Q3 2020 Prudential Financial Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Prudential quarterly earnings call.
At this time all lines are in a listen only mode. Later, we will conduct a question and answer session instructions will be given to you at that time.
If you need assistance during the call Press Star and then zero and an operator will assist you offline and as a reminder, today's conference call is being recorded.
I'd like to turn the conference over to Mr. Darin Arita. Please go ahead.
Good morning, and thank you for joining our call representing Prudential on today's call are Charlie Lowrey, Chairman and CEO, Rob Falzon bite Sherman and the fellow that had to be with businesses. Scott placed her head of international businesses can tansy, Chief Financial Officer, and Rob Doxil.
Controller and principal accounting officer, we will start with prepared comments by Charlie Robb and Ken and then we will take your questions.
Today's presentation May include forward looking statements. It is possible that actual results may differ materially from their 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 and a discussion of doctors that could cause actual results to differ.
Materially from those in the forward looking statements.
See the slide titled forward looking statements and non-GAAP measures in the appendix to today's presentation, which can be found on our website at investor <unk> Dot Prudential Dot com with that I'll hand, it over to Charlie.
Thank you Darren good morning, everyone and thank you for joining us today.
To begin I hope that you your families and colleagues remain safe and healthy.
As the global Health Pandemic continues we remain intently focused as a company and caring for our employees and the communities in which we live and work as well as serving the evolving needs of our customers and other stakeholders in the current environment.
We're also incredibly proud and grateful for their continued dedication and commitment that our employees have shown in fulfilling our company purpose of making lives better by solving the financial travel inches or changing world.
I'd like to highlight a few of the ways in which were serving the unique and evolving needs of our customers, who now more than ever are relying on credentialed to address their financial challenges.
Since the beginning of the pandemic team Jim has focused on providing clients with timely portfolio updates and asset allocation ideas.
Our operational resilient diversified global business model and strong performance has allowed us to support our clients.
One example of the success is the growth of our U.S. mutual funds, we Werent, where we are one of the top ranked the company is based on net flows this year.
In our U.S. businesses, we continue to pivot within annuities to our Flexcard buffered annuity product, which offers downside protection and upside opportunity.
A time when customers face new challenges in protecting and growing their retirement assets.
Following its accelerated launch to market in the second quarter Flexcard continues to gain momentum accounting for 38% of our annuity sales this quarter.
And in Japan, our life planner model with its highly personalized and customized approach to engaging customers continues to be resilient as demonstrated by our strong sales this quarter.
During the third quarter, we continued to successfully execute on our strategic priorities for 2020, despite the challenging macroeconomic backdrop, including taking additional steps to expand our cost savings program.
We also continue to benefit from the strength of our rock solid balance sheet, which places us on sound financial footing to navigate changes in the current environment.
Turning now to 2020 priorities on slide three.
On last quarter's call. We mentioned that we were exploring the potential to generate additional cost savings on top of our 2022 plan.
Through the third quarter of this year, we have realized approximately 135 million of arc 500 million dollar cost savings program.
Based on our progress of accelerating the savings realized and creating new ways of working we now expect to generate an incremental $250 million inefficiencies by the end of 2023, bringing our total cost savings program to $750 million.
With respect to rotating the international earnings mix during the quarter, we announced an agreement to sell Prudential of Taiwan to tighten financial holding.
And expect the transaction to close in 2021 subject to all regulatory approvals and we also closed on our transaction to the best Prudential of Korea and received proceeds of 1.6 billion U.S. dollars.
Finally, we continue to take additional steps across the company to reduce our exposure to changes in markets and rates by shifting sales momentum to less interest rate sensitive solutions, while aggressively repricing certain existing products.
As an example in annuities, we are focusing our efforts on delivering protected outcome solutions like our flexcard product and we're just continuing all sales of our traditional variable annuities with guaranteed living benefits.
We will also explore strategic opportunities for blocks of business, including reinsurance and other transactions.
Turning to slide four as we continued to execute against our strategic priorities, we remain grounded by a rock solid balance sheet, including a highly liquid assets of $6.1 billion at the end of the third quarter.
Prudential financial and its subsidiaries continue to hold capital that exceeds a double a financial strength level.
The financial strength gives us the confidence and the flexibility to manage our business for long term growth, while navigating the current and future market environment.
We also continue to closely monitor conditions and the credit markets.
