Q2 2020 Prudential Financial Inc Earnings Call

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Prudential Quarterly earnings Conference call. At this point all that participant lines Arnold listen only mode. However, there will be an opportunity for your questions instructions will be given at that time, if you should require any assistance during the call keys.

Press Star then zero and operator will assist you offline as a reminder, today's call is being recorded I'll turn the call now Mr. Darin Arita. Please go ahead Sir.

Good morning, and thank you for joining Oracle, representing Credentialing today's call, our Charlie Lowrey, Chairman and CEO, Bob thousand Vice Chairman and the Sullivan head of U.S. businesses.

Got Quaker head of international businesses can Kathy Chief Financial Officer, I brought back, though controller and principal accounting officer, we will start with prepared comments by Charlie Robin Ken and then we will take your question.

Today's presentation may include forward looking statements.

It is possible that I'm sure results may differ materially from the 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 measures under discussion up doctors that could cause actual results could differ materially from those into poor but can stay.

Shipments please see the slide titled forward looking statements and non-GAAP measures in the appendix to todays presentation, which can be found on our website at investor Dot credential Dot com.

With that I'll hand, it over to Charlie.

Thank you Dan Good morning, everyone and thank you for joining us today.

I'll start by saying, we hope that you your family and colleagues remains safe and healthy during these extraordinary time.

The events the past several months have created unforeseen new difficulties for people around the world.

While further exposing the deep seated problem of an equity in our society.

It's in times like these that we believe our company's purpose of solving the financial challenges or changing world.

And standing by our employees customers and community is most important.

After transitioning over 95% <unk> employees and most of our international importance to remote work in March.

We continue to seamlessly serve customers.

While the vast majority of our employees around the world continue to work in that fashion.

This allows us to exercise modes caution as we evaluate how and when to return to the workplace.

In the meantime, I'm, so proud of our people and how they've continued to focus on meeting the evolving needs of our customers.

Many of whom face new challenges related to the cobot 19 pandemic and its economic impact.

Well continue to innovate the ways, we serve our customers during.

And after the pandemic.

During the second quarter, we maintain the we're focused on executing against our 2020 initiative.

The challenging macroeconomic backdrop.

Hi, delivering on.

Progress on our cost savings targets.

Relatively repricing and pivoting products to mitigate the impact of low rate on our performance.

And rotating our international earnings net.

We're also focused on identifying opportunities for further action.

Particularly as we look to continue to reduce our sensitivity to market.

And we're exploring the potential to generate additional cost savings on top of our existing 2020 target.

Throughout this period, we benefited from the strength of our rock solid balance sheet.

Which gives us the confidence and the flexibility to navigate changes to the economic environment.

I'll touch on each of these points in greater detail before turning it over to Robin can for a look at our second quarter results.

Turning now to our 2020 priorities on slide three.

We remain on track to achieve our 140 million cost savings target for the full year.

Another cheap 75 million and savings year to date with 45 million in the second quarter.

We also continue to make progress in shifting our international earnings mix to higher growth market.

We remain on track.

Close on the sale of Prudential of Korea in the second half of 2020.

For advancing our review of strategic options for credential and Taiwan.

Which may include the sale.

As I mentioned earlier, we are aggressively modifying our product mix.

While exercising a highly disciplined approach to pricing in this low interest rate environment.

Turning to slide four.

Well, we are encouraged by the progress, we're making to position our businesses and operations for the future.

We continue to look at ways to work smarter and more efficiently in order to achieve cost savings on top of our target of 500 million.

2022.

This includes are using technology and automation.

And leveraging the learnings from operating in a remote work environment to optimize how and where we were.

In addition, we're looking at other ways to build upon our repricing on product shift to further mitigate the impact of market sensitivity.

On slide five.

We know how we're embarking on these initiatives.

On diesel strength provided by our balance sheet and robust capital position.

Including highly liquid assets, a four and a half billion at the end of the second quarter.

Prudential financial and its subsidiaries continue to exceed a double a financial strength rating.

Our second quarter assumption update had a modest effect on our financial results.

Even as we reduced our U.S. long term interest rate by 50 basis points to three in a quarter percent.

Lastly, we anticipate receiving the 1.7 billion U.S. dollar use of proceeds from the sale of Korea, Our Korean business by the end of the year.

