Q1 2021 Prudential Financial Inc Earnings Call
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[music] on your conference will begin momentarily please continue to hold.
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Ladies and gentlemen, thank you for standing by and welcome to the Prudential Quarterly earnings Conference call.
At this time all lines are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given to you at that time.
If you need assistance during the call Press Star then zero and an operator will assist you offline and as a reminder, today's conference call is being recorded.
I would now like to turn the conference over to Mr. Dan a readout. Please go ahead.
Good morning, and thank you for joining our call representing Prudential on today's call are Charlie Lowrey, Chairman and CEO, Rob Falzon, Vice Chairman and <unk>.
Sullivan head of U S.
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Okay. Now we can hear sorry, everybody, we were having a little bit of technical difficulty, it's Charlie Darrin I'll start over.
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Start over here so good morning, and thank you for joining our call representing Prudential on today's call are Charlie Lowrey, Chairman and CEO, Rob Falzon, Vice Chairman and Chief Sullivan head of U S businesses, Scott <unk> head of international businesses, Ken <unk>, Chief Financial Officer, and Rob Axel Controller, and principal accounting officer.
We will start with prepared comments by Charlie Rob and Ken and then we will take your questions. Today's presentation may include forward looking statements. It is possible that actual results may differ materially from the predictions. We make today. In addition, this presentation may include references to non-GAAP measures for a reconciliation of such measures to the.
Comparable GAAP measures and a discussion of factors that could cause actual results to differ materially from those and the forward looking statements. Please see the slide titled forward looking statements and non-GAAP measures and the appendix to today's presentation and our quarterly financial supplement both of which can be found on our website, a prudential and invest.
<unk> dot Prudential dot com with that I'll hand, it over to Charlie.
Thank you Darren and thank you all for joining US. This morning as always I Hope you and your families have remained safe and healthy.
Fight the ongoing challenges created by the pandemic Prudential reported strong results for the first quarter, including record adjusted operating income and a robust sales and flows across many of our businesses. Our performance reflects strong underlying demand for our products continued execution on our strategic initiatives.
The complementary nature of our retirement and life insurance businesses, which has helped us mitigate mortality risk favorable markets.
And the commitment of our employees around the world.
We're on track with our key transformation initiatives and have increased returns to shareholders supported by our strong performance and the strength of our balance sheet.
I'll cover each of these topics in more detail and begin with a brief review of the transformation initiatives. We highlighted for you in February and turning to slide three we are on track to deliver $750 million and cost savings by the end of 2023 400 million of which were targeted for 2020 one.
Cost savings for the first quarter were $110 million the.
And the initiatives generating these cost savings are also producing better customer and employee experiences and as a result, enhancing the competitiveness of our businesses.
We are also and the process of reallocating $5 billion to $10 billion of capital by pursuing programmatic acquisitions to grow and asset management and in international emerging markets and.
In addition, we will remain focused on investing and our other businesses to expand our addressable market and to continue to improve expense and capital efficiency and.
In parallel we are actively executing on other means of changing our business mix and earnings profile by pivoting to less market and rate sensitive products, such as our buffered annuity product Flex guard.
Running off certain blocks of business and actively pursuing potential derisking transactions as a result, we expect prudential to emerge as a higher growth less market sensitive and more nimble company.
As we execute against our transformation initiatives you can expect that we'll continue to demonstrate discipline and the redeployment of capital within our businesses and to our shareholders.
Turning now to slide four and.
And the first quarter, we increased our shareholder dividend by 5% and repurchased $375 million of common shares in.
In addition, based on our progress with our initiatives as well as the improving macroeconomic outlook and the more favorable equity market and interest rate environment, We announced a $500 million increase to our 2021 share repurchase authorization.
We expect to repurchase these additional shares starting in the second quarter.
As a result, we now expect to returned $10 $5 billion to shareholders through 2020 three.
Moving to slide five our expanded shareholder return program is supported by a rock solid balance sheet, which included $5 $4 billion and highly liquid assets at the end of the first quarter.
Our operating subsidiaries continue to hold capital to support double a financial strength ratings and we have a high quality investment portfolio.
Turning to slide six.
We are also executing on behalf of our stakeholders through our commitment to environmental social and governance actions.
This work has long been reflected in our purpose as a company and solving the financial challenges of our changing world and it is as important as ever.
Recent note on the environment, we have made significant progress reducing emissions waste and paper.
And we continually evaluate how we can improve our impact on the environment.
On social issues, we have invested further and our people with training and development programs and continued to maintain a high level of pay equity throughout the firm.
We also achieved our three year goal that we created in 2017 of increasing representation of diverse persons among our senior management by five points over that time period.
We followed this by establishing new goals and are continuing to tie our goals to management compensation as we did and the prior period.
And we're already making progress on our commitments to advance racial equity, which we announced last summer.
On governance, we continually refresh our board with people, who are highly skilled and who also reflect the diverse communities and geographies that we serve today, 82% of our independent directors are diverse.
You can see more details on how we're progressing against our goals and commitments in our ESG summary report that we published in March.
