Q2 2021 Prudential Financial Inc Earnings Call

Ladies and gentlemen, thank you for standing by.

And welcome to the Prudential quarterly earnings Conference call at this point all the participant lines are in a listen only mode. If you should require any assistance during the call. Please press star zero on and operator will assist you offline as a reminder, today's call is being recorded I will turn the call now over to Darin Lorena. Please go ahead.

Thank you John Good morning, and thank you for joining our call representing Prudential on today's call are Charlie Lowrey, Chairman and CEO, Bob <unk>, Vice Chairman, Andrew Sullivan head of U S businesses, Scott <unk> head of international businesses, Ken <unk>, Chief Financial Officer, and brought back so controller and print.

People accounting officer.

And we'll start with prepared comments by Charlie Rob 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 the predictions, we make today and it.

And this presentation may include references to non-GAAP measures for a reconciliation of such measures to the comparable GAAP measures and a discussion of factors that could cause actual results to differ materially from those and the forward looking statements. Please see the slide titled forward looking statements and non-GAAP measures and the appendix to today's presentation.

And the quarterly financial supplement both of which can be found on our website at investors Dot Prudential Dot com.

That I'll hand, it over to Charlie.

Thank you Darren and thanks to everyone for joining us today as always we hope you and your families remain safe and healthy.

We reported strong financial results for the second quarter, reflecting robust investment performance and further progress in achieving our cost savings target.

We also made significant progress executing on our strategy to become a higher growth less market sensitive and more nimble company as.

And as an example, we announced an agreement to sell our full service retirement business last month.

Second our cost savings program is progressing well and is ahead of our original plan.

And third with the support of our rock solid balance sheet, we are thoughtfully redeploying capital both by increasing capital returned to shareholders and by selectively pursuing acquisition opportunities.

I'll now provide and update on each of these strategic initiatives beginning with our recent divestiture activity.

Turning to slide 3.

Following the sale of our Korean business last year, we successfully closed on the sale of our Taiwan business during the second quarter.

And in July we announced an agreement to sell our full service retirement business to empower retirement and a transaction, which is expected to close in the first quarter of 2022.

Including the announced full service sale and completed sales of our Korea, and Taiwan businesses. We expect net proceeds of approximately $4.2 billion from these divestitures. Meanwhile, we continue to pursue opportunities to reduce the size of our legacy block on traditional variable annuities with guaranteed living.

<unk>.

Moving to slide 4 and.

As I mentioned earlier, we are progressing well and remain on track to generate $750 million of cost savings by the end of 2020.3.

To date, we have achieved 515 million of run rate cost savings, which exceeded our original target of $500 million.

And did so 18 months ahead of plan.

These savings include $130 million and the second quarter and a total of $240 million for the first half of 2021.

We have also identified new cost savings to replace those we had not yet realized and our full service retirement business and as a result continue to expect to generate $750 million of cost savings.

Turning to slide 5.

These initiatives are complemented by our thoughtful approach to capital redeployment.

<unk> through increased shareholder distributions last month, when announcing our agreement to sell the full service retirement business, we increased our share repurchase authorization by an additional $500 million our.

Our second increase of this amount since the beginning of 2021.

This brings our total shareholder distributions to a targeted $11 billion through the end of 2023 up from the $10 billion target. We initially identified earlier this year.

Year to date, we've returned $2.2 billion to shareholders, including $1.3 billion and the second quarter comprised of 875 million and share buybacks and $460 million in debit and payments.

In addition, consistent with our disciplined approach to capital management and guided by our philosophy of being prudent stewards of shareholder capital, we intend to reduce leverage and enhance our financial flexibility by redeeming $900 million of outstanding debt in the third quarter.

Meanwhile, we are being disciplined and executing on our programmatic M&A opportunities as we have done in the past with a focus on higher growth areas, including asset management and emerging markets.

As evidence of this earlier this year, our Africa joint venture partner closed on a minority stake and IC, a lion holdings, a highly respected financial service market leader in Kenya, with operations, and Tanzania and Uganda.

More recently and July PJM announced and deal to acquire Montana capital partners, a European based private equity secondaries asset manager, which will enhance <unk> capabilities and further expand its $250 billion alternatives platform.

These transactions are consistent with our strategy to add capabilities and PGM and deepen our presence in emerging markets enhancing our growth opportunity on.

Our capital deployment and supported by a rock solid balance sheet, including highly liquid assets of $4.9 billion at the end of the second quarter and.

And double AA financial strength capital levels at our primary business subsidiaries.

Before turning it over to Rob.

To provide and update on our environmental social and governance commitments, which are integral to our business strategy and purpose of solving the financial challenges of our changing world.

