Q1 2020 Earnings Call
Conference call.
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I would now like to turn the conference over to her host Mr. Darren read up. Please go ahead.
Good morning, and thank you for joining our call representing Prudential on today's call, our Charlie Lowrey, Chairman and CEO, Rob Falzon, Vice Chairman and the Sullivan head of U.S. businesses, Scott Flextor head of international businesses can kind of <unk>, Chief financial Officer, and Rod Doxil.
Controller and principal accounting officer.
Let's start with prepared remarks by Charlie Robb and Ken and then we will take your questions.
Today's presentation May include forward looking statements. It is possible that actual results may differ materially from the predictions we make today.
This in 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 into forward looking statements. Please see the slide titled forward looking statements and non-GAAP measures in the appendix to todays.
Presentation, which can be found on our website at investor Dot Prudential Dot com.
Also due to circumstances created by the Corbett 19 pandemic, we have decided to cancel or Tokyo Investor day that was scheduled for September with that I'll hand, it over to Charlie.
Thank you Doug good morning, everyone and thank you for joining us today.
I'd like to start this morning by recognizing the extraordinary circumstances created by the Cobot 19 pandemic and by expressing our gratitude to all of those on the front lines, who are fighting this crisis around the world.
For those individuals and their families directly affected by the pandemic and particularly those who have lost loved ones.
We extend our deepest sympathies.
I Prudential, we're guided by our purpose to make lives better by solving the financial challenges are changing world.
And that includes being there for our employees, our customers and our communities, especially in times like these.
We are completely focused on ensuring that we take the right course of action for the business mitigating the impact of cobot 19, while investing for the future.
In order to emerge from this crisis stronger than before.
Strength of our balance sheet enables us to manage our business for the long term growth, while dealing with short term business realities.
Before we get into the first quarter performance I'll cover some of the key steps we've taken as a company to support our employees customers and communities in response to covert 19.
First turning to slide three ensuring that health and wellbeing of our employees and their families is our top priority.
As the pandemic emerged we initiated new policies and actions to ensure their safety and security, including additional family care support.
This included implementing a wide scale remote work environment with approximately 98% of our employees and most of our international employees now working remotely.
Please to report that all our businesses and operational functions continue to run smoothly.
Prioritizing the well being up our employees enables us to address the evolving hell and financial needs of our customers, that's a pandemic and its economic impact reverberate more broadly.
We've also provided customers with the systems, such as premium deferrals and fee waivers as well as enhanced digital tools.
I'm also incredibly proud of the work or employees have done to support our local communities, including a new work El Paso, Hartford and multiple international locations.
These efforts include the donation of more than 150000 face masks, including 75095 respirators for healthcare workers in New Jersey.
In addition.
The American Nurses Association and credential recently entered into an agreement for Prudential to sponsor and they events and outreach initiatives in 2020.
This agreement will include offering credentials financial wellness services and solutions to a in a members and the broader nursing community.
We're pleased to be of assistance. So those serving on the front lines of this pandemic.
Turning to our financial strength on slide four or rock solid balance sheet provides a foundation for our employees to serve our customers and our communities.
We're confident in our ability to successfully manage in this environment in large part due to the robust operational and financial risk framework that we put into place after the great recession of 2008.
This framework paired up with a playbook to address multiple stress scenarios, including Pandemics and economic conditions that are more severe than what we are currently experiencing.
In addition, we benefit from our recurring revenue model and mix of complementary businesses, which offset risk and produce capital benefits, giving us confidence about prudential to navigate the current environment.
We began 2020 with a strong capital and liquidity position.
And our capital ended the quarter exceeding double a financial strength levels.
As the pandemic unfolded and in light of uncertainty in the global markets, we executed our playbook.
We successfully issued $1.5 billion.
Senior debt in early March while spreads were still attractive.
This included a 500 million dollar green bond issuance. The first of its time for U.S. company in our sector.
These actions Prefunded or are these through the end of 2021 and enhance the liquidity of our businesses.
As part of the playbook, we further enhance liquidity of our businesses and also pause share repurchases at the end of the first quarter to see how the economic environment develops.
During the quarter, our variable annuity hedging performed extremely well with a 99% effective rate.
Our approach to hedging the economic risk resulted in significant gains on our equity market in interest rate hedges to offset the increase liability.
We feel comfortable about our ability to manage equity market fluctuations and continued low interest rates over time.
We're also highly confident about the quality of our investment portfolio, which Rob will cover in more detail shortly.
The strength of our financial position means our dividends to shareholders remain well covered by our income and free cash flow.
Turning to slide five we're on track to accomplish our strategic initiatives for the year and in fact, our accelerating their execution in some cases.
First.
