Business context and reporting period
Prudential Financial, Inc. (NYSE: PRU) provides insurance, annuity, retirement, investment management and related financial services. This unaudited Form 10-Q covers the three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020. Results are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 or prior date |
|---|---|---|
| Total revenue | $16.952 billion | $13.464 billion |
| Net income attributable to Prudential | $2.828 billion | Loss of $271 million |
| Diluted earnings per share | $6.98 | Loss of $0.70 |
| Adjusted operating income before tax, segments | $2.088 billion | $1.137 billion |
| Net investment income | $4.382 billion | $4.202 billion |
| Realized investment gains, net | $2.079 billion | $1.667 billion |
| Cash flows from operating activities | Used $3.297 billion | Provided $14.766 billion |
Revenue rose about 26% year over year, and Prudential moved from a net loss to profit. The improvement included substantial market-sensitive and investment-related items; it should not be read as a measure of recurring earnings alone. Segment adjusted operating income is a non-GAAP management measure and is not equivalent to GAAP net income.
At March 31, total assets were $907.280 billion versus $940.722 billion at year-end; total equity was $58.776 billion versus $68.210 billion, including Prudential Financial, Inc. equity of $58.036 billion versus $67.425 billion. Accumulated other comprehensive income fell to $19.219 billion from $30.738 billion, primarily reflecting a large decline in unrealized investment gains as interest rates rose.
Cash and cash equivalents were $16.099 billion at quarter-end ($16.151 billion including restricted cash). Investing activities provided $6.476 billion and financing activities used $670 million. The operating cash outflow was heavily affected by derivative-related cash movements and should be assessed alongside the insurer’s investment and financing cash flows.
Short- and long-term debt reported on the balance sheet totaled approximately $20.6 billion; management reported consolidated borrowings of $20.597 billion. Debt covenants were met, and no committed credit facilities were drawn. Management reported total capital of $52.309 billion. Parent-company highly liquid assets were $5.695 billion including intercompany liquidity-account borrowings, or $4.926 billion excluding those net borrowings.
Material changes versus the prior comparable period
- GAAP net income attributable to Prudential improved by $3.099 billion. Management cited favorable year-over-year movements in variable-annuity embedded derivatives and hedges, market experience updates, higher segment adjusted operating income, and investment-related activity. These were partly offset by less favorable realized investment gains and related charges and higher tax expense.
- Adjusted operating income before tax rose to $2.088 billion from $1.137 billion. PGIM reported $651 million (up from $164 million), Retirement $623 million (up from $245 million), and International Businesses $871 million (up from $696 million). Group Insurance reported a $132 million loss, Individual Life a $44 million loss, and Assurance IQ a $39 million loss.
- PGIM’s results included a gain from selling its 35% stake in Pramerica SGR; the sale generated an approximately $330 million after-tax gain. PGIM assets under management were $1.451 trillion, down from $1.499 trillion at year-end but up from $1.296 trillion a year earlier.
- Operating cash flow changed from a large inflow to an outflow, with derivatives a major driver. Net unrealized investment gains in AOCI also declined substantially during the quarter.
- Comparative segment results reflect the prior reclassification of the sold Korean business and the Taiwan business held for sale to Divested and Run-off Businesses.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no specific full-year earnings guidance. Management said it expects its business mix to support appropriate returns in the current environment and remains on track for approximately $750 million of annual run-rate cost savings by the end of 2023. Cost-efficiency programs benefited Q1 2021 results by $112 million.
- Interest rates: Under stated rate assumptions, management estimated that reinvestment activity could reduce net investment income by $50–$90 million in U.S. operations and $20–$40 million in Japanese operations over April 1, 2021–March 31, 2022. These are scenario estimates, not forecasts. Management also highlighted lower reinvestment yields and competitive limits on reducing some policy crediting rates.
- COVID-19: The pandemic adversely affected results and may continue to affect claims, sales, policyholder behavior, investments and operations. Q1 underwriting effects included unfavorable mortality in Group Insurance and Individual Life, partly offset by favorable mortality in Retirement. Management estimated a net adverse underwriting impact of about $85 million per additional 100,000 U.S. fatalities, with actual effects dependent on multiple factors. It expected domestic pandemic impacts to begin moderating in Q2, subject to uncertainty. About 1.6% of invested assets had been modified to allow limited forbearance.
- Market and hedging risk: Earnings and capital are sensitive to interest rates, equity markets, credit quality, foreign exchange and policyholder behavior. Variable-annuity guarantees and hedge positions produced large, offsetting market-sensitive movements. Derivatives used in the Individual Annuities hedging programs were in a net collateral-posting position of $6.5 billion, compared with a $3.4 billion net receive position at year-end.
- Divestiture: The Taiwan insurance business was held for sale, subject to regulatory approval and closing conditions, and was expected to close in 2021. Prudential had recorded a cumulative estimated $390 million after-tax charge to adjust its carrying value; the final loss could vary materially. Expected cash consideration was approximately $195 million, plus contingent consideration valued at about $30 million at March 31.
- Legal and regulatory matters: Prudential disclosed inquiries involving Assurance IQ’s supplemental health-product sales and marketing and variable-product sales and replacement activity, including an SEC subpoena. It estimated aggregate reasonably possible losses above established accruals at less than $250 million for matters where an estimate could be made; this is not an estimate of expected or maximum loss. Management said outcomes remain uncertain and could affect results or cash flow in a period.
- Capital returns: Prudential repurchased 4.3 million shares for $375 million in Q1 and declared $467 million in common dividends ($1.15 per share). The Board later increased the 2021 repurchase authorization from $1.5 billion to $2.0 billion.
- Accounting change: Prudential intends to adopt the long-duration insurance accounting standard, ASU 2018-12, on January 1, 2023. It expects balance-sheet and earnings-pattern effects; the magnitude of transition adjustments was still being assessed.
Most important facts for investors to verify
- How much of the $2.828 billion GAAP profit and $6.98 diluted EPS reflects recurring business performance versus market movements, variable-annuity hedges, market experience updates and the Pramerica SGR gain.
- Whether the operating cash outflow and derivative collateral needs persist, and how they compare with available parent and subsidiary liquidity.
- Changes in AOCI, equity, fixed-income portfolio values and regulatory capital; the RBC and solvency ratios cited are as of December 31, 2020, not March 31, 2021.
- COVID-19 claims, sales and policyholder behavior, along with interest-rate and reinvestment effects, against management’s stated scenario estimates.
- Closing and final financial impact of the Taiwan divestiture, and developments in the Assurance IQ and variable-product regulatory and legal matters.
- Progress toward the cost-savings target and the effect of repurchases and dividends on capital flexibility.