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’ll conduct a question-and-answer session. Instructions will be given at that time. As a reminder, today’s call is being recorded. I will now turn the call over to Mr. Bob McLaughlin. Please go ahead.

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 International Businesses; and PGIM, our global investment manager; Caroline Feeney, Head of US 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 those predictions we make today. In addition, this presentation may include references to non-GAAP measures. For a reconciliation of such measures to the comparable GAAP measure and a discussion of factors that could cause actual results to differ materially from those in the forward-looking statements. Please see the slides 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. Now, I'll turn it over to Charlie.

Thank you, Bob, and thanks to everyone for joining us today. Before we begin, I'd like to comment on our CFO transition. As you saw from yesterday's news release, Yanela Frias, President of Prudential's Group Insurance Business has been named Executive Vice President and CFO of Prudential, succeeding Ken Tanji, who has a 27-year veteran of Prudential. Yanela is a seasoned executive who brings a deep understanding of our business and industry, as well as significant finance, operations and leadership experience. I'm sure you'll enjoy getting to know her as she starts her new role. Yanela will become CFO effective March 15, and Ken will stay on for a six-month period to ensure a smooth transition. Ken has been a great partner and friend and has had a distinguished 35-year career at Prudential. I don't need to go back far to articulate his impact. Most recently, as CFO, Ken guided Prudential through the financial challenges of the COVID pandemic and the market volatility that followed. During the same time, his leadership on strategic initiatives meaningfully contributed to our goals of becoming less market-sensitive and more nimble. We are grateful to Ken for his many contributions over more than three decades and wish him well. Now, let's turn to my remarks for the quarter. Our financial results for 2023 reflect continued strong sales momentum across our insurance and retirement businesses and solid underlying earnings growth. The fourth quarter capped a productive year of continued transformation to make Prudential a higher growth, more capital-efficient and more nimble company. Our strategic progress and financial strength position us well to navigate the current macroeconomic environment, maintain a disciplined approach to capital deployment and deliver long-term sustainable growth. Turning to Slide 3. I will begin today by sharing a few examples of how we are transforming our business to drive future growth and unlock value for all our stakeholders. Over the course of 2023, we executed several attractive transactions adding to our capital efficiency. We reinsure the $10 billion block of traditional variable annuities, reducing our market sensitivity. We closed a $10 billion transaction of structured settlement annuities with Prismic, a life and annuity reinsurance company we launched. Prismic will enhance our mutually reinforcing business system and drive future growth by leveraging our differentiated brands, global asset and liability origination capabilities and multichannel distribution. In addition, we entered into a reinsurance agreement with Somerset Re for a $12.5 billion block of guaranteed universal life reserves, which will release capital and increase earnings. We continue to strengthen the capabilities of our market-leading businesses through strategic M&A, expanded distribution channels and created new products and solutions to meet the evolving needs of our customers across the globe and to support future growth. In PGIM, we enhanced our capabilities in the attractive area of private credit and direct lending by acquiring a majority stake in Dearpath Capital, which closed in December. To further provide investors with a cohesive offering, we brought together PGIM's private alternatives capabilities into one global team with the formation of PGIM private alternatives. Internationally, we continue to expand third-party distribution in Latin America through Mercado Libre, reaching a milestone of close to 300,000 policies in force last quarter. In Japan, we launched expanded inheritance and new investment products to diversify our portfolio and meet a broader range of customer needs. Our Institutional Retirement Strategies business secured its second largest longevity risk transfer transaction ever with one of the biggest life insurance companies in the Netherlands. This marks our first international reinsurance deal in the Dutch market. Retirement strategies also worked with Fidelity Investments to address growing consumer demand for a workplace retirement income solution. Our Prudential Simply Income product, a new single premium immediate annuity is now available to employer-based retirement plans administered by Fidelity. In addition, to solidify our leadership and expand our addressable market and structured settlements, we launched a new index structured settlement annuity product. We also continue to create a more nimble and efficient company to meet the changing needs of our customers and maintain a competitive position in the marketplace. This included evolving our operating model and organizational structure to better support customers at the business level and leveraging technology to bring products to market faster. Our business and technology teams together launched an average of one new or enhanced product every two weeks in 2023. Additionally, we are strategically leaning into partnerships with cutting-edge technology firms within our group business to increase the speed of innovation, add capabilities and enhance customer experience. We entered 2024 with momentum and optimism as we have expanded and diversified our product offerings, enhanced customer and client experiences and continued to reinvest in our businesses for sustainable long-term growth. Moving to Slide 4. Our transformation strategy and growth initiatives are supported by Prudential's rock-solid balance sheet and robust risk and capital management framework, which have allowed us to confidently navigate the macroeconomic environment. Our AA rated financial strength includes a strong capital position, including approximately $50 billion of unrealized insurance margins, $4.1 billion in highly liquid assets at the end of the fourth quarter, and a high-quality, well-diversified investment portfolio and disciplined approach to asset liability management. Turning to Slide 5, our disciplined approach to capital deployment enables us to effectively balance investing in the long-term growth of our businesses with returning capital to shareholders. In the fourth quarter, we returned over $700 million of capital to shareholders. For 2024, our board has authorized up to $1 billion in share repurchases as well as a 4% dividend increase beginning in the first quarter. This represents our 16th consecutive annual dividend increase.

