Prudential Financial, Inc. (PRU) Q1 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the 2018 Financial Outlook Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given to you at that time. [Operator Instructions] And as a reminder, today’s conference call is being recorded. I would now like to turn the conference over to Mark Finkelstein. Please go ahead.

Thank you, Cynthia. Good morning, and thank you for joining our 2018 financial outlook conference call. Please find our presentation for today’s call on our website at www.investor.prudential.com. Representing Prudential on today’s call are John Strangfeld, CEO; Mark Grier, Vice Chairman; Charlie Lowrey, Head of International Businesses; Steve Pelletier, Head of Domestic Businesses; Rob Falzon, Chief Financial Officer; and Rob Axel, Principal Accounting Officer. We will start with prepared comments by John and Rob, and then we will answer your questions. Today’s presentation includes forward-looking statements. It is possible that actual results may differ materially from the predictions we make today. In addition, this presentation includes references to non-GAAP measures. The slide deck includes a reconciliation of such measures to the comparable GAAP measures, and a discussion of factors that could cause actual results to differ materially from those in the forward-looking statements. And with that, I will hand it over to John.

Thank you, Mark. Hello everyone. I would like to welcome you to our 2018 financial outlook call. Before Rob takes you through the specifics, I want to provide some higher level observations. The key message is that we continue to believe that our differentiated business mix will produce steady growth in earnings and book value per share, strong cash flows, and a sustainable higher return on equity. There are clearly challenges including the sustained low-interest rate environment. However, we benefit from our complementary mix of protection, retirement and investment management businesses that are well-positioned to thrive even in the face of these challenges. What gives us confidence looking forward is the success we have shown over time, connecting strategy, innovation and execution to create differentiated financial outcomes. Examples include our unique international franchise which has shown good growth and strong returns, despite the economic and interest rate challenges in Japan; our investment management business which has shown more than a decade of consecutive positive net flows in both our institutional and retail channel; and our retirement business, which has produced exceptional results, led by our innovative pension risk transfer business. Additionally, we remain excited about our financial wellness strategy and initiatives to connect with consumers in different ways including through technology enabled means. We believe these initiatives will accelerate our domestic growth rate. And while the impact will be seen over the longer term, we are uniquely positioned to succeed given the strength of our Prudential advisors distribution for us, our broad product offering, and our focus on more than 20 million individuals we serve in our U.S. business. Turning to capital generation and deployment, we have increased our expectation of the average level of free cash flow we generate as ratio to earnings from 60% to 65% over time. This is the result of a higher level of cash generation across many of our businesses. Our increased cash flow together with our robust capital position has led our Board to authorize an increase in our share repurchase program for 2018 to $1.5 billion. In addition, we anticipate that our quarterly dividend in 2018 will reflect this higher level of free cash flow. Since the beginning of 2011, we’ve returned nearly $14 billion to shareholders in the form of dividends and share repurchases. Overall, we feel very good about the positioning of our businesses and our prospects to continue to generate strong value for our shareholders. And whilst uncertainties remain whether economic, regulatory or tax policy, we’re well-positioned to navigate them. Turning to slide three. This slide shows our return on equity since 2012. Recall that last year, we lowered our near-to-intermediate term ROE expectation to 12% to 13% due to the multiyear impact of low interest rates and to a lesser extent, initiative spending focused on producing longer term growth. On a trailing 12-month basis, we have exceeded that ROE objective. This reflects favorable underwriting, market and investment performance as compared to our average expectations as well as other positive factors. Looking forward, we continue to expect to achieve a 12% to 13% ROE over the near-to-intermediate term. I would add that we expect to be able to achieve this ROE objective, despite making certain positive onetime adjustments to our adjusted book value which will increase the denominator in the ROE calculation, and Rob will talk to this in a moment. To sum up, we benefit from a differentiated return profile. This provides strong cash flow and opportunities to return considerable amounts of capital to our shareholders while also enabling us to invest in our operations to continue to produce favorable outcomes over the longer time horizons. With that, I’ll hand it over to Rob.

