Prudential Financial, Inc. (PRU) Earnings Call Transcript & Summary

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 del Frias, Chief Financial Officer. Before we begin, please note that today's call has been extended to 90 minutes. Andy and Yanela will begin with a discussion of Prudential's refreshed strategy and long-term vision, followed by a review of our second quarter earnings results. We will then open the call for Q&A. We have also posted slides on our website at investor.prudential.com, which provide context for today's strategy discussion. I want to remind you that today's discussion may include forward-looking statements. It's possible that our actual results may differ materially from those statements. This includes, among other things, any statements regarding the company's strategy, objectives, goals, priorities, expectations, plans, initiatives or anticipated future performance, all of which should be considered forward-looking statements and are subject to risks and uncertainties. In addition, remarks made on today's call and in our quarterly earnings press release, earnings presentation, quarterly financial supplement and strategy update presentation, which can be found on our website, include references to non-GAAP measures. For a reconciliation of these measures to the most comparable GAAP measures and a discussion of the factors that could cause actual results to differ materially from those in our forward-looking statements, please see the slides titled Forward-Looking Statements and Non-GAAP Measures in the appendices to our strategy update presentation, 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. I'd like to start by outlining our refreshed strategy and vision for Prudential's future, which is grounded in a clear view of where we can win and how we create value. Since stepping into the CEO role, I've said that delivering the performance our shareholders expect requires a simpler company, fewer priorities and execution excellence. That remains the standard and the status quo is not an option. Prudential is a uniquely integrated financial services company, differentiated by a formidable global brand and trust earned over more than a century. At its core is a powerful ecosystem, industry-leading liability generation and a world-class asset management platform that reinforce one another. Few companies of the customer relationships and distribution reach to originate liabilities across retirement and protection products globally. Even fewer compare those liabilities with an investment platform capable of sourcing and allocating capital across public and private markets. These advantages create a powerful competitive moat. Our insurance businesses generate a steady flow of liabilities, while PGIM's investment expertise, particularly in credit and real assets, enables us to deliver differentiated solutions and attractive risk-adjusted returns for our asset management clients across market cycles. We have a strong foundation in businesses and markets with favorable structural growth, and we will drive performance by leaning into our advantages. Our strategy is about building on those advantages to produce leading outcomes, exceeding our potential, anchored by 4 priorities designed to deliver top quartile earnings growth, excluding the earnings from our legacy variable annuities business, increased cash flow conversion, and sustained strong returns on capital over time. The first priority is narrowing our geographic footprint. We are operating in a fragmented global environment where capital moves less freely across borders. Success requires more than market presence. It demands scale and leadership. Our strategy is clear: concentrate our capital, talent and management attention on large developed markets where we have the clear ability to win. With that in mind, we are making deliberate geographic choices. Today, our retirement and insurance businesses operate in more than a dozen countries. We plan to reduce that footprint by roughly half and concentrate liability generation in the U.S., Japan and select European countries, large markets with attractive retirement and protection growth. This means exiting emerging markets while managing those exits to maximize value. We will rotate the supporting capital expected to be well north of $3 billion to these geographies and to our asset management business, which we expect to be a larger, more strategic driver of enterprise value. It also means increasing the proportion of earnings from our businesses in the U.S. and Europe relative to Japan. But a smaller footprint is not the objective. It is the enabler. It creates the capacity to invest in our highest conviction opportunities and to advance our second priority, scaling our chosen businesses to lead. We are concentrating on global retirement, asset management and select protection businesses, areas with long-term structural demand where our capabilities are most differentiated. We intend to lead in these businesses as the strongest returns accrued to the top-tier market leaders. We are targeting both organic and inorganic sources of growth to strengthen our asset management platform, expand our retirement footprint in the U.S., Europe and Japan and enhance our group insurance product diversification in the U.S. We will evolve from a portfolio of good businesses to a company built around category leaders, powered by an integrated model that drives compounding value over time. To do this, we must also optimize capital deployment, our third priority. As we execute the strategy, we will intentionally increase the earnings contribution from capital-light businesses, including asset management and group insurance while continuing to pursue disciplined growth in retirement. Our objective is for PGIM to become 25% of PFI's AOI, more than double its current contribution to the portfolio. In addition to the overall portfolio mix, we will actively manage product mix within each business to improve capital efficiency and drive stronger growth. This leads to our fourth priority, leveraging our global scale to become more efficient. As we further integrate our businesses, simplify structures and processes and use technology to raise productivity, we will not only reduce costs but improve operating efficiency and speed of execution. This work is expected to result in approximately $750 million in pretax run rate benefits by year-end 2028, up from our original target of $150 million in 2027 and drive sustainable improvement in earnings and free cash flow growth. Taken together, these 4 priorities, focusing our geographic footprint, leading in chosen businesses, optimizing capital deployment and enhancing enterprise efficiency will position Prudential to scale, perform and win. For shareholders, these priorities translate into 3 objectives. First, we expect to deliver top quartile earnings growth, excluding VA, through a deliberate, sequenced capital rotation strategy. Second, we intend to increase free cash flow conversion through a greater contribution from fee-based earnings and highly cash-generative businesses. And third, we will continue delivering