Earnings Transcript

Corrected Transcript

03-Nov-2021

Prudential Financial, Inc. (PRU)

Q3 2021 Earnings Call

Total Pages: 20

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Prudential Financial, Inc. (PRU)	Corrected Transcript
Q3 2021 Earnings Call	03-Nov-2021

CORPORATE PARTICIPANTS

Bob McLaughlin	Kenneth Yutaka Tanji
Head of Investor Relations, Prudential Financial, Inc.	Chief Financial Officer & Executive Vice President, Prudential Financial,
Charles F. Lowrey	Inc.
Andrew F. Sullivan
Chairman & Chief Executive Officer, Prudential Financial, Inc.
Robert Michael Falzon	Executive Vice President & Head-US Business, Prudential Financial,
Inc.
Vice Chairman, Prudential Financial, Inc.	Scott Garrett Sleyster
	Executive Vice President & Head-International Business, Prudential
	Financial, Inc.

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OTHER PARTICIPANTS

Erik Bass	Thomas Gallagher
Analyst, Autonomous Research	Analyst, Evercore ISI
Ryan Krueger	Elyse Greenspan
Analyst, Keefe, Bruyette & Woods, Inc.	Analyst, Wells Fargo Securities LLC
Humphrey Lee	John Barnidge
Analyst, Dowling & Partners Securities LLC	Analyst, Piper Sandler & Co.
Tracy Benguigui	Jimmy S. Bhullar
Analyst, Barclays Capital, Inc.	Analyst, JPMorgan Securities LLC
Andrew Kligerman
Analyst, Credit Suisse Securities (USA) LLC

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Prudential Financial, Inc. (PRU)	Corrected Transcript
Q3 2021 Earnings Call	03-Nov-2021

MANAGEMENT DISCUSSION SECTION

Operator: 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 will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, today's call is being recorded.

I will now turn the call over to Mr. Bob McLaughlin. Please go ahead.

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Bob McLaughlin

Head of Investor Relations, Prudential Financial, Inc.

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 US Businesses; Scott Sleyster, Head of International Businesses; Ken Tanji, Chief Financial Officer; and Rob Axel, Controller and Principal Accounting Officer. We will start with prepared comments by Charlie, Rob and Ken, and then we will take your questions.

Today's presentation may include forward-looking statements. It is possible that actual results may differ materially from the predictions we make today. In addition, this presentation may include references to non-GAAP measures. For a reconciliation of such measures to comparable GAAP measures and a discussion of factors that could cause actual results to differ materially from those 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 the quarterly financial supplement, both of which can be found on our website at investor.prudential.com.

And with that, I'll turn it over to Charlie.

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Charles F. Lowrey

Chairman & Chief Executive Officer, Prudential Financial, Inc.

Thank you, Bob, and thanks to everyone for joining us today. As always, we hope you and your families remain safe and healthy. Prudential delivered solid financial results for the third quarter, reflecting our strong investment performance and high demand for the products we've introduced to support our customers as they solve their financial challenges in a changing world.

We also made significant progress executing on our transformation strategy to become a higher-growth, less market-sensitive and more nimble company. First, we reached agreements to divest our full-service recordkeeping business and to sell a portion of our traditional variable annuities, advancing our pivot toward less market-sensitive and higher-growth businesses.

Second, we continue to advance our cost-savings program and remain on track to achieve $750 million of savings by the end of 2023. And third, with the support of our rock-solid balance sheet, we are maintaining a disciplined and balanced approach to redeploying capital. I'll provide an update on each of these transformation initiatives before turning it over to Rob and Ken.

Turning to Slide 3. In September, we reached an agreement to sell a block of our traditional variable annuities to Fortitude Re. This divestiture, which is expected to close in the first half of 2022, represents approximately 20% of our traditional individual annuities account values and significantly advances our goal of cutting in half the

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Prudential Financial, Inc. (PRU)	Corrected Transcript
Q3 2021 Earnings Call	03-Nov-2021

earnings contribution of legacy variable annuities products through a mix of strategic transactions and natural runoff. This transaction expands upon our prior divestiture activity, including the agreement we announced in July to sell our full-service recordkeeping business and the successful completion of the sales of our Taiwan and Korea insurance businesses.

As a result of these divestitures to date, we expect to generate net proceeds of approximately $6 billion by the first half of 2022. And we continue to explore additional opportunities to derisk in-force blocks of business. With the pending sale of our full-service recordkeeping business and our annuities block transaction, we have combined our individual annuities and retirement businesses to better serve the retirement needs of both individuals and institutions and support our growth strategy.

Turning next to our cost-savings program on slide 4. We are progressing well and remain on track to achieve our $750 million cost-savings target by the end of 2023 as we look to reduce expenses while improving both the customer and employee experience. To date, we have achieved $590 million in run rate cost savings, exceeding our $500 million target for the full year. These savings include $145 million achieved in the third quarter for a total of $385 million this year.

