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Prudential Financial (NYSE:PRU)
Q2 2020 Earnings Call
Aug 05, 2020, 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 conference call. [Operator instructions] I'll turn the call now over to Mr. Darin Arita. Please go ahead, sir.

Darin Arita -- Senior Vice President, Investor Relations

Good morning, and thank you for joining our call. Representing Prudential on today's call are Charlie Lowrey, chairman and CEO; Bob Falzon, vice chairman; Andy Sullivan, head of U.S. businesses; Scott Sleyster, head of international businesses; Ken Tanji, chief financial officer; and Rob Axel, controller and principal accounting officer. We will start with prepared comments by Charlie, Rob and Ken, and then we will take your questions.

Today's presentation may include forward-looking statements. It is possible that actual results may differ materially from the predictions we may make today. In addition, this presentation may include references to non-GAAP measures. For a reconciliation of such measures to the comparable GAAP measures and the discussion of factors that could cause actual results to differ materially from those in the forward-looking statements, please see the slide titled Forward-looking Statements and Non-GAAP Measures in the appendix to today's presentation which can be found on our website at investor.prudential.com.

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

Charlie Lowrey -- Chairman and Chief Executive Officer

Thank you Darin. Good morning everyone, and thank you for joining us today. I'll start by saying we hope that you, your families and colleagues remain safe and healthy during these extraordinary times. The events of the past several months have created unforeseen new difficulties for people around the world, while further exposing the deep-seated problem of inequity in our society.

It's in times like these that we believe our company's purpose of solving the financial challenges of our changing world and standing by our employees, customers and communities is most important. After transitioning over 95% of our U.S. employees and most of our international employees to remote work in March, we continue to seamlessly serve customers, while the vast majority of our employees around the world continue to work in that fashion. This allows us to exercise utmost caution as we evaluate how and when to return to the workplace.

In the meantime, I am so proud of our people and how they continue to focus on meeting the evolving needs of our customers, many of whom face new challenges related to the COVID-19 pandemic and its economic impact. We'll continue to innovate the ways we serve our customers during and after the pandemic. During the second quarter, we maintained a clear focus on executing against our 2020 initiatives despite the challenging macroeconomic backdrop by delivering on progress on our cost savings targets, aggressively repricing and pivoting products to mitigate the impact of low rates on our performance and rotating our international earnings mix. We're also focused on identifying opportunities for further action, particularly as we look to continue to reduce our sensitivity to markets.

And we're exploring the potential to generate additional cost savings on top of our existing 2020 targets. Throughout this period, we benefited from the strength of our rock-solid balance sheet which gives us the confidence and the flexibility to navigate changes to the economic environment. I'll touch on each of these points in greater detail before turning it over to Rob and Ken for a look at our second quarter results. Turning now to our 2020 priorities on Slide 3.

We remain on track to achieve our $140 million cost savings target for the whole year, and have achieved $75 million in savings year to date, with $45 million in the second quarter. We also continue to make progress in shifting our international earnings mix to higher growth markets. We remain on track to close on the sale of Prudential of Korea in the second half of 2020 and are advancing on review of strategic options for Prudential of Taiwan which may include a sale. As I mentioned earlier, we are aggressively modifying our product mix, while exercising a highly disciplined approach to pricing in this low interest rate environment.

Turning to Slide 4. While we are encouraged by the progress we're making to position our businesses and operations for the future, we continue to look at ways to work smarter and more efficiently in order to achieve cost savings on top of our target of $500 million by 2022. This includes using technology and automation, and leveraging the learnings from operating in a remote work environment to optimize how and where we work. In addition, we're looking at other ways to build upon our repricing and product shift to further mitigate the impact of market sensitivity.

On Slide 5, we note how we're embarking on these initiatives with the foundational strength provided by our balance sheet and robust capital position including highly liquid assets of $4.5 billion at the end of the second quarter. Prudential Financial and its subsidiaries continue to exceed a AA financial strength rating. Our second quarter assumption update had a modest effect on our financial results, even as we reduced our U.S. long-term interest rate by 50 basis points to three and a quarter percent.

Lastly, we anticipate receiving the USD 1.7 billion of proceeds from the sale of Korea -- our Korea business by the end of the year. In terms of our capital deployment plans, we'll continue to monitor developments in the credit markets and the economy to determine our strategy. Slide 6 shows our second quarter financial results. This quarter exemplified the benefits of our thoughtful approach to risk management and our complementary business mix.

