Okay. We will get going here. First, let me just say thank you for being here. I have Yanela Frias, Chief Financial Officer of Prudential Financial.
Well, thank you for having me. Great to be here.
Of course. You have laid out a five-year plan in August, narrow the footprint to more than a dozen to about six geographies, rotate north of $3 billion of capital, take PGIM from 12% to 25%, and remove $750 million of costs by the end of 2028. There is a lot there. What are the components that are more tangible that you can focus on in the next year? How would you map that out first?
Yeah. Well, agree there is a lot there. I would say we are not starting from scratch, right? This is something that has been well underway. Obviously, we rolled it out very recently, but we have been working through it, developing the strategy, and beginning to execute for a while. Maybe just let me go through each of the components. When we think about the capital rotation, which will generate well north of $3 billion, we have been really executing that for a while now. We have announced a couple of the smaller emerging market transactions, Indonesia, Kenya, for example. There are a few other small ones that are very close to completion. Then, the larger ones, Mexico, Brazil, those processes are well underway, that we think through this year will play out over time.
From that capital rotation and the exiting of emerging markets, we feel really good about where we are and how we've been executing. Second is PGIM. We have a stated objective of doubling PGIM's contribution, making it 25% of PFI's AOI. Half of that is organic, with the other half being inorganic. That organic piece has very much been underway in terms of us investing in capabilities that will drive higher fee asset growth. Those investments are going quite well. Frankly, we've been executing them for a while, and they're starting to hit the J curve. They're really contributing to the earnings. That, plus the fact that the integration of the multi-asset model to one PGIM, we're almost a year into that, and that also has been delivering results, including expense and revenue synergies. That's PGIM.
Third is the $750 million expense saves and what we call optimization. That's another thing that's been well underway. If you remember, we put out a goal of $150 million in saves back at the end of last year through 2027. Those saves are coming along. We've been executing on that, and the $750 million is just sort of an expansion of that and of looking at us operating differently, and there's several levers that we're looking at that we can talk about. But that's a process that's been underway as well, and we're starting to see the benefits in the earnings coming through already. Then lastly, there's inorganic, which obviously is a little bit more out of our control. But the way we think about that is we're very active. We're constantly out there in the know, in the flow.
We're not waiting for auctions to come to us. We're engaged in the process. That's something that we will be driving and highly engaged in going forward and on an ongoing basis. The last thing I would say is, also very important for us is that continuous execution of the day-to-day business. We want to be excellent operators, excellent allocators of capital. That will show up every quarter, has been showing up every quarter, and that's a big part, especially in the near term, of how we intend to demonstrate progress towards this longer-term strategy.
Yep. I want to follow up on the M&A piece. I mean, my perception is you all have been a little louder in discussing M&A recently, and wanted to get a feel for the kinds of things you're interested in, and how do you approach return hurdles and, ultimately, over what time period does it need to be accretive to metrics like EPS?
Yeah. I think on M&A, we have been open about it, about the fact that it is part of the strategy, and we've opened the aperture a bit. Historically, when we spoke about M&A, it was constantly about PGIM, about smaller programmatic transactions that would enhance our capabilities, and we've done those, and they've gone well. Deerpath, for example, being one of them. We do think as we think about the longer-term strategy and the more ambitious goals that we have, that larger transactions will be more impactful. That's when we say open the aperture in terms of the size, but also in terms of the areas that we're focused. When we think about where we're focused, I will start with PGIM. That is an area of focus. Obviously, we will continue to look at the smaller single-asset capabilities because that will be helpful.
We've also expanded to look at platforms that have multi-asset that will bring in more capabilities within one transaction, which will result in revenue and expense synergies. That's an area that we've been focused on. Second is in Group Insurance. We believe that Group Insurance is a strong business for us, strong opportunity, capital-light business, where we have a very strong current position, brand distribution, and part of our goal is to grow those capital-light earnings, PGIM and Group Insurance. The strategy there has been to go down market and to diversify from a segment perspective, and there is inorganic opportunity there, an example being dental and vision as a capability we don't have today. Third would be around expanding our presence in U.K. retirement.
