Q3 2021 Prudential Financial Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Prudential's Quarterly earnings Conference call. At this time, all participants have been placed in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time if.
If you should require any assistance during the call. Please press star zero and an operator will assist you offline as a reminder, today's call is being recorded I will now turn the call over to Mr. Bob Mclauchlin. Please go ahead.
Morning, and thank you for joining our call representing Prudential on today's call are Charlie Lowrey, Chairman and CEO, Rob Falzon, Vice Chairman and he Sullivan head of U S businesses, Scott life their head of international businesses.
And Dan <unk>, Chief Financial Officer, and Rob Axel Controller, and principal accounting officer.
Art with prepared comments by Charlie Rob and Ken and then we'll take your questions.
Today's presentation May include forward looking statements is possible that actual results may differ materially from the predictions we make today.
In addition, this presentation may include references to non-GAAP measures.
For a reconciliation of such measures to comparable GAAP measures and a discussion of factors that could cause actual results to differ materially from those in the forward looking statements. Please see the slide titled forward looking statements and non-GAAP measures in the appendix to today's presentation and our quarterly financial supplement both of which can be found on there.
Our website at Investor Prudential Dot com.
And with that I'll turn it over to Charlie.
Thank you Bob and thanks to everyone for joining us today as always we hope you and your families remain safe and healthy.
Prudential delivered solid financial results for the third quarter, reflecting our strong investment performance and high demand for the products, we have introduced to support our customers.
They solve their financial challenges in a changing world.
We also made significant progress executing on our transformation strategy to become a higher growth less market sensitive and more nimble company.
First we reached agreements to divest our full service record keeping business and to sell a portion of our traditional variable annuities advancing our pivot towards less market sensitive and higher growth businesses.
Second we continue to advance our cost savings program and remain on track to achieve $750 million of savings by the end of 'twenty 'twenty three.
And third with the support of our rock solid balance sheet, we're maintaining a disciplined and balanced approach to redeploying capital.
I'll provide an update on each of these transformation initiatives before turning it over to Robyn Ken.
Turning to slide three.
In September we reached an agreement to sell a block of our traditional variable annuities to fortitude re.
This divestiture, which is expected to close in the first half of 2022 represents approximately 20% of our traditional individual annuity account values and significantly advances our goal of cutting in half the earnings contribution of legacy variable annuities products through a mix of strategic transactions.
And natural runoff.
This transaction expands upon our prior divestiture activity, including the agreement we announced in July to sell all our full service record keeping business and the successful completion of the sales of our Taiwan and Korea insurance businesses.
As a result of these divestitures to date, we expect to generate net proceeds of approximately $6 billion by the first half of 2022 and we continue to explore additional opportunities to de risk in force blocks of business.
With the pending sale about full service record keeping business and our annuities block transaction, we have combined our individual annuities and retirement businesses to better serve the retirement needs of both individuals and institutions.
And support our growth strategy.
Turning next to our cost savings program on slide four.
We are progressing well and remain on track to achieve our 750 million dollar cost savings target by the end of 'twenty two 'twenty three as we look to reduce expenses, while improving both the customer and employee experience.
To date, we have achieved 590 million in run rate cost savings exceeding our $500 million target for the full year. These.
These savings include 145 million achieved in the third quarter for a total of $385 million this year.
Turning to slide five.
We continue to demonstrate a disciplined and balanced approach to capital deployment by enhancing returns to shareholders, reducing leverage and investing in the growth of our businesses all supported by a rock solid balance sheet.
Year to date, we've returned $3 $5 billion to shareholders, including $2 1 billion of share buybacks and $1 4 billion in dividend payments, reflecting a 5% increase in our quarterly dividend compared to last year.
And we're targeting to returned $11 billion of capital to shareholders by the end of 'twenty two 'twenty three.
During the third quarter, we also took steps to enhance our financial flexibility by redeeming $900 million of outstanding debt. This reduced financial leverage and generated 30 million in annual interest savings going forward.
We also continued to deploy capital in our businesses to drive long term growth. For example, this quarter, we completed a $5 billion funded pension risk transfer transaction, which is the fourth largest transaction in the history of the PRT market and demonstrates our expertise ability to execute at scale and.
To this market.
We also deployed capital to support our ongoing.
Pivot to less interest rate sensitive and higher growth products, including our flex guard and variable life products are.
Our capital deployment is supported by our balance sheet strength, including highly liquid assets of $3 $8 billion at the end of the third quarter and our capital position continues to support a double AA financial strength rating.
Turning to slide six I'm pleased to report a meaningful expansion of our environmental social and governance commitments.
