Prudential Financial, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed February 17, 2022. This summary covers the full year, not the fourth quarter alone. Prudential is a global insurer and investment manager, with approximately $1.742 trillion in assets under management. Its businesses include PGIM, U.S. insurance and retirement operations, international businesses, and the Closed Block.
Financial performance and position
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $70.934 billion | $57.033 billion |
| Income (loss) before tax and equity in operating joint ventures | $9.381 billion | $(323) million |
| Net income (loss) attributable to Prudential Financial | $7.724 billion | $(374) million |
| Diluted earnings per share | $19.51 | $(1.00) |
| Cash flow from operating activities | $9.812 billion | $8.368 billion |
| Cash and cash equivalents | $12.888 billion | $13.701 billion |
| Total assets | $937.582 billion | $940.722 billion |
| Total equity | $62.608 billion | $68.210 billion |
| Consolidated short- and long-term debt | $19.344 billion | $20.643 billion |
Net investment income was $18.287 billion, up from $17.410 billion. The filing does not present a single consolidated operating-margin measure; segment profitability is primarily assessed using adjusted operating income, a non-GAAP measure.
- Adjusted operating income before tax: $7.301 billion, versus $4.950 billion in 2020. By segment: PGIM $1.643 billion; Retirement $2.178 billion; Group Insurance loss of $455 million; Individual Annuities $1.901 billion; Individual Life $393 million; Assurance IQ loss of $142 million; International Businesses $3.390 billion; and Corporate and Other loss of $1.607 billion.
- Liquidity and capital: Prudential Financial had $4.226 billion in highly liquid assets at year-end, or $3.553 billion excluding net borrowings from its intercompany liquidity account. Total capital was $53.244 billion. The company said resources were sufficient for its needs; insurance-subsidiary funds are subject to regulatory limits on transfers.
- Investment portfolio: General account investments totaled $492.199 billion, including $372.410 billion of available-for-sale fixed maturities. More than 99% of commercial mortgage and other loans were current. The loan allowance for credit losses declined to $102 million from $207 million, which management attributed primarily to improving credit conditions.
- Shareholder returns: Prudential repurchased $2.5 billion of stock in 2021 and declared $4.60 per share in dividends. The board authorized up to $1.5 billion of repurchases in 2022; a $1.20-per-share dividend was declared in February 2022.
Material changes versus 2020
- GAAP net income improved by $8.098 billion, from a loss to substantial profit. Management cited favorable year-over-year changes in realized investment results, variable-annuity embedded derivatives and hedges, segment adjusted operating income, market-experience updates, and divested/run-off results. Higher tax expense and a $1.060 billion Assurance IQ goodwill impairment partly offset these gains.
- Revenue increased by $13.901 billion. Results were materially affected by market-sensitive investment and derivative gains; therefore, the increase in GAAP earnings should not be read as solely reflecting recurring operating improvement.
- Other comprehensive income was a $9.429 billion loss, compared with $6.710 billion of income in 2020, primarily reflecting lower unrealized investment gains. Total equity fell by $5.602 billion.
- Group Insurance adjusted operating results deteriorated to a $455 million loss from a $16 million loss, principally due to unfavorable claims experience, including COVID-19-related mortality and disability claims. Its total benefits ratio rose to 98.3% from 90.2%.
- Assurance IQ revenue rose to $558 million from $391 million, but its adjusted operating loss widened to $142 million from $88 million. The company recorded the $1.060 billion non-cash goodwill impairment after lower forecast Medicare growth and higher expected expenses, alongside a decline in peer valuations.
Outlook, management commentary, risks and unusual items
- Management expected 2022 results to benefit from Prudential’s mix of businesses, while acknowledging low interest rates, fee compression and other market challenges. Its strategy is to reallocate capital toward higher-growth businesses, increase their earnings contribution, and reduce Individual Annuities’ contribution.
- The multi-year transformation program incurred approximately $250 million of costs in 2021. Management estimated approximately $540 million of savings generated in 2021 and remained on track for approximately $750 million in annual run-rate savings by the end of 2023.
- Management estimated COVID-19 had a significant net negative effect on 2021 underwriting results. It expected first-quarter 2022 underwriting results to be adversely affected by approximately $160 million in U.S. Businesses and $20 million in International Businesses; actual effects depend on pandemic and claims developments.
- Under illustrative 2022 interest-rate scenarios, the company estimated reinvestment activity could reduce net investment income by $30–$60 million in U.S. operations and $20–$40 million in Japanese operations. These are scenario estimates, not guidance for reported earnings.
- Two major pending dispositions were expected to close in the first half of 2022, subject to approvals and other conditions: Full Service Retirement, with expected proceeds of approximately $2.8 billion and approximately $400 million of expected taxes and transaction costs; and the PALAC variable-annuity block, with a stated total transaction value of approximately $2.2 billion. Prudential expected to recognize sale gains upon closing.
- Key risks include market and interest-rate movements, credit and counterparty losses, mortality and morbidity experience, policyholder behavior, derivative collateral and liquidity demands, ratings changes, regulation, cybersecurity, and execution of the business transformation and Assurance IQ integration. The company also faces contested tax treatment of its Brazil Section 952 election.
- For disclosed litigation and regulatory matters, management estimated reasonably possible losses in excess of established accruals at less than $250 million where estimable. It cautioned that outcomes are uncertain. Regulatory inquiries include Assurance IQ marketing and sales practices and variable-product sales; the filing also describes securities, escheatment, ERISA and LIBOR-related matters.
- Prudential plans to adopt the long-duration insurance accounting standard (ASU 2018-12) in 2023 and expected a significant reduction in equity at adoption, primarily through AOCI, plus a change in the pattern of earnings. The financial statements were audited by PwC, which issued an unqualified opinion; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- How much of 2021’s GAAP profit came from market-sensitive gains and assumption updates versus recurring segment operations; review the reconciliation to adjusted operating income.
- Whether the Full Service Retirement and PALAC transactions close on expected terms and timing, and their effects on capital, earnings and retained obligations.
- Whether Assurance IQ improves growth and profitability after the impairment, and whether further impairment or integration costs arise.
- Developments in COVID-19 claims, Group Insurance benefit ratios, low-rate investment spreads, and annuity guarantee and hedging exposures.
- Progress toward the stated cost-savings target, the 2023 accounting transition, and resolution of the Brazil tax issue and material legal or regulatory matters.