You've actually seen us already transact in terms of our partnership with Standard Life and CVC to expand and to participate in the U.K. BPA market. That also brings on board a significant client for PGIM in terms of managing the assets. I would highlight that transaction also, in terms of opening the aperture as to what types of transactions we do, how we leverage our capabilities, how we leverage our balance sheet. It doesn't all have to be an outright acquisition. That's one, I think, a creative way of entering and expanding our presence in U.K. retirement while not going out there, having an outright acquisition, acquiring a license in the U.K., which we don't have today. Those are the three areas of focus. I think we will continue to be very active.
We will be very disciplined in terms of the type of transaction and the economics, to your question. We'll be active, we'll be disciplined. It has to be the right transaction strategically. Culturally, it has to bring on the right capabilities. We have multiple levers of funding. We have the well north of $3 billion, but there are other levers that we do have. In terms of the dilution altering our capital deployment plans, there will be a very high bar for dilution. There will be a very high bar for us to alter our current capital deployment plans. Ultimately, the transaction has to add long-term value to the shareholder, and we will look at it in terms of what are the returns, what are the economics relative to other capital deployment plans and opportunities, including giving that capital back to shareholders.
It has to be additive and contribute to our objectives of top-quartile earnings growth, higher cash flow generation, and market-leading returns on equity.
Yep. Okay. I want to key in on the group business for a minute and just the strategy to go down market. Group Benefits has been, I would call it, a pretty fantastic business, heck, some of the COVID volatility over the last several years, so I totally get the interest there. I would say that some of the peers have had a tough time going down market. That is the one thing in Group Benefits I have not seen a big company really succeed at. So how do you approach that, and how do you sort of succeed where others have fallen down there?
Yeah. No, I think that is a great question. I think, look, our strategy there has been to diversify the product set and diversify our segment penetration and presence. I actually ran that business a couple of years prior to coming to this role, and when I got to Group Insurance, having been at Prudential for 27 years, I was positively shocked at the brand that we have in that space and the strong distribution that we have. So it was obvious that we had a huge opportunity to grow because we were highly concentrated in very large employer life and, to some extent, disability, but mostly life. So the strategy has always been about diversifying the product set, coming down market, and we have actually executed quite well doing that, right? So we view this as we have a larger opportunity.
We can grow beyond the growth of the market because we are so concentrated, yet we have this fantastic brand and this great distribution, and so we have been very successfully coming down market. Now, that is where the sort of inorganic and the investments come in because there are certain capabilities that we will need to acquire over time. You can go down market successfully. At some point, dental becomes something that you need to have, so we are highly focused on that. But we have great conviction in the business. It is a great business. High cash flow, low capital. We are well-positioned. We do need to execute in terms of enhancing those capabilities, but we are confident that we can do that over time.
Got it. I have one more M&A before I leave the topic, and then I will leave the topic. This is a little more of a harder-hitting one, I would say.
Okay, bring it on.
The last two proved larger-scale transactions that were done did not go particularly well. They faced some headwinds. Right now in Japan, you have some things that you are having to work through there as well right now. Why is right now the time to consider larger-scale M&A when there is It puts a lot of balls in the air?
Yeah, no, I think that is fair. What I would say there is that one of the key tenets of our strategy, and frankly, this new leadership team, is really around focus on businesses where we could be market leaders. We have a very strong belief that market leaders generally are rewarded with an outsized piece of the returns in a profit pool, right? We believe that we need to be market leaders in all our chosen businesses. The good news is that we are market leaders in a lot of them, but we are not in all. That is where the inorganic comes in some of these areas where we believe we have the right to win. Again, PGIM, Group Insurance being examples. They are the right businesses from a capital light perspective. We have great brands. We have great opportunities and capabilities.