In terms of our capital deployment plan will continue to monitor developments in the credit markets and the economy to determine our strategy.

Slide six shows our second quarter financial result.

This quarter exemplified the benefits of our thoughtful approach to risk management and our complimentary business net.

We aim to balance mortality and longevity risk. So we don't have a one sided exposure.

In the quarter, you had net favorable underwriting experience.

Our adjusted operating income was 931 billion in the quarter.

Well, we recorded a net GAAP loss driven primarily by the noncash effect of non economic market impacts, which had no effect on our regulatory capital position.

Our U.S. businesses reported adjusted operating income of 455 million.

Due to more favorable underwriting offset by the unfavorable impact to be assumption update and lower fee and spread income.

Jim reported record adjusted operating income of 324 million as well as a record assets under management of 1.4 trillion, a 9% increase from the year earlier period.

This growth reflected strong flows into fixed income as well as market appreciation.

Our international businesses reported adjusted operating income of 693 million.

More favorable underwriting.

Higher earnings from joint ventures, and business growth were offset by unfavorable impact of the assumption update and lower spread income and higher expenses.

Before turning it over to Rob.

I'd like to address the recent disturbing incident racial injustice and how we use an organization are responding to the deep seated and per system problem of racism and in equity in society.

Last month, we announced commitments to advance racial equity as highlighted on slide seven.

These commitments were born out of the courageous candor of our employees, who shared their experiences and their expectations and the listening that has taken place.

All across credential.

Taking a bottom up approach.

Redevelop concrete and measurable action expanding our talent practices to how we design and deliver product.

To the investments we make.

How we foster social and racial equity in the communities, where we work.

And do business.

We already had a subset of programs underway and a body of work the reflects our longstanding commitment to racial equity.

Polluting investing over a billion dollars in our hometown of newer.

We recognized at this moment in both for us to amplify what credential has already been doing to drive change within our company.

And within Society.

He does immoral.

And it is a business imperative that aligns directly with our company's purpose. This all the financial challenges are changing world.

As well as our multi stakeholder commitment to employee.

Customers shareholders and society.

We stand by the promises we make.

And we're prepared to be judged for actions to support our colleagues.

Customers and community today.

And over the long term.

And with that I'll turn it over to Rob.

Thank you Charlie and I want to reemphasize your comment about our commitment as a management team supporting racial equity. This is an issue that is aligned to our purpose. It's part of the fabric of our culture and critical to our success as an organization.

I'll now provide an update on how we are executing on our strategy within our U.S.P., Jim and international businesses as well as on the outlook for these businesses will also provide an update on our investment portfolio turning to slide age.

Yeah. This business has produced a diversified source of earnings from fees net investment spread and underwriting income we continue to execute on three key priorities first we've implemented pricing and product actions to simplify and de risk our business mix, while protecting profitability. For example, we took aggressive pricing actions aligned.

With our attention to significantly reduce sales of HDR, our legacy flagship he a product and launched Flexcard, our buffered annuity product, which has been well received by the market supporting our product mix shift to less sensitive less interest rate sensitive solutions.

And our individual life business, we suspended sales of our single life guaranteed Universal life product in July. This will result in the continued shift to variable life and other less interest rate sensitive products.

We will continue to take product and pricing actions, including steps to diversify our mix of business to maintain profitability in this interest rate environment.

As a result, we expect individual annuities and individual life sales to continue to move lower in the near term.

Second I.

Yes, the needs of our customers rapidly evolve, including in response to covert 19, and its economic impact we are increasingly leveraging technology to enhance customer engagement and efficiency. For example, we've expanded our process to electronically deliver policies from application submission to policy issuance and have increased use of our fast track.

Automated underwriting process and we have expanded the use of electronic signatures and self service customer capabilities across our businesses.

And third we remain committed to expanding our addressable market dependent make has amplified the financial wellness challenges that many U.S. households face and as highlighted the importance of our financial wellness platform and our life insurance retirement and financial planning solutions.

We also continue to see increasing interest in our assurance Q platform from customers in the healthcare life and P. C N C lines of business.

Preparation for the Medicare annual enrollment period in the fourth quarter, we've been progressing well with our agent Onboarding and training process.

Now turning to slide nine.

