Q1 2022 Prudential Financial Inc Earnings Call
Good morning, and thank you for joining our call representing Prudential on today's call are Charlie Lowrey, Chairman and CEO , Rob <unk>, Vice President Vice Chairman, Andy Sullivan head of U S businesses.
<unk> head of international businesses, Ken <unk>, Chief Financial Officer, and Rob Axel Controller, and principal accounting officer, we will start with prepared remarks by Charlie Robyn Ken and then we will take your questions. Today's presentation may include forward looking statements and it is possible that actual results may differ materially from the predictions we make today.
In addition, this presentation may include references to non-GAAP measures for a reconciliation of such measures to the comparable GAAP measures and a discussion of factors that could cause actual results to differ materially from those in the forward looking statements. Please see the slides titled forward looking statements and non-GAAP measures in the appendix to today's presentation.
And the quarterly financial supplement both of which can be found on our website at investor Prudential Dot Com now I'll turn the call over to Bob Mclaughlin. Please go ahead.
Morning, and thank you for joining our call representing Prudential on today's call are Charlie Lowrey, Chairman and CEO , Rob Falzon.
Vice Chairman, Andy Sullivan head of U S businesses, Scott <unk> head of international businesses Ken.
<unk>, Chief Financial Officer, and Rob Axel Controller, and principal accounting officer.
It will start with prepared comments by Charlie Robyn can and then we will take your questions. Today's presentation may include forward looking statements. It is possible that actual results may differ materially from the predictions. We make today. In addition, this presentation may include references to non-GAAP measures.
A reconciliation of such measures to the comparable GAAP measures and a discussion of factors that could cause actual results to differ materially from those in the forward looking statements. Please see the slide titled forward looking statements and non-GAAP measures in the appendix to today's presentation, and our quarterly financial supplement both of which can.
Be found on our website at Investor Dop Credential Dotcom now I'll turn it over to Charlie.
Thank you Bob and thanks to everyone for joining us. This morning, we delivered solid operating earnings for the first quarter, including strong variable investment income that more than offset the impact of the elevated mortality from COVID-19, we.
We've also recently achieved multiple significant milestones in our transformation process to become a higher growth less.
Market sensitive and more nimble company.
These milestones included continued execution on our plans to reposition our businesses, we completed two key divestitures and announced another programmatic acquisition.
We continue to invest in our businesses to further enhance the customer experience and expand solutions to support sustainable long term growth and we also further advanced the progress on our $750 million cost savings program.
We are pleased with the pace of these initiatives, which are well supported by a rock solid balance sheet and help us expand access to investing insurance and retirement security for our customers and clients around the world.
I'll provide an update on each of these areas before turning it over to Robyn Ken.
Moving to slide three.
At the beginning of April we successfully completed the divestiture of our full service retirement business and the sale of a significant portion of our legacy variable annuities block together. These dispositions reduced the overall market sensitivity of our businesses by approximately 20%.
While enabling us to further sharpen our focus on higher growth opportunities, including programmatic M&A and asset management and emerging markets.
To that end, we agreed during the quarter to acquire a minority stake in Alexander Forbes, a leading provider of financial advice retirement investment and wealth management in South Africa.
This deal provides access to a central financial tools and further expands our footprint in a strategically important market.
We also continue to focus on enhancing customer experiences and creating solutions to drive sustainable growth across our businesses and to address the evolving needs of our customers for example.
<unk> continued to build momentum and we are excited about its future and a broader suite of complementary annuity products, including flex card income.
In individual life, we continue to expand our reach to a broader range of customers and further address the 12 trillion dollar life insurance coverage gap with the introduction of a final expense product.
And we are also making similar growth investments to further enhance customer experience and expand solutions across our international businesses in.
In Japan, we were focusing on evolving our product suite to meet the increasing retirement and inheritance needs of the aging Japan population.
In Brazil, we are diversifying our customer offerings with the introduction of a new standalone accident and health product and in China. We introduced grow partners a digital sales platform that we are extending to distribution partners and directly to consumers beginning with the medical cash benefit plan.
