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Prudential Financial, Inc. (PRU)
2013 Investor Day
June 18, 2013 8:30 am ET
John Robert Strangfeld - Chairman, Chief Executive Officer, President and Member of Executive Committee
Mark B. Grier - Vice Chairman
Previous Statements by PRU
» Prudential Financial, Inc. - Shareholder/Analyst Call
» Prudential Financial Management Discusses Q1 2013 Results - Earnings Call Transcript
» Prudential Financial's Management Presents at Citigroup US Financial Services Conference (Transcript)
Robert F. O'Donnell - President of Annuities Business
Edward P. Baird - Executive Vice President and Chief Operating Officer of International Businesses
Robert Michael Falzon - Chief Financial Officer and Executive Vice President
Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division
A. Mark Finkelstein - Evercore Partners Inc., Research Division
Seth Weiss - BofA Merrill Lynch, Research Division
Suneet L. Kamath - UBS Investment Bank, Research Division
Yaron Kinar - Deutsche Bank AG, Research Division
Christopher Giovanni - Goldman Sachs Group Inc., Research Division
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division
Ryan Krueger - Dowling & Partners Securities, LLC
Erik James Bass - Citigroup Inc, Research Division
Thomas G. Gallagher - Crédit Suisse AG, Research Division
Ian Gutterman - Adage Capital Management, L.P.
Randy Binner - FBR Capital Markets & Co., Research Division
Nigel P. Dally - Morgan Stanley, Research Division
Thank you for joining us for Prudential's Investor Day 2013 edition. To those of you with us via the webcast, I'm going to steal a line from one of my colleagues. "Good morning, good afternoon, good evening." An agenda is in your binders. As you can see, we plan Q&As for Charlie and Bob after Bob's presentation on Annuities and for Ed Baird after Ed's presentation. And you will have the opportunity to address questions to John and Mark at the end of the morning. Rest assured we do plan 2 breaks in the action along the way.
We have another event scheduled to begin in the same room at 1:00. So we're going to have to stick pretty closely to our scheduled end time for this one at 12:30. Thank you again for coming. And now, I'll hand off to John Strangfeld.
Is that the legal one you disclosed?
Oh, yes. And after this, [indiscernible]...
You just saw the -- did you just see the legalese? I forgot to give you the legalese. It's all in your binders.
John Robert Strangfeld
Thank you, Eric. Good morning, everyone, and welcome. Let's get going. Nearly 3 years ago, we presented to you Prudential's aspiration for ROE in 2013. And at that time, we thought it was important to do so to provide some guidance regarding our view of the company's earnings power post crisis. When we pooled together our views regarding our business mix, our capital deployment opportunities and ability to execute, we became confident in setting an ROE objective that would be distinctive within our sector and will support our theme of superior performance. Our announcement of 13% to 14% may have been ambitious, but it was not abstract nor arbitrary.
Last year, we transitioned from an aspiration to a specific goal of 13% to 14% for this year of 2013. Today, we believe we are on track to achieve this goal and to achieve it in a manner consistent with what we planned, namely through strong performance of our existing businesses, targeted deployment of capital and new initiatives such as Star/Edison, pension risk transfer, Hartford life and, finally, with very meaningful distribution of capital to our shareholders.
Relative to our original expectations, we had faced some headwinds using 2 examples, one external, one internal, an external example being low interest rates. An internal example would be some of the challenges we've had in group insurance. On the other hand, we've also benefited from tailwinds: better sales inflows in the U.S. businesses and, consequently, higher assets under management; outstanding results in International Insurance; new initiatives like pension risk transfer; and of course, a stronger stock market. We would expect that many specific things would be different than we envisioned when we set out our goal nearly 3 years ago. But taken as a whole, we believe we're clearly on a good track towards meeting our goals. Our objective is to achieve it and to sustain it and sustain it by remaining true to our investor value proposition.
Turning to our investor value proposition, our theme is to build a company that can produce and sustain superior performance, especially defined as ROE. Our focus is on long-term quality and shareholder-friendly approach to managing capital, meaning that capital distribution is a priority and that deals and investments must ultimately enhance our future financing and financial capability.
We see 4 key elements to our value proposition. First, our portfolio of businesses. As we've said before, it's by design. It's not an aggregation of historical decisions. It's highly focused, yet with a balance of risk and an attractive blend of growth and stability.
Second, the quality of our businesses. Our businesses are market leaders. The support for that assertion is reflected in the strong fundamentals or vital signs of each of our individual businesses.
Third, capital management whose dimensions include financial strengths, which is a key underpinning to our value proposition to customers, employees and shareholders, and a disciplined balance of capital deployment between organic growth, innovative new products and businesses, such as pension risk transfer, M&A and return to shareholders.
