01—Abstract
Summary
Summary of the 10-K filed March 9, 2005. Cited figures are marked; the original filing is the authoritative source.
Prudential Financial, Inc. (NYSE: PRU) reported net income of $2.256 billiona for 2004, up from $1.264 billion in 2003, on total revenues of $28.348 billion.
The Financial Services Businesses and Closed Block Business are reported separately: the Financial Services Businesses produced income from continuing operations before taxes of $2.372 billionb, and the Closed Block Business $915 million. Total assets rose to $401.058 billion at year-end 2004 from $321.274 billion, largely reflecting the April 1, 2004 acquisition of CIGNA's retirement business for $2.123 billion, which added $34.7 billion of defined contribution account value and $19.1 billion of defined benefit account value. The company's earnings improved across most segments.
Individual Life and Annuities adjusted operating income rose to $817 millionc from $619 million, International Insurance to $917 million from $819 million, and Retirement to $334 million from $192 million. Financial Advisory, which holds a 38% stake in Wachovia Securities, posted an adjusted operating loss of $245 million, including $194 million of transition costs. Stockholders' equity was $22.344 billion, and the company repurchased 32.5 million shares for $1.5 billion in 2004, with a new $1.5 billion authorization for 2005.
The Common Stock dividend was raised 25% to $0.625d per share. Investors should note the structure of the company: the Common Stock tracks the Financial Services Businesses, while the Class B Stock tracks the Closed Block Business, which carries $1.75 billion of IHC debt.
The filing also discloses ongoing regulatory inquiries and litigation, including mutual fund market timing matters, requests for information on payments to insurance intermediaries, and the Azar and Shane class actions. Management believes the ultimate outcome of pending litigation should not have a material adverse effect on financial position.
02—Key points
Key Highlights
- Net income was $2.256 billion in 2004, compared with $1.264 billion in 2003 and $194 million in 2002.
- Total revenues were $28.348 billion in 2004, up from $27.888 billion in 2003.
- The CIGNA retirement business acquisition for $2.123 billion on April 1, 2004 raised total assets to $401.058 billion and expanded the Retirement segment's account values.
- Adjusted operating income grew in the Individual Life and Annuities ($817 million vs. $619 million), International Insurance ($917 million vs. $819 million), and Retirement ($334 million vs. $192 million) segments.
- The Financial Advisory segment reported an adjusted operating loss of $245 million, including $194 million of transition costs related to the Wachovia Securities joint venture.
- The company repurchased 32.5 million shares of Common Stock for $1.5 billion in 2004, with an authorization of up to $1.5 billion for 2005, and raised the annual Common Stock dividend 25% to $0.625 per share.
- Stockholders' equity was $22.344 billion at December 31, 2004, and claims-paying ratings for Prudential Insurance were upgraded by A.M. Best, Moody's, and S&P during 2004.
03—Questions
Frequently Asked Questions
How is Prudential Financial structured for investors holding its two classes of stock?
The Common Stock (NYSE: PRU) reflects the performance of the Financial Services Businesses, while the Class B Stock, a private placement with no public market, reflects the Closed Block Business. The filing states there is no legal separation between the two businesses, so Common Stock holders are subject to the risks of the consolidated company, and losses in the Closed Block Business can reduce assets legally available for Common Stock dividends.
What drove the increase in total assets and account values in 2004?
The April 1, 2004 acquisition of CIGNA Corporation's retirement business for $2.123 billion was the primary driver. The filing reports total assets of $401.058 billion at December 31, 2004, compared with $321.274 billion a year earlier, and attributes the Retirement segment's account value growth mainly to the acquisition.
What were the main litigation and regulatory exposures disclosed?
The filing describes requests for information from the New York Attorney General, the SEC, and others regarding payments to insurance intermediaries, and mutual fund market timing investigations involving former Prudential Securities and American Skandia entities. It also cites the Burns case, in which a $269 million judgment including interest and fees was sustained and is under appeal, and the Azar modal premium class action. Management believes the ultimate outcome should not have a material adverse effect on financial position, though results in a particular period could be materially affected.
How did the Closed Block Business perform and what is its financial position?
The Closed Block Business reported income from continuing operations before income taxes of $915 million in 2004, compared with $370 million in 2003, with realized investment gains of $715 million contributing significantly. Its IHC debt was $1.75 billion, and the filing states the Closed Block Assets are not available to service that debt or pay Class B dividends. Class B Stock earnings per share were $249.00 for 2004.
What is the company's capital and share repurchase position?
The Financial Services Businesses had approximately $23 billion in capital, and the filing estimates that excess capital combined with unused borrowing capacity exceeds $2.5 billion. Debt used for general corporate purposes was $3.480 billion, a 15.1% ratio of debt to total capital that the filing says implies up to $1.4 billion of additional borrowing capacity. A new $1.5 billion share repurchase program was authorized for 2005.
04—Continue