Prudential Financial, Inc. (NYSE:PRU) Q4 2024 Earnings Conference Call February 5, 2025 11:00 AM ET

Company Participants

Bob McLaughlin - Vice President, Investor Relations
Charlie Lowrey - Chairman & Chief Executive Officer
Rob Falzon - Vice Chairman
Yanela Frias - Chief Financial Officer
Andy Sullivan - Head, International Businesses & PGIM
Caroline Feeney - Head, US Businesses

Conference Call Participants

Suneet Kamath - Jefferies
Tom Gallagher - Evercore ISI
Ryan Krueger - KBW
Elyse Greenspan - Wells Fargo
Wes Carmichael - Autonomous Research
John Barnidge - Piper Sandler
Jack Matten - BMO
Alex Scott - Barclays
Wilma Burdis - Raymond James

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Prudential's quarterly earnings conference call. At this time, all participants have been placed in a listen-only mode. Later, we will conduct a question and answer session.

Instructions will be given at that time. Press star zero, and an operator will assist you offline. As a reminder, today's call is being recorded.

I would now turn the call over to Mr. . Bob McLaughlin. Please go ahead.

Bob McLaughlin

Good morning, and thank you for joining our call. Representing Prudential Financial, Inc. on today's call are Charlie Lowrey, chairman and CEO, Rob Falzon, vice chairman, Andy Sullivan, head of international businesses and PGIM, our global investment manager, Caroline Feeney, head of US businesses, Yanela Frias, chief financial officer, and Robert Axel, controller and principal accounting officer. We will start with prepared comments by Charlie, Rob, and Yanela and then we will take 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 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 and the quarterly financial supplement, both of which can be found on our website at investors. prudential. com.

And now, I'll turn it over to Charlie.

Charlie Lowrey

Thank you, Bob, and thanks to all of you for joining us today. First, I'd like to comment on the leadership changes we announced in the fourth quarter. The board appointed Andy Sullivan as Prudential's next CEO effective March 31st.

He is an exceptional leader, and the board and I have every confidence he is the right person to take Prudential into the future. Also at the end of March, Caroline Feeney will take on an expanded role overseeing our global retirement and insurance businesses. Both Andy and Caroline have been highly engaged in setting and executing our strategy, so we expect a smooth transition.

And Jacques Chapuis will be joining as CEO of PGIM, our global asset management business. Both Caroline and Jacques will report directly to Andy. This is an exciting and significant time for Prudential.

And the right time to elevate the next generation of leadership as we mark our 150th anniversary. Finally, I'd also note that just last week, we were recognized as the number one company among our life and health insurance peers for 2024 on Fortune's List of the World's Most Admired Companies. Now let's turn to our results.

In 2024, we made significant progress on our path to becoming a higher growth, more capital-efficient company. We maintained our disciplined approach to capital deployment while also continuing to invest in our businesses and returned excess capital to shareholders. Our strategic progress and performance are backed by our financial strength.

Turning to slide three, our results for the full year reflect continued momentum as we further diversified our product suite and expanded our distribution capabilities to address the investment, insurance, and retirement needs of our customers and clients around the world. Earnings for the fourth quarter were lower than we anticipated but do not reflect the earnings power of our businesses. This was largely due to adverse underwriting experience primarily driven by an elevated level of large individual life claims.

Large claim activity will vary on a quarterly basis, but our fundamentals remain strong. And the actions we are taking across our businesses create a solid foundation for future growth. We reported strong full-year sales across our retirement and insurance businesses as well as strong investment performance and significant positive net flows. PGIM reported robust affiliated and third-party flows for the full year 2024, benefiting from our broad capabilities across fixed income, equities, and our diversified private alternatives platform, and fueled by the growing global retirement opportunity and the growth of our retirement and insurance businesses.

Our retirement strategies business continues to address the growing needs of the market as a leader in pension risk transfer and individual annuities. On the institutional side, our pension risk transfer business had the highest annual level of sales for any single carrier since 2012. On the individual side, we had our ninth consecutive quarter of sales growth.

We also continue to diversify our product and expand our distribution networks in group insurance and individual life, which resulted in continued sales momentum. And in our international businesses, we continue to diversify our product portfolio in Japan, including retirement solutions, and we expanded our distribution channels in Brazil. In addition to the momentum we are seeing across our businesses, during 2024, we successfully executed on a number of transactions that enhanced our capital flexibility, improved the quality of our earnings, and shifted our business mix.

We completed two guaranteed universal life reinsurance transactions, which reduced our cumulative exposure to this product by 60%. And just last month, we announced our second Prismic transaction to insure a $7 billion block of Japanese whole life policies, adding further scale to the Prismic platform. Turning to slide four, our continued investments in our businesses are supported by our disciplined approach to capital deployment, which included returning nearly $3 billion to shareholders in 2024.

In addition, the board has authorized share repurchases of up to $1 billion in 2025 and increased the common stock dividend for the 17th consecutive year. Turning to slide five, our strategic progress is supported by our robust risk and capital framework. We maintained a AA rating, which reflects a healthy capital position including holding more than $4 billion in highly liquid assets.

