Business Context and Reporting Period
This Form 8-K filing by Prudential Financial, Inc. was submitted on December 14, 2017. The report primarily addresses the Company's 2018 financial outlook and a new share repurchase authorization approved by the Board of Directors.
Key Financial Metrics and Guidance
2018 Earnings Guidance
Prudential expects Common Stock earnings per share (EPS) in the range of $11.20 to $11.70 for 2018, based on after-tax adjusted operating income. This guidance excludes potential market unlocking adjustments for deferred policy acquisition and other costs.
Share Repurchase Program
The Board authorized the repurchase of up to $1.5 billion of outstanding Common Stock. The program is effective from January 1, 2018, through December 31, 2018.
Key Assumptions Underlying Guidance
- Equity Markets: S&P 500 ending 2017 at 2,600 and growing 3% to 2,675 by end of 2018.
- Currency: Japanese yen at 111 per U.S. dollar; Korean won at 1,150 per U.S. dollar.
- Interest Rates: Ten-year U.S. Treasury securities at 2.40% at the end of 2018.
- Investment Returns: Non-coupon investments expected to return 5% to 6%.
- Tax Rate: Effective tax rate of approximately 26% (excluding potential U.S. federal tax reform impacts).
- Capital Targets: Financial leverage ratio within a 25% target and total leverage ratio within a 40% target.
Note: The filing does not provide specific historical revenue, profit, cash flow, or debt figures for the current or prior periods; it focuses exclusively on forward-looking guidance and assumptions.
Material Changes and Non-GAAP Measures
The filing details the use of non-GAAP measures, specifically "adjusted operating income" and "adjusted book value," to evaluate performance. Adjusted operating income excludes realized investment gains/losses, impairments, and results of divested businesses to highlight underlying profitability. Adjusted book value excludes accumulated other comprehensive income and foreign currency remeasurements to isolate core business net worth.
Management noted that adjusted book value will be positively impacted by an accounting change for equity investments (ASU 2016-01) and the elimination of a one-month reporting lag in Gibraltar Life Insurance Company, Ltd. operations.
Outlook and Risks
Management does not expect to provide updates to the 2018 EPS guidance during the year. The filing includes extensive forward-looking statements subject to risks, including:
- General economic, market, and political conditions.
- Interest rate fluctuations and prolonged low rates.
- Changes in U.S. federal tax reform proposals.
- Foreign currency exchange rate fluctuations.
- Regulatory changes, including Dodd-Frank and fiduciary rules.
- Investment losses, defaults, and counterparty non-performance.
- Reestimates of reserves for future policy benefits and claims.
Investor Verification Checklist
- Verify the reconciliation of adjusted operating income to GAAP income from continuing operations in Exhibit 99.1.
- Monitor the impact of U.S. federal tax reform on the assumed 26% effective tax rate.
- Track actual S&P 500 performance and interest rate movements against the 2018 assumptions (S&P 500 at 2,675; 10-year Treasury at 2.40%).
- Review the execution of the $1.5 billion share repurchase program throughout 2018.
- Assess the impact of the ASU 2016-01 accounting change on adjusted book value in subsequent filings.