Earnings Call Transcript
PRUDENTIAL FINANCIAL INC (PRU)
Earnings Call Transcript - PRU Q1 2022
Operator, Operator
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 Sleyster, Head of International Businesses; Ken Tanji, Chief Financial Officer; and Rob Axel, Controller and Principal Accounting Officer. We will start with prepared remarks by Charlie, Rob and Ken, and then we will take your questions. Today's presentation may include forward-looking statements. It is possible that actual results may differ materially from the predictions we make today. 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 of today's presentation. And the quarterly financial supplement, both of which can be found on our website at investor.prudential.com. Now, I'll turn the call over to Bob McLaughlin. Please go ahead.
Operator, Operator
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 Sleyster, Head of International Businesses; Ken Tanji, 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. 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. Now, I'll turn it over to Charlie.
Charlie Lowrey, CEO
Thank you, Bob, and thanks to everyone for joining us this morning. We delivered solid operating earnings for the first quarter, including strong variable investment income that more than offset the impact of elevated mortality from COVID-19. We have also recently achieved multiple significant milestones in our transformation process to become a higher growth, less market-sensitive and more nimble company. These milestones included continued execution on our plans to reposition our businesses. We completed two key divestitures and announced another programmatic acquisition. We continue to invest in our businesses to further enhance the customer experience and expand solutions to support sustainable long-term growth. And we also further advanced the progress on our $750 million cost savings program. We are pleased with the pace of these initiatives, which are well supported by our rock-solid balance sheet and help us expand access to investing insurance and retirement security for our customers and clients around the world. I'll provide an update on each of these areas before turning it over to Rob and Ken. Moving to Slide 3. At the beginning of April, we successfully completed the divestiture of our full service retirement business and the sale of a significant portion of our legacy variable annuities block. Together, these dispositions reduced the overall market sensitivity of our businesses by approximately 20%, while enabling us to further sharpen our focus on higher growth opportunities, including programmatic M&A and asset management and emerging markets. To that end, we agreed during the quarter to acquire a minority stake in Alexander Forbes, a leading provider of financial advice, retirement, investment and wealth management in South Africa. This deal provides access to essential financial tools and further expands our footprint in a strategically important market. We also continue to focus on enhancing customer experiences and creating solutions to drive sustainable growth across our businesses and to address the evolving needs of our customers. For example, FlexGuard continued to build momentum, and we are excited about its future and our broader suite of complementary annuity products, including FlexGuard Income. In Individual Life, we continue to expand our reach to a broader range of customers and further address the $12 trillion life insurance coverage gap with the introduction of a final expense product. And we are also making similar growth investments to further enhance customer experience and expand solutions across our international businesses. In Japan, we are focusing on evolving our product suite to meet the increasing retirement and inheritance needs of the aging Japan population. In Brazil, we are diversifying our customer offerings with the introduction of a new stand-alone accident and health product. And in China, we introduced Grow Partners, a digital sales platform that we are extending to distribution partners and directly to consumers, beginning with a medical cash benefit plan. Turning to Slide 4. We continue to make steady progress towards achieving our cost savings target of $750 million at the end of 2023, while improving customer experience. During the first quarter, we realized $170 million in cost savings for a total of $680 million of run rate savings to date since 2019. Turning now to Slide 5. Prudential's rock solid balance sheet provides significant financial flexibility to execute on our transformation strategy while returning substantial capital to shareholders. Our robust financial position includes: a high-quality, well-diversified investment portfolio; a capital position that supports a AA financial strength rating; and $3.6 billion in highly liquid assets at the end of the first quarter, as well as over $4 billion of additional proceeds from divestitures that we have already received in the second quarter. In addition to supporting our strategy for sustainable, profitable growth, we remain committed to returning $11 billion of capital to shareholders between 2021 and the end of 2023. As part of this program, we have increased our dividend by 4% in the first quarter of 2022, our 14th consecutive annual dividend increase. Before turning it over to Rob, I'd like to update you on a few of our recent ESG initiatives, which we consider integral to our purpose of solving the financial challenges of our changing world. First, relating to the war in Ukraine. In addition to providing financial assistance to humanitarian and non-profit organizations supporting people impacted by the war, we divested our modest level of Russian financial assets in our investment portfolio. Closer to home, we've adopted a hybrid working model that combines the benefits of in-person collaboration and remote work flexibility to support our employees and help us attract and retain talent. Our hybrid work model will enable us to reduce our total home office properties in the U.S. by approximately 50% over time as we invest in the redesign of 600,000 square feet of office space that will be optimized for collaborative and hybrid work, most of which was completed during the past two years. In addition to helping us achieve our cost savings targets, our real estate and hybrid work strategies are one of the several factors that will contribute to a 2050 net zero emissions target. Alongside these efforts, we are also finding new opportunities to support our home city in Newark, New Jersey, including new investments in local commerce, Live Workspaces for resident small business owners and additional opportunities to foster local home ownership. We look forward to continuing to support the city's revitalization. With that, I'll turn it over to Rob for more specific details on our business performance.