Thank you, John. I will walk through a series of key business and other considerations and the principal assumptions underlying our outlook and 2018 earnings per share guidance. Before I begin, let me highlight that effective in the fourth quarter of 2017, our business segments are organized consistent with the new U.S. business structure we announced back in July. This structure reflects our focus on leveraging our mix of businesses and our digital and customer engagement capabilities to expand our value proposition for the benefit of customers and stakeholders. The new organizational structure retains our existing segments but realigns them under new divisions. Therefore, as you think about your financial models, there will be no changes to our reporting segments or to our measure of segment profitability. Rather, it just effects how these segments roll up into divisions. So, I’ll start now with the key business considerations and insensitivities on slides four and five beginning with the U.S. workplace solutions division. In retirement, we remain optimistic about our opportunities for long-term growth. Notably, our differentiated capabilities and demonstrated execution in our pension risk transfer business will continue to generate attractive growth opportunities that are expected to exceed the $4 billion of combined funded and longevity-only business that is expected to run off in 2018. However, as we have said on numerous occasions, growth will not be linear, given the episodic nature of larger cases, which is the segment of the market where we are most competitive and where the returns are most compelling. In addition, embedded in guidance is the continuation of the spread and fee compression that we have been experiencing in our full service business and which will moderate the growth we expect to experience in other parts of retirement. In group insurance, we are focused on expanding our premier market segment while maintaining a leadership position in the national segment and deepening our customer relationships through our financial wellness platform. We are benefiting from our multiyear underwriting efforts, especially in disability where improved claims management and our continued pricing discipline have resulted in improvements to our benefits ratio. And as a result, we have lowered our benefits ratio target for the combined group life and disability business to a range of 86% to 90%, reflecting a 1% decrease on both the low and high end of that range. Turning to our U.S. individual solutions division. In the individual annuities business, we expect continued strong results with margins for 2018 above our long-term targeted return on assets or ROA of about 115 basis points. In addition, we expect our free cash flow to be high, given the stability in our block and the challenged industry wide sales environment. On ROAs, as we have discussed on recent earnings calls, we have been enhancing our risk management strategy to optimize the mix of derivatives and cash instruments. This will cause some downward pressure on ROAs over time but is expected to produce less volatile net income and cash flows, particularly in adverse scenarios. Further, there is some natural fee rate reduction as the block matures, and we would also expect our recent favorable hedging outcomes to normalize over time. Hence, in 2018, we expect to exceed our long-term ROA target of about 115 basis points but expect the combined impact of hedging costs, contractual fee reductions and more normal hedging outcomes to cause our ROA to migrate to this level over a multiyear period of time. On sales, we continue to execute on our product diversification strategy and focus on a broad range of outcome-oriented solutions for customers. So, over the near-term, we expect the challenged industry sales environment to persist. And given a more muted equity growth assumption than in prior years, we expect a slight decline in account values. In individual life, we continue to execute on our diversified product strategy and deepen our relationships with distribution partners while developing a more customer-oriented experience. Product actions over the last several months could result in a slightly higher tilt towards term and variable life sales over the next several quarters. However, we continue to emphasize a diversified product offering. In investment management, we expect to complete our 15th consecutive year of positive institutional net flows and 13th consecutive year of positive retail net flows. As we look to 2018, we continue to see good prospects for growth in AUM and expect stable fields, driven by payoffs from investments and products, distribution and our multi-manager model. In international insurance, we continue to focus on death protection products with returns largely driven by mortality and expense margins which help mitigate exposure to interest rates. Further, we have also seen a shift in our sales mix with a greater emphasis on U.S. dollar denominated products in Japan. We expect this trend to continue. We’re also focused on achieving scale in select growth markets outside of Japan. In terms of distribution, we continue to target low single digit growth of our Life Planner account in Japan. However, we do expect a decline in Gibraltar and Life Consultants as we continue to focus on increasing quality and productivity standards. Turning to slide six. Here are some of the key assumptions and considerations that underpin our guidance for 2018. Our guidance assumes that the S&P 500 ends 2017 at about 2,600, appreciates by 3% during the year and ends 2018 at 2,675. Our 3% equity growth assumption is lower than what we have previously assumed but it is consistent with the actuarial assumptions embedded in certain of our internal models. In our international insurance business, the yen and Korean won earnings are fully hedged for 2018 at ¥111 per dollar and at ₩1,150 per dollar. Based on interest rate assumptions on an average of recent forward yield curves as a benchmark, we assume a 10-year treasure rate of 2.4% at the end of 2018. Our 2018 returns on non-coupon investments are expected to be in line with our long-term expected average of 5% to 