This quarter I'll focus on our environmental commitments.

Last month, we took an important next step to integrate our ESG and financial frameworks with the renewal of a standing $4 billion credit facility, which now directly links our financing costs to our progress and meeting previously established sustainability targets. These.

These targets include reducing our greenhouse gas emissions as well as improving diverse representation among our senior ranks.

We also continue to make strong progress against other goals outlined in our 2019 global environmental commitment, including investing and sustainable companies and projects issuing our inaugural Green bond last year and by providing greater transparency around our general account investment Alex.

<unk>.

We are also reducing our reliance on paper documentation, both internally and and the volume of letters and other mailing shared with our customers and partnership with American forests, we aspire to significantly reduce our pay per use by the end of 2022.

We are committed to ensuring the sustainability runs through everything we do with Prudential.

This also includes fulfilling benign commitments to advance racial equity that we established 1 year ago. This week.

Which are in addition to our ongoing diversity equity and inclusion efforts.

I look forward to updating you next quarter on the progress of this work as well as on our other social commitments.

With that I'll turn it over to Rob for more specific details on our business performance.

Thanks, Charlie I'll provide an overview of our financial results and business performance for PJM.

U S and international businesses I'll begin on slide 6 with our financial results from the second quarter. Our pre tax adjusted operating income was $1.9 billion or $3.79 per share on an after tax basis and reflected the benefit of strong markets business growth and lower than typical expenses.

Which exceeded the net mortality impacts from COVID-19.

Our global asset manager had record asset management fees, driven by record account values of 1.5 trillion.

That were offset by lower other related revenues driven by a decrease and seed and co investment income and higher expenses supporting business growth.

Our U S business results were more than double the year ago quarter and reflected higher net investment spread results driven by higher variable investment income higher fee income, primarily driven by equity market appreciation and a more favorable impact from our annual assumption update partially offset by less favorable underwriting experience.

Driven by COVID-19 related mortality.

And earnings and our international business has increased 16%, reflecting continued business growth higher net investment spread results lower expenses and a more favorable impact of the annual assumption update. This increase was partially offset by lower earnings from required co investment and our Chilean pension joint venture and less favorable.

Underlying results, primarily driven by higher COVID-19 claims and Brazil.

Turning to slide 7.

<unk> continues to demonstrate the strength of its diversified active management platform as a top 10 global investment manager and <unk> diversified global investment capabilities, and both public and private asset classes across fixed income alternatives real estate and equities position us favorably to capture flows and addition.

<unk> investment performance remains attractive with more than 93% of assets under management and outperforming their benchmarks over the last 3.5 and 10 year periods.

Our diversified capabilities and strong investment performance helped to contribute to more than $5 billion of third party net flows during the quarter driven by continued strong public fixed income flows with $5.6 billion of institutional flows partially offset by modest retail outflows. These retail outflows reflected continued.

Positive inflows into <unk> mutual funds offset by outflows from southern advisory mandates and U S equities.

And as the investment engine of Prudential PGM also benefits from a mutually beneficial relationship with our U S and international insurance businesses, and <unk> asset origination capabilities and investment management expertise provide a competitive advantage, helping our businesses to bring enhanced solutions and more value to our customers and our businesses in turn and provide a source of growth for PJM.

Through affiliated flows that complement its successful third party track record of growth.

<unk> asset management fees increased 16% compared to the year ago quarter to a record level as a result of market appreciation and continued positive third party net flows. This contributed to <unk> adjusted operating margin of 33%, which is above our expectation of 30% across the cycle now.

Now turning to slide 8.

And our U S business has produced diversified earnings from fees net investment spread and underwriting income and benefit from a complementary mix of longevity and mortality businesses.

We continue to strengthen our businesses transform our cost structure and expand our addressable markets, while shifting away from low growth capital intensive and interest rate sensitive products and businesses.

Our productivity have worked well demonstrated by continued strong sales of our buffered annuity flex cars, which were $1.5 billion and the second quarter, representing 87% of total individual annuity sales over.

Over the past 3 quarters <unk> sales have totaled $4.3 billion.

These sales reflect customer demand for investment solutions that offer the potential for appreciation from equity markets combined with downside protection.

We have exercised discipline through frequent pricing actions and our sales continued to benefit from having a strong and trusted brand and highly effective distribution team hiring.

And our individual life sales continued to be strong with higher variable life sales compared to the year ago quarter offset by lower sales of other policies and particular universal life sales consistent with our product pivot strategy.

And group insurance and financial wellness capabilities are core to our business success and continue to differentiate our value proposition enhanced benefit participation.

And to accelerate growth and our targeted markets.

