Ladies and gentlemen, thank you for standing by, and welcome to the Prudential Quarterly Earnings Conference Call. At this time, all lines are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given to you at that time. And as a reminder, today's conference call is being recorded.
I would now like to turn the conference over to Mr. Darren Please go ahead.
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.
Okay. Now we can hear sorry, everybody. We're having a little bit of technical difficulties, Charlie. Darren will start over.
Start over here. So 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 Syster, Head of International Businesses Ken Tanji, Chief Financial Officer and Rob Axel, Controller and Principal Accounting Officer.
We will start with prepared comments 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 cause actual results to differ materially from those in the forward looking statements.
Please see the slide titled Forward Looking Statements and Non GAAP Measures in the appendix to today's presentation and the quarterly financial supplement, both of which can be found on our website at investor. Prudential.com. With that, I'll hand it over to Charlie.
Thank you, Darren, and thank you all for joining us this morning. As always, I hope you and your families have remained safe and healthy. Despite the ongoing challenges created by the pandemic, Prudential reported strong results for the Q1, including record adjusted operating income and robust sales and flows across many of our businesses. Our performance reflects strong underlying demand for our products, continued execution on our strategic initiatives, the complementary nature of our retirement and life businesses, which has helped us mitigate mortality risk, favorable markets and the commitment of our employees around the world. We're on track with our key transformation initiatives and have increased returns to shareholders, supported by our strong performance and the strength of our balance sheet.
I'll cover each of these topics in more detail and begin with a brief review of the transformation initiatives we highlighted for you in February. Turning to Slide 3. We're on track to deliver $750,000,000 in cost savings by the end of 2023, $400,000,000 of which were targeted for 2021. Cost savings for the Q1 were $110,000,000 The initiatives generating these cost savings are also producing better customer and employee experiences and as a result, enhancing the competitiveness of our businesses. We are also in the process of reallocating $5,000,000,000 to $10,000,000,000 of capital by pursuing programmatic acquisitions to grow in Asset Management and in International Emerging Markets.
In addition, we'll remain focused on investing in our other businesses to expand our addressable market and to continue to improve expense and capital efficiency. In parallel, We're actively executing on other means of changing our business mix and earnings profile by pivoting to less market and rate sensitive products such as our buffered annuity product FlexGuard, running off certain blocks of business and actively pursuing potential de risking transactions. As a result, we expect Prudential to emerge as a higher growth, less market sensitive and more nimble company. As we execute against our transformation initiatives, you can expect that we'll continue to demonstrate discipline in the redeployment of capital within our businesses and to our shareholders. Turning now to Slide 4.
In the Q1, we increased our shareholder dividend by 5% and repurchased $375,000,000 of common shares. In addition, based on our progress with our initiatives As well as the improving macroeconomic outlook and the more favorable equity market and interest rate environment, we announced a $500,000,000 increase our 2021 share repurchase authorization. We expect to repurchase these additional shares starting in the Q2. As a result, we now expect to return $10,500,000,000 to shareholders through 2023. Moving to Slide 5, Our expanded shareholder return program is supported by our rock solid balance sheet, which included $5,400,000,000 in highly liquid assets at the end of the Q1.
Our operating subsidiaries continue to hold capital to support AA Financial Strength Ratings and we have a high quality investment portfolio. Turning to Slide 6. We are also executing on behalf of our stakeholders through our commitment to environmental, social and governance actions. This work has long been reflected in our purpose as a company of solving the financial challenges of our changing world and is Important as ever. A recent note, on the environment, we have made significant progress reducing emissions, waste and paper.
And we continually evaluate how we can improve our impact on the environment. On social issues, we have invested further in our people with training and development programs and continued to maintain a high level of pay equity throughout the firm. We also achieved our 3 year goal that we created in 2017 of increasing representation of diverse persons among our senior management by 5 points over that time period. We followed this by establishing new goals and are continuing to tie our goals to management compensation as we did in the prior period. And we're already making progress on our commitments to advance racial equity, which we announced last summer.
On governance, we continually refresh our Board with people who are highly skilled and who also reflect the diverse communities and geographies that we serve. Today, 82% of our independent directors are diverse. You can see more details on how we're progressing against our goals and commitments in our ESG summary report that we published in March. Before closing, I would like to thank all of our employees around the world. It's through their continued hard work and dedication that we've been able to support our customers and colleagues during these challenging times, all while advancing our company's transformation and purpose of making lives better by solving the financial challenges of our changing world.
With that, I'll turn it over to Rob for more specific details on our business performance.
Thank you, Charlie. I'll provide an overview of our financial results and business performance for our U. S, PGIM and international businesses. Turning to Slide 7. I'll begin with our financial results for the Q1.
