Prudential Financial (PRU) Q4 2023 Earnings Call Transcript

Prudential Financial (PRU 5.40%)
Q4 2023 Earnings Call
Feb 07, 2024, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Prudential’s quarterly earnings conference call. [Operator instructions] As a reminder, today’s call is being recorded. I will now turn the call over to Mr. Bob McLaughlin.

Please go ahead.

Bob McLaughlin — Vice President, Investor Relations

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 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.

Charlie Lowrey — Chairman and Chief Executive Officer

Thank you, Bob, and thanks to everyone for joining us today. Before we begin, I’d like to comment on our CFO transition. As you saw from yesterday’s news release, Yanela Frias, president of Prudential’s Group Insurance Business, has been named executive vice president and CFO of Prudential, succeeding Ken Tanji. As a 27-year veteran of Prudential, Yanela is a seasoned executive who brings a deep understanding of our business and industry as well as significant finance, operations, and leadership experience.

I’m sure you’ll enjoy getting to know her as she starts her new role. Yanela will become CFO effective March 15th, and Ken will stay on for a six-month period to ensure a smooth transition. Ken has been a great partner and friend and has had a distinguished 35-year career at Prudential. I don’t need to go back far to articulate his impact.

Most recently, as CFO, Ken guided Prudential through the financial challenges of the COVID pandemic and the market volatility that followed. During the same time, his leadership on strategic initiatives meaningfully contributed to our goals of becoming less market-sensitive and more nimble. We are grateful to Ken for his many contributions over more than three decades and wish him well. Now let’s turn to my remarks for the quarter.

Our financial results for 2023 reflect continued strong sales momentum across our insurance and retirement businesses and solid underlying earnings growth. The fourth quarter capped a productive year of continued transformation to make Prudential a higher growth, more capital-efficient, and more nimble company. Our strategic progress and financial strength position us well to navigate the current macroeconomic environment, maintain a disciplined approach to capital deployment, and deliver long-term sustainable growth. Turning to Slide 3.

I will begin today by sharing a few examples of how we are transforming our business to drive future growth and unlock value for all our stakeholders. Over the course of 2023, we executed several attractive transactions adding to our capital efficiency. We reinsured a $10 billion block of traditional variable annuities, reducing our market sensitivity. We closed a $10 billion transaction of structured settlement annuities with Prismic, a life and annuity reinsurance company we launched.

Prismic will enhance our mutually reinforcing business system and drive future growth by leveraging our differentiated brands, global asset and liability origination capabilities, and multichannel distribution. In addition, we entered into a reinsurance agreement with Somerset Re for a $12.5 billion block of guaranteed universal life reserves, which will release capital and increase earnings. We continue to strengthen the capabilities of our market-leading businesses through strategic M&A, expanded distribution channels, and created new products and solutions to meet the evolving needs of our customers across the globe and to support future growth. In PGIM, we enhanced our capabilities in the attractive area of private credit and direct lending by acquiring a majority stake in Deerpath Capital, which closed in December.

To further provide investors with a cohesive offering, we brought together PGIM’s private alternatives capabilities into one global team with the formation of PGIM Private Alternatives. Internationally, we continue to expand third-party distribution in Latin America through Mercado Libre, reaching a milestone of close to 300,000 policies in force last quarter. In Japan, we launched expanded inheritance and new investment products to diversify our portfolio and meet a broader range of customer needs. Our Institutional Retirement Strategies business secured its second-largest longevity risk transfer transaction ever with one of the biggest life insurance companies in the Netherlands.

This marks our first international reinsurance deal in the Dutch market. Retirement strategies also worked with Fidelity Investments to address growing consumer demand for a workplace retirement income solution. Our Prudential SimplyIncome product, a new single premium immediate annuity is now available to employer-based retirement plans administered by Fidelity. In addition, to solidify our leadership and expand our addressable market and structured settlements, we launched a new index structured settlement annuity product.

