Earnings Call Transcript
PRUDENTIAL FINANCIAL INC (PRU)
Earnings Call Transcript - PRU Q3 2021
Operator, Operator
Ladies and gentlemen, thank you for standing by and welcome to Prudential’s Quarterly Earnings Conference Call. As a reminder, today's call is being recorded. I will now turn the call over to Mr. Bob McLaughlin. Please go ahead.
Operator, Operator
Good morning and thank you for joining our call. Representing Prudential on today's call are; Charlie Lowrey, Chairman and CEO; Rob Falzon, Vice Chairman; Andy Sullivan, Head of US Businesses; Scott Sleyster, Head of International Businesses; Ken Tanji, Chief Financial Officer; and Rob Axel, Controller and Principal Accounting Officer. We will start with prepared comments by Charlie, Rob and Ken, and then we will take your questions. Today's presentation may include forward-looking statements. It is possible that actual results may differ materially from the predictions we make today. In addition, this presentation may include references to non-GAAP measures. For a reconciliation of such measures to comparable GAAP measures and a discussion of factors that could cause actual results to differ materially from those in the forward-looking statements. Please see the slide titled Forward-Looking Statements and Non-GAAP Measures in the appendix to today's presentation and the quarterly financial supplement, both of which can be found on our website at investor.prudential.com. And with that, I'll turn it over to Charlie.
Charlie Lowrey, CEO
Thank you, Bob, and thanks to everyone for joining us today. As always, we hope you and your families remain safe and healthy. Prudential delivered solid financial results for the third quarter, reflecting our strong investment performance and high demand for the products we've introduced to support our customers as they solve their financial challenges in a changing world. We also made significant progress executing on our transformation strategy to become a higher-growth, less market-sensitive and more nimble company. First, we reached agreements to divest our full-service recordkeeping business and to sell a portion of our traditional variable annuities, advancing our pivot toward less market-sensitive and higher-growth businesses. Second, we continue to advance our cost-savings program and remain on track to achieve $750 million of savings by the end of 2023. And third, with the support of our rock-solid balance sheet, we are maintaining a disciplined and balanced approach to redeploying capital. I'll provide an update on each of these transformation initiatives before turning it over to Rob and Ken. Turning to Slide 3. In September, we reached an agreement to sell a block of our traditional variable annuities to Fortitude Re. This divestiture, which is expected to close in the first half of 2022, represents approximately 20% of our traditional individual annuities account values and significantly advances our goal of cutting in half the earnings contribution of legacy variable annuities products through a mix of strategic transactions and natural runoff. This transaction expands upon our prior divestiture activity, including the agreement we announced in July to sell our full-service recordkeeping business and the successful completion of the sales of our Taiwan and Korea insurance businesses. As a result of these divestitures to date, we expect to generate net proceeds of approximately $6 billion by the first half of 2022. And we continue to explore additional opportunities to derisk in-force blocks of business. With the pending sale of our full-service recordkeeping business and our annuities block transaction, we have combined our individual annuities and retirement businesses to better serve the retirement needs of both individuals and institutions and support our growth strategy. Turning next to our cost-savings program on slide 4. We are progressing well and remain on track to achieve our $750 million cost-savings target by the end of 2023 as we look to reduce expenses while improving both the customer and employee experience. To date, we have achieved $590 million in run rate cost savings, exceeding our $500 million target for the full year. These savings include $145 million achieved in the third quarter for a total of $385 million this year. Turning to slide 5. We continue to demonstrate a disciplined and balanced approach to capital deployment by enhancing returns to shareholders, reducing leverage and investing in the growth of our businesses, all supported by our rock-solid balance sheet. Year-to-date, we have returned $3.5 billion to shareholders, including $2.1 billion of share buybacks and $1.4 billion in dividend payments, reflecting a 5% increase in our quarterly dividend, compared to last year. And we're targeting to return $11 billion of capital to shareholders by the end of 2023. During the third quarter, we also took steps to enhance our financial flexibility by redeeming $900 million of outstanding debt. This reduced financial leverage and generated $30 million in annual interest savings going forward. We also continued to deploy capital in our businesses to drive long-term growth. For example, this quarter, we completed a $5 billion funded pension risk transfer transaction, which is the fourth largest transaction in the history of the PRT market and demonstrates our expertise, ability to execute at scale and commitment to this market. We also deployed capital to support our ongoing pivot to less interest rate sensitive and higher growth products, including our FlexGuard and variable life products. Our capital deployment is supported by our balance sheet strength, including highly liquid assets of $3.8 billion at the end of the third quarter and a capital position that continues to support AA financial strength rating. Turning to slide 6. I'm pleased to report a meaningful expansion of our environmental, social and governance commitments. Earlier this week, we announced our commitment to achieve net-zero emissions across our primary global home office operations