Turning to slide four.
We continued to make steady progress towards achieving our cost savings target of about $750 million at the end of 'twenty 'twenty three while improving customer experience during the first quarter, we realized 170 million in cost savings for a total of $680 million of run rate savings to date.
Since 2019.
Turning now to slide five.
Credentials rock solid balance sheet provides significant financial flexibility to execute on our transformation strategy, while returning substantial capital to shareholders.
Our robust financial position includes a high quality well diversified investment portfolio.
A capital position that supports a double AA financial strength rating.
And $3 $6 billion in highly liquid assets at the end of the first quarter as well as over $4 billion of additional proceeds from divestitures that we have already received in the second quarter.
In addition to supporting our strategy for sustainable profitable growth, we remain committed to returning $11 billion of capital to shareholders between 2021 and the end of 'twenty 'twenty three.
As part of this program, we have increased our dividend by 4% in the first quarter of 2022 our 14th consecutive annual dividend increase.
Before turning it over to Rob I'd like to update you on a few of our recent ESG initiatives, which we consider integral to our purpose of solving the financial challenges of our changing world.
First relating to the war in Ukraine.
In addition to providing financial assistance to humanitarian and nonprofit organizations supporting people impacted by the war, we divested our modest level of Russian financial assets in our investment portfolio.
Closer to home, we have adopted a hybrid working model that combines the benefits of in person collaboration and remote work flexibility to support our employees and help us attract and retain talent.
Our hybrid work model will enable us to reduce our total home office properties in the U S by approximately 50% over time as.
As we invest in the redesign of 600000 square feet of office space that will be optimized for collateral collaborative and hybrid work most of which was completed during the past two years.
In addition to helping us achieve our cost savings targets, our real estate and hybrid work strategies are one of the several factors that will contribute to a 2050 net zero emissions target.
Alongside these efforts, we're also finding new opportunities to support our home city in Newark, New Jersey, including New investments in local Commerce live Workspaces for resident small business owners and additional opportunities to foster local home ownership.
We look forward to continuing to support the city's revitalization.
With that I'll turn it over to Rob for more specific details on our business performance.
Thank you Charlie I'll provide an overview of our financial results and business performance for our PGM U S and international businesses.
I'll begin on slide six with our financial results for the first quarter of 2022 are.
Our pre tax adjusted operating income was $1 6 billion or $3.17 per share I'm, an after tax basis and reflected a benefit from variable investment income, which exceeded the net mortality impact from COVID-19.
Our global investment manager had higher asset management fees in the year ago quarter. However, these were more than offset by lower other related revenues as well as investments made to support business growth.
<unk> of our U S businesses increased 12% from the year ago quarter, and reflected higher net investment spread including benefits from variable investment income and rising interest rates more favorable underwriting primarily due to declining COVID-19 related mortality experience and lower expenses, primarily driven by our cost savings initiatives.
Partially.
All set by lower fee income, resulting from the runoff of our legacy variable annuities.
Earnings in our international businesses decreased by 8%, reflecting lower net investment results less favorable underwriting results and lower earnings from joint venture investments, partially offset by continued business growth.
Turning to slide seven.
PGM, our top 10 global investment manager has diversified capabilities in both public and private asset classes across fixed income alternatives real estate and equities pizza as long term investment performance remains attractive with more than 84% of assets under management outperforming their benchmarks over the last three five.
Five and 10 year periods P.
<unk> experienced third party net outflows of $4 $3 billion in the quarter as institutional net inflows driven by fixed income and real estate were more than offset by retail outflows driven by mutual fund investors rebalancing out of fixed income due to rising rates and inflation expectations.
The investment engine of Prudential, the success and growth of Pizza and of our U S and international insurance and retirement businesses are mutually enhancing P. James asset origination capabilities investment management expertise and access to institutional and other sources of private capital are a competitive advantage, helping our businesses bring enhanced.
