Prudential Financial, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing; unaudited fourth-quarter results are noted below. Amounts are in U.S. dollars unless indicated otherwise.
Business context
Prudential is a global insurer and investment manager operating across the United States, Asia, Europe and Latin America. Its businesses include PGIM, U.S. retirement and group insurance, individual annuities and life insurance, Assurance IQ, international businesses, and the Closed Block. Assets under management were $1.721 trillion at year-end, including $1.499 trillion managed by PGIM.
Financial results and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $57.0 billion | $64.8 billion |
| Net income (loss) attributable to Prudential | $(374) million | $4.186 billion |
| Diluted earnings per share | $(1.00) | $10.11 |
| Cash provided by operating activities | $8.368 billion | $19.625 billion |
| Total assets | $940.7 billion | $896.6 billion |
| Total equity | $68.2 billion | $63.7 billion |
| Short- and long-term debt | $20.6 billion | $20.6 billion |
Revenue fell about 12% year over year. Benefits and expenses declined to $57.4 billion from $59.7 billion, but the company reported a pretax loss of $323 million versus pretax income of $5.085 billion. The result included $3.887 billion of net realized investment losses, versus $459 million of losses in 2019, and a loss in divested and run-off businesses compared with a prior-year gain. Net investment income was $17.410 billion, down slightly from $17.585 billion. Total general-account investment yield was 3.54%, compared with 3.81% in 2019.
Management’s non-GAAP segment measure, adjusted operating income before tax, was $5.144 billion, down from $5.851 billion. PGIM rose to $1.262 billion from $998 million; Retirement to $1.436 billion from $1.301 billion; Group Insurance fell to a $16 million loss from $285 million income; Individual Annuities declined to $1.470 billion from $1.843 billion; Individual Life fell to a $48 million loss from $87 million income; and International Businesses declined to $2.952 billion from $3.112 billion. Assurance IQ recorded an $88 million adjusted operating loss in its first full reporting year.
Operating cash flow was $8.368 billion; investing cash flow was a $16.210 billion outflow and financing cash flow was a $4.883 billion inflow. Cash, cash equivalents and restricted cash ended the year at $13.855 billion, down $2.619 billion. Prudential Financial, the parent holding company, reported $5.560 billion of highly liquid assets excluding net intercompany liquidity-account borrowings. Year-end balance-sheet debt was $925 million short-term and $19.718 billion long-term. The company reported $50.2 billion of capital under its defined measure, which includes equity excluding AOCI and capital debt.
Unaudited fourth-quarter results were revenue of $16.029 billion and net income attributable to Prudential of $819 million, or $2.04 per diluted share. The filing does not provide a standalone fourth-quarter cash-flow figure in the supplied text.
Material changes and notable items
- The annual net-income decline reflected a $2.801 billion unfavorable year-over-year change in realized investment results (excluding specified businesses and variable-annuity hedging effects), a $1.444 billion unfavorable change in divested and run-off results, and $707 million lower segment adjusted operating income, partly offset by $1.028 billion lower tax expense.
- COVID-19 adversely affected underwriting results, including mortality claims in Group Insurance and Individual Life, and increased expenses by about $150 million; reduced travel and other costs provided about $110 million of offsets. The company estimated an approximately $85 million net adverse underwriting impact for each additional 100,000 U.S. fatalities, subject to significant uncertainties.
- Prudential completed the sale of its Korean insurance business for approximately $1.9 billion and recorded an approximately $800 million after-tax loss. It agreed to sell its Taiwan business for about $195 million cash plus contingent consideration and recorded an approximately $350 million after-tax charge through year-end; closing was expected in 2021, subject to approvals.
- The company suspended common-stock repurchases after buying $500 million in the first quarter. It paid $4.40 per share in declared dividends for 2020. In February 2021, the board authorized up to $1.5 billion in 2021 repurchases and declared a $1.15-per-share dividend.
Outlook, risks and contingencies
Management expects the business mix to support appropriate returns in 2021 despite low interest rates, fee pressure and pandemic-related disruption. It plans to reallocate capital toward higher-growth businesses and reduce the earnings contribution of Individual Annuities. A multiyear efficiency program had incurred cumulative implementation costs of approximately $594 million; Prudential reported about $400 million of achieved run-rate savings and expects savings to reach approximately $750 million by the end of 2023. This is management’s outlook, not a guarantee.
Low rates are expected to pressure reinvestment income: under specified rate assumptions, management estimated 2021 reinvestment-related net investment income headwinds of $120–$160 million for U.S. operations and $40–$80 million for Japanese operations. The company also cited potential credit deterioration, market and foreign-exchange volatility, variable-annuity guarantees and hedging, mortality and policyholder behavior, liquidity and collateral demands, ratings changes, regulation, cybersecurity, and execution and integration risks. The first quantitative Assurance IQ goodwill test found estimated fair value only 10% above carrying value, making performance and valuation assumptions important to monitor.
Pending litigation and regulatory outcomes are uncertain. Management estimated that reasonably possible losses in excess of accruals for matters where an estimate could be made were less than $250 million at year-end; this is not an estimate of maximum exposure. The auditor issued an unqualified opinion on the financial statements and internal controls. The filing identifies valuation of guaranteed benefits, deferred acquisition costs, and Assurance IQ goodwill impairment as critical audit matters.
Investor facts to verify
- How much of the 2020 GAAP loss reflects derivative and variable-annuity accounting and other realized investment items, and how those results compare with the company’s adjusted operating measure.
- Whether COVID-19 mortality, disability claims, policyholder behavior and investment-credit conditions differ materially from management’s assumptions.
- Progress toward the $750 million cost-savings target, and whether savings exceed implementation and execution costs.
- Completion and final proceeds or loss on the Taiwan sale, and the use of proceeds from the Korean sale.
- Insurance-subsidiary statutory capital, parent liquidity, debt and any constraints on subsidiary dividends or share repurchases.