Q3 2024 Prudential Financial Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to Prudential's Quarterly Earnings Conference Hall at this time-up, crisp, andative, and place in a listenably mode. Later, welcome to the question and answer session. Instructions will be given at that time.
Speaker Change: If you should require any assistance during the call, please press star zero and an operator will assist you offline. As a reminder, today's call is being recorded. I will now turn the call over to Mr. Bob McLaughlin. Please go ahead.
Bob Mclaughlin: Good morning and thank you for joining our call.
Bob Mclaughlin: Representing Prudential on today's call are Charlie Lowrey, Chairman and CEO.
Rob Falzon, Vice Chairman, Andy Sullivan, Head of International Businesses, and P. Jim, our Global Investment Manager, Caroline Feeney, Head of U.S. Businesses, Yanela Frias, Chief Financial Officer, and Rob Axel, Controller and Principal Accounting Officer.
We will start with prepared comments by Charlie, Rob, and Yanela, and then we will take your questions.
Today's discussion may include forward-looking statements. It is possible that actual results may differ materially from the predictions we make today.
In addition, our presentation includes references to non-GAAP measures.
For reconciliation of such measures to the comparable gap measures and a discussion of factors that could cause actual results to differ materially from those in the forward looking statements,
Please see the slides titled Forward-Looking Statements and Non-Gap Measures in the appendix of today's presentation and the quarterly financial supplement, both of which can be found on our website at investor.prudential.com. And now I'll turn it over to Charlie.
Thank you, Bob. And thanks to all of you for joining us today. Our third quarter performance reflects continued positive momentum in growing our businesses, increasing capital efficiency, and pivoting our product suite to address the investing insurance and retirement needs of our customers and clients around the world.
We reported robust sales across our U.S. and international insurance and retirement businesses, as well as strong investment performance and private credit originations in PGEM.
We also maintained our disciplined approach to capital deployment, while continuing to invest in our businesses and returning excess capital to shareholders.
Bob Mclaughlin: Our strategic progress and performance are backfire financial strength. Turning to slide 3.
This morning I will highlight how we continue to become a higher growth, more capital efficient company. We are growing our market leading businesses while increasing our capital flexibility.
Let's start by taking a closer look at how our Retirement Strategies business is benefiting from the global retirement opportunity.
On the institutional side, our continued leadership and pension risk transfer was reinforced through a second transaction with IBM.
This time to re-insure $6 billion of pension liabilities.
With this latest transaction, we have now closed seven out of the ten largest pension risk transfer deals in the U.S.
On the individual side, five of our annuity products have exceeded $1 billion in sales so far this year, validating our product diversification strategy.
Bob Mclaughlin: Our Japan business is another great example of how we are addressing the growing demand for retirement products. While life insurance has traditionally comprised the bulk of our business in Japan, year-to-date sales of retirement and savings products are up 30% compared to the prior year.
Bob Mclaughlin: Meanwhile, PGM is well-positioned to help plan sponsors deliver benefits to millions of retirement beneficiaries through its diversified investment solutions.
As a market leader, with nearly half a trillion dollars of assets under management supporting defined benefit and defined contribution plans, PGEM serves more than half of the world's 300 largest pension funds.
Now let's look at how we are further growing our market-leading businesses by diversifying our products and expanding our global distribution networks.
In our group insurance business, we are expanding our disability and supplemental health products and growing our position in the under 5,000 lives and association market segments.
In our international businesses, we're benefiting from recent product launches and our strong multi-channel distribution in both Japan and Brazil.
And lastly, PGM continues to benefit from our deeply connected and reinforcing business mix, resulting in strong affiliated flows on a year-to-date basis.
In addition, Private Alternatives Capital deployment has increased 24% year-to-date, underscoring the demand in the market and PGEM's private credit capabilities.
PGIM is also well positioned to continue to capture the growing retail demand for fixed income products.
Bob Mclaughlin: In addition, our investments in technology across our insurance, retirement, and asset management businesses is helping us to deliver exceptional sales, service, and claims experiences supporting our growth strategy.
At the same time, we're improving the quality of earnings from the continued shift of our business mix.
This quarter we announced a transaction with Wilton Reed to re-insure an $11 billion guaranteed universal lifeblock.
Following this transaction, we will have reduced our guaranteed universal life reserves by 60%, advancing our strategic progress to become a higher-growth, more capital-efficient company.
Bob Mclaughlin: Turning to slide four.
