Q4 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 participants have been placed in a listen only mode. Later, we'll 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 will now 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 Sullivan head of international businesses and PJM, Our global investment manager airline E head of U S businesses, and Tanja <unk> 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's presentation May include forward looking statements. It is possible that actual results may differ materially from those predictions we make today.
In addition, this presentation may include references to non-GAAP measures.
For a reconciliation of such measures to the comparable GAAP measures and a discussion of factors that could cause actual results to differ materially from those in the forward looking statements. Please see the slide titled forward looking statements and non-GAAP measures in the appendix to today's presentation and our quarterly financial supplement both of which can be found on our web.
I'd say 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 as.
As we look back on 2022, I am proud of the progress we've made executing against our strategic priorities.
During the year, we continue to transform our business to be less market sensitive and better positioned to deliver sustainable long term growth.
We exceeded our $750 million cost savings target one year ahead of schedule.
And a rock solid balance sheet provided the financial strength to navigate the evolving macroeconomic environment.
I'll provide an update on each of these areas beginning with our business transformation.
Turning to slide three.
During 2022, where you reduce the overall market sensitivity of our business by completing the sales of the full service retirement business and the pay like block as well as the run off of traditional variable annuities we.
We simultaneously continue to invest in the long term sustainable growth of our business through programmatic acquisitions and partnerships in emerging markets.
In Africa, we acquired a minority interest in Alex Forbes, a leading provider of financial advice retirement investment and wealth management in the South Africa.
We also continue to grow our third party distribution network in Latin America, particularly in Brazil, where third party distribution now accounts for about 50% of sales and complements our strong life planner channel.
Additionally, we advanced our vision to be a global leader in expanding access to investing insurance and retirement security.
For example, we completed the second largest pension risk transfer transaction in the U S market history, with IBM and closed several major longevity risk transactions, including the $8 billion transaction, we completed in the fourth quarter with the Barclays Bank U K retirement fund these transactions underscore our leadership in.
These markets as well as the strength of our interconnected business model.
R. I B M. P. R. T transaction provided PGM with more than $8 billion in additional assets under management and is a good example of how we leverage synergies across our businesses we.
We see a strong pipeline of opportunities in these markets in the year ahead.
We continue to expand our product offerings to meet the increasing customer needs for financial solutions. For example building on the success of our Flex guard annuity products. We introduced during the fourth quarter Flex Guard life and index variable Universal life product.
Impeach him, we expanded our private loan capabilities through PGM private capital Inc.
Including our direct lending capabilities. This broad proprietary origination platform provides our insurance businesses and our institutional clients with unique investment opportunities and is another example of our self reinforcing business model.
We also invested in enhanced customer experiences that blend human touch with advanced technology and.
In Brazil for example, we expanded our digital sales application to expedite the same day policy delivery and processing with greater automation and.
In addition, as the administrator for the I B M. P. R. T transaction, we introduced new technology capabilities to expedite the Onboarding experience for 100000, I B M pensioners.
And as part of our continued efforts to refine customer experience.
We implemented a companywide initiative to better understand the evolving needs of all our customers around the globe and in turn deliver the most effective products and solutions to meet their needs.
Moving to slide four we achieved $820 million of annual run rate cost savings exceeding our target of $750 million one year ahead of schedule.
We reached this milestone by streamlining and automating the way in which we operate while improving the customer and employee experience.
We leveraged new systems and technologies to enhance our digital underwriting claims and fund processing capabilities, improving efficiency, while reducing customer wait times.
For example for many of our individual life customers, we reduced the underwriting time from 22 days to 22 seconds.
Our group insurance claims processing is now three times faster.
And fun verification.
<unk> new annuity sales now it takes two to three days down from two to three weeks.
We also implemented a hybrid work model for our employees, but reduced our U S real estate footprint by 50% equating to approximately $50 million in annual run rate savings.
And finally, we adopted a continuous improvement mindset that helps us proactively identify and execute on cost savings opportunities that enhance customer and employee experiences and continue to improve our competitiveness going forward.
Turning now to slide five our rock solid balance sheet and disciplined approach to capital deployment have helped prudential navigate financial and macroeconomic challenges for nearly 150 years and 2022 was no exception.
Our financial strength, including our double a ratings is supported by $4 $5 billion in highly liquid assets at the end of the fourth quarter as well as a high quality well diversified investment portfolio.
We continue to balance investments in the growth of our businesses with returning capital to our shareholders. During the fourth quarter, we returned more than $800 million to shareholders through dividends and share repurchases for a total of over seven and a half billion dollars since the beginning of 2021.
For 2023.