Turning to slide 5. We continue to demonstrate a disciplined and balanced approach to capital deployment by enhancing returns to shareholders, reducing leverage and investing in the growth of our businesses, all supported by our rock-solid balance sheet. Year-to-date, we returned $3.5 billion to shareholders, including $2.1 billion of share buybacks and $1.4 billion in dividend payments, reflecting a 5% increase in our quarterly dividend, compared to last year. And we're targeting to return $11 billion of capital to shareholders by the end of 2023.

During the third quarter, we also took steps to enhance our financial flexibility by redeeming $900 million of outstanding debt. This reduced financial leverage and generated $30 million in annual interest savings going forward. We also continued to deploy capital in our businesses to drive long-term growth.

For example, this quarter, we completed a $5 billion funded pension risk transfer transaction, which is the fourth largest transaction in the history of the PRT market and demonstrates our expertise, ability to execute at scale and commitment to this market. We also deployed capital to support our ongoing pivot to less interest rate sensitive and higher growth products, including our FlexGuard and variable life products. Our capital deployment is supported by our balance sheet strength, including highly liquid assets of $3.8 billion at the end of the third quarter and a capital position that continues to support AA financial strength rating.

Turning to slide 6. I'm pleased to report a meaningful expansion of our environmental, social and governance commitments. Earlier this week, we announced our commitment to achieve a net-zero emissions across our primary global home office operations by 2050, with an interim goal of becoming carbon neutral by 2040. We're also carefully assessing the emissions impact of our investment portfolio.

As an immediate action, we will restrict new direct investments in companies that derive a material portion of their revenues from thermal coal. Separately, on the social front, the Prudential Foundation achieved an important milestone during the quarter, reaching $1 billion in funding to partners aimed at eliminating barriers to financial and social mobility around the world since making its first grant in 1978. These investments include funding aligned with our racial equity commitments to support organizations, such as those supporting minority-owned small businesses and historically black colleges and universities that foster black economic empowerment and address the racial wealth gap.

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Prudential Financial, Inc. (PRU)	Corrected Transcript
Q3 2021 Earnings Call	03-Nov-2021

This milestone by the foundation follows the $1 billion investment mark achieved in our impact investing portfolio in 2020. We are confident these actions taken alongside of our strategic transformation will help us build a more sustainable company on behalf of all our stakeholders. Thank you for your time this morning.

And with that, I'll turn it over to Rob.

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Robert Michael Falzon

Vice Chairman, Prudential Financial, Inc.

Thank you, Charlie. I'll provide an overview of our financial results and business performance for our PGIM, US and International businesses. I'll begin on slide 7 with our financial results for the third quarter. Our pre-tax adjusted operating income was $1.8 billion or $3.78 per share on an after-tax basis and reflected the benefit of strong markets and business growth, which exceeded the net mortality impacts from COVID-19.

PGIM, our global asset manager, had record-high asset management fees, driven by record account values of over $1.5 trillion that were offset by lower other related revenues relative to the elevated level in the year ago quarter as well as higher expenses supporting business growth.

Results of our US businesses increased approximately 29% from the year ago quarter and reflected higher net investment spread, driven by higher variable investment income and higher fee income, primarily driven by equity market appreciation, partially offset by less favorable underwriting experience driven by COVID-19-related mortality.

Earnings in our International businesses increased 14%, reflecting continued business growth, higher net investment spread, lower expenses and higher earnings from joint venture investments. This increase was partially offset by less favorable underwriting results, primarily driven by higher COVID-19 claims.

Turning to Slide 8. PGIM continues to demonstrate the strength of its diversified capabilities in both public and private asset classes across fixed income, alternatives, real estate and equities as a top 10 global active investment manager. PGIM's investment performance remains attractive with more than 94% of assets under management outperforming their benchmarks over the last 3, 5 and 10-year periods.

Third-party net flows were $300 million in the quarter, including institutional net flows of $700 million, primarily driven by public fixed income flows. Modest retail net outflows of $400 million were due to equity outflows from sub-advised mandates and client reallocations due to rising rates and inflation concerns.

As the investment engine of Prudential, PGIM benefits from a mutually beneficial relationship with our US and International Insurance businesses. PGIM's asset origination capabilities and investment management expertise provide a competitive advantage by helping our businesses to bring enhanced solutions and more value to our customers. And our businesses, in turn, provide a source of growth for PGIM through affiliated flows that complement its successful third-party track record of growth.

PGIM's asset management fees reached another record, up 13% compared to the year ago quarter as a result of strong flows driven by investment performance and market appreciation. PGIM's alternatives business, which has assets in excess of $250 billion, continues to demonstrate momentum across private credit and real estate equity and debt, benefiting by our global scale and market-leading positions.

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