Prudential Financial, Inc. · NYSE:PRU
Prudential Financial — Investor Day (September 2004)
84 slides from Prudential Financial's investor day presentation, Sep 22, 2004
Slide 1: Tokyo Investor Day
Tokyo Investor Day September 23, 2004 Tokyo, Japan
Slide 2: Forward Looking Statements and Non-GAAP Measure
Forward Looking Statements and Non-GAAP Measure We will make some forward-looking statements in the following presentations. It is possible that actual results may differ materially from the predictions we make today. Additional information regarding factors that could cause such a difference appear
Slide 3: International Insurance and Investments Division – Reconciliation
International Insurance and Investments Division – Reconciliation between adjusted operating income and the comparable GAAP measure Year ended December 31, Six months ended June 30, (in millions) 2001 2002 2003 2004 Revenues (1): International Insurance, excluding Gibraltar Life 2,120 2,379 2,935 1,
Slide 4: International Division
International Division Rodger Lawson Vice Chairman International Insurance and Investments Division
Slide 5: International Division today
International Division today Life Planning Insurance Traditional Insurance International Investments Major Prudential markets today Emerging markets for Prudential today Japan Korea Taiwan Mexico China Philippines Argentina Brazil Germany Italy UK Poland
Slide 6: International Division financial performance
International Division financial performance Year Ended December 31 Six Months Ended June 30 ($ millions) 2002 2003 2004 Adjusted operating income before tax: International Insurance excluding Gibraltar Life $379 $449 $250 Gibraltar Life 378 370 209 26% ROE (1) $459 International Investments (6) (17
Slide 7: Key elements of our international strategy
Key elements of our international strategy Focus on limited number of attractive countries Prioritize the affluent and mass affluent individual markets Develop business platforms based on Life Insurance or Investment Management or both Pursue opportunistic acquisitions Maintain very strict financial
Slide 8: Life Planning insurance
Life Planning insurance Value Proposition – Life Planners A highly trained, professional field force focused on providing life insurance plans tailored to the specific needs of each individual client Competitive Advantage Client focus Needs based selling Industry leadership service capability Produc
Slide 9: Life Planners
Life Planners 1,603 1,908 2,332 2,884 3,495 4,104 4,505 4,989 1996 1997 1998 1999 2000 2001 2002 2003 Japan Korea Taiwan All others
Slide 10: Life Planner model: number of individual policies in-force
Life Planner model number of individual policies in-force # of Policies, thousands 1,181 1,482 1,719 2,010 1998 1999 2000 2001 2002 2003 Japan Korea All Others
Slide 11: Productivity, retention and persistency
Productivity, retention and persistency Life Planner Model 1998 1999 2000 2001 2002 2003 Life Planner 7.1 7.5 7.5 8.1 6.8 7.0 productivity(1) Life Planner 12-month 86% 79% 75% 66% 72% 75% Retention Life Planner 24-month 69% 72% 65% 61% 55% 57% Retention 13-month policy 93% 94% 94% 93% 93% 93% persis
Slide 12: Life Planner model business driver growth
Life Planner model business driver growth CAGR 1998 – 2003 Number of Life Planners 16% Annualized New Business Premiums (1) 18% Number of Policies in Force (000) 21% Adjusted Operating Income (2) 26% 4,989 2,332 $608 mm $270 mm 2,010 776 $449 mm $144 mm (1) GAAP Exchange rate basis – translated base
Slide 13: Life Planner model strategy and plans
Life Planner model strategy and plans Disciplined implementation Organic expansion in existing markets Continued growth in Life Planners Maintenance of Life Planner productivity Maintenance of client policy persistency levels Very selective entry into new markets
Slide 14: Gibraltar Life summary
Gibraltar Life - summary Stable earnings and distribution system High return on equity Strong free cash flow Year Ended December 31 Six Months Ended June 30 2002 2003 2004 Adjusted operating income (1) $378 $370 $209 Equity (2) $1.1 $1.1 $0.8 ROE (3) 22% 23% 35% (1) Before-tax; in millions (2) Avera
Slide 15: Where we are today – summary
Where we are today - - summary Leadership positions in life planning Gibraltar generates high ROEs and cash flows Developing asset management platforms Profitability dominated by Japan and Korea Management depth; country expertise Acquisitions potentially additive
Slide 16: International Insurance Finance
International Insurance Finance John Hanrahan Chief Financial Officer International Insurance
