Q2 2022 Prudential Financial Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Prudential's Quarterly earnings Conference call. At this time, all participants have been placed in a listen only mode. Later, we'll conduct a question and answer session and instructions will be given at that time.
If you should require any assistance during the call. Please press star zero and an operator will assist you offline as a reminder, today's call is being recorded I will now turn the call over to Mr. Baber Guac Bae. Please go ahead Sir.
Good morning, and thank you for joining our call representing Prudential on today's call are Charlie Lowrey, Chairman and CEO , Rob thousand Vice Chairman, Andy Sullivan head of U S businesses, Scott life their head of international businesses, Ken Tansey, Chief Financial Officer, and Rob Axel controller and principal accounting.
Officer, we will start with prepared comments by Charlie Rob and Ken and then we will take your questions.
This 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 Prudential Dot Com and now I'll turn.
And it over to Charlie.
Thank you Bob and thanks to everyone for joining us today, our second quarter financial results reflect the impact of macroeconomic environments, including the unusual confluence and magnitude of rising interest rates widening credit spreads and equity market declines.
In addition, we strengthened our individual life reserves as part of our annual review of assumptions, which had a significant impact on our results.
This was primarily driven by an increase in our guaranteed universal life reserves.
As a reminder, we discontinued single life guaranteed Universal life sales in 'twenty 'twenty as part of our strategy to Derisk, our product mix and we continue to make strategic progress in transforming our businesses to be less market sensitive and more nimble.
We also made additional investments to enhance our long term sustainable growth.
We did this in several ways first we significantly reduced our market sensitivity by completing our planned divestitures.
Second we invested in growth businesses and partnerships to address customer needs and expand access to our products and solutions.
And third we continue to advance our cost savings program and now expect to reach our $750 million target one year ahead of schedule.
We executed on these strategic initiatives with the support of our solid balance sheet, our strong financial position provides us with a flexibility to navigate through the current macroeconomic conditions, while continuing to invest in the long term growth of our businesses and return capital to shareholders.
We're also confident that a higher rate environment will benefit our businesses overtime. Despite the short term impacts on our financial performance.
I'll now provide an update on the progress of our strategic initiatives.
Turning to slide three we are executing on our plans to reposition the businesses by reducing market sensitivity and making investments to support long term sustainable growth.
We completed the sales of our full service business and a portion of our traditional variable annuities in April together. These divestitures resulted in a $1.5 billion pre tax gain and further reduce the overall market sensitivity of our businesses by approximately 20%.
Moving to our growth investments, we are investing in programmatic acquisitions and partnerships that will help us grow in emerging markets and expand access to investing insurance and retirement security around the world.
In Africa, we completed our acquisition of an initial minority stake and Alex Forbes, a leading provider of financial advice retirement investment and wealth management in South Africa.
We are now in the process of increasing our stake in the company by up to an additional 18% through a tender offer.
In June we established a partnership with Mockado Libre, the largest e-commerce platform in Latin America, with approximately 200 million users.
This will enable us to deliver life insurance and accident and health products tailored to the platforms mass market customer base.
At the same time, we're investing in the growth of our products that meet the evolving needs of our customers are flex guard buffered annuity product recently surpassed $10 billion in sales since launching two years ago.
We're also experiencing strong sales from our more recently launched flex guard income offering.
Turning to our cost savings initiative on slide four.
We now expect to achieve our full $750 million cost savings target in 'twenty 'twenty. Two one year ahead of schedule. We recorded 175 million in cost savings during the second quarter for a total of $725 million of run rate savings to date since 2019.
We've also implemented a process of continuous improvement to identify and execute on additional cost savings opportunities in the future.
Turning now to slide five.
Our robust balance sheet is at the core of all our efforts to transform prudential to be a leader in expanding access to investing insurance and retirement security around the world.
This financial strength also provides the flexibility to balance investing in our businesses with delivering attractive returns to our shareholders.
Our robust financial position includes a high quality well diversified investment portfolio, our capital position supports a double a financial strength rating.
And we had $7 billion and highly liquid assets at the end of the second quarter.