We aim to balance mortality and longevity risk, so we don't have a one-sided exposure. In the quarter, we had net favorable underwriting experience. Our adjusted operating income was $931 million in the quarter. While we recorded a net GAAP loss driven primarily by the noncash effect of noneconomic market impacts which have no effect on our regulatory capital position.

Our U.S. businesses reported adjusted operating income of $455 million due to more favorable underwriting, offset by the unfavorable impact of the assumption update and lower fee and spread income. PGIM reported record adjusted operating income of $324 million as well as record assets under management of $1.4 trillion, a 9% increase from the year earlier period. This growth reflected strong flows into fixed income as well as market appreciation.

Our international businesses reported adjusted operating income of $693 million, as more favorable underwriting, higher earnings from joint ventures and business growth were offset by the unfavorable impact of the assumption update and lower spread income and higher expenses. Before turning it over to Rob, I'd like to address the recent disturbing incidents of racial injustice and how we, as an organization, are responding to the deep-seated and persistent problem of racism and inequity in society. Last month, we announced commitments to advance racial equity, as highlighted on Slide 7. These commitments were borne out of the courageous candor of our employees, who have shared their experiences and their expectations, and the listening that is taking place all across Prudential.

Taking a bottom-up approach, we developed concrete and measurable actions spanning our talent practices to how we design and deliver products, to the investments we make and how we foster social and racial equity in the communities where we work and do business. We already had a substantive set of programs under way and a body of work that reflects our long-standing commitment to racial equity including investing over $1 billion in our hometown of Newark. We recognize that this moment calls for us to amplify what Prudential has already been doing to drive change within our company and within society. It is a moral and it is a business imperative that aligns directly with our company's purpose to solve the financial challenges of our changing world as well as our multi-stakeholder commitments to employees, customers, shareholders and society.

We stand by the promises we make, and we are prepared to be judged for our actions to support our colleagues, customers and communities today and over the long term. And with that, I'll turn it over to Rob.

Bob Falzon -- Vice Chairman

Thank you Charlie. And I want to reemphasize your comment about our commitment as a management team to supporting racial equity. This is an issue that is aligned to our purpose, it's part of the fabric of our culture and critical to our success as an organization. I'll now provide an update on how we are executing on our strategy within our U.S., PGIM and international businesses as well as on the outlook for these businesses, and we'll also provide an update on our investment portfolio.

Turning to Slide 8. The U.S. businesses produced a diversified source of earnings from fees, net investment spread and underwriting income. We continue to execute on three key priorities.

First, we've implemented pricing and product actions to simplify and derisk our business mix, while protecting profitability. For example, we took aggressive pricing actions, aligned with our intention to significantly reduce sales of HDI, our legacy flagship VA product, and launched FlexGuard, our buffered annuity product which has been well received by the market, supporting our product mix shift to less sensitive, less interest rate-sensitive solutions. And in our individual life business, we suspended sales of our single life guaranteed universal life product in July. This will result in the continued shift to variable life and other less interest rate-sensitive products.

We will continue to take product and pricing actions including steps to diversify our mix of business, to maintain profitability in this interest rate environment. As a result, we expect individual annuities and individual life sales to continue to move lower in the near term. Second, as the needs of our customers rapidly evolve including in response to COVID-19 and its economic impact, we are increasingly leveraging technology to enhance customer engagement and efficiency. For example, we've expanded our process to electronically deliver policies from application submission to policy issuance and have increased the use of our Fast Track automated underwriting process.

And we have expanded the use of electronic signatures and self-service customer capabilities across our businesses. And third, we remain committed to expanding our addressable market. The pandemic has amplified the financial wellness challenges that many U.S. households face and has highlighted the importance of our financial wellness platform and our life insurance, retirement and financial planning solutions.

We also continue to see increasing interest in our Assurance IQ platform from customers in the healthcare, life and P&C lines of business. Preparation for the Medicare annual enrollment period in the fourth quarter, we've been progressing well with our agent onboarding and training process. Now turning to Slide 9. PGIM is a top 10 global investment manager that continues to demonstrate the strength and resilience of its multi-manager business model.

Our assets under management reached a record level of $1.4 trillion, up 9% from the year-ago quarter driven by net flows as well as the positive impact from equity and credit markets. PGIM's long-term investment performance remains strong and has rebounded from the temporary downturn in the first quarter. More than 85% of assets under management have outperformed their benchmarks over the last three, five and 10-year periods. This strong investment performance, coupled with diversified investment capabilities across asset classes, regions and client segments, has led to continued growth.

