Earnings Call Transcript - PRU Q4 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to Prudential's Quarterly Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's call is being recorded. I will now turn the call over to Mr. Bob McLaughlin. Please go ahead.

Bob McLaughlin, Senior Vice President

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 a discussion of factors that could result in differing materially from those in the forward-looking statements, please see the slides titled Forward-Looking Statements and Non-GAAP Measures in the appendix to today's presentation and the quarterly financial supplement, both of which can be found on our website at investor.prudential.com. And now, I'll turn it over to Charlie.

Charles Lowrey, CEO

Thank you, Bob, and thanks to everyone for joining us this morning. Prudential delivered strong financial results for the fourth quarter and the full year, reflecting favorable investment performance and continued high demand for the products we introduced during the pandemic to address our customers' evolving needs. 2021 was also a pivotal year for Prudential and our efforts to become a higher-growth, less market-sensitive and more nimble company. First, we are repositioning our business mix to generate sustainable long-term growth with reduced market sensitivity. Second, we continue to advance our cost savings program. And third, we maintained our disciplined and thoughtful approach to deploying capital. I'll provide an update on each of these areas before turning it over to Rob and Ken. Moving to Slide 3. We are making significant progress repositioning our business for sustainable long-term growth with reduced market sensitivity through a mix of divestitures and strategic programmatic acquisitions. Following the successful completion of the sales of our Korea and Taiwan insurance businesses, which produced $1.8 billion in proceeds, we reached agreements to divest our full-service business and a portion of our traditional variable annuities. We are on track to close both of these transactions in the first half of 2022 and generate additional proceeds of over $4 billion. We are redeploying capital in part through highly targeted acquisitions and investments in asset management and emerging markets. Last year, PGIM acquired Montana Capital Partners, a European-based private equity secondaries asset manager; and Green Harvest, a separately managed account platform that provides customized solutions for high net worth investors. Meanwhile, on the emerging markets front, we closed on an investment in ICEA LION Holdings, a highly respected financial services market leader in Kenya with operations in Tanzania and Uganda. Turning to Slide 4. We continue to advance our cost savings program and are on track to achieve $750 million in savings by the end of 2023. To date, we have already achieved $635 million in run rate cost savings, exceeding our $500 million target for 2021. We have also taken steps to improve experiences around the world for our customers and employees through innovation. This includes using automation, artificial intelligence and other technology to expedite underwriting, reduce and simplify processes, provide faster, more convenient service options, and deliver meaningful financial advice in the ways our customers want it. I'll touch more upon how we're using the technology in a moment. Turning to Slide 5. We have maintained a disciplined and balanced approach to deploying capital by enhancing returns to shareholders, reducing financial leverage and by investing in the growth of our businesses. We currently plan to return a total of $11 billion of capital to shareholders between 2021 and the end of 2023. This includes $4.3 billion returned during 2021 through share repurchases and dividends. As part of this plan, the Board has authorized $1.5 billion of share repurchases and a 4% increase in our quarterly dividend beginning in the first quarter. This represents our 14th consecutive annual dividend increase. We also reduced debt by $1.3 billion in 2021. In addition to the acquisitions I previously mentioned, we’ve also made investments in our businesses to drive long-term growth and to meet the evolving needs of our customers. In PGIM, for example, we have significantly strengthened our suite of environmental, social and governance bond funds to better serve sustainability-focused investors. Meanwhile, in our insurance businesses, we continue to develop products that are less market-sensitive and have higher-growth potential, such as our FlexGuard and Variable life products, with a focus on improved customer experience and driving greater operational efficiency. One example, as I mentioned earlier, is our use of artificial intelligence. We use AI to quickly and accurately assess risk in our life insurance businesses and to expedite the application and underwriting process. The application of innovative technology generated significant efficiencies for our global businesses during 2021, while delivering a dramatically better experience for our customers. We will continue to expand the use of AI and other emerging technologies across the firm. Our capital deployment strategy is supported by a rock-solid balance sheet, which includes $3.6 billion in highly liquid assets at the end of the fourth quarter and a capital position that continues to support our AA financial strength rating. Turning to Slide 6. Our ongoing efforts to transform the company in 2021 go hand-in-hand with Prudential's long-standing commitment to sustainability. This commitment is reflected in several significant enhancements to our environmental, social and governance framework last year. We committed to achieve net zero emissions by 2050 across our primary global home office operations, with an interim goal of becoming carbon-neutral in these facilities by 2040. We are also reviewing our general account investment holdings and have restricted new direct investments in companies that derive 25% or more of their revenues from thermal coal. On the social front, the Prudential Foundation surpassed $1 billion in grants to partners primarily focused on eliminating barriers to financial and social mobility around the world. This achievement follows another milestone that we reached in 2020 when our impact investment portfolio exceeded $1 billion. We also continue to advance our nine commitments to racial equity through investments in funding for organizations committed to diversity, equity and inclusion, and through internal measures, including diversity training and our commitment to equitable compensation for our employees. Our governance actions reflected a shared commitment to diversity and inclusion, beginning at the top with over 80% of our independent Board Directors being diverse. It also includes the steps we are taking to improve diverse representation throughout Prudential and to provide greater transparency around the composition of our U.S. workforce. In 2021, we enhanced our diversity disclosures by publishing EEO-1 data and the results of our pay equity analysis for our U.S. employees. We also expanded our policy of tying compensation plans for senior executives to the achievement of workforce diversity goals. As I noted earlier, we believe our sustainability commitments and transformation to become a higher growth, less market-sensitive and more nimble business are closely connected. Together, they help us fulfill our purpose of making lives better by solving the financial challenges of our changing world by expanding access to investing insurance and retirement security for customers and clients around the globe. Before turning it over to Rob, I'd like to thank all of our employees for their unwavering dedication to the customers and communities we serve, particularly in light of the continued challenges created by the pandemic. I am proud of the progress we made and the momentum we built in 2021 and look forward to making an even more meaningful difference in the lives of all our stakeholders in 2022 and beyond. Thank you for your time this morning. And with that, I'll turn it over to Rob.