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 6 with our financial results for the fourth quarter and full year of 2023. Our pre-tax adjusted operating income was $5.5 billion or $11.62 per share for 2023 and $1.3 billion or $2.58 per share in the fourth quarter. These results reflect an increase in the underlying earnings power of our businesses, including the benefits of strong sales growth and higher interest rates. This was partially offset by pressure on variable investment income and higher expenses, primarily due to a $200 million restructuring charge in the fourth quarter. Our GAAP net income for the quarter was $374 million higher than our after-tax AOI primarily driven by net investment gains due to declining rates. Turning to the quarterly operating results of our businesses compared to the year ago quarter. PGIM, our global investment manager, had lower other related revenues driven by lower incentive fees and agency income and higher expenses. This was partially offset by higher asset management fees, including the benefits from our acquisition of Deerpath Capital and of launching Prismic. Results of our US businesses primarily reflected higher spread income driven by business growth and the benefit of higher interest rates and lower expenses. This was partially offset by lower legacy traditional variable annuity fee income as we pivot to less market-sensitive products. The earnings in our international businesses primarily reflected less favorable underwriting results, including unfavorable policyholder behavior partially offset by lower expenses. Turning to Slide 7, PGIM, our global active investment manager, has diversified capabilities in both public and private asset classes across fixed income, equities and alternatives. PGIM's strong investment performance over the past year has also driven attractive long-term performance with over 80% of assets under management outperforming their benchmarks over the last five- and 10-year periods. PGIM's assets under management increased 6% to $1.3 trillion from the year ago quarter, primarily resulting from market appreciation. Third-party net outflows in the fourth quarter totaled $13.5 billion. Institutional outflows of $6.3 billion were driven primarily by a large redemption of a low fee equity index mandate and redemptions in public fixed income resulting from client rebalancing and liquidity needs. Retail outflows of $7.2 billion were primarily driven by equity, sub-advised mandates and fixed income outflows. As the investment engine of Prudential, the success and growth of PGIM and of our US and International insurance and Retirement businesses are mutually reinforcing. PGIM's asset origination capabilities, investment management expertise and access to institutional and other sources of private capital, including through the recently launched reinsurer Prismic or a competitive advantage, helping our businesses to bring enhanced solutions and create more value for our customers. Our insurance and retirement businesses, in turn, provide a source of growth for PGIM through affiliated net flows as well as unique access to insurance liabilities. In addition, we continue to grow both organically and through acquisitions, our PGIM Private Alternatives business, which has assets of approximately $240 billion across private, corporate and infrastructure credit, real estate equity and debt and secondary private equity. Capital deployment across PGIM's private assets platform of $9 billion during the quarter benefited from robust private placement and direct lending originations. Turning to Slide 8, our US businesses produced diversified earnings from fees, net investment spread and underwriting income and benefit from our complementary mix of longevity and mortality businesses. We continue to drive growth by transforming our capabilities to improve customer experiences and expanding our addressable market with new financial solutions leveraging the capabilities across Prudential. Retirement strategies generated strong sales of $16.4 billion in the fourth quarter across its institutional and individual lines of business. Institutional Retirement sales of $14.3 billion in the fourth quarter were driven by strong international reinsurance sales and our best quarter for structured settlements since 2016. International Reinsurance sales included a $9.2 billion transaction in the Netherlands, and with the recently passed Dutch Pension Reform Legislation, we anticipate this market will continue to grow over time. Individual Retirement posted $2.1 billion in sales, reaching the highest level since the third quarter of 2019. Our product pivots have resulted in continued strong sales of FlexGuard and FlexGuard Income, which increased about 20% from the year ago quarter, while fixed annuity sales have doubled. Our Individual Life sales increased 33% from the year ago quarter, reflecting our product pivot strategy towards more capital-efficient products. Variable life protection and accumulation products represented approximately 70% of sales for the year, including a benefit from our recently launched FlexGuard Life product. In group Insurance, we continue to execute on our strategy of product and client segment diversification while leveraging technology to increase operating efficiency and enhance the customer experience. Our full year sales were up 11% compared to the prior year, driven by growth in disability and supplemental health. Group's full year adjusted operating income was the highest in the past 15 years and included favorable underwriting experience. As a result, we are lowering our benefits ratio target range by 2 percentage points to 83% to 87%.

