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F500-2023-067.

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<ul> 
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G500-2021-178-PRUDENTIAL FINANCIAL

<span data-sheets-value="{&quot;1&quot;:2,&quot;2&quot;:&quot;The insurance giant felt the squeeze of the pandemic in 2020; Prudential’s revenues fell 12%, while it posted a net loss of $374 million (compared with profits of nearly $4.2 billion in 2019). But chairman and CEO Charles Lowrey has talked up plans to invest up to $10 billion into “higher-growth, less market-sensitive” businesses, as well as a cost-cutting target of $750 million by the end of 2023. One bright spot remains PGIM, the insurer’s massive investment management arm, which saw its assets under management (AUM) swell 13% to nearly $1.5 trillion at the end of 2020.&quot;}" data-sheets-userformat="{&quot;2&quot;:12673,&quot;3&quot;:{&quot;1&quot;:0},&quot;10&quot;:2,&quot;11&quot;:4,&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:11}">The insurance giant felt the squeeze of the pandemic in 2020; Prudential’s revenues fell 12%, while it posted a net loss of $374 million (compared with profits of nearly $4.2 billion in 2019). But chairman and CEO Charles Lowrey has talked up plans to invest up to $10 billion into “higher-growth, less market-sensitive” businesses, as well as a cost-cutting target of $750 million by the end of 2023. One bright spot remains PGIM, the insurer’s massive investment management arm, which saw its assets under management (AUM) swell 13% to nearly $1.5 trillion at the end of 2020.

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F500-2021-55-Prudential Financial

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F500-2020-053-Prudential

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Global business is back. After limping through a worldwide financial crisis and economic slowdown, the 500 largest companies ranked by revenues shattered all sorts of performance records in 2013: They racked up combined revenues of $31.1 trillion, up 2.5% from 2012, and profits soared 27% to nearly $2 trillion. China’s 95 companies (up from 89 last year) posted $5.8 trillion in revenues. The U.S. has four fewer companies on the list than last year but remains (for now) the country leader, with 128 corporations on the list—including No. 1 Wal-Mart Stores—reporting $8.6 trillion in revenues. 

Wal-Mart stayed on top as its sales crept closer to half-a-trillion dollars. Apple moved into the top five. And UnitedHealth Group continued its steady climb. 

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Prudential Financial, a global financial services company founded in 1875, offers life insurance, annuities, retirement solutions, mutual funds, and investment management services to individuals, businesses, and institutions.

Q2 2026

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Q4 2024

Prudential Financial (PRU): Company Profile, Stock Price, News, Rankings

legacy

Prudential Financial

prudential financial

Ladies and gentlemen, thank you for standing by, and welcome to Prudential's Quarterly Earnings Conference Call. At this time, all participants have been placed in a listen only mode. Later, we'll conduct a question and answer session. Instructions will be given at that time. As a reminder, today's call is being recorded.

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

Good morning and thank you for joining our call. Representing Prudential on today's call are Andy Sullivan, CEO and Janella Freas, CFO. We will start with prepared comments by Andy and Janella and then we will address your questions. Today's discussion may include forward looking statements. It is possible that actual results may differ materially from those predictions we make today.

In addition, our presentation includes 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, which can be found on our website at investor.prudential.com. And now I'll turn it over to Andy.

Good morning, everyone. I'm incredibly excited to lead Prudential forward at this pivotal moment in our one hundred and fifty year history. We make promises that last for decades and we commit every single day to keep those promises to our 50,000,000 customers all over the world. Our work makes a difference and that is a privilege that I take seriously. Over the past few months, I've been visiting our global offices and meeting with our leadership as I take stock of the state of our business.

What is clear to me from this early assessment as CEO is that we need to sharpen our focus on driving growth and on creating greater value for our stakeholders. Beginning on slide two, I see both significant opportunities and challenges in front of us. With our unique combination of global scale, distribution power, brand and talent, we're well positioned to address the growing protection and retirement needs of customers and clients around the world and to meet increasing investor appetite for a broad range of investment products, including private credit and alternatives. Over the last several years, we've made tangible progress towards derisking and diversifying the company. Through our divestitures and blocks placed into runoff, we significantly reduced our exposure to more volatile and market sensitive products.

We've already reduced our overall exposure to traditional variable annuities and guaranteed universal life products by nearly 60%. And we continue to focus on ways to optimize our balance sheet, capital and cash flows. Our life and annuity products in The U. S. Are more diverse than ever.