Robert Falzon, Vice Chairman

Thanks, 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 7 with our financial results. For 2021, pre-tax adjusted operating income was $7.3 billion or $14.58 a share on an after-tax basis. Results for the year included a benefit from the outperformance of variable investment income that exceeded target returns by about $1.6 billion, reflecting market performance, strategy and manager selection. In the fourth quarter, pre-tax adjusted operating income was $1.6 billion or $3.18 a share on an after-tax basis, while GAAP net income was $3.13 per share. Of note, our GAAP net income includes realized investment gains and favorable market experience updates that were offset by a goodwill impairment that resulted in a charge of $837 million net of tax. This charge reflects two main drivers of a reduction in the estimated fair value of Assurance. First, we acquired capabilities to increase access to more customers, and we have experienced good revenue growth. However, this growth has been slower than expected and we are now assuming it will take longer to monetize into earnings and cash flow. And second, we have seen a significant decline in publicly traded peer valuations, which is a key input in our assessment of fair value. Turning to the operating results of our businesses. PGIM, our global asset manager, had record asset management fees driven by record account values of over $1.5 trillion. Relative to the year-ago quarter, earnings reflected the elevated level of other related revenues last year as well as higher expenses supporting business growth in the current period. Results of our U.S. businesses increased 13% from the year-ago quarter and reflected higher net investment spread, including a greater benefit from variable investment income, higher fee income, primarily driven by equity market appreciation, partially offset by higher expenses driven by a legal reserve and less favorable underwriting experience due to COVID-19-related mortality. Earnings in our International businesses increased 5%, reflecting continued business growth, lower expenses and higher net investment spread. 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 investment manager. PGIM's investment performance remains attractive with more than 95% of assets under management outperforming their benchmarks over the last 3-, 5- and 10-year periods. This performance has contributed to third-party net flows of $11 billion for the year, with positive flows across U.S. and non-U.S.-based clients in both public and private strategies. As the investment engine of Prudential, success and growth of PGIM and of our U.S. and International insurance businesses are mutually enhancing. PGIM's asset origination capabilities, investment management expertise and access to institutional and other sources of private capital provide a competitive advantage by helping our businesses to bring enhanced solutions, innovation and more value to our customers. And our businesses, in turn, provide a source of growth for PGIM through affiliated flows and unique access to insurance liabilities that complement its successful third-party track record of growth. PGIM's sixth consecutive quarter of record asset management fees reflect strong business fundamentals and record assets under management. We continue to expand our global equity franchise to grow our alternatives and private credit business, which has assets in excess of $240 billion across private credit and real estate equity and debt and benefits from our global scale and market-leading positions. Notably, PGIM's private businesses deployed nearly $50 billion of gross capital, up 33% from last year. Now turning to Slide 9. Our U.S. Businesses produced diversified earnings from fees, net investment spread and underwriting income and also benefit from our complementary mix of longevity and mortality businesses. We continue to shift our business mix towards higher growth and less interest rate-sensitive products and businesses to transform our capabilities and cost structure and to expand our addressable markets. Our product pivots have worked well, demonstrated by continued strong sales of our buffered annuities, which were nearly $6 billion for the year, representing 87% of total individual annuity sales. 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 benefit from having a strong and trusted brand and a highly effective distribution team. Our Individual Life sales also reflect our earlier product pivot strategy with Variable products representing 71% of sales for the year. Our Retirement business has market-leading capabilities, which drove robust international reinsurance and funded pension risk transfer sales, including a $5 billion transaction, which was the fourth largest in the history of the market during 2021. And reflected strong persistency and revenue growth in 2021 across all segments. With respect to Assurance, our digitally enabled distribution platform, total revenues for the year were up 43% from last year. Turning to Slide 10. Our International Businesses encompass our Japanese life insurance companies, which utilize a distinct multichannel distribution model, along with other ventures in high-growth emerging markets. We are optimistic about the resilience of our unique distribution capabilities, which have upheld the stability of our sales and our ongoing business despite the pandemic. In Japan, our focus is on delivering high-quality service, expanding our world-class sales force, and broadening our geographic reach and product range. Our needs-based approach and emphasis on mortality protection continue to offer significant value to our customers as we broaden our offerings to fulfill their changing requirements. In emerging markets, we aim to curate a carefully chosen portfolio of businesses and regions where customer needs are increasing, where there are promising opportunities to establish market-leading businesses and partnerships, and where Prudential can contribute value. As we move forward, we are well positioned across our operations to be a global leader in enhancing access to investment, insurance, and retirement security. We intend to keep investing in growth-oriented businesses and markets to provide industry-leading customer experiences and develop the next generation of financial solutions to better address the varied needs of a wide range of customers. Now, I will pass it on to Ken.