We are repricing, our products more quickly and pivoting towards lower risk and less capital intensive products.
Second with respect to rotating our international earnings mix to higher growth markets. In April we reached an agreement to sell our Prudential of Korea business.
We also continue to pursue strategic alternatives for our Taiwan business.
Finally, we continue to make progress on achieving our goal of $500 million in cost savings.
Hundred 40 million of which should be achieved this year.
We realized 30 million in the first quarter through actions, we completed before the start of 2020.
Turning to slide six well it seems like a lifetime ago I'd like to spend a moment on our first quarter performance.
We reported pre tax adjusted operating income of $1.2 billion or $2 from 32 cents per share.
The GAAP net loss was 70 cents per share driven largely by non economic factors.
Our U.S. and international business earned lower variable investment income in the quarter.
We also generated lower underwriting income in our U.S. businesses.
Higher asset management fees at PJM were offset by lower other related revenues.
Well, the severity and duration of the pandemic and related economic impact remains unknown.
We are confident about the strength of our company.
Prudential has survived pandemics.
Wars recession.
And the depression, among other events and it's 145 year history.
We are resilient.
We are strong.
We will continue to move forward to deliver sustainable value for all our stakeholders with that I'll turn it over to Rob for a detailed look at our business performance for the quarter.
Thank you Charlie shortly indicated the results from our businesses in the first quarter were negatively impacted by two significant factors that we had not anticipated.
Adverse mortality and the impact the pandemic, particularly on equity markets interest rates and credit spreads.
Adverse market conditions resulted in a $150 million of lower variable investment income in our U.S. and international businesses and also reduced other related revenues in PJM by $55 million and the Chilean and high earnings in our international business by $30 million over.
Overall mortality was $60 million above our seasonal expectations.
We're continuing to work toward improving the profitability of our individual life business, we have strong life insurance marketing and distribution capabilities, which has expanded with the acquisition of assurance I Q.
In aggregate. These factors reduced first quarter is adjusted operating income by about $295 million or 58 cents a share.
Lower interest rates in equity markets also challenged fundamentals across our businesses and we are actively executing pricing and product actions to shift our business mix to less market sensitive customer solutions.
With that in mine I'll turn now to providing more color on how we were executing on our strategy within our U.S.P., Jim and international businesses as well as on the outlook for these businesses considering current market conditions.
We'll also provide an overview of our investment portfolio given the increased focus on the risks associated with the potential near term credit cycle.
Turning to slide seven.
Our U.S. businesses consist of the workplace solutions individual solutions and assurance I Q divisions that produce a diversified source of earnings from fees investment spread and underwriting income.
Our U.S. businesses continue to execute on three key priorities first and foremost the financial strength of these businesses, which continues to be solid despite the impacts of coking 19, the broader economic conditions, we continue to take public actions, including steps to diversify our mix of business and maintain profitability.
Second as the needs of our customers rapidly evolving including in response to covert 19, and its economic impact we are leveraging our ongoing technology transformation and digital capabilities to enhance customer engagement.
For example.
Within a matter of days in March we introduced our fast track automated underwriting process for Covidien 19 related claims with expanded E capabilities for proof of death.
Just a weekend, we introduced new mobile apps and chat bots to help manage a surge in customer calls and inquiries.
And we have expanded the use of electronic signatures across our businesses.
We will continue to invest in transforming our capabilities by accelerating use of technology to deliver a better customer experience and enhance the speed at which we operate.
And third we remain committed to expanding our addressable market.
Pandemic has amplified the financial wellness challenges that many U.S. households face to support our clients in these challenging times, we continue to invest in and expand our range of capabilities to meet their needs.
For example.
Completely transformed our flagship financial wellness offering pathways from an onsite to a virtual offering.
As a matter of just weeks, we scheduled over 150 lives web based financial education seminars for our clients and we introduced a new solution to help customers manage debt in partnership with Green path.
We're also shifting our focus to serving expanded addressable market was lower risk and less market sensitive solutions to address the changing market conditions.
Example, in our individual annuities business, we're pivoting to less interest rate sensitive products, including accelerating to may of this year the launch of our flexcard indexed annuity.
Our individual life business, we're also making product and pricing changes that will result in the continued pivot to variable life in other less interest rate sensitive products.
As a result of pricing actions.
Product.
Yes, and disruptions to distribution from covert 19, we expect sales to continue to decline for individual annuities in the near term and we also expect reduced sales for individual life.
And our retirement business, while the longevity reinsurance market remains active we expect that current market conditions will impact the funding levels of pension plans and therefore result in lower pension risk transfer transactions.
Now turning to slide eight.
