Prudential Financial, Inc. 2026 Q2 Earnings Call

Good morning, everyone, and thank you for joining us. Representing Prudential on today's call are Andrew Sullivan, Chairman and Chief Executive Officer, and Janella Frias, Chief Financial Officer. Before we begin, please note that today's call has been extended to 90 minutes. Andy and Janella 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 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. 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 compare those liabilities with an investment platform capable of sourcing and allocating capital across public and private markets. These advantages create a powerful competitive moat. Our insurance businesses generate a steady flow of liabilities, while PGIM's investment expertise, particularly in credit and real assets, enables us to deliver differentiated solutions and attractive risk-adjusted returns for our asset management clients across market cycles. We have a strong foundation in businesses and markets with favorable structural growth, and we will drive performance by leaning into our advantages. Our strategy is about building on those advantages to produce leading outcomes, exceeding our potential, anchored by four priorities designed to deliver top-quartile earnings growth, excluding the earnings from our legacy variable annuities business, increase cash flow conversion, and sustain 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. 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 pre-tax 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 four 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.

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 three 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 de-risk 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 two 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 six 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. 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 de-risking and retirement income solutions, and our capabilities, particularly in longevity and asset management, are well aligned with these needs. Turning to PGIM. PGIM's scaled, highly integrated global asset management platform, anchored by $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 a quarter 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.