PRUDENTIAL FINANCIAL INC quarterly report, Q2 FY2023

Prudential Financial, Inc. — Q2 2023 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Prudential provides insurance, annuity, retirement and investment-management products in the U.S. and internationally. Comparative 2022 figures were adjusted for adoption of the long-duration insurance accounting standard, ASU 2018-12; reported results and balance-sheet comparisons should be read with that change in mind.

Financial performance

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Revenue	$13,498	$11,392	$30,543	$23,247
Income (loss) before tax and joint-venture earnings	$621	$(1,068)	$2,468	$(1,726)
Net income (loss) attributable to Prudential	$511	$(1,010)	$1,973	$(1,503)
Diluted EPS	$1.38	$(2.71)	$5.31	$(4.04)
Adjusted operating income before tax	$1,392	$1,150	$2,658	$2,686

Revenue growth reflected higher premiums and net investment income, along with changes in other income and market-related items. Net investment income was $4,476 in Q2 and $8,796 for the half-year, up from $3,938 and $8,296, respectively.
Net realized investment losses narrowed to $938 in Q2 and $721 for the half-year, versus losses of $1,636 and $2,680 in 2022. The change in market-risk benefits, net of related hedging gains and losses, was $16 in Q2 and $91 for the half-year, compared with losses of $710 and $980.
The earnings improvement also reflects the prior-year Individual Life assumption-review charge. Conversely, 2023 results did not include prior-year gains from the PALAC and Full Service Retirement sales. Management’s adjusted operating income is a non-GAAP segment measure and is not a substitute for GAAP net income.
Operating cash flow was $2,567 for the first half, compared with $1,502 a year earlier. Investing cash flow was $(6,143), financing cash flow was $1,114, and cash, cash equivalents and restricted cash ended the period at $14,694.

Financial position, liquidity and capital

At June 30, total assets were $697,304, total liabilities $667,849 and total equity $29,455. Prudential-attributable equity was $28,434, down from $30,593 at year-end 2022; AOCI was a loss of $6,649.
Total investments were $425,332. Available-for-sale fixed maturities had fair value of $312,230 against amortized cost of $333,311; the company reported $30,417 of gross unrealized losses and concluded no earnings adjustment for credit losses was warranted on those securities. Management attributed most unrealized losses to interest rates, spreads and currency movements, and said it did not intend, and was not more likely than not required, to sell them before recovery.
Cash and cash equivalents were $14,652, down from $17,251 at December 31. Short- and long-term debt totaled $19,639, down from $20,683. Prudential reported compliance with debt covenants and no borrowings under its syndicated unsecured committed credit facilities.
Holding-company highly liquid assets were $5,043 including net intercompany account borrowings, or $4,475 excluding them. The derivatives in the Individual Retirement Strategies hedging program were in a net collateral-posting position of $12.1 billion, versus $10.8 billion at year-end.
Management reported $48,144 of capital, defined as equity excluding AOCI plus capital debt. PICA’s latest reported RBC ratio was 383% at December 31, 2022; Prudential of Japan and Gibraltar Life solvency margin ratios were 782% and 903%, respectively, at March 31, 2023. These are subsidiary statutory measures, not consolidated GAAP capital ratios.
General-account investment income after expenses yield, as reported by management, was 3.91% in Q2 versus 3.46% a year earlier, and 3.90% for the half-year versus 3.42%. Management cited higher reinvestment rates and short-term yields.

Material changes and business developments

Adjusted operating income before tax for Q2 rose to $1,392 from $1,150; for the half-year it was $2,658 versus $2,686. Q2 gains in Group Insurance and International Businesses were partly offset by lower Retirement Strategies results and larger Corporate and Other losses. Retirement Strategies’ comparison was affected by the absence of the 2022 PALAC sale gain.
PGIM assets under management were $1.266 trillion at June 30, up from $1.228 trillion at year-end, largely from market appreciation, but third-party flows were negative $19.2 billion in the first half. Total Prudential assets under management were $1.415 trillion.
In April, Prudential completed reinsurance of approximately $10 billion of PDI variable-annuity account values with Ohio National. The transaction produced approximately $650 million of proceeds, including statutory capital release, reserve release and ceding commission, net of taxes; the filing also reports a $309 million deferred reinsurance gain to be amortized over the policies’ estimated remaining life.
In July, after quarter-end, Prudential agreed to reinsure certain guaranteed universal life policies representing about 30% of reserves on that in-force block. The transaction was expected to close by year-end, subject to approvals and customary conditions, and was expected to generate approximately $450 million of proceeds, subject to adjustments.
Prudential repurchased $504 million of common stock in the first half under a $1.0 billion 2023 authorization and declared dividends of $2.50 per share. It issued $500 million of junior subordinated notes and redeemed $1.5 billion of such notes.

Outlook, risks and unusual items

The filing provides no specific full-year earnings or revenue guidance. Management said results should benefit from a diversified mix of businesses and described active asset-liability management, but noted reinvestment returns, product pricing and policyholder behavior remain sensitive to market conditions.
Management reported an unfavorable 2023 annual assumptions-review impact to net income, primarily from lapse and claim-incidence updates on long-term-care policies, and unfavorable model refinements for additional insurance reserves. For the first half, the aggregate pretax impact of assumption updates and refinements was a loss of $397, compared with a loss of $1,620 in 2022; the 2023 impact included both operating and reconciling items.
Interest-rate, equity-market and foreign-exchange changes can affect investment values, insurance reserves, derivatives, collateral needs, liquidity, capital and fees. Other stated risks include credit deterioration or counterparty default, mortality and morbidity deviations, policyholder lapses, regulatory and tax changes, ratings downgrades, competition, cybersecurity and litigation.
The filing estimates reasonably possible litigation and regulatory losses in excess of established accruals at less than $250 million for matters where an estimate can currently be made. Management said outcomes remain uncertain and did not expect the matters, after reserves and indemnification, to have a material adverse effect, while acknowledging an unfavorable resolution could materially affect a particular period.
ASU 2018-12 materially changed insurance accounting and prior-period presentation. At adoption on January 1, 2023, it reduced retained earnings by $1.7 billion and increased AOCI by $16.0 billion. Results also include substantial market and derivative effects, so GAAP earnings comparisons may not reflect underlying segment trends.

Important facts for investors to verify

Reconcile the GAAP earnings recovery with investment losses, market-risk-benefit movements, assumption updates and the non-GAAP adjusted operating income measure.
Review the quality, duration and liquidity of the fixed-income and commercial mortgage portfolios, including unrealized losses, credit-loss allowances and office-property exposures.
Assess the collateral and liquidity implications of the $12.1 billion net-post derivative position, and the sensitivity of reserves and earnings to interest rates, equity markets and policyholder behavior.
Track the Ohio National and Somerset Re transactions, including realized capital and cash benefits, counterparty protections, deferred-gain amortization and remaining risks retained by Prudential.
Confirm statutory capital and dividend capacity using current subsidiary filings; the RBC and international solvency ratios cited here are dated December 2022 and March 2023, respectively.