Prudential Financial, Inc. (NYSE:PRU) Q1 2020 Earnings Conference Call May 6, 2020 11:00 AM ET

Company Participants

Darin Arita - Investor Relations
Charlie Lowrey - Chairman & Chief Executive Officer
Rob Falzon - Vice Chairman
Ken Tanji - Chief Financial Officer
Andy Sullivan - Head of U.S. Businesses

Conference Call Participants

Erik Bass - Autonomous Research
Suneet Kamath - Citi
Tom Gallagher - Evercore ISI
Ryan Krueger - KBW
Alex Scott - Goldman Sachs
Nigel Dally - Morgan Stanley
Humphrey Lee - Dowling & Partners
John Barnidge - Piper Sandler
Elyse Greenspan - Wells Fargo

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Prudential’s Quarterly Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions being given at that time. [Operator Instructions] As a reminder, today’s conference is being recorded.

I would now like to turn the conference over to your host, Mr. Darin Arita. Please go ahead.

Darin Arita

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 the 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, which can be found on our website at investor.prudential.com. Also, due to circumstances created by the COVID-19 pandemic, we have decided to cancel our Tokyo Investor Day that was scheduled for September.

With that, I’ll hand it over to Charlie.

Charlie Lowrey

Thank you, Darin. Good morning, everyone, and thank you for joining us today. I would like to start this morning by recognizing the extraordinary circumstances created by the COVID-19 pandemic and by expressing our gratitude to all of those on the front lines who are fighting this crisis around the world.

For those individuals and their families directly affected by the pandemic and particularly those who have lost loved ones, we extend our deepest sympathies. At Prudential, we're guided by our purpose: to make lives better by solving the financial challenges of our changing world and that includes being there for our employees, our customers and our communities, especially in times like these.

We are completely focused on ensuring that we take the right course of action for the business, mitigating the impact of COVID-19, while investing for the future in order to emerge from this crisis stronger from this crisis stronger than before. The strength of our balance sheet enables us to manage our business for the long-term growth, while dealing with short-term business realities.

Before we get into the first quarter performance, I'll cover some of the key steps we have taken as a company to support our employees, customers and communities in response to COVID-19.

First, turning to slide 3. Ensuring the health and well-being of our employees and their families is our top priority. As the pandemic emerged, we initiated new policies and actions to ensure their safety and security, including additional family care support. This included implementing a wide-scale remote work environment, with approximately 98% of our employees and most of our international employees not working remotely. I’m pleased to report that all our businesses and operational functions continue to run smoothly.

Prioritizing the well-being of our employees enables us to address the evolving health and financial needs of our customers as the pandemic and its economic impact reverberate more broadly. We've also provided customers with assistance, such as premium deferrals and fee waivers as well as enhanced digital tools. I'm also incredibly proud of the work our employees have done to support our local communities, including in Newark, El Paso, Hartford and multiple international locations. These efforts include the donation of more than 150,000 face masks, including 75,000 N95 respirators for health care workers in New Jersey.

In addition, the American Nurses Association and Prudential recently entered into an agreement for Prudential to sponsor ANA events and outreach initiatives in 2020. This agreement will include offering Prudential's financial wellness services and solutions to ANA members and the broader nursing community. We're pleased to be of assistance to those serving on the front lines of this pandemic.

Turning to our financial strength. On Slide 4, our rock-solid balance sheet provides the foundation for our employees to serve our customers and our communities. We're confident in our ability to successfully manage in this environment in large part due to the robust, operational and financial risk framework that we put into place after the Great Recession of 2008.

This framework prepared us with a playbook to address multiple stress scenarios, including pandemics and economic conditions that are more severe than what we are currently experiencing. In addition, we benefit from our recurring revenue model and mix of complementary businesses, which offset risk and produce capital benefits, giving us confidence about Prudential to navigate the current environment.

We began 2020 with a strong capital and liquidity position, and our capital ended the quarter exceeding AA financial strength levels. As the pandemic unfolded and in light of uncertainty in the in the global markets, we executed our playbook. We successfully issued $1.5 billion of senior debt in early March, while spreads were still attractive. This included a $500 million green bond issuance, the first of its kind for a U.S. company in our sector.

These actions pre-funded our opportunities through the end of 2021 and enhance the liquidity of our businesses. As part of the playbook, we further enhanced liquidity of our businesses and also paused share repurchases at the end of the first quarter to see how the economic environment develops.

During the quarter, our variable annuity hedging performed extremely well with a 99% effective rate. Our approach to hedging the economic risk resulted in significant gains on our equity market and interest rate hedges to offset the increased liability. We feel comfortable about our ability to manage equity market fluctuations and continued low interest rates over time.