Slide 17: Sources of financial performance
Sources of financial performance Sales Persistency Growth in business in-force Emphasis on protection products Improving investment spreads Strengthening Yen
Slide 18: Operating income
Operating income (1) ($ millions) 250 200 150 100 50 0 (50) 1 2 3 4 5 6 7 8 9 10 11 LP Model LP Productivity LP Persistency XYZ Year (1) Based on Prudential definition of adjusted operating income
Slide 19: Sales growth primarily driven by increase in LPs
Sales growth primarily driven by increase in LPs 4,989 2,332 Life Planners 16% CAGR $608 M $270 M Annualized New Business Premiums (1) 18% CAGR Overall LP productivity and average premium have been driven by POJ Combined LP operations show similar sales/LP growth correlation Interim results can devi
Slide 20: Long term sales growth tracks LP growth
Long term sales growth tracks LP growth Reasons for higher sales in 2001: Gibraltar LA sold POJ products during restructuring period Temporary surge in sales before premium rate increases New Business Annualized Premiums ($ millions) (1) 700 600 500 400 300 200 100 0 Sales of POJ products by Gibralt
Slide 21: POJ sources of product profitability
POJ sources of product profitability (1) Term/Riders Whole Life Endowment 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% 26% 9% 35% 11% 10% 14% 4% 10% 4% -7% -10% Mortality Expense Interest TOTAL (1) Estimated percentage based on before-tax income (on an adjusted operating income basis) to premiums Internat
Slide 22: Business mix vs. Industry - POJ
Business mix vs. Industry - POJ POJ Based on face amount in-force March 31, 2004 Industry (1) Based on face amount in-force March 31, 2004 Saving 1% Whole life (2) 37% Term 62% Term 19% Saving 6% Whole life 74% (1) Based on Japanese Life Insurance Association Industry data (2) Includes retirement in
Slide 23: Gibraltar life product mix
Gibraltar life product mix – increased emphasis on protection products Face amount in-force 12/31/2003 Face amount new business first 6 months of 2004 11% 38% 51% 9% 22% 68% Term and other protection Whole Life Savings
Slide 24: Sources of total profitability 2003
Sources of total profitability 2003 Profitability (1) ($ millions) POJ POK Gibraltar Mortality $242 $72 $290 Interest (106) (4) 100 Expenses 220 69 4 Surrenders — — (24) TOTAL $356 $137 $370 (1) Estimated breakdown of before-tax adjusted operating income International Insurance 23
Slide 25: Improving interest rate environment in Japan
Improving interest rate environment in Japan Required interest rates coming down $1.8 billion of POJ and Gibraltar asset portfolio will mature in the next 12 months. Average yield of these maturing assets is 2.3%. Average new money investment yield under current environment is 2.5% . Conservative po
Slide 26: Interest rate impact on profitability - POJ
Interest rate impact on profitability - POJ ($ millions) 2003 1H’04 Average Required Interest 4.00% 3.90% Average Yield 2.37% 2.54% Negative Spread (%) (1.63%) (1.36%) Negative Spread ($MM) (106) (52) International Insurance 25
Slide 27: Foreign exchange hedge impact
Foreign exchange hedge impact Yen income hedging plan on 12 quarter rolling basis Yen forward rates exceed spot rates against the dollar A strengthening Yen helps earnings Hedging delays impact on earnings, but does not eliminate it Yen / $ Actual vs. AOI Yen / $ Rate 2001 – 2Q 2004 140 130 120 110
Slide 28: Strong capital position
Strong capital position Solvency Margins Prudential of Japan Gibraltar Typical Rating Agency Targets FY’03 Solvency Margin 1,030% 1,157% AA – 700%, A – 500% Significantly higher capital than needed to operate businesses International Insurance has successfully redeployed nearly $1 billion of excess
Slide 29: Summary
Summary Strong sales and superior persistency provide growth of business in-force Life Planner system sales track LP growth over long term Emphasis on protection products leads to superior margins Improving Japanese investment spreads and strengthening Yen contribute to results Strong capital positi
Slide 30: Prudential of Japan
Prudential of Japan Kazuo Maeda President and CEO Prudential International Insurance Life Planner Operations
Slide 31: Life insurance market in Japan
Life insurance market in Japan (1) Total population: 127 million (Rank #10) Nominal GDP: $4.3 trillion (Rank #2) Life insurance premium: $387 billion (Rank #2) Life insurance premium: 9.1% of GDP Top 6 companies control 67% of private market 89.6% of households have life insurance Life insurance mar
Slide 32: POJ – current status