During the second quarter, we returned over $800 million to shareholders and since the beginning of 'twenty 'twenty. One we've returned a total of $6 billion towards our objective of $11 billion by the end of 'twenty two 'twenty three.
Finally, a comment on the environmental social and governance front in June we published our third annual sustainability report, which details the progress of our ESG initiatives, including information on our E O one and pay equity disclosures to amendments to racial equity and achieving net zero emission.
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We believe in transparency and hold ourselves accountable to the commitments detailed in our report.
With that I'll turn it over to Rob for an update on our business performance.
Thank you Charlie I'll provide an overview of our financial results and business performance for our P. J O U S and international businesses I'll begin on slide six with our financial results for the second quarter of 2022 pre.
Pretax adjusted operating income was $872 million or $1 74 per share on an after tax basis and included a $1 $4 billion increase in reserves from our annual assumption update and other refinements, we strengthened our individual life reserves, primarily reflecting updates to policyholder behavior and result in reverse.
Highest mortality assumptions. These updates were based on several industry studies emerging practices and our own experience following our well established annual assumption update process.
Current quarter results also included an $852 million gain from completing the sale of Pat like a legacy block of variable annuities.
Our GAAP net loss was $1 $4 billion lower than our after tax adjusted operating income primarily driven by the mark to market impact from higher interest rates on derivatives that are used for asset liability management, partially offset by a gain on the full on the sale of our full service business.
Turning to the operating results of our businesses, excluding the impacts of the annual assumption update in the gain on the sale of talent.
Jim Our global investment manager reported lower other related revenues driven by a decrease in seed and co investment income and incentive fees as well as lower asset management fees compared to the year ago quarter.
<unk> of our U S businesses were lower than the year ago quarter, reflecting lower spread income due to less favorable variable investment income and lower fee income, resulting from the decline in equity markets, partially offset by more favorable underwriting.
The decrease in earnings in our international businesses, primarily reflected lower earnings from joint venture investments lower net investment results driven by less favorable variable investment income and less favorable underwriting results, partially offset by business growth turning to slide seven teach them our global active investment manager has diversified case.
Abilities in both public and private asset classes across fixed income alternatives real estate and equities Pgm's long term investment performance remains attractive with 75% to 85% of assets under management outperforming their benchmarks over the last three five and 10 year periods.
<unk> benefited from its diversified business mix as strong institutional net inflows of $8 $1 billion, primarily driven by fixed income offset retail outflows as investors reposition their portfolios in a rising rate environment.
As the investment engine of Prudential, the success and growth and teach them and of our U S and international insurance and retirement businesses are mutually enhancing.
<unk> 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 solutions innovation and create more value for our customers.
Our insurance and retirement businesses in turn provide a source of growth for <unk> through affiliated flows and unique access to insurance liabilities that complement its successful third party track record of growth.
The average fee rate increased due to the successful execution of our strategy, including the continued mixed shift toward higher fee strategies in our alternatives and private credit business.
As a result asset management fees decreased by only 6% despite assets under management declined by 11% due to rising rates widening spreads and equity market depreciation.
We continue to grow our alternatives and private credit business, which has assets under management of approximately $230 billion across private credit and real estate equity and debt and private equity secondaries and benefits from our global scale and market leading positions, notably across peaches private platform, we deployed nearly 15.
Billion dollars of capital up nearly 40% from the year ago quarter, reflecting the continued strong environment for private credit.
Teach them also raised nearly $3 billion in new private capital commitments across real estate and private credit.
Turning to slide eight our U S business has produced diversified earnings from fees net investment spread and underwriting income and benefit from a 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.
Retirement strategies achieved solid sales in the second quarter across its institutional and individual lines of business institutional.
Institutional stable value sales for $1 $6 billion.
International reinsurance close $1 $4 billion of longevity reinsurance transactions during the quarter and U S pension risk transfer closed several transactions totaling more than $725 million.
Our productivity and individual retirement have resulted in strong sales a more simplified solutions with nearly $1.5 billion of Flex guard and flex card income sales in the second quarter are.
Our strong <unk> sales benefited from implementing a fully digital and automated new business experience. This tech forward approach helps to maintain our record pace of sales.