Thanks Rob. I'll begin on Slide 10, which provides insight into earnings for the first quarter of 2024 relative to our fourth quarter results. As noted, pre-tax adjusted operating income in the fourth quarter was $1.3 billion and resulted in earnings per share of $2.58 on an after-tax basis. To get a sense for how our first quarter results might develop, we suggest adjustments for the following items; first, variable investment income was below expectations in the fourth quarter by $95 million. Second, underwriting experience was below expectations by $15 million in the fourth quarter, and we expect $30 million of unfavorable seasonality in the first quarter. And last, we included an adjustment of $240 million for expenses and other items. This includes the $200 million restructuring charge related to changes in our organizational structure as well as adjustments for typical seasonality related to the timing of expenses and premium. These adjustments combined get us to a baseline of $3.36 per share for the first quarter. I'll note that if we exclude items specific to the first quarter, earnings per share would be $3.50. The key takeaway is that our underlying earnings power has increased significantly over the past year, while we have also made strategic progress improving our risk profile. While we have provided these items to consider, please note that there may be other factors that affect earnings per share in the first quarter. As we look forward, we have included other considerations for 2024 in the appendix. Turning to Slide 11. Our capital position continues to support our AA financial strength rating. Our regulatory capital ratios are above our targets, and we expect PICA's year-end RBC ratio to be greater than 425%. Our cash and liquid assets were $4.1 billion within our liquidity target range of $3 billion to $5 billion, and we have substantial off-balance sheet resources. We remain thoughtful in our capital deployment, balancing the preservation of financial strength and flexibility, investment in our businesses for long-term growth and shareholder distributions.

Sure, Alex, it's Charlie. I'll take that. Thanks for the question. We've always aimed to be good stewards of capital and, as a result, maintain a consistent, disciplined, and balanced approach to redeploying capital within our businesses and to shareholders. Our focus has three main aspects. First, we prioritize maintaining our strong balance sheet and financial strength, which is essential for delivering on our commitments to customers and clients. Second, we invest both organically and through strategic acquisitions to foster sustainable long-term growth. Third, we return excess capital to shareholders as we have historically done. In this quarter, we've accomplished all three objectives. We've allocated capital to support strong sales across our businesses, including the launch of several new products tailored to our customers' evolving needs. We completed the Deerpath acquisition for PGIM and returned over $700 million to shareholders. We will continue to uphold this consistent and disciplined approach moving forward.

Thank you. We’ll now be conducting a question-and-answer session. Our first question is coming from Tom Gallagher from Evercore ISI. Your line is now live.

