Prudential Financial Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2022

Key Takeaways

  • Q2 results were weighed down by macro headwinds—including rising interest rates, widening credit spreads and equity market declines—and a $1.4 billion annual reserve strengthening on individual life products, resulting in a GAAP net loss.
  • Prudential completed planned divestitures of its full‐service retirement business and a portion of traditional variable annuities, cutting market sensitivity by about 20% and delivering a $1.5 billion pre‐tax gain.
  • The company accelerated its cost savings program, achieving $725 million of run‐rate savings to date and now expects to hit the $750 million target one year ahead of schedule.
  • Growth investments included an initial minority stake in South Africa’s Alex Forbes, a partnership with MercadoLibre in Latin America, and continued strong sales of the FlexGuard buffered annuity (now over $10 billion since launch).
  • Prudential’s robust balance sheet supported returning over $800 million to shareholders in Q2 and $6 billion since early 2021, maintaining financial flexibility for ongoing investments and dividends.
AI Generated. May Contain Errors.
Earnings Conference Call
Prudential Financial Q2 2022
00:00 / 00:00

There are 15 speakers on the call.

Operator

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 will conduct a question and answer session. Instructions will be given at that time. As a reminder, today's call is being recorded.

Operator

I will now turn the call over to Mr. Bob McLaughlin. Please go ahead, sir.

Speaker 1

Good 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 Slicer, Head of International Businesses Ken Tangie, Chief Financial Officer and Rob Axel, Controller and Principal Accounting Officer. We will start with prepared comments by Charlie, Rob and Ken, Call.

Speaker 1

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. 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.com.

Speaker 1

And now I'll turn it over to Charlie.

Speaker 2

Thank you, Bob, and thanks to everyone for joining us today. Our 2nd 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 2020 as part of our strategy to de risk our product mix, and we continue to make strategic progress in transforming our businesses to be less market sensitive and more nimble.

Speaker 2

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. 2nd, 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 $750,000,000 target 1 year ahead of schedule.

Speaker 2

We executed on these strategic initiatives with the support of our solid balance sheet. Our strong financial position provides us with the 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 over time, 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 3. We are executing on our plans to reposition the businesses by reducing market sensitivity and making investments to support long term sustainable growth.

Speaker 2

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 $1,500,000,000 pre tax gain And further reduced 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 in Alex Forbes, A leading provider of financial advice, retirement, investment and wealth management in South Africa.

Speaker 2

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 MercadoLibre, the largest e commerce platform in Latin America with approximately 200,000,000 users. This will enable us to deliver life insurance and accident and health products tailored to the platform's mass market customer base. At the same time, we are investing in the growth of our products that meet the evolving needs of our customers. Our FlexGuard buffered annuity product recently surpassed $10,000,000,000 in sales since launching 2 years ago.

Speaker 2

We are also experiencing strong sales from our more recently launched FlexGuard income offering. Turning to our cost savings initiative on Slide 4. We now expect To achieve our full $750,000,000 cost savings target in 2022, 1 year ahead of schedule, we recorded $175,000,000 in cost savings For a total of $725,000,000 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 5. 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.

Speaker 2

This financial strength also provides flexibility to balance investing in our businesses with delivering attractive returns to our shareholders. Our robust financial position includes a high quality, With assets at the end of the second quarter. During the second quarter, we returned over $800,000,000 to shareholders. And since the beginning of 2021, we have returned a total of $6,000,000,000 towards our objective of $11,000,000,000 by the end of 2023. Finally, a comment on the environmental, social and governance front.

Speaker 2

In June, we published our 3rd annual sustainability report, which details the progress of our ESG initiatives, including information on our EEO-one and Pay Equity disclosures, Commitments to racial equity and achieving net zero emissions. 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.

Speaker 3

Thank you, Charlie. I'll provide an overview of our financial results and business performance for our PGIM U. S. And International businesses. I'll begin on Slide 6 With our financial results for the Q2 of 2022, pre tax adjusted operating income was $872,000,000 or $1.74 per share on an after basis and included a $1,400,000,000 increase in reserves from our annual assumption update and other refinements.

Speaker 3

We strengthened our individual life reserves, primarily reflecting updates to policyholder behavior and revised 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 $852,000,000 gain from completing the sale of Palak, a legacy block of variable annuities. Our GAAP net loss was $1,400,000,000 lower than our after tax adjusted operating income, primarily driven by the mark to Turning to the operating results of our businesses, excluding the impacts of the annual assumption update and the gain on the sale of Palak. PGIM, our global investment manager, reported lower other related revenues driven by a decrease in seed and co investment incentive fees as well as lower asset management fees compared to the year ago quarter.