Our pre tax adjusted operating income was a record high of 2 $100,000,000 or $4.11 per share on an after tax basis. Earnings exceeded the year ago quarter across all of our businesses. Results of our U. S. Businesses were up 38% and reflected higher net investment spread results driven by higher variable investment income and higher fee income, primarily driven by equity market appreciation, partially offset by less favorable underwriting experience driven by COVID-nineteen related mortality.
PGIM, our global asset manager, had record high results, including a gain on the sale of our Italian joint venture. Our partner was acquired by another firm with an existing asset management business and expressed a desire to purchase our interest, which was a right it retained under the joint venture agreement. Nonetheless, assets under management of $1,500,000,000,000 were up 12% from a year ago, driving asset management fees to a record level and earnings in our international businesses increased 25%, reflecting business growth, higher net investment spread, more favorable underwriting results and higher earnings from our Chilean pension joint venture. Turning to Slide 8, Our U. S.
Businesses produce diversified earnings from fees, net investment spread and underwriting income and benefit from our complementary mix of longevity and mortality As Charlie noted, we continue to make progress in shifting away from capital intensive and interest rate sensitive products. Our product pivots have worked well with sales of our buffered annuity FlexGuard growing to $1,600,000,000 in the 1st quarter, representing 84% of total annuity sales, up from $1,200,000,000 in the Q4 of 2020. Our sales reflect increasing customer demand for investment solutions that offer the potential for appreciation from equity markets combined with downside protection. In addition, we benefit from having a strong and trusted brand as well as a highly effective distribution team that has significant reach with Prudential Advisors and 3rd party advisors. We are engaging with a broad range of advisors with FlexGuard.
Also leverage our broad multi dimensional relationships with our strategic partners that both distribute our products and manage the assets of our clients. With respect to individual life, we increased sales by 9% compared to the year ago quarter as higher variable life sales offset lower sales of other policies, in particular, universal life sales consistent with our product pivot strategy. In our retirement business, account values were a record high, up 23% from a year ago, driven by business growth and market appreciation. Net flows in the quarter were $6,000,000,000 including a longevity reinsurance transaction in excess of $8,000,000,000 With respect to Assurance, Total revenues, our primary financial metric as we concentrate on scaling the business, were up 80% over the prior quarter. We grew all business lines, particularly in Medicare where we expanded distribution to increase sales outside of the 4th quarter annual enrollment period.
Now turning to Slide 9, PGIM continues to demonstrate the strength of its diversified active management platform As a top 10 global investment manager, PGIM's diversified global investment capabilities in both public and private asset classes across fixed income, alternatives, real estate and equities position us favorably to capture flows. In addition, PGIM's investment performance remains attractive with approximately 90% or more of assets under management outperforming their benchmarks over the last 3, 5 10 year periods. Our diversified capabilities and strong investment performance helped contribute to more than $5,000,000,000 of third party net during the quarter, including $4,000,000,000 of retail and $1,000,000,000 of institutional flows. Offsetting the growth in net flows was a decrease in the market value of our income assets, reflecting the increase in interest rates. As the investment engine of Prudential, PGIM also benefits from a symbiotic relationship with our U.
S. And international insurance businesses. PGIM's asset origination capabilities and investment management expertise provide a competitive advantage, helping our businesses to bring enhanced solutions and more value to our customers. And our businesses in turn provide differentiated source of growth for PGIM through affiliated flows that complement its successful third party track record of growth. PGIM's asset management fees increased 15% compared to the year ago quarter to a record level as a result of market appreciation and continued positive third party net flows.
This contributed to an 8 point increase in PGIM's net adjusted operating margin, including the gain on the sale of the Italy joint venture excuse me, excluding the gain on the sale of Italy joint venture compared to the year ago quarter, consistent with our expectation of 30% across the cycle. Turning to Slide 10, our international businesses include our Japanese life insurance operation where we have a differentiated multi channel distribution model as well as other operations focused on high growth markets. While sales across both Life Planner and Gibraltar operations were lower than the prior year, reflecting the disruption from Japan's metropolitan areas being in a state of emergency this quarter, As well as lower demand for our U. S. Dollar denominated products following price increases last year, profitability increased significantly.
We remain encouraged by the resiliency of our unique distribution capabilities which has helped to continue to grow our in force business. And with that, I'll now hand it over to Ken.
Thanks, Rob. I'll begin on Slide 11, which provides insight into earnings for the Q2 of 2021 relative to our Q1 results. Pretax adjusted operating income in the first quarter was $2,100,000,000 and resulted in earnings per share of $4.11 on an after tax basis. Then we adjust for the following items. First, variable investment income outperformed expectations in the Q1, which is worth 275,000,000 2nd, we adjust underwriting experience by $160,000,000 This includes a placeholder for COVID-nineteen claims experience of an additional $70,000,000 based upon 55,000 COVID-nineteen related fatalities in the U.