While they have been developing better than previously expected, we don't intend to restate buybacks. This year we.
We believe this is prudent as the duration and severity of the pandemic and its effect on the economy remain highly uncertain.
Well provide more details on our Twentytwenty one capital deployment plans once they have been finalized and approved by the board.
Turning to slide five.
I'll now take a moment to highlight our financial results for the third quarter.
Pre tax adjusted operating income was $1.6 billion in the quarter and after tax adjusted earnings per share was $3.21, which benefited in part from strong variable investment income across our businesses.
Our U.S. businesses reported adjusted operating income of $873 million due to higher net investment spread offset by lower net fee income in our individual annuities business and less favorable underwriting driven by COVID-19 related mortality experience.
PGM reported record adjusted operating income of $370 million driven by record assets under management of 1.4 trillion dollars and higher other related revenues for.
The 11% growth in assets under management reflects strong flows robust investment performance and market appreciation.
Our international businesses reported adjusted operating income of $775 million as businesses as business growth lower expenses and more favorable underwriting results were partially offset by lower earnings from joint venture investments and lower net investment spread.
With that I'll turn it over to Rob for more specific details on our business performance during the third quarter.
Thank you all for your time this morning.
Thank you Charlie I'll provide an update on how we are executing on our strategy within our U.S.P., Jim and international businesses. The outlook for these businesses and a brief update on our investment portfolio.
Turning to slide six our U.S. businesses produced a diversified source of earnings from fees net investment spread and underwriting income.
We made progress in the quarter executing on three key priorities first we continue to implement pricing and product actions to simplify and de risk our business mix, while protecting profitability. For example, we are further pivoting to less interest rate sensitive solutions in individual annuities by discontinuing sales up.
Additional variable annuities with guaranteed living benefits, including both our highest daily income and Prudential defined income products.
And our individual life business, we're repricing products to mitigate the impact of low rates. In addition to suspending sales of our single life guaranteed Universal life product in July.
As a result of these actions, we expect individual annuities and individual life sales to continue to move lower in the near term.
In addition, we continued to adjust crediting rates in our retirement business.
Second as the needs of our customers change, including in response to Cove, It and its economic impact we're evolving the way we work.
We continue to adapt and develop new ways of working effectively and remote locations and expect to recognize additional cost savings as we expand the use of technology optimize our real estate footprint and benefit from a more efficient workforce.
As Charlie mentioned, these and other opportunities to further efficiencies and improve our customer experience have resulted in a 50% increase in our originally planned $500 million earnings improvement target.
And third we remain committed to expanding our addressable market. For example, we continue to see strong interest in our assurance I Q platform from customers in the health care life and PNC lines of business.
Preparation for the Medicare annual enrollment period in the fourth quarter, we accelerated our agent Onboarding and training processes.
While we are only three weeks into the annual enrollment period. We are pleased with the customer demand that we're seeing which is driving considerable sales growth.
Now turning to slide seven.
Hey, Jim is a top 10 global investment manager that continues to demonstrate the strength and resilience of its multi manager model Peach and strong investment performance and diversified global investment capabilities across public and private asset classes, especially higher returning and income generating strategies across fixed income alternatives real estate.
And equities position us favorably to continue to capture flows it missed industrywide dislocation.
Our assets under management reached a record level of over 1.4 trillion dollars up 11% from the year ago quarter, driven by strong flows robust investment performance as well as market depreciation.
He Jim's long term investment performance remains strong with more than 90% of assets under management outperforming their benchmarks.
This strong investment performance, coupled with diversified investment capabilities across asset classes regions and client segments has led to continued growth region.
We generated over $7 billion, a third party net flows during the quarter.
Including $5.3 billion of retail flows and $2 billion of institutional flows driven by a continued appetite for fixed income strategies, partially offset by moderating equity outflows.
Our public fixed income platform generated flows of $11.6 billion as it continues to benefit from our broad suite of strategies and the leading position of our franchise and the combination of customer demand fund performance and investments in product development and distribution over the past several years has.
Resulted in PJM investments being ranked the second highest U.S. mutual fund franchise based on year to date net flows.
Pgms asset management fees were up 11% compared to the year ago quarter, driven by the growth in Africa in average assets under management.
Second an increase in other related revenues was driven by an increase in co investment in seed investment earnings record High agency loan production and higher all higher incentive fees Pgms operating margin exceeded 37% for the quarter aided by these strong other related revenues as we continue to focus on generate.
