Q3 2022 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 chip.
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As a reminder, today's call is being recorded.
Now I'll turn the call over to Mr. Bob Mclaughlin. Please go ahead.
Good morning, and thank you for joining our call representing Prudential on today's call are Charlie Lowrey, Chairman and CEO , Rob Falzon, Vice Chairman Andy.
Any Sullivan head of U S businesses, Scott flight their head of international businesses, and Tansey, Chief Financial Officer, and Rob Axel Controller, and principal accounting officer, we will start with prepared comments by Charlie Rob and Ken and then we will take your questions today.
Today's presentation May include forward looking statements. It is possible that actual results may differ materially from the predictions that we make today. In addition, this presentation may include references to non-GAAP measures for a reconciliation of such measures to the comparable GAAP measures and a discussion of 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 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 today.
Our third quarter financial results reflect the impact of market conditions, including the variability in alternative investment returns and lower fee income as well as an elevated level of COVID-19 hospitalization claims in Japan.
Really offset by underlying business growth, including the benefit from rising interest rates.
We continue to transform our businesses to be less market sensitive and better positioned to deliver sustainable long term growth.
<unk> investing in products and solutions that meet the evolving needs of our customers.
And achieving our $750 million cost savings target one year ahead of schedule.
Our rock solid balance sheet provides the financial strength to navigate the current macroeconomic environment.
And support our customers shareholders employees and other stakeholders.
Turning to slide three.
I'll start off today with an update on how we are investing in long term growth opportunities that meet the evolving needs of our customers and support our vision to be a global leader in expanding access to investing insurance and retirement security in.
In September Prudential was selected by IBM for a 50% participation in the second largest pension risk transfer transaction in the U S market history with a total value of over $16 billion. This transaction builds upon our leadership role in this market, where we have helped employers safeguard.
Their workers retirement since pioneering the first jumbo PRT transaction a decade ago.
We are well positioned to continue to benefit from the growing PRT market, which is expected to have over $50 billion of total industry transactions in 2022.
In the individual retirement market are flex guard suite continues to grow in both sales volume and product scope with an additional $1 billion in sales, bringing the total to nearly $12 billion since its launch in 2020.
Building upon flex garden's tremendous success, we plan to introduce Flex Guard life and index variable Universal life product later this month.
We expect our businesses will benefit from the increased demand for retirement decumulation products over the next decade.
As we strengthen our role as a leader in the 300 billion dollar annuities market.
We're making similar growth investments on behalf of our international customers as well.
During the third quarter, we expanded into Argentina, our partnership with Mercado Libre Latin America's largest e-commerce platform with approximately 200 million users. Our expanded partnership follows our initial launch with Mccarter Libre in Brazil earlier, this year, which deliveries life insurance and ask it.
And health products tailored to the platforms mass market customer base.
Moving to slide four as I noted earlier, we have now achieved $765 million of annual run rate cost savings.
Exceeding our target of $750 million and completed this one year ahead of schedule.
This includes a $180 million realized in the third quarter.
To achieve these cost savings, we carefully assessed all aspects of our business and operations from our physical office space to how we leverage technology to deliver more efficient customer experiences.
For example.
By embracing a hybrid work model, we reduced our office space footprint in the U S by approximately 50%, which results in an annual run rate savings of about $50 million.
On the customer experience front, our use of artificial intelligence accelerated our individual life underwriting from 22 days to 22 seconds and our new digital claims processing capability can now deliver fun most customers in six hours as opposed to six days.
We also automated and reduce the timing upon verification and processing on about one third of new annuity sales from what was two to three weeks to know two to three days.
And our group insurance claims processing is now three times faster thanks to new data systems, we have installed.
Turning now to slide five.
A rock solid balance sheet and disciplined approach to capital deployment has helped to prudential navigate financial and macroeconomic challenges for nearly 150 years.
With our double a financial strength rating, we have a strong capital position a high quality well diversified investment portfolio and approximately $5 billion in highly liquid assets at the end of the third quarter.
We continue to balance investing in our businesses for long term growth.
With shareholder distributions in.
In addition to the investments in our businesses that I. Previously mentioned, we also returned over $800 million to shareholders. During the third quarter through dividends and share repurchases for a total of $7 billion since the beginning of 2021.
Looking ahead, we expect higher interest rates will economically benefit our business over time.
We have the financial strength to continue to navigate the current economic and market environment.
As we monitor developments, we will maintain our disciplined approach to capital management and redeployment and our board will review our 2023 capital plan early next year.
Before turning it over to Rob I'd like to touch upon the leadership transition, we announced last week as part of our thoughtful approach to creating a sustainable long term leadership structure.
Beginning early next year, Andy Sullivan will move from his current role as head of our U S businesses, including teach him to lead our international businesses and PGM Caroline Feeney, who currently leads our U S retirement and insurance businesses will take on an expanded role as head of our business portfolio.
The U S and will join our executive leadership team.
Scott Slicer, who currently leads our international businesses will retire in the first quarter of 2023.
We thank Scott for his tremendous contributions to Prudential over the course of the 35 year career with the company.
And look forward to working closely with Andy and Caroline in their new roles.
I'll now turn it over to Rob for an update on our business performance.
