Q4 2024 Prudential Financial Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Prudential's Quarterly earnings Conference call. At this time, all participants have been placed in a listen only mode. Later, we'll conduct a question and answer session and instructions will be given at that time, if you should require any assistance during the call. Please.
Speaker Change: 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.
Speaker Change: 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, Andy Sullivan head of international businesses and teach them, our global investment manager Caroline Keeney head of U S businesses, you know, France, Chief Financial Officer and Rob.
Speaker Change: Axel controller and principal accounting officer.
Speaker Change: We will start with prepared comments by Charlie Robbins in L. A and then we will take your questions today.
Speaker Change: 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 a reconciliation of such measures to the comparable GAAP measures and a discussion of factors that could cause actual results to differ materially from that.
Speaker Change: It was in the forward looking statements. Please see the slide titled forward looking statements and non-GAAP measures in the appendix to today's presentation and quarterly financial supplement both of which can be found on our website at investor adopt Prudential Dot com and now I'll turn it over to Charlie.
Charlie Robbins: Thank you Bob and thanks to all of you for joining US today first I'd like to comment on the leadership changes, we announced in the fourth quarter. The board appointed Andy Sullivan S. Prudential's next CEO effective March 31st he is an exceptional leader and the board and I have every confidence he is the right person to take prudential into the future.
Speaker Change: Sure.
Speaker Change: Also at the end of March Carolyn Feeney will take on an expanded role overseeing our global retirement and insurance businesses, both Andy and Caroline had been highly engaged in setting in executing our strategy. So we expect a smooth transition.
Speaker Change: And Jack up where he will be joining as CEO of PGM, our global asset management business, Both Carolina Jacques will report directly to Andy.
Speaker Change: This is an exciting and significant time for Prudential and the right time to elevate the next generation of leadership as we Mark our 150th anniversary.
Speaker Change: Finally, I'd also note that just last week, we were recognized as the number one company among our life and health insurance peers for 'twenty 'twenty four Unfortunately list of the world's most admired companies.
Speaker Change: Now, let's turn to our results in 'twenty 'twenty four we made significant progress on our path to becoming a higher growth more capital efficient company. We maintained our disciplined approach to capital deployment, while also continuing to invest in our businesses and return excess capital to shareholders, our strategic progress and performance.
Speaker Change: Backed by our financial strength.
Speaker Change: Turning to slide three.
Speaker Change: Our results for the full year reflect continued momentum as we further diversified our product suite.
Speaker Change: And expanded our distribution capabilities to address the investment insurance and retirement needs of our customers and clients around the world.
Speaker Change: Earnings for the fourth quarter were lower than we anticipated, but do not reflect the earnings power of our businesses. This was largely due to adverse underwriting experience, primarily driven by an elevated level of large individual life claims.
Speaker Change: Large claim activity will vary on a quarterly basis, but our fundamentals remain strong and the actions, we're taking across our businesses create a solid foundation for future growth.
Speaker Change: We reported strong full year sales across our retirement and insurance businesses as well as strong investment performance and significant positive net flows in PJM.
Speaker Change: Thank you Jim reported robust affiliated and third party flows for the full year 'twenty 'twenty, four and fading from our broad capabilities across fixed income equities and our diversified private alternatives platform and fueled by the growing global retirement opportunity and the growth of our retirement and insurance businesses.
Speaker Change: Our retirement strategies business continues to address the growing needs of the market as a leader in pension risk transfer and individual annuities on the institutional side, our pension risk transfer business had the highest annual level of sales for any single carrier since 2012 on the individual side, we had our ninth.
Speaker Change: Consecutive quarter of sales growth.
Speaker Change: We also continued to diversify our products and expand our distribution networks and group insurance and individual life, which resulted in continued sales momentum.
Speaker Change: And in our international businesses, we continue to diversify our product portfolio in Japan, including retirement solutions, and we expanded our distribution channels in Brazil.
Speaker Change: In addition to the momentum we're seeing across our businesses during 'twenty 'twenty four we successfully executed on a number of transactions that enhanced our capital flexibility improve the quality of our earnings and shifted our business mix, we completed two guaranteed universal life reinsurance transactions, which reduce our cumulative exposure.
Speaker Change: To this product by 60% and just last month, we announced our second prisoner transaction to reinsure, a $7 billion block of Japanese whole life policies, adding further scale to the prisoner platform turning to slide four our continued investments in our businesses are supported by our disciplined approach to capital deployment.
Speaker Change: <unk>.
Speaker Change: Which included returning nearly $3 billion to shareholders in 'twenty 'twenty. Four in addition, the board has authorized share repurchases of up to $1 billion in 2025 and increase the common stock dividend for the 17th consecutive year.
Speaker Change: Turning to slide five.
Speaker Change: Our strategic progress is supported by our robust risk and capital framework.
Speaker Change: We maintained a double a rating, which reflects a healthy capital position, including holding more than $4 billion in highly liquid assets. We also maintained a well diversified high quality investment portfolio and a disciplined approach to asset liability management.
Speaker Change: We're operating from a position of strength and have entered 'twenty twenty-five with continued confidence in our strategy our capabilities and our path to deliver long term sustainable value for all our stakeholders.
Speaker Change: Before I turn the call over to Rob I want to acknowledge the extraordinary partnership we've shared over these past six years, Rob was retiring from Prudential in July, culminating a remarkable 42 year career with the firm and which he has made innumerable and material contributions to our continued success and future growth.
Speaker Change: And with that I'll turn it over to Rob.
Speaker Change: Thank you Charlie it's been a privilege offer.
Speaker Change: Provide an overview of our financial results and business performance for our PGM U S and international businesses.
