Prudential Financial Aktie

Ladies and gentlemen, thank you for standing by, and welcome to Prudential's Quarterly Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Tina Madon. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us. Representing Prudential on today's call are Andy Sullivan, Chairman and Chief Executive Officer; and Yanela Frias, Chief Financial Officer. We'll start with prepared remarks by Andy and Yanela, and then we'll address your questions. Before we begin, I want to remind you that today's discussion may include forward-looking statements.

It is possible that our actual results may differ materially from those statements. In addition, remarks made on today's call and in our quarterly earnings press release, earnings presentation and quarterly financial supplement, which can be found on our website at investor.prudential.com, include references to non-GAAP measures.

For a reconciliation of such measures to the most comparable GAAP measures and a discussion of the factors that could cause actual results to differ materially from those in these forward-looking statements, please see the slides titled Forward-Looking Statements and non-GAAP Measures in the appendices to our earnings presentation and quarterly financial supplement.

With that, I'll now turn the call over to Andy.

Good morning, everyone, and thank you for joining our call. Before turning to our first quarter results, I want to take a moment to step back. This is my fifth earnings call as CEO and the first of my second year in the role, an important point to take stock of where we are as a company and where we are headed. Over the past 12 months, we've made meaningful progress against the priorities I established at the onset, and we're seeing tangible evidence of stronger execution across the business.

The issue we encountered in Japan was unexpected, but we are navigating through it, and it does not change our assessment of the path forward. Results across the organization reinforce my confidence in our direction and in the operating discipline we are building. Last year, I laid out 3 priorities: evolving and delivering on our strategy, improving on our execution and fostering a high-performance culture aimed at delivering stronger performance, more consistent results and sustained long-term value creation.

Since then, we have sharpened our focus, raised the bar on accountability and made foundational changes to our leadership and operating structure to support that agenda. Prudential is at a defining moment. We have a strong foundation, distinctive businesses and significant capabilities. We compete in large, attractive but highly competitive markets, and that puts a premium on accountability and strong operating discipline. Since that first call last year, I've been clear, delivering the level of performance our shareholders expect requires a simpler company, clear priorities and a relentless focus on execution.

The status quo is not an option. Our business is anchored in real strengths. We have a trusted brand, deep distribution and long-standing customer relationships in markets where demand is durable and growing. Nowhere is that more evident than in retirement and asset management, where powerful secular trends are creating significant opportunity. Institutions with the scale and capabilities to manage long-duration liabilities, deliver reliable income solutions and generate strong investment outcomes will win. A defining strength of Prudential is the integration between our retirement capabilities and our asset management platform.

That connectivity enables us to source and manage assets in ways that support our retirement and protection liabilities while positioning PGIM as a sustainable, capital-efficient growth engine for the enterprise. These differentiated competitive advantages matter, but positioning alone is not enough. Success requires clear choices. It means concentrating on the businesses and capabilities where our advantages are real and sustainable and stepping back where they are not. You've seen us act on this conviction with our recent portfolio actions, specifically the sales of our PGIM operations in Taiwan and India as well as our insurance businesses in Kenya and Indonesia.

The decision to exit markets where we do not see a scale opportunity or a path to market leadership reinforces our commitment to redeploy capital toward areas where we could generate high cash flows and attractive returns over the long term. It also means building an operating model supported by a culture that is grounded in accountability, candor and consistently delivering at the highest level for customers, shareholders and our employees.

Our work towards these goals is well underway. While there's more to do, the direction is clear and our momentum is building. We will share more details on Prudential's long-term vision and strategy on our second quarter call in August. With that, let me turn to the quarter. Pretax adjusted operating income was $1.6 billion or $3.61 per share, up 10% from the year ago quarter, with an adjusted operating return on equity of approximately 15%. These results reflect solid underlying performance, improved consistency and discipline in how we operate and early benefits from the actions we have taken to sharpen focus and strengthen execution across the company.

Let me now briefly highlight progress across the businesses, starting with PGIM. PGIM delivered strong investment performance and continued to advance the simplification and integration of its organizational platform. This momentum translated into strong year-over-year earnings growth, and the business is on track to deliver the run rate savings and margin expansion we previously committed to, both in magnitude and time line. PGIM's earnings profile is steadily improving even as the rate environment and market uncertainty have weighed on certain asset classes and challenged flows, particularly fixed income and real estate, which comprise over 70% of PGIM's assets under management.

That said, we are pleased with the momentum in our expanding Private-assets business, both in capital deployment and fundraising, which have continued to increase since 2023. Our efforts, specifically in direct lending and asset-backed finance are yielding strong results, driving approximately $5 billion of the $13 billion we deployed in private assets this quarter. These businesses are higher fee, higher margin and vital to the competitiveness of our Retirement business. We're also seeing good momentum in our active ETF retail offering, another important growth area for us. This platform reached nearly $30 billion in assets under management at quarter end, almost doubling over the last year. Additionally, PGIM's total flow picture improved meaningfully on a sequential basis.

Third-party net inflows from institutional and retail sources totaled nearly $2 billion in the quarter despite ongoing pressure from active equity outflows consistent with industry trends. Affiliated net outflows were $1.9 billion, primarily driven by annuity runoff. Across our U.S. businesses, results reflect the actions we've taken to strengthen our competitive positioning.

We have been very intentional and methodical in broadening our distribution and diversifying our product offerings. This is enabling us to capture demand and improve the underlying fundamentals of our Retirement and Insurance businesses. In Retirement, momentum remains strong. Retail annuities delivered more than $3 billion in sales in the quarter, supported by continued strength in RILA and fixed products. Our new FlexGuard 2.0 product delivered the highest quarterly RILA sales in over a year. Additionally, we completed $1.4 billion in PRT transactions across multiple middle market cases.

These results underscore the depth and breadth of our franchise across both the retail and institutional markets. On the retail side, our broad product set is a key competitive strength, enabling us to meet customer preferences across various market environments. On the institutional side, our leadership spans from executing large complex transactions to growing opportunities in the core middle market as our scale, asset capabilities and customer-centric expertise differentiate us.

In Group Insurance, we continue to strengthen the foundational capabilities of this business and position it for improved outcomes. Our focus on product diversification, including supplemental health and a pivot toward broader market representation through our Premier middle-market segment are driving momentum in this business.

However, results this quarter reflected increased macroeconomic uncertainty, which impacted disability underwriting as experience continued to normalize from unusually favorable prior year levels. This was partially offset by improved life underwriting due to favorable mortality experience, resulting in a total benefits ratio that increased year-over-year but was within our targeted range. Yanela will provide more details on these dynamics in her remarks, but it's important to keep in mind that our diversified portfolio of group life, group disability and supplemental health products, supported by our disciplined pricing approach, positions us to navigate effectively as conditions evolve.

We remain confident in the long-term fundamentals of our Group business and our ability to perform through the cycle. In Individual Life, our focus on portfolio diversification, disciplined pricing and expanded distribution has resulted in a more resilient earnings profile and enhanced capital efficiency. With the re-segmentation of guaranteed universal life, both the strength and quality of our ongoing Individual Life business is more visible with this segment generating $139 million in AOI this quarter.

Now turning to International. Sales and earnings this quarter reflected the financial impact of the sales suspension in Prudential of Japan. As we discussed on our April 21 call, voluntarily extending the POJ sales suspension through November 5 reflects our current judgment of the time required to make the operational, governance, organization and related changes necessary for POJ to resume sales. We are confident in the underlying fundamentals of the franchise and in our ability to return POJ to the market as a stronger, more resilient business.

Importantly, when looking more broadly across our Japan businesses, we have a sustainable and increasingly diversified platform. On the product side, our work to diversify into more yen offerings and build on our retirement offerings is paying off. This quarter, over 35% of our sales came from products launched in the last 36 months. On the distribution side, we are continuing to broaden and specifically strengthen our third-party distribution through banks and independent agents.

Our independent agency sales were up 7% year-over-year, and third party are approximately 1/3 of our total sales, demonstrating reduced reliance on our captive channels. Together, these factors reinforce the underlying strength and durability of our franchise in Japan. Outside of Japan, emerging markets delivered a very strong first quarter, led by a record earnings quarter in Brazil, where broader distribution, including agency and third-party expansion and high productivity continue to support profitable new business growth. I'd also like to note that we have now exceeded 1.2 million policies through our Mercado Libre relationship, demonstrating our ability to grow through digital platforms. With that, let me close with some final thoughts. What you are beginning to see across Prudential is a higher standard for how we are managing the business and positioning it for future success.

We are simplifying the organization, allocating capital with greater discipline, raising the bar on execution and increasingly leveraging technology and AI to become more productive and efficient. As I said at the beginning of my remarks, we operate in attractive but competitive markets, and we have a clear understanding of the opportunities and challenges ahead. We are building a stronger Prudential, one that is positioned to meet those challenges and deliver durable value to all stakeholders across cycles. This work is well underway. While changing the performance trajectory of a company of this size is a multiyear endeavor, our direction of travel is clear and our momentum is real. I have firm conviction in our path forward.

With that, let me turn it over to Yanela.

Thank you, Andy, and good morning, everyone. Our first quarter results reflected continued momentum entering the year. We reported after-tax adjusted operating income of approximately $1.3 billion or $3.61 per common share, reflecting a 10% increase from the prior year quarter. This performance was primarily driven by higher spread income in our U.S. and International Insurance businesses as well as more favorable life underwriting results. These increases were partially offset by higher operating expenses, including costs related to the sale suspension at Prudential of Japan.

As I have highlighted previously, optimizing our expense base is a key area of focus. Excluding the impact of onetime items, our operating expenses were flat year-over-year. We are taking targeted actions to reduce costs across the enterprise to support investments in critical areas, including enhancing our service and distribution and elevating our customer and adviser experience.

We anticipate that the benefits of these actions will be evident in 2027. Let me now review the key performance highlights for each of our businesses. PGIM reported pretax adjusted operating income of $190 million, up 22% from the prior year quarter. These results reflected higher asset management fees driven by market appreciation and higher other related revenues from agency earnings.

These increases were partially offset by increased expenses related to growth initiatives, including the expansion of our Direct Lending and Private Asset-Backed Finance platforms. PGIM is on track to deliver approximately $100 million of gross annual run rate savings and more than 200 basis points of margin expansion in 2026, accelerating progress towards its 25% to 30% margin target.

In the first quarter, PGIM delivered a 19.1% margin, reflecting a 260 basis point increase year-over-year, which demonstrates meaningful progress toward that goal. Recall that first quarter margins are seasonally the lowest of the 4 quarters due to the timing of annual long-term incentive awards. Assets under management totaled $1.4 trillion, increasing 3% from the prior year quarter, driven primarily by market appreciation and strong broad-based investment performance across public and private fixed income.

Total flows across third-party and affiliated sources were essentially flat, representing a substantial sequential improvement in all channels. Importantly, third-party net inflows totaled $1.8 billion as strong fixed income inflows more than offset equity outflows, which, as Andy noted, remain pressured consistent with broader industry trends away from active equities. Net outflows in PGIM's affiliated channel totaled $1.9 billion, primarily driven by runoff in traditional variable annuities. Our U.S. businesses generated pretax adjusted operating income of approximately $1 billion, a 3% increase compared to the prior year quarter. Higher spread income in Retirement and Individual Life was partially offset by higher expenses across all the businesses related to the investments I mentioned earlier. Lower fee income associated with the runoff of our traditional variable annuity block now reported in the U.S. Legacy Products segment was also an offset.

As disclosed in April, we established a new U.S. Legacy Products reporting segment in the first quarter. This segment includes certain traditional variable annuity and guaranteed universal life products that we no longer sell. The re-segmentation improves transparency and better aligns our financial reporting with how we manage the business while providing improved visibility into the underlying growth and earnings profiles of Retirement and Individual Life. We also believe that the combination of Institutional and Individual Retirement will provide a clearer view of the growth trends in the predominantly spread-based earnings of this business.

Now turning to the details of our Retirement segment. Retirement delivered pretax adjusted operating income of over $570 million in the first quarter, 9% higher year-over-year. These results primarily reflected higher spread income related to new business growth as well as approximately $25 million of prepayment income, which is episodic.

These increases were partially offset by higher distribution expenses associated with business growth, along with the investments I mentioned earlier. Less favorable underwriting results were also an offset. Total sales in the quarter were $7.4 billion, including $3.3 billion of retail annuity sales, reflecting strong momentum following the December 2025 launch of FlexGuard 2.0, our newest RILA product. Pension risk transfer sales totaled $1.4 billion and were across 4 middle market transactions.

Net account values were $356 billion at the end of the quarter, increasing 8% year-over-year, reflecting market appreciation and broad-based growth across our diversified retirement product set. Of note, retail annuities grew to $58 billion in account values, representing a 34% increase from the prior year, driven by over $13 billion in sales over the last year.

Now turning to Group Insurance. Group reported pretax adjusted operating income of $38 million compared to $89 million in the prior year quarter. Excluding the impact of a favorable reserve refinement of approximately $30 million last year, the decline primarily reflected less favorable disability underwriting driven by higher incidence and severity amid increased macroeconomic uncertainty. This impact was partially offset by improved life underwriting results, driven by favorable mortality experience in the working-age population.

This result also reflected higher expenses, primarily related to investments supporting business growth and operational efficiency in both our claims and service organization. The total benefits ratio increased to 83.7% in the quarter as less favorable disability experience was partially offset by more favorable life experience. The benefits ratio remains within our target range of 83% to 87%. As a reminder, our total group benefit ratio reached a first quarter record low of 81.3% last year, driven by the favorable reserve refinement I mentioned earlier and very favorable disability experience.

Sales totaled $526 million in the quarter, up 32% year-over-year, driven by continued momentum in our Premier segment across our diversified product set as we continue to execute on our market segment and product diversification strategy. This outcome also reflects strong supplemental health sales, which nearly doubled year-over-year. Individual Life generated pretax adjusted operating income of $139 million in the quarter, more than doubling year-over-year. This increase primarily reflected improved underwriting results due to more favorable mortality experience from lower severity of claims.

Higher spread income also contributed to this result. Sales of $251 million marked a record first quarter, driven by strong momentum in variable accumulation products, where we continue to lead given our robust distribution and service capabilities. Our new U.S. Legacy Products segment generated pretax adjusted operating income of $207 million in the first quarter, a 22% decrease compared to the prior year quarter. This decrease primarily reflects lower net fee income driven by the continued runoff of the traditional variable annuity block, partially offset by market appreciation.

Also contributing to the decline were less favorable underwriting results related to the GUL block. Our International businesses generated pretax adjusted operating income of $810 million in the first quarter, down 4% year-over-year. This result was driven by higher spread income, along with more favorable underwriting results, primarily due to new business growth in Brazil, which had a record earnings quarter. These increases were more than offset by expenses related to the Prudential of Japan sales suspension. The financial impact of the suspension totaled $130 million in the quarter, in line with our expectations.

Approximately $50 million of this amount related to customer reimbursements and $50 million related to Life Planner compensation. The remainder was attributable to lower sales and higher surrenders. As a reminder, and consistent with our comments on April 21, we continue to expect the aggregate impact to our 2026 pretax adjusted operating income will be approximately $525 million to $575 million.

Sales in our International businesses of $424 million, were down 27% on a constant currency basis compared to the prior year quarter, primarily driven by the sales suspension in Prudential of Japan. Now turning to capital, ESR and cash flows. Our capital position and strong regulatory capital ratios reinforce our AA financial strength and provide the flexibility to grow our core businesses. Our cash and liquid assets were $3.7 billion at the end of the quarter, which is well above our minimum liquidity target of $3 billion, and we have substantial off-balance sheet resources.

Our Japan entities remain well capitalized and are managed to levels aligned with our AA objectives. We estimate that our ESR results as of March 31 were in the range of 170% to 190%, well above our 150% operating target. As I mentioned on our April 21 call, we do not anticipate any material impact to our capital, ESR or cash flows over 2026 and 2027 as a result of the voluntary sales suspension at Prudential of Japan.

Before closing, I want to take a moment to update you on a revision to our tax rate guidance. We are lowering the range for full year 2026 from 23% to 24% to 21% to 22%. There were several factors which drove this, including lower expected earnings in our Japan business and asset allocation changes we made in our Japan portfolio during the first quarter to optimize the after-tax investment return. To close, let me again reiterate that we are a large-diversified company with multiple sources of earnings and cash flow, and we remain confident in our broader trajectory. We look forward to discussing our strategic direction in more detail on our second quarter call in August.

And with that, we are happy to take your questions.

[Operator Instructions] Our first question is coming from Tom Gallagher from Evercore ISI.

A couple of questions about Japan. If I could start with Gibraltar. Can you shed a little light on what's happening with that part of the business? I think there's the secondment issue that PRU has, but several other Japanese insurers are also dealing with that. And also, Andy, I think in the update call you did recently, I think you made the comment that you felt good that Gibraltar didn't have the same systemic problems that occurred at POJ. So I just want to understand maybe a little further elaboration on that and also how you feel about sales and persistency outlook at Gibraltar.

Yes, thanks for giving me the opportunity to build on what we shared on the 21st. Remember, our Gibraltar segment consists of really 2 components: our 7,000-person strong captive Life Consultants and our Independent-agent business. On top of that, we have a very strong Bank-channel business, and you mentioned the secondments are what happens in the bank channel. But the changes that are going on there, we're navigating just fine. So there's nothing really to report around that.

But we have these multiple components that provides a great deal of diversification well beyond just Prudential of Japan and our Life Planner business. And that can help understand the resilience that we're seeing in the overall platform. As far as sales go in Gibraltar, for our life consultants, we saw lower sales year-over-year. That was unrelated to our compliance issues in POJ, and there's really nothing to focus in on there. That was counteracted, that life consultant sales was counteracted by stronger independent agent sales. So we have been very methodically adding independent agencies and deepening the number of agents in those agencies, and we're seeing that strengthen our overall independent agent sales. And as I referenced in my remarks, we're really seeing a strengthening of third-party overall, which is beginning to balance our captive channels. As far as surrenders go in Gibraltar, the only effects that we believe that we've seen relate to the weaker yen and the FX rate. And at the quarter end, surrenders were at normal levels in our Gibraltar platform.

Appreciate that, Andy. The -- I guess my follow-up is just on POJ. I know you gave the guidance of in-force earnings being down 10% year 1, 15% in year 2. Can you shed a little light on what kind of sales and lapse expectations are embedded in those numbers? Maybe just if we focus on the sales number, are you assuming kind of very gradual recovery? Like are sales levels are going to be half of the normal levels 1 year out and then gradually recovering? Any kind of directional help on how we think about the sales recovery and how that builds back over time?

Yes. Tom, let me give you some details there. So in terms of sales, the assumption is that there are no sales through November 5 during the suspension period. And then there's a gradual ramp-up through 2027. And the '27 average LP production assumption is 50%. So through '27, we're ramping up and we get to an average of 50% LP productivity. On surrenders, we are assuming that they remain at elevated levels above baseline and FX-related activity throughout the suspension period.

Your next question is coming from Ryan Krueger from KBW.

First question is just on the earnings power of the International business at this point. I think if I look at the earnings, excluding variances, they were up 6% year-over-year despite, I think, about a 4% drag from the POJ sales suspension and lapses. Can you give us some more color on just what factors led to this in the current quarter? And I guess, to what extent some of these things you wouldn't expect to recur or if we should view this as a pretty good run rate from here?

Yes. Ryan, I think there's a few things that you need to consider here. So if you -- let me walk through them. First is the timing of the cost and the impact of the POJ misconduct. As you heard in the prepared remarks, in the first quarter, we had $50 million of customer reimbursement that's nonrecurring, $50 million of LP comp and then about $30 million of impact of sales and surrenders, half -- each of those is worth half. A few things to keep in mind. There were only 2 months of impact in the first quarter that the suspension began in February.

Second is that the impact is not linear. The impact of lower sales and surrenders builds as the year progresses. Similarly, the LP compensation grows through the year as well because the payments are based on new business production and the longer they are not selling, the higher that our payments will be. So that's what impacts the timing. So it's not linear, and we expect the impact to grow throughout the year.

Second, what you're seeing is the resilience of the Japan business coming through as 90% of the earnings in POJ are driven by the in-force. So that's definitely contributing. And of course, you have strong earnings from Brazil. Brazil has been steadily growing. Typically, it's been contributing in the high single digits in terms of earnings in International, a bit higher this quarter as Japan earnings were lower. And again, Brazil has grown steadily. So you see the resilience in Japan earnings and the strength in Brazil. And then third, we did have prepays that impacted International. In total, we had about $50 million in prepays in the quarter. These are episodic and generally, they impacted several businesses, but mainly Retirement and International.

Sorry, actually, just one quick follow-up. The $50 million of prepays, that was total for the company? Or is that all in Japan? And is that in -- sorry, go ahead.

Ryan, that was total for the company across several businesses, mainly impacting Retirement and International.

Got it. And then I know you updated the tax rate. Any change to your corporate guidance that you had given last quarter given the favorable expenses this quarter?

Yes. No. So we're not updating the corporate guidance. We did have some one-timers and also some expense timing. So if you look at our kind of our normalization, there's about $70 million of one-timers. Half of that is timing, half of that is real one-timers. And at this time, we don't expect to update. The first half will be lighter, but the second half will be heavier getting us to the $1.65 billion.

