Earnings Call Transcript - PRU Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Prudential Quarterly Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. Instructions will be given at that time. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Head of Investor Relations, Mr. Darin Arita. Please go ahead.

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

Charlie Lowrey, CEO

Thank you, Darin. Good morning, everyone, and thank you for joining us today. As we approach the one-year mark of the global pandemic, I hope that you, your families and colleagues remain safe and healthy in this continuing difficult environment. As before, we remain deeply focused on the well-being of our employees, customers, communities, and other stakeholders, and on addressing their evolving needs and challenges. Amid the extraordinary events of 2020, we continue to take steps to evolve our business for the future while living up to our purpose. We successfully executed on a number of our strategic initiatives in 2020 to reduce our market sensitivity and increase our growth potential, including the expansion of our cost savings program, while further solidifying our already robust financial position. We’re now focused on building upon our achievements over the past year to further accelerate our strategy. I’ll speak to this next phase of our transformation in more detail momentarily, but will start by recapping our accomplishments in 2020. We realized $215 million in cost savings during the year, exceeding our $140 million target. Recall that last quarter, we increased our cost savings target to $750 million to be realized by the end of 2023. We also began to rotate our international earnings mix towards higher growth markets. During the year, we completed the sale of our Korea business and announced the sale of our Taiwan business. We also took significant steps to address the low interest rate environment with derisking actions such as repricing products and pivoting to less interest rate-sensitive solutions. This pivot included discontinuing sales of variable annuities with guaranteed living benefits and launching a buffered annuity product, FlexGuard, which is less sensitive to market fluctuations while continuing to serve our customer needs. As we look ahead, we’re building upon the actions we’ve already taken, as well as our competitive strengths to significantly transform the Company over the medium term. To achieve this transformation, we expect to deliver on our cost savings program and to reallocate $5 billion to $10 billion in capital over the next three years, as we pivot towards higher growth and less market-sensitive businesses. In parallel to this capital reallocation, we anticipate returning $10 billion of capital to shareholders over the next three years. This includes dividends as well as share repurchases that are resuming in the first quarter, under our new $1.5 billion authorization. As a result of these efforts, Prudential should emerge as a higher growth, less market-sensitive, and more nimble business that is positioned not only to deliver growth for shareholders, but also to make a more meaningful difference in the financial lives of more people around the world. As we transform to become a higher growth, less market-sensitive business, we expect to double our growth businesses to more than 30% of earnings and have our Individual Annuities business represent 10% or less of earnings. We will change our business mix primarily through organic growth and programmatic acquisitions for both our global asset manager, PGIM, and in emerging markets within our international businesses. PGIM manages $1.5 trillion of assets, which we have grown both organically and through acquisitions of talent and capabilities. In emerging markets, we have expanded with joint ventures and acquisitions in regions with large markets and favorable demographic tailwinds, such as Asia, Latin America and Africa. We benefit from strong relationships with companies that have a large footprint and a significant local market expertise. In addition, we will remain focused on investing in our other businesses to expand our addressable market as well as continue to improve expense and capital efficiency. Additional actions to change our business mix include derisking and other transactions in conjunction with running off certain blocks of business. The $1.6 billion of capital generated from the sale of the Korea business is included in the $5 billion to $10 billion we plan to reallocate into our growth businesses. Our change in business mix will obviously not be a straight line. But as we reallocate capital, we’ll provide you with information to help you both understand and measure our progress. We are well-positioned to execute this strategic plan with a rock-solid balance sheet. At the end of the fourth quarter, we had $5.6 billion in highly liquid assets. And our operating subsidiaries continue to hold capital to support AA financial strength ratings. Finally, during this time of change and transformation, our commitment to our Company purpose and to supporting all our stakeholders remains as fundamental as ever. This importance is reflected in the multiple environmental, social and governance initiatives that we advanced over the course of this quarter and throughout 2020. We became the first U.S. insurer to insure a green bond aligned with the United Nations Sustainable Development Goals. We improved our commitment to environmental transparency and accountability by disclosing our environmental impact through CDP, the world’s leading environmental disclosure platform. Prudential scored an A minus on CDP’s 2020 Climate Change Survey. We introduced nine commitments to advance the work we’ve been doing on racial equity, spanning our talent practices, our design and delivery of products, our investments, and public policy works, and our support of community institutions working to remove persistent obstacles to black economic empowerment. I’m also pleased that we’ll continue to tie inclusion and diversity with executive compensation. Three years ago, we added an inclusion and diversity performance modifier that factored into our 2020 compensation plan. Over this period, diverse representation amongst senior management has increased. We’re including this type of modifier again to drive us to improve further our inclusion and diversity over the next three years. Before closing, I’d like to say thank you to all our employees around the world. It’s through your hard work and dedication that we’ve been able to successfully help our customers and advance our transformation. With that, I’ll turn it over to Rob for more specific details on our business performance. Thank you all for your time this morning.