Jim is a top 10 global investment manager that continues to demonstrate the strength and resilience of its multi manager business model.

Our assets under management reached a record level of 1.4 trillion dollars up 9% from the year ago quarter, driven by net flows as well as the positive impact from equity and credit markets.

Jim's long term investment performance remained strong has rebounded from the temporary downturn in the first quarter more than 85% of assets under management have outperformed their benchmarks over the last three five and 10 year periods.

The strong investment performance, coupled with diversified investment capabilities across asset classes regions and client segments has led to continued growth we generated nearly $4 billion of net third party flows during the second quarter driven by record retail flows of 9 billion.

Institutional outflows were driven by a single passive equity client redemption.

Public speaking Sixteenqam platform generated flows of $10 billion as it continues to benefit from our broad suite strategies and the leading position of our franchise.

Jim investments was the number one rent U.S. mutual fund franchise across active and passive asset managers based on net year to date sales.

He Jim's asset management fees were up 3% compared to the year ago quarter, driven by the growth in average assets under management.

Addition.

Other related revenues increased primarily due to higher strategic investment earnings as a result of strong investment performance and the effect of credit spreads tightening reversing the widening that had occurred in the first quarter.

We also continue to focus on cost discipline to fund growth in further increase our operating leverage.

Turning to slide 10.

Our international businesses, including our Japan, Japanese life insurance operation, where we have a differentiated multi can't multichannel distribution model as well as other operations focused on high growth markets.

Affected life planner sales decreased 30% compared to the year ago quarter, primarily reflecting lower sales in Japan due to covert 19 related restrictions on sales activities.

Life planner head count, however, increased 5% compared to a year ago.

Similar to life planner sales for Gibraltar, 34%, lower but the number of life consultants has declined as we continue to focus on quality distribution.

Helane market returns in the quarter were higher than average and that contributed to an operating income benefit of approximately $25 million reversing the impact we experienced in the first quarter.

With respect to expenses across international we provided appropriate sales support to protect and care for our captive distribution as we noted last quarter.

Contributed 55 million to expenses, which we expect to trend lower in the second half of the year.

I've seen some recovery in Japan sales beginning in June as the state of emergency was lifted and overtime. We expect sales to normalize in addition to mitigate the impacts of reduced face to face sales. Our agents have adapted to increased usage of virtual tools to connect with customers and we have seen early signs of success, we believe that our knee.

Space selling approach and death protection product focus continue to provide important value to our customers.

With respect to interest rates, we successfully successfully managed through decades of low interest rates and other market challenges in Japan as.

As you just as you have seen us due in the past, we adjust our product offering quickly to meet the needs and preferences of our customers. While also achieving our return expectations.

Already taken actions and we'll continue to do so as needed as we move forward.

Turning to slide 11.

We have a conservative quality focused investment portfolio that reflects our robust asset liability management practices.

Want to broad diversification and a disciplined interest rate manage interest rate risk management framework.

We also leverage pgms ex expertise across multiple asset classes, including its deep and longstanding variance in private placements and real estate.

Year to date credit migration and losses have trended below our expectations.

The second quarter credit losses were $139 billion, driven by energy and consumer cyclical sectors.

While we expect credit losses to be a multiple quarters story, we feel comfortable that our exposure is manageable and that we are well capitalized to weather whatever emerges.

And with that I'll hand, it over to Kevin.

Thanks, Rob I'll begin on slide 12, which provides insight into earnings for the third quarter relative to our second quarter results. The key point is that our underlying earnings power increased slightly from last quarter, primarily reflecting higher equity markets to help you see this I'll start with pre tax adjusted op.

Operating income in the second quarter, which was 931 million resulted in earnings per share of $1.85 cents on an after tax basis.

Then we adjust for the following items first the annual review of assumptions and other refinements resulted in a net charge of 334 million in the second quarter, primarily driven by a reduction of our long term interest rate assumption by 50 basis points in the U.S.

Next we adjusted variable investment income to normalized level, which is worth 130 million.

Please note that while we have not included adjustment for variable investment income for the third quarter.

This will exist for continued revaluation of private equity in real estate investments due to the current adverse economic conditions.

While returns of our alternative investment portfolio are currently lower than our target returns and will vary period to period overtime. This portfolio has generated income above our targeted returns.