Next question today is coming from Suneet Kamath from Jefferies.

Starting with Andy, I appreciate the business exits that you mentioned in your prepared remarks, but it strikes me that they're not particularly needle moving. You can correct me if I'm wrong there, but they didn't seem to be that big. So I guess the question is, are you open to something bigger in terms of shifting the business mix? And in terms of setting the stage for this August call, should we think about that as sort of the conclusion of a strategic review? Or is this sort of just updating guidance based on everything that's happened since the last time you gave it to us?

Yes. Suneet, thank you for the question. I appreciate the broader question. I've been very candid that the performance of the organization has not been good enough. We believe that a key contributor to that underperformance is a lack of focus. Both capital and investment dollars are spread too thinly. We have too many businesses in too many markets where we're either subscale or we're not competitive, and that's not a great use of the company's capital.

So you -- our team did do work over the last year or so, and it's been a continual process. Strategy is always ongoing. It's not a start and stop type thing, but we have done a broader review as we did the step back and looked in the mirror. Our team is very committed to leaving the next generation of PRU leadership with a stronger performing company, a much more valuable company that is materially better focused and clearly winning in the spots that we compete.

That means that we're a top player in a more focused set of businesses. We will focus our capital and investment dollars more than you've seen. And we're going to focus those on big markets with tailwinds, where we clearly have the product and distribution capabilities and brand to win and where we know that we could deliver a differentiated value prop to drive strong shareholder returns. So you mentioned, you've already seen, I would call it, early evidence of where we're getting out of.

And obviously, we mentioned those on the prepared remarks. And you've already seen areas we're leaning into like Retirement and Asset Management. But I would frame it that it's early in our business mix shift. Yanela and I are looking forward to providing you greater detail on the August call about that shift and about our change in focus as an organization. The fact is that this is an iconic company with just incredible capabilities. And we want to make sure that we do everything that we need to, to put the company on a strong growth trajectory.

Okay. And then I just wanted to drill into the Group Disability business. I know it's not a huge business for you. But if I think about the loss ratio, let's call it, in the high 70s, and I think about some of the other players that we cover probably being in the mid-60s, there's a pretty sizable gap there. And I'm just wondering, is this -- is that a structural -- is there a structural reason why your loss ratio is so much higher? And at the end of the day, is this a business that's producing adequate returns relative to the mid-teens ROE target that the company has overall?

Yes, Suneet, thanks for the question. So I would say it's very important as you look at Group businesses across the industry to really look closely at both the size segment that they're in as well as the product mix that they're in between life, disability and voluntary product supplemental health. All of those have different benefit ratio and admin ratio characteristics. The fact is a lot of the competitors across the space have business mixes that are more down market than ours.

I think as you're well aware, we -- our strongest asset in our business is national accounts and higher end of the middle market. Industry-wide, that segment has higher benefit ratios but lower admin ratios. So when you look -- you got to be very careful comparing benefit ratios and admin ratios across. As we look at the performance of our business, to your question, this is a business that has cycles. We're coming off a year in 2025 of very low disability benefit ratios and very low benefit ratios in general.

This quarter, we saw underwriting pressure in the disability block, almost entirely related to LTD incidence and severity. That was offset by good performance in the life block from working-age populations. This is a business that's producing returns in excess of our cost of capital. We're happy with the deployment of capital to this business, and it is a focused area of growth for us as we look forward. We fully expect to see performance to be in the guidance range of 83% to 87%.

The next question today is coming from Wes Carmichael from Wells Fargo.

Just wanted to talk about the Retirement segment for a second. It was a good earnings in the quarter. I just -- I'm just trying to get an idea for run rate. And I think, Yanela, you mentioned $25 million of prepay income. There was also some unfavorable alts and positive underwriting. So I guess if we net all that together, I get somewhere in the neighborhood of, call it, $600 million on a run rate basis. So I'm just wondering if I'm thinking about that correctly, if that's the kind of the math you're doing.

Yes, Wes, I think that's right. So I mentioned total prepays of $50 million, mainly in International and Retirement. In my prepared remarks, I did mention $25 million in Retirement. I mean what you're seeing in Retirement, and it's probably easier to look year-over-year because you have the full impact of sales for the past year is a strong growth, and that's due to the sales that we're seeing in retail annuities and in our institutional markets.

So if you adjust for the prepays and some other noise that you have, you have seen -- you're seeing the growth in the business coming through. We also did have some higher operating expenses. As I mentioned, we're investing in service and technology and driving enhanced customer experience, but we're funding that at a total company level with efficiencies throughout the company. So net-net, year-over-year the total enterprise expenses are flat.

Got it. That's helpful. And just a different subject. But when going through the re-segmentation, you can kind of pull out the income statement for Guaranteed Universal Life. And so I think that business generated something like a $200 million loss in 2025, and I think $500 million in 2024 on a reported basis. So just given that, that business seems to be generating a loss, how do you think about reserves there? You've already taken some charges, but do you need to do more to increase the reserves in that business?

Yes. So I think the way to think about that is that the GUL losses are mainly driven by the reserve accrual, right? So when you think about this, we've reinsured a portion of the block, but the retained portion still includes exposure to the underlying economics and is still in that stage where GAAP reserves are building up.

And the way GAAP works is that it [ dictates ] that reserves be accrued at a higher pace than the best estimate liability would require as you're building the reserve. And this is what leads to the GAAP losses that we're seeing earlier in the life of the block. And these losses will reverse over the long term as the expected benefits are paid and the reserves are released. So you're seeing that dynamic because we're still building the reserve and over the long term, that will reverse.

So Wes, I would just add in a real positive of the re-segmentation. You're seeing the strength and the quality of the go-forward Individual Life business. It's much more evident. We have been very methodical about executing the strategy to diversify the portfolio, to reduce expenses and to write new business at attractive margins. This was a record sales quarter for us in Individual Life, and those sales are coming in well in excess of the cost of capital. So we're pleased that you're now able to see the quality and growth of that Individual Life business now that we've re-segmented out GUL.

Our next question today is coming from Joel Hurwitz from Dowling & Partners.

Just on expenses. You mentioned in the prepared remarks that you expect some of the actions you're taking to be evident in '27. Just any more color on the expected benefits that you expect to emerge next year? And where would we see that show up in the financials?

Yes, Joel, I mean, in terms of expenses, to just take it up a level, you've heard me speak a lot about our focus on continuous improvement and gaining efficiencies to be able to reinvest in the business. That's what's really funding these investments. We do expect these to have benefits in '27. We're not necessarily quantifying that, but it will come through in our results.

And these are investments in things like modernizing and driving efficiencies in onboarding and claims management and group and investments in service delivery throughout all our U.S. businesses. So these do lead to efficiencies. The one thing I would highlight and remind you of is that last quarter, we did talk about the fact we took $135 million restructuring charge that will result in run rate savings of $150 million in 2027. Those are separate from these -- the benefits of these investments.

Got it. And then, Andy, just going back to Gibraltar sales, I heard you say no issues on any of the POJ issues like carrying over to life consultants. But any color on why life consultant sales have been a little subdued in the past 2 quarters?

Yes, Joel, just to add to my response, we actually changed some of the incentive programs and rewards programs in our life consultant channel. It's part of our ongoing work around making sure that the business is as efficient as it needs to be. And that had an influence on the level of sales. We don't expect that, though, to inhibit us in any way over the longer term in our ability to grow those -- that life consultant channel. And that is a channel that we consider pretty darn unique in that it has specialized access to teachers and the service defense forces across Japan and literally is in every geography across Japan with 7,000 agents.

Next question is coming from Mike Ward from UBS.

I just wanted to dig in on the Group Disability real quick. And I get that it's a small business, but just curious about conceptually like for the industry. I think you specifically mentioned macro-driven uncertainty driving claim incidence and severity. I just was curious what specifically you meant by that.

Yes. So Mike, let me take the question overall, and then I'll hit your specific about the macroeconomic environment. And again, it gets down to really specifics that you have to look at across the books of business and the mix of products, et cetera. We experienced a weakening in our disability benefit ratio, as you saw this quarter versus last year, but it did improve pretty materially sequentially over 4Q. So we're seeing that recover. That said, there were 3 main drivers.

All of these were LTD related, not STD or paid leave, and we sometimes get that question. On LTD, we saw an increase in the new claims incidents. The comment about the macro environment is when there's greater uncertainty around job loss, and you've seen the announcements around tens of thousands of jobs being eliminated from a variety of big names. Remember that we tend to have a book of business that's upmarket, and we cover and service a lot of larger employers. That leads to higher incidents and higher severity.

You also have to look at the segmentation of industry mix. We have many, many blue collar -- or excuse me, many white-collar-type cases, and you sometimes see greater impacts in those cases than blue collar. So increase in claims incidents and severity. But the other thing is we had somewhat lower resolutions in the quarter, but that's going to vary quarter-to-quarter. That's something that we're completely comfortable with our capabilities and the way we're managing that and know that will be where it needs to be over the long term. So taking just a giant step back, we've been in the Group business over 100 years. We've seen cycle after cycle after cycle. We're very comfortable with our capabilities, and this is an important area of focus for us.

And then on Japan, so I think you guys have said no anticipated free cash flow impact over '26 and '27. But I guess, longer term, the sales suspension at POJ, should we expect some free cash flow and ESR impact?

Yes. Mike, so we did talk about -- when you think about the earnings of POJ, right, 90% come from the in-force and the impact of the sales and surrenders will result in 10% earnings power reduction in '26 and another 5% in '27, so getting to 15%. That is a small portion of the earnings in POJ. Obviously, the earnings will decline and then we will be ramping up. And I did talk on the April 21 call about the fact that cash flows from Japan are driven by Japanese stat versus GAAP, and that's a big piece of the difference in terms of.

We have a $1 billion impact on GAAP earnings, but that doesn't come through in stat. So that is also dampening the impact on cash flows. And over the long term, as we begin sales again, we will have earnings. And we also will not have the subsidy that we're paying the Life Planner. So that's an offset to the capital that we're putting in for the new sales. So net-net, we don't expect a longer-term significant impact, assuming what we're seeing today.

Next question is coming from Pablo Singzon from JPMorgan.

First question, can you talk about what was new with the RILA product that you launched in December? And maybe use that as a stepping stone to discuss the broader competitive environment for RILA. Are you still able to innovate on features or distribution? Or are you having to give up economics to remain competitive?

Yes. So thanks. Let me start with the competitive piece, and then I'll talk about the innovation in FlexGuard. As I've said before on these calls, the RILA market is competitive. You don't go from 5 competitors to 25 without it having a competitive effect. And we've seen some well-established players enter the space, and we've seen some level of aggressive pricing. We are and we always will take a very consistent disciplined approach to ensure that we generate profitable sales.

It's not about revenue. It's about profit. But I would draw that pricing is only one element of winning in this market. There are clear ways that we are differentiated other than pricing. Our product features, which I'll talk about in a minute, our distribution which continues to deepen and expand, our world-class service and our brand. All of that matters. We're strong on all those facets and that produces success. The innovation on FlexGuard, and I would ask you to recall, when we launched FlexGuard 1.0, it was one of the fastest-growing buffered annuity launches in the history of the industry.

We're expecting very strong success from 2.0. In essence, we've tweaked the design, so it offers more upside opportunity for growth with also more downside protection in the way that the product is designed, all linked to market performance. So I think taking a giant step back, we're now reporting total sales in our individual annuities market because these are all spread-based products. And there -- given market conditions and competitive conditions, you need to lean in and lean out of different spots, and it literally is a pretty dynamic market week-to-week. What we know is we have an all-weather portfolio. We're disciplined in our pricing. We have a lot of differentiation, and we will grow this overall in total from that set of capabilities.

And then for my follow-up about POJ, I was wondering if you'd be want to give a more current update on the Life Planner count or most recent trends and the persistency. I think if you look at the reported 1Q '26 metrics, there was some slight deterioration, and I was wondering how the trend has developed through May.

Yes, Pablo. So just to reiterate what we shared on the April 21 call, what we saw in the first quarter is the Life Planner headcount was down less than 1%. Since the start of the year, the rate of LP resignations has been at a similar level compared to what we saw last year. And everything we've seen since announcing the 180-day extension of the suspension has been consistent with the expectations and financials that we've put out to the Street.

We think the reason we're seeing such success is really due to a couple of reasons. First, we are providing, and this is why the impacts are what the impacts are, material financial support. It goes beyond the money that we're providing to the Life Planners. What they see us is stepping forward and being very committed to this business and being very committed to them, and they're very appreciative of that. We've also done a lot of work on improved and delivered training. And we're clearly painting a picture of where this business is going for those Life Planners. That's all being done so that we -- so that Life Planners can see a sustainable career path. And we believe that's why we're seeing such -- still early in the suspension period, but such good results from a Life Planner retention perspective.

Our next question today is coming from Jack Matten from BMO Capital Markets.

Just a question on pension risk transfer. I'm wondering how you view the outlook both for you and for the industry regarding volumes this year? And maybe specifically, do you think we can see more jumbo cases come to market?

So thanks, Jack. As you know well, PRT is a transaction-oriented business. It's not a flow business. So it will be episodic, especially in the jumbo space. We have seen reduced activity in the market given the economic uncertainty and the geopolitics that are being experienced. The bottom line is volatility and uncertainty make business leaders slower in decision-making. We've absolutely seen that in the marketplace. We expect that '26 will mirror '25 and that demand should get stronger in the second half.

That's generally what happens, in particular, in the jumbo space. It's hard to say exactly how much that will strengthen, but we believe that will be the pattern. But importantly, what you've now seen 2 quarters in a row is we are writing more middle market deals as a firm. While we're clearly a leader in jumbo, we have a very good and growing presence in the middle market. And what that will do is it will help balance out our success in the jumbo space. We are very well positioned. We're one of the best at this business. And now that we're participating more broadly across segments, we believe we'll be even more successful going forward.

And then maybe on PGIM. Can you talk about the outlook for the Private-markets business and some of the investments that you referenced earlier? I guess where do you feel that business is differentiated versus its competitors? And then maybe any impacts you're seeing related to some of the recent headlines around private credit?

Yes, sure. So we're very proud of our Private business. And obviously, for us, the biggest part of our Private business is credit. We're one of the largest and most successful credit managers in the industry. We have about $1 trillion of credit assets under management, about $750 million or so of that is public and $250 million is private. That's in addition to our $150 billion or so in real estate. This is a focused business for us. And in particular, in the private credit space, we've had a fast-growing direct lending and asset-backed finance capability. The strength that we have really comes from the fact that since we have the public side and the private side, we can serve customers with a range of risk and collateral types and across the liquidity spectrum. So that's a differentiator.

On the private side, we have this vast origination network where we have direct access to companies around the globe. That enables us to source a significant share of nonsponsored deals. So as far as the strength of the business, our focus on it, it's a really strong business. We're focused on growing it. It has great synergies with our insurance platform. So we have strong growth aspirations for it.

I think the other part of your question was just some of what's going on in the space around private credit and the stress. Most of what's happening there, candidly, what's in the headlines is around the retail side of the business. And what we've seen on the institutional side is strength. While institutions are slowing down a bit in their decision-making, they're still leaning into private credit. They're still leaning into the highest quality managers that have track records over decades of underwriting, and that's what we're seeing. And that's why we're producing very good levels of private capital deployment as well as fundraising.

Next question is coming from Tracy Benguigui from Wolfe Research.

Just a quick follow-up on the GUL retained reserves. I appreciate the GAAP commentary. But if I could ask, how do you think of the adequacy of those reserves on a statutory basis?

Yes. So Tracy, so first of all, on a GAAP basis, I spoke about the reserving and the trend. I would also speak to the fact that another data point in terms of adequately being reserved on a GAAP basis is the fact that we have to undertake loss recognition testing that is performed every quarter, and that is required to ensure that the GAAP reserves are sufficient.

As of 3/31, the GUL reserves held on our balance sheet exceed what is required under loss recognition. And under stat, the Chief Actuary, the Head Actuary signs off on those statutory reserves every year, and they are signing off that they are sufficient as well. So we go through all the process. We have our assumption updates that we track and book and the actuaries sign off on the statutory reserves as well.

Okay. Switching gears a little bit. I'm wondering, could VM-22, the principle-based reserving reduce incentives to cede FA risk to your Bermudian affiliates? And how does VM-22 stack up against the BMA rules, which are also principle-based?

Yes. Look, the current proposed version of VM-22 is definitely a helpful step toward a more economic principle-based standard. That is definitely the case. So the relative benefits of Bermuda would be lower based on the current proposal. But our current view is that Bermuda continues to be an attractive option for us. So we'll continue to assess that over time as the VM-22 rules are finalized.

Our final question today is coming from Wilma Burdis from Raymond James.

This is Chris on for Wilma. There's a lot of growth opportunity in Japan reinsurance right now and as PRU is one of the largest there. Could you discuss that market opportunity?

Chris, so we don't participate in the Reinsurance business as a business line, but obviously, we could participate in that opportunity through Prismic, our sponsored entity. So let me just give you an update on Prismic. We continue to work on an active pipeline for Prismic, and that pipeline includes ongoing balance sheet optimization, financing new business growth and working on third-party blocks, Prismic specifically. And Prismic has made really good progress over the past 2 quarters.

So in the fourth quarter, we entered into our first flow reinsurance transaction with Prismic, reinsuring MYGAs out of our Retirement business. In the first quarter, we executed a second flow reinsurance transaction with Prismic covering U.S. dollar-denominated Japan liabilities. And then also in the first quarter, more relevant to your point and your question, Prismic did reach an agreement with Daiichi to reinsure yen-denominated in-force block of whole life and annuity policies, and that is Prismic's first third-party transaction.

Chris, maybe just one add. We're very pleased and happy with how Prismic has continued to move forward. Just as a reminder, as Prismic succeeds in third-party reinsurance, PGIM is able to manage the lion's share of the assets that go into that relationship. So that's a good growth engine for PGIM as well.

Great. And then could we expect the POJ pause to have any effect on pace of capital return to shareholders for the remainder of the year or through 2027?

Yes. Chris, as we said on the April 21 call, we do not expect the impact of the POJ sales misconduct to materially impact our cash flows or our capital position. So we do not expect any changes to our capital deployment or shareholder distribution.

Thank you. We have reached the end of our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.

Ladies and gentlemen, thank you for standing by. Welcome to this evening's conference call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Tina Madon. Please go ahead.

Thank you. Good evening, everyone, and thank you for joining us to discuss the Extension of the Sales Suspension at Prudential of Japan. Representing Prudential on tonight's call are Andy Sullivan, Chairman and Chief Executive Officer; and Yanela Frias, Chief Financial Officer. We will begin with prepared remarks from Andy and Yanela, and then we'll address your questions.

Before we begin, I want to remind you that tonight's discussion includes forward-looking statements and actual results may differ materially from those statements. In addition, remarks made on tonight's call and in the investor presentation on the sales suspension posted to our website at investor.prudential.com include references to non-GAAP measures. For a discussion of the factors that could cause actual results to differ materially from those in the forward-looking statements and the non-GAAP measures, please see the slides titled, Forward-Looking Statements and Non-GAAP measures in the Appendix to the investor presentation. Please note that we will not be discussing our first quarter 2026 results or the Form 8-K we filed on April 14, which includes, among other things, information related to our resegmentation. Accordingly, we ask that you limit your questions to the topic of tonight's call, the sales suspension extension at Prudential of Japan. With that, I'll turn the call over to Andy.

Good evening, everyone, and thank you for joining us. We are holding this call to update you on our decision to extend the voluntary sales suspension at Prudential of Japan, known also as POJ, by an additional 180 days to discuss the estimated financial implications and outline our current thinking on the path forward.

Since my first call with you as CEO a year ago, I have emphasized that you can expect transparency and candor from me. Given the importance of POJ and our Japan businesses to Prudential earnings profile and the trust we have built over decades with customers and society in Japan, we believe our extension decision warranted a dedicated call this evening. It is clear to my leadership team and me that POJ requires meaningful transformation and further oversight. Through the reset now underway, we are addressing the issues we have identified so far and repositioning the business for the future.

When we announced the initial voluntary 90-day suspension, I said that we would not resume new sales until we were comfortable that POJ's compliance and oversight environment supported doing so. That remains our standard. As you know, following a review of the business and its leadership structure last fall, I appointed a new CEO to lead our Japan Protection and Retirement businesses, reporting directly to me, and we undertook a broader reset of the POJ leadership team. This new team brings deep expertise and has completed a rigorous internal assessment of the business against current market standards. Based on that assessment, together with ongoing analysis we have conducted and other information learned to date, we concluded that the scope and complexity of the required changes within POJ are greater than we previously anticipated and will take additional time to design and implement.

In parallel, we initiated an independent third-party review of POJ's management system as part of our governance process. That review is ongoing and is expected to take several months to complete. Its findings will also inform any additional actions that we may need to take. We, therefore, decided to extend the voluntary sales suspension by an additional 180 days through November 5. This reflects our current judgment of the time required for the operational, governance, organizational and related changes necessary for POJ to resume sales.