S. During the Q2. 3rd, we expect expenses and other items to be approximately $500,000,000 lower in the second quarter, primarily as a result of favorable items in the first quarter, including the $378,000,000 gain from the sale of PGIM's joint venture in Italy and seasonality. 4th, we anticipate net investment income will be reduced by $10,000,000 reflecting difference between new money rates and disposition yields of our investment portfolio. These items combined get us to a baseline of $2.89 per share for the 2nd quarter.
I'll note that if you exclude items specific to the 2nd quarter, earnings per share would be $2.97 The key takeaway is that our underlying earnings power increased from last quarter, including the benefit from business growth in higher equity markets. While we have provided these items to consider, please note that there may be other factors that affect earnings per share in the Q2. I would also note that we continue to expect the full year 2021 corporate and other loss to be about $1,500,000,000 On slide 12, We provided an update on the potential impact of the pandemic. Consistent with the information we provided on our Q4 call, The estimated sensitivity of operating income for 100,000 incremental U. S.
Debt due to the pandemic is about 85,000,000 As I noted earlier, our 2nd quarter baseline includes a net mortality impact of $70,000,000 due to COVID-nineteen. The actual impact will depend on a variety of factors such as infection and fatality rates, geographic concentration and the continued speed acceptance and effectiveness of the vaccine rollout. Turning to Slide 13. 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 $5,400,000,000 which is greater than 3 times annual fixed charges. And other sources of funds include free cash flow from our businesses and other continued capital facilities. Turning to Slide 14 and in summary, we are on with our key initiatives and we maintained disciplined capital management while returning additional capital to shareholders and we continue to benefit from the support of our rock solid balance sheet. Now I'll turn it to the operator for your questions.
Thank you. Our first question will come from the line of Tom Gallagher with Evercore.
Charlie, just wanted to see if we can get an update On potential timing and sizing of risk transfer deals, where things stand now for freeing up capital? And also, Same question on the programmatic M and A you're targeting?
Hey, Tom, it's Rob. Me take a first shot at that, if you don't mind. So thank you for the question. First, actually, let me start with a reminder. A large portion of the broader business mix objectives that we have are actually going to be achieved organically.
The internal growth objective we have, which is essentially to double the size of our growth businesses, about a third of that targeted an increase will come from the organic growth in those businesses. And then with respect to the targeted reduction, specifically bringing our annuities business Down to around 10% or so of total contribution, 40% to 45% of that comes from the runoff of our legacy block. We then expect capital redeployment in the form of on the growth side programmatic acquisitions And then on the reduction side, reinsurance and or sales to largely close the remainder of the gap. And as Charlie indicated in his opening remarks, we are actively executing on that, including through de risking transactions on the reduction side. While we're making progress, we're not yet in a position, Tom, where we're going to speak any more specifically, although I'd like to reiterate what we said before.
1st, these transactions are generally complex and therefore they require time. And secondly, we intend to remain disciplined transacting both with back to the dispositions as well as acquisitions to ensure that we're creating value for our shareholders in any transaction that we undertake. It's why we indicated sort of a relatively broad range of the $5,000,000,000 to $10,000,000,000 and a multi year period for accomplishing that. The last thing I'd want to mention is that the product repricings and pivots that we've been undertaking are also important levers The change in net business mix and maybe Andy, if you don't mind, you could just sort of give
a quick update on that.
Sure, Rob. So, Tom, good morning. So, I'll make this very specific. So, let's talk about annuities. So, as we've talked about, step 1 in derisking is the runoff.
And that started with ceasing of sales. So, you saw this quarter where we only had 1% of our sales that came from traditional variable annuities with guaranteed living benefits. And we very successfully have pivoted over to FlexGuard. We will expect to see about a $3,000,000,000 per quarter runoff in that traditional variable annuity block of business. This quarter, we saw about 3,800,000,000 As we pivoted to FlexGuard, we're putting into the market a very different type of product that better balances consumer value with shareholder value.
And we could not be more pleased with the success of that product. We had a 14.5% market share back in 4Q. And as you saw, our sales have continued to expand where we had $1,600,000,000 in sales this quarter. That is really coming off the strength of our brand and the strength of our distribution. And we're very happy with the returns and the risk profile of that new business that we're putting on the books.
So, it's a very good example of how step 1 is all about the runoff and pivot.
Thank you. Next, we will go to the line of Elyse Greenspan with Wells Fargo.