Rob Axel, Controller and Principal Accounting Officer

Thank you, Charlie. I’ll provide an overview of our financial results, an update on our strategic progress, and highlights of our outlook for our U.S., PGIM and international businesses. On a pretax, adjusted operating income for 2020 was $5.1 billion or $10.21 per share on an after-tax basis. In the fourth quarter, our pretax adjusted operating income was $1.5 billion or $2.93 a share. Earnings exceeded the year-ago quarter as increases in our PGIM and international businesses, as well as our Corporate & Other operations, offset a decline in our U.S. businesses. Results of our U.S. businesses reflected heightened COVID-19-related mortality experience as well as lower fee income in our Individual Annuities business, primarily due to outflows. This was partially offset by higher net investment spread results, driven by higher variable investment income and lower expenses. In addition, we made a change in our Individual Life procedures that provides policyholders information to better manage their policies and premiums for certain flexible premium policies. Due to this change, we have revised the estimated premiums to be paid for these policies, resulting in an adjustment to reserves. We also established and incurred but not reported our IBNR reserve in our group insurance business for the expected increase in disability claims as a result of the lag effect from higher unemployment. PGIM, our global asset manager, reported record assets under management of $1.5 trillion, up 13% from a year ago, as well as higher net asset management fees and record-high other related revenues. And earnings in our international businesses increased 6%, reflecting business growth, lower expenses, and more favorable underwriting results, partially offset by lower net investment spread. Our U.S. businesses produce a diversified source of earnings from fees, net investment spread, and underwriting income, which includes the benefits from netting longevity and mortality experience. We continued to make progress this quarter, executing on our priorities, including implementing pricing and product actions to derisk our business mix while protecting profitability and expanding our addressable market. Our product pivot has worked well with sales of our buffered annuity, FlexGuard, doubling to $1.2 billion in the fourth quarter from $600 million in the third quarter. And the pandemic has increased awareness of the value of our broad set of life insurance and financial solutions as we continue to enhance our capabilities to reach people when, where and how they want. These capabilities include traditional agents and financial advisors, as well as the workplace. We launched our Medicare business a little more than a year ago. As a result of our investments in our distribution capacity, marketing capabilities, and development of new technology, we nearly tripled our fourth quarter Medicare revenues versus the year-ago quarter. We expect to continue to grow these revenues as we further expand distribution, utilize newly developed tools for data-driven consumer product recommendations, and broaden our marketing. Total revenues are our primary financial metric for Assurance, as we concentrate on scaling the business, which doubled versus the year-ago quarter. We’re adding more carriers in all of our existing markets and expanding into new product lines. To execute this expansion, we have increased our investments in marketing, distribution, and infrastructure. We expect operating losses in the near term and earnings to emerge as we reach scale. PGIM continues to demonstrate the strength and resilience of its diversified platform as a top 10 active global investment manager. PGIM’s strong investment performance and diversified global investment capabilities in both public and private asset classes across fixed income, alternatives, real estate, and equities, position us favorably to capture flows. PGIM’s investment performance demonstrated resiliency with more than 90% of assets under management outperforming their benchmarks over the last 3, 5, and 10-year periods. This investment performance contributed $6.3 billion of third-party net flows during the fourth quarter, including $3.8 billion of retail and $2.5 billion of institutional flows, resulting in $20 billion of net flows for the year. Of note, PGIM investments achieved the highest U.S. mutual fund franchise ranking based on net flows in 2020. PGIM’s strong overall flows were driven by continued investor appetite for fixed income strategies, particularly higher-yielding strategies and for real estate. PGIM’s asset management fees increased 12% compared to the year-ago quarter, reflecting growth in average assets under management. In addition, record-high agency loan production and the effect of strong investment performance on incentive fees, as well as co-investment and seed investment earnings, drove significant growth in other related revenues. These results contributed to an increase in PGIM’s operating margin, which was in excess of 36% for the quarter. While PGIM’s operating margin will vary with market conditions, we expect to sustain a margin of approximately 30% across the cycle. 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 markets. As anticipated, Life Planner sales in the quarter were reduced by the accelerated sales in Japan last quarter, following the U.S. dollar-denominated product repricing in August. For the year, we were pleased that sales were about flat as our high-quality distribution overcame the effect of the pandemic-related shutdown. Similar to Life Planner, Gibraltar sales were reduced in the current quarter, and sales for the full year were about even with the prior year. While we do not report separately on our emerging markets businesses, we would note that Brazil’s life insurance in force grew by 10% from a year ago, and our Chilean pension business held its number one ranking for market share benefitting from continued favorable investment performance.