Kenneth Tanji, CFO

Thanks, Rob. I'll begin on Slide 11, which provides insight into earnings for the first quarter of 2022 relative to our fourth quarter results. Pre-tax adjusted operating income in the fourth quarter was $1.6 billion and resulted in earnings per share of $3.18 on an after-tax basis. To get a sense for how all our first quarter results might develop, we suggest adjustments for the following items: first, variable investment income outperformed expectations in the fourth quarter by $440 million. Next, we adjust underwriting experience by a net $90 million. This adjustment includes a placeholder for COVID-19's claims experience in the first quarter of $195 million, assuming 75,000 COVID-19-related fatalities in the U.S. While we have provided this placeholder for COVID-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 effectiveness of vaccines. Third, we expect seasonal expenses and other items will be lower in the first quarter by $105 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 first quarter effective tax rate to normalize. These items combined get us to a baseline of $2.73 per share for the first quarter. I'll note that if you exclude items specific to the first quarter, earnings per share would be $3.17. The key takeaway is that the underlying earnings power per share continues to improve and has increased 9% over the last year, driven by business growth, the benefits of our cost savings program, capital management and market appreciation. While we have provided these items to consider, please note there may be other factors that affect earnings per share in the first quarter. As we look forward, we have also included seasonal and other considerations for 2022 in the appendix. 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 we have substantial sources of funding. Our cash and liquid assets were $3.6 billion and within our $3 billion to $5 billion liquidity target range 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 our plans to reposition our businesses and we are on track to achieve our targeted cost savings. And with the support of our rock-solid balance sheet, we are thoughtfully deploying 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 Ryan Krueger from KBW. Your line is now live.

Ryan Krueger, Analyst

Hi, good morning. The recent acquisitions that you've talked about have not utilized a material amount of capital. I guess, given the amount of capital that you are freeing up from the full-service retirement and variable annuity block sales, would you consider deals that were a bit larger in size if they're available and they need the opportunities you're looking for?

Charles Lowrey, CEO

Hey, Ryan, this is Charlie. I'll answer that question. And let me offer a couple of comments. First, one of the major tenets of our strategy is to be prudent stewards of capital. And we're doing that by balancing three factors. One is investment in our existing businesses to achieve business growth, the second is programmatic M&A, and the third is returning capital to shareholders. But with regards specifically to your question in terms of acquisitions, what we can say is they're going to be consistent with our stated strategy of growing PGIM and emerging markets, by which we can expand and extend our capabilities or our distribution or increase the scale of our existing businesses. And to your point, we'll be looking at a variety of opportunities in different sizes. But what we can also say is that regardless of size, we will evaluate the strategic and financial merits of each transaction with the obvious observation that the larger the transaction, the more financially compelling that transaction needs to be. And as we've said, we will have a programmatic approach, right, as demonstrated by the three acquisitions we did last year and as we've actually done for a couple of decades in both areas where you've seen us make numerous acquisitions in both emerging markets and asset management at various scales.