Board has authorized up to $1 billion in share repurchases as well as a 4% dividend increase beginning in the first quarter. This represents our 15th consecutive annual dividend increase.
Looking ahead, our strategic progress.
Strength and self reinforcing business system, coupled with the higher interest rate environment.
Vision us well to be a leader in expanding access to investing insurance and retirement for our customers across the globe.
Now before turning it over to Rob I'd like to extend a special thank you to all our employees for their dedication to our customers and our communities.
Together, we have made significant progress on our transformation and are fulfilling our purpose of making lives better by solving the financial challenges of our changing world.
And now over to Rob to talk about the fourth quarter financial results and to provide 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.
Pretax adjusted operating income was $4 7 billion or $9 46 per share for 2022, and $1 2 billion or $2.42 per share in the fourth quarter. These results reflect lower variable investment and fee income, partially offset by improved mortality as COVID-19 has transitioned to an endemic.
As an increase in spread income due to rising interest rates and underlying business growth. In addition, full year results.
Include the strengthening of reserves from our annual assumption update in the gain on the sale of the pallet legacy variable annuity block.
Our GAAP net loss for the quarter was $1 53 per share and included net realized investment losses and related charges and adjustments of $800 million largely reflecting the impact of rising interest rates.
This loss also included a $700 million goodwill impairment due to the reduction in the estimated fair value of assurance or assurance is making good progress in many areas and had a profitable fourth quarter. The impairment reflects lower growth expectations, a higher discount rate applied to future applied to future cash flows reflecting macroeconomic conditions.
And lower publicly traded peer evaluations.
Turning to the operating results from our businesses compared to the year ago quarter teach them, our global investment manager reported lower fees, primarily due to lower assets under management, resulting from higher rates and equity market declines.
<unk> of our U S businesses, primarily reflected less favorable variable investment income, partially offset by the impact of higher rates on spread income and more favorable underwriting.
The decrease in earnings in our international businesses, primarily reflected lower spread income largely due to less favorable variable investment income and less favorable underwriting, including elevated surrenders in Japan due to the depreciation of the yet.
Turning to slide seven PGM, our global investment manager has diversified capabilities in both public and private asset classes across fixed income equities and alternatives, including real estate and private credit P.
<unk> investment performance remains attractive with more than 79% of assets under management outperforming their benchmarks over the last three five and 10 year periods.
For 2022, PGM experienced positive institutional net flows that were more than offset by retail outflows, primarily in fixed income consistent with industry trends due to the rising rate environment in the fourth quarter Peachum experienced third party net outflows of $11 $7 billion driven by public fixed income strategies across institutional.
And retail clients institutional net outflows were driven by a few large client redemptions, while retail net outflows reflected the impact of the rising interest rate environment, our retail flows across the industry.
As the investment engine of Prudential success and growth of teach them and of our U S and international insurance and retirement businesses are mutually reinforcing.
<unk> asset origination capabilities investment management expertise and access to institutional and other sources of private capital are a competitive advantage, helping 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 <unk> through affiliated flows that totaled $13 billion during 2022 as well as unique access to insurance liabilities.
In addition, we continue to grow our alternatives business, which has assets in excess of 210 $30 billion across private credit and real estate equity and debt and benefits from our global scale and market, leading positions, notably pigeons private businesses deployed nearly $43 billion of gross capital in 2022.
Turning to slide eight.
Our U S businesses produced diversified earnings from fees net investment spread and underwriting income and benefit from a complementary mix of longevity and mortality businesses.
We continue to shift towards higher growth and less market sensitive products and markets.
Hence our customer experience, while reducing costs by amplifying the use of <unk> capabilities in self service tools and further expand our addressable markets.
<unk> strategy has achieved robust sales in fourth quarter and full year 2022 across its institutional and individual lines of business.
Our institutional retirement business has market leading capabilities with full year sales of almost $32 billion driving record account values at the end of the year. This includes being selected for a 50% participation and a 16 billion dollar pension risk transfer transaction and our fourth largest international reinsurance transaction of 8 billion.
In the fourth quarter.
In individual retirement productivity have resulted in continued strong sales of more simplified solutions like flex Garden's flex card income representing over $12 billion of sales since inception, as well as increased fixed annuity sales.
Our individual life sales were consistent through the year and reflect our earlier product pivot strategy with variable life products, representing approximately 70% of sales for the year.
And our group insurance benefits ratio has improved during the year from lower Covid mortality.
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.
In Japan, we are focused on providing high quality service and expanding our geographic coverage and product offerings, our needs based approach and protection product 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 regions, where customers' needs are growing where there are compelling opportunities to build market, leading businesses and where the financial enterprise can add value.