We're also highly confident about the quality of our investment portfolio, which Rob will cover in more detail shortly. The strength of our financial position means our dividends to shareholders remain well covered by our income and free cash flow.

Turning to Slide 5. We are on track to accomplish our strategic initiatives for the year and, in fact, are accelerating their execution in some cases. First, we are repricing our products more quickly and pivoting towards lower risk and less capital-intensive products.

Second, with respect to rotating our international earnings mix to higher-growth markets, in April, we reached an agreement to sell our Prudential of Korea business. We also continue to pursue strategic alternatives for our Taiwan business.

Finally, we continue to make progress on achieving our goal of $500 million in cost savings, $140 million of which should be achieved this year. We realized $30 million in the first quarter through actions we completed before the start of 2020.

Turning to slide 6. While it seems like a light time ago, I'd like to spend a moment on our first quarter performance. We reported pre-tax adjusted operating income of $1.2 billion or $2.32 per share. The GAAP net loss was $0.70 per share, driven largely by non-economic factors.

Our U.S. and international business earned lower variable investment income in the quarter. We also generated lower underwriting income in our U.S. businesses. Higher asset management fees at PGIM were offset by lower other related revenues.

While the severity and duration of the pandemic and related economic impact remains unknown, we are confident about the strength of our company. Prudential has survived pandemics, wars, recessions and the depression, among other events in its 145-year history. We are resilient, we are strong and we will continue to move forward to deliver sustainable value for all our stakeholders.

With that, I'll turn it over to Rob for a detailed look at our business performance for the quarter.

Rob Falzon

Thank you, Charlie. As Charlie indicated, the results from our businesses in the first quarter were negatively impacted by two significant factors that we had not anticipated: adverse mortality and the impact of the pandemic, particularly on equity markets, interest rates and credit spreads.

Adverse market conditions resulted in $150 million of lower variable investment income in our U.S. and international businesses and also reduced other related revenues in PGIM by $55 million, and the Chilean and Kaha earnings in our international business by $30 million. Overall mortality was $60 million above our seasonal expectation.

We are continuing to work toward improving the profitability of our individual life business. We have strong life insurance, marketing and distribution capabilities, which we've expanded with the acquisition of Assurance IQ. In aggregate, these factors reduced first quarter's adjusted operating income by about $295 million or $0.58 a share.

Lower interest rates and equity markets also challenged fundamentals across our businesses, and we are actively executing pricing and product actions to shift our business mix to less market-sensitive customer solutions.

With that in mind, I'll turn now to providing more color on how we are executing on our strategy within our U.S., PGIM and international businesses as well as on the outlook for these businesses considering current market conditions. I will also provide an overview of our investment portfolio, given the increased focus on the risks associated with the potential near-term credit cycle.

Turning to slide 7. Our U.S. businesses consist of the workplace solutions, individual solutions and Assurance IQ division that produce a diversified source of earnings from fees, investment spread and underwriting income.

Our U.S. businesses continue to execute on three key priorities. First and foremost, the financial strength of these businesses, which continues to be solid despite the impacts of COVID-19 and the broader economic conditions. Continue to take product actions, including steps to diversify our mix of business and maintain profitability.

Second, as the needs of our customers rapidly evolve, including in response to COVID-19 and its economic impact, we are leveraging our ongoing technology transformation and digital capabilities to enhance customer engagement. For example, within a matter of days in March, we introduced our fast track automated underwriting process for COVID-19 related claims with expanded e-capabilities for proof of death.

Just weekend, we introduced new mobile apps and chat bots to help manage a surge in customer calls and inquiries. And we have expanded the use of electronic signatures across our businesses.

We will continue to invest in transforming our capabilities by accelerating use of technology to deliver a better customer experience and enhance the speed at which we operate.

And third, we remain committed to expanding our addressable market. The pandemic has amplified the financial wellness challenges that many US households face. To support our clients in these challenging times, we continue to invest in and expand our range of capabilities to meet their needs.

For example, we completely transformed our flagship financial wellness offering pathways from an on-site to a virtual offering. In a matter of just weeks, we scheduled over 150 live web-based financial education seminars for our clients.

And we introduced a new solution to help customers managed debt in partnership with GreenPath. We're also shifting our focus to serving an expanded addressable market with lower risk and less market sensitive solutions to address the changing market conditions.

For example, in our individual annuities business, we're pivoting to less interest rate sensitive products, including accelerating to May of this year for launch of our FlexGuard indexed annuity.

In our individual life business, we're also making product and pricing changes that will result in the continued pivot to variable life and other less interest rate-sensitive products.

As a result of pricing actions, product pivots and the disruptions from COVID-19, we expect sales to continue to decline for individual annuities in the near term, and we also expect reduced sales for individual life.