Speaker Change: I'll begin on slide six with our financial results.
Speaker Change: Our pretax adjusted operating income was $1 $4 billion or $2.96 per share for the fourth quarter of 2024, and $5.9 billion or $12 62 per share for the full year up 6% from 2023.
Speaker Change: This reflects the execution of our strategy to grow our market, leading businesses and was driven by higher fee and spread income due to continued strong sales and flows as well as the benefit of higher interest rates and equity markets net of increased expenses to support the growth of our businesses.
Speaker Change: Our GAAP net loss for the quarter was $57 million. This was primarily due to interest rate driven realized losses on the investment portfolio that will be transferred to prison in connection with our recently announced reinsurance transaction as well as some modest repositioning of our investment portfolio in the quarter.
Speaker Change: 2024, adjusted operating return on equity of 13, 1% improved 70 basis points from 2023. This reflects the strength of our businesses and the benefits from the deliberate actions, we have taken to pivot to more capital efficient and higher growth products turning to the quarterly operating results from our businesses compared to the year.
Speaker Change: Year ago quarter.
Speaker Change: P J, our global investment manager had higher asset management fees, driven by strong net flows market appreciation favorable investment performance and increasing contributions from the <unk> capital acquisition and higher other related revenues driven by higher incentive fees. This was partially offset by higher expenses to support business growth.
Speaker Change: Results of our U S businesses reflected higher expenses related to the onetime transaction impacts associated with the closing of both the guaranteed universal life reinsurance transaction and the consolidation of our captive financing arrangements let's.
Speaker Change: Less favorable underwriting results driven by mortality experience and true ups and lower net fee income.
Speaker Change: This was partially offset by higher net investment spread income, primarily driven by business growth or.
Speaker Change: Our international businesses had less favorable underwriting results, primarily reflect an elevated U S. Dollar products surrenders with the continued weakness in the yen and higher expenses to support business growth. These were partially offset by increased spread income due to higher yields from favorable market performance and reinvestment of the portfolio.
Speaker Change: Turning to slide seven PGM, our global investment manager has diversified capabilities in both public and private asset classes across fixed income equities and alternatives teach them as investment performance remained strong with 78% and 85% of assets under management outperforming their benchmarks over the last five and 10 year periods respectively.
Speaker Change: <unk> assets under management increased by 6% to $1 four trillion dollars from year end 2023, driven by market appreciation net flows and strong investment performance.
Speaker Change: Total net flows in the quarter of $8 $6 billion included affiliated net flows of $8 9 billion driven by a large annuities mandate, partially offset by $300 million of third party net outflows.
Speaker Change: Total net flows for full year 2024 were $38 million, including 24 billion and affiliated flows and 14 billion from third party clients. These inflows reflect the competitive positioning of both teach them and our retirement business in the wake of large, albeit episodic institutional pension plan activity.
Speaker Change: As the investment engine of Prudential teaching capabilities support the success and growth of our U S and international businesses and retirement asset management and insurance.
Speaker Change: <unk> asset origination capabilities investment management expertise and access to institutional and other sources of private capital, including through our sponsored reinsurer of preserving our competitive advantage, helping our businesses bring enhanced solutions and create more value for our customers.
Speaker Change: Our retirement and insurance businesses in turn provide a source of growth for peach them through affiliated net flows as well as unique access to insurance liabilities.
Speaker Change: In addition, our diversified PGM private alternatives platform, which has assets under management of nearly $250 billion experienced 37% growth in private credit origination activity in 2024 compared to the prior year. This was driven by our direct lending businesses, including our acquisition of Deere pass capital and the organic build.
Speaker Change: Out of our private asset backed financing business.
Speaker Change: Turning to slide eight our U S businesses produced diversified sources of earnings from fees net investment spread and underwriting income and benefit from complementary mix of longevity and mortality businesses. We continue to focus on growing our market leading businesses by expanding our addressable market with new financial solutions delivered through a broader.
Speaker Change: Distribution footprint leveraging capabilities across Prudential and enhancing those capabilities to improve the experience of our customers and distribution partners, while driving operating efficiencies.
Speaker Change: Retirement strategies generated strong sales at $50 billion in 2024 across its institutional and individual lines of business institutional retirement sales of $10 billion in the fourth quarter contributed to 36 billion of sales for the year up 27% from the prior year.
Speaker Change: U S funded pension risk transfer transactions for the year were over $16 billion, the highest annual level for any single carrier since we set a record in 2012.
Speaker Change: Additionally, longevity risk transfer sales totaled over $10 billion this year.
Speaker Change: Individual retirement posted $3 $6 billion in sales in the fourth quarter, its best quarter of sales in over a decade.
Speaker Change: 24 sales ruble 14 billion up 84% from the prior year.
Speaker Change: Our productivity and innovation have resulted in continued strong sales of our registered indexed linked annuities and fixed annuity product sales have doubled from the prior year. Additionally, we continue to reduce market sensitivity by running off our legacy variable annuities.
Speaker Change: Group insurance sales totaled $550 million in 2024.
Up 4% from the prior year driven by growth in supplemental health.
Speaker Change: We are executing our strategy of both product and client segmentation 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, 1% for the year, which is at the low end of our target range at.
Speaker Change: In individual life sales reached a quarterly record high of $326 million in the fourth quarter and for the full year increased 23% from 20 twenty-three.
Speaker Change: These increases include the benefit from the strength and breadth of our distribution capabilities the expansion of our product offerings, including our pivot towards more capital efficient products and from an increased level of estate planning sales concentrated in the fourth quarter.
Speaker Change: Turning to slide nine.
