Q4 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 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 would now turn the call over to Mr. Bob Mclaughlin. Please go ahead.

Good morning, and thank you for joining our call.

Presenting prudential on today's call are Charlie Lowrey, Chairman and CEO , Rob thousand Vice Chairman.

Andy Sullivan head of U S businesses, Scott <unk> head of international businesses Ken.

<unk>, Chief Financial Officer, and Rob Axel Controller, and principal accounting officer.

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 in.

In addition, this presentation may include references to non-GAAP measures.

For a reconciliation of such measures to the comparable GAAP measures and a discussion of factors that could cause actual results to differ materially from those in the forward looking statements. Please see the slides 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 our website at Investor Prudential Dot Com and now I'll turn it over to Charlie.

Thank you Bob and thanks to everyone for joining us this morning.

Potential delivered strong financial results for the fourth quarter and the full year, reflecting favorable investment performance and continued high demand for the products. We introduced during the pandemic to address our customers' evolving needs.

2021 was also a pivotal year for Prudential and our efforts to become a higher growth less market sensitive and more nimble company.

First we are repositioning our business mix to generate sustainable long term growth with reduced market sensitivity second we continued to advance our cost savings program and third we maintained our disciplined and thoughtful approach to deploying capital.

I'll provide an update on each of these areas before turning it over to Rob and Ken.

Moving to slide three.

We are making significant progress repositioning our business for sustainable long term growth with reduced market sensitivity through a mix of divestitures and strategic programmatic acquisitions.

Following the successful completion of the sale of our Korea, and Taiwan insurance businesses, which produced $1 8 billion in proceeds we reached agreements to divest our full service business and a portion of our traditional variable annuities.

We're on track to close both of these transactions in the first half of 2022 and generate additional proceeds of over $4 billion.

We are redeploying capital in part through highly targeted acquisitions and investments in asset management and emerging markets.

Last year teach them acquired Montana capital partners, a European based private equity secondaries asset manager and Green harvest a separately managed account platform that provides customized solution for high net worth investors. Meanwhile, on the emerging markets front, we closed on an investment and I see a lion holdings.

A highly respected financial services market leader in Kenya with operations in Tanzania and Uganda.

Turning to slide four.

We continue to advance our cost savings program and are on track to achieve $750 million in savings by the end of 'twenty. Two 'twenty three to date, we have already achieved $635 million and run rate cost savings exceeding our $500 million target for 2020 one.

We have also taken steps to improve experiences around the world for our customers and employees through innovation.

This includes using automation artificial intelligence and other technology to expedite underwriting reduce and simplify processes provide faster more convenient service options and deliver meaningful financial advice in the ways our customers want it.

I'll touch more upon how we're using technology in a moment.

Turning to slide five.

We have maintained a disciplined and balanced approach to deploying capital by enhancing returns to shareholders, reducing financial leverage and by investing in the growth of our businesses.

We currently plan to return a total of $11 billion of capital to shareholders between 2020 , one and the end of 2023.

This includes $4 3 billion return during 2021 through share repurchases and dividends.

As part of this plan the board has authorized $1 $5 billion of share repurchases and a 4% increase in our quarterly dividend beginning in the first quarter.

This represents our 14th consecutive annual dividend increase.

We also reduced debt by $1 $3 billion in 2020 one.

In addition to the acquisitions I previously mentioned, we have also made investments in our businesses to drive long term growth and to meet the evolving needs of our customers in PGM. For example, we have significantly strengthened our suite of environmental social and governance bond funds to better serve sustainability focused investors.

While in our insurance businesses, we continue to develop products that are less market sensitive and have higher growth potential such as our flex guard and variable life products with a focus on improved customer experience and driving greater operational efficiency.

One example, as I mentioned earlier is our use of artificial intelligence, we use AI to quickly and accurately assess risk in our life insurance businesses and to expedite the application and underwriting process.

The application of innovative technology generated significant efficiencies for our global businesses and during 2021 while delivering a dramatically better experience for our customers. We will continue to expand the use of AI and other emerging technologies across the firm.

Our capital deployment strategy is supported by a rock solid balance sheet, which includes $3 $6 billion in highly liquid assets at the end of the fourth quarter and a capital position that continues to support our double a financial strength rating.

Turning to slide six.

Our ongoing efforts to transform the company in 2021 go hand in hand, with prudential's long standing commitment to sustainability.

This commitment is reflected in several significant and handler enhancements to our environmental social and governance framework last year.

We committed to achieve net zero emissions by 2050 across our primary global home office operations with an interim goal of becoming carbon neutral in these facilities by 2040. We are also reviewing our general account investment holdings and have restricted new direct investments in companies that drive 25 person.

Or more of their revenues from thermal coal.

On the social front.

The Prudential Foundation surpassed $1 billion in grants to partners, primarily focused on eliminating barriers to financial and social mobility around the world.