<unk> innovation and more value to our customers and our insurance and retirement businesses in turn provide a source of growth for peach them through affiliated flows and unique access to insurance liabilities that complement its successful third party track record of growth.
P J as asset management fees increased by 2% compared to the year ago quarter, reflecting positive third party flows and a continued shift towards higher yielding strategies, including the benefits from recent acquisitions over the past year, partially offset by the impact of rising rates.
As rates rise in the near term investor demand for some fixed income strategies could continue to moderate however over the longer term a stabilized higher rate environment would be a positive for fixed income demand N P gems business.
We continue to grow our alternatives and private credit business, which has assets under management of approximately $240 billion across private credit and real estate equity and debt and private equity secondaries and benefits from our global scale and market leading capabilities.
Notably across Pgm's private platform, we deployed nearly $10 billion of capital up 20% from the year ago quarter, reflecting the continued strong environment for both real estate and private credit.
Now turning to slide eight our U S businesses produced diversified earnings from fees net investment spread and underwriting income and benefit from our complementary mix of longevity and mortality businesses.
We continue to shift our business mix towards higher growth and less market sensitive products and businesses to transform our capabilities and cost structure and to further expand our addressable markets.
Our product pivots have worked well as demonstrated by strong sales of recently launched simplified solutions.
Our flex guard and flex card income products represented $1.4 billion or over 90% of total individual annuity sales in the first quarter, we continue to exercise pricing discipline informed by changing market conditions, and our sales benefit from having a strong and trusted brand and a highly effective distribution team.
Our individual life sales also reflect our earlier product pivot strategy with variable life products, representing approximately 70% of sales for the quarter.
We also successfully completed the national rollout of our individual life Express term plus product with a large national distributor and recently launched a final expense product continuing to expand our middle market presence.
And we are focused on enhancing customer experience through digital tools, including automated underwriting, resulting in more than 90% utilization for eligible policies in the first quarter of 2022.
Our retirement business has market, leading capabilities, which drove funded pension risk transfer sales of $700 million in the quarter.
And our group insurance business reflect reflected sales growth of 5% compared to the prior year quarter, driven by an increase in supplemental health sales.
Turning to slide nine our international businesses include our Japanese life insurance companies, where we have a differentiated multichannel distribution model as well as other businesses aimed at expanding in high growth emerging markets.
In Japan, we are focused on providing high quality service and expanding our geographic coverage and product offerings, our needs based approach and mortality protection focus continue to provide important value to our customers as we expand our product offerings to meet their evolving needs.
We continued to enhance customer experience agent support including through digital tools. The value. We provide customers was recently recognized by the 2022 J D power life insurance customer satisfaction survey Prudential of Japan was ranked number one in all three categories contract servicing.
And claims.
In emerging markets, we are focused on creating a carefully selected portfolio of businesses and regions, where customers' needs are growing.
Where there are compelling opportunities to build market, leading businesses and partnerships and where the Prudential enterprise can add value.
In the first quarter, we continued to focus on expanding product and business capabilities in emerging markets to meet the evolving needs of our customers, we launched a new accident and health products in the large and growing Brazil market and continued to expand our wellness platform across Latin America.
In addition, as Charlie discussed earlier, we were pleased to expand our presence in Africa with the announcement to acquire a minority interest in Alexander Forbes through our existing partnership with leap frog investments.
As we look ahead, we're well positioned across our businesses to be a global leader in expanding access to investing insurance and retirement security. We plan to continue to invest in growth businesses and markets deliver industry, leading customer experiences and create the next generation of financial solutions to better serve the diverse needs of a broad range.
<unk> of customers.
With that I'll hand, it over to Ken.
Thanks, Rob I'll begin on slide 10, which provides insight into earnings for the second quarter of 2022 relative to our first quarter results pre tax adjusted operating income in the first quarter was $1 6 billion and resulted in earnings per share of $3.17 on an after tax.
<unk> spaces to get a sense of how our second quarter results might develop we suggest adjustments for the following items first variable investment income outperformed expectations in the first quarter by $275 million.
