Q2 2023 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 into 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 Caroline Feeney head of U S businesses, Ken <unk>, Chief Financial Officer and.
Rob Axel controller, and principal accounting officer, we will start with prepared comments by Charlie Robyn can and then we will take your questions.
Today's presentation May include forward looking statements. It is possible that actual results may differ materially from the predictions. We make today. In addition, this presentation may include references to non-GAAP measures for a reconciliation of such measures to the comparable GAAP measure.
And a discussion of factors that could cause actual results to differ materially from those in the forward looking statements. Please see the slides titled forward looking statements and non-GAAP measures in the appendix to today's presentation and our quarterly financial supplement both of which can be found on our website at investor Prudential Dot Com and now I'll turn it over to Charlie.
Thank you Bob and thanks to everyone for joining us today, our second quarter results reflect continued momentum across our businesses, including the fourth consecutive quarter of underlying earnings growth and record operating earnings for group insurance.
We continue to execute on our strategy by reducing market sensitivity and increasing our capital flexibility.
Enhancing our capabilities and optimizing operating efficiency to support long term growth.
Our strategic progress and financial strength position us well to navigate the current macroeconomic environment and maintain our disciplined approach to capital deployment.
Turning to slide three.
I'll start this morning by noting two significant milestones demonstrating how we are reducing market sensitivity and increasing our capital flexibility.
During the second quarter, we completed a reinsurance transaction for $10 billion block a traditional variable annuities and received proceeds of $650 million with this transaction I am pleased that we have achieved our objective of lowering the proportion of traditional variable annuities, while continuing our progress.
Pivoting to less market sensitive and higher growth products.
Additionally, last week, we announced another transaction to reinsure, a $12 $5 billion block up guaranteed universal life policies, which will be accretive to earnings we expect to receive approximately $450 million of proceeds when the transaction closes which is expected to be in the fourth quarter of this year.
We also continued to deliver on our vision to increase access to investing insurance and retirement security by enhancing our capabilities and customer experiences and by expanding our distribution channels and products to more people around the world.
In Latin America, we continued to expand our distribution through the Mockado Libre platform and added 150000, new customers last quarter also Prudential of Brazil achieved a record sales quarter driven by strong performance by life planners and continued expansion of the third party distribution.
Channel.
Prudential of Brazil is now the third largest life insurance company in the country growing at twice the market average and reaching more than three and a half million customers.
In addition, we see continued opportunity and feel we are well positioned in the international longevity risk transfer market as we completed more than three and a half a billion dollars of transactions in the second quarter.
In the U S. Our individual retirement strategies business achieved annuity sales of $1.9 billion in the second quarter, a 20% increase year over year and the highest since the fourth quarter of 2020.
Our Flex Guard suite has reached $15 billion of sales over the past three years.
Our fixed annuity sales in the quarter represented over one third of new business as we innovate our portfolio of annuity solutions to meet customer needs.
As we look ahead, we are well positioned as a global leader at the intersection of asset management and insurance, we're confident that our strategy and mutually reinforcing business mix, which leverages. The combined strength of our brand global asset and liability origination capabilities and multichannel distribution.
Will enable us to drive future growth and continue to expand access to investing insurance and retirement security.
At the same time, we continued to enhance the ways, we leverage technology to improve customer experiences and optimize operating efficiency.
One recent example is model my retirement, a new digital tool designed to help institutional pension customers gain a better understanding of their retirement benefits and adjust their financial planning accordingly cuts.
Customers can now quickly and seamlessly get an estimate of their available annuity benefits through our self service website.
We also announced a strategic partnership with denier, a leading benefits experience platform. The new partnership will allow group insurance clients to harness AI and data science capabilities to make more informed workplace benefit decisions.
And we're also using chat bot technology and robotic process automation to reduce transaction processing time across our U S businesses.
As part of our continuous improvement framework, we are focusing on creating a leaner faster and more agile company. So that we can better meet the needs of our customers, while driving growth and efficiency.
We've made good progress in this area, having exceeded the target we established two years ago, but we think there's more work we can do well.
We are evaluating additional opportunities, including further evolving our operating model.
Simplifying our organizational structure and streamlining decision making.
Turning now to slide four.
Prudential's rock solid balance sheet, and robust risk and capital management frameworks have allowed us to confidently navigate the current macro environment, our double a financial strength is supported by our strong capital position, including approximately $50 billion of unrealized insurance margins 4.5.