Finally, our most important strategy is not product or even portfolio or even capital management. It's talent. We believe that the single biggest driver of our long-term performance is our talent. Talent is not just about skill sets. It's about culture. It's the way people work with one another. It's the recognition of the power and wisdom of teamwork and diversity. It's an obsession with quality. It's a recognition of the power of collaboration. Collaboration means it's not enough to have skills that can be used independently. The real powerful impact arises from using skills in combination to create solutions for growing and changing market needs. Some call the talent side of things the soft side of business. We view them as strategic and the key charge of our leadership team. I hope you see it in our people and in our results. It's why Star/Edison execution has been close to flawless. It's why POJ has had 25 years of distinctive results. It's what accounts for strong U.S. fundamentals. It's how we utilize multidisciplinary skills to distinguish ourselves in pension risk transfer. It's why we have confidence in our future.
When you bring these 4 elements together, you have our investor proposition. It's not that complicated, but it does require clarity, consistency and the talent and culture to pull it off.
So there you have it. We believe we're on track for distinctive and superior performance attained and sustained by a clear and consistent investor value proposition and a determination to execute upon it. And these themes will carry through in every presentation you here today. It's not spin, it's substance, it's who we are.
With that, I would like to turn it over to Mark for some commentary on current events. Mark?
Mark B. Grier
Thank you, John. Good morning, good afternoon or good evening. Appreciate your interest today. And John characterized my discussion as current events. And I want to focus on the intersection of a number of issues and themes that are out in the market that kind of get at the guts of a number of questions around companies, and I want to be clear about how we're thinking about Prudential and where we are on the hit parade of current events and issues and items in the marketplace. And if there's a message at the end of the day that runs through each of the points that I'm going to talk about, the message is that we are strong and we're conservative, and we are consistently sensitive to the quality and substance of our balance sheet.
Now let me go through some of the families of issues that are out there. One relates to the kind of general question of how we might stand up under group or holding company supervision. We believe that's coming in one form or another. I'm not going to go around the track on SIFI designation again, but that's one way in which we could find ourselves with a group supervisor, which would be the Federal Reserve. But as you know, there are other things out there in the international arena and in the domestic arena that would result in a form of group supervision. So I want to talk a little bit about our confidence in our ability to hold up well in the context of group supervision.
There's another family of issues around the impact of assumptions and what's in the balance sheet. We still get questions about the impact of low interest rates. I want to make some brief comments about that.
And then finally, there are some general questions around financial structure and around risk and around some elements, as I said earlier the guts of the company, that I want to touch on as well just to be clear with respect to where we stand.
You've heard us, and me in particular, consistently express confidence in the quality of our balance sheet, in our capitalization and in our capital management processes. And I want to hit one headline around the macro view of the company that I think is extremely important. And that is that the GAAP balance sheet is not a very effective portrayal of either solvency or risk. Our GAAP balance sheet is an umbrella that covers a number of different economic arrangements that they wind up booked on the balance sheet, but it's not apples-to-apples as you look through different categories of liability products or as you look through different investment product or asset management arrangements as they wind up on the GAAP balance sheet.
The starting point for solvency in a company like Prudential is to understand reserving practices. And that's totally different from the starting point that you might use as your frame of reference for looking at a bank. But for us, it's reserves, and it's the assumptions that are embedded in reserves, and it's conservatism and it's the overall process that we use to create the liability side of our balance sheet. And remember that when we create a reserve, we fund it. So everything that's on there has an asset on the other side, and those asses are subsequently tested in our cash flow testing processes to ensure that they will support the reserves that we've recognized. Good example of this is the way in which we reserve on our statutory books for low interest rates. We reserve for the low rate shock in the so-called New York 7 in the asset adequacy testing process. What that means specifically is that the low rate shock is not a hypothetical what-if. It's actually a funded outcome on our books. It's reserved for and it's invested for on the asset side.
So the first element of the macro view, I think, starts with the idea that reserves are really central. And understanding what's in there and what's in there for contingencies or deviations from expectations are very important concepts and themes that really is the guts of where it all begins.
And then if you move to the asset side, as I said earlier, there's a range of arrangements covered by the GAAP accounting umbrella that look different, separate accounts, participating policies, other elements of loss absorption built into either product design or the investment standards that we set and adhere to. And all of those things create a very different picture of the economics of the balance sheet relative to the optics of the balance sheet. And our view, which I've expressed a number of times, is that appropriately measured -- and this doesn't require a Ph.D. in finance, by the way, this is a pretty straightforward consideration of what's really on the balance sheet. Appropriately measured, our capital ratios are very, very strong even considering the context of an equity-to-assets-like measure, which is a little different for an insurance company. Even considering the context of an equity-to-assets-like measure, we believe that we would exceed any even remotely reasonable regulatory standards for financial strength.
So the starting point with respect to the macro issue is that the big picture is not as it seems, taking accounting numbers at face value. But digging into the guts of statutory and GAAP financials results in a picture of financial strength that, we think, makes a lot of sense and results in the company being extraordinarily strong with respect to capitalization. By the way, that makes sense. We deal in a world that expects high standards from us. We deal in a world where we're often, for example, transacting in an environment where the counter party has to meet a fiduciary standard. That's a high standard. So we would expect that in order for this company to be successful in its markets, we would have to be financially strong. And again, understanding it properly leads to that conclusion and reinforces my original point that we're conservative, we're strong and we're consistently sensitive to the quality of the balance sheet.