We also continue to create a more nimble and efficient company to meet the changing needs of our customers and maintain a competitive position in the marketplace. This included evolving our operating model and organizational structure to better support customers at the business level and leveraging technology to bring products to market faster. Our business and technology teams together launched an average of one new or enhanced product every two weeks in 2023. Additionally, we are strategically leaning into partnerships with cutting-edge technology firms within our group business to increase the speed of innovation, add capabilities, and enhance customer experience.

We entered 2024 with momentum and optimism as we have expanded and diversified our product offerings, enhanced customer and client experiences, and continued to reinvest in our businesses for sustainable long-term growth. Moving to Slide 4. Our transformation strategy and growth initiatives are supported by Prudential’s rock-solid balance sheet and robust risk and capital management framework, which have allowed us to confidently navigate the macroeconomic environment. Our AA-rated financial strength includes a strong capital position, including approximately $50 billion of unrealized insurance margins, $4.1 billion in highly liquid assets at the end of the fourth quarter, and a high-quality, well-diversified investment portfolio and disciplined approach to asset liability management.

Turning to Slide 5. Our disciplined approach to capital deployment enables us to effectively balance investing in the long-term growth of our businesses with returning capital to shareholders. In the fourth quarter, we returned over $700 million of capital to shareholders. For 2024, our board has authorized up to $1 billion in share repurchases as well as a 4% dividend increase beginning in the first quarter.

This represents our 16th consecutive annual dividend increase. And now I will turn it over to Rob.

Rob Falzon — Vice Chairman

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 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 U.S. 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 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, Prisma, are 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 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 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 toward 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.

Ken Tanji — Chief Financial Officer

Thanks, Rob. I’ll begin on Slide 10, which provides insight into earnings for the first quarter of 2024 relative to our fourth-quarter results. As noted, pre-tax adjusted operating income in the fourth quarter was $1.3 billion and resulted in earnings per share of $2.58 on an after-tax basis. To get a sense for how our first quarter results might develop, we suggest adjustments for the following items: First, variable investment income was below expectations in the fourth quarter by $95 million; second, underwriting experience was below expectations by $15 million in the fourth quarter, and we expect $30 million of unfavorable seasonality in the first quarter; and last, we included an adjustment of $240 million for expenses and other items.

This includes the $200 million restructuring charge related to changes in our organizational structure as well as adjustments for typical seasonality related to the timing of expenses and premium. These adjustments combined get us to a baseline of $3.36 per share for the first quarter. I’ll note that if we exclude items specific to the first quarter, earnings per share would be $3.50. The key takeaway is that our underlying earnings power has increased significantly over the past year, while we have also made strategic progress improving our risk profile.

While we have provided these items to consider, please note that there may be other factors that affect earnings per share in the first quarter. As we look forward, we have included other considerations for 2024 in the appendix. Turning to Slide 11. Our capital position continues to support our AA financial strength rating.

Our regulatory capital ratios are above our targets, and we expect PICA’s year-end RBC ratio to be greater than 425%. Our cash and liquid assets were $4.1 billion within our liquidity target range of $3 billion to $5 billion, and we have substantial off-balance sheet resources. We remain thoughtful in our capital deployment, balancing the preservation of financial strength and flexibility, investment in our businesses for long-term growth and shareholder distributions. Turning to Slide 12 and in summary, we are transforming our business for sustainable growth.

We continue to confidently navigate the macro environment with the financial strength of our rock-solid balance sheet, and we are maintaining a balanced and disciplined approach to capital deployment. Now I’ll turn it to the operator for your questions.

Questions & Answers:

Operator

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

Tom Gallagher — Evercore ISI — Analyst

Good morning. Ken, good luck. The — just looking at the 65% free cash flow conversion, I know that bullet was removed from the capital slides. I just want to make sure that, that’s still the target.

And then relatedly, when thinking about Japan economic solvency implementation, can you comment on how you see that impacting sources and uses of capital and capital generation over the next few years?

Ken Tanji — Chief Financial Officer

Hey, Tom. It’s Ken and thanks for the good luck. I appreciate it. The — 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 60 — 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, in 2023, 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 U.S. 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.

