Prudential Financial (PRU) Earnings Report: Q1 2016 ...
[Pages:20]C ompany Name: Pr ude nt ial Financial Inc C ompany Ticker: PRU Sector: Financ ial Industry: Ins ur anc e
Event Description: Q1 20 16 Ear nings Call Market C ap as of Event Date: 34.0 2B Price as of Event Date: 75.66
Prudential Financial (PRU) Earnings Report: Q1 2016 Conference Call Transcript
The following Prudential Financial conference call took place on May 5, 2016, 11:00 AM ET. This is a transcript of that earnings call:
Co mpany Par t ic ipant s
Mark Finkelstein; Prudential Financial Inc; Investor Relations John Strangfeld; Prudential Financial Inc; C EO Mark Grier; Prudential Financial Inc; Vice C hairman Rob Falzon; Prudential Financial Inc; C FO Steve Pelletier; Prudential Financial Inc; Head of Domestic Businesses C harlie Lowrey; Prudential Financial Inc; Head of Internatinal Businesses
Ot he r Par t ic ipant s
Erik Bass; C itigroup; Analyst Jimmy Buehler; JPMorgan; Analyst Suneet Kamath; UBS; Analyst Ryan Krueger; Keefe, Bruyette & Woods, Inc; Analyst Sean Dargan; Macquarie Research; Analyst Eric Berg; RBC C apital Markets; Analyst Steven Schwartz; Raymond James & Associates, Inc; Analyst Randy Binner; FBR & C o; Analyst Humphrey Lee; Dowling Partners; Analyst
MANAGEMENT DISC USSIO N SEC TIO N
Ope r at o r :
Welcome to the first quarter 2016 quarterly earnings call.
(O perator Instructions)
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mr. Mark Finkelstein, please go ahead.
Mar k Finke ls t e in (Investor Relations):
Thank you, . Good morning, and thank you for joining our call.
Representing Prudential on today's call are John Strangfeld, C EO ; Mark Grier, Vice C hairman; C harlie Lowery, Head of International Businesses; Steve Pelletier, Head of Domestic Businesses; Rob Falzon, C hief Financial O fficer; and Rob Axel, C ontroller and Principal Accounting O fficer.
We will start with prepared comments by John, Mark and Rob, and then we will answer 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.
? 2014 TheStr eet, I nc. Al l R i ghts R eser ved
Page 1 of 20
C ompany Name: Pr ude nt ial Financial Inc C ompany Ticker: PRU Sector: Financ ial Industry: Ins ur anc e
Event Description: Q1 20 16 Ear nings Call Market C ap as of Event Date: 34.0 2B Price as of Event Date: 75.66
In addition, this presentation may include references to non-GAAP measures.
For a reconciliation of such measures to the comparable GAAP measures and a discussion of factors that could cause actual results to differ materially from those in the forward-looking statements, please see the section titled Forward-Looking Statements and non-GAAP Measure of our earnings press release, which can be found on our website at investor..
John, I'll hand it over to you.
Jo hn St r angf e ld (C EO ):
Thank you, Mark. Good morning, everyone. Thank you for joining us.
While our underlying fundamentals in Q 1 remained strong, we were buffeted by market headwinds and our first-quarter results trailed our expectations. This quarter's operating earnings per share of $2.26, which excludes market-driven and discrete items, is below the $2.65 we reported in the first quarter of 2015.
O ur annualized return on equity for the quarter was a little over 12%. We're modestly below the 13% to 14% that we target across the cycle. This, of course, will fluctuate on a quarterly basis.
At an overall level, we produced solid, core results. However, the adverse impact of weaker non-coupon investment results, lower average equity markets and foreign currency headwinds drove the year-overyear decline from the particularly favorable results of a year ago.
Mark and Rob will walk to the specifics of our key drivers, results and financial measures. I will provide some higher-level observations on our businesses, and discuss other matters affecting our operations.
O ur International Business had a solid quarter, despite the market challenges I mentioned. We continue to see strong underwriting margins and good core growth at both our Life Planner and Gibraltar b u sin e sse s.