Teach him as a top 10 global investment manager was 1.3 trillion dollars of assets under management and continues to leverage its diversified multi manager model to serve investors.
Our robust infrastructure investments in technology have allowed employees to seamlessly transition to working from home. This operational flexibility has allowed us to support clients with portfolio information and insights and address their questions. Even as we work in a virtual environment.
Well significant market fluctuations in the month of March affected our three year performance Pgms long term track record remains strong.
79% of assets under management has outperformed their benchmarks over the last five years and 94% over the last 10 years.
And we have seen some recovery of performance and our short term track record in April.
Despite claims temporarily rebalancing into cash we generated $2.9 billion net third party flows during the first quarter.
This reflects the resiliency of P., Jim's diversified platform across asset classes regions and client segments.
Net flows included $4.2 billion of institutional inflows, partially offset by $1.3 billion of retail outflows.
Public fixed income experienced both retail and institutional inflows and of note P. Jim was the highest ranking U.S. mutual fund franchise across active and passive asset managers based on net sales in the quarter.
He just asset management fees were up 8% compared to the year ago quarter, driven by growth in average assets under management and a stable fee rate.
Other related revenues declined primarily due to the effect of mark to market losses from credit spread widening in the first quarter.
We expect near term sales across the industry to be impacted by volatile public market conditions reduced transaction volume and private asset classes and slowdown in client activity. Despite this we expect teach them to emerge well positioned vis-a-vis our competitors driven by its diversified global platform.
Turning to slide nine.
Our international businesses include our Japanese life insurance operation, where we have a differentiated multichannel distribution model as well as other operations focused on high growth markets.
Life planner sales decreased 5% compared to the year ago quarter, driven by lower corporate products sales following the Japan tax law change, partially offset by replacement U.S. dollar protection products.
Life planner head count, however, reached a record levels, increasing 5% compared to a year ago.
Sales for Gibraltar were also 5% lower primarily reflecting the continued to trend of lower single pay U.S. dollar fixed annuity sales in our life consultant and independent agency channels.
In addition.
As we continue to focus on quality distribution the number of life consultants has declined.
In Chile, we have a leading pension provider VR joint venture with habitat.
Earn fees on assets in realized mark to market gains or losses on the capital that we are required to invest in the funds.
Our investment performance has outperformed overtime as well as in the fourth quarter in the first quarter.
Returns in the quarter, however were down across the industry and that contributed to approximately $30 million of lower than expected operating income.
As we looked at the second quarter, we expect international sales decreased significantly, reflecting the effective social distancing protocols that limit in person engagement with customers across our distribution channels. This will also affect recruiting of new life planners and life consoles.
We are actively taking measures, including appropriate sales support to protect and care for our captive distribution during this difficult time.
Over the longer term, we believe covert 19 may result in heightened interest in protection products, particularly the death protection products throughout the core of our needs based selling approach.
With respect to the current interest rate environment, we have successfully managed through decades of low interest rates and other market challenges in Japan.
As you've seen in the past, we adjust to meet the needs and preferences of our customers. While also achieving our return expectations. We've already taken actions and we'll continue to do so as needed as we move forward.
Also as Charlie stated in April we announced that we have entered into a definitive agreement to sell Prudential of Korea.
This business represented less than 10% of international business sales.
Now turning to our investment portfolio on slide 10.
We don't get conservative quality focused approach to our investment portfolio construction in management. It reflects our robust asset liability management practices commitment to broad diversification and a disciplined interest rate risk management framework.
We also leverage pgms expertise across multiple asset classes, including its deep and longstanding experience in private placements and real estate.
With respect to our investment portfolio here a few key points.
We have a high allocation to government securities, which is primarily comprised of U.S. treasuries and Japanese government bonds.
About half of our Triple B in below rated corporate securities, our private placements with financial covenants and structural protections that consistently resulted in lower losses than comparable public securities in past cycles. The loss experience of our triple the private placements has been comparable to single a public.
Credits or about half the losses similar rated triple the public credits.
Our commercial mortgage loans are well protected with a loan to value on the entire portfolio, a 56% and debt service coverage is in excess of 2.4 times.
We are overweight in more defensive sectors, such as industrial and multifamily and underweight in both office and retail.
We also have a low exposure in our investment portfolio to currently more vulnerable sectors like energy retail and other at risk corpus.
The quality of our portfolio as demonstrated by its performance during the financial crisis in 2008 in 2009, where our credit loss experience compared favorably to peers. Since then we have decreased our exposure structured securities and Triple B corporates and increased our holdings of government bonds and single eight above rated corporates.
From 2008 through the first quarter of 2020, our annual fixed maturity credit losses averaged just 13 basis points of our portfolio.