Good morning, and Ken, good luck. Just looking at the 65% free cash flow conversion, I know that bullet was removed from the capital slides. I just want to make sure that, that's still the target? And then relatedly, when thinking about Japan economic solvency implementation, can you comment on how you see that impacting sources and uses of capital and capital generation over the next few years? Thanks.

Yes. Hey, Tom, it's Ken and thanks for the good wishes. I appreciate it. We didn't take that comment out. It's well understood that our free cash flow ratio has averaged around 65% over time, which reflects our business mix and growth. While it may fluctuate from period to period, it generally stays around 65%. We believe this shows our commitment to balancing growth with sustainable and diversified sources of cash flow. In 2023, you'll notice that cash flows were even higher for various reasons, so there are no changes on that front. Regarding ESR in Japan, we believe our businesses there are well capitalized and financially solid, which should be clear under any reasonable capital standards. We're actively engaging with the FSA, advocating for reasonable and responsible standards, but we also have strategies in place to adapt to the new regime. We could reinsure business internally to the US or Bermuda, or opt for external reinsurance. We have several strategies ready to manage under the new regime, and that's an ongoing focus for us.

Got you. Thanks. And then just a follow-up, if I could. The strength in Japan and International sales more broadly, I thought was kind of notable in the quarter. Can you comment on the competition in those markets what's driving the stronger sales? And do you think that's going to translate into stronger top line? Because I know it's been sort of flattish, but do you expect that to inflect at all in 2024 or 2025?

So, Tom, its Andy. I'll take your question. And thank you for noting that. You've heard me say this before. Sales are an outcome of strong brand, great product and outstanding distribution we feel that we clearly have a competitive advantage in those areas, particularly as it relates to Japan and Brazil. As you heard from Rob, we are very pleased that our sales were up 24% year-over-year, up 21% in Life Planner and 27% in Gibraltar. Once again, that success was very broad-based as we saw growth in every channel in Brazil and across life planners, independent agents and the bank channel in Japan. In Japan, we continue to see lift from higher sales of our US dollar product, really supported by the higher US interest rate. But also clearly, our work on, innovating our product designs and enhancing our customer experience, in particular, in digital is paying off. If you look at Brazil and the results there, we saw double-digit year-over-year growth in every channel. Our Life Planner channel outperformed throughout all of last year with high Life Planner retention and strong productivity. On top of that, we continue to expand and strengthen our third-party distribution. Once again, we saw really strong results flowing from Itau Bank. And we also remain quite pleased that the expansion of our partnership with Mercado Libre. So, you asked about the outlook. As always, our priority is going to be to deliver strong value to our customers, while achieving healthy levels of profitability, but we are optimistic about our ability to grow both the top and bottom-line of our business.

Thank you. Our next question is coming from Ryan Krueger from KBW. Your line is now live.

Hey. Thanks. Good morning. First, can you provide some more color on the key drivers of the RBC ratio improvement in the quarter? I know you had given us the exact RBC during the year, but it seems like it increased a fair amount in the quarter.

Yes. Hey Ryan, it's Ken. Just to remind people, RBC is something that is reported annually. And so the greater than 25% is where we believe RBC will be at the end of the year. But again, that will be filed in much greater detail, at the end of the month. And so yes, we did have an improvement in our RBC ratio in 2023, and it's really a combination of a few things. One, our in-force businesses are generating free surplus, that's part of it. We had the benefit of admitting negative IMR with the regulatory change that was adopted during the year. We also had a reduction in our AAT reserves, generally from reaggregation of policies and investment portfolios, which created some efficiency. So it was a combination of that. And so overall, our capital position and flexibility has improved in 2023. And again, you'll see all that when we file our report at the end of February.

Thanks. And then can you help us understand your sensitivity to short-term interest rates, specifically as we get closer to a potential Fed cutting cycle?

Yes, of course, Ryan. The key point is that we don't anticipate significant net impact from short-term rates. We hold cash and collateral balances that generate short-term yields, which are generally counterbalanced by the interest rate derivatives in our investment portfolio, where we are paying short-term rates while receiving fixed rates to manage duration. These two elements typically offset one another.