Thank you Charlie I'll provide an overview of our financial results and business performance for our P. J U S and international businesses I'll begin on slide six with our financial results for the third quarter of 2022.
Pretax adjusted operating income was $1 billion or $2.13 per share on an after tax basis and reflected lower variable investment income driven by market conditions and an elevated level of Japan, COVID-19, hospitalization claims, partially offset by underlying business growth, including a benefit from rising interest rates.
Our get GAAP net loss per share was <unk> 78 cents on an after tax basis, primarily reflecting realized investment losses, largely driven by higher interest rates.
Turning to the operating results from our businesses compared to the year ago quarter PGM.
Teach them, our global investment manager reported lower asset management fees, resulting from a reduction in assets under management, reflecting higher interest rates widening credit spreads and declines in equity markets.
<unk> of our U S businesses were lower than the year ago quarter, reflecting lower spread income due to less favorable variable investment income and lower fee income, resulting from the sale of a portion of the legacy variable annuities business the decline in equity markets and net outflows, partially offset by more favorable underwriting as COVID-19 trends.
<unk> to an identical level in the U S.
The decrease in earnings in our international businesses reflected elevated COVID-19, hospitalization claims in Japan, and lower spread income driven by less favorable variable investment income.
Turning to slide seven P M. Our global active investment manager has diversified capabilities in both public and private asset classes across fixed income alternatives real estate and equities.
<unk> long term investment performance remains attractive with more than 80% of assets under management outperforming their benchmarks over the last five and 10 year periods PGM experienced retail outflows, primarily in fixed income consistent with industry trends due to the rising rate environment, while institutional net flows continued to be positive.
As the investment engine of Prudential, the success and growth of teach them and of our U S and international insurance and retirement businesses are mutually enhancing.
<unk> asset origination capabilities investment management expertise and access to institutional and other sources of private capital are a competitive advantage. This helps our businesses bring enhanced solutions and create more value for our customers our insurance and retirement businesses in turn provide a source of growth for PGM through affiliated flows and unique.
Access to insurance liabilities that complement its track record of third party growth.
P. Jim's annual fee rate increased due to the continued shift toward higher fee strategies, including our alternatives and private credit business.
We continue to grow our alternatives and private credit business, which has assets under management of nearly $230 billion across private credit and real estate equity and debt and private equity secondaries and benefits from our global scale and market leading positions across patrons private platform, we deployed $9 $6 billion of capital this quarter.
<unk>.
As we continue to invest in growth areas that are aligned with the needs of our clients. We also remain disciplined in finding opportunities to protect operating margins by managing the business more efficiently.
Turning to slide eight our U S business has produced diversifying 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 towards higher growth and less market sensitive products and markets transform our capabilities and cost structure.
Further expand our addressable markets.
Retirement strategies achieved robust sales in the third quarter across its institutional and individual lines of business.
Institutional retirement closed nearly $10 billion of pension risk transfer transactions in the third quarter, including being selected by IBM for a 50% participation and a $16 billion pension risk transfer transaction.
Our focus on superior execution supported by the experience of our high quality PRT team and our continued market leadership in the U S pension risk transfer market contributed to IBM selecting us we continue to see a significant opportunity in the growing PRT market need.
In individual retirement product pivots have resulted in continued strong sales of more simplified solutions with $1 billion of flex start in flex card income sales in the third quarter as well as increased fixed annuity sales.
Our individual life sales also reflect our earlier productivity strategy with variable life products, representing approximately 70% of sales for the quarter.
Group insurance experienced a 50% increase in sales compared to the year ago quarter, reflecting higher national account life and disability sales and execution of our product growth strategy to drive the supplemental health.
Turning to slide nine.
Our international businesses include our Japanese life insurance companies, where we have a differentiated multichannel distribution model as well as other businesses aimed at expanding our presence in high growth emerging markets and Japan, we are focused on providing high quality service and expanding our geographic coverage and product offerings, our needs based approach and protection products.
Focus continued to provide important value to our customers as we expand our product offerings to meet their evolving needs. For example, we launched a yen denominated investment product with a joint survivorship feature in the bank channel in the third quarter.
In emerging markets, we are focused on creating a carefully selected portfolio of businesses and regions, where customer needs are growing where there are compelling opportunities to build market, leading businesses and where the prudential enterprise can add value.
In the third quarter, we continued to focus on expanding product and business capabilities to meet the evolving needs of customers in Brazil, we expanded our digital sales application and achieved record sales for the second consecutive quarter driven by strong performance across all distribution channels. We further expanded our product offerings on the netcom built libre platform.
In Brazil and successfully launched this sales platform in Argentina as Charlie mentioned in addition, we completed our tender offer for Alex Forbes, expanding our ownership to 33% of a leading provider of integrated retirement investment and wealth management services in South Africa. As we look ahead, we're well positioned across our businesses to be.
A global leader in extending access to investing insurance and retirement security.
We 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 now with that I'll hand, it over to Ken.
Thanks, Rob I'll begin on slide 10, which provides insight into earnings for the fourth quarter of 2022 relative to our third quarter results as noted pretax adjusted operating income in the third quarter was $1 billion and resulted in earnings per share of $2 13 on an after tax basis.