strong returns on capital by concentrating investment where we have a clear edge. That is the destination. Let me walk through how we get there, starting with global retirement. This is a large and durable growth market. Retirement assets in OECD countries are expected to grow to roughly $75 trillion by 2029, with more than 75% concentrated in the U.S., Japan and key parts of Europe, our priority markets. We intend to enhance our capabilities, increase market share and expand operating leverage across our retirement businesses. In the U.S., we are building a leading position in retail annuities, where we see a clear opportunity to materially strengthen our position while meeting the growing need for protected income and retirement solutions. Our brand, product breadth, distribution and differentiated service model, have more than tripled our addressable market in the past 3 years, and our expansion into the IMO channel has meaningfully increased our reach. We will continue expanding products and distribution to capture the most attractive opportunities. PGIM fuels this growth by enhancing pricing power while we improve returns through asset mix, scale and efficiency. On the institutional retirement side, pension risk transfer remains a significant opportunity as defined benefit plans derisk and outsource asset liability management. We have a premier market position in PRT, driven by our brand, underwriting and execution. We will remain a market leader in PRT transactions in the approximately $3 trillion U.S. corporate pension market, which is expected to continue transacting over the next 2 decades. We will also leverage this leadership to build our European capabilities. Our retirement expertise extends well beyond the U.S. Japan is a core element of our global retirement strategy, where we serve nearly 6 million customers through businesses with leading market positions. Japan is one of the world's largest retirement markets, shaped by aging demographics, new government initiatives and rising demand for products that help customers save and convert assets into secure income. Retirement and investment products now comprise roughly 75% of our new business production, reflecting this structural shift, although we will also continue to meet the protection needs of Japan society. We are moving our captive distribution force of over 10,000 financial professionals to a stronger relationship-based model focused on long-term customer value. Additionally, we are broadening how we go to market, including strengthening third-party distribution in banks and independent agencies. Prudential of Japan will be an important driver of this outcome. While the sales recovery will take time as we reset the operating model, the business should emerge better positioned for the long term. Combined with Gibraltar and PGFL, we have a well-established franchise in Japan with broad capabilities and a strong competitive position. In Europe, we are deepening our presence in large mature retirement markets, such as the U.K. and the Netherlands. These markets have strong demand for derisking and retirement income solutions and our capabilities, particularly in longevity and asset management are well aligned with these needs. Now turning to PGIM. PGIM scaled, highly integrated global asset management platform, anchored by a $1.2 trillion in credit assets is central to our strategy and foundational to how we win. Our objective is to further advance our market-leading franchise by leveraging strength in areas where we have led for decades, including credit, infrastructure debt and real assets. At the same time, we will expand in priority areas, including asset-backed finance and direct lending. These asset classes support stronger returns, competitive pricing in our retirement businesses and improved enterprise performance. We will also look to enter adjacent areas, increasingly important to our third-party clients, including infrastructure equity and primary private equity, building on our deep client relationships. Growth in higher fee asset classes combined with expansion into new geographies and client segments will further improve asset management performance. We see significant opportunity outside North America, which makes up roughly half of the $147 trillion global asset pool. Only about 1/4 of our third-party assets under management are sourced internationally today. We also have substantial runway to diversify our client base by expanding in retail and institutional segments where demand for private market solutions is accelerating, including insurance, sovereign wealth and family office channels. Serving these clients with our highest value products will gradually shift PGIM's business mix and help drive margins above our current 30% multiyear target. As we expand, PGIM's origination expertise will remain a key differentiator, allowing us to syndicate more of what we originate, deepen client relationships and increase the scalability of our platform. PGIM is among a small group of managers that can address borrowers' needs at scale across the liquidity spectrum. This advantage will help broaden our investor base, increase third-party capital and generate additional earnings. Alongside Retirement and PGIM, our U.S. protection businesses, Group Insurance and Individual Life generates strong earnings and cash flow and provide important diversification benefits to the enterprise. That diversification enhances resiliency, supports more consistent profitability and helps fund our strategy. We are allocating capital to the most attractive opportunities and growing where we could generate compelling returns. We will achieve this by expanding our reach, broadening our solutions and leveraging Prudential's differentiated capabilities and relationships. In Group, we see a meaningful opportunity to increase its earnings contribution given the large addressable market and the capital efficiency of this business. Our strategy is anchored in product and segment diversification, maintaining our leadership position in the national account market, while expanding in the middle market. where selective inorganic opportunities could accelerate growth and in disability, absence management and supplemental health. In Individual Life, we are building on a leading market position and a portfolio of differentiated products and solutions. We will grow where we can achieve attractive returns, supported by disciplined pricing, targeted product innovation and prudent capital allocation. This business generates important strategic synergies across Prudential, and we expect it to continue generating resilient earnings and meaningful value. We will also evaluate derisking opportunities where the economics are compelling and the long-term value creation is clear. Let me close by saying that driving sustained improvement across an organization of this scale takes time and will not be easy. But our strategic direction is clear, and our momentum is building. My leadership team and I have firm conviction in the path ahead. With that, let me turn it over to Yanela, who will walk through the financial implications of this strategy.