Speaker 3

Results of our U. S. Businesses We're 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 7, PGIM, our global active investment manager, has diversified capabilities in both public and private asset classes across fixed income, Alternatives, Real Estate and Equities.

Speaker 3

PGIM's long term investment performance remains attractive with 75% to 85% of assets under management outperforming their benchmarks over the last 3, 5 10 year periods. PGIM benefited from its diversified business mix As strong institutional debt inflows of $8,100,000,000 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 of PGIM and of our U. S. And Insurance and Retirement businesses are mutually enhancing.

Speaker 3

PGIM's 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 PGIM through affiliated flows and unique access to insurance liabilities that complemented successful third party track record of growth. PGIM's average fee rate increased due to the successful execution of our strategy, including the continued mix 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 declining 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 $230,000,000,000 across private credit, real estate equity and debt and private equity secondaries And benefits from our global scale and market leading positions.

Speaker 3

Notably, across Pigeon's private platform, we deployed nearly $1,000,000,000 of capital, up nearly 40% from the year ago quarter, reflecting the continued strong environment for private credit. PGIM also raised nearly $3,000,000,000 in new private capital commitments across real estate and private credit. Turning to Slide 8. Our U. S.

Speaker 3

Businesses produce 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. Retirement Strategies achieved solid sales in the 2nd quarter across its institutional and individual lines of business. Institutional stable value sales were $1,600,000,000 International Reinsurance closed $1,400,000,000 of longevity reinsurance transactions during the quarter And U. S.

Speaker 3

Pension risk transfer closed several transactions totaling more than $725,000,000 Our product pivots in individual retirement have resulted in strong sales of more simplified solutions with nearly $1,500,000,000 of FlexGuard and FlexGuard income sales in the 2nd quarter. Our strong FlexGuard 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 product pivot 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.

Speaker 3

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 9. 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.

Speaker 3

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 customer needs are growing, where there are compelling opportunities to build market leading businesses and where the Prudential enterprise can add value. In the Q2, we continue to focus on expanding product and business capabilities in emerging markets to meet the evolving needs of customers.

Speaker 3

In Brazil, we achieved record sales, driven by the expansion of our 3rd party distribution channel, where sales increased 120% compared to the year ago quarter, as well as by the continued strength of the Life Planner channel. We established a partnership with Mercado Libre in Latin America to expand access customers in the region. In the 1st 2 weeks following the launch in June, we have sold life and A and 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 by establishing a partnership with Medife, a health service provider to 300,000 customers in Argentina.

Speaker 3

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 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. And with that, I'll hand it over to Ken.

Speaker 4

Thanks, Rob. I'll begin on Slide 10, which provides insight Earnings for the Q3 of 2022 relative to our Q2 results. As noted, pre tax adjusted operating income in the second quarter A charge of $571,000,000 in the second quarter. Our annual assumption update and other refinements resulted in a net charge of $1,400,000,000 primarily driven by our Individual Life business, as Rob previously described. This was partially offset by a 850 $2,000,000 gain from the sale of a block of legacy variable annuities.

Speaker 4

Next, variable investment income expectations in the 2nd quarter by $80,000,000 3rd, we adjust underwriting experience by a net $25,000,000 This adjustment includes a placeholder for COVID-nineteen claims experience in the Q3 of $50,000,000 for our international businesses, Primarily due to hospitalization benefits for policyholders recovering from COVID-nineteen at home in accordance with a special regulatory provision in Japan that is We have also updated our mortality assumptions for the U. S. Businesses to include continued COVID-nineteen mortality with an expected gradual transition to an endemic phase over time. While we have attempted to reflect COVID-nineteen 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 $30,000,000 lower in the 3rd quarter, primarily due to lower than typical expenses in 2nd quarter that were partially offset by lower other related revenues in PGIM and lower joint venture earnings.

Speaker 4

These items combined get us to a baseline of $2.63 per share for the 3rd quarter. I'll note that if you exclude items specific to the 3rd quarter, earnings per share would be 2 $0.75 a modest decline primarily due to lower fee income as a result of market depreciation, lower underwriting income due to the updated actuarial And continued COVID-nineteen 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 Q3.