To really grow substantially, we do need inorganic growth, and that's why we're leaning into it, because we think it is the right way to have a meaningful impact on the business and the strategy. We will be very focused and very disciplined. I've said that before. The other thing I would highlight, we believe we're an advantaged acquirer because we bring to bear a $500 billion balance sheet, which creates synergies beyond price. Especially when you look at an asset management acquisition, an insurance balance sheet that size really matters. Back to the point about we're being creative as to how we think about it, how we fund, how we structure. We're an advantage acquirer, we believe. Then I'll close back with the economics. We will be disciplined. We will be focused.
This is about the right transaction that makes sense, consistent with the strategy, not something outside of the strategy. It has to pencil out. It has to really contribute to top quartile earnings growth, cash flow generation, and market-leading returns on equity. The bar, again, is really high on dilution. To the extent we do something, it has to make sense, and we will clearly articulate why we believe it makes sense strategically and how the economics play out over time.
Got it. Next, I wanted to turn to the expense save initiative, $750 million. Could you help us think through how much of that we should expect to sort of hit the bottom line more mechanically, and we'll be able to see more clearly what portion of it is maybe more of reinvested into growth and an operating leverage play over time?
Yeah. The way we think about it, and this gets at your question, is it's much more than just efficiency and optimization, as we call it, but it's really about creating capacity and capital to invest in the growth of the business. So it is both. When I think about the levers, there's really three key levers that we're looking at. The first is just continuing to simplify our company and our operating model. We've done a lot of work around that. We're still really complex, and there's incredible opportunity, whether it's management layers, increasing spans of control, just simplifying the way we're organized. There's real value to be had there. Second is just technology and automation. I'm not just talking about AI. Everyone talks about AI, and that's work to be done and to be understood. But it's just simple automation.
We still do a lot of things manually. We also have an incredibly complex technology infrastructure that as you simplify, there's incredible savings because it costs so much money to run a complex technology stack, in the U.S. and Japan. They're separate, and there's incredible opportunity there. The third is really leveraging a global workforce. This is an area that we're behind. We have not leveraged a global workforce. I'm not talking about outsourcing. We've outsourced. This is really having our own capabilities, our own employees. We have a global capability center in Ireland. We just opened one up in India. This is about taking end-to-end processes and really transferring them, re-envisioning them, transferring them to the right location, leveraging the skill sets and the talent in those locations, and then creating efficiencies as we do that.
The reality is today, the majority of our workforce is in the Northeast. That's really expensive. We're taking this opportunity to obviously not only leverage the potential savings that we can have from doing that, but re-envisioning our processes and leveraging the talent and skill sets as well.
Got it. Very helpful. Quick update on Japan. I think you've talked about an assumption that sales would resume sometime in November. I think at a recent industry conference, you mentioned 12- 18 month kind of rephase in of sales. I just wanted to see how do I translate that into what's already been laid out? Is there any kind of update on when you expect that process of phased reopening to begin, and what does that look like?
Yeah. I'd start with, Japan is just for us, it has been and continues to be a fantastic business. It is a fantastic opportunity when you think about that market, how it's evolving, and the tailwinds of higher rates, more retirement and savings focus, things that are right up our alley and capabilities. It's a great business. There's three components to Japan, to be clear, right? There's Prudential Japan, which is the life planner model. This is where we have voluntarily stopped selling. There's Gibraltar, which is the life consultant model. Both of those are captive agencies. Then there's the bank channel and independent channel, which obviously very attractive because that market is actually transitioning from much more of a captive channel to an independent channel. Those are the three pieces.
First and foremost for us, it is about doing business the right way and caring for our customers. When we voluntarily chose to stop selling, that is not an easy decision, but we thought it was the right thing to do to care for our customers, to earn back that trust, and really to take the time to make sure we had the right governance, the right agency model, the right compensation model. That is a bit of the background, just because I think it is important. We have laid out very clear plans for Japan that we have been very public about, including the financial impacts. We are executing very clearly. We are right on track. In terms of everything we can control, it is on track, and we feel really good about that.
