Prudential Financial, Inc. (NYSE: PRU):
John Strangfeld, Chairman and CEO, commented on results:
“We are pleased with performance for the first half of the year with
an annualized adjusted operating return on equity above our 12-13%
target and positive growth metrics across our businesses. In the second
quarter we significantly strengthened the reserves of our divested
businesses, while maintaining a strong capital position. We returned
approximately $760 million to shareholders through dividends and share
repurchases in the quarter, and we expect to continue this robust level
of capital return through the year.
Looking ahead, we continue to invest in our businesses and our people
to broaden and deepen the value we bring to our retail and institutional
relationships. Our customer-centric business model enables us to deliver
innovative, integrated solutions, including financial wellness, across
individual and workplace customer segments, partnering in a way that
addresses the full picture of needs. Our employees are at the heart of
our purpose-driven culture, which aspires to unlock financial
opportunities for more people.”
($ millions, except per share)
Prudential Financial, Inc. today reported second quarter results. Net
income attributable to Prudential Financial, Inc., was $197 million
($0.46 per Common share) for the second quarter of 2018, compared to
$491 million ($1.12 per Common share) for the second quarter of 2017.
After-tax adjusted operating income was $1,298 million ($3.01 per Common
share) for the second quarter of 2018, compared to $919 million ($2.09
per Common share) for the second quarter of 2017.
Consolidated adjusted operating income, adjusted book value and adjusted
operating return on equity are non-GAAP measures. These measures are
discussed later in this press release under “Forward-Looking Statements
and Non-GAAP Measures” and reconciliations to the most comparable GAAP
measures are provided in the tables that accompany this release.
RESULTS OF ONGOING OPERATIONS
The Company’s ongoing operations include PGIM, U.S. Workplace Solutions,
U.S. Individual Solutions, International Insurance, and Corporate &
Other Operations. In the following business-level discussion, adjusted
operating income refers to pre-tax results.
PGIM
PGIM, the Company’s global investment management businesses,
reported adjusted operating income of $254 million for the current
quarter, compared to $218 million in the year-ago quarter.
The increase of $36 million from the year-ago quarter was driven by
higher asset management fees, reflecting an increase in assets under
management primarily from fixed income net inflows and equity market
appreciation, partially offset by higher expenses.
PGIM assets under management of $1.156 trillion includes a record-high
$611 billion of unaffiliated third-party institutional and retail assets
under management. Unaffiliated third-party net inflows, excluding money
market, totaled $7.3 billion for the current quarter driven by new and
existing institutional client mandates into fixed income and retail
fixed income flows.
U.S. Workplace Solutions
U.S. Workplace Solutions, consisting of the Retirement and Group
Insurance segments, reported adjusted operating income of $359 million
for the second quarter of 2018, compared to $444 million in the year-ago
quarter.
The Retirement segment reported adjusted operating income of $277
million for the current quarter, compared to $308 million in the
year-ago quarter. Excluding the notable items above, results increased
$17 million from the year-ago quarter reflecting a higher contribution
from net investment spread results and an increase in underwriting
income reflecting business growth, partially offset by higher expenses.
Retirement account values were a record high $433 billion as of June 30,
2018, up 8% from a year earlier, reflecting positive net flows and
market appreciation over the past four quarters. Net flows in the
current quarter totaled $2.8 billion with $1.2 billion from Full Service
and $1.6 billion from Institutional Investment Products, driven largely
by pension risk transfer flows.
The Group Insurance segment reported adjusted operating income of
$82 million in the current quarter, compared to $136 million in the
year-ago quarter. Excluding the notable items above, results increased
$5 million from the year-ago quarter reflecting an increase in
underwriting results, including business growth, partially offset by
higher expenses.
Group Insurance earned premiums, policy charges and fees of $1.2 billion
in the current quarter were up 5% from the year-ago quarter.
U.S. Individual Solutions
U.S. Individual Solutions, consisting of the Individual Annuities
and Individual Life segments, reported adjusted operating income of $550
million for the second quarter of 2018, compared to $55 million in the
year-ago quarter.
