Prudential Financial, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing, not a standalone fourth-quarter report; the filing also provides unaudited quarterly results. Prudential is a diversified U.S. and international insurer, retirement-services provider and asset manager. Its reporting separates the Financial Services Businesses from the Closed Block Business, but the businesses are not legally separate. The company reported approximately $1.107 trillion of assets under management.
Financial results and position
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $41.461 billion | $84.847 billion |
| Income (loss) before tax and equity earnings of operating joint ventures | $(1.684) billion | $708 million |
| Income tax expense (benefit) | $(1.058) billion | $213 million |
| Net income (loss) attributable to Prudential Financial | $(667) million | $520 million |
| Basic and diluted EPS, Common Stock | $(1.55) | $1.06 basic; $1.05 diluted |
| Adjusted operating income before tax, Financial Services Businesses | $6.369 billion | $4.027 billion |
| Net cash provided by operating activities | $8.445 billion | $20.909 billion |
| Total assets | $731.781 billion | $709.235 billion |
| Total equity | $35.881 billion | $39.112 billion |
| Short-term and long-term debt | $26.222 billion | $27.213 billion |
Reported revenue and profit were heavily affected by investment and derivative accounting. Consolidated realized investment losses were $5.206 billion, versus $1.441 billion of losses in 2012; Financial Services Businesses losses were primarily derivative-related. Prudential attributed significant year-over-year earnings volatility to variable-annuity embedded derivatives and hedges, Japanese yen movements affecting economically matched non-yen assets and liabilities, interest-rate movements, and assumption updates. Adjusted operating income is a non-GAAP management measure and excludes significant items; it should not be treated as a substitute for GAAP results.
Operating cash flow was $8.445 billion; investing activities used $16.334 billion and financing activities provided $2.242 billion. Cash and cash equivalents declined by $6.661 billion to $11.439 billion. Prudential Financial, the holding company, reported $5.555 billion of cash and short-term investments including intercompany liquidity-account balances, or $4.354 billion excluding net borrowings from that account. Management said it believed available sources were sufficient for current needs, including under reasonably foreseeable stress scenarios.
At year-end, Prudential reported $391.355 billion of general-account investments, including $325.341 billion attributed to Financial Services Businesses and $66.014 billion to the Closed Block. Common Stock dividends declared were $1.73 per share for 2013. The company repurchased $750 million of shares under its 2013 authorization. Insurance subsidiaries’ reported RBC ratios were above 400%; Japan solvency margins were above 700%, according to the filing.
Material changes and business drivers
- Financial Services Businesses’ adjusted operating income increased to $6.369 billion from $4.027 billion. Individual Annuities rose to $2.085 billion from $1.039 billion; Retirement to $1.039 billion from $638 million; Asset Management to $723 million from $584 million; Individual Life to $583 million from $384 million; Group Insurance to $157 million from $16 million; and International Insurance to $3.152 billion from $2.704 billion. Corporate and Other remained a significant loss, widening to $1.370 billion from $1.338 billion.
- The reported revenue comparison is distorted by approximately $32 billion of premiums from two large pension risk-transfer transactions recorded in 2012, with related increases in policyholder benefits. The 2013 Hartford life acquisition added approximately 700,000 policies and $141 billion of net retained face amount in force; cash consideration was $615 million.
- Individual Annuities account values increased to $154.140 billion from $135.342 billion, primarily reflecting market appreciation. Net sales fell to $3.786 billion from $13.226 billion as Prudential reduced or modified certain variable-annuity benefits and sales; new PDI product sales partly offset the decline.
- Asset Management assets under management increased to $869.9 billion from $827.0 billion, supported by market appreciation and net flows. International Insurance adjusted operating income benefited from business growth, integration savings and currency effects, while constant-currency new business premiums fell to $3.118 billion from $3.956 billion.
- The Closed Block reported $46 million of net income attributable to Prudential Financial, compared with $41 million. Its equity represented 4% of total attributed equity. Closed Block cash flows and assets principally benefit participating policyholders, not Common Stock shareholders.
Outlook, risks and unusual items
- Management’s 2014 commentary emphasizes long-term growth in U.S. retirement income and pension risk-transfer solutions, high-quality U.S. insurance growth, expanded distribution, and selective expansion in international markets. It did not provide consolidated earnings or revenue guidance.
- Management expected continued pressure on portfolio yields from low interest rates. For a specified hypothetical rate scenario, it estimated an unfavorable effect on domestic net interest margins in adjusted operating income of approximately $16 million in 2014 and $48 million in 2015. These estimates are scenario-dependent, limited in scope and exclude potential mitigants and other business changes.
- In September 2013, Prudential was designated a “Designated Financial Company” under Dodd-Frank; it was also identified as a global systemically important insurer. The company anticipated enhanced supervision and potential capital, leverage, liquidity, stress-testing, resolution-planning and disclosure requirements. Final effects and costs were uncertain.
- The New York Department of Financial Services disputed Prudential’s statutory reserve calculations, including reinsurance credit, for certain variable-annuity products. Discussions were ongoing; additional reserves or collateral, if required, could constrain capital deployment.
- Key risks include market and interest-rate movements, variable-annuity guarantees and hedge effectiveness, mortality and policyholder behavior, investment and counterparty losses, yen and other foreign-exchange exposure, reserve and valuation assumptions, subsidiary dividend restrictions, regulatory change, litigation, and operational or cybersecurity failures. The filing estimated reasonably possible litigation and regulatory losses in excess of accruals at less than $250 million where an estimate could be made; outcomes remain uncertain.
- Unusual items include a retrospective accounting change for performance-based incentive fee revenue, which reduced 2013 reported revenue by $18 million relative to the prior method and revised prior periods; and a $116 million fourth-quarter 2013 pre-tax benefit from correcting an overstatement of annuity reserves caused by incorrect non-performance-risk inputs. The reserve correction affected quarterly results but not full-year 2013 results.
Important facts for investors to verify
- Reconcile the $6.369 billion of pre-tax adjusted operating income with the GAAP loss, especially derivative, foreign-currency, reserve and tax effects; review the precise non-GAAP adjustments.
- Assess the sustainability and risk profile of variable-annuity earnings, guarantee exposure, hedging results, policyholder behavior assumptions and the effect of market changes.
- Track regulatory resolution of the NY DFS reserve dispute and implementation of Federal Reserve and global systemic-insurer requirements, including any effects on capital, liquidity and dividends.
- Review holding-company liquidity and debt maturities alongside restrictions on dividends from insurance subsidiaries; distinguish holding-company cash from consolidated cash and insurer assets.
- Evaluate the economics and integration progress of the Hartford acquisition, expected savings, and the substantial decline in 2013 international new-business premiums.
- Confirm the status and exposure of material litigation and unclaimed-property matters, and examine the unaudited fourth-quarter results and the $116 million reserve correction.