Thank you. Our next question today is coming from Alex Scott from Goldman Sachs. Your line is now live.

Hi. So, I wanted to touch on the capital as well. I mean you're in a much stronger position sort of going into 2024 compared to a year ago. I just wanted to get an update on how you're thinking about priorities for deploying that capital? I know at times you've talked about finding some ways to enhance growth. I mean, certainly, organic growth across some of your businesses has begun to pick up as well. But how are you thinking about all of that? And how do you look at driving more growth into the business?

Sure, Alex, it's Charlie. Thanks for the question. We've always aimed to be responsible with our capital. As a result, we maintain a consistent, disciplined, and balanced approach to reallocating capital within our businesses and to shareholders. Our approach focuses on three main aspects. First, we prioritize maintaining a strong balance sheet and financial stability, which is essential for keeping our commitments to customers and clients. Second, we invest both organically and through strategic acquisitions to ensure sustainable long-term growth for our businesses. Lastly, we return excess capital to shareholders, as we have in the past. In this quarter, we successfully executed all three aspects. We allocated capital to support impressive sales across our businesses, launched several new products to address our customers' changing needs, completed the Deerpath acquisition for PGIM, and returned over $700 million to shareholders. We will continue with this consistent and disciplined strategy moving forward.

Thank you. We will now begin the question-and-answer session. Our next question is from Elyse Greenspan at Wells Fargo. Your line is now live.

Hi. Thanks. My first question is about PGIM. In the slides, you mentioned programmatic M&A. Could you provide an update on the pipeline of transactions and what you might be considering?

So, thanks, Elyse. It's Andy. So I won't get obviously specific around pipeline, but maybe just bring it up a level, we've demonstrated our strong ability to grow PGIM organically over a long period of time. So we certainly don't look at it as we need M&A to grow. That said, we do remain interested in augmenting our organic growth with mergers and acquisitions. Montana Capital Partners, PGIM Custom Harvest and then obviously, our closure of Deerpath in December. Those are great examples of us adding capabilities in higher growth, higher fee areas of the industry. So, as we look forward, we're going to continue to look to globalize the business. and we're going to focus on higher growth, higher fee areas, so areas like private alternatives and real asset capabilities. Clearly, periods of time like this that are disruptive can lead to opportunities, so we're making sure that we're in the know and in the flow on what's going on. We've also seen an uptick in activity in the marketplace. But as always, we're going to remain patient and disciplined in our approach.

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

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.

This is Rob. I'll address your question, Mike. Starting with the overall market, we've observed a roughly 16% correction from peak to trough across the market, specifically in institutional quality real estate, which is what we focus on investing in or lending against, on an unlevered basis. We estimate that the peak to trough correction in this cycle will exceed 20%, suggesting there is still about 5% to 6% of price correction left to experience. Office real estate has been impacted more severely, with corrections closer to 30% to date, and it likely has another 10% to 15% to go. Our portfolio is significantly underweight in office properties, and thanks to its overall quality, geographical diversification, and the expertise of our team at PGIM, who average around 25 years of industry experience, our portfolio is performing quite well. Currently, the loan-to-value ratio across the portfolio stands at about 58%, and our debt service coverage ratios are around 2.5%. Throughout 2023, valuations in our overall portfolio increased by approximately 6%, despite a double-digit decline in the office segment, which constitutes only 2% of our assets and about 14% of our mortgages. Therefore, the strong performance of the remainder of the portfolio has helped offset the decline in offices. Regarding watch lists, we have dealt with about $2 billion in scheduled maturities during 2023, providing modifications for less than $400 million of that amount, which included longer-term extensions. The rest of the maturities were resolved positively through refinancing payoffs or short-term extensions leading to subsequent payoffs. In 2024, we expect about $3 billion in maturities, approximately 6% of the portfolio. While we know we won't be entirely immune to the current cycle, we believe we will remain relatively resilient. We have increased our reserves in the real estate portfolio to around $370 million by the end of the year, representing about 72 basis points, which we believe is adequately provisioned based on the quality of the portfolio we've experienced.

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.

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.