Get a sense for how our fourth quarter results might develop we suggest adjustments for the following items first variable investment income was below expectations in the third quarter by $295 million next we adjust underwriting experienced by a net $165 million. This adjustment includes a placeholder for COVID-19.
<unk> experience in the fourth quarter up $20 million for our international insurance businesses, we expect a lower level of hospitalization claims due to the recent government supported industry revision of eligible benefits, where policyholders recovering from COVID-19 at home in Japan.
And last we expect seasonal and other items to reduce adjusted operating income by $166 million, primarily driven by the seasonally elevated expenses expected in the fourth quarter.
These items combined get us to a baseline of $2 71 per share for the fourth quarter I'll note that if you exclude items specific to the fourth quarter earnings per share would be $2.96. The key takeaway is that our under underlying earnings power improve due to business growth, including the benefit of higher interest rate.
It's that more than offset equity market depreciation.
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 11, our capital position supports our double a financial strength rating, our cash and liquid assets were $5 billion at the high end of our liquidity target range after investing in our businesses to support long term growth, including the capitals to support our IBM pension risk transfer transaction we.
We have substantial off balance sheet resources, including contingent capital and liquidity facilities.
Over the long term a higher interest rate environment is economically beneficial in the near term the current market environment and the annual assumption update reduce our regulatory capital and excess liquidity.
We will remain prudent in our capital deployment balancing the preservation of financial strength investment in our businesses for sustainable long term growth and shareholder distributions.
Turning to slide 12, and in summary, we are executing our plans to reposition our businesses. We achieved our targeted cost savings one year ahead of plan and we are navigating the current macro environment with the financial strength of our rock solid balance sheet now I'll turn it over to the operator for your questions.
Thank you well now be conducting a question and answer session 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 you'd like to move your question from the queue. We ask you. Please ask one question one follow.
I'll then return to the queue once again Thats star one to be placed in the question queue and we ask you. Please ask one question. One follow up then return to the queue. Our first question today is coming from Tom Gallagher from Evercore ISI. Your line is now live.
Yeah.
Good morning. The my first question is just on the decline in the holding company cash balance it dropped.
2 billion sequentially, despite the increase in net debt by $500 million.
Ken can you comment on whether there were any contributions to subs.
I assume there were no dividends, taking out, but a little bit of color for for what happened there.
Yeah, Hey, Tom sure I'll cover that we made we did make a capital contribution of $1 billion to pica, Our main U S life insurance company and that is to support a high volume of business growth, including the I B M and other pension risk transfer transactions that we did.
We also made a $200 million of contributions to fund a few international joint joint venture.
Investments.
That's part of our programmatic M&A into emerging markets.
And then as we mentioned and highlighted that we funded shareholder distributions of $800 million.
The 500 million of net debt increase that we had is as we refinance our our debt profile was essentially offset by holding company costs, including interests. We did not have dividends from our subs in this quarter you know the timing of dividends from our subs to the Holdco.
Tend to vary and tend to be greater in the fourth quarter and first quarter I'm, putting that altogether we.
Ended with highly liquid assets of $5 1 billion is still above our target range. So you know in some that the primary reason our holdco H L. O. HLA declined are highly liquid assets decline was due to the $1 2 billion of our business growth I also I just thought it'd be helpful to Rockwood remind people what I said on.
Our last call is that we expect the statutory funding needs for our U S. Life insurance business are included in our assumption updates to be comparable to our GAAP. The GAAP impact that we recorded in Q. The reserve strengthening will be higher status more conservative and that's going to be fully reflected in our staff.
Results in the fourth quarter as as I also mentioned on our last call we have excess capacity already in pica available to to meet that need. So the combination of the capital that we contributed to support business growth this quarter and the excess capacity you had in pica within pica.
We will remain with RBC ratios consistent with our double AA financial strength targets you know in terms of shareholder distributions, we will complete our shareholder distributions for this year in the fourth quarter with both dividends and share repurchases.
And as Charlie mentioned in his remarks, our capital plan for 2023 will be approved by the board early next year and as always they'll consider our capital position our opportunities to invest in our businesses and now.
Increasingly so the volatility uncertainty of the economy and markets looking ahead, so we'll factor that all in <unk>, but.
But we will continue with our philosophy of being thoughtful and disciplined with our capital and balance investment in our businesses with long term growth and maintaining financial strength and returning capital to shareholders.
Hey, Tom It's Charlie let me just add one thing because I think part of your question is about can we execute on our long term plan and I just take it up a level and say we have additional levers we can pull and resources that we can use to to do just that to execute on our long term plan.
So chip. Thanks, a lot guys that was very comprehensive and Charlie just so you'd still I think it was the $10 billion three year total capital return plan you still feel good about that given the levers that.
That you have to work from.
Yeah, Ken do you want do you want to comment on that yeah. Yeah again, you know.
We will complete we've already returned 7 billion through the third quarter, we will complete our plans for this year and again or our board will factor in all the considerations that I mentioned are into their decisions are in the early part of next year.
Okay. Thanks, a lot guys.
Thank you. Your next question is coming from Tracy Bengie from Barclays. Your line is not a lot.
Thank you first congratulations to Scott your retirement, Andy Carolina in your new role.