Our individual life sales also reflect our earlier productivity strategy with variable life products, representing approximately 71% of sales for the quarter.
The improved group insurance benefits ratio for the quarter reflects the transition from a pandemic to an endemic phase of Covid as well as favorable experience in both group life and disability.
In addition, we're focused on creating the next generation of financial solutions to serve the diverse needs of a broader range of customers and clients.
This quarter, we launched the Prudential simplified issue final expense product on the assurance platform.
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 our presence 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 and we continue to enhance customer experience and agent support including through digital tools. For example, this quarter Gibraltar launched an exclusive website dedicated to teachers to.
Help serve this market.
In emerging markets, we are focused on creating a carefully selected portfolio of businesses in regions, where our customer needs are growing where there are compelling opportunities to build market, leading businesses and where the prudential enterprise can add value.
In the second quarter, we continued to focus on expanding product and business capabilities in emerging markets to meet the evolving needs of customers in.
In Brazil, we achieved record sales driven by the expansion of our third party distribution channel, where sales increased 120 per cent compared to the year ago quarter as well as by the continued strength of our life planner channel. We established a partnership with Mercado Libre in Latin America to expand access to customers in the region in.
The first two weeks following the launch in June we have sold life and A&H policies in every state in Brazil. This was accomplished through a fully digital sales customer service and claims experience.
We also continued to expand our wellness platform across Latin America by establishing a partnership with Medici.
Service provider to 300000 customers in Argentina.
In addition, we are expanding our presence in Africa through an investment in South African based Alex Forbes as Charlie discussed earlier.
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 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 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 third quarter of 2022 relative to our second quarter results as noted pretax adjusted operating income in the second quarter was 872 million resulted in earnings per share of $1.74 on an after tax basis to get us.
Sense for how our third quarter results might develop we suggest adjustments for the following items.
First is an adjustment for two one time items that net to a charge of 571 million in the second quarter.
Our annual assumption update and other refinements resulted in a net charge of $1 4 billion, primarily driven by our individual life business as Rob previously described.
This was partially offset by 852 million dollar gain from the sale of a block of legacy variable annuities next variable investment income outperformed expectations in the second quarter by $80 million.
Third we adjust underwriting experience by a net $25 million. This adjustment includes a placeholder for COVID-19 claims experience in the third quarter of 50 million for our international businesses, primarily due to hop hospitalization benefits for policyholders recovering from COVID-19 at home in accordance with a special regulatory for.
A vision in Japan that is currently in effect.
We have also updated our mortality assumptions for the U S businesses to include continued COVID-19 mortality within the expected gradual transition to an endemic phase overtime. While we have attempted to reflect 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 30 million lower in the third quarter, primarily due to lower than typical expenses in the second quarter that were partially offset by lower other related revenues in PJM and lower joint venture earnings.
These items combined get us to a baseline of $2 63 per share for the third quarter.
I'll note that if you exclude items specific to the third quarter earnings per share would be $2 75.
Modest decline, primarily due to lower fee income as a result of market depreciation lower underwriting income due to the updated actuarial assumptions and continued COVID-19 mortality that is now reflected in our U S businesses expected results.
While we have provided these items to consider please note there may be other factors that affect earnings per share in the third quarter.
Turning to slide 11, I will now comment on the upcoming adoption of the new accounting standard for long duration insurance contracts also known as L. D Ti, which goes into effect on January one 2023.
The new accounting standard applies to our GAAP financial statements and will have no direct effect on our statutory financial statements cash flows or dividend capacity, we estimate that adjusted book value, which excludes accumulated other comprehensive income or a OCI will be reduced by $1 billion to $2 billion as of December 31.
2021.
This reflects the reclassification of nonperformance risk gains from retained earnings to OCI and other changes in reserves we.
We believe adjusted book value, which excludes Aoc I remains a relevant measure as a OCI and GAAP equity will continue to lack symmetry in the valuation of invested assets and insurance liabilities.
We estimate that a OCI will be reduced by approximately 28 to 33 billion as of December 31, 2021, primarily due to the remeasurement of long duration liabilities with a lower discount rates, primarily in our Japan business.
Also of note GAAP equity and adjusted book value will continue to exclude certain unrealized insurance margins for products subject to L. D T I S.