We also maintained a well-diversified high-quality investment portfolio and a disciplined approach to asset liability management. We are operating from a position of strength and have entered 2025 with continued confidence in our strategy, our capabilities, and our path to deliver long-term sustainable value for all our stakeholders. Before I turn the call over to Rob, I want to acknowledge the extraordinary partnership we have shared over these past six years.

Rob is retiring from Prudential in July, culminating a remarkable 42-year career with the firm, in which he has made innumerable and material contributions to our continued success and future growth. And with that, I'll turn it over to Rob.

Rob Falzon

Thank you, Charlie. It's been a privilege. I'll provide an overview of our financial results and business performance for our PGIM, U.S., and International businesses. I'll begin on slide six with our financial results.

Our pretax adjusted operating income was $1.4% billion or $2.96% per share for the fourth quarter of 2024, and $5.9% billion or $12.62% per share for the full year, up 6% from 2023. This reflects the execution of our strategy to grow our market-leading businesses and was driven by higher fee and spread income due to continued strong sales and flows as well as the benefit of higher interest rates in equity markets, net of increased expenses to support the growth of our businesses. Our GAAP net loss for the quarter was $57 million.

This was primarily due to interest rate-driven realized losses on the investment portfolio that will be transferred to Prismic in connection with our recently announced reinsurance transaction, as well as some modest repositioning of our investment portfolio in the quarter. 2024 adjusted operating return on equity of 13.1% improved 70 basis points from 2023. This reflects the strength of our businesses and the benefits from the deliberate actions we have taken to pivot to more capital-efficient and higher growth products.

Turning to the quarterly operating results from our businesses compared to the year-ago quarter, PGIM, our Global Investment Manager, had higher asset management fees driven by strong net flows, market appreciation, favorable investment performance, and increasing contributions from the DeerPath Capital acquisition and higher other related revenues driven by higher incentive fees. This was partially offset by higher expenses to support business growth. Results of our U.S. businesses reflected higher expenses related to the one-time transaction impacts associated with the closing of both universal life reinsurance transactions and the consolidation of our captive financing arrangements, less favorable underwriting results driven by mortality experience and true-ups, and lower net fee income.

Spread income primarily driven by business growth. Our international businesses had less favorable underwriting results, primarily reflected elevated U.S. dollar product surrenders with the continued weakness in the yen and higher expenses to support business growth. These were partially offset by increased spread income due to higher yields from favorable market performance reinvestment of the portfolio.

Turning to slide seven, PGIM, our global investment manager, has diversified capabilities in both public and private asset classes across fixed income, equities, and alternatives. PGIM's investment performance remained strong with 78% and 85% of assets under management outperforming their benchmarks over the last five and ten-year periods respectively. PGIM's assets under management increased by 6% to $1.4% trillion from year-end 2023, driven by market appreciation, net flows, and strong investment performance.

Total net flows in the quarter of $8.6% billion included affiliated net flows of $8.9% billion driven by a large annuities mandate partially offset by $300 million of third-party net outflows. Total net flows for the full year 2024 were $38 billion including $24 billion in affiliated flows and $14 billion from third-party clients. These inflows reflect the competitive positioning of both PGIM and our retirement business in the wake of large, albeit episodic, institutional pension plan activity.

As the investment engine of Prudential, PGIM's capabilities support the success and growth of our U.S. and international businesses in retirement, asset management, and insurance. PGIM's asset origination capabilities, investment management expertise, and access to institutional and other sources of private capital, including through our sponsored reinsurer Prismic, are a competitive advantage, helping our businesses bring enhanced solutions and create more value for our customers. Our retirement and insurance businesses, in turn, provide a source of growth for PGIM through affiliated net flows as well as unique access to insurance liabilities.

In addition, our diversified PGIM private alternatives platform, which has assets under management of nearly $250 billion, experienced 37% growth in private credit origination activity in 2024 compared to the prior year. This was driven by our direct lending businesses, including our acquisition of DeerPath Capital and the organic build-out of our private asset-backed financing business. Turning to slide eight, our U.S. businesses produced diversified sources of earnings from fees, net investment spread, and underwriting income, and benefit from a complementary mix of longevity and mortality businesses.

We continue to focus on growing our market-leading businesses by expanding our addressable market with new financial solutions delivered to a broader distribution footprint, leveraging capabilities across Prudential, and enhancing those capabilities to improve the experience of our customers and distribution partners while driving operating efficiencies. Retirement strategies generated strong sales at $50 billion in 2024 across its institutional and individual lines of business. Contributed to $36 billion of sales for the year, up 27% from the prior year.

U.S. funded pension risk transfer transactions for the year were over $16 billion, the highest annual level for any single carrier since we set the record in 2012. Additionally, longevity risk transfer sales totaled over $10 billion this year. Individual Retirement posted $3.6% billion in sales in the fourth quarter, its best quarter of sales in over a decade.

2024 sales were over $14 billion, up 84% from the prior year. Our product pivots and innovation have resulted in continued strong sales of our registered indexed linked annuities and fixed annuity product sales have doubled from the prior year. Additionally, we continue to reduce market sensitivity by running off our legacy variable annuities.

Group insurance sales totaled $550 million in 2024, up 4% from the prior year, driven by growth in supplemental health. We are executing our strategy of both product and client segmentation diversification, while leveraging technology to increase operating efficiency and enhance the customer experience. These actions to improve profitability and performance resulted in a benefits ratio of which is at the low end of our target range.