Slide 23 in the appendix provides more detail on our investment portfolio to exposures currently in focus.
While we expect credit losses to emerge. The main takeaway is that we feel comfortable that our exposure is quite manageable and we are well capitalized to absorb such losses.
Turning to slide 11 to help you assess potential credit losses, our investment portfolio over a three year recession cycle, we provide a framework using publicly available rating agency and other third party data for the underlying assumptions. This framework provides potential impairments defaults and ratings migration.
The output suggests impact Picas RBC ratio and the solvency margin ratios in Japan would be very manageable and consistent with our expectations.
Credit losses on an after tax basis will total approximately $2.4 billion over a three year period.
To put that into perspective that will be less than one year of our free cash flow also will be used experiences from the prior recession in 2008 at the underlying assumptions for this framework. The after tax credit losses would be much smaller at about $1.6 billion and with that I'll hand, it over to Ken.
Thanks, Rob I will begin on slide 12, which provides insight into earnings for the second quarter of 2020 relative to our first quarter results. We've began with pretax adjusted operating income in the first quarter, which was $1.2 billion resulted in earnings per share of $2.32.
On an after tax basis.
Then we adjust for the following items first we expect variable investment income in the second quarter to be $150 million lower than in the first quarter is primarily driven by lower returns from private equity investments, resulting from the decline in values in the first quarter reported on a one quarter lag in the second quarter.
Second next in the second quarter, we won't have lower seasonal expenses, partially offset by higher implementation costs, which will result in a net benefit of $50 million.
Third there are other items that combined.
$45 million more favorable in the second quarter relative to the first quarter. This includes the normalization of Pgms are the related revenues and our chocolate Chilean joint venture income, which were lower in the first quarter due to the mark to market of assets for equity markets New credit spreads. This normalization is partially offset.
My classifying our potential Korea business as a divested business.
Fourth we expect seems to be lower on a run rate basis in the second quarter.
This reflects account values, starting the second quarter at a lower point than the average level in the first quarter.
Next we included a place holder potential potential.
19 related claims and expenses totaling $250 million I will provide additional details of these items on the next slide.
Last we anticipate net investment income will be reduced by $15 million, reflecting the difference between new money rates and disposition yields on our investment portfolio.
These items combined get us to a baseline of $792 million of operating earnings and $1.53 cents per share for the second quarter [noise].
Please note that this baseline includes items specific to the second quarter that reduced EPS by approximately $1.22 cents per share.
While we have provided these items to consider there maybe other factors that affect earnings per share in the second quarter of 2020.
Given the extraordinary circumstances created by coded 19 on slide 13, we provide estimates for the potential operating earnings impact directly associated with the pandemic in 2020.
As part of our risk management process, we model, many potential stress scenarios, including a pandemic scenario.
We have some substantial reserves and highly liquid assets to ensure we are well positioned to readily set up <unk> satisfy all policyholder claims and continue to be well capitalized. We also benefit from the diversification of our businesses and specifically the complementary nature of a retirement longevity business and our mortality businesses.
Although the extent and duration of the Cobot 19 pandemic remains uncertain, we thought it would be helpful to revive estimates for the potential impact on net mortality and cost in 2020.
Yes, and that's where the impact on net mortality assumes 100000 deaths across the total U.S. population and 40000 deaths across the total population in Japan.
After considering the profile of our insurance policyholders, we estimate that impact on earnings from that mortality, maybe be approximately $200 million in 2020.
Also assuming the spread of Cobot 19 is substantially contained in the second quarter. We estimate approximately 135 million of earnings impact may occur in the second quarter would possibly lower impact in the second half of the year.
Also as we continue to support our poison families are in this difficult time, we expect to incur additional costs primarily related to sales report employee health protection technology and other expenses in 2020, we estimate these costs would be approximately $230 million with 115.
Million dollars of these costs in the second quarter.
Turning to slide 14, we continued to maintain a robust capital position and adequate sources of funding our capital position exceeds our double the financial strength targets and we maintain liquid assets at the parent company that are greater than three times annual sick charges, our financial leverage ratio is at our target.
Our regulatory capital levels at our insurance companies remain higher than that targets. In addition, we have substantial sources of funding our cash and liquid assets at the parent company were $5.3 billion at the end of the quarter.
As previously highlighted we expect to received net proceeds of approximately $1.7 billion from the sale of potential Korea business. Following the close of the transaction, which is expected in the second half of 2020.
And another source of funding is free cash flow from our businesses, which represents approximately 65% of earnings over time.
In addition, we have readily available off balance sheet resources. This includes 4 billion dollar credit facility with 23 banks in the syndicate structure across the U.S. Europe and Asia. We also have access to $1.5 billion of funding from the contingent capital facility with the right because you got in exchange for U.S. trade.