I'm wondering given your progress to date and thinking about market opportunities do you feel like you need any long eight the three year timetable about reallocating $5 billion to $10 billion of capital to higher ground market sensitive business.
Sure Tracy it's Charlie let me, let me take that one.
So let me start by saying, we remain totally focused on executing on our transformation strategy to become a less market sensitive and higher growth company as you've seen we've made a number of programmatic acquisitions in PGM and emerging markets and in the second quarter. We completed two key divestitures that reduce our overall market sensitivity by 20%. So we're well on our way.
Now our path may not be linear as different growth opportunities present themselves at different times.
And I would note that our diverse set of businesses provides opportunities to grow in different market environments. As we've seen with this market environment and we're well positioned to benefit from this diversification for instance in the third quarter, our retirement strategies business did nearly $15 billion of sales, including a significant PRT.
Transaction the demonstrated our leadership position in this market, where we believe there's just tremendous growth potential going forward.
But our our business system is also self reinforcing and as an example, the recent I B M. P. R T and would be the reason I B M. P O T transaction.
Which is in the institutional retirement business that also brought in over $8 billion AUM to teach them.
So by saying, we're focused on our high growth businesses, namely P. Jim in emerging markets. It doesn't mean, we're not looking to grow our other businesses as well. So you know in summary, what I'd say is we're definitely committed to becoming a higher growth less market sensitive company, but our progress will depend upon a couple of things one is the opportunities that arise.
And the second is the macroeconomic conditions.
Okay. That's very helpful. So it sounds like you have organic growth opportunity, you're not only relying on programmatic.
So speaking of organic and you mentioned parakeet I was just wondering if we should expect to see more of coinsurance can't seek care for these large deal.
And also if you could comment on you know funded status. These days you know what you've seen the pipeline what that prohibit some deals getting done.
So traci good morning, it's Andy and first let me say thanks for I. Appreciate the congratulations you probably could tell we're exceptionally proud of our of our team and of our capabilities in our pension risk transfer business. You know the fact that we conducted the second largest transaction in history second only to the to the groundbreaking transaction, we did with <unk>.
Motors about a decade ago for $29 billion. You know this transaction, we did split 50 50 between us and another provider and for clarity the decision to split a deal is made by the plan sponsor versus carriers bidding together you know as we look forward, we don't think deal splitting will be atypical.
And we will always be open to that type of a situation depending on the deals characteristics.
Overall, the market in pension risk transfer remains very robust the industry experienced a third successive record breaking quarter. Our third quarter came in at 28 billion, which was a 60% increase from last year funded status remains near record levels at 106%. So we now expect this year as you heard in Charlie's remarks to come.
In above 50 billion for the industry and we believe that we'll consistently see above 40 billion going forward you know given the size of that market. Despite that it's a competitive market, we expect given our industry, leading track record and our capabilities. We're going to continue to find success in picking our spots and net net this will be a nice.
This organic growth area for us over time.
Thank you.
Thank you. Your next question is coming from Ryan Krueger from K B W. Your line is now live.
Hey, Thanks, Good morning, I had a question on individual retirement earnings I think on a core basis, they were up about $60 million sequentially.
Can you help us think through the key drivers of that and if you'd expect that to be sustainable longer term.
Yeah, So Ryan it's Andy again good morning. Thanks for your question on the individual retirement business. We're very pleased with the momentum that we're seeing this quarter. Let me speak first about our core earnings our progress and then I'll talk about our continued success at Flex Guard.
We saw a material lift in our core earnings thanks, primarily to the change in the interest rate environment and that's both on the short and long end of the curve.
We get lift from interest rates on our collateral on the short end and we're getting lift on the long term side in our portfolio as well and we're seeing the flex car blocked grow. That's why you saw the step up in our core earnings and I would just kind of go back to what Ken said earlier higher rates are a good thing overall for Prudential.
Additionally, we're very pleased with our continued progress in building a very healthy flex guard block of business quarter in and quarter out we remain a top share player in the market.
We've achieved 11 billion in sales life to date, we very much like the profitability of the block that we've brought into the organization and at the end of the day, you know kind of back to the organic growth discussion, we see the retirement accumulation opportunity in the country as a very good growth opportunity and we have all the right stuff to capture it.
Thanks, and then just wanted I had one quick capital follow up Charlie you had mentioned that you have other levers that you can pull to execute on your long term capital deployment plan.
If you could expand on that that at all and I guess probably related to that just you would contribute the capital earlier this year to Bermuda you know at what point in time do you think you might see more business. There to then release capital in the U S. Thanks.
Sure Let me take the first part of that and then turn it over to Ken I'll. Just give you a couple of quick examples one would be sort of ongoing reinsurance transactions that we continue to review and the other would be we have levers.
Levers both on and off balance sheet that we can pull so we have lots of different levers and resources that we can use and regularly look at them in order to access additional capital.
And Ken do you want to talk about Bermuda.
Yeah, Ryan Yeah, the Bermuda sub that we launched earlier in the year is a good example of the levers that Charlie referenced we we we have a new reinsurance in Bermuda, It's called Lotus re we did capitalize it with 800 million earlier this year and we reinsured a block of variable.
Life business to it.
So it'll create capital efficiency and it's a reinsurance capability, that's sort of another tool in our toolbox going forward.