In individual life, sales reached a quarterly record high of $326 million in the fourth quarter and for the full year increased to 23% from 2023. These increases include the benefit from the strength and breadth of our distribution capabilities, the expansion of our product offerings, including our pivot towards more capital-efficient products, and from an increased level of estate planning sales concentrated in the fourth quarter. Turning to slide nine, 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.

In Japan, we are focused on providing high-quality service and expanding our distribution of product offerings. Our needs-based selling approach and protection and retirement product focus continue to provide important value to our customers as we expand our product offerings to meet their evolving needs. In emerging markets, we are focused on creating a selective portfolio of businesses in regions where customer needs are growing, where there are compelling opportunities to build market-leading businesses, and where the Prudential enterprise can add value.

Sales in our international businesses for 2024 were up 6% compared to the prior year. Sales in Japan are benefiting from recent retirement and savings product launches, which are gaining traction with customers, resulting in a 14% increase in sales of these products compared to the full year 2023. In addition, emerging market sales increased 12% versus the prior year, driven by growth in Brazil.

We continue to expand third-party distribution and benefit from the strong performance of our Life planners. 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. We continue to focus on investing in growth businesses and markets, delivering industry-leading customer and client experiences, and creating the next generation of financial solutions to serve the diverse needs of a broad range of customers.

And with that, I'll now hand it over to Yanela.

Yanela Frias

Thank you, Rob. I will begin on slide ten. Our significant capital position and strong regulatory capital ratios can and our ability to expand our market-leading businesses.

Our cash and liquid assets were $4.6% billion, which is above our minimum liquidity target of $3 billion, and we have substantial off-balance sheet resources. Now turning to slide eleven. As I mentioned on last quarter's call, in order to provide greater insights into our financial outlook and align with our longer-term nature of our business, we are introducing new financial targets through 2027.

Our significant growth in sales and flows supported by the strength of our balance sheet and our commitment to become a higher growth, more capital-efficient company position us well to achieve these targets. We expect this will lead to annual core earnings per share growth of 5% to 8%, which is based off of core adjusted operating income per share for 2024. And an adjusted return on equity of 13% to 15%.

We're also introducing an operating expense ratio for our global retirement and insurance businesses an anticipated range of 8.5% to 10.5%, which we expect will trend down over the three-year period. The momentum in our sales and flows combined with operating efficiencies and incremental buybacks are expected to contribute to our earnings growth and returns over the three-year period. But this performance may not be linear due to the near-term strain from new business and the impact of runoff blocks.

In addition, we will remain thoughtful in our capital deployment, preserving our financial strength and flexibility by targeting to maintain highly liquid assets of over $3 billion at the holding company while investing in our businesses for long-term sustainable, profitable growth. We expect to deploy 30% to 40% of capital generated towards organic growth as we see significant opportunities in our chosen markets. After consideration of organic growth, this yields a free cash flow ratio of approximately 65% of net income, with 35% to 45% expected to be deployed to attractive and increasing dividends.

This is a healthy return to shareholders that represent an annual payout of approximately 6% of adjusted book value as of year-end 2024. Further, we expect to return 20% to 30% towards share repurchase and the board authorized $1 billion of repurchases in 2025. Finally, we continue to proactively explore opportunities to invest in inorganic growth while maintaining a disciplined approach to capital deployment in the current environment.

Turning to slide twelve. Our enterprise metrics will be supported by our business segment growth targets. We expect low double-digit earnings growth in PGIM, backed by strong asset management fee growth of 6% to 9%, driven by net flows and market appreciation and an adjusted operating margin of 25% to 30%.

In the U.S. businesses, we expect mid-single-digit earnings growth, supported by account value and sales growth across businesses. In retirement strategies, our account value growth assumes annual growth sales of $35 billion to $45 billion will be partially offset by annual net runoff of our pension and longevity risk transfer products of $8 billion to $10 billion and legacy variable annuities of $12 billion to $16 billion. In group insurance, we expect premium growth of 2% to 4% and in individual life, we expect sales to be flat to 5% growth. And lastly, in our international businesses, we expect low to mid-single-digit earnings growth driven by sales growth of 4% to 6% as we continue to diversify our product mix.

We also have included our key economic assumptions and other earnings considerations specific to 2025 in the appendix. We are confident in our ability to deliver on these financial objectives as we drive incremental organic growth in our businesses while continuing to maintain our disciplined capital deployment approach. So turning to slide thirteen and in summary, continue to become a higher growth, more capital-efficient company.

We will maintain our disciplined approach to capital deployment and our growth is supported by the strength of our balance sheet. And with that, we will be happy to take your questions.

Operator

Thank you. We'll now be conducting a question and answer session. Our first question today is coming from Suneet Kamath from Jefferies.

Your line is now live.

Suneet Kamath

Great. Thanks. I want to start on the annuity outlook. I see the 20% to 25% account value growth.

Caroline, I was just wondering if you could help us maybe translate that into sales growth expectations for the year. And the reason I ask is, yeah, I think LIMRA is out saying sales will probably be down for the industry. And I just want to get a sense of how you're thinking about Prudential's outlook.

