PRUDENTIAL FINANCIAL, INC.
PRUDENTIAL FINANCIAL, INC.
PRUDENTIAL FINANCIAL, INC.
1. BUSINESS AND BASIS OF PRESENTATION
Prudential Financial, Inc. (“Prudential Financial”) and its subsidiaries (collectively, “Prudential” or the “Company”) provide a wide range of insurance, investment management, and other financial products and services to both individual and institutional customers throughout the United States and in many other countries. Principal products and services provided include life insurance, annuities, retirement-related services, mutual funds and investment management.
The Unaudited Interim Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). The Unaudited Interim Consolidated Financial Statements include the accounts of Prudential Financial, entities over which the Company exercises control, including majority-owned subsidiaries and minority-owned entities such as limited partnerships in which the Company is the general partner and variable interest entities (“VIEs”) in which the Company is considered the primary beneficiary. See Note 4 for additional information on the Company’s consolidated variable interest entities. Intercompany balances and transactions have been eliminated.
In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining deferred policy acquisition costs (“DAC”) and related amortization; policyholders’ account balances related to the fair value of embedded derivative instruments associated with the index-linked features of certain universal life and fixed annuity products; value of business acquired (“VOBA”) and its amortization; amortization of deferred sales inducements (“DSI”); measurement of goodwill and any related impairment; valuation of investments including derivatives, measurement of allowance for credit losses, and the recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; pension and other postretirement benefits; provision for income taxes and valuation of deferred tax assets; and accruals for contingent liabilities, including estimates for losses in connection with unresolved legal and regulatory matters.
highly uncertain nature of these conditions, it is not possible to estimate the ultimate impacts at this time. The risks may have manifested, and may continue to manifest, in ourthe Company’s financial
statements in the areas of, among others, i) investments: increased risk of loss on our investments due to default or deterioration in credit quality or value; and ii) insurance liabilities and related balances: potential changes to assumptions regarding investment returns, mortality, morbidity and policyholder behavior which are reflected in our insurance liabilities and certain related balances (e.g., DAC, VOBA, etc.); and iii) goodwill: the macroeconomic environment may also result in the need to recognize an impairment of goodwill which could negatively impact our results of operations and financial condition. We. The Company cannot predict what impact the COVID-19 pandemic will ultimately have on the global economy, markets or ourits businesses.
Certain amounts in prior periods have been reclassified to conform to the current period presentation.
2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASUs”) to the FASB Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs. ASUs listed below include those that have been adopted during the current fiscal year
The following table sets forth the composition of “Assets supporting experience-rated contractholder liabilities,” as of the dates indicated:
The net change in unrealized gains (losses) from assets supporting experience-rated contractholder liabilities still held at period end, recorded within “Other income (loss),” was $(842)$(459) million and $469$(842) million during the three months ended March 31, 20202021 and 2019,2020, respectively.
The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Other income (loss),” was $(1,481)$352 million and $529$(1,481) million during the three months ended March 31, 20202021 and 2019,2020, respectively.
The Company monitors its concentrations of financial instruments and mitigates credit risk by maintaining a diversified investment portfolio which limits exposure to any single issuer.
As of the dates indicated, the Company’s exposure to concentrations of credit risk of single issuers greater than 10% of the Company’s equity included securities of the U.S. government and certain U.S. government agencies and securities guaranteed by the U.S. government, as well as the securities disclosed below:
The following tables set forth an aging of past due commercial mortgage and other loans based upon the recorded investment gross of allowance for credit losses, as well as the amount of commercial mortgage and other loans on non-accrual status, as of the dates indicated:
The following table sets forth the composition of “Other invested assets,” as of the dates indicated:
The following table sets forth “Realized investment gains (losses), net” by investment type, for the periods indicated:
The following table sets forth net unrealized gains (losses) on investments, as of the dates indicated:
In the normal course of business, the Company sells securities under agreements to repurchase and enters into securities lending transactions. The following table sets forth the composition of “Securities sold under agreements to repurchase,” as of the dates indicated:
4. VARIABLE INTEREST ENTITIES
In the normal course of its activities, the Company enters into relationships with various special-purpose entities and other entities that are deemed to be variable interest entities (“VIEs”). For additional information, see Note 4 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020.
The table below reflects the carrying amount and balance sheet caption in which the assets and liabilities of consolidated VIEs are reported. The liabilities primarily comprise obligations under debt instruments issued by the VIEs. The creditors of these VIEs do not have recourse to the Company in excess of the assets contained within the VIEs.
The Company has determined that it is not the primary beneficiary of certain VIEs for which it is the investment manager. The Company’s maximum exposure to loss resulting from its relationship with unconsolidated VIEs for which it is the investment manager is limited to its investment in the VIEs, which was $824$948 million and $1,021$935 million at March 31, 20202021 and December 31, 2019,2020, respectively. These investments are reflected in “Fixed maturities, available-for-sale,” “Fixed maturities, trading,” “Equity securities” and “Other invested assets.” There are 0 liabilities associated with these unconsolidated VIEs on the Company’s Unaudited Interim Consolidated Statements of Financial Position.
In the normal course of its activities, the Company will invest in limited partnerships and limited liability companies (“LPs/LLCs”), which include hedge funds, private equity funds and real estate-related funds and may or may not be VIEs. The Company’s maximum exposure to loss on these investments, both VIEs and non-VIEs, is limited to the amount of its investment. The Company classifies these investments as “Other invested assets” and its maximum exposure to loss associated with these entities was $11,288$13,854 million and $11,157$12,883 million as of March 31, 20202021 and December 31, 2019,2020, respectively.
In addition, in the normal course of its activities, the Company will invest in structured investments including VIEs for which it is not the investment manager. These structured investments typically invest in fixed income investments and are managed by third-parties and include asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities. The Company’s maximum exposure to loss on these structured investments, both VIEs and non-VIEs, is limited to the amount of its investment. See Note 3 for details regarding the carrying amounts and classification of these assets. The Company has not provided material financial or other support that was not contractually required to these structures. The Company has determined that it is not the primary beneficiary of these structures due to the fact that it does not control these entities.
5. DERIVATIVE INSTRUMENTSDERIVATIVES AND HEDGING
Other types of financial contracts that the Company accounts for as derivatives are:
For detailed information on these contracts and the related strategies, see Note 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020.
The table below provides a summary of the gross notional amount and fair value of derivatives contracts by the primary underlying risks, excluding embedded derivatives and associated reinsurance recoverables. Many derivative instruments contain multiple underlying risks. The fair value amounts below represent the value of derivative contracts prior to taking into account the netting effects of master netting agreements and cash collateral. This netting impact results in total derivative assets of $3,184$1,847 million and $867$1,906 million as of March 31, 20202021 and December 31, 2019,2020, respectively, and total derivative liabilities of $904$1,575 million and $831$792 million as of March 31, 20202021 and December 31, 2019,2020, respectively, reflected in the Unaudited Interim Consolidated Statements of Financial Position.
Most of the Company’s derivatives do not qualify for hedge accounting for various reasons. For example: (i) derivatives that economically hedge embedded derivatives do not qualify for hedge accounting because changes in the fair value of the embedded derivatives are already recorded in net income; (ii) derivatives that are utilized as macro hedges of the Company’s exposure to various risks typically do not qualify for hedge accounting because they do not meet the criteria required under portfolio hedge accounting rules; and (iii) synthetic GICs, which are product standalone derivatives, do not qualify as hedging instruments under hedge accounting rules.
The following table presents recognized derivative instruments (excluding embedded derivatives and associated reinsurance recoverables), and repurchase and reverse repurchase agreements that are offset in the Unaudited Interim Consolidated Statements of Financial Position, and/or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the Unaudited Interim Consolidated Statements of Financial Position.
For information regarding the rights of offset associated with the derivative assets and liabilities in the table above, see “—Counterparty Credit Risk” below. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company’s accounting policy for securities repurchase and resale agreements, see Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.2020.
The following table provides the financial statement classification and impact of derivatives used in qualifying and non-qualifying hedge relationships, including the offset of the hedged item in fair value hedge relationships.
The changes in fair value of cash flow hedges are deferred in AOCI and are included in “Net unrealized investment gains (losses)” in the Unaudited Interim Consolidated Statements of Comprehensive Income; these amounts are then reclassified to earnings when the hedged item affects earnings. Using March 31, 20202021 values, it is estimated that a pre-tax gain of approximately $354$206 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending March 31, 2021.2022.
The exposures the Company is hedging with these qualifying cash flow hedges include the variability of future cash flows from forecasted transactions denominated in foreign currencies, the purchases of invested assets, and the receipt or payment of variable interest on existing financial instruments. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions is 10 years.
There were no material amounts reclassified from AOCI into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging. In addition, there were no instances in which the Company discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.
The following table provides a summary of the notional and fair value of written credit protection. The Company’s maximum amount at risk under these credit derivatives, assuming the value of the underlying referenced securities become worthless, is equal to the notional amounts. These credit derivatives have maturities of less than 1 year and less than 2726 years for single name and index references, respectively.Index Reference.
In addition to writing credit protection, the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. As of March 31, 20202021 and December 31, 2019,2020, the Company had $237$1 million and $6$307 million of outstanding notional amounts and reported at fair value as an asseta liability of $1$0 million and $0$28 million, respectively.
Substantially all of the Company’s derivative agreements have zero thresholds which require daily full collateralization by the party in a liability position. In addition, certain of the Company’s derivative agreements contain credit-risk related contingent features; if the credit rating of one of the parties to the derivative agreement is to fall below a certain level, the party with positive fair value could request termination at the then fair value or demand immediate full collateralization from the party whose credit rating fell and is in a net liability position.
Level 1—Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities.
Level 2—Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, and other market observable inputs.
Level 3—Fair value is based on at least one significant unobservable input for the asset or liability. The assets and liabilities in this category may require significant judgment or estimation in determining the fair value.
For a discussion of Company’s valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 6 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
The fair value option allows the Company to elect fair value as an alternative measurement for selected financial assets and financial liabilities not otherwise reported at fair value. Such elections have been made by the Company to help mitigate volatility in earnings that result from different measurement attributes. Electing the fair value option also allows the Company to achieve consistent accounting for certain assets and liabilities. Changes in fair value are reflected in “Realized investment gains (losses), net” for commercial mortgage and other loans and “Other income (loss)” for other assets and notes issued by consolidated VIEs. Changes in fair value due to instrument-specific credit risk are estimated using changes in credit spreads and quality ratings for the period reported. Interest income on commercial mortgage and other loans is included in “Net investment income.” Interest income on these loans is recorded based on the effective interest rate as determined at the closing of the loan.
The following tables present information regarding assets and liabilities where the fair value option has been elected.
The table below presents the carrying amount and fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. The financial instruments presented below are reported at carrying value on the Company’s Unaudited Interim Consolidated Statements of Financial Position. In some cases, as described below, the carrying amount equals or approximates fair value.
On December 18, 2001, the date of demutualization, The Prudential Insurance Company of America (“PICA”) established a closed block for certain in-force participating insurance policies and annuity products, along with corresponding assets used for the payment of benefits and policyholders’ dividends on these products, (collectively the “Closed Block”), and ceased offering these participating products. The recorded assets and liabilities were allocated to the Closed Block at their historical carrying amounts. The Closed Block forms the principal component of the Closed Block division. For additional information on the Closed Block, see Note 15 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Closed Block liabilities and assets designated to the Closed Block, as well as maximum future earnings to be recognized from these liabilities and assets, are as follows:
Closed Block revenues and benefits and expenses are as follows for the periods indicated:
The Company uses a full year projected effective tax rate approach to calculate year-to-date taxes. In addition, certain items impacting total income tax expense are recorded in the periods in which they occur. The projected effective tax rate is the ratio of projected “Total income tax expense” divided by projected “Income before income taxes and equity in earnings of operating joint ventures.” Taxes attributable to operating joint ventures are recorded within “Equity in earnings of operating joint ventures, net of taxes.” The interim period tax expense (or benefit) is the difference between the year-to-date income tax provision and the amounts reported for the previous interim periods of the fiscal year.
The Company’s income tax provision, on a consolidated basis, amounted to an income tax benefitexpense of $(58)$636 million, or 17.2%18.6% of income (loss) before income taxes and equity in earnings of operating joint ventures, in the first three months of 2020,2021, compared to an income tax expensebenefit of $232$(58) million, or 20.4%17.2%, in the first three months of 2019.2020. The Company’s current and prior effective tax rates differ from the U.S. statutory rate of 21% primarily due to non-taxable investment income, tax credits, and foreign earnings taxed at higher rates than the U.S. statutory rate.rate, and the items discussed below.
10. EMPLOYEE BENEFIT PLANS
The Company has funded and non-funded non-contributory defined benefit pension plans (“Pension Benefits”), which cover substantially all of its employees. For some employees, benefits are based on final average earnings and length of service, while benefits for other employees are based on an account balance that takes into consideration age, length of service and earnings during their career.
The Company provides certain health care and life insurance benefits for its retired employees, their beneficiaries and covered dependents (“Other Postretirement Benefits”). The health care plan is contributory; the life insurance plan is non-contributory. Substantially all of the Company’s U.S. employees may become eligible to receive Other Postretirement Benefitsother postretirement benefits if they retire after age 55 with at least 10 years of service or under certain circumstances after age 50 with at least 20 years of continuous service.
Net periodic (benefit) cost included in “General and administrative expenses” includes the following components:
__________ (1)For 2020 and 2021, certain employees were provided special termination benefits under non-qualified plans in the form of unreduced early retirement benefits as a result of their involuntary termination or participation in the Voluntary Separation Program that was offered to eligible U.S.-based employees in 2019.
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(1) | For 2020 certain employees were provided special termination benefits under non-qualified plans in the form of unreduced early retirement benefits as a result of their involuntary termination or participation in the Voluntary Separation Program that was offered to eligible U.S.-based employees in 2019. |
11. EQUITY
The changes in the number of shares of Common Stock issued, held in treasury and outstanding, are as follows for the periods indicated:
| | | | | | | | | Common Stock | |
| | Common Stock | | Issued | | Held In
Treasury | | Outstanding | |
| | Issued | | Held In Treasury | | Outstanding | | (in millions) |
| | (in millions) | |
| Balance, December 31, 2019 | 666.3 |
| | 267.5 |
| | 398.8 |
| |
| Balance, December 31, 2020 | | Balance, December 31, 2020 | 666.3 | | | 269.9 | | | 396.4 | | |
| Common Stock issued | 0.0 |
| | 0.0 |
| | 0.0 |
| Common Stock issued | 0.0 | | | 0.0 | | | 0.0 | | |
| Common Stock acquired | 0.0 |
| | 6.7 |
| | (6.7 | ) | Common Stock acquired | 0.0 | | | 4.3 | | | (4.3) | | |
| Stock-based compensation programs(1) | 0.0 |
| | (1.7 | ) | | 1.7 |
| Stock-based compensation programs(1) | 0.0 | | | (2.2) | | | 2.2 | | |
| Balance, March 31, 2020 | 666.3 |
| | 272.5 |
| | 393.8 |
| |
| Balance, March 31, 2021 | | Balance, March 31, 2021 | 666.3 | | | 272.0 | | | 394.3 | | |
__________
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(1) | Represents net shares issued from treasury pursuant to the Company’s stock-based compensation programs. |
(1)Represents net shares issued from treasury pursuant to the Company’s stock-based compensation programs.
In December 2019,February 2021, Prudential Financial’s Board of Directors (the “Board”) authorized the Company to repurchase at management’s discretion up to $2.0$1.5 billion of its outstanding Common Stock during the period from January 1, 20202021 through December 31, 2020.2021. On May 4, 2021, the Board increased the Company’s current share repurchase authorization by $500 million, bringing the aggregate share repurchase authorization for calendar year 2021 to $2.0 billion. As of March 31, 2020, 6.72021, 4.3 million shares of the Company’s Common Stock were repurchased under this authorization at a total cost of $500$375 million. The Company temporarily suspended Common Stock repurchases under the existing repurchase authorization beginning April 1, 2020; however, the Company will continue to evaluate the resumption of share repurchases under the existing Board authorization for 2020.
The timing and amount of share repurchases are determined by management based upon market conditions and other considerations, and repurchases may be effectedexecuted in the open market, through derivative, accelerated repurchase and other negotiated transactions and through prearranged trading plans complying with Rule 10b5-1(c) under the Securities Exchange Act of 1934 (the “Exchange Act”). Numerous factors could affect the timing and amount of any future repurchases under the share repurchase authorization, including, but not limited to: compliance with laws, increased capital needs of the Company due to changes in regulatory capital requirements, opportunities for growth and acquisitions, and the effect of adverse market conditions on the segments.conditions.
Dividends declared per share of Common Stock are as follows for the periods indicated:
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2021 | | 2020 |
| Dividends declared per share of Common Stock | | | | | $ | 1.15 | | | $ | 1.10 | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Dividends declared per share of Common Stock | $ | 1.10 |
| | $ | 1.00 |
|
Accumulated Other Comprehensive Income (Loss)
AOCI represents the cumulative OCI items that are reported separate from net income and detailed on the Unaudited Interim Consolidated Statements of Comprehensive Income. The balance of and changes in each component of AOCI as of and for the three months ended March 31, 20202021 and 2019,2020, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Accumulated Other Comprehensive Income (Loss) Attributable to
Prudential Financial, Inc. |
| | Foreign Currency
Translation
Adjustment | | Net Unrealized
Investment Gains
(Losses)(1) | | Pension and
Postretirement
Unrecognized Net
Periodic Benefit
(Cost) | | Total
Accumulated
Other
Comprehensive
Income (Loss) |
| | (in millions) |
| Balance, December 31, 2020 | $ | 52 | | | $ | 34,065 | | | $ | (3,379) | | | $ | 30,738 | |
| Change in OCI before reclassifications | (660) | | | (12,762) | | | 29 | | | (13,393) | |
| Amounts reclassified from AOCI | (3) | | | (1,366) | | | 67 | | | (1,302) | |
| Income tax benefit (expense) | (54) | | | 3,254 | | | (24) | | | 3,176 | |
| Balance, March 31, 2021 | $ | (665) | | | $ | 23,191 | | | $ | (3,307) | | | $ | 19,219 | |
|
| | | | | | | | | | | | | | | |
| | Accumulated Other Comprehensive Income (Loss) Attributable to Prudential Financial, Inc. |
| | Foreign Currency Translation Adjustment | | Net Unrealized Investment Gains (Losses)(1) | | Pension and Postretirement Unrecognized Net Periodic Benefit (Cost) | | Total Accumulated Other Comprehensive Income (Loss) |
| | (in millions) |
| Balance, December 31, 2019 | $ | (536 | ) | | $ | 28,112 |
| | $ | (3,537 | ) | | $ | 24,039 |
|
| Change in OCI before reclassifications | (298 | ) | | (808 | ) | | 2 |
| | (1,104 | ) |
| Amounts reclassified from AOCI | 3 |
| | (546 | ) | | 70 |
| | (473 | ) |
| Income tax benefit (expense) | (25 | ) | | 179 |
| | (16 | ) | | 138 |
|
| Balance, March 31, 2020 | $ | (856 | ) | | $ | 26,937 |
| | $ | (3,481 | ) | | $ | 22,600 |
|
| | | | | | | | | | | | Accumulated Other Comprehensive Income (Loss) Attributable to
Prudential Financial, Inc. |
| | Accumulated Other Comprehensive Income (Loss) Attributable to Prudential Financial, Inc. | | Foreign Currency
Translation
Adjustment | | Net Unrealized
Investment Gains
(Losses)(1) | | Pension and
Postretirement
Unrecognized Net
Periodic Benefit
(Cost) | | Total
Accumulated
Other
Comprehensive
Income (Loss) |
| | Foreign Currency Translation Adjustment | | Net Unrealized Investment Gains (Losses)(1) | | Pension and Postretirement Unrecognized Net Periodic Benefit (Cost) | | Total Accumulated Other Comprehensive Income (Loss) | | (in millions) |
| | (in millions) | |
| Balance, December 31, 2018 | $ | (564 | ) | | $ | 14,745 |
| | $ | (3,275 | ) | | $ | 10,906 |
| |
| Balance, December 31, 2019 | | Balance, December 31, 2019 | $ | (536) | | | $ | 28,112 | | | $ | (3,537) | | | $ | 24,039 | |
| Change in OCI before reclassifications | (109 | ) | | 8,564 |
| | 4 |
| | 8,459 |
| Change in OCI before reclassifications | (298) | | | (808) | | | 2 | | | (1,104) | |
| Amounts reclassified from AOCI | 5 |
| | (275 | ) | | 60 |
| | (210 | ) | Amounts reclassified from AOCI | 3 | | | (546) | | | 70 | | | (473) | |
| Income tax benefit (expense) | (3 | ) | | (1,926 | ) | | (15 | ) | | (1,944 | ) | Income tax benefit (expense) | (25) | | | 179 | | | (16) | | | 138 | |
| Cumulative effect of adoption of ASU 2017-12 | 0 |
| | 7 |
| | 0 |
| | 7 |
| |
| Balance, March 31, 2019 | $ | (671 | ) | | $ | 21,115 |
| | $ | (3,226 | ) | | $ | 17,218 |
| |
| Balance, March 31, 2020 | | Balance, March 31, 2020 | $ | (856) | | | $ | 26,937 | | | $ | (3,481) | | | $ | 22,600 | |
__________
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(1) | Includes cash flow hedges of $3,186 million and $832 million as of March 31, 2020 and December 31, 2019, respectively, and $776 million and $811 million as of March 31, 2019 and December 31, 2018, respectively. |
(1)Includes cash flow hedges of $(159) million and $(168) million as of March 31, 2021 and December 31, 2020, respectively, and $3,186 million and $832 million as of March 31, 2020 and December 31, 2019, respectively, and fair value hedges of $12 million and $10 million as of March 31, 2021 and December 31, 2020, respectively, and $0 million and $0 million as of March 31, 2020 and December 31, 2019, respectively.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Reclassifications out of Accumulated Other Comprehensive Income (Loss)
| | | | Three Months Ended
March 31, | | Affected line item in Consolidated Statements of Operations | | Three Months Ended
March 31, | | | Affected line item in Consolidated Statements of Operations |
| | 2020 | | 2019 | | | 2021 | | 2020 | | |
| | (in millions) | | | (in millions) | | |
| Amounts reclassified from AOCI(1)(2): | | | | | Amounts reclassified from AOCI(1)(2): | | | |
| Foreign currency translation adjustment: | | | | | Foreign currency translation adjustment: | | | |
| Foreign currency translation adjustments | $ | (3 | ) | | $ | (5 | ) | | Realized investment gains (losses), net | Foreign currency translation adjustments | $ | 0 | | | $ | (3) | | | | Realized investment gains (losses), net |
| Foreign currency translation adjustments | 0 |
| | 0 |
| | Other income (loss) | Foreign currency translation adjustments | 3 | | | 0 | | | | Other income (loss) |
| Total foreign currency translation adjustment | (3 | ) | | (5 | ) | | Total foreign currency translation adjustment | 3 | | | (3) | | | | |
| Net unrealized investment gains (losses): | | | | | Net unrealized investment gains (losses): | | | |
| Cash flow hedges—Interest rate | (1 | ) | | (1 | ) | | (3) | Cash flow hedges—Interest rate | 5 | | | (1) | | | | (3) |
| Cash flow hedges—Currency | 1 |
| | 1 |
| | (3) | Cash flow hedges—Currency | (1) | | | 1 | | | | (3) |
| Cash flow hedges—Currency/Interest rate | 388 |
| | 15 |
| | (3) | Cash flow hedges—Currency/Interest rate | 148 | | | 388 | | | | (3) |
| Fair value hedges—Currency | | Fair value hedges—Currency | (2) | | | 0 | | | | (3) |
| Net unrealized investment gains (losses) on available-for-sale securities | 158 |
| | 260 |
| | Net unrealized investment gains (losses) on available-for-sale securities | 1,216 | | | 158 | | | | Realized investment gains (losses), net |
| Total net unrealized investment gains (losses) | 546 |
| | 275 |
| | (4) | Total net unrealized investment gains (losses) | 1,366 | | | 546 | | | | (4) |
| Amortization of defined benefit pension items: | | | | | Amortization of defined benefit pension items: | | | |
| Prior service cost | (1 | ) | | 0 |
| | (5) | Prior service cost | (1) | | | (1) | | | | (5) |
| Actuarial gain (loss) | (69 | ) | | (60 | ) | | (5) | Actuarial gain (loss) | (66) | | | (69) | | | | (5) |
| Total amortization of defined benefit pension items | (70 | ) | | (60 | ) | | Total amortization of defined benefit pension items | (67) | | | (70) | | | | |
| Total reclassifications for the period | $ | 473 |
| | $ | 210 |
| | Total reclassifications for the period | $ | 1,302 | | | $ | 473 | | | | |
__________
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(1) | All amounts are shown before tax. |
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(2) | Positive amounts indicate gains/benefits reclassified out of AOCI. Negative amounts indicate losses/costs reclassified out of AOCI. |
| |
(3) | See Note 5 for additional information on cash flow hedges. |
| |
(4) | See table below for additional information on unrealized investment gains (losses), including the impact on deferred policy acquisition and other costs, future policy benefits and policyholders’ dividends. |
| |
(5) | See Note 10 for information on employee benefit plans. |
(1)All amounts are shown before tax.
(2)Positive amounts indicate gains/benefits reclassified out of AOCI. Negative amounts indicate losses/costs reclassified out of AOCI.
(3)See Note 5 for additional information on cash flow and fair value hedges.
(4)See table below for additional information on unrealized investment gains (losses), including the impact on deferred policy acquisition and other costs, future policy benefits and policyholders’ dividends.
(5)See Note 10 for information on employee benefit plans.
Net Unrealized Investment Gains (Losses)
Net unrealized investment gains (losses) on available-for-sale fixed maturity securities and certain other invested assets and other assets are included in the Company’s Unaudited Interim Consolidated Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from “Other comprehensive income (loss)” those items that are included as part of “Net income (loss)” for a period that had been part of “Other comprehensive income (loss)” in earlier periods. The amounts for the periods indicated below, split between amounts related to net unrealized investment gains (losses) on available-for-sale fixed maturity securities on which an allowance for credit losses has been recognized, and all other net unrealized investment gains (losses), are as follows:
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Net Unrealized Investment Gains (Losses) on Available-for-sale Fixed Maturity Securities on which an allowance for credit losses has been recognized
| | | | | | | | | | | | | | | | Net Unrealized Investment Gains (Losses) on Available-for-Sale Fixed Maturity Securities on which an allowance for credit losses has been recognized | | Net Unrealized
Gains (Losses)
on All Other Investments(1) | | DAC, DSI, VOBA and Reinsurance Recoverables | | Future Policy
Benefits,
Policyholders’
Account
Balances and
Reinsurance Payables | | Policyholders’
Dividends | | Deferred
Income
Tax
(Liability)
Benefit | | Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses) |
| | Net Unrealized
Gains (Losses)
on Investments | | DAC, DSI, VOBA and Reinsurance Recoverables | | Future Policy Benefits, Policyholders’ Account Balances and Reinsurance Payables | | Policyholders’ Dividends | | Deferred
Income
Tax
(Liability)
Benefit | | Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses) | | (in millions) |
| | (in millions) | |
| Balance, December 31, 2019(1) | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| |
| Balance, December 31, 2020 | | Balance, December 31, 2020 | $ | (25) | | | $ | 58,442 | | | $ | (1,229) | | | $ | (6,588) | | | $ | (5,892) | | | $ | (10,643) | | | $ | 34,065 | |
| Net investment gains (losses) on investments arising during the period | 0 |
| | | | | | | | 0 |
| | 0 |
| Net investment gains (losses) on investments arising during the period | 13 | | | (19,615) | | | 4,404 | | | (15,198) | |
| Reclassification adjustment for (gains) losses included in net income | (38 | ) | | | | | | | | 6 |
| | (32 | ) | Reclassification adjustment for (gains) losses included in net income | 10 | | | (1,376) | | | 307 | | | (1,059) | |
| Increase (Decrease) due to non-credit related losses recognized in AOCI during the period | (80 | ) | | | | | | | | 13 |
| | (67 | ) | |
| Reclassification due to allowance for credit losses recorded during period | | Reclassification due to allowance for credit losses recorded during period | (3) | | | 3 | | | 0 | | | 0 | |
| Impact of net unrealized investment (gains) losses on DAC, DSI, VOBA and reinsurance recoverables | | | 2 |
| | | | | | 0 |
| | 2 |
| Impact of net unrealized investment (gains) losses on DAC, DSI, VOBA and reinsurance recoverables | | 338 | | | (84) | | | 254 | |
| Impact of net unrealized investment (gains) losses on future policy benefits, policyholders’ account balances and reinsurance payables | | | | | (5 | ) | | | | 1 |
| | (4 | ) | Impact of net unrealized investment (gains) losses on future policy benefits, policyholders’ account balances and reinsurance payables | | 3,874 | | | (821) | | | 3,053 | |
| Impact of net unrealized investment (gains) losses on policyholders’ dividends | | | | | | | 4 |
| | (1 | ) | | 3 |
| Impact of net unrealized investment (gains) losses on policyholders’ dividends | | 2,628 | | | (552) | | | 2,076 | |
| Balance, March 31, 2020 | $ | (118 | ) | | $ | 2 |
| | $ | (5 | ) | | $ | 4 |
| | $ | 19 |
| | $ | (98 | ) | |
| Balance, March 31, 2021 | | Balance, March 31, 2021 | $ | (5) | | | $ | 37,454 | | | $ | (891) | | | $ | (2,714) | | | $ | (3,264) | | | $ | (7,389) | | | $ | 23,191 | |
__________
| |
(1) | Allowance for credit losses on available-for-sale fixed maturity securities effective January 1, 2020. |
All Other Net Unrealized Investment Gains (Losses) in AOCI
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Investments(1) | | DAC, DSI, VOBA and Reinsurance Recoverables | | Future Policy Benefits, Policyholders’ Account Balances and Reinsurance Payables | | Policyholders’ Dividends | | Deferred Income Tax (Liability) Benefit | | Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses) |
| | (in millions) |
| Balance, December 31, 2019(2) | $ | 45,339 |
| | $ | (1,585 | ) | | $ | (2,909 | ) | | $ | (3,366 | ) | | $ | (9,367 | ) | | $ | 28,112 |
|
| Net investment gains (losses) on investments arising during the period | (1,422 | ) | | | | | | | | 225 |
| | (1,197 | ) |
| Reclassification adjustment for (gains) losses included in net income | (508 | ) | | | | | | | | 81 |
| | (427 | ) |
| Reclassification due to allowance for credit losses recorded during the period | 80 |
| | | | | | | | (13 | ) | | 67 |
|
| Impact of net unrealized investment (gains) losses on DAC, DSI, VOBA and reinsurance recoverables | | | 419 |
| | | | | | (90 | ) | | 329 |
|
| Impact of net unrealized investment (gains) losses on future policy benefits, policyholders’ account balances and reinsurance payables | | | | | 62 |
| | | | (15 | ) | | 47 |
|
| Impact of net unrealized investment (gains) losses on policyholders’ dividends | | | | | | | 132 |
| | (28 | ) | | 104 |
|
| Balance, March 31, 2020 | $ | 43,489 |
| | $ | (1,166 | ) | | $ | (2,847 | ) | | $ | (3,234 | ) | | $ | (9,207 | ) | | $ | 27,035 |
|
__________
| |
(1) | Includes cash flow hedges. See Note 5 for information on cash flow hedges. |
| |
(2) | Includes net unrealized gains (losses) for which an OTTI loss had been previously recognized. |
12. EARNINGS PER SHARE
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
A reconciliation of the numerators and denominators of the basic and diluted per share computations of Common Stock based on the consolidated earnings of Prudential Financial for the periods indicated is as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| | Income | | Weighted Average Shares | | Per Share Amount | | Income | | Weighted Average Shares | | Per Share Amount |
| | (in millions, except per share amounts) |
| Basic earnings per share | | | | | | | | | | | |
| Net income (loss) | $ | (270 | ) | | | | | | $ | 937 |
| | | | |
| Less: Income (loss) attributable to noncontrolling interests | 1 |
| | | | | | 5 |
| | | | |
| Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards | 5 |
| | | | | | 10 |
| | | | |
| Net income (loss) attributable to Prudential Financial available to holders of Common Stock | $ | (276 | ) | | 397.0 |
| | $ | (0.70 | ) | | $ | 922 |
| | 409.2 |
| | $ | 2.25 |
|
| Effect of dilutive securities and compensation programs | | | | | | | | | | | |
| Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic | $ | 5 |
| | | | | | $ | 10 |
| | | | |
| Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted | 5 |
| | | | | | 10 |
| | | | |
| Stock options | | | 0.0 |
| | | | | | 1.2 |
| | |
| Deferred and long-term compensation programs | | | 0.0 |
| | | | | | 1.1 |
| | |
| Exchangeable Surplus Notes | 0 |
| | 0.0 |
| | | | 5 |
| | 6.1 |
| | |
| Diluted earnings per share(1) | | | | | | | | | | | |
| Net income (loss) attributable to Prudential Financial available to holders of Common Stock | $ | (276 | ) | | 397.0 |
| | $ | (0.70 | ) | | $ | 927 |
| | 417.6 |
| | $ | 2.22 |
|
55
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 |
| | Income | | Weighted
Average
Shares | | Per Share
Amount | | Income | | Weighted
Average
Shares | | Per Share
Amount |
| | (in millions, except per share amounts) |
| Basic earnings per share | | | | | | | | | | | |
| Net income (loss) | $ | 2,804 | | | | | | | $ | (270) | | | | | |
| Less: Income (loss) attributable to noncontrolling interests | (24) | | | | | | | 1 | | | | | |
| Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards | 44 | | | | | | | 5 | | | | | |
| Net income (loss) attributable to Prudential Financial available to holders of Common Stock | $ | 2,784 | | | 396.3 | | | $ | 7.02 | | | $ | (276) | | | 397.0 | | | $ | (0.70) | |
| Effect of dilutive securities and compensation programs | | | | | | | | | | | |
| Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic | $ | 44 | | | | | | | $ | 5 | | | | | |
| Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted | 44 | | | | | | | 5 | | | | | |
| Stock options | | | 0.6 | | | | | | | 0.0 | | | |
| Deferred and long-term compensation programs | | | 1.9 | | | | | | | 0.0 | | | |
| Diluted earnings per share(1) | | | | | | | | | | | |
| Net income (loss) attributable to Prudential Financial available to holders of Common Stock | $ | 2,784 | | | 398.8 | | | $ | 6.98 | | | $ | (276) | | | 397.0 | | | $ | (0.70) | |
__________
(1)For the three months ended March 31, 2020, weighted average shares for basic earnings per share is also used for calculating diluted earnings per share because dilutive shares and dilutive earnings per share are not applicable when a net loss is reported. As a result of the net loss attributable to Prudential Financial available to holders of Common Stock for the three months ended March 31, 2020, all potential stock options and compensation programs were considered antidilutive.
| |
(1) | For the three months ended March 31, 2020, weighted average shares for basic earnings per share is also used for calculating diluted earnings per share because dilutive shares and dilutive earnings per share are not applicable when a net loss is reported. As a result of the net loss attributable to Prudential Financial available to holders of Common Stock for the three months ended March 31, 2020, all potential stock options and compensation programs were considered antidilutive. |
Unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and included in the computation of earnings per share pursuant to the two-class method. Under this method, earnings attributable to Prudential Financial are allocated between Common Stock and the participating awards, as if the awards were a second class of stock. During periods of net income available to holders of Common Stock, the calculation of earnings per share excludes the income attributable to participating securities in the numerator and the dilutive impact of these securities from the denominator. In the event of a net loss available to holders of Common Stock, undistributed earnings are not allocated to participating securities and the denominator excludes the dilutive impact of these securities as they do not share in the losses of the Company. Undistributed earnings allocated to participating unvested share-based payment awards for the three months ended March 31, 20202021 and 2019,2020, as applicable, were based on 5.16.0 million and 4.65.1 million of such awards, respectively, weighted for the period they were outstanding.
Stock options and shares related to deferred and long-term compensation programs that are considered antidilutive are excluded from the computation of diluted earnings per share. Stock options are considered antidilutive based on application of the treasury stock method or in the event of a net loss available to holders of Common Stock. Shares related to deferred and long-term compensation programs are considered antidilutive in the event of a net loss available to holders of Common Stock. For the periods indicated, the number of stock options and shares related to deferred and long-term compensation programs that were considered antidilutive and were excluded from the computation of diluted earnings per share, weighted for the portion of the period they were outstanding, are as follows:
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 |
| | Shares | | Exercise Price
Per Share | | Shares | | Exercise Price
Per Share |
| | (in millions, except per share amounts, based on weighted average) |
| Antidilutive stock options based on application of the treasury stock method | 2.1 | | | $ | 97.46 | | | 2.3 | | | $ | 87.62 | |
| Antidilutive stock options due to net loss available to holders of Common Stock | 0.0 | | | | | 0.9 | | | |
| Antidilutive shares based on application of the treasury stock method | 0.0 | | | | | 0.2 | | | |
| Antidilutive shares due to net loss available to holders of Common Stock | 0.0 | | | | | 1.7 | | | |
| Total antidilutive stock options and shares | 2.1 | | | | | 5.1 | | | |
|
| | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| | Shares | | Exercise Price Per Share | | Shares | | Exercise Price Per Share |
| | (in millions, except per share amounts, based on weighted average) |
| Antidilutive stock options based on application of the treasury stock method | 2.3 |
| | $ | 87.62 |
| | 1.1 |
| | $ | 103.47 |
|
| Antidilutive stock options due to net loss available to holders of Common Stock | 0.9 |
| | | | 0.0 |
| | |
| Antidilutive shares based on application of the treasury stock method | 0.2 |
| | | | 0.0 |
| | |
| Antidilutive shares due to net loss available to holders of Common Stock | 1.7 |
| | | | 0.0 |
| | |
| Total antidilutive stock options and shares | 5.1 |
| | | | 1.1 |
| | |
In September 2009, the Company issued $500 million of surplus notes with an interest rate of 5.36% per annum which were exchangeable at the option of the note holders for shares of Common Stock. In August 2019, as a result of the note holders’ exercise of the exchange option, the Company issued approximately 6.2 million shares of Common Stock at an exchange rate equal to 12.3877 shares of Common Stock per each $1,000 principal amount of surplus notes. The Company’s obligations under the surplus notes are now satisfied. In calculating diluted earnings per share under the if-converted method, for the three months ended March 31, 2019, the potential shares that would be issued assuming a hypothetical exchange, weighted for the period the notes were outstanding, are added to the denominator, and the related interest expense, net of tax, is excluded from the numerator, if the overall effect is dilutive.
13. SEGMENT INFORMATION
Segments
The Company’s principal operations are comprisedconsist of PGIM (the Company’s global investment management business), the U.S. Businesses (consisting of the U.S. Workplace Solutions, U.S.Retirement, Group Insurance, Individual Solutions,Annuities, Individual Life and Assurance IQ divisions)businesses), the International Businesses, the Closed Block division, and the Company’s Corporate and Other operations. The U.S. Workplace Solutions division consists of the Retirement and Group Insurance businesses, the U.S. Individual Solutions division consists of the Individual Annuities and Individual Life businesses, and the Assurance IQ division consists of the Assurance IQ business. In October 2019, the Company completed the acquisition of Assurance IQ, LLC (“Assurance IQ”), a leading consumer solutions platform that offers a range of solutions that help meet consumers’ financial needs. The Closed Block division is accounted for as a divested business that is reported separately from the Divested and Run-off Businesses that are included in Corporate and Other. Divested and Run-off Businesses are comprisedconsist of businesses that have been, or will be, sold or exited, including businesses that have been placed in wind downwind-down status that do not qualify for “discontinued operations” accounting treatment under generally accepted accounting principles in the United States of America (“U.S. GAAP”).GAAP. The Company’s Corporate and Other operations include corporate items and initiatives that are not allocated to business segments as well as the Divested and businesses that have been or will be divested or placed in run-off, excluding the Closed Block division.Run-off Businesses described above.
Adjusted Operating Income
The Company analyzes the operating performance of each segment using “adjusted operating income.” Adjusted operating income does not equate to “Income (loss) before income taxes and equity in earnings of operating joint ventures” or “Net income (loss)” as determined in accordance with U.S. GAAP but is the measure of segment profit or loss used by the Company’s chief operating decision maker to evaluate segment performance and allocate resources, and consistent with authoritative guidance, is the measure of segment performance presented below. Adjusted operating income is calculated by adjusting each segment’s “Income (loss) before income taxes and equity in earnings of operating joint ventures” for the following items:
•Realized investment gains (losses), net, and related adjustments;
•Charges related to realized investment gains (losses), net;
•Market experience updates;
•Divested and Run-off Businesses;
Other adjustments; and
•Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests.interests; and
•Other adjustments.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
These items are important to an understanding of overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and the Company’s definition of adjusted operating income may differ from that used by other companies. TheHowever, the Company however, believes that the presentation of adjusted operating income as measured for management purposes enhances the understanding of results of operations by highlighting the results from ongoing operations and the underlying profitability factors of its businesses. For additional information on these reconciling items, see Note 22 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020. The Company has historically reflected the results of its variable annuities hedging programs in adjusted operating income over time. Beginning with the second quarter of 2020, these impacts are excluded from adjusted operating income which the Company believes enhances the understanding of underlying performance trends.
Reconciliation of adjusted operating income to net income (loss)
The table below reconciles “Adjusted operating income before income taxes” to “Income (loss) before income taxes and equity in earnings of operating joint ventures”:
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Adjusted operating income before income taxes by segment: | (in millions) |
| PGIM | $ | 164 |
| | $ | 214 |
|
| U.S. Businesses: | | | |
| U.S. Workplace Solutions division: | | | |
| Retirement | 245 |
| | 251 |
|
| Group Insurance | 44 |
| | 53 |
|
| Total U.S. Workplace Solutions division | 289 |
| | 304 |
|
| U.S. Individual Solutions division: | | | |
| Individual Annuities(1) | 373 |
| | 472 |
|
| Individual Life | (20 | ) | | 105 |
|
| Total U.S. Individual Solutions division | 353 |
| | 577 |
|
| Assurance IQ division(2): | | | |
| Assurance IQ | (23 | ) | | 0 |
|
| Total Assurance IQ division | (23 | ) | | 0 |
|
| Total U.S. Businesses | 619 |
| | 881 |
|
| International Businesses | 751 |
| | 922 |
|
| Corporate and Other | (342 | ) | | (412 | ) |
| Total segment adjusted operating income before income taxes | 1,192 |
| | 1,605 |
|
| Reconciling items: | | | |
| Realized investment gains (losses), net, and related adjustments(3) | 105 |
| | (612 | ) |
| Charges related to realized investment gains (losses), net | (803 | ) | | 25 |
|
| Market experience updates(4) | (947 | ) | | 0 |
|
| Divested and Run-off Businesses: | | | |
| Closed Block division | (1 | ) | | (19 | ) |
| Other Divested and Run-off Businesses | 80 |
| | 174 |
|
| Other adjustments(5) | 45 |
| | 0 |
|
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | (9 | ) | | (33 | ) |
| Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures | $ | (338 | ) | | $ | 1,140 |
|
________
| |
(1) | Individual Annuities segment results reflect DAC as if the individual annuity business is a stand-alone operation. The elimination of intersegment costs capitalized in accordance with this policy is included in consolidating adjustments within Corporate and Other operations. |
| |
(2) | Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. |
| |
(3) | Prior period amounts have been updated to conform to current period presentation. |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2021 | | 2020(1) |
| Adjusted operating income before income taxes by segment: | | | | | (in millions) |
| PGIM | | | | | $ | 651 | | | $ | 164 | |
| U.S. Businesses: | | | | | | | |
| Retirement | | | | | 623 | | | 245 | |
| Group Insurance | | | | | (132) | | | 44 | |
| Individual Annuities(2) | | | | | 444 | | | 373 | |
| Individual Life | | | | | (44) | | | (20) | |
| Assurance IQ | | | | | (39) | | | (23) | |
| Total U.S. Businesses | | | | | 852 | | | 619 | |
| International Businesses | | | | | 871 | | | 696 | |
| Corporate and Other | | | | | (286) | | | (342) | |
| Total segment adjusted operating income before income taxes | | | | | 2,088 | | | 1,137 | |
| Reconciling items: | | | | | | | |
| Realized investment gains (losses), net, and related adjustments | | | | | 1,264 | | | 299 | |
| Charges related to realized investment gains (losses), net | | | | | (239) | | | (802) | |
| Market experience updates | | | | | 304 | | | (938) | |
| Divested and Run-off Businesses: | | | | | | | |
| Closed Block division | | | | | 34 | | | (1) | |
| Other Divested and Run-off Businesses | | | | | 30 | | | (69) | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | | | | | (54) | | | (9) | |
| Other adjustments(3) | | | | | (13) | | | 45 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures per Unaudited Interim Consolidated Financial Statements | | | | | $ | 3,414 | | | $ | (338) | |
________
(1)Effective second quarter of 2020, the results of POK and the impact of its sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Effective third quarter of 2020, the results of POT and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 for additional information.
(2)Individual Annuities segment results reflect DAC as if the Individual Annuities business is a stand-alone operation. The elimination of intersegment costs capitalized in accordance with this policy is included in consolidating adjustments within Corporate and Other operations.
(3)Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration.
| |
(4) | Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company had historically recognized these impacts in adjusted operating income. |
| |
(5) | Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. |
Reconciliation of select financial information
The tables below present certain financial information for the Company’s segments and its Corporate and Other operations, including assets by segment and revenues by segment on an adjusted operating income basis, and the reconciliation of the segment totals to amounts reported in the Consolidated Financial Statements.
|
| | | | | | | |
| | March 31,
2020 | | December 31,
2019 |
| Assets by segment: | (in millions) |
| PGIM | $ | 47,099 |
| | $ | 47,655 |
|
| U.S. Businesses: | | | |
| U.S. Workplace Solutions division: | | | |
| Retirement | 187,992 |
| | 198,153 |
|
| Group Insurance | 43,706 |
| | 43,712 |
|
| Total U.S. Workplace Solutions division | 231,698 |
| | 241,865 |
|
| U.S. Individual Solutions division: | | | |
| Individual Annuities | 179,366 |
| | 189,040 |
|
| Individual Life | 92,364 |
| | 96,072 |
|
| Total U.S. Individual Solutions division | 271,730 |
| | 285,112 |
|
| Assurance IQ division(1): | | | |
| Assurance IQ | 2,618 |
| | 2,639 |
|
| Total Assurance IQ division | 2,618 |
| | 2,639 |
|
| Total U.S. Businesses | 506,046 |
| | 529,616 |
|
| International Businesses | 243,012 |
| | 241,071 |
|
| Corporate and Other | 17,673 |
| | 16,883 |
|
| Closed Block division | 59,882 |
| | 61,327 |
|
| Total assets per Unaudited Interim Consolidated Financial Statements | $ | 873,712 |
| | $ | 896,552 |
|
__________
| |
(1) | Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | |
| |
| March 31,
2021 | | December 31,
2020 |
| Assets by segment: | (in millions) |
| PGIM | $ | 47,460 | | | $ | 48,680 | |
| U.S. Businesses: | | | |
| Retirement | 208,679 | | | 213,726 | |
| Group Insurance | 43,685 | | | 45,601 | |
| Individual Annuities | 192,342 | | | 200,718 | |
| Individual Life | 109,541 | | | 110,953 | |
| Assurance IQ | 2,697 | | | 2,703 | |
| Total U.S. Businesses | 556,944 | | | 573,701 | |
| International Businesses | 219,600 | | | 231,128 | |
| Corporate and Other | 23,786 | | | 25,124 | |
| Closed Block division | 59,490 | | | 62,089 | |
| Total assets per Unaudited Interim Consolidated Financial Statements | $ | 907,280 | | | $ | 940,722 | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Revenues on an adjusted operating income basis: | (in millions) |
| PGIM | $ | 778 |
| | $ | 870 |
|
| U.S. Businesses: | | | |
| U.S. Workplace Solutions division: | | | |
| Retirement | 2,437 |
| | 2,639 |
|
| Group Insurance | 1,424 |
| | 1,441 |
|
| Total U.S. Workplace Solutions division | 3,861 |
| | 4,080 |
|
| U.S. Individual Solutions division: | | | |
| Individual Annuities | 1,148 |
| | 1,235 |
|
| Individual Life | 1,530 |
| | 1,482 |
|
| Total U.S. Individual Solutions division | 2,678 |
| | 2,717 |
|
| Assurance IQ division(1): | | | |
| Assurance IQ | 60 |
| | 0 |
|
| Total Assurance IQ division | 60 |
| | 0 |
|
| Total U.S. Businesses | 6,599 |
| | 6,797 |
|
| International Businesses | 6,162 |
| | 6,152 |
|
| Corporate and Other | (205 | ) | | (171 | ) |
| Total revenues on an adjusted operating income basis | 13,334 |
|
| 13,648 |
|
| Reconciling items: | | | |
| Realized investment gains (losses), net, and related adjustments(2) | (558 | ) | | (209 | ) |
| Charges related to realized investment gains (losses), net | (62 | ) | | (72 | ) |
| Market experience updates(3) | (332 | ) | | 0 |
| Divested and Run-off Businesses: | | | |
| Closed Block division | 677 |
| | 1,374 |
|
| Other Divested and Run-off Businesses | 359 |
| | 388 |
|
| Other adjustments(4) | 58 |
| | 0 |
|
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | (12 | ) | | (38 | ) |
| Total revenues per Unaudited Interim Consolidated Financial Statements | $ | 13,464 |
| | $ | 15,091 |
|
| | | | | | | | | | | | | | | |
| | | | | |
| | | Three Months Ended
March 31, |
| | | | | | 2021 | | 2020(1) |
| Revenues on an adjusted operating income basis: | | | | | (in millions) |
| PGIM | | | | | $ | 1,314 | | | $ | 778 | |
| U.S. Businesses: | | | | | | | |
| Retirement | | | | | 2,591 | | | 2,437 | |
| Group Insurance | | | | | 1,556 | | | 1,424 | |
| Individual Annuities | | | | | 1,199 | | | 1,148 | |
| Individual Life | | | | | 1,635 | | | 1,530 | |
| Assurance IQ | | | | | 108 | | | 60 | |
| Total U.S. Businesses | | | | | 7,089 | | | 6,599 | |
| International Businesses | | | | | 5,931 | | | 5,636 | |
| Corporate and Other | | | | | (119) | | | (205) | |
| Total revenues on an adjusted operating income basis | | | | | 14,215 | | | 12,808 | |
| Reconciling items: | | | | | | | |
| Realized investment gains (losses), net, and related adjustments | | | | | 1,004 | | | (364) | |
| Charges related to realized investment gains (losses), net | | | | | (76) | | | (61) | |
| Market experience updates | | | | | 101 | | | (334) | |
| Divested and Run-off Businesses: | | | | | | | |
| Closed Block division | | | | | 1,365 | | | 677 | |
| Other Divested and Run-off Businesses | | | | | 371 | | | 692 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | | | | | (28) | | | (12) | |
| Other adjustments(2) | | | | | 0 | | | 58 | |
| Total revenues per Unaudited Interim Consolidated Financial Statements | | | | | $ | 16,952 | | | $ | 13,464 | |
__________
| |
(1) | Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. |
| |
(2) | Prior period amounts have been updated to conform to current period presentation. |
| |
(3) | Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company had historically recognized these impacts in adjusted operating income. |
| |
(4) | Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. |
(1)Effective second quarter of 2020, the results of POK and the impact of its sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Effective third quarter of 2020, the results of POT and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 for additional information.
(2)Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration.
Intersegment revenues
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Management has determined the intersegment revenues with reference to market rates. Intersegment revenues are eliminated in consolidation in Corporate and Other operations. The PGIM segment revenues include intersegment revenues, primarily consisting of asset-based management and administration fees, as follows:
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| PGIM segment intersegment revenues | $ | 217 |
| | $ | 180 |
|
| | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2021 | | 2020 |
| | | | | | (in millions) |
| PGIM segment intersegment revenues | | | | | $ | 223 | | | $ | 217 | |
Segments may also enter into internal derivative contracts with other segments. For adjusted operating income, each segment accounts for the internal derivative results consistent with the manner in which that segment accounts for other similar external derivatives.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Asset management and service fees
The table below presents asset management and service fees, predominantly related to investment management activities, for the periods indicated:
| | | | Three Months Ended March 31, | | | Three Months Ended March 31, |
| | 2020 | | 2019 | | | 2021 | | 2020 |
| | (in millions) | | | (in millions) |
| Asset-based management fees | $ | 875 |
| | $ | 843 |
| Asset-based management fees | | $ | 994 | | | $ | 875 | |
| Performance-based incentive fees | 14 |
| | 35 |
| Performance-based incentive fees | | 27 | | | 14 | |
| Other fees | 144 |
| | 138 |
| Other fees | | 155 | | | 144 | |
| Total asset management and service fees | $ | 1,033 |
| | $ | 1,016 |
| Total asset management and service fees | | $ | 1,176 | | | $ | 1,033 | |
14. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments and Guarantees
Commercial Mortgage Loan Commitments
|
| | | | | | | |
| | March 31,
2020 | | December 31,
2019 |
| | (in millions) |
| Total outstanding mortgage loan commitments | $ | 2,137 |
| | $ | 2,129 |
|
| Portion of commitment where prearrangement to sell to investor exists | $ | 837 |
| | $ | 751 |
|
| | | | | | | | | | | |
| March 31,
2021 | | December 31,
2020 |
| | (in millions) |
| Total outstanding mortgage loan commitments | $ | 2,121 | | | $ | 2,357 | |
| Portion of commitment where prearrangement to sell to investor exists | $ | 1,017 | | | $ | 882 | |
In connection with the Company’s commercial mortgage operations, it originates commercial mortgage loans. Commitments for loans that will be held for sale are recognized as derivatives and recorded at fair value. In certain of these transactions, the Company pre-arranges that it will sell the loan to an investor, including to government sponsored entities as discussed below, after the Company funds the loan. The above amount includes unfunded commitments that are not unconditionally cancellable. For related credit exposure, there was a reduction to thean allowance for credit losses of less than $1 million and $0 million as of March 31, 2021 and December 31, 2020, respectively. The change in allowance is an increase of $1 million and $0 million for the three months ended March 31, 2020.2021 and 2020, respectively.