Speaker 4

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 LVTI, which goes into effect on January 1, 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 AOCI will be reduced by $1,000,000,000 to $2,000,000,000 as of December 31, 2021. This reflects the reclassification of non performance risk gains from retained earnings to AOCI and other changes in reserves.

Speaker 4

We believe adjusted book value, which excludes AOCI, remains a relevant measure as AOCI and GAAP equity will We estimate that AOCI will be reduced by approximately $28,000,000,000 to $33,000,000,000 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 from products subject To LVTI. As of December 31, 2021, the estimated after tax unrealized insurance margins related to those products Are expected to be $60,000,000,000 to $65,000,000,000 primarily in our Japan business. These margins represent an important factor in determining financial strength. Turning to Slide 12.

Speaker 4

We continue to maintain a robust capital position and adequate sources of funding. Our capital position continues to support AA Financial strength rating and we have substantial sources of funding. Our cash and liquid assets were $7,000,000,000 and above our $3,000,000,000 to $5,000,000,000 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 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 1 year ahead of plan, And our rock solid balance sheet provides financial flexibility to execute on our transformation and thoughtfully deploy capital.

Speaker 4

Now, I'll turn it to your operator for questions.

Operator

Thank you. We'll now be conducting a question and answer session. We ask you please ask one question and one follow-up, then return to the queue. Our first question today is coming from Tom Gallagher from Evercore. Your line is now live.

Speaker 5

Good morning. I'd like to start on the mortality assumption review, the charge. Can you talk a little bit about What drove it? Was it more the mortality side? Was it more the lap side?

Speaker 5

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.

Speaker 4

Yes. Hey, Tom, it's Ken. Let me give you a little bit of background on the assumption update. As I think most people know, each year in the Q2, 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 comprehensive and well established.

Speaker 4

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 mainly with our guaranteed universal life products, where we lowered our lapse and surrender assumptions. And that revision reflected information we gained from 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 portion of the business. In terms of mortality, we also included the impact of COVID-nineteen claims with the of shifting from endemic to or from a pandemic to endemic phase, and we also lowered future mortality improvement as well given recent trends. Now the majority of the reserve strengthening was the result of the Policyholder persistency assumption, the mortality updates were more modest in and across all of our businesses.

Speaker 5

That's really helpful, Ken. Appreciate that color. My follow-up is just, Will this also result 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?

Speaker 4

Yes. The updated assumptions are applied To our statutory reserves as well, it will have a comparable magnitude of impact, But we're well positioned to maintain strong regulatory capital ratios. We have a strong capital position overall. And we continue to have diverse sources of free cash flow going forward as well.

Operator

Your next question is coming from Ryan Krueger from KBW.

Speaker 6

Would you expect much of

Speaker 7

an impact from updated C2 factors for longevity risk, Which I don't think was in the RBC ratio previously and an updated mortality risk factor when that is implemented, I believe, which may be at year end.

Speaker 4

Yes. Brian, it's Ken again. I'll take those. No, we don't expect a significant overall impact for either of Those, the longevity factors, were incorporated, I believe last year, and including Some correlation benefits between longevity and mortality, and given the updated The updates to mortality that have been proposed, those will be manageable and again reflective of the good combination of business that we have that is both longevity based and

Speaker 7

And mortality based. Got it. Thanks. And then I had a question on the Bermuda Subsidiary that you established earlier this year and contributed capital to last year or last quarter. Can you give any more Color on kind of what your longer term plans are for that and what to what extent You may be able to start shifting U.

Speaker 7

S. Business into Bermuda to get an offset, that is offsetting benefits from the capital you had

Speaker 4

Okay. Yes, Ryan, we did launch a new company last Quarter, it's a new reinsurance company that's based in Bermuda, which we call Lotus Re. We think it's a really good capability to have. We've reinsured a block of variable life policies to that company. We're obviously following the BMA standards.

Speaker 4

The business is well reserved and capitalized, including the capital that we put in it last quarter. But it's also very well aligned with the economics of that business. So going forward, We do believe this will be a more efficient capital framework for our variable life business that's well aligned with the economics

Operator

Our next question is coming from John Barnidge from Piper Stanley. Your line is now live.

Speaker 8

Thank you very much. Can you maybe talk about persistency trends in group life and visibility? There's been increased lapse activity seen by other market participants, given kind of the movements in the war on talent among employees. It looks like persistency did go down in 2Q for disability, but not life. Thank you.

