Earnings Call Transcript
PRUDENTIAL FINANCIAL INC (PRU)
Earnings Call Transcript - PRU Q3 2023
Operator, Operator
Thank you for joining us today for Prudential's quarterly earnings conference call. This call is being recorded. I will now hand it over to Mr. Bob McLaughlin. Please proceed.
Operator, Operator
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.
Charles Lowrey, CEO
Thank you, Bob, and thanks to everyone for joining us today. Our third quarter results reflect continued momentum across our businesses, excluding the benefits from strong sales and the fifth consecutive quarter of underlying earnings growth. We continue to execute on our strategy to become a higher growth, less market-sensitive and more nimble company. This quarter, we increased our capital efficiency and enhanced our capabilities in a mutually reinforcing business system. We are also optimizing our operating model to drive both efficiency and growth. Our strategic progress and financial strength position us well to navigate the current macroeconomic environment and maintain a disciplined approach to capital deployment. Turning to Slide 3. During the quarter, we launched Prismic, a life and annuity reinsurance company alongside Warburg Pincus and other investors. It is one of our most exciting opportunities to drive sustainable long-term growth across our investment management, insurance and retirement businesses. Through Prismic, we can ensure portions of our life and annuity in-force and new business to reduce market sensitivity, free up capital and invest in growth opportunities. Prismic can also offer its services to other insurance companies in need of reinsurance support, tapping into additional sources of third-party capital to drive further growth. In addition, Prismic expands PGIM's assets under management. Prismic is a great example of how Prudential can unlock value for customers, shareholders and other stakeholders with our mutually reinforcing business system, which combines the power of our brand, global asset and liability origination capabilities and multichannel distribution. We're also growing and investing in our businesses to better serve our customers through both the products and services we offer and through the ways we do business. Our distribution channels continue to evolve and expand to provide more people around the world with our products and services in the way they want them. I'll provide a few examples from the third quarter. In Brazil, we achieved the second consecutive quarter of record sales, driven by continued expansion in the third-party distribution channel and the strong performance of our Life Planner channel. In the U.S., individual retirement strategies posted its strongest sales quarter in three years, driven by the continued success of FlexGuard as well as the expansion of our fixed annuity suite with the launch of our new Wealth Guard multiyear guaranteed annuity. Within the Institutional market, retirement strategy secured $2.5 billion in new pension risk transfer transactions to the health savings account space by securing a $1.2 billion transaction with a top HSA provider, expanding our addressable market. And in our Prudential Advisors distribution channel, we announced a strategic relationship with LPL Financial, which upon completion in the latter part of next year, will enhance both our adviser and customer experience by leveraging LPL's expertise, industry-leading technology and robust broker dealer and registered investment adviser services. Alongside these investments in our businesses, we continue to focus on customer service through enhanced sales and claims platforms. For example, this year, we have announced seven customer experience technology partnerships within group insurance. These include Enrolofy, an innovative platform transforming the enrollment experience for millions of employees and Evolution IQ, an AI-driven platform that will streamline the disability claims process. We're also working to create a leaner, faster and more agile company so that we can better meet the changing needs and expectations of our customers around the world while driving growth and efficiency to further strengthen our competitive position. We're taking new steps to simplify our organizational structure by reducing management layers, complexity and costs while making investments in technology and data platforms. Our goal is to empower faster decision-making and bring our integrated business teams closer to our customers and clients. Turning now to Slide 4. Prudential's rock-solid balance sheet and robust risk and capital management frameworks have allowed us to confidently navigate the current macroeconomic environment. Our AA financial strength is supported by our strong capital position, including approximately $48 billion of unrealized insurance margins, $4.3 billion in highly liquid assets at the end of the third quarter and a high-quality, well-diversified investment portfolio and disciplined approach to asset liability management. Moving to Slide 5. Our disciplined approach to capital deployment, coupled with the added capital efficiency from the Prismic transaction enables us to effectively balance investing in the long-term growth of our businesses with returning capital to shareholders. In the third quarter, we returned over $700 million of capital to shareholders. And with that, I'll turn it over to Rob.
