Prudential Plc · LSE:PRU
Prudential — Investor Day (2018)
66 slides from Prudential's investor day presentation, 2018
Slide 1: US Introduction
US Introduction Barry Stowe Chairman and Chief Executive Officer North American Business Unit 212
Slide 2: Who is Jackson?
Who is Jackson? Prudential U.S. Operations US Life Insurance Asset Management Leadership position in annuities market PPM America, Inc. manages $112bn AUM as of 6/30/18: Producer-focused distribution model: – 59% on behalf of Jackson Largest wholesaling network – 26% on behalf of Pru UK client
Slide 3: Track Record of Success
Track Record of Success Jackson’s long-term performance is strong and consistent Separate Account Assets ($bn) VA Fee Revenue ($bn) Remittances ($m) 177 5.1 600 250 30 0.7 2018 INVESTOR CONFERENCE 214
Slide 4: Agenda
Agenda Brad Harris Steve Binioris Chad Myers Overview of risk Product and risk Product economics framework overview and accounting dynamics Equity and credit Product design risk limits and pricing Statutory deep dive Assumptions Fund selection Sources of latent review update capita
Slide 5: US Risk Management Framework
US Risk Management Framework Brad Harris Senior Vice President, Chief Risk Officer Jackson National Life Insurance Company 216
Slide 6: Topics
Topics Overview of risk framework Equity and credit risk limits Assumptions review update 2018 INVESTOR CONFERENCE 217
Slide 7: North American Risk Framework
North American Risk Framework Holistic risk framework Three Lines of Defense Model Governance 1st Line owns and manages risk Board with independent directors 2nd Line provides independent oversight Fully independent Audit and Risk Committees membership 3rd Line provides assurance Holisti
Slide 8: Equity Risk Limit
Equity Risk Limit The amount of equity risk allowed is largely unchanged since the crisis Equity Risk Limit Jackson’s equity risk limit is based on the % of capital that can be put at risk $1.6 $ Because the capital level has remained flat over the last decade, the dollar amount of risk limit is
Slide 9: Credit Risk Limit
Credit Risk Limit The amount of credit risk allowed is lower than pre-crisis Credit Risk Limit Jackson’s credit risk limit is also based on the % of capital that can be put at risk Because the capital level has remained flat over the last decade, the dollar amount of risk limit is largely unchan
Slide 10: Key Risk Oversight – Credit
Key Risk Oversight – Credit Materially de-risked investment portfolio since the financial crisis 2007 ($44.9 billion) Q2 2018 ($58.7 billion) +30% 0.5% 1.2% 0.9% 3.4% 3.7% 2.2% 9.6% 12.3% 14.2% 7.4% 52.0% 25.2% 2.2% 60.1% 5.1% 2018 INVESTOR CONFERENCE 221
Slide 11: Key Risk Oversight – Credit
Key Risk Oversight – Credit Jackson’s BBB exposure is stable while the investment grade market has moved toward BBB 12/12 12/13 12/14 12/15 12/16 12/17 Jackson BBB as % of IG (lhs) Market BBB as % of IG (rhs) 2018 INVESTOR CONFERENCE 222
Slide 12: Key Risk Oversight – Policyholder Behaviour
Key Risk Oversight – Policyholder Behaviour Jackson Assumption Setting Process Internal Review and Experience Approval^ Studies Independent Expert ASSUMPTION SETTING Risk Opinion Judgment ASSUMPTION SETTING GOVERNANCE INPUTS Assumption External Working Group Benchmarking 2018 INVESTOR ^ Review by As
Slide 13: Assumptions Update
Assumptions Update Modest impacts similar to recent years Magnitude of changes in underlying assumptions are modest Experience trends for Variable Annuities Slightly lower lapses, potentially due to lack of attractive alternatives & regulatory uncertainty Slight overall increase in GMWB util
Slide 14: North American Risk Key Takeaways
North American Risk Key Takeaways Jackson has a holistic risk framework Absolute size of equity risk limit roughly unchanged compared to pre-crisis Absolute size of credit risk limit slightly down compared to pre-crisis Materially de-risked investment portfolio since the financial crisis R