Bob Mclaughlin: Our continued investments in our businesses are supported by our disciplined approach to capital deployment, which included returning more than $700 million to shareholders during the third quarter.
Bob Mclaughlin: Turning to slide 5.
In closing, we're operating from a position of strength, with confidence in our strategy, our capabilities, and our path to deliver long-term sustainable value for all our stakeholders. And with that, I'll turn it over to Rob.
Thanks, Charlie. I'll provide an overview of our financial results and business performance for our PGIM, U.S., and international businesses.
I'll begin on slide 6 with our financial results.
These results reflect the execution of our strategy to grow our market-leading businesses and were driven by higher spread in fee income due to continued strong sales and the benefit of higher interest rates and equity markets, net of increased expenses to support the growth of our businesses.
Year-to-date adjusted operating return on equity of 13.7 percent has improved a half a percentage point from the prior year. This reflects the strength of our businesses, the benefits from the deliberate actions we have taken to pivot to more capital efficient and higher growth products.
Turning to the operating results from our businesses compared to the year-ago quarter. PGEM, our global investment manager, had higher asset management fees driven by favorable investment performance, contributions from the Deere Prep capital acquisition, and market appreciation.
Bob Mclaughlin: This was partially offset by higher expenses to support business growth.
Earnings growth in our U.S. businesses reflected more favorable underwriting results from better than expected mortality experience in individual life and higher spread income driven by business growth and the benefit of higher interest rates.
Partially offset by higher joint venture earnings driven by Incaje performance in Chile and higher spread income due to higher yields from reinvestment of the portfolio.
Turning to slide 7, PGIM, our Global Investment Manager, has diversified capabilities in both public and private asset classes across fixed income, equities, and alternatives.
Bob Mclaughlin: PGIM's strong investment performance continues to improve with 86% of assets under management exceeding their benchmarks over the past year.
This has contributed favorably to strong long-term performance, with 79% and 85% of assets under management outperforming their benchmarks over the last 5 and 10 year periods, respectively.
Partially offset by $3.2 billion of third-party net outflows. On a year-to-date basis, total net flows were $29 billion, including $15 billion in affiliated flows and $14 billion from third-party clients.
These inflows reflect the net benefit from large episodic institutional pension plan activity.
Speaker Change: © The Uncanny Countertops
Speaker Change: Asset Management, and Insurance.
PGEM's asset origination capabilities, investment management expertise, and access to institutional and other sources of private capital, including through our sponsored reinsurer, Prismic, are a competitive advantage, helping our businesses bring enhanced solutions and create more value for our customers. Our insurance and retirement businesses, in turn, provide a source of growth for PGEM through affiliated net flows, as well as unique access to insurance liabilities.
Speaker Change: In addition, our diversified PGEM private alternatives platform, which has assets under management of over $250 billion, experience strong private credit origination activity driven by our direct lending businesses, including the benefit from our recent acquisition of Deer Path Capital.
Turning to slide 8, our U.S. businesses produce diversified earnings from fees, net investment spread and underwriting income, and benefit from our complementary mix of longevity and mortality businesses and diversified sources of earnings.
We continue to focus on growing our market-leading businesses by expanding our addressable market with new financial solutions delivered through a broader distribution footprint, leveraging capabilities across Prudential.
and enhancing those capabilities to improve the experience of our customers and distribution partners while driving operating efficiencies. Retirement strategies generated strong sales of nearly $15 billion in the third quarter across its institutional and individual lines of business.
Institutional retirement sales totaled $11 billion in the quarter. U.S. funded pension risk transfer transactions of $6.3 billion included the second PRT transaction with IBM.
Speaker Change: Additionally, longevity risk transfer sales totaled $2.8 billion for the quarter. Year-to-date, institutional retirement sales were over $26 billion as we have captured about 40% of the PRT market.
Speaker Change: Our product pivots and innovation have resulted in continued strong sales of our registered indexed linked annuities and fixed annuity products have more than doubled from the prior year. Additionally, we continue to reduce market sensitivity by running off our legacy variable annuities.
Speaker Change: Group insurance sales primarily occur in the first quarter of the year, based on annual enrollments. On a year-to-date basis, sales increased 3% compared to the prior year, driven by growth in supplemental health.
We are executing our strategy of both product and client segment diversification while leveraging technology to increase operating efficiency and enhance the customer experience.
These actions, to improve profitability and performance, resulted in a benefits ratio of 83.4%, which is the low end of our target range.
and individual likes.