As of December 31, 2021, the estimated after tax unrealized insurance margins related to those products are expected to be 60 to 65 billion pre.
Primarily in our Japan business.
These margins represent an important factor in determining financial strengths.
Turning to slide 12, 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 <unk> 7 billion and above our three to 5 billion liquidity target range due to the receipt of proceeds from the sales of our full service retirement business any block of legacy variable annuities and.
And other sources of funds include free cash flow from our businesses as well as contingent capital facilities.
Turning to slide 13, and in summary, we are executing on our plans to reposition our businesses.
We are expecting to reach our targeted cost savings one year ahead of plan and a rock solid balance sheet provides financial flexibility to execute on our transformation and thoughtfully deploy capital now I'll turn it to your operator for questions.
Thank you well now be conducting a question and answer session. We ask you. Please ask one question and one follow up then return to the queue, 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 queue. You May press star two if he'd like to remove your question from.
In the Q for participants using speaker equipment that may be necessary to pick up your handset before pressing star one and once again, we ask you kindly ask one question. One follow up then return to the queue. Our first question today is coming from Tom Gallagher from Evercore. Your line is now live.
Good morning, I'm late to start on the mortality assumption review the charge he talk a little bit about <unk>.
What drove it was it more the mortality side was it more of a lap side was it mainly mortality assumptions pre pandemic was there a meaningful adjustment from the experience that you've seen through the pandemic a little bit of color there would be helpful. Thanks.
Yeah.
Yeah, Hey, Tom It's it's Ken.
But let me give you a little bit of background on the assumption update.
I think most people know each year in the second quarter.
We examine our updated experience that's available from our own business, but we also look at information that's available from industry studies and other surveys.
And again this year, we followed our process that's quite contract had a comprehensive.
And well established.
We did make updates to our individual life insurance actuarial assumptions, primarily for policyholder persistency and mortality.
Let me start with the policy persistency changes that was that was mainly with our guaranteed universal life products, where we lowered our lapse and surrender assumptions in that that revision.
Reflected information we gain from our recently released studies and surveys.
As well as our recent emerging experience.
And so we essentially refined into a more dynamic lapse.
Assumptions for that that portion of the business.
And in terms of mortality. We also included the impact of COVID-19 claims with the expectation of shifting from endemic to or from a pandemic to endemic phase and we also lowered our future mortality improvement as well given given recent.
Trends now.
Now that the majority of the reserve strengthening was the result of the policyholder persistency assumption the mortality updates were more modest and across all of our all of our businesses.
That's that's really helpful. Can appreciate that color my follow up is just will the.
Well. This also resulted in a statutory impact.
In addition to the GAAP impact and if so can you help quantify that and talk about how that could impact capital management if at all.
Yeah.
Dated assumptions are applied to our our statutory reserves, it's all as well it'll have a comparable magnitude of impact.
But you know, we're well positioned to maintain strong regulatory capital ratios, we have a strong capital position overall and you know we continue have diverse sources of free cash flow going forward as well.
Thank you. Your next question is coming from Ryan Krueger from K B W. Your line is now live.
Hi, Thanks, good morning.
And would you expect much of an impact from updated E. Two factors for longevity risk, which I don't think was in the RBC ratio previously.
Needed mortality risk factor when that is implemented I believe which may be at year end.
Yeah, Brian It's Ken again I'll take those.
We don't expect a significant overall impact for either those the longevity factors were incorporated a I believe last year and including some some correlation benefits between longevity and mortality.
And given the updated the updates to mortality that had been proposed those those will be manageable and again reflective of the good combination of business that we have that is both longevity based in mortality based.
Got it thanks, and then I had a question that on the Bermuda subsidiary that you would establish earlier this year and contributed capital to last year or last last quarter can you give any more color on kind of what your longer term plans are for that and you know what what.
To what extent you may be able to start shifting U S business into Bermuda.
They get an offset.
Offsetting benefit from the capital and you had contributed last quarter. Thanks.
Okay, Yeah, Ryan Yeah. The we did launch a new company last quarter, it's a new reinsurance company, that's based in commuter which we call a Lotus re we think it's a really good capability to have we've reinsured a block of variable life policy.