The Individual Annuities segment reported adjusted operating
income of $507 million in the current quarter, compared to $612 million
in the year-ago quarter. Excluding the notable items above, results
decreased $3 million from the year-ago quarter.
Individual Annuities account values were $164 billion as of June 30,
2018, roughly flat from a year earlier, as market appreciation offset
net outflows over the past four quarters. Individual Annuities gross
sales were $2.1 billion in the current quarter, up 37% from the year-ago
quarter, as customers have reacted favorably to pricing actions.
The Individual Life segment reported adjusted operating income of
$43 million for the current quarter, compared to a loss of $557 million
in the year-ago quarter. Excluding the notable items above, results
increased $7 million from the year-ago quarter reflecting lower expenses.
Individual Life sales of $142 million in the current quarter were down
7% from the year-ago quarter, reflecting lower guaranteed universal life
sales from prior year pricing actions partially offset by increases in
variable life sales.
International Insurance
International Insurance, consisting of Life Planner
Operations and Gibraltar Life & Other Operations, reported adjusted
operating income of $784 million for the second quarter of 2018,
compared to $823 million in the year-ago quarter.
The Life Planner Operations reported adjusted operating income of
$376 million for the current quarter, compared to $329 million in the
year-ago quarter. Excluding the notable items above, results increased
$29 million from the year-ago quarter reflecting business growth,
partially offset by lower net investment spread results driven by low
interest rates in Japan.
Life Planner Operations constant dollar basis sales of $292 million in
the current quarter were down 17% from the year-ago quarter, primarily
reflecting accelerated sales in the year-ago quarter in advance of
premium rate increases on yen-based products partially offset by higher
sales of U.S. dollar-denominated products in our Japan operations.
The Gibraltar Life & Other Operations reported adjusted
operating income of $408 million for the current quarter, compared to
$494 million in the year-ago quarter. Excluding the notable items above,
results decreased $33 million from the year-ago quarter reflecting a
shift in earnings seasonality resulting from the elimination of the
one-month reporting lag last quarter partially offset by business growth.
Gibraltar Life & Other Operations sales of $399 million in the current
quarter were down 3% from the year-ago quarter.
Corporate & Other Operations
Corporate & Other Operations reported a loss, on an adjusted
operating income basis, of $286 million in the second quarter of 2018,
compared to a loss of $312 million in the year-ago quarter.
Excluding the notable items above, the decreased loss of $19 million
from the year-ago quarter reflects lower net expenses in the current
quarter, including lower costs for employee benefit and compensation
plans tied to equity market returns, and higher income from the
qualified pension plan, partially offset by lower investment income net
of interest expense.
ASSETS UNDER MANAGEMENT
Assets under management amounted to $1.388 trillion at June 30,
2018, compared to $1.334 trillion a year earlier.
NET INCOME AND INVESTMENT PORTFOLIO
Net income attributable to Prudential Financial, Inc. amounted to
$197 million for the second quarter of 2018, compared to $491 million
for the year-ago quarter.
Current quarter net income includes $277 million of pre-tax net realized
investment gains and related charges and adjustments. The foregoing net
gains include pre-tax gains of $379 million primarily related to
derivatives used for risk management including foreign currency and
asset and liability duration management and other risk mitigation
activities, and net pre-tax gains of $90 million from general portfolio
and related activities. The foregoing gains were partially offset by net
pre-tax losses of $162 million from products that contain embedded
derivatives or guarantees and associated hedging activities, and $30
million from impairments and sales of credit-impaired investments.
Net income for the current quarter reflects a pre-tax decrease of $193
million in recorded asset values and a pre-tax decrease of $85 million
in recorded liabilities representing changes in value which are expected
to ultimately accrue to contractholders. These changes primarily
represent mark-to-market adjustments.
Net income for the current quarter also reflects a pre-tax loss of $1.6
billion from divested businesses, driven by the annual review of
actuarial assumptions in the Long-Term Care business, which included the
removal of the morbidity improvement assumption.