We generated nearly $4 billion of net third-party flows during the second quarter driven by record retail flows of $9 billion. Institutional outflows were driven by a single passive equity client redemption. Our public fixed income platform generated flows of $10 billion, as it continues to benefit from our broad suite of strategies and the leading position of our franchise. PGIM investments was the No.

1 ranked U.S. mutual fund franchise across active and passive asset managers based on net year-to-date sales. PGIM's asset management fees were up 3% compared to the year-ago quarter driven by the growth in average assets under management. In addition, other related revenues increased primarily due to higher strategic investment earnings as a result of strong investment performance and the effect of credit spreads tightening, reversing the widening that had occurred in the first quarter.

We also continue to focus on cost discipline to fund growth and further increase our operating leverage. Turning to Slide 10. Our international businesses including our Japanese life insurance operation, where we have a differentiated multichannel distribution model as well as other operations focused on high-growth markets. As expected, life planner sales decreased 30% compared to the year-ago quarter primarily reflecting lower sales in Japan due to COVID-19-related restrictions on sales activities.

Life planner headcount however increased 5% compared to a year ago. Similar to life planner, sales for Gibraltar were 34% lower, but the number of life consultants has declined as we continue to focus on quality distribution. Chile, market returns in the quarter were higher than average, and that contributed to an operating income benefit of approximately $25 million, reversing the impact we experienced in the first quarter. With respect to expenses across international, we provided appropriate sales support to protect and care for our captive distribution, as we noted last quarter.

This contributed $55 million to expenses which we expect to trend lower in the second half of the year. We have seen some recovery in Japan sales beginning in June as the state of emergency was lifted. And over time, we expect sales to normalize. In addition, to mitigate the impacts of reduced face-to-face sales, our agents have adapted to increased usage of virtual tools to connect with customers, and we have seen early signs of success.

We believe that our needs-based selling approach and death protection product focus continue to provide important value to our customers. With respect to interest rates, we've successfully managed through decades of low interest rates and other market challenges in Japan. As you have seen us do in the past, we adjust our product offering quickly to meet the needs and preferences of our customers, while also achieving our return expectations. We have already taken actions and will continue to do so as needed as we move forward.

Now turning to Slide 11. We have a conservative, quality-focused investment portfolio that reflects our robust asset liability management practices, commitment to broad diversification and a disciplined interest rate risk management framework. We also leveraged PGIM's expertise across multiple asset classes including its deep and long-standing experience in private placements and real estate. Year-to-date credit migration and losses have trended below our expectations.

Second-quarter credit losses were $139 million driven by energy and consumer cyclical sectors. While we expect credit losses to be a multiple-quarter story, we feel comfortable that our exposure is manageable and that we are well capitalized to weather whatever emerges. And with that, I'll hand it over to Ken.

Ken Tanji -- Chief Financial Officer

On Slide 12 which provides insight into earnings for the third quarter relative to our second-quarter results. The key point is that our underlying earnings power increased slightly from last quarter primarily reflecting higher equity markets. To help you see this, I'll start with pre-tax adjusted operating income in the second quarter which was $931 million and resulted in earnings per share of $1.85 on an after-tax basis. Then, we adjust for the following items.

First, the annual review of assumptions and other refinements resulted in a net charge of $334 million in the second quarter primarily driven by a reduction of our long-term interest rate assumption by 50 basis points in the U.S. Next, we adjusted variable investment income to a normalized level which is worth $130 million. Please note that while we have not included an adjustment for variable investment income for the third quarter, the potential exists for continued revaluation of private equity and real estate investments due to the current adverse economic conditions. While returns of our alternative investment portfolio are currently lower than our target returns, and will vary period to period, over time, this portfolio has generated income above our targeted returns.

Third, we adjusted underwriting experience by $155 million. This reflects $100 million of favorable experience in the second quarter primarily driven by reserve gains in retirement. We estimate claims experience in the third quarter will include $55 million for COVID-19. Next, there are other items that, combined, may be $75 million more favorable in the third quarter primarily related to expenses and markets.

We expect expenses including implementation costs, to be $130 million lower in the third quarter. This is primarily due to legal expenses in the second quarter. In addition, due to favorable markets in the second quarter, other related revenues in PGIM benefited by $45 million. And income in our Gibraltar segment also benefited by $25 million.

Fifth, we expect operating costs due to COVID-19 to be $25 million lower in the third quarter. And last, we anticipate net investment income will be reduced by $15 million reflecting the difference between new money rates and disposition yields of our investment portfolio. These items combined get us to a baseline of $2.63 per share for the third quarter. Please note that this baseline includes items specific to the third quarter, that reduced EPS by approximately $0.19 per share.

