Bob McLaughlin:

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 the International Businesses and PGIM, our Global Investment Manager; Caroline Feeney, Head of U.S. Businesses; Yanela Frias, Chief Financial Officer; and Rob Axel, Controller and Principal Accounting Officer. We will start with prepared comments by Charlie, Rob, and Yanela, and then we will take your questions. Today’s discussion may include forward-looking statements. It is possible that actual results may differ materially from the predictions we make today. In addition, our presentation includes references to non-GAAP measures. For a reconciliation of such measures to the comparable GAAP measures and a discussion of factors that could cause actual results to differ materially from those in the forward-looking statements, please see the slides titled Forward-Looking Statements and Non-GAAP Measures in the appendix to today’s presentation and the quarterly financial supplement, both of which can be found on our website at investor.prudential.com. And now I’ll turn it over to Charlie.

Rob Falzon:

Thank you, Charlie. I’ll provide an overview of our financial results and business performance for our PGIM, U.S., and International Businesses. I’ll begin on Slide 6 with our financial results for the second quarter of 2024. Our pre-tax adjusted operating income was $1.6 billion or $3.39 per share on an after-tax basis, up 10% from the year-ago quarter and 12.5% on a year-to-date basis. These results reflect the execution of our strategy to grow our market-leading businesses. Higher spread in fee income was the result of continued strong sales and the benefit of higher interest rates in equity markets. Additionally, expenses were lower and include a reduction in legal reserves. Results for the current quarter also include a modest net favorable impact from our annual assumptions update and other refinements reflecting the benefit of our diversified business mix. Year-to-date adjusted operating return on equity was 13.5% and has improved nearly 1.5 percentage points from the prior year. This reflects the strength of our businesses, the benefits from the deliberate actions we’ve taken to pivot to more capital-efficient products, and operating efficiencies we’ve achieved that support growth. Turning to the operating results from our businesses compared to the year-ago quarter. PGIM, our Global Investment Manager, had higher asset management fees driven by favorable investment performance, contributions from the Deerpath Capital acquisition, and equity market appreciation. Additionally, higher incentive and transaction fees resulted in an increase in other related revenues. This was partially offset by higher expenses to support business growth. Earnings growth in our U.S. businesses reflected higher spread income driven by business growth and the benefit of higher interest rates, more favorable underwriting results, and lower expenses. In addition, a more favorable relative impact from our annual assumptions update and other refinements was driven by a more favorable Retirement Strategies update partially offset by a less favorable update in Individual Life. This was partially offset by lower legacy traditional variable annuity fee income as we intentionally pivot to less market-sensitive products. Results of our International Businesses included an unfavorable relative impact from our annual assumptions update and other refinements, less favorable underwriting results, primarily reflecting policyholder behavior, and lower spread income due to less favorable variable investment income. Results in the quarter also included higher joint venture earnings. Turning to Slide 7, PGIM, our Global Investment Manager, has diversified capabilities in both public and private asset classes across fixed income, equities and alternatives. PGIM’s strong investment performance continues to improve with 83% of assets under management exceeding their benchmarks over the past year. This has contributed favorably to strong long-term performance with 80% and over 90% of assets under management outperforming their benchmarks over the last five-year and 10-year periods, respectively. PGIM’s assets under management increased by 5% to $1.3 trillion from the year-ago quarter driven by market appreciation, investment performance and affiliated net flows. Third-party net outflows in the quarter totaled $9.5 billion. Institutional outflows of $8.9 billion were primarily in fixed income driven by two large clients. Retail outflows of $600 million were driven by sub-advised equity strategies and mutual funds and were partially offset by positive momentum in public fixed income. PGIM third-party flows are episodic due to large single-client transactions. On a year-to-date basis, we generated $17.1 billion of inflows reflecting the net benefit from large institutional pension clients. As the investment engine of Prudential, PGIM’s capabilities support the success and growth of our U.S. and International Businesses in retirement, asset management, and insurance. PGIM’s asset origination capabilities, investment management expertise and access to institutional and other sources of private capital, including through the recently launched Reinsurer Prismic, 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 PGIM through affiliated net flows, as well as unique access to insurance liabilities. In addition, our diversified PGIM Private Alternatives platform, which has assets under management of approximately $240 billion, experienced strong private credit origination activity driven by our direct lending businesses, including from our recent acquisition of Deerpath Capital. Turning to Slide 8, our U.S. businesses produce diversified earnings from fees, net investment spread and underwriting income, and benefit from our complementary mix of longevity and mortality businesses. We continue to focus on growing our market-leading businesses by transforming our capabilities to improve customer experiences and expanding our addressable market with new financial solutions leveraging the capabilities across Prudential. Retirement Strategies generated strong sales of $7.5 billion in the second quarter across its institutional and individual lines of business. Institutional Retirement sales of $4 billion included U.S.-funded pension risk transfer transactions of $1.4 billion and longevity risk transfer sales of $1.2 billion. Year-to-date, Institutional Retirement has generated sales of $15 billion. Individual Retirement posted $3.5 billion in sales, its best quarter of sales in over a decade. Our product pivots have resulted in continued strong sales of FlexGuard and FlexCard Income and fixed annuity sales have doubled from the prior year. Additionally, we continue to reduce market sensitivity by running off our legacy variable annuities. Group Insurance sales primarily occur in the first quarter of the year based on annual enrollments. On a year-to-date basis, sales increased 13% compared to the prior year, driven by growth in life, disability and supplemental health. We are executing our strategy of both product and client segmentation diversification while leveraging technology to increase operating efficiency and enhance customer experience. These actions to improve profitability and performance resulted in a favorable benefit ratio of 81.1%. In Individual Life, sales increased 3% from the year-ago quarter and 7% year-to-date. These increases include the benefit from our FlexGuard Life product, which reached its highest sales quarter since its launch in 2022, and from our pivot towards more capital-efficient products. Turning to Slide 9, our International Businesses include our Japanese life insurance companies, where we have a differentiated multi-channel distribution model, as well as other businesses aimed at expanding our presence in targeted high-growth emerging markets. In Japan, we are focused on providing high-quality service and expanding our distribution and product offerings. Our needs-based approach and protection of retirement 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 selective portfolio of businesses and regions where customers’ needs are growing, where there are compelling opportunities to build market-leading businesses, and where the financial enterprise can add value. Sales in our International Businesses were up 11% compared to the year-ago quarter. Higher sales in Japan are benefiting from recent product launches as we expand our retirement and savings offerings. These new products are gaining traction with customers and represented 20% of the current quarter sales. In addition, emerging market sales were higher, driven by growth in Brazil, as we continue to expand third-party distribution and benefit from the strong performance of our world-class life planners. 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. 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 serve the diverse needs of a broad range of customers. And with that, I’ll now hand it over to Yanela.

Operator:

Thank you. [Operator Instructions] Our first question is coming from Ryan Krueger from KBW. Your line is now live.

Rob Falzon:

Good morning, Ryan. It’s Rob. Yeah. We and our Prismic investors share aspirations to grow well beyond the initial $10 billion transaction that we completed relatively recently. We continue to work on a very active pipeline of multiple insurance transactions. That pipeline includes ongoing balance sheet optimization, flow or new sales solutions across our businesses, as well as third-party blocks where we have a particular focus on Japan. I would be -- we would be disappointed if we’ve not entered into an additional transaction before year end.

Yanela Frias:

Hi, Ryan. It’s Yanela. Yes. With regards to rates, short-term rates, we do not expect much of an impact due to changes in short-term rates. We have cash at the holding company and collateral in individual Retirement Strategies that earned short-term yields. And this is generally offset by interest rate derivatives where we pay short-term rates and receive fixed, and we use these to manage duration across our businesses. So generally, these are offsetting. Let me also address long-term rates since we’ve seen some recent movement. With respect to long-term rates, we have benefited from the rise in rates over the past few years. We have been at levels that are significantly higher than over the past decade and this has increased our portfolio yields in both domestic and international. So higher rates are good for us and it has been a tailwind. If rates were to decline, it would reduce our new money rates, but we do have a healthy spread between our new money rates and portfolio yields. And lastly, I would point out that we have a very disciplined ALM approach which significantly reduces future spread volatility of the enforced.

Operator:

Thank you. Next question is coming from Suneet Kamath from Jefferies. Your line is now live.

Caroline Feeney:

Yeah. So, Suneet, it’s Caroline, and I’ll take your question. So, right now, the annuity market continues to be extremely strong, as you referenced, with the market on pace to deliver a third straight record year, outpacing last year’s run rate by over 20%. It’s certainly possible that in a decreasing interest rate environment, we could see some pullback from the record sales levels, particularly in fixed annuities. From a Prudential perspective, while we’ve been very pleased with the growth in our fixed annuity sales, for us, it’s really just a piece of the overall portfolio. We have the broadest product portfolio we’ve ever had, with no overconcentration in any single product. In fact, this past quarter, we had record sales in three distinct products, and two of those products are in our RILA suite of solutions, which are actually less sensitive to interest rates. And Suneet, this really reflects our very deliberate strategy, which enables us to serve the broadest set of customers across all market conditions. Frankly, we’re also very excited about the broader retirement opportunity. We do see strengthening tailwinds from rapid growth in the population of Americans over age 65, and as well as increased demand for solutions that protect retirement savings and provide lifetime income. So, we believe customer demand for protected income will continue to be the driving force behind growth over the long-term and we’re well positioned to meet that demand with our diverse portfolio of solutions and the strength of our brand and distribution. Finally, Suneet, you asked a question about pricing. We are also very well positioned to continue with our pricing discipline, which we have the ability to adapt pricing and enter the market with revised pricing in very short order, which enables us to be very nimble with changing markets.

Rob Falzon:

So, Suneet, so it would actually be the second deal. So, the first transaction we closed was about $10 billion in reserves and so relatively significant in size. For the next transaction, I would -- what I would say is that, the nature of underlying liabilities is what impacts the sizing of the transaction and that’s going to be dependent upon sort of market sensitivity, hedging and collateral needs. So, we’re not constraining it simply because of appetite or access to capital or other capabilities. It would really just be a function of making sure that as we’re constructing the Prismic portfolio, it all fits together well.

Rob Falzon:

Well, I would say, we -- the continued balance sheet optimization is probably our highest priority, Suneet, and incidentally, the most controllable of the things that we’re working on. But both flow and third-party are high priorities for us, and they are being actively worked as well.

Rob Falzon:

Okay.

Elyse Greenspan:

Hi. Thanks. Good morning. My first question is on PGIM. I know you guys had called out two large pension outflows in the quarter, but I was hoping to just get more color on trends and flows, both on the institutional and retail side, and how you think about the outlook for the balance of the year.

Elyse Greenspan:

Thanks. And then my second question was on the group side. Results there were pretty strong. Just anything you’re calling one-off there? And then how should we think about the benefits ratio trending in that business over the balance of the year?

Elyse Greenspan:

Thank you.

Wesley Carmichael:

Good morning. Thank you. On Individual Life, I was hoping you could touch on the assumption review impact, what drove that unfavorable in the quarter and do you think there’s an ongoing impact to either earnings or cash flow?

Wesley Carmichael:

Yeah. That’s helpful, Yanela. And is that ongoing impact? Is that an operating earnings impact or is there any statutory impact on that?

Wesley Carmichael:

No. That’s great. Thank you. And then maybe my follow-up, on variable investment income, I think some of your competitors this quarter have talked about an expectation for real estate equity returns to improve in the back half of the year. So just curious if you guys have the same outlook or not?

Wesley Carmichael:

That’s helpful. Thanks, Rob.

Tom Gallagher:

Good morning. Just a follow-up on that actuarial review. I think most of the $800 million or so net income release from the review came from RILA. Would you mind just sort of, A, is that correct, and, B, can you talk about what drove the change, was that a utilization assumption changes, and will that be a gap-only impact or will there be a statutory impact as well?

Tom Gallagher:

Got you. Okay. Thanks. And then my follow-up is, can you just comment on what caused some of the weakness in Institutional Retirement this quarter? Was it spreads, underwriting, expenses? And how do you feel about earnings visibility going forward in that business?

Tom Gallagher:

Got you. Thanks, Caroline.

Operator:

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

Caroline Feeney:

Sure. John, it’s Caroline. I’ll take your question. So the growth in our book continues to be primarily driven by the execution of our diversification strategy, which is focused on growing in the under 5,000 lives market, as well as our focus on further diversifying in disability and supplemental health products. We’re certainly benefiting from strong employment, John, which is driving overall employee and wage growth and will continue to grow organically in the block. However, when you look at what is primarily driving our growth, it is more driven by the strong underlying fundamentals and executing on our strategy. So hopefully that helps you. I would also say one more thing in terms of our strategy. We’ve also made a lot of progress on diversification in our under 5,000 market, which spreads our premiums out more across the year. So we’re continuing to like what we see in our diversification.

Andy Sullivan:

So, John, it’s Andy. I’ll take the question. Yeah. And as you said, our strategy in emerging markets or in International in general is to accelerate our growth through a select set of emerging markets by extending our leadership position in Latin America, by strengthening our footprint in emerging Asia, and in particular in India and Indonesia, and by investing in market leaders in Africa. I mean, I think the important thing here is, you’re already seeing very, very strong good growth in Brazil that is leading to healthy earnings growth in that block of business. Many of these other markets offer us very good opportunity, but they will take time to develop. So this is about the medium- and long-term as well. As far as M&A, we are absolutely open to opportunistic, programmatic M&A to help us accelerate our growth in those markets. But as always, organic growth is going to be job one for us. We’re confident that over time, emerging markets will become a bigger part of the Prudential pie.

Operator:

Thank you. Next question is coming from Jimmy Bhullar from JPMorgan. Your line is now live.

Yanela Frias:

Hey, Jimmy. It’s Yanela. So, look, we remain well capitalized. You saw PICA’s RBC ratio in excess of our AA objective of 375. We are positioned to continue to invest in the growth of our businesses and you’ve seen that year-to-date where we’ve closed three large PRT transactions exceeding $10 billion in liabilities and we’ve funded strong growth across all of our businesses. And even with that, we continue to pay dividends out of our insurance subsidiaries, and our highly liquid assets increased a bit, as you mentioned. But we will remain thoughtful in our capital deployment. We will remain focused on preserving financial strength and flexibility, investing in our businesses for long-term growth where we see a lot of opportunities and then returning capital to shareholders.

Andy Sullivan:

Yeah. Jimmy, it’s Andy. I’ll take the question. Maybe let me just start by saying we’re very, very pleased with the sales results that we saw. We experienced strong year-over-year growth in our life planner, independent agent and bank channels. And sales in Japan were up 10% year-over-year. That is really flowing from our work to continue to broaden and innovate our product portfolio and to enhance the customer experience in our business. The fact is, in that 10% year-over-year up, 20% of our sales this quarter flowed from more recent product introductions, including both life and annuity products, and we’ve been expanding our yen offerings in addition to our U.S. dollar offerings. Obviously, we are -- we see effects from the yen strengthening and weakening. Lately here, with the strength we’ve seen, we think that will be a benefit to our U.S. dollar products as it will make them more affordable for the consumer. Japanese consumers are still absolutely interested in taking advantage of the U.S. interest rates. So we’re pleased with the yen movement this week, we’re pleased with the work that we’ve done and the results we’ve shown and we expect to continue the good sales trend.

Andy Sullivan:

Yeah. Jimmy, I start by saying all the businesses we compete in are competitive, but I would say, yes, the marketplace is rational. At times, you may see a competitor get aggressive, but overall we see it as a rational market with a good ability for us to derive and drive profitability. And we’re competitively advantaged with broad product portfolio, differentiated distribution and a good brand. So, the last thing I always reinforce is we’ll be disciplined no matter what the competition does and make sure that we deliver for the customer and the shareholder.

Operator:

Thank you. Next question is coming from Michael Ward from Citi. Your line is now live.

Yanela Frias:

So, Mike, this is Yanela, let me take your question. So, obviously, we executed on the transaction earlier this year. We don’t have a sense of what the impact would have been. So that said, in terms of further derisking transactions, we always are looking at options and opportunities to the extent they are available.