Speaker Change: Turning to slide 9.
In Emerging Markets, we are focused on creating a selective portfolio of businesses in regions where customer needs are growing, where there are compelling opportunities to build market-leading businesses, and where the prudential enterprise can add value.
Speaker Change: Sales in our international businesses were up 25% compared to the year ago quarter.
Higher sales in Japan are benefiting from recent product launches as we expand our retirement and savings offerings, which are gaining traction with customers and represented 75% of the current quarter sales.
Speaker Change: In addition...
Emerging market sales were also higher, driven by growth in Brazil as we continue to expand third-party distribution and benefit from the strong performance of our world-class life planners.
As we look ahead, we are well positioned across our businesses to be a global leader in expanding access to investing, insurance, and retirement security.
We continue to focus on investing in growth businesses and markets, delivering industry-leading customer and client experiences, and creating the next generation of financial solutions to serve the diverse needs of a broad range of customers. And with that, I'll now hand it over to Yanela.
Thank you, Rob. I will begin on slide 10, which provides insight into earnings for the fourth quarter of 2024 relative to our third quarter results.
Pre-tax adjusted operating income for the third quarter was $1.6 billion and resulted in earnings per share of $3.48 on an after-tax basis.
To get a sense of how our fourth quarter results might develop, we suggest adjustments for the following items. First, variable investment income was below expectations by $50 million in the third quarter, driven by lower private equity returns.
Speaker Change: Beginning next quarter, we plan to pre-announce our estimated variable investment income results.
Next, underwriting experience was above expectations by $15 million in the third quarter.
And last, we include an adjustment of $100 million for expenses and other items.
Speaker Change: We expect higher initiative investments to continue in the fourth quarter and maintain the full year 2024 expected loss in corporate and other of 1.8 billion dollars
Speaker Change: We also expect seasonally lower annual premiums of $50 million in international in the fourth quarter.
Speaker Change: Unknown
These adjustments combined get us to a baseline of $3.34 per share for the fourth quarter. I will note that if you exclude items specific to the fourth quarter, earnings per share would be $3.67.
The key takeaway is that our underlying earnings power increased and reflects the improved quality of earnings from intentionally shifting our business mix and continued investment in the growth of our market-leading businesses.
A few items that I would highlight.
We continue to benefit from new money rates that were higher than our portfolio yield in the third quarter. And we do not expect a significant impact from the potential decline in short-term rates.
We have cash at the holding company, floating rate assets across our businesses, and collateral in individual retirement strategies that earn short-term yields, which is generally offset by interest rate derivatives that manage duration across our businesses, where we pay short-term rates and receive fixed.
Speaker Change: In addition, our legacy variable annuities in force is running off at $3 to $4 billion per quarter.
Speaker Change: and we have been experiencing an elevated level of surrenders in our businesses in Japan associated with U.S. dollar products as the yen has weakened relative to the U.S. dollar.
The exchange rate hit a 38-year low in the second quarter, and while we have experienced a reduction in surrender levels as the yen strengthened during the third quarter, we expect some continued near-term pressure on earnings before surrenders normalize.
Speaker Change: Also of note, in order to provide greater insight into our financial outlook and to better align with the longer-term nature of our business, we plan to introduce new intermediate-term financial targets.
Speaker Change: Turning to slide 11.
Our regulatory capital ratios are strong and above levels that we believe represent double-A financial strength as we continue to maintain margins to support strong organic growth prospects.
Speaker Change: Our cash and liquid assets were $4.3 billion, which is above our minimum liquidity target of $3 billion, and we have substantial off-balance sheet resources.
We remain thoughtful in our capital deployment, preserving financial strength and flexibility, investing in our businesses for long-term growth, and returning capital to shareholders.
Turning to slide 12 and in summary, we are becoming a higher growth, more capital efficient company. We are maintaining a disciplined approach to capital deployment and our growth is supported by the strength of our balance sheet. And with that, we will be happy to take your questions.
Thank you. We will now be conducting a question and answer session. If you would like to be placed into question queue, please press star 1 on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
You may press star 2 if you'd like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1.
We ask that you please ask one question and one follow-up, then return to the queue. And once again, that's star 1 to be placed into question Q.
Speaker Change: Our first question today is coming from Ryan Krueger from KBW, your line is now live.
Ryan Krueger: Hey, thanks. Good morning.
Speaker Change: and Robert McLaughlin. Thank you.
