Prudential Financial Stock

Ladies and gentlemen, thank you for standing by. 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.

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.

Thank you, Tina, and good morning, everyone. Our third quarter results demonstrated the discipline and consistency with which we are executing and the progress we are making in creating a simpler, more focused Prudential. We are advancing our strategic priorities from a position of strength. In August, we laid out a clear direction: concentrate our capital, talent and management attention on retirement, asset management and select protection businesses where we are best positioned to compete and scale.

We've taken an important step forward on our first priority, narrowing our geographic footprint. We recently announced the sale of Prudential of Brazil and Prudential of Mexico to CNP Assurances for $4.025 billion. We also closed the sales of our insurance businesses in Indonesia and Kenya and announced the sale of our South Africa business. Together, these actions are tangible proof of our strengthened execution and commitment to do what we say.

As I said in August, a smaller footprint is not the objective. It is the enabler. We are creating the capacity to invest in the businesses where we could scale and lead, Global Asset Management, Global Retirement and select Protection businesses. We intend to rotate capital in a deliberate, sequenced way into each. Every opportunity is being measured against its strategic fit, return profile and contribution to earnings and free cash flow growth. The bar is high. The discipline we are demonstrating in selling businesses will be matched by the discipline we bring to deploying capital.

With that, let me turn to the quarter. After-tax adjusted operating income was $1.3 billion or $3.77 per share compared with $1.4 billion or $4.05 per share in the prior year quarter. Year-to-date adjusted operating return on average equity was 14.5%, in line with the prior year period. Lower earnings in Japan more than offset solid fundamentals in PGIM and our U.S. businesses. While the Prudential of Japan, or POJ, sale suspension was a headwind, our broader Japan platform continued to demonstrate resilience.

Now for the highlights of our segment results. PGIM AOI increased solidly year-over-year, driven by higher asset management fees and additional progress in the integration of its investment platform. The earnings profile of this business continues to steadily improve as expected, despite persistent macro pressure on the fixed income and real estate sectors, which account for nearly three-quarters of PGIM's assets under management. We sustained solid momentum in private assets with fundraising up 10% year-over-year, led by direct lending and real estate debt, which made up nearly 70% of the private capital raised this quarter.

While overall deployment was down slightly from the year-ago quarter as fundraising cycles create variability in quarter-over-quarter origination, asset-backed finance deployment increased nearly 30%. PGIM's third-party net flows were the highest in 10 quarters, totaling $9 billion with positive contributions from both institutional and retail clients. These results reflect the strength of our investment capabilities and client relationships. Public fixed income inflows were a key driver of that performance, while public equity outflows remained a challenge, consistent with the industry shift away from active equities. Affiliated net outflows of $1.6 billion were mainly driven by variable annuity runoff and the absence of PRT transactions in the quarter.

PGIM's $40 billion active ETF lineup continued to experience strong growth with more than $6 billion of net inflows in the third quarter. Our focus is on translating PGIM's scale into stronger growth and profitability while preserving the investment expertise that clients value. By expanding our private market offerings and integrating our capabilities more effectively, we are making asset management a larger, more strategic contributor to Prudential.

In our U.S. businesses, results reflect the focused actions we are taking to strengthen our competitive position. By expanding distribution, broadening our product offerings and investing in our capabilities, we are capturing more demand and improving the fundamentals of our retirement and insurance franchises. In retirement, we are seeing the value of product innovation backed by strong distribution. Retail annuity sales reached $3.9 billion, our highest quarterly level since 2013, including our highest RILA sales quarter ever, reflecting the continued success of the enhanced product we introduced late last year. These results demonstrate our ability to meet customer demand for protected accumulation while delivering on our strategy to maintain a disciplined approach to pricing and returns.

On the institutional side, PRT sales remained muted. Activity was quiet through the first 3 quarters of the year across the industry, but the pipeline has picked up. We closed 3 midsized transactions totaling approximately $1.6 billion in October and anticipate closing several additional transactions by the end of this year. We remain confident in the opportunity in the institutional retirement market, both in the U.S. and in Europe over the long term. We will pursue growth selectively, prioritizing value over volume while remaining a leader in this market. Our consortium partnership with Standard Life, announced in August, expands our access to the large U.K. retirement market and complements our longevity reinsurance and U.S. pension risk transfer capabilities.

Group Insurance delivered solid quarterly earnings growth, underscoring sustained momentum in this business. This result was driven by strong underwriting in our National Account Life business, reflecting continued favorable mortality experience. While our overall benefit ratio improved year-over-year on strong performance in Group Life, this quarter's disability results reflected an uncertain macroeconomic environment. That said, we are confident in the fundamentals of this business as a key driver of earnings and free cash flow growth. Year-to-date sales increased 23%, driven by growth in our premier middle market segment, particularly in supplemental health products. Our brand and distribution partnerships position us well for further growth as we pair disciplined underwriting with consistent delivery for employers.

Individual Life also delivered strong earnings growth, reflecting the actions we have taken to strengthen our leadership position through product portfolio diversification, distribution expansion and a focus on profitable growth. Record sales of our Custom Premier II variable universal life product reflects the success of our shift toward accumulation-focused offerings. Overall sales of $230 million were lower year-over-year, reflecting normal quarter-to-quarter variation. The quality and profitability of new business remains strong as we continue to reshape the portfolio toward more profitable, capital-efficient business.

Now turning to our Japan businesses. Quarterly earnings declined 25% year-over-year, primarily attributable to the $140 million impact of the sale suspension in the quarter and lower alternative investment income. Year-to-date, earnings were down 10%, but the business remained resilient, supported by a diversified platform. Third-party sales were strong, particularly in the independent agent channel, which experienced a 53% year-over-year increase. We have top 10 businesses in both the independent agent and bank channels. And it's important to note that the FSA sales suspension orders do not apply to these third-party channels. We have launched several additional retirement and savings products into the independent agent channel and expanded the number of agencies selling these products by threefold over the last 12 months.

In the bank channel, our new product launches are expanding our shelf space with Japan's major national banks. We are building on that presence and our product competitiveness to further expand into the major securities firms and larger regional banks. In POJ, we continue to make good progress on the reforms identified by the FSA in its sales suspension order, and we remain committed to implementing the changes to strengthen the way we conduct business in Japan. Our objective is not simply to restart sales, but to build a business model that sustains customer trust and supports responsible growth. Our priority is to complete this work and demonstrate that our new governance and oversight frameworks are effective in practice. We expect that POJ will be positioned to return to the market in phases beginning on February 1 with strong oversight, clear accountability and customer outcomes at the center of how it operates.

We are also applying the relevant lessons from the POJ experience over the past year to the Gibraltar business and expect that Gibraltar will also return to the market on February 1, as we previously discussed. The organizational and operational changes we are making, as outlined on our October 9 call, are meaningful and enduring. We are confident that they will position our businesses in Japan to serve customers more effectively, operate with greater accountability and create long-term value. We remain convinced that we will exit this period with a strong franchise built for the long-term opportunity.

In closing, we are making tangible progress on the priorities we set out in August. We are reshaping our portfolio, investing in the businesses where we have the strongest opportunities to grow and building a more efficient operating model. There is more work ahead and the full benefits will take time to materialize. But we are clear on where we will compete, how we will allocate capital and how we will deliver superior shareholder value. The progress we made this quarter strengthens our conviction in both our strategy and in our ability to build a more focused, higher-performing Prudential over time.

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

Thank you, Andy, and good morning, everyone. Our third quarter results reflected solid underlying business performance and disciplined execution as we continue to simplify the portfolio, improve earnings quality and deploy capital with discipline. As Andy noted, we reported after-tax adjusted operating income of $1.3 billion or $3.77 per share compared to $1.4 billion or $4.05 per share in the year ago quarter. Year-over-year, higher spread income and favorable underwriting results in our U.S. businesses as well as higher asset management fees at PGIM were key contributors to this performance. These increases were more than offset by the impact of the sale suspension in Prudential of Japan, or POJ, and higher variable expenses to support growth in our U.S. businesses.

Excluding the costs related to the POJ sale suspension, underlying operating expenses for the quarter and year-to-date were lower than in the prior year periods. We have improved operating leverage through expense discipline while continuing to invest in capabilities that support business growth and improve the customer experience. Year-to-date, we are ahead of target on realizing our previously communicated $150 million in pretax run rate benefits in 2027.

Now turning to our third quarter results by business. PGIM reported pretax adjusted operating income of $263 million, up 8% year-over-year. The pretax adjusted operating margin was 26.5%, expanding by 280 basis points. These results were driven by higher asset management fees, equity market appreciation and strong investment performance as well as lower expenses. The lower expenses reflected the absence of a reorganization charge in the prior year quarter as well as savings from the ongoing integration of PGIM's operating platform.

Offsetting these positives were lower other related revenues, primarily driven by reduced earnings from certain seed investments and weaker agency earnings due to the higher rate environment. PGIM's year-to-date margin was 24.6%. Excluding the reorganization charge, this represents a 240 basis point increase over the prior year period, ahead of PGIM's target of at least 200 basis points of margin expansion in 2026. Our U.S. businesses generated pretax adjusted operating income of $1.2 billion, essentially in line with the year ago quarter.

Our retirement businesses reported pretax adjusted operating income of $620 million, down modestly year-over-year. Higher spread income, driven primarily by strong retail annuity growth, higher prepays and higher alternative investment income, was offset by the impact of PRT runoff. Results also reflected less favorable mortality as well as lower encaje earnings in our Habitat business, now part of Retirement, due to higher interest rates. Expenses increased compared to the prior year quarter, primarily driven by higher variable expenses related to continued business growth.

Net account values were $364 billion at quarter end, up modestly year-over-year. Retail annuity account values rose 25% to $68 billion, supported by $14 billion in sales over the last 12 months, reflecting the strength of our diverse product portfolio. As Andy highlighted, year-to-date institutional volumes reflect the episodic nature of pension and longevity risk transfer with limited transactions industry-wide. However, momentum has picked up in the fourth quarter, and we have multiple transactions scheduled to close by year-end. We remain disciplined on pricing and focused on writing business that meets our return objectives.

Group Insurance delivered pretax adjusted operating income of $101 million, up 12% year-over-year, driven primarily by higher underwriting results. Life underwriting results reflect a more favorable mortality in the working-age population, while earnings also benefited from continued growth in our supplemental health offering as we further expand in these markets. Operating expenses were also higher as we made additional investments in our claims and service organizations to support growth, improve efficiency and enhance operating leverage.

Our overall benefit ratio of 81% was below our target range, reflecting strong life results and the strategic actions we are taking to diversify our business mix by segment and product. However, our disability benefit ratio rose year-over-year due to elevated short- and long-term disability incidence and severity amid ongoing macro uncertainty. While disability incidence remains elevated, we are actively managing through the environment with disciplined claims execution and strong risk management. Over the past several years, we have made meaningful investments to enhance our claims organization, which have increased our ability to effectively manage higher claim volumes and support better outcomes for our customers.

Individual Life reported pretax adjusted operating income of $199 million compared to $153 million in the prior year quarter. The year-over-year increase primarily reflected more favorable underwriting results, driven by a reserve refinement of about $30 million in the current quarter and increased spread income reflecting higher new money yields due to higher rates. The evolution of the Individual Life business over the last several years has fundamentally reshaped its financial profile, delivering stronger, more consistent underlying earnings growth, higher cash flow and greater capital efficiency.

Our U.S. Legacy Products segment generated pretax adjusted operating income of $253 million compared to $308 million a year-ago. This decrease primarily reflected lower net fee income from ongoing runoff of the variable annuity block, partially offset by equity market appreciation and less favorable underwriting results in the GUL block. Now turning to our Japan businesses. As a reminder, last month, we restated our international results, moving emerging markets to divested businesses and therefore, outside of AOI, our Habitat joint venture to retirement and presenting Japan on a stand-alone basis.

Our Japan businesses reported pretax adjusted operating income of $559 million compared to $750 million in the year ago quarter. Strong underlying business fundamentals were more than offset by the expenses and lower underwriting results related to the POJ sale suspension as well as lower alternative investment income. The sale suspension reduced third quarter adjusted operating income by approximately $140 million, bringing the year-to-date impact to approximately $375 million, in line with our expectations. We continue to expect a full year 2026 impact of approximately $500 million for POJ and $100 million for GIB.

Sales were $291 million, down 36% year-over-year due to the POJ sale suspension, but up 11% sequentially, driven by strong third-party distribution. This underscores the underlying strength of the franchise and the value of our diversified distribution model. Retirement and savings products remained a meaningful contributor to sales.

Now let me turn 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 and grow our core businesses. We ended the quarter with $4 billion of cash and highly liquid assets, well above our $3 billion minimum liquidity target as well as substantial off-balance sheet resources.

Our Japan businesses remain well capitalized and are managed to levels aligned with our AA objective. Later this month, Prudential Holdings of Japan will report a consolidated ESR ratio as of September 30 of approximately 200%, well above our 150% operating target. We do not expect the sale suspension to materially affect capital, ESR or cash flows in 2026 or 2027.

We continue to take actions that support disciplined capital deployment. We intend to deploy the expected proceeds from the sales of our Brazil and Mexico businesses into targeted acquisitions that advance our growth strategy. We do not expect the receipt of the proceeds to change our total capital deployment plans, which we will announce with our fourth quarter earnings in February of next year. Before closing, an update on tax guidance. We now expect a full year effective tax rate of 20% to 21%, down from 21% to 22%, primarily due to moving emerging markets into divested businesses.

In closing, we delivered another solid quarter, supported by strong underlying earnings momentum, business growth and expense discipline. At the same time, we continue to address the sales suspension in Japan with urgency and transparency and a strong commitment to reform. We are building a simpler, more focused company with higher quality earnings, greater capital flexibility and a stronger foundation for long-term growth. This, coupled with consistent execution, is the path to sustained value creation.

With that, let me now turn the call over to the operator for Q&A.

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

The first question I had is, I know, just related to the LatAm sale, the $4 billion. I know you mentioned the sale price. Can you talk about what the after-tax proceeds are expected to be?

Yes. Tom, well, first of all, let me start by saying that we're very pleased with the economics from the sale of Brazil and Mexico with the consideration being a total of $4.025 billion, clearly north of $3 billion. The net proceeds will reflect taxes, transaction fees and closing costs. So we expect that value to be approximately $3.1 billion. And the majority of the difference there is taxes. We will be -- we expect to close in the second half of next year, and we will confirm the net proceeds at that time.

Got you. So my follow-up is, Andy, I heard you say, I think asset management and selected benefits businesses are potential focus for M&A. Are you leaning in one direction or the other? And should we assume in terms of M&A that you probably need to close on this deal first? Or would you potentially look to do something sooner?

Yes. So Tom, let me start by reiterating some of the comments I made in my opening. We're pursuing a deliberate sequenced capital rotation strategy. So that means step one in the sequence is divesting our emerging market businesses as an important source of capital. Obviously, what we're looking to do there, our goals were to have clean exits and to be well paid for the value of the franchises. And I think you can see that we're making great progress.

As far as your question about leaning, we are not leaning in a particular direction. As we look to deploy the capital, we're widening our aperture. And I think that those would be the key words across PGIM, group insurance and select opportunities for retirement in Europe. As we're doing that, we're ensuring that we're thinking very creatively on a wide range of possible deal structures. And you've heard me use these words before, make sure we're in the know and in the flow. We believe strongly the best deals happen principal-to-principal that we don't rely on investment banking auctions.

So the reason I say widening the aperture, M&A is always a low probability endeavor. So you need to have a wide aperture and look at many, many things to make sure that what you do is good and strong for the shareholder. I'll reiterate, we have a high bar. Every opportunity, we're measuring against our strategy to make sure it has good strategic fit, make sure it has good return profile and is a strong contributor over time to earnings and free cash flow growth. So we are certainly looking in asset management and looking at a wide range of opportunities and in group insurance to keep accelerating our strategy.

I would not think of this, even though we're pursuing a deliberate sequenced rotation, I wouldn't take that literally like we're going to finish one and start the other. We are working on both the divestitures and the acquisitions at the same time. A lot of my time and my senior team's time is actually spent out and about principal-to-principal. So we have been working on this at the same time. But what you should expect from us is we're going to be patient, we're going to be persistent, and we're going to be disciplined because that's what's required when you're looking at the acquisition side. And we're confident that we'll be able to successfully redeploy this capital in a manner that's going to produce a good shareholder result.