Andy Sullivan:

So, it’s Andy. I’ll take the question. I’ll take that in two parts. First, the quant manager where you’re referring to is not a material part of our business. It had less than a $1 billion in assets under management and it’s a subcomponent on the quantitative equity side that we’re exploring strategically what we want to do with the capability. But as far as you referenced investment performance, we’re actually quite pleased with our investment performance in the business. Obviously, that is job one. It’s the most critical ingredient. And if you look at our short-term and long-term results, they have been very, very strong and we remain confident in our ability to continue that track. But as far as that block of business, it’s small, not material to the overall business.

Operator:

Thank you. We reach the end of our question-and-answer session. I’d like to turn the floor back over for any further closing comments.

Operator:

Thank you. That does conclude today’s teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

Robert Falzon:

Thanks, Charlie. I will provide an overview of our financial results and business performance for our PGIM U.S. and international businesses I'll begin on Slide 6 with our financial results for the first quarter of 2024.

Yanela del Frias:

Thank you, Rob. I will begin on Slide 10, which provides insight into earnings for the second quarter of 2024 relative to our first-quarter results. As noted, pretax adjusted operating income for the first quarter was $1.5 billion and resulted in earnings per share of $3.12 on an after-tax basis.

Ryan Krueger:

My first question was on Prismic. Can you talk about the outlook for reinsuring in-force blocks, additional in-force blocks to Prismic and do you expect more activity on this in 2024?

Yanela del Frias:

Ryan, this is Yanela. And I will take your question. We are committed to keeping expenses flat while investing in our businesses. And as you noted, we did see an increase in G&A this quarter, but keep in mind that G&A includes expenses to support growth, including nondeferrable sales expenses in support of our very strong sales this quarter as well as onetime expenses like the cost-related to the GUL transaction.

Caroline Feeney-Pfundstein:

Yes, sure. Of course, Yanela, thanks. And Ryan, clearly, Yanela just went through some of the earnings drivers. So now let me share with you how we're thinking about the fundamentals in our growth story. So overall, we're very pleased with the strong sales growth across our Retirement Strategies business. with over $14 billion in sales this past quarter.

Thomas Gallagher:

First question is just on the I think, what was a jumbo PGIM inflow that you got from a single client this quarter? I think that might have been $25 billion or $26 billion. And if that's not right, can you please sort of clarify what that amount was? And then what was the mandate in? Was that public fixed income? And any kind of sense for what kind of fee rate you would have had on that?

Andrew Sullivan:

Yes. So maybe, Tom, let me just bring it up and I'll end with the outcome. So overall, on the institutional side, we're obviously very pleased given that large mandate, we feel that reinforces our position as a leading partner in the marketplace. And I'd also add that we've been consistently adding new clients to our roster on the institutional side every quarter, every year.

Robert Axel:

Yes, Tom, the investors that we have in Prismic and our conversations with them have indicated their desire to put a significant amount of capital to work and the strategy that we've outlined to them. And so expectations are that these are firms that deal on the billions, not the millions or hundreds of millions.

Operator:

Next question today is coming from Joel Hurwitz from Dowling & Partners.

Caroline Feeney-Pfundstein:

Yes. Of course, Joel. It's Caroline, and I'll take your question. So first of all, the individual annuities market had a record year last year with about $380 billion of sales, and fixed annuities were a key piece of that given the rapid rises that we did see in interest rates. We're seeing continued momentum for fixed annuities this year as the value proposition remains strong, driving industry sales of over $100 billion in the first quarter, putting the industry on track for another record year.

Joel Hurwitz:

Okay. So it sounds like this will be a core product in your line of filing forward then?

Joel Hurwitz:

Okay. And then just moving over to pension risk transfer. Just any update on your outlook and Obviously, a very strong start to the year, I guess, how should we think about your desire to grow this business year-on-year out?

Caroline Feeney-Pfundstein:

Yes. So I'd say, in general, Joel, obviously, each large transaction naturally consumes its appropriate share of capital. We believe these deals are a very effective way of deploying capital. and we like the returns that we're generating.

Wesley Carmichael:

Rob, on your answer on Prismic, you mentioned the transactions require regulatory coordination is one of the considerations here. I'm just wondering if you can give us an update on the regulatory environment in Bermuda and how that's changed, if at all, over the past year if the CMA is more involved in improving potential deals or influencing the structure of transactions.

Wesley Carmichael:

And maybe just a quick follow-up on that. But do you think PRT is a good liability for Prismic? Does that make sense there?

Wesley Carmichael:

That's really helpful. And then maybe just one more on the regulatory front. But can you give us just an update on the transition to ESR in Japan, we're getting closer to the implementation date here. So has there been any movement, particularly on how long-duration FX products are treated or anything else? Any other color might be helpful.

Operator:

[Operator Instructions] Our next question today is coming from Elyse Greenspan from Wells Fargo.

Charles Lowrey:

Sure, Elyse. This is Charlie. Thanks for the question. We've executed on many transactions over time that have significantly grown the company. And we have pursued these transactions or acquisitions for a variety of reasons such as expanding our capabilities, broadening our distribution, increasing scale and/or adding key talent.

Caroline Feeney-Pfundstein:

Sure. Of course, Elyse, it's Caroline, and I'll take your question. So first of all, we're very pleased with our first quarter sales for group overall, which are influenced by the momentum we've seen in executing on our strategy to maintain our core product leadership while growing in the under 5,000 lives and association markets and further diversifying in disability and supplemental health.

Suneet Kamath:

To start with Individual Retirement. Caroline, you had mentioned the strong sales, and I think you're expecting that will persist going forward for you in the industry. Just wanted to get a sense of where that money is coming from. Is this new money coming to the industry, maybe from the qualified market? Or are we seeing 1035 exchanges from existing annuities? Just wanted to get a sense of where that demand is coming from.

Suneet Kamath:

Got it. Okay. That makes sense. And then I guess, one for Rob, if I could. I think in your, Rob, you keep referencing this $48 billion of insurance margins, I don't know what that means. Like how was that calculated? And if that's such a big number, is there a way that you can start to monetize that rather than just wait for it to flow through the income statement?

Suneet Kamath:

Got it. If I could just sneak one more in for Yanela. On HoldCo cash, are there any big movements that you're expecting as we move through the year in terms of capital structure, either issuances or repayments? Or are we kind of at a steady state at this point?

Operator:

Next question today is coming from Jimmy Bhullar from JPMorgan.

Yanela del Frias:

Jimmy, it's Yanela. I'll take your question. And as we say that we've begun a wind-down process for Assurance and have moved the results to divested businesses. First of all, let me acknowledge that these decisions are always difficult and our utmost focus is caring for the people involved. That said, this winddown will not have a material impact on earnings.

Jamminder Bhullar:

And I would have thought that it would be -- the exit would be slightly accretive to earnings given that Assurance IQ wasn't really making much money. And in most of the years when you were reporting it stand-alone, it was actually losing money. But is that not correct?

Jamminder Bhullar:

And then on the [ CRE ] portfolio, it seems like on commercial mortgage loans, most of the credit metrics are fairly stable with what they had been recently. But if you just talk about what's going on there and give us some insight into the percentage of loans or the number of loans that are maturing this year and what's happened with loans that have matured -- like are you having to extend more of them? Or are they just paying down? Or just anything to give us more color on how the portfolio has been performing.

Operator:

Your next question is coming from Wilma Burdis from Raymond James.

Caroline Feeney-Pfundstein:

Yes. So Wilma, it's Caroline. So I'll take your question. if I think about life for a moment and our sales results and our outlook going forward, I'll take that first. We are very pleased, Wilma, with our first quarter results with over $165 million in sales an increase of more than 10% from the prior year quarter. That's driven by our term and variable products, and we continue to write that new business at healthy returns continuing the trend we saw throughout the year in spite of competition.

Andrew Sullivan:

So Wilma, it's Andy. So our emerging market strategy is to focus on a few select high-growth geographies that offer us the opportunity for significant scale. So at this point, what I would tell you is we're in the countries that we want to be in. So there really are no direct implications from the sale of Argentina for the rest of our portfolio. And we remain highly committed to Latin America as part of our emerging market growth strategy.

Operator:

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Mr. Lowrey for any further closing comments.

Operator:

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.

Robert McLaughlin:

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 PGIM, our global investment manager; Caroline Feeney, Head of US Businesses; Ken Tanji, 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 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 the quarterly financial supplement, both of which can be found on our website at investor.prudential.com. Now, I'll turn it over to Charlie.

Robert Falzon:

Thank you, Charlie. I'll provide an overview of our financial results and business performance for our PGIM, US and International businesses. I'll begin on Slide 6 with our financial results for the fourth quarter and full year of 2023. Our pre-tax adjusted operating income was $5.5 billion or $11.62 per share for 2023 and $1.3 billion or $2.58 per share in the fourth quarter. These results reflect an increase in the underlying earnings power of our businesses, including the benefits of strong sales growth and higher interest rates. This was partially offset by pressure on variable investment income and higher expenses, primarily due to a $200 million restructuring charge in the fourth quarter. Our GAAP net income for the quarter was $374 million higher than our after-tax AOI primarily driven by net investment gains due to declining rates. Turning to the quarterly operating results of our businesses compared to the year ago quarter. PGIM, our global investment manager, had lower other related revenues driven by lower incentive fees and agency income and higher expenses. This was partially offset by higher asset management fees, including the benefits from our acquisition of Deerpath Capital and of launching Prismic. Results of our US businesses primarily reflected higher spread income driven by business growth and the benefit of higher interest rates and lower expenses. This was partially offset by lower legacy traditional variable annuity fee income as we pivot to less market-sensitive products. The earnings in our international businesses primarily reflected less favorable underwriting results, including unfavorable policyholder behavior partially offset by lower expenses. Turning to Slide 7, PGIM, our global active investment manager, has diversified capabilities in both public and private asset classes across fixed income, equities and alternatives. PGIM's strong investment performance over the past year has also driven attractive long-term performance with over 80% of assets under management outperforming their benchmarks over the last five- and 10-year periods. PGIM's assets under management increased 6% to $1.3 trillion from the year ago quarter, primarily resulting from market appreciation. Third-party net outflows in the fourth quarter totaled $13.5 billion. Institutional outflows of $6.3 billion were driven primarily by a large redemption of a low fee equity index mandate and redemptions in public fixed income resulting from client rebalancing and liquidity needs. Retail outflows of $7.2 billion were primarily driven by equity, sub-advised mandates and fixed income outflows. As the investment engine of Prudential, the success and growth of PGIM and of our US and International insurance and Retirement businesses are mutually reinforcing. PGIM's asset origination capabilities, investment management expertise and access to institutional and other sources of private capital, including through the recently launched reinsurer Prismic or a competitive advantage, helping our businesses to bring enhanced solutions and create more value for our customers. Our insurance and retirement businesses, in turn, provide a source of growth for PGIM through affiliated net flows as well as unique access to insurance liabilities. In addition, we continue to grow both organically and through acquisitions, our PGIM Private Alternatives business, which has assets of approximately $240 billion across private, corporate and infrastructure credit, real estate equity and debt and secondary private equity. Capital deployment across PGIM's private assets platform of $9 billion during the quarter benefited from robust private placement and direct lending originations. Turning to Slide 8, our US businesses produced diversified earnings from fees, net investment spread and underwriting income and benefit from our complementary mix of longevity and mortality businesses. We continue to drive growth by transforming our capabilities to improve customer experiences and expanding our addressable market with new financial solutions leveraging the capabilities across Prudential. Retirement strategies generated strong sales of $16.4 billion in the fourth quarter across its institutional and individual lines of business. Institutional Retirement sales of $14.3 billion in the fourth quarter were driven by strong international reinsurance sales and our best quarter for structured settlements since 2016. International Reinsurance sales included a $9.2 billion transaction in the Netherlands and with the recently passed Dutch Pension Reform Legislation, we anticipate this market will continue to grow over time. Individual Retirement posted $2.1 billion in sales, reaching the highest level since the third quarter of 2019. Our product pivots have resulted in continued strong sales of FlexGuard and FlexGuard Income, which increased about 20% from the year ago quarter, while fixed annuity sales have doubled. Our Individual Life sales increased 33% from the year ago quarter, reflecting our product pivot strategy towards more capital-efficient products. Variable life protection and accumulation products represented approximately 70% of sales for the year, including a benefit from our recently launched FlexGuard Life product. In group Insurance, we continue to execute on our strategy of product and client segment diversification while leveraging technology to increase operating efficiency and enhance the customer experience. Our full year sales were up 11% compared to the prior year, driven by growth in disability and supplemental health. Group's full year adjusted operating income was the highest in the past 15 years and included favorable underwriting experience. As a result, we are lowering our benefits ratio target range by 2 percentage points to 83% to 87%. Turning to Slide 9, 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. In 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. In emerging markets, we are focused on creating a selective portfolio of businesses in regions where customer needs are growing, where there are compelling opportunities to build market-leading businesses and where the Prudential enterprise can add value. Sales in our international businesses were up 24% compared to the year ago quarter. Life Planner sales were up 21%, including the benefits of recent product launches in Japan to diversify our product offering. In addition, Brazil sales were up 24%, reflecting growth across all channels and leading to a full year record. Gibraltar sales were up 27%, primarily driven by higher independent agency sales and 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. 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 serve the diverse needs of a broad range of customers. And with that, I'll now hand it over to Ken.

Operator:

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Tom Gallagher from Evercore ISI. Your line is now live.

Kenneth Tanji:

Yes. Hey, Tom, it's Ken and thanks for the good luck. I appreciate it. We didn't remove that comment. I think it's pretty well understood that our free cash flow ratio has been about 65% over time and that's reflective of our business mix and our growth. It's going to vary period-to-period, but it will be about -- it's been about 65% on average. And we think that's reflective of our approach to balance growth with sustainable and diversified sources of cash flow. Actually, in2023, you'll see that cash flows were actually higher than that for a variety of reasons, so no change there. In terms of ESR in Japan, again, we believe our businesses in Japan are well capitalized and financially strong. And that would be evident in any reasonable capital standard. We're certainly working with the FSA, advocating for reasonable and responsible standards, but we also have strategies to adapt to that new regime as well. We could reinsure business internally, to the US or Bermuda, we could reinsure externally. So we have a number of strategies to manage in the new regime. And that's something that we're working on.

Andrew Sullivan:

So, Tom, its Andy. I'll take your question. And thank you for noting that. You've heard me say this before. Sales are an outcome of strong brand, great product and outstanding distribution we feel that we clearly have a competitive advantage in those areas, particularly as it relates to Japan and Brazil. As you heard from Rob, we are very pleased that our sales were up 24% year-over-year, up 21% in Life Planner and 27% in Gibraltar. Once again, that success was very broad-based as we saw growth in every channel in Brazil and across life planners, independent agents and the bank channel in Japan. In Japan, we continue to see lift from higher sales of our US dollar product, really supported by the higher US interest rate. But also clearly, our work on, innovating our product designs and enhancing our customer experience, in particular, in digital is paying off. If you look at Brazil and the results there, we saw double-digit year-over-year growth in every channel. Our Life Planner channel outperformed throughout all of last year with high Life Planner retention and strong productivity. On top of that, we continue to expand and strengthen our third-party distribution. Once again, we saw really strong results flowing from Itau Bank. And we also remain quite pleased that the expansion of our partnership with Mercado Libre. So, you asked about the outlook. As always, our priority is going to be to deliver strong value to our customers, while achieving healthy levels of profitability, but we are optimistic about our ability to grow both the top and bottom-line of our business.

Operator:

Thank you. Our next question is coming from Ryan Krueger from KBW. Your line is now live.

Kenneth Tanji:

Yes. Hey Ryan, it's Ken. Just to remind people, RBC is something that is reported annually. And so the greater than 25% is where we believe RBC will be at the end of the year. But again, that will be filed in much greater detail, at the end of the month. And so yes, we did have an improvement in our RBC ratio in 2023, and it's really a combination of a few things. One, our in-force businesses are generating free surplus, that's part of it. We had the benefit of admitting negative IMR with the regulatory change that was adopted during the year. We also had a reduction in our AAT reserves, generally from reaggregation of policies and investment portfolios, which created some efficiency. So it was a combination of that. And so overall, our capital position and flexibility has improved in 2023. And again, you'll see all that when we file our report at the end of February.