$5 billion in highly liquid assets at the end of the second quarter, which does not include the 650 million of proceeds from the traditional variable annuities reinsurance transaction that was completed this quarter and a high quality well diversified investment portfolio and disciplined approach to asset liability management.
Moving to slide five our disciplined approach to capital deployment, coupled with the added capital flexibility achieved through our derisking transactions enables us to effectively balance investing in the long term growth of our businesses with returning capital to shareholders in the second quarter, we returned approximately 700.
<unk> million dollars in capital to shareholders.
And with that Rob will now provide an overview of our second quarter financial results and an update on our business performance.
Thank you Charlie I'll provide an overview of our financial results and business performance for our PGM U S and international businesses I'll begin on slide six with our financial results for the second quarter of 2023.
Our pre tax adjusted operating income was $1 4 billion or $2 94 per share on an after tax basis. These results reflect underlying business growth, including the benefits from a higher interest rate environment and favorable underwriting experience, partially offset by elevated expenses and lower variable investment income.
Income our GAAP net income was 576 million lower than our after tax adjusted operating income primarily driven by mark to market losses on currency and interest rate derivatives and losses on fixed maturity sales driven by higher rates turning to the operating results from our businesses compared to a year ago quarter.
Teach them, a global investment manager and lower asset management fees, driven by rising rates and net outflows higher expenses to support growth initiatives. While other related revenues increased primarily from higher seed and co investment earnings.
Results of our U S business is primarily reflected a more favorable comparable impacts from our annual assumption update higher spread income and more favorable underwriting partially offset by the absence of a one time gain from the sale of pallets in the prior year quarter and lower fee income.
Increase in earnings in our international businesses, primarily reflected higher emerging markets earnings and a favorable impact from our annual assumption update and other refinements.
Turning to slide seven P M. Our global active investment manager has their diversified capabilities in both public and private asset classes across fixed income equities and alternatives.
Teach them as long term investment performance remains attractive with 80% or more of assets under management outperforming their benchmarks over the last five and 10 year periods.
Now our short term performance has improved since the last quarter, 80% of assets exceeding their benchmarks over a one year period.
Did you have experienced third party net outflows of $5 2 billion in the quarter, primarily from public equity strategies institutional outflows were primarily driven by client redemptions for liquidity needs and retail outflows were driven by sub advised equity mandates.
Investment engine of Prudential, the success and growth of pizza 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 or 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 teaching affiliate of net flows as well as unique access.
Two insurance liabilities.
In addition, we continue to grow both organically and through acquisitions, our private alternatives and credit business, which has assets of approximately $234 billion across private corporates in infrastructure credit real estate equity and debt and secondary private equity.
Capital deployment across PJM as private assets platform increased from the prior quarter to $8 billion benefiting from strong private placement and direct lending originations.
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 drive towards a higher value higher growth and less market sensitive mix of earnings as evidenced by the Derisking transactions that Charlie mentioned.
Investing in our businesses to deliver best in class customer experiences and expand our addressable market with new financial solutions leveraging capabilities across Prudential.
Retirement strategies generated strong sales of $7 $6 billion in the second quarter across institutional and individual lines of business.
Our institutional retirement business has leading market capabilities, which helped to produce second quarter sales of $5 7 billion, including $3 6 billion of international reinsurance transactions as well as strong stable value yourselves retirement account values were a record high at the end of the second quarter.
Individual retirement, our product pivots that resulted in continued strong sales of more simplified solutions like Flex guard and flagstar income representing approximately 65% of sales and increased fixed annuity sales that accounted for approximately one third of sales this quarter.
Our individual life sales increased 27% from the year ago quarter, reflecting our earlier product fit that strategy.
Life products, representing approximately 74% of sales in the quarter.
And group insurance sales were up 33% compared to the year ago quarter, driven by growth in disability and supplemental health. We've been very pleased with the momentum we are seeing in our group insurance business as we execute our strategy of product and segment diversification, while leveraging technology to increase operating efficiency and enhance the customer experience a record result.
This quarter include.
Favorable group life, and disability underwriting experience, which resulted in a benefits ratio of 81%.
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 targeted high growth emerging markets.
Japan, we are focused on providing high quality service and expanding our distribution 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 and emerging markets. We are focused on creating a 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.
Our international business sales were up 9% compared to the year ago quarter.
Life planner sales were up 12% driven by record sales in Brazil, as well as higher single premium U S dollar sales in Japan Gibraltar.
Gibraltar sales were up 6%, primarily driven by growth in the bank channel.