Brian, it's Rob. I'll take the first part of your question and I think Charlotte will probably jump in and handle the second part of that.
So, I guess what I'd start with, Ryan, is I would reiterate what we said last quarter, which is we'd be disappointed if we've not entered into an additional transaction that we could announce before year end. We're continuing our work.
on a very active pipeline. It's got multiple reinsurance transactions across a spectrum of types so it's
It's ongoing looking at our own balance sheet optimization. It's looking at opportunities for flow or new sales financing.
as well as third-party blocs. And there we have a particular focus on Japan.
And as you may have seen, Prismac actually made an announcement that we've stood up a dedicated licensed team.
in Tokyo in order to be able to advance that opportunity. While they're all in play, I think we would say that the likely next transaction is going to be back book amongst the variety of things that we're working on and potentially in Japan.
If I was stepping back, Ryan, I would say we have a visible pipeline.
Speaker Change: And Ryan, this is Charlie. Let me add on to what Rob said in terms of capital deployment. We've always said that we want to be good stewards of capital and that we have a consistent, disciplined, and balanced approach to the redeployment of that capital with our businesses and to our shareholders.
The second is investing.
both organically and through programmatic acquisitions to support the sustainable long-term growth of our businesses. And finally, returning excess capital to shareholders, as we've done in the past. And in this quarter, we deployed capital to support strong sales across our businesses, including several new products to meet the evolving needs of our customers. And we returned over $700 million to shareholders. So we have a consistent process, and we're going to follow that through.
Speaker Change: © The Uncanny Countertops
Speaker Change: Great, thank you.
Thank you. Next question today is coming from Sunit Kamal from Jeffries. Your line is now live.
Hi, thanks. Good morning. I wanted to start with Japan. Can you talk about how the margins of the returns on this, these retirement products that you're selling, compared to, you know, the protection products, death protection products that you used to sell? I mean, my recollection is those death protection products have very attractive margins and
I just want to get a sense of the new business that you're writing and how that compares.
Speaker Change: Yeah, good morning. It's Andy. I'll take the question. So we're pleased with the profitability of the of the sales that we're seeing in Japan and we do not expect an impact on the margins given the mixed shift between the product types
Speaker Change: Well, we already have a broad product portfolio there.
Speaker Change: And those sales accounted for the majority of Japan sales in the quarter. So, we don't expect an impact on the margin given that mix shift, and we're very excited as we see this as early days in what should be a very long-term opportunity tailwind.
Okay, that makes sense. Thanks for that. And then I guess for Caroline,
You know, it looks like your prediction that 2024 would be another record year for annuity sales is playing out.
Just curious, if you can give some color around like
where the growth is kind of coming from. Is it coming out of 401k plan rollovers or?
Speaker Change: Product Exchanges and
How sustainable do you think this level of sales is as we think about, you know, moving into 2025? Thanks. Yes, sure. Thanks for your question, Sunit. So first of all, let me say we are extremely pleased with our individual retirement results. And as you saw in the third quarter, we drove over three and a half billion of sales.
We now have the broadest individual product portfolio we've ever had.
and to put that in perspective, Sunit, as Charlie mentioned in his opening comments.
Speaker Change: Just two years ago, we had only one product that generated over a billion in sales.
Now we already have five products that have exceeded that mark this year.
So in terms of your question on sustainability, the outlook for our individual annuity franchise remains strong. Beyond our diversified portfolio, what we see is a clear tailwind coming from aging demographics. That's over 11,000.
Speaker Change: Americans turning 65 every day, and 30 million Americans turning 65 between now and 2030. So a lot of that growth to need is coming from that tailwind. We're also seeing increased demand in the marketplace for protected savings and income solutions. So combining those factors.
Speaker Change: The industry is on pace for a third sequential record-setting sales year, as you say, with year-to-date sales outpacing last year by more than 25%. And we'll meet that demand head-on with our diverse portfolio solutions and the strength of our brand and our distribution.
Speaker Change: Okay, thanks for that.
Thank you. Next question today is coming from Tom Gallagher from Evercore ISI. Your line is now live.
Speaker Change: Unknown Speaker 0
Good morning. First question back on Japan. Can you talk about...
Foreign currency has been a big part of what's gone on. But just given the move higher in rates in Japan, are you starting to see a pivot back into yen oriented products? And how do you see that going forward? Thanks.
Yeah, Tom, it's Andy. I'll take the question. So in the third quarter, we saw about 30% of our sales in Japan were yen-based sales.