With respect to assurance total revenues, our primary financial metric as we concentrate on scaling the business were up 92% over the prior year quarter. I would also note that similar to last year, we plan to increase the number of agents and the third quarter to help meet the seasonally higher expected demand of the Medicare.

Our annual enrollment period that occurs and the fourth quarter.

Turning to slide 9 our international businesses include our Japanese life insurance operation, where we have a differentiated multichannel distribution model as well as other operations focused on high growth markets.

Sales across both life planner and Gibraltar operations held up well admits to the state of emergency and Japan life planner sales were 14, 9% higher than the year ago quarter, while <unk> sales were 33% higher than the prior year. We remain encouraged by the resiliency of our unique distribution capabilities, which have helped us to continue the <unk>.

Growth of our in force business 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 third quarter of 2021 relative to our second quarter results pre tax adjusted operating income in the second quarter was $1.9 billion and resulted in earnings per share of $3.79 on.

On an after tax basis to get a sense of how our third quarter results might develop we suggest adjustments for the following items first our annual assumption update and other refinements resulted in a net charge of 34 million and the second quarter next variable investment income outperformed expectations in the second quarter by 3.

<unk> hundred $65 million.

Third underwriting experience is adjusted by a net $30 million. This adjustment includes a placeholder for COVID-19 claims experience in the third quarter of $25 million for our U S businesses based on 30000, COVID-19 related fatalities in the U S and $20 million for our international businesses.

While we have provided this placeholder for COVID-19 related underwriting experience for the third quarter. The actual impact will depend on a variety of factors such as infection, a fatality rates geographic concentration and the continued acceptance and effectiveness of the vaccine.

Fourth we expect earnings will be lower and the third quarter by $290 million, primarily due to the timing of expenses between the second and third quarters, and then make whole fee of approximately $90 million associated with the previously announced redemption of $900 million of debt in the third quarter.

And this also includes the reduction in adjusted operating income from the sale of our full service business, which will be reclassified to a divested business as well as retained costs that will be reported and corporate and other.

Last we anticipate net investment income will be reduced by about $10 million, reflecting the difference between new money rates and disposition yields of our investment portfolio. These.

These items combined get us to a baseline of $2.59 per share for the third quarter I'll note that if we can exclude items specific to the third quarter earnings per share would be $3.

The key takeaway is that our underlying earnings power has increased from last quarter as the benefits from business growth, our cost savings program and higher and higher equity markets more than offset the reduction in earnings from the sale of the full service business. While we have provided these items considered please note that there may be other factors that affect.

Earnings per share and the third quarter.

I would also note that with the debt make whole fee and routine cost of full service. We now expect the full year 2021, corporate and other loss to be about 1.65 billion.

Turning to slide 11, and we continue to maintain a robust capital position and adequate sources of funding our capital position continues to support a double day financial strength rating and we have substantial sources of funding our cash and liquid assets were $4.9 billion, which is greater than 3 times annual fixed charges and other.

Sources of funds include free cash flow from our businesses and other contingent capital facilities.

The redemption of debt as previously mentioned, we'll complete our plan to reduce financial leverage and 2021 and join generate annual interest savings of approximately $30 million, while also enhancing our financial flexibility for the future as we execute on our strategic transformation.

Turning to slide 12, and in summary, we are executing on divestitures. We are ahead of schedule on cost savings initiatives and with the support of our rock solid balance sheet, we are thoughtfully redeploying capital.

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

Yeah.

Thank you and ladies and gentlemen, if you wish to ask a question. Please press 1 then zero on your telephone keypad.

You may withdraw your question at any time by repeating the 1 zero command, if you're using a speaker phone. Please pick up the handset before pressing the numbers. Once again, if you have a question and you May press, 1 and zero at this time and we do ask me. Please limit yourself to 1 question and 1 follow up.

And first of all on a line of Ryan Krueger with <unk>. Please go ahead.

Hi, Good morning could you provide and update on your progress toward a variable annuity transaction and also I think and in the past you had commented that the market tended to be interested in $1 billion to $2 billion inside and VA transactions.

So I'm curious if that's still the case.

Hi, Ryan Good morning, It's Andy I'll I'll take your question. So let me start by reiterating what Charlie said and as per my prepared remarks at the at the top we are committed to significantly reducing the earnings contribution from traditional variable annuities with guaranteed living benefits and as you remember we talked about this as a 2 step process.

Step 1 is run off and we expect about 40 to 45 per cent of the earnings reduction will come from run off and and we're executing on what we consider to be a highly successful pivot and if you look at this quarter, we had zero percent of our sales in those legacy products those traditional variable annuities.

And we experienced $3.8 billion and run off in those products in the quarter.