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

Maybe start with Japan. Can you just provide some color on how surrenders have trended versus expectations over the past month since the FSA order?

Joel, so first of all, I would say surrenders through the year have been a little bit lower than what we originally estimated. We had a spike early in April when we announced the suspension, but then they moderated down. We did see an uptick of surrenders following the October announcement, but that has also reverted back to normal levels. So we expected this increase. It was part of our estimates. And what I would say is through the end of the year, we expect that to be consistent with what's built into our estimates.

Got it. That's helpful. And then can you just talk about corporate losses, right? It's consistently better than sort of the expectations that you've put out there. Just what are the drivers? And what should we expect for losses like a loss run rate running forward?

Yes. So we do continue to project the full year 2026 loss at $1.55 billion. I know we've -- there's a number of moving pieces with the emerging markets restatement and some timing of expenses. So I would highlight a couple of things. The impact of the emerging markets restatement, which reduced the loss because we removed -- increased the loss, excuse me, because we removed some earnings, was largely offset by expense saves. So you heard in my prepared remarks that we are ahead of target with our expense saves, the original $150 million commitment. So that's coming through within the businesses and in corporate. And then the offset to that is that we do expect higher losses and higher expenses in the fourth quarter in corporate. That is due to higher benefit expenses, higher brand spend in the fourth quarter, and there is some timing of initiative spend from earlier in the year that got pushed to the fourth quarter.

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

I guess, Andy, maybe following up on the M&A discussion. Just as you are out there talking and looking for things, like how would you characterize the overall M&A environment in terms of opportunities in the areas that you're targeting?

Yes. Thanks, Ryan. Well, maybe let me start with that last part of your question. There are many opportunities in the marketplace. So we're not for a lack of things to look at and conversations to have. And that's not surprising. Look, when you talk about asset management and when you talk about group insurance, these are very attractive spaces. They're capital-light cash flow generative type businesses that people want to continue to grow and add on to and people want to be in. So it is competitive for these assets. Both these industries, scale matters more than ever, and I think that's clear.

But I think the most important thing is we have a lot to offer counterparties as Prudential. Our capabilities, our size, our scale, our breadth is highly attractive to many of the counterparties that we talk to. If you think about the asset management business, first and foremost, we have $1.5 trillion asset manager that is well diversified with nearly $300 billion in private alternatives. That's an attractive platform in and of itself. But when you couple that with our liability generation capability and our balance sheet, what we see is counterparties want to talk to us.

Similarly, in the group insurance business, we're one of the biggest out there in national account life and disability. So counterparties look and say that they could see where you could produce real synergies. So I would just frame it as it is a competitive M&A environment, but there are a multitude of opportunities, and we think that we have very special characteristics and capabilities that make us highly attractive to counterparties.

And then any color you can provide, Yanela, just on the improvement in ESR from, I think it was up about 20 points, I guess, at the midpoint of your guidance from last quarter.

Yes, Ryan. So a couple of things there. As you know, we manage ESR to a cushion above our 150% operating target, and that cushion is meant to support volatility that has absorbed some of the volatility we've seen around rates and yen. So it has worked as intended. In addition, we continue to execute actions to manage ESR and help offset the headwinds that we see. And the last item I would highlight is that we did refine some of the assumptions used in the ESR calculation, which when you combine that with the natural buildup of earnings did also drive the ESR slightly higher.

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

So first, Andy, on the capital rotation, you gave us a lot of aspirational goals in terms of what you want Prudential to look like post the strategic moves that you're planning on making. Is $3 billion of dry powder enough to kind of get you where you need to be to hit some of those targets? Or is this part of an even bigger capital deployment opportunity that you'll need in order to achieve those targets?

Yes. So Suneet, thanks for the question. So what I would -- where I'd start on that is remember when we put out these targets that this is a longer-term aspiration, and you should be thinking over a period of 5 years. So I would certainly not think that, I would not say $3 billion, oh, that is what the company has as far as firepower to redeploy. And I also wouldn't necessarily draw the conclusion that this is a one-step type capital rotation. There are a multitude of capabilities that we're looking to get into our asset manager and into our group insurance business.

We may or may not find that in one counterparty. So I would expect that this will be a multistep journey and that we will rotate capital over that 5-year period and do not draw the conclusion that, that means $3 billion. The other thing I would say is this is also about organic growth. We have incredible organic growth opportunities across all of our chosen businesses. We're already, in many of them, category leaders. And in others, we're not that far away from getting to category leadership.

So I think we've talked about in the past, but we would expect, as an example, in Asset Management, we said we want to go from 12% of earnings to 25%. At least half of that journey, we see line of sight to from an organic growth perspective. So I think it's really important that we don't lose focus on the organic growth potential of the company with this capital rotation strategy. It's about both.

Okay. That makes sense. And then I guess just drilling into the annuity business, I think your sales were up maybe 15% year-over-year. I haven't seen the industry data, but my guess is you probably gained some share. If that's the case, what would you attribute that to? And then separately or relatedly, are you seeing anything in terms of features or offerings in the market that give you a little bit of pause? When we hear these annuity guys get aggressive in terms of sales, sometimes there's a downside to it in terms of more aggressive features and feature creep, that kind of thing. So any thoughts there would be helpful.

Yes, Suneet, maybe let me just give you some overall thoughts, and then I'll answer your specific questions. So first and foremost, the individual annuities market continues to just be incredibly strong and growing. This is -- the market, again, is going to be over $120 billion this quarter. That's the 12th consecutive quarter it's been above $100 billion. We expect that the market will just continue to grow. It's a $500 billion market as we sit here today. The aging of society that needs protected income, the trillions of dollars of retirement that are in motion.

So we're executing in this business against the backdrop of a market that has incredible tailwinds. As far as why we're being so successful, it really gets to our strengths and our capabilities. We have a broad all-weather product portfolio across RILA and across fixed annuities. We have incredible distribution that's very expansive, but that we're adding to as we've entered the IMO space. And then we feel very strongly that we have a brand that's second to none. So we sell on our value prop in that space.

I see just continued growth for us as we look ahead. As for any particular product features that might give me pause. I've got to be very upfront about this. We focus on us. We focus on making sure that we put product into the market that provides great consumer value and a great return for the shareholder. We've been an innovation leader. You've seen us do that with FlexGuard and FlexGuard 2.0. So really nothing specific I'd point to that gives me pause in the marketplace.

Our next question is coming from Pablo Singzon from JPMorgan.

For PGIM, it sounds like you're making good progress in your ETF offering, which is helping offset outflows in active strategies. Do you see the mix shift there being meaningful enough to weigh on your overall fee rate? And I also recognize you're growing private assets. And I guess tied with that, if you could also discuss your aspiration to improve margins in that business to, I think you had said before, 30% over time. You made good progress so far in '26, but any sort of indications on what the path might look like from here?

Yes, Pablo, thanks. A lot in there, so let me dissect it. Let me start with your question about active ETFs and what's going on in the equity side. Our active ETF platform continues to be a very important area of growth for us. And we've shown great success both in the quarter and year-to-date. The fact is we've doubled our assets under management. We're now over $40 billion on that ETF platform because we keep innovating from a product perspective and now have over 70 ETFs on the platform. So what you're seeing from us in the ETF space is we continue to move up the league tables. We're now #10 in flows and #10 in assets under management overall. We expect that to continue.

I would not, if you step back, we're $1.5 trillion asset manager. It takes time to move your average fee rate. So you should expect to see that move over years, not over quarters. That doesn't mean that it's not meaningful because you change that fee rate by a couple of bps over $1.5 trillion, it makes a big difference. But you shouldn't be looking quarter-to-quarter on that. As far as margins, we have a very intentional strategy to expand our margin to 30% over the multiyear and over the longer period of time to go north of 30%. We are very pleased with what we're showing in PGIM from a margin perspective.

As Yanela noted in her remarks, we're well on track to exceed our, the expectation we set to improve margins 200 bps year-over-year. And we expect that, that's going to continue, first and foremost, because we expect, over time, the fixed income and real estate market will improve. That has been delayed by the macro environment up to this point. Second, we are absolutely seeing positive organic traction in higher fee, higher-margin products like direct lending, asset-backed finance, and as we mentioned, ETFs. And finally, and we're very proud of this, we have a laser focus on expense management, and we are ahead of our commitments overall, and we are also ahead of our commitments in our asset management business. So over time, while that margin might fluctuate quarter-to-quarter, we feel very confident in marching it to 30% and then over a longer time frame, marching it north of there.

And then my second question for Yanela, perhaps a simpler question. How much were Habitat earnings this quarter? And what is the typical earnings contribution for Habitat on a quarterly basis?

Yes. So Pablo, the quarterly run rate for Habitat is $25 million a quarter. So you can think about that as the expected earnings. Now there is some volatility in the encaje earnings. And this quarter, we had a negative impact of that of about $6 million. And so that's what you see there. Last quarter, last year, third quarter, we had a positive of $10 million. So there was a flip of $16 million in encaje, but the expected earnings are $25 million per quarter.

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

Just on the Retirement segment again, but it is just on earnings. It looked like spread increased pretty materially sequentially. So I'm just wondering, was there any prepayment or onetime income that helped spread in the quarter? Or do you, I guess, said differently, I think the $615 million pretax is implied by the slides is a good run rate going forward?

Wes, so yes, we had a nice healthy increase in quarter-over-quarter core earnings. And the majority of that is the benefit of growth in the business, right? We've had very healthy retail annuities sales, and that is driving the growth. We did have slightly higher prepayment income this quarter versus last quarter. So in second quarter '26, we had $22 million of prepays in retirement. This quarter, we had $30 million. So quarter-over-quarter, an $8 million variance. If you strip that out, that still shows a quarter-over-quarter growth of $20 million in core earnings. But the $615 million does have $30 million of prepays.

Got it. That's helpful. And just a separate topic, but back to capital management. Just curious, Andy, as you've had a little more time at the helm, do you think that roughly $2 billion of capital allocated to the common dividend with a flattish buyback is kind of the right strategy going forward? And I guess as you're rotating capital in the business, I just wanted to get your updated thoughts around uses of capital on a go-forward basis.

Yes. Wes, let me start and Andy could add. I think we have had a very consistent philosophy around capital deployment and capital management. It starts with maintaining our AA strength and strengthening the balance sheet, investing in our organic growth in the business and then the deployment to the buyback and to dividends. That total deployment plan has not changed. It will not change with the strategy. We obviously will be looking at and we always look at balancing growth and returns, and that won't change. So we do not expect the total capital deployment plans to change as a result of the capital rotation.

Yes. I mean the only thing I would add, Wes, is that priority order is important. And I think as you've heard us say before, we've raised the bar on capital deployment expectations, the return levels that we're achieving and expecting inside the company. But we've also been very pleased that given the strength of our franchise, we're able to achieve those levels, and we are seeing very healthy organic opportunities across the business set. So that order of priority is important as we look at how do we want to grow the company and what organic things do we want to deploy capital into.

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

First one on group disability. Can you unpack the drivers of the benefit ratio increase this quarter? One of your peers cited a material uptick in behavioral health-related claims incidence. I'm curious about the driver for you? Or were there other underlying drivers you would point to?

Yes, Jack. Thanks. We experienced a slight increase in our disability benefit ratio this quarter versus a year ago. The primary driver of the year-over-year increase is higher incidence and severity in both short-term disability and long-term disability. And we are aware of what some others have said. And in a similar way, we are seeing higher behavioral health claims, and we are seeing higher claims from high-wage earners. Importantly, this is across most of the sectors that we have business in. So it's not any specific sector or any specific case type.

I would remind you, though, that the way we view this, we went through a few years as an industry post-COVID of what we would call abnormally low claims or abnormally strong experience. So it's not surprising to see somewhat of a reversion to the mean. The other thing I would point out is the macro environment is leading to what I would term employment insecurity. This may or may not be a traditional cycle. It may be something more structural given the shift with AI and job losses. We'll stay all over that.

What's really important is we focus on controlling what we can control. First, ensuring that we have extreme discipline in pricing and underwriting. And where we are seeing higher experience, we are putting rate into the book. Second, and I've been consistent on this all the time, investing in our claims operation as a risk management operation. That investment is paying off. And you saw we had very strong resolutions this quarter. We had the best resolutions in over 2 years. So while we have a cautious outlook about incidence and severity looking forward, we know that we have the discipline and the capabilities to navigate the environment as it comes.

That's helpful. And then regarding the strong growth in third-party sales in Japan, I'm just curious how the return profile or the product profile of the business you sell through those channels compares to what you sell through your captive distribution? And would you expect to continue to see stronger growth in those channels even after the sales suspension ends?

Yes. Jack, I would say we're very pleased with the growth in that independent channel. I think it does demonstrate our diverse business there and distribution. And in terms of profitability, we are very comfortable with the profitability of those products, and they are well in excess of our cost of capital as intended.

So Jack, I would add, when we talk about we expect to emerge from the issues in Japan a stronger company. There's reasons behind why we say that. And this third-party channel success, I think, is a big reason. First, the market opportunity in Japan for retirement and savings products is very, very strong and is a high-growth area. The third-party channels are higher growth channels versus the captive channels. So we see great potential to continue to growing in both independent agency and bank channel.

What we saw this quarter, a 9% overall growth year-over-year in the third-party channels and 53% in independent agencies. What we're seeing is institutions candidly vote with their feet and give us a vote of confidence. So we've expanded the number of agencies that we work with, and we've expanded the shelf space that we have with the banks that we do business with in Japan. That is because they know that we're a high-quality organization with a great product portfolio that always follows through and is why we believe that our brand will be stronger at the end of the day and why we feel so strongly about our resilience.

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

A lot of my questions have been asked, so I'm going to ask some follow-ups. First, on the behavioral LTD submissions. I'm just curious, what's the typical duration on behavioral claims in terms of years? Is it like 2 years? And how deep is your in-house behavioral expertise to manage these claims? Is it to the same rigor as physical disability claims?

So Tracy, let me take the second part and then the first part. And I'll start with the word, absolutely. We have a very, very strong and deep and broad claims capability. That includes specialists in a number of areas, behavioral specialists, voc specialists, physical therapists, nurses, doctors. So while the incidence on these types of claims is up, these are claims that we've managed for decades given how long we've been in this business and have everything that we need to be able to manage those types of claims. And it does tie to why we're seeing success on the resolution side.

As far as the duration of the claim, the reality is duration of claim is very individual specific and is much more tied to the presence or lack of presence of comorbidities and comorbid conditions. So I wouldn't provide any data around the specific -- duration of a specific claim type. And I also would be careful to draw any conclusions around that. The punchline is, though, we have strong capabilities to manage the claims and to help all of these individuals get back to productive work.

Okay. Another follow-up. It's good to see the ESR at 200%. I'm curious how many points of that would you attribute to the refinements to the ESR calculation assumptions that you mentioned? Also, how much of the improvement came from sales suspension at POJ? Is it fair to say that with less new business means less capital strain?

Yes, Tracy. So first of all, we don't do that, we don't provide that detailed attribution to ESR. There are a number of moving pieces, the earnings buildup, et cetera. So obviously, it's gone in the right direction. How we manage ESR is working as intended. So I would leave it at that. In terms of the suspension, no, that's not really driving too much of the increase in ESR. Obviously, we have lower earnings, which because of the suspension, including the expenses that we're incurring to sustain the business and that those 2 things kind of offset.

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

Retail annuity sales have been particularly strong this quarter, but retirement operating earnings have declined year-over-year. Can you just walk us through what primarily drove this?

Wilma, yes. So year-over-year, we did have a decline. We are obviously still seeing the impact of business growth, net of related sales expenses, mainly that increase in annuities, but that has been partially offset by 2 things. The runoff of PRT, it has been a slower year in general in the industry, although as we said, we had strong October results. So we have the runoff of PRT, and we also have seen less favorable underwriting mortality in retirement as well.

Okay. Great. And then how much of the recent fundraising momentum in PGIM is coming from higher fee private asset strategies versus traditional fixed income products? And what are the implications for the segment's margin outlook?