Thank you, Andy, and good morning. Let me build on Andy's remarks by providing perspective on what our strategy means for Prudential's financial profile. At its core, it is designed to deliver a stronger, more predictable stream of earnings, supported by a balanced mix of capital-intensive and capital-light businesses. It will also enhance our ability to grow free cash flow over time, reflecting a targeted business mix, lower capital intensity and improved flexibility, further strengthening our financial profile and reinforcing the AA ratings position that we maintain today. Executing this strategy will take time. And we do not expect progress to be linear or measured in quarters. Realizing our ambitions will require consistent execution and disciplined capital allocation. While the full financial benefits will take time to emerge, including the execution of the portfolio actions Andy outlined and the resumption of sales at Prudential of Japan, we have clear objectives. We are reshaping Prudential around category-leading businesses that generate durable earnings, strong cash flow and attractive returns while redesigning the enterprise to operate more efficiently. There are 3 drivers that anchor this outcome. The first is stronger earnings growth and a higher quality mix. Retirement will remain our largest contributor to earnings, with multiple levers to support future expansion. We expect results to benefit from steady growth in account values, improved pricing and increasing operating leverage as the business scales. Importantly, we will build on PGIM's growing capabilities in higher-yielding private alternatives to enhance both pricing power and investment returns. At the same time, access to third-party capital solutions will increase capital efficiency. These actions position retirement to remain a core driver of enterprise results while supporting attractive returns on capital. Japan will also remain an important contributor to Prudential's earnings and cash flow profile. We have a diversified franchise in Japan that provides exposure to both retirement and protection growth opportunities. As Prudential of Japan recovers, and customer demand continues to shift toward retirement and investment products, we expect Japan to remain a meaningful source of long-term value creation. PGIM represents about 12% of our annual AOI today. And as Andy noted, we expect that contribution to increase to roughly 25%. That is an important outcome of our strategy, not only because it drives growth, but because it improves the overall quality of Prudential's financial profile. Asset management businesses generate stable fee-based earnings that are highly scalable and relatively capital efficient, making them attractive contributor to long-term value creation. Beyond revenue growth, we see substantial opportunity to improve profitability. As assets under management and average fees increase and we continue to realize the synergies from our consolidated platform in PGIM, operating leverage should improve meaningfully. Combined with ongoing efficiency initiatives within the business, and the impact of the client diversification that Andy highlighted, we see the opportunity to expand margins above 30% over time. Our U.S. protection businesses are also contributors to our evolving earnings mix. Group Insurance combines attractive growth characteristics with strong cash generation, and relatively low capital intensity, making it one of the highest quality sources of growth within our portfolio. We also expect to benefit from operating leverage as investments in claims management, underwriting and customer experience continue to mature. In addition, we plan to grow Individual Life thoughtfully. This business generates attractive earnings and cash flow and support enterprise diversification. Taken together, PGIM, Group Insurance and Individual Life are expected to account for a larger share of enterprise earnings over time, improving both growth and quality while creating a better balance of risk and return through the cycle. The second driver is structural efficiency. Our prior expense and efficiency programs have delivered meaningful benefit and contributed to a stronger operating model. But Prudential remains a complex company in how we are organized, how work gets done and how resources are allocated. As we focus on a more targeted set of priorities, we see additional opportunities to simplify the organization, improve execution, and enhance structural