This achievement follows another milestone that we reached in 2020, when our impact investment portfolio exceeded $1 billion.

We also continued to advance our nine commitments to racial equity through investments and funding for organizations committed to diversity equity and inclusion and through internal measures, including diversity training and our commitment to equitable compensation for our employees.

Our governance actions reflected a shared commitment to diversity and inclusion beginning at the top with over 80% of our independent board directors being diverse. It also includes the steps, we're taking to improve diverse representation throughout credential and to provide greater transparency around the composition of our U S workforce.

In 2020 , one we enhanced our diversity disclosures by publishing EEO, one data and the results of our pay equity analysis for our U S employees.

We also expanded our policy of tying compensation plans for senior executives to the achievement of workforce diversity goals.

As I noted earlier, we believe our sustainability commitments and transformation to become a higher growth less market sensitive and more nimble business are closely connected.

Together, they help us fulfill our purpose of making lives better by solving the financial challenges of our changing world by expanding access to investing insurance and retirement security for customers and clients around the globe.

Before turning it over to Rob I'd like to thank all of our employees for their unwavering dedication to the customers and communities, we serve particularly in light of the continued challenges created by the pandemic I.

I am proud of the progress we made and the momentum we built in 2021 and look forward to making an even more meaningful difference in the lives of all our stakeholders in 2022 and beyond.

Thank you for your time, this morning, and with that I'll turn it over to Rob.

Thanks, 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 2021 pre tax adjusted operating income was $7.3 billion or $14.58 a share on an after tax.

Basis results for the year included a benefit from the outperformance of variable investment income that exceeded target returns by about $1.6 billion, reflecting market performance strategy and manager selection in.

In the fourth quarter pre tax adjusted operating income was $1.6 billion or $3.18 a share on an after tax basis, while GAAP net income was $3 13 per share of note. Our GAAP net income includes realized investment gains and favorable market experience updates that were offset by a goodwill impairment that result.

Any charge of $837 million net of tax. This charge reflects two main drivers of a reduction in the estimated fair value of assurance first we acquired capabilities to increase access to more customers and we've experienced good revenue growth. However, this growth has been slower than expected and we are now assuming it will take longer to me.

Monetize into earnings and cash flow and second we have seen a significant decline in publicly traded peer evaluations, which is a key input in our assessment of fair value.

Turning to the operating results of our businesses teach them, our global asset manager had record asset management fees driven by record account that is over 1.5 trillion dollars.

Relative to the year ago quarter earnings reflected the elevated level of other related revenues last year as well as higher expenses supporting business growth in the current period.

Results of our U S businesses increased 13% from the year ago quarter, and reflected higher net investment spread including a greater benefit from variable investment income higher fee income, primarily driven by equity market appreciation, partially offset by higher expenses, driven by a legal reserve and less favorable underwriting experience due to COVID-19 .

19 related mortality.

Earnings in our international businesses increased 5%, reflecting continued business growth lower expenses and higher net investment spread.

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 investment manager Pgm's investment performance remains attractive with more than 95% of assets under management outperforming there.

[noise] benchmarks over the last three five and 10 year periods. This.

This performance distributed contributed to third party net flows of $11 billion for the year with positive flows across U S and non U S based clients in both public and private strategies as.

As the investment engine of Prudential success and growth of Peach and of our U S and international insurance businesses are mutually enhancing.

<unk> asset origination capabilities investment management expertise and access to institutional and other sources of private capital provide a competitive advantage by helping our businesses to bring enhanced solutions innovation and more value to our customers and our businesses in turn provide a source of growth for PGM through affiliated flows and unique access to ensure.

Orange liabilities that complement its successful third party track record of growth.

<unk> sixth consecutive quarter of record asset management fees reflect strong business fundamentals and record assets under management.

We continue to expand our global equity franchise to grow our alternatives and private credit business, which has assets in excess of $240 billion across private credit and real estate equity and debt and benefits from our global scale and market leading positions notably.

Notably pigeons private businesses deployed nearly $50 billion of gross capital up 33% from last year.

Now turning to slide nine our U S businesses produced diversified earnings from fees investment spread and underwriting income and also benefit from a complementary mix of longevity and mortality businesses. We continue to shift our business mix towards higher growth and less interest rate sensitive products and businesses to transform our capabilities and cost structure.

And to expand our addressable markets our productivity have worked well demonstrated by continued strong sales of our buffered annuities, which were nearly $6 billion for the year, representing 87% of total individual annuity sales. These sales reflect customer demand for investment solutions that offer the potential for appreciation from equity markets come.

Bind with downside protection we.

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

Our individual life sales also reflect our earlier productivity strategy with variable products, representing 71% of sales for the year.

Our retirement business has market, leading capabilities, which drove robust international reinsurance and funded pension risk transfer sales, including a $5 billion transaction, which was the fourth largest in the history of the market during 2021 .