Third we adjusted we adjusted the underwriting experience by 155 million. This reflects a 100 million of favorable experience in the second quarter, primarily driven by reserved gains in retirement.

We estimate claims experience in the third quarter will include 55 million for Cobot 19.

There are other items that combined maybe 75 million more favorable in the third quarter, primarily related to expenses end markets.

We expect expenses, including implementation costs to be a 130 million lower in the third quarter. This is primarily due to legal expenses in the second quarter.

In addition, due to favorable markets in the second quarter other related revenues in PJM benefited by 45 million in CPI income in our Gibraltar segment also benefited by 25 million.

Shift, we expect operating costs due to covert 90 to be 25 million lower in the third quarter and last we anticipate net investment income will be reduced by 15 million, reflecting the difference between new money rates and disposition yields of our investment portfolio.

These items combined get us to a baseline of $2.63 for share for the third quarter.

Please note that this baseline includes items specific to the third quarter that reduced EPS by approximately 19 cents per share why we have provided these items to consider there may be other factors that affect earnings per share in the third quarter.

On slide 13, we provided an update on the potential impact of the pandemic.

We have included a sensitivity for operating income based on the U.S. population experiencing 100000 incremental deaths due to the pandemic.

We estimate this me lower operating income by 70 million.

And this is less than the sensitivity we provided on our last earnings call as we have seen a lower fatality rate due to cope with 19 in our U.S. insurance businesses than previously estimated.

Our third quarter baseline includes a net impact for mortality due to the coldest 19 of approximately 55 million.

The actual impact will depend on a variety of factors such as infection and fatality rates geographic considerations and progress in testing and medical treatments.

We have also reduced our estimate for incremental operating costs due to cope with 19 and have estimated the potential reduction in other operating costs such as for travel and entertainment.

In the second half of 2020, we expect to incur incremental operating costs of 60 million due to cope with 19 with 40 million in the third quarter and 20 million in the fourth quarter.

And the estimate of these cost is lower than what we provided on our last call primarily due to lower health benefit costs of our U.S. employees and lower cost to support our sales professionals in Japan as their productivity is improving faster than previously estimated.

We also expect to have 30 million of lower travel and entertainment expenses in the second half of 2020.

Turning to slide 14.

We continue to maintain a robust capital position and adequate sources of funding.

Our capital position exceeds our double the financial strength targets and we maintain liquid assets at the parent company that are greater than three times and no fixed charges.

We have substantial sources of funding our cash and liquid assets at the parent company were four and a half billion at the end of the quarter.

We expect received net proceeds of $1.7 billion from the sale of our Prudential of Korea business. Following the close of the transaction, which is expected in the second half of this year.

And another source of funding is free cash flow from our businesses.

In May we added a new $1.5 billion contingent capital facility that combined with our previous this facility brings our total available contingent capital funding resources to 3 billion.

Turning to slide 15, and in summary, we remain on track with our objectives for the year as we accelerate the execution of our initiatives, we're exploring the potential to increase our cost savings initiative and looking at additional ways to build upon a repricing in product shift to further mitigate mark.

It impacts.

And we maintain a rock bounce the rock solid balance sheet with a robust capital and liquidity position.

Now I'll turn it over to the operator for your question.

Ladies and gentlemen, if you wish to ask your question. Please press one than zero on your telephone keypad you may withdraw your question at any time may repeating the one zero command. We ask if you use any speakerphone. Please pick up the handset before pressing the numbers once again, if you have a question.

And make press one than zero at this time, we do asking the interests of time. If you. Please try and limit yourself to one question and one follow up.

First one line of at least Greenspan with Wells Fargo. Please go ahead.

Hi, Thanks, good morning.

With that.

Mortality assumption you laid out for the third quarter. So wed look at your disclosures longevity did benefit your results in both the Q1 into Q2. This year. So I'm just trying to understand why.

No that wouldn't.

Continue to some degree in the third quarter.

Hi lease a this is Ken I'll take your question about the coated mentality into the third quarter. So we in our second quarter, we benefited from our longevity business in the UK.

Mortality in the UK.

You know came in a little bit higher than we had previously estimated and that resulted in a gain.

From our UK long longevity reinsurance business.