Slide 15: US Pricing and ALM
US Pricing and ALM Steve Binioris Senior Vice President, Asset Liability Management Jackson National Life Insurance Company 226
Slide 16: Topics
Topics Product and risk overview Product design and pricing Fund selection Health of book Hedging strategy 2018 INVESTOR CONFERENCE 227
Slide 17: Diversified Portfolio With Complementary Risk Profile
Diversified Portfolio With Complementary Risk Profile Product Risks Exposure as of Product Mortality / September 30, 2018 Equity Interest Rate Credit Longevity Low Rates (Min Guarantee) Fixed Annuities $25bn reserves √ High Rates (Incr Surrenders) Fixed Indexed $11bn reserves Higher Markets √ Annuit
Slide 18: Key features of Guarantee Minimum Withdrawal Benefit (GMWB)
Key features of Guarantee Minimum Withdrawal Benefit (GMWB) Key features Simplified Illustration of Benefit Mechanics (Assumes immediate utilization and 0% market return) Typical customer. Looking to manage retirement income needs. Gray shading represents account value – until account value is exh
Slide 19: Pricing Approach and Methodology
Pricing Approach and Methodology Identify Concept & Initiate a Risk/Regulatory Review Set Assumptions Risk Adjusted Stochastic Pricing Disciplined Pricing Process Holistic and Formal Approach 2018 INVESTOR CONFERENCE 230
Slide 20: Guaranteed Withdrawal Benefit Pricing
Guaranteed Withdrawal Benefit Pricing Jackson prices its benefits conservatively Text PV Unhedged Profit by Percentile GMWB benefit is profitable at the historical mean and well into the tails Pricing Level Jackson prices far enough out in the tails to provide enough revenue to hedge PV of Pro
Slide 21: Investment Freedom Has Led to Upside For Policyholders
Investment Freedom Has Led to Upside For Policyholders Account value upside while equity allocation remains within assumptions In-Force Allocation of VA Account Values 100% 90% Jackson offers full investment freedom, meaning no restrictions on asset allocation 80% 70% Policyholders’ risk toleran
Slide 22: Reallocation History
Reallocation History Policyholders have not reallocated in reaction to market movements 25% 3,000 20% 2,500 2,000 15% 1,500 Policyholders have not made large 10% 1,000 reallocations to their portfolios 5% 500 0% 0 This has been true even during large -500 market moves -5% -1,000 -10% The equit
Slide 23: Fund Manager Selection
Fund Manager Selection Disciplined and robust process Before a fund is offered on Jackson’s VA platform, it must pass a rigorous evaluation process Detailed review of fund history to demonstrate its trackability Breakouts of all individual holdings to assess any concentration issues Must hav
Slide 24: Diversified Separate Account
Diversified Separate Account Jackson Top 10 Funds Offer wide array of managers with no material concentration (131 funds account for 65% of our SA holdings) Several balanced funds in the top 10, limiting equity market exposure by default Jackson monitors individual holdings in each fund to det
Slide 25: Unhedged GMWB Cash Flow Exposure
Unhedged GMWB Cash Flow Exposure $millions S&P @ 9/30 = 2,914 Includes guarantee fees only Base, 5% Gross Return Guarantee Fees Uses prudent best estimate assumptions (AG43, C3P2) PV Future Guarantee Fees 12,272 Benefits PV Benefits (2,182) 5% gross return is well below historical average mark
Slide 26: GMWB Unhedged Cash Flows
GMWB Unhedged Cash Flows Jackson’s block is in a very strong position Time PV of PV of Period Fees Benefits Net PV 2011 $3.0bn ($0.5bn) $2.5bn Guarantee Fees (excludes base contract fees) 2012 $4.3bn ($0.4bn) $3.9bn Benefits 2013 $5.8bn ($0.4bn) $5.4bn 2014 $7.3bn ($0.7bn) $6.6bn 2015 $9.8bn ($2.3bn
Slide 27: Cohort Analysis
Cohort Analysis Jackson has a strong VA back book, both pre and post crisis GMDB Policy Count (000s) GMWB Policy Count (000s) 19% OTM 2% ITM 931 809 6% OTM 7% OTM 103 38 Pre 3/31/07 Cohort Post 3/31/07 Cohort Pre 3/31/07 Cohort Post 3/31/07 Cohort Pre March 2007 block still solidly profitable due