I will provide more color in a moment, but first, let me briefly address the estimated financial implications. We expect a $525 million to $575 million impact on 2026 pretax adjusted operating income, reflecting both the initial 90-day suspension and the 180-day extension. For context, this amount represents approximately 18% of the 2025 pretax adjusted operating income of our Japan business and roughly 8% of PFIs. In 2027, we estimate a $400 million to $450 million impact on pretax adjusted operating income, primarily reflecting the annualized impact of surrenders and the suspension of new sales activity for most of 2026 as well as the cost of restarting new sales in 2027. While we expect the recovery of sales to take time as we reset the operating model, POJ has strong capabilities, a well-established brand and a long-standing presence in the market. We believe the business will emerge better positioned to serve consumers over the long term. Yanela will provide further details on these financial considerations in a moment, including how we are thinking about our intermediate-term EPS growth target.

Let me now provide further context on why we made this decision. The extension is not simply a further pause in sales activity. It is more fundamental than that. It is a deliberate decision to prioritize the changes needed to critical elements of POJ's business model. This is being done to support long-term consumer outcomes and meet societal and regulatory expectations as well as our own. The issues we are addressing stem from POJ's legacy management system and agency operating model. Since the initial suspension began, the Japan leadership team has established a clear road map with defined milestones to support a comprehensive modernization of both these elements, covering how the business is governed, how incentives and compensation are designed and how accountability is enforced.

We have already made tangible progress in support of these objectives. We launched the independent third-party customer reimbursement committee and initial payments to impacted customers have already been made. We began implementing a new customer success model and initiated the redesign of the Life Planner compensation structure to better align incentives and decision-making with customer interests. We expect to begin rolling out key components later this spring.

During the extended suspension period, our focus will be on sustained, measurable actions designed to improve customer outcomes. This includes strengthening POJ's oversight and governance, improving the transparency of sales activities and enhancing protections around customer information. Supporting our Life Planner population through this transition will also be a critical focus as their engagement is essential to driving lasting cultural and structural change. Retention is also a priority, given the importance of continuity and experience to customers and long-term franchise strength.

Let me be clear on how we are overseeing this work. We have moved decisively to strengthen enterprise-level engagement in Japan. PFI is now deeply embedded in the oversight of the work underway, and our Japan leadership team operates with clear direct accountability to me. My leadership team and I are frequently on the ground in Tokyo, working with the Japan leadership and the local teams to drive execution, reinforce governance and ensure the changes underway are comprehensive, durable and fully aligned with our group-wide standards. This is a hands-on high accountability approach, and it is intentional.

From a leadership perspective, we are accountable for ensuring every one of our businesses operates in line with our standards and expectations. Therefore, we have undertaken a proactive review of our other Japan entities, PGFL, our bank channel; and Gibraltar, our life consultant and independent agency channel.

I'd like to close by putting all of this into perspective. POJ serves 2.2 million customers across life and annuities, supported by roughly 4,200 life planners across Japan. It is a large, diversified in-force book and remains a core component of Prudential's global footprint. While the suspension is clearly disruptive, the timing of the sales resumption will depend on progress against the actions underway and on our regulatory engagement. That said, we believe the underlying fundamentals of the franchise, its customer base, its capabilities and our long-term market presence and commitment remain intact. I am confident that we will return POJ to the market as a stronger, more resilient business with a modernized operating model that supports our customers over the long term.

With that, let me turn the call over to Yanela.

Thank you, Andy, and good evening, everyone. As Andy outlined, we are focused on taking decisive actions in Japan and being clear and transparent about what we know today. I will build on that by outlining the estimated financial impacts of the 180-day extension to the initial voluntary sales suspension announced in February. Specifically, I will cover the estimated aggregate impact to 2026 and 2027 adjusted operating income resulting from the full 270-day period of suspended sales, what this means for capital, ESR and cash flows and our current thinking about the intermediate-term EPS growth target that we previously provided for PFI.

As I cover the financial impacts, it may be helpful to follow along on Slide 6 of the supplemental presentation posted to our Investor Relations website. We currently believe that the aggregate impact to our 2026 pretax adjusted operating income will be approximately $525 million to $575 million. This amount includes the $300 million to $350 million that we shared in February related to the initial 90-day suspension.

Let me break down what has changed and what hasn't. As we previously communicated, there were 3 elements to our initial $300 million to $350 million estimate tied to the 90-day sales suspension. First, $150 million to $180 million associated with sustaining the business; second, $70 million of anticipated onetime costs primarily related to customer reimbursement; and third, $80 million in estimated lower earnings attributable to the gradual ramp-up of new sales after the suspension period. As you will recall, the $150 million to $180 million range for sustaining the business included the estimated impact of Life Planner compensation, lost sales and higher surrenders, all of which are currently tracking within this range.

As a result of the additional 180-day voluntary suspension, we now estimate a total impact of sustaining the business of approximately $450 million to $500 million. The overall mix of these components remains the same.

Now turning to the estimated $70 million of onetime costs. As we noted in February, approximately 70% of this amount relates to customer reimbursement. This estimate remains unchanged and will be reflected in our first quarter results. And the third component was roughly $80 million in estimated lower earnings from lost sales during the gradual ramp-up throughout the year following the end of the initial 90-day suspension. Now with the extension continuing through November 5, this ramp-up effect will be pushed predominantly into 2027. As Andy mentioned, to put all this into perspective, the midpoint of the estimated total 2026 impact of $525 million to $575 million is approximately 18% of total 2025 Japan pretax adjusted operating income and roughly 8% of PFIs.

Now turning to the 2027 financial impact of the suspension extension. We currently anticipate the aggregate impact to our 2027 pretax adjusted operating income will be approximately $400 million to $450 million. This estimate primarily reflects the annualized impact of surrenders and suspended new sales activity in 2026, together with restarting and ramping up new sales in 2027. Life Planner compensation also factors into this range, but is a smaller contributor. While it is difficult to estimate how long it will take to restore sales, we expect a gradual and consistent ramp-up period toward a steady state level. As a result, POJ's in-force earnings base is expected to decline by about 10% by year-end 2026 relative to year-end 2025 and 15% by year-end 2027, also relative to year-end 2025.

To reiterate a point that Andy made, we believe POJ will emerge as a stronger, more resilient business that is better positioned to serve consumers over the long term. That said, we expect the recovery to take time as we reset the business model. We feel confident that the actions underway rooted in appropriate oversight, incentives and organizational structure will reposition POJ for long-term success. We believe that the financial impacts outlined today represent a reasonable base case estimate of the costs related to the sales suspension and repositioning at POJ.

Now to provide a sensitivity, if sales were to resume later than November 6, we estimate that each additional month of delay would increase the 2027 impact by approximately $50 million to $60 million. It is important to note that over 90% of POJ's pretax adjusted operating income is driven by its in-force business, both retirement and savings and protection products, which will help stabilize the trajectory of its earnings over a multiyear period.

Now turning to capital, ESR and cash flows. We currently do not anticipate that the suspension of sales will have a material impact to our capital, ESR or solvency ratios. Likewise, based on the financial implications I just outlined, we do not expect PFI cash flows to be materially impacted over 2026 and 2027.

Finally, an update on PFI's intermediate-term EPS growth target. As I mentioned on our fourth quarter call, if changes to the magnitude and/or duration of the POJ issues differed from what we understood at the time, we may not hit the low end of our EPS growth target range by the end of 2027. Given the increased estimated financial impact of the sale suspension and the related inherent uncertainties, we are withdrawing our previously communicated 5% to 8% EPS growth target. Our decision to communicate this today reflects our commitment to ongoing transparency. This does not reflect a change in our confidence in the long-term earnings power or fundamentals of the franchise or in our long-term value creation framework.

To close, we are focused on restoring the trust of our consumers and society in Japan through sustained, measurable change. Japan is an important market for Prudential, and we are determined to regain the confidence built over decades. We will continue to monitor the key drivers of POJ's financial results and we'll provide relevant updates as we make progress on the repositioning of POJ's operating model.

With that, we are ready to open the line for questions.

We'll now be conducting a question-and-answer session. [Operator Instructions] We ask you please ask one question and one follow-up then return to the queue.

Our first question today is coming from Suneet Kamath from Jefferies.

I wanted to start with Gibraltar. I guess the press release says that there -- you wouldn't expect an impact on Gibraltar from the sales suspension extension, but there were some media reports overnight that suggested some issues and you had mentioned on the last call that Gibraltar was going through a review. So I just want to level set where we sit with respect to that review. And could we see another type of sales suspension issue at Gibraltar if some issues are uncovered?

Suneet, it's Andy. First, let me just reiterate so we're clear that the sales suspension does apply only to POJ. We received a few questions -- I saw a few questions on that. It does not apply to the other OpCos. That said, and as we talked about, we have undertaken a proactive review of Gibraltar. In essence, we think it's really important that we apply the cross learnings and drive consistency in compliance across our various operations. From a leadership perspective, we're -- as I said at the upfront, we're accountable to make sure that every one of our businesses operates within our group-wide standards. So just as an example of what we've been doing there. So we talked about the customer reimbursement committee in the past that we implemented for POJ. We extended that and implemented that across for Gibraltar as a good practice. Some of the news reports that you're referring to, we've received around 70 inquiries, 7-0, that the independent committee that we've established is reviewing. To be clear, those are inbound inquiries. They're not confirmed cases of misconduct. Just to put that in perspective, Gibraltar is a business with 3 million customers. So based on what we know today, we do not believe that we have systemic issues in Gibraltar. And Gibraltar specifically is a business that over the last several years, we worked very hard to enhance our life consultant controls and supervision in.

Okay. And then I guess for Yanela, on the cash flows, I'm just trying to understand, it looks like over the 2 years, the financial impact is going to be close to $1 billion, right, $975 million, if I'm doing the math. And I guess, given that order of magnitude, why is it that we're not seeing any impact on free cash flow? I would have expected, given that size, there would be something, but you're saying there's nothing.

Yes, Suneet. So let me emphasize just a couple of very key points here. First of all, our cash flows from the Japan business are generated from multiple sources and legal entities, including the 3 Japan entities, POJ, Gibraltar and PGFL as well as PICA, which is our statutory entity, which has historically reinsured a meaningful portion of Japan's U.S. dollar business; and Gibraltar Re, our Bermuda entity, which also reinsures Japan business. So to provide context, as of 1Q 2026, over 40% of the Japan business is reinsured out of Japan.

So a key point here is that we are not overly reliant on any single vehicle to deliver cash flows to PFI either in Japan or across the broader enterprise. But to go maybe a little bit deeper, a second point I would provide. It is important to note that there are differences between the AOI impacts and how they present in statutory earnings, which is what drives cash flows and capital. So at the risk of getting really technical, let me walk through that.

The AOI impacts that we shared are on a pretax basis, and they are anchored in U.S. GAAP. However, our cash flows and capital, i.e., ESR, are impacted by after-tax local statutory earnings. So JGAAP for the business in the Japan operating entities and U.S. GAAP for the businesses reinsured to PICA. So in the near term, there is a dynamic where the expenses resulting from the sales suspension are largely offset by lower new business strain. Also, reserve releases due to surrenders tend to be in excess of surrender value. So this limits the impact on statutory earnings in the near term and therefore limits the impact on capital. Over the longer horizon, obviously, the loss of profitable business does create some headwinds on local statutory earnings, but these should emerge gradually over time, and we believe these headwinds remain manageable. So again, let me just summarize 3 things. One, we are a large diversified company with multiple businesses and multiple sources of cash flow. Two, we're not overly reliant on any single vehicle to deliver cash flow to PFI, either in Japan or throughout the enterprise. And third, there are differences between the AOI impacts that we're sharing and the statutory impact of the cost of the suspension, and that is what drives cash flows and capital.

Next question today is coming from Tom Gallagher from Evercore ISI.

So the first question is the annual impact you're giving out for '26 and '27. Should we assume the '26 drag continues into '27? And so '27 is on top of the '26 drag. So is it kind of a cumulative impact? Or should earnings recover somewhat in '27 versus '26? I just want to make sure I'm kind of level set on how to think about the sequencing of this.

Yes. No, Tom, they are not additive. So the 2026 impact is for 2026, '27 is separate, and it is a continuation of some of the items. So the way to think about it is in '27, the $290 million to $340 million is mainly due to the lost sales and the impact of surrenders, and that's about 40% each of that total. And then the third component is Life Planner compensation, which is about 20% because that is ramping down as we restart sales. And then you see the other $60 million, which is due to operating costs related to the new operating model and $50 million of lost earnings due to the ramp-up during the sales ramp-up in '27, but these are not additive. '26 impact is impact on '26 and '27 is the impact on '27.

Got you, Yanela. Yes, I was -- I just saw the in-force 10% moving to 15% impact. And I was -- I just wanted to be clear that we shouldn't expect there to be this sort of growing impact, but those should be taken separately.

They're separately and they're obviously diminishing over time.

Got you. My follow-up is just on how big of a change in compensation will it be for the POJ life planners to align better with customer interest? Is it a meaningful change? Is it moving a lot more to fixed compensation versus variable comp? Like what exactly is happening there? And what's your level of confidence that you'll be able to retain some of your highest producing life planners in light of these changes?

Yes, Tom, thank you. So this is one of the most important changes that we're making. And you could think of it this way. We're moving away from a new business-centric model. That model, the deeper we dug into it, some of the things we didn't like about it, it drove short-term behaviors and it produced income instability in the field force. Our new framework has 4 key elements to it. First, it establishes a minimum base pay. Second, it extends commission payments so that we're paying over multiple years. Third, it adds a stronger component for persistency of business. And fourth, and obviously, an important component is it strengthens the compliance-related accountabilities.

To your question, we really think this is a winning structure for everybody, for our employees, for our company, for the customers. You shouldn't imply that it's a meaningful change necessarily in the sort of total level of compensation, but it certainly is a major change in the way that we incentivize our Life Planners. We believe and I am confident that we're going to be very successful at both retaining Life Planners over the long term and having a higher quality distribution force. The fact is we have incredible loyalty from our Life Planners. This is a business that's been there for 40 years. And our Life Planners like doing well and doing right by our customers. So we're working with them as we're making these changes, and we know that they'll be successful as we go forward.

Next question today is coming from Ryan Krueger from KBW.

My first question is, can you just give us the rough amount of sales for POJ you did assume occur in 2027 relative to your, I guess, 2025 baseline?

So Ryan, I think when you think about the components of '27, we have an assumption of lost sales that happen in '26, and that's what's driving the lower earnings in '27. The amount of lost sales in '27, they start ramping up in '27 because the suspension ends in November. We don't expect we immediately go up to 100%, but they ramp up throughout the year.

Okay. And then just one more on Gibraltar. It sounded like you don't think there's any systemic issues there. But when would you expect that review to be fully complete and I guess, fully confident that, that will be the case?

So, thanks, Ryan. Our best estimate of the review will be sometime in the summer that it would come to conclusion. And as always, as we're evaluating this, we're assessing the facts as they materialize. But as I said, we don't believe we're not seeing evidence that we have anything systemic in Gibraltar. And as I just reiterate, Gibraltar happens to be the operating company where we did the most work over the last 5 years at really working to strengthen our controls.

The next question today is coming from Wes Carmichael from Wells Fargo.

Could you maybe just talk about the Japan and the FSA's involvement with the process so far? And I guess, relatedly, are there any potential fines or penalties that are contemplated in your updated estimated financial impacts?

Yes, Wes, thanks for the question. As you would expect, we're working with the FSA as the local regulator on the issues that we've had and on our remediation plans. The FSA has a very important job to do, which we respect greatly, and we're working hard to fulfill our role and to drive what we need to drive. We appreciate, though, your understanding that we're prohibited from commenting on the details of the interaction, and I would not conjecture on what that might look like.

Got it. And just on the withdrawal of the EPS target, I think Yanela, you mentioned this too, the slide mentions related inherent uncertainties. I realize there's probably a lot of uncertainties here, but are there any other kind of big potential developments that you're monitoring that may exacerbate the financial impacts?

Yes. So 2 things. One, I wanted to get to your other question, are there any fines embedded in the financial impacts? The answer is no. And you could see the components of the financial impacts on Page 6. Sorry, can you repeat your question again, your second question?

Yes, of course. So on the EPS guidance, I think right there on that slide, it says there's related inherent uncertainties. I just want to make sure, are there any other kind of big developments you're monitoring that we should be on the lookout for?

There are no new developments that we're monitoring. Obviously, the one thing I would highlight is that we cannot provide assurance at this time that we will be able to resume sales in early November. We are doing -- we're executing our plan. We want to be transparent about that. The timing could be not within our control and influenced by the completion of the readiness criteria and external considerations. So that's the point there with regards to the other uncertainties. There's nothing tangible that we're monitoring at this time.

Next question is coming from Michael Ward from UBS.

I was wondering if you could speak to at all the surrender or lapse activity that you have seen across the Japan business just because I believe that is an important component for the ESR.

Yes. So Michael, we do continue to monitor surrenders very closely. As I mentioned in our prepared remarks, we are trending. As of now, everything we've seen is trending with the initial 90-day period estimate that was provided in February. And when you think about the revised estimate that we've just provided, the estimated impact for '26 and '27 do assume a continued level of elevated surrenders above pre-suspension levels.

Okay. And then I guess, maybe regardless of the new growth level for the business after the sales pause whenever it concludes, is there anything you can say with respect to like a change in the margin profile for the Japan business?

So Mike, it's Andy. So obviously, when we emerge and begin selling again, we've always had a very strong all-weather product portfolio. And our intentions are to continue selling that product portfolio. While we will be adding some additional support resources from a customer support model, there's obviously other things we're doing within the business to take efficiencies out for lack of a better term. So we don't expect any sort of a material change in our margin profiles on what we're selling.

Your next question is coming from Alex Topp from Barclays.

First one is, could you give us an update on any attrition you've seen with the Life Planner force so far through the process? And what are you anticipating that gets to?

Yes, Alex, Life Planner headcount remained relatively flat during the first quarter. And specifically, it was down less than 1%. Since the start of the year, the rate of LP resignations has been at a similar level compared to last year. Clearly, though, as you point out, as we go into this extended 180 days, there is a risk of losing Life Planners. But we're doing a lot to make sure that we mitigate that effect. We're providing material financial support. We're obviously improving our training for them, and we're doing a lot of work to clarify what the future vision of this business is, all in the name of -- so that the Life Planners see a sustainable career path in front of them. So while things have gone very, very well in this first 90 days, it is reasonable to expect that we'll see higher resignations, and I would just remind you that we're also not recruiting during this period when we have suspension. So the exact impact is hard to predict, but we've certainly had good success thus far, and we're working very hard to mitigate any impacts.

Got it. That's all helpful. And the second question I had is sort of more big picture and strategic around this business. I mean it seems like it's been difficult to manage just culturally from the United States. I mean is there anything that you're considering or looking at that from a strategy standpoint could change and shape the business in a different way?

So Alex, what I would say is simply stated, we're very committed to this market. So more dramatic strategic changes around Japan. This is a market we've been in for 40 years. It's been a market that's been very successful. We intend to be in this market for decades to come. And that's because we believe the fundamentals of the Japan market remain very strong. It's one of the top insurance markets in the world. It's going to stay that way. It's a market that's shifting towards retirement and savings where we have a great amount of capability. So there's real opportunity in this market. We're still very committed to it. As far as changes, we've put in an entirely new leadership team, both at the holding company level as well as at the operating company level for the CEOs, and we did that so that we could come out higher quality and better controlled, but so that we could keep attacking this marketplace because it is a very good market that has a lot of needs.

Next question is coming from Tracy Benguigui from Wolfe Research.

Just one for me. Your first suspension was 90 days, and now you're doubling it for another 180 days. I'm just curious how you arrived at that number and why you think that might be sufficient?

Tracy, let me just kind of refresh. At this point, we've reached out to all of our 2.2 million POJ customers, literally every single customer. And we finished a thorough internal review, and we've launched the independent external review. We know what we believe needs to be done to properly resume sales and what the bodies of work are around that and those bodies of work are well underway. On each of those areas, we have detailed plans and detailed milestones and a real deep cadence where we're closely monitoring execution. So based on that work, we fully believe we'll be in a place to resume sales on November 6.

Next question today is coming from Pablo Singzon from JPMorgan.

I was wondering if you could quantify how much of POJ sales are from -- new business sales, right, are from existing customers or net new customers? And what are the sort of parameters that constrict the activities of the Life Planners? Are they -- I assume they're not allowed to solicit new business, but for existing customers, are they still allowed to sort of like keep those relationships warm?

So Pablo, let me answer the question. So our Life Planners are currently not -- we are not allowing them to seek out new customers. However, we feel it's very, very important to service existing customers, and we're actually enhancing our ability to do that. As far as the specific percentages of what comes from existing business and what comes from new business, we don't disclose that. But what I would say is I'd go back to what I said earlier, the system was -- I'll use the words, overly rotated to focusing on finding new customers and not enough focused on how do we work with existing customers to more holistically care for their needs over their lifetime. So while we don't disclose that, I fully expect that, that ratio is going to shift towards existing customers and have less emphasis on new.

We've reached the end of our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

Ladies and gentlemen, thank you for standing by, and welcome to Prudential's Quarterly Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to Tina Madon. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us. Representing Prudential on today's call are Andy Sullivan, Chief Executive Officer; and Yanela Frias, Chief Financial Officer. We'll start with prepared remarks by Andy and Yanela, and then we'll address your questions.

