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Prudential Financial Inc (NYSE:PRU)
Q3 2019 Earnings Call
Nov 5, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Prudential quarterly earnings call. [Operator Instructions] I would now like to turn the conference over to Mr. Darin Arita. Please go ahead.

Darin Arita -- Head of Investor Relations, Senior Vice President

Thank you, Cynthia. 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; Steve Pelletier, Head of US Businesses along with Andy Sullivan, our next Head of US Businesses; Scott Sleyster, Head of International Businesses; Ken Tanji, Chief Financial Officer; and Rob Axel, Controller and Principal Accounting Officer.

We will start with prepared remarks by Charlie, Robin, 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 doctors 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, which can be found on our website at investor.prudential.com.

I'll hand it over to Charlie.

Charles Lowrey -- Chairman and Chief Executive Officer

Thank you, Darin. Good morning everyone and thank you for joining us today on this call. Yesterday, we reported third quarter earnings per share of $3.22 cents. We also reported a year-to-date ROE of 13%. I'll begin by discussing our progress and executing our financial wellness strategy. We are committed to delivering a broader set of financial wellness solutions to more people in new ways, leveraging our scale across multiple distribution channels and drawing on our expertise, including product development and asset management. During the quarter, we took steps to expand our digital distribution capabilities through the announced acquisition of Assurance IQ, a fee-based and capital-light growth engine. Assurance is a leading direct to consumer platform for financial wellness solutions that enable us to serve a different demographic segment including the mass and middle markets. Over time, we believe we can expand these capabilities internationally.

The Assurance acquisition, which closed in October, also provides attractive financial benefits and significant upside potential. Assurance shares our purpose of solving the financial challenges of a changing world, which is at the core of who we are. In that theme. I'm pleased to note that Fortune has named Prudential to its prestigious Change the World List for a second consecutive year. We also made progress in the quarter toward our margin expansion goals by evolving and transforming the way we do business across the organization. Along these lines, we launched a voluntary separation program in October for segments of our US workforce. These efforts are intended to better position us to meet the needs of our customers while driving greater speed and efficiency.

Finally, we continue to advance our efforts to reduce the impact of market fluctuations and add transparency to our quarterly financial performance. As a result, beginning in the fourth quarter our corporate and other results will be less affected by changes in the equity markets and our own stock price. Looking ahead, we're taking a very disciplined approach to pricing to help offset the impact of rates on new business profitability, which will have an obvious effect on some of our sales.

We're encouraged by our progress and are moving quickly and with conviction to implement the plans we have set forward to deliver meaningful solutions and long-term value to our customers and shareholders. With that, I'll turn it over to Rob for a closer look at our business performance for the quarter. Rob.

Robert Falzon -- Vice Chairman

Thank you, Charlie. I'll provide an update on how we're executing on our strategy to leverage our multi-channel distribution product and asset management expertise and scale to deliver financial opportunity to a wider demographic within our US Financial Wellness PGIM and international businesses.

As shown on Slide 4, US Financial wellness currently represents our workplace and individual solutions division that produce a diversified source of earnings from fees, investment spread, and underwriting income. Beginning in the 4th quarter, it will also include fee-based earnings from the Assurance business, earnings, which are not correlated to equity markets, interest rates, or credit. We continue to execute our strategy to expand our addressable market.

Our Financial Wellness proposition is resonating with our workplace customers and with the employees of those customers, driving higher participation rates in the employee benefit programs and increased engagement with our advice platform. The number of people who have activated our digital Financial Wellness platform has increased to 9 million as of September 30th. This platform provides a digital venue to address a variety of needs, including education on financial wellness topics and assessment of financial health.

We're also growing individual relationships and expect to provide additional solutions to the employees of our workplace customers as well as other retail customers. One way we deliver these solutions is through link by Prudential, which is are highly interactive personalized online resource that enables people to create a path toward achieving their financial goals. Earlier this year, we began to deploy link on our workplace platform and we have already made it available to roughly 2.3 million people. We are on track to meet our goal of 2.5 million people by the end of the year. And notably with the October closing of our acquisition of Assurance, we have significantly expanded our addressable market with approximately 19 million individuals who are actively seeking insurance solutions. Assurance has direct to consumer platform an end-to-end engagement model, which includes over 3,000 agents, enables us to serve more people along the socioeconomic spectrum. In addition, this platform will enable us to expand our range of available solutions for our workplace customers by adding third party provided health and property and casualty insurance as well as Medicare coverage.

We're also making progress streamlining our operations to increase agility while driving efficiencies and enhancing the customer experience. We are on track to achieve $50 million in run rate margin expansion by the end of 2019 and expect this to increase to $500 million by the end of 2022 this is being accomplished through a number of programs that we have under way. In the current quarter, we incurred about $20 million of implementation cost to support these programs.

Shifting to a discussion of third quarter trends in the underlying fundamentals of our businesses, I'll start with flows in the US Financial Wellness this quarter, focusing on our Retirement and Annuities Businesses.

Our Retirement business had net outflows of $2.7 billion driven by a single large client lapse in our full-service business. This was partially offset by strong sales in the quarter, as the market continues to be active including episodic large client activity. The Institutional Investments business had net inflows of $600 million, including $3.6 billion of longevity risk transfer transactions. Year-to-date we have closed $17 billion of longevity reinsurance transactions and we have a strong pipeline. This elevated deal activity is driven by our strong competitive positioning and innovation as well as by UK pension funds de-risking ahead of Brexit. While we did not close any funded PRT transactions in the third quarter and recent declines in interest rates have impacted the funding levels of these plans.