6%. On taxes, which I know is a hot topic, this guidance includes an effective tax rate of approximately 26%. Given the uncertainties with tax reform, we didn’t factor the potential impacts into our 2018 expectations. When we have more clarity on what the tax reform package will look like, we plan to provide you with an update on its impact to our cash assumptions. I also want to highlight two adjustments that we’ll be making to the balance sheet at the beginning of 2018, which will have a positive impact on equity, excluding other comprehensive income. The first is the implementation of an accounting standard which will result in certain equity investments being measured at fair value with the changes in value recognized in net income. As we implement this accounting standard, effective January 1st, we’ll reclassify the remaining unrealized gains on equity investments from other comprehensive income to retained earnings, resulting in an increase in our adjusted book value. Based on where we are today, implementation of this accounting standard is expected to increase our adjusted book value by about $900 million from the third quarter of 2017. In addition, beginning in 2018, we plan to eliminate the one month reporting lag of our Gibraltar operations which is also expected to increase our book value, however to a much lesser extent. You should note that this will not result in an extra month of Gibraltar earnings in our 2018 results, instead we’ll essentially be recording the adjustment to opening book value. Between these two adjustments, we currently estimate book value will benefit by roughly $1 billion. As John previously mentioned, this is a headwind to ROE. However, we are not changing our near to intermediate term ROE target of 12% to 13%. On capital deployment, as also mentioned by John, our Board has authorized a 20% increase in the share repurchase authorization for 2018, up to $1.5 billion. This authorization reflects our expectation of an increase in free cash flow, which we expect to be about 65% of our after-tax adjusted operating income on average and over time, as well as our strong capital position and our high earnings. And finally, we continue to operate at AA financial strength standards, including leverage ratios that are within our targets. Turning to slide seven. To level set, since we haven’t reported fourth-quarter earnings yet, this slide starts with the reported results for the trailing 12 months ended September 30, 2017, and removes the impact of market-driven and discrete items, as well as net favorable variances from our average expectations in the key areas we call out each quarter, such as mortality experience, and non-couponed investment returns. We have also adjusted the earliest quarter including the fourth quarter of 2016, for the change in currency plan rates as we moved into 2017, so that the entire baseline gives effect to the 2017 currency plan rates. This leads to a pro forma baseline earnings level of about $10.55 per share. While this should not be viewed as a projection of our full-year 2017 results, we believe it provides a useful frame of reference for discussing our 2018 guidance. Starting from this baseline, we take into account a net drag from market factors comprised of a few items. First, consistent with our guidance last year, we estimate that there will be a further negative impact from continued low interest rates of $0.25 to $0.30 per share in 2018, mainly driven by reinvestment rates on portfolio turnover and lower investment yields on recurring premiums. The net impact from continued low interest rates is modestly offset by the impact of our assumed 3% appreciation in equity markets. In addition, we estimate a positive impact of about $0.02 per share from the change in foreign exchange rates, including the hedged rate for the yen going from 112 to 111. Otherwise, we expect continued core growth in our businesses with the key considerations I reviewed earlier and we expect an incremental benefit from our $1.5 billion of authorized share repurchases. Putting all of this together, our 2018 earnings guidance range for baseline adjusted operating income is $11.20 to $11.70 per share, which represents a 6% to 11% growth over our trailing 12-month baseline results. On slide eight, we review sensitivity to key market factors. You can see the estimated impact on our earnings per share from a plus or minus 10% movement in the equity markets and a plus or minus 100 basis-point change in interest rates. In each case, these shocks are viewed in isolation and applied at the beginning of 2018 on top of our existing market assumptions. As shown, a 10% move in equity markets translates to about $0.30 per share and 100 basis-point change in interest rates defined as a parallel shift in the yield curve, translates to about $0.25 per share. I would like to caution that these sensitivities are not necessarily linear, nor entirely symmetrical, and should not be extrapolated over more severe shock levels in either direction. That said, we believe they along with the business level sensitivities contained in the earlier slides, provide a useful frame of reference for some of the key assumptions that affect our results. To sum up, we believe that our business mix and solid fundamentals will continue to produce attractive financial results, driven by steady earnings and book value per share growth, increased free cash flows and attractive returns to shareholders. Based on what we know today about the potential outcome of tax reform, there may be consequences to capital levels. However, we do not expect that these would impact our capital deployment plans or our ability to meet our AA financial strength targets, while remaining within our leverage ratios. Finally, I want to cover one another topic. We’re considering an alternative approach to how we present guidance next year. Notably, we’re considering providing more robust metrics at the business segment level in place of our consolidated annual earnings per share guidance. While we’ve made no final decisions, we wanted to provide you with an early notice to avoid any surprises, if we ultimately go this route. Now, I’ll turn it back over to John.

