Prudential Financial, Inc. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015; filed February 19, 2016. The filing is an annual report, not a standalone fourth-quarter filing. Prudential provides insurance, annuities, retirement services and investment management, with approximately $1.184 trillion in assets under management at year-end.
Financial performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $57.119 billion | $54.105 billion |
| Income from continuing operations | $5.712 billion | $1.426 billion |
| Net income attributable to Prudential | $5.642 billion | $1.381 billion |
| Diluted EPS | $12.17 | $3.23 |
| Adjusted operating income before tax | $6.231 billion | $5.892 billion |
| Operating cash flow | $13.895 billion | $19.396 billion |
| Total assets | $757.388 billion | $766.655 billion |
| Total debt, short- and long-term | $20.943 billion | $23.670 billion |
| Total equity | $41.923 billion | $42.349 billion |
Revenue increased about 5.6%, while reported net income rose sharply. The increase in GAAP earnings was substantially affected by investment, hedging, foreign-exchange and accounting items; it should not be read as equivalent growth in underlying operations. Adjusted operating income before tax increased about 5.8%. Prudential reported $4.025 billion of realized investment gains, versus $1.636 billion in 2014, and income-tax expense increased to $2.072 billion from $349 million.
Fourth quarter: Revenue was $14.256 billion, continuing-operations income was $740 million, and net income attributable to Prudential was $735 million, or $1.62 basic and $1.60 diluted EPS. Fourth-quarter 2014 reported a $1.451 billion continuing-operations loss and a $1.459 billion attributable net loss. The filing attributes substantial period-to-period volatility to market and accounting effects.
Material changes and business results
- In January 2015, Prudential repurchased and cancelled all Class B shares. FY 2015 EPS therefore reflects consolidated earnings; 2014 EPS reflected the former Financial Services Businesses. Comparisons are not fully like-for-like.
- Adjusted operating income before tax rose to $6.231 billion from $5.892 billion. International Insurance contributed $3.226 billion, Individual Annuities $1.797 billion, Retirement $931 million, Asset Management $779 million, Individual Life $635 million and Group Insurance $176 million; Corporate and Other was a $1.313 billion loss.
- Individual Annuities adjusted operating income increased to $1.797 billion from $1.467 billion, but account value fell to $152.9 billion from $158.7 billion, including negative net flows of $1.5 billion. Sales of highest-daily-benefit products declined as Prudential adjusted product offerings and risk exposure.
- Retirement adjusted operating income fell to $931 million from $1.215 billion, mainly due to lower investment spreads, higher expenses and lower fee income. Full-service account values rose to $189.0 billion; institutional investment product account values were $180.0 billion.
- International Insurance adjusted operating income was $3.226 billion, down slightly from $3.252 billion. Constant-currency new business premiums increased to $2.800 billion from $2.602 billion, while reported results were pressured by currency movements and assumption updates.
- Group Insurance adjusted operating income improved to $176 million from $23 million, substantially reflecting more favorable assumption updates. Its 2015 total benefits ratio was 86.6%, compared with 91.1%.
Cash, capital, debt and liquidity
- Consolidated cash and cash equivalents were $17.612 billion at year-end, up from $14.918 billion. Operating cash flow declined $5.501 billion year over year; the filing does not present a conventional free-cash-flow measure.
- Holding-company cash and short-term investments totaled $11.104 billion, including intercompany liquidity-account balances; excluding net borrowings from that account, the figure was $5.062 billion. Management targets at least $1.3 billion of holding-company cash.
- Debt declined to $20.943 billion, including $1.216 billion short-term and $19.727 billion long-term. A $4.0 billion committed revolving credit facility had no borrowings outstanding at year-end. The contractual-obligations table estimates $41.678 billion of debt payments, including estimated interest.
- Management reported $41.589 billion of total capital under its measure, including $29.605 billion of equity excluding AOCI, $5.884 billion of junior subordinated debt and $6.100 billion of other capital debt. Domestic insurance subsidiaries each had RBC ratios above 400%; major Japanese subsidiaries had solvency margin ratios above 700% at year-end.
- Common dividends declared were $2.44 per share for 2015, versus $2.17 in 2014. The Board authorized up to $1.5 billion of repurchases for 2016. Dividends and buybacks remain subject to subsidiary distribution limits, capital needs and regulatory requirements.
Outlook, risks and unusual items
- Management gave no numerical earnings guidance. It expects 2016 results to reflect business mix, product-diversification initiatives and capital management; it highlighted growth, risk management, digital and infrastructure capabilities, and cross-business synergies.
- For a specified scenario of a 2.25% average 10-year Treasury rate through 2017 with credit spreads unchanged, management estimated an unfavorable pre-tax adjusted-operating-income impact of about $20 million in 2016 and $55 million in 2017. This is a limited scenario estimate, not a full-company forecast.
- Prudential expects in 2016 to recapture variable-annuity living-benefit risks previously ceded to a captive and manage them in statutory insurance entities; management expects this to reduce capital volatility. It also expected to close the AFP Habitat transaction in Chile in the first quarter of 2016.
- Low interest rates and reinvestment yields below existing portfolio yields remain significant risks. The company estimated approximately $168 billion of relevant U.S. fixed-maturity and commercial-mortgage assets, with a current average yield around 4.5%, and expects reinvestment pressure. Other key exposures include equity-market guarantees, policyholder behavior, mortality and morbidity assumptions, Japanese yen movements, investment credit and liquidity, and counterparty performance.
- Prudential is subject to Federal Reserve supervision as a designated financial company and is identified as a global systemically important insurer. Potential capital, liquidity, stress-testing and resolution requirements, as well as the proposed DOL fiduciary rule and evolving captive-reinsurance rules, could raise costs or constrain capital distributions.
- FY 2015 included an estimated $80 million of remediation costs in Corporate and Other relating to administration of certain securities-lending activities. In February 2016, the company disclosed that it self-reported to the SEC and other regulators that a long-standing restriction had in some cases limited securities-lending income for certain separate accounts; it said it had removed the restriction and planned customer remediation.
- The final purchase price for the Class B shares is disputed and may change. The company estimated aggregate reasonably possible litigation and regulatory losses in excess of established accruals at less than $250 million where estimable; outcomes remain uncertain.
Important facts for investors to verify
- How much of the 2015 GAAP earnings increase came from repeatable operations versus realized gains, hedge effects, currency accounting and assumption updates; compare with adjusted operating income and its reconciliation.
- Whether the 2015-to-2014 comparison is appropriately adjusted for the Class B repurchase and the resulting change in reporting basis.
- The performance and capital effects of variable-annuity guarantees, hedging, external reinsurance and the planned 2016 captive-risk recapture.
- The sensitivity of investment spreads and earnings to persistently low rates, credit deterioration—especially energy exposures—and Japanese yen movements.
- The status and potential cost of securities-lending remediation, the Class B purchase-price dispute, and material litigation or regulatory matters.
- Subsidiary statutory capital, dividend capacity, rating changes and any new Federal Reserve, state or international capital and liquidity requirements.