Commitments to Purchase Investments (excluding Commercial Mortgage Loans)
| | | | | | | | | | | |
| March 31,
2021 | | December 31,
2020 |
| | (in millions) |
| Expected to be funded from the general account and other operations outside the separate accounts | $ | 9,003 | | | $ | 9,567 | |
| Expected to be funded from separate accounts | $ | 255 | | | $ | 336 | |
|
| | | | | | | |
| | March 31,
2020 | | December 31,
2019 |
| | (in millions) |
| Expected to be funded from the general account and other operations outside the separate accounts | $ | 6,729 |
| | $ | 7,372 |
|
| Expected to be funded from separate accounts | $ | 124 |
| | $ | 49 |
|
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
The Company has other commitments to purchase or fund investments, some of which are contingent upon events or circumstances not under the Company’s control, including those at the discretion of the Company’s counterparties. The Company anticipates a portion of these commitments will ultimately be funded from its separate accounts. The above amount includes unfunded commitments that are not unconditionally cancellable. There were 0 related charges for credit losses for either the three months ended March 31, 2021 or 2020.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Indemnification of Securities Lending and Securities Repurchase Transactions
|
| | | | | | | |
| | March 31,
2020 | | December 31,
2019 |
| | (in millions) |
| Indemnification provided to certain clients for securities lending and securities repurchase transactions(1) | $ | 5,244 |
| | $ | 5,071 |
|
| Fair value of related collateral associated with above indemnifications(2) | $ | 5,360 |
| | $ | 5,204 |
|
| Accrued liability associated with guarantee | $ | 0 |
| | $ | 0 |
|
| | | | | | | | | | | |
| March 31,
2021 | | December 31,
2020 |
| | (in millions) |
| Indemnification provided to certain clients for securities lending and securities repurchase transactions(1) | $ | 7,516 | | | $ | 7,108 | |
| Fair value of related collateral associated with above indemnifications(1) | $ | 7,673 | | | $ | 7,254 | |
| Accrued liability associated with guarantee | $ | 0 | | | $ | 0 | |
__________
| |
(1) | Includes $39 million and $38 million related to securities repurchase transactions as of March 31, 2020 and December 31, 2019, respectively. |
| |
(2) | Includes $38 million and $37 million related to securities repurchase transactions as of March 31, 2020 and December 31, 2019, respectively. |
(1)Includes $65 million and $34 million related to securities repurchase transactions as of March 31, 2021 and December 31, 2020, respectively.
In the normal course of business, the Company may facilitate securities lending or securities repurchase transactions on behalf of certain client accounts (collectively, “the accounts”). In certain of these arrangements, the Company has provided an indemnification to the accounts to hold them harmless against losses caused by counterparty (i.e., borrower) defaults associated with such transactions facilitated by the Company. In securities lending transactions, collateral is provided by the counterparty to the accounts at the inception of the transaction in an amount at least equal to 102% of the fair value of the loaned securities and the collateral is maintained daily to equal at least 102% of the fair value of the loaned securities. In securities repurchase transactions, collateral is provided by the counterparty to the accounts at the inception of the transaction in an amount at least equal to 95% of the fair value of the securities subject to repurchase and the collateral is maintained daily to equal at least 95% of the fair value of the securities subject to repurchase. The Company is only at risk if the counterparty to the transaction defaults and the value of the collateral held is less than the value of the securities loaned to, or subject to repurchase from, such counterparty. The Company believes the possibility of any payments under these indemnities is remote.
Credit Derivatives Written
As discussed further in Note 5, the Company writes credit derivatives under which the Company is obligated to pay the counterparty the referenced amount of the contract and receive in return the defaulted security or similar security.
Guarantees of Asset Values
|
| | | | | | | |
| | March 31,
2020 | | December 31,
2019 |
| | (in millions) |
| Guaranteed value of third-parties’ assets | $ | 80,984 |
| | $ | 80,009 |
|
| Fair value of collateral supporting these assets | $ | 83,568 |
| | $ | 81,604 |
|
| Asset (liability) associated with guarantee, carried at fair value | $ | 1 |
| | $ | 1 |
|
| | | | | | | | | | | |
| March 31,
2021 | | December 31,
2020 |
| | (in millions) |
| Guaranteed value of third-parties’ assets | $ | 85,273 | | | $ | 86,264 | |
| Fair value of collateral supporting these assets | $ | 88,249 | | | $ | 90,612 | |
| Asset (liability) associated with guarantee, carried at fair value | $ | 0 | | | $ | 0 | |
Certain contracts underwritten by the Retirement segment include guarantees related to financial assets owned by the guaranteed party. These contracts are accounted for as derivatives and carried at fair value. The collateral supporting these guarantees is not reflected on the Unaudited Interim Consolidated Statements of Financial Position.
Indemnification of Serviced Mortgage Loans
| | | | | | | | | | | |
| March 31,
2021 | | December 31,
2020 |
| | (in millions) |
| Maximum exposure under indemnification agreements for mortgage loans serviced by the Company | $ | 2,784 | | | $ | 2,684 | |
| First-loss exposure portion of above | $ | 812 | | | $ | 784 | |
| Accrued liability associated with guarantees(1) | $ | 40 | | | $ | 41 | |
|
| | | | | | | |
| | March 31,
2020 | | December 31,
2019 |
| | (in millions) |
| Maximum exposure under indemnification agreements for mortgage loans serviced by the Company | $ | 2,154 |
| | $ | 2,113 |
|
| First-loss exposure portion of above | $ | 633 |
| | $ | 622 |
|
| Accrued liability associated with guarantees | $ | 17 |
| | $ | 19 |
|
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
(1)The accrued liability associated with guarantees includes an allowance for credit losses of $19 million and $20 million as of March 31, 2021 and December 31, 2020, respectively. The change in allowance is a reduction of $1 million for both the three months ended March 31, 2021 and 2020.
As part of the commercial mortgage activities of the Company’s PGIM segment, the Company provides commercial mortgage origination, underwriting and servicing for certain government sponsored entities, such as Fannie Mae and Freddie Mac. The Company has agreed to indemnify the government sponsored entities for a portion of the credit risk associated with certain of the mortgages it services through a delegated authority arrangement. Under these arrangements, the Company originates multi-family mortgages for sale to the government sponsored entities based on underwriting standards they specify, and makes payments to them for a specified percentage share of losses they incur on certain loans serviced by the Company. The Company’s percentage
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
share of losses incurred generally varies from 4% to 20% of the loan balance, and is typically based on a first-loss exposure for a stated percentage of the loan balance, plus a shared exposure with the government sponsored entity for any losses in excess of the stated first-loss percentage, subject to a contractually specified maximum percentage. The Company determines the liability related to this exposure using historical loss experience, and the size and remaining life of the asset. The Company serviced $17,243$22,030 million and $16,878$21,465 million of mortgages subject to these loss-sharing arrangements as of March 31, 20202021 and December 31, 2019,2020, respectively, all of which are collateralized by first priority liens on the underlying multi-family residential properties. As of March 31, 2021, these mortgages had a weighted-average debt service coverage ratio of 2.00 times and a weighted-average loan-to-value ratio of 63%. As of December 31, 2020, these mortgages had a weighted-average debt service coverage ratio of 1.921.99 times and a weighted-average loan-to-value ratio of 62%. As of December 31, 2019, these mortgages had a weighted average debt service coverage ratio of 1.88 times and a weighted-average loan-to-value ratio of 61%63%. The Company had 0 losses related to indemnifications that were settled for botheither the three months ended March 31, 2020 and 2019. For related credit exposure, there was a reduction to the allowance for credit losses of $1 million for the three months ended March 31,2021 or 2020.
Other Guarantees
|
| | | | | | | |
| | March 31,
2020 | | December 31,
2019 |
| | (in millions) |
| Other guarantees where amount can be determined | $ | 54 |
| | $ | 55 |
|
| Accrued liability for other guarantees and indemnifications | $ | 0 |
| | $ | 0 |
|
| | | | | | | | | | | |
| March 31,
2021 | | December 31,
2020 |
| | (in millions) |
| Other guarantees where amount can be determined | $ | 85 | | | $ | 52 | |
| Accrued liability for other guarantees and indemnifications | $ | 0 | | | $ | 0 | |
The Company is also subject to other financial guarantees and indemnity arrangements. The Company has provided indemnities and guarantees related to acquisitions, dispositions, investments and other transactions that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential obligation is subject to contractual limitations, while in other cases such limitations are not specified or applicable. Included above reflects $12is $9 million for bothas of March 31, 20202021 and December 31, 2019, respectively,2020, of yield maintenance guarantees related to certain investments the Company sold. The Company does not expect to make any payments on these guarantees and is not carrying any liabilities associated with these guarantees.
Since certain of these obligations are not subject to limitations, it is not possible to determine the maximum potential amount due under these guarantees. The accrued liabilities identified above do not include retained liabilities associated with sold businesses.
Assurance IQ Contingent Consideration Liability
On October 10, 2019, the Company completed its acquisition of Assurance IQ, a leading consumer solutions platform that offers a range of solutions that help meet consumers’ financial needs. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Pursuant to the merger agreement, contingent consideration as well as additional compensation awards are payable in 2023 in a mix of approximately 25% cash and 75% Prudential Financial Common Stock, contingent upon Assurance IQ’s achievement of certain targets for gross revenues net of associated selling expenses (“Variable Profits”) over the period from January 1, 2020 through December 31, 2022 as follows:
•If Variable Profits are less than $900 million, 0 additional amount is payable.
•If Variable Profits are greater than $1,300 million, an additional amount of $1,150 million is payable.
•If Variable Profits are greater than $900 million but less than or equal to $1,300 million, an additional amount is payable equal to the product of (i) the quotient of (A) an amount equal to (1) Variable Profits achieved minus (2) $900 million divided by (B) $400 million and (ii) $1,150 million.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Payment of the additional amount may be accelerated if the Company violates certain provisions of the merger agreement requiring it to take or refrain from taking certain actions, including with respect to the management and operation of Assurance IQ.
The contingent consideration liability referred to above is reported at fair value. Fair value is determined based on the present value of expected payments under the arrangement described above, using an internally developed option pricing model based on a number of assumptions, including certain unobservable assumptions for future Variable Profits and the future price of Prudential Financial Common Stock. The fair value of the liability is updated each reporting period, with changes in fair value reported within “Other income.” The fair value of the contingent consideration liability was $47 million0 as ofof March 31, 20202021 and $105 million
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
as of December 31, 2019 (see Note 6 for additional information).2020. The stock-based component of contingent consideration impacts the share count for purposes of calculating the Company’s diluted earnings per share when Assurance IQ’s actual Variable Profits achieved as of the end of the reporting period is in excess of $900 million, as if the contingent consideration performance period ended on the applicable reporting date. The number of shares issued as part of the contingent consideration payable in 2023 will be based on a $83.71 price per share.
Contingent Liabilities
On an ongoing basis, the Company and its regulators review its operations including, but not limited to, sales and other customer interface procedures and practices, and procedures for meeting obligations to its customers and other parties. These reviews may result in the modification or enhancement of processes or the imposition of other action plans, including concerning management oversight, sales and other customer interface procedures and practices, and the timing or computation of payments to customers and other parties. In certain cases, if appropriate, the Company may offer customers or other parties remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.
The Company is subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment of unclaimed or abandoned funds, and is subject to audit and examination for compliance with these requirements. For additional discussion of these matters, see “—Litigation and Regulatory Matters” below.
It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be materially affected as a result of payments in connection with the matters discussed above or other matters depending, in part, upon the results of operations or cash flow for such period. Management believes, however, that ultimate payments in connection with these matters, after consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on the Company’s financial position.
Litigation and Regulatory Matters
The Company is subject to legal and regulatory actions in the ordinary course of its businesses. Pending legal and regulatory actions include proceedings relating to aspects of the Company’s businesses and operations that are specific to it and proceedings that are typical of the businesses in which it operates, including in both cases businesses that have been either divested or placed in wind downwind-down status. Some of these proceedings have been brought on behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. The outcome of litigation or a regulatory matter, and the amount or range of potential loss at any particular time, is often inherently uncertain.
The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established but the matter, if potentially material, is disclosed, including matters discussed below. The Company estimates that as of March 31, 2020,2021, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is less than $250 million. Any estimate is not an indication of expected loss, if any, or the Company’s maximum possible loss exposure on such matters. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.
The following discussion of litigation and regulatory matters provides an update of those matters discussed in Note 23 to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, and should be read in conjunction with the complete descriptions provided in the Form 10-K.
SecuritiesEscheatment Litigation
City of Warren v. PFI, et al
In March 2020, the court issued an order consolidating this action with Donald P. Crawford v. PFI, et al. under the caption In re Prudential Financial, Inc. Securities Litigation.
Donald P. Crawford v. PFI, et al.
In March 2020, the court issued an order consolidating this action with City of Warren v. PFI, et al. under the caption In re Prudential Financial, Inc. Securities Litigation. Future updates will be consolidated with the City of Warren action.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Shareholder Demands
In January 2020,March 2021, the Boardplaintiff filed a third amended complaint asserting claims against all defendants for violation of Directorsthe New York False Claims Act, and seeking injunctive relief, compensatory and treble damages, attorneys’ fees and costs.
Securities Litigation
Donel Davidson v. Charles F. Lowrey, et al.
In March 2021, the court issued an order consolidating this action with Robert Lalor, Derivatively on behalf of Prudential Financial, Inc. v. Charles F. Lowrey, et al. under the caption In re Prudential Financial, Inc. Derivative Litigation.
Robert Lalor v. Charles F. Lowrey, et al.
In March 2021, the court issued an order consolidating this action with Donel Davidson, Derivatively on Behalf of Prudential Financial, Inc. v. Charles F. Lowrey, et al. under the caption In re Prudential Financial, Inc. Derivative Litigation. Case updates will be consolidated with the Donel Davidson action.
Assurance IQ, LLC
The Company has received a shareholdercivil investigative demand letter containing allegations: (i)and other inquiries related to the appropriateness of wrongdoing similarAssurance’s supplemental health product sales and marketing activity. The Company is cooperating with regulators and may become subject to those allegedadditional regulatory inquiries and other investigations and actions related to this matter.
William James Griffin, et al. v. Benefytt Technologies, Inc., et al. and Assurance IQ, LLC
In February 2021, an amended putative class action complaint entitled William James Griffin, et al. v. Benefytt Technologies, Inc. (f/k/a Health Insurance Innovations, Inc.), Health Plan Intermediaries Holdings, Inc. and Assurance IQ, LLC, was filed in the CityUnited States District Court for the Southern District of Warren and Crawford complaints; and (ii) that certain of the Company’s current and former directors and executive officers breached their fiduciary duties of loyalty, due care and candor. The demand letter requestsFlorida, alleging that the Boarddefendants violated the Racketeering Influenced and Corrupt Organizations Act, and engaged in a conspiracy to defraud customers through the sale of Directors investigatelimited indemnity and commence legal proceedings against the namedshort term health insurance products to individuals to recover for the Company’s benefit theseeking comprehensive medical insurance. The complaint seeks unspecified treble damages, purportedly sustained by the Company as a result of the alleged breaches. In February 2020, the Board of Directors authorized the creation of a special committee to investigate the allegations set forth in the shareholder demand letter. declaratory and injunctive relief.
Other Matters
Doyle C. Stone v. PFI, et al.
In April 2020,2021, defendants filed a motion to dismiss the complaint.
Regulatory
Variable Products
The Company has received additional shareholder demands raising allegations similar to those contained inregulatory inquiries and requests for information from state and federal regulators, including a subpoena from the January 2020 demand,U.S. Securities and Exchange Commission, concerning the appropriateness of variable product sales and replacement activity. The Company is cooperating with regulators and may bebecome subject prospectively to additional activity relatingregulatory inquiries and other actions related to these matters.this matter.
Summary
The Company’s litigation and regulatory matters are subject to many uncertainties, and given their complexity and scope, their outcome cannot be predicted. It is possible that the Company’s results of operations or cash flow in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters depending, in part, upon the results of operations or cash flow for such period. In light of the unpredictability of the Company’s litigation and regulatory matters, it is also possible that in certain cases an ultimate unfavorable resolution of one or more pending litigation or regulatory matters could have a material adverse effect on the Company’s financial position.statements. Management believes, however, that, based on information currently known to it, the ultimate outcome of all pending litigation and regulatory matters, after consideration of applicable reserves and rights to indemnification, is not likely to have a material adverse effect on the Company’s financial position.statements.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
15.SUBSEQUENT EVENTS
Shareholder Distributions
On April 10, 2020,May 4, 2021, Prudential International Insurance Holdings, Ltd. (“PIIH”), a subsidiaryFinancial’s Board of Prudential Financial, entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with KB Financial Group Inc. (the “Buyer”), pursuant to which PIIH has agreed to sell to the Buyer all of the issued and outstanding capital stock of The Prudential Life Insurance Company of Korea, Ltd. (“POK”),Directors increased the Company’s Korean insurance business,current share repurchase authorization for cash considerationthe period from January 1, 2021 through December 31, 2021 by $500 million, bringing the aggregate share repurchase authorization to $2.0 billion.
The Share Purchase Agreement contains customary warranties and covenants of PIIH and the Buyer. The Company expects the transaction to close by the end of 2020, subject to regulatory approval and the satisfaction of customary closing conditions.
POK’s 2019 and first quarter 2020 pre-tax adjusted operating income were $228 million and $53 million, respectively. In the second quarter of 2020, the Company will report its investment in POK as “held for sale” and expects to recognize a $600 million after-tax charge to earnings to adjust the book value of POK to the market value reflected in the purchase price. The after-tax charge excludes the impact of currency hedging transactions that the Company expects to settle at transaction closing, the fair value of which was approximately $70 million in assets at March 31, 2020. The ultimate after-tax loss, as well as the settlement value of the hedging transactions, will be based on balances at the closing date and could vary materially from the charge recorded in the second quarter. In addition, upon closing of the transaction, the Company expects to recognize an approximately $100 million tax expense, with an offsetting benefit to AOCI, related to the release of legacy tax balances resulting from prior year changes in tax law.
The Company intends to use the proceeds of the transaction for general corporate purposes.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE OF CONTENTS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the consolidated financial condition of Prudential Financial, Inc. (“Prudential,” “Prudential Financial,” “PFI,” or “the Company”) as of March 31, 2020,2021, compared with December 31, 2019,2020, and its consolidated results of operations for the three months ended March 31, 20202021 and 2019.2020. You should read the following analysis of our consolidated financial condition and results of operations in conjunction with the MD&A, the “Risk Factors” section, and the audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, as well as the statements under “Forward-Looking Statements,” the “Risk Factors” section, and the Unaudited Interim Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Overview
Prudential Financial, a financial services leader with approximately $1.481$1.663 trillion of assets under management as of March 31, 2020,2021, has operations primarily in the United States of America (“U.S.”), Asia, Europe and Latin America. Through our subsidiaries and affiliates, we offer a wide array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management. We offer these products and services to individual and institutional customers through one of the largest distribution networks in the financial services industry.
Our principal operations are comprisedconsist of PGIM (our global investment management business), our U.S. Businesses (consisting of our U.S. Workplace Solutions, U.S.Retirement, Group Insurance, Individual Solutions,Annuities, Individual Life and Assurance IQ divisions)businesses), our International Businesses, the Closed Block division, and our Corporate and Other operations. The U.S. Workplace Solutions division consists of our Retirement and Group Insurance businesses, the U.S. Individual Solutions division consists of our Individual Annuities and Individual Life businesses, and the Assurance IQ division consists of our Assurance IQ business. In October 2019, we completed the acquisition of Assurance IQ, LLC (“Assurance IQ”), a leading consumer solutions platform that offers a range of solutions that help meet consumers’ financial needs (see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information). The Closed Block division is accounted for as a divested business that is reported separately from the Divested and Run-off Businesses that are included in Corporate and Other. Divested and Run-off Businesses are comprisedconsist of businesses that have been, or will be, sold or exited, including businesses that have been placed in wind downwind-down status that do not qualify for “discontinued operations” accounting treatment under generally accepted accounting principles in the United States of America (“U.S. GAAP”). Our Corporate and Other operations include corporate items and initiatives that are not allocated to business segments and businesses that have been or will be divested or placed in run-off, excluding the Closed Block division.
Our strategy centers on our mix of high-quality protection, retirement and investment management businesses which creates growth potential due to earnings diversification and the opportunity to provide customers with integrated cross-business solutions, as well as capital benefits from a balanced risk profile. We are well positioned to meet the needs of customersDivested and tap into significant market opportunities through our U.S.Run-off Businesses PGIM (our investment management business) and our International Businesses.described above.
We attribute financing costs to each segment based on the amount of financing used by each segment, excluding financing costs associated with corporate debt, which are reflected in our Corporate and Other operations. The net investment income of each segment includes earnings on the amount of capital that management believes is necessary to support the risks of that segment.
In order to further increase our competitive advantage, we are working to enhance the experience of our customers and the capabilities of our businesses, which we expect will also help us realize improved margins. In 2019, we launched programs in pursuit of these objectives that will result in multi-year investments in technology, systems and employee reskilling, as well as severance and related charges, which we expect will result in significant expense efficiencies over the next several years. For the three months ended March 31, 2021, the impact to the Company’s 2021 results from these programs was a benefit of $112 million and, as of March 31, 2021, we continue to remain on track to accumulate approximately $750 million of annual run-rate cost savings by the end of 2023.
COVID-19
DuringBeginning in the first quarter of 2020, the outbreak of the 2019 novel coronavirus (“COVID-19”) created extreme stress and disruption in the global economy and financial markets and elevated mortality and morbidity experience for the global population. These events impactedThe pandemic continues to impact our results of operations in the current period and areis expected to drivecontinue to be a driver of future impacts to our results of operations. The Company has taken several measures to manage the impacts of this crisis. The actual and expected impacts of these events and other items are included in the following update:
Outlook
PGIM•. Our global investment management business, PGIM, is focused on maintaining strong investment performance while leveragingOutlook. COVID-19 specific outlook considerations for certain of our businesses include the scale of its approximately $1.3 trillion of assets under management through its distinctive multi-manager model. We expect that earnings across the asset management industry, including PGIM, will be negatively impacted in 2020 by the continued effects of credit spreads widening, lower equity market values, lower transaction volume in private asset classes, and a slowdown in client activity. In addition, our average fee yield has decreased slightly in 2020 due to fee pressures in some strategies and a continued mix shift in our assets under management from public equities to public fixed income. These factors could lead to lower fee-based revenues, incentive fees taking longer to be realized and additional losses in our strategic investing portfolio. Nevertheless, we believe PGIM’s uniquely diversified global platform is well positioned to be resilient in the face of market and industry headwinds. Underpinning our growth strategy is our ability to continue to deliver robust investment performance, and to attract and retain high-caliber investment talent.following:
U.S. Businesses:
U.S. Workplace SolutionsRetirement.. In our Retirement business, we expect that account Account values in our full-servicefull service business willmay continue to be impacted by market volatility and byelevated participant withdrawal activity due to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which
provides qualified individuals the ability to withdraw from defined contribution plans up to $100,000 penalty-free, with the withdrawal taxed over a three-year period (unless otherwise elected by the individual). Market conditions are also likely to have an impact on Retirement sales volume. We continue to maintain pricing discipline to ensure we are achieving appropriate returns in the current market, including in our funded pension risk transfer business, where we have seen a slowdown in the pipeline as a resultimpacts of the impact of these market conditions on pension plan funding levels. Given many of the products inCOVID-19. In our institutional investment products business, given that many of the products assume longevity risk, elevated levels of mortality resulting from COVID-19 may result incontinue to contribute to a
higher level of underwriting gains in this business. In our gains. The pandemic may also impact sales volumes and the utilization of workplace benefits.
Group Insurance business, weInsurance. We expect COVID-19 to drivecontinue to contribute to elevated levels of mortality resulting in increased life insurance claims in the near-term. In both Retirement and Group Insurance, we believe over time COVID-19 may contribute to heightened interest in the solutions we offer to help improve the financial wellness of individuals at the workplace; however,addition, we expect near-term revenue growth prospectselevated unemployment to be slowed by thedrive increased disability claims in this business. The pandemic may also impact of social distancing on new business sales volumes and the impact of employee financial hardships on utilization of workplace benefits.
U.S.
Individual SolutionsLife. . In our Individual Life insurance business, weWe expect COVID-19 to drivecontinue to contribute to elevated levels of mortality, resulting in increased life insurance claims in the near-term. In our Individual Annuities business, we expect account values and fee income will be impacted by market volatility. Across our Individual Solutions businesses,addition, while we have taken pricing and product actions to ensure we realize appropriate returns for the current economic environment, and to diversify our product mix to further limit our sensitivity to interest rates, while maintaining a solid value proposition for our customers. In addition, while our distribution platforms include a suiteseen strong sales of digital, hybrid advisory, and in-person advisory options, mandatedkey products, social distancing associated with COVID-19 could adversely impact sales prospects in the near-term.
International Businesses:
Through the first quarter of 2021, we continued to see an elevated level of claims due to COVID-19, mostly in Brazil and Japan; however, expenses to support our captive agents have decreased significantly compared to 2020. Japan has limited in-person engagement between customersdeclared two COVID-19 driven states of emergency in 2021: one that was in effect from January to March, and advisors. Collectively, we expecta second, more focused on specific prefectures with more concentrated restrictions, that is expected to be in effect from April through mid-May. As the product actions we have takenglobal pandemic continues to evolve, further tightening of COVID-19 restrictions is possible, both in Japan and in other markets, and depending on the constrained distribution environment tospecific circumstances and geographies impacted, could adversely impact our sales prospects infor a period of time. We believe our needs-based selling and death protection focus are even more valuable to consumers based on the near-term. Sales to employeesglobal experience of COVID-19 and will help support the continued long-term growth of our Workplace Solutions clients may also be delayed as a resultbusinesses.
•Results of current economic conditions, as we encourage employees to prioritize workplace benefits to regain or retain their financial wellness. We continue to expect to offer our Individual Solutions products on the Assurance IQ platform over time, beginning with an Individual Life product offering added in the second quarter.
Assurance IQOperations. We expectSee “—Results of Operations” and “—Results of Operations by Segment” for a discussion of results for the first quarter of 2021.
•Investment Portfolio. While the economy continues to re-open and recover from the impacts of COVID-19, there could still be periods of volatility. The market expectations for credit migration and related losses continue to decrease. The sectors most impacted by the pandemic, including energy, consumer cyclical and retail related investments, have started to recover but may lag the general economic improvement (see “—General Account Investments” for additional information). In certain instances, the Company may agree to modify an investment to provide forbearance, which grants borrowers additional time to make payments. As of March 31, 2021, approximately 1.6% of total invested assets were modified to allow for limited forbearance. Under the terms of forbearance, the borrower is allowed to defer a portion of current year principal and/or interest payments for a short period (e.g., 6 months). These deferrals accrue additional interest and do not have a material impact on our Assurance IQ business to be limited, as this business does not have direct exposure to capital markets conditions or mortality, and its distribution is not dependent on in-person engagement with consumers; however, consumer financial hardships created by the current economic conditions could negatively impact persistency and expected sales levels.investment value.
International Businesses
•Sales and Flows. Our International Businesses remain focused on meeting customers’ protectionSee “—Segment Results of Operations” for a discussion of sales and financial needs and maintaining the underlying strengthflows in each of our distribution channels. With the implementation of social distancing protocols globally, in-person engagement between customers and advisors will be limited in the near-term within both our captive agent and third-party distribution channels. Reflective of the disruptions in the global financial markets, certain pricing and product actions have been implemented and we expect we will take additional actions as needed as we move forward to ensure we maintain appropriate returns, while maintaining a solid value proposition for our customers. Collectively, we expect the constrained distribution environment and potential product actions will adversely impact our sales prospects in the near-term. We also expect an increased level of claims in the near-term as a result of elevated levels of mortality from COVID-19. We believe over time COVID-19 may contribute to heightened interest in protection products, particularly the death protection products that are at the core of our needs-based selling approach.segments.
Corporate and Other Operations•. Underwriting Results. In our Corporate & Other operations, the Company will likely see a short-term increase in medical and disability claims associated with our active employee population resulting from COVID-19. These plans are self-insured (“pay as you go”), where 100% of claims are incurred and paid out of the Company’s Corporate & Other operations. Also, the Company is providing reimbursement for certain dependent care costs for eligible employees. Like medical and disability, these costs will be borne by the Company’s Corporate and Other operations. Lastly, if equity market and interest rate declines are sustained through December 31, 2020, it will likely result in higher expenses in the future associated with the Company’s pension and post retirement plans due to lower than expected returns on plan assets and increases in plan obligations.
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• | Results of Operations. For the three months ended March 31, 2020 we reported a net loss of $(271) million, as unfavorable financial market conditions had a substantial negative effect on the reported results of our businesses. See “Results of Operations” and “Segment Results of Operations” for a discussion of first quarter results.
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• | Liquidity. As of March 31, 2020, we had $5,293 million in highly liquid assets at Prudential Financial. During the first quarter we took several steps to proactively manage liquidity, including issuing $1.5 billion in senior debt in part to pre-fund 2020 and 2021 maturities. We temporarily suspended Common Stock repurchases beginning April 1, 2020 under our existing repurchase authorization, after repurchasing $500 million of shares of Prudential Financial’s Common Stock in
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the first quarter of 2020. We will continue to evaluate the resumption of share repurchases under our existing Board authorization for 2020. The impact of2021, we estimate that COVID-19 and related market dislocations could strain our existing liquidity and cause us to increase the use of our alternative sources of liquidity, which could result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings or ratings outlooks. See “Liquidity and Capital Resources—Liquidity” forhad a discussion of our liquidity.
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• | Capital Resources. As of March 31, 2020, all of our significant insurance subsidiaries maintained capital levels consistent with their ratings targets. However, market conditions could negatively impact the statutory capital of our insurance companies and constrain our overall capital flexibility. Continued adverse market conditions could require us to take additional management actions for our insurance subsidiaries to maintain capital consistent with their ratings objectives, which may include redeploying financial resources from internal sources or, if markets continue to decline, using available external sources of capital or seeking additional sources. See “Liquidity and Capital Resources—Capital” for a discussion of our capital resources.
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• | Investment Portfolio. Net unrealized gains (losses) on fixed maturity investments (excluding securities classified as trading) were a net unrealized gain of $40,552 million as of March 31, 2020, compared to a net unrealized gain of $44,891 million as of December 31, 2019. Gross unrealized gains increased from $46,206 million as of December 31, 2019 to $47,677 million as of March 31, 2020 and gross unrealized losses increased from $1,315 million to $7,125 million for the same period. The increase in gross unrealized losses was primarily due to credit spread widening and liquidity concerns. The continued impact of COVID-19 on the global economy and corporate credit may result in credit migration and losses in our investment portfolio. Due to the highly uncertain nature of these conditions, it is not possible to estimate the overall impacts at this time. The sectors most impacted by the COVID-19 crisis include energy, consumer cyclical and retail related investments (see “—General Account Investments” for additional information). Specific to our equity investments in LPs/LLCs where we apply the equity method, we use financial information provided by the investee, generally on a one to three-month lag. As such, as a result of the lag, any unfavorable impacts from these investments that were not recorded in the current period will be reflected in the next reporting period.
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• | Sales and Flows. First quarter sales and flows were not significantly impacted by COVID-19. See “Segment Results of Operations” for a discussion of sales and flows in each of our segments.
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• | Underwriting Results. First quarter mortality experience was not significantly impacted by COVID-19. See “Segment Results of Operations” for a discussion of mortality experience in each of our segments.
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We expect COVID-19 could ultimately have an adversenet negative impact on our underwriting results ofreflecting unfavorable mortality impacts in our Group Insurance and Individual Life businesses, partially offset by favorable mortality impacts in our Retirement business. Going forward, we estimate that our net underwriting results will be adversely impacted by approximately $200$85 million for every incremental 100,000 fatalities in the aggregate acrossUnited States; however, the ultimate impact on our businesses,underwriting results will depend on factors such as: an insured’s age; geographic concentration; insured versus uninsured populations among the fatalities; the transmissibility and virulence of the virus, including the potential for further mutation; and the speed and efficacy of the vaccine rollout. While near-term virus transmission remains high, the vaccine rollout continues at an effective pace with more thanalmost half of this impact beingthe U.S. adult population receiving at least one dose; consequently, the Company currently expects that the impacts from the pandemic on our domestic businesses will start to moderate in the second quarter of 2020. This estimate gives effect2021. See “—Results of Operations by Segment” for a discussion of mortality experience in each of our segments, where applicable.
•Risk Management. Prudential has a robust risk management framework that seeks to offsetting underwriting benefitsensure we can fulfill our customer, regulatory, and expenses, assumes 100,000 deaths acrossother stakeholder obligations under a range of stress scenarios by maintaining the total U.S. population and 40,000 deaths in Japan, and adjusts for factors such as age, geographic location, and insured versus uninsured populations.
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• | Expenses. We expect higher expenses of approximately $230 million in 2020 from costs associated with COVID-19, with more than half of this impact being in the second quarter of 2020. These higher expenses are primarily related to agent compensation, as well as technology and third-party vendor capabilities related to remote work functionality and protecting our employees’ health. We also expect some offsets to these higher expenses from lower travel, meeting, meal and entertainment costs. Expenses incurred for the first quarter of 2020 were not significantly impacted by COVID-19.
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We have initiated a number of customer accommodations in response to the COVID-19 pandemic, including in some cases extending grace periods for premium payments, expediting claim payments and withdrawal requests, waiving certain claims payment requirements, waiving certain transaction fees, and wiring funds atappropriate balance between the Company’s expense.resources and risks. We evaluate the Company’s exposure to stress under four lenses (economic, STAT, GAAP, and liquidity).
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• | Risk Management. Prudential has a robust risk management framework that seeks to ensure we can fulfill our customer, regulatory, and other stakeholder obligations under a range of stress scenarios by maintaining the appropriate balance between the Company’s resources and risks. We evaluate the Company’s exposure to stress under four lenses (economic, STAT, GAAP, and liquidity).
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Our risk management framework incorporates severe to very severe stresses across equities, interest rates, credit migration and defaults, currencies and pandemics. This framework includes a specific “pandemic and sell-off” scenario with a mortality calamity (1.5 extra insured deaths per 1,000 lives in the first year) based on a modern-day interpretation of the 1918 Spanish Flu experience that is aligned with most regulatory frameworks. The stress scenario assumes an
even distribution of increased mortality across the population, whilewhich is more punitive to our business than our current understanding of COVID-19 mortality, which is sharply skewed toward older ages. As the COVID-19 eventpandemic continues to unfold, we continue to update our analysis and take management actions in response to
this specific event.
As of March 31, 20202021, the COVID-19 pandemic has not reached the most severe levels of financial impacts included in the Company’s stress testing.
In addition, we expect the impact of COVID-19-relatedCOVID-19 related claims to be moderated by the balance between our mortality exposure (such as in our individualIndividual Life and group lifeGroup Insurance businesses) and our longevity exposure (such as in our retirementRetirement business).
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• | •Risk Factors. The COVID-19 pandemic has adversely impacted our results of operations, financial position, investment portfolio, new business opportunities and operations, and these impacts are expected to continue. For additional information on the risks to our business posed by the COVID-19 pandemic, see “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
•Business Continuity. Throughout the COVID-19 pandemic, we have been executing our business continuity protocols to ensure our employees are safe and able to serve our customers. This included effectively transitioning the vast majority of our employees to remote work arrangements.
. The COVID-19 pandemic has adversely impacted our results of operations, financial position, investment portfolio, new business opportunities and operations, and these impacts are expected to continue. For additional information on the risks to our business posed by the COVID-19 pandemic, see “Risk Factors.”
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• | Business Continuity. One of the main impacts of the COVID-19 pandemic has been executing our business continuity protocols to ensure our employees are safe and able to serve our customers. This included effectively transitioning the vast majority of our employees to remote work arrangements.
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We believe all of our businesses can sustain remote work and social distancing for an indefinite period while ensuring that critical business operations are sustained. In addition, we are managing COVID-19-relatedCOVID-19 related impacts on third-party provided services, and do not anticipate significant interruption in critical operations.
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• | CARES Act and Other Regulatory Developments. In March, 2020 Congress enacted the CARES Act, which provides $2 trillion in economic stimulus to taxpayers, small businesses, and corporations through various grant and loan programs, tax provisions and regulatory relief. We are analyzing the CARES Act and its potential impact on Prudential, and implementing operational changes necessary in our Retirement, Annuities and PGIM businesses to accommodate the CARES Act.
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Other governments and regulators, including the Japan FSA, the NAIC and state insurance regulators, have implemented, or are considering, a number of actions in response to the crisis, including delaying implementation of certain regulatory changes, temporarily waiving certain regulatory requirements and requiring or requesting insurers to waive premium payments and policy provisions and exclusions for certain periods of time.
The Company is not aware of any new or proposed government mandates that could materially impact the Company’s solvency or liquidity position.
Impact of a Low Interest Rate Environment
As a global financial services company, market interest rates are a key driver of our results of operations and financial condition. Changes in interest rates can affect our results of operations and/or our financial condition in several ways, including favorable or adverse impacts to:
•investment-related activity, including: investment income returns, net interest margins, net investment spread results, new money rates, mortgage loan prepayments and bond redemptions;
•hedging costs and other risk mitigation activities;
•insurance reserve levels, market experience true-ups and amortization of both deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”);
•customer account values, including their impact on fee income;
•fair value of, and possible impairments on, intangible assets such as goodwill;
•product offerings, design features, crediting rates and sales mix; and
•policyholder behavior, including surrender or withdrawal activity.
For more information on interest rate risks, see the “Risk Factors” section and “Risk Factors—Market Risk” included in our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
See below for discussions related to the current interest rate environments in our two largest markets, the U.S. and Japan; the composition of our insurance liabilities and policyholder account balances; and the hypothetical impacts to our investment related results if these interest rate environments are sustained.
U.S. Operations excluding the Closed Block Division
Interest rates in the U.S. have experienced a sustained period of historically low levels with certain benchmarks reaching significant lows in the first quarter of 2020.lows. While market conditions and events make uncertain the timing, amount and impact of any monetary policy decisions by the Federal Reserve, changes in interest rates may impact our reinvestment yields, primarily for our investments in fixed maturity securities and commercial mortgage loans. As interest rates decline, our reinvestment yield
may be below our overall portfolio yield, resulting in an unfavorable impact to earnings. Conversely, as interest rates rise, our reinvestment yield may exceed the overall portfolio yield resulting in a favorable impact to earnings.
For the general account supporting our U.S. Individual Solutions division, U.S. Workplace Solutions divisionBusinesses and our Corporate and Other operations, we estimate annual principal payments and prepayments that we would be required to reinvest to be approximately 6.7%6.8% of the fixed maturity security and commercial mortgage loan portfolios through 2021.2022. The portion of the general account attributable to these operations has approximately $221$234 billion of such assets (based on net carrying value) as of March 31, 2020.2021. The average portfolio yield for fixed maturity securities and commercial mortgage loans is approximately 4.2%3.8% as of March 31, 2020.2021.
Included in the $221$234 billion of fixed maturity securities and commercial mortgage loans are approximately $143$166 billion that are subject to call or redemption features at the issuer’s option and have a weighted average interest rate of approximately 4%. Of this $143$166 billion, approximately 57%54% contain provisions for prepayment premiums. If we reinvest scheduled payments or prepayments (not subject to a prepayment fee) at rates below the current portfolio yield, including in some cases at rates below those guaranteed under our insurance contracts, future operating results will be impacted to the extent we do not, or are unable to, reduce crediting rates on in-force blocks of business, or effectively utilize other asset/liability management strategies described below, in order to maintain current net interest margins.
The following table sets forth the insurance liabilities and policyholder account balances of our U.S. Operations excluding the Closed Block Division, by type, for the date indicated:
| | | | | |
| As of
March 31, 2021 |
| (in billions) |
| Long-duration insurance products with fixed and guaranteed terms | $ | 142 | |
| Contracts with adjustable crediting rates subject to guaranteed minimums | 62 | |
| Participating contracts where investment income risk ultimately accrues to contractholders | 14 | |
| Total | $ | 218 | |
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| | | |
| | As of March 31, 2020 |
| | (in billions) |
| Long-duration insurance products with fixed and guaranteed terms | $ | 156 |
|
| Contracts with adjustable crediting rates subject to guaranteed minimums | 59 |
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| Participating contracts where investment income risk ultimately accrues to contractholders | 15 |
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| Total | $ | 230 |
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The $156$142 billion above relates to long-duration products such as group annuities, structured settlements and other insurance products that have fixed and guaranteed terms, for which underlying assets may have to be reinvested at interest rates that are lower than portfolio rates. We seek to mitigate the impact of a prolonged low interest rate environment on these contracts through asset/liability management, as discussed further below.
The $59$62 billion above relates to contracts with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. Although we may have the ability to lower crediting rates for those contracts above guaranteed minimums, our willingness to do so may be limited by competitive pressures. The following table sets forth the related account values by range of guaranteed minimum crediting rates and the related range of the difference, in basis points (“bps”), between rates being credited to contractholders as of March 31, 2020,2021, and the respective guaranteed minimums.
| | | | Account Values with Adjustable Crediting Rates Subject to Guaranteed Minimums: | | Account Values with Adjustable Crediting Rates Subject to Guaranteed Minimums: |
| | At guaranteed minimum | | 1-49 bps above guaranteed minimum | | 50-99 bps above guaranteed minimum | | 100-150 bps above guaranteed minimum | | Greater than 150 bps above guaranteed minimum | | Total | | At
guaranteed
minimum | | 1-49
bps above
guaranteed
minimum | | 50-99
bps above
guaranteed
minimum | | 100-150
bps above
guaranteed
minimum | | Greater than
150
bps above
guaranteed
minimum | | Total |
| | ($ in billions) | | ($ in billions) |
Range of Guaranteed Minimum Crediting Rates: | | | | | | | | | | | | Range of Guaranteed Minimum
Crediting Rates: | |
| Less than 1.00% | $ | 0.6 |
| | $ | 1.4 |
| | $ | 0.5 |
| | $ | 0.0 |
| | $ | 0.0 |
| | $ | 2.5 |
| Less than 1.00% | $ | 1.0 | | | $ | 1.2 | | | $ | 0.2 | | | $ | 0.0 | | | $ | 0.0 | | | $ | 2.4 | |
| 1.00% - 1.99% | 1.0 |
| | 2.8 |
| | 13.3 |
| | 2.5 |
| | 1.0 |
| | 20.6 |
| 1.00% - 1.99% | 4.3 | | | 13.4 | | | 2.1 | | | 1.6 | | | 1.2 | | | 22.6 | |
| 2.00% - 2.99% | 1.3 |
| | 0.9 |
| | 0.5 |
| | 2.7 |
| | 1.2 |
| | 6.6 |
| 2.00% - 2.99% | 1.3 | | | 1.5 | | | 1.5 | | | 1.0 | | | 1.5 | | | 6.8 | |
| 3.00% - 4.00% | 26.1 |
| | 2.2 |
| | 0.1 |
| | 0.2 |
| | 0.2 |
| | 28.8 |
| 3.00% - 4.00% | 28.2 | | | 0.5 | | | 0.1 | | | 0.2 | | | 0.0 | | | 29.0 | |
| Greater than 4.00% | 0.9 |
| | 0.0 |
| | 0.0 |
| | 0.0 |
| | 0.0 |
| | 0.9 |
| Greater than 4.00% | 0.8 | | | 0.0 | | | 0.0 | | | 0.0 | | | 0.0 | | | 0.8 | |
| Total(1) | $ | 29.9 |
| | $ | 7.3 |
| | $ | 14.4 |
| | $ | 5.4 |
| | $ | 2.4 |
| | $ | 59.4 |
| Total(1) | $ | 35.6 | | | $ | 16.6 | | | $ | 3.9 | | | $ | 2.8 | | | $ | 2.7 | | | $ | 61.6 | |
| Percentage of total | 50 | % | | 13 | % | | 24 | % | | 9 | % | | 4 | % | | 100 | % | Percentage of total | 58 | % | | 27 | % | | 6 | % | | 5 | % | | 4 | % | | 100 | % |
__________
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(1) | Includes approximately $0.79 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity. |
(1)Includes approximately $0.53 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity.
The remaining $15$14 billion of insurance liabilities and policyholder account balances in these operations relates to participating contracts for which the investment income risk is expected to ultimately accrue to contractholders. The crediting rates for these contracts are periodically adjusted based on the return earned on the related assets.
Assuming a hypothetical scenario where the average 10-year U.S. Treasury rate is 0.70%1.50% (which is reasonably consistent with recent rates) for the period from April 1, 20202021 through March 31, 20212022 (and credit spreads remain unchanged from average levels as of March 31, 2020)experienced during the first quarter 2021), we estimate that the unfavorable impact to net investment income of reinvesting activities, including scheduled maturities and estimated prepayments of fixed maturities and commercial mortgage and other loans (excluding assets supporting participating contracts), would be between $40$50 million and $80$90 million for the period from April 1, 20202021 through March 31, 2021.2022.
In order to mitigate the unfavorable impact that a low interest rate environment has on our net interest margins, we employ a proactive asset/liability management program, which includes strategic asset allocation and hedging strategies within a disciplined risk management framework. These strategies seek to match the characteristics of our products, and to closely approximate the interest rate sensitivity of the assets with the estimated interest rate sensitivity of the product liabilities. Our asset/liability management program also helps manage duration gaps, currency and other risks between assets and liabilities through the use of derivatives. We adjust this dynamic process as products change, as customer behavior changes and as changes in the market environment occur. As a result, our asset/liability management process has permitted us to manage the interest rate risk associated with our products through several market cycles. Our interest rate exposure is also mitigated by our business mix, which includes lines of business for which fee-based and insurance underwriting earnings play a more prominent role in product profitability. We also regularly examine our product offerings and their profitability. As a result, we may reprice certain products and discontinue sales of other products that do not meet our profit expectations.
Closed Block Division
Substantially all of the $59$58 billion of general account assets in the Closed Block division support obligations and liabilities relating to the Closed Block policies only. See Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information on the Closed Block.
International Insurance Operations
While our international insurance operations have experienced a low interest rate environment for many years, the current reinvestment yields for certain blocks of business in our international insurance operations are generally lower than the current portfolio yield supporting these blocks of business. In recent years, the Bank of Japan’s monetary policy has resulted in even lower and, at times, negative yields for certain tenors of government bonds. Our international insurance operations employ a proactive asset/liability management program in order to mitigate, to the extent possible, the unfavorable impact that the current interest rate environment has on our net interest margins. In conjunction with this program, we have not purchased negative yielding assets to support the portfolio and we continue to purchase long-term bonds with tenors of 30 years or greater. Additionally, our diverse product portfolio in terms of currency mix and premium payment structure allows us to further mitigate the negative impact from this low interest rate environment. We also regularly examine our product offerings and their profitability. As a result, we have repricedmay reprice certain products, adjustedadjust commissions for certain products and have discontinueddiscontinue sales of other products that do not meet our profit expectations. The impact of these actions and the introduction of certain new products has resulted in an increase in sales of U.S. dollar-denominated products relative to products denominated in other currencies. For additional information on sales within our international insurance operations, see “—International Businesses—Sales Results,” below.
The following table sets forth the insurance liabilities and policyholder account balances of our Japanese operations, by type, for the date indicated:
| | | | | |
| As of
March 31, 2021 |
| (in billions) |
| Insurance products with fixed and guaranteed terms | $ | 136 | |
| Contracts with a market value adjustment if invested amount is not held to maturity | 26 | |
| Contracts with adjustable crediting rates subject to guaranteed minimums | 11 | |
| Total | $ | 173 | |
|
| | | |
| | As of March 31, 2020 |
| | (in billions) |
| Insurance products with fixed and guaranteed terms | $ | 130 |
|
| Contracts with a market value adjustment if invested amount is not held to maturity | 25 |
|
| Contracts with adjustable crediting rates subject to guaranteed minimums | 11 |
|
| Total | $ | 166 |
|
The $130$136 billion above is primarily comprised of long-duration insurance products that have fixed and guaranteed terms,terms- for which underlying assets may have to be reinvested at interest rates that are lower than current portfolio yields. The remaining insurance liabilities and policyholder account balances include $25$26 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity and $11 billion related to contracts with crediting rates that may be adjusted over
the life of the contract, subject to guaranteed minimums. Most of the current crediting rates on these contracts, however, are at or near contractual minimums. Although we have the ability in some cases to lower crediting rates for those contracts that are above guaranteed minimum crediting rates, the majority of this business has interest crediting rates that are determined by formula.
Assuming a hypothetical scenario where the average 30-year Japanese Government Bond yield is 0.40%0.65% and the 10-year U.S. Treasury rate is 0.70%1.50% (which is reasonably consistent with recent rates) for the period from April 1, 20202021 through March 31, 20212022 (and credit spreads remain unchanged from average levels as of March 31, 2020)experienced during the first quarter 2021), we estimate that the unfavorable impact to net investment income of reinvesting activities, including scheduled maturities and estimated
prepayments of fixed maturities and commercial mortgage and other loans (excluding assets supporting participating contracts), would be between $40$20 million and $80$40 million for the period from April 1, 20202021 through March 31, 2021.2022.
Results of Operations
Consolidated Results of Operations
The following table summarizes net income (loss) for the periods presented.
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| | | | | (in millions) |
| Revenues | | | | | $ | 16,952 | | | $ | 13,464 | |
| Benefits and expenses | | | | | 13,538 | | | 13,802 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | | | | | 3,414 | | | (338) | |
| Income tax expense (benefit) | | | | | 636 | | | (58) | |
| Income (loss) before equity in earnings of operating joint ventures | | | | | 2,778 | | | (280) | |
| Equity in earnings of operating joint ventures, net of taxes | | | | | 26 | | | 10 | |
| | | | | | | |
| | | | | | | |
| Net income (loss) | | | | | 2,804 | | | (270) | |
| Less: Income attributable to noncontrolling interests | | | | | (24) | | | 1 | |
| Net income (loss) attributable to Prudential Financial, Inc. | | | | | $ | 2,828 | | | $ | (271) | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| Revenues | $ | 13,464 |
| | $ | 15,091 |
|
| Benefits and expenses | 13,802 |
| | 13,951 |
|
| Income (loss) before income taxes and equity in earnings of operating joint ventures | (338 | ) | | 1,140 |
|
| Income tax expense (benefit) | (58 | ) | | 232 |
|
| Income (loss) before equity in earnings of operating joint ventures | (280 | ) | | 908 |
|
| Equity in earnings of operating joint ventures, net of taxes | 10 |
| | 29 |
|
| Net income (loss) | (270 | ) | | 937 |
|
| Less: Income attributable to noncontrolling interests | 1 |
| | 5 |
|
| Net income (loss) attributable to Prudential Financial, Inc. | $ | (271 | ) | | $ | 932 |
|
The $1,203$3,099 million decreaseincrease in “Net income (loss) attributable to Prudential Financial, Inc.” for the first quarter of 20202021 compared to the first quarter of 20192020 reflected the following notable items:
•$1,3832,236 million unfavorablefavorable variance, on a pre-tax basis, reflecting the impact from changes in the value of our embedded derivatives and related hedge positions, net of DAC and other costs, associated with certain variable annuities;
•$1,242 million favorable variance, on a pre-tax basis, driven by market experience updates primarily within our Individual Annuities and Individual Life businesses (see Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information);
•$951 million favorable variance, on a pre-tax basis, from higher adjusted operating income from our business segments, including a gain from the sale of the Company’s 35% ownership stake in Pramerica SGR; (see “Segment Results of Operations” for additional information); and
•$373 million favorable variance, on a pre-tax basis, from investment related activities that are recordedprimarily within “Other income (loss)” for PFI excluding our Divested and Run-off Businesses. These unfavorablefavorable impacts were primarily driven by unrealized gains (losses) from equity securities, andpartially offset by higher losses from fixed maturity securities designated as trading;trading.
$1,006 million unfavorable variance, on a pre-tax basis, driven by market experience updates primarily from our Individual Annuities and Individual Life businesses; and
$809 million unfavorable variance, on a pre-tax basis, reflecting the net impact from changes in the value of our embedded derivatives and related hedge positions associated with certain variable annuities (see “—Results of Operations by Segment—U.S. Businesses—U.S. Individual Solutions Division—Individual Annuities—Variable Annuity Risks and Risk Mitigants” for additional information).
Partially offsetting these decreasesincreases in “Net income (loss) attributable to Prudential Financial, Inc.” waswere the following item:items:
•$2,4441,063 million favorableunfavorable variance, on a pre-tax basis, from realized investment gains (losses) and lossesrelated charges for PFI excluding our Divested and Run-off Businesses, and excluding the impact of the hedging program associated with certain variable annuities and market experience updates discussed above (see “—General“General Account Investments” for additional information).; and
Segment Results of Operations
We analyze the performance of our segments and Corporate and Other operations using a measure of segment profitability called adjusted operating income. See “—Segment Measures” for a discussion of adjusted operating income and its use as a measure of segment operating performance.
