Prudential Financial, Inc. (PRU) Presents at RBC Capital Markets Financial Institutions Broker Conference Call - (Transcript)

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About: Prudential Financial, Inc. (PRU)
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Earning Call Audio

Prudential Financial, Inc. (NYSE:PRU) RBC Capital Markets Financial Institutions Conference March 13, 2019 9:20 AM ET

Company Participants

Robert Falzon - Vice Chairman

Conference Call Participants

Mark Dwelle - RBC Capital Markets

Mark Dwelle

I guess we'll go ahead and get started. We may get a few last stragglers in here. I know some of the sessions are not in perfect sync. So maybe we'll get a few more in here as we go along.

I have the honor today to bring Prudential Financial to our stage. There -- this room venue has been used for nothing but banks until this point in time. So we have the unique opportunity to bring the only company that escaped the clutches of the FSP to this stage during this conference. So that's a unique opportunity. I'm glad to have it.

I have with me today Rob Falzon, he's Vice Chairman of Prudential right now. Those of you who've been following the company for a while, he's been Chief Financial Officer, he's Head of the Real Estate division. A tenure that goes back, I guess, well into the '90s.

So I guess, the format today I'm going to lead off with a few questions, some topics to kind of get things rolling. After a little bit, we'll open it up to the floor to take some questions from the audience. And if you don't have any, then I'll just keep going because I can do this all day, that's what I do.

Question-and-Answer Session

Q - Mark Dwelle

Let's start out with -- I mean, kind of the big initiative has been financial wellness. Clearly, something that's new. It's a great opportunity. Maybe just talk about some of the key elements of it, what you see as the opportunity there.

Robert Falzon

Yes. So first, we view this as an opportunity to significantly expand the addressable market that we have as a company, frankly, as an industry. And as a result of that, I think there's the opportunity to accelerate our growth materially in the future. So we hit a new point, an inflection point in our growth. So start with a sort of what the market looks like. These numbers are not necessarily new, but the life insurance gap has been quantified by LIMRA at $12 trillion. Even if they're wrong because they're an industry association, so they tend to sort of quantify that in a generous way, it's -- whatever you want to hear could've, but it's a huge market. The retirement savings gap is -- different estimates on that, but they range from anywhere from $7 trillion to $14 trillion. So very large markets and the ability to crack into those markets is something that can materially change the growth trajectory of the industry and particularly of our company.

The issue is that those statistics are actually not particularly new, right? This is a phenomenon that's been out there. The innovation is that there are tools designed that we think can actually crack the code to address that market. And the tools come in sort of a package of, I think, 3 critical elements sort of to get at it. The first is we believe the way we're going to get at this is through the workplace. For Americans, the workplace is the place where we consume our benefits. It's where we're used to doing that, one. Two, there's the opportunity to create a value proposition. And this is the trick, the value proposition for the employer as well as the employee. Because the key is if you want to get into the workplace, you have to get this thing called permissioning in order to actually get at the employee.

So if you can create a value proposition for the employer, and that's what we're calling financial wellness, which is that if your employees are financially well, they're more engaged, they're more productive, less absenteeism, they retire on time. It's a better outcome for you as an employer. If you can make them financially well, you'll benefit from those outcomes, so allow us to work with your employees in order to sort of help them to achieve those outcomes. For the employees, it's about education, it's about identifying goals and then solutions to meet up with those goals. And so you have a process of engagement with the employees that's to the benefit of the employer. So that's the first piece of it. Execute for the workplace.

Second piece of it is around the way in which you can engage with individuals on a go-forward basis, and that's been enabled by technology. So digital to hybrid to traditional in person is now a critical element of being able to deliver that financial wellness even at the workplace to individuals. So technology has enabled and engaged with employees that is both effective and low cost, which is the key when you want to get to sort of a broader population.