As we look ahead, we are well positioned across our businesses to be a global leader in expanding access to investing insurance and retirement security.
You need to focus on investing in growth businesses and markets delivering industry, leading customer experiences and creating the next generation of financial solutions to serve the diverse needs of a broad range of customers.
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 third quarter of 2023 relative to our second quarter results as noted pre tax adjusted operating income in the second quarter was $1 $4 billion and resulted in earnings per share of $2.94 on an after tax basis.
To get a sense of how our third quarter results might develop we suggest adjustments for the following items.
First our annual assumption update and other refinements resulted in a net benefit of $16 million in the second quarter.
Next variable investment income was below expectations in the second quarter by $50 million.
While we have not included an adjustment for the third quarter. The potential exists for continued reevaluation of real estate investments and lower prepayment prepayment activity due to the current market and economic conditions.
Variable investment income will vary from period to period. However over time it has exceeded our expectations.
Third underwriting experience was below expectations by $5 million in the second quarter, and we expect $20 million of favorable seasonality in the third quarter.
And last we include an adjustment of 90 million for other items, primarily due to elevated expenses in the second quarter.
These adjustments combined get it to get us to a baseline of $3.26 per share for the third quarter. I'll note. If you exclude items specific to the third quarter earnings per share would be $3.35.
The key takeaways that our underlying earnings power continued to improve due to business growth, including the benefit of higher interest rates, partially offset by higher investments in our capabilities and growth initiatives.
I would also note that due to continued opportunities to build capabilities pursue growth initiatives and gain efficiency. We expect an increased level of investments in these areas that will be reflected in corporate and other.
While we have provided these items to consider please note that there may be other factors that affect earnings per share in the third quarter.
Turning to slide 11.
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.
Our regulatory capital ratios were well above our targets and we have substantial off balance sheet resources, including $9 billion of contingent capital and liquidity facilities, we remain thoughtful in our capital deployment balancing preservation of financial strength and flexibility investment in our businesses and shareholder distributions.
Turning to slide 12, and in summary, we are transforming our business for sustainable growth. We continue to navigate the current macro environment with the financial strength of our rock solid balance sheet, and we maintain a balanced and disciplined approach to capital deployment now I'll turn it to the operator for your questions.
Thank you well now be conducting a question and answer session. We ask you. Please ask one question and one follow up if you'd like to be placed into 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 remove your question from the queue.
For participants using speaker equipment that may be necessary to pick up a handset before pressing star one and once again, we ask you. Please ask one question and one follow up our first question today is coming from Tom Gallagher from Evercore ISI. Your line is now live.
Good morning.
First question is can you talk a little bit about the.
The the dividend flows are the dividends that were paid up in the quarter from from the subs. It seemed like a pretty strong capital generation quarter. So so a little bit behind what what drove that.
And Relatedly the capital that you're going to be that you received for the V. A transaction or the freed up capital and the S. G. Well deals later this year would you expect to be able to dividend those up and use the proceeds.
And then finally, the IMF rule change can you comment on.
Whether that affected.
Your RBC this quarter or do you expect that to affect it later in the year. Thanks.
Yeah.
Yeah, Hey, Tom it's can yeah, we executed planned distributions from our businesses in the second quarter.
That cash flow reflected dividends from pica, and Japan, and other affiliated cashless and some subsidiaries as well again. It was it was all part of our plans for the year.
Our capital position as a result is very healthy our regulatory capital ratios are a bubble above our double E. Our objectives that would include the benefit of the recent.
The a reinsurance transaction, but does not yet reflect the <unk> transaction, which will be subject to close later and again, our holdco assets or a $4 5 billion relatively flat from the prior quarter and a high end of our target range. So again what will benefit.
From the G O L transaction when it closes.
And the NII I see.
I M. Our proposal win that is adopted so that's not yet in our RBC ratios and these will all be key considerations for dividends from pica to <unk> in the second half of the year again with the close of G O L and Ntic's decision on negative by bar. So overall.
We feel very good about our capital position and the Ah.
Outlook for our flexibility looking ahead.
Okay. Thanks, Thanks, Ken and then just a follow up on the potential I am more changes and take the limitation is now looking like 10% of surplus.
Can you give a little bit of color for I think you had had something like 1 billion eight negative impact from that in 'twenty 'twenty. Two would you expect to be able to reverse most of that some of that and would we still be looking at potential limitation.
Or or future losses, if rates keep going up here I guess, it's the other follow up on that thanks.