Our international businesses experienced their highest sales since the third quarter of 2020, including record sales in Brazil.
Impaired to the prior year quarter, Gibraltar sales were up 20%, mainly driven by the life consultant channel primarily from higher U S. Dollar sales life planner sales were also up 17% driven by continued momentum in Brazil's third party distribution channel as well as higher sales in Japan.
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 continue to focus on investing in growth businesses and markets delivering industry, leading customer experiences and creating the next generation of financial solutions to better serve the diverse needs of a broad range of customers.
And with that I'll now hand, it over to Ken.
Thanks, Rob I'll begin on slide 10, which provides insight into earnings for the first quarter of 2023 relative to our fourth quarter results.
As noted pre tax adjusted operating income in the fourth quarter was $1 $2 billion and resulted in earnings per share of $2 42 on an after tax basis.
Get a sense of how our first quarter results might develop we suggest adjustments for the following items first variable investment income was below expectations in the fourth quarter by $125 million next we adjust underwriting experience by a net 60 million as we normalize for fourth quarter experience and expect season.
The healthy in the first quarter.
And last we expect other items to increase adjusted operating income by $91 million, primarily due to seasonally elevated expenses in the fourth quarter.
These items combined get us to a baseline of $3.01 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 seven.
The key takeaway is that our underlying earnings power has improved due to business growth and the benefit of higher interest rates.
While we have provided these items to consider please note that there may be other factors that affect earnings per share in the first quarter.
Actually as we look forward. We have included other considerations for 2023 in the appendix.
Turning to slide 11, I'll now provide an update on the adoption of the new accounting standard for long duration insurance contracts, which went into effect on January one.
The new standard that applies to our GAAP financial statements and will have no direct effect on our statutory financial statements cash flows our dividend capacity.
We estimate that as of September 32022, GAAP equity will increase by approximately 15 billion comprised of two components.
Accumulated other comprehensive income or OCI will increase by approximately 17 billion, primarily due to the remeasurement of long duration liabilities with higher discount rates and our Japan business retained earnings will be reduced by approximately 2 billion, reflecting the reclassification of nonperformance.
Gains from retained earnings to OCI and other changes in reserves also some note GAAP equity will continue to exclude certain unrealized insurance margins for products subject to L. P. Ti as at September 32022, the estimated after tax unrealized insurance margins relate.
To those products are approximately 50 billion, primarily in our Japan business.
These margins are an important factor in determining financial strength and assessing profitability.
And finally, we do not expect significant impacts from L. D. T. I on our total underlying earnings power as impacts across our businesses will largely offset.
Turning to slide 12.
Our capital position continues to support our double a financial strength rating.
Our cash and liquid assets were $4 5 billion at the high end of our liquidity target range, we have substantial off balance sheet resources, including contingent capital and liquidity facilities, we remain thoughtful in our capital deployment balancing the preservation of financial strength investment in our businesses and shareholder distributions.
<unk>.
Turning to slide 13, and in summary, we are transforming our businesses for sustainable growth, we exceeded our targeted cost savings one year ahead of plan and we'll maintain our discipline and continuous improvement mindset going forward. We continue to navigate the current acro environment with the financial strength of our rock solid balance sheet.
Now I'll turn it to the operator for your questions.
Thank you you may 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. We ask you. Please ask one question one follow up then return to the queue. If you like to remove your question from the queue.
You. Please press star two once again Thats star one to be placed in the question queue. Our first question today is coming from Erik bass from Autonomous Research. Your line is now live.
Hi, Thank you just hoping you could talk a bit more about how you're viewing excess capital. If we look at the pieces you provide the pike RBC ratio is below the 400% level, where it's run historically I think the semi ratio looks in line and Holdco liquidity is within your target range, but at the low end, if we adjust for the planned that call.
All that you'd talked about on the last call. So.
This suggests a little excess capital, but are there other pieces are sources that we should be considering.
Yeah, Hey, Eric It's it's Ken.
Overall, we do feel good about our overall capital picture and in multiple parts as you suggest but I thought it might be helpful to give us a little bit of an overall context for our capital management.
We've had a very well established and consistent approach and it served us very well, particularly last year as we look to shift our business to be less market sensitive and grow while also maintaining our financial strength and flexibility.
We closed the sales of our full service.
This and the pallet variable annuity block last year that released capital at attractive terms.
And we also deployed capital to.
To the second largest PRT transaction with with IBM.
We also as we mentioned and discussed on our last call absorbed the the capital impact of the assumption update in our life insurance business.
And.
The non economic impact of higher rates on stat capital again that was expected.
Manageable and we've appropriately addressed those capital implications.
