保德信金融集團 (PRU) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2014 earnings teleconference.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mark Finkelstein. Please go ahead.

Thank you, Cynthia. Good morning, and thank you for joining our call.

Representing Prudential on today's call are John Strangfeld, CEO; Mark Grier, Vice Chairman; Charlie Lowrey, Head of International Businesses; Steve Pelletier, Head of Domestic Businesses; Rob Falzon, Chief Financial Officer; and Rob Axel, Controller and Principal Accounting Officer. We will start with prepared comments by John, Mark and Rob, and then we will answer your questions.

In order to help you understand Prudential Financial, we will make some forward-looking statements in the following presentation. It is possible that actual results may differ materially from the predictions we make today. Additional information regarding factors that could cause such a difference appears in the section titled forward-looking statements and non-GAAP measures of our earnings press release for the third quarter of 2014, which can be found on our website at www.investor.prudential.com.

In addition, this presentation may include references to adjusted operating income or to earnings per share, or EPS, or return on equity, or ROE, which are determined based on adjusted operating income. Adjusted operating income is a non-GAAP measure of performance of our financial services businesses that excludes certain items. Adjusted operating income is not a substitute for income determined in accordance with Generally Accepted Accounting Principles, GAAP, and the excluded items are important to an understanding of our overall results of operations.

For a reconciliation of adjusted operating income to the comparable GAAP measure, please see our earnings press release on our website. Additional historical information relating to the Company's financial performance is also located on our website. John, I'll hand it over to you.

Thank you, Mark. Good morning, everyone, and thank you for joining us.

Prudential reported another good quarter, and we are on track to meet or exceed our financial goals for the year. Mark and Rob will walk you through the specifics impacting our drivers, results, and capital position. I will focus my comments on overall highlights and themes.

The key message is we are pleased with where we are as a Company and with our strategic initiatives designed to drive long-term growth and sustained returns above industry averages. Excluding the impact of market-driven and discrete items, our year-to-date adjusted operating income per share is 12% higher than a year ago. Results have benefited from favorable investment results and better than expected underwriting margins in our insurance businesses.

While these are clear tailwinds, the underlying fundamentals of our businesses are performing well, and I will highlight just a few for the quarter. Our annuities business continues to show good core margins and returns. Mark will walk through the results of our annual actuarial assumption update, but we remain confident in the products we are selling, the risk profile of the business, and the returns we are achieving.

In asset management, our third-party assets under management have increased 11% over the prior year, with total net flows over the last four quarters of $12 billion. While we saw modest net outflows this quarter, this after 22 consecutive quarters of positive net flows, importantly, our overall investment performance remained strong. Individual life earnings reflect strong mortality performance in the quarter, and while this will vary, we have shown favorable mortality experience relative to expectation in eight of the last nine quarters.

Our international business reported solid results. Our Life Planner account grew sequentially about 2% and delivered solid year-over-year sales growth in each key market. At Gibraltar, we are seeing the benefits of the actions we have taken to improve the productivity of life consultants. Sales through this channel were essentially unchanged from the prior year despite a 7% decline in our life consultant count.

Now I'd like to spend a few moments discussing the retirement business, and specifically, pension risk transfer, or as we call it, PRT. Since June 30, we have completed or announced five transactions that could be considered larger deals by market standards. This includes two funded pension buyouts where we were taking on about $4.5 billion in pension liabilities, and three longevity reinsurance transactions where we are assuming the longevity risk on approximately $31 billion in pension liabilities.

While we have been in the pension buyout business for decades, our success in winning larger PRT deals is directly attributable to the investment we began to make in 2006 when we first identified the opportunity at the larger end of the market. At that time, we built a dedicated team and supplemented this team with resources across Prudential. As many of you know, it took six years until we successfully executed the two largest pension buyout transactions ever, in 2012, the GM and Verizon contracts.

Our ability to evaluate, structure, and close these complex transactions in a timely way, and to seamlessly on-board over 150,000 retirees has given us proven market credibility which helps us succeed on subsequent transactions like the five we announced since June. And, importantly, our process of evaluating these transactions, which involves many layers of oversight, have remained consistent and disciplined.

To sum up, we're excited about the success we have had shown in this business and we like the risk and return profiles of the transactions we have announced. And we view pension risk transfer as a source of future growth given our track record, our reputation for successfully executing large and complex deals, and the long-term growth characteristics of the market.

On another matter, we're also excited with the recently announced Memorandum of Understanding to partner with ILC that will lead to Prudential indirectly acquiring 34% to 40% of AFP Habitat, a leading Chilean retirement services provider. We view this as an attractive use of capital to participate in the growing Chilean pension market and build on our Latin American businesses, while doing so with an equal partner that has a strong track record and a terrific reputation in the local market.

With that, I'll hand it over to Mark.

Thanks, John. Good morning, good afternoon, or good evening. Thanks for joining us on the call today.

I'll take you through our results for the quarter, and then I'll turn it over to Rob Falzon, who will cover our capital and liquidity picture. I'll start with an overview of our financial results for the quarter.

(technical difficulty)

Hello, I'm back. Our system somehow went on mute by itself. I'll start over.

I'll take you through the results for the quarter, and then I'll turn it over to Rob Falzon, who will cover our capital and liquidity picture. And I apologize for the interruption.

I'll start with an overview of our financial results for the quarter shown on slide 2. On a reported basis, common stock earnings per share amounted to $2.20 for the third quarter based on after-tax adjusted operating income of the financial services businesses. This compares to EPS of $2.89 a year ago.