Yeah, So you're right Tom the proposal as a sub.
Subject to a limitation of 10% of statutory surplus was adjusted for some exclusions and for US that's about $1 3 billion or Oh, you can that you can think of that as about 26 RBC points. So that's that's.
That's what it would represent for us, where we sit and where interest rates sits right now.
Thank you. Our next question is coming from Jimmy Mueller from J P. Morgan. Your line is now live.
Yeah.
Hey, good morning. So first just a question on your Japan business and how do you. How are you thinking about potential changes in Neil or new sales mix and given changes in the capital regime and also just fluctuations recently have you seen in terms of interest rates and currencies in Japan.
Hey, Jamie it's Andy I'll take your question you know our Japan operation as you know is competitively advantaged with outstanding distribution, great product and a strong band and we've been quite pleased with the sales results. This quarter as we experienced year over year growth in our L. P. R. L C and our bank channels.
You know that growth was aided by higher U S dollar product sales, but we've also been investing into the business clearly our work on innovating our product designs and enhancing our customer experience is paying off.
You know as we look at the interest rate changes.
As we always say overall higher interest rates are good for Prudential and are good for our Japanese business says we.
We do believe that those higher interest rates, well, obviously give us greater flexibility in our product design and then delivering a value.
To our customers. So while we may see a shift of the mix between U S dollar and yen denominated.
We think we'll still see strong demand and as we look forward, we're optimistic about our ability to continue to grow the Japan business and deliver shareholder value.
Does the change in capital.
Affect your sort of and economics of the other products between U S dollar and yen denominated.
Hey, Jimmy it's Rob So a couple thoughts as you're referring to the eventual adoption of ESR first point.
<unk> is still a work in process and and is not scheduled for adoption until like 2025, and so we continue to work with the J F S a and with the industry to fine tune the.
Yet the ESR regime, which is you know to date largely mirrored the regime. That's been established on the international side as currently constructed it would cause us to look creatively at how we manage our book of business and ourselves. So I don't think it would necessarily.
Again, our distribution and our sales, but where.
Where we are where we where we hold the assets against those sales could be in Japan or it could be reinsured into other jurisdictions in order to be able to make sure that where we're matching economics of the products that we're selling into the economics of the statutory regimes in which they reside so are we.
We're comfortable that either through a combination of of advocacy and getting sort of the right economic outcomes and all the other levers that we have available to us that we'll be able to sort of continue the balance of sales that we have and and sort of manage the way in which we are well capitalized and reserve those cells.
Okay.
And then just shifting onto bejan the negative flows this quarter how much of that is something that's maybe prudential related that might continue into the second half versus maybe just overall industry wide issues that a lot of your peers have had and asset management recently as well.
Sure Jimmy It's Andy I'll take your question and I'll just hit it broadly to talk about flows for the quarter. You know as we've talked about flows are an outcome of having great distribution broadly diversified products and strong investment results and we've been a net flow winner over a multiyear period in PJM and we're quite confident in the strength of our capabilities and as always we're going to continue to manage this for the long term.
You know that said this quarter, we did see a material reduction in our outflows versus the previous quarters on the retail and outflows were $2 2 billion and were predominantly an equity story.
We've seen retail clients rebalancing their portfolios based on the heels of strong equity market appreciation on the institutional side. The outflows were 3 billion for the quarter again, that's a material improvement over the previous quarters. These outflows included both equity and fixed income are the equity story for institutional is the same as that for retail.
Client rebalancing for fixed income we saw some of our clients make asset allocation changes and other shift to passive.
You know as far as an outlook near term we expect that this current investor behavior is going to continue and to your question. Our trend is consistent with what we're seeing across the rest of the industry over the longer term, we have a lot of confidence in our PGM platform and we know that we're going to return to strong positive flows and gain market share.
Okay.
Yeah.
Yeah.
Thank you and next question is coming from John Barnidge from Piper Sandler Your line is now live.
Good morning, Thanks for the opportunity question on PJM another investment manager on some of these risk transferred assets.
How long does that agreement those agreements last can you talk about how the wind down of those assets would work.
Thank you.
So John it's Andy I'll take it and maybe I'll bring it up a level and just talk about AR and in general as we do Derisking transactions and in particular, the recent Derisking transactions, we did in individual retirement strategies and individual life.
You know it is true we'll lose some assets under management from the general account, but we we are as you've noted we worked hard and made and got an I M E. L D.
That is deal specific how long they are those are I M H gau, depending deal to deal.