And our group insurance business reflected strong persistency and revenue growth in 2021 across all segments with respect to assurance our digitally enabled distribution platform total revenues for the year were up 43% from last year.

Turning to slide 10.

Our international businesses include our Japanese life insurance companies, where we have a differentiated multichannel distribution model as well as other business is focused on high growth emerging markets. We remain encouraged by the resiliency of our unique distribution capabilities, which have maintained the stability of our sales and our in force business. Despite the pandemic.

In Japan, we are focused on providing high quality service growing our world class sales force and expanding our geographic coverage and product offerings. Our needs based approach of mortality protection focus continue to provide important value to our customers as we expand our product offerings to meet their evolving needs.

In emerging markets, we are focused on creating a carefully selected portfolio of businesses and regions, where customers are needs are growing where there are compelling opportunities to build market, leading businesses and partnerships and where prudential Prudential enterprise can add value.

As we look ahead, we're well positioned across our businesses to be a global leader in expanding access to investing insurance and retirement security. We plan to continue to invest in growth businesses and markets deliver industry, leading customer experiences and create the next generation of financial solutions to better serve the diverse needs of a broad range of customers and with that.

I will now hand, it over to Curt.

Thanks, Rob I'll begin on slide 11, which provides insight into earnings for the first quarter of 2022 relative to our fourth quarter results pre tax adjusted operating income in the fourth quarter was $1 $6 billion and resulted in earnings per share of $3 18 on an after tax basis to get us.

Sense for all our first quarter results might develop we suggest adjustments for the following items first variable investment income outperformed expectations in the fourth quarter by $440 million next we adjust underwriting experienced by a net $90 million.

This adjustment includes a placeholder for COVID-19 claims experience in the first quarter of $195 million, assuming 75000, COVID-19 related fatalities in the U S. While we have provided this placeholder for Covid 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 effectiveness of vaccines.

Third we expect seasonal expenses and other items will be lower in the first quarter by $105 million.

We anticipate to 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 first quarter effective tax rate to normalize these.

These items combined get us to a baseline of $2 73 per share for the first quarter.

I'll note that if you exclude items specific to the first quarter earnings per share would be $3 17.

The key takeaway is that the underlying earnings power per share continues to improve and has increased 9% over the last year driven by business growth the benefits of our cost savings program capital management and market appreciation.

While we have provided these items to consider please note there may be other factors that affect earnings per share in the first quarter.

As we look forward. We have also included seasonal and other considerations for 2022 in the appendix.

Turning to slide 12, we continue to maintain a robust capital position and adequate sources of funding our capital position continues to support a double a financial strength rating and we have substantial sources of funding our cash and liquid assets were $3 $6 billion and within our $3 billion to $5 billion liquidity target.

Range.

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 on our plans to reposition our businesses and we are on track to achieve our targeted cost savings and with the support of our rock solid balance sheet. We are thoughtfully deploying capital now I'll turn it to the operator for your questions.

Thank you well now be conducting a question and answer session. We ask you. Please ask one question and one follow up the 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 once again, we ask you. Please ask one question one follow up their return to the queue. Our first question today is coming from Ryan Krueger from K B W. Your line is now live.

Hi, good morning.

The recent acquisition debt that you've talked about have not.

Not utilized a material amount of capital.

I guess given the amount of capital that you are freeing up full service retirement and variable annuity block sales, but would you consider deals that were a bit larger in size.

If they're available.

They need to have the opportunity if youre looking for.

Hey, Ryan This is Charlie I'll answer that question and let me proper a couple of comments first one of the major tenants of our strategy is to be prudent stewards of capital and we're doing that by balancing three factors one is investment in our existing businesses to achieve business grew.

The second is programmatic M&A and the third is returning capital to shareholders, but with regard specifically to your question in terms of acquisitions. What we can say is those are theyre going to be consistent with our stated strategy of growing PGM and emerging markets by which we can expand and extend our capabilities or our distribution.

Or increase the scale of our existing businesses and to your point, we'll be looking at a variety of opportunities of different sizes, but what we can also say is that regardless of size, we will evaluate the strategic and financial merits of each transaction with the obvious observation that the larger the transaction the more financially compelling that.

Transaction needs to be.

And as we've said we will have a programmatic approach right.

Demonstrated by the three acquisitions, we did last year and as we've actually done for a couple of decades in both areas, where you've seen us make numerous acquisitions in both emerging markets and asset management at various scale.

Thanks, and then from.

A divestiture standpoint are you still looking to do more whether it be in U S individual life or more in variable annuities.

Yeah sure Ryan it's fairly again I'll take that.

So first of all we're focused on closing the existing transaction that you were that you referred to and that we've signed and we just as an update we are on track to close both of those transactions in the first half of 2022 .