Speaker Change: Our international businesses include our Japanese life insurance companies, where we have a differentiated multichannel distribution model as well as other businesses aimed at expanding our presence in targeted high growth emerging markets and Japan. We are focused on providing high quality service and expanding our distribution and product offerings are needs based selling approach and protection of our time.
Speaker Change: With product focus continue to provide important value to our customers as we expand our product offerings to meet their evolving needs and emerging markets. We are focused on creating a selected portfolio of businesses and regions, where our customer needs are growing where there are compelling opportunities to build a market, leading businesses and where the prudential enterprise can add value sale.
Speaker Change: Sales in our international businesses for 2024 were up 6% compared to the prior year sales in Japan are benefiting from recent retirement and savings product launches, which are gaining traction with customers, resulting in a 14% increase in sales of these products compared to the full year of 2023.
Speaker Change: In addition, emerging market sales increased 12% versus the prior year driven by growth in Brazil, as we continue to expand third party distribution and benefit from the strong performance of our 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.
Speaker Change: 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 Jeanette law.
Speaker Change: Thank you Rob.
Jeanette law: I will begin on slide 10.
Jeanette law: Our significant capital position and strong regulatory capital ratios continue to support our double a financial strength and our ability to expand our market leading businesses, our cash and liquid assets were $4 $6 billion, which is above our minimum liquidity target of $3 billion and we have substantial off balance.
Jeanette law: <unk> resources.
Now turning to slide 11, as I mentioned on last quarter's call in order to provide greater insights into our financial outlook and align with our longer term nature of our business, we are introducing new financial targets through 2027.
Jeanette law: Our significant growth in sales and flows supported by the strength of our balance sheet and our commitment to become a higher growth more capital efficient company position us well to achieve these targets.
Jeanette law: We expect this will lead to annual core earnings per share growth of five 8%, which is based off of core adjusted operating income per share for 2024.
Jeanette law: And an adjusted return on equity of 13% to 15%.
Jeanette law: We're also introducing an operating expense ratio for our global retirement and insurance businesses and anticipate a range of eight and a half to 10, 5%, which we expect will trend down over the three year period.
Jeanette law: The momentum in our sales inflows combined with operating efficiencies and incremental buybacks are expected to contribute to our earnings growth and returns over the three year period, but this performance may not be linear due to the near term strain from new business and the impact of run off blocks.
Jeanette law: In addition, we will remain thoughtful in our capital deployment, preserving our financial strength and flexibility by targeting to maintain highly liquid assets of over $3 billion at the holding company, while investing in our businesses for long term sustainable profitable growth.
Jeanette law: We expect to deploy 30% to 40% of capital generated towards organic growth as we see significant opportunities in our chosen markets.
Jeanette law: After consideration of organic growth this yields a free cash flow ratio of approximately 65% of net income was 35% to 45% expected to be deployed to attractive and increasing dividends.
Jeanette law: This is a healthy return to shareholders that represents an annual payout of approximately 6% of adjusted book value as of year end 2024.
Jeanette law: Further we expect to return, 20% to 30% towards share repurchases and the board authorized $1 billion of repurchases in 2025.
Jeanette law: Finally, we continue to proactively explore opportunities to invest in inorganic growth, while maintaining a disciplined approach to capital deployment in the current environment.
Jeanette law: Turning to slide 12, our enterprise metrics will be supported by our business segment growth targets.
Jeanette law: We expect low double digit earnings growth and Keygen backed by strong asset management fee growth of 6% to 9% driven by net flows and market appreciation and an adjusted operating margin of 25% to 30%.
Jeanette law: In the U S businesses, we expect mid single digit earnings growth supported by account value and sales growth across businesses.
Jeanette law: And retirement strategies, our caf value growth assumes annual gross sales of $35 billion to $45 billion, which will be partially offset by annual net run off of our pension and longevity risk transfer products of $8 billion to $10 billion and legacy valuable annuities of 12 to 16.
Jeanette law: Yeah.
Jeanette law: In group insurance, we expect premium growth of 2% to 4% and in individual life, we expect sales to be flat to 5% growth.
Jeanette law: And lastly in our international businesses, we expect low to mid single digit earnings growth.
Jeanette law: Even by sales growth of four 6% as we continue to diversify our product mix.
Jeanette law: We also have included our key economic assumptions and other earnings considerations specific to 2025 in the appendix.
Jeanette law: We are confident in our ability to deliver on these financial objectives, as we drive incremental organic growth in our businesses, while continuing to maintain our disciplined capital deployment approach.
Jeanette law: So turning to slide 13, and in summary, we continue to become a higher growth more capital efficient company, we will maintain our 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.
Jeanette law: Thank you will now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Jeanette law: Press Star two if you'd like to move your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing star one one moment. Please while we poll for questions.
Speaker Change: First question today is coming from city come off from Jefferies. Your line is now life great.
Speaker Change: Great. Thanks, I wanted to start out on the annuity outlook I see the 20% to 25% account value growth. Caroline I was just wondering if you could help us maybe translate that into sales growth expectations for the year and the reason I ask is I think Liberals out, saying sales will probably be down for the industry and I just wanted to get.
A sense of how youre thinking about cruise outlook.
Speaker Change: Yeah terrific, so neat and I will certainly take your question. So clearly it was a another extremely strong year for annuities, where there were 425 billion in total industry sales last year, and I think what lemon might be referencing in terms of are there. Some of their outlook is is this past quarter the industry did.
Speaker Change: See some softening of traditional fixed annuity sales, which is to be expected with rate decreases. So what we're seeing is a shift from I guess, which are more sensitive to rates.
Speaker Change: <unk> products, such as <unk>, but.