When you put that all together, we ended 2022 and a solid capital position, our RBC ratios were above our double a objectives and our target there is to be above $3 75.
R R.
Our Japan solvency margin ratios are above their double the objectives, we have an HLA balance of $4 5 billion at the Holdco.
As you mentioned that's at the high end of our target range and we have a healthy outlook for our businesses with sustained profitability and free cash flow.
So that led our board to authorize a $1 billion of share repurchases for next year or this year actually 2023.
And that's reflective of our capital position as we end 2022 that also considers the free cash flow outlook for our businesses.
And our opportunities to deploy capital and also the macro environment.
Whether that's the potential for another recession or or other stress event. So again, when we put that all together.
We feel good that were consistent with our double E objectives.
We have a level of flexibility and that's what our board considered when they are issued where they authorized a $1 billion of share repurchases for this year and increased our dividend, 4%, which again is the 15th straight year of dividend increases. So hopefully I gave you a much broader answer there but.
Oh, that's helpful context.
Yes. Thank you and then my second question I was just hoping you could provide a bit more color on the company's sensitivity to short term interest rates how much. It seems like it's been a big uplift, particularly in the individual retirement business, hoping to get a little bit of a sensitivity. There and then just wondering if it were to reverse in the third word.
Cut interest rates would then you'd see kind of the earnings pattern for individual retirement move back lower.
Yeah, Hey, Eric I'll start and then turn it over to Caroline to give a broader business context, but just from a.
Your sensitivity to short term rates. We yes. We are we are benefiting from short term rates and generally overall, our variable annuity business is sensitive to rates, both long term and short term sort of rise in both is actually actually helping us in terms of short term rates, we did see a pick up in earnings because we're earning a higher rent.
Turn from collateral that's posted on our hedging positions are and that's driven by the uptick in short term rates, but theres more dynamics going on broadly for the business. So maybe Caroline I'll turn it over to you for that Yeah of course can so Eric first I should point out that the individual annuities market had a record year last year Brito.
<unk> 300 billion of sales.
And our own individual retirement strategies business delivered strong sales and earnings and our sales success continues to be driven by our flex Guard suite of index variable annuities, where we now have over 12 billion in sales are clearly reinforcing our leadership position as a top five player in this market.
And we also saw Ericsson and strong growth in our fixed index and fixed annuity installations.
With fourth quarter results twice that of what we saw in the third quarter are actually in fact more than 25% of our sales for the quarter came from these products. So ultimately.
We're pleased with the progress we've made in that space and we liked the diversification these products bring to our overall business mix and the role that compliance is a strong complement to our fixed charge like garden suite installations.
Thank you next question today is coming from Tom Gallagher from Evercore ISI. Your line is now live.
Good morning, Ken should we should we think about debt reduction being a planned use of the four and a half billion of holdco cash in 2023 I think you'll have a callable instrument in the middle part of the year, but 1 billion five should we assume your.
Planning on calling that or you still expect a which should we expect that to remain outstanding.
Yeah generally are and again I think I mentioned this on the last call. Our overall level of debt has been pretty consistent over the last few years and we do have the ability to call about 1 billion half of that this year in June .
That's that's up to us we're not obligated to do so.
It is our practice to pre fund upcoming maturities and calls and we've factored that into our debt issuance plans last year, having said that where we're going to continue to evaluate the market conditions and our liquidity position and a factor that into the decision to two and the timing to call the debt or or not.
And we're also going to look at our overall funding needs going forward.
And again, our our our discipline is to pre fund our upcoming plans. So it's really an ongoing cycle is the best way you should think of it.
Okay. Thanks, and then.
Can you just from my follow up can you talk about how big of a G well charge.
You took at for the Pica for year end.
And in any other.
We'll call it.
Adjustments that we should consider that occurred on a statutory basis at year end between.
I assume that might've been a a T reserve releases or and any other ins and outs that you can provide on on on the statutory impacts. Thanks.
Sure Tom.
We are as we described when we updated our assumptions for GAAP, we would be making those same.
Assumption updates for stat and that.
Statutory purposes occurs in the fourth quarter.
So that was our our GAAP impact was about $1 4 billion. It is larger on a stat basis that tends to be more conservative and that's what what occurred in the fourth quarter that was generally what.
<unk> led to the our RBC RBC RBC ratio in the.
Fourth quarter going from above 400% to below it but still again above our our double a objective of $3 75, and we didnt make a capital contribution into pica to achieve that again as we expected. So I'm just remind of the.
Moving parts there.
Thank you. Your next question today is coming from Sydney come out from Jefferies. Your line is kind of alive.
Thanks, I guess for Ken.