While we have provided these items to consider, there may be other factors that affect earnings per share in the third quarter. On Slide 13, we provided an update on the potential impact of the pandemic. We have included a sensitivity for operating income based on the U.S. population experiencing 100,000 of incremental deaths due to the pandemic.

We estimate that this may lower operating income by $70 million. And this is less than the sensitivity we provided on our last earnings call, as we have seen a lower fatality rate due to COVID-19 in our U.S. insurance businesses than previously estimated. Our third-quarter baseline includes a net impact for mortality due to COVID-19 of approximately $55 million.

The actual impact will depend on a variety of factors such as infection and fatality rates, geographic considerations and progress in testing and medical treatments. We have also reduced our estimate for incremental operating costs due to COVID-19 and have estimated the potential reduction in other operating costs, such as for travel and entertainment. In the second half of 2020, we expect to incur incremental operating costs of $60 million due to COVID-19, with $40 million in the third quarter and $20 million in the fourth quarter. The estimate of these costs is lower than what we provided on our last call primarily due to lower health benefit costs of our U.S.

employees and lower cost to support our sales professionals in Japan as their productivity is improving faster than previously estimated. We also expect to have $30 million of lower travel and entertainment expenses in the second half of 2020. Turning to Slide 14. We continue to maintain a robust capital position and adequate sources of funding.

Our capital position exceeds our AA financial strength targets, and we maintain liquid assets at the parent company that are greater than three times annual fixed charges. We have substantial sources of funding. Our cash and liquid assets at the parent company were $4.5 billion at the end of the quarter. We expect to receive net proceeds of $1.7 billion from the sale of our Prudential of Korea business following the close of the transaction which is expected in the second half of this year.

And another source of funding is free cash flow from our businesses. In May, we added a new $1.5 billion contingent capital facility that, combined with our previous facility, brings our total available contingent capital funding resources to $3 billion. Turning to Slide 15. And in summary, we remain on track with our objectives for the year as we accelerate the execution of our initiatives.

We're exploring the potential to increase our cost savings initiative and looking at additional ways to build upon our repricing and product shift to further mitigate market impacts. And we maintain a rock-bound -- rock-solid balance sheet with a robust capital and liquidity position. Now, I'll turn it over to the operator for your questions.

Questions & Answers:


Operator

[Operator instructions] First, with the line of Elyse Greenspan with Wells Fargo. Please go ahead.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Hi. Thanks. Good morning. My first question was just on the mortality assumption you laid out for the third quarter.

So if I look at your disclosures, longevity did benefit your results in both the Q1 and the Q2 this year. So I'm just trying to understand why that wouldn't at least continue to some degree in the third quarter?

Ken Tanji -- Chief Financial Officer

Hi, Elyse. This is Ken. I'll take your question about the COVID mortality into the third quarter. So we -- in our second quarter, we benefited from our longevity business in the U.K.

Mortality in the U.K. came in a little bit higher than we had previously estimated, and that resulted in a gain from our U.K. longevity reinsurance business. While there was fatalities in the U.K.

in the second quarter, right now, that seems to be more contained, and we wouldn't expect that to continue given the current fatality rates. So we also, in our new estimate, have incorporated into that sensitivity what we learned from the second quarter which is in our -- also in our life insurance and group insurance businesses, the fatality rates were lower than we previously estimated. So we've incorporated that into our new estimate.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

OK, thanks. And then second, on the capital side, as I said, in your prepared remarks that you would continue to monitor credit markets and the economy in determining your strategy. I guess, as you have one additional quarter under your belt, how are you thinking about capital return? Is it dependent upon getting the capital, the $1.7 billion from the Korea sale toward the end of this year or is it more just dependent upon kind of more time going on and seeing how credit markets develop?

Charlie Lowrey -- Chairman and Chief Executive Officer

Elyse, it's Charlie. I'll take that one. So as you know, we paused our share repurchases in the second quarter, in line with the risk framework that we had in place. And as you said, until we get better visibility into the depth and the duration of the pandemic, the possible recession and the credit cycle, we will maintain our financial flexibility and resiliency.

When we get the clarity into those issues I just mentioned, we'll then share the timing of our plan to resume share buybacks and by how much. And that would also include the proceeds from the sale or potential sale of the Korean business. So we're going to focus on maintaining our financial strength. But when we get clarity into the issues going forward, we will certainly let you know, and we'll be transparent about it.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Thank you. I appreciate the color.