Great. Thank you.
Thank you next question today is coming from Sony come off from Jefferies. Your line is now live.
Hi, Thanks, Good morning, I, just wanted to circle back on capital you made comments about 2023, and a couple of times, but just to level set I mean, we're used to thinking about you know kind of a 65% free cash flow conversion and sort of the the yep.
The level of capital return that you guys would do on an annual basis ex any specific special transactions.
Should we be thinking about that as a baseline for next year or are you signaling that the operating environment is a little bit more challenging so maybe you'd guide just something a little bit lower than that.
Yeah.
Yeah, Hey, Nate.
Yes, 65% if you if you looked at our Oh, what we've generated free cash flow from our businesses overtime. That's that's been the average it's been in some years higher than that and then some years lower than that cash flow from our businesses. This year as is below our historical average that's bolt as we continue to invest.
In our businesses for long term growth.
But also worked through the statutory reserve increases in our in our life insurance businesses that we updated this.
This year, so it'll it'll vary over time, but we think given our growth rates in our business profile that that's that's that's you know what our historical average has been.
Okay got it and then just if I could come back to that billion dollar infusion into pica I mean, my rough math would suggest maybe half of that was related to.
The I B M. PRT deal so that leaves another four or 500 million left and I hear you on Flex guard a funding that growth, but individual retirement is still in outflows and I would have thought the capital released from withdrawals would've sort of supported the new business I guess I'm just trying to understand.
But the other piece of it is into pica apart from the PRT transaction. Thanks.
Yeah.
I don't know if what rule of thumb, you use and on specific business lines, but it was for US. It was primarily related to not just the IBM transaction, but the other deals that we did as well and and the growth in our Flex Brook card business and you know we continue to see good profitability and cash flows from our existing VA.
This as well.
Was there any impact from interest rate hedges, you had a GAAP loss, but just wondering if there was any impact from that on the statutory results.
Yeah.
There is Sydney you know is the rise in interest rates has been very swift.
And you know over time that will allow us to invest our insurance reserves that higher yields and improving our profitability and cash flows but in the near term our statutory surplus in the U S business. Our U S businesses is reduced by what we consider a non economic statutory reserve method that that tends to manifest.
Itself when when rates rise.
And and we experienced unrealized and realized losses on our fixed income and derivatives. This is not unique to us.
Aleve, it's an issue for the broader industry and it's an economic in nature and should be addressed and theres a lot of discussions going on with regulators and in the industry about this so we'll we'll manage the change in the rate environment.
And we will maintain regulatory capital is consistent with our our double late financial strength, our objectives, but there you know there is a short term impact on our statutory capital.
Can you size that at all.
It's still it's going to be subject to you know where the rates move and so you know that's still that's still dynamic.
Okay. Thanks, Ken.
Thank you I was a reminder, that star one to be placed in the question queue and we ask you asked one question. One follow up then return to the queue. Our next question is coming from John Barnidge from Piper Sandler. Your line is now live.
Thank you very much.
Really three Qs has typically been the best mortality quarter in any given year.
This is a pre pandemic world of course with Covid now clearly endemic did that typical mortality seasonality return this year.
Hey, John Good morning, It's Andy I'll I'll talk about our about our Covid, we intentionally as we've talked about many times in the past manage our business mix to have a good balance between longevity and mortality that absolutely paid us dividends and all throughout the pandemic daring three Q, we the U S experienced <unk>.
42000 deaths, which was you know 17000 more than our estimate but the fact is we continue to see a declining impact from COVID-19 in the U S. Let me just hit it a little bit about each business in group insurance or life benefit ratio was 91, 4%. It did reflect pre pandemic mortality that was slightly elevated due to.
Accidental death, and dismemberment claims that we very much see just as a natural quarter to quarter variability nothing more were very pleased that we continued to see working age our guests and its impact on working age is continuing to decline in individual life. We saw our mortality actual to expected at the low end of our range nine.
7%.
We saw particularly good performance in the smaller face amount bands and that is typically where we would see the COVID-19 experience show up.
Institutional retirement, we did see underwriting gains above our seasonal is expectations, particularly in pension risk transfer, but again not surprising given the average age of that block of business. So you know the bottom line is given the balanced mix of businesses that we have we very much expect this will be very manageable as the COVID-19.
News to shift into an endemic state.
Yeah.
Great and then my follow up question.
Institutional flows positive, but a material deceleration in T Jim retail in Peru.
Outflow can you maybe talk about how FX impacts is changing.
Where you're seeing demand either a geographic perspective.
Or from an asset perspective, thank you.
<unk>.
Yeah, John It's Andy I'll take your question on flows you know as we've always talked about flows will vary quarter to quarter.
So we stay very focused on our long term track record.
In Q3, we experienced third party net outflows of 4 billion driven on the retail side. Our institutional net flows remain positive with strong positive flows into both jennison equity and real estate debt. So showing the benefit of our diversified portfolio. We're very pleased with our positive 9 billion in institutional flows.
Year to date I would also note that we experienced good affiliated flows so from our insurance transactions like the IBM transaction. We saw 7 billion an affiliated flows in Q3 in 2000 14 billion year to date, you know that is a very important part of our strategy and it reflects the synergies between our liability generation.