And efficiencies to fund growth investments and on delivering margin increases from operating leverage.
Pgms operating margin will vary with market conditions, we expect margins to remain in the 30% range across the cycle.
Turning to slide eight.
Our international business includes our Japanese life insurance operation, where we have a differentiated multichannel distribution model as well as other operations focused on high growth markets.
Our sales this quarter demonstrated the strength of our distribution channels and the continuing customer demand for the protection and retirement products we offer.
Our distribution channels are also employing more virtual tools from non face to face sales and have benefited from the easing of pandemic related restrictions.
Life planner sales increased 57% compared to the year ago quarter, reflecting the resilience of the life planner model easing of covert restrictions in Japan and higher sales ahead of US dollar denominated product repricing in August.
As planned our head count increased 3% compared to a year ago due to stable recruitment and low resignations.
Similar to life planner sales across Gibraltars life consultant independent agent and bank channels also increased in total by 30%.
We believe a degree of sales were pulled forward into the current quarter due to repricing actions and therefore, we expect a lower level of sales in the fourth quarter with sales returning to more normal levels over time, beginning and Twentytwenty one.
Current quarter adjusted operating income continued to be impacted by low interest rates and we anticipate this trend to continue given gibraltars higher exposure to U.S. dollar products, we have taken pricing actions and will continue to identify opportunities to become more efficient. In addition, we had $15 million of coping response cost primarily just.
Port our life consultants in Japan, Walter which we expect will moderate in future quarters.
Now turning to slide nine.
We have a conservative high quality investment portfolio that reflects our robust asset liability management practices.
Mid to broad diversification and a disciplined interest rate risk management framework, we also leverage p. jim's expertise across multiple asset classes, including its deep and longstanding experience and private placements and real estate.
There has been a slowdown in the pace of credit migration into parents since the first quarter of this year with year to date credit migration and losses below our expectations for the third quarter credit losses were just $12 million.
We remain confident that we are well capitalized to weather whatever might emerge in the future and with that I'll hand, it over to Ken.
Thanks, Rob I'll begin on slide 10, which provides insight into earnings for the fourth quarter relative to our third quarter results pre.
Pre tax adjusted operating income in the third quarter was $1.6 billion and resulted in earnings per share of $3.21 on an after tax basis.
We then adjust for the following items first.
Variable investment income outperformed expectations in the third quarter, which is worth 215 million.
Second we adjust underwriting experienced by a net 35 million this.
This includes seasonally lower reserve gains in retirement, and an estimate of $60 million for COVID-19 claims experienced in the fourth quarter.
Third we expect expenses and other items to be 70 million higher in the fourth quarter, primarily due to seasonal expenses and implementation costs fourth we expect the net operating costs due to cope with 19 to be 5 million lower in the fourth quarter.
Yes.
We anticipate net investment income will be reduced by 15 million, reflecting the difference between new money rates in disposition yields of our investment portfolio and last we expect the fourth quarter effective tax rate to normalize for third quarter items.
These items combined to get us to a baseline of $2.48 per share for the fourth quarter.
I'll note that if you exclude items specific to the fourth quarter earnings per share would be $2.93.
The key takeaway is that our under underlying earnings power increased slightly from last quarter, including the benefit from higher equity markets as of quarter end.
While we have provided these items to consider please note that there may be other there may be other factors that affect earnings per share in the fourth quarter.
In addition, as we look forward, we have increased the expected benefits from our cost savings program.
$250 million by the end of 2023, we.
We expect these benefits will be largely self funded.
Incremental net savings emerging in 2022 and 2023.
We will provide additional details about this program on our earnings call in February.
On slide 11, we provided an update on the potential impact of the pandemic.
The estimated sensitivity of operating income for 100000 of incremental U.S., yes.
Due to the pandemic remains unchanged at 70 million base.
Based on our updated outlook, our fourth quarter baseline includes a net mortality impact of $60 million due to cold at 19.
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.
Also we continue to expect incremental operating costs through the COVID-19 to be $5 million in the fourth quarter.
This includes additional operating costs of 25 million, partially offset by $20 million of lower travel and entertainment expenses.
Turning to slide 12.
We continue to maintain a robust capital position and adequate sources of funding our capital position exceeds our double way financial strength targets and we have liquid assets at the parent company that are greater than three times annual fixed charges and we have substantial sources of funding our cash and liquid assets at the parent company.