Rob Falzon, Vice Chairman
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 first quarter of 2022. Our pretax adjusted operating income was $1.6 billion or $3.17 per share on an after-tax basis and reflected a benefit from variable investment income, which exceeded the net mortality impact from COVID-19. PGIM, our global investment manager had higher asset management fees than the year ago quarter. However, these were more than offset by lower other related revenues as well as investments made to support business growth. Results of our U.S. businesses increased 12% from the year ago quarter and reflected higher net investment spread, including benefits from variable investment income and rising interest rates, more favorable underwriting, primarily due to declining COVID-19-related mortality experience and lower expenses, primarily driven by our cost savings initiatives, partially offset by lower fee income resulting from the runoff of our legacy variable annuities. Earnings in our international businesses decreased by 8%, reflecting lower net investment results, less favorable underwriting results and lower earnings from joint venture investments, partially offset by continued business growth. Turning to Slide 7. PGIM, our top 10 global investment manager has diversified capabilities in both public and private asset classes across fixed income, alternatives, real estate and equities. PGIM's long-term investment performance remains attractive with more than 84% of assets under management outperforming their benchmarks over the last 3-, 5- and 10-year periods. PGIM experienced third-party net outflows of $4.3 billion in the quarter as institutional net inflows, driven by fixed income and real estate, were more than offset by retail outflows, driven by mutual fund investors rebalancing out of fixed income due to rising rates and inflation expectations. As the investment engine of Prudential, the success and growth of PGIM and of our U.S. and international insurance and retirement businesses are mutually enhancing. 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 more value to our customers. And our insurance and retirement businesses, in turn, provide a source of growth for PGIM through affiliated flows and unique access to insurance liabilities that complement its successful third-party track record of growth. PGIM's asset management fees increased by 2% compared to the year ago quarter, reflecting positive third-party flows and a continued shift towards higher fee-yielding strategies, including the benefits from recent acquisitions over the past year, partially offset by the impact of rising rates. As rates rise in the near term, investor demand for some fixed income strategies could continue to moderate. However, over the longer term, a stabilized higher rate environment would be a positive for fixed income demand and PGIM's business. We continue to grow our alternatives in private credit business, which has assets under management of approximately $240 billion, across private credit, real estate equity and debt and private equity secondaries, and benefits from our global scale and market-leading capabilities. Notably, across PGIM's private platform, we deployed nearly $10 billion of capital, up 20% from the year ago quarter, reflecting the continued strong environment for both real estate and private credit. Now turning to Slide 8. Our U.S. businesses produced diversified earnings from fees, net investment spread and underwriting income and benefit from our complementary mix of longevity and mortality businesses. We continue to shift our business mix towards higher growth and less market-sensitive products and businesses to transform our capabilities and cost structure and to further expand our addressable markets. Our product pivots have worked well, as demonstrated by strong sales of recently launched simplified solutions. Our FlexGuard and FlexGuard income products represented $1.4 billion or over 90% of total individual annuity sales in the first quarter. We continue to exercise pricing discipline informed by changing market conditions and our sales benefit from having a strong and trusted brand and a highly effective distribution team. Our individual life sales also reflect our earlier product pivot strategy with variable life products representing approximately 70% of sales for the quarter. We also successfully completed the national rollout of our Individual Life Express terms product with a large national distributor and recently launched a final expense product continuing to expand our middle market presence. And we are focused on enhancing customer experience through digital tools, including automated underwriting, resulting in more than 90% utilization for eligible policies in the first quarter of 2022. Our retirement business has market-leading capabilities, which drove funded pension risk transfer sales of $700 million in the quarter. And our group insurance business reflected sales growth of 5% compared to the prior year quarter driven by an increase in supplemental health sales. 