Just curious if have you used lotus re yet and if and when you use it should we expect sort of the freed resources to be somewhere in that neighborhood of the 800 million capital contribution that you originally made.
Yes.
Thanks for bringing that up.
We do have a company in Bermuda called <unk>, which is a reinsurer and it does gives us the capability to reinsure business to that to that entity and we did so in 2022 as you were as you mentioned, we initially capitalized at and.
Then we reinsured a block of variable life business to that business or to that to that entity in 2022 and that was a source of of capital release and all of that was factored into.
Our pika outcomes for the year, which again, we continue to be above above $3 75.
And can you size that capital relief.
I don't we don't think we want to put a precise number on it it's an internal reinsurance transaction, but it does improve our flexibility.
Got it and then I guess my follow up for Charlie I guess overnight. We saw some headlines that came out about I don't know if they were quoting you are referring to some comment that you made about prudential's M&A strategy and perhaps a change post I'm, assuming the goodwill write downs for assurance IQ.
So I just wanted to give you a chance to comment on that and kind of how youre thinking about M&A, especially as you think about that strategy of around improving the earnings contribution from growth businesses that you've talked about I guess two years ago.
Sure. So thanks for the question and in our ability to clarify yeah. We we saw the headlines too and we were slightly surprised.
The our strategy remains consistent with exactly what we have been doing so what we've said is that we won't be investing in early stage companies with less less proven track records. What we're focusing on is developing a portfolio programmatic acquisitions concentrating in our more established businesses, where we can expand the capabilities and scale.
Of our existing businesses.
And this this approach supports what you said, which is our strategy of growing PGM and emerging markets.
Focusing on asset management and high growth International markets that will help increase our fee earnings and growth profile and if you look at our recent most recent four transactions, which include I see a lion, Montana capital partners custom harvest asset management and most recently Alex Forbes. These are all examples.
Of this approach of acquiring more established companies and are consistent with what we what we have done and what we will do going forward.
Got it thank you.
Thank you next question is coming from Alex Scott from Goldman Sachs. Your line is now live.
Hi, first one I had is on just sort of sources of cash flow as we think about 2023.
You've talked about 1 billion of share repurchases penetrate some debt reduction.
Could you talk about how that'll be funded between PGM cash flows pica in the U S businesses versus Japan.
Yes, and specifically I'm interested in particular in pica, if you're planning to take dividends out this year.
Yeah, Hey, Alex it's Ken.
Our our businesses are generating free cash flow to maintain our shareholder distributions, but and also to support the growth of the business.
And we do have diverse sources of cash flow to the parent company. That's provided by our business mix across our U S insurance and retirement, PJM and Japan businesses.
And they're all they're all expected to contribute.
You know over time, I think the way to think about our free cash flow ratio is it's been about 65% given our of our after tax ally given our mix of business and in growth.
And we think that's we think that's about right and we would expect again to receive capital from all.
All of our businesses, including the pica legal not legal entity.
Got it second question I had is on Japan.
Yes sales have picked up recently and look pretty good I guess the premium growth is still.
But a bit weaker year on year over year comps and so forth I was just interested in and you know what what you expect from that.
What kind of topline growth can we expect from that business.
So Alex it's Andy I'll take your question. Yeah, you you sort of mentioned some of the effects as we look back from the Covid pandemic that obviously resulted in a in some headwinds from a sales perspective, but thankfully as we sit here those pandemic challenges have subsided quite a bit.
We're exceptionally proud of our Japanese business says, we've steadily increased our market share over time and we've consistently ranked in the top three for new business face amounts.
Every year of the last decade.
That's generated significant earnings and cash flows for Prudential our strategy to grow the business is threefold first we're very focused on continuing to strengthen and expand both our captive and our third party distribution second we're going to continue to innovate and expand on our solutions that we deliver to our customers and finally and importantly.
We remain laser focused on delivering an outstanding customer experience with a particular emphasis on our digital capabilities, we're very very proud and good or bad in fact, we're consistently ranked by J D powers in the top three and often number one and policy issuance policy servicing claims.
The market remains highly attractive to us and we intend to grow our position in the low single digits overtime.
Got it thank you.
Thank you. Your next question is coming from Ryan Krueger from K B W. Your line is alive.
Hey, good morning, a follow up on Japan have you seen any change in policyholder behavior.
In Germany.
Driven by the weaker and volatile yen that we've seen over the last year regarding the FX products. Thanks.
Yeah, Ryan it's Andy again I'll take the question so given the rise in the U S dollar and the weakening of the yen we have seen an elevated level of surrenders in the business are the effect. There is really some customers are looking to monetize their games out of their non yen products in in yen terms, you know that being said we saw this effect begin to two.