But we continuously seek opportunities within the businesses and the existing blocks that we have to optimize capital and reduce market sensitivity, while improving the consistency and the predictability of our financial results with the goal of creating additional value for shareholders.

But as we've said in the past we will continue to be thoughtful as we progress towards the goal of becoming a more nimble less market sensitive and a higher growth company. So we'll continue to look for opportunities as they arise and execute accordingly.

Okay Ryan.

It's Andy let me just add and we're making great progress on Derisking in our annuities business and as we've talked about before.

That's a two step process to deregister legacy step one is all about run off and we are very much on track. We're seeing the expected run off we saw $3 8 billion in run off in the quarter and.

And we saw over 18 billion in run off in a year. So run off is a significant contributor to derisking.

As Charlie said.

Two was about doing the Derisking transaction and obviously, we're very pleased with the pallet sale.

That represents about 20% of our legacy account values. So as Charlie said, we're going to continue to explore how to further derisk. The remaining legacy, but we are very focused right now on closing the fortitude re deal and a high quality manner.

Thank you.

Thank you. Your next question is coming from Elyse Greenspan from Wells Fargo. Your line is now live.

Hi, Thanks, Good morning, My first question.

The write down that you guys talk with an assurance IQ can you just give us a sense of the contribution Dom you mentioned lower earnings impossible.

Public peer evaluations can you give us a sense of what contribution that.

When you came up with.

It just happened in the quarter.

Yeah. It was at least it's Ken it was a good combination of both so we you know each quarter, we assess the conditions of the fair value of the business, we've been doing that since we've acquired it.

We incorporated the recent experience from the Medicare annual enrollment.

And we looked at the updated values for multiples appears and so that all went in and and so it was both a combination of our updating for recent experience as well as the recent multiples in the market for peers.

Okay. Thanks, and then maybe a follow up on the capital side.

You mentioned that the Pollock and full service retirement transaction is on track for a half year, one close on at some point.

M&A transactions I don't don't materialize adult materialize.

A higher magnitude would you consider raising the repurchase authorization for 2022 above the $1 5 billion.

So Lisa this is Charlie I think what we've said and what we'll continue to say is again, we're gonna be prudent stewards of capital and to the extent that we can't find opportunities.

Two to execute on our strategy, we will consider returning capital and if you saw what we did last year, we actually increased the share buybacks by $1 billion to $500 million segment. So we've done it in the past and we will continue to be prudent stewards of capital as we go forward and consider all of our.

<unk>.

Okay. Thank you.

Thank you. Our next question is coming from Erik bass from Autonomous Research. Your line is now live.

Hi, Thank you can you talk about flow trends at PJM, and the new business pipeline heading into 2022.

Seeing much shift in demand for fixed income given the rise in interest rates.

Hi, Eric Hi, It's Andy I'll take your question you know as we've discussed in the past, obviously pizza flows will vary quarter to quarter.

And then the fourth quarter, we experienced overall flat flows.

Yeah as you saw our retail outflows were $3 6 billion.

Market volatility really led to client rotation out of our sub advise equities and out of our core and core plus fixed income into shorter duration strategies that was counteracted by very strong inflows on the institutional side and in particular in fixed income I as many pension plans allocations rotate in and this type of an environment.

I would say it's important to note. If you look at our fixed income business overall across both institutional and retail overall, we had positive flows in the quarter despite facing.

Facing the rising rate environment that is a real testament to the diversification of our distribution and of our portfolio you know.

As we've always said, we think it's very important to look at the long term track record when it comes to flows we've done 60 billion inflows over the last five years and we did 11 billion in 2021.

Specific to your question around are around the retail side and what we're seeing from a fixed income perspective, we've seen a 27 billion in retail flows out over the last five years.

And our retail assets under management have have doubled in that time frame really driven by the positive flows that we see in the alpha performance that we've seen and and markets. So we've been very successful. There. You know flows are an outcome of having outstanding capabilities exceptional investment performance and great distribution.

And we feel very strongly we have all of those are and will be a net winner over time and we've proven our ability to see succeed across all different market conditions.

Thank you and then can you provide some more color on your group results this quarter, both for group life and disability.

Sure, Eric It's Andy I'll, I'll keep going and I'm going to split this out between group life group disability I'll start on the group life side.

As we've all seen Delta now omicron are having a big impact on the country U S des where.

<unk> were higher than <unk>. So we saw 126000 U S deaths in it for Q versus 94000 and <unk>.

As a top three life carrier, we have a big broad book of business. There's two effects really on the life side that I would note. The first is very similar to third to third quarter and that's we have a high concentration of large retail and health care are employer accounts.

Think about it those are employers that have a high number of frontline workers that are out and about and exposed on a daily basis and also many of those workers are in low vaccination geographies are the <unk>.

In fact, we saw as well in this quarter, we did see a slight shift to a.

Two older age we're.

We're still seeing significant increase in incidence rates in the under 55 population and that population tends to have larger dollar amount policies.