Ryan Krueger, Analyst

Thanks. And then from a divestiture standpoint, are you still looking to do more, whether it be in U.S. Individual Life or more in Variable Annuity?

Charles Lowrey, CEO

Yes, Ryan, it's Charlie again. I'll address that. First and foremost, we are focused on finalizing the existing transaction you mentioned. As an update, we are on schedule to complete both transactions in the first half of 2022. We continue to identify opportunities within our businesses and existing assets to optimize capital and lessen market sensitivity while enhancing the consistency and predictability of our financial outcomes, all aimed at creating additional value for our shareholders. However, as we have indicated before, we will remain cautious as we work towards becoming a more agile, less market-sensitive, and higher-growth company. We will keep searching for opportunities as they present themselves and act accordingly.

Andrew Sullivan, Head of U.S. Businesses

Ryan, it's Andy. Let me just add in. We’re making great progress on derisking in our annuities business. And as we've talked about before, that's a two-step process to derisk the legacy. Step one is all about runoff, and we are very much on track. We're seeing the expected runoff. We saw a $3.8 billion in runoff in the quarter. And we saw over $18 billion in runoff in the year. So runoff is a significant contributor to derisking. As Charlie said, step two was about doing the derisking transaction. And obviously, we're very pleased with the PALAC sale and that represents about 20% of our legacy account values. So as Charlie said, we're going to continue to explore how to further derisk the remaining legacy, but we are very focused right now on closing the Fortitude Re deal in a high-quality manner.

Ryan Krueger, Analyst

Thank you.

Operator, Operator

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

Elyse Greenspan, Analyst

Hi, thanks. Good morning. My first question is on the write-down that you guys took within Assurance IQ. Can you just give us a sense of the contributions? You mentioned lower earnings and cash flows as well as public peer valuations. Can you give us a sense of the contributions of each when you came up with the goodwill write-down that you took in the quarter?

Kenneth Tanji, CFO

Yes, it's Ken. It is a good combination of both. Each quarter, we assess the conditions and the fair value of the business, which we've been doing since acquisition. We incorporated the recent experience from the Medicare annual enrollment and looked at the updated values for multiples of our peers. This analysis included both our updates based on recent experience and the latest market multiples for peers.

Elyse Greenspan, Analyst

Okay. Thanks. And then maybe a follow-up on the capital side. So you guys mentioned that the PALAC and full-service retirement transactions are on track for a half-year one close. At some point, if M&A transactions either don't materialize or don't materialize to a higher magnitude, would you guys consider raising the repurchase authorization for 2022 above the $1.5 billion?

Charles Lowrey, CEO

So Elyse, this is Charlie. I think what we've said and what we'll continue to say is, again, we're going to be prudent stewards of capital. And to the extent that we can't find opportunities to execute on our strategy, we'll consider returning capital. And if you saw what we did last year, we actually increased the share buybacks by $1 billion in two $500 million segments. We've done it in the past, and we will continue to be prudent stewards of capital as we go forward and consider all our opportunities.

Elyse Greenspan, Analyst

Okay. Thank you.

Operator, Operator

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

Erik Bass, Analyst

Hi, thank you. Can you talk about flow trends at PGIM in the new business pipeline heading into 2022? And are you seeing much shift in demand for fixed income given the rise in interest rates?

Andrew Sullivan, Head of U.S. Businesses

Hi, Eric, it's Andy. I'll take your question. As we've discussed in the past, obviously, PGIM flows will vary quarter-to-quarter. And in the fourth quarter, we experienced overall flat flows. As you saw, our retail outflows were $3.6 billion. Market volatility really led to client rotation out of our sub-advised equities and out of our core and core plus fixed income into shorter duration strategies. That was counteracted by very strong inflows on the institutional side and in particular, in fixed income, as many pension plans allocations rotate in this type of an environment. I would say it's important to note, if you look at our fixed income business overall across both institutional and retail, overall, we had positive flows in the quarter despite facing the rising rate environment. That is a real testament to the diversification of our distribution and of our portfolio. As we've always said, we think it's very important to look at the long-term track record when it comes to flows. We have done $60 billion in flows over the last five years and we did $11 billion in 2021. Specific to your question around the retail side and what we are seeing from a fixed income perspective, we have seen $27 billion in retail flows over the last five years and our retail assets under management have doubled in that timeframe, really driven by the positive flows that we see, the alpha performance that we've seen and end markets. So we've been very successful there. Flows are an outcome of having outstanding capabilities, exceptional investment performance and great distribution, and we feel very strongly we have all of those and we'll be a net winner over time, and we've proven our ability to succeed across all different market conditions.