<unk> were $6.1 billion at the end of the quarter, which includes the proceeds from the sale of potential Korea.
And other sources of funds include free cash flow from our businesses and other contingent capital facilities.
Turning to slide 13 and in summary.
During the third quarter, we continued to successfully execute on our strategic priorities for 2020, we have taken additional steps to expand our cost savings program.
And we continue to benefit from the strength of our rock solid balance sheet, which includes which gives us the confidence and flexibility to navigate the changes in this economic environment.
Now I'll turn it over to the operator for your questions.
Thank you and ladies and gentlemen, if you wish to ask a question. Please press one and then zero Touchtone phone.
In the interest of time, we do ask that you. Please limit yourself to one question and one follow up.
And our first question will come from the line of Eric bass.
Summit Research your line is open.
Hi, Thank you can you provide some more details on where you expect the additional expense savings to come from and how much of the cuts our efficiency initiatives and how much.
It's sort of reflecting a reappraisal of business volumes and the revenue environment.
Hi, Eric This is Ken I'll start and just by way of background earlier. This year, we put in place a transformation office and its led by one of our senior business leaders, Phil Sewell, Waldeck and it's given us the capabilities to identify priority.
Ties and implement with a continuous improvement mindset.
It involves all of our us businesses in all of our functions and so you know, we're finding efficiencies through combining client service centers process run engineering automation.
Procurement strategies and so it's a it's a culmination of transformation across the company. So.
So that's that's generally what's what's driving that.
And Eric its Andy I would just add it's really not related to business volumes or revenues. It is core efficiency improvement, where we're applying process and technology and able to hit a number of cost reduction levers. So it's becoming more efficient at the business that we have.
Got it thank you.
Then you've talked about sort of all options being on the table for your in force individual life and annuities blocks and we started to see an increase in transaction activity across the industry. So hoping you can talk a little bit about what you're seeing in terms of buyer interest for liabilities like yours, and maybe the current bid ask spread in the market.
Sure. This is Charlie let me take it kind of at a high level and then turn it over to Andy but.
You know Eric over the past couple of years, we've been really active in beginning to change our business mix. So as you know we've sold our operations in Poland, Italy in Korea, now hub agreement in Taiwan, and we continue to focus on rotating our earnings mix to higher growth markets internationally now looking at the U.S.
In terms of changing the focus within the business, we're on a path to de risking and.
And have made major pivots to less interest rate sensitive and more capital light solutions, and our individual annuities and in our life business and specifically you've seen us pivot away from a visa lifetime income guarantees to less market sensitive products and at the same time, you've seen us in our life business pivot to simpler non guaranteed.
Products.
But what we've also said is that we want to accelerate the transformation and I've said that we'll we'll explore reinsurance and potentially the sale of certain blocks, but.
I would add the caveat that these type of transactions are complex.
And they take time and as we explore our options we want to make sure that we're making good economic decisions that are in the best interest of shareholders. So we're going to take all these things into account as we go forward Andy I don't know if you want to add on to that.
Yeah, maybe I would just add Eric you also I think asked about what the marketplace for these types of transactions and while we will not quote on any specific deals that are going on I think there are two important takeaways that.
That that we should discuss one is I think we've we've generally believe that a number of these blocks of business and our block of business. Its value is not fully appreciated in the marketplace and I think if you look at the the recent transactions that that certainly that that certainly.
Has been has been I think proven out the other thing is that there is capital moving towards these types of deals and that theres capacity. So we've as Charlie said, we've begun to work on on these these alternatives and when we have something more to report, we'll certainly do so.
All right thanks for the comments.
Thank you. Our next question will come from the line of Humphrey Lee with Dowling and partners. Your line is open.
Good morning, and thank you for taking my questions.
I was just trying to bridge the comments or just kind of sentiment towards.
The decision to.
Not reinstate your share repurchase this year, given the credit concern and Youre at the same time your confidence about your balance sheet I guess, what kind of what we do need to see not to make you feel comfortable.
Comfortable to assume buyback.
So hundreds Charlie let me, let me take a stab at that one.
In line with the risk framework that we have in place we pause share repurchases in the second quarter, but it's really about this until we have better visibility into the depth and the duration of the pandemic a possible recession and the credit cycle, which still maybe before us.