These two that company you know, we're we're obviously following the BMA standards, the businesses, well reserved and capitalized including the capital that we put it in this last quarter.
But it's also very well aligned with the economics of that business. So you know so going forward. We we do believe this will be a more efficient capital framework for.
For our variable life business, that's well aligned with the economics of that business as well.
Thank you. Our next question is coming from John Barnidge from Piper Sandler Your line is now live.
Thank you very much can you maybe talk about persistency trends in group life and disability.
There's been increased lapse activity was seen by other market participants given kind of the movements in the war on talent.
Employees it looks like persistency did go down from two key for disability, but not life. Thank you.
Hey, John Good morning, It's Andy I'll take your question, but maybe I'll bring it up a level to say that the general effect that we saw during the pandemic was companies.
Really pulled back on switching their benefit plans.
As we've come through the pandemic and as hopefully we're coming out the other side and it's becoming more endemic we've seen basically in the marketplace a normal level of RFP activity, so things have gotten sort of back back to normal.
We can talk about our persistency, we're very pleased with our persistency results and as you would imagine we track very closely the profitability of the business that we retain versus the profitability of the business that we lose.
Part of the secret sauce of manage a group insurance businesses. As you know sometimes addition by subtraction, if we can't get the rates that we want to get to move a case to profitability.
We we are our plan and our intention and our fall through is always to let it go but we're quite pleased that the persistency levels in the business.
Great. Thank you very much and then my follow up question. If I may the unrealized insurance margin in Japan is that a game that can be harvested through a risk transfer or how should we be thinking about per realizing this.
Yeah, Hey, John its Ken.
Let me just the B.
Unrealized insurance margin is.
That were referencing here in a quantified is under the GAAP construct and you can think of it as is basically the present value of future premiums.
The less the amounts of the premiums needed to provide claims for ride for claims. So it's it's a it's margin above and beyond what's needed to support the expected claims and it is indicative of the profitability of the business and and the majority is from our Japan business and it's reflected.
What we think is the strong profitability of our Japan business.
It's there is good embedded profits there in value and it is a potential source of Oh.
Free cash flow over time, and if you know if we choose to reinsure a block of it as well we could release capital that way.
Thank you next question is coming from Elyse Greenspan from Wells Fargo. Your line is now live.
Hi, Thanks, My first question I'm going back to individual life, when we normalize for the assumption review VII and under and underwriting it looks like the underlying earnings power of that segment is in the range of 100 million and I think in the slides you guys put the kids meal baseline at 96.
So can you talk about if there are any ongoing earnings impact from the assumption review and is roughly 100 million pretax a good quarterly level run rate earnings for that segment.
Yeah. Lisa this is Andy I'll take your question the assumption update does have an ongoing impact on our individual life business. It reduces our core earnings capability are in the neighborhood of $30 million per quarter.
So our core run rate was about one O five before so it brings it down to 75, what youre seeing in our walk on the slide remember that we expect to have 20 million of higher underwriting gains are seasonally in third quarter of 'twenty. Two so if you make that adjustment that gets you to that to that 96 baseline.
Okay. Thank you and then my second question is on assurance IQ. If you guys can just give us some color on the upcoming enrollment season, and then revenues decline. There you know roughly 30% in the second quarter, where revenue is for some reason impacted by the assumption review or should we just think about that 70.
8 million, perhaps indicating a lower baseline for that segment.
Yeah at least it's Andy I'll take the question, let me start by reiterating that we're still very focused on scaling up revenue in each of the distinct product lines in the assurance IQ platform and that really is what's required to get the business to achieve profitability.
That said and you you sort of pointed to this there are a number of things that are important to discuss this quarter. As we've made really good progress in Medicare advantage that was somewhat masked first we did have a $17 million negative a L. T V adjustment that has a direct impact on revenue that was at a an adjustment.
Function adjustment based on our persistency second we saw an impact on the under 65 health care business versus a year ago quarter as the biting administration did not open up a special enrollment period like they did last year. Those two factors really massed a 64% improvement in Medicare advantage enrollment.