<unk> ER as well as our asset management capability, you know to your specific question about retail outflows were $4 6 billion that was a marketed proved meant from the $8 3 billion last quarter them much like the rest of the industry. We continue to be impacted by headwinds in both active fixed income and growth equity.
As far as where the aware or are the flows going at it. There are flows are tending to go into passive and into short duration strategies. We're obviously not a passive player.
As far as FX impacts, we really haven't seen anything material to speak of.
You know the end of the day, we're highly confident that our diversified product portfolio has us well positioned that as the environment settles down and stabilizes.
And flow start to shift back in we have the experience to succeed and we will be a net winner.
As we always have been a you know as we've talked about before we've experienced 18 out of 19 years of positive inflows.
Thank you.
Thank you next question is coming from Elyse Greenspan from Wells Fargo. Your line is now live.
Hi, Thanks, Good morning, My first question.
The Japan Covid losses, you had guided last part I can maybe see you know about $50 million unfavorable underwriting and pack and that came in at 200 million. This quarter. So are you concerned that some of that bleeds into the fourth quarter and you think that that could be any movement around your reserves.
Yeah.
Thanks, Elyse. This is Scott <unk> during the quarter, Japan experienced the largest surge in COVID-19 cases since the beginning of the pandemic, Japan sort of did a really good job upfront, but I'm trying to get them hard a much later the new infections were mainly concentrated in younger ages and they peaked in August.
I'd like over 240000, they have since declined quite significantly I think they are running around 40000 today, so they're down to about a six to where they were from the from the beginning of the pandemic and consistent with regulatory guidance.
And each claim's provided for a policyholder payments related to hospitalizations irrespective of whether the Oh, the patient actually checked into the hospital. So with the large surge in Covid cases, we did in fact see a big Spike in A&H claims, which is which is what you were saying.
<unk> September 26, the industry.
In agreement or with support from the government determined that hospitalization benefits will no longer be paid if the insured individuals are not actually in the hospital with very few exceptions things for people over 65, I'm pregnant women and certain serious comorbidities.
So we we expect the change here to be pretty dramatic in the fourth quarter first of all the infection levels are down a great deal and then the qualification levels had been substantially restricted I think Ken already mentioned that we've got a placeholder.
$20 million versus the 180 for the fourth quarter.
So we will continue to closely monitor the situation and then you know and then as in the past.
We remain focused on really taking care of our customers, but also looking out for our employees and maintaining the strength of our distribution channels.
Thanks, and then my second question what are you guys seeing in terms of the base spreads within institutional retirement, how quickly are those accelerating and how should we think about the earnings growth potential.
That segment from a rising rate.
Yeah.
And at least it's Kevin I'll I'll start and.
We have seen is as the rise in rates and the rising yields of have played out a better opportunity to invest at more attractive terms.
And and you see that are leading to earnings improvement, but probably more importantly will be you know the business growth, particularly with the with the pension risk transfer business that we that we just put on the books and at the end of the third quarter.
Yeah, Alicia it's Andy I would just add we have a lot of momentum in our institutional retirement business. You know we have exceptional people great capabilities, great brand and distribution system that is really second to none and obviously you've heard about that from a pension risk transfer perspective, but we had 13 5 billion in sales in institutional retirement. So it goes.
Well beyond just pension risk transfer.
We also had a billion and a half and that our investment only stable value and ability to an end and longevity reinsurance. So we have very good momentum and it was a banner quarter for us in institutional retirement.
Yeah.
Okay. Thank you.
Thank you. Your next question is coming from Erik bass from Autonomous Research. Your line is now live.
Hi, Thank you your outlook implies higher seasonal expenses of a $115 million in the fourth quarter, which is less than $125 million to $175 million range that you typically expect.
Is this a function of just being disciplined on expenses given the environment or should we think of this as a more permanent trend given the cost saving actions that you've highlighted.
Yeah, Hey, Eric it's Ken.
We are being more disciplined but it's it's it's really timing, we see a lot of that coming into the fourth quarter as usual.
And I wouldn't I wouldn't read too much into that it's yes, we are being disciplined but there's also timing considerations.
Got it. Thank you and then can you talk about how the yen movements are affecting demand for U S. Dollar denominated products in Japan does this materially change the consumer value proposition and the outlook for demand or persistency.
Thanks.
Eric This is Scott I'll go ahead and take that.
There are several things that go on from the strength of the U S dollar.
On the one hand, you will have a cohort of customers who have bought.
Kind of investment products and they may want to.
Terminate to take again, if a if it's a net positive versus Indy any surrender charge.
And for people that have permanent life are they may be thinking about reducing our coverage because a certain dollar amount will provide more yen coverage, which is ultimately a typically what they're looking for.
I think your question focus more on on on the sales side.
With the with the dollar being as strong we think people that we'll be looking for U S. Dollar products will be sizing down their purchase again because in general there looking back to the to the coverage of the.
Of ultimately how it how it covers them in yen, but that being said two other good things I think are going on with higher rates are U S. Dollar investment products do look more attractive and ultimately over time, while we have some short term headwinds.
Headwinds, because we use swaps to hedge them.