November 6th being the day after the suspension, the voluntary suspension ends, that is something that we are really focused on what we can control, but it is more than just us. There are multiple stakeholders as we bring regulators along, et cetera. We are very comfortable with what we can control, but there are multiple stakeholders, and we are working our way towards that with a very active dialogue. The other thing I would say, and this goes back to the comments that Andy made last week, it is a ramp-up. November 6th is not a flip of a switch. It is a ramp-up of we are opening certain agencies over time, and we expect it to be a 12- 18 month process. That allows us to, in an orderly fashion, test what we have created and what we are rolling out.
That ramp-up though is built into all the financial impacts that we have shared.
Okay.
We have talked about, I have talked about our assumption is that in 2027, next year, we are at 50% productivity as we ramp up over time. That ramp-up is built into the financial implications, and we are very comfortable that we are tracking to that.
Got it. All right, pivoting over to PGIM. One of the things you've talked about is this integration into a single platform, and I think one of the things you were targeting to come out of that was more cross-selling of business. How is that going? Do you expect us to be able to see it contributing to the net flow story and being a meaningful offset to some of the headwinds that the whole industry may be facing?
Yeah. PGIM, as I've said and as I think you all know, is a key component of the strategy. The integration of PGIM is a key component to PGIM growing and to our overall strategy. I would say it's going quite well. Your question is around revenues. I would say around the efficiencies.
Yeah.
Going quite well. I always talk about, well, we had six of everything and now we have one. That's really good outcomes. We're looking at about $150 million in savings, and we're tracking very well to that. On the revenue side, when you take multiple sales forces and combine them, you're caring for the client in a better way, right? You're meeting them where they need to be. You're really able to understand their challenges, create the right solutions, and provide them with the right products and strategies. Over time, that does create revenue opportunities. We are seeing instances where somebody that used to only sell fixed income now actually is selling other things because we've combined the sales forces. That will take time because there's an education component.
If you've been selling fixed income your entire life, you need to learn a little bit about the other assets. We see that going quite well, and that will contribute. We also see opportunities, though, in just expanding our client set. Right? So into insurance, we started with Prismic, but we're managing other insurance type of portfolios, family offices, sovereign wealth funds, and also geographically, we see opportunity. We're in Japan with PGIM. As our Japan business evolves towards retirement and savings, and even as we integrate better between the insurance business and PGIM, there is opportunity to grow PGIM in Japan. The private credit markets over time, we expect to evolve in Japan as well. So those are all things that will contribute to that growth in PGIM.
Got it. Okay. Next topic I have for you is affiliated reinsurance, actually. It is a question that I get probably more than you would think, actually, because there is some criticism out there of affiliated reinsurance. To be fair, I think we have seen a couple peers restructure affiliate reinsurance, and maybe it was more data as part of a cash flow improvement program. When you look across your organization, I think people have had the observation that it is a little more complex just with Japan and Bermuda and U.S. and so forth. Is there any need to take a look at that from a PFI standpoint? Is that something that needs to be looked at to improve cash flow?
Yeah. The short answer to that is no. Just to give you a little bit of background, because I think we are a market leader in how we leverage reinsurance, and it is a key component of our strategy. We are looking at the full spectrum. We have our captive reinsurance, and we have two entities in Bermuda. We reinsure U.S. business into that, Japan business into that. We have third-party reinsurance at the other side of the spectrum. Then we have Prismic, which is our sponsored entity that actually is pretty unique because it allows us to grow our capital-intensive businesses, leveraging third-party capital while still having PGIM manage the assets. That is really an advantage for us. Our goal with reinsurance, especially with captive reinsurance, is always about ensuring that we are managing reserves and capital in a jurisdiction that best reflects the economics, full stop.
Because it allows us to be more capital efficient and allows us to offer better products. We have been doing that for a really long time and doing it very effectively. We have had the Bermuda entities for a very long time. That has been just a great strategy for us, and we continue to leverage that. About 70% of our Japan business is reinsured out of Japan into either the U.S. or Bermuda, and it has been a tool that we have utilized over time and has been quite helpful in managing to the new capital standards around ESR. So that has been very helpful. With Prismic, again, that is just a great tool that allows us to, over time, bring in third-party capital, grow our capital-intensive businesses, but also grow PGIM as it manages the assets. We do not need to restructure. We are always looking to optimize honestly, right?