After adjusting for market-driven and discrete items in both the current quarter and the year-ago quarter and a benefit to current quarter results from a favorable catch-up in our effective tax rate, EPS was up 5%, amounting to $2.46 this quarter compared to $2.34 a year ago. Looking across our businesses, here are the main drivers of this comparison.

We benefited from higher fees reflecting growth in account values in our annuities business, and the contribution of recent longevity reinsurance transactions in retirement. Our asset management business benefited from strong performance-based fees in the current quarter.

Our individual life and group insurance businesses benefited from more favorable claims experience. And in our international insurance business higher expenses, including technology costs in the current quarter, coupled with less favorable foreign currency exchange rates more than offset the benefit of continued business growth in the year-over-year comparison.

On a GAAP basis, we reported net income of $465 million for the current quarter. This reflects a non-AOI charge to increase our embedded derivative liability for annuity living benefits, largely driven by our annual actuarial review, and reflects the loss from foreign currency remeasurement driven by weakening the Japanese yen. The foreign currency remeasurement that affects our net income is an accounting presentation mismatch and it does not reflect the economics of our currency matched assets and liabilities in Japan.

We hold currency matched assets to support the non-yen liabilities of our Japanese insurance companies, and the impact of currency exchange rate fluctuations on the liabilities runs through the income statement, while the offsetting impact on the assets is included in accumulated other comprehensive income, or AOCI. Book value per share, excluding AOCI and after adjusting the numbers to remove the impact of this FX remeasurement mismatch, amounted to $64.89 at the end of the third quarter, up $4.90 from last year-end after payment of three quarterly dividends totaling $1.59 per share. Growth in book value plus dividends paid exceeded 10%.

We also evaluate our ROE performance after adjusting for the FX remeasurement mismatch which benefited our reported ROE by reducing the denominator. After removing this benefit, along with the impact on results from market driven and discrete items, our annualized ROE for the first nine months of the year would be about 16%. This reflects solid underlying performance across our businesses with tailwinds from strong non-coupon investment results and mortality more favorable than our average expectations in individual life and international insurance.

Slide 3 presents the AOI impact of our assumption updates. This year's annual review of actuarial assumptions had a net unfavorable impact of $186 million on pre-tax adjusted operating income, or $0.26 per share. The most significant items are a $107 million charge in group insurance to strengthen long-term disability reserves, including an update of our estimate for the benefit of Social Security claims offsets. And a $63 million charge in individual life to adjust amortization and reserves giving effect to refinements in our approach to estimating gross profits and guaranteed benefit costs.

Turning to slide 4, the remainder of this quarter's list of market-driven and discrete items included in our results is short. In the annuities business, performance of our separate account funds in the current quarter was less favorable than our expectations. And we strengthened our reserves for guaranteed minimum death and income benefits and adjusted DAC resulting in a net charge $0.07 per share. And in individual life, we absorbed integration costs of about $0.01 per share related to the Hartford Life acquisition.

In total, the items I just mentioned, including the impact of the annual actuarial reserve, had a net unfavorable impact of $0.34 per share on third quarter results. In addition, a favorable catch-up in our effective tax rate contributed $0.08 per share to our results for the current quarter mitigating a portion of the impact of the market-driven and discrete items. This catch-up reflects a downward change in our estimate of the full-year effective rate applicable to our pre-tax adjusted operating income.

During the year-ago quarter, market-driven and discrete items produced a net benefit of $0.55 per share, mainly driven by favorable DAC and reserve updates in the annuity business reflecting the annual review of actuarial assumptions and strong performance of our separate account funds in the quarter. Moving to slide 5, on a GAAP basis, our net income of $465 million in the current quarter includes amounts characterized as net realized investment losses of $1.1 billion comprised of the items you see here.

The $970 million loss from product-related embedded derivatives and hedging included a $631 million charge from the annual actuarial review for variable annuities largely driven by updated lapse assumptions. While our experience on living benefit guarantees is still limited, enhanced analytics combined with industry data has enabled us to refine our approach in predicting customer behavior.

The key refinements include making expected lapses on products with living benefit guarantees sensitive to the level of interest rates. These changes caused us to lower our expected level of lapses for most of our contracts in force. The charge reflects GAAP guidelines for valuing embedded derivatives, including a risk neutral framework for estimating growth in account values over decades. We believe that this accounting paradigm overstates the true liability and the result would be different under conventional insurance accounting.

The remainder of the $970 million loss from product embedded derivatives and hedging reflect the mark-to-market on our GAAP liability for variable annuity living benefits including the impact of changes in interest rates during the quarter. Foreign currency remeasurement, driven by weakening of the Japanese yen in relation to the US dollar and other currencies in which we issue products in Japan, resulted in a pre-tax loss of $576 million for the current quarter. Impairments and credit losses on investments were $37 million for the quarter.

Going the other way, mark-to-market on derivatives, mainly related to management of currency exposures and asset and liability durations, resulted in a $328 million pre-tax gain. And general portfolio activities mainly in our international insurance operations resulted in net pre-tax gains of $123 million.

Moving to our business results, and starting on slide 6, this slide shows our US retirement solutions and investment management businesses. This is a view of the results of these businesses showing the adjustments we make for actuarial reviews, market unlockings, and experience true-ups to get a view of underlying performance relative to a year ago.

Slide 7 highlights individual annuities. After adjusting for market-driven and discrete items, annuities results were $403 million for the quarter, an increase of $33 million from a year ago.