The fourth quarter has started well and we have a solid pipeline of pending transactions. Our Annuities business experienced $1.1 billion of net outflows driven by normal accounts withdrawals roles as well as by elevated lapses, as certain contracts moved out of the surrender period. We expect this elevated level of lapses to persist through 2020. This was partially offset by an increase in sales, including the impact of launching our PruSecure Fixed Indexed Annuity last year and expanding into the IMO channel this quarter. However, we expect the current low interest rate environment to continue to pressure sales.

Turning to Slide 5, our strategy in PGIM, our Asset Management Business, is to combine our multi-manager model with global distribution and affiliated flows to grow and higher value-added strategies that serves investors globally. PGIM is a top 10 global asset manager with $1.3 billion of assets under management. It ranks as the fifth largest investor in fixed income and the third largest investor in alternative investments with significant real estate and private investment platforms. As the investment engine of Prudential, it benefits from a symbiotic relationship with our US Financial Wellness 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, both retail and institutional.

And our businesses in turn provide a differentiated source of growth for PGIM for affiliated AUM flows that complements its successful third party track record of performance and growth. Generated $800 million of net third party flows during the third quarter. Our third party net retail flows were $3 billion. Strong investment performance in our growing ETF and usage platforms and record Mutual Fund sales delivered solid fixed income flows, partially offset by equity outflows and our third-party institutional outflows were $2.2 billion, mainly driven by a single institutional fixed income client withdrawal of $2.9 billion dollars due to management consolidation. We serve many of the world's largest institutional investors and as a result, experience large idiosyncratic inflows and outflows from time to time.

Our Asset Management Fees benefited from record assets of the management due to market appreciation and continued robust fixed income flows. Strong investment performance and expertise across a broad range of asset classes has allowed us to continue to attract flows into higher return strategies. Approximately 80% or more of assets under management have outperformed their benchmarks over the last 3-year, 5-year, and 10-year periods. We continue to broaden and globalize our products and capabilities by developing and launching private and alternative investments expanding and retail and international markets.

Our multi-manager model strong track record of private originations and demonstrated investment performance, as well as the investments we are making in our distribution capabilities will position us to generate positive flows over time and to grow our earnings even absent the Wells Fargo fee arrangement, which ends this year.

Turning to Slide 6, our international business includes our world-class Japanese life insurance operation, where we have a differentiated business model with unique distribution as well as other operations in high growth markets like Brazil. Our Life Planner strategy is to grow our high quality distribution with a focus on needs based sales. In emerging markets, we look to combine Prudential strengths with local expertise to serve customers in a non-traditional way.

Life Planner sales which were about half of the total international sales in the current quarter increased by 8% compared to the year ago quarter. This was driven by record Life Planner count and higher US dollar sales in Japan as well as by continued growth in our Brazil operations. Sales for Gibraltar, which represents the other half of international were 11% lower than a year ago.

This primarily reflects lower single-pay US dollar fixed annuity sales in our life consultant channel, as we continue to focus on recurring pay protection products. In addition, the recent decline in US interest rates resulted in lower crediting rates, which also affected sales of US dollars denominated products. We also experienced lower production in our independent agency channel and lower bank channel sales due to continued heightened competitive conditions.

We will continue to innovate new products and consider pricing actions while focusing on maintaining our target level of profitability and improve sales over time. Summary, in order to generate profitable growth and attractive returns, we are expanding our distribution and product solutions, leveraging our asset management expertise and focused on engaging more deeply with our customers.

And with that, I'll hand it over to Ken.

Ken Tanji -- Chief Financial Officer

Thanks, Rob. I'll begin on Slide 7, which provides additional insight into our fourth quarter earnings. Relative to our third quarter results. We begin with our third quarter pre-tax adjusted operating income, which was $1.7 billion and resulted in earnings per share of $3.22 on an after-tax basis, then we adjust for the following items. First, we adjust a variable investment income to a normalized level, which is worth $65 million.

Second, the fourth quarter will include seasonal expenses and implementation costs related to the acceleration of our Financial Wellness strategy. We expect this will lower results in the fourth quarter by approximately $280 million resulting in an expected loss in the corporate another segment of $475 million to $500 million inclusive of the cost of our Financial Wellness initiatives. There will also be additional costs in the fourth quarter related to the voluntary separation programs that Charlie mentioned. This is all part of this $600 million to $700 million of implementation costs to accelerate our financial wellness strategy, as we discussed on Investor Day.

Third, there are other considerations that we expect will result -- will increase results by approximately $25 million on a net basis in the fourth quarter.

And fourth, we anticipate a $10 million reduction in the quarterly net investment income from portfolio reinvestment, assuming reinvestment rates are held flat with the third quarter. Absent a change in interest rates, the $0.02 per share for one quarter would compound to $0.30 per share over the five-quarter period ending December 2020. This assumes a 7% annual turnover on $370 billion fixed income portfolio with new money yields 65 basis points below disposition, yields on average. Combined, this gets us to a baseline of $2.50 per share for the fourth quarter before including the impact of future share repurchases, business growth, and market impacts.

This baseline includes a few items that puts it below our typical earnings level. First, we have seasonal expenses in the fourth quarter, we expect those expenses to be similar to prior years at about $125 million to $175 million. Second, we expect about $95 million of Financial Wellness implementation costs in the fourth quarter. And third, we expect $55 million of higher typical expenses -- higher than typical expenses in Life Planner.These three items total about $0.58 per share and explain the elevated level expense expected in the fourth quarter baseline.

While we have provided these items to consider, there may be other factors that affect fourth quarter earnings per share. A few additional items to note. First, we issued 5.5 million shares in the fourth quarter for the Assurance acquisition. Second, as Charlie mentioned in his remarks, we have taken further action to reduce fluctuation of quarterly earnings by reducing the impact of movement in Prudential's stock in the equity markets on long-term and deferred compensation expenses.