Robert Falzon, CFO
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 or $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 five- and ten-year periods. In addition, our short-term performance continues to improve with 83% of assets exceeding their benchmarks over a one-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 two-thirds of sales and fixed annuities that accounted for approximately one-third 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 number one 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.
Kenneth Tanji, CFO
Thanks, Rob. I'll begin on Slide 10, which provides insight into earnings for the fourth quarter of 2023 relative to our third quarter results. As noted, pretax adjusted operating income in the third quarter was $1.6 billion and resulted in earnings per share of $3.44 on an after-tax basis. To get a sense of how our fourth quarter results might develop, we suggest adjustments for the following items: First, variable investment income was below expectations in the third quarter by $25 million. Second, we adjust underwriting experience by $10 million to normalize for third quarter experience. And last, we include an adjustment of $350 million for expenses and other items. This includes elevated seasonal expenses and lower international earnings due to timing of seasonal premiums in the fourth quarter. In addition, as Charlie mentioned, we are implementing changes to our organizational structure as part of our continuous improvement process, and we have included an estimated restructuring charge of approximately $200 million that will be incurred in the fourth quarter. We expect these actions will create operating efficiencies and provide reinvestment capacity to build capabilities. This will allow us to realize additional efficiencies, strengthen our competitiveness and fuel future growth. These adjustments combined get us to a baseline of $2.75 per share for the fourth quarter. I'll note that if you exclude items specific to the fourth quarter, earnings per share would be $3.48. The key takeaway is that our underlying earnings power continued to improve due to business growth, including the benefit of higher interest rates. While we have provided these items to consider, please note that there may be other factors that affect earnings per share in the fourth quarter. Turning to Slide 11. Our capital position continues to support our AA financial strength rating. Our cash and liquid assets were $4.3 billion within our liquidity target range of $3 billion to $5 billion. Regulatory capital ratios are above our targets, and we have substantial off-balance sheet resources, including approximately $9 billion of contingent capital and liquidity facilities. 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 navigate the current 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.
Operator, Operator
Our first question is from Tom Gallagher at Evercore ISI.
Thomas Gallagher, Analyst
Just a couple of questions on capital. Did the GAAP net income loss you had this quarter also impact statutory capital at all? And if so, did that require any contributions to subsidiaries or otherwise?
Kenneth Tanji, CFO
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 statutory capital. But our RBC ratios remain above our target and didn't require a capital contribution.
Thomas Gallagher, Analyst
Okay. And then the follow-up is when I think about the transition that lies ahead to ESR from SMR in Japan. Do you have enough clarity at this point to know how you should be positioned? Is it likely to consume capital, release capital? What do you think it should mean for Pru?
Kenneth Tanji, CFO
Yes. First, let me start with the financial profile of our businesses in Japan, which are high quality, profitable, financially robust, generating strong earnings, and have good solvency margin ratios under the current regulatory framework. The Financial Services Agency is working on implementing new capital standards, but the adoption is still a couple of years away. However, we believe our businesses are well capitalized and financially strong, and this would be evident under any reasonable capital standard. We also have methods to manage the outcomes, as we can reinsure business internally or externally to better align with the economics of the business if necessary. This is something we are currently evaluating and developing. Additionally, we are advocating for reasonable and responsible standards and will have strategies to adapt to the new potential regulatory framework.
Operator, Operator
Your next question is coming from Ryan Krueger from KBW.
Ryan Krueger, Analyst
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?