Before closing I would like to thank all of our employees around the world.
Its through their continued hard work and dedication that we've been able to support our customers and colleagues. During these challenging times, all while advancing our company's transformation and purpose of making lives better by solving the financial challenges of our changing world with that I'll turn it over to Rob for more specific details on our busy.
And this performance.
Thank you Charlie I'll provide an overview of our financial results and business performance for our U S PGM and international businesses, turning to slide seven I'll begin with our financial results for the first quarter. Our pre tax adjusted operating income was a record high of $2 1 billion or $4.11 per share on an after tax.
Basis earnings exceeded the year ago quarter across all of our businesses. The result of our U S businesses were up 38% and reflected higher net investment spread results driven by higher variable investment income and higher fee income, primarily driven by equity market appreciation, partially offset by less favorable on.
Your writing experience driven by COVID-19 related mortality.
Our global asset manager had record high results, including a gain on the sale of our Italian joint venture.
Our partner was acquired by another firm with an existing asset management business and expressed and desire to purchase our interest which was a REIT. It retained under the joint venture agreement Nonetheless assets under management of $1 $5 billion were up 12% from a year ago, driving asset management fees to a record level and.
Earnings and our international businesses increased to 25%, reflecting business growth higher net investment spread more favorable underwriting results and higher earnings from our Chilean pension joint venture.
Turning to slide eight.
Our U S businesses produced diversified earnings from fees net investment spread and underwriting income and benefit from a complementary mix of longevity and mortality businesses as Charlie noted, we continue to make progress and shifting away from capital intensive and interest rate sensitive products, our productivity and have worked well with sales of our buffered.
And what he flex guard growing to $1 6 billion and the first quarter, representing 84% of total annuity sales up from $1 $2 billion and the fourth quarter of 2020.
Our sales reflect increasing customer demand for investment solutions that offer the potential for appreciation from equity markets combined with downside protection.
In addition, we benefit from having a strong and trusted brand as well as a highly effective distribution team that has significant reach with Prudential advisors and third party advisors, we are engaging with a broad range of advisers with flex Gartner, we also leverage our broad multi dimensional relationships with our strategic partners that both distribute our products.
And manage the assets of our clients.
With respect to individual life, we increased sales by 9% compared to the year ago quarter, and higher variable life sales offset lower sales of other policies and particular, universal and Universal life sales consistent with our product pivot strategy.
And our retirement business account values were a record high of 23% from a year ago, driven by business growth and market appreciation net flows and the quarter were $6 billion, including a longevity reinsurance transaction and excess of $8 billion.
With respect to assurance total revenues, our primary financial metric as we concentrate on scaling the business were up 80% over the prior quarter.
We grew all business lines, particularly and Medicare, where we expanded distribution to increase sales outside of the fourth quarter annual enrollment period.
Now turning to slide nine.
<unk> continues to demonstrate the strength of its diversified active management platform as a top 10 global investment manager Pizza.
<unk> diversified global investment capabilities, and both public and private asset classes across fixed income alternatives real estate and equities position us favorably to capture flows and addition, <unk> investment performance remains attractive with approximately 90% or more of assets under management and outperforming their benchmarks.
Over the last three five and 10 year periods.
Our diversified capabilities and strong investment performance helped to contribute to more than $5 billion of third party net flows during the quarter, including 4 billion of retail and $1 billion of institutional flows.
Offsetting the growth and net flows was a decrease and the market value of our fixed income assets, reflecting the increase and interest rates.
And the investment engine of Prudential PGM also benefits from a symbiotic relationship with our U S and international insurance businesses, and <unk> asset origination capabilities and investment management expertise provide a competitive advantage and helping our businesses to bring enhanced solutions and more value to our customers and.
And our businesses in turn and provide a differentiated source of growth for <unk> through affiliated flows that complement its successful third party track record of growth.
<unk> asset management fees increased 15% compared to the year ago quarter, and a record to a record level as a result of market appreciation and continued positive third party net flows.
This contributed to an eight point increase and <unk> net adjusted operating margin, including the gain on the sale of the.
Italy joint venture.
Excuse me, excluding the gain on the sale of the Italy joint venture compared to the year ago quarter, consistent with our expectation of 30% across the cycle.
Turning to slide 10, our international businesses include our Japanese life insurance operation, where we have a differentiated multichannel distribution model as well as other operations focused on high growth markets, while sales across both life planner and Gibraltar operations were lower than the prior year, reflecting the disruption from Japan's metropolitan areas being and us.
State of emergency this quarter as well as lower demand for our U S. Dollar denominated products following price increases last year profitability increased significantly and we remain encouraged by the resiliency of our unique distribution capabilities, which has helped us to continue to grow our in force business and with that I'll now hand, it over to Ken.
Yeah.
Thanks, Rob I'll begin on slide 11, which provides insight into earnings for the second quarter of 2021 relative to our first quarter results pre tax adjusted operating income and the first quarter was $2 $1 billion and resulted in earnings per share of $4 and 11 on an after tax basis.
