01—Abstract
Summary
Summary of the 10-K filed February 15, 2019. Cited figures are marked; the original filing is the authoritative source.
Prudential Financial, Inc. (PRU) reported net income attributable to Prudential Financial, Inc. of $4.07 billiona for 2018, down from $7.86 billion in 2017, with total revenues of $62.99 billion (up from $59.69 billion).
The filing attributes the decrease primarily to income tax expense of $822 millionb in 2018 versus a tax benefit of $1.44 billion in 2017 due to tax reform, along with a pre-tax unfavorable variance of $1.43 billion from reserve, DAC and other cost adjustments and a $1.54 billion-equivalent (pre-tax) loss from Divested and Run-off Businesses, primarily Long-Term Care. The company reported $1.377 trillion of assets under management at December 31, 2018, with total assets of $815.08 billion and total equity of $49.03 billion. Adjusted operating income before income taxes totaled $6.37 billion in 2018, up from $6.24 billion in 2017, with International Insurance ($3.27 billion) and Individual Annuities ($1.93 billion) as the largest contributors.
Capital and shareholder returns remained central to the filing: the company repurchased $1.5 billionc of common stock and declared $1.5 billion in common dividends during 2018, and the Board authorized up to $2.0 billion of repurchases for 2019. The company stated it was no longer designated a non-bank financial company subject to Federal Reserve supervision after the Financial Stability Oversight Council rescinded that designation in October 2018. Management reported that it expects RBC and solvency margin ratios at year-end 2018 to exceed its AA-level targets, although these figures were not yet filed.
Key risks highlighted include a low interest rate environment affecting net investment spread, Japanese yen exposure (Japan is a major earnings source), rising regulatory and reserving changes (including ASU 2018-12 effective January 1, 2021), and a 2018 Long-Term Care reserve charge of $1.46 billiond from updated morbidity assumptions. Management also noted ongoing litigation and regulatory matters, none of which it expects to have a material adverse effect on financial position.
02—Key points
Key Highlights
- Net income attributable to Prudential Financial, Inc. was $4.07 billion in 2018, versus $7.86 billion in 2017; diluted EPS was $9.50 compared with $17.86.
- Total revenues rose to $62.99 billion from $59.69 billion, while income tax expense was $822 million versus a $1.44 billion benefit in 2017 driven by tax reform.
- Long-Term Care (a Divested and Run-off business) recorded a $1.46 billion net charge from annual assumption updates, including removal of expected morbidity improvement.
- Adjusted operating income before income taxes was $6.37 billion, led by International Insurance at $3.27 billion and Individual Annuities at $1.93 billion.
- The company repurchased $1.5 billion of common stock and paid $1.5 billion in dividends in 2018; the Board authorized up to $2.0 billion of repurchases for 2019.
- Assets under management totaled $1.377 trillion at December 31, 2018, with PGIM contributing $1.161 trillion in managed assets.
- Total equity declined to $49.03 billion from $54.51 billion, reflecting a $6.97 billion after-tax decline in other comprehensive income.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 15, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $62.99B$59.69B | +5.5% |
| Operating Expenses | $3.22B— | — |
| Operating Income | $4.01B$7.92B | −49.4% |
| Interest Expense | $1.42B$1.33B | +7.0% |
| Net Income | $4.09B$7.86B | −48.0% |
| EPS (Basic) | $9.64$18.19 | −47.0% |
| EPS (Diluted) | $9.50$17.86 | −46.8% |
| Shares Outstanding (Basic) | 417.60M427.00M | −2.2% |
| Shares Outstanding (Diluted) | 426.20M436.00M | −2.2% |
05—Questions
Frequently Asked Questions
Why did net income fall so sharply in 2018?
Net income attributable to Prudential Financial fell to $4.07 billion from $7.86 billion. The filing attributes the decline mainly to a $3.69 billion unfavorable tax variance, as 2018 reflected tax expense of $822 million versus a 2017 tax benefit, driven by tax reform. Other factors included a $1.43 billion pre-tax unfavorable variance from reserve and DAC adjustments and a $221 million pre-tax swing in Divested and Run-off Businesses.
What drove the Long-Term Care charge?
The filing reports a $1.46 billion net charge in Long-Term Care from the 2018 annual review and update of assumptions, including removal of the assumption of expected future morbidity improvement, reflecting unfavorable morbidity experience relative to prior expectations.
How much capital did Prudential return to shareholders in 2018?
Prudential repurchased $1.5 billion of its common stock and declared aggregate common dividends of $1.5 billion in 2018, or $3.60 per share. In December 2018 the Board authorized up to $2.0 billion of additional repurchases for 2019, and on February 6, 2019 it declared a $1.00 per share quarterly dividend payable March 14, 2019.
What is the company's exposure to Japan and the yen?
Japan is a major earnings source. The filing states that 43% of general account investments excluding the Closed Block division related to Japanese insurance operations at December 31, 2018. Yen-based earnings were hedged at 100% for 2019, 72% for 2020 and 28% for 2021, and the International Insurance segment accounted for $3.27 billion of adjusted operating income.
Is Prudential still subject to Federal Reserve supervision?
No. In October 2018 the Financial Stability Oversight Council rescinded the company's designation as a non-bank financial company subject to Federal Reserve Board supervision under Dodd-Frank. The company said it no longer incurs related FRB supervisory fees, which totaled about $24 million in each of the last three years, though the Council retains authority to re-designate it.
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