Decelerate in the month of December and that deceleration has continued here in the month of January as the unappreciated.
So we would expect as the engine starts to stabilize this effect will stabilizing the business.
Got it thanks, and then on that the SQL charge.
Is there a chance to see some of that could reverse from the <unk> subtest.
Higher interest rates when you when you do the look back in 'twenty three.
Ryan It's Ken.
I think you're referring to our asset adequacy testing, we're not expecting any significant change in our a a T reserves.
In light of the higher rate environment.
Okay got it thanks.
Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from Tracy Bengie from Barclays. Your line is now live.
Thank you a follow up on your statutory reserve charge fair assumption update it last quarter can you mentioned it would be absorbed within pack as excess capital position has that changed in the quarter, where the ultimate size ended up being higher than your expectation and also unlike GAAP reserve charges I understand that funding.
For statutory reserve charge does not have to come in all at once in four key ill. So can you share if you booked a portion of it before for Kale.
Hey, Stacy now in terms of the assumption update.
That is recorded in that was recorded in the fourth quarter.
Again, consistent with established practice for statutory reporting and nothing nothing new there to report came in as expected.
We did not we did and.
And did not need to fund pica with capital from the Holdco.
As as also as expected so nothing nothing nothing really new there.
Okay.
And your latest buyback authorization level suggests you're not meeting your objective over three years of 11 billion of capital returns. So I'm just if you could walk us through what has changed since he set that objective with the chest a reserve charge or is it something else like P. B R. I guess my broader question is kind of experience are you rethinking the idea.
Coming up with a multiyear plan versus a singular here a plan.
Yeah, Tracy it's Ken.
Looking back here and as a reminder, when we set that three year objective in 2021.
And the target was initially $10 billion over the three year period.
Later in 2021, we increased that objective as cash flow for 2021 was very strong and as you know as I kind of highlighted earlier in the call in 2022 last year, we managed through a number of significant items, which was our.
Update in our life insurance business the jump in rates and the non economic impact on Stat accounting and then we had the major PRT transactions and and again when we put that all together. We think we end up at at the end of 2022 and are in a very competitive position from a capital standpoint, and a healthy outlook.
For our businesses with sustained cash flow going forward. So yeah. That's that's what got factored into the decision along with.
The outlook of the economy with the recession uncertainty so the $1 billion will put us a little shy of $11 billion, but it will only take about another quarter or two to achieve that.
Okay. Thank him.
Thank you next question is coming from Jimmy Buhler from Jpmorgan. Your line is now live.
Hey, Thanks first just a could you talk about your sales pipeline and beach them in both the retail and the institutional side and how that's looking.
Sure Jimmy are at its Andy we have a high degree of confidence.
And our approach in PJM, you know as you've heard me say before flows are an outcome of really three things, having a broad and diversified product portfolio. Great long term investment results are great distribution on the bottom line is we've stayed very focused on those elements because we know they work.
It has resulted in our strong track record over with positive flows in 18 of the last 20 years.
We're continuing to expand our product range and vehicles just as an example, our ultrashort bond ETF rank number two in terms of net flow rate in its category.
We're continuing to invest in distribution on both the retail and institutional sites are in retail, we're maintaining our high activity high visibility approach with advisors.
And in institutional we added a significant number of new clients. This year and then obviously finally, our long term.
Investment track record speaks for itself over three five and 10 years, you know the predominant impact that we've seen has been a fixed income impact.
And you know in particular, we believe that sustained higher rates are really good for the fixed income business. So we're going to keep doing what we know works and we're confident that we're gonna be a net grower overtime.
Do you have enough visibility to sort of.
Assume that you'll have positive flows on an overall basis it'd be Jim for 'twenty, and 'twenty, three or too early to say.
So as I've said in the past flows very a good bit quarter to quarter, especially on the institutional side, they're chunky. So we wouldn't provide a forecast on that over the long run we know that we're going to grab it.
Thank you next question is coming from John Barnidge from Piper Sandler Your line is now live.
Thank you very much my question is around agents as I look at the agent counts.
Declined overall in international.
Is there anything being done to drive greater agent recruitment or.
With productivity improved are you taken assurance lessons on the tax side do the agent force more generally.
So Jonathan Andy Oh, I'll I'll take your question.
So really the impact just a solid near term COVID-19 kept pressure on our recruiting efforts and retention efforts factors throughout the last couple of years. It was a harder environment to recruit and established culture with with new agents.
That impacted our life consultant counts more so than our life planner count, but it did affect both you know as we've started to transition to more of an endemic we we are seeing an improvement and expect to see an improvement over time.
You know, we'll we'll remain focused on two areas first strengthening our existing People's performance.