Caroline Feeney

Yeah. Terrific, Suneet. We'll certainly take your question.

So clearly, it was another extremely strong year for annuities, with over $425 billion in total industry sales last year. And I think what LIMRA might be referencing in terms of some of their outlook is this past quarter the industry did see some softening of traditional fixed annuity sales, which is to be expected with rate decreases. So what we're seeing is a shift from MYGAs, which are more sensitive to rates, to index products such as RILAs.

But Suneet, what I would point out is that RILA sales were up over 35% across the industry last year. So in our own business, we continue to see positive results. In the fourth quarter, we delivered roughly $3.5% billion in sales, which was our ninth consecutive quarter of sales growth.

So from an outlook perspective, Suneet, as we've discussed previously, we continue to see those compelling tailwinds in the marketplace driven by aging demographics, plus a high volume of money in motion, and that includes an estimated $70 billion in fixed annuities that's coming due, as well as over $7 trillion of money market fund balances. So all of this just underscores the importance of our diversified product portfolio. As you know, Suneet, this has been a key focus for us over the past few years.

And as a result, we now have the broadest individual product portfolio in our history. And we actually have five different products with over a billion in annual sales. So overall, we believe the tailwinds will continue to support strong sales.

And certainly, we are well-positioned to capture demand thanks to the strength of our distribution and our well-established brand.

Suneet Kamath

Got it. And then I just wanted to pivot to Prismic. Obviously, we saw the internal reinsurance deal.

You know, presumably, that's going to consume some of their time and capital. I guess the question is, how quickly do you think Prismic could sort of pivot to maybe some third-party deals, particularly in Japan. Is it going to take some time for them to integrate this transaction or any thoughts around that would be helpful.

Rob Falzon

Suneet, it's Rob. I'll address that. So yeah, we closed the second transaction as we, I think, had indicated, Japan-based.

A number of important reasons for doing that. But more broadly, as we think about the Japan opportunity, including the third-party opportunity in Japan, we think it's a significant growth opportunity for Prismic, both from our own book and third-party reinsurance. Japan's the third-largest life market in the world, and it's been relatively underserved by third-party reinsurers.

So there's an opportunity there, and that opportunity is sort of accelerating by virtue of the introduction of the ESR regime. And its impact on legacy books that have been sold not just by us, but across the industry. ESR has a non-economic treatment of long-duration foreign currency-denominated products.

That's in the Japan marketplace, but the industry has sold a lot of that. And continues to sell it because of the demand that our customers have for the product. And so addressing those books and those flows of sales are going to be something that the industry has to grapple with and we think we're well-positioned to do so.

Our brand, our local presence, and the market intelligence that we've got create a competitive advantage. Prismic, as we've indicated in the last quarter, we've stood up a dedicated licensed team in Japan. And then by virtue of, as I indicated upfront, by closing on our own whole life book, it's given us the experience and confidence to execute third-party blocks and further establishes our credibility in the marketplace.

But I would emphasize more generally, we're optimistic that we can grow Prismic through the multiple levers that we've got, Suneet. So that includes ongoing balance sheet optimization both in the U.S. and Japan. It includes importantly flow, so new sales solutions across our businesses.

And third-party blocks, particularly in Japan.

Suneet Kamath

Got it. Okay. Thanks.

Operator

Thank you. Next question today is coming from Tom Gallagher from Evercore ISI. Your line is now live.

Tom Gallagher

Good morning. A few questions on free cash flow. So the 65% free cash flow conversion, why is 30% to 40% of that needed for growth capital when most of the businesses that I would think of requiring capital are growing sub 5%.

Yanela Frias

Hey, Tom. It's Yanela. So, let me take that.

So we continue to see strong opportunities in our chosen markets and we're leaning into those opportunities as evidenced by our strong sales and flows really across our businesses. So as an example, on a full-year basis, we had a 39% increase in sales for retirement strategies, a 23% increase in sales for individual life, and these strong sales are contributing to earnings. But we do face near-term headwinds due to a strain from new business, specifically distribution costs that are not deferred.

And the impact of runoff. So, you know, I would emphasize that we're investing in strong growth that is materializing in earnings, but we have near-term headwinds related to new business strain and runoff. And as these headwinds moderate, we would expect an upward trajectory in our core earnings growth.

But even with these headwinds, we have a 5% to 8% growth rate in core earnings. We are paying a healthy dividend, and we have a healthy level of buybacks.

Tom Gallagher

Gotcha. And, Yanela, just a follow-up making sure I'm understanding what the intention is here. When I'm solving for buybacks and dividends.

If I take the 75% of the 65% free cash flow conversion, that would equate to about 50% of GAAP earnings that will be returned through buybacks and dividends over the next three years. Is that the rough math. And just a related question, I think you used to use operating income.

Now you're using net income. Is there anything to read into with the change in that conversion. Thanks.

Yanela Frias

Yeah. So, I mean, if you look at our capital allocation priorities that we shared, it's so attractive in dividends are 35% to 45%, share repurchases 20% to 30%. So I think you're just adding those two when you get to the 75%.

