Prudential Financial, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results; amounts below are in U.S. dollars unless noted. Prudential provides insurance, annuities, retirement services and investment management. The filing describes the substantial disruption from COVID-19 and a planned sale of its Korean insurance business.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenues | $12.1 billion | $15.4 billion | $25.6 billion | $30.5 billion |
| Benefits and expenses | $14.4 billion | $14.5 billion | $28.2 billion | $28.5 billion |
| Net income (loss) attributable to Prudential | $(2.4) billion | $708 million | $(2.7) billion | $1.6 billion |
| Diluted earnings per share | $(6.12) | $1.71 | $(6.80) | $3.93 |
| Operating cash flow | Not separately stated | Not separately stated | $13.5 billion | $8.3 billion |
Q2 pre-tax loss was $2.3 billion, versus pre-tax income of $876 million a year earlier. Net realized investment losses were $3.8 billion in Q2 and $2.1 billion for the first half, largely reflecting derivatives and variable-annuity hedging activity. Prudential reported adjusted operating income before tax of $931 million for Q2, down from $1.6 billion; this non-GAAP segment measure excludes specified investment, market and other items.
For the first half, investing cash outflow was $13.3 billion and financing cash inflow was $4.7 billion. Cash, cash equivalents and restricted cash ended the period at $21.3 billion, up $4.8 billion from year-end.
Financial position and liquidity
- At June 30, 2020, total assets were $915.4 billion, total liabilities $848.9 billion and total equity $66.5 billion. Separate-account assets and liabilities were each $301.0 billion.
- Total investments were $547.9 billion, including $407.9 billion of available-for-sale fixed maturities. Net unrealized investment gains contributed to AOCI of $30.8 billion, compared with $24.0 billion at year-end 2019.
- Reported short-term debt was $1.1 billion and long-term debt $20.2 billion. Consolidated borrowings, as defined in MD&A, were $21.3 billion, up from $20.6 billion at year-end. Debt covenants were reported as being met.
- Prudential Financial had $4.5 billion of highly liquid assets excluding net borrowings from its intercompany liquidity account; the broader holding-company balance was $5.1 billion. No amounts were drawn on committed credit facilities at June 30.
- Management said significant insurance subsidiaries maintained capital levels consistent with ratings targets. The filing gives year-end 2019 RBC ratios of 411% for PICA and 484% for PALAC, and March 2020 solvency margin ratios of 818% for Prudential of Japan and 835% for Gibraltar Life.
Changes versus comparable periods
- Revenue fell about 21% in Q2 and 16% in the first half year over year; Prudential moved from profit to substantial GAAP net losses in both periods.
- Lower segment adjusted operating income, investment losses, market-sensitive variable-annuity results and losses in divested/run-off businesses weighed on results. Q2 variable-annuity results excluded from adjusted operating income were a $1.7 billion loss; the comparable first-half loss was $3.6 billion.
- Segment adjusted operating income declined in U.S. Businesses to $455 million in Q2 from $875 million, and in International Businesses to $693 million from $790 million. PGIM increased to $324 million from $264 million.
- In Q2, Prudential recorded an approximately $700 million after-tax charge to mark its Korean business, POK, to the expected sale price. POK assets and liabilities classified as held for sale were $20.8 billion and $17.1 billion, respectively.
- Cash dividends declared were $1.10 per share in Q2, versus $1.00 a year earlier. Prudential repurchased $500 million of shares in Q1, then suspended repurchases beginning April 1.
Outlook, risks and unusual items
- COVID-19: Management said the pandemic had adversely affected results, investment values, statutory capital flexibility, sales and operations, and that ultimate impacts could not be estimated. Q2 underwriting results were estimated to benefit on net from the balance of mortality and longevity exposures; management estimated net underwriting results could be adversely affected by about $70 million for each additional 100,000 U.S. fatalities, subject to population and insured-life factors.
- Management expected about $80 million of COVID-related expenses in Q2 and another $60 million in the second half, partly offset by approximately $60 million of expected 2020 savings. It cited elevated mortality claims in life and group insurance, reduced in-person distribution and possible pressure on persistency, fees and investment returns.
- Low rates: Under specified rate assumptions, Prudential estimated an unfavorable $40–$80 million impact to net investment income from reinvestment activity during July 2020–June 2021 for U.S. operations excluding the Closed Block, and the same range for Japanese operations. These are scenario estimates, not earnings guidance.
- POK sale: The approximately $1.9 billion cash sale to KB Financial Group was expected to close by year-end 2020, subject to approvals and customary conditions. Prudential expected an additional approximately $100 million tax expense at closing, with an offsetting AOCI benefit; the final sale loss and hedge settlement could differ materially from amounts recorded.
- Prudential said it was exploring strategic options for its Taiwanese insurance business, which could include a sale. It also changed its presentation of variable-annuity hedging impacts, excluding them from adjusted operating income beginning in Q2 2020.
- Risks include credit deterioration or defaults, market and interest-rate movements, derivative collateral and liquidity demands, mortality and policyholder behavior, ratings changes, regulatory developments and litigation. The estimated range of reasonably possible litigation and regulatory losses above established accruals was less than $250 million where estimable; outcomes remain uncertain.
Important facts for investors to verify
- How much of the GAAP loss reflects market-sensitive derivative and variable-annuity valuation changes versus underlying business performance, and how the revised adjusted-operating-income presentation affects comparisons.
- POK sale approvals, closing timing, proceeds, final after-tax loss and settlement of related currency hedges.
- COVID-19 effects on claims, sales, persistency, credit losses and statutory capital, together with the assumptions behind management’s mortality sensitivity estimate.
- Holding-company liquidity, subsidiary dividend capacity, collateral needs and debt levels if market stress persists; confirm the stated capital ratios as more recent regulatory data becomes available.
- Credit quality and performance of exposed investment sectors, including energy, consumer cyclical, retail and commercial real estate, and the effect of low reinvestment yields on insurance spreads.