Ken Tanji, CFO

Thanks, Rob. I’ll begin on slide 12, which provides insight into earnings for the first quarter of 2021 relative to our fourth quarter results. Pretax adjusted operating income in the fourth quarter was $1.5 billion, resulting in earnings per share of $2.93 on an after-tax basis. Then, we adjust for the following items. First, variable investment income outperformed expectations in the fourth quarter, which is worth $360 million. Second, we adjust underwriting experience by a net $65 million. This includes a placeholder for COVID-19 claims experienced across our businesses of $170 million, based on 250,000 COVID-19-related fatalities in the U.S. during the first quarter. Third, we expect expenses to be $165 million lower in the first quarter, primarily due to seasonal items in the fourth quarter. Fourth, there are other items that may be $40 million more favorable in the first quarter. As Rob discussed, in the fourth quarter, we recorded a charge for the change in our Individual Life business practice, which was partially offset by strong other related revenues in PGIM. Fifth, we anticipate net investment income will be reduced by $15 million, reflecting the difference between new money rates and disposition yields of our investment portfolio. And last, we expect the first quarter effective tax rate to normalize. These items combined get us to an earnings per share of $2.54 for the first quarter. I’ll note that if you exclude items specific to the first quarter, earnings per share would be $2.90 per share. The key takeaway is that this is roughly in line with the prior quarter. 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, I’d like to bring your attention to a few other items in the appendix. In addition to the seasonal considerations, we have included other considerations for 2021. Notably, we expect to realize an increase in cost savings from $250 million in 2020 to $400 million in 2021. We also provided the expected net cost for Corporate & Other, the yen foreign exchange rate, and the effective tax rate for 2021. On slide 13, we’ve provided an update on the potential impact of the pandemic. The estimated sensitivity of operating income for $100,000 incremental U.S. deaths due to the pandemic is $85 million based on our updated outlook. This is up slightly from our prior sensitivity as the virus more broadly spreads across demographics and geographies, including the insured population. The actual impact will depend on a variety of factors, such as infection and fatality rates, geographic considerations, and the speed and effectiveness of the vaccine rollout. We maintain a robust capital position and adequate sources of funding. Our capital position continues to support a AA financial strength rating, and we have substantial sources of funding. Our cash and liquid assets at the parent Company were $5.6 billion at the end of the quarter, which is greater than three times annual fixed charges. And other sources of funds include free cash flow from our businesses and other contingent capital facilities. In summary, we successfully executed our 2020 initiatives, and we are building on those initiatives to transform Prudential into a higher growth, less market-sensitive, and more nimble business. And we continue to benefit from the strength of our rock-solid balance sheet. Now, I’ll turn it to the operator for your questions.

Operator, Operator

[Operator Instructions] Our first question comes from the line of Suneet Kamath with Citi. Please go ahead.

Suneet Kamath, Analyst

Thanks. I wanted to start high level, if I could. Charlie, at the 2019 Investor Day, I think you guys laid out a strategy around financial wellness. And that initiative was supposed to get you to double-digit EPS growth and a 12% to 14% ROE kind of over the long term. Based on what you’re talking about today, do you need to take these additional capital reallocation steps to get there, or should we think about these initiatives as potentially pushing you above what you guided to?