Speaker Change: And what I would point out is that <unk> sales were up over 35%.
Speaker Change: Cross the industry last year, so in our own business. We continue to see positive results in the fourth quarter, we delivered roughly $3 5 billion in sales, which was our ninth consecutive quarter of sales growth and.
Speaker Change: So from an outlet perspective, Sydney I'd say as we've discussed previously we continue to see those compelling tailwind in the marketplace driven by aging demographics, plus a high volume of money in motion and that includes an estimated 70 billion in fixed annuities, that's coming due as well as over seven.
Speaker Change: Trillion in money market fund balances. So all of this just underscores the importance of our diversified product portfolio.
Speaker Change: As you know it's a neat that's has been a key focus for us over the past few years and as a result, we now have the broadest individual product portfolio in our history and we actually have five different products that over a billion in annual sales. So overall, we believe the tailwind will continue to support strong sales and certainly we are well positioned.
Speaker Change: Capture that demand and thanks to the strength of our distribution and our well established brand.
Speaker Change: Got it and then I just wanted to pivot to prismatic. Yeah. Obviously, we saw the internal reinsurance deal and presumably that's going to consume some of their time and capital I guess the question is how quickly do you think prisma could sort of pivot to maybe some third party deals, particularly in Japan is it going to take some.
Speaker Change: And for them to integrate this transaction or just any thoughts around that would be helpful.
Rob: So need it's Rob I'll address that so.
Rob: Yeah. We are closed the second transaction as we I think had indicated with Japan based on a number of important reasons for doing that but more broadly as we think about the Japan opportunity, including the third party opportunity in Japan, We think it's a significant growth opportunity for Christmas.
Rob: Both from our own book and US and third party reinsurance Japan's the third largest life market in the world and it's been relatively underserved by third party reinsurers So theres.
Rob: There is an opportunity there and that opportunity is sort of accelerating by virtue of the introduction of the ESR regime.
Rob: And its impact on legacy books that have been sold not just by us but across the industry. ESR is has a non economic treatment of a long duration foreign currency denominated product.
Rob: That's in the Japan market place, but the industry has sold a lot of that and continues to sell it because of the demand that our customers have for the product and so addressing those books and that's in those in those flows of sales are going to be something that the industry has to grapple with and we think we're well positioned to do so.
Rob: Our brand our local presence.
Rob: And the market intelligence.
Rob: That we've got crude create a competitive advantage prismatic as we've indicated in the last quarter, we stood up a dedicated license to team in Japan, and then by virtue of as I indicated upfront by closing on our own whole life book, It's given us the experience and confidence to execute third party blocks and further establishes our.
Rob: Ability in the marketplace, but I would emphasize more generally you know we're optimistic that we can grow prismatic through the multiple levers that we've got some needs. So that includes ongoing balance sheet optimization, both in the U S and Japan. It includes importantly flow so new sales solutions across our businesses and third party blocks, particularly in Japan.
Rob: Got it okay. Thanks.
Speaker Change: Thank you next question today is coming from Tom Gallagher from Evercore ISI. Your line is now live.
Tom Gallagher: Good morning, a few questions on free cash flow the.
Tom Gallagher: So the 65% free cash flow conversion why is 30% to 40% of that needed for growth capital when most of the businesses.
Tom Gallagher: That I would think of requiring capital or growing sub 5%.
Tom Gallagher: Yeah.
Tom Gallagher: Hey, Tom It's Alan So let me take that so we you know we continue to see strong opportunities in our chosen markets and we're leaning into those opportunities as evidenced by our strong sales and flows really across our businesses. So as an example on a full year basis, we had a 39% increase in sales for retirement is trying to do is 23.
Tom Gallagher: Increase in sales for individual life and these strong sales are contributing to earnings, but we do face near term headwinds due to strained from new business, specifically distribution costs that are not deferred and the impact of run off. So you know I would emphasize that we're investing in strong growth that is materializing in earnings, but we haven't.
Tom Gallagher: Near term headwinds related to new business strain and run off.
Tom Gallagher: These headwinds moderate we would expect an upward trajectory in our core earnings growth, but even with these headwinds we have a 5% to 8% growth rate in core earnings were paying a healthy dividend and we have a healthy level of buybacks.
Speaker Change: Got you in general just a follow up.
Speaker Change: Making sure I'm understanding what the intention is here when I solving for buybacks and dividends if I take the 75% of the 65% free cash flow conversion that would equate to about 50% of GAAP earnings that will be returned through buybacks and.
Speaker Change: Hands over the next three years is that is that the rough math and and and just a related question.
Speaker Change: Thank you you used to use operating income now youre using that income is there anything to read into with with the change in that conversion. Thanks.
Speaker Change: Yeah. So I mean, if you look at our capital allocation priorities that we shared so attractive.
Speaker Change: Dividends are 35% to 45% share repurchase is 20 to 30, so I think you're just adding those two when you get to the to the 75.
Speaker Change: And so in terms of the change to net income no Wow, Eli as a primary basis for assessing operating results. We do think that over the near term GAAP net income will be closer proxy for free cash flows and that is because there are items that are excluded from ally that do impact statutory.
Speaker Change: Capital, which is the primary driver of cash flows. So for example realized gains and losses that arrived to normal course portfolio management activity or mark to market on hedging instruments impact both GAAP and stat.
Speaker Change: Now Conversely, there are some components of drop down and some that don't impact us cash flows, but our free cash flow ratio is an overtime calculation time, and we do anticipate that much of the non economic volatility largely evens out over time, leaving us with net income being a good indicator of cash flows.
Speaker Change: In the near term for us.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you. Your next question is coming from Ryan Krueger from K B W. Your line is now live.