Erik Bass, Analyst

Thank you. And then can you provide some more color on your group results this quarter, both for Group Life and Disability?

Andrew Sullivan, Head of U.S. Businesses

Sure, Eric, it's Andy. I'll continue with a breakdown of Group Life and Group Disability. Starting with Group Life, we have seen significant impacts from Delta and Omicron across the country. U.S. deaths in Q4 rose to 126,000, compared to 94,000 in Q3. As one of the top three life carriers, we manage a diverse book of business. There are two notable effects on the Life side. First, we have a high concentration of large retail and healthcare employer accounts that employ many frontline workers who are frequently exposed and are mostly in areas with low vaccination rates. Second, although we have observed a slight shift toward older ages this quarter, we continue to see a significant rise in incidence rates among individuals under 55, who typically hold larger policies. Moving to the Disability side, while the main impact this quarter was felt in Life, we are also experiencing effects in Disability. This aligns with our expectations and preparations for the Disability business. Our benefit ratio stands at 87.3, which is 320 basis points better than last year. There are two primary influences here. On the short-term disability (STD) side, we are experiencing higher volumes due to the impacts of Omicron and the related isolation requirements, which drive up STD absences; however, this is a fee-based business and the costs are reflected in the administrative ratio. We have increased our staffing to ensure we are available for our customers. On the long-term disability (LTD) side, we are seeing approximately a 10% increase in both incidence and severity, which aligns with our expectations and preparations for claims management. We are committed to fulfilling our promises to our customers, and as the pandemic shifts to an endemic phase, we anticipate our benefit ratios will return to normal levels.

Operator, Operator

Your next question is coming from Andrew Kligerman from Credit Suisse.

Andrew Kligerman, Analyst

I want to shift back to mergers and acquisitions. Over the last two decades, Prudential has executed many successful M&As. However, the write-down related to Assurance IQ casts a bit of a shadow on that success. Charlie, you’ve mentioned the importance of programmatic M&A and being cautious. I would like to understand how the Assurance IQ acquisition affects your view on future acquisitions, especially regarding accretion and dilution.

Charles Lowrey, CEO

Sure, it's Charlie. Let me explain why we pursued the Assurance transaction and its role within our business. Assurance is a young and innovative company that aligns with our purpose and strategy. It helps us expand our reach and improves access for more customers, particularly those underserved by our industry, aligning with our mission. Additionally, it operates on a digital platform where we sought to increase our investments and enter a new space. Strategically, this acquisition helps us lessen market sensitivity by boosting our fee-based earnings, which aligns with our goal of becoming a more agile, less market-sensitive, and higher-growth company. Looking ahead, as I mentioned earlier, our future acquisitions will focus on PGIM and emerging markets, targeting more mature businesses to enhance our capabilities, distribution, and scale. This is our expertise, having successfully managed numerous acquisitions in both emerging markets and asset management, so we are confident in the strategic value of the Assurance deal and its impact on our company.

Andrew Kligerman, Analyst

And any comment on accretion dilution you might add to that?

Charles Lowrey, CEO

Let me discuss the metrics we consider for a moment. When we evaluate acquisitions, we approach them from both strategic and financial angles. Strategically, we aim to enhance our capabilities, such as product offerings or distribution, or to increase our scale in a specific market or country. From a financial perspective, we assess a range of metrics when evaluating potential acquisitions, including earnings contribution and growth. Naturally, for larger transactions, the financial benefits need to be more compelling. However, our primary focus is on becoming a higher growth, less margin-sensitive, and more agile business. We will remain very intentional and disciplined in our approach, with the aim of creating value for all our stakeholders.

Andrew Kligerman, Analyst

Okay. I understand. Just quickly regarding the expenses, it's impressive that you're aiming for $750 million in savings by 2023. I see you've already achieved 635 million according to the slides, which is an increase from the initial 500 million. Do you believe there is potential for even more savings beyond that?

Kenneth Tanji, CFO

Andrew, it's Ken. We've made excellent progress, both in terms of not just gaining efficiencies and lowering costs, but also building capabilities. And as we have done that on an accelerated basis relative to our initial targets, we remain certainly focused, again, both on building capabilities, but also gaining efficiency to drive growth going forward. We're very much on track to achieve $750 million by 2023. And at this point, we've really institutionalized both capabilities but also a mindset across the company of continuous improvement. And we're getting good payback on our initiative costs. So we expect to maintain a budget for that and also maintain this discipline going forward. Right now, we're focused on achieving that $750 million by 2023, and that's our main objective.