Before we begin, I want to remind you that today's discussion may include forward-looking statements. It is possible that our actual results may differ materially from those statements. In addition, remarks made on today's call and in our quarterly earnings press release, earnings presentation and quarterly financial supplement, which can be found on our website at investor.prudential.com. include references to non-GAAP measures.

For a reconciliation of such measures to the most comparable GAAP measures, and a discussion of the factors that could cause actual results to differ materially from those in these forward-looking statements. Please see the slide titled Forward-looking Statements and non-GAAP measures in the appendices to our earnings presentation and quarterly financial supplement.

With that, I'll now turn the call over to Andy.

Good morning, everyone, and welcome to our earnings call. Before turning to our full year results, let me take a moment to address the employee misconduct in our Japan business described in our press release yesterday afternoon. I want to emphasize that doing right by our customers is a core value of our company, and a cornerstone of what we stand for, and we are taking this issue extremely seriously. For nearly 40 years, Prudential has been a symbol of exceptional customer care in Japan and we are committed to restoring the standing that has long set us apart in that market.

In January of this year, Prudential of Japan announced findings of an internal investigation in the instances of misconduct by certain of its employees. This misconduct very clearly does not meet our standards or what our customers expect of us. In consultation with the regulators in Japan, we have made the decision to voluntarily halt new sales at POJ for a 90-day period. To fully address the root causes of the misconduct, we are implementing a series of actions across the business which includes strengthening oversight of sales practices, governance and risk management. We will also be restructuring employee compensation and enhancing education compliance training and recruiting standards for all POJ employees. While we have set a 90-day suspension of sales, we will not resume distribution through the Life Planner channel, until we are comfortable that our internal compliance and oversight environment supports doing so. This could result in an extension of the 90-day period.

These actions are essential to restoring trust in this important market. While there are financial implications to the sales suspension, we believe that this is the prudent path forward in addressing the misconduct and positioning our business in Japan to rebuild customer trust. We are working with local regulators and other key stakeholders to address these issues thoroughly. Implement the necessary remediation measures and uphold the highest standards of governance and customer care going forward. We expect an impact on 2026 pretax adjusted operating income of $300 million to $350 million, equivalent to approximately 5% of 2025 PFI earnings. Yanela will cover more details on the financial implications in her remarks.

We're also establishing a customer reimbursement program that will be developed and administered by an independent oversight committee. We intend to make this right for these customers, and we remain deeply committed to responding in a manner that places customer trust as our highest priority. That is who we are, and we are confident we will come out of this as a stronger company.

Now moving to our financial results. Last year, I set out 3 priorities that are essential to delivering stronger performance, more consistent results and sustained long-term value for our shareholders. These were evolving and delivering on our strategy, improving on our execution and fostering a high-performance culture. Our issues in Japan only reinforce that these are the right priorities and we must continue on the path my team has set. While we have more work to do across the company, I am encouraged by the tangible progress we have made.

Over the last year, we sharpened the focus on our businesses in large and growing addressable markets where we have differentiated capabilities and believe we can earn superior returns. We executed with greater accountability and discipline as we streamline the organization and strengthened our core franchises. This progress makes clear that our brand, customer value proposition and scale our unique competitive advantages that position us for durable long-term growth as we reposition our company globally.

In 2025, we delivered solid progress in results. For the full year, our pretax adjusted operating income was $6.6 billion or $14.43 per share, and our adjusted operating return on equity was approximately 15%, up nearly 200 basis points from the prior year. We also delivered nearly $3 billion to shareholders in the year through dividends and buybacks. Our full year performance displayed improved and more disciplined execution and demonstrated the momentum we believe we are building across our businesses as we continue to meet growing demand for our products fulfilled through our diversified distribution platforms, resulting in higher sales growth.

Let me now recap the highlights across each of our businesses. In PGIM, we delivered strong investment performance last year with solid traction across our core capabilities, including public fixed income, securitized products and asset-backed finance as well as indirect lending. We also saw continued progress in newer vehicles, such as ETFs and are beginning to see tangible benefits from our new centralized distribution model. 2025 was a transformative year for PGIM. We moved quickly to integrate our asset management capabilities into one unified platform, enabling deeper client cross-sell engagement and reducing costs over time. Additionally, bringing together our public and private fixed income capabilities into a single $1 trillion global credit platform positions us as one of the largest and most differentiated credit managers in the industry.

Clients value the ability to access the full spectrum of credit from liquid public markets to bespoke private solutions through one integrated platform with consistent underwriting, deeper origination and the scale to source opportunities others cannot. And as I've said many times before, I am a deep believer in being proactive in the marketplace which means we're continuing to be vigilant for the best opportunities to enhance our capabilities, scale our business and better serve our customers around the world.

Alongside this momentum, it is important to acknowledge areas where we see pressure. As I noted on our last call, our fundamental active equity platform, Jennison, is not immune to broader industry trends and is experiencing systemic outflows with the continued shift from active to passive management. These outflows have weighed on PGIM's organic growth and earnings momentum. In addition, this quarter's net flows were impacted by a single low fee fixed income client withdrawal at the end of 2025, which was unrelated to performance. We continue to manage through these headwinds and expect offsetting growth over time as PGIM's diversified offerings across public fixed income, private credit and real estate continue to grow. The bottom line is we generated over $30 billion of total net inflows last year from these 3 asset classes.

Additionally, our momentum is building in key growth areas, such as asset-backed finance, direct lending and ETFs. This success will be enhanced going forward as we start to realize the benefits of our newly integrated distribution model. The results of our U.S. businesses reflect the actions taken over the last year to sharpen our focus and leverage our competitive strengths.

In retirement strategies, we delivered $40 billion of sales across our institutional and individual channels for the year. Reflecting solid demand, diversified distribution and our ongoing leadership in meeting the evolving needs of retirement customers. We continue to strengthen our solutions, improve the mix of products we sell and refine the capital and asset strategies that underpin our business.

In Institutional Retirement, we remain well positioned to lead the large pension and longevity risk transfer markets in both the United States and Europe. In 2025, we delivered nearly $26 billion of sales, including our second longevity risk transfer transaction in the Netherlands.

In Individual Retirement, we generated sales of $14 billion in 2025, capping an eighth consecutive quarter of more than $3 billion in sales, reflecting strength in RILA as well as growth in fixed annuities supported by strategic reinsurance partners, including Prismic. Our diverse product set and distribution strength are driving strong top line growth, a clear proof point of our focus on consistent execution.

Group Insurance generated full year sales of over $600 million, up 11% year-over-year, underscoring the benefits of further product diversification and increasing our market presence in our premier segment. These are key areas of strategic focus as we continue to grow and expand the profitability of this business. In Individual Life, full year sales of $955 million increased 5% over the prior year as we continue to pivot our focus towards less capital-intensive accumulation products, including FlexGuard Life. We continue to deliver this new business growth at solid returns on capital.

Now turning to our international businesses. In Japan, we are highly focused on the issue in POJ. That said, we are capturing growing customer demand for retirement and savings products, which now account for a majority of our sales in the country. Over the past 3 years, we have launched 10 new products in this category which have steadily gained traction and accounted for nearly 1/4 of 2025 sales.

Now turning to emerging markets. This business reported record full year sales of $386 million on a constant currency basis, up 6% from the prior year. This growth is primarily driven by broader distribution in Brazil. As we turn to 2026, we will continue to evaluate our global footprint to ensure that we are prioritizing markets and geographies that are large and growing and where we believe we are competitively positioned to win and can deliver industry-leading returns on capital. The decision to exit our PGIM Taiwan business last quarter and our insurance business in Kenya last month are prime examples of us executing on this priority and driving stronger discipline across the company.

As part of our focus on talent and high-performance culture, we continue to refine our management structure to make the organization more results-driven and accountable and to improve the speed of decision-making. The changes we made last year bring me closer to our businesses and their leaders as well as our customers as we execute our growth strategy in 2026.

To conclude, we believe we've established the foundation for the broader reimagining of Prudential, one that positions us to lead and win in the markets we choose to compete in. While we are still early in this transformation the momentum we're building gives us great confidence in the road ahead.

With that, I'll hand the call over to Yanela.

Thank you, Andy, and good morning, everyone. I will begin with covering our fourth quarter financial results before turning to the financial implications related to POJ. Our fourth quarter results reflected continued progress against the 3 priorities we outlined in early 2025, capping a solid year of financial performance.

We reported fourth quarter after-tax adjusted operating income of approximately $1.2 billion or $3.30 per common share. These results include an after-tax onetime charge of $107 million or $0.30 per commenter, primarily related to severance, which I will discuss in more detail later on. Excluding the impact of this charge, after-tax adjusted operating income per share was $3.60, reflecting an increase of 22% over the prior year quarter.

Let's now turn to Slide 4, which provides a high-level summary of our quarterly operating results by business. PGIM reported pretax adjusted operating income of $249 million. down slightly from the prior year quarter. Higher asset management fees driven by market appreciation were more than offset by higher expenses related to ongoing business investments including the continued expansion of our asset-backed finance platform and our technology and data strategy. Other related revenues were also weaker due to lower seed and co-investment income.

Our U.S. businesses delivered pretax adjusted operating income of approximately $1.1 billion, a 22% increase compared to the prior year quarter. This result was driven by higher spread income and retirement strategies, coupled with more favorable underwriting results in Individual Life and Group Insurance and lower expenses in Individual Life due to onetime transaction costs that occurred in the prior year quarter. Partially offsetting these positives was lower fee income resulting from the ongoing runoff of our legacy variable annuity block.

Our International Businesses generated pretax adjusted operating income of $757 million, modestly higher than the prior year quarter as higher spread income and more favorable underwriting results were partially offset by higher expenses primarily related to timing as we noted last quarter.

Now turning to the key highlights on Slide 5. PGIM's assets under management of approximately $1.5 trillion increased 7% from the prior year quarter, driven primarily by market appreciation and strong investment performance. PGIM experienced net outflows of approximately $10 billion in the quarter across third-party and affiliated channels, reflecting the industry trend away from active equities as well as a single low fee fixed income withdrawal. Additionally, our VA runoff and the inherently lumpy nature of PRT new business impacted our affiliated net flows. As we noted last quarter, we expect PGIM to deliver over 200 basis points of margin expansion in 2026, accelerating the path towards our 25% to 30% margin target.

Now turning to the key highlights on Slide 6. Our U.S. businesses again produced strong quarterly results, reinforcing the benefit of our diversified sources of earnings from fees, spread and underwriting income. Institutional Retirement reported sales of approximately $4 billion, including $1 billion of pension risk transfers across 4 middle market deals. While fourth quarter activity was relatively muted, our strong brand and our proven track record in executing large complex transactions position us well to lead in the sizable pension and longevity risk transfer opportunity across our core markets in the U.S., U.K. and the Netherlands.

Individual Retirement delivered more than $3 billion in sales, driven by fixed and registered index-linked annuities. Our broad product portfolio provides flexibility to deploy capital where returns are most compelling. Additionally, we continue to innovate to address evolving customer and adviser needs. However, the runoff in our legacy variable annuity block remains a headwind. For 2026, we continue to expect $3 billion to $4 billion of quarterly account value runoff which translates into approximately $10 million to $15 million of pretax adjusted operating income runoff per quarter, compounding to $100 million to $150 million annually prior to market impacts on account values.

Now turning to Group Insurance. Sales totaled $56 million in the quarter, reflecting continued momentum in our Premier segment in both Group Life and Disability as we execute our product and market segment diversification strategy. The benefit ratio of 82.5% in the quarter came in below our target range reflecting favorable life underwriting results and less favorable disability experience driven by higher new claims, coupled with lower resolution.

In Individual Life, quarterly sales totaled $269 million, down from the prior year record quarter as we continue to pivot towards more capital-efficient products. On a full year basis, we increased sales traction and accumulation-focused variable life products, fueled by our strong brand and distribution footprint.

Now turning to the key highlights on Slide 7. Sales in our International businesses of $525 million were up 4% on a constant currency basis compared to the prior year quarter, driven by growing demand for retirement and savings products in Japan and record sales in Brazil. While surrender activity in Japan moderated in 2025, it remains a headwind that will partially offset new business growth. We continue to closely assess macro indicators, including the value of the yen, which has been extremely volatile. We estimate that the impact to 2026 earnings from the excess surrenders that we experienced in 2025 will be roughly $50 million.

Now turning to the key highlights on Slide 8. Our capital position and strong regulatory capital ratios support our AA financial strength and our ability to grow our market-leading businesses. Our cash and liquid assets were $3.8 billion, which is above our minimum liquidity target of $3 billion, and we have substantial off-balance sheet resources. The Board has authorized share repurchases of up to $1 billion in 2026 and increased the common stock dividend for the 18th consecutive year. Consistent with our approach across the enterprise, we remain well capitalized and manage our Japanese entities to levels aligned with our AA objective. ESR results remain well above our 150% operating target outlined last quarter, even with a sharp increase in long-term Japanese interest rates last month.

Now let me take a moment to outline a few key financial highlights heading into 2026. First, as I mentioned earlier, we recorded a pretax charge of $135 million in our corporate and other operations related to our ongoing efforts to improve our organizational efficiency. These changes are expected to deliver approximately $150 million in pretax run rate benefits in 2027. I want to emphasize that the benefits from these actions were already embedded in our intermediate financial targets, including the target for our operating expense ratio.

Second, on Slide 17, we have provided additional earnings considerations specific to 2026. And third, as Andy noted in his remarks, we have made the decision to voluntarily hold new sales in POJ for a 90-day period. I want to share our preliminary view of the financial implications for both the new sales suspension and the remedial actions we are taking. We currently believe that the impact to our 2026 pretax adjusted operating earnings will be in the range of $300 million to $350 million.

There are 3 components to this estimate. The first is the impact of the 90-day new sales suspension, which we expect will be in the range of $150 million to $180 million. This range reflects the anticipated costs associated with sustaining the business and compensating the distribution force during the suspension period. The impact of suspending new sales activity, and anticipated higher surrenders. The second component is $70 million of estimated onetime costs, of which roughly 70% relates to customer reimbursement. The third is roughly $80 million in estimated lower earnings attributable to the gradual ramp-up of new sales through the remainder of the year once we resume sales. The lower sales and higher surrenders we expect this year will also have an impact on 2027 results. However, based on what we know today and assuming the 90-day new sales suspension, we expect the overall impact will be considerably lower in 2027.

Now let me tell you what this means for our intermediate EPS growth target of 5% to 8%. Recall that our intermediate targets are for the 2024 through 2027 period. In 2025, we met our internal expectations for earnings growth, and we are on track with the actions and expense efficiencies that underpin this intermediate term guidance. That said, the financial impact associated with the POJ issue could bring us to the low end of this range by the end of 2027. In addition, to the extent that the magnitude and/or duration of the POJ issue is different than we currently anticipate we may not hit the low end of the EPS range by the end of 2027.

We are providing these estimates to help frame the range of potential financial implications. But as Andy noted, we will not resume new sales until we are satisfied that our internal compliance and oversight environment supports doing so. We are closely monitoring each element of the financial waterfall that I just laid out, and we'll update you as we gain better visibility into the trajectory of POJ sales, surrenders and earnings. Despite these headwinds, it is important to remember that we are a large, diversified company with multiple sources of earnings and cash flows, and we are confident in the path ahead as we reposition Prudential to deliver strong value to shareholders.

And with that, we're happy to take your questions.

[Operator Instructions] Our first question today is coming from Suneet Kamath from Jefferies.

I wanted to start with Japan and the 90-day sales suspension. How did you arrive at the 90-day period? And was this done in conjunction with the FSA and other regulators in Japan?

As you can imagine, voluntarily suspending sales in such an important channel for us was a very carefully considered decision and something that we didn't take lightly. We have the leadership in POJ right now focused on 4 major initial actions. Customer reimbursement, which Yanela spoke to. Life Planner training, which obviously will be a major focus during the shutdown period, enhancing our sales supervision and then Life -- redesigning our Life Planner compensation.

As we looked at those 4 actions and the time frame it would take to make major progress, we thought that 90 days was a reasonable time frame to make meaningful progress. But I would reiterate what we -- what I said in my opening comments and what Yanela said in hers as well that we're not going to resume distribution in the channel until we're comfortable that the internal compliance and oversight environment really supports us reopening it.

As far as your question on the FSA, I would reiterate that this was a voluntary decision. But as you would expect, we work closely with our regulators in every market, every single week. So we consulted with the JFSA before announcing this decision.

Okay. Got it. And then have you done a similar review for Gibraltar Life in terms of sales practice issues? And does the suspension have any impact on Gibraltar or any of the channels that you're talking about in Japan?

Yes. So Suneet, yes, the answer is yes. We are conducting a similar review of Gibraltar. This is underway and in process and will conclude a few months from now. You should expect this, right, from a leadership team perspective here at PRU, we take the responsibility for making sure that every one of our operations in every market and every channel is conducted in the right way and that we keep our customers upfront as job #1.

As far as any effects that we've seen so far, the only effect we've seen in Gibraltar is some modest pressure is the way I would frame it on recruiting of life consultants. But we intend to be very assertive in restoring the trust and confidence that people have of us half of us in Japan, and we intend to come out of this stronger.

Next question is coming from Tom Gallagher from Evercore ISI.

Andy, a few follow-ups on Japan. I guess, will you also suspend hiring new Life Planners while you shut down sales? Or are you going to continue normal course with hiring plans? And is the plan here to pay out special bonuses that vest over a number of years from a retention standpoint? Just want to see what you're doing to make -- to kind of ensure that you keep your -- one of your best assets, which is the Life Planner system intact while you go through this?

Yes, Tom. So let me start by just saying thank you for your last comment because we really do believe that this is a special company and an incredible asset. To take your first question, we are not stopping recruiting of new Life Planners in the channel that will continue. But we are taking decisive steps that is every bit intended to preserve the distribution force.

Two things I would specifically mention. The first is investing in our Life Planners in their training and development. So we always do that, but over the next 90 days, it will be at a much enhanced level. And the second is providing financial support to them to retain them over the longer term. I'm not going to get into the exact specifics of what that looks like. We do have confidence that these actions are going to help us retain this special asset. But I would mention one other thing, Tom, that I think is really, really critical. Taking these actions also ensures that we have a company that our employees could be incredibly proud of and that they want to work for.

And in particular, in Japan, that is one of the most important elements that goes into retention. So that combination of actions will help us retain the life planners, but we know will also help us with the broader employee population.

And for my follow-up, I had read a news report that indicated the FSA was going to conduct an on-site investigation for POJ as well and it said it was going to start in February. Just want to see if you can confirm whether that's begun? Is that going to be going on side by side while PRU does its own due diligence?

So Tom, what I would say is we don't comment on specific ongoing interactions with the regulators. Obviously, this is something that, as I said earlier, we were in -- discussed with the FSA before we voluntarily see sales. We have regular ongoing interactions with the FSA every single week. But as far as the specifics of ongoing regulatory actions and the actions they take, I'm not going to comment.

Your next question today is coming from Wes Carmichael from Wells Fargo.

My first one, also on Japan, but maybe a little bit of a different topic. In terms of surrender activity that you're seeing, I mean, I think there's a couple of components. Maybe one is FX with the yen at [ 156, 157 ] versus your guidance for strengthening to [ 135 ]. And I just wanted to ask on loan rates being much higher, are you seeing an impact to surrenders there? And then just maybe on POJ with any kind of fallout from this conduct. Is there any way you can dimensionalize those 3 impacts, please?

Yes, it's Yanela. So let me start on the surrenders. So in terms of the impact of the yen, the depreciation of the yen since 2022, has driven an elevated level of U.S. dollar product surrenders. We've been talking about this for several quarters. The surrender rates declined to mid-single digits through third quarter 2025, in line with the stabilization that we saw at that time. But we did see it pick up this quarter, fourth quarter '25 with the renewed yen weakening. So we have seen the volatility as well.

So to give you a sense, fourth quarter '25 surrender rate increased to 6.3% from 5.6%, so a slight uptick. But we're still below the rates that we've seen earlier in the cycle. And the fact here is that the customers with heightened sensitivity to FX rates have already surrendered. And frankly, this kind of leaves us with a block that is less sensitive to FX movement. So that's how I would position that.

You did hear in my opening remarks that for the full year 2026, we expect the impact of 2025 surrenders to be in the range of $50 million. With regards to rates, frankly, we view the impact of rates in terms of earnings and sales as a positive. It allows us to offer more attractive yen-denominated products and invest in new money rates that are higher.

Wes, I would just add because I think you also mentioned, given our misconduct issues. We expect sales and surrenders obviously, to be impacted in the short term that's included in the financial estimates that you heard from Yanela at the opening of the call. We're going to continue to do the right things and put our customers first.

What I would say is, remember, we have an exceptional all-weather product portfolio that really protects our customers and helps them in both protection and retirement so while we expect near-term impacts, we gave very thought -- a lot of thought and care to the numbers that we provided to you. Obviously, it's early days, but we'll continue to monitor this, but we know that over the longer period of time, will be stronger.

That's very helpful. And just my follow-up on ESR, I know that's coming up for publication shortly. But just wondering if you could touch on what -- how that moved in the quarter, higher yen rates. I think Yanela, maybe a couple of quarters ago, you gave a little bit of sensitivity on ESR. But did that pressure the ratio in the quarter, perhaps there's some positive equity market performance. But if there's anything you can help us with, that would be great.