But you know it does give us the ability to continue to manage.
A majority of the assets and at the end of the day. If you look across the risk transactions that we've done recently, it's not really going to have a material impact on PGM earnings.
Hey, John its Rob maybe just just a little further elaboration in the in the reinsurance of the PDI transaction recall that those are individuals sort of client separate accounts and so those are the.
So the separate account business there is something that PJM will continue to manage with regard to the <unk> business.
The agreement that we have there is actually a seven year initial IMA and obviously with good performance. We would expect to continue to be able to to manage that even over a longer period of time.
Okay. Thank you for that and then my follow up question sticking with asset management business.
Industry wide headwinds lead to inorganic opportunities and are there products or geographies you'd wanna get greater scaling.
John It's Andy again, I'll I'll take that so and I'll start where I always start when we talk about this we've demonstrated a strong ability over a couple of decades to grow PJM organically. So we certainly as we look at the programmatic M&A, we don't need it to grow.
That being said, we do remain interested in augmenting the organic growth plans with programmatic M&A. If you look at what we've done recently, Montana capital Partners P Chip custom harvest and now Dear path. You know those are really good examples of the areas that we said, we're going to lean into higher fee higher growth.
As we look forward, we're going to continue to work to globalize, the business and lean into areas like private alternatives and real assets. Clearly you know any disruptive environment can lead to opportunity. So we make sure that we stay in the know in and the flow of what's going on in the industry, but as always.
We will remain very patient and be disciplined in our approach.
Thank you.
Thank you. Your next question today is coming from Ryan Krueger from K B W. Your line is now live.
Hi, Thanks, Good morning, I was hoping you could discuss the new open architecture platform that was referenced in the June press release and give some more specifics on really what youre looking to do there.
Ryan It's Rob.
Take that.
We've talked about in the past, we see really interesting opportunities that exist in the intersection of asset management and insurance you see evolving in the industry and we're quite excited about what that implies for our ability to create avenues of growth both in our insurance and our asset management businesses. So we're being thoughtful about how we execute against that opportunity and that includes <unk>.
Organizing ourselves.
In a way so as to institutionalize, our ongoing balance sheet optimization capability. So think about that on the liability side as we're looking at reinsurance solutions to balance the use of captives affiliates and third party reinsurance to.
To continue to actively evaluate additional blocks existing blocks of business for reinsurance and then also looking at slower new sales solutions on the asset side, it's about expanding our lens on the available assets or investments that can generate greater alpha for us while also expanding our capabilities to source those investments either.
Directly or in partnership with others, including things like acquiring capabilities as we did with Deere path.
This is an important component of our broader strategy, which is around enhancing valuation by becoming higher growth less market sensitive and more nimble.
Thanks, and just one follow up there I mean should we think of this as also including.
A potential to bring in more third party capital.
In a sidecar like structured to back some of your new business in the future.
I think we're looking at the full range of opportunities that would exist there instead of going from captive to third party and hybrid solutions that would exist in between that.
Got it thank you.
Thank you I just a reminder that star one to be placed in the question queue. Our next question is coming from West Carmichael from Wells Fargo. Your line is now live.
Hey, good morning, I, just had a follow up on Tom's question on the Holdco liquidity. So I think in the first quarter that was roughly around $4 5 billion and ended this quarter at four and a half billion, but if I kind of add up all the uses of capital in the quarter from buybacks dividends I think there was a 1 billion and a half of callable debt I think they were around two two and a half billion of use.
And in the period, so I'm just curious like.
We're we're dividends accelerated I know you said that they were planned but was there any other affiliated borrowings I'm just trying to square that because it's a pretty a pretty sizeable use of capital and I'm just trying to trying to figure out where that came from.
Yeah, Hey, weapons can no. It was all planned so the distributions we received were all planned.
And we didn't issue any debt in the quarter are either in fact as you recognize we we are called some debt, which again was all planned. So we didn't pull forward anything so it was all up partway.
Part of what our plans were for the year, So I hope that helps.
Okay, and then just maybe any.
Any thoughts around your your kind of PRT pipeline in and just maybe how you think about that versus balancing that with like the longevity business and deploying capital to those those two in the in the institutional retirement business.
Yes, Hi, Wes, it's Caroline and I will take your question and so first of all I'd say overall, we're very pleased with the strong results we saw across our entire retirement strategies business a bit.
With just over $7 5 billion of Ted on South and record institutional account values of 259 billion. That's included $5 7 billion and our institutional retirement strategy business highlighted by a strong quarter and international reinsurance transactions.