Thanks, Wilma. So let me just start by talking about how pleased we are with the flows that we are seeing in PGIM. Our total net flows improved again this quarter. This is the third quarter in a row that total flows have improved in a very good trajectory with the predominance of this, given the softness of the PRT market this year coming from third-party assets that are flowing into the business. As you look at the $9 billion in third-party flows that came in, it was both on the institutional and retail client side. So we're seeing success on both.

The majority of those assets are public credit assets. You are correct that some of the flows are private credit. But the way that works is we fundraise and then when we call the capital, that's when the private credit shows up in the business. That is becoming a stronger, more important part of our business over time. As I mentioned, we have a private alts business now that's approaching $300 billion. That is higher fee and higher margin. It is part of what is strengthening our average fee rate, but I'll go back to the comments I made earlier that, that will be a change that occurs over a few years as we march the margin towards 30% and north of 30%. But that is absolutely core to the strategy and is playing through.

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

I want to start with the PRT pipeline and the U.K. partnership. It just seems like year-to-date, the deal flow has been quite modest. And even with the pickup in the fourth quarter, should we expect maybe increased competition just given that year-to-date numbers have been so low? And if so, do you expect the returns and the profile and the economics of these deals to show some increased competition?

Thanks, Yaron. So year-to-date industry volumes, as I just said, have been softer, with no jumbos through the end of 3Q, and I'm speaking there up through 3Q. That reduced activity really was driven by the economic and geopolitical uncertainty. CEOs and CFO decision-makers slowed up, for lack of a better term. But as we often see, the pipeline has picked up for 4Q. And as I said in my opening remarks, we closed 3 midsized transactions and anticipate closing more deals in 4Q, expecting to have a strong 4Q.

As far as competition, this is a marketplace. I would frame it, it's not different today than it was 12 months ago or 24 months ago. Over the last 5 years, it has become a more competitive market with multiple entrants coming into the space and more and more people trying to go upmarket into the jumbo space. So it's not more competitive. It's the same. We're well positioned. Candidly, we're a category leader here. We've done most of the large deals in the space over the last 10 to 15 years, and that's because of the strength of our underwriting, the strength of our asset management and our distribution.

We're achieving the returns that we want to achieve. We're quite pleased. We always will stay disciplined. We're about value over volume. And we've been able to achieve on all the deals we've done this year, returns in excess of our expectations. So if the market does get more competitive and returns don't make sense, we won't do the deals.

And then my second question is just around the PGIM AUM. Is there any AUM that's attributable to the soon to be disposed of Brazil and Mexico businesses? And if so, what would the impact be on AUM and on fees at PGIM?

Yaron, PGIM does not manage any assets for Brazil or Mexico. So there is no impact to PGIM.

Our next question is coming from Alex Scott from Barclays.

So I wanted to ask about Japan and just the reinsurance. I think there were some comments made intra-quarter about 70% of the business being reinsured now to, I think, some combination of Bermuda and PICA. And I just want to understand how that's trended over the last year or 2. And I think it may have increased quite materially if it did. What's happened to the freed up capital in Japan? I mean is that just sort of in that higher ESR? Did you, were you able to dividend any of that up in 3Q? I think 3Q is the normal cadence of dividends. So I'd just be interested if you could opine on all that.

Alex, so yes, let me start with sort of how we think about reinsurance and use reinsurance. So we use reinsurance, especially this internal reinsurance to manage reserves and capital in jurisdictions that best reflect the economics of the products. We have 2 captives in Bermuda. That is what we use them for. We've been reinsuring business out of Japan since 2019 for this reason. So this was well before ESR. So the 70% of Japan business being reinsured out of Japan is something that's accumulated since 2019.

Obviously, we have continued to use reinsurance and we will continue to use reinsurance to manage ESR volatility. But there's been no particular increase in reinsurance out of Japan over the last few quarters. We did announce a transaction in October with Prismic for USD 5 billion of whole life Japan product. That was actually out of Gibraltar. So that had already been managed within our internal captive framework, and that was just a transaction with Prismic for balance sheet optimization.

Alex, the reinsurance we've done in Bermuda since 2019, we were using the PICA entity before that.

Okay. So the 70% wasn't materially different going back a year ago.

No, absolutely. It's been a long time.

Got it. Okay. And then just a follow-up. Are you able to answer all the question around the dividend because I think Japan usually sends up a dividend in 3Q. Is there something you could tell us about?

Yes. No. I mean, obviously, timing of dividends varies between these operating companies. And what I would say is what we said consistently, the impact of the sales suspension will have -- the sales suspension will have no impact on cash flows or dividends out of the Japan businesses.

Our final question today is coming from Mike Ward from UBS.

So maybe to spin off of that last one, just on the kind of the long-term implications for the Japan business. Definitely appreciate the improvement and the coming out of this stronger company in Japan. But just curious like if you can help us think about the margin profile in the out years and the change in the compensation structure and whatnot, if there's anything incremental you can share?

Yes, Mike, let me start. I mean, we don't expect any material changes to the margin of the products that we sell. In terms of the earnings trajectory, a couple of things. As we previously shared, over 90% of the earnings in Japan come from the in-force. And we do continue to expect that roughly 15% reduction in the in-force due to the sale suspension. But I would also highlight that we have a higher rate environment, which drives earnings up as well as the strength in our retirement and savings sales and our other channels as we spoke about earlier in the call. So I think, obviously, the sales suspension has negative pressure on earnings, but we see higher rates and the opportunity in Japan through the diversified distribution and the strength of retirement and savings to be a tailwind against those headwinds.

And then, Mike, I would add, you had a comment in there about the compensation of Life Planners, Life Consultants. That's just a shift in how that compensation occurs. It's not compensating them more or compensating them less. It is just shifting it to be less compensation focused on new sales and more compensation focused on an additional number of elements like compliance orientation, like customer retention. And the pay stream will be over a longer time frame, much less in year 1 and pay out over a multitude of number of years, but it's not a higher level of compensation.

I see. Andy, that's helpful. So it's not literally a shift from sort of variable comp to fixed. It's just kind of spreading out variable.

There's some of both because we're also implementing a higher base salary that is fixed cost. So it's both effects. But if you look in total, the dollars spent across the categories aren't expected to go up or down.

Okay. The last one was just on data center finance. Curious about your activity in PGIM in that asset class, both like originating for third parties, but also your exposure on the general account.

Yes. So Mike, let me take PGIM first and then Yanela will talk about the general account. So this is a capability that we have in PGIM. If you think about both our private credit business and our real estate business, we have digital infrastructure funds and have done loans for data centers. So it has been an area of growth in our private alternatives business, where we, candidly, this isn't new for us. We've been in these businesses for a very long time and have seen some lift in the space. In the overall story of PGIM though, it's only a component of many different things we're doing to both accelerate the growth and expand the margin.

Yes, Mike. And then in terms of the exposure, let me take sort of AI exposure in total because I know it's been an important topic. So we have a total of $7.2 billion of AI-related exposure in the general account that is less than 2% of the general account. 60% of that exposure is tied to hyperscaler credit with diversified revenue streams, and we believe that diversification is quite important. $3.1 billion of the exposure is data centers that are either backed by long-term investment-grade leases or diversified tenant pools with no specific construction risk, again, important, speculative construction risk. And then lastly, we have $1.1 billion of that $7.2 billion is GPU exposure backed by investment-grade leases.

We 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. Welcome to this morning'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 morning, everyone, and thank you for joining us to discuss an update on our Japan business following the business suspension and improvement orders received from Japan's Financial Services Agency.

Representing Prudential on this morning's call are Andy Sullivan, Chairman and Chief Executive Officer; and Yanela Frias, Chief Financial Officer. We'll begin with prepared remarks from Andy and Yanela, and then we'll address your questions.

Before we begin, I want to remind you that today's discussion includes forward-looking statements, and actual results may differ materially from those statements. In addition, remarks made on today's call and in the accompanying investor presentation 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 third quarter 2026 results today. Accordingly, we ask that you limit your questions to the topic of the call. With that, let me turn the call over to Andy.

Good morning, everyone. We appreciate you making time for this call. Today, we will provide an update on 2 developments in our Japan business, including the related financial implications and our path forward.

The first is the business suspension order issued to Prudential of Japan, or POJ, by Japan's Financial Services Agency, or FSA, that will conclude on January 31, 2027, and the related business improvement orders for POJ and Prudential Holdings of Japan, or PHJ.

As part of this, I will touch on the findings of our independent third-party investigation and of the FSA inspection, which were largely consistent with the remediation steps we are already implementing.

I will also outline the phased approach we plan on taking to resume sales in POJ at the conclusion of the FSA suspension. And the second is the business improvement and partial business suspension order issued to Gibraltar Life Insurance, or GIB, which will also conclude on January 31, 2027.

I want to begin by reinforcing my confidence in our Japan leadership team. When we spoke on our special call in April, the team was new and early in its assessment of the business. Since then, they have moved decisively, translating our assessment into a clear transformation road map and advancing it with urgency and discipline alongside employees, regulators and other key stakeholders.

They understand the scale of change required and the importance of getting it right. Their vision and progress to date strengthen my conviction that we have the right team to lead the business through this next phase and return it to the market well positioned to serve our customers over the long term. Let me now turn to the FSA orders received by POJ and PHJ.

The POJ business suspension order extends the period in which it cannot solicit new business to January 31, 2027. The FSA's rationale for the extension is to allow additional time to advance the remediation actions we are already implementing. I'll provide more detail on those actions in a moment.

The POJ and PHJ business improvement orders require each business to submit a business improvement plan to the FSA by the end of November and report on our progress regularly. These plans will build on the remediation work already underway to strengthen governance, sales practices and operations.

We will continue working closely with the FSA. Yanela will provide more detail, but while the mix and timing differ from the estimates we provided in April, our assessment of the aggregate financial impact of the POJ suspension remains unchanged at roughly $1 billion in pretax adjusted operating income across 2026 and 2027.

Let me now briefly review the findings of the independent third-party investigation and the FSA inspection. While the findings are serious, it is important to note that they largely reinforce the priorities we identified when we voluntarily suspended sales earlier this year.

As I have previously mentioned, we have a detailed plan to reset POJ's business model. And over the past 8 months, we have made substantial progress implementing it. Both the investigation and inspection examined the root causes of the misconduct, which primarily related to the interplay between the business model, management framework and organizational culture and added specificity to the work underway, helping ensure the changes are comprehensive and durable.

Our transformation is centered on 4 interconnected priorities designed to improve execution, strengthen accountability and oversight and position POJ to deliver better customer and business outcomes.

First, we are strengthening governance and accountability by clarifying roles, enhancing governance practices and enabling PHJ to oversee POJ more effectively. We've also separated sales leadership from control functions to reinforce independent oversight. Second, we are redesigning the sales model to place greater emphasis on customer outcomes through compensation and performance management. Enhanced recruiting standards, training, monitoring of sales activity and customer interactions support these changes.

Third, we are simplifying the organization by streamlining head office responsibilities, clarifying functional ownership and consolidating the field organization into a branch network to improve supervision and management oversight.

Finally, we are reinforcing a culture of accountability and customer focus through clearer expectations for conduct and greater engagement by senior leaders in the field to help ensure these enhancements are implemented effectively and sustained.

With this work well underway, we remain focused on the next phase of remediation, a deliberate and carefully sequenced return to market. The phased reentry is fully reflected in our $1 billion estimate.

The POJ team has made considerable progress, but completing the remediation is only one milestone. Sustaining its effectiveness is the measure of success as we reset the foundation for growth. That principle is central to our deliberate phased resumption of sales.

As we previously communicated, we expect the broader return to market to unfold over roughly 12 to 18 months. This phased approach will allow us to test the changes in practice, confirm the intended outcomes and adjust where needed. Sales activity will expand as controls are proven, and both we and the regulator are satisfied that the revised model is working as intended.

This deliberate sequencing will allow us to build momentum from a position of strength, expanding sales as the revised operating model proves effective.

Let me now turn to the business improvement and partial business suspension order received by GIB. This suspension order applies to the life consultant sales force within GIB, but not to the independent agency channel.

The order runs parallel to the POJ suspension order, starting and concluding on the same dates. This order reflects the FSA's focus on addressing the root causes of the misconduct, including strengthening customer protections, reforming incentives and oversight and fostering a culture that places compliance and customer interests ahead of sales.

This is consistent with the work we've been doing throughout the process. The business improvement order requires that GIB submit a business improvement plan to the FSA by the end of November and report on our progress regularly.

Consistent with our approach to the POJ and PHJ orders, we will continue working closely with the FSA.

We recently completed our internal review of GIB, which included reaching out to over 2 million of its customers. As of mid-September, 57 of those customers were eligible for reimbursement, totaling approximately $2.6 million.

Based on what we know today, we are reaffirming that we do not believe we have systemic issues in this business. Since 2019, we have made substantial changes to GIB's governance, sales practices and operations in efforts to address many of the same issues that we are now remediating in POJ.

During this period, we have also migrated GIB's compensation structure and performance management system to emphasize long-term customer outcomes. As a result of our proactive customer outreach, we have received valuable feedback that has informed additional enhancements to GIB's operating model.

We have also been making further refinements to this model and compensation structure as a result of what we have learned in POJ. That said, the process of enhancing how we operate and manage all of our businesses is ongoing. We are applying relevant lessons from POJ across our Japan platform, including GIB, further strengthening governance and oversight while preserving each franchise's distinctive capabilities and growth potential.

Let me briefly address the additional financial implications of the partial Gibraltar sales suspension. Yanela will provide more detail, but we anticipate a pretax adjusted operating income impact of $100 million in 2026 and $175 million in 2027.

While we are not planning a phased approach to resuming sales in GIB, we expect to provide similar compensation support to Life Consultants as a result of the suspension.

In closing, as I said in August, growing our Japan business is a key strategic priority. To do that, we need to complete our remediation efforts, demonstrate effectiveness and continue rebuilding trust with our customers. We expect to begin resuming sales in POJ and GIB on February 1. Consumers in Japan have substantial and enduring needs across protection, retirement and savings, and our differentiated model offers improved outcomes for them.

Prudential brings decades of experience, established customer relationships and meaningful capabilities to serve those needs. That foundation positions the franchise to regain momentum, reestablish its leadership in Japan and contribute meaningfully to our long-term growth. Let me now turn the call over to Yanela.

Thank you, Andy, and good morning, everyone. Starting with POJ, Andy has described both the scope of the work underway and the deliberate approach we will take to resuming sales.

The main takeaway is that our estimate of the cumulative financial impact for POJ across 2026 and 2027 remains roughly $1 billion of pretax adjusted operating income, even with the additional FSA business suspension.

What has changed is the timing and mix of the impact. At the beginning of our sales suspension in February, our estimate reflected initial assumptions about the suspension, customer behavior, Life Planner retention and the cost of maintaining the franchise.

We now have 8 months of experience, visibility into the FSA's actions and a clearer view of how POJ will return to the market.

As a result, the underlying components have evolved. Let me break down what has changed. For 2026, we now expect an impact to pretax AOI of approximately $500 million compared to the $525 million to $575 million range we communicated in April.

We now expect costs associated with sustaining the business, including the estimated impact of Life Planner compensation, lost sales and elevated surrenders, to be approximately $405 million, a decline from our previous estimate of $450 million to $500 million. Results through early October have been better than our initial estimate, largely because surrenders at POJ have moderated since May and have remained stable. This provides an offset to the additional costs associated with the longer suspension.

Although we assume some increase in surrenders related to the FSA announcement, we do not expect the level of elevated experience to have a material impact. Additional Life Planner support during the extended suspension is moderated by a lower Life Planner headcount as a result of the hiring pause.

We now expect onetime costs of approximately $95 million, an increase from our previous estimate of $70 million, which was primarily related to customer reimbursement. While the customer reimbursement is unchanged, there are higher regulatory and business response expenses, reflecting the extended work of the independent investigation, remediation and related governance changes.

Those costs are necessary to address the root causes Andy discussed. Lastly, the prior estimate of $5 million attributable to the gradual ramp-up of new sales after the suspension period ends has shifted to 2027.

For 2027, we expect a pretax AOI impact of approximately $500 million to $550 million compared to the $400 million to $450 million range we communicated in April. As I mentioned, while the cumulative financial impact is generally in line with prior estimates, we now have a clear view of several factors, including a detailed plan for POJ's phased reopening, which will impact sales levels and Life Planner compensation.

