Prudential Financial, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are against December 31, 2022. Prudential provides insurance, annuity, retirement, and investment-management products and services. Figures are unaudited and in U.S. dollars unless otherwise noted.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior date |
|---|---|---|
| Total revenue | $17.045 billion | $11.855 billion in Q1 2022 |
| Net income attributable to Prudential | $1.462 billion; diluted EPS $3.93 | Net loss of $493 million; diluted EPS loss of $1.33 in Q1 2022 |
| Income before tax | $1.847 billion; about 10.8% of revenue | Loss of $658 million in Q1 2022 |
| Net income margin | About 8.6% | Negative in Q1 2022 |
| Operating cash flow | $1.343 billion | $1 million in Q1 2022 |
| Cash and cash equivalents | $17.425 billion | $17.251 billion at December 31, 2022 |
| Total assets / total equity | $709.269 billion / $32.447 billion | $689.029 billion / $31.548 billion at December 31, 2022 |
| Total consolidated borrowings | $21.156 billion | $20.683 billion at December 31, 2022 |
| Adjusted operating income before tax | $1.266 billion | $1.536 billion in Q1 2022 |
Revenue rose about 44%, but the year-over-year swing to profit was substantially affected by market-sensitive investment and market-risk-benefit items, as well as results from divested and run-off businesses. Net investment income was $4.320 billion versus $4.358 billion; net realized investment gains were $217 million versus a $1.044 billion loss. Segment adjusted operating income declined about 18%, so consolidated GAAP earnings should not be read as a direct measure of recurring operating momentum.
Operating, investing, and financing cash flows were respectively $1.343 billion, a use of $3.303 billion, and a source of $2.129 billion. Prudential reported $5.526 billion of parent-company highly liquid assets, including intercompany liquidity; excluding net intercompany borrowings, the amount was $4.554 billion. Management said liquidity and capital resources were sufficient under reasonably foreseeable stress scenarios. Company-reported capital was $49.776 billion, including equity measured excluding AOCI.
Material changes and notable items
- Q1 2023 GAAP net income improved by $1.955 billion year over year. Management identified favorable variances of $2.090 billion in realized investment gains and related items, $379 million in market-risk-benefit changes net of hedges, and $347 million in divested and run-off business results. Higher income taxes and lower segment adjusted operating income partly offset these effects.
- Institutional Retirement Strategies recorded higher pension risk transfer premiums following a significant transaction. The business’s revenue increased $2.142 billion and benefits and expenses increased $2.261 billion, with the corresponding expense largely offsetting the premium increase. The filing reports $1.506 billion of assets received and $2.409 billion of liabilities assumed in significant pension risk transfer transactions during the quarter.
- Adjusted operating income declined at PGIM ($151 million versus $188 million), Retirement Strategies ($837 million versus $946 million), Individual Life (a loss of $102 million versus a loss of $18 million), and International Businesses ($840 million versus $951 million). Group Insurance improved to $25 million from a loss of $115 million. The filing attributes results to factors including lower investment-management fees, spread results and underwriting experience, partly offset by higher reinvestment rates and improved Group Insurance claims experience.
- Prudential adopted ASU 2018-12 on January 1, 2023, changing accounting and disclosures for long-duration insurance contracts, including market risk benefits and liability discount-rate remeasurement. Adoption materially changed presentation and prior-period comparability; the company reported a $1.7 billion decrease to retained earnings and a $16.0 billion increase to AOCI at adoption. Comparative financial statements were adjusted.
- Available-for-sale fixed maturities had $320.512 billion fair value against $338.604 billion amortized cost at quarter-end. Prudential reported $28.304 billion of gross unrealized losses and $10.481 billion of gross unrealized gains; management said it did not intend to sell the securities and did not expect to be required to sell them before recovery. The filing identifies interest rates, credit spreads, currency movements and issuer conditions as drivers of unrealized losses.
- Prudential issued $500 million of 6.750% fixed-to-fixed reset junior subordinated notes due 2053. It also authorized up to $1.0 billion in 2023 share repurchases and repurchased 2.7 million shares for $250 million through March 31. The quarterly dividend declared was $1.25 per share.
Outlook, risks and contingencies
The filing provides no specific consolidated earnings or revenue guidance. Management described higher reinvestment yields as a potential support to future spreads, while emphasizing that results depend on reinvestment rates, asset-liability management, product guarantees and policyholder behavior. The company generally conducts its annual actuarial assumption review in the second quarter and may update assumptions sooner if it identifies a material long-term trend.
Key stated risks include rapid interest-rate increases, equity-market declines, credit deterioration or counterparty default, mortality and morbidity deviations, policyholder lapses and withdrawals, derivative collateral and other liquidity demands, foreign-exchange movements, regulatory and tax changes, cybersecurity and operational failures, ratings downgrades, competition, and litigation. The company’s Individual Retirement Strategies hedging derivatives were in a net collateral-posting position of $11.1 billion at March 31, 2023. Commercial mortgage and other loan credit-loss allowances increased during the quarter; office loans were $8.727 billion in the consolidated loan portfolio.
For litigation and regulatory matters where an estimate could be made, management estimated reasonably possible losses in excess of established accruals at less than $250 million as of March 31, 2023. It cautioned that outcomes remain uncertain and could affect results or cash flows in a particular period. Management did not expect the ultimate outcome of pending matters, after reserves and indemnification, to materially affect the financial statements. No significant ratings or outlook actions were reported since the 2022 Form 10-K.
Management stated that disclosure controls and procedures were effective as of March 31, 2023, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate recurring segment performance from volatile GAAP investment, market-risk-benefit and divested-business effects; review the reconciliation to adjusted operating income.
- Assess the effects of ASU 2018-12 on opening equity, AOCI, insurance liabilities, and the comparability of reported results.
- Review fixed-maturity unrealized losses, credit quality, commercial real estate exposure—especially office loans—and the adequacy of credit-loss allowances.
- Monitor liquidity and capital at the parent and regulated insurance subsidiaries, including derivative collateral requirements and limits on subsidiary distributions.
- Track actuarial assumption updates, policyholder behavior and the estimated exposure from litigation and regulatory proceedings.