If I shift over to the disability side I'd start by saying most of our impact in the quarter and the business was on the life side, but we are seeing some impacts on the disability side as well I would frame. This it's it's what we expected to see and what we prepared for for the disability doesn't as you know our ratio our benefit ratio was 87.3 that was 300 and <unk>.

<unk> bps better than a year ago.

Theres really two effects on the yesterday absent side of the business. We are seeing increased volumes. If you think about the impact that Oh Micron has had as an example in the isolation roles that drives the SPD in absence, but that's a fee based business. So the effect. We're seeing there really is a enhanced expense showing up in the admin ratio are we.

We staffed up to make sure that we're there for our customers because that's job one on the LTV side, a much like the third quarter. We we continue to see about a 10% increase in incidents in about a 10% increase in severity, but again, it's what we expected and it is what we prepared for from a claims management perspective. So.

Oh, we're just proud to be able to deliver on our promises to our customers and as the pandemic subsides or as it flows ended up being more of an endemic we know that our benefit ratios will come back into the normal range.

Thank you I appreciate the color.

Thank you. Your next question is coming from Andrew <unk> from Credit Suisse. Your line is that right.

Hey, Thanks, a lot.

Well that kind of shift back to <unk>.

<unk>.

As I think about the Prudential.

You know over the last two decades, the company's done a lot of excellent M&A is.

But the assurance IQ.

Which are you know with this write down today kind of puts a little bit of a shade on it.

And.

Charlie you've talked about programmatic M&A being prudent.

So what I'd like to know is.

How does the assurance IQ.

Acquisition, how does that.

Thank you think about acquisitions going forward.

Particularly in terms of accretion dilution.

Sure.

It's Charlie So let me, let me take that Andrew.

Let me take a step back and explain exactly why we did the assurance transaction and the function that claims within our business mix.

As a young and innovative company that it is completely aligned with our purpose and our strategy.

Helping us expand our addressable market, which is something we want to do and increase access to more customers, especially a customer base. That's traditionally been underserved by our industry and that's absolutely aligned with our purpose secondly, it's a digitally based platform, but frankly in which we were underinvested and is a new space for us, but one that we want.

It is very much to be in and third from a strategic perspective, it is helping us to reduce market sensitivity by increasing our mix of fee based earnings which is entirely consistent with what we talked about it becoming a more nimble less market sensitive and higher growth company.

Now as we look forward.

As I mentioned earlier in the call at the acquisitions, we will be making a they.

They are going to be a M.

In PJM and emerging markets and they'll be focused on will be focused on acquiring more mature businesses again by which we can expand and extend our capabilities or our distribution or our scale over time and this is absolutely in our wheelhouse right. This is this is what we've been doing for decades in both in both.

Emerging markets and asset management and have made I won't say hundreds, but tens of of successful acquisitions over that time period. So we feel very comfortable with where we're going but we also feel.

Very good about the strategic merits of.

The assurance deal and the role it plays within our company.

And then any comment on accretion dilution you might add to that.

Sure Let me talk about the metrics that we use for a moment. So when we think about acquisitions from both we think about them both from a strategic and a financial perspective and from a strategic perspective, we look to add capabilities as it said such as you know product or distribution or increasing scale in a market or country and from.

Financial standpoint, we look at a variety of metrics when accessing assessing potential acquisitions, such as earnings contribution and growth et cetera, now obviously the larger the transaction the more compelling the financial aspects.

The transaction has to be but but importantly, I think our focus is on becoming a higher growth again less margin sensitive and more nimble business and we're going to continue to be extremely thoughtful and disciplined about how we execute with the goal of creating value for all our stakeholders.

Okay got it and just real quickly on the expenses.

It looks great that you're targeting $750 million in savings by.

23, and that's you know I think you've.

Completed 635, so far per the slides and that's up from an initial 500 do you think beyond that you could do more in expenses.

Yeah, Andrew it's Ken.

Yeah, we've made excellent progress both in terms of not just gaining efficiencies and lowering costs.

But also building capabilities and as we have done that on an accelerated basis relative to our initial targets. We remain certainly focused again, both on building capabilities, but also gaining efficiency.

To drive growth going forward.

We're very much on track to achieve $750 million by 2023 and at this point, we've we've really institutionalized.

Both capabilities, but also a mindset across the company of continuous improvement.

And we're getting good payback on our initiative costs. So we expect to maintain a budget for that and and and also maintain this discipline going forward right. Now we're focused on achieving that 750 by 2023 and and that's our main objective.

Thank you.

Thank you. Our next question today is coming from Tom Gallagher from Evercore. Your line is now live.

Good morning.

Just a question on sort of sources and uses of capital how should we think about the four and a half billion of proceeds.

Plus coming from the deals how much of that do you think is freeing clear for you to use.