We're going to maintain our financial flexibility and the resiliency and when we get clarity into those issues that I just mentioned will share the timing, we view of our plan to resume share buybacks and by how much but until then we're going to focus on maintaining our financial strength with with many of the unknown still in for.
One of us.
I guess just for a quick clarification so.
Do you suggest.
We do not intend to reinstate buyback this year, but does that preclude you from using some of your capital shrink for acquisitions.
Not necessarily.
But again, we're going to we're going to take a we're going to take a very measured approach to that because we want to maintain our financial flexibility. So we're not going to comment about any.
Business or specific transaction, but if I can take this step back for a moment again and just make a more general comment on how we think about capital allocation in particular optimization you know as we look across our businesses both domestically and internationally, we want to ensure that we're optimizing capital employment and you've seen us do that with.
Some of the sales we've done internationally, but we're going to continue to look for ways to optimize capital and capital deployment to maximize outcomes for shareholders, but at the same time, we're going to take a.
Hard look at the the environment in which we're operating and make sure that again, we maintain our financial strength.
Central flexibility in our resiliency as we go forward.
Makes sense.
And then my next question is related to assurance I Q. So I think in the prepared remarks, you talked about you're excited with the activity so far in the quarter granted it's still very early.
In terms of the customer demand I think last year that the challenge was you see you saw similar you saw strong demand. But then you are not able to get you to cope with the fact that the processing of those kind of incoming demand.
Maybe can you talk about like how like in terms of the demand relative to your current capacity, where do you stand so far for for the enrollment period yeah.
Yeah Humphrey, it's Andy So I'll take your question and.
You know as we discussed sort of from a lessons learned perspective from last year. We've done a lot. This year to make sure were that we were better prepared for the annual enrollment period.
We direct contracting with the health carriers, which which gives us a lot more flexibility and agility, we invested much more heavily in an agent recruiting licensing and training and we began to bring on agents. This.
This year in the month of July which was much earlier than last year. So.
Repeating what Rob said, we're only about three weeks into the season, but we certainly see evidence that our investments are paying off and that we're having stronger performance than we had in 2019, having.
Having said that about 50% of industry wide Medicare advantage transactions occur in the last two weeks of the annual enrollment period and that's the first two weeks of December so while we like what we see from a growth perspective in these early days, it's certainly too early to draw definitive conclusions.
Do you feel like given the activities that you're seeing some of the preparedness you already in place do you think assurance I could turn positive for the fourth quarter.
Yeah, and I think I I think in our materials, we had given a walk to.
About 25 million for the fourth quarter.
Got it thank you.
Oh actually I had that number wrong. It was 50 it was 15 Humphrey sorry, it was off.
Looked at the wrong line.
Thank you and our next question comes from the line of Tom Gallagher with Evercore. Your line is open.
Sure Charlie just.
Wanted to circle back on capital deployment as.
That's my first question, if we think about 2021.
At this point do you have a preference of buybacks or M&A and I ask in particular, because if you do free up capital from a risk transfer deal. They're also happens to be we'll say more activity more more things on the market now than they were and there were recently so curious what.
Your view is if you're more likely to want to do M&A or buybacks at this point.
Yeah Tom.
Thanks for the question I guess, a couple of things one.
Again, I would caution people in thinking we're going to free up capital immediately these transactions take a long time and therefore, we have to think through that secondly, I think it depends on it depends on the deal what we've said before.
Is given where our stock price is there was a fairly high hurdle right.
On the other hand to your point.
There could be some very interesting things on the market. So we're going to have to we're going to have to balance. If you will a short term accretion from stock buybacks.
And long term growth and we'll have to we'll have to weigh those two against the opportunity set that's out there in this and the stock the stock purchase price at the time.
That that that's helpful and with defined contribution be on the wish list.
M&A interest from your perspective, because I know you've done more international and then you did assurance sites you in recent times.
So Tom it's Andy I'll take your question, we've been very focused on on strengthening out our value proposition in our in our full service retirement business.
We've talked a lot about over the last couple of years. The work that we've done in financial wellness. We've we've pretty heavily invested in digital and mobile and that has resulted in very good organic growth on that platform. If you look at our net flows over time, it's been very positive. We're completing our third year of record sales Yeah, we had our largest corp.
Great client ever in the quarter. So we've seen great success, even though we certainly pay attention to the consolidation of the space. We've seen great success organically growing the business and that maintains our focus.