And so in terms of the change to net income, you know, while AOI is our primary basis for assessing operating results, we do think that over the near term, GAAP net income will be a closer proxy for free cash flows. And that is because there are items that are excluded from AOI that do impact statutory capital, which is the primary driver of cash flows. So for example, realized gains and losses that arise due to normal course portfolio management activity or mark to market on hedging instruments impact both GAAP and stat.

Now, conversely, there are some components of GAAP net income that don't impact cash flows. But our free cash flow ratio is an overtime calculation, Tom. And we do anticipate that much of the non-economic volatility largely evens out over time, leaving us with net income being a good indicator of cash flows in the near term for us.

Tom Gallagher

Okay. Thank you.

Operator

Thank you. Next question is coming from Ryan Krueger from KBW. Your line is now live.

Ryan Krueger

Hey, thanks. Good morning. My first question was just on the ULSG transaction you completed in the Japan Prismic that announced between the two of them you're freeing up several hundred million dollars.

I think over $500 million but kept the buyback at $1 billion for 2025. Can you give more color on how you may use that capital over time. Are you holding it for potential opportunistic M&A, or are there any other considerations where you could use that for.

Yanela Frias

Hi, Ryan. It's Yanela. So, you know, the potential uses of the capital will be consistent with our capital allocation priorities that we detailed with our financial targets, and we'll be consistent with our essentially, our priority is in terms of how we think about capital deployment.

So we look to strike a balance between preserving financial strength and flexibility, investing in our businesses for long-term growth, and returning capital to shareholders. As part of our shareholder distribution philosophy, a core level of share repurchases will generally be sustainable. But keep in mind that that may vary with opportunities for attractive capital deployment or reductions in free cash flow in times of stress.

So we constantly monitor developments in economic and market conditions. We will follow our risk management and capital management playbooks with discipline to be prepared for opportunities and risks as well.

Ryan Krueger

Thank you. And then there was a recent lawsuit against the plan sponsor that involved the pension risk transfer transaction with Prudential. There have been some other lawsuits against other plan sponsors from other risk transfer providers that have had some negative impact, it seems, on activity.

Do you think this will have any impact on Prudential's transaction pipeline, or do you view this more as a one-off issue.

Caroline Feeney

Yeah. So, Ryan, it's Caroline, and I'll take your question. And while I won't comment on the impact on any other peer companies, I will say clearly that litigation like this threatens the ongoing health of the pension risk transfer industry.

It's particularly harmful for plan sponsors who are looking to de-risk their pension obligations and for the retiree whose pensions are protected through these transactions. So, fundamentally, companies like Prudential who are governed by the insurance regulatory system are simply better holders of these types of risks. Our industry has an extensive history of fulfilling the promises made to retirees since we here at Prudential actually pioneered this business in a transaction with the Cleveland Public Library, which was now over a hundred years ago, Ryan.

So while we're not a named party in the lawsuit, let me just reiterate that this lawsuit does not accurately represent Prudential or the quality and security of the industry. In terms of the impact going forward from a new business perspective, Ryan, we still see strong funded statuses and we see favorable market conditions. So we have every reason to believe there will continue to be an active pipeline.

And with our ability to work with plan sponsors of all different sizes, we remain confident.

Ryan Krueger

Thanks. Appreciate the response.

Operator

Thank you. Next question is coming from Elyse Greenspan from Wells Fargo. Your line is now live.

Elyse Greenspan

Hi, thanks. Good morning. I know you guys said the 5% to 8% EPS growth outlook, right, is not expected to be linear, I think was the words.

And, obviously, there could be some variation by year. But how would you think, you know, going into 2025, your expectations there relative to the 5% to 8% target.

Yanela Frias

Yeah. Hi, Elyse. It's Yanela.

So I would start by saying that we feel confident about our 5% to 8% EPS growth target off of core earnings. We see strong opportunities and tailwinds and we're executing on those opportunities as evidenced by our strong sales and flows. But as you pointed out and as I said in my opening remarks, this growth will not be linear, and we do have near-term headwinds, mainly due to strain of sales and runoff.

So the 5% to 8% is an average over the three-year period. It could be lower or higher in any given year. And, naturally, as the headwinds of some of our runoff blocks moderate, and our growth investments take hold, we would expect an upward trajectory in our core earnings over that three-year period.

Elyse Greenspan

Thanks. And then my second question is just on Prismic in Japan. You guys did announce a recent transaction.

Beyond that, you know, as we deal with the capital changes in Japan, do you guys expect to do additional transactions with Prismic there.

Rob Falzon

Elyse, it's Rob. I'll take that question. We're continuing to work on an active pipeline of multiple reinsurance transactions.

They include ongoing balance sheet optimization from our own book, both in the U.S. and Japan. We're working on flow solutions as well across our businesses, again, in the U.S. and Japan. And we are looking at third-party blocks with a focus there being really almost exclusively in Japan.

So our expectation is that yes, we'll continue to have opportunities with Prismic to address what we see as a significant market opportunity, not just in our own book, but across the industry in Japan.

Elyse Greenspan

Thank you.

Operator

Thank you. Next question is coming from Wes Carmichael from Autonomous Research. Your line is now live.

Wes Carmichael

Hey, good morning. I wanted to follow-up on Japan and maybe the progress that's being made on the ESR implementation. I think your Japanese SMR ratios are in excess of 700% today.