Earlier this week, we announced our commitment to achieve a net zero emissions across our primary global home office operations by 2050, with an interim goal of becoming carbon neutral by 2040.
We're also carefully assessing the emissions impact of our investment portfolio.
As an immediate action, we will restrict new direct investments in companies that derive a material portion of their revenues from thermal coal.
Separately on the social front, the Prudential Foundation achieved an important milestone during the quarter.
Reaching $1 billion in funding to partners aimed at eliminating barriers to financial and social mobility around the world since making its first granted in 1978.
These investments include funding aligned with our racial equity commitments to support organizations such as those supporting minority owned small businesses and historically black colleges and universities that foster black economic empowerment and address the racial wealth gap.
This milestone by the foundation that follows the 1 billion dollar investment Mark achieved in our impact investing portfolio in 'twenty 'twenty.
We are confident these actions taken alongside of our strategic transformation will help us build a more sustainable company on behalf of all our stakeholders.
Thank you for your time, this morning, and with that I'll turn it over to Rob.
Thank you Charlie I'll provide an overview of our financial results and business performance for our P. Jim U S and international businesses I'll begin on slide seven with our financial results for the third quarter. Our pre tax adjusted operating income was $1 8 billion or $3.78 per share on an after tax basis.
Reflecting the benefit of strong markets and business growth, which exceeded the net mortality impacts from COVID-19, PJM, our global asset manager had record high asset management fees driven by record account values over of over 1.5 trillion dollars that were offset by lower other related revenues relative to the.
Elevated level in the year ago quarter, as well as higher expenses supporting business growth.
Results of our U S businesses increased approximately 29% from the year ago quarter.
And higher net investment spread driven by higher variable investment income and higher fee income, primarily driven by equity market appreciation, partially offset by less favorable underwriting experience driven by COVID-19 related mortality.
Earnings in our international businesses increased 14%, reflecting continued business growth higher net investment spread lower expenses and higher earnings from joint venture investments. This increase was partially offset by less favorable underlying underwriting results, primarily driven by higher COVID-19 claims.
Turning to slide eight P. M continues to demonstrate the strength of its diversified capabilities in both public and private asset classes across fixed income alternatives real estate and equities as a top 10 global active investment manager Peter.
<unk> investment performance remains attractive with more than 94% of assets under management outperforming their benchmarks over the last three five and 10 year periods.
Third party net flows were $300 million in the quarter, including institutional net flows of $700 million, primarily driven by public fixed income flows.
Modest retail net outflows of 400 million were due to equity outflows from sub advised mandates and client reallocations due to rising rates and inflation concerns as the investment engine of Prudential PGM benefits from a mutually beneficial relationship with our U S and international insurance businesses P. Jim's asset origination capabilities and investment management expert.
<unk> provide a competitive advantage by helping our businesses to bring enhanced solutions and more value to our customers and our businesses in turn provide a source of growth for PGM. So we're affiliated flows that complement its successful third party track record of growth.
<unk> asset management fees reached another record up 13% compared to the year ago quarter. As a result of strong flows driven by investment performance and market depreciation Pgm's alternatives business, which has assets in excess of 250 billion continues to demonstrate momentum across private credit and real estate equity and debt.
Benefiting by our global scale and market leading positions as an example, peters private businesses deployed almost $12 billion of capital this quarter, 28% more than the year ago quarter. This strategic focus on expanding higher yielding products has resulted in stable fee rates over time despite industry wide.
Pressures.
Now turning to slide nine 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 shift our business mix away from low growth capital intensive and interest rate sensitive products and businesses transform our capabilities and.
Cost structure and expand our addressable markets.
In addition to the agreement that we announced in July to sell our full service retirement business. This quarter. We also announced the sale of a portion of our legacy in force annuities block to reduce the overall contribution of traditional variable annuities. These transactions are significant steps forward in shifting our business mix and product portfolio to reduced market sensitivity and.
Accelerate long term growth in addition, our <unk>.
Activists have worked well demonstrated by continued strong sales of our buffered annuity products, which were $1 $3 billion in the third quarter, representing 88% of total individual annuity sales.
Since the launch of flex start in 2020 sales have exceeded $6 billion. These sales reflect customer demand for investment solutions that offer the potential for appreciation from equity markets combined with downside protection.
We've also exercised discipline through frequent pricing actions and our sales continued to benefit from having a strong and trusted brand and highly effective distribution team.
Also our individual life sales continued to be strong and reflect our product strategy with higher variable life sales compared to the year ago quarter.
Our retirement business reflected strong sales in the quarter, including a $5 2 billion dollar funded pension risk transfer transaction and $1 6 billion of international reinsurance transactions, demonstrating our market leading capabilities.