Kenneth Tanji:

Yes. Sure, Ryan. The bottom line is that there's -- we don't expect much net impact from short-term rates. We have cash and collateral balances that earn short-term yields. And that would generally be offset by interest rate derivatives from our investment portfolio, where we're actually paying short-term rates and receiving fixed to manage duration. The two generally offset each other.

Operator:

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

Charles Lowrey:

Sure. Alex, it's Charlie. I'll take that. Thanks for the question. We have said that we've always wanted -- that we want to be good stewards of capital. And as a result, we want to have a consistent disciplined and balanced approach to the redeployment of capital within our businesses, as you said, and to shareholders. And there are really three aspects to our approach on which we focus. First and foremost is maintaining our rock-solid balance sheet and financial strength, which is critical to fulfilling the promises we make to our customers and clients. Second is investing both organically and through programmatic acquisitions to support sustainable long-term growth of our businesses. And the third is returning excess capital to shareholders as we have in the past. And in this quarter, we've done all three. We've deployed capital to support strong sales across our businesses, including several new products to meet the evolving needs of our customers. We closed on the Deerpath acquisition for PGIM, and we returned over $700 million to shareholders. So we'll continue to have this consistent and disciplined approach as we go forward

Andrew Sullivan:

Yes. Alex, it's Andy. Thanks for your question. We're not satisfied with the recent flow performance of the business, and we have been, and we're going to continue to take the appropriate actions to restore that performance to historical norms. That really starts with ensuring that we have a range of strategies and vehicles so that we can broadly serve our customers. You've seen us continue to intentionally invest into the business to accomplish just that. So we've continued our expansion into private alternatives with the acquisitions of Montana Capital Partners and Deerpath. You've also seen us launch new vehicles like exchange traded funds and ESG strategies. All that work adds to an already broad and diversified portfolio. The second thing I would tell you is flows and active management are correlated with investment performance. And our performance strengthened throughout all of 2023, but flows can lag. So that's one of the reasons we're constructive on the outlook looking forward. Third, we've continued -- we've not taken our foot off the gas on investing in distribution because of those three things, product breadth, investment results and distribution lead to active flows over the longer term. Let me also add that like others, I'm sure you're hearing, we believe that the record money market assets that are sitting on the sideline will flow back into fixed income once inflation and rates are stabilized and the rate trajectory, people are more confident in it. we're ready to capitalize on that given the strength of our investment performance with 81% of our assets outperforming benchmark over five and 10 years. So, clearly not satisfied about the recent flow performance, but optimistic looking forward. I would just end by noting we saw a pickup in gross inflows towards the end of 4Q, and that has continued into this year. So we're optimistic.

Operator:

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

Andrew Sullivan:

So, thanks, Elyse. It's Andy. So I won't get obviously specific around pipeline, but maybe just bring it up a level, we've demonstrated our strong ability to grow PGIM organically over a long period of time. So we certainly don't look at it as we need M&A to grow. That said, we do remain interested in augmenting our organic growth with mergers and acquisitions. Montana Capital Partners, PGIM Custom Harvest and then obviously, our closure of Deerpath in December. Those are great examples of us adding capabilities in higher growth, higher fee areas of the industry. So, as we look forward, we're going to continue to look to globalize the business. and we're going to focus on higher growth, higher fee areas, so areas like private alternatives and real asset capabilities. Clearly, periods of time like this that are disruptive can lead to opportunities, so we're making sure that we're in the know and in the flow on what's going on. We've also seen an uptick in activity in the marketplace. But as always, we're going to remain patient and disciplined in our approach.

Kenneth Tanji:

Yes, Elyse, it's Ken. We're well within our AA financial objectives on an RBC basis. Now, it's not the only thing that matters for our credit rating. But on that measure, we're where we need to be, and we have flexibility. So, we -- again, we'll balance maintaining financial strength, which is obviously important to our value proposition growth and also distribution to shareholders. So, we're balancing all three of those objectives.

Operator:

[Operator Instructions] Our next question is coming from Suneet Kamath from Jefferies. Your line is now live.

Robert Falzon:

Suneet, it's Rob. Yes, the deal continues to proceed toward closing. Our counterparty has actually received its regulatory approval. We've got one or two final steps on our end, but we expect a closing in this quarter. Just a couple of reminders. One is, recall it is retrospective to the beginning of the year, so 1/1/24. And with respect to the financial impacts, annual earnings as well as one-time closing costs and capital, we'll update that in an announcement once we close.

Andrew Sullivan:

Yes, Suneet, I would focus on how much our investment performance has strengthened here in the near term. We did have a period of time. We're an active manager. We have many high conviction strategies designed to produce alpha. We went through a brief period in 2021, 2022, where we did see a dip in performance is specifically in our fixed income business, but that performance has strengthened quite nicely and is very, very strong right now. So, we don't expect that to have a major impact on us looking forward.

Operator:

Thank you. Next question is coming from Jimmy Bhullar from JPMorgan. Your line is now live.

Charles Lowrey:

Sure. As I mentioned to Alex earlier, we do -- we have a consistent and balanced approach. And -- as a result, Jimmy, we really look for, again, the three things. One is to make sure that we have a very strong balance sheet, which we do, as Ken was talking about. The second is to invest organically in our businesses, and you've seen us do that, and we will continue to do that to support sales growth, to support the growth of all our businesses as we go forward and then to look for acquisitions that make sense. Those would be in higher growth areas. It could be in distribution, it could be in geography as well. We also see tremendous opportunities right now in the marketplace in places like PRT, right, where we are one of the leaders in this business. We think there's going to be tremendous volume there, and that's a really good business for us as we go forward. And Caroline, you may want to talk about that in one moment. The final thing, as we've talked about, is returning excess capital to shareholders. We've done that in the past. And if we think we have excess capital, we'll do so. But we're going to evaluate that relative to our investment in our businesses and the opportunities that come along. And Caroline, you might want to talk about one in particular.

Jimmy Bhullar:

Okay. And then just in Latin America, can you share what your views are in terms of potential pension reform in the Chilean market, and what the reasonable case or sort of a worst-case impact would be on Prudential's business there?

Jimmy Bhullar:

Thank you.

Joel Hurwitz:

Hey. Good morning. So, I know lapses have periodically been an issue in Japan just given exchange rates. It looks like there were a pretty sizable quarter-over-quarter reduction in the in-force of main both international businesses in the quarter. Can you just talk about what you saw in terms of [Indiscernible] there?

Joel Hurwitz:

Okay, helpful. And then switching gears to group. So you reduced the benefit ratio target there. Can you just talk about the overall drivers to the reduction there? And what's the growth outlook for that business? It looks like top line for full year was roughly flat. Just any color on growth expectations there.

Joel Hurwitz:

Very helpful. Thank you.

Wilma Burdis:

Hey. Good morning. I'm just wondering if there's been any activity with Prismic? Seeing that you guys have focused on the sales of [indiscernible] and also with this large PRT deals. So if you can give us an update there, please?

Wilma Burdis:

Thank you. Could you talk a little bit about the buyback? I think you guys talk with the $1 billion authorization for 2024. Certainly, when you guys sell blocks and run off earnings a little bit, it's good to see more capital returns. So can you just talk about how you guys are thinking through that? Thank you.

Wilma Burdis:

Thank you.

John Barnidge:

Good morning. Thank you for the opportunity. And best of luck, Ken. My first question, I appreciate -- if we could go to the Group Insurance business, I appreciate the benefit ratio guidance. But is there an expense savings storing disability coming up I can't help, but notice improvement in administrative expenses in recent quarters. And with COVID moving endemic, the ramping up of expenses, should that fall to the side. Thank you.

John Barnidge:

Thank you for that answer. My follow-up question. When you talk about globalizing the PGIM business, are there markets you're not large in size that you want to get bigger in? Where does Prismic sit within that growth opportunity for PGIM internationally?

Robert Falzon:

John, it's Rob. Just following up on Andy. Within Asia and with respect to Prismic, I think what I'd note is we see a huge opportunity in Japan, both with regard to, as Ken alluded to earlier, in the call, optimizing our own book, but also with respect to the sort of opportunities we see with third parties in that marketplace as well.

Operator:

Thank you. Our next question is coming from Michael Ward from Citi. Your line is now live.

Robert Falzon:

This is Rob. So I'll take your question, Mike. So a couple of thoughts. One, from an overall market standpoint, let me start there. From a peak to trough, what we've seen is across the market, about a 16% correction, and that number relates to, what I'll call, institutional quality real estate, the sort of things that we invest in or we lend against, and that's on an unlevered basis. Our estimate is that the peak to trough in this cycle across real estate types is going to probably be a little over 20%. So we've got 5% or 6% probably left in the way of price correction yet to experience. Now, within that, office, obviously, has corrected much more severely closer to 30% to date, and probably has another 10%, 15% yet to go. Because the construction of our portfolio is significantly underweight office, and because the overall quality of the portfolio and the diversification of it across geography and property types, and importantly, because this is a portfolio that's directly originated by PGIM with the team that's deep and averages some 25 years of industry experience, we're actually finding that our portfolio is holding up quite well. So loan to values across the portfolio were about 58% and our discount -- our debt service coverage ratios remain right around 2.5%. Within our overall portfolio, our actual valuations increased about 6% during the course of 2023 despite the fact that we saw a double-digit decline in the office component of our portfolio. But again, because that office component is only 2% of our assets or 50% -- about 14% of our mortgages, the performance of the rest of the portfolio has offset that. So, with regard to portfolio performance, we're actually feeling quite good. The last thing that you asked about was sort of what we're seeing in watch list, et cetera. I guess the way I would describe that, Mike, is that, first, if we look at our experience with maturities during 2023, we had about $2 billion worth of scheduled maturities. Of those, we provided modifications for four -- less than $400 million of that $2 billion with those modifications providing longer-term extensions. The remainder of all of those maturities was resolved favorably through refinancing payoffs or short-term extensions that then led or leading to subsequent payoffs. In the upcoming year 2024, we've got about $3 billion of maturities coming on. That's about 6% of the portfolio that's maturing. And while we don't expect to be immune from this cycle by any means, we do expect that on a relative basis, we'll be quite resilient. We increased our reserves in the real estate portfolio to around $370 million as of the end of the year and that represents about 72 basis points, and we think that that's well provisioned against the portfolio, again, given what we've experienced in the underlying quality of that portfolio.

Operator:

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to Mr. Lowrey for any further closing comments.

Operator:

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.

Robert McLaughlin:

Good morning, and thank you for joining our call. Representing Prudential on today's call are Charlie Lowrey, Chairman and CEO; Bob Falzon, Vice Chairman and Head of International Businesses; and PGIM, our Global Investment Manager; Caroline Feeney, Head of U.S. Businesses; Ken Tanji, 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 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 of today's presentation and the quarterly financial supplement, both of which can be found on our website at investor.prudential.com. And now I'll turn it over to Charlie.

Robert Falzon:

Thank you, Charlie. I'll provide an overview of our financial results and business performance for our PGIM U.S. and International businesses. I'll begin on Slide 6 with our financial results for the third quarter of 2023. Our pretax adjusted operating income was $1.6 billion $3.44 per share on an after-tax basis, up 45% from the year ago quarter. These results reflect underlying business growth, including the benefits from a higher interest rate environment, more favorable variable investment income and underwriting experience, partially offset by lower fee income. . Our GAAP net loss was $2.1 billion lower than our after-tax adjusted operating income, primarily driven by mark-to-market losses on interest rate derivatives due to the higher rates. Turning to the operating results from our businesses compared to the year ago quarter. PGIM, our global investment manager, had lower other related revenues driven by lower agency and seed and co-investment earnings and higher expenses. Results of our U.S. businesses primarily reflected higher spread income, including more favorable variable investment income and lower expenses, partially offset by lower fee income and the increase in earnings in our International businesses primarily reflected higher spread income. Turning to Slide 7. PGIM, our global active investment manager has diversified capabilities in both public and private asset classes across fixed income, equities and alternatives. PGIM's long-term investment performance remains attractive with 80% or more of assets under management outperforming their benchmarks over the last 5- and 10-year periods. In addition, our short-term performance continues to improve with 83% of assets exceeding their benchmarks over a 1-year period. PGIM experienced third-party net outflows of $5.7 billion in the quarter, Institutional outflows were primarily driven by lower than normal fixed income inflows and a large client outflow. Retail outflows were driven by sub-advised equity mandates. As the investment engine of Prudential, the success and growth of PGIM end of our U.S. and International insurance and retirement businesses are mutually reinforcing. PGIM's asset origination capabilities, investment management expertise and access to institutional and other sources of private capital, including through the recently launched reinsurer of Prismic, our 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 PGIM through affiliated net flows as well as unique access to insurance liabilities. In addition, we continue to grow both organically and through acquisitions, our private alternatives and credit business, which has assets of approximately $230 billion across private corporate and infrastructure credit real estate equity and debt and secondary private equity. Capital deployment across PGIM's private assets platform of $8 billion during the quarter benefited from robust private placement and direct lending originations. Turning to Slide 8. Our U.S. businesses produced diversified earnings from fees, net investment spread and underwriting income and benefit from our complementary mix of longevity and mortality businesses. We continue to drive towards a higher value, higher growth and less market-sensitive mix of earnings, invest in our businesses to deliver best-in-class customer experiences and expand our addressable market with new financial solutions leveraging the capabilities across Prudential. Retirement strategies generated strong sales of $6.7 billion in the third quarter across its institutional and individual lines of business. Our institutional retirement business has leading market capabilities, which helped to produce third quarter sales of $4.7 billion, including $2.5 billion of pension risk transfer transactions as well as strong stable value sales. Individual Retirement posted $2 billion in sales, up 40% from the prior year quarter. Our product pivots have resulted in continued strong sales of FlexGuard and FlexGuard income, which represented about 2/3 of sales and fixed annuities that accounted for approximately 1/3 of sales this quarter. Our Individual Life sales increased 24% from the year ago quarter, reflecting our earlier product pivot strategy with variable life products representing approximately 73% of sales in the quarter, including the benefit from our recently launched FlexGuard Life product. And in Group Insurance, we continue to execute on our strategy of product and client segment diversification while leveraging technology to increase operating efficiency and enhance the customer experience. Our strong results this quarter included favorable group life underwriting experience, which resulted in a benefit ratio of 82.4%. Turning to Slide 9. 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. In 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. During the third quarter, we launched a new U.S. dollar indexed annuity product and Prudential of Japan was ranked as the #1 Japanese life insurer in the Forbes world best life insurance companies this year. We are proud to be recognized for the value we provide to our customers. In emerging markets, we are focused on creating a select portfolio of businesses in regions where our 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 19% compared to the year ago quarter. Life Planner sales were up 18%, driven by our second consecutive quarter of record sales in Brazil as well as higher sales in Japan. Gibraltar sales were up 20%, primarily driven by growth in the bank channel. As we look ahead, we are well positioned to cross 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 serve the diverse needs of a broad range of customers. And with that, I'll now turn it over to Ken.

Operator:

[Operator Instructions]. Our first question is coming from Tom Gallagher from Evercore ISI.

Kenneth Tanji:

Tom, it's Ken. Our GAAP results included the mark-to-market on interest rate hedges and a portion of that increased our negative IMR balance for stat. But our RBC ratios remain above our target and didn't require a capital contribution.

Kenneth Tanji:

Yes. Sure. First, let me start with our Japan businesses financial profile, which the businesses are high quality profitable, financially strong, generating earnings, strong earnings and have good solvency margin ratios under the current regime. The FSA is taking steps to implement new capital standards and that's underway with adoption still now a couple of years away. But generally, we still believe our businesses are well capitalized, financially strong, and that would be evident under any reasonable capital standard. We also have ways to manage the outcomes we can reinsure business internally or externally to better match the economics of the business if we need to do that. And so we're -- it's something that we're looking at and working on. We're also advocating for reasonable and responsible standards and we'll have strategies to adapt to the new potential regime.

Ryan Krueger:

My first question was on the restructuring charge. Can you talk a little bit about the potential economic benefits of that on a go-forward basis in terms of potential expense reduction?