And we've pivoted to products that are are a much better balance consumer value with shareholder value and <unk>.

Obviously flex guard being the chassis product there.

We were we saw a 17% market share in the first quarter and we were the number 2 provider of index variable annuity. So step 1 is it's all about runoff and now having said that step 2 is the transaction and conducting a transaction does remain a priority for US you know we are we have work in progress and we're progressing.

That work forward as you noted you know I would say the 1 to 2 billion range. If you look at the transactions that have been done and the marketplace is a good precedent.

And I would say that we continue to see tailwind of of of capital coming towards the space. You know, we we we as we've articulated before we have a very high quality block of business and as always as we as we continue to progress we're gonna be disciplined to make sure. We only do things that are that are shareholder friendly and have the right economics.

Much like you saw us do with the full service transactions. So we're going to keep moving down the tracks and we will share when we have something more to share.

Thank you and a follow up is other than other than variable annuities.

You've already said there and full service retirement sale are there any other businesses that you would consider divesting and at this point.

Yeah, Hi, Ryan its Charlie.

You know as as Andy said and as I said in my opening remarks, we're making significant progress I think executing on becoming a higher growth less market sensitive and and more nimble business.

And this includes the announced full service sale, but also the completed sales of some of the things we've done before including the sale of our Korea, Taiwan, Italy, and Poland businesses.

And we will continue to pursue opportunities to reduce the size of our legacy Mark block as Andy said, a traditional variable annuities with guaranteed living benefits, but.

As we've noted in the past, we're looking at life insurance blocks of business as well. So we've accomplished a significant amount, but we still have a lot more work to do.

And we're gonna be very thoughtful about how we execute on the dual goals and fulfilling our purpose on the 1 hand and creating value for shareholders on the other.

Thank you.

Our next question is from Erik bass with Autonomous Research. Please go ahead.

Hi, Thank you last night, we saw another jumbo PRT transaction and 1 of your competitors is talking about this being potentially a record year for industry volumes and peruse historically, but on the dominant competitor and the jumbo market on but now we've seen some others take bleed. So was just hoping you could talk about your appetite for our PRT business going forward and.

The competitive dynamics and the market currently.

Yeah. Thanks, Eric This is Andy I'll take your question and and thank you for your recognition and we are absolutely has been a pioneer and a leader in the space of pension risk transfer.

We have a great brand, we have very strong capabilities and we believe that we have a unique and the strength distinguished track record of execution. We also are seeing strong market opportunity and the market size in the second quarter was about 4 and a half billion that was similar to what we saw and the first quarter and we expect the back.

Half of the year to be very healthy if you look at the average funding rate is 99% and sponsors still have a high desire to transact.

And that being said this has become a more competitive market both from a per the perspective of the number of competitors competing in it and but also the number of competitors that are seeking larger and larger deals. So you know very consistent with what we've told you and apply it passed we're gonna be disciplined and our approach.

And we're going to pick our spots and that that is what you're seeing from us.

And you should expect to see a quarter to quarter variation, but if you combine the strong pipeline that we see going forward with the strength of our business are number 1 we feel comfortable we could take this approach and number 2 are we expect that will be a net winner over time and experienced good flows.

Thank you and then from next question that you highlighted 2 examples of programmatic M&A that you've done year to date can.

Can you give a sense of how much capital was allocated to these transactions and will deals of this size would be enough to meet your capital reallocation targets or do you expect to potentially do something bigger.

Yeah, I'll I'll jump in on that 1 we are not going to talk about the specific size of some of these transactions.

But it is fair to say that we are taking a very disciplined approach and balanced approach to M&A and that the and that with programmatic M&A you can expect us to do more of this type of this type of deal going forward.

Okay. Thank you.

Next we'll go to Humphrey Lee with Dowling and partners. Please go ahead.

Good morning, and thank you for taking my questions on just a follow up on M&A.

I understand some of the either the transactions you have done.

Our year to date, but just thinking about on the.

The impact on the food surface sale and just trying to costs being left behind like is the party is going to be something that's focused more on the mature businesses that provide more solid earnings. So that you can absorb and and offset the stranded costs from the foodservice sale.

Yeah Humphrey, it's Charlie let me, let me take that 1.

First of all again, where we're going to take a very disciplined and balanced approach to this but when we think about acquisitions, we think about them both from a strategic and a financial perspective right. So from a strategic perspective, we look to add capabilities, such as product or distribution or increase scale and a market or country and from a financial standpoint, we look at a variety of metrics win.

Assessing potential acquisitions and that can be earnings contribution and can be growth, it's going to be a number of factors that we consider.

And most importantly, our focus is on becoming a higher growth less market sensitive and more nimble business and we're going to continue to be very thoughtful and disciplined about how we execute with the goal of creating value for shareholders.

