PRUDENTIAL FINANCIAL INC quarterly report, Q3 FY2023

Prudential Financial, Inc. — Q3 2023 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2023. Prudential provides insurance, annuity, retirement, investment-management and related financial services in the U.S. and internationally. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.

Financial performance

Metric	Q3 2023	Q3 2022	Nine months 2023	Nine months 2022
Total revenue	$8,352	$20,201	$38,895	$43,448
Net income (loss) attributable to Prudential	$(802)	$(92)	$1,171	$(1,595)
Diluted EPS	$(2.23)	$(0.26)	$3.15	$(4.32)
Adjusted operating income before tax, segments	$1,606	$1,167	$4,264	$3,853
Net investment income	$4,571	$3,631	$13,367	$11,927

Q3 2023 GAAP loss reflected $2.4 billion of net realized investment losses and a $251 million adverse change in market risk benefits, net of hedging. Higher segment adjusted operating income partly offset these items. For the first nine months, the company returned to GAAP profitability; year-over-year improvement included better realized investment results, lower market-risk-benefit losses and higher segment adjusted operating income. Prior-period results were retrospectively adjusted for the adoption of ASU 2018-12, so reported comparisons reflect the new accounting basis.

Net investment income rose 26% in Q3 and 12% year to date, with higher reinvestment and short-term rates contributing. Total benefits and expenses were $9.4 billion in Q3 and $37.5 billion for nine months. Q3 revenue and benefits were unusually lower than in 2022, especially in Institutional Retirement Strategies, principally because the prior-year period included a large pension risk transfer transaction; associated premium and benefit movements substantially offset each other.

Cash flow, balance sheet and capital

Cash flow: Operating cash flow was $5.4 billion for the first nine months, compared with $5.8 billion in 2022. Investing cash flow was $(9.0) billion and financing cash flow was $3.5 billion. Cash, cash equivalents and restricted cash ended the period at $16.9 billion.
Assets and equity: Total assets were $681.3 billion, down from $689.0 billion at year-end 2022. Total equity was $26.9 billion, versus $31.5 billion; Prudential-attributable equity was $25.8 billion. AOCI was $(7.8) billion, compared with $(3.8) billion at year-end, reflecting investment and currency-related movements.
Investments: Total investments were $407.2 billion, down from $417.4 billion. Available-for-sale fixed maturities had $295.3 billion fair value against $332.0 billion amortized cost, with $43.1 billion of gross unrealized losses. Management said these losses were primarily due to higher rates, credit-spread widening and currency movements, and that it did not intend, nor expect to be required, to sell the securities before recovery.
Debt and liquidity: Consolidated short- and long-term debt was $19.5 billion, down from $20.7 billion; the company reported compliance with debt covenants. Prudential Financial, the parent, held $5.0 billion in highly liquid assets, or $4.3 billion excluding net intercompany liquidity-account borrowings. It reported $46.6 billion of capital, including equity excluding AOCI and capital debt. PICA’s latest reported RBC ratio was 383% at December 31, 2022; significant Japanese subsidiaries’ solvency-margin ratios were 772% and 894% at June 30, 2023.
Shareholder returns: The company repurchased $750 million of stock through September 30 under its $1.0 billion 2023 authorization and declared dividends of $1.25 per share in each of the first three quarters.

