Q3 2025 Contradictions Emerge on Pension Risk Transfer Market Outlook and ESR Levels for Japan Business

Date of Call: October 30, 2025

Financials Results

• EPS: $4.26 per share (pretax adjusted operating income), up 28% YOY
• Operating Margin: PGIM margin 23.7% in the quarter; would have been 25.9% excluding $40M severance and Taiwan sale (management targets 25%–30% and expects ~200 bps expansion in 2026)

Guidance:

• Expect approximately $100M of annual run-rate savings by end of 2026 with ~1/3 reinvested into sales/distribution
• Anticipate over 200 basis points of PGIM margin expansion in 2026; 25%–30% margin target
• Maintain intermediate 3-year core earnings growth target of 5%–8% (not updating now)
• Board approved an economic solvency ratio operating target of 150% for Japan entities
• Anticipate ~ $30M of higher expenses in Q4 (timing-driven)

Business Commentary:

• Strong Financial Performance:
• Prudential Financial, Inc. reported a record pretax adjusted operating income of $1.9 billion or $4.26 per share for Q3 2025, reflecting an 28% increase from the prior year quarter.

• This growth was driven by higher spread income, favorable underwriting experience, and increased fee income from PGIM.

• PGIM and Asset Management Growth:

• PGIM's assets under management increased by 5% from the prior year quarter, driven by market appreciation, positive net flows, and strong investment performance.

• The integration of PGIM's multi-manager model has led to savings and efficiencies, contributing to margin expansion expected in 2026.

• Retirement and Insurance Business Performance:

• The Individual Retirement business delivered over $3 billion in sales for the seventh consecutive quarter, and Group Insurance sales totaled almost $80 million in Q3, with year-to-date sales up 14%.

• These results reflect a differentiated distribution and product portfolio that captures market growth opportunities.

• International Business Challenges:

• Sales in International businesses were down 6% compared to the prior year quarter, primarily due to strong U.S. dollar-denominated single-pay sales in Japan.

• While surrender activity in Japan continues to be a near-term headwind, new product introductions are showing traction, with 20% of sales from recent products.

• Challenges in Active Equity Management:

• Jennison, Prudential's active equity manager, experienced outflows, impacting the company's organic growth and earnings momentum in PGIM.
• This is consistent with broader industry trends and challenges from active to passive pressure.

Sentiment Analysis:

Overall Tone: Positive

• Management called Q3 a "strong third quarter" with pretax adjusted operating income of $1.9B ($4.26/share), up 28% YOY, citing higher spread income, favorable underwriting and strong PGIM performance, while noting headwinds from Jennison outflows and Japan surrender activity.

Q&A:

• Question from Wilma Jackson Burdis (Raymond James & Associates, Inc., Research Division): Just first question on the PRTs. We saw you had a 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 could give us an update on what you're seeing.
  Response: PRT market softer in 2025 vs 2024 but pipeline strengthened in H2; Prudential is well positioned to win in a large multi‑trillion dollar opportunity; LRT/UK market remains attractive with healthy annual volume and strong returns.

• Question from Wilma Jackson Burdis (Raymond James & Associates, Inc., Research Division): 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?
  Response: Total inflows were strong ($2.4B this quarter, >$20B over 12 months) driven by fixed income, privates and alternatives; Jennison equity outflows persist but management is optimistic on institutional flows and cautious on more volatile retail.

• Question from Suneet Kamath (Jefferies LLC, Research Division): 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 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?
  Response: VA runoff expected to continue ~$3B–$4B quarterly with ~$10M–$15M AOI impact per quarter (compounding to ~$100M–$150M); as the block runs off and new products' account values grow, the headwind will diminish and new business earnings will increasingly flow into results.

• Question from Suneet Kamath (Jefferies LLC, Research Division): Got it. 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.
  Response: Prudential's private credit portfolio is long-established, skewed to private placements with strong covenants; ~90% of corporate private credit is investment grade and management is comfortable with portfolio quality and modest growth in the exposure.

• Question from Thomas Gallagher (Evercore ISI Institutional Equities, Research Division): 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 peer 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% like a fine number for you? And is that something you've gotten blessed by the rating agencies and regulators?
  Response: 150% ESR is a post‑stress operating target (not an aspirational normal‑time level); normal times they hold higher (e.g., 180%–200% at year‑end) and the target reflects modeling, stress scenarios and dialogue with rating agencies; regulators focus on 100% threshold.