The primary driver of the increase to 2027 is the reopening plan that Andy described. Reopening over roughly 12 to 18 months will constrain near-term production as we transition sales offices into a new branch model and demonstrate readiness under the new standard.

Activity will restart with a set of branches and then expand as the revised controls are tested and proven effective. We, therefore, anticipate sales in 2027 to be roughly 25% of 2025 levels versus our previous estimate of 50%.

As a result, costs associated with sustaining the business have increased to a range of $370 million to $390 million from the previous range of $290 million to $340 million. This is driven by the increased cost to retain and support our Life Planner force through this extended sales suspension and phase transition and the impact of the extended suspension on sales.

These costs are partially offset by the impact of lower surrenders. The impact of the gradual ramp-up has increased to a range of $70 million to $100 million from $50 million due to the more deliberate pace of branch reopenings in 2027.

Lastly, onetime costs primarily related to regulatory and business response expenses remain unchanged at $60 million. Despite the disruption at POJ, the in-force business has remained resilient. POJ serves approximately 2.2 million customers across roughly 4.5 million policies, and the durability of that base is evident in the surrender experience we have seen this year.

Life Planner retention has also been better than initially anticipated. The Life Planner count has declined given the hiring pause, but first half attrition was only modestly above the prior year and well below our initial assumptions. Maintaining a core of experienced Life Planners preserves customer coverage and provides the foundation to rebuild sales.

Our Life Planners are sticking with us as we are making significant structural changes to the compensation model. Over time, we believe the redesigned model will better align economics with customer outcomes. Moving to Gibraltar. As a reminder, the suspension only applies to the life consultant channel.

As Andy noted, our estimate of the cumulative financial impact across 2026 and 2027 is roughly $275 million of pretax AOI. For 2026, we expect a pretax AOI impact of approximately $100 million, reflecting costs associated with sustaining the business, including the estimated impact of life consultant compensation, lost sales and elevated surrenders.

For 2027, we expect a pretax AOI impact of approximately $175 million, reflecting costs associated with sustaining the business, including the estimated impact of life consultant compensation, lost sales, elevated surrenders and the ramp-up period during 2027. In Gibraltar, we plan to fully reopen all agencies after the suspension period. However, there will be a ramp-up period due to the lack of prospecting activity during the sales suspension.

We anticipate that sales in 2027 will be approximately 50% of 2025 levels as life consultants return to full productivity by the end of the year. It is important to note that, similar to POJ, over 90% of Gibraltar's pretax AOI is driven by its in-force business, both retirement and savings and protection products, which will help stabilize its earnings over a multiyear period.

In both POJ and GIB, there are still variables we will need to manage closely. These include how customers respond to the FSA orders, the pace at which the field meets the requirements to resume sales activity, continued sales force retention and sales productivity during the transition period.

That said, the financial performance of our Japan business so far this year has demonstrated the resilience of the franchise. That underlying strength does not lessen the seriousness of the issues or the work required. It does, however, reinforce our confidence that in February, we will emerge a stronger, more consistent business. With that, let me open the call up for questions.

[Operator Instructions] Today's first question is coming from Tom Gallagher of Evercore ISI.

First question, what percent of sales and earnings are Life Planner versus independent agents for GIB?

Tom, it's Yanela. So 70% is Life Consultant and 30% is independent agency.

Okay. So my follow-up is, so if the FSA is issuing similar orders for the GIB Life Planners and the POJ Life Planners, will you have to do a similar overhaul to essentially the restructuring you've done at POJ for GIB? Or are you leaving everything in place at GIB in terms of this whole -- in terms of what you've announced at POJ, it sounds like a pretty significant change to both offices, consolidation and change in practices and surveillance. Is something similar? Or have you already done something similar at GIB? Or how should we think about that?

Yes, Tom, thanks. So first and foremost, I think it's important to understand that these are 2 very distinct and separate businesses.

And to your point, we have actually done a lot of work in improving our capabilities and controls in Gibraltar since 2019. So I would frame it this way. It's in a better position. It's in better shape than we were in POJ. That being said, we knew there were some enhancements that we needed to continue to make.

So we were already cross-applying the learnings from the POJ work from early in the year. So you shouldn't expect that the size of the change and the degree of the change that's required in Gibraltar is at all similar to POJ because we've done quite a bit of work on it over the last several years, but also this year, in particular, already cross applying the learnings.

So -- and I think you see evidence in that in that when we went out to our over 2 million customers, we have under 60 cases that we're remediating. So business is in better shape, but we're aligned that it needs further improvement and that we need to continuously work on upping our game.

But that does not require the same degree of work, and we expect that we will begin to resume sales on February 1.

The next question is coming from Suneet Kamath of Jefferies.

I guess I don't understand the sales suspension at GIB. So what did the FSA find that caused them to do that? Because if you were already doing the remediation work and your outreach to the customers was pretty modest in terms of impact. Just getting the headline of the sales suspension is pretty dramatic. So what did they see that required that action?

Yes. Suneet, it's Andy. I'll just reiterate what I've said. So we -- as we assess the state of the business at Gibraltar, do not believe that we have systemic issues.

Let me explain why I say that. We had completed our own internal investigation in the business. As I just said, we had reached out to our millions of customers, and we have done a lot of work to strengthen the controls as we've worked with the FSA, the FSA -- and we're aligned on this. We're aligned that further work was needed that even though it was in a better position than where POJ was, we needed to further move the compensation system, better separate out our controls from our sales functions and the like.

So our perspective -- our perspective was a sales cessation wasn't required, obviously. We're aligned -- we respect the FSA's action. And the most important thing here is we're aligned on what the root causes are. We're aligned on the plans that need to be executed, and we've been executing those plans throughout the year.

Okay. And then my follow-up is, I guess, bigger picture, what gives you the confidence that you can get both of the franchises back to where they were, say, a couple of years ago? Have you done any work to assess if there's been any permanent damage to the brands of these companies, maybe survey work? Or is anything like that planned?

So let me talk about why we're so confident that we're going to come out the other side of this stronger. And this will take time. So as we have this discussion, we're giving you projections over a multiyear period.

But first and foremost, this is one of the best insurance and retirement markets in the world. The opportunity from a customer perspective is incredible. And that's why we've kept it a key strategic priority. If you step back, we have a set of capabilities that are hard to replicate.

The expansiveness of our product portfolio across both insurance and retirement products, across both yen and U.S. dollar denomination, that's a product suite that's more comprehensive than others. The multichannel distribution that we have throughout the country and relationships we have with third parties, these are capabilities that are not easy to replicate.

So when we say, well, how will we come back, will we be stronger? We know that we can rely on those capabilities as we step back into the market. The other thing is we've had the ability to build new capabilities. Candidly, and I know this isn't great, but there's a silver lining to this of this has enabled us to up our game on building out a stronger set of capabilities like our communication capabilities in the country and our relationships with the rest of the business community.

I guess the final thing I would share, Suneet, would be from a brand perspective, we likely will do brand work over time, we always do. But we just have a deep-seated belief that when companies face difficult times, you have a choice.

And your choice is to try and avoid and minimize or you step to the plate, you take accountability, you make the hard decisions, you put the customer at the center and you do the right thing. And when you do that, I think history shows that companies, brands and companies come out stronger, and that's exactly what we've done.

The next question is coming from Joel Hurwitz of Dowling & Partners.

Yanela, you gave some color on expectations for sales for full year '27. But I guess, any color on where you expect to exit '27 from a sales perspective relative to normal expectations? And how long do you assume it takes POJ or Gibraltar to return to more normal sales?

Yes. So Joel, what we said is we expect to open all agencies in Gibraltar in February. And -- but there is a ramp-up because of the lack of prospecting.

So the 2027 sales for Gibraltar will be at 50% of 2025. That's sort of the normalized level. But by the end of the year, we expect to be at 100% productivity for Gibraltar. So you think about -- because the suspension period is short, by the end of the year, we're at 100% productivity.

So by 2028, you would be back to those levels of 25%. For POJ, it is a slower ramp-up. We've talked about the fact that we have a phased approach. So for '27, we will be at 25% of 2025 sales, and we expect that to be at 50% in 2028. So the way to think about it is that by 2029, we expect to be at 100% productivity.

But total sales do also rely on total Life Planner count. And so depending on where the Life Planner count is, the sales will -- the total sales will be determined.

Got it. That's helpful. And then can you just provide a breakout of the estimated Gibraltar impact? How much of the $100 million in '26 and $175 million in '27 is related to compensation costs versus the impact of lower sales and higher lapses?

Yes. So definitely, the total impact, as we said, for '26 and '27 is $275 million. So let me break that up. For '26, the impact is $100 million, $75 million of that is life consultant compensation support and the remainder is the impact of lost sales and surrenders.

So that's '26. For '27, we have $150 million. That is the impact for life consultant compensation and the impact of lost sales and surrenders, and that would be both the carryover impact from '26 and '27. And of that $150 million, about half is Life Planner life consultant compensation, the other half is lost sales and surrenders.

In '27, we have an additional $25 million that is due to that ramp-up in sales. So again, we will be opening all agencies on February 1. However, the lack of prospecting does create this ramp-up effect. So $150 million for Life Consultant compensation and impact of sales and surrenders and $25 million for the ramp-up.

I do want to clarify one more thing in my answer to Tom. So 70% of sales in Gibraltar Life Consultant, 30% of sales are independent agent, not earnings. We don't break out earnings and we don't disclose that. So I just wanted to be clear.

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

Could you walk us through how your voluntary suspension factored into the FSA's decision? I'm just curious, absent that action, would the regulator imposed a suspension longer than 3 months?

So Tracy, it's Andy. Let me just talk about our voluntary suspension. So you are correct. Obviously, our initial voluntary suspension and the 180-day extension, that was a deliberate decision on our part because we had done our internal investigation in POJ, and we knew that we had a sizable work to do. That's the way I would frame it.

And we needed the time to get that done to put our customers first and come out with a stronger business. As far as how that factored into the FSA's decision-making, I wouldn't conjecture to know that hasn't been part of the communications back and forth. What I would say is if the size of the changes that needed to be done required longer than 3 months. So I don't know whether they would have done a longer suspension or not, but we needed longer than 3 months to do the work required to get the business to where it needs to be so that we're comfortable that it's operating at a high-quality level.

Got it. It's good to see that you don't see any changes in ASR or cash flows. I'm just curious, given a recent transaction with Prismic, the Japanese life block. I know it's not the first time you've done it, but did that provide any kind of relief in getting to that conclusion?

No, Tracy. I mean that transaction was just part of our ongoing balance sheet optimization management, managing the back book as well as managing flow and obviously, with Prismic being a key partner.

[Operator Instructions] Our next question is coming from Wes Carmichael of Wells Fargo.

I just had a question on, I think, the process from here. I understand that the suspension order ends on January 31. But regarding the business improvement plan, does that also conclude on the same date? Or is that something that's going to be kind of ongoing after that date?

Yes. The business improvement plan, Wes, is ongoing. So the cessation has a distinct end date, but the business improvement, we will -- in essence, what we do is by the end of November, we go in with very detailed plans.

We already have detailed plans in place, but we will submit those to the FSA. Those actions, while a predominance of them will obviously be done either by the end of this year or by the end of January, there will be ongoing actions as part of that plan and that business improvement order continues. And candidly, that's part of continuously improving the operation. But there is not an end on the business improvement like there is on the sales cessation.

And just secondly, I think you said you'd expect some additional surrenders associated with this announcement. Just wondering if you can give a little bit more detail on how surrenders have trended recently and how you think they may pick up from here?

Yes. Wes, so obviously, we surrender -- I'll speak to how surrenders have trended with POJ. So we did see a spike in POJ upon the announcement back in January.

Those sort of tapered and normalized in May and have remained stable since then. So -- and that is one of the drivers of our lower impact in 2026 for POJ is frankly, the lower surrenders. We do assume some level of increased surrenders related to the FSA announcement now for POJ, but we do not expect that to have a material impact. That is one of the reasons we're still within the $1 billion. For Gibraltar, we also assume an elevated level of surrenders and those are included in the financial impacts that I provided.

The next question is coming from Pablo Singzon of JPMorgan.

So first question, before these issues emerged, I think premium growth in international business is already negative, right, at your sort of baseline level of sales that wasn't affected by any of the enforcement actions. And also Brazil was in there, and I think that's an asset that you're looking to sell. So I guess the question is, are you able to provide perspective on how much sales you have to recover from sort of like the lower levels, right, post enforcement to get back to breakeven growth -- breakeven premium growth in the international business?

Yes. So Pablo, first and foremost, obviously, when we sell our emerging markets portfolio, we're going to pull those sales out. So from my perspective, the real view is how are you going to grow Japan? I would set aside the emerging markets because obviously, we're going to get -- as we said before, we feel well paid for the sale of those emerging markets, and we'll be able to redeploy that capital into other forms of organic growth in the company.

So I think the right comparison is how did Japan grow before? How is it going to grow going forward. We're confident in our ability to grow the Japan platform, starting with the fact because the market is accelerating, in particular, with the retirement opportunity and the degree to which the citizens are coming out of the banks and moving into things that require higher yields and buying annuity products.

So the fact that we have such a wide product portfolio and great distribution, the right comparison will be to look at how our insurance and retirement sales in Japan grow over time. And we're confident that when you look over the time frame that we set the strategy, this will be a nice grower for us.

That makes sense. And then second question, are there ongoing expenses to consider once all of this remediation is behind us, right? So maybe additional monitoring for compliance costs? And I guess more broadly, do you anticipate a permanent change in the expense structure of international with your upgraded operating model?

Yes, Pablo, I mean, there will be obviously a few things that move around. So for example, the compensation changes do move some variable costs into fixed costs and OpEx because we will be paying a certain level of salary.

So that moves expenses around. In terms of compliance and other things, I mean, obviously, we're enhancing governance and compliance, but doing that with all our existing resources. So we do not see a large impact to our expenses from those changes either.

Thank you. Ladies and gentlemen, this concludes today's question-and-answer session and today's conference call.

Thank you for your interest in Prudential Financial. You may log off the webcast and disconnect your phone lines at this time, and enjoy the rest of your day.

Okay. We will get going here. So first, let me just say thank you for being here. I have Yanela del Frias, Chief Financial Officer of Prudential Financial.

Thank you for having me. Great to be here.

Of course. So you've laid out a 5-year plan in August, narrow the footprint from more than a dozen to about 6 geographies, rotate north of $3 billion of capital, take PGIM from 12% to 25% and remove $750 million of costs by the end of '28. There's a lot there. What are the components that are more tangible that you can focus on the next year? How would you map that out for us?

Yes. Well, I agree, there's a lot there. But I would say we're not starting from scratch, right? So we -- this is something that has been well underway. Obviously, we rolled it out very recently, but we've been working through it, developing the strategy and beginning to execute for a while.

And maybe just let me go through each of the components. When we think about the capital rotation, which will generate well north of $3 billion, we've been really executing that for a while now. We've announced a couple of the smaller emerging market transactions, Indonesia, Kenya, for example. There's a few other small ones that are very close to completion. And then the larger ones, Mexico, Brazil, those are processes that are well underway that we think through this year will play out over time. So from that capital rotation and the exiting of emerging markets, we feel really good about where we are and how we've been executing.

Second is PGIM. So we have a stated objective of doubling PGIM's contribution, making it 25% of PFI's AOI. Half of that is organic with the other half being inorganic. So that organic piece has very much been underway in terms of us investing in capabilities that will drive higher fee asset growth. And those investments are going quite well. And frankly, we've been executing them for a while, and they're starting to hit the J curve. So they're really contributing to the earnings. And that plus the fact that the integration of the multi-asset model to one PGIM, we're almost a year into that, and that also has been delivering results, including expense and revenue synergies. So that's PGIM.

Third is the $750 million expense saves and what we call optimization. That's another thing that's been well underway. If you remember, we put out a goal of $150 million in saves back at the end of last year through 2027. So those saves are coming along. We've been executing on that. And the $750 million is just sort of an expansion of that and of looking at us operating differently, and there are several levers that we're looking at that we can talk about. But that's a process that's been underway as well, and we're starting to see the benefits in the earnings coming through already.