Net income for the year-ago quarter included $679 million of pre-tax net
realized investment losses and related charges and adjustments. The
foregoing net losses include pre-tax losses of $961 million from
products that contain embedded derivatives or guarantees and associated
derivative portfolios that are part of a hedging program related to the
risks of these products, largely driven by the impact of applying
tighter credit spreads to a higher gross GAAP liability for variable
annuity living benefits. The increase in the gross GAAP liability was
primarily due to lower interest rates. The year-ago quarter also
included pre-tax losses of $44 million from impairments and sales of
credit-impaired investments and $31 million primarily related to
derivatives used in risk management activities including foreign
currency and asset and liability duration management. The foregoing
losses were partially offset by pre-tax gains of $357 million from
general portfolio and related activities.
Excluding holdings of the Closed Block division, gross unrealized losses
on general account fixed maturity investments at June 30, 2018 amounted
to $4.5 billion, including $4.0 billion on high and highest quality
securities based on NAIC or equivalent ratings, and amounted to $1.5
billion at December 31, 2017. Net unrealized gains on these investments
amounted to $22.9 billion at June 30, 2018, compared to $32.0 billion at
December 31, 2017.
FORWARD-LOOKING STATEMENTS AND NON-GAAP MEASURES
Certain of the statements included in this release constitute
forward-looking statements within the meaning of the U.S. Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
made based on management’s current expectations and beliefs concerning
future developments and their potential effects upon Prudential
Financial, Inc. and its subsidiaries. Prudential Financial, Inc.’s
actual results may differ, possibly materially, from expectations or
estimates reflected in such forward-looking statements. Certain
important factors that could cause actual results to differ, possibly
materially, from expectations or estimates reflected in such
forward-looking statements can be found in the “Risk Factors” and
“Forward-Looking Statements” sections included in Prudential Financial,
Inc.’s Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.
Prudential Financial, Inc. does not undertake to update any particular
forward-looking statement included in this document.
Consolidated adjusted operating income, adjusted book value and adjusted
operating return on equity are non-GAAP measures. Reconciliations to the
most directly comparable GAAP measures are included in this release.
Adjusted operating income is the measure used by the Company to evaluate
segment performance and to allocate resources. Adjusted operating income
excludes “Realized investment gains (losses), net,” as adjusted, and
related charges and adjustments. A significant element of realized
investment gains and losses are impairments and credit-related and
interest rate-related gains and losses. Impairments and losses from
sales of credit-impaired securities, the timing of which depends largely
on market credit cycles, can vary considerably across periods. The
timing of other sales that would result in gains or losses, such as
interest rate-related gains or losses, is largely subject to our
discretion and influenced by market opportunities as well as our tax and
capital profile.
Realized investment gains (losses) within certain of our businesses for
which such gains (losses) are a principal source of earnings, and those
associated with terminating hedges of foreign currency earnings and
current period yield adjustments are included in adjusted operating
income. Adjusted operating income generally excludes realized investment
gains and losses from products that contain embedded derivatives, and
from associated derivative portfolios that are part of an
asset-liability management program related to the risk of those
products. However, the effectiveness of our hedging program will
ultimately be reflected in adjusted operating income over time. Adjusted
operating income also excludes gains and losses from changes in value of
certain assets and liabilities relating to foreign currency exchange
movements that have been economically hedged or considered part of our
capital funding strategies for our international subsidiaries, as well
as gains and losses on certain investments that are designated as
trading. Additionally, adjusted operating income excludes the changes in
fair value of equity securities that are recorded in net income
beginning on January 1, 2018 as a result of the adoption of ASU 2016-01.
Adjusted operating income also excludes investment gains and losses on
assets supporting experience-rated contractholder liabilities and
changes in experience-rated contractholder liabilities due to asset
value changes, because these recorded changes in asset and liability
values are expected to ultimately accrue to contractholders. In
addition, adjusted operating income excludes the results of divested
businesses, which are not relevant to our ongoing operations.
