Prudential Financial, Inc. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Strategy Evolution: Focus on driving growth and creating value for stakeholders, with capital allocation prioritized to high-growth areas.
• Execution Consistency: Evolve to a more favorable product and business mix, improve capital deployment returns, and enhance expense profile.
• Culture Focus: Align incentives to EPS growth, capture new opportunities faster, and foster a high-performance culture.
• Financial Results: Q1 pre-tax adjusted operating income up 8%, but recent results below expectations. Near-term headwinds in U.S. (runoff of volatile products) and Japan (surrenders due to yen weakness), but headwinds expected to dissipate over time.
• PGIM Performance: Strong investment performance, AUM growth, and diversified capabilities with 81% and 79% of assets under management outperforming benchmarks over 5 and 10-year periods, respectively.
• U.S. Business Performance: Diversified earnings sources, strong retirement sales, and reduced market sensitivity through runoff of legacy products.
• International Business Performance: Japan and emerging markets sales growth, with Japan benefiting from new retirement/savings product launches and emerging markets driven by Brazil's strong performance.

Segment Performance

• PGIM: Pre-tax adjusted operating income was $1.5 billion, or $3.29 per share, for Q1 2025, up 8% from the prior year quarter. Assets under management increased by 3% to $1.4 trillion from the prior year quarter, driven by market appreciation, net flows, and strong investment performance. The net flows in the quarter were $4.3 billion, with institutional third-party flows of $4.6 billion. The diversified PGIM private alternatives platform, with assets under management of nearly $250 billion, experienced over $10 billion in private capital deployment, though activity slowed towards the end of Q1 due to market uncertainty.
• U.S. Businesses: Results reflected more favorable underwriting results and lower expenses, partially offset by lower fee income from the runoff of legacy traditional variable annuity block and lower spread income. Retirement strategies had strong sales momentum, generating over $10 billion in Q1. Group insurance sales totaled $400 million, up 6% y-o-y. Individualized sales totaled over $200 million, up 26% y-o-y.
• International Businesses: Sales were up 15% y-o-y. Japan saw over 20% increase in sales of retirement and savings products. Emerging market sales increased 19% y-o-y, driven by record sales in Brazil.

Guidance

• Intermediate-term financial targets of 5%-8% core adjusted operating EPS growth through 2027, inclusive of transitory headwinds.
• Near-term headwinds expected to drag EPS growth by 3-4 points in 2025, but expected to dissipate over time. Confident in achieving intermediate-term targets outlined last quarter.

Risks

• Near-term earnings pressure in U.S. from runoff of traditional variable annuities and guaranteed universal life products.
• Elevated surrenders in Japan due to weaker yen, though signs of stabilization.
• Volatile economic conditions impacting earnings across businesses.

Q: Ryan Krueger from KBW asked about capital deployment plans and PGIM margin target.

A: Andy Sullivan discussed continuous evaluation of capital uses across organic, inorganic, and return profile, and PGIM's margin path towards 30% over the three-year period, citing investment in growth, market recovery, and expense discipline.

Q: Tom Gallagher from Evercore ISI asked about shrinking VA and SUL exposure.

A: Andy Sullivan stated de-risking is continuous, not an event, and there's nothing in the pipeline to discuss regarding dramatic shrinkage of these exposures.

Q: Bob Huang from Morgan Stanley asked about Japan ESR and variable investment income.

A: Yanela Frias discussed ESR planning to be shared in summer, and variable investment income volatility, noting challenging near-term prediction due to market uncertainty but confidence in long-term alternatives portfolio.

Q: Suneet Kamath from Jeffries asked about strategic value of individual life insurance.

A: Andy Sullivan highlighted go-forward product set is less interest rate sensitive, capital efficient, and core to Prudential's purpose, with deep underwriting capabilities and flight to quality.

Q: Joel Hurwitz from Dowling Partners asked about institutional retirement earnings.

A: Yanela Frias explained earnings contraction due to internal expense allocation shift, lower spread income on cash balances, and accounting methodology refinement, but saw growth in spread earnings from strong sales.

Q: John Barnidge from Piper Sandler asked about inorganic growth and interval funds for PGIM.

A: Andy Sullivan emphasized organic growth is priority, but inorganic is necessary for market leadership, and PGIM has introduced early interval funds with investment in capabilities.

Q: Elyse Greenspan from Wells Fargo asked about EPS guide and capital return.

A: Yanela Frias explained 5%-8% EPS growth target is intermediate-term, with near-term headwinds, and capital return ratio is an overtime measure not linear.

Q: Jimmy Bhullar from JPMorgan asked about ESR threshold and PGIM/annuity flows in volatility.

A: Yanela Frias said ESR views to be shared in summer, and PGIM flows affected by market volatility, while annuity business sees long-term tailwinds from aging population and need for protected solutions.

Q: Jack Matten from BMO Capital Markets asked about individual retirement sales outlook and group business growth.

A: Andy Sullivan declined specific April sales insight, but saw long-term tailwinds; Yanela Frias noted group business strong performance from growth strategy and price discipline.

Q: Wes Carmichael from Autonomous Research asked about Prismic and EPS baseline.

A: Yanela Frias provided EPS baseline of $13.67, and Prismic focuses on financing growth, balance sheet optimization, with ongoing transactions.

Q: Alex Scott from Barclays asked about yen hedging and Life Insurance segment core earnings.

A: Yanela Frias discussed yen hedging and equity hedging in Japan, and Life Insurance segment core earnings strength from new profitable, capital-efficient business.

Q: Mike Ward from UBS asked about EPS sensitivities and common dividend.

A: Yanela Frias shared equity and interest rate sensitivities, and capital deployment prioritizes financial strength, growth investment, and shareholder distributions.