Thank you, Rob. So, we’ll now open it up for questions.

Thank you. [Operator Instructions] And our first question will come from the line of Jimmy Bhullar with JP Morgan. Your line is open.

Hi. Thank you. Good morning. I had a couple of questions, first on -- I don’t know if you’re able to disclose the RBC impact if taxes go down. And you mentioned that you don’t expect this to affect your capital deployment. Is it because you’ve got a cushion in capital to begin with or is it that you’ve had conversations with rating agencies and regulators, and you don’t -- that gives you comfort that they’re not going to change their metrics on capital, if the tax rate in fact does go down?

Okay. So, Jimmy, it’s Rob. Let me respond to the capital question there. So, reform will have an impact. But, due to the strength of our balance sheet and our capital position, we can absorb these changes and remain within our solvencies, leverage, and liquidity, and shareholder distribution targets as they stand today. So, we define solvency in terms of RBC ratios at our current standards for AA, which are at a 400% RBC. However, to the point of the question that you asked, we believe that tax reforms should give rise to revaluation of the appropriate AA standard for RBC. The larger positive impact on the after tax margins that we have from tax reform relevant to the impact on our equity on an after-tax basis means that on an overall basis, we’re actually stronger, post tax reform. And that actually shows up in our economic solvency metrics that we use in running the business. We actually show that post tax reform, we’re in a stronger capital position. And we think that from an RBC standpoint, what’s reflected in the -- in our economic models is the combination of both capital and margins. And when you look at that on the RBC, you have to look up at the margins that are in the reserves in order to capture. We’ve begun to have a dialogue on this with both the rating agencies and with our regulators. We think people understand this. But having said that our -- the statements that we’ve made are in the context of today’s standards around those ratios.

Okay. And then, just on your equity and interest rate sensitivity, I noticed, it seems like the equity and the interest rate in fact is a little bit higher than it was, like $0.05 to $0.10 higher than it was last year. And I recognize that the earnings base is higher as well. But, what are the drivers of the increased sensitivity?

So, Jimmy, the point that you made, we have a higher -- our book is bigger, our earnings are larger; that’s a driver. Secondly, as we’ve discussed in the past, we’ve been growing through large transformations in our systems, and we’re getting increasingly sophisticated in our ability to modeling on sensitivity analytics, and that gives rise to our ability to be a little bit more precise around those impacts. And the combination of those things has led to the adjustment that we’ve provided.

And then, if I could just ask a quick one, your equity assumption is fairly conservative relative to what most companies use. How -- what’s your view on or what’s embedded in your guidance on alternative investment returns in the various businesses?