efficiency. To realize those benefits, we are taking a comprehensive approach that combines organizational simplification with a more efficient workforce model, greater use of technology and a streamlined operating infrastructure. These actions will help us operate more effectively, improve productivity and better align resources with our highest conviction opportunities. An important component of this effort is optimizing where work gets done across the enterprise. We see a significant opportunity to expand the use of captive talent hubs in global locations with highly skilled workforces and structurally lower costs than the United States. Bringing our utilization closer to industry norms will lower our cost base while increasing flexibility and scalability. We're also simplifying our organizational structure by continuing to reduce management layers, recalibrating our workforce footprint and aligning resources more directly to the businesses and capabilities that will drive our future growth. Technology will be another important enabler. We are consolidating and simplifying applications, streamlining workflows and using data and analytics more effectively to improve productivity throughout the enterprise. As Andy noted, these actions are expected to result in approximately $750 million in pretax run rate benefits by year-end 2028, up from our original target of $150 million in 2027 with the full benefit reflected in our 2029 operating results. More importantly, these actions structurally lower our fixed cost base. They improve operating leverage, increase organizational flexibility and allow us to reinvest in the areas that matter most to our future growth. Our adjusted operating expense ratio improved approximately 100 basis points year-over-year in 2025 to about the midpoint of our current target of 8.5% to 10.5%. We expect to improve that ratio by an additional 150 basis points over the next 3 years. Please recall that we exclude PGIM from the ratio because we measure this business based on adjusted operating margin. That improvement reflects not only disciplined expense management, but a fundamentally more efficient operating model. The third driver is creating a better balance between capital-intensive and capital-light businesses. The first 2 drivers, higher quality earnings and greater structural efficiency naturally lead to the third, a better balance between capital-intensive and capital-light businesses. As we execute our strategy, we expect a greater proportion of our earnings to come from fee-based and capital-light businesses. At the same time, retirement in Japan will remain important sources of growth and long-term value creation. We will also continue to use access to third-party capital and balance sheet optimization as strategic tools to improve capital efficiency across the enterprise. This evolving mix and improved capital efficiency should improve free cash flow conversion by increasing earnings generated by highly cash-generative businesses. In addition, we will further optimize efficient capital deployment across PRT, annuities and our retirement and protection businesses in Japan to support growth. We expect these actions, together with an ongoing focus on expense efficiency will enable us to support growth while requiring less capital, creating greater financial flexibility and continued strong returns over time. Before I turn the call back over to Andy to begin the review of our second quarter results, let me highlight 3 key takeaways. First, this is a multiyear plan. Execution will be sequenced and the benefits will build progressively as we reshape the portfolio and improve operating efficiency. Second, the repositioned Prudential will be a more focused and resilient company across market cycles. A simpler, better balanced business mix should enhance the consistency and durability of our financial profile over time. Third, we expect these actions to translate into strong financial outcomes, including top quartile earnings growth, excluding VA, and improving free cash flow conversion and to drive compounding benefits over time. In closing, this is not about any one quarter or initiative. The choices we're making today, how we deploy capital, allocate resources and operate the business are designed to strengthen our financial profile over time and position Prudential to drive strong value creation for shareholders. Let me now turn the call back over to Andy to review our second quarter results.