Turning to slide 8, most of our operating earnings in the annuities business come from base contract charges linked to daily account values. Measured point-to-point account values at the end of the third quarter increased by 6% from a year ago driven by market appreciation over the past year. However, the increase in average daily account values for the quarter outstripped the point-to-point increase producing a 10% increase in policy charges and fees. The benefit of higher fees net of associated expenses was partially offset by a lower contribution from investment results resulting in a 9% increase in earnings from the year-ago quarter.

Slide 9 shows the trend in annuity sales. Our gross annuity sales for the quarter were $2.6 billion, up by roughly $200 million from a year ago. Net sales were $392 million.

We've adapted our variable annuity product line to diversify the risk exposures associated with our product guarantees. And to enhance our ability to maintain appropriate pricing and return expectations under changing market conditions. As you see on this slide, our Prudential Defined Income, or PDI product, has become a significant contributor to our sales mix.

Sales of PDI, shown in the light blue bars, amounted to $459 million, or about 20% of overall sales for the current quarter, roughly consistent with the contribution over the past few quarters and about double the relative contribution of a year ago. PDI directs a client's entire investment to a separate account fixed income portfolio that we manage. And PDI provides a guaranteed lifetime income amount which is determined by applying an income payout percentage which is based on the client's age at time of purchase to the premium paid.

The payout percentage grows at a contractual rollup rate until lifetime withdrawals begin. The design of PDI allows us to change both the income payout rate in the rollup rate for new business, enabling us to keep pricing in sync with changes in market conditions including interest rates.

Since PDI allows us to reprice more rapidly than other lifetime income guaranteed products in the marketplace, its competitive position changes as we maintain appropriate targets in returns, and our sales are an outcome of that process. Sales of our Highest Daily Suite, or HDI products, shown in the dark blue bars, accounted for $1.8 billion of our current quarter sales, down slightly from the year-ago quarter.

Similar to PDI, our current generation product, HDI 3.0, also allows us to change key pricing elements including the rollup rate for protected withdrawal value that determines the base for lifetime income and the withdrawal percentages for various age bands as often as monthly for new business. The remainder of our current quarter sales, about $300 million, represents annuities without living benefit guarantees.

This includes early sales of our recently introduced Prudential Premier Investment Variable Annuity product which does not offer these guarantees and unbundles guaranteed minimum death benefits as an optional add-on. We see a market opportunity in serving clients who are focused on tax-deferred asset growth potential and are in the initial stages of introducing this product to our distribution partners.

Slide 10 highlights the retirement business. After stripping out the impact of refinements reflecting our annual actuarial reviews, earnings for the retirement business amounted to $269 million for the current quarter, an increase of $28 million from a year ago.

The increase was largely driven by a $21 million greater contribution from net investment results. Investment income for the current quarter includes about $35 million of returns that we would consider to be above average expectations on non-coupon asset classes. The remainder of the increase in earnings came mainly from higher fees, including the contribution from the longevity reinsurance transactions that closed in July, partly offset by higher expenses.

Turning to slide 11, total retirement gross deposits and sales for the current quarter were $36.2 billion, including $29 billion for the two significant longevity reinsurance transactions that we closed in July covering about 212,000 retirees in total. Unlike funded pension risk transfer transactions like GM and Verizon, where we took on both asset risk and longevity risk, in these transactions we assumed only the risk of participant longevity, and the cash flows take the form of monthly fees and net settlements rather than a significant transfer of assets to us on day one.

Since we haven't taken on significant asset risk, the capital charges per dollar of notional amount are substantially lower than they would be in a funded transaction. We are now separately reporting the balances for longevity reinsurance, investment-only stable value wraps, and group annuities including funded pension risk transfer cases in our financial supplement. This provides additional transparency given their different economics in relation to notional amount.

Excluding the longevity reinsurance transaction, standalone institutional gross sales were roughly $2 billion in the current quarter compared to $5 billion a year ago. Current quarter sales includes $660 million from stable value wrap products while the year-ago quarter included $4.1 billion of those sales. With about $70 billion of this fee-based business on the books as of September 30, we face concentration limits with a number of counter parties and competition is increased in the market for these products with a greater number of wrap providers.

Full service gross deposits and sales, shown in the dark blue bars, were $5.2 billion for the quarter compared to $5.5 billion a year ago. The timing of attractive large case opportunities in the full service market leads to a variable sales pattern from one quarter to another. During the current quarter, we closed three cases of over $100 million each totaling about $800 million, while the year-ago quarter included a major case win for $1.3 billion. Total retirement account values amounted to $356 billion at the end of the third quarter, up by $44 billion from a year ago.

Slide 12 highlights the asset management business. The asset management business reported adjusted operating income of $200 million for the current quarter compared to $173 million a year ago. While most of the segment's results come from asset management fees, the increase from the year-ago quarter included a $21 million greater contribution from what we call other related revenues which includes incentive transactions, strategic investing, and commercial mortgage activities. This was driven by strong performance-based incentive fees in the quarter.

The contribution from other related revenues, which amounted to $36 million for the current quarter, is inherently variable since it reflects changing valuation and the timing of transactions. The benefit to results of continued growth in asset management fees was largely offset by higher expenses in the current quarter. The segment's assets under management amounted to $918 billion at the end of the third quarter including $544 billion managed for institutional and retail clients.