Hi, thanks. My first question, maybe following up on Tom's question, just on the and A side of things. So you guys mentioned PGIM and emerging markets as areas where you would book to deals. As you're executing on that plan, can you just give us a sense of what you're seeing out there from the M and A perspective as you're kind of looking to execute there?
Sure, Elyse. This is Charlie. Let me just take a step back, if you will, and put what we're doing into context, and then I'll answer your specific question. But As we look at the journey we're on, if you will, we as a management team are laser focused on three goals. Well, the first is to deliver strong and consistent performance, and hopefully, you've seen that.
The second is to execute on the transformation that Rob and Andy just talked about, and there are 3 parts to that. 1 is pivoting our products To be less market sensitive and capital sensitive, the second is to execute on our cost efficiency goals. And you saw that we expanded our goals by 50% last year and are ahead of track. And the third is to lean into the growth markets, as Rob talked about, the reallocation of the $5,000,000,000 to $10,000,000,000 of capital. So that's the second goal.
The third goal is to be good stewards of capital, balancing the return of capital to shareholders with investing both organically and inorganically in our businesses. And we think that by achieving that balance, we can maximize shareholder value over time. So those are the 3 goals: strong and consistent performance, executing on our transformation and being good stewards of capital. And that will hopefully give you a framework around which we couldn't look at any of the actions that we take, including as you talked about the programmatic M and A, which Andy now can talk about.
Yes. So thanks, Charlie, and Elyse, I'll build upon it. So, first, when it comes to PGIMM, I'd be remiss if I didn't say that we've had just great success organically growing this business. We've seen somewhere in the neighborhood of $55,000,000,000 in flows over the last 5 years due to the strength of our platform. And we will continue to invest growth.
Having said that, this is an area we've identified where we want to augment through M and A. And that all starts being very clear on our priorities and clear on our spots. As we talked about last quarter, we're very interested in expanding upon our already good capabilities in alternatives, as well as continuing to expand on our track record of success globally. Those are areas we're focused on because if you look at the overall asset management industry, they are faster growth areas of the space. As we're looking, everything and anything we look at would obviously, we need to vet for a cultural fit and to make sure it fits with our multi manager model.
The way that I talk to my team and my team, we talk about this is being in the flow and in the know. And what I mean by that is We need to make sure that we see all potential opportunities, both what's already in the marketplace, but what might be in the marketplace. And I can tell you that we are very confident that we are in the know and in the flow. We will be very programmatic and disciplined in deploying capital towards these acquisitions. And we are very confident that it will meaningfully add to PGIM over time.
Okay. That's great. Then my second question, in terms of the plans that you guys laid out, the exiting and the downsizing of businesses, it was all kind of focused on the U. S. Individual solutions side of the house.
But as we think about So Workplace Solutions, be that retirement or group, are those businesses that if there was an opportunity Via transaction to monetize some of the assets, is that something that you would consider? Or are you still more focusing On annuities and Mike as you look to free up capital?
So it's Charlie again, Elyse. We've spoken about the fact that we've taken a broad strategic review on our businesses within the context of having a business mix that is less market sensitive, less capital intensive and higher growth. And we're going to be really thoughtful and diligent about how we execute on the process with the goal of maximizing value for shareholders. So when there's more to report, we'll let you know, but we're in the process of doing that.
Okay. Thanks for the color.
Thank you. Our next question comes from the line of Andrew with Credit Suisse.
Just following up on Lisa's Question, if you could give a little more clarity on the full service retirement business, Is that considered a core capital light business?
So this is Charlie, Andrew. Again, we're not going to comment on any particular business. What I'll do is go back to our original premise, which is that we've looked at all businesses. We're considering a business mix in totality That's going to be higher growth, less capital intensive, less market intensive and less volatile over time. And we've evaluated all our businesses within that context.
And as we go through that process, as we make decisions and execute, You will be one of the first to know along with all your other colleagues.
Maybe you can all right, let me know a little Moving on to Assurance IQ. I mean, These revenues look phenomenally robust and yet this quarter you generated a pretax loss of $39,000,000 Could you give a sense of when you'd like to kind of turn the corner on profitability or is it still a little too early to say?
So Andrew, it's Andy. Thank you for your question. First, let me make sure I point out that in this quarter, we had $10,000,000 of onetime non recurring expense. And just to give you a feel and a flavor for that, That, as an example, we ended a couple of vendor contracts in distribution as we're maturing our model. As far as the path We're on to drive the business towards our ultimate revenue and margin objectives.
Nothing has changed. We bought this business and platform for its long term strategic capabilities that it provides us, both from expanding the addressable market as well as for shifting our mix to a more fee oriented mix. So, as such, we're investing and managing the business for the long term. We continue to invest in broadening and deepening the product portfolio. We continue to invest in deepening and making more capable of the distribution system.
