Prudential Financial : 2Q25 Prudential Financial, Inc. Earnings Conference Call Transcript

31-Jul-2025

Prudential Financial, Inc. (PRU)

Q2 2025 Earnings Call

CORPORATE PARTICIPANTS

Robert McLaughlin

Head-Investor Relations, Prudential Financial, Inc.

Andrew F. Sullivan

Chief Executive Officer & Director, Prudential Financial, Inc.

Yanela del Carmen Frias

Chief Financial Officer & Executive Vice President, Prudential Financial, Inc.

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OTHER PARTICIPANTS

Ryan Krueger

Analyst, Keefe, Bruyette & Woods, Inc.

Suneet Kamath

Analyst, Jefferies LLC

Thomas Gallagher

Analyst, Evercore ISI

Elyse Greenspan

Analyst, Wells Fargo Securities LLC

John Barnidge

Analyst, Piper Sandler & Co.

Jack Matten

Analyst, BMO Capital Markets Corp.

Wes Carmichael

Analyst, Autonomous Research US LP

Jimmy S. Bhullar

Analyst, JPMorgan Securities LLC

Bob Huang

Analyst, Morgan Stanley & Co. LLC

Michael Ward

Analyst, UBS Securities LLC

Alex Scott

Analyst, Barclays Capital, Inc.

MANAGEMENT DISCUSSION SECTION Operator: 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. [Operator Instructions] As a reminder, today's call is being recorded.

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

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Robert McLaughlin

Head-Investor Relations, Prudential Financial, Inc.

Good morning, and thank you for joining our call. Representing Prudential on today's call are Andy Sullivan, CEO; and Yanela Frias, CFO. We will start with prepared comments by Yanela and Andy 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 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.

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Andrew F. Sullivan

Chief Executive Officer & Director, Prudential Financial, Inc.

Good morning, everyone, and welcome to the call. Let me begin with my perspective on our progress and performance, and then I'll provide details on our priorities and major actions taken during the second quarter.

Our pre-tax adjusted operating income was $1.7 billion or $3.58 per share, up 9% from the prior-year quarter, and our year-to-date return on equity was over 14%. These results reflect more favorable underwriting experience and higher spread income across our global insurance businesses as well as higher fee income in PGIM.

Current quarter results included alternative investment income that was $60 million below our expectations, driven by lower private equity and real estate returns, and the net unfavorable impact of approximately $50 million from our annual assumption update process.

Our performance reflects solid momentum across most of our businesses and geographies, and the actions we have taken to diversify our products, expand our distribution and address evolving market demands. I'll highlight a few examples.

Our Group Insurance business continues to demonstrate strength, having one of its best earnings quarters in recent memory. Our efforts to diversify our product and segment mix in this business are clearly paying dividends.

In Individual Life, we produced improved earnings results and grew sales 10% year-over-year with a broader product portfolio. And in Institutional Retirement, we delivered robust longevity risk transfer transactions, leading to $9 billion of sales for the segment.

Turning to our International Insurance Businesses. In Japan, where our business has traditionally focused on protection products, we are now consistently capturing the growing demand for retirement and savings solutions through the introduction of new offerings, and we continue to see the stabilization of surrender activity, which has been a significant headwind for us recently.

In Brazil, we continued to deliver strong sales, with particular strength in our Life Planner channel. We've expanded our agency network by adding seven new agencies over the last year, increasing our Life Planner head count to an all-time high.

There were two areas where we are looking for stronger, more consistent results. In PGIM, flows were relatively flat as equity market volatility at the beginning of the quarter resulted in large retail outflows, offsetting solid positive institutional inflows. And in Individual Retirement Strategies, we have produced lower core earnings over the last several quarters. Although this was, in part, due to the expected runoff of our legacy variable annuity block, it was still disappointing. We seek to achieve more consistent results going forward as we lean into our further diversified product offering and continue to benefit from managing expenses efficiently and our pricing discipline.

