Q1 2025 Prudential Financial Inc Earnings Call

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 and instructions will be given at that time.

Speaker Change: If you should require any assistance during the call. Please press star zero and an operator will assist you offline as a reminder, today's call is being recorded I will now turn the call over to Mr. Bob Mclaughlin. Please go ahead.

Speaker Change: Good morning, and thank you for joining our call representing Prudential on today's call are Andy Sullivan, CEO and Ginola, France, CFO, we will start with prepared comments by Andy in Vanilla and then we will address your questions.

Speaker Change: 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.

Speaker Change: 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 Dot Com and now I'll turn it over to Andy.

Andy Sullivan: Good morning, everyone I'm incredibly excited to lead Prudential Ford at this pivotal moment in our 150 year history, we make promises that last for decades, and we commit every single day to keep those promises to our 50 million customers all over the world.

Speaker Change: Our work makes a difference.

Andy Sullivan: That is a privilege that I take seriously.

Andy Sullivan: 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.

Andy Sullivan: What is clear to me from this early assessment of C. E. O is that we need to sharpen our focus on driving growth and on creating greater value for our stakeholders.

Andy Sullivan: Beginning on slide two I see both significant opportunities and challenges in front of us.

Andy Sullivan: With our unique combination of global scale distribution power brand and talent.

Andy Sullivan: We're well positioned to address the growing protection and retirement needs of customers and clients around the world.

Andy Sullivan: And to meet increasing investor appetite for a broad range of investment products, including private credit and alternatives.

Andy Sullivan: Over the last several years, we've made tangible progress towards Derisking and diversifying the company.

Andy Sullivan: Through our divestitures and blocks placed into runoff, we significantly reduced our exposure to more volatile and market sensitive products.

Andy Sullivan: We've already reduced our overall exposure to traditional variable annuities and guaranteed universal life products by nearly 60%.

Andy Sullivan: And we continue to focus on ways to optimize our balance sheet capital and cash flows.

Andy Sullivan: 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.

Andy Sullivan: Complementing our core life insurance offering in that market.

Andy Sullivan: 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 PJM continues to benefit from a broader range of traditional and alternative investment products and expanding distribution platform and strong investment performance.

Andy Sullivan: 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 PJM.

Andy Sullivan: And while our earnings were higher than in the first quarter of last year.

Andy Sullivan: I want to be clear our recent results do not meet our expectations.

Andy Sullivan: And we will do better.

Andy Sullivan: The underlying capabilities distribution strengths brand and product quality of Prudential should deliver more value to our stakeholders.

Andy Sullivan: We will deliver to a higher performance standard going forward.

Andy Sullivan: That is what our customers our employees and our shareholders expect.

Andy Sullivan: My leadership team and I are committed to executing on our strategy to fundamentally improve our financial performance.

Andy Sullivan: At the same time, the path to higher earnings growth will not be linear.

Andy Sullivan: 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.

Andy Sullivan: Prized of traditional variable annuities.

Andy Sullivan: And guaranteed Universal life products.

Andy Sullivan: 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.

Andy Sullivan: Although we're seeing signs that this is beginning to stabilize.

Andy Sullivan: Importantly, we believe these earnings headwinds that contribute to an estimated three to four point drag to EPS growth in 2025.

Andy Sullivan: Will dissipate over time.

Andy Sullivan: We will see the compounding impact of our strong sales and flows drive stronger growth long term.

Andy Sullivan: 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.

Andy Sullivan: Is inclusive of the transitory headwinds.

Andy Sullivan: We have real work ahead of us to create greater value for our stakeholders.

Andy Sullivan: But let me reiterate we are committed to delivering stronger results overtime.

Andy Sullivan: Turning to slide three.

Andy Sullivan: To share with you today, how I see us getting there.

Andy Sullivan: First we will evolve and deliver on our strategy.

Andy Sullivan: 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.

Andy Sullivan: Second we will execute with consistency, we must raise the bar as we execute.

Andy Sullivan: Specifically that means continuing to evolve to a more favorable product and business mix.

Andy Sullivan: Improving our track record of delivering the expected returns of our inorganic and organic capital deployment.

Andy Sullivan: And continuing to improve our expense profile across our operations.

Andy Sullivan: Finally, we will focus on our culture.

Andy Sullivan: We benefit from strong talent expertise and diversity of perspectives.

Andy Sullivan: But we must move faster to ensure we capture new opportunities as they emerge and take greater accountability for outcomes.

Andy Sullivan: We've already taken action to align incentives, even more closely to earnings per share growth.

Andy Sullivan: These are my priorities are evolving and delivering on our strategy.

Andy Sullivan: Proving on our execution and fostering a high performance culture.

Andy Sullivan: Coupled with our differentiated position, serving 50 million 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 moves.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: Our diversified business mix provides stability across a variety of macroeconomic scenarios.