The fact is, our level of yen-based sales has nearly doubled over the last three years, and this has been based on what have been a series of very intentional actions on our part.
Speaker Change: You know, we believe in having a broadly diversified product portfolio in every geography that we operate.
So for Japan, that means having good diversification across life insurance, retirement and savings products.
and having a nice balance between U.S. dollar and Yen offerings. So we've been intentionally strengthening the choices that our customers have for Yen-based products over the last year or so. And these new product introductions...
Speaker Change: have been a material contributor to the 29% year-over-year sales increase. So, you know, we believe in a broad portfolio. We've been expanding the yen-based offerings and we're seeing the success of that strategy.
Gotcha, thanks. And then my follow-up is, I guess, a broader industry question, but...
Speaker Change: I think Swiss Re Research Institute put out a report recently on how they expect excess mortality to persist for another five to ten years.
and, you know,
Hard to know exactly what the degrees they're referring to is, but is that that's and particularly if it mentioned the US and Japan, which are obviously two big exposures for Peru. Curious.
Do you share that view, broadly speaking, if that does come to pass, do you feel like you have enough prudence in your reserves to handle it, and any additional thoughts you would have on that topic?
Some continued excess mortality through 2028 before returning to the pre-pandemic trend line.
And obviously, we regularly monitor mortality trends and advances and adjust accordingly every year during our annual assumption process in the second quarter.
Speaker Change: with expectations since updating our mortality-based table assumptions in 2022 and this quarter we saw favorable experience. Now the individual life insured population is less impacted by COVID than the general population.
Our PRT mortality experience has trended heavier in 2023 that is consistent with continued excess mortality and what I would say is that our PRT population tends to be more closely correlated to the general population.
That's great. Thanks.
Speaker Change: Thank you. Next question today is coming from Nick Anito from Wells Fargo. Your line is now live.
Hey, good morning. Thanks. I just wanted to hit on PGIM first. Maybe could you talk about what went on at Institutional in the quarter, what drove the outflows and maybe how you're expecting them to come into 25? I mean, I know it's episodic, but any call would be helpful. Thanks.
Sure, Nick. It's Andy. And let me actually comment on institutional and retail. So starting on institutional, I'd reiterate what I said last quarter. We expect to continue experiencing more near-term variability in our institutional fixed income flows.
That is leading to more money in motion, creating this near-term variation. But as the rate curve normalizes, money will flow back more consistently into institutional fixed income, and we obviously expect a benefit from that given our world-class business.
Speaker Change: You know, stepping back from that dynamic, we believe in analyzing our flows over a longer time frame and looking inclusively at affiliated flows.
Affiliated flows stem from when we win pension risk transfer transactions as well as from flow from asset intensive annuities and life insurance. In the pension space often the activity within third party and affiliated
are linked. So you're really talking about the same universe of DB plans. So the bottom line is you have to look at both third party and affiliated to get the full picture on our PGM assets under management.
Speaker Change: If you look across 2024 year-to-date, our third-party institutional flows are a positive $14 billion. If you look across 2024 year-to-date, our third-party institutional flows are a positive
and our affiliated institutional flows are a positive $15 billion. So we like that track record of success. Just a minute on retail. On the retail side of the business, we continue to achieve improving results. And in the quarter, we saw a positive $1.3 billion in inflows.
And we would expect that will accelerate given the anticipated Fed direction. So really, if you step back, the strength of our fixed income franchise is very, very strong. And we think over time, we're going to experience significant tailwinds and we'll be a net winner over the long term.
I guess following the GUL deal that you guys just did and some of the other deals that you guys have done, is there any block in the business that you guys kind of view non-core that can be shopped?
Speaker Change: Unknown Speaker 00.00.00.00
Hey Nick, it's Charlie. Let me take that one and I'll take a step back and then directly answer your question But you know we feel really good about the considerable progress We've made in shifting our business mix to be more capital efficient and the fact that we're well positioned to capture market opportunities for higher growth
We've executed on several transactions that have driven a 50% reduction in our traditional variable annuities portfolio and also a 60% reduction in the guaranteed universal life reserves.
You know, following the transaction we announced in the third quarter with Wilton Reed. And while we've been quite successful in increasing our capital efficiency as part of our strategy, we've been equally focused on investing in our market-leading businesses to drive growth with some of those proceeds.