by 2050, with an interim goal of becoming carbon neutral by 2040. We're also carefully assessing the emissions impact of our investment portfolio. As an immediate action, we will restrict new direct investments in companies that derive a material portion of their revenues from thermal coal. Separately, on the social front, the Prudential Foundation achieved an important milestone during the quarter, reaching $1 billion in funding to partners aimed at eliminating barriers to financial and social mobility around the world since making its first grant in 1978. These investments include funding aligned with our racial equity commitments to support organizations, such as those supporting minority-owned small businesses and historically black colleges and universities that foster black economic empowerment and address the racial wealth gap. This milestone by the foundation follows the $1 billion investment mark achieved in our impact investing portfolio in 2020. We are confident these actions taken alongside of our strategic transformation will help us build a more sustainable company on behalf of all our stakeholders. Thank you for your time this morning. And with that, I'll 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, US and International businesses. I'll begin on Slide 7 with our financial results for the third quarter. Our pre-tax adjusted operating income was $1.8 billion or $2.78 per share on an after-tax basis and reflected the benefit of strong markets and business growth, which exceeded the net mortality impacts from COVID-19. PGIM, our global asset manager, had record-high asset management fees, driven by record account values of over $1.5 trillion that were offset by lower other related revenues relative to the elevated level in the year ago quarter as well as higher expenses supporting business growth. Results of our US Businesses increased approximately 29% from the year ago quarter and reflected higher net investment spread, driven by higher variable investment income and higher fee income, primarily driven by equity market appreciation, partially offset by less favorable underwriting experience driven by COVID-19-related mortality. Earnings in our International Businesses increased 14%, reflecting continued business growth, higher net investment spread, lower expenses and higher earnings from joint venture investments. This increase was partially offset by less favorable underwriting results, primarily driven by higher COVID-19 claims. Turning to Slide 8. PGIM continues to demonstrate the strength of its diversified capabilities in both public and private asset classes across fixed income, alternatives, real estate and equities as a top 10 global active investment manager. PGIM's investment performance remains attractive with more than 94% of assets under management outperforming their benchmarks over the last three, five and 10-year periods. Third-party net flows were $300 million in the quarter, including institutional net flows of $700 million, primarily driven by public fixed income flows. Modest retail net outflows of $400 million were due to equity outflows from sub-advised mandates and client reallocations due to rising rates and inflation concerns. As the investment engine of Prudential, PGIM benefits from a mutually beneficial relationship with our US and International Insurance businesses. PGIM's asset origination capabilities and investment management expertise provide a competitive advantage by helping our businesses to bring enhanced solutions and more value to our customers. And our businesses, in turn, provide a source of growth for PGIM through affiliated flows that complement its successful third-party track record of growth. PGIM's asset management fees reached another record, up 13% compared to the year ago quarter as a result of strong flows driven by investment performance and market depreciation. PGIM's alternatives business, which has assets in excess of $250 billion, continues to demonstrate momentum across private credit and real estate equity and debt, benefiting from our global scale and market-leading positions. As an example, PGIM's private businesses deployed almost $12 billion of capital this quarter, 28% more than the year ago quarter. This strategic focus on expanding higher-yielding products has resulted in stable fee rates over time despite industry-wide fee pressures. Now turning to Slide 9. Our US businesses produced diversified earnings from fees, net investment spread and underwriting income and benefit from our complementary mix of longevity and mortality businesses. We continue to shift our business mix away from low-growth, capital-intensive and interest rate-sensitive products and businesses, transform our capabilities and cost structure and expand our addressable markets. In addition to the agreement that we announced in July to sell our full-service retirement business, this quarter, we also announced the sale of a portion of our legacy in-force annuities block to reduce the overall contribution of traditional variable annuities. These transactions are significant steps forward in shifting our business mix and product portfolio to reduce market sensitivity and accelerate long-term growth. In addition, our product pivots have worked well, demonstrated by continued strong sales of our buffered annuity products, which were $1.3 billion in the third quarter, representing 88% of total individual annuity sales. Since the launch of FlexGuard in 2020, sales have exceeded $6 billion. These sales reflect customer demand for investment solutions that offer the potential for appreciation from equity markets combined with downside protection. We have also exercised discipline through frequent pricing actions, and our sales continue to benefit from having a strong and trusted brand and highly effective distribution team. Also, our Individual Life sales continue to be strong and reflect our product pivot strategy, with higher variable life sales compared to the year ago quarter. Our retirement business reflected strong sales in