Third party AUM increased by 11% from a year ago, driven by market appreciation along with about $12 billion of net flows over the past year. Net institutional outflows of $1.4 billion in the current quarter were driven by equities and included some client rebalancing of portfolios to reduce the weighting of some domestic equity product classes. These outflows were largely offset by net retail inflows of $1.2 billion.

Slide 13 shows the results of our US individual life and group insurance businesses, showing the adjustments for refinements and updates reflecting our actuarial reviews and showing the Hartford integration costs in individual life.

Slide 14 highlights individual life. After adjusting for market-driven and discrete items, individual life earnings were $168 million for the current quarter compared to $145 million a year ago. The $23 million increase was driven by a greater contribution from mortality experience.

Claims experience was favorable, both in the current quarter and the year-ago quarter. The contribution to current quarter results for mortality experience together with recurring reserve updates was about $40 million more favorable than our average expectations.

Slide 15 shows individual life sales based on annualized new business premiums which amounted to $97 million for the current quarter. This compares to the sales of $165 million a year ago.

The $68 million decrease was mainly driven by a $61 million decline in sales of guaranteed universal life insurance products shown in the dark blue bars. This decline is directionally consistent with the recent trend we've seen across companies and distributors. The latest available data to the first half of the year shows a 40% decline in industry sales of guaranteed universal life from a year earlier. Our sales decrease also reflects actions we've taken to limit concentration in these products and maintain appropriate returns, including a series of price increases and actions taken by some competitors to enter the market or make their products relatively more attractive.

Term insurance sales, in the light blue bars, were down $5 million from a year ago reflecting price reductions by several competitors. In August, we implemented pricing changes on several of our guaranteed universal life and term insurance products, enhancing our competitive position where we see opportunities to offer attractive value propositions with appropriate expected returns. Since the underwriting and issue process typically takes up to 90 days from the time of a policy application, these repricings did not have a significant impact on our current quarter sales.

Slide 16 highlights the group insurance business. After adjusting for reserve refinements reflecting our actuarial reviews, group insurance earnings amounted to $34 million in the current quarter compared to $23 million a year ago. The $11 million increase was driven by more favorable claims experience in disability, partly offset by less favorable claims experience in group life. Slide 17 presents benefit ratios for group life and group disability.

In group disability, favorable current quarter claims experience, including development of existing cases and fewer new cases, drove an improvement of about 11 percentage points in the benefits ratio compared to the year-ago quarter after removing the impact of the reserve refinements as shown in the dark blue bars. While we've taken steps to improve results, experience will vary from one quarter to another and improvements won't be linear. On a similar adjusted basis, the group life benefits ratio was less favorable than a year ago reflecting higher average claim size in the current quarter.

Moving on to international insurance, on slide 18. This slide shows the results of our international insurance business adjusting for the refinements reflecting our actuarial reviews and the Star and Edison integration costs in Gibraltar Life a year ago.

Slide 19 highlights our life planner operations. After adjusting for market-driven and discrete items, our life planner business reported earnings of $397 million for the quarter, down $8 million from a year ago. Higher expenses in the current quarter, including technology and distribution costs, more than offset the benefits of continued business growth and more favorable claims experience.

Mortality was favorable on both the current quarter and the year-ago quarter, and we estimate that the contribution to current quarter results was about $20 million more favorable than our average expectations. In addition, foreign currency exchange rates, which reflect our hedging of yen income at JPY82 versus JPY80 last year had a negative impact of $4 million on earnings in comparison to a year ago. We have completed the hedging of our expected yen earnings for 2015 and our hedging rate for next year will be JPY91 per US dollar.

Slide 20 highlights Gibraltar Life and other operations. After adjusting for the items I mentioned, Gibraltar Life reported earnings of $446 million for the current quarter, down $24 million from a year ago. Policy benefits experience, including mortality and gains on surrenders, was less favorable in the current quarter than a year ago.

And current quarter results reflected a higher level of expenses than the year-ago quarter largely driven by technology costs. In addition, foreign currency exchange rates had a negative impact of $10 million on the comparison of results to a year ago.

Turning to slide 21, international insurance sales on a constant dollar basis were $743 million for the current quarter, an increase of $35 million, or 5%, from a year ago. Slide 21 is a product view of our sales. Our sales pattern has been affected by actions we have taken including changes in our product lineup.

In addition, the seasonal sales trend favors the first quarter for our Japanese life planner business and favors the second quarter for Gibraltar Life. Our yen-based single premium bank channel product, shown in the brown bars, which we discontinued late last year after cumulative sales of more than $1 billion, contributed $49 million to sales at Gibraltar Life in the year-ago quarter.

Excluding the discontinued product, international insurance sales increased by $84 million from a year ago. Sales of annuities, substantially all of which are fixed annuities denominated in Australian and US dollars, contributed $51 million of the increase, as you can see in the gold bars.

These products, which have been popular among Gibraltar's customers, are repriced every two weeks for new business to stay in sync with current interest rates. And account value adjustments apply in the event of surrender to reflect interest rate changes after the sale. The remainder of the sales increase came from $25 million greater sales of US-dollar-denominated whole life and retirement income products and $8 million of growth in sales for other products such as term insurance.

Slide 22 breaks out life planner sales. Life planner sales were $298 million in the current quarter, up $40 million, or 16% from a year ago. Sales by our life planners in Japan were $192 million in the current quarter, up $15 million from a year ago.

As shown in the gold bars, sales of US-dollar-denominated whole life and retirement income products increased by $10 million to $47 million for the current quarter. The remainder of the increase came from other products, shown in the dark blue bars, including term insurance. Sales outside of Japan, in the light blue bars, were up by $25 million from a year ago, mainly driven by increases in Korea and Brazil.