Interest rates in Japan are clearly a challenge, and we have made and will continue to make the necessary product and pricing changes to maintain strong returns. I would highlight that our overall constant dollar sales growth of 12% was driven by US dollar products in Japan, where we have seen an increase in demand.
We also completed the acquisition of an indirect ownership interest in AFP Habitat, a leading C hilean retirement administrator. We're excited about the prospects of this business as we expand our International footprint, and expect Habitat to produce steady growth and generate stable earnings and cash flows. It has taken a while to come to fruition, but we believe this investment and relationship is a very good fit for us.
O ur domestic businesses showed some mixed results, also largely reflecting market factors. At a high level, individual annuities continued to show solid margins, though sales levels have shown some pressure. This reflects our pricing discipline as well as lower variable annuity sales industrywide.
Retirement earnings benefited from another quarter of solid case experience in our pension risk transfer business, which helped mitigate the impact of non-coupon investment returns coming in lower than our average expectation. Let me add that although we did not close any PRT deals in the quarter, we continue to see solid activity in the market. And as we've discussed on previous calls, the timing and distribution of the PRT transactions can be lumpy.
Asset Management earnings were impacted by lower average equity assets under management and
? 2014 TheStr eet, I nc. Al l R i ghts R eser ved
Page 2 of 20
C ompany Name: Pr ude nt ial Financial Inc C ompany Ticker: PRU Sector: Financ ial Industry: Ins ur anc e
Event Description: Q1 20 16 Ear nings Call Market C ap as of Event Date: 34.0 2B Price as of Event Date: 75.66
lighter earnings from other related revenues, particularly compared with recent trends. We also experienced weakness in third-party unaffiliated net lows, which showed net outflows of about $3 billion for the quarter.
To put this in context, however, this follows very strong net flows in 2015 of $22 billion and our pipeline for new mandates is robust. We remain optimistic on our Asset Management business, and continue to invest in capabilities and distribution. But we're also not immune to some of the industry trends that have impacted active equity management strategies.
Life Insurance earnings were impacted by adverse underwriting results as compared to our average expectations, which is not unusual for us to see in the first quarter. This quarter, we experienced both a greater than typical volume of claims, as well as a higher level of claims with larger face values.
O ver time, we have had significant favorable mortality, including since we acquired Hartford's life business in 201e, which, by the way, has proven to be a very good it. But mortality can vary on a quarterly basis. We continue to show solid sales results, which has benefited from product and distribution actions, while maintaining underwriting discipline.
And finally, our Group Insurance business continues to show the benefits to earnings of our multi-year underwriting efforts. We also saw an increase in sales levels following several years of weakness, as we benefited from several large case wins in the quarter.
Let me also briefly address a few other topics of interest. In April, we recaptured the variable annuity living benefit riders that were managed in a captive insurer, and now house all of our product rest together in our statutory insurance entities.
This is a very important initiative that will meaningfully reduce the volatility in our business and increase transparency, while not having adverse consequences on our capital flexibility. We will provide more details on this initiative with our second-quarter results.
The decision in favor of MetLife and their challenge to the FSO C designation as systemically important, is a significant development with respect to group supervision and capital standards.
We will determine an appropriate path for Prudential as this issue develops, considering other aspects of groups regulation as well. With respect to the FSO C designation, we have options as we go through our annual redesignation process.
The fiduciary standard rule issued by the Department of Labor addressed some of the concerns expressed by the industry participants regarding the proposed rule, and includes several positive c h a n g e s.
We continue to evaluate the new regulation and potential impacts on our business, which also needs to include consideration of how our distribution Partners will respond.
The final rule gives us a path forward to implement certain changes to our processes and businesses, including in individual annuities, Retirement, Asset Management and our in-house distribution arm, Prudential Advisors. And while there will be challenges with the new rule, we have a history of adapting to change and will continue to support our customers with innovative solutions to meet their retirement n e e d s.
In terms of capital deployment, we returned roughly $700 million to shareholders through dividends and share repurchases in the quarter. And funded approximately $530 million for our C hilean investment, all while maintaining strong capital flexibility.