While in Japan, we've increased sales of savings and retirement products by more than 50% over the past three years, complementing our core life insurance offering in that market. We're beginning to see the benefits of this more diversified product mix, specifically stronger sales and flows across our retirement and insurance businesses, while PGIM continues to benefit from a broader range of traditional and alternative investment products and expanding distribution platform and strong investment performance. In the first quarter, we reported strong sales across our global retirement and insurance businesses as well as strong investment performance and robust flows at PGIM. And while our earnings were higher than in the first quarter of last year, I want to be clear. Our recent results do not meet our expectations and we will do better.

The underlying capabilities, distribution strength, brand and product quality of Prudential should deliver more value to our stakeholders. We will deliver to a higher performance standard going forward. That is what our customers, our employees and our shareholders expect. My leadership team and I are committed to executing on a strategy to fundamentally improve our financial performance. At the same time, the path to higher earnings growth will not be linear.

There are two reasons for this. First, we expect lower earnings growth in our U. S. Businesses over the near term as we continue to run off more volatile blocks of our business comprised of traditional variable annuities and guaranteed universal life products. Second, we face near term earnings pressure in our Japan business, driven by elevated surrenders of U.

S. Dollar denominated products due to a weaker yen, although we're seeing signs that this is beginning to stabilize. Importantly, we believe these earnings headwinds that contribute to an estimated three to four point drag to EPS growth in 2025 will dissipate over time. We will see the compounding impact of our strong sales and flows drive stronger growth long term. We remain confident in achieving the intermediate term financial targets we provided to you last quarter.

While we do not plan to provide quarterly updates to these targets, I want to assure you that as the new CEO and despite the current macro uncertainty, we continue to expect 5% to 8% core adjusted operating EPS growth on average through 2027, which is inclusive of the transitory headwinds. We have real work ahead of us to create greater value for our stakeholders. But let me reiterate, we are committed to delivering stronger results over time. Turning to slide three, I want to share with you today how I see us getting there. First, we will evolve and deliver on our strategy.

Our world is evolving. We will adapt to meet the opportunity and prioritize the allocation of our capital accordingly. The areas that present the greatest opportunities for profitable growth will get more capital, those that do not will get less. Second, we will execute with consistency. We must raise the bar as we execute.

Specifically, that means continuing to evolve to a more favorable product and business mix, improving our track record of delivering the expected returns of our inorganic and organic capital deployment and continuing to improve our expense profile across our operations. Finally, we will focus on our culture. We benefit from strong talent, expertise and diversity of perspectives, But we must move faster to ensure we capture new opportunities as they emerge and take greater accountability for outcomes. We've already taken action to align incentives even more closely to earnings per share growth. These are my priorities, evolving and delivering on our strategy, improving on our execution and fostering a high performance culture.

Coupled with our differentiated position serving 50,000,000 customers and clients with a diverse range of financial solutions, I have every confidence that we can and we will evolve our business and drive sustainable profitable growth in the years ahead. Moving to Slide four and before turning it over to Janella to provide greater detail on our results, let me briefly reflect on how we're positioned in the current macroeconomic and market environment. Prudential has a long history of navigating economic cycles and global events and we are well positioned to support our customers and capitalize on new opportunities as they emerge. Our diversified business mix provides stability across a variety of macroeconomic scenarios. Our balance sheet includes nearly $5,000,000,000 in highly liquid assets, strong statutory solvency ratios and access to significant off balance sheet resources that support our AA financial strength.

In addition, we have a high quality, well diversified investment portfolio and disciplined approach to asset liability and risk management, which is designed for times like these to perform through periods of stress, uncertainty and volatility. And with that, I'll turn it over to Janella.

Thank you, Andy. I will provide an overview of our financial results and business performance for our PGIM U. S. And international businesses. I will begin on Slide five with our financial results.

Our pretax adjusted operating income was $1,500,000,000 or $3.29 per share for the first quarter of twenty twenty five, up 8% from the prior year quarter. This reflects favorable variances on underwriting results across our U. S. Businesses, including the benefits of our recent derisking transactions and lower expenses. The current quarter also included alternative investment income that was below our expectations by $90,000,000 driven by lower private equity and real estate returns.

