Prudential (PRU) 1st Quarter 2020 10Q Summary
Prudential Financial Inc announced its first-quarter 2020 results on May 5, 2020. The quarter was as expected, given the ongoing results from operations affected by the Covid-19 pandemic.
This summary will discuss the different segments of operations for Prudential, as well as management’s discussions on the upcoming year and potential impacts from the pandemic.
We will also discuss risks the company faces, and include a potential valuation for price assessment for the upcoming quarters.
Ok, let’s dive in and look at what occurred during the first quarter of 2020.
Overview of Results
- Net loss for the 1st quarter of $271 million or $0.70 per share compared to net income of $932 million or $2.22 per share of the year-ago quarter.
- Prudential had adjusted after-tax operating income of $939 million or $2.32 per share compared to $1.259 billion or $3.00 per share of the year-ago quarter
- Book value per share for Prudential of $152.45 compared to $132.83 per share of the previous year’s quarter. The adjusted book value per share of $99.71 versus $96.76 per share the previous year.
- Prudential returned $945 million of capital to shareholders in the form of $500 in share buybacks and $445 in dividends. An increase compared to the previous year’s quarter of $915 million. The dividend per share was raised to $1.10, a 4% yield on the adjusted book value.
- Prudential carries $5.3 billion of highly liquid assets compared to $5.5 billion of last year.
- Prudential also completed $1.5 billion of senior bond issuance, which is intended to cover maturities of the investment portfolio through 2021.
- Assets under management of Prudential amounted to $1.481 trillion versus $1.456 trillion of the year-ago quarter.
Results of Ongoing Operations
Next, we will dissect each segment of Prudential operations.
PGIM is Prudential’s global investment management business. PGIM reported adjusted operating income of $164 million in the first quarter, compared to $214 million in the year-ago quarter. Prudential reports that the lower-income reflects lower income in Other Related Revenue, which was driven by lower strategic investment earnings, plus higher expenses. All of which was off set by higher asset management fees as a result of higher average assets under management.
Speaking of assets under management, Prudential saw an increase in AUM of 4% to a total of $1.296 trillion, up from a year-ago quarter. All this reflects market appreciation and fixed income increase in investments, with a decrease in equity investments.
U.S. Businesses reported adjusted operating income of $619 million for the first quarter, compared to $881 million for a year-ago quarter. Prudential attributes the decreases to lower underwriting results, impacts from favorable changes in market conditions on estimates of profitability from the year-ago quarter. Also, Prudential saw lower fee net income and the results of lower net investment spread.
U.S. Workplace Solutions, which consists of Retirement and Group Insurance, reported an operating income of $289 million on an adjusted basis for the first quarter of 2020—comparing this to the $304 million from the year-ago quarter.
- Retirement – this segment had an adjusted operating income of $245 million in the first quarter, compared to $251 million from the previous year’s quarter. Prudential accords the decreases to lower reserve gains, which were partially offset by lower expenses and higher fee income. Retirement also had higher account values of $466 billion, up 3% from the previous year’s quarter. The pension risk transfer transactions drove the increases. Net flows in the quarter totalted $1.7 billion, with $1.4 billion from Institutional Investment Products, and $0.3 billion from Full Service.
- Group Insurance – this segment reported adjusted operating income of $245 million in the first quarter, compared to the $251 earned in the previous year’s quarter. Prudential reports the decreases to reflect lower reserve gains and were partially offset by higher fee income and lower expenses. The reported earned premiums, fees, and policy changes of $1.3 billion from the first quarter were flat compared to the year-ago quarter.
U.S. Individual Solutions
U.S. Individual Solutions consists of two segments, Individual Annuities, and Individual Life. The segments reported an adjusted operating income of $353 million for the first quarter of 2020. These numbers were compared to $577 million in the previous year’s quarter.
Individual Annuities – the annuities segment reported adjusted operating income of $373 million compared to $472 million from the previous year’s quarter. Prudential records the decreases reflect the lower fee income, net of distribution expenses, and other associated costs. The segment also saw lower net investment spreads and favorable results from the changes in market conditions on estimates on the profitability of the previous year’s quarter.