Okay. Thanks, and then just as a quick follow up the elevated level of non taxable expanses that you brought or is that like and I guess for the guide for Fourq Q is that likely to continue into 2021 or is there something that's more.
No I would say temporary regarding.
The lower earnings and higher expenses at Gibraltar.
Hey, Tom This is Scott.
The Gibraltar run rate base.
Has been impacted by really two factors.
And one here. The first one is more permanent we adjusted our comp and straight compensation structure for life consultants to better balance policy holding.
Policyholder servicing things like customer visits persistency and so forth.
With new business production and then this led to a lower level of deferrable commissions overall, the commissions have not actually changed but our immediate run rate was impacted by roughly $10 million a quarter and we view. This is permanent now we recapture that over the life of the products, but that takes a quite a while.
Well to pick up.
By the way, we do not expect this to have any impact on gibraltars cash flow second Gibraltar does have a large block of U.S. dollar business, which is experiencing a spread erosion due to declines in U.S. dollar interest rate. So it's really those two factors combined with the biggest being the first.
Okay. Thanks.
Thank you and as a reminder for any questions or comments you May press, one and then zero.
Next we'll go to the line of Suneet Kamath with Citi. Your line is open.
Thanks, I wanted to circle back to assure insight Q.
If we assume your place holder of 15 million for the fourth quarter is right I.
I think it would still put you at a loss for the year.
Versus your original guidance of.
EPS accretion in 2020, so just curious what's what's driving that and then should we.
Do you think we can get back on track to your I think you had guided to 30 to 35 cents in 2021 can we assume that you can kind of get back on track there or do you think.
It's sort of a more of a challenge to get this back to profitability for the full year for a full year. Thanks.
So suneet, it's Andy I'll take your question.
And let me maybe raise it up a level. So we're very pleased that we bought this business model and the in this set of capabilities.
Model, that's not sensitive to interest rates or equity markets, obviously with what happened in the March timeframe.
Yeah were even more pleased to have this as part of the fold. We immediately got very focused on building out and expanding the business model.
So that we could we could care for more needs in the mass market and middle market consumer side. So you know as as Weve really worked on the business internally success for us is not about near term AOL.
Except for US is very much about continuing to expand the reach and breadth of the of the of the platform and is very much measured in how we grow our revenues as very much measured in the products that we have on the platform. So we began with life you saw us immediately lean into Medicare advantage.
And then more recently weve leaned into a property and casualty and again I always remind this is from a distribution perspective not from a manufacturing perspective, and you know these bring fee based earnings that are very capital efficient. So our focus is really expanding this out.
As rapidly as we can.
Okay.
And then I guess, a bigger picture question on your financial Wellness initiative.
When you guys talked about this at your latest Investor day, and we spend a lot of time talking about mark.
Marketing at the Worksite, reaching the employees of your corporate customers. So if we assume that we're going to be in this work at home environment for longer how are you modulating that initiative to make sure that you are still capturing the growth opportunity that you guys talked about when you can't do these group meetings.
You guys discussed at the Investor day. Thanks.
Yes, Suneet, it's Andy and I guess right up front I'll draw very.
Sharp distinction in our financial wellness work from what I would call Worksite marketing, which I know a number of voluntary products are more worksite marketing with feet on the street in the employer ours was very much about building a set of capabilities that could really reach people, when where and how they want it. So there was a real digital focused.
What weve built.
We've had accelerating success. If you remember there were sort of couple of stages to what we are trying to accomplish.
At this point we've had.
A large portion of our employers adopt our capabilities. We have 20 million individuals that have access to the platform. That's ahead of our goals for 2020.
We've we've what my words permission and 12 million individuals that they can access we get access to market. Our retail solutions that is also ahead of our goals.
And at this point, we've we've put 15000 retail customers into Prudential through the platform.
You know as Koby came in the base capabilities were such that we were able to pretty quickly.
And expand upon as an example, our potential pathways program and make it purely digital with Webinars capabilities and at this at this point, that's now reaching about eight and a half million folks. So we don't see the current environment actually hindering us at all and it's really about how we built the whole platform.
Okay. Thanks, Andy.
Thank you.
Next question will come from the line of Ryan Krueger with KBW. Your line is open.
Good morning.
Total annuity question one.
In recent years, you've been sending dividends up to the holding company.
It would be.
The area that can kind of be roughly $2 billion range give or take.