Summary of Results of Operations by Segment
Shown below are the adjusted operating income contributions of each segment and Corporate and Other operations for the periods indicated and a reconciliation of this segment measure of performance to “Income (loss) before income taxes and equity in earnings of operating joint ventures” as presented in the Unaudited Interim Consolidated Statements of Operations.
| | | | Three Months Ended
March 31, | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | | 2021 | | 2020(1) |
| | (in millions) | | | (in millions) |
| Adjusted operating income before income taxes by segment: | | | | Adjusted operating income before income taxes by segment: | | |
| PGIM | $ | 164 |
| | $ | 214 |
| PGIM | | $ | 651 | | | $ | 164 | |
| U.S. Businesses: | | | | U.S. Businesses: | | |
| U.S. Workplace Solutions division: |
| |
| |
| Retirement | 245 |
| | 251 |
| Retirement | | 623 | | | 245 | |
| Group Insurance | 44 |
| | 53 |
| Group Insurance | | (132) | | | 44 | |
| Total U.S. Workplace Solutions division | 289 |
| | 304 |
| |
| U.S. Individual Solutions division: | | | | |
| Individual Annuities | 373 |
| | 472 |
| Individual Annuities | | 444 | | | 373 | |
| Individual Life | (20 | ) | | 105 |
| Individual Life | | (44) | | | (20) | |
| Total U.S. Individual Solutions division | 353 |
| | 577 |
| |
| Assurance IQ division(1): | | | | |
| Assurance IQ | (23 | ) | | 0 |
| Assurance IQ | | (39) | | | (23) | |
| Total Assurance IQ division | (23 | ) | | 0 |
| |
| Total U.S. Businesses | 619 |
| | 881 |
| Total U.S. Businesses | | 852 | | | 619 | |
| International Businesses | 751 |
| | 922 |
| International Businesses | | 871 | | | 696 | |
| Corporate and Other | (342 | ) | | (412 | ) | Corporate and Other | | (286) | | | (342) | |
| Total segment adjusted operating income before income taxes | 1,192 |
| | 1,605 |
| Total segment adjusted operating income before income taxes | | 2,088 | | | 1,137 | |
| Reconciling items: | | | | Reconciling items: | | | | |
| Realized investment gains (losses), net, and related adjustments(2) | 105 |
| | (612 | ) | Realized investment gains (losses), net, and related adjustments(2) | | 1,264 | | | 299 | |
| Charges related to realized investment gains (losses), net(3) | (803 | ) | | 25 |
| Charges related to realized investment gains (losses), net(3) | | (239) | | | (802) | |
| Market experience updates(4) | (947 | ) | | 0 |
| |
| Divested and Run-off Businesses(5): | | | | |
| Market experience updates | | Market experience updates | | 304 | | | (938) | |
| Divested and Run-off Businesses(4): | | Divested and Run-off Businesses(4): | | |
| Closed Block division | (1 | ) | | (19 | ) | Closed Block division | | 34 | | | (1) | |
| Other Divested and Run-off Businesses | 80 |
| | 174 |
| Other Divested and Run-off Businesses | | 30 | | | (69) | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(5) | | Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(5) | | (54) | | | (9) | |
| Other adjustments(6) | 45 |
| | 0 |
| Other adjustments(6) | | (13) | | | 45 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(7) | (9 | ) | | (33 | ) | |
| Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures | $ | (338 | ) | | $ | 1,140 |
| Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures | | $ | 3,414 | | | $ | (338) | |
__________
| |
(1) | Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. |
| |
(2) | Represents “Realized investment gains (losses), net,” and related adjustments. See “(1)Effective second quarter of 2020, the results of POK and the impact of its sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Effective third quarter of 2020, the results of POT and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.—General Account Investments” and Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. Prior period amounts have been updated to conform to current period presentation. |
| |
(3) | Includes charges that represent the impact of realized investment gains (losses), net, on the amortization of DAC and other costs, and on changes in reserves. Also includes charges resulting from payments related to market value adjustment features of certain of our annuity products and the impact of realized investment gains (losses), net, on the amortization of unearned revenue reserves. |
| |
(4) | Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company had historically recognized these impacts in adjusted operating income. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. |
| |
(5) | Represents the contribution to income (loss) of Divested and Run-off Businesses that have been or will be sold or exited, including businesses that have been placed in wind down, but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP. See “—Divested and Run-off Businesses.” |
| |
(6) | Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. |
| |
(7) | Equity in earnings of operating joint ventures are included in adjusted operating income but excluded from “Income (loss) before income taxes and equity in earnings of operating joint ventures” as they are reflected on an after-tax U.S. GAAP basis as a separate line in the Unaudited Interim Consolidated Statements of Operations. Earnings attributable to noncontrolling interests are excluded from adjusted operating income but included in “Income (loss) before income taxes and equity in earnings of operating joint ventures” as they are reflected on a U.S. GAAP basis as a separate line in the Unaudited Interim Consolidated Statements of Operations. Earnings attributable to noncontrolling interests represent the portion of earnings from consolidated entities that relates to the equity interests of minority investors. |
(2)See “—General Account Investments” and Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. (3)Includes charges that represent the impact of realized investment gains (losses), net, on the amortization of DAC and other costs, and on changes in reserves. Also includes charges resulting from payments related to market value adjustment features of certain of our annuity products and the impact of realized investment gains (losses), net, on the amortization of Unearned Revenue Reserves (“URR”).
(4)Represents income (loss) of Divested and Run-off Businesses that have been or will be sold or exited, including businesses that have been placed in wind down, but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP. See “—Divested and Run-off Businesses” for additional information.
(5)Equity in earnings of operating joint ventures are included in adjusted operating income but excluded from “Income (loss) before income taxes and equity in earnings of operating joint ventures” as they are reflected on an after-tax U.S. GAAP basis as a separate line in the Unaudited Interim Consolidated Statements of Operations. Earnings attributable to noncontrolling interests are excluded from adjusted operating income but included in “Income (loss) before income taxes and equity in earnings of operating joint ventures” as they are reflected on a U.S. GAAP basis as a separate line in the Unaudited Interim Consolidated Statements of Operations. Earnings attributable to noncontrolling interests represent the portion of earnings from consolidated entities that relates to the equity interests of minority investors.
(6)“Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
Segment results for the period presented above reflect the following:
PGIM. Results for the first quarter of 20202021 increased in comparison to the prior year period, primarily reflecting a gain from the sale of our 35% ownership stake in Pramerica SGR, an asset management joint venture in Italy, as well as higher asset management fees and other related revenues, partially offset by higher expenses.
Retirement. Results for the first quarter of 2021 increased in comparison to the prior year period, primarily reflecting higher net investment spread results and higher reserve gains.
Group Insurance. Results for the first quarter of 2021 decreased in comparison to the prior year period, primarily reflecting lower underwriting results in our group life and group disability businesses.
Individual Annuities. Results for the first quarter of 2021 increased in comparison to the prior year period, primarily driven by higher net investment spread results and higher fee income, net of distribution expenses and other associated costs.
Individual Life. Results for the first quarter of 2021 decreased in comparison to the prior year period, primarily reflecting lower underwriting results, partially offset by higher net investment spread results.
Assurance IQ. Results for the first quarter of 2021 decreased in comparison to the prior year period, reflecting an increase in asset management fees that was more than offset by lower other related revenues and higher expenses.
Retirement. Results for the first quarter of 2020 decreased in comparison to the prior year period, primarily reflecting lower reserve gains,operating expenses supporting business growth, partially offset by higher fee income and net investment spread results and lower expenses.revenues.
Group Insurance. Results for the first quarter of 2020 decreased in comparison to the prior year period, primarily reflecting lower net investment spread results.
Individual Annuities. Results for the first quarter of 2020 decreased in comparison to the prior year period, primarily driven by lower fee income, net of distribution expenses and other associated costs, lower net investment spread results, and the absence of a favorable impact in the prior year period from changes in our estimated profitability of the business, which beginning with the second quarter of 2019 is excluded from adjusted operating income.
Individual Life. Results for the first quarter of 2020 decreased in comparison to the prior year period, primarily reflecting less favorable underwriting results and the absence of a favorable impact in the prior year period from changes in our estimated profitability of the business, which beginning with the second quarter of 2019 is excluded from adjusted operating income.
Assurance IQ. The acquisition of Assurance IQ was completed in October 2019. Results for the first quarter of 2020 includes revenues, net of marketing and distribution expenses, operating expenses and amortization expenses related to intangible assets recognized as part of purchase accounting (see Note 1 and Note 10 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information).
International Businesses. Results for the first quarter of 2020 decreased2021 increased in comparison to the prior year period, inclusive of an unfavorable net impact from foreign currency exchange rates, primarily driven by lowerhigher net investment spread results, more favorable underwriting results including from business growth, and higher expenses, lower earnings from our joint venture investments and lower underwriting results, partially offset by business growth.investments.
Corporate and Other. Results for the first quarter of 2020 reflected decreased losses in comparison to the prior year period, driven by lower net charges from other corporate activities, including lower long-term and deferred compensation expenses, and favorable pension and employee benefit results, partially offset by lower net investment income.
Closed Block Division. Results for the first quarter of 20202021 reflected decreased losses in comparison to the prior year period, primarily reflecting a decreaselower net charges from other corporate activities, favorable pension and employee benefit results and lower interest expense on debt, partially offset by lower investment income.
Closed Block Division. Results for the first quarter of 2021 increased in comparison to the prior year period, primarily driven by higher net investment activity results, partially offset by an increase in the policyholder dividend obligation as a result of lower net investment activity results.obligation.
Segment Measures
Adjusted Operating Income. In managing our business, we analyze our segments’ operating performance using “adjusted operating income.” Adjusted operating income does not equate to “Income (loss) before income taxes and equity in earnings of operating joint ventures” or “Net income (loss)” as determined in accordance with U.S. GAAP, but is the measure of segment profit or loss we use to evaluate segment performance and allocate resources, and consistent with authoritative guidance, is our measure of segment performance. The adjustments to derive adjusted operating income are important to an understanding of our overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and our definition of adjusted operating income may differ from that used by other companies. However,companies; however, we believe that the presentation of adjusted operating income as we measure it for management purposes enhances the understanding of our results of operations by highlighting the results from ongoing operations and the underlying profitability of our businesses.
See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information on the presentation of segment results and our definition of adjusted operating income.
Annualized New Business Premiums. In managing our Individual Life, Group Insurance and International Businesses, we analyze annualized new business premiums, which do not correspond to revenues under U.S. GAAP. Annualized new business premiums measure the current sales performance of the business, while revenues primarily reflect the renewal persistency of policies written in prior years and net investment income, in addition to current sales. Annualized new business premiums include 10% of first year premiums or deposits from single pay products. No other adjustments are made for limited pay contracts.
The amount of annualized new business premiums for any given period can be significantly impacted by several factors, including but not limited to: addition of new products, discontinuation of existing products, changes in credited interest rates for certain products and other product modifications, changes in premium rates, changes in tax laws, changes in regulations or changes in the competitive environment. Sales volume may increase or decrease prior to certain of these changes becoming effective, and then fluctuate in the other direction following such changes.
Assets Under Management. In managing our PGIM business, we analyze assets under management (which do not correspond directly to U.S. GAAP assets) because the principal source of revenues is fees based on assets under management. Assets under management represent the fair market value or account value of assets which we manage directly for institutional clients, retail clients, and for our general account, as well as assets invested in our products that are managed by third-party managers.
Account Values. In managing our Individual Annuities and Retirement businesses, we analyze account values, which do not correspond to U.S. GAAP assets. Net sales (redemptions) in our Individual Annuities business and net additions (withdrawals) in our Retirement business do not correspond to revenues under U.S. GAAP, but are used as a relevant measure of business activity.
Impact of Foreign Currency Exchange Rates
Foreign currency exchange rate movements and related hedging strategies
As a U.S.-based company with significant business operations outside the U.S., particularly in Japan, we are subject to foreign currency exchange rate movements that could impact our U.S. dollar (“USD”)-equivalent earnings and shareholder return on equity. Our USD-equivalent earnings could be materially affected by currency fluctuations from period to period, even if earnings on a local currency basis are relatively constant. Our USD-equivalent equity is impacted as the value of our investment in international operations may also fluctuate based on changes in foreign currency exchange rates. We seek to mitigate these impacts through various hedging strategies, including the use of derivative contracts and by holding USD-denominated assets in certain of our foreign subsidiaries.
In order to reduce earnings volatility from foreign currency exchange rate movements, we enter into forward currency derivative contracts to effectively fix the currency exchange rates for a portion of our prospective non-USD-denominated earnings streams. This forward currency hedging program is primarily associated with our insurance operations in Japan and Korea.Japan.
In order to reduce equity volatility from foreign currency exchange rate movements, we primarily utilize a yen hedging strategy that calibrates the hedge level to preserve the relative contribution of our yen-based business to the Company’s overall return on equity on a leverage neutral basis. We implement this hedging strategy utilizing a variety of instruments, including USD-denominated assets, foreign currency derivative contracts, and dual currency and synthetic dual currency investments held locally in our Japanese insurance subsidiaries. The total hedge level may vary based on our periodic assessment of the relative contribution of our yen-based business to the Company’s overall return on equity.
The table below presents the aggregate amount of instruments that serve to hedge the impact of foreign currency exchange movements on our USD-equivalent shareholder return on equity from our Japanese insurance subsidiaries as of the dates indicated.
| | | | March 31,
2020 | | December 31,
2019 | | March 31,
2021 | | December 31,
2020 |
| | (in billions) | | (in billions) |
| Foreign currency hedging instruments: | | | | Foreign currency hedging instruments: | |
| Hedging USD-equivalent earnings: | | | | Hedging USD-equivalent earnings: | |
| Forward currency contracts (notional amount outstanding) | $ | 0.5 |
| | $ | 0.6 |
| Forward currency contracts (notional amount outstanding) | $ | 0.4 | | | $ | 0.4 | |
| Hedging USD-equivalent equity: | | | | Hedging USD-equivalent equity: | |
| USD-denominated assets held in yen-based entities(1) | 13.6 |
| | 13.1 |
| USD-denominated assets held in yen-based entities(1) | 9.8 | | | 10.1 | |
| Dual currency and synthetic dual currency investments(2) | 0.6 |
| | 0.6 |
| Dual currency and synthetic dual currency investments(2) | 0.5 | | | 0.5 | |
| Total USD-equivalent equity foreign currency hedging instruments | 14.2 |
| | 13.7 |
| Total USD-equivalent equity foreign currency hedging instruments | 10.3 | | | 10.6 | |
| Total foreign currency hedges | $ | 14.7 |
| | $ | 14.3 |
| Total foreign currency hedges | $ | 10.7 | | | $ | 11.0 | |
__________
| |
(1) | Includes USD-denominated fixed maturities at amortized cost plus any related accrued investment income, as well as USD notional amount of foreign currency derivative contracts outstanding. Note this amount represents only those USD assets serving to hedge the impact of foreign currency volatility on equity. Separate from this program, our Japanese operations also have $60.3 billion and $57.8 billion as of March 31, 2020 and December 31, 2019, respectively, of USD-denominated assets supporting USD-denominated liabilities related to USD-denominated products. |
| |
(2) | Dual currency and synthetic dual currency investments are held by our yen-based entities in the form of fixed maturities and loans with a yen-denominated principal component and USD-denominated interest income. The amounts shown represent the present value of future USD-denominated cash flows. |
(1)Includes USD-denominated fixed maturities at amortized cost plus any related accrued investment income, as well as USD notional amount of foreign currency derivative contracts outstanding. Note this amount represents only those USD assets serving to hedge the impact of foreign currency volatility on equity. Separate from this program, our Japanese operations also have $66.5 billion and $65.8 billion as of March 31, 2021 and December 31, 2020, respectively, of USD-denominated assets supporting USD-denominated liabilities related to USD-denominated products.
(2)Dual currency and synthetic dual currency investments are held by our yen-based entities in the form of fixed maturities and loans with a yen-denominated principal component and USD-denominated interest income. The amounts shown represent the present value of future USD-denominated cash flows.
The USD-denominated investments that hedge the impact of foreign currency exchange rate movements on USD-equivalent earnings and shareholder return on equity from our Japanese insurance operations are reported within yen-based entities and, as a result, foreign currency exchange rate movements will impact their value reported within our yen-based Japanese insurance entities. We seek to mitigate the risk that future unfavorable foreign currency exchange rate movements will decrease the value of these USD-denominated investments reported within our yen-based Japanese insurance entities, and therefore negatively impact their equity and regulatory solvency margins, by having our Japanese insurance operations enter into currency hedging transactions. Those hedges aretransactions with a subsidiary of Prudential Financial. These hedging strategies have the economic effect
of moving the change in value of these USD-denominated investments due to foreign currency exchange rate movements from our Japanese yen-based entities to our USD-based entities.
These USD-denominated investments also pay a coupon which is generally higher than what a similar yen-denominated investment would pay. The incremental impact of this higher yield on our USD-denominated investments, as well as our dual currency and synthetic dual currency investments, will vary over time, and is dependent on the duration of the underlying investments as well as interest rate environments in both the U.S. and Japan at the time of the investments.
Impact of intercompany foreign currency exchange rate arrangements on segment results of operations
The financial results of our International Businesses and PGIM reflect the impact of intercompany arrangements with our Corporate and Other operations pursuant to which certain of these segments’ non-USD-denominated earnings are translated at fixed currency exchange rates. Results of our Corporate and Other operations include any differences between the translation adjustments recorded by the segments at the fixed currency exchange rate versus the actual average rate during the period. In addition, specific to our International Businesses where we hedge certain currencies, the results of our Corporate and Other operations also include the impact of any gains or losses recorded from the forward currency contracts that settled during the period, which include the impact of any over or under hedging of actual earnings that differ from projected earnings.
For our International Businesses, the fixed currency exchange rates are generally determined in connection with a foreign currency income hedging program designed to mitigate the impact of exchange rate changes on the segment’s expected USD-equivalent earnings. Pursuant to this program, our Corporate and Other operations execute forward currency contracts with third-parties to sell the net exposure of projected earnings for certain currencies in exchange for USD at specified exchange rates. The maturities of these contracts correspond with the future periods (typically on a three-year rolling basis) in which the identified non-USD-denominated earnings are expected to be generated. In establishing the level of non-USD-denominated earnings that will be hedged through this program, we exclude the anticipated level of USD-denominated earnings that will be generated by USD-denominated products and investments. For the three months ended March 31, 2020,2021, approximately 12% of the segment’s earnings were yen-based and, as of March 31, 2020,2021, we have hedged 100%, 83% and 39% of expected yen-based earnings for 2020, 2021, 2022 and 2022,2023, respectively. To the extent currently unhedged, our International Businesses’ future expected USD-equivalent of yen-based earnings will be impacted by yen exchange rate movements.
As a result of these arrangements, our International Businesses’ results for 20202021 and 20192020 reflect the impact of translating yen-denominated earnings at fixed currency exchange rates of 103 and 104 and 105 yen per USD, respectively, and Korean won-denominated earnings at fixed currency exchange rates of 1,090 and 1,110 Korean won per USD, respectively. Since determination of the fixed currency exchange rates for a given year is impacted by changes in foreign currency exchange rates over time, the segment’s future earnings will ultimately be impacted by these changes in exchange rates.
For PGIM and certain other currencies within our International Businesses, the fixed currency exchange rates for the current year are predetermined during the third quarter of the prior year using forward currency exchange rates.
The table below presents, for the periods indicated, the increase (decrease) to revenues and adjusted operating income for the International Businesses, PGIM and Corporate and Other operations, reflecting the impact of these intercompany arrangements.
| | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2021 | | 2020 |
| | | | | | (in millions) |
| Segment impacts of intercompany arrangements: | | | | | | | |
| International Businesses | | | | | $ | 1 | | | $ | 12 | |
| PGIM | | | | | 0 | | | 0 | |
| Impact of intercompany arrangements(1) | | | | | 1 | | | 12 | |
| Corporate and Other: | | | | | | | |
| Impact of intercompany arrangements(1) | | | | | (1) | | | (12) | |
| Settlement gains (losses) on forward currency contracts(2)(3) | | | | | 8 | | | 22 | |
| Net benefit (detriment) to Corporate and Other | | | | | 7 | | | 10 | |
| Net impact on consolidated revenues and adjusted operating income | | | | | $ | 8 | | | $ | 22 | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| Segment impacts of intercompany arrangements: | | | |
| International Businesses | $ | 12 |
| | $ | 15 |
|
| PGIM | 0 |
| | 1 |
|
| Impact of intercompany arrangements(1) | 12 |
| | 16 |
|
| Corporate and Other: | | | |
| Impact of intercompany arrangements(1) | (12 | ) | | (16 | ) |
| Settlement gains (losses) on forward currency contracts(2) | 29 |
| | 12 |
|
| Net benefit (detriment) to Corporate and Other | 17 |
| | (4 | ) |
| Net impact on consolidated revenues and adjusted operating income | $ | 29 |
| | $ | 12 |
|
__________
| |
(1) | Represents the difference between non-USD-denominated earnings translated on the basis of weighted average monthly currency exchange rates versus fixed currency exchange rates determined in connection with the foreign currency income hedging program. |
| |
(2) | As of March 31, 2020 and 2019, the notional amounts of these forward currency contracts within our Corporate and Other operations were $2.4 billion and $2.5 billion, respectively, of which $0.5 billion and $1.2 billion, respectively, were related to our Japanese insurance operations. |
(1)Represents the difference between non-USD-denominated earnings translated on the basis of weighted average monthly currency exchange rates versus fixed currency exchange rates determined in connection with the foreign currency income hedging program.
(2)As of March 31, 2021 and 2020, the total notional amounts of these forward currency contracts within our Corporate and Other operations were $0.9 billion and $1.2 billion, respectively, of which $0.4 billion and $0.5 billion, respectively, were related to our Japanese insurance operations.
(3)Excludes impacts related to POK. Prior period amounts have been updated to conform to current period presentation. Effective second quarter of 2020, the intercompany arrangement for the Korean won between our International Businesses and Corporate and Other operations was terminated and the related hedges were repurposed in relation to the anticipated sale of POK. Effective second quarter of 2020, Korean won-denominated earnings for 2020 that were translated at fixed currency exchange rates of 1,090 Korean won per USD are excluded from the International Businesses and are included in the Divested and Run-off Businesses included in Corporate and Other.
Impact of products denominated in non-local currencies on U.S. GAAP earnings
While our international insurance operations offer products denominated in local currency, several also offer products denominated in non-local currencies,currencies. This is most notablynotable in our Japanese operations, which currently offer USD- andprimarily USD-denominated products, but have also historically offered Australian dollar (“AUD”)-denominated products. The non-local currency-denominated insurance liabilities related to these products are supported by investments denominated in corresponding currencies, including a significant portion designated as available-for-sale. While the impact from foreign currency exchange rate movements on these non-local currency-denominated assets and liabilities is economically matched, differences in the accounting for changes in the value of these assets and liabilities due to changes in foreign currency exchange rate movements have historically resulted in volatility in U.S. GAAP earnings.
In 2015, we implemented a structure in Gibraltar Life’s operations that disaggregated the USD- and AUD-denominated businesses into separate divisions, each with its own functional currency that aligns with the underlying products and investments. The result of this alignment was to reduce differences in the accounting for changes in the value of these assets and liabilities that arise due to changes in foreign currency exchange rate movements. For the USD- and AUD-denominated assets that were transferred under this structure, the net cumulative unrealized investment gains associated with foreign exchange remeasurement that were recorded in “Accumulated other comprehensive income (loss)” (“AOCI”) totaled $2.6 billion and $2.7$2.3 billion as of both March 31, 20202021 and December 31, 2019, respectively,2020, and will be recognized in earnings within “Realized investment gains (losses), net” over time as these assets mature or are sold. Absent the sale of any of these assets prior to their stated maturity, approximately 10%11% of the $2.6$2.3 billion balance as of March 31, 20202021 will be recognized throughout the remainder of 2020,2021, approximately 13%12% will be recognized in 2021,2022, and the remaining balance will be recognized from 20222023 through 2051.
Highly inflationary economy in Argentina
Our insurance operations in Argentina, Prudential of Argentina (“POA”), have historically utilized the Argentine peso as the functional currency given it is the currency of the primary economic environment in which the entity operates. During 2018, Argentina experienced a cumulative inflation rate that exceeded 100% over a 3-year period. As a result, Argentina’s economy was
deemed to be highly inflationary resulting in reporting changes effective July 1, 2018. Under U.S. GAAP, the financial statements of a foreign entity in a highly inflationary economy are to be remeasured as if its functional currency (formerly the Argentine peso) is the reporting currency of its parent reporting entity (the USD) on a prospective basis. While this changed how the results of POA are remeasured and/or translated into USD, the impact to our financial statements was not material nor is it expected to be material in future periods given the relative size of our POA operations. It should also be noted that due to the macroeconomic environment in Argentina, substantially all of POA’s balance sheet consists of USD-denominated product liabilities supported by USD-denominated assets. As a result, this accounting change serves to reduce the remeasurement impact reflected in net income given that the functional currency and currency in which the assets and liabilities are denominated will be more closely aligned.
Accounting Policies & Pronouncements
Application of Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the application of accounting policies that often involve a significant degree of judgment. Management, on an ongoing basis, reviews estimates and assumptions used in the preparation of financial statements. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, the Company’s results of operations and financial position as reported in the Unaudited Interim Consolidated Financial Statements could change significantly.
Management believes the accounting policies relating to the following areas are most dependent on the application of estimates and assumptions and require management’s most difficult, subjective, or complex judgments:
•DAC, deferred sales inducements (“DSI”) and VOBA;
•Policyholder liabilities;
•Goodwill;
| |
• | •Valuation of investments including derivatives, measurement of allowance for credit losses, and recognition of other-than-temporary impairments (“OTTI”); •; |
Pension and other postretirement benefits;
•Taxes on income; and
•Reserves for contingencies, including reserves for losses in connection with unresolved legal matters.
Market Performance - Equity and Interest Rate Assumptions
DAC, DSI and VOBA, associated with the variable and universal life policies of our Individual Life and International Businesses segments and the variable and fixed annuity contracts of our Individual Annuities and International Businesses segments, are generally amortized over the expected lives of these policies in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. The quarterly adjustments for market performance reflect the impact of changes to our estimate of total gross profits to reflect actual fund performance and market conditions. A significant portion of gross profits for our variable annuity contracts and, to a lesser degree, our variable life contracts are dependent upon the total rate of return on assets held in separate account investment options. This rate of return influences the fees we earn on variable annuity and variable life contracts, costs we incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts, as well as other sources of profit. Returns that are higher than our expectations for a given period produce higher than expected account balances, which increase the future fees we expect to earn on variable annuity and variable life contracts and decrease the future costs we expect to incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts. The opposite occurs when returns are lower than our expectations. The changes in future expected gross profits are used to recognize a cumulative adjustment to all prior periods’ amortization.
Furthermore, the calculation of the estimated liability for future policy benefits related to certain insurance products includes an estimate of associated revenues and expenses that are dependent on both historical market performance as well as estimates of market performance in the future. Similar to DAC, DSI and VOBA described above, these liabilities are subject to quarterly adjustments for experience including market performance, in addition to annual adjustments resulting from our annual reviews of assumptions.
The weighted average rate of return assumptions used in developing estimated market returns consider many factors specific to each product type, including asset durations, asset allocations and other factors. With regard to equity market assumptions, the near-term future rate of return assumption used in evaluating DAC, DSI and VOBA and liabilities for future policy benefits for
certain of our products, primarily our domestic variable annuity and domestic and international variable life insurance products, is generally updated each quarter and is derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15.0%, we use our maximum future rate of return. If the near-term projected future rate of return is lower than our near-term minimum future rate of return of 0%, we use our minimum future rate of return. As of March 31, 2020,2021, our domestic variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 9.7%0.7% near-term mean reversion equity expected rate of return, and our international variable life insurance business assumes a 4.8% long-term equity expected rate of return and a 7.7%0% near-term mean reversion equity expected rate of return.
With regard to interest rate assumptions used in evaluating DAC, DSI and VOBA and liabilities for future policy benefits for certain of our products, we update the long-term and near-term future rates used to project fixed income returns annually and quarterly, respectively. As a result of our 20192020 annual reviews and update of assumptions and other refinements, which were performed in the second quarter, we keptreduced our long-term expectation of the (i) 10-year U.S. Treasury rate by 50 basis points and now grade to a rate of 3.25% over ten years, and (ii) 10-year Japanese Government Bond yields unchangedyield by 30 basis points and continue tonow grade to ratesa rate of 3.75% and 1.30%, respectively,1.00% over ten years. As part of our quarterly market experience updates, we update our near-term projections of interest rates to reflect changes in current rates.
For a discussion of the impact that could result from changes in certain key assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting Policies and Pronouncements—Sensitivities for Insurance Assets and Liabilities” in our Annual Report on Form 10-K for the year ended December 31, 20192020.
Future Adoption of New Accounting Pronouncements
ASU 2018-12, Financial Services - —Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the Financial Accounting Standards Board (“FASB”) on August 15, 2018 and is expected to have a significant impact on the Consolidated Financial Statements and Notes to the Consolidated Financial Statements. In October 2019, the FASB issued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of ASU 2018-12 to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. ThisAs a result of the COVID-19 pandemic, in November 2020 the FASB issued ASU 2020-11, Financial Services—Insurance (Topic 944): Effective Date and Early Application to defer for an additional one year the effective date of ASU 2018-12 from January 1, 2022 to January 1, 2023, and to provide transition relief to facilitate the early adoption of the ASU. The transition relief would allow large calendar-year public companies that early adopt ASU 2018-12 to apply the guidance either as of January 1, 2020 or January 1, 2021 (and record transition adjustments as of January 1, 2020 or January 1, 2021, respectively) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements. The Company currently intends to adopt ASU 2018-12 effective January 1, 2023. ASU 2018-12 will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. In addition to the impacts to the balance sheet upon adoption,transition, the Company also expects an impact to howthe pattern of earnings emerge thereafter.emergence following the transition date. See Note 2 to the Unaudited Interim Consolidated Financial Statements for a more detailed discussion of ASU 2018-12, as well as other accounting pronouncements issued but not yet adopted and newly adopted accounting pronouncements.
Results of Operations by Segment
PGIM
Business Update
•In the first quarter of 2021, we sold our 35% ownership stake in Pramerica SGR, an asset management joint venture in Italy, to our partner UBI Banca, which was acquired in 2020 by Intesa Sanpaolo Group, resulting in a pre-tax gain of $378 million. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
Operating Results
The following table sets forth PGIM’s operating results for the periods indicated.
| | | | Three Months Ended
March 31, | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | | 2021 | | 2020 |
| | (in millions) | | | (in millions) |
| Operating results(1): | | | | Operating results(1): | | |
| Revenues | $ | 778 |
| | $ | 870 |
| Revenues | | $ | 1,314 | | | $ | 778 | |
| Expenses | 614 |
| | 656 |
| Expenses | | 663 | | | 614 | |
| Adjusted operating income | 164 |
| | 214 |
| Adjusted operating income | | 651 | | | 164 | |
| Realized investment gains (losses), net, and related adjustments | 4 |
| | 0 |
| Realized investment gains (losses), net, and related adjustments | | (2) | | | 4 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | (36 | ) | | 5 |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | | (28) | | | (36) | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 132 |
| | $ | 219 |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | | $ | 621 | | | $ | 132 | |
__________
| |
(1) | Certain of PGIM’s investment activities are based in currencies other than the U.S. dollar and are therefore subject to foreign currency exchange rate risk. The financial results of PGIM include the impact of an intercompany arrangement with our Corporate and Other operations designed to mitigate the impact of exchange rate changes on PGIM’s U.S. dollar-equivalent earnings. For more information related to this intercompany arrangement, see “—Results of Operations—Impact of Foreign Currency Exchange Rates,” above. |
(1)Certain of PGIM’s investment activities are based in currencies other than the U.S. dollar and are therefore subject to foreign currency exchange rate risk. The financial results of PGIM include the impact of an intercompany arrangement with our Corporate and Other operations designed to mitigate the impact of exchange rate changes on PGIM’s U.S. dollar-equivalent earnings. For more information related to this intercompany arrangement, see “—Results of Operations—Impact of Foreign Currency Exchange Rates,” above.
Adjusted Operating Income
Adjusted operating income decreased $50 million. Higherincreased $487 million, primarily reflecting an increase in service, distribution and other revenues driven by a gain from the sale of our Pramerica SGR joint venture and higher asset management fees, net of related expenses, due to higher average assets under management as a result of market appreciation and strong investment performance. Also contributing to the increase were more than offset by lowerhigher other related revenues, net of related expenses, and higher operational and variable expenses. Asset management fees, netprimarily driven by
the absence of a significant fee earnedco- and seed investment losses resulting from widening credit spreads in the prior year period. Operational and variable expenses reflected those supporting business growth,period and higher retail salescommercial mortgage origination revenue driven by higher loan production and average assets under management, respectively.profitability.
Revenues and Expenses
The following table sets forth PGIM’s revenues, presented on a basis consistent with the table above under “—Operating Results,” by type.
| | | | Three Months Ended
March 31, | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | | 2021 | | 2020 |
| | (in millions) | | | (in millions) |
| Revenues by type: | | | | Revenues by type: | | |
| Asset management fees by source: | | | | Asset management fees by source: | | |
| Institutional customers | $ | 328 |
| | $ | 312 |
| Institutional customers | | $ | 348 | | | $ | 328 | |
| Retail customers(1) | 229 |
| | 209 |
| Retail customers(1) | | 302 | | | 229 | |
| General account | 136 |
| | 123 |
| General account | | 145 | | | 136 | |
| Total asset management fees | 693 |
| | 644 |
| Total asset management fees | | 795 | | | 693 | |
| Other related revenues by source: | | | | Other related revenues by source: | | | | |
| Incentive fees | 18 |
| | 36 |
| Incentive fees | | 27 | | | 18 | |
| Transaction fees | 4 |
| | 2 |
| Transaction fees | | 5 | | | 4 | |
| Strategic investing | (27 | ) | | 36 |
| |
| Co- and seed investments | | Co- and seed investments | | 5 | | | (27) | |
| Commercial mortgage(2) | 27 |
| | 26 |
| Commercial mortgage(2) | | 45 | | | 27 | |
| Total other related revenues(3) | 22 |
|
| 100 |
| |
| Service, distribution and other revenues(4) | 63 |
| | 126 |
| |
| Total other related revenues | | Total other related revenues | | 82 | | | 22 | |
| Service, distribution and other revenues | | Service, distribution and other revenues | | 437 | | | 63 | |
| Total revenues | $ | 778 |
| | $ | 870 |
| Total revenues | | $ | 1,314 | | | $ | 778 | |
__________
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(1) | Consists of fees from: individual mutual funds and variable annuities and variable life insurance separate account assets; funds invested in proprietary mutual funds through our defined contribution plan products; and third-party sub-advisory relationships. Revenues from fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance are included in the general account. |
| |
(2) | Includes mortgage origination revenues from our commercial mortgage origination and servicing business. |
| |
(3) | Future revenues will be impacted by the level and diversification of our strategic investments, the commercial real estate market, and other domestic and international markets. |
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(4) | Prior period amount includes payments from Wells Fargo under an agreement dated as of July 30, 2004, implementing arrangements with respect to money market mutual funds in connection with the combination of our retail securities brokerage and clearing operations with those of Wells Fargo. The agreement extended for ten years from the Wachovia Securities joint venture termination date of December 31, 2009 to December 31, 2019. The revenue from Wells Fargo under this agreement was $16 million for the three months ended March 31, 2019. |
(1)Consists of fees from: individual mutual funds and variable annuities and variable life insurance separate account assets; funds invested in proprietary mutual funds through our defined contribution plan products; and third-party sub-advisory relationships. Revenues from fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance are included in the general account.
(2)Includes mortgage origination revenues from our commercial mortgage origination and servicing business.
Revenues decreased $92increased $536 million. Higher assetService, distribution and other revenues increased primarily reflecting a gain from the sale of our Pramerica SGR joint venture, as discussed above. Asset management fees increased primarily reflecting an increase inhigher average assets under management as a result of market appreciation and net inflows over the last twelve months, were more than offset by lower otherstrong investment performance. Other related revenues increased primarily driven by lower strategicthe absence of co- and seed investment resultslosses resulting from widening credit spreads in the prior year period, and lower performance-based incentive fees, and lower service, distribution and other revenues, primarilyhigher commercial mortgage origination revenue driven by lower revenues fromhigher loan production and profitability.
Expenses increased $49 million. This increase primarily reflects higher variable expenses associated with an increase in overall segment earnings and higher compensation expenses driven by business growth and certain consolidated funds, which were fullylong-term employee compensation plans tied to performance factors, partially offset by lower expenses related to noncontrolling interests in these funds.travel and entertainment resulting from COVID-19.
Expenses decreased $42 million. Higher compensation and operational expenses related to business growth and higher variable expenses reflecting increases in retail sales and average assets under management were more than offset by lower expenses related to revenues associated with certain consolidated funds, as discussed above.
Assets Under Management
The following table sets forth assets under management by asset class and source as of the dates indicated.
| | | | | | | | | | March 31, 2021 | | December 31, 2020 | | March 31, 2020(1) |
| | March 31, 2020 | | December 31, 2019 | | March 31, 2019 | | (in billions) |
| | (in billions) | |
| Assets Under Management(1) (at fair value): | | | | | | |
| Institutional customers: | | | | | | |
| Assets Under Management(2) (at fair value): | | Assets Under Management(2) (at fair value): | |
| Public equity | $ | 45.3 |
| | $ | 57.1 |
| | $ | 55.2 |
| Public equity | $ | 199.3 | | | $ | 202.4 | | | $ | 131.7 | |
| Public fixed income | 402.9 |
| | 418.6 |
| | 393.9 |
| Public fixed income | 951.8 | | | 1,004.5 | | | 882.0 | |
| Real estate | 49.2 |
| | 49.1 |
| | 48.8 |
| Real estate | 121.1 | | | 121.5 | | | 116.4 | |
| Private credit and other alternatives | 23.3 |
| | 23.5 |
| | 22.6 |
| Private credit and other alternatives | 103.5 | | | 106.5 | | | 95.9 | |
| Multi-asset | 4.1 |
| | 4.5 |
| | 3.5 |
| Multi-asset | 75.6 | | | 63.7 | | | 69.7 | |
| Institutional customers(2) | 524.8 |
| | 552.8 |
| | 524.0 |
| |
| Retail customers: | | | | | | |
| Public equity | 82.9 |
| | 104.2 |
| | 105.3 |
| |
| Public fixed income | 131.7 |
| | 138.7 |
| | 110.9 |
| |
| Real estate | 1.8 |
| | 2.0 |
| | 1.9 |
| |
| Private credit and other alternatives | 0.4 |
| | 0.5 |
| | 0.4 |
| |
| Multi-asset | 65.6 |
| | 60.2 |
| | 60.6 |
| |
| Retail customers(3) | 282.4 |
| | 305.6 |
| | 279.1 |
| |
| General account: | | | | | | |
| Public equity | 3.5 |
| | 4.4 |
| | 4.0 |
| |
| Public fixed income | 347.4 |
| | 328.6 |
| | 306.9 |
| |
| Real estate | 65.4 |
| | 66.0 |
| | 61.7 |
| |
| Private credit and other alternatives | 72.2 |
| | 73.5 |
| | 68.4 |
| |
| Multi-asset | 0.0 |
| | 0.1 |
| | 0.0 |
| |
| General account | 488.5 |
| | 472.6 |
| | 441.0 |
| |
| Total PGIM assets under management(4) | $ | 1,295.7 |
| | $ | 1,331.0 |
| | $ | 1,244.1 |
| |
| Total PGIM assets under management | | Total PGIM assets under management | $ | 1,451.3 | | | $ | 1,498.6 | | | $ | 1,295.7 | |
| | | | | | | | | | | | |
| Assets under management within other reporting segments(4)(5) | $ | 185.7 |
| | $ | 219.9 |
| | $ | 211.4 |
| |
| Assets under management within other reporting segments(3) | | Assets under management within other reporting segments(3) | 212.1 | | | 222.3 | | | 185.7 | |
| Total PFI assets under management | $ | 1,481.4 |
| | $ | 1,550.9 |
| | $ | 1,455.5 |
| Total PFI assets under management | $ | 1,663.4 | | | $ | 1,720.9 | | | $ | 1,481.4 | |
__________
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(1) | Prior period amounts have been updated to conform to current period presentation. “Public equity” represents stock ownership interest in a corporation or partnership (excluding hedge funds) or real estate investment trust. “Public fixed income” represents debt instruments that pay interest and usually have a maturity (excluding mortgages). “Real estate” includes direct real estate equity and real estate mortgages. “Private credit and other alternatives” includes private credit, private equity, hedge funds, agricultural debt and equity and other alternative strategies. “Multi-asset” includes funds or products that invest in more than one asset class balancing equity and fixed income funds and target date funds. |
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(2) | Consists of third-party institutional assets and group insurance contracts. |
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(3) | Consists of individual mutual funds and variable annuities and variable life insurance separate account assets; funds invested in proprietary mutual funds through our defined contribution plan products; and third-party sub-advisory relationships. Fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance are included in the general account. |
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(4) | Effective first quarter of 2020, certain assets have been reclassified from the U.S. Individual Solutions division to PGIM. |
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(5) | Primarily include certain assets related to annuity and variable life products in our U.S. Individual Solutions division, retirement and group life products in our U.S. Workplace Solutions division and certain general account assets of our International Businesses. These assets are not directly managed by PGIM, but rather are invested in non-proprietary funds or are managed by either the divisions themselves or our Chief Investment Officer Organization. |
(2)“Public equity” represents stock ownership interest in a corporation or partnership (excluding hedge funds) or real estate investment trust. “Public fixed income” represents debt instruments that pay interest and usually have a maturity (excluding mortgages). “Real estate” includes direct real estate equity and real estate mortgages. “Private credit and other alternatives” includes private credit, private equity, hedge funds and other alternative strategies. “Multi-asset” includes funds or products that invest in more than one asset class, balancing equity and fixed income funds and target date funds.
(3)Primarily includes certain product-related assets in our U.S. Businesses and certain general account assets in our International Businesses. These assets are not directly managed by PGIM, but rather are invested in non-proprietary funds or are managed by either the divisions themselves or by our Chief Investment Officer Organization.
PGIM’s assets under management as of March 31, 2021increased $52$156 billion in comparison to the prior year quarter, primarily reflecting market appreciation and public fixed income inflows, partially offset by equity outflows. PGIM’s assets under managementstrong investment performance, and decreased $35$47 billion in comparison to the prior quarter, primarily reflecting market depreciation, partially offsetdepreciation.
The following table sets forth assets under management by publicsource as of the dates indicated.
| | | | | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 | | March 31, 2020 |
| | (in billions) |
| Assets Under Management(1) (at fair value): | | | | | |
| Institutional customers | $ | 591.8 | | | $ | 614.9 | | | $ | 524.8 | |
| Retail customers | 381.0 | | | 372.0 | | | 282.4 | |
| General account | 478.5 | | | 511.7 | | | 488.5 | |
| Total PGIM assets under management | $ | 1,451.3 | | | $ | 1,498.6 | | | $ | 1,295.7 | |
| | | | | |
| Assets under management within other reporting segments(2) | 212.1 | | | 222.3 | | | 185.7 | |
| Total PFI assets under management | $ | 1,663.4 | | | $ | 1,720.9 | | | $ | 1,481.4 | |
__________
(1)“Institutional customers” consist of third-party institutional assets and group insurance contracts. “Retail customers” consist of individual mutual funds and variable annuities and variable life insurance separate account assets, funds invested in proprietary mutual funds through our defined contribution plan products, and third-party sub-advisory relationships. “General account” also includes fixed incomeannuities and multi-asset inflows.the fixed-rate accounts of variable annuities and variable life insurance.
The following table sets forth the component changes in PGIM’s assets under management by asset source for the periods indicated.
|
| | | | | | | | | | | |
| | Three Months Ended
March 31, | | Twelve
Months
Ended
March 31, |
| | 2020 | | 2019 | | 2020 |
| | (in billions) |
| Institutional Customers: | | | | | |
| Beginning assets under management | $ | 552.8 |
| | $ | 493.5 |
| | $ | 524.0 |
|
| Net additions (withdrawals), excluding money market activity: | | | | | |
| Third-party | 4.2 |
| | 1.0 |
| | (3.3 | ) |
| Third-party via affiliates(1) | (0.8 | ) | | (0.3 | ) | | (0.3 | ) |
| Total | 3.4 |
| | 0.7 |
| | (3.6 | ) |
| Market appreciation (depreciation)(2) | (30.5 | ) | | 24.3 |
| | 6.4 |
|
| Other increases (decreases)(3) | (0.9 | ) | | 5.5 |
| | (2.0 | ) |
| Ending assets under management | 524.8 |
| | 524.0 |
| | 524.8 |
|
| Retail Customers(4): | | | | | |
| Beginning assets under management | 305.6 |
| | 260.2 |
| | 279.1 |
|
| Net additions (withdrawals), excluding money market activity: | | | | | |
| Third-party | (1.3 | ) | | 0.4 |
| | 4.0 |
|
| Third-party via affiliates(1) | 10.9 |
| | (6.5 | ) | | 7.2 |
|
| Total | 9.6 |
| | (6.1 | ) | | 11.2 |
|
| Market appreciation (depreciation)(2) | (32.6 | ) | | 25.1 |
| | (8.2 | ) |
| Other increases (decreases)(3) | (0.2 | ) | | (0.1 | ) | | 0.3 |
|
| Ending assets under management | 282.4 |
| | 279.1 |
| | 282.4 |
|
| General Account: | | | | | |
| Beginning assets under management | 472.6 |
| | 427.8 |
| | 441.0 |
|
| Net additions (withdrawals), excluding money market activity: | | | | | |
| Third-party | 0.0 |
| | 0.0 |
| | 0.0 |
|
| Affiliated | 0.7 |
| | 0.6 |
| | 6.2 |
|
| Total | 0.7 |
| | 0.6 |
| | 6.2 |
|
| Market appreciation (depreciation)(2) | (0.6 | ) | | 14.2 |
| | 22.2 |
|
| Other increases (decreases)(3) | 15.8 |
| | (1.6 | ) | | 19.1 |
|
| Ending assets under management | 488.5 |
| | 441.0 |
| | 488.5 |
|
| Total assets under management(4) | $ | 1,295.7 |
| | $ | 1,244.1 |
| | $ | 1,295.7 |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | Twelve
Months
Ended
March 31, |
| | | | | 2021 | | 2020(1) | | 2021 |
| | | | | | (in billions) |
| Beginning assets under management | | | | | $ | 1,498.6 | | | $ | 1,331.0 | | | $ | 1,295.7 | |
| Institutional third-party flows | | | | | 1.1 | | | 4.2 | | | (0.1) | |
| Retail third-party flows | | | | | 4.4 | | | (1.3) | | | 22.9 | |
| Total third-party flows | | | | | 5.5 | | | 2.9 | | | 22.8 | |
| Affiliated flows(2) | | | | | (3.4) | | | 10.8 | | | (22.7) | |
| Market appreciation (depreciation)(3) | | | | | (43.3) | | | (63.7) | | | 167.1 | |
| Foreign exchange rate impact | | | | | (7.4) | | | (1.8) | | | 1.2 | |
| Net money market activity and other increases (decreases) | | | | | 1.3 | | | 16.5 | | | (12.8) | |
| Ending assets under management | | | | | $ | 1,451.3 | | | $ | 1,295.7 | | | $ | 1,451.3 | |
__________
| |
(1) | Represents assets that PGIM manages for the benefit of other reporting segments within the Company. Additions and withdrawals of these assets are attributable to third-party product inflows and outflows in other reporting segments. |
| |
(2) | Includes income reinvestment, where applicable. |
| |
(3) | Includes the effect of foreign exchange rate changes, net money market activity and the impact of acquired business. The impact from foreign currency fluctuations, which primarily impact the general account, resulted in a loss of $1.8 billion and $1.2 billion for the three months ended March 31, 2020 and 2019, respectively; and a gain of less than $0.1 billion for the twelve months ended March 31, 2020. |
| |
(4) | Prior period amounts have been updated to conform to current period presentation. |
Strategic Investments(2)Represents assets that PGIM manages for the benefit of other reporting segments within the Company. Additions and withdrawals of these assets are attributable to third-party product inflows and outflows in other reporting segments.
(3)Includes income reinvestment, where applicable.
Private Capital Deployment
Private capital deployment is indicative of the pace and magnitude of capital that is invested and will result in future revenues that may include management fees, transaction fees, incentive fees and servicing revenues, as well as future costs to manage these assets.
Private capital deployment represents the gross value of private capital invested in real estate debt and equity, and private credit and equity asset classes. Assets under management resulting from private capital deployment are included in “Real estate” and “Private credit and other alternatives” in the “—Assets Under Management— by asset class table” above. As of March 31, 2021, these assets decreased approximately $3 billion, primarily reflecting market depreciation and capital returned to investors, partially offset by private capital deployed.
Private capital deployment includes PGIM’s real estate agency debt business, which consists of agency commercial loans that are originated and sold to third party investors. PGIM continues to service these commercial loans; however, they are not included in assets under management.
The following table sets forth PGIM’s strategicprivate capital deployed by asset class for the periods indicated.
| | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | 2021 | | 2020 |
| | | | | | (in billions) |
| Private capital deployed: | | | | | | | |
| Real estate debt and equity | | | | | $ | 5.8 | | | $ | 4.3 | |
| Private credit and equity | | | | | 2.1 | | | 2.4 | |
| Total private capital deployed | | | | | $ | 7.9 | | | $ | 6.7 | |
Co- and Seed Investments
The following table sets forth PGIM’s co- and seed investments at carrying value (including the value of derivative instruments used to mitigate equity market and currency risk) by asset class and source as of the dates indicated.
| | | | | | | | March 31, 2021 | | December 31, 2020 |
| | March 31, 2020 | | December 31, 2019 | | (in millions) |
| | (in millions) | |
| Co-Investments(1): | | | | |
| Co-Investments: | | Co-Investments: | |
| Public fixed income | $ | 373 |
| | $ | 462 |
| Public fixed income | $ | 440 | | | $ | 489 | |
| Real estate | 217 |
| | 228 |
| Real estate | 168 | | | 170 | |
| Private credit and other alternatives | 21 |
| | 19 |
| Private credit and other alternatives | 25 | | | 26 | |
| Seed Investments(1): | | | | |
| Seed Investments: | | Seed Investments: | |
| Public equity | 626 |
| | 671 |
| Public equity | 727 | | | 675 | |
| Public fixed income | 294 |
| | 325 |
| Public fixed income | 339 | | | 356 | |
| Real estate | 26 |
| | 34 |
| Real estate | 37 | | | 33 | |
| Private credit and other alternatives | 60 |
| | 59 |
| Private credit and other alternatives | 90 | | | 79 | |
| Multi-asset | 62 |
| | 74 |
| Multi-asset | 58 | | | 62 | |
| Total | $ | 1,679 |
| | $ | 1,872 |
| Total | $ | 1,884 | | | $ | 1,890 | |
__________
| |
(1) | Prior period amounts have been updated to conform to current period presentation. For more information, see the “Assets Under Management” table above. |
The decrease of $193$6 million in strategicco- and seed investments was primarily driven by unfavorable fixed income investment performance as a result of credit spread widening. The decrease also reflects PGIM’s redemption ofin public fixed income reflecting fund redemptions and the impact of higher interest rates, partially offset by the impact of favorable equity markets on public equity seed investments.and private credit and other alternatives.
U.S. Businesses
Operating Results
The following table sets forth the operating results for our U.S. Businesses for the periods indicated.
| | | | Three Months Ended
March 31, | | | Three Months Ended March 31, 2021 |
| | 2020 | | 2019 | | | 2021 | | 2020 |
| | (in millions) | | | (in millions) |
| Adjusted operating income before income taxes: | | | | Adjusted operating income before income taxes: | | |
| U.S. Businesses: | | | | U.S. Businesses: | | |
| U.S. Workplace Solutions division: | | | | |
| Retirement | $ | 245 |
| | $ | 251 |
| Retirement | | $ | 623 | | | $ | 245 | |
| Group Insurance | 44 |
| | 53 |
| Group Insurance | | (132) | | | 44 | |
| Total U.S. Workplace Solutions division | 289 |
| | 304 |
| |
| U.S. Individual Solutions division: | | | | |
| Individual Annuities | 373 |
| | 472 |
| Individual Annuities | | 444 | | | 373 | |
| Individual Life | (20 | ) | | 105 |
| Individual Life | | (44) | | | (20) | |
| Total U.S. Individual Solutions division | 353 |
| | 577 |
| |
| Assurance IQ division(1): | | | | |
| Assurance IQ | (23 | ) | | 0 |
| Assurance IQ | | (39) | | | (23) | |
| Total Assurance IQ division | (23 | ) | | 0 |
| |
| Total U.S. Businesses | 619 |
| | 881 |
| Total U.S. Businesses | | 852 | | | 619 | |
| Reconciling Items: | | | | Reconciling Items: | | | | |
| Realized investment gains (losses), net, and related adjustments(2) | (240 | ) | | (1,094 | ) | |
| Realized investment gains (losses), net, and related adjustments | | Realized investment gains (losses), net, and related adjustments | | 1,889 | | | (240) | |
| Charges related to realized investment gains (losses), net | (816 | ) | | 31 |
| Charges related to realized investment gains (losses), net | | (236) | | | (816) | |
| Market experience updates(3) | (940 | ) | | 0 |
| |
| Other adjustments(4) | 45 |
| | 0 |
| |
| Market experience updates | | Market experience updates | | 307 | | | (940) | |
| Other adjustments(1) | | Other adjustments(1) | | (13) | | | 45 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 1 |
| | 0 |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | | 0 | | | 1 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | (1,331 | ) | | $ | (182 | ) | Income (loss) before income taxes and equity in earnings of operating joint ventures | | $ | 2,799 | | | $ | (1,331) | |
________
| |
(1) | Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. |
| |
(2) | Prior period amounts have been updated to conform to current period presentation. |
| |
(3) | Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company had historically recognized these impacts in adjusted operating income. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. |
| |
(4) | (1)Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. |
Adjusted operating income for our U.S. Businesses decreased by $262 million primarily due to:
Lower underwriting results in our Individual Life and Retirement businesses;
A favorable impact from changes in market conditions on estimates of profitability in the prior year period, which beginning with the second quarter of 2019 is excluded from adjusted operating income (see Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information);information.