Also on Slide 17, we have provided updated information regarding seasonal items by business. We hope that you continue to find our new disclosures, including our baseline earnings per share information, helpful in understanding the earnings power of our businesses. We have indicated over the past few years, we are considering alternatives to how we approach guidance. With the new disclosure now in place and provided on a regular basis, we have decided not to provide annual EPS guidance or host an outlook call in December. We believe our enhanced disclosures and processes provide insightful information on a more frequent basis.

Turning to Slide 8, I'll provide an update on capital deployment, liquidity, and leverage. We feel very good about the overall strength of our capital position. We returned $1.4 billion to shareholders during the current quarter through dividends and share repurchases. Our share repurchase authorization for the remainder of the year is $500 million as of September 30th and over the last 5 years, we've increased our dividend per share by 16% per year on average. Our current quarterly dividend of $1 represents a 4% yield on our adjusted book value. We also continue to maintain a rock solid balance sheet. Our regulatory capital ratios continue to be above our AA financial strength target levels and our financial leverage ratio remains better than our target. Our cash and liquid assets at the parent company was $6.2 billion at the end of the quarter and that was above our top end of our $3 billion to $5 billion liquidity target range.

As shown on the Slide, we've provided a pro forma of the highly liquid asset balance that reflects the amount that funded the acquisition of Assurance in early October and brings the balance within our target range. We will look to continue to invest in the growth of our businesses, assess acquisition opportunities to build, scale, or gain capabilities and return capital to shareholders.

Turning to Slide 9 and in summary, we are accelerating our strategy and positioning our businesses to deliver long-term growth. We remain on track to achieve $50 million in run rate margin expansion by the end of 2019 and $500 million by the end of 2022. We've generated a record high adjusted book-value per share and continue to generate strong cash flows that support consistent growth in dividends and other distributions to shareholders and we maintain a robust capital and liquidity position with financial flexibility.

Now, I'll turn it over to the operator for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We'll go to the line of Alex Scott with Goldman Sachs. Your line is open.

Alex Scott -- Goldman Sachs -- Analyst

Hi, good morning . So first question I had is on variable annuities and I guess here we're seeing the ROA, it's really starting to come down. And I just wanted to see if you could dimension for us. What's impacting that, is it sort of the spread you're making on the writers, is it just the fee levels coming down and how I think previously you talked about 115 or 116 bps or so. We're already below that. I mean should we expect significantly lower long-term sort of trend level at this point?

Ken Tanji -- Chief Financial Officer

Yeah. Hey, this is Ken. I'll take that. First, our variable annuity business continues to be very profitable and that's although it's a bit lower, it still has a high ROA and a strong ROE. We've mentioned in the past that we'd expect the ROA trend over overtime as policies both move into lower fee tiers and as we continue to diversify our product mix to solutions with less equity market sensitivity. So that continues to play out. And while the ROA is a general -- generally a good benchmark for profitability, it will adjust when markets move significantly and interest rates have declined pretty significantly in 2019 down by about over 100 basis points year-to-date. So while the decline in rates increases the account value, it affects earnings by the combination of higher benefit ratios and and higher DAC amortization. So despite the decline in rates, again the business continues to be very profitable and generating a quarterly cash flow, we still like the profitability, albeit at a lower ROA.

Alex Scott -- Goldman Sachs -- Analyst

Got it. Okay. And then my followup question is I guess more broadly on expenses, there is some acceleration in Life Planner, a little bit more next quarter, you've got the digital expenses going on, but I guess you've also got Assurance IQ coming on, which I think there were some synergies with some of the things you're doing on digital capabilities. So just -- just wondering if you could provide more detailed thoughts on how much you'd be looking to spend over the next year or so and what kind of offset there is from Assurance coming online. And if -- and if you have any more like big accelerations like there was a Life Planner for other segments like once you get past whatever you're focusing on Life Planner.

Charles Lowrey -- Chairman and Chief Executive Officer

Let me just -- this is Charlie. Let me start in and then others others can join in. So, we said with Assurance that there would be -- there would be a certain amount of expense synergies. I think we said $25 million to $50 million next year and then additional after that. So you can expect those to come in over time. Those are separate and distinct from some of the other expenditures that we're making or some of the other savings we're seeing in the margin improvements.

Robert Falzon -- Vice Chairman

And then the other area for the quarter was international, where we did see the shift of some expenses and a higher level of expenses in the quarter.

Alex Scott -- Goldman Sachs -- Analyst

So, is that really one time or are you going through any kind of process, where you might be assessing needs for other other segments that are outside of the digital initiative that's in corporate?

Scott Sleyster -- Executive Vice President and Chief Operating Officer, International Businesses

Hi Alex, this is -- this is Scott. I think Darin gave some guidance on what will be recurring and non-recurring, but there is a couple of big things going on. First of all to the specific quarters, as I mentioned before, we see evolving regulatory oversight and we're trying to put the infrastructure in place to continue to be at industry best practices and some of that's rolling out actually not just in Japan, but around the world. As I mentioned at Investor Day, we also have been following some of the technology upgrades and the digital upgrades that occurred in the US. We kind of follow what worked well and we're rolling some of those out across the board. And then this quarter, we actually had some additional litigation and other reserves and finally some things we're doing on process improvement and automation.

So I would say, it really falls into those two big buckets. We were playing a bit of catch-up on the improving regulatory best practices and then we had some significant initiative roll outs that we were doing in International that I would say lag the US by about a year. We're most of the way through that and so I think if you look at the -- if you look at the adjustments we have call it $55 million and accelerated additional spending in the fourth quarter that will disappear as we hit our run rate going into 2020, I think we would say that's -- that's largely our new baseline.