Speaker Change: Our balance sheet includes nearly $5 billion and highly liquid assets strong statutory solvency ratios and access to significant off balance sheet resources that support our double a financial strength.

Speaker Change: 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.

Speaker Change: Uncertainty and volatility and with that I'll turn it over to Jim Miller.

Jim Miller: Thank you Andy I will provide an overview of our financial results and business performance for our P. Jim U S and international businesses.

Speaker Change: I'll begin on slide five with our financial results.

Speaker Change: Our pretax adjusted operating income was $1.5 billion or $3.29 per share for the first quarter of 2025.

Speaker Change: 8% from the prior year quarter.

Speaker Change: This reflects favorable variances on underwriting results across our U S businesses, including the benefit of our recent derisking transactions and lower expenses.

Speaker Change: The current quarter also included alternative investment income that was below our expectations by $90 million driven by lower private equity and real estate returns.

Speaker Change: Turning to the quarterly operating results from our business as compared to the year ago quarter.

Speaker Change: P. J 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.

Speaker Change: 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.

Speaker Change: Our international businesses had a lower spread income, including lower alternative investment returns.

Speaker Change: Lower joint venture earnings driven by less favorable <unk> performance in Chile.

Speaker Change: And the net unfavorable impact from foreign currency exchange rates.

Speaker Change: Turning to slide six.

Speaker Change: Teach them has diversified capabilities in both public and private asset classes.

Speaker Change: Across fixed income equities and alternatives.

Speaker Change: He just investment performance remained strong with 81 is 79% of assets under management outperforming their benchmarks over the last five and 10 year periods respectively.

Speaker Change: P J 's assets under management increased by 3% to one four trillion dollars from the prior year quarter, driven by market appreciation net flows and strong investment performance.

Speaker Change: The net flows in the quarter a $4.3 billion included institutional third party follows a $4 $6 billion driven by mandates across fixed income <unk>.

Speaker Change: But alternatives and equity, which are partially offset by modest retail third party outflows.

Speaker Change: Our diversified teach them private alternatives platform, which has assets under management of nearly $250 billion experienced over $10 billion in private capital deployment up over 60% compared to the prior year quarter.

Speaker Change: 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.

Speaker Change: Turning to slide seven.

Speaker Change: Our U S businesses produced diversified sources of earnings from fees net investment spread and underwriting income and benefit from a complementary mix of longevity and mortality businesses.

Retirement strategies continue to have strong sales momentum generating over $10 billion in the first quarter across its institutional and individual lines of business.

Speaker Change: Institutional retirement sales of $7 billion, including two international longevity reinsurance transactions.

Speaker Change: Currently nearly $5 billion, we also experienced our best quarter ever in structured settlements with $600 million in sales.

Speaker Change: Individual retirement posted three $5 billion in sales in the first quarter.

Speaker Change: 5% from the year ago quarter.

Speaker Change: Our registered index linked annuities continued to demonstrate the benefits of our product and innovation.

Speaker Change: We sustained momentum in our fixed annuity product sales.

Speaker Change: Additionally, we continued to reduce market sensitivity by running off our legacy variable annuities.

Speaker Change: Corporate insurance sales totaled $400 million into first quarter up 6% from the prior year quarter, driven primarily by strength in our group life products.

Speaker Change: We are executing our strategy of both product and market segment diversification, while leveraging technology to increase operating efficiency and enhance the customer experience.

Speaker Change: The benefits ratio of 81, 3% in the first quarter.

Speaker Change: Favorable underwriting results in the quarter as well as our strategic actions to improve profitability and performance.

Speaker Change: In individual life sales totaled over $200 million in the first quarter up 26% from the prior year quarter.

Speaker Change: This growth was driven largely by accumulation focused variable products reflective of our pivot to be more capital efficient.

Speaker Change: Turning to slide eight our international businesses include our Japanese life insurance companies.

Speaker Change: Where we have a differentiated multichannel distribution model as well as other businesses aimed at expanding our presence in targeted high growth emerging markets.

Speaker Change: Sales in our international businesses were up 15% compared to the prior year quarter.

Speaker Change: I was 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% and sales of these products compared to the prior year quarter.

Speaker Change: 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 her life planners and group life sales.

Speaker Change: Turning to slide nine our significant capital position and strong regulatory capital ratios continue to support our double a financial strength and our ability to expand our market leading businesses.

Speaker Change: Our cash and liquid assets for $4 $9 billion, which is above our minimum liquidity target of $3 billion and we have substantial off balance sheet resources.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: And with that we will be happy to take your questions.

Speaker Change: Thank you will now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue in the interest of time. We ask you. Please ask one question one follow up then return to the queue. Once again Thats star one.

Speaker Change: To be placed in the question queue and we ask you. Please ask one question and one follow up then return to the queue.