Thanks, Yanela. Our second quarter results were strong as we continue to execute with discipline and build momentum. The quarter reflected greater focus across the enterprise. While there's more work ahead as we advance the strategy outlined today, we are building on a strong foundation and making solid progress against our priorities. After-tax adjusted operating income was $1.4 billion or $4.08 per share, 14% higher year-over-year. While year-to-date operating return on average equity increased 110 basis points to 15.5%. These results reflect the strength and resiliency of our businesses and the progress we're making to operate more effectively and consistently. Let me now turn to our business level results, beginning with PGIM. PGIM generated another quarter of strong investment performance and made steady progress in integrating its operating platform, resulting in a solid year-over-year increase in margins and earnings. We continue to see strong momentum in private capital deployment, which grew by nearly 60% on a sequential quarter basis. The increase was driven primarily by asset-backed finance origination, which comprised roughly $7 billion of the nearly $21 billion deployed in the second quarter, driven by affiliated demand for this asset class. Investment-grade private credit assets were another driver of the increase as was real estate debt, driven by third-party and affiliated demand. Direct lending origination remained solid during the quarter, and our positioning in this asset class will be enhanced by PGIM's recently announced acquisition of the remaining interest in Deerpath Capital. With the addition of Deerpath's lower middle market platform, PGIM is among a select group of asset managers with capabilities across the direct lending spectrum, which better positions us to serve sponsors, borrowers and investors. PGIM's active ETF retail offering continued to grow extremely well, with AUM increasing nearly 21% on a sequential quarter basis, approaching $35 billion as of quarter end. We have seen meaningful improvement in our ETF market share over the last 2 years and we're in the top 10 in quarter-to-date and year-to-date net flows. PGIM's suite of fixed income funds drove the majority of active ETF inflows with 4 ETFs now exceeding $1 billion in assets under management. PGIM's total flows were strong in the quarter. Institutional and retail third-party net flows totaled $4.6 billion, driven primarily by strong public credit inflows. This result was achieved despite having to overcome equity outflows of approximately $5 billion in the quarter as the broader industry rotation from active to passive equity management continues. Affiliated net outflows were $3 billion, driven by our variable annuities runoff. In our U.S. businesses, we saw additional benefits from the actions we've taken to broaden our reach and deepen our capabilities. Our investments in distribution and product diversification are helping us meet evolving customer needs while supporting growth and improving the quality of our retirement and insurance franchises. In Retirement, second quarter results were solid year-over-year. Retail annuity sales reached $3.6 billion in the quarter, a 14% increase driven by ongoing strength in RILA as our FlexGuard 2.0 product continued to be well received in the market. This result also reflected strong sales in fixed annuities such as our fixed rate products with income. Our distribution reach and innovative product design, our differentiated competitive advantages, enabling us to target areas of the market that prioritize customer solutions over price. On the institutional side, we completed $1 billion of longevity reinsurance sales, but PRT sales remained muted in the quarter with a notable absence of jumbo transactions in the U.S. market in the first half of this year. While we expect industry activity to accelerate in the second half, as is typical, we anticipate the transaction volumes this year will remain below the record levels seen in recent years. Although activity remains episodic, this market represents a significant forward opportunity, both here in the U.S. and in Europe, as I noted in my strategy remarks. And these transactions should drive strong earnings growth over time. Our brand, underwriting expertise and execution capabilities will enable us to maintain our leadership position as these markets continue to transact. Our Group Insurance business delivered record quarterly earnings as initiatives to strengthen the business and diversify its growth profile translated into results. Performance was led by our National Account Life business, where we continue to benefit from our market-leading position. We also saw increasing contributions from a broader mix of products and customer segments, demonstrating the benefits of our diversification strategy. Sales remained strong, driven by growth in our premier middle market segment and demand for supplemental health solutions. Our brand strength and deep distribution relationships remain key competitive advantages in supporting growth across the business. Individual Life generated strong sales and earnings in the quarter, building on its momentum in the variable accumulation market. Over the last several years, we have transformed this business by diversifying our product portfolio, building a deep distribution bench and targeting strong profitable growth. Our progress has resulted in increased earnings power, improved cash flow generation and greater capital efficiency. The life insurance market is showing durable tailwinds with application submissions at record levels and premium growth above historical norms. Aging demographics and increased interest in accumulation-oriented solutions are reinforcing demand. And digital integration, automated underwriting and faster decision-making are further supporting growth. We expect Individual Life will have healthy and durable core earnings growth that is driven by a strong combination of underwriting, fee and spread income. Now turning to International. Earnings this quarter were strong despite the impact of the voluntary sales suspension in Prudential of Japan, reflecting the resilience of the underlying business and continued growth in Brazil. Sales increased in Brazil resulting from growth in our Life Planner channel and strengthened performance in the third-party channel. Our Japan businesses continue to demonstrate the benefits of our diverse platform, and the economic tailwinds in Japan, delivering a strong earnings quarter despite the impact on sales of the POJ sales suspension. Third-party channel sales remained resilient, driven by robust independent agent channel performance, supported by expanded retirement and savings products offerings, which comprised more than 75% of sales in the quarter, including our recently launched single-pay products. Our yen-denominated products are also experiencing strong momentum. Within POJ, we made solid progress during the quarter on the actions needed to resume sales and are on plan including advancement of governance and agency redesign measures that will begin a phased rollout in the fall. We are also making good progress on the design of a new compensation structure to be launched once we go back into the market. And retention of Life Planners has been strong. We remain committed to ensuring that the changes needed to resume sales in POJ are implemented by November 5. This quarter, demonstrates the progress we are making across Prudential and highlights the durability of our business model in a dynamic environment. Our results reflect both the underlying strength of our franchise and our ability to capitalize on emerging opportunities. We will continue to execute with discipline, deliver for our customers and build on the momentum we've established across the business. We are pleased with our performance confident in our trajectory and focused on delivering sustainable growth and value creation over time. With that, I'll turn the call back over to Yanela.