Charles Lowrey, CEO
Ryan, it's Charlie. Let me take that at a high level and provide you some context and then turn it over to Ken to specifically answer your question. But in terms of the restructuring program, we made good progress toward becoming a higher growth, less market-sensitive and more nimble company. And if you think about what we've done, that's including releasing a significant amount of capital through the disposition of market-sensitive and/or low-growth businesses and products, executing a series of programmatic acquisitions to expand our investment capabilities and growth potential. Launching Prismic, another arrow in our quiver, if you will, enhancing our mutually reinforcing business system and then exceeding our initial expense goal that we established a number of years ago. But we've also said that we plan to continuously improve and build upon the progress we've made to further accelerate our vision and our growth objectives. We operate in an increasingly competitive environment. And in order to remain competitive and grow sales and earnings, we will continue to focus on further investing in our businesses and technology, reducing our cost of capital, enhancing the risk-adjusted returns we earn on our products and investments and transforming our operations to produce efficiencies while enhancing both our customer and employee experience. So we're taking steps to create a leaner, faster, and more agile company, including simplifying our management structure by reducing management layers, complexities and costs with the goal of bringing our integrated teams closer to our customers and our clients. We're also empowering our employees with faster decision-making in part through investments in technology and data platforms. And as we make progress in each of these areas, we'll update you as we have in the past. So with that as context, Ken, let me turn it over to you to answer the specific question Ryan had.
Kenneth Tanji, CFO
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 savings 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.
Ryan Krueger, Analyst
And then a question on Prismic, you launched it with $1 billion of capital. I assume that the structured settlements transaction consumed a good amount of that. Can you give us any color on how much committed capital that you have already in place for future growth?
Robert Axel, Controller and Principal Accounting Officer
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 help 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.
Operator, Operator
Next question is coming from John Barnidge from Piper Sandler.
John Barnidge, Analyst
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?
Charles Lowrey, CEO
Sure. It's Charlie again. As part of our ongoing improvement efforts, we will be simplifying our operating model and organizational structure to streamline decision-making, making our company leaner, faster, and more agile. This will enable us to better meet our customers' needs while driving growth and efficiency. We are focusing more on optimizing our organizational structure through design and technology investments rather than offshoring. This represents the primary direction we are pursuing.
John Barnidge, Analyst
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?
Charles Lowrey, CEO
Yes. It's Charlie again. Let me take that. We've done many acquisitions that have significantly grown the company over time. And these acquisitions include companies of various sizes as well as teams of specialists. And programmatic M&A, to your point, will continue to play a role as we think about the development of what we want to do going forward and a series of well-executed programmatic M&A transactions will become material over time. As a result, we continue to look at a variety of opportunities and different sizes. But we're continuing to be thoughtful about the deployment of capital, especially in light of the current macroeconomic conditions. And our M&A interest continues to be focused on mature companies that support our strategy of growing PGIM and emerging markets by which we can expand our capabilities or our distribution and continue to increase the scale of our existing businesses. But regardless of size, we're going to be thoughtful about evaluating the strategic and the financial merits of each transaction.
Andrew Sullivan, CFO
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.
Operator, Operator
Next question is coming from Wes Carmichael from Wells Fargo.
Wesley Carmichael, Analyst
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?
Kenneth Tanji, CFO
Yes, it's Ken. The benefit of including the negative IMR as part of the new standard has been adopted and is effective for our third quarter results. We were able to include $1.3 billion, which is at the cap level relative to our surplus, and that is already reflected in the results.
Wesley Carmichael, Analyst
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?
Robert Falzon, CFO
It's Wes. Let me address that question. First, I want to highlight that this regulatory framework is still being developed. It is based on the international ICS capital standards, which do not necessarily reflect the underlying economics of more complex products, especially in the U.S. We are actively working on the international front regarding the ICS and collaborating with Japan on how this will be incorporated into their system, regardless of any modifications at the international level. We have noticed that the current proposals do not accurately capture the economics of the long-duration products typically offered in the U.S., both in life insurance and retirement solutions. The industry is engaging with regulators to address these issues, and we are optimistic about making progress. As Ken mentioned earlier, if these proposals present challenges, we have alternatives to consider for managing these products moving forward. There is strong demand for these products in the Japanese market, especially for U.S. dollar-denominated products. Therefore, the industry is committed to continuing to offer these products and will devise solutions to finance them economically.