With respect to assurance, our digitally enabled the distribution platform total revenues our primary financial metric as we concentrate on scaling the business were up 47% over the prior year quarter. During the third quarter, we increased the number of agents to prepare for the seasonally higher expected demand of the Medicare annual enrollment.
Period that occurs in the fourth quarter.
Turning to slide 10, 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 emerging markets.
Across both life planner and Gibraltar operations were higher than last quarter amidst the state of emergency in Japan that ended on September 30th.
However, sales were lower than the prior year quarter, which were elevated ahead of the U S. Dollar denominated product repricing in Japan that we implemented in the third quarter of last year. We also continued to see sales momentum in Brazil, particularly within the third party distribution channel. We remain encouraged by the resiliency of our unique distribution.
<unk>, which have supported the continued growth of our in force business and with that I'll hand, it over to Kent.
Thanks, Rob I'll begin on slide 11, which provides insight into earnings for the fourth quarter of 2021 relative to our third quarter results pre tax adjusted operating income in the third quarter was $1 8 billion and resulted in earnings per share of $3 78 on an after tax basis to get a sense for.
How our fourth quarter results might develop we suggest adjustments for the following items first variable investment income outperformed expectations in the third quarter by $570 million.
Next we included a placeholder for COVID-19 claims experience in the fourth quarter that is a similar level to our experience in the third quarter. While we have provided this placeholder for COVID-19 related claims experience the actual impact will depend on a variety of factors such as infection and fatality rates geographic and demographic.
Mix and the continued acceptance and effectiveness of vaccines.
Third we expect seasonal expenses and other items will be higher in the fourth quarter by $140 million fourth 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 and last we expect the fourth quarter effective tax rate to normalize. These.
Combined get us to a baseline of $2 27 per share in the fourth quarter I'll note that if you exclude items specific to the fourth quarter earnings per share would be $3 and five.
The key takeaway is that our underlying earnings power has increased from last quarter driven by the benefits of business grow our cost savings program and market appreciation. While we have provided these items to consider please note that there may be other factors that affect earnings per share in the fourth quarter.
Turning to slide 12, we continued to maintain a robust capital position and adequate sources of funding our capital position continues to support a double AA financial strength rating and have substantial sources of funding.
Our cash and liquid assets with $3 8 billion, which is greater than three times annual fixed charges and other sources of funds include free cash flow from our businesses and contingent capital facilities.
Turning to slide 13, and in summary, we are executing onto divestitures. We are on track to achieve our targeted cost saving 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.
Thank you, we'll now be conducting a question and answer session. We ask you. Please ask one question and one follow up then return to the queue, if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he'd like to remove your question from the queue for.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing star one and once again, we ask you. Please ask one question and one follow up then return to the queue. Our first question today is coming from Erik bass from Autonomous Research. Your line is now live.
Hi, Thank you.
So we've recently seen asset managers, such as T Rowe and Franklin announced sizable deals to acquire private and alternative asset capabilities and transactions that were generally well received by investors I'm wondering if you see more properties like these available in the market and would this be the type of programmatic M&A that you might consider for PJM.
So thanks, Eric It's Andy and good morning, I'll take your question. So let me start by reiterating that PJM is a business that has demonstrated a incredibly strong ability to grow organically year after year and that's really due to the success of our multi manager model.
And the teams very strong execution, we've seen 55 billion in net flows over the last five years, and we've seen 11 billion and year to date flows.
As we've talked about in the past, though are we do want to build upon that track record with programmatic bolt on M&A.
And we've been very assertive in making sure that we're both in the no one in the flow and we are aware of these transactions in the marketplace.
We're leaned into areas that are higher growth and higher fee oriented areas. Three I would mentioned, we're looking to continue to globalize the business specifically in Europe and Asia. We're looking to continue to build on our already strong alternatives business, where we have 250 billion in assets under management and our acquisition of <unk>.
Tanner capital Partners is a great example of that and we're looking in the area of real assets you know as always we're gonna be disciplined in what we do and in how we deploy capital.
To your question about sizable deals.
We very much feel if you look across our managers in PJM. We are at scale. So it's unlikely that you would see us do what I would call a big pure play scale deal.
But to the degree that we we would look in and potentially do something larger it.
It would come with a key capability or strengthen us in a material way in a key geography and also bring along with it.
Bring along with it synergies.
Got it that's helpful. Thank you and then I was hoping you could talk a little bit or provide some more color on your group claims experienced this corner and particularly the trends youre seeing in both group life and disability.