And then lastly, there's inorganic, which obviously is a little bit more out of our control. But the way we think about that is we're very active. We're constantly out there in the know and the flow. We're not waiting for auctions to come to us. We're engaged in the process, and that's something that we will be driving and highly engaged in going forward and on an ongoing basis.

And the last thing I would say is also very important for us is that continuous execution of the day-to-day business. We want to be excellent operators, excellent allocators of capital. That will show up every quarter, has been showing up every quarter. And that's a big part, especially in the near term, of how we intend to demonstrate progress towards this longer-term strategy.

Yes. So I want to follow up on the M&A piece. I mean my perception is you all have been a little louder in discussing M&A recently and I wanted to get a feel for the kinds of things you're interested in? And how do you approach return hurdles and ultimately, over what time period does it need to be accretive to metrics like EPS?

Yes. So I think on M&A, we have been open about it, about the fact that it is part of the strategy. And we've opened the aperture a bit. Historically, when we spoke about M&A, it was constantly about PGIM, about sort of smaller programmatic transactions that would enhance our capabilities, and we've done those, and they've gone well. Deerpath, for example, being one of them. But we do think as we think about the longer-term strategy and the more ambitious goals that we have that larger transactions will be more impactful. So that's -- when we say open the aperture in terms of the size, but also in terms of the areas that we're focused.

So when we think about where we're focused, I will start with PGIM. That is an area of focus. Obviously, we will continue to look at the smaller single asset capabilities because that is -- that will be helpful. But we've also expanded to look at platforms that have multi-asset that will bring in more capabilities within one transaction, which will result in revenue and expense synergies. So that's an area that we've been focused on.

Second is in group insurance. So we believe that group insurance is a strong business for us, strong opportunity, capital-light business where we have a very strong current position, brand distribution. And part of our goal is to grow those capital-light earnings, PGIM and group insurance. And so the strategy there has been to go down market and to diversify from a segment perspective. And there is inorganic opportunity there, an example being dental and vision as a capability we don't have today.

And then third would be around expanding our presence in U.K. retirement. And you've actually seen us already transact in terms of our partnership with Standard Life and CVC to expand and to participate in the U.K. BPA market. And that also brings on board a significant client for PGIM in terms of managing the assets. And I would highlight that transaction also in terms of opening the aperture as to what types of transactions we do, how we leverage our capabilities, how we leverage our balance sheet. It doesn't all have to be an outright acquisition. So that's one, I think, a creative way of entering and expanding our presence in U.K. retirement while not going out there having an outright acquisition, acquiring a license in the U.K., which we don't have today.

So those are the 3 areas of focus. I think we will continue to be very active. We will be very disciplined in terms of the type of transaction and the economics to your question, we'll be active. We'll be disciplined. It has to be the right transaction strategically. Culturally, it has to bring on the right capabilities. And we have multiple levers of funding. We have well north of $3 billion, but there are other levers that we do have. And in terms of the dilution, altering our capital deployment plans, there will be a very high bar for dilution. There will be a very high bar for us to alter our current capital deployment plans.

And ultimately, the transaction has to add long-term value to the shareholder. And we will look at it in terms of what are the returns, what are the economics relative to other capital deployment plans and opportunities, including giving that capital back to shareholders. And it has to be additive and contribute to our objectives of top quartile earnings growth, higher cash flow generation and market-leading returns on equity.

Okay. I want to key in on the group business for a minute and just the strategy to go down market. Group Benefits has been, I'd call it, a pretty fantastic business ex some of the COVID volatility over the last several years. So I totally get the interest there. I would say that some of the peers have had a tough time going down market. Like that's the one thing in Group Benefits. I haven't seen a big company really succeed at. So how do you approach that? And how do you sort of succeed where others have fallen down there?

Yes. No, I think that's a great question. And I think, look, our strategy there has been to diversify the product set and diversify our segment penetration and presence. And actually, I ran that business a couple of years prior to coming to this role. And when I got to group insurance, having been at Prudential for 27 years, I was positively shocked at the brand that we have in that space and the strong distribution that we have. So it was obvious that we had a huge opportunity to grow because we were highly concentrated in very large employer life and to some extent, disability, but mostly life.

So the strategy has always been about diversifying the product set, coming down market. And we've actually executed quite well doing that, right? So we view this as we have a larger opportunity. We can grow beyond the growth of the market because we're so concentrated yet we have this fantastic brand and this great distribution. And so we've been very successfully coming down market. Now that's where the sort of inorganic and the investments come in because there are certain capabilities that we will need to acquire over time. You can go down market successfully. At some point, dental becomes something that you need to have. So we're highly focused on that. But we have great conviction in the business. It's a great business, high cash flow, low capital. We're well positioned. We do need to execute in terms of enhancing those capabilities, but we are confident that we can do that over time.

Got it. So I have one more on M&A before I leave the topic, and then I will leave the topic. But -- and a little more of a harder hitting one, I would say, but...

The last 2 PRU larger scale transactions that were done did not go particularly well. They faced some headwinds. Right now in Japan, you have some things that you're having to work through there as well right now. Why is right now the time to consider larger scale M&A when there's -- it puts a lot of balls in here?

Yes. No, I think that's fair. What I would say there is that one of the key tenets of our strategy, and frankly, this new leadership team is really around focus on businesses where we could be market leaders. We have a very strong belief that market leaders generally are rewarded with an outsized piece of the returns in the profit pool, right? So we believe that we need to be market leaders in all our chosen businesses.

The good news is that we are market leaders in a lot of them, but we're not in all. And so that's where the inorganic comes in, in some of these areas where we believe we have the right to win, again, PGIM, Group Insurance being examples, they're the right businesses from a capital-light perspective. We have great brands. We have great opportunities and capabilities. To really grow substantially, we do need inorganic growth. And that's why we're leaning into it because we think it is the right way to have a meaningful impact on the business and the strategy. We will be very focused and very disciplined. I said that before.

The other thing I would highlight, we believe we're an advantaged acquirer because we bring to bear a $500 billion balance sheet, which creates synergies beyond price. So especially when you look at an asset management acquisition, an insurance balance sheet that size really matters. So back to the point about we're being creative as to how we think about it, how we fund, how we structure. We're an advantaged acquirer, we believe. And then I'll close back with the economics. We will be disciplined. We will be focused.

This is about the right transaction that makes sense, consistent with the strategy, not something outside of the strategy. It has to pencil out. It has to really contribute to top quartile earnings growth, cash flow generation, and market-leading returns on equity. The bar, again, is really, really high on dilution. And to the extent we do something, it has to make sense, and we will clearly articulate why we believe it makes sense strategically and how the economics play out over time.

Got it. Next, I wanted to turn to the expense save initiatives, $750 million. Could you help us think through how much of that we should expect to sort of hit the bottom line more mechanically and we'll be able to see more clearly versus what portion of it is maybe more of like reinvesting in growth and then operating leverage play over time?

Yes. So I mean, the way we think about it, and this gets to your question is it's much more than just efficiency and optimization as we call it, but it's really about creating capacity and capital to invest in the growth of the business. So it is both. When I think about the levers, there's really 3 key levers that we're looking at. The first is just continuing to simplify our company and our operating model. We've done a lot of work around that. We are still really complex, and there's incredible opportunity, whether it's management layers, increasing spans and control, just simplifying the way we're organized. There's real value to be had there.

Second is just technology and automation. And I'm not just talking about AI. Everyone talks about AI, and that's work to be done and to be understood. But it's just simple automation. We still do a lot of things manually, and we also have an incredibly complex technology infrastructure that as you simplify, there's incredible savings because it costs so much money to run a complex technology stack, whether -- in the U.S. and Japan, and they're separate and there's incredible opportunity there.

And then the third is really leveraging a global workforce. And this is an area that we're behind. We have not leveraged a global workforce. And I'm not talking about outsourcing. We've outsourced. But this is really having our own capabilities, our own employees. So we have a global capability center in Ireland. We just opened one up in India. And this is about taking end-to-end processes and really transferring them -- reenvisioning them, transferring them to the right location, leveraging that -- the skill sets and the talent in those locations and then creating efficiencies as we do that.

The reality is today, the majority of our workforce is in the Northeast. That's really expensive. So we're taking this opportunity to obviously not only leverage the potential savings that we can have from doing that, but reenvisioning our processes and leveraging the talent and skill sets as well.

Got it. Very helpful. Quick update on Japan. I think you've talked about an assumption that sales would resume sometime in November. I think at a recent industry conference, you mentioned 12- to 18-month kind of phase in of sales. And just wanted to see if -- how do I translate that into what's already been laid out? Is there any kind of update on when you expect that process of phased reopening to begin? And what does that look like?

Yes. I mean -- so I'd start with Japan is just -- for us, it has been and continues to be a fantastic business. It is a fantastic opportunity when you think about that market, how it's evolving and the tailwinds of higher rates, more retirement savings focused, things that are right up our alley and capabilities. And so it's a great business.

There's 3 components to Japan, to be clear, right? So there's Prudential Japan, which is the life planner model. This is where we have voluntarily stopped selling. There's Gibraltar, which is the life consultant model. Both of those are captive agencies. And then there's the bank channel and independent channel, which obviously very attractive because that market is actually transitioning from much more of a captive channel to an independent channel. So those are the 3 pieces.

And first and foremost, for us, it's about doing business the right way and caring for our customers. So when we voluntarily chose to stop selling, that's not an easy decision, but we thought it was the right thing to do to care for our customers, to earn back that trust and really to take the time to make sure we have the right governance, the right agency model, the right compensation model. So that's a bit of the background just because I think it's important.

We've laid out very clear plans for Japan that we've been very public about, including the financial impacts. And we're executing very clearly. We're right on track. And in terms of everything we can control, it's on track, and we feel really good about that. The November 6 being the day after the suspension -- the voluntary suspension ends, that's something that we're really focused on what we can control, but it's more than just us. There's multiple stakeholders as we bring regulators along, et cetera. So we are very comfortable with what we can control, but there's multiple stakeholders, and we're working our way towards that with a very active dialogue.

The other thing I would say, and this goes back to the comments that Andy made last week, it is a ramp-up. So November 6 is not a flip of a switch. It is a ramp-up of we're opening certain agencies over time, and we expect it to be a 12- to 18-month process. That allows us to, in an orderly fashion, test what we've created and what we're rolling out. That ramp-up, though, is built into all the financial impacts that we've shared. We've talked about -- I talked about -- our assumption is that in 2027 next year, we're at 50% productivity as we ramp up over time. And so that ramp-up is built into the financial implications, and we're very comfortable that we're tracking to that.

Got it. Pivoting over to PGIM. One of the things you've talked about is this integration into a single platform. And I think one of the things you were targeting to come out of that was more cross-selling of business. How is that going? And do you expect us to be able to see it contributing to the net flow story and being a meaningful offset to some of the headwinds that the whole industry may be facing?

Yes. PGIM, as I said and as I think you all know, is a key component of the strategy. The integration of PGIM is a key component to PGIM growing and to our overall strategy. And I would say it's going quite well. And your question is around revenues. I would say around the efficiencies, going quite well. I always talk about, well, we had six of everything, and now we have one. So that's really good outcomes, and we're looking at about $150 million in savings, and we're tracking very well to that.

On the revenue side, when you take multiple sales forces and combine them, you're caring for the client in a better way, right? You're meeting them where they need to be, you're really able to understand their challenges, create the right solutions and provide them with the right products and strategies. And over time, that does create revenue opportunities. We are seeing instances where somebody that used to only sell fixed income now actually is selling other things because we've combined the sales forces. That will take time because there's an education component. If you've been selling fixed income your entire life, you need to learn a little bit about the other assets. But we see that going quite well, and that will contribute.

We also see opportunities, though, in just expanding our client set, right? So into insurance, we started with Prismic, but we are managing other insurance type of portfolios, family offices, sovereign wealth funds. And also geographically, we see opportunity. We're in Japan with PGIM. As our Japan business evolve towards retirement savings and even as we integrate better between the insurance business and PGIM, there is opportunity to grow PGIM in Japan. And the credit market -- the private credit markets over time, we expect to evolve in Japan as well. So those are all things that will contribute to that growth in PGIM.

Got it. Okay. Next topic I have is affiliated reinsurance actually. And it's a question that I get probably more than you'd think I get actually because there's some criticism out there of affiliated reinsurance. And to be fair, I think we have seen a couple of peers restructure affiliate reinsurance that maybe it was more dated to -- as part of the cash flow improvement program. When you look across your organization, I think people have had the observation that it's a little more complex just with Japan and Bermuda and the U.S. and so forth. Is there any need to take a look at that from a PRU standpoint? Is that something that needs to be looked at to improve cash flow?

Yes. The short answer to that is no. But just to give you a little bit of background because I think we're a market leader in how we leverage reinsurance. And it's a key component of our strategy. And we're looking at the full spectrum. So we have our captive reinsurance and we have 2 entities in Bermuda, and we reinsure U.S. business into that, Japan business into that. We have third-party reinsurance at the other side of the spectrum. And then we have Prismic, which is our sponsored entity that actually is pretty unique because it allows us to grow our capital-intensive businesses leveraging third-party capital while still having PGIM manage the assets. So that's really, really an advantage for us.

But our goal with reinsurance, especially with captive reinsurance is always about ensuring that we're managing reserves and capital in a jurisdiction that best reflects the economics. Full stop. Because it allows us to be more capital efficient and allows us to offer better products. And so we've been doing that for a really long time and doing it very effectively. We've had the Bermuda entities for a very long time. And that's been just a great strategy for us, and we continue to leverage that. About 70% of our Japan business is reinsured out of Japan into either the U.S. or Bermuda. And it's been a tool that we've utilized over time and has been quite helpful in managing to the new capital standards around ESR. So that's been very helpful.

And with Prismic, again, that's just a great tool that allows us to, over time, bring in third-party capital, grow our capital-intensive businesses, but also grow PGIM as it manages the assets. So we don't need to restructure. We're always looking to optimize, honestly, right? So there's always tweaks that we make. And as we do that and as we leverage Prismic, we will -- that will be a contributor to us growing earnings in a capital-light manner and growing cash flows over time.

Got it. Next topic for you is on some of the asset allocation. And I think it was mentioned also at a recent industry conference that you could look a little bit more at some of the private credit, particularly in the allocation for the Japan business. And so I'm interested just in terms of what you're thinking there, what kind of uplift could we potentially get to net investment income and how you approach risk tolerance in that business.

Yes. So specifically to Japan, and I'll speak more broadly. So there's a couple of things in Japan that are happening that are real tailwinds, the main one being higher interest rates. This is a market that has had -- you all know there's 0 interest rates forever. These higher interest rates allow us to really offer better products, yen-denominated products. Historically, we've been more heavily weighted towards U.S. products. And it's a $160 billion general account portfolio. A lot of it invested in JGBs, right?

So just as the portfolio turns over, we're reinvesting at significantly higher rates. That's just a simple opportunity that's already coming through. We also have been looking at it much more proactively as to how can we leverage the portfolio? How can we have it work more efficiently for us. So that's been an area. And we do think over time, private credit will be something that becomes more prominent in Japan, and we will have opportunities to rotate into that. Similarly, in the U.S., we have been rotating a little bit more into private credit. There's many definitions of private credit.

Our private credit is what I would say is something that we've been doing for a really long time. It is something that we have expertise in, that we know how to underwrite and that we think are good assets to support some of our liabilities. In terms of how we think about it, we will always -- to the extent we're expanding more into private credit, it's all within our risk appetite framework, within our capital framework, and we look at that very carefully and track it and monitor it. We know what we're holding and where we're holding it at all times.

Got it. Okay. Can you give us an update on the pension risk transfer market and maybe also just longevity in the U.K. and the opportunity you have there? I think flows have been a little lighter than maybe we had expected a couple of years ago on the back of some of the -- even some of the lawsuits that I guess have been out there, not necessarily related to you guys. But how are you seeing that evolve? Do you expect it to pick up in the back half?