So, our alternative investments are assumed to be in the range of the 5% to 6% that we expect on a long-term basis, and despite the fact that our assumption about equity markets are in fact more muted.

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

Thanks. Good morning. I think, as of the third quarter, you had about $4 billion of holding company in liquidity. I just want to get a sense of what your plans are for that cash and what a normal sort of target would be at the holding company?

So, Suneet, Rob. Our cash -- our target minimum cash level is $1.5 billion. And so, we look to hold that under sort of all circumstances. We generally operate with a higher level of liquidity than that. And the kind of ranges that you’ve seen us in the cash that would range between sort of $3.5 billion and $4 billion I think are pretty typical of what you might see at any point in time.

But that’s not being earmarked for anything; that’s -- just happens to be where you sit today and you will reassess over time. Is that the right way to think about it?

Yes. I mean, if you look at what our cash levels have been over the last several quarters, I think they’ve been as low as low $3 billion; they’ve been as high as $4.5 billion. And I think that’s a range within which we would -- would tend to vary, and there is no specific earmark for how we would go about deploying that, beyond the things that we talked about in the form of -- our higher level of stock repurchases and then the dividend distributions that we make.

And then, in terms of the fourth quarter earnings, I know you are saying that the baseline doesn’t include the forecast of the fourth quarter, but it’s a little bit lower than maybe where we were thinking. Is there anything unusual, other than the normal expense seasonality in the fourth quarter that you are building in to the baseline?

Just to be very, very clear on, Suneet, do not confuse our baseline with any prediction as to what might happen in the fourth quarter. It is solely an exercise of looking at a trailing 12 months basis. So, there is no messaging embedded in that baseline number with respect to the upcoming fourth quarter. With regard to your specific question, seasonality in the fourth quarter, we’ve given a number on that. That’s been $125 million to $175 million worth of the higher level of spending relative to the average for the year. And I think that that’s a range that we believe will also be reflected in this year.

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

Rob, just to circle back. Could you guys give an update on what the expected RBC impact would be in the event of tax reform, even a ballpark estimate?

So, Tom, I think the range that we would expect is -- first of all, there are lots of moving pieces on this. So, we have some hesitation about giving our ranges, -- while there is -- there appears to be progress on tax reform and more transparency on that, it does get to be around understanding a lot of the details of that. Having said that, a range of around a 100 basis points impact to RBC at the PICA level, which is sort of the primary as you are going to look at given that PALAC is managed as looking [ph] RBCs, I think as you are very much aware. If you think about PICA, think about it being in the order of magnitude of about 100 basis points. As I mentioned in my opening remarks, we would, post tax reform, still operate at the 400 basis points or above, even with that kind of an impact, given how strong our starting balance sheet position is.

And then, the 65% free cash flow guidance for -- is that for -- is that the expectation for 2018? I know, it says -- it sounds a little vague whether that’s this year or more into the future, because if I sell for 65% for this year, that would imply, I think a common dividend increase of over 20%. I just wanted to see if I was -- if that implies 2018?

So, we are not formulaic about how we do these things, Tom. And so, we don’t have a defined dividend payout ratio. And so, I would caution you on the math that you just did. Having said, what I would reaffirm is that 65% is on average over time, but it’s a number that we’ve been migrating up to and hence felt comfortable giving the guidance for this year.

Just remember that it moves around sum, the cash flows vary and sometimes there’s more and sometimes there’s less. So, again, to Rob’s point, don’t be quite so linear.

And then in terms of tax reform, I don’t know, if I’m thinking about this the right way. But, on a GAAP basis, I think you guys have a net DTL of $10 billion. And I am assuming if we get tax reform that would actually be a very sizeable step up in your GAAP book value, just that you’re netting out the DTA versus DTL. Is that the right way to think about it? And would you expect there to be a big step up in your GAAP book value?

I am not sure where you’re getting your numbers from, Tom. In the third quarter, our DTL, GAAP DTL was about $2.6 billion. So, if you took a 20% ratio, I calculated that having done the 21% that’s currently sort of in play; that would be something more like around $700 million increase to our book value.