• Question from Thomas Gallagher (Evercore ISI Institutional Equities, Research Division): 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 in 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.
  Response: The leadership change was an accelerated, planned succession due to operational/compliance considerations; new CEO Brad Hearn has relevant experience and management expects Japan to continue growing (YTD sales +4%) despite near‑term surrender headwinds.

• Question from Jamminder Bhullar (JPMorgan Chase & Co, Research Division): 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 on another product line.
  Response: Disability headwinds this quarter from larger average claim sizes, lower LTD resolutions (after a strong prior quarter) and adverse NY Paid Family Leave experience; pricing remains rational and management is applying underwriting, pricing and claims management discipline.

• Question from Jamminder Bhullar (JPMorgan Chase & Co, Research Division): Okay. And then just on competition in the RILA 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. So -- 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?
  Response: RILA market has become much more crowded (from ~5 to ~25 competitors), driving aggressive pricing from some entrants; Prudential will pursue disciplined growth prioritizing profitability despite competitive pressure.

• Question from John Barnidge (Piper Sandler & Co., Research Division): My question is about the Partners 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 insurers not just stop at one for product creation?
  Response: Partnership with Partners Group is highly complementary to deliver multi‑asset solutions (esp. retail/wealth); Prudential will use strategic partnerships to expand capabilities—this is additive to prior initiatives like Prismic.

• Question from John Barnidge (Piper Sandler & Co., Research Division): Okay. And then with the Board approving the ESR, what is the opportunity for Prismic as you see it in the coming year?
  Response: Prismic remains an important capital‑management tool for balance sheet optimization and managing ESR volatility; launched first small forward‑flow transaction for U.S. retail fixed annuities and has an active pipeline including third‑party blocks.

• Question from Francis Matten (BMO Capital Markets Equity Research): My first question is on Individual Retirement. Your core earnings growth there took a nice step up this quarter. It looks like at least part of that was on kind of better spread earnings. Just wondering if you could discuss further the earnings growth outlook for that business. Are there ways you can keep offsetting the headwinds from VA runoff? And any impacts from Fed rate cuts that we should be thinking about in the coming quarters?
  Response: Core earnings rose from higher spread income and fee income (market appreciation and reinvestment yields > portfolio yields); VA runoff is being offset over time by new sales and reinvestment, and a 50bp one‑time long‑term rate decline would reduce AOI by ~ $0.20/sh annually.

• Question from Francis Matten (BMO Capital Markets Equity Research): Got it. And then the follow-up is on expenses. I think we were 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 you're 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 maybe some in corporate or the operating segments?
  Response: Expense discipline is ongoing; intermediate target for operating expenses is 10.5%–8.5% and management expects continuous improvement (savings will partly be reinvested).

• Question from Taylor Scott (Barclays Bank PLC, Research Division): 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?
  Response: Integration to a unified PGIM is already driving cross‑sell momentum and efficiencies; the quarter's 23.7% margin was impacted by $40M severance and Taiwan sale—excluding those it was 25.9%—and management is confident in the path to 25%–30% margins with ongoing savings and productivity gains.

• Question from Taylor Scott (Barclays Bank PLC, Research Division): That's really helpful. Next one I had is on capital management. Just in light of seeing 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 thoughts on M&A outlook?
  Response: Capital priorities unchanged: invest in high‑return business opportunities, maintain healthy dividend and buybacks (>$700M deployed this quarter), target ~65% free cash flow ratio; M&A is a tool but management remains disciplined and focused on organic growth first.

• Question from Ryan Krueger (Keefe, Bruyette, & Woods, Inc., Research Division): In regards to the headwind from variable annuity runoff, I guess one alternative that could 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.
  Response: Prudential continually evaluates reinsurance and risk‑transfer opportunities (already reduced exposure >60% for certain legacy products) and will pursue transactions opportunistically given available market capital.

• Question from Ryan Krueger (Keefe, Bruyette, & Woods, Inc., Research Division): Great. And then in January, you had announced that you were pursuing a strategic partnership with The Dai-ichi. Is there anything you can provide in terms of an update on that and what that could potentially include?
  Response: Partnership with Dai‑ichi is progressing: distributing Dai‑ichi's Neo First cancer product via Life Planner channel and managing assets (including private credit) with AUM approaching $1B; both sides are focused on executing Phase 1 well before expanding.

