Prudential Financial, Inc. — FY2011 Form 10-K
Business context and reporting period. This is the annual report for the year ended December 31, 2011, not a standalone fourth-quarter filing. Prudential is a global insurer and asset manager with approximately $900.7 billion in assets under management. Its reporting separates the Financial Services Businesses from the Closed Block Business, but the two are not legally separate. Common Stock reflects the Financial Services Businesses; privately held Class B Stock reflects the Closed Block Business.
Financial performance and position
| Metric | FY2011 | FY2010 |
|---|---|---|
| Total revenue | $49.045 billion | $38.200 billion |
| Income from continuing operations before tax and joint-venture earnings | $5.117 billion | $4.392 billion |
| Net income attributable to Prudential Financial | $3.666 billion | $3.195 billion |
| Diluted Common Stock EPS | $7.22 | $5.75 |
| Operating cash flow | $12.377 billion | $6.542 billion |
- Reported revenue rose about 28%; net income attributable to Prudential rose about 15%. Revenue growth included investment gains, foreign-exchange effects, and the acquired Japanese businesses.
- Management’s non-GAAP adjusted operating income before tax for the Financial Services Businesses was $4.273 billion, up from $3.982 billion. It is a segment-performance measure, not a substitute for GAAP income.
- Operating, investing, and financing cash flows were $12.377 billion, negative $13.295 billion, and positive $2.099 billion, respectively. Cash and cash equivalents increased $1.336 billion.
- At year-end, total assets were $624.521 billion, total equity $37.811 billion, and total investments $356.247 billion. Separate-account assets and liabilities were each $218.380 billion.
- Consolidated short- and long-term debt was $26.958 billion; including asset-based financing, total borrowings and financing were $36.154 billion. Parent-company cash and short-term investments were $4.944 billion.
- Net realized investment gains were $2.831 billion, versus $1.050 billion in 2010. Financial Services general-account fixed-maturity unrealized gains were $10.493 billion at year-end, compared with $5.726 billion a year earlier. Investment yield was pressured by low rates.
- No single consolidated operating-margin measure is presented as a key performance measure; Prudential reports multiple insurance and investment-management businesses and uses adjusted operating income for segment analysis.
Material changes versus the prior comparable period
- FY2011 net income attributable to Prudential increased $471 million. Financial Services Businesses income from continuing operations rose to $3.568 billion from $2.693 billion; Closed Block income fell to $135 million from $480 million, mainly because of higher policyholder-dividend-obligation expense.
- The February 2011 acquisition of AIG’s Star and Edison Japanese insurance businesses cost $4.709 billion, including $496 million of assumed third-party debt. They contributed $354 million of adjusted operating income before acquisition and integration costs, and $213 million of transaction and integration costs were recorded in 2011.
- Individual Annuities adjusted operating income decreased to $713 million from $1.046 billion, including a $232 million net charge in 2011 from variable-annuity reserve and acquisition-cost adjustments, versus a $348 million net benefit in 2010. Retirement income rose modestly to $598 million; Asset Management rose to $659 million.
- International Insurance adjusted operating income increased to $2.705 billion from $2.085 billion, reflecting the acquisition, growth, currency effects, and gains from investment sales. U.S. Group Insurance adjusted operating income declined to $208 million from $215 million, with disability claims a headwind.
- Full-year individual annuity gross sales declined to $20.3 billion from $21.8 billion; net sales declined to $13.1 billion from $14.6 billion. Institutional Investment Products account values rose to $90.1 billion, with $21.6 billion in net additions.
- Third-party institutional and retail Asset Management net flows were $20.2 billion, down from $35.0 billion; assets under management nevertheless increased to $619.1 billion from $537.3 billion.
- Unaudited fourth-quarter results: revenue was $11.695 billion versus $8.049 billion; net income attributable to Prudential was $686 million versus $177 million; diluted Common Stock EPS was $1.26 versus $0.45.
Outlook, management commentary, risks, and unusual items
- Management’s 2012 priorities include retirement-income products and pension risk transfer in the U.S., higher-quality insurance growth and distribution development, and Japanese expansion and integration of Star and Edison. Management expected approximately $500 million of pre-tax integration costs over five years, including about $200 million in 2012, and approximately $250 million of annual cost savings after integration, with about two-thirds expected by the end of 2012. These are estimates, not guaranteed results.
- Management declared a 2011 Common Stock dividend of $1.45 per share, about 26% above 2010, and repurchased $999.5 million of stock under a $1.5 billion authorization. Further repurchases and dividends remain subject to capital needs, subsidiary dividend restrictions, and Board decisions.
- Variable-annuity guarantees and hedging remain significant sources of earnings and capital volatility. Prudential reported a $1.662 billion 2011 loss in Corporate and Other from temporarily hedging below its stated hedge target; the filing says this decision reflected overall capital considerations and market conditions.
- The March 2011 Japan earthquake and tsunami resulted in an estimated $61 million pre-tax charge. Corporate and Other also recorded a $93 million expense related to expanded Social Security death-file matching and a $20 million voluntary contribution to an insurance insolvency fund.
- Other notable items include a $96 million pre-tax gain on the sale of the Afore XXI stake, a $49 million pre-tax gain on the real-estate brokerage and relocation-services sale, and a $18 million pre-tax loss on the Global Commodities sale. The China Pacific investment disposals generated a $237 million pre-tax benefit in 2011.
- Key risks include prolonged low interest rates, market and credit volatility, reserve and policyholder-behavior assumptions, ineffective hedging or counterparty default, foreign-exchange exposure (particularly Japan), regulatory change under Dodd-Frank and possible systemic designation, and litigation or unclaimed-property obligations.
- Adoption of revised acquisition-cost accounting on January 1, 2012 was estimated to reduce equity by approximately $2.7–$3.1 billion and could initially lower earnings; the change is not expected to affect cash flows.
- Management stated that pending litigation and regulatory matters were not likely, based on information then available and after reserves and indemnification, to have a material adverse effect on financial position. Outcomes remain uncertain. PwC gave an unqualified opinion on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Reconcile reported GAAP earnings and investment gains with adjusted operating income; assess how much of 2011’s increase is recurring versus market-, currency-, acquisition-, or disposal-related.
- Track variable-annuity guarantee exposure, reserve sensitivity, hedge effectiveness, and the consequences of management’s decision to hedge below target.
- Verify Star and Edison integration spending, realized cost savings, acquired-business profitability, and any remaining assumed debt or liabilities.
- Review holding-company liquidity and debt maturities alongside subsidiary dividend capacity, RBC and solvency margins, and any collateral or credit-rating triggers.
- Assess asset quality and valuation, including European exposures, Japanese government securities, below-investment-grade holdings, and mortgage-related investments.
- Monitor disability-claim trends, Closed Block dividend obligations, litigation and unclaimed-property developments, and the 2012 acquisition-cost accounting impact.