Tom Gallagher — Evercore ISI — Analyst

Gotcha. And then just a follow-up, if I could. Strength in Japan and international sales more broadly, I thought, was kind of notable in the quarter. Can you comment on the competition in those markets what’s driving the stronger sales? And do you think that’s going to translate into stronger top line? Because I know it’s been sort of flattish, but do you expect that to inflect at all in ’24 or ’25?

Andy Sullivan — Head of International Businesses

So Tom, it’s 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 U.S.

dollar product, really supported by the higher U.S. 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.

Tom Gallagher — Evercore ISI — Analyst

OK. Thanks.

Operator

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

Ryan Krueger — Keefe, Bruyette and Woods — Analyst

Hey. Thanks. Good morning. First, can you provide some more color on the key drivers of the RBC ratio improvement in the quarter? I know you had given us the exact RBC during the year, but it seems like it increased a fair amount in the quarter.

Ken Tanji — Chief Financial Officer

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.

Ryan Krueger — Keefe, Bruyette and Woods — Analyst

And then can you help us understand your sensitivity to short-term interest rates, specifically as we get closer to a potential Fed cutting cycle?

Ken Tanji — Chief Financial Officer

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.

Ryan Krueger — Keefe, Bruyette and Woods — Analyst

OK. Thanks.

Operator

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

Alex Scott — Goldman Sachs — Analyst

Hi. So I wanted to touch on the capital as well. I mean you’re in a much stronger position sort of going into ’24 compared to a year ago. I just wanted to get an update on how you’re thinking about priorities for deploying that capital? I know at times you’ve talked about finding some ways to enhance growth.

I mean certainly, organic growth across some of your businesses has begun to pick up as well. But how are you thinking about all of that? And how do you look at driving more growth into the business?

Charlie Lowrey — Chairman and Chief Executive Officer

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.

Alex Scott — Goldman Sachs — Analyst

The second question I had is on PGIM flows. I was hoping you could just provide a little more color on what you expect going into 2024 as some of these headwinds begin to abate that have driven some outflows.

Andy Sullivan — Head of International Businesses

Yes. Alex, it’s Andy. Thanks for your question. We’re not satisfied with the recent flows 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 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 5 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 toward the end of 4Q, and that has continued into this year. So we’re optimistic.

Alex Scott — Goldman Sachs — Analyst

Thank you.

Operator

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

Elyse Greenspan — Wells Fargo Securities — Analyst

Hi. Thanks. My first question is on, I guess, sticking with PGIM. In the slides, you still call out — you call out programmatic M&A there.

Can you just provide an update just on the pipeline of transactions and what you might be thinking about there?

Andy Sullivan — Head of International Businesses

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.

Elyse Greenspan — Wells Fargo Securities — Analyst

And then my second one is on the RBC. So it’s now greater than 425%, right? And you guys saw a nice lift in the quarter. Would you look to maintain PICA RBC ratio around this level? Or is that something that you would maybe manage down over time and look to bring more capital to parent?

Ken Tanji — Chief Financial Officer

Yeah, 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 3 of those objectives.

Elyse Greenspan — Wells Fargo Securities — Analyst

Thank you.

Operator

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

Suneet Kamath — Jefferies — Analyst

Thanks. Good morning. First of all, thank you to Ken for all of your help over the years. I really appreciate it.

My first question is just on the SGUL deal with Somerset Re. If I remember correctly, that was supposed to close in the fourth quarter. Obviously, we haven’t seen an announcement on that yet, so maybe just an update there. And are you still expecting $450 million of proceeds when that deal closes?

Rob Falzon — Vice Chairman

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 onetime closing costs and capital, we’ll update that in an announcement once we close.

Suneet Kamath — Jefferies — Analyst

Got it. And then I guess on PGIM, totally appreciate the strong 5- and 10-year numbers, but it looks like the three-year number, 63% outperforming is a little bit lower. Is that something that we should — that could have an impact on kind of the flow dynamics? Or is there something maybe that will drop off? Or — I just want to get some color on how you’re thinking about that three-year number.

Andy Sullivan — Head of International Businesses

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 ’21, ’22, where we did see a dip in performance 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.

Suneet Kamath — Jefferies — Analyst

OK. Thanks.