So first question is.
To what extent was negatively impacted by new stream associated with right.
Living benefit guarantees so I guess should we see some improvement there.
The roughly $1 billion per year as sustainable in the current interest rate environment.
Brian This is Ken our annuity business as we've mentioned in the past has been very.
Very well hedged and very well capitalized and as you mentioned.
Providing a regular source of dividends to the holding company.
Now that has moderated over time as our sales have.
Been below our outflows the business has been getting smaller.
And although we're we're quite happy with the launch of our Flexcard product.
It won't be in the near term sufficient to.
Pace the.
The outflows that we have on our enforced block so over time that will decrease our level of earnings and cash flow and you could see that as a as a moderating trend.
Got it.
And I guess from a.
Legal entity standpoint, I know, you're probably something you're more likely to pursue a reinsurer.
In general is there any uh huh.
Legally between the potential annuity.
I got or other or other life insurance subsidiaries include.
Completely separate.
Our our annuity business is actually involves a couple major legal entities.
One would be our Pruco life of Arizona Company, which is a subsidiary of pica that had been historically been the legal entity that we use to underwrite annuity business, but as you may recall many years ago, We acquired annuities company from American Skandia, that's what we call.
Potential assurance life insurance company or palette.
And that also has a variable annuity business unit.
So it's in a couple of different legal entities that are involved.
Okay got it thank you.
Thank you. Our next question will come from the line of John Barnidge with Piper Sandler and your line is open.
Thank you you Didnt really addressed this in the commentary on cost cutting.
When adding $250 million in pushing out to 200.
2023 is this real estate savings that it's far off far out enough that it could address leasing.
So John it's it's Andy this is really just an expansion of our program to as Ken said earlier every business and every function.
So it is it is.
Real estates part of it but there are a number of different buckets. It really is across real estate it.
It it's across side.
Better vendor management and procurement.
More efficiency from a travel perspective, so it really goes across a number of areas that you know we learned a lot in the first in the first 12 to 18 months of this program.
We saw a lot of what was possible and feasible and we expect quickly expanded it to every corner of the organization. So it's not one particular category.
It's just from the success of the overarching program and accelerating it.
Okay and then thank you very much and my follow up.
It would be the products within annuities and life business.
This year can you talk about the amount of assets associated with that that were suspended respectfully. Thank you for your answers.
So from an annuities perspective.
I'm not going to get this exactly right, but I think it's in the 110 120 billion range.
And.
I will I don't have the the guaranteed universal life in front of me.
Okay answers.
Thank you.
Next question comes from the line of Jimmy Bhullar with JP Morgan and your line is open.
Hi, Thanks, So first I just had a question on your disability loss ratio, it's actually margins in the business have been pretty good are you starting to see are expecting to see any impact.
From sort of higher unemployment and just a weaker economy on your benefits ratio in the disability business.
Hi, It's Andy I'll take I'll take your question. So we've actually been very pleased we have not seen an uptick in incidence.
In either our short term disability business or our long term disability business that being said, though obviously, we've we've operated this business for many many decades and we know that in recessionary environments. There's generally somewhere in the neighborhood of a year lag.
From when that incident shows up so we have invested to make sure that.
Our claims teams have low what we call desk loads. So.
So that if and when that incidence starts to tick up we're well prepared for it but we have not seen evidence of that yet.
Okay, and then on the just on Japan sales, obviously, you benefited this quarter from sort of front ending prior to the price increase but.
So I'm, assuming you expect sales to decline a decent amount next quarter.
And then also if you could just talk about how the conditions are in that market in terms of agents' ability to lead to the prospects.
And like given social distancing and everything else that's going on.
Sure. Thanks, Jimmy This is Scott well as Rob noted in his remarks with a significant decline in us interest rates, we implemented pricing changes in August across all of our U.S. dollar products in Japan.
As you know, it's common for salespeople to use such a pricing change to stimulate.
Client contact and that tends to accelerate.
Sales from maybe the quarter ahead prior to such a change sales in Threeq. You also did benefit from the relaxation of social distancing requirements in Japan that were implemented in the beginning of June and I think you also ask on that question.
We expect that such enhanced demand will taper off in the following quarter, but then we are expecting things really to normalize as we head in to.
2021 overall, our distribution in Japan is largely operating in kind of a back to normal mode and I think that really reflects the strength of our differentiated business model.
Okay. Thanks.
