Prudential Financial, Inc. — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. Prudential is a global insurer and financial-services company with approximately $667 billion in assets under management. Its reporting separates the Financial Services Businesses from the legacy Closed Block Business, but the two are not legally separate entities.
Key financial results
| Metric | 2009 | 2008 |
|---|---|---|
| Total revenue | $32.688 billion | $29.219 billion |
| Income (loss) before tax and equity in operating joint ventures | $1.569 billion | $(1.139) billion |
| Net income (loss) attributable to Prudential Financial | $3.124 billion | $(1.117) billion |
| Diluted net income (loss) per Common share | $7.63 | $(2.53) |
| Cash flow from operating activities | $5.840 billion | $10.855 billion |
| Total assets | $480.203 billion | $445.011 billion |
| Total equity | $25.729 billion | $13.786 billion |
| Short- and long-term debt | $24.159 billion | $30.825 billion |
Revenue less benefits and expenses was $1.569 billion, or approximately 4.8% of revenue, compared with a pretax loss in 2008. Prudential’s insurer mix and investment-related accounting make this a limited measure of operating margin. Cash and cash equivalents were $13.164 billion consolidated; the parent reported $3.830 billion in cash and short-term investments. Committed unsecured credit facilities totaled $4.340 billion, with no borrowings outstanding under them at year-end.
Material changes and notable items
- Net income rebounded from a 2008 loss, reflecting improved financial markets and a major disposal gain. Prudential received $4.5 billion in cash for its Wachovia Securities minority interest sale, completed December 31, 2009. The sale generated a $2.247 billion pretax gain; related one-time costs were $104 million. The filing also reports different after-tax gain measures depending on the presentation, so investors should reconcile these figures.
- Financial Services Businesses adjusted operating income before tax was $3.319 billion, versus $1.490 billion in 2008. This non-GAAP segment measure excludes, among other items, realized investment results and divested businesses; it should not be confused with consolidated GAAP earnings.
- Consolidated realized investment losses were $2.896 billion, compared with losses of $2.399 billion in 2008. Financial Services Businesses reported $1.651 billion of realized losses and related adjustments, including substantial fixed-maturity and equity impairments. General account fixed-maturity unrealized positions improved sharply: Financial Services Businesses moved from $6.567 billion of net unrealized losses at year-end 2008 to $998 million of net unrealized gains at year-end 2009.
- Operating cash flow declined despite positive net income. Cash flow from investing activities was $2.429 billion and financing activities used $10.421 billion; cash and cash equivalents decreased by $1.864 billion during the year.
- Debt declined, in part as short-term borrowings and convertible notes were repaid. Total borrowings plus asset-based financing were $33.579 billion, down from $43.376 billion. These measures include financing beyond the debt total shown above.
Business performance, outlook and risks
- Individual Annuities adjusted operating income improved to $703 million from a $1.077 billion loss, with significant effects from market-driven changes in variable-annuity guarantees, hedges, reserves and acquisition-cost amortization. Gross sales reached a record $16.3 billion; net sales were $10.3 billion versus $2.1 billion in 2008.
- Full Service Retirement deposits and sales were $23.2 billion and net additions were $8.8 billion, up from $18.9 billion and $3.9 billion, respectively. Asset Management adjusted operating income declined to $55 million from $232 million, including pressure from commercial mortgage credit charges, lower fees and real-estate conditions.
- International Insurance adjusted operating income reached a record $1.843 billion. Results included the 2009 acquisition of Yamato Life. Prudential agreed in February 2010 to sell its Korean asset-management operations, subject to regulatory approval.
- Management expected the economic and market recovery to remain challenging in 2010, while pursuing retirement-income growth, high-quality U.S. insurance business and expansion in selected international markets. No quantified earnings guidance was provided in the supplied filing text.
- Prudential identified material sensitivities to financial markets, interest rates, credit defaults, policyholder behavior, mortality and morbidity, foreign exchange, reserve assumptions, ratings and access to financing. Variable-annuity guarantees and hedging performance are particularly market-sensitive. The company estimated up to $900 million of 2010 financing needs for XXX/AXXX statutory reserves, subject to mitigation efforts.
- Commercial mortgage interim loans in Asset Management totaled $1.7 billion at year-end, with a weighted-average loan-to-value ratio of 112% and a $236 million allowance for losses or credit-related valuation losses. The company had suspended new interim-loan originations in 2008.
- Legal and regulatory matters include a shareholder demand alleging $6.5 billion in damages in the Lederman matter and other insurance, securities and employment disputes. Management stated that, based on information then available and after considering reserves and indemnification, the ultimate outcome was not likely to materially affect financial position; outcomes remain uncertain.
Most important facts for investors to verify
- Reconcile reported GAAP net income and EPS with the Wachovia sale gain, one-time costs, investment impairments and market-sensitive annuity adjustments.
- Review statutory capital and dividend capacity at regulated subsidiaries, ratings and any collateral or financing requirements; parent liquidity is not interchangeable with subsidiary funds.
- Assess variable-annuity guarantee exposure, hedge effectiveness, reserve assumptions and sensitivity to market and policyholder behavior.
- Examine subprime and commercial real-estate exposures, loan-loss allowances, valuation inputs and the status of interim loans.
- Track the anticipated XXX/AXXX reserve financing, 2010 outlook, pending legal matters and the proposed Korean asset-management sale.
PricewaterhouseCoopers issued an unqualified audit opinion, and management and the auditor concluded that internal control over financial reporting was effective as of December 31, 2009.