? 2014 TheStr eet, I nc. Al l R i ghts R eser ved
Page 3 of 20
C ompany Name: Pr ude nt ial Financial Inc C ompany Ticker: PRU Sector: Financ ial Industry: Ins ur anc e
Event Description: Q1 20 16 Ear nings Call Market C ap as of Event Date: 34.0 2B Price as of Event Date: 75.66
So to sum it up, while this quarter's results were a little light than we would normally expect due to mainly market factors, the fundamentals in our business remain sound. And we continue to benefit from a strong balance sheet and capital position that enables us to return substantial amounts of capital to shareholders, while continuing to support organic and inorganic growth opportunities.
With that, I'll turn it over to Mark.
Mar k Gr ie r (Vice C hairman):
Thank you, John. Good morning, good afternoon or good evening. Thank you all for joining our call today.
I'll take you through our results in, and then I'll turn it over to Rob Falzon who will cover liquidity leverage and capital highlights.
And I'll start on slide 2. After-tax adjusted operating income amounted to $2.18 per share for the quarter, compared to $2.79 a year ago.
After adjusting for market-driven and discrete items, EPS was down $0.39 from a year ago. While underlying business performance was solid, the decrease reflected a less favorable macro environment and negative fluctuations in some inherently variable items.
Non-coupon investment returns were about $90 million below our average expectations in the quarter -in contrast to a year ago, when we called out a contribution about $60 million above expectations.
Earnings from asset-based fees in our US businesses were about $50 million below the year-ago level, largely reflecting the 5% decline in equity market averages. And, the contribution from other related revenues in our Asset Management business, which is largely driven by changes in market values and timing of transactions, was $25 million below the year-ago quarter.
We estimate that these three items, together with less favorable currency exchange rates, had a negative impact of roughly $0.40 per share on the comparison of results to a year ago.
Now moving on to slide 3, returns on non-coupon investments fluctuate over a cycle by their nature. As we mentioned in our earnings guidance call in December, our long-term expected returns on these investments are 6% to 7% with our expectation for 2016 slightly before the long-term average.
In our case, included in non-coupon or alternative investments are private equities, hedge funds, real estate, and a $3.6 billion public equity portfolio, held mainly in Japan, which includes stocks, mutual funds and J-REITs. These assets total about $8.8 billion as of March 31. While these investments diversify our exposure and are a good fit with some of our longer-term liabilities, especially in Retirement, the pattern of returns introduces some variability into our results.
We've called out significant variances from our average expectations, which provided a fairly strong tailwind in 2013 and 2014. However, returns are below the long-term expected average in the current q u a rte r.
We would estimate that current quarter variances in comparison to our long-term average expectations from returns on non-coupon investments, mortality and Individual Life and International Insurance, pension risk transfer case experience.
Together with the benefit of favorable revenue seasonality in our International Life Planner business, had a net negative impact on earnings per share of about $0.10. After adjusting for market-driven and discrete items, our EPS of $2.26 for the quarter implies an annualized RO E of 12%.
O n a GAAP basis, including amounts categorized as realized investment gains or losses and the results
? 2014 TheStr eet, I nc. Al l R i ghts R eser ved
Page 4 of 20
C ompany Name: Pr ude nt ial Financial Inc C ompany Ticker: PRU Sector: Financ ial Industry: Ins ur anc e
Event Description: Q1 20 16 Ear nings Call Market C ap as of Event Date: 34.0 2B Price as of Event Date: 75.66
from divested businesses, we reported net income of $1.3 billion for the current quarter. This compares to just over $2 billion a year ago, which included substantial mark-to-market gains from derivatives and hedging activity.
Turning to slide 4, for the current quarter, market-driven and discrete items consist only of our quarterly market and experience unlocking in the annuities business. Driven mainly by performance of equities in our customer's accounts, which resulted in a net charge of $0.08 per share.
Now moving to slide 5, our GAAP net income of $1.3 billion in the current quarter includes amounts characterized as net realized investment gains of $338 million. And divested business results and other items outside of adjusted operating income amounting to net pre-tax gains of $44 million.
O f note, product related embedded derivatives and hedging had a positive impact of $282 million in the quarter. Driven by the impact of applying credit spreads to our gross GAAP liability balance for the variable annuity living benefits, which increased due to the decline in interest rates in the quarter.