There's always tweaks that we make. As we do that, and as we leverage Prismic, that will be a contributor to us growing earnings in a capital-light manner and growing cash flows over time.
Got it. Next topic for you is on some of the asset allocation. I think it was mentioned also at a recent industry conference that you could look a little bit more at some of the private credit, particularly in the allocation for the Japan business. I'm interested just in terms of what you're thinking there, what kind of uplift could we potentially get to net investment income, and how do you approach risk tolerance in that business? Yeah.
Yeah. Specifically to Japan, and I'll speak more broadly. There's a couple things in Japan that are happening that are real tailwinds, the main one being higher interest rates. This is a market that has had, you all know this, zero interest rates forever. These higher interest rates allow us to really offer better products, yen-denominated products. Historically, we've been more heavily weighted towards U.S. products. It's a JPY 160 billion general account portfolio, a lot of it invested in JGBs, right? Just as the portfolio turns over, we're reinvesting at significantly higher rates. That's just a simple-
Yeah.
-opportunity that's already coming through. We also have been looking at it much more proactively as to how can we leverage the portfolio, how can we have it work more efficiently for us. That's been an area. We do think over time, private credit will be something that becomes more prominent in Japan, and we will have opportunities to rotate into that. Similarly, in the U.S., we have been rotating a little bit more into private credit. There's many definitions of private credit. Our private credit is, what I would say is, something that we've been doing for a really long time. It is something that we have expertise in, that we know how to underwrite, and that we think are good assets to support some of our liabilities.
In terms of how we think about it, we will always, to the extent we're expanding more into private credit, it's all within our risk appetite framework, within our capital frameworks. And we look at that very carefully and track it and monitor it. We know what we're holding and where we're holding it at all times.
Got it. Okay. Can you give us an update on the pension risk transfer market and maybe also just longevity in U.K. and the opportunity you have there? I think flows have been a little lighter than maybe we had expected a couple of years ago, on the back of even some of the lawsuits that I guess have been out there, not necessarily related to you guys.
Yeah.
But how have you seen that evolve? Do you expect it to pick up in the back half?
Yeah. It has been a quieter year. It's interesting, historically, the first half of the year was quite quiet, and then it ramped up. For a couple of years, it was really robust, and this year has been quieter. It's hard to pinpoint what it is, and you mentioned lawsuits, but some of those have actually been resolved-
Yeah.
-positively. One hypothesis that I tend to prescribe to is, pension plans are so overfunded that it is not the top priority anymore. Businesses and CFOs have three other priorities that are more important than the underfunded or the pension liability. That will likely change over time, and that will lead them to transact. That is one hypothesis. The reality is that, look, these are large markets that will be here for a really long time, whether it is the U.K. or the U.S. I mean, U.S. alone, you have $3 trillion in pensions that have yet to transact.
We think this is a market that is here to stay for a long time and a large profit pool. In terms of your specific question on this year, we do see, in the pipeline, more jumbo deals, a few jumbo deals that we had not seen in the beginning of the year. So there is a little bit more activity that we are engaged in. Obviously, we see every transaction. We have had good success with smaller deals this year because there has not been significant jumbo deals, but we do have a pipeline building up for the sprint towards the end of the year.
Yep. Okay. Next topic, cash conversion. I think you all have spoken pretty confidently about expecting it to improve over time. You have been a little hesitant to put more of a fine number on it for the near term or even over the next year or two. So what is holding you back there? Are there cash requirements that you have right now that should dissipate? Are there strategies that you are working through that just will not bear fruit for a little while? Maybe take us through some of that.
Yeah. We do have a target. When we put out the intermediate targets about a year and a half ago now, almost two, we have the target of 65% of net income free cash flow conversion. That is in place through 2027. One thing I would highlight, we do look at this as an overtime measure. It is not linear. You generate a lot of cash flow in regulated entities, but getting the cash flow from the regulated entity to the holding company is not linear. It can be episodic, and year by year, it can vary. So we look at it as an overtime measure. The other thing I would highlight is our 65% is after we fund growth in the business. I always say I can generate 100% cash flow if I do not grow the business.