Ryan Krueger: Hey, Thanks, good morning.
Ryan Krueger: First question was just on the U S. T transactions you completed in the Japan pretty big transaction that announced between the two of them Youre freeing up.
Ryan Krueger: Several hundred million dollars I think of over $500 million, but kept the buyback at $1 billion for 2005 can you give more color on how you may use that capital over time are you holding it for potential opportunistic M&A or is there are there any other consideration for it you can use that for.
Ryan Krueger: Hi, My name is Jen Allen. So you know the potential uses of the capital will be consistent with our capital allocation priorities that we detailed our with our financial targets and we'll be consistent with our essentially our priorities in terms of how we think about capital deployment. So we look to strike a balance between preserving for them.
Ryan Krueger: So strength and flexibility investing in our businesses for long term growth and returning capital to shareholders as part of our shareholder distribution philosophy.
Ryan Krueger: Poor level of share repurchases will generally be sustainable.
Ryan Krueger: Keep in mind that that may vary with opportunities for attractive capital deployment or.
Ryan Krueger: Or reductions in free cash flow in times of stress. So we constantly monitor developments and economic and market conditions, we will follow our risk management and capital management Playbooks with discipline to be prepared for opportunities and risks as well.
Speaker Change: Thank you and then there was a recent lawsuit against the plan sponsors that involves the pension risk transfer transaction with Prudential.
Speaker Change: And then some other lawsuits against other planned sponsors from other pension risk transfer providers that have had some negative impact. It seems on activity do you think this will have any impact on the Prudential transaction refiners do you view this more as a one off issue.
Speaker Change: Yeah, So Ryan it's Caroline and I will take your question and while I won't comment on the impact on any of our peer companies I will say clearly that litigation like that threatens the ongoing health of the pension risk transfer industry.
Speaker Change: It's particularly harmful for plan sponsors who are looking to derisk their pension obligations.
Speaker Change: For the retiree pensions are protected through these transactions so fundamentally companies like Prudential, who are governed by the insurance regulatory system are simply better holders of these types of risks in our registry has an extensive history of fulfilling the promises made to retirees.
Speaker Change: And since we here at Prudential actually pioneered this business in a transaction with the Cleveland Popsicles Library, which was now over 100 years ago, Ryan So while we're not a named party and a lawsuit and let me just reiterate that this lawsuit does not accurately represented prudential or the quality and the security of the industry.
Speaker Change: In terms of the impact going forward from a new business perspective, Ryan we still see strong funded status is and we see favorable market conditions. So we have every reason to believe they will continue to be an active pipeline and with our ability to work with plan sponsors of all different types and sizes, we are well positioned to continue.
Speaker Change: To be a market leader in that space.
Speaker Change: Thanks I appreciate the response.
Speaker Change: Thank you. Your next question is coming from Elyse Greenspan from Wells Fargo. Your line is now live.
Elyse Greenspan: Hi, Thanks, Good morning, I know you guys said on the five to EPS growth outlook. Why it is is not expect it to be linear I think was the words and obviously there could be some variations by ear, but how would you think you know calling into 25 25.
Elyse Greenspan: Your expectations, there relative to the 5% to 8% target.
Speaker Change: Yeah, Hi, Lisa So now so I would start by saying that we feel confident about our 5% to 8% EPS growth target off of core earnings we see strong opportunities in tailwind and we're executing on those opportunities as evidenced by our strong sales and flows.
Speaker Change: But as you as you pointed out and as I said in my opening remarks. This growth will not be linear and we do have some near term headwinds are mainly due to the strain of sales.
Speaker Change: And run off so the 5% to 8% is an average over the three year period, it could be lower or higher in any given year and naturally as the headwinds of some of our run off blocks moderate and our growth investments take hold we would expect an upward trajectory in our core earnings over the three year period.
Speaker Change: Thanks, and then my second question is on just on price, making Japan on you guys did announce a recent transaction beyond that.
Speaker Change: The deal with the capital T. The upcoming capital changes in Japan, do you guys expect us to do additional transactions with op with Crescent back there.
Speaker Change: Elyse, it's Rob I'll take that question, we're continuing to work on an active pipeline of multiple reinsurance transactions Ah. They include ongoing balance sheet optimization from our own book, both in the U S and Japan.
Speaker Change: We're working on flow solutions as well across our businesses again in the U S and Japan and.
Speaker Change: And we are looking at third party blocks with a focus there being really almost exclusively in Japan. So our expectation is that yes, we will continue to have opportunities with prismatic to address the opposite of what we see as a significant market opportunity not just in our own book, but across the industry in Japan.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Thank you. Your next question is coming from Wes Carmichael from Autonomous Research. Your line is now live.
Wes Carmichael: Hey, good morning, I wanted to follow up on Japan, and maybe the progress that's being made on an ESR implementation I think your your Japanese FMR ratios are in excess of 700% today, but could you give us any insight on your view of current excess capital in Japan, If you had to implementing a sorry today.
Wes Carmichael: I was just so yeah did you have to say, it's playing is to adopt ESR mm for the fiscal year beginning April one 2025 with the first mandatory reporting date being March 31, 2026, and we expect upon implementation of stars on our capital levels will continue to be above target levels.
Wes Carmichael: That would support the only financial strength ratings and as we said before our intent is to start providing information about our MSR position in the summer we have executed some transactions are affiliated reinsurance transactions to help mitigate the volatility and like we always do we constantly seek to optimize our bauer.
Wes Carmichael: Sheet and manage our risks and capital and reserving regimes that best match, the economics of our products. So we don't anticipate a significant change in our.
Wes Carmichael: Our capital position in those entities.