Speaker Change: Our first question today is coming from Ryan Krueger from K B W. Your line is now live.

Ryan Krueger: 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.

Ryan Krueger: A Bloomberg article last night, where I think you mentioned that the changing competitive and economic landscape may call for a review of of your capital deployment plans at some point I I was hoping you could expand on what you mean by that and if that was more about where your organic reallocating capital to grow or.

Ryan Krueger: That refers more to things that could involve M&A or divestitures.

Ryan Krueger: So good morning, Ryan and Thanks first of all for reading. The article you know my job as the CEO is to ensure that we deploy capital to the highest and the best uses across the entire enterprise. So.

Ryan Krueger: So we continuously evaluate the various opportunities in front of us.

Ryan Krueger: 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.

Ryan Krueger: Capital, but my statement really as you know markets change businesses change and we're going to need to evolve with that as as things evolve.

Ryan Krueger: As we sit here, we like our capital deployment plans.

Ryan Krueger: Obviously reflect the current opportunities that we see in the marketplace.

Ryan Krueger: 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.

Speaker Change: Okay. Thanks makes sense and then on P. Jim you had provided at 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 sometimes do this three year period.

Speaker Change: 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.

Speaker Change: Let me just make some comments overall about our margins in PJM, 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.

Speaker Change: You know 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 mentioned three things I've talked about before first we.

Speaker Change: They consistently investing in a whole variety of 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.

Speaker Change: 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.

Speaker Change: We will continue to look for productivity and efficiency opportunities are and that will help us expand our margin. So.

Speaker Change: We're confident in the path towards 30% as we stated in our intermediate financial targets.

Speaker Change: Thank you.

Speaker Change: Thank you. Your next question is coming from Tom Gallagher from Evercore ISI. Your line is now live.

Tom Gallagher: Good morning, I'm, Andy I appreciate your candor in your opening remarks. So thanks, thanks for that.

Tom Gallagher: I know you flagged the some of the headwinds and in terms of the V. A N S. Schuh all run off I guess, one way to reduce the headwind is to meaningfully shrink the remaining exposure of the enforced free up capital and then you don't.

Tom Gallagher: 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 that's on the table a much more dramatic shrink of those whether that's through a prism make transaction or a third party is that is that something that's on the table that we should be thinking about.

Tom Gallagher: So Tom first thank you for the feedback on on my opening remarks I appreciate that you.

Tom Gallagher: You know 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.

Tom Gallagher: Traditional variable annuities, a guaranteed universal life and put them in run off and we've done very successful transaction. So those were absolutely the right decisions, where we're happy we did it but let me let me just share with how I think about this oh and you know we've talked about derisking.

Tom Gallagher: Almost like its an event, it's not an event derisking and really managing risk profile of the company is continuous.

Tom Gallagher: So I've intentionally chosen the words of continuously optimizing our balance sheet our capital our cash flows are.

Tom Gallagher: Because that is a discipline that we have consistently evaluating opportunities. So I don't see it as something that starts in and then we're done at.

Tom Gallagher: At this point sitting here today, what Ive chairs, there's nothing in the pipeline that's worthy of talking about with you.

Speaker Change: Gotcha. Thanks, Thanks for that and then.

Speaker Change: For Junella just a question on how you're feeling about capital levels in Japan ahead of the U S. Our implementation set for next year would you.

Speaker Change: Would you anticipate having to contribute capital or do you feel like you're good.

Speaker Change: Good enough based on at least preliminary assessing.

Speaker Change: Assessment, you've done on on how how that might impact capital. Thank you.

Speaker Change: Good morning, Tom Yeah, 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 double AA financial strength rating post the implementation.

Speaker Change: 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.

Speaker Change: And I would add that we are confident in our ability to solve for an economic volatility India saw a 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.

Speaker Change: And maybe lastly, I would say that you know we've had a number of years to plan for this and we focused on two things one is the level of Es hunk and capital and of course on 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.

Speaker Change: It has influenced our reinsurance strategy and just maybe as a point of reference <unk> as of the end of 2020 for roughly 70% of our U S. Dollar liabilities in Japan are reassured outside of Japan.

Gotcha that's helpful color. Thank you.

Speaker Change: Yeah.

Thank you. Your next question is coming from Bob Wong from Morgan Stanley. Your line is that a lot.

Bob Wong: Good morning, maybe just a follow up on the questions on Japan The U S. R.

Bob Wong: As you think about reassure like liabilities out of Japan can you maybe help us think about just the broader reinsurance market.

Bob Wong: There.

Bob Wong: He is present, the most efficient way from a pricing perspective to reinsure business out of Japan or are there other reinsurance opportunities that you can evaluate is there a way to think about that.

Bob: Yeah, Good morning, Bob.

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 prismatic and X.

Bob: Reinsurance so we have multiple tools in terms of where we decide where to manage the risks 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 of all the things that we think about and care about P. S. I.