But really, when we say 65% free cash flow conversion, that is after we have funded all the organic growth, and that is really where the capital uses are. So when we set the 65%, and still now, we continue to have really good opportunities to invest our capital to grow the business. You have seen our continued strong sales in individual retirement. Those sales take capital to support them. Our Japan business is a business that requires capital to support those sales. So that is where we are utilizing the capital. That is what drives the 65%. We do, as you say, have this long-term goal of increasing our cash flow conversion, and that will be done by increasing earnings from highly cash generative businesses like Group Insurance, like PGIM. As we execute on that, we will see the higher cash flow conversion.
To your point, we do not have a target as of now, but we expect that to play out over the next five years.
Got it. I wanted to circle back on some of the protection businesses. You have made a lot of comments around wanting to invest to make sure you are top tier, because the top tier is going to win. So, when I look at some of your U.S. businesses or the Japan protection, what do you need to invest in to make that happen? I know you talked on Group Insurance specifically.
Yeah.
I would be really interested in Japan too, and maybe the life business.
Yeah. A couple things. When we talk about our strategy, it is about retirement, asset management, and the select protection businesses. We are big believers in multiple engines of growth. Obviously, we have retirement as a growth engine, asset management, but that is where those protection businesses come in. It is also something that is important, and I highly value, is the diversification in business mix, risk profile, and capital intensive and capital light businesses. That is really why there is that third sort of leg to the stool around the protection businesses. When you think about the protection businesses, individual life and group are capital light businesses that really add to the equation. These businesses bring in assets for PGIM to manage as well. It is not just retirement. That is sort of their role in the business portfolio.
In terms of where we need to go, I spoke about groups, so I will not go back to that. In Japan, we are already a market leader, certainly in that space and in protection. So there it is about retaining that leadership position while growing in the retirement and savings space, which is a really great opportunity, and about more than 70% of our sales today are coming from retirement and savings, in addition to protection. Nothing significant in terms of investment other than continuing to expand our product set. Today we have a very attractive product set. In individual life, they are a market leader today. It is a very diversified product portfolio, but 75% of sales come from accumulation products, which is why we think about it as capital light and cash generative.
That is, I think, something now that we have re-segmented and you could see that business, we will see the ongoing growth and the earnings contribution over time.
Got it. Okay. In terms of reinsurance opportunities, I am interested in particularly Prismic, just given the relationship as a sponsor-owned one that you guys are close with. If you were to look at them or others to do reinsurance, should we think more about what I would call an offensive transaction, or maybe you reinsure something that has a lot of margin in an effort to release capital so you can redeploy it elsewhere? Or should I think more de-risking transactions? Because certainly you still have some things that would probably be good to get off the books, like [inaudible] .
It is sort of all of the above. We look at really everything. You mentioned Prismic. We are very pleased with Prismic. Obviously, we seeded it with back book, a couple of transactions with back book, which was very helpful to get it started. But the goal for Prismic has always been, can they support our flow, especially in capital intensive businesses with third-party capital. That is happening. We are reinsuring flow business as we speak, and they have done a third-party transaction as well, which is important because as an independent company, we want them to also have third-party business. So that is going very well. If I think about the priorities for Prismic and for us, I would put flow at the top of the list because again, as we can leverage third-party capital, we can grow more in certain markets.
We will look at back books, and to your question, it could be offensive to generate capital and rotate capital. Obviously, you want to make sure you are rotating it to a business that has the right returns and the right characteristics. But also we can look at back books as well and legacy. When we think about legacy, because that is a question that I get asked a lot, we have done a lot. We are very happy with the de-risking we have done. Now it is really about optimization of the balance sheet. The legacy business we have, some of it has synergies with business that we continue to write. So when we think about transacting on legacy, there is a lot that goes into understanding why. The economics has to work. Does it contribute to cash flow generation, freeing up capital?
But also what happens with earnings, with synergies across the organization? Those are all things we look at when we determine whether we want to transact or not.