And the results in the quarter, you see evidence of that. I'll point back to what we said last quarter. The key metric is revenue growth as we scale this platform up. And as you saw, we had 80% quarter to quarter revenue growth and had revenues grow in all lines. So, we have a plan.
We're executing against it. Seeing the metrics go the right way, we need to scale the platform. And as such, in the near term, we will see operating losses.
Thank you.
Thank you. Our next question comes from the line of Ryan Krueger with KBW.
I noticed that you stopped Breaking out the wellness implementation costs this quarter, can you give us any context for why you did that? And also, I guess as we look if we think about Corporate segment losses of $1,500,000,000 for 2021, should we expect that to decline in the following years as implementation costs also declined?
Hi, it's Ryan, it's Ken. We're making really good progress our transformation and cost saving initiatives and that's being driven by our transformation office and we're making great progress. We included the implementation costs that we expect this year in our estimated loss for corporate and other of 1,500,000,000 So it's in there and it's comparable to the amount that we had in 2020. At this stage, we don't expect the magnitude to due to very significantly. So that's why we didn't feel the need to continue to separate and isolate it out.
We are, as I mentioned, making very good progress towards our objective of achieving 100 or $750,000,000 of cost saves by 2023. And over this period, we would expect to have implementation costs included in our Corporate and Other segment to continue.
Thanks. And then on your retirement business, can you give us any rough Breakdown, since there's kind of a couple of different businesses in your reporting segment, what the rough breakdown in terms Earnings contribution is from full service compared to institutional investment product?
We have an excellent full service business, but it's part of our overall retirement segment. We haven't historically separated that out. It is part of that business line and we're not going to separate that those Excel for just the full service segment.
Got it.
All
right. Thank you.
Thank you. Our next question comes from the line of Suneet Thomas with Citi.
My first question is, I'm just trying to reconcile something, which is At the 2019 Investor Day, we spent a lot of time on the financial wellness initiative and how you were tracking a lot of these meetings that you're hosting with the employees of your corporate customers. So I'm trying to reconcile that strategy with comments that we're hearing today that a lot of your U. S. Businesses are under review, including the retirement business. So it felt to me that those two things were interconnected.
So I'm trying to figure out, is there a change in that financial wellness strategy or what's going on?
So Suneet, it's Andy. I'll take your question. Financial wellness absolutely remains a key component of our organic growth strategy in the company. As we articulated at that Investor Day and as you heard me say often, we're working to bring more solutions to more people and to address a broader swath of the American marketplace. That is both through the workplace, through the advisor channel and direct to consumer.
As we talked about, our financial wellness capabilities that we've built out have really helped to activate a couple of value levers. And the 2 predominant ones would be institutional value And the second would be converting individuals in the workplace to long term loyal customers of Prudential. We've seen those value levers activated. We've talked in the past about institutional value that's been delivered, both from the net revenue growth in the group insurance business, but also from the growth of our full service platform. And we are seeing the conversion to individual product sales from the financial wellness value prop.
So, you should think of it as it is an important component of the organic piece of our strategy to grow and expand our addressable market. But It is that. It's a component of the broader strategy as we push the business system to be higher growth, less capital intensive and less market
Okay. And then on the capital reallocation, I think when we were talking about growth businesses last quarter, You highlighted 3 emerging markets, PGIM and Assurance IQ. I think, Charlie, in your prepared remarks this morning, you didn't mention Assurance IQ. Should we take from that that you're currently not planning on allocating more capital to either Assurance IQ or other sort of Insured Tech Types of operations?
Yes, I think that's a fair comment. In other words, as we think about Programmatic M and A, in particular, as we've talked about it this morning, it's investing primarily in our other businesses in the U. S. And international. And what we mean by programmatic M and A is very it's a very specific strategy.
We're going to be highly selective and we're going to do targeted acquisitions that add either scale or augment capabilities to our existing businesses like PGIM and like emerging markets.
Suneet, it's Rob. Let me just add to Charlie's comments, which is to say that differentiate what would be the objective that we articulated was to have The combination of the 3 businesses that you mentioned equal to 30% of our earnings in the timetable that we have targeted. And then we separately said with regard to redeployment of capital, however, that we were focused on PG and Emerging Markets. We did not at that point in time call assurance as an area for capital deployment.
Okay, thanks.
Thank you. Our next question will come from the line of Erik Bass with Autonomous Research. And your line is open.
Hi, thank you. Can you provide some more details on your current emerging markets businesses and where they stand in terms of scale and profitability? How much earnings are you generating from emerging markets today? And how do you expect that to grow organically over the next 3 years?