Kenneth Tanji:

Yes. So I think, Ryan, we expect, as you just heard from Charlie, a number of benefits in the way we're transforming but also financially, the restructuring will result in annual cost savings that will be greater than the restructuring charge of $200 million. And those savings will provide expense capacity to invest in capabilities and gain further efficiencies sort of, as Charlie described there to help offset inflation and also to grow our businesses. And the way we think when we put that all together is we'll be keeping expenses flat over the near term. . And that's, again, how we think of things holistically, not just the saves but also combined with the investments in growing our businesses while keeping operating expenses flat and improving margins. And that's the continuous improvement mindset that we're striving for.

Robert Axel:

Ryan, Rob, maybe let me give a perspective about that. If you're asking that from the perspective of sort of the Prismic standpoint in terms of the appetite there. A couple of thoughts. One is, as Charlie actually indicated in opening remarks, we see very interesting opportunities, growth opportunities that are at the intersection of asset management and insurance, and we expect Prismic to play a material role in executing against that. And we think the benefit of that is it's going to actually accelerate growth across all of our businesses. . And in the course of doing so, actually helped to shift the business mix so that it's higher growth, less market-sensitive and more highly valued at the end of the day. With respect to Prismic itself, I think what we've articulated before is that we and our investors share operations that go well beyond the initial $10 billion structured settlement transaction. So we anticipate that, that will include opportunities to further optimize our balance sheet. It's going to include what's closed. So the reserve and capital financing for our new sales across our businesses and importantly, third-party blocks that will be -- we're looking to reinsure into Prismic as well.

John Barnidge:

Great. Appreciate the opportunity. The restructuring program, you talked about a portion being there to invest. Can you talk about human capital versus automation and then the offshoring opportunity as well?

John Barnidge:

Fantastic. And my follow-up question, can you maybe talk about M&A interest? Do you have what you need to grow organically from a product perspective? And is there opportunities for PGIM to get larger insurances?

Andrew Sullivan:

John, it's Andy. Maybe I'll just add in because you asked about PGIM we're going to continue to work to globalize the business. And as we've talked about before, focus on higher growth, higher fee areas. So you should think about private alternatives and real asset capabilities.

Wesley Carmichael:

I had a question on RBC. I think your slide showed that PICA's RBC ratio is in excess of 3.75. I just wanted to confirm, is the benefit of negative IMR within that RBC ratio? And could you maybe just size that for us?

Wesley Carmichael:

And maybe just a follow-up on an earlier question on Japan and ESR. Could you maybe just help us understand how your USD-denominated products are proposed to be treated under ESR versus the current SMR framework?

Andrew Sullivan:

This is Andy. I was just going to add in. We have a lot of ability and flexibility to navigate those changes that are coming at us. We obviously have incredibly strong distribution, both captive and third party. We have a very wide product portfolio from both a yen and U.S. dollar perspective and single premium and recurring premium and we've been very successful at delivering a top-notch, great customer experience that we've been recognized for. So the strength of that business complex will really enable us to navigate the changes that are coming down the road.

Jimmy Bhullar:

First a question on PGIM flows. If you could just talk about what drove the negative flows in both retail and institutional funds? And to what extent do you think it's a function of just industry-wide issues that asset managers are seeing versus maybe the slight dip that you saw in your performance? And then relatedly, the impact on fees, should it be considered to the assets? Or are the fees lower or higher on the assets that you've lost?

Jimmy Bhullar:

Okay. And then on Individual Life, that's a business where the results have been weak the past several quarters, but this quarter was actually a good quarter. I think you mentioned in the presentation, there's a benefit from lower expenses and a legal reserve release. Can you quantify how much each was so that one gets an idea on sort of the underlying earnings in the business? And what your outlook is for individual Life earnings? .

Jimmy Bhullar:

And just any color on the size of the legal reserve because that I view that more as sort of a onetime versus expenses tend to move around. .

Operator:

Next question is coming from Tracy Benguigui from Barclays.

Caroline Feeney:

Sure, Tracy, it's Caroline, and I'll take your question. So I'll first start off by saying, Tracy, we've been a long-time support of regulations that provide consumer protections while ensuring that all Americans continue to have access to quality advice and the solutions they need for a secure retirement. So the proposal was just released 2 days ago, and so we're very much still in the midst of thoroughly reviewing and analyzing it so we can assess any potential impact on our customers and specifically their ability to access critical retirement products. And you specifically strike you about. So we do realize that in the proposal, there appears to be a focus on fixed indexed annuities, which today, for us, accounts for less than 20% of our total annuity sales, but are also part of a well diversified suite of annuity solutions as we continue to focus on delivering valuable solutions to help our customers meet their retirement savings needs -- that being said, I will just reiterate that we're still in the process of reviewing the proposed rule. And finally, I'll just add that under the last proposed rule change, we implemented policies and procedures to comply with the final prohibited transaction exemption in a timely fashion, and we'd expect to do the same here.

Caroline Feeney:

I'm sorry, Tracy, I want to make sure I heard your question.

Caroline Feeney:

So what I could improve on Yes. So Tracy, what I couldn't comment on is others in terms of their IMO channels and whether they'd be prepared or not. What I will say, particularly, and I'll just reiterate with the last DOL-proposed rule, we were very much ready as an entire enterprise across all of the various businesses where there was any impact, and we are ready to comply with the rule. And as I mentioned, we would expect to do the same here. That would include all of the distribution channels that would, in any way, be impacted by the new proposed rule.

Robert Falzon:

Tracy, it's Rob. So we're partnering with a group of very large global institutional investors. Their intent is to operate with scale. And their investment horizon very much aligned with our own is quite long term. Prismic itself has an independent Board of Directors, and that will govern the route toward growth and otherwise. But there are no put or call provisions embedded in the agreement that we've got with Prismic.

Wilma Burdis:

A couple of earnings-related questions. First, I think you guys previously cited $65 million of deal closing costs with Somerset Re. I just want to know if that would lower the 275 baseline for 4Q? Or maybe just an update on timing there? And then the other is, if you could walk us through the trajectory of benefits from the restructuring. Will we see a benefit in 1Q? Or is it going to take a little bit longer?

Wilma Burdis:

Yes, the restructuring, should we start to see some benefits coming in 1Q? Or is it going to take some time?

Wilma Burdis:

And could you talk about the impact of Prismic on Pages RBC -- just -- I know there was a little bit of a holdco liquidity impact from the initial investments. So could you just talk about that aspect as well?

Operator:

Next question today is coming from Suneet Kamath from Jefferies.

Charles Lowrey:

Sure. Let me take a step back and just tell you generally how we're thinking about this. This makes really an example of our open architecture solutions and is a very important additional component of our strategy to become a higher growth, less market-sensitive and more nimble company. We formed Prismic with Warburg Pincus and other global investors because we see significant opportunities that exist at the intersection, as Rob said, of asset management and insurance. And we're perfectly positioned to take advantage of those opportunities in the business which we have. And we're excited about our ability to leverage third-party capital and reinsurance to drive the incremental growth in our insurance, retirement and asset management businesses. And Prismic, to get, to your point, really reinforces and enhances our mutually reinforcing business system in 3 ways. First, we can reinsure portions of our in-force business like the structural settlements transaction we just completed and have PGIM continue to manage the majority of assets locking up capital to become less market sensitive. And to your point, we'll look to our retirement and life businesses for those assets. Secondly, we can write new business that could be reinsured to Prismic, so forward flow. And since Prismic is mainly supported by third-party capital, we can write additional retirement and insurance business to further accelerate our growth and at the same time, increase PGIM's assets under management. And finally, Prismic can reinsure third-party blocks, which would again increased PGIM's AUM. So there's a lot of potential we see for Prismic, and we're being thoughtful about how we execute against these opportunities and have recently reallocated resources to further optimize and cap our will further optimize our capabilities since Prismic is such an important component of our mutually reinforcing business system. So it's going to be in the life and retirement businesses mainly that we think about reinsuring other blocks, but we could think about others as we go forward.

Suneet Kamath:

Okay. Got it. And then I guess on the VA deal, the proceeds from that transaction still in PICA and is the expectation that they'll just sort of stay there and be used to support organic growth? Or would you expect to take those proceeds up to holdco for other uses?

Suneet Kamath:

Sorry, dividend out of PICA.

Suneet Kamath:

So just a quick follow-up there. I was just trying to track the holdco cash because it looked like it went down a little bit sequentially. Can you just kind of give us some of the bigger moving pieces there?

Operator:

Your next question is coming from Michael Ward from Citi.

Robert Falzon:

Mike, it's Rob. So yes, PGIM will have an appetite for doing both flow and balance sheet from Prudential as well as third parties. We will look to put -- and yes, we will get the asset management on those blocks as they're brought into Prismic. So that's part of the arrangement that we have with Prismic. And then separately, we'll make a decision as to how much we invest in Prismic on a go-forward basis. . As of now, our ownership in Prismic is at a 20% level. It's not a contractual application for us to stay at that level. But having said that, we think that the returns that we get for a capital that could be deployed through Prismic when you think about the returns on the underlying blocks enhanced by the fees that we get from from our asset management business could be quite attractive on a risk-reward basis. And so we would have some appetite for continuing to invest in those sorts of business when they significantly enhance the fee components that we get out of that business, which on an overall basis with a reduced risk profile of the earnings stream on a go forward.

Robert Falzon:

No, I would say that -- it's Rob again. Sorry, Mike, that nothing material to update you on from last quarter. We have a very high-quality overall real estate portfolio, including the office components to that or component of that. And we continue to see resiliency within that portfolio, as you would expect, given the experience that we have there, the dedicated team that we have from an underwriting standpoint and the quality of the overall portfolio. So while on the -- from a valuation standpoint, but updating our valuations and the valuations of the collateral supporting office loans continues to come down, but our LTV still remain quite low on a relative basis, and we feel very comfortable with the overall portfolio exposure there.

Wesley Carmichael:

Just had a couple of earnings ones should be quick. But on the baseline for Q4, the $2.75 that includes normal variable investment income. So I was just hoping if you could help us with your outlook in the near term. It's a pretty modest headwind in the third quarter, but just wondering if you expect that to be a bit challenged going forward.

Wesley Carmichael:

Got it. And then on PGIM, I think you lowered your expected range for other related revenues by about $10 million on a quarterly basis. Just curious if you can provide us some color on what's driving that there.

Operator:

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Mr. Lowrey for any further closing comments.

Operator:

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.

Bob McLaughlin:

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 PGIM, our Global Investment Manager; Caroline Feeney, Head of U.S. Businesses; Ken Tanji, 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 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 the quarterly financial supplement, both of which can be found on our website at investor.prudential.com. And now, I’ll turn it over to Charlie.

Rob Falzon:

Thank you, Charlie. I’ll provide an overview of our financial results and business performance for our PGIM, U.S. and International businesses. I’ll begin on slide 6 with our financial results 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 and fee 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 the year ago quarter. PGIM, our global investment manager, had lower asset management fees, driven by rising rates and net outflows and higher expenses to support growth initiatives, while other related revenues increased primarily from higher seed and co-investment earnings. Results of our U.S. businesses primarily reflected a more favorable, comparable impact from our annual assumption update, higher spread income and more favorable underwriting, partially offset by the absence of one-time gain from the sale of PALAC in the prior year quarter and lower fee income. The 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 7. PGIM, our global active investment manager has diversified capabilities in both public and private asset classes across fixed income, equities, and alternatives. PGIM’s long-term investment performance remains attractive with 80% or more of assets under management outperforming their benchmarks over the last 5 and 10 year periods. In addition, our short-term performance has improved since the last quarter, with 80% of assets exceeding their benchmarks over a one year period. PGIM 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. As the investment engine of Prudential, the success and growth of PGIM end of our U.S. and international insurance and retirement businesses are mutually reinforcing. PGIM’s 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 PGIM through affiliated net flows, as well as unique access to 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, corporate and infrastructure credit, real estate equity and debt, and secondary private equity. Capital deployment across PGIM’s private assets platform increased from the prior quarter to $8 billion, benefiting from strong private placement and direct lending originations. Turning to slide 8, our U.S. businesses produce diversified earnings from fees, net investment spread and underwriting income, and benefit from our complimentary mix of longevity and mortality businesses. We continued to drive towards a higher value, higher growth, and less market sensitive mix of earnings, as evidenced by the de-risking transactions that Charlie mentioned, invest in our businesses to deliver best in class customer experiences and expand our addressable market with new financial solutions, leveraging the capabilities across Prudential. Retirement strategies generated strong sales of $7.6 billion in the second quarter across its 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 sales. Retirement account values were a record high at the end of the second quarter. In individual retirement, our product pivots have resulted in contingent strong sales of more simplified solutions like FlexGuard and FlexGuard 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 pivot strategy with variable 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. Our record results this quarter include favorable group life and disability underwriting experience, which resulted in a benefits ratio of 81%. Turning to slide 9, our international businesses include our Japanese Life Insurance companies, where we have a differentiated multi-channel distribution model, as well as other businesses aimed at expanding our presence in targeted high growth emerging markets. In 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. In emerging markets, we’re focused on creating a selective portfolio of businesses in regions where customer needs are growing, where there are compelling opportunities to build market leading businesses, and where the financial 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 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. 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 serve the diverse needs of a broad range of customers. And with that, I’ll now hand it over to Ken.

Operator:

[Operator Instructions] Our first question today is coming from Tom Gallagher from Evercore ISI.

Ken Tanji:

Ys. Hey Tom, it’s Ken. Yes, we executed planned distributions from our businesses in the second quarter. That cash flow reflected dividends from PICA and Japan and other affiliated cash flows from subsidiaries as well. And again, it was all part of our plans for the year. Our capital position as a result is very healthy. Our regulatory capital ratios are above our AA objectives that would include the benefit of the recent VA reinsurance transaction, but does not yet reflect the GUL transaction, which will be subject to close later. And again, our Holdco assets were $4.5 billion, relatively flat from the prior quarter and a high end of our target range. So again, we’ll benefit from the GUL transaction when it closes and the NAIC IMR proposal when that is adopted. So that’s not yet in our RBC ratios. And these will all be key considerations for dividends from PICA to PFI in the second half of the year, again, with the close of GUL and NAIC’s decision on negative IMR. So overall, we feel very good about our capital position and the outlook for our flexibility looking ahead.

Ken Tanji:

Yes. So you’re right, Tom. The proposal is subject to a limitation of 10% of statutory surplus with adjusted for some exclusions. And for us, that’s about $1.3 billion or that you can think of that as about 26 RBC points. So, that’s what it would represent for us where we sit and where interest rate sits right now.

Jimmy Bhullar:

So first, just a question on your Japan business and how do you -- how are you thinking about potential changes in your new sales mix given changes in the capital regime and also just fluctuations recently we’ve seen in terms of interest rates and currencies in Japan?

Jimmy Bhullar:

Does the change in capital affect your sort of the economics of your products between U.S. dollar and yen denominated?

Jimmy Bhullar:

Okay. And then just shifting on to PGIM. 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 in asset management recently as well?

Operator:

Our next question is coming from John Barnidge from Piper Sandler.

Andy Sullivan:

So John, it’s Andy. I’ll take it. Maybe I’ll bring it up a level, just talk about in general as we do de-risking transactions. And in particular, the recent de-risking transactions we did in Individual Retirement Strategies and Individual Life. It is true, we’ll lose some assets under management from the general account. But we -- as you’ve noted, we worked hard and got an IMA. That is deal specific, how long they -- those IMAs go, depending deal to deal. But 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 PGIM earnings.

John Barnidge:

And then my follow-up question, sticking with asset management business, do industry-wide headwinds lead to inorganic opportunities? And are there products or geographies you’d want to get greater scale in?

Operator:

Your next question today is coming from Ryan Krueger from KBW.

Rob Falzon:

Ryan, it’s Rob. I’ll take that. As 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 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 continue to actively evaluate additional blocks, existing blocks of business for reinsurance and then also looking at flow or new sales solutions. On the asset side, it’s about expanding our lens on the available assets or investments that can generate greater outlook for us. We’re also expanding our capabilities to source those investments either directly or in partnership with others, including things like acquiring capabilities as we did with Deerpath. This is an important component of our broader strategy, which is around enhancing valuation by becoming higher growth, less market-sensitive and more nimble.

Rob Falzon:

I think we’re looking at the full range of opportunities that would exist there. And so going from captive to third party and hybrid solutions that would exist in between that.