Next we adjust underwriting experienced by a net $165 million. This adjustment includes a placeholder for COVID-19 claims experience in the second quarter, a $40 million for our U S businesses based on 25000, COVID-19 related fatalities in the U S and a placeholder of two.
$25 million for our international businesses, while we have provided this placeholder for COVID-19 related claims experience the actual impact will depend on a variety of factors such as infection and fatality rates geographic and demographic mix and the effectiveness of vaccines.
And last we expect other items to be $95 million lower in the second quarter, primarily as a result of completing the sales of both our full service retirement business and a block of legacy variable annuities.
These items combined get us to a baseline of $2 75 per share for the second quarter I'll note that if you exclude items specific to the second quarter earnings per share would be $2 91.
A modest decline from recent quarters, primarily from the completed sales of businesses and the proceeds from these sales will provide flexibility for future capital deployment.
I would also note a few other items first due to the rise in interest rates, we no longer anticipate a reduction in net investment income from portfolio reinvestment.
The benefit from a rising rate environment on our investment income pop compounds overtime as Ryan as we reinvest our portfolio.
However, the reduction in assets under management and related income and our fee based businesses occurs more immediately.
In addition, as a result of our Derisking actions the sensitivity of our adjusted operating income to markets will be reduced by approximately 20% on an annual basis. We also expect to report a gain on the sale of the legacy variable annuity block in adjusted operating income in the second quarter.
Impacts from the annual review of actuarial and economic assumptions will also be reported in the second quarter.
In accordance with our established practice, we have a comprehensive process that will include among other things. The review of long term interest rates inflation COVID-19 mortality experience and updated industry data that may impact our assumptions.
And finally as a result of new foreign tax credit regulations, we are expecting an effective tax rate in the range of 21% to 23% for 2022.
While we have provided these items to consider please note there may be other factors that affect earnings per share in the second quarter.
Turning to slide 11, we continue to maintain a robust capital position and adequate sources of funding our capital position continues to support a double a financial strength rating and we have substantial sources of funding our cash and liquid assets were $3 $6 billion and within our $3 billion to $5 billion liquidity target range.
And other sources of funds include free cash flow from our businesses proceeds from divested businesses and contingent capital facilities.
Turning to slide 12, and in summary, we are executing on our plans to reposition our businesses. We are on track to achieve our targeted cost savings and a rock rock solid balance sheet provides financial flexibility to execute on our transformation and thoughtfully deploy capital now I'll turn it to the operator for your questions.
<unk>.
Thank you well now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Hugh You May Press star two if he'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing.
Star One one moment, please while we poll for questions. Our first question today is coming from Erik bass from Autonomous Research. Your line is now live.
Hi, Thank you can you provide some more color on the net flow drivers for PJM in the quarter and with interest rates continuing to move higher can you talk about how this is affecting fixed income demand from both the retail and institutional clients.
Sure. Good morning, Eric It's Andy you know as we've discussed in the past Pete inflows are going to vary from quarter to quarter, and we're very focused and stay focused on our long term track record.
Proud of the fact that 18 of the last 19 years, we've had positive third party flows.
In the first quarter, we did experienced $4 3 billion in net outflows. It was a challenging quarter for the fixed income U S. Mutual fund industry in general and we were similarly effect that we saw $4 6 billion of retail outflows almost entirely driven by retail investor repositioning out of fixed income.
On the institutional side, we saw a positive 300 million driven by flows into public fixed income in real estate. We continue to think this is good proof of our of our diversification and on the institutional side, we see algorithms actually positioning into fixed income given the rising rate environment as we see.
Back our long term track record remains very strong we saw 55 billion and it flows between 2017 and 2021 with 27 billion of that being on the retail side, you know that being said, we do think it's fair to expect continued pressure on our retail fixed income industry as the rates are and spreads continue to rise.
But that's a near term effect as Rob said upfront a higher rates are good after the transitory period for the fixed income business. Yeah. We're very confident in that the fact that we have the right products. The right strategies exceptional long term investment performance and great distribution and will be a net winner over time.