Rob Axel, Controller and Principal Accounting Officer

Suneet, it’s Rob. I’ll jump in on that, if you don’t mind. So, a couple of thoughts. One, since our Investor Day, obviously, rates have declined quite materially. And given our current business mix, a low interest rate environment with a 10-year hovering around one to one five presents headwinds to improving ROE. I would note, nonetheless, that in a challenging year for the industry, 2020, we achieved an ROE of just under 11%. And I think that speaks to the strength and earnings potential of the mix of businesses that we have. I’d also add that our focus, Suneet, is on not just ROE but also on cost of equity, and importantly, the spread between the two. The strategies and initiatives that Charlie outlined, I think, around derisking, simplifying and reducing market sensitivity, and changing the business mix, I would look at as very much geared toward expanding that spread between our return on equity and our cost of equity.

Suneet Kamath, Analyst

Okay. And then, as we think about that $5 billion to $10 billion of capital that you’re going to reallocate, is it fair to think about most of that coming from life and annuities? And can you give us the amount of capital that’s currently being consumed by those two businesses?

Charlie Lowrey, CEO

Yes. Let me jump in on that, Suneet. As we’ve said in the past, I think everything is on the table, right? But what we’ve also said in this call is that we’re really focused on annuities. And one of our priorities is annuities and shrinking annuities to 10% or less of earnings. But in addition to that, what we’re doing is that we’re looking at all market-sensitive, low-growth businesses or blocks of businesses in terms of runoff, reinsurance or sales. So we’re going to continue to look at those. Life will be one of the businesses we look at in addition to annuities, but not necessarily the only one.

Ken Tanji, CFO

Hey Suneet, it’s Ken. I’ll just -- you asked about the amount of capital. Our annuities business is predominantly within one company and one statutory company called Prudential Life Assurance Company and its statutory capital is a little bit more than $6 billion. Our Life business is well capitalized, but it’s across a number of companies. And I don’t have that aggregate number handy here.

Operator, Operator

Our next question comes from the line of Yaron Kinar with Goldman Sachs. Please go ahead.

Yaron Kinar, Analyst

I guess my first question is around the reduction of earnings coming from Individual Annuities. Can you achieve that without a block transfer or reinsurance deal? And the reason I ask that is I would think that there may be a bit more of a challenge to dispose of that given that it is more of a GLWB variable annuity block? And we haven’t seen a lot of appetite for that in the market to date. So, maybe you could address those questions?

Rob Axel, Controller and Principal Accounting Officer

Yes. Yaron, it’s Rob. I’ll jump in first and then maybe Ken or Andy might want to jump in after me. But just with respect to the first part of your question, as we think about our objective of getting our annuities business to represent 10% or less of our overall earnings, I think as we indicated in our slides, a non-inconsequential component of that comes from the runoff of the existing legacy block, to the tune of about -- that legacy block runs off at about $3 billion a quarter. And so, that gets us to a range of 40% to 45% of our objective, just with respect to runoff. Why don’t I ask to defer to Ken and Andy to talk a little bit about the multiples and deployment of capital in the market?

Ken Tanji, CFO

Yes, sure. Yaron, our variable annuity business is, as we’ve said in the past, very well capitalized. It has good profitability, cash flow, and risk profile. And we don’t see the fact that it’s a GMWB book to present any unique or difficult challenges.

Yaron Kinar, Analyst

Okay. That’s helpful. And then, I guess, on the flip side of that in terms of growth into the double growth markets. I’m assuming there is this large inorganic component there, just considering the $5 billion to $10 billion that you’re looking to deploy. In those markets, I would think the valuations there may be a little bit higher. So, how do you go about determining the prioritization of capital between buybacks, inorganic growth, and organic growth in those emerging markets, asset management and the like?

Rob Axel, Controller and Principal Accounting Officer

Yaron, it’s Rob. I’ll start out with that and then I’ll turn it over to others to answer the second part of your question. Just in terms of the amount of inorganic versus organic. As you think about the businesses that are grouped together in that sort of area that we’re trying to grow to in excess of 30% or more of our earnings, those are higher growth businesses. They’re dominated by PGIM. And PGIM, as we’ve said before, is a business that is growing in the mid to high single digits on an organic basis. And so, as we think about that combined with the emerging markets and Assurance, which we think have the potential for quite high-growth rates, we think that in excess of a third of our objective can be accomplished, simply by organic growth. So, let me stop there and turn it over to others to answer the second part of your question.