Operator

Thank you. Our next question is coming from Jimmy Bhullar from J.P. Morgan. Your line is now live.

Jimmy Bhullar — JPMorgan Chase and Company — Analyst

Hey. Good morning. So first, a question for Charlie, maybe on capital and just capital deployment overall. Can you talk about what your priorities are and where do — and how do you think about M&A and/or share buybacks? Because it seems like you certainly have the capacity to do more in buybacks given your capital generation than you’ve been doing, but not sure if you’re prioritizing other things instead as well.

Charlie Lowrey — Chairman and Chief Executive Officer

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 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.

Caroline Feeney — Head of U.S. Businesses

Yes, absolutely. So, Jimmy, we did finish another strong year in pension risk transfer. We closed 11 transactions worth almost $6 billion finishing as the No. 2 pension risk transfer writer.

And we’ve already built on that positive momentum this year with a $5 billion deal with Shell. It’s our largest first-quarter pension risk transfer ever. And with this win, Prudential now has completed seven of the top 10 U.S. PRT transactions on record.

We also see that strong sales trend continuing. It’s driven by healthy pipelines due to favorable funding positions of over 100%. And last year’s market volume was roughly $45 billion, and we do expect to see that healthy pipeline continue this year. And although the market is highly competitive with more new entrants, very few competitors have executed transactions exceeding $1 billion.

And while transactions will continue to be episodic in our PRT business our expertise and our ability to handle large complex transactions and our leadership position in service delivery, we believe, will position us well to remain a leader in the market.

Jimmy Bhullar — JPMorgan Chase and Company — Analyst

OK. 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?

Andy Sullivan — Head of International Businesses

Yes. So, Jimmy, it’s Andy. Thank you for your question. As we’ve talked about before, our priority is always delivering for our customers day in and day out.

We’re very leaned into what’s in their best interest. As you would expect, because of that, we believe in being very proactive on advocating on their behalf. We’re going to continue to advocate for reforms that improve the pension outcomes in Latin America and specifically for the citizens of Chile. Just to give you an update, in Chile, the constitutional referendum was rejected on December 17th, but after two failed attempts.

So President Boric really has moved on and is now focused squarely on pension reform. And there is a proposal that’s advancing through Congress. That bill proposes to eliminate AFPs and to increase employer contributions to 6%. We’re closely monitoring that situation as the passage would impact our Habitat JV.

But I would say just a couple of things. Our Habitat JV is a high-quality, very well-run business. It’s been working to actively diversify across countries and into voluntary savings offerings. And if you take a step back, just recognize that joint venture, while it’s obviously a larger component of our emerging markets, it’s not a material contributor to PFI earnings.

So we’ll obviously stay very close to it, and we’ll let you know when we have any more clarity.

Jimmy Bhullar — JPMorgan Chase and Company — Analyst

Thank you.

Operator

Thank you. Your next question is coming from Joel Hurwitz from Dowling and Partners. Your line is now live.

Joel Hurwitz — Dowling and Partners — Analyst

Hey. Good morning. So I know lapses have periodically been an issue in Japan just given the exchange rates. It looks like there was a pretty sizable quarter-over-quarter reduction in the in-force amount in both international businesses in the quarter.

Can you just talk about what you saw in terms of lapsation there?

Andy Sullivan — Head of International Businesses

Yes. So thanks, Joel, it’s Andy. So let me just talk about the decline in the in-force. First, as I always start, we’re exceptionally proud of our Japanese businesses.

They’ve been very consistent and stable contributors to Prudential for a very long time. With that, there are a few factors, though, that are impacting the life insurance in-force amounts. First, this is important to note, a significant portion of our recent sales are investment contracts, and that really reflects what customers are looking to buy. Those sales do not include a material life component, but are contributing to our earnings.

Second, we are seeing natural runoff in the older life blocks, particularly in the legacy yen business in Gibraltar. And then as we’ve talked about in previous quarters, with the recent yen depreciation, we’ve seen a modestly elevated level of surrenders. But all that said, we are confident in our ability to grow and diversify our Japanese businesses across insurance, investment, and retirement security. And we’re continuing to invest in them.