And our result, and 35% increase in Medicare advantage Commission revenue versus a year ago quarter. Yeah. So we are pleased with the continued underlying fundamental strengthening in the Medicare advantage product line you know the first part of your question is how we're how we're feeling about our preparation, we're making very good progress in and becoming ready for the fall.
Quarter open enrollment season.
From an agent preparedness perspective, specifically you know we've now will be entering our third year. So we have the benefit of up to full cycles are underneath us and candidly, we're seeing great success in in our hiring agents are partly due to the difficult time that some of the smaller players in the space are having.
Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from Jimmy Mueller from JP Morgan. Your line is now live.
Hi, good morning.
Just had a question first on the actuarial review and its impact on future income I think you mentioned $120 million on a GAAP should we assume a commensurate impact on stat income going forward as well.
It would have it would have a similar impact on GAAP earnings.
Uh huh.
But we'll have to get back to you on that is the quantum of that but there would be a future.
On strengthening our reserves going forward.
Okay, and then can you talk about your the decline in the lifeblood of their talent and Gibraltar life consultants and whether it's sort of what your expectations are for growth in both of those agency channels.
Is the decline being caused more by sort of COVID-19 related factors right now or or.
Should we assume modest growth going forward in both of those.
Hi, Jimmy this is Scott.
The LP count has been essentially flat with new recruits roughly offsetting L. T resignations and R. L. C. Count has actually been slightly negative as you might expect it's been more challenging to recruit in a in a pandemic environment.
A little bit harder to mentor.
New hires.
In this kind of environment.
We expect this you know the situation to remain challenging until the pandemic eases.
But we would then expect to see improvement in kind of a return to normal beyond the pandemic I think it's also worth noting that we continue to focus a great deal of energy on expanding our third party.
Distribution channels across all of our markets.
Yeah.
Thank you next question is coming from Mr needs to come off from Jefferies. Your line is that right.
Thanks, just wanted to come back to the assumption review and the impact on statutory just given the size of the charge does this suggest that you're going to need to infuse capital into the into pica or is there enough excess RBC in there to sort of absorb.
The the that the similar charge that you took on a GAAP basis.
Yeah overall, the this would be very manageable as I mentioned, where we think we're well positioned to to maintain strong RBC statutory ratios are and right now we're not expecting to have to infuse additional capital as a result.
Okay got it and then I guess for Charlie.
I'll ask the same question I always ask on the strategy and this idea of improving the earnings contribution from growth businesses to over 30% of it it still seems like you'll need.
Pretty sizable inorganic M&A to get there so just.
Curious, what you're seeing out there in the landscape are you seeing opportunities.
To put some of the $7 billion of liquid assets at the holding company to work I mean, just thinking about inorganic growth.
What are you seeing out there thanks.
Sure. We are seeing we're seeing a number of different opportunities at this point in the cycle, you're beginning to see other things or some things free up that wouldn't have been there before and at reduced multiples. So it's a good time to have flexibility in order to E in order to.
Be able to think of that think about that kind of acquisition.
What I would say is I'll make a couple of observations, but the first is our strong balance sheet provides us with the flexibility to manage through whatever macro economic conditions. We may face a as we look forward and that's that's going to be an important consideration for us as we go forward, but second to your point, having a strong.
Balance sheet and dislocated market means that we can take advantage of opportunities that prevent themselves present themselves. So.
We're going to be.
We do have a strong balance sheet, we're going to remain flexible with that balance sheet and we're going to look for opportunities that may present themselves in the current in the current economic environment.
Thank you next question is coming from Alex Scott from Goldman Sachs. Your line is now live.
Hi, first question I had was on the annuities business now.
Now that the transactions close I was just wondering if you could help us think through earnings power. There and you know just given a lot of moving parts of the transaction equity markets and then I think you know maybe the runoff of the block how should we think of that over the next several quarters.
Okay.
Oh.
Okay.
Alright, sorry about that but maybe I'll just comment we did close the pellet transaction.
And it was you know.
It came in as we were expecting.
And would reduce our earnings by about 75 million a quarter and that that is very consistent with what we had announced at the at the time of the transaction.