Bob: Our capital levels are 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.

Speaker Change: Got it thanks, and apologies if I missed this but you did not provide a preliminary yes our ratio at all right now we we continue to plan on providing that this summer which is about a year in advance of the required disclosure.

Speaker Change: Got it okay. No I really appreciate that maybe my follow up is on the variable investment income.

Speaker Change: 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 V I into the second quarter or maybe rest of the year from a modeling perspective.

Speaker Change: Yeah. 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 low.

Speaker Change: Your real estate returns.

Speaker Change: With regard to the outlook you know I would say that predicting near term performance in the current environment is challenging due to the high heightened uncertainty and volatility. However, it is likely that the decline that we have experienced so far this quarter and equity markets will result in returns below our expected levels at the beginning of the year end.

Speaker Change: Let me share a sensitivity with you. So if we experience and equity market decline of 10% followed by a 1.25% quarterly recovery.

Speaker Change: Turns on our alternatives would still be positive, but we could see anywhere between 200 to 250 basis point decline.

Speaker Change: Two our intermediate term expectations of 7% to 9% over a four quarter period.

Speaker Change: I would note that this is a more conservative scenario than we have historically observed over the last 25 years back to 2000.

Speaker Change: And I would also be very clear that we are comfortable with our alternatives portfolio in the long term target returns and this has proven out over time on accumulative basis. These investments have exceeded expectations over the past decade.

Speaker Change: Yeah.

Speaker Change: Excellent. Thank you very much.

Speaker Change: Thank you. Your next question today is coming from city come off from Jefferies. Your line is now live.

City: Great. Thanks, and Andy I also appreciate the comment that you made about improving the financial performance of the company that.

Speaker Change: 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.

Speaker Change: Deal with it it's about 5% of your earnings so it's not a huge needle mover in and just based on my experience. It seems like this business maybe more often hurts Pru then 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.

Andy Sullivan: Yeah, Sidney it's Andy so.

Speaker Change: 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.

Speaker Change: The first aspect is obviously the legacy guaranteed Universal life business are that's that's in run off.

Speaker Change: But then the second is the go forward product set.

Speaker Change: And we obviously feel.

Speaker Change: Feel differently about the two pieces that you know we've been working very diligently to reduce our exposure on the guaranteed universal life side, putting into run off 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.

Speaker Change: But your question about the go forward business, we like this business.

Speaker Change: Yeah, obviously, it's a business that's core to prudential's purpose from a long run perspective, but are there other reasons I would hit the.

Speaker Change: 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 a good profitability with that obviously this is a business that also adds a.

Speaker Change: Two our mortality longevity longevity balance, which is important for the company given that we're always managing business mix as part of as part of our accountability.

Speaker Change: And you know.

Speaker Change: When you look to us to be in a business you're not in a business you need to look at your strengths and your capabilities. This is a business, where we have deep capabilities.

Speaker Change: In our underwriting a shop, where one of the most trusted brands out there with great customer experience, we're seeing a flight to quality, so when well managed.

Speaker Change: 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 this quarter with the great sales that we had.

Speaker Change: 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.

Speaker Change: Surrender fee or reserve release that helps earnings in the short term or is it just a kind of a negative one.

Speaker Change: When these things happen.

Speaker Change: Yeah, Hi, Sidney so as Andy noted in his opening remarks, our wild surrender activity remains a near term headwind. We are seeing signs that this trend is beginning to stabilize we've seen improvement in the peso surrenders through 2024, and continuing through 2025, and we would expect that.

Speaker Change: The trend would continue given current exchange rates, but in terms of when is behind us it's difficult to predict given that it is a it is tied to two the exchange rate.

Speaker Change: Again, but that said are they the the impact of the surrenders has dissipated.

Speaker Change: I would say that it remains a headwind to this year and just to give you. Some some quantification we estimate that the impact to 2025 earnings from the surrenders that we experienced in 2024 will be roughly $100 million.

Speaker Change: To your question about are there offsetting surrender fees. The majority of these are these contracts are beyond the surrender charge period. Therefore, there is no offsetting impact of the surrender charge fee.

Speaker Change: Sidney I would just add into that that you know we've been very proactive in Japan from a business perspective, taking action to.

Speaker Change: 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 24 months is evidence of that we've doubled our yen offerings in the marketplace, 30% of this quarters sales were were yen based.

Speaker Change: And we've added staff both in the in the distribution organization and in the customer service organization. So that we can work with customers, who still have needs for protection to not just dropped their coverage, but to find other alternatives. So we're being very proactive in working to mitigate this.

Speaker Change: Got it okay. Thank you.

Speaker Change: Thank you. Your next question today is coming from Joel Horowitz from Dowling <unk> partners. Your line is now live.

Joel Horowitz: Hey, good morning.