Joel Hurwitz — Dowling and Partners — Analyst

OK. 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 then 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.

Caroline Feeney — Head of U.S. Businesses

Yes, absolutely, Joel. It’s Caroline. Thank you so much for your question. So first of all, I’ll start off by saying we had another very strong quarter for Group insurance and we’re very pleased with the full year results of this business.

And we believe we’re in that strong position in group given the progress we’ve made in executing on our strategy. And our future earnings power will reflect the efforts we’ve made to grow in a disciplined and profitable manner. We continue to focus on diversifying our business by expanding in the under 5,000 live market and the association segments. We’re adding new products like supplemental health and continuing our growth in disability.

And we made progress in that diversification effort, increasing our disability premiums and fees at a higher rate than before. And our supplemental health premiums also grew at strong double-digit annual growth rates. And this diversification is driving stronger core earnings with higher margins. So as for our performance, our full-year benefits ratio was just over 83 percentage points.

It includes very strong performance in our Life block in the second and third quarters of last year and record disability results in the first half of the year. While we don’t expect that record performance to continue indefinitely, there are certainly other factors to consider. So overall, Joel, I’d say that our Group business is growing. It’s doing so at attractive margins with COVID having transitioned to an endemic state, combined with our diversification strategy I just walked you through as well as investments we’ve made in improving our claims management capabilities and strategic partnerships, we believe we’ll see that underwriting performance and earnings power continue to improve.

And that is why we are confident with our decision in lowering our benefits ratio guidance to be 83% to 87% for the year. And in terms of just future earnings power as well, I gave you some color there as well, Joel. We believe the future earnings power of Group Insurance will continue to be strong as we continue to grow and execute on our strategy.

Joel Hurwitz — Dowling and Partners — Analyst

Very helpful. Thank you.

Operator

Thank you. Our next question today is coming from Wilma Burdis from Raymond James. Your line is now live.

Wilma Burdis — Raymond James — Analyst

Hey. Good morning. I’m just wondering if there’s been any activity with Prismic. Seeing that you guys have been focused on the sales of fixed annuity and also with this large PRT deal.

So if could give us an update there, please.

Rob Falzon — Vice Chairman

Wilma, it’s Rob. So as we’ve articulated before, we’re quite enthusiastic about Prismic and more broadly about what we see to be the opportunities that are coming out of the intersection between asset management and insurance and specifically the role that Prismic can play in helping us to execute against that opportunity. We believe it will create avenues of growth across our businesses, not specifically for the PRT transaction that we recently announced, but the opportunity to be a source of financing for sales growth, both in the retirement marketplace and our other businesses on a go-forward basis. Our investors, which are extremely large global institutional investors share our aspirations, both from a directional standpoint and from a quantum standpoint.

So our expectation is to go well beyond the initial $10 billion structured securities or structured settlements transaction that we completed. It’s going to include some level of ongoing balance sheet optimization. It’s going to include, as I noted, financing the growth across our businesses. I think what’s unique in a way about Prismic is the appetite by it and its investors for longer duration and more complex liabilities.

And we’re also going to look to do third-party blocks as well in Prismic, all of which will enable the benefit of increasing the assets under management for our PGIM business.

Wilma Burdis — Raymond James — Analyst

And could you talk a little bit about the buyback. I think you guys said that the $1 billion authorization for 2024 — certainly, with — would 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.

Ken Tanji — Chief Financial Officer

Yeah. It’s Ken. Yes, we’ve had a very consistent approach to shareholder distributions using both dividends and share repurchases as a way to return capital. Our share repurchases for this year was approved by the board, and they had considered our capital position, our outlook for free cash flow but also opportunities to deploy that capital into organic growth, as Charlie discussed, in particular, the very robust PRT market.

So all those things factored into it. We increased our dividend again. That’s — now we’ve increased that 16 years in a row. So again, it all factors into what we think is a very consistent approach, balancing all our objectives as well.

So I hope that color helps.

Wilma Burdis — Raymond James — Analyst

Thank you.