Operator, Operator

Our next question today is coming from Tom Gallagher from Evercore.

Thomas Gallagher, Analyst

Just a question on sort of sources and uses of capital. How should we think about the $4.5 billion of proceeds plus coming from the deals? How much of that do you think is free and clear for you to use? How much do you think you might need to use to bolster capital levels, if any of it is? I ask only because just looking at the HoldCo levels, I guess you're getting closer to the low end of the target now. I'm wondering if you want to bolster that back up to the top end. And also maybe any comments you have at any subsidiary levels that you'd like to strengthen capital, if at all, or you find across the board there? And any debt reduction?

Kenneth Tanji, CFO

Yes. Tom, it's Ken. You should think of that $4 billion of or more proceeds coming in from our two transactions as free and clear and readily deployable. It will quickly move to the holding company upon the close of the transaction. And just in general, we've had a very consistent approach to capital management. Our businesses are generating free cash flow. And also last year, we reduced debt. So that we thought it was a good time to reduce debt. And so we certainly have debt capacity as well. And now we also have the $4 billion of proceeds coming in. So we feel really good about our capital position and our liquidity and our flexibility and including being well positioned to meet our objective of returning $11 billion to shareholders over the three-year period 2021 to 2023.

Thomas Gallagher, Analyst

Got you. Thanks, Ken. And then my follow-up is just I was looking at your supplement and saw that you had operating debt of $5.6 billion that was issued out of the holding company. Now I guess I've always typically thought about operating debt getting issued out of the operating subs, not out of the holding company because it's kind of a higher-rated entity. But can you talk a little bit about what is that exactly, the operating debt that's issued out of the holding company?

Kenneth Tanji, CFO

Yes. So we consider operating debt to be funding that funds sort of a specific asset or structure that where the cash flows from that asset or structure will pay off the debt. And some examples would be within our PGIM business. We do co and seed investments that are funded both with capital to support the risk of those investments, but also operating debt. And we find that efficient to do that from the holding company. Our PGIM business also has an agency mortgage business, where we fund loans from time to time, again, where those loans would support that operating debt. So those are two examples. But again, it's where specific assets or structures will support that debt.

Operator, Operator

Next question is coming from John Barnidge from Piper Sandler.

John Barnidge, Analyst

My first question, is there any way to bifurcate VII between marks and realized gains?

Kenneth Tanji, CFO

Yes. We do look at that and you should think of it as variable investment income is both balanced between cash coming from distributions as well as appreciation in the mark-to-market. Usually, it's pretty balanced. Last year, a little bit more appreciation than cash just given the move in the market.

John Barnidge, Analyst

Great. And my follow-up, given the focus on large and jumbo within group, how much of the contracts there have seen pricing increases since COVID emerged?

Andrew Sullivan, Head of U.S. Businesses

So John, it's Andy. I don't have the exact percentage at my fingertips, but I'll make some high-level commentary. So as I think you're very aware, those contracts renew anywhere from every two years to say, every five years, and it's very much based on the size of the business with the smaller cases renewing more frequently every two years and large national accounts renewing approximately every five years. 80% of our group insurance block of business is national accounts. So our renewal cycle, they would tend to be more towards the longer end of that spectrum. From a pricing perspective, now that we're entering the third year of the pandemic and it's probable at least that this will go from pandemic to endemic, we very much felt that we needed to take our COVID experience from the last 24 months and to put it into our new business and renewal business pricing. And we have done that on both the Life and Disability side. So that business will reprice over the next few years.

Operator, Operator

Our next question is coming from Tracy Benguigui from Barclays.

Tracy Benguigui, Analyst

I wanted to circle back to your comment about completing a $5 billion PRT deal, the fourth largest in market history. So I recall, Andy, in a group meeting, you mentioned that more competitors have entered the space something like 15 to 20, and probably 6 or 7 of those are consistently trying to do these over $1 billion transaction. So I'm just wondering if pricing is getting too frothy for these mega deals and have your view of IRR change due to competition?

Andrew Sullivan, Head of U.S. Businesses

Yes, thank you for your question. In the fourth quarter, we completed two transactions totaling $210 million. This followed a very successful transaction in the third quarter, which was the largest of the year, and we were among the top writers. I want to highlight two points. First, the market outlook remains very strong, with funding levels at their highest in a decade and a funded status of 98% at the end of November. Therefore, we believe the market will continue to be robust. As a leader in the industry, despite increased competition, we are maintaining a disciplined approach to underwriting and pricing, allowing us to choose our opportunities wisely. Given the size of the market, we expect to earn our fair share and continue growing this business due to our brand and capabilities.