Turning to the quarterly operating results from our businesses compared to the year ago quarter. PGIM had lower other related revenues driven by lower seed and co investment income and incentive fees, which was partially offset by higher asset management fees, net of related expenses. Results of our U. S. Businesses reflected more favorable underwriting results and lower expenses, partially offset by lower fee income from the runoff of our legacy traditional variable annuity block and lower spread income driven by lower alternative investment returns that more than offset the benefit from business growth.

Our international businesses had lower spread income, including lower alternative investment returns, lower joint venture earnings driven by less favorable encaje performance in Chile and the net unfavorable impact from foreign currency exchange rates. Turning to Slide six. PGIM has diversified capabilities in both public and private asset classes across fixed income, equities and alternatives. Investment performance remains strong with eighty one percent and seventy nine percent of assets under management outperforming their benchmarks over the last five and ten year periods, respectively. CGM's assets under management increased by 3% to $1,400,000,000,000 from the prior year quarter, driven by market appreciation, net flows and strong investment performance.

The net flows in the quarter of $4,300,000,000 included institutional third party flows of $4,600,000,000 driven by mandates across fixed income, private alternatives and equity, which were partially offset by modest retail third party outflows. Our diversified PGIM private alternatives platform, which has assets under management of nearly $250,000,000,000 experienced over $10,000,000,000 in private capital deployment, up over 60% compared to the prior year quarter. Although deployment was higher across both private credit and real estate, activity slowed towards the end of the quarter due to heightened market uncertainty, which has continued into the second quarter. Turning to Slide seven. Our U.

S. Businesses produced diversified sources of earnings from fees, net investment spread and underwriting income and benefit from our complementary mix of longevity and mortality businesses. Retirement strategies continue to have strong sales momentum, generating over $10,000,000,000 in the first quarter across its institutional and individual lines of business. Institutional Retirement sales of $7,000,000,000 included two international longevity reinsurance transactions totaling nearly $5,000,000,000 We also experienced our best quarter ever in structured settlements with $600,000,000 in sales. Individual Retirement posted $3,500,000,000 in sales in the first quarter, up 5% from the year ago quarter.

Our registered index linked annuities continue to demonstrate the benefits of our product pivots and innovation, while we sustain momentum in our fixed annuity product sales. Additionally, we continue to reduce market sensitivity by running off our legacy variable annuities. Group insurance sales totaled $400,000,000 in the first quarter, up 6% from the prior year quarter, driven primarily by strength in our group life products. We are executing our strategy of both product and market segment diversification, while leveraging technology to increase operating efficiency and enhance the customer experience. The benefits ratio of 81.3% in the first quarter reflects favorable underwriting results in the quarter as well as our strategic actions to improve profitability and performance.

In Individual Life, sales totaled over $200,000,000 in the first quarter, up 26% from the prior year quarter. This growth was driven largely by accumulation focused variable products, reflective of our pivot to be more capital efficient. Turning to Slide eight. Our international businesses include our Japanese life insurance companies, where we have a differentiated multichannel distribution model as well as other businesses aimed at expanding our presence in targeted high growth emerging markets. Sales in our international businesses were up 15% compared to the prior year quarter.

Sales in Japan are benefiting from our recent retirement and savings product launches, which are gaining traction with customers, resulting in an increase of over 20% in sales of these products compared to the prior year quarter. In addition, emerging market sales increased 19% versus the prior year quarter, driven by record sales in Brazil as we continue to benefit from the strong performance of our Life Planners and Group Life sales. Turning to Slide nine. Our significant capital position and strong regulatory capital ratios continue to support our AA financial strength and our ability to expand our market leading businesses. Our cash and liquid assets were $4,900,000,000 which is above our minimum liquidity target of $3,000,000,000 and we have substantial off balance sheet resources.

As we look ahead, we are well positioned across our businesses to be a global leader in expanding access to investing, insurance and retirement security. As Andy mentioned, there are near term headwinds impacting the earnings across several of our businesses, and we're operating in volatile economic conditions, but we have confidence in the intermediate term targets outlined last quarter. And with that, we will be happy to take your questions.

Thank you. We'll now be conducting a question and answer session. Our first question today is coming from Ryan Krueger from KBW. Your line is now live.

Hey, thanks. Good morning. I had a question for Andy. You touched on this a little bit in your prepared remarks, but I noticed also there was a Bloomberg article last night where I think you mentioned that the changing competitive and economic landscape may call for a review of your capital deployment plans at some point. I was hoping you could expand on what you mean by that and if that was more about where you're organically allocating capital to grow or if that refers more to things that could involve M and A or divestitures?