Andy Sullivan, Head of U.S. Businesses

So, Yaron, it’s Andy. Maybe I’ll jump in. This is a good spot to talk about PGIM and our plans around PGIM and how to accelerate into programmatic M&A. But first, I’d reemphasize what Rob said. We’ve had great growth in that business, and we expect that great growth to continue. When we look at our M&A opportunities in PGIM, we’re looking to do, as we’ve termed programmatic, which we would frame as methodical and planful, specifically leaning into new product and investment strategy capabilities. We feel very confident that when we do that, we can gain leverage from our distribution, might and strength. Obviously, anything we do has to fit with our multi-manager model because we don’t want to be disruptive to that multi-manager model. And particular areas of interest are higher growth parts of the asset management business, so I would name alternatives as a key area as well as international.

Operator, Operator

Thank you. Our next question comes from the line of Erik Bass with Autonomous Research. Please go ahead.

Erik Bass, Analyst

How are you evaluating potential acquisitions in the growth markets that you’ve highlighted? Are you focused on near-term earnings accretion, or is the bigger priority finding scalable properties with large addressable markets that you can grow over time?

Scott Sleyster, Head of International Businesses

This is Scott. Why don’t I start with that on the emerging markets front? First of all, we expect to remain focused on Latin America, emerging Asia, and Africa, and primarily on those markets where we already have established operations and partners. And in some cases, I think that would include expansion into adjacent markets. For the most part, we’ve been looking at, if you will, expanding into the markets that we’re already in. And so, we might be adding a capability or a little bit of scale. I think, in those situations, the valuations have been relatively attractive. But going back to Charlie’s opening remarks, we’re going to be a disciplined buyer and make sure that we’re earning an attractive return over our cost of capital before we deploy any funds, over a reasonable amount of time. Thanks.

Erik Bass, Analyst

And then, maybe another one is on a similar topic, but as you consider annuity reinsurance transactions, how do you think about the challenge of replacing the lost earnings and potential for EPS dilution, if you’re selling with a relatively low multiple business to potentially buy higher multiple businesses?

Ken Tanji, CFO

We are reallocating capital, as you suggest, to achieve better growth, to lower our market sensitivity and improve our quality of earnings. And the combination, again, will deliver higher growth and less market sensitivity. And that we believe will be recognized in terms of a lower cost of capital and expanded valuation that would offset the dilution.

Operator, Operator

Thank you. Our next question comes from the line of Jimmy Bhullar with JP Morgan. Please go ahead.

Jimmy Bhullar, Analyst

First, I just had a question on the Assurance IQ results. It was a good quarter on revenues, but you generated loss. And it seems like, at least from the outside, the business has done significantly worse than would have been expected when you announced the deal. So, what are your impressions of how that transaction has gone, now that you’ve had it for about a year, a little bit over a year?

Andy Sullivan, Head of U.S. Businesses

Yes. Jimmy, it’s Andy. So, I’ll handle your question. And you’re correct, we now have four full quarters of operating the business under our belt. And we are very encouraged and glad that we have Assurance as part of our business mix, and see it as an expansion extension of our business model. Pretty early on in 2020, we made an explicit decision because we saw market opportunity to both expand and broaden the Assurance platform. And we did that from both the product and a distribution perspective. So, if you think of -- from a product perspective, we began to add additional product lines, product categories like Medicare and like Property and Casualty. On the distribution side, we determined that we would be more successful over the long-term, if we added on to the on-demand agent model. So, we now have an external BPO agent component and we’re building out a Prudential W-2 agent component. That leaning in to organically growing the business and expanding the business has led to a pretty significant increase in OpEx, as you would expect. And that’s why we’re so focused on revenues because now it’s about scaling up the platform. And we’re very confident over the long term about the growth potential, both from a revenue perspective, but also expanding margins over time. As we said in previous quarters, we don’t intend to provide or update any Assurance specific guidance other than what Rob sort of said at the top of the section about, in the near term, given our organic investment that I spoke to, we expect operating losses.