One thing I wanted to add add today. When we talk about flows is is more around the private business that Rob talked about a given that those are our higher fee rate business. As we continue to benefit from a very strong market for for real estate and private credit we were able to put $9 6 billion to work in the first quarter across <unk>.
Stated P J private capital and raised another $1 8 billion. So we are confident in PJM and confident in our long term track record.
Thank you I appreciate all the color there and then I was hoping that you could talk about the implications of the weaker yen for your Japan business in terms of earnings capital and then demand for foreign currency denominated products and I realize that you're hedged for 2022 but can you just remind us what percentage of your earnings are in yen.
Yeah, Hey, Eric it's Ken I'll start off on sort of the financial implications and you're right. We do have a pretty established in and we think very effective hedging program, but first its important to know that of our because of the success of us are in the Japan market with U S dollar products.
A substantial portion of our reserves and our assets backing those reserves are U S dollar denominated and that in combination with the fact that you know as a Japanese company are our expenses are are almost exclusively denominated in yen the combi.
A nation of that results in our income from our Japan business being mostly you know nearly all of our U S income in Japan is U S. Dollar denominated what income we have are denominated in yen, we hedge over over over three years and we have a net equity.
Capital hedge position as well so its a long established hedging approach and we are we think it performs well both from an accounting and economic standpoint.
Got it and for the product demand with just.
Now you sell a lot of well, let's see.
Denominated products that started it over there.
I'll hand that over to Scott.
Hi, Eric This is Scott.
In the.
It's a little bit of a mixed bag or a dislocation if you are if.
If you will but.
For the for the most part.
A higher U S interest rates, which I think are related to the currency is is good for demand is as Rob said and I think it's good for Prudential overall, but as investors in Japan, we're looking for more attractive yielding products. That's good in the short run, though and when the currency moves it does make the price tag of the purchase a little more.
Expensive and we have found in the bank channel.
Where there's an intermediary intermediary are in there.
You may see slightly higher surrenders because of the run up in the dollar but net net we think it's generally a positive for us.
Got it thank you.
Thank you as a reminder, that star one to be placed into question queue and we ask you. Please ask one question. One follow up then return to the queue. Our next question is coming from Tom Gallagher from Evercore. Your line is now live.
Good morning.
A question on the whole co cash and just overall capital generation in the quarter. If I look at the it looks like you issued a billion of junior debt in the quarter.
So that would be an inflow and you've got $300 million of cash from the dispositions and I guess 4 billion plus is still closed after the quarter, but that's a billion three.
And then I look at your Holdco cash balance it didnt change versus <unk>. So just curious how we should think about that it doesn't.
Looking at it that way it doesn't look like there were much in the way of dividends that came up during the quarter.
With their capital needs that came up in the subs or or is it a timing issue can you help us think through like the capital generation in the quarter and what that should look like going forward. Thanks Yep.
Yep Yep. Thanks, Tom Yeah, we did issue $1 billion of hybrid debt Oh extras actually early in the quarter and before the rise in rates and before the the spreads widened out. So we were we were happy with that execution and that's part of our process to pre fund upcoming.
That are that we would like to either that's either maturing or were going to call in and we do have about 1 billion of hybrid debt that is gonna be callable in September so we sort of earmarked that billion for for that purpose.
Liquid assets at the holding company will fluctuate due to timing typically that's within.
Within our three to 5 billion target, but in the first quarter as is typical with most first quarters for us subsidiary dividends and cash flow were low and then they tend to be greater in.
In the second part of the year and so part of that is just timing but.
But we also did make a capital contribution to a new reinsurance subsidiary that we have that we've established in Bermuda in the first quarter and that will give us the ability to reinsure policies from pica, our U S insurance company.
To that new subsidiary to give us more economic reserving and greater capital efficiency over time. So over time. It was it did require some capital to initially fund but over time, you know we feel good about that in terms of giving us a much more balance sheet efficiency going forward and then also.
Just keep in mind you know, we we did receive a 4 billion from the sale of full service and pallet in in April .