How much do you think you might need to use to bolster capital levels. If any of it is I ask only because just looking at.

Holdco levels, I guess, you're getting closer to the low end of the target now I'm wondering if you wanted to bolster that back up to the top end.

And also maybe any comments you had that any subsidiary levels that you'd like to shrinking capital if at all or do you are you you're fine.

Cross the board, there and any debt reduction.

Yeah, Hey, Tom It's Ken I'll take that you.

You should think of that 4 billion of.

Or more proceeds coming in from our two transactions is free and clear and readily deployable it'll quickly moved to the holding company upon.

Those are the transaction.

Just in general you know we've had a very consistent approach to capital management, our businesses are generating free cash flow and.

And also last year, we reduced debt.

So that that we thought it was a good time to reduce debt and so we definitely that we certainly have that capacity as well and now we also have the 4 billion of proceeds coming in so we feel really good about our capital position and our liquidity.

And in our flexibility and including being well positioned to meet our objectives of returning 11 billion to shareholders over the three year period 2021 to 2023.

Gotcha, Thanks, Ken and then my follow up is just.

I was looking at your supplement and saw that you had operating debt of $5 6 billion that was issued out of the holding company.

Now I guess I've always typically thought about operating debt.

Getting issued out of the.

The operating subs not not at the holding company, because it's kind of higher rated entity.

But can you talk a little bit about what is what is that exactly the operating debt that's issued at the holding company.

Yeah. So we consider operating debt to be funding debt funds sort of a specific action asset or structure that where the cash flows from that asset or structure will pay off the debt.

Some examples would be within our PGM business, we do co in seed investments that are funded.

Both with capital to support the the risks of those investments, but also operating debt and we find that efficient to do that from the holding company.

Our PGM business also has an agency mortgage business, where we.

We fund.

Loans from time to time, again, where those loans would support that operating debt. So those are those are two.

Two examples, but again, it's where specific assets or structures will support that debt.

Got you thanks.

Thank you. Your next question is coming from John Barnidge from Piper Sandler Your line is now live.

Thank you very much my first question is there any way to bifurcate VII between marks and realized gains.

Yes, we do we do look at that and that you should think of it as a variable investment income as both balanced between cash coming from distributions as well as the appreciation in the mark to market.

It's pretty balanced last year, a little bit more appreciation than than cash just given the move in the market.

Great Thanks, and my follow up.

Given the focus on large and jumbo within group how much of the contracts there have seen pricing increases since COVID-19 emerged.

So John it's Andy I'll take your question, sorry, I don't have the exact percentage at my fingertips, but I'll make some high level commentary.

So as I think you're you're very aware those contracts renew anywhere from every two years to say every five years and it's very much based on the size of the business with the smaller cases remote renewing more frequently every two years and large national accounts renewing approximately every five years.

80% of our group insurance block of business is national accounts, so our renewal cycle. They would tend to be more towards the longer end of that spectrum you know.

From a pricing perspective now.

Now that we're entering the third year of the pandemic and and it's it's probable at least that this will go from pandemic endemic we very much felt that we needed to take our COVID-19 experience from the last 24 months and to put it into our new business and renewal business pricing.

And we have done that on both the life and disability side, so that business will reprice over over the next few years.

Thank you best of luck.

Thank you. Our next question is coming from Tracy Bengie from Barclays. Your line is now live.

<unk> I wanted to circle back to your comment about completing a 5 billion PRP D. All of the fourth largest in market history.

Recall M D N. A group meeting you've mentioned that more competitors have entered the state something like 15 to 20, and probably six or seven of those are consistently trying to do the over $1 billion transaction.

Just wondering if pricing is getting too frothy or these mega deal and has your view of IRR changed due to competition.

Yeah Tracy so it's Andy Yeah. Thank you for your question. So Yeah. You know we did two transactions in the fourth quarter for a 210 million and as you noted that was on the heels of a very successful transaction and three Q, which ended up being the largest transaction of the year and we were one of the top writers of the year.

I guess I'd make two comments one the market outlook here for the size of the market remains very strong.

The funding levels are at the strongest they've been in 10 years funded status at the end of November was at 98%. So we believe that the market is going to stay a large and as a pioneer and a leader in the space to your point.

Despite it becoming more competitive there are more competitors. Yeah. We we were still seeing that we by being disciplined with underwriting and pricing are we can pick our spots and we can pick our spots and given the size of the market, we will win our fair share.

And we will be able to continue to grow that business, thanks to our brand and our capabilities.

Yeah, that's very helpful and he was like a I guess a bigger picture question on wage inflation.

On one hand that could maybe fail. Many other hang you know there are these talent shortly Jay I'm wondering how that May also impact expenses, if you could provide some color.

Tracy, it's Rob I'll take a first stab at that and Andy If you want to jump in please feel free to do so I guess Tracy I'd start by bringing it up a level, which is the most significant impacts of inflation would be on rates and that would be and if inflation actually leads to higher rates. That's a good thing for the industry and for US included as a part of that with.