While there was physicality is in the UK in the second quarter right now that seems to be more contained and we wouldn't expect that to continue given the current vitality rates. So we also in our new estimate.

Have incorporated.

To that so that sensitivity, what we learn from the from the second quarter.

Which is in our also in our life insurance and group insurance businesses that utility rates were lower than we previously estimated so we've incorporated that into our new estimate.

Okay. Thanks, and then second on the capital.

I said.

Our remarks that you would continue to monitor credit market economy.

Turning your strategy I guess as of yet.

Additional quarter under your belt.

How you're thinking about capital return is it not dependent upon getting getting the capital.

<unk> point 7 billion.

Sales for the ended this year.

I did more just dependent upon kind of more time going on now credit develop.

At least it's Charlie I'll take that one so.

As you know, we paused or share repurchases in the second quarter in line with the risk framework that we had in place and as you said it until we get better visibility into the depth and the duration of the pandemic the possible recession and the credit cycle, we will maintain our financial flexibility and resiliency.

When we get the clarity into those issues I just mentioned.

Well then share the timing of our plan to resume share buybacks and by how much and that would also include the proceeds from the sale the potential sale of the Korean business. So we're going to focus on maintaining our financial strength.

But when we when we get clarity into the issues going forward. We will certainly let you know and will be transparent about it.

Thank you appreciate the color.

Our next question from the line of Ryan Krueger with KBW. Please go ahead.

Hi, Good morning could you elaborate on.

Just a bit things, you're considering that would cause a reduction in your market in interest rate can be.

I guess in particular.

I guess I would assume to meaningfully change that you use that would require some sort of been forced reinsurance transaction, but if you could could elaborate come on what you're thinking about.

Ryan It's Rob I'll take a shot at that first let me just bringing up a level and days, we sort of think about like our strategy on a go forward basis, just think about the elements of that is the first instance, simplifying and de risking the businesses we articulated in her opening remarks.

The other components that are about proving near term earnings through the efficiency initiatives that we've talked about.

And which we think has some expansion opportunity associated with them and obviously continued to expand.

Our addressable market.

Order to support longer term growth, specifically with regard to the de risking.

I'd characterize the repricing and product shifts that we've done is sort of the first steps.

Positioning to lower volatility less interest rate and general market.

Tivity across our businesses for those products that we've either stepped back from or actually explicitly discontinued. So think about that is being 80 I in the variable annuities business and guaranteed universal life in the in the life business.

Well look actively at opportunities to optimize the economics of the legacy blocks that are associated with those products and those options ranging anywhere from simply sort of just running off the blocks.

Reinsuring indoor.

Looking at selling the blocks.

Couple of things.

Outside of data across our products, we're actually looking actively at product design as well as individual aggregate limits that could reduce the amount of potential volatility that we get from any individual product or or or grouping of products that you saw us significantly reduced the retention limits that we have within our individual life business by way of example.

Charlie hit on a financial flexibility and resiliency, so we're going to retain our capital in order to make sure that we have that in place I and we think that Thats an element of the de risking missed in the near term. We're also looking at the investment portfolio.

And looking at strategic asset allocation re optimizing sort of the risk return and volatility tradeoffs that are associated with our equity.

Credit at our interest rate exposures in light of where we are the cycle on the opportunities there in front of us and I guess the lasting had mentioned is that as we look at the growth of the business on a go forward basis, our strategic emphasis is really on growing the elements of our of our business that are less rate sensitive and more predictable and more capital like like.

Like for instance, each of our asset management business. So those would be the primary things that we're thinking about on a on that yet.

From a de risking standpoint, I'm, Charlie I don't know if there's any further color you'd want to add onto that yep. Thanks, Rob So Ryan Let me let me just.

Frank connect some dots because over the past 18 months.

As Rob said, we've taken actions to begin to accomplish many of the the objectives that Rob articulated, namely lower market sensitive the lower capital intensity of our business mix, becoming more competitive in terms of serving our customers with processes.

Better processes and lower costs, and then finally, as Rob said increasing growth right and so.

Let me just tick through a number of things that we've done in order to achieve those objectives.

Were sold or selling out of lower growth businesses, Italy, Poland Korea, and exploring options for Taiwan.

