Prudential(PRU) - 2025 Q4 - Annual Report

Interest Rate and Liquidity Risks - Prudential Financial is exposed to interest rate risk, which can lead to earnings compression and volatility in both earnings and capital due to asset/liability duration mismatches [172]. - Liquidity risk arises from potential shortfalls in meeting near-term obligations, driven by market, insurance, investment, and operational risks [183]. - The company has four primary sources of liquidity exposure, including derivative collateral market exposure and asset liability mismatches, which can create significant liquidity demands [185]. - Prudential Financial's exposure to liquidity risks includes unexpected cash demands from severe mortality calamities or customer withdrawals [185]. - Current market conditions, including rising interest rates and economic stagnation, could adversely affect liquidity, capital positions, and overall financial performance [221]. Foreign Exchange and Market Risks - The company faces foreign exchange risk, particularly from significant operations outside the U.S., which can adversely affect profitability and financial condition if the U.S. dollar strengthens against other currencies [177]. - Changes in foreign currency exchange rates can create volatility in U.S. dollar-equivalent earnings and equity for international operations [178]. - The company’s products, particularly variable annuities, include market-sensitive guarantees that may increase earnings volatility and affect financial position [180]. - Prudential Financial's investment portfolio is designed to maintain diversified maturities to mitigate interest rate risk, but market volatility can complicate this matching [176]. - The company may experience volatility in net income due to changes in the fair value of embedded derivatives related to reinsurance transactions [182]. Operational and Cybersecurity Risks - Operational risks may lead to liabilities that could adversely impact the company's financial condition and liquidity [186]. - The company faces significant operational risks, including business continuation risks due to potential disruptions in operations, systems, or data from various sources such as internal fraud and cyber-attacks [187]. - Cybersecurity threats have increased, with a notable incident disclosed in February 2024, highlighting vulnerabilities in both internal systems and those of third parties [188]. - Cyber-attacks have resulted in the compromise of sensitive information, leading to reputational damage and potential financial losses [199]. - The company may incur significant costs related to cyber incidents, including response, recovery, and compliance efforts, which could adversely affect financial condition [201]. Regulatory and Legal Risks - Regulatory scrutiny regarding the use of personal and confidential information is increasing, with new laws and regulations that may affect compliance and operational costs [200]. - The company is exposed to legal and regulatory risks due to potential non-compliance with laws governing the sale of financial products, which could result in reputational harm and financial penalties [205]. - Regulatory investigations into sales practices have led to enforcement actions, which could impose penalties and corrective action plans affecting product marketing [204]. - The company faces potential legal challenges regarding the classification of independent contractors, which could adversely affect its business in the future [206]. - Regulatory changes, particularly in emerging markets, may limit the role of private companies and adversely impact the company's business model [213]. Strategic and Competitive Risks - The company is considering various strategic transactions, including acquisitions and joint ventures, which could significantly alter its business profile and strategy [214]. - Strategic risks include the impact of interest rate changes on new product development and sales of interest-sensitive products, which could affect long-term growth [212]. - The reliance on third-party distributors for product sales introduces competitive and regulatory risks, as these distributors may not exclusively promote the company's products [203]. - A significant portion of sales in Japan is derived from key relationships with major banks and a single association, making the company vulnerable to disruptions in these partnerships [207]. - The company is exposed to model risk, which could lead to financial loss or reputational damage due to errors in financial models used for projections and evaluations [211]. Technological and Market Changes - The development and adoption of AI technologies present both opportunities and risks, including potential misuse and operational challenges that could impact efficiency and profitability [194]. - Rapid technological changes and evolving customer preferences may disrupt the company's existing business model and require redesigning products [219]. - The company may face challenges in meeting environmental, social, and governance (ESG) standards, which could lead to reputational harm and regulatory scrutiny [222].