the quarter, including a $5.2 billion funded pension risk transfer transaction and $1.6 billion of international reinsurance transactions, demonstrating our market-leading capabilities. With respect to Assurance, our digitally enabled distribution platform, total revenues, our primary financial metric as we concentrate on scaling the business, were up 47% over the prior year quarter. During the third quarter, we increased the number of agents to prepare for the seasonally higher expected demand of the Medicare annual enrollment period that occurs in the fourth quarter. Turning to slide 10, our International Businesses include our Japanese life insurance operation, where we have a differentiated multichannel distribution model as well as other operations focused on high-growth emerging markets. Sales across both Life Planner and Gibraltar operations were higher than last quarter amidst the state of emergency in Japan that ended on September 30th. However, sales were lower than the prior year quarter, which were elevated ahead of the US dollar-denominated product repricing in Japan that we implemented in the third quarter of last year. We also continue to see sales momentum in Brazil, particularly within the third-party distribution channel. We remain encouraged by the resiliency of our unique distribution capabilities, which have supported the continued growth of our in-force business. And with that, I'll hand it over to Ken.
Ken Tanji, CFO
Thanks Rob. I'll begin on slide 11, which provides insight into earnings for the fourth quarter of 2021 relative to our third quarter results. Pretax adjusted operating income in the third quarter was $1.8 billion and resulted in earnings per share of $3.78 on an after-tax basis. To get a sense for how our fourth quarter results might develop, we suggest adjustments for the following items. First, variable investment income outperformed expectations in the third quarter by $570 million. Next, we included a placeholder for COVID-19 claims experience in the fourth quarter that is a similar level to our experience in the third quarter. While we have provided this placeholder for COVID-19-related claims experience, the actual impact will depend on a variety of factors, such as infection and fatality rates, geographic, and demographic mix and the continued acceptance and effectiveness of vaccines. Third, we expect seasonal expenses and other items will be higher in the fourth quarter by $140 million. Fourth, we anticipate net investment income will be reduced by about $10 million, reflecting the difference between new money rates and disposition yields of our investment portfolio. And last, we expect the fourth quarter effective tax rate to normalize. These items combined get us to a baseline of $2.27 per share in the fourth quarter. I'll note that if you exclude items specific to the fourth quarter, earnings per share would be $3.05. The key takeaway is that our underlying earnings power has increased from last quarter, driven by the benefits of business growth, our cost-savings program and market appreciation. 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 12. We continue to maintain a robust capital position and adequate sources of funding. Our capital position continues to support a AA financial strength rating and have substantial sources of funding. Our cash and liquid assets were $3.8 billion, which is greater than three times annual fixed charges, and other sources of funds include free cash flow from our businesses and contingent capital facilities. Turning to slide 13 and in summary, we are executing on divestitures. We are on track to achieve our targeted cost-saving initiatives. And with the support of our rock-solid balance sheet, we are thoughtfully redeploying capital. Now I'll turn it to the operator for your questions.
Operator, Operator
Thank you. We’ll now be conducting a question-and-answer session. Our first question today is coming from Erik Bass from Autonomous Research. Your line is now live.
Erik Bass, Analyst
Hi. Thank you. So we've recently seen asset managers, such as T. Rowe and Franklin, announce sizable deals to acquire private and alternative asset capabilities and transactions that were generally well received by investors. Wondering if you see more properties like these available in the market? And would this be the type of programmatic M&A that you might consider for PGIM?
Andy Sullivan, Head of US Businesses
So thanks, Erik. It's Andy and good morning, I'll take your question. So let me start by reiterating that PGIM is a business that has demonstrated an incredibly strong ability to grow organically year after year. And that's really due to the success of our multi-manager model and the team's very strong execution. We've seen $55 billion in net flows over the last five years, and we've seen $11 billion in year-to-date flows. As we've talked about in the past, though, we do want to build upon that track record with programmatic bolt-on M&A. And we've been very assertive in making sure that we're both in the now and in the flow, and we are aware of these transactions in the marketplace. We're leaned into areas that are higher-growth and higher-fee-oriented areas. Three I would mention; we're looking to continue to globalize the business, specifically in Europe and Asia. We're looking to continue to build on our already strong alternatives business, where we have $250 billion in assets under management. Our acquisition of Montana Capital Partners is a great example of that. And we're looking in the area of real assets. As always, we're going to be disciplined in what we do and in how we deploy capital. To your question about sizable deals, we very much feel, if you look across our managers in PGIM, we are at scale. So it's unlikely that you would see us do what I would call a big pure-play scale deal. But to the degree that we would look and potentially do something larger, it would come with a key capability or strengthen us in a material way in a key geography and also bring along with it synergies.