And maybe Charlie I'll, just add and you know in terms of.

I'm free what you describe as a standard cost are or the retained costs from that transaction.

And as we've sort of demonstrated across the company, we've made excellent progress in transforming our operations and gaining.

Dana and efficiencies, but also including capabilities.

And institutionalized process and structure and it's good.

Accelerating our progress on on our cost objectives, we're focused on meeting the cost savings objectives of $750 million by 2023, and as we reallocate and redeploy capital and we'll look to reallocate overhead across our businesses as well.

Got it.

Shifting gears, so you talked about using some of the proceeds from the foodservice so to Laura you'll average can you just talk about the rationale behind the decision since the sale doesn't really trigger and the issue of your leverage and especially given the do you expect to gain from from the sale.

Yeah. Humphrey. This is really part of our regular review of capital and liquidity profile and given our current position. We thought it was a good time to redeem the debt that redemption will have a near term earnings benefit.

But it's also going to provide that capacity and flexibility for the future. So it really just reflects.

And we thought it was a good way and a good time to.

Reduce our debt and an efficient way.

Okay. So I shouldn't read it as like a potential V. A transaction that may have an impact on on your book value or you maybe to a more leaning towards lever up and down the road, but just seemly Yorktown periodically irregular review and just fine as a good time right now yeah, exactly I think I don't I wouldn't connected directly to any specific.

Transaction.

And we're overall regularly reviewing where we are and we thought it was a smart thing to do.

Got it thank you.

Our next question is from Andrew Klingerman with Credit Suisse. Please go ahead.

Hey, good morning.

I'm thinking about.

Sure and site Q and net suite current 92% year over year growth in revenue, but then you had a loss pre tax and about 38 million which was.

Up materially year over year.

Could you talk a little bit about a the growth rate can you keep at this pace and b.

And when might we think about a timeframe for when you get to breakeven.

So thanks, Andrew It's Andy I'll take your question you know as we've discussed in the past, we're very intentionally bid it built a building out the business and the platform.

And we're doing that because as we brought this business and the Prudential, we saw just real opportunity and an incredible customer demand. We saw again 7 million shoppers in the quarter and you know we're looking at hundreds of thousands of policies that we're going to have sold and.

And these are customers that we would've never reached at Prudential, So very much part of expanding our addressable market.

You know as as you look at those investments there is I'll call. It a J curve to those investments where as we're adding agents. As an example, you know they will become more and more productive over time and a number of of these divestments or fixed expense. So that's why we say the predominant metric is scale we have to scale.

Our tier 2 and I'll use the word overcome that fixed expense and we're seeing great progress you know that that we're also we're very pleased with the hundred and $12 million and the 92% growth rate. We believe that we have a lot of continued room are in front of us to grow to specifically answer your question on.

And as to a specific timeframe all around and achieving the long term economics, we're not going to provide more exact guidance.

Okay, Yeah that was helpful and.

On the buffered annuity market.

So now that was I think 87% of your total segment sales there.

Do you see a point, where you could get to the volumes, even if what you where you were doing on the legacy products and how do you see the competition. There I mean, it seems like a lot of players have been jumping into the buffered annuity market and as you said kind of kind of impede your growth.

Yeah. So thanks for the question on <unk> on the buffered annuity market and on Flex Guard, Let me, let me start by by saying you know the driver of our success.

<unk> has a lot to do with we're very well established brand that's very well respected we have just you know and outstanding distribution system and distribution partners and we came to market with a a very differentiated product from the index strategy perspective, all of that has any.

Build us to have 1 of the best launches I E.

In in and probably the history of the industry. So we're very very proud of it you know the market itself is growing so we're seeing more and more volume industry wide shift from a more traditional type product designs over to the index variable annuity area and I would think of this as more of a.

On the chassis, it's really a pretty broad area of accumulation oriented products that have upside and upside and downside are buffering.

Buffering and so we see a good bit of room still to run.

Having said that we we have at this time rolled.

It rolled it out to all of our all of our third party relationships and we're all in all of our key geographies. So quite pleased with how we've we've done I you know as far as at its ability to get to you know some of the very high levels that we saw you know 5 to 10 years ago I'm not going to put a prediction on that.

Thanks, a lot.

Our next question from Tracy and Geeky with Barclays. Please go ahead.

Thank you I have another assurance IQ question and it looks like there isn't a changing of the guard I understand their original founders are not there anymore and they have left before a potential earn out which would've been on meeting performance targets anyway on what is the new strategic direction under new management and.

And we should anticipate.