POJ – current status Business Rating Solvency Margin Ratio Number of Policies in Force Assets (US GAAP) Sales Offices # of Employees Home Office Field Office Individual Life Insurance (No Pension or Group Business) AA- S&P A+ AM Best 1,030%(1) (2) 1.3 million(3) $11.6 billion(3) 67 (4) 3,356(3) 2,94
Slide 33: History of operation
History of operation Established in 1987 with 15 people and $70 million capital – interest in previous joint-venture sold to SONY 32 Life Planners (LPs) started selling life insurance in 1988 Number of LPs 2,500 2,000 1,500 1,000 500 0 Growth of Business and LPs Number of LPs Number of Policies Numb
Slide 34: POJ in the life insurance industry
POJ in the life insurance industry (1) New Business Face Amount in Billion $ Industry 1,500 1,000 500 Industry POJ 94 95 96 97 98 99 00 01 02 03 15 POJ 10 5 0 In-force Face Amount in Billion $ 14,000 13,000 12,000 11,000 10,000 9,000 8,000 Industry Industry POJ 94 95 96 97 98 99 00 01 02 03 (1) On a
Slide 35: Vision, Mission, and Strategy
Vision, Mission, and Strategy Vision Revolutionize the way life insurance business is conducted and become the most admired insurer in the Japanese market Mission Help customers achieve financial security and peace of mind by providing the best possible services Strategy Develop true professionals o
Slide 36: Business model – Life Planner
Business model – Life Planner Life Planner – a selective, high quality sales force Only 2-4 out of 100 candidates are hired - Well trained and professional Customer focused Disciplined, and demonstrates “missionary zeal” Profile of a typical POJ new Life Planner Age 32 years old College graduate Goo
Slide 37: The beneficial cycle
The beneficial cycle Strategy and Execution High Quality Referrals High Life Planner Productivity High Customer Satisfaction High Life Planner Income High Policy Persistency High Life Planner Retention High Profitability (low expense) High Quality Recruits Good Growth
Slide 38: Business model – Needs Based Selling
Business model – Needs Based Selling What do we mean by needs based selling of life insurance? We are in the life insurance business. – However – We are not in business to sell life insurance as a product. We are in the business to sell life insurance as a solution. – That means – We are in the busi
Slide 39: Key drivers comparison
Key drivers comparison Key drivers POJ (1) Top 5 (2) Productivity (3) (# of policies / LP / month) 7.0 2.3 Policy Persistency (Face-amount) 13 - month 94.3% 84.2% 25 - month 87.3% 73.5% Life Planner Retention 12 - month 91.3% 37.9% 24 - month 80.8% 17.2% (1)For the twelve months ended March 31, 2004
Slide 40: POJ - Product mix
POJ - Product mix Based on face amount in-force as of June 30, 2004 Based on new business face amount for the quarter ended June 30, 2004 62% 1% 3% 34% 2% 24% 74% Whole Life Term Endowment Other
Slide 41: Outlook
Outlook Continued strong demand for death protection “ 51% of Japanese life insurance policyholders think they are underinsured. They feel that 2.8 times his/her current coverage would be suitable.” - Study by Japan Institute of Life Insurance, 2000 Customers increasingly selective of insurers Chang
Slide 42: Competitive environment
Competitive environment Improved financial conditions of competitors Bancassurance—complete deregulation in 2007 Reinforcement of low-price strategies by some insurers Sales of life insurance through postal system Increasing variety of financial products
Slide 43: Growth Strategy
Growth Strategy POJ’s strength = Life Planners’ strength Improving the basic quality of Life Planners is the foundation of all POJ strategies Selective recruiting Thorough training Effective motivation Strict compliance Maintain key drivers Focus on missionary zeal
Slide 44: Geographic expansion
Geographic expansion POJ Today Tier I Cities Tier II Cities Expansion of field office network to middle-size cities will increase the source of LP candidates Securing Sales / Agency Manager resources will be the greatest challenge
Slide 45: Prudential of Japan – 1988 Agencies
Prudential of Japan – 1988 10 Agencies
Slide 46: Prudential of Japan – 1994 Agencies
Prudential of Japan – 1994 23 Agencies
Slide 47: Prudential of Japan – 1999 Agencies
Prudential of Japan –1999 37 Agencies
Slide 48: Prudential of Japan – September 2004 Agencies
Prudential of Japan – September 2004 67 Agencies
Slide 49: Summary
Summary Selective, high quality Life Planner sales force Needs based selling; protection products Superior productivity, policy persistency, Life Planner retention Life Planner expansion drives continued growth Focused strategy and execution
Slide 50: Gibraltar Life