Erik Bass, Analyst
Got it. That's helpful. Thank you. And then was hoping you could talk a little bit or provide some more color on your group claims experience this quarter, and particularly, the trends you're seeing in both group life and disability.
Andy Sullivan, Head of US Businesses
Sure, Erik. It's Andy. I'll address that again. To begin with the group life side, as you've likely seen in the news, Delta has significantly affected the country. The deaths in the third quarter were three times what we anticipated, with 95,000 deaths compared to our expectation of 30,000. As a leading carrier in life and disability insurance, we have a substantial and diverse portfolio. There are three key effects I want to highlight from the quarter. First, deaths among individuals aged 35 to 54 in the U.S. tripled in percentage terms. This age group constitutes many of our younger workers, with an average age of about 46 in our group block. Second, we have a considerable national account business and a strong presence in healthcare, retail, and manufacturing—industries where frontline workers are more vulnerable due to the nature of their jobs. Finally, around 50% of the pandemic's impact on life insurance claims originated from the southern United States. It is unfortunate that we continue to face this situation, but we are proud to fulfill our commitments and support these families. Shifting to the group disability side, we are seeing what we anticipated and prepared for as an organization. It's important to note that the predominant impact on group insurance has been on the life side. However, the disability benefit ratio was somewhat raised at 85.9%. There were two main factors at play. In our fee-based short-term disability (STD) and absence business, we are noticing a higher rate of absence leading to increased STD claims, which results in higher expenses reflected in the administrative ratio. On the long-term disability (LTD) side, as mentioned in previous quarters, we had set up incurred but not reported (IBNR) reserves and increased claims staffing to manage the expected rise in incidents, stemming from both pandemic-related morbidity and subsequent unemployment impacts. We have observed a 10% increase in LTD incidents and severity in the quarter. Nonetheless, this aligns with our expectations and preparations, and we are managing effectively. We anticipate improvements in these metrics over time.
Erik Bass, Analyst
Great. Thank you.
Operator, Operator
Thank you. Our next question today is coming from Ryan Krueger from KBW. Your line is now live.
Ryan Krueger, Analyst
Hey, good morning. First question was, what areas are you focused on additional derisking? Does that include more potential variable annuity transactions? And then, is individual life also part of the consideration?
Charlie Lowrey, CEO
Yes. Hi, Ryan, it's Charlie Lowrey. I'll take that. As we stated in our opening remarks, we're making significant progress on executing to become a higher-growth, less market-sensitive and more nimble business. And this includes, as you rightly point out, the sales of our full-service recordkeeping business and our block of traditional variable annuities, as well as the completed sales of what we've talked about in Korea, Taiwan, Italy and Poland. We have also noted, to your point, that in the past, we're looking at other blocks of business that may include the areas that you spoke about. So we're accomplishing a significant amount, but we still have a lot of work to do. I would note that in terms of our overall goals, we have which we stated is between $5 billion and $10 billion of capital that we wanted to free up to reposition, we're already $6 billion into that, right? So we don't need to do other deals at this point. We are very happy with the economics of the deals we've done as we think it reflects the high quality of the businesses we have, but we'll only transact other deals if they make sense for all our stakeholders as we go forward.
Ryan Krueger, Analyst
Thanks. And then a bit of a follow-up on M&A. So you've done a few deals, but they've been on the pretty small side, I think, in terms of capital, and you have a fair amount of capital coming in next year from the transactions you've announced. Do you still anticipate ultimately redeploying that additional capital freed up into M&A transactions over time, or if not, would you consider upping the buybacks again?
