Prudential Financial, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Prudential provides insurance, annuity, retirement, and investment-management products in the U.S. and internationally. Amounts are in U.S. dollars; financial-statement figures are in millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $15,425 | $15,105 | $41,004 | $45,584 |
| Net income (loss) attributable to Prudential | $1,487 | $1,418 | $(1,193) | $3,058 |
| Diluted EPS | $3.70 | $3.44 | $(3.06) | $7.35 |
| Adjusted operating income before tax, segments and Corporate and Other | $1,563 | $1,582 | $3,629 | $4,712 |
- Q3 benefits and expenses were $13,978 million, versus $13,380 million a year earlier. Nine-month expenses were $42,227 million, versus $41,843 million.
- Nine-month operating cash flow was $12,881 million, compared with $15,640 million in 2019. Investing cash flow was $(13,739) million and financing cash flow was $5,066 million. Cash, cash equivalents, and restricted cash totaled $20,804 million at period-end.
- At September 30, total assets were $911,589 million, total liabilities $844,699 million, and total equity $66,890 million. Cash and cash equivalents on the balance sheet were $20,658 million.
- Short- and long-term debt totaled $21,282 million. Parent-company highly liquid assets were $6,089 million excluding net borrowings from the intercompany liquidity account. The company reported $50,182 million of capital, including equity excluding AOCI and capital debt.
- Available-for-sale fixed maturities had a fair value of $400,816 million and gross unrealized gains of $56,106 million at quarter-end. Nine-month net investment income was $12,834 million, down from $13,044 million.
Changes versus comparable periods
- Q3 attributable net income increased $69 million year over year, despite lower pre-tax income. Management cited favorable variable-annuity embedded-derivative and hedge movements, a more favorable tax result, and investment-related gains, partly offset by weaker realized investment results.
- Nine-month attributable results swung to a $1,193 million loss from $3,058 million of income. Total revenue fell $4,580 million; realized investment losses were $2,164 million, compared with $249 million of losses in 2019. Segment adjusted operating income declined to $3,629 million from $4,712 million.
- Q3 adjusted operating income was broadly stable overall. PGIM increased to $370 million from $232 million; U.S. Businesses declined to $873 million from $910 million; International Businesses increased to $775 million from $721 million; and Corporate and Other losses widened to $455 million from $281 million.
- Net unrealized investment gains in AOCI increased, contributing to Prudential equity of $66,217 million at September 30, versus $63,115 million at year-end 2019. Total equity also includes noncontrolling interests.
Outlook, risks, and unusual items
- COVID-19: Management said the pandemic adversely affected results, investment values, capital flexibility, sales prospects, and operations, and that ultimate effects could not be estimated. It estimated a net underwriting impact of approximately $70 million for each additional 100,000 U.S. fatalities, subject to population and insured-risk factors.
- Management expected approximately $155 million of pandemic-related expenses in 2020, including about $40 million in Q3 and $25 million in Q4, partly offset by anticipated cost savings of approximately $90 million for the year. These are estimates, not formal earnings guidance.
- Low rates pose reinvestment and spread risks. Under specified rate assumptions, Prudential estimated lower investment income of $100–$140 million for U.S. operations and $40–$80 million for Japanese operations over October 2020–September 2021.
- Prudential completed the sale of its Korean insurer in August for approximately $1.9 billion and reported an approximately $800 million after-tax loss, including about $100 million in Q3. It agreed to sell its Taiwan business for approximately $190 million plus contingent consideration and recorded an approximately $300 million after-tax charge in Q3; closing was expected in 2021, subject to approvals and other conditions.
- Share repurchases were suspended beginning April 1; the company said it did not intend to resume them in 2020. It declared dividends of $1.10 per share in each 2020 quarter reported.
- Prudential issued $1.3 billion of junior subordinated notes and redeemed $1.285 billion of higher-coupon junior subordinated notes. It also issued $1.5 billion of senior notes earlier in the year. Debt covenants were met, and no amounts were drawn on committed credit facilities at quarter-end.
- COVID-19, credit deterioration, interest-rate and market movements, mortality and policyholder behavior, derivative collateral needs, liquidity, regulatory changes, and cyber/operational disruption are among the stated risks. Litigation and regulatory matters had an estimated aggregate range of reasonably possible losses below $250 million in excess of accruals, for matters where an estimate could be made. Management cautioned that outcomes remain uncertain.
- Management reported that significant insurance subsidiaries maintained capital consistent with ratings targets. Disclosed RBC ratios are as of December 31, 2019 and Japanese solvency ratios as of June 30, 2020; these are not September 2020 measurements. No significant company rating or outlook actions were reported through the filing date.
Investor verification priorities
- Reconcile the nine-month GAAP loss and major realized investment and derivative impacts with adjusted operating income, including the company’s changed treatment of variable-annuity hedge results.
- Track COVID-19 mortality, claims, policyholder behavior, sales, credit migration, and whether management’s expense and underwriting estimates change.
- Verify the final proceeds, closing conditions, and realized losses for the Korea and Taiwan dispositions, including the Taiwan contingent consideration.
- Assess liquidity and capital at the parent and regulated-insurer levels, including collateral demands, subsidiary dividend restrictions, and updated statutory capital ratios.
- Monitor low-rate reinvestment effects, investment exposures in stressed sectors, commercial mortgage credit quality, and the impact of the expected long-duration insurance accounting changes.