Gibraltar Life Tim Feige President and CEO Gibraltar Life
Slide 51: Growth in Japan operations
Growth in Japan operations POJ and Gibraltar Combined Number of LPs Number of LAs New Business Annualized Premiums New Business Annualized Premiums ($ millions) (1) Number of LP & LAs 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Slide 52: Gibraltar overview
Gibraltar overview (1) Acquired by Prudential Financial in 2001 Strong Affinity Group Relationships Over $30 Billion in Assets (Rank #11) (1) Over 4 Million Individual Policies In Force (Rank #7) (1) 81 agencies, 533 sub branches, 4,888 Life Advisors (2) Developing additional distribution channels (
Slide 53: Gibraltar Life performance
Gibraltar Life performance Year Ended December 31 Six Months Ended June 30 2001 (1) 2002 2003 2004 Life Advisors (2) 6,121 5,155 4,826 4,888 New Annualized Premium (3) (4) $116 $253 $299 $134 Before tax AOI (3) $262 $378 $370 $209 Equity (5) $1.2 $1.1 $1.1 $0.8 ROE(6) 20% 22% 23% 35% (1) Results fro
Slide 54: Gibraltar transformation
Gibraltar transformation Leverage Life Planner Model Focus on Key Drivers Build Infrastructure Strengthen Management Team Develop Unique Strategy
Slide 55: Life Advisors
Life Advisors Prior to Acquisition “Sales Agents” Current “Life Advisors” Fixed Compensation Product Sales Part-time Job Product Training Admin Managers Full Commission Needs-based Sales Professional Career Education and Support Professional Sales Mgt
Slide 56: Key drivers - Life Advisor trend
Key drivers - Life Advisor trend # of Life Advisors 7,000 6,000 5,000 4,000 3,000 2,000 1,000 6,121 5,726 5,525 5,233 5,155 4,993 4,877 4,848 4,826 4,815 4,888 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 Count Productivity Productivity (1) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 (1) Polic
Slide 57: Growth in recurring premium sales
Growth in recurring premium sales Annualized new business premiums ($ millions) (1) 300 250 200 150 100 50 0 First half 2003 First half 2004 Recurring premium Single premium (1) Translated based on average exchange rate for the year ended December 31, 2003 Gibraltar Life
Slide 58: Key drivers comparison
Key drivers comparison Key drivers POJ (1) Gibraltar (1) Top 5 (2) Productivity (3) (# of policies / LP or LA / month) 7.0 3.8 2.3 Policy Persistency (Face-amount) 13—month 94.3% 93.3% 84.2% 25—month 87.3% 81.7% 73.5% Life Planner / Life Advisor Retention 12—month 91.3% 56.3% 37.9% 24—month 80.8% 29
Slide 59: Infrastructure improvements
Infrastructure improvements Financial Reporting and Control Asset Management Compliance and Risk Management Operations and Systems Sales and Marketing Human Resources
Slide 60: Management team
Management team President & CEO Chief Marketing Officer Regional Marketing Officers Association Marketing Group Marketing Kyoko Marketing Chief Investment Officer Chief Compliance Officer Chief Legal Officer Chief Operations Officer Customer Service Officer Chief Information Officer Chief Financial
Slide 61: Unique strategy
Unique strategy Strategic considerations Country demographics Competitive environment Company position & skills Prudential expertise Market segment focus Association relationships Tailored distribution, products & service Financial discipline Performance & value based culture
Slide 62: International acquisition strategy
International acquisition strategy Leveraging International Insurance and Gibraltar experience Integrated, focused team: Japan, US and other countries Disciplined, agile approach Target countries: Japan, Korea, Taiwan Additional countries: opportunistic
Slide 63: Summary
Summary High return on equity Excellent cash generation Stable distribution system and in-force business Building on competitive advantages Leverage International Insurance and Gibraltar experience
Slide 64: Prudential of Korea
Prudential of Korea O.J. Hwang President Prudential of Korea
Slide 65: Life insurance market in Korea
Life insurance market in Korea Total Population of South Korea is 48.1 million (#23 in the world) (1) Total GDP is $ 621 billion (#10) (1) Total Life Insurance Premium is $ 42 billion (#7) (1) Total Life Insurance Premium is 6.8% of GDP (#8) (1) 90% of households have life insurance (2) Domestic Big
Slide 66: POK – current status
POK – current status Focus on LP Channel and Protection Life Insurance Face amount ranks #5 in industry (1)(2) $1.6 billion in assets(3) (4) 71 sales offices(3) Rankings(1) #1 in policy persistency(5) #1 in agent retention(6) #1 in customer satisfaction for 6 consecutive years(7) (1)As of March 31,
Slide 67: Life Planner and agency growth