LowerAdjusted operating income for our U.S. Businesses increased by $233 million primarily due to:
•Higher net investment spread results driven by lowerhigher income on non-coupon investmentsinvestments; and lower investment yields due to a decline in interest rates; and
Lower•Higher fee income, net of distribution expenses and other associated costs, in our Individual Annuities business.and Individual Life businesses.
•Partially offsetting these decreases was the following item:
Lower expenses, including costs associated with business initiatives.
increases were lower underwriting results primarily driven by COVID-19 related mortality claims in our Individual Life and Group Insurance businesses, partially offset by favorable COVID-19 related mortality gains in our Retirement business. U.S. Businesses—U.S. Workplace Solutions Division
Retirement
Operating Results
The following table sets forth Retirement’s operating results for the periods indicated.
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| | | | | (in millions) |
| Operating results: | | | | | | | |
| Revenues | | | | | $ | 2,591 | | | $ | 2,437 | |
| Benefits and expenses | | | | | 1,968 | | | 2,192 | |
| Adjusted operating income | | | | | 623 | | | 245 | |
| Realized investment gains (losses), net, and related adjustments | | | | | (480) | | | (21) | |
| Charges related to realized investment gains (losses), net | | | | | 13 | | | (23) | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | | | | | 0 | | | 1 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | | | | | $ | 156 | | | $ | 202 | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| Operating results: | | | |
| Revenues | $ | 2,437 |
| | $ | 2,639 |
|
| Benefits and expenses | 2,192 |
| | 2,388 |
|
| Adjusted operating income | 245 |
| | 251 |
|
| Realized investment gains (losses), net, and related adjustments(1) | (21 | ) | | 130 |
|
| Charges related to realized investment gains (losses), net | (23 | ) | | 3 |
|
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 1 |
| | 0 |
|
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 202 |
| | $ | 384 |
|
__________
| |
(1) | Prior period amounts have been updated to conform to current period presentation. |
Adjusted Operating Income
Adjusted operating income decreased $6increased $378 million, driven by lower reserve gains, partially offset by higher fee income and net investment spread results and lower expenses. The lower contribution from reserve experience primarily reflected lower mortality gains on a comparative basis within our pension risk transfer business. The increase in fee income primarily reflected higher longevity risk transfer account values resulting from 2019 sales activity. The increase in net investment spread results, primarily reflectedreflecting higher prepayment fee income. The lower expenses primarily reflected the absence of certain costs incurred in the prior year period to support business initiatives.income on non-coupon investments, and a higher contribution from reserve experience resulting from COVID-19 related mortality gains.
Revenues, Benefits and Expenses
Revenues decreased $202increased $154 million. The decrease primarily reflected lower pension risk transfer premiums with corresponding offsets in policyholders’ benefits, as discussed below. This decreaseincrease was partially offsetdriven by higher net investment income primarilyand higher other income, reflecting higher prepayment fee income and higher policy charges and fee income driven by higher longevity risk transfer accounton non-coupon investments.
values.
Benefits and expenses decreased $196$224 million. Policyholders’ benefits, including the change in policy reserves, decreased as a result of more favorable reserve experience primarily related to the decrease in premiums discussed above, driven by a decrease in pension risk transfer premiums, partially offset by lowerCOVID-19 related mortality gains within our pension risk transfer business.gains.
Account Values
Account values are a significant driver of our operating results, and are primarily driven by net additions (withdrawals) and the impact of market changes. The income we earn on most of our fee-based products varies with the level of fee-based account values sinceas many policy fees are determined by these values. The investment income and interest we credit to policyholders on our spread-based products varies with the level of general account values. To a lesser extent, changes in account values impact our pattern of amortization of DAC and VOBA and general and administrative expenses.
The following table shows the changes in the account values and net additions (withdrawals) of Retirement’s products for the periods indicated. Net additions (withdrawals) are plan sales and participant deposits or additions, as applicable, minus plan and participant withdrawals and benefits. Account values include both internally- and externally-managed client balances as the total balances drive revenue for the Retirement business. For more information on internally-managed balances, see “—PGIM.”
| | | | Three Months Ended
March 31, | | Twelve
Months
Ended
March 31, | | | Three Months Ended
March 31, | | Twelve
Months
Ended
March 31, |
| | 2020 | | 2019 | | 2020 | | | 2021 | | 2020 | | 2021 |
| | (in millions) | | | (in millions) |
| Full Service: | | | | | | Full Service: | | |
| Beginning total account value | $ | 272,448 |
| | $ | 231,669 |
| | $ | 251,071 |
| Beginning total account value | | $ | 315,227 | | | $ | 272,448 | | | $ | 238,435 | |
| Deposits and sales | 8,952 |
| | 9,567 |
| | 35,779 |
| Deposits and sales | | 10,933 | | | 8,952 | | | 42,895 | |
| Withdrawals and benefits | (8,668 | ) | | (9,105 | ) | | (35,269 | ) | Withdrawals and benefits | | (9,360) | | | (8,668) | | | (35,344) | |
| Change in market value, interest credited and interest income and other activity | (34,297 | ) | | 18,940 |
| | (13,146 | ) | Change in market value, interest credited and interest income and other activity | | 9,356 | | | (34,297) | | | 80,170 | |
| Ending total account value | $ | 238,435 |
| | $ | 251,071 |
| | $ | 238,435 |
| Ending total account value | | $ | 326,156 | | | $ | 238,435 | | | $ | 326,156 | |
| Institutional Investment Products: | | | | | | Institutional Investment Products: | | | | | | |
| Beginning total account value | $ | 227,596 |
| | $ | 200,759 |
| | $ | 203,101 |
| Beginning total account value | | $ | 243,387 | | | $ | 227,596 | | | $ | 227,346 | |
| Additions(1) | 6,893 |
| | 2,247 |
| | 35,747 |
| Additions(1) | | 9,760 | | | 6,893 | | | 25,336 | |
| Withdrawals and benefits | (5,510 | ) | | (3,649 | ) | | (18,604 | ) | Withdrawals and benefits | | (5,642) | | | (5,510) | | | (18,420) | |
| Change in market value, interest credited and interest income | 2,435 |
| | 2,644 |
| | 8,880 |
| Change in market value, interest credited and interest income | | (653) | | | 2,435 | | | 5,766 | |
| Other(2) | (4,068 | ) | | 1,100 |
| | (1,778 | ) | Other(2) | | 644 | | | (4,068) | | | 7,468 | |
| Ending total account value | $ | 227,346 |
| | $ | 203,101 |
| | $ | 227,346 |
| Ending total account value | | $ | 247,496 | | | $ | 227,346 | | | $ | 247,496 | |
__________
| |
(1) | Additions primarily include: group annuities calculated based on premiums received; funding agreements issued; longevity reinsurance contracts calculated as the present value of future projected benefits; and investment-only stable value contracts calculated as the fair value of customers’ funds held in a client-owned trust. |
| |
(2) | “Other” activity includes the effect of foreign exchange rate changes associated with our British pounds sterling denominated longevity reinsurance business and changes in asset balances for externally-managed accounts. For the three months ended March 31, 2020 and 2019, “Other” activity also includes $2,752 million in receipts offset by $2,536 million in payments and $611 million in receipts offset by $617 million in payments, respectively, related to funding agreements backed by commercial paper which typically have maturities of less than 90 days. |
(1)Additions primarily include: group annuities and funded pension reinsurance calculated based on premiums received; unfunded longevity reinsurance contracts calculated as the present value of future projected benefits; investment-only stable value contracts calculated as the fair value of customers’ funds held in a client-owned trust; and funding agreements issued.
(2)“Other” activity includes the effect of foreign exchange rate changes associated with our British pounds sterling denominated longevity reinsurance business and changes in asset balances for externally-managed accounts. For the three months ended March 31, 2021 and 2020, “Other” activity also includes $722 million in receipts offset by $765 million in payments and $2,752 million in receipts offset by $2,536 million in payments, respectively, related to funding agreements backed by commercial paper which typically have maturities of less than 90 days.
The decreaseincrease in full serviceFull Service account values for the three months and twelve months ended March 31, 20202021 reflected unfavorablefavorable changes in the market value of customer funds.funds and increases in deposits and sales, net of withdrawals and benefits.
The decreaseincrease in institutional investment productsInstitutional Investment Products account values for the three months ended March 31, 20202021 reflected a decrease in other activitynet additions primarily driven by the negative impacts of foreign exchange rate changes, and from pension risk transfer benefit payments. These decreases were largely offset by additions from investment-only stable value accounts and collateralized funding agreements, and the impact of favorable changesactivity, including a large unfunded longevity reinsurance sale in the market value of account assets. The increase in accountcurrent quarter. Account values for the twelve months ended March 31, 20202021 reflected net additions fromprimarily driven by pension risk transfer activity, andincluding a large unfunded longevity reinsurance sale in the current quarter, a favorable changeschange in the market value of account assets.values, and an increase in other activity primarily driven by the positive impact of foreign exchange rate changes.
Group Insurance
Operating Results
The following table sets forth Group Insurance’s operating results and benefits and administrative operating expense ratios for the periods indicated.
| | | | Three Months Ended
March 31, | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | | 2021 | | 2020 |
| | ($ in millions) | | | ($ in millions) |
| Operating results: | | | | Operating results: | | |
| Revenues | $ | 1,424 |
| | $ | 1,441 |
| Revenues | | $ | 1,556 | | | $ | 1,424 | |
| Benefits and expenses | 1,380 |
| | 1,388 |
| Benefits and expenses | | 1,688 | | | 1,380 | |
| Adjusted operating income | 44 |
| | 53 |
| Adjusted operating income | | (132) | | | 44 | |
| Realized investment gains (losses), net, and related adjustments | 81 |
| | 1 |
| Realized investment gains (losses), net, and related adjustments | | (34) | | | 81 | |
| | Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 125 |
| | $ | 54 |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | | $ | (166) | | | $ | 125 | |
| Benefits ratio(1)(3): | | | | Benefits ratio(1)(3): | | | | |
| Group life | 88.4 | % | | 89.0 | % | Group life | | 104.2 | % | | 88.4 | % |
| Group disability | 76.0 | % | | 74.6 | % | Group disability | | 80.5 | % | | 76.0 | % |
| Total Group Insurance | 85.6 | % | | 85.9 | % | Total Group Insurance | | 99.0 | % | | 85.6 | % |
| Administrative operating expense ratio(2)(3): | | | | Administrative operating expense ratio(2)(3): | | |
| Group life | 12.4 | % | | 11.7 | % | Group life | | 10.8 | % | | 12.4 | % |
| Group disability | 24.8 | % | | 26.9 | % | Group disability | | 32.2 | % | | 24.8 | % |
| Total Group Insurance | 15.1 | % | | 14.9 | % | Total Group Insurance | | 15.8 | % | | 15.1 | % |
__________
| |
(1) | Ratio of policyholder benefits to earned premiums plus policy charges and fee income. |
| |
(2) | Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income. |
| |
(3) | The benefit and administrative ratios are measures used to evaluate profitability and efficiency. |
(1)Ratio of policyholder benefits to earned premiums plus policy charges and fee income.
(2)Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income.
(3)The benefit and administrative ratios are measures used to evaluate profitability and efficiency.
Adjusted Operating Income
Adjusted operating income decreased $9$176 million, primarily reflecting lower net investment spreadunderwriting results in our group life business driven by lower incomeunfavorable claim experience mostly due to COVID-19 impacts on non-coupon investments,non-experience-rated contracts, and less favorable underwriting results in our group disability business driven by lower interest rates, partially offset by morea less favorable underwriting results in our group life business.impact from claim experience on long-term disability contracts.
Revenues, Benefits and Expenses
Revenues decreased $17increased $132 million. The decreaseincrease primarily reflected lower net investment income driven by lower income on non-coupon investments, with offsets in interest credited to policyholder account balances, as discussed below, partially offset by higher premiums and policy charges and fee income driven by lower premium returns in our group life business due to COVID-19 impacts on experience-rated contracts, with offsets in policyholders’ benefits and changes in reserves, as discussed below, as well as growth in our group life and group disability business.businesses.
Benefits and expenses decreased $8increased $308 million. The decreaseincrease primarily reflected lower interest credited to policyholder account balances, with offsets in net investment income, as discussed above. The decrease was partially offset by higher policyholders’ benefits and changes in reserves, which reflectedincluding increases in our group life business mostly due to COVID-19 impacts on experience- and non-experience-rated contracts, and increases in our group disability business partially offsetdriven by decreases in our group life business.a less favorable impact from claim experience on long-term disability contracts.
Sales Results
The following table sets forth Group Insurance’s annualized new business premiums, as defined under “—Segment Measures” above, for the periods indicated.
| | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2021 | | 2020 |
| | | | | | (in millions) |
| Annualized new business premiums(1): | | | | | | | |
| Group life | | | | | $ | 175 | | | $ | 173 | |
| Group disability | | | | | 120 | | | 108 | |
| Total | | | | | $ | 295 | | | $ | 281 | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| Annualized new business premiums(1): | | | |
| Group life | $ | 173 |
| | $ | 174 |
|
| Group disability | 108 |
| | 119 |
|
| Total | $ | 281 |
| | $ | 293 |
|
__________
| |
(1) | Amounts exclude new premiums resulting from rate changes on existing policies, from additional coverage under our Servicemembers’ Group Life Insurance contract and from excess premiums on group universal life insurance that build cash value but do not purchase face amounts. |
(1)Amounts exclude new premiums resulting from rate changes on existing policies, from additional coverage under our Servicemembers’ Group Life Insurance contract and from excess premiums on group universal life insurance that build cash value but do not purchase face amounts.
Total annualized new business premiums for the three months ended March 31, 2020 decreased $122021 increased $14 million compared to the prior year period, primarily driven by lowerhigher sales in our group disability business.
business within the existing Premier and National client base. U.S. Businesses—U.S. Individual Solutions Division
Individual Annuities
Operating Results
The following table sets forth Individual Annuities’ operating results for the periods indicated.
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| | | | | (in millions) |
| Operating results: | | | | | | | |
| Revenues | | | | | $ | 1,199 | | | $ | 1,148 | |
| Benefits and expenses | | | | | 755 | | | 775 | |
| Adjusted operating income | | | | | 444 | | | 373 | |
| Realized investment gains (losses), net, and related adjustments | | | | | 2,555 | | | (865) | |
| Charges related to realized investment gains (losses), net | | | | | (407) | | | (375) | |
| Market experience updates | | | | | 176 | | | (646) | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | | | | | $ | 2,768 | | | $ | (1,513) | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| Operating results: | | | |
| Revenues | $ | 1,148 |
| | $ | 1,235 |
|
| Benefits and expenses | 775 |
| | 763 |
|
| Adjusted operating income | 373 |
| | 472 |
|
| Realized investment gains (losses), net, and related adjustments | (865 | ) | | (1,344 | ) |
| Charges related to realized investment gains (losses), net | (375 | ) | | 134 |
|
| Market experience updates(1) | (646 | ) | | 0 |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | (1,513 | ) | | $ | (738 | ) |
________
| |
(1) | Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company had historically recognized these impacts in adjusted operating income. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. |
Adjusted Operating Income
Adjusted operating income decreased $99 million. The decrease wasincreased $71 million primarily driven by lowerhigher net investment spread results reflecting higher income on non-coupon investments and higher fee income, net of distribution expenses and other associated costs, resulting from higher average separate account values due to unfavorable impacts from our living benefit guarantees,favorable equity markets, partially offset by net outflows, certain products reaching contractual milestones for fee tier reduction partially offset by higher average account values.and product mix changes. Also contributing to the decreaseincrease were lower operating expenses, primarily due to cost savings initiatives.
Revenues, Benefits and Expenses
Revenues increased $51 million primarily driven by higher net investment spread resultsincome reflecting lower investmenthigher income on non-coupon investments, and the absence of a favorable impact in the prior year period from changes in our estimated profitability of the business, which beginning with the second quarter of 2019 is excluded from adjusted operating income.
Revenues, Benefits and Expenses
Revenues decreased $87 million. The decrease was primarily driven by lower premiums resulting from a decrease in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below. Also contributing to the decrease was lowerhigher policy charges and fee income reflecting higher average separate account values due to unfavorable impacts from our living benefit guarantees resulting fromfavorable equity market performance and declining interest rates,markets, partially offset by net outflows, certain products reaching contractual milestones for fee tier reduction and product mix changes. Also contributing to the increase were higher asset management and services fees, with offsets in general and administrative expenses, as described below.
Benefits and expenses decreased $20 million primarily driven by lower interest expense, partially offset by higher general and administrative expenses, net of capitalization, driven by higher distribution and asset management expenses reflecting higher average separate account values, resulting from market appreciation which was partially offset by net outflows. Partially
offsetting these decreases was an increase in asset management and service fees and other income reflecting a favorable impact from changes in market conditions on estimates of profitability in the prior year periodlower operating expenses, as discussed above.
Benefits and expenses increased $12 million. The increase was driven by higher amortization costs and reserve provisions due to equity market performance and declining interest rates. Policyholders’ benefits, including changes in reserves, reflected an unfavorable impact of changes in the estimates of profitability in the prior year period as discussed above, and a favorable impact resulting from a decrease in single premium immediate annuity sales, with offsets in premiums as discussed above.
Account Values
Account values are a significant driver of our operating results. Since most fees are determined by the level of separate account assets, fee income varies primarily based on the level of account values. Additionally, our fee income generally drives other items such as the pattern of amortization of DAC and other costs. Account values are driven by net flows from new business sales, surrenders, withdrawals and benefit payments, policy charges and the impact of positive or negative market value changes. The annuity industry’s competitive and regulatory landscapes, which have been dynamic over the last few years, may impact our net flows, including new business sales. The following table sets forth account value information for the periods indicated.
| | | | Three Months Ended
March 31, | | Twelve
Months
Ended
March 31, | | Three Months Ended
March 31, | | | Twelve
Months
Ended
March 31, |
| | 2020 | | 2019 | | 2020 | | 2021 | | 2020 | | | 2021 |
| | (in millions) | | (in millions) |
| Total Individual Annuities(1): | | | | | | Total Individual Annuities(1): | | | |
| Beginning total account value | $ | 169,681 |
| | $ | 151,080 |
| | $ | 161,890 |
| Beginning total account value | $ | 176,280 | | | $ | 169,681 | | | | $ | 143,976 | |
| Sales | 1,927 |
| | 2,307 |
| | 9,340 |
| Sales | 1,855 | | | 1,927 | | | | 6,743 | |
| Full surrenders and death benefits(2) | (2,519 | ) | | (1,940 | ) | | (9,953 | ) | |
| Sales, net of full surrenders and death benefits(2) | (592 | ) | | 367 |
| | (613 | ) | |
| Partial withdrawals and other benefit payments(2) | (1,399 | ) | | (1,236 | ) | | (5,326 | ) | |
| Full surrenders and death benefits | | Full surrenders and death benefits | (2,492) | | | (2,519) | | | | (7,818) | |
| Sales, net of full surrenders and death benefits | | Sales, net of full surrenders and death benefits | (637) | | | (592) | | | | (1,075) | |
| Partial withdrawals and other benefit payments | | Partial withdrawals and other benefit payments | (1,429) | | | (1,399) | | | | (5,221) | |
| Net flows | (1,991 | ) | | (869 | ) | | (5,939 | ) | Net flows | (2,066) | | | (1,991) | | | | (6,296) | |
| Change in market value, interest credited and other activity | (22,822 | ) | | 12,573 |
| | (8,323 | ) | Change in market value, interest credited and other activity | 3,142 | | | (22,822) | | | | 42,324 | |
| Policy charges | (892 | ) | | (894 | ) | | (3,652 | ) | Policy charges | (914) | | | (892) | | | | (3,562) | |
| Ending total account value | $ | 143,976 |
| | $ | 161,890 |
| | $ | 143,976 |
| Ending total account value | $ | 176,442 | | | $ | 143,976 | | | | $ | 176,442 | |
__________
| |
(1) | (1)Includes gross variable and fixed annuities sold as retail investment products. Investments sold through defined contribution plan products are included with such products within our Retirement business. Variable annuity account values were $139.0 billion and $157.9 billion as of March 31, 2020 and 2019, respectively. Fixed annuity account values were $4.9 billion and $4.0 billion as of March 31, 2020 and 2019, respectively. |
| |
(2) | Prior period amounts have been reclassified to conform to current period presentation. |
The decrease in account values for the twelve months endedwere $170.6 billion and $139.0 billion as of March 31, 2021 and 2020, was largely driven by unfavorable changes in the market valuerespectively. Fixed annuity account values were $5.8 billion and $4.9 billion as of contractholder funds, partial withdrawalsMarch 31, 2021 and other benefit payments on contracts as well as policy charges on contractholder accounts.2020, respectively.
The decrease in sales,Sales, net of full surrenders and death benefits, for the three months ended March 31, 20202021 declined in comparison to the prior year period, reflects higher full surrendersperiod. Sales in the current quarter reflect the product pivot strategy and consisted largely of indexed variable annuities, as sales of traditional variable annuities with guaranteed living benefit riders have been discontinued as of December 31, 2020.
The increase in account values for the twelve months ended March 31, 2021 was driven by a large block of business exiting the surrender charge period, higher death benefitsmarket value appreciation, partially offset by net outflows and lower gross sales. The decline in gross sales was largely driven by benefit rate reductions, across most products, in response to capital market pressures.policy charges on contractholder accounts.
Risks and Risk Mitigants
The following is a summary of certain risks associated with Individual Annuities’ products, certain strategies in mitigating those risks including any updates to those strategies since the previous year-end, and the related financial results. For a more detailed description of these items and their related accounting treatment, refer to the complete descriptions provided in our Annual Report on Form 10-K for the year ended December 31, 2019.
Fixed Annuity Risks and Risk Mitigants. The primary risk exposuresexposure of our fixed annuity products relaterelates to investment risks we bear for providing customers a minimum guaranteed interest rate or an index-linked interest rate required to be credited to the customer’s account value, includingwhich include interest rate fluctuations and/or sustained periods of low interest rates, and credit risk
related to the underlying investments. We manage these risk exposures primarily through our investment strategies and product design features, which include credit rate resetting subject to the minimum guaranteed interest rate as well as surrender charges applied during the early years of the policycontract that help to provide protection for premature withdrawals. In addition, a portion of our fixed products havehas a market value adjustment provision that providesaffords protection of lapse in the case of rising interest rates. We also manage these risk exposures through external reinsurance.reinsurance for certain of our fixed annuity products.
Indexed Variable Annuity Risks and Risk Mitigants. The primary risk exposure of our indexed variable annuity products relates to the investment risks we bear in order to credit to the customer’s account balance the required crediting rate based on the performance of the elected indices at the end of each term. We manage this risk primarily through our investment strategies including derivatives and product design features, which include credit rate resetting subject to contractual minimums as well as surrender charges applied during the early years of the contract that help to provide protection for premature withdrawals. In addition, our indexed variable annuity strategies have an interim value provision that provides protection from lapse in the case of rising interest rates.
Variable Annuity Risks and Risk Mitigants. The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital markets assumptions such as equity market returns, interest rates and market volatility, along with actuarial assumptions such as contractholder mortality, the timing and amount of annuitization and withdrawals, and contract lapses. For these risk exposures, achievement of our expected returns is subject to the risk that actual experience will differ from the assumptions used in the original pricing of these products. We manage our exposure to certain risks driven by fluctuations in capital markets primarily
through a combination of i) Product Design Features, ii) our Asset Liability Management Strategy, and iii) our Capital Hedge Program, as discussed below. We also manage these risk exposures through external reinsurance.reinsurance for certain of our variable annuity products. Sales of traditional variable annuities with guaranteed living benefit riders have been discontinued as of December 31, 2020.
i.Product Design Features:
A portion of the variable annuity contracts that we offeroffered include an automatic rebalancing feature, also referred to as an asset transfer feature. This feature is implemented at the contract level, and transfers assets between certain variable investment sub-accounts selected by the annuity contractholder and, depending on the benefit feature, a fixed-rate account in the general account or a bond fund sub-account within the separate accounts. The objective of the automatic rebalancing feature is to reduce our exposure to equity market risk and market volatility. Other product design features we utilize include, among others, asset allocation restrictions, minimum issuance age requirements and certain limitations on the amount of contractholder deposits,purchase payments, as well as a required minimum allocation to our general account for certain of our products. We continue to introduce products that diversify our risk profile and have incorporated provisions in product design allowing frequent revisions of key pricing elements for certain of our products. In addition, there is diversity in our fee arrangements, as certain fees are primarily based on the benefit guarantee amount, the contractholder account value and/or premiums, which helps preserve certain revenue streams when market fluctuations cause account values to decline.
ii.Asset Liability Management (“ALM”) Strategy (including fixed income instruments and derivatives):
We employ an ALM strategy that utilizes a combination of both traditional fixed income instruments and derivatives to help defray potential claimsmeet expected liabilities associated with our variable annuity living benefit guarantees. The economic liability we manage with this ALM strategy consists of expected living benefit claims under less severe market conditions, which are managed using an ALM strategy through the accumulation of fixed income and derivative instruments, derivatives, or a combination thereof, and potential living benefit claims resulting from more severe market conditions, which are hedged using derivative instruments. For our Prudential Defined Income (“PDI”) variable annuity, we utilize fixed income instruments to help defray potential claims.meet expected liabilities. For the portion of our ALM strategy executed with derivatives, we enter into a range of exchange-traded and over-the-counter (“OTC”) equity, and interest rate and credit derivatives, including, but not limited to: equity and treasury futures; total return, credit default and interest rate swaps; and options including equity options, swaptions, and floors and caps. The intent of this strategy is to more efficiently manage the capital and liquidity associated with these products while continuing to mitigate fluctuations in net income due to movements in capital markets. To achieve this, we periodically review and recalibrate the ALM strategy by optimizing the mix of derivatives and fixed income instruments to achieve expected outcomes.
The difference between the change in value of our hedging instruments and the change in value of the portion of the economic liability that is being hedged, has historically been reflected in adjusted operating income over time. Beginning with the second quarter of 2020, this impact is excluded from adjusted operating income which the Company believes enhances the understanding of underlying performance trends.
The valuation of the economic liability we seek to defray excludes certain items that are included within the U.S. GAAP liability, such as non-performance risk (“NPR”) (inin order to maximize protection irrespective of the possibility of our own default),default, as well as risk margins (required by U.S. GAAP but different from our best estimate) and valuation methodology differences. The following table provides a reconciliation between the liability reported under U.S. GAAP and the economic liability we manage through our ALM strategy as of the periods indicated:
| | | | | | | | March 31,
2021 | | December 31,
2020 |
| | March 31, 2020 | | December 31, 2019 | | (in millions) |
| | (in millions) | |
| U.S. GAAP liability (including NPR) | $ | 27,563 |
| | $ | 12,697 |
| |
| NPR adjustment | 9,771 |
| | 3,437 |
| |
| U.S. GAAP liability, including NPR, net of reinsurance recoverables | | U.S. GAAP liability, including NPR, net of reinsurance recoverables | $ | 11,194 | | | $ | 18,537 | |
| NPR adjustment, net of reinsurance recoverables | | NPR adjustment, net of reinsurance recoverables | 3,219 | | | 4,103 | |
| Subtotal | 37,334 |
| | 16,134 |
| Subtotal | 14,413 | | | 22,640 | |
| Adjustments including risk margins and valuation methodology differences | (11,897 | ) | | (4,385 | ) | Adjustments including risk margins and valuation methodology differences | (3,034) | | | (5,080) | |
| Economic liability managed through the ALM strategy | $ | 25,437 |
| | $ | 11,749 |
| Economic liability managed through the ALM strategy | $ | 11,379 | | | $ | 17,560 | |
As of March 31, 2020,2021, the fair value of our fixed income instruments and derivative assets exceed the economic liability within the entities in which the risks reside.
The following table illustrates the net impact to the Unaudited Interim Consolidated Statements
Under our ALM strategy, we expect differences in the U.S. GAAP embedded derivative liability and hedge positions undernet income impact between the ALM strategy, and the related amortization of DAC and other costs, that are excluded from adjusted operating income.
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| | (in millions)(1) |
| Excluding impact of assumption updates and other refinements: | | | |
| Net hedging impact(2) | $ | (176 | ) | | $ | (55 | ) |
| Change in portions of U.S. GAAP liability, before NPR(3) | (7,693 | ) | | 320 |
|
| Change in the NPR adjustment | 6,599 |
| | (1,063 | ) |
| Net impact from changes in the U.S. GAAP embedded derivative and hedge positions | (1,270 | ) | | (798 | ) |
| Related benefit (charge) to amortization of DAC and other costs | (176 | ) | | 161 |
|
| Net impact of assumption updates and other refinements | 0 |
| | 0 |
|
| Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs | $ | (1,446 | ) | | $ | (637 | ) |
__________
| |
(1) | Positive amount represents income; negative amount represents a loss. |
| |
(2) | Net hedging impact represents the difference between the changechanges in fair value of the risk we seek to hedge using derivatives and the change in fair value of the derivatives utilized with respect to that risk. |
| |
(3) | Represents risk margins and valuation methodology differences between the economic liability managed by the ALM strategy and the U.S. GAAP liability. |
The amounts in the table above exclude the impacts of $952 million of gains and $473 million of losses, for the three months ended March 31, 2020 and 2019, respectively, associated with our capital hedge program which is intended to protect a portion of the overall capital position of the variable annuities business against its exposurefixed income instruments (either designated as available-for-sale or designated as trading) and derivatives as compared to the equity markets. See “—iii. Capital Hedge Program” below for more information.
For the first quarter of 2020, the loss of $1,446 million primarily reflected the impact of a $1,270 million net charge from the changes in the U.S. GAAP embedded derivative liability these assets support. These differences can be primarily attributed to three distinct areas:
•Different valuation methodologies in measuring the liability we intend to cover with fixed income instruments and hedge positions. This net charge was primarily driven by an unfavorable impact relatedderivatives versus the liability reported under U.S. GAAP. The valuation methodology utilized in estimating the economic liability we intend to defray with fixed income instruments and derivatives is different from that required to be utilized to measure the portionsliability under U.S. GAAP. Additionally, the valuation of the economic liability excludes certain items that are included within the U.S. GAAP liability, beforesuch as NPR that are excludedin order to maximize protection irrespective of the possibility of our own default and risk margins (required by U.S. GAAP but different from our hedge target, primarily driven by wideningbest estimate).
•Different accounting treatment between liabilities and assets supporting those liabilities. Under U.S. GAAP, changes in the fair value of credit spreads, declining interest rates (with offsetsthe embedded derivative liability, derivative instruments and fixed income instruments designated as trading are immediately reflected in net income, while changes in the fair value of fixed income instruments that are designated as available-for-sale are recorded as unrealized gains (losses) in OCI versus net income) and unfavorable equity market performance. This decrease was partially offset by an increase in the NPR adjustment driven by widening of credit spreads used in measuring our living benefit liabilities. Also contributing to the net charge was a charge related to the amortization of DAC and other costs of $176 million.comprehensive income.
•General hedge results. For the first quarter of 2019, the loss of $637 million primarily reflected the impact of a $798 million net charge from the changes in the U.S. GAAP embedded derivative and hedge positions. This net charge was driven by a decrease in the NPR adjustment driven by tightening of credit spreads used in measuring our living benefit liabilities. This decrease was partially offset by a favorable impact related to the portions of the U.S. GAAP liability before NPR, that are excluded from our hedge target, primarily driven by tightening of credit spreads and declining interest rates (with offsets in changes in the fair value of fixed income instruments that are recorded in OCI versus net income), partially offset by favorable equity market performance. The net charge was partially offset by a benefit related to the amortization of DAC and other costs of $161 million.
For information regarding the Risk Appetite Framework we use to evaluate and support the risksportion of the ALM strategy, see “—Liquiditythe net hedging impact (the extent to which the changes in value of the hedging instruments offset the change in value of the portion of the economic liability we are hedging) may be impacted by a number of factors, including: cash flow timing differences between our hedging instruments and Capital Resources—Capital.”the corresponding portion of the economic liability we are hedging, basis differences attributable to actual underlying contractholder funds to be hedged versus hedgeable indices, rebalancing costs related to dynamic rebalancing of hedging instruments as markets move, certain elements of the economic liability that may not be hedged (including certain actuarial assumptions), and implied and realized market volatility on the hedge positions relative to the portion of the economic liability we seek to hedge.
iii. Capital Hedge Program:
We employ a capital hedge program to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets. The capital hedge program is conducted using equity derivatives which include equity call and put options, total return swaps and futures contracts. The changes in value of these derivatives arehave historically been recognized in adjusted operating income over the expected duration of the capital hedge program. Beginning with the second quarter of 2020, changes in value of these derivatives are excluded from adjusted operating income which the Company believes enhances the understanding of underlying performance trends.
Results excluded from adjusted operating income
The following table provides the net impact to the Unaudited Interim Consolidated Statements of Operations from the results excluded from adjusted operating income, which is primarily driven by the changes in the U.S. GAAP embedded derivative liability and hedge positions under the ALM strategy as described above, and the related amortization of DAC and other costs.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, | | | | |
| | | | | 2021 | | 2020 | | | | |
| | | | | (in millions)(1) | | | | |
| Results excluded from adjusted operating income: | | | | | | | | | |
| Change in value of U.S. GAAP liability, pre-NPR(2) | | | | | $ | 8,392 | | | $ | (20,538) | | | | | |
| Change in the NPR adjustment | | | | | (884) | | | 6,599 | | | | | |
| Change in fair value of hedge assets, excluding capital hedges(3) | | | | | (4,992) | | | 11,954 | | | | | |
| Change in fair value of capital hedges(4) | | | | | (295) | | | 952 | | | | | |
| Other | | | | | 334 | | | 168 | | | | | |
| Realized investment gains (losses), net, and related adjustments | | | | | 2,555 | | | (865) | | | | | |
| Market experience updates(5) | | | | | 176 | | | (646) | | | | | |
| Charges related to realized investment gains (losses), net | | | | | (407) | | | (375) | | | | | |
| Total results excluded from adjusted operating income(6) | | | | | $ | 2,324 | | | $ | (1,886) | | | | | |
__________
(1)Positive amounts represent income; negative amounts represent a loss.
(2)Represents the change in the liability (excluding NPR) for our variable annuities living benefit guarantees which is measured utilizing a valuation methodology that is required under U.S. GAAP. This liability includes such items as risk margins which are required by U.S. GAAP but not included in our best estimate of the liability.
(3)Represents the change in fair value of the derivatives utilized to hedge potential claims associated with our variable annuity living benefit guarantees.
(4)Represents the changes in fair value of equity derivatives of the capital hedge program intended to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets.
(5)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability.
(6)Excludes amounts from the change in unrealized gains and losses on fixed income instruments recorded in OCI (versus net income) of $(1,870) million, and $1,706 million for the three months ended March 31, 2021 and 2020, respectively.
For the three months ended March 31, 2021, the gain of $2,324 million was driven by a favorable impact related to the U.S. GAAP liability before NPR, net of the change in fair value of hedge assets (excluding capital hedges) largely due to rising interest rates and favorable equity market performance, as well as favorable market experience updates from the impact of favorable equity markets and higher interest rates. These impacts were partially offset by an unfavorable NPR adjustment driven by higher interest rates and losses associated with our capital hedge program.
For the three months ended March 31, 2020, the loss of $1,886 million was driven by an unfavorable impact related to the U.S. GAAP liability before NPR, net of the change in fair value of hedge assets (excluding capital hedges) largely due to widening credit spreads, declining interest rates, and unfavorable equity market performance, as well as unfavorable market experience updates from the impact of unfavorable equity markets and lower interest rates. These impacts were partially offset by a favorable NPR adjustment driven by widening credit spreads and gains associated with our capital hedge program.
Product Specific Risks and Risk Mitigants
As noted above, the risks associated with our products are mitigated through product design features, including automatic rebalancing, as well as through our ALM strategy and external reinsurance. The following table sets forth the risk management profile of our living benefit guarantees and guaranteed minimum death benefit (“GMDB”) features as of the periods indicated.indicated:
| | | | | March 31, 2020 | | December 31, 2019 | | March 31, 2019 | | March 31, 2021 | | December 31, 2020 | | March 31, 2020 |
| | | Account Value | | % of Total | | Account Value | | % of Total | | Account Value | | % of Total | | Account
Value | | % of
Total | | Account
Value | | % of
Total | | Account
Value | | % of
Total |
| | | ($ in millions) | | ($ in millions) |
| Living benefit/GMDB features(1): | | | | | | | | | | | | | Living benefit/GMDB features(1): | |
| Both ALM strategy and automatic rebalancing(2)(3) | | $ | 92,692 |
| | 67 | % | | $ | 111,535 |
| | 68 | % | | $ | 108,390 |
| | 68 | % | Both ALM strategy and automatic rebalancing(2)(3) | | $ | 111,948 | | | 66 | % | | $ | 112,177 | | | 66 | % | | $ | 92,692 | | | 67 | % |
| ALM strategy only(3) | | 6,188 |
| | 4 | % | | 7,703 |
| | 5 | % | | 7,936 |
| | 5 | % | ALM strategy only(3) | | 7,362 | | | 4 | % | | 7,410 | | | 4 | % | | 6,188 | | | 4 | % |
| Automatic rebalancing only | | 644 |
| | 1 | % | | 732 |
| | 1 | % | | 801 |
| | 1 | % | Automatic rebalancing only | | 617 | | | 1 | % | | 634 | | | 1 | % | | 644 | | | 1 | % |
| External reinsurance(4) | | 2,617 |
| | 2 | % | | 3,150 |
| | 2 | % | | 3,059 |
| | 2 | % | External reinsurance(4) | | 3,201 | | | 2 | % | | 3,173 | | | 2 | % | | 2,617 | | | 2 | % |
| PDI | | 15,802 |
| | 11 | % | | 16,296 |
| | 9 | % | | 12,649 |
| | 8 | % | PDI | | 17,122 | | | 10 | % | | 18,540 | | | 11 | % | | 15,802 | | | 11 | % |
| Other products | | 1,955 |
| | 1 | % | | 2,457 |
| | 1 | % | | 2,474 |
| | 2 | % | Other products | | 2,487 | | | 1 | % | | 2,492 | | | 1 | % | | 1,955 | | | 1 | % |
| Total living benefit/GMDB features | | $ | 119,898 |
| | | | $ | 141,873 |
| | | | $ | 135,309 |
| | | Total living benefit/GMDB features | | $ | 142,737 | | | $ | 144,426 | | | $ | 119,898 | | |
| GMDB features and other(5) | | 19,149 |
| | 14 | % | | 23,055 |
| | 14 | % | | 22,587 |
| | 14 | % | GMDB features and other(5) | | 27,893 | | | 16 | % | | 26,120 | | | 15 | % | | 19,149 | | | 14 | % |
| Total variable annuity account value | | $ | 139,047 |
| | | | $ | 164,928 |
| | | | $ | 157,896 |
| | | Total variable annuity account value | | $ | 170,630 | | | $ | 170,546 | | | $ | 139,047 | | |
__________
| |
(1) | All contracts with living benefit guarantees also contain GMDB features, which cover the same insured contract. |
| |
(2) | Contracts with living benefits that are included in our ALM strategy and that have an automatic rebalancing feature. |
| |
(3) | Excludes PDI which is presented separately within this table. |
| |
(4) | Represents contracts subject to a reinsurance transaction with an external counterparty covering certain new Highest Daily Lifetime Income (“HDI”) v.3.0 business for the period April 1, 2015 through December 31, 2016. These contracts with living benefits also have an automatic rebalancing feature. |
| |
(5) | Includes contracts that have a GMDB feature and do not have an automatic rebalancing feature. |
(2)Contracts with living benefits that are included in our ALM strategy and that have an automatic rebalancing feature. (3)Excludes PDI which is presented separately within this table.
(4)Represents contracts subject to a reinsurance transaction with an external counterparty covering certain Highest Daily Lifetime Income (“HDI”) v.3.0 business for the period April 1, 2015 through December 31, 2016. These contracts with living benefits also have an automatic rebalancing feature.
(5)Includes contracts that have a GMDB feature and do not have an automatic rebalancing feature.
Individual Life
Operating Results
The following table sets forth Individual Life’s operating results for the periods indicated.
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| Operating results: | | | |
| Revenues | $ | 1,530 |
| | $ | 1,482 |
|
| Benefits and expenses | 1,550 |
| | 1,377 |
|
| Adjusted operating income | (20 | ) | | 105 |
|
| Realized investment gains (losses), net, and related adjustments | 565 |
| | 119 |
|
| Charges related to realized investment gains (losses), net | (418 | ) | | (106 | ) |
| Market experience updates(1) | (294) |
| | 0 |
|
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | (167 | ) | | $ | 118 |
|
__________
| |
(1) | Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company had historically recognized these impacts in adjusted operating income. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. |
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| | | | | (in millions) |
| Operating results: | | | | | | | |
| Revenues | | | | | $ | 1,635 | | | $ | 1,530 | |
| Benefits and expenses | | | | | 1,679 | | | 1,550 | |
| Adjusted operating income | | | | | (44) | | | (20) | |
| Realized investment gains (losses), net, and related adjustments | | | | | (152) | | | 565 | |
| Charges related to realized investment gains (losses), net | | | | | 158 | | | (418) | |
| Market experience updates | | | | | 131 | | | (294) | |
| | | | | | | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | | | | | $ | 93 | | | $ | (167) | |
Adjusted Operating Income
Adjusted operating income decreased $125$24 million, primarily reflecting lower underwriting results, driven by an unfavorable impact from mortality experience, net of reinsurance, and the unfavorable ongoing impact of our annual reviews and update of assumptions and other refinements,primarily attributable to COVID-19 related claims. This decrease was partially offset by business growth. Also contributing to the decrease was the absence of a favorable impact in the prior year period from changes in our estimated profitability of the businesshigher net investment spread results driven by equity market performancehigher income on policyholder accounts. Beginning with the second quarter of 2019, this activity is excluded from adjusted operating income.non-coupon investments.
Revenues, Benefits and Expenses
Revenues increased $48$105 million. This increase was primarily driven by higher income on non-coupon investments and higher net investment income due to higher average invested assets, partially offset by lower investment yields. The increase also reflected higher policy charges and fee income driven by business growth, and an increase in net investment income from higher average invested assets resulting from business growth, partially offset by lower investment yields due to a decline in interest rates.growth.
Benefits and expenses increased $173$129 million. This increase reflected higher policyholders’ benefits driven by an unfavorable impact from mortality experience, net of reinsurance, and the unfavorable ongoing impact of the assumption update and other refinements, as well as higher interest creditedprimarily attributable to account balances drivenCOVID-19 related claims, partially offset by business growth, as discussed above. Also contributing to the increase was the absence of a favorable impact in the prior year periodlower operating expenses resulting from changes in our estimated profitability of the business driven by equity market performance on policyholder accounts, as discussed above.cost savings initiatives.
Sales Results
The following table sets forth Individual Life’s annualized new business premiums, as defined under “—Results of Operations—Segment Measures” above, by distribution channel and product, for the periods indicated.
| | | | | | | | | | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | Three Months Ended March 31, 2021 | | Three Months Ended March 31, 2020 |
| | | Prudential Advisors | | Third- Party | | Total | | Prudential Advisors | | Third- Party | | Total | | Prudential
Advisors | | Third-
Party | | Total | | Prudential
Advisors | | Third-
Party | | Total |
| | | (in millions) | | (in millions) |
| Term Life | | $ | 6 |
| | $ | 34 |
| | $ | 40 |
| | $ | 7 |
| | $ | 44 |
| | $ | 51 |
| Term Life | | $ | 6 | | | $ | 25 | | | $ | 31 | | | $ | 6 | | | $ | 34 | | | $ | 40 | |
| Guaranteed Universal Life(1) | | 2 |
| | 27 |
| | 29 |
| | 2 |
| | 19 |
| | 21 |
| Guaranteed Universal Life(1) | | 0 | | | 12 | | | 12 | | | 2 | | | 27 | | | 29 | |
| Other Universal Life(1) | | 7 |
| | 23 |
| | 30 |
| | 9 |
| | 21 |
| | 30 |
| Other Universal Life(1) | | 2 | | | 13 | | | 15 | | | 7 | | | 23 | | | 30 | |
| Variable Life | | 20 |
| | 68 |
| | 88 |
| | 16 |
| | 45 |
| | 61 |
| Variable Life | | 28 | | | 118 | | | 146 | | | 20 | | | 68 | | | 88 | |
| Total | | $ | 35 |
| | $ | 152 |
| | $ | 187 |
| | $ | 34 |
| | $ | 129 |
| | $ | 163 |
| Total | | $ | 36 | | | $ | 168 | | | $ | 204 | | | $ | 35 | | | $ | 152 | | | $ | 187 | |
__________
| |
(1) | Single pay life premiums and excess (unscheduled) premiums are included in annualized new business premiums based on a 10% credit and represented approximately 5% and 6% of Guaranteed Universal Life and 7% and 6% of Other Universal Life annualized new business premiums for the three months ended March 31, 2020 and 2019, respectively. Prior period percentages have been updated to conform to current period presentation. |
(1)Single pay life premiums and excess (unscheduled) premiums are included in annualized new business premiums based on a 10% credit and represented approximately 0% and 5% of Guaranteed Universal Life and 2% and 7% of Other Universal Life annualized new business premiums for the three months ended March 31, 2021 and 2020, respectively.
Total annualized new business premiums for the three months ended March 31, 20202021 increased $24$17 million compared to the prior year period, primarily driven by higher sales of variable life insurance products as a result of product design and pricing actions, partially offset by lower sales of term lifeacross all other products.
U.S. Businesses—Assurance IQ Division
Assurance IQ
Operating Results
The following table sets forth Assurance IQ’s operating results for the periodperiods indicated.
| | | | | | Three Months Ended
March 31, |
| | | Three Months Ended
March 31, 2020 | | | 2021 | | 2020 |
| | | (in millions) | | (in millions) |
| Operating results: | | | Operating results: | |
| Revenues | | $ | 60 |
| Revenues | | $ | 108 | | | $ | 60 | |
| Expenses | | 83 |
| Expenses | | 147 | | | 83 | |
| Adjusted operating income | | (23 | ) | Adjusted operating income | | (39) | | | (23) | |
| Other adjustments(1) | | 45 |
| Other adjustments(1) | | (13) | | | 45 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | | $ | 22 |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | | $ | (52) | | | $ | 22 | |
__________
| |
(1) | “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. |
(1)“Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
Adjusted Operating Income
The acquisition of Assurance IQ was completed in October 2019. Adjusted operating income for the first quarter of 2020 was $(23)decreased $16 million, reflecting revenues,an increase in operating expenses supporting business growth, partially offset by higher net of marketing and distribution expenses,revenues primarily related to our health (Health Under 65)the Medicare and life insuranceLife product lines. Results also included operating expenses and amortization expenses related to intangible assets recognized as part of purchase accounting (see Note 1 and Note 10 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information).
Revenues and Expenses
Revenues were $60increased $48 million, primarily reflectingdue to commissions and marketingcase referral revenues from our health (Health Under 65)the Medicare product line, driven by business growth and life insurancefrom a strategic shift by the business to emphasize Medicare products, as well as from higher case referral sales in the Life product lines.line. Expenses were $83increased $64 million, driven by higher marketing and distribution costs primarily related to the Medicare product line, and higher general and administrative operating expenses and amortization expenses related to intangible assets.supporting business growth.
International Businesses
Business UpdateUpdates
•In Aprilthe first quarter of 2021, the Company acquired a 24% interest (through a private equity limited partnership managed by LeapFrog Investments) in ICEA LION, a Kenya-based insurer and asset manager, for approximately $100 million. This investment is consistent with the Company’s strategic focus internationally on higher-growth emerging markets, and furthers the partnership’s specific objective to identify and make strategic investments in high quality financial services companies in selected African geographies.
•In the third quarter of 2020, wethe Company entered into a definitive agreement with KBTaishin Financial Group, Inc.Holding Co, Ltd., a KoreanTaiwanese financial services provider, to sell The Prudential Life Insurance Company of Korea, Ltd.Taiwan Inc. (“POK”POT”) for cash consideration of approximately $1.9 billion$195 million at then current exchange rates, to be paid at closing. The transaction is consistentclosing, and contingent consideration with our strategic focus internationally on Japan and higher-growth emerging markets around the world. The transaction is expected to close by the enda fair value of 2020, subject toapproximately $30 million at March 31, 2021. If regulatory approvals are obtained and customary closing conditions. Inconditions are satisfied, we expect the secondtransaction to close in 2021.
Beginning in the third quarter of 2020, we will reportreported our investment in POKPOT as “held for sale” and expect to recognize a $600have cumulatively recognized an approximate $390 million after-tax charge to earnings, through March 31, 2021, to adjust the bookcarrying value of POKPOT to the fair market value reflected in the purchase price (see Note 151 to the Unaudited Interim Consolidated Financial Statements for additional information). EffectiveAlso, effective in the secondthird quarter of 2020, the results of this business and the impact of theits anticipated sale will bewere reflected in the Divested and Run-off Businesses that are included in Corporate and Other.Other, and all prior period amounts have been updated to conform to the current period presentation. We intend to use the proceeds of the transaction for general corporate purposes.
We are exploring strategic options for our Taiwanese insurance business, which may include a sale.
Operating Results
The results of our International Businesses’ operations are translated on the basis of weighted average monthly exchange rates, inclusive of the effects of the intercompany arrangement discussed in “—Results of Operations—Impact of Foreign Currency Exchange Rates” above. To provide a better understanding of operating performance within the International Businesses, where indicated below, we have analyzed our results of operations excluding the effect of the year over year change
in foreign currency exchange rates. Our results of operations, excluding the effect of foreign currency fluctuations, were derived by translating foreign currencies to USD at uniform exchange rates for all periods presented, including for constant dollar information discussed below. TheFor our Japan operations, we used an exchange rates used were Japanese yen at a rate of 104103 yen per USD, and Korean won at a rate of 1,090 won per USD, both of which werewas determined in connection with the foreign currency income hedging program discussed in “—Results of Operations—Impact of Foreign Currency Exchange Rates” above. In addition, for constant dollar information discussed below, activity denominated in USD is generally reported based on the amounts as transacted in USD. Annualized new business premiums presented on a constant exchange rate basis in the “Sales Results” section below reflect translation based on these same uniform exchange rates.
The following table sets forth the International Businesses’ operating results for the periods indicated.
| | | | Three Months Ended
March 31, | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | | 2021 | | 2020(1) |
| | (in millions) | | | (in millions) |
| Operating results: | | | | Operating results: | | |
| Revenues: | | | | Revenues: | | |
| Life Planner | $ | 3,244 |
| | $ | 3,175 |
| Life Planner | | $ | 2,930 | | | $ | 2,718 | |
| Gibraltar Life and Other | 2,918 |
| | 2,977 |
| Gibraltar Life and Other | | 3,001 | | | 2,918 | |
| Total revenues | 6,162 |
| | 6,152 |
| Total revenues | | 5,931 | | | 5,636 | |
| Benefits and expenses: | | | | Benefits and expenses: | | | | |
| Life Planner | 2,827 |
| | 2,694 |
| Life Planner | | 2,466 | | | 2,356 | |
| Gibraltar Life and Other | 2,584 |
| | 2,536 |
| Gibraltar Life and Other | | 2,594 | | | 2,584 | |
| Total benefits and expenses | 5,411 |
| | 5,230 |
| Total benefits and expenses | | 5,060 | | | 4,940 | |
| Adjusted operating income: | | | | Adjusted operating income: | | | | |
| Life Planner | 417 |
| | 481 |
| Life Planner | | 464 | | | 362 | |
| Gibraltar Life and Other | 334 |
| | 441 |
| Gibraltar Life and Other | | 407 | | | 334 | |
| Total adjusted operating income | 751 |
| | 922 |
| Total adjusted operating income | | 871 | | | 696 | |
| Realized investment gains (losses), net, and related adjustments(1) | 381 |
| | 532 |
| |
| Realized investment gains (losses), net, and related adjustments | | Realized investment gains (losses), net, and related adjustments | | (789) | | | 575 | |
| Charges related to realized investment gains (losses), net | (8 | ) | | 0 |
| Charges related to realized investment gains (losses), net | | (14) | | | (7) | |
| Market experience updates(2) | (15 | ) | | 0 |
| |
| Market experience updates | | Market experience updates | | 0 | | | (6) | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 4 |
| | (30 | ) | Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | | (22) | | | 4 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 1,113 |
| | $ | 1,424 |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | | $ | 46 | | | $ | 1,262 | |
__________
| |
(1) | Prior period amounts have been updated to conform to current period presentation. |
| |
(2) | Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company had historically recognized these impacts in adjusted operating income. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. |
(1)Effective second quarter of 2020, the results of POK and the impact of its sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Effective third quarter of 2020, the results of POT and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
Adjusted Operating Income
Adjusted operating income from our Life Planner operations decreased $64 million, including a $0 million net impact from currency fluctuations, inclusive of the currency hedging program discussed above, primarily reflecting lower net investment spread results driven by lower income on non-coupon investments and lower investment yields. Also contributing to the decrease were higher expenses driven by updates to legal reserves, as well as higher costs related to business growth and business initiatives, and lower underwriting results driven by an unfavorable impact from mortality experience.These decreases were partially offset by the growth of business in force in our Japan and Brazil operations.