Operator

Our next question is from the line of Ryan Krueger with KBW. Please go ahead.

Ryan Krueger -- KBW -- Analyst

Hi. Good morning. Could you elaborate on I guess the things you're considering that would cause a reduction in your market in interest rate sensitivity? And I guess, in particular I guess I would assume to meaningfully change that, you would -- that would require some sort of an in-force reinsurance transaction. But if you could elaborate some more what you're thinking about?

Bob Falzon -- Vice Chairman

Ryan, it's Rob. I'll take a shot at that. But first, let me just bring it up a level and say as we sort of think about our strategy on a go-forward basis, we think about the elements of that is, in the first instance, simplifying and derisking the business as we articulated in our opening remarks. The other components of that are about improving near-term earnings through the efficiency initiatives that we've talked about and which we think has some expansion opportunity associated with them.

And then obviously, continue to expand our addressable market in order to support longer-term growth. Specifically with regard to the derisking, I would characterize the repricing and product shifts that we've done as sort of the first steps in transitioning to lower volatility, less interest rate and general market sensitivity across our businesses. For those products that we've either stepped back from or actually explicitly discontinued, so think about that as being HDI in the variable annuities business and guaranteed universal life in the life business, we'll look actively at opportunities to optimize the economics of the legacy blocks that are associated with those products. And those options range anywhere from simply sort of just running off the blocks to reinsuring indoor -- looking at selling the blocks.

A couple of other things outside of that across our products, we're actually looking actively at product design as well as individual and aggregate limits that could reduce the amount of potential volatility that we get from any individual product or grouping of products. So you saw us significantly reduce the retention limits that we have within our individual life business by way of example. Charlie hit on financial flexibility and resiliency, so we're going to retain our capital in order to make sure that we have that in place. And we think that that's an element of the derisking, at least in the near term.

But we're also looking at the investment portfolio and looking at strategic asset allocation, reoptimizing sort of the risk return and volatility trade-offs that are associated with our equity credit and our interest rate exposures, in light of where we are in the cycle and the opportunities that are in front of us. And I guess the last thing I'd mention is that as we look at the growth of the business, on a go-forward basis, our strategic emphasis is really on growing the elements of our business that are less rate-sensitive and more predictable and more capital-light like, for instance, PGIM, our asset management business. So those would be the primary things that we're thinking about on a -- from a derisking standpoint. Charlie, I don't know if there's any further color you'd want to add on to that.

Charlie Lowrey -- Chairman and Chief Executive Officer

Yeah. Thanks, Rob. So Ryan, let me just try and connect some dots. Because over the past 18 months, as Rob said, we've taken actions to begin to accomplish many of the objectives that Rob articulated, namely lower market sensitivity, lower capital intensity of our business mix, becoming more competitive in terms of serving our customers with processes, better processes and lower costs.

And then finally, as Rob said, increasing growth, right? And so let me just tick through a number of things that we've done in order to achieve those objectives. We're sold or selling out of lower-growth businesses, Italy, Poland, Korea and exploring options for Taiwan. We acquired assurance, around which we have high conviction about growth in a business that isn't as market-sensitive, so lower risk. We've significantly reduced or stopped selling certainly highly interest rate-sensitive products and annuities and ILI.

We introduced less market-sensitive products such as the buffered annuity. We repriced almost our entire product line. We announced and are executing on our future work initiative which will produce $500 million in cost savings with the potential to do more. And as Rob said, we're currently exploring other options on books of business that are market-sensitive.

So we're executing on a series of incremental changes that we believe will lead to fundamental change in our business mix and ultimately, the trajectory of the firm as we go forward. So that's a foundation off of which we are going to grow going forward.

Ryan Krueger -- KBW -- Analyst

Thank you. I appreciate it.

Operator

[Operator instructions] And next from the line of Humphrey Lee with Dowling & Partners. Please go ahead.

Humphrey Lee -- Dowling and Partners -- Analyst

Goood morning and thank you for taking my questions. Regarding the kind of potential -- hello?

Charlie Lowrey -- Chairman and Chief Executive Officer

Yeah, Humphrey. We can hear you.

Humphrey Lee -- Dowling and Partners -- Analyst

In savings, I know it's still probably in the early stage of planning. But is there any way to help us think about the potential size and scope of that impact? Should it be kind of comparable to what you've been targeting so far or just more of an incremental to what you -- just a modest incremental to what you've been targeting?