Slide 28: Hedging Philosophy
Hedging Philosophy Hedging recognizes natural offsets Manage risks within tolerances Not an immunization strategy High level of hedge effectiveness (90%+ for large market moves) Tail risks must be within risk appetite without benefit of rebalancing Requires significant portion of hedges
Slide 29: Hedging Philosophy
Hedging Philosophy Strategy unchanged, but methods are updated over time 2008 2018 Hedging Payoffs in Down 40% ~$1 billion ~$15 billion Equity Shock Put Options Short Futures, Call Options Primary Hedging Instruments Short Futures Put Options Counterparty Risk Emergence Down Markets Up Markets Count
Slide 30: Hedging Illustration
Hedging Illustration Ability to match economic profile, but counterparty risk is diminished Counterparty risk occurs when markets are down 2008 Vanilla Put Short Futures Vanilla Call Synthetic Put 2018 Counterparty risk occurs when markets are up 2018 INVESTOR CONFERENCE 241
Slide 31: Economic Profile of VA Guarantees
Economic Profile of VA Guarantees Jackson focuses its hedging on the protection of the economics Change in Unhedged Liability Line represents the unhedged economic liability profile for the guarantee only There is upside benefit, but this is limited due to step-ups However there would be signi
Slide 32: Economic Profile of VA Guarantees
Economic Profile of VA Guarantees Statutory accounting will not always match the economics Change in Unhedged Liability Line represents the unhedged economic liability profile for statutory as it stands 30 September 2018 Because the reserves are floored out, there are no reserves to release in u
Slide 33: Economic Profile of VA Guarantees
Economic Profile of VA Guarantees Jackson focuses its hedging on the protection of the economics Change in Unhedged Liability Layering the economic profile (orange line) with the 30 September 2018 statutory profile (brown line) illustrates the following: The economic gain on the upside will not
Slide 34: Takeaways
Takeaways Jackson has a long history of strong risk management Disciplined approach to product design, fund selection, and pricing In-force book remains strong Hedging has adapted to different conditions, but strategy is unchanged Defensively positioned for market downturns 2018 INVESTOR C
Slide 35: US Economics and Capital
US Economics and Capital Chad Myers Executive Vice President, Chief Financial Officer Jackson National Life Insurance Company 246
Slide 36: Topics
Topics Product economics and accounting dynamics Statutory deep dive Sources of latent capital Capital generation history and current regulatory headwinds 2018 INVESTOR CONFERENCE 247
Slide 37: Economics of Jackson’s Business
Economics of Jackson’s Business What drives the economics of the business lines? Fee Spread Life Revenues Base Contract Fees Investment Income Premiums Collected Guarantee Fees Investment Income Asset Management Fees Expenses Commissions Commissions Commissions Hedging Interest Credited Interest Cre
Slide 38: Accounting Frameworks
Accounting Frameworks Accounting regimes have different objectives U.S. Statutory Designed with the protection of policyholder interests and long-term solvency of a company as the priority Therefore it is generally more conservative than other bases Faster amortization of acquisition expenses
Slide 39: Statutory Reserve Dynamics For VA Guarantees
Statutory Reserve Dynamics For VA Guarantees Statutory reflects all relevant cash flows In statutory accounting, variable annuity reserves are reported according to AG43 The stochastic scenario for statutory reserves reflects cash flows under the worst 30% of outcomes (CTE 70) This includes al
Slide 40: Statutory Reserve Dynamics
Statutory Reserve Dynamics Comparison of two similar sized, hypothetical VA blocks Scenario #1 – Reserves above CSV The required reserve using the PV of cash flows exceeds the Excess cash surrender value over CSV This requires booking a reserve for the amount above the CSV floor Reserve Based on