Sure Erika, it's Andy I'll take that one again and let me let me start on the group life side. So as I'm sure you know and you've seen it in the press a delta has had a large impact on the country.
The deaths are in three Q were three times, what we're expecting we were expecting 30000 deaths and and we saw a 95000.
You know we are a top three life and disability carrier, so and because of that we have a very big and broad book of business and Theres really three effects that I would point to that we saw in the quarter first our U S deaths in the age group between 35, and 54 tripled from a percentage perspective, and we cover.
A lot of younger workers. The average age of our group block is in the neighborhood of 46 years old.
Second as as as you probably know and expect we have a large national account book of business and and and have.
A very strong share in healthcare in retail and manufacturing. These are areas, where frontline workers are out and about by the definition and nature of their job and therefore more exposed and then the third thing I would mention is Ah Ah Ah.
About 50% of the pandemic input impact we saw on the life side.
Came from claims are in the southern United States now.
So clearly this is very unfortunate that a we keep experiencing this but we're proud that we're able to deliver on our promises and help these families.
As I flip to the group disability side I would frame. It as you know we're seeing what we expected to see and we're seeing what we prepared for as an organization and as I frame. This this this impact on the disability side was not the predominant impact on group insurance. It was the life side, but having said that the.
The benefit ratio was somewhat elevated at 85, 9% there were really two effects that were that were at play.
Our fee based S. T D. In absence business, we are continuing to see a higher level of absence, an STD claims that really leads to more expense in the business and you see that show up in the admin ratio.
On the L T D side.
We talked about in previous quarters, we had both put up I'd be NR, but also we had built claim staffing to be able to be ready to handle what we expect it to come which we thought we would see enhanced incidents due to both the morbidity impacts of the pandemic, but also the impacts from the unemployment.
Subsequent unemployment and we are seeing that our incidents on the L. T. D was up about 10% in the quarter and our severity was up as well about 10% in the quarter, but again. This is what we expect it to see and this is what we prepared for so we're handling it well and we would expect obviously for this to improve in <unk>.
Site overtime.
Alright, thank you.
Thank you. Our next question today is coming from Ryan Krueger from K B W. Your line is now live.
Hey, Good morning first question was what.
What areas are you focused on additional.
Derisking does that include more potential variable annuity transactions.
And then as individual life also part of the consideration.
Yeah, Hi, Ryan its Charlie Lowrey I'll take that.
As we stated in our opening remarks, we're making significant progress on executing to become a higher growth less market sensitive and more nimble business and this includes as you rightly pointed out the sales of our full service record keeping business in our block of traditional variable annuities as well as the completed sales of what we do.
I talked about in Korea, Taiwan, Italy and Poland.
We have also noted to your point that in the past we're looking at other blocks of business that May may include the areas that you spoke about so we're accomplishing a significant amount, but we still have a lot of work to do I would note that in terms of our overall goals.
We have which we stated is between five and $10 billion to capital.
Capital that we wanted to free up to reposition we're already $6 billion into that right. So we don't need to do other deals at this point, we're very happy with the economics of the deals we've done as.
As we think it reflects the high quality of the businesses, we have but will only transact other deals if they make sense for all our stakeholders as we go forward.
Thanks, and then.
I have a follow up on M&A.
You've done a few deals, but they've been on a pretty small side I think in terms of capital.
Have a fair amount of capital coming in next year from the transactions you've announced do you still anticipate ultimately redeploying.
That additional capital freed up into M&A transactions over time.
Or if not would you consider them up in the buybacks again.
I think what we've always said in the past.
Ryan is that if we can't find good uses for that capital, we will return that capital to stakeholders, but.
What I would also say is that we are looking both organically and inorganically at ways of redeploying that capital in organic organic investment is another way of doing that so we'll be very disciplined as we go forward in looking at potential acquisitions that M&A is going to focus on again asset.
<unk> and emerging markets as we increase the percentage of earnings from growth areas and and reduce the percentage of our legacy traditional variable annuities.
But we will we'll continue to focus in a very disciplined way on those two areas Andy mentioned in his previous comment that the acquisition of Montana.
A capital partners is as an example of that but we'll we'll look at at the pipeline that's out there and see if they're good deals to do if they're not we'll return we will return capital to shareholders as we have in the past.
Thanks, Charlie.
Yeah.
Thank you. Our next question today is coming from Humphrey Lee from Dowling and partners. Your line is now live.
Good morning, and thank you for taking my questions. My first question is regarding the fourth quarter outlook for assurance IQ.
Can you talk about the preparation you've done so far in terms of.