Material changes and business developments

Segment adjusted operating income rose to $1.6 billion in Q3 from $1.2 billion. U.S. Businesses improved to $1.1 billion from $615 million, including stronger Retirement Strategies and Group Insurance results. International Businesses increased to $811 million from $748 million; PGIM declined to $211 million from $219 million. Corporate and Other losses widened to $504 million from $415 million.
For the first nine months, segment adjusted operating income increased to $4.3 billion from $3.9 billion. Individual Life and Group Insurance improved substantially versus 2022, which included a significant unfavorable Individual Life assumption-update charge. Retirement Strategies declined to $2.7 billion from $3.8 billion, in part because the prior-year period included the PALAC sale gain and because of lower fee income and reinsurance impacts.
PGIM assets under management were $1.219 trillion, down from $1.228 trillion at 2022 year-end. Third-party net outflows for the first nine months were $24.9 billion.
Prudential invested approximately $200 million for a 20% interest in Prismic HoldCo. A September reinsurance agreement with Prismic Re covered approximately $9 billion of structured-settlement reserves; Prudential recorded a $393 million deferred reinsurance loss to be amortized over the reinsured contracts. The company also completed reinsurance of approximately $10 billion of PDI variable-annuity account values with Ohio National, recording a $309 million deferred gain.
In Q3, Prudential reclassified its entire held-to-maturity securities portfolio to available-for-sale after changing its intent to hold a portion for a reinsurance transaction. The portfolio was recorded at fair value; a $136 million net unrealized gain was placed in AOCI.

Outlook, risks and contingencies

Management provided no numerical earnings or revenue guidance in the supplied filing text. It expects a roughly $200 million restructuring charge in Q4 2023 as it simplifies its organization and targets operating efficiencies. Management also described higher reinvestment yields as supportive of investment spreads, while noting that future results depend on reinvestment rates, product guarantees, customer behavior and market conditions. It said it believes capital and liquidity resources are sufficient for reasonably foreseeable needs.

Key exposures include interest-rate and equity-market changes, foreign exchange, credit deterioration and counterparty default, insurance mortality and morbidity, policyholder lapses and withdrawals, derivative collateral demands, asset-liability mismatches, ratings downgrades, regulatory change, and operational, cyber and legal risks. A 100-basis-point upward rate shock was estimated to produce a $1.3 billion net fair-value loss; a 10% equity-market decline, a $1.2 billion net loss. These are hypothetical sensitivities, not forecasts.
Individual Retirement Strategies derivatives were in a net collateral-posting position of $13.3 billion at quarter-end, up from $11.8 billion at year-end 2022. Rapid market moves could increase liquidity demands.
Commercial mortgage loan credit-loss allowances rose to $332 million from $203 million on the consolidated balance sheet; management cited loan-specific reserves and weaker market conditions. Office loans were 14.6% of commercial mortgage and agricultural property loans.
The Somerset Re agreement to reinsure certain guaranteed universal-life policies, representing about 30% of reserves on the in-force block, remained subject to regulatory approvals and customary closing conditions. Management expects changes to captive financing, including increased Guideline AXXX financing, upon closing.
Management estimated reasonably possible litigation and regulatory losses above established accruals at less than $250 million where an estimate could be made. It cautioned that outcomes remain uncertain and could affect a particular period. A court denied class certification in Moreland; another court granted class certification in Cho; and the City of Warren securities case was remanded for further consideration.

The company adopted ASU 2018-12 effective January 1, 2023. The standard significantly changed long-duration insurance accounting, including reserve discounting, DAC amortization and fair-value accounting for market risk benefits; this affects reported earnings, AOCI and period comparability. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.

Investor verification priorities

Reconcile the Q3 GAAP loss to realized investment and derivative losses, market-risk-benefit changes, and segment adjusted operating income; assess both market sensitivity and hedge effectiveness.
Review the composition and recovery prospects of unrealized fixed-income losses, and the implications of moving all held-to-maturity securities to available-for-sale.
Track collateral requirements, parent-level liquidity and legally available subsidiary dividends, especially under stressed market scenarios.
Confirm the timing, approvals, financing consequences and deferred gain or loss recognition for the Prismic, Ohio National and Somerset Re transactions.
Monitor commercial mortgage credit quality, particularly office exposure, rising allowances and any deterioration in debt-service coverage or loan-to-value metrics.
Assess the Q4 restructuring charge, ongoing corporate costs, capital distributions and the effects of ASU 2018-12 when comparing results across periods.
Follow litigation and regulatory developments, including class-action matters and the disclosed reasonably possible loss estimate.