Yes. It has been a quieter year. It's interesting. Historically, the first half of the year was quiet and then it ramped up. For a couple of years, it was really, really robust, and this year has been quieter. It's hard to pinpoint what it is. You mentioned losses, but some of those have actually been resolved positively. One hypothesis that I tend to subscribe to is pension plans are so overfunded that it's not the top priority anymore. And businesses and CFOs have 3 other priorities that are more important than the underfunded or the pension liability, that will likely change over time, and that will lead them to transact. But that's one hypothesis.

But the reality is that, look, these are large markets that will be here for a really long time, whether it's the U.K. or the U.S. I mean, U.S. alone, you have $3 trillion in pensions that have yet to transact. And we think this is a market that is here to stay for a long time and a large profit pool. In terms of your specific question on this year, we do see in the pipeline more jumbo deals, a few jumbo deals that we hadn't seen in the beginning of the year. So there's a little bit more activity that we're engaged in. Obviously, we see every transaction. We've had good success with smaller deals this year because there hasn't been significant jumbo deals, but we do have a pipeline building up for the sprint towards the end of the year.

Yes. Okay. Next topic, cash conversion. So I think you all have spoken pretty confidently about expecting it to improve over time. You've been a little hesitant to put more of a fine number on it for the near term or even over the next year or two. So what's holding you back there? Do you have -- are there cash requirements that you have right now that should dissipate? Are there strategies that you're working through that just won't bear fruit for a little while? Like maybe take us through some of that.

Yes. I mean -- so we do have a target. When we put out the intermediate targets about 1.5 years ago now, almost 2, we have the target of 65% of net income free cash flow conversion. That's in place through 2027. One thing I would highlight, we do look at this as an overtime measure. It isn't linear when you're -- when cash flow -- you generate a lot of cash flow in regulated entities, but getting the cash flow from the regulated entity to the holding company is not linear. It can be episodic and year-by-year, it can vary. So we look at it as an overtime measure.

The other thing I would highlight is our 65% is after we fund growth in the business. So I always say I can generate 100% cash flow if I don't grow the business. But really, when we say 65% free cash flow conversion, that's after we have funded all the organic growth. And that's really where the capital uses are. So when we set the 65% and still now, we continue to have really good opportunities to invest our capital to grow the business. You've seen our continued strong sales in Individual Retirement. Those sales take capital to support them.

Our Japan business is a business that requires capital to support those sales. So that's where we're utilizing the capital. That's what drives the 65%. We do, as you say, have this long-term goal of increasing our cash flow conversion, and that will be done by increasing earnings from highly cash-generative businesses like group insurance, like PGIM. As we execute on that, we will see the higher cash flow conversion. To your point, we don't have a target as of now, but we expect that to play out over the next 5 years.

Got it. I wanted to circle back on some of the protection businesses. And you've made a lot of comments around wanting to invest to make sure you're top tier because the top tier is going to win. So when I look at some of your U.S. businesses, the Japan protection, what do you need to invest in to make that happen? And I know you talked on group insurance specifically. So I'd be really interested in Japan, too, and maybe the life business.

Yes. So I think -- so a couple of things. So when we talk about our strategy, it is about retirement, asset management and the select protection businesses. We are big believers in multiple engines of growth. And that's where the -- obviously, we have retirement as a growth engine, asset management, but that's where those protection businesses come in. It's also something that is important and I highly value is the diversification in business mix, risk profile, and capital-intensive and capital-light businesses.

And so that's really why there's that third sort of leg to the stool around the protection businesses. And when you think about the protection businesses, Individual Life and group are capital-light businesses that really add to the equation. And these businesses bring in assets for PGIM to manage as well. It's not just retirement. So that's sort of their role in the business portfolio. In terms of where we need to go, I spoke about group, so I won't go back to that.

In Japan, we are already a market leader in -- certainly in that space and in protection. So there it is about retaining that leadership position while growing in the retirement and savings space, which is a really great opportunity and about more than 70% of our sales today are coming from retirement and savings in addition to protection. So nothing significant in terms of investment other than continuing to expand our product set. And today, we have a very attractive product set.

In Individual Life, that is -- they're a market leader today. It's a very diversified product portfolio, but 75% of sales come from accumulation products, which is why we think about it as capital-light and cash generative. And that's, I think, something now that we've resegmented and you could see that business, we'll see the ongoing growth and the earnings contribution over time.

Got it. Okay. In terms of reinsurance opportunities, I'm interested in particularly Prismic, just given the relationship sponsor on that you guys are close with. If you were to look at them or others to do reinsurance, should we think more about sort of, call it an offensive transaction where maybe you reinsure something that's got a lot of margin in an effort to release capital so you can redeploy it elsewhere? Or should I think more derisking transactions? Because certainly, you still have some things that would probably be good to get off the books like SGUL and long-term care.

It's sort of all of the above. We look at really everything. I mean you mentioned Prismic. Prismic, we're very pleased with Prismic. Obviously, we seeded it with back book, a couple of transactions with back book, which was very helpful to get it started. But the goal for Prismic has always been, can they support our flow, especially in capital-intensive businesses with third-party capital. That's happening. We're reinsuring flow business as we speak. And they've done a third-party transaction as well, which is important because as an independent company, we want them to also have third-party business. So that's going very well.

If I think about the priorities for Prismic and for us, I would put flow at the top of the list because, again, as we can leverage third-party capital, we can grow more in certain markets. We will look at back books. And it will -- to your question, it could be offensive to generate capital and rotate capital. Obviously, you want to make sure you're rotating it to a business that has the right returns and the right characteristics. But also we can look at back books as well and legacy.

And when we think about legacy because that's a question that I get asked a lot, we've done a lot. We're very happy with the derisking we have done. And now it's really about optimization of the balance sheet. The legacy business we have -- some of it has synergies with business that we continue to write, right? So when we think about transacting on legacy, there's a lot that goes into understanding why the economics have to work. Does it contribute to cash flow generation, freeing up capital, but also what happens with earnings, with synergies across the organization. And those are all things we look at when we determine whether we want to transact or not.

Yes. Makes sense. Just maybe one on the competitive environment in the annuity market. I understand some of the moves you've made. You made tough decisions around PALAC and variable annuities to simplify what you're doing. One caveat is that some of the more simple products have gotten somewhat competitive. So how do you navigate that? What do you do to bob and weave around it, whether it's distribution and staying disciplined on price, et cetera?

Yes. I think -- so a couple of thoughts there. First of all, on the RILA space, that's one where I think our innovation comes across. And you can -- it's less of a sort of just a straightforward product. You can be more innovative. And when you think about our sort of FlexGuard 2.0 that we launched a few quarters ago, you see that in the receptivity in the market and how well that product has done. So we think the product innovation that has carried over from our VA days, right, we were always considered quite innovative. That you could see certainly in the RILA space.

To your point, a lot of the other products are quite vanilla, very competitive, very price sensitive. That's where I would highlight two things: our brand and our distribution. Our brand is second to none from a retail perspective, retirement and all else being equal, somebody will buy the Prudential product before they buy another product. Our financial strength AA, not everybody selling these products is AA. So that goes a long way as well.

And to your point, we've invested a lot in deepening our distribution. We've always had great distribution relationships, and it's a combination of our captive force that our captive distribution sells about 40% of our annuities today, but really enhancing that with third-party distribution and deepening those relationships recently going into the IMO channel, for example, which we were not a player in. And so that's really been driving it as well.

And then yes, the last thing I would say is we are always going to be very disciplined around pricing. And if it's highly competitive and the pricing doesn't work, you'll see those products in a given quarter, not be so strong for us, right? And we've seen that as markets move, et cetera. But I think when it comes down to price, all else being equal, brand distribution relationships really matter, and that's where we show really well, and that's where we compete.

Got it. Okay. So maybe going back to cash flow for a second. One of the businesses you're running off is variable annuities. My perception is that your variable annuity book has actually been one of the better ones in the industry.

Thank you. We agree.

And the caveat to that, though, is like, well, it's probably been producing better cash flow relative to some of your businesses. It hasn't really run off because the market is like the left side of the mountain until recently. But what does that look like? I mean is that running off actually, is that a headwind that to improve cash flow, you actually have to overcome and some to get it moving up?

Yes. Well, so when I talk about all the things we consider when we think about transacting on the legacy block, I mentioned cash flow is one of them. Yes. It's -- we've always said this is a good block. We really like it. It's performed quite well. It does generate strong earnings. It does generate strong cash flows, that's factored in all our views and all our projections, right? So we have a view of how this will run off over time, markets notwithstanding. And as we think about our cash flow generation, we factor that in.

There's a reason we did the resegmentation so that it could be -- so that you all could see how this is growing and over time, how we generate cash. It's also one of the reasons why we want to grow our earnings in highly cash-generative businesses because that allows us to generate more cash to have uses for that cash, including reinvest in the more capital-intensive businesses. So yes, it has high cash flows. Yes, it's running off, something we look at very carefully, and we consider in how we think about the business mix going forward.

Got it. Maybe last one for you, just in light of things that people are focused on in the macro, higher interest rates, particularly at the short end. What does that do for you in terms of maybe a net investment income opportunity? But then also, maybe just remind us about disintermediation risk and what you do to manage and mitigate that risk.

Yes. I mean, all in, higher rates are good for us. It's good for insurance. Rates have been rising, but they've been rising -- there hasn't been crazy spikes. I did go on vacation and came back and the 10-year was at 5% and I was like, what happened? And I did check on vacation. But -- so generally speaking, it's good for us. We -- disintermediation for us is not a big risk. We're well asset liability managed. These are insurance liabilities that it's not a bank where they walk out the door.

So where we focus on with higher rates is really around capital. So we have a derivative portfolio that moves around with rates and there's collateral -- capital liquidity collateral implications. It's something we track very carefully. We've -- actually, I just spoke to our Board yesterday, said no impact to our capital flexibility. We've got plenty of liquidity, but that's where we look at for higher rates, especially when it happens very quickly.

Yes. Okay. Thank you very much for being with us today.

Thank you, Alex. Thank you all for being here.

Thank you, everyone.

Really pleased to have Prudential Financial with us today. And up on stage with me is Andy Sullivan, Chairman and CEO. I also want to acknowledge Tina Madon and the IR team in the front row.

So Andy, it's been about 18 months since you took over as...

Is that all?

Something along those lines as CEO, and you did provide a strategic update recently. So I was hoping to start by summarizing the key components of your go-forward strategy and what you view as changing at the company in the new strategy?

So there's a good bit that's underway and changing. And hopefully, everyone had a chance to listen to our call. But it's very simple and straightforward. There's 4 main strategic priorities. The first is narrowing our geographic footprint in our insurance businesses. I'm a huge believer in focus. And my team and I believe that Prudential had become, in my words, spread too thinly. We think it's really important to focus talent, focus capital, focus investment if you're going to be successful. So we are narrowing our retirement and insurance business footprint. We're currently in over a dozen markets. That will be about half of that.

And in the process, raising well north of $3 billion as we exit those markets, we already have good momentum on that process. I've been asked about that announcement. So we wouldn't have talked about if we didn't have some momentum already in that regard. But narrowing the footprint isn't the objective or the goal, right? It's the enabler of what we can then do, which is really the second priority. I'm a big believer is pick the businesses that you believe that you could compete and win in and be a top-tier player because the -- no matter the industry, the top-tier players get the lion's share of the profitability, get the lion's share of the growth from a growth rate perspective.

We believe that our Global Retirement, Global Asset Management and our -- what we call our select protection businesses. So life in the U.S. and Japan and group insurance in the U.S. are businesses that we have the right set of capabilities that when we continue to invest in them, that we will be a top-tier player and get those rewards. Our goal, as we've said, is to be category leaders in those businesses. The third priority is about optimizing our capital deployment. There's really 2 aspects of this.

The first aspect, and this is a change, difference is we've taken a much more top-down oriented approach to capital deployment. We have every intention to be my words, just excellent capital allocators to make sure that every dollar of capital that gets allocated produces a very, very strong return above the cost of capital. But then the other part of the third priority is shifting the mix of the business.

It is really important when you have a set of businesses that are capital-heavy and our asset-intensive insurance businesses are that you have the right mix of capital-light businesses. The capital-light businesses are -- you should think of group insurance and asset management. And then finally, all that fueled by a change in the operating model, priority 4, which many people sort of digest down to just expense reduction, but it's broader than just expense reduction.

We are really changing how we operate so that we're simpler, we're faster, we're more decisive. And as an outcome, we're taking out a significant amount of cost from the organization, $750 million between now and the end of 2028. So those 4 priorities, we believe, will let us exceed our potential, and I've been pretty upfront that, that is the goal is to really take this to the next level.

Great. So one of the priorities is exiting emerging markets. So how are you thinking about redeploying the capital that does get freed up from those exits? And what areas are you the most focused on for redeploying the capital inorganically?

Yes. So the words I use on this, Ryan, is I've widened the aperture from what the previous strategy and previous team was aimed at. We used to be very, very focused on just asset management and very focused on only what I would call programmatic small- to medium-sized acquisitions in the asset management space. So first and foremost, when I say widen the aperture, there's now 3 different areas that we are looking at inorganic opportunities. First is asset management, second is group insurance, and third is select opportunities to expand our retirement footprint in the U.K. Maybe let me take each of those.

On the asset management side, we have, again, widened. We're certainly still looking at programmatic type acquisitions. Those would likely be if we do single asset class that are high multiple acquisitions because candidly, it would be too dilutive to do very large-scale things. You can think of maybe infrastructure equity as an example of that. Those are still on the list of potentials. But we've also begun looking at more cross-asset class, broader platform that when combined with our asset management business could produce better, stronger expense and revenue synergies with a particular focus, obviously, on private alternatives as the higher margin, higher growth areas and private credit, given the connection back to the balance sheet. So that's asset management.

Group insurance, we have a very strong national account group insurance business, mostly upmarket, mostly life and disability. There's a great opportunity given the set of capabilities we have to look to continue our product diversification. And typical next set of products would be dental and vision as an example, but also to continue to strengthen our downmarket capability and when I say down market, you have to always specify because that's different depending on the company. We're really strong in employers that have 1,000-plus employees, so really getting down below that.

And then finally, selectively looking to expand our retirement capabilities in the U.K. I'm a big believer in say what you're going to do and then do it. You've already seen us do that. We talked about it in August, but you've already seen us do the deal with Standard Life and CVC as partners expanding into the BPA market. The important part of that deal is that it brings a new large, sizable client to PGIM for us to manage high-fee, high-margin products like asset-backed finance, commercial loans and direct lending. But that's the set of things that we're really focused on.

You've probably been asked this a lot, but how do you go about the sequencing of this? So you're selling emerging markets. Is there a risk that you end up sitting on that capital for a while as you look for the right compelling opportunities? Or do you already have certain targets in mind? Or just how do you think that sequencing will play out?

Yes. So -- and I'm always very upfront of the sequencing of this is a complex thing. But it is an intentional sequenced capital rotation. I think the first thing that needs to be understood is you don't sell businesses and then start a process of buying businesses, right, because these processes are year-long -- 2-year long type processes. So it is a safe assumption that we have both processes in flight. Part of widening the aperture on the acquisition side is that gives us an ability to get more at-bats, to get more looks at platforms and to, over time, match capital sources and capital uses. But safe to assume that we're doing both simultaneously, and we don't have an intention of raising a bunch of capital and then sitting on it because that's not a great answer for anybody.

And then I guess related to this, but just how do you stay disciplined on M&A given that the areas you're focused on, particularly probably asset management and group insurance are also areas there's a fair amount of other likely buyers in, and it could be a competitive process to do M&A?

Yes. So maybe a couple of thoughts on this. First, you need to look at a lot of things. That's really, really important. When I talk about this, the investment banking space is a very important space. I have very good relationships with investment bankers, but I'm not a believer on relying on investment banking processes. Most of the best acquisitions and deals I've seen in my career have been principal-to-principal relationships that have been built over time.

I spend a very large portion of my time, you've heard me say this on the call, in the know and in the flow, developing principal-to-principal relationships. So we get a lot of looks, but it's also so that the counterparties know us, know we bring more to the table than just the best price, than just the price tag. The other thing is we're an advantaged acquirer, and I really deeply believe that. When you look at asset management, obviously, a number of the private alternative capabilities we look at we have a $500 billion balance sheet, right? We are probably one of the biggest balance sheets in the world. And we have the ability to bring that balance sheet to bear to help with the growth of these private alternative businesses. That is very, very attractive to counterparties.