Quite assurance around which we have high conviction about growth in a business that isn't as market sensitive the sensitivity sensitive so lower risk.

We significantly reduced or stop selling certainly highly interest rate sensitive products in annuities and idle lie.

We introduced left the market sensitive products, such as the buffered annuity.

We repriced almost our entire product line.

We announced and are executing on our future work initiative, which will produce 500 million and cost savings with the potential to do more.

And as Rob said, we're currently exploring other options on books of business that our market sensitive.

So.

We're executing on a series of incremental changes.

We believe will lead to fundamental change.

Our business mix and ultimately the trajectory of the from as we go forward.

So that's a foundation offer which we are going to.

Grow going forward.

Thank you appreciate it.

And ladies and gentlemen, just quick reminder, if you do have a question. Please press one than zero.

And next in line of Humphrey Lee with Dowling and partners. Please go ahead.

Good morning, and comfortable taking my questions.

Regarding the potential.

Hello.

Yeah, I'm, sorry, we can hear you.

And savings.

I know, it's still probably in the early stage of planning, but is there any way to help us to think about the potential size and scope that impact should it be comparable to what have you been targeting so far or just a mall that incremental to what you just modest incremental to what you are targeting.

Well if rates, Rob I'll take a shot at that you cut out a little bit, but I think I understood. Your question. So.

As as well as we have.

And then in the course of executing on the.

Efficiency initiatives that we had articulated earlier earlier in the year earlier last year, we've actually accelerated those actions and in the course of doing so we've actually institutionalized continuous transformation capability and as a result is that we're generating new ideas and strategies.

For further efficiencies that enhance customer experiences and remember that sort of the first priority as added may enable our businesses, putting us in more competitive positions and it increases our operating profits, particularly in light, which is needed uptick in light of the the.

The impact of earnings of a low rate environment. The levers, we're using Humphrey are pretty much the things that we've done to date so.

Increased use of technology and automation process improvements sourcing or design all the things that are that a classic. We just think theres as a result, this continuous process much much further that we can go from than what Weve articulated today.

We're also contemplating learnings from the crisis and some of the implications of that the pandemic in there and and our experience in that on things like promote work changes and communications and travel and use of technology on a go forward basis.

So all of that leads us to be optimistic that we can we can expand materially from where we are today, but we're not ready to quantify that will provide more guidance on that when we get further into the year.

And once we finished a workable bull.

As Joe indicated will be will be transparent.

Appreciate the color.

Shifting gears looking at PJM.

As you mentioned flows were very good in the quarter, especially on the retail side, but on the institutional side, even after the death 12.5 billion passive equity mandates redemption.

So flows were still come back. This so I was just wondering if you can you comment on what you saw in the quarter and then also how's your pipeline looking out a fall, especially on the institutional side.

Sure on rates and the I think your question and we were tightening up a little bit I'm not sure. If it was your me so.

Retail flows are really the result of through probably is very strong investment management performance.

Broad and.

Product portfolio and strong distribution.

And we're performing on on all of those fronts.

Investment performance in the second quarter was very strong.

All of our peak in fixed income strategies outperformed benchmark.

96% Queen Janus equity has outperformed benchmarks, so very very strong fundamental performance as you know weve been building out our global distribution overtime. So we were actually quite pleased with our flows in the quarter. We were the number one our mutual fund family year to date.

Not in half billion in positive retail boat.

We didn't have the.

Billion dollar.

Thanks, Patrick flow related to queue at night.

With a very low rate.

So thinking neighborhood of one to two bets, so literally atlanta with less than a million in fees.

It also was the last from our.

On the cost.

Thanks.

As you look forward.

Quarter to quarter, there will be there will be variability, but over the long run our fundamental investment performance.

The strength of our distribution, we have had strong organic what was over last five years, we'd expect that to continue as we look forward over the next several years.

Hey, Andy you cut out for one secular repeat the point, you're making about I don't know that was well heard on the.

Number of passive large mandate passive funds that was little blurry.

Yeah, sure sorry about that ultimately.

The four and a half billion outflow with the last.

Passive mandate that we have in our portfolio.

Got it appreciated the color.

And next would a line of Tom Gallagher with Evercore. Please go ahead.

Good morning, Charlie just a follow up on Brian's question on.

I guess the range of things, you're considering with risk transfer.