Speaker 9

Hey, John. Good morning. It's Andy. I'll take your question. 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 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.

Speaker 9

So things have gotten sort of back to normal. When we 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. And part of The secret sauce of managing group insurance businesses is sometimes addition by subtraction. If we can't get the rates that we want to get to move a case Profitability, we our plan and our intention and our follow through is always to let it go.

Speaker 9

But we're quite pleased at the persistent T levels in the business.

Speaker 8

Great. Thank you very much. And then my follow-up question, if I may. That unrealized insurance margin in Japan,

Speaker 6

Is that a gain that

Speaker 8

can be harvested through a risk transfer or how should we be thinking about pre realizing those?

Speaker 4

Yes. Hey, John, it's Ken. Let me just the unrealized insurance margin is that we're referencing here and Quantified is under the GAAP constructs and you can think of it as basically the present value of future premiums Less the amounts of the premiums needed to provide claims provide for claims. So It's margin above and beyond what's needed to support the expected claims. It is indicative of the profitability of the business And the majority is from our Japan business and it's reflective of what we think is the strong profitability of our Japan business.

Speaker 4

It's there is good embedded profits there and value, and it is a potential source Of free cash flow over time and if we choose to reinsure a block of it as well, we could

Operator

Next question is coming from Elyse Greenspan from Wells Fargo. Your line is now live.

Speaker 10

Hi, thanks. My first question, going back to individual life, when we normalize for The assumption review, VII and underwriting, it looks like the underlying earnings power of that segment is in the range of 100,000,000 And I think in the slides, you guys put the Q3 baseline at $96,000,000 So can you talk about if there are any ongoing earnings impacts from the assumption review? And is Roughly $100,000,000 pretax, a good quarterly level run rate earnings for that segment?

Speaker 9

Yes, Elyse, 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 in the neighborhood $30,000,000 per quarter. So our core run rate was about $105,000,000 before, so it brings it down to 75,000,000 What you're seeing in our walk on the slide, remember that we expect to have $20,000,000 of higher underwriting gains seasonally in Q3 of 'twenty two.

Speaker 9

So if you make that adjustment, that gets you to that 96 baseline.

Speaker 10

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 There roughly 30% in the second quarter.

Speaker 10

Were revenues for some reason impacted by the assumption review? Or should we just think about That's $78,000,000 perhaps indicating a lower baseline for that segment?

Speaker 9

Yes, Elyse, it's Andy. 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 as that really is what's required to get to the business to achieve profitability. With that said and you sort of pointed to this, there are a number of things that are important to Discussed this quarter as we've made really good progress in Medicare Advantage that was somewhat masked. First, we did have a $17,000,000 negative LTV adjustment, that is a direct impact on revenue.

Speaker 9

That was an adjustment assumption adjustment based on our persistency. 2nd, we saw an impact on the under 65 healthcare business versus a year ago quarter as the Biden administration did not open up a special enrollment like they did last year. Those two factors really masked a 64% improvement in Medicare Advantage enrollments And a result in 35% increase in Medicare Advantage commission revenue versus a year ago quarter. So we are pleased with the continued underlying Fundamental strengthening in the Medicare Advantage product line. The first part of your question is how we're feeling about our preparation.

Speaker 9

We're making very good progress in becoming ready for the Q4 open enrollment season from an agent preparedness perspective specifically. We've now will be entering our 3rd year, so we have the benefit of 2 full cycles underneath us. And candidly, we're seeing great success in

Operator

Our next question is coming from Jimmy Bhullar from JPMorgan. Your line is now live.

Speaker 6

Hi, good morning. So I just had a question first on the actuarial review and its impact on future income. I think you mentioned $120,000,000 On GAAP, should we assume a commensurate impact on stat income going forward as well?

Speaker 4

It would have a Similar impact on GAAP earnings. I'm not I will have to get back to you under the quantum of that, but there would be a future The impact of strengthening the reserves going forward.

Speaker 6

Okay. And then can you talk about your the decline in the Life Planner account And Gibraltar Life Consultants and whether it's sort of and what your expectations are for growth in both of those agency channels? Is the decline being caused more by sort of COVID related factors right now or There should be some modest growth going forward in both of those.

Speaker 2

Hi, Jimmy. This is Scott. The LP count has been essentially flat with new recruits roughly offsetting LP resignations And our LC count has actually been slightly negative. As you might expect, it's been more challenging to Crude in a pandemic environment. It's actually a little bit harder to mentor new hires in this kind of environment.