Operator

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

John Barnidge — Piper Sandler — Analyst

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 story in 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?

Caroline Feeney — Head of U.S. Businesses

Yes. So, John, it’s Caroline. Thank you so much for your question. In terms of our overall expense management, you may have seen we saw 100 basis point improvement in our admin ratio from the year ago quarter.

That is driven by both business growth and continued expense discipline. And we will continue to focus on expense efficiencies and obviously then would regularly adjust our operating models to ensure the appropriate levels of service going forward. In terms of disability overall, I would say across group disability, results were driven by our focus on effective claims management, including those short- and long-term disability as well as absence in family leave. We also benefited from the continued tailwinds of strong employment and a high-interest rate environment, and our disability business had an outstanding year.

I would also just want to point out something else strategically, we’re doing on the disability side as we continue to grow that area. We’ve actually invested, John, in improving our claims management process through a strategic partnership with EvolutionIQ. This is a provider of AI-driven technology that provides real-time monitoring leading to increased recoveries. So overall, I’d say in terms of expense management, we remain highly disciplined and also, obviously, very much focused in terms of our pricing discipline.

The evidence there is our ability to accomplish all this growth in maintaining our price competitiveness. But the fact that as we continue to grow our book, we’re also not afraid to walk away if the pricing just doesn’t make sense on any particular case. So overall, we remain confident in our decision to lower benefit ratio guidance and feel very comfortable with our expense management and our pricing discipline.

John Barnidge — Piper Sandler — Analyst

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?

Andy Sullivan — Head of International Businesses

So John, I’ll start out, and then, Rob, if you want to tail in, you can jump in. So when we talk about globalizing the business, I think it’s important to recognize that a majority of our assets under management today are in the United States. So we’ve been actively, for many years now, working to expand across Europe and Asia and have invested quite heavily in distribution on both the institutional and retail side of the business. That said, as we look to continue to broaden and diversify our mix of both asset classes, but geographies, we would look to Europe and Asia as key geographies that we’re most interested in growing.

Rob Falzon — Vice Chairman

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.

John Barnidge — Piper Sandler — Analyst

Appreciate that. Thank you.

Operator

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

Mike Ward — Citi — Analyst

Thanks guys. Good morning. Sorry to be the one to ask. Just curious if there’s any update on commercial real estate side for you guys.

It looked like the LTV deteriorated a little bit. Just kind of wondering how you feel about any kind of watch list or resolutions that you’ve made last year, too.

Rob Falzon — Vice Chairman

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, it’s significantly underweight, office and because of 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 a 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, etc.

I guess the way I would describe that, Mike, is that the 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 are 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.

Mike Ward — Citi — Analyst

Awesome. Really helpful. Thanks, Rob.

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 closing comments.

Charlie Lowrey — Chairman and Chief Executive Officer

So thank you again for joining us today. The fourth quarter capped a year of continued growth and evolution for Prudential. Our strategy, coupled with our mutually reinforcing business system positions us well to deliver long-term sustainable growth to all our stakeholders. Our fundamentals are strong, and we are confident about our momentum going into 2024.

We will continue to lead the way in expanding access to investing insurance and retirement security across the globe as we seek to help current and future generations build a secure financial future. Thank you again for joining us, and have a good day.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Bob McLaughlin — Vice President, Investor Relations

Charlie Lowrey — Chairman and Chief Executive Officer

Rob Falzon — Vice Chairman

Ken Tanji — Chief Financial Officer

Tom Gallagher — Evercore ISI — Analyst

Andy Sullivan — Head of International Businesses

Ryan Krueger — Keefe, Bruyette and Woods — Analyst

Alex Scott — Goldman Sachs — Analyst

Elyse Greenspan — Wells Fargo Securities — Analyst

Suneet Kamath — Jefferies — Analyst

Jimmy Bhullar — JPMorgan Chase and Company — Analyst

Caroline Feeney — Head of U.S. Businesses

Joel Hurwitz — Dowling and Partners — Analyst

Wilma Burdis — Raymond James — Analyst

John Barnidge — Piper Sandler — Analyst

Mike Ward — Citi — Analyst

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