Charlie Lowrey, CEO
Yes. I think what we've always said in the past, Ryan, is that if we can't find good uses for that capital, we will return that capital to stakeholders. But what I would also say is that we are looking both organically and inorganically at ways of redeploying that capital, and organic investment is another way of doing that. So we'll be very disciplined as we go forward in looking at potential acquisitions. The M&A is going to focus on, again, asset management and emerging markets as we increase the percentage of earnings from growth areas and reduce the percentage of our legacy traditional variable annuities but we’ll continue to focus in a very disciplined way on those two areas. Andy mentioned in his previous comment the acquisition of Montana as a capital partner as an example of that, but we'll look at the pipeline that's out there and see if there are good deals to do. If they're not, we'll return capital to shareholders as we have in the past.
Operator, Operator
Thanks. Our next question today is coming from Humphrey Lee from Dowling & Partners. Your line is now live.
Humphrey Lee, Analyst
Good morning and thank you for taking my questions. My first question is about the fourth quarter outlook for Assurance IQ. Can you discuss the preparation you've done so far for the enrollment period? And how confident are you in generating the necessary level of activities to support breakeven AOI?
Andy Sullivan, Head of US Businesses
Humphrey, good morning, it's Andy. And thanks for your question. So as you know and as we've talked about in the past, we do expect our revenue at Assurance IQ to be strongest in the fourth quarter given the annual enrollment season. Medicare Advantage remains a very strong opportunity for us. If you look, last year, we had a little under 1% share in that marketplace, and that marketplace is growing at 10% per year. So there's a lot of space to operate. As you saw in the quarter, we continue to invest in the platform, both in the business overall, but specifically in the quarter, we invested in building out our W-2 Prudential agent force. And what we saw is coming into the annual enrollment period season, we came in with more agents than we had last year, and those agents were operating at a higher level of productivity right out of the gate. So we're encouraged versus last year. As I've said before, we're confident in what the platform can do for us in the long term and its ability to scale.
Ken Tanji, CFO
Humphrey, it's Ken. Just if I could add, as Andy said, we're well prepared. For the purposes of the baseline for the fourth quarter, we just simply put in a placeholder for Assurance at a breakeven because we wanted to neutralize for the seasonality, but it's not a forecast. It's just a placeholder to neutralize the earnings for the fourth quarter.
Humphrey Lee, Analyst
Okay. Got it. I see. Yes, because I was just thinking like what type of revenue level would you need to have in order to get to that break-even target, but it seems like this is just more of a placeholder as opposed to anything.
Ken Tanji, CFO
That's right.
Humphrey Lee, Analyst
My second question is about PGIM, particularly on the retail side. The flow appears to have softened somewhat over the past few quarters. Can you share your observations on that and what steps you are taking to enhance retail flows?
Andy Sullivan, Head of US Businesses
Thank you for your question on PGIM. As we've discussed before, we see natural variability in flows from quarter to quarter. This quarter, we experienced minor inflows primarily from institutional activities, thanks to our efforts in fixed income and real estate. However, there were modest outflows on the retail side due to clients reallocating from equities to shorter-duration fixed income strategies. It's important to note that client reallocations can go in either direction in any given quarter. What matters most is the long-term track record, and so far this year, we've seen $11 billion in inflows, driven by our strong capabilities and execution. PGIM has a diverse product portfolio, and as mentioned in our release, we have exceptional investment performance, with over 94% of our products outperforming benchmarks over three, five, and ten years. While we may see some variability in the near term, we are confident that we will come out as net winners in the long run.
Humphrey Lee, Analyst
Got it. Thank you.
Operator, Operator
Thanks. Our next question today is coming from Tracy Benguigui from Barclays. Your line is now live.
Tracy Benguigui, Analyst
Thank you. So assume this quarter so far is an early glimpse on LDTI with some company disclosures. There was one that was quantitative, another more qualitative. Your 10-Q is not out yet, but are you planning to add any disclosures there, like either now this quarter or in the near future?
Ken Tanji, CFO
Hey, Tracy, it's Ken. We continue to evaluate the new standards and refine our methods. And we continue to adjust as we move towards the effective date, and the effective date is still over a year away. And the impact also will be subject to rates at the time of the effective date as well as the actions that we have been taking and will continue to make to shift our business to be less market-sensitive. And that will have an impact obviously at the time of the effective date. So overall, we're making good progress on implementing the new standards, but it's too early to provide estimates, and that's where we are.
Tracy Benguigui, Analyst
Okay. Maybe just one question on that, on your Japanese business. To the extent that there are dollar-denominated products, does that act like a mitigant at all in your view when those liabilities have to be marked to market?