So good morning, Ryan, and thanks first of all for reading the article. My job as the CEO is to ensure that we deploy capital to the highest and the best uses across the entire enterprise. So we continuously evaluate the various opportunities in front of us and that obviously includes all various uses organic, inorganic and their return profile. As we do that, we're working to optimize our balance sheet, our cash flows and our capital. But my statement really is markets change, businesses change and we're going to need to evolve with that as things evolve.

As we sit here, we like our capital deployment plans, which obviously reflect the current opportunities that we see in the marketplace. But it would certainly be reasonable to expect that uses of capital could evolve over time. So I think the important thing is this is a continuous discipline that we have.

Okay, thanks. Makes sense. And then on PGIM, you had provided a 25% to 30% adjusted margin target over the three year period last quarter. Is that something that you think you can get into the range this year or will it potentially take, sometime through this three year period?

So as we framed last call, this is an intermediate term target. So we're not going to get into the habit of giving quarterly updates. Let me just make some comments overall about our margins at PGIM. Obviously, I was disappointed with our Q1 margins. As you know, the first quarter is typically the lowest margin quarter because of the long term incentive compensation expenses.

But this quarter, the volatility affected our seed and co investments. So volatility creates headwinds here in the near term. Whether that's going to last for months or quarters is very hard to tell. It's been a pretty volatile environment. But long term our path is clear and I'm confident in it, which is the path towards 30%.

And I would mention three things I've talked about before. First, we've been consistently investing in a whole variety of growth opportunities. We're coming out the other side of the J curve on those and we're seeing earnings produced from those. So that'll give us lift. Second, I think as you're well aware, both the real estate and fixed income markets have had low points here over the last couple of years and we've been seeing those markets recover that will obviously also create a tailwind for us.

And then finally, we've made expense discipline part of our DNA across our businesses. We will continue to look for productivity and efficiency opportunities and that will help us expand our margin. So, we're confident in the path towards 30% as we stated in our intermediate financial targets.

Thank you. Next question is coming from Tom Gallagher from Evercore ISI. Your line is now live.

Good morning. Andy, I appreciate your candor and your opening remarks. Thanks for that. I know you flagged the some of the headwinds and in terms of the VA and SGL runoff. I guess one way to reduce the headwind is to meaningfully shrink the remaining exposure of the in force free up capital and then you don't have that as an earnings drag.

Is that now I know you've already cut significantly cut the size of both of those risks. Is that something now that's on the table a much more dramatic shrink of those whether that's through a prismic transaction or third party is that something that's on the table that we should be thinking about?

So Tom, first, thank you for the feedback on my opening remarks. I appreciate that. As you've said, we've made very good progress in derisking the company. And obviously, we've used the two levers. We see selling traditional variable annuities at Guaranteed Universal Life and put them in runoff.

And we've done very successful transactions. So those were absolutely the right decisions. We're happy we did it. But let me just share with how I think about this. And we've talked about de risking almost like it's an event, it's not an event.

De risking and really managing risk profile of the company is continuous. So I've intentionally chosen the words of continuously optimizing our balance sheet, capital, our cash flows because that is a discipline that we have consistently evaluating opportunities. So I don't see it as something that starts and then we're done. At this point sitting here today what I would share is there's nothing in the pipeline that's worthy of talking about with you.

Got you. Thanks for that. And then for Janella, just a question on how you're feeling about capital levels in Japan ahead of the ESR implementation set for next year. Would you anticipate having to contribute capital or do you feel like you're good enough based on at least preliminary assessment you've done on how that might impact capital? Thank you.

Good morning, Tom. Yes, with regards to ESR, so I'll start with a couple of things. First, as we've said before, we expect capital levels will continue to be above levels that would support AA financial strength ratings post the implementation. Second, we do not expect dividend capacity to change as a result of ESR implementation. The statutory framework will remain unchanged, and we expect that to continue to be the binding constraint on cash dividends.

And I would add that we are confident in our ability to solve for uneconomic volatility in the ESR framework. We have historically used different tools, including reinsurance, to manage our capital and liquidity positions, and we expect to continue to leverage these tools. And maybe lastly, I would say that we've had a number of years to plan for this, and we've focused on two things. One is the level of ESR capital and, of course, the volatility in the framework. And that has influenced our product strategy.