Wes Carmichael:

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, ended this quarter at $4.5 billion. But if I kind of add up all the uses of capital in the quarter, from buybacks, dividends, I think there was $1.5 billion of callable debt. I think there were around $2.5 billion of uses in the period. So I’m just curious, like were 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 sizable use of capital. and I’m just trying to figure out where that came from.

Wes Carmichael:

And just maybe any thoughts around your kind of PRT pipeline? And just maybe how you think about that versus balancing that with like the longevity business and deploying capital to those two in the institutional retirement business?

Operator:

Your next question today is coming from Suneet Kamath from Jefferies.

Charlie Lowrey:

So, I would say, yes, to both of those. So, let me go through yes and, Suneet. So first, I’ll go through each one sort of GUL and then the VA business. But, first, we are very pleased with the valuation we received for reinsuring the $12.5 billion block of guaranteed universal life policies that we announced last week. 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 de-risking opportunity for Life sub block? Absolutely. As long as it met the strategic 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 life insurance gap. And I think our strong Individual Life sales in the second quarter reflects our product pivot to 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. On the VA side, it’s a little bit of a different story, 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 we’re pleased with the valuations, again, that we received for reinsuring the $10 billion block of traditional variable annuities in the second quarter as well as the valuation for the $30 billion block we sold last year. But as a result of these transactions, as we’ve said, and the natural runoff of this business, we have achieved the original objective that we established two years ago of blowing the proportion of traditional variable annuities. So, we’re not in a position of having to do another transaction. Having said that, I want to be very clear that we’ll continue to explore additional opportunities. But again, to state the obvious, but I’ll state it, we’ll only do something if it’s in the best interest of all our stakeholders. But these transactions aren’t only about de-risking. As you said, they’re also about growth. So, while we’ve been quite successful in our de-risking 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, let me turn it over to Caroline for a minute because -- Caroline, would you want to talk about some of the progress we’ve made with that part of our strategy?

Suneet Kamath:

Got it. That makes sense. And then I just want to follow up. I think, Ken, 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 how long should we expect this incremental investment to be impacting that line. Thanks.

Suneet Kamath:

Got it. So you’re not signaling that we need to reflect this $25 million in our corporate forecast going forward, it’s more -- you’re going to have this, but it’s going to be offset by efficiencies and other things?

Suneet Kamath:

Got it. Just offset at the segments?

Operator:

Your next question is coming from Erik Bass from Autonomous Research.

Andy Sullivan:

So Erik, 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 is part of shifting our overall business mix to be higher growth. And we’re quite pleased with the performance of our EM portfolio, which is obviously, and as 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. Brazil posted strong double-digit year-over-year sales growth with success across basically every channel Life Planner, Third-party and Group, and we had another record quarter. Second, I would highlight our 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 is $67 million. 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 this sort of at the top of the call was this really exciting partnership we have with Mercado Pago, which is for financial subsidiary of Mercado Libre. Mercado Libre is the largest e-commerce system in Latin America and has given us access to the mass market in Latin America, and we’re seeing really nice growth there. So, we don’t necessarily break out the specific growth rates, but this is a portfolio that’s becoming quite 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 spot at the right time, and that growth will continue.

Andy Sullivan:

So thanks, Erik, it’s Andy again. I will talk about the quarter, and then I’ll talk about the outlook. In the second quarter, ORR came in at $31 million, which was about $20 million below our average expectation. The bottom line there is the slowdown in the real estate market is playing through as we predicted, and we’ve seen lower agency earnings, lower real estate transactions fees and lower incentive fees. As far as looking forward, we would expect near term to see pressure remain on the ORR line really until the market experiences a rebound in the real estate transaction volumes.

Tracy Benguigui:

Let’s talk about RBC improvements. I appreciate that you quantify the IMR relief. How many RBC points are you expecting from your VA deal and ULSG [ph] deal?

Tracy Benguigui:

Okay. Awesome. When I’m thinking about these transactions and the counterparty credit risk, do you look at the size of capital by 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. What mechanisms do you put in place to reduce recapture risk? And if you could also share any assumptions at Somerset like with that deal?

Tracy Benguigui:

It definitely does. If I could just slip in, if there was any assumptions, like mortality or lapse rates that Somerset like looking at the deal?

Operator:

Next question is coming from Mike Ward from Citi.

Charlie Lowrey:

Hi. Mike, this is Charlie. I think it’s really the former. In other words, if you think about what we’re trying to do, if we take a step back and think about strategy of becoming a higher growth, less market-sensitive and more nimble company, this clearly falls as Caroline and I talked about in the first and second bucket. So we are de-risking and have de-risked and would consider further de-risking 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.

Caroline Feeney:

Yes. So Mike, it’s Caroline, and I’ll take your question. So certainly, I’ll start by saying it was indeed a great quarter for Group Insurance. And as Charlie mentioned upfront, we saw record earnings and an overall benefit ratio of 81%. That reflects the execution of our strategy of product and segment diversification and our continued focus 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 a strong double-digit growth. And our segment diversification strategy is focused on growing in the under 5,000 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, driven primarily from lower incidents and the impact from positive rate actions on renewals. And also disability continued to see strong results as well. That was driven by lower incidents, strong employment numbers and our continued focus on effective claim management. The disability benefits ratio we saw was our second best reported ever trailing only last quarter. So, 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 this, you’ll note that we’ve already increased our expectations for core earnings going forward.

Operator:

Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the floor back over to Mr. Lowrey for any further or closing comments.

Operator:

Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.

Bob McLaughlin:

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; PGIM [ph], our Global Investment Manager, Caroline Feeney, Head of US Businesses, Ken Tanji, 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. As a reminder, our financial results reflect the long duration targeted improvement accounting guidance that was adopted at the beginning of the year and prior year results have been adjusted accordingly. Today’s presentation may also 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 measures and the 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 the quarterly financial supplement, both of which can be found on our website at investor.prudential.com. And now, I’ll turn it over to Charlie.

Rob Falzon:

Thank you, Charlie. I'll provide an overview of our financial results and business performance for our PGIM, US and International businesses. I will also provide an overview of our investment portfolio and specifically our commercial real estate holdings, given the increased focus on the risks associated with a potential near-term credit cycle. I'll begin on slide six with our financial results for the first quarter of 2023. Our pre-tax adjusted operating income was $1.3 billion or $2.66 per share on an after-tax basis. These results reflect underlying business growth, including the benefits from a higher interest rate environment, offset by lower variable investment and fee income, as well as elevated seasonal mortality experience. While elevated mortality improved compared to the year ago quarter as COVID has transitioned to an endemic phase. Turning to the operating results from our businesses compared to the year ago quarter. PGIM, our global investment manager, had lower asset management fees due to lower assets under management resulting from the higher interest rates, equity market declines, and net outflows. Other related revenues increased primarily from seed and co-investment earnings. Results of our US businesses, primarily reflected lower fee income, 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. Turning to slide seven, PGIM, our global active investment manager, has diversified capabilities in both public and private asset classes across fixed income, equities, and alternatives. PGIM's investment performance remains attractive with 80% or more of assets under management outperforming their benchmarks over the last three, five and 10-year periods. PGIM experienced third-party institutional and retail net outflows of $14 billion in the quarter, primarily from fixed income strategies. Institutional outflows were mainly driven by client redemptions for liquidity needs, including de-risking actions of defined benefit sponsors. Retail outflows were driven by investors rebalancing amidst higher interest rates and inflation, consistent with the industry. As the investment engine of Prudential, the success and growth of PGIM and of our US and international insurance and Retirement businesses are mutually self-reinforcing. PGIM's 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 PGIM through affiliated net flows, which totaled $2 billion in the first quarter of 2023 as well as unique access to insurance liabilities. In addition, we continue to grow our private alternatives and credit business, which has assets of approximately $235 billion across private, corporate and infrastructure credit, real estate equity and debt, and secondary private equity and will be further enhanced through the acquisition of Deerpath Capital, as Charlie previously stated. Turning to slide eight, our US businesses produced diversified earnings from fees, net investment spread and underwriting income and benefit from our complementary mix of longevity and mortality businesses. We continue to shift towards higher growth and less market-sensitive products and markets, enhance our customer and adviser experiences, and further expand our addressable market. Retirement strategies achieved strong sales of $5.5 billion in the first quarter across its institutional and individual lines of business. Our Institutional Retirement business has market-leading capabilities with first quarter sales of $3.8 billion, including a jumbo pension risk transfer transaction, which contributed to record account values at the end of the first quarter. In Individual Retirement, product pivots have resulted in continued strong sales of more simplified solutions like FlexGuard and FlexGuard Income, representing over $13 billion of sales since inception, as well as increased fixed annuity sales that comprised approximately one-third of our sales. Our individual life sales reflect our earlier product pivot strategy with variable life products representing about 70% of sales for the quarter. And we continue to diversify group insurance sales with strong growth in supplemental health and disability products and driving 25% growth in the premier segment from the prior year quarter. Turning to slide nine. Our international businesses include our Japanese life insurance companies, where we have a differentiated multi-channel 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. We continue to enhance customer experience and agent support, including through digital tools. Prudential of Japan ranked number one in two out of the three categories in the 2023 J.D. Power Life Insurance customer satisfaction survey. We are proud to be recognized for the value we provide customers. In emerging markets, we are focused on creating a carefully selected portfolio of businesses in 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 businesses experienced their highest sales since the third quarter of 2020. Compared to the prior year quarter, Gibraltar sales were up 16%, mainly driven by the Life Consultant channel, primarily from higher US dollar sales. Life Planner sales were up 13%, driven by the continued momentum in Brazil as well as higher sales in Japan. Now turning to our investment portfolio on slide 10. We have a disciplined approach to our investment portfolio construction and management. It reflects our robust asset liability management practices, commitment to broad diversification and a rigorous underwriting security selection and credit management framework. We also leverage PGIM's expertise across multiple asset classes, including its deep and long-standing experience in private placements and real estate. With respect to our investment portfolio, here are a few key points. 30% of the portfolio is invested in government securities, primarily comprised of US treasuries and Japanese government bonds. 43% of the portfolio is invested in corporate securities, of which over 93% are investment grade. Private placements represent almost 40% of these corporate securities and over half of our BBB and below rated securities. These privates have financial covenants and structural protections that have consistently resulted in lower losses than comparable public securities. In past cycles, the loss experienced on our BBB private placements have been comparable to single A public credits. Mortgage loans represent an area of interest; I'll provide more detail on slide 11. Our mortgage loans represent 13% of our portfolio and reflect our conservative underwriting with an average loan-to-value of 57% and debt service coverage of 2.4 times. The portfolio is broadly diversified by property type, overweight in more defensive sectors such as multifamily and industrial, and underweighted in both office and retail. Specifically, office properties represent only 2% of invested assets, with loan to values and debt service coverage ratios that are in line with the overall portfolio. We have a disciplined portfolio monitoring process to review all investments at least annually and a robust risk management framework, which includes stress tests under cyclical and tail scenarios. Any potential credit losses in these scenarios are factored into our capital management framework and are expected to be manageable. As we look ahead, we are well positioned across our businesses to be a leader in expanding access to investing, insurance and retirement security. We continue to be focused 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.

Operator:

Thank you. We’ll now be conducting your question-and-answer session [Operator Instructions] Our first question today is coming from Tom Gallagher from Evercore ISI. Your line is now live.

Ken Tanji:

Hi, Tom, it's Ken. Yes, the NAIC is in the process of addressing what is uneconomic issues with the IMR. They -- as you mentioned, they've released a proposal, and that's out for comment until June 9th. So, they're giving some time to receive input for the industry to work collectively on this. We think it's a big step in the right direction as both the industry, the ACOI regulators that -- they're focused on addressing this issue. Having said that, the proposal needs some changes in a few areas, but there is a process to sort that out. We and many others are engaged in very constructive discussions. It's hard to predict the regulatory process, but it seems it's on the path for changes this year.

Kenn Tanji:

Yes, Tom, again, it's hard to predict. There are things that are being discussed and until that those things get sorted out, I wouldn't want to give an indication of how that plays out. But again, they are taking input, it's a very constructive process, I think all the intentions are there to put this on the path for resolution, but that will play out in time.

Kenn Tanji:

Yes. Sure. Yes, at the end of first quarter, we were in line with our leverage objectives and then when we call the $1.5 billion of debt, which has always been in our plans to do that in June, that would increase our debt capacity. Our overall debt capacity, though, is a function of rating agency criteria and other objectives, as we look at profitability, free cash flow, fixed cost coverage and stress testing, which we believe is important. So, it's not just leverage that would determine our debt capacity. But again, calling that debt was part of our plans. It was prefunded and that will improve our debt capacity going forward. And overall, we're on track for our plans for the year.

Operator:

Thank you. Next question today is coming from Ryan Krueger from KBW. Your line is now live.

Andy Sullivan:

Good morning Ryan, it's Andy. I'll take your question. As we always discuss, flows are going to vary quarter-to-quarter. So, we stay focused on the long-term track record. In Q1, we experienced third-party net outflows of $14 billion, driven both by retail and the institutional. On both fronts, as you heard Rob say upfront, it is very much a fixed income story. Our retail outflows were $3.8 billion in the quarter. The fact is we continue to see money flowing out of active US mutual funds and into money market funds, CDs and other short-term solutions. That being said, we did see a slowing of the retail outflows in the quarter consistent with the industry. We would expect this outflow trend to reverse once inflation moderates and the rate environment stabilizes. On the institutional side, net outflows were $10.2 billion for the quarter. That was driven almost entirely by redemptions from public fixed income as institutional investors sought that liquidity, as you mentioned, and DB sponsors de-risk their plans. We would expect that the near-term, flow volatility in the institutional business will remain volatile, given the heightened macroeconomic, geopolitical and market uncertainty. That being said, our long-term investment performance remains very, very strong with over 80% of our benchmarkable assets outperforming the three, five and 10-year marks. We have high confidence in the power of our platform, particularly as sustained higher rates are going to be good for the fixed income business, and we will benefit over time from the synergy between our insurance and asset management businesses. So by paying attention to the fundamentals, we know we'll be a net grower.

Andy Sullivan:

Yes. Again, it's Andy. Thanks, Ryan. As you know, last quarter, we lowered our run rate expectations for ORR, specifically due to as you're speaking to the expected slowdown in real estate-related revenues. And that shows up in a variety of ways, obviously, both in the agency side, but also as you're talking about in transaction fees and incentive fees. So in the quarter, we came in lower than our expected average, because we saw that real estate slowdown as we expect it. And I guess, the only other thing I would mention is, just a reminder that incentive fees tend to be seasonally low in Q1. So that was definitely a contributor as well. So I think over time, the expected average of about $50 million is still the right ballpark, but definitely, the real estate slowdown will have an impact.

Operator:

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

Rob Falzon:

Erik, it's Rob. I'll take the first stab at sort of describing how we think about stress testing. And then, Ken, perhaps I'll turn it over to you and you can talk about how we factor that into our capital planning. So we perform -- we have a very robust enterprise risk management capability and perform a whole series of stress tests that vary between our outlook on a base case basis, which includes sort of a moderate decline from an economic standpoint, a full board recession and particularly with respect to our real estate portfolio, we look at -- we run some of the CCARs more severe stress tests that the banks are subject to as well. The results of those are factored into both our capital planning and our reserving. We haven't, Erik, updated any disclosure on that. But what I would say is if you look back to when we first -- or last, I should say, provided some disclosure on that was back in the first quarter of 2020, the order of magnitude that we articulated then in terms of the impact coming from the portfolio from a credit cycle is roughly same order of magnitude today. Ken, I don't know if you want to elaborate further on that.

Erik Bass:

Got it. Thank you. And then I was hoping you could talk a little bit about your strategic view of the US individual life business going forward. Just under LDTI, I think your guidance implies this business will be roughly breakeven, are almost slightly profitable on a GAAP basis. So are there any actions that you're considering or that you could take to improve the profitability of this business?

Erik Bass:

Great. Thank you.

Operator:

Thank you. Your next question today is coming from Jimmy Bhullar from JPMorgan. Your line is now live.