• Question from Cave Montazeri (Deutsche Bank AG, Research Division): 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 the new generation of AI tools are adding more urgency to invest even more in tech right now than, let's say, 3 years ago? Or do you view this as being just business as usual in terms of technology investments?
  Response: AI is seen as transformational; investments are ramping because tools are materially better—focus on improving adviser/customer experience and materially boosting organizational efficiency/productivity.

• Question from Cave Montazeri (Deutsche Bank AG, Research Division): My follow-up question, and maybe there's 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?
  Response: Management declined to disclose amounts, stating technology investment is significant and integral to business strategy.

• Question from Elyse Greenspan (Wells Fargo Securities, LLC, Research Division): 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 just 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?
  Response: The 5%–8% intermediate growth target remains unchanged; management says growth won't be linear and it's too early to update the target now.

• Question from Elyse Greenspan (Wells Fargo Securities, LLC, Research Division): 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% million. So can 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?
  Response: Disclosure will mirror RBC/PICA approach (annual publication); at March 31 ESR was 180%–200% and June 30 remains well above the 150% target; interim quarters will reference level relative to target until full quarterly Japan disclosure begins.

• Question from Tracy Benguigui (Wolfe Research, LLC): 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 the 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 an 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?
  Response: Prudential evaluates new private credit asset classes for returns and diversification within its robust risk and capital frameworks and will consider allocations that meet risk/return and capital tests.

• Question from Tracy Benguigui (Wolfe Research, LLC): My next question is on the VUL growth. It was nearly 20% this quarter. It is a more market-sensitive product, and you're the market leader in the space. I was looking at Wink data, it 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?
  Response: Prudential prefers VUL accumulation products over guaranteed universal life; success driven by strong distribution and new FlexGuard Life product—VUL is less market‑sensitive than previously exited products and offers attractive growth/earnings potential.

• Question from Wesley Carmichael (Autonomous Research US LP): 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. It seems to me with some of the divestitures on the Life side and growth in PRT, Retail annuities, Longevity Re. 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 in mortality and morbidity from GLP-1 drugs. So I wonder if that's a risk if you're shifting more towards longevity products.
  Response: Management monitors all drivers of mortality improvement (not just GLP‑1); LDTI changed risk emergence so they don't show prior balance slide, but they feel well balanced today and have substantial capacity to take on more longevity.

• Question from Wesley Carmichael (Autonomous Research US LP): 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.
  Response: Last year's captive restructuring improved the profile; management continually looks to optimize the balance sheet (captives and other means) but is not actively pursuing additional transactions at this time.

• Question from Unknown Analyst (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?
  Response: Group benefit ratio is monitored annually; current performance is strong due to pricing, underwriting and claims management, but management will reassess the target range at year‑end and notes macro factors like rising unemployment could increase ratios.

Contradiction Point 1

Pension Risk Transfer Market Outlook

It involves differing expectations regarding the Pension Risk Transfer market, which is a significant revenue driver for the company.

What's your commentary on the large Jumbo PRT in this year's slow market? What's your update on the U.K. longevity market with new entrants? - Wilma Jackson Burdis(Raymond James & Associates, Inc., Research Division)

2025Q3: We still believe that the Pension Risk Transfer market will be softer in '25 versus '24, but we're seeing an uptick in the pipeline for the second half of the year. - Andrew Sullivan(CEO)

Update on the U.S. pension risk transfer market and why it slowed down? - Suneet Laxman L. Kamath(Jefferies LLC, Research Division)

2025Q2: The market has softened slightly to around $30 billion to $40 billion this year. The slowdown is due to uncertainty and volatility affecting decision-making, with litigation potentially impacting the industry size. - Andrew Francis Sullivan(CEO)

Contradiction Point 2

ESR Level for Japan Business

It involves differences in expectations regarding the appropriate ESR level for the Japan business post-implementation, which impacts capital management and financial strength.

What ESR level is appropriate for your Japan business post-implementation? - Jamminder Bhullar(JPMorgan Chase & Co)

2025Q3: We expect to be above the levels that support a AAA financial strength rating post ESR implementation. - Yanela del Frias(CFO)

What ESR level is appropriate for your Japan business after implementation? - Jamminder Bhullar(JPMorgan)

2025Q1: We will share our preliminary ESR views during the summer. Capital will be above levels that support AA financial strength post ESR implementation. - Yanela del Frias(CFO)