Ken Tanji, CFO
We have a long-established capability and competitive edge in US dollar operations in Japan. Our business in Japan is centered around meeting the long-term needs of our customers, primarily focused on death protection, including products denominated in US dollars. This business has a long duration profile, supported by strong reserves and a high-quality investment portfolio, making it very financially resilient. It's early for us to provide specific estimates, but we are optimistic about the overall profitability, risk profile, and financial strength of our Japan business, including the US dollar segment.
Tracy Benguigui, Analyst
Thank you.
Operator, Operator
Thank you. Our next question today is coming from Andrew Kligerman from Credit Suisse. Your line is now live.
Andrew Kligerman, Analyst
Good morning. My first question is a follow-up regarding your capital management. Charlie, you mentioned that you would assess the pipeline and that organic investing is a means to allocate capital. Can you explain what you mean by organic investing and how much capital it might require? Additionally, regarding the pipeline, could you provide some insights? Given that the two deals you completed were relatively small, is it possible that there may not be anything particularly appealing, and might you consider other uses for that capital?
Charlie Lowrey, CEO
Sure. So, a couple of comments, taking them in order. In terms of organic growth, if you look at FlexGuard as an example, we have pivoted away from the variable annuities with guaranteed living benefits and then started with new products and are investing in those and supporting those as they grow. And that really ties into becoming a less market-sensitive company, and frankly, a higher-growth company. So, that's an example. So we'll look at the product pivots that we do as an example of organic growth. In terms of inorganic growth, I think there are going to be plenty of opportunities as we go forward, especially in the areas that we want to invest in, namely asset management and emerging markets, some of the growth areas. So, over time, I think we will find good places to put the capital. And as always, if we don't find places to put that capital to the extent that we don't have attractive opportunities that meet our strategic and financial criteria, we'll return the excess capital to shareholders as we've done in the past.
Andrew Kligerman, Analyst
Got it. That makes sense, Charlie. And then with regard to your international businesses in Japan, Gibraltar and the Life Planners, sales were off pretty sharply in the 30%-plus range. And in the press release, you cited the dollar-denominated product repricing that went on in the year ago quarter, that the people wanted to catch these products. Could you clarify for us whether those products written a year ago were adequately priced and adequate returns? Was there a possibility for anti-selection? And now going forward, with an emergency act and kind of that getting out of the rearview, is there a possibility that as COVID subsides, these sales could really jet upward?
Scott Sleyster, Head of International Businesses
Thanks, Andrew. This is Scott. I'll take that question. As you may remember, we made significant changes to our crediting rates for US dollar products last August. This was part of our ongoing effort to ensure strong profitability across all our new business activities, including in Japan and other markets. Typically, we see a surge in sales ahead of these crediting rate changes, which can lead to pulling sales forward by a quarter or two. Additionally, the impact of COVID emergency measures and the Olympics in Japan also affected sales temporarily. However, we are pleased with the recovery in sales. Looking at the third quarter, the quarter-over-quarter results appear strong. In Japan, we benefit from various distribution channels, including life planners, life consultants, affinity channels, banks, and third-party distributors. Furthermore, we've made significant advancements in technology and new strategies to support both our customers and distribution channels. All of this combined gives us confidence in the positive sales momentum we have. We continue to practice strong discipline and closely monitor our pricing strategies. Currently, we do not anticipate any significant repricing actions in Japan, and we believe the decisions we made last year were timely.
Ken Tanji, CFO
And Andrew, it's Charlie. I would like to add that we have been very disciplined in examining the pricing of all our products globally, not just in Japan but in all other countries, including the US. We are pleased with our pricing increases, which have been necessary due to low interest rates and strong sales. This success stems from three main factors: the strength of our brand, the effectiveness of our solutions like the new FlexGuard, and the quality of our distribution both in-house and through third parties. We have numerous distribution methods, which I believe will benefit us in the long run.
Operator, Operator
Our next question today is coming from Tom Gallagher from Evercore ISI. Your line is now live.
Tom Gallagher, Analyst
Good morning. So individual mortality held up pretty well this quarter despite the increase in COVID mortality and also by some measures, there was elevated non-COVID mortality also this quarter. In terms of describing why you think your block only had minor sensitivity, can you comment on what that might be? Is it just vaccination levels, older age, demographics and geography, or anything you could share on that?
Andy Sullivan, Head of US Businesses
Yes, Tom, it's Andy. I'll address your question, and I appreciate it. When considering our Individual Life block in the third quarter, there are several points to highlight. We noticed an increase, and the third quarter is typically our peak period for underwriting gains, so seasonality is evident in the results. Additionally, we experienced fewer large face amount claims this quarter, which can fluctuate from one quarter to the next. Regarding the impact of the pandemic, our block is primarily based in the Northeast, while the US death rates were notably higher in the Southern region. Furthermore, the average age of our Individual Life block is older, and this demographic tends to have higher vaccination rates.