Rob Falzon:

Jimmy, it's Rob. I'll handle that. First, just from a sort of a high-level standpoint, the real estate portfolio is a very high-quality portfolio, broadly diversified both by geography and in the underlying property types. And we really benefit from PGIM's direct origination capabilities in this arena. They've got a management team there that's got well over 25 years industry experience and deep knowledge of the markets and a proven track record in that area. When we look at the quality of the portfolio, it's actually holding up quite well. You can see that our CECL reserve for that portfolio is just a little under $200 million. That's about 39 basis points against the portfolio, then that is up from about 21 basis points a year ago. But that's primarily a general reserve. We only have a single loan with a specific reserve in there, an office property. But outside of that, the reserve really comprises our estimation of losses across the portfolio based on historical data.

Charlie Lowrey:

So, Jimmy, let me take that and just raise it up a level and then I'll answer your question directly. We have said when we think about buybacks and the application of capital, that we want to be good stewards of capital. And we have and will continue to demonstrate a very disciplined and balanced approach to the redeployment of capital within our businesses and to our shareholders and other stakeholders. And you saw in the first quarter, we returned over $700 million to shareholders, which included the 15th consecutive annual increase in our dividend. So -- but if I take a step back for a moment, let me share with you some observations about how we think about capital allocation and particular optimization, which fits to your point. We look across all our businesses, both domestically and internationally, to ensure that we're optimizing capital deployment. So we'll continue to look for ways to optimize capital to maximize outcomes for all our stakeholders by balancing investments in our businesses and business growth, programmatic M&A, and returning capital to shareholders while maintaining our financial strength. And you saw examples of all four of that this quarter, right? We continue to invest in our businesses. We did programmatic M&A with the Deerpath Capital. We returned capital to shareholders, both in the form of dividends and share repurchases and we made an announcement to repay hybrid, which lowers our -- the hybrid, which lowers our leverage. So we'll continue to evaluate all these things as we go forward, especially in the current macroeconomic environment. But as an example, this quarter, we were able to do all of that given the strength of our capital position, given the cash flow we've generated and given our strategy going forward.

Elyse Greenspan:

Hi. Thanks. Good morning. My first question is on the capital side of things. When we -- after the $1.5 billion debt pay down, right, you guys at around are at 3.1 at the holdco. So can you just give me -- I'm just looking for a sense of where you want to run relative to that target? And then the answer to that question, can you give us a sense of just the timing of dividends that you're going to take out of PICA this year as well as any repatriation of capital from Japan?

Elyse Greenspan:

Thanks. And then the second quarter baseline, the 320 EPS, that assumes normal PII, but prepays and alternative real estate income could be lower just given the volatility we're seeing in markets. So how should we think about just PII, not only for the Q2, but also for the balance of the year?

Elyse Greenspan:

Thank you.

Alex Scott:

Hey, good morning. First one I had is on annuities. That was a place where, I guess, relative to the presentation, you all put out at the time of the LDTI recast, the result came in much, much stronger this quarter. So I just wanted to see if you had a perspective on sort of what changed there versus what you were expecting at the time of the LDTI recast? And one of the things that struck me was NII, and I know you all have talked about sensitivity to the NII on shorter-duration collateral securities and cash. And I just wanted to see if you could provide any kind of sensitivity to help us think through how to model that, as we think through federal funds at the levels they are today versus some of the projections that have them declining?

Alex Scott:

Got it. Maybe just a follow-up to that, I mean the portion that's the sensitivity to shorter term interest rates, is there any way for us to gauge how that may react if the Fed run trade begins to decline. It just seemed like there's maybe a bit more leverage than I would have guessed on the upside to that. So I don't want to overlook – estimate?

Alex Scott:

Got it. Yeah, I understand. Thank you.

John Barnidge:

Thank you very much for the opportunity, and good morning. My question is around the group insurance. Persistency decline in both group life and disability, can you maybe talk about the drivers, seeing any impact from deployment reductions as the larger jumbo into the market?

John Barnidge:

Thank you very much. And another question around Japan. I believe they're lifting pandemic related restrictions, categorizing COVID like infectious disease or like the influenza. Can you talk about -- is that anticipated to improve or enhance distribution, or are there any product launches planned around that? Thank you.

John Barnidge:

Thank you very much.

Suneet Kamath:

Thanks. I just want to go back to Charlie, an answer that you gave to a previous question on capital, I think it was Jimmy's question. So I just wanted to confirm, are you committing to the $1 billion of buyback for the year, or it just felt like maybe there was a little bit of vagueness in your response. I just wanted to give you the opportunity to clarify.

Suneet Kamath:

Okay. That's clear. Thanks for that. And then I guess, I don't know if it's for Rob or Ken, when you talk about on Slide 11 about the mortgage loan portfolio and the process that you go through evaluating at least once a year, what is that process like? Is that an internal process where you use your team, or do you go externally and hire firms to kind of confirm or validate your approach? Just curious how you think about that?

Suneet Kamath:

Makes sense. And if I could sneak one more in just on Japan again. So higher rates in Japan is a relatively new phenomenon. So I'm just curious, one, is that changing kind of customer behavior in terms of products? And then relatedly, I think maybe a quarter or so ago, you guys were having some issues with lapses in the foreign currency products. So just curious if there's an update there in terms of if that's continuing or if it's stabilized, that would be helpful. Thanks.

Suneet Kamath:

Got it. Okay. Thank you, guys.

Tracy Benguigui:

Thank you. What drove elevated mortality in the first quarter versus what you typically see? I guess, I'm just curious if you saw an early flu season last quarter that was a pull forward or not?

Tracy Benguigui:

Very helpful. I appreciate that. The next question, I'd like to ask you about your office loan maturities in the next 24 months. Our review of stat filings, it looks like it's about $500 million. Can you speak to the feasibility of extension? Do you feel like borrowers could either purchase an interest rate cap if the loan is floating or reduce the loan balance by putting in more equity with the current debt yields allow that?

Tracy Benguigui:

Thank you. Very helpful.

Michael Ward:

Thanks guys for squeezing me in. Maybe just on commercial real estate. I was wondering about the slide on the REIT debt. I was just wondering if you could expand on that and help us understand how it fits in the spectrum and how -- if we should think about the credit risk they're similar to like a direct commercial mortgage loan?

Michael Ward:

Thanks Rob. And then somewhat and relatedly, I believe PGIM’s one of the bigger CLO managers, I was just wondering if you had any perspective or outlook for that asset class, given broader credit risk?

Michael Ward:

Okay. Thanks very much.

Charlie Lowrey:

Okay. Thank you again for joining us today. I hope we demonstrated to you the progress we're making in transforming Prudential to deliver sustainable long-term growth and to meet the evolving needs of our customers. We're confident in our strategy and the strength of our company. For nearly 150 years, Prudential has been focused on creating value for our customers and other stakeholders who we will continue to serve as we strive to be a global leader in expanding access to investing insurance and retirement security. Thank you again for joining us, and have a good day.

Bob McLaughlin:

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; PGIM [ph], our Global Investment Manager, Caroline Feeney, Head of US Businesses, Ken Tanji, 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 the predictions that we make today. In addition, this presentation may include references to non-GAAP measures. For a reconciliation of such measures to the comparable GAAP measures and the 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 the quarterly financial supplement, both of which can be found on our website at investor.prudential.com. And now, I’ll turn it over to Charlie.

Rob Falzon:

Thank you, Charlie. I'll provide an overview of our financial results and business performance for our PGIM, US, and International Businesses. I'll begin on slide six. Pre-tax 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 has transitioned to an endemic phase, 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 and the gain on the sale of the PALAC 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 impacts of rising interest rates. This loss also included a $700 million goodwill impairment due to the reduction in the estimated fair value of assurance. While assurance is making good progress in many areas and had a profitable fourth quarter, the impairment reflects lower growth expectations, higher discount rate applied to future applied to future cashflows reflecting macroeconomic conditions, and lower publicly traded peer evaluations. Turning to the operating results from our businesses compared to the year ago quarter. PGIM, our global investment manager reported fees, primarily due to lower assets under management, resulting from higher rates and equity market declines. Results of our US 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 and 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 through the depreciation of the yen. Turning to slide seven, PGIM, 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. PGIM's 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, PGIM 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, PGIM 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 on retail flows across the industry. As the investment engine of Prudential, success and growth of PGIM and of our US and International Insurance and Retirement businesses are mutually reinforcing. PGIM's 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 PGIM 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 $230 billion across private credit and real estate equity and debt and benefits from our global scale and market leading positions. Notably, PGIM’s private businesses deployed nearly $43 billion of gross capital in 2022. Turning to slide 8. Our US Businesses produced diversified earnings from fees, net investments spread and underwriting income and benefit from our complimentary mix of longevity and mortality businesses. We continue to shift towards higher growth and less market sensitive products and markets, enhance our customer experience while reducing costs by amplifying the use of capabilities and self-service tools and further expand our addressable markets. Retirement Strategies 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 in a $16 billion pension risk transfer transaction and our fourth largest international reinsurance transaction of $8 billion in the fourth quarter. In Individual Retirement, product pivots have resulted in continued strong sales of more simplified solutions like FlexGuard and FlexGuard 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 9. Our International Businesses include our Japanese life insurance companies, where we have a differentiated multi-channel 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 and regions where customer's needs are growing, where there are compelling opportunities to build market leading businesses and where the Prudential enterprise can add value. Our International Businesses experienced their highest sales since the third quarter of 2020, including record sales in Brazil. Compared to the prior year quarter, Gibraltar sales were up 20% mainly driven by the life consultant channel primarily from higher US 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 in 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.

Operator:

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Erik Bass from Autonomous Research. Your line is now live.

Ken Tanji:

Yeah. Hey, Erik, it's Ken. Overall, we do feel good about our overall capital picture in multiple parts, as you suggest, but I thought it might be helpful to give a little bit of an overall context for our capital management. We've had a very well-established and consistent approach. And we've served us very well particularly last year as we look to shift our business to be less market-sensitive and grow, while also maintaining financial strength and the flexibility. We closed the sales of our full service business and the PALAC variable annuity block last year that released capital at attractive terms. And we also deployed capital to the second largest PRT transaction with IBM. We also, as we mentioned and discussed on our last call, absorbed the capital impact of the assumption update in our life insurance business and the non-economic impact of higher rates on staffed capital. Again, that was expected. It's manageable, and we've appropriately addressed those capital implications. When you put that all together, we ended 2022 in a solid capital position. Our RBC ratios were above our AA objectives and our target there is to be above 3.75%. Our Japan solvency margin ratios are above their AA objectives. We have an HLA balance of $4.5 billion at the Holdco. And 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 $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 a potential for another recession or other stress events. So again, when we put that all together, we feel good that we're consistent with our AA objectives. We have a level of flexibility, and that's what our board considered when they issued where they authorized $1 billion in 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 I hope that's helpful context.

Ken Tanji:

Hey, Erik, I'll start and then turn it over to Caroline to give a broader business context. But just from a sheer sensitivity to short-term rates, yes, we are benefiting from short-term rates. And generally, overall, our variable annuity business is sensitive to rates, both long-term and short-term. So a rise in both is actually helping us. In terms of short-term rates, we did see a pickup in earnings, because we're earning a higher return from collateral, that's posted on our hedging positions, and that's driven by the uptick in short-term rates. But there's more dynamics going on broadly for the business. So maybe Caroline, I'll turn it over to you for that.

Operator:

Thank you. Next question today is coming from Tom Gallagher from Evercore ISI. Your line is now live.

Ken Tanji:

Yes. 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 $1.5 billion of debt this year in June. But 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, we're going to continue to evaluate the market conditions in our liquidity position and factor that into the decision to -- and the timing to call the debt or not. And we're also going to look at our overall funding needs going forward. And again, our discipline is to pre-fund upcoming plan. So it's really an ongoing cycle is the best way you should think of it.

Ken Tanji:

Sure, Tom. We -- as we described, when we updated our assumptions for GAAP, we would be making those same assumption updates for stat and that -- for statutory purposes occurs in the fourth quarter. So that was -- our GAAP impact was about $1.4 billion. It is larger on a stat basis. Stat tends to be more conservative, and that's what occurred in the fourth quarter. That was generally what led to the -- our RBC ratio in the fourth quarter going from above 400% to below it, but still, again, above our AA objective of 375. And we didn't make a capital contribution into PICA to achieve that again as we expected. So, just a reminder of the moving parts there.

Suneet Kamath:

Thanks. I guess for Ken. Just curious, 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?

Suneet Kamath:

And can you size that capital release?

Suneet Kamath:

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 comments 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 you're thinking about M&A, especially as you think about that strategy around improving the earnings contribution from growth businesses that you talked about, I guess, two years ago?

Suneet Kamath:

Got it. Thank you.

Alex Scott:

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, potentially some debt reduction. Could you talk about how that will be funded between PGIM cash flows, PICA in the US businesses versus Japan. And specifically, I'm interested in particular in PICA, if you plan to take dividends out this year?

Alex Scott:

Got it. Second question I had is on Japan. Sales have picked up recently and looked pretty good. I guess, the premium growth is still a bit weaker on year-over-year comps and so forth. So I was just interested in what you expect from that, what kind of top line growth can we expect from that business?

Alex Scott:

Got it. Thank you.

Ryan Krueger:

Hey, good morning. I had a follow-up on Japan. Have you seen any change in policyholder behavior in terms that may be driven by the weaker and volatile yen that we've seen over the last year regarding the FX products? Thanks.

Ryan Krueger:

Got it. And then on the FC well charge, is there a chance that some of that could reverse from AAT subtest from higher interest rates when you do the look back in 2023?

Ryan Krueger:

Okay. Got it. Thanks.

Tracy Benguigui:

Thank you. A follow-up on your statutory reserve charge for your assumption update. Last quarter, Ken, you mentioned it would be absorbed within PICA's excess capital position. Has that changed in the quarter where the ultimate size ended up being higher than your expectations and also on like GAAP reserve charges, I understand that funding for a statutory reserve charge does not have to come in all at once in 4Q. So can you share if you booked a portion of it before 4Q?

Tracy Benguigui:

Okay. And your latest buyback authorization levels suggest 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 you set that objective. Was it just the reserve charge, or is it something else like PRT? I guess, my broader question is from this experience, are you rethinking the idea of coming up with a multiyear plan versus a singular year plan?

Tracy Benguigui:

Okay. Thank you.

Jimmy Bhullar:

Thanks. First, just could you talk about your sales pipeline in PGIM in both the retail and the institutional side and how that's looking?

Jimmy Bhullar:

Do you have enough visibility to assume that you'll have positive flows on an overall basis at PGIM for 2023 or too early to say?

Operator:

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

Andy Sullivan:

So John, it's Andy. I'll take your question. So really, the impact you saw near-term, COVID kept pressure on our recruiting efforts and retention efforts. Fact is, throughout the last couple of years, it was a harder environment to recruit and establish culture with new agents. That impacted our life consultant count more so than our Life Planner counts, but it did affect both. As we've started to transition to more of an endemic, we are seeing an improvement and expect to see an improvement over time. 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 lean in to attract land and develop new agents, which 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.

Caroline Feeney:

Sure. John, it's Caroline. So 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're aware, the fourth quarter does tend to be a little lighter in terms of sales quarter, with the first quarter being our largest, as the majority of our cases do have January 1 inception dates. So the lower sales that you're noticing on a year-over-year basis is largely due to just a large case buyout last year that drove up sales volumes. And these do occur periodically and certainly can produce some variability in sales volumes, particularly in those lighter sales quarters. So John, if you were to normalize for last year's one-time buyout that we saw sales are actually up about 7%. And obviously, this is on the disability side. On the life side, it was just a matter of timing of premiums driven by changes in when some customers do enrollment in the year. So I would just say, overall, we feel very good as well about our existing pipeline as we continue with our strong sales momentum.

Operator:

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

Ken Tanji :

Yes. Hey, Elyse, the impact on our PICA RBC ratio was about 35 basis points, maybe a little bit more. And that occurred with the rise in rates from 2Q through 4Q. And you'll be able to see that in our Blue Book and Green Book combined. So we'll be reporting that 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 working with our regulators and many others are as well to see what -- how best to address this issue.