And then we adjust for the following items first variable investment income outperformed expectations and the first quarter, which is worth $275 million.
And we adjust underwriting experienced by $160 million.
This includes a placeholder for COVID-19 claims experience of an additional $70 million based upon 55000, and COVID-19 related fatalities in the U S. During the second quarter.
Third we expect expenses and other items to be approximately $500 million lower in the second quarter, primarily as a result of favorable items in the first quarter, including the $378 million gain from the sale of Pjm's joint venture in Italy and seasonality.
Fourth we anticipate net investment income will be reduced by $10 million reflect and difference between new money rates and disposition yields of our investment portfolio.
These items combined get us to a baseline of $2 89 per share for the second quarter I will note that if you exclude items specific to the second quarter earnings per share would be $2 and 97.
The key takeaway is that our underlying earnings power increased from last quarter, including the benefit from business growth and higher equity markets. While we have provided these items to consider please note that there may be other factors that affect earnings per share and the second quarter.
I'd also note that we continue to expect the full year 2021, corporate and other loss to be about $1 $5 billion.
On slide 12, we provided an update on the potential impact of the pandemic consistent with the information we provided on our fourth quarter call. The estimated sensitivity of operating income for 100000 incremental U S deaths due to the pandemic is about $85 million.
As I noted earlier, our second quarter baseline includes a net mortality impact of $70 million due to COVID-19.
The actual impact will depend on a variety of factors such as infection and fatality rates geographic concentration and the continued speed acceptance and effectiveness and the vaccine rollout.
Turning to slide 13, we continued to maintain a robust capital position and adequate sources of funding our capital position continues to support a double a financial strength rating and we have substantial sources of funding our cash and liquid assets were $5 $4 billion, which is greater than three times Andrew.
Fixed charges and other sources of funds include free cash flow from our businesses and other contingent capital facilities.
Turning to slide 14, and in summary, we are on track with our key initiatives and we maintained disciplined capital management, while returning additional capital to shareholders and we continue to benefit from the support of our rock solid balance sheet now I'll turn it to the operator for your questions.
Thank you and ladies and gentlemen, if you wish to ask a question. Please press one followed by zero.
We will take your questions and the order that they queue up.
Once again, that's one and then do you all for your questions or comments on our first question will come from the line of Tom Gallagher with Evercore. Your line is open.
Yes.
Good morning, Charlie just just wanted to see if we can get an update on <unk>.
<unk> timing and sizing of risk transfer deals, where where things stand now for freeing up capital and also same question on the programmatic M&A you're targeting.
Hey, Tom It's Rob Let me, let me take a first shot at that if you don't mind. So thank you for the question.
The first actually let me start with a reminder, a large portion of the broader business mix objectives that we have are actually going on achieved be achieved organically.
And the internal growth objective, we have which essentially to double the growth of our double the size of our growth businesses about a third of that is of that targeted increase will come from the organic growth and those businesses and then with respect to the targeted reduction specifically, bringing our annuities business down to around 10% or so of the total contribution.
40% to 45% of that comes from the run off of our legacy block.
The the expense, we then expect capital redeployment and in the form of on the growth side programmatic acquisitions.
And then on the reduction side reinsurance and door sales to largely closed the remainder of the GAAP and as Charlie indicated in his opening remarks, we are actively executing on that including through Derisking transactions on the reduction side, while we're making progress and we're not yet and the physician Tom we're going to speak any more.
Typically.
Although I'd like to reiterate what we said before.
First these transactions are generally complex and therefore they require time.
And secondly, we intend to remain disciplined transacting, both both with respect to bid on.
On dispositions as well as acquisitions to and.
Ensure that we're creating value for our shareholders and any any transaction that we undertake.
Why are we indicated and sort of relatively broad range of the five to 10 billion and and a multi year period for accomplishing that probably the last thing I'd want to mentioned is that the product re pricings and pivots that we've been undertaking are also important levers to change and net business mix and maybe Andy If you don't mind, you could just sort of give a quick update on that.
Sure, Rob So talk Tom and good morning, So I'll make this very specific so let's talk about annuities. So as we've talked about step one and derisking as is the run off.
And you know that.
Starting with ceasing of sales. So you saw this quarter, where we only had 1% of our sales that came from traditional variable annuities with guaranteed living benefits.
And we very successfully have pivoted over and a flex guard, we will expect to see about a $3 billion per quarter run off in note and that traditional variable annuity block of business. This quarter. We saw about $3 8 billion as we pivoted to flex card, where we're putting into the market at very different type of product that better balance.
And as consumer value.
Value with shareholder value and we could not be more pleased with the success and that product. We had a 14, 5% market share back and <unk> and as you saw our sales have continued to expand where we had $1 6 billion and <unk> and sales. This quarter that is really coming off on the strength of our brand and the strength of our distribution and.
And we're very happy with the returns and the risk profile of that new business that we're putting on the on the book. So it's a very good example of how step one is all about the runoff and pivot.
Thank you.
