Prudential Financial, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance sheet compared with December 31, 2021. Prudential provides insurance, annuity, retirement, and investment-management products in the U.S. and internationally. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $13,215 | $16,952 |
| Benefits and expenses | $13,330 | $13,538 |
| Income (loss) before tax and joint-venture earnings | $(115) | $3,414 |
| Net income (loss) attributable to Prudential | $(31); $(0.10) per diluted share | $2,828; $6.98 per diluted share |
| Net cash from operating activities | $1 | $(3,297) |
| Net investment income | $4,358 | $4,382 |
Management’s non-GAAP segment measure, adjusted operating income before tax, was $1,566, down from $2,043. The filing does not provide a single consolidated operating margin; adjusted operating income is not a GAAP measure.
At March 31, total assets were $878,066, total liabilities $833,388, and total equity $44,678. Cash and cash equivalents were $14,086. Short- and long-term debt totaled $20,233; debt covenants were reported in compliance. Prudential’s capital measure was $53,358, including $39,773 of equity excluding AOCI and $8,607 of junior subordinated debt.
Changes versus the prior period
- Revenue fell $3,737, while the pretax result swung from income to a loss. The largest factors included an unfavorable $1,546 variance in realized investment gains and related items, an $869 unfavorable variance from variable-annuity embedded derivatives and hedges, lower segment adjusted operating income, and a $355 unfavorable change in divested and run-off businesses. Lower tax expense partly offset the decline.
- Realized investment results were a net loss of $316, versus a gain of $2,079 a year earlier. Prudential cited rising rates and credit spreads, among other factors, for significant investment valuation pressure.
- Comprehensive loss attributable to Prudential was $17,150, primarily reflecting a $21,770 pretax decline in net unrealized investment gains. AOCI fell to $4,205 from $21,324 at year-end; management said unrealized fixed-income losses were primarily related to interest-rate increases and spread widening and that it did not expect to be forced to sell the affected securities before recovery.
- Adjusted operating income varied by business: PGIM $188 (from $651); U.S. Businesses $943 (from $843); International Businesses $801 (from $871); and Corporate and Other $(366) (from $(322)). PGIM’s comparison included the absence of a prior-year gain on the sale of its Pramerica SGR stake.
- Total assets declined to $878,066 from $937,582 and total equity to $44,678 from $62,608. The equity decline largely reflects the adverse change in AOCI.
Liquidity, capital, and significant transactions
- Prudential reported $4,645 of highly liquid assets at the holding company, or $3,596 excluding net borrowings from its intercompany liquidity account. It said liquidity and capital resources were sufficient for reasonably foreseeable needs. Unsecured committed credit facilities were undrawn at quarter-end.
- Variable-annuity hedging and capital-hedging derivatives were in a net collateral-posting position of $6.9 billion, up from $5.5 billion at year-end, mainly due to rising interest rates. The filing notes that collateral demands can create material liquidity needs.
- In February, Prudential issued $1.0 billion of 5.125% junior subordinated notes due 2052. It repurchased 3.3 million shares for $375 million in the quarter and declared $1.20 per share in dividends.
- On April 1, 2022, after quarter-end, Prudential completed the sale of PALAC to Fortitude for an approximately $2.6 billion transaction value and the sale of its Full Service Retirement business to Great-West for approximately $2.8 billion. These values include items such as capital released and are subject to adjustments. Expected gains were to be recognized in Q2; the Full Service Retirement sale was also expected to incur approximately $400 million in taxes and transaction costs.
Outlook, risks, and unusual items
- Management said rising rates may reduce assets under management and fee income in the near term, while potentially improving investment income over time through higher reinvestment rates. Under a stated U.S. rate scenario, it estimated reinvestment activity would affect net investment income by between $0 and $(20) million over April 2022–March 2023; it estimated no material impact under its stated Japan rate scenario.
- Prudential reported approximately $170 million of cost savings from multi-year efficiency programs in Q1 and remained on track for approximately $750 million of annual run-rate savings by the end of 2023. Program costs were approximately $25 million in the quarter.
- COVID-19 continued to affect claims and sales. The company estimated a significant net negative underwriting impact in Q1. For Q2, it expected adverse underwriting impacts of approximately $40 million in U.S. Businesses and $25 million internationally, subject to significant uncertainty.
- Prudential planned its annual actuarial assumption review in Q2 2022. It was evaluating industry mortality data that could be more adverse than its current Individual Life assumptions and could increase reserves and reduce earnings; the outcome was uncertain.
- The company expects adoption of long-duration insurance accounting standard ASU 2018-12 on January 1, 2023 to significantly reduce total equity, principally through AOCI, and affect subsequent earnings patterns; the impact was still being assessed.
- Management identified market, credit, mortality and policyholder-behavior risks; derivative collateral and liquidity needs; COVID-19; regulatory and legal matters; and currency movements among significant uncertainties. The estimated aggregate range of reasonably possible litigation and regulatory losses above established accruals was less than $250 million where estimable; this is not an estimate of maximum exposure.
- The quarter’s tax benefit was $69 million, including a $26 million benefit related to uncertainty in foreign tax credit treatment. The effective tax rate is affected by items including non-taxable investment income, tax credits, and foreign earnings.
Important facts for investors to verify
- How much of the GAAP loss and sharp year-over-year earnings decline reflects market valuation and hedging effects versus underlying operating performance; review both GAAP results and adjusted operating income reconciliations.
- The actual Q2 accounting gains, net proceeds, capital released, tax costs, and post-closing adjustments from the PALAC and Full Service Retirement sales.
- Results of the Q2 actuarial review, particularly any Individual Life reserve changes and the effects of COVID-19 claims.
- Whether the $6.9 billion net collateral-posting position or further market movements create additional liquidity or capital pressure.
- Progress toward the 2023 cost-savings target, the effect of the 2023 insurance accounting standard, and any material changes in investment credit quality or legal contingencies.