Slide 41: Statutory Reserve Dynamics
Statutory Reserve Dynamics Assume the two blocks experience a meaningful gain in equity markets Scenario #1 – Reserves above CSV The required reserve using the PV of cash flows will continue to Smaller exceed the cash surrender value, but because of the improved gap Partial state of the block, the
Slide 42: Statutory Reserve Dynamics
Statutory Reserve Dynamics Assume the two blocks experience a meaningful equity market decline Scenario #1 – Reserves above CSV The required reserve using the PV of cash flows will continue to exceed the cash surrender value, but because of the weaker state of the block, the excess will be larger
Slide 43: Jackson’s Required Reserves Under Statutory are Floored
Jackson’s Required Reserves Under Statutory are Floored This indicates a strong liability profile Statutory Reserves Statutory VA guaranteed benefit reserves reflect the economic value of the future cash flows expected to be generated by the block High reserve levels relative to the balance shee
Slide 44: Impact of Floored out Reserves
Impact of Floored out Reserves Change in Unhedged Liability As stated in the preceding examples, when reserves are floored out, further up moves in equity markets will cause a build up of “latent capital” This is illustrated by the growing gap between the two lines as we move to the right Howe
Slide 45: Additional Hedge Spend Requirement
Additional Hedge Spend Requirement Floored out reserves have led to additional call option spend Incremental Hedge Spend to Protect Statutory Capital in Up Markets ($m) 500 In recent years, the flooring out of statutory reserves has meant that there was little or no reserve offset for hedging loss
Slide 46: Statutory Deferred Tax Asset
Statutory Deferred Tax Asset Non-admitted DTAs represent unrecognized economic value Non-Admitted Deferred Tax Asset ($m) 679 Under statutory accounting, DTAs will be included in capital to the extent that they are deemed to be “admitted” by various tests 519 In recent years, Jackson’s admitted
Slide 47: Divergence of Statutory and IFRS Operating
Divergence of Statutory and IFRS Operating IFRS operating income has grown while statutory operating has been flat Statutory and IFRS Operating Income* ($bn) 1.8 1.9 1.7 In recent years, IFRS operating income growth has 1.5 been strong, while stat operating capital generation 1.3 1.3 has been most
Slide 48: Guarantee Fee Recognition
Guarantee Fee Recognition As the VA block has grown, guarantee fees have grown as well Guarantee Fee Recognition ($bn) The reported statutory operating capital generation removes all guarantee fees collected and moves them to “Reserves net 0.5 of hedging” 0.5 0.4 IFRS reserving methods incorpora
Slide 49: Acquisition Cost Treatment
Acquisition Cost Treatment Statutory is conservative in its amortization of acquisition expense Pattern of Acquisition Cost Recognition Jackson Total Annuity Sales ($bn) $30 Commission expenses are paid at issue, but these will be largely offset by the deferral of DAC/CARVM $20 After the surrender c
Slide 50: Impact of Acquisition Cost Differential
Impact of Acquisition Cost Differential Strong 2011-2015 sales led to a drag on statutory compared to IFRS Impact of Acquisition Cost Treatment ($bn) 0.2 0.2 0.2 0.2 0.17 0.1 0.12 As explained in an earlier slide, under IFRS, DAC is amortized based on the expected gross profits over the life of th
Slide 51: Capital History
Capital History Despite headwinds, Jackson has generated significant capital in the last decade Capital Development Since 2007 ($bn) 12 600% Jackson’s business continues to be capital generative 10 500% The reported capital and RBC levels have been roughly flat however, as the cash flows have la
Slide 52: Regulatory Update