Andrew Sullivan, CFO
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.
Operator, Operator
Next question is coming from Jimmy Bhullar from JPMorgan.
Jimmy Bhullar, Analyst
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?
Andrew Sullivan, CFO
So Jimmy, it's Andy. I'll take your question. So this quarter, we experienced third-party outflows of $5.7 billion. On the retail end, outflows were $1.9 billion. That was predominantly an equity story. We've seen clients rebound for a variety of reasons, including to recognize gains as the funds have performed well. We have produced strong equity performance with 89% of our equity asset performing benchmark in the last year. On the institutional side, outflows were $3.8 billion. Net outflows were primarily fixed income. We are seeing a lower level of gross inflows into this asset class. Investors are hesitant to come back in until it's clear rates have stabilized. We also saw one large low-fee rate mandate lapse in institutional. As to your question, industry or specific, these are consistent with the industry. And in particular, the fixed income headwinds are consistent. As far as our outlook looking forward, a stable higher rate environment will be good for our flow. So we know that once rates stabilize, we expect to benefit flow-wise. Your question around fees, obviously, it depends very much on the mix of assets, but we're being very successful in bringing inflows into higher fee rate strategies, in particular, into the private alternative areas of our business.
Jimmy Bhullar, Analyst
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?
Caroline Feeney, Head of U.S. Businesses
Yes. So Jimmy, it's Caroline, and I'll take your question. So as you mentioned, this quarter, Individual Life did see favorable expense experience and that includes a number of one-time items, but it also, as you mentioned, does include the release of a legal reserve. So Jimmy, it's our practice to regularly review our legal reserves and then make appropriate adjustments reflecting activity within the quarter. And the release this quarter reflects the results of that review. In terms of the outlook for life overall, I would say, in addition to what you saw in favorable expenses on the life side, we also saw strong investment results and also underwriting results that were largely aligned to our expectations and overall fundamentals of the business continue to remain very solid, and we're very optimistic about the growth there.
Jimmy Bhullar, Analyst
And just any color on the size of the legal reserve because that I view that more as sort of a one-time versus expenses tend to move around.
Caroline Feeney, Head of U.S. Businesses
Jimmy, I would not comment on the specific size of a particular legal reserve, as I said. We saw favorable expenses overall and part of that was the release of a legal reserve, but we do not comment on the specific size of a case.
Operator, Operator
Next question is coming from Tracy Benguigui from Barclays.
Tracy Benguigui, Analyst
I know it's early, but I was wondering if you could just share your thoughts on DOL and the impact on your FIA business.
Caroline Feeney, Head of U.S. Businesses
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 supporter 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 two 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.
Tracy Benguigui, Analyst
Do you think that evolution also took place in the IMO channel or they could comply with new standards?
Caroline Feeney, Head of U.S. Businesses
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, CFO
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.
Operator, Operator
Our next question is from Wilma Burdis from Raymond James.
Wilma Burdis, Analyst
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 2.75 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?
Kenneth Tanji, CFO
Yes. It's Ken. The deal-related costs for the reinsurance with Somerset Re will be incurred at the time of closing, and those have not been included in the baseline. And I'm sorry. And obviously, I think your second part of the question was the benefits of the restructuring or the benefits of the reinsurance will occur subsequent to close, obviously.
Wilma Burdis, Analyst
Yes, the restructuring, should we start to see some benefits coming in 1Q? Or is it going to take some time?
Kenneth Tanji, CFO
Are you referring to the organizational restructuring or the reinsurer? I apologize. We will see benefits in 2024, and there will be some that are effective in the first quarter and then afterward. The initial impact of the reinsurance of the structured settlement from Prismic was modest, reflected in our RBC ratio for September. We experienced some immediate effects from this initial portion. However, over time, it will also provide capital benefits as we reallocate the retained investment portfolio. There was some immediate impact, but we expect continued effects as we adjust the investment portfolio.
