Prudential Financial, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. Prudential is a diversified insurer and investment manager operating in the U.S. and internationally. Its businesses include PGIM, U.S. retirement and insurance operations, International Businesses, Corporate and Other, and the Closed Block division. The company reports segment performance using adjusted operating income, a non-GAAP measure.
Key financial metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $60.1 billion | $70.9 billion |
| Benefits and expenses | $61.8 billion | $61.6 billion |
| Net income (loss) attributable to Prudential | $(1.4) billion | $7.7 billion |
| Adjusted operating income before tax, segments and Corporate and Other | $4.7 billion | $7.3 billion |
| Cash flow from operating activities | $5.2 billion | $9.8 billion |
| Cash and cash equivalents | $17.3 billion | $12.9 billion |
| Total assets | $689.9 billion | $937.6 billion |
| Consolidated borrowings | $20.7 billion | $19.3 billion |
| Total capital, as defined by the company | $50.1 billion | $53.2 billion |
Conventional consolidated profit margins are not presented as a key performance measure in the filing; results are significantly affected by insurance liabilities, investment marks, and market-sensitive guarantees. Prudential declared $4.80 per common share in dividends in 2022 and repurchased $1.5 billion of shares.
Material changes versus 2021
- Revenue fell about 15%, while attributable net income swung from $7.7 billion profit to a $1.4 billion loss. The filing attributes the decline principally to a $6.9 billion unfavorable change in realized investment gains and related adjustments, lower segment adjusted operating income, variable-annuity mark-to-market effects, and weaker results in divested and run-off businesses. Lower income tax expense partly offset these items.
- Net realized investment results were a $3.4 billion loss in 2022 versus a $4.0 billion gain in 2021. Rising rates drove substantial unrealized losses on available-for-sale fixed maturities: gross unrealized losses were $36.0 billion at year-end 2022, compared with $1.7 billion a year earlier. The company said it did not intend, and was not more likely than not required, to sell the affected securities before recovery.
- Other comprehensive loss was $41.2 billion after tax, primarily reflecting investment-value declines. Shareholders’ equity fell to $16.3 billion from $61.9 billion, with accumulated other comprehensive income moving from positive $21.3 billion to negative $19.8 billion.
- PGIM adjusted operating income declined to $843 million from $1.6 billion; PGIM assets under management fell to $1.23 trillion from $1.52 trillion, largely due to market depreciation, outflows, currency effects, and business sales.
- Retirement Strategies adjusted operating income rose to $4.2 billion from $4.1 billion, including the $852 million PALAC sale gain. Group Insurance improved to a near break-even adjusted operating loss of $16 million from a $455 million loss. Individual Life declined to a $1.2 billion adjusted operating loss from $393 million of income, including a $1.4 billion net charge from annual assumption updates.
- Assurance IQ recorded a $903 million non-cash goodwill impairment in the fourth quarter, following a $1.06 billion impairment in 2021. The company cited weaker growth forecasts, scaling challenges, a longer path to sustained profitability, and higher discount rates.
Liquidity, debt, and capital
At year-end, Prudential Financial, the parent holding company, reported $5.4 billion of highly liquid assets including its intercompany liquidity account, or $4.5 billion excluding net borrowings from that account. Consolidated debt was $20.7 billion; total capital was $50.1 billion. The company stated that it believed its capital and liquidity were sufficient, and reported that debt covenants were met. PICA’s 2021 RBC ratio was 456%; 2022 statutory results were not yet filed, but management expected the ratio to remain above its target. The company likewise expected Japan subsidiaries’ year-end solvency ratios to exceed 700%. These are management expectations, not final reported 2022 ratios.
Derivative collateral demands increased: hedges for Individual Retirement Strategies were in a net collateral-posting position of $10.8 billion at year-end, versus $5.5 billion in 2021. The filing identifies subsidiary dividend restrictions and potential collateral needs as important constraints on liquidity. Separate-account assets and liabilities were each $197.7 billion and are generally legally segregated.
Outlook, risks, and unusual items
- Management expects the diversified business mix to support results in 2023 and says sustained higher U.S. interest rates should benefit results over time. It provided no quantified consolidated earnings guidance in the supplied filing text.
- Prudential aims to become less market-sensitive, reduce risk through measures including reinsurance, and reallocate capital toward higher-growth businesses. It reported more than $750 million in annual run-rate cost savings by year-end 2022, one year ahead of target; transformation costs were approximately $145 million in 2022.
- The Full Service Retirement business and PALAC were sold in April 2022. The filing reports gains of $620 million and $852 million, respectively, and a further deferred reinsurance gain of approximately $400 million related to the Full Service Retirement sale. A 33% interest in South Africa’s Alexander Forbes was acquired in 2022.
- COVID-19 continued to weigh on underwriting results, though the company incorporated COVID-19 considerations into relevant best-estimate mortality assumptions beginning in the third quarter. Actual results remain sensitive to mortality and morbidity, policyholder behavior, rates, equity markets, credit spreads, foreign exchange, and the effectiveness and cost of hedging.
- Other material risks include investment credit deterioration, liquidity and collateral stress, ratings downgrades, cybersecurity and third-party failures, regulatory and tax changes, and pending litigation or regulatory matters. The company estimated reasonably possible litigation and regulatory losses in excess of accruals at less than $250 million for matters where an estimate could be made; it cautioned that outcomes remain uncertain.
- Prudential will adopt the long-duration insurance accounting standard (ASU 2018-12) in 2023 and expects significant financial statement and disclosure effects. Its estimates through September 2022 indicated material transition adjustments, particularly to AOCI, with amounts changing as interest rates moved.
Important facts for investors to verify
- Reconcile the $1.4 billion GAAP net loss with $4.7 billion of adjusted operating income, including the treatment of realized investment losses, assumption updates, and goodwill impairment.
- Review the size, duration, and credit quality of unrealized fixed-income losses, and test whether liquidity needs could require asset sales before recovery.
- Confirm final 2022 statutory RBC and Japan solvency ratios, available subsidiary dividends, and the capacity to meet derivative collateral calls.
- Assess whether the $903 million Assurance IQ impairment and revised growth and profitability expectations indicate further impairment or funding needs.
- Evaluate the effects of the 2023 accounting-standard adoption, including transition impacts on retained earnings, AOCI, and future earnings patterns.
- Review the terms and remaining risks of the PALAC and Full Service Retirement dispositions, reinsurance arrangements, and pending legal and regulatory matters.
PwC issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management also concluded that disclosure controls were effective as of year-end.