Regulatory Update Jackson is successfully navigating meaningful capital headwinds 2017 1H18 2019-2020 Began year at 485% Began year at 409% C-1 Factor Update RBC Ratio RBC Ratio Estimated 30-40 RBC point impact 75 RBC point DTA impact 35 RBC point impact from tax reform from tax factors NAIC VA Fram
Slide 53: Takeaways
Takeaways Continued track record of delivering cash to Group despite volatile markets and regulatory headwinds Continue to drive significant value creation through a market leading position in the highest return segment of the market The economic profile of the VA book continues to improve, bu
Slide 54: US Strategic Outlook
US Strategic Outlook Barry Stowe Chairman and Chief Executive Officer North American Business Unit 265
Slide 55: Market Leadership
Market Leadership Leading individual annuity seller in the US Strong growth in balance sheet and earnings Industry leading operating return on equity A long, durable track record of financial success for consumers and shareholders …no large write-offs, write-downs, impairments or charges tak
Slide 56: The Future
The Future Strategic initiatives designed to expand reach New products for fee-based advisors Changing the narrative Technology integration Traditional channels continue to lead 2018 INVESTOR CONFERENCE 267
Slide 57: Product Launches
Product Launches Long-time leader in the commission annuity market Launched fee based versions of guaranteed VA, investment only VA, and FIA Trend in financial services has been toward fee-based for some time Wealth Management Revenue1 75% 65% 55% Fees 45% Commissions 35% 25% 2009 2010 2011 20
Slide 58: Changing the Narrative
Changing the Narrative Demonstrating the unique value proposition of annuities to all stakeholders Regulators Investors Policyholders Influential industry voices 2018 INVESTOR CONFERENCE 269
Slide 59: Technology Integration
Technology Integration Announced collaboration in September 2018 Jackson’s variable annuity as well as fixed/index annuities will be available on the Envestnet Insurance Exchange Both commission and advisory versions will be offered Envestnet connects to over 90,000 advisors with roughly $2.
Slide 60: Traditional Channels
Traditional Channels Jackson has a market leading distribution footprint: Top VA seller in Independent B/D, Bank, and Wirehouse channels Largest and most productive wholesaling force 627 selling agreements Key development - announced distribution partnership with State Farm in October Ja
Slide 61: Takeaways
Takeaways Insured retirement products represent a large, profitable and predictable growth opportunity Jackson is a product and distribution innovator Jackson has market leading capabilities Jackson provides thought leadership Jackson uniquely demonstrates the value of insured retirement p
Slide 62: Wrap-up and Q&A
Wrap-up and Q&A • [Panel setup] 2018 INVESTOR CONFERENCE 273
Slide 63: Appendix
Appendix ___________________ Group 2018 INVESTOR CONFERENCE 274
Slide 64: Glossary – Product Terms
Glossary – Product Terms Guarantee Fee - The guarantee fees are the charge(s) deducted from the contract value for the guaranteed benefit option(s) elected by the policyowner. Guaranteed Minimum Death Benefit (GMDB) - A guarantee offered within a variable annuity product which guarantees, that upon
Slide 65: Glossary – ALM Terms
Glossary – ALM Terms Call Option - A call option gives the buyer the right to buy an asset at a predetermined price. The option will produce a payoff when the price of the underlying asset rises above the strike price. The payoff of a call option will continue to increase as the price of the underly
Slide 66: Glossary – Accounting And Regulatory Terms
Glossary – Accounting And Regulatory Terms Cash Surrender Value (CSV) - The cash value of an insurance contract, also called the cash surrender value or surrender value, is the cash amount offered to the policyowner by the issuing company upon cancellation/surrender of the contract. Commissioners’ A