Yes. No, absolutely. So first of all, I would start with ESR remained well above our 150% operating target that we outlined last quarter. As you know, that's the target that we believe is consistent with AA standards. And this is the case even after the sharp increase in rates that we saw in January so we still remain above that target. And frankly, as we discussed last quarter, we are managing ESR to a level at normal times that is well in excess of what we believe to be the AA standard and that provides ample cushion following market stresses, and that cushion has absorbed some of the increase in rates that we saw.

And so the sensitivity I shared a few quarters ago still holds if Japanese rates rise 50 basis points and equity markets decreased by 10%. We do not expect ESR to be binding in terms of Japanese cash flows. I do recognize that there's been a sharp rise in rates. So I would also add that from where we are today, around above 3.5%, right above 3.5% for the 30-year rates, even if rates were to increase by approximately another 100 basis points, 90 to 100 basis points, we would still be within the operating target range.

Our next question today is coming from Bob Huang from Morgan Stanley.

I just have one question circling back on the 90-days sales suspension. If we look at prior other companies miss behaviors when they get caught, it generally felt like the penalty is a lot longer than 90-days. Do you feel that the 90-days is enough to kind of regain the public trust, so to speak, is 90-days enough for you to normalize back to a normal sales environment, I guess, is what I'm trying to get at? Or do you think the public will naturally give you a much longer penalty time frame in this particular situation?

Yes. So Bob, thank you for the question. So first, let me start just by reiterating what I've said earlier, which we sized the 90 days based on the set of actions that we felt was necessary to begin that restoration of customer trust. So there's 4 items I went through earlier. And we believe that 90 days is that right time frame. That said, as you referenced, we won't talk about any specific situation. every situation is unique. There certainly have been a variety over the last decade or so of other companies that have had cessation periods, some of those not being voluntary.

But what you should understand as part of this is this is a collective set of actions that we're taking. The cessation of sales is one of them in order to begin this beginning of the restoration of trust and confidence and we're obviously going to work very closely with the regulators. But this is much more, as you heard me emphasize, this is about when we feel as a leadership team and as a company, that we can resume sales and feel fully confident in the customers being placed first. We think 90 days is the right estimate for that, but we will share information if that changes in the future.

Your next question today is coming from Joel Hurwitz from Dowling & Partners.

Just given the macro with the yen and JGB movements and the lost earnings from the POJ sales issues and remediation, what's the impact to your cash flow from international? And does that drive any impact to your overall capital deployment outlook?

Yes. Joel, so we do not expect a significant impact to cash flows out of our Japan businesses. I would remind you, we generate these cash flows from multiple sources and legal entities. This includes the 3 legal entities in Japan, POJ, Gibraltar, PGFL. It also includes Prudential Insurance, our U.S. statutory entity, which has historically reinsured a good amount of Japan's U.S. dollar business; and thirdly, Gibraltar Re, our Bermuda entity, which also reinsurance business from Japan.

So the fact is that we're not overly reliant on any single vehicle to deliver cash flows to PFI either in Japan or across our businesses. Of course, we continue to monitor the Japan situation carefully, but we do not expect an impact to our capital deployment plans or our shareholder distribution.

Got you. That's helpful. And then just a follow up on Wes' question on surrenders in Japan. Any impact from the higher JGB yields on the yen business that you write?

Yes. No, there's some modest impact but the reality is that 90% of our earnings come from U.S. dollar products. So it's really the yen impact that will drive our earnings sensitivities.

And Joel, the only thing I would add to that, and we've talked about this in previous quarters. I think there's 2 things to keep top of mind. One is that we have this all-weather portfolio, where we now have a much better blend of yen and U.S. dollar-denominated products. And we, over the last couple of years due to the surrender headwinds had actually enhanced our staffing across our distribution teams and across our service teams because even if there is pressure from some of these, I'll call them, economic type things.

At the end of the day, the customers still have needs and generally move from one type of product to another and we make sure that we have the right staffing and the right engagement with the customer to catch those flows.

Your next question today is coming from John Barnidge from Piper Sandler.

I wanted to -- my question, the first one is on kind of the exiting the businesses in Taiwan and Kenya over the recent several quarters, are you able to dimension the size of the businesses that are kind of like up for a review in international markets where you don't view yourself as a leader?

So John, maybe what I would do there is just talk more about strategically how we think about the strategy. As you've heard me say before, we are evaluating our global footprint to prioritize markets that are large and growing that are -- where we're well positioned to win, given our differentiated capabilities and are spots that we think we can deliver industry-leading returns. The other part of this is we are focusing our capital and our investment dollars because we think that is very, very important in order to be a winner in our chosen spots. For emerging markets, our main focus is twofold. It's Brazil, and Brazil is running very, very well. We had another record sales quarter there.

And second is our Habitat business where we have a very successful pension business. As far as when you say dimensionalizing, obviously, our -- I'll use the words by far, predominant or Japan and in our international operations and as far as the percentage of earnings. So that's the lion's share.

My follow-up question on Japan. If we get an extension of that 90-day suspension, does the impact from less sales volume actually compound and grow similar to how the runoff of the VA block compounds?

So John, so let me maybe walk through the components of the $150 million to $180 million, which is the impact -- the direct impact from the suspension. So we have a couple of components there. The direct impact of the lost sales is roughly 20% of that number. We also anticipate higher surrenders. That's also about roughly 20% of that number. And now with regards to surrenders, it is uncertain whether they'll continue at the level that we're expecting and anticipating but that's the number that we built into the 3-month number.

And then the remainder is related to anticipated costs associated with providing financial support to our distribution force. That is not something that carries over. That is a discretionary decision that we've made during that 3-month period. And so therefore, that is really tied to the period where we have suspended sales.

Next question today is coming from Mike Ward from UBS.

I was just wondering if you guys had any update on in Japan on policyholder behavior in January or year-to-date thus far? And I think the comments sort of largely pertain to '25 activity.

Mike. So yes, it pertains to '25, but I would tell you, there's nothing new or different as far as '26 other than, I would break this into a couple -- into the 2 components, right? There's the impacts on policyholder behavior that are more driven by, I called it earlier, the economic effects, the FX rate, the interest rates. And obviously, those -- all of a sudden wouldn't change '25 to '26, they're directionally similar. The thing that is different is the effects of the misconduct and the perception issues and public reaction. The press release was done in January. The press conference was held and was quite prevalent in the media. So 2 different effects.

But maybe one thing I would tag on is the change in the interest rate environment in Japan is, I think, something to really take note of and is for historical terms, quite dramatic. But the things we're observing, and this is over a longer period of time, not just the beginning of '26. One is demand for yen products is gradually increasing because of that. We think that's a good thing, right? The fact that there is an interest rate there, we could deliver products of greater value. And the other thing is we've talked about in the past is the government is incentivizing their citizens to take more investment risk and seek higher yield. And we are seeing customers that have a higher risk profile or a higher risk tolerance and are seeking improved returns. So as those shifts are occurring we feel very good about our all-weather product portfolio, the strength of our distribution to capture the changing nature of this marketplace.

And Mike, what I would say is that the assumption or the estimate that we have embedded in the $100 million to $180 million of impact of the sales suspension for surrenders, is informed by what we have seen since the press release and since the results of the internal investigation have been published publicly.

Okay. That's helpful. And then one of the things I'm wondering -- I don't think we've really touched on this, but just the inflows and outflows. I'm curious if you can quantify at all like the level of outflows that you can absorb thinking about capital and liquidity and the fact that you're basically cutting off new business. I'm just trying to get some comfort in this dynamic.

Yes. So Mike, I'll start -- I mean from a capital liquidity perspective, as I mentioned in the answer to the other question, we do not expect this to impact our cash flows out of our Japan operations. Part of it is because we have multiple sources of cash flows, as I mentioned.

From a liquidity perspective, we -- the majority of the Japan portfolio is in JGBs. We do not expect an impact of this on liquidity. And again, we've sized the impact of surrenders during this 3-year period -- 3-month period, and it is roughly 20% of the $150 million to $180 million or $30 million.

Yes. So Mike, all I would add is, obviously, we've been in the market for 40 years. These are very, very large of in-force blocks of business. So the impact of new sales, I don't want to underplay it because, obviously, this was a difficult decision and very important, and we frame the financial impacts for you compared to the in-force this cessation is -- compared to the in force, it's not large. So that's why Yanela just went through the numbers, and we're comfortable with those numbers.

Next question today is coming from Jimmy Bhullar from JPMorgan.

So first, Yanela just on your comments on cash flow not being impacted based on this. I realize in the short term, there's not exact correlation between income in the businesses and cash flow. But eventually, there should be an impact to the extent that earnings in the business are depressed either because of fines or just other actions or just spending to remediate what's been going on. Wouldn't there be an eventual impact on cash flows beyond this year or next year if the earnings, in fact, are depressed in the business?

Yes. No. So what I've given you is what we expect for 2026, and that is correlated to the $300 million to $350 million impact we expect this year. As I said, if you assume the 90-day sales suspension, the impact to '27 would be less lower than that. If the impact continued, we would see an impact on continue to expand on cash flows but what we're giving you is based on what we know today.

And then just, Andy, on -- the business has fairly high persistency. So obviously, sales don't -- or the lack of sales doesn't really affect earnings in the short term that much. To mean the bigger impact of the lack of sales would be just your ability to retain agents because if people are not able to earn income for much more beyond 3 months than the sort of distribution channel begins to melt away. But I don't know if you view that as a credible risk and sort of what are your view -- what are the sort of things that you could do to ensure that you can retain the agents if, in fact, the suspension period is running longer.

Yes. Jimmy. So yes, first of all, that is of paramount importance because this is -- we consider this to be an incredibly valuable franchise and one of the best operations in Japan. I'll just go back to my earlier comments. We are taking decisive steps to make sure that we preserve the Life Planners, but also the other employees in POJ. And the 2 predominant actions is investing in our Life Planners, training and development. And second is providing them ongoing financial support so that we do retain them over the longer term.

But I would also reiterate what I said, people work here at Prudential because they're proud of the company. We're a purpose-oriented company and us taking assertive action and my words leading from the front on this issue. We'll make sure that people are proud to work here and that's as important to retain people as the compensation and the training.

Our next question today is coming from Jack Matten from BMO Capital Markets.

Just one follow-up on Japan. Regarding Japan FSA, it sounds like you're in contact with them regarding the actions that you're taking voluntarily. But just wondering if there's a possibility that they could impose either a fine or some other financial or operational impact beyond those voluntary actions? Or are you comfortable that they're satisfied with the proactive steps that you're taking?

So Jack, I'll go back to what I said, which is we won't comment or speculate on what the regulators actions are or may be. But we are working in collaboration with them on a weekly basis. They were aware of our voluntary decision to cease selling and the most important thing that we could do to make sure that we come out of this as expeditiously as possible and as strong as possible is stay focused on the set of actions that I've already shared.

Got it. Okay. And then can you just follow up on free cash flow generation more broadly. I know you have the target of 65% of net income over time. From a payout standpoint, you're on track to do, I think, around $3 billion again in '26, including dividends and buybacks. That $3 billion would apply a pretty high conversion rate relative to where your net income has been running in recent years. Just want to make sure you feel that the level of return sustainable given that net income trend and the potential impacts in Japan that you've talked about?

Yes, Jack. So we have not changed our capital deployment priorities. So we are continuing to focus on balancing the preservation of financial strength and flexibility, investing in our businesses and shareholder distributions. The fact is that cash flows and dividends from our operating entities are not linear and throughout the years and across the year so that's why the 65% is an overtime measure. And the 65% correlates to the distributions that we have put out there, the $3 billion. So we are confident in our cash flow generation, again, recognizing that the timing of cash flows can be volatile in that linear, but also that is based on our capital allocation decisions as well.

So we actively manage capital deployment decisions through out the year. This is a dynamic process for us. And again, I would just say, I would also highlight that we have strong cash balances at the holding company and strong financial ratios at our operating entities.

Our next question today is coming from Yaron Kinar from Mizuho.

Just going back to Japan for a second. The $350 million expected impact to operating income, does that include reimbursements to customers on the civil side? I'm not talking about the regulatory potential fines and whatnot?

Hi Yaron, yes. So the $300 million to $350 million, if you think about that, the second component I mentioned, the $70 million onetime cost does include and it's about 70% of the total customer reimbursement.

Got it. Okay. And then moving away from Japan, I'm sure you'd like to. On the -- sorry, RILA sales slowed down in 2025, fixed annuity sales picked up. Can you talk a little bit about spreads and expected returns in each?

Yes. So let me take that and let me just more broadly address what's going on in the space. So obviously, we've talked about the RILA market becoming more competitive, and that remains to be true. We've gone from 5 competitors to '25. And we always look for ways to differentiate ourselves that beyond price. We have a great all-weather product portfolio. We have very strong service and our brand matters.

So while our RILA sales were down somewhat, our fixed annuity sales were up. In essence, we've done a lot of work to innovate and broaden our product portfolio that enables us to lean into the customer demand across a whole range of market environments. As far as the pricing environment, we're always going to be disciplined and ensure that we have profitable sales. And we're not focused on just driving a sales number. So it's more -- it's about returns and profitability. But this is an area given the longevity needs, the income needs of the U.S. society that is a sizable market that's going to grow for a very long time. and we're really well positioned to take advantage of that secular tailwind.

So we don't get overly exercised quarter-to-quarter or specific product to specific product. It's more about long term, we know we're going to be a winner.

And specifically on the returns there, can you compare the returns in the RILA book versus the FA book as they are today?

Yes, Yaron. I'm not going to provide product-specific spreads or returns.

Our next question is coming from Tracy Benguigui from Wolfe Research.

Staying with Japan, since the value of new business takes a while to materialize, how should we think about the longer-term impact to earnings from pausing new business? Should we look at that $80 million third component of that $300 million to $350 million for '26 and carry that over to '27 and beyond?

Tracy, no. I wouldn't -- no, we wouldn't do that. So the way to think about it is of the $150 million to $180 million component of stopping sales, 20% of that is due to not selling, right? So that's about $30 million. Then the $80 million is really what we think about when we ramp up because we don't assume that we immediately go back up to full sales. And frankly, so we're ramping up throughout the year, getting up to about 90% sales levels through 2027. So the $300 million to $350 million includes no sales for 90 days and then a slow ramp-up throughout the year that gets to 90% by the end of 2026. So in total, what this results in is that POJ sales will be 50% lower in 2026 from normal levels.

Okay. I just to give you a breather on Japan. I like seeing your private credit disclosure. I'm just curious, in your definition of traditional, are you including private letter ratings and on that? If you could just give a breakout between the large 3 versus the smaller agencies?

Yes. So we primarily rely on the 3 large agencies. And what I would say in terms of sort of the smaller ones and Egan-Jones specifically, we virtually have no exposure to Egan-Jones

Okay. And just if I could throw another quick one in. I saw an announcement that PGIM is expanding $1 billion into private credit secondaries. Will the general account be part of that ?

Yes. I mean, look, the general account is -- we're always looking at asset diversification, how that matches up with our liabilities. We are very comfortable with private credit as a long-term asset supporting our liabilities. The reality is we've been investing in underwriting private credit for a long time. We see value in private credit for the general account, and we see opportunities in terms of where we can pick up additional investment yield portfolio diversification and get better downside protection at the end of the day. So we continue to see this as a good asset class.

85% of our private credit exposure is investment grade. These are largely private placements with strong covenants and downside protections. And historically, we've consistently performed better in these private credit investments than equally rated public during economic downturn. So this is a good asset class for us.

Yes. And Tracy, maybe just let me add in from the PGIM business perspective. We're really excited about the secondary space in general across asset classes. I think you probably recall, we bought Montana Capital Partners, a private equity secondary business back in 2021. That's now fully assimilated into PGIM. And we believe that we could combine our world-class credit prowess with this deep secondary's expertise. And we're already seeing -- so we just talked about the general account. We're already seeing strong third-party client interest in this capability, and we see this as a really good growth extender PGIM.

Our next question is coming from Alex Scott from Barclays.

Thanks for squeezing here in the end. First, I do have one on Japan. I just wanted to see if you could opine at all about what this does just at a more high level to the trajectory of revenue. And I'm just sensitive to it because I think you guys been talking about maybe some of the Life Planners beginning to sell more financial products and we'll be interested in does this set that back and by how much? Or is it more permanent? Because I think we may have had something for that is an offset in our revenue growth. And I just want to make sure that I get that consistent with what you're expecting?

Alex, it's Andy. I'll take that. So I guess the first thing I would say is, this is really early days in navigating the situation. But I would always turn to long-term trends and secular tailwinds. And in reality, what we're seeing in Japan is, it's one of the wealthiest markets in the world where we have incredible distribution despite this near-term challenge. If 10,000 captive agents, we have incredible bank access, great independent agent access. We are looking to rotate more towards retirement and savings and investment.

If anything, we are seeing very clear evidence that the consumers in Japan want to seek higher yield and want to seek investment type products.

So while I would expect that we're going to see pressure on the protection side, I think we have everything we need to rotate as the market rotates. And while it's early days to talk about specifically this issue, there's a longer-term secular tailwind that we would expect to be able to grow over the longer term.

Got it. Okay. That's helpful. And then maybe my last one on PGIM flows. They generally been doing pretty well over the last year but a little bit of a setback. I think there's some lumpiness to it this quarter. Is there any element of that that's sort of some of the yen-based investors that have been investing in USD and maybe higher rates in Japan is causing some lumpiness in terms of accounts being pulled back to just invest in yen? I mean, is that something you're seeing there? Or is there not that kind of dynamic, and we should see this kind of revert back to positive flows?

Yes, Alex, let me start directly and then talk more broadly about flows. So directly, I do not believe that, that is in any way kind of the factor that you're seeing show up in our flows that may be more of a minor factor or more specific to certain individuals, but it's not really the story when it comes to our flows. And as you know, when we talk about flows, we talk about total flows.

What we're seeing on the third-party side is consistent with things we've talked about in the past and just be very upfront, we're not pleased with our flows this quarter. In retail, we're seeing this very heavy headwind from active to passive management. Jennison is a great platform. and customers expect public equity as part of their portfolio. So it certainly is an important part of our system, but that is quite a headwind to overcome on the retail side.

On the third-party institutional, we have some of the largest clients in the world. And that can inherently make things lumpy on a quarter-to-quarter basis. And what we saw, as I said in my upfront was a fairly sizable low fee redemption that was one of these lumpy quarter-to-quarter. We've seen that go the other direction in the past as well to our benefit. So I don't think the yen is a driver here. It's more of those other factors I spoke to.

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further closing comments.

So thank you again for joining us this morning. As we outlined, we are moving fast. We're moving with discipline to address the issues in POJ. Our commitment to the highest standards of customer care is absolute. At the same time, we remain focused on executing on our 3 priorities and driving momentum across our businesses as we lay the foundation for a stronger, more durable growth pattern. We're moving with speed to deliver the value that our customers and our shareholders expect and deserve from Prudential.

I just want to close, as I always do, by recognizing our employees around the world for the dedication and commitment that they show every single day. Thank you for everything that you're doing for our customers and for each other. And with that, we'll conclude our call.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

Ladies and gentlemen, thank you for standing by, and welcome to Prudential's quarterly earnings conference call. [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.

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 comments by Andy and Yanela, 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 the 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 the 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, and welcome to the call. We had a strong third quarter. Our pretax adjusted operating income was $1.9 billion or $4.26 per share, a record high, up 28% from the prior year quarter, reflecting earnings growth in every business. And our year-to-date adjusted operating return on equity was over 15%. These results reflect higher spread income and more favorable underwriting experience across our Global Retirement and Insurance businesses as well as higher fee income in PGIM.

Current quarter results benefited from alternative investment income that was above our expectations, as well as other favorable onetime items. Higher alternative investment income was driven by stronger private equity and hedge fund returns, partially offset by lower real estate returns. Our third quarter performance reflects sustained momentum across our businesses. Let me highlight a few examples.

PGIM remains focused on delivering strong investment performance and strengthening core capabilities, while continuing to invest in the business to drive future growth. This quarter, we achieved positive net inflows across both third-party and affiliated channels. In Institutional Retirement we closed a Jumbo Pension Risk Transfer transaction, reinforcing our market leadership and complementing the robust Longevity Risk Transfer activity so far this year. Our Individual Retirement, Individual Life and Group Insurance businesses are benefiting from our differentiated distribution and the actions we've taken to broaden our product portfolios and diversify our market segments.

Individual Retirement delivered over $3 billion in sales for the seventh consecutive quarter, and Individual Life and Group Insurance, we delivered double-digit year-to-date sales growth.

Turning to our International Insurance businesses. In Japan, where our business has been traditionally focused on protection products, we continue to expand our Retirement and Saving Solutions, leaning into the changing nature of this marketplace. And in Brazil, we set a new sales record in the Life Planner channel. In addition, we continue to expand our third-party distribution network and deepen our strategic partnerships. While business performance was strong for the quarter overall, let me bring one area of pressure to your attention.

Jennison, our active equity manager continued to experience outflows consistent with broader industry trends. These outflows are dampening our organic growth and earnings momentum in PGIM. We are encouraged by the third quarter results and remain committed to delivering stronger and more consistent earnings growth that creates long-term value for our shareholders.