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 in high-growth emerging markets. In Japan, we are focused on providing high-quality service and expanding our geographic coverage and product offerings. Our needs-based approach and mortality protection focus continue to provide important value to our customers as we expand our product offerings to meet their evolving needs. We continue to enhance customer experience and agent support, including through digital tools. The value we provide customers was recently recognized by the 2022 J.D. Power life insurance customer satisfaction survey. Prudential of Japan was ranked number one in all three categories: contract; servicing; and claims. In emerging markets, we are focused on creating a carefully selected portfolio of businesses in regions where customer needs are growing, where there are compelling opportunities to build market-leading businesses and partnerships and where the Prudential enterprise can add value. In the first quarter, we continued to focus on expanding product and business capabilities in emerging markets to meet the evolving needs of our customers. We launched a new accident and health product in the large and growing Brazil market, and continue to expand our wellness platform across Latin America. In addition, as Charlie discussed earlier, we are pleased to expand our presence in Africa with the announcement to acquire a minority interest in Alexander Forbes through our existing partnership with leapfrog investments. As we look ahead, we're well positioned across our businesses to be a global leader in expanding access to investing, insurance and retirement security. We plan to continue to invest in growth businesses and markets, deliver industry-leading customer experiences and create the next generation of financial solutions to better serve the diverse needs of a broad range of customers. And with that, I'll hand it over to Ken.
Ken Tanji, CFO
Thanks, Rob. I'll begin on Slide 10, which provides insight into earnings for the second quarter of 2022 relative to our first quarter results. Pretax adjusted operating income in the first quarter was $1.6 billion, and resulted in earnings per share of $3.17 on an after-tax basis. To get a sense of how our second quarter results might develop, we suggest adjustments for the following items: first, variable investment income outperformed expectations in the first quarter by $275 million; next, we adjust underwriting experience by a net $165 million. This adjustment includes a placeholder for COVID-19 claims experienced in the second quarter of $40 million for our U.S. businesses based on 25,000 COVID-19-related fatalities in the U.S. and a placeholder of $25 million for our international businesses. While we have provided this placeholder for COVID-19-related claims experience, the actual impact will depend on a variety of factors such as infection and fatality rates, geographic and demographic mix and the effectiveness of vaccines; and last, we expect other items to be $95 million lower in the second quarter, primarily as a result of completing the sales of both our full service retirement business and a block of legacy variable annuities. These items combined get us to a baseline of $2.75 per share for the second quarter. I'll note that if you exclude items specific to the second quarter, earnings per share would be $2.91. A modest decline from recent quarters, primarily from the completed sales of businesses, and the proceeds from these sales will provide flexibility for future capital deployment. I would also note a few other items: first, due to the rise in interest rates, we no longer anticipate a reduction in net investment income from portfolio reinvestment. The benefit from a rising rate environment on our investment income compounds over time as we reinvest our portfolio. However, the reductions in assets under management and related income and our fee-based businesses occurs more immediately. In addition, as a result of our derisking actions, the sensitivity of our adjusted operating income to markets will be reduced by approximately 20% on an annual basis. We also expect to report a gain on the sale of the legacy variable annuity block and adjusted operating income in the second quarter. Impacts from the annual review of actuarial and economic assumptions will also be reported in the second quarter. In accordance with our established practice, we have a comprehensive process that will include, among other things, the review of long-term interest rates, inflation, COVID mortality experience and updated industry data that may impact our assumptions. And finally, as a result of new foreign tax credit regulations, we are expecting an effective tax rate in the range of 21% to 23% for 2022. While we have provided these items to consider, please note there may be other factors that affect earnings per share in the second quarter.
Operator, Operator
Our first question today is from Erik Bass from Autonomous Research. Your line is now live.