Next we will go to the line of Elyse Greenspan with Wells Fargo and your line is open.
Hi, Thanks.
My first question on maybe following up on Tom's question on just on the M&A side of things. So you guys on.
Mentioned, PJM and emerging market areas, we would love to deal on.
We're executing on that plan can you just give us a sense of what you're seeing out there from on the.
The M&A perspective, and you're kind of looking to execute there.
Sure at least this is Charlie.
Let me let me just take a step back if you will and and put what we're doing into context, and and then I'll answer your specific question, but.
As we as we look and the the journey, we're on and if you will.
We as a management team are laser focused on three goals.
Well the first is to deliver strong and consistent performance and hopefully you've seen that the.
The second is to execute on the trend the transformation that Rob and Andy just talked about and there are three parts to that one is pivoting our products to be less market sensitive and capital sensitive.
The second is to execute on our cost efficiency goals and you saw that we expanded our goals by 50% last year and are ahead of track and the third is to lean into the higher growth markets as Rob talked about the reallocation of the $5 billion to $10 billion of capital. So that's the second go the third goal is to be good stewards of capital.
Balancing the return of capital to shareholders with investing both organically and Inorganically in our businesses and we think that by achieving that balance where we can maximize shareholder value over time. So those are the three goals strong and consistent performance executing on our transformation and being good stewards of capital and that will.
Hopefully give you a framework around which we couldn't look at any of the actions that we take including as you talked about the programmatic M&A, which which Andy now can you can talk about.
Yeah, so thanks, Charlie and and at least I'll build upon it. So so first when it comes to PJ met that I'd be remiss, if I didn't say that we've had just great success organically growing this business, we've seen somewhere in the neighborhood of 55 billion and flow is over the last five years due to the strength of our of our platform.
And we will we will continue to invest and that organic growth having said that this is an area. We've identified where we want to augment through M&A and where that all starts with being very clear on on our priorities and clearer on our spots.
As we talked about last quarter, we're very interested in expanding upon our already good capabilities in alternatives.
And as well as continuing to expand on our track record of success globally.
Those are areas, we're focused on because if you look at the overall asset management industry. They are faster growth areas of this space as we're looking everything and anything we look at wood, obviously, we need to vet for a cultural fit and to make sure it fits with our multi manager model.
And the way that I talked to my team and my team and we talk about this as being in the flow and and then no and what I mean by that is we need to make sure that we see all potential opportunities both what's already in the marketplace, but what might be and the marketplace and I can tell you that we are very confident that we are in the know and the and in the flow.
We will be very programmatic and disciplined in deploying capital towards these acquisitions and we are very confident that it will meaningfully add to PJM overtime.
Okay. That's great and then my second question on.
In terms on the plan that you guys laid out exiting and the downsizing of businesses and go with it.
And I'll kind of focus on the U S individual solutions on.
Side of the house, but as we think about the workplace solutions on B that retirement and her group.
Those businesses that you know if there was an opportunity on.
You know via a transaction to monetize some of the assets is that something that you would consider or are you still on.
And we're focusing on on annuities and life and he loves to free up capital.
So it's it's Charlie again lease.
So we've spoken about the fact that we've taken a broad strategic review on our businesses.
Within the context of having a business mix that is less market sensitive less capital intensive and and higher growth and we're going to be really thoughtful and diligent about how we execute on the process with the goal of maximizing value for shareholders. So when there's more to report, we'll let you know, but we're in the process of doing that.
Okay. Thanks for the color.
Thank you. Our next question comes from the line of Andrew Quail Goldman with Credit Suisse and your line is open.
Hey, good morning, everyone I'm just following up on Lisa's question. If if you could give a little more clarity on the full service retirement business is that considered a core capital light business.
So this is this is a this is Charlie Andrew.
Again, we're not going to comment on any particular business and what I'll do is go back to our original premise, which is that we've looked and all businesses.
We're considering our business mix in totality, that's going to be higher growth less capital intensive less market sensitive and intensive and less volatile over time and.
And we've evaluated all our businesses within that context, and and as we go through that process as we make decisions and execute.
And you'll be one of the first to know along with all your other colleagues.
Maybe you can alright, let me now a little before them.
Anyway [laughter] Hum.
Moving on to assurance IQ I mean, these these revenues looks to nominally robust and and.
And yet this quarter you generated a pre tax loss of 30.
And 39 million.
Could you give a sense of when you'd like to kind of turned the corner on profitability or is it still a little too early to say.
So Andrew it's Andy. Thank you for your question first let me make sure I point out that day in this quarter, we had a $10 million of onetime non recurring expense and just to give you a feel on a flavor for that.
That as example, we ended a couple of vendor contracts in distribution as we're maturing our model as far as the path. We're on to drive the business towards ultimate our ultimate revenue and margin objectives nothing has changed.
And we bought this business and platform for its long term strategic capabilities that it provides us.
Both from expanding the addressable market as well as for shifting our mix to a more fee oriented mix. So as such we're investing and managing the business for the long term, we continue to invest and broadening and deepening the product portfolio, we continue to invest and in.