Thanks, Eric. This is Scott. I'll go ahead and take that question. Well, first of all, from a big picture perspective, following the sale of Korea, about 94% to 95% of our earnings come from Japan. So that's why we spend a lot of focused on Japan.
Within the emerging markets, I think I've said before that the bulk of the earnings from those from that sector comes from a combination of Brazil and Chile. So the good news is in our emerging markets platform is that we feel like we're in a lot of the right countries. And we've actually worked pretty hard to get the right partners in those countries where partners were required. The challenge that we faced is that we originally started in a lot of those markets with tight agency or an LP model. And we've now broadened that out to add independent agency and bank assurance.
But we're Starting from a rather small platform. So the good news is we are seeing rapid growth in the emerging markets. For example, our in force grew at single digit in Brazil and double digit in Mexico last year. But for most of our emerging markets, we're starting off with a rather small base. And that's why Charlie talks about it in the context of markets that we'd like to grow.
We tend to think we're in the right places. We have licenses and partners. And that's why we think a bolt on strategy is probably the best strategy for growing those markets. Thanks.
Thank you. And then a follow-up on sticking with the international businesses. In the Life Planner business, you continue to show healthy growth in Life Planners at POJ, but the Total life planner counts down year over year. I'm assuming the decline is coming from Brazil. Just was hoping you could provide some more color on what's going on and what we should infer about the underlying growth trends in that business?
Yes, Eric. That's a good follow-up and your observation is is correct. I believe I commented last quarter, but we systemically or consistently kind of go through our LP models and we change our contract terms. And we do that to maintain productivity, sometimes adapt to regulatory changes, customer and regulatory needs and the like. And we did implement some new contract terms in Brazil last year.
We were expecting a decline to follow that. That in fact did occur and so that really was the change. Actually Japan Life planner growth was actually up in POJ 4% year over year and that's our biggest market. In quarter over quarter, we were back up slightly in Brazil. So I would view that as kind of A contract related change.
Further, I would say that if you look back 3 or 4 years ago in Brazil, almost all of our sales were coming from the Life Planner channel. And we've had a lot of growth in our bank segment. And increasingly, we've been making progress in our group segments so that recently almost 30% of our sales have been coming from outside the life planner model. So we're actually quite pleased with how things are going in Brazil. Thanks.
Thank you.
Thank you. Next, we will go to the line of Jan Ciner with Goldman Sachs.
My first question goes to the increase in the buyback authorization, less so about I think 2021, but The thought of seeing that $500,000,000 increase flow through to your 3 year target. I just conceptually, I want to maybe get your sense. Is that something that you think you'll be revisiting on a quarterly basis based on the performance of the company? Or is this kind of a one off? How should we think of this new $10,500,000,000 target?
This is Ken. We've had a very consistent approach to capital management. We use both share repurchases and dividend as a way to distribute capital to shareholders. We've prioritized dividends and our earnings have been about 3 times dividends. Our free cash flow has been about 65% of our earnings and about 2 times our dividend.
So while we seek to use dividends and grow them, We'll use a level of share repurchases, but it will vary over time. Our recent decision to increase that by $500,000,000 And again, just not just for 2021, but we also, as you mentioned, increased our 3 year outlook. It really reflects where we are at this point in time with our capital position as well as our outlook on the economy. And again, it's consistent with returning excess capital to shareholders. As time passes, we will continue to reassess our capital position and determine if adjustments are appropriate.
So again, it's just it's really consistent with the approach we've had for many years. And if we have excess capital, we'll make the practice of share returning that to shareholders.
Okay. But a quarter ago, you were also talking about the other pillar there, which was the $5,000,000,000 to $10,000,000,000 that you deploy into and shifting business mix and then shifting to a more capital light structure. So I'm just trying to think of is this additional $500,000,000 does that mean that you're seeing less opportunity to deploy into shifting business mix? Or is it just that you identify more excess capital than you initially thought and therefore I'm thinking the other pillar.
Yes, it's really a reflection of our current position of excess capital. As Rob mentioned, we're making great progress towards our objective of $5,000,000,000 to $10,000,000,000 of capital reallocation. And again, it's a wide range because We want we will be disciplined about transactions to release and redeploy. So it's primarily the result of how we feel about our current capital position and the economic outlook.
Understood. And then my second question, because of Pigeon, so clearly very strong net flows, but kind of a tale of I don't want to say a tale of 2 stories, but you are seeing very, very robust retail flows, which I think is pretty consistent with what we are hearing in the market, Whereas institutional flows slowed down a little bit sequentially. I think that I don't know if I call that a trend or not, but maybe any color you can give us in terms of what you're seeing in both institutional and retail? And Are you seeing trends there?