Erik Bass, Analyst
Can you provide some more color on the net flow drivers for PGIM in the quarter? And with interest rates continuing to move higher, can you talk about how this is affecting fixed income demand from both retail and institutional clients?
Andy Sullivan, Head of U.S. Businesses
Sure. Erik, it's Andy. As we've discussed in the past, PGIM flows are going to vary from quarter-to-quarter, and we're very focused and stay focused on our long-term track record. We're very proud of the fact that 18 of the last 19 years, we've had positive third-party flows. In the first quarter, we did experience $4.3 billion in net outflows. It was a challenging quarter for the fixed income U.S. mutual fund industry in general, and we were similarly affected. We saw $4.6 billion of retail outflows, almost entirely driven by retail investor repositioning out of fixed income. On the institutional side, we saw a positive $300 million driven by flows into public fixed income and real estate. We continue to think this is a good proof of our diversification. And on the institutional side, we see algorithms actually positioning into fixed income given the rising rate environment. As we step back, our long-term track record remains very strong. We saw $55 billion in flows between 2017 and 2021, with $27 billion of that being on the retail side. That being said, we do think it's fair to expect continued pressure on the retail fixed income industry as the rates and spreads continue to rise, but that's a near-term effect. As Rob said upfront, higher rates are good after the transitory period for the fixed income business. We're very confident in the fact that we have the right products, the right strategies, exceptional long-term investment performance and great distribution and will be a net winner over time. One thing I wanted to add today, when we talk about flows is more around the private business that Rob talked about given that those are higher fee rate businesses. We continue to benefit from a very strong market for real estate and private credit. We were able to put $9.6 billion to work in the first quarter across real estate at PGIM Private Capital raise another $1.8 billion. So, we are confident in PGIM and confident in a long-term track record.
Erik Bass, Analyst
I appreciate all the color there. And then, I was hoping that you could talk about the implications of the weaker yen for your Japan business in terms of earnings, capital and the demand for foreign currency-denominated products? And I realize that you're hedged for 2022, but can you just remind us what percentage of your earnings are in yen?
Ken Tanji, CFO
Yes, Erik, it's Ken. I'll begin by discussing the financial implications. You're correct that we have a well-established and effective hedging program. It's important to note that due to our success in the Japan market with U.S. dollar products, a significant portion of our reserves and the assets supporting those reserves are in U.S. dollars. Additionally, as a Japanese company, our expenses are primarily in yen. This results in our income from the Japan business being nearly entirely U.S. dollar denominated. Any income we do have in yen has been hedged over the last three years, and we also have a net equity capital hedge position. This long-standing hedging approach has demonstrated strong performance from both accounting and economic perspectives.
Erik Bass, Analyst
Got it. And for the product demand, you sell a lot of products in foreign countries.
Scott Sleyster, Head of International Businesses
Eric, this is Scott. Yes, it’s somewhat of a mixed situation. However, the increase in U.S. interest rates, which I believe is linked to the currency, is beneficial for demand, as Rob mentioned, and is overall favorable for Prudential. Additionally, Japanese investors seeking more attractive yielding products is a positive sign. In the short term, though, currency fluctuations can make purchases more expensive. We've noticed in the bank channel, where there is an intermediary, there might be slightly higher surrenders due to the rise in the dollar. Overall, we believe this is generally a positive development for us.
Operator, Operator
Our next question is coming from Tom Gallagher from Evercore. Your line is now live.
Tom Gallagher, Analyst
Ken, I have a question regarding the holdco cash and overall capital generation for the quarter. It seems like you issued $1 billion of junior debt, which contributes to cash inflow, and received $300 million from asset sales. Additionally, there are over $4 billion in transactions that closed after the quarter, totaling $1.3 billion. However, your holdco cash balance hasn't changed compared to the fourth quarter. I'm wondering how to interpret this. It appears there weren't many dividends during the quarter. Were there capital needs in the subsidiaries, or is this just a timing issue? Can you clarify the capital generation for the quarter and what we might expect moving forward?