I hear I hear what you guys are saying on.

Limiting new sales considering some reinsurance back books it sounds like maybe on on life insurance.

Have you considered anything more transformational and the reason I asked that is.

So kind of a more moderate.

I will say limited approach to this strategy probably from a shareholder standpoint is going to result in very limited gross adds you had some of these businesses.

That that you still own that are shrinking every year. So it becomes kind of a challenge from an earnings annual earnings growth standpoint.

Have you considered that and would you consider something more extreme like.

Now an IPO of some of your capital market sensitive businesses score.

Bigger reinsurance transaction or are you thinking anymore limited scale.

So Tom Thanks for the question appreciate it.

Let me just take a step back and then I'll answer your question directly but and make a comment about how we think about capital allocation and particular optimization, because when we look across our businesses.

What we try and do both domestically and internationally than sure we're optimizing that capital deployment.

So we mentioned in the past that we're looking at or continue to look at businesses, such as I align annuities and some of our international operations as well as LTC, you've seen us take some bold action in terms of Italy, Poland Korea, potentially Taiwan et cetera. So what we're going to do is and what we can assure you is that.

We will continue to look to ways to optimize capital and capital deployment.

Maximize outcomes for shareholders right be that through a significant.

Whatever whatever labor that may take.

Through potential share repurchases or through acquisitions and right. Now we have acknowledged will continue to acknowledge that there is a high hurdle for any major acquisition, given where our stock prices trading we get that but we're looking as you've seen in the actions we've taken to date over the last 18 months.

And I think what you'll see us do going forward is look at all our businesses in order to optimize the capital we deploy in how we do that and that's our that's our commitment to shareholders and that's what we're doing.

Gotcha appreciated the.

I guess my follow up is just it looks like you've reduced pretty substantially the expense drag.

For the subsidies skewer planning on or have you been paying to the life planners in Japan.

That is that because you see greater visibility on a sales recovery emerging we're.

Have you guess lowered the the level of subsidy.

Why don't I go ahead, and why don't I got them take that Tom This is Scott.

I think the answer is multi faceted, but maybe I'll speak first of the question on have we seen in sales recovery, we actually started to see a pretty good bounce back.

In June.

To the point, where we were starting to get close to even 2019 sales.

In both Japan.

And in Brazil, and that has continued and actually modestly.

Strengthened in the month in July so we are seeing a pretty good sales recovery and we're encouraged.

But of course that is that has to be tempered by any kind of resurgence that that could occur.

In the case of the life planners, we were actually able to take what was an initial subsidy.

That was sort of an uncharacteristic payment that we have and we were able to roll it into their bonus simple plan. So a portion of the amount that we have for PEO jays actually being deferred into their sales comps, so you're not seeing it as directly but it's still there.

Okay. Thanks.

And next we'll go to a Jimmy Beulah with Jpmorgan. Please go ahead.

Hi, Good morning, first just on your annual assumption review and the interest rate assumption, obviously, it's a more conservative than it was before but still fairly optimistic versus market level. So just if you could talk about what went into your thoughts on.

How much to reduce the beta assumption by and why.

Did you not like make a bigger it doesn't giving their market rates or.

Jimmy It's Ken.

Terms of our long term rate assumption, we followed a very established process that we've had for a number of years and that it considers a multiple expect perspectives. So we look at again long term interest rate forecast of economists banks and managers and we look to be.

At the median of all those and for this year when we looked at that that meant a.

Tenure, you as treasury rate in the long term of 3.25% and 1% for the JGB in Japan. So we follow the same process, we've had for a number of years.

It's also important to know how we grade into that long term assumption, we do that over 10 years.

In the first two years follows the forward curve and as a result, it's not just the long term assumption, but the path of which we get there and so over the next five years, our average rate would be 1.25% in 10 years, it's it's about 1.9%. So again we.

Pretty established process, we look at third party inputs and and look to be at the median and and that was the result for this year.

And then any color on how your long term care block has held up recently and whether you've seen any benefit on your claims or reserves from.

Dependent Mick.

We saw a little bit elevated mortality in our.

Our policies that are already on claim.

But it was it was it was it was fairly modest and I wouldn't call significant.

Okay. Thanks.