And deepening and making more capable the distribution system and the results in the quarter you see evidence of that I'll point back to what we said last last quarter. The key metric is revenue growth as we scale. This platform up and as you saw we had 80% quarter to quarter revenue grow.
<unk> and had revenues grow in all lines.
And so we have a plan we're executing against it we're seeing the metrics go the right way, we need to scale the platform.
And as.
As such in the near term, we will see operating losses.
Yeah.
Thank you.
Thank you.
Our next question comes from the line of Ryan Krueger with K B W. And your line is open.
Hi, good morning.
I noticed that you stopped breaking out the wellness implementation costs. This quarter can you give us any context for why you did that and also.
I guess as we look if we think about the corporate segment losses of $1 5 billion for 2021 should we expect that the decline in.
And the following years as implementation costs.
The decline.
Hi, its Ryan it's Ken.
We're making really good progress on our transformation and cost saving initiatives and that's being driven by our transformation office and they're making great progress.
We're we included the implementation cost that we expect this year in our estimated loss for corporate and other of $1 5 billion. So it's in there and it's comparable to the amount that we had in 2020.
This stage, we don't expect the magnitude to very significantly. So that's why we didn't feel the need to continue to separate and isolate it out.
You know we are as I've mentioned, making very good progress towards our objective of achieving a 107 hundred $50 million of cost savings by 2023.
And over this period, we would expect to have implementation costs.
Included in our corporate and other segment to continue.
Thanks, and then on your retirement business can you give us any rough breakdown since they're kind of there's a couple of different businesses and Youre reporting segment, what the rough breakdown in terms of.
Earnings contribution is from full service compared to institutional investment and product.
We have and excellent full service business, but it's it's part of our overall retirement segment.
We haven't historically separated that out it is it is part of that business line and and we're not going to separate that those specifics out for just the full service segment.
Got it alright, thank you.
Thank you.
Our next question comes from the lineups and heat come up with city and your line is open.
Great. Thanks.
And my first question is I'm, just trying to reconcile something which is.
2019, Investor Day, we spent a lot of time on the financial Wellness initiative and and how you were tracking a lot of these meetings that are that you are hosting with the employees of your corporate customers and so I'm trying to reconcile that strategy with comments that we're hearing today that a lot of your U S or U S businesses are under review.
And <unk>, including the retirement business because it felt to me that those two things are interconnected. So I'm trying to figure out is there a change and that financial wellness strategy or what's going on.
So Sidney it's Andy I'll take your question financial wellness, absolutely remains a key component of our organic growth strategy and the company.
We articulated that at that Investor day, and and as you heard me say, often where we're working to bring more solutions to more people and to address a broader swath of the American marketplace that is both through the workplace.
Through the advisor channel and direct to consumer as we can.
<unk> talked about our financial wellness capabilities that we've built out.
And really helped us to activate a couple value levers and the two predominant ones would be institutional value.
And the second would be converting.
Individuals and the workplace to long term loyal customers a prudential, we've seen though we've seen those value levers activated and we've talked in the past about institutional value that's been delivered.
Both from the net revenue growth and the group insurance business, but also from the growth of our full service platform and we are seeing.
And the conversion to individual product sales.
Yeah.
From the financial wellness value prop. So you should think of it as it is an important component of the organic piece of our strategy to grow and expand our addressable market, but it is and it is that it's a component of the broader strategy as we pushed the business system to be higher growth less capital intensive and less market sensitive.
On it.
Okay, and then on the capital.
<unk> and I think when we were talking about growth businesses last quarter, you highlighted three and emerging markets PJM and assurance IQ I think Charlie and your prepared remarks. This morning, you Didnt mentioned and assurance IQ should we take from that that you.
We're currently not planning on allocating more capital to either assurance IQ or other sort of insure tech types of operations.
Yeah, I think I think that's a fair comment in other words and as we think about programmatic M&A and in particular as we've we've talked about it. This morning, it's investing primarily in our other businesses and the U S and international and what we mean by programmatic M&A is very it's a very specific strategy, we're going to be highly selective and.
And we're gonna do targeted acquisitions that add either scale or augment capabilities.
To our existing businesses like P, Jim and like emerging markets.
And so need it's Rob I would just add to Charlie's comments, which is to say that deferral.
Differentiate what would the objective that we articulated was to have the combination of the three businesses that you mentioned are equal to 30% of our earnings and in the timetable that we that we had targeted and then we separately said with regard to redeployment of capital. However, that we were focused on PGM and and emerging markets and we did not it.
That point and time call at assurance as a as an area for capital deployment.
Okay. Thanks.
Thank you. Our next question will come from the line of Erik bass with Autonomous Research and your line is open.
Hi, Thank you can you provide some more details on your current emerging markets and businesses and where they stand in terms of scale and profitability and I guess, how much earnings are you generating from emerging markets today, and how do you expect that to grow organically over the next three years.
Thanks, Eric This is Scott I'll go ahead, and and and take that question well you know first of all from a big picture perspective, you know following the <unk> the sale of our Korea about 94%, 95% of our earnings come from Japan. So that's why we spend a lot of time.