Slide 23 shows Gibraltar Life sales. Sales from Gibraltar Life were $445 million in the current quarter compared to $450 million a year ago. Sales by life consultants, in the dark blue bars, amounted to $196 million for the current quarter, essentially unchanged from a year ago. Productivity of our life consultants, measured by policy sold per agent per month, has essentially returned to the level we achieved prior to our acquisition of Star and Edison.

This reflects the results of our implementation of minimum production requirements and other quality standards for the sales force that came to us with the acquisition. This increased productivity entirely offset a decline in the number of life consultants of about 700, or 7% over the past year. Sales through the bank channel, shown in the gold bars, amounted to $177 million for the current quarter, down by $23 million from a year ago.

This decrease reflects the $49 million of sales of the discontinued single premium product in the year-ago quarter that I mentioned earlier, partly offset by a $26 million increase in sales of other products including fixed annuities and recurring premium whole life. Sales through independent agents, shown in the light blue bars, amounted to $72 million in the current quarter, up by $17 million from a year ago. The increase was driven mainly by greater sales of fixed annuities and death protection products.

Slide 24 shows the results of corporate and other operations. After adjusting for a charge in the current quarter to strengthen our reserves for obligations to [premium] mutualization policy holders, corporate and other operations reported a loss of $320 million for the current quarter compared to a $312 million loss a year ago. The increase in the loss reflects higher net expenses in the current quarter including the impact of a lower pension credit.

Now I'll turn it over to Rob Falzon.

Thanks, Mark. I'm going to give you an update on some key items under the heading of financial strengths and flexibility starting with slide 25.

We continue to manage our insurance companies to levels of capital that we believe are consistent with AA standards. At the end of last year, Prudential Insurance reported an RBC ratio of 456% with total adjusted capital, or TAC, of $13.9 billion. While we don't perform a quarterly bottoms-up RBC calculation, we estimate that our RBC ratio continues to be well above our 400% target after giving effect to results for the first nine months of the year.

In Japan, Prudential of Japan and Gibraltar Life reported strong solvency margins of 835% and 967%, respectively, as of June 30. These reported solvency margins are also well above our targets. Looking at the overall capital position for the financial services businesses on slide 26, we calculate our balance sheet capital capacity by comparing the statutory capital position of Prudential Insurance (pause.)

(audio difficulty) Would you like to entertain questions? I'm sorry, you were breaking up. Did you want to entertain questions?

This is Cindy, can you still hear me? One moment, please. Hi, this is Cynthia.

Hi, it's Prudential. We had a problem with our room, we're going to our backup line.

Okay, all right, and I'll place this in. One moment.

By the way, Cynthia, we will go about 10 minutes after the top of the hour.

Okay, not a problem.

(Operator Instructions)

Thank you.

And one moment. Your host has now rejoined. Please continue.

This is Rob Falzon. I'm going to continue on. We apologize, we're having a modest problem with our system.

I think where I left off, or before it cut off, we were turning to slide 26 after having covered the solvency margins for our Japan businesses. So looking at the overall capital position for the financial services businesses, on slide 26, we calculate our on-balance sheet capital capacity by comparing the statutory capital position of Prudential Insurance to our 400% RBC ratio target, and then add capital capacity held at the parent Company and other subsidiaries.

At the end of last year, we estimated that our on-balance sheet capital capacity was about $3.5 billion including about $1.5 billion that we considered readily deployable. During the first nine months of this year, we returned about $1.5 billion to shareholders. These returns came in the form of three quarterly common stock dividends of $0.53 each per share in each quarter for a total of about $740 million and the repurchase of $750 million of our common stock.

This includes $250 million of repurchases during the third quarter under the $1 billion June Board authorization which extends through June 30 of next year. Net of these returns of capital, our available on-balance sheet capital capacity was about $5 billion before funding of our investment in AFP Habitat in Chile, which we expect to close in the first half of 2015 for the purchase price of $530 million to $620 million. We would consider about $1.5 billion of our capital capacity to be readily deployable.

Turning to the cash position at the parent Company. Cash and short-term investments, net of outstanding commercial paper, amounted to $4 billion as of the end of the third quarter. This reflects senior debt issuances of $600 million during the quarter. The cash in excess of our targeted $1.3 billion liquidity cushion is available to repay maturing operating debt, to fund operating needs, and to redeploy over time for strategic and capital management purposes.

Now I'll turn it back over to John.

Thank you, Rob. Thank you, Mark. We'd like to now open it up to questions.

And you're ready for questions?

Yes we are.

Thank you. (Operator Instructions) Nigel Dally with Morgan Stanley.

Great, thanks, and good afternoon, or good morning. With the annuities and the change in lapse assumptions, some other companies are also talking about utilization as being an offset. Interested whether you've recalibrated your utilization assumptions there, as well?

Nigel, it's Rob Falzon. We actually looked at all of the assumptions that went into that calculation, so utilization, efficiency, et cetera, were included in that. The primary driver, however, to the assumption update was lapse, and the lapse sensitivity to interest rates.

Okay, then a second question on asset management. If you exclude out the other related revenue, it seems like the core ROA came down pretty meaningfully this quarter. It seems like it was on meaningfully higher expenses. Just like to get some additional color as to what's happening there?