For the enrollment period, and how confident are you in terms of kind of generating the necessary level of activities to support the breakeven ally.
Humphrey Good morning, it's Andy and thanks for your question. So as you know and as we've talked about in the past, we do expect our revenue assurance IQ to be strongest in the fourth quarter given the annual enrollment season.
Season, a Medicare advantage remains a very strong opportunity for us.
If you look last year, we had a little under a 1% share in that marketplace and that marketplace is growing at 10% per year. So they're there theres a lot of a lot of space to operate.
You know as you saw in the quarter, we continue to invest in the platform both in the business overall, but specifically in the quarter, we invested in building out our W. Two Prudential agent force and what we saw is coming into the annual enrollment period season, we came in with more age.
Since then we had last year and those agents were operating at a at a higher level of productivity right out of the gate. So we're encouraged versus last year.
As I've said before we're confident in what they platform can do for us in the long term and its ability to scale.
And again I'm sorry.
Hey, Humphrey it's Kent.
If I could add.
And he said we are well prepared for the purposes of the baseline for the fourth quarter.
We just simply put in a placeholder for assurance at a breakeven.
Because we wanted to neutralize for the seasonality, but it's not a forecast it's just a placeholder to neutralize the earnings for the fourth quarter.
Okay got it I see yeah, because I was just thinking like what type of revenue level would you need to have in order to get to that breakeven target, but it seems like this is just more of a placeholder as opposed to anything.
That's right.
Okay. Alright, My second question is really cutting PJM, especially on the retail side the flow seems to be probably have softened a bit over the past couple of quarters can you provide some color in terms of what youre seeing there and what kind of actions that you've taken to improve retail flows.
Yeah Humphrey, it's Andy again, thank you for your question on PJM.
As we've discussed in the past, we will see natural variability and variation quarter to quarter when it comes to flows.
This quarter in aggregate, we saw modest inflows driven by a positive result on the institutional side. Thanks to our work in fixed income and real estate we.
We did experience a modest outflows on the retail side as a result of client reallocation.
Out of equities and in the fixed income space into shorter duration strategies.
What I would say is in any given quarter you could experience client reallocations and that can go either way. What we think is very important to keep it keep your eye on is the long term track record.
You know I'd say and I said as I've said this is a business where we've experienced a lot of flows over the long term and $11 billion year to date.
It really comes from both outstanding capabilities and strong execution, we have a broad and diversified product portfolio in PJM.
And we as you've seen in our release, we continue to have exceptional investment performance with 94% plus are outperforming benchmarks in the three five and 10 year period.
So we're confident that while there'll be variability quarter to quarter potentially in the near term we will be a net winner over time.
Got it thank you.
Thank you. Our next question today is coming from Tracy Bengie from Barclays. Your line is now live.
Thank you.
As seen this quarter. So far is an early glimpse on L. D. P. I with some company disclosure there was one that with quantitative another more qualitative. Your 10-Q is not out yet but are you planning to add any disclosures there like either now this quarter or in the near future.
Hey, Tracy it's Ken.
We continue to evaluate the new standards and refine our methods and.
We continue to adjust as we move towards the effective date and the effective date is still over a year away and the.
The impact also will be subject to rates at the time of the effective date as well as the actions that.
That we have been taking and will continue to make to shift our business to be less market sensitive.
And that'll have an impact obviously at the time of the effective date. So overall, we're making good progress on implementing the new standards, but it's too early to provide estimates and that's that's where we are.
Okay, maybe just one question on that on your Japanese business.
To the extent that.
Some of them needed product does that act like a mitigate at all your view on.
When it was liabilities have to be mark to market.
Yes, we've had a long standing capability and competitive advantage in U S dollar business in Japan.
And again, our Japan business is focused on.
Starting the lifetime needs of our customers with a primary focus on death protection, including those that are denominated in U S dollars. It does have a long duration profile.
And it's supported with robust reserves and a high quality investment portfolio and as you know very financial resilience.
Again, we're not we're not it's too early for us to provide estimates.
But overall you know, although the accounting will be modified we feel very good about the overall profitability of the business the risk profile and the financial strength of our Japan business, including the U S dollar business.
Okay. Thank Kent.
Thank you. Our next question today is coming from Andrew.
Credit Suisse. Your line is now live.
Hey, good morning.
First question is a follow up on your capital management Charlie.
You made a continent to comment you would look at the pipeline in that.
Organic investing is a way to deploy the capital so could.
Could you clarify what you meant by organic investing in the amount of money that might that require and then with regard to the.
Pipeline.
Color on that.
The two deals you did were rather small.
Is it possible that there might not be anything that that really intrigues, you and you might.