In our retirement business, while the longevity reinsurance market remains active, we expect that current market conditions will impact the funding levels of pension plans and, therefore, result in lower pension risk transfer transactions.

Now turning to slide 8. PGIM is a top 10 global investment manager with $1.3 trillion of assets under management and continues to leverage its diversified multi-manager model to serve investors.

Our robust infrastructure and investments in technology have allowed employees to seamlessly transition to working from home. This operational flexibility has allowed us to support clients with portfolio information and insights and address their questions even as we work in a virtual environment.

While significant market fluctuations in the month of March affected our three-year performance, PGIM's long-term track record remains strong. 79% of assets under management have outperformed their benchmarks over the last five years and 94% over the last 10 years, and we have seen some recovery of performance and our short-term track record in April.

Despite clients temporarily rebalancing into cash, we generated $2.9 billion of net third party flows during the first quarter. This reflects the resiliency of PGIM's diversified platform across asset classes, regions and client segments.

Net flows included $4.2 billion of institutional inflows, partially offset by $1.3 billion of retail outflows. Fixed income experienced both retail and institutional inflows, and of note PGIM was the highest ranking US mutual fund franchise across active and passive asset managers based on net sales in the quarter.

PGIM's asset management fees were up 8% compared to the year ago quarter driven by growth in average assets under management and a stable fee rate. Other related revenues decline primarily due to the effect of mark-to-market losses from credit spread widening in the first quarter.

We expect near-term sales across the industry to be impacted by volatile public market conditions, reduced transaction volume in private asset classes and a slowdown in client activity. Despite this, we expect PGIM to emerge well-positioned vis-à-vis our competitors, driven by its diversified global platform.

Turning to slide 9. Our international businesses include our Japanese life insurance operation, where we have a differentiated multichannel distribution model as well as other operations focused on high-growth markets. Life planner sales decreased 5% compared to the year ago quarter, driven by lower corporate product sales following the Japan tax law change, partially offset by replacement U.S. dollar protection products.

Life planner headcount, however, reached a record level, increasing 5% compared to a year ago. Sales for Gibraltar were also 5% lower, primarily reflecting the continued trend of lower single-pay U.S. dollar fixed annuity sales in our life consultant and independent agency channels. In addition, as we continue to focus on quality distribution, the number of life consultants has declined.

In Chile, we are the leading pension provider via our joint venture with Habitat. We earn fees on assets and realized mark-to-market gains or losses on the capital that we are required to invest in the funds. Our investment performance has outperformed over time as well as in the fourth quarter -- in the first quarter. Returns in the quarter, however, were down across the industry, and that contributed to approximately $30 million of lower than expected operating income.

As we look to the second quarter, we expect international sales to decrease significantly, reflecting the effect of social distancing protocols that limit in-person engagement with customers across our distribution channels. This will also affect recruiting of new life planners and life consultants.

We're actively taking measures, including appropriate sales support to protect and care for our captive distribution during this difficult time. Over the longer term, we believe COVID-19 may result in heightened interest in Protection products, particularly the death protection products throughout the core of our needs-based selling approach.

With respect to the current interest rate environment, we have successfully managed through decades of low interest rates and other market challenges in Japan. As you've seen in the past, we adjust to meet the needs and preferences of our customers while also achieving our return expectation. We have already taken actions and will continue to do so as needed as we moved forward. Also, as Charlie stated, in April, we announced that we have entered into a definitive agreement to sell Prudential of Korea. This business represented less than 10% of international business sales.

Now turning to our investment portfolio on slide 10. We have a conservative, quality focused approach to our investment portfolio, construction and management reflects our robust asset liability management practices, commitment to broad diversification and a disciplined interest rate risk management framework. We also leverage PGIM's expertise across multiple asset classes, including its deep and long-standing experience in private placements and real estate.

With respect to our investment portfolio, here are a few key points. We have a high allocation to government securities, which is primarily comprised of U.S. treasuries and Japanese government bonds. About half of our BBB and below rated corporate securities are private placements with financial covenants and structural protections that have consistently resulted in lower losses than comparable public securities. In past cycles, the loss experience of our BBB private placements has been comparable to A public credits or about half the losses of similarly rated BBB public credits.

Our commercial mortgage loans are well-protected with a loan-to-value on the entire portfolio of 56% and debt service coverages in excess of 2.4 times. We are overweight in more defensive sectors, such as industrial and multifamily and underweight in both office and retail. We also have a low exposure in our investment portfolio to currently more vulnerable sectors like energy, retail and other at-risk corporates. Quality of our portfolio as demonstrated by its performance during the financial crisis in 2008 and 2009, where our credit loss experience compared favorably to peers. Since then, we have decreased our exposure to structured securities and BBB corporates and increased our holdings of government bonds and single A and above rated corporates.