Account values of $144 billion were down 11% from the previous year’s quarter, which is accounting for net outflows and decreases inequities in the first quarter. Prudential saw gross sales of $1.9 billion in the current quarter, which they say reflects the ongoing diversification strategy Prudentail employed. 64% of the gross sales were a result of less sensitive market equity products.
Individual Life – this segment reported a loss of $20 of the adjusted operating income compared to the $105 million from the previous year’s quarter. The decreases reflect less favorable results from underwriting, lower net investment spreads, and a favorable impact from changes in market expectations from the previous year. Individual Life also saw an increase in sales of $187 million, which was up 15% from the year-ago quarter, which was a result of higher variable life sales.
Assurance I.Q. segment reported a loss of $23 million on an adjusted operating income from the current quarter.
Internation Businesses which consists of two segments, Life Planner and Gibraltor Life & Other. Both segments reported an adjusted operating income of $751 million in the first quarter 2020, which was lower than the $922 million of the previous year’s quarter. The decreases reflect lower net investment spreads, higher expenses, lower earnings from market results in joint ventures, and underwriting results being less favorable. All these items were offset by business growth.
Life Planner – this segment reported adjusted operating income of $417 million of the current quarter, which was less than the $481 million of the previous year’s quarter. Prudential’s attributes the decreases to lower net investment spreads, higher expenses, poor underwriting results. Life Planner saw an increase in business growth, which helped offset the decline in income. The constant dollar basis of sales of $386 million in the first quarter was down 5% from the first quarter of 2019. The decrease was from lower sales in Japan, which was offset by higher sales in other countries.
Gibraltar Life & Other – this segment reported an adjusted operating income of $334 million from the first quarter of 2020, compared to the $441 income from the first quarter of 2019. The decrease was attributed to lower net investment spreads and lower results from joint venture investments due to market fluctuations. The segment also saw constant dollar sales of $309 million in the current quarter, an increase of 5% from first quarter 2019. Prudential attributed this to lower U.S. dollar-denominated annuity sales in the Life Consultant channel. All this was offset by growth in the Bank channel.
Corporate & Other
Corporate & Other segment reported a loss on an adjusted operating income basis of $342 million in first-quarter 2020, comparing this to the loss of $412 million from the first quarter of 2019. The lower loss was from the previous year’s quarter is a result of lower expenses and higher income from pension and other employee benefit plans. The gains were offset by lower net investment income from the fluctuations in the market.
Prudential’s net loss in the current quarter included $698 million of pre-tax net realized investment losses from the downturn in the market in March. There were also impairment-related losses of $224 million, and $947 million of pre-tax losses related to market upheaval.
Net income from the first quarter 2019 of $587 million included pre-tax net realized investment losses and related charges, also including $67 million of impairment related losses.
Strength of the Balance Sheet
Prudential has been preparing for the Covid-19 pandemic, and their balance sheet is in good shape to weather the storm.
Prudential currently has an AA rated strength level, according to Moody’s, as of March 31, 2020.
Prudential also enacted its stress scenario playbook in the first quarter of 2020. The company raised $1.5 billion of debt, intended to cover maturities of its bond portfolio in 2021, including $500 million green bond issuance. They also have a credit facility of $4 billion available, and 100 Yen credit facility available in Japan if needed.
Given the fluidity of the markets right now, doing a valuation on a company is difficult. To attempt the valuation of Prudential, I will put together a discounted cash flow to value the company. I will share my inputs so you can see the assumptions I am factoring in.
Prudential Discounted Cash Flow assumptions
- TTM Earnings – $2983
- WACC – 7.14
- Free Cash Flow rate – 11.06%
- GDP – 2.2%
- Cash on Hand – $0
- Total Debt – $23839
- Shares Outstanding – 397
Terminal Value – $88,396.99
Discounted Terminal Value – $6311.55
Intrinsic Value – $42,853.95
Intrinsic Value per Share – $47.90
Thank you for reading, and I hope you enjoyed the overview of Prudential’s first quarter 2020 results. The report is not meant to be a recommendation to buy Prudential, nor is the valuation. Rather it is meant to be an informative exercise to help you better understand the results of the company from the quarter.
I have not offered any opinion and will not expound on my thoughts on the company other than reporting their real financial results.