Prudential Financial, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Prudential provides insurance, retirement, and investment-management services. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $15,917 | $12,115 | $32,869 | $25,579 |
| Net income attributable to Prudential | $2,158 | $(2,409) | $4,986 | $(2,680) |
| Diluted EPS | $5.40 | $(6.12) | $12.39 | $(6.80) |
| Net investment income | $4,552 | $4,186 | $8,934 | $8,388 |
| Realized investment gains (losses), net | $635 | $(3,752) | $2,714 | $(2,085) |
| Operating cash flow | Not presented for quarter | $1,062 | $13,479 |
Revenue and earnings recovered sharply from the prior-year loss, but comparisons are heavily affected by investment and derivative marks, variable-annuity hedge results, and other items. Adjusted operating income before tax, Prudential’s non-GAAP segment measure, was $1,906 for Q2 (versus $929) and $3,994 for the first half (versus $2,066).
Financial position, liquidity, and capital
- At June 30, total assets were $926.5 billion, down from $940.7 billion at year-end 2020; total equity was $63.7 billion, versus $68.2 billion. AOCI declined to $23.3 billion from $30.7 billion.
- Cash and cash equivalents were $15.1 billion. Total consolidated borrowings were $20.6 billion, including $19.7 billion of long-term debt. Prudential reported compliance with debt covenants and no draws on committed credit facilities as of June 30.
- Management reported $53.3 billion of capital available to support the businesses. Latest disclosed statutory ratios were December 2020 RBC ratios of 394% for PICA and 465% for PALAC; March 2021 solvency-margin ratios were 834% for Prudential of Japan and 876% for Gibraltar Life.
- Operating cash flow fell to $1.1 billion for the first half from $13.5 billion a year earlier. The cash-flow statement reports a $3.5 billion net derivative-related adjustment in 2021, versus a $10.6 billion source in 2020.
Material changes and business results
- U.S. Businesses adjusted operating income rose to $1.09 billion in Q2 from $455 million. Retirement and Individual Annuities improved, supported by investment spreads and fee income; Group Insurance remained pressured by claims, including COVID-19 effects.
- International Businesses adjusted operating income increased to $803 million in Q2 from $691 million. Prudential cited higher investment spreads and business growth, partly offset by COVID-related claims and currency effects.
- PGIM Q2 adjusted operating income was $315 million, down from $324 million; higher asset-management fees were offset by lower other revenues and higher expenses. PGIM assets under management were $1.51 trillion, up from $1.39 trillion a year earlier.
- Assurance IQ revenue increased, but its adjusted operating loss widened to $38 million for Q2 from $16 million, reflecting growth-related marketing, distribution, and operating costs.
- Prudential completed the sale of its Taiwan insurance business in June for about $200 million cash plus contingent consideration. The cumulative after-tax sale loss was about $400 million, most of which had been recorded in 2020.
- Prudential sold its 35% stake in Italian asset manager Pramerica SGR in March, recording an approximately $330 million after-tax gain in adjusted operating income.
Outlook, risks, and unusual items
- Management said pandemic impacts had moderated overall but remained uncertain. It expected Q3 2021 underwriting results to be adversely affected by about $25 million in U.S. Businesses and $20 million internationally; actual effects depend on infection trends, variants, vaccination, and policyholder experience.
- In a stated low-rate scenario, Prudential estimated reinvestment would reduce net investment income by $50–$80 million in U.S. operations and $20–$40 million in Japanese operations over the 12 months ending June 30, 2022. These are scenario estimates, not earnings guidance.
- The company remained on track to accumulate approximately $750 million of annual run-rate cost savings by the end of 2023 from multi-year efficiency programs. Management estimated those programs benefited results by $242 million in the first half of 2021.
- After quarter-end, Prudential agreed to sell its Full Service Retirement business to Great-West. Expected proceeds are approximately $2.8 billion before about $400 million of transaction costs and taxes; closing was expected by Q1 2022, subject to approvals and other conditions.
- After quarter-end, Prudential announced redemption of $910 million of medium-term notes, with an expected pre-tax charge of about $90 million, primarily for make-whole premiums. It also extended its $4.0 billion credit facility to July 2026.
- Key risks include COVID-19, low interest rates, mortality and morbidity experience, policyholder behavior, investment credit deterioration, market-sensitive guarantees, derivative collateral and liquidity needs, foreign exchange, regulation, litigation, and cybersecurity or operational failures. Management estimated reasonably possible litigation and regulatory losses above established accruals at less than $250 million, where estimable; outcomes remain uncertain.
- Prudential intends to adopt the long-duration insurance accounting standard (ASU 2018-12) on January 1, 2023 and expects it to affect balance-sheet reporting and the pattern of earnings emergence.
Important facts for investors to verify
- How much of reported earnings reflects recurring segment performance versus realized investment gains, derivative marks, market-experience updates, and divestiture or run-off results.
- The trend in operating cash flow and the drivers of the substantial year-over-year decline.
- Progress and final economics of the Full Service Retirement sale, including regulatory approvals, proceeds, transaction costs, and effects on capital and future earnings.
- COVID-19 claims experience, especially in Group Insurance, Individual Life, Brazil, and Japan, and whether the stated Q3 impact estimate is borne out.
- Exposure to low rates, variable-annuity guarantees, and collateral calls; review the assumptions behind Prudential’s scenario estimates and stress testing.
- Developments in the Assurance IQ sales-related regulatory inquiries and litigation, and any changes to reserves or potential losses.