Prudential Financial, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Prudential provides insurance, annuity, retirement, investment-management and related financial services. Amounts below are in millions of dollars unless otherwise noted. Interim results are unaudited.
Financial results and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $21,641 | $15,425 | $54,510 | $41,004 |
| Income before tax and joint-venture earnings | $1,806 | $1,447 | $7,993 | $(1,223) |
| Net income attributable to Prudential | $1,530 | $1,487 | $6,516 | $(1,193) |
| Diluted EPS | $3.90 | $3.70 | $16.32 | $(3.06) |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $6,479 | $12,881 |
- Revenue and earnings: Nine-month revenue rose about 33%, and net income swung from a loss to profit. Q3 net income increased modestly despite substantially higher revenue. Revenue includes significant pension risk-transfer premiums, with corresponding benefit costs; realized investment results and variable-annuity mark-to-market effects also materially influenced comparisons.
- Margins: The consolidated filing does not state a single headline operating margin. Group Insurance’s total benefits ratio rose to 100.7% in Q3 from 89.4% and was 96.2% for the first nine months versus 88.0%. Adjusted operating income, a non-GAAP segment measure, was $1,844 for Q3 and $5,716 year to date, versus $1,500 and $3,483, respectively.
- Cash and liquidity: Cash and cash equivalents were $15,605 at September 30, versus $13,701 at year-end 2020. Nine-month operating cash flow fell to $6,479 from $12,881; investing activities provided $597, while financing used $3,527. Parent-company highly liquid assets were $4,519 including intercompany liquidity-account borrowings, or $3,764 excluding net borrowings. No amounts were drawn on committed credit facilities.
- Debt and capital: Consolidated short- and long-term debt was $19,596, down from $20,643 at year-end. Total capital, as defined by the company and excluding AOCI from equity, was $52,643 versus $50,158. September 30 total equity was $62,559, versus $68,210 at year-end; Prudential-attributable AOCI declined to $21,836 from $30,738, principally reflecting lower unrealized investment gains. Management reported compliance with debt covenants and stated that capital and liquidity were sufficient.
- Portfolio: Total investments were $488,790, down from $553,620, with major transfers to held-for-sale classification accounting for part of the change. Available-for-sale fixed maturities had $373,252 fair value and $41,025 net unrealized gains at September 30; management said it did not intend, and was not more likely than not required, to sell securities in unrealized-loss positions before recovery.
Material changes and significant transactions
- Prudential agreed to sell its Full Service Retirement business to Great-West for expected proceeds of approximately $2.8 billion, with about $400 million of expected taxes and transaction costs. Closing was expected by the end of Q1 2022, subject to approvals and closing conditions. The business was classified as held for sale, and its results moved to Divested and Run-off Businesses; prior segment and adjusted-operating-income presentations were restated, but GAAP results were not affected.
- Prudential agreed to sell PALAC, representing a portion of its traditional variable-annuity block, to Fortitude for an approximately $2.2 billion total transaction value. Closing was expected in the first half of 2022, subject to approvals and other conditions. The block represented about $30 billion, or 18%, of individual annuity account values; its results remained in Individual Annuities pending closing.
- Prudential completed the sale of its Taiwan insurer for about $200 million in cash plus contingent consideration. It recorded a $34 million liability for a guarantee of certain insurance obligations; the contingent consideration was valued at about $21 million at quarter-end. It also sold its Pramerica SGR stake, recording a $330 million after-tax gain in Q1.
- Q3 earnings were affected by a $91 million make-whole payment on debt redeemed in August, recorded in general and administrative expense. The company repurchased $2,125 million of shares through September 30 under a 2021 authorization increased to $2.5 billion; cash dividends paid in the first nine months were $1,374 million.
Outlook, commentary and risks
- Management outlook: Prudential gave no consolidated earnings guidance in the provided filing text. It remained on track to achieve approximately $750 million of annualized run-rate cost savings by the end of 2023; efficiency programs contributed estimated benefits of $146 million in Q3 and $388 million year to date. It announced a new Retirement Strategies business combining capabilities from Individual Annuities and Retirement; future segment presentation may change.
- COVID-19: Management said Q3 mortality impacts increased versus Q2. It expected Q4 underwriting results to be adversely affected by approximately $185 million in U.S. Businesses, predominantly Group Insurance, and $20 million in International Businesses. Through nine months, COVID-19 had a net negative underwriting impact, with unfavorable mortality in Group Insurance, Individual Life and International partly offset by favorable Retirement mortality experience.
- Interest rates: Under specified rate assumptions, management estimated reinvestment-related net investment income headwinds of $50–$80 million for U.S. operations and $20–$40 million for Japanese operations over October 2021–September 2022. Persistent low rates may pressure reinvestment yields and margins; asset-liability management, hedging and product repricing are among the stated mitigants.
- Other principal risks: COVID-19 and future mortality/morbidity and policyholder behavior; credit deterioration or counterparty default; interest-rate, equity and foreign-exchange movements; guarantees and derivative collateral/liquidity demands; regulatory, tax, cybersecurity, legal and operational matters; ratings changes; competition and execution of strategy. Management said market risk exposure had not materially changed from year-end 2020.
- Accounting and contingencies: Prudential expects to adopt long-duration insurance accounting standard ASU 2018-12 on January 1, 2023, and expects significant financial-statement and earnings-pattern effects; the magnitude was still under assessment. The estimated range of reasonably possible litigation and regulatory losses above accruals was less than $250 million where estimable; management did not expect the ultimate outcome, after reserves and indemnification, to materially adversely affect financial position. Regulatory inquiries include Assurance IQ sales and marketing and variable-product sales and replacement activity.
Key investor verification points
- Reconcile GAAP earnings with adjusted operating income and the sizable effects of investment gains, variable-annuity hedging, market-experience updates and business dispositions.
- Track approval, closing, proceeds, costs and any gain recognition for the Great-West and PALAC sales; confirm the related segment and balance-sheet treatment.
- Assess the persistence of COVID-related claims, particularly Group Insurance, against management’s Q4 estimates, and compare the actual experience across businesses.
- Monitor reinvestment yields, credit quality, unrealized losses, derivative collateral requirements and parent-company liquidity under changing market conditions.
- Verify the pace and funding of buybacks and dividends alongside regulatory capital needs, subsidiary dividend restrictions and the pending accounting-standard transition.