So thanks, Tracy it's Andy let me hit the tail end of your question first there is zero change and strategic direction or change in strategy with our with the assurance platform and and with it fit with Prudential and what we're trying to accomplish and you know as you would expect we have been adding to the team and deepening the talent as the business matures.

And you you rightly identify at the top of the house, Mike well, our founder has moved over to a strategic adviser role to me and that enables me to take a broader use of his experience and expertise and.

In addition to that we promote it Allison and our Zeno, who was the chief data scientist to be the CEO I'm very excited by that she is a fantastic leader and and has jumped in and has it continued the momentum they have.

And the thing I'd mentioned and as we've been very pleased that through the combination of Prudential brand.

And the unique and attractiveness of the insurance platform, we've we've been able to attract top top industry talent.

Specific for specifically for a product P&L role. So as an example, we recruited a gentleman by the name of Chris Hake them, who has deep health expertise. Both in Court Court courthouse, but also was a key leader at Ehealth and he's leading our under 65 health and Medicare advantage. So we're we're pleased with the the talent.

And we're confident that we have the right team and and the right talent to take it forward.

Yeah.

Okay, Great maybe moving on to your assumption update I see that you did not change your long term rate assumption and I get that interest rates are at a higher spot now and this time last year.

Yes, my thinking like that insurance, we still want and grade into lower and version and I mean, I'm sure and to prepare for L. D. T. I is that part of your thinking at all or is it more near term when you conduct take on radio.

Yeah, Hey, Tracy its Ken.

And as you know and we've talked about we have a very established process for setting and our long term rate assumptions and in doing so we look at a variety of a forecast for long term rates on both internally and externally and and when we did that this year, we saw very little movement in those forecasts.

And therefore, we didn't.

Didn't see it appropriate to change our long term rate assumptions.

So we look at it very consistently and the way we've done it in the past and in terms of long duration targeted improvements and that's still a year and a half away, but we're making great progress and implementing that and we'll be ready to adopt that on on time.

But it won't be a transition you know, it's a it's and adoption date and that's the that's the method that we think is appropriate.

Okay, great thank him.

Next we'll go to Tom Gallagher with Evercore ISI. Please go ahead.

Hey, Charlie when.

When you mentioned you were looking at at life insurance risk transfer deals as well as the day can you provide a little bit of color on the process here is that a dual track process, where you're sort of simultaneously looking at both the a and life deals.

So you could get.

Either our transaction and the timing is unclear.

Unclear and between the 2 or any any way of sort of handicapping whether.

Youre more likely to do life insurance from a V. A first and then just relatedly.

Now now that you do have those 2 line youre looking specifically at doing risk transfer on are we now looking closer to maybe at the high end and a $5 billion to $10 billion.

Freeing up of capital that you guys had laid out.

So let me start and then Rob can Rob can elaborate so right now we've said that we're at a sort of $4.2 billion. If you include Korea, Taiwan and the full service business, we wont make predictions, we said 5 to 10, because we're going to take a very prudent approach to doing this and we don't have to do anything but.

If it makes sense for shareholders, we will do things and we'll see where we fall out and there, but that's and intentionally wide wide band.

In terms of annuities versus life insurance I think we have said that we are a we're focused on annuities right now, but we will also think about life insurance as we go forward Rob do you want on the add to that yeah just.

Tom that we have to see a distinct teams focused on each of those initiatives.

But as Charlie indicated the more important initiative from the standpoint, and the impact we believe on a.

Valuation to shareholders and overall valuation of the company is to get the EE transaction.

Don first and so it's been a priority, but not necessarily to the detriment of having resources that are dedicated to looking at the opportunities within the life sector as well.

Okay. That's that's helpful guys. Thanks, just a quick follow up day.

Based on the guidance, you've given out for 3 Q it looks like you're estimating virtually all of the COVID-19 impacts you're gonna come on group and not individual life is.

Is that is that what you saw on this quarter also and you can provide a little color about what you're seeing from COVID-19 impacts for group versus individual.

Yeah, Tom It's Andy I'll I'll take your question. So we saw and in second quarter on Covid mortality impacts in both our individual life insurance and group insurance.

And going forward for <unk>, Oh, you know similarly overall, we S. We estimate that we will continue to see impact from Covid mortality in both our group insurance and life, but I would note that that COVID-19 impact and try and is beginning to moderate as we go and into 3 Q.

I think what you're you're picking up there in ili is.

The COVID-19 impact and is being partially offset by the fact that third quarter is the highest quarter for our seasonal seasonal underwriting results. So that's that's why that looks a little different and the exhibit.

And Tom This is Scott on the international front.

We're continuing to see.

Really.

Really modest impacts across the board and Japan, we are seeing more of our impact in our Brazil operations and similar to the U S. We are seeing a mix of cost across both group and individual lines.