But could you give us any insight on your view of current capital in Japan if you had to implement ESR today.

Yanela Frias

Hi, Wes. This is Yanela. So, yeah, the JFSA's plan is to adopt the ESR for the fiscal year beginning April 1st, 2025, with the first mandatory reporting date being March 31st, 2026.

We expect upon implementation of ESR that our capital levels will continue to be above target levels that would support AA financial strength ratings. And as we said before, our intent is to start providing information about our ESR position in the summer. We have executed some transactions, affiliated reinsurance transactions to help mitigate the volatility.

And like we always do, we constantly seek to optimize our balance sheet and manage our risks in capital and reserving regimes that best match the economics of our product. So we don't anticipate a significant change in our capital position in those entities.

Andy Sullivan

Hey, Wes. It's Andy. Let me just add that in Japan, you know, we offer a broad product portfolio, including with ESR-friendly offerings.

You know, so the bottom line for us is these product capabilities, when combined with our strong underwriting, our asset liability management, and our hedging, you know, we have everything that we need to continue to profitably grow well in Japan.

Wes Carmichael

Got it. Thank you. And maybe Andy, as a follow-up, as you think about taking the reins of Prudential at the end of March, how are you thinking about your direction as a leader of the business.

Any color on where you're most focused strategically in your first few months as CEO.

Andy Sullivan

Yeah. So, Wes, thank you for the question. And let me start by saying this is an absolute honor and it's a privilege, and I couldn't be more excited about what's ahead of us.

You know, as you would expect, we have a rigorous transition plan that we're marching through, and that transition's going very well. It obviously helps that I've been a member of this executive team now for over five years. But having said that, we always have a lot of work to get done in front of us.

We absolutely intend to continue to raise the performance of the company over time, given the strong opportunities that we see in the marketplace. So, you know, what I'd say is I'm not yet in the role, so it would be premature to share additional information right now. But I look forward to sharing more with you in future calls as the team settles in.

Wes Carmichael

Got it. Thanks, Andy.

Operator

Our next question is coming from John Barnidge from Piper Sandler. Your line is now live.

John Barnidge

Good morning. Thank you for the opportunity. My question is on the free cash flow conversion and the 0% to 10% opportunistic M&A.

I know Prudential maintained its ownership in the second round of Prismic. Is that going to be the main consumer of that 0% to 10% of M&A, or does there remain interest in high-growth emerging markets international in asset management as previously expressed by the company in prior years.

Charlie Lowrey

So John, it's Charlie. I will take your question. I say thank you.

I'm excited to get a question. So that's great. You know, taking a step back for a moment, again, as always, organic growth is job number one as you heard from some of the other management.

But we're open to opportunities and opportunistic and selective M&A that accelerates our strategy and meets our financial objectives as we go forward. In the past, we've executed on many acquisitions that have significantly grown the company. And we pursued these acquisitions for a whole variety of reasons, such as expanding our capabilities, broadening our distribution, increasing scale, or adding key talent.

And as we look forward, we're going to focus on organic growth opportunities to expand our product breadth and distribution capabilities, scale our existing businesses, including through Prismic as you suggest, which provides us access to third-party capital, and we will be both strategic and selective in our M&A interest. Which remain consistent in terms of focusing on our programmatic acquisitions for PGIM or emerging markets and focusing on distribution capabilities or scale.

John Barnidge

Thank you. That's helpful. And with the pipes kind of laid with that second transaction in Prismic, are you beginning to kind of warehouse liabilities and investors for subsequent rounds so the friction is less.

Rob Falzon

John, it's Rob. We don't have a specific plan for warehousing liabilities in the way that you described it. What I would say is that we have brand quality and scale in our insurance and retirement business both in the U.S. and in Japan.

And so we both have significant back books and we have a significant volume of sales as EBITDA. And with the sales across our businesses. And so we don't have a bespoke warehouse.

Instead, what we have is a business system which is generating significant amounts of liabilities, which lend themselves to opportunities for Prismic on a go-forward basis.

John Barnidge

Thanks.

Operator

Thank you. Next question is coming from Jack Madden from BMO. Your line is now live.

Jack Madden

Hi. Good morning. Just one follow-up on the free cash flow conversion.

You mentioned the headwinds from new business strain and the impact of runoff. I guess just to clarify, are those comments related to GAAP earnings or are you referring to the cash flow conversion ratio because the business strain element of that makes sense to me, but I would have thought that blocks running off would have had a higher cash flow conversion rate since you're not incurring any new business strains. So just want to make sure I'm understanding those impacts correctly.

Yanela Frias

Yeah. Jack, it's Yanela. So, yes, I was referring to the GAAP earnings, AOI, core earnings specifically in my answer to the runoff and the new business strain.

Jack Madden

Got it. Thank you. And then just a question on the intermediate-term growth outlook within the international operations.

In your guidance for low to mid-single-digit earnings growth, I guess, is that outlook assuming that products remain to raise normalize off of the more recent kind of elevated levels. Any other drivers that you would call out as jogging an uptick in kind of your growth trajectory in those markets.

Andy Sullivan

Yeah. It's Andy. I'll take the question.