Focused on Japan within the emerging markets I think I've said before that the bulk of the earnings from those from that sector comes from a combination of Brazil, and and Chile. So the good news is and our emerging markets platform is that we feel like we're in a lot of the right countries.
And we've actually worked pretty hard to get the right partners and those countries where partners where required.
The challenge that we faced is that we originally started and are in a lot of those markets with tight agency or and L. P model and we've now broaden that out to an independent agency and bank assurance, but we're starting from a rather small platform. So so the good news is we are seeing a wrap.
Rapid growth in the emerging markets for example, our in force grew at high single digit in Brazil, and and double digit and Mexico last year, but for most of our emerging markets. We're starting off of a rather small base and and that's why Charlie talks about it and the context of our markets that we'd like to grow we tend to think we are in the right place.
Mrs. We have licenses and partners and that's why we think a bolt on strategy is probably the best strategy for growing and those markets.
Thanks.
Yeah.
Thank you and then.
Follow up on sticking with the international businesses in the life planner business you continue to show healthy growth and life planners at T O J.
The total life planner accounts down year over year and I'm, assuming the decline is coming from Brazil, and so just was hoping you could provide some more color on what's going on and what we should infer about the underlying growth trends and that business yes.
Yes, Eric that's a that's a good follow up and your observation is correct I believe I commented last quarter, but we we.
We systemically are consistently kind of go through our LP models, and we change our contract terms and we do that too and.
Maintain productivity, sometimes adapt to regulatory changes.
Customer and you know and regulatory needs and the like and we did implement some new contract terms in Brazil last year, we were expecting a decline to follow that that in fact did occur and so that really was the change actually Japan life planner.
Growth was actually up and P O J, a 4% year over year, and that's our biggest market and.
Quarter over and quarter over quarter, we were back up slightly and Brazil, So I would view that as kind of a.
Tracked related change further I would say that if you look back three or four years ago.
And Brazil, almost all of our sales were coming from the the life planner.
Panel and we've had a lot of growth and our bank segment and increasingly we've been making progress on our group segment. So that recently almost 30% of our sales have been coming from outside the life planner model. So we're actually quite pleased with how things are going and Brazil.
Yes.
Thank you.
Thank you.
Next we will go to line of yarn Kinner with Goldman Sachs.
And your line is open. Please go ahead.
Thank you good morning, everybody.
My first question goes to the increase and the buyback.
<unk> less so about I think 2021, but the thought of.
Seeing that and half a billion dollar increase flow through to your three year target I just conceptually I wanted to maybe get your sense is that something that you think youll be revisiting on a quarterly basis based on the performance of the company.
Or is this kind of a one off how should we think of this new kind of half billion dollar target.
Yeah.
Yeah. This is Ken.
We've had a very consistent approach to capital management.
We use both share repurchases and.
And dividends as a way to distribute capital to shareholders.
And we prioritize dividends.
And you know.
Our earnings have been about three times dividends, our free cash flow has been about 65% of our earnings and and about two times our dividend. So you know while we seek to use.
On dividends and grow them.
We will use a level of share repurchases, but it will vary over time and our recent decision to increase that by a happen.
And $1 billion and again, just not just for 'twenty, one, but we also as you mentioned increased our three year outlook.
It really reflects where.
Where we are at this point in time with our capital position.
As well as our outlook on on the economy.
And again, it's consistent with returning excess capital to shareholders.
As time passes we will continue to reassess our capital position.
Physician and determined if adjustments are appropriate. So again, it's just it's really consistent with the approach we've had for many years.
And we have excess capital, we'll we'll make the practice of share.
Return on that to shareholders.
Okay.
But you know a quarter ago, you were also talking about the other pillar, there, which was the $5 billion to $10 billion that you deploy.
And two and shifting business mix and and shifting to a more capital light structure.
So I'm just trying to think of is this additional half a billion dollars does that mean that you are seeing less opportunity to deploy and to shifting business mix or is it just that you identify more excess capital than you initially thought and therefore are increasingly the other pillar.
Yeah, it's really a reflection of our current position of excess capital as Rob mentioned, we're making great progress towards our objective of a $5 to $10 billion of capital reallocation and again, it's a wide range because we want we will be.
And be disciplined about transactions to release and redeploy. So it's primarily a result of how we feel about our current capital position and the economic outlook.
Understood.
And then my second question.
P. J, so clearly very strong net flows but kind of a tale of I.
I don't want to say a tale of two stories, but you are seeing very very robust retail flows.
Which I think it's pretty consistent with what we are hearing and the market.
Whereas institutional flows slowed down a little bit sequentially.
And I think that debt and I know, if I should call that a trend or not but maybe any color you can give on us in terms of what youre seeing and both institutional and retail and.
Or are you seeing trends there.
So you are in it and it's Andy Thanks for your question, Yeah, and I I I I would not draw any conclusions or say were seeing any trends.