So Yaron, it's Andy. Thanks for your question. Yes, and I would not draw any conclusions or We're seeing any trends. I guess the way we'd frame it is, we are a very diversified business our multi managers, across both public and private sectors, we serve a very wide range of clients. The only thing I'd say on the institutional side is, obviously, institutional clients can tend to be more lumpy and you'll get variability quarter to quarter versus on the retail side.
On the retail side, we have seen a lot of money in money markets and we think that could be a tailwind coming continuing to come into the marketplace. But more broadly, we have a broad suite of products. And I think at the end of the day, we're very confident that we'll be a net winner from a flows perspective, given the strength and the balance that we have across product types and across institutional and retail. But to your question of should you draw any trends or conclusions, I would say no.
Great. Thank you.
Thank you. Our next question comes from the line of Humphrey Lee with Dowling and Partners.
My first question is related to Retirement in general. I think in your 10 ks, you indicated that the spread compression in your full service business a key headwind to earnings for retirement. Just looking back the past couple of years or at least over the past several quarters in terms of The interest rate headwind that you highlighted, how should we think about the portion of spread compressions in foodservice versus that in the IIP business?
Hey, Humphrey, it's Ken. We do see spread compression in our retirement business and that's a combination of service in our institutional business. In the baseline roll forward that we provided, you'll see that of the $10,000,000 impact, half That or $5,000,000 is in our Retirement segment, but we don't split that out between full service and institutional.
I guess kind of directionally, which one would you say would be a blunt of that?
Yes. Again, we don't want to get down get into the breakdown of that.
Okay. I guess as just a follow-up to just the fixed income portion of the business in general, how should we think about the capital that you have is currently backing the stable value business in full service?
Again, we our full service business is part of our overall retirement segment. That's where the earnings are reported and the capital is held, but we're not going to break down the split of it by sub segment.
Okay. All right. Thank you.
Thank you. Our next question comes from the line of Tracy Sajewski with Barclays.
I'm wondering if you could reconcile some comments made. On one hand, you mentioned De emphasizing higher market and rate sensitive business. But on the other hand, Charlie, you mentioned previously that none of your businesses are sacred how that you look at everything. So it would be helpful to understand how open ended your quest is or if you have a pecking order in
Thanks, Tracy, for the question. We I'll just go back to what I said before, which is we have Look and are looking at all our businesses. Our objective is to create and maximize shareholder value over time. We're not going to talk about a pecking order, if you will, of businesses at this time, but rest assured that we're looking carefully at all our businesses and understanding specifically how they fit into an overall business mix and The objective that we articulated in the Q1, which was to expand our higher growth businesses and to reduce annuities and our market sensitive businesses to a smaller extent. So that's about all we want to say At this point, but we are in the process of doing that.
And as I said before, you all will know when there's more to report.
Okay, understood. Maybe it was a different topic. I mean, there's a lot of talk about COVID-nineteen, but I'm wondering if you had experienced better non COVID-nineteen mortality losses for the quarter. I understand the Q1 is usually a heavy flu quarter, but Looking at CDC data, it looks like excess mortality, ex COVID was unusually low. Did you have that experience?
Hey, Tracy. This is certainly an unusual stretch of time during a pandemic. But generally, we did not see any significant or credible trend or variance in our underwriting experience other than What seems to be related to COVID. So really can't give any other comments other than that.
Okay. Thank you.
Thank you. Next, we will go to the line of John Barnidge with Piper Sandler. And your line is open.
Thank you very much. And don't worry, it's not a question about risk transfers. So I was curious, with some short term disability claims seemingly going to go into long term disability, because of the natural things that occur with economic shock lapses a few quarters out. Can you talk about your expectations for that as well as associated elevated administrative expenses?
Sure, John. It's Andy. And appreciate the new topic to cover. So, As you would expect, last year, given the impact of COVID and the pandemic, we absolutely saw an increase in short term disability claims, we've actually seen those claims volumes coming back down, obviously, as the pandemic is getting more into control with vaccines and the like. We continue to expect, due to our experience, the impact on the economy to have an effect on long term disability claim incidents.
We have not seen that tick up as of yet. That Does not necessarily mean that we won't. There's generally a 6 month ELIM period on the long term disability plan. That's why you saw us put up an IBNR last quarter and we put up an additional IBNR this quarter. So, we're still expecting that.
And that directly flows to your question about increased administrative expenses. One of the things that we consider very, very important to managing this business is having the right number of claims professionals, nurses and folks specialists. We have beefed up our staffing in the claims part of the business to be ready to properly help individuals return to work that go on long term disability claims. And you're seeing that reflected in the elevated admin ratio.
And will that do it for you, John?
Sorry, I was on mute. Thank you. A Follow-up to that related to it. Do you think the corporate push, not Peru, but industry wide to return to office in, say, the summer fall may actually add another layer dynamic to that long term disability dynamic?