The operating costs. Your specific question, one I would note that our ongoing efficiency initiatives will help to mitigate any impact that we would have on increases that come through.

Secondly, we are quite comfortable that we have sufficient pricing power in most in our most material products and markets that if there is that to the extent, there's a residual impact will be able to incorporate that into pricing.

I'd add that you know well and inflation.

Inflation is a macro factor that we're very much looking at how it influences the upcoming year. There are a number of other things happening from a macro standpoint beyond inflation.

And we believe that there'll be drivers actually two to tailwind that'll get created for our businesses.

Things like higher rates and a.

Our improving outlook for Covid, Andy I don't know if you wanted to add anything more specific on a business level basis.

Maybe the only thing I would add as you know Tracy our both our U S insurance and retirement businesses and our pizza business, where break we're big we're broad were well diversified and there are plenty of spots in our business system, where this environment is very good and I. Just mentioned you know we are one of the largest real estate.

<unk> in the World number three by assets under management, and obviously, an inflationary environment can be very helpful for that business.

Thank you.

Thank you. Our next question is coming from Humphrey Lee from Dowling and partners. Your line is now live.

Good morning, and thank you for taking my question I just have a question related to group disability in the slide deck. You talked about you are looking to diversify your group insurance portfolio and looking to expand into group disability and voluntary product can you just talk about how you are planning to do that especially.

With some of the industry disability results from recently seeing some pressure how do you balance growing market share at the same time that she is achieving.

Pricing.

Sure Humphrey, it's Andy So let me first bring it up a level and talk about how do we think about this strategically so you know as as we've talked about expanding our addressable market and bringing more solutions. The more people. We continue to believe that the workplace is a great place to grow our because of the reach and access that it gives US you know we've.

Been executing on our strategy and our group business very consistently over the last five years.

To grow and in particular to grow in certain spots to grow in in middle market. So smaller smaller cases grow our disability block and to grow our voluntary capabilities and block. So that we we diversified the business further.

And that makes a lot of sense, because a lot of clients in the group space a bundle.

I said earlier the majority of our business at group insurance is is large national account and the majority of his life. So we feel we have a lot of room to grow and assets. You know we're gonna stay the course on our value prop we've invested a quite significantly.

In strengthening our overall value prop book value prop, both our financial wellness capabilities, but also our core fundamental capabilities in both life and disability.

Your your question about how do you do it in an environment like we're in it's it's all about discipline right, it's about being disciplined in pricing and underwriting and making sure that you are especially on the disability side that you maintain strong disability claims expertise and staffing so that you could properly manner.

The business in an environment, where we're seeing increased incidents and severity.

So my follow up to that is.

And kind of your strategic review you talked about kind of M&A area would be asset management and emerging markets, but given your interest now in expanding disability and voluntary benefits and the work site is no group insurance be an elder area of potential M&A or are you still sticking to kind of asset management and in your emerging market.

<unk>.

So Humphrey this is Charlie for now our concentration is going to be on asset management and emerging markets. So those are two areas, where we think we have a we could benefit significantly from the increase in capabilities and scale in the markets in which we already are doing business and so that's.

That's going to be our focus in the certainly in the near to medium term.

Got it thank you.

Yeah.

Thank you. Our next question today is coming from sort of didn't come off from Jefferies. Your line is that right.

Great. Thanks, Charlie.

Currently a year ago, we talked about wanting to increase the earnings contribution from growth businesses from I think the math was 18% to over 30%.

And I'm just wondering is that still on the table because it would seem that that might be difficult without M&A, but.

But I was just wanted to get your thoughts on whether you can get there organically.

Sure and that remains our goal and in two to three years, but as you pointed out we'd be doing it through a combination of a couple of things one is or three things really one is organic growth. So we will be continuing to invest arm businesses. One inorganic growth because we will have to do some M&A to get there and the third is.

Really the dispositions of either lower growth or our market sensitive businesses and.

You've seen us begin to execute on that with the two transactions that were going to close this year.

And that's that's all within again, the context of being prudent stewards of capital or investing in our business, having programmatic M&A and returning capital to shareholders. So.

The short answer of your question is yes that still remains our goal and we'll do it through a combination of factors.

And is it fair to say that the M&A piece might.

It might need to be the biggest of the three or do you think it sort of evenly distributed across the three.

It's hard to say, whether whats what the percentages will be it will depend on the opportunities, we see both organically and inorganically and and the dispositions that we make so it's sort of a multi variable equation. If you will but we're looking to balance that equation and do it thoughtfully.

And prudently.

Got it makes sense and then I just wanted to ask about.

International sales, if we focus on Japan, and Gibraltar It looks like sales have kind of been flattish I'm just.

Wondering if.