Speaker Change: Wanted to touch on the earnings emergence in the retirement business businesses, we saw individual retirement with a nice pick up this quarter, but institutional retirement earnings have contracted a bit despite the the really strong PRT activity last year.

Speaker Change: Just any color on what's going on in institutional and when do you expect sort of the the earnings to pick up.

Speaker Change: Hi, Joe.

Speaker Change: Yes, so and you know 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 one one and also we rotate in.

Speaker Change: The portfolio in the best way to think about this is to look at first quarter 2025, and compare that to first quarter 2024, now the core earnings and institutional retirement in those periods was down by $24 million, but that does reflect the benefit of the of the sales. So let's walk through that we did.

Speaker Change: Have a growth in spread earnings from our strong sales again, particularly the strong P. R. T cells that we had in 2024 and the benefit to spread net of the expected runoff of the enforced PRT is a runoff business was approximately $25 million. So that is the benefit of the sales.

Speaker Change: 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 million of annual expenses to institutional retirement that nets to zero across the company, but it does impact the business.

Speaker Change: Second we had lower spread income on cash balances are in the business and that was due to the reduction in short term rates of about 100 basis points in the second half of 2024 as you've heard US say short term rates don't have a total a material.

Speaker Change: <unk> 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 after retirement no impact to net but it did impact the core earnings power. So those are the three.

Speaker Change: Drivers that offset the fact that we're seeing our earnings and spread and we feel good about the growth that we're seeing in spread it's just being masked by these items.

Speaker Change: Okay that 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.

Speaker Change: So thanks Joel for the question.

Speaker Change: The market size that we've seen all the way through the first quarter is a I would frame it is as expected.

Speaker Change: So we have not seen an effect of the litigation on on the willingness and desire for transactions in the marketplace are nor have we seen any impact obviously on our success in that market you know that being said I wouldn't be surprised to see 2025 normalize from a market size purse.

Speaker Change: Specter of 'twenty 'twenty four was was a pretty robust a robust year. The reason I feel that way is because of the volatility. That's currently going on in the environment.

Speaker Change: 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 I think the important thing is long term. This is a very good growth area. There's three trillion.

Speaker Change: And in pension plan assets that Havent transacted, our 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.

Speaker Change: Not a flow oriented business, so transactions will be episodic and you shouldn't expect to see things every quarter.

Speaker Change: Okay. Thanks for the answers.

Speaker Change: Youre welcome.

Speaker Change: Thank you. Your next question today is coming from John Barnidge from Piper Sandler Your line is now live.

John Barnidge: Good morning, Thank you for the opportunity.

John Barnidge: My first question is about the comment about sharpening the focus growth where does inorganic sit within that.

John Barnidge: John Thanks for the question.

John Barnidge: So.

John Barnidge: 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 that is always our highest priority and best thing to do that said inorganic growth is at an important and necessary tool for us to continue to maintain our market leadership and expand our market leadership.

John Barnidge: So you've seen us do 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 Deere past capital.

John Barnidge: You know, which was very complementary but required to continue to build on and maintain market leadership, what I will share is as I always share is we're going to be a very disciplined have a high bar for inorganic capital deployment and you should think of you know we're leaning into higher growth in <unk>.

John Barnidge: Capital efficient areas as we stated in the past so no change from that perspective.

Speaker Change: Thank you for that maybe my follow up question on the organic.

John Barnidge: Number of life insurers that have sizable asset management operations.

John Barnidge: Started to introduce investment options, combining public and private in the same where where do you sit with the opportunity for interval funds for PJM. Thank you.

John Barnidge: So oh. Thank you for the question. So we actually has been bringing our public and private.

John Barnidge: All of these together.

John Barnidge: With with PJM 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.

John Barnidge: 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.

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

John Barnidge: Yes.

John Barnidge: Thank you.

John Barnidge: Yeah.

John Barnidge: Okay.

Speaker Change: Thank you. Your next question is coming from Elyse Greenspan from Wells Fargo. Your line is now live.

Elyse Greenspan: Hi, Thanks, I'm sorry, good morning.

Speaker Change: My first question I guess I wanted to go back.

Sorry did that the EPS guide right. So you know you guys were talking about 3% to 4% track this year. So.

So when you think about the 5% to 8% rate over the three year period should we think about that.

Speaker Change: Some of that coming back in 26 of the three to four and then more than 27, so the earnings growth.

Speaker Change: <unk> picks up steam as we go through the three years and you know kind of get that that average growth over the three year period.

Elyse Greenspan: Good morning, Elyse, Yeah, Let me, let me take that so so going back to when we share the targets last quarter.

Elyse Greenspan: You 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.

Elyse Greenspan: A couple of thoughts we are seeing the benefit of our strong sales and earnings coming through.

Elyse Greenspan: 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 are which I just stopped quantified and the impact of the run run off 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.