Got you and just a follow up there can can you comment on the size of the of the new reinsurance vehicle. That's I guess range on the on the captive that you referenced.
We initially capitalized at with $800 million. So that was the amount of initial capital that we put in and although its a requirement now it's actually going to you know.
Provide capital efficiency in the future. So you can think about that as a net positive to our our our capital efficiency over time.
Thanks, that's helpful.
Thank you. Our next question today is coming from SUNY come off from Jefferies. Your line is now live.
Great first question just on strategy I guess, Charlie we've been talking about this.
The objective of improving the earnings contribution from growth businesses too like it's over 30% and you know where we're a year into the strategy and haven't.
I haven't really seen that move all that much at least based on the way. We're calculating it. So my question is are or is the plan to still sort of get there over the next you know couple of years and is it going to take something more than programmatic M&A in order to accomplish that.
Sure. Thanks for the question. So we can't control the markets, but this is this we look at it as both a numerator and denominator issue and we're continuing to make progress on both through both the acquisitions. We've made the four acquisitions, we've made over the past year and the dispositions that we just completed.
And so you've seen that we've made progress with the with the four acquisitions in the two major dispositions and we'll continue to we'll continue to execute on the strategy. We have a sense of urgency we're going to make progress as we go forward and we will make progress in both ways.
And can you give a sense on the timing of the use of the $4 billion of proceeds obviously, if we could think about a couple of different buckets, right M&A and or a capital return to shareholders, but now that these deals are closed.
Over what timeframe would you like to use that capital.
Yeah sure so as I hope you've seen we are operating with a sense of urgency right speed speed is important but we don't have a specific time band per se, so where we're going to be remain prudent stewards of capital as we've said and continue to evaluate programmatic acquisitions, but as we've also said and as we've done in the past.
We will return capital.
To shareholders, if we can't find the appropriate opportunities over time, so we're going to continue on our process, but as you've seen we have returned capital to shareholders and we'll continue to operate in that fashion.
Got it if I could just sneak one more in for Ken or Rob when.
When we think about the individual annuity business I think in the past I'm, specifically thinking about the highest daily value product.
The commentary you guys gave in the past as a rising interest rate environment, coupled with a falling equity market environment is generally not great for that business.
Which is the environment, obviously, we're sitting in today. So can you just talk about from a risk management perspective, how that business is holding up in this environment.
Okay.
Yeah.
That's a neat this is ken.
We are very well capitalized and reserved our business and we have a highly effective hedging program and that that has been very effective of mitigating market impacts both from equity markets and interest rates and.
And so and it continues it was continued to be very effective in the quarter. So no change there.
Okay. Thanks, Ken.
Thank you. Our next question today is coming from John Barnidge from Piper Sandler Your line is now live.
Thank you very much for the opportunity.
Expense ratios in both group disability and group life insurance decline I know that some of the source of the expense saves programs, but you're also building. This service Covid claims can you maybe dimension some of the improvement in admin expenses there between those two.
<unk>.
Sure John Good morning, it's Andy So our admin expense ratio for the quarter was 15.6% that was almost a 4% improvement from Q4, but it was basically flat from Q1 of last year I would just keep in mind fourth quarter was elevated by some one time compensation expenses. So there's some seasonality.
That's going on we are starting to see the beginnings of our core expense improvement.
Impacting our businesses when I think about that I would say the expense saves are more attributable to the overall expense work on the incidence and severity in the business remain elevated even though they they have started to come back towards normal they remain elevated and we maintain a higher level of staffing in both our claim in our call.
Centers are so we would expect that the admin ratio will stay elevated for the remainder of the year.
Oh, great. Thank you and then my follow up question.
Can you talk about maybe how higher rates of change the conversation around pension risk transfer activity with potential counterparties. Thank you.
So John it's Andy Thanks again for the question. So we maybe let me talk about the current quarter and then I'll go into looking forward. So.