Your securities held by a trust.
And we have a bank, Japan Bank facility with 1 billion yen 100 billion yen available to potential of holdings of Japan.
Turning to slide 15, and in summary, we are committed to filling our purpose to make lives better by solving the financial challenges of are changing world. We maintain a rock solid balance sheet with robust capital and liquidity position, we remain on track with our objectives for the year as we accelerate the execution of our initiatives now.
I'll turn it over to the operator for your questions.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press one followed by zero now if you are using a speaker phone here. This afternoon, maybe help actually is the handset before pressing those number keys.
Once again, we'd be last that you limit yourself to just one question.
One follow up today once again.
It's yourself in Q immediately leased one followed by zero.
It looks like our first question comes from the line of their cost of the toughest research. Your line is open.
Hi, Thank you. Its first can you provide a bit more color on how you're coming up with your estimated cobranded impacts and how you're thinking about the interplay between mortality and longevity exposures and then also just to clarify on the expenses is that and just related to co bid or is that a net impact.
Factoring and other things such as lower TNT expense.
Yes, Hi, Eric it's a it's can okay I'll take your questions.
On the Colgate estimates first I wouldn't like to recognize that these these are placeholders. These are based on an estimate of 100000 deaths in the U.S. and ER and 40000 deaths in Japan now it.
Well you have to see how things play out and Ah theres likely a range of outcomes around that for the U.S. in Japan. So just want to recognize that we've done our best to give a place holder, but it's predicated on a number of assumptions. What we do then is we.
We then.
Considerations for a lower physicality rates for the insured population versus the general population, we certainly have taken into consideration higher fatality rates.
For the older population and then we took into consideration the geography of our of our insured population with the tend to have a little bit higher concentration in New Jersey in New York.
California in Washington.
When we put that altogether, we applied those two our average profile and ER and provided those estimates.
And again, we'll we'll likely have a good range around some of those some of those assumptions.
In terms of our.
Retirement business it does provide a and offset to some of our life insurance as Weve expected then designed.
The offsets about 30% of of our our exposure and that's just kind of how the modeling plays out.
And then your second question was around the expenses.
You know we looked at the steps that we need to take in order to care for our employees a for a crisis care a as well as.
Compensation for sales professionals, particularly in our international locations fire sales were decline and and Weve estimated that the appropriate thing to do but given that the situation.
We will we havent included in that estimate potential offsets for the fact that travel and conferences and entertainment will be lower we would expect if things return at some point to normal that some of that might come back.
Perhaps you know to sort of rebound, but I would estimate if we're going to have savings here in the next quarter. So that you can think of that and the tens of millions but.
But that's not included in the estimate.
Just a reminder is one followed by zero, if you'd like to queue up your for question.
Next we Atlanta Suneet Kamath Citi. Your line is open.
Thanks wanted to go to long term care earlier as we go when your competitors announced a regulatory review of long term care reserves resulted in a pretty sizable increase to stat reserves. So just curious if any of your regulators are contemplating are conducting similar reviews.
Maybe over what timeframe would we expect any resolution if there are such reviews in place. Thanks.
Yes, Hi, this is Kevin can see.
Well just an ordinary course.
We review our reserves with our regulators and ER and they have not indicated any concern about our level of reserves related to long term care and Theres No special review underway.
Next in queue, we have the light of Tom Gallagher Evercore ISI. Your line is open.
Good morning.
The.
The 2 billion of debt that Pru issued in one Q is I think being counted as operating debt.
So just curious what.
Why that's counted as operating debt I think which is excluded from the leverage calculation and what will your plan is with with those proceeds and then.
Let's see the other question I had is.
Just on the.
The gap breakage, you had on the on the variable annuity side this quarter, which are also a similar statutory.
Level of breakage I realize it's on economic based on their accounting differences between.
The assets and that and the liabilities, but just curious if you had a similar impact on statutory thanks.
Yeah, Hey, Tom It's Oh picked goes.
On.
The two dotting the debt included the billion and a half that we issued a.
At the Holdco.
You can think of that as we would ordinarily have this you'd say half a billion earlier in the year and a half a billion towards the end of the year, but we decided to do.
<unk> billion and a half in March we were worried about how the conditions were developing and thought it would be prudent to a dual billion and a half which essentially will will take care of any maturities.
In 2000, 22021, so it's about a billion more than we would ordinarily have done perhaps but we thought it was a an appropriate thing to do in terms of why we called operating debt right now those proceeds sit at the holding company in cash.
And and we follow sort of the way that our rating agencies or think about classifications of debt so and that the plan proceeds again, we havent available at the holding company and it would it's used its available for a for paying off the death again for this year and next year in terms of.