Nigel, this is Steve. Our growth in fees was commensurate with the growth in assets, but we did have growth in expenses, as you note. Some of that was one-time in nature, but the remainder of it reflected our continued investment in the long-term growth of the business.

Okay. Thank you.

Thank you. Tom Gallagher with Credit Suisse.

Hi. The first question I had is just on the group disability reserve charge of around $100 million. Mark, you had referenced Social Security offsets. Can you give a little more color for what's going on there? Are they getting harder to come by now, has something changed with the Social Security offsets?

Tom, this is Steve. I'll address your question. This does not reflect a change in the external environment, external to ourselves regarding this. We have refined our methodology about assessing the probability that a certain segment of our claimants will receive Social Security Disability, and the reserve strengthening that we did this quarter reflects that refine.

So, but you haven't seen any change in behavior nor amount of Social Security offsets, it's more assessing future probabilities, going lower, I assume?

That's correct. It's a refinement in our own methodologies around it.

Okay, and then, related to the VA charge, was there a statutory earnings impact, and I believe the last year when you did this there was a statutory earnings impact, but there wasn't a capital impact. Can you comment on those two issues?

Tom, it's Rob Falzon. So, yes, recall that from a statutory standpoint we used the modified GAAP accounting that defines our hedge target. So, yes, there was a statutory impact. Yes, it also had a capital consequence associated with it. However, the numbers that we've quoted you with regard to our total capital capacity and readily deployable, factor that in, and so thereafter the effects of the capital impact.

So, Rob, would that have included -- so would that have been resources that were available within Pru global funding or how was that funded?

We have resources across the firm, so it was a combination of capacity that we had within the annuities -- legal entity businesses to absorb that, in addition to funding that we provided from other parts of the organization.

Okay, thanks. And just one last one, if I could sneak it in. The retirement business, I guess, the results had been quite strong in the first part of the year, it got a little bit weaker this quarter, and I believe it was underwriting related. Is 10% to 15% quarterly swings in earnings volatility due to underwriting something we should expect going forward, or was there something unusual about this quarter?

Tom, it's, Steve. I'll address your question. I wouldn't draw long-term expectations around this quarter. Our first and second quarter case experience was very, very strong relative to our assumptions and expectations. Our third quarter experience was also positive relative to our expectations, but not to the same extent as we saw in the first and second quarter. And that's really about the extent of it.

Okay, thanks.

Thank you. Erik Bass with Citigroup.

Hi, thank you. I was hoping you could discuss competition for the jumbo PRT deals and current pricing in the market. In particular given Motorola's comments about paying no premium. It would just be helpful to get your perspective on if and how the economics have changed and why you are comfortable that these blocks will generate attractive returns?

Eric, it's Steve, I'll address your question. First of all, just to emphasize a point John made in his opening remarks, and that is that we are very pleased with the returns on the business we've written this year. Those returns are thoroughly consistent with our corporate return objectives. Second, the statements that you are referencing about par or above par or at par, those comments are all in relation to a planned sponsors GAAP valuation of its pension liability. From one plan sponsor to another, those valuations can be impacted by a whole range of factors, including in particular, whether a given plan sponsor is using old or new mortality tables in its valuation of the liability.

Frankly, that's all pretty much irrelevant to us. We use a consistent and very disciplined methodology with multiple layers of oversight in order to arrive at our customized view from the ground up of the economic risks that we are taking on in a given transaction. That view is based on information that ranges far beyond the Society of Actuaries mortality tables. It includes industry data, it includes our own extensive experience in managing mortality risk; and it includes, especially in the large case market, the extensive census data that a planned sponsor supplies us on their retirees. So we're very, very confident in the approach that we take in that regard.

Finally, I'd make some remarks regarding the different role that price plays in different segments of the market. And this reflects, certainly our own competitive experience, but also the input that we've consistently received from plan sponsors and their advisors. In the large case market, price certainly matters, and there's a need to be competitive on pricing. In particular, pricing serves as a factor in winnowing down the competitive universe from the initial list to a very short list of finalists.

We find that pricing among those finalists is typically within a very narrow band and that the plan sponsors' choice are based on assessment of certain critical factors that John mentioned in his opening comments. The ability of an insurer to execute a large and complex transactions and to bring them to a successful and timely close, and the ability to on-board literally tens of thousands of retirees in a seamless way that provides them a quality client experience. We have an established track record in this regard and that gives plan sponsors a lot of confidence.

The small market, and here I'm talking about a few hundred million and below, is very different. It is a market in which the business process really is that of a price-based auction. And so, when we back up and look at our experience, we are writing relatively more than our fair share of business in the large case market where these capabilities and our ability to differentiate ourselves comes into play in the eyes of plan sponsors. And we're writing, if you will, less than our fair share of business in the segment of the market that tends to be all about price.

Thank you, that's very helpful. And how should we think about interest rate risk related to these transactions? You're doing retiree blocks, are you able to pretty tightly match the assets and liabilities?

Yes, that's a real good point, Erik. Very often the point about retirees is, obviously seen, as a mitigator as it relates to longevity risk, but it's also a significant mitigator in relation to interest rate risk. These are people who are already drawing their payments. The payment schedule is set. There is no more optionality or behavioral risk in these cash flows, and we're able to match them very closely.

Got it. And how much risk is there if rates move between when a transaction is announced and when it is closed?

We have contractual provisions to adjust closing pricing for rate movements between announcement and closing.

Great. Thank you very much.

Thank you. John Nadel with Sterne, Agee.