You now have other uses for that capital.
Sure. So a couple of comments taking them in order in terms of organic growth. If you look at <unk>. As an example, so we have pivoted away from Oh, the variable annuities with guaranteed living benefits and then started with new.
Ducks and are investing and investing in those and supporting those as they grow and that really ties into becoming a less market sensitive company and frankly, a higher growth company. So.
That's an example, so we'll look at we'll look at the product pivots that we do as an example of of organic growth in terms of inorganic growth I think there are going to be plenty of opportunities as we go forward, especially in the areas that we want to invest in namely asset management.
In emerging markets some of the growth areas. So oh over time I think we will find good places to put the capital and as always if we don't find places to put that capital to the extent that we don't have attractive opportunities are there.
That meet our strategic and financial criteria, we'll return the excess capital to shareholders as we've done in the past.
Got it that makes sense, Charlie and then with regard to your international businesses in Japan, Gibraltar life parameters sale.
Sales were off pretty sharply in the 30 plus percent range.
<unk> press release you cited.
The dollar denominated product repricing that went on in the year ago quarter.
Wanted to catch catch these products.
Could you clarify for us.
Whether those products written a year ago were adequately priced at adequate returns was there a possibility for anti selection and now going forward.
With an emergency act and kind of that getting out of the rear view is there a possibility that as COVID-19 subsides. These these sales could really jet upward.
Okay.
Thanks, Andrew This is Scott I'll go ahead and take that one.
As you recall, we took significant crediting rate actions.
Last August on our U S dollar.
Products and that's really just part of our ongoing effort to maintain strong profitability on all of our new business activity and that's across Japan.
Japan, but across all of our other operations.
And as is typical that does create a sales surge ahead of the crediting rate, which typically pull sales.
Forward from a quarter or two.
And then additionally, I would say the impact of Covid.
Emergency states as well as the Olympics in Japan also dampened sales for a period.
But we are happy.
With the recovery that we've had in sales and if you look at the third quarter.
Quarter over quarter it looks good.
In Japan, we benefit from having multiple distribution channels, we've got life planners life consultants the affinity.
Channel Bank and third party distribution and further I would say that we've made significant progress in using and enhancing.
Technology, and new strategies to support both our customers.
And our distribution channels. So I think all of that put together says we feel pretty good about the sales momentum that we have and we maintain a strong discipline and a continuous watch on our pricing actions and where we're priced now quite frankly, we don't foresee any material repricing.
Action so on the horizon.
In Japan, and I think we made the actions that we took a year ago in a timely manner.
Ken what are you going to say something.
Oh, it was just to say.
Our Japan businesses consistently.
Written business above its cost of capital we were happy with the returns last year and it's really the.
These pricing actions that keep us in good position from both a profitability, but our customer value proposition. So it's been a pretty consistent story.
And Andrew it's Charlie if I could just ask you.
Andrew if I could add one other thing and that is what what Scott alluded to which is that.
We have been extraordinarily disciplined in looking at the pricing of all our products around the world not just in Japan, but as Scott said and all the other countries, including the U S and we've been really pleased as we've as we've increased the pricing as we've had to with the low interest rates the strength of the sales and I think that.
Comes from three three points of view one is the strength of our brand.
Second is the strength of the solutions, we provide such as with the new introduction of Flex Garden. This example, and third is the quality of our distribution.
Which is both our in house distribution and through third parties. So we have plenty of different.
Ways of distributing the product and I think that in years to our benefit.
Thanks, Charlie.
Yeah.
Thank you. Our next question today is coming from Tom Gallagher from Evercore ISI. Your line is now live.
Good morning.
Individual mortality held up pretty well this quarter. Despite the increase in Covid mortality and also by some measures.
There was elevated non COVID-19 mortality also this quarter.
You know in terms of describing why why do you think your block only had minor.
Minor sensitivity can you comment on what that might be is it fact, just vaccination levels older age.
Democrat.
Demographics, and geography or any anything you can share on that.
Yes, Tom It's Andy I'll take your question and thanks for the question. So when you think about our individual life block and in the third quarter I I'd go through a series of items here I think we did see lift third quarter I think as you're aware is our highest underwriting gain quarter. So there's definitely seasonality that's showing and there is.
We also saw in the quarter, a fewer large face amount claims.
And again, that's the type of thing that will vary quarter to quarter. This quarter, we happened to just see a fewer of those I guess that that when it comes to the pandemic effect in particular I would I would say that our block tends to be more oriented towards the northeast as far as geographic distribution.
And I think it's pretty clear that from a U S death perspective, it was heavier in the southern region of the United States.