And we're exceptionally proud of our talent, we have the highest number of million dollar Roundtable members, who really deliver every single day for our customers and second we are continuing to to lean in to attract landed and developed a new agents, which are as we come out of the Covid pandemic, we believe will be easier for us.
So this is a model that has worked for us very consistently over a long period of time, and we expect to keep seeing steady performance.
Yeah.
Thank you for that and then my follow up question can you talk about the decline in group new annualized premium.
In both group life and group disability is just from renewals.
Selective exits or job cuts at the large and jumbo into the market. Thank you sure John It's Caroline chime in I'll take your question.
So first of all just let me say, we're very pleased with the momentum that we've seen in our group insurance business and as you are aware that the fourth quarter does tend to be a little lighter in terms of south corridor with.
With the first quarter being I mean, our largest is the majority of our cases do you have January 1st inception dates so the lower sales that you're noticing on a year over year basis is largely due to just a large keeps buyouts on last year that drove that sales volumes and these two are car paired out periodically and certainly can produce some some.
L a and sales volumes, particularly in the lighter sales quarters.
And John if you were to normalize for last year is a one time buyout that we saw sales are actually up about 7%.
Obviously this is on the disability side.
I'm on the life side. It was just a matter of timing of premiums are driven by changes in and when some customers that do enrollment in a year. So I mean I can say overall, we feel very good as well about our existing pipeline as we continue with our strong sales momentum.
Okay.
Thank you for the answers.
Thank you next question today is coming from Elyse Greenspan from Wells Fargo. Your line is now live.
Hi, Thanks. Good morning. My first question can you talk about the impact that you've seen on your RBC ratio from the I am are getting floored at zero and do you think that that issue is solvable via either and I N AIC changes or by getting a permitted practice from new Jersey.
Yeah, Hey, Elyse.
The impact on our RBC ratio was about.
35 basis points, maybe a little bit more and that occurred with the rise in rates from.
From <unk> through <unk>.
And and you'll be able to see that in our Blue book and Green book combined So and we'll we'll be reporting that at the at the end of the at the end of the month, we have been with very active discussions with regulators and I know many others have across the industry have been as well.
There seems to be a good understanding of the issue and a lot of careful consideration being given on how to best address it.
So more to come.
But.
Rest assured, we're where we're working with our regulators and and and at many others are as well too.
To see what how best to address this issue.
Thanks, and then Rob I think you you had mentioned that the board was looking at capital deployment in the context of a recession and severe credit cycle potential could you talk about what kind of credit outlook factored into the board's decision on the 20th we buyback plan and what is your budget for downgrades and impairments if we enter into.
Recession.
Thanks Lisa.
It is Ken articulated earlier the decision with regard to the buybacks are factored in a number of considerations, including in that is a possibility of a recession and obviously of recession that might be accompanied by a credit a credit cycle, which could affect the portfolio.
A couple of thoughts on that first well we are we do scenarios, which would anticipate the potential for both negative migration and credit losses. We also take some comfort in is our board did from the strength that we have in portfolio management, we think we're incredibly well positioned in the event of any deterioration in the economy.
It might lead to a credit cycle we're.
We're not yet seeing any of that I'll note elyse.
If you look at our net credit migration in the fourth quarter and for the full year of 2022, it was actually positive.
So we haven't seen any.
Any imminent signs of distress sort of percolating within the within the portfolio that would lead us to be overly concerned about that.
But as we established the buyback.
Amount that was authorized we did anticipate that such a thing could occur and that we would want to be able to both.
Both.
Anticipate that level of buyback and have the strength to.
To be able to absorb anything that might happen from a negative migration or or default standpoint.
Maybe I'll just add just to remind people you know we do have contingent sources of funding in.
<unk> R P caps.
Which is <unk> three.
$3 billion is a guaranteed source of funding so.
That's a that's an important source of funding in the event of a variety of reasons, including stress.
Thank you.
Thank you. Your next question is coming from Andrew <unk> from Credit Suisse. Your line is now live.
Hey, good morning, I know, there's been a number of capital questions and the I am Moira was impacted this quarter.
Due to derivative losses, given rising interest rates.
Now, we've got rates coming off a bit in <unk> 'twenty three so I'm wondering if you could give us.
A little sensitivity on rate.
How we can think about that impact on capital, particularly with regard to these derivatives.
Yes again.
Rising rates is generally a good thing economically but for this one item called the RMR.
A decline in rates would help.
But it's a it's a pretty complicated and complex item and will also vary depending upon the activity level. So.
I can't give you a.
Precise sensitivity as a result.