Thank you, Andy. Our results this quarter demonstrated that our actions to strengthen Prudential's financial performance are translating into results. We reported after-tax adjusted operating income of approximately $1.4 billion or $4.08 per common share, up 14% year-over-year, driven primarily by higher spread income, a net favorable assumption update and higher asset management fees. These increases were partially offset by higher operating expenses, mainly related to the Prudential of Japan sales suspension and variable costs in support of sales. Underlying expenses were essentially unchanged year-over-year as we improved efficiency and created capacity to invest and enhance distribution and service capabilities. We remain on track to realize our previously communicated $150 million in pretax run rate benefits in 2027. Before turning to our segment results, let me touch on our annual assumption update. We recorded a onetime pretax net benefit of $65 million to AOI at the enterprise level, and we do not anticipate material ongoing impacts to AOI. The total pretax GAAP impact was a $379 million loss, primarily related to unfavorable lapse and mortality assumption updates and retirement and unfavorable mortality and claims incidence updates in long-term care within divested businesses. Now turning to second quarter segment results. Except for PGIM, comparisons include the impact of our annual assumption updates in the current and prior year periods. PGIM reported pretax adjusted operating income of $294 million, up 28% year-over-year, driven by higher asset management fees from equity market appreciation and strong investment performance as well as higher net service, distribution and other revenues. These benefits were partially offset by affiliated net outflows primarily from variable annuity runoff and the impact of higher interest rates in the year-over-year period on asset management fees. PGIM delivered a 28.2% adjusted operating margin, up 470 basis points year-over-year, primarily from asset management fee growth and strong equity markets. Also contributing to this result were strong other related revenues, agency production and higher incentive fees in the quarter. PGIM remains on track for more than 200 basis points of margin expansion in 2026 as it moves towards its 25% to 30% target. Now turning to our U.S. Businesses, which generated pretax adjusted operating income of approximately $1 billion, essentially unchanged versus the prior year quarter. Excluding the favorable impact of our annual assumption update, these results reflected increased spread income, which was more than offset by higher distribution expenses, less favorable underwriting results and lower fee income. Our Retirement business delivered pretax adjusted operating income of $392 million, essentially unchanged year-over-year. Higher spread income from retail annuity growth was offset by less favorable underwriting, PRT runoff and increased distribution expenses. Longevity reinsurance sales were roughly $1 billion across 3 U.K. middle market transactions. We had no material PRT activity during the quarter. As we've noted before, this market is episodic in both the U.S. and Europe. Net account values were $363 billion at quarter end, up 4% year-over-year, reflecting favorable markets and growth across our diverse product portfolio. Retail annuity account values rose more than 30% to $66 billion, supported by nearly $14 billion in sales over the last 12 months. Now turning to Group Insurance. Group delivered a record quarter with pretax adjusted operating income of $155 million, up 24% versus the prior year period. Excluding the favorable impact of our annual assumption update, the quarter was also a record. The year-over-year increase, excluding the benefit from the assumption update, reflected favorable life underwriting and higher spread income, partially offset by expenses related to new business growth and less favorable disability underwriting amid macroeconomic uncertainty. Targeted investments continue to improve claims and service efficiency. The group total benefit ratio improved to 80.4% in the quarter, below our 83% to 87% target range, driven by favorable working age mortality in group life and higher long-term disability resolutions as our investments in claims management delivered positive results. Year-to-date sales totaled $599 million, increasing 26% from the prior year period. This result was driven by continued momentum in our Premier segment as we executed on our market segment and product diversification strategy. Individual Life delivered pretax adjusted operating income of $176 million in the quarter, more than doubling year-over-year. Excluding the favorable year-over-year impact of our annual assumption update, the increase primarily reflected favorable underwriting results and higher spread income, which benefited from attractive new money rate. Sales of $237 million set a second quarter record, reflecting sustained demand for variable accumulation products where our distribution reach and service model differentiate us in the market. Our flagship product, Custom Premier 2, achieved record sales, demonstrating our success serving clients seeking cash value accumulation and retirement protection. This capital-efficient product produces strong returns. The U.S. Legacy Products segment generated pretax adjusted operating income of $234 million, down 33% year-over-year. Excluding the unfavorable year-over-year impact of our annual assumption update, results primarily reflected less favorable underwriting related to the GOL block, lower variable annuity fee income from runoff and lower spread results partially offset by market appreciation. Our International Businesses generated pretax adjusted operating income of $855 million, up 12% year-over-year. Excluding the favorable year-over-year impact of our annual assumption update, the increase primarily reflected higher spread income and stronger emerging markets results, including growth in Brazil, partially offset by expenses and less favorable underwriting related to the Prudential Japan sales suspension. The impact of the sales suspension totaled $105 million, coming in below expectations primarily due to lower Life Planner compensation and better-than-expected surrender activity. Roughly $70 million related to the Life Planner compensation, the remainder reflected lost sales and surrenders. We continue to expect that the aggregate impact on our full year 2026 pretax adjusted operating income will be approximately $525 million to $575 million. Now turning to capital, ESR and cash flows. Our strong capital position and regulatory capital ratios support our AA financial strength ratings and provide flexibility to invest in our core businesses. Cash and liquid assets were $4.2 billion at quarter end, well above our $3 billion minimum liquidity target, and we have substantial off-balance sheet resources. Our Japanese entities remain well capitalized and are managed to levels align with our AA objective. Under Japan's ESR regime, Prudential Holdings of Japan reported a 192% consolidated ESR ratio as of March 31, Japan's fiscal year-end. We estimate that Prudential Holdings of Japan's consolidated ESR ratio as of June 30 was in the range of 170% to 190%, well above our 150% operating target. As previously communicated, we do not anticipate any material impact to capital, ESR or cash flows over 2026 and 2027 from the sales suspension. Before closing, an update to our corporate and other guidance. We are lowering our expected 2026 loss from $1.65 billion to $1.55 billion, primarily reflecting the benefit of onetime items. In closing, we delivered a strong quarter and outlined a clear strategy for Prudential's future. As we look ahead, we remain focused on disciplined execution sustainable growth and long-term value creation for our shareholders. And with that, I will now turn the call back to the operator to begin Q&A.