Alex Scott -- Goldman Sachs -- Analyst

Got it. That's all very helpful Thank you.

Charles Lowrey -- Chairman and Chief Executive Officer

And I'll just add, for the quarter, keep in mind, corporate was lower and there is sort of a couple of pieces there. We had lower long-term compensation expense related to the change in our share price that. As we mentioned will no longer occur going forward, as we've -- we've modified our long-term compensation program to no longer need to have that stock price flowing through our expense and then corporate expenses were also a little bit lower. So if you looked at corporate international, they were somewhat offsetting.

Alex Scott -- Goldman Sachs -- Analyst

Thanks.

Operator

Thank you. Our next question comes from the line of Erik Bass with Autonomous Research. Your line is open.

Erik Bass -- Autonomous Research -- Analyst

Hi. Thank you. So you've talked about the outlook for EPS in the fourth quarter, but it sounds like that includes a number of one-off expenses in addition to the normal seasonal impact. So it's not, I guess a real reflection of your earnings power. Therefore, can you help us think about a more reasonable earnings baseline for 2020 and is it really adding back the $0.54 of items, so thinking of something in kind of the low $3 range before buybacks and growth.

Ken Tanji -- Chief Financial Officer

Yeah. Hey, Erik, it's Ken. There's actually a number of ways that you can think about this and look at this. So I'll -- first, I'll start with the baseline that we gave at the end of the second quarter, going into the third quarter, which was about $3. So that was sort of where we thought in the middle of the year, our earnings power was. The third-quarter results came in at $3.22 and that was a little bit above that, because we had favorable variable investment income and favorable underwriting expense across our businesses and as I mentioned in our last comments the expenses kind of offset between corporate and other international.

So if you adjusted that, you got to a number that was a little better than -- than $3. Now, in the fourth quarter baseline, you do have a number of items like I said in my -- in my opening remarks that make it a little bit below our typical earnings level. The first is our seasonal expenses that's unique going on this year, typical to what we see in the fourth quarter. We have the Financial Wellness implementation costs, again very consistent with what we articulated at Investor Day. And then third, we have expectation of little higher expenses in our international businesses. If you put those items altogether and you adjust it for that, you'd be back at a earnings level a little bit over $3. So I think that's the way we're thinking about, our earnings power over those time frames.

Robert Falzon -- Vice Chairman

And Erik, it's Rob. Let me just sort of pickup on that sort of looking ahead off that baseline, Ken mentioned in his commentary that we do have interest rate sensitivity going forward and we've given some guidance on that. So that's sort of updated and will be a headwind contrary to what would otherwise have underlying business growth and then obviously the very significant increase we have growth as a result of capital deployment from shares. The other piece to think about, with interest rates is that we'll have lower sales that that come out of that in a lower interest rate environment as well or at least that's -- that's what we're anticipating. Recognizing all of that, we are being very proactive, we're managing sales through product pricing, design, and mix, we're managing costs, so that includes implementing the previously announced Financial Wellness initiatives that Ken covered as well and we've been actively deploying capital for growth that was evidenced very clearly in the Assurance IQ acquisition, which is not sensitive to rates or equity markets, but also the things that we've done in PGIM and its investment capabilities and its distribution capabilities and the other global technology and distribution initiatives that we have, all of which we think will contribute to fundamental growth and then obviously, as I mentioned the share repurchases. So deploying capital for growth, all that we believe gives us the ability in combination with what's happening on international in terms of our continued ability to grow the in-force. It gives us confidence that we can continue to show a differentiated level or we can show going forward a differentiated level of of growth and ROE vis-a-vis the industry in light of the sort of the macro headwinds that we outlined.

Erik Bass -- Autonomous Research -- Analyst

Thank you. That's helpful detail. Maybe going on the interest rate comment, I mean it seems like your interest rate sensitivity has increased versus the $0.30 impact for 100 basis point move that you gave on last year's outlook call, just hoping you could give a little bit more color on why that's the case.

Charles Lowrey -- Chairman and Chief Executive Officer

Yeah. Sure, I'll cover that. Again a year ago when we issued guidance, interest rates were in a different zone and our guidance a year ago assumed 2019 would have interest rates above 3% if you use the 10-year US Treasury as a benchmark. We were at rate levels that are now over 100 basis points below that, well I should -- and when we gave that guidance last year, we mentioned that our sensitivity to 100 basis point decline would be $0.30 per share and that's kind of what we've experienced as we've gone through the year and that's what we've experienced in our financial results as well. So the impact that we've experienced in 2019 is very consistent with what we provide is as sensitivities again, a year ago. But from here, the rates are at a lower start point and we also have more US dollar business in Japan. We have more business that's at crediting rate minimums. So there is -- and it's not linear as well and in which we do have a greater impact and you also have to consider there is an impact on the present value of claims at a lower discount rate. So those are the reasons that -- we have more interest rate sensitivity now and it all has to do with a lower rate environment.

Erik Bass -- Autonomous Research -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Suneet Kamath with Citi. Your line is open.

Suneet Kamath -- Citi -- Analyst

Thanks. Just a follow-up on that, Ken, just as we're thinking about this rate pressure potentially compounding over time, the $0.02 eventually becoming a much bigger number. If rates don't move up, isn't this is going to pretty much offset some of the margin expansion that you are targeting as associated with the Financial Wellness initiatives.

Ken Tanji -- Chief Financial Officer

The interest rate impact again assuming rates don't change does build over time. Eventually, it does dissipate as the portfolio more fully turns over. And this is exactly the experience that we had, if you go back a number of years as we shift it from the then rate environment to what was the more recent rate environment, now we're going through that again. So that phenomenon is not new, it's how it plays out. And so, I think it will -- it will work its way through in multiple -- in multiple waves as you go out, but again dissipates eventually over time as the portfolio turns over.