Ken Tanji, CFO
Yes, we issued $1 billion of hybrid debt early in the quarter, before interest rates increased and spreads widened. We're pleased with that execution, as it's part of our strategy to prefund upcoming debt that is either maturing or set to be called. We have about $1 billion of hybrid debt that will be callable in September, which we've allocated for that purpose. Liquid assets at the holding company will vary due to timing, typically staying within our $3 billion to $5 billion target. However, in the first quarter, as is common for us, subsidiary dividends and cash flow were low, with expectations for higher amounts in the latter part of the year. This reflects timing rather than any significant changes. Additionally, we made a capital contribution to a new reinsurance subsidiary established in Bermuda during the first quarter. This will enable us to reinsure policies from PICA, our U.S. insurance company, to the new subsidiary, leading to enhanced economic reserving and greater capital efficiency over time. While this initial funding required some capital, we believe it will improve our balance sheet efficiency moving forward. Lastly, we received $4 billion from the sale of our full-service business and PALAC in April.
Tom Gallagher, Analyst
Got you. And just a follow-up there, Ken. Can you comment on the size of the new reinsurance vehicle that's, I guess, ranged on the captive that you referenced?
Ken Tanji, CFO
Yes. We initially capitalized it with $800 million. So that was the amount of initial capital that we put in. And although it's a requirement now, it's actually going to provide capital efficiency in the future. So you can think about that as a net positive to our capital efficiency over time.
Operator, Operator
Our next question comes from Suneet Kamath from Jefferies. Your line is now live.
Suneet Kamath, Analyst
Great. First question just on strategy. I guess, Charlie, we've been talking about this objective of improving the earnings contribution from growth businesses to, I guess, over 30%. And we're a year into the strategy and haven't really seen that move all that much, at least based on the way we're calculating it. So my question is, is the plan to still sort of get there over the next couple of years? And is it going to take something more than programmatic M&A in order to accomplish that?
Charlie Lowrey, CEO
Sure. We can't control the markets, but we view it as an issue with both the numerator and the denominator. We're continuing to make progress on both fronts through the four acquisitions we've made over the past year and the dispositions we recently completed. You can see that we've advanced with the four acquisitions and the two significant dispositions. We'll keep executing our strategy with a sense of urgency, and we are committed to making progress in both areas as we move forward.
Suneet Kamath, Analyst
And can you give us a sense on the timing of the use of the $4 billion of proceeds? Obviously, we could think about a couple of different buckets, right, M&A and/or capital return to shareholders. But now that these deals have closed, sort of over what time frame would you like to use that capital?
Charlie Lowrey, CEO
Yes. Sure. So as I hope you've seen, we are operating with a sense of urgency, right? Speed is important, but we don't have a specific time band per se. So, we're going to remain prudent stewards of capital, as we've said, and continue to evaluate programmatic acquisitions. But as we've also said and as we've done in the past, we'll return capital to shareholders if we can't find the appropriate opportunities over time. So, we're going to continue on our process. But as you've seen, we have returned capital to shareholders, and we'll continue to operate in that fashion.
Suneet Kamath, Analyst
Got it. If I could just sneak one more in for Ken or Rob. When we think about the individual annuity business, I think in the past, specifically thinking about the highest daily value product, I think the commentary you guys gave in the past is a rising interest rate environment, coupled with a falling equity market environment is generally not great for that business, which is the environment, obviously, we're sitting in today. So can you just talk about from a risk management perspective, how that business is holding up in this environment?
Ken Tanji, CFO
Yes, this is Ken. We are well-capitalized and have adequately reserved our business, and our hedging program is highly effective. It has successfully mitigated the impacts of both equity markets and interest rates, and this effectiveness continued throughout the quarter. So there are no changes in that regard.
Operator, Operator
Your next question today is coming from John Barnidge from Piper Sandler. Your line is now live.
John Barnidge, Analyst
Expense ratios in both group disability and group life insurance decline. I know that some of the source of the expense saves programs, but you're also building the service COVID claims. Can you maybe dimension some of the improvement in admin expenses there between those two?
Andy Sullivan, Head of U.S. Businesses
Sure, John. It's Andy. So our admin expense ratio for the quarter was 15.6%. That was almost a 4% improvement from Q4, but was basically flat from Q1 of last year. I would just keep in mind, fourth quarter was elevated by some one-time compensation expenses, so there's some seasonality effects going on. We are starting to see the beginnings of our core expense improvement of impacting our businesses. When I think about that, I would say the expense saves are more attributable to the overall expense work. The incidents and severity in the business remain elevated, even though they have started to come back towards normal, they remain elevated, and we maintain the higher level of staffing in both our claim and our call centers. So, we would expect that the admin ratio will stay elevated for the remainder of the year.
