Prudential Faces $350M Hit from Japan Sales Scandal, Voluntarily Halts New Business for 90 Days
NEWARK, N.J. – Prudential Financial (NYSE: PRU) reported robust full-year 2025 earnings but found itself grappling with a significant self-inflicted wound during its fourth-quarter earnings call. Management disclosed that employee misconduct at its Prudential of Japan (POJ) unit will force a voluntary 90-day halt to new sales and is projected to slash 2026 pre-tax adjusted operating income by $300 million to $350 million.
CEO Andy Sullivan addressed the issue head-on, stating the company is taking the matter "extremely seriously." "Doing right by our customers is a core value," Sullivan emphasized, committing to "restoring trust" in the critical Japanese market. The misconduct, uncovered in an internal investigation announced in January, involved certain employees, though specific details were not disclosed.
In consultation with Japan's Financial Services Agency (J-FSA), Prudential decided to suspend new sales through its Life Planner channel for three months. Sullivan cautioned that sales would not resume until leadership is confident in the compliance environment, leaving open the possibility of an extension beyond the initial period.
CFO Yanela Frias quantified the expected damage, breaking down the $300-$350 million 2026 impact into three parts: approximately $150-$180 million from the sales suspension itself, $100-$120 million for customer remediation, and $50 million tied to higher policy surrenders. While the 2027 impact is expected to be "considerably lower," Frias warned the scandal could push the company to the low end of its intermediate 5%-8% EPS growth target through 2027.
The scandal casts a shadow over an otherwise strong performance. Prudential reported full-year 2025 pre-tax adjusted operating income of $6.6 billion, or $14.43 per share, with an adjusted operating return on equity of approximately 15%. The company returned nearly $3 billion to shareholders via dividends and buybacks.
Fourth-quarter results were solid, with after-tax adjusted operating income of $1.2 billion, or $3.30 per share. Excluding a one-time severance charge, per-share earnings were $3.60, a 22% year-over-year increase. The U.S. businesses saw a 22% profit jump, while International operations posted modest growth. However, PGIM, the asset management arm, reported slight profit decline and $10 billion in net outflows for the quarter, reflecting industry-wide shifts from active to passive strategies.
Frias assured that Prudential's capital position remains strong, with holding company liquidity of $3.8 billion exceeding targets. The board authorized up to $1 billion in share repurchases for 2026 and raised the dividend for an 18th consecutive year. Management does not expect the Japan issue to impact broader capital deployment plans.
Analyst & Investor Commentary:
"The financial hit is substantial, but manageable given Prudential's scale. The proactive suspension and detailed remediation plan are the right steps to contain reputational damage. The key will be executing the compliance overhaul and limiting the duration of the sales halt." – Eleanor Vance, Senior Insurance Analyst at Clearwater Advisors
"This is a stark reminder of the operational risks in large, decentralized global insurers. A $350 million earnings impact from misconduct in a single sales channel is staggering. It raises serious questions about the adequacy of oversight in their international divisions beyond just Japan." – Marcus Thorne, Portfolio Manager at Horizon Capital
"So much for 'core values.' This isn't a minor compliance slip; it's a major breakdown that will cost shareholders hundreds of millions. The 90-day 'voluntary' halt feels like a pre-emptive move ahead of heavier regulatory action. Trust isn't restored with press releases and financial estimates—it's earned through years of ethical conduct, which clearly failed here." – David Chen, Founder of Integrity Investment Partners
"The underlying business performance, especially in the U.S., remains strong. The Japan issue is a significant but isolated setback. Prudential's capital strength and dividend track record provide a buffer while management fixes the problem. For long-term investors, this may present a buying opportunity once the dust settles." – Rebecca Shaw, Independent Market Strategist