Yep. Makes sense. Just maybe one on the competitive environment in the annuity market. I understand some of the moves you've made. You made tough decisions around PALIC and variable annuities to simplify what you're doing. One caveat is that some of the more simple products have gotten somewhat competitive. How do you navigate that? What do you do to bob and weave around it, whether it's distribution and staying disciplined on price, et cetera?
Yeah. A couple thoughts there. First of all, on the RILA space, that's one where I think our innovation comes across. It's less of a sort of just a straightforward product. You can be more innovative. When you think about our sort of FlexGuard 2.0 that we launched a few quarters ago, you see that in the receptivity in the market and how well that product has done. We think the product innovation that has carried over from our VA days, right? We were always considered quite innovative. That you could see certainly in the RILA space. To your point, a lot of the other products are quite vanilla, very competitive, very price sensitive. That's where I would highlight two things, our brand and our distribution.
Our brand is second to none from a retail perspective, retirement, and all else being equal, somebody will buy the Prudential product before they buy another product. Our financial strength, AA, not everybody selling these products is AA, so that goes a long way as well. To your point, we've invested a lot in deepening our distribution. We've always had great distribution relationships, and it's a combination of our captive force that our captive distribution sells about 40% of our annuities today, but really enhancing that with third-party distribution and deepening those relationships recently, going into the IMO channel, for example, which we were not a player in. That's really been driving it as well. The last thing I would say is we are always going to be very disciplined around pricing.
If it's highly competitive and the pricing doesn't work, you'll see those products in a given quarter not be so strong for us, right? We've seen that as markets move, et cetera. I think, when it comes down to price, all else being equal, brand, distribution, relationships really matter, and that's where we show really well, and that's where we compete.
Got it. Okay. Maybe going back to cash flow for a sec. One of the businesses you are running off is variable annuities. My perception is that your variable annuity book has actually been one of the better ones in the industry.
Thank you. We agree.
The caveat to that, though, is like, well, it has probably been producing better cash flow relative to some of your businesses. It has not really run off because the markets just like the left side of a mountain.
Yeah.
-until recently. What does that look like? I mean, does that running off actually, is that a headwind that to improve cash flow, you actually have to overcome and some to get it moving up?
Yeah. When I talk about all the things we consider when we think about transacting on the legacy block, I mentioned cash flow as one of them. Yes. We've always said, "This is a good block. We really like it. It's performed quite well. It does generate strong earnings. It does generate strong cash flows." That's factored in all our views and all our projections, right? We have a view of how this will run off over time, markets notwithstanding.
Sure.
As we think about our cash flow generation, we factor that in. There's a reason we did the resegmentation so that you all could see how this is growing, and over time, how we generate cash. It's also one of the reasons why we want to grow our earnings in highly cash generative businesses because that allows us to generate more cash, to have usage for that cash, including reinvest in the more capital-intensive businesses. Yes, it has high cash flows. Yes, it's running off. Something we look at very carefully, and we consider in how we think about the business mix going forward.
Got it. Maybe the last one for you, just in light of things that people are focused on in the macro, higher interest rates, particularly at the short end. What does that do for you in terms of maybe a net investment income opportunity? Then also, maybe just remind us about disintermediation risk and what you do to manage and mitigate that risk.
Yeah. I mean, all in, higher rates are good for us. It's good for insurance. Rates have been rising, but they've been rising, there hasn't been crazy spikes. I did go on vacation and came back, and the 10-year was at 5%, and I was like, "What happened?" I did check on vacation. Generally speaking, it's good for us. Disintermediation for us is not a big risk. We're well asset-liability matched. These are insurance liabilities. It's not a bank where they walk out the door. Where we focus on with higher rates is really around capital.
We have a derivative portfolio that moves around with rates, and there's collateral, capital liquidity collateral implications. It's something we track very carefully. I just spoke to our board yesterday and said no impact to our capital flexibility. We've got plenty of liquidity. But that's where we look at for higher rates, especially when it happens very quickly.
Yep. Okay. Thank you very much for being with us today.
Thank you. Thanks you all for being here.
Thank you, everyone.