Prudential Financial, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; interim financial statements are unaudited. Prudential provides insurance, annuity, retirement, investment-management and related financial services. Results are reported across the Financial Services Businesses and the separately managed Closed Block Business.
Financial results and position
- Revenue: $10.185 billion, up 5.8% from $9.623 billion in Q1 2012. Premiums were $7.084 billion; net investment income was $3.638 billion. Asset management fees and other income were negative $1.170 billion, reflecting substantial foreign-exchange-related accounting effects.
- Profit: Net loss attributable to Prudential was $706 million, versus a $939 million loss; common-stock loss per share was $1.55 versus $2.03. The loss narrowed in part because income taxes shifted from $179 million expense to an $831 million benefit. The filing cautions that Japanese foreign-currency accounting mismatches materially affected reported earnings.
- Operating measure: Financial Services Businesses adjusted operating income before tax, a management measure that is not GAAP net income, rose to $1.484 billion from $1.048 billion. International Insurance contributed $877 million versus $597 million. Individual Annuities declined to $372 million from $421 million.
- Cash flow: Operating cash flow was $187 million, down from $767 million. Investing activities used $3.652 billion and financing activities provided $349 million. Cash and cash equivalents decreased $3.623 billion to $14.477 billion. Cash flows can be volatile for an insurer and should be assessed with its broader liquidity disclosures.
- Balance sheet and debt: Total assets were $724.1 billion, up from $709.3 billion at year-end; total equity was $40.7 billion, up from $39.3 billion. Short- and long-term debt totaled $27.7 billion, versus $27.2 billion. Prudential reported $6.88 billion of parent-company cash and short-term investments and $3.75 billion of committed credit facilities, with no facility borrowings outstanding.
- Comprehensive income and distributions: Comprehensive income attributable to Prudential was $1.498 billion, including $2.204 billion of after-tax other comprehensive income, principally unrealized investment gains. The company declared a $0.40 quarterly common-stock dividend.
Material changes and management commentary
- Prudential acquired The Hartford’s individual life business on January 2 for $615 million, assuming approximately 700,000 policies with $141 billion of net retained face amount. The acquired business contributed to Individual Life growth.
- Management expects approximately $125 million of pre-tax integration costs over two to three years, including about $50 million in 2013; $8 million was recorded in Q1. After integration, it expects approximately $90 million in annual cost savings. These are expectations, not guarantees.
- International Insurance improved on business growth, persistency, lower Star and Edison integration costs, synergies and a gain on the sale of the remaining indirect China Pacific Group investment. Yen weakness also affected reported results. The filing describes economically matched foreign-currency assets and liabilities whose accounting treatment creates earnings volatility.
- Individual Annuities results reflected higher fee income from account-value growth, offset by less favorable profitability updates and reserve effects. Variable-annuity guarantees and hedging outcomes remain sensitive to markets and policyholder behavior.
- In April, Prudential agreed to sell its wealth-management services unit to Envestnet; closing was expected in 2013 and the transaction was not expected to materially affect results. Prudential also remained under consideration by the Financial Stability Oversight Council for possible designation for enhanced Federal Reserve supervision; no final designation was reported.
Risks, contingencies and unusual items
- Key risks include interest-rate and market fluctuations, prolonged low rates, investment losses and defaults, foreign-currency movements, reserve and actuarial assumption changes, variable-annuity guarantees, access to financing, regulation, and the ability of subsidiaries to distribute funds to the holding company.
- Management estimated reasonably possible litigation and regulatory losses above established accruals at $0 to approximately $200 million where estimable; this is not an expected-loss estimate or maximum exposure. Matters include state inquiries and lawsuits concerning unclaimed life-insurance benefits and retained-asset accounts. Management said an adverse resolution could materially affect a period’s results or cash flow, while believing the overall ultimate outcome was not likely to materially harm financial position.
- Other notable items include a $117 million estimated recovery relating to Lehman derivative losses and a $66 million gain on the China Pacific Group investment sale. The filing reports no material change in market-risk exposures from year-end 2012.
Important facts for investors to verify
- How much of the Q1 loss and tax benefit reflects recurring operations versus foreign-exchange accounting, derivatives and discrete tax effects.
- Whether adjusted operating income growth is sustained, particularly in International Insurance, and how it reconciles to GAAP results.
- Actual Hartford integration spending, realized cost savings, and progress on the expected wealth-management sale.
- Developments in unclaimed-property and retained-asset-account litigation, including potential losses beyond the disclosed estimable range.
- Capital, liquidity and regulatory implications if Prudential receives a Financial Stability Oversight Council designation; the filing provides no full-year earnings guidance.