And ladies and gentlemen, once again, if you do have a question. Please press one than zero at any time and next we have to John Barnidge with Piper Sandler. Please.

Great. Thanks, and most of my questions, but to answer but can you talk about a commercial mortgage loans for parents in the quarter directionality of that as well. Thank you.

Hey, John It's Rob Yes.

In.

To date, our we've received forbearance requests that are about.

8% or so the portfolio, we provided forbearance in 6% of those instances and the remaining.

2% or under review and that excludes a little bit that we've gotten requests on that were declined but.

In that only about 1% of the requests that resulted in a.

For all of interest.

And all other instances, where we remain card on interest and they've been deferrals of of principal recall that.

Across our portfolio our loan to values are actually quite low.

So as a result of that when we defer principal were actually not particularly concerned about that because we know that.

The the principal down is actually quite safety average loan to value across our entire portfolio based on our internal appraisals is 56 ish percent using external appraisals that would be about 10 points lower than that so less than 50%.

And so given that low LTV.

Accommodations on amortization of principal repayment or principle, we believe as a prudent thing to be doing and if we get remain card on interest that keeps the lowest performing and thats been sort of our experienced to date.

Great. Thanks answer.

Okay.

And next go to US Suneet came up with Citi. Please go ahead.

Thanks.

Just a question first off on variable annuities in one of the things that folks are talking about now is that the FDIC is reviewing the means reversion assumption that they include in VA capital reform.

So just curious if that's what if that was changed.

Are you would you expect to see either a big impact on your hedging program or your capital requirements for V.A.

Hi, This is Ken.

Weve I, just a little bit of backdrop on this for US we've managed our VA business with a very robust economic view and active hedging for for many years.

We're very supportive of a statutory framework that also is based on robust economic scenarios. Both in terms of the long term assumptions, but also the dispersion around those assumptions.

Our our internal scenarios that we used to manage the business are actually more conservative than those being considered by the any I see.

So we continue to advocate for appropriate economic scenarios within the V 20.

The 21 framework.

And we believe that will be well positioned due to our the internal framework that weve used to manage the business for for many years.

Got it Okay, and then just at shift over to international if I could.

Obviously, a lot of moving parts in terms of coveted face to face sales.

Low interest rates.

Expenses, but as you think about the longer term outlook for the Japan businesses.

When do you see those businesses.

Back to earnings growth as opposed to.

Either earnings declines are flattish earnings again, just just conceptually how are you thinking about the outlook for that business.

Hi, Steve This is Scott again ill take that.

I guess I'd I'd.

Talk a little bit about capital rotation mixed in with that question.

We were seeing low growth in the developed markets in Korea, Taiwan and Japan.

And you saw that we took actions in a in Korea and when considering those in Taiwan and the reason that you see a difference between those businesses in Japan is that we have really strong market share.

In permanent in Japan, and we have a really high performing LP.

Model there the business generates attractive returns over our cost of capital and it generates a lot of free cash flow to the parents. So we really like our Japan operation and we continue to invest in it that being said overall premium growth in Japan has been negative for the last several years.

And the country continues to face demographic challenges. So the fact that we've been able to continue to grow in.

Jay it's been a significant outperformance.

In in the country. So I guess, what I would say is we expect kind of low single digit growth in Japan, and if we're achieving that that's actually very strong relative performance and then in the context about a business system that is creating a lot of value and cash to the parent.

In the meantime, we'll look for redeployment.

In higher growth markets, but those are going to have to be opportunistic.

Okay. Thanks, Scott.

Okay.

And again, ladies and gentlemen, if you have a question. Please press one than zero at this time.

And see no further questions coming in Mr. Lottery, I'll turn it over to you.

Okay. Thanks very much.

So as we come to the end of the call today I'd just like the thank you for listening and for your continued interest in Prudential.

I also want to take a moment to thank all our employees for the steps they continue to take to support our business our customers in our community, including our collective efforts to address racial equity Prudential and in society at large.

We continue to make progress on executing our initiatives for the year.

Frankly are working to do more even as the global health pandemic continues.

Backed by our financial strength and guided by our purpose will continue to focus on delivering meaningful outcomes and value to all our stakeholders. Thanks again for joining us today, we appreciate it.

Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.

We're sorry your conference is ending now please hang up.