The third piece of it that's important is to be able to provide simplified products. The industry has been built over recent decades and longer on a target toward the more affluent portions of our population. And the products that we've designed had been to meet the needs of that more affluent population. This is more about mass affluent and middle market, and the needs there are much more straightforward and the products need to be designed to do that.

So we think if you can take those 3 features, those 3 tools, package them together, then what you can do is you can take what are generally, what I call, points of reflection, reflection points of an individual's life and turn that to inflection points. And that's been the issue, which is there's this latent demand, but how do you turn latent demand into actual demand, and we think through the workplace, through the introduction of technology, which will -- there's both a cost-effective way and an engaging way to be dealing with the employee, and by having the right suite of products that you can then translate that latent demand into actual demand.

Mark Dwelle

It's really kind of interesting because like my grandfather's generation, he'd had a pension, but he might not had health care and voluntary benefits. And over the decades, we've translated into this focus on health care and voluntary benefits and we've lost track of the retirement aspect, that's the piece that for many companies or many individuals has gone away. So there's a degree to which kind of what you're doing is you're really kind of bringing that back to the fore and encouraging companies to help their workers see to that third need, the retirement need.

Robert Falzon

Yes, it's -- there was -- the whole shift in the market from DB to DC, it's been a wave and we're all well aware of that. The issue is that the consumer is not well aware of it. Someone has got something saved and they think, "I'm heading to retirement, I got $75,000 in my 401k, terrific." Well, they don't understand what that translates to in the way of sustainable income on a go-forward basis. Incidentally, that's why we've been a big proponent of this recent initiative legislation. A component of that is actually to get at this, to inform employees when they get their 401k statements, not just what that balance is, but actually what that balance would translate into a way of an annuity, an income for life for them in order to create a connection and visibility as to where the need to get to in order to be adequately saved.

Mark Dwelle

Right. No, it's a good thought. There's a lot of companies that kind of poke at the idea of they don't call it financial wellness, they have their own name for it. What differentiates Prudential? Where do you have an edge? Why...

Robert Falzon

So we believe this -- we're one of -- we may be the only company, actually, that has the full suite of tools that are necessary in scale. So let me explain what I mean by that. If you go through those 3 drivers, those 3 components. You start with workplace. So we're in the workplace already through our group business and through our retirement business. We actually have 20 million customers at that workplace. So we have a mechanism to apply financial wellness.

Secondly, we've developed the digital interface for customers. So we have developed an educational series and a series of engagement tools and it plugs into a continuum that we have. So we can engage with individuals online in a hybrid fashion. So think of it sort of as -- you could be telephone assisted, online or chats online all the way through if you need to speak to an adviser directly in person, we can do that as well. And we think, actually, having that full continuum of engagement and distribution is important for execution. And then it's the product piece, the third piece that I mentioned. And so we have in scale all the businesses that are necessary to deliver financial wellness into the marketplace. So it's about savings, it's about investments, it's about retirement, it's about guaranteed income and it's about protection. And we have large-scale businesses in all of those areas providing those services.

Mark Dwelle

And it's certainly an area where Prudential, not exclusively unique, but certainly has an edge on a lot of people because, I mean, you can really bring together the whole gamut of life insurance, annuity, regular, traditional investment, 401k. I mean, there's not a lot of financial companies, particularly with your branding, that can kind of pull off the grand slam, so to speak.

Robert Falzon

Yes. So we have a power of branding. And the other thing we have is we have a whole history of our culture, where we've -- what's made us successful in the past is we've got this culture of teamwork and collaboration. And so it's important to have the components, but it's equally important to make sure that the components are actually working together to deliver the solution at the work site and to the individual. And we've got a history of being able to do that in a variety of our lines of businesses and showing how they can work together. And that culture of organization allows us to not only have the capabilities, but actually execute against those capabilities.

Mark Dwelle

So how big is it going to be?

