PRUDENTIAL FINANCIAL INC quarterly report, Q2 FY2022

Prudential Financial, Inc. — Q2 2022 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2022. Amounts are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise. Prudential provides insurance, retirement, investment-management and related financial services. The company’s Retirement Strategies segment was fully operationalized in Q2, combining its institutional and individual retirement businesses; comparative segment figures were recast.

Financial performance

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Total revenue	$13,021	$15,917	$26,236	$32,869
Net income (loss) attributable to Prudential	$(565)	$2,158	$(596)	$4,986
Diluted EPS	$(1.53)	$5.40	$(1.62)	$12.39
Adjusted operating income before tax	$872	$1,829	$2,438	$3,872

Q2 revenue fell 18% year over year; six-month revenue declined 20%. Premiums and policy charges rose, but lower net investment income, negative other income and realized investment losses weighed on reported revenue.
Q2 net investment income was $3,938, down from $4,552; six-month net investment income was $8,296, down from $8,934.
Net realized investment losses were $1,147 in Q2 and $1,463 for the first half, versus gains of $635 and $2,714 in the comparable 2021 periods. Higher interest rates drove substantial losses on interest-rate derivatives and fixed-maturity sales.
Benefits and expenses were $13,532 in Q2 and $26,862 for the first half. The filing does not present a single consolidated operating-margin measure; Prudential uses adjusted operating income as a non-GAAP segment-performance measure.
Operating cash flow was $1,502 for the first half, compared with $1,062 in 2021. Investing activities used $3,240, versus providing $3,162 in 2021; financing activities provided $1,464, versus using $2,667. Ending cash, cash equivalents and restricted cash were $14,414.

Financial position, capital and liquidity

At June 30, 2022, total assets were $695.6 billion, total liabilities $666.7 billion and total equity $28.9 billion. At year-end 2021, the respective totals were $937.6 billion, $875.0 billion and $62.6 billion. The comparison reflects the April sales of PALAC and the Full Service Retirement business, as well as market-value changes.
Accumulated other comprehensive income (loss) moved to a $10.2 billion loss from $21.3 billion of income at year-end, principally reflecting unrealized investment losses as rates rose. Available-for-sale fixed maturities had $24.9 billion of gross unrealized losses at June 30, versus $1.7 billion at year-end. Management said the losses were primarily rate, spread and currency related, and it did not intend, nor expect to be required, to sell the securities before recovery.
Short- and long-term debt totaled $20.2 billion, up from $19.3 billion at year-end. Long-term debt was $19.6 billion; short-term debt was $558 million. Prudential issued $1 billion of 5.125% junior subordinated notes due 2052 in February and reported compliance with debt covenants.
Management reported $52.0 billion of total capital, including equity excluding AOCI and capital debt. Parent-company highly liquid assets, excluding net intercompany borrowings, were $7.1 billion. No amounts were drawn on the syndicated unsecured committed credit facilities at quarter-end.
Latest disclosed statutory capital measures were PICA’s 456% RBC ratio at December 31, 2021, and solvency margin ratios of 806% for Prudential of Japan and 911% for Gibraltar Life at March 31, 2022. The filing says the insurance subsidiaries substantially exceeded applicable regulatory minimums.

Material changes and unusual items

On April 1, Prudential completed the PALAC sale to Fortitude. PALAC represented approximately $30 billion of in-force individual annuity account values. Prudential recorded an $852 million pretax gain in Q2, included in Retirement Strategies adjusted operating income, and retained certain results through reinsurance arrangements.
Prudential also completed the Full Service Retirement sale to Great-West on April 1. It recorded a $690 million net pretax gain in Q2, excluded from adjusted operating income, and a separate $495 million deferred gain to be recognized over the ceded policies’ term. A post-closing adjustment was expected by Q4 2022; management did not expect a material impact.
Annual actuarial assumption reviews and other refinements produced a $1.406 billion unfavorable impact to segment adjusted operating income for the first half, principally a $1.401 billion Individual Life charge in Q2. Prudential also recorded second-quarter out-of-period Individual Life adjustments with a $125 million aggregate pretax benefit to GAAP income; the filing reports a $310 million aggregate benefit to adjusted operating income from these adjustments. Management said the out-of-period adjustments were not material to prior periods and were not expected to be material to 2022 annual statements.
By segment, Q2 adjusted operating income was $1.703 billion for Retirement Strategies, $53 million for Group Insurance, a loss of $1.325 billion for Individual Life, a loss of $61 million for Assurance IQ, $206 million for PGIM and $555 million for International Businesses. Individual Life’s assumption-review charge was the main reported segment pressure; Retirement Strategies benefited from the PALAC gain.
Group Insurance’s Q2 benefit ratio improved to 84.2% from 88.7%. PGIM assets under management fell to $1.257 trillion from $1.512 trillion at June 2021, primarily due to market depreciation; total Prudential assets under management were $1.410 trillion.
Prudential repurchased $750 million of shares in the first half under a $1.5 billion 2022 authorization and declared $2.40 per share in dividends for the half year. It reported 372 million common shares outstanding at July 31.

Outlook, commentary and risks

No numerical company-wide earnings guidance is provided in the supplied filing text. Management said higher rates may reduce assets under management and fee income in the near term, while potentially improving investment income over time through higher reinvestment yields. Under specified rate assumptions, it estimated a $0–$45 million favorable reinvestment-income effect over the following 12 months for each of the U.S. operations excluding the Closed Block and Japanese operations, and the Japanese operations.
Management estimated approximately $750 million of annual run-rate cost savings from multi-year efficiency programs by year-end 2022, one year ahead of its prior target; reported savings were approximately $174 million in Q2 and $344 million for the first half. Program costs were $38 million and $63 million, respectively.
COVID-19 continued to affect claims and sales, particularly in Japan, though U.S. mortality results in Q2 were within expected ranges. Beginning in Q3, the company planned to incorporate COVID-19 considerations into best-estimate mortality assumptions for applicable U.S. businesses.
Principal risks include market movements in interest rates, equities and currencies; investment credit deterioration or counterparty default; mortality, morbidity and policyholder behavior differing from assumptions; derivative collateral and liquidity demands; regulatory, legal, technology, cybersecurity and operational risks; competition; and execution and integration risks.
Prudential said it had divested its Russian sovereign and state-owned enterprise holdings and had no direct investment exposure in Russia or Ukraine as of the filing. It also expects adoption of long-duration insurance accounting guidance on January 1, 2023 to have a significant financial-statement impact and change earnings emergence; estimates disclosed as of year-end 2021 included decreases of $1–$2 billion in retained earnings and $28–$33 billion in AOCI at transition.
For litigation and regulatory matters where a loss estimate could be made, aggregate reasonably possible losses in excess of established accruals were estimated at less than $250 million. The company cautioned that outcomes are uncertain and estimates do not represent maximum exposure.

Important facts for investors to verify

How much of the Q2 and first-half GAAP loss reflects market-driven realized losses and AOCI movements, versus underlying segment performance.
The sustainability of Retirement Strategies earnings excluding the PALAC gain, and the implications of the actuarial-assumption changes and Individual Life charge.
Post-sale exposure retained through PALAC reinsurance and participation arrangements, and the final Full Service Retirement sale adjustment and deferred-gain recognition.
Interest-rate, equity-market and currency effects on investment values, annuity guarantees, derivative collateral needs and fee income; also review the quality and liquidity of investment assets.
Current statutory capital ratios and parent liquidity, which were reported using different measurement dates from the June 30 GAAP statements.
The transition effects of the 2023 long-duration insurance accounting standard, and any developments in litigation, regulatory matters or COVID-19 claims experience.