We have an incredible liability generation engine with a brand that's second to none. That is very attractive to these counterparty asset managers. If you think about the Group Insurance conversation we just have, with the right complementary platform, there's incredible revenue and expense synergies that could be shared with the counterparty. So we believe we're an advantaged acquirer that can bring a lot more than just paying the top dollar and paying the top multiple.

Got it. It probably my last one on M&A. But -- how do you -- if you do find an opportunity that is larger, that exceeds your excess capital, what other resources could you pull on to fund a larger transaction? And is there a scenario where you would also consider some portion of equity financing on an M&A deal?

Yes. So I do get asked this question quite a bit because the brains naturally went to, okay, well north of $3 billion. Everyone said, okay, that probably means 3 point, whatever. And that's not big enough to actually rotate. We have other sources and other levers and other tools. The very next one that I would go to is we are a sizable company with very big blocks of business. So reinsurance is an important way that we can raise capital. And that's through third-party reinsurance or reinsuring to our affiliated platform, Prismic. But that can bring pretty significant firepower in addition to that well north of $3 billion.

Obviously, for the right acquisition, and when I say right acquisition, it needs to be strategically down the middle. It needs to be a very good cultural fit and it needs to pencil over the long term for the shareholder from an accretion dilution perspective, we can suspend the buyback. We have a very high bar for that. I want to be very clear. Like you would expect, that's a very high bar, not an intention to do it, but it's a tool and a lever. And then you mentioned the ultimate tool as a public company is equity issuance, and that's an even higher bar is the way we look at it. So we sort of look at that priority. The asset sales produce a level of capital, reinsurance adds to that. And we have additional levers if we see something really, really right, that's even bigger.

Got it. I want to move to PGIM. So last year, you transitioned from a multi-manager model to more of a single integrated model and platform. What were the reasons that you decided to do that? And then how are the expense and revenue benefits emerging from that transition so far?

Yes. So the reasons were very simple. It's all about growth in customers. What's happened in the asset management space is the world is moving from a specialist model, right, where the deployers of capital, right, the institutional providers of capital and even the retail used to be willing to work with dozens of asset managers. That's changing. More and more, we see our clients, they don't want to work with dozens of asset managers. They want to work with 2 or 3 or 4, and that requires those 2 or 3 or 4 to have much broader and deeper capabilities, right?

You need to be able to speak for all the different ways on the risk spectrum and on the liquidity spectrum that they want to deploy capital. So our customers were telling us, we want to work across. We don't want to be called on by 6 different salespeople from Prudential, one for fixed income, one for private capital, one for real estate. And we want to have a strategic conversation with you. So the rationale was all customer-driven and growth-driven. And from a growth-driven perspective, I think we said this on the call, only 10% of our clients in PGIM have business across more than one asset class.

If you looked across other asset managers, that's a significant opportunity for us. We are absolutely on the low end of the spectrum. So how is that going? We -- our distribution has been integrated, and we already have sold cross mandates where that number -- it will take us time and it will be over time but we expect that 10% cross-sell rate to go up significantly over time. It's on track. And we've not lost. Part of what you worry about when you do these things in asset management is talent loss. We've not lost anybody that we didn't want to lose in the distribution system.

And then there's the expense fall out of that. If you think about fixed income, private capital, real estate, they run as fully separate businesses. They had their own CEOs, their own Chief Technology Officers, their own Chief HR officers. We had 6 of everything. So there is a significant expense opportunity. And at this point, we are ahead of pace, ahead of schedule. And you should expect that we're going to be able to take north of $150 million out of that business over time. And that will show up in growth rates and margins, right, all of that I just went through.

And just any color you can give on how the current pipeline looks at PGIM for flows?

Yes. So the most important thing to really keep in mind on flows is, first of all, we had a very quarter -- last quarter, we were very pleased with. But we have a tale of 2 cities that anybody that's in the public equity business has a tale of 2 cities. The public equity business has been in for a very long time, systemic outflow. Our Jennison business has been in systemic outflow. Interestingly enough, everyone's business is the same, though. Those have -- earnings have been well maintained because of how equity markets have performed over time. That is -- you got to kind of set that aside.

Outside of that, we feel very good about our flow opportunities, mostly because of what I just went through, the integration of the distribution force, the fact that we're starting to see cross-mandate sales, but also because of the work that we've done to grow direct lending and asset-backed finance, we are very pleased with the mandate wins that we're beginning to see. And our intention going back to what I said of customers want to work with 2, 3 or 4, we intend to be in that set of people that customers want to work with.

Got it. So at the strategic update, one of the targets you laid out was doubling the earnings contribution at PGIM from 25% -- from about 12% to 25% over the long term. How much of that can be achieved organically through the revenue and expense benefits that you were just talking about? And then how much of that would you say is needed from an inorganic standpoint to get there?

So I very much appreciate the question because as soon as I think those words left my lips, the immediate focus was acquisition, acquisition, acquisition. And the reality is there are 2 levers, organic growth and inorganic growth. And first, thank you over the long term, this you should think of over 5 years, right? So this is not overnight. It takes time to change business mix and move the system.

About half the journey, Ryan, will come from the organic growth. So you think we're covering 12% to 25%, about half rough numbers. We believe we have organic line of sight to based on the things we've already just talked about. We believe very strongly we have good organic growth opportunities. And Jacques and his team are already after that. In particular, we're seeing good growth in some of the more private credit-oriented direct lending, asset-backed finance, et cetera. That means the other half, though, has to come from inorganic.

And as I said earlier, we've widened the aperture. That can be anything from plugging in an infrastructure equity business to something that's more across. Obviously, we're looking for things that are most synergistic. We're not looking for just pure scale deals because those candidly don't -- when you're already scaled in an asset management business like fixed income, scale acquisitions don't work. because clients have concentration limits, they can't do much more fixed income necessarily with us. We have to get new clients. But half the journey organically, half inorganically and over a 5-year period. And our confidence level is high in that journey.

Got it. You mentioned this earlier, but a few weeks ago, you did announce a new partnership in the U.K. on U.K. risk transfer and partnerships with Standard Life and other capital providers and other asset managers. Can you give a little more information on how that will all work and how the benefits will flow through to Prudential?

Yes, absolutely. So first and foremost, that's a good example, Ryan, of when we announced things on the August call, we already have a lot of momentum in various areas that we have line of sight to getting things done, and it goes back to say what you're going to do and do what you say. The first thing I'd say is this builds on, and I think most know this, we have a really very successful top-tier longevity risk transfer business in the U.K. So we've been in the U.K. BPA longevity risk transfer space, not in the BPA, but in that general world for over a decade. So we have good expertise. So we're building on that longevity risk transfer business.

When we do partnerships, acquisitions, anything with counterparties, we look for high-quality counterparties. I will tell you, I know Andy Briggs and the Standard Life team very, very deeply. I think the world of them, they are very talented. He's done a great job at Standard Life. And then CVC is one of the best private capital firms in the world and obviously, extremely capable in the U.K. That partnership, if you think of those 2 parties plus what we bring to the table from our knowledge of pension risk transfer and our capabilities in PGIM and in particular, U.S. capabilities, positions that triumvirate along with Goldman to -- we're very confident that we will win business in that $2 billion-plus level, and we'll win it at nice return levels.

The most important aspect, though, that I would stress about this partnership is the PGIM aspect. At the end of the day, this creates what we believe will be one of PGIM's largest clients at the end of the day, where PGIM is managing asset-backed finance, commercial mortgage lending -- commercial mortgage loans, direct lending, higher fee, higher margin type products as we look to juice up the margin and grow PGIM.

Got it.

But really pleased, and we've known the Standard Life and CVC team for quite some time.

I want to shift to the cost save. I know it's not just cost, but the efficiency gains that you spoke about, the $750 million that you're targeting. I guess just can you give us some more details on the types of things you're looking to do to achieve that, how the timing of the benefits might emerge and how you're using kind of technology to also assist with all this?

Yes, absolutely. First, thank you for your statement. It's more than just cost because it really is changing how we operate across the firm. And that's all about speed of decision-making and speed of execution, which a simpler, more focused firm enables you to do. We have high confidence in the expense reduction numbers. We had put out $150 million as the first tranche of that by the end of '27. We're well underway, well in hand, feel great about that. The $600 million additional, we have a lot of levers at Prudential that we can lean into. And I would mention a couple.

First is good old traditional organizational design, organizational simplification, getting much fewer levels in our hierarchy so we can go faster. If you looked at our tenure and my words, our top heaviness, that's changed quite dramatically. We'll continue to change more. Second, though, is technology. And I am a deep believer, it's not just AI, but infrastructure consolidation, automation, AI, that's an amazing set of tools to conduct business entirely differently than we've conducted it in the past. And that is every function, every business.

So when we talk about the $750 million, no part of Prudential will not change. And that's a little different than it's been done in the past. So in the past, not that much work, as an example, was done in Japan. We have great opportunity to be more efficient and effective across every business and every function. So tech is big. We're heavily leaned into spending there. That's not just expense reduction, though, I want to be clear. We're doing a lot of work with AI on delivering outstanding customer experience because that will accelerate our growth rate, not just reduce expense.

And then the last lever I would talk about, and some may know this, some may not, Prudential being headquartered in Newark, New Jersey, our employee footprint compared to others is overly focused in the Northeast of the United States. And that's an expensive footprint. Full stop. So we have opened global capability centers in Ireland and in India. And that doesn't mean we're just doing outsourcing. We're looking at whole processes and whole segments of businesses that could be better done elsewhere. But that will lower our cost of business substantially.

So this is -- obviously, this is always extremely hard work. It does impact employees. So we do it with the greatest utmost respect and care possible because that's who we are at Prudential. But we're confident in our ability to take that cost out. And then what you should look for is in the asset management business, the margins to get to 30% and then over a longer period of time, given the mix shift to go above that. And then in the insurance businesses, we're already kind of sitting in the middle of the 8.5% to 10.5% OpEx ratio. We are very confident we're going to drop that by another 150 bps over a 3-year time frame.

Got it. Free cash flow, improving free cash flow conversion was one of the outcomes that you're targeting from the strategic update. Certainly, growing asset management and group insurance, where they're more capital-light will help. Are there other components, though, on where you might consider like pulling back from certain more capital-intensive products? Or is that not really part of how we should be thinking about this?

Yes. No, I appreciate the question. And quite naturally, and I know this, I guess I'd say it this way, some investors were left a little wanting of we want more specificity on by when and what are we going to see. So I'll talk about that as well. You recognize one of the major levers, right, is get more group insurance, get more asset management, shift to a more capital-light group of businesses. But it's not just -- and I said this, but it was probably I didn't emphasize it well enough or right enough on the call. It's not just the business mix across.

Within businesses, we're doing a lot of work to change the product mix. So I would use like our Individual Life business as an example. Not a lot of time is spent focusing on our -- okay, on our VUL product, how much is VUL accumulation versus how much is VUL Protector. One of those products is much more capital-light than the other. And what I would tell you is most of what we sell today is VUL accumulation product, not rotector product. So we are changing the product mix in each business as well. And that's across Group Insurance, Individual Life, Japan. We're doing that work all the way across. So those are 2 levers. But 2 more I would mention.

Obviously, when you think of cash flow conversion, we're just becoming more productive. I used to work in manufacturing. Our cost of goods sold, our unit cost is going down by what we're doing on what we just spoke about. So every dollar of premium that comes in produces more cash for us. And then we're -- I go back to stronger allocators of capital. We're requiring higher levels of return and profitability for every dollar that we're deploying. That over time produces more cash generation. So it's a combination of factors that give us confidence in over time.

And I don't know if you're ready to do this yet, but on the quantification side of it, I guess, anything you can share on how we should think about the progression and how to track it?

Yes, I figured I'd let you ask the question before I answered it, but I was figuring that was next. So first, I did not -- we did not feel it was appropriate given the level of change that we have right now in the system to be very specific. And I take very, very, very seriously when we make commitments, we need to do what we say and we need to hit them. So we spend a lot of time on making sure when we make the commitments that the math is good and the math is strong and the math is right.

And when I say too much is going on, obviously, we're not yet selling again in POJ. We're taking significant cost out of the organization. We have potential acquisitions in front of us. But -- so when is the question. We had, as you know, a set of 3-year multiyear targets that end at the end of '27. We pulled one of those 3 back in the earnings growth rate. The other ones remain in place. It's a very natural thing for us as we come to the end of that through the end of next year to provide the investment community with another set of multiyear plans that do get more specific on cash flow amongst other things.

Great.

So it's coming, but you need to give us some.

Maybe just anything you can provide in terms of an update on Japan? Do you feel like you're on track to resume the POJ sales in November? And any update, I think you've been doing some review of Gibraltar, too. Any update you can give there?

Yes. So let me start just more broadly just to -- I always want to make sure everyone understands our Japan platform because candidly, as the CEO of Prudential, the Japan platform is a privilege to have in the business. It's incredible. It's 40% of the company. There's 3 operating components. There's POJ, which is our Life Planners. There's Gibraltar, which is our Life Consultants. And then there's really the independent agents and bank channel. POJ is about 40% of the Japan sales. So not insignificant, pretty significant.

Let me just start with an update. So we -- as we go in and looked at the issues that we are having, we, first and foremost, believe deeply, we always do the right thing at Prudential. That pays off in the long term even when the decisions are hard. So I did not take lightly the decision to cease sales, but we felt we had enough that we needed to do it so that we could put in plans to make sure that we had the sales practices and address the conduct issues that we had experienced. And I would be very clear, the conduct issues, the majority, far majority, we have great employees. So that is a great platform. It's going to come out stronger.

We're -- we knew what we needed to do. We set out the plans. We're hitting our milestones, and we're on track for what we know we need to do. That said, I think there's too much focus, just to be very honest with, is it November 6? The decision on what's the exact date of which we start selling is obviously going to be a lot on us. But there are other stakeholders that are involved in the discussions with us, including the regulators. And we want to start when we're comfortable, but others are comfortable that we're where we need to be. We're feeling really good about the progress that we've made.

I say there's too much focus on it because we're -- I've already said this publicly, we're going to reopen that business in a phased manner over a 12- to 18-month period because we need to test the new controls that we've put in place. We're making significant changes across the agency system. We want to make sure that they're operating the way that we intend. All that's been built into the math of the numbers that we've provided already. So we -- our expectation is we're doing better than expected, but it will be a phased reopening.

Got it. Maybe just stepping back from that part of Japan, Gibraltar too.

Yes, I missed that. That's important. We fully believe there are no systemic issues in Gibraltar. Just to give perspective, by the end of the day, and this is -- I don't say this arrogantly, I say this proudly, you go through something like this, I believe we will have one of the best managed, cleanest businesses in all of Japan. If you think we have over 6 million customers in Japan, we literally have sent 6 million customers, communications, reached out to them, worked with them to say, we want to make sure that you're satisfied with our relationship with the value that you're getting with what's being delivered. We did that with Gibraltar.

We actually have had a higher response rate from customers. Most of them saying, thank you. You're an excellent company. We like what you're doing for us. And then as far as problems or issues, we've seen a much lower level than what we would have expected going out to that many people. So there are no systemic issues that we see in the Gibraltar business.

Got it. And then more of a broader question on Japan. Just highest interest rate environment in 25 years, aging population. How do you see the retirement growth opportunity there? And then also, how much of an opportunity is there to do some asset repositioning and take advantage of the higher rates? And is that providing an earnings tailwind at this point?

Yes. So first, let me start with the retirement opportunity. And it was interesting when we first hit the issues in Japan, I did have a few investors kind of go -- ask me, are you going to sell Japan? Are you going to get out of Japan? And I said, no, that would be crazy, right? Given Japan is one of the wealthiest countries on the planet. It has some of the longest longevity. And candidly, because the citizens -- 60% plus of the citizens had their money -- most of their money in the bank at no interest, the retirement savings need and protected income gap is greater than anywhere else. So the opportunity is just outstanding.

And candidly, that's why you see a lot of competitors piling into Japan because the opportunity is tangible, it's real, and it's going to be producing for decades to come. We had already done a lot of work on shifting our portfolios, developing a lot of new retirement and savings products. And we've had great success in those sales and in that lift. So I think the market and the opportunity is great. Higher interest rates are good for insurance companies, just full stop.