The gain from other risk management derivatives also came mainly from the decline in interest rates. Impairments and credit losses of $106 million included $85 million from the energy sector, primarily on b o n d s.
Moving to our business results, and starting on slide 6. I'll discuss the comparative results excluding the market-driven and discrete items that I mentioned.
Annuities earnings were $381 million for the quarter, down by $42 million from a year ago. The earnings decrease was mainly driven by a 7% decline in policy charges and fees, reflecting a similar decline in average account values, which was largely driven by equity market levels. Higher expenses and lower non-coupon investment returns, which were modestly below our average expectations, also contributed to the earnings decline and to the decrease in return on assets, or RO A, which has fluctuated in the low 100 basis point range.
Slide 7 presents our annuity sales. O ur sales mix continues to reflect our product diversification strategy, which we enhanced in April of last year with an agreement to reinsure about half of the living benefit guarantees on new business related to our highest daily or HD product. This agreement extends through this year.
We've also grown sales on a fixed income based PDI product, with some recent small adjustments to enhance product attractiveness. As a result, only about one-third of our sales for the current quarter come with retained exposure to equity market linked living benefit guarantees.
Turning to slide 8. Retirement earnings were $219 million for the quarter, down by $65 million from a year ago. The decrease included a $36 million lower contribution from net investment results.
Returns from non-coupon investments were about $40 million below our average expectations in the current quarter, versus about $15 million above average expectations a year ago. The decrease in noncoupon returns was partly offset by the impact of growth of the investment base over the past year.
C ontribution from case experience was about $20 million below the year-ago quarter, but roughly $20 million above our average quarterly expectations. The remainder of the earnings decline came mainly from lower fees in our full-service business, and higher expenses. The sequential quarter in earnings in Retirement mainly reflects lower expenses compared to the elevated level of the fourth quarter, and a greater contribution from case experience than in the fourth quarter.
Turning to slide 9. Total Retirement gross deposits and sales were $8.7 billion for the current quarter, compared to $7.3 billion a year ago. Standalone institutional growth sales were about $2 billion for the
? 2014 TheStr eet, I nc. Al l R i ghts R eser ved
Page 5 of 20
C ompany Name: Pr ude nt ial Financial Inc C ompany Ticker: PRU Sector: Financ ial Industry: Ins ur anc e
Event Description: Q1 20 16 Ear nings Call Market C ap as of Event Date: 34.0 2B Price as of Event Date: 75.66
quarter, largely driven by stable value wrap products, compared to sales of roughly $1 billion a year ago which included about $660 million for a funded BRT case.
Full-service sales were roughly in line with a year ago. Total Retirement account value amounted to $372 billion at the end of the quarter, up by about $7 billion from a year earlier. Reflecting net flows of about $5 billion from our full-service business, and about $2 billion from our institutional standalone business.
Turning to slide 10. Asset Management earnings were $165 million for the quarter, compared to $205 million a year ago. While most of the segment's results come from Asset Management fees, the decrease from a year ago was mainly driven by a $25 million lower contribution from other related revenues. Reflecting strong, strategic investing results and incentive fees in the year-ago quarter.
The remainder of the earnings decline came mainly from lower Asset Management fees, driven by a 12% decline in average equity assets under management, which reflected both outflows and negative market impact. Higher fees from management of fixed income assets with a 5% increase in average assets under management partly offset the equity driven decline.
After $22 billion of net positive third-party flows in 2015, we experienced outflows of $3 billion in the current quarter, nearly all driven by equity strategies. As John indicated, we are seeing the impact of industry trends, including movement to passive strategies as well as some client rebalancing.
Turning now to slide 11. Individual Life earnings were $120 million for the quarter, compared to $125 million a year ago. The decrease in earnings was driven by higher expenses, including costs supporting business growth. The net contribution from claims experience was essentially unchanged from a year ago, but about $35 million below our average expectation.
Historically, the first quarter has tended to reflect the lower contribution from mortality than the average for the year. The contribution from net investment results was essentially unchanged from a year ago. Lower returns on non-coupon investments, which were about $10 million below our average expectation, were offset by the benefits from a larger investment base.