And in the long pole this will add to our net investment income, which we view as a as a tailwind in that market.
Got it thank you.
Thank you next question is coming from will Novartis from Raymond James Your line is now live.
Good morning.
Could you clarify how the Lotus re Bermuda entity works to create capital efficiencies and is there a plan to bring in third party capital in Bermuda.
Okay.
Yeah. The Lotus re as is our internal reinsurance capability that space that's based in Bermuda.
Bermuda and we find that certain products and in our initial use of it was with variable life that we find that the regime, there which is a very robust.
You know reserving standard is more principle based and has a better aligned with the economics of that business and as a result.
With by transferring that to reinsure that to that regime.
Where we we get releases of reserves and capital in <unk> and pika.
And again, it's it's where it's our efforts to really align the economics are businesses with reserve and capital standards that are robust recognize and risk sensitive recognize the nature of the business and are a better fit for that type of business.
Well, Matt it's Rob just sort of falling on the second part of your question. So in that particular entity no. Our intent is not to bring in third party capital.
As Ken.
Alluded to I'd say, yeah, it's a kind of a captive vehicle, having said that we are keenly aware of the increased institutional appetite coming into this sector and as we've said before we don't think that there's a firm who's better positioned to figure out how to satisfy the intersection of of demand for our customers.
Their liability origination side with appetite for funding into those sorts of investments from the institutional side. So nothing to talk about near term there, but we think we're particularly well positioned in order to be able to exploit that.
Okay. Thank you.
Thank you next question is coming from Alex Scott from Goldman Sachs. Your line is now live.
Hi, I had a follow up on some of the questioning on the capital and the Holdco cash balance.
Think about gross you know I appreciate that there is the P. R. A T.
You know ex maybe some heightened PRT growth I would think pika would be you know a bit more self funding and I'm just trying to understand if maybe some of the need to fund growth from from the Holdco balance.
It has to do with the expectation of what's going to happen in <unk> around the few well a review and the reason I ask is just you know if that is part of the contemplation that that's fine and it's actually good because it means maybe you don't need to contribute anymore in four Q and that's that's really what I'm trying to figure out.
As you know when you go through that review and for Q1.
This need to occur again, right, where they need to be more cash from the old car that goes down into pica to help fund that.
That impact.
Yeah.
So Alex.
<unk>.
Pica is generating statutory capital.
Its business profile.
But the size of the business growth.
That we experienced this quarter was was pretty high and unique and that's why we thought it was a very attractive use of capital and deploy capital for that purpose, we acknowledged that the assumption update.
Would require funding needs and that was a use of capital as well, but we had to.
At the time of the second quarter we.
We're well positioned to absorb that capital requirement with within pica, including the using the cash flow and statutory surplus that's being generated by our businesses and we'll be looking at the fourth quarter.
In evaluating again, Oh, and I should mention as I also described we have had some short term.
<unk> capital that is being.
Being held in reserves potentially for what we considered non economic reserving given the rise in rates.
And then and then again as we always do in the fourth quarter look at our capital position are our opportunities to deploy capital attractively and and and make sure we're maintaining pica at our double AA financial strength standards.
Got it that's helpful and then maybe a little bit of a more broad question on Japan could you talk about you know how a weaker yen impacts your business and you know if that should be something we contemplate as we think about cash flow in 2023, either positive or negative.
Thanks, Alex This is Scott.
You know, we we've been operating in Japan for a long time and you know in my many years here I've seen again, it's as low as in the high Seventy's too.
So as high as it is.
It is today, so as that happens customer preferences will shift.
And so we'll see more <unk> sales.
For example, if if a dollar products get.
Price too high I'm on the other hand, we may see more.
Dollar deposit type products that'll be more attractive than in the bank or other parts of our of the gym channel you know related to where the dollar is so I'd say fundamentally we have the ability to adapt and we've demonstrated that we've done that.
Over time, I guess, what I would come back to is I would say, we're very disciplined in how we price our business in.
In Japan are part of the reason you've seen the bank channel down is is we've pared we've maintained our discipline around profitability, we haven't been chasing deposit products. When the margins were you know were really tight so I feel very good about the franchise. We have there we see less price sensitivity in <unk>.
Panels, where we have a preferred position like life planners and some of the affinity groups.
And you know, we'll adapt the product mix are based off of customer demand, but we're always going to keep our pricing discipline front and center.
And Alex I'll just add.
We also have a very established a hedging program.
With our Japanese business.
That hedges, both earnings and the net equity position.
Given the strength of the dollar that has a $1 8 billion dollar gain at the end of the third quarter.
Got it thank you.
Yeah.
Thank you. Your next question is coming from Mike Ward from Citi. Your line is now live.
Thank you guys I'm, sorry, if you mentioned potentially reinsurance is one.
Lever for a source of capital I was just wondering if that means we should sort of be expecting.
You know on annuities reinsurance deal or could it be life or anywhere else any color there.
Sure Let me take that this is this is Charlie.
You know first of all I'll deal with both the annuities and then talk a little bit about life. You know, we're really pleased with the valuation for the block of traditional variable annuities with guaranteed living benefits that we sold as evidenced by the gain on sale, we reported and we will continue to explore possible additional opportunities to be risk enforced blocks of traditional V. A busy.