Robert Falzon

That's a good question. I think we're going to -- we actually have our Investor Day coming up in June. I think we'll be a little bit more prepared to talk about sort of the quantums in this in more specificity. But what I would say is that I spoke to the size of the market, so we think the opportunity is quite large, and we're actually very encouraged by the early feedback that we are getting and the early success that we're having. And I kind of think about the impact of growth is coming in 3 stages. The first is that what's happening for us as we're actually winning business because we have a financial wellness platform. So we're winning business in our Group platform and we're winning business in our Retirement platform. We can attribute $11 billion of AUM to the successes that we've had -- the successes that were because of financial wellness in the Retirement business, and about $100 million of revenues associated with our Group business that were wins because the decision was made on the basis of having our financial wellness capability as a differentiation.

So in the first instance, what we're going to see is that 20 million customer base, as we'd like to describe it, at the top of the funnel that we're trying to engage with and wind up at the bottom of the funnel with execution, that 20 million is going to be growing as a result of the competitiveness of our institutional platforms, our company platforms. And then what you'll see is that, that business, once financial wellness is in place, becomes sticky because it's hard to replace it. And so that gives us retention and it gives us pricing power on renewal. And so you're going to see a second leg of earnings growth that's associated with that. And then while that's occurring, you're going to see a growing level of sales associated with, what I'll call, retail sales, and that's the consumption of the services, that once we've done the education and we've identified goals and we're now helping individuals to execute against those goals.

And we're actually seeing good results from this. So we have this program called Pathways and we deliver it on site to employers. So we actually have it in place with large employers. So right now, it's on the platform for 450 employers, they represent about 4.5 million individuals/employees. To date, as we've been rolling it out, we've had 45,000. So we're just at the tip of the iceberg. But 45,000 individuals go through our Pathways program. And the Pathways program is about education and we bring a PRU adviser in, in order to deliver a whole series of modules on education around financial wellness. Now they are not permitted to sell during this. The only thing they can do is they can leave a business card, but they're strictly prohibited from selling and that's the agreement we have with the individual companies. Despite that, what we found is of that 45,000, about 20% of the individuals who attended those seminars then contacted the presenter in order to arrange a meeting as a follow-up to that series of seminars.

Mark Dwelle

Better than leaving your business card in a fishbowl.

Robert Falzon

Yes, absolutely. And then what's really powerful is 20% of them actually then went on and executed and bought products from us. And so you sort of think about now, if you're able to scale that, that goes well beyond our expectations than what we hoped to get in terms of population translating into execution. Those are very, very powerful numbers. So we think we've got the right equation, and we're in the process of doing this sort of accelerating the rollout of that.

Mark Dwelle

Excellent. I mean, it's -- I think it brings together a lot of elements and certainly the run way is vast. And you described at the beginning kind of the global need and its numbers with trillions involved. I mean, $11 billion is a great start, but it just -- it makes apparent the size of the runway that you have to work with as you continue to scale and roll.

Robert Falzon

Yes. We're at the very front end of what we think will eventually be a steep curve of acceleration.

Mark Dwelle

Okay. And it seems like part of the key to this, I mean, I -- to me, one of the more intriguing bits of it is really that technology interface. Same thing to talk about my grandfather. He ripped open the statement that showed up in his mail. My daughter doesn't understand why this truck stops in front of our house every day. Her whole world happens on the Internet. So maybe describe some of the technology that Prudential is using both within the wellness program and then, more broadly, kind of interface with customers and build that relationship.

Robert Falzon

Yes. So I think technology hits a whole spectrum of things. And the most -- from our standpoint, the most powerful potential for technology is around expanding our addressable universe, right? And so we think about that in terms of engagement with -- access to customers and engagement with customers. There also is an application of technology which will produce efficiency and productivity for us as well. So let me kind of go through that spectrum. From a customer standpoint, we think about engagement with a customer and, there, we've rolled out a series of tools that are around leads identification, that are -- it's highly personalized experience an individual can go through in order to identify their needs, quantify goals that are associated with that, customize a set of goals, and then actually point to a series of solutions against those goals that we can help them to execute against.