Speaker 2

We expect this 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 3rd party distribution channels across all of our markets.

Operator

Thank you. Next question is coming from Suneet Kamal from Jefferies. Your line is now live.

Speaker 11

Thanks. Just I want 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 Pika? Or is there enough excess RBC in there to sort of absorb The similar charge that you took on a GAAP basis?

Speaker 4

Yes. Overall, this will be very manageable. As I mentioned, we think we're well positioned to maintain strong RBC statutory ratios. And right now, we're not expecting to have

Speaker 11

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%, it still seems like you'll need Pretty sizable inorganic M and 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 $7,000,000,000 of liquid assets at the holding company to work, I mean, just thinking about inorganic growth, what are you seeing out there? Thanks.

Speaker 2

Yes, sure. We are 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 multiple. So it's a good time to have flexibility in order to be able to think about that kind of acquisition. What I would say is, I'll make a couple of observations.

Speaker 2

The first is our strong balance sheet provides us We have the flexibility to manage through whatever macroeconomic conditions we may face as we look forward. And that's going to be an important consideration for us as we go forward. But second, to your point, having a strong balance sheet in 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

Speaker 12

Hi. First question I had was on the annuities business. Now that the transaction is I was just wondering if you could help us think through earnings power there and just given a lot of moving parts to the Transaction, Equity Markets and then I think maybe the runoff of the block, how should we think of that over the next several quarters?

Speaker 9

Go ahead,

Speaker 4

Andy. All right. Sorry about that. Maybe I'll just comment, we did close the Palak transaction And it was it came in as we were expecting, and would reduce our earnings by about $75,000,000 a quarter and that is very consistent with what we had announced at the time of the transaction.

Speaker 9

Yes, Ken, maybe I'll just jump in and add. I just may bring it up a level back to our intentional strategy to reduce our 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 2 step process of pivoting and runoff. That remains on track. We saw 2 $900,000,000 in runoff this quarter and then obviously the de risking transaction.

Speaker 9

But the other major part of that was pivot to our FlexGuard chassis, a more Simpler design, less volatile design, and we're certainly pleased with the continued strength of those sales.

Speaker 12

Got it. And the second one I had for you was on the LDTI. You gave some good disclosure on the book value impact. And I know you mentioned that there's a lot of margin that's sort of left in the reserve because of the pivot sort of approach to LDTI. What does that mean for the earnings power?

Speaker 12

Can you help us think through that, particularly in Japan, where it's a lot of 5.60 percent? I assume that a lot of that margin probably has to do with that business. Will this materially change the earnings power?

Speaker 4

Yes. Overall, And we'll be providing more disclosure around the whole transition to the new accounting standard as we around the time that Expect a significant impact on the level of core operating earnings. Certain businesses have little or no impact like PGIM And Group Insurance. And from our insurance and retirement businesses in the U. S.

Speaker 4

And internationally, Some will be a bit higher, some will be a bit lower, but overall that's generally offsetting. So again, overall, We don't expect a significant change in the level of our core operating earnings.

Operator

Thank you. Next question today is coming from Tracy Banghigian from Barclays. Your line is now live.

Speaker 10

Good morning. I have another question on the Assumption update, you mentioned industry study, we're in the cheat sheets here. Is that something that is widely available or if you could provide context Regarding who participated in that study, and who conducted the study, that would be very helpful.

Speaker 4

Yes, Tracy, that was done by a private party and it did Involve a number of people in the industry. We're not at liberty to disclose, who was in there. That's proprietary information of the study. So that's about what I can tell you.

Speaker 10

Okay, got it. Also noticed that your $65,000,000,000 guidance.

Speaker 4

Yes. During the quarter, we did have some favorable items. We did have An FX gain that was helpful this quarter.

Speaker 7

We did

Speaker 4

have some other lower expenses. And then there is some timing and we do expect to have seasonally higher expenses in the second half of the year. But given where we are on the first half, we would expect to be modestly below the $1,650,000,000 guidance that we originally gave.

Operator

Thank you. Our next question is coming from Jack Matson from Wolfe Research. Your line is now live.

Speaker 13

Hi, good morning. I wanted to ask on the investment portfolio. Are there any metrics you can provide regarding new money rates relative to current portfolio yields? And then what percentage of the portfolio turns over on average in a given year?