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

Thanks for that strategy update. I just wanted to focus my questions there. So Andy, the exit of the emerging markets that you had indicated, I think there should be 5 or 6 of them, if I'm following what you said correctly and $3 billion of related capital. How would you expect the capital freeing up to occur over what period of time? Would they mainly be sales? Or would the -- would some of these be shut down of existing businesses?

Yes, Tom. Thanks for the question. So when we look at our emerging market exits, and you're right, I'm not going to do the quick math. It's about 6 or 7. Our priority is maximizing the value on the exit of these properties. We're not going to comment on any specific market around sales process timing or sequence. This will take us some time in each process. We are going to focus on making sure that we're taking care to get the best outcome for our customers, our employees and the shareholder. That means it will take time to find the right buyers. But you should be thinking of it that this is in general and for the most part, sales of businesses versus shutting down businesses because our emerging markets across every one of them are valuable platforms and businesses that we believe the value maximization strategy will be through sale.

Got you. And then I guess my follow-up is -- and you mentioned, I think, repositioning or repurposing the $3 billion into your going concern businesses or your areas of focus. So should we expect that to be kind of the level that you would probably deploy into inorganic M&A? Or would you consider going with anything bigger or strategic when you think about inorganic opportunities?

Yes, Tom, so 2-parter there. Let me take it. But let me start kind of rotating back to one point on your first question. And I just want to emphasize that we expect the amount to be freed up to be well north of $3 billion. So you shouldn't have that $3 billion number in your mind. As we're looking at deploying that, where we would highlight would be, first and foremost, PGIM. Obviously, we're looking to expand our private alternatives capability, as you heard on the script, grow in retail and globalize. Second, would be in Group Insurance, looking to accelerate the product and segment diversification that we've been executing against. And third, for Retirement, really selectively building out our Retirement capabilities further in Europe. I also would not directly tie the $3 billion to the exact amount that we're going to be investing in these 3 areas. We obviously have other ways of generating and raising capital over time. But importantly, as you think about this strategy and this capital rotation, and I would say the strategy in total, this is a longer-term aspirational strategy. So you should be thinking about the period of 5 years to execute across this.

Next question today is coming from Ryan Krueger from KBW.

I guess first question is on in terms of shifting business mix. I get the emerging markets and some of the inorganic things you're looking to do. Are there any other areas that you're looking to pull back from that your current -- in terms of businesses you're currently in? Or should we just think about the emerging market exit? And is this mix mostly shifting due to different sources of organic and inorganic growth? .

Yes, Ryan. So it's Andy. I think we were quite detailed and thorough in the strategic update. Obviously, we focused on the emerging market exits as the predominant source of capital raising. But as we've said, our go-forward chosen businesses that we intend to lead in are global retirement, global asset management and select insurance businesses in the U.S. and in particular, that means group insurance and individual life insurance. So that is the footprint. Obviously, you also heard as part of that, Japan is a very, very important part of our future. But we see that market more and more rotating to a retirement orientation, which we think plays directly into our strength. So that really is the footprint. And as we look at those businesses, we feel very much that we have a leading position and have the credible opportunity to be a long-term leader in winner in those markets, and that's why we use the words category leader.

Understood. And then anything you can help us with to think about free cash flow uplift. I know that's 1 of the key priorities you're targeting. But I don't know if there's any way you can frame either whether it be free cash flow conversion or some metric we can think about in terms of how you think that could progress over time?

Yes, Ryan. I mean, look, as we said, we expect that our strategy will result in improved balance between capital light and capital-intensive businesses, right? That's one of the key objectives. And we do see a great opportunity to scale our capital light and fee-based businesses, specifically in areas like PGIM as we grow PGIM. That is a high cash-generative business. And also growing our fee-based earnings in our other businesses. That will support free cash flow generation and enterprise capital efficiency as well. So we do -- that is how we expect to increase free cash flow generation over time.

Our next question is coming from Suneet Kamath from Jefferies.

I wanted to start with the $750 million of cost savings. Should we expect that those savings will fall to the bottom line as we get to '28 and '29? Or is that freed up capacity going to go -- going to be part of the reinvestment into the growth businesses?

Yes, Suneet. So what we're doing here with the $750 million is we're taking a comprehensive approach really to simplify and optimize the organization. I highlighted a number of levers in my prepared remarks that we expect to utilize but this is really about the what, the where and the how of our work. So it is very comprehensive. This isn't just about expense reduction. So we do view it as a source of capacity and capital that will allow us to invest in growth over time. So I would encourage you to focus on our operating expense ratio and the PGIM margin. Ultimately, that is how we measure success here. It is the best way to measure our progress and how the sales are flowing through the bottom line, net of cost to grow. So we don't have a specific ratio of what falls to the bottom line and what will we reinvest. As I said in my prepared remarks, we expect a 150 basis point improvement to our operating expense ratio over the next 3 years. That is from the [ 12/31/25 ] ratio, which was already in the midpoint of our target of 8.5% to 10.5%.

Okay. And then sorry for the nitpicky question, but I just want to understand the growth outlook here because the EPS growth target was 5% to 8% sort of all in. And now you're saying top quartile ex VA -- and VA was in that 5% to 8%. So I guess I'm just trying to get a better sense of like what range are you talking about in terms of EPS growth? Are you saying 10% to 12%? Is that kind of the top quartile? Just any -- I just want to get a better sense of what you're aiming for.

Yes. So a couple of things, Suneet. The 5% to 8% was EPS growth rate, just to be clear, what we're talking here about is top quartile earnings growth. Obviously, EPS is impacted by share buybacks and capital deployment, so we didn't want to get into that level of detail in today's terms. Top quartile earnings growth is around high single digit. That's how we think about it. But I do want to be clear a couple of things. We're not setting a new earnings growth target today because, obviously, the strategy will build progressively. It does take time to execute, and we are -- need to resume sales in POJ. So we don't necessarily -- are not putting a target in place. But we talk about the top quartile being an objective of the strategy, not to anchor to a specific target, but to communicate our ambition to perform alongside leading companies in the industry over time.

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

First one, I wanted to touch on the results in the quarter and hit on the POJ sales impacts. Can you just unpack the drivers of the better-than-expected impact in the quarter, both from LP compensation and then the impact from sales and surrenders? And I guess, why wouldn't that translate to something below your full year range of $525 million to $575 million?