Suneet Kamath, Analyst
Great. I wanted to go to Prismic again. Charlie, I think in your prepared remarks, you talked about further optimization of your in-force block. And I think you specifically referred to life and annuity blocks. Is that sort of the extent to where we should be thinking about in terms of where you'd optimize? I guess where I'm going with this is there an opportunity for something like a long-term care in terms of your in-force and reinsuring that to Prismic?
Charles Lowrey, CEO
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 three ways. First, we can reinsure portions of our in-force business like the structured 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.
Robert Falzon, CFO
Suneet, it's Robert. I want to add a general observation about the market based on Charlie's comments. We've noticed that investors involved in various reinsurance vehicles, whether through partnerships or other means, are showing a stronger interest in a wide range of products. Initially, reinsurance transactions were primarily focused on basic insurance and fixed annuities. However, we've observed that this has now extended to variable annuities and GUL, and we believe this trend will continue. There is a strong demand, and as investors become more familiar with the insurance market and its business model, we expect that demand to grow. Therefore, we see valuable opportunities both in the domestic market and importantly, on an international scale as well.
Kenneth Tanji, CFO
Yes, it's Ken. So the reinsurance of our variable annuity block closed in April. And so we had the benefit of that effective April 1, and it is one of the considerations we made as we looked at our RBC and our dividend capacity and factored into the dividends that we made in the third quarter, which was $1 billion from PICA. So we did get the benefit. It's one of the things we thought about when we looked at the overall level of our RBC and then decided to make a dividend to PICA of $1 billion in the third quarter.
Suneet Kamath, Analyst
Sorry, dividend out of PICA.
Kenneth Tanji, CFO
Yes, I'm sorry, yes. Sure. Yes, the bigger moving pieces, like I just mentioned, was the $1 billion that the holding company received from PICA as a dividend. And then we also made a $200 million investment in Prismic and then the other would be ordinary course, interest expense and shareholder distributions. And those are the main components that led to a very small change in our HLA.
Michael Ward, Analyst
Another one on Prismic. But for the third-party component and the mechanics, if PGIM could get the AUM of new blocks being reinsured, wouldn't the general account of the external blocks go on your balance sheet? Because I wouldn't have thought that you're targeting exposure to third-party capital intensive business.
Robert Falzon, CFO
Mike, it's Rob. PGIM is interested in both flow and balance sheet from Prudential as well as from third parties. We will ensure that asset management is included as those blocks are incorporated into Prismic. That’s part of our agreement with Prismic. Separately, we will decide our future investment in Prismic. Currently, we own 20% of Prismic, but we are not contractually obligated to maintain that stake. Nonetheless, we believe that the returns from capital invested through Prismic, considering the enhanced returns on the underlying blocks and the fees from our asset management business, could be quite appealing in terms of risk-reward. Therefore, we would be inclined to continue investing in such businesses that significantly boost the fee income we derive from that sector, especially given the lower risk profile of the earnings stream moving forward. No, I would say that it's Rob again. Sorry, Mike, there is nothing material to update you on from last quarter. We have a very high-quality real estate portfolio, including its office components. We continue to see resiliency within that portfolio, as expected, given our experience, the dedicated underwriting team, and the quality of the overall portfolio. From a valuation standpoint, our valuations and the valuations of the collateral supporting office loans are continuing to decrease, but our loan-to-value ratio still remains quite low on a relative basis, and we feel very comfortable with the overall portfolio exposure there.
Operator, 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.
Charles Lowrey, CEO
Okay. Thank you again for joining us today. We're entering into the next chapter of our evolution with a unique business model and growth strategy that positions Prudential to help current and future generations secure financial futures. We are confident that our strategy and mutually reinforcing business model will enable Prudential to be a global leader in expanding access to investing insurance and retirement security. Thank you again, and stay well.
Operator, 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.