Bob Falzon -- Vice Chairman

Humphrey, it's Rob. I'll take a shot at that. You cut out a little bit, but I think I understood your question. So as we have been in the course of executing on the efficiency initiatives that we had articulated earlier in the year, earlier last year, we've actually accelerated those actions.

And in the course of doing so, we've actually institutionalized continuous transformation capability. And as a result of that, we're generating new ideas and strategies for further efficiencies that enhance customer experiences. Remember that sort of the first priority of that is they enable our businesses, putting us in more competitive positions, and it increases our operating profits, particularly in light of the -- which is needed in particular in light of the impact of earnings of a low rate environment. The levers we're using, Humphrey, are pretty much the things that we've done to date.

So increased use of technology and automation, process improvements, sourcing org design, all the things that are classic. We just think there's, as a result of this continuous process, much further that we can go from -- than what we've articulated to date. We're also contemplating learnings from the crisis and some of the implications of the pandemic and our experience in that on things like remote work, changes in communications and travel and use of technology on a go-forward basis. So all of that leads us to be optimistic that we can expand materially from where we are today, but we're not ready to quantify that.

We'll provide more guidance on that when we get further into the year. And once we finished our work, we'll -- as Charlie indicated, we'll be transparent.

Humphrey Lee -- Dowling and Partners -- Analyst

Appreciate the color. Shifting gear, looking at PGIM, as you mentioned, flows were very good in the quarter, especially on the retail side. But on the institutional side, even after that $4.5 billion of passive equity mandates redemption, flows were still kind of negative. So I was just wondering, can you comment on what you saw in the quarter? And then also, how is your pipeline looking out for -- especially on the institutional side?

Andy Sullivan -- Head of U.S. Businesses

Sure, Humphrey. It's Andy. I'll take your question. And you were cutting in a little bit.

I'm not sure if it was you or me. So retail flows are really a result of three things: very strong investment management performance, a broad and wide product portfolio and strong distribution. And we're performing well on all of those fronts. Our investment performance in the second quarter was very strong.

All of our PGIM fixed income strategies outperformed benchmark. 96% of our equity -- Jennison equities outperformed benchmark. So very, very strong fundamental performance. As you know, we've been building out our global distribution over time.

So we were actually quite pleased with our flows in the quarter. We were the No. 1 mutual fund family year to date and had $9.5 billion in positive retail flows. We did have the $4.5 billion index passive flow related to QMA.

That was a very low fee rate mandate. So think in the neighborhood of 1 to 2 bps. So literally, it was less than $1 million in fees. It also was the last of our what I would call index mandate.

As you look forward, quarter to quarter, there will be variability. But over the long run, our fundamental investment performance, the strength of our distribution, we have had strong organic flows over the last five years, and we would expect that to continue as we look forward over the next several years.

Humphrey Lee -- Dowling and Partners -- Analyst

Andy, you cut out for one sec. You want to repeat the point you were making about -- I don't know if that was well-heard on the number of passive -- large mandate passive funds. That one was a little blurry.

Andy Sullivan -- Head of U.S. Businesses

Sorry about that. All I mentioned was the $4.5 billion outflow was the last large passive mandate that we have in our portfolio.

Humphrey Lee -- Dowling and Partners -- Analyst

Got it. I appreciate the color.

Operator

And next with the line of Tom Gallagher with Evercore. Please go ahead.

Tom Gallagher -- Evercore ISI -- Analyst

Good morning. Charlie, just a follow up on Ryan's question on the -- I guess, the range of things you're considering with risk transfer. I hear what you guys are saying on limiting new sales considering some reinsurance back books, it sounds like maybe on life insurance. Have you considered anything more transformational? And the reason I ask that is kind of a more moderate, we'll say, limited approach to the strategy probably from a shareholder standpoint, is going to result in very limited growth as you have some of these businesses that you still own that are shrinking every year.

So it becomes kind of a challenge from an annual earnings growth standpoint. Have you considered that? And would you consider something more extreme like an IPO of some of your capital market-sensitive businesses or a bigger reinsurance transaction or are you thinking in a more limited scale?

Charlie Lowrey -- Chairman and Chief Executive Officer

So Tom, thanks for the question. I appreciate it. Let me just take a step back and then I'll answer your question directly, but I'll make a comment about how we think about capital allocation and particular optimization. Because when we look across our businesses, what we try and do both domestically and internationally is ensure we're optimizing that capital deployment.