Tom Gallagher, Analyst
Got you. Okay. Thanks. And then for my follow-up, just curious, any updates on the economic solvency regime in Japan? Is that still set for 2025? If so, how do you feel about your positioning to adopt that?
Rob Axel, Controller and Principal Accounting Officer
Hey Tom, it's Rob. I’ll address that. To our knowledge, there hasn't been any change in the timing of that. The JFSA has been well aligned with the broader international International Capital Standard that's being implemented. Their plan has always been to be slightly behind the rollout as their new solvency regime is closely linked to it. Regarding our Japan business, as both Ken and Scott have mentioned, the underlying economics are very strong. We hope that under both accounting and regulatory frameworks, this will ultimately be evident. However, we have raised some concerns, as others in the industry have, about the proposed international capital standard due to some fundamental flaws that remain. If those issues carry over into Japan's economic solvency regime, we would be concerned. Nevertheless, we are actively engaging in discussions both internationally and in Japan, along with several of our peers. We are hopeful that through this continued dialogue, we can ensure that the economics of the underlying business are properly reflected in the regulatory frameworks.
Tom Gallagher, Analyst
Okay. Thanks, Rob.
Operator, Operator
Thanks. Our next question today is coming from Elyse Greenspan from Wells Fargo. Your line is now live.
Elyse Greenspan, Analyst
Hi, thanks. Good morning. My first question, on the PRT business. You guys had some pretty good activity in the third quarter. Can you just talk about the pipeline there for the fourth quarter? I know that tends to be heavy towards the end of the year. And any initial outlook for 2022?
Andy Sullivan, Head of US Businesses
Yes. Elyse, hi, it's Andy. I'd be happy to take the question. So, we think the market in 3Q was in and around $17 billion and that's very consistent with what communicated on the previous couple of calls, that we felt the back half of the year would be very healthy. The average funded status for plans is around 97%, which is the best level in 10 years and they still have a very strong desire to transact. We think the total market size for the year will be in the neighborhood of $40 billion, and we think that level of momentum will continue in the near-term. This is a space that, in many ways, we're a pioneer in and very much a leader in the space. As we've said in the past, we are very committed to it, and we are going to pick our spots. We're very confident that the strength of our brand and our capabilities and our track record. We're going to gain more than our fair share over time. But in the near-term, we do think the market is going to be healthy.
Elyse Greenspan, Analyst
Okay. And then my second question, going on to your Group Life book, you guys gave some good color on what you'll be elevated COVID boxes there in the third quarter. As we think about the fourth quarter in 2022, do you expect that you would see losses in line with kind of that same elevated severity that you've been seeing? And then how much of your losses that you've set up so far for COVID or IBNR?
Andy Sullivan, Head of US Businesses
So, Elyse, maybe I'll start and then Ken could follow-up. So, I kind of went through the dynamics of what's causing the elevated mortality, the three predominant things being the average age, the predominance of our book in certain segments, and the distribution of the claims being in places where the vaccination rates are lower. We would expect those underlying drivers to continue near-term into the fourth quarter.
Ken Tanji, CFO
Yes. In terms of IBNR, we have remained fairly up-to-date on claim activity. The lag is measured in weeks, and we have a well-established process to assess that, which is ongoing. Regarding our outlook for 2022, we haven't provided guidance past the current quarter. Based on the continuation of current trends, which Andy mentioned, we believe this is the most sensible approach. The situation is quite unique and dynamic, with many variables involved, such as social distancing, preventive measures, vaccines, treatments, and variants. Therefore, we have extrapolated the current trends in our baseline, and that reflects our perspective.
Operator, Operator
Thank you. Our next question today is coming from John Barnidge from Piper Sandler. Your line is now live.
John Barnidge, Analyst
Thank you. Just thinking about the group business, given the enduring nature of the pandemic, unfortunately, is there a need to build more administrative expenses to support that effort?
Andy Sullivan, Head of US Businesses
So, John, it's Andy. I think as we've talked about in the past, we actually have a higher level of both call and claims staff across our product lines. We hired out ahead of what we expected to see. So, we were well prepared as it was coming in. But we think that that level is already reflected in the admin ratio that you see.
