Prudential Financial, Inc. Announces Second Quarter 2019 Results

Prudential Financial, Inc. (NYSE: PRU) today reported second quarter results. Net income attributable to Prudential Financial, Inc. was $708 million ($1.71 per Common share) for the second quarter of 2019, compared to $197 million ($0.46 per Common share) for the second quarter of 2018. After-tax adjusted operating income was $1.307 billion ($3.14 per Common share) for the second quarter of 2019, compared to $1.298 billion ($3.01 per Common share) for the second quarter of 2018.

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. Financial Wellness including U.S. Workplace Solutions and U.S. Individual Solutions Divisions, International Insurance, and Corporate & Other Operations. In the following segment-level discussion, adjusted operating income refers to pre-tax results.

PGIM

PGIM, the Company’s global investment management business, reported adjusted operating income of $264 million in the current quarter, compared to $254 million in the year-ago quarter. The increase from the year-ago quarter reflects higher asset management fees, from an increase in average assets under management, and higher other related revenues, mostly offset by higher expenses.

PGIM assets under management of $1.260 trillion were up 9% from the year-ago quarter, reflecting market appreciation and fixed income inflows partially offset by equity outflows. Third-party net outflows in the current quarter of $4.9 billion included a single institutional fixed income client withdrawal of $5 billion.

U.S. Financial Wellness

U.S. Workplace Solutions, consisting of the Retirement and Group Insurance segments, reported adjusted operating income of $548 million for the second quarter of 2019, compared to $359 million in the year-ago quarter.

Retirement Segment:

• Reported adjusted operating income of $467 million in the current quarter, compared to $277 million in the year-ago quarter. This increase includes a net favorable comparative impact from our annual reviews and update of assumptions and other refinements of $222 million. Excluding this item, current quarter results primarily reflect less favorable underwriting experience, partially offset by higher net investment spread results.
• Account values of $478 billion, a record high, were up 11% from the year-ago quarter. Net flows in the current quarter totaled $14.7 billion with $10.9 billion from Institutional Investment products, primarily from pension risk transfer transactions, and $3.8 billion from Full Service.

Group Insurance Segment:

• Reported adjusted operating income of $81 million in the current quarter, compared to $82 million in the year-ago quarter. This decrease includes a less favorable comparative impact from our annual reviews and update of assumptions and other refinements of $22 million. Excluding this item, current quarter results primarily reflect higher net investment spread results and lower expenses.
• Reported earned premiums, policy charges, and fees of $1.3 billion in the current quarter, increased 2% from the year-ago quarter.

U.S. Individual Solutions, consisting of the Individual Annuities and Individual Life segments, reported adjusted operating income of $327 million in the second quarter of 2019, compared to $550 million in the year-ago quarter.

Individual Annuities Segment:

• Reported adjusted operating income of $462 million in the current quarter, compared to $507 million in the year-ago quarter. This decrease includes a net unfavorable comparative impact from our annual reviews and update of assumptions and other refinements of $22 million. Excluding this item, current quarter results primarily reflect lower net asset-based fee income and higher expenses, partially offset by a higher contribution from net investment spread results.
• Account values of $165 billion were up 1% from the year-ago quarter, reflecting market appreciation over the year, partially offset by net outflows. Gross sales of $2.7 billion in the current quarter were up 29% from the year-ago quarter, reflecting our product diversification strategy including sales momentum of our fixed indexed annuity product.

Individual Life Segment:

• Reported an adjusted operating loss of $135 million in the current quarter, compared to operating income of $43 million in the year-ago quarter. This decrease includes a more unfavorable comparative impact from our annual reviews and update of assumptions and other refinements of $153 million. Excluding this item, current quarter results primarily reflect less favorable underwriting experience, and higher expenses, partially offset by a higher contribution from net investment spread results.
• Sales of $181 million in the current quarter were up 27% from the year-ago quarter, reflecting higher universal and variable life sales.

International Insurance

International Insurance, consisting of Life Planner Operations and Gibraltar Life & Other Operations, reported adjusted operating income of $849 million in the second quarter of 2019, compared to $784 million in the year-ago quarter.