From 2008 through the first quarter of 2020, we our annual fixed maturity credit losses averaged just 13 basis points of our portfolio. Slide 23 in the appendix provides more detail on our investment portfolio to exposures currently in focus. While we expect credit losses to emerge, the main takeaway is that we feel comfortable that our exposure is quite manageable and that we are well capitalized to absorb such losses.

Turning to slide 11, to help you assess potential credit losses on our investment portfolio over a three- year recession cycle, we provide a framework using publicly available rating agency and other third-party data for the underlying assumptions. This framework provides potential impairments defaults and ratings migration. The output suggests impact to PICA's RBC ratio and the solvency margin ratios in Japan would be very manageable and consistent with our expectations.

Credit losses on an after-tax basis would total approximately $2.4 billion over a 3- year period. To put that into perspective, that will be less than 1 year of our free cash flow. Also, if we used experiences from the prior recession in 2008 as the underlying assumptions for this framework, the after-tax credit losses will be much smaller at about $1.6 billion.

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

Ken Tanji

Thanks, Rob. I will begin on slide 12, which provides insight into earnings for the second quarter of 2020 relative to our first quarter results. We began with pretax adjusted operating income in the first quarter, which was $1.2 billion and resulted in earnings per share of $2.32 on an after-tax basis. Then we adjust for the following items:

First, we expect variable investment income in the second quarter to be $150 million lower than in the first quarter. This is primarily driven by lower returns from private equity investments resulting from the decline in values in the first quarter, reported on a one quarter lag in the second quarter. Second, next, in the second quarter, we will have lower seasonal expenses, partially offset by higher implementation costs, which will result in a net benefit of $50 million. Third, there are other items that combined may be $45 million more favorable in the second quarter relative to the first quarter. This includes the normalization of PGIM's other related revenues in our Chilean joint venture income, which were lower in the first quarter due to the mark-to-market of assets for equity markets and credit spreads.

This normalization is partially offset by classifying our Prudential Korea business as a divested business. Fourth, we expect fees to be lower on a run rate basis in the second quarter. This reflects account values starting the second quarter at a lower point than the average level in the first quarter. Next, we included a placeholder for potential COVID-19 related claims and expenses totaling $250 million. I will provide additional details of these items on the next slide. And last, we anticipate net investment income will be reduced by $15 million, reflecting the difference between new money rates and disposition yields on our investment portfolio.

These items combined get us to a baseline of $792 million of operating earnings and $1.53 per share for the second quarter.

Please note that this baseline includes items specific to the second quarter that reduced EPS by approximately $1.22 per share. While we have provided these items to consider, there may be other factors that affect earnings per share in the second quarter of 2020.

Given the extraordinary circumstances created by COVID-19, on slide 13, we provide estimates for the potential operating earnings impact directly associated with the pandemic in 2020. As part of our risk management process, we model many potential stress scenarios, including a pandemic scenario. We have substantial reserves and highly liquid assets to ensure we are well positioned to readily satisfy all policyholder claims and continue to be well capitalized.

We also benefit from the diversification of our businesses, and specifically, the complementary nature of our retirement longevity business in our mortality businesses. Although, the extent and duration of the COVID-19 pandemic remains uncertain, we thought it would be helpful to provide estimates for the potential impact on net mortality and costs in 2020. The estimate for the impact on net mortality assumes 100,000 deaths across the total U.S. population and 40,000 deaths across the total population in Japan.

After considering the profile of our insured policyholders, we estimate the impact on earnings from net mortality may be approximately $200 million in 2020. Also, assuming the spread of COVID-19 is substantially contained in the second quarter, we estimate approximately $135 million of earnings impact may occur in the second quarter with possibly lower impact in the second half of the year.

Also, as we continue to support our employees and families during this difficult time, we expect to incur additional costs, primarily related to sales support, employee health protection, technology and other expenses. In 2020, we estimate these costs will be approximately $230 million with $115 million of these costs in the second quarter.

Turning to slide 14. We continue to maintain a robust capital position and adequate sources of funding. Our capital position exceeds our AA financial strength target and we maintain liquid assets at the parent company that are greater than three times annual fixed charges.

Our financial leverage ratio is at our target and our regulatory capital levels at our insurance companies remain higher than the targets. In addition, we have substantial sources of funding, our cash and liquid assets at the parent company were $5.3 billion at the end of the quarter. As previously highlighted, we expect to receive net proceeds from -- of approximately $1.7 billion from the sale of Prudential of Korea business following the close of the transaction, which is expected in the second half of 2020. And another source of funding is free cash flow from our businesses, which represents approximately 65% of earnings over time.