Moving to Slide 3. I've been clear on my three priorities as CEO. First, we are evolving our strategy to focus on opportunities that will deliver the most profitable growth over time and are allocating our capital accordingly. Specifically, we're looking to focus on areas with large and growing addressable markets in which we have highly differentiated capabilities and can earn attractive returns. Accordingly, in the third quarter, we completed the sale of our PGIM Taiwan business to focus resources on higher growth opportunities.

Second, we are determined to execute with more consistency and discipline. We are quickly evolving to a unified asset manager model in PGIM and have taken actions to deliver run rate savings that will drive margin expansion in 2026. Client response to our new organizational structure which includes a centralized distribution capability for institutional investors has been overwhelmingly positive. In fact, we now expect to double the percentage of clients engaging with two or more of our Asset Management businesses, which will drive additional margin growth over time.

The sales momentum in our Global Retirement businesses underscores how we're meeting evolving customer needs around the world. In U.S. Retirement Strategies, year-to-date sales of over $30 billion demonstrate our leadership in the growing retirement market and contributed our highest earnings in the last 5 quarters. Additionally, over the past 3 years in Japan, we've launched 7 new products, reflecting our commitment to meeting the evolving needs of our customers through a comprehensive suite of Protection and Retirement Solutions. As a result, sales in Japan have increased by about 35% over this period with yen-denominated sales increasing by over 50%.

And third, we are enhancing our culture with a focus on speed and accountability. As an example, we accelerated our succession plan in Japan, appointing Brad Hern as CEO reporting directly to me. This move ensures we have the right leadership in place to drive our growth strategy in Japan. Brad, brings a strong track record of driving results and scaling distribution networks from his time leading our Domestic Prudential Advisors business. His experience is directly relevant given the shifting nature of Japan's market towards retirement. He will continue working closely with Caroline, Jacques and the entire leadership team to share best practices and collaborate across businesses, ultimately helping us better serve customers and capture opportunities in this rapidly evolving market.

We extend our thanks to Hamada-san for his 33 years of service in Japan. Before I turn it over to Yanela, I want to emphasize that across the enterprise, we're taking clear and decisive action to address these priorities. I look forward to sharing more in the quarters ahead as we continue to build on our momentum. With that, I'll hand it over to Yanela.

Thank you, Andy. I will provide an overview of the performance for our PGIM, U.S. 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. Higher other related revenues from strong Fannie Mae, and Freddie Mac originations and gains on [indiscernible] co-investment. Third quarter results also included $40 million in reorganization charges from integrating PGIM's multi-manager model, partially offset by a $25 million gain from the sale of our Taiwan business. Results of our U.S. businesses reflected higher net investment spread income in Retirement Strategies, including the benefit from stronger alternative investment income, coupled with more favorable underwriting results from Individual Life and Group Insurance. This was partially offset by lower fee income resulting from the runoff of our legacy variable annuity block and higher expenses to support business growth.

In our International businesses, we also experienced higher net investment spread results including the benefit from stronger alternative investment income and more favorable underwriting, partially 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 70% of assets under management outperforming their benchmarks over the 5- and 10-year periods. In addition, the 3-year track record, which is an important metric for the retail channel has 80% of assets outperforming benchmarks. PGIM's assets under management of $1.5 trillion increased 5% from the prior year quarter, driven by market appreciation, positive net flows and strong investment performance.

Total net inflows in the quarter of $2.4 billion included affiliated net inflows of $1.8 billion and third-party net inflows of $600 million. Third-party institutional and retail inflows were both $300 million, mainly driven by fixed income inflows, partially offset by Jennison equity outflows as previously noted.

Before I move on from PGIM, I want to expand on Andy's commentary regarding the rapid progress we have made reorganizing, including early financial impacts. The actions taken thus far will drive operating efficiencies and create reinvestment capacity, enabling us to continue expanding capabilities, enhancing client experience and strengthening our competitive position to support future growth. We expect to realize approximately $100 million in annual run rate savings by the end of 2026 and plan to reinvest about 1/3 of these savings to bolster sales and distribution.

Compared to 2025, we now anticipate over 200 basis points of margin expansion in 2026 from these actions and are well positioned to reach our 25% to 30% margin target.

Turning to Slide 6. 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 momentum, generating $10 billion of sales in the third quarter across its Institutional and Individual lines of business. Institutional Retirement sales of over $6 billion included a $2.3 billion Jumbo Pension Risk Transfer and was complemented by $1.5 billion of Longevity Risk Transfer transactions.

Individual Retirement posted over $3 billion in sales, driven by continued momentum in fixed annuities as well as solid sales of registered index-linked annuities reflecting the actions we have taken to broaden our product portfolio. Group Insurance sales totaled almost $80 million in the third quarter, with year-to-date sales of $555 million, up 14% from 1 year ago, driven by growth in both Group Life and Disability. We are executing our strategy of both product and market segment diversification while leveraging technology to increase operating efficiency and enhanced customer experience. The benefit ratio of approximately 83% remains at the low end of our target range, reflecting favorable life underwriting results and less favorable disability experience, driven by an uptick in severity and lower claim resolutions, which can vary quarter-to-quarter.

In Individual Life, sales of $253 million in the third quarter were up 20% from the prior year quarter. This growth was driven by higher accumulation-focused variable life, including record sales in our differentiated FlexGuard Life product suite. Turning to Slide 7.

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 down 6% compared to the prior year quarter. This was primarily due to strong U.S. dollar-denominated single-pay sales in Japan that benefited from the yen appreciating sharply in the prior year quarter. Year-to-date, International sales remained solid and are up 4% versus prior year, driven by growth in both Japan and Brazil.

As we previously stated, while surrender activity in Japan continued to show signs of stabilization, it remains a near-term headwind that will partially offset new business growth. We also anticipate approximately $30 million of higher expenses in the fourth quarter, primarily due to timing consistent with what we've observed in prior years. Turning to Slide 8.

Our capital position and strong regulatory capital ratios continue to support our AA financial strength and our ability to grow our market-leading businesses. Our cash and liquid assets were $3.9 billion, which is above our minimum liquidity target of $3 billion, and we have substantial off-balance sheet resources.

Also of note, our Board approved an economic solvency ratio operating target of 150% as part of our annual capital planning process. Prudential of Japan and Gibraltar Life remained well above this level. 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. And with that, happy to take your questions.

[Operator Instructions] Our first question today is coming from Wilma Burdis from Raymond James.

Just first question on the PRT. We saw you -- large Jumbo Pension Risk Transfer this quarter, which has been a slow market this year. Maybe just give a little bit of commentary on that. And then also the Longevity market in the U.K., we've seen a couple of entrants there. So just if you can give us an idea of what you're seeing?

Sure. So we still believe that the Pension Risk Transfer market will be softer in '25 versus '24. But we've seen an uptick in the pipeline for the second half of the year is proving to be more robust than what we saw earlier. Remember that especially in the PRT market, it's an episodic market, particularly in the Jumbo space. That said, this is going to be a big market for years to come with $3 trillion in un-transacted liabilities, funding levels sitting at 105%. We're very well positioned to win and to remain a leader given the strength of our brand, our underwriting, our asset management and service. So we're happy to see that the market is strengthening here in the back half of the year.

When it comes to the LRT market, this is a very good opportunity as well. Globally, pension plans are even more well funded than they are here in the U.S. We focus on two core markets, the U.K. and Netherlands. In the U.K., we're seeing about $50 billion to $55 billion of pension risk transfers per year, with about 80% of that volume seeking longevity reinsurance.

In the Netherlands, there's about $330 billion in defined benefit pension money that's -- given the reform looking to transition to defined contribution, much of that will seek pension risk transfer and reinsurance.

Similar story to PRT. We're a leader in the space. We did two deals this quarter for $1.5 billion. That puts our year-to-date sales over $11 billion. So this is also just a very good market with healthy returns and plenty of room to grow. So we like the dynamics we're seeing in both of these spaces.

Sounds great. And then PGIM flows have been improving. Could you just talk a little bit more about the drivers? And do you think this is an inflection point? Or what are you kind of seeing? Do you think this is an improvement that's going to continue?

Yes, certainly. So -- and we've discussed this before. As it comes to flows, we assess success by looking at total flows, both affiliated and third-party and we look at it over longer time frames. So if you look at it from that lens, over the last 12 months, we did over $20 billion in total inflows. This quarter, we did $2.4 billion in total inflows, and in the third party in particular, we were positive and split evenly between retail and institutional.

What we saw this quarter was very strong inflows across public fixed income, privates and alternatives, that was offset by Jennison equity outflows. This is systemic in the industry, and we're not immune given what's happened with the active to passive pressure. That said, active equity plays a very important role in our clients' portfolio and is important in the mix. As we look forward as far as an outlook perspective, given the consistent strength we've been showing in Institutional, we're optimistic. We're more cautious on the retail side as that is more volatile and clients tend to react quicker to changes in the environment. And we are working to lessen and overcome those equity outflows.

Your next question today is coming from Sunnet Kamath from Jefferies.

I guess, Yanela, in the past, you've talked about this 3- to 4-point drag on EPS growth from the legacy VA and the surrenders. Can you maybe just give us some color on how that you expect that to play out over the next few years?

And then somewhat relatedly, you've been putting on all this new business growth, but is there a lag between when you write this business and when it actually shows up in the EPS results?

Yes. Suneet. Yes, so let me start. Recall when we provided the intermediate target of 5% to 8%, I did speak about these near-term headwinds being incorporated in the target, and therefore, the growth not being linear. As these headwinds dissipate, we will see the earnings power of the new annuity sales and the Japan business continue to emerge.

Specific to the two items. With regards to the VA runoff, we expect to continue to see the $3 billion to $4 billion quarterly runoff which, as I said, has about $10 million to $15 million AOI impact per quarter compounding, hence, the $100 million to $150 million that we've talked about before. As that block continues to run off and the account values of the new products grow, we will have a crossover point and the earnings headwind will be reduced.

With regard to the higher-than-expected surrenders in Japan, we do continue to see stabilization. Given the stabilization as we look forward beyond 2025, we would expect a more moderate impact of surrenders.

With regards to the second point of the question, I would say we are seeing the benefit in EPS when we look at the core earnings growth in both Individual and Institutional Retirement this quarter. And as I said, over time as the headwinds dissipate, that earnings growth will continue to grow.

And then just shifting gears, I wanted to ask about the private credit asset class, just given some of the headlines that we've seen over the past couple of weeks. Given your strength in fixed income asset management in general, I figured you'd have a good read on what you're seeing in the market? And maybe more specifically what you're seeing at Pru?

So let me talk about the general account for sure. Obviously, we're monitoring this very closely as we do with all markets. With regards to private credit and our portfolio, we've been in the private credit space for decades. Our private credit portfolio is largely private placements with strong covenants and other downside protections. And this portfolio has consistently performed better than equally rated public during economic downturns, and we've seen this consistently.

Approximately 90% of our corporate private credit securities are investment grade. Roughly half of the below investment grade private placements are in the BB category and are very well underwritten. And lastly, our growth in private credit has been modest. So we've been doing this a long time, and we are very comfortable with the portfolio.

Next question is coming from Tom Gallagher from Evercore ISI.

A couple of questions about Japan. The 150% ESR target. Can you guys kind of get into why you think that's the appropriate level? I think there's some confusion around what Pure targets are, how they're higher than Pru's. And generally, the domestic insurers in Japan are running at around 200% plus and why 150% is like a fine number for you? And is that something you've gotten blessed by the rating agencies and regulators?

Yes, Tom. Let me explain what the 150% ESR target is and what it isn't, because I agree with you, there may be some confusion. In terms of what it is, it is the level that we would hold after a market stress occurs. So this is the level we would not want to go below. And this type of stress that includes shock to market rates and credit. This is how we set our targets across all our legal entities. And as you've heard me say before, we have capital resources to manage these stresses as well as to manage more severe stresses, including our contingent capital sources. So that's what it is.

In terms of what it isn't, it is not what we would aspire to hold in normal time. So in normal times, we would hold higher levels as you saw at the March 31 date where our ESR level was between 180% and 200%. So we plan to hold a level of capital above our target to provide a cushion that can withstand a market stress. And that is very consistent with how we manage our other businesses. And further, and to some of your questions, these ratios are a result of considerable thought, considerable modeling outcomes and does include dialogue with key constituents, including the rating agencies.

As far as regulators, they're more focused on the threshold level for them, which is 100%. And relative to peers, different companies do have different business mix, and we believe that is a big driver of the difference in the levels. So I would just close by saying that our operations in Japan remain well capitalized. Our June results were well above our 150% target just like our March 31 results were, as we discussed last quarter, and our ESR is not a binding constraint when it comes to cash flows from Japan.

That's all helpful. I appreciate it. And just my follow-up is, so you had the recent abrupt departure of your CEO in Japan. I guess my perception is it's somewhat related to some regulatory issues that have occurred in the market that have impacted Prudential of Japan. Can you elaborate what's happening there? And I just want to make sure you don't think there's going to be any impacts to sales revenues when we think about things going forward in that business?

Yes. So succession planning is something that we take really seriously here at Pru and do very well. So this change from Hamada-san to Brad was planned. So when you use the words "abrupt departure" this was a planned succession change. We did accelerate it, and Hamada-san stepped down given some operational and compliance considerations, as you mentioned. Hamada-san felt, and I felt as well it was a good time to give Brad Hern, what I would call the driver seat. I want to -- as I did in my opening remarks to thank Hamada-san for all he's done for the company. But Japan is in great hands.

Brad Hern is a 30-plus year veteran of the industry. Brad oversaw our Prudential adviser capability here in the U.S. He was the architect and key driver of the strategic relationship with LPL. He's saw the U.S. market go from independent insurance agent over time to financial planners which is a very similar trend to which we're beginning to see in Japan. So he is the right leader to lead for capitalizing on this changing nature of the market.

As far as like what this might mean from a go-forward perspective. From a revenue perspective, looking forward, I'd just say, keep in mind two things. One, the market is changing. It is rotating towards retirement and savings, and then recognize in our results, you're still seeing the surrender headwinds. We're pleased with sales year-to-date in Japan. They're up 4%. And we've seen our new product introductions are really taking hold. About 20% of our sales are from products that we've introduced in the last 24 months, and a majority of the sales are from Retirement and Savings.

So this was a planned change that we accelerated. If you look at the -- Brad is the leader, the breadth of our product portfolio, the depth of our multichannel distribution, we know that all of that will help us overcome these headwinds over time and will help our growth.

Next question today is coming from Jimmy Bhullar from JPMorgan.

I had a couple of questions. First, if you could just talk about what you're seeing in terms of claims trends and price competition in the disability market? And then I had one another product line.

Yes. So thanks, Jimmy, and maybe I'll take this overall from both perspectives. So first, we are pleased with the quarter that we had in Group, and we're very pleased with our results year-to-date. As you saw in the quarter, we saw very strong Life performance. So very, very happy about that.

We did see headwinds on the disability side. There's really three things that I would talk about when it comes to the higher disability ratio that we saw in the quarter. First, we saw an increase in the average size of new claims, for both short term and long term. As you know, that will naturally vary quarter-to-quarter. Second, we saw lower LTV resolutions. Remember, last quarter for us was an exceptionally strong quarter, and it was exceptionally strong as a resolution quarter as well. So it's quite natural for that to step down after such a strong quarter. And then third, we had unfavorable experience in our New York Paid Family Leave book. That's very consistent with the industry. And I would note that New York recently raised pricing in Paid Family Leave, which is going to help offset that headwind.

Pricing remains rational. We obviously closely monitor new business pricing, and we're not seeing anything different than we would expect to see. We also obviously spend a lot of time monitoring our book experience at the block and case level, and we've been quite successful at placing renewal increases where they've been warranted. So our group business is very well led. We have a very experienced team that stays on top of changes in the outside environment, and we have a good deal of confidence in the path forward.

Okay. And then just on competition in the [indiscernible] market, your sales, I think sequentially were up, but they have slowed from what they were last year, and you've been citing competition as one of the reasons. And I just wanted to ask you for more details on what type of -- are you seeing competitors? Or are you just seeing a more crowded market? Or is it that companies are offering terms and conditions which you feel you don't want to match?

Yes. This is consistent with what we've discussed about -- discussed last quarter. It has become more competitive and you can use the word more crowded. I think that's a great way to frame it. We went from 5 competitors a few years back to 25 today. That includes some broader annuity players that have entered more recently. When you only had 5, the share was very concentrated. So it's quite natural for new players to work very hard to fragment that concentration. We expect it and have seen that there will be some aggressive pricing in the marketplace. What you should expect from us is disciplined growth, right?

Capitalizing on the strength of our brand, the strength of the product portfolio and our wide distribution. We're going to always make sure we're growing, but we're also achieving the right level of profitability. And that's what you're seeing show up in the sales. If you look at that business in general, we've done greater than $1 billion of sales per month every single month of 2025. That is very consistent success, and that's what we would expect going forward.

Next question is coming from John Barnidge from Piper Sandler.

My question is about the Partner's Group partnership. How meaningful do you envision it? And are there other partnerships that could be added beyond Partners Group as we've seen Life Insurance, not just stop at one for product creation?

Yes, we're very excited about the partnership with the Partners Group. PGIM and the Partners Group are highly complementary and obviously bring to the table best-in-class capabilities from both sides. Really, this partnership is about working together to bring forth multi-asset solutions to wealth, retirement and insurance clients, particularly in the retail space.

If you think about it, Partners brings capabilities that we don't have, like primary private equity and we bring credit and real estate capabilities that are very additive to their strengths. So you should expect that one of the ways we'll look to grow our asset management capability and success is using partnerships. It's additive to help us grow. But it's not new. You saw us do this as we launch Prismic as well.

Okay. And then with the Board approving the ESR, what is the opportunity for Prismic as you see it in the coming year?

John, with regards to Prismic, I would say Prismic continues to be an important tool in our tool kit. Reinsurance is key to our business. It allows us to manage products in the most capital-efficient manner by matching capital and reserving regimes with economics, and to accomplish this, we use reinsurance with wholly owned entities, Prismic and third parties, and you've seen us do that in order to manage ESR volatility as we've talked about in the past. And we continue to work on an active pipeline with Prismic, that includes ongoing balance sheet optimization, financing new business growth as well as working on third-party capital -- third-party block.

So the one thing I would say that is new about Prismic is that we did recently launch our first forward flow transaction with Prismic covering U.S. retail fixed annuities. It's in small quantities because we just began that, but it is our first forward flow transaction.

Next question is coming from Jack Matson from BMO Capital Markets.

My first question is on Individual Retirement. Your core earnings growth there took a nice step up this quarter. At least part of that was on kind of better spread earnings. I'm just wondering if you could discuss further the earnings growth outlook for that business? Are the ways you can keep offsetting the headwinds from VA runoff and any impacts from Fed rate cut we should be thinking about in the coming quarters?

Yes, Jack. So a couple of things. Yes, to your point, we did have nice core earnings growth there. So there were two things. We did have higher spread income as well as higher fee income in the business, and that is a result of both business growth and favorable markets. With the Canadian strong sales that we have seen, we did have an increase in spread earnings. There was also some reinvestment benefit as reinvestment yields continue to be above portfolio yield. So that's the first driver.

And in addition to that, the benefit from market appreciation did more than offset the runoff of our legacy variable annuities, increasing fee income. So that is definitely a driver that we're seeing.

With regards to offsetting the runoff, obviously, the earnings here are going to be driven by both markets and spread. In terms of rate cuts and the impact on spreads, there is no material impact of changes on short-term rates for us. As I mentioned, our reinvestment yields continue to be higher than our portfolio yields, and so from a long-term perspective, we do have our sensitivities that we shared in interest rates. And so I would remind you if we had a onetime 50 basis point decline in long-term interest rates with no recovery after 12 months, we estimate an annual AOI impact of approximately $0.20 per share.

Jack, I would just add that this is a market with a lot of tailwinds. It's a market that's now consistently over $110 billion per quarter. If you think about the aging society and aging society's need for protected income, the fact that there's $7 trillion in money markets on the side and $40 trillion in unprotected retirement assets sitting in retirement accounts. There's just a lot of tailwind, and we're well positioned to capture share in the market given the strength of our capability. So we like what we see and we expect to see growth here.

Got it. And follow-up is on expenses. I think we're lower this quarter across the company, I think both in corporate and other and the operating segments. I guess could you just talk about any kind of expense efficiencies that are driving across the organization and looking forward, should we think about whether it's a certain expense ratio or level of savings next year and [indiscernible] some incorporate or the operating segments?

Yes, definitely. And I would start by saying that for us, expense discipline is a lifestyle, not necessarily a diet. So we don't think about specific initiatives. We are constantly looking for continuous improvement, and that provides resources to continue to invest in the business as well as potentially fall to the bottom line. We do have an intermediate target for operating expense expenses of 10.5% to 8.5%. And when we did set the target at the end of last year, we were already at the top end of the range, and we do expect to continue to make progress with regards to that target.

Next question is coming from Alex Scott from Barclays.

I wanted to come back to PGIM and just some of the comments you made about the margin improvement over time. I'd be interested in the restructuring reorganization charge that you had this year and how much of that directly translates into more immediate savings on expenses? And will you have any more of those kind of reorganization charges as we think about going into year-end and early next year?