Turning to slide 12. Individual Life sales based on annualized new business premiums were up $21 million or 17% from a year ago. Guaranteed Universal life sales contributed about half of the increase. Mainly from greater sales in selected age bands where we repriced last year to bring our rates more in line with the market.
We continually monitor expected returns and competitor actions, and in February we implemented modest price increases. The remainder of the increase in sales came mainly from variable life, where sales tend to be driven by large cases and are lumpy.
Moving now to slide 13. Group Insurance earnings were $26 million for the quarter, compared to $30 million a year ago. A lower contribution from investment results with non-coupon returns about $10 million below our average expectations, together with higher expenses, more than offset more favorable underwriting results driven by Group Life. The current quarter total benefits ratio was more favorable than a year ago, and within our targeted range of 87% to 91%.
Turning to slide 14. Group Insurance sales, based on annualized new business premiums, were $311 million for the quarter, nearly double the level of a year ago. Most sales occur in the first quarter based on calendar year inception. Following the substantial completion of underwriting and repricing actions we've taken over the last few years, we did see an increase in sales of both Group Life and Group Disability, including more larger cases.
Moving now to International Insurance and turning to slide 15. Earnings of our Life Planner business were
? 2014 TheStr eet, I nc. Al l R i ghts R eser ved
Page 6 of 20
C ompany Name: Pr ude nt ial Financial Inc C ompany Ticker: PRU Sector: Financ ial Industry: Ins ur anc e
Event Description: Q1 20 16 Ear nings Call Market C ap as of Event Date: 34.0 2B Price as of Event Date: 75.66
$410 million for the quarter, compared to $439 million a year ago. Excluding a $30 million negative impact of foreign currency exchange rates, earnings are essentially unchanged from a year ago.
The benefit to earnings from continued business growth was offset by less favorable mortality experience, higher expenses, including non-linear items such as legal and business development costs. And a lower contribution from investment results, including non-coupon investment returns, about $5 million below our average expectations.
Mortality experience in the current quarter was essentially consistent with our average expectations, but about $15 million less favorable than a year ago. A concentration of annual mode premium revenues in our Life Planner business results in an earnings pattern that favors the first quarter. We estimate that this benefited current quarter results by about $30 million in relation to a quarterly average.
Turning to slide 16. Gibraltar Life earnings were $369 million for the quarter, compared to $395 million a year ago. Excluding a negative impact of $28 million on the comparison from foreign currency exchange rates, earnings are essentially unchanged from a year ago.
Looking at some key components. The benefits to earnings from business growth, including the initial contribution of our investment in AFP Habitat in C hile, and more favorable mortality experience in the current quarter were offset by a lower contribution from investment results of about $40 million. Business growth drove an increase in earnings of about $20 million, with about half from C hile, including aboveaverage returns on the coinvestment in the managed funds, otherwise known as the [Encai].
The contribution to earnings from mortality experience, which was about $5 million more favorable than our average expectations, exceeded the year-ago quarter by about $15 million. Net investment results included returns on non-coupon investments about $20 million below our average expectations in the current quarter, compared to about $40 million above expectations a year ago. This $60 million variance was partly offset by benefits to spread results, including higher prepayment income and growth in the base of invested assets.
Turning to slide 17. International Insurance sales on a constant dollar basis were $781 million for the current quarter, up by $86 million or 12% from a year ago. The increase was driven by our Life Planners in Japan and by Gibraltar's bank channel and life consultants. About 45% of our current quarter sales in Japan were US dollar products, compared to roughly one-third of sales a year ago.
Life Planner sales in Japan were up by 15% from a year ago, reflecting a 6% increase in agent count, together with higher productivity and higher average premium size. Gibraltar sales were also up by 15% from a year ago.
Sales from the bank channel increased by 27%, largely driven by a recurring premium US dollar Retirement income product and by death protection products. Life C onsultant sales increased by 10%, benefiting from a recently introduced US dollar whole life product that has been popular among clients seeking maximum death protection in early contract years.