So we've mentioned in the past that we're looking at or continue to look at businesses such as ILI annuities and some of our international operations as well as LTC. You've seen us take some bold action in terms of Italy, Poland, Korea, potentially Taiwan, etc. So what we're going to do is -- and what we can assure you is that we will continue to look to ways to optimize capital and capital deployment to maximize outcomes for shareholders, right, be that through significant dispositions, whatever flavor that may take, through potential share repurchases or through acquisitions. And right now, we have acknowledged and we'll continue to acknowledge that there's a high hurdle for any major acquisition, given where our stock price is trading.

We get that. But we're looking, as you've seen in the actions we've taken to date over the last 18 months. And I think what you'll see us do going forward is look at all our businesses in order to optimize the capital we deploy and how we do that. And that's our commitment to shareholders, and that's what we're doing.

Tom Gallagher -- Evercore ISI -- Analyst

Got you. Appreciate it. The -- I guess, my follow-up is just, it looks like you've reduced pretty substantially the expense drag for the subsidies you were planning on or you've been paying to the life planners in Japan. Is that because you see greater visibility on a sales recovery emerging or have you just lowered the level of subsidy?

Scott Sleyster -- Head of International Businesses -- Analyst

Why don't I go ahead and take that, Tom? This is Scott. I think the answer is multifaceted, but maybe I'll speak first to the question on have we seen a sales recovery. We actually started to see a pretty good bounce back in June to the point where we were starting to get close to even to 2019 sales in both Japan and in Brazil. And that has continued and actually modestly strengthened in the month of July.

So we are seeing a pretty good sales recovery, and we're encouraged. But of course, that is -- that has to be tempered by any kind of resurgence that could occur. In the case of the life planners, we were actually able to take what was an initial subsidy that was sort of an uncharacteristic payment that we have, and we were able to roll it into their bonusable plan. So a portion of the amount that we have for POJ is actually being deferred into their sales comp.

So you're not seeing it as directly, but it's still there.

Tom Gallagher -- Evercore ISI -- Analyst

OK. Thanks.

Operator

And next we'll go to Jimmy Bhullar with JP Morgan. Please go ahead.

Jimmy Bhullar -- J.P. Morgan -- Analyst

Hi. Good morning. First, just on your annual assumption review and the interest rate assumption. Obviously, it's more conservative than it was before but still fairly optimistic versus market levels.

So just if you could talk about what went into your thoughts on how much to reduce the rate assumption by? And why did you not like make a bigger adjustment given where market rates are?

Ken Tanji -- Chief Financial Officer

Hey, Jimmy. It's Ken. In terms of our long-term rate assumption, we followed a very established process that we've had for a number of years, and it considers multiple perspectives. So we look at again long-term interest rate forecast of economists, banks and managers.

And we look to be at the median of all those. And for this year, when we looked at that that meant a 10-year U.S. treasury rate in the long-term of 3.25% and 1% for the JGB in Japan. So we followed the same process we've had for a number of years.

It's also important to know how we grade into that long-term assumption. We do that over 10 years. And the first two years follows the forward curve. And as a result, it's not just the long-term assumption but the path with which we get there.

And so over the next five years, our average rate would be 1.25%. In 10 years, it's about 1.9%. And so again, we have a pretty established process. We look at third-party inputs and look to be at the median, and that was the result for this year.

Jimmy Bhullar -- J.P. Morgan -- Analyst

OK. And then any color on how your long-term care block has held up recently? And whether you've seen any benefit on your claims or reserves from the pandemic?

Ken Tanji -- Chief Financial Officer

We saw a little bit elevated mortality in our policies that are already on claim, but it was fairly modest, and I wouldn't call it significant.

Jimmy Bhullar -- J.P. Morgan -- Analyst

OK, thanks.

Operator

[Operator instructions] And next, we'll go to John Barnidge with Piper Sandler. Please go ahead.

John Barnidge -- Piper Sandler -- Analyst

Great. Thanks and most of my questions have been answered. But can you talk about commercial mortgage loan forbearance in the quarter? Directionality of that as well?

Bob Falzon -- Vice Chairman

Hey, John. It's Rob. Yes. In -- to date, our -- we've received forbearance requests that are about 8% or so of the portfolio.

We provided forbearance in 6% of those instances, and the remaining 2% are under review, and that excludes a little bit that we've gotten requests on that were declined. But in that, only about 1% of the requests have resulted in a deferral of interest. In all other instances, we remain current on interest and they've been deferrals of principal. Recall that across our portfolio, our loan to values are actually quite low.