Yes. So, it may have to do with the valuation allowance, but I can circle back with that. But the -- and final question is just on the individual life mortality. I think, there was a step up in the standard deviation guidance on that. Is that -- now, it’s up to 80 million I think on the high end in the one standard deviation event. Are you using less reinsurance or is that driven by the model change from this year?

All the above, Tom. So, the book is larger; we’re reinsuring less, because we’re -- we like the mortality risk and the returns we’re getting on our mortality risk; and we’ve updated our models and gotten more sophisticated about our ability to do those sorts of calculations.

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

One more question on tax, and realizing there is moving pieces. But, can you give you an estimate of what you would expect the impact to be under GAAP tax rate?

I am going to defer doing that for the time being, Erik. I think when we’ve been able to work that through, we’ll come back to you and update everyone on what we think that impact will be. There are enough moving pieces in that that we don’t think it’s prudent at this point to be providing a number. It’ll be lower, but we’ve got work to do to quantify how much lower.

And on the group business, you commented that you moved the target benefits ratio down by 1%. Can you talk about what you’re seeing in the business that gives you the confidence projecting the improved benefits ratio going forward?

Hey, Erik. It’s Steve Pelletier. I’ll address that question. As we’ve spoken about over the past several quarters, we’re very pleased with the performance and the trajectory of the group business. This is a reflection of efforts to improve our underwriting over the past several years and our claims management practices. And the results we have experienced combined with our continued focus on diversifying our business mix and really strengthening the value proposition that we are advancing into the marketplace, all of that gives us comfort in reducing that target range slightly to 86% to 90%. There will be normal quarterly variability in those results, but we do expect overall improvement, as expressed in that ratio, and that will be driven by a combination of controlled growth, well-priced growth, strong underwriting and organizational efficiencies.

Our next question will come from the line of Ryan Krueger with KBW. Your line is open.

I have one more question on tax. On the 100 points to the PICA RBC ratio, did that include both the impact of the DTA as well an assumption for a change in the factors in the denominator?

Ryan, it’s Rob. Yes, it did. So, it’s a sort of a holistic view of all moving parts as we understand and as they are currently in play.

And then, just a question on investment management. Can you talk about how you are thinking about margins, as you go into next year, and if you expect positive operating leverage as some of the investments you’ve been making in the business start trailing off a bit?

Ryan, it’s Steve. I’ll address that question. Yes. We saw -- we’ve seen so far in 2017 a clearer evidence than ever of the investments that we’ve made in the business, from a distribution standpoint and from an investment platform standpoint, really starting to pay off. And we expect that to continue in the year to come. We also -- we noticed that -- Rob spoke about strong flows. I’d also point out the fact as we have discussed over the past few quarters, a lot of those flows have been coming into the fixed income business. And especially to address your point about margins. That’s a business where our margins -- where our whole business platform is particularly scalable, and the scale economics are particularly attractive, and where we are able to operate at robust margins. So, we think all of those factors will contribute to promising margin picture for the asset management business. On the fee basis, we’ve been able to withstand kind of secular pressure on fee levels through growth in higher yielding fee strategies. That hasn’t made us immune from that secular pressure but it’s helped us mitigate us. And the combination of that plus an attractive margin picture makes us -- bodes well for the near-term future in that business.

We will go to line of Humphrey Lee with Dowling & Partners. Your line is open.

Just to follow on investment management in terms of the -- on net flows. Can you talk about what the institutional pipeline that you’re looking at right now, and how does that compare to where you were last year, just from a standpoint of modeling?

I would say Humphrey that our flows picture remains quite promising. I’d say, compared to last year, we’ve seen even further progress in the flows that we’re attracting from overseas markets, particularly Japan but not limited to Japan. And that plus still very strong prospects in our core U.S. institutional markets, and our retail markets, feels that that -- makes us look with confidence to the prospects for flows in the business. Obviously, what we’ve already been accomplishing with the 15 or coming up on to 15 positive years, of positive institutional net flows, is a very positive picture. But, given the institutional pipeline, we’re looking at and in particular given the multi-asset class nature of our investment management business and the fact that we have different cylinders that can fire different times, depending on what market conditions and investor demand may be at a given moment, all of that looks -- makes us feel confident about the prospect for continuing that success.