We've launched more products that are ESR friendly but also meet customer needs. And it has influenced our reinsurance strategy. And just maybe as a point of reference, as of the end of twenty twenty four, roughly 70% of our U. S. Dollar liabilities in Japan are reinsured outside of Japan.

Got you. That's helpful color. Thank you.

Thank you. Next question is coming from Bob Huang from Morgan Stanley. Your line is now live.

Good morning. Maybe just a follow-up on the questions on Japan and ESR. As you think about reinsurer like liabilities out of Japan, can you maybe help us think about just the broader reinsurance market in there? Like is Prismic the most efficient way from a pricing perspective to reinsure business out of Japan? Or are there other reinsurance opportunities that you can evaluate?

Yes. Good morning, Bob. So a couple of things. So let me start by saying that reinsurance is an important tool that we use to optimize capital and to align regulatory reserves and capital requirements to the economics of our products. And we have multiple avenues for where and how we manage risk.

So, we use our wholly owned entities, Prismic, and external reinsurance. So, we have multiple tools. In terms of where we decide where to manage the risk, I mean, the decision regarding where to manage it really will be made in the context of our strategy and also in the context of evaluating the implications to all the things that we think about and care about, PFI, capital levels, statutory GAAP, economic and liquidity lenses. So, we really put it through that entire paradigm and that is how we make the decision as to where to manage the risk. The great thing is that we have multiple tools.

Got it. Thanks. And apologies if I missed this, but you did not provide a preliminary ESR ratio at all, right?

No. We continue to plan on providing that this summer, which is about a year in advance of the required disclosure.

Got it. Okay. No, I really appreciate that. Maybe my follow-up is on the variable investment income. Just given how volatile the market was so far, is it possible maybe to kind of provide some color in terms of how we should think about the VII into the second quarter or maybe rest of the year from a modeling perspective?

Yes. So definitely, as you mentioned in the first quarter, we did see lower alternative investment income that was driven by lower than expected private equity returns and lower real estate returns. With regards to the outlook, I would say that predicting near term performance in the current environment is challenging due to the heightened uncertainty and volatility. However, it is likely that the decline that we have experienced so far this quarter in equity markets will result in returns below our expected levels at the beginning of the year. And let me share a sensitivity with you.

So if we experience an equity market decline of 10% followed by a 1.25% quarterly recovery, Returns on our alternatives would still be positive, but we could see anywhere between a 200 basis to two fifty basis point decline to our intermediate term expectations of 7% to 9% over a four quarter period. I would note that this is a more conservative scenario than we have historically observed over the last twenty five years back to February. And I'd also be very clear that we are comfortable with our alternatives portfolio and the long term target returns, and this has proven out over time. On a cumulative basis, these investments have exceeded expectations over the past decade.

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

Great. Thanks. And Andy, I also appreciate the comments that you made about improving the financial performance of the company. That was good to hear. I wanted to follow-up on Tom's questioning, but specifically with a focus on the Life Insurance business.

And what I'd like to try to understand is the strategic value of Individual Life. And the reason I asked the question is, we did see earlier in the year another company effectively exit Individual Life, got a pretty good deal with it. It's about 5% of your earnings. So it's not a huge needle mover. And just based on my experience, it seems like this business maybe more often hurts PRU than helps it.

So there must be some rationale in terms of why you've decided to keep the business and I'd like to understand that a little bit more. Thanks.

Yes, Suneet, it's Andy. So first thank you for your very candid question. Let me talk about our Life Insurance business. And really when we talk about this, there's two aspects that you should think about when we think about our Life business. The first aspect is obviously the legacy guaranteed universal life business that's in runoff.

But then the second is the go forward product set. And we obviously feel differently about the two pieces. We've been working very diligently to reduce our exposure on the Guaranteed Universal life side putting it a runoff doing the transactions. And obviously you've seen the outcomes that we've been able to produce there. What we've done is made sure we've learned from that experience and are applying these learnings.

But your question about the go forward business, we like this business. Obviously, it's a business that's core to Prudential's purpose from a long run perspective. But there are other reasons I would hit. The product portfolio that we're in the market with today is less interest rate sensitive and more capital efficient than the prior product set and we're seeing good profitability with that. Obviously, this is a business that also adds to our mortality longevity balance, which is important for the company given that we're always managing business mix as part of our accountability.