This.
We expect to reach our goal of reducing market sensitivity through the pellet transaction. We did we just completed and through the natural run off of traditional variable annuities business overtime and were not in a position of having to do another transaction, but having said this will continue to explore.
Possible additional opportunities, but we'll only do something as we've said before if it's in the best interest of stakeholders.
So that's on the annuity side on the life block side.
As we've noted in the past we've dedicated resources to looking at various opportunities aligned with our strategy of becoming a higher growth and less market sensitive company and as a result, we'd certainly consider opportunities for a life sub block if they came our way, but with the caveat that it has to make sense for shareholders. So we're gonna be disciplined in our pea.
Broach as the individual life business continues to be core to our purpose.
Great. Thank you that's very helpful. And then maybe on PRT just wondering if there's kind of a benchmark that maybe you could give in terms of how you think about earnings.
<unk> per $1 billion of PRT business or something like that.
I guess one of your larger peers has given us in the past I think it's around $7 million to $8 million of earnings per billion of PRT wondering if that sounds ballpark accurate.
Yeah, Hey, Mike. This is Ken you know all the deals are a little different.
I think putting out a benchmark is as you know would be appropriate.
Okay. Thanks.
Thank you. Our next question today is a follow up from Tracy Bengie from Barclays. Your line is now live.
Thank you I just wanted to revisit that statutory reserve charge, you'll be taking in the fourth quarter.
We understand better why it would be comparable in size on the outside cause as you mentioned you know statutory reserves are marching carve it out.
I would imagine there would be some question there.
Yeah.
<unk> yeah.
Tracy I it will be it will be higher but again.
And because generally because the stat is more conservative, but it's also it's just different but.
But again, we have capacity to absorb that.
And.
We still hold that view.
Okay. When you say higher you may not know many times already the contribution will be higher will they compete.
No I'm sorry, you know when when we took the charge. We believed that we had and we continue to believe we have capacity absorb that within our pike as excess capital position.
As a result.
Okay, but I think last quarter I think it was something like $1 4 billion pretax or are we talking the same dollar amount.
It would be it would be higher again, we're still finalizing those that'll be finalized in our fourth quarter results, but again, we have the capacity.
Passing to absorb that within pica and will continue to maintain RBC ratio is consistent with our double they standards.
Okay. Okay.
Yeah.
Thank you. Our next question is a follow up from Ryan Krueger. Your line is now live from K B W.
Hey, Thanks, I figured I'd just ask this since it wasn't asked last quarter.
Would you be able to say what what your U S. G. Stat was their total is and what you moved to the ultimate lapse rate assumption to when you did the review last quarter.
[laughter].
I think we need to follow up on both of those they're pretty specific that's alright.
Yeah, no problem I, just figured I'd give it a shot thank you.
Yeah.
Thank you next question is a follow up from Tom Gallagher from Evercore ISI. Your line is now live.
Thanks, just just one question on the holding company cash again to come back to the 10 to the $5 1 billion I believe includes a billion and a half.
That we should think about for pre funding of debt maturity in the middle part of 2023 I just wanted to confirm that that's the intention and should we think about the holding company cash really is $3 6 billion.
On a net basis. Thanks.
Yeah, Tom and our holding company cash.
<unk> will will vary depending upon the timing of when we issue a debt or debt matures or we call. It. We've we've consistently made it a good practice to pre fund maturing in callable debt 12 to 18 months in advance and you know this.
What this does is it reduces our refinancing risk and enables us to be selective in the timing of that funding relative to particular market conditions. In August we issued $1 5 billion of debt and we'd earmarked that for debt. That's callable next year. The timing was good we're happy.
With the outcome and we're going to continue to pre fund that as a good practice and.
Overall, though if you've looked at our level of debt over the last three years, it's been a fairly consistent level. It will vary depending on timing of maturities and issuance, but overall it hasnt changed that much.
We also have as we continued to highlight.
Contingent sources of debt. So overall, we feel very good about the level of our debt consistent with our double AA financial strength rating.
And how we manage refinancings of our debt very well as well.
Hey, Tom It's Charlie I, just reiterate what I said at the beginning as well as you know we believe we have other levers and resources by which to execute on our plan. So there are you can you can look at it in the one way you did but on the other hand, as Ken said and as we've reiterated throughout the call. We have other other mean.
By which to execute on our plan as well.
Okay.
Thank you we've reached end of our question and answer session I'd like to turn the floor back over to Mr. Larrea for any further closing comments.
Okay. Thank you operator, and thank you for joining us today.
Before I conclude I.
I want to acknowledge the unexpected passing of Georgia pause last week, a member Prudential's Board of directors for the past six years George was an integral member of our board with a unique perspective and deep business experience that helped us shape, our thinking on a multitude of issues. He will be greatly missed and remembered as both a trusted adviser and as a <unk>.
Friend.
I hope we demonstrated during this call the progress, we're making to transform prudential to deliver sustainable.
Sustainable long term growth and meet the evolving needs of our customers.
Looking ahead, we remain confident in our strategy and the strength of our company for nearly 150 years Prudential has been there for its customers and other stakeholders, who we will continue to serve as we strive to be a global leader in expanding access to investing insurance and retirement security. Thank.
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.