So, John, it's Andy. I'll take your question. That's a really hard one to predict. And where my thoughts go on that is we have a very of what we're going to see from a return to the workplace perspective are going to be pretty varied across those different industry size segments and geographies. So, really hard to tell what influence that might have on the disability claims incident side.
Thank you very much for your answers.
Thank you. Our next question will come from the line of Josh Shanker with Bank of America.
Two quick ones, I think. The first one is, Obviously, Q1 is very interesting from an interest rate perspective move and it affected the Mark to market results at the PGIM strategies in a negative sort of way.
I guess, I mean, look, There might
be an argument that interest rates are going to continue to rise, probably not at the pace they did in the Q1. But does PGIM have the right set of strategies to entertain inflows in a rising industry economy that PGIM customers will embrace?
So Josh, it's Andy. Thanks for your question. So, yes, as you're Referring to if we were to see a consistently rising rate environment, that very likely has an impact on fixed income flows in general across the space and could impact growth for that sector. But I'd go back to something I said earlier, which is We're a top 10 asset manager with a very broad and well diversified portfolio in both publics and private. And in any economic environment, we feel that we'll be a net winner across those set of businesses from a net perspective.
So, we feel very well positioned. And then, obviously, I'd be remiss if I didn't add. Remember, a rising rate environment overall is a net positive for Prudential.
I understand that. And 2, I just understand the financial advisor new sales on the annuity side of the business. Obviously, the buffer annuity sales have been very strong. But I just want to break down. If I have a variable annuity with living benefits With Prudential, can I keep contributing into it?
And how much of the new sales are legacy living benefits customers or putting more money into their older policies?
Yes. So, again, it's Andy. Thanks for the question. Depending on the product, depending on the regulatory territory, there are Various rules on what we call those sub pays, how much additional money could be dropped into the policies. We have actually closed off to the degree we're able And it is, to a large degree, sub pays going into those products.
That's why when we report that only 1% is in the traditional variable annuities and guaranteed living benefits. That is reflective of the sub pays as well. So when we're really talking about runoff, those products truly are not owning sales to new customers, but additional money is being dropped in. It really is a hard stop on
Okay. Thank you for both the
answers. Thank you. We will go to a follow-up from Tom Gallagher with Evercore ISI.
Andy, just a Follow-up on the buffer annuity sales, which are now the majority of your annuity sales. That's obviously a very big pivot into that product. Can you talk a bit about the risk profile of that business, the capital intensity Of this product compared to your legacy VA business and why you obviously feel a lot of confidence with this Volume of sales if you're looking to exit legacy VA, but maybe just a compare and contrast about why you have confidence and clarity on the risk profile there.
Yes, Tom. So, it's Andy. Maybe I'll take sort of two sides to that question, risk and return. From a risk Perspective, the product is vastly different from our traditional variable noties, like the highest daily income. If you think about it, we're sharing risk with the consumer.
We're giving them a buffer on the downside for a little bit of upside, but they have the tail downside risk and obviously the upside is capped. So, At the end of the day, we're not taking interest rate risk like we were in HDI. The interest rate risk because of the design of the product could be nearly We hedge with simple options. So, the risk profile, we're very, very comfortable with from a go forward perspective. Your question around returns, I think what I've talked about in previous quarters, we did a lot of work to be able to more rapidly price our products and adjust our product pricing.
We're quite pleased with the returns that we're seeing on the business that we're selling. And obviously, that might be begging the question of, well, why have you been so successful? So, let me hit that. Number 1, we are one of the very best and top brands in the space with a lot of history through the 3rd party advisor channels. Number 2, We have great distribution people and relationships inclusive of Prudential Advisors, which is a very big strategic advantage for us.
And that has led to the sales results and the very, very positive results. But we like the risk profile and we'd like to return. Hey, Tom, it's Rob. Just to add on to one thing Andy said, you talked about the interest rate risk profile. Just implied in his comments as well, but to make sure it's clear, the equity risk profile is also quite low.
We're able The buffer is something that we're able to actively hedge with options in the marketplace. So we're not taking that equity market risk on ourselves. Thanks.
Okay. Thanks guys.
Thank you. And with that, Mr. Lowery, I'd like to turn it back over to you for any closing comments.
Thank you very much. So thank you for your time and interest today. I hope we've conveyed the increased sense of momentum and the steady progress around our transformation We remain confident in our strategy and the additional steps we're taking to build a nimbler and higher growth business and one which continues to focus on the evolving needs of our customers. We look forward to sharing more details on our progress with you in the coming quarters, And thank you again for joining us today.
Thank you. And ladies and gentlemen, that does conclude your conference call for today.