Life Planner Operations:

• Reported adjusted operating income of $438 million in the current quarter, compared to $376 million in the year-ago quarter. This increase includes a net favorable comparative impact from our annual reviews and update of assumptions and other refinements of $50 million. Excluding this item, current quarter results primarily reflect favorable underwriting experience and business growth, mostly offset by higher expenses.
• Constant dollar basis sales of $309 million in the current quarter were up 5% from the year-ago quarter, driven by our Brazil operations.

Gibraltar Life & Other Operations:

• Reported adjusted operating income of $411 million in the current quarter, compared to $408 million in the year-ago quarter. This increase includes a net favorable comparative impact from our annual reviews and update of assumptions and other refinements of $39 million. Excluding this item, current quarter results primarily reflect higher expenses and less favorable underwriting experience, net of business growth.
• Constant dollar basis sales of $297 million in the current quarter were down 26% from the year-ago quarter, primarily reflecting lower U.S. dollar-denominated fixed annuity sales in the Life Consultant channel, competitive pressures in the Bank channel, and lower production in our Independent Agency channel.

Corporate & Other Operations

Corporate & Other Operations reported a loss, on an adjusted operating income basis, of $335 million in the second quarter of 2019, compared to a loss of $286 million in the year-ago quarter. The $49 million higher loss from the year-ago quarter reflects higher costs for employee benefit and compensation plans tied to Company stock and equity market performance, higher expenses related to corporate initiatives, and lower income from the qualified pension plan, partially offset by higher net investment income, net of interest expense.

NET INCOME AND INVESTMENT PORTFOLIO

Net income attributable to Prudential Financial, Inc. amounted to $708 million for the second quarter of 2019, compared to $197 million for the year-ago quarter.

Current quarter net income included:

• $630 million of pre-tax net realized investment losses and related charges and adjustments, primarily driven by net pre-tax losses of $566 million from products that contain embedded derivatives or guarantees and associated hedging activities. This pre-tax loss also includes $14 million of credit loss impairments
• $208 million of pre-tax losses related to market experience updates

Net income for the year-ago quarter included:

• $277 million of pre-tax net realized investment gains and related charges and adjustments, including $30 million of credit loss impairments
• $1.6 billion of pre-tax losses from divested businesses

FORWARD-LOOKING STATEMENTS AND NON-GAAP MEASURES⁽¹⁾

Certain of the statements included in this release, including those regarding prospective earnings, earnings per share growth and return on equity, 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. Statements regarding prospective earnings, earnings per share growth and return on equity are subject to the risk that we will be unable to execute our strategy because of market or competitive conditions or other factors. 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.

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. 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 1, 2019, at 11:00 a.m. ET, to discuss with the investment community the Company's second quarter results. The conference call will be broadcast live over the Company’s Investor Relations website at 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 15. Institutional investors, analysts, and other members of the professional financial community are invited to listen to the call and participate in the Q&A by dialing one of the following numbers: (877) 777-1971 (domestic callers) or (612) 332-0226 (international callers). All others may join the conference call in listen-only mode by dialing one of the above numbers. To listen to a replay of the conference call starting at 2:00 p.m. ET on August 1 through August 8, dial (800) 475-6701 (domestic callers) or (320) 365-3844 (international callers). The access code for the replay is 458815.

(1) Description of Non-GAAP Measures:

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. Additionally, market experience updates, reflecting the immediate impacts in current period results from changes in current market conditions on estimates of profitability, are excluded from adjusted operating income beginning with the second quarter of 2019, which we believe enhances the understanding of underlying performance trends.

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 and Run-off 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 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.

Adjusted book value is calculated as total equity (GAAP book value) excluding accumulated other comprehensive income (loss) and the cumulative effect of foreign currency exchange rate remeasurements and currency translation adjustments corresponding to realized investment gains and losses. 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.

Prudential Financial, Inc. (NYSE: PRU), a financial services leader with more than $1 trillion of assets under management as of June 30, 2019, 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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