Yes. Thanks, Alex. Maybe let me take that in two different steps. Let me talk a little bit about the integration and then talk about the margin. Just to keep front and center, the integration, the reason we did that was really driven by customer behavior and the way that we see customers buying. They absolutely want to work with fewer asset managers that have more breadth, that's why we decided to go to market as One PGIM. I'm very proud of Jacques and the leadership team and the rapid progress they made that they already fully changed and leaned into this new model. And the change is being well received in the marketplace by our clients. We're already seeing early signs of cross-sell momentum. And as Yanela talked about in the opening, this will lead to real bottom line savings and strong efficiencies, that absolutely is going to be helped from a margin perspective.

Our margins in the quarter were 23.7%. That was impacted by really two different, I'll call them, one-timers, the $40 million of severance, but also the Taiwan sale. Without those, the margin in the quarter would have been 25.9%. So in our 25% to 30% range. The path to getting towards the high end of that range at 30% is very clear. We are starting to see the beginning of the improvement in the fixed income and real estate market. That certainly will be helpful. We are seeing traction in our major growth initiatives, with real progress across ETFs, asset-backed finance and direct lending.

And to your point, we will maintain a laser focus on expenses. And that means both looking for lower priority areas that we can shift investment out of as well as just across the entire company. We have a fantastic opportunity with AI and new technology to become more productive. So we are confident in our ability to achieve the high end of 25% to 30% and the changes that we're starting to make more rapidly are giving us good momentum.

That's really helpful. Next one I had is on capital management. Just in light of you've some better growth coming through. Could you update us on just capital management priorities overall? And mix between sort of growth capital versus redeployment and bolt-on M&A outlook?

Sure, Alex. So I would start by saying that our capital deployment priorities have not changed. We remain focused on achieving our growth objectives and take a very disciplined approach towards capital deployment to support this. Our top priority has and continues to be to invest in our businesses at attractive returns, while continuing to pay a healthy dividend along with share buybacks, and we are comfortable with our current level of capital deployed to shareholders, which was over $700 million in the quarter, and we feel that we maintain a balanced mix. And as you know, our guidance and our intermediate target is a 65% free cash flow ratio after investing in the business.

And I would just jump in on the M&A side. We've talked about we're evolving our strategy to recognize the changing world around us and leaning into the best areas for growth and return. As we do that, obviously, as I've always said, organic growth is always job one, and we think we have some very good organic growth opportunities.

But we do view M&A as an important tool to be utilized over time. You've heard me on many calls now. I'm a deep believer in being very proactive in the marketplace. I've used the words "in the now and in the flow". That means across our very best growth opportunities, so things like asset management, being very active and always being aware. As always, though, we're going to be very intentional, methodical and disciplined in what we do in the M&A space.

Your next question today is coming from Ryan Krueger from KBW.

In regards to the headwind from variable annuity runoff, I guess, one alternative that to limit that would be pursuing more variable annuity risk transfer. I know you've already, of course, done a couple of transactions already, but I was hoping to get an update on if that's something that you'd be -- maybe consider pursuing again?

I'm going to raise this up and not just focus it on variable annuities because there's other areas that this would apply to. Recognize we've made very good progress on our product pivots, and on the reinsurance transactions, we're pleased that we have those behind us. And we have reduced the exposure to traditional variable annuities and guaranteed universal life substantially, by greater than 60%.

As I said last quarter, we don't view this as a start or a stop. We're always seeking to optimize our balance sheet, our capital, our cash flows. And as we sit here, there is a healthy market available for transactions. There's plenty of capital available. There are plenty of counter-parties that are seeing value in these legacy books of business. So we are and we will continue to assess those opportunities. Obviously, we will keep you informed when we do something.

Great. And then in January, you had announced that you were pursuing a strategic partnership with Dai-ichi. Is there anything you can provide in terms of an update on that and what that could potentially include?

Yes, absolutely. The partnership is off to a very good start. And I would just say, recall from what we announced, there are two major aspects to Phase I.

First, we will distribute Dai-ichi's Neo First cancer product through our Life Planner system. That demonstrates the strength and the value of that Life Planner system and others recognize that strength. The second part of it is we will manage material assets over time for Dai-ichi and in particular, including private credit. The assets that we have begun to manage assets for Dai-ichi. It's steadily growing and will soon reach $1 billion in assets under management.

This is a very important partnership for us. And the Dai-ichi CEO, Kikuta-san, and I meet with regularity. And we do have a menu of looking at things of how we might expand this relationship. But we're also both very clear that job one is doing these current things very, very well to earn the right to the next set of things.

Next question today is coming from Cave Montazeri from Deutsche Bank.

First question is on tech and AI. You've been investing in technology and big data analysis for a long time now. Do you think that a new generation of AI tools or adding your urgency to invest even more in tech right now than, let's say, 3 years ago? Or do you view that as being just business as usual in terms of technology investments?

Yes. Cave, we do believe that AI is going to have a profound impact on Prudential over time. And to your point, we have been investing in this for quite some time, and we're obviously going to keep doing that. Investments are ramping up -- and they're ramping up because we see the value of that enhanced level of investment, I think, as many do. They're also ramping up though because the quality of tools available to use are much better than they have -- than they were even a year ago.

Where we're focused is two core areas. First is improving our customer and adviser experience and using AI to personalize the process and to have faster decision-making, and then second, there's just a very strong opportunity to improve the efficiency of the organization, both accelerating employee productivity at the individual level as well as simplifying processes across the company. So this is an area where investments are ramping up, and it will enable and inflect our performance over time.

My follow-up question, maybe just a bit of a competitive sensitivity around it, so feel free to not answer it. But how much do you spend on any given year on these investment in AI and growth initiatives from a technology standpoint?

Well, Cave you nailed it. We're not going to provide that figure, but maybe I'll just kind of frame it that we believe technology is intertwined and is core. There's no difference between business and technology today. So the level of investment is significant, and we feel it's appropriate and provides great return to the shareholder.

Next question is coming from Elyse Greenspan from Wells Fargo.

My first question, I know you guys provided a little bit of forward guidance for next year, right, just within PGIM and margin improvement. And then is based on how you see other things sitting today, do you guys expect to get back or to get within that 5% to 8% EPS target that you guys laid out next year?

Elyse, again, if you recall, when we talked about the targets, we said it wouldn't be linear. We talked about the near-term headwinds. And over time, as those dissipate, we would have growth. The actions we've taken in PGIM, obviously will produce operating efficiencies and create investment capacity and drive growth. We are not, at this point, updating the targets, and it is too early to provide an update. So I would just say we still are targeting the 3-year growth to be between 5% to 8%.

And then my second question, I guess, goes back to the ESR right? I know you guys are now laying out this 150% target, right? And last quarter, you guys had given us the range that 180% to 200%, where you were at the end of the fiscal year. And I believe you said that you're well above the 150%. So could you give us a sense like, are you still within the 180% to 200%? And I know the disclosure will start to come next year, but would you, I guess, disclose if you fall outside of that 180% to 200% range? Or if you could just give us a sense of just what the disclosure is going to be from now into next year?

Yes. So between now and to next year, you could think about our disclosure being very consistent with how we talk about RBC for PICA, RBC for PICA is published on an annual basis. And in the interim quarters, we talk about our level relative to that target. It will be the same for the rest of the year until we are publishing in Japan the quarterly RBC. And so what we said at March 31 is that at the fiscal year-end, we were at 180% to 200% as well in excess of the 150% target. What we said this quarter is as of June 30, we are well in excess of that target.

Next question is coming from Tracy Benguigui from Wolfe Research.

I have a follow-up on private credit. I get that the traditional place life insurers like to be is private placements, and you have a long track record in space and many of the private placements are rated. But the market is evolving and new private credit asset classes have emerged in recent years. So my question is on allocation perspective. What is your appetite for some of these newer type of private credit assets like residential mortgage loans, asset-backed lending, middle market loans and infrastructure?

Yes. Tracy, what I would say is -- we have a strong portfolio constructed to be resilient and perform well. We always evaluate new asset classes. So absolutely, there are new asset classes in private credit, and we're looking to evaluate the asset classes that offer attractive relative returns and diversification opportunity. But this is always done in the context of our robust risk and capital frameworks, and we will continue to do that.

Tracy, I would just add in, obviously, that's from a general account perspective, but these are important businesses in PGIM, and we've been expanding our capabilities from an asset class perspective in the credit space. And you'll recall, we just brought together public and private credit together into a $1.1 trillion manager because that's how customers are buying. But we have leaned in and really strengthened.

I'll give two examples. Direct lending. You'll recall a couple of years back, we bought Deer Path Capital, in between our organic growth in direct lending and Deer Path, we're now over $14 billion in assets under management. We're also leaned into asset-backed finance, which is part of our $145 billion securitized product business. We're one of the leading players out there in public and private ABF. These are capabilities that grew out of the general account.

But it's important both to have the right capabilities for RGA but also to get real commercial success out of them as well.

My next question is on the VUL growth. It was nearly 20% this quarter. It is a more market-sensitive product and you're a market leader in the space. I was looking at Wink Data, looks like you're #1 and you have nearly 30% market share. So it seems like you like the product more than others. And I'm wondering, what is it about the product that you like? And what's the earnings profile of VUL that maybe others are missing?

So thanks, Tracy. Maybe let me start by saying VUL is less market-sensitive than the product set that we moved away from. You'll recall that we pivoted away from Guaranteed Universal Life to Variable Universal Life, in particular Variable Universal Life accumulation products. As far as why we're seeing such great success in the marketplace, I'd just say a couple of things. First is the strength of our distribution. We have one of the strongest distribution capabilities in the marketplace between our Prudential Adviser capability and our third-party relationships. We also have a relatively new product in the marketplace, FlexGuard Life, and that product is a VUL product and had a record quarter.

To be clear, though, others are entering the space. They do see the attractiveness and it is becoming more competitive. We feel we have everything that we need to remain a leader, but we would expect to see more pressure as more of our competitors are getting into this part of the market.

Our next question today is coming from Wes Carmichael from Autonomous Research.

I had a broad question on Longevity. If I think back a number of years, I remember Prudential had a slide in the deck that showed call it, the balance between Mortality and Longevity Risk. Seems to me with some of the divestitures on the Life side and growth in PRT, Retail Annuities, Longevity. I'm just trying to wonder how you're thinking about the balance of Longevity? And I guess I ask in the context of Swiss-Re is calling for a significant improvement, mortality and morbidity from GLP-1 drugs. So I wonder if that's a risk if you're shifting more towards Longevity products?

Yes, Wes. So a couple of thoughts there. I would say, number one, LDTI had significant changes to how that risk emerges in our balance sheet and our earnings. So that's one of the reasons we don't provide that anymore. We do obviously look at Longevity and Mortality. We track all drivers of Mortality improvement and not just GLP-1. So it's something we look at very carefully. We feel we're well balanced and we have a significant capacity actually to take on more Longevity. So we're very comfortable with where we are today.

All right. That's helpful. And a question on Individual Life, maybe it's a little bit specific. But last year, you guys announced the transaction with Wilton. But in that press release, you also announced some restructuring of the Life captives and I think that improved run rate earnings power. Are there any additional opportunities for captive restructuring? And we've heard that financing charges for some of those older captives have kind of increased substantially. So just wondering if that's still an opportunity.

Yes. I mean -- so obviously, last year, we had what I would call a big project where we restructured those. We -- it was very helpful, and it improved our profile. What I would say is we're constantly looking at how we optimize our balance sheet and ultimately, how we match the economics of our products to the reserving and capital standards. So we will continue to do that, whether it's with captives or other areas of our balance sheet, but we're not actively looking to do anything else at this point.

Our final question today is coming from [ James Coney ] from Morgan Stanley.

This is [ James Kane ] on for Bob. On Group Insurance, how should we think about the total benefits ratio going forward given that it's been trending at the low end below the target range for the last couple of quarters?

So James, it's Andy. So first, I will say we look at that annually. So we will, at the end of this year, be looking at our benefit ratio range because we obviously recognize what you're saying. I made comments earlier in the call, we're very pleased with the performance of the business. Really benefit ratio comes from discipline in pricing, really strong underwriting and then on the disability side, having top-notch claims management. We feel we have all three of those and the business has really been operating well in both the life and the disability side.

We have a very experienced team there. They're obviously watching the environment. If unemployment were to tick up, we'd expect not just for us, but for others, the benefit ratio to increase. But at this point in time, we like where the business is running. We'll reevaluate at the end of the year what the right range should be.

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

So thank you again for joining us this morning. Before we close out the call, as I often like to do, I want to take a moment to recognize the Prudential team. Our employees are doing the hard, essential work of serving our customers as we sharpen our strategy to deliver the long-term growth that we expect. I look forward to updating you on our progress in February. Thanks, and have a great day.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time. Have a wonderful day. We thank you for your participation today.

Ladies and gentlemen, thank you for standing by, and welcome to Prudential's quarterly earnings conference call. [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.

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 relief 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.

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 pretax 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 saving 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 continue to deliver strong sales with particular strength in our Life Planner channel. We've expanded our agency network by adding 7 new agencies over the last year, increasing our Life Planner head count to an all-time high. There were 2 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 3 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 shift in 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 6 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 in 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 ability 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.

Thank you, Andy. I will provide an overview of the performance for our PGIM U.S. 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 U.S. 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. We 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 3-year track record, which is an important retail metric improved notably with 87% of assets now outperforming benchmarks. PG'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 and 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 placement. We are excited by the opportunity to further expand our private credit offerings as we bring our world-class public and private credit capabilities together in PGIM.

Turning to Slide 6. 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 momentum generating $12 billion of sales in the second quarter across its institutional and individual lines of business. Institutional Retirement sales were $9 billion, with over $5 billion of Longevity risk transfer deals, including our second transaction in the Netherlands. Individual Retirement posted $3 billion in sales, driven by continued momentum in fixed annuity product sales, which benefited from expanded distribution as well as solid sales of registered index-linked annuities. Additionally, we continue to reduce market sensitivity by running off our legacy variable annuities.

Group Insurance sales totaled almost $80 million in the second quarter with year-to-date sales of $477 million, up 13% from a year ago, driven by growth in both group life and disability. 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 benefit ratio improved to 80.9% in the second quarter, excluding the favorable impact from our annual assumption update and other refinements and underscores favorable life underwriting results as well as our strategic initiatives to improve overall profitability and performance. In Individual Life, sales of $223 million in the second quarter, up 10% from the prior year quarter. This growth was driven by higher accumulation-focused variable life and term product sales.

Turning to Slide 7. 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 4% compared to the prior year quarter. mainly driven by our continued expansion of retirement and savings products in Japan as we focus on meeting the evolving needs of customers. While surrender activity has shown signs of stabilization in the second quarter, it will continue to be a near-term headwind that will partially offset new business growth.

Turning to Slide 8. Our capital position and strong regulatory capital ratios continue to support our AA financial strength and our ability to grow our market-leading businesses. This includes our Japan operations, where in April, the JFSA implemented its new economic capital standard with a mandatory reporting date set for March 31, 2026 and the first public disclosure reporting around May of 2026. Our operations continue to remain well capitalized. As of March 31, 2025, the fiscal year-end for Japan we estimate that the unadjusted ratios for Prudential of Japan and Gibraltar Life would be between 180 and 200%, well in excess of levels that support our AA rating. These unadjusted economic solvency ratios are consistent with how we would report to the Japan regulator based on a strict interpretation of the standard specifications.

As I have stated previously, we do not anticipate any changes to our cash flow or dividend capacity, financial ratings or business opportunities in Japan as a result of implementing the new standard. Our cash and liquid assets were $3.9 billion, which is above our minimum liquidity target of $3 billion, and we have substantial off-balance sheet resources. In the quarter, our highly liquid asset balance declined as a result of redeeming $1 billion of hybrid securities. 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. And with that, we are happy to take your questions.

[Operator Instructions] Our first question today is coming from Ryan Krueger from KBW.

Could you talk a little bit more about the changes you're making at PGIM with the unified structure versus the multi-manager model. I guess -- is it -- it sounds like it's something that you're doing to try to improve margins and expenses, but also growth. So can you give a little bit more perspective on that? And how we should think about the financial benefit coming through?

Yes. Ryan, sure. I'm sure, as you know, the asset management industry has been evolving quite rapidly. What we see as institutional customers in specific are wanting to work with fewer and fewer asset managers and do more with those managers and the consolidation continues with the big getting bigger. So more than ever, we believe that scale, breadth of offering and efficiency are really, really important. So we've made this change to improve our competitiveness. We decided to go to market as what I would call on PGIM so that we could deliver seamless experience and integrated solutions.

It really is a pretty sizable step for us to improve our competitiveness we've been in the multi-manager model near about 20 years at this point. On the asset side, the key change to really focus on is really the combination of our public and private credit capability. That's how customers are buying today with integrated solutions. On the distribution side, collapsing from 5 sales forces to 1 is key as well. To your point, Ryan, this will have measurable benefits. We still believe that 25% to 30% margin is the right target over the intermediate term. This will help us drive towards the top end of that target at a faster rate.

A couple of key benefits, and you mentioned them. First is obviously expense efficiency as we run this as 1 P&L versus 6 separate P&Ls. But the other very clear opportunity is on the revenue side from a cross-sell perspective. As we sit here today, only 10% of our institutional clients actually buy more than 1 thing from us in PGIM so there's a clear revenue opportunity as we bring together more of an integrated model. Over time, this is going to strengthen our business, and I'm quite pleased at the speed that the leadership team is attacking this.

Great. And then follow-up is, can you give an update on the U.S. pension risk transfer market and why you think it slowed down? Is it -- do you think it's more about the losses going on within the industry or the external environment that's causing this?

Yes. Ryan, thank you for the question. We do believe that the market has softened modestly is the way I would frame it. we expect that the market will come in around $30 billion to $40 billion this year, and it's really a tale of 2 cities. In the smaller end of the market, transaction volume has remained strong. But in the jumbo space, it has definitely been quieter this year. Remember, that is episodic by nature. We believe the key driver still remains the uncertainty and volatility that's happening in the environment.

Uncertainty always causes business decision-makers to slow down in their decision-making. When you talked about litigation, we think that's potentially having some impact on the industry size. But again, we think the predominant impact is the uncertainty and the volatility. If you take a step back, though, from that, this is a big market, and this will be a big market for years to come. There's $3 trillion in untransacted liabilities, funding levels still sit at 105% and from our interactions with plan sponsors, they still have a high desire to transact. We feel very well positioned. Obviously, we have a great underwriting capabilities, very strong asset management organization and strong servicing. That's why we've done 7 of the 10 largest transactions. We're optimistic that the market conditions will improve over time and when that happens, we'll benefit.

Our next question today is coming from Suneet Kamath from Jefferies.

I wanted to start on individual retirement and your RILA sales, which I think were down 23% year-over-year. And if we look at industry data, I think the industry was up 20%. So it's a pretty big difference there. Just wondering kind of what you're seeing in the market? Is it competition or new entrants? And then somewhat relatedly, Andy, you talked about improving the earnings mix or the earnings quality of individual retirement. And I guess beyond just new business, are there other things that you're contemplating when you make that statement?

So Suneet, thanks for the question. Let me start with the RILA sales. The market for individual retirement sales has been quite healthy. again, the sales this quarter industry-wide, were over $110 billion. We believe that the market will remain strong given the fact that we live with an aging society, that aging society needs protected income. There's $7 trillion sitting on the sidelines and money market funds. Well, it's going to stay strong. We're well positioned, thanks to the work that we've done to broaden the product portfolio and to deepen our distribution and we've been pretty consistently selling above $3 billion each quarter.

As to the RILA market specifically, we do believe the market has become more competitive. The fact is, if you look at the market, we've gone from 5 competitors a few years back to -- as we sit here today, there are 25 active competitors in the marketplace including seeing some reputable broader annuities players that have entered RILA. By definition, if you take a few years back, only 5 players, the share was very concentrated. So these new entrants are working pretty hard in order to obviously fragment that market share. As it comes to our -- the sales, what you should expect from us is we're going to continue to be disciplined and seek the best returns across this broadened product portfolio. And obviously, we think this is a tailwind environment that we'll be able to participate in.

As to the improvement in individual retirement, the predominant effect on our results have been the earnings volatility from our legacy runoff variable annuities block. This is one of the main reasons that we exited that business. The volatility is driven both by the market impacts on fees that we collect but also on the level of surrenders each quarter. We also obviously have experienced assumption and refinement changes in the business overall but the plan remains the same. Obviously, we've made very good progress on pivoting the business and derisking through transactions. We're going to continue as the legacy rolls off to replace that, but with new, less complex products. And as we do that, we know that the earnings results and consistency will improve.

Got it. That's helpful. And then I guess for Yanela, on the 180% to 200% ESR ratio, you made the comment that you feel that's well above AA standards. But -- how are you calculating that? Or how are you determining that? Because I don't believe the rating agencies have come out with something that kind of gives a standard. So when you say that it's above AA, what -- how are you reaching that conclusion?

So we developed our view of the AA standard considering multiple factors. We included our internal frameworks as well as rating agency considerations. So they haven't come out with a view, but we understand their considerations, and we have an active dialogue. We will officially request approval of the target from our Board as part of our normal process later this year, so it would be premature to share that. But I would highlight that we intend to maintain strong ESR levels during normal markets, and that provides a cushion that enables us to meet what we believe are AA levels after a cyclical stress.