And then yeah, you you've mentioned this but the average age of our of our Ili block tends to be older.
And those are those are older age demographics tend to have higher higher vaccination rates.
Gotcha, Okay. Thanks, and then for my follow up just curious any any updates on economic solvency regime in Japan.
Is that still I think last I heard it was like 2025 is that is that still the timing and if so how do you feel that you're positioned to adopt that.
Hey, Tom It's Rob I'll take a shot at that too.
To our knowledge there has not been any change in the timing of that.
The J FSA has been well synchronized with the broader international Ics or the international capital standard that's being rolled out and so their plan has always been to sort of be slightly behind the implementation of that as their.
New solvency regime. This is closely aligned to that.
And with respect to our Japan business I think as both Ken and Scott had pointed out the underlying economic store, Japan business are incredibly strong and so we would hope that under both of those that are under both accounting.
Counting in regulatory constructs that that ultimately is visible having.
Having said that we would.
We have articulated some concerns as others in the industry have with regard to both the international capital standard that's being proposed in terms of some fundamental flaws that continue to persist there and then to the extent that those carryover into Japan.
Economic solvency regime that.
That would be a concern that we would have but we continue to be an active dialogue both on the international front and in Japan, along with a number of our peers and we're optimistic that through that continued engagement. We can ensure that the economics of the underlying business can appropriately reflected in the in the regulatory constructs.
Great. Thanks, Rob.
Thank you. Our next question today is coming from Elyse Greenspan from Wells Fargo. Your line is now live.
Hi, Thanks. Good morning, My first question on the PRT business you guys had some pretty good activity in the third quarter can you just talk about the pipeline there.
For the fourth quarter, I know that tends to be heavy towards the end of the year and any initial outlook for 2022.
Yeah at least hi, it's Andy I I'd be happy to take the questions. So we think the market in <unk> was in and around 17 billion and that's very consistent with what we communicated on the previous couple of calls that we felt the back half of the year would be very healthy.
You know the average funded status for plans around 97%, which is the best level in 10 years and they still have a very strong desire to transact. We think the total market size for the year will be in the neighborhood of 40 billion.
And we think that that level of momentum will continue in the near term you know.
This is a space that in many ways, we're a pioneer in and very much a leader in this space as we've said as we've said in the past we are very committed to it and we are going to pick our spots you.
You know, we're we're very confident that the strength of our brand and our capabilities and our track record, we're going to gain more than our fair share over time, but in the near term. We do think the market is going to be healthy.
Okay. Thanks, and then my second question going on here.
Right.
I think you gave some good color on electrical would be.
Elevated calls Boston is there in the third quarter.
As we think about the fourth quarter in 2022 do you expect that you would see losses in line with kind of that same elevated severity that you've been seeing and then how much of your boxes that you set up so far.
R R.
So at least maybe I'll start and then and then Ken can follow up so I kind of went through the dynamics of what's causing whats, causing the elevated mortality.
You know the three predominant things being the average age the predominance of our book and in certain segments and the distribution of the claims are being in places where the vaccination rates are lower we would expect those those underlying drivers to continue near term ended the fourth quarter.
Yeah at least in terms of IBM.
We stayed pretty current on claim activity you see you know the the leg is measured in weeks and we have a pretty established.
Established process to measure that and so that continues.
In terms of an.
On outlook for 2022, we have not provided.
And outlook.
The current quarter and based upon as Andy described just sort of the continuation of current trends.
We think that's.
The most reasonable approach.
The situations very unique and very dynamic.
A lot of variables at play, whether it's social distancing or other preventive measures or vaccines and treatments and variance so.
We've in.
Our baseline we've we've extrapolated the current trends and that's what that reflects.
Thank you.
Thank you. Our next question today is coming from John Barnidge from Piper Sandler Your line is now live.
Thank you just sticking with the group business.
Given the enduring nature of the pandemic. Unfortunately.
Is there a need to build more administrative expenses to support that effort.
So John it's Andy.
I think as we've talked about in the past. We are we actually have a have a higher level of both call and claims staff across our product lines. We hired out ahead of what we expect it to to see so we were well prepared as it was coming in but we think that that that level is already reflected in.
The admin ratio that you see.
That's great. Thank you and then maybe my follow up just wanted to touch on that comment around L. T D incidence increase in frequency and severity how.
How should we be thinking of this maybe in light of vaccine mandates, there's headlines about Boeing and Raytheon and percentage of workers. There I'm just trying to think through that.
In light of cruise focus within the group market. Thank you.
