Prudential Financial, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in millions of dollars unless otherwise noted. Prudential provides insurance, retirement, investment-management and related financial services. Its reporting segments include PGIM, U.S. Businesses, International Businesses, Closed Block, and Corporate and Other.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenues | $20,480 | $21,641 | $46,716 | $54,510 |
| Benefits and expenses | $20,917 | $19,835 | $47,779 | $46,517 |
| Income (loss) before tax and operating-joint-venture earnings | $(437) | $1,806 | $(1,063) | $7,993 |
| Net income (loss) attributable to Prudential | $(284) | $1,530 | $(880) | $6,516 |
| Diluted EPS | $(0.78) | $3.90 | $(2.41) | $16.32 |
| Operating cash flow | Not presented quarterly in the supplied filing text | $5,780 | $6,479 |
Cash flow: For the first nine months, investing activities used $4,262, versus $597 provided in 2021; financing activities provided $4,075, versus $3,527 used. Cash, cash equivalents and restricted cash ended the period at $20,152, compared with $12,934 at the start of the year.
Balance sheet and liquidity: Total assets were $677,756 at September 30, down from $937,582 at year-end 2021; the comparison reflects, among other items, completion of the PALAC and Full Service Retirement sales and lower investment values. Total equity was $17,180, compared with $62,608, including a shift in accumulated other comprehensive income (loss) from $21,324 to $(20,874). The company reported $20,665 of consolidated borrowings, including short- and long-term debt. Prudential Financial, the parent, held $6,071 of highly liquid assets, or $5,115 excluding net borrowings from its intercompany liquidity account. Management said liquidity and capital resources were sufficient for requirements.
Capital: Reported total capital was $51,442, including equity excluding AOCI and capital debt. PICA’s RBC ratio was 456% at December 31, 2021; Prudential of Japan and Gibraltar Life solvency margin ratios were 769% and 883%, respectively, at June 30, 2022. These are the latest dates stated in the filing for those measures.
Material changes versus prior periods
- GAAP results turned to losses: third-quarter attributable net loss was $284, versus income of $1,530; nine-month loss was $880, versus income of $6,516. Management attributed the deterioration chiefly to adverse realized investment results and lower segment adjusted operating income.
- Net realized investment losses were $514 for the quarter and $1,977 for the nine months, compared with gains of $432 and $3,146 in 2021. Rising rates and market movements affected fixed-income and derivative valuations; nine-month derivative results included $4,138 of interest-rate-derivative losses, partly offset by gains in other hedge positions.
- Other income was a loss of $1,083 for Q3 and $1,874 for the nine-month period, versus income of $500 and $2,135 in 2021. Net investment income also declined, to $3,631 for the quarter and $11,927 for nine months.
- Other comprehensive loss was $42,200 after tax for the first nine months, primarily reflecting investment valuation losses. Gross unrealized losses on available-for-sale fixed maturities without a credit-loss allowance were $39,375 at September 30, compared with $1,705 at year-end 2021; management said these were primarily attributable to higher rates, wider credit spreads and foreign exchange movements, and did not consider an earnings credit-loss adjustment warranted.
- Adjusted operating income before tax across segments fell to $1,026 for Q3 from $1,844, and to $3,464 for nine months from $5,716. This is a company-defined non-GAAP segment measure, not a substitute for GAAP income.
- PGIM assets under management fell to $1.206 trillion from $1.524 trillion at year-end 2021, mainly from market depreciation and the sales of PALAC and Full Service Retirement. Total Prudential assets under management were $1.350 trillion.
Outlook, management commentary, risks and unusual items
- Market environment: Management said geopolitical risk, rapidly rising interest rates and equity-market declines adversely affected liquidity, capital, cash flows and results. The company may take actions to preserve liquidity and capital, including using off-balance-sheet resources or suspending share repurchases. No formal company-wide earnings guidance is provided in the supplied filing text.
- Interest rates and markets: Higher rates may support reinvestment yields over time, but also affect asset values, reserves, policyholder behavior, fee income, derivative collateral and hedging costs. Prudential cited material collateral demands: its Individual Retirement Strategies hedging programs were in a net collateral-posting position of $8.5 billion at September 30, versus $5.5 billion at year-end 2021.
- COVID-19: The company reported elevated claims in Japan through the first nine months, including increased Q3 incidence, while a late-September industry change narrowed certain at-home hospitalization benefits. COVID-19 also remains a source of potential mortality, morbidity, sales and recruiting impacts. The company incorporated COVID-19 considerations into future mortality assumptions beginning in Q3.
- Business sales and gains: On April 1, Prudential completed the PALAC sale and Full Service Retirement sale. It recognized an $852 pre-tax PALAC gain and a $690 net pre-tax Full Service Retirement gain in Q2; approximately $400 of a reinsurance gain is deferred and recognized over the ceded policies’ term. A post-closing adjustment to the Full Service Retirement sale remained pending, though management did not expect a material effect.
- Assumption updates and adjustments: Individual Life recorded a $1,401 net charge from 2022 annual assumption reviews and refinements for the first nine months, mainly related to policyholder behavior and mortality. Q2 out-of-period adjustments in Individual Life produced a $125 net pre-tax GAAP benefit and a $310 benefit to adjusted operating income; the company said they were not material to prior statements or expected 2022 annual statements.
- Accounting change: Prudential expects to adopt long-duration insurance accounting standard ASU 2018-12 on January 1, 2023. As of June 30, 2022, it estimated adoption would reduce retained earnings by about $2–$3 billion and increase AOCI by about $3–$8 billion; it expects a significant financial-statement impact and changes to earnings emergence.
- Debt, shareholder returns and taxes: The company issued $2.5 billion of junior subordinated notes in 2022 and redeemed $1.0 billion of notes. It repurchased $1,125 of shares under a $1.5 billion authorization through September 30 and declared $1.20 per share quarterly dividends. The Inflation Reduction Act’s corporate minimum tax and stock-repurchase excise tax take effect after 2022; the company said the minimum-tax impact, if any, will vary.
- Contingencies and risks: Management estimated reasonably possible litigation and regulatory losses above established accruals at less than $250, where estimable; this is not an estimate of maximum exposure. The filing warns outcomes remain uncertain and identifies market, credit, counterparty, insurance-experience, liquidity, regulatory, cyber/operational and ratings risks. No material change in market-risk exposure from year-end was reported. Debt covenants were met, and disclosure controls were assessed as effective.
Most important facts for investors to verify
- How much of the GAAP loss and sharp AOCI decline reflects market-rate and valuation movements versus underlying business performance, and how those effects may reverse or persist.
- The sustainability of segment adjusted operating income, especially the effect of Individual Life assumption changes, lower investment spread, and the nonrecurring PALAC and Full Service Retirement gains.
- Insurer statutory capital and liquidity after market movements, collateral posting needs, and any reserve or regulatory changes; the cited RBC and solvency ratios are from earlier measurement dates.
- Credit quality and valuation exposure in the investment portfolio, including the substantial unrealized fixed-maturity losses, commercial mortgage reserves, and Japan-related concentration.
- The final Full Service Retirement sale adjustment, recognition timing of deferred reinsurance gains, and the actual financial-statement effects of ASU 2018-12 adoption.
- Whether share repurchases continue amid the company’s stated capital-preservation considerations and the timing of future debt repayments or refinancing.