Tracy Benguigui, Analyst

That's very helpful. And here's like, I guess, a bigger picture question on wage inflation. I guess, on one hand, that could maybe boost sales. But on the other hand, there are these talent shortages. So I'm wondering how that may also impact expenses, if you could provide some color?

Robert Falzon, Vice Chairman

Tracy, it's Rob. I'll start off by addressing that. Andy, feel free to chime in. To begin, I want to emphasize that the most significant effect of inflation will be on rates. If inflation results in higher rates, that would be beneficial for the industry, including us. Regarding your question about operating costs, I want to note that our ongoing efficiency initiatives will help lessen any impact from increases. Additionally, we are confident in our pricing power in our major products and markets, so if there is any residual impact, we can adjust our pricing accordingly. While inflation is a macro factor we are closely monitoring for the upcoming year, there are other macroeconomic factors at play beyond inflation. We believe there will be positive drivers that create tailwinds for our businesses, such as higher rates and an improving outlook for COVID. Andy, do you have anything further to add on a business level?

Andrew Sullivan, Head of U.S. Businesses

Maybe the only thing I would add is, Tracy, both our U.S. Insurance and Retirement businesses and our PGIM business, we're big, we're broad, we're well diversified. And there are plenty of spots in our business system where this environment is very good. And I just mentioned, we are one of the largest real estate investors in the world, # 3 by assets under management. And obviously, an inflationary environment could be very helpful for that business.

Operator, Operator

Our next question is coming from Humphrey Lee from Dowling and Partners.

Humphrey Lee, Analyst

I just have a question related to Group Disability. In the slide deck, you talked about you looking to diversify your group insurance portfolio and looking to expand into group disability and voluntary product. Can you just talk about how you are planning to do that, especially with some of the industry disability results recently seeing some pressure? How do you balance growing market share at the same time achieving adequate pricing?

Andrew Sullivan, Head of U.S. Businesses

Sure, Humphrey. It's Andy. Let me start by discussing our strategic perspective. As we mentioned, we aim to expand our addressable market and offer more solutions to a wider audience. We believe that the workplace is an excellent area for growth due to the reach and access it provides. Over the last five years, we have consistently executed a strategy in our group business, focusing on growth in specific areas such as the middle market, our disability block, and our voluntary capabilities to further diversify the business. This approach is logical since many clients in the group space tend to bundle their services. As I previously noted, the majority of our Group Insurance business comes from large national accounts, predominantly in life insurance, so we see significant growth potential. We plan to maintain our value proposition, having invested significantly to enhance our overall offering, including financial wellness and core capabilities in both Life and Disability. In response to your question about navigating the current environment, discipline is crucial. It's essential to be disciplined in pricing and underwriting, particularly on the Disability side, where it's important to maintain strong expertise and staffing to effectively manage the business despite rising incidence and severity.

Humphrey Lee, Analyst

So my follow-up to that is in kind of your strategic review, you talked about M&A area would be asset management and emerging markets. But given your interest now in expanding disability and voluntary benefits in the work site, is now group insurance be in other areas of potential M&A? Or are you still sticking to kind of asset management in emerging markets?

Charles Lowrey, CEO

So Humphrey, this is Charlie. For now, our concentration is going to be on asset management and emerging markets. Those are two areas where we believe we can benefit significantly from the increase in capabilities and scale in the markets where we already operate. Therefore, that will be our focus in the near to medium term.

Operator, Operator

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

Suneet Kamath, Analyst

Charlie, a year ago, we talked about wanting to increase the earnings contribution from growth businesses from, I think the math was 18% to over 30%. And I'm just wondering, is that still on the table because it would seem that, that might be difficult without M&A, but I was just wanting to get your thoughts on whether you can get there organically.

Charles Lowrey, CEO

Sure. That remains our goal in 2 to 3 years. As you mentioned, we'll achieve this through a combination of several strategies. One of these is organic growth, where we will continue to invest in our businesses. Another aspect is our focus on growth. The third strategy involves divesting lower growth or market-sensitive businesses. You've already seen us begin to implement this with the two transactions set to close this year. All of this will be done while ensuring we are prudent stewards of capital, continuing to invest in our business, pursuing programmatic mergers and acquisitions, and returning capital to shareholders. So, to answer your question, yes, that goal still stands, and we will pursue it through a mix of factors.

Suneet Kamath, Analyst

And is it fair to say that the M&A piece might need to be the biggest of the three? Or do you think it's sort of evenly distributed across the three?