Rob Axel:

Thanks, Elyse. We -- as Ken articulated earlier, the decision with regard to the buybacks factored in a number of considerations, including in that the possibility of recession and obviously, a recession that might be accompanied by a credit cycle, which could affect the portfolio. A couple of thoughts on that. First, while we do scenarios, which would anticipate the potential for both negative migration and credit losses, we also take some comfort, as 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 that might lead to a credit cycle. 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 2022, it was actually positive. So, we haven't seen any imminent signs of distress sort of percolating 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 anticipate that level of buyback and have the strength to be able to absorb anything that might happen from a negative migration or default standpoint.

Elyse Greenspan:

Thank you.

Andrew Kligerman:

Hey good morning. I know there's been a number of capital questions and the IMR was impacted this quarter due to derivative losses given rising interest rates, now we've got rates coming off a bit in 1Q 2023. So, I'm wondering if you could give us a little sensitivity on rates and how we can think about that impact on capital, particularly with regard to these derivatives?

Andrew Kligerman:

Okay. Okay. And maybe help us on the expenses. So, you've got this terrific $820 million run rate savings. But as I look at results, I'm unable to kind of find those benefits falling to the bottom-line. So, maybe like a little color geographically, is all of it hitting the bottom-line? Like just a little color as to how we could think about that $820 million going forward?

Andrew Kligerman:

Got it. And just a real quick technical question. Are you planning to deploy capital into Assurance IQ going forward, or will it -- now that its generating a little profit, can it be self-funding?

Andrew Kligerman:

Thanks a lot.

Michael Ward:

Thanks guys. Good morning. Just a high level question, I was wondering if the capital pressures, reserve 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?

Michael Ward:

Okay, great. Thank you. 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?

Michael Ward:

Okay, great. Thank you.

Suneet Kamath:

Great. Thanks for the follow-up. Maybe just two quick ones. Just for Ken, I was curious about your comment about no change to AAT reserves even with the move up in rates. Can you just talk about why that would be the case?

Suneet Kamath:

Got it. And then just curious on LDTI. I know you said that the AO impacts offset across businesses. But can you just give us a sense of maybe, which businesses benefits, and which businesses saw some pressure?

Suneet Kamath:

Okay. Thank you.

Charlie Lowrey:

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 value 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.

Bob McLaughlin:

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 US Businesses; Scott Sleyster, Head of International Businesses; Ken Tanji, 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 the predictions that we make today. In addition, this presentation may include references to non-GAAP measures. For a reconciliation of such measures to the comparable GAAP measures and the 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 the quarterly financial supplement, both of which can be found on our website at investor.prudential.com. And now, I’ll turn it over to Charlie.

Rob Falzon:

Thank you, Charlie. I'll provide an overview of our financial results and business performance for our PGIM, US and international businesses. I'll begin on Slide 6 with our financial results for the third quarter of 2022. Pre-tax adjusted operating income was $1 billion or $2.13 per share on an after-tax basis and reflected lower variable investment income driven by market conditions and an elevated level of Japan COVID-19 hospitalization claims, partially offset by underlying business growth, including a benefit from rising interest rates. Our GAAP net loss per share was $0.78 on an after-tax basis, primarily reflecting realized investment losses, largely driven by higher interest rates. Turning to the operating results from our businesses compared to the year ago quarter. PGIM, our Global Investment Manager reported lower asset management fees, resulting from a reduction in assets under management reflecting higher interest rates, widening credit spreads and declines in equity markets. Results of our US businesses were lower than the year-ago quarter, reflecting lower spread income due to less favorable variable investment income and lower fee income resulting from the sale of a portion of the legacy variable annuities business, the decline in equity markets and net outflows, partially offset by more favorable underwriting as COVID-19 transitions to an endemic level in the US. The decrease in earnings in our international businesses reflected elevated COVID-19 hospitalization claims in Japan and lower spread income driven by less favorable variable investment income. Turning to Slide 7. PGIM, our global active investment manager, has diversified capabilities in both public and private asset classes across fixed income, alternatives, real estate and equities. PGIM's long-term investment performance remains attractive with more than 80% of assets under management outperforming their benchmarks over the last five and 10-year periods. PGM experienced retail outflows, primarily in fixed income, consistent with industry trends due to the rising rate environment, while institutional net flows continue to be positive. As the investment engine of Prudential, the success and growth of PGIM and of our US and international insurance and retirement businesses are mutually enhancing. PGIM's asset origination capabilities, investment management expertise and access to institutional and other sources of private capital or a competitive advantage. This helps our businesses bring enhanced solutions and create more value for our customers. Our insurance and retirement businesses, in turn, provide a source of growth for PGIM through affiliated flows and unique access to insurance liabilities that complement its track record of third-party growth. PGIM's annual fee rate increased due to the continued shift toward higher fee strategies, including our alternatives and private credit business. We continue to grow our alternatives in private credit business, which has assets under management of nearly $230 billion across private credit, real estate equity and debt and private equity secondaries and benefits from our global scale and market-leading positions. Across PGIM's private platform, we deployed $9.6 billion of capital this quarter. As we continue to invest in growth areas that are aligned with the needs of our clients, we also remain disciplined in finding opportunities to protect operating margins by managing the business more efficiently. Turning to Slide 8. Our US businesses produced diversified earnings from fees, net investment spread and underwriting income and benefit from our complementary mix of longevity and mortality businesses. We continue to shift our business mix towards higher growth and less market-sensitive products in markets, transform our capabilities and cost structure and further expand our addressable markets. Retirement Strategies achieved robust sales in the third quarter across its institutional and individual lines of business. Institutional Retirement closed nearly $10 billion of pension risk transfer transactions in the third quarter including being selected by IBM for a 50% participation in a $16 billion pension risk transfer transaction. Our focus on superior execution, supported by the experience of our high-quality PRT team and our continued market leadership in the US pension risk transfer market contributed to IBM selecting us. We continue to see a significant opportunity in the growing PRT market. In individual retirement, product pits have resulted solutions with $1 billion of FlexGuard and FlexGuard income sales in the third quarter, as well as increased fixed annuity sales. Our individual life sales also reflect our earlier product pivot strategy with variable life products representing approximately 70% of sales for the quarter. Group Insurance experienced a 50% increase in sales compared to the year ago quarter, reflecting higher national account life and disability sales and execution of our product growth strategy to drive supplemental health. Turning to Slide 9. 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. For example, we launched a yen-denominated investment product with a joint survivorship feature in the bank channel in the third quarter. In emerging markets, we are focused on creating a carefully selected portfolio of businesses and regions where customer needs are growing, where there are compelling opportunities to build market-leading businesses and where the Prudential enterprise can add value. In the third quarter, we continued to focus on expanding product and business capabilities to meet the evolving needs of customers. In Brazil, we expanded our digital sales application and achieved record sales for the second consecutive quarter driven by strong performance across all distribution channels. We further expanded our product offerings on the Mercado Libre platform in Brazil and successfully launched the sales platform in Argentina, as Charlie mentioned. In addition, we completed our tender offer for Alex Forbes, expanding our ownership to 33% of a leading provider of integrated retirement, investment and wealth management services in South Africa. As we look ahead, we're well positioned across our businesses to be a global leader in expanding access to investing, insurance and retirement security. We continue to invest in growth businesses and markets, deliver industry-leading customer experiences and create the next generation of financial solutions to better serve the diverse needs of a broad range of customers. And now with that, I'll hand it over to Ken.

Operator:

Thank you. We’ll now be conducting question-and-answer session. [Operator Instructions] Our first question today is coming from Tom Gallagher from Evercore ISI. Your line is now live.

Ken Tanji:

Yeah. Hey Tom, sure. I'll cover that. We did make a capital contribution of $1 billion to PICA, our main US life insurance company. And that is to support a high volume of business growth, including the IBM and other pension risk transfer transactions that we did. We also made a $200 million of contributions to fund a few international joint venture investments that's part of our programmatic M&A into emerging markets. And then as we mentioned and highlighted that we funded shareholder distributions of $800 million. The $500 million of net debt increase that we had as we refinance our debt profile was essentially offset by holding company costs, including interest. We did not have dividends from our subs in this quarter, the timing of dividends from our subs to the holdco tend to vary and tend to be greater in the fourth quarter and first quarter. Putting that all together, we ended with highly liquid assets, $5.1 billion, still above our target range. So in some, the primary reason our holdco HLA declined or highlight liquid assets declined was due to the $1.2 billion of business growth. I also -- I just thought it would be helpful to remind people what I said on our last call is that we expect the statutory funding needs for our US Life Insurance business, including our assumption updates to be comparable to our GAPP -- the GAAP impact that we recorded in 2Q. The reserve strengthening will be higher, stat is more conservative, and that's going to be fully reflected in our stat results in the fourth quarter. As I also mentioned on our last call, we have excess capacity already in Pika available to meet that need. So the combination of the capital that we contributed to support business growth this quarter and the excess capacity we had in Pika within Pika will remain with RBC ratios consistent with our AA financial strength target. In terms of shareholder distributions, we will complete our shareholder distributions for this year in the fourth quarter with both dividends and share repurchases. And as Charlie mentioned in his remarks, our capital plan for 2023 will be approved by the Board early next year. And as always, they'll consider our capital position, opportunities to invest in our businesses and now increasingly so, the volatility uncertainty of the economy and markets looking ahead. So we'll factor that all in. But we'll continue with our philosophy of being thoughtful and disciplined with our capital and balance investment in our businesses with long-term growth and maintaining financial strength and returning capital to shareholders.

Tom Gallagher:

Thanks a lot guys. It was very comprehensive. And Charlie, just -- so you'd still -- I think it was the $10 billion three-year total capital return plan. You still feel good about that given the levers that you have to work from?

Ken Tanji:

Yes. Yes. Again, we're will complete -- we've already returned $7 billion through the third quarter. We'll complete our plans for this year. And again, our Board will factor in all the considerations that I mentioned into their decisions in early part of next year.

Operator:

Thank you. Next question is coming from Tracy Benguigui from Barclays. Your line is now live.

Charlie Lowrey:

Sure, Tracy, it's Charlie. Let me take that one. So let me start by saying we remain totally focused on executing on our transformation strategy to become a less market-sensitive and higher-growth company. As you've seen, we've made a number of programmatic acquisitions in PGIM and emerging markets and in the second quarter, we completed two key divestitures that reduced our overall market sensitivity by 20%, so we're well on our way. Now, our path may not be linear as different growth opportunities present themselves at different times. And I would note that our diverse set of businesses provides opportunities to grow in different market environments as we've seen with this market environment, and we're well-positioned to benefit from this diversification. For instance, in the third quarter, our Retirement Strategies business did nearly $15 billion of sales, including a significant PRT transaction that demonstrate our leadership position in this market where we believe there's just tremendous growth potential going forward. But our business system is also self-reinforcing and as an example, the recent IBM PRT -- with the recent IBM PRT transaction, which is in the institutional retirement business. That also brought in over $8 billion in AUM to PGIM. So by saying we're focused on our high-growth businesses, naming PGIM and emerging markets, doesn't mean we're not looking to grow our other businesses as well. So, in summary, what I'd say is we're definitely committed to becoming a higher growth, less market-sensitive company. But our progress will depend upon a couple of things. One is the opportunities that arise, and the second is the macroeconomic conditions.

Andy Sullivan:

So, Tracy, it's Andy. And first, let me thanks for -- I appreciate the congratulations. You probably could tell we're exceptionally proud of our team and of our capabilities in our pension risk transfer business. The fact that we conducted the second largest transaction in history is second only to the ground breakage transaction we did with General Motors about a decade ago for $29 billion. This transaction, we did split 50-50 between us and another provider. And for clarity, the decision to split a deal is made by the plan sponsor versus carriers bidding together. As we look forward, we don't think deal splitting will be atypical and we will always be open to that type of situation depending on the deal's characteristics. Overall, the market in pension risk transfer remains very robust. The industry experienced a third successive record-breaking quarter. Third quarter came in at $28 billion, which was a 60% increase from last year. Funded status remains near record levels at 106%. So, we now expect this year, as you heard in Charlie's remarks to come in above $50 billion for the industry, and we believe that we'll consistently see about $40 billion going forward. Given the size of that market, despite that it's a competitive market, we expect, given our industry-leading track record and our capabilities, we're going to continue to find success at picking our spots. And net-net, this will be a nice organic growth area for us over time.

Operator:

Thank you. Next question is coming from Ryan Krueger from KBW. Your line is now live.

Andy Sullivan:

Yes. So, Ryan, it's Andy again. Good morning. Thanks for your question on the Individual Retirement business. We're very pleased with the momentum that we're seeing this quarter. Let me speak first about our core earnings progress, and then I'll talk about our continued success at FlexGuard. We saw a material lift in our core earnings, thanks primarily to the change in the interest rate environment. And that's both on the short and long end of the curve. We get lift from interest rates on our collateral on the short end, and we're getting lift on the long-term side in our portfolio as well. And we're seeing the FlexGuard block grow. That's why you saw the step-up in our core earnings. And I would just kind of go back to what Ken said earlier, higher rates are a good thing overall for Prudential. Additionally, we're very pleased with the continued progress at building a very healthy FlexGuard block of business. Quarter in and quarter out, we remain a top share player in the market. We've achieved $11 billion in sales life to date. We very much like the profitability of the block that we've brought into the organization. And at the end of the day, kind of back to the organic growth discussion, we see the retirement decumulation opportunity in the country as a very good growth opportunity and we have all the right stuff to capture it.

Charlie Lowrey:

Sure. Let me take the first part of that and then turn it over to Ken. I'll just give you a couple of quick examples. One would be sort of ongoing reinsurance transactions that we continue to review. And the other would be, we have levers both on and off balance sheet that we can pull. So we have lots of different levers and resources that we can use and regularly look at them in order to access additional capital. And Ken, do you want to talk about Bermuda?

Ryan Krueger:

Great. Thank you.

Suneet Kamath:

Hi. Thanks. Good morning. Just wanted to circle back on capital. You made comments about 2023 a couple of times. But just to level set, I mean, we're used to thinking about kind of the 65% free cash flow conversion as sort of the level of capital return that you guys would do on an annual basis, ex any specific special transactions. Should we be thinking about that as a baseline for next year, or are you signaling that the operating environment is a little bit more challenging. So maybe you'd guide to something a little bit lower than that.

Suneet Kamath:

Okay. Got it. And then just if I could come back to that $1 billion infusion into PICA, I mean, my rough math would suggest maybe half of that was related to the IBM PRT deal. So that leaves another $400 million, $500 million left. And I hear you on FlexGuard funding that growth, but individual retirement is still in outflows. And I would have thought the capital release from withdrawals would have sort of supported the new business. I guess I'm just trying to understand what the other piece of it is into PICA apart from the PRT transaction. Thanks.

Suneet Kamath:

Was there any impact from interest rate hedges? You had a GAAP loss, but just wondering if there's any impact from that on the statutory results?

Suneet Kamath:

Can you size that at all?

Suneet Kamath:

Okay. Thanks, Ken.

John Barnidge:

Thank you very much. Seasonally 3Qs had typically been the best more talented quarter in any given year. This is a pre-pandemic world, of course. With COVID now clearly endemic, did that typical mortality seasonality return this year?

John Barnidge:

Great. And then my follow-up question. Institutional flows positive, but material deceleration in PGIM, retail improve in outflow. Can you maybe talk about how FX impact is changing where you're seeing demand, either a geographic perspective or from an asset perspective? Thank you.

John Barnidge:

Thank you.

Elyse Greenspan:

Hi. Thanks. Good morning. My first question is on the Japan COVID losses. You had guided last quarter to maybe seeing about $50 million of unfavorable underwriting impact. And that came in at $200 million this quarter. So are you concerned that some of that leads into the fourth quarter? And do you think that there could be any movement around your reserves?

Elyse Greenspan:

Thanks. And then my second question, what are you guys seeing in terms of the base spreads within institutional retirement? How quickly are those accelerating? And how should we think about the earnings growth potential in that segment from rising rates?

Andy Sullivan:

Yeah. And Elyse, it's Andy. I would just add, we have a lot of momentum in our institutional retirement business. We have exceptional people, great capabilities, great brand and distribution systems, that's really second to none. And obviously, you've heard about that from a pension risk transfer perspective. But we had $13.5 billion in sales and institutional retirement. So it goes well beyond just pension risk transfer. We also had $1.5 billion in investment-only stable value and $1.2 billion in longevity reinsurance. So we have very good momentum, and it was a banner quarter for us in Institutional Retirement.