And so as a result of that, when we defer principal, we're actually not particularly concerned about that because we know that the principal amount is actually quite safe. The average loan-to-value across our entire portfolio based on our internal appraisals is 56-ish percent. Using external appraisals, it will be about 10 points lower than that, so less than 50%. And so given that low LTV, accommodations on amortization of principal or repayment of principal, we believe, is a prudent thing to be doing.

And if we can remain current on interest, that keeps the loans performing, and that's been sort of our experience to date.

John Barnidge -- Piper Sandler -- Analyst

Great. Thanks for the answer.

Operator

And next we'll go to Suneet Kamath with Citi. Please go ahead.

Suneet Kamath -- Citi -- Analyst

Thanks. Just a question, first off, on variable annuities. One of the things that folks are talking about now is that the NAIC is reviewing the mean to reversion assumption that they include in VA capital reform. So just curious if that's -- if that was changed, are you -- would you expect to see either a big impact on your hedging program or your capital requirements for VA?

Ken Tanji -- Chief Financial Officer

Hi. This is Ken. We've -- I guess, a little bit of backdrop on this for us. We've managed our VA business with a very robust economic view and active hedging for many years.

We're very supportive of a statutory framework that also is based on robust economic scenarios, both in terms of the long term assumptions, but also the dispersion around those assumptions. Our internal scenarios that we use to manage the business are actually more conservative than those being considered by the NAIC. So we continue to advocate for appropriate economic scenarios within the VM-21 framework. And we believe that we'll be well positioned due to our -- the internal framework that we've used to manage the business for many years.

Suneet Kamath -- Citi -- Analyst

Got it. OK. And then just to shift over to international, if I could. Obviously, a lot of moving parts in terms of COVID, face-to-face sales, low interest rates, expenses.

But as you think about the longer-term outlook for the Japan businesses, when do you see those businesses sort of back to earnings growth as opposed to either earnings declines or flattish earnings? Again, just conceptually, how are you thinking about the outlook for that business?

Scott Sleyster -- Head of International Businesses -- Analyst

Hi, Suneet. This is Scott again. I'll go ahead and take that. I guess, I'd talk a little bit about capital rotation mixed in with that question.

We were seeing low growth in the developed markets in Korea, Taiwan and Japan. And you saw that we took actions in Korea, and we're considering those in Taiwan. And the reason that you see a difference between those businesses in Japan is that we have really strong market share in Japan, and we have a really high-performing LP model there. The business generates attractive returns over our cost of capital and it generates a lot of free cash flow to the parent.

So we really like our Japan operation, and we continue to invest in it. That being said, overall premium growth in Japan has been negative for the last several years and the country continues to face demographic challenges. So the fact that we've been able to continue to grow in POJ has been a significant outperformance in the country. So I guess what I would say is we expect kind of low single-digit growth in Japan.

And if we're achieving that that's actually very strong relative performance. And then in the context of a business system that's creating a lot of value and cash to the parent. In the meantime, we'll look for redeployment in higher-growth markets, but those are going to have to be opportunistic.

Suneet Kamath -- Citi -- Analyst

OK. Thanks, Scott.

Operator

[Operator instructions] And seeing no further questions coming in, Mr. Lowrey, I'll turn it over to you.

Charlie Lowrey -- Chairman and Chief Executive Officer

OK. Thanks very much. So as we come to the end of the call today, I'd just like to thank you for listening and for your continued interest in Prudential. I also want to take a moment to thank all our employees for the steps they continue to take to support our business, our customers and our community including our collective efforts to address racial equity at Prudential and in society at large.

We continue to make progress on executing our initiatives for the year, and frankly, are working to do more even as the global health pandemic continues. Backed by our financial strength and guided by our purpose, we'll continue to focus on delivering meaningful outcomes and value to all our stakeholders. Thanks again for joining us today. We appreciate it.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Darin Arita -- Senior Vice President, Investor Relations

Charlie Lowrey -- Chairman and Chief Executive Officer

Bob Falzon -- Vice Chairman

Ken Tanji -- Chief Financial Officer

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Ryan Krueger -- KBW -- Analyst

Humphrey Lee -- Dowling and Partners -- Analyst

Andy Sullivan -- Head of U.S. Businesses

Tom Gallagher -- Evercore ISI -- Analyst

Scott Sleyster -- Head of International Businesses -- Analyst

Jimmy Bhullar -- J.P. Morgan -- Analyst

John Barnidge -- Piper Sandler -- Analyst

Suneet Kamath -- Citi -- Analyst

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