Prudential Financial, Inc. (NYSE:PRU) Q4 2023 Earnings Call Transcript

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Wilma Burdis: Thank you.

Operator: Thank you. Next question is coming from John Barnidge from Piper Sandler. Your line is now live.

John Barnidge: Good morning. Thank you for the opportunity. And best of luck, Ken. My first question, I appreciate — if we could go to the Group Insurance business, I appreciate the benefit ratio guidance. But is there an expense savings storing disability coming up I can’t help, but notice improvement in administrative expenses in recent quarters. And with COVID moving endemic, the ramping up of expenses, should that fall to the side. Thank you.

Caroline Feeney: Yes. So John, it’s Caroline. Thank you so much for your question. In terms of our overall expense management, you may have seen we saw 100 basis point improvement in our admin ratio from the year ago quarter. That is driven by both business growth and continued expense discipline. And we will continue to focus on expense efficiencies and obviously then would regularly adjust our operating models to ensure the appropriate levels of service going forward. In terms of disability overall, I would say across group disability results were driven by our focus on effective claims management, including those short- and long-term disability as well as absence in family leave. We also benefited from the continued tailwinds of strong employment and high interest rate environment and our disability business had an outstanding year.

I would also just want to point out something else strategically, we’re doing on the disability side as we continue to grow that area. We’ve actually invested, John, in improving our claims management process through a strategic partnership with Evolution IQ. This is a provider of AI-driven technology that provides real-time monitoring leading to increased recoveries. So, overall, I’d say in terms of expense management, we remain highly disciplined and also, obviously, very much focused in terms of our pricing discipline. The evidence there is our ability to accomplish all this growth in maintaining our price competitiveness. But the fact that as we continue to grow our book, we’re also not afraid to walk away if the pricing just doesn’t make sense on any particular case.

So, overall, we remain confident in our decision to lower benefit ratio guidance and feel very comfortable with our expense management and our pricing discipline.

John Barnidge: Thank you for that answer. My follow-up question. When you talk about globalizing the PGIM business, are there markets you’re not large in size that you want to get bigger in? Where does Prismic sit within that growth opportunity for PGIM internationally?

Andrew Sullivan: So, John, I’ll start out and then, Rob, if you want to tail in, you can jump in. So when we talk about globalizing the business, I think it’s important to recognize that a majority of our assets under management today are in the United States. So, we’ve been actively, for many years now, working to expand across Europe and Asia and have invested quite heavily in distribution on both the institutional and retail side of the business. That said, as we look to continue to broaden and diversify our mix of both asset classes, but geographies, we would look to Europe and Asia as key geographies that we’re most interested in growing.

Robert Falzon: John, it’s Rob. Just following up on Andy. Within Asia and with respect to Prismic, I think what I’d note is we see a huge opportunity in Japan, both with regard to, as Ken alluded to earlier, in the call, optimizing our own book, but also with respect to the sort of opportunities we see with third parties in that marketplace as well.

John Barnidge: Appreciate that. Thank you.

Operator: Thank you. Our next question is coming from Michael Ward from Citi. Your line is now live.

Michael Ward: Hey, guys. Good morning. Sorry to be the one just curious if there’s any update on commercial real estate side for you guys. It looked like the LTV deteriorated a little bit. Just kind of wondering how you feel about any kind of watch list or resolutions that you’ve made last year too.

Robert Falzon: This is Rob. So I’ll take your question, Mike. So a couple of thoughts. One, from an overall market standpoint, let me start there. From a peak to trough, what we’ve seen is across the market, about a 16% correction, and that number relates to, what I’ll call, institutional quality real estate, the sort of things that we invest in or we lend against, and that’s on an unlevered basis. Our estimate is that the peak to trough in this cycle across real estate types is going to probably be a little over 20%. So we’ve got 5% or 6% probably left in the way of price correction yet to experience. Now, within that, office, obviously, has corrected much more severely closer to 30% to date, and probably has another 10%, 15% yet to go.

Because the construction of our portfolio is significantly underweight office, and because the overall quality of the portfolio and the diversification of it across geography and property types, and importantly, because this is a portfolio that’s directly originated by PGIM with the team that’s deep and averages some 25 years of industry experience, we’re actually finding that our portfolio is holding up quite well. So loan to values across the portfolio were about 58% and our discount — our debt service coverage ratios remain right around 2.5%. Within our overall portfolio, our actual valuations increased about 6% during the course of 2023 despite the fact that we saw a double-digit decline in the office component of our portfolio. But again, because that office component is only 2% of our assets or 50% — about 14% of our mortgages, the performance of the rest of the portfolio has offset that.

So, with regard to portfolio performance, we’re actually feeling quite good. The last thing that you asked about was sort of what we’re seeing in watch list, et cetera. I guess the way I would describe that, Mike, is that, first, if we look at our experience with maturities during 2023, we had about $2 billion worth of scheduled maturities. Of those, we provided modifications for four — less than $400 million of that $2 billion with those modifications providing longer-term extensions. The remainder of all of those maturities was resolved favorably through refinancing payoffs or short-term extensions that then led or leading to subsequent payoffs. In the upcoming year 2024, we’ve got about $3 billion of maturities coming on. That’s about 6% of the portfolio that’s maturing.

And while we don’t expect to be immune from this cycle by any means, we do expect that on a relative basis, we’ll be quite resilient. We increased our reserves in the real estate portfolio to around $370 million as of the end of the year and that represents about 72 basis points, and we think that that’s well provisioned against the portfolio, again, given what we’ve experienced in the underlying quality of that portfolio.

Michael Ward: Awesome. Really helpful. Thanks, Rob.

Operator: Thank you. We reached the end of our question-and-answer session. I’d like to turn the floor back over to Mr. Lowrey for any further closing comments.

Charles Lowrey: So, thank you again for joining us today. The fourth quarter capped a year of continued growth and evolution for Prudential. Our strategy, coupled with our mutually reinforcing business system positions us well to deliver long-term sustainable growth to all our stakeholders. Our fundamentals are strong, and we are confident about our momentum going into 2024. We will continue to lead the way in expanding access to investing insurance and retirement security across the globe, as we seek to help current and future generations build a secure financial future. Thank you again for joining us, and have a good day.

Operator: Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.

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