Thank you.
Our next question comes from the line of Josh Shanker with Bank of America. Your line is open.
Yes. Thank you.
Back in time, maybe three years ago I think.
You would have said that.
Individual variable annuities is a core competency of the company you've got a lot of your competitors don't understand her backing away from the market.
Many of them pivoted to buffer annuities and whatnot.
Just continuing sales of.
Terrible news with living benefits you talk about whats the return characteristics of that product have been over the past three years, where they stand today and what it means for the back book.
So Josh it's Andy I'll take that so our our HD I and NPD I block of business is a very high returning block of business as Ken talked about earlier.
It's a it's a well capitalized block and well hedged block and creates a good cash flows. It's more of a go forward perspective, if you think about the decision making around our product habit.
We're we're working towards more of what I would frame as an all weather portfolio, where we're taking less fully on ourselves the interest rate and equity market risk. The H.T.I. as are most sensitive product.
In that regard. So you know we think from a go forward perspective. As you noted we are very very good in in the annuity space. We believe there is still as a deep sea that need to help people with accumulation.
And to help them with de Cumulation, you know from a longevity insurance perspective.
And we think our go forward product portfolio portfolio does that does that well, but does it in a way that's more shareholder friendly.
The financial advisors, who work with you need a product like in their silo from you for you to remain competitive with them.
No no if you're if you're asking about do they do they need the sort of the H.T.I.P.D.I. types of product no. We've we've actually I think we benefit from our brand and our strength of our distribution and I think Thats really why you see such a strong start to our Flexcard us buffered annuity we.
We bid was 38% of our sales here in the third quarter and we recently went through a $1 billion in sales and we haven't even finished fully rolling it out to all states and all advisor so.
We think our product portfolio will meet the needs of the advisors and we'll see good growth in it.
Thank you for the answers.
Thank you.
Next question will come from the line of the lease Greenspan with Wells Fargo. Your line is open.
Hi, Thanks. Good morning, My first question going back to the capital conversation you guys mentioned you have over 6 million of capital at the holding company on that's around three times your fixed charges. So can you remind us what you typically like under normal time Keith.
At the holding company and then as we think about 2021 and you mentioned you know we evaluating capital return once we kind of get out of Colgate, where you go back to what you view as kind of that normal level of fixed charges at the holding company or do you think that you know you're going forward after that well look to me.
Hold onto an extra buffer as well.
At least it's Ken.
Our target for highly liquid assets in difficult times is three to 5 billion and we think that's a that's a good level to carry to have the flexibility that that a company like ours needs.
So we are above that we think these are different than typical times and.
As Charlie mentioned, that's a prudent thing to do and we will continue to evaluate.
A number of factors, including the credit markets as we go forward.
And but again our target is typically three to 5 billion that gives us ample flexibility.
Flexibility in ordinary times, and we think now's a good time to be above that.
Okay and then.
I was hoping to get more color on PRT environment, obviously with weight lower in deal activity slowed in the third quarter.
Monthly volume does pick up in the fourth quarter as we close the year is out could you just give us some color on the pipeline there and thoughts about transactions that you can potentially standpoint glitter.
Yeah at least it's Andy I'll take your question. So you're absolutely right. If we look at sort of 2020, the marketplace or size of the marketplace versus 2019, 2020 is definitely going to be down we think it's going to be somewhere in the neighborhood of 20% ish or so.
Third quarter was relatively quiet, we are seeing a building pipeline in for Q, but I, but I would point out that you know with a lower overall market size. We also have talked about in the past that we're now probably up to five plus competitors that can do deals of 1 billion plus so we think it's going to be very competitive.
Women in the fourth quarter, we're going to be very disciplined about how we approach the marketplace and we're going to pick our spots.
Okay. Thank you very much.
Thank you and with that I'd like to turn it back over to Mr., Charles Lowery for any closing comments.
Thank you very much so in closing today I hope today.
We have demonstrated our commitment towards and the ongoing momentum we have to transforming our business and financial performance in ways that deliver meaningful outcomes to our customers as well as to our investors and other stakeholders.
We continue to move with urgency and conviction to execute on and be true to our purpose of solving the financial challenges for more people.
So thanks again for joining us today, we appreciate it.
Thank you and ladies and gentlemen that does conclude your conference call for today. Thank you for your participation. If you use an ATM T executive teleconference service you may now disconnect.
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