Life Planner and agency growth No. of Agencies No. of LPs 1,800 1,600 1,400 1,200 Planners 1,000 Life 800 600 400 200 0 91 93 95 97 99 01 03 2Q 04 80 70 60 Agencies 40 30 20 10 0
Slide 68: Business growth – policies in-force
Business growth – policies in-force Policies In-force, in thousands 91 93 95 97 99 01 03 2Q 04
Slide 69: Business growth – adjusted operating income
Business growth – adjusted operating income Before tax adjusted operating income ($ millions) 98 99 00 01 02 03
Slide 70: Business model
Business model Life Planner model – selective, high quality sales force – Well trained and professional – Customer focused – Disciplined and demonstrates “missionary zeal” Needs based selling Corporate vision – to be the most trusted life insurance company in Korea Corporate mission – to help custom
Slide 71: Key drivers comparison
Key drivers comparison (1) Prudential of Korea Top 3 (2) Productivity(3) (# of policies / LP / month) 8.5 4.6 Policy Persistency (Face-amount) 13 - month 91.4% 74.2% 25 - month 90.0% 60.8% Life Planner Retention 12 - month 86.4% 36.2% 24 - month 77.5% N/A (1) For the twelve months ended March 31, 20
Slide 72: POK product mix
POK product mix Based on annualized new premiums for the year ended December 31, 2003 Other Protection-based 25% Other 9% Whole Life 66% Tokyo Investor Day 9.23.04
Slide 73: Growth strategy
Growth strategy Life Planners annual growth: double digit percentage Maintain productivity Continue emphasis on protection products Increase geographical reach
Slide 74: Agency building history
Agency building history No. of Agencies 1991 1994 2000 2003 2Q04 Seoul Seoul Capital cities of provincial governments Nationwide cities with 300,000+
Slide 75: Summary
Summary Selective, high quality Life Planner sales force Needs based selling; protection products Business model strength underlies rapid growth Life Planner expansion and increased geographical reach drive continued growth Focused strategy and execution
Slide 76: International Investments - Korea
International Investments - Korea Christopher Cooper President & CEO Prudential Investments & Securities Co., Ltd.
Slide 77: Korean investment management market
Korean investment management market (1) Industry AUM: $130 billion, 59% of 1999 peak 300,000 250,000 200,000 Industry (billion won) 150,000 100,000 50,000 Industry AUM Daewoo SK Jun 1997 Jun 1998 Jun 1999 Jun 2000 Jun 2001 Jun 2002 Jun 2003 Jun 2004 (1) Asset Management Association of Korea June 30,
Slide 78: Korean investment management market
Korean investment management market 46 firms, of which – 9 have foreign ownership (Prudential is the only foreign firm with captive distribution) – 24 are part of larger financial groups (banks and insurance companies) Market concentration is high: top 4 share is 43%; 2 of top 4 are receiving govern
Slide 79: Hyundai acquisition overview
Hyundai acquisition overview Acquisition closed end of February Client assets $14 billion (1) Largest foreign-owned firm in market; 4th largest overall (2) Emphasis on proprietary distribution: approximately 90 branches, 600 sales personnel (1) Over 490,000 clients (1) More equity-oriented than indu
Slide 80: Hyundai acquisition
Hyundai acquisition Prudential acquired 80% stake from the Korean Deposit Insurance Corporation (KDIC) for a purchase price of approximately $300 million –$2.2 billion government injection – Purchase price below fair value of net assets Remaining 20% may be acquired by Prudential three to six years
Slide 81: Integration actions
Integration actions New senior management team Enhanced control environment, compliance regimen Finance: US GAAP conversion, Sarbanes-Oxley Expense reductions, operational efficiencies
Slide 82: Opportunities
Opportunities Potential for clear market leadership Massive risk transfer from fund sponsors to investors Underserved mass affluent market Consumers evolving from “savers” to “investors” Size and reputation as key success factors Prudential brand
Slide 83: Strategic priorities: distribution/marketing/service
Strategic priorities: distribution/marketing/service Intensify focus on mass affluent; take opportunistic approach to institutional business Expand and diversify product mix Implement needs-based selling approach Capitalize on client relationship as core advantage Understand client needs and risk to
Slide 84: Summary
Summary Hyundai acquisition creates major presence in Korean investment market Integration underway; improving sales process Market focus, size, reputation and brand build potential for clear market leadership 15% ROE expected after first full year of operations