In terms of the pipeline overall as we continue to see strong opportunity in both the U S and global wrench transfer markets with strong funding positions, but it was about a 100%.
And also high intent to transact.
I would be remiss not to mention what was just announced yesterday.
Selected to scare of the pension benefits for about 2000 of P. S. T N jeans retirees and their beneficiaries and so far we've seen a record first half of the year N P. R. A T.
And while we expect to see a strong second half.
We don't expect to surpass last year's record pipeline.
We also see an extremely strong pipeline in the U K.
It's funded positions over 110% and west finally, I'd say that given our expertise and our ability to manage large complex transactions along with our financial strength.
We are well positioned.
<unk> a leader in both markets.
Yeah.
Thank you.
Thank you. Our next question to me is coming from city come off from Jefferies. Your line is now live.
Hi, Thanks, I wanted to go back to the risk transfer deals just for a second I think Charlie in your comments you talked about achieving your goal on the VA side, and obviously you've done an S. G. O L transaction of late should we think about this is still ongoing activity for you or are you sort of.
Declaring victory here and kind of moving on to some of the more growth oriented areas of your strategy.
So I would say, yes to both of those so let me let me go through and yes and.
Sydney. So you know first of all I'll go through each one sort of G. O L. And then and then the VA business, but you know first we are very pleased with the valuation we received for reentering. The 12, 12, and a half billion a block of guaranteed Universal life policies that we announced last week and and as we said we expect to receive approximately $450 million of proceeds when.
The transaction closes.
The transaction will be accretive to earnings and will also reduce our market sensitivity and increase our capital flexibility, but would we consider an additional derisking opportunity for lifestyle block you know absolutely.
As long as it met the strategic and financial objectives and made sense to all our stakeholders. However, we're going to be disciplined in our approach as the individual life business continues to be core to our purpose.
There's still significant potential for growth in the industry with a 12 trillion dollar life insurance gap and I think our our strong individual life sales in the second quarter reflects our product pivot to a less market sensitive products and from an enterprise perspective, our life business helps balance our longevity with our mortality. So it remains important to us.
The VA side, it's a little bit of a different story, but but there are some similarities.
So we've made considerable progress in reducing the market sensitivity and increasing our capital flexibility through the two transactions, we've done and where we're pleased with the valuations again that we received for reentering the $10 billion block a traditional variable annuities in the second quarter as well as evaluation to the $30 billion block we sold last.
Last year, but as a result of these transactions as we've said and the natural run off of this business. We have achieved the original objective that we established two years ago of blowing the proportion of traditional variable annuities. So when we're not in a position of having to do another transaction, having said that I want to be very clear that will.
<unk> to explore additional opportunities, but again it just state the obvious but I'll state it.
We will only do something if it's in the best interest of all our stakeholders.
But these transactions aren't only about Derisking as you said there they're also about growth. So while we've been quite successful in our Derisking efforts as part of our strategy. We've also been equally focused on growing with less market sensitive products in our businesses, which you've seen over the past few quarters. So.
You know, let me turn it over to Caroline for men, because Caroline would you want to talk about some of the progress we've made with that part of our strategy Yeah sure Charlie I'd be happy to talk about how we're growing barefaced ethnos's them. So first of all in our life business such as he said we had a 12 trillion dollar insurance gaps. So we had a strong growth path for it.
And particularly when you think about the 50 million Americans, who are currently under insured.
And as you mentioned Charlie had been very successful in pivoting our pets in a sense to products that have a more favorable risk profile are they still they shouldn't have less embedded guarantees they are less capital intensive and we're writing new business at attractive returns and as part of that we saw strong sales in the quarter up more than 25% over the prior year.
And then on the individual retirement strategy side. We also continued to deliver strong sales and earnings and in fact, we had our strongest sales quarter since the fourth quarter of 2020, and roughly a 20% increase San Fran prior year and that's anchored by our Flex Guard suite of index variable annuities, where are we now.
Now have over $15 billion.
And cumulative sales reinforcing our leadership position as a top five player and we also saw strong growth in our fixed annuity solutions.
Roughly one third of our sales in the quarter and a significant increase over the prior year. So I'd say that our derisking transactions, along with our product pivots have put us in a position to be more nimble.
With less market sensitivity and we see a meaningful opportunity for strong growth in both pets in a sense going forward.