And then shifting gear to pension risk transfer, I think in your prepared remarks you talked about you expect the pipeline would be more than offset the annual runoff that would expect in any given year. But, can you talk about a similar -- from a similar perspective, how is your pipeline looking right now compared to where you were last year at the same time?

Again, Humphrey, I would say, the pipeline looks very solid. Funding levels generally in the marketplace have improved as interest rates have ticked up, modestly but ticked up and that improves funding levels. Also, the fact that corporate treasurers and plan sponsor decision makers don’t seem to have an expectation that rates will run up rapidly from here, increases propensity to transact as well. So, we see a strong demand in the marketplace across segments. We know that 2017, we saw growth in kind of the middle market segment, transactions ranging from $500 million to $1 billion. But an interesting point there, even that segment of the market, a lot of the growth was driven by actually very large plan sponsors offloading a portion of their liabilities, portions that are usually characterized by a large headcount in terms of participants, low value per participant for that part of the liability. And they are looking to transfer that part of the liability in order to reduce costs, overall administrative costs and the per capita portion of PBGC premiums. Reason I am making this point is that while we’ve seen growth in that market segment, that’s still being done by large plan sponsors to whom our value proposition is very strong, certainty of close, very effective management of the overall transaction arc, and in particular being able to provide really world-class service to plan participants, immediately upon transfer of the liability and the responsibility for providing that service in cutting the monthly checks.

And then, so just kind of just wanted to ask, so I think some of the industry participants talked about 2017 was a very good year for pension risk transfer, definitely much better than the past couple of years. Do you envision 2018 would be a even better year than 2017?

We think 2018 will continue to see a progress in both the marketplace and in terms of our competitiveness in it, for the reasons I just outlined.

We will go to line of Sean Dargan with Wells Fargo. Your line is open.

I was just wondering if you could give us an update on the financial wellness initiative, in terms of take rates and if that’s going to be the driver and in any topline growth in 2018?

Sean, this is Steve. The financial wellness value proposition, over time we expect to drive growth in a number of different ways. First of all, there is simply the -- advancing a more differentiated value proposition into the marketplace, at the employer level by our group and by our full-service retirement businesses; that we are seeing already. We are seeing case wins that are directly attributable to our financial wellness capabilities and to the proof points that we are advancing into the marketplace around those capabilities. As you know, a big part of the strategy is to deepen and an individualize our relationships with the tens of millions of people who come to us via the workplace over time. That part of the revenue stream that we expect from financial wellness from that individual engagement that will emerge over the longer time frame. But we do see positive results already at the institutional or at the employer level. And we look forward to that continuing. As I mentioned, a lot of that has to do with the tangible proof points that we are already advancing into the marketplace. In particular, as we touched upon at investor day, the Prudential Pathways program whereby we are looking to offer financial planning and financial education seminars to the employees of our group and retirement clients. That Prudential Pathways now covers companies with employees ranging up to the 3 million mark. And that is something that again is a very tangible proof point to employers of our commitment to this value proposition, and we are winning attractive business on the basis of those proof points.

And just a follow-up question on how to think about interest rates. I think, in the past, you said the 10-year yield was at 3.1%; we would stop seeing year-over-year spread compression or pressure on net investment income. Given where corporate spreads are now, is that still the way to think about it?

Sean, if you think about the gap today between -- this is simplistic and overly simplistic, but I think it’s a helpful way to think about it and rule of thumb. If you look at where our portfolio yield is and you look at our new money rates, you are going to see there is difference between that of somewhere around 65, 75 basis point, something like that. And so, you would think that rates would generally -- if rates rose to close that gap, interest rates would cease being a drag on our earnings growth and would allow us to then build back toward our 13% to 14%.

Thank you. And with that that does conclude our conference call for today. Thank you for your participation, and you may now disconnect.