Elyse Greenspan: The annuity so as we have previously shared.

Elyse Greenspan: The quarterly run off is anywhere between $3 billion to $4 billion earnings impact will fluctuate with market.

Elyse Greenspan: From quarter to quarter, but we estimate that the annual earnings impact.

Elyse Greenspan: Cumulative basis is anywhere between $100 million to $150 million. So those are the 2025 impacts are two to earnings.

Elyse Greenspan: But we do expect these headwinds to dissipate over time, they're embedded in the intermediate term targets of 5%, 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 are we continued to demonstrate further growth.

Elyse Greenspan: Yeah.

Elyse Greenspan: Thanks, and then my second question you know 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. When you guys were above 100% last year and again in the Q1, so you're still kind of gearing folks to think about capital return as it were.

Elyse Greenspan: Set of net income as opposed to operating how shall we think about that for this year.

Elyse Greenspan: Yeah at least when I think about the targets that we spoke about you know we have the 65% of net income as a free cash flow target that 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.

Elyse Greenspan: Ratio. It is an overtime measure not a quarterly view because cashless tool it from the businesses to the Holdco can can be it can be lumpy and are not linear that said, we did have strong cash flows from the businesses. This quarter, we had $600 million come up two P. S. I in addition to <unk>.

Elyse Greenspan: Other sources and uses them and again I would just highlight that that ratio is an overtime measure and will not be linear.

Elyse Greenspan: Okay. Thank you.

Elyse Greenspan: Yeah.

Speaker Change: Thank you. Your next question is coming from Jimmy Buhler from J P. Morgan Your line is now live.

Jimmy Buhler: Hey, I guess, it's good morning still.

Speaker Change: First I just had a question for janella following up on your E.

Speaker Change: Yes, our discussion you didn't obviously you give a number but on what the ESR is but what do you think is the normal thresholds that you'd want to run your business given your liability profile in Japan.

Speaker Change: Yeah. So I mean, what we would say is you know we'll share the preliminary ESR views during the summer we will continue to manage these entities to a level of capital consistent with our double a targets and.

Speaker Change: We do think that post esri implementation, we will be at those levels.

Speaker Change: Okay, but you're not open to discussing what the level is or what the pieces are not asking what your blood level is or what do you think is the appropriate base.

Speaker Change: Yeah, No again, we will share the where we are and what we think the appropriate level is in the summer.

Speaker Change: Okay and then on your flows in PJM. We're obviously very strong this quarter and then annuity flows also benefited from and decent growth in the buffer product how should we assume that both of those businesses are going to hold up in the face of higher market volatility I'm, assuming PJM, obviously he's going to.

Speaker Change: See some pressure but.

Speaker Change: Showed that the annuity business benefit or is it going to be pressured as well given.

Speaker Change: Higher volatility and a directionally declining market overall.

Speaker Change: Jimmy Let me take those one at a time I'll start with PJM and then and then I'll talk about annuities. So on page M. We were quite pleased with our flows in the first quarter is as you mentioned you know and we had very strong institutional flows that were it was very broad based we saw that across.

Speaker Change: Many clients are which we were happy to see and also across almost all of our asset classes. So it was very broad based.

Speaker Change: Inflows you know we did see obviously, a volatility really kick up in March and.

Speaker Change: And uncertainty in the market causes clients to go risk off the.

Speaker Change: The most immediate effect of that as retail clients react first and we definitely saw that in March.

Speaker Change: Seeing that continue into into April.

Speaker Change: If volatility continues I would expect to see it have an impact on institutional flows as well. So I would frame. This is we are off to a great start in 2025, thanks to all of our hard work and good results, but we're now more cautious.

Speaker Change: On PGM flows. Please also they'll keep in mind the affiliated flows.

Speaker Change: <unk>, which which are in essence flat this quarter, but over time, thanks to our retirement and insurance capabilities that'll be a good growth opportunity you know on the annuity side. The the market's robust we saw the third record basically quarter at 100 billion in sales obviously as interest rates go up.

Speaker Change: Down you could have a dampening or or enhancing effects, but the important thing is there are significant long term tailwind that are driving this business.

Speaker Change: When you think of the aging of the population are the the real need to.

Speaker Change: Search for yield.

Speaker Change: It did to search for higher yield.

Speaker Change: The fact is volatility creates I hired a desire for protected solutions uncertainty so.

Speaker Change: So we expect this to remain a robust market. We were pleased with our $3 5 billion in sales. We've now been very consistent at that so I believe that this will be a good growth area for us.

Speaker Change: Okay, Thanks, and if I could just ask one more and Andy can you talk about like some of the key areas, where maybe we'll see a shift in strategy or focus on the part of Prudential and I think you mentioned something along the lines of like uses of capital might evolve over time, but there maybe.