The.
The.
Non AOL why items for the quarter, our variable annuity business is very well hedged and we like to align.
Our outcomes for gap us and Staten economics in our as Charlie mentioned in his comments it was highly effective at 99%.
The way, we hedge interest rate risk.
Again, which was highly effective in the quarter is with both derivatives.
That our mark to market and recorded in the PML, but also by holding a a 30 year us treasuries, which had a $1.7 billion gain.
I would have offer offset the non AOL item in the quarter, but that the gain on the us treasuries as recorded two OCI.
And not to the income statement, so economically and from a stat standpoint, we were very well aligned just with a little bit of difference between where are our gain is recorded for gap.
Just a reminder is one followed by zero to place your line in Q.
We have only to Ryan Krueger of KBW. Your line is open.
Hi, Thanks. Good morning can you help us think about.
Interest rate sensitivity.
Then the balance sheet, both GAAP and that I think previously you provided a sensitivity or 10 year rates and the two in two to two actors that range, but given where they are.
Today with hoping for some additional sensitivity.
Sure Yeah, maybe I'll start was that Ryan and.
We have had sensitivity to arse that financials, primarily around asset adequacy testing.
Last year.
Given the decline in rates, we increased our asset adequacy testing reserve by about a half a billion now we had derivatives that offset that so we were with again. So we were at a stable.
We see outcome, but it's also important to know that sort of at this level of very low interest rates.
That the the way the testing works is the you know when rates are so low the shock is much lower so we'll have less sensitivity to lower rates from from this point forward from a GAAP standpoint, our our sensitivity really hasn't changed.
And as you know we have a up a process or I'll remind people that we have a process, where we look at our long term rate assumption and that includes.
On a survey of economists banks and in other managers and we also look at the implied forward curves and we look to be at the median of of all that.
And.
That's the process that we're going through I'd also note that.
The way our interest rate assumptions work for gap is we start at current rates and we grade to a long term assumption over 10 years. So as a result.
Are the tenure treasury under under the next seven years is less than less than 3%. So we're going through our process as we would typically would.
That will be finalized by our risk management committees in late June So no change in our significant change in our GAAP sensitivity and.
I will be a we'll be doing our usual process in the second quarter.
Thank you.
Next in queue Weaseling of Alec Scott of Goldman Sachs. Your line is open.
Hi, Thanks for taking the question.
First one I have is just a follow up on the stat rate sensitivity comments that humid I just wanted to make sure I interpreted it correctly.
As you go through your actuarial review and if the ultimate rate is set lower.
Does that reduce sensitive sensitivity sort of apply now why would we.
It is sort of the 3% to 4% book value type impact bank gap would that not necessarily all translate the statutory.
Again the.
The way asset adequacy testing works is we don't set a long term rate those those are prescribed by gap and and we're going through our we're going through our and so it's a little bit of a different different framework.
And we will also so we're we're working through that.
Just a reminder, pressing one followed by zero to police yourself in Q.
Next in queue, we had delayed Nigel Daily Morgan Stanley. Your line is alright, great. Thank you. So I had a question on the on buybacks you. Let me spend if EBITDA to time running through the strength of your current capital position and also what appears to be quite a manageable stress scenario clearly a number if I may have in fact, as but what you.
Looking for what it to let some of the things that you're looking for to be comfortable in receiving buybacks should we assume that buyback to suspend it through the ended the year old.
They could it be somewhat sooner than that any color there as to how you're looking at that.
Yes, the I think the primary thing we're looking at is the economic cycle.
And no where we're seeing a substantial impact given the situation that we're in we'd like the quality of our investment portfolio and we think it's manageable, but we want to see how hard for all this credit cycle emerges. So I don't know quite you put a timeframe on that I think time.
So.
Next in queue land of Humphrey Lee of Deleon Partners. Your line is open.
Hi, Good morning, Thanks for taking my questions. My first question is related to insurance like Q.
The losses for the quarter looks a little bit longer than expected.
How should we think about those losses would trade show would expect.
For the next couple of quarters would be coming that kind of 30 million range before seeing a recovering in the fourth quarter when activity started to pick up due to enrollment period.
Yeah Humphrey good morning, attendee and thanks for your question and our gets kind of a little bit of a break here. So.
Sure. Thank you I would characterize the results for quarter, one as as modestly worse than what we expect that we have started to lean and from an investment perspective to building out the platform more broadly and to bringing new new product solutions onto the platform as we think that first mover advantage is very very important.
As we talked about last quarter as well, we learned some lessons from a Medicare advantage.