Moving to slide 3. We are making progress against the three priorities I laid out for Prudential in the first quarter call, which will deliver stronger performance and more consistent results over time.

First, we are evolving our strategy. This is required due to the changing needs of our customers, the shifting competitive environment and rapid advances in technology. This is about focus, focusing our management attention and our capital deployment on the areas with the greatest opportunities to deliver profitable and sustainable growth over time. More updates will follow over the next several quarters.

Second, we are determined to execute with more consistency and discipline. This means improving our earnings performance as we refine our mix of businesses and products. We are committed to continuing to improve our cost base and the experience we deliver to our customers. Expanding our use of technology is core to these outcomes.

Artificial intelligence is already being used across the company to enhance how we engage with customers and in our operations, through automated underwriting, claims processing and risk management, and will be further leveraged to more efficiently scale our businesses and support our growth.

Third, we are enhancing our culture by leaning into the talent, expertise and diversity of perspectives that define this company, while building greater speed, ownership and accountability into how we work. This isn't about future actions. We are acting as a team with urgency to drive change and deliver outcomes each and every quarter.

Let me provide a specific example from this quarter. We are fundamentally changing the historical organizational model in PGIM, moving from a multi-manager model with six independent business units to one integrated asset management business. This is a substantive change that will lead to stronger revenues, reduce costs and improve margins over time.

Additionally, we are unifying our multiple institutional sales forces in PGIM into one integrated client team. This will lead to a better customer experience and stronger cross-selling results. In this change, we have combined our public fixed income and private credit businesses to create a single global capability with over $1 trillion in credit assets under management.

We are one of the largest credit managers in the industry, and this change enables us to provide more value to our clients through a wider range of origination and alpha generating strategies, allowing us to capitalize on the rapidly growing market for broader private credit solutions.

Culturally, this work in PGIM highlights our new focus on speed and accountability. Going forward, you'll see even more from us, greater focus, more follow-through to outcomes and steady progress in how we operate and create long-term shareholder value.

With that, I'll turn it over to Yanela to walk through the financials in more detail.

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Yanela del Carmen Frias

Chief Financial Officer & Executive Vice President, Prudential Financial, Inc.

Thank you, Andy. I will provide an overview of the performance for our PGIM, US and International Businesses. I will begin on slide 4 with the quarterly operating results from our businesses compared to the year-ago quarter. PGIM delivered higher asset management fees, driven by market appreciation, positive net flows and strong investment performance, and margin expansion of 140 basis points, despite higher expenses to support business growth.

Results of our US Businesses reflected an unfavorable impact from our annual assumption update and other refinements relative to the prior year. Excluding this item, current quarter results were higher, reflecting more favorable underwriting results from Individual Life, Group Insurance and Institutional Retirement Strategies. This was partially offset by lower fee income from the runoff of our legacy traditional variable annuity block, which will be a near-term headwind, as mentioned on prior calls.

Our International Businesses demonstrated a favorable impact from our annual assumption update and other refinements relative to the prior year. Excluding this item, current quarter results were up slightly, as favorable underwriting and higher net investment spread results were mostly offset by higher expenses to support business growth.

Turning to slide 5. PGIM has diversified capabilities in both public and private asset classes, across fixed income, equities and alternatives. PGIM's long-term investment performance remains strong, with over 75% of assets under management outperforming their benchmarks over the last 5- and 10-year periods. In addition, their three-year track record, which is an important retail metric, improved notably with 87% of assets now outperforming benchmarks.

PGIM's assets under management increased by 8% to $1.4 trillion from the prior year quarter, driven by market appreciation, positive net flows and strong investment performance. Total net flows in the quarter of $400 million included institutional third-party net inflows of $2.6 billion comprised of broad-based mandates across fixed income, private alternatives and equity, and $600 million of affiliated net inflows, which were offset by $2.8 billion of retail third-party outflows, driven by equity market volatility at the beginning of the second quarter.

In addition, we continue to see momentum in our private credit business, which had a strong fundraising quarter and maintained steady, disciplined deployment across direct lending, asset-backed financing and private