Hey, good morning, everybody. I have a question about the assumption review, and especially around the individual life insurance business, how you change the long-term path for investment yields there, in your current view versus your former view? I guess, specifically, does that have any influence on your view of the return potential for the Hartford Life block?

John, it's Rob Falzon. We actually only made a relatively modest change to our long-term view of interest rates. So prior to the current quarter, using the 10-year as a benchmark, we had set that at 4.65%. We brought that down to 4.5% and then a corresponding adjustment to the rest of the yield curve.

The only other adjustment that was made is the method for which we migrate to that long-term reversion rate was modified where we used a forward curve now for a two-year period, and then linearly move out to the long-term assumption over the remaining eight years. That in and of itself is a relatively modest change and would not otherwise alter the view that we would have with respect to the economics on the Hartford transaction or in any material way our other blocks.

Terrific. And then just a question on G&A, overall, general and administrative expenses overall for the Company. I think you mentioned in a couple of segments that expense levels were a little bit elevated in the current quarter. Is there any reason we should expect that in those couple of instances, Life Planner, a few other places, should we trend from this level? Or is some of that IP spending and other spending, one off?

So, John, we have not called out to you or to anyone any normalization of the expenses that we had in the current quarter with respect to any of the businesses on an overall basis, so I think that's the best way I can answer the question.

Okay. And then, lastly, just on the Chilean partnership, when you fund that sometime in the first half of 2015, where do you expect that funding will come from? Will it come from the parent or will it come from one of the international operating subsidiaries? And should we expect that that funding, we should reduce the expectation for buybacks, by a like amount, like you did when you did Hartford?

Yes, so the overall level of funding for this, recall, that the transaction will be somewhere around $600 million. So it's a relatively modest-sized transaction, and it will be closing during the course of the first half of next year. We have adequate readily deployable capital, as we have articulated, in order to complete that acquisition. And absent any other events, funding for this would not alter any existing capital redeployment plans that we would have.

Thank you very much for the answers.

Thank you. Jimmy Bhullar with JPMorgan.

Hi, good morning. The first question, just related to the previous one on -- given the Chilean deal, but also more importantly, the number of pension close-outs and longevity transactions you have announced recently. Should we assume that you would be less proactive on share buybacks going forward than you have been because you are using a lot of capital in those deals?

And then, secondly, you have spoken about this a couple times in your prepared remarks, but on the pension closeout deals, you won a disproportionate share of the deals that have done in the large case market, so just wondering what's allowing you to win these deals other than the price? If you could just give us a little bit more detail on what type of returns that you are earning on these, and like you've said that consistent with your long-term objectives. I'm wondering if you could just talk a little more specific on the type of returns you are assuming and what you're earning on the deals you done over the past couple of years? Thanks.

Jimmy, it's Rob. I'll handle the first part of your question, and then I'm going to turn it over to Steve for the second part of your question. I think I'd almost repeat what I said just prior to your question. We would, both in terms of when we got the authorization for our stock buyback program back in June for the $1 billion and then with respect to how we are thinking about Habitat, all of that considered; our expectations with regard to our ability to fund our continuing business, including our PRT business, and neither of those events other than our success with PRT or the Habitat acquisition would cause us to otherwise think about altering the existing capital redeployment plans that we have. And then, second part, I'll turn it over to Steve.

Jimmy, this is Steve. I won't characterize our returns on the transactions beyond what I said, which is, like you said, we like the returns on the business we've written. They are in line with our corporate return expectations. In regard to capabilities, I'd mention the comments that John made at the outset which is these are capabilities we've been investing in since 2006 in terms of the dedicated team.

Also, we have a proven methodology for taking the resources of that dedicated team and connecting them to our resources across the Company that are involved in successful and timely execution of these deals. That would include our asset/liability management, our investment management, our actuarial, and our legal area as well, and our ability to execute documentation in a ready fashion.

That is a path of certainty that we can offer plan sponsors from the very outset of these transactions. We are able to give them a calendar for how they should expect matters to progress along this path, and that is a calendar that we have consistently followed through on in the different transactions we have done. And that creates, like I say, kind of our virtuous cycle about plan sponsor confidence in our ability to execute on these transactions.

And I can understand you not disclosing specifics on a certain deal, but I think one thing that might be helpful in the future is, given that you've done a number of these now, that at least give us some idea on what the actual returns have been. Because whether it's right or wrong, given how many of these deals have been announced, and what proportion of those you've ended up getting, there's a concern out there that maybe Prudential is being aggressive on pricing. But that's something for you to evaluate in the future.

Jimmy, it's Mark. Let me add two elements of color on this. One point is that the deals to date have outperformed our assumptions and expectations on both liabilities and assets. But, secondly, I said early on in questions about these deals, particularly after we had just done GM and Verizon, that if these were done in a standalone company you would want to buy that company. And I would stand by that comment. I believe that on a risk/return basis appropriately considering the entire deal and capitalization, these are attractive opportunities for us.

Okay, that's helpful. And lastly, just on the institutional asset management business, your flow has been consistently positive for a number of years, this quarter was a negative. So if you could just give us a little bit of color and whether it's more of an aberration, or is there something that's changed in terms of your performance, or anything else that drove the results this quarter?

No, Jimmy, this is Steve, I'd call it more of an aberration. It was driven by some rebalancing activities by equity clients and also the planned unwinding of an Asian real estate fund. Obviously, flows can be lumpy and it's, of course, unfortunate to see a streak ending, but when we look at our investment performance that continues to give us great confidence in our ability to garner flows in this business going forward.