So so it's Andy again, I guess I'd say two things that are our expectation for the number of deaths in the quarter take into account what we what we think the current our current approaches in the employer marketplace and the current landscape of AV mandates you know to the <unk>.
Gree, our book tens AR tends to be more of a national account book of business and there are more mandates are.
You know in that segment I think that would be a would be a help to us in it and a tailwind.
Great. Thank you for your answers and best of luck.
Thank you. Our next question today is a follow up from Tracy Bengie from Barclays. Your line is now live.
Thanks for taking another question I just wanted to touch on your upcoming combination of individual and institutional retirement is it is this just to simplify our operational model. After the pending full service sale or should we expect anything.
Coming out of that either on the expense and revenue side.
So Tracy it's Andy let me take your question of of you know about the driver. So first and foremost this is really a statement about our commitment as a firm to help things solve the their retirement needs in America.
And you know we continue to see a real need in the pension Derisking area. We continue to see the need to lean in and help individuals in their retirement accumulation of Decumulation journeys.
This was really about taking two businesses that had great momentum that we're market leaders in their space and combining together the market leading talent in the market and market leading capabilities you know the benefits, we expect to see as it will accelerate our decision making as we go as we continue to go after the retirement need and sharpen our focus.
On the retirement space so.
From that that was really the driver and it's an important step in and how we're transforming our business mix and system.
Thank you.
Thank you. Our next question is coming from Jimmy Mueller from Jpmorgan. Your line is now live.
So just a follow up question on Charlie your comments around dispositions and or a derisking. The reinsurance type transactions I think I think you mentioned annuities essentially and individual life as well, but how do you think about long term care in that context and is that a business there.
There are you seeing counterparties emerge or is it still like the bid ask is do I do.
Expect a transaction in the near future.
Yeah, I'll I'll start and then maybe Ken can add to the Jimmy I I think what what you observed is is exactly correct. So it is it is something that we would obviously look at our if the market was there, but I think the the market is extraordinarily thin at this point for bidders on blocks like that.
I would also observe that we have a we have a very a relatively small block of business and a relatively young block of business.
And as a result.
And one frankly, but we feel reasonably good about in fact quite good about so.
If we are as we've said going to be very disciplined about.
The divestitures, we make.
And with an eye toward creating shareholder value, we need to get make sure that the.
If we did transact something that it would be and economic transaction that was in the economic interests of our shareholders and given the the young block are that it is.
The bid ask spread if you will can it can be quite large so we.
We will continue to evaluate options if they come up but at this point, we are continuing to run the book and the book is going quite well Ken.
No I haven't.
I think that covers it well Charlie nothing to add for me.
And then just on the can you talk about the operating environment in your two largest international markets in Japan and in Brazil, obviously different stages.
In terms of Goldman in both the markets, but how how are those businesses hearing and what your outlook is for sales.
Given the pandemic and economic conditions in Latin America.
Hi, well why don't I.
Why don't I start Jimmy with.
With Japan, which you know I think I covered a little bit before but I would say that.
The combined impact of the states of emergency and then the Olympics.
Really did slow things down and the effect of that really ran through September.
September 29th with the with the state of emergency.
We've come out of that nicely and we.
We really feel that our channels had benefited from our use of technology as have our customers. During this period. So we really feel like our our sales organizations have adapted well to the new environment and now that we see things are you know out of a state of emergency and returning to a more.
<unk> seen a good.
Sequential quarter.
I'd also say that you know recruiting has been somewhat challenged during a COVID-19 environment. We've also learned how to recruit and bring people on board and are in a more remote environment, but I think as we come out of Covid, both the actual sales activity and the ability to recruit will continue to improve and we see it.
That is a is a positive sign in.
In Brazil, our sales have been improving from the combination of having a strong life planner model, but more importantly, we've been building our third party distribution and most recently that's now exceeded a third of our sales and you know just a few years ago that was closer to 10%. So we've.
Seen positive momentum from the channels that we sell in.
Covid hit harder quite frankly, a bit harder in Brazil than it than it did in Japan and again, we're really happy with the resiliency that our sales force has has shown there. So overall, we feel good about the trends in both markets and I think the most recent quarter is it.
As indicative them why why we maintain that confidence.
Okay. Thank you.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to Mr. Lowery for any further or closing comments.
Thank you and thank you all for joining US today, our performance this year and the progress we're making on repositioning our business mix and advancing the cost savings program, along with disciplined capital deployment reinforces our confidence in our strategy to transform prudential and generate substantial growth we remain optimistic about the opportunity.
To continue to deliver strong financial outcomes to all our stakeholders. Thank you again for joining us today and for your time.
Thank you that does conclude today's teleconference and webinar you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.