Speaker Change: Having said that, and this gets to your question, we will consider additional opportunities as long as they meet our strategic and financial objectives and make sense for all our stakeholders. So we'll continue to review our portfolios, but it needs to meet the strategic and financial objectives that we talked about.
Speaker Change: That's helpful. Thanks.
Thank you. Next question today is coming from John Barnidge from Piper Sandler. Your line is now live.
Good morning. Thank you for the opportunity. On the variable investment income preannouncement that you're going to do for disclosure going forward, will that be a wholly separate preannouncement from the AUM one that comes out as an 8K? Thanks.
Hey John, it's Yanela. That will be included in the current disclosure that we provide on AUM, so it will be all-inclusive.
Speaker Change: Thank you for that. And then it sounded like you were upbeat about the growth opportunity and workplace solutions. Can you maybe talk about partnerships there that you're working on? Thank you.
Speaker Change: Thank you. Thank you.
Yeah. Hi, John. It's Caroline. Thank you for your question. And yes, we are very much upbeat and confident in terms of our group results going forward. And we have a number of strategic partnerships.
Speaker Change: that we've recently executed. And most of these are very much focused on elevating the customer enrollment experience.
But they're also going to be a key contributor to our overall focus on things like claims management. And I'll just give you a few examples, John.
One of theirs is a partnership with a leading edge technology firm.
That's really transforming the benefits experience for millions of people and essentially their innovative platform walks employees through the enrollment process.
Speaker Change: Connecting them with credential counselors for one-on-one support. Another partnership we have is with Evolution IQ.
This is an AI-driven platform that leverages data to expedite claim examiner evaluations in short as well as long-term disability claims.
as we've demonstrated another strong quarter driven by solid underlying fundamentals.
and when I think about our overall diversification strategy.
Speaker Change: Improving Claims Management Capabilities and Investments in those Strategic Partnerships I just mentioned.
Speaker Change: We're very much positioned to continue to see that profitable growth and solid earnings.
Thank you.
Speaker Change: Thank you. Next question today is coming from Wes Carmichael from Autonomous. Your line is now live.
Wes Carmichael: Hey, thanks. Good morning. My first question, I guess, was on the comments regarding moving away from the quarterly EPS baseline and moving towards new financial targets. Is there any more color you can provide us on what you're considering for those and realize it still may be in flux?
Speaker Change: https://www.kenhub.com
Speaker Change: Emerge over a longer period of time. We also think it will help investors better understand our business outlook and earnings power
So that is really what we're doing. We will be replacing the quarterly baseline. And again, as we shared also, we will be preannouncing VII. We plan to implement these changes beginning with the release of the fourth quarter earnings results. So we will share the targets and the information at that time.
Okay, got it. Thanks, John. Um, you know, my second question, I guess, was on, sorry, was there something else?
Thank you for watching. Please subscribe to my channel. Please subscribe to my channel.
My second question is on the group business. I saw a press release, I think last quarter, that proves entering the stop-loss business. I guess just curious how meaningful that could be over time and kind of what that business brings through.
Yes, of course, Wes, it's Caroline, and I'll take your question.
So our entry into the medical stop-loss builds upon our strategy to diversify our portfolio across both client segments and products.
Speaker Change: As you know, employers frequently purchase medical stop-loss in conjunction with other group products.
In the near term, Wes, we plan to take a thoughtful approach to scaling with a disciplined underwriting process and robust reinsurance program with experienced partners. And given the size of our total book, we expect it to be a small portion of our business mix.
Speaker Change: Our longer term success will be guided by a disciplined approach to scale. We're committed to sustainable growth and ensuring that our expansion in this area is both strategic and measured.
Speaker Change: Thank you.
Thank you. As a reminder, to be placed into question queue, please press star 1 on your telephone keypad. Our next question is coming from Wilma Burtis from Raymond James. Your line is now live.
Hey, good morning. Could you talk a little bit more about the Prismic team, the Prismic Japan team that you're building out and maybe give us some examples of the types of deals that could make sense and, you know, the size of the market. Thanks.
Wilma, it's Rob. Sure, so in order for us to be able to effectively do reinsurance transactions in Japan we need to have an agency licensed business on the ground there dedicated to Prismic.
And so that's what we've put into place in response to what we see is a very large opportunity there. If you think about the discussions we've had even on this call about the foreign, the U.S. dollar and other foreign currency denominated products,
that are sold in Japan and historically have been sold in Japan.
Speaker Change: with the upcoming ESR, so the new economic solvency regime that's going to be adopted in Japan.