Thank you.

Thank you. Randy Binner with FBR Capital Markets.

Great, thank you. I just have a couple of follow-ups. One, just on what Jimmy was asking about return expectations with the various pension closing activities. Can you remind us of what your corporate return expectations are versus your cost of capital to maybe help triangulate the return question?

Randy, it's Rob Falzon. We have a stated target objective of 13% to 14% and we think that that provides a handsome premium over our cost of capital.

Okay, and I think in the past, when you have kind of identified businesses that are above or below that target to kind of average to the return, where would pension fall on that continuum? Japan would be lower and then some of the annuity activities would be higher.

Higher?

Say again?

Japan's a lot higher.

The actual returns that we post on our Japan business are actually -- while, the risk would merit a lower hurdle rate, the actual returns against that have actually been well above what you would benchmark as our hurdle rate for that business. Having said that, Randy, we actually don't provide any visibility toward individual hurdle rates for any of our segment businesses. We just articulate that in the context of the overall Company objectives because our mix of business and the capital that we deploy in it will change over time.

Okay, understood. And then, on the group charge, and just kind of following up on the Social Security piece of that. I guess, a couple. One is do you have any sense that Prudential's book would have more Social Security reimbursement exposure than a normal book? And then, on that charge, was it mostly due to the Social Security recoverability issue, or was there another major piece of the charge in the group area?

Randy, this is Steve. There's nothing about our business that is materially different about the Social Security matter. As I said, this is a refinement of our own methodologies. The second part of your question was in regard to?

I'm just trying to reconcile, I think just intuitively, you're having good current year development or activity, as you stated. But then, so I'm trying to reconcile that with these refinements and so Social Security has come out as a piece which makes sense. Is there another big piece and kind of how big of a piece of the charge was the Social Security item?

We made across the board an update of our actuarial assumptions and there were a variety of impacts, but the Social Security offset matter was the biggest piece.

Okay. That's perfect. Thank you.

Thank you. Eric Berg with RBC Capital Markets.

Thank you, and good afternoon. I actually have just one question today. You've emphasized that the pension risk transfer business, on the one hand, and the longevity reinsurance business on the other, are really quite different from each other in terms of capital requirements, the profits that come out, the funding; one is funded, the other is not. Do you prefer one business over the other? Is one business a better business than the other? Thank you.

Eric, this is Steve. First of all, we view this as a business, and we see longevity reinsurance and funded pension risk transfer business as different parts of that business. We view these as actually highly, highly complementary to each other. They are complementary to each other in terms of the capabilities that we were speaking about earlier. The insights we garner from one part of the business can help inform our risk management and our pricing in another part of the business. And we also see them as highly complementary from a financial results standpoint.

Pension risk transfer business, funded pension risk transfer business, our earnings tend to decay gradually over time as the book runs off. Longevity reinsurance, the earnings profile actually escalates over time as our actuarial certainty about outcomes progresses as time elapses. So, I would say both from a strategic and from a financial standpoint they are highly complementary.

And if I could just ask one quick follow-up. Is there any reason as an industrial company or another old-line industrial company or another plan sponsor -- I realize you have newer companies with defined benefit plans, so let's just talk about a plan sponsor in general. As a plan sponsor thinks about sort of getting out of the pension business or reducing its exposure to pension, what sort of considerations would prompt it to choose one approach over the other?

Meaning funded versus longevity swap?

Yes, please.

I think, Eric, we find that at least to date in the US market the funded business has been the primary choice. Whereas in the UK, and also starting to extend into other markets like Canada and the Netherlands, we see the longevity reinsurance market as being, at this stage, much more highly developed and that's the way a lot of companies choose to go. That could emerge in the US market, as well, but right now we see the differentiation as largely a geographical one.

Okay, I look forward to following up. Thank you.

Cynthia, we will take one more question, please.

Thank you, and that will be from the line of Steven D. Schwartz with Raymond James.

Good morning, everybody. Better to be lucky than good. I want to follow up on the Social Security issue first, and I just want to make sure I understand this. From the initial comments, it sounded to me like it was one part of the business that was affected by the Social Security refinement, is that accurate?

Yes, it's our group insurance disability business.

No, no, no. I meant like one cohort or one type of risk or something like that, or was this just more general?

No, we refined our methodologies in how we assess the likelihood of claimants to receive Social Security Disability, especially around our segmentation of claimants.

That's what I meant, the segmentation of claimants. So that somehow -- but it wasn't necessarily one or the other. That's what I was trying to get to, what does that mean, segmentation of claimants?

That means we refine the extent to which, how we vary our assessment of probability from one segment to the next. A much more granular approach.

Okay, all right, that's what I wanted to get to. Okay, and then, if we could stick on the actuarial stuff, with regards to the change in lapse assumptions on the variable annuities, what was it about interest rates? I would think that lower interest rates, older people, obviously, they have got nowhere to go; they would stick with their policies. But that's not what you were talking about here, is it?

No, Steven, this is Steve again. We changed our approach quite significantly this year to a much more sophisticated approach towards lapsation. Previously, our approach had been fundamentally based on in-the-moneyness of the guarantee and that's kind of an industry standard approach. Now we're focusing on the ability of a policyholder to replicate the income stream from our guarantee through other sources. Other sources that might be available in the marketplace. As such, that makes this approach much more -- that makes our lapse assumptions under this approach much more sensitive to interest rate movements.

Okay, all right, that's what I wanted to ask. Thank you, guys, very much.

Thank you.

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