John Barnidge, Analyst
Great. And then my follow-up question. Can you talk about maybe how higher rates have changed the conversation around pension risk transfer activity with potential counterparties?
Andy Sullivan, Head of U.S. Businesses
So, John, it's Andy. Let me discuss the current quarter and then look ahead. As you know, this is a transaction-driven business, and the first quarter is typically light, which aligns with industry trends. We believe the first quarter revenue was about $5.3 billion. We were pleased, as Rob mentioned, that we completed two deals totaling $700 million. Looking forward for the rest of the year, we anticipate a strong performance, with the overall industry expected to reach around $40 billion. Notably, the funded status peaked at a record high of 102% in February. Coupled with rising rates and the current volatile environment, this strengthens sponsors' inclination to engage in transactions. Although the market is increasingly competitive, we are confident that by targeting the right opportunities and maintaining discipline, we will achieve growth over time.
Operator, Operator
Our next question is coming from Tracy Benguigui from Barclays. Your line is now live.
Tracy Benguigui, Analyst
I'm wondering if your intolerance of interest rate sensitive business changed at all considering the 10-year is nearly 3% may go up from here? Like are you thinking at all about increasing the portion of spread-based business going forward?
Rob Falzon, Vice Chairman
Tracy, it's Rob. Let me address that. First, regarding your point, yes, rising interest rates are beneficial. They help our industry and our company by enhancing our competitive value proposition for customers and positively affecting our portfolio yield. That said, we aim to maintain a mix of businesses and products that are less sensitive to market fluctuations across various cycles. Our focus is on balancing both shareholder and customer value propositions that can remain sustainable over time. If you're inquiring about how we perceive the influence of higher interest rates on the long-term reversion rate in our assumptions, it's clear that this impacts pricing and valuation. We typically update our assumptions in the second quarter, so there's not much specific we can share at this moment. But let me pass it to Ken, who can provide more general comments.
Ken Tanji, CFO
Thank you, Rob. We review long-term interest rates and our assumptions annually, considering various perspectives from economists, banks, and asset managers. We also analyze the forward curve, which has recently increased, and align our assumptions close to the median of that data. In addition to this, we take into account rising inflation in our reserve setting, both in the near term and for the long term. Our assumption updates will also address mortality and policyholder behavior, incorporating our own experiences and new industry data. Recently, we received an industry study indicating more adverse experiences related to some assumptions in our U.S. life insurance segment. We are assessing this information and its relevance to our business, including any potential impact on reserves or earnings. This work is currently ongoing and will be completed later this quarter, with details being part of our second quarter report.
Tracy Benguigui, Analyst
Okay. Great. I'm also wondering as unfavorable FX impacts change your view right now on increasing international business through M&A.
Scott Sleyster, Head of International Businesses
Tracy, this is Scott. I'll go ahead and take that one. I guess in the short answer, I'd say, not really. We're seeking to build out a well-diversified emerging markets portfolio of businesses. And we see local currency weakness as an opportunity to improve our U.S. dollar purchase economics, if you will. But that being said, we do factor in the potential for currency risk over time by using risk-adjusted discount rates in our valuation estimates when we think about these businesses. So I would say if you take a step back, we'd actually say, it's a net positive.
Tracy Benguigui, Analyst
Okay. Sorry, if I could just sneak one quick one, that mention of that reinsurance entity established in Bermuda for the type of business. I'm just wondering, is that reinsurance flow or the back book? Is that being reinsured?
Ken Tanji, CFO
Initially, we're going to use it for reinsuring some of our existing business, but we are gaining experience in Bermuda and our ability to utilize it. We will be considering strategies for flow in the future.
Operator, Operator
Your next question is coming from Alex Scott from Goldman Sachs. Your line is now live.