Perspective, and we are investing ahead of Q4 to make sure that we have the right number of agents and that they are fully in properly trained and we're ready to ready to go into fourth quarter. So I think you can think about performance similar.
In the next couple of quarters and obviously, they the large opportunity is in Medicare advantage in Q4.
Got it.
Huh.
Just a reminder, one followed by zero to police yourself in Q, and we do remind that limit yourself to one question and one follow up if possible next.
We have the line of John Barnidge Piper Sander Your line is open.
Great. Thanks, if we were to assume the.
He is a seasonal nature and returns at the very lease in one Q 21 could you help me dot dimension, how many of these non mortality and morbidity CD 19 costs through would remain on a go forward basis.
Yeah, I don't think we want to try to forecast that far in which the.
Given the the situation.
Eventually I think we will operate differently given given the changes environment than the way, we're gonna have to conduct business, but that's that's a bit out there. So I don't I don't think we want to start to to look through.
As far at the moment.
Okay, and then could you maybe provide average age on the products where are you have seen cdnineteen exposure. Please.
Yes. So oh this is Andy so obviously the two predominant areas. There are really our individual life business and our group life business and then obviously offsets in the longevity business that we havent retirement.
So actually an individual life and group insurance average age across the they know the whole book is relatively similar in the about 55.
In group insurance in particular, though 95% of that business is under the age of 65.
As far as the longevity risk transfer business and the pension risk transfer business are at our average age is in the 74 to 75 range.
Thank you.
Next in queue filling release Greenspan Wells Fargo.
Thanks.
Hi, Thanks.
First question is on that business.
You just discuss your outlook for the margin.
The year, just given that I.
I think Colgate 19 can impact on some of those businesses or do you think that you might not be an impact there.
Maybe in fell 2021.
Yeah at least this is Andy so I'll take that question and there are a number of impact so maybe I'll start.
You know more on on the claims side of things and we do expect it within the estimates that that can walk through that we will see increased mortality in the book of business. Obviously in the group business as I, just just reference that somewhat mitigated by by the average age, but we do think that that that will go up.
We also believe and that seen evidence that we'll see a an uptick in short term disability incidents.
So that will serve to compress margins throughout this year.
We see a couple other impacts I just mentioned from a from a sales inflows perspective.
Most of our book of business is is medium and large size employer. So actually most of our sales for 2020 are already baked in that business and any slowdown. We're seeing is is more of a 2021 impact I guess the last thing I'd mentioned as a lot of the impact that group insurance will will feel.
We actually are mitigated against from that perspective that we're not in the under 100 lied segment business. So we don't have exposure to the small segment employers and obviously here early days, that's where a number of the impacts of that.
Okay, Great and then my second question you buy in your prepared remarks kind of shifting a bit natco less interest rate sensitive paddle after we think about.
Capital that you have to put forth right. Some of the new business why that's less interest rate sensitive first is you know some products that may be required more capital.
Capital arbitrage there as you kind of shift you're writing in this low interest rate environment.
Yeah I'll take that.
The products that we're shifting towards do have less interest rate sensitivity.
Things like variable life.
Things like our we're looking to root.
Release, a a structured a variable annuity and so they will be less capital intensive and and and less interest rate sensitive I don't think theres anything more to the dynamic than that.
And this is Andy maybe I'll, just just add some some color commentary so in the individual life business as can reference we've we've been shifting towards variable life.
We're very pleased in Q1 that our sales were 187 million, which was up 15% quarter from Q1 of last year.
50% near 50% of those sales were variable life.
We've also in April launched a a product that is much less sensitive to interest rates and equity markets tuned to the are a channel and our buffered annuity. We're very excited about that launch that has become a robust market.
60% of the volumes in that marketplace are going through independent broker dealers and we have very very strong relationship. There. So we think thats going to be very promising for us.
Next in queue follow from the live sneak Hamas Citi. Your line is open.
Yeah. Thanks for the follow up on the individual life business in the past do you guys have talked about using reinsurance to either dampened down the earnings volatility or actually free capital.
So I want to get an update on that and is that strategy is still effective are still possible given all the uncertainty around Tobin 19.
Yes, they needed for India, and maybe I'll take that question up a level first.
As we talked about last quarter, we are lean Danny they're performing the overall to improving the overall performance of that book of that book of business in that business with three levers first we're very much leaned into improving the expense profile of the business.
Lot of our future work energy and effort is is aimed in that regard and we actually saw a reduction year over year in our expenses in the business. So so we like the progress we're seeing there. The second lever was is leaning into and growing the business with with with profitable business that we're putting on the books and as I mentioned.
Our sales are up year over year, and we're comfortable with that the pricing in the profitability of the business that we're selling as far as are the third lever and it's the lever that you referenced it really is looking at the ability to reinsure.