As you're aware this is a very transaction oriented business and first quarter tends to be light and that's kind of what we saw with the industry. We think the first quarter was somewhere around $5 3 billion. We were very pleased as Rob said that we did two deals for 700 million overall as we look forward for the rest of the year. We are we.
Aleve, it's gonna be a strong year and and think they overall industry level should clock in around 40 billion. You know the fact is funded status hit a record high in February of 102% and if you add on top of that the rise in rates and and then the volatile environment that we're in all of that false bolster sponsors desire.
And proclivity to transact. So you know this is a big market that it has become more competitive, but we know that but we can pick our spots and be disciplined in that net will grow over time.
Thank you.
Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from Tracy Bengie from Barclays. Your line is now live.
Good morning.
I'm wondering if you are intolerant of interest rate sensitivity changed at all considering the 10 year nearly 3% make a lot from here like are you thinking at all about increasing the question that's right isn't it.
And going forward.
Hey, Tracy its Rob let me take a stab at that first to your point Yeah rising interest rates are a good thing. They are a good thing for the industry and there are a good thing for us as a company both because it allows us to be more competitive in providing a value proposition to our customers and our products.
Also because it hasnt been a positive impact on our portfolio yield.
Having said that it is our desire to have a mix of businesses and products.
That our less market sensitive and less market sensitive across market cycles.
So our focus is on trying to operate at the intersection of both shareholder and customer value propositions that are sustainable throughout cycles.
Aye.
If you're asking about how we think about the impact of higher interest rates on the long term.
Version right that we have in our assumptions, obviously that drives pricing and valuation.
We do our assumption updates in the second quarter, probably not something anything specific we can say about that but maybe I'll turn it over to Ken and he can comment more generally.
Yeah, Thanks, Rob yet the long term interest rates and our assumptions are something that we do look at in our assumption updates annually, we do that by looking at multiple perspectives sort of from a array of economists and banks and asset managers. We also look at the forward curve, which.
As you know has a has increased recently and we and we set our assumption kind of close to the median of that Oh.
And also you know with our assumption update inflation as you know has has risen we factor near term inflation into our reserve setting as well as for long term inflation as well.
And then you know part of our assumption update will obviously cover mortality and other policyholder behavior as well, including not just our own experience, but anything we get in terms of new data from other sources in the industry.
We did recently will receive a <unk> in a new industry study that indicates experience is more adverse than some of our assumptions of our U S life insurance business were.
And this is information and its applicability to our business and to the extent that it would cause an increase in reserves or a decline in earnings. So that all all that work is underway it will conclude.
Later in the quarter and that will be part of what we report in the second quarter.
Okay, Great I'm also wondering has unfavorable FX.
Tax impact changed your view right now on increasing international through M&A.
Hi, Tracy this is Scott I'll go ahead and take that one.
Yes, the short answer I'd say, not really we're seeking to build out a well diversified emerging markets portfolio of businesses and we see local currency weakness as an opportunity to improve our U S. Dollar purchase economics, if you will but that being said, we do factor in the potential for currency.
Risk over time by using risk adjusted discount rates you know in our view.
<unk> estimates.
When we think about these businesses. So I would say if you take a step back we would actually say, it's a net positive.
Yeah.
Okay.
Sorry, if I could just sneak one quick one that mention of that reinsurance entity established in Bermuda.
I'm, just wondering is that reinsurance wow or and back up that being reinsured.
Initially we're going to use it for reinsurance in some of our in force business, but you know we are gaining experience in Bermuda and you know our ability to use. It you know we will be considering strategies of potentially for flow in the future.
Okay.
Thank you. Our next question is coming from Alex Scott from Goldman Sachs. Your line is now live.
Hi, I had a follow up just on the on <unk> question and the answer there and where you mentioned that the business mix shift you know part of it's the denominator I guess.
You know I think part of that is also been communicated as the run off of the annuities business overtime or at least the the sort of more legacy piece of the annuities business and now that those transact whenever that transaction is closed I was just wondering if you could give us a more firm way to think about you know how we should expect.