Wes Carmichael: Hey, Wes it's Andy let me just add that in Japan, we offer a broad product portfolio that meets the needs of our customers and we're continuing to innovate and expand on that port portfolio, including with ESR friendly offerings. So the bottom line for us as these product capabilities when combined with our strong underwriting our asset liability management.
Wes Carmichael: And our hedging.
Wes Carmichael: We have everything that we need to continue to profitably grow well in Japan.
Wes Carmichael: Got it thank you and maybe Andy as a follow up for you as you think about taking the reins of Prudential at the end of March how are you thinking about your direction as leader of the business any color on where you're most focused strategically in your first few months as CEO.
Wes Carmichael: Yeah. So Wes thank you for the question and let me start by saying this is an absolute honor and it's a privilege and I couldn't be more excited about what what's ahead of us.
Wes Carmichael: As you would expect we have a rigorous transition plan that we're marching through and that transition is going very well.
Wes Carmichael: It obviously helps that I've been a member of this executive team now for over five years.
Wes Carmichael: But having said that we always have a lot of work to get done in front of US we absolutely intend to continue to raise the performance of the company over time.
Wes Carmichael: And given the strong opportunities that we see in the marketplace. So you know what.
Wes Carmichael: It's not yet in the role so it would be premature to share additional information right now, but I look forward to sharing more with you in the future calls as the team settles in.
Speaker Change: Got it thanks Anthony.
Wes Carmichael: Yeah.
Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from John Barnidge from Piper Sandler Your line is now live.
John Barnidge: Good morning, Thank you for the opportunity.
John Barnidge: My question is on the free cash flow conversion in the zero to 10% opportunistic M&A I know Peru maintained its ownership in the second round of prismatic is that going to be the main consumer of zero to 10% of opportunistic M&A or.
John Barnidge: Does it remain interests in high growth emerging markets International.
John Barnidge: As previously expressed by the company in prior years.
John Barnidge: So John it's Charlie I will take your question I'd say, thank you I'm I'm excited to get a question. So that's that's great.
Speaker Change: Taking a step back for a moment as always organic growth is job number one as you heard from some of the other management.
Speaker Change: But we're open to operate as an opportunistic and selective M&A that accelerates our strategy and meets our financial objectives. As we go forward in the past we've executed on many acquisitions that have significantly grown the company and we pursued these acquisitions for a whole variety of reasons, such as expanding our capabilities broadening our distribution increasing scale or add.
Speaker Change: Key talent and as we look forward, we're going to focus on organic growth opportunities to expand our product breadth and distribution capabilities scale, our existing businesses, including through his prismatic as you suggest which provides us access to third party capital and we will be both strategic and selective in our M&A interest.
Speaker Change: Which remain consistent in terms of focusing on our programmatic acquisitions, four P, Jim or emerging markets and focusing on distribution capabilities or scale.
Speaker Change: Yeah.
Speaker Change: Thank you that's helpful and with the pipe kind of laid with that second transaction of the prismatic or you'd be getting kind of warehouse liabilities and investors for subsequent round.
Speaker Change: The friction is left.
Speaker Change: John It's Rob we don't have a specific plan for warehousing liabilities in the way that you described it what I would say is that we have brand quality and scale in our insurance and retirement businesses, both in the U S and in Japan and.
Speaker Change: And so we both have significant back books, and we have a significant volume of sales as evidenced by the growth that we witnessed just in this last year on quarter with the sales across our businesses and so we.
Speaker Change: We don't have a bespoke warehouse, where instead, what we have as a business system, which is generating significant amounts of liabilities, which lend themselves to opportunities for Christmas on a go forward basis.
Speaker Change: Yeah.
Speaker Change: Thanks.
Speaker Change: Thank you. Your next question is coming from Jack Madden from BMO. Your line is now law.
Jack Madden: Hi, Good morning, I'm, just just one follow up on the free cash flow conversion.
Jack Madden: You mentioned the headwinds from new business strain and the impact of run off I guess just to clarify those comments related to GAAP earnings or what are you referring to the cash flow conversion ratio, excluding new business strain element of that makes sense to me, but I would've thought that blocks running off would've had a higher cash flow conversion rates conversion rates and should not.
Jack Madden: Any new business strain, so just want to make sure I'm understanding it correctly.
Jack Madden: Correctly.
Speaker Change: Yeah, Jonathan Chanel, I'm, sorry, yes, I was referring to are the GAAP earnings on a la Carte core earnings specifically in my answer to the run off and the new business strain.
Speaker Change: Got it thank you and then.
Speaker Change: Just a question on the intermediate term growth outlook within the international operations.
Speaker Change: Your guidance for low to mid single digit earnings growth I guess does that outlook assume that all products are injuries normalize off of the more recent elevated levels.
Speaker Change: Or any other drivers that you would call out as driving an uptick in kind of your growth trajectory in those markets.
Speaker Change: Yeah, I'd say, Andy I'll I'll take the question. So are you know as we look at at the growth at a low to mid single digit earnings right. The growth is really driven by a few things favorable net spread results that flow from higher yields and stronger alternative investment income stronger underwriting results as our sales momentum is continuing and obviously.
Speaker Change: Our continued expense discipline those positive forces are going to more than counteract the near term pressure that where we are expected to continue from a from the U S dollar product surrenders in Japan.
Speaker Change: Those are we did see in Q4.
Speaker Change: Lois level of surrenders of any quarter in 2024, So we think and believe over time that will stabilize net net are we expect solid growth, but we are having to overcome some of these headwinds.
Speaker Change: Thank you.
Yeah.
Speaker Change: Thank you next question is coming from Alex Scott from Barclays. Your line is that life.