And when you look to be in a business or not in a business, you need to look at your strengths and your capabilities. This is a business where we have deep capabilities in our underwriting shop. We're one of the most trusted brands out there with great customer experience. We're seeing a flight to quality. So, when well managed, which is what every intention we have to do, this is a good business and it's an important part of the overall mix.

And I think that flight to quality you saw this quarter with the great sales that we had.

Okay. I appreciate that. Thanks. And then I guess on the Japan surrenders, it sounds like in your prepared remarks you had mentioned that maybe the pressure is abating a little bit. I was wondering if you could provide a little bit more information there.

How much more of this is sort of in front of Peru? And when these surrenders happen, is there some sort of a surrender fee or reserve release that helps earnings in the short term? Or is it just kind of a negative when these things happen? Thanks.

Yes. Hi, Suneet. So as Andy noted in his opening remarks, while surrender activity remains a near term headwind, we are seeing signs that this trend is beginning to stabilize. We've seen improvement in the pace of surrenders through 2024 and continuing through 2025. And we would expect that the trend would continue given current exchange rates.

But in terms of when it's behind us, it's difficult to predict given that it is tied to the exchange rate. Again, but that said, the impact of the surrenders has dissipated. I would say that it remains a headwind to this year. And just to give you some quantification, we estimate that the impact to 2025 earnings from the surrenders that we experienced in 2024 will be roughly $100,000,000 To your question about are there offsetting surrender fees, the majority of these contracts are beyond the surrender charge period. Therefore, is no offsetting impact of a surrender charge fee.

Sunita, I would just add into that that we've been very proactive in Japan from a business perspective taking action to mitigate the effects here. So you've heard us talk about broadening and diversifying our product portfolio. The fact of the 20% of our sales came from products launched in the last twenty four months is evidence of that. We've doubled our yen offerings in the marketplace, 30% of this quarter sales were yen based and we've added staff both in distribution organization and in the customer service organization, so that we can work with customers who still have needs for protection to not just drop their coverage but to find other alternatives. So we're being very proactive in working to mitigate this.

Thank you. Next question today is coming from Joel Hurwitz from Dowling and Partners. Your line is now live.

Hey, good morning. So I wanted to touch on the earnings emergence in the retirement businesses. We saw individual retirement with a nice pickup this quarter, but Institutional Retirement earnings have contracted a bit despite the really strong PRT activity last year. Just any color what's going on in Institutional and when you expect sort of the earnings to pick up?

Hi, Joel. So yes, this is a topic I know we've talked about throughout last year, right, in terms of the fact that we had very strong sales, especially on PRT in 2024 and the fact that the emergence of those earnings happens over several quarters as the timing of the sales is not obviously as of oneone. And also we rotate into the portfolio. And the best way to think about this is to look at first quarter twenty twenty five and compare that to first quarter twenty twenty four. Now the core earnings in Institutional Retirement in those periods was down by $24,000,000 but that does reflect the benefit of the sales.

So let's walk through that. We did have growth in spread earnings from our strong sales, again, particularly the strong PRT sales that we had in 2024. And the benefit to spread, net of the expected runoff of the in force PRT is a runoff business was approximately $25,000,000 So that is the benefit of the sales. But that was more than offset by other factors. Primarily, we had the change in the internal expense allocation that we previously announced.

There was a shift of $50,000,000 of annual expenses to institutional retirement that nets to zero across the company, but it does impact the business. Second, we had lower spread income on cash balances in the business and that was due to the reduction in short term rates of about 100 basis points in the second half of twenty twenty four. As you've heard us say, short term rates don't have a total material impact to the enterprise, but they did impact the business due to cash balances. And lastly, we had a refinement of accounting methodology for certain derivatives, which resulted in a reclassification out of operating income to non operating earnings for retirement. No impact to net, but it did impact the core earnings power.

So those are the three drivers that offset the fact that we're seeing our earnings in spread. And we feel good about the growth that we're seeing in spread. It's just being masked by these items.

Okay. That was really helpful. Thank you. Maybe just sticking on PRT, can you just talk about what you're seeing in the market and are you seeing any sort of impact just given the legal case out there?

So, thanks Joel for the question. The market size that we've seen all the way through the first quarter is, I would frame it as expected. So we have not seen an effect of the litigation on the willingness and desire for transactions in the marketplace nor have we seen any impact obviously on our success in that market. That being said, I wouldn't be surprised to see 2025 normalize from a market size perspective. 2024 was a pretty robust year.