Okay. Thanks, guys.

And next we'll go to Elyse Greenspan with Wells Fargo. Please go ahead.

Hi, Thanks, and good morning, My first question on when you guys announced a full service Sal and good on up your buyback by 5 and 8 million for this year or so as we think about additional transactions with yea and perhaps life insurance should we think about some portion of the capital potentially going to incremental.

And we purchases as well as on the M&A bucket.

Yeah at least it's Charlie I'll I'll take your question.

And we've said all along we want to be good stewards of capital and we have and and we'll continue to demonstrate a disciplined and a balanced approach to the redeployment of capital with on our businesses and to our shareholders. So that's that's the overriding concept.

And to date, we've already returned a significant amount of capital to shareholders. We've returned over $2 billion and have increased both the dividend and the share repurchase authorization.

So we plan on over the next 3 and 3 years or through the end of 2020.3 to returned $11 billion of capital, but stepping back.

Let me share with you, how we think about capital allocation and in particular optimization of that capital because we look across all our businesses both domestically and internationally.

To ensure that we're optimizing capital deployment and will continue to look for ways to optimize that capital to maximize outcomes for shareholders and as we've stated to to the extent, we cannot find attractive capital deployment opportunities that meet our strategic and financial criteria.

And then we'll return excess capital to shareholders as you've seen us do and the past.

That's helpful. And then when we think about corporate costs are and I guess I'm thinking more of beyond 'twenty, and 2020 'twenty, 1 and salary into 2020, 2 and 2020.3.

Can you give us a sense of how corporate costs could come in on what do you think about bold implementation costs and how we should see it.

And those trending and the out here and then also the stranded costs from our full service requirements and finally.

The guide what are the 1.5 billion on those lines.

Here, but how should we think about costs on.

Right.

And at least it's Ken.

And as I mentioned earlier.

And we're making great progress with our transformation effort and including gaining efficiencies and and it is a ongoing and institutionalized and continuous improvement process at this point.

So we continue to expect to make progress towards our 750 million cost savings objectives by 2023, and we think we're well on track to AR to continue with that and again as we reallocate capital and redeploy capital will reallocate some of our overhead costs and.

And you can expect that to continue as well. So overall, we continue to make good progress with our with our cost objectives and I think you should.

And expect us to continue to make progress like we have and the past.

Yeah.

Okay. Thank you.

And our next question is from John Barnidge with Piper Sandler. Please go ahead.

Okay. Thank you with the group disability loss ratio coming down for 2 straight quarters how.

How should we be thinking about the relationship with the administrative expense ratio and that's been elevated for a few quarters to handle those increased cases.

So thanks, John and it's it's Andy Yeah. As you rightly noted we have had enhanced staffing levels and our group insurance business I think we talked about this on previous quarters, you know given given the nature of the pandemic and the morbidity effects, we have we have seen and.

And the enhanced level of S City, and absence claims and we've been maintaining higher higher staffing levels to make sure that we provide the right level of service. We we also have been making sure that we maintain our long term disability claims staff at and at higher levels. So you're definitely seeing that as a contributor.

To the elevated administrative ratio and the other thing I would mention is and then we've talked about this on previous conversations.

We have entered into a strategic relationship with Accenture.

To do a to do something on the operations for us and the nature of that we're implementing that as we speak and there's some transition costs basically that are doubling up but that's a onetime effect and over time, we expect everything we're doing and in our group business will bring down the admin ratio as part of our transformation efforts.

Okay and then.

Second question have you developed a sense of maybe vaccination rates of insured life blocks versus that of the general population.

John generally John we believe that the vaccination rate of the insured population is higher than the general population.

And that reflects a variety of factors between.

Age and geography.

And a number a number of things, but yes, we generally feel that the insured population has a higher vaccination rates.

Thanks for the answers.

Next we'll go to Jimmy Bula with J P. Morgan. Please go ahead.

And good morning. So first had a question on your Japan your outlook for the operating environment and Japan. Your sales were obviously pretty strong and Duke you, but it was mostly because of easier comps to what extent are you seeing and improvement in trends and the market as businesses are opening up.

Versus sort of ongoing challenges and <unk>.

And given the increase and the and the case count and the country.

Thanks, Jimmy This is Scott as you pointed out current quarter sales were well ahead of the prior year.

But that was significantly impacted by Covid really ramping up at that time.

But this quarter was only slightly below the first quarter and as you know our typical first quarter sales are quite strong because that's when we're closing out our annual.

Incentive measurement cycle.

Although the situation with Covid and its related impacts remains fluid dynamic whatever you want to call. It.

We are pleased with our strong underlying business performance this quarter.