Alex Scott: Hi, I wanted to drill into the PS Jim.
Alex Scott: Drivers of earnings growth in the low double digits that you provided.
Alex Scott: Yeah, it looks like.
Alex Scott: Revenue is more mid single digits.
Alex Scott: I just wanted to understand the the.
Alex Scott: The margin improvement that you're expecting there looks to be pretty substantial and you know I just wanted to understand like what are some of the things that are that are tangible that youre doing to to improve expense base.
Alex Scott: Okay.
Alex Scott: So thanks, Alex it's Andy So let me, let me talk about our pizza margins and let me just start by saying we are pleased with the progress that we've made improving.
Alex Scott: Improving the margins every quarter through 2024, ending the year with a 25% 25, 6% margin so really good progress.
Alex Scott: That being said I think as we've talked about in previous quarters. Overall, our margins are still depressed as a result of the higher rate environment and the impact that has on both fixed income and from the slowdown in the real estate market, but you know the path for US. It is very clear, we expect to expand our margins towards 30%.
Alex Scott: Led by three main drivers first and improving fixed income and real estate environment that will drive fees and it'll drive a normalization of flows in fundraising.
Alex Scott: We expect continued traction in our growth investments, where we're seeing very real progress, particularly in our in our private credit work.
Alex Scott: And third we do have a continued discipline on expenses I know that's been a laser focus for us.
Alex Scott: And we are balancing finding efficiencies with reinvesting in growth. So the bottom line is we do expect our margins are going to continue to expand from here from both our intentional actions, but also from an improvement in the cycle.
Alex Scott: Yeah.
Speaker Change: Got it Okay and then similar question on the expense ratio improvement that was part of the intermediate guide after the insurance businesses.
Alex Scott: How do we think about.
Alex Scott: Calculating that and understanding the way that that will influence the bottomline results across different segments.
Alex Scott: Hey, Alex This is Jen Allen So you know the expense ratio, but I would start with is as of the full year 2024, we are already close to meeting the top end of that range in terms of calculating and we were sharing the materials. How we calculate it now we don't currently disclose the split between variable and.
Alex Scott: And operating G&A, we will start doing that to help you calculate the ratio.
Alex Scott: But I would I would also speak to the fact that there has been upward pressure on our journey, but that has been really driven by variable distribution expenses, resulting from our strong sales and these valuable expenses have corresponding revenues that we generally have a positive impact on the operating expense ratio. So are we.
Alex Scott: We do anticipate that overtime, our continuous improvement approach and that the investments that we're making to grow and transform our businesses will continue.
Alex Scott: Two contributed efficiencies, which will be evident through the positive trends in the ratio over time. So that's what we expect in the ratio I do want to go back to John's question on the run off in the castle, though so yes, what I was speaking about the runoff I was speaking about the impact on core earnings but runoff also does impact cash flows because obviously the fee.
Alex Scott: That we receive on those lines.
Alex Scott: Let's see variable annuities is also a going away.
Alex Scott: Okay.
Alex Scott: Okay. Thank you.
Alex Scott: Yeah.
Mike Ward: Thank you next question is coming from Mike Ward from UBS. Your line is now live.
Speaker Change: Hey, Thank you good morning.
Speaker Change: One question just on the on the lifestyles pretty big jump in sales in the quarter I'm wondering what product lines that was in and if if we're seeing that big growth like if it's a state planning sales could that actually open up for a little bit more earnings volatility.
Speaker Change: Going forward. Thanks.
Speaker Change: Sure, Mike, It's Caroline and I will take your question. So actually as you say our individual life business finished the year strong we had record sales of over $325 million in the fourth quarter.
Speaker Change: Which is an increase of 60% over the prior year quarter.
For the full year, Mike our sales were up nearly 25% versus the prior year.
Speaker Change: And most importantly, you asked about products and where we're seeing that we're actually achieving those sales increases across virtually every product and our well diversified portfolio, while continuing to generate attractive returns.
Speaker Change: You also mentioned a say a state planning and and the significant sales increase we saw this past quarter did benefit from some increase the state planning activity.
Speaker Change: I don't think that that brings any additional volatility to us what I would say is I think it's quite possible that we may continue to see some of our customers continue to focus here based on a couple of macro factors that are driving this activity overall.
Speaker Change: Overall, we're very pleased in the breadth and the quality of our life New business are the last point that I will notice that we are seeing a flight to quality across the industry and we are well positioned to continue to benefit thanks to our established brand and our distribution strength.
Speaker Change: Great. Thank you. Thank you so much that's helpful.
Speaker Change: Maybe on the on the just on the capital strain Gino I know you clarified this but I would've thought that there is at least some sort of capital relief or release upon runoff business.
Speaker Change: I'm guessing it's sort of just the operating or the the fees are more significant in the component but.
Speaker Change: I think any clarity on that would be helpful. Thanks.
Yeah no.
Speaker Change: When those run off Theres cap are released but we are also reinvesting capital into the growth of the business and the new sales. So you know when we talk about a 30% to 40%.
Speaker Change: Organic growth funding that is that includes you know that the piece that we're freeing up into casuals were generating.
Speaker Change: Okay. Thanks.
Speaker Change: Thank you. Your next question is coming from women <unk> from Raymond James Your line is now live.
Speaker Change: Oh, Hey, good morning could you talk about the morbidity margins in Japan, and the potential operating opportunities to free up some of that capital.
Speaker Change: And along the same lines can you talk about why prismatic reinsurer to more recent block of business from Japan. When the legacy products are more pressured by ESR and just maybe talk about the goals there. Thanks.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: It's Rob I'll jump in on the second part of that question.
Speaker Change: First and then.