In addition, we have readily available off-balance sheet resources. This includes a $4 billion credit facility with 23 banks and a syndicate structure across the U.S., Europe and Asia. We also have access to $1.5 billion of funding from a contingent capital facility with the right to issue debt in exchange for U.S. treasury securities held by a trust. And we have a bank -- Japan Bank facility with ¥100 billion available to Prudential Holdings of Japan.

Turning to slide 15, and in summary, we are committed to fulfilling our purpose to make lives better by solving the financial challenges of our changing world. We maintain a rock-solid balance sheet with a robust capital and liquidity position, and we remain on track with our objectives for the year as we accelerate the execution of our initiatives.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Looks like our first question comes from the line of Erik Bass of Autonomous Research. Your line is open.

Erik Bass

Hi. Thank you. First, can you provide a bit more color on how you're coming up with your estimated COVID impacts and how you're thinking about the interplay between mortality and longevity exposures. And then also just to clarify on the expenses. Is that just related to COVID, or is that a net impact factoring in other things such as lower T&E expense?

Ken Tanji

Yes, hi, Eric, it's Ken. I'll take your questions. On the COVID estimates. First, I want like to recognize that these are placeholders. These are based on an estimate of 100,000 deaths in the U.S. and 40,000 deaths in Japan. Now we'll have to see how things play out. And there's likely a range of outcomes around that for the U.S. and Japan. So I just want to recognize that we've done our best to give a placeholder, but it's predicated on a number of assumptions.

What we do then is we then make considerations for lower fatality rates for the insured populations versus a general population. We certainly have taken certainly have taken in consideration higher fatality rates for the older population and then we took into consideration the geography of our insured population with –tend to have a little bit higher concentration in New Jersey and New York, California and Washington.

So when we put that all together, we've applied those to our average profile and provided those estimates. And again, we'll likely have a good range around some of those assumptions.

In terms of our retirement business, it does provide an offset to some of our life insurance as we've expected and designed. It offsets about 30% of our exposure, and that's just kind of how the modeling plays out.

And then your second question was around the expenses. We've – we looked at the steps that we need to take in order to care for our employees for crisis care as well as compensation for sales professionals, particularly in international locations, if our sales were to decline.

And we've estimated that is the appropriate thing to do given the situation. We will – we haven't included in that estimate, potential offsets for the fact that travel and conferences and entertainment will be lower. We would expect if things return at some point to normal that some of that might come back you know sort of rebound. But I would estimate that we are going to have savings here in the next quarter or so that you can think of that in the tens of millions, but that's not included in the estimate.

Operator

[Operator Instructions] Next, we have the line of Suneet Kamath of Citi. Your line is open.

Suneet Kamath

Thanks. I wanted to go to long-term care. Earlier this week, one of your competitors announced a regulatory review of long-term care reserves resulted in a pretty sizable increase to stat reserves. So just curious if any of your regulators are contemplating or conducting similar reviews and maybe over what time frame would we expect any resolution, if there are such reviews in place? Thanks.

Ken Tanji

Yeah. Hi, this is Ken, Suneet. Just an ordinary course, we review our reserves with our regulators. And they have not indicated any concern about our level of reserves related to long-term care, and there's no special review underway.

Operator

Next in queue, we have the line of Tom Gallagher of Evercore ISI. Your line is open.

Tom Gallagher

Good morning. The $2 billion of debt that PRU issued in 1Q is, I think being counted as operating debt. So just curious why that's counted as operating debt, I think which is excluded from the leverage calculation and what your plan is with those proceeds? And then let's see the other question I had is just on the GAAP breakage you had on the variable annuity side this quarter? Was there also a similar statutory level of breakage. I realize it's uneconomic based on the accounting differences between the assets and the liabilities. But just curious, if you had a similar impact on statutory? Thanks.

Charlie Lowrey

Yes. Hey, Tom, it's -- I'll take those. On the $2 billion of debt included the $1.5 billion that we issued at the holdco. You can think of that as we would ordinarily have issued, say, $500 million earlier in the year and $500 million towards the end of the year. But we decided to do $1.5 billion in March. We were worried about how the conditions were developing and thought it would be prudent to do $1.5 billion, which essentially will take care of any maturities in 2020 and 2021. So it's about $1 billion more than we would ordinarily have done perhaps, but we thought it was an appropriate thing to do.

In terms of why we call it operating debt, right now, those proceeds sit at the holding company in cash. And we follow sort of the way that our rating agencies think about classifications of debt. So -- and the planned proceeds, again, we have it available at the holding company. And it would -- it's used -- it's available for paying off the debt again for this year and next year. In terms of the non-AOI item for the quarter, our variable annuity business is very well hedged. And we like to align our outcomes for GAAP us in stat economics. And as Charlie mentioned in his comments, it was highly effective at 99%. The way we hedge interest risk, again, which was highly effective in the quarter, is with both derivatives that mark-to-market and recorded in the P&L, but also by holding a 30-year U.S. treasuries, which had a $1.7 billion gain and would have offset the non-AOI item in the quarter. But the gain on the U.S. treasuries is recorded to OCI and not to the income statement. So economically, and from a stat standpoint, we were very well aligned just with a little bit of difference between where our gain is recorded for GAAP.