So, you know, as we look at the growth at a low to mid-single-digit earnings rate, the growth is really driven by a few things: favorable net spread results that flow from higher yields and stronger alternative investment income, stronger underwriting results as our sales momentum is continuing, and obviously a continued expense discipline. Those positive forces are going to more than counteract the near-term pressure that we're expecting to continue from the U.S. dollar product surrenders in Japan. Those, we did see in Q4 the lowest level of surrenders of any quarter in 2024.

So we think and believe over time that'll stabilize. Net-net, we expect solid growth, but we are having to overcome some of these headwinds.

Jack Madden

Thank you.

Operator

Thank you. Next question is coming from Alex Scott from Barclays. Your line is now live.

Alex Scott

Hi. I wanted to drill into the PGIM drivers of earnings growth in the low double digits that you provided. It looks like, you know, revenue is more, you know, mid-single digits.

So I just wanted to understand the margin improvement that you're expecting there. It looks to be pretty substantial. And, you know, I just wanted to understand, like, what are some of the things that are tangible that you're doing to improve the expense base.

Andy Sullivan

Thanks, Alex. It's Andy. So let me talk about our PGIM margins.

And let me just start by saying we are pleased with the progress that we've made improving the margins every quarter through 2024, ending the year with a 25.6% margin. So really good progress. That being said, because we've talked about previous quarters, overall, our margins are still depressed as a result of the higher rate environment and the impact that has on both fixed income and from the slowdown in the real estate market.

But, you know, the path for us is very clear. We expect to expand our margins towards 30% really led by three main drivers. First, an improving fixed income and real estate environment, that will drive fees, and it'll drive a normalization of flows and fundraising.

Second, we expect continued traction in our growth investments where we're seeing very real progress, particularly in our private credit work. And third, we do have a continued discipline on expenses. I know that's been a laser focus for us, and we are balancing finding efficiencies with reinvesting in growth.

So the bottom line is we do expect our margins are going to continue to expand from here, from both our intentional actions, but also from an improvement in the cycle.

Alex Scott

Got it. Okay. And then similar question on the expense ratio improvement that was part of the intermediate guide for the insurance businesses.

How do we think about calculating that and understanding the way that that will influence the bottom line results across the different segments.

Yanela Frias

Hey, Alex. This is Yanela. So, you know, the expense ratio, what I would start with is as of the full year 2024, we are already close to meeting the top end of that range.

In terms of calculating it, we share in the materials how we calculate it. Now we don't currently disclose the split between variable and operating G&A, we will start doing that to help you calculate the ratio. But I would also speak to the fact that there has been upward pressure on our G&A, but that has been really driven by variable distribution expenses resulting from our strong sales.

And these variable expenses have corresponding revenues that we generally have a positive impact on the operating expense ratio. So we do anticipate that over time, our continuous improvement approach and the investments that we're making to grow and transform our businesses will continue to contribute efficiencies which will be evident through the positive trends in the ratio over time. So that's what we expect in the ratio.

I do want to go back to Jack's question on the runoff and the cash flow, though. So, yes, while I was speaking about the runoff, I was speaking about the impact on core earnings. But runoff also does impact cash flows because that obviously, the fees that we receive on those legacy variable annuities is also going away.

Operator

Thank you. Next question is coming from Mike Ward from UBS. Your line is now live.

Mike Ward

Hey, thank you. Good morning. One question just on the life sales, pretty big jump in sales in the quarter.

Wondering, you know, what product lines that was in and if we're seeing that big growth, like, if it's estate planning, could sales could that actually open up for a little bit more earnings volatility going forward. Thanks.

Caroline Feeney

Sure. Mike, it's Caroline, and I'll take your question. So as you say, our individual life business finished the year strong.

We had record sales of over $325 million in the fourth quarter, which is an increase of 60% over the prior year quarter. For the full year, Mike, our sales were up nearly 25% versus the prior year. And most importantly, you asked about product and where we're seeing that.

We're actually achieving those sales increases across virtually every product. Our well-diversified portfolio while continuing to generate attractive returns. You also mentioned estate planning and the significant sales increase we saw this past quarter did benefit from some increase to estate planning activity.

I don't think that that brings any additional volatility to us. What I would say is I think it's quite possible that we may continue to see some of our customers continue to focus here based on a couple of macro factors that are driving this activity. Overall, Mike, we're very pleased in the growth and the quality of our Life New business.

The last point that I will note is that we are seeing a flight to quality across the industry. And we are well-positioned to continue to benefit, thanks to our established brand and our distribution strength.

Mike Ward

Great. Thank you. Thank you so much.

That's helpful. Maybe on the capital strain, Yanela, I know you clarified this, but I would have thought that there's at least some sort of capital release or release upon runoff business. I'm guessing it's sort of just the operating or the fees are a more significant component, but any clarity on that would be helpful.

Thanks.

Yanela Frias

Yeah. No. When there's runoff, there's capital release, but we are also reinvesting capital into the growth of the business and the new sales.

So, you know, when we talk about 30% to 40% of organic growth funding, that includes, you know, the piece that we're freeing up and the cash flows we're generating.

Operator

Okay. Thanks. Thank you.

Next question is coming from Wilma Burdis from Raymond James. Your line is now live.