Adjusted operating income from our Gibraltar Life and Other operations decreased $107increased $102 million, including a net unfavorable impact of $3 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding this item, adjusted operating income from our Gibraltar Life and OtherPlanner operations decreased $104increased $105 million primarily reflecting lowermore favorable underwriting results due to the growth of business in force in our Japan and Brazil operations, and favorable impacts from mortality and policyholder experience. Also contributing to the increase were higher net investment spread results driven by lowerhigher income on non-coupon investments, partially offset by lower reinvestment yields.
Adjusted operating income from our Gibraltar Life and Other operations increased $73 million, including a net $0 million impact from currency fluctuations, inclusive of the currency hedging program discussed above, primarily reflecting higher net investment spread results driven by higher income on non-coupon investments, partially offset by lower investmentreinvestment yields. Also contributing to the decreaseincrease were lowerhigher earnings from our joint venture investments, due to market performance, as well as higher expenses, including costs associated with business initiatives.more favorable underwriting results primarily due to favorable policyholder experience.
Revenues, Benefits and Expenses
Revenues from our Life Planner operations increased $69$212 million, including a net unfavorablefavorable impact of $45$5 million from currency fluctuations. Excluding this item, revenues increased $114$207 million, primarily reflecting higher net investment income driven by higher income on non-coupon investments, partially offset by lower reinvestment yields. Also contributing to the increase were higher premiums and policy charges and fee income attributable to the growth of business in force.
Benefits and expenses of our Life Planner operations increased $133$110 million, including a net favorableunfavorable impact of $45$8 million from currency fluctuations. Excluding this item, benefits and expenses increased $178$102 million, primarily reflecting higher policyholders’ benefits, including changes in reserves, driven by an unfavorable impactthe growth of business in force, partially offset by favorable impacts from mortality experience as well as business growth. Also contributing to the increase were higher expenses driven by updates to legal reserves, as well as higher costs related to business growth and business initiatives.policyholder experience.
Revenues from our Gibraltar Life and Other operations decreased $59increased $83 million, including a net favorable impact of $1$46 million from currency fluctuations. Excluding this item, revenues decreased $60increased $37 million, primarily reflecting lowerhigher net investment resultsincome driven by lowerhigher income on non-coupon investments, andpartially offset by lower investment yields due to a decline in interest rates.reinvestment yields. Also contributing to the decreaseincrease was lowerhigher other income driven by an unfavorablea favorable impact from our joint venture investments due to market performance.investments.
Benefits and expenses of our Gibraltar Life and Other operations increased $48$10 million, including a net unfavorable impact of $4$46 million from currency fluctuations. Excluding this item, benefits and expenses increased $44decreased $36 million, primarily driven by higher expenses, including costs associated with business initiatives, and higherlower policyholders’ benefits, including changes in reserves.
Sales Results
The following table sets forth annualized new business premiums, as defined under “—Results of Operations—Segment Measures” above, on an actual and constant exchange rate basis for the periods indicated.
| | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020(1) |
| | | | | | (in millions) |
| Annualized new business premiums: | | | | | | | |
| On an actual exchange rate basis: | | | | | | | |
| Life Planner | | | | | $ | 248 | | | $ | 303 | |
| Gibraltar Life and Other | | | | | 258 | | | 307 | |
| Total | | | | | $ | 506 | | | $ | 610 | |
| On a constant exchange rate basis: | | | | | | | |
| Life Planner | | | | | $ | 259 | | | $ | 306 | |
| Gibraltar Life and Other | | | | | 259 | | | 309 | |
| Total | | | | | $ | 518 | | | $ | 615 | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| 2020 | | 2019 |
| | (in millions) |
| Annualized new business premiums: | | | |
| On an actual exchange rate basis: | | | |
| Life Planner | $ | 378 |
| | $ | 404 |
|
| Gibraltar Life and Other | 307 |
| | 323 |
|
| Total | $ | 685 |
| | $ | 727 |
|
| On a constant exchange rate basis: | | | |
| Life Planner | $ | 386 |
| | $ | 408 |
|
| Gibraltar Life and Other | 309 |
| | 325 |
|
| Total | $ | 695 |
| | $ | 733 |
|
(1)Effective second quarter of 2020, the results of POK and the impact of its sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Effective third quarter of 2020, the results of POT and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
The amount of annualized new business premiums and the sales mix in terms of types and currency denomination of products for any given period can be significantly impacted by several factors, including but not limited to: the addition of new products, discontinuation of existing products, changes in credited interest rates for certain products and other product modifications, changes in premium rates, changes in interest rates or fluctuations in currency markets, changes in tax laws, changes in life insurance regulations or changes in the competitive environment. Sales volume may increase or decrease prior to certain of these changes becoming effective, and then fluctuate in the other direction following such changes.
Our diverse product portfolio in Japan, in terms of currency mix and premium payment structure, allows us to adapt to changing market and competitive dynamics, including the extremely low interest rate environment. We regularly examine our product offerings and their related profitability and, as a result, we have repriced or discontinued sales of certain products that do not meet our profit expectations. The impact of these actions, coupled with the introduction of certain new products, has generally resulted in an increase in sales of products denominated in USD relative to products denominated in other currencies.
The table below presents annualized new business premiums on a constant exchange rate basis, by product and distribution channel, for the periods indicated.
| | | | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | Three Months Ended March 31, 2021 | | Three Months Ended March 31, 2020(1) |
| | Life | | Accident & Health | | Retirement(1) | | Annuity | | Total | | Life | | Accident & Health | | Retirement(1) | | Annuity | | Total | | Life | | Accident
&
Health | | Retirement(2) | | Annuity | | Total | | Life | | Accident
&
Health | | Retirement(2) | | Annuity | | Total |
| | (in millions) | | (in millions) |
| Life Planner | $ | 207 |
| | $ | 26 |
| | $ | 121 |
| | $ | 32 |
| | $ | 386 |
| | $ | 235 |
| | $ | 36 |
| | $ | 116 |
| | $ | 21 |
| | $ | 408 |
| Life Planner | $ | 142 | | | $ | 19 | | | $ | 98 | | | $ | 0 | | | $ | 259 | | | $ | 164 | | | $ | 21 | | | $ | 121 | | | $ | 0 | | | $ | 306 | |
| Gibraltar Life and Other: | | | | | | | | | | | | | | | | | | | | Gibraltar Life and Other: | |
| Life Consultants | $ | 82 |
| | $ | 9 |
| | $ | 18 |
| | $ | 22 |
| | $ | 131 |
| | $ | 87 |
| | $ | 11 |
| | $ | 23 |
| | $ | 45 |
| | $ | 166 |
| Life Consultants | $ | 73 | | | $ | 7 | | | $ | 9 | | | $ | 16 | | | $ | 105 | | | $ | 83 | | | $ | 9 | | | $ | 18 | | | $ | 22 | | | $ | 132 | |
| Banks(2) | 120 |
| | 0 |
| | 10 |
| | 2 |
| | 132 |
| | 94 |
| | 0 |
| | 9 |
| | 5 |
| | 108 |
| |
| Banks(3) | | Banks(3) | 100 | | | 0 | | | 3 | | | 15 | | | 118 | | | 120 | | | 0 | | | 10 | | | 2 | | | 132 | |
| Independent Agency | 22 |
| | 1 |
| | 21 |
| | 2 |
| | 46 |
| | 31 |
| | 3 |
| | 9 |
| | 8 |
| | 51 |
| Independent Agency | 18 | | | 1 | | | 16 | | | 1 | | | 36 | | | 21 | | | 1 | | | 21 | | | 2 | | | 45 | |
| Subtotal | 224 |
| | 10 |
| | 49 |
| | 26 |
| | 309 |
| | 212 |
| | 14 |
| | 41 |
| | 58 |
| | 325 |
| Subtotal | 191 | | | 8 | | | 28 | | | 32 | | | 259 | | | 224 | | | 10 | | | 49 | | | 26 | | | 309 | |
| Total | $ | 431 |
| | $ | 36 |
| | $ | 170 |
| | $ | 58 |
| | $ | 695 |
| | $ | 447 |
| | $ | 50 |
| | $ | 157 |
| | $ | 79 |
| | $ | 733 |
| Total | $ | 333 | | | $ | 27 | | | $ | 126 | | | $ | 32 | | | $ | 518 | | | $ | 388 | | | $ | 31 | | | $ | 170 | | | $ | 26 | | | $ | 615 | |
__________
| |
(1) | Includes retirement income, endowment and savings variable universal life. |
| |
(2) | Single pay life annualized new business premiums, which include 10% of first year premiums, and 3-year limited pay annualized new business premiums, which include 100% of new business premiums, represented 4% and 67%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended March 31, 2020, and 0% and 65%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended March 31, 2019. |
(1)Effective second quarter of 2020, the results of POK and the impact of its sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Effective third quarter of 2020, the results of POT and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
(2)Includes retirement income, endowment and savings variable universal life.
(3)Single pay life annualized new business premiums, which include 10% of first year premiums, and 3-year limited pay annualized new business premiums, which include 100% of new business premiums, represented 8% and 67%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended March 31, 2021, and 4% and 67%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended March 31, 2020.
Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations decreased $22$47 million, primarily reflectingdriven by lower sales in Japan driven by the corporate product tax rule change effective July 2019, partially offset by higherdue to COVID-19 impacts on distribution, as well as lower sales of USD-denominated protection products supported by growthresulting from pricing increases in Life Planner headcount. Also partially offsetting the decrease was higher sales in our Korea, Taiwan and Brazil operations driven by growth in Life Planner headcount.third quarter of 2020.
Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations decreased $16$50 million. Life Consultants sales decreased $35 million, primarily reflecting lower sales of USD-denominated fixed annuity products driven by declines in crediting rates and lower Life Consultant headcount. Independent Agency sales decreased $5$27 million, primarily driven by the suspension of corporate term products in the first quarter of 2019,COVID-19 impacts on distribution and lower sales of USD-denominated fixed annuityprotection and retirement products partially offsetresulting from pricing increases in the third quarter of 2020. Bank channel and Independent Agency sales decreased $14 million and $9 million, respectively, primarily driven by higherCOVID-19 impacts on distribution and lower sales of USD-denominated protection products. These decreases were partially offset by a $24 million increaseproducts resulting from pricing increases in Bank channel sales primarily driven by higher salesthe third quarter of USD-denominated protection products.2020.
Corporate and Other
Corporate and Other includes corporate operations, after allocations to our business segments, and Divested and Run-off Businesses other than those that qualify for “discontinued operations” accounting treatment under U.S. GAAP.
| | | | Three Months Ended
March 31, | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | | 2021 | | 2020(1) |
| | (in millions) | | | (in millions) |
| Operating results: | | | | Operating results: | | |
| Capital debt interest expense | $ | (198 | ) | | $ | (199 | ) | |
| Investment income, net of operating debt interest expense | 28 |
| | 44 |
| |
| Interest expense on debt(2) | | Interest expense on debt(2) | | $ | (208) | | | $ | (219) | |
| Investment income(2) | | Investment income(2) | | 36 | | | 49 | |
| Pension and employee benefits | 50 |
| | 24 |
| Pension and employee benefits | | 62 | | | 50 | |
| Other corporate activities(1) | (222 | ) | | (281 | ) | |
| Other corporate activities(3) | | Other corporate activities(3) | | (176) | | | (222) | |
| Adjusted operating income | (342 | ) | | (412 | ) | Adjusted operating income | | (286) | | | (342) | |
| Realized investment gains (losses), net, and related adjustments | (40 | ) | | (50 | ) | Realized investment gains (losses), net, and related adjustments | | 166 | | | (40) | |
| Charges related to realized investment gains (losses), net | 21 |
| | (6 | ) | Charges related to realized investment gains (losses), net | | 11 | | | 21 | |
| Market experience updates(2) | 8 |
| | 0 |
| |
| Market experience updates | | Market experience updates | | (3) | | | 8 | |
| Divested and Run-off Businesses | 80 |
| | 174 |
| Divested and Run-off Businesses | | 30 | | | (69) | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 22 |
| | (8 | ) | Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | | (4) | | | 22 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | (251 | ) | | $ | (302 | ) | Income (loss) before income taxes and equity in earnings of operating joint ventures | | $ | (86) | | | $ | (400) | |
__________
| |
(1) | Includes consolidating adjustments. |
| |
(2) | Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company had historically recognized these impacts in adjusted operating income. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. |
(1)Effective second quarter of 2020, the results of POK and the impact of its sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Effective third quarter of 2020, the results of POT and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
(2)Prior period amounts have been updated to conform to current period presentation.
(3)Includes consolidating adjustments.
The loss from Corporate and Other operations, on an adjusted operating income basis, decreased $70$56 million. Net charges from other corporate activities decreased $59$46 million primarily driven byreflecting lower costs for deferred and long-term compensation plans tiedexpenses. Also contributing to Company stock and equity market performance, reflecting certain changes implemented in the fourth quarter of 2019 to reduce market-based earnings volatility. The decrease also reflectedwere favorable results of $26$12 million from pension and employee benefits, primarily driven by higher income from our qualified pension plan as a result of incurring lower interest costs on plan obligations, as well as an $11 million decrease in employee health benefit costs. Investment income, net of operating debtfrom interest expense decreased $16on debt, primarily reflecting lower average interest rates. These decreases were partially offset by lower investment income of $13 million, primarily driven by lower income on both highly liquid assets.assets and coupon investments due to lower investment yields, partially offset by higher income on non-coupon investments.
Divested and Run-off Businesses
Divested and Run-off Businesses Included in Corporate and Other
Income from our Divested and Run-off Businesses includes results from several businesses that have been or will be sold or exited, including businesses that have been placed in wind down status that do not qualify for “discontinued operations” accounting treatment under U.S. GAAP. The results of these Divested and Run-off Businesses are reflected in our Corporate and Other operations, but are excluded from adjusted operating income. A summary of the results of the Divested and Run-off Businesses reflected in our Corporate and Other operations is as follows for the periods indicated:
| | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| | | | | | (in millions) |
| Long-Term Care | | | | | $ | 3 | | | $ | 81 | |
| Other(1) | | | | | 27 | | | (150) | |
| Total Divested and Run-off Businesses income (loss) excluded from adjusted operating income | | | | | $ | 30 | | | $ | (69) | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| 2020 | | 2019 |
| | (in millions) |
| Long-Term Care | $ | 81 |
| | $ | 164 |
|
| Other | (1 | ) | | 10 |
|
| Total Divested and Run-off Businesses income (loss) excluded from adjusted operating income | $ | 80 |
| | $ | 174 |
|
(1)Effective second quarter of 2020, the results of POK and the impact of its sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Effective third quarter of 2020, the results of POT and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
Long-Term Care. Results for the first quarter of 20202021 decreased $78 million compared to the prior year period reflectingdriven by an unfavorable comparative change in the market value of investments in equity securities, an increase in reserves as a result of an unlocking of assumptions driven by a decline in interest rates in the current period, and lower underwriting results driven by unfavorable policy experience. These decreases were partially offset by higher net realized investment gains in the current period driven by more favorableimpact from changes in the market value of derivatives used for duration management. This decrease was partially offset by a favorable impact from changes in the market value of equity securities, and higher underwriting results driven by favorable policy and claim experience.
Other. Results for both the first quarter of 2021 and the first quarter of 2020 primarily reflect the results of POT and the impact of its anticipated sale, while results for the prior year period also include the results of POK and the impact of its sale. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
Closed Block Division
The Closed Block division includes certain in-force traditional domestic participating life insurance and annuity products and assets that are used for the payment of benefits and policyholder dividends on these policies (collectively the “Closed Block”), as well as certain related assets and liabilities. We no longer offer these traditional domestic participating policies. See Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information.
Each year, the Board of Directors of The Prudential Insurance Company of America (“PICA”) determines the dividends payable on participating policies for the following year based on the experience of the Closed Block, including investment income, net realized and unrealized investment gains (losses), mortality experience and other factors. Although the Closed Block experience for dividend action decisions is based upon statutory results, at the time the Closed Block was established, we developed, as required by U.S. GAAP, an actuarial calculation of the timing of the maximum future earnings from the policies included in the Closed Block. If actual cumulative earnings in any given period are greater than the cumulative earnings we expected, we record this excess as a policyholder dividend obligation. We will subsequently pay this excess to Closed Block policyholders as an additional dividend unless it is otherwise offset by future Closed Block performance that is less favorable than we originally expected. The policyholder dividends we charge to expense within the Closed Block division will include any change in our policyholder dividend obligation that we recognize for the excess of actual cumulative earnings in any given period over the cumulative earnings we expected in addition to the actual policyholder dividends declared by the Board of Directors of PICA.
As of March 31, 2020,2021, the excess of actual cumulative earnings over the expected cumulative earnings was $2,320$3,166 million, which was recorded as a policyholder dividend obligation. Actual cumulative earnings, as required by U.S. GAAP, reflect the recognition of realized investment gains and losses in the current period, as well as changes in assets and related liabilities that support the Closed Block policies. Additionally, the accumulation of net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block has been reflected as a policyholder dividend obligation of $3,208$3,244 million at March 31, 2020,2021, to be paid to Closed Block policyholders unless offset by future experience, with a corresponding amount reported in AOCI.
Operating Results
The following table sets forth the Closed Block division’s results for the periods indicated.
| | | | Three Months Ended
March 31, | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | | 2021 | | 2020 |
| | (in millions) | | | (in millions) |
| U.S. GAAP results: | | | | U.S. GAAP results: | | |
| Revenues | $ | 677 |
| | $ | 1,374 |
| Revenues | | $ | 1,365 | | | $ | 677 | |
| Benefits and expenses | 678 |
| | 1,393 |
| Benefits and expenses | | 1,331 | | | 678 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | (1 | ) | | $ | (19 | ) | Income (loss) before income taxes and equity in earnings of operating joint ventures | | $ | 34 | | | $ | (1) | |
Income (loss) Before Income Taxes and Equity in Earnings of Operating Joint Ventures
LossIncome (loss) before income taxes and equity in earnings of operating joint ventures decreased $18increased $35 million. Net investment activity results decreasedincreased primarily reflecting higher other income driven by favorable changes in the value of equity
securities, partially offset by a decrease in other income,realized investment gains driven by unfavorable changes in the value of equity securities, partially offset by an increase in realized investment gains, driven by an increase in thefair value of derivatives used in risk management activities. Net insurance activity results reflected a favorable comparative change driven by a decrease in the 20202021 dividend scale.scale and run-off of the business in force. As a result of the above and other variances, a $483$246 million reductionincrease in the policyholder dividend obligation was recorded in the first quarter of 2020,2021, compared to a $123$483 million increasereduction in the first quarter of 2019.2020. If actual cumulative earnings fall below expected cumulative earnings in future periods, earnings volatility in the Closed Block division, which is primarily due to changes in investment results, may not be offset by changes in the cumulative earnings policyholder dividend obligation. For a discussion of the Closed Block division’s realized investment gains (losses), net, see “—General Account Investments.”
Revenues, Benefits and Expenses
Revenues decreased $697increased $688 million primarily driven by a decreasean increase in other income, partially offset by an increasea decrease in net realized investment gains, and lower premiums due to runoff of policies in force, as discussed above.
Benefits and expenses decreased $715increased $653 million primarily driven by a decreasean increase in dividends to policyholders, reflecting a decreasean increase in the policyholder dividend obligation expense due to changes in cumulative earnings, as discussed above.
Income Taxes
For information regarding income taxes, see Note 8 to the Unaudited Interim Consolidated Financial Statements.
Experience-Rated Contractholder Liabilities,
Assets Supporting Experience-Rated Contractholder Liabilities and Other Related Investments
Certain products included in the Retirement and International Businesses segments are experience-rated in that investment results associated with these products are expected to ultimately accrue to contractholders. The majority of investments supporting these experience-rated products are carried at fair value. These investments are reflected on the Unaudited Interim Consolidated Statements of Financial Position as “Assets supporting experience-rated contractholder liabilities, at fair value.” Realized and unrealized gains (losses) for these investments are reported in “Other income (loss).” Interest and dividend income for these investments is reported in “Net investment income.” To a lesser extent, these experience-rated products are also supported by derivatives and commercial mortgage and other loans. The derivatives that support these experience-rated products are reflected on the Unaudited Interim Consolidated Statements of Financial Position as “Other invested assets” and are carried at fair value, and the realized and unrealized gains (losses) are reported in “Realized investment gains (losses), net.” The commercial mortgage and other loans that support these experience-rated products are carried at unpaid principal, net of unamortized discounts and an allowance for losses, and are reflected on the Unaudited Interim Consolidated Statements of Financial Position as “Commercial mortgage and other loans.” Gains (losses) on sales and changes in the valuation allowance for commercial mortgage and other loans are reported in “Realized investment gains (losses), net.”
Our Retirement segment has two types of experience-rated products that are supported by assets supporting experience-rated contractholder liabilities and other related investments. Fully participating products are those for which the entire return on underlying investments is passed back to the policyholders through a corresponding adjustment to the related liability, primarily classified in the Unaudited Interim Consolidated Statements of Financial Position as “Policyholders’ account balances.” The adjustment to the liability is based on changes in the fair value of all of the related assets, including commercial mortgage and other loans, which are carried at amortized cost, less any valuation allowance. Partially participating products are those for which only a portion of the return on underlying investments is passed back to the policyholders over time through changes to the contractual crediting rates. The crediting rates are typically reset semiannually, often subject to a minimum crediting rate, and returns are required to be passed back within ten years.
In our International Businesses, the experience-rated products are fully participating. As a result, the entire return on the underlying investments is passed back to policyholders through a corresponding adjustment to the related liability.
Adjusted operating income excludes net investment gains (losses) on assets supporting experience-rated contractholder liabilities, related derivatives and commercial mortgage and other loans. This is consistent with the exclusion of realized investment gains (losses) with respect to other investments supporting insurance liabilities managed on a consistent basis. In addition, to be consistent with the historical treatment of charges related to realized investment gains (losses) on investments, adjusted operating income also excludes the change in contractholder liabilities due to asset value changes in the pool of investments (including changes in the fair value of commercial mortgage and other loans) supporting these experience-rated contracts, which are reflected in “Interest credited to policyholders’ account balances.” The result of this approach is that adjusted operating income for these products includes net fee revenue and interest spread we earn on these experience-rated contracts, and excludes changes in fair value of the pool of investments, both realized and unrealized, that we expect will ultimately accrue to the contractholders.
The following table sets forth the impact on results for the periods indicated of these items that are excluded from adjusted operating income:
| | | | Three Months Ended
March 31, | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | | 2021 | | 2020 |
| | (in millions) | | | (in millions) |
| Retirement: | | | | Retirement: | | |
| Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net(1) | $ | (289 | ) | | $ | 326 |
| |
| Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net | | Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net | | $ | (435) | | | $ | (289) | |
| Change in experience-rated contractholder liabilities due to asset value changes | 327 |
| | (279 | ) | Change in experience-rated contractholder liabilities due to asset value changes | | 438 | | | 327 | |
| Gains (losses), net, on experienced rated contracts(2)(3) | $ | 38 |
| | $ | 47 |
| |
| Gains (losses), net, on experienced rated contracts(1)(2) | | Gains (losses), net, on experienced rated contracts(1)(2) | | $ | 3 | | | $ | 38 | |
| International Businesses: | | | | International Businesses: | | | | |
| Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net | $ | (336 | ) | | $ | 124 |
| Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net | | $ | 180 | | | $ | (336) | |
| Change in experience-rated contractholder liabilities due to asset value changes | 336 |
| | (124 | ) | Change in experience-rated contractholder liabilities due to asset value changes | | (180) | | | 336 | |
| Gains (losses), net, on experienced rated contracts | $ | 0 |
| | $ | 0 |
| Gains (losses), net, on experienced rated contracts | | $ | 0 | | | $ | 0 | |
| Total: | | | | Total: | | | | |
| Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net(1) | $ | (625 | ) | | $ | 450 |
| |
| Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net | | Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net | | $ | (255) | | | $ | (625) | |
| Change in experience-rated contractholder liabilities due to asset value changes | 663 |
| | (403 | ) | Change in experience-rated contractholder liabilities due to asset value changes | | 258 | | | 663 | |
| Gains (losses), net, on experienced rated contracts(2)(3) | $ | 38 |
| | $ | 47 |
| |
| Gains (losses), net, on experienced rated contracts(1)(2) | | Gains (losses), net, on experienced rated contracts(1)(2) | | $ | 3 | | | $ | 38 | |
__________
| |
(1) | Prior period amounts have been reclassified to conform to current period presentation. |
| |
(2) | Decreases to contractholder liabilities due to asset value changes are limited by certain floors and therefore do not reflect cumulative declines in recorded asset values of $14 million and $24 million as of March 31, 2020 and 2019, respectively. We have recovered and expect to recover in future periods these declines in recorded asset values through subsequent increases in recorded asset values or reductions in crediting rates on contractholder liabilities. |
| |
(3) | Included in the amounts above related to the change in the liability to contractholders as a result of commercial mortgage and other loans are a decrease of $37 million and an increase of $29 million for the three months ended March 31, 2020 and 2019, respectively. As prescribed by U.S. GAAP, changes in the fair value of commercial mortgage and other loans held for investment in our general account, other than when associated with impairments, are not recognized in income in the current period, while the impact of these changes in fair value are reflected as a change in the liability to fully participating contractholders in the current period. |
(1)Decreases to contractholder liabilities due to asset value changes are limited by certain floors and therefore do not reflect cumulative declines in recorded asset values of $3 million and $14 million as of March 31, 2021 and 2020, respectively. We have recovered and expect to recover in future periods these declines in recorded asset values through subsequent increases in recorded asset values or reductions in crediting rates on contractholder liabilities.
(2)Included in the amounts above related to the change in the liability to contractholders as a result of commercial mortgage and other loans are an increase of $11 million and a decrease of $37 million for the three months ended March 31, 2021 and 2020, respectively. As prescribed by U.S. GAAP, changes in the fair value of commercial mortgage and other loans held for investment in our general account, other than when associated with impairments, are not recognized in income in the current period, while the impact of these changes in fair value are reflected as a change in the liability to fully participating contractholders in the current period.
The net impacts, for the Retirement segment, of changes in experience-rated contractholder liabilities and investment gains (losses) on assets supporting experience-rated contractholder liabilities and other related investments reflect timing differences between the recognition of the mark-to-market adjustments and the recognition of the recovery of these adjustments in future periods through subsequent increases in asset values or reductions in crediting rates on contractholder liabilities for partially participating products. These impacts also reflect the difference between the fair value of the underlying commercial mortgages and other loans and the amortized cost, less any valuation allowance, of these loans, as described above.
Valuation of Assets and Liabilities
Fair Value of Assets and Liabilities
The authoritative guidance related to fair value measurement establishes a framework that includes a three-level hierarchy used to classify the inputs used in measuring fair value. The level in the hierarchy within which the fair value falls is determined based on the lowest level input that is significant to the measurement. The fair values of assets and liabilities classified as Level 3 include at least one significant unobservable input in the measurement. See Note 6 to the Unaudited Interim Consolidated Financial Statements for an additional description of the valuation hierarchy levels as well as for the balances of assets and liabilities measured at fair value on a recurring basis by hierarchy level presented on a consolidated basis.
The table below presents the balances of assets and liabilities measured at fair value on a recurring basis, as of the periods indicated, and the portion of such assets and liabilities that are classified in Level 3 of the valuation hierarchy. The table also provides details about these assets and liabilities excluding those held in the Closed Block division. We believe the amounts excluding the Closed Block division are most relevant to an understanding of our operations that are pertinent to investors in Prudential Financial because substantially all Closed Block division assets support obligations and liabilities relating to the Closed Block policies only. See Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information on the Closed Block.
| | | | As of March 31, 2020 | | As of December 31, 2019 | | As of March 31, 2021 | | As of December 31, 2020 |
| | PFI excluding Closed Block Division | | Closed Block Division | | PFI excluding Closed Block Division | | Closed Block Division | | PFI excluding Closed Block Division | | Closed Block
Division | | PFI excluding Closed Block Division | | Closed Block
Division |
| | Total at Fair Value | | Total Level 3(1) | | Total at Fair Value | | Total Level 3(1) | | Total at Fair Value | | Total Level 3(1) | | Total at Fair Value | | Total Level 3(1) | | Total at
Fair Value | | Total
Level 3(1) | | Total at
Fair Value | | Total
Level 3(1) | | Total at
Fair Value | | Total
Level 3(1) | | Total at
Fair Value | | Total
Level 3(1) |
| | (in millions) | | (in millions) |
Fixed maturities, available-for- sale | $ | 349,179 |
| | $ | 4,525 |
| | $ | 40,535 |
| | $ | 1,059 |
| | $ | 349,720 |
| | $ | 3,570 |
| | $ | 41,376 |
| | $ | 745 |
| Fixed maturities, available-for- sale | $ | 339,679 | | | $ | 5,105 | | | $ | 38,917 | | | $ | 1,167 | | | $ | 370,681 | | | $ | 5,005 | | | $ | 42,224 | | | $ | 1,038 | |
| Assets supporting experience-rated contractholder liabilities: | | | | | | | | | | | | | | | | Assets supporting experience-rated contractholder liabilities: | |
| Fixed maturities | 19,031 |
| | 804 |
| | 0 |
| | 0 |
| | 19,530 |
| | 730 |
| | 0 |
| | 0 |
| Fixed maturities | 21,302 | | | 776 | | | 0 | | | 0 | | | 21,414 | | | 615 | | | 0 | | | 0 | |
| Equity securities | 1,466 |
| | 0 |
| | 0 |
| | 0 |
| | 1,790 |
| | 0 |
| | 0 |
| | 0 |
| Equity securities | 2,296 | | | 0 | | | 0 | | | 0 | | | 2,043 | | | 0 | | | 0 | | | 0 | |
| All other(2) | 893 |
| | 7 |
| | 0 |
| | 0 |
| | 261 |
| | 0 |
| | 0 |
| | 0 |
| All other(2) | 398 | | | 20 | | | 0 | | | 0 | | | 619 | | | 20 | | | 0 | | | 0 | |
| Subtotal | 21,390 |
| | 811 |
| | 0 |
| | 0 |
| | 21,581 |
| | 730 |
| | 0 |
| | 0 |
| Subtotal | 23,996 | | | 796 | | | 0 | | | 0 | | | 24,076 | | | 635 | | | 0 | | | 0 | |
| Fixed maturities, trading | 3,403 |
| | 240 |
| | 218 |
| | 9 |
| | 3,628 |
| | 275 |
| | 256 |
| | 12 |
| Fixed maturities, trading | 5,932 | | | 230 | | | 270 | | | 12 | | | 3,636 | | | 230 | | | 278 | | | 13 | |
| Equity securities | 4,348 |
| | 527 |
| | 1,691 |
| | 67 |
| | 5,140 |
| | 557 |
| | 2,245 |
| | 76 |
| Equity securities | 5,785 | | | 632 | | | 2,563 | | | 96 | | | 5,653 | | | 576 | | | 2,345 | | | 84 | |
Commercial mortgage and other loans | 670 |
| | 0 |
| | 0 |
| | 0 |
| | 228 |
| | 0 |
| | 0 |
| | 0 |
| Commercial mortgage and other loans | 500 | | | 0 | | | 0 | | | 0 | | | 1,092 | | | 0 | | | 0 | | | 0 | |
| Other invested assets(3) | 3,763 |
| | 581 |
| | 1 |
| | 0 |
| | 1,433 |
| | 567 |
| | 0 |
| | 0 |
| Other invested assets(3) | 2,225 | | | 378 | | | 0 | | | 0 | | | 2,268 | | | 366 | | | 3 | | | 0 | |
| Short-term investments | 6,013 |
| | 43 |
| | 99 |
| | 10 |
| | 3,789 |
| | 119 |
| | 147 |
| | 36 |
| Short-term investments | 4,207 | | | 342 | | | 97 | | | 54 | | | 6,222 | | | 146 | | | 88 | | | 31 | |
| Cash equivalents | 20,640 |
| | 1 |
| | 532 |
| | 0 |
| | 8,855 |
| | 99 |
| | 151 |
| | 32 |
| Cash equivalents | 6,382 | | | 4 | | | 619 | | | 0 | | | 5,241 | | | 1 | | | 241 | | | 0 | |
| Other assets | 382 |
| | 382 |
| | 0 |
| | 0 |
| | 113 |
| | 113 |
| | 0 |
| | 0 |
| Other assets | 144 | | | 144 | | | 0 | | | 0 | | | 268 | | | 268 | | | 0 | | | 0 | |
| Separate account assets | 249,044 |
| | 1,528 |
| | 0 |
| | 0 |
| | 288,724 |
| | 1,717 |
| | 0 |
| | 0 |
| Separate account assets | 302,905 | | | 1,306 | | | 0 | | | 0 | | | 304,270 | | | 1,821 | | | 0 | | | 0 | |
| Total assets | $ | 658,832 |
| | $ | 8,638 |
| | $ | 43,076 |
| | $ | 1,145 |
| | $ | 683,211 |
| | $ | 7,747 |
| | $ | 44,175 |
| | $ | 901 |
| Total assets | $ | 691,755 | | | $ | 8,937 | | | $ | 42,466 | | | $ | 1,329 | | | $ | 723,407 | | | $ | 9,048 | | | $ | 45,179 | | | $ | 1,166 | |
| Future policy benefits | $ | 27,935 |
| | $ | 27,935 |
| | $ | 0 |
| | $ | 0 |
| | $ | 12,831 |
| | $ | 12,831 |
| | $ | 0 |
| | $ | 0 |
| Future policy benefits | $ | 11,314 | | | $ | 11,314 | | | $ | 0 | | | $ | 0 | | | $ | 18,879 | | | $ | 18,879 | | | $ | 0 | | | $ | 0 | |
| Policyholders’ account balances | 1,206 |
| | 1,206 |
| | 0 |
| | 0 |
| | 1,316 |
| | 1,316 |
| | 0 |
| | 0 |
| Policyholders’ account balances | 2,171 | | | 2,171 | | | 0 | | | 0 | | | 1,914 | | | 1,914 | | | 0 | | | 0 | |
| Other liabilities(3) | 925 |
| | 47 |
| | 25 |
| | 0 |
| | 928 |
| | 105 |
| | 8 |
| | 0 |
| Other liabilities(3) | 1,152 | | | 0 | | | 3 | | | 0 | | | 385 | | | 0 | | | 0 | | | 0 | |
Notes issued by consolidated variable interest entities (“VIEs”) | 799 |
| | 799 |
| | 0 |
| | 0 |
| | 800 |
| | 800 |
| | 0 |
| | 0 |
| |
| | Total liabilities | $ | 30,865 |
| | $ | 29,987 |
| | $ | 25 |
| | $ | 0 |
| | $ | 15,875 |
| | $ | 15,052 |
| | $ | 8 |
| | $ | 0 |
| Total liabilities | $ | 14,637 | | | $ | 13,485 | | | $ | 3 | | | $ | 0 | | | $ | 21,178 | | | $ | 20,793 | | | $ | 0 | | | $ | 0 | |
__________
| |
(1) | Level 3 assets expressed as a percentage of total assets measured at fair value on a recurring basis for PFI excluding the Closed Block division and for the Closed Block division totaled 1.3% and 2.7%, respectively, as of March 31, 2020, and 1.1% and 2.0%, respectively, as of December 31, 2019. |
| |
(2) | “All other” represents cash equivalents and short-term investments. |
| |
(3) | “Other invested assets” and “Other liabilities” primarily include derivatives. The amounts include the impact of netting subject to master netting agreements. |
(1)Level 3 assets expressed as a percentage of total assets measured at fair value on a recurring basis for PFI excluding the Closed Block division and for the Closed Block division totaled 1.3% and 3.1%, respectively, as of March 31, 2021, and 1.3% and 2.6%, respectively, as of December 31, 2020.
(2)“All other” represents cash equivalents and short-term investments.
(3)“Other invested assets” and “Other liabilities” primarily include derivatives. The amounts include the impact of netting subject to master netting agreements.
The determination of fair value, which for certain assets and liabilities is dependent on the application of estimates and assumptions, can have a significant impact on our results of operations and may require the application of a greater degree of judgment depending on market conditions, as the ability to value assets and liabilities can be significantly impacted by a decrease in market activity or a lack of transactions executed in an orderly manner. The continued impact of the COVID-19 pandemic on the global economy may have adverse effects on the valuation of assets and liabilities. Due to the highly uncertain nature of these conditions, it is not possible to estimate the overall impacts at this time.
Fixed maturity securities included in Level 3 in our fair value hierarchy are generally priced based on internally-developed valuations or indicative broker quotes. For certain private fixed maturity and equity securities, the internal valuation models use significant unobservable inputs and, accordingly, such securities are included in Level 3 in our fair value hierarchy. Level 3 fixed maturity securities for PFI excluding the Closed Block division included approximately $1.9$1.6 billion of public fixed maturities as of March 31, 2020,2021, with values primarily based on indicative broker quotes, and approximately $3.6$4.6 billion of private fixed maturities, with values primarily based on internally-developed models. Significant unobservable inputs used in their valuation included: issue specific spread adjustments, material non-public financial information, management judgment, estimation of future earnings and cash flows, default rate assumptions, liquidity assumptions and indicative quotes from market makers. Separate account assets included in Level 3 in our fair value hierarchy primarily include corporate securities and commercial mortgage loans.
Embedded derivatives reported in “Future policy benefits” and “Policyholders’ account balances” that are included in level 3 of our fair value hierarchy represent general account liabilities pertaining to living benefit features of the Company’s
variable annuity contracts and the index-linked interest credited features on certain life and annuity products. These are carried at fair value with changes in fair value included in “Realized investment gains (losses), net.” These embedded derivatives are valued using internally-developed models that require significant estimates and assumptions developed by management. Changes in these estimates and assumptions can have a significant impact on the results of our operations.
For additional information about the valuation techniques and the key estimates and assumptions used in our determination of fair value, see Note 6 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020.
General Account Investments
Portfolio Composition
Our investment portfolio consists of public and private fixed maturity securities, commercial mortgage and other loans, policy loans and non-coupon investments, which include equity securities and other invested assets such as limited partnerships and limited liability companies (“LPs/LLCs”), real estate held through direct ownership, derivative instruments and seed money investments in separate accounts. The composition of our general account reflects, within the discipline provided by our risk management approach, our need for competitive results and the selection of diverse investment alternatives available primarily through our PGIM segment. The size of our portfolio enables us to invest in asset classes that may be unavailable to the typical investor.
The following tables set forth the composition of our general account investment portfolio apportioned between PFI excluding the Closed Block division and the Closed Block division, as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2021 |
| | | PFI Excluding
Closed Block Division | | Closed Block
Division | | Total |
| | | ($ in millions) |
| Fixed maturities: | | | | | | | | |
| Public, available-for-sale, at fair value | | $ | 280,849 | | | 61.7 | % | | $ | 26,863 | | | $ | 307,712 | |
| Public, held-to-maturity, at amortized cost, net of allowance | | 1,608 | | | 0.4 | | | 0 | | | 1,608 | |
| Private, available-for-sale, at fair value | | 58,268 | | | 12.8 | | | 12,054 | | | 70,322 | |
| Private, held-to-maturity, at amortized cost, net of allowance | | 193 | | | 0.1 | | | 0 | | | 193 | |
| Fixed maturities, trading, at fair value | | 5,732 | | | 1.3 | | | 271 | | | 6,003 | |
| Assets supporting experience-rated contractholder liabilities, at fair value | | 24,027 | | | 5.3 | | | 0 | | | 24,027 | |
| Equity securities, at fair value | | 5,227 | | | 1.1 | | | 2,563 | | | 7,790 | |
| Commercial mortgage and other loans, at book value, net of allowance | | 55,738 | | | 12.3 | | | 8,297 | | | 64,035 | |
| Policy loans, at outstanding balance | | 7,006 | | | 1.4 | | | 3,984 | | | 10,990 | |
| Other invested assets, net of allowance(1) | | 11,174 | | | 2.5 | | | 3,730 | | | 14,904 | |
| Short-term investments, net of allowance | | 5,135 | | | 1.1 | | | 132 | | | 5,267 | |
| Total general account investments | | 454,957 | | | 100.0 | % | | 57,894 | | | 512,851 | |
| Invested assets of other entities and operations(2) | | 5,978 | | | | | 0 | | | 5,978 | |
| Total investments | | $ | 460,935 | | | | | $ | 57,894 | | | $ | 518,829 | |
|
| | | | | | | | | | | | | | | |
| | | March 31, 2020 |
| | | PFI Excluding Closed Block Division | | Closed Block Division | | Total |
| | | ($ in millions) |
| Fixed maturities: | | | | | | | | |
| Public, available-for-sale, at fair value | | $ | 298,348 |
| | 65.1 | % | | $ | 29,226 |
| | $ | 327,574 |
|
| Public, held-to-maturity, at amortized cost, net of allowance | | 1,672 |
| | 0.4 |
| | 0 |
| | 1,672 |
|
| Private, available-for-sale, at fair value | | 50,289 |
| | 11.0 |
| | 11,309 |
| | 61,598 |
|
| Private, held-to-maturity, at amortized cost, net of allowance | | 223 |
| | 0.1 |
| | 0 |
| | 223 |
|
| Fixed maturities, trading, at fair value | | 2,254 |
| | 0.5 |
| | 218 |
| | 2,472 |
|
| Assets supporting experience-rated contractholder liabilities, at fair value | | 21,580 |
| | 4.7 |
| | 0 |
| | 21,580 |
|
| Equity securities, at fair value | | 3,921 |
| | 0.8 |
| | 1,691 |
| | 5,612 |
|
| Commercial mortgage and other loans, at book value, net of allowance | | 54,423 |
| | 11.9 |
| | 8,439 |
| | 62,862 |
|
| Policy loans, at outstanding balance | | 7,889 |
| | 1.7 |
| | 4,210 |
| | 12,099 |
|
| Other invested assets, net of allowance(1) | | 9,426 |
| | 2.1 |
| | 3,336 |
| | 12,762 |
|
| Short-term investments, net of allowance | | 7,767 |
| | 1.7 |
| | 178 |
| | 7,945 |
|
| Total general account investments | | 457,792 |
| | 100.0 | % | | 58,607 |
| | 516,399 |
|
| Invested assets of other entities and operations(2) | | 8,277 |
| |
|
| | 0 |
| | 8,277 |
|
| Total investments | | $ | 466,069 |
| |
|
| | $ | 58,607 |
| | $ | 524,676 |
|
| | | | | December 31, 2019 | | | December 31, 2020 |
| | | PFI Excluding Closed Block Division | | Closed Block Division | | Total | | | PFI Excluding
Closed Block Division | | Closed Block
Division | | Total |
| | | ($ in millions) | | | ($ in millions) |
| Fixed maturities: | | | | | | | | | Fixed maturities: | |
| Public, available-for-sale, at fair value | | $ | 296,382 |
| | 64.9 | % | | $ | 29,011 |
| | $ | 325,393 |
| Public, available-for-sale, at fair value | | $ | 309,813 | | | 63.7 | % | | $ | 29,475 | | | $ | 339,288 | |
| Public, held-to-maturity, at amortized cost | | 1,705 |
| | 0.4 |
| | 0 |
| | 1,705 |
| |
| Public, held-to-maturity, at amortized cost, net of allowance | | Public, held-to-maturity, at amortized cost, net of allowance | | 1,719 | | | 0.4 | | | 0 | | | 1,719 | |
| Private, available-for-sale, at fair value | | 52,750 |
| | 11.6 |
| | 12,365 |
| | 65,115 |
| Private, available-for-sale, at fair value | | 60,224 | | | 12.4 | | | 12,749 | | | 72,973 | |
| Private, held-to-maturity, at amortized cost | | 228 |
| | 0.1 |
| | 0 |
| | 228 |
| |
| Private, held-to-maturity, at amortized cost, net of allowance | | Private, held-to-maturity, at amortized cost, net of allowance | | 211 | | | 0.1 | | | 0 | | | 211 | |
| Fixed maturities, trading, at fair value | | 2,467 |
| | 0.5 |
| | 256 |
| | 2,723 |
| Fixed maturities, trading, at fair value | | 3,425 | | | 0.7 | | | 277 | | | 3,702 | |
| Assets supporting experience-rated contractholder liabilities, at fair value | | 21,597 |
| | 4.7 |
| | 0 |
| | 21,597 |
| Assets supporting experience-rated contractholder liabilities, at fair value | | 24,115 | | | 5.0 | | | 0 | | | 24,115 | |
| Equity securities, at fair value | | 4,586 |
| | 1.0 |
| | 2,245 |
| | 6,831 |
| Equity securities, at fair value | | 5,108 | | | 1.1 | | | 2,345 | | | 7,453 | |
| Commercial mortgage and other loans, at book value, net of allowance | | 54,671 |
| | 12.0 |
| | 8,629 |
| | 63,300 |
| Commercial mortgage and other loans, at book value, net of allowance | | 55,892 | | | 11.5 | | | 8,421 | | | 64,313 | |
| Policy loans, at outstanding balance | | 7,832 |
| | 1.7 |
| | 4,264 |
| | 12,096 |
| Policy loans, at outstanding balance | | 7,207 | | | 1.5 | | | 4,064 | | | 11,271 | |
| Other invested assets(1) | | 9,210 |
| | 2.0 |
| | 3,334 |
| | 12,544 |
| |
| Short-term investments | | 5,223 |
| | 1.1 |
| | 227 |
| | 5,450 |
| |
| Other invested assets, net of allowance(1) | | Other invested assets, net of allowance(1) | | 10,716 | | | 2.1 | | | 3,610 | | | 14,326 | |
| Short-term investments, net of allowance | | Short-term investments, net of allowance | | 7,640 | | | 1.5 | | | 124 | | | 7,764 | |
| Total general account investments | | 456,651 |
| | 100.0 | % | | 60,331 |
| | 516,982 |
| Total general account investments | | 486,070 | | | 100.0 | % | | 61,065 | | | 547,135 | |
| Invested assets of other entities and operations(2) | | 5,778 |
| |
| | 0 |
| | 5,778 |
| Invested assets of other entities and operations(2) | | 6,485 | | | | | 0 | | | 6,485 | |
| Total investments | | $ | 462,429 |
| |
| | $ | 60,331 |
| | $ | 522,760 |
| Total investments | | $ | 492,555 | | | $ | 61,065 | | | $ | 553,620 | |
__________
| |
(1) | Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments and other miscellaneous investments. For additional information regarding these investments, see “—Other Invested Assets” below. |
| |
(2) | Includes invested assets of our investment management and derivative operations. Excludes assets of our investment management operations that are managed for third-parties and those assets classified as “Separate account assets” on our balance sheet. For additional information regarding these investments, see “—Invested Assets of Other Entities and Operations” below. |
(1) Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments and other miscellaneous investments. For additional information regarding these investments, see “—Other Invested Assets” below.
(2)Includes invested assets of our investment management and derivative operations. Excludes assets of our investment management operations that are managed for third-parties and those assets classified as “Separate account assets” on our balance sheet. For additional information regarding these investments, see “—Invested Assets of Other Entities and Operations” below.
The increasedecrease in general account investments attributable to PFI excluding the Closed Block division in the first three months of 20202021 was primarily due to an increase in interest rates and the translation impact of the U.S. dollar strengthening against the yen, partially offset by the reinvestment of net investment income and net business inflows, partially offset by a decrease in fair value due to overall interest rate increases driven by credit spread widening that was only partially offset by other rate declines.income. For information regarding the methodology used in determining the fair value of our fixed maturities, see Note 6 to the Unaudited Interim Consolidated Financial Statements.
As of both March 31, 20202021 and December 31, 2019, 42%2020, 44% and 43%, respectively, of our general account investments attributable to PFI excluding the Closed Block division related to our Japanese insurance operations. The following table sets forth the composition of the investments of our Japanese insurance operations’ general account, as of the dates indicated:
| | | | | March 31, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| | | (in millions) | | (in millions) |
| Fixed maturities: | | | | | Fixed maturities: | |
| Public, available-for-sale, at fair value | | $ | 144,121 |
| | $ | 142,220 |
| Public, available-for-sale, at fair value | | $ | 142,899 | | | $ | 154,261 | |
| Public, held-to-maturity, at amortized cost, net of allowance | | 1,672 |
| | 1,705 |
| Public, held-to-maturity, at amortized cost, net of allowance | | 1,608 | | 1,719 | |
| Private, available-for-sale, at fair value | | 18,290 |
| | 19,189 |
| Private, available-for-sale, at fair value | | 20,955 | | 21,748 | |
| Private, held-to-maturity, at amortized cost, net of allowance | | 223 |
| | 228 |
| Private, held-to-maturity, at amortized cost, net of allowance | | 193 | | 211 | |
| Fixed maturities, trading, at fair value | | 431 |
| | 492 |
| Fixed maturities, trading, at fair value | | 530 | | 550 |
| Assets supporting experience-rated contractholder liabilities, at fair value | | 2,463 |
| | 2,777 |
| Assets supporting experience-rated contractholder liabilities, at fair value | | 3,255 | | 3,149 | |
| Equity securities, at fair value | | 1,855 |
| | 2,185 |
| Equity securities, at fair value | | 2,186 | | 2,134 | |
| Commercial mortgage and other loans, at book value, net of allowance | | 18,987 |
| | 19,138 |
| Commercial mortgage and other loans, at book value, net of allowance | | 20,026 | | 19,915 | |
| Policy loans, at outstanding balance | | 2,952 |
| | 2,859 |
| Policy loans, at outstanding balance | | 2,905 | | 3,078 | |
| Other invested assets(1) | | 2,618 |
| | 2,187 |
| Other invested assets(1) | | 2,745 | | 3,045 | |
| Short-term investments | | 519 |
| | 165 |
| |
| Short-term investments, net of allowance | | Short-term investments, net of allowance | | 775 | | 438 | |
| Total Japanese general account investments | | $ | 194,131 |
| | $ | 193,145 |
| Total Japanese general account investments | | $ | 198,077 | | | $ | 210,248 | |
__________
| |
(1) | Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments and other miscellaneous investments. |
(1)Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments and other miscellaneous investments.
The increasedecrease in general account investments related to our Japanese insurance operations in the first three months of 20202021 was primarily attributabledue to an increase in U.S. interest rates and the translation impact of the U.S. dollar strengthening against the yen, partially offset by the reinvestment of net investment income and portfolio growth as a result of net business inflows, partially offset by a decrease in fair value due to overall interest rate increases driven by credit spread widening that was only partially offset by other rate declines.inflows.
As of March 31, 2020,2021, our Japanese insurance operations had $80.1$85.1 billion, at carrying value, of investments denominated in U.S. dollars, including $1.9 billion that were hedged to yen through third-party derivative contracts and $66.3$71.0 billion that support liabilities denominated in U.S. dollars, with the remainder as part of the hedging ourof foreign currency exchange rate exposure to U.S. dollar-equivalent equity. As of December 31, 2019,2020, our Japanese insurance operations had $77.1$89.2 billion, at carrying value, of investments denominated in U.S. dollars, including $2.1$1.8 billion that were hedged to yen through third-party derivative contracts and $62.4$74.8 billion that support liabilities denominated in U.S. dollars, with the remainder as part of the hedging ourof foreign currency exchange rate exposure of U.S. dollar-equivalent equity. The $3.0$4.1 billion increasedecrease in the carrying value of U.S. dollar-denominated investments from December 31, 20192020 was primarily attributable to a decreasean increase in the U.S. treasury bond rates, partially offset by reinvestment of net investment income and portfolio growth as a result of net business inflows and reinvestment of net investment income.inflows.
Our Japanese insurance operations had $8.5$9.8 billion and $9.9$10.2 billion, at carrying value, of investments denominated in Australian dollars that support liabilities denominated in Australian dollars as of March 31, 20202021 and December 31, 2019,2020, respectively. The $1.4$0.4 billion decrease in the carrying value of Australian dollar-denominated investments from December 31, 20192020 was primarily attributable to the translation impact of theincrease in Australian dollar weakening against the U.S. dollar and run off of the portfolio.government bond rates. For additional information regarding U.S. and Australian dollar investments held in our Japanese insurance operations and a discussion of our yen hedging strategy, see “—Results of Operations by Segment—Impact of Foreign Currency Exchange Rates” above.
Investment Results
The following tables set forth the investment results of our general account apportioned between PFI excluding the Closed Block division, and the Closed Block division, for the periods indicated. The yields are based on net investment income as reported under U.S. GAAP and as such do not include certain interest-related items, such as settlements of duration management swaps which are included in “Realized investment gains (losses), net.”