It is the reason the COVID-19 impacts and lack of face to face or do you have to do some more work in terms of the product set that you guys are offering both an integral ultra in the life planner model.

Hi, Simeon this is a this is Scott let me, let me give a little more context on why the sales were down and then I can talk about what we're doing.

First of all our bank channel.

Is subject to a higher level of variability.

And given.

When there are shifts in the competitive market.

Given both COVID-19 related headwinds, but also higher U S. Dollar interest rates the regional banks have shifted to easier to sell investment products.

You know, we maintain a strong pricing discipline.

On deposit products, and we've always concentrated our efforts on selling recurring premium death.

Death protection products in that in that channel. There was a second there was a second factor during the fourth quarter, where we're making some product shelf adjustments in our life consultant channel and we're in the process of updating our U S. Dollar annuity offerings and we expect the majority of the new products to be in place by the end of the first.

So I think that explains why you know why we were down.

The actions that we're taking in the bank channel look we intend to maintain our discipline, but we do think the market will evolve over time, especially as there is a COVID-19 .

Striction are relaxed. Additionally, in Japan, we continue to go front and center.

With our death protection products, but increasingly we've been adding to our product line with more retirement wealth transfer and health products and we believe given those product line increases coupled with a really high quality distribution, there and life planners and life consultants will be able to counteract this where were.

Actually pretty optimistic about going forward there.

Okay. Thanks.

Thank you next question is coming from Alex Scott from Goldman Sachs. Your line is now live.

Hey.

I guess for my first one I just had a follow up on international.

Through sales and persistency you know it seems for at least the near term you know I think premium growth will kind of continue to be the same or if not a little lower than you've had and you know when I look at earnings over the last few years. It seems like G&A expenses declining his allowed for you guys to defend or.

And in a in a pretty strong way and I just wanted to probe there a little bit and understand you know what what have you been doing to take expenses out and you know is that something you can continue to do a to help earnings and international.

Yeah, there's a couple of different comments I'll get there.

Yeah.

First of all just like the U S transformation, the international business, Japan, and others have been looking for ways to be more efficient and to use automation and other activities to control cost also in some of our emerging markets, we're experiencing faster growth.

We're starting to see some scale benefits and then finally, we've done a good job of <unk>.

Cost control.

At the corporate at the corporate center level.

That being said you know I think our opportunities to grow earnings in.

Internationally are much more driven by the revenue actions that I alluded to in.

And the product actions and the distribution force actions.

That were that are taking place in both L. P.

And L. C. So we're always going to be disciplined on the expense front, but I think it's more of the both the product and the emerging market growth areas that we think it'll be more important going forward Lastly, I would say of course Covid has made it more challenging to recruit life planners and life consultants and we do.

We expect that to ease as the pandemic eases it turns into an endemic.

Got it and then maybe for a follow up.

There there is a long term care insurance underwriter that did had a pretty sizeable gross charge associated with the reimbursement policies and the impacts of inflation and I just wanted to to find out from you all what where do you feel like your exposure is to that and would that have any impact on your in stat filings in.

The required reserves and it was there any material impact to cash flow we should consider.

No.

The short answer is no we do factor in inflation into our assumptions and we're well positioned for an elevated level of.

Of inflation in the near term and and we continue to see claims experience consistent with our assumptions and and actually were actually a little bit more favorable.

Thanks.

Thank you. Your next question is coming from Mike Zaremski from Wolfe Research. Your line is now behind us.

Great just one question and follow up on the pension marketplace comments.

You mentioned that funding levels at their highest levels it looks like since the mid <unk>.

Great financial crisis.

And but not above 100, yet just curious is there kind of like a magic number given theres costs associated with it if you know pension funding levels.

Let's say, we had a good market.

And macro market in 'twenty two it got to like one O three one O five or or is there a magic number that would kind of cause sales to an uplift.

Mike It's Andy I'll take your question and the answer is we don't believe so.

At 98% are you know our plan sponsors are very willing to lean in and to transact it.

I think plan sponsors when there are in this range and they see the.

The volatility.

In the marketplace, it really drives the desire to transact and to Derisk their pension plans. So there's no magic number.

Having having said that you know we think at these levels, we're going to continue to see robust markets.

Thank you.

Thank you we reached end of our question and answer session I would like to turn the floor back over to Mr. Lowery for any further or closing comments.

Thank you and thank you for joining US today 2021 was a year of transformation for Prudential and we'd three reached a record high level of after tax operating earnings distributed a record amount back to shareholders and made real progress towards becoming a more nimble less market sensitive and higher growth company as we look ahead to 2012.

Two and beyond we are focused on creating and driving growth and becoming a global leader in expanding access to investing insurance and retirement security.

We are both excited about and confident in our strategy and our ability to create value for all our stakeholders by building even further upon our progress we look forward to sharing more with you along the way and thank you again for joining us today.

Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.