Robert Falzon -- Vice Chairman

Suneet, just call out in the deck, it's Rob, in the deck that we provided, we gave you the sort of the sensitive rates based on what's the delta between our third quarter new money rates and the yield on the portfolio that will be turning over on a go-forward basis. That's about 65 basis points so vis-a-vis, where we are today, if rates modestly rise to something that's sort of in the mid-2's not very different from where we were just a little while ago, this phenomena begins to wear off.

Suneet Kamath -- Citi -- Analyst

Got it. Okay. And then just on the decision to not host an outlook call I guess for next year. Typically, it would be on that call that we would get a sense of how you're thinking about capital return for the upcoming year and view or an outlook on year-end AAT reserves. So since you're not having that call, just wondering if you could provide some commentary on how you're thinking about those two things at this point?

Ken Tanji -- Chief Financial Officer

Yeah. So first, I'll start with AAT, given lower rates, we would have a rise in asset adequacy testing reserves, but we do have derivative -- interest rate derivative hedges that would have gains as well to offset that. So, we still feel very good about the RBC level of our -- of Prudential Insurance Company of America. In terms of our capital returns, that's a decision that the Board will make in December and -- and we'll get that information out once the Board makes that decision and does its authorization.

Our free cash flow profile has been very consistent and our capital management approach has also been very consistent, so for now you can factor that into your thinking.

Suneet Kamath -- Citi -- Analyst

Okay. Thanks guys.

Operator

Thank you. Our next question comes from the line of Tom Gallagher with Evercore ISI. Your line is open.

Tom Gallagher -- Evercore -- Analyst

Good morning. Ken, just going through the Slide that discusses the Corporate loss. If I take $475 million for the 4Q guide and then I strip out the $150 million sort of the mid point of higher seasonal 4Q expenses in the $95 million of one-time restructuring expenses that gets me to a Corporate loss of about $230 million. I think the guidance you guys have provided has been over $300 million a quarter as more of a normalized Corporate loss. I just want to know are you implying that you would expect the Corporate loss to be lower on a go-forward basis or is there -- is a little over $300 million still a decent quarterly loss expectation?

Ken Tanji -- Chief Financial Officer

Yeah. Tom, the one thing I think that I think you have a little bit off there is the $150 million of seasonal doesn't all occur in Corporate and Other, only about half of it does. So if -- I think if you -- if you make that consideration, you're more in line with where our Corporate and Other run rate has been.

Tom Gallagher -- Evercore -- Analyst

Okay. Thanks for that clarification. The other -- the other question I had is on the , just a follow-up on capital return cash flow, the -- I think based on -- I understand there's been some GAAP earnings pressure here, but can you talk about how cash flow visibility is playing out as you head into 2020. Would you still expect a similar or call it 65% conversion ratio or will that be changing based on where interest rates are in both Japan and the US.

Ken Tanji -- Chief Financial Officer

Yeah. Tom, our cash flow engines are still very much intact. So first for the businesses that have been providing quarterly dividends, PGIM and our annuities business, as you can see those have been very consistent regular and paid quarterly and Japan paid a dividend this quarter in the third quarter as well, and we'll be filing for a dividend from PICA in the fourth quarter. So yeah rates will decrease net investment income and have some modest impact as we talked about with our sensitivities, but in general our cash flow picture is quite strong and quite consistent.

Tom Gallagher -- Evercore -- Analyst

Got you. And then just one final follow-up if I could, the market related Experience Adjustment Factor, which was I think around the negative $300 million to net income this quarter, was that a just a one-time adjustment outside of the actuarial review to reflect macro or can you just provide some color on that? Thanks.

Ken Tanji -- Chief Financial Officer

Yeah, sure. No, that wasn't a one-time adjustment. So that adjustment occurs to update our discount rates related to our best -- best estimates of insurance liabilities and the amortization of deferred acquisition costs and it did lead to a charge for the quarter. Having said that, we had other gains as well and if you looked at GAAP net income, it was actually above operating income. So overall, our GAAP profile was pretty in line with our operating profile.

Tom Gallagher -- Evercore -- Analyst

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of John Nadel with UBS. Your line is open.

John Nadel -- UBS -- Analyst

Good morning everybody. Maybe a question for Rob or Ken. It sounds like -- it sounds like this is more macro-driven and maybe you can correct me if I'm wrong, but it sounds like your expectations are that sort of given in particular sustained low rates, some insurance products are simply less attractive to customers. And as a result you know that your expectation is that sales in such an environment would be somewhat pressured, it maybe down. First question is, do I have that right or is there something else to that story and then the second or related question is should we expect that at least in the short term, as a result of that environment, your free cash flow could actually be better and maybe we ought to consider potentially at least some incremental capital deployment or capital return to shareholders.

Charles Lowrey -- Chairman and Chief Executive Officer

Yeah, John, this is Charlie. Let me start and then some others will jump in too. Let me just philosophically about sales. So the answer is as As interest rates decrease, absolutely sales will -- may well decrease as we change pricing and as certain products become much less profitable for us and we've always talked about a sustained level of profitability over time and so what we have to calibrate between is making sure that our products meet our hurdle rates on the one hand and two, sustaining distribution on the other hand and we're always calibrating between that, but we will -- we have already and will continue to raise pricing, lower crediting rates, do whatever it takes in order to maintain a level of profitability that makes sense for the company and shareholders and at the same time, look at what a minimum level of sales would be in order to maintain what is a world-class distribution system as we go forward and that's what we're toggling and that's why we're toggling on those two issues, and you will -- you will see that as we go through, but we have already raised pricing and taken multiple pricing actions, both domestically and internationally.