Got it that makes sense and then I just wanted to follow up I think kind of in your prepared remarks towards the end of your commentary you talked about an increased level of investment I think in the corporate segment. I was just wondering if you could maybe size that and then some thoughts around for for how long should we expect this incremental investment to be a to b.
Is impacting that line. Thanks.
Sure.
The what I mentioned, there was we have found new opportunities to invest in our capabilities in and including growth opportunities and to gain efficiency.
Building on the programs that we've executed in the past and we have increased our investment level there.
We've put a place holder in there in terms of a run rate of about a <unk> increase of about 25 million a quarter and so that's a given our plans now we think that's appropriate planned increase in the pace of that I just want to mention that you know the the way we look at these opportunities is there.
And companywide.
And that's why you see the expenses occurring in corporate but the benefits are then are reflected in our in our business segments.
And then overall from an expense level standpoint.
Maintained basically a flat level of expenses are while we've increased the level of of capacity to invest in growth and capabilities and efficiencies are the efficiencies that we've gained there of given us given us that capacity and so overall, we've seen a flat level of.
Fences improved label level of capabilities gained efficiencies and improved margins.
Got it so you're not signaling that we need to reflect this $25 million in our corporate forecasts going forward it's more.
Youre going to have this but it's going to be offset by efficiencies and other things.
Yes, but if you think if you think about corporate you should think about that as being a ongoing level of spend and incorporate.
Got it just offset of the segments.
Yes.
Thanks.
Thank you. Your next question is coming from Erik bass from Autonomous Research. Your line is now live.
Hi, Thank you.
You provide an update on just your emerging markets businesses and what Theyre currently contributing to earnings and how they're growing from a bottom line perspective.
So Eric it it's all Andy it's Andy I'll take the question. Let me just start by kind of reminding everyone of the strategy our focus on emerging markets as part of a shifting our overall business mix to be higher growth and we're quite pleased with the performance of our E M portfolio, which is.
Obviously and as you could you could see steadily growing and positively contributing to our earnings profile I would highlight a couple of areas. We're very pleased with our results in Brazil and quite optimistic about our prospects.
Zelle posted strong double digit year over year sales growth with sex success across.
Basically every channel life planner, a third party and group and we had another record quarter.
Second I would highlight our habitat habitat joint venture has contributed steady growth since the acquisition in 2016 as of the end of the second quarter total habitat assets under management at 67 billion that makes US number one in Chile and number two overall in Latin America.
Third we're continuing to invest in emerging Asia and Africa, and then finally, and Charlie mentioned sort of at the top of the call was this.
This really exciting partnership we have with Mercado Pago, which as of for financial subsidiary of Mercado Libre.
Mercado Libre is the largest ecommerce system in Latin America, and has given us access to the mass market Ah Ah in Latin America, and we're seeing really nice growth. There. So we don't we don't necessarily break out the specific growth rates, but this is a portfolio, that's becoming quite a meaningful with our particular emphasis being on.
How Brazil, and Latin America are growing and as we look forward. We really do believe we're in the right spots at the right time and that growth will continue.
Okay.
Thank you and then on P. Jim I was just hoping you could talk about the drivers of the other related revenues in your outlook for the second half of the year and I think the baseline outlook assumes that these normalized so is that an expectation or just a modeling assumption.
So thanks, Eric its Andy again, I'll talk about the quarter and then I'll talk about the outlook in the second quarter, Oh RR came in at $31 million, which was about 20 million below our average expectations are the bottom line. There is the slowdown in the real estate market is playing through as we predict that and we've seen lower agency earnings lower real estate transact.
And fees and lower incentive fees as far as looking forward, we would expect near term to see pressure remain on the or our line really until the market experiences a rebound in the real estate transaction volumes.
Yeah.
Thank you.
Thank you. Our next question is coming from Tracy Bengie from Barclays. Your line is now live.
Encounter, let's talk about RBC improvements I appreciate that you've quantified I am our relief how many RBC points, you're expecting from your V. A P O and you all that detail.
Yeah, Hey, Tracy its Ken.
A deal. It's a 650 is about 13 RBC points in the $4 50 from the G well deal.
Is about nine RBC points.
That's the quantities are expressed in the RBC.
Awesome.
When I'm thinking about these transactions and the counterparty credit Ras do you look at the size of capital by a reinsurer, let's just put the ratings aside like the Somerset re capital base feels a little bit light you did say there was over collateralization, but I don't think there's a comfort trust.
Mechanisms do you put in place to reduce recapture risk and if you could also share any assumptions at Somerset liked with that deal.