Yeah, Ken maybe I'll just jump in and add you know I, just maybe bring it up a level back to our intentional strategy to reduce our exposure.
Exposure to traditional variable annuities with guaranteed living benefits to be less than 10% of our enterprise earnings and so that reduction is very intentional and it was the two step process of pivoting and run off.
That remains on track we saw we saw a $2 9 billion in run off this quarter and then obviously the derisking transaction, but the other major part of that was pivot to the to our flex cart chassis, a more simpler design less volatile design and we're certainly pleased with the continued strength of those sales.
Got it.
And the second one I had for you was on the L. D. T. I gave gave some good disclosure on the book value impact you know and I know you mentioned that Theres a lot of margin that's sort of left in the reserve because of the pivot sort of approach to the Ti what what does that mean for the earnings power can you help us think through that particularly.
In Japan, where it's a lot of Fas 60, I assume that a lot of that margin probably has to do with that business.
This materially change the earnings power.
Yeah.
You know overall, and we'll be providing more disclosure around the whole transition to the new accounting standard.
Around the time that it is implemented but let me provide some overall thoughts on an earnings you know first overall, we don't expect a significant impact on the level of core operating earnings certain businesses are have little or no impact like a few Jim.
And group insurance and from our insurance and retirement businesses in the U S and internationally.
Some will be a bit higher some will be a bit lower but overall, that's that's generally offsetting so again overall, we don't expect a significant change in the level of our core operating earnings.
Thank you. Your next question today is coming from Tracy Bengie from Barclays. Your line is now live.
Good morning, I have another question on <unk>.
You mentioned.
He or she hears that.
Finally available or if you could provide contact.
Rd, who participated in the study.
Who conducted a study that would be very helpful.
Yeah, Tracy that that was that was done by a private party and Ah. It. It did involve a number of people in the industry, where we're not at liberty to disclose.
You know who was in there that's proprietary information of the study.
So that's about what I can tell you.
Okay got it.
I also noticed that you are a corporate expense is well well in the quarter compared to the baseline you talked about it last year and I'm just wondering how you're thinking about your full year guidance.
Yeah, our AR during the quarter, we did have some favorable items, we did have and FX gain that was helpful. This quarter.
We did have some other lower expenses and.
And then there was there is some timing and we do expect to have seasonally higher expenses in the second half of the year, but given given where we are on the first half we would expect it to be modestly below the 1 billion $6 50 guidance that we originally gave.
Thank you. Our next question is coming from Jack Nothing from Wolfe Research. Your line is now live.
Hi, Good morning wanted to ask on the investment portfolio.
Are there any metrics you can provide regarding new money rates relative to current portfolio yields and.
And then what percentage of the portfolio turns over on average in any given year.
Jack It's Rob I can provide that for you in the if you compare the new menu rates to our portfolio yields are they're up about 20 basis points in the U S and a 50 basis points of positive spread in Japan. So the rise in rates means we're no longer having a drag on our earnings when we measure our new money rates against that portfolio.
Leo yield.
In terms of rollover, it's somewhere between five and 10% on an annual basis.
Got it thank you and then.
Just a question on the drivers and the outlook for net flows in the PGM business and clueless quarter Theres, a strong recovery in institutional flows, but some pressure on retail flows I guess could you just talk about what's driving some of that divergence across those customer types and maybe your outlook moving forward.
Yeah, Jack it's Andy I'll take your question on flows you know as we've talked about in the past flows at PJM will vary quarter to quarter. So we stay very focused on the long term track record in Q2 <unk> third party net flows were roughly flat as very strong institutional inflows of $8 1 billion were offset by the retail outflows of $8 3 billion, let me give.
Some color on that so the $8 1 billion of institutional inflows represented our best quarter since 2018, and those flows were positive across every geography that we operate in the real drivers, where we continue to see clients their algorithms institutional clients algorithm shifting into fixed income as the rates rise.
And we also see those clients continuing to seek yield and our privates and alternative strategies on the retail side I would say the story as we were impacted like the rest of the industry by headwinds in the active fixed income and growth equity space. The industry experienced 305 billion in outflows across active U S mutual funds as individual <unk>.