The block of business, we continue to explore solutions, obviously, where we're looking very carefully about what is what is is the right economic favorability for us and if and when we take action on that we will report out on it but nothing to report as as we sit here today.
I just have one quick follow up for Ken.
As a follow up to Lisa's question on capital you'd cited in your prepared remarks pretty significant declines in sales both in the U.S. as well as Japan.
Any sense of how much capital or lower strain could you guys experience relative to a normal year based on that sales decline.
Yeah.
So all things being equal.
We would we would have a less cap you know we go if we were selling what we when we sell business, we capitalize it well and if you were selling less that means it's requiring less capital to support it and so we would expect all the things being equal that would be the case I think it's too hard to quantify.
That right now, we'll see how our sales plays out if we have if we have opportunities to make sales and attractive business. We'll do that if the conditions are such that either the returns are attractive or it's too difficult to conduct business that with lower sales and we would.
See some.
Capital offset for that so I I, just don't I think it's little too tricky to put a number on that right now.
Alright. Thanks.
Just a reminder, one followed by sea or to place yourself in Q. It's like we do have a follow up from the line of Alec Scott Goldman Sachs. Your line is open.
Hi, Thanks for taking the follow up I just wanted to see if you did provide an update on the mortgage loan book and I guess, specifically that commercial mortgage loans.
Yes, it would be interested in.
Operating up around like how much of it you've got forbearance requests on and what you'd expect there.
Alex It's Rob.
To handle that one.
Yeah, we have Rashid forbearance request the vast majority that as you would expect is coming from the hotel and mall tenants.
Having said that to date through through April in any event. We've had we've actually granted forbearance on a little less than 3% of the portfolio in and the that but by and large almost entirely has been just with respect to principal amortization loans continued to remain current with regard to to interest payments.
We do expect that that will build overtime.
Just some greater amount, but having said that we're actually quite comfortable if you look at the loan to values that we have across a the mortgage portfolio.
Which at that said, 56% based on our internal appraisals and what we find is if we actually use external appraisals that drops to around 46% so being in a position to be able to provide forbearance on principle, we don't think actually puts at risk our ability to be repaid on those loans given the relatively low.
All amount of leverage that we have on our properties and combined with the effective bar mortgage portfolio is very concentrated in higher quality will located properties. So we're feeling quite good about the status of the mortgage portfolio, we expected to be resilient.
Through this crisis as it has been in fact, a through all prior of our recessions. If you look at the 2008, a recession and you sort of take that as we roll that forward, we've had sort of a one basis point loss ratio on our mortgages from from that period until now so.
So we actually feel pretty good about the way in which Youve underrated underwritten it and and we feel very good about the way.
Position going forward.
Got it and how.
Alex is Danny I was just going to add a point from our third party managed fund business very similar trends.
To date seen seen low single digit levels up for barron's.
And clearly that arise over time, but very similar trends to what Rob covered.
Got it.
In one followed by zero as a reminder, next we do have a follow up from Humphrey Lee Deleon Partners. Your line is open.
Thank you for taking my follow up on looking at PJM. So other related revenue is always being a source of variability flotek sentiment I think this quarter you had some rent related issue hurting somebody to private credit. So looking forward like still be the strategies that you haven't PGM, Brett it's really.
They all private credit at all or some of the specialty.
Products, they are likely to see lower activities. So how should we seemed about the other related revenue trends for the balance of the year.
Yeah, So Humphrey it's Andy so.
You're correct in first quarter, the the predominant in packaged in other related revenues from our strategic investing portfolio, that's where we we have arsene strategies as well as where we co invested alongside of our clients.
We have the predominant impact was in from credit spread widening on the fixed income portion of that portfolio.
In general if you look back we tend to have somewhere in the neighborhood of $50 million to $60 million coming from our or are we do think it is reasonable as you kind of look forward over the next couple of quarters obviously.
We think flows will be lumpier in general and we do believe that there will be slowed up some slowdown in client activity and then transaction. So there may be some near term pressure on that but over the long run you could think of that in that 50 to 60 million range.
No further questions here in Q4 will be happy to turn it back to Charlie Lowrey for any closing remarks.
Great. Thank you very much we'd just like the thing closing, but we'd like to take a moment to thank all our employees for the extraordinary steps they've taken to support our businesses our customers in our communities.
Together, we remain financially strong we remain resilient and we remain committed to fulfilling our purpose of solving financial challenges are changing world, including doing our part to contribute to an inclusive global recovery.
Thank you all for joining the call. Please stay safe and we look forward to talked in Houston.
Ladies and gentlemen that does conclude today's conference call you may now disconnect.
Yes.
Right.
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