Stephen Pelletier -- Executive Vice President and Chief Operating Officer, U.S. Businesses

John, it's Steve. Maybe I'll amplify Charlie's comments and get a little bit more specific on what I think is a primary example of it, which is in the -- in the annuities business. Recently with the decline in interest rates, we have been active in making product changes that reduce the level of product benefits and effectively increased pricing, but that relates to over the past couple of months, reducing payout rates by 40 to 45 points in some of -- in our products by reducing roll-up rate on HDI by 50 basis points.

This is something that we do, as Charlie mentioned in the normal course of business in order to manage the business for sustainable profitable growth, while certainly looking to maintain relevance with distribution partners and a competitive value proposition for customers. We've seen some competitors take some actions, but frankly we've made more changes than most and as a result, it's possible that we could see our sales trajectory decline in the near term and we'd simply see that as an outcome of how we manage the business and I would mention as how we manage that business foreign extended period of time. If you look over a multi-year period in the annuities business, we've certainly been active in the marketplace throughout, but we've been significantly more active during periods where capital market conditions were more supportive of product features and add issue returns and we've been relatively less active in periods, where capital market conditions were not so supportive, it's that over an extended period of time that has built the in-force block in that business that has the characteristics, pardon me, that Ken mentioned earlier of strong profitability, robust returns, and solid cash flow.

John Nadel -- UBS -- Analyst

Yeah. Listen, I appreciate the need to balance right maintenance or maintaining distribution versus profitability of sales. I was just wondering if you'd expect that sales would be down sufficiently such that maybe it has in near-term or a short-term impact on free cash flow. But we can take that offline.

Ken Tanji -- Chief Financial Officer

Hey, you know John, I can cover that real quickly, expect sales come down. Yes, naturally, you would expect that cash flow would improve because we're not -- we don't need to hold capital associated with new business, so the direction is as you described.

John Nadel -- UBS -- Analyst

Thank you. And Ken, I've got one quick housekeeping one, and this is in light of really no outlook for 2020 call, but any reason why your tax rate given the business mix, etc. should be any -- it should be meaningfully different next year than it is this year?

Ken Tanji -- Chief Financial Officer

No. I don't -- I think our tax rate has been very consistent.

John Nadel -- UBS -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Humphrey Lee with Dowling & Partners. Your line is open.

Humphrey Lee -- Dowling & Partners -- Analyst

Good morning and thank you for taking my questions. Looking at PGIM, the fee rate seems to be a little bit more pressure this quarter, especially in retail and general account assets. I was just wondering if you can talk about just kind of your overall fee rate expectation in the near term and especially the fees of the assets that have left versus those that came in?

Stephen Pelletier -- Executive Vice President and Chief Operating Officer, U.S. Businesses

Humphrey, it's Steve. I'll take your question. Well, Rob called out a specific Fixed Income institutional outflow this quarter, but general story throughout 2019 has been pretty strong inflows into Fixed Income and some other asset classes and a pressure on equity flows, negative flows in the equity space really experience across the industry, as I would say the active to passive the -- active to passive headwinds picked up again this year. Given the relative fee rates across asset classes that that migration of assets from -- of asset mix from from equities to Fixed Income has that impact that you -- that you noted on our average fee levels. Now, I should emphasize, we've been able to significantly mitigate that by drawing a lot of our flows and including our Fixed Income flows into specific strategy -- strategies that have a solid fee levels. But nonetheless, the cumulative impact is as you -- as you pointed out. I would say though that this gradual migration of assets from equity to Fixed Income -- of asset mix from equity to Fixed Income especially fueled by Fixed Income appreciation in recent quarters due to the declining interest rate environment, while that might be a source of pressure on fees, it's also highly supportive of margin in the business. Fixed Income -- we have scale economies throughout our Asset Management complex, but the Fixed Income business is where those scale economies are most attractive and the flows increasing contribution of Fixed Income to our asset mix will be supportive of margin expansion in the business.

Humphrey Lee -- Dowling & Partners -- Analyst

Got it. I appreciate the color. Just for clarification on the expenses in International. I think in response to Alex's question earlier, you talked about the $55 million in the fourth quarter in terms of the elevated expenses to kind of where you think would drop off. But I think from last quarter's call, you talked about in Gibraltar you expect some high expenses to -- to continue throughout 2020 and then especially given, it seems like Gibraltar was a little bit lighter expenses in the third quarter, should we still expect some elevated expenses in International throughout 2020 and then kind of coming off after that or how should we think about that in general?

Scott Sleyster -- Executive Vice President and Chief Operating Officer, International Businesses

Hi, Humphrey, this is Scott. I'll take that. The $55 million really related to the Life Planner business and as you pointed out, we had a -- we actually had a -- we kind of overshot on what we thought our expenses might be in Gibraltar this quarter. We do still expect in Gibraltar a modest level of elevated expenses, I think where we guided you last quarter that that would continue to about mid-year. The really sizable amounts of that were picked up in 2019, so I'd say those are relatively de minimis. And I think in the -- in the guidance on expenses that were given on the overnight, we've captured that bleeding and I would say it's not really very significant in Gibraltar.

Humphrey Lee -- Dowling & Partners -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question will come from the line of Jimmy Bhullar with JP Morgan. Your line is open.

Jimmy Bhullar -- JP Morgan -- Analyst

Hi. So first, a question for Ken on the interest rate impact. I'm assuming that if you don't -- if rates do not change than that at least for the next 1 or 2 or 3 years compounds at a much faster rate than your normal earnings growth, so it becomes a bigger and bigger headwind in 2021 versus what you have outlined for potentially the next 12 months. Right?