Speaker Change: And then some.
Speaker Change: Some of them want to jump in on the first part with.
Speaker Change: With respect to the block that we selected for prismatic and treatment under ESR.
Speaker Change: I would note is that it was again a longer duration are dollar denominated product and so under ESR that is in fact, the type of product, where we have significant margins.
Speaker Change: But those margins arent necessarily reflected wells in the from an economic standpoint under ESR.
Speaker Change: And so it actually presented itself as a good test case block for us given that our view is across the industry that type of product meeting dollar denominated longer duration is the area where people where other players in the marketplace will be feeling.
Speaker Change: Feeling some.
Speaker Change: Strain under ESR, and therefore, a good opportunity for us to sort of get the pipe set up demonstrated that we could do it.
Speaker Change: And and learn from that process and create the credibility we need for third parties as well.
Speaker Change: The with respect to your your first question on the mortality margins, maybe Andy wants to jump in on that.
Speaker Change: That part of the question.
Speaker Change: Yeah, and well known.
Speaker Change: Upfront I didn't fully follow or what you meant by your question, but what I would tell you is our our morbidity experience in Japan has been within our expected ranges.
Speaker Change: And as I said earlier, what we're what we've really been experiencing in the underwriting line is the enhanced headwinds and pressure from a surrender perspective.
Speaker Change: But that being said we've done a lot of work to broaden out our product portfolios.
Speaker Change: We've been very successful in enhancing our offerings and ER and that's really shown me the strength in sales over the last couple of years.
Speaker Change: Okay. Thank you and then just trying to put a little finer point on 25.
Speaker Change: We expect EPS growth at the lower end of the 5% to 8% EPS range.
Speaker Change: Even more weighted towards the back half of about 27 range. Thanks.
Speaker Change: Yeah, well not pseudomonas so I as I mentioned its not linear and also we had the near term headwinds. So if you take into account near term hurt near term headwinds that I would say, yes twenty-five being closer to the near term would have a higher headwinds there.
Speaker Change: And the out years.
Speaker Change: Yeah.
Speaker Change: Thank you.
Thank you. Your next question is a follow up from Wes Carmichael from Autonomous Research. Your line is now live.
Wes Carmichael: Hey, Thanks, so much for taking my follow up Andy I know you just mentioned on surrender activity in Japan, and I just wanted to touch on that for a second that's been impacted I think by by the move in the yen and in your assumptions, you're assuming a pretty meaningful strengthening of the yen and $1 35. So I guess can you talk about what we might see or how do you expect that to play out in guidance. If you don't.
Speaker Change: See a pretty significant strengthening of the yen.
Yeah sure West let me take that in a couple of parts. So.
Speaker Change: First let me take the guidance around the assumption of the ongoing to 135. So that Oh are you an assumption is really based on the forward curve and as we sit here today and look at that that's that sits in and around $1 35.
Speaker Change: So the market believes the yen will appreciate based on both economic growth in Japan in any interest rate increases in Japan.
Speaker Change: But I would remind you no.
Speaker Change: No matter, which way. They these are yen rates go we've been intentionally diversifying the portfolio as I just said.
Speaker Change: And our young sales in Japan as a percent of the total are up 10% year over year to 35%.
Speaker Change: So we do expect these surrender headwinds to to lessen.
Speaker Change: As we look forward and the yen to appreciate given the economic environment, but no matter, which way. Those go we have a broad set of offerings across yen and U S. Dollar and we know that demand for our products is going to stay strong.
Speaker Change: Oh. Thank you that's really helpful and I guess my my last follow up on an individual life underwriting.
Speaker Change: It was a little bit worse in the quarter, but if I look back over the past couple of years, it's been a pretty pretty meaningful headwind as you call. It out in your slides. So I realize theres some seasonality and you guys have done a couple of transactions, but can you give us any help on how you're expecting to kind of get that back to a headline profitability.
Speaker Change: Ah, yes, so I'll take your question, it's Caroline so for this past quarter as Charlie mentioned in his opening comments, we had several large case claims from permanent policies from our legacy Hartford block in and so that's resulted in the adverse mortality that negative underwriting that you saw which can happen episodically.
Speaker Change: And what I would say, though and in terms of underwriting over a more broadly we do continue to see encouraging signs that COVID-19 has transitioned to an endemic state with more predictable seasonal fluctuations in mortality such such as what we typically see during the flu season.
Speaker Change: Other thing that I would add with it. It's clearly you have seen us and continue to successfully execute on our strategy to reduce market sensitivity and.
Speaker Change: And increased capital flexibility.
Speaker Change: With actually Derisking and now reducing the size of our G well enforced by roughly 60% and so we are very pleased with the transactions we've completed them.
Speaker Change: We will continue to.
Speaker Change: To be very proactive in terms of managing our in force block of business.
Speaker Change: And so that that is a major priority for us and and so are.
Speaker Change: Our derisking transactions have gone a long way towards smoothing out and expectations.
Speaker Change: Thank you we've reached end of our question and answer session I'd like to turn the floor back over to Mr. Lowery for any further or closing comments.
Lowery: Thank you and thank you for joining us today I'll close with a few final thoughts it has been a privilege to lead Prudential as CEO for the past six years I'm proud of what we've accomplished to become a higher growth and more capital efficient company that is well positioned for long term sustainable growth.
Lowery: I offer my profound thanks to our employees around the world, who care for our customers our clients our communities and for each other every day I'm confident that this will continue under the next generation of leadership and I look forward to supporting Andy and the leadership team in my role as executive Chairman.
Lowery: And for joining our call today and for your time.
Speaker Change: Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day.
Lowery: For your participation today.