And I guess I guess the way we would frame. It is we are a very diversified business across our multi managers across both public and private sectors. We serve a very wide range of clients and the only thing I'd say on the institutional side is obviously institutional clients and can tend to be more lumpy.
And youll get variability quarter to quarter.
Versus on the retail side on the retail side, we have seen a lot of money.
And in and money markets, and and we think that could be a tailwind.
Coming continuing to come into the marketplace.
But more.
More broadly we have a broad suite of products and I think at the end of the day, we're very confident that we'll be a net winner from a flow perspective, given the strength and the balance that we have across product types and across institutional and retail but to your question of should you draw any trends or conclusions I would say now.
Great. Thank you.
Thank you.
Our next question comes from the line of Humphrey Lee with Dowling and partners and your line is open.
Good morning, and thank you for taking my questions. On my first question is related to every time and in general are thinking your 10-K, you indicated that the spread compression in your foodservice business is a key headwind to earnings for retirement, just looking at that kind of on the past couple of years.
At least the past several quarters in terms of the interest rate headwind that you highlighted how should we think about the portion of spread compressions and fruit surface versus that and the IP business.
Hey, Humphrey it's Ken.
We do see a spread compression and our retirement business and that's.
That's a combination of full service and our institutional business in the baseline roll forward that we provided you'll see that of the $10 million impact half of that or $5 million is and our retirement segment.
But we don't split that out between full service and and institutional.
And I guess kind of directional which one would you say would be.
And be a bunch of that.
Yeah again, we don't we don't want to get down to get into the breakdown of that.
Okay. I guess, that's just a follow up to the to just be the fixed income portion of the business in general how should we think about the capital that you have is currently backing the staple of this stable value business in foodservice.
Yeah.
Again, we are our full service business as part of our overall retirement segment.
That's where the earnings are reported and the capital is held but we're not going to breakdown the split of of it by sub segment.
Okay alright, thank you.
Thank you. Our next question comes from the line and Tracy.
And with Barclays and.
Your line is open.
Thank you and I'm wondering if you could wrapped and saw some comments need on one hand, and you mentioned, you're emphasizing higher margin and rate sensitive business and.
On the other hand, and Charlie mentioned previously that many of your business and as our sacred cows that you've looked at everything so it would just be helpful to understand how open and get your questions or if you have a pecking order in mind.
Thanks, Tracy for the question Yeah, we we Oh I'll just go back to what I said before which is we have looked and are looking at all of our businesses. Our objective is to create and maximize shareholder value over time.
We're not going to talk about a pecking order if you will of businesses at this time, but rest assured that that we're looking carefully at all our businesses and understanding specifically, how they fit into and overall business mix and and the objective that we articulated in the first quarter, which was to expand our higher growth.
Businesses and and to reduce and.
Nobody's and and our market sensitive businesses to a smaller extent. So that's that's about all we want to say at this point, but we are in the process of doing that and as I said before you all will know when when there's more to report.
Okay understood.
And maybe there's a different topic I mean.
There's a lot of talk about COVID-19, but I'm wondering if you had experience better and non COVID-19 mortality loss, it's part of the quarter I understand and I first quarter is usually a heavy flu quagga, but looking at CDC data it looks like access and mortality.
On ex COVID-19 was unusually low because you have that experience.
Hey, Tracy.
This is certainly an unusual.
Stretch of time during a pandemic, but generally we did not.
And I see any significant are incredible trend or variants and our underwriting experience other than <unk>.
And what seems to be related to COVID-19. So really can't give you any other comments other than that.
Okay. Thank you.
Thank you.
Next we will go to the line of John Barnidge with Piper Sandler and your line is open.
Thank you very much and don't worry it's not a question about risk transfers.
So I was curious with share some short term disability claims seemingly going to going to long term disability.
Cause if the natural things that occur with economic shock lapses.
Two quarters out can you talk about your expectation for that as well as associated elevated and administrative expenses.
Sure John and it it's Andy and I appreciate that I appreciate the new topic to cover.
So as you would expect last year.
Given the COVID-19.
And the impact of COVID-19 and the pandemic, we absolutely saw an increase and short term disability claims we've actually seen those claims volumes are coming back down obviously as the pandemic is getting more and to control it vaccines and the like.
We continue to expect.
And due to our experience the impact on the economy too to have an effect on long term disability claim incidents.
We have not seen that tick up as of yet.
That does not necessarily mean that we won't there's there's generally a six month <unk> period on the long term disability plan.
That's why you saw us put up and I b and our last quarter, and we put up and additional IV and or this quarter. So we're still expecting that and.
Directly flows to your question about increased administrative expenses one of the things that we consider very very important to managing this business is having the right number of claims professionals nurses and vote specialists, we have beefed up our staffing and the in the claims part of the business.
To be ready to properly help individuals' returned to work that go on long term disability claims and you're seeing that reflected and in the elevated admin ratio.
And will that do it for you John.
Sorry, I was on mute. Thank you a follow up to that related to it and do you think the corporate push not Peru, but industry wide to return to office and say this summer to fall may actually add another layer dynamics to that long term disability dynamic.