Ken Tanji -- Chief Financial Officer

Yeah. I think you should think of it as for -- we said $0.30 for five quarters, call it $0.28 for four and that's sort of the annual -- the annual drag.

Jimmy Bhullar -- JP Morgan -- Analyst

But then beyond that, it should be considerably higher than the $0.28 in the next four quarters, just at the pace that it's building up. Correct?

Ken Tanji -- Chief Financial Officer

Yeah. Yeah. That's the way the math works. But I think over time it dissipates, but.

Jimmy Bhullar -- JP Morgan -- Analyst

Yeah. But that's a few years out as you rolled the portfolio over assuming no change in rates again. Right?

Ken Tanji -- Chief Financial Officer

That's right. That's right.

Jimmy Bhullar -- JP Morgan -- Analyst

And then on your Japan sales at Prudential Japan, you -- there was a tax law change, you withdrew a term product. Should we assume that, at least in the near-term that sales will remain muted or and if you could just give us color on what drove that weakness if there is something besides that, that drove the weak sales this quarter And just some idea on sort of the trends in that market and what your expectations are for sales? Hi, Jimmy, this is Scott. Let me take that a couple of ways. One, the corporate tax law change did in fact impact everybody in the industry, but it touched us in both POJ and in the Life Planner business and so there was the national tax authority was reviewing the rules and there was a 4-5 month period, where you didn't know what they were going to look like and then an implementation period after that. In the case of -- in the case of POJ, I would say the effect was more modest because of the clientele being business owners and high net worth and some of the products that are coming back there will continue to sell some of the new corporate products.

But more importantly, the Life Planner growth across our channel has been strong really -- really across the board. So that's favorable. I would say in the case of in Gibraltar, it's really a more significant challenge. We've been seeing more competitive -- we had the corporate product. We've also continued to see pretty intense competition in the bank -- in the bank channel market and we've also imposed some pricing discipline, where we've favored kind of recurring premium, mortality based products versus some of the more income-oriented products as rates came down. So when you combine those three effects, I would say in the case of Gibraltar the issues are more challenging. In the case of POJ and Life Planner generally, they're more transitory in nature. Again, then just lastly, any comments on what's going on in the Chilean market, just with all the political instability and the potential for pension reform at some point?

Scott Sleyster -- Executive Vice President and Chief Operating Officer, International Businesses

Yeah. A couple of comments. Our business there with with Habitat actually has performed very, very well year-to-date and we actually had very, very favorable and [Indecipherable] performance based on the underlying markets this quarter. That being said, I would say we've been in touch fairly frequently with what's going on there, and I wouldn't really downplay what's going on there, it's, you know, it's relatively serious. I think the people there are concerned about the unrest. That being said, one of the -- one of the responses and one of the request if you will, the demands that are out there and the factors impacting insecurity relates to people being nervous about old age retirement and so there is actually proposals to materially increase the deposits and then call it the generosity of some of the systems, we may or may not benefit that much from that because sometimes when they increase the deposits, they don't allow fees on them and what have you.

But in general, I would say, I think it's a serious situation down there. That being said, we're actually quite well positioned and we're in a space in the market, where the demands of those that are feeling disadvantaged are looking for government actions that would be supportive of our sector.

Ken Tanji -- Chief Financial Officer

And also don't forget, we have the -- we have the lowest fees and some of the best investment performance in the business and therefore within the pension sector, we're very well positioned as well.

Jimmy Bhullar -- JP Morgan -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question will come from the line of John Barnidge with Sandler O'Neill. Your line is open.

John Barnidge -- Sandler O'Neill and Partners -- Analyst

Thanks. Another life insurer had a large writedown in the quarter and private equity position. Can you walk us through how many different private equity or venture capital positions you have, average investment size, and largest on carrying value please?

Robert Falzon -- Vice Chairman

John, it's Rob. In our -- if you look at our alternatives portfolio, a couple of things to note. One is it's extraordinarily well diversified. There are in excess of 2,000 underlying companies invested through somewhere around 300 funds in that portfolio. So we do not have any particular concentration to the extent that we have direct investments in companies in that portfolio, which come about as they do and these kind of strategies by co-investment rights, they are primarily, if not exclusively in private equity, not in venture capital and therefore tend to have significantly less volatility and any of those underlying investments are relatively small. So we obviously in the context of our alternatives portfolio, we have out in order performance that's a reflection of markets and overall segment performance. We tend to have a little less of the idiosyncratic performance as a result of single investments, we're not entirely immune from it, but nothing to particularly call out there. Well-diversified and relatively conservatively positioned.

John Barnidge -- Sandler O'Neill and Partners -- Analyst

Great. My follow-up, most of them have been answered, but are you seeing any signs of early activity in flu season, it seems like everyone here is sick earlier?

Stephen Pelletier -- Executive Vice President and Chief Operating Officer, U.S. Businesses

John, this is Steve. I'll answer your question, I think, I don't know about the -- about the immediately present the state of the flu season. But I think that we did see in this quarter, our Life mortality in the Individual Life business have some -- have some experience that was counter to what we normally see as -- as the seasonal trends. Normally, the third quarter tends to be a positive experience in Life mortality, it didn't play out that way this quarter. We saw the unfavorable experience in this quarter in blocks that have really generally trended quite favorably over time and as a result, we believe that this quarter's result is more of a random fluctuation rather than indicative of any underlying issues or trends. I would say also in relation to the third quarter mortality experience being different from normal seasonal patterns in Life, we saw exact -- the similar phenomenon play out in the Retirement business, a business that normally has, in the third quarter, less favorable reserve experience and in this quarter because of similar mortality trends, the business was able to realize outsized reserve gains again kind of pushing away from the normal seasonal patterns. And I think this speaks to our complementary business mix working out, as we've -- as we intend to do and as we've designed it to.