The higher interest rate environment has provided us opportunity to design more attractive product in Japan, more attractive yen offerings. We're seeing a higher percent of our sales coming in yen denominated, not U.S. dollar-denominated. So yes, it's giving us lift. The natural turnover of the portfolio with higher interest rates will provide a natural tailwind to the business. But in addition, there -- it's far, far, far behind where the U.S. market is or even the Europe market. But there's clear evidence from my perspective that there will be more of a private alternative private credit market that emerges over time, which means there is an asset repositioning ability for us to do.

And remember, that we really have 2 businesses you need to think about, right? There's a U.S. dollar-denominated business that a good bit of that sits in our U.S. entity or in our Bermuda entity. That's U.S. assets that back that. And then there's the Japan and the yen offerings. There's opportunity on both those sets. So a lot of things that do provide natural tailwind.

Got it. And in the U.S., I was hoping to get your view on the current state of the U.S. retail annuity market. I think on the one hand, Prudential has scale, it feeds assets to PGIM. I guess, on the other hand, it has become more and more competitive over time?

Yes. So first, I always start with we want to participate in very large-scale markets that have tailwinds because that gives you -- if you're a top competitor, it gives you a lot of room to grow. And annuities fits that bill tenfold, right? You're seeing an annuity market that's greater than $110 billion sales a quarter. So total market size is going to approach $0.5 trillion a year. It's an incredibly big market. It's not just about price, right? It's about having a broad product portfolio. It's about having really deep and broad distribution relationships and then having an incredible brand.

I know I'm biased sitting up here as the CEO of Prudential, but we don't have to be the lowest priced carrier in any of our businesses, given the depth of our relationships, given our heritage and given our brand. So that's a lot of ways that you can drive the right returns well above the cost of capital despite the fact that there's many, many competitors. And you need to be disciplined. If you look across whether it's buffered annuities versus fixed annuities versus MYGA, they're not all the same level of competitiveness, right? The simpler things become, the shorter duration they become, the more competitive, we pick our spots, right? And that's also, Ryan, why you won't see me get exercised if we have quarterly sales that go up or down because we're going to be disciplined based on what's going on in the marketplace, and we're playing the game for the long term.

And my final question was on one of the outcomes that you're targeting is top quartile earnings growth at the company over the next several years, excluding the runoff of variable annuities. What are the key components that will get you to that? And what's your level of confidence in achieving it?

Yes. Well, first and foremost, just a couple of things about the goal. It's over time, right? So this is -- we'll be -- get to the top quartile over this 5-year stretch of strategy. Second, it's in earnings, not an earnings per share because we think that's a pure -- you can kind of do things around capital return that affect the earnings per share. If you think about everything that we've talked about, we have -- by focusing on a smaller set of businesses that we're already well positioned in that we can then double down on the talent, capital and investment and drive ourselves to that top 3 to 5 spot, we see great organic growth opportunity.

We've picked things with tailwinds, where we have the right capabilities to be a top winner to produce that strong organic growth, but you should be -- expect it in Global Retirement, Global Asset Management and the select Protection businesses that's where I expect you to look for and to hold us accountable to demonstrate the growth and over time to get to that top quartile growth rate. I have a high degree of confidence. But what you're also probably seeing from me is I'm not making 12 months because markets move and markets change. But I know by being really good allocators of capital and being really strong executors over that longer period of time, we will produce that growth rate.

Excellent. All right. We're going to wrap it up there. Thank you very much, Andy and the Prudential team.

I appreciate it. Thank you, Ryan.

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.

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 have the customer relationships and distribution reach to originate liabilities across retirement and protection products globally. Even fewer can pair 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 accrue 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 three 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's 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, generate 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 can 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 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 three 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 in 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 contributors 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 supports 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 benefits 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 hub in global locations with highly skilled workforces and structurally lower cost 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 reposition 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 are 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 are 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 that 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 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 product 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 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 in enhanced 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 in 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 benefits 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 II, 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 GUL 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 aligned 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 sale 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 some of these be shutdowns 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, more 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 you're -- in terms of businesses you're currently in? Or should we just think about the emerging market exit and business 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 us 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 and 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 one 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 be a 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 saves are flowing through the bottom line net of cost to growth.

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, which -- 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? 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 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 and 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 secondees. 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 diversify 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 absence 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?

Yes. 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 focused 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 GUL 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 GUL, there was -- yes, so we had a small update related to surrenders. Some policyholder activity in GUL that was reflected in AOI. And in terms of the stat impact, so obviously, that comes through at the end of the year. It's 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, some market conditions. But again, as of what we see today, we do not expect a material stat impact.

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

Going back to your free cash flow aspirations, if conversion is one of your objectives, can you help me understand how much of a drag on free cash flow conversion is that north of $3 billion of emerging markets capital that you want to redeploy?

So Tracy, the north of $3 billion of emerging markets obviously comes from dispositions of emerging markets. What I could say is emerging markets is not a major contributor to our cash flow generation today because they've been growing businesses and they've been actually consuming capital.

Okay. Got it. I heard what you said earlier that it would be a high bar to change your capital return strategy. But I guess, how do you address the concern that capital that's unlocked from emerging market exits could sit idle for a while, potentially over 5 years as you search for the right targets. I'm assuming you'll be disciplined on M&A.

So maybe Tracy, let me start. And I'll start where you ended. Yes, we will be disciplined. That is very, very important to us. That said, my earlier comment was not to imply that it will be 5 years before we do anything. I want to be very intentional here. We're going to be patient and persistent, but we are very active in the marketplace. You've heard these words from me before, in the know and in the flow. So we will be looking to deploy capital over this period of time. It's not back-ended in any way. So I just wanted to be specific about that. And Yanela, I didn't know if you wanted to add anything.

No, the only thing is I think we've said multiple times, it will be a thoughtful intentional rotation of capital. So we will just be very thoughtful, careful about it. It will take time, but that is how we will approach it.

And maybe just one final comment, Tracy. A difference here that I think you're also hearing is, I'll use the words, we've opened the aperture of areas that we're looking to grow in from an inorganic perspective. So in the past, what you would have heard is all about asset management and not about the 2 other areas, group insurance or institutional retirement. So that obviously is a broader aperture that we're looking at and that's a key difference as well.

Our next question today is coming from Josh Shanker from Bank of America.

And when we talk about the $750 million, how much of that is coming from streamlining operations where you are dedicated to continuing and growing? And how much is from areas where you think you'd be more prudent to exit?

Yes. Josh, obviously, as I mentioned, we are looking at the entire organization, right, looking to simplify, remove complexity, et cetera. So there's -- I'm not going to get into how much is coming from each business. We will obviously invest in the growth of our chosen businesses. That's a key part of the strategy.

And the other thing I would say is we're looking very hard at our corporate functions and that level of fixed cost and making sure that we're as streamlined and efficient as possible.

And then look, it's hard to execute but easy to cut in terms of making those plans, but it's much harder to grow. What is the time line do you think before you're comfortable giving us time lines about what this all means for revenues?

Are you -- I'm sorry, Josh, are you referring to just the general strategy or the expense?

Yes, the strategy. So we are knee deep in the strategy, and we can now talk about what we plan growth looks like going forward. How are we 2 years away from being able to make those comments? Are we -- is that a 6-month out sort of trajectory? When will we sort of know when your feet are solid on the ground, you're able to make some sort of guidance about the future?

Yes. So Josh, it's Andy. I'll start. And obviously, if Yanela wants to jump in, she can. What I would say is we're already seeing evidence, but we have milestones that we're looking to achieve. The clearest evidence is going to flow from the 4 priorities that we talked about and we know that's going to result in a consistent improvement in the financial results over time. So we need to be looking at milestones.

So like the first priority, seeing continued execution in reducing the footprint. So as investors, as analysts, you should be looking for tangible evidence of sales and maximization of value in those sales. Obviously, this is a path that we've already been on as we've sold Kenya and Indonesia.

Second, as we're looking to advance leadership and grow more quickly in our chosen businesses, you should look for capability expansions and continued growth over time and this is never a quarter-to-quarter thing, but growth in sales, margins and earnings. Clearly, the milestone in Japan is resumption of sales in POJ. But on the final priority around the expense work, it's all about improving OpEx ratio. We've already seen a 100 bps improvement in that OpEx ratio. We've given you that we're going to see another 150 bps.

So you need to look for milestones as we go. We're highly confident, though, that the actions we're taking will turn into those results over this multiyear journey.

Yes. Yanela please.

Yes. Sorry, a couple of more things. So obviously, this OpEx, the 150 basis points will happen over the next 3 years, as I've mentioned. And I said earlier, we're not setting a new earnings growth target for 2 reasons. It will take time to execute the strategy and we need to resume sales in POJ. But I would remind you that we're still managing to the other financial targets that we have out there through 2027. So ROE, OpEx of 8.5% to 10.5% we just spoke about further improvement and free cash flow conversion as well.

Our next question is coming from Wilma Burdis from Raymond James.

How would you describe the strategy is different from your prior strategies? And I guess what gives you confidence that you can execute on it?

So Wilma, thanks. It's Andy. I would tell you that we think it's -- there are significant differences between the stated strategy and execution of the past and the way that my leadership team has made decisions and is operating today. And I would summarize it really in two words: focus and execution.

The most important differences candidly, are showing up in what we choose not to do. In the past, the organization sought to continue expanding our footprint at Prudential across a wide range of markets. What you're seeing us do today is we're making the difficult decisions to narrow our focus to concentrate our capital, our talent, our investment where we know that we can scale and win. I would not underestimate the degree of capital investment dollars and management attention that, that wider range of markets took. This is a major shift.

Second difference is in the quality and consistency of our execution. And this is directly tied to our talent and our culture. We have raised the bar on capital deployment, and we're managing it much more top down. We've changed our performance and compensation systems to drive a higher degree of accountability in the organization. And I would point to the evidence of already producing greater consistency in our quarterly results. We've met or exceeded 5 of the last 6 quarters. That's not victory, but it's showing the progression of more consistent delivery.

So it's about focus and it's about execution. And the bottom line is we see it quite differently and that we will produce a simpler company with stronger results for the shareholder.

And then I guess this is a broader question, but you beat pretty significantly in the last couple of quarters. I realize there's probably a lot moving with POJ, but if there's anything specific you can point us to that helps with whether it's just run rate earnings, especially in international, would appreciate it.

I'm sorry, Wilma, we had trouble hearing that. Could you repeat that?

Yes, you beat the last couple of quarters. I think part of it is just POJ has a lot of moving pieces, but can you just help us think in a more simple way about the EPS and the international earnings going forward?

Yes. So I mean, a couple of thoughts. On international, yes, I think in terms of the beat, I think generally, there was an assumption that the impact was a run rate equally by quarter. And as I've mentioned, it's not linear and it will grow. So we still believe it's $525 million to $575 million, but that -- how that's been modeled may vary. We had a significant beat due to earnings growth and business growth this quarter year-over-year.

So the earnings in international are based on business growth and the tailwind of interest rates. Retirement had growth in earnings due to business growth, Individual Life as well. So some of it is business growth and the fact that we're executing on our strategy as well. There were other -- also some onetime items. We talked about the corporate and other had some onetime items. We adjusted the loss estimate for that. So that's the driver as well. But I think it's a business growth and fundamentals, a difference in how the international impacts have been modeled and then third, some onetime items.

Yes. And I would add a benefit of having a simpler company is being able to more clearly show in the results, the fundamental sales growth and revenue growth and expense reduction. We've been -- candidly, I think, over the last 10 years, I'll go for a broader period, guilty as charged of we're a big complex company. And sometimes the really important fundamental growth stories and fundamental execution gets lost with that complexity. So we clearly didn't make the decisions because of that, but it will be a benefit as we go forward of having a simpler, more focused company.

And sorry, one more thing that I missed. PGIM had significant growth as well year-over-year, and that's just investment performance, market performance and asset management fees for the business.

Our next question is coming from Pablo Singzon from JPMorgan.

So first question is a follow-up to Wilma's question. So as I think back to the strategy several years ago, right, when you're trying to remix the liability profile, I think the disposals at the time were mostly capital-intensive insurance businesses, right? And I think one criticism that you received was that you were selling low multiple businesses to potentially acquire more expensive businesses and perhaps because of that capital was better used just to buy back stock, right?

So the question is, how are you thinking about that calculus now, right? It seems like you're expecting good value for your exits, but it seems to me to -- if I were to guess that some of the assets you're looking to acquire might be more expensive than your own equity?

Yes. Pablo, I think we said this will be a thoughtful intentional capital rotation. We do expect well north of $3 billion from the exits, and we do expect to grow businesses like PGIM. I would remind you that the PGIM growth is not just due to inorganic. There is a component that is organic. PGIM is a higher growth business than our other businesses. That will accelerate as we build out PGIM's capabilities in private assets as we highlighted in our remarks. So that's part of it.

And as I mentioned, to the extent that we're looking at acquiring higher multiple businesses, the bar will be high with regards to dilution and how those economics pencil out at the end of the day.

Yes. And what I would add to that, Pablo, is -- and that bar is directly tied to how strategic is the acquisition. It has to be very, very strategic and synergistic and really produce the right outcomes for the shareholder over the long term. So that's how you should think about the bar.

And then the second question, maybe a simpler one. Are you able to size the incremental investments or costs you need to basically put up to generate the higher expense savings you're targeting by '27?

Yes, Pablo, good question. So we are in the process of doing that now, and the goal is to have a view of that by the end of the year. So we don't -- we're not quoting a number today, but we will have that by the end of the year.

Next question is coming from Mike Ward from UBS.

I was wondering if you guys could dig in specifically a little bit more into the capabilities or kind of types of assets in asset management or for PGIM that you might be particularly interested in?

Yes, Mike, thanks for the question. Let me start with, obviously, we already have a significantly scaled platform in PGIM. We're $1.5 trillion asset manager, and we've been a market leader, particularly in public fixed income, real estate and private placements for decades. But clearly, there are high-growth areas that we've -- as we've described, we're either underrepresented or we're not in those asset classes today at all.

So as we think about what we're going to lean into, obviously, job one comes on building on our established strength in credit. That is the most important area writ large because that obviously has very synergistic characteristics with growing and strengthening our insurance businesses. But we also mentioned there are other areas like infrastructure equity, like private equity from an asset class perspective.

We also intend to globalize the business. And when we talk about that, you should be thinking about fundraising and clients and where we manage from and for as the globalization of the business. Today, only 1/4 of our business really coming from outside of the U.S. We think that's a really large opportunity. And then if you look industry-wide, retail is and continues to be one of the higher growth areas. That's why we focus so much on our organically growing out our ETF platform. But as we look at acquisitions, we're looking at both, I'll call them, bolt-ons that add single capabilities to more holistic type things, but anything more holistic has to hit multiple buckets and work well for the business and the shareholder long term.

And then on Japan, I'm just curious for you guys, like as you've kind of dealt with the challenges there and learned more through the situation, I'm just -- can you expand on anything that gives you confidence in your ability to resume and continue growth and new business production in the same way that you historically had there?

Yes. So I'll take that. First and foremost, job one is executing on getting back to selling in POJ. We know what we need to do to resume sales on November 6. We know the 4 major areas of work that we outlined in our remarks. And we've been very intentionally focused in controlling what we can control so that we get to the place that we can resume sales.

Your question is longer term, what gives us confidence in Japan. I would tell you that, that is a market that we've been in for 40 years. We have a leading franchise, and we're seeing clear evidence. When you look at the business and you look at the fact that POJ sales, generally, I'll give an average number. It used to be about 40% of the overall sales of Japan. And we have a significant operation like that not selling. The fact that we're producing in the other areas of the business, the fact that the earnings are so resilient shows how strong and how resilient that franchise is.

So we feel we are very well positioned from the broad product portfolio that we have, I recognize all the work that we've done to expand our offerings in retirement, all the work that we've done to expand our yen-based offerings and how well those products are currently selling in the other channels. We've continued to work and expand our distribution. And we see clear evidence that the society wants us in the market and wants us to succeed in the market.

So we see the evidence that we need that this is a great market, first and foremost, large addressable with great tailwinds, and we have all the right capabilities, and we're going to come through this even stronger and show very good growth.

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 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, 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.