We have something called LINK by Prudential that we very recently rolled out, that's available actually to individuals as well as to the workplace. It takes people through that journey of sort of plotting out with their life is going to look like and then how they need to plan against that. Those are very helpful and important tools, they're dynamic, they're customized and they begin to create a level of engagement so people can begin to understand what their needs are. And that's part of the issue, is that these are -- people don't know what -- wake up in the morning and say today's the day I'm going to buy some life insurance. And certainly, that's not our industry works. That's why we've had to rely on advisers to sort of coach people as to what they need, and so you have a digital capability of doing that.

The other part of our customer experience, there is also -- when we have customers, it's the servicing and engagement that we have with the existing customers as well. So we're standing up a platform that will call Aurora. Think of it as a sort of a -- it's a unified customer contact center. So that individuals, regardless of where they are in our organization, who are calling in can have an experience where we know everything we need to do about them as we're talking with them. And then we have an opportunity to sort of more holistically address their needs. So that's on the sort of the customer interface side.

The second component of it is how key we can help with product and delivering service actually to the customers. So we've now introduced artificial intelligence to our underwriting. So for any Individual Life policy up to $1 million that we sell, individuals can apply for that through something we call Fast Track. And we've taken -- and they fill out -- they answer 7 questions, and after answering 7 questions, we can get back to them within 48 hours, a process that takes, from a manual underwriting standpoint, months, right, to underwrite someone for a life insurance, you get that down to 48 hours where they're now underwritten. We've tracked the success of this using the artificial intelligence and then back-testing it against our own data and our manual underwriting, and it's 97% effective. And we've assumed -- and the 3%, what that means is that it comes up with the same result as of the underwriter would've come up 97% of the time.

Mark Dwelle

And this -- do you still have to have the lady come with the scale and the cup or...

Robert Falzon

Well, it eliminates cups. It eliminates fluids from the equation. So it's a much more comfortable experience for individuals. And obviously, we use the 7 questions in our own data and externally databases in order to be able to do that. So that takes that customer -- that creates a very different customer experience, and it's essentially the way in which we deliver product. And then the last piece of it is around productivity and efficiency. And we think about taking talent and enabling talent with technology, with artificial intelligence, with automation, with improved organizational design and sourcing and process and what you can do is get individuals out of what we think to be important roles or critical roles, but they're critical roles that can be done by other than -- things other than human beings. And take those individuals, take that capacity, that talent and redirect it toward what we call pivotal activities in the organization. Things that are going to impact the customer experience that are going to help us to accelerate revenues that enhance our profitability. So I think about technology as everything from the customer experience to the products that we're delivering to the customer, and the way in which we're operating as an organization.

Mark Dwelle

Okay. Before I -- maybe before I go to the crowd, we'll hit on one more topic. I mean, we've got a room full of people here who are involved with asset management organizations. PGIM, of course, is among the biggest, and there's a lot of challenges in the asset management sector right now. But PGIM seems to have found our way through. I mean, you're continuing to drive good asset management growth. Maybe talk kind of what are some of the things you're doing there, some of the product initiatives, some of the things that have been giving you an edge, and what's good and exciting in PGIM.

Robert Falzon

Yes. So let me describe PGIM first for those that might -- may not be familiar with it. So it's our investment management business. It's 10th largest global investment -- asset management business in the world. And we've got 1,400 institutional clients in that platform. Within that 1,400, what you will find is that we have -- we do business with 23, I think the number is, or the 25 largest corporate pension plans in the United States. We do business with more than half the 300 largest global pension funds. So it's got a big institutional business. This is not just an extension of our general account. This is actually a legitimate large third-party institutional management business. The -- let's talk about the business model maybe next. And so that's what sort of customer base looks like. Oh, incidentally, we have about a quarter of a trillion of AUM in retail, that sort of came to my mind. Now the business model for PGIM is it's an active manager, okay? And they're actually quite proud of the fact that they're active. The good news for us is they're actually quite good at it as well.