John Barnidge -- Sandler O'Neill and Partners -- Analyst

Great. Thank you very much.

Operator

Thank you. Our next question will come from the line of Elyse Greenspan with Wells Fargo. Your line is open.

Elyse Greenspan -- Wells Fargo -- Analyst

Hi, thanks, good morning. My first question. So I recognize you guys aren't hosting an outlook on anymore, but I guess is there a way that you can give us some kind of baseline EPS growth or maybe where you come in within your ROE band in 2020, just so we get a sense of kind of the forward base beyond just I guess you thinking about some of the items you called out in the Slides as well as ride the higher corporate expenses that do recur every fourth quarter.

Ken Tanji -- Chief Financial Officer

Yeah. Sure. I'll just sort of echo some of the things that Rob mentioned earlier and I sort of described how you can think about whether the baseline that we described coming out of the second quarter or -- or our results for the third quarter adjusted for the things that were a bit favorable or the fourth quarter baseline we provided adjusted for the elevated level of expenses, all kind of gets you to an EPS number that's a little bit better than 3 bucks. And then our businesses are growing. We articulated some of our growth thoughts at Investor Day and now we do have a lower interest rate environment, so that eats into that a little bit as we described and given sensitivities to, but then on top of that we have the margin improvement that we have under way, which again we've articulated and gaining measures for as well as the impact of Assurance IQ acquisition, which we expect to be accretive in 2020. So I think those are all the components that we think about as we look to 2020 and would encourage you to to think about for yourself.

Robert Falzon -- Vice Chairman

Elyse, it's Rob. Let me just sort of jump in on the ROE portion of your question. First, I'd note that in the -- in the third quarter we had an ROE in excess of 13%. So while we had headwinds associated with equity markets, we did have positive impacts -- headwind associated with interest rates, we had positive impacts with the -- with the movement in equity markets and if you think about the little better than $3 quarterly baseline number that Ken triangulated around. That would still represent an ROE that would be about 13%. And so, when we provided our outlook of 12% to 14% ROE, it was obviously in an environment where interest rates were much higher, but the expectation was that absent those interest rates, we would be in the mid-point of that -- the 13% as the midpoint, between 12% and 14% was more sort of a baseline expectation as opposed to the high end of our range. With the headwind and interest rates, we could put a little bit of pressure on that, but I think that the -- the statements we made with regard to that range of 12% to 14% have not changed materially by virtue of anything that's occurred since the point in time where we've -- where we won't give out that guidance, absent the recalibration for interest rates.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. Thanks. And then in terms of Assurance, that deal is now closed, is there anything in terms of modeling that you want to point out in terms of the seasonality, as we put that into our models. I believe you guys had previously said it was more weighted toward the fourth quarter, just anything that stands out, as we think about getting that into 2020 on a quarterly basis?

Andy Sullivan -- CEO of Workplace Solutions

Yeah. Sure. Elyse, this is Andy. I'll take your question and thank you for the question. There will be seasonal variability quarter-to-quarter and right now, a good portion of the revenue is driven by the Medicare Advantage product and the individual under age 65 product that are really driven by the open enrollment periods in the fourth quarter. So when you think about earnings pattern with the current mix of business that we have with Assurance and prior to us go executing on adding additional products to the platform, the fourth quarter will likely be our heaviest from both the revenue and earnings perspective.

Ken Tanji -- Chief Financial Officer

Yeah. But keep in mind again, this is a young company and a growing company, and we didn't expect it to be material to the fourth quarter -- and but we feel good about the progress we're making and the outlook for 2020 and 2021.

Robert Falzon -- Vice Chairman

Yeah. Maybe just two add-ons obviously in this fourth quarter will experience transaction -- transaction and financing costs, also the core results are going to be net of the amortization of the intangible assets that are -- that weren't on the books so.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. Thank you very much.

Operator

Thank you. And with that, I'd like to turn it back over to Charlie Lowrey for any closing comments.

Charles Lowrey -- Chairman and Chief Executive Officer

Thank you. So as you heard, we're committed to delivering on our purpose of providing financial opportunity to more people, and we look forward to keeping you updated on our progress in the months ahead. But before wrapping up, I'd like to take a moment to recognize Steve Pelletier, who is retiring next month following an extraordinary 27-year career at the company. Thank you, Steve for your many contributions to Prudential throughout your career and for those of you who are not in the room here, but on the telephone, I wish you could see his grin, which is from ear-to-ear, as he participates in his last earnings call. And with that, I'd like to thank you again for joining us today and we look forward to more conversations in the future. Thank you.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Darin Arita -- Head of Investor Relations, Senior Vice President

Charles Lowrey -- Chairman and Chief Executive Officer

Robert Falzon -- Vice Chairman

Ken Tanji -- Chief Financial Officer

Scott Sleyster -- Executive Vice President and Chief Operating Officer, International Businesses

Stephen Pelletier -- Executive Vice President and Chief Operating Officer, U.S. Businesses

Andy Sullivan -- CEO of Workplace Solutions

Alex Scott -- Goldman Sachs -- Analyst

Erik Bass -- Autonomous Research -- Analyst

Suneet Kamath -- Citi -- Analyst

Tom Gallagher -- Evercore -- Analyst

John Nadel -- UBS -- Analyst

Humphrey Lee -- Dowling & Partners -- Analyst

Jimmy Bhullar -- JP Morgan -- Analyst

John Barnidge -- Sandler O'Neill and Partners -- Analyst

Elyse Greenspan -- Wells Fargo -- Analyst

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