Jimmy Bhullar, Analyst

Okay. And then, just on your annuity business, sequentially, you saw an improvement in variable annuity sales. And I wanted to get an idea -- and a lot of that I think is being driven by the FlexGuard product. I just wanted to get an idea on, is that fully rolled out to your distribution, or is there sort of still ramp-up potential for sales in that product? And relatedly, should we assume that sales in 1Q and through the first half of this year would be weak, because you’re withdrawing the living benefit -- traditional living benefit products?

Andy Sullivan, Head of U.S. Businesses

So, Jimmy, it’s Andy. I’ll take the question. And let me start with FlexGuard. Yes, we’ve been very, very pleased with the success that we’ve had of the FlexGuard buffered annuity product. In essence, we rolled it out in May. And through the -- May through December, we almost crossed $2 billion in sales. We think it’s one of the most successful launches probably in the industry. And the strength there is really coming from the strength of our business, the fact that our brand is so strong, our distribution and our relationships are so strong and we came out with a very good product. To your question of around momentum, we still are rolling it out to additional third-party intermediaries. So, we have some additional work to go there. And we also have a couple of states left that haven’t rolled out. So, we’re seeing great momentum and expect that momentum to continue. To the second part of your question, given the pivot that we’re doing in that business, it was a pretty assertive and material change to see selling of our highest daily income and Prudential-defined income products. They were a big part of our sales in the past. So, that will have an impact on our overall sales and flows. And, I think, you could expect that we will see outflows from the business, due to that change.

Operator, Operator

Thank you. Our next question comes from the line of Elyse Greenspan with Wells Fargo. Please go ahead.

Elyse Greenspan, Analyst

My first question, I guess, is going back to some of the transactions you’ve been talking about on the annuity side. So, depending upon, obviously, structure, you could potentially -- and how the sales or transaction takes place, there could potentially be some hit that I imagine you could potentially take to equity. So, how do we think about the leverage within your capital plan? Can you just update us on where you would see leverage going? And, I’m assuming as you think through kind of freeing up capital that you’ve taken into account and that you could probably absorb some hits and still keep your leverage within target, so the capital freed up, like you said, be used for some of this M&A within the growth market?

Ken Tanji, CFO

Yes. Elyse, it’s Ken. As we look at these transactions, we’ll be looking at a number of key metrics in making sure we keep them all in balance. That’s whether it’s potential charges or gains to our equity, depending upon the transaction terms, what it would do to our cash flow going forward, our earnings and our risk profile. And, very importantly, we’ll be focused and disciplined on looking at fair value as we conduct these things. So, we’ve managed our leverage ratio over time within our objectives to maintain our AA credit rating, and we’ll continue to keep that a priority.

Elyse Greenspan, Analyst

So, how high could it go? How high could the debt go?

Ken Tanji, CFO

We have some room and some flexibility. I don’t want to pinpoint a number, but we will -- but we manage to make sure we keep our objectives with our credit rating.

Elyse Greenspan, Analyst

Okay. And then, my second question, on your slide deck, you guys talk about growth markets, doubling that to greater than 30%. That includes -- you do mention that your growth markets include Assurance IQ. So, I guess following up on one of the earlier questions. They’re obviously embedded in the three-year outlook. There is some assumption for the Assurance contribution to earnings, because it sounds like your margins improve as the business scales. So, if you can give us a sense as you put this plan together over this three-year period, what you’re kind of assuming Assurance does ultimately add to earnings over time?

Ken Tanji, CFO

Yes. Elyse, it’s Ken. As Andy mentioned, we are very-focused on growing this business, and that includes expanding distribution, expanding product lines, and that’s requiring that we make some investments to realize the growth potential that’s in the business that will lead to a modest loss in the near term. But as that business scales and gains efficiency, we would expect to see it gaining profitability.

Operator, Operator

Thank you. Our next question comes from the line of Ryan Krueger with KBW. Please go ahead.

Ryan Krueger, Analyst

In terms of the $5 billion to $10 billion of capital reallocation, given that your higher growth businesses are generally not -- wouldn’t be very capital consumptive, is it fair to assume that $5 billion to $10 billion would also equate to the rough amount of programmatic M&A that you’re anticipating to do?