Mark Dwelle

Any active managers in the room?

Robert Falzon

I hope a few. The -- if you look at their 5-year track record across their fund complex, 90% of the funds are beating their benchmarks. And so they're actually good at executing against that. The other dimension of it aside from being active, is that it's a multi-manager model, all right? And within that multi-manager model, every business we have is individually of scale. It could be a standalone sizable investment management business. And included in that are alternatives, like our real estate business. In fact, if you look at our real estate business between equities and debt, we're the second largest global real estate investment manager in the world, obviously, global. And if you look at alternatives holistically, we'd be the third largest manager of alternatives globally.

Mark Dwelle

I think probably a lot of people don't realize that. That's a good stat.

Robert Falzon

Yes. They're -- it's a very large and successful, and particularly within alternatives. And so the combination of that strategy, the organization that we have, the strategy and the performance has led to 16 consecutive years of positive institutional cash flows into the business, which we're very proud of the track record. And that's over periods of time. And not many asset managers, and people in this room could probably attest to, have that sort of track record of sort of consistently being able to attract investors into the platform. The -- so in terms of sort of what's in the future for that as we're thinking about it, we want to continue to grow the business. Probably the 3 areas that we're focused on would be continuing to grow in retail, continuing to grow global and really international, and then growing our alternatives business.

Mark Dwelle

Okay. Let me take the opportunity here to see if there's anybody in the audience that has a question, somebody who wants to jump in because I can go for hours. So what's on your mind? Anybody? Anybody? All right. I'll keep going then. I mean, you just mentioned International. The International units continue to deliver pretty good sales results, certainly the various business units in Japan and so forth. Can you talk about what you're seeing there? What you're doing there? Where you might see opportunity over time on the International front?

Robert Falzon

Yes. So internationally, if you think about International business, it's anchored in what we believe as the premier Japanese insurance company. And then in addition to that, we have what I'll characterize as seed investments in a number of other areas, and particularly in some high-growth markets. So we're in China. We're in Indonesia. We're in Brazil, Chile. We're in Indiana. So we've got growing businesses in high-growth markets, but we have this very large and very successful business in Japan. So when I think about the things that are sort of going well within that International complex, obviously, our Japan business anchors it and is doing quite well. And so if you look at the business, it generates, pretty steadily, a mid-single-digit growth rate. It has a high-teens ROE, highly stable earnings performance and the earnings translate into a high level of free cash flow for us. So we're at every year, every quarter taking capital out of that Japan business and bringing it back into the U.S. So it readily translates into free cash flow for us.

The unique thing about our Japan business, what makes it a premier business, is that we have a proprietary distribution capability that no one else in the market has been able to emulate. We have less than 6% of the agents in the Japan market, but we represent over 1/3 of the members of the million-dollar roundtable. So you sort of think about we punch well above our weight in terms of the productivity of our agents. So then we have a good formula for success and that continues to generate growth for us and good returns. The areas where we're looking to grow is we'd like those investments that we have in the growth and emerging markets to be a larger component of that International -- overall International business mix. And so you've seen us investing in joint ventures and acquisitions in order to -- there's a good organic growth there, but we really need to grow it more than organically if we want to balance out the very large business that we have in Japan.

Mark Dwelle

Certainly, places like Brazil, India, I mean, these are emerging middle-class and upper-middle-class markets, more financial sophistication beginning to get into those markets. So it certainly seem, again, kind of a good runway for Brazil...