Charles Lowrey, CEO

It's hard to say what the percentages will be. It will depend on the opportunities we see, both organically and inorganically, and the dispositions that we make. So it's sort of a multivariable equation, if you will, but we're looking to balance that equation and do it thoughtfully and prudently.

Suneet Kamath, Analyst

Got it. That makes sense. I wanted to ask about international sales, specifically in Japan and Gibraltar. It seems like sales have been relatively flat. Is this due to the impacts of COVID and the lack of face-to-face interactions, or do you need to enhance the product offerings in both Gibraltar and the Life Planner model?

Scott Sleyster, Head of International Businesses

Suneet, this is Scott. Let me give a little more context on why the sales are down, and then I can talk about what we're doing. First of all, our bank channel is subject to a higher level of variability and given when there are shifts in the competitive market. And given both COVID-related headwinds, but also higher U.S. dollar interest rates, the regional banks have shifted to easier to sell investment products. As you know, we maintain a strong pricing discipline on deposit products, and we've always concentrated our efforts on selling recurring premium death protection products in that channel. There was a second factor during the fourth quarter, where we're making some product shelf adjustments in our Life Consultant channel, and we're in the process of updating our U.S. dollar annuity offerings and we expect the majority of the new products to be in place by the end of the first quarter. So I think that explains why we were down. The actions that we're taking, in the bank channel, look, we intend to maintain our discipline, but we do think the market will evolve over time, especially as COVID restrictions are relaxed. Additionally, in Japan, we continue to go front and center with our death protection products. But increasingly, we've been adding to our product line with more retirement, wealth transfer and health products. And we believe, given those product line increases, coupled with really high-quality distribution there in Life Planners and Life Consultants, we'll be able to counteract this. We're actually pretty optimistic about going forward there.

Operator, Operator

Next question is coming from Alex Scott from Goldman Sachs.

Alexander Scott, Analyst

Yes, I guess for my first one, I just had a follow-up on International. When I think through sales and persistency, it seems for at least the near term, I think premium growth will kind of continue to be the same or if not a little lower than you've had. And when I look at earnings over the last few years, it seems like G&A expenses declining has allowed for you guys to defend earnings in a pretty strong way. And I just wanted to probe there a little bit and understand what have you been doing to take expenses out? And is that something you can continue to do to help earnings in international?

Scott Sleyster, Head of International Businesses

Yes. There's a couple of different comments I'll give there. First of all, just like the U.S. transformation, the International Business, Japan and others have been looking for ways to be more efficient and to use automation and other activities to control costs. Also, in some of our emerging markets, we're experiencing faster growth. So we're starting to see some scale benefits. And then finally, we've done a good job of cost control at the corporate center level. That being said, I think our opportunities to grow earnings internationally are much more driven by the revenue actions that I alluded to in the product actions and the distribution force actions that are taking place in both LP and LC. So we're always going to be disciplined on the expense front, but I think it's more of the product and the emerging market growth areas that we think will be more important going forward. Lastly, I would say, of course, COVID has made it more challenging to recruit Life Planners and Life Consultants. And we do expect that to ease as the pandemic eases or turns into an endemic.

Operator, Operator

Next question is coming from Mike Zaremski from Wolfe Research.

Michael Zaremski, Analyst

Okay, great. I have one question and a follow-up regarding the pension marketplace comments. You noted that funding levels are at their highest since the great financial crisis, but still not over 100. I'm curious if there's a specific number that would influence sales positively, for instance, if funding levels reached around 103 or 105 after a strong market in 2022.

Andrew Sullivan, Head of U.S. Businesses

Mike, it's Andy. I'll take your question. And the answer is, we don't believe so. At 98%, plan sponsors are very willing to lean in and to transact. I think plan sponsors, when they're in this range and they see the volatility in the marketplace, it really drives the desire to transact and to derisk their pension plans. So there's no magic number. Having said that, we think at these levels, we're going to continue to see robust markets.

Operator, Operator

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

Charles Lowrey, CEO

Thank you, and thank you for joining us today. 2021 was a year of transformation for Prudential in which we reached a record high level of after-tax operating earnings, distributed a record amount back to shareholders and made real progress towards becoming a more nimble, less market-sensitive and higher-growth company. As we look ahead to 2022 and beyond, we are focused on creating and driving growth and becoming a global leader in expanding access to investing insurance and retirement security. We are both excited about and confident in our strategy and our ability to create value for all our stakeholders by building even further upon our progress. We look forward to sharing more with you along the way, and thank you again for joining us today.

Operator, Operator

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