Sure Tracy, it's Ken a number of things there. So let me let me cover them in if I Miss them make sure I'd come back to them, but overall, we utilize reinsurance and and our counterparties.
Very carefully are we.
We spread our reinsurance across a select group of high quality third party reinsurers.
And as you would expect we have standards for that reinsurance that we certainly applied to these transactions wow well the they're entering into the business. They do have experienced the management team of these reinsurers of have a lot of industry experience and are committed to the business in the long term.
But beyond that we have contractual provisions some of which you you alluded to but also want to highlight that we will be doing the administration of the business. So we have complete control over that and the reserves for the business and in one instance will be and that comfort trust and the other.
The structure to segregate segregated account, but they they provide similar assurances and protections and and again will be over collateralized with the procedures for timely settlement.
We also want to highlight.
Investment guidelines for the investment portfolios for the investments that are that are held in these trusts are accounts. So so overall when we put that all together we think the.
Counterparty risk is well positioned for us.
I think I covered your questions there but.
Hopefully that helps.
It definitely does if I if I could just slip in if there was any assumptions like mortality and lapse rates that summer Sun life I'm looking at the deal.
Yeah, but obviously those are their assumptions are again, they have a lot of the people there on the other side with Somerset and they have a lot of experience, but they make their own assumptions, but also the obviously youre going to be subject to their own regulatory standards in the jurisdictions of which.
They they operate so this got a lot of regulatory attention on both their side and our side.
And we think that's also in good standing.
Got it thank you.
Thank you. Your next question is coming from Mike Ward from Citi. Your line is now live.
Thanks, guys.
Really appreciate all the commentary around the Derisking and simplification.
I'm just I'm just curious should we think about this as as you guys are sort of saying you are open for considering more block deals or.
Internal reinsurance restructuring whatnot or shall we think about it as potentially more significant like a more material split or divestiture within the organization to unlock value.
Yeah.
Hi, Mike This is Charlie I think it's it's really be.
The former <unk> in other words, if you think about what we're trying to do if we take a step back and think about the strategy of becoming a higher growth less market sensitive and more nimble company. This clearly falls is Carolyn and I talked about in the first and second bucket. So so we are derisking.
And have Derisked and would consider further derisking transactions, if they made sense to stakeholders, but at the same time using that as a way to pivot to becoming a higher growth company.
Thank you that's very helpful. Maybe on group insurance hasn't gotten much airtime.
Results were pretty favorable as they have been for peers. Just curious if there's any sort of updated kind of you know annual go forward earnings power for group now.
Yeah, So Mike, it's Caroline and I will take your questions. So certainly I'll start by saying it was indeed, a great corner for group insurance and as Charlie mentioned upfront, we saw record earnings and an overall benefit ratio of 81% and that reflects the execution of our strategy is product and segment diversification and our continued.
On profitability.
Total disability, new business premiums grew 24% year to date compared to the same period last year and our supplemental health business a core component of our product diversification strategy also saw strong jump object graph and our segment diversification strategy is focused on growing in the under 5000 lives.
Market.
We've got great momentum with that segment now comprising about a quarter of our block.
We're also pleased to be achieving that diversification and growth without sacrificing profitability and pricing discipline.
The current quarter also reflects favorable mortality experience in the working age population.
Primarily from lower incidents and the impact from positive rate actions on renewals.
And also disability continue to see strong results as well and that was driven by lower incidents strong employment numbers and our continued focus on effective claim management.
Disability benefits ratio, we saw with our second Astra reported ever trailing only last quarter. So I'm moving forward. Mike we are confident in our group business. We believe we're in a great position to continue executing on our strategy, while continuing to grow in a disciplined and profitable manner because of that you'll note that we have.
<unk> already increased our expectations for core earnings going forward.
Hey, Mike one other thing it's it's Charlie you know we talk a lot about the investments, we're making in technology processes infrastructure and other things and this is what's pleasing about this is that this is a tangible you can see a tangible outcome of some of the investments we're making.
Specifically in group this time, but there are tangible outcomes, we're beginning to see.
Thank you guys appreciate it.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to Mr. Larry <unk> for any further or closing comments.
Alright. Thank you again for joining US today, we are making progress transforming prudential to deliver sustainable long term growth and to meet the evolving needs of our customers. We're confident that our strategy and mutually reinforcing business mix will enable prudential to become a leader in expanding access to investing insurance and.
Retirement security thank.
Thank you again and have a great day.
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.