Robert Falzon

Yes, our Brazilian business is going gangbusters. Actually, I was just looking at some numbers the other day and new business premiums in Brazil just exceeded, on an annual basis, our Korean business. We've been in Korea for 30 years. We've been in Brazil for 15 years, and now it's already surpassing it on a new business basis. And a year or so ago, we actually added to our Brazilian business. We only had an Individual Life business, so we bought a group business. So we're now both have a group and life business in Brazil. So we're very optimistic about the potential for that business. Along with -- we started a joint venture in Indonesia and we feel really good about the opportunities in that market. So across markets, we think the potential is clearly there. We just want to accelerate the impact.

Mark Dwelle

Okay. Let's turn our attention back to the United States with the annuities business. Spreads there have been pretty strong, sales growth has begun to kind of pick back up. Can you talk about sort of what's working here? Where the opportunity lies? I mean, how you see that business continuing to progress after the downturn we had a couple of years ago?

Robert Falzon

Yes. So we have a really high-quality annuities business that I think is generally underappreciated by the market. It's a business that's also churning out mid- to high-teens ROEs. It has a very stable ROA. The -- we -- the earnings translated -- about 80% of the earnings translated to free cash flow for us. And we've gone through now volatility in the marketplace, and what we've shown is that both earnings and capital are actually quite stable in the way that we manage the block. So you have this -- you have stability combined with high returns and high free cash flow, it's a very attractive business for us.

One of the challenges is that the industry, and our business included, the sales growth has slowed down pretty considerably. Now last year, industry growth was somewhere around the 13%, 14%, so sales have begun to pick back up. Our sales growth was up 40% 2018 over 2017. So we very clearly have begun to reaccelerate sales. There's been a shift. So it's gone from variable to fixed. I think about 2/3 or so of the sales in '18 were fixed and so we've pivoted our sales as well. We're a big variable annuity seller. We're -- we've been -- we've introduced the fixed indexed annuity and our sales of that have been climbing pretty dramatically as well. And I think some of the issues around the DOL fiduciary rule sort of the cloud lifted, and I think allowed that -- the industry to begin sort of reengaging and selling.

Mark Dwelle

Okay. Anything from the crowd? We have time for maybe one more. Otherwise, I've got one. All right. I mean, I -- to me, one of the bigger stories in the last year or 2 -- I mean, you guys have always done capital management. You're always a good dividend payer, buy back some stock. I mean, I would say you kind of kicked it up a notch over the last year or two. Can you just talk in general about how you're thinking about capital management? Obviously, the strong earnings and the cash flows help support all of that. Just talk about how you think about the capital management process and what kind of goes into the equation.

Robert Falzon

Yes, sure. So actually, this year is our 11th consecutive year of increased -- increasing dividends. And so every year as our earnings have been growing, we've been translating those earnings into higher dividends. And so this year, we increased the dividend by 11%. We also increased the authorized buybacks by 33%. So a pretty significant increase there. So we're at $2 billion of authorized buybacks for 2019. So -- and that is to the point that you made, Mark, it starts with the fact that the earnings that we have within our businesses are strong and we -- our free cash flow ratio, the translation of earnings into free cash flow is around 65%.

And so as we think about that, we generally think about, okay, we're going to take half of our free cash flow roughly -- there's no formulas around these things, but those are guidelines. When you think about it, about half of our free cash flow, we want to sort of systematically return to investors, and the best way to do that is through dividends. And so we think about the dividend as representing about that half of free cash flow, which is 65% of our overall earnings. Then the remaining other half of our free cash flow when you look at it is -- those are -- that's cash that we can look to reinvest in the business in order to accelerate growth either organically or inorganically. And if we don't find the opportunities to do that, then we would return that to investors as well, and that's generally the form of stock buybacks. And hence, why you've seen us go from $1.5 billion of stock buybacks last year to $2 billion of stock buybacks this year.

Mark Dwelle

Well, that's -- we've covered a lot of ground here in a fairly short period of time. Hopefully, a bunch of you have meetings with Prudential over the course of the balance of the day. Red light's on. Join me in giving a round of applause here.

Robert Falzon

Thank you. Thanks, Mark.

Mark Dwelle

Thank you.