Operator

[Operator Instructions] Next, we’ll go to the line of Ryan Krueger of KBW. Your line is open.

Ryan Krueger

Hi. Thanks. Good morning. Can you help us think about – I guess interest rate sensitivity within the balance sheet, both GAAP and stat? I think previously, you provided sensitivity for 10-year rates in the 2% to 2.5% range. But given where they are today was hoping for some additional sensitivity.

Charles Lowrey

Sure. Yeah. Maybe I'll start with stat, Ryan. And the – we have had sensitivity to our stat financials, primarily around asset adequate testing. Last year, given the decline in rates, we increased our asset adequacy testing reserve by about $0.5 billion. Now we had derivatives that offset that, so we were with a gain. So we were – had a stable RBC outcome. But it's also important to know that sort of at this level of very low interest rates, that the way the testing works is the – when rates are so low, the shock is much lower. So we'll have less sensitivity to lower rates from this point forward.

From a GAAP standpoint, our sensitivity really hasn't changed. And as you know, we have a process – I'll remind people that we have a process where we look at our long-term rate assumption and that includes doing a survey of economist banks and other managers. And we also look at the implied forward curve, and we look to be at the median of all that. And that's the process that we're going through.

I'd also note that, the way our interest rate assumptions work for GAAP is we start at current rates and we grade to a long-term assumption over 10 years. So as a result, our – the 10-year treasury under the next seven years is less than 3%. So we're going through our process as we typically would and that will be finalized by our risk management committees in late June. So no change in our – significant change in our GAAP sensitivity, and we'll be doing our usual process in the second quarter.

Ryan Krueger

Thank you.

Operator

And next in queue, we have the line of Alex Scott of Goldman Sachs. Your line is open.

Alex Scott

Hi. Thanks for taking the question. First one, I have is just a follow-up on the stat rate sensitivity comments that you made. I just want to make sure I interpreted it correctly. I guess, as you go through your actuarial review and if the ultimate rate is set lower, does that reduce sensitivity sort of apply now? Like would we -- if it is sort of the 3% to 4% book value type impact on GAAP, would that not necessarily all translate to statutory?

Charlie Lowrey

Again, the way asset adequacy testing works is we don't set a long-term rate. Those are prescribed by GAAP. And we're going through our -- and so it's a little bit of a different framework. And we'll also -- so we're working through that.

Operator

[Operator Instructions] Next in queue, we have the line of Nigel Dally of Morgan Stanley. Your line is open.

Nigel Dally

Great. Thank you. So, I had a question on the -- on buybacks. You spend a fair bit of time running through the strength of your current capital position? And also what appears to be quite a manageable stress scenario. Clearly a number of moving factors, but what are you looking for? What are sort of like some of the things that you're looking for to be comfortable in resuming buybacks?

Should we assume that buybacks suspended through the end of the year, or potentially, could it be somewhat sooner than that? Any color there as to kind of how you're looking at that?

Charlie Lowrey

Yes. The -- I think the primary thing we're looking at is the economic cycle. And we're seeing substantial impact given the situation that we're in. We like the quality of our investment portfolio, and we think it's manageable, but we want to see how this credit cycle emerges. So, I don't know if I can put a timeframe on that. I think time will tell.

Operator

Next in queue, we have the line of Humphrey Lee of Dowling & Partners. Your line is open.

Humphrey Lee

Good morning and thank you for taking my questions. My first question is related to Assurance IQ. The losses for the quarter looks a little bit larger than expected, like how should we think about those losses would trend? Should we expect for the next couple of quarters will be kind of in that $30 million range before seeing a recovery in the fourth quarter when activity started to pick up due to enrollment period?

Andy Sullivan

Yes, Humphrey, good morning it's Andy. And thanks for your question, and I'll give kind of a little bit of a break here. So, on Assurance IQ, I would characterize the results for quarter one as modestly worse than what we expected.

We have started to lean in from an investment perspective to building out the platform more broadly. And to bringing new product solutions onto the platform as we think the first-mover advantage is very, very important.

As we talked about last quarter as well, we learned some lessons from a Medicare Advantage perspective and we are investing ahead of Q4 to make sure that we have the right number of agents and that they are fully and properly trained and we're ready to ready to go in the fourth quarter. So, I think you could think about performance similar in the next couple of quarters. And obviously, the large opportunity is in Medicare Advantage in Q4.

Humphrey Lee

Got it.