Discontinued operations and earnings attributable to noncontrolling
interests, each of which is presented as a separate component of net
income under GAAP, are also excluded from adjusted operating income. The
tax effect associated with pre-tax adjusted operating income is based on
applicable IRS and foreign tax regulations inclusive of pertinent
adjustments.
Adjusted book value is calculated as total equity (GAAP book value)
excluding accumulated other comprehensive income (loss), the cumulative
effect of foreign currency exchange rate remeasurements and currency
translation adjustments corresponding to realized investment gains and
losses, and as of December 31, 2017 certain deferred taxes resulting
from the change in the U.S. tax rate enacted with the Tax Cuts and Jobs
Act. These items are excluded in order to highlight the book value
attributable to our core business operations separate from the portion
attributable to external and potentially volatile capital and currency
market conditions.
Adjusted operating return on equity is equal to the annualized
year-to-date after-tax adjusted operating income divided by the average
adjusted book value. Return on equity based on GAAP balances is
calculated using after-tax net income and equity.
We believe that our use of these non-GAAP measures helps investors
understand and evaluate the Company’s performance and financial
position. The presentation of adjusted operating income as we measure it
for management purposes enhances the understanding of the results of
operations by highlighting the results from ongoing operations and the
underlying profitability of our businesses. Trends in the underlying
profitability of our businesses can be more clearly identified without
the fluctuating effects of the items described above. Adjusted book
value augments the understanding of our financial position by providing
a measure of net worth that is primarily attributable to our business
operations separate from the portion that is affected by capital and
currency market conditions, and by isolating the accounting impact
associated with insurance liabilities that are generally not marked to
market and the supporting investments that are marked to market through
accumulated other comprehensive income under GAAP. Adjusted return on
equity is a useful measure of the operating return the Company achieves
in relation to the capital available to our businesses. However, these
non-GAAP measures are not substitutes for income, equity and return on
equity determined in accordance with GAAP, and the adjustments made to
derive these measures are important to an understanding of our overall
results of operations and financial position. The schedules accompanying
this release provide reconciliations of non-GAAP measures with the
corresponding measures calculated using GAAP. The information referred
to above, as well as the risks of our businesses described in our Annual
Report on Form 10-K for the year ended December 31, 2017, and subsequent
Quarterly Reports on Form 10-Q, should be considered by readers when
reviewing forward-looking statements contained in this release.
Additional historic information relating to our financial performance is
located on our website at www.investor.prudential.com.
EARNINGS CONFERENCE CALL
Members of Prudential’s senior management will host a conference call on
Thursday, August 2, 2018, at 11 a.m. ET, to discuss with the investment
community the Company’s second quarter results. The conference call and
an accompanying slide presentation will be broadcast live over the
Company’s Investor Relations website at www.investor.prudential.com.
Please log on 15 minutes early in the event necessary software needs to
be downloaded. The call will remain on the Investor Relations website
for replay through August 17. Institutional investors, analysts, and
other members of the professional financial community are invited to
listen to the call and participate in Q&A by dialing (877) 777-1971
(domestic callers) or (612) 332-0226 (international callers). All others
are encouraged to dial into the conference call in listen-only mode,
using the same numbers. To listen to a replay of the conference call
starting at 2 p.m. on August 2, through August 9, dial (800) 475-6701
(domestic callers) or (320) 365-3844 (international callers). The access
code for the replay is 439434.
Prudential Financial, Inc. (NYSE:
PRU), a financial services leader with more than $1 trillion of
assets under management as of June 30, 2018, has operations in the
United States, Asia, Europe, and Latin America. Prudential’s diverse and
talented employees are committed to helping individual and institutional
customers grow and protect their wealth through a variety of products
and services, including life insurance, annuities, retirement-related
services, mutual funds and investment management. In the U.S.,
Prudential’s iconic Rock symbol has stood for strength, stability,
expertise and innovation for more than a century. For more information,
please visit news.prudential.com.
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