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| PFI Excluding Closed Block Division and Japanese Operations | | Japanese Insurance Operations | | PFI Excluding Closed Block Division | | Closed Block Division | | Total(5) |
| Yield(1) | | Amount | | Yield(1) | | Amount | | Yield(1) | | Amount | | Amount | | Amount |
| ($ in millions) |
| Fixed maturities(2) | 4.51 | % | | $ | 1,787 | | | 2.67 | % | | $ | 969 | | | 3.63 | % | | $ | 2,756 | | | $ | 364 | | | $ | 3,120 | |
| Assets supporting experience-rated contractholder liabilities | 2.84 | | | 148 | | | 1.14 | | | 9 | | | 2.61 | | | 157 | | | 0 | | | 157 | |
| Equity securities | 0.87 | | | 7 | | | 0.80 | | | 4 | | | 0.84 | | | 11 | | | 12 | | | 23 | |
| Commercial mortgage and other loans | 3.84 | | | 342 | | | 3.73 | | | 186 | | | 3.80 | | | 528 | | | 85 | | | 613 | |
| Policy loans | 4.95 | | | 51 | | | 4.76 | | | 35 | | | 4.87 | | | 86 | | | 58 | | | 144 | |
| Short-term investments and cash equivalents | 0.30 | | | 8 | | | 0.34 | | | 1 | | | 0.30 | | | 9 | | | 0 | | | 9 | |
| Gross investment income | 4.02 | | | 2,343 | | | 2.76 | | | 1,204 | | | 3.48 | | | 3,547 | | | 519 | | | 4,066 | |
| Investment expenses | (0.14) | | | (70) | | | (0.13) | | | (56) | | | (0.13) | | | (126) | | | (31) | | | (157) | |
| Investment income after investment expenses | 3.88 | % | | 2,273 | | | 2.63 | % | | 1,148 | | | 3.35 | % | | 3,421 | | | 488 | | | 3,909 | |
| Other invested assets(3) | | | 256 | | | | | 93 | | | | | 349 | | | 98 | | | 447 | |
| Investment results of other entities and operations(4) | | | 26 | | | | | 0 | | | | | 26 | | | 0 | | | 26 | |
| Total investment income | | | $ | 2,555 | | | | | $ | 1,241 | | | | | $ | 3,796 | | | $ | 586 | | | $ | 4,382 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | PFI Excluding Closed Block Division and Japanese Operations | | Japanese Insurance Operations | | PFI Excluding Closed Block Division | | Closed Block Division | | Total(5) |
| | Yield(1) | | Amount | | Yield(1) | | Amount | | Yield(1) | | Amount | | Amount | | Amount |
| | ($ in millions) |
| Fixed maturities(2) | 4.52 | % | | $ | 1,895 |
| | 2.76 | % | | $ | 946 |
| | 3.73 | % | | $ | 2,841 |
| | $ | 399 |
| | $ | 3,240 |
|
| Assets supporting experience-rated contractholder liabilities | 3.39 |
| | 160 |
| | 3.20 |
| | 21 |
| | 3.37 |
| | 181 |
| | 0 |
| | 181 |
|
| Equity securities | 2.00 |
| | 11 |
| | 1.10 |
| | 6 |
| | 1.57 |
| | 17 |
| | 12 |
| | 29 |
|
| Commercial mortgage and other loans | 4.01 |
| | 355 |
| | 3.99 |
| | 189 |
| | 4.00 |
| | 544 |
| | 93 |
| | 637 |
|
| Policy loans | 5.12 |
| | 63 |
| | 3.99 |
| | 29 |
| | 4.70 |
| | 92 |
| | 61 |
| | 153 |
|
| Short-term investments and cash equivalents | 1.28 |
| | 71 |
| | 1.62 |
| | 7 |
| | 1.31 |
| | 78 |
| | 3 |
| | 81 |
|
| Gross investment income | 4.06 |
| | 2,555 |
| | 2.90 |
| | 1,198 |
| | 3.60 |
| | 3,753 |
| | 568 |
| | 4,321 |
|
| Investment expenses | (0.12 | ) | | (85 | ) | | (0.14 | ) | | (68 | ) | | (0.13 | ) | | (153 | ) | | (43 | ) | | (196 | ) |
| Investment income after investment expenses | 3.94 | % | | 2,470 |
| | 2.76 | % | | 1,130 |
| | 3.47 | % | | 3,600 |
| | 525 |
| | 4,125 |
|
| Other invested assets(3) | | | 81 |
| | | | (27 | ) | | | | 54 |
| | 20 |
| | 74 |
|
| Investment results of other entities and operations(4) | | | 3 |
| | | | 0 |
| | | | 3 |
| | 0 |
| | 3 |
|
| Total investment income | | | $ | 2,554 |
| | | | $ | 1,103 |
| | | | $ | 3,657 |
| | $ | 545 |
| | $ | 4,202 |
|
| | | | Three Months Ended March 31, 2019 | | Three Months Ended March 31, 2020 |
| | PFI Excluding Closed Block Division and Japanese Operations | | Japanese Insurance Operations | | PFI Excluding Closed Block Division | | Closed Block Division | | Total(5) | | PFI Excluding Closed Block Division and Japanese Operations | | Japanese Insurance Operations | | PFI Excluding Closed Block Division | | Closed Block Division | | Total(5) |
| | Yield(1) | | Amount | | Yield(1) | | Amount | | Yield(1) | | Amount | | Amount | | Amount | | Yield(1) | | Amount | | Yield(1) | | Amount | | Yield(1) | | Amount | | Amount | | Amount |
| | ($ in millions) | | ($ in millions) |
| Fixed maturities(2) | 4.61 | % | | $ | 1,848 |
| | 2.83 | % | | $ | 937 |
| | 3.80 | % | | $ | 2,785 |
| | $ | 419 |
| | $ | 3,204 |
| Fixed maturities(2) | 4.52 | % | | $ | 1,895 | | | 2.76 | % | | $ | 946 | | | 3.73 | % | | $ | 2,841 | | | $ | 399 | | | $ | 3,240 | |
| Assets supporting experience-rated contractholder liabilities | 3.50 |
| | 165 |
| | 3.14 |
| | 20 |
| | 3.46 |
| | 185 |
| | 0 |
| | 185 |
| Assets supporting experience-rated contractholder liabilities | 3.39 | | | 160 | | | 3.20 | | | 21 | | | 3.37 | | | 181 | | | 0 | | | 181 | |
| Equity securities | 2.37 |
| | 12 |
| | 1.43 |
| | 7 |
| | 1.90 |
| | 19 |
| | 11 |
| | 30 |
| Equity securities | 2.00 | | | 11 | | | 1.10 | | | 6 | | | 1.57 | | | 17 | | | 12 | | | 29 | |
| Commercial mortgage and other loans | 3.98 |
| | 332 |
| | 3.81 |
| | 165 |
| | 3.92 |
| | 497 |
| | 95 |
| | 592 |
| Commercial mortgage and other loans | 4.01 | | | 355 | | | 3.99 | | | 189 | | | 4.00 | | | 544 | | | 93 | | | 637 | |
| Policy loans | 5.11 |
| | 62 |
| | 3.85 |
| | 26 |
| | 4.66 |
| | 88 |
| | 63 |
| | 151 |
| Policy loans | 5.12 | | | 63 | | | 3.99 | | | 29 | | | 4.70 | | | 92 | | | 61 | | | 153 | |
| Short-term investments and cash equivalents | 2.70 |
| | 95 |
| | 2.90 |
| | 8 |
| | 2.71 |
| | 103 |
| | 9 |
| | 112 |
| Short-term investments and cash equivalents | 1.28 | | | 71 | | | 1.62 | | | 7 | | | 1.31 | | | 78 | | | 3 | | | 81 | |
| Gross investment income | 4.31 |
| | 2,514 |
| | 2.94 |
| | 1,163 |
| | 3.76 |
| | 3,677 |
| | 597 |
| | 4,274 |
| Gross investment income | 4.06 | | | 2,555 | | | 2.90 | | | 1,198 | | | 3.60 | | | 3,753 | | | 568 | | | 4,321 | |
| Investment expenses | (0.13 | ) | | (106 | ) | | (0.13 | ) | | (68 | ) | | (0.13 | ) | | (174 | ) | | (54 | ) | | (228 | ) | Investment expenses | (0.12) | | | (85) | | | (0.14) | | | (68) | | | (0.13) | | | (153) | | | (43) | | | (196) | |
| Investment income after investment expenses | 4.18 | % | | 2,408 |
| | 2.81 | % | | 1,095 |
| | 3.63 | % | | 3,503 |
| | 543 |
| | 4,046 |
| Investment income after investment expenses | 3.94 | % | | 2,470 | | | 2.76 | % | | 1,130 | | | 3.47 | % | | 3,600 | | | 525 | | | 4,125 | |
| Other invested assets(3) | | | 38 |
| | | | 51 |
| | | | 89 |
| | 20 |
| | 109 |
| Other invested assets(3) | | | 81 | | | | | (27) | | | | | 54 | | | 20 | | | 74 | |
| Investment results of other entities and operations(4) | | | 61 |
| | | | 0 |
| | | | 61 |
| | 0 |
| | 61 |
| Investment results of other entities and operations(4) | | 3 | | | 0 | | | 3 | | | 0 | | | 3 | |
| Total investment income | | | $ | 2,507 |
| | | | $ | 1,146 |
| | | | $ | 3,653 |
| | $ | 563 |
| | $ | 4,216 |
| Total investment income | | $ | 2,554 | | | $ | 1,103 | | | $ | 3,657 | | | $ | 545 | | | $ | 4,202 | |
__________
| |
(1) | For interim periods, yields are annualized. The denominator in the yield percentage is based on quarterly average carrying values for all asset types except for fixed maturities which are based on amortized cost, net of allowance. Amounts for fixed maturities, short-term investments and cash equivalents are also netted for securities lending activity (i.e., income netted for rebate expenses and asset values netted for securities lending liabilities). A yield is not presented for other invested assets as it is not considered a meaningful measure of investment performance. Yields exclude investment income and assets related to other invested assets. |
| |
(2) | Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading, which are included in other invested assets. |
| |
(3) | Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments, fixed maturities classified as trading and other miscellaneous investments. |
| |
(4) | Includes net investment income of our investment management operations. |
| |
(5) | The total yield was 3.55% and 3.71% for the three months ended March 31, 2020 and 2019, respectively. |
(1)For interim periods, yields are annualized. The denominator in the yield percentage is based on quarterly average carrying values for all asset types except for fixed maturities which are based on amortized cost, net of allowance. Amounts for fixed maturities, short-term investments and cash equivalents are also netted for securities lending activity (i.e., income netted for rebate expenses and asset values netted for securities lending liabilities). A yield is not presented for other invested assets as it is not considered a meaningful measure of investment performance. Yields exclude investment income and assets related to other invested assets.
(2)Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading, which are included in other invested assets.
(3)Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments, fixed maturities classified as trading and other miscellaneous investments.
(4)Includes net investment income of our investment management operations.
(5)The total yield was 3.42% and 3.55% for the three months ended March 31, 2021 and 2020, respectively.
The decrease in investment income after investment expenses yield attributable to our general account investments, excluding both the Closed Block division and the Japanese insurance operations’ portfolio, for the three months ended March 31, 2020,2021, compared to the three months ended March 31, 2019,2020, was primarily the result of lower fixed income reinvestment rates and lower returns on short-term investments based on a decrease in short-term rates.
The decrease in investment income after investment expenses yield attributable to the Japanese insurance operations’ portfolio, for the three months ended March 31, 2020,2021, compared to the three months ended March 31, 2019,2020, was primarily the result of lower fixed income reinvestment rates.
Both the U.S. dollar-denominated and Australian dollar-denominated fixed maturities that are not hedged to yen through third-party derivative contracts provide a yield that is substantially higher than the yield on comparable yen-denominated fixed maturities. The average amortized cost of U.S. dollar-denominated fixed maturities that are not hedged to yen through third-party derivative contracts was approximately $51.9$57.4 billion and $44.9$51.9 billion for the three months ended March 31, 20202021 and 2019,2020, respectively. The majority of U.S. dollar-denominated fixed maturities support liabilities that are denominated in U.S. dollars. The average amortized cost of Australian dollar-denominated fixed maturities that are not hedged to yen through third-party derivative contracts was approximately $7.9$8.5 billion and $9.1$7.9 billion for the three months ended March 31, 20202021 and 2019,2020, respectively. The majority of Australian dollar-denominated fixed maturities support liabilities that are denominated in Australian dollars. For additional information regarding U.S. and Australian dollar investments held in our Japanese insurance operations, see “—Results of Operations by Segment—Impact of Foreign Currency Exchange Rates” above.
Realized Investment Gains and Losses
The following table sets forth “Realized investment gains (losses), net” of our general account apportioned between PFI excluding Closed Block division, and the Closed Block division, by investment type as well as “Charges related to realized investment gains (losses), net” and adjustments, for the periods indicated:
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| | (in millions) |
| PFI excluding Closed Block Division: | | | |
| Realized investment gains (losses), net: | | | |
| Due to foreign exchange movements on securities approaching maturity(2) | $ | (3 | ) | | $ | 0 |
|
| Due to securities actively marketed for sale(2) | (69 | ) | | (1 | ) |
| Due to credit or adverse conditions of the respective issuer(1)(3) | N/A |
| | (30 | ) |
| Allowance for credit losses on fixed maturities(1)(3) | (150 | ) | | N/A |
|
| Net gains (losses) on sales and maturities | 311 |
| | 269 |
|
| Fixed maturity securities(4) | 89 |
| | 238 |
|
| Commercial mortgage and other loans | 6 |
| | (3 | ) |
| Derivatives | 1,109 |
| | (1,006 | ) |
| OTTI losses on other invested assets recognized in earnings(3) | N/A |
| | 0 |
|
| Allowance for credit losses on other invested assets(3) | (4 | ) | | N/A |
|
| Other net gains (losses) | (3 | ) | | 1 |
|
| Other | (7 | ) | | 1 |
|
| Subtotal | 1,197 |
| | (770 | ) |
| Investment results of other entities and operations(5) | 214 |
| | (52 | ) |
| Total — PFI excluding Closed Block Division | 1,411 |
| | (822 | ) |
| Related adjustments(6) | (1,306 | ) | | 210 |
|
| Realized investment gains (losses), net, and related adjustments(6) | 105 |
| | (612 | ) |
| Charges related to realized investment gains (losses), net | (803 | ) | | 25 |
|
| Realized investment gains (losses), net, and charges related to realized investment gains (losses), net and adjustments(6) | $ | (698 | ) | | $ | (587 | ) |
| Closed Block Division: | | | |
| Realized investment gains (losses), net: | | | |
| Due to foreign exchange movements on securities approaching maturity(2) | $ | (9 | ) | | $ | 0 |
|
| Due to securities actively marketed for sale(2) | (10 | ) | | 0 |
|
| Due to credit or adverse conditions of the respective issuer(1)(3) | N/A |
| | (4 | ) |
| Allowance for credit losses on fixed maturities(1)(3) | (8 | ) | | N/A |
|
| Net gains (losses) on sales and maturities | 96 |
| | 26 |
|
| Fixed maturity securities(4) | 69 |
| | 22 |
|
| Commercial mortgage and other loans | 4 |
| | 0 |
|
| Derivatives | 184 |
| | 39 |
|
| OTTI losses on other invested assets recognized in earnings(3) | N/A |
| | 0 |
|
| Allowance for credit losses on other invested assets(3) | 0 |
| | N/A |
|
| Other net gains (losses) | (1 | ) | | (5 | ) |
| Other | (1 | ) | | (5 | ) |
| Subtotal — Closed Block Division | 256 |
| | 56 |
|
| Consolidated PFI realized investment gains (losses), net | $ | 1,667 |
| | $ | (766 | ) |
| | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| | 2021 | | 2020 | | | | |
| | (in millions) |
| PFI excluding Closed Block Division: | | | | | | | |
| Realized investment gains (losses), net: | | | | | | | |
| (Addition to) release of allowance for credit losses on fixed maturities | $ | 11 | | | $ | (150) | | | | | |
| Write-downs on fixed maturities (1) | 0 | | | (72) | | | | | |
| Net gains (losses) on sales and maturities | 1,050 | | | 311 | | | | | |
| Fixed maturity securities(2) | 1,061 | | | 89 | | | | | |
| Commercial mortgage and other loans | 10 | | | 6 | | | | | |
| Derivatives | 842 | | | 1,109 | | | | | |
| OTTI losses on other invested assets recognized in earnings | (9) | | | 0 | | | | | |
| (Addition to) release of allowance for credit losses on other invested assets | (1) | | | (4) | | | | | |
| Other net gains (losses) | 65 | | | (3) | | | | | |
| Other | 55 | | | (7) | | | | | |
| Subtotal | 1,968 | | | 1,197 | | | | | |
| Investment results of other entities and operations(3) | 39 | | | 214 | | | | | |
| Total — PFI excluding Closed Block Division | $ | 2,007 | | | $ | 1,411 | | | | | |
| Related adjustments(4) | $ | (743) | | | $ | (1,112) | | | | | |
| Realized investment gains (losses), net, and related adjustments | 1,264 | | | 299 | | | | | |
| Charges related to realized investment gains (losses), net(4) | (239) | | | (802) | | | | | |
| Realized investment gains (losses), net, and charges related to realized investment gains (losses), net and adjustments | $ | 1,025 | | | $ | (503) | | | | | |
| Closed Block Division: | | | | | | | |
| Realized investment gains (losses), net: | | | | | | | |
| (Addition to) release of allowance for credit losses on fixed maturities | $ | (7) | | | $ | (8) | | | | | |
| Write-downs on fixed maturities (1) | 0 | | | (19) | | | | | |
| Net gains (losses) on sales and maturities | 161 | | | 96 | | | | | |
| Fixed maturity securities(2) | 154 | | | 69 | | | | | |
| Commercial mortgage and other loans | 1 | | | 4 | | | | | |
| Derivatives | (82) | | | 184 | | | | | |
| | | | | | | |
| | | | | | | |
| Other net gains (losses) | (1) | | | (1) | | | | | |
| Other | (1) | | | (1) | | | | | |
| Subtotal — Closed Block Division | 72 | | | 256 | | | | | |
| Consolidated PFI realized investment gains (losses), net | $ | 2,079 | | | $ | 1,667 | | | | | |
__________
| |
(1) | Represents circumstances where we believe credit events or other adverse conditions of the respective issuers have caused or will lead to a deficiency in the contractual cash flows related to the investment. The amount of the impairment or allowance recorded in earnings is the difference between the amortized |
(1)Amounts represent write-downs of credit adverse securities, write-downs on securities approaching maturities related to foreign exchange movements and securities actively marketed for sale.
cost(2)Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading.
(3)Includes “realized investment gains (losses), net” of our investment management operations.
(4)Prior period amounts have been updated to conform to current period presentation.
Net gains on sales and maturities of fixed maturity securities were $1,050 million for the debt security and the net present valuefirst quarter of its projected future cash flows discounted at the effective interest rate implicit2021 primarily driven by sales of U.S. treasuries acquired in the debt security prior to impairment (2019) or allowance (2020).
| |
(2) | Represents the difference between the fair value of the debt security and the amortized cost at the time of the write-down. |
| |
(3) | Effective January 1, 2020, due to the implementation of ASU 2016-13, OTTI is no longer recorded. |
| |
(4) | Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading. |
| |
(5) | Includes “realized investment gains (losses), net” of our investment management operations. |
| |
(6) | Prior period amounts have been updated to conform to current period presentation. |
a higher interest-rate environment within our domestic segments. Net gains on sales and maturities of fixed maturity securities were $311 million and $269 million for the first quarter of 2020 and 2019, respectively, primarily driven by the impact of foreign currency exchange rate movements on U.S. and Australian dollar-denominated securities that matured or were sold within our International Businesses segment and other sales of fixed maturity securities within our domestic segments from interest rate declines duringsegments.
For the investment holding period.
Fixed maturity securityfirst quarter of 2021, the $11 million release of allowance for credit losses for fixed maturities was $150 million indue to modifications on public securities within the energy sector, partially offset by an addition to the allowance for credit losses within the energy, utilities and consumer cyclical sectors. In the first quarter of 2020, andthe $150 million addition to allowance for credit losses for fixed maturities was concentrated in the energy and communications sectors within corporate securities and foreign government securities. This credit loss allowance was primarily related to securities with liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers. Fixed maturity credit impairments were $30
Net realized gains on derivative instruments of $842 million, infor the first quarter of 20192021 primarily included:
•$2,874 million of gains on product-related embedded derivatives and were concentratedrelated hedge positions associated with certain variable annuity contracts;
Partially offsetting these gains were:
•$1,727 million of losses on interest rate derivatives due to increases in the utilityswap and energy sectors within corporate securities. These credit impairments were primarily relatedU.S. Treasury rates; and
•$331 million of losses on capital hedges due to securities with liquidity concerns, downgradesincreases in credit, bankruptcy or other adverse financial conditions of the respective issuers.equity indices.
Net realized gains on derivative instruments of $1,109 million for the first quarter of 2020 primarily included:
•$2,355 million of gains on interest rate derivatives due to decreases in swap and U.S. Treasury rates;
•$1,113 million of gains on capital hedges due to decreases in equity indices;
•$1,001 million of gains on foreign currency hedges due to U.S. dollar appreciation versus the euro and British pound and due to USD interest rates declining more than foreign rates; and
•$33 million of gains for fees earned on fee-based synthetic guaranteed investment contracts (“GICs”);GICs;
Partially offsetting these gains were:
•$3,390 million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts; and
•$41 million of losses on credit default swaps primarily due to spreads widening.
Net realized losses on derivative instruments of $1,006 million for the first quarter of 2019 primarily included:
$1,201 million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts; and
$487 million of losses on capital hedges due to increases in equity indices;
Partially offsetting these losses were:
$428 million of gains on interest rate derivatives due to decreases in swap and U.S. Treasury rates;
$102 million of gains on foreign currency hedges due to U.S. dollar appreciation;
$68 million of gains on credit default swaps primarily due to spreads tightening; and
$36 million of gains for fees earned on fee-based synthetic GICs.
For a discussion of living benefit guarantees and related hedge positions in our Individual Annuities segment, see “—Results of Operations by Segment—U.S. Businesses—U.S. Individual Solutions Division—Individual Annuities” above.
Related adjustments include the portions of “Realized investment gains (losses), net” that are included in adjusted operating income and the portions of “Other income (loss)” and “Net investment income” that are excluded from adjusted operating income. These adjustments are made to arrive at “Realized investment gains (losses), net, and related adjustments” which are excluded from adjusted operating income. Results for the first quarter of 2021 and 2020 reflected net negative related adjustments of net negative $1,306$743 million and $1,112 million, respectively. Both periods’ results were primarily due to settlements on interest rate and currency derivatives as well asdriven by changes in the fair value of equity securities and fixed income securities designated as trading, which are recorded in “Other income (loss).” Results for the first quarter of 2019 reflected related adjustments of net positive $210 million primarily due toas well as settlements and changes in the fair value of equity securities which are recorded in “Other income (loss).”derivatives.
Charges that relate to “Realized investment gains (losses), net” are also excluded from adjusted operating income and may be reflected as net charges or net benefits. Results for the first quarter of 2021 and 2020 reflected a net related chargecharges of $803$239 million compared to a net related benefit of $25and $802 million, for the first quarter of 2019.respectively. Both periods’ results were primarily driven by the impact of derivative activity on the amortization of DAC and other costs, and certain policyholder reserves.
Credit Losses
The level of credit losses generally reflects current and expected economic conditions and is expected to increase when economic conditions worsen and to decrease when economic conditions improve. Historically, the causes of credit losses have been specific to each individual issuer and have not directly resulted in credit losses to other securities within the same industry or geographic region. We may also realize additional credit and interest rate-related losses through sales of investments pursuant to our credit risk and portfolio management objectives.
We maintain separate monitoring processes for public and private fixed maturities and create watch lists to highlight securities that require special scrutiny and management. For private placements, our credit and portfolio management processes help ensure prudent controls over valuation and management. We have separate pricing and authorization processes to establish “checks and balances” for new investments. We apply consistent standards of credit analysis and due diligence for all
transactions, whether they originate through our own in-house origination staff or through agents. Our regional offices closely monitor the portfolios in their regions. We set all valuation standards centrally, and we assess the fair value of all investments quarterly. Our public and private fixed maturity investment managers formally review all public and private fixed maturity holdings on a quarterly basis and more frequently when necessary to identify potential credit deterioration whether due to ratings downgrades, unexpected price variances and/or company or industry-specific concerns.
For LPs/LLCs accounted for using the equity method and for wholly-owned investment real estate, the carrying value of these investments is written down or impaired to fair value when a decline in value is considered to be other-than-temporary. For additional information regarding our OTTI policies, see Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020.
COVID-19
TheA continued impact of COVID-19 on the global economy and corporate credit may result in losses and credit migration in our investment portfolio. Due to the highly uncertain nature of these conditions, it is not possible to estimate the overall impacts at this time. We believe our investment portfolio has been diligently constructed with a strong focus on ALM discipline, risk management, and capital preservation; and although certain industries will likely be more impacted by COVID-19 driven market conditions, we expect to benefit from our experience in managing highly specialized asset classes through multiple credit cycles. The following represents some of thecertain sectors in our investment portfolio mostthat were impacted by COVID-19.
Energy Related Investments
As of March 31, 2020,2021, PFI excluding the Closed Block division had energy related exposure with a market value of approximately $11$13 billion including a net unrealized lossgain of approximately $1 billion, which was reflected in AOCI. This $11$13 billion represented investments in public and private corporate fixed maturity securities (excluding trading securities) and was comprised of the midstream (40%(44%), independent energy (24%), integrated energy (24%), independent energy (23%(20%), oil field services (7%(6%) and refining (6%) sub-sectors. As of March 31, 2020,2021, the credit quality of energy sector fixed maturity securities was 82%87% investment grade and 18%13% below investment grade. Energy related investment realized lossesgains were approximately $52$28 million from write-downs and $79 million fromprimarily due to a release of allowance for credit loss allowanceslosses for the quarter ended March 31, 2020. Our investments in the energy sector could experience future valuation declines or losses if energy prices maintain their recent levels or continue to decline for an extended period of time. Our assessment that securities are other-than temporarily impaired may change due to new developments, including those developments related to COVID-19.2021.
Consumer Cyclical Related Investments
As of March 31, 2020,2021, PFI excluding the Closed Block division had consumer cyclical related exposure with a market value of approximately $11$12 billion includingand a net unrealized gain of less thanapproximately $1 billion, which was reflected in AOCI. This $11$12 billion represented investments in public and private corporate fixed maturity securities (excluding trading securities) and included exposures in retail (37%(39%), automotive (20%(21%), restaurants (8%), leisure (8%(7%), gaming (3%(5%) and lodging (2%). As of March 31, 2020,2021, the credit quality of consumer cyclical sector fixed maturity securities was 78%75% investment grade and 22%25% below investment grade. For additional information regarding “—Retail Related Investments,” see below.
Retail Related Investments
As of March 31, 2020,2021, PFI excluding the Closed Block division had retail-related investments of approximately $12$13 billion consisting primarily of $5$6 billion of corporate fixed maturities of which 90% waswere investment grade (also included in “—Consumer Cyclical Related Investments”); $6 billion of commercial mortgage loans with a weighted-average loan-to-value ratio of approximately 51%57% and weighted-average debt service coverage ratio of 2.452.15 times; and $1 billion of real estate held through direct ownership and real estate-related LPs/LLCs. In addition, we held approximately $11 billion of commercial mortgage-backed securities, of which approximately 79%99% and 21%1% were rated AAA (super senior) and AA to A, respectively, and comprised of diversified collateral pools. Approximately 30% of the collateral pools were comprised of retail-related investments, with no pools solely collateralized by retail-related investments. For additional information regarding commercial mortgage-backed securities, see “—Fixed Maturity Securities—Fixed Maturity Securities Credit Quality” below.
Airline Related Investments
As of March 31, 2020, PFI excluding the Closed Block division had $0.1 billion of airline related corporate fixed maturities within the transportation sector of which 99% was investment grade.
General Account Investments of PFI excluding Closed Block Division
In the following sections, we provide details about our investment portfolio, excluding investments held in the Closed Block division. We believe the details of the composition of our investment portfolio excluding the Closed Block division are most relevant to an understanding of our operations that are pertinent to investors in Prudential Financial, Inc. because substantially all Closed Block division assets support obligations and liabilities relating to the Closed Block policies only. See Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information on the Closed Block.
Fixed Maturity Securities
In the following sections, we provide details about our fixed maturity securities portfolio, which excludes fixed maturity securities classified as assets supporting experience-rated contractholder liabilities and classified as trading.
Fixed Maturity Securities and Unrealized Gains and Losses by Industry
The following table sets forth the composition of the portion of our fixed maturity, available-for-sale portfolio by industry category attributable to PFI excluding the Closed Block division and the associated gross unrealized gains and losses, as well as the allowance for credit losses (“ACL”), as of the dates indicated:
| | | | | March 31, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| Industry(1) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses (5) | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | Industry(1) | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | ACL | | Fair
Value | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | ACL | | Fair
Value |
| | | (in millions) | | (in millions) |
| Corporate securities: | | | | | | | | | | | | | | | | | | | Corporate securities: | |
| Finance | | $ | 35,665 |
| | $ | 1,955 |
| | $ | 656 |
| | $ | 0 |
| | $ | 36,964 |
| | $ | 34,710 |
| | $ | 2,796 |
| | $ | 85 |
| | $ | 37,421 |
| Finance | $ | 37,669 | | | $ | 3,174 | | | $ | 256 | | | $ | 0 | | | $ | 40,587 | | | $ | 37,577 | | | $ | 5,240 | | | $ | 70 | | | $ | 0 | | | $ | 42,747 | |
| Consumer non-cyclical | | 25,442 |
| | 2,811 |
| | 429 |
| | 3 |
| | 27,821 |
| | 24,941 |
| | 2,846 |
| | 112 |
| | 27,675 |
| Consumer non-cyclical | 28,983 | | | 3,169 | | | 317 | | | 0 | | | 31,835 | | | 28,891 | | | 5,085 | | | 52 | | | 0 | | | 33,924 | |
| Utility | | 22,809 |
| | 2,154 |
| | 351 |
| | 4 |
| | 24,608 |
| | 22,341 |
| | 2,498 |
| | 81 |
| | 24,758 |
| Utility | 24,352 | | | 2,662 | | | 221 | | | 17 | | | 26,776 | | | 24,235 | | | 4,504 | | | 60 | | | 11 | | | 28,668 | |
| Capital goods | | 12,339 |
| | 865 |
| | 409 |
| | 1 |
| | 12,794 |
| | 12,287 |
| | 1,150 |
| | 83 |
| | 13,354 |
| Capital goods | 13,718 | | | 1,302 | | | 131 | | | 0 | | | 14,889 | | | 13,711 | | | 1,947 | | | 49 | | | 2 | | | 15,607 | |
| Consumer cyclical | | 11,189 |
| | 730 |
| | 566 |
| | 2 |
| | 11,351 |
| | 10,871 |
| | 994 |
| | 45 |
| | 11,820 |
| Consumer cyclical | 10,582 | | | 1,019 | | | 68 | | | 11 | | | 11,522 | | | 11,196 | | | 1,536 | | | 52 | | | 13 | | | 12,667 | |
| Foreign agencies | | 5,048 |
| | 758 |
| | 125 |
| | 0 |
| | 5,681 |
| | 5,649 |
| | 928 |
| | 10 |
| | 6,567 |
| Foreign agencies | 5,475 | | | 721 | | | 37 | | | 0 | | | 6,159 | | | 5,323 | | | 903 | | | 11 | | | 0 | | | 6,215 | |
| Energy | | 12,745 |
| | 408 |
| | 1,713 |
| | 79 |
| | 11,361 |
| | 12,922 |
| | 1,126 |
| | 186 |
| | 13,862 |
| Energy | 12,145 | | | 1,097 | | | 132 | | | 30 | | | 13,080 | | | 12,257 | | | 1,583 | | | 118 | | | 58 | | | 13,664 | |
| Communications | | 6,099 |
| | 795 |
| | 151 |
| | 23 |
| | 6,720 |
| | 5,916 |
| | 939 |
| | 34 |
| | 6,821 |
| Communications | 5,979 | | | 938 | | | 50 | | | 39 | | | 6,828 | | | 6,013 | | | 1,343 | | | 35 | | | 22 | | | 7,299 | |
| Basic industry | | 5,834 |
| | 373 |
| | 184 |
| | 0 |
| | 6,023 |
| | 5,866 |
| | 497 |
| | 38 |
| | 6,325 |
| Basic industry | 6,166 | | | 629 | | | 44 | | | 0 | | | 6,751 | | | 5,895 | | | 914 | | | 17 | | | 0 | | | 6,792 | |
| Transportation | | 9,519 |
| | 651 |
| | 307 |
| | 0 |
| | 9,863 |
| | 9,443 |
| | 833 |
| | 34 |
| | 10,242 |
| Transportation | 9,926 | | | 1,006 | | | 55 | | | 0 | | | 10,877 | | | 10,067 | | | 1,568 | | | 40 | | | 0 | | | 11,595 | |
| Technology | | 3,359 |
| | 223 |
| | 77 |
| | 0 |
| | 3,505 |
| | 3,395 |
| | 278 |
| | 13 |
| | 3,660 |
| Technology | 4,398 | | | 281 | | | 53 | | | 0 | | | 4,626 | | | 3,717 | | | 381 | | | 14 | | | 0 | | | 4,084 | |
| Industrial other | | 3,995 |
| | 367 |
| | 210 |
| | 0 |
| | 4,152 |
| | 3,894 |
| | 351 |
| | 33 |
| | 4,212 |
| Industrial other | 4,397 | | | 466 | | | 57 | | | 0 | | | 4,806 | | | 4,485 | | | 778 | | | 21 | | | 0 | | | 5,242 | |
| Total corporate securities | | 154,043 |
| | 12,090 |
| | 5,178 |
| | 112 |
| | 160,843 |
| | 152,235 |
| | 15,236 |
| | 754 |
| | 166,717 |
| Total corporate securities | 163,790 | | | 16,464 | | | 1,421 | | | 97 | | | 178,736 | | | 163,367 | | | 25,782 | | | 539 | | | 106 | | | 188,504 | |
| Foreign government(2) | | 97,078 |
| | 19,572 |
| | 103 |
| | 38 |
| | 116,509 |
| | 97,880 |
| | 20,658 |
| | 63 |
| | 118,475 |
| Foreign government(2) | 88,481 | | | 13,646 | | | 321 | | | 0 | | | 101,806 | | | 93,521 | | | 16,229 | | | 236 | | | 0 | | | 109,514 | |
| Residential mortgage-backed(3) | | 3,087 |
| | 199 |
| | 8 |
| | 0 |
| | 3,278 |
| | 2,955 |
| | 154 |
| | 1 |
| | 3,108 |
| Residential mortgage-backed(3) | 2,822 | | | 162 | | | 15 | | | 0 | | | 2,969 | | | 2,572 | | | 198 | | | 0 | | | 0 | | | 2,770 | |
| Asset-backed | | 10,621 |
| | 84 |
| | 430 |
| | 0 |
| | 10,275 |
| | 9,832 |
| | 123 |
| | 34 |
| | 9,921 |
| Asset-backed | 10,734 | | | 142 | | | 7 | | | 0 | | | 10,869 | | | 11,584 | | | 137 | | | 67 | | | 0 | | | 11,654 | |
| Commercial mortgage-backed | | 10,207 |
| | 479 |
| | 17 |
| | 0 |
| | 10,669 |
| | 10,211 |
| | 441 |
| | 9 |
| | 10,643 |
| Commercial mortgage-backed | 10,205 | | | 574 | | | 30 | | | 0 | | | 10,749 | | | 10,296 | | | 883 | | | 8 | | | 0 | | | 11,171 | |
| U.S. Government | | 26,373 |
| | 9,786 |
| | 2 |
| | 0 |
| | 36,157 |
| | 24,938 |
| | 4,511 |
| | 94 |
| | 29,355 |
| U.S. Government | 18,800 | | | 3,931 | | | 209 | | | 0 | | | 22,522 | | | 25,959 | | | 8,348 | | | 15 | | | 0 | | | 34,292 | |
| State & Municipal | | 9,636 |
| | 1,289 |
| | 19 |
| | 0 |
| | 10,906 |
| | 9,593 |
| | 1,327 |
| | 7 |
| | 10,913 |
| State & Municipal | 9,978 | | | 1,514 | | | 26 | | | 0 | | | 11,466 | | | 10,142 | | | 1,991 | | | 1 | | | 0 | | | 12,132 | |
| Total fixed maturities, available-for-sale(4)(5) | | $ | 311,045 |
| | $ | 43,499 |
| | $ | 5,757 |
| | $ | 150 |
| | $ | 348,637 |
| | $ | 307,644 |
| | $ | 42,450 |
| | $ | 962 |
| | $ | 349,132 |
| |
| Total fixed maturities, available-for-sale(4) | | Total fixed maturities, available-for-sale(4) | $ | 304,810 | | | $ | 36,433 | | | $ | 2,029 | | | $ | 97 | | | $ | 339,117 | | | $ | 317,441 | | | $ | 53,568 | | | $ | 866 | | | $ | 106 | | | $ | 370,037 | |
__________
| |
(1) | Investment data has been classified based on standard industry categorizations for domestic public holdings and similar classifications by industry for all other holdings. |
(1)Investment data has been classified based on standard industry categorizations for domestic public holdings and similar classifications by industry for all other holdings.
(2)As of March 31, 20202021 and December 31, 2019,2020, based on amortized cost, 77%85% and 76%86%, respectively, represent Japanese government bonds held by our Japanese insurance operations with no other individual country representing more than 11%4% of the balance.
(3)As of both March 31, 20202021 and December 31, 2019,2020, based on amortized cost, 96% and more than 99%97% were rated A or higher, respectively.higher.
(4)Excluded from the table above are securities held outside the general account in other entities and operations. For additional information regarding investments held outside the general account, see “—Invested Assets of Other Entities and Operations” below.
(5) Effective January 1,
The decrease in net unrealized gains from December 31, 2020 to March 31, 2021 was primarily due to the implementation of ASU 2016-13, an allowance for credit losses is now presented for available-for-sale securities. Prior period amounts have been updated to exclude held-to-maturity securities to conform to current period presentation.increase in U.S. interest rates.
The following table sets forth the composition of the portion of our fixed maturity, held-to-maturity portfolio by industry category attributable to PFI excluding the Closed Block division and the associated gross unrealized gains and losses, as well as the allowance for credit losses, as of the dates indicated:
| | | | | March 31, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| Industry(1) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Allowance for Credit Losses | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | Industry(1) | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value | | ACL | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value | | ACL |
| | | (in millions) | | (in millions) |
| Corporate securities: | | | | | | | | | | | | | | | | | | | Corporate securities: | |
| Finance | | $ | 624 |
| | $ | 57 |
| | $ | 0 |
| | $ | 681 |
| | $ | 9 |
| | $ | 628 |
| | $ | 64 |
| | $ | 0 |
| | $ | 692 |
| Finance | $ | 612 | | | $ | 60 | | | $ | 0 | | | $ | 672 | | | $ | 7 | | | $ | 651 | | | $ | 67 | | | $ | 0 | | | $ | 718 | | | $ | 9 | |
| Foreign agencies | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 21 |
| | 0 |
| | 0 |
| | 21 |
| |
| | Basic industry | | 83 |
| | 2 |
| | 0 |
| | 85 |
| | 0 |
| | 83 |
| | 2 |
| | 0 |
| | 85 |
| Basic industry | 82 | | | 1 | | | 0 | | | 83 | | | 0 | | | 87 | | | 2 | | | 0 | | | 89 | | | 0 | |
| | Total corporate securities | | 707 |
| | 59 |
| | 0 |
| | 766 |
| | 9 |
| | 732 |
| | 66 |
| | 0 |
| | 798 |
| Total corporate securities | 694 | | | 61 | | | 0 | | | 755 | | | 7 | | | 738 | | | 69 | | | 0 | | | 807 | | | 9 | |
| Foreign government(2) | | 896 |
| | 263 |
| | 0 |
| | 1,159 |
| | 0 |
| | 891 |
| | 282 |
| | 0 |
| | 1,173 |
| Foreign government(2) | 872 | | | 239 | | | 0 | | | 1,111 | | | 0 | | | 935 | | | 270 | | | 0 | | | 1,205 | | | 0 | |
| Residential mortgage-backed(3) | | 301 |
| | 23 |
| | 0 |
| | 324 |
| | 0 |
| | 310 |
| | 21 |
| | 0 |
| | 331 |
| Residential mortgage-backed(3) | 242 | | | 17 | | | 0 | | | 259 | | | 0 | | | 266 | | | 20 | | | 0 | | | 286 | | | 0 | |
| | Total fixed maturities, held-to-maturity(4) | | $ | 1,904 |
| | $ | 345 |
| | $ | 0 |
| | $ | 2,249 |
| | $ | 9 |
| | $ | 1,933 |
| | $ | 369 |
| | $ | 0 |
| | $ | 2,302 |
| Total fixed maturities, held-to-maturity(4) | $ | 1,808 | | | $ | 317 | | | $ | 0 | | | $ | 2,125 | | | $ | 7 | | | $ | 1,939 | | | $ | 359 | | | $ | 0 | | | $ | 2,298 | | | $ | 9 | |
__________
| |
(1) | (1)Investment data has been classified based on standard industry categorizations for domestic public holdings and similar classifications by industry for all other holdings. (2)As of both March 31, 2021 and similar classifications by industry for all other holdings. |
| |
(2) | As of both March 31, 2020 and December 31, 2019, based on amortized cost, 98% represent Japanese government bonds held by our Japanese insurance operations. |
| |
(3) | As of both March 31, 2020 and December 31, 2019, based on amortized cost, all were rated A or higher. |
| |
(4) | Excluded from the table above are securities held outside the general account in other entities and operations. For additional information regarding investments held outside the general account, see “—Invested Assets of Other Entities and Operations” below. |
The decrease in net unrealized gains from December 31, 2019 to2020, based on amortized cost, 98% represent Japanese government bonds held by our Japanese insurance operations.
(3)As of both March 31, 2021 and December 31, 2020, was primarily due to credit spread wideningbased on amortized cost, all were rated A or higher.
(4)Excluded from the table above are securities held outside the general account in other entities and operations. For additional information regarding investments held outside the translation impactgeneral account, see “—Invested Assets of the Japanese yen strengthening against the U.S. dollar, partially offset by a decrease in U.S. interest rates.Other Entities and Operations” below.
Fixed Maturity Securities Credit Quality
The Securities Valuation Office (“SVO”) of the National Association of Insurance Commissioners (“NAIC”) evaluates the investments of insurers for statutory reporting purposes and assigns fixed maturity securities to one of six categories called “NAIC Designations.” In general, NAIC Designations of “1” highest quality, or “2” high quality, include fixed maturities considered investment grade, which include securities rated Baa3 or higher by Moody’s Investor Service, Inc. (“Moody’s”) or BBB- or higher by Standard & Poor’s Rating Services (“S&P”). NAIC Designations of “3” through “6” generally include fixed maturities referred to as below investment grade, which include securities rated Ba1 or lower by Moody’s and BB+ or lower by S&P. The NAIC Designations for commercial mortgage-backed securities and non-agency residential mortgage-backed securities, including our asset-backed securities collateralized by sub-prime mortgages, are based on security level expected losses as modeled by an independent third-party (engaged by the NAIC) and the statutory carrying value of the security, including any purchase discounts or impairment charges previously recognized.
As a result of time lags between the funding of investments, the finalization of legal documents, and the completion of the SVO filing process, the fixed maturity portfolio includes certain securities that have not yet been designated by the SVO as of each balance sheet date. Pending receipt of SVO designations, the categorization of these securities by NAIC Designation is based on the expected ratings indicated by internal analysis.
Investments of our international insurance companies are not subject to NAIC guidelines. Investments of our Japanese insurance operations are regulated locally by the Financial Services Agency (“FSA”), an agency of the Japanese government. The FSA has its own investment quality criteria and risk control standards. Our Japanese insurance companies comply with the FSA’s credit quality review and risk monitoring guidelines. The credit quality ratings of the investments of our Japanese insurance companies are based on ratings assigned by nationally recognized credit rating agencies, including Moody’s and S&P, or rating equivalents based on ratings assigned by Japanese credit ratings agencies.
The following table sets forth our fixed maturity, available-for-sale portfolio by NAIC Designation or equivalent rating attributable to PFI excluding the Closed Block division, as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | March 31, 2021 | | December 31, 2020 |
| | March 31, 2020 | | December 31, 2019 | |
| NAIC Designation(1)(2) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses(3) | | Allowance for Credit Losses(7) | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses(3) | | Fair Value | |
| NAIC Designation(1) (2) | | NAIC Designation(1) (2) | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses(3) | | ACL | | Fair
Value | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses(3) | | ACL | | Fair
Value |
| | (in millions) | | (in millions) |
| 1 | $ | 231,376 |
| | $ | 39,633 |
| | $ | 1,229 |
| | $ | 0 |
| | $ | 269,780 |
| | $ | 232,039 |
| | $ | 35,923 |
| | $ | 287 |
| | $ | 267,675 |
| 1 | $ | 216,471 | | | $ | 28,298 | | | $ | 1,242 | | | $ | 0 | | | $ | 243,527 | | | $ | 229,951 | | | $ | 41,311 | | | $ | 381 | | | $ | 0 | | | $ | 270,881 | |
| 2 | 62,747 |
| | 3,312 |
| | 2,688 |
| | 0 |
| | 63,371 |
| | 59,114 |
| | 5,198 |
| | 384 |
| | 63,928 |
| 2 | 69,860 | | | 6,930 | | | 502 | | | 0 | | | 76,288 | | | 68,458 | | | 10,683 | | | 180 | | | 0 | | | 78,961 | |
| Subtotal High or Highest Quality Securities(4) | 294,123 |
| | 42,945 |
| | 3,917 |
| | 0 |
| | 333,151 |
| | 291,153 |
| | 41,121 |
| | 671 |
| | 331,603 |
| Subtotal High or Highest Quality Securities(4) | 286,331 | | | 35,228 | | | 1,744 | | | 0 | | | 319,815 | | | 298,409 | | | 51,994 | | | 561 | | | 0 | | | 349,842 | |
| 3 | 9,982 |
| | 269 |
| | 897 |
| | 2 |
| | 9,352 |
| | 10,033 |
| | 854 |
| | 93 |
| | 10,794 |
| 3 | 11,480 | | | 865 | | | 107 | | | 0 | | | 12,238 | | | 11,913 | | | 1,192 | | | 95 | | | 0 | | | 13,010 | |
| 4 | 5,330 |
| | 109 |
| | 697 |
| | 65 |
| | 4,677 |
| | 4,914 |
| | 248 |
| | 98 |
| | 5,064 |
| 4 | 4,954 | | | 200 | | | 114 | | | 34 | | | 5,006 | | | 5,119 | | | 211 | | | 119 | | | 23 | | | 5,188 | |
| 5 | 1,336 |
| | 154 |
| | 230 |
| | 46 |
| | 1,214 |
| | 1,280 |
| | 196 |
| | 83 |
| | 1,393 |
| 5 | 1,736 | | | 114 | | | 56 | | | 28 | | | 1,766 | | | 1,629 | | | 123 | | | 67 | | | 16 | | | 1,669 | |
| 6 | 274 |
| | 22 |
| | 16 |
| | 37 |
| | 243 |
| | 264 |
| | 31 |
| | 17 |
| | 278 |
| 6 | 309 | | | 26 | | | 8 | | | 35 | | | 292 | | | 371 | | | 48 | | | 24 | | | 67 | | | 328 | |
| Subtotal Other Securities(5)(6) | 16,922 |
| | 554 |
| | 1,840 |
| | 150 |
| | 15,486 |
| | 16,491 |
| | 1,329 |
| | 291 |
| | 17,529 |
| |
| Total fixed maturities, available-for-sale(7) | $ | 311,045 |
| | $ | 43,499 |
| | $ | 5,757 |
| | $ | 150 |
| | $ | 348,637 |
| | $ | 307,644 |
| | $ | 42,450 |
| | $ | 962 |
| | $ | 349,132 |
| |
| Subtotal Other Securities(5) (6) | | Subtotal Other Securities(5) (6) | 18,479 | | | 1,205 | | | 285 | | | 97 | | | 19,302 | | | 19,032 | | | 1,574 | | | 305 | | | 106 | | | 20,195 | |
| Total fixed maturities, available-for-sale | | Total fixed maturities, available-for-sale | $ | 304,810 | | | $ | 36,433 | | | $ | 2,029 | | | $ | 97 | | | $ | 339,117 | | | $ | 317,441 | | | $ | 53,568 | | | $ | 866 | | | $ | 106 | | | $ | 370,037 | |
__________
| |
(1) | Reflects equivalent ratings for investments of the international insurance operations. |
| |
(2) | Includes, as of March 31, 2020 and December 31, 2019, 882 securities with amortized cost of $3,964 million (fair value, $3,780 million) and 796 securities with amortized cost of $3,073 million (fair value, $3,130 million), respectively, that have been categorized based on expected NAIC Designations pending receipt of SVO ratings. |
| |
(3) | As of March 31, 2020, includes gross unrealized losses of $1,179 million on public fixed maturities and $661 million on private fixed maturities considered to be other than high or highest quality and, as of December 31, 2019, includes gross unrealized losses of $188 million on public fixed maturities and $103 million on private fixed maturities considered to be other than high or highest quality. |
| |
(4) | On an amortized cost basis, as of March 31, 2020, includes $250,593 million of public fixed maturities and $43,530 million of private fixed maturities and, as of December 31, 2019, includes $248,179 million of public fixed maturities and $42,974 million of private fixed maturities. |
| |
(5) | On an amortized cost basis, as of March 31, 2020, includes $9,206 million of public fixed maturities and $7,716 million of private fixed maturities and, as of December 31, 2019, includes $9,049 million of public fixed maturities and $7,442 million of private fixed maturities. |
| |
(6) | On an amortized cost basis, as of March 31, 2020, securities considered below investment grade based on lowest of external rating agency ratings total $17,975 million, or 6% of the total fixed maturities, and include securities considered high or highest quality by the NAIC based on the rules described above. |
| |
(7) | Effective January 1, 2020, due to the implementation of ASU 2016-13, an allowance for credit losses is now presented for available-for-sale securities. Prior period amounts have been updated to exclude held-to-maturity securities to conform to current period presentation. |
(1)Reflects equivalent ratings for investments of the international insurance operations.
(2)Includes, as of March 31, 2021 and December 31, 2020, 722 securities with amortized cost of $4,975 million (fair value, $4,965 million) and 102 securities with amortized cost of $356 million (fair value, $382 million), respectively, that have been categorized based on expected NAIC Designations pending receipt of SVO ratings.
(3)As of March 31, 2021, includes gross unrealized losses of $148 million on public fixed maturities and $137 million on private fixed maturities considered to be other than high or highest quality and, as of December 31, 2020, includes gross unrealized losses of $184 million on public fixed maturities and $121 million on private fixed maturities considered to be other than high or highest quality.
(4)On an amortized cost basis, as of March 31, 2021, includes $240,784 million of public fixed maturities and $45,547 million of private fixed maturities and, as of December 31, 2020, includes $253,387 million of public fixed maturities and $45,022 million of private fixed maturities.
(5)On an amortized cost basis, as of March 31, 2021, includes $9,228 million of public fixed maturities and $9,251 million of private fixed maturities and, as of December 31, 2020, includes $9,592 million of public fixed maturities and $9,440 million of private fixed maturities.
(6)On an amortized cost basis, as of March 31, 2021, securities considered below investment grade based on low issue composite ratings total $15,656 million, or 5% of the total fixed maturities, and include securities considered high or highest quality by the NAIC based on the rules described above.
The following table sets forth our fixed maturity, held-to-maturity portfolio by NAIC Designation or equivalent rating attributable to PFI excluding the Closed Block division, as of the dates indicated:
| | | | March 31, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| NAIC Designation(1) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses(2) | | Fair Value | | Allowance for Credit Losses | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses(2) | | Fair Value | NAIC Designation(1) | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses(2) | | Fair
Value | | ACL | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses(2) | | Fair
Value | | ACL |
| | (in millions) | | (in millions) |
| 1 | $ | 1,713 |
| | $ | 329 |
| | $ | 0 |
| | $ | 2,042 |
| | $ | 4 |
| | $ | 1,743 |
| | $ | 351 |
| | $ | 0 |
| | $ | 2,094 |
| 1 | $ | 1,714 | | | $ | 307 | | | $ | 0 | | | $ | 2,021 | | | $ | 5 | | | $ | 1,839 | | | $ | 349 | | | $ | 0 | | | $ | 2,188 | | | $ | 7 | |
| 2 | 191 |
| | 16 |
| | 0 |
| | 207 |
| | 5 |
| | 190 |
| | 18 |
| | 0 |
| | 208 |
| 2 | 94 | | | 10 | | | 0 | | | 104 | | | 2 | | | 100 | | | 10 | | | 0 | | | 110 | | | 2 | |
| Subtotal High or Highest Quality Securities(3) | 1,904 |
| | 345 |
| | 0 |
| | 2,249 |
| | 9 |
| | 1,933 |
| | 369 |
| | 0 |
| | 2,302 |
| Subtotal High or Highest Quality Securities(3) | 1,808 | | | 317 | | | 0 | | | 2,125 | | | 7 | | | 1,939 | | | 359 | | | 0 | | | 2,298 | | | 9 | |
| 3 | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| 3 | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| 4 | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| 4 | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| 5 | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| 5 | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| 6 | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| 6 | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Subtotal Other Securities | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| Subtotal Other Securities | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total fixed maturities, held-to-maturity | $ | 1,904 |
| | $ | 345 |
| | $ | 0 |
| | $ | 2,249 |
| | $ | 9 |
| | $ | 1,933 |
| | $ | 369 |
| | $ | 0 |
| | $ | 2,302 |
| Total fixed maturities, held-to-maturity | $ | 1,808 | | | $ | 317 | | | $ | 0 | | | $ | 2,125 | | | $ | 7 | | | $ | 1,939 | | | $ | 359 | | | $ | 0 | | | $ | 2,298 | | | $ | 9 | |
__________
| |
(1) | Reflects equivalent ratings for investments of the international insurance operations. |
| |
(2) | As of both March 31, 2020 and December 31, 2019, there were no gross unrealized losses on public fixed maturities and private fixed maturities considered to be other than high or highest quality. |
| |
(3) | On an amortized cost basis, as of March 31, 2020, includes $1,681 million of public fixed maturities and $223 million of private fixed maturities and, as of December 31, 2019, includes $1,705 million of public fixed maturities and $228 million of private fixed maturities. |
(1)Reflects equivalent ratings for investments of the international insurance operations.