Charlie Lowrey, CEO

Yes. Ryan, it’s Charlie. I think that’s a fair assumption. In other words, as we think about reallocating capital, we’re reallocating capital from the lower growth, less market-sensitive businesses into the opposite, right, higher growth, higher market-sensitive businesses. So, it really is a reallocation of that capital, if you will, between the businesses.

Ryan Krueger, Analyst

Got it. And then, on the Individual Annuities business, can you give us a rough sense of what percentage of those earnings are generated from the blocks that you’ve now discontinued that have living benefit guarantees?

Charlie Lowrey, CEO

Right now our current earnings are driven largely by our legacy business. We’re new in the FlexGuard space. We’re gaining great traction, and it’s going well. But the majority of our current earnings are from our legacy business.

Operator, Operator

Thank you. Our next question comes from the line of Andrew Kligerman with Credit Suisse. Please go ahead.

Andrew Kligerman, Analyst

So, another question on your M&A approach. You’ve mentioned asset management, emerging markets. I haven’t heard anything about Retirement and Group. And I’m wondering if there’s -- I think, these are growth businesses. And I’m wondering whether full-service and record-keeping and various group and voluntary businesses might be attractive M&As as well.

Charlie Lowrey, CEO

Hey Andrew, it’s Charlie. Let me start, and then I’ll turn it over to Andy and Scott to elaborate some. But I think it’s important to start with what we’re not interested in, right? So, we’re not interested in doing a mega transaction that expands over multiple businesses. What we’ve said and what we’re going to stick to is really looking at our less market sensitive, higher growth businesses, in this case, emphasizing asset management and emerging markets. And so, that’s what we’re going to do. And we’re going to do it in terms of programmatic M&A that really emphasizes a multi-manager model in PGIM and certain specific markets in emerging markets.

Andy Sullivan, Head of U.S. Businesses

Yes. Andrew, it’s Andy. I would just add, you specifically mentioned our institutional businesses. I’ll frame it that way in full-service and in Group Insurance. We’ve seen very good success in -- in particular with our financial wellness strategy at strengthening our institutional value prop in general. And that has led to good growth in both of those businesses. So, I would say, our focus in those businesses is to lean into that organic growth and to continue to see net revenue growth that flows from the investment in financial wellness.

Operator, Operator

Thank you. Our next question comes from the line of Josh Shanker with Bank of America Securities. Please go ahead.

Josh Shanker, Analyst

If we go back to the Investor Day that we keep bringing up, I guess, the big difference is the parting ways of the annuities or at least certainly the high capital consumptive annuities. If I want to, like -- are there other strategic changes that really come out? Just put numbers to things that were already in motion, or are there other strategic changes embedded in those numbers that we really should focus on?

Charlie Lowrey, CEO

So, I’ll take a first stab at that, and then Rob, maybe you want to join in. But I think when you look at our strategy, we still have the wellness strategy. That still exists. It’s still a very much part of what was our Investor Day presentation back then and continues to be there. What we’ve done with a much lower interest rate environment and with a strategic review is, again, say, where we want to reallocate capital. And that’s new, and that’s what we’ve come out with this quarter, in terms of thinking where we want to be in three years with the higher growth businesses. So, if I were to articulate a difference, it would be there.

Rob Axel, Controller and Principal Accounting Officer

Yes, Josh, so thank you for the question. Just to elaborate a little bit on what Charlie’s saying. I think, Josh, if you think about what we said in Investor Day, all of that is largely intact, as we described it around our organic growth opportunities. We have said that it’s -- that our near-term aspirations around some of that are -- we’re facing headwinds with regard to a much lower interest rate environment than we were in at the point in time in which we articulated that. But, I think it’s not just the pivot away from annuities, but as Charlie said, it’s also as contrasted to what we described at Investor Day, the reallocation of the active reallocation of capital more broadly into those growth businesses.

Operator, Operator

Thank you. Now, we will turn it back to Charlie Lowrey for closing comments.

Charlie Lowrey, CEO

Okay. Thank you very much. In closing today, I’d just like to reinforce our commitment to creating a new and more nimble Prudential, one that remains deeply focused on its customers, that will have a higher growth potential and will be less market-sensitive in the future. We’re excited and we’re optimistic about this next phase of our transformation. And we look forward to keeping you updated on our progress. So, thanks again for joining us today.

Operator, Operator

Thank you, ladies and gentlemen. That does conclude our conference for today. We thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.