Prudential Plc · LSE:PRU

Prudential — Investor Day (2018)

66 slides from Prudential's investor day presentation, 2018

  1. Slide 1: US Introduction

    US Introduction Barry Stowe Chairman and Chief Executive Officer North American Business Unit 212

  2. 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

  3. 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

  4. 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

  5. Slide 5: US Risk Management Framework

    US Risk Management Framework Brad Harris Senior Vice President, Chief Risk Officer Jackson National Life Insurance Company 216

  6. Slide 6: Topics

    Topics  Overview of risk framework  Equity and credit risk limits  Assumptions review update 2018 INVESTOR CONFERENCE 217

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. Slide 15: US Pricing and ALM

    US Pricing and ALM Steve Binioris Senior Vice President, Asset Liability Management Jackson National Life Insurance Company 226

  16. Slide 16: Topics

    Topics  Product and risk overview  Product design and pricing  Fund selection  Health of book  Hedging strategy 2018 INVESTOR CONFERENCE 227

  17. 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

  18. 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

  19. 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

  20. 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

  21. 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

  22. 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

  23. 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

  24. 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

  25. 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

  26. 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

  27. 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

  28. 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

  29. 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

  30. 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

  31. 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

  32. 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

  33. 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

  34. 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

  35. Slide 35: US Economics and Capital

    US Economics and Capital Chad Myers Executive Vice President, Chief Financial Officer Jackson National Life Insurance Company 246

  36. 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

  37. 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

  38. 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

  39. 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

  40. 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

  41. 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

  42. 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

  43. 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

  44. 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

  45. 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

  46. 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

  47. 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

  48. 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

  49. 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

  50. 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

  51. 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

  52. 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

  53. 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

  54. Slide 54: US Strategic Outlook

    US Strategic Outlook Barry Stowe Chairman and Chief Executive Officer North American Business Unit 265

  55. 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

  56. 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

  57. 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

  58. 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

  59. 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.

  60. 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

  61. 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

  62. Slide 62: Wrap-up and Q&A

    Wrap-up and Q&A • [Panel setup] 2018 INVESTOR CONFERENCE 273

  63. Slide 63: Appendix

    Appendix ___________________ Group 2018 INVESTOR CONFERENCE 274

  64. 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

  65. 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

  66. 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

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