(2)As of both March 31, 2021 and December 31, 2020, there were no gross unrealized losses on public fixed maturities and private fixed maturities considered to be other than high or highest quality.
(3)On an amortized cost basis, as of March 31, 2021, includes $1,615 million of public fixed maturities and $193 million of private fixed maturities and, as of December 31, 2020, includes $1,728 million of public fixed maturities and $211 million of private fixed maturities.
Asset-Backed and Commercial Mortgage-Backed Securities
The following table sets forth the amortized cost and fair value of asset-backed and commercial mortgage-backed securities within our fixed maturity available-for-sale portfolio attributable to PFI excluding the Closed Block division by credit quality, as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | March 31, 2021 | | December 31, 2020 |
| | March 31, 2020 | | December 31, 2019 | | Asset-Backed
Securities(2) | | Commercial Mortgage-Backed Securities(3) | | Asset-Backed
Securities(2) | | Commercial Mortgage-Backed Securities(3) |
| | Asset-Backed Securities(2) | | Commercial Mortgage-Backed Securities(3) | | Asset-Backed Securities(2) | | Commercial Mortgage-Backed Securities(3) | |
| Lowest Rating Agency Rating(1) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | |
| Low Issue Composite Rating(1) | | Low Issue Composite Rating(1) | Amortized Cost | | Fair
Value | | Amortized Cost | | Fair
Value | | Amortized Cost | | Fair
Value | | Amortized Cost | | Fair
Value |
| | (in millions) | | (in millions) |
| AAA | $ | 10,038 |
| | $ | 9,635 |
| | $ | 8,146 |
| | $ | 8,408 |
| | $ | 9,381 |
| | $ | 9,377 |
| | $ | 8,128 |
| | $ | 8,454 |
| AAA | $ | 10,458 | | | $ | 10,516 | | | $ | 10,192 | | | $ | 10,737 | | | $ | 11,327 | | | $ | 11,323 | | | $ | 10,284 | | | 11,159 |
| AA | 440 |
| | 442 |
| | 2,047 |
| | 2,247 |
| | 288 | | 304 | | 2,068 |
| | 2,173 |
| AA | 165 | | | 172 | | | 2 | | | 2 | | | 139 | | 144 | | 1 | | | 2 |
| A | 5 |
| | 5 |
| | 5 |
| | 5 |
| | 5 | | 6 | | 6 | | 7 | A | 7 | | | 8 | | | 2 | | | 2 | | | 16 | | 17 | | 2 | | 2 |
| BBB | 5 |
| | 4 |
| | 9 |
| | 9 |
| | 12 | | 12 | | 9 | | 9 | BBB | 14 | | | 15 | | | 9 | | | 8 | | | 12 | | 13 | | 9 | | 8 |
| BB and below | 133 |
| | 189 |
| | 0 |
| | 0 |
| | 146 | | 222 | | 0 | | 0 | BB and below | 90 | | | 158 | | | 0 | | | 0 | | | 90 | | 157 | | 0 | | | 0 | |
| Total(4) | $ | 10,621 |
| | $ | 10,275 |
| | $ | 10,207 |
| | $ | 10,669 |
| | $ | 9,832 |
| | $ | 9,921 |
| | $ | 10,211 |
| | $ | 10,643 |
| Total(4) | $ | 10,734 | | | $ | 10,869 | | | $ | 10,205 | | | $ | 10,749 | | | $ | 11,584 | | | $ | 11,654 | | | $ | 10,296 | | | $ | 11,171 | |
__________
| |
(1) | The table above provides ratings as assigned by nationally recognized rating agencies as of March 31, 2020, including S&P, Moody’s, Fitch Ratings, Inc. (“Fitch”) and Morningstar, Inc. (“Morningstar”). |
| |
(2) | Includes collateralized loan obligations (“CLOs”), credit-tranched securities collateralized by auto loans, education loans, home equity loans, and other asset types. |
| |
(3) | As of both March 31, 2020 and December 31, 2019, based on amortized cost, 97% were securities with vintages of 2013 or later. |
| |
(4) | Excludes fixed maturity securities classified as “Assets supporting experience-rated contractholder liabilities” and “Fixed maturities, trading,” as well as securities held outside the general account in other entities and operations. |
(1)The table above provides ratings as assigned by nationally recognized rating agencies as of March 31, 2021, including S&P, Moody’s, Fitch Ratings, Inc. (“Fitch”) and Morningstar, Inc. (“Morningstar”). Low issue composite rating uses ratings from the major credit rating agencies or if these are not available an equivalent internal rating. For securities where the ratings assigned are not equivalent, the second lowest rating is utilized.
(2)Includes collateralized loan obligations (“CLOs”), credit-tranched securities collateralized by auto loans, education loans, credit card and other asset types.
(3)As of both March 31, 2021 and December 31, 2020, based on amortized cost, 98% were securities with vintages of 2013 or later.
(4)Excludes fixed maturity securities classified as “Assets supporting experience-rated contractholder liabilities” and “Fixed maturities, trading,” as well as securities held outside the general account in other entities and operations.
Included in “Asset-backed securities” above are investments in CLOs. The following table sets forth information pertaining to these investments in CLOs within our fixed maturity available-for-sale portfolio attributable to PFI excluding the Closed Block division, as of the dates indicated:
| | | | | | | | | | | | March 31, 2021 | | December 31, 2020 |
| | March 31, 2020 | | December 31, 2019 | | Collateralized Loan Obligations |
| | Collateralized Loan Obligations | |
| Lowest Rating Agency Rating(1) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | |
| Low Issue Composite Rating(1) | | Low Issue Composite Rating(1) | Amortized Cost | | Fair
Value | | Amortized Cost | | Fair
Value |
| | (in millions) | | (in millions) |
| AAA | $ | 7,997 |
| | $ | 7,593 |
| | $ | 7,294 |
| | $ | 7,271 |
| AAA | $ | 8,969 | | | $ | 8,993 | | | $ | 9,554 | | | $ | 9,506 | |
| AA | 0 |
| | 0 |
| | 0 |
| | 0 |
| AA | 7 | | | 7 | | | 2 | | | 2 | |
| A | 0 |
| | 0 |
| | 0 |
| | 0 |
| A | 5 | | | 5 | | | 1 | | | 1 | |
| BBB | 0 |
| | 0 |
| | 0 |
| | 0 |
| BBB | 5 | | | 5 | | | 1 | | | 1 | |
| BB and below | 0 |
| | 0 |
| | 0 |
| | 0 |
| BB and below | 6 | | | 6 | | | 1 | | | 1 | |
| Total(2)(3) | $ | 7,997 |
| | $ | 7,593 |
| | $ | 7,294 |
| | $ | 7,271 |
| Total(2)(3) | $ | 8,992 | | | $ | 9,016 | | | $ | 9,559 | | | $ | 9,511 | |
__________
| |
(1) | The table above provides ratings as assigned by nationally recognized rating agencies as of March 31, 2020, including S&P, Moody’s, Fitch Ratings, Inc. (“Fitch”) and Morningstar, Inc. (“Morningstar”). |
| |
(2) | There was no allowance for credit losses as of March 31, 2020. |
| |
(3) | Excludes fixed maturity securities classified as “Assets supporting experience-rated contractholder liabilities” and “Fixed maturities, trading,” as well as securities held outside the general account in other entities and operations. |
(1)The table above provides ratings as assigned by nationally recognized rating agencies as of March 31, 2021, including S&P, Moody’s, Fitch and Morningstar. Low issue composite rating uses ratings from the major credit rating agencies or if these are not available an equivalent internal rating. For securities where the ratings assigned are not equivalent, the second lowest rating is utilized.
(2)There was no allowance for credit losses as of both March 31, 2021 and December 31, 2020.
(3)Excludes fixed maturity securities classified as “Assets supporting experience-rated contractholder liabilities” and “Fixed maturities, trading,” as well as securities held outside the general account in other entities and operations.
Assets Supporting Experience-Rated Contractholder Liabilities
For information regarding the composition of “Assets supporting experience-rated contractholder liabilities,” see Note 3 to the Unaudited Interim Consolidated Financial Statements.
Commercial Mortgage and Other Loans
Investment Mix
The following table sets forth the composition of our commercial mortgage and other loans portfolio attributable to PFI excluding the Closed Block division, as of the dates indicated:
| | | | | March 31, 2020 | | December 31, 2019 | | | March 31, 2021 | | December 31, 2020 |
| | | (in millions) | | | (in millions) |
| Commercial mortgage and agricultural property loans | | $ | 53,709 |
| | $ | 53,928 |
| Commercial mortgage and agricultural property loans | | $ | 55,151 | | | $ | 55,223 | |
| Uncollateralized loans | | 660 |
| | 656 |
| Uncollateralized loans | | 583 | | | 655 | |
| Residential property loans | | 115 |
| | 124 |
| Residential property loans | | 86 | | | 101 | |
| Other collateralized loans | | 146 |
| | 65 |
| Other collateralized loans | | 114 | | | 120 | |
| Total recorded investment gross of allowance(1) | | 54,630 |
| | 54,773 |
| Total recorded investment gross of allowance(1) | | 55,934 | | | 56,099 | |
| Allowance for credit losses | | (207 | ) | | (102 | ) | Allowance for credit losses | | (196) | | | (207) | |
| Total net commercial mortgage and other loans(2) | | $ | 54,423 |
| | $ | 54,671 |
| Total net commercial mortgage and other loans(2) | | $ | 55,738 | | | $ | 55,892 | |
__________
| |
(1) | As a percentage of recorded investment gross of allowance, more than 99% of these assets were current as of both March 31, 2020 and December 31, 2019. |
| |
(2) | Excluded from the table above are commercial mortgage and other loans held outside the general account in other entities and operations. For additional information regarding commercial mortgage and other loans held outside the general account, see “—Invested Assets of Other Entities and Operations” below. |
(1)As a percentage of recorded investment gross of allowance, more than 99% of these assets were current as of both March 31, 2021 and December 31, 2020.
(2)Excluded from the table above are commercial mortgage and other loans held outside the general account in other entities and operations. For additional information regarding commercial mortgage and other loans held outside the general account, see “—Invested Assets of Other Entities and Operations” below.
We originate commercial mortgage and agricultural property loans using a dedicated sales and underwriting staff through our various regional offices in the U.S. and international offices primarily in London and Tokyo. All loans are underwritten consistently to our standards using a proprietary quality rating system that has been developed from our industry experience in real estate and mortgage lending.
Uncollateralized loans primarily represent corporate loans which do not meetheld by the definition of a security under authoritative accounting guidance.Company’s international insurance operations.
Residential property loans primarily include Japanese recourse loans. Upon default of these recourse loans, we can make a claim against the personal assets of the property owner, in addition to the mortgaged property. These loans are also backed by third-party guarantors.
Other collateralized loans include consumer loans.
Composition of Commercial Mortgage and Agricultural Property Loans
Our commercial mortgage and agricultural property loan portfolio strategy emphasizes diversification by property type and geographic location. The following tables set forth the breakdown of the gross carrying values of commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division by geographic region and property type, as of the dates indicated:
| | | | | March 31, 2020 | | December 31, 2019 | | | March 31, 2021 | | December 31, 2020 |
| | | Gross Carrying Value | | % of Total | | Gross Carrying Value | | % of Total | | | Gross
Carrying
Value | | % of
Total | | Gross
Carrying
Value | | % of
Total |
| | | ($ in millions) | | | ($ in millions) |
| Commercial mortgage and agricultural property loans by region: | | | | | | | | | Commercial mortgage and agricultural property loans by region: | |
| U.S. Regions(1): | | | | | | | | | U.S. Regions(1): | |
| Pacific | | $ | 18,258 |
| | 34.0 | % | | $ | 18,061 |
| | 33.5 | % | Pacific | | $ | 19,345 | | | 35.1 | % | | $ | 19,186 | | | 34.7 | % |
| South Atlantic | | 8,828 |
| | 16.4 |
| | 8,943 |
| | 16.6 |
| South Atlantic | | 8,630 | | | 15.6 | | | 8,710 | | | 15.8 | |
| Middle Atlantic | | 6,605 |
| | 12.3 |
| | 6,664 |
| | 12.4 |
| Middle Atlantic | | 6,468 | | | 11.7 | | | 6,500 | | | 11.8 | |
| East North Central | | 3,283 |
| | 6.1 |
| | 3,413 |
| | 6.3 |
| East North Central | | 2,959 | | | 5.4 | | | 3,018 | | | 5.5 | |
| West South Central | | 5,467 |
| | 10.2 |
| | 5,439 |
| | 10.1 |
| West South Central | | 5,509 | | | 10.0 | | | 5,426 | | | 9.8 | |
| Mountain | | 2,448 |
| | 4.6 |
| | 2,442 |
| | 4.5 |
| Mountain | | 2,199 | | | 4.0 | | | 2,239 | | | 4.1 | |
| New England | | 1,677 |
| | 3.1 |
| | 1,902 |
| | 3.5 |
| New England | | 1,598 | | | 2.9 | | | 1,664 | | | 3.0 | |
| West North Central | | 508 |
| | 0.9 |
| | 454 |
| | 0.8 |
| West North Central | | 469 | | | 0.8 | | | 531 | | | 0.9 | |
| East South Central | | 545 |
| | 1.0 |
| | 622 |
| | 1.2 |
| East South Central | | 865 | | | 1.6 | | | 836 | | | 1.5 | |
| Subtotal-U.S. | | 47,619 |
| | 88.6 |
| | 47,940 |
| | 88.9 |
| Subtotal-U.S. | | 48,042 | | | 87.1 | | | 48,110 | | | 87.1 | |
| Europe | | 3,869 |
| | 7.2 |
| | 3,781 |
| | 7.0 |
| Europe | | 4,706 | | | 8.5 | | | 4,605 | | | 8.3 | |
| Asia | | 950 |
| | 1.8 |
| | 886 |
| | 1.6 |
| Asia | | 914 | | | 1.7 | | | 979 | | | 1.8 | |
| Other | | 1,271 |
| | 2.4 |
| | 1,321 |
| | 2.5 |
| Other | | 1,489 | | | 2.7 | | | 1,529 | | | 2.8 | |
| Total commercial mortgage and agricultural property loans | | $ | 53,709 |
| | 100.0 | % | | $ | 53,928 |
| | 100.0 | % | Total commercial mortgage and agricultural property loans | | $ | 55,151 | | | 100.0 | % | | $ | 55,223 | | | 100.0 | % |
__________
| |
(1) | Regions as defined by the United States Census Bureau. |
| | | | | March 31, 2020 | | December 31, 2019 | | | March 31, 2021 | | December 31, 2020 |
| | | Gross Carrying Value | | % of Total | | Gross Carrying Value | | % of Total | | | Gross
Carrying
Value | | % of
Total | | Gross
Carrying
Value | | % of
Total |
| | | ($ in millions) | | | ($ in millions) |
| Commercial mortgage and agricultural property loans by property type: | | | | | | | | | Commercial mortgage and agricultural property loans by property type: | |
| Industrial | | $ | 12,181 |
| | 22.7 | % | | $ | 12,224 |
| | 22.7 | % | Industrial | | $ | 14,093 | | | 25.5 | % | | $ | 13,819 | | | 25.0 | % |
| Retail | | 6,249 |
| | 11.6 |
| | 6,524 |
| | 12.1 |
| Retail | | 5,635 | | | 10.2 | | | 5,718 | | | 10.4 | |
| Office | | 10,794 |
| | 20.1 |
| | 11,203 |
| | 20.8 |
| Office | | 10,567 | | | 19.2 | | | 10,719 | | | 19.4 | |
| Apartments/Multi-Family | | 15,526 |
| | 28.9 |
| | 15,176 |
| | 28.1 |
| Apartments/Multi-Family | | 15,194 | | | 27.5 | | | 15,316 | | | 27.7 | |
| Agricultural properties | | 3,046 |
| | 5.7 |
| | 2,856 |
| | 5.3 |
| Agricultural properties | | 3,338 | | | 6.1 | | | 3,273 | | | 5.9 | |
| Hospitality | | 2,056 |
| | 3.8 |
| | 2,066 |
| | 3.8 |
| Hospitality | | 2,079 | | | 3.8 | | | 2,056 | | | 3.7 | |
| Other | | 3,857 |
| | 7.2 |
| | 3,879 |
| | 7.2 |
| Other | | 4,245 | | | 7.7 | | | 4,322 | | | 7.9 | |
| Total commercial mortgage and agricultural property loans | | $ | 53,709 |
| | 100.0 | % | | $ | 53,928 |
| | 100.0 | % | Total commercial mortgage and agricultural property loans | | $ | 55,151 | | | 100.0 | % | | $ | 55,223 | | | 100.0 | % |
Loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial mortgage and agricultural property loans. The loan-to-value ratio compares the amount of the loan to the fair value of the underlying property collateralizing the loan and is commonly expressed as a percentage. A loan-to-value ratio less than 100% indicates an excess of
collateral value over the loan amount. Loan-to-value ratios greater than 100% indicate that the loan amount exceeds
the collateral value. The debt service coverage ratio compares a property’s net operating income to its debt service payments. Debt service coverage ratios less than 1.0 times indicate that property operations do not generate enough income to cover the loan’s current debt payments. A debt service coverage ratio greater than 1.0 times indicates an excess of net operating income over the debt service payments.
As of March 31, 2020,2021, our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division had a weighted-average debt service coverage ratio of 2.472.48 times and a weighted-average loan-to-value ratio of 56%58%. As of March 31, 2020, 95%2021, 94% of commercial mortgage and agricultural property loans were fixed rate loans. For those commercial mortgage and agricultural property loans that were originated in 2020,2021, the weighted-average debt service coverage ratio was 2.873.03 times, and the weighted-average loan-to-value ratio was 64%62%.
The values utilized in calculating these loan-to-value ratios are developed as part of our periodic review of the commercial mortgage and agricultural property loan portfolio, which includes an internal evaluation of the underlying collateral value. Our periodic review also includes a credit quality re-rating process, whereby we update the internal quality rating originally assigned at underwriting based on the proprietary quality rating system mentioned above. As discussed below, the internal credit quality rating is a key input in determining our allowance for credit losses.
For loans with collateral under construction, renovation or lease-up, a stabilized value and projected net operating income are used in the calculation of the loan-to-value and debt service coverage ratios. Our commercial mortgage and agricultural property loan portfolio included $0.7$2.6 billion and $1.8$2.4 billion of such loans as of March 31, 20202021 and December 31, 2019,2020, respectively. All else being equal, these loans are inherently riskier than those collateralized by properties that have already stabilized. As of March 31, 20202021 and December 31, 2019,2020, there were $1.6less than $1 million and $0$1 million, respectively, of allowanceallowances related to these loans. In addition, these unstabilized loans are included in the calculation of our portfolio reserve, as discussed below.
The following table sets forth the gross carrying value of our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division by loan-to-value and debt service coverage ratios, as of the date indicated:
| | | | | March 31, 2020 | | | March 31, 2021 |
| | | Debt Service Coverage Ratio | | | | | Debt Service Coverage Ratio | |
| | | > 1.2x | | 1.0x to < 1.2x | | < 1.0x | | Total Commercial Mortgage and Agricultural Property Loans | | | > 1.2x | | 1.0x
to
< 1.2x | | < 1.0x | | Total
Commercial Mortgage
and Agricultural
Property
Loans |
| Loan-to-Value Ratio | | (in millions) | Loan-to-Value Ratio | | (in millions) |
| 0%-59.99% | | $ | 28,491 |
| | $ | 657 |
| | $ | 150 |
| | $ | 29,298 |
| 0%-59.99% | | $ | 26,011 | | | $ | 679 | | | $ | 426 | | | $ | 27,116 | |
| 60%-69.99% | | 14,724 |
| | 905 |
| | 141 |
| | 15,770 |
| 60%-69.99% | | 16,874 | | | 1,436 | | | 227 | | | 18,537 | |
| 70%-79.99% | | 7,690 |
| | 656 |
| | 28 |
| | 8,374 |
| 70%-79.99% | | 8,086 | | | 748 | | | 213 | | | 9,047 | |
| 80% or greater | | 168 |
| | 97 |
| | 2 |
| | 267 |
| 80% or greater | | 139 | | | 300 | | | 12 | | | 451 | |
| Total commercial mortgage and agricultural property loans | | $ | 51,073 |
| | $ | 2,315 |
| | $ | 321 |
| | $ | 53,709 |
| Total commercial mortgage and agricultural property loans | | $ | 51,110 | | | $ | 3,163 | | | $ | 878 | | | $ | 55,151 | |
The following table sets forth the breakdown of our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division by year of origination, as of the date indicated:
| | | | | | | | | | | | | | |
| | March 31, 2021 |
| | Gross
Carrying
Value | | % of
Total |
| Year of Origination | | ($ in millions) |
| 2021 | | $ | 1,527 | | | 2.8 | % |
| 2020 | | 5,296 | | | 9.6 | |
| 2019 | | 9,890 | | | 17.9 | |
| 2018 | | 8,438 | | | 15.3 | |
| 2017 | | 7,016 | | | 12.7 | |
| 2016 | | 6,283 | | | 11.4 | |
| 2015 | | 5,650 | | | 10.2 | |
| 2014 & Prior | | 11,051 | | | 20.1 | |
| Total commercial mortgage and agricultural property loans | | $ | 55,151 | | | 100.0 | % |
|
| | | | | | | |
| | | March 31, 2020 |
| | | Gross Carrying Value | | % of Total |
| Year of Origination | | ($ in millions) |
| 2020 | | $ | 1,644 |
| | 3.1 | % |
| 2019 | | 9,645 |
| | 18.0 |
|
| 2018 | | 8,611 |
| | 16.0 |
|
| 2017 | | 7,114 |
| | 13.2 |
|
| 2016 | | 6,360 |
| | 11.8 |
|
| 2015 | | 5,797 |
| | 10.8 |
|
| 2014 | | 4,769 |
| | 8.9 |
|
| 2013 & Prior | | 9,769 |
| | 18.2 |
|
| Total commercial mortgage and agricultural property loans | | $ | 53,709 |
| | 100.0 | % |
Commercial Mortgage and Other Loans Quality
The commercial mortgage and other loans portfolio is monitored on an ongoing basis. If certain criteria are met, loans are assigned to either of the following “watch list” categories:
(1) “Closely Monitored,” which includes a variety of considerations, such as when loan metrics fall below acceptable levels, the borrower is not cooperative or has requested a material modification, or the portfolio manager has directed a change in category; or
(2) “Not in Good Standing,” which includes loans in default or with a high probability of loss of principal, such as when the loan is in the process of foreclosure or the borrower is in bankruptcy.
Our workout and special servicing professionals manage the loans on the watch list.
The CECLcurrent expected credit loss (“CECL”) allowance represents the Company’s best estimate of expected credit losses over the remaining life of the assets. The determination of the allowance considers historical credit loss experience, current conditions, and reasonable and supportable forecasts. The allowance is calculated separately for commercial mortgage loans, agricultural mortgage loans, uncollateralized loans, other collateralized loans and uncollateralizedresidential property loans.
For commercial mortgage and agricultural mortgage loans, the allowance is calculated using an internally developed CECL model.
Key inputs to the CECL model include unpaid principal balances, internal credit ratings, annual expected loss factors, average lives of the loans adjusted for prepayment considerations, current and historical interest rate assumptions and other factors influencing the Company’s view of the current stage of the economic cycle and future economic conditions. Subjective considerations include a review of whether historical loss experience is representative of current market conditions and the Company’s view of the credit cycle. Model assumptions and factors are reviewed and updated as appropriate.
When individual loans no longer have the credit risk characteristics of the commercial or agricultural mortgage loan pools, they are removed from the pools and are evaluated individually for an allowance. The allowance is determined based on the outstanding loan balance less the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
The CECL allowance for other collateralized and uncollateralized loans carried at amortized cost is determined based on probability of default and loss given default assumptions by sector, credit quality and average lives of the loans.
The following table sets forth the change in allowance for credit losses for our commercial mortgage and other loans portfolio, as of the dates indicated:
| | | | | March 31, 2020 | | December 31, 2019 | | | March 31, 2021 | | December 31, 2020 |
| | | (in millions) | | | (in millions) |
| Allowance, beginning of year | | $ | 102 |
| | $ | 106 |
| Allowance, beginning of year | | $ | 207 | | | $ | 102 | |
| Cumulative effect of adoption of ASU 2016-13 | | 101 |
| | 0 |
| Cumulative effect of adoption of ASU 2016-13 | | 0 | | | 101 | |
| Addition to (release of) allowance for credit losses | | 1 |
| | (4 | ) | Addition to (release of) allowance for credit losses | | (10) | | | 1 | |
| Write-downs charged against the allowance | | 0 |
| | 0 |
| |
| Recoveries of amounts previously written-down | | 0 |
| | N/A |
| |
| Change in foreign exchange | | 0 |
| | 0 |
| |
| | Other | | 3 |
| | 0 |
| Other | | (1) | | | 3 | |
| Allowance, end of period | | $ | 207 |
| | $ | 102 |
| Allowance, end of period | | $ | 196 | | | $ | 207 | |
The allowance for credit losses as of March 31, 2020 increased2021 decreased compared to December 31, 2019,2020, primarily due toreflecting the cumulative effect of adopting ASU 2016-13.improving credit environment.
Equity Securities
The equity securities attributable to PFI excluding the Closed Block division consist principally of investments in Common and Preferred Stock of publicly-traded companies, as well as mutual fund shares. The following table sets forth the composition of our equity securities portfolio and the associated gross unrealized gains and losses, as of the dates indicated:
| | | | | March 31, 2020 | | December 31, 2019 | | | March 31, 2021 | | December 31, 2020 |
| | | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | | Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value | | Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| | | (in millions) | | | (in millions) |
| Mutual funds | | $ | 913 |
| | $ | 90 |
| | $ | 9 |
| | $ | 994 |
| | $ | 817 |
| | $ | 258 |
| | $ | 1 |
| | $ | 1,074 |
| Mutual funds | | $ | 1,386 | | | $ | 468 | | | $ | 22 | | | $ | 1,832 | | | $ | 1,481 | | | $ | 410 | | | $ | 5 | | | $ | 1,886 | |
| Other Common Stocks | | 2,425 |
| | 699 |
| | 242 |
| | 2,882 |
| | 2,429 |
| | 1,091 |
| | 57 |
| | 3,463 |
| Other Common Stocks | | 2,160 | | | 1,169 | | | 26 | | | 3,303 | | | 2,201 | | | 1,013 | | | 62 | | | 3,152 | |
| Non-redeemable Preferred Stocks | | 52 |
| | 3 |
| | 10 |
| | 45 |
| | 51 |
| | 3 |
| | 5 |
| | 49 |
| Non-redeemable Preferred Stocks | | 79 | | | 19 | | | 6 | | | 92 | | | 54 | | | 22 | | | 6 | | | 70 | |
| Total equity securities, at fair value(1) | | $ | 3,390 |
| | $ | 792 |
| | $ | 261 |
| | $ | 3,921 |
| | $ | 3,297 |
| | $ | 1,352 |
| | $ | 63 |
| | $ | 4,586 |
| Total equity securities, at fair value(1) | | $ | 3,625 | | | $ | 1,656 | | | $ | 54 | | | $ | 5,227 | | | $ | 3,736 | | | $ | 1,445 | | | $ | 73 | | | $ | 5,108 | |
__________
| |
(1) | Amounts presented exclude investments in private equity and hedge funds and other investments which are reported in “Other invested assets.” |
(1)Amounts presented exclude investments in private equity and hedge funds and other investments which are reported in “Other invested assets.”
The net change in unrealized gains (losses) from equity securities attributable to PFI excluding Closed Block division still held at period end, recorded within “Other income (loss),” was $(758)$230 million and $249$(758) million during the three months ended March 31, 20202021 and 2019,2020, respectively.
Other Invested Assets
The following table sets forth the composition of “Other invested assets” attributable to PFI excluding the Closed Block division, as of the dates indicated:
| | | | | March 31, 2020 | | December 31, 2019 | | | March 31, 2021 | | December 31, 2020 |
| | | (in millions) | | (in millions) |
| LPs/LLCs: | | | | | LPs/LLCs: | |
| Equity method: | | | | | Equity method: | |
| Private equity | | $ | 2,965 |
| | $ | 2,740 |
| |
| Private equity(1) | | Private equity(1) | | $ | 3,743 | | | $ | 3,411 | |
| Hedge funds | | 1,316 |
| | 1,362 |
| Hedge funds | | 1,997 | | | 1,770 | |
| Real estate-related | | 811 |
| | 792 |
| |
| Real estate-related(1) | | Real estate-related(1) | | 1,251 | | | 1,214 | |
| Subtotal equity method | | 5,092 |
| | 4,894 |
| Subtotal equity method | | 6,991 | | | 6,395 | |
| Fair value: | | | | | Fair value: | |
| Private equity | | 1,033 |
| | 990 |
| Private equity | | 1,112 | | | 1,063 | |
| Hedge funds | | 1,082 |
| | 1,233 |
| Hedge funds | | 1,057 | | | 1,111 | |
| Real estate-related | | 49 |
| | 50 |
| Real estate-related | | 42 | | | 41 | |
| Subtotal fair value | | 2,164 |
| | 2,273 |
| Subtotal fair value | | 2,211 | | | 2,215 | |
| Total LPs/LLCs | | 7,256 |
| | 7,167 |
| Total LPs/LLCs | | 9,202 | | | 8,610 | |
| Real estate held through direct ownership(1) | | 1,356 |
| | 1,350 |
| |
| Real estate held through direct ownership(2) | | Real estate held through direct ownership(2) | | 1,060 | | | 1,176 | |
| Derivative instruments | | 60 |
| | 73 |
| Derivative instruments | | 229 | | | 199 | |
| Other(2) | | 754 |
| | 620 |
| |
| Other(3) | | Other(3) | | 683 | | | 731 | |
| Total other invested assets | | $ | 9,426 |
| | $ | 9,210 |
| Total other invested assets | | $ | 11,174 | | | $ | 10,716 | |
__________
| |
(1) | As of March 31, 2020 and December 31, 2019, real estate held through direct ownership had mortgage debt of $548 million and $537 million, respectively. |
| |
(2) | Primarily includes leveraged leases and member and activity stock held in the Federal Home Loan Banks of New York and Boston. For additional information regarding our holdings in the Federal Home Loan Banks of New York and Boston, see Note 17 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. |
(1)Prior period amounts have been updated to conform to current period presentation.
(2)As of March 31, 2021 and December 31, 2020, real estate held through direct ownership had mortgage debt of $354 million and $409 million, respectively.
(3)Primarily includes leveraged leases and member and activity stock held in the Federal Home Loan Banks of New York and Boston. For additional information regarding our holdings in the Federal Home Loan Banks of New York and Boston, see Note 17 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Invested Assets of Other Entities and Operations
“Invested Assets of Other Entities and Operations” presented below includes investments held outside the general account and primarily represents investments associated with our investment management operations and derivative operations. Our derivative operations act on behalf of affiliates primarily to manage interest rate, foreign currency, credit and equity exposures. Assets within our investment management operations that are managed for third-parties and those assets classified as “Separate account assets” on our balance sheet are not included.
| | | | | March 31, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| | | (in millions) | | | (in millions) |
| Fixed maturities: | | | | | Fixed maturities: | |
| Public, available-for-sale, at fair value(1) | | $ | 541 |
| | $ | 587 |
| Public, available-for-sale, at fair value(1) | | $ | 562 | | | $ | 644 | |
| Private, available-for-sale, at fair value | | 1 |
| | 1 |
| |
| | Fixed maturities, trading, at fair value(1) | | 1,149 |
| | 1,161 |
| Fixed maturities, trading, at fair value(1) | | 199 | | | 212 | |
| Equity securities, at fair value | | 564 |
| | 691 |
| Equity securities, at fair value | | 702 | | | 682 | |
| Commercial mortgage and other loans, at book value(2) | | 697 |
| | 259 |
| Commercial mortgage and other loans, at book value(2) | | 519 | | | 1,112 | |
| Other invested assets(1) | | 5,309 |
| | 3,062 |
| |
| Other invested assets | | Other invested assets | | 3,959 | | | 3,799 | |
| Short-term investments | | 16 |
| | 17 |
| Short-term investments | | 37 | | | 36 | |
| Total investments | | $ | 8,277 |
| | $ | 5,778 |
| Total investments | | $ | 5,978 | | | $ | 6,485 | |
__________
| |
(1) | As of March 31, 2020 and December 31, 2019, balances include investments in CLOs with fair value of $375 million and $438 million, respectively. |
| |
(2) | Book value is generally based on unpaid principal balance, net of any allowance for credit losses, or at fair value, when the fair value option has been elected. |
(1)As of March 31, 2021 and December 31, 2020, balances include investments in CLOs with fair value of $405 million and $496 million, respectively.
(2)Book value is generally based on unpaid principal balance, net of any allowance for credit losses, or at fair value, when the fair value option has been elected.
Fixed Maturities, Trading
“Fixed maturities, trading, at fair value” are primarily related to assets associated with consolidated VIEs for which the Company is the investment manager. The assets of the consolidated VIEs are generally offset by liabilities for which the fair
value option has been elected. For additionalfurther information on these consolidated VIEs, see Note 4 to the Unaudited Interim Consolidated Financial Statements.
Commercial Mortgage and Other Loans
Our investment management operations include our commercial mortgage operations, which provide mortgage origination, investment management and servicing for our general account, institutional clients, the Federal Housing Administration and government-sponsored entities such as Fannie Mae and Freddie Mac.
The mortgage loans of our commercial mortgage operations are included in “Commercial mortgage and other loans.” Derivatives and other hedging instruments related to our commercial mortgage operations are primarily included in “Other invested assets.”
Other Invested Assets
“Other invested assets” primarily include assets of our derivative operations used to manage interest rate, foreign currency, credit, and equity exposures.
Furthermore, other invested assets include strategic investments made as part of our investment management operations. We make these strategic investments in real estate, as well as fixed income, public equity and real estate securities, including controlling interests. Certain of these investments are made primarily for purposes of co-investment in our managed funds and structured products. Other strategic investments are made with the intention to sell or syndicate to investors, including our general account, or for placement in funds and structured products that we offer and manage (seed investments). As part of our investment management operations, we also make loans to our managed funds that are secured by equity commitments from investors or assets of the funds. Other“Other invested assetsassets” also include certain assets in consolidated investment funds where the Company is deemed to exercise control over the funds.
Liquidity and Capital Resources
Overview
Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of our businesses, fund business growth, and provide a cushion to withstand adverse circumstances. Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of our businesses, general economic conditions and our access to the capital markets and the alternate sources of liquidity and capital described herein.
Our businesses are subject to comprehensive regulation and supervision by domestic and international regulators. These regulations currently include requirements (many of which are the subject of ongoing rule-making) relating to capital, leverage, liquidity, stress-testing, overall risk management, credit exposure reporting and credit concentration. For information on these regulatory initiatives and their potential impact on us, see “Business—Regulation” and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2019.
COVID-19 and Related Market Disruptions
During the first quarter of 2020 and continuing into the second quarter, broad market concerns over the impact of COVID-19 have led to significant volatility and disruptions in the global economy and financial markets. Given this macro environment and the global pandemic, as examined through our stress testing, in the first quarter we took the following significant management actions to enhance our liquidity and capital position:
We issued $1.5 billion of senior notes, with maturities ranging from 2026 to 2040. Of these senior notes, $500 million were issued in the form of “green bonds,” where proceeds are allocated to existing or future investments in assets, businesses or projects that provide environmental benefits, and $1 billion were issued for general corporate purposes, including pre-funding in part our senior notes maturing through 2021;
We temporarily suspended Common Stock repurchases under our existing repurchase authorization beginning April 1, 2020, after repurchasing $500 million of shares of Prudential Financial’s Common Stock in the first quarter of 2020. We will continue to evaluate the resumption of share repurchases under our existing Board authorization for 2020;
Prudential Legacy Insurance Company of New Jersey issued $800 million of surplus notes under its $4 billion reserve financing facility to enhance the statutory surplus of the Closed Block. This facility, established in 2015, is intended to alleviate any temporary impact to the Closed Block’s surplus due to the timing difference between the mark to market on assets and the decision on the level of the policyholder dividend;
We executed additional capital hedges that protect a portion of the capital position of our U.S. insurance subsidiaries against additional declines in the equity markets; and
We accelerated our product diversification strategy and repriced certain products, which are expected to support the capital position of our insurance subsidiaries over time.
Liquidity. The Company continues to operate with significant liquid resources. As of March 31, 2020, Prudential Financial had highly liquid assets of $5.3 billion, excluding the net borrowings from an intercompany liquidity account. Nevertheless, the impact of COVID-19 and related market dislocations could strain our existing liquidity and cause us to increase the use of our alternative sources of liquidity, which could result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings or ratings outlooks.
Capital. As of March 31, 2020, all of our significant insurance subsidiaries maintained capital levels consistent with their ratings targets. However, market conditions could negatively impact the statutory capital of our insurance companies and constrain our overall capital flexibility. Continued adverse market conditions could require us to take additional management actions for our insurance subsidiaries to maintain capital consistent with their ratings objectives, which may include redeploying financial resources from internal sources or, if markets continue to decline, using available external sources of capital or seeking additional sources.
Liquidity and Capital Risk Management.Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity of Prudential Financial and its subsidiaries on a daily basis and projects borrowing and capital needs over a multi-year time horizon. We use a Risk Appetite Framework (“RAF”) to ensure that all risks taken across the Company align with our capacity and willingness to take those risks. The RAF provides a dynamic assessment of capital and liquidity stress impacts, including scenarios similar to, and more severe than, those occurring due to COVID-19, and is intended to ensure that sufficient resources are available to absorb those impacts. We believe that our capital and liquidity resources are sufficient to satisfy the capital and liquidity requirements of Prudential Financial and its subsidiaries.
From the beginning of 2021 through the date of this report, we took the following significant actions that impacted our liquidity and capital position:
•In February 2021, Prudential Financial’s Board of Directors (the “Board”) authorized the Company to repurchase at management’s discretion up to $1.5 billion of its outstanding Common Stock during the period from January 1, 2021 through December 31, 2021. On May 4, 2021, the Board increased this current share repurchase authorization by $500 million, bringing the aggregate share repurchase authorization for calendar year 2021 to $2.0 billion.
Capital
The primary components of the Company’s capitalization consist of equity and outstanding capital debt, including junior subordinated debt. As shown in the table below, as of March 31, 2020,2021, the Company had $52.4$52.3 billion in capital, all of which was available to support the aggregate capital requirements of its businesses and its Corporate and Other operations. Based on our assessment of these businesses and operations, we believe this level of capital is consistent with our ratings targets.
| | | | March 31, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| | (in millions) | | (in millions) |
| Equity(1) | $ | 37,847 |
| | $ | 39,076 |
| Equity(1) | $ | 38,817 | | | $ | 36,687 | |
| Junior subordinated debt (including hybrid securities) | 7,578 |
| | 7,575 |
| Junior subordinated debt (including hybrid securities) | 7,613 | | | 7,615 | |
| Other capital debt | 7,004 |
| | 7,001 |
| Other capital debt | 5,879 | | | 5,856 | |
| Total capital | $ | 52,429 |
| | $ | 53,652 |
| Total capital | $ | 52,309 | | | $ | 50,158 | |
__________
| |
(1) | Amounts attributable to Prudential Financial, excluding AOCI. |
(1)Amounts attributable to Prudential Financial, excluding AOCI.
We manage PICA, The Prudential Life Insurance Company, Ltd. (“Prudential of Japan”), Gibraltar Life, and other significant insurance subsidiaries to regulatory capital levels consistent with our “AA” ratings targets. We utilize the risk-based capital (“RBC”) ratio as a primary measure of the capital adequacy of our domestic insurance subsidiaries and the solvency margin ratio as a primary measure of the capital adequacy of our Japanese insurance subsidiaries.
The table below presents the RBC ratios of our most significant domestic insurance subsidiaries as of December 31, 2019,2020, the most recent statutory fiscal year-end and RBC reporting date for these subsidiaries.
|
| | | | |
| Ratio(1) |
| PICA(2) | 411394 | % |
| Prudential Annuities Life Assurance Corporation (“PALAC”) | 484465 | % |
| Composite Major U.S. Insurance Subsidiaries(3) | 426411 | % |
__________
| |
(1) | The RBC ratio calculations are intended to assist insurance regulators in measuring an insurer’s solvency and ability to pay future claims. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities, but is available to the public. |
| |
(2) | Includes Prudential Retirement Insurance and Annuity Company (“PRIAC”), Pruco Life Insurance Company (“Pruco Life”), Pruco Life Insurance Company of New Jersey (“PLNJ”), which is a subsidiary of Pruco Life, and Prudential Legacy Insurance Company of New Jersey (“PLIC”). |
| |
(3) | Includes PICA and its subsidiaries, as noted above, and PALAC. Composite RBC is not reported to regulators and is based on the summation of total adjusted capital and risk charges for the included companies as determined under statutory accounting and RBC guidance to calculate a composite numerator and denominator, respectively, for purposes of calculating the composite ratio. |
(1)The RBC ratio calculations are intended to assist insurance regulators in measuring an insurer’s solvency and ability to pay future claims. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities, but is available to the public.
(2)Includes Prudential Retirement Insurance and Annuity Company (“PRIAC”), Pruco Life Insurance Company (“Pruco Life”), Pruco Life Insurance Company of New Jersey (“PLNJ”), which is a subsidiary of Pruco Life, and Prudential Legacy Insurance Company of New Jersey (“PLIC”).
(3)Includes PICA and its subsidiaries, as noted above, and PALAC. Composite RBC is not reported to regulators and is based on the summation of total adjusted capital and risk charges for the included companies as determined under statutory accounting and RBC guidance to calculate a composite numerator and denominator, respectively, for purposes of calculating the composite ratio.
Similar to the RBC ratios that are employed by U.S. insurance regulators, regulatory authorities in the international jurisdictions in which we operate generally establish some form of minimum solvency margin requirements for insurance companies based on local statutory accounting practices. These solvency margins are a primary measure of the capital adequacy of our international insurance operations. Maintenance of our solvency margins at certain levels is also important to our competitive positioning, as in certain jurisdictions, such as Japan, these solvency margins are required to be disclosed to the public and therefore impact the public perception of an insurer’s financial strength.
The table below presents the solvency margin ratios of our most significant international insurance subsidiaries as of December 31, 2019,2020, the most recent date for which this information is available.
|
| | | | |
| Ratio |
| Prudential of Japan consolidated(1) | 911929 | % |
| Gibraltar Life consolidated(2) | 929991 | % |
__________
| |
(1) | Includes Prudential Trust Co., Ltd., a subsidiary of Prudential of Japan. |
| |
(2) | Includes Prudential Gibraltar Financial Life Insurance Co., Ltd. (“PGFL”), a subsidiary of Gibraltar Life. |
(1)Includes Prudential Trust Co., Ltd., a subsidiary of Prudential of Japan.
(2)Includes Prudential Gibraltar Financial Life Insurance Co., Ltd. (“PGFL”), a subsidiary of Gibraltar Life.
All of our domestic and significant international insurance subsidiaries have capital levels that substantially exceed the minimum level required by applicable insurance regulations. However,regulations; however, market conditions could negatively impact the statutory capital of our insurance companies and constrain our overall capital flexibility. Continued adverse market conditions could require us to take additional management actions for our insurance subsidiaries to maintain capital consistent with their ratings objectives, which may include redeploying financial resources from internal sources or, if markets continue to decline, using available external sources of capital or seeking additional sources. Our regulatory capital levels also may be affected in the future by changes to the applicable regulations, proposals for which are currently under consideration by both
domestic and international insurance regulators. For additional information on the calculation of RBC and solvency margin ratios, as well as regulatory minimums, see Note 19 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Captive Reinsurance Companies
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital—Captive Reinsurance Companies” included in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, for a discussion of our use of captive reinsurance companies.
Shareholder Distributions
Share Repurchase Program and Shareholder Dividends
In December 2019, theFebruary 2021, Prudential Financial’s Board of Directors authorized the Company to repurchase, at management’s discretion, up to $2.0$1.5 billion of its outstanding Common Stock during the period from January 1, 20202021 through December 31, 2020.2021. On May 4, 2021, the Board increased this share repurchase authorization by $500 million, bringing the aggregate share repurchase authorization for calendar year 2021 to $2.0 billion.
TheIn general, the timing and amount of share repurchases are determined by management based on market conditions and other considerations, including any increased capital needs of our businesses due to, among other things, credit migration and losses in our investment portfolio, changes in regulatory capital requirements and opportunities for growth and acquisitions. Repurchases may be executed in the open market, through derivative, accelerated repurchase and other negotiated transactions and through plans designed to comply with Rule 10b5-1(c) under the Securities Exchange Act of 1934. We temporarily suspended Common Stock repurchases under our existing repurchase authorization beginning April 1, 2020; however, we will continue to evaluate the resumption of share repurchases under our existing Board authorization for 2020.
The following table sets forth information about declarations of Common Stock dividends, as well as repurchases of shares of Prudential Financial’s Common Stock, for the three months ended March 31, 2020.2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Dividend Amount | | Shares Repurchased |
| Three months ended: | Per Share | | Aggregate | | Shares | | Total Cost |
| | (in millions, except per share data) |
| March 31, 2021 | $ | 1.15 | | | $ | 467 | | | 4.3 | | | $ | 375 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | |
| | Dividend Amount | | Shares Repurchased |
| Three months ended: | Per Share | | Aggregate | | Shares | | Total Cost |
| | (in millions, except per share data) |
| March 31, 2020 | $ | 1.10 |
| | $ | 445 |
| | 6.7 |
| | $ | 500 |
|
Liquidity
The principles of our liquidity management framework are described in an enterprise-wide policy that is reviewed and approved by the Board. Liquidity management and stress testing are performed on a legal entity basis as the ability to transfer funds between subsidiaries is limited due in part to regulatory restrictions. Liquidity needs are determined through daily and quarterly cash flow forecasting at the holding company and within our operating subsidiaries. We seek to maintain a minimum balance of highly liquid assets to ensure that adequate liquidity is available at Prudential Financial to cover fixed expenses in the event that we experience reduced cash flows from our operating subsidiaries at a time when access to capital markets is also not available.
We seek to mitigate the risk of having limited or no access to financing due to stressed market conditions by generally pre-funding debt in advance of maturity. In the first quarter of 2020, we issued $1.5 billion of Prudential Financial senior notes, of which $1 billion were issued for general corporate purposes, including pre-funding in part our senior notes maturing through 2021. We mitigate the refinancing risk associated with our debt that is used to fund operating needs by matching the term of debt with the assets financed. To ensure adequate liquidity in stress scenarios, stress testing is performed for our major operating subsidiaries. We seek to further mitigate liquidity risk by maintaining our access to alternative sources of liquidity, as discussed below.
Liquidity of Prudential Financial
The principal sources of funds available to Prudential Financial, the parent holding company, are dividends, returns of capital and loans from subsidiaries, and proceeds from debt issuances and certain stock-based compensation activity. These sources of funds may be supplemented by Prudential Financial’s access to the capital markets as well as the “—Alternative Sources of Liquidity” described below.
The primary uses of funds at Prudential Financial include servicing debt, making capital contributions and loans to subsidiaries, making acquisitions, paying declared shareholder dividends and repurchasing outstanding shares of Common Stock executed under authority from the Board.
As of March 31, 2020,2021, Prudential Financial had highly liquid assets with a carrying value totaling $5,992$5,695 million, an increasea decrease of $888$784 million from December 31, 2019.2020. Highly liquid assets predominantly include cash, short-term investments, U.S. Treasury securities, obligations of other U.S. government authorities and agencies, and/or foreign government bonds. We maintain an intercompany liquidity account that is designed to optimize the use of cash by facilitating the lending and borrowing of funds between Prudential Financial and its subsidiaries on a daily basis. Excluding the net borrowings from this intercompany liquidity account, Prudential Financial had highly liquid assets of $5,293$4,926 million as of March 31, 2020, an increase2021, a decrease of $1,232$634 million from December 31, 2019.2020.
The following table sets forth Prudential Financial’s principal sources and uses of highly liquid assets, excluding net borrowings from our intercompany liquidity account, for the periods indicated.
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | | 2021 | | 2020 |
| | (in millions) |
| Highly Liquid Assets, beginning of period | | $ | 5,560 | | | $ | 4,061 | |
| | | | |
| Dividends and/or returns of capital from subsidiaries(1) | | 508 | | | 558 | |
| | | | |
| Capital contributions to subsidiaries(2) | | (26) | | | 0 | |
| Total Business Capital Activity | | 482 | | | 558 | |
| | | | |
| Share repurchases(3) | | (359) | | | (485) | |
| Common stock dividends(4) | | (471) | | | (448) | |
| Disposition activity(5) | | 0 | | | 0 | |
| Total Share Repurchases, Dividends and Disposition Activity | | (830) | | | (933) | |
| | | | |
| Proceeds from the issuance of debt | | 0 | | | 1,486 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total Debt Activity | | 0 | | | 1,486 | |
| Proceeds from stock-based compensation and exercise of stock options | | 86 | | | 72 | |
| Net income tax receipts & payments | | 16 | | | 31 | |
| Affiliated (borrowings)/loans - (operating activities)(6) | | (34) | | | (33) | |
| Interest paid on external debt | | (210) | | | (208) | |
| | | | |
| | | | |
| | | | |
| Other, net | | (144) | | | 259 | |
| Total Other Activity | | (286) | | | 121 | |
| | | | |
| Net increase/(decrease) in highly liquid assets | | (634) | | | 1,232 | |
| | | | |
| Highly Liquid Assets, end of period | | $ | 4,926 | | | $ | 5,293 | |
|
| | | | | | | | |
| Sources and Uses of Holding Company Highly Liquid Assets(1): | | Three Months Ended March 31 |
| | | 2020 | | 2019 |
| | | (in millions) |
| Highly Liquid Assets, beginning of period | | $ | 4,061 |
| | $ | 5,548 |
|
| Dividends and/or returns of capital from subsidiaries(2) | | 558 |
| | 479 |
|
| Capital contributions to subsidiaries(3) | | 0 |
| | (268 | ) |
| Total Business Capital Activity | | 558 |
| | 211 |
|
| Share repurchases(4) | | (485 | ) | | (484 | ) |
| Common stock dividends(5) | | (448 | ) | | (420 | ) |
| Total Share Repurchases and Dividends | | (933 | ) | | (904 | ) |
| Proceeds from the issuance of debt | | 1,486 |
| | 989 |
|
| Total Debt Activity(6) | | 1,486 |
| | 989 |
|
| Proceeds from stock-based compensation and exercise of stock options | | 72 |
| | 59 |
|
| Net income tax receipts & payments | | 31 |
| | 17 |
|
| Affiliated (borrowings)/loans - (operating activities)(7) | | (33 | ) | | (81 | ) |
| Interest paid on external debt | | (208 | ) | | (165 | ) |
| Other, net(6) | | 259 |
| | (129 | ) |
| Total Other Activity | | 121 |
| | (299 | ) |
| Net increase/(decrease) in highly liquid assets | | 1,232 |
| | (3 | ) |
| Highly Liquid Assets, end of period | | $ | 5,293 |
| | $ | 5,545 |
|
(1)2021 includes $210 million from Prudential Annuities Holding Company, $186 million from PGIM subsidiaries, and $112 million from international insurance subsidiaries. 2020 includes $241 million from international insurance subsidiaries, $207 million from PALAC, $63 million from PGIM subsidiaries, $43 million from Prudential Annuities Holding Company, and $4 million from other subsidiaries.
| |
(1) | Prior period amounts have been updated to conform to current period presentation. |
| |
(2) | 2020 includes $241 million from international insurance subsidiaries, $207 million from PALAC, $63 million from PGIM subsidiaries, $43 million from Prudential Annuities Holding Company, and $4 million from other subsidiaries. 2019 includes $245 million from PALAC, $133 million from PGIM subsidiaries, $61 million from international insurance subsidiaries and $40 million from Prudential Annuities Holding Company. |
| |
(3) | 2019 includes capital contributions of $200 million to PICA and $68 million to PGIM subsidiaries. |
| |
(4) | Excludes cash payments made on trades that settled in the subsequent period. |
| |
(5) | Includes cash payments made on dividends declared in prior periods. |
| |
(6) | “Total Debt Activity” excludes changes in PFI Commercial Paper. These changes are captured in “Other, net” in the “Total Other Activity” section. |
(7) (2)2021 includes capital contributions of $17 million to international insurance subsidiaries and $9 million to PGIM subsidiaries.