Particularly considering the ongoing challenges of the global pandemic.

The demand for our products remain strong I'd, even say somewhat elevated because of awareness of threatening life issues.

And we continue to focus and Japan on our needs based selling approach and that's anchored by recurring premium death protection and then we add on to that supplemental other products like accident and health and retirement.

To meet our evolving customer needs. Our operations are also increasing and enhancing and adapting to the use of digital and virtual tools to support sales activities amid the social distancing restrictions. So that maybe that's a longer answer than you wanted I would say, we feel pretty good about the level that.

We're at we feel that we've adapted to the technology I have to acknowledge that it is still difficult to recruit and past levels in both Lps and Lcs amid the COVID-19 environment, but right now we feel pretty good actually quite good about how the business is performing and Japan.

Thanks and on on insurance when you had announced the deal I think you had mentioned that there was the potential for up to 1 billion 0.2 earn outs can you discuss how results have dragged worse as the metrics and that the business would have would've had to hit for those are for the earn out payments.

Hey, Jimmy it's Ken.

And we set that earn out.

And recall that it was above what we set as a baseline for for the for the performance of the business. It was it was to provide compensation if they were to exceed our original expectation. So.

And that's that's the way we thought about when we did the deal and that's that's continues to be the the way that earn out is positioned.

But I'm assuming that you don't think that the likelihood of you having to pay anything out as high right.

Again, it was there to provide upside if they outperformed our expectations and that's still the way it's designed.

Okay and when can you. So when would you have clarity on whether or not you're going to have to pay anything.

It extends to the end of next year. So we're we're midway through it at this point.

And it is based on the results so far or any color on like.

Yes, or no or sort of half day, I think we've been and the total Jimmy I think we've been pretty transparent with the results. So far theyre separately disclosed so you can evaluate them for yourself.

Got it okay. Thank.

Thank you.

And next we'll go to Mike Ward with UBS. Please go ahead.

Hi, Good morning. Thanks for taking my question I was just wondering on the retirement segment. Net flows are there was some pressure on my understanding is that it's being driven in part by some seasonality and and PRT flows coming through and mostly in the second half. So I guess, what I'm. Just wondering is should we be thinking about that phenomenon, becoming more prevalent.

Forward with full service being divested.

So somebody gets Andy I'll take your question, you know and as I think you're aware they are the PRT and LRT business their transaction oriented businesses, which means by definition on the sales in flow side, that's gonna be episodic, but on the outflow side you know, it's got to be more steady and consistent.

And and we're obviously have a pretty large large blocks given our past success. So you know I do think it's right to think of that that will produce quarter to quarter variation, but I would repeat what I said earlier on the call. You know we are a pioneer and a leader and that's it it has been quite competitive and we plan to be disciplined but given the.

And he's in front of us and given the strength of our platform. We think over the long term, we'll see good flows and what will be a net winner.

Great. Thanks, that's helpful. And then I was just wondering about the organic earnings mix change within the transformation specifically annuities are I know you've mentioned the natural V. A value running off but just wondering what we should be thinking for the trend and the dollar amount of earnings from annuities organically you know do you.

Have a placeholder that you used to think about what you expect just from the trend and organic.

Earnings from annuities ex any deals thanks.

So I'm sorry, Andy.

Andy go ahead okay.

So Mike.

What I would say is we expect that as we said we're going to be very committed to reduce the earnings from traditional variable annuities and that the run off effect.

<unk> is will produce 40 to 45 per cent of the of the overall result, and obviously, we would look to do transactions are to get the remainder of the impact.

So Mike it's Rob.

And I think the number that we've given out is that the legacy book runs off at about $3 billion a quarter.

And so you can use that as a sort of a metric for thinking about that and run off against the sales that were doing on our newer products, which are less market sensitive and very oh.

And a very attractive from a return profile you can look at the offset between those 2 to get a sense for how the earnings profile with Dell runoff absent anything happening with markets. Obviously, what you've seen is despite that net run off our accounts that are up as a result of continued appreciation in the market.

Thanks very much.

And with no further questions I'll turn the call over to Charlie Lowrey for closing remarks.

Alright, Thank you very much thank.

And thank you for joining us today I hope our performance this year the progress we're making on repositioning the portfolio advancing our cost savings program and our thoughtful consideration and capital deployment confirms that our strategy to transform Prudential remains on track, we will continue to act with conviction and with speed to evolve.

Our company and deliver greater financial opportunity to all of our stakeholders. We look forward to keeping you updated on our progress and thanks again for your time today.

Ladies and gentlemen, and that concludes your conference call for today and you may now disconnect.

Okay.

We're sorry your conferences ending now please hang up.