Operator

[Operator Instructions] Next, we have the line of John Barnidge of Piper Sandler. Your line is open.

John Barnidge

Great. Thanks. If we were to assume the disease, a seasonal nature and returns at the very lease in 1Q 2021, could you help me dimension how many of these non-mortality and morbidity CV-19 cost would remain on a go-forward basis?

Charlie Lowrey

Yeah. I don't think we want to try to forecast that far, which -- given the situation. Eventually, I think we will operate differently given the changes in environment and the way we're going to have to conduct business, but that's a bit out there. So I don’t think we want to start to look through that far at the moment.

John Barnidge

Okay. And then could you maybe provide average age on the products where you have some CV-19 exposure, please?

Andy Sullivan

Yeah. So -- this is Andy. So, obviously, two predominant areas there are, really are individual life business and our group life business, and then obviously offsets in the longevity business that we have in retirement. So actually, an individual life and in group insurance, average age across the whole book is relatively similar in the -- about 55. And in group insurance, in particular, though, 95% of that business is under the age of 65. As far as of the longevity risk transfer business and the pension risk transfer business our average age is in 74 to 75 range.

John Barnidge

Thank you.

Operator

And next in queue is Elyse Greenspan from Wells Fargo. Your line is open.

Elyse Greenspan

Hi, thanks. My first question is on the group business. Can you just discuss your outlook for the margins within that business for the rest of the year, just given that I think COVID-19 could impact some of those businesses, or do you think that we might not see an impact there maybe until 2021?

Andy Sullivan

Yeah. Elyse, this is Andy. So I'll take that question, and there are a number of impacts. So maybe I'll start more on the claim side of things. And we do expect, and it was in the estimates that Ken walked through. That we will see increased mortality in the book of business. Obviously, in the group business, as I just referenced, that's somewhat mitigated by the average age. But we do think that, that will go up.

We also believe and have seen evidence that we'll see an uptick in short-term disability incidents. So that will serve to compress margins throughout this year. We see a couple of other impacts I just mentioned from a sales and flows perspective. Most of our book of business is medium and large size employers. So actually, most of our sales for 2020 are already baked in that business. And any slowdown we're seeing is more of a 2021 impact.

I guess, the last thing I’d mention is a lot of the impacts that group insurance will feel, we actually are mitigated against from the perspective that we're not in the under 100 live segment business. So we don't have exposure to the small segment employers. And, obviously, here, early days, that's where a number of the impacts have been.

Elyse Greenspan

Okay, great. And then my second question, you guys, in your prepared remarks, went through shifting the business to less interest rate-sensitive products. How do we think about the capital that you have to put forth to write some of the new business where there’s less interest rate-sensitive versus some products that maybe required more capital, is there kind of capital arbitrage there some products that may be required more capital. Is there kind of a capital arbitrage there as you kind of shift your writings in this low interest rate environment?

Ken Tanji

Yes. I'll take that. The products that we are shifting towards do have less interest rate sensitivity, things like variable life things like we’re looking to release a structured variable annuity. And so, they will be less capital-intensive and less interest rate sensitive. I don't think there's anything more to the dynamic than that.

Andy Sullivan

And this is Andy. Maybe I'll just add some color commentary. So, in the individual life business, as Ken referenced, we've been shifting towards variable life. We're very pleased in Q1 that our sales were $187 million which was up 15% -- Q1 of last year and 50% of those sales were variable life. We've also in April launched a product that is much less sensitive to interest rates and equity markets tuned to the RIA channel. And our buffered annuity, we're very excited about that launch. That has become a robust market. And 60% of the volumes in that marketplace are going through independent broker-dealers, and we have very, very strong relationships there. So, we think to be very promising for us.

Operator

Next in queue, we have a follow-up from the line of Suneet Kamath of Citi. Your line is open.

Suneet Kamath

Yes, thanks for the follow-up. On the Individual Life business, in the past, you guys have talked about using reinsurance to either dampen down the earnings volatility or actually free capital. So, I want to get an update on that? And is that strategy still effective or still possible given all the uncertainty around COVID-19?

Andy Sullivan

Yes Suneet, its Andy. And maybe I'll take that question up a level first. As we talked about last quarter, we are leaned into performing the overall -- to improving the overall performance of that book of business in that business. We’ve three levers. First, we are very much leaned into improving the expense profile of the business. A lot of our future of work, energy and effort is aimed in that regard. And we actually saw a reduction year-over-year in our expenses on business. So, we like the progress we're seeing there.

The second lever is leaning into and growing the business with profitable business that we're putting on the books. And as I mentioned, our sales are up year-over-year. And we are comfortable with the pricing and the profitability of the business that we’re selling. As far as the third lever and it’s the lever that you referenced, it really is looking at the ability to reinsure the block of business. We continue to explore solutions. Obviously, we’re looking very carefully about what is the right economic favorability for us and if and when we take action on that, we will report out on it, but nothing to report as we sit here today.