Let me move to another one that relates to quality capital and current events, and that's the question of captives. We use captives to isolate risk. And when we isolate risk in a captive, we're then able to manage that risk more efficiently. We don't use captives to reduce the reserves that we hold, and we don't use captives to reduce the capital that we hold. We hold reserve levels that are the same as the reserve levels that would be held in the seeding company, and we capitalize our captives to AA standards. We also hold appropriate assets to ensure that the reserves are adequately backed. We have no offshore captives, and our captives are in the same states as our primary seeding companies. What that means is that within that picture of a state with a primary company and a captive company, we provide full transparency to the regulators in that state. We also, by the way, provide full transparency to the rating agencies with respect to our captives.
So to repeat this again, we don't use captives to reduce reserves, we don't use captives to reduce capital. We hold appropriate assets backing reserves in our captives. No letters of credit, no naked parental guarantees, no hollow assets. These are real, substantive entities. The economic benefit to us arises from the efficiency that we get from isolating and managing certain kinds of risks in separate entities. And that's the end of the story.
Let me comment briefly on market assumptions that are embedded in our balance sheet. You may recall that in the third quarter of last year when we went through our annual assumption reviews, we reduced our expected equity market returns by 2 percentage points, and we reduced our interest rate assumptions by 1 percentage point. And we also extended the time that we would grade back to more of a reversion to mean-type level of returns in either the equity markets or the interest rate markets. We believe, based on what we can tell from disclosures, that we stand out in terms of how conservative we are with respect to the economic assumptions that support our balance sheet. And I would say we also believe that there is more real-time valuation reflected in our balance sheet, meaning more responsiveness to current conditions then there is in some other balance sheets within the industry. So what I want to emphasize with respect to market assumptions is that we're on top of it. We have a rigorous process that reviews our market assumptions. We have conservative assumptions, at least as far as we can tell, relative to the industry supporting our balance sheet. And we are responsive to current market conditions in assessing the assumptions that will support reserves. By the way, this is another kind of central thing. It relates to that whole balance sheet picture that drives then the investing side and the need to back reserves with high-quality assets.
Finally, a comment on the impact of low rates on the way in which we're managing. And the question comes up often in investor meetings about what we're doing to reach for yield or generate more investment income. And the answer to that is that we're not doing anything. We're investing according to the core competencies that have been reflected in our investing behaviors over many, many years. We're not making dramatic changes in asset mix in response to low interest rates, and we're not reaching for yield. We are, by the way, repricing our products. We are, by the way, cutting expenses. And I think, I would say that we're probably doing what U.S. shareholders think we should be doing in this environment. We are aggressively trying to protect our margins, but we're not doing it in the context of reaching or extending the risk profile of the company. There are changes in the risk profile that result from some of the products we sell. Some of the pension risk transfer deals , for example, as we receive payment in kind of the premium payment there included some asset classes in which we were underweighted and with which we're very comfortable but that had resulted in some changes at the margin with respect to what in the industry would be known as risk assets. These are actually, by the way, pretty strong seasoned portfolios of private equity. But the net point on this one is that we're not reaching for yield, we're not reconfiguring our investment portfolio. We're repricing, we're cutting expenses and we're investing in the things that we've always been historically good at investing in.
I've covered a number of I guess what you might call miscellaneous topics. I think the broad themes that run through all of this tie a number of issues together. They tie issues together around regulatory scrutiny. And as you heard, when you peel the onion and understand the economics of leverage in our company and understand the components of the balance sheet as it relates to reserves and captives and assumptions and risk profile, you come up with what we consider to be a great story, what we consider to be a great platform from which to execute the business strategies and fulfill the investor value proposition that John talked about.
So I'll stop there. We'll have a chance for questions at the end, but I hope that's helpful clarification around a number of current events, topics, that are important to the industry and important to Prudential and where I think we have very good, strong, positive messages. Thank you.
And now, John and I will depart. And Charlie, we'll not depart. We're only going right here.
Charles Frederick Lowrey
Good morning. This will be a little bit of a different presentation than you've heard before in that we're going to talk more about strategy and priorities of the U.S. businesses than perhaps we have in the past. But the bottom line is we really like the opportunities that we're seeing in the U.S. today and believe that there are areas of growth based on significant secular changes in the United States by which we can expand our businesses.
So we've broken the presentation up into 4 parts. In the first part, we will review 4 major themes that will be prevalent throughout the presentation. Second, we'll discuss how we're actually approaching the opportunities in the U.S. Third, we'll briefly talk about each of the U.S. businesses. You all know the U.S. businesses. You hear about them every quarter, you talk to senior management about them, you talk to Eric and Neil [ph] about them. But there are some important points that we'd like to make about each of the businesses. And finally, we'll have some summary comments.