The reason I feel that way is because of the volatility that's currently going on in the environment. Volatility impacts decision makers in that most business decision makers slow up on their decision making, sometimes they pull up on their decision making. So that probably will mean a normalization in the near term. But look, think the important thing is long term, this is a very good growth area. There's $3,000,000,000,000 in pension plan assets that haven't transacted, funded status is at 105.

At the end of the day, volatility creates a higher desire for plan sponsors to want to transact. So we see this as a good long term growth area. Maybe the last thing I'd say is just remember this is a more transaction oriented business not a flow oriented business. So transactions will be episodic and you shouldn't expect to see things every quarter.

Thank you. Next question today is coming from John Barnidge from Piper Sandler. Your line is now live.

Good morning. Thank you for the opportunity. My first question is about the comment about sharpening the focus in growth. Where does inorganic sit within that?

John, thanks for the question. So even though you asked the question that way, I will start with organic growth is job one and we're going to stay very focused on that. That is always our highest priority and best thing to do. That said, inorganic growth is an important and necessary tool for us to continue to maintain our market leadership and expand our market leadership. So you've seen us do this where like in direct lending as an example, we organically built a business that was very successful.

We then complemented that business by the purchase of DeerPath Capital, which was very complementary, but required to continue to build on and maintain market leadership. What I will share as I always share is we're going to be very disciplined, have a high bar for inorganic capital deployment and you should think of we're leaning into higher growth and capital efficient areas as we stated in the past. So, no change from that perspective.

Thank you for that. And maybe my follow-up question on the organic. A number of life insurers that have sizable asset management operations have started to introduce investment options combining public and private in the same. Where do you sit with the opportunity for interval funds for PGIM? Thank you.

So, thank you for the question. So, we actually have been bringing our public and private capabilities together with PGIM and have actually been introducing early days interval funds. As you know, we've been leaning into areas that we think are going to be higher growth and higher fee and have been expanding those capabilities both institutionally and on the retail side. So, we definitely think that is an area of opportunity that we've invested in. As with any of these capabilities, I'd go back to kind of my J curve comment earlier.

It obviously takes a bit of time for the assets to flow in and for the results to show up on the bottom line.

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

Hi, thanks. Sorry, good morning. My first question, I guess, I want to go back, sorry, to the EPS guide, right. So you guys were talking about 3% to 4% drag this year. So when you think about the 5% to 8% right over the three year period, should we think about that some of that coming back in 2026 of the 3% to 4% and then more in 2027, so the earnings growth picks up steam as we go through the three years and kind of get that average growth over the three year period?

Morning, Alicia. Let me take that. So going back to when we shared the targets last quarter, we said the 5% to 8% is a three year view intermediate and the growth will not be linear. And as you heard in Andy's opening remarks, we face near term headwinds. A couple of thoughts.

We are seeing the benefit of our strong sales in earnings coming through. However, in the near term, they are being offset by headwinds that we've talked about. So the surrenders in Japan due to the weakening yen, which I just quantified, and the impact of the runoff variable annuity. So I quantified the impact of the weakening yen. I thought it'd be helpful to also quantify our expectations on the impact of the runoff of the variable annuity.

So as we have previously shared, the quarterly runoff is anywhere between 3,000,000,000 to $4,000,000,000 Earnings impact will fluctuate with markets from quarter to quarter, but we estimate that the annual earnings impact on a cumulative basis is anywhere between 100,000,000 to $150,000,000 So, those are the 2025 impacts to earnings. But we do expect these headwinds to dissipate over time. They're embedded in the intermediate term targets of 5% to 8%. We expect them to dissipate over time as the surrenders stabilize and as the runoff slows down and of course as our growth continues to emerge and we continue to demonstrate further growth.

Thanks. And then my second question, you guys last quarter, right, we're talking about capital return as a percent of net income, but obviously that could swing around quarter to quarter and you guys were above 100% last year and again in the Q1. So are you still kind of gearing folks to think about capital return as a percent of net income as opposed to operating? How should we think about that for this year?

Yes. Elyse, when I think about the targets that we spoke about, we have the 65% of net income as a free cash flow target. That isn't directly linked to capital return, but obviously, it is the capital that is available to be returned. And as you noted, it does fluctuate. So, when we think about the free cash flow target ratio, it is an overtime measure, not a quarterly view, because cash flows to and from the businesses to the HoldCo can be lumpy and are not linear.

Prudential Financial (PRU) Q1 2025 Earnings Call Transcript

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