<unk> continued to reposition our every top 10 fixed income manager in nine of the top 10 active growth equity managers posted negative flows so but despite that environment. Our PJM investments moved up to the number 16 U S Mutual fund family in the quarter by assets under management.
Oh and by the way I I I I I typically do which is we're confident that we're gonna be a net flow winter overtime.
As we look at our business, we have a broad and diversified product portfolio. We continue to put up very strong long term investment performance and we have great distribution. So we'll continue to build on our track record of of 18 of the last 19 years of positive flows.
And we're quite proud of that.
Thank you next question is coming from Mike Ward from Citi. Your line is now live.
Yeah.
Thanks, guys just wanted to follow up answer <unk> question about the transformation and I think you've touched on your strategy in terms of acquisitions, but to his point.
It seems like that would require a pretty decent chunk of inorganic growth.
So I guess just wondering you know should we assume from here that the strategy is primarily around organic growth acquisitions are opportunistic you know buys or do you do you still look at material kind of divestments or reinsurance from your existing business mix.
Yeah. This is Charlie let me, let me take that one it's gonna be a combination of both right because in the as we've done in the past we're going to continue to be thoughtful about the deployment of proceeds, especially in light of the macroeconomic conditions and we've always said, we're going to be good stewards of capital, but we're gonna what we're gonna do is to continue to do.
Inventory, the disciplined consistent and a balanced approach to the redeployment of capital within our businesses are for acquisitions and to our shareholders, while fulfilling our commitment to our financial strength by my maintaining a strong balance sheet. So we're going to look at a combination.
Again.
In our businesses.
Acquisitions returns to shareholders, but also divestitures, if if they make sense and we've always said we will look at.
Additional divestitures of blocks of business, but only if they make sense and that's our that's what we're gonna do as we go forward. So we are it will be we'll get to our goals through both edition and potentially subtraction.
But it has to make sense on both sides for shareholders.
Okay. Thanks, very much and so I guess kind of relatedly. It it sounds like a pretty comprehensive review in the life business just thinking about some of the difficulties that segment has faced over the last few years. I guess you know does this have any impact on your strategic view of the life business and almost.
Seems like at this point, even if you were to sell it or offloaded at a loss it might be beneficial or is the diversification benefits mortality longevity offset is that you know is that important to the extent that you you know you're going to hang onto life. Thanks.
Yeah, Let me start and then Andy you may want to add some some.
Commentary on it but for the life business, we still think there's a significant potential for growth in the industry. You have a 12 trillion dollar insurance life insurance gap you have increasing sales as shown by last year's industry with sales being the best they have been in about two decades and from an enterprise perspective the life.
This continues to be a really helpful component and balancing our longevity with our mortality. So theres a lot of interconnection with the other businesses along with PJM.
And it's it's a business that we would like to remain in but we'll do so a very very carefully as we go forward Andy Yeah, Charlie I I would just add that we've had a very explicit strategy that where we remain committed to it and the path forward is clear you know, we recognize a disappointing end and volte.
It'll aspects of G well, but remember that our strategy has been about pivoting and derisking. The business, we see selling G. Well single life G well in third quarter of 'twenty, and we began to rotate to the product portfolio towards simpler designs are inclusive of variable universal life, a final expense and simply.
Tom.
We also have been very much leaned in to reducing expenses to make the business more efficient. So you know as as we're doing that we're seeing the new business sales, where we have a lot of pricing power and we liked the positive returns of that block of business that we're putting on and we're filling that gap that Charlie talked about.
Thank you we've reached end of our question and answer session I'd like to turn the floor back over to Mr. Lowery for any further or closing comments.
Okay. Thank you very much and thank you. Thank you for joining us today.
We've made significant progress, reducing our market sensitivity, while investing in sustainable long term growth advancing our cost savings program and returning capital to shareholders.
Looking ahead, we are confident that our strategy along with our solid financial position will help us deliver an even more meaningful difference in the lives of our customers and delivering value to all our stakeholders, including providing attractive returns to our shareholders, while enabling us to fulfill our vision to become a global leader in expanding access to <unk>.
Best thing insurance and retirement security.
Thank you again for joining us and 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 today.
Yeah.
Okay.
Yeah.