Operator:

Thank you. Next question is coming from Erik Bass from Autonomous Research. Your line is now live.

Ken Tanji:

Hey Erik, it's Ken. We are being more disciplined, but it's really timing. We see a lot of that coming into the fourth quarter as usual. And I wouldn't read too much into that. It's -- yes, we are being disciplined, but there's also timing considerations.

Scott Sleyster:

Thanks, Erik. This is Scott. I'll go ahead and take that. There are several things that go on from the strength of the US dollar. On the one hand, you will have a cohort of customers who have bought kind of investment products, and they may want to terminate to take a gain if it's a net positive versus any surrender charge. And for people that have permanent life they may be thinking about reducing coverage because a certain dollar amount will provide more yen coverage, which is ultimately typically what they're looking for. I think your question focused more on the sales side. With the dollar being this strong, we think people that will be looking for US dollar products will be sizing down their purchase again because in general, they are looking back to the coverage of the -- of ultimately how it covers them in yen. That being said, two other good things, I think, are going on with higher rates, US dollar investment products do look more attractive. And ultimately, overtime, while we have some short-term headwinds because we use swaps to hedge. In the long fall, this will add to our net investment income, which we view is a tailwind in that market.

Operator:

Your next question is coming from Wilma Burdis from Raymond James. Your line is now live.

Ken Tanji:

Yes. The Lotus Re is an internal reinsurance capability that's based in Bermuda. And we find that certain products in our initial use of it was with variable life that we find that the regime there, which is a very robust reserving standard is more principle-based and is better aligned with the economics of that business. And as a result, by transferring that to reinsuring that to that regime, we get releases of reserves and capital in PICA. And again, it's our efforts to really align the economics of our businesses with reserve and capital standards that are robust and risk sensitive, recognize the nature of the business and are a better fit for that type of business.

Wilma Burdis:

Okay. Thank you.

Alex Scott:

Hi, I had a follow-up on some of the questions on capital and the holdco cash balance. When I think about growth. I appreciate that there's the PRT. Ex maybe some heightened PRT growth, I would think PICA would be a bit more self-funding -- and I'm just trying to understand if maybe some of the need to fund growth from the holdco balance has to do with the expectation of what's going to happen in 4Q around the UL review. And the reason I ask is just if that is part of the contemplation that that's fine, and it's actually good because it means maybe you don't need to contribute any more in 4Q. And that's really what I'm trying to figure out is when you go through that review in 4Q, would this need to occur again? Like will there need to be more cash from the holdco that goes down into PICA to help fund that that impact?

Alex Scott:

Got it, that's helpful. And then maybe a little bit of a more broad question on Japan. Could you talk about how a weaker yen impacts your business? And if that should be something we contemplate as we think about cash flow in 2023, either positive or negative?

Ken Tanji:

And Alex, I'll just add. We also have a very established hedging program with our Japanese business that hedges both earnings and the net equity position. And given the strength of the dollar that has a $1.8 billion gain at the end of the third quarter.

Operator:

Thank you. Next question is coming from Mike Ward from Citi. Your line is now live.

Charlie Lowrey:

Sure. Let me take that. This is Charlie. First, I'll deal with both annuities and then talk a little bit about life. We're really pleased with the valuation for the block of traditional variable annuities with guaranteed living benefits that we sold as evidenced by the gain on sale we reported. And we'll continue to explore possible additional opportunities to de-risk in-force blocks of traditional VA business. We expect to reach our goal of reducing market sensitivity through the pallet transaction we just completed and through the natural runoff of traditional variable annuities business over time and as we're not in a position of having to do another transaction. But having said this, we'll continue to explore possible additional opportunities, but we'll only do something, as we've said before, if it's in the best interest of stakeholders. So that's on the annuity side. On the Life block side, as we've noted in the past, we've dedicated resources to looking at various opportunities aligned with our strategy of becoming a higher growth and less market-sensitive company. And as a result, we'd certainly consider opportunities for a life sub-block if they came our way, but with the caveat that it has to make sense for shareholders. So we're going to be disciplined in our approach as the individual life business continues to be core to our purpose.

Ken Tanji:

Yeah. Hey, Mike, this is Ken. All the deals are a little different. I don't think putting out a benchmark is – would be appropriate.

Operator:

Thank you. Our next question today is a follow-up from Tracy Benguigui from Barclays. Your line is now live.

Ken Tanji:

Yes. Tracy, it will be higher. But again -- and because generally because the stat is more conservative and it's also -- it's just different. But again, we have capacity to absorb that, and we still hold that view.

Ken Tanji:

No, I'm sorry. When we took the charge, we believe that we had and we continue to believe we have capacity to absorb that within PICA's excess capital position as a result.

Ken Tanji:

It would be higher again. We're still finalizing those. That will be finalized in our fourth quarter results. But again, we have the capacity to absorb that within PICA, and we'll continue to maintain RBC ratios consistent with our AA standards.

Operator:

Thank you. Our next question is a follow-up from Ryan Krueger. Your line is now live from KBW.

Ken Tanji:

I think we need to follow up on both of those. They're pretty specific, if that's all right.

Operator:

Thank you. Next question is a follow-up from Tom Gallagher from Evercore ISI. Your line is now live.

Ken Tanji:

Yes, Tom, in our holding company, cash position will vary depending upon the timing of when we issue debt or debt matures or we call it. We've consistently made it a good practice to prefund maturing and callable debt 12 to 18 months in advance. And this -- what this does is it reduces our refinancing risk and enables us to be selective in the timing of debt funding relative to particular market conditions. In August, we issued $1.5 billion of debt and we've earmarked that for debt that's callable next year. The timing was good. We're happy with the outcome. And we're going to continue to prefund debt as a good practice. And overall, though, if you looked at our level of debt over the last three years, it's been at a fairly consistent level. It will vary depending on timing of maturities and issuance. But overall, it hasn't changed that much. We also have, as we continue to highlight contingent sources of debt. So overall, we feel very good about the level of our debt that's consistent with our AA financial strength rating and how we manage refinancings of our debt very well as well.

Charlie Lowrey:

Okay. Thank you, operator, and thank you for joining us today. Before I conclude, I want to acknowledge the unexpected passing of George Paz last week, a member of Prudential's Board of Directors for the past six years. George was an integral member of our Board, with a unique perspective and deep business experience that helped us shape our thinking on a multitude of issues. He will be greatly missed and remembered as both a trusted adviser and as a friend. I hope we demonstrated during this call, the progress we're 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 has been there for its customers and other stakeholders, who we will continue to serve as we strive to be a global leader in expanding access to investing insurance and retirement security. Thank you again for joining us today.

Bob McLaughlin:

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 US Businesses; Scott Sleyster, Head of International Businesses; Ken Tanji, 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 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 measures and the 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 the quarterly financial supplement, both of which can be found on our website at investor.prudential.com. And now I'll turn it over to Charlie.

Rob Falzon:

Thank you, Charlie. I'll provide an overview of our financial results and business performance for our PGIM, US and International Businesses. I'll begin on slide six with our financial results for the second quarter of 2022. Pre-tax adjusted operating income was $872 million or $1.74 per share on an after-tax basis and included a $1.4 billion increase in reserves from our annual assumption update and other refinements. We strengthened our Individual Life reserves, primarily reflecting updates to policyholder behavior and revised mortality assumptions. These updates were based on several industry studies; emerging practices and our own experience, following our well-established annual assumption update process. Current quarter results also included an $852 million gain from completing the sale of PALAC, a legacy block of Variable Annuities. Our GAAP net loss was $1.4 billion lower than our after-tax adjusted operating income, primarily driven by the mark-to-market impact from higher interest rates on derivatives that are used for asset liability management, partially offset by a gain on the full -- on the sale of our full service business. Turning to the operating results of our businesses, excluding the impacts of the annual assumption update and the gain on the sale of PALAC. PGIM, our global investment manager reported lower other related revenues driven by a decrease in seed and co-investment income and incentive fees, as well as lower asset management fees compared to the year ago quarter. Results of our US businesses were lower than the year ago quarter, reflecting lower spread income due to less favorable variable investment income and lower fee income resulting from the decline in equity markets, partially offset by more favorable underwriting. The decrease in earnings in our International Businesses primarily reflected lower earnings from joint venture investments, lower net investment results driven by less favorable variable investment income and less favorable underwriting results, partially offset by business growth. Turning to Slide 7. PGIM, our global active investment manager, has diversified capabilities in both public and private asset classes across fixed income, alternatives, real estate and equities. PGIM's long-term investment performance remains attractive with 75% to 85% of assets under management outperforming their benchmarks over the last three, five and ten-year periods. PGIM benefited from its diversified business mix, as strong institutional net inflows of $8.1 billion, primarily driven by fixed income, offset retail outflows as investors repositioned their portfolios in a rising rate environment. As the investment engine of Prudential, the success and growth of PGIM and of our US and international insurance and retirement businesses are mutually enhancing. PGIM's asset origination capabilities, investment management expertise and access to institutional and other sources of private capital are our competitive advantage, helping our businesses bring enhanced solutions, innovation and create more value for our customers. Our insurance and retirement businesses in turn, provide a source of growth for PGIM through affiliated flows and unique access to insurance liabilities that complement its successful third-party track record of growth. PGIM's average fee rate increased due to the successful execution of our strategy, including the continued mix shift toward higher fee strategies in our alternatives and private credit business. As a result, asset management fees decreased by only 6% despite assets under management declining by 11% due to rising rates, widening spreads and equity market depreciation. We continue to grow our alternatives in private credit business, which has assets under management of approximately $230 billion across private credit, real estate equity and debt and private equity secondaries and benefits from our global scale and market-leading positions. Notably, across PGIM's private platform, we deployed nearly $15 billion of capital, up nearly 40% from the year ago quarter, reflecting the continued strong environment for private credit. PGIM also raised nearly $3 billion in new private capital commitments across real estate and private credit. Turning to Slide 8. Our US businesses produced diversified earnings from fees, net investment spread and underwriting income and benefit from our complementary mix of longevity and mortality businesses. We continue to shift our business mix towards higher growth and less market-sensitive products and businesses to transform our capabilities and cost structure and to further expand our addressable markets. Retirement Strategies achieved solid sales in the second quarter across its institutional and individual lines of business. Institutional stable value sales were $1.6 billion. International reinsurance closed $1.4 billion of longevity reinsurance transactions during the quarter, and US pension risk transfer closed several transactions totaling more than $725 million. Our product pivots in individual retirement have resulted in strong sales of more simplified solutions with nearly $1.5 billion of FlexGuard and FlexGuard Income sales in the second quarter. Our strong FlexGuard sales benefited from implementing a fully digital and automated new business experience. This tech-forward approach helps to maintain our record pace of sales. Our Individual Life sales also reflect our earlier product pivot strategy, with variable life products representing approximately 71% of sales for the quarter. The improved group insurance benefits ratio for the quarter reflects the transition from a pandemic to an endemic phase of COVID, as well as favorable experience in both group life and disability. In addition, we're focused on creating the next generation of financial solutions to serve the diverse needs of a broader range of customers and clients. This quarter, we launched the Prudential simplified issue final expense product on the Assurance platform. Turning to slide nine. Our International Businesses include our Japanese life insurance companies, where we have a differentiated multi-channel 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 mortality protection focus continue to provide important value to our customers, as we expand our product offerings to meet their evolving needs. And we continue to enhance customer experience and agent support, including through digital tools. For example, this quarter, Gibraltar launched an exclusive website dedicated to teachers to help serve this market. In emerging markets, we are focused on creating a carefully selected portfolio of businesses in regions where customer needs are growing, where there are compelling opportunities to build market-leading businesses and where the Prudential enterprise can add value. In the second quarter, we continued to focus on expanding product and business capabilities in emerging markets to meet the evolving needs of customers. In Brazil, we achieved record sales, driven by the expansion of our third-party distribution channel, where sales increased 120% compared to the year ago quarter, as well as by the continued strength of the Life Planner channel. We established a partnership with Mercado Libre in Latin America to expand access to customers in the region. In the first two weeks following the launch in June, we have sold Life and A&H policies in every state in Brazil. This was accomplished through a fully digital sales, customer service and claims experience. We also continue to expand our wellness platform across Latin America by establishing a partnership with Medifé, a health service provider to 300,000 customers in Argentina. In addition, we are expanding our presence in Africa through an investment in South African-based Alex Forbes, as Charlie discussed earlier. 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 invest in growth businesses and markets, deliver industry-leading customer experiences and create the next generation of financial solutions to better serve the diverse needs of a broad range of customers. And with that, I'll hand it over to Ken.

Operator:

Thank you. [Operator Instructions] Our first question today is coming from Tom Gallagher from Evercore. Your line is now live.

Ken Tanji:

Yes. Hey Tom, it's Ken. Let me give you a little bit of background on the assumption update. As I think most people know, each year in the second quarter, we examined our updated experience that's available from our own business, but we also look at information that's available from industry studies and other surveys. And again, this year, we followed our process that's quite comprehensive and well established. We did make updates to our individual life insurance actuarial assumptions, primarily for policyholder persistency and mortality. Let me start with the policy persistency changes, that was mainly with our guaranteed Universal Life products, where we lowered our lapse and surrender assumptions and that revision reflected information, we gained from recently released studies and surveys, as well as our recent emerging experience. And so, we essentially refined into a more dynamic lapse assumptions for that portion of the business. In terms of mortality, we also included the impact of COVID-19 claims with the expectation of shifting from endemic to -- or from a pandemic to endemic phase. And we also lowered future mortality improvement, as well given recent trends. Now the majority of the reserve strengthening was the result of the policyholder persistency assumption. The mortality updates were more modest and across all of our businesses.

Ken Tanji:

Yes. The updated assumptions are applied to our statutory reserves as well. It will have a comparable magnitude of impact but we're well positioned to maintain strong regulatory capital ratios. We have a strong capital position overall, and we continue to have diverse sources of free cash flow going forward as well.

Ryan Krueger:

Hi, thanks. Good morning. Would you expect much of an impact from updated Q2 factors for longevity risk, which I don't think was in the RBC ratio previously and an updated mortality risk factor when that is implemented, I believe, which may be at year-end?

Ryan Krueger:

Got it. Thanks. And then I had a question on the Bermuda subsidiary that you had established earlier this year and contributed capital to last year -- or last quarter. Can you give any more color on kind of what your longer-term plans are for that? And what -- to what extent you may be able to start shifting US Business into Bermuda to get an offsetting benefit from the capital you had contributed last quarter. Thanks.

Operator:

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

Andy Sullivan:

Hey, John, good morning, it's Andy. Ill take your question. Maybe I'll bring it up a level and say that the general effect that we saw during the pandemic was companies really pulled back on switching their benefit plans. As we've come through the pandemic and as hopefully we're coming out the other side, and it's becoming more endemic, we've seen, basically, in the marketplace, a normal level of RFP activity. So things have gotten sort of back to normal. When we talk about our persistency, we're very pleased with our persistency results. And as you would imagine, we track very closely the profitability of the business that we retain versus the profitability of the business that we lose. And part of the secret sauce of managing group insurance businesses is, sometimes addition by subtraction. If we can't get the rates that we want to get to move a case to profitability, we -- our plan and our intention and our follow-through is always to let it go. But we're quite pleased at the persistency levels in the business.

Ken Tanji:

Yes. Hey, John, it's Ken. Let me just -- the unrealized insurance margin is -- that we're referencing here and quantified is under the GAAP constructs. And you can think of it as basically the present value of future premiums less the amounts of the premiums needed to provide claims -- to provide for claims. So it's margin above and beyond what's needed to support the expected claims. It is indicative of the profitability of the business, and the majority is from our Japan business, and it's reflective of what we think is the strong profitability of our Japan business. It's -- there is good embedded profits there and value, and it is a potential source of free cash flow over time. And if we choose to reinsure a block of it as well, we could release capital that way.

Elyse Greenspan:

Hi. Thanks. My first question, going back to Individual Life. When we normalize for the assumption review, VII and underwriting, it looks like the underlying earnings power of that segment is in the range of $100 million. And I think in the slides, you guys put the Q3 baseline at $96 million. So can you talk about if there are any ongoing earnings impact from the assumption review? And is roughly $100 million pre-tax a good quarterly level run rate earnings for that segment?