So John it's Andy I'll take your question, that's a really hard one to predict and whereas where.
And my thoughts go on that as we have a very diversified book of business and.
Cross size segments and geographies.
And I think the patterns of what we're going to see from a return to the workplace perspective are gonna be pretty varied.
Across those different industry size segments and.
And geography, so really hard to tell what influence that might have on the disability claims incidence and site.
Thank you very much for your answers.
Thank you and.
Our next question will come from the line of Josh Shanker with Bank of America and your line is open.
Yeah. Thank you for slipping me in here at the end.
Two quick ones I think the first one is obviously our first quarter is very interesting from a interest rate perspective move on.
And it affected I'd be.
Mark to market result, if the P. Jim.
<unk> and a negative sort of way I.
And I guess I'm look around and there might be and arguing that interest Richard when you're continuing to rise probably not at the pace. They did and the first quarter, but the peach and have the right set of strategies to entertain inflows and a rising interest rate and economy that that.
P J and customers will embrace.
So Josh its Andy Thanks. Thanks for your question so yeah, as you're referring to if we were to see a consistently rising rate environment.
And that very likely has an impact on fixed income flows in general across the space and could impact growth for that sector, but I'd go back to something I said earlier, which is we.
And where we're a top 10 asset manager with a very broad and well diversified portfolio and both publics and privates and.
And in any economic environment, we feel that will be a net winner across those set of businesses from a from a net flows perspective.
So we feel very well positioned and then obviously I'd be remiss, if I didn't add remember Ryan a rising rate environment overall is a net positive for production.
No I understand that.
And to just understand the financial adviser and new sales on the annuity side of the business.
Obviously, the buffer annuity salesman and very strong, but I just wanted to break down if I have a variable annuity with living benefits with Prudential can I keep contributing intuit and how much of the new sales are legacy living benefits customers, who are putting more money into their older policies.
Yes, so again, it's Andy Thanks for the question so.
And depending on the product depending on the.
On the regulatory territory there are various rules on what we call those sub pays how much additional money can be dropped into the policies.
We have actually closed off.
And the degree we're able and it is to a large degree sub pays going into those products. That's why when we report net only 1% is in the traditional variable annuities with guaranteed living benefits that is reflective of the sub pays as well.
So when we're really talking about run off those products truly are not on any sales to new customers, but additional monies being dropped and it really is a hard stop on it.
Okay. Thank you for book and answers.
Thank you.
We'll go to a follow up from Tom Gallagher with Evercore ISI and your line is open.
Thanks, Andy.
Andy just a follow up on the buffer annuity sales, which are now the majority of your annuity shelf.
That's that's obviously, a very big pivot into that product can you talk a bit about the risk profile of that business the capital intensity.
This product compared to your legacy VA business and why you obviously feel a lot of confidence with this volume of sales. If you are looking to exit legacy VA, but maybe just to compare and contrast about why why you have confidence and clarity on on the risk profile there.
Yeah, Tom sorry, it's Andy and maybe maybe I'll take a sort of two sides of that question on risk and return from a risk perspective. The product is is vastly different from our traditional variable annuities like the highest daily income.
If you think about it we're sharing we're sharing risk with the consumer we're giving them a buffer on the downside for a little bit of upside, but they have the tail downside risk and obviously the upside is capped.
So you know at the end of the day, we're not taking interest rate risk like we were in HDI.
The interest rate risk because of the design of the product can be nearly perfectly hedged with simple options.
And so the risk profile, we're very very comfortable with from a go forward perspective. Your question around returns and I think what I've talked about in previous quarters. We did a lot of work to be able to more rapidly price our products and and adjust our product pricing. We're quite pleased with the returns that we're seeing on the business that way.
Selling and.
Obviously and that might be begging the question of well why have you been so successful. So let me let me hit that.
Number one we are one of the very best and top brands and the space with a lot of history through the third party adviser channels.
And number two we have great distribution people and relationships inclusive of Prudential advisors, which is a very big strategic advantage for us and.
And and that has led to.
The sales results and and they're very very positive results, but we like the risk profile and we like the returns.
Hey, Tom it's Rob just to add on to one thing Andy said he talked about the.
And the interest rate risk profiles, and just implied in his comments as well, but to make sure it's clear the.
And the equity risk profile profile is also quite low we're able to the structure of the buffer is something that we were able to actively hedge with options and the marketplace. So we're not taking net equity market risk on ourselves.
Okay. Thanks, guys.
Thank you and with that Mr. Laurie I'd like to turn it back over to you for any closing comments.
Thank you very much. So thank you for your time and interest today and I hope we've conveyed the increased sense of momentum and the steady progress around our transformation initiatives, we remain confident and our strategy and the additional steps, we're taking to build a nimbler and higher growth business and one which continues to focus on the evolving needs of our custom.
And we look forward to sharing more details on our progress with you in the coming quarters and thank you again for joining us today.
Thank you and ladies and gentlemen that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service you may now disconnect.
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