Joel, so the total costs this quarter were $105 million, as I mentioned. They were down from $130 million in the first quarter. The majority of the decline was due to the customer reimbursement accrual that we booked last quarter, which was $45 million. Approximately $70 million of the impact this quarter related to LP compensation. And we did have surrenders moderate in the quarter, below our expected heightened surrender levels. But it would be premature to lower the guidance of $525 million to $575 million. And I'll remind you what I mentioned last quarter, which is that these impacts are not linear, and there's really 2 drivers of that. The impact of the lost sales in surrenders will compound through the year. And second, LP compensation grows through the year because the LPs are paid based on a percentage of new business and the longer they don't sell, the higher the payments we make to them. So this is not linear and the expectation is that it grows over time. We did have better surrenders than we anticipated, but it is premature to update that guidance.

And Joel, it's Andy. You had also asked about sales in the quarter. So obviously, sales were down year-over-year, predominantly due to the POJ suspension. But we've been very impressed with the resiliency and the strength of our product portfolio and our distribution system overall in Japan. Obviously, we highlighted the significant uplift we saw in the independent agent channel, and that was really driven by a lot of the new product introductions that we did from a retirement and savings perspective. But we're also liking the strength we're seeing in other areas like the bank channel. Now I recognize sales were down. Sales were down double digit, though, industry-wide in the bank channel due to the change the FSA made with -- or the industry made with working with the FSA around [ seconds ]. But we've actually gone up in our number of bank partnerships and depth of our bank partnerships over the last 12 months. So we have a really strong franchise when it comes to Japan that is broad and deep. And you're seeing that show up in how the results are holding up.

Got it. That's helpful. And then just back to the strategy and on group benefits, I get the attractiveness of the business, but it's been a very small part of your overall business. So I guess how big of an earnings contributor do you think this business can become for Pru? And I guess, as you look to grow down market, I mean, what do you think gives you the right to win down market? We've heard others try to move down market. It's usually pretty challenging.

So Joel, thank you for the question. So first and foremost, let me just reinforce why we're focused on Group Insurance. It is a highly cash generative business and a source of capital-light growth. And yes, we recognize that the market is mature. But we see a market that is going to continue to grow in the low single digits. I mean, employers are very committed to providing robust benefits offerings to their employees. And we're very confident that we can expand both our product capabilities, but also diversified down market over time. That confidence comes from -- this is a strategy that we've already been executing against, and we see positive indications in our sales and in our growth over the last 12 to 18 months, where we are obviously retaining leadership in national accounts. But we are seeing an accelerated growth rate in the Premier segment, and we are seeing accelerated growth in diversifying into disability, absences and supplemental health. So that is a key reason. It is a very good market. And while it's lower growth, we believe that we will grow in our market share. Last thing I would say, it's an important diversifier in the mix overall. It clearly enhances the resiliency of our business mix. It helps funds the strategy over time. So this is a business that we've been in for a century. We know how to operate it, and we're confident in the trajectory.

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

Just on the strategy. I know, Yanela, you said you didn't want to really get into buybacks, but maybe a question just a bit more broadly. But when you think you step back, like is there any other change to your philosophy around capital management, whether that's buybacks, common dividends, I mean, even issuing some equity to fund a bigger deal? Just wanted to get your thoughts on that.

Wes, I think in terms of our capital deployment philosophy and priorities, we've been very consistent, right? So maintaining financial strength, investing in the growth of our businesses and then redeploying capital back to investors. As you've heard from the strategy, we are committed to growing our businesses through both a combination of organic and inorganic means. So as we execute the strategy, we will rotate capital to our chosen businesses in our focus markets to build and sustain leadership positions. So we do not expect to change our capital deployment philosophy or priorities. In terms of bigger deals and capital raises, the bar is really high on issuing equity or adjusting the buyback strategy. So I just want to be really clear about that. It would require a clear and credible path to value creation and would need to generate a return that would justify dilution. So we're very mindful about that. And obviously, we have clear objectives to deliver top quartile earnings growth ex VA and increased free cash flow. So all that has to really come together. And then the last thing I would say, and Andy alluded to this a bit, but we have other ways to source capital beyond the exits, right? So balance sheet optimization as we realign the portfolio could be a source, the better balance between capital light and capital-intensive businesses over time generates higher cash flow. And we have the ability to leverage reinsurance to enhance capital efficiency and source capital as well. So we have multiple tools at our disposal.

That's very clear. And then maybe a more micro question. On the assumption review, I think, Yanela, you mentioned there was a charge for guaranteed universal life that I think was offset by a couple of other items. I'm just wondering what drove the negative impact in GOL in the quarter? How big was that? And are you expecting any statutory impact as you look towards the year-end?

Yes. So a couple of things there. So on the assumption update related to GOL, there was -- yes, so we had a small update related to surrenders. So policyholder activity in GOL that was reflected in AOI. But -- and in terms of the stat impact, so obviously, that comes through at the end of the year is a regular process. The impact on stat and GAAP frameworks can vary based on the difference in methodologies. And so what we can tell you today, based on what we see through the second quarter, we do not expect a material stat impact from the changes in the assumptions that we've made. Now the stat impact will vary through the year based on equities and rates, for example, so market conditions. But again, as of what we see today, we do not expect a material stat impact.

Operator?

Sorry, folks. We're checking on the operator.

Apologies for the delay. The next question is coming from the line of Tracy Benguigui with Wolfe Research.