Speaker Change: It'd be a little bit more specific on where it is that you will be different going forward than maybe in the past few years.

Speaker Change: Yeah. So so so Jimmy Oh, I'll, just sort of reiterate what I talked about at the top of the call with Ryan, which is we're going to continuously be evaluating the various growth opportunities that we have in front of us and their return profile as we look to optimize things.

Jimmy Buhler: I sit here today I'm not ready to.

Speaker Change: To go deeper we we obviously have a continuous process.

Speaker Change: Of assessing the market changes and business changes and how we need to evolve our capital plans, but I think the important takeaway is it's a continuous discipline that we have and will evolve and adjust over time.

Speaker Change: Okay. Thanks.

Speaker Change: Yeah.

Speaker Change: Thank you next question is coming from Jack Morton from BMO capital markets. Your line is not a lot.

Jack Morton: Hey, good morning, Justin.

Speaker Change: Just a follow up on the individual retirement sales outlook.

Speaker Change: I mean, any Indian second half sales levels are trending so far in April, especially for the Violet product given some of the recent market volatility I think he referenced a good environment for sales, but do you think about the $3 5 billion this quarter as things that you can.

Speaker Change: Sustained throughout the balance of the year.

Andy Sullivan: Jack It's Andy I'm, not going to get that specific about what we're seeing and in the month of April and candidly. We look at this business over the long term and what the long term tailwind trends are going to be for us and obviously, we feel very very good very strong about that.

Speaker Change: Got it okay. Thank you.

Speaker Change: It looks from the on the group business I think premium growth in the quarter was pretty strong kind of well above like the intermediate.

Speaker Change: Term target you've laid out and just any color on what drove that result, and how you view the outlook for growth in that business. This year.

Speaker Change: Hey, Jack it's Jim So yeah, we we had strong performance across the board and group both in group life and disability to core earnings in the quarter really highlight our continued momentum.

Speaker Change: And we're executing on our growth strategy and also ensuring that we are maintaining price discipline here, we're making investments in improving our customer experience.

Speaker Change: And claims management capabilities. So a very good story and you can see our focus on profitable growth highlighted really in the overall benefit ratio, which was just over 81% this quarter and right below the target of 83% to 87%.

Speaker Change: And of course, our segment diversification strategy is also showing up in improving our fundamentals in the business.

Speaker Change: Most notably under the 5000 lives market, where we had over 50% sales growth compared to a year ago quarter. So all of this is showing up in the results and we feel good about the outlook for the business.

Speaker Change: Thank you.

Speaker Change: Yeah.

Speaker Change: Thank you. Your next question today is coming from West Carmichael from Autonomous Research. Your line is that a lot.

West Carmichael: Hey, good morning I.

West Carmichael: I wanted to come back to the EPS discussion real quick, but Andy you reiterated 5% to 8% average core EPS growth over the three year period could you just help us with the baseline with which to measure you too because I know there was some change to reported seasonality, but if I look at last quarter slide deck 2024 core EPS was $13.94. So is that the baseline.

Speaker Change: Would we be looking at a different figure.

Speaker Change: Yeah. Wes this is gino so if you recall last quarter when we had it in the presentation. The core base that you should be working off of its $13.67.

Speaker Change: And that's adjusted for all of the seasonality and reflecting all of that all of those changes.

Speaker Change: Okay.

Speaker Change: That's helpful. Thanks, Thanks Sheila.

Speaker Change: And maybe just a question on prism, Nick I know you announced the $7 billion transaction in January but I wanted to see if you could provide a little more color on maybe just strategically if anything's changed.

Speaker Change: Prismatic, if you're focused on more back big deals are looking towards third party business now.

Speaker Change: Yeah. So I don't think anything has strategically changed I mentioned in my answer to the prior question that we you know we really have multiple lever levers that we look at our multiple avenues for where and how we manage risk.

Speaker Change: Wholly owned entities prismatic and external reinsurance and we really leverage all of those we have an active pipeline for prisma and really that focuses on financing new business growth.

Speaker Change: I'm going balance sheet optimization, you heard Andy say that is a constant we're constantly looking at how do we optimize the balance sheet and lastly, third party blocks. You know however, these transactions are complex there'd be spoke to each situation and require regulatory coordination. So they do take time and again as you said, we just closed on the Japan.

Speaker Change: A $7 billion.

Speaker Change: Yeah.

Speaker Change: Thank you.

Speaker Change: Yeah.

Speaker Change: Yeah.

Speaker Change: Thank you. The next question is coming from Alex Scott from Barclays. Your line is now live.

Speaker Change: Hey, first one I had is on the the yen hedging program I'm just just in light of some of the volatility in currency.

Speaker Change: Currency markets could you talk about that program and you know if you.