The earnings power to run off or whether some of the new product growth can can offset that.
Yeah, Hey, Alex it's Ken.
Yeah, our traditional we've you know we're no longer issuing traditional variable annuities. So it is running off and you know after our Oh, the sale of about 20% of our of our block of business with Paluch, you know it'll continue to run off at about about 3 billion of quarters is what you saw.
In the quarter. So you can kind of think about that as you know kind of $12 billion to $15 billion a year and that's about an 8% run off a year. So you know that combined with you know.
The pallet business that was 20%.
That over time will get us very close to our objective to to reducing our income from traditional variable annuities.
And I haven't said that we would we would think about other other ways to do that as well.
Got it. Thank you and then I had one more follow up to the response on the.
The impact of interest rates, particularly your comments on the actuarial review.
The inflation impact that you mentioned I assume thats, probably long term care and the reimbursement style policies.
Could you help us think through you know the sensitivity to that I mean, you've provided a lot of sensitivity around long term care and so we have all of that around changes in discount rates and new money yields and so forth, but the inflation one I've I've struggled to put my finger on so even if it's just relative to rates you know, which is the bigger fat.
Or any.
Any kind of commentary you can provide to help us think through that would be useful.
Yeah Alex.
Yeah long term care is is probably where that's most.
Relevant in terms of inflation, we we have factored in inflation, obviously into our reserves.
Including increases in near term it's long.
Long term inflation would be where its more sensitive we have provided some of those sensitivities. So and you know overall you know we think it's a it's very manageable for us.
Thank you.
Thank you. Your next question today is coming from Elyse Greenspan from Wells Fargo. Your line is now live.
Hi, My first question is on assurance IQ on you guys took a goodwill impairment there in the fourth quarter and I believe at the time, you mentioned that part of the rationale for that was although our evaluation of the public peers I noticed you didn't take another charge this quarter and it appears you don't have rebated subsequently.
Lower you know from a few months ago was that contemplated when you took the charge in the fourth quarter or you know any update you can give us there.
Yes.
The.
The charge that we took in the fourth quarter was relevant to the environment at the end of the fourth quarter. We again did a qualitative review of or the value of our insurance goodwill and assurance and we did not.
Need any any further impairment so that that's where that stands.
Okay and then.
And my second question on the group.
Loss ratio was pretty strong in the quarter can we just get some more color there and just how you expect that to trend over the balance of the year.
Yeah at least it's Andy Ah, we very much obviously like the improvement that we saw in the disability business. This quarter. It was our best benefit ratio since 2018 at 73, 4% I would frame. This as what we've seen in disability. It continues to behave as we would expect and what we have been preparing for and you all.
These need to split this into two different impacts you know the one impact on the absence of an S. T D side.
On that side, we do continue to see a very high level of Covid related claims that in general turns into the need for the elevated staffing and claim and call and because those are fee oriented businesses that shows up in our more from an elevated admin ratio perspective, we're going to stay the course on that staffing because being there for our customers.
It's critically important and job one on the long term disability side as I mentioned earlier, we are beginning to see both incidents and severity trend back downward in the business you'll recall the previous two quarters. Both of those were up about 10% in Q3 and Q4.
But on top of that our claims teams are also experiencing very good claims resolutions and what we're hearing from our claims managers is that the combination of very low unemployment at three 8%.
And wage inflation accelerating there there's a strong desire for claimants to get back to two the productive workforce.
So in all you know, we're very pleased with with the claims team's performance and we're obviously happy to see the beginnings of an improvement in the environment.
Thanks for the color.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to Charlie for any further or closing comments.
Alright, Thank you very much and thank you all for joining US today, we continued to make significant progress on repositioning our business mix and advancing our cost savings program to transform prudential into a higher growth less market sensitive and more nimble company. We're confident this strategy will help us deliver an even more meaningful difference in the lives of our customers.
And sustained value for our shareholders, while enabling us to fulfill our vision of becoming a global leader in expanding access to investing insurance and retirement security. Thanks again for your time today.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation.
Yeah.