There is a, there's a, it, it, that, that sovereignty regime.
Speaker Change: in very much what we believe to be a non-economic way.
And we think that that's going to give rise and be a catalyst to ongoing desire by insurers in that marketplace to continue to meet.
The customer demand for those products because Japanese customers continue to have an interest in dollar denominated products and the returns that they can get on those. But to be able to square that off with being able to economically finance the reserves and capital.
Speaker Change: against that business in a way that continues to create a compelling economic proposition for the Japanese customers. So we're actually quite excited about that opportunity. We think the brand and quality and scale of our own business there gives us incredible credibility.
Yes, of course Wilma, it's Caroline and I'll take your question.
So, in the near term for our longevity reinsurance, our overall international reinsurance, we remain focused on the U.S.
So this is why we are pleased that we're not only a leader in this business in the U.S. but also in the U.K. and obviously Wilma, you also saw our expansion last year in the Netherlands.
Speaker Change: And so for the time being, those are very much our three areas of focus and we're pleased to remain a leader.
Speaker Change: Thank you.
Thank you. Next question is coming from Alex Scott from Barclays, your line is online.
Alex Scott: Hi. Good morning. First one I had for you was on the comments that were made on, I guess, surrenders in foreign currency products being a bit elevated. And it was noted that there was some earnings pressure from that. I wanted to also get a feel for what kind of revenue pressure is that exhibiting on the
Speaker Change: International Franchise, particularly Life Planner.
So Alex, it's Andy, I'll take I'll take your question and maybe let's just let's start by explaining the dynamics to make sure everyone has it clear. So the weaker yen...
Speaker Change: is leading to an enhanced level of U.S. dollar policy surrenders. That's really kind of flowing from two things.
Speaker Change: First on US dollar recurring premium products affordability has become an issue for customers as it takes more yen to pay the premium
Speaker Change: Second, some customers in our U.S. dollar investment products are looking to monetize their gains.
Speaker Change: So, with this, they either reduce their level of coverage or they turn the policy in. That obviously has some influence on our sales, but I think the best way to think about this is, had it not been for this surrender experience over this recent period, we would have seen, instead of being flat, low single-digit earnings growth across our PII business segment. So it's influencing both, obviously, the premium and the AOI.
Speaker Change: Got it, that's helpful. And then I had a follow-up on the potential for reinsurance in Japan and you know the comments on Prismic.
Should we think about that more as mitigating whatever impact would have been there from the economic solvency regime, or does it go further than that? Should we think about it as potentially releasing capital that could...
that could be redeployed elsewhere in your business.
Speaker Change: Unknown Speaker 0.0.0 Transcription by CastingWords © The Ballot Board of the U.S. Department of State
Speaker Change: So,
Speaker Change: Let me answer that question, sorry it's Rob, let me answer that question.
Speaker Change: Let me say more broadly, when we think about reinsurance, and whether that be
to Prismic, or it be to sort of...
Speaker Change: Other opportunities that we have for reinsurance within our portfolio. We really think about reinsurance as an opportunity to 1. De-risk and grow our portfolio. So financing for growth and by reinsuring diversifying against risk.
We also think about that as an opportunity.
Speaker Change: for optimizing our back book and that would be in response to things like you're alluding to the TSR regime.
The Economic Solvency Regime in Japan.
Speaker Change: And when we look at the benefits from that re-insurance, we then say, okay, from an economic and business strategy standpoint.
and provide, therefore, to our investors, shareholders, a better risk-adjusted return by being able to monetize those.
whole life products from Japan to our Bermuda affiliate.
Gibraltari, and in the second quarter we executed a transaction for U.S. dollar new business from Gibraltar to PICA. So definitely is a tool that will help us stabilize capital in all of our operating entities including in Japan.
Speaker Change: Thank you.
Thank you. Our next question is a follow-up from Wes Carmichael from Autonomous. Your line is now live.
Wes Carmichael: Hey, thanks for taking the follow up. I guess I just really wanted to follow up on this particular topic on on ESR and Rob, your comments that, you know, this this regime is punitive and perhaps uneconomic for long duration liabilities. Like, I guess I think about I understand that you have levers for reinsurance for your own book, but
Speaker Change: Yeah, no, Wes, you want to start, Yanela, and then I'll add in.
Wes Carmichael: Let me start in terms of the impact to our capital position. I'll reiterate that we believe our Japan businesses are well capitalized and financially strong.
Speaker Change: The New ESR Framework.