Suneet Kamath

I just have one quick follow-up for Ken, I guess, a follow-up to Elyse's question on capital. You cited in your prepared remarks pretty significant declines in sales, both in the U.S. as well as Japan. So, any sense of how much capital or lower strain could you guys experience relative to a normal year based on that sales decline?

Ken Tanji

Yes. So all things being equal, we would have less -- if we're selling -- when we sell business, we capitalize it well. And if we're selling less that means it's requiring less capital to support it. And so, we would expect all other things being equal that would be the case. I think it's too hard to quantify that right now

Ken Tanji>

We'll see how our sales plays out. If we have if we have opportunities to make sales in attractive business, we'll do that. If the conditions are such that either the returns aren't attractive or it's too difficult to conduct business that would lower sales and we would see some capital offset for that. So I just don't -- I think it's a little tricky to put a number on that right now.

Suneet Kamath

Got it. Thanks.

Operator

[Operator Instructions] We do have a follow-up from the line of Alex Scott of Goldman Sachs. Your line is open.

Alex Scott

Hi. Thanks for taking the call. I just wanted to see if you could provide an update on the mortgage loan book. And I guess, specifically the commercial mortgage loans, would be interested if you can operate anything up around like how much of it you've got forbearance requests on and what you'd expect there?

Rob Falzon

Alex, it's Rob. Let me handle that one. We haven't received forbearance request. The vast majority of that, as you would expect is coming from the hotel and mall tenants having said that to date through April in any event, we've actually granted forbearance on a little less than 3% of the portfolio. And that by and large almost entirely has been just with respect to principal amortization, the loans continue to remain current with regard to interest payments. We do expect that that will build over time to some greater amount, but having said that, we're actually quite comfortable. If you look at the loan-to-value that we have across the mortgage portfolio, it's at 56% and based on our internal appraisals. What we find is if we actually use external appraisals that drops to around 46%.

So being in a position to be able to provide forbearance on principle, we don't think actually puts at risk our ability to be repaid on those loans given the relatively low amount of leverage that we have on our property, and combined with the fact that our mortgage portfolio is very concentrated in higher quality well located properties. So we're feeling quite good about the status of the mortgage portfolio, and we expect it to be resilient through this crisis as it has been in fact through all prior of our recessions. If you look at the 2008 recession and you sort of take that and you roll that forward, we've had sort of a 1 basis point loss ratio on our mortgages from that period until now. So we actually feel pretty good about the way in which we've underwritten it, and we feel very good about the way we're positioned going forward.

A – Andy Sullivan

Alex, it's Andy. I was just going to add a point from our third-party managed fund business, very similar trends. We've to date seen low single-digit levels of forbearance. And clearly, that will rise over time, but very similar trends to what Rob covered.

Operator

[Operator Instructions] Next, we do have a follow-up from Humphrey Lee with Dowling & Partners. Your line is open.

Humphrey Lee

Thank you for taking my follow-up. Looking at PGIM, so other related revenue has always been a source of variability for that segment. I think this quarter, you had some spread related kind of issue hurting some of the private credit. But looking forward, like some of the strategies that you have in PGIM, whether it's real estate or private credit or some of the specialty products, they're likely to see lower activities, so how should we think about the other related revenue will trend for the balance of the year?

A – Andy Sullivan

Yes. So Humphrey, it's Andy. So you're correct. In first quarter, the predominant impact in other related revenue was from our strategic investing portfolio. That's where we have our seed strategies as well as where we co-invest alongside of our clients. The predominant impact was in -- from credit spread widening on the fixed income portion of that portfolio. In general, if you look back, we tend to have somewhere in the neighborhood of $50 million to $60 million coming from our ORR. We do think it is reasonable as you kind of look forward over the next couple of quarters Obviously, we think flows will be lumpier in general, and we do believe that there will be some slowdown in client activity and then transactions. So there may be some near-term pressure on that. But over the long run, you could think of that in the $50 million to $60 million range.

Operator

With no further questions here in queue, I'll be happy to turn it back to Charlie Lowrey for any closing remarks.

Charlie Lowrey

Great. Thank you very much. We'd just like to say in closing that we'd like to take a moment to thank all our employees for the extraordinary steps they've taken to support our businesses, our customers and our communities. Together, we remain financially strong. We remain resilient, and we remain committed to fulfilling our purpose of solving financial challenges of our changing world, including doing our part to contribute to an inclusive global recovery. Thank you all for joining the call. Please stay safe, and we look forward to talking to you soon.

Operator

Ladies and gentlemen, that does conclude today's conference call. You may now disconnect.