Turning to slide 18. The corporate and other loss was $312 million for the current quarter, compared to a $253 million loss a year ago. The main drivers of the increased loss are lower investment income, reflecting a benefit in the year-ago quarter from returns on assets from our closed block restructuring, that were subsequently deployed in our businesses. And higher expenses, including items such as legal costs, which can fluctuate, and lower income from our pension plan, following our assumption update at year end.
Now, I'll turn it over to Rob.
? 2014 TheStr eet, I nc. Al l R i ghts R eser ved
Page 7 of 20
C ompany Name: Pr ude nt ial Financial Inc C ompany Ticker: PRU Sector: Financ ial Industry: Ins ur anc e
Event Description: Q1 20 16 Ear nings Call Market C ap as of Event Date: 34.0 2B Price as of Event Date: 75.66
Rob Falz on (CFO ):
Thank you, Mark.
I'm going to give an update on the key balance sheet items, financial measures and other related areas of interest starting on slide 19.
As of year-end, Prudential Insurance reported an RBC ratio of 484%, with total adjusted capital, or TAC , of $15 billion. While we don't perform a quarterly bottoms up RBC calculation, we estimate that our RBC ratio as of the end of the first quarter is well above our 400% target.
In Japan, Prudential of Japan and Gibraltar Life reported strong solvency margins of 877% and 929% respectively, as of their most recent reporting date, December 31, 2015. We expect these ratios to be above our targets as of their fiscal year end on March 31.
Looking at liquidity, leverage and capital deployment highlights on slide 20. O ur cash and liquid assets at the parent company amounted to $4.1 billion at the end of the quarter. The decline of about $1 billion from year end was driven primarily by our shareholder distributions, debt reduction and acquisition fu n d in g .
The excess over our targeted $1.3 billion liquidity cushion is available to repay maturing operating debt, to fund operating needs, and to deploy over time for strategic and capital management purposes. O ur financial leverage and total leverage ratios as of March 31, remained within our targets.
During the first quarter, we returned roughly $700 million to shareholders. Including $375 million of share repurchases under the $1.5 billion authorization for the year. And in March, we funded with the purchase of our stake in AFP Habitat in C hile, with a purchase price of about $530 million. As John noted, we maintained our capital capacity at a level not meaningfully different than what we reported at year end.
Let me provide an update on a few other noteworthy items. The fair value of our yen equity hedge was about $760 million at the end of the quarter, compared to $1.7 billion at year end. The decline in fair value is, as expected, in response to the 7% strengthening of the yen in relation to the US dollar during the quarter, and corresponds to an increase in the US dollar equivalent of yen earnings in Japan over time .
Expected cash flows from the yen hedge in 2016 reflects scheduled settlements that are essentially unaffected by the change in fair value. While the fair value or our equity hedge declined sequentially, it continued to operate as designed to protect the value of our businesses and the overall return profile against currency moves in our largest overseas operation.
O n our energy holdings, our net unrealized loss on the energy sector fixed maturities, excluding the closed block, at the end of the quarter, was about $200 million, essentially unchanged from year end. 83% of fixed maturities were investment grade.
To update you on the variable annuity recapture, on April 1, we recaptured the living benefit risks from our captive reinsurerer, moving the rider risks into out statutory insurance companies to be managed together with the base contracts. This marks a major milestone in our initiative, which is on track for completion over the course of the year.
Now, I'll turn it back over to John.
Jo hn St r angf e ld (C EO ):
Thank you, Rob, thank you, Mark. We would like to open it up to questions.
? 2014 TheStr eet, I nc. Al l R i ghts R eser ved
Page 8 of 20
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related download
- adding more to life
- 20 finance challenges of the future prudential indicators
- prudential financial inc
- dryden s p 500 index fund first prudential financial
- pt prudential life assurance business review
- who regulates whom and how an overview of u s financial
- prudential financial pru earnings report q1 2016
- the macroprudential policy strategy in the light of the
- striking a examining trends faced by today s finance
Related searches
- amazon quarterly earnings report 2018
- prudential financial yahoo finance
- amazon earnings report 2018
- prudential financial stock
- prudential financial inc
- amazon earnings report today
- starbucks earnings report 2020
- amazon earnings report q2
- amazon earnings report 2020
- 1st quarter earnings report 2020
- earnings report calendar
- quarterly earnings report template