(3)Excludes cash payments made on trades that settled in the subsequent period.
(4)Includes cash payments made on dividends declared in prior periods.
(5)2021 excludes cash proceeds from the sale of the Company’s interest in Pramerica SGR in March 2021, which were received by PFI in April 2021.
(6)Represent loans to and from affiliated subsidiaries to support business operating needs.
Dividends and Returns of Capital from Subsidiaries
Domestic insurance subsidiaries. During the first three months of 2020,2021, Prudential Financial received returns of capital of $207 million from PALAC and dividends of $43$210 million from Prudential Annuities Holding Company.Company, of which $192 million was from PALAC.
International insurance subsidiaries. During the first three months of 2020,2021, Prudential Financial received dividends of $241$112 million from its international insurance subsidiaries. In addition to paying Common Stock dividends, our international insurance operations may return capital to Prudential Financial through or facilitated by other means, such as the repayment of preferred stock obligations held by Prudential Financial or other affiliates, affiliated lending, affiliated derivatives and reinsurance with U.S.- and Bermuda-based affiliates.
Other subsidiaries. During the first three months of 2020,2021, Prudential Financial received dividends and returns of capital of $63$186 million from PGIM subsidiaries and dividendssubsidiaries.
Restriction on dividends and returns of capital from subsidiaries. Our insurance companies are subject to limitations on the payment of dividends and other transfers of funds to Prudential Financial and other affiliates under applicable insurance law and regulation. Further, as discussed above, recent market conditions could negatively impact capital positions of our insurance companies, which could further restrict their ability to pay dividends. More generally, the payment of dividends by any of our subsidiaries is subject to declaration by their Board of Directors and can be affected by market conditions and other factors.
With respect to our domestic insurance subsidiaries, PICA is permitted to pay ordinary dividends based on calculations specified under New Jersey insurance law, subject to prior notification to the New Jersey Department of Banking and Insurance (“NJDOBI”). Any distributions above this amount in any twelve-month period are considered to be “extraordinary” dividends, and the approval of the NJDOBI is required prior to payment. The laws regulating dividends of the states where our other domestic insurance companies are domiciled are similar, but not identical, to New Jersey’s.
Capital redeployment from our international insurance subsidiaries is subject to local regulatory requirements in the international jurisdictions in which they operate. Our most significant international insurance subsidiaries, Prudential of Japan and Gibraltar Life, are permitted to pay common stock dividends based on calculations specified by Japanese insurance law, subject to prior notification to the FSA. Dividends in excess of these amounts and other forms of capital distribution require the prior approval of the FSA. The regulatory fiscal year end for both Prudential of Japan and Gibraltar Life is March 31, 2020,2021, after which time the common stock dividend amount permitted to be paid without prior approval from the FSA can be determined.
The ability of our PGIM subsidiaries and the majority of our other operating subsidiaries to pay dividends is largely unrestricted from a regulatory standpoint.
See Note 19 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, for information on specific dividend restrictions.
Liquidity of Insurance Subsidiaries
We manage the liquidity of our insurance operations to ensure stable, reliable and cost-effective sources of cash flows to meet all of our obligations. Liquidity within each of our insurance subsidiaries is provided by a variety of sources, including portfolios of liquid assets. The investment portfolios of our subsidiaries are integral to the overall liquidity of our insurance operations. We segment our investment portfolios and employ an asset/liability management approach specific to the requirements of each of our product lines. This enhances the discipline applied in managing the liquidity, as well as the interest rate and credit risk profiles, of each portfolio in a manner consistent with the unique characteristics of the product liabilities.
Liquidity is measured against internally-developed benchmarks that take into account the characteristics of both the asset portfolio and the liabilities that they support. We consider attributes of the various categories of liquid assets (for example, type of asset and credit quality) in calculating internal liquidity measures to evaluate our insurance operations’ liquidity under various stress scenarios, including company-specific and market-wide events. We continue to believe that cash generated by ongoing operations and the liquidity profile of our assets provide sufficient liquidity under reasonably foreseeable stress scenarios for each of our insurance subsidiaries.
The principal sources of liquidity for our insurance subsidiaries are premiums, investment and fee income, investment maturities, sales of investments, and sales associated with our insurance and annuity operations, as well as internal and external borrowings. The principal uses of that liquidity include benefits, claims and dividends paid to policyholders, and payments to policyholders and contractholders in connection with surrenders, withdrawals and net policy loan activity. Other uses of liquidity may include commissions, general and administrative expenses, purchases of investments, the payment of dividends to the parent holding company, hedging and reinsurance activity and payments in connection with financing activities.
The following table sets forth the fair value of certain of our domestic insurance operations’ portfolio of liquid assets, as of the dates indicated.
| | | | March 31, 2020 | | | | March 31, 2021 | | |
| | Prudential Insurance | | PLIC | | PRIAC | | PALAC | | Pruco Life | | Total | | December 31, 2019 | | Prudential
Insurance(1) | | PLIC | | PRIAC | | PALAC | | Pruco Life | | Total | | December 31, 2020 |
| | (in billions) | | (in billions) |
| Cash and short-term investments | $ | 9.4 |
| | $ | 0.8 |
| | $ | 1.3 |
| | $ | 16.0 |
| | $ | 0.7 |
| | $ | 28.2 |
| | $ | 11.9 |
| Cash and short-term investments | $ | 6.0 | | | $ | 1.0 | | | $ | 0.5 | | | $ | 1.8 | | | $ | 0.3 | | | $ | 9.6 | | | $ | 9.4 | |
| Fixed maturity investments(1): | | | | | | | | | | | | | | |
| Fixed maturity investments(2): | | Fixed maturity investments(2): | |
| High or highest quality | 126.6 |
| | 36.7 |
| | 19.0 |
| | 15.1 |
| | 5.3 |
| | 202.7 |
| | 201.3 |
| High or highest quality | 126.9 | | | 34.1 | | | 21.0 | | | 14.3 | | | 6.7 | | | 203.0 | | | 222.4 | |
| Other than high or highest quality | 6.7 |
| | 2.5 |
| | 1.1 |
| | 0.6 |
| | 0.3 |
| | 11.2 |
| | 12.2 |
| Other than high or highest quality | 9.0 | | | 3.6 | | | 1.4 | | | 0.8 | | | 0.4 | | | 15.2 | | | 15.4 | |
| Subtotal | 133.3 |
| | 39.2 |
| | 20.1 |
| | 15.7 |
| | 5.6 |
| | 213.9 |
| | 213.5 |
| Subtotal | 135.9 | | | 37.7 | | | 22.4 | | | 15.1 | | | 7.1 | | | 218.2 | | | 237.8 | |
| Public equity securities, at fair value | 0.2 |
| | 1.7 |
| | 0.0 |
| | 0.1 |
| | 0.0 |
| | 2.0 |
| | 2.5 |
| Public equity securities, at fair value | 0.4 | | | 2.5 | | | 0.1 | | | 0.3 | | | 0.0 | | | 3.3 | | | 3.2 | |
| Total | $ | 142.9 |
| | $ | 41.7 |
| | $ | 21.4 |
| | $ | 31.8 |
| | $ | 6.3 |
| | $ | 244.1 |
| | $ | 227.9 |
| Total | $ | 142.3 | | | $ | 41.2 | | | $ | 23.0 | | | $ | 17.2 | | | $ | 7.4 | | | $ | 231.1 | | | $ | 250.4 | |
__________
| |
(1) | Excludes fixed maturities designated as held-to-maturity. Credit quality is based on NAIC or equivalent rating. |
(1)Represents legal entity view and as such includes both domestic and international activity.
(2)Excludes fixed maturities designated as held-to-maturity. Credit quality is based on NAIC or equivalent rating.
The following table sets forth the fair value of our international insurance operations’ portfolio of liquid assets, as of the dates indicated.
| | | | March 31, 2020 | | | | March 31, 2021 | | |
| | Prudential of Japan | | Gibraltar Life(1) | | All Other(2) | | Total | | December 31, 2019 | | Prudential
of Japan | | Gibraltar
Life(1) | | All
Other(2) | | Total | | December 31, 2020 |
| | (in billions) | | (in billions) |
| Cash and short-term investments | $ | 1.3 |
| | $ | 3.9 |
| | $ | 1.9 |
| | $ | 7.1 |
| | $ | 5.0 |
| Cash and short-term investments | $ | 1.6 | | | $ | 3.8 | | | $ | 1.2 | | | $ | 6.6 | | | $ | 6.0 | |
| Fixed maturity investments(3): | | | | | | | | | | Fixed maturity investments(3): | |
| High or highest quality(4) | 43.1 |
| | 91.6 |
| | 24.5 |
| | 159.2 |
| | 157.2 |
| High or highest quality(4) | 41.8 | | | 88.6 | | | 8.1 | | | 138.5 | | | 147.7 | |
| Other than high or highest quality | 0.6 |
| | 2.3 |
| | 1.6 |
| | 4.5 |
| | 5.4 |
| Other than high or highest quality | 0.7 | | | 2.2 | | | 1.9 | | | 4.8 | | | 4.8 | |
| Subtotal | 43.7 |
| | 93.9 |
| | 26.1 |
| | 163.7 |
| | 162.6 |
| Subtotal | 42.5 | | | 90.8 | | | 10.0 | | | 143.3 | | | 152.5 | |
| Public equity securities | 1.7 |
| | 1.5 |
| | 0.6 |
| | 3.8 |
| | 4.7 |
| Public equity securities | 2.2 | | | 2.0 | | | 0.1 | | | 4.3 | | | 3.6 | |
| Total | $ | 46.7 |
| | $ | 99.3 |
| | $ | 28.6 |
| | $ | 174.6 |
| | $ | 172.3 |
| Total | $ | 46.3 | | | $ | 96.6 | | | $ | 11.3 | | | $ | 154.2 | | | $ | 162.1 | |
__________
| |
(2) | Represents our international insurance operations, excluding Japan. |
| |
(3) | Excludes fixed maturities designated as held-to-maturity. Credit quality is based on NAIC or equivalent rating. |
| |
(4) | As of March 31, 2020, $123.6 billion, or 78%, were invested in government or government agency bonds. |
(1)Includes PGFL.
(2)Represents our international insurance operations, excluding Japan. (3)Excludes fixed maturities designated as held-to-maturity. Credit quality is based on NAIC or equivalent rating.
(4)As of March 31, 2021, $104.1 billion, or 75%, were invested in government or government agency bonds.
Liquidity associated with other activities
Hedging activities associated with Individual Annuities
For the portion of our Individual Annuities’ ALM strategy executed through hedging, as well as the capital hedge program, we enter into a range of exchange-traded, cleared and other OTC equity and interest rate derivatives in order to hedge certain capital market risks related to more severe market conditions. For a full discussion of our Individual Annuities’ risk management strategy, see “—Results of Operations by Segment—U.S. Businesses—U.S. Individual Solutions Division—Individual Annuities.” This portion of our Individual Annuities’ ALM strategy and capital hedge program requires access to liquidity to meet payment obligations relating to these derivatives, such as payments for periodic settlements, purchases, maturities and terminations. These liquidity needs can vary materially due to, among other items, changes in interest rates, equity markets, mortality and policyholder behavior.
The hedging portion of our Individual Annuities’ ALM strategy and capital hedge program may also result in derivative related collateral postings to (when we are in a net pay position) or from (when we are in a net receive position) counterparties. The net collateral position depends on changes in interest rates and equity markets related to the amount of the exposures hedged. Depending on market conditions, the collateral posting requirements can result in material liquidity needs when we are in a net pay position. As of March 31, 2020,2021, the derivatives comprising the hedging portion of our Individual Annuities’ ALM strategy and capital hedge program were in a net receivepost position of $15.3$6.5 billion compared to a net receive position of $4.7$3.4 billion as of December 31, 2019.2020. The change in collateral position was primarily driven by a positivethe impact from decliningof increasing interest rates and equity markets.
Foreign exchange hedging activities
We employ various hedging strategies to manage potential exposure to foreign currency exchange rate movements, particularly those associated with the yen. Our overall yen hedging strategy calibrates the hedge level to preserve the relative contribution of our yen-based business to the Company’s overall return on equity on a leverage neutral basis. The hedging strategy includes two primary components:
Income Hedges—We hedge a portion of our prospective yen-based earnings streams by entering into external forward currency derivative contracts that effectively fix the currency exchange rates for that portion of earnings, thereby reducing volatility from foreign currency exchange rate movements. As of March 31, 2020,2021, we have hedged 100%, 83% and 39%, of expected yen-based earnings for 2020, 2021, 2022 and 2022,2023, respectively.
Equity Hedges—We hold both internal and external hedges primarily to hedge our USD-equivalent equity. These hedges also mitigate volatility in the solvency margins of yen-based subsidiaries resulting from changes in the market value of their USD-denominated investments hedging our USD-equivalent equity attributable to changes in the yen-USD exchange rate.
For additional information on our hedging strategy, see “—Results of Operations—Impact of Foreign Currency Exchange Rates.”
Cash settlements from these hedging activities result in cash flows between subsidiaries of Prudential Financial and either international-based subsidiaries or external parties. The cash flows are dependent on changes in foreign currency exchange rates and the notional amount of the exposures hedged. For example, a significant yen depreciation over an extended period of time could result in net cash inflows, while a significant yen appreciation could result in net cash outflows. The following tables set forth information about net cash settlements and the net asset or liability resulting from these hedging activities related to the yen and other currencies for the periods indicated.
| | | | Three Months Ended
March 31, | | Three Months Ended
March 31, |
| Cash Settlements: Received (Paid) | 2020 | | 2019 | Cash Settlements: Received (Paid) | 2021 | | 2020 |
| | (in millions) | | (in millions) |
| Income Hedges (External)(1) | $ | 29 |
| | $ | 12 |
| Income Hedges (External)(1) | $ | 8 | | | $ | 29 | |
| Equity Hedges: | | | | Equity Hedges: | |
| Internal(2) | 104 |
| | 92 |
| Internal(2) | 100 | | | 104 | |
| External(3) | 45 |
| | 37 |
| External(3) | 7 | | | 45 | |
| Total Equity Hedges | 149 |
| | 129 |
| Total Equity Hedges | 107 | | | 149 | |
| Total Cash Settlements | $ | 178 |
| | $ | 141 |
| Total Cash Settlements | $ | 115 | | | $ | 178 | |
| | | | | | | | |
| | March 31, | | December 31, | |
| Assets (Liabilities): | 2020 | | 2019 | Assets (Liabilities): | March 31, 2021 | | December 31, 2020 |
| | (in millions) | | (in millions) |
| Income Hedges (External)(4) | $ | 180 |
| | $ | 60 |
| Income Hedges (External)(4) | $ | 40 | | | $ | 3 | |
| Equity Hedges: | | | | Equity Hedges: | |
| Internal(2) | 699 |
| | 506 |
| Internal(2) | 821 | | | 291 | |
| External(5) | 89 |
| | 43 |
| |
| Total Equity Hedges(6) | 788 |
| | 549 |
| |
| External | | External | (143) | | | (56) | |
| Total Equity Hedges(5) | | Total Equity Hedges(5) | 678 | | | 235 | |
| Total Assets (Liabilities) | $ | 968 |
| | $ | 609 |
| Total Assets (Liabilities) | $ | 718 | | | $ | 238 | |
__________
| |
(1) | Includes non-yen related cash settlements of $23 million, primarily denominated in Korean won, Australian dollar and Brazilian real and $5.5 million, primarily denominated in Australian dollar, Chilean peso and Brazilian real, for the three months ended March 31, 2020 and 2019, respectively. |
| |
(2) | Represents internal transactions between international-based and U.S.-based entities. Amounts noted are from the U.S.-based entities’ perspectives. |
| |
(3) | Includes non-yen related cash settlements of $23 million and $1 million, denominated in Korean won for the three months ended March 31, 2020 and 2019, respectively. |
| |
(4) | Includes non-yen related assets of $158 million, primarily denominated in Brazilian real, Australian dollar and Korean won, and assets of $37 million, primarily denominated in Korean won, Australian dollar and Chilean peso, as of March 31, 2020 and December 31, 2019, respectively. |
| |
(5) | Includes non-yen related assets of $31 million, denominated in Korean won, and assets of $1 million, denominated in Korean won, as of March 31, 2020 and December 31, 2019, respectively. |
| |
(6) | As of March 31, 2020, approximately $218 million, $378 million, $185 million and $7 million of the net market values are scheduled to settle in 2020, 2021, 2022 and thereafter, respectively. The net market value of the assets (liabilities) will vary with changing market conditions to the extent there are no corresponding offsetting positions. |
(1)Includes non-yen related cash settlements of $5 million, primarily denominated in Brazilian real, Australian dollar and Chilean peso and $23 million, primarily denominated in Korean won, Australian dollar and Brazilian real for the three months ended March 31, 2021 and 2020, respectively.
(2)Represents internal transactions between international-based and U.S.-based entities. Amounts noted are from the U.S.-based entities’ perspectives.
(3)Includes non-yen related cash settlements of $23 million, denominated in Korean won for the three months ended March 31, 2020.
(4)Includes non-yen related assets of $18 million, primarily denominated in Brazilian real, Australian dollar and Chilean peso and assets of $2 million, primarily denominated in Brazilian real, Chilean peso and Australian dollar, as of March 31, 2021 and December 31, 2020, respectively.
(5)As of March 31, 2021, approximately $225 million, $188 million, $260 million and $5 million of the net market values are scheduled to settle in 2021, 2022, 2023 and thereafter, respectively. The net market value of the assets (liabilities) will vary with changing market conditions to the extent there are no corresponding offsetting positions.
PGIM operations
The principal sources of liquidity for our fee-based PGIM businesses include asset management fees, and commercial mortgage origination and servicing fees.fees, and internal and external funding facilities. The principal uses of liquidity include general and administrative expenses, facilitating our commercial mortgage loan business, and distributions of dividends and
returns of capital to Prudential Financial. The primary liquidity risks for our fee-based PGIM businesses relate to their profitability, which is impacted by market conditions, and our investment management performance.performance and client redemptions. We believe the cash flows from our fee-based PGIM businesses are adequate to satisfy the current liquidity requirements of these operations, as well as requirements that could arise under reasonably foreseeable stress scenarios, which are monitored through the use of internal measures.
The principal sources of liquidity for our strategicco- and seed investments held in our PGIM businesses are cash flows from investments, the ability to liquidate investments, borrowing lines from internal sources, including Prudential Financial and Prudential Funding, LLC (“Prudential Funding”), a wholly-owned subsidiary of PICA, and external sources, including PGIM’s limited-recourse credit facility. The principal useuses of liquidity for our strategicco- and seed investments includesinclude making investments to support business growth and paying interest expense from the internal and external borrowings used to fund those investments. The primary liquidity risks include the inability to sell assets in a timely manner, declines in the value of assets and credit defaults. There have been no material changes to the liquidity position of our PGIM operations since December 31, 2019.2020.
Alternative Sources of Liquidity
In addition to asset-based financing as discussed below, Prudential Financial and certain subsidiaries have access to other sources of liquidity, including syndicated, unsecured committed credit facilities, membership in the Federal Home Loan Banks, commercial paper programs, and contingent financing facilities in the form of a put option agreement and facility agreement. For more information on these sources of liquidity, see Note 9 to the Unaudited Interim Consolidated Financial Statements contained herein and Note 17 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Asset-based Financing
We conduct asset-based or secured financing within our insurance and other subsidiaries, including transactions such as securities lending, repurchase agreements and mortgage dollar rolls, to earn spread income, to borrow funds, or to facilitate trading activity. These programs are primarily driven by portfolio holdings of securities that are lendable based on counterparty demand for these securities in the marketplace. The collateral received in connection with these programs is primarily used to purchase securities in the short-term spread portfolios of our insurance entities. Investments held in the short-term spread portfolios include cash and cash equivalents, short-term investments (primarily corporate bonds), mortgage loans and fixed maturities (primarily collateralized loan obligations and other structured securities), with a weighted average life at time of purchase by the short-term portfolios of four years or less. Floating rate assets comprise the majority of our short-term spread portfolio. These short-term portfolios are subject to specific investment policy statements, which among other things, do not allow for significant asset/liability interest rate duration mismatch.
The following table sets forth our liabilities under asset-based or secured financing programs as of the dates indicated.
| | | | March 31, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| | PFI Excluding Closed Block Division | | Closed Block Division | | Consolidated | | PFI Excluding Closed Block Division | | Closed Block Division | | Consolidated | | PFI
Excluding
Closed Block
Division | | Closed
Block
Division | | Consolidated | | PFI
Excluding
Closed Block
Division | | Closed
Block
Division | | Consolidated |
| | ($ in millions) | | ($ in millions) |
| Securities sold under agreements to repurchase | $ | 7,841 |
| | $ | 2,716 |
| | $ | 10,557 |
| | $ | 6,834 |
| | $ | 2,847 |
| | $ | 9,681 |
| Securities sold under agreements to repurchase | $ | 6,679 | | | $ | 2,705 | | | $ | 9,384 | | | $ | 8,092 | | | $ | 2,802 | | | $ | 10,894 | |
| Cash collateral for loaned securities | 2,980 |
| | 416 |
| | 3,396 |
| | 3,228 |
| | 986 |
| | 4,214 |
| Cash collateral for loaned securities | 4,487 | | | 186 | | | 4,673 | | | 3,379 | | | 120 | | | 3,499 | |
| Securities sold but not yet purchased | 2 |
| | 0 |
| | 2 |
| | 0 |
| | 0 |
| | 0 |
| Securities sold but not yet purchased | 3 | | | 0 | | | 3 | | | 2 | | | 0 | | | 2 | |
| Total(1) | $ | 10,823 |
| | $ | 3,132 |
| | $ | 13,955 |
| | $ | 10,062 |
| | $ | 3,833 |
| | $ | 13,895 |
| |
| Portion of above securities that may be returned to the Company overnight requiring immediate return of the cash collateral(2) | $ | 10,268 |
| | $ | 3,132 |
| | $ | 13,400 |
| | $ | 10,062 |
| | $ | 3,833 |
| | $ | 13,895 |
| |
| Weighted average maturity, in days(2) | 23 |
| | N/A |
| | | | N/A |
| | N/A |
| | | |
| Total(1)(2) | | Total(1)(2) | $ | 11,169 | | | $ | 2,891 | | | $ | 14,060 | | | $ | 11,473 | | | $ | 2,922 | | | $ | 14,395 | |
| Portion of above securities that may be returned to the Company overnight requiring immediate return of the cash collateral(3) | | Portion of above securities that may be returned to the Company overnight requiring immediate return of the cash collateral(3) | $ | 10,550 | | | $ | 2,891 | | | $ | 13,441 | | | $ | 10,463 | | | $ | 2,922 | | | $ | 13,385 | |
| Weighted average maturity, in days(3) | | Weighted average maturity, in days(3) | 26 | | N/A | | 28 | | N/A | |
__________
| |
(1) | The daily weighted average outstanding balance for the three months ended March 31, 2020 was $10,803 million for PFI excluding the Closed Block division, and $3,717 million for the Closed Block division. |
| |
(2) | Excludes securities that may be returned to the Company overnight. “N/A” reflects that all outstanding balances may be returned to the Company overnight. |
(1)The daily weighted average outstanding balance for the three months ended March 31, 2021 was $11,550 million for PFI excluding the Closed Block division, and $2,936 million for the Closed Block division.
(2)Includes utilization of external funding facilities for PGIM’s commercial mortgage origination business.
(3)Excludes securities that may be returned to the Company overnight. “N/A” reflects that all outstanding balances may be returned to the Company overnight.
As of March 31, 2020,2021, our domestic insurance entities had assets eligible for the asset-based or secured financing programs of $120.4$122.7 billion, of which $14.0$13.8 billion were on loan. Taking into account market conditions and outstanding loan balances as of March 31, 2020,2021, we believe approximately $19.7$13.4 billion of the remaining eligible assets are readily lendable, including approximately $13.6$9.3 billion relating to PFI excluding the Closed Block division, of which $3.8$2.6 billion relates to certain separate accounts and may only be used for financing activities related to those accounts, and the remaining $6.1$4.1 billion relating to the Closed Block division.
Financing Activities
As of March 31, 2020,2021, total short-term and long-term debt of the Company on a consolidated basis was $22.7$20.6 billion, an increasea decrease of $2.1less than $0.1 billion from December 31, 2019.2020. The following table sets forth total consolidated borrowings of the Company as of the dates indicated. We may, from time to time, seek to redeem or repurchase our outstanding debt securities through open market purchases, individually negotiated transactions or otherwise. Any such actions will depend on prevailing market conditions, our liquidity position, and other factors.
| | | | March 31, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| Borrowings: | Prudential Financial | | Subsidiaries | | Consolidated | | Prudential Financial | | Subsidiaries | | Consolidated | Borrowings: | Prudential
Financial | | Subsidiaries | | Consolidated | | Prudential
Financial | | Subsidiaries | | Consolidated |
| | (in millions) | | (in millions) |
| General obligation short-term debt: | | | | | | | | | | | | General obligation short-term debt: | |
| Commercial paper | $ | 453 |
| | $ | 700 |
| | $ | 1,153 |
| | $ | 25 |
| | $ | 524 |
| | $ | 549 |
| Commercial paper | $ | 25 | | | $ | 371 | | | $ | 396 | | | $ | 25 | | | $ | 355 | | | $ | 380 | |
| Current portion of long-term debt | 1,179 |
| | 0 |
| | 1,179 |
| | 1,179 |
| | 0 |
| | 1,179 |
| Current portion of long-term debt | 400 | | | 0 | | | 400 | | | 399 | | | 0 | | | 399 | |
| Subtotal | 1,632 |
| | 700 |
| | 2,332 |
| | 1,204 |
| | 524 |
| | 1,728 |
| Subtotal | 425 | | | 371 | | | 796 | | | 424 | | | 355 | | | 779 | |
| General obligation long-term debt: | | | | | | | | | | | | General obligation long-term debt: | | | | | | | | | | | |
| Senior debt | 11,400 |
| | 173 |
| | 11,573 |
| | 9,912 |
| | 172 |
| | 10,084 |
| Senior debt | 11,009 | | | 173 | | | 11,182 | | | 11,007 | | | 173 | | | 11,179 | |
| Junior subordinated debt | 7,520 |
| | 58 |
| | 7,578 |
| | 7,518 |
| | 57 |
| | 7,575 |
| Junior subordinated debt | 7,556 | | | 57 | | | 7,613 | | | 7,554 | | | 60 | | | 7,615 | |
| Surplus notes(1) | 0 |
| | 342 |
| | 342 |
| | 0 |
| | 342 |
| | 342 |
| Surplus notes(1) | 0 | | | 343 | | | 343 | | | 0 | | | 343 | | | 343 | |
| Subtotal | 18,920 |
| | 573 |
| | 19,493 |
| | 17,430 |
| | 571 |
| | 18,001 |
| Subtotal | 18,565 | | | 573 | | | 19,138 | | | 18,561 | | | 576 | | | 19,137 | |
| Total general obligations | 20,552 |
| | 1,273 |
| | 21,825 |
| | 18,634 |
| | 1,095 |
| | 19,729 |
| Total general obligations | 18,990 | | | 944 | | | 19,934 | | | 18,985 | | | 931 | | | 19,916 | |
| Limited and non-recourse borrowings(2): | | | | | | | | | | | | Limited and non-recourse borrowings(2): | | | | | | | | | | | |
| Short-term debt | 0 |
| | 16 |
| | 16 |
| | 0 |
| | 13 |
| | 13 |
| Short-term debt | 0 | | | 9 | | | 9 | | | 0 | | | 18 | | | 18 | |
| Current portion of long-term debt | 0 |
| | 191 |
| | 191 |
| | 0 |
| | 192 |
| | 192 |
| Current portion of long-term debt | 0 | | | 62 | | | 62 | | | 0 | | | 128 | | | 128 | |
| Long-term debt | 0 |
| | 656 |
| | 656 |
| | 0 |
| | 645 |
| | 645 |
| Long-term debt | 0 | | | 592 | | | 592 | | | 0 | | | 581 | | | 581 | |
| Total limited and non-recourse borrowings | 0 |
| | 863 |
| | 863 |
| | 0 |
| | 850 |
| | 850 |
| Total limited and non-recourse borrowings | 0 | | | 663 | | | 663 | | | 0 | | | 727 | | | 727 | |
| Total borrowings | $ | 20,552 |
| | $ | 2,136 |
| | $ | 22,688 |
| | $ | 18,634 |
| | $ | 1,945 |
| | $ | 20,579 |
| Total borrowings | $ | 18,990 | | | $ | 1,607 | | | $ | 20,597 | | | $ | 18,985 | | | $ | 1,658 | | | $ | 20,643 | |
__________
| |
(1) | Amounts are net of assets under set-off arrangements of $10,614 million and $9,749 million as of March 31, 2020 and December 31, 2019, respectively. |
| |
(2) | Limited and non-recourse borrowing primarily represents mortgage debt of our subsidiaries that has recourse only to real estate investment property of $548 million and $537 million as of March 31, 2020 and December 31, 2019, respectively, and a draw on a credit facility with recourse only to collateral pledged by the Company of $300 million as of both March 31, 2020 and December 31, 2019. |
(1)Amounts are net of assets under set-off arrangements of $10,514 million and $10,964 million as of March 31, 2021 and December 31, 2020, respectively.
(2)Limited and non-recourse borrowing primarily represents mortgage debt of our subsidiaries that has recourse only to real estate investment property of $354 million and $409 million as of March 31, 2021 and December 31, 2020, respectively, and a $300 million draw on a credit facility that has recourse only to collateral pledged by the Company as of both March 31, 2021 and December 31, 2020.
As of March 31, 2020,2021, and December 31, 2019,2020, we were in compliance with all debt covenants related to the borrowings in the table above. For additional information on our short- and long-term debt obligations, see Note 9 to the Unaudited Interim Consolidated Financial Statements contained herein and Note 17 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Prudential Financial’s consolidated borrowings increased $1.92 billiondecreased $46 million from December 31, 2019,2020, primarily driven by the issuance, net of related costs, of $1.5 billion of seniora $51 million decrease in subsidiary borrowings. This decrease is primarily due to $66 million in debt andmaturities, partially offset by a $428$16 million increase in commercial paper outstanding. Borrowings of our subsidiaries increased $191 million from December 31, 2019, driven by a $176 million increase in commercial paper, an $11 million increase in mortgage debt, and a $3 million increase in short-term debt.paper.
Term and Universal Life Reserve Financing
We use captive reinsurance subsidiaries to finance the portion of the statutory reserves required to be held by our domestic life insurance companies under Regulation XXX and Guideline AXXX that we consider to be non-economic. The financing arrangements involve the reinsurance of term and universal life business to our captive reinsurers and the issuance of surplus notes by those captives that are treated as capital for statutory purposes. These surplus notes are subordinated to policyholder
obligations, and the payment of principal and interest on the surplus notes can only be made with prior insurance regulatory approval.
We have entered into agreements with external counterparties providing for the issuance of surplus notes by our captive reinsurers in return for the receipt of credit-linked notes (“Credit-Linked Note Structures”). As of March 31, 2020,2021, we had Credit-Linked Note Structures with an aggregate issuance capacity of $13,625$14,700 million, of which $11,999$12,644 million was outstanding, as compared to an aggregate issuance capacity of $13,700$14,825 million, of which $12,009$12,919 million was outstanding, as of December 31, 2019.2020. Under the agreements, the captive receives in exchange for the surplus notes one or more credit-linked notes issued by a special-purpose affiliate of the Company with an aggregate principal amount equal to the surplus notes outstanding. The captive holds the credit-linked notes as assets supporting Regulation XXX or Guideline AXXX non-economic reserves, as applicable. For more information on our Credit-Linked Note Structures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities” in our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
The following table summarizes our Credit-Linked Note Structures, which are reported on a net basis, as of March 31, 2020.2021.
| | | | Surplus Notes | | Outstanding as of March 31, 2020 | | | | Surplus Notes | | Outstanding
as of
March 31, 2021 | |
| Credit-Linked Note Structures: | Original Issue Dates | | Maturity Dates | | Facility Size | Credit-Linked Note Structures: | Original
Issue Dates | | Maturity
Dates | | Facility
Size |
| | ($ in millions) | | ($ in millions) |
| XXX | 2011-2014 | | 2021-2024 | | $ | 1,750 |
| (1) | | $ | 1,750 |
| XXX | 2011-2021 | | 2021-2036 | | $ | 1,600 | | (1) | | $ | 1,750 | |
| AXXX | 2013 | | 2033 | | 3,248 |
| | 3,500 |
| AXXX | 2013 | | 2033 | | 3,248 | | | 3,500 | |
| XXX | 2014-2018 | | 2021-2034 | | 2,285 |
| (2) | | 2,375 |
| XXX | 2014-2018 | | 2021-2034 | | 2,230 | | (2) | | 2,250 | |
| XXX | 2014-2017 | | 2024-2037 | | 2,330 |
| | 2,400 |
| XXX | 2014-2017 | | 2024-2037 | | 2,330 | | | 2,400 | |
| AXXX | 2017 | | 2037 | | 1,466 |
| | 2,000 |
| AXXX | 2017 | | 2037 | | 1,466 | | | 2,000 | |
| XXX | 2018 | | 2038 | | 920 |
| | 1,600 |
| XXX | 2018 | | 2038 | | 1,070 | | | 1,600 | |
| AXXX | | AXXX | 2020 | | 2032 | | 700 | | | 1,200 | |
| Total Credit-Linked Note Structures | | $ | 11,999 |
| | $ | 13,625 |
| Total Credit-Linked Note Structures | | $ | 12,644 | | | $ | 14,700 | |
__________
| |
(1) | Prudential Financial has agreed to reimburse amounts paid under the credit-linked notes issued in this structure up to $0.5 billion. During the fourth quarter of 2019, this financing facility was restructured to allow for an extension through 2036. |
| |
(2) | The $2.3 billion of surplus notes represents an intercompany transaction that eliminates upon consolidation. Prudential Financial has agreed to reimburse amounts paid under credit-linked notes issued in this structure up to $1.0 billion. |
(1)Prudential Financial has agreed to reimburse amounts paid under the credit-linked notes issued in this structure up to $500 million.
(2)The $2,230 million of surplus notes represents an intercompany transaction that eliminates upon consolidation. Prudential Financial has agreed to reimburse amounts paid under credit-linked notes issued in this structure up to $1,000 million.
As of March 31, 2020,2021, we also had outstanding an aggregate of $2.6 billion$2,775 million of debt issued for the purpose of financing Regulation XXX and Guideline AXXX non-economic reserves, of which approximately $0.7 billion$1,175 million relates to Regulation XXX reserves and approximately $1.9 billion$1,600 million relates to Guideline AXXX reserves. In addition, as of March 31, 2020,2021, for purposes of financing Guideline AXXX reserves, one of our captives had approximately $4.0 billion$3,982 million of surplus notes outstanding that were issued to affiliates.
The Company has introduced updated versions of its individual life products in conjunction with the requirement to adopt principle-based reserving by January 1, 2020. These updated products are currently priced to support the principle-based statutory reserve level without the need for reserve financing. Certain elements of the implementation of principle-based reserving are yet to be finalized by the NAIC and may have a material impact on statutory reserves. The Company continues to assess the impact of the implementation of principle-based reserving on projected statutory reserve levels, product pricing and the use of financing.
Ratings
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Ratings” in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, for a discussion of our financial strength and credit ratings and their impact on our business.
There have been no significant changes or actions in ratings or ratings outlooks for our Company that have occurred since the filing of our Form 10-K for the year ended December 31, 2019 through the date of this filing. In 2020, Moody’s, Fitch, and AM Best revised their Outlook on the U.S. life insurance industry from Stable to Negative.
Off-Balance Sheet Arrangements
Guarantees, Other Contingencies and Other Contingent Commitments
In the course of our business, we provide certain guarantees and indemnities to third-parties pursuant to which we may be contingently required to make payments in the future. We also have other commitments, some of which are contingent upon events or circumstances not under our control, including those at the discretion of our counterparties. See “—Commitments and Guarantees” within Note 14 to the Unaudited Interim Consolidated Financial Statements for additional information. For further discussion of certain of these commitments that relate to our separate accounts, also see “—Liquidity—Liquidity associated with other activities—PGIM operations.”
Other Off-Balance Sheet Arrangements
In May 2020, Prudential Financial entered into a ten-year facility agreement with a Delaware trust that gives Prudential Financial the right, at any time over a ten-year period, to issue up to $1.5 billion of senior notes to the trust in return for principal and interest strips of U.S. Treasury securities that are held by the trust.
In November 2013, we entered into a put option agreement with a Delaware trust that gives Prudential Financial the right, at any time over a ten-year period, to issue up to $1.5 billion of senior notes to the trust in return for principal and interest strips of U.S. Treasury securities that are held by the trust.
In 2014, Prudential Financial entered into financing transactions, pursuant to which it issued $500 million of limited-recourse notes and, in return, obtained $500 million of asset-backed notes from a Delaware master trust and ultimately contributed the asset-backed notes to its subsidiary, PRIAC. As of March 31, 2020,2021, no principal payments have been received or are currently due on the asset-backed notes and, as a result, there was no payment obligation under the limited-recourse notes. Accordingly, none of the notes are reflected in the Company’s Unaudited Interim Consolidated Financial Statements as of that date.
Other than as described above, we do not have retained or contingent interests in assets transferred to unconsolidated entities, or variable interests in unconsolidated entities or other similar transactions, arrangements or relationships that serve as credit, liquidity or market risk support, that we believe are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or our access to or requirements for capital resources. In addition, other than the agreements referred to above, we do not have relationships with any unconsolidated entities that are contractually limited to narrow activities that facilitate our transfer of or access to associated assets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of fluctuations in the value of financial instruments as a result of absolute or relative changes in interest rates, foreign currency exchange rates, equity prices or commodity prices. To varying degrees, our products and services, and the investment activities supporting them, generate exposure to market risk. The market risk incurred, and our strategies for managing this risk, vary by product. As of March 31, 2020,2021, there have been no material changes in our economic exposure to market risk from December 31, 2019,2020, a description of which may be found in our Annual Report on Form 10-K, for the year ended December 31, 2019,2020, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” filed with the Securities and Exchange Commission. See the “Risk Factors” section and Item 1A, “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2019,2020, for a discussion of how difficult conditions in the financial markets and the economy generally may materially adversely affect our business and results of our operations.
ITEM 4. CONTROLS AND PROCEDURES
In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized, and reported on a timely basis, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of March 31, 2020.2021. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2020,2021, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), occurred during the quarter ended March 31, 2020,2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 14 to the Unaudited Interim Consolidated Financial Statements under “—Litigation and Regulatory Matters” for a description of certain pending litigation and regulatory matters affecting us, and certain risks to our businesses presented by such matters, which is incorporated herein by reference.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.2020. These risks could materially affect our business, results of operations or financial condition, cause the trading price of our Common Stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by, or on behalf of, the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” and the risks of our businesses described elsewhere in this Quarterly Report on Form 10-Q. The following should be read in conjunction with and supplements and amends the section titled “Risk Factors” in our Annual Report on Form 10-K.
The COVID-19 pandemic has resulted in extreme stress and disruption in the global economy and financial markets, and has adversely impacted, and may continue to adversely impact, our results of operations, financial condition and prospects.
During the first quarter of 2020 the COVID-19 crisis (i) caused unfavorable financial market conditions which had a substantial negative effect on reported results of our businesses and market values in our investment portfolio, (ii) negatively impacted the statutory capital of our insurance companies and constrained our overall capital flexibility primarily due to asset value declines and the need to strengthen reserves, and (iii) caused us to lower our outlook for the future, as described further under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—COVID-19.”
We cannot predict what impact the COVID-19 pandemic will ultimately have on the global economy, markets or our businesses. The pandemic could exacerbate existing areas of concern, such as the pace of economic growth, equity market performance, and continued low interest rates, among others. Changes in consumer spending, business investment, and government debt and spending as a result of the crisis may negatively impact our businesses.
These risks may have manifested, and may continue to manifest, in our business in the following areas, among others:
Investment Risk. The COVID-19 pandemic and its impact on the global economy has increased the risk of loss on our investments due to default or deterioration in credit quality or value as described further under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—General Account Investments—COVID-19.”
Insurance Risk. We expect COVID-19 to drive elevated levels of mortality in the near-term. The COVID-19 pandemic may ultimately result in a mortality calamity, which is the risk that short-term mortality rates deviate adversely from what is expected as a result of pandemics or other disasters. Elevated losses will reduce our earnings and capital, and we may be forced to liquidate assets before maturity in order to pay the excess claims. The pandemic situation may worsen depending on the evolution of the virus’s transmissibility and virulence, effectiveness of public health measures and availability of potential vaccines and treatments. Ultimate losses would depend on several factors, including the rates of mortality and morbidity among various segments of the insured population, age distribution of associated deaths, collectability of reinsurance, performance of our investment portfolio, effect on lapses and surrenders of existing policies, as well as sales of new policies and other variables.
The pandemic may also result in a change in policyholder behavior, such as policyholders choosing to defer or stop paying insurance premiums. It may also result in a lapse calamity, which is the risk that lapse rates over the short-term deviate adversely from what is expected. For example, surrenders of cash surrender value products by customers in need of liquidity can impact our liquidity, and it may be necessary in certain market conditions to sell assets to meet surrender demands. Lapse calamity can also impact our earnings through its impact on estimated future profits.
As a result of COVID-19 we also expect to experience elevated short-term disability claims in our Group Insurance business and may experience elevated claims in our Long-Term Care business.
Finally, we cannot predict whether COVID-19 will ultimately lead to longer-term deviations from the mortality, policyholder behavior or morbidity assumptions we used to price our products.
Market Risk. Continued market disruptions and volatility may further negatively impact the profitability of many of our insurance and annuity products, which depends in part on the value of the separate accounts supporting these products which can fluctuate substantially depending on market conditions. Market volatility and reduced liquidity may reduce our ability to implement asset-liability management and hedging strategies. In addition, market conditions may further reduce the value of assets that we manage in our investment management business, which depends on fees related primarily to the value of assets under management. The decline in interest rates, in particular, may result in lower investment income, higher reserve levels and other consequences as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of a Low Interest Rate Environment.” Finally, low interest rates and poor equity market returns will likely result in increased pension and other postretirement benefit plan expenses and reduce our profitability.
Liquidity Risk. During the first quarter of 2020, the Company took significant actions to support liquidity as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Nevertheless, the impact of the COVID-19 crisis and related market dislocations could strain our existing liquidity and cause us to increase the use of our alternative sources of liquidity, which could result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings. Furthermore, certain sources of liquidity might not be available during times of stress, or may only be available on unfavorable terms, which can result in a decrease in our profitability and a significant reduction in our financial flexibility.
In particular, abrupt changes to interest rate, equity, and/or currency markets could lead to increased collateral requirements to counterparties, and cash demands due to severe mortality calamity, customer withdrawals or lapse events.
Operational Risk. One of the main impacts of the COVID-19 crisis has been executing our business continuity protocols to ensure our employees are safe and able to serve our customers. This included transitioning the vast majority of our employees to remote work arrangements. We have also made a number of operational changes to accommodate our customers as further described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—COVID-19.”
In this environment, there is an elevated risk that weaknesses or failures in our business continuation plans could lead to disruption of our operations, liability to clients, exposure to disciplinary action or harm to our reputation. Furthermore, weaknesses or failures within a vendor’s business continuation plan can materially disrupt our business operations. Our information systems and those of our vendors and service providers may be more vulnerable to cyber-attacks, computer viruses or other computer related attacks, programming errors and similar disruptive problems during a business continuation event.
Strategic Risk. The COVID-19 pandemic could ultimately generate an economic downturn; higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending. In such an environment, the demand for our products and our investment returns could be materially adversely affected. In addition, we expect near-term sales to be slowed by the impact of social distancing and financial hardship on our customers.
The macroeconomic environment may also result in the need to recognize an impairment of goodwill which could negatively impact our results of operations and financial condition.
Finally, we expect that account values in our Full Service business will be impacted by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provides qualified individuals the ability to withdraw from defined contribution plans up to $100,000 penalty-free, with the withdrawal taxed over a three-year period (unless otherwise elected by the individual). We cannot predict what other actions governments will take in response to the COVID-19 pandemic, and how any new laws, regulations, or state-sponsored programs may impact our business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) The following table provides information about purchases by the Company during the three months ended March 31, 2020,2021, of its Common Stock:
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program(2) | | Approximate Dollar Value of Shares that May Yet Be Purchased under the Program(2) |
| January 1, 2020 through January 31, 2020 | | 1,781,319 |
| | $ | 93.92 |
| | 1,774,536 |
| | |
| February 1, 2020 through February 29, 2020 | | 2,504,845 |
| | $ | 91.90 |
| | 1,835,907 |
| | |
| March 1, 2020 through March 31, 2020 | | 3,120,892 |
| | $ | 53.50 |
| | 3,115,209 |
| | |
| Total | | 7,407,056 |
| | $ | 76.21 |
| | 6,725,652 |
| | $ | 1,500,000,000 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number
of Shares
Purchased(1) | | Average
Price Paid
per Share | | Total Number of
Shares Purchased
as Part of
Publicly Announced
Program(2) | | Approximate Dollar Value of Shares that May Yet Be Purchased under the Program(2) |
| January 1, 2021 through January 31, 2021 | | 4,525 | | | $ | 83.61 | | | 0 | | | |
| February 1, 2021 through February 28, 2021 | | 2,841,507 | | | $ | 83.54 | | | 2,226,281 | | | |
| March 1, 2021 through March 31, 2021 | | 2,058,855 | | | $ | 91.29 | | | 2,053,979 | | | |
| Total | | 4,904,887 | | | $ | 86.79 | | | 4,280,260 | | | $ | 1,625,000,000 | |
__________
| |
(1) | Includes shares of Common Stock withheld from participants for income tax withholding purposes whose shares of restricted stock units vested during the period. Such restricted stock units were originally issued to participants pursuant to the Prudential Financial Inc. Omnibus Incentive Plan. |
| |
(2) | In December 2019, Prudential Financial’s Board of Directors authorized the Company to repurchase, at management’s discretion, up to $2.0 billion of its outstanding Common Stock during the period from January 1, 2020 through December 31, 2020. The Company temporarily suspended Common Stock repurchases under its existing repurchase authorization beginning April 1, 2020; however, the Company will continue to evaluate the resumption of share repurchases under the existing Board authorization for 2020. |
(1)Includes shares of Common Stock withheld from participants for income tax withholding purposes whose shares of restricted stock units vested during the period. Such restricted stock units were originally issued to participants pursuant to the Prudential Financial Inc. Omnibus Incentive Plan.
(2)In February 2021, Prudential Financial’s Board of Directors authorized the Company to repurchase, at management’s discretion, up to $1.5 billion of its outstanding Common Stock during the period from January 1, 2021 through December 31, 2021. On May 4, 2021, the Board increased the Company’s current share repurchase authorization by $500 million, bringing the aggregate share repurchase authorization for calendar year 2021 to $2.0 billion.
ITEM 6. EXHIBITS
EXHIBIT INDEX
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| 101.INS - XBRL | Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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| 101.SCH - XBRL | Taxonomy Extension Schema Document. |
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| 101.CAL - XBRL | Taxonomy Extension Calculation Linkbase Document. |
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| 101.LAB - XBRL | Taxonomy Extension Label Linkbase Document. |
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| 101.PRE - XBRL | Taxonomy Extension Presentation Linkbase Document. |
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| 101.DEF - XBRL | Taxonomy Extension Definition Linkbase Document. |
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| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
__________
* Certain confidential information contained in this exhibit, marked by [***], has been omitted because it (i) is not material and (ii) would likely cause competitive harm to the Company if it were to be publicly disclosed.** This exhibit is a management contract or compensatory plan or arrangement.
Shareholder Services
Prudential Financial, Inc.
751 Broad Street, 21st Floor
Newark, New Jersey 07102
GLOSSARY
Throughout this Quarterly Report on Form 10-Q, the Company may use certain abbreviations, acronyms and terms which are defined below.
| | | | | | | | | | | | | | |
| Prudential Entities |
| | | | |
| Assurance IQ | Assurance IQ, LLC | | POT | Prudential EntitiesLife Insurance Company of Taiwan Inc. |
| Company | | | | |
Company | Prudential Financial, Inc. and its subsidiaries | | PRIAC | Prudential Retirement Insurance and Annuity Company |
| PALAC | Prudential Annuities Life Assurance Corporation | | Pruco Life | Pruco Life Insurance Company |
| PFI | Prudential Financial, Inc. and its subsidiaries | | Prudential | Prudential Financial, Inc. and its subsidiaries |
| PGFL | Prudential Gibraltar Financial Life Insurance Co., Ltd. | | Prudential Financial | Prudential Financial, Inc. |
| PIIH | Prudential International Insurance Holdings, Ltd. | | Prudential Funding | Prudential Funding, LLC |
| PLIC | Prudential Legacy Insurance Company of New Jersey | | Prudential Insurance/PICA | The Prudential Insurance Company of America |
| PLNJ | Pruco Life Insurance Company of New Jersey | | Prudential of Japan | The Prudential Life Insurance Company, Ltd. |
| POA | Prudential of Argentina | | Registrant | Prudential Financial, Inc. |
| POK | The Prudential Life Insurance Company of Korea, Ltd. | | | |
| | | | | | | | | | | | | | |
| Defined Terms |
| | | | |
Defined Terms |
| Board | | | | |
Assurance IQ | Assurance IQ, LLC | | Morningstar | Morningstar, Inc. |
Board | Prudential Financial's Board of Directors | | Other Postretirement Benefits | Certain health care and life insurance benefits provided by the Company for its retired employees, their beneficiaries and covered dependents |
| Closed Block | Certain in-force participating insurance policies and annuity products, along with corresponding assets used for the payment of benefits and policyholders' dividends on these products | | Pension Benefits | Funded and non-funded non-contributory defined benefit pension plans which cover substantially all of the Company’s employees |
| Exchange Act | The Securities Exchange Act of 1934 | | PGIM | The global investment management businesses of Prudential Financial, Inc. |
| Fitch | Fitch Ratings Inc. | | Regulation XXX | Valuation of Life Insurance Policies Model Regulation |
| Guideline AXXX | The Application of the Valuation of Life Insurance Policies Model Regulation | | S&P | Standard & Poor's Rating Services |
| Moody's | Moody's Investors Service, Inc. | | U.S. GAAP | Generally accepted accounting principles in the United States of America |
| Morningstar | Morningstar, Inc. | | Variable Profits | Assurance IQ’s achievement of certain targets for gross revenues net of associated selling expenses |
| | | | | | | | | | | | | | |
| Acronyms |
| | | | |
AcronymsACL | Allowance for Credit Losses | | LPs/LLCs | Limited Partnerships and Limited Liability Companies |
| ALM | | | | |
ALM | Asset Liability Management | | MD&A | Management's Discussion and Analysis of Financial Condition and Results of Operations |
| AOCI | Accumulated Other Comprehensive Income (Loss) | | NAICMRB | Market Risk Benefits |
| ASC | Accounting Standards Codification | | NAIC | National Association of Insurance Commissioners |
| ASU | Accounting Standards Update | | NAV | Net Asset Value |
| AUD | Australian Dollar | | NJDOBI | New Jersey Department of Banking and Insurance |
| bps | Basis Points | | NPR | Non-Performance Risk |
CECLCARES Act | Coronavirus Aid, Relief, and Economic Security Act | | OCI | Other Comprehensive Income (Loss) |
| CECL | Current Expected Credit Loss | | OCIOTC | Other Comprehensive Income (Loss)Over-The-Counter |
| CLO | Collateralized Loan Obligations | | OTCOTTI | Over-The-CounterOther-Than-Temporary Impairments |
| COVID-19 | 2019 Novel Coronavirus | | OTTIPDI | Other-Than-Temporary ImpairmentsPrudential Defined Income |
| DAC | Deferred Policy Acquisition Costs | | PDIRAF | Prudential Defined IncomeRisk Appetite Framework |
| DSI | Deferred Sales Inducements | | RAFRBC | Risk Appetite FrameworkRisk-Based Capital |
| EBITDA | Earnings Before Interest, Taxes, Depreciation and Amortization | | RBCSEC | Risk-Based CapitalSecurities and Exchange Commission |
| FASB | Financial Accounting Standards Board | | SECSVO | Securities and Exchange CommissionValuation Office |
FSAFHLBNY | Federal Home Loan Bank of New York | | TBA | To Be Announced |
| FSA | Financial Services Agency (an agency of the Japanese government) | | SVOTDR | Securities Valuation OfficeTroubled Debt Restructuring |
| GICs | Guaranteed Investment Contracts | | TBAURR | To Be AnnouncedUnearned Revenue Reserve |
GMDBGILTI | Guaranteed Minimum Death BenefitsGlobal Intangible Low-Taxed Income | | U.S. | The United States of America |
GSEGMDB | Government Sponsored EntitiesGuaranteed Minimum Death Benefits | | USD | U.S. Dollar |
| HDI | Highest Daily Lifetime Income | | VIEs | Variable Interest Entities |
| LIBOR | London Inter-Bank Offered Rate | | VOBA | Value of Business Acquired |
LPs/LLCs | Limited Partnerships and Limited Liability Companies | | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | | | | | | | |
| | Prudential Financial, Inc. |
| | By: | /S/ KENNETH Y. TANJI |
| | | Kenneth Y. Tanji
Executive Vice President and Chief Financial Officer
(Authorized signatory and principal financial officer)
|
Date: May 8, 2020