Wilma Burdis

Hey, good morning. Could you talk about the more margins in Japan and the potential opportunities to free up some of that capital. And along the same lines, can you talk about why Prismic reinsured a more recent block of business from Japan when the legacy products are more pressured by ESR just maybe talk about the goals there.

Thanks.

Rob Falzon

Wilma, it's Rob. I'll jump in on the second part of that question first and then someone might want to jump in on the first part. With respect to the block that we selected for Prismic and treatment under ESR, what I would note is that it was, again, a longer duration dollar-denominated product.

And so under ESR, that is in fact the type of product where we have significant margins, but those margins aren't necessarily reflected well in the, you know, from an economic standpoint under ESR. And so it actually presented itself as a good test case block for us given that our view is across the industry that type of product, meaning dollar-denominated longer duration, is the area where people where other players in the marketplace will be feeling some strain under ESR. And therefore a good opportunity for us to sort of get the pipes set up, demonstrate that we could do it, and learn from that process and create the credibility we need for third parties as well.

With respect to your first quarter on mortality margins, maybe Andy wants to jump in on that part of the question.

Andy Sullivan

Yeah. And Wilma, I'll be upfront. I didn't fully follow what you meant by question.

But what I would tell you is our morbidity experience in Japan has been within our expected ranges. And as I said earlier, what we've really been experiencing in the underwriting line is the enhanced headwinds and pressure from a surrender perspective. But that being said, we've done a lot of work to broaden out our product portfolios.

We've been very successful at enhancing our yen offerings, and that's really shown the strength in sales over the last couple of years.

Wilma Burdis

Okay. Thank you. And then just trying to put a little bit of finer point on 2025.

We expect the EPS growth to be at the lower end of the 5% to 8% EPS range or even more weighted toward the back half of that 2027 range. Thanks.

Yanela Frias

Yeah. Wilma, it's Yanela. So as I mentioned, it's not linear.

And, also, we have the near-term headwinds. So if you take into account near-term headwinds, then I would say, yes, 2025 being closer to the near term would have higher headwinds than the out years.

Operator

Thank you. Next question is a follow-up from Wes Carmichael from Autonomous Research. Your line is now live.

Wes Carmichael

Hey. Thanks so much for taking my follow-up. Andy, you just mentioned on surrender activity in Japan, I just wanted to touch on that for a second.

That's been impacted, I think, by the move in the yen. And in your assumptions, you're assuming a pretty meaningful strengthening of the yen dollars at 135. So, you know, I guess, can you talk about what we might see or how to expect that to play out in guidance if you don't see a pretty significant strengthening in the yen.

Andy Sullivan

Yeah. Wes. Let me take that in a couple parts.

So first, let me take the guidance around the assumption of the yen going to 135. So that our yen assumption is really based on the forward curve. And as we sit here today and look at that, that sets in and around 135.

So the market believes the yen will appreciate based on both economic growth in Japan and the interest rate increases in Japan. You know. But I would remind you, you know, to no matter which way these yen rates go, we've been intentionally diversifying the portfolio, as I just said.

And our yen sales in Japan as a percent of the total are up 10% year over year to 35%. So we do expect these surrender headwinds to lessen as we look forward and, again, to appreciate, given the environment. But no matter which way those go, we have a broad set of offerings across yen and US dollar, and we know that demand for our products is going to stay strong.

Wes Carmichael

Oh, thank you. That's really helpful. And I guess my last follow-up on individual life underwriting, you know, was a little bit worse in the quarter.

But if I look back over the past couple of years, it's been a pretty meaningful headwind as you call it out in your slides. So I realize there's some seasonality and you guys have done a couple transactions, but can you give us any help on, you know, how you're expecting to kind of get that back to headline profitability.

Caroline Feeney

Yes. So I'll take your questions, Caroline. So for this past quarter, as Charlie mentioned in his opening comments, we had several large case claims from permanent policies from our legacy Hartford block.

And so this resulted in the adverse mortality, that negative underwriting that you saw, which can happen episodically. What I would say though in terms of underwriting overall more broadly, we do continue to see encouraging signs that COVID-19 has transitioned to an endemic state with more predictable seasonal fluctuations in mortality such as what we typically see during the flu season. The other thing that I would add, Wes, is clearly you have seen us continue to successfully execute on our strategy to reduce market sensitivity and increase capital flexibility with actually derisking and now reducing the size of our GUL in force by roughly 60%.

So we are very pleased with the transactions we've completed. We will continue to be very proactive in terms of managing our in-force block of business. And so that is a major priority for us.

And so our derisking transactions have gone a long way towards moving out patient.

Operator

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Mr.

. Lowrey for any further or closing comments.

Charlie Lowrey

Thank you, and thank you for joining us today. I'll close with a few final thoughts. It has been a privilege to lead Prudential Financial, Inc. as CEO for the past six years.

I'm proud of what we've accomplished to become a higher growth and more capital-efficient company that is well-positioned for long-term sustainable growth. And I offer my profound thanks to our employees around the world who care for our customers, our clients, our communities, and for each other every day. I'm confident that this will continue under the next generation of leadership and I look forward to supporting Andy and the leadership team in my role as executive chairman.

Thank you for joining our call today and for your time.

Operator

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

We thank you for your participation today.