Speaker 3

Jack, it's Rob. I can provide that for you. In the If you compare the new money rates to our portfolio yields, they're up about 20 basis points in the U. S. And 50 basis points in terms of Positive spread in Japan.

Speaker 3

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 yield. In terms of rollover, it's somewhere between 5% 10% on an annual basis.

Speaker 13

Got it. Thank you. And then just a question on the drivers and the outlook for net flows in the PGM business. Clearly, this quarter, there was a strong recovery in institutional flows, pressure on retail flows. I guess, could you just talk about what's driving some of the divergence across those customer types and maybe your outlook moving forward?

Speaker 9

Yes, Jack, it's Andy. I'll take your question on flows. As we've talked about in the past, flows at PGIM will vary quarter to quarter, so we stay very focused On the long term track record, in Q2, 3rd party net flows were roughly flat, as very strong Inflows of $8,100,000,000 were offset by the retail outflows of $8,300,000,000 Let me give you some color on that. So the $8,100,000,000 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' algorithms shifting into fixed income as the rates rise.

Speaker 9

And we also see those clients continuing to seek yield in our privates and alternative strategies. On the retail side, I would say the story is we were impacted like the rest of the industry by headwinds in the active fixed income and growth equity space. The industry experienced $305,000,000,000 in outflows across active U. S. Mutual funds as individual investors continue to reposition.

Speaker 9

Every top ten Fixed income manager and 9 of the top 10 active growth equity managers posted negative flows. So, but despite that environment, our PGIM investments Moved up to the number 16 U. S. Mutual fund family in the quarter by assets under management. I'll end the way I We're confident that we're going to be a net flow winner over time.

Speaker 9

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 18 in the last 19 years of positive flows, and we're quite proud of that.

Operator

Next question is coming from Mike Ward from Citi. Your line is now live.

Speaker 14

Thanks, guys. Just wanted to follow-up on Suneet's question about the transformation. And I think you 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, should we assume from here that the strategy is primarily around organic growth acquisitions or opportunistic buys? Or do you still look at material kind of divestments or reinsurance from your existing business mix?

Speaker 2

Yes. This is Charlie. Let me take that one. It's going to 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 Deployment of proceeds, especially in light of the macroeconomic conditions, and we've always said we're going to be good stewards of capital.

Speaker 2

But we're going to what we're going to do is To continue to demonstrate a disciplined, a consistent and a balanced approach to the redeployment of capital Within our businesses, for acquisitions and to our shareholders, while fulfilling a commitment to our financial Strength by maintaining a strong balance sheet. So we're going to look at a combination of, again, Investment in our businesses, acquisitions, returns to shareholders, but also divestitures, if they make sense. And we've always said we'll look at additional divestitures of blocks of business, but only if they make sense. And that's what we're going to do as we go forward. So we it will be we'll get to our goals through both addition and potentially subtraction, But it has to make sense on both sides for shareholders.

Speaker 14

Okay. Thanks very much. And so I guess kind of relatedly, 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, does this have any impact on your strategic view of the Life business? It almost seems like at this point, even if you were to sell it or offload it at a loss, it might be beneficial or is the diversification benefit, the

Speaker 2

Yes. Let me start and then Andy, you may want to add 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 $12,000,000,000,000 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 2 decades.

Speaker 2

And from an enterprise perspective, the Life business continues to be a really helpful component in balancing Our longevity with our mortality. So there's a lot of interconnection with the other businesses along with PGIM, and It's a business that we would like to remain in, but we'll do so very, very carefully as we go forward. Andy?

Speaker 9

Yes, Charlie, I would just add that we've had a very explicit strategy that we remain committed to and the path forward is clear. We recognize the disappointing and volatile aspects of GUL, but remember that our strategy has been about pivoting and derisking the business. We see selling GUL, single life GUL in Q3 of 'twenty and we began to rotate The product portfolio towards simpler designs, inclusive of variable universal life, final expense and simply term. We also have been very much leaned into reducing expenses to make the business more efficient. So as we're doing that, we're seeing The new business sales where we have a lot of pricing power and we like the positive returns of that block of business that we're putting on and we're filling that gap that Charlie talked

Operator

Thank you. We've reached the 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.

Speaker 2

Okay. Thank you very much, and 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, we'll 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 investing, insurance and retirement security. Thank you again for joining us and for your time today.

Operator

Thank you. That does conclude today's teleconference and

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