John Barnidge, Analyst
That's great. Thank you. And then maybe my follow-up, just wanted to touch on that comment around LTD incidence increase in frequency and severity. How should we be thinking of this maybe in light of vaccine mandates? There's headlines about Boeing and Raytheon in percentage of workers there. I'm just trying to think through that in light of PRU's focus within the group market. Thank you.
Andy Sullivan, Head of US Businesses
So it's Andy, again. I guess I'd say two things. Our expectation for the number of deaths in the quarter take into account what we think the current approach is in the employer marketplace and the current landscape of mandates. To the degree, our book tends to be more of a national account book of business, and there are more mandates in that segment, I think that would be a help to us and a tailwind.
Operator, Operator
Thank you. Our next question today is a follow-up from Tracy Benguigui from Barclays. Your line is now live.
Tracy Benguigui, Analyst
Thanks for taking another question. I just want to touch on your upcoming combination of individual and institutional retirement business. Is this just to simplify your operational model after the pending full-service sale, or should we expect anything strategic coming out of that either on the expense or revenue side?
Andy Sullivan, Head of US Businesses
So Tracy, it's Andy. Let me address your question about the drivers. First and foremost, this reflects our firm’s commitment to addressing retirement needs in America. We recognize a significant demand in the pension derisking area and we continue to focus on assisting individuals through both the retirement accumulation and decumulation processes. This is about merging two businesses that have strong momentum and are leaders in their fields to combine top talent and capabilities. We anticipate that this will enhance our decision-making as we pursue retirement needs and refine our focus in this area. This is a crucial step in transforming our business mix and system.
Operator, Operator
Thank you. Our next question is coming from Jimmy Bhullar from JPMorgan. Your line is now live.
Jimmy Bhullar, Analyst
So just a follow-up question on, Charlie, your comments around dispositions and/or derisking reinsurance type transactions. I think you mentioned annuities potentially and Individual Life as well. But how do you think about long-term care in that context? And is that a business where you're seeing counterparties emerge, or is it still like the bid ask as to why to expect a transaction in the near future?
Charlie Lowrey, CEO
I'll start and then maybe Ken can add to that, Jimmy. I think what you observed is exactly correct. It's something we would consider if the market allows, but the market is currently very thin for bidders on blocks like that. Additionally, we have a relatively small and young block of business that we feel quite good about. As we've mentioned, we are committed to being very disciplined with our divestitures and focused on creating shareholder value, so any transaction we pursue must be in the best economic interest of our shareholders. Given the young nature of this block, the bid-ask spread can be quite large. We'll keep evaluating options as they arise, but for now, we are continuing to manage the book, which is performing well. Ken, do you have anything to add?
Ken Tanji, CFO
No. I think that covers it well, Charlie. Nothing to add from me.
Jimmy Bhullar, Analyst
Can you discuss the operating environment in your two largest international markets, Japan and Brazil? These markets are experiencing different stages of COVID. How are those businesses performing and what is your outlook for sales considering the pandemic and economic conditions in Latin America?
Charlie Lowrey, CEO
I’ll begin with Japan. The combined effects of the states of emergency and the Olympics really slowed things down, and this impact continued through September 29 with the state of emergency. We have since emerged from that situation positively. Our channels have benefited from our use of technology, and our customers have too during this time. Our sales teams have adapted well to the new environment. As we move beyond the state of emergency and head toward a normal state, we've seen a solid sequential quarter. Recruiting has been somewhat difficult during the COVID period, but we’ve adapted and learned how to bring new team members on board remotely. As we emerge from COVID, both sales activities and recruitment will continue to improve, which is a positive sign. In Brazil, our sales are improving due to a strong Life Planner model and significantly increased third-party distribution, now accounting for more than a third of our sales compared to around 10% a few years ago. We have seen positive momentum from the channels we operate in. COVID affected Brazil more severely than Japan, but we are pleased with the resilience shown by our sales force there. Overall, we are confident about the trends in both markets, and the recent quarter reflects this confidence.
Operator, Operator
Thank you. We reach 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, CEO
Thank you. And thank you all for joining us today. Our performance this year and the progress we're making on repositioning our business mix and advancing the cost-savings program, along with disciplined capital deployment, reinforces our confidence in our strategy to transform Prudential and generate substantial growth. We remain optimistic about the opportunity to continue to deliver strong financial outcomes to all our stakeholders. Thank you again for joining us today and for your time.
Operator, Operator
Thank you. That does conclude today's teleconference and webinar. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.