So this considers any potential variability in ESR results under different market stresses and is consistent with how we manage under the current solvency margin framework. And I would just finish by saying, as I said before, the implementation of ESR will not impact our cash flows, our dividend capacity, our ratings or our overall operations in Japan.

Next question today is coming from Tom Gallagher from Evercore ISI.

A couple of questions on Japan. One on ESR follow-up, Yanela. The -- so I think Aflac has put out a range of $170 million to $230 million. Does that -- is that like within the ZIP code of the way you're viewing a potential range that you'd want to operate in? Obviously, 190 would be within that range. But curious on that and whether you can talk about where your ESR is most sensitive to potential macro changes? And anything on sensitivity?

Yes. So Tom, our range, as I mentioned, is 180 to 200 in terms of the -- as of 3/31. It is, as I said, well above our AA what we view as a AA level of capital. So our target, we'll share it once we speak to the Board, but it has not been approved by the Board right now. I would remind you all -- what we're sharing in terms of an ASR level is consistent with how we would report to the Japan regulator based on a strict interpretation of current specifications. So that is important. Our understanding is that ESRs that are currently being disclosed by other companies are on an adjusted basis using internal calculations and economic capital models, which may differ from the specifications, we are following the strict specifications.

So that's important. In terms of sensitivities, so we've conducted a series of sensitivities on our ESR results in arriving at what we believe is a AA standard. And our ESR level is reflective of that level of variability that we -- so that is important. To just give you a sense of sensitivities, it's kind of premature to go through all the sensitivities, but I would say that our ESR results are most sensitive increases in Japanese interest rates. Our Japanese liabilities are very well ALM match. However, a potential rise in rates could cause lapse risk and some products. So to provide a sense of the sensitivity if Japanese interest rates would to increase by 50 basis points and equity markets would decrease by 10%, we still do not expect ESR to be binding in terms of impact on Japan Capital and cash flows.

That is helpful. Appreciate it. And then just one quick follow-up. I noticed Japan premiums declined around 10%. And this quarter despite pretty good sales results, and I think you made positive comps on persistency. Was that due to the Prismic reinsurance deal or something else going on there? .

Yes, Tom, it wasn't due to the Prismic reinsurance deal. There were really 3 primary drivers when you look at the year-over-year variance. The first is the impact of the assumption update on premiums. So when you compare year-over-year, the assumption update impact on the premium line had a variance, and that was over half of the change. The second is the continuing impact of surrenders on our results as some of the surrenders are recurring pay products and are reflected in that line. And lastly would be our strong sales of retirement and savings as well as single-pay products, which are generally reflected in policy charges and fee in that line versus premium. So related to that third one, we've added disclosure in the QFS for account balances. So that detail could be more visible.

I guess -- sorry, just one other follow-up to that point, Yanela, that's helpful. Would your view be Japan total top line momentum on an economic basis is shrinking now based on all those factors? Or do you think it's flat or slightly growing? Like it's just hard to interpret direction of travel here.

Yes. I think if you look at the policyholder account balances on a sequential quarter, they're up by about $2 billion, and that reflects our strong sales of our retirement and savings products, where we have seen a lot of momentum.

Yes. And Tom, I would just add in, I mean, we've talked about our intentional strategy about broadening the product deepening distribution. And really, what we're seeing is a lot of sales coming from new product introductions in Japan, things that we've introduced over the last 2 years, both U.S. dollar and yen denominated. Yen is now about 30% of the portfolio. And we've done that work to help us overcome the surrender headwinds, and we're seeing that progress. .

Next question today is coming from Elyse Greenspan from Wells Fargo.

I want to start with, I guess, capital return, right? You guys target 65%. And you obviously -- you had shifted us a couple of quarters ago to looking at that relative to net versus operating income. We looked so far this year, right, that's running almost 119%, obviously because the net income has been lower. So how should we think about, I guess, that ratio like moving forward? And if that continues, I guess, to stay high, will that have an impact on forward capital return? .

So there are definitely a number of variables to consider here through a few of them. First of all, the primary driver of cash flows is that for capital. And while we believe that net income is a closer approximation of cash flows, neither net income nor AOI are perfect proxies for cash flow. Now in terms of net income, what we see is that net income from certain items that are excluded from adjusted operating income but that may still influence statutory capital. So for example, realized gains and losses from retained portfolio management activities or mark-to-market on hedging instruments. They're both reflected in both GAAP net income and statutory reporting, but not in AOI.

Conversely, there are components of GAAP net income that do not translate directly into cash flow. So there's reconciling items in both directions. This quarter, the difference between net income and after-tax AOI is split roughly evenly between items that impact cash flows and those that do not. And I would remind you that the 65% free cash flow ratio is an overtime measure in cash flows from our operating entities, 2 PFI may and do fluctuate quarter-over-quarter. And just as an example, this year, we have not taken a dividend from our major domestic entities, yet our holding company cash balances remain strong. We continue to manage capital well above our AA solvency targets and we have continued to make shareholder distribution. So I would just summarize by saying that dividends from our operating entities are not linear across the year and will vary, and the cash flow ratio is an overtime measure.

And then my second one, right? You guys outlined like 5% to 8% EPS growth, right, over 3 years. Through the first half of the year on a core basis, right, you guys are at around like 3%. Obviously, there's some expense movement and then there's business growth and other things that could impact the back half. But -- is that the right way to think about, I guess, where you are for this year? And then with the expectation based on where things sit today, be to get back on or to get within that range job next year? .

Yes. Elyse, the 5% to 8% target is a 3-year target. So if you remember when we share the targets, we also identified some near-term headwinds in the form of a variable annuity runoff and Japan surrenders. Those have been incorporated in the target. But as I said a couple of quarters ago, that does mean that the earlier years, i.e., '25 growth may be lower and that it is not linear. So the growth trajectory is not linear. As we said, as the growth of our ongoing businesses and our new sales will kind of outperform the VA runoff, for example, we will see that growth come through more prominently. And so I would just remind you that it's not linear. And as the headwinds dissipate, we will have stronger growth and the 5% to 8% is an average over the 3-year period.

Next question today is coming from John Barnidge from Piper Sandler.

How do you view 401(k) retirement reform and proves positioning to benefit from that with the 1 PGIM unified structure?

Thanks, John. We have always been advocates of good retirement reform, and we always work hard to stay actively engaged in the dialogue not only obviously here in the United States, but also globally. And as you noted, there are really 2 big areas of focus as we see them first is encouraging lifetime income solutions and specifically by making them defaults and defined contribution plans. .

Second is really an expanding access to alternative and private type investments in retirement plans while you focused on the reform, I would also talk about it's important that we are doing innovation. A prime example of that is the work we've done to pioneer what we call active income, which is where we work with financial advisers to add longevity protection to separately managed accounts without moving their assets by adding an insurance overlay. So this is a new lifetime income category that we've created. It's very early, but we're excited about it.

As far as your question around PGIM and our integration to one model, a big part of this is bringing forth solutions that can integrate across asset classes. Obviously, we think that will be an advantage to us as the retail uptake for lack of a better term, starts to begin to happen in DC plans. Obviously, the other things that we've been doing is on the retail side, expanding the types of vehicles that we can offer to ETFs and SMAs and broadening out our distribution. So between the reform and the changes that we're making in the business, we feel that we're well positioned to capitalize.

Speaking with PGIM. My follow-up question on PGIM. I'd say, as you search for greater scale and is this opportunity to present itself, where does inorganic fit within that to leverage that scale even further?

John, probably won't be surprised to hear me say organic growth is always job number one. And we feel we have a lot of opportunity to grow organically. In particular, with these recent changes, we think we're unlocking some additional opportunity. So I would start by saying M&A is not required to meet our intermediate-term financial targets. That being said, as it pertains to M&A, we do feel it's important to consistently consider a range of things from smaller capability bolt-ons to larger, more holistic things that can bring scale. We obviously look to globalize the business and are very interested in building on our leading positions in credit and alternatives and in real assets.

As we think about that, M&A can be an accelerant to what we want to do, but again, not required to meet the intermediate-term targets. As always, we're going to be disciplined. And what I mean by that is it will absolutely have to align very strong strategically and provide the right returns to the shareholder over time.

Next question today is coming from Jack Matten from BMO Capital Markets.

A question, what has been any update or change to your thoughts around risk transfer, especially for the runoff VA business. We saw a pretty sizable VA deal a couple of months ago that was well received by the market. So just curious about your thoughts there.

Jack, First, I always start by saying we need to recognize, we've made very good progress on derisking between the work we've done to pivot the portfolios and the transactions that you referenced we've reduced the exposure to traditional variable annuities by about 60%. And we don't view this as sort of starting or stopping. We view it as always looking to optimize the balance sheet, the capital, the cash flows. To your point, there is a large market that's available for transactions, which is a good thing. There's plenty of capital, plenty of counterparties that are finding value in these legacy insurance blocks. So we will continue to assess opportunities over time. And if and when we have something to share, we will post you on it. .

Got it. And then just a follow-up on the Japan consistency kind of outlook. It's good to see that things have been stabilizing or improving there. I mean, just look I guess in the past month or so we've seen the yen weaken again and rate have been rising. I know it's not a simple formula, but I guess just curious with that kind of backdrop, are you seeing any, I don't know, shift in kind of those trends and how you're thinking about that for the rest of this year?

Sure, Jack. I'll take it. As you know, surrenders remain a near-term headwind for us, but we do see that they're continuing to improve and stabilize. And unless there's a large change in the end. We expect the impact is going to lessen over time. Additionally, we've also taken steps to counteract the effects. First and foremost, we put additional resourcing into our distribution and into our service areas to work with customers to adjust their coverage levels.

Second, we've expanded our product offerings, doubling our yen offerings and leaning into retirement and savings, all of that is helping us counteract the headwinds that we're feeling. While we're seeing improvement, as we sit here, we still expect about a $100 million impact to 2025 consistent with what we said last quarter.

Next question is coming from Wes Carmichael from Autonomous Research.

Andy, I think you began in your prepared remarks highlighting group and definitely good underwriting in the period. But if I kind of zoom out a little bit, I think groups maybe 5% or so of the overall enterprise earnings. So I guess, is this a segment that you think can really move the needle? And are you really pushing to grow that contribution overall to prove?

Wes, thanks for the question. And I was hopeful we would get to talk about group insurance. We're really pleased with the results, both in the quarter and year-to-date. As I said in my prepared remarks, this is literally the second best quarter on record with strong life and solid disability. We laid down a strategy several years back to diversify both our product mix and our segment mix, and that's been paying off. We see it in the premium growth with sales up 60% year-to-date and in our persistency at 96%.

We see it in the underwriting from sitting here with a benefit ratio of 80.9% so this has been a business that we've invested quite steadily in. It has been growing nicely. It's been a consistent performer. So our plans are to continue to stay the course on the strategy within the business. continue investing in the business and to have it become a larger percentage of what we do over time.

That's helpful. And maybe for Yanela, on the assumption review, particularly in individual retirement, I think there's a onetime impact in the quarter, but there's also some ongoing impact of $20 million or so a quarter. Just hoping you could unpack what the driver of the assumption review in that segment was and why there was an ongoing impact.

Yes, so the AOI impact in individual retirement of the onetime and ongoing is due to reserve refinements for some fixed annuity products that we've been selling. Now these refinements have no impact on statutory results, capital or cash flows, and they don't impact our expected lifetime economic outcome. However, the change will accelerate the timing of the GAAP reserve recognition, and we're really taking that GAAP reserve closer to when we expect the payments to happen.

Your next question is coming from Jimmy Bhullar from JPMorgan.

So first, just a question on your comments around competition in the RILA market. Is it more that the -- because there are more competitors, you're just having a hard time differentiating yourself? Or is it -- are you seeing companies actually either pay more in commissions or offer more generous terms and conditions that you're not willing to match in terms of just the details on what you meant by increased competition?

Yes, Jimmy, I guess the way I would frame it is, and the way I think about it is any time you have any marketplace where you go from 5 people competing for a piece of business to -- by definition, you start to see market share start to get split up. And what I would tell you is with '25 competitors in the market, there's a lot of levers to try and accelerate sales, whether that be leaning in on pricing or leaning in on the commissions that are being paid. So without any specific comments around that, you should expect that all those levers are being utilized by competitors. And that creates just a more competitive environment. And I think it's natural to see that the market will fragment over time, given all that new competition.

And then seems like you're comfortable where you are, but should we assume that you would actually, over time, try to get the number higher than 200%? Or is this where you are as consistent with your long-term target as well?

No. So I would remind you, Jimmy, we intend to maintain an ESR level during normal markets that provides a cushion for cyclical events and stresses. So we are very comfortable with the level with where we are.

Next question today is coming from Bob Huang from Morgan Stanley.

Most of my questions are answered. Maybe just one on Brazil. Obviously, you've had a pretty strong momentum in most of your international markets. But can you maybe help us understand like -- what is the latest trend that you think would be good growth opportunities in Brazil? I mean, how should we think about that market going forward from here?

Yes, Bob, thank you for the question because Brazil has been going quite well for us. and it dominates our EM portfolio. In Brazil, sales were up 10% year-to-date versus the prior year. And really, the story of where you see us accelerating is we're showing particular strength in our Life Planner channel. Obviously, the Life Planner model has served us exceptionally well over decades in Japan. We've been building that capability over a long period of time in Brazil. And we have a lot of geography, I call it room to run, a lot of geography that we can expand that life planner system out into that's why our head count is up 12% year-over-year.

We've added 7 new agencies and 300 life planners in the last 12 months. I would also mention that we're continuing to diversify other aspects of distribution. And as an example, we've done great work with Mercado Libre, and we now are seeing -- we won the ability to do credit life in that relationship. And we're seeing the sales levels and the number of policyholders. We're now serving over 600,000 people. So there's just a number of different elements around distribution, in particular, that's enabling this pace of growth and we would expect to have the ability to keep going.

Our next question is coming from Michael Ward from UBS.

Andy, I'm just thinking through your comments last quarter about the evolution of capital uses. And now that we have a manageable range on the ESR. I'm just wondering how you might -- if you're able to sort of rank your priorities on the capital use front?

Yes. Mike, let me start with that. So our capital deployment priorities haven't changed because our capital plan hasn't been impacted by the implementation of ESR. So back to -- I think I've been saying for 3 quarters, we don't expect the ESR implementation to impact our dividend capacity, our cash flows. And we've had a long time to plan for ESR. So when we developed our capital plans, we had ESR in mind and our capital allocation prioritization still continues to be -- the way we think about it is that we are balancing the preservation of financial strength and flexibility with investment in our businesses for long-term growth and supporting shareholder distributions. And we like the way we've been approaching that allocation, and it will not change due to the implementation of ESR.

Okay. And then maybe on longevity risk transfer, it seems like you guys have had ongoing success there. I'm just wondering if you could help us understand how to think about that versus pension risk transfer and how you think about sort of the evolution of longevity with medical advancements and whatnot?

Yes, Mike, let me start. And longevity risk transfer is a very good opportunity for us. If you look globally, pension plans are very well funded. We participate in 2 core markets, the U.K. and the Netherlands. The U.K., the pension transfer market is somewhere between $50 million and $55 billion a year quite reliably with about 80% of those transactions seeking reinsurance. In the Netherlands, given the DC reform and the transition from DB to DC, many of those plans, and there's about $300 billion of market opportunity sitting there, we'll seek pension risk transfer and seek longevity reinsurance. .

So it's an area that is a very good growth area where we're a leader in. That's why you saw us do 3 transactions for $5.6 billion this quarter. It gives us healthy returns and gives us a lot of room to grow. So maybe Yanela could jump in and talk about kind of how the financials look versus PRT.

Yes. So a couple of things. From a medical advances, perspective, we track medical advances very closely as we have large longevity and mortality businesses. I would remind you that our mix of businesses provides a natural offset between mortality and longevity. And I would highlight that our risk and capital framework includes stress testing for mortality improvement under severe scenarios that reflect conditions changing for many reasons. So we're monitoring all trends that influence mortality, and we'll continue to update our actuarial assumptions each year as we review emerging internal experience and industry studies.

I guess just I meant like on the -- how did the earnings -- are the margins compare on LRT versus PRT? .

Yes. So LRT and PRT are different businesses. Obviously, we're reinsuring longevity on both. But LRT is essentially a longevity swap that is fee-based and PRT is pad-based earnings that not only has longevity risk but also asset risk. So LRT has fee-based but also has lower capital requirements so earnings on both are consistent with our targeted return.

Next question today is coming from Alex Scott from Barclays.

As mentioned earlier that you're expanding distribution and as part of your strategy to begin growing in a bigger way organically. And just wanted to see if you could run us through that. I think you commented more on like the PGIM and some of the things you're doing there with transformation. But maybe just thinking more broadly across your businesses, are there any important spots where we should be aware of things that you're actively doing on distribution?

Yes, Alex. And I've already mentioned several of these. So maybe let me just start with on the international side. We think it's very important to have a mix of distribution capabilities. And whenever I think about that, I think of having captive which obviously in international would be things like our Life Planner or Life Consultant to have bank distribution in these international markets and then other third parties working with independent agencies and agents.

So as you think about that, that work is about consistently trying to expand your geographic reach and the number of captive agents that you have trying to work more with more banks in the market, not just the nationals, but the regionals. So from an international perspective, it's very consistent, methodical work to build that and make it broader and make sure you're covering the entire market opportunity similar depending on which business you're talking about in the U.S., we're doing the work to make sure that we have distribution leadership and resources in all the right places and all the right spots whether that's expanding our captive capability with Prudential advisers or working through the intermediaries that we work with in our group insurance business or in our retirement business.

And then yes, obviously, we talked about PGIM and specifically focusing on Europe and Asia as areas that we are putting more feet on the street and looking to access more intermediaries but it takes consistent effort and energy every single day to build it out. The great news is once you have it built out, it really is differentiating and it's hard to replicate.

Got it. That's helpful. Follow-up question I had is just if you could provide some comments on the sort of transactional environment for real estate and where you see that heading as you look out over the next year?

Yes. So obviously, the real estate business is a business that we're quite proud of. We're #3 worldwide by assets under management. We have strength in equity and debt and it's been something for decades that we've delivered strong returns. The industry clearly hit a rough patch back in 2023 due to the change in the interest rate environment. We did see, and I said this on previous calls, that the space was starting to recover, starting to come out of the trough. But then candidly, that recovery has been delayed due to the uncertainties that's in the environment specifically around, obviously, all the conversations around tariffs.

That said, we are seeing signs of life. So the bid-ask spread between buyers and sellers has narrowed substantially. We are increasingly able to sell assets at acceptable prices. And a big part of that is valuations have improved modestly from the trough. So we expect a slow recovery to be in front of us. and we know we're well positioned to capitalize on that. And that's obviously another key reason as that market recovers, that will help contribute to our improving margins in PGIM as well.

Next question is a follow-up from Wes Carmichael from Autonomous Research.

Just hoping if you have any, could you provide any color on the PGIM flow pipeline in the second half of the year, particularly on third party?

Sure. Yes, absolutely. When it comes to flows, we always assess our success by looking at total flows that's affiliated and third party, and we look over a longer time frame. And the way I frame that is 12 months. From that lens, we clearly see a successful picture over the last 12 months. We've had nearly $25 billion in flows, $16 million on the affiliated side and 9 on the third-party side. As Yanela said in her opening commentary, we've seen consistent success on the institutional side. So we're -- and that's across asset classes.

Retail has absolutely been more pressured given the market uncertainty and volatility. As we look forward, we're optimistic the track record on institutional will continue. We're more cautious on the retail side. given there's a lot of money on the sidelines, we're not yet seeing it really come back into fixed income. And as long as there's uncertainty around the interest rate environment, that's going to continue to be true. What we do know is if you look over longer time frames, 12 months or even longer with the capabilities that we have and the changes that the leadership team are making will be a net winner over time.

And Wes, this is Bob. I just wanted to jump in and clarify your prior comment regarding group sales. I think Andy may have stated year-to-date group sales are up 60%. That's actually the current quarter over last year second quarter. Year-to-date sales are actually up 13%. .

Got it. And maybe sneaking one more in just on I guess, on Slide 7 for the international businesses, one of the key priority bullets as optimized capital. And I guess I just wanted to maybe get a little bit more color about what you're thinking. I don't know if that relates to ESR or not, but in terms of any recent reinsurance activity affiliated or what are you kind of contemplating as you think about optimizing capital for international?

Yes. So I mean, look, I would say that, that is that is always important in all of our businesses, like we seek to optimize capital, I think for international, given the fact that we've been in this period of assessing ESR, preparing for ESR, optimizing capital has been really important. As you've heard me say before, we've reinsured about 70% of our U.S. dollar business out of Japan. We've been utilizing reinsurance for a long time and the optimization of capital also plays into the products that we sell. So it's just good housekeeping to make sure that we're optimizing capital in all our businesses, especially in Japan. And yet that had obviously, line of sight into the ESR implementation.

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

Thank you all for joining us today and for your very thoughtful questions. We appreciate it. I also, as always, want to extend my sincere appreciation to our employees around the world for their dedication and their commitment that they show every single day to our customers. Looking ahead, I'm confident in the opportunities that lie before us, and our leadership team remains very focused on evolving our strategy, executing with consistency and discipline and fostering our high-performance culture so that we deliver the long-term value for all of our stakeholders. We appreciate your continued support, and we look forward to keeping you updated on our progress. Have a great day.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.