As we mentioned, we have tools like reinsurance, we have transacted in a couple of blocks of business, but we expect
Speaker Change: that upon implementation of our capital levels will continue to be above target levels that would support AAA financial strength ratings in Japan.
Yeah, Wes, and it's Andy. I was just going to add, you know, we've managed changing capital regimes at Prudential over a very long period of time. In Japan, we have a very broad product portfolio that meets the needs of our customers. We've continued to innovate and expand that portfolio, including with ESR-friendly type products.
The bottom line is as a management team, between the product capabilities combined with our strong underwriting, our ALM capabilities, hedging, and reinsurance, we believe we have everything we need to continue to profitably grow in Japan and navigate these changes.
Got it. That's all very helpful. I guess my follow-up would be just any help with the outlook for the pension risk transfer market into the fourth quarter. I know the third quarter was a big one with IBM, but as you look to this quarter and maybe even to 2025, any thoughts there?
Speaker Change: Yes, of course, Wes, it's Caroline, and I'll take that one.
So, with over $16 billion and a 40% market share in PRT sales this year, clearly we're continuing to demonstrate our strong market leadership. And as we look forward to 2025,
Speaker Change: We continue to view the U.S. PRT market as highly attractive, with $3 trillion in outstanding U.S. corporate pension liabilities, favorable funding positions, and a robust long-term pipeline of opportunities.
And while the market remains highly competitive, we believe we are uniquely positioned to execute.
Speaker Change: of course, our scale, our depth of underwriting experience.
as well as our ability to originate attractive assets enable us to price competitively while generating attractive returns for our shareholders.
We also deliver deep expertise, have a demonstrated ability to handle complex deals and provide industry-leading service.
West, we believe that combination is evident in our sales this year, where over half of our transactions
Speaker Change: John Barnidge, Jamminder Bhullar, Thomas Gallagher,
Speaker Change: Thank you. As a reminder, that's star one to be placed into question Q.
Speaker Change: Our next question is a follow-up from Tom Gallagher from ISI, your line is now live.
Speaker Change: Thank you.
Thanks, Yanela. Would you mind reiterating what you said you're going to change to quarterly disclosure? Did you say you were going to eliminate the quarterly bridge that you typically provide on the next quarter out? And I think I heard you say you were going to start pre-announcing alternatives and any other changes you're planning on making. Thanks.
Yeah, Tom, so we are eliminating the quarterly baseline disclosure and we're replacing that with intermediate term financial targets, starting with 25 and preannouncing variable investment income. Those are the two key changes we're making.
Speaker Change: We are still going to speak to unique items in the quarter, really to help you understand what's happening, but that's the extent of the changes.
Speaker Change: Okay, thank you.
Thank you. Our next question is a follow-up from Sunit Kamal from Jeffrey. Your line is now live.
because you're giving up some of the earnings that you're now.
You own 100% of it and obviously you'll give up some of those earnings to your Prismic partners. Presumably, you'll free up some capital which you can then deploy in new business, but there might be a little bit of a lag between when you lose the earnings on the back book versus when you deploy the capital that's being freed. Is that the right way to think about it? Or is there some sort of offset that I'm missing there?
No, Sunit, I think you've, I'm sorry, it's Rob, I think you've captured it well, which is that's not unique.
to doing a back book deal in Japan. That's that you could use that same description and apply it to each of the reinsurance transactions that we've done to date, which is that by virtue of reinsuring, we unlock capital and embedded value. And in Japan in particular, we think that our products there have very high levels of margins.
in the reserves that we have, and so we're able to release.
Unknown Executive, Robert McLaughlin, Charles Lowrey, Unknown Executive, Robert McLaughlin,
And does PGIM manage all of the assets that back the Japanese liabilities already or is there a portion of assets that they don't manage that if it went into Prismic it would start to earn fees on?
The assets that we have within our business today, the vast, vast majority of them are managed by PGM.
There's a selective couple of instances where we do have some third party managers in specific areas that PGIM is not focused on.
Speaker Change: But I would say, by and large, it would be accurate to characterize that those liabilities, excuse me, those assets that are backing the liabilities are being managed by PEDRM today.
Thank you. We reach the end of our question and answer session. I'd like to turn the floor back over to Mr. Lowrey for any further closing comments.
We are well positioned to address the growing needs of our customers and clients around the world as they seek to protect their life's work and live better lives longer. So thank you again and enjoy the rest of the day.
Speaker Change: Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.