Speaker Change: We're able to talk at all about how that impacts potential yes, our ratio I know, we don't we don't know what it is we don't know what the baseline is but you know one of your peers had some volatility in there yes are related to to this and you know just just given you guys have a big program as well.

Speaker Change: But I'd just be interested in.

Speaker Change: How that if at all affects the capitalization and the Japan business.

Speaker Change: Yeah. So a couple of thoughts there. So we don't hedge our yen earnings are in Japan. So obviously you know the percentage of Vienna yen earnings in Japan is not significant given that we have a lot of U S dollar business and our yen I expect our expenses are in yen, we do hedge our equity.

Speaker Change: In Japan, and a well you know we feel good about that it's an active program.

Speaker Change: It is part of our broader capital management framework. So that is all it all covered there.

Speaker Change: With regards to Es are obviously, when we implement ESR and when we look at ESR and capital levels being consistent with our levels of capital work factoring into hedging program as well.

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change:

Speaker Change: Maybe shifting gears.

Speaker Change: The the life insurance segment, you called it out as an area, where there's some near term headwind and I appreciate the reasons why but at the same time.

Speaker Change: The core earnings power I know Theres, a lot of volatility in the actual number but the core number that you guys kind of pointed us to in your release looked stronger I mean, I think it was the best number you've put out since.

Speaker Change: 'twenty one.

So I'd just be interested is that not a sustainable number or you know is there.

Speaker Change: Some other nuance to the first quarter numbers.

Speaker Change: Just.

Speaker Change: You know Alex what I would say is yeah. We we did see a slight growth in the core earnings power of the individual life business that is reflective of the really the good business that we're writing and as you heard Andy say you know we feel good about the new business. We're writing is profitable it's capital efficient and over time the benefit.

Speaker Change: Earnings of those sales are coming through and obviously it is negatively impacted by the remaining G. O L portion that's in that business as well, but that's really what's going on so if it's in court it will be sustainable and it is not a one time item.

Speaker Change: Okay. Thank you.

Speaker Change: Okay.

Speaker Change: Thank you. Your next question is coming from Mike Ward from UBS. Your line is now live.

Mike Ward: Thanks, guys good morning.

Mike Ward: Just wondering if I appreciate the commentary on the alternatives.

Mike Ward: So to me, but wondering if you have an updated view of overall sensitivities for future equity market or interest rate shocks just given the reduction in market sounds like <unk> been working on.

Speaker Change: Yeah. Good morning, Mike Oh, we do so let me share those you may recall that following our variable annuity derisking transactions. We did specify that are earning sensitivities had been reduced by approximately 20%. So our earnings sensitivities remain relatively unchanged from those levels.

Speaker Change: But let me walk through them from an equity market perspective, if we apply the same equity market shock that I spoke about for alternatives. So 10% one time equity market decline followed by a 1.25% quarterly recovery.

Speaker Change: We would expect the impact to be a reduction of about 30 per share on an annual basis. So that's the equity market shock from an interest rate perspective, if we assume a 50 basis 0.1 time interest rate decline, we expect the impact to be about a 20% decline in EPS on an annual basis.

Jim: Thanks, Jim.

Speaker Change: That's helpful and then maybe for Andy just curious how are you.

Speaker Change: Are you thinking about the common dividend in the context of capital priorities just it seems like.

Speaker Change: But increasingly a significant use of capital and I think double your spend on buybacks just curious how that.

Speaker Change: <unk> fits into the capital discussion.

Speaker Change: Yes, Mike I'm going to let janella cover how we think about that capital deployment.

Speaker Change: Yeah, Yeah. So somebody you know what I would say there is our capital deployment priorities and and and and how we think about it hasnt changed.

Speaker Change: We continue to apply a very thoughtful approach to balancing the preservation of financial strength and flexibility investing in our businesses for long term growth and supporting shareholder distributions, both in the form of dividends and share repurchases.

Speaker Change: And would reiterate that we continue to see valuable organic growth opportunities and I with double click on the financial strength aspect of the priorities given the macro environment that we're seeing and we continue to confidently navigate the macro environment with our strong balance sheet. So we don't anticipate any changes.

Speaker Change: Mhm.

Speaker Change: Okay.

Andy Sullivan: We reached end of our question and answer session I'd like to turn the floor back over to Andy for any further or closing comments.

Andy Sullivan: Thank you everyone for joining us today, and I want to give a special thanks to our employees all around the world.

Andy Sullivan: For their commitment to our customers and to each other.

Andy Sullivan: I see tremendous opportunity ahead for our business and our leadership team is well aligned on the priorities that will get us there evolving and delivering on our strategy improving our execution and fostering a high performance culture. We're confident that we're near an inflection point towards a much stronger company I look forward to keeping you updated on the progress along the way have a great day.

Andy Sullivan: Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and that's a wonderful day, we thank you for your participation today.

Andy Sullivan: Yeah.

Andy Sullivan: Yeah.