But we factor it into we factored into our overall capital position in order to make sure we can deal with the volatility.
Yeah.
Okay, Okay, and maybe help us on the expenses so you've got this terrific.
Terrific $820 million run rate savings.
But as I look at results I'm unable to close.
Behind those benefits flowing to the bottom line, so maybe like a little color geographically.
It is all of that hitting the bottom line like just just a little color as to how we could think about that eight 'twenty going forward.
Yeah. It is it has been a companywide our objective so the impact is across all of our all of our businesses.
And the contribution that our corporate centers make towards that.
And it does hit the bottom line, having said that.
We are investing to grow certain business lines, particularly teach them in international.
So they're just want to add that dynamic in there as well.
Got it and then just real quick technical question are you planning to.
Deploy capital into assurance IQ going forward or will it now that it's generated a little profit can it can it be self funding.
Yeah, we we maintained our assurance well capitalized and and funded its losses as they've been they've been incurred profitability continues to improve and we will continue to keep it well capitalized going forward.
Thanks, a lot.
Thank you next question is coming from Michael Ward from Citi. Your line is ally.
Thanks, guys. Good morning, just high level question I was wondering if the capital pressures.
<unk> charge, maybe earnings pressure in certain lines over the last 12 months or so I'm wondering if that has changed specifically how you think about your business mix at all and I know you've taken a few solid steps so far.
But it seems like some incremental divestment or derisking could help reduce some of these pressures going forward. So I'm just wondering how you think about that prospect.
Sure Mike, It's Charlie I'll take that so as you know we've made significant progress in our transformation. So far but we would also note we still have more work to do to become a higher growth and less market sensitive company and as we look ahead, we're going to focus on our financial performance, we're going to focus on advancing our transformation, including the customer.
Unemployed experience and we're going to focus on continuing to thoughtfully deploy capital all of with all of that with a goal of creating long term sustainable value for all our stakeholders and we think we're well positioned across our businesses to be a global leader in expanding access to investment investing insurance and retirement security and we will.
Do that in three ways, we will continue to invest in our growth businesses and markets. As we go forward, we will deliver industry, leading customer experiencing leveraging our broad capabilities and scope of diversified businesses, and which will continue to invest as well.
And we will create the next generation of financial solutions to better serve the diverse needs of a broad range of customers. So what I'd say in summary is that we're definitely committed to becoming a higher growth less market sensitive company.
And our progress will obviously be dependent upon opportunities that arise in macroeconomic conditions, we face, but we're laser focused on what we need to do and we'll accomplish that.
Okay, great. Thank you and and most of my questions were asked but I was curious just sort of nail in the coffin, making sure you're not liable for the earn out with assurance IQ.
Yeah, I'll cover that actually one of the things that we disclosed for GAAP is the fair value of that earn out and we've been disclosing that as zero. So I think that would give you a good indication.
Okay, great. Thank you.
Thank you. Your next question is a follow up from city come off from Jefferies. Your line is now live.
Great. Thanks for the follow up maybe just two quick ones just for Ken I was curious about your comment about no change to a tee reserves, even with the move up in rates.
Can you just talk about why that would be the case.
Yeah, because a T. I mean, it looks at a number of scenarios and it's.
It also looks at not just the level of ending surplus.
But also interim periods and you know what.
With derivatives, we have some interim periods that kind of offset the impact of the the impact of higher rates on the ultimate periods. So it's a little technical question, but overall the little change there.
Got it and then just curious on an L. D. T. I know you said that the a O impacts offset across businesses, but can you just give us a sense of maybe which businesses benefits and which businesses saw some pressure.
Yeah sure so yeah again no overall.
We don't expect an overall change to the run rate level of the earnings and actually some of the businesses will have no or little impact, which would be as you would expect PJM assurance in group insurance.
The earnings from our international and institutional retirement businesses.
<unk> are expected to increase on a run rate basis, and that's and that's really due to the earlier recognition of the unrealized insurance margins, which are which are quite sizable on the other hand earnings from individual retirement and life insurance in the U S are expected to be lower than that.
Primarily due to the slower recognition of ribbon revenue for those businesses again kind of some pluses and minuses that offset.
But that's sort of the segment level information, we like others will be providing a lot more information.
Prior to our first quarter earnings.
When we restate.
Under the new standard so you can expect to get a lot more.
Okay. Thank you.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to Mr. Lowery for any further or closing comments.
Okay. Thank you and thank you everyone for joining us today I hope we demonstrated the progress we are making to transform prudential to deliver 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 is focused on creating.
For our customers and other stakeholders, who we will continue to serve as we strive to be the global leader in expanding access to investing insurance and retirement security. Thank you again for your time 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.