Alex Goldman, Analyst
I wanted to follow up on Suneet's question and your response regarding the business mix shift. Part of that involves the denominator, and I believe you are also referring to the decline of the annuities business over time, particularly the older segment. Now that the transaction is complete, could you provide a clearer understanding of how we should anticipate the earnings power to diminish or if any new product growth might balance that out?
Ken Tanji, CFO
Alex, it's Ken. Yes, we have stopped issuing traditional variable annuities, so that business is now in runoff mode. Following the sale of about 20% of our block of business with PALAC, the runoff will continue at approximately $3 billion each quarter, which translates to around $12 billion to $15 billion annually, equating to about an 8% decline each year. This, combined with the 20% from the PALAC business, will gradually align us with our goal of decreasing our income from traditional variable annuities. We are also considering additional strategies to achieve this.
Alex Goldman, Analyst
Got it. And then I had one more follow-up to the response on the impact of interest rates, particularly your comments on the actuarial review. The inflation impact that you mentioned, I assume that's probably long-term care and the reimbursement style policies. Could you help us think through the sensitivity to that? I mean, you've provided a lot of sensitivity around long-term care. And so, we have all of that around changes in discount rates and new money yields and so forth. But the inflation one, I've struggled to put my finger on. So even if it's just relative to rates, which is the bigger factor, any kind of commentary you can provide to help us think through that would be useful.
Ken Tanji, CFO
Yes, Alex. Long-term care is likely where inflation is most relevant. We have incorporated inflation into our reserves, including short-term increases, but long-term inflation is where we see greater sensitivity. We have shared some of those sensitivities, and overall, we believe it is very manageable for us.
Operator, Operator
Your next question is coming from Elyse Greenspan from Wells Fargo. Your line is now live.
Elyse Greenspan, Analyst
My first question is on Assurance IQ. You guys took a goodwill impairment there in the fourth quarter. And I believe at the time, you mentioned that part of the rationale for that was the lower valuation of the public peers. I noticed you didn't take another charge this quarter, and the peers have rerated subsequently lower from a few months ago. Was that to contemplate it when you took the charge in the fourth quarter? Or any update you can give us there?
Ken Tanji, CFO
The charge we recorded in the fourth quarter was appropriate for the conditions at that time. We conducted another qualitative review of the value of our insurance goodwill and assurance, and determined that no additional impairment was necessary. That is the current situation.
Elyse Greenspan, Analyst
Okay. And then my second question, the group disability loss ratio was pretty strong in the quarter. Can we just get some more color there and just how you expect that to trend over the balance of the year?
Andy Sullivan, Head of U.S. Businesses
Yes. Elyse, it's Andy. We very much obviously like the improvement that we saw in the disability business this quarter. It was our best benefit ratio since 2018 at 73.4%. I would frame this as what we've seen in disability, it continues to behave as we would expect and what we have been preparing for. And you always need to split this into the two different impacts. The one impact on the absence and STD side, on that side, we do continue to see a very high level of COVID-related claims. That, in general, turns into the need for the elevated staffing and claim and call. And because those are fee-oriented businesses, it shows up in our more from an elevated admin ratio perspective. We're going to stay the course on that staffing because being there for our customers is critically important in job one. On the long-term disability side, as I mentioned earlier, we are beginning to see both incidents and severity trend back downward in the business. You'll recall the previous two quarters both of those were up about 10% in Q3 and Q4. But on top of that, our claims teams are also experiencing very good claims resolutions. And what we're hearing from our claims managers is the combination of very low unemployment at 3.8% and wage inflation accelerating, there's a strong desire for claimants to get back to the productive workforce. So, in all, we're very pleased with the claims team's performance, and we're obviously happy to see the beginnings of an improvement in the environment.
Operator, Operator
We reach end of our question-and-answer session. I'd like to turn the floor back over to Charlie for any further closing comments.
Charlie Lowrey, CEO
All right. Thank you very much, and thank you all for joining us today. We continue to make significant progress on repositioning our business mix and advancing our cost savings program to transform Prudential into a higher growth, less market-sensitive and more nimble company. We're confident this strategy will help us deliver an even more meaningful difference in the lives of our customers and sustain value for our shareholders, while enabling us to fulfill our vision of becoming a global leader in expanding access to investing, insurance and retirement security. Thanks again for your time today.
Operator, Operator
Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation.