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 Company’s principal operations are comprised of PGIM (the Company’s global investment management business), the U.S. Businesses (consisting of the U.S. Workplace Solutions, U.S. Individual Solutions, and Assurance IQ divisions), 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. The Company’s 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.
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.
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 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.
Beginning in the first quarter of 2020, the outbreak of the novel coronavirus (“COVID-19”) 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 cash flows. Due to the 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 our 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; 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 cannot predict what impact the COVID-19 pandemic will ultimately have on the global economy, markets or our businesses.
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,in 2021, subject to regulatory approval and the satisfaction of customary closing conditions.
The Company intends to use the proceeds of the transaction for general corporate purposes.
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 Company adopted ASU 2016-13, and related ASUs, effective January 1, 2020 using the modified retrospective method for certain financial assets carried at amortized cost and certain off-balance sheet exposures. The modified retrospective method results in a cumulative effect adjustment to opening retained earnings. The Company adopted the guidance related to fixed maturities, available-for-sale on a prospective basis.
This ASU requires the use of a new current expected credit loss (“CECL”) model to account for expected credit losses on certain financial assets reported at amortized cost (e.g., loans held for investment, fixed maturities held-to-maturity, reinsurance receivables, etc.) and certain off-balance sheet credit exposures (e.g., indemnification of serviced mortgage loans and certain loan commitments). The guidance requires an entity to estimate lifetime credit losses related to such financial assets and credit exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that may affect the collectability of the reported amounts. The standard also modifies the OTTI guidance for fixed maturities, available-for-sale requiring the use of an allowance rather than a direct write-down of the investment.
The impacts of this ASU on the Company’s Consolidated Financial Statements primarily include (1) A Cumulative Effect Adjustment Upon Adoption; (2) Changes to the Presentation of the Consolidated Statements of Financial Position and Consolidated Statements of Operations; and (3) Changes to Accounting Policies. Each of these impacts is described below. This section is meant to serve as an update to, and should be read in conjunction with, 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.
The prospective adoption of the portions of the standard related to fixed maturities, available-for-sale resulted in no impact to opening retained earnings.
(2) Changes to the Presentation of the Consolidated Statements of Financial Position and Consolidated Statements of Operations
The allowance for credit losses is presented parenthetically on relevant line items in the Consolidated Statements of Financial Position. In the Consolidated Statements of Operations, realized investment gains (losses), net are presented on one
line item and will no longer reflect the breakout of OTTI on fixed maturity securities; OTTI on fixed maturity securities transferred to other comprehensive income (“OCI”); and other realized investment gains (losses), net. The presentation of this detail in prior periods is immaterial.
This section has been updated to include the following changes in our accounting policies resulting from the adoption of ASU 2016-13.
Fixed maturities, available-for-sale (“AFS debt securities”) are reported at fair value in the Statements of Financial Position. Interest income, and amortization of premium and accretion of discount are included in “Net investment income” under the effective yield method. For mortgage-backed and asset-backed securities, the effective yield is based on estimated cash flows, including interest rate and prepayment assumptions based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also vary based on other assumptions relating to the underlying collateral, including default rates and changes in value. These assumptions can significantly impact income recognition and the amount of impairments recognized in earnings and OCI. For mortgage-backed and asset-backed securities rated below
AA, the effective yield is adjusted prospectively for any changes in the estimated timing and amount of cash flows unless the investment is impaired or purchased with credit deterioration. For impaired mortgage-backed and asset-backed securities rated below AA, the effective yield is adjusted prospectively only if subsequent favorable or adverse changes in expected cash flows are not reflected in the allowance for credit losses. Prior to the adoption of this standard, the effective yield was adjusted prospectively regardless of whether the investment was impaired or not.
AFS debt securities with unrealized losses are reviewed quarterly to determine whether the amortized cost basis of the security is recoverable. In evaluating whether the amortized cost basis is recoverable, the Company considers several factors including, but not limited to the extent of the decline and the reasons for the decline in value (credit events, currency or interest-rate related, including general credit spread widening), and the financial condition of the issuer.
When an AFS debt security is in an unrealized loss position and (1) the Company has the intent to sell the AFS debt security, or (2) it is more likely than not the Company will be required to sell the AFS debt security before its anticipated recovery, or (3) the Company has deemed the AFS debt security to be uncollectable, the amortized cost basis of the AFS debt security is written down to fair value and any previously recognized allowance is reversed. The impairment is reported in “Realized investment gains (losses), net.” The new cost basis is not adjusted for subsequent increases in estimated fair value.
For an AFS debt security in an unrealized loss position that does not meet these conditions, the Company analyzes its ability to recover the amortized cost by comparing the net present value of projected future cash flows (the “net present value”) with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the AFS debt security at the date of acquisition. The Company may use the estimated fair value of collateral, if any, as a proxy for the net present value if it believes that the security is dependent on the liquidation of collateral for recovery of its investment. If the net present value is less than the amortized cost of the investment, an allowance for losses is recognized in earnings for the difference between amortized cost and the net present value and is limited to the difference between amortized cost and fair value of the AFS debt security. Any difference between the fair value and the net present value of the debt security at the impairment measurement date remains in “Other comprehensive income (loss).” Changes in the allowance for losses are reported in “Realized investment gains (losses), net.”
Prior to the adoption of this standard, any impairments on AFS debt securities were reported as an adjustment to the amortized cost basis of the security. Subsequent to the impairment, the AFS debt security was treated as if it were newly acquired at the date of impairment, and any increases in cash flows expected to be collected were accreted into net investment income over the life of the investment.
Fixed maturities, held-to-maturity are reported in the Statements of Financial Position at amortized cost net of the CECL allowance. The CECL allowance is generally determined based on probability of default and loss given default assumptions according to sector, credit quality and remaining time to maturity. Additions to or releases of the allowance are reported in “Realized investment gains (losses), net.”
Prior to the adoption of this standard, fixed maturities, held-to-maturity deemed to be OTTI were written down to the net present value of expected cash flows. Any difference between the fair value and the net present value of the debt security at the impairment measurement date was recorded in “Other comprehensive income (loss).”
Interest income, and amortization of premium and accretion of discount are included in “Net investment income” under the effective yield method. For mortgage-backed and asset-backed securities, the effective yield is based on estimated timing and amount of cash flows, including interest rate and prepayment assumptions based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also vary based on other assumptions regarding the underlying collateral, including default rates and changes in value. These assumptions can significantly impact income recognition and the amount of impairment recognized in earnings and OCI. For mortgage-backed and asset-backed securities rated below AA, the effective yield is adjusted prospectively for any changes in the estimated timing and amount of cash flows unless the investment is impaired or purchased with credit deterioration. For impaired mortgage-backed and asset-backed securities rated below AA, the effective yield is adjusted prospectively only if subsequent favorable or adverse changes in expected cash flows are not reflected in the allowance for credit losses.
Prior to the adoption of this standard, the effective yield was adjusted prospectively regardless of whether the investment was impaired or not.
Commercial mortgage and other loans are reported in the Statements of Financial Position at amortized cost net of the CECL allowance. Additionally, certain off-balance sheet credit exposures (e.g., indemnification of serviced mortgage loans, and certain unfunded mortgage loan commitments where the Company cannot unconditionally cancel the commitment) are also subject to a CECL allowance.
The CECL allowance represents the Company’s best estimate of expected credit losses over the remaining life of the assets or off-balance sheet credit exposures. 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, and other collateralized and uncollateralized loans.
For commercial mortgage and agricultural mortgage loans (and related unfunded commitments where the Company cannot unconditionally cancel the commitment), 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. Information about certain key inputs is detailed below.
Key factors in determining the internal credit ratings for commercial mortgage and agricultural mortgage loans include loan-to-value and debt-service-coverage ratios. Other factors include amortization, loan term, and estimated market value growth rate and volatility for the property type and region. The loan-to-value ratio compares the carrying amount of the loan to the fair value of the underlying property or properties collateralizing the loan and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the carrying amount of the loan exceeds the collateral value. A loan-to-value ratio less than 100% indicates an excess of collateral value over the carrying amount of the loan. The debt-service-coverage ratio is a property’s net operating income as a percentage of its debt service payments. Debt-service-coverage ratios less than 1.0 times indicate that a property’s 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. The values utilized in calculating these ratios are developed as part of the Company’s periodic review of the commercial mortgage and agricultural mortgage loan portfolios, which includes an internal appraisal of the underlying collateral value. The Company’s periodic review also includes a credit re-rating process, whereby the internal credit rating originally assigned at underwriting is updated based on current loan, property and market information using a proprietary credit quality rating system. See Note 3 for additional information related to the loan-to-value ratios and debt-service-coverage ratios related to the Company’s commercial mortgage and agricultural mortgage loan portfolios. Generally, every loan is re-rated at least annually.
Annual expected loss rates are based on historical default and loss experience factors. Using average lives, the annual expected loss rates are converted into life-of-loan loss expectations.
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 on commercial mortgage and other loans can increase or decrease from period to period based on the factors noted above. The change in allowance is reported in “Realized investment gains (losses), net.” As it relates to unfunded commitments that are in scope of this guidance, the CECL allowance is reported in “Other liabilities,” and the change in the allowance is reported in “Realized investment gains (losses), net.”
When a commercial mortgage or other loan is deemed to be uncollectible, any allowance is reversed and a direct write-down of the carrying amount of the loan is recorded through “Realized investment gains (losses), net.” The carrying amount of the loan is not adjusted for subsequent recoveries in value.
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. Additions to or releases of the allowance are reported in “Realized investment gains (losses), net.”
Prior to the adoption of this standard, the impairments on commercial mortgage and other loans were collectively reviewed at a portfolio level for impairment based on probable incurred but not specifically identified losses with any such losses reflected in an allowance for credit losses. When a loan was individually identified to be impaired, the loan was individually evaluated for an allowance. Changes in these allowances were reported in “Realized investment gains (losses), net.” Additionally, an allowance for credit losses was not required on unfunded loan commitments.
As further described in Note 14, the Company’s PGIM business provides commercial mortgage origination, underwriting and servicing for certain government sponsored entities (“GSEs”). The Company has agreed to indemnify the GSEs for a portion of the credit risk associated with certain of the mortgages it services. Management has established a CECL allowance that factors in historical loss information, current conditions and reasonable and supportable forecasts. The allowance also considers the remaining lives of the loans subject to the indemnification. The CECL allowance is included in “Other liabilities” and changes in the CECL allowance are reported in “Realized investment gains (losses), net.” Prior to the adoption of this standard, a credit loss allowance was not required.
Reinsurance recoverables are reported on the Statements of Financial Position in “Other Assets” net of the CECL allowance. The CECL allowance considers the credit quality of the reinsurance counterparty and is generally determined based on the probability of default and loss given default assumptions, after considering any applicable collateral arrangements. Additions to or releases of the allowance are reported in “Policyholders’ benefits.”
Prior to the adoption of this standard, an allowance for credit losses for reinsurance recoverables was established only when it was deemed probable that a reinsurer may fail to make payments to us in a timely manner.
Trade receivables related to Assurance IQ are reported in the Statements of Financial Position in “Other assets” net of the CECL allowance. The CECL allowance considers the credit quality of the counterparties and is generally determined based on probability of default and loss given default assumptions. Additions to or releases of the allowance are reported in “General and administrative expenses.” Prior to the adoption of this standard, the reserve was limited to an allowance for doubtful accounts.
3. INVESTMENTS
The following tables set forth the composition of fixed maturity securities (excluding investments classified as trading), as of the dates indicated:
The following table sets forth the fair value and gross unrealized losses on available-for-sale fixed maturity securities without an allowance for credit losses aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the date indicated:
The following table sets forth the fair value and gross unrealized losses on fixed maturity securities aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the date indicated:
As of December 31, 2019, the gross unrealized losses on fixed maturity securities were composed of $973 million related to “1” highest quality or “2” high quality securities based on the NAIC or equivalent rating and $342 million related to other than high or highest quality securities based on NAIC or equivalent rating. As of December 31, 2019, the $878 million of gross unrealized losses of twelve months or more were concentrated in the Company’s corporate securities within the energy, consumer non-cyclical and finance sectors.
In accordance with its policy described in Note 2, the Company concluded that an adjustment to earnings for credit losses related to these fixed maturity securities was not warranted at JuneSeptember 30, 2020. These conclusions were based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to general credit spread widening, increases in interest rates, foreign currency exchange rate movements and the financial condition or near-term prospects of the issuer. As of JuneSeptember 30, 2020, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.
The following table sets forth the amortized cost or amortized cost, net of allowance and fair value of fixed maturities by contractual maturities, as of the date indicated:
The following table sets forth the sources of fixed maturity proceeds and related investment gains (losses), as well as losses on write-downs, impairments and the allowance for credit losses of fixed maturities, for the periods indicated:
See Note 2 for additional information about the Company’s methodology for developing our allowance and expected losses.
The Company did not have any fixed maturity securities purchased with credit deterioration, as of JuneSeptember 30, 2020.
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 $984$255 million and $300$99 million during the three months ended JuneSeptember 30, 2020 and 2019, respectively, and $142$397 million and $769$868 million during the sixnine months ended JuneSeptember 30, 2020 and 2019, respectively.
The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Other income (loss),” was $825$324 million and $51$52 million during the three months ended JuneSeptember 30, 2020 and 2019, respectively, and $(656)$(332) million and $581$632 million during the sixnine months ended JuneSeptember 30, 2020 and 2019, 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 table sets forth the composition of “Commercial mortgage and other loans,” as of the dates indicated:
See Note 2 for additional information about the Company’s commercial mortgage and other loans credit quality monitoring process.
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:
Loans on non-accrual status recognized interest income of $2 million for both the three months and sixnine months ended JuneSeptember 30, 2020, respectively, and $19$17 million of these loans did not have a related allowance for credit losses as of JuneSeptember 30, 2020.
The Company did not have any significant losses on commercial mortgage and other loans purchased with credit deterioration as of JuneSeptember 30, 2020.
The following table sets forth the composition of “Other invested assets,” as of the dates indicated:
The following table sets forth the composition of “Accrued investment income,” as of the date indicated:
The following table sets forth “Net investment income” by investment type, for the periods 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:
The following table sets forth the composition of “Cash collateral for loaned securities,” which represents the liability to return cash collateral received for the following types of securities loaned, 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.
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 $1,015$1,098 million and $1,021 million at JuneSeptember 30, 2020 and December 31, 2019, 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 $11,356$11,858 million and $11,157 million as of JuneSeptember 30, 2020 and December 31, 2019, 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.
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 $1,644$1,190 million and $867 million as of JuneSeptember 30, 2020 and December 31, 2019, respectively, and total derivative liabilities of $684$573 million and $831 million as of JuneSeptember 30, 2020 and December 31, 2019, 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.
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 JuneSeptember 30, 2020 values, it is estimated that a pre-tax gain of approximately $328$271 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending JuneSeptember 30, 2021.
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 27 years for single name and index references, respectively.references.
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 JuneSeptember 30, 2020 and December 31, 2019, the Company had $440 million and $6 million of outstanding notional amounts and reported at fair value as a liability of $10$21 million and $0 million, respectively.
The Company is exposed to losses in the event of non-performance by counterparties to financial derivative transactions with a positive fair value. The Company manages credit risk by: (i) entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties governed by master netting agreements, as applicable; (ii) trading through central clearing and over-the-counter (“OTC”) parties; (iii) obtaining collateral, such as cash and securities, when appropriate; and (iv) setting limits on single party credit exposures which are subject to periodic management review.
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 following tables present the balances of derivative assets and liabilities measured at fair value on a recurring basis, as of the date indicated, by primary underlying risk. These tables include NPR and exclude embedded derivatives and associated reinsurance recoverables. The derivative assets and liabilities shown below are included in “Other invested assets” or “Other liabilities” in the tables contained within the sections “—Assets and Liabilities by Hierarchy Level” and “—Changes in Level 3 Assets and Liabilities,” above.
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.
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 expense of $57$7 million, or (2.1)(0.6)% of income (loss) before income taxes and equity in earnings of operating joint ventures, in the first sixnine months of 2020, compared to an income tax expense of $394$726 million, or 19.5%19.4%, in the first sixnine months of 2019. 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.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted into law. One provision of the CARES Act amends the Tax Cuts and Jobs Act (“TCJA”) and allows companies with net operating losses (“NOLs”) originating in 2018, 2019 or 2020 to carry back those losses for five years. The Company has incorporated into the full year projected effective tax rate an income tax benefit of $512$325 million that would result from carrying the estimated 2020 NOL back to tax years that have a 35% tax rate. The projected tax benefit related to the NOL carryback was partially offset by an incremental Global Intangible Low-Taxed Income (“GILTI”) tax expense of $140$13 million driven primarily by projected overall domestic losses (“ODLs”) which resulted in a reduced GILTI foreign tax credit. These amounts are estimates and will change if the amount of, and sources of, 2020 net taxable income are different from forecast. The inclusion of these two amounts in the full year projected effective tax rate results in a projected negative effective tax rate for the year, which when applied to the year-to-date pre-tax loss resulted in a $781$38 million increase to our income tax expense for the first sixnine months of 2020. The first sixnine months of 2020 also include a $47 million reduction in income tax expense recorded as a discrete item from the carryback of 2018 NOL and related ODL.
and the U.S. tax principles used to determine GILTI. Also, our Japan affiliates have a different tax year than the U.S. calendar tax year used to
determine GILTI. Therefore, while many of the countries, including Japan, have a statutory tax rate above the 18.9% threshold, separate affiliates may not meet the 18.9% threshold each year and, as such, may not qualify for this exclusion. The Company plans to make the high-tax exception election for the 2020 tax year and reflected the impact of the election in its full year projected effective tax rate used to calculate year-to-date taxes for the first nine months of 2020. The Company is in the process of reviewing and estimating the impacts of the regulations for the 2018 and will record any such impacts in the third quarter of 2020.2019 tax years.
The Treasury Department and the IRS also issued Proposed Regulations on July 20th which would require that, if a high-tax exception election is made with respect to GILTI in any year, an election having the same effect must also be made with regard to income taxed under Subpart F of the Tax Code. Such an election under Subpart F of the Tax Code would apply to the Full Inclusion election made by the Company for its insurance operations in Brazil, thereby increasing the tax rate applied to our Brazil insurance operations. The Proposed Regulations will be effective for taxable years beginning after they are issued in final form.
9. SHORT-TERM AND LONG-TERM DEBT
The table below presents the Company’s short-term debt as of the dates indicated:
In the first quarter of 2020, PICA issued $3.6 billion in funding agreements under the FHLBNY facility. As of JuneSeptember 30, 2020, $3.6$3.0 billion of funding agreements remain outstanding under this facility with maturities ranging from five months to seven years
and rates from 0.430% to 1.925%. These funding agreements are reflected as “Policyholders’ account balances” on the Consolidated Statements of Financial Position and as such are not included in the foregoing table. For additional information on this facility, 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.
In May 2020, Prudential Financial entered into a ten-year facility agreement with a Delaware trust upon the completion of the sale of $1.5 billion of trust securities by that Delaware trust in a Rule 144A private placement. The trust invested the proceeds from the sale of the trust securities in a portfolio of principal and/or interest strips of U.S. Treasury securities. The facility agreement provides Prudential Financial the right to issue and sell to the trust from time to time up to $1.5 billion of 2.850% senior notes due May 15, 2030 and receive in exchange a corresponding amount of the U.S. Treasury securities held by the trust. In return, the Company agreed to pay a semi-annual facility fee to the trust at a rate of 2.175% per annum applied to the maximum amount of senior notes that the Company could issue and sell to the trust. The facility agreement with the trust provides Prudential Financial with a source of liquid assets in exchange for notes and is similar to the Company’s existing put option agreement in respect of $1.5 billion of senior notes that expires in 2023.
The right to issue senior notes described above will be exercised automatically in full upon the Company’s failure to make certain payments to the trust, such as paying the facility fee or reimbursing the trust for its expenses, if the Company’s failure to pay is not cured within 30 days, and upon an event involving its bankruptcy. The Company is also required to exercise this issuance right if its consolidated stockholders’ equity, calculated in accordance with U.S. GAAP but excluding AOCI, falls below $9.0 billion, subject to adjustment in certain cases. Prior to any involuntary exercise of the issuance right, the Company has the right to repurchase any of its senior notes then held by the trust in exchange for U.S. Treasury securities. Finally, Prudential Financial may redeem any outstanding senior notes, in whole or in part, prior to February 15, 2030, at a redemption price equal to the greater of par or a make-whole price, or thereafter, redeem the senior notes, in whole or in part, at par.
In June 2020, the Company established a new $1.2 billion captive financing facility to finance non-economic reserves required under Guideline AXXX. Similar to the Company’s other captive financing facilities, a captive reinsurance subsidiary may issue surplus notes under the facility in exchange for credit-linked notes issued by a special-purpose affiliate that are held to support non-economic reserves. The credit-linked notes are redeemable for cash upon the occurrence of a liquidity stress event affecting the captive and external counterparties have agreed to fund these payments. Prudential Arizona Reinsurance Universal Company issued $700 million of surplus notes under this facility in June 2020. As of JuneSeptember 30, 2020, an aggregate of $700 million of surplus notes was outstanding under the facility and no credit-linked note payments have been required.
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, 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 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 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.
| |
(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. |
| |
(2) | For 2019 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. |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
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, 2019 | 666.3 | | | 267.5 | | | 398.8 | | |
| 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 | | | 6.7 | | | (6.7) | | |
| Stock-based compensation programs(1) | 0.0 |
| | (2.5 | ) | | 2.5 |
| Stock-based compensation programs(1) | 0.0 | | | (3.3) | | | 3.3 | | |
| Balance, June 30, 2020 | 666.3 |
| | 271.7 |
| | 394.6 |
| |
| Balance, September 30, 2020 | | Balance, September 30, 2020 | 666.3 | | | 270.9 | | | 395.4 | | |
__________
| |
(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, Prudential Financial’s Board of Directors (the “Board”) 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
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
December 31, 2020. As of JuneSeptember 30, 2020, 6.7 million shares of the Company’s Common Stock were repurchased under this authorization at a total cost of $500 million. The Company temporarily suspended Common Stock repurchases under the existing repurchase authorization beginning April 1, 2020; however,2020 and does not intend to resume share repurchases this year as the duration and severity of the pandemic and its effect on the economy remain uncertain. The Company continues towill evaluate the resumption of share repurchases underas informed by the existing Board authorization.market environment and any alternative opportunities for capital deployment.
The timing and amount of share repurchases are determined by management based upon market conditions and other considerations, and repurchases may be effected 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 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.
Dividends declared per share of Common Stock are as follows for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Dividends declared per share of Common Stock | $ | 1.10 | | | $ | 1.00 | | | $ | 3.30 | | | $ | 3.00 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Dividends declared per share of Common Stock | $ | 1.10 |
| | $ | 1.00 |
| | $ | 2.20 |
| | $ | 2.00 |
|
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 sixnine months ended JuneSeptember 30, 2020 and 2019, 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, 2019 | $ | (536) | | | $ | 28,112 | | | $ | (3,537) | | | $ | 24,039 | |
| Change in OCI before reclassifications | 69 | | | 7,939 | | | 8 | | | 8,016 | |
| Amounts reclassified from AOCI | 46 | | | (1,045) | | | 210 | | | (789) | |
| Income tax benefit (expense) | 73 | | | (1,289) | | | (49) | | | (1,265) | |
| Balance, September 30, 2020 | $ | (348) | | | $ | 33,717 | | | $ | (3,368) | | | $ | 30,001 | |
|
| | | | | | | | | | | | | | | |
| | 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 | (213 | ) | | 9,449 |
| | 4 |
| | 9,240 |
|
| Amounts reclassified from AOCI | 5 |
| | (702 | ) | | 140 |
| | (557 | ) |
| Income tax benefit (expense) | 28 |
| | (1,881 | ) | | (32 | ) | | (1,885 | ) |
| Balance, June 30, 2020 | $ | (716 | ) | | $ | 34,978 |
| | $ | (3,425 | ) | | $ | 30,837 |
|
|
| | | | | | | | | | | | | | | |
| | 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, 2018 | $ | (564 | ) | | $ | 14,745 |
| | $ | (3,275 | ) | | $ | 10,906 |
|
| Change in OCI before reclassifications | 98 |
| | 17,296 |
| | (39 | ) | | 17,355 |
|
| Amounts reclassified from AOCI | 5 |
| | (501 | ) | | 120 |
| | (376 | ) |
| Income tax benefit (expense) | 8 |
| | (3,899 | ) | | (19 | ) | | (3,910 | ) |
| Cumulative effect of adoption of ASU 2017-12 | 0 |
| | 7 |
| | 0 |
| | 7 |
|
| Balance, June 30, 2019 | $ | (453 | ) | | $ | 27,648 |
| | $ | (3,213 | ) | | $ | 23,982 |
|
__________
| |
(1) | Includes cash flow hedges of $2,498 million and $832 million as of June 30, 2020 and December 31, 2019, respectively, and $1,017 million and $811 million as of June 30, 2019 and December 31, 2018, respectively, and fair value hedges of $(3) million and $0 million as of June 30, 2020 and December 31, 2019, respectively. |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2018 | $ | (564) | | | $ | 14,745 | | | $ | (3,275) | | | $ | 10,906 | |
| Change in OCI before reclassifications | (74) | | | 22,759 | | | (76) | | | 22,609 | |
| Amounts reclassified from AOCI | 5 | | | (1,188) | | | 180 | | | (1,003) | |
| Income tax benefit (expense) | 20 | | | (4,956) | | | (25) | | | (4,961) | |
| Cumulative effect of adoption of ASU 2017-12 | 0 | | | 7 | | | 0 | | | 7 | |
| Balance, September 30, 2019 | $ | (613) | | | $ | 31,367 | | | $ | (3,196) | | | $ | 27,558 | |
__________
(1)Includes cash flow hedges of $1,407 million and $832 million as of September 30, 2020 and December 31, 2019, respectively, and $1,584 million and $811 million as of September 30, 2019 and December 31, 2018, respectively, and fair value hedges of $(1) million and $0 million as of September 30, 2020 and December 31, 2019, respectively.
Reclassifications out of Accumulated Other Comprehensive Income (Loss)
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | | Affected line item in Consolidated Statements of Operations | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Affected line item in Consolidated Statements of Operations |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2020 | | 2019 | | 2020 | | 2019 | |
| | (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 | $ | (2 | ) | | $ | 0 |
| | $ | (5 | ) | | $ | (5 | ) | | Realized investment gains (losses), net | Foreign currency translation adjustments | $ | (2) | | | $ | 0 | | | $ | (7) | | | $ | (5) | | | Realized investment gains (losses), net |
| Foreign currency translation adjustments | 0 |
| | 0 |
| | 0 |
| | 0 |
| | Other income (loss) | Foreign currency translation adjustments | (39) | | | 0 | | | (39) | | | 0 | | | Other income (loss) |
| Total foreign currency translation adjustment | (2 | ) | | 0 |
| | (5 | ) | | (5 | ) | | Total foreign currency translation adjustment | (41) | | | 0 | | | (46) | | | (5) | | |
| Net unrealized investment gains (losses): | | | | | | | | | Net unrealized investment gains (losses): | |
| Cash flow hedges—Interest rate | 9 |
| | 0 |
| | 8 |
| | (1 | ) | | (3) | Cash flow hedges—Interest rate | 19 | | | 57 | | | 27 | | | 56 | | | (3) |
| Cash flow hedges—Currency | 3 |
| | 1 |
| | 4 |
| | 2 |
| | (3) | Cash flow hedges—Currency | 0 | | | 3 | | | 4 | | | 5 | | | (3) |
| Cash flow hedges—Currency/Interest rate | 32 |
| | 156 |
| | 420 |
| | 171 |
| | (3) | Cash flow hedges—Currency/Interest rate | (77) | | | 267 | | | 343 | | | 438 | | | (3) |
| Net unrealized investment gains (losses) on available-for-sale securities | 112 |
| | 69 |
| | 270 |
| | 329 |
| | Net unrealized investment gains (losses) on available-for-sale securities | 401 | | | 360 | | | 671 | | | 689 | | |
| Total net unrealized investment gains (losses) | 156 |
| | 226 |
| | 702 |
| | 501 |
| | (4) | Total net unrealized investment gains (losses) | 343 | | | 687 | | | 1,045 | | | 1,188 | | | (4) |
| Amortization of defined benefit pension items: | | | | | | | | | Amortization of defined benefit pension items: | |
| Prior service cost | 0 |
| | 0 |
| | (1 | ) | | 0 |
| | (5) | Prior service cost | (1) | | | 0 | | | (2) | | | 0 | | | (5) |
| Actuarial gain (loss) | (70 | ) | | (60 | ) | | (139 | ) | | (120 | ) | | (5) | Actuarial gain (loss) | (69) | | | (60) | | | (208) | | | (180) | | | (5) |
| Total amortization of defined benefit pension items | (70 | ) | | (60 | ) | | (140 | ) | | (120 | ) | | Total amortization of defined benefit pension items | (70) | | | (60) | | | (210) | | | (180) | | |
| Total reclassifications for the period | $ | 84 |
| | $ | 166 |
| | $ | 557 |
| | $ | 376 |
| | Total reclassifications for the period | $ | 232 | | | $ | 627 | | | $ | 789 | | | $ | 1,003 | | |
__________
| |
(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 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 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.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
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 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
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) |
| | 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 |
| |
| December 31, 2019(1) | | December 31, 2019(1) | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Net investment gains (losses) on investments arising during the period | 34 |
| | | | | | | | (7 | ) | | 27 |
| Net investment gains (losses) on investments arising during the period | 41 | | | (8) | | | 33 | |
| Reclassification adjustment for (gains) losses included in net income | 13 |
| | | | | | | | (3 | ) | | 10 |
| Reclassification adjustment for (gains) losses included in net income | 23 | | | (4) | | | 19 | |
| Increase (Decrease) due to non-credit related losses recognized in AOCI during the period | (87 | ) | | | | | | | | 19 |
| | (68 | ) | Increase (Decrease) due to non-credit related losses recognized in AOCI during the period | (87) | | | 17 | | | (70) | |
| 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 | | 2 | | | 0 | | | 2 | |
| Impact of net unrealized investment (gains) losses on future policy benefits, policyholders’ account balances and reinsurance payables | | | | | 0 |
| | | | 0 |
| | 0 |
| Impact of net unrealized investment (gains) losses on future policy benefits, policyholders’ account balances and reinsurance payables | | 0 | | | 0 | | | 0 | |
| Impact of net unrealized investment (gains) losses on policyholders’ dividends | | | | | | | (5 | ) | | 1 |
| | (4 | ) | Impact of net unrealized investment (gains) losses on policyholders’ dividends | | (3) | | | 1 | | | (2) | |
| Balance, June 30, 2020 | $ | (40 | ) | | $ | 2 |
| | $ | 0 |
| | $ | (5 | ) | | $ | 10 |
| | $ | (33 | ) | |
| Balance, September 30, 2020 | | Balance, September 30, 2020 | $ | (23) | | | $ | 2 | | | $ | 0 | | | $ | (3) | | | $ | 6 | | | $ | (18) | |
__________
| |
(1) | Allowance for credit losses on available-for-sale fixed maturity securities effective January 1, 2020. |
(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 | 12,195 |
| | | | | | | | (2,599 | ) | | 9,596 |
|
| Reclassification adjustment for (gains) losses included in net income | (715 | ) | | | | | | | | 152 |
| | (563 | ) |
| Reclassification due to allowance for credit losses recorded during the period | 87 |
| | | | | | | | (19 | ) | | 68 |
|
| Impact of net unrealized investment (gains) losses on DAC, DSI, VOBA and reinsurance recoverables | | | 226 |
| | | | | | (40 | ) | | 186 |
|
| Impact of net unrealized investment (gains) losses on future policy benefits, policyholders’ account balances and reinsurance payables | | | | | (1,036 | ) | | | | 202 |
| | (834 | ) |
| Impact of net unrealized investment (gains) losses on policyholders’ dividends | | | | | | | (1,967 | ) | | 413 |
| | (1,554 | ) |
| Balance, June 30, 2020 | $ | 56,906 |
| | $ | (1,359 | ) | | $ | (3,945 | ) | | $ | (5,333 | ) | | $ | (11,258 | ) | | $ | 35,011 |
|
__________
| |
(1) | Includes cash flow and fair value hedges. See Note 5 for information on cash flow and fair value 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)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) |
| 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 | 11,509 | | | | | | | | | (2,232) | | | 9,277 | |
| Reclassification adjustment for (gains) losses included in net income | (1,068) | | | | | | | | | 207 | | | (861) | |
| Reclassification due to allowance for credit losses recorded during the period | 87 | | | | | | | | | (17) | | | 70 | |
| Impact of net unrealized investment (gains) losses on DAC, DSI, VOBA and reinsurance recoverables | | | 336 | | | | | | | (68) | | | 268 | |
| Impact of net unrealized investment (gains) losses on future policy benefits, policyholders’ account balances and reinsurance payables | | | | | (1,764) | | | | | 357 | | | (1,407) | |
| Impact of net unrealized investment (gains) losses on policyholders’ dividends | | | | | | | (2,182) | | | 458 | | | (1,724) | |
| Balance, September 30, 2020 | $ | 55,867 | | | $ | (1,249) | | | $ | (4,673) | | | $ | (5,548) | | | $ | (10,662) | | | $ | 33,735 | |
__________
(1)Includes cash flow and fair value hedges. See Note 5 for information on cash flow and fair value hedges.
(2)Includes net unrealized gains (losses) for which an OTTI loss had been previously recognized.
12. EARNINGS PER SHARE
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 September 30, |
| | 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) | $ | 1,507 | | | | | | | $ | 1,425 | | | | | |
| Less: Income (loss) attributable to noncontrolling interests | 20 | | | | | | | 7 | | | | | |
| Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards | 18 | | | | | | | 15 | | | | | |
| Net income (loss) attributable to Prudential Financial available to holders of Common Stock | $ | 1,469 | | | 395.3 | | | $ | 3.72 | | | $ | 1,403 | | | 404.1 | | | $ | 3.47 | |
| Effect of dilutive securities and compensation programs | | | | | | | | | | | |
| Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic | $ | 18 | | | | | | | $ | 15 | | | | | |
| Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted | 18 | | | | | | | 15 | | | | | |
| Stock options | | | 0.3 | | | | | | | 1.0 | | | |
| Deferred and long-term compensation programs | | | 1.5 | | | | | | | 1.2 | | | |
| Exchangeable Surplus Notes | 0 | | | 0.0 | | | | | 1 | | | 2.2 | | | |
| Diluted earnings per share(1) | | | | | | | | | | | |
| Net income (loss) attributable to Prudential Financial available to holders of Common Stock | $ | 1,469 | | | 397.1 | | | $ | 3.70 | | | $ | 1,404 | | | 408.5 | | | $ | 3.44 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| | 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) | $ | (2,405 | ) | | | | | | $ | 738 |
| | | | |
| Less: Income (loss) attributable to noncontrolling interests | 4 |
| | | | | | 30 |
| | | | |
| Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards | 6 |
| | | | | | 8 |
| | | | |
| Net income (loss) attributable to Prudential Financial available to holders of Common Stock | $ | (2,415 | ) | | 394.6 |
| | $ | (6.12 | ) | | $ | 700 |
| | 405.3 |
| | $ | 1.73 |
|
| Effect of dilutive securities and compensation programs | | | | | | | | | | | |
| Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic | $ | 6 |
| | | | | | $ | 8 |
| | | | |
| Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted | 6 |
| | | | | | 8 |
| | | | |
| Stock options | | | 0.0 |
| | | | | | 1.3 |
| | |
| Deferred and long-term compensation programs | | | 0.0 |
| | | | | | 1.1 |
| | |
| Exchangeable Surplus Notes | 0 |
| | 0.0 |
| | | | 6 |
| | 6.2 |
| | |
| Diluted earnings per share(1) | | | | | | | | | | | |
| Net income (loss) attributable to Prudential Financial available to holders of Common Stock | $ | (2,415 | ) | | 394.6 |
| | $ | (6.12 | ) | | $ | 706 |
| | 413.9 |
| | $ | 1.71 |
|
__________ | |
(1) | For the three months ended June 30, 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 June 30, 2020, all potential stock options and compensation programs were considered antidilutive. |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 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) | $ | (1,168) | | | | | | | $ | 3,100 | | | | | |
| Less: Income (loss) attributable to noncontrolling interests | 25 | | | | | | | 42 | | | | | |
| Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards | 16 | | | | | | | 33 | | | | | |
| Net income (loss) attributable to Prudential Financial available to holders of Common Stock | $ | (1,209) | | | 395.6 | | | $ | (3.06) | | | $ | 3,025 | | | 406.2 | | | $ | 7.45 | |
| Effect of dilutive securities and compensation programs | | | | | | | | | | | |
| Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic | $ | 16 | | | | | | | $ | 33 | | | | | |
| Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted | 16 | | | | | | | 33 | | | | | |
| Stock options | | | 0.0 | | | | | | | 1.1 | | | |
| Deferred and long-term compensation programs | | | 0.0 | | | | | | | 1.1 | | | |
| Exchangeable Surplus Notes | 0 | | | 0.0 | | | | | 12 | | | 4.8 | | | |
| Diluted earnings per share(1) | | | | | | | | | | | |
| Net income (loss) attributable to Prudential Financial available to holders of Common Stock | $ | (1,209) | | | 395.6 | | | $ | (3.06) | | | $ | 3,037 | | | 413.2 | | | $ | 7.35 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 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) | $ | (2,675 | ) | | | | | | $ | 1,675 |
| | | | |
| Less: Income (loss) attributable to noncontrolling interests | 5 |
| | | | | | 35 |
| | | | |
| Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards | 11 |
| | | | | | 18 |
| | | | |
| Net income (loss) attributable to Prudential Financial available to holders of Common Stock | $ | (2,691 | ) | | 395.8 |
| | $ | (6.80 | ) | | $ | 1,622 |
| | 407.3 |
| | $ | 3.98 |
|
| Effect of dilutive securities and compensation programs | | | | | | | | | | | |
| Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic | $ | 11 |
| | | | | | $ | 18 |
| | | | |
| Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted | 11 |
| | | | | | 18 |
| | | | |
| Stock options | | | 0.0 |
| | | | | | 1.2 |
| | |
| Deferred and long-term compensation programs | | | 0.0 |
| | | | | | 1.1 |
| | |
| Exchangeable Surplus Notes | 0 |
| | 0.0 |
| | | | 11 |
| | 6.2 |
| | |
| Diluted earnings per share(1) | | | | | | | | | | | |
| Net income (loss) attributable to Prudential Financial available to holders of Common Stock | $ | (2,691 | ) | | 395.8 |
| | $ | (6.80 | ) | | $ | 1,633 |
| | 415.8 |
| | $ | 3.93 |
|
| |
(1) | For the six months ended June 30, 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 six months ended June 30, 2020, all potential stock options and compensation programs were considered antidilutive. |
(1)For the nine months ended September 30, 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 nine months ended September 30, 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 JuneSeptember 30, 2020 and 2019, as applicable, were based on 5.04.9 million and 4.5 million of such awards, respectively, and for the sixnine months ended JuneSeptember 30, 2020 and 2019, as applicable, were based on 5.0 million and 4.6 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 September 30, |
| | 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 | 3.2 | | | $ | 84.17 | | | 1.4 | | | $ | 101.57 | |
| Antidilutive stock options due to net loss available to holders of Common Stock | 0.0 | | | | | 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 | 0.0 | | | | | 0.0 | | | |
| Total antidilutive stock options and shares | 3.4 | | | | | 1.4 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 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 | 3.4 | | | $ | 80.64 | | | 1.2 | | | $ | 103.35 | |
| Antidilutive stock options due to net loss available to holders of Common Stock | 0.4 | | | | | 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 | 1.6 | | | | | 0.0 | | | |
| Total antidilutive stock options and shares | 5.6 | | | | | 1.2 | | | |
|
| | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| | 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 | 4.7 |
| | $ | 74.92 |
| | 0.9 |
| | $ | 105.95 |
|
| Antidilutive stock options due to net loss available to holders of Common Stock | 0.2 |
| | | | 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 | 1.3 |
| | | | 0.0 |
| | |
| Total antidilutive stock options and shares | 6.4 |
| | | | 0.9 |
| | |
|
| | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 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 | 3.5 |
| | $ | 79.06 |
| | 1.0 |
| | $ | 104.57 |
|
| Antidilutive stock options due to net loss available to holders of Common Stock | 0.5 |
| | | | 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 | 1.5 |
| | | | 0.0 |
| | |
| Total antidilutive stock options and shares | 5.7 |
| | | | 1.0 |
| | |
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 and sixnine months ended JuneSeptember 30, 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 comprised of PGIM (the Company’s global investment management business), the U.S. Businesses (consisting of the U.S. Workplace Solutions, U.S. Individual Solutions, and Assurance IQ divisions), 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 comprised of 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 Company’s 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.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
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.
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. 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. 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”:
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Adjusted operating income before income taxes by segment: | (in millions) |
| PGIM | $ | 324 |
| | $ | 264 |
| | $ | 488 |
| | $ | 478 |
|
| U.S. Businesses: | | | | | | | |
| U.S. Workplace Solutions division: | | | | | | | |
| Retirement | 281 |
| | 467 |
| | 526 |
| | 718 |
|
| Group Insurance | 5 |
| | 81 |
| | 49 |
| | 134 |
|
| Total U.S. Workplace Solutions division | 286 |
| | 548 |
| | 575 |
| | 852 |
|
| U.S. Individual Solutions division: | | | | | | | |
| Individual Annuities(1) | 249 |
| | 462 |
| | 622 |
| | 934 |
|
| Individual Life | (64 | ) | | (135 | ) | | (84 | ) | | (30 | ) |
| Total U.S. Individual Solutions division | 185 |
| | 327 |
| | 538 |
| | 904 |
|
| Assurance IQ division(2): | | | | | | | |
| Assurance IQ | (16 | ) | | 0 |
| | (39 | ) | | 0 |
|
| Total Assurance IQ division | (16 | ) | | 0 |
| | (39 | ) | | 0 |
|
| Total U.S. Businesses | 455 |
| | 875 |
| | 1,074 |
| | 1,756 |
|
| International Businesses(3) | 693 |
| | 790 |
| | 1,391 |
| | 1,649 |
|
| Corporate and Other | (541 | ) | | (335 | ) | | (883 | ) | | (747 | ) |
| Total segment adjusted operating income before income taxes | 931 |
| | 1,594 |
| | 2,070 |
| | 3,136 |
|
| Reconciling items: | | | | | | | |
| Realized investment gains (losses), net, and related adjustments(4) | (3,191 | ) | | (572 | ) | | (2,982 | ) | | (1,194 | ) |
| Charges related to realized investment gains (losses), net | 519 |
| | (82 | ) | | (283 | ) | | (57 | ) |
| Market experience updates(5) | 55 |
| | (207 | ) | | (886 | ) | | (207 | ) |
| Divested and Run-off Businesses: | | | | | | | |
| Closed Block division | (22 | ) | | (21 | ) | | (23 | ) | | (40 | ) |
| Other Divested and Run-off Businesses(3) | (602 | ) | | 168 |
| | (580 | ) | | 415 |
|
| Other adjustments(6) | 32 |
| | 0 |
| | 77 |
| | 0 |
|
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | (54 | ) | | (4 | ) | | (63 | ) | | (37 | ) |
| Income (loss) before income taxes and equity in earnings of operating joint ventures per Unaudited Interim Consolidated Financial Statements | $ | (2,332 | ) | | $ | 876 |
| | $ | (2,670 | ) | | $ | 2,016 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Adjusted operating income before income taxes by segment: | (in millions) |
| PGIM | $ | 370 | | | $ | 232 | | | $ | 858 | | | $ | 710 | |
| U.S. Businesses: | | | | | | | |
| U.S. Workplace Solutions division: | | | | | | | |
| Retirement | 372 | | | 302 | | | 898 | | | 1,020 | |
| Group Insurance | 22 | | | 90 | | | 71 | | | 224 | |
| Total U.S. Workplace Solutions division | 394 | | | 392 | | | 969 | | | 1,244 | |
| U.S. Individual Solutions division: | | | | | | | |
| Individual Annuities(1) | 408 | | | 459 | | | 1,030 | | | 1,393 | |
| Individual Life | 101 | | | 59 | | | 17 | | | 29 | |
| Total U.S. Individual Solutions division | 509 | | | 518 | | | 1,047 | | | 1,422 | |
| Assurance IQ division(2): | | | | | | | |
| Assurance IQ | (30) | | | 0 | | | (69) | | | 0 | |
| Total Assurance IQ division | (30) | | | 0 | | | (69) | | | 0 | |
| Total U.S. Businesses | 873 | | | 910 | | | 1,947 | | | 2,666 | |
| International Businesses(3) | 775 | | | 721 | | | 2,162 | | | 2,364 | |
| Corporate and Other | (455) | | | (281) | | | (1,338) | | | (1,028) | |
| Total segment adjusted operating income before income taxes | 1,563 | | | 1,582 | | | 3,629 | | | 4,712 | |
| Reconciling items: | | | | | | | |
| Realized investment gains (losses), net, and related adjustments(4) | 223 | | | 331 | | | (2,746) | | | (882) | |
| Charges related to realized investment gains (losses), net | (70) | | | (92) | | | (353) | | | (149) | |
| Market experience updates(5) | (134) | | | (314) | | | (1,016) | | | (515) | |
| Divested and Run-off Businesses: | | | | | | | |
| Closed Block division | 8 | | | 45 | | | (15) | | | 5 | |
| Other Divested and Run-off Businesses(3) | (132) | | | 207 | | | (725) | | | 641 | |
| Other adjustments(6) | (12) | | | 0 | | | 65 | | | 0 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 1 | | | (34) | | | (62) | | | (71) | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures per Unaudited Interim Consolidated Financial Statements | $ | 1,447 | | | $ | 1,725 | | | $ | (1,223) | | | $ | 3,741 | |
________
| |
(1) | 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. |
| |
(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) | Effective second quarter of 2020, the results of POK 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. |
| |
(4) | Prior period amounts have been updated to conform to current period presentation. |
| |
(5) | 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. |
| |
(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. |
(1)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.
(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)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.
(4)Prior period amounts have been updated to conform to current period presentation.
(5)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.
(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.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
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.
| | | | | | | | | | | |
| |
| September 30,
2020 | | December 31,
2019 |
| Assets by segment: | (in millions) |
| PGIM | $ | 48,507 | | | $ | 47,655 | |
| U.S. Businesses: | | | |
| U.S. Workplace Solutions division: | | | |
| Retirement | 205,878 | | | 198,153 | |
| Group Insurance | 43,851 | | | 43,712 | |
| Total U.S. Workplace Solutions division | 249,729 | | | 241,865 | |
| U.S. Individual Solutions division: | | | |
| Individual Annuities | 193,509 | | | 189,040 | |
| Individual Life | 104,036 | | | 96,072 | |
| Total U.S. Individual Solutions division | 297,545 | | | 285,112 | |
| Assurance IQ division(1): | | | |
| Assurance IQ | 2,621 | | | 2,639 | |
| Total Assurance IQ division | 2,621 | | | 2,639 | |
| Total U.S. Businesses | 549,895 | | | 529,616 | |
| International Businesses(2) | 224,932 | | | 213,335 | |
| Corporate and Other(2) | 26,433 | | | 44,619 | |
| Closed Block division | 61,822 | | | 61,327 | |
| Total assets per Unaudited Interim Consolidated Financial Statements | $ | 911,589 | | | $ | 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.
(2)Effective second quarter of 2020, the carrying amount of assets of POK 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 carrying amount of assets of POT 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.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Revenues on an adjusted operating income basis: | (in millions) |
| PGIM | $ | 1,066 | | | $ | 855 | | | $ | 2,801 | | | $ | 2,651 | |
| U.S. Businesses: | | | | | | | |
| U.S. Workplace Solutions division: | | | | | | | |
| Retirement | 2,690 | | | 2,261 | | | 8,119 | | | 8,486 | |
| Group Insurance | 1,457 | | | 1,438 | | | 4,352 | | | 4,340 | |
| Total U.S. Workplace Solutions division | 4,147 | | | 3,699 | | | 12,471 | | | 12,826 | |
| U.S. Individual Solutions division: | | | | | | | |
| Individual Annuities | 1,148 | | | 1,251 | | | 3,249 | | | 3,774 | |
| Individual Life | 1,609 | | | 1,529 | | | 4,702 | | | 4,519 | |
| Total U.S. Individual Solutions division | 2,757 | | | 2,780 | | | 7,951 | | | 8,293 | |
| Assurance IQ division(1): | | | | | | | |
| Assurance IQ | 75 | | | 0 | | | 194 | | | 0 | |
| Total Assurance IQ division | 75 | | | 0 | | | 194 | | | 0 | |
| Total U.S. Businesses | 6,979 | | | 6,479 | | | 20,616 | | | 21,119 | |
| International Businesses(2) | 5,481 | | | 5,216 | | | 16,201 | | | 15,734 | |
| Corporate and Other | (190) | | | (177) | | | (545) | | | (512) | |
| Total revenues on an adjusted operating income basis | 13,336 | | | 12,373 | | | 39,073 | | | 38,992 | |
| Reconciling items: | | | | | | | |
| Realized investment gains (losses), net, and related adjustments(3) | 392 | | | 491 | | | (2,290) | | | (6) | |
| Charges related to realized investment gains (losses), net | (40) | | | (62) | | | (121) | | | (187) | |
| Market experience updates(4) | (58) | | | (67) | | | (406) | | | (74) | |
| Divested and Run-off Businesses: | | | | | | | |
| Closed Block division | 1,301 | | | 1,482 | | | 3,318 | | | 4,157 | |
| Other Divested and Run-off Businesses(2) | 511 | | | 928 | | | 1,411 | | | 2,813 | |
| Other adjustments(5) | 0 | | | 0 | | | 105 | | | 0 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | (17) | | | (40) | | | (86) | | | (111) | |
| Total revenues per Unaudited Interim Consolidated Financial Statements | $ | 15,425 | | | $ | 15,105 | | | $ | 41,004 | | | $ | 45,584 | |
|
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
| Assets by segment: | (in millions) |
| PGIM | $ | 47,722 |
| | $ | 47,655 |
|
| U.S. Businesses: | | | |
| U.S. Workplace Solutions division: | | | |
| Retirement | 203,191 |
| | 198,153 |
|
| Group Insurance | 43,900 |
| | 43,712 |
|
| Total U.S. Workplace Solutions division | 247,091 |
| | 241,865 |
|
| U.S. Individual Solutions division: | | | |
| Individual Annuities | 191,259 |
| | 189,040 |
|
| Individual Life | 100,429 |
| | 96,072 |
|
| Total U.S. Individual Solutions division | 291,688 |
| | 285,112 |
|
| Assurance IQ division(1): | | | |
| Assurance IQ | 2,599 |
| | 2,639 |
|
| Total Assurance IQ division | 2,599 |
| | 2,639 |
|
| Total U.S. Businesses | 541,378 |
| | 529,616 |
|
| International Businesses(2) | 226,611 |
| | 220,381 |
|
| Corporate and Other(2) | 37,927 |
| | 37,573 |
|
| Closed Block division | 61,749 |
| | 61,327 |
|
| Total assets per Unaudited Interim Consolidated Financial Statements | $ | 915,387 |
| | $ | 896,552 |
|
(1)__________
| |
(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) | Effective second quarter of 2020, the carrying amounts of assets of POK 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. |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
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.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Revenues on an adjusted operating income basis: | (in millions) |
| PGIM | $ | 957 |
| | $ | 926 |
| | $ | 1,735 |
| | $ | 1,796 |
|
| U.S. Businesses: | | | | | | | |
| U.S. Workplace Solutions division: | | | | | | | |
| Retirement | 2,992 |
| | 3,586 |
| | 5,429 |
| | 6,225 |
|
| Group Insurance | 1,471 |
| | 1,461 |
| | 2,895 |
| | 2,902 |
|
| Total U.S. Workplace Solutions division | 4,463 |
| | 5,047 |
| | 8,324 |
| | 9,127 |
|
| U.S. Individual Solutions division: | | | | | | | |
| Individual Annuities | 953 |
| | 1,288 |
| | 2,101 |
| | 2,523 |
|
| Individual Life | 1,563 |
| | 1,508 |
| | 3,093 |
| | 2,990 |
|
| Total U.S. Individual Solutions division | 2,516 |
| | 2,796 |
| | 5,194 |
| | 5,513 |
|
| Assurance IQ division(1): | | | | | | | |
| Assurance IQ | 59 |
| | 0 |
| | 119 |
| | 0 |
|
| Total Assurance IQ division | 59 |
| | 0 |
| | 119 |
| | 0 |
|
| Total U.S. Businesses | 7,038 |
| | 7,843 |
| | 13,637 |
| | 14,640 |
|
| International Businesses(2) | 5,233 |
| | 5,058 |
| | 11,010 |
| | 10,782 |
|
| Corporate and Other | (150 | ) | | (164 | ) | | (355 | ) | | (335 | ) |
| Total revenues on an adjusted operating income basis | 13,078 |
| | 13,663 |
| | 26,027 |
|
| 26,883 |
|
| Reconciling items: | | | | | | | |
| Realized investment gains (losses), net, and related adjustments(3) | (2,241 | ) | | (259 | ) | | (2,695 | ) | | (478 | ) |
| Charges related to realized investment gains (losses), net | (20 | ) | | (54 | ) | | (81 | ) | | (125 | ) |
| Market experience updates(4) | (14 | ) | | (7 | ) | | (348 | ) | | (7 | ) |
| Divested and Run-off Businesses: | | | | | | | |
| Closed Block division | 1,340 |
| | 1,301 |
| | 2,017 |
| | 2,675 |
|
| Other Divested and Run-off Businesses(2) | (18 | ) | | 777 |
| | 623 |
| | 1,602 |
|
| Other adjustments(5) | 47 |
| | 0 |
| | 105 |
| | 0 |
|
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | (57 | ) | | (33 | ) | | (69 | ) | | (71 | ) |
| Total revenues per Unaudited Interim Consolidated Financial Statements | $ | 12,115 |
| | $ | 15,388 |
| | $ | 25,579 |
| | $ | 30,479 |
|
(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.
__________
| |
(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) | Effective second quarter of 2020, the results of POK 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. |
| |
(3) | Prior period amounts have been updated to conform to current period presentation. |
| |
(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. |
| |
(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. |
Intersegment revenues
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
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| PGIM segment intersegment revenues | $ | 208 |
| | $ | 194 |
| | $ | 425 |
| | $ | 374 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| PGIM segment intersegment revenues | $ | 215 | | | $ | 197 | | | $ | 640 | | | $ | 571 | |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
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.
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 June 30, | | Six Months Ended June 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) | | (in millions) |
| Asset-based management fees | $ | 840 |
| | $ | 872 |
| | $ | 1,715 |
| | $ | 1,715 |
| Asset-based management fees | $ | 930 | | | $ | 881 | | | $ | 2,644 | | | $ | 2,596 | |
| Performance-based incentive fees | 16 |
| | 62 |
| | 30 |
| | 98 |
| Performance-based incentive fees | 43 | | | 10 | | | 73 | | | 108 | |
| Other fees | 135 |
| | 149 |
| | 279 |
| | 286 |
| Other fees | 147 | | | 147 | | | 427 | | | 433 | |
| Total asset management and service fees | $ | 991 |
| | $ | 1,083 |
| | $ | 2,024 |
| | $ | 2,099 |
| Total asset management and service fees | $ | 1,120 | | | $ | 1,038 | | | $ | 3,144 | | | $ | 3,137 | |
14. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments and Guarantees
Commercial Mortgage Loan Commitments
|
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
| | (in millions) |
| Total outstanding mortgage loan commitments | $ | 1,754 |
| | $ | 2,129 |
|
| Portion of commitment where prearrangement to sell to investor exists | $ | 787 |
| | $ | 751 |
|
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| | (in millions) |
| Total outstanding mortgage loan commitments | $ | 1,701 | | | $ | 2,129 | |
| Portion of commitment where prearrangement to sell to investor exists | $ | 959 | | | $ | 751 | |
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 an allowance for credit losses of $2$1 million as of JuneSeptember 30, 2020, which is a change of $0 million and $(1) million for the three and sixnine months ended JuneSeptember 30, 2020, respectively.2020.
Commitments to Purchase Investments (excluding Commercial Mortgage Loans)
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| | (in millions) |
| Expected to be funded from the general account and other operations outside the separate accounts | $ | 8,968 | | | $ | 7,372 | |
| Expected to be funded from separate accounts | $ | 120 | | | $ | 49 | |
|
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
| | (in millions) |
| Expected to be funded from the general account and other operations outside the separate accounts | $ | 8,394 |
| | $ | 7,372 |
|
| Expected to be funded from separate accounts | $ | 53 |
| | $ | 49 |
|
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 the three and sixnine months ended JuneSeptember 30, 2020.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Indemnification of Securities Lending and Securities Repurchase Transactions
|
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
| | (in millions) |
| Indemnification provided to certain clients for securities lending and securities repurchase transactions(1) | $ | 7,167 |
| | $ | 5,071 |
|
| Fair value of related collateral associated with above indemnifications(2) | $ | 7,317 |
| | $ | 5,204 |
|
| Accrued liability associated with guarantee | $ | 0 |
| | $ | 0 |
|
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| | (in millions) |
| Indemnification provided to certain clients for securities lending and securities repurchase transactions(1) | $ | 7,328 | | | $ | 5,071 | |
| Fair value of related collateral associated with above indemnifications(2) | $ | 7,480 | | | $ | 5,204 | |
| Accrued liability associated with guarantee | $ | 0 | | | $ | 0 | |
__________
| |
(1) | Includes $34 million and $38 million related to securities repurchase transactions as of June 30, 2020 and December 31, 2019, respectively. |
| |
(2) | Includes $34 million and $37 million related to securities repurchase transactions as of June 30, 2020 and December 31, 2019, respectively. |
(1)Includes $34 million and $38 million related to securities repurchase transactions as of September 30, 2020 and December 31, 2019, respectively.
(2)Includes $34 million and $37 million related to securities repurchase transactions as of September 30, 2020 and December 31, 2019, 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
|
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
| | (in millions) |
| Guaranteed value of third-parties’ assets | $ | 82,325 |
| | $ | 80,009 |
|
| Fair value of collateral supporting these assets | $ | 86,247 |
| | $ | 81,604 |
|
| Asset (liability) associated with guarantee, carried at fair value | $ | 1 |
| | $ | 1 |
|
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| | (in millions) |
| Guaranteed value of third-parties’ assets | $ | 84,088 | | | $ | 80,009 | |
| Fair value of collateral supporting these assets | $ | 88,425 | | | $ | 81,604 | |
| Asset (liability) associated with guarantee, carried at fair value | $ | 1 | | | $ | 1 | |
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
|
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
| | (in millions) |
| Maximum exposure under indemnification agreements for mortgage loans serviced by the Company | $ | 2,278 |
| | $ | 2,113 |
|
| First-loss exposure portion of above | $ | 668 |
| | $ | 622 |
|
| Accrued liability associated with guarantees(1) | $ | 37 |
| | $ | 19 |
|
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| | (in millions) |
| Maximum exposure under indemnification agreements for mortgage loans serviced by the Company | $ | 2,451 | | | $ | 2,113 | |
| First-loss exposure portion of above | $ | 718 | | | $ | 622 | |
| Accrued liability associated with guarantees(1) | $ | 39 | | | $ | 19 | |
__________
| |
(1) | As of June 30, 2020, the accrued liability associated with guarantees includes an allowance for credit losses of $17 million, which is a change of $0 million and $(1) million for the three and six months ended June 30, 2020, respectively. |
(1)As of September 30, 2020, the accrued liability associated with guarantees includes an allowance for credit losses of $18 million, which is a change of $1 million and $0 million for the three and nine months ended September 30, 2020, respectively.
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
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
certain of the mortgages it services through a delegated authority arrangement. Under these arrangements, the Company originates multi-family
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
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 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 $18,154$19,411 million and $16,878 million of mortgages subject to these loss-sharing arrangements as of JuneSeptember 30, 2020 and December 31, 2019, respectively, all of which are collateralized by first priority liens on the underlying multi-family residential properties. As of JuneSeptember 30, 2020, these mortgages had a weighted-average debt service coverage ratio of 1.961.89 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%. The Company had 0 losses related to indemnifications that were settled for both the sixnine months ended JuneSeptember 30, 2020 and 2019.
Other Guarantees
|
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
| | (in millions) |
| Other guarantees where amount can be determined | $ | 51 |
| | $ | 55 |
|
| Accrued liability for other guarantees and indemnifications | $ | 0 |
| | $ | 0 |
|
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| | (in millions) |
| Other guarantees where amount can be determined | $ | 52 | | | $ | 55 | |
| 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 $9 million and $12 million as of JuneSeptember 30, 2020 and December 31, 2019, respectively, 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.
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.
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.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
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
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
“Other “Other income.” The fair value of the contingent consideration liability was less than $1 million0 as of Juneof September 30, 2020 and $105 million as of December 31, 2019 (see Note 6 for additional information). 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 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 JuneSeptember 30, 2020,, 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.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—Statements���(Continued)
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, and should be read in conjunction with the complete descriptions provided in the Form 10-K.
Individual Annuities, Individual Life, and Group Insurance
Broderick v. PICA, et al.
In September 2020, the parties filed a Joint Stipulation of Dismissal with Prejudice. This matter is closed.
Behfarin v. Pruco Life
In June 2020, the court issued an order: (i) granting plaintiffs’ motion for certification of the settlement class; (ii) approving the proposed nationwide class settlement agreement; (iii) approving the class notice; (iv) awarding attorneys’ fees and costs to plaintiffs and a reduced incentive award to Behfarin; and (v) dismissing the action with prejudice, but maintaining jurisdiction over the settlement.
Securities 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. In June 2020, plaintiffs filed an amended complaint and added Robert M. Falzon, PFI’s vice chairman, as an individual defendant. In August 2020, the Company filed a motion to dismiss the amended complaint.
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. Case updates are consolidated with the City of Warren action.
Pekin Police Pension Fund v. Charles F. Lowrey, et al.
In September 2020, a shareholder derivative complaint entitled Pekin Police Pension Fund, Derivatively on Behalf of Prudential Financial, Inc. v. Charles F. Lowrey, et al., was filed in the United States District Court for the District of New Jersey (the “Derivative Complaint”) against PFI as a “nominal” defendant, PFI’s chairman and chief executive officer, vice chairman, chief financial officer, certain former officers of PFI, and all of the current outside directors of PFI’s Board. The Derivative Complaint asserts claims for federal securities law violations, breach of fiduciary duty, waste of corporate assets, and unjust enrichment, and alleges that: (i) the Company's reserve assumptions failed to account for adversely developing mortality experience in the Individual Life business segment; (ii) the Company's reserves were insufficient to satisfy its future policy benefit liabilities; (iii) the Company materially understated its liabilities and overstated net income due to flawed assumptions in calculating mortality experience; and (iv) the individual defendants breached their duty of care and loyalty to the Company by allowing the alleged improper activity.
Daniel Plaut v. Prudential Financial, Inc.
In October 2020, a shareholder derivative complaint entitled Daniel Plaut, Derivatively on Behalf of Prudential Financial, Inc. v. Charles F. Lowrey, et al., was filed in the Superior Court of New Jersey, Law Division, Essex County (the “Derivative Complaint”) against PFI as a “nominal” defendant, PFI’s chairman and chief executive officer, vice chairman, and all of the current outside directors of PFI’s Board. The Derivative Complaint asserts claims for breach of fiduciary duty, unjust enrichment, and abuse of control and alleges that: (i) the Company's reserve assumptions failed to account for adversely developing mortality experience in the Individual Life business segment; (ii) the Company's reserves were insufficient to satisfy its future policy benefit liabilities; (iii) the Company materially understated its liabilities and overstated net income due to flawed assumptions in calculating mortality experience; and (iv) the individual defendants engaged in corporate misconduct, mismanagement and waste through their participation in the alleged wrongdoing.
Shareholder Demands
In January 2020, the Board of Directors received a shareholder demand letter containing allegations: (i) of wrongdoing similar to those alleged in the City 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 requests that the Board of Directors investigate and commence legal proceedings against the named individuals to recover for
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
the Company’s benefit the 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. In April 2020, the Company received additional shareholder demands raising allegations similar to those contained in the January 2020 demand, and may be subject prospectively to additional activity relating to these matters.
Other Matters
Cho v. PICA, et al.
In September 2020, plaintiff filed an amended complaint and added as individual defendants certain PFI officers and current and former members of the Company’s Administrative Committee and Investment Oversight Committee.
LIBOR Litigation
Prudential Investment Portfolios 2, f/k/a Dryden Core Investment Fund, o/b/o Prudential Core Short-Term Bond Fund and Prudential Core Taxable Money Market Fund v. Bank of America Corporation, et al.
In May 2020, the court issued two orders approving stipulations dismissing with prejudice Prudential’s claims against Barclays Bank PLC, Barclays Capital Inc., and Barclays PLC. In August 2020, the court issued two orders approving stipulations dismissing with prejudice Prudential’s claims against Deutsche Bank AG. In October 2020, the court issued orders approving stipulations dismissing with prejudice Prudential’s claims against JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., and J.P. Morgan Securities LLC, f/k/a/ J.P. Morgan Securities Inc., Bank of America Corporation, Bank of America, N.A., and Merrill Lynch, Pierce, Fenner & Smith Inc., f/k/a Banc of America Securities LLC.
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. 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.
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 JuneSeptember 30, 2020, compared with December 31, 2019, and its consolidated results of operations for the three and sixnine months ended JuneSeptember 30, 2020 and 2019. 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, 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 $1.605$1.648 trillion of assets under management as of JuneSeptember 30, 2020, 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. Individual Solutions, and Assurance IQ divisions), 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 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 customers and tap into significant market opportunities through our U.S. Businesses, PGIM (our global investment management business) and our International Businesses.
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.
COVID-19
Beginning 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 impacted our results of operations in the current period and are expected to drive 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 leveraging the scale of its approximately $1.4 trillion of assets under management through its distinctive multi-manager model. AlthoughDespite this COVID-19 environment since first quarter, PGIM has experienced favorable equity markets have largely recoveredmarket and credit spreads have compressedconditions, strong performance, continued positive flows across both institutional and retail investors, gains from their highs, thereour seed capital and co-investments and increased levels of production and profitability from the agency business demonstrating the counter cyclical nature of the business. There remain risks to earnings across the asset management industry, including PGIM, if economic conditions remain unstable, and markets decline or credit spreads widen further.widen. The economic downturn iscould also having an impacthave further impacts on real estate prices as well as transaction volumevolumes in certain private asset classes. These factorsAdverse changes in market conditions could lead to lower fee-based revenues, incentive fees taking longer to be realized and losses emerging in our strategic investingco- and seed investment portfolio. While the impacts of COVID-19 are a net negative for PGIM, and the overall asset management industry, we believe there is an opportunity for earnings growth as markets recover, potentially leading to higher asset management fees, incentive fees and transaction activity. 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.
U.S. Businesses:
U.S. Workplace Solutions. In our Retirement business, we expect that account values in our full-service business will beare impacted by capital market volatilitymovements and by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provides qualified individuals the ability to withdraw from defined contribution plans and individual retirement accounts 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 ancontinue to 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 result of the impact of these market conditions on pension plan funding levels.business. Given many of the products in our institutional investment products business assume longevity risk, elevated levels of mortality resulting from COVID-19 may continue resulting into contribute to a higher level of underwriting gains in this business. In our Group Insurance business, 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 over time in the solutions we offer to help improve the financial wellness of individuals at the workplace; however, we expect near-term revenue growth prospects to be slowed by the impact of social distancing on new business sales and the impact of employee financial hardships on utilization of workplace benefits.
U.S. Individual Solutions. In our Individual Life insurance business, we 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 continue to be impacted by capital market volatility.movements. Across our Individual Solutions businesses, we have taken pricing and product actions including the suspension of our single life guaranteed universal life product in July 2020, 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. These actions included the suspension in July 2020 of our single life guaranteed universal life product in our Individual Life business, and a pivot to less rate-sensitive products in our Individual Annuities business with the decision to discontinue sales of traditional variable annuities with guaranteed living benefits effective December 31, 2020. In addition, while our distribution platforms include a suite of digital, hybrid, advisory, and in-person advisory options, mandated social distancing has limited in-person engagement between customers and advisors.financial professionals. Collectively, we expect the product actions we have taken and the constrained distribution environment to adversely impact our sales prospects in the near-term. SalesAlthough our retail solutions are available to employees of our Workplace Solutions clients, may also be delayed as a result of current economic conditions, as we encourage employees to prioritize workplace benefits to regain or retainenhance their financial wellness. We continue to expect to offer our Individual Solutions products on the Assurance IQ platform over time beginning with anin addition to the Individual Life product offering added in the second quarter.quarter of 2020.
Assurance IQ. We expect the impacts of COVID-19 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.
International Businesses. Our International Businesses remain focused on meeting customers’ protection and financial needs and maintaining the underlying strength of our distribution channels. WithIn the implementationthird quarter of social distancing protocols2020, we experienced an increase in sales in part as the significant restrictions on personal interactions that existed globally in-person engagement betweenduring portions of the first half of 2020 were reduced and customers, and advisors has been reduced within both our captive agentagents and third-party distribution channels. Reflectivedistributors adapted to greater use of virtual communications (see “—Results of Operations by Segment—International Insurance Division—International Insurance” for additional information). However, a reversal of the disruptions in the global financial markets and the low interest rate environment, 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 actionseasing of COVID-19 restrictions on personal interactions may adversely impact our sales prospects in the near-term. However, we expectnear term. Through the adverse impacts to be mitigated over time andthird quarter of 2020, we have seenexperienced a degree of relaxation of social distancing protocols in some markets and increased usage of virtual tools to connect with customers. We also expect an increasedslightly elevated level of claims in the near-termdue to COVID-19 and temporary higher expenses mostly related to supporting our captive agents. Weagents which we expect will decrease over time. Going forward, 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.
Corporate and Other Operations. In our Corporate and Other operations, if equity markets and interest rates decline through December 31, 2020, it will potentially 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 and nine months ended September 30, 2020 we reported a net gain of $1,487 million and a net loss of $(1,193) million, respectively, as financial market conditions had a substantial effect on. For the three months and six months ended June 30, 2020 we reported a net loss of $(2,409) million and $(2,680) million, respectively, as unfavorable financial market conditions had a substantial negative effect on the reported results of our businesses. See “Results of Operations” and “Results of Operations by Segment” for a discussion of results for second quarter and first half of the year. |
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• | Liquidity. As of June 30, 2020, we had $4,517 million in highly liquid assets at Prudential Financial. During the first half of the year, we took several steps to proactively manage liquidity, including entering into a $1.5 billion facility agreement with a Delaware trust to increase our alternative sources of liquidity and issuing $1.5 billion in senior debt in part to pre-
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the reported results of our businesses. See “Results of Operations” and “Results of Operations by Segment” for a discussion of results for the third quarter and the first nine months of 2020.
•Liquidity. As of September 30, 2020, we had $6.1 billion in highly liquid assets at Prudential Financial. Since the beginning of the year, we took several steps to proactively manage liquidity, including refinancing $1.3 billion of junior subordinated debt to reduce our financing costs, entering into a $1.5 billion facility agreement with a Delaware trust to increase our alternative sources of liquidity and 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 the first quarter of 2020. We continuedo not intend to resume share repurchases this year as the duration and severity of the pandemic and its effect on the economy remain uncertain. We will evaluate the resumption of share repurchases under our existing Board authorizationas informed by the market environment and any alternative opportunities for 2020.capital deployment. 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. See “Liquidity and Capital Resources—Liquidity” for a discussion of our liquidity.
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• | •Capital Resources. As of September 30, 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, including as a result of credit migration and losses in our investment portfolio as discussed below. 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 using available external sources of capital or seeking additional sources. See “Liquidity and Capital Resources—Capital” for a discussion of our capital resources.
•Investment Portfolio. Net unrealized gains (losses) on fixed maturity investments (excluding securities classified as trading) were a net unrealized gain of $54,811 million as of September 30, 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 $56,460 million as of September 30, 2020 and gross unrealized losses increased from $1,315 million to $1,649 million for the same period. The increase in gross unrealized gains was primarily due to a decrease in U.S. interest rates, while 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 continue to result in negative credit migration and possible 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). During 2020, approximately 1.4% 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 investment value.
•Sales and Flows. See “Segment Results of Operations” for a discussion of sales and flows in each of our segments.
•Underwriting Results. See “Segment Results of Operations” for a discussion of mortality experience in each of our segments.
. As of June 30, 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, including as a result of credit migration and losses in our investment portfolio as discussed below. 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 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 $54,717 million as of June 30, 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 $57,171 million as of June 30, 2020 and gross unrealized losses increased from $1,315 million to $2,454 million for the same period. The increase in gross unrealized gains was primarily due to a decrease in U.S. interest rates, while 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 continue to result in negative credit migration and possible 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). During 2020, approximately 1% 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 investment value.
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• | Sales and Flows. See “Segment Results of Operations” for a discussion of sales and flows in each of our segments.
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• | Underwriting Results. See “Segment Results of Operations” for a discussion of mortality experience in each of our segments.
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In the secondthird quarter of 2020, we estimate that COVID-19 had a net positivenegative impact on our underwriting results reflecting the complementary risk profile ofunfavorable mortality impacts in our Group Insurance and Individual Life businesses partially offset by favorable mortality and longevity exposures.impacts in our Retirement business. Going forward, we estimate that our net underwriting results will be adversely impacted by approximately $70 million for every incremental 100,000 fatalities in the U.S. However, the ultimate impact on our underwriting results will depend on factors such as age, geographic location, and insured versus uninsured populations among the fatalities.
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• | Expenses. We expect higher expenses in 2020 from costs associated with COVID-19, including approximately $80 million incurred in the second•Expenses. We expect higher expenses of approximately $155 million in 2020 from costs associated with COVID-19, including approximately $40 million incurred in the third quarter of 2020 and approximately $25 million expected in the fourth 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. However, we also expect cost savings associated with COVID-19 of approximately $90 million in 2020, including approximately $30 million of cost savings realized in the third quarter of 2020 and approximately $20 million expected to be realized in the fourth quarter of 2020 and approximately $60 million expected in the second half 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. However, we also expect cost savings associated with COVID-19 of approximately $60 million in 2020, including approximately $30 million of cost savings expected to be realized in aggregate over the third and fourth quarters of 2020. These cost savings are from lower employee health and welfare claims, and lower travel meeting, meal and entertainment costs.
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We have initiatedprovided, and in some cases continue to provide, 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, waiving interest on policy loans and wiring funds at the Company’s expense.
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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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•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).
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 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, while current COVID-19 mortality is sharply skewed toward older ages. As the COVID-19 event continues to unfold, we continue to update our analysis and take management actions in response to this specific event. As of JuneSeptember 30, 2020 the COVID-19 pandemic has not reached the most severe levels included in the Company’s stress testing.
In addition, we expect the impact of COVID-19-related claims to be moderated by the balance between our mortality exposure (such as in our individual and group life businesses) and our longevity exposure (such as in our retirement 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.”
•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.
. 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-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. One provision of the CARES Act amends the Tax Cuts and Jobs Act (“TCJA”) and allows companies with net operating losses (“NOLs”) originating in 2018, 2019 or 2020 to carry back those losses for five years. See Note 8 to the Unaudited Interim Financial Statements for more information.
. 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. One provision of the CARES Act amends the Tax Cuts and Jobs Act (“TCJA”) and allows companies with net operating losses (“NOLs”) originating in 2018, 2019 or 2020 to carry back those losses for five years. See Note 8 to the Unaudited Interim Financial Statements for more information. We are continuing to analyze 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,Financial Services Agency (“FSA”), the NAICNational Association of Insurance Commissioners (“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.
Regulatory Developments
DOL Fiduciary Rules
In June 2020, the DOL announced that it is proposing a new exemption to replace the previously vacated “best interest contract exemption.” This proposed exemption would allow fiduciaries meeting the requirements of the exemption to receive compensation, including as a result of advice to roll over assets from a qualified plan to an Individual Retirement Account (“IRA”), and to purchase from or sell certain investments to qualified plans and IRAs. The DOL also reinstated the prior
investment advice regulation and other existing exemptions and provided its current interpretation of the pre-2016 fiduciary investment advice regulation. We cannot predict what impact the newly proposed exemption or interpretative guidance will have on the Company.
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;
•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 “Risk Factors” in this Quarterly Report on Form 10-Q and “Risk Factors—Market Risk” included in our Annual Report on Form 10-K for the year ended December 31, 2019.
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 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 division and our Corporate and Other operations, we estimate annual principal payments and prepayments that we would be required to reinvest to be approximately 5.5%5.7% of the fixed maturity security and commercial mortgage loan portfolios through 2021. The portion of the general account attributable to these operations has approximately $248$243 billion of such assets (based on net carrying value) as of JuneSeptember 30, 2020. The average portfolio yield for fixed maturity securities and commercial mortgage loans is approximately 4.1%4.0% as of JuneSeptember 30, 2020.
Included in the $248$243 billion of fixed maturity securities and commercial mortgage loans are approximately $155$162 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 $155$162 billion, approximately 55%53% 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
September 30, 2020 |
| (in billions) |
| Long-duration insurance products with fixed and guaranteed terms | $ | 155 | |
| Contracts with adjustable crediting rates subject to guaranteed minimums | 61 | |
| Participating contracts where investment income risk ultimately accrues to contractholders | 14 | |
| Total | $ | 230 | |
|
| | | |
| | As of June 30, 2020 |
| | (in billions) |
| Long-duration insurance products with fixed and guaranteed terms | $ | 157 |
|
| Contracts with adjustable crediting rates subject to guaranteed minimums | 60 |
|
| Participating contracts where investment income risk ultimately accrues to contractholders | 14 |
|
| Total | $ | 231 |
|
The $157$155 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 $60$61 billion above relates to contracts with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. Although we may have the ability to lower crediting rates for those contracts above guaranteed minimums,
our willingness to do so may be limited by competitive pressures. The following table sets forth the related account values by range of guaranteed minimum crediting rates and the related range of the difference, in basis points (“bps”), between rates being credited to contractholders as of JuneSeptember 30, 2020, and the respective guaranteed minimums.
| | | | Account Values with Adjustable Crediting Rates Subject to Guaranteed Minimums: | | Account Values with Adjustable Crediting Rates Subject to Guaranteed Minimums: |
| | At guaranteed minimum | | 1-49 bps above guaranteed minimum | | 50-99 bps above guaranteed minimum | | 100-150 bps above guaranteed minimum | | Greater than 150 bps above guaranteed minimum | | Total | | At
guaranteed
minimum | | 1-49
bps above
guaranteed
minimum | | 50-99
bps above
guaranteed
minimum | | 100-150
bps above
guaranteed
minimum | | Greater than
150
bps above
guaranteed
minimum | | Total |
| | ($ in billions) | | ($ in billions) |
Range of Guaranteed Minimum Crediting Rates: | | | | | | | | | | | | Range of Guaranteed Minimum
Crediting Rates: | |
| Less than 1.00% | $ | 0.6 |
| | $ | 1.3 |
| | $ | 0.4 |
| | $ | 0.1 |
| | $ | 0.0 |
| | $ | 2.4 |
| Less than 1.00% | $ | 0.8 | | | $ | 1.3 | | | $ | 0.3 | | | $ | 0.0 | | | $ | 0.0 | | | $ | 2.4 | |
| 1.00% - 1.99% | 1.1 |
| | 5.0 |
| | 11.5 |
| | 2.6 |
| | 1.1 |
| | 21.3 |
| 1.00% - 1.99% | 1.1 | | | 15.0 | | | 2.7 | | | 2.0 | | | 1.2 | | | 22.0 | |
| 2.00% - 2.99% | 1.3 |
| | 0.9 |
| | 0.5 |
| | 2.6 |
| | 1.2 |
| | 6.5 |
| 2.00% - 2.99% | 1.3 | | | 1.0 | | | 2.0 | | | 1.1 | | | 1.2 | | | 6.6 | |
| 3.00% - 4.00% | 24.8 |
| | 3.8 |
| | 0.2 |
| | 0.2 |
| | 0.0 |
| | 29.0 |
| 3.00% - 4.00% | 27.9 | | | 0.6 | | | 0.1 | | | 0.2 | | | 0.2 | | | 29.0 | |
| Greater than 4.00% | 0.9 |
| | 0.0 |
| | 0.0 |
| | 0.0 |
| | 0.0 |
| | 0.9 |
| Greater than 4.00% | 0.9 | | | 0.0 | | | 0.0 | | | 0.0 | | | 0.0 | | | 0.9 | |
| Total(1) | $ | 28.7 |
| | $ | 11.0 |
| | $ | 12.6 |
| | $ | 5.5 |
| | $ | 2.3 |
| | $ | 60.1 |
| Total(1) | $ | 32.0 | | | $ | 17.9 | | | $ | 5.1 | | | $ | 3.3 | | | $ | 2.6 | | | $ | 60.9 | |
| Percentage of total | 48 | % | | 18 | % | | 21 | % | | 9 | % | | 4 | % | | 100 | % | Percentage of total | 53 | % | | 30 | % | | 8 | % | | 5 | % | | 4 | % | | 100 | % |
__________
| |
(1) | Includes approximately $0.68 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity. |
(1)Includes approximately $0.62 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity.
The remaining $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 0.65% (which is reasonably consistent with recent rates) for the period from JulyOctober 1, 2020 through JuneSeptember 30, 2021 (and credit spreads remain unchanged from average levels as of June 30,experienced during the third quarter 2020), 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$100 million and $80$140 million for the period from JulyOctober 1, 2020 through JuneSeptember 30, 2021.
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.
Closed Block Division
Substantially all of the $61 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 regularly examine our product offerings and their profitability. As a result, we have repriced certain products, adjusted commissions for certain products and have discontinued 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
September 30, 2020 |
| (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 June 30, 2020 |
| | (in billions) |
| Insurance products with fixed and guaranteed terms | $ | 132 |
|
| 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 | $ | 168 |
|
The $132$136 billion above is primarily comprised of long-duration insurance products that have fixed and guaranteed 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 0.60% and the 10-year U.S. Treasury rate is 0.65% (which is reasonably consistent with recent rates) for the period from JulyOctober 1, 2020 through JuneSeptember 30, 2021 (and credit spreads remain unchanged from average levels as of June 30,experienced during the third quarter 2020), 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 million and $80 million for the period from JulyOctober 1, 2020 through JuneSeptember 30, 2021.
Results of Operations
Consolidated Results of Operations
The following table summarizes net income (loss) for the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Revenues | $ | 15,425 | | | $ | 15,105 | | | $ | 41,004 | | | $ | 45,584 | |
| Benefits and expenses | 13,978 | | | 13,380 | | | 42,227 | | | 41,843 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | 1,447 | | | 1,725 | | | (1,223) | | | 3,741 | |
| Income tax expense (benefit) | (50) | | | 332 | | | 7 | | | 726 | |
| Income (loss) before equity in earnings of operating joint ventures | 1,497 | | | 1,393 | | | (1,230) | | | 3,015 | |
| Equity in earnings of operating joint ventures, net of taxes | 10 | | 32 | | | 62 | | | 85 | |
| | | | | | | |
| | | | | | | |
| Net income (loss) | 1,507 | | | 1,425 | | | (1,168) | | | 3,100 | |
| Less: Income attributable to noncontrolling interests | 20 | | | 7 | | | 25 | | | 42 | |
| Net income (loss) attributable to Prudential Financial, Inc. | $ | 1,487 | | | $ | 1,418 | | | $ | (1,193) | | | $ | 3,058 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Revenues | $ | 12,115 |
| | $ | 15,388 |
| | $ | 25,579 |
| | $ | 30,479 |
|
| Benefits and expenses | 14,447 |
| | 14,512 |
| | 28,249 |
| | 28,463 |
|
| Income (loss) before income taxes and equity in earnings of operating joint ventures | (2,332 | ) | | 876 |
| | (2,670 | ) | | 2,016 |
|
| Income tax expense (benefit) | 115 |
| | 162 |
| | 57 |
| | 394 |
|
| Income (loss) before equity in earnings of operating joint ventures | (2,447 | ) | | 714 |
| | (2,727 | ) | | 1,622 |
|
| Equity in earnings of operating joint ventures, net of taxes | 42 |
| | 24 |
| | 52 |
| | 53 |
|
| Net income (loss) | (2,405 | ) | | 738 |
| | (2,675 | ) | | 1,675 |
|
| Less: Income attributable to noncontrolling interests | 4 |
| | 30 |
| | 5 |
| | 35 |
|
| Net income (loss) attributable to Prudential Financial, Inc. | $ | (2,409 | ) | | $ | 708 |
| | $ | (2,680 | ) | | $ | 1,640 |
|
Three Month Comparison. The $3,117$69 million decreaseincrease in “Net income (loss) attributable to Prudential Financial, Inc.” for the secondthird quarter of 2020 compared to the secondthird quarter of 2019 reflected the following notable items:
•$2,136711 million favorable 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);
•$382 million favorable variance reflecting a tax benefit in the current period compared to a tax expense in the prior year period; and
•$307 million favorable variance, on a pre-tax basis, from investment related activities that are primarily within “Other income (loss)” for PFI excluding our Divested and Run-off Businesses. These favorable impacts were primarily driven by unrealized gains (losses) from fixed maturity securities designated as trading.
Partially offsetting these increases in “Net income (loss) attributable to Prudential Financial, Inc.” was the following item:
•$1,219 million unfavorable variance, on a pre-tax basis, from realized investment gains and losses for PFI excluding the Divested and Run-off Businesses, and excluding the impact of the hedging program associated with certain variable annuities discussed belowabove (see “General Account Investments” for additional information);.
Nine Month Comparison. The $4,251 million decrease in “Net income (loss) attributable to Prudential Financial, Inc.” for the first nine months of 2020 compared to the first nine months of 2019 reflected the following notable items:
•$7711,386 million unfavorable variance, on a pre-tax basis, from a loss in the current period from our Divested and Run-off Businesses compared to a gain in the prior year period (see “Results of Operations by Segment—Divested and Run-off Businesses” for additional information);
•$6631,083 million unfavorable variance, on a pre-tax basis, from lower adjusted operating income from our business segments (see “—Segment“Segment Results of Operations” for additional information);
•$1,096 million unfavorable variance, on a pre-tax basis, from realized investment gains and losses for PFI excluding Divested and Run-off Businesses, and excluding the impact of the hedging program associated with certain variable annuities discussed below (see “General Account Investments” for additional information);
•$491589 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).; and
Partially offsetting these decreases in “Net income (loss) attributable to Prudential Financial, Inc.” were the following items:
$446 million favorable variance, on a pre-tax basis, from investment related activities that are primarily within “Other income (loss)” for PFI excluding our Divested and Run-off Businesses. These favorable impacts were primarily driven by unrealized gains (losses) from equity securities as well as fixed maturity securities designated as trading; and
$258 million favorable variance, on a pre-tax basis, driven by market experience updates excluding those impacts related to the hedging program associated with certain variable annuities discussed above.
Six Month Comparison. •The $4,320 million decrease in “Net income (loss) attributable to Prudential Financial, Inc.” for the first six months of 2020 compared to the first six months of 2019 reflected the following notable items:
$1,300 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);
$1,066 million unfavorable variance, on a pre-tax basis, from lower adjusted operating income from our business segments (see “Segment Results of Operations” for additional information);
$978 million unfavorable variance, on a pre-tax basis, from a loss in the current period from our Divested and Run-off Businesses compared to a gain in the prior period (see “Results of Operations by Segment—Divested and Run-off Businesses” for additional information);
$859526 million unfavorable variance, on a pre-tax basis, from investment related activities that are primarily within “Other income (loss)” for PFI excluding our Divested and Run-off Businesses. These unfavorable impacts were primarily driven by unrealized gains (losses) from equity securities as well as fixed maturity securities designated as trading; andsecurities.
$326 million unfavorable variance, on a pre-tax basis, driven by market experience updates excluding those impacts related to the hedging program associated with certain variable annuities discussed above.
Partially offsetting these decreases in “Net income (loss) attributable to Prudential Financial, Inc.” was the following item:
•$114719 million favorable variance onfrom a pre-tax basis, from realized investment gains and losses for PFI excluding Divested and Run-off Businesses, and excluding the impact of the hedging program associated with certain variable annuities discussed above (see “General Account Investments” for additional information).lower tax expense.
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.
Annual Reviews and Update of Assumptions and Other Refinements
Annually during the second quarter of each year, we perform a comprehensive review of actuarial assumptions utilized in measuring insurance liabilities and expected gross profits used in amortizing deferred acquisition costs, sales inducement costs, unearned revenue reserves and value of business acquired. The assumptions reviewed include, but are not necessarily limited to, inputs such as mortality, morbidity, contractholder behavior and expected future rates of returns on investments. As part of this review, we may update these assumptions and make refinements to our models based upon emerging experience, future expectations and other data, including any observable market data. These assumptions are generally updated annually during the second quarter of each year, unless a material change in experience that we feel is indicative of a long-term trend is observed during an interim period.
Shown below are the impacts on our adjusted operating income from updates of actuarial assumptions and other refinements as discussed above. The information below is presented by each segment and Corporate and Other operations and includes a reconciliation of these impacts to the impacts within income (loss) before income taxes and equity in earnings of operating joint ventures.
|
| | | | | | | |
| | Three and Six Months Ended
June 30, |
| | 2020 | | 2019 |
| | (in millions) |
| Favorable (unfavorable) impact to adjusted operating income before income taxes by segment: | | | |
| U.S. Businesses: | | | |
| U.S Workplace Solutions division: | | | |
| Retirement | $ | (22 | ) | | $ | 154 |
|
| Group Insurance | 11 |
| | 9 |
|
| Total U.S. Workplace Solutions division | (11 | ) | | 163 |
|
| U.S. Individual Solutions division: | | | |
| Individual Annuities | (136 | ) | | (12 | ) |
| Individual Life | (92 | ) | | (208 | ) |
| Total U.S. Individual Solutions division | (228 | ) | | (220 | ) |
| Total U.S. Businesses | (239 | ) | | (57 | ) |
| International Businesses(1) | (95 | ) | | 11 |
|
| Corporate and Other | 0 |
| | 0 |
|
| Total segment favorable (unfavorable) impact to adjusted operating income before income taxes | (334 | ) | | (46 | ) |
| Reconciling items: | | | |
| Realized investment gains (losses), net, and related adjustments | 302 |
| | 9 |
|
| Charges related to realized investment gains (losses), net | (41 | ) | | 16 |
|
| Divested and Run-off Businesses: | | | |
| Closed Block division | 0 |
| | (7 | ) |
| Other Divested and Run-off Businesses(1) | (33 | ) | | (12 | ) |
| Favorable (unfavorable) impact to consolidated income (loss) before income taxes and equity in earnings of operating joint ventures | $ | (106 | ) | | $ | (40 | ) |
__________
| |
(1) | Effective second quarter of 2020, the results of POK 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. |
See “—Results of Operations by Segment” for a discussion of the impacts of our annual reviews and update of assumptions and other refinements.
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
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) | | (in millions) |
| Adjusted operating income before income taxes by segment: | | | | | | | | Adjusted operating income before income taxes by segment: | |
| PGIM | $ | 324 |
| | $ | 264 |
| | $ | 488 |
| | $ | 478 |
| PGIM | $ | 370 | | | $ | 232 | | | $ | 858 | | | $ | 710 | |
| U.S. Businesses: | | | | | | | | U.S. Businesses: | |
| U.S. Workplace Solutions division: |
| |
| |
| |
| U.S. Workplace Solutions division: | |
| Retirement | 281 |
| | 467 |
| | 526 |
| | 718 |
| Retirement | 372 | | | 302 | | | 898 | | | 1,020 | |
| Group Insurance | 5 |
| | 81 |
| | 49 |
| | 134 |
| Group Insurance | 22 | | | 90 | | | 71 | | | 224 | |
| Total U.S. Workplace Solutions division | 286 |
| | 548 |
| | 575 |
| | 852 |
| Total U.S. Workplace Solutions division | 394 | | | 392 | | | 969 | | | 1,244 | |
| U.S. Individual Solutions division: | | | | | | | | U.S. Individual Solutions division: | | | | | | | |
| Individual Annuities | 249 |
| | 462 |
| | 622 |
| | 934 |
| Individual Annuities | 408 | | | 459 | | | 1,030 | | | 1,393 | |
| Individual Life | (64 | ) | | (135 | ) | | (84 | ) | | (30 | ) | Individual Life | 101 | | | 59 | | | 17 | | | 29 | |
| Total U.S. Individual Solutions division | 185 |
| | 327 |
| | 538 |
| | 904 |
| Total U.S. Individual Solutions division | 509 | | | 518 | | | 1,047 | | | 1,422 | |
| Assurance IQ division(1): | | | | | | | | Assurance IQ division(1): | | | | | | | |
| Assurance IQ | (16 | ) | | 0 |
| | (39 | ) | | 0 |
| Assurance IQ | (30) | | | 0 | | | (69) | | | 0 | |
| Total Assurance IQ division | (16 | ) | | 0 |
| | (39 | ) | | 0 |
| Total Assurance IQ division | (30) | | | 0 | | | (69) | | | 0 | |
| Total U.S. Businesses | 455 |
| | 875 |
| | 1,074 |
| | 1,756 |
| Total U.S. Businesses | 873 | | | 910 | | | 1,947 | | | 2,666 | |
| International Businesses(2) | 693 |
| | 790 |
| | 1,391 |
| | 1,649 |
| International Businesses(2) | 775 | | | 721 | | | 2,162 | | | 2,364 | |
| Corporate and Other | (541 | ) | | (335 | ) | | (883 | ) | | (747 | ) | Corporate and Other | (455) | | | (281) | | | (1,338) | | | (1,028) | |
| Total segment adjusted operating income before income taxes | 931 |
| | 1,594 |
| | 2,070 |
| | 3,136 |
| Total segment adjusted operating income before income taxes | 1,563 | | | 1,582 | | | 3,629 | | | 4,712 | |
| Reconciling items: | | | | | | | | Reconciling items: | | | | | | | |
| Realized investment gains (losses), net, and related adjustments(3) | (3,191 | ) | | (572 | ) | | (2,982 | ) | | (1,194 | ) | Realized investment gains (losses), net, and related adjustments(3) | 223 | | | 331 | | | (2,746) | | | (882) | |
| Charges related to realized investment gains (losses), net(4) | 519 |
| | (82 | ) | | (283 | ) | | (57 | ) | Charges related to realized investment gains (losses), net(4) | (70) | | | (92) | | | (353) | | | (149) | |
| Market experience updates(5) | 55 |
| | (207 | ) | | (886 | ) | | (207 | ) | Market experience updates(5) | (134) | | | (314) | | | (1,016) | | | (515) | |
| Divested and Run-off Businesses(6): | | | | | | | | Divested and Run-off Businesses(6): | |
| Closed Block division | (22 | ) | | (21 | ) | | (23 | ) | | (40 | ) | Closed Block division | 8 | | | 45 | | | (15) | | | 5 | |
| Other Divested and Run-off Businesses(2) | (602 | ) | | 168 |
| | (580 | ) | | 415 |
| Other Divested and Run-off Businesses(2) | (132) | | | 207 | | | (725) | | | 641 | |
| Other adjustments(7) | 32 |
| | 0 |
| | 77 |
| | 0 |
| Other adjustments(7) | (12) | | | 0 | | | 65 | | | 0 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(8) | (54 | ) | | (4 | ) | | (63 | ) | | (37 | ) | Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(8) | 1 | | | (34) | | | (62) | | | (71) | |
| Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures | $ | (2,332 | ) | | $ | 876 |
| | $ | (2,670 | ) | | $ | 2,016 |
| Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 1,447 | | | $ | 1,725 | | | $ | (1,223) | | | $ | 3,741 | |
__________
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(1) | (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. |
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(2) | Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and 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. |
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(3) | Represents “Realized investment gains (losses), net,” and related adjustments. See “—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.
|
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(4) | 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. |
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(5) | 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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. |
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(6) | 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.” |
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(7) | 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. |
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(8) | 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)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.
(3)Represents “Realized investment gains (losses), net,” and related adjustments. See “—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.
(4)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.
(5)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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(6)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.”
(7)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.
(8)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.
Segment results for the period presented above reflect the following:
PGIM. Results for both the secondthird quarter of 2020 and the first nine months of 2020 increased in comparison to the prior year periods, primarily reflecting increases in asset management fees and other related revenues, partially offset by higher expenses.
Retirement. Results for the third quarter of 2020 increased in comparison to the prior year period, primarily reflecting increases in asset management feeshigher net investment spread results and other related revenues, and decreases in expenses.higher reserve gains. Results for the first six months of 2020 increased in comparison to the prior year period, reflecting increases in asset management fees and decreases in expenses, partially offset by decreases in other related revenues.
Retirement. Results for both the second quarter and the first sixnine months of 2020 decreased in comparison to the prior year periods,period, primarily reflecting an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results for both periods decreasedincreased compared to the prior year period, primarily driven by higher reserve gains, partially offset by lower net investment spread results, partially offset by higher reserve gains.results.
Group Insurance. Results for both the secondthird quarter andof 2020 decreased in comparison to the prior year period, primarily reflecting lower underwriting results in our group life business, partially offset by higher underwriting results in our group disability business. Results for the first sixnine months of 2020 decreased in comparison to the prior year periods,period, primarily reflecting lower underwriting results in our group life business and lower net investment spread results.
Individual Annuities. Results for the third 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, partially offset by higher net investment spread results. Results for the first nine months of 2020 decreased in comparison to the prior year period, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results decreased primarily driven by lower fee income, net of distribution expenses and other associated costs.
Individual Life. Results for the third quarter of 2020 increased in comparison to the prior year period, primarily reflecting higher net investment spread results and lower expenses. Results for the first nine months of 2020 decreased in comparison to the prior year period, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results for both periods decreased primarily reflecting lower underwriting results, and lower net investment spread results.
Individual Annuities. Results for both the second quarter and the first six months of 2020 decreased in comparison to the prior year periods, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results for both periods decreased primarily driven by lower fee income, net of distribution expenses and other associated costs. The results for the second quarter were partially offset by higher net investment spread results.
Individual Life. Results for the second quarter of 2020 reflected a decrease in losses in comparison to the prior year period, and results for the first six months of 2020 reflected an increase in losses in comparison to the prior year period. Both periods include a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, adjusted operating income decreased for both periods, primarily reflecting lower net investment spread results, and lower underwriting results driven by an unfavorablethe absence of a favorable impact from mortality experience, netchanges in market conditions on estimates of reinsurance,profitability in the prior year period (which beginning with the second quarter of 2019 is excluded from adjusted operating income). These decreases were partially offset by lower expenses.
Assurance IQ. The acquisition of Assurance IQ was completed in October 2019. Results for both the secondthird quarter and the first sixnine months of 2020 include 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 both the secondthird quarter of 2020 increased in comparison to the prior year period, inclusive of a favorable net impact from foreign currency exchange rates, primarily reflecting lower expenses and favorable underwriting results including business growth, partially offset by lower earnings from our joint venture investments and lower net investment spread results. Results for the first sixnine months of 2020 decreased in comparison to the prior year periods, inclusive of an unfavorable net impact from foreign currency exchange rates and an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding these items,this item, results for the second
quarter of 2020 increased driven by favorable underwriting results and higher earnings from our joint venture investments, partially offset by lower net investment spread results and higher expenses, while results for the first six months of 2020 decreased driven by lower net investment spread results higher expenses and lower earnings from our joint venture investments, partially offset by favorable underwriting results.results including business growth.
Corporate and Other. Results for both the secondthird quarter of 2020 and the first sixnine months of 2020 reflected increased losses in comparison to the prior year periods, primarily reflecting higher net charges from other corporate activities, driven by increases to legal reserves, lower investment income and higher interest expense on debt, partially offset by favorabledebt. The results for the third quarter reflected lower income from pension and employee benefit results.plans, while the results for the first nine months of 2020 reflected higher income from pension and employee benefit plans.
Closed Block Division. Results for both the secondthird quarter and the first nine months of 2020 reflected an increase in lossesdecreased in comparison to the prior year period,periods, primarily reflecting an increase in the policyholder dividend obligation as a result of higher net investment activity results. Results for the first six months of 2020 reflected a decrease in losses in comparison to the prior year period, primarily reflectingdriven by a decrease in the policyholder dividend obligation as a result of lower net investment activity results.
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, 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 operationsoperation 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-
denominatedUSD-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.
| | | | June 30,
2020 | | December 31,
2019 | | September 30,
2020 | | December 31,
2019 |
| | (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) | $ | 0.4 |
| | $ | 0.6 |
| Forward currency contracts (notional amount outstanding) | $ | 0.4 | | | $ | 0.6 | |
| Hedging USD-equivalent equity: | | | | Hedging USD-equivalent equity: | |
| USD-denominated assets held in yen-based entities(1) | 10.9 |
| | 13.1 |
| USD-denominated assets held in yen-based entities(1) | 10.4 | | | 13.1 | |
| Dual currency and synthetic dual currency investments(2) | 0.6 |
| | 0.6 |
| Dual currency and synthetic dual currency investments(2) | 0.6 | | | 0.6 | |
| Total USD-equivalent equity foreign currency hedging instruments | 11.5 |
| | 13.7 |
| Total USD-equivalent equity foreign currency hedging instruments | 11.0 | | | 13.7 | |
| Total foreign currency hedges | $ | 11.9 |
| | $ | 14.3 |
| Total foreign currency hedges | $ | 11.4 | | | $ | 14.3 | |
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(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 $62.2 billion and $57.8 billion as of June 30, 2020 and December 31, 2019, respectively, of USD-denominated assets supporting USD-denominated liabilities related to USD-denominated products. |
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(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 $64.2 billion and $57.8 billion as of September 30, 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.
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 are 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 these segments’ non-USD-denominated earnings are translated at fixed currency exchange rates. Results of our Corporate and Other operations include 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 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 sixnine months ended JuneSeptember 30, 2020, approximately 4%5% of the segment’s earnings were yen-based and, as of JuneSeptember 30, 2020, we have hedged 100%, 92%97% and 50%61% of expected yen-based earnings for 2020, 2021 and 2022, 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 2020 and 2019 reflect the impact of translating yen-denominated earnings at fixed currency exchange rates of 104 and 105 yen per USD, respectively. We expect our 2021 results to reflect the impact of translating yen-denominated earnings at a fixed currency exchange rate of 103 yen per USD. 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
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) | | (in millions) |
| Segment impacts of intercompany arrangements: | | | | | | | | Segment impacts of intercompany arrangements: | |
| International Businesses(3) | $ | 19 |
| | $ | 11 |
| | $ | 31 |
| | $ | 26 |
| International Businesses(3) | $ | 15 | | | $ | 6 | | | $ | 46 | | | $ | 32 | |
| PGIM | 2 |
| | 2 |
| | 2 |
| | 3 |
| PGIM | (3) | | | 1 | | | (1) | | | 4 | |
| Impact of intercompany arrangements(1) | 21 |
| | 13 |
| | 33 |
| | 29 |
| Impact of intercompany arrangements(1) | 12 | | | 7 | | | 45 | | | 36 | |
| Corporate and Other: | | | | | | | | Corporate and Other: | | | | | | | |
| Impact of intercompany arrangements(1)(3) | (21 | ) | | (13 | ) | | (33 | ) | | (29 | ) | Impact of intercompany arrangements(1)(3) | (12) | | | (7) | | | (45) | | | (36) | |
| Settlement gains (losses) on forward currency contracts(2)(3) | 20 |
| | 16 |
| | 42 |
| | 29 |
| Settlement gains (losses) on forward currency contracts(2)(3) | 15 | | | 14 | | | 57 | | | 43 | |
| Net benefit (detriment) to Corporate and Other | (1 | ) | | 3 |
| | 9 |
| | 0 |
| Net benefit (detriment) to Corporate and Other | 3 | | | 7 | | | 12 | | | 7 | |
| Net impact on consolidated revenues and adjusted operating income | $ | 20 |
| | $ | 16 |
| | $ | 42 |
| | $ | 29 |
| Net impact on consolidated revenues and adjusted operating income | $ | 15 | | | $ | 14 | | | $ | 57 | | | $ | 43 | |
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(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. |
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(2) | As of June 30, 2020 and 2019, the total notional amounts of these forward currency contracts within our Corporate and Other operations were $1.1 billion and $2.0 billion, respectively, of which $0.4 billion and $1.2 billion, respectively, were related to our Japanese insurance operations. Prior period total notional amount of these forward currency contracts has been updated to conform to current period presentation. |
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(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 and 2019 that were translated at fixed currency exchange rates of 1,090 and 1,110 Korean won per USD, respectively, are excluded from the International Businesses and are included in the Divested and Run-off Businesses included in Corporate and Other. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information. |
(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 September 30, 2020 and 2019, the total notional amounts of these forward currency contracts within our Corporate and Other operations were $1.0 billion and $1.6 billion, respectively, of which $0.4 billion and $0.8 billion, respectively, were related to our Japanese insurance operations. Prior period total notional amount of these forward currency contracts has been updated to conform to current period presentation.
(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 and 2019 that were translated at fixed currency exchange rates of 1,090 and 1,110 Korean won per USD, respectively, are excluded from the International Businesses and are included in the Divested and Run-off Businesses included in Corporate and Other. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
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, most notably our Japanese operations, which offer USD- and 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 $2.5$2.4 billion and $2.7 billion as of JuneSeptember 30, 2020 and December 31, 2019, respectively, 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 7%3% of the $2.5$2.4 billion balance as of JuneSeptember 30, 2020 will be recognized throughout the remainder of 2020, approximately 13% will be recognized in 2021, and the remaining balance will be recognized from 2022 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. As of JuneSeptember 30, 2020, our domestic variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 5.1%3.5% 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 5.0%3.9% 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 2020 annual reviews and update of assumptions and other refinements, we reduced 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 yield by 30 basis points and now grade to a rate of 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, 20192019.
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. As a result of the COVID-19 pandemic, in November 2020 the FASB voted in June 2020 issued ASU 2020-11, Financial Services—Insurance (Topic 944): Effective Date and Early Application to tentatively defer for an additional one year the current 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. Subsequently in July 2020, the FASB issued a proposed ASU with comment deadline of August 24, 2020 to obtain additional feedback on the tentative decisions, which are expected to be finalized during the third quarter of 2020. 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, 2021)2020 or January 1, 2021, respectively) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would also apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements. 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, the Company also expects an impact to how earnings emerge thereafter. 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
Operating Results
The following table sets forth PGIM’s operating results for the periods indicated.
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) | | (in millions) |
| Operating results(1): | | | | | | | | Operating results(1): | |
| Revenues | $ | 957 |
| | $ | 926 |
| | $ | 1,735 |
| | $ | 1,796 |
| Revenues | $ | 1,066 | | | $ | 855 | | | $ | 2,801 | | | $ | 2,651 | |
| Expenses | 633 |
| | 662 |
| | 1,247 |
| | 1,318 |
| Expenses | 696 | | | 623 | | | 1,943 | | | 1,941 | |
| Adjusted operating income | 324 |
| | 264 |
| | 488 |
| | 478 |
| Adjusted operating income | 370 | | | 232 | | | 858 | | | 710 | |
| Realized investment gains (losses), net, and related adjustments | (1 | ) | | 1 |
| | 3 |
| | 1 |
| Realized investment gains (losses), net, and related adjustments | (2) | | | 0 | | | 1 | | | 1 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | (6 | ) | | 30 |
| | (42 | ) | | 35 |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 15 | | | (7) | | | (27) | | | 28 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 317 |
| | $ | 295 |
| | $ | 449 |
| | $ | 514 |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 383 | | | $ | 225 | | | $ | 832 | | | $ | 739 | |
__________
| |
(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
Three Month Comparison. Adjusted operating income increased $60 million. The increase$138 million, primarily reflectedreflecting an increase in asset management fees, net of related expenses, due to higher average assets under management as a result of market appreciation and fixed income inflows, as well as a decrease in expenses driven by lower costs of long-term employee compensation plans tied to performance factors and a temporary pause in travel and entertainment due to COVID-19.inflows. The increase also reflected an increase in other related revenues, net of related expenses, primarily due to higher strategic investingco- and seed investment results driven by spread tightening impacting fixed income investment strategies and strong equityunderlying investment performance, partially offsethigher commercial mortgage origination revenue driven by lowerhigher loan production and profitability, and higher net performance-based incentive fees driven by the absence of a significant fee earned in the prior year period.fees. These increases were partially offset by a decrease in service, distribution and other revenues primarily reflecting the absence of fees in the current year period related to the Wells Fargo agreement (see the “Revenues by type” table in “—RevenueRevenues and Expenses,” below).
SixNine Month Comparison. Adjusted operating income increased $10 million. This increase$148 million, primarily reflectedreflecting an increase in asset management fees, net of related expenses, due to higher average assets under management as a result of market appreciation and fixed income inflows. The increase was partially offset by a decreasealso reflected an increase in other related revenues, net of related expenses, primarily due to lower net performance-based incentive fees driven by the absence of significant fees earned in the prior year,higher co- and lower strategic investingseed investment results driven by spread widening impacting fixed incomestrong underlying investment strategies. The increase was alsoperformance and higher commercial mortgage origination revenue driven by higher loan production and profitability. These increases were partially offset by a decrease in service, distribution and other revenues primarily due toreflecting the absence of fees in the current year period related to the Wells Fargo agreement.
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
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) | | (in millions) |
| Revenues by type: | | | | | | | | Revenues by type: | |
| Asset management fees by source: | | | | | | | | Asset management fees by source: | |
| Institutional customers | $ | 325 |
| | $ | 319 |
| | $ | 653 |
| | $ | 631 |
| Institutional customers | $ | 345 | | | $ | 323 | | | $ | 998 | | | $ | 954 | |
| Retail customers(1) | 227 |
| | 220 |
| | 456 |
| | 429 |
| Retail customers(1) | 262 | | | 223 | | | 718 | | | 652 | |
| General account | 138 |
| | 132 |
| | 274 |
| | 255 |
| General account | 143 | | | 130 | | | 417 | | | 385 | |
| Total asset management fees | 690 |
| | 671 |
| | 1,383 |
| | 1,315 |
| Total asset management fees | 750 | | | 676 | | | 2,133 | | | 1,991 | |
| Other related revenues by source: | | | | | | | | Other related revenues by source: | | | | | | | |
| Incentive fees | 17 |
| | 62 |
| | 35 |
| | 98 |
| Incentive fees | 43 | | | 10 | | | 78 | | | 108 | |
| Transaction fees | 4 |
| | 10 |
| | 8 |
| | 12 |
| Transaction fees | 5 | | | 5 | | | 13 | | | 17 | |
| Strategic investing | 64 |
| | 18 |
| | 37 |
| | 54 |
| |
| Co- and seed investments | | Co- and seed investments | 50 | | | 3 | | | 87 | | | 57 | |
| Commercial mortgage(2) | 32 |
| | 25 |
| | 59 |
| | 51 |
| Commercial mortgage(2) | 67 | | | 32 | | | 126 | | | 83 | |
| Total other related revenues(3) | 117 |
|
| 115 |
|
| 139 |
|
| 215 |
| |
| Service, distribution and other revenues(4) | 150 |
| | 140 |
| | 213 |
| | 266 |
| |
| Total other related revenues | | Total other related revenues | 165 | | | 50 | | | 304 | | | 265 | |
| Service, distribution and other revenues(3) | | Service, distribution and other revenues(3) | 151 | | | 129 | | | 364 | | | 395 | |
| Total revenues | $ | 957 |
| | $ | 926 |
| | $ | 1,735 |
| | $ | 1,796 |
| Total revenues | $ | 1,066 | | | $ | 855 | | | $ | 2,801 | | | $ | 2,651 | |
__________
| |
(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. |
| |
(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 $15 million for the three months ended June 30, 2019 and $31 million for the six months ended June 30, 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.
(3)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 $15 million for the three months ended September 30, 2019 and $45 million for the nine months ended September 30, 2019.
Three Month Comparison. Revenues increased $31$211 million. Asset management fees increased primarily reflecting an increase inhigher average assets under management as a result of market appreciation and fixed income inflows. Other related revenues increased primarily reflecting higher strategic investingco- and seed investment results driven by spread tightening impacting fixed income investment strategies and strong equityunderlying investment performance, partially offsethigher commercial mortgage origination revenue driven by lowerhigher loan production and profitability, and higher performance-based incentive fees driven by the absence of a significant fee earned in the prior year period.fees. Service, distribution and other revenues increased primarily reflecting higher revenues from certain consolidated funds (which were fully offset by higher expenses related to noncontrolling interests in these funds), partially offset by the absence of fees in the current year period related to the Wells Fargo agreement.
Expenses decreased $29increased $73 million. Expenses decreased, primarily driven by lower costs for certain long-term employee compensation plans tied to performance factors and a temporary pause in travel and entertainment due to COVID-19. Also contributing to the decrease were lower expenses associated with lower performance-based incentive fee revenues. These decreases were partially offset by an increase in expenses for service, distribution and other revenues increased primarily driven by higher revenues associated with certain consolidated funds as discussed above.
Six
Nine Month Comparison. Revenues decreased $61increased $150 million. Asset management fees increased primarily reflecting an increase inhigher average assets under management as a result of market appreciation and fixed income inflows. Other related revenues decreasedincreased primarily reflecting higher co- and seed investment results driven by strong underlying investment performance and higher commercial mortgage origination revenue driven by higher loan production and profitability, partially offset by lower performance-based incentive fees due to the absence of a significant fee earned in the prior year period, and lower strategic investing results driven by spread widening impacting fixed income investment strategies.fees. Service, distribution and other revenues decreased primarily reflecting lower revenues from certain consolidated funds, which were fully offset by lower expenses related to noncontrolling interests in these funds, and the absence of fees in the current year period related to the Wells Fargo agreement.
Expenses decreased $71increased $2 million. Expenses for service, distribution and other revenues decreased primarily drivenHigher variable expenses reflecting higher overall segment earnings, which were largely offset by lower revenues associated with certain consolidated funds as discussed above. Also contributing to the decrease were lower expenses associated with lower performance-based incentive fee revenues, and a temporary pausedecrease in travel and entertainment due to COVID-19.
Assets Under Management
The following table sets forth assets under management by asset class and source as of the dates indicated.
| | | | June 30, 2020 | | December 31, 2019 | | June 30, 2019 | | September 30, 2020 | | December 31, 2019 | | September 30, 2019 |
| | (in billions) | | (in billions) |
| Assets Under Management(1) (at fair value): | | | | | | Assets Under Management(1) (at fair value): | |
| Institutional customers: | | | | | | Institutional customers: | |
| Public equity | $ | 48.9 |
| | $ | 57.1 |
| | $ | 54.9 |
| Public equity | $ | 53.5 | | | $ | 57.1 | | | $ | 52.9 | |
| Public fixed income | 443.9 |
| | 418.6 |
| | 404.7 |
| Public fixed income | 458.4 | | | 418.6 | | | 410.5 | |
| Real estate | 48.9 |
| | 49.1 |
| | 48.3 |
| Real estate | 48.8 | | | 49.1 | | | 48.4 | |
| Private credit and other alternatives | 24.7 |
| | 23.5 |
| | 23.0 |
| Private credit and other alternatives | 25.0 | | | 23.5 | | | 23.8 | |
| Multi-asset | 4.8 |
| | 4.5 |
| | 4.0 |
| Multi-asset | 5.3 | | | 4.5 | | | 4.2 | |
| Institutional customers(2) | 571.2 |
| | 552.8 |
| | 534.9 |
| Institutional customers(2) | 591.0 | | | 552.8 | | | 539.8 | |
| Retail customers: | | | | | | Retail customers: | | | | | |
| Public equity | 109.7 |
| | 104.2 |
| | 105.2 |
| Public equity | 121.3 | | | 104.2 | | | 100.0 | |
| Public fixed income | 152.0 |
| | 138.7 |
| | 119.7 |
| Public fixed income | 163.5 | | | 138.7 | | | 130.0 | |
| Real estate | 1.8 |
| | 2.0 |
| | 1.9 |
| Real estate | 1.8 | | | 2.0 | | | 1.9 | |
| Private credit and other alternatives | 0.5 |
| | 0.5 |
| | 0.3 |
| Private credit and other alternatives | 0.6 | | | 0.5 | | | 0.5 | |
| Multi-asset | 56.2 |
| | 60.2 |
| | 60.8 |
| Multi-asset | 55.8 | | | 60.2 | | | 58.9 | |
| Retail customers(3) | 320.2 |
| | 305.6 |
| | 287.9 |
| Retail customers(3) | 343.0 | | | 305.6 | | | 291.3 | |
| General account: | | | | | | General account: | | | | | |
| Public equity | 4.0 |
| | 4.4 |
| | 4.0 |
| Public equity | 4.2 | | | 4.4 | | | 4.2 | |
| Public fixed income | 354.8 |
| | 328.6 |
| | 321.9 |
| Public fixed income | 359.1 | | | 328.6 | | | 333.2 | |
| Real estate | 67.2 |
| | 66.0 |
| | 63.5 |
| Real estate | 68.1 | | | 66.0 | | | 64.7 | |
| Private credit and other alternatives | 77.1 |
| | 73.5 |
| | 70.3 |
| Private credit and other alternatives | 77.7 | | | 73.5 | | | 72.5 | |
| Multi-asset | 0.0 |
| | 0.1 |
| | 0.1 |
| Multi-asset | 0.0 | | | 0.1 | | | 0.1 | |
| General account | 503.1 |
| | 472.6 |
| | 459.8 |
| General account | 509.1 | | | 472.6 | | | 474.7 | |
| Total PGIM assets under management(4) | $ | 1,394.5 |
| | $ | 1,331.0 |
| | $ | 1,282.6 |
| Total PGIM assets under management(4) | $ | 1,443.1 | | | $ | 1,331.0 | | | $ | 1,305.8 | |
| | | | | | | | | | | | |
| Assets under management within other reporting segments(4)(5) | $ | 210.8 |
| | $ | 219.9 |
| | $ | 214.8 |
| Assets under management within other reporting segments(4)(5) | $ | 205.0 | | | $ | 219.9 | | | $ | 213.0 | |
| Total PFI assets under management | $ | 1,605.3 |
| | $ | 1,550.9 |
| | $ | 1,497.4 |
| Total PFI assets under management | $ | 1,648.1 | | | $ | 1,550.9 | | | $ | 1,518.8 | |
__________
| |
(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. |
| |
(2) | Consists of third-party institutional assets and group insurance contracts. |
| |
(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. |
| |
(4) | Effective first quarter of 2020, certain assets have been reclassified from the U.S. Individual Solutions division to PGIM. |
| |
(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)Consists of third-party institutional assets and group insurance contracts.
(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.
(4)Effective first quarter of 2020, certain assets have been reclassified from the U.S. Individual Solutions division to PGIM.
(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.
PGIM’s assets under managementincreased $137 billion and $112 billion in comparison to the prior year quarter primarilyand prior year end, respectively, reflecting market appreciation and public fixed income inflows, partially offset by public equity outflows. PGIM’s assets under management increased $64 billion in comparison to the prior year-end primarily reflecting market appreciation and public fixed income inflows, partially offset by public equity outflows.
The following table sets forth the component changes in PGIM’s assets under management by asset source for the periods indicated.
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | | Twelve
Months
Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Twelve
Months
Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 |
| | (in billions) | | (in billions) |
| Institutional Customers: | | | | | | | | | | Institutional Customers: | |
| Beginning assets under management | $ | 524.8 |
| | $ | 524.0 |
| | $ | 552.8 |
| | $ | 493.5 |
| | $ | 534.9 |
| Beginning assets under management | $ | 571.2 | | | $ | 534.9 | | | $ | 552.8 | | | $ | 493.5 | | | $ | 539.8 | |
| Net additions (withdrawals), excluding money market activity: | | | | | | | | | | Net additions (withdrawals), excluding money market activity: | |
| Third-party | (5.7 | ) | | (6.0 | ) | | (1.5 | ) | | (5.0 | ) | | (3.0 | ) | Third-party | 2.0 | | | (2.2) | | | 0.5 | | | (7.2) | | | 1.2 | |
| Third-party via affiliates(1) | (0.3 | ) | | 0.8 |
| | (1.1 | ) | | 0.5 |
| | (1.4 | ) | Third-party via affiliates(1) | 0.1 | | | (0.4) | | | (1.0) | | | 0.1 | | | (0.9) | |
| Total | (6.0 | ) | | (5.2 | ) | | (2.6 | ) | | (4.5 | ) | | (4.4 | ) | Total | 2.1 | | | (2.6) | | | (0.5) | | | (7.1) | | | 0.3 | |
| Market appreciation (depreciation)(2) | 43.3 |
| | 16.6 |
| | 12.8 |
| | 40.9 |
| | 34.2 |
| Market appreciation (depreciation)(2) | 17.0 | | | 10.0 | | | 29.8 | | | 50.9 | | | 41.2 | |
| Other increases (decreases)(3) | 9.1 |
| | (0.5 | ) | | 8.2 |
| | 5.0 |
| | 6.5 |
| Other increases (decreases)(3) | 0.7 | | | (2.5) | | | 8.9 | | | 2.5 | | | 9.7 | |
| Ending assets under management | 571.2 |
| | 534.9 |
| | 571.2 |
| | 534.9 |
| | 571.2 |
| Ending assets under management | 591.0 | | | 539.8 | | | 591.0 | | | 539.8 | | | 591.0 | |
| Retail Customers(4): | | | | | | | | | | Retail Customers(4): | | | | | | | | | |
| Beginning assets under management | 282.4 |
| | 279.1 |
| | 305.6 |
| | 260.2 |
| | 287.9 |
| Beginning assets under management | 320.2 | | | 287.9 | | | 305.6 | | | 260.2 | | | 291.3 | |
| Net additions (withdrawals), excluding money market activity: | | | | | | | | | | Net additions (withdrawals), excluding money market activity: | |
| Third-party | 9.4 |
| | 1.1 |
| | 8.1 |
| | 1.5 |
| | 12.3 |
| Third-party | 5.3 | | | 3.0 | | | 13.4 | | | 4.5 | | | 14.6 | |
| Third-party via affiliates(1) | (14.0 | ) | | (0.3 | ) | | (3.1 | ) | | (6.8 | ) | | (6.5 | ) | Third-party via affiliates(1) | (3.7) | | | (1.4) | | | (6.8) | | | (8.2) | | | (8.8) | |
| Total | (4.6 | ) | | 0.8 |
| | 5.0 |
| | (5.3 | ) | | 5.8 |
| Total | 1.6 | | | 1.6 | | | 6.6 | | | (3.7) | | | 5.8 | |
| Market appreciation (depreciation)(2) | 42.0 |
| | 7.8 |
| | 9.4 |
| | 32.9 |
| | 25.9 |
| Market appreciation (depreciation)(2) | 21.0 | | | 2.0 | | | 30.4 | | | 34.9 | | | 44.9 | |
| Other increases (decreases)(3) | 0.4 |
| | 0.2 |
| | 0.2 |
| | 0.1 |
| | 0.6 |
| Other increases (decreases)(3) | 0.2 | | | (0.2) | | | 0.4 | | | (0.1) | | | 1.0 | |
| Ending assets under management | 320.2 |
| | 287.9 |
| | 320.2 |
| | 287.9 |
| | 320.2 |
| Ending assets under management | 343.0 | | | 291.3 | | | 343.0 | | | 291.3 | | | 343.0 | |
| General Account: | | | | | | | | | | General Account: | | | | | | | | | |
| Beginning assets under management | 488.5 |
| | 441.0 |
| | 472.6 |
| | 427.8 |
| | 459.8 |
| Beginning assets under management | 503.1 | | | 459.8 | | | 472.6 | | | 427.8 | | | 474.7 | |
| Net additions (withdrawals), excluding money market activity: | | | | | | | | | | Net additions (withdrawals), excluding money market activity: | |
| Third-party | 0.0 |
| | 0.0 |
| | 0.0 |
| | 0.0 |
| | 0.0 |
| Third-party | 0.0 | | | 0.0 | | | 0.0 | | | 0.0 | | | 0.0 | |
| Affiliated | 0.1 |
| | 1.0 |
| | 0.8 |
| | 1.6 |
| | 5.3 |
| Affiliated | 2.1 | | | (0.4) | | | 2.9 | | | 1.2 | | | 7.8 | |
| Total | 0.1 |
| | 1.0 |
| | 0.8 |
| | 1.6 |
| | 5.3 |
| Total | 2.1 | | | (0.4) | | | 2.9 | | | 1.2 | | | 7.8 | |
| Market appreciation (depreciation)(2) | 18.0 |
| | 14.2 |
| | 17.4 |
| | 28.4 |
| | 25.9 |
| Market appreciation (depreciation)(2) | 5.0 | | | 10.6 | | | 22.4 | | | 39.0 | | | 20.3 | |
| Other increases (decreases)(3) | (3.5 | ) | | 3.6 |
| | 12.3 |
| | 2.0 |
| | 12.1 |
| Other increases (decreases)(3) | (1.1) | | | 4.7 | | | 11.2 | | | 6.7 | | | 6.3 | |
| Ending assets under management | 503.1 |
| | 459.8 |
| | 503.1 |
| | 459.8 |
| | 503.1 |
| Ending assets under management | 509.1 | | | 474.7 | | | 509.1 | | | 474.7 | | | 509.1 | |
| Total assets under management(4) | $ | 1,394.5 |
| | $ | 1,282.6 |
| | $ | 1,394.5 |
| | $ | 1,282.6 |
| | $ | 1,394.5 |
| Total assets under management(4) | $ | 1,443.1 | | | $ | 1,305.8 | | | $ | 1,443.1 | | | $ | 1,305.8 | | | $ | 1,443.1 | |
__________
| |
(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 gain of $1.1 billion and $1.9 billion for the three months ended June 30, 2020 and 2019, respectively, and a loss of $0.7 billion and gain of $0.7 billion for the six months ended June 30, 2020 and 2019, respectively; and a loss of $0.9 billion for the twelve months ended June 30, 2020. |
| |
(4) | Prior period amounts have been updated to conform to current period presentation. |
Strategic(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 gain of $3.4 billion and a loss of $0.5 billion for the three months ended September 30, 2020 and 2019, respectively, and a gain of $2.7 billion and $0.2 billion for the nine months ended September 30, 2020 and 2019, respectively; and a gain of $3.0 billion for the twelve months ended September 30, 2020.
(4)Prior period amounts have been updated to conform to current period presentation.
Co- and Seed Investments
The following table sets forth PGIM’s strategicco- 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.
| | | | June 30, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 |
| | (in millions) | | (in millions) |
| Co-Investments(1): | | | | Co-Investments(1): | |
| Public fixed income | $ | 441 |
| | $ | 462 |
| Public fixed income | $ | 467 | | | $ | 462 | |
| Real estate | 210 |
| | 228 |
| Real estate | 154 | | | 228 | |
| Private credit and other alternatives | 22 |
| | 19 |
| Private credit and other alternatives | 22 | | | 19 | |
| Seed Investments(1): | | | | Seed Investments(1): | |
| Public equity | 635 |
| | 671 |
| Public equity | 717 | | | 671 | |
| Public fixed income | 343 |
| | 325 |
| Public fixed income | 349 | | | 325 | |
| Real estate | 31 |
| | 34 |
| Real estate | 32 | | | 34 | |
| Private credit and other alternatives | 61 |
| | 59 |
| Private credit and other alternatives | 74 | | | 59 | |
| Multi-asset | 63 |
| | 74 |
| Multi-asset | 65 | | | 74 | |
| Total | $ | 1,806 |
| | $ | 1,872 |
| Total | $ | 1,880 | | | $ | 1,872 | |
__________
| |
(1) | Prior period amounts have been updated to conform to current period presentation. For more information, see the “Assets Under Management” table above. |
(1)Prior period amounts have been updated to conform to current period presentation. For more information, see the “Assets Under Management” table above.
The decreaseincrease of $66$8 million in strategicco- and seed investments was primarily driven by PGIM’s redemptions of invested seed capitalstrong equity and unfavorable market conditions impacting public fixed income andseed investment performance, partially offset by a significant liquidation of a real estate co-investments.co-investment.
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
June 30, | | Six Months Ended June 30, 2020 | | Three Months Ended
September 30, | | Nine Months Ended September 30, 2020 |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| | (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: | | | | | | | | U.S. Workplace Solutions division: | |
| Retirement | $ | 281 |
| | $ | 467 |
| | $ | 526 |
| | $ | 718 |
| Retirement | $ | 372 | | | $ | 302 | | | $ | 898 | | | $ | 1,020 | |
| Group Insurance | 5 |
| | 81 |
| | 49 |
| | 134 |
| Group Insurance | 22 | | | 90 | | | 71 | | | 224 | |
| Total U.S. Workplace Solutions division | 286 |
| | 548 |
| | 575 |
| | 852 |
| Total U.S. Workplace Solutions division | 394 | | | 392 | | | 969 | | | 1,244 | |
| U.S. Individual Solutions division: | | | | | | | | U.S. Individual Solutions division: | | | | | | | |
| Individual Annuities | 249 |
| | 462 |
| | 622 |
| | 934 |
| Individual Annuities | 408 | | | 459 | | | 1,030 | | | 1,393 | |
| Individual Life | (64 | ) | | (135 | ) | | (84 | ) | | (30 | ) | Individual Life | 101 | | | 59 | | | 17 | | | 29 | |
| Total U.S. Individual Solutions division | 185 |
| | 327 |
| | 538 |
| | 904 |
| Total U.S. Individual Solutions division | 509 | | | 518 | | | 1,047 | | | 1,422 | |
| Assurance IQ division(1): | | | | | | | | Assurance IQ division(1): | | | | | | | |
| Assurance IQ | (16 | ) | | 0 |
| | (39 | ) | | 0 |
| Assurance IQ | (30) | | | 0 | | | (69) | | | 0 | |
| Total Assurance IQ division | (16 | ) | | 0 |
| | (39 | ) | | 0 |
| Total Assurance IQ division | (30) | | | 0 | | | (69) | | | 0 | |
| Total U.S. Businesses | 455 |
| | 875 |
| | 1,074 |
| | 1,756 |
| Total U.S. Businesses | 873 | | | 910 | | | 1,947 | | | 2,666 | |
| Reconciling Items: | | | | | | | | Reconciling Items: | | | | | | | |
| Realized investment gains (losses), net, and related adjustments(2) | (2,188 | ) | | (677 | ) | | (2,428 | ) | | (1,771 | ) | Realized investment gains (losses), net, and related adjustments(2) | 571 | | | (40) | | | (1,857) | | | (1,811) | |
| Charges related to realized investment gains (losses), net | 551 |
| | 2 |
| | (265 | ) | | 33 |
| Charges related to realized investment gains (losses), net | (63) | | | (123) | | | (328) | | | (90) | |
| Market experience updates(3) | 96 |
| | (170 | ) | | (844 | ) | | (170 | ) | Market experience updates(3) | (130) | | | (306) | | | (974) | | | (476) | |
| Other adjustments(4) | 32 |
| | 0 |
| | 77 |
| | 0 |
| Other adjustments(4) | (12) | | | 0 | | | 65 | | | 0 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 0 |
| | 1 |
| | 1 |
| | 1 |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 1 | | | 0 | | | 2 | | | 1 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | (1,054 | ) | | $ | 31 |
| | $ | (2,385 | ) | | $ | (151 | ) | Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 1,240 | | | $ | 441 | | | $ | (1,145) | | | $ | 290 | |
________
| |
(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. |
(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.
| |
(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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. |
| |
(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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. |
(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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
Three Month Comparison. Adjusted operating income for our U.S. Businesses decreased by $420$37 million primarily due to:
•Lower fee income, net of distribution expenses and other associated costs, in our Individual Annuities business; and
•Lower underwriting results primarily driven by COVID-19 related net mortality experience.
•Partially offsetting these decreases were higher net investment spread results driven by higher income on non-coupon investments.
Nine Month Comparison. Adjusted operating income for our U.S. Businesses decreased by $719 million primarily due to:
•Lower fee income, net of distribution expenses and other associated costs, in our Individual Annuities business;
•Lower net investment spread results driven by lower income on non-coupon investments;
•An unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements; and
•Lower fee income,underwriting results primarily driven by COVID-19 related net of distribution expenses and other associated costs, in our Individual Annuities business.mortality experience.
•Partially offsetting these decreases were the following items:
Higher underwriting results primarily driven by our Retirement business due to higher reserve gains driven by COVID-19 related mortality gains; and
Lowerlower expenses, including coststhose associated with strategiccost savings initiatives.
Six Month Comparison. Adjusted operating income for our U.S. Businesses decreased by $682 million primarily due to:
Lower net investment spread results driven by lower income on non-coupon investments;
An unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements;
Lower fee income, net of distribution expenses and other associated costs, in our Individual Annuities business; and
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).
Partially offsetting these decreases was the following item:
Lower expenses, including costs associated with strategic initiatives.
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
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) | | (in millions) |
| Operating results: | | | | | | | | Operating results: | |
| Revenues | $ | 2,992 |
| | $ | 3,586 |
| | $ | 5,429 |
| | $ | 6,225 |
| Revenues | $ | 2,690 | | | $ | 2,261 | | | $ | 8,119 | | | $ | 8,486 | |
| Benefits and expenses | 2,711 |
| | 3,119 |
| | 4,903 |
| | 5,507 |
| Benefits and expenses | 2,318 | | | 1,959 | | | 7,221 | | | 7,466 | |
| Adjusted operating income | 281 |
| | 467 |
| | 526 |
| | 718 |
| Adjusted operating income | 372 | | | 302 | | | 898 | | | 1,020 | |
| Realized investment gains (losses), net, and related adjustments(1) | 16 |
| | 38 |
| | (5 | ) | | 168 |
| Realized investment gains (losses), net, and related adjustments(1) | 98 | | | 200 | | | 93 | | | 368 | |
| Charges related to realized investment gains (losses), net | 12 |
| | 8 |
| | (11 | ) | | 11 |
| Charges related to realized investment gains (losses), net | 6 | | | (10) | | | (5) | | | 1 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 0 |
| | 1 |
| | 1 |
| | 1 |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 1 | | | 0 | | | 2 | | | 1 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 309 |
| | $ | 514 |
| | $ | 511 |
| | $ | 898 |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 477 | | | $ | 492 | | | $ | 988 | | | $ | 1,390 | |
__________
| |
(1) | Prior period amounts have been updated to conform to current period presentation. |
(1)Prior period amounts have been updated to conform to current period presentation.
Adjusted Operating Income
Three Month Comparison. Adjusted operating income decreased $186increased $70 million, primarily reflectingdriven by higher net investment spread results and higher reserve gains. The increase in net investment spread results primarily reflected higher income on non-coupon investments and the impact of lower crediting rates, partially offset by lower reinvestment yields. The higher contribution from reserve experience was primarily driven by COVID-19 related mortality gains.
Nine Month Comparison. Adjusted operating income decreased $122 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for the second quarter of 2020 included a net charge of $22
$22 million from these updates primarily driven by an increase in expected benefit payments, while results for the second quarter of 2019 included a net benefit of $154 million from these updates, primarily driven by a reduction in expected benefit payments. Excluding this item, adjusted operating income decreased $10increased $54 million, primarily driven by higher reserve gains, partially offset by lower net investment spread results, partially offsetresults. The higher contribution from reserve experience was primarily driven by higher reserveCOVID-19 related mortality gains. The decrease in net investment spread results primarily reflected lower income on non-coupon investments. The higher contribution from reserve experience was primarily driven by higher COVID-19 related mortality gains.
Six Month Comparison. Adjusted operating income decreased $192 million, primarily reflecting an unfavorable comparative net impact from our annual reviewsinvestments and update of assumptions and other refinements, as discussed above. Excluding this item, adjusted operating income decreased $16 million, primarily driven by lower net investment spread results,reinvestment yields, partially offset by higher reserve gains. The decrease in net investment spread results primarily reflectedthe impact of lower income on non-coupon investments. The higher contribution from reserve experience was primarily driven by higher COVID-19 related mortality gains.crediting rates.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues increased $429 million. This increase primarily reflected higher pension risk transfer premiums with corresponding offsets in policyholders’ benefits, as discussed below. This increase also reflected higher net investment income, primarily driven by higher income on non-coupon investments, partially offset by lower reinvestment yields.
Benefits and expenses increased $359 million. Policyholders’ benefits, including the change in policy reserves, increased primarily related to the increase in pension risk transfer premiums discussed above, partially offset by more favorable reserve experience primarily driven by COVID-19 related mortality gains.
Nine Month Comparison. Revenues decreased $594$367 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $600$373 million. This decrease primarily reflected lower pension risk transfer premiums with corresponding offsets in policyholders’ benefits, as discussed below. This decrease also reflected lower net investment income, primarily reflecting lower income on non-coupon investments.investments and lower reinvestment yields.
Benefits and expenses decreased $408$245 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $590$427 million. Policyholders’ benefits, including the change in policy reserves, decreased primarily related to the decrease in pension risk transfer premiums discussed above, as well as a higher contribution frommore favorable reserve experience primarily driven by higher COVID-19 related mortality gains.
Six Month Comparison. Revenues decreased $796 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $802 million. This decrease primarily reflected lower pension risk transfer premiums with corresponding offsets in policyholders’ benefits, as discussed below. This decrease also reflected lower net investment income, primarily reflecting lower income on non-coupon investments.
Benefits and expenses decreased $604 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $786 million. Policyholders’ benefits, including the change in policy reserves, decreased primarily related to the decrease in pension risk transfer premiums discussed above, as well as a higher contribution from reserve experience primarily driven by higher COVID-19 related mortality 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, since 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
June 30, | | Six Months Ended
June 30, | | Twelve
Months
Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Twelve
Months
Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 |
| | (in millions) | | (in millions) |
| Full Service: | | | | | | | | | | Full Service: | |
| Beginning total account value | $ | 238,435 |
| | $ | 251,071 |
| | $ | 272,448 |
| | $ | 231,669 |
| | $ | 262,133 |
| Beginning total account value | $ | 266,433 | | | $ | 262,133 | | | $ | 272,448 | | | $ | 231,669 | | | $ | 259,946 | |
| Deposits and sales | 5,455 |
| | 11,047 |
| | 14,407 |
| | 20,614 |
| | 30,187 |
| Deposits and sales | 14,705 | | | 7,458 | | | 29,112 | | | 28,072 | | | 37,434 | |
| Withdrawals and benefits | (7,040 | ) | | (7,259 | ) | | (15,708 | ) | | (16,364 | ) | | (35,050 | ) | Withdrawals and benefits | (9,465) | | | (10,758) | | | (25,173) | | | (27,122) | | | (33,757) | |
| Change in market value, interest credited and interest income and other activity | 29,583 |
| | 7,274 |
| | (4,714 | ) | | 26,214 |
| | 9,163 |
| Change in market value, interest credited and interest income and other activity | 13,337 | | | 1,113 | | | 8,623 | | | 27,327 | | | 21,387 | |
| Ending total account value | $ | 266,433 |
| | $ | 262,133 |
| | $ | 266,433 |
| | $ | 262,133 |
| | $ | 266,433 |
| Ending total account value | $ | 285,010 | | | $ | 259,946 | | | $ | 285,010 | | | $ | 259,946 | | | $ | 285,010 | |
| Institutional Investment Products: | | | | | | | | | | Institutional Investment Products: | | | | | | | | | |
| Beginning total account value | $ | 227,346 |
| | $ | 203,101 |
| | $ | 227,596 |
| | $ | 200,759 |
| | $ | 215,978 |
| Beginning total account value | $ | 231,142 | | | $ | 215,978 | | | $ | 227,596 | | | $ | 200,759 | | | $ | 217,580 | |
| Additions(1) | 4,545 |
| | 15,044 |
| | 11,438 |
| | 17,291 |
| | 25,248 |
| Additions(1) | 2,780 | | | 5,235 | | | 14,218 | | | 22,526 | | | 22,793 | |
| Withdrawals and benefits | (3,527 | ) | | (4,161 | ) | | (9,037 | ) | | (7,810 | ) | | (17,970 | ) | Withdrawals and benefits | (4,189) | | | (4,626) | | | (13,226) | | | (12,436) | | | (17,533) | |
| Change in market value, interest credited and interest income | 3,000 |
| | 2,826 |
| | 5,435 |
| | 5,470 |
| | 9,054 |
| Change in market value, interest credited and interest income | 1,944 | | | 2,406 | | | 7,379 | | | 7,876 | | | 8,592 | |
| Other(2) | (222 | ) | | (832 | ) | | (4,290 | ) | | 268 |
| | (1,168 | ) | Other(2) | 3,019 | | | (1,413) | | | (1,271) | | | (1,145) | | | 3,264 | |
| Ending total account value | $ | 231,142 |
| | $ | 215,978 |
| | $ | 231,142 |
| | $ | 215,978 |
| | $ | 231,142 |
| Ending total account value | $ | 234,696 | | | $ | 217,580 | | | $ | 234,696 | | | $ | 217,580 | | | $ | 234,696 | |
__________
| |
(1) | Additions primarily include: group annuities calculated based on premiums received; funding agreements issued; unfunded 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 June 30, 2020 and 2019, “Other” activity also includes $2,614 million in receipts offset by $2,740 million in payments and $792 million in receipts offset by $577 million in payments, respectively, and for the six months ended June 30, 2020 and 2019, includes $5,366 million in receipts offset by $5,276 million in payments and $1,403 million in receipts offset by $1,194 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 calculated based on premiums received; funding agreements issued; unfunded 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 September 30, 2020 and 2019, “Other” activity also includes $869 million in receipts offset by $831 million in payments and $1,418 million in receipts offset by $1,024 million in payments, respectively, and for the nine months ended September 30, 2020 and 2019, includes $6,235 million in receipts offset by $6,107 million in payments and $2,822 million in receipts offset by $2,218 million in payments, respectively, related to funding agreements backed by commercial paper which typically have maturities of less than 90 days.
The increase in full serviceFull Service account values for the three months, nine months and twelve months ended JuneSeptember 30, 2020 primarily reflected favorable changes in the market value of customer funds partially offset by net withdrawals and benefits. The decrease in full service account values for the six months ended June 30, 2020 primarily reflected unfavorable changes in the market value of customer funds and net withdrawalsdeposits and benefits.sales.
The increase in institutional investment productsInstitutional Investment Products account values for the three months six months and twelve months ended JuneSeptember 30, 2020 reflected an increase in other activity, primarily driven by the positive impacts of foreign exchange rate changes, and a favorable changeschange in the market value of account assets.assets, partially offset by net withdrawals driven by pension risk transfer activity. Account values for the threenine months ended JuneSeptember 30, 2020 also reflected a favorable change in the market value of account assets and net additions from pension risk transfer activity and investment-only stable value accounts. Account values for the six months ended June 30, 2020 also reflected net additions fromdriven by collateralized funding agreements and investment-only stable value accounts, which were partially offset by pension risk transfer activity. Account values for the twelve months ended September 30, 2020 reflected a favorable change in the market value of account values, net additions driven by collateralized funding agreements, pension risk transfer activity and a decreaseinvestment-only stable value accounts, and an increase in other activity primarily driven by the negativepositive impacts of foreign exchange rate changes. Account values for the twelve months ended June 30, 2020 also reflected net additions from pension risk transfer activity and collateralized funding agreements.
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
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| | ($ in millions) | | ($ in millions) |
| Operating results: | | | | | | | | Operating results: | |
| Revenues | $ | 1,471 |
| | $ | 1,461 |
| | $ | 2,895 |
| | $ | 2,902 |
| Revenues | $ | 1,457 | | | $ | 1,438 | | | $ | 4,352 | | | $ | 4,340 | |
| Benefits and expenses | 1,466 |
| | 1,380 |
| | 2,846 |
| | 2,768 |
| Benefits and expenses | 1,435 | | | 1,348 | | | 4,281 | | | 4,116 | |
| Adjusted operating income | 5 |
| | 81 |
| | 49 |
| | 134 |
| Adjusted operating income | 22 | | | 90 | | | 71 | | | 224 | |
| Realized investment gains (losses), net, and related adjustments | (10 | ) | | 8 |
| | 71 |
| | 9 |
| Realized investment gains (losses), net, and related adjustments | 4 | | | 0 | | | 75 | | | 9 | |
| | Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | (5 | ) | | $ | 89 |
| | $ | 120 |
| | $ | 143 |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 26 | | | $ | 90 | | | $ | 146 | | | $ | 233 | |
| Benefits ratio(1)(4): | | | | | | | | Benefits ratio(1)(4): | | | | | | | |
| Group life(2) | 93.0 | % | | 90.2 | % | | 90.7 | % | | 89.6 | % | Group life(2) | 93.9 | % | | 84.7 | % | | 91.8 | % | | 88.0 | % |
| Group disability(2) | 74.0 | % | | 65.3 | % | | 75.0 | % | | 69.9 | % | Group disability(2) | 73.5 | % | | 79.4 | % | | 74.5 | % | | 73.1 | % |
| Total Group Insurance(2) | 89.0 | % | | 84.7 | % | | 87.3 | % | | 85.3 | % | Total Group Insurance(2) | 89.4 | % | | 83.5 | % | | 88.0 | % | | 84.7 | % |
| Administrative operating expense ratio(3)(4): | | | | | | | | Administrative operating expense ratio(3)(4): | |
| Group life | 11.8 | % | | 12.2 | % | | 12.1 | % | | 11.9 | % | Group life | 12.2 | % | | 13.1 | % | | 12.1 | % | | 12.3 | % |
| Group disability | 26.1 | % | | 24.2 | % | | 25.4 | % | | 25.5 | % | Group disability | 25.2 | % | | 22.0 | % | | 25.4 | % | | 24.3 | % |
| Total Group Insurance | 14.9 | % | | 14.8 | % | | 15.0 | % | | 14.8 | % | Total Group Insurance | 15.1 | % | | 15.2 | % | | 15.0 | % | | 14.9 | % |
__________
| |
(1) | Ratio of policyholder benefits to earned premiums plus policy charges and fee income. |
| |
(2) | Benefit ratios reflect the impact of our annual reviews and update of assumptions and other refinements. Excluding these impacts, the group life, group disability and total Group Insurance benefit ratios were 93.4%, 75.7% and 89.6% for the three months ended June 30, 2020, respectively, 90.9%, 75.8% and 87.6% for the six months ended June 30, 2020, respectively, 88.5%, 74.5% and 85.5% for the three months ended June 30, 2019, respectively, and 88.7%, 74.6% and 85.7% for the six months ended June 30, 2019, respectively. |
| |
(3) | Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income. |
| |
(4) | 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)Benefit ratios for the nine months ended September 30, 2020 and 2019 reflect the impact of our annual reviews and update of assumptions and other refinements. Excluding these impacts, the group life, group disability and total Group Insurance benefit ratios were 91.9%, 75.0% and 88.2% for the nine months ended September 30, 2020, respectively, and 87.4%, 76.2% and 85.0% for the nine months ended September 30, 2019, respectively.
(3)Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income.
(4)The benefit and administrative ratios are measures used to evaluate profitability and efficiency.
Adjusted Operating Income
Three Month Comparison. Adjusted operating income decreased $76$68 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts, partially offset by more favorable underwriting results in our group disability business driven by a favorable impact from claim experience on long-term disability products.
Nine Month Comparison. Adjusted operating income decreased $153 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for both the second quarter of 2020 and 2019 included a net benefit from this update of $11 million and $9 million, respectively. Excluding this item, adjusted operating income decreased $78$155 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts. The decrease also reflected lower net investment spread results driven by lower income on non-coupon investments.
Six Month Comparison. Adjusted operating income decreased $85 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, adjusted operating income decreased $87 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts. The decrease also reflected lower net investment spread results driven by lower income on non-coupon investments.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues increased $10 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $21$19 million. The decreaseincrease primarily reflected higher premiums and policy charges and fee income driven by growth in our group life business, partially offset by lower net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below,below.
Benefits and expenses increased $87 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, including increases in our group life business mostly due to COVID-19 impacts, partially offset by decreases in our group disability business driven by a favorable impact from claim experience on long-term disability products. The increase was also partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.
Nine Month Comparison. Revenues increased $12 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $19 million. The decrease primarily reflected lower
net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below. Partially offsetting the decrease were higher premiums and policy charges and fee income driven by growth in our group life business.
Benefits and expenses increased $86$165 million. Excluding the impact offrom our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $57$136 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, which reflectedincluding increases in our group life business mostly due to COVID-19 impacts. The increase was partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.
Six Month Comparison
. Revenues decreased $7 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $38 million. The decrease primarily reflected lower net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below, partially offset by higher premiums and policy charges and fee income driven by growth in our group life and disability businesses.
Benefits and expenses increased $78 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $49 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, which reflected increases in our group life business mostly due to COVID-19 impacts. The increase was partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.
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
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) | | (in millions) |
| Annualized new business premiums(1): | | | | | | | | Annualized new business premiums(1): | |
| Group life | $ | 8 |
| | $ | 17 |
| | $ | 181 |
| | $ | 191 |
| Group life | $ | 46 | | | $ | 42 | | | $ | 227 | | | $ | 233 | |
| Group disability | 18 |
| | 16 |
| | 126 |
| | 135 |
| Group disability | 17 | | | 18 | | | 143 | | | 153 | |
| Total | $ | 26 |
| | $ | 33 |
| | $ | 307 |
| | $ | 326 |
| Total | $ | 63 | | | $ | 60 | | | $ | 370 | | | $ | 386 | |
__________
| |
(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 JuneSeptember 30, 2020 decreased $7increased $3 million compared to the prior year period, driven by lowerhigher sales in our group life business. Total annualized new business premiums for the sixnine months ended JuneSeptember 30, 2020 decreased $19$16 million compared to the prior year period, driven by lower sales in our group life and group disability businesses. Sales levels reflect pricing competitiveness and reduced levels of client case movement within the large market.
U.S. Businesses—U.S. Individual Solutions Division
Individual AnnuitiesAccount 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, since 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
September 30, | | Nine Months Ended
September 30, | | Twelve
Months
Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 |
| (in millions) |
| Full Service: | | | | | | | | | |
| Beginning total account value | $ | 266,433 | | | $ | 262,133 | | | $ | 272,448 | | | $ | 231,669 | | | $ | 259,946 | |
| Deposits and sales | 14,705 | | | 7,458 | | | 29,112 | | | 28,072 | | | 37,434 | |
| Withdrawals and benefits | (9,465) | | | (10,758) | | | (25,173) | | | (27,122) | | | (33,757) | |
| Change in market value, interest credited and interest income and other activity | 13,337 | | | 1,113 | | | 8,623 | | | 27,327 | | | 21,387 | |
| Ending total account value | $ | 285,010 | | | $ | 259,946 | | | $ | 285,010 | | | $ | 259,946 | | | $ | 285,010 | |
| Institutional Investment Products: | | | | | | | | | |
| Beginning total account value | $ | 231,142 | | | $ | 215,978 | | | $ | 227,596 | | | $ | 200,759 | | | $ | 217,580 | |
| Additions(1) | 2,780 | | | 5,235 | | | 14,218 | | | 22,526 | | | 22,793 | |
| Withdrawals and benefits | (4,189) | | | (4,626) | | | (13,226) | | | (12,436) | | | (17,533) | |
| Change in market value, interest credited and interest income | 1,944 | | | 2,406 | | | 7,379 | | | 7,876 | | | 8,592 | |
| Other(2) | 3,019 | | | (1,413) | | | (1,271) | | | (1,145) | | | 3,264 | |
| Ending total account value | $ | 234,696 | | | $ | 217,580 | | | $ | 234,696 | | | $ | 217,580 | | | $ | 234,696 | |
__________
(1)Additions primarily include: group annuities calculated based on premiums received; funding agreements issued; unfunded 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 September 30, 2020 and 2019, “Other” activity also includes $869 million in receipts offset by $831 million in payments and $1,418 million in receipts offset by $1,024 million in payments, respectively, and for the nine months ended September 30, 2020 and 2019, includes $6,235 million in receipts offset by $6,107 million in payments and $2,822 million in receipts offset by $2,218 million in payments, respectively, related to funding agreements backed by commercial paper which typically have maturities of less than 90 days.
The increase in Full Service account values for the three months, nine months and twelve months ended September 30, 2020 primarily reflected favorable changes in the market value of customer funds and net deposits and sales.
Institutional Investment Products account values for the three months ended September 30, 2020 reflected an increase in other activity, primarily driven by the positive impacts of foreign exchange rate changes, and a favorable change in the market value of account assets, partially offset by net withdrawals driven by pension risk transfer activity. Account values for the nine months ended September 30, 2020 reflected a favorable change in the market value of account assets and net additions driven by collateralized funding agreements and investment-only stable value accounts, which were partially offset by pension risk transfer activity. Account values for the twelve months ended September 30, 2020 reflected a favorable change in the market value of account values, net additions driven by collateralized funding agreements, pension risk transfer activity and investment-only stable value accounts, and an increase in other activity primarily driven by the positive impacts of foreign exchange rate changes.
Group Insurance
Operating Results
The following table sets forth Individual Annuities’Group Insurance’s operating results and benefits and administrative operating expense ratios for the periods indicated.
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) | | ($ in millions) |
| Operating results: | | | | | | | | Operating results: | |
| Revenues | $ | 953 |
| | $ | 1,288 |
| | $ | 2,101 |
| | $ | 2,523 |
| Revenues | $ | 1,457 | | | $ | 1,438 | | | $ | 4,352 | | | $ | 4,340 | |
| Benefits and expenses | 704 |
| | 826 |
| | 1,479 |
| | 1,589 |
| Benefits and expenses | 1,435 | | | 1,348 | | | 4,281 | | | 4,116 | |
| Adjusted operating income | 249 |
| | 462 |
| | 622 |
| | 934 |
| Adjusted operating income | 22 | | | 90 | | | 71 | | | 224 | |
| Realized investment gains (losses), net, and related adjustments | (2,178 | ) | | (881 | ) | | (3,043 | ) | | (2,225 | ) | Realized investment gains (losses), net, and related adjustments | 4 | | | 0 | | | 75 | | | 9 | |
| Charges related to realized investment gains (losses), net | 474 |
| | 56 |
| | 99 |
| | 190 |
| |
| Market experience updates(1) | 18 |
| | (10 | ) | | (628 | ) | | (10 | ) | |
| | Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | (1,437 | ) | | $ | (373 | ) | | $ | (2,950 | ) | | $ | (1,111 | ) | Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 26 | | | $ | 90 | | | $ | 146 | | | $ | 233 | |
| Benefits ratio(1)(4): | | Benefits ratio(1)(4): | | | | | | | |
| Group life(2) | | Group life(2) | 93.9 | % | | 84.7 | % | | 91.8 | % | | 88.0 | % |
| Group disability(2) | | Group disability(2) | 73.5 | % | | 79.4 | % | | 74.5 | % | | 73.1 | % |
| Total Group Insurance(2) | | Total Group Insurance(2) | 89.4 | % | | 83.5 | % | | 88.0 | % | | 84.7 | % |
| Administrative operating expense ratio(3)(4): | | Administrative operating expense ratio(3)(4): | |
| Group life | | Group life | 12.2 | % | | 13.1 | % | | 12.1 | % | | 12.3 | % |
| Group disability | | Group disability | 25.2 | % | | 22.0 | % | | 25.4 | % | | 24.3 | % |
| Total Group Insurance | | Total Group Insurance | 15.1 | % | | 15.2 | % | | 15.0 | % | | 14.9 | % |
__________
________(1)Ratio of policyholder benefits to earned premiums plus policy charges and fee income.
| |
(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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. |
(2)Benefit ratios for the nine months ended September 30, 2020 and 2019 reflect the impact of our annual reviews and update of assumptions and other refinements. Excluding these impacts, the group life, group disability and total Group Insurance benefit ratios were 91.9%, 75.0% and 88.2% for the nine months ended September 30, 2020, respectively, and 87.4%, 76.2% and 85.0% for the nine months ended September 30, 2019, respectively.
(3)Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income.
(4)The benefit and administrative ratios are measures used to evaluate profitability and efficiency.
Adjusted Operating Income
Three Month Comparison. Adjusted operating income decreased $213$68 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts, partially offset by more favorable underwriting results in our group disability business driven by a favorable impact from claim experience on long-term disability products.
Nine Month Comparison. Adjusted operating income decreased $153 million, including an unfavorablea favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for the second quarter ofboth 2020 included a $136 million net charge from these updates primarily driven by unfavorable impacts related to a decrease in long-term interest rate assumptions. Results for the second quarter ofand 2019 included a $12net benefit from this update of $11 million net charge from these updates.and $9 million, respectively. Excluding this item, adjusted operating income decreased $89$155 million, primarily reflecting lower underwriting results in our group life business driven by lower fee income, net of distribution expenses and other associated costs,unfavorable claim experience mostly due to lower average account values, unfavorableCOVID-19 impacts from our living benefit guarantees, and certain products reaching contractual milestones for fee tier reduction. Thison non-experience-rated contracts. The decrease was partially offset by higheralso reflected lower net investment spread results due to a higher level of invested assets.
Six Month Comparison. Adjusted operating income decreased $312 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements, as discussed above. Excluding this item, adjusted operating income decreased $188 million. The decrease was primarily driven by lower fee income net of distribution expenses and other associated costs, due to unfavorable impacts from our living benefit guarantees, certain products reaching contractual milestones for fee tier reduction, and lower average account values.on non-coupon investments.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues decreased $335increased $19 million. The increase primarily reflected higher premiums and policy charges and fee income driven by growth in our group life business, partially offset by lower net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below.
Benefits and expenses increased $87 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, including increases in our group life business mostly due to COVID-19 impacts, partially offset by decreases in our group disability business driven by a favorable impact from claim experience on long-term disability products. The increase was also partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.
Nine Month Comparison. Revenues increased $12 million. Excluding the impact offrom our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $203$19 million. The decrease was primarily reflected lower
net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below. Partially offsetting the decrease were higher premiums and policy charges and fee income as well as a decreasedriven by growth in asset management and service fees and other income, reflecting lower average account values resulting from net outflows, unfavorable impacts from our living benefit guarantees resulting from declining interest rates and certain products reaching contractual milestones for fee tier reductions. Also contributing to the decrease were lower premiums resulting from a decrease in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below. These decreases were partially offset by higher net investment income reflecting a higher level of invested assets.group life business.
Benefits and expenses decreased $122increased $165 million. Excluding the impact offrom our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $114 millionincreased $136 million. The increase primarily driven byreflected higher policyholders’ benefits includingand changes in reserves, including increases in our group life business mostly due to COVID-19 impacts. The increase was partially offset by lower reserve provisions resulting from a decrease in single premium immediate annuity sales,interest credited to policyholder account balances, with partial offsets in premiums,net investment income, as discussed above. Also contributing
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
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Annualized new business premiums(1): | | | | | | | |
| Group life | $ | 46 | | | $ | 42 | | | $ | 227 | | | $ | 233 | |
| Group disability | 17 | | | 18 | | | 143 | | | 153 | |
| Total | $ | 63 | | | $ | 60 | | | $ | 370 | | | $ | 386 | |
__________
(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 September 30, 2020 increased $3 million compared to the decrease were lower general and administrative expenses, net of capitalization,prior year period, driven by higher sales in our group life business. Total annualized new business premiums for the nine months ended September 30, 2020 decreased $16 million compared to the prior year period, driven by lower distribution expenses reflecting lower average account values.
Six Month Comparison. Revenues decreased $422 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $290 million. The decrease was primarily driven by lower policy charges and fee income, as well as a decrease in asset management and service fees and other income, reflecting unfavorable impacts from our living benefit guarantees resulting from declining interest rates, certain products reaching contractual milestones for fee tier reductions, and lower average account values resulting from net outflows. Also contributing to the decrease were lower premiums resulting from a decrease in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below.
Benefits and expenses decreased $110 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $102 million primarily driven by policyholders’ benefits, including changes in reserves, due to lower reserve provisions resulting from a decrease in single premium immediate annuity sales, with offsets in premiums, as discussed above. Also contributing to the decrease were lower general and administrative expenses, net of capitalization, driven by lower distribution expenses reflecting lower average account values.U.S. Businesses—U.S. Individual Solutions Division
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, since 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
September 30, | | Nine Months Ended
September 30, | | Twelve
Months
Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 |
| (in millions) |
| Full Service: | | | | | | | | | |
| Beginning total account value | $ | 266,433 | | | $ | 262,133 | | | $ | 272,448 | | | $ | 231,669 | | | $ | 259,946 | |
| Deposits and sales | 14,705 | | | 7,458 | | | 29,112 | | | 28,072 | | | 37,434 | |
| Withdrawals and benefits | (9,465) | | | (10,758) | | | (25,173) | | | (27,122) | | | (33,757) | |
| Change in market value, interest credited and interest income and other activity | 13,337 | | | 1,113 | | | 8,623 | | | 27,327 | | | 21,387 | |
| Ending total account value | $ | 285,010 | | | $ | 259,946 | | | $ | 285,010 | | | $ | 259,946 | | | $ | 285,010 | |
| Institutional Investment Products: | | | | | | | | | |
| Beginning total account value | $ | 231,142 | | | $ | 215,978 | | | $ | 227,596 | | | $ | 200,759 | | | $ | 217,580 | |
| Additions(1) | 2,780 | | | 5,235 | | | 14,218 | | | 22,526 | | | 22,793 | |
| Withdrawals and benefits | (4,189) | | | (4,626) | | | (13,226) | | | (12,436) | | | (17,533) | |
| Change in market value, interest credited and interest income | 1,944 | | | 2,406 | | | 7,379 | | | 7,876 | | | 8,592 | |
| Other(2) | 3,019 | | | (1,413) | | | (1,271) | | | (1,145) | | | 3,264 | |
| Ending total account value | $ | 234,696 | | | $ | 217,580 | | | $ | 234,696 | | | $ | 217,580 | | | $ | 234,696 | |
__________
(1)Additions primarily include: group annuities calculated based on premiums received; funding agreements issued; unfunded 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 September 30, 2020 and 2019, “Other” activity also includes $869 million in receipts offset by $831 million in payments and $1,418 million in receipts offset by $1,024 million in payments, respectively, and for the nine months ended September 30, 2020 and 2019, includes $6,235 million in receipts offset by $6,107 million in payments and $2,822 million in receipts offset by $2,218 million in payments, respectively, related to funding agreements backed by commercial paper which typically have maturities of less than 90 days.
The increase in Full Service account values for the three months, nine months and twelve months ended September 30, 2020 primarily reflected favorable changes in the market value of customer funds and net deposits and sales.
Institutional Investment Products account values for the three months ended September 30, 2020 reflected an increase in other activity, primarily driven by the positive impacts of foreign exchange rate changes, and a favorable change in the market value of account assets, partially offset by net withdrawals driven by pension risk transfer activity. Account values for the nine months ended September 30, 2020 reflected a favorable change in the market value of account assets and net additions driven by collateralized funding agreements and investment-only stable value accounts, which were partially offset by pension risk transfer activity. Account values for the twelve months ended September 30, 2020 reflected a favorable change in the market value of account values, net additions driven by collateralized funding agreements, pension risk transfer activity and investment-only stable value accounts, and an increase in other activity primarily driven by the positive impacts of foreign exchange rate changes.
Group Insurance
Operating Results
The following table sets forth Group Insurance’s operating results and benefits and administrative operating expense ratios for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| ($ in millions) |
| Operating results: | | | | | | | |
| Revenues | $ | 1,457 | | | $ | 1,438 | | | $ | 4,352 | | | $ | 4,340 | |
| Benefits and expenses | 1,435 | | | 1,348 | | | 4,281 | | | 4,116 | |
| Adjusted operating income | 22 | | | 90 | | | 71 | | | 224 | |
| Realized investment gains (losses), net, and related adjustments | 4 | | | 0 | | | 75 | | | 9 | |
| | | | | | | |
| | | | | | | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 26 | | | $ | 90 | | | $ | 146 | | | $ | 233 | |
| Benefits ratio(1)(4): | | | | | | | |
| Group life(2) | 93.9 | % | | 84.7 | % | | 91.8 | % | | 88.0 | % |
| Group disability(2) | 73.5 | % | | 79.4 | % | | 74.5 | % | | 73.1 | % |
| Total Group Insurance(2) | 89.4 | % | | 83.5 | % | | 88.0 | % | | 84.7 | % |
| Administrative operating expense ratio(3)(4): | | | | | | | |
| Group life | 12.2 | % | | 13.1 | % | | 12.1 | % | | 12.3 | % |
| Group disability | 25.2 | % | | 22.0 | % | | 25.4 | % | | 24.3 | % |
| Total Group Insurance | 15.1 | % | | 15.2 | % | | 15.0 | % | | 14.9 | % |
__________
(1)Ratio of policyholder benefits to earned premiums plus policy charges and fee income.
(2)Benefit ratios for the nine months ended September 30, 2020 and 2019 reflect the impact of our annual reviews and update of assumptions and other refinements. Excluding these impacts, the group life, group disability and total Group Insurance benefit ratios were 91.9%, 75.0% and 88.2% for the nine months ended September 30, 2020, respectively, and 87.4%, 76.2% and 85.0% for the nine months ended September 30, 2019, respectively.
(3)Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income.
(4)The benefit and administrative ratios are measures used to evaluate profitability and efficiency.
Adjusted Operating Income
Three Month Comparison. Adjusted operating income decreased $68 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts, partially offset by more favorable underwriting results in our group disability business driven by a favorable impact from claim experience on long-term disability products.
Nine Month Comparison. Adjusted operating income decreased $153 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for both 2020 and 2019 included a net benefit from this update of $11 million and $9 million, respectively. Excluding this item, adjusted operating income decreased $155 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts. The decrease also reflected lower net investment spread results driven by lower income on non-coupon investments.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues increased $19 million. The increase primarily reflected higher premiums and policy charges and fee income driven by growth in our group life business, partially offset by lower net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below.
Benefits and expenses increased $87 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, including increases in our group life business mostly due to COVID-19 impacts, partially offset by decreases in our group disability business driven by a favorable impact from claim experience on long-term disability products. The increase was also partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.
Nine Month Comparison. Revenues increased $12 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $19 million. The decrease primarily reflected lower
net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below. Partially offsetting the decrease were higher premiums and policy charges and fee income driven by growth in our group life business.
Benefits and expenses increased $165 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $136 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, including increases in our group life business mostly due to COVID-19 impacts. The increase was partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.
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
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Annualized new business premiums(1): | | | | | | | |
| Group life | $ | 46 | | | $ | 42 | | | $ | 227 | | | $ | 233 | |
| Group disability | 17 | | | 18 | | | 143 | | | 153 | |
| Total | $ | 63 | | | $ | 60 | | | $ | 370 | | | $ | 386 | |
__________
(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 September 30, 2020 increased $3 million compared to the prior year period, driven by higher sales in our group life business. Total annualized new business premiums for the nine months ended September 30, 2020 decreased $16 million compared to the prior year period, driven by lower sales in our group life and group disability businesses. Sales levels reflect pricing competitiveness and reduced levels of client case movement within the large market.
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
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Operating results: | | | | | | | |
| Revenues | $ | 1,148 | | | $ | 1,251 | | | $ | 3,249 | | | $ | 3,774 | |
| Benefits and expenses | 740 | | | 792 | | | 2,219 | | | 2,381 | |
| Adjusted operating income | 408 | | | 459 | | | 1,030 | | | 1,393 | |
| Realized investment gains (losses), net, and related adjustments | 518 | | | (408) | | | (2,525) | | | (2,633) | |
| Charges related to realized investment gains (losses), net | (166) | | | (84) | | | (67) | | | 106 | |
| Market experience updates(1) | (58) | | | (120) | | | (686) | | | (130) | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 702 | | | $ | (153) | | | $ | (2,248) | | | $ | (1,264) | |
________
(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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
Adjusted Operating Income
Three Month Comparison. Adjusted operating income decreased $51 million primarily driven by lower fee income, net of distribution expenses and other associated costs, due to unfavorable impacts from our living benefit guarantees, certain products reaching contractual milestones for fee tier reduction, and lower average separate account values. This decrease was partially offset by higher net investment spread results primarily reflecting a higher level of invested assets net of lower reinvestment yields.
Nine Month Comparison. Adjusted operating income decreased $363 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for 2020 included a $136 million net charge from these updates primarily driven by unfavorable impacts related to a decrease in long-term interest rate assumptions. Results for 2019 included a $12 million net charge from these updates. Excluding this item, adjusted operating income decreased $239 million primarily driven by lower fee income, net of distribution expenses and other associated costs, due to unfavorable impacts from our living benefit guarantees, certain products reaching contractual milestones for fee tier reduction, and lower average account values.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues decreased $103 million primarily driven by lower policy charges and fee income reflecting unfavorable impacts from our living benefit guarantees resulting from declining interest rates, certain products reaching contractual milestones for fee tier reduction, and lower average separate account values resulting from net outflows which were partially offset by market appreciation. Also contributing to the decrease were lower premiums resulting from a decrease in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below. These decreases were partially offset by higher asset management and services fees and other income related to lower capital hedge costs.
Benefits and expenses decreased $52 million primarily driven by lower interest expense on collateral amounts related to investment activities, and lower policyholders’ benefits, including changes in reserves, due to lower reserve provisions resulting from a decrease in single premium immediate annuity sales, with offsets in premiums, as discussed above.
Nine Month Comparison. Revenues decreased $525 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $393 million. The decrease was primarily driven by lower policy charges and fee income reflecting unfavorable impacts from our living benefit guarantees resulting from declining interest rates, certain products reaching contractual milestones for fee tier reductions, and lower average account values resulting from net outflows which were partially offset by market appreciation. Also contributing to the decrease were lower premiums resulting from a decrease in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below. These decreases were partially offset by higher asset management and services fees and other income as a result of lower capital hedge costs.
Benefits and expenses decreased $162 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $154 million primarily driven by lower policyholders’ benefits, including changes in reserves, due to lower reserve provisions 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
June 30, | | Six Months Ended
June 30, | | Twelve
Months
Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Twelve
Months
Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 |
| | (in millions) | | (in millions) |
| Total Individual Annuities(1): | | | | | | | | | | Total Individual Annuities(1): | |
| Beginning total account value | $ | 143,976 |
| | $ | 161,890 |
| | $ | 169,681 |
| | $ | 151,080 |
| | $ | 165,313 |
| Beginning total account value | $ | 159,276 | | | $ | 165,313 | | | $ | 169,681 | | | $ | 151,080 | | | $ | 164,698 | |
| Sales | 1,346 |
| | 2,675 |
| | 3,273 |
| | 4,982 |
| | 8,011 |
| Sales | 1,562 | | | 2,657 | | | 4,835 | | | 7,639 | | | 6,916 | |
| Full surrenders and death benefits | (1,410 | ) | | (2,397 | ) | | (3,929 | ) | | (4,337 | ) | | (8,966 | ) | Full surrenders and death benefits | (1,811) | | | (2,568) | | | (5,740) | | | (6,905) | | | (8,209) | |
| Sales, net of full surrenders and death benefits | (64 | ) | | 278 |
| | (656 | ) | | 645 |
| | (955 | ) | Sales, net of full surrenders and death benefits | (249) | | | 89 | | | (905) | | | 734 | | | (1,293) | |
| Partial withdrawals and other benefit payments | (1,146 | ) | | (1,229 | ) | | (2,545 | ) | | (2,465 | ) | | (5,243 | ) | Partial withdrawals and other benefit payments | (1,205) | | | (1,229) | | | (3,750) | | | (3,694) | | | (5,219) | |
| Net flows | (1,210 | ) | | (951 | ) | | (3,201 | ) | | (1,820 | ) | | (6,198 | ) | Net flows | (1,454) | | | (1,140) | | | (4,655) | | | (2,960) | | | (6,512) | |
| Change in market value, interest credited and other activity | 17,358 |
| | 5,289 |
| | (5,464 | ) | | 17,862 |
| | 3,747 |
| Change in market value, interest credited and other activity | 7,270 | | | 1,448 | | | 1,806 | | | 19,310 | | | 9,569 | |
| Policy charges | (848 | ) | | (915 | ) | | (1,740 | ) | | (1,809 | ) | | (3,586 | ) | Policy charges | (894) | | | (923) | | | (2,634) | | | (2,732) | | | (3,557) | |
| Ending total account value | $ | 159,276 |
| | $ | 165,313 |
| | $ | 159,276 |
| | $ | 165,313 |
| | $ | 159,276 |
| Ending total account value | $ | 164,198 | | | $ | 164,698 | | | $ | 164,198 | | | $ | 164,698 | | | $ | 164,198 | |
__________
| |
(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 $154.1 billion and $161.0 billion as of June 30, 2020 and 2019, respectively. Fixed annuity account values were $5.2 billion and $4.3 billion as of June 30, 2020 and 2019, respectively. |
The increase in account values for the three months ended Junewere $158.6 billion and $160.1 billion as of September 30, 2020 and 2019, respectively. Fixed annuity account values were $5.6 billion and $4.6 billion as of September 30, 2020 and 2019, respectively.
The decrease in sales, net of full surrenders and death benefits, for both the decrease for the sixthree and nine months ended JuneSeptember 30, 2020 were largely driven by market value appreciation and depreciation, respectively. For both periods, in comparison to the prior year period, the decrease in net flows primarily reflected a decline inperiods, reflects lower gross sales largely driven by benefit rate reductions and pricing actions in response to capital market pressures.pressures, and lower full surrenders driven by general uncertainty around COVID-19 as well as recent market volatility.
The slight decrease in account values for the twelve months ended JuneSeptember 30, 2020 was largely driven by partial withdrawalsnet outflows and other benefit payments on contracts as well as policy charges on contractholder accounts, partiallylargely offset by market value appreciation.
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 exposures of our fixed annuity products relate 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, including 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 contract that help to provide protection for premature withdrawals. In addition, a portion of our fixed products has a market value adjustment provision that provides protection of lapse in the case of rising interest rates. We also manage these risk exposures through external reinsurance for certain of our fixed annuity products.
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) Asset Liability Management Strategy, and iii) Capital Hedge Program as discussed below. We also manage these risk exposures through external reinsurance for certain of our variable annuity products.
i.Product Design Features:
A portion of the variable annuity contracts that we offer 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 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 claims 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, 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. 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 derivatives, including, but not limited to: equity and treasury futures; total return 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.
Under our ALM strategy, 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”) (in order to maximize protection irrespective of the possibility of our own 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:
| | | | June 30, 2020 | | December 31, 2019 | | September 30,
2020 | | December 31,
2019 |
| | (in millions) | | (in millions) |
| U.S. GAAP liability, including NPR, net of reinsurance recoverables(1) | $ | 25,777 |
| | $ | 12,612 |
| U.S. GAAP liability, including NPR, net of reinsurance recoverables(1) | $ | 22,881 | | | $ | 12,612 | |
| NPR adjustment, net of reinsurance recoverables(1) | 6,539 |
| | 3,522 |
| NPR adjustment, net of reinsurance recoverables(1) | 5,941 | | | 3,522 | |
| Subtotal | 32,316 |
| | 16,134 |
| Subtotal | 28,822 | | | 16,134 | |
| Adjustments including risk margins and valuation methodology differences | (8,907 | ) | | (4,385 | ) | Adjustments including risk margins and valuation methodology differences | (7,406) | | | (4,385) | |
| Economic liability managed through the ALM strategy | $ | 23,409 |
| | $ | 11,749 |
| Economic liability managed through the ALM strategy | $ | 21,416 | | | $ | 11,749 | |
________
| |
(1) | Prior period amounts have been updated to conform to current period presentation. |
(1)Prior period amounts have been updated to conform to current period presentation.
As of JuneSeptember 30, 2020, the fair value of our fixed income instruments and derivative assets exceed the economic liability within the entities in which the risks reside.
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 have 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 impactsderivatives 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, and the related amortization of DAC and other costs.
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| Results excluded from adjusted operating income(2) | (in millions)(1) | Results excluded from adjusted operating income(2) | (in millions)(1) |
| Change in value of U.S. GAAP liability, pre-NPR(3) | $ | 5,467 |
| | $ | (2,545 | ) | | $ | (15,071 | ) | | $ | (2,265 | ) | Change in value of U.S. GAAP liability, pre-NPR(3) | $ | 3,852 | | | $ | (4,451) | | | $ | (11,219) | | | $ | (6,716) | |
| Change in the NPR adjustment | (3,582 | ) | | 190 |
| | 3,017 |
| | (873 | ) | Change in the NPR adjustment | (597) | | | 1,197 | | | 2,420 | | | 324 | |
| Change in fair value of hedge assets, excluding capital hedges(4) | (3,349 | ) | | 1,410 |
| | 8,605 |
| | 1,265 |
| Change in fair value of hedge assets, excluding capital hedges(4) | (2,391) | | | 2,756 | | | 6,214 | | | 4,021 | |
| Change in fair value of capital hedges(5) | (704 | ) | | (159 | ) | | 248 |
| | (631 | ) | Change in fair value of capital hedges(5) | (360) | | | (15) | | | (113) | | | (647) | |
| Other | (10 | ) | | 223 |
| | 158 |
| | 279 |
| Other | 14 | | | 105 | | | 173 | | | 385 | |
| Realized investment gains (losses), net, and related adjustments | (2,178 | ) | | (881 | ) | | (3,043 | ) | | (2,225 | ) | Realized investment gains (losses), net, and related adjustments | 518 | | | (408) | | | (2,525) | | | (2,633) | |
| Market experience updates(6) | 18 |
| | (10 | ) | | (628 | ) | | (10 | ) | Market experience updates(6) | (58) | | | (120) | | | (686) | | | (130) | |
| Charges related to realized investment gains (losses), net | 474 |
| | 56 |
| | 99 |
| | 190 |
| Charges related to realized investment gains (losses), net | (166) | | | (84) | | | (67) | | | 106 | |
| Total results excluded from adjusted operating income(7) | $ | (1,686 | ) | | $ | (835 | ) | | $ | (3,572 | ) | | $ | (2,045 | ) | Total results excluded from adjusted operating income(7) | $ | 294 | | | $ | (612) | | | $ | (3,278) | | | $ | (2,657) | |
__________
| |
(1) | Positive amount represents income; negative amount represents a loss. |
| |
(2) | Includes the impact of annual reviews and update of assumptions and other refinements. |
| |
(3) | 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. |
| |
(4) | Represents the change in fair value of the derivatives utilized to hedge potential claims associated with our variable annuity living benefit guarantees. |
| |
(5) | 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. |
| |
(6) | 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. |
| |
(7) | Excludes amounts from the changes in fair value of fixed income instruments recorded in OCI (versus net income): a loss of $4 million and gain of $391 million for the three months ended June 30, 2020 and 2019, respectively; and a gain of $1,702 million and $651 million for the six months ended June 30, 2020 and 2019, respectively. |
(1)Positive amount represents income; negative amount represents a loss.
(2)Includes the impact of annual reviews and update of assumptions and other refinements.
(3)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.
(4)Represents the change in fair value of the derivatives utilized to hedge potential claims associated with our variable annuity living benefit guarantees.
(5)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.
(6)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.
(7)Excludes amounts from the changes in fair value of fixed income instruments recorded in OCI (versus net income): a loss of $33 million and gain of $587 million for the three months ended September 30, 2020 and 2019, respectively; and a gain of $1,668 million and $1,237 million for the nine months ended September 30, 2020 and 2019, respectively.
For the three months ended JuneSeptember 30, 2020, the lossgain of $1,686$294 million primarily reflected unfavorablefavorable living benefit results. These results were driven by an unfavorable NPR adjustment, unfavorable hedge breakage driven by credit spreads tightening, and losses associated with our capital hedge program, partially offset by a favorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by tightening of credit spreads.spreads and favorable equity market performance, and gains from duration management swaps associated with the living benefit results. These gains were partially offset by an unfavorable NPR adjustment, losses associated with our capital hedge program, and unfavorable hedge breakage driven by credit spreads tightening. These net lossesgains were partially offset by a benefitcharge related to the amortization of DAC and other costs.
For the sixnine months ended JuneSeptember 30, 2020, the loss of $3,572$3,278 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates, widening of credit spreads, and unfavorable equity market performance. Also contributing to the results were unfavorable hedge breakage driven by equity market volatility partially offset by credit spreads tighteningwidening, and losses from duration management swaps associated with the living benefit results, partially offset byresults. Partially offsetting these losses was a favorable NPR adjustment. These net losses were partially offset by a benefitA charge related to the amortization of DAC and other costs.costs also contributed to the results.
For the three months ended JuneSeptember 30, 2019, the loss of $835$612 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates with partial offsets driven by favorable equity market performance, losses associated with our capital hedge program,and widening of credit spreads, and losses from duration
management swaps associated with the living benefit results. Partially offsetting these losses was a favorable NPR adjustment. These net losses were partially offset by a benefitA charge related to the amortization of DAC and other costs.
costs also contributed to the results.
For the sixnine months ended JuneSeptember 30, 2019, the loss of $2,045$2,657 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable NPR adjustment, an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates with partial offsets drivenpartially offset by favorable equity market performance, losses associated with our capital hedge program, and losses from duration management swaps associated with the living benefit results.results, and losses associated with our capital hedge program. Partial offsets to these losses were a favorable NPR adjustment. These net losses were partially offset by a benefit related to the amortization of DAC and other costs.
Product Specific Risks and Risk Mitigants
As noted above, the risks associated with our products are mitigated through product design features, including automatic rebalancing, as well as through our ALM strategy and external reinsurance. The following table sets forth the risk management profile of our living benefit guarantees and guaranteed minimum death benefit (“GMDB”) features as of the periods indicated.
| | | | | June 30, 2020 | | December 31, 2019 | | June 30, 2019 | | September 30, 2020 | | December 31, 2019 | | September 30, 2019 |
| | | Account Value | | % of Total | | Account Value | | % of Total | | Account Value | | % of Total | | Account
Value | | % of
Total | | Account
Value | | % of
Total | | Account
Value | | % of
Total |
| | | ($ in millions) | | ($ in millions) |
| Living benefit/GMDB features(1): | | | | | | | | | | | | | Living benefit/GMDB features(1): | |
| Both ALM strategy and automatic rebalancing(2)(3) | | $ | 102,137 |
| | 66 | % | | $ | 111,535 |
| | 68 | % | | $ | 109,819 |
| | 68 | % | Both ALM strategy and automatic rebalancing(2)(3) | | $ | 104,815 | | | 66 | % | | $ | 111,535 | | | 68 | % | | $ | 108,457 | | | 68 | % |
| ALM strategy only(3) | | 6,836 |
| | 4 | % | | 7,703 |
| | 5 | % | | 7,855 |
| | 5 | % | ALM strategy only(3) | | 6,955 | | | 4 | % | | 7,703 | | | 5 | % | | 7,586 | | | 5 | % |
| Automatic rebalancing only | | 646 |
| | 1 | % | | 732 |
| | 1 | % | | 778 |
| | 1 | % | Automatic rebalancing only | | 634 | | | 1 | % | | 732 | | | 1 | % | | 747 | | | 1 | % |
| External reinsurance(4) | | 2,855 |
| | 2 | % | | 3,150 |
| | 2 | % | | 3,096 |
| | 2 | % | External reinsurance(4) | | 2,944 | | | 2 | % | | 3,150 | | | 2 | % | | 3,055 | | | 2 | % |
| PDI | | 17,646 |
| | 12 | % | | 16,296 |
| | 9 | % | | 14,248 |
| | 9 | % | PDI | | 17,888 | | | 11 | % | | 16,296 | | | 9 | % | | 15,624 | | | 9 | % |
| Other products | | 2,225 |
| | 1 | % | | 2,457 |
| | 1 | % | | 2,475 |
| | 1 | % | Other products | | 2,306 | | | 1 | % | | 2,457 | | | 1 | % | | 2,396 | | | 1 | % |
| Total living benefit/GMDB features | | $ | 132,345 |
| | | | $ | 141,873 |
| | | | $ | 138,271 |
| | | Total living benefit/GMDB features | | $ | 135,542 | | | $ | 141,873 | | | $ | 137,865 | | |
| GMDB features and other(5) | | 21,734 |
| | 14 | % | | 23,055 |
| | 14 | % | | 22,746 |
| | 14 | % | GMDB features and other(5) | | 23,104 | | | 15 | % | | 23,055 | | | 14 | % | | 22,265 | | | 14 | % |
| Total variable annuity account value | | $ | 154,079 |
| | | | $ | 164,928 |
| | | | $ | 161,017 |
| | | Total variable annuity account value | | $ | 158,646 | | | $ | 164,928 | | | $ | 160,130 | | |
__________
| |
(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 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.
Individual Life
Operating Results
The following table sets forth Individual Life’s operating results for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Operating results: | | | | | | | |
| Revenues | $ | 1,609 | | | $ | 1,529 | | | $ | 4,702 | | | $ | 4,519 | |
| Benefits and expenses | 1,508 | | | 1,470 | | | 4,685 | | | 4,490 | |
| Adjusted operating income | 101 | | | 59 | | | 17 | | | 29 | |
| Realized investment gains (losses), net, and related adjustments | (49) | | | 168 | | | 500 | | | 445 | |
| Charges related to realized investment gains (losses), net | 97 | | | (29) | | | (256) | | | (197) | |
| Market experience updates(1) | (72) | | | (186) | | | (288) | | | (346) | |
| | | | | | | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 77 | | | $ | 12 | | | $ | (27) | | | $ | (69) | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Operating results: | | | | | | | |
| Revenues | $ | 1,563 |
| | $ | 1,508 |
| | $ | 3,093 |
| | $ | 2,990 |
|
| Benefits and expenses | 1,627 |
| | 1,643 |
| | 3,177 |
| | 3,020 |
|
| Adjusted operating income | (64 | ) | | (135 | ) | | (84 | ) | | (30 | ) |
| Realized investment gains (losses), net, and related adjustments | (16 | ) | | 158 |
| | 549 |
| | 277 |
|
| Charges related to realized investment gains (losses), net | 65 |
| | (62 | ) | | (353 | ) | | (168 | ) |
| Market experience updates(1) | 78 |
| | (160 | ) | | (216 | ) | | (160 | ) |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 63 |
| | $ | (199 | ) | | $ | (104 | ) | | $ | (81 | ) |
__________
| |
(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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. |
Adjusted Operating Income
Three Month Comparison. Adjusted operating income reflected a decrease in losses of $71increased $42 million, primarily reflecting higher net investment spread results, driven by higher income on non-coupon investments, and lower expenses from cost savings initiatives.
Nine Month Comparison. Adjusted operating income decreased $12 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for the second quarter of 2020 included a $92 million net charge from these updates, mainly driven by unfavorable impacts related to a decrease in long-term interest rate assumptions. Results for the second quarter of 2019 included a $208 million net charge from these updates, mainly driven by unfavorable impacts related to mortality assumptions. Excluding this item, adjusted operating income decreased $45 million, primarily reflecting lower net investment spread results driven by lower income on non-coupon investments and lower investment yields, partially offset by business growth. Also contributing to the decrease were lower underwriting results driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims. These decreases were partially offset by lower expenses from cost savings initiatives, as well as the absence of certain expenses incurred in the prior year period.
Six Month Comparison. Adjusted operating income reflected an increase in losses of $54 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements, as discussed above. Excluding this item, adjusted operating income decreased $170$128 million, primarily reflecting lower underwriting results, driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims, and lower net investment spread results driven by lower income on non-coupon investments and lower investment yields, partially offset by business growth. Also contributing to the decrease was the absence of 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. Also contributing to the decrease were lower net investment spread results driven by lower income on non-coupon investments and lower investment yields, partially offset by business growth. These decreases were partially offset by lower expenses from cost savings initiatives, as well as the absence of certain expenses incurred in the prior year period.initiatives.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues increased $55$80 million. This increase was primarily driven by higher policy charges and fee income driven by business growth, and higher net investment income due to higher average invested assets resulting from business growth and higher income on non-coupon investments, partially offset by lower investment yields.
Benefits and expenses increased $38 million. This increase was primarily driven by higher policyholders’ benefits, including changes in reserves, due to business growth. The increase was partially offset by lower general and administrative expenses, net of capitalization, reflecting lower expenses, as discussed above.
Nine Month Comparison. Revenues increased $183 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $16increased $112 million. This decreaseincrease was primarily driven by lower net investment income due to lower income on non-coupon investments and lower investment yields, partially offset by the impact of higher average invested assets resulting from business growth. The decrease was partially offset by higher policy charges and fee income driven by business growth.growth, and higher net investment income due to higher average invested assets resulting from business growth, partially offset by lower income on non-coupon investments and lower investment yields.
Benefits and expenses decreased $16increased $195 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $29 million. This increase was primarily driven by higher general and administrative expenses, net of capitalization, reflecting increased VOBA amortization, partially offset by lower expenses as discussed above. Also contributing to this increase were higher policyholders’ benefits driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims, as well as higher interest credited to account balances driven by business growth.
Six Month Comparison. Revenues increased $103 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $32 million. This increase was primarily driven by higher policy charges and fee income driven by business growth.
Benefits and expenses increased $157 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $202$240 million. This increase reflected higher policyholders’ benefits, including changes in reserves, driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims, as well as higher interest credited to account balances driven by business growth. Also contributing to the increase was the absence of a favorable impact from changes in market conditions on estimates of profitability in the prior year period, as discussed above. The increase also reflected higher general and administrative expenses, net of capitalization, reflecting increased VOBA amortization, partially offset by lower other expenses, as discussed above.
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 June 30, 2020 | | Three Months Ended June 30, 2019 | | Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2019 |
| | | 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 | | $ | 7 |
| | $ | 33 |
| | $ | 40 |
| | $ | 7 |
| | $ | 46 |
| | $ | 53 |
| Term Life | | $ | 6 | | | $ | 28 | | | $ | 34 | | | $ | 7 | | | $ | 42 | | | $ | 49 | |
| Guaranteed Universal Life(1) | | 1 |
| | 33 |
| | 34 |
| | 2 |
| | 22 |
| | 24 |
| Guaranteed Universal Life(1) | | 1 | | | 19 | | | 20 | | | 2 | | | 22 | | | 24 | |
| Other Universal Life(1) | | 5 |
| | 18 |
| | 23 |
| | 11 |
| | 37 |
| | 48 |
| Other Universal Life(1) | | 3 | | | 17 | | | 20 | | | 9 | | | 26 | | | 35 | |
| Variable Life | | 22 |
| | 65 |
| | 87 |
| | 19 |
| | 37 |
| | 56 |
| Variable Life | | 22 | | | 76 | | | 98 | | | 20 | | | 47 | | | 67 | |
| Total | | $ | 35 |
| | $ | 149 |
| | $ | 184 |
| | $ | 39 |
| | $ | 142 |
| | $ | 181 |
| Total | | $ | 32 | | | $ | 140 | | | $ | 172 | | | $ | 38 | | | $ | 137 | | | $ | 175 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, 2020 | | Six Months Ended June 30, 2019 | | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2019 |
| | | 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 | | $ | 13 |
| | $ | 67 |
| | $ | 80 |
| | $ | 14 |
| | $ | 90 |
| | $ | 104 |
| Term Life | | $ | 19 | | | $ | 95 | | | $ | 114 | | | $ | 21 | | | $ | 132 | | | $ | 153 | |
| Guaranteed Universal Life(1) | | 3 |
| | 60 |
| | 63 |
| | 4 |
| | 41 |
| | 45 |
| Guaranteed Universal Life(1) | | 4 | | | 79 | | | 83 | | | 6 | | | 63 | | | 69 | |
| Other Universal Life(1) | | 12 |
| | 41 |
| | 53 |
| | 20 |
| | 58 |
| | 78 |
| Other Universal Life(1) | | 15 | | | 58 | | | 73 | | | 29 | | | 84 | | | 113 | |
| Variable Life | | 42 |
| | 133 |
| | 175 |
| | 35 |
| | 82 |
| | 117 |
| Variable Life | | 64 | | | 209 | | | 273 | | | 55 | | | 129 | | | 184 | |
| Total | | $ | 70 |
| | $ | 301 |
| | $ | 371 |
| | $ | 73 |
| | $ | 271 |
| | $ | 344 |
| Total | | $ | 102 | | | $ | 441 | | | $ | 543 | | | $ | 111 | | | $ | 408 | | | $ | 519 | |
__________
| |
(1) | Single pay life premiums and excess (unscheduled) premiums are included in annualized new business premiums based on a 10% credit and represented approximately 12% and 7% of Guaranteed Universal Life and 11% and 17% of Other Universal Life annualized new business premiums for the three months ended June 30, 2020 and 2019, respectively, and approximately 9% and 7% of Guaranteed Universal Life and 10% and 14% of Other Universal Life annualized new business premiums for the six months ended June 30, 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 5% and 4% of Guaranteed Universal Life and 2% and 8% of Other Universal Life annualized new business premiums for the three months ended September 30, 2020 and 2019, respectively, and approximately 9% and 6% of Guaranteed Universal Life and 7% and 13% of Other Universal Life annualized new business premiums for the nine months ended September 30, 2020 and 2019, respectively. Prior period percentages have been updated to conform to current period presentation.
Total annualized new business premiums for the secondthird quarter and the first six months of 2020 increaseddecreased $3 million and $27 million, respectively, compared to the prior year periodsperiod, primarily driven by lower sales of term life products due to pricing actions and lower sales of other universal life products due to the absence of large case activity in the third quarter of 2020. The decrease was partially offset by higher sales of variable life products as a result of product design and pricing actions,actions. Total annualized new business premiums for the first nine months of 2020 increased $24 million compared to the prior year period, primarily driven by higher sales of variable life products, as discussed above, and higher sales of guaranteed universal life products. The increases for both periods wereincrease was partially offset by lower sales of term life products, due to pricing actionsas discussed above, and lower sales of other universal life products due to the absence of large case activity in the second quarterand third quarters of 2020.
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
June 30, 2020 | | Six Months Ended
June 30, 2020 | | | Three Months Ended
September 30, 2020 | | Nine Months Ended
September 30, 2020 |
| | | (in millions) | | (in millions) |
| Operating results: | | | | | Operating results: | |
| Revenues | | $ | 59 |
| | $ | 119 |
| Revenues | | $ | 75 | | | $ | 194 | |
| Expenses | | 75 |
| | 158 |
| Expenses | | 105 | | | 263 | |
| Adjusted operating income | | (16 | ) | | (39 | ) | Adjusted operating income | | (30) | | | (69) | |
| Other adjustments(1) | | 32 |
| | 77 |
| Other adjustments(1) | | (12) | | | 65 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | | $ | 16 |
| | $ | 38 |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | | $ | (42) | | | $ | (4) | |
__________
| |
(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 secondthird quarter and the first sixnine months of 2020 was $(16)$(30) million and $(39)$(69) million, respectively, reflecting revenues, net of marketing and distribution expenses, primarily related to our health (Health Under 65) and life insurance product lines. Results for both periods also included operating expenses, including certain expenses incurred in the third quarter in preparation for the fourth quarter 2020 annual Medicare enrollment period, 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 for the secondthird quarter and the first sixnine months of 2020 were $59$75 million and $119$194 million, respectively, primarily reflecting commissions and marketing referral revenues from our health (Health Under 65) and life insurance product lines. Expenses for the secondthird quarter and the first sixnine months of 2020 were $75$105 million and $158$263 million, respectively, driven by marketing and distribution costs, general and administrative operating expenses including certain expenses incurred in the third quarter in preparation for the fourth quarter 2020 annual Medicare enrollment period, and amortization expenses related to intangible assets.
International Businesses
Business Update
•In AprilAugust 2020, we entered into a definitive agreement with KB Financial Group, Inc., a Korean financial services provider, to sellsuccessfully completed the sale of The Prudential Life Insurance Company of Korea, Ltd. (“POK”) to KB Financial Group Inc., for cash consideration of approximately 2.3 trillion Korean Won, equal to approximately $1.9 billion (based onbillion. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information. Effective in the second quarter of 2020, the results of this business and the impact of its sale were reflected in the Divested and Run-off Businesses that are included in Corporate and Other, and all prior period amounts have been updated to conform to the current period presentation. See “—Divested and Run-off Businesses.”
•In August 2020, we entered into a definitive agreement with Taishin Financial Holding Co, Ltd., a Taiwanese financial services provider, to sell Prudential Life Insurance Company of Taiwan Inc. (“POT”) for cash consideration of approximately $190 million at then current exchange rates)rates, to be paid at closing.closing, and contingent consideration with a fair value of approximately $26 million at September 30, 2020. The transaction is consistent with our strategic focus internationally on Japan and higher-growth emerging markets around the world. The transaction is expected to close by the end of 2020,in 2021, subject to regulatory approvals and customary closing conditions. In the secondthird quarter of 2020, we reported our investment in POKPOT as “held for sale” and recognized an approximately $700$300 million after-tax charge to earnings to adjust the carrying value of POKPOT to the fair market value reflected in the purchase price (see Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information). Effective in the secondthird quarter of 2020, the results of this business and the impact of the anticipated sale are reflected in the Divested and Run-off Businesses that are included in Corporate and 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. The exchange rate used was Japanese yen at a rate of 104 yen per USD, which was 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
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) | | (in millions) |
| Operating results(1): | | | | | | | | Operating results(1): | |
| Revenues: | | | | | | | | Revenues: | |
| Life Planner | $ | 2,474 |
| | $ | 2,409 |
| | $ | 5,333 |
| | $ | 5,156 |
| Life Planner | $ | 2,548 | | | $ | 2,336 | | | $ | 7,591 | | | $ | 7,228 | |
| Gibraltar Life and Other | 2,759 |
| | 2,649 |
| | 5,677 |
| | 5,626 |
| Gibraltar Life and Other | 2,933 | | | 2,880 | | | 8,610 | | | 8,506 | |
| Total revenues | 5,233 |
| | 5,058 |
| | 11,010 |
| | 10,782 |
| Total revenues | 5,481 | | | 5,216 | | | 16,201 | | | 15,734 | |
| Benefits and expenses: | | | | | | | | Benefits and expenses: | | | | | | | |
| Life Planner | 2,170 |
| | 2,030 |
| | 4,665 |
| | 4,359 |
| Life Planner | 2,134 | | | 2,039 | | | 6,513 | | | 6,140 | |
| Gibraltar Life and Other | 2,370 |
| | 2,238 |
| | 4,954 |
| | 4,774 |
| Gibraltar Life and Other | 2,572 | | | 2,456 | | | 7,526 | | | 7,230 | |
| Total benefits and expenses | 4,540 |
| | 4,268 |
| | 9,619 |
| | 9,133 |
| Total benefits and expenses | 4,706 | | | 4,495 | | | 14,039 | | | 13,370 | |
| Adjusted operating income: | | | | | | | | Adjusted operating income: | | | | | | | |
| Life Planner | 304 |
| | 379 |
| | 668 |
| | 797 |
| Life Planner | 414 | | | 297 | | | 1,078 | | | 1,088 | |
| Gibraltar Life and Other | 389 |
| | 411 |
| | 723 |
| | 852 |
| Gibraltar Life and Other | 361 | | | 424 | | | 1,084 | | | 1,276 | |
| Total adjusted operating income | 693 |
| | 790 |
| | 1,391 |
| | 1,649 |
| Total adjusted operating income | 775 | | | 721 | | | 2,162 | | | 2,364 | |
| Realized investment gains (losses), net, and related adjustments(2) | 177 |
| | 261 |
| | 662 |
| | 783 |
| Realized investment gains (losses), net, and related adjustments(2) | 168 | | | 439 | | | 843 | | | 1,203 | |
| Charges related to realized investment gains (losses), net | (15 | ) | | (3 | ) | | (22 | ) | | (3 | ) | Charges related to realized investment gains (losses), net | (11) | | | (4) | | | (33) | | | (7) | |
| Market experience updates(3) | (37 | ) | | (37 | ) | | (46 | ) | | (37 | ) | Market experience updates(3) | 3 | | | (1) | | | (39) | | | (32) | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | (34 | ) | | (28 | ) | | (30 | ) | | (58 | ) | Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 8 | | | (28) | | | (22) | | | (86) | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 784 |
| | $ | 983 |
| | $ | 1,955 |
| | $ | 2,334 |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 943 | | | $ | 1,127 | | | $ | 2,911 | | | $ | 3,442 | |
__________
| |
(1) | Effective second quarter of 2020, the results of POK 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) | 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. 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)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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
Adjusted Operating Income
Three Month Comparison. Adjusted operating income from our Life Planner operations decreased $75increased $117 million, including a net favorable impact of $4 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding this item, adjusted operating income from our Life Planner operations increased $113 million, primarily reflecting lower expenses driven by the absence of updates to legal reserves incurred in the prior year period. Also contributing to the increase were favorable underwriting results due to the growth of business in force in our Japan and Brazil operations, favorable policyholder experience and a favorable impact from mortality experience.
Adjusted operating income from our Gibraltar Life and Other operations decreased $63 million, including a net unfavorable impact of $2 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding this item, adjusted operating income from our Gibraltar Life and Other operations decreased $61 million, primarily reflecting lower earnings from our joint venture investments, as well as higher expenses driven by costs associated with COVID-19 (see “Overview—COVID-19”). Also contributing to the decrease were lower net investment spread results driven by lower reinvestment yields, partially offset by higher income on non-coupon investments. These decreases were partially offset by favorable underwriting results due to the growth of business in force and a favorable impact from mortality experience.
Nine Month Comparison. Adjusted operating income from our Life Planner operations decreased $10 million, including a net favorable impact of $3 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in a $43$42 million net charge in the second quarter of 2020 compared to a $4$5 million net benefit in the second quarter of 2019. The net charge in 2020 iswas primarily driven by unfavorable impacts related to a decrease in long-term interest rate assumptions.
Excluding these items, adjusted operating income from our Life Planner operations decreased $25increased $34 million primarily reflecting lower net investment spread results driven by lower investment yields and lower income on non-coupon investments. Also contributing to the decrease were higher expenses driven by costs associated with COVID-19 (see “Overview—COVID-19”). These decreases were partially offset by favorable underwriting results primarily due to the growth of business in force in our Japan and Brazil operations.operations and favorable policyholder experience, partially offset by an unfavorable impact from mortality experience. Also contributing to the increase were lower expenses primarily driven by the absence of updates to legal reserves incurred in the prior year period, partially offset by higher costs related to business growth and business initiatives. These increases were partially offset by lower net investment spread results primarily driven by lower reinvestment yields.
Adjusted operating income from our Gibraltar Life and Other operations decreased $22$192 million, including a net unfavorable impact of $2$6 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in a $52 million net charge in the second quarter of 2020 compared to a $7 million net benefit in the second quarter of 2019. The net charge in 2020 was primarily driven by updates of reserves reflecting the impact of a decrease in long-term interest rate assumptions, as well as other refinements.
Excluding these items, adjusted operating income from our Gibraltar Life and Other operations increased $39decreased $127 million, primarily reflecting higher earnings from our joint venture investments due to market performance and lower expenses driven by lower costs associated with business initiatives, partially offset by costs associated with COVID-19 (see “Overview—COVID-19”).
Also contributing to the increase were favorable underwriting results driven by a favorable impact from mortality experience, and higher net investment spread results driven by higher income on non-coupon investments, partially offset by lower investment yields.
Six Month Comparison. Adjusted operating income from our Life Planner operations decreased $129 million, including a net unfavorable impact of $3 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, adjusted operating income from our Life Planner operations decreased $79 million 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 costs associated with COVID-19 (see “Overview—COVID-19”). These decreases were partially offset by favorable underwriting results due to the growth of business in force in our Japan and Brazil operations, partially offset by an unfavorable impact from mortality experience.
Adjusted operating income from our Gibraltar Life and Other operations decreased $129 million, including a net unfavorable impact of $4 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, adjusted operating income from our Gibraltar Life and Other operations decreased $66 million, primarily reflecting lower net investment spread results driven by lower investment yields and lower income on non-coupon investments. Also contributing to the decrease were lower earnings from our joint venture investments, due to market performance, as well as higher expenses driven by costs associated with COVID-19 (see “Overview—COVID-19”),. Also contributing to the decrease were lower net investment spread results driven by lower reinvestment yields, partially offset by lower costs related to business initiatives.higher income on non-coupon investments. These decreases were partially offset by favorable underwriting results driven by the growth of business in force and a favorable impact from mortality experience.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues from our Life Planner operations increased $65$212 million, including a net unfavorable impact of $21$38 million from currency fluctuations. Excluding this item, revenues increased $250 million, primarily driven by higher premiums and policy charges and fee income attributable to the growth of business in force, and higher net investment results driven by higher income on non-coupon investments, partially offset by lower reinvestment yields.
Benefits and expenses of our Life Planner operations increased $95 million, including a net favorable impact of $42 million from currency fluctuations. Excluding this item, benefits and expenses increased $137 million, primarily reflecting higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force. This increase was partially offset by lower expenses primarily driven by the absence of updates to legal reserves incurred in the prior year period.
Revenues from our Gibraltar Life and Other operations increased $53 million, including a net favorable impact of $16 million from currency fluctuations. Excluding this item, revenues increased $37 million, primarily reflecting higher premiums driven by the growth of business in force. Partially offsetting the increase were lower other income driven by an unfavorable impact from our joint venture investments, and lower net reinvestment results driven by lower investment yields, partially offset by higher income on non-coupon investments.
Benefits and expenses of our Gibraltar Life and Other operations increased $116 million, including a net unfavorable impact of $18 million from currency fluctuations. Excluding this item, benefits and expenses increased $98 million, primarily driven by higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force.
Nine Month Comparison. Revenues from our Life Planner operations increased $363 million, including a net unfavorable impact of $92 million from currency fluctuations and a net benefit of $33 million from our annual reviews and update of assumptions and other refinements. Excluding these items, revenues increased $53$422 million, primarily driven by higher premiums and policy charges and fee income attributable to the growth of business in force, partially offset by lower net investment results driven by lower investment yields and lower income on non-coupon investments.force.
Benefits and expenses of our Life Planner operations increased $140$373 million, including a net favorable impact of $18$95 million from currency fluctuations and a net charge of $80 million from our annual reviews and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $78$388 million, primarily reflecting higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force, and higheras well as an unfavorable impact from mortality experience. These increases were partially offset by lower expenses primarily driven by costs associated with COVID-19.the absence of updates to legal reserves incurred in the prior year period.
Revenues from our Gibraltar Life and Other operations increased $110$104 million, including a net favorable impact of $18$36 million from currency fluctuations and a net charge of $9 million from our annual reviews and update of assumptions and other refinements. Excluding these items, revenues increased $101 million, primarily reflecting higher premiums driven by the growth of business in force, and higher other income driven by a favorable impact from our joint venture investments due to market performance.
Benefits and expenses of our Gibraltar Life and Other operations increased $132 million, including a net unfavorable impact of $20 million from currency fluctuations and a net charge of $50 million from our annual reviews and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $62 million, primarily driven by higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force. The increase was partially offset by lower expenses driven by lower costs associated with business initiatives, partially offset by costs associated with COVID-19.
Six Month Comparison. Revenues from our Life Planner operations increased $177 million, including a net unfavorable impact of $45 million from currency fluctuations. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, revenues increased $189 million, primarily driven by 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 $306 million, including a net favorable impact of $42 million from currency fluctuations. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, benefits and expenses increased $268 million, primarily reflecting higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force, as well as an unfavorable
impact from mortality experience. 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 costs associated with COVID-19.
Revenues from our Gibraltar Life and Other operations increased $51 million, including a net favorable impact of $20 million from currency fluctuations. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, revenues increased $40$77 million, primarily driven by higher premiums attributable to the growth of business in force. The increase was partially offset by lower other income driven by an unfavorable impact from our joint venture investments, due to market performance, and lower net investment results driven by lower investmentreinvestment yields, and lowerpartially offset by higher income on non-coupon investments.
Benefits and expenses of our Gibraltar Life and Other operations increased $180$296 million, including a net unfavorable impact of $24$42 million from currency fluctuations. Excluding the impactfluctuations and a net charge of currency fluctuations, as well as the impact$50 million from our annual reviews and update of assumptions and other refinements as discussed above,refinements. Excluding these items, benefits and expenses increased $106$204 million, primarily driven by higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force. Also contributing to the increase was higher expenses driven by costs associated with COVID-19, partially offset by lower costs associated with business initiatives.
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
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) | | (in millions) |
| Annualized new business premiums(1): | | | | | | | | Annualized new business premiums(1): | |
| On an actual exchange rate basis: | | | | | | | | On an actual exchange rate basis: | |
| Life Planner | $ | 166 |
| | $ | 253 |
| | $ | 487 |
| | $ | 608 |
| Life Planner | $ | 381 | | | $ | 250 | | | $ | 839 | | | $ | 833 | |
| Gibraltar Life and Other | 197 |
| | 296 |
| | 504 |
| | 619 |
| Gibraltar Life and Other | 407 | | | 312 | | | 911 | | | 931 | |
| Total | $ | 363 |
| | $ | 549 |
| | $ | 991 |
| | $ | 1,227 |
| Total | $ | 788 | | | $ | 562 | | | $ | 1,750 | | | $ | 1,764 | |
| On a constant exchange rate basis: | | | | | | | | On a constant exchange rate basis: | | | | | | | |
| Life Planner | $ | 178 |
| | $ | 255 |
| | $ | 505 |
| | $ | 613 |
| Life Planner | $ | 395 | | | $ | 251 | | | $ | 871 | | | $ | 839 | |
| Gibraltar Life and Other | 198 |
| | 298 |
| | 507 |
| | 623 |
| Gibraltar Life and Other | 408 | | | 313 | | | 915 | | | 936 | |
| Total | $ | 376 |
| | $ | 553 |
| | $ | 1,012 |
| | $ | 1,236 |
| Total | $ | 803 | | | $ | 564 | | | $ | 1,786 | | | $ | 1,775 | |
__________
| |
(1) | Effective second quarter of 2020, the results of POK 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. |
(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 June 30, 2020 | | Three Months Ended June 30, 2019 |
| | Life | | Accident & Health | | Retirement(1) | | Annuity | | Total | | Life | | Accident & Health | | Retirement(1) | | Annuity | | Total |
| | (in millions) |
| Life Planner(2) | $ | 89 |
| | $ | 18 |
| | $ | 71 |
| | $ | 0 |
| | $ | 178 |
| | $ | 137 |
| | $ | 23 |
| | $ | 95 |
| | $ | 0 |
| | $ | 255 |
|
| Gibraltar Life and Other: | | | | | | | | | | | | | | | | | | | |
| Life Consultants | $ | 59 |
| | $ | 7 |
| | $ | 6 |
| | $ | 17 |
| | $ | 89 |
| | $ | 84 |
| | $ | 10 |
| | $ | 19 |
| | $ | 56 |
| | $ | 169 |
|
| Banks(3) | 57 |
| | 0 |
| | 3 |
| | 2 |
| | 62 |
| | 73 |
| | 0 |
| | 9 |
| | 3 |
| | 85 |
|
| Independent Agency | 18 |
| | 2 |
| | 27 |
| | 0 |
| | 47 |
| | 19 |
| | 3 |
| | 18 |
| | 4 |
| | 44 |
|
| Subtotal | 134 |
| | 9 |
| | 36 |
| | 19 |
| | 198 |
| | 176 |
| | 13 |
| | 46 |
| | 63 |
| | 298 |
|
| Total | $ | 223 |
| | $ | 27 |
| | $ | 107 |
| | $ | 19 |
| | $ | 376 |
| | $ | 313 |
| | $ | 36 |
| | $ | 141 |
| | $ | 63 |
| | $ | 553 |
|
__________
| |
(1) | Includes retirement income, endowment and savings variable universal life. |
| |
(2) | Effective second quarter of 2020, the results of POK 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. |
| |
(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 3% and 75%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended June 30, 2020, and 0% and 68%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended June 30, 2019. |
Three Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations decreased $77 million, primarily driven by restrictions in sales activities due to COVID-19 (see “Overview—COVID-19”), which resulted in lower sales across products.
Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations decreased $100 million. Life Consultants and Bank channel sales decreased $80 million and $23 million, respectively, primarily driven by COVID-19 impacts. Life Consultants sales also reflected lower sales of USD-denominated fixed annuity products driven by declines in crediting rates and lower Life Consultant headcount. These decreases were partially offset by a $3 million increase in Independent Agency sales driven by higher sales of USD-denominated endowment products.
The table below presents annualized new business premiums on a constant exchange rate basis, by product and distribution channel, for the periods indicated.
| | | | Six Months Ended June 30, 2020 | | Six Months Ended June 30, 2019 | | Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2019 |
| | Life | | Accident & Health | | Retirement(1) | | Annuity | | Total | | Life | | Accident & Health | | Retirement(1) | | Annuity | | Total | | Life | | Accident
&
Health | | Retirement(1) | | Annuity | | Total | | Life | | Accident
&
Health | | Retirement(1) | | Annuity | | Total |
| | (in millions) | | (in millions) |
| Life Planner(2) | $ | 268 |
| | $ | 42 |
| | $ | 194 |
| | $ | 1 |
| | $ | 505 |
| | $ | 345 |
| | $ | 56 |
| | $ | 209 |
| | $ | 3 |
| | $ | 613 |
| Life Planner(2) | $ | 199 | | | $ | 19 | | | $ | 177 | | | $ | 0 | | | $ | 395 | | | $ | 130 | | | $ | 18 | | | $ | 103 | | | $ | 0 | | | $ | 251 | |
| Gibraltar Life and Other: | | | | | | | | | | | | | | | | | | | | Gibraltar Life and Other: | |
| Life Consultants | $ | 141 |
| | $ | 16 |
| | $ | 24 |
| | $ | 39 |
| | $ | 220 |
| | $ | 171 |
| | $ | 21 |
| | $ | 42 |
| | $ | 101 |
| | $ | 335 |
| Life Consultants | $ | 122 | | | $ | 9 | | | $ | 25 | | | $ | 12 | | | $ | 168 | | | $ | 95 | | | $ | 10 | | | $ | 23 | | | $ | 24 | | | $ | 152 | |
| Banks(3) | 177 |
| | 0 |
| | 13 |
| | 4 |
| | 194 |
| | 167 |
| | 0 |
| | 18 |
| | 8 |
| | 193 |
| Banks(3) | 152 | | | 0 | | | 6 | | | 9 | | | 167 | | | 107 | | | 0 | | | 9 | | | 3 | | | 119 | |
| Independent Agency | 40 |
| | 3 |
| | 48 |
| | 2 |
| | 93 |
| | 50 |
| | 6 |
| | 27 |
| | 12 |
| | 95 |
| Independent Agency | 43 | | | 1 | | | 28 | | | 1 | | | 73 | | | 18 | | | 1 | | | 21 | | | 2 | | | 42 | |
| Subtotal | 358 |
| | 19 |
| | 85 |
| | 45 |
| | 507 |
| | 388 |
| | 27 |
| | 87 |
| | 121 |
| | 623 |
| Subtotal | 317 | | | 10 | | | 59 | | | 22 | | | 408 | | | 220 | | | 11 | | | 53 | | | 29 | | | 313 | |
| Total | $ | 626 |
| | $ | 61 |
| | $ | 279 |
| | $ | 46 |
| | $ | 1,012 |
| | $ | 733 |
| | $ | 83 |
| | $ | 296 |
| | $ | 124 |
| | $ | 1,236 |
| Total | $ | 516 | | | $ | 29 | | | $ | 236 | | | $ | 22 | | | $ | 803 | | | $ | 350 | | | $ | 29 | | | $ | 156 | | | $ | 29 | | | $ | 564 | |
__________
| |
(1) | Includes retirement income, endowment and savings variable universal life. |
| |
(2) | Effective second quarter of 2020, the results of POK 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. |
| |
(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 4% and 70%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the six months ended June 30, 2020, and 0% and 66%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the six months ended June 30, 2019. |
(1)Includes retirement income, endowment and savings variable universal life.
Six(2)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.
(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 1% and 74%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended September 30, 2020, and 2% and 68%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended September 30, 2019.
Three Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations decreased $108increased $144 million, primarily driven by higher sales of USD-denominated products ahead of pricing increases in August 2020, as well as an increase in sales activities resulting from easing of COVID-19 impacts. Also contributingrestrictions on personal interactions and a greater use of technology (see “Overview—COVID-19”).
Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations increased $95 million. Bank channel and Independent Agency sales increased $48 million and $31 million, respectively, primarily driven by higher sales of USD-denominated products ahead of pricing increases in August 2020. Life Consultants sales also increased $16 million, reflecting higher sales of USD-denominated protection and endowment products ahead of pricing increases in August 2020, partially offset by lower sales of USD-denominated fixed annuity products driven by declines in crediting rates and lower Life Consultant headcount.
The table below presents annualized new business premiums on a constant exchange rate basis, by product and distribution channel, for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2019 |
| | Life | | Accident
&
Health | | Retirement(1) | | Annuity | | Total | | Life | | Accident
&
Health | | Retirement(1) | | Annuity | | Total |
| | (in millions) |
| Life Planner(2) | $ | 448 | | | $ | 54 | | | $ | 369 | | | $ | 0 | | | $ | 871 | | | $ | 460 | | | $ | 70 | | | $ | 308 | | | $ | 1 | | | $ | 839 | |
| Gibraltar Life and Other: | | | | | | | | | | | | | | | | | | | |
| Life Consultants | $ | 263 | | | $ | 25 | | | $ | 49 | | | $ | 51 | | | $ | 388 | | | $ | 266 | | | $ | 31 | | | $ | 65 | | | $ | 125 | | | $ | 487 | |
| Banks(3) | 329 | | | 0 | | | 19 | | | 13 | | | 361 | | | 274 | | | 0 | | | 27 | | | 11 | | | 312 | |
| Independent Agency | 83 | | | 4 | | | 76 | | | 3 | | | 166 | | | 68 | | | 7 | | | 48 | | | 14 | | | 137 | |
| Subtotal | 675 | | | 29 | | | 144 | | | 67 | | | 915 | | | 608 | | | 38 | | | 140 | | | 150 | | | 936 | |
| Total | $ | 1,123 | | | $ | 83 | | | $ | 513 | | | $ | 67 | | | $ | 1,786 | | | $ | 1,068 | | | $ | 108 | | | $ | 448 | | | $ | 151 | | | $ | 1,775 | |
__________
(1)Includes retirement income, endowment and savings variable universal life.
(2)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 decrease wereUnaudited Interim Consolidated Financial Statements for additional information.
(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 3% and 72%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the nine months ended September 30, 2020, and 1% and 67%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the nine months ended September 30, 2019.
Nine Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations increased $32 million primarily driven by higher sales of USD-denominated products ahead of pricing increases in August 2020. The increase was partially offset by lower sales due to COVID-19 impacts, as well as lower sales of corporate term products in Japan driven by the corporate product tax rule change effective July 2019.
Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations decreased $116$21 million. Life Consultants sales decreased $115$99 million, primarily driven by COVID-19 impacts, as well as lower sales of USD-denominated fixed annuity products driven by declines in crediting rates and lower Life Consultant headcount. Bank channel sales remained relatively flatincreased $49 million, reflecting higher sales of USD-denominated protection products ahead of pricing increases in August 2020, partially offset by lower sales due to COVID-19 impacts. Independent Agency sales also remained flatincreased $29 million, reflecting lowerhigher sales of USD-denominated protection and fixed annuityendowment products ahead of pricing increases in August 2020, partially offset by higherlower sales of USD-denominated endowmentfixed annuity products.
CorporateClosed Block Division
Substantially all of the $61 billion of general account assets in the Closed Block division support obligations and Otherliabilities relating to the Closed Block policies only. See Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information on the Closed Block.
Corporate
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, Other includes corporateat times, negative yields for certain tenors of government bonds. Our international insurance operations after allocationsemploy 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 regularly examine our product offerings and their profitability. As a result, we have repriced certain products, adjusted commissions for certain products and have discontinued 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
September 30, 2020 |
| (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 | |
The $136 billion above is primarily comprised of long-duration insurance products that have fixed and guaranteed 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 $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 segments,has interest crediting rates that are determined by formula.
Assuming a hypothetical scenario where the average 30-year Japanese Government Bond yield is 0.60% and the 10-year U.S. Treasury rate is 0.65% (which is reasonably consistent with recent rates) for the period from October 1, 2020 through September 30, 2021 (and credit spreads remain unchanged from average levels experienced during the third quarter 2020), 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 million and $80 million for the period from October 1, 2020 through September 30, 2021.
Results of Operations
Consolidated Results of Operations
The following table summarizes net income (loss) for the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Revenues | $ | 15,425 | | | $ | 15,105 | | | $ | 41,004 | | | $ | 45,584 | |
| Benefits and expenses | 13,978 | | | 13,380 | | | 42,227 | | | 41,843 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | 1,447 | | | 1,725 | | | (1,223) | | | 3,741 | |
| Income tax expense (benefit) | (50) | | | 332 | | | 7 | | | 726 | |
| Income (loss) before equity in earnings of operating joint ventures | 1,497 | | | 1,393 | | | (1,230) | | | 3,015 | |
| Equity in earnings of operating joint ventures, net of taxes | 10 | | 32 | | | 62 | | | 85 | |
| | | | | | | |
| | | | | | | |
| Net income (loss) | 1,507 | | | 1,425 | | | (1,168) | | | 3,100 | |
| Less: Income attributable to noncontrolling interests | 20 | | | 7 | | | 25 | | | 42 | |
| Net income (loss) attributable to Prudential Financial, Inc. | $ | 1,487 | | | $ | 1,418 | | | $ | (1,193) | | | $ | 3,058 | |
Three Month Comparison. The $69 million increase in “Net income (loss) attributable to Prudential Financial, Inc.” for the third quarter of 2020 compared to the third quarter of 2019 reflected the following notable items:
•$711 million favorable 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);
•$382 million favorable variance reflecting a tax benefit in the current period compared to a tax expense in the prior year period; and
•$307 million favorable variance, on a pre-tax basis, from investment related activities that are primarily within “Other income (loss)” for PFI excluding our Divested and Run-off Businesses. These favorable impacts were primarily driven by unrealized gains (losses) from fixed maturity securities designated as trading.
Partially offsetting these increases in “Net income (loss) attributable to Prudential Financial, Inc.” was the following item:
•$1,219 million unfavorable variance, on a pre-tax basis, from realized investment gains and losses for PFI excluding the Divested and Run-off Businesses, other than those that qualifyand excluding the impact of the hedging program associated with certain variable annuities discussed above (see “General Account Investments” for “discontinued operations” accounting treatment under U.S. GAAP.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Operating results: | | | | | | | |
| Interest expense on debt(1) | $ | (227 | ) | | $ | (222 | ) | | $ | (445 | ) | | $ | (439 | ) |
| Investment income(1) | 26 |
| | 64 |
| | 74 |
| | 126 |
|
| Pension and employee benefits | 58 |
| | 36 |
| | 108 |
| | 60 |
|
| Other corporate activities(2) | (398 | ) | | (213 | ) | | (620 | ) | | (494 | ) |
| Adjusted operating income | (541 | ) | | (335 | ) | | (883 | ) | | (747 | ) |
| Realized investment gains (losses), net, and related adjustments | (1,179 | ) | | (157 | ) | | (1,219 | ) | | (207 | ) |
| Charges related to realized investment gains (losses), net | (17 | ) | | (81 | ) | | 4 |
| | (87 | ) |
| Market experience updates(3) | (4 | ) | | 0 |
| | 4 |
| | 0 |
|
| Divested and Run-off Businesses(4) | (602 | ) | | 168 |
| | (580 | ) | | 415 |
|
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | (14 | ) | | (7 | ) | | 8 |
| | (15 | ) |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | (2,357 | ) | | $ | (412 | ) | | $ | (2,666 | ) | | $ | (641 | ) |
__________
| |
(1) | Prior period amounts have been updated to conform to current period presentation. |
| |
(2) | Includes consolidating adjustments. |
| |
(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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. |
| |
(4) | Effective second quarter of 2020, the results of POK 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. |
Three
Nine Month ComparisonComparison. . The loss from Corporate and Other operations, on an adjusted operating income basis, increased $206 million. Net charges from other corporate activities increased $185$4,251 million primarily driven by increases to legal reserves, partially offset by lower costs related to corporate initiatives. Investment income decreased $38 million primarily due to lower income on non-coupon investments and highly liquid assets. Interest expense on debt increased $5 million reflecting higher average debt balances. Results from pension and employee benefits increased $22 million primarily driven by a decrease in employee health benefit costs.“Net income (loss) attributable to Prudential Financial, Inc.” for the first nine months of 2020 compared to the first nine months of 2019 reflected the following notable items:
Six Month Comparison•. The$1,386 million unfavorable variance, on a pre-tax basis, from a loss from Corporate and Other operations, on an adjusted operating income basis, increased $136 million. Net charges from other corporate activities increased $126 million primarily driven by increases to legal reserves, partially offset by lower costs for deferred and long-term compensation plans tied to Company stock and equity market performance, as well as lower costs related to corporate initiatives. Investment income decreased $52 million primarily driven by lower income on non-coupon investments and highly liquid assets. Interest expense on debt increased $6 million reflecting higher average debt balances. Results from pension and employee benefits increased $48 million primarily driven by a decrease in employee health benefit costs.
Divested and Run-off Businesses
Divested and Run-off Businesses Included in Corporate and Other
Incomethe current period from our Divested and Run-off Businesses compared to a gain in the prior year period (see “Results of Operations by Segment—Divested and Run-off Businesses” for additional information);
•$1,083 million unfavorable variance, on a pre-tax basis, from lower adjusted operating income from our business segments (see “Segment Results of Operations” for additional information);
•$1,096 million unfavorable variance, on a pre-tax basis, from realized investment gains and losses for PFI excluding Divested and Run-off Businesses, and excluding the impact of the hedging program associated with certain variable annuities discussed below (see “General Account Investments” for additional information);
•$589 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); and
•$526 million unfavorable variance, on a pre-tax basis, from investment related activities that are primarily within “Other income (loss)” for PFI excluding our Divested and Run-off Businesses. These unfavorable impacts were primarily driven by unrealized gains (losses) from equity securities.
Partially offsetting these decreases in “Net income (loss) attributable to Prudential Financial, Inc.” was the following item:
•$719 million favorable variance from a lower tax expense.
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
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Adjusted operating income before income taxes by segment: | | | | | | | |
| PGIM | $ | 370 | | | $ | 232 | | | $ | 858 | | | $ | 710 | |
| U.S. Businesses: | | | | | | | |
| U.S. Workplace Solutions division: | | | | | | | |
| Retirement | 372 | | | 302 | | | 898 | | | 1,020 | |
| Group Insurance | 22 | | | 90 | | | 71 | | | 224 | |
| Total U.S. Workplace Solutions division | 394 | | | 392 | | | 969 | | | 1,244 | |
| U.S. Individual Solutions division: | | | | | | | |
| Individual Annuities | 408 | | | 459 | | | 1,030 | | | 1,393 | |
| Individual Life | 101 | | | 59 | | | 17 | | | 29 | |
| Total U.S. Individual Solutions division | 509 | | | 518 | | | 1,047 | | | 1,422 | |
| Assurance IQ division(1): | | | | | | | |
| Assurance IQ | (30) | | | 0 | | | (69) | | | 0 | |
| Total Assurance IQ division | (30) | | | 0 | | | (69) | | | 0 | |
| Total U.S. Businesses | 873 | | | 910 | | | 1,947 | | | 2,666 | |
| International Businesses(2) | 775 | | | 721 | | | 2,162 | | | 2,364 | |
| Corporate and Other | (455) | | | (281) | | | (1,338) | | | (1,028) | |
| Total segment adjusted operating income before income taxes | 1,563 | | | 1,582 | | | 3,629 | | | 4,712 | |
| Reconciling items: | | | | | | | |
| Realized investment gains (losses), net, and related adjustments(3) | 223 | | | 331 | | | (2,746) | | | (882) | |
| Charges related to realized investment gains (losses), net(4) | (70) | | | (92) | | | (353) | | | (149) | |
| Market experience updates(5) | (134) | | | (314) | | | (1,016) | | | (515) | |
| Divested and Run-off Businesses(6): | | | | | | | |
| Closed Block division | 8 | | | 45 | | | (15) | | | 5 | |
| Other Divested and Run-off Businesses(2) | (132) | | | 207 | | | (725) | | | 641 | |
| Other adjustments(7) | (12) | | | 0 | | | 65 | | | 0 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(8) | 1 | | | (34) | | | (62) | | | (71) | |
| Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 1,447 | | | $ | 1,725 | | | $ | (1,223) | | | $ | 3,741 | |
__________
(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)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.
(3)Represents “Realized investment gains (losses), net,” and related adjustments. See “—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.
(4)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.
(5)Represents the immediate impacts in current period results from several businesseschanges in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(6)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, statusbut that dodid not qualify for “discontinued operations” accounting treatment under U.S. GAAP. The results of these See “—Divested and Run-off BusinessesBusinesses.”
(7)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.
(8)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.
Segment results for the period presented above reflect the following:
PGIM. Results for both the third quarter of 2020 and the first nine months of 2020 increased in comparison to the prior year periods, primarily reflecting increases in asset management fees and other related revenues, partially offset by higher expenses.
Retirement. Results for the third quarter of 2020 increased in comparison to the prior year period, primarily reflecting higher net investment spread results and higher reserve gains. Results for the first nine months of 2020 decreased in comparison to the prior year period, primarily reflecting an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results increased compared to the prior year period, primarily driven by higher reserve gains, partially offset by lower net investment spread results.
Group Insurance. Results for the third quarter of 2020 decreased in comparison to the prior year period, primarily reflecting lower underwriting results in our group life business, partially offset by higher underwriting results in our group disability business. Results for the first nine months of 2020 decreased in comparison to the prior year period, primarily reflecting lower underwriting results in our group life business and lower net investment spread results.
Individual Annuities. Results for the third 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, partially offset by higher net investment spread results. Results for the first nine months of 2020 decreased in comparison to the prior year period, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results decreased primarily driven by lower fee income, net of distribution expenses and other associated costs.
Individual Life. Results for the third quarter of 2020 increased in comparison to the prior year period, primarily reflecting higher net investment spread results and lower expenses. Results for the first nine months of 2020 decreased in comparison to the prior year period, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results decreased primarily reflecting lower underwriting results, lower net investment spread results, and the absence of 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). These decreases were partially offset by lower expenses.
Assurance IQ. The acquisition of Assurance IQ was completed in October 2019. Results for both the third quarter and the first nine months of 2020 include 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 third quarter of 2020 increased in comparison to the prior year period, inclusive of a favorable net impact from foreign currency exchange rates, primarily reflecting lower expenses and favorable underwriting results including business growth, partially offset by lower earnings from our joint venture investments and lower net investment spread results. Results for the first nine months of 2020 decreased in comparison to the prior year periods, inclusive of an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results decreased driven by lower net investment spread results and lower earnings from our joint venture investments, partially offset by favorable underwriting results including business growth.
Corporate and Other. Results for both the third quarter and the first nine months of 2020 reflected increased losses in comparison to the prior year periods, primarily reflecting higher net charges from other corporate activities, lower investment income and higher interest expense on debt. The results for the third quarter reflected lower income from pension and employee benefit plans, while the results for the first nine months of 2020 reflected higher income from pension and employee benefit plans.
Closed Block Division. Results for both the third quarter and the first nine months of 2020 decreased in comparison to the prior year periods, primarily driven by a decrease in the policyholder dividend obligation as a result of lower net investment activity results.
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, 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 operation in 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.
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| | (in billions) |
| Foreign currency hedging instruments: | | | |
| Hedging USD-equivalent earnings: | | | |
| Forward currency contracts (notional amount outstanding) | $ | 0.4 | | | $ | 0.6 | |
| Hedging USD-equivalent equity: | | | |
| USD-denominated assets held in yen-based entities(1) | 10.4 | | | 13.1 | |
| Dual currency and synthetic dual currency investments(2) | 0.6 | | | 0.6 | |
| Total USD-equivalent equity foreign currency hedging instruments | 11.0 | | | 13.7 | |
| Total foreign currency hedges | $ | 11.4 | | | $ | 14.3 | |
__________
(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 $64.2 billion and $57.8 billion as of September 30, 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.
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 are 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 these segments’ non-USD-denominated earnings are translated at fixed currency exchange rates. Results of our Corporate and Other operations include 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 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 nine months ended September 30, 2020, approximately 5% of the segment’s earnings were yen-based and, as of September 30, 2020, we have hedged 100%, 97% and 61% of expected yen-based earnings for 2020, 2021 and 2022, 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 2020 and 2019 reflect the impact of translating yen-denominated earnings at fixed currency exchange rates of 104 and 105 yen per USD, respectively. We expect our 2021 results to reflect the impact of translating yen-denominated earnings at a fixed currency exchange rate of 103 yen per USD. 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
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Segment impacts of intercompany arrangements: | | | | | | | |
| International Businesses(3) | $ | 15 | | | $ | 6 | | | $ | 46 | | | $ | 32 | |
| PGIM | (3) | | | 1 | | | (1) | | | 4 | |
| Impact of intercompany arrangements(1) | 12 | | | 7 | | | 45 | | | 36 | |
| Corporate and Other: | | | | | | | |
| Impact of intercompany arrangements(1)(3) | (12) | | | (7) | | | (45) | | | (36) | |
| Settlement gains (losses) on forward currency contracts(2)(3) | 15 | | | 14 | | | 57 | | | 43 | |
| Net benefit (detriment) to Corporate and Other | 3 | | | 7 | | | 12 | | | 7 | |
| Net impact on consolidated revenues and adjusted operating income | $ | 15 | | | $ | 14 | | | $ | 57 | | | $ | 43 | |
__________
(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 September 30, 2020 and 2019, the total notional amounts of these forward currency contracts within our Corporate and Other operations were $1.0 billion and $1.6 billion, respectively, of which $0.4 billion and $0.8 billion, respectively, were related to our Japanese insurance operations. Prior period total notional amount of these forward currency contracts has been updated to conform to current period presentation.
(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 and 2019 that were translated at fixed currency exchange rates of 1,090 and 1,110 Korean won per USD, respectively, are excluded from the International Businesses and are included in the Divested and Run-off Businesses included in Corporate and Other. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
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, most notably our Japanese operations, which offer USD- and 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 $2.4 billion and $2.7 billion as of September 30, 2020 and December 31, 2019, respectively, 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 3% of the $2.4 billion balance as of September 30, 2020 will be recognized throughout the remainder of 2020, approximately 13% will be recognized in 2021, and the remaining balance will be recognized from 2022 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. As of September 30, 2020, our domestic variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 3.5% 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 3.9% 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 2020 annual reviews and update of assumptions and other refinements, we reduced 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 yield by 30 basis points and now grade to a rate of 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, 2019.
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. As 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. 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, the Company also expects an impact to how earnings emerge thereafter. 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
Operating Results
The following table sets forth PGIM’s operating results for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Operating results(1): | | | | | | | |
| Revenues | $ | 1,066 | | | $ | 855 | | | $ | 2,801 | | | $ | 2,651 | |
| Expenses | 696 | | | 623 | | | 1,943 | | | 1,941 | |
| Adjusted operating income | 370 | | | 232 | | | 858 | | | 710 | |
| Realized investment gains (losses), net, and related adjustments | (2) | | | 0 | | | 1 | | | 1 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 15 | | | (7) | | | (27) | | | 28 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 383 | | | $ | 225 | | | $ | 832 | | | $ | 739 | |
__________
(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
Three Month Comparison. Adjusted operating income increased $138 million, primarily reflecting an increase in asset management fees, net of related expenses, due to higher average assets under management as a result of market appreciation and fixed income inflows. The increase also reflected an increase in other related revenues, net of related expenses, primarily due to higher co- and seed investment results driven by strong underlying investment performance, higher commercial mortgage origination revenue driven by higher loan production and profitability, and higher net performance-based incentive fees. These increases were partially offset by a decrease in service, distribution and other revenues primarily reflecting the absence of fees in the current year period related to the Wells Fargo agreement (see the “Revenues by type” table in “—Revenues and Expenses,” below).
Nine Month Comparison. Adjusted operating income increased $148 million, primarily reflecting an increase in asset management fees, net of related expenses, due to higher average assets under management as a result of market appreciation and fixed income inflows. The increase also reflected an increase in other related revenues, net of related expenses, primarily due to higher co- and seed investment results driven by strong underlying investment performance and higher commercial mortgage origination revenue driven by higher loan production and profitability. These increases were partially offset by a decrease in service, distribution and other revenues primarily reflecting the absence of fees in the current year period related to the Wells Fargo agreement.
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
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Revenues by type: | | | | | | | |
| Asset management fees by source: | | | | | | | |
| Institutional customers | $ | 345 | | | $ | 323 | | | $ | 998 | | | $ | 954 | |
| Retail customers(1) | 262 | | | 223 | | | 718 | | | 652 | |
| General account | 143 | | | 130 | | | 417 | | | 385 | |
| Total asset management fees | 750 | | | 676 | | | 2,133 | | | 1,991 | |
| Other related revenues by source: | | | | | | | |
| Incentive fees | 43 | | | 10 | | | 78 | | | 108 | |
| Transaction fees | 5 | | | 5 | | | 13 | | | 17 | |
| Co- and seed investments | 50 | | | 3 | | | 87 | | | 57 | |
| Commercial mortgage(2) | 67 | | | 32 | | | 126 | | | 83 | |
| Total other related revenues | 165 | | | 50 | | | 304 | | | 265 | |
| Service, distribution and other revenues(3) | 151 | | | 129 | | | 364 | | | 395 | |
| Total revenues | $ | 1,066 | | | $ | 855 | | | $ | 2,801 | | | $ | 2,651 | |
__________
(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)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 $15 million for the three months ended September 30, 2019 and $45 million for the nine months ended September 30, 2019.
Three Month Comparison. Revenues increased $211 million. Asset management fees increased primarily reflecting higher average assets under management as a result of market appreciation and fixed income inflows. Other related revenues increased primarily reflecting higher co- and seed investment results driven by strong underlying investment performance, higher commercial mortgage origination revenue driven by higher loan production and profitability, and higher performance-based incentive fees. Service, distribution and other revenues increased primarily reflecting higher revenues from certain consolidated funds (which were fully offset by higher expenses related to noncontrolling interests in these funds), partially offset by the absence of fees in the current year period related to the Wells Fargo agreement.
Expenses increased $73 million. Expenses for service, distribution and other revenues increased primarily driven by higher revenues associated with certain consolidated funds as discussed above. Also contributing to the increase were higher variable expenses associated with an increase in performance-based incentive fee revenues as well as higher overall segment earnings, and higher expenses due to certain long-term employee compensation plans tied to performance factors. Partially offsetting these increases were lower expenses driven by a decrease in travel and entertainment due to COVID-19.
Nine Month Comparison. Revenues increased $150 million. Asset management fees increased primarily reflecting higher average assets under management as a result of market appreciation and fixed income inflows. Other related revenues increased primarily reflecting higher co- and seed investment results driven by strong underlying investment performance and higher commercial mortgage origination revenue driven by higher loan production and profitability, partially offset by lower performance-based incentive fees. Service, distribution and other revenues decreased primarily reflecting the absence of fees in the current year period related to the Wells Fargo agreement.
Expenses increased $2 million. Higher variable expenses reflecting higher overall segment earnings, which were largely offset by lower expenses associated with lower performance-based incentive fee revenues, and a decrease in travel and entertainment due to COVID-19.
Assets Under Management
The following table sets forth assets under management by asset class and source as of the dates indicated.
| | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 | | September 30, 2019 |
| (in billions) |
| Assets Under Management(1) (at fair value): | | | | | |
| Institutional customers: | | | | | |
| Public equity | $ | 53.5 | | | $ | 57.1 | | | $ | 52.9 | |
| Public fixed income | 458.4 | | | 418.6 | | | 410.5 | |
| Real estate | 48.8 | | | 49.1 | | | 48.4 | |
| Private credit and other alternatives | 25.0 | | | 23.5 | | | 23.8 | |
| Multi-asset | 5.3 | | | 4.5 | | | 4.2 | |
| Institutional customers(2) | 591.0 | | | 552.8 | | | 539.8 | |
| Retail customers: | | | | | |
| Public equity | 121.3 | | | 104.2 | | | 100.0 | |
| Public fixed income | 163.5 | | | 138.7 | | | 130.0 | |
| Real estate | 1.8 | | | 2.0 | | | 1.9 | |
| Private credit and other alternatives | 0.6 | | | 0.5 | | | 0.5 | |
| Multi-asset | 55.8 | | | 60.2 | | | 58.9 | |
| Retail customers(3) | 343.0 | | | 305.6 | | | 291.3 | |
| General account: | | | | | |
| Public equity | 4.2 | | | 4.4 | | | 4.2 | |
| Public fixed income | 359.1 | | | 328.6 | | | 333.2 | |
| Real estate | 68.1 | | | 66.0 | | | 64.7 | |
| Private credit and other alternatives | 77.7 | | | 73.5 | | | 72.5 | |
| Multi-asset | 0.0 | | | 0.1 | | | 0.1 | |
| General account | 509.1 | | | 472.6 | | | 474.7 | |
| Total PGIM assets under management(4) | $ | 1,443.1 | | | $ | 1,331.0 | | | $ | 1,305.8 | |
| | | | | |
| Assets under management within other reporting segments(4)(5) | $ | 205.0 | | | $ | 219.9 | | | $ | 213.0 | |
| Total PFI assets under management | $ | 1,648.1 | | | $ | 1,550.9 | | | $ | 1,518.8 | |
__________
(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.
(2)Consists of third-party institutional assets and group insurance contracts.
(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.
(4)Effective first quarter of 2020, certain assets have been reclassified from the U.S. Individual Solutions division to PGIM.
(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.
PGIM’s assets under managementincreased $137 billion and $112 billion in comparison to the prior year quarter and prior year end, respectively, reflecting market appreciation and public fixed income inflows, partially offset by public equity outflows.
The following table sets forth the component changes in PGIM’s assets under management by asset source for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Twelve
Months
Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 |
| (in billions) |
| Institutional Customers: | | | | | | | | | |
| Beginning assets under management | $ | 571.2 | | | $ | 534.9 | | | $ | 552.8 | | | $ | 493.5 | | | $ | 539.8 | |
| Net additions (withdrawals), excluding money market activity: | | | | | | | | | |
| Third-party | 2.0 | | | (2.2) | | | 0.5 | | | (7.2) | | | 1.2 | |
| Third-party via affiliates(1) | 0.1 | | | (0.4) | | | (1.0) | | | 0.1 | | | (0.9) | |
| Total | 2.1 | | | (2.6) | | | (0.5) | | | (7.1) | | | 0.3 | |
| Market appreciation (depreciation)(2) | 17.0 | | | 10.0 | | | 29.8 | | | 50.9 | | | 41.2 | |
| Other increases (decreases)(3) | 0.7 | | | (2.5) | | | 8.9 | | | 2.5 | | | 9.7 | |
| Ending assets under management | 591.0 | | | 539.8 | | | 591.0 | | | 539.8 | | | 591.0 | |
| Retail Customers(4): | | | | | | | | | |
| Beginning assets under management | 320.2 | | | 287.9 | | | 305.6 | | | 260.2 | | | 291.3 | |
| Net additions (withdrawals), excluding money market activity: | | | | | | | | | |
| Third-party | 5.3 | | | 3.0 | | | 13.4 | | | 4.5 | | | 14.6 | |
| Third-party via affiliates(1) | (3.7) | | | (1.4) | | | (6.8) | | | (8.2) | | | (8.8) | |
| Total | 1.6 | | | 1.6 | | | 6.6 | | | (3.7) | | | 5.8 | |
| Market appreciation (depreciation)(2) | 21.0 | | | 2.0 | | | 30.4 | | | 34.9 | | | 44.9 | |
| Other increases (decreases)(3) | 0.2 | | | (0.2) | | | 0.4 | | | (0.1) | | | 1.0 | |
| Ending assets under management | 343.0 | | | 291.3 | | | 343.0 | | | 291.3 | | | 343.0 | |
| General Account: | | | | | | | | | |
| Beginning assets under management | 503.1 | | | 459.8 | | | 472.6 | | | 427.8 | | | 474.7 | |
| Net additions (withdrawals), excluding money market activity: | | | | | | | | | |
| Third-party | 0.0 | | | 0.0 | | | 0.0 | | | 0.0 | | | 0.0 | |
| Affiliated | 2.1 | | | (0.4) | | | 2.9 | | | 1.2 | | | 7.8 | |
| Total | 2.1 | | | (0.4) | | | 2.9 | | | 1.2 | | | 7.8 | |
| Market appreciation (depreciation)(2) | 5.0 | | | 10.6 | | | 22.4 | | | 39.0 | | | 20.3 | |
| Other increases (decreases)(3) | (1.1) | | | 4.7 | | | 11.2 | | | 6.7 | | | 6.3 | |
| Ending assets under management | 509.1 | | | 474.7 | | | 509.1 | | | 474.7 | | | 509.1 | |
| Total assets under management(4) | $ | 1,443.1 | | | $ | 1,305.8 | | | $ | 1,443.1 | | | $ | 1,305.8 | | | $ | 1,443.1 | |
__________
(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 gain of $3.4 billion and a loss of $0.5 billion for the three months ended September 30, 2020 and 2019, respectively, and a gain of $2.7 billion and $0.2 billion for the nine months ended September 30, 2020 and 2019, respectively; and a gain of $3.0 billion for the twelve months ended September 30, 2020.
(4)Prior period amounts have been updated to conform to current period presentation.
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.
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (in millions) |
| Co-Investments(1): | | | |
| Public fixed income | $ | 467 | | | $ | 462 | |
| Real estate | 154 | | | 228 | |
| Private credit and other alternatives | 22 | | | 19 | |
| Seed Investments(1): | | | |
| Public equity | 717 | | | 671 | |
| Public fixed income | 349 | | | 325 | |
| Real estate | 32 | | | 34 | |
| Private credit and other alternatives | 74 | | | 59 | |
| Multi-asset | 65 | | | 74 | |
| Total | $ | 1,880 | | | $ | 1,872 | |
__________
(1)Prior period amounts have been updated to conform to current period presentation. For more information, see the “Assets Under Management” table above.
The increase of $8 million in co- and seed investments was primarily driven by strong equity and fixed income seed investment performance, partially offset by a significant liquidation of a real estate co-investment.
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
September 30, | | Nine Months Ended September 30, 2020 |
| | 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Adjusted operating income before income taxes: | | | | | | | |
| U.S. Businesses: | | | | | | | |
| U.S. Workplace Solutions division: | | | | | | | |
| Retirement | $ | 372 | | | $ | 302 | | | $ | 898 | | | $ | 1,020 | |
| Group Insurance | 22 | | | 90 | | | 71 | | | 224 | |
| Total U.S. Workplace Solutions division | 394 | | | 392 | | | 969 | | | 1,244 | |
| U.S. Individual Solutions division: | | | | | | | |
| Individual Annuities | 408 | | | 459 | | | 1,030 | | | 1,393 | |
| Individual Life | 101 | | | 59 | | | 17 | | | 29 | |
| Total U.S. Individual Solutions division | 509 | | | 518 | | | 1,047 | | | 1,422 | |
| Assurance IQ division(1): | | | | | | | |
| Assurance IQ | (30) | | | 0 | | | (69) | | | 0 | |
| Total Assurance IQ division | (30) | | | 0 | | | (69) | | | 0 | |
| Total U.S. Businesses | 873 | | | 910 | | | 1,947 | | | 2,666 | |
| Reconciling Items: | | | | | | | |
| Realized investment gains (losses), net, and related adjustments(2) | 571 | | | (40) | | | (1,857) | | | (1,811) | |
| Charges related to realized investment gains (losses), net | (63) | | | (123) | | | (328) | | | (90) | |
| Market experience updates(3) | (130) | | | (306) | | | (974) | | | (476) | |
| Other adjustments(4) | (12) | | | 0 | | | 65 | | | 0 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 1 | | | 0 | | | 2 | | | 1 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 1,240 | | | $ | 441 | | | $ | (1,145) | | | $ | 290 | |
________
(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. A summaryincome beginning with the second quarter of 2019. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(4)Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the resultsconsideration 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 DivestedUnaudited Interim Consolidated Financial Statements for additional information.
Three Month Comparison. Adjusted operating income for our U.S. Businesses decreased by $37 million primarily due to:
•Lower fee income, net of distribution expenses and Run-off Businesses reflectedother associated costs, in our CorporateIndividual Annuities business; and Other operations is as follows
•Lower underwriting results primarily driven by COVID-19 related net mortality experience.
•Partially offsetting these decreases were higher net investment spread results driven by higher income on non-coupon investments.
Nine Month Comparison. Adjusted operating income for our U.S. Businesses decreased by $719 million primarily due to:
•Lower fee income, net of distribution expenses and other associated costs, in our Individual Annuities business;
•Lower net investment spread results driven by lower income on non-coupon investments;
•An unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements; and
•Lower underwriting results primarily driven by COVID-19 related net mortality experience.
•Partially offsetting these decreases were lower expenses, including those associated with cost savings initiatives.
U.S. Businesses—U.S. Workplace Solutions Division
Retirement
Operating Results
The following table sets forth Retirement’s operating results for the periods indicated:indicated.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Long-Term Care | $ | 107 |
| | $ | 145 |
| | $ | 188 |
| | $ | 309 |
|
| Other(1) | (709 | ) | | 23 |
| | (768 | ) | | 106 |
|
| Total Divested and Run-off Businesses income (loss) excluded from adjusted operating income | $ | (602 | ) | | $ | 168 |
| | $ | (580 | ) | | $ | 415 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Operating results: | | | | | | | |
| Revenues | $ | 2,690 | | | $ | 2,261 | | | $ | 8,119 | | | $ | 8,486 | |
| Benefits and expenses | 2,318 | | | 1,959 | | | 7,221 | | | 7,466 | |
| Adjusted operating income | 372 | | | 302 | | | 898 | | | 1,020 | |
| Realized investment gains (losses), net, and related adjustments(1) | 98 | | | 200 | | | 93 | | | 368 | |
| Charges related to realized investment gains (losses), net | 6 | | | (10) | | | (5) | | | 1 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 1 | | | 0 | | | 2 | | | 1 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 477 | | | $ | 492 | | | $ | 988 | | | $ | 1,390 | |
__________
| |
(1) | Effective second quarter of 2020, the results of POK 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(1)Prior period amounts have been updated to conform to current period presentation.
Adjusted Operating Income
Three Month Comparison. Results for the second quarterAdjusted operating income increased $70 million, primarily driven by higher net investment spread results and the first six months of 2020 decreased compared to the prior year periods, includinghigher reserve gains. The increase in net investment spread results primarily reflected higher income on non-coupon investments and the impact of lower crediting rates, partially offset by lower reinvestment yields. The higher contribution from reserve experience was primarily driven by COVID-19 related mortality gains.
Nine Month Comparison. Adjusted operating income decreased $122 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for 2020 included a net charge of
$22 million from these updates primarily driven by an increase in expected benefit payments, while results for 2019 included a net benefit of $154 million from these updates, primarily driven by a reduction in expected benefit payments. Excluding this item, adjusted operating income increased $54 million, primarily driven by higher reserve gains, partially offset by lower net investment spread results. The higher contribution from reserve experience was primarily driven by COVID-19 related mortality gains. The decrease in net investment spread results primarily reflected lower income on non-coupon investments and lower reinvestment yields, partially offset by the impact of lower crediting rates.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues increased $429 million. This increase primarily reflected higher pension risk transfer premiums with corresponding offsets in policyholders’ benefits, as discussed below. This increase also reflected higher net investment income, primarily driven by higher income on non-coupon investments, partially offset by lower reinvestment yields.
Benefits and expenses increased $359 million. Policyholders’ benefits, including the change in policy reserves, increased primarily related to the increase in pension risk transfer premiums discussed above, partially offset by more favorable reserve experience primarily driven by COVID-19 related mortality gains.
Nine Month Comparison. Revenues decreased $367 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $373 million. This decrease primarily reflected lower pension risk transfer premiums with corresponding offsets in policyholders’ benefits, as discussed below. This decrease also reflected lower net investment income, primarily reflecting lower income on non-coupon investments and lower reinvestment yields.
Benefits and expenses decreased $245 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $427 million. Policyholders’ benefits, including the change in policy reserves, decreased primarily related to the decrease in pension risk transfer premiums discussed above, as well as more favorable reserve experience primarily driven by COVID-19 related mortality 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, since 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
September 30, | | Nine Months Ended
September 30, | | Twelve
Months
Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 |
| (in millions) |
| Full Service: | | | | | | | | | |
| Beginning total account value | $ | 266,433 | | | $ | 262,133 | | | $ | 272,448 | | | $ | 231,669 | | | $ | 259,946 | |
| Deposits and sales | 14,705 | | | 7,458 | | | 29,112 | | | 28,072 | | | 37,434 | |
| Withdrawals and benefits | (9,465) | | | (10,758) | | | (25,173) | | | (27,122) | | | (33,757) | |
| Change in market value, interest credited and interest income and other activity | 13,337 | | | 1,113 | | | 8,623 | | | 27,327 | | | 21,387 | |
| Ending total account value | $ | 285,010 | | | $ | 259,946 | | | $ | 285,010 | | | $ | 259,946 | | | $ | 285,010 | |
| Institutional Investment Products: | | | | | | | | | |
| Beginning total account value | $ | 231,142 | | | $ | 215,978 | | | $ | 227,596 | | | $ | 200,759 | | | $ | 217,580 | |
| Additions(1) | 2,780 | | | 5,235 | | | 14,218 | | | 22,526 | | | 22,793 | |
| Withdrawals and benefits | (4,189) | | | (4,626) | | | (13,226) | | | (12,436) | | | (17,533) | |
| Change in market value, interest credited and interest income | 1,944 | | | 2,406 | | | 7,379 | | | 7,876 | | | 8,592 | |
| Other(2) | 3,019 | | | (1,413) | | | (1,271) | | | (1,145) | | | 3,264 | |
| Ending total account value | $ | 234,696 | | | $ | 217,580 | | | $ | 234,696 | | | $ | 217,580 | | | $ | 234,696 | |
__________
(1)Additions primarily include: group annuities calculated based on premiums received; funding agreements issued; unfunded 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 September 30, 2020 and 2019, “Other” activity also includes $869 million in receipts offset by $831 million in payments and $1,418 million in receipts offset by $1,024 million in payments, respectively, and for the nine months ended September 30, 2020 and 2019, includes $6,235 million in receipts offset by $6,107 million in payments and $2,822 million in receipts offset by $2,218 million in payments, respectively, related to funding agreements backed by commercial paper which typically have maturities of less than 90 days.
The increase in Full Service account values for the three months, nine months and twelve months ended September 30, 2020 primarily reflected favorable changes in the market value of customer funds and net deposits and sales.
Institutional Investment Products account values for the three months ended September 30, 2020 reflected an increase in other activity, primarily driven by the positive impacts of foreign exchange rate changes, and a favorable change in the market value of account assets, partially offset by net withdrawals driven by pension risk transfer activity. Account values for the nine months ended September 30, 2020 reflected a favorable change in the market value of account assets and net additions driven by collateralized funding agreements and investment-only stable value accounts, which were partially offset by pension risk transfer activity. Account values for the twelve months ended September 30, 2020 reflected a favorable change in the market value of account values, net additions driven by collateralized funding agreements, pension risk transfer activity and investment-only stable value accounts, and an increase in other activity primarily driven by the positive impacts of foreign exchange rate changes.
Group Insurance
Operating Results
The following table sets forth Group Insurance’s operating results and benefits and administrative operating expense ratios for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| ($ in millions) |
| Operating results: | | | | | | | |
| Revenues | $ | 1,457 | | | $ | 1,438 | | | $ | 4,352 | | | $ | 4,340 | |
| Benefits and expenses | 1,435 | | | 1,348 | | | 4,281 | | | 4,116 | |
| Adjusted operating income | 22 | | | 90 | | | 71 | | | 224 | |
| Realized investment gains (losses), net, and related adjustments | 4 | | | 0 | | | 75 | | | 9 | |
| | | | | | | |
| | | | | | | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 26 | | | $ | 90 | | | $ | 146 | | | $ | 233 | |
| Benefits ratio(1)(4): | | | | | | | |
| Group life(2) | 93.9 | % | | 84.7 | % | | 91.8 | % | | 88.0 | % |
| Group disability(2) | 73.5 | % | | 79.4 | % | | 74.5 | % | | 73.1 | % |
| Total Group Insurance(2) | 89.4 | % | | 83.5 | % | | 88.0 | % | | 84.7 | % |
| Administrative operating expense ratio(3)(4): | | | | | | | |
| Group life | 12.2 | % | | 13.1 | % | | 12.1 | % | | 12.3 | % |
| Group disability | 25.2 | % | | 22.0 | % | | 25.4 | % | | 24.3 | % |
| Total Group Insurance | 15.1 | % | | 15.2 | % | | 15.0 | % | | 14.9 | % |
__________
(1)Ratio of policyholder benefits to earned premiums plus policy charges and fee income.
(2)Benefit ratios for the nine months ended September 30, 2020 and 2019 reflect the impact of our annual reviews and update of assumptions and other refinements. Excluding these impacts, the group life, group disability and total Group Insurance benefit ratios were 91.9%, 75.0% and 88.2% for the nine months ended September 30, 2020, respectively, and 87.4%, 76.2% and 85.0% for the nine months ended September 30, 2019, respectively.
(3)Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income.
(4)The benefit and administrative ratios are measures used to evaluate profitability and efficiency.
Adjusted Operating Income
Three Month Comparison. Adjusted operating income decreased $68 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts, partially offset by more favorable underwriting results in our group disability business driven by a favorable impact from claim experience on long-term disability products.
Nine Month Comparison. Adjusted operating income decreased $153 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for both 2020 and 2019 included a net benefit from this update of $11 million and $9 million, respectively. Excluding this item, adjusted operating income decreased $155 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts. The decrease also reflected lower net investment spread results driven by lower income on non-coupon investments.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues increased $19 million. The increase primarily reflected higher premiums and policy charges and fee income driven by growth in our group life business, partially offset by lower net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below.
Benefits and expenses increased $87 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, including increases in our group life business mostly due to COVID-19 impacts, partially offset by decreases in our group disability business driven by a favorable impact from claim experience on long-term disability products. The increase was also partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.
Nine Month Comparison. Revenues increased $12 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $19 million. The decrease primarily reflected lower
net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below. Partially offsetting the decrease were higher premiums and policy charges and fee income driven by growth in our group life business.
Benefits and expenses increased $165 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $136 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, including increases in our group life business mostly due to COVID-19 impacts. The increase was partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.
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
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Annualized new business premiums(1): | | | | | | | |
| Group life | $ | 46 | | | $ | 42 | | | $ | 227 | | | $ | 233 | |
| Group disability | 17 | | | 18 | | | 143 | | | 153 | |
| Total | $ | 63 | | | $ | 60 | | | $ | 370 | | | $ | 386 | |
__________
(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 September 30, 2020 increased $3 million compared to the prior year period, driven by higher sales in our group life business. Total annualized new business premiums for the nine months ended September 30, 2020 decreased $16 million compared to the prior year period, driven by lower sales in our group life and group disability businesses. Sales levels reflect pricing competitiveness and reduced levels of client case movement within the large market.
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
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Operating results: | | | | | | | |
| Revenues | $ | 1,148 | | | $ | 1,251 | | | $ | 3,249 | | | $ | 3,774 | |
| Benefits and expenses | 740 | | | 792 | | | 2,219 | | | 2,381 | |
| Adjusted operating income | 408 | | | 459 | | | 1,030 | | | 1,393 | |
| Realized investment gains (losses), net, and related adjustments | 518 | | | (408) | | | (2,525) | | | (2,633) | |
| Charges related to realized investment gains (losses), net | (166) | | | (84) | | | (67) | | | 106 | |
| Market experience updates(1) | (58) | | | (120) | | | (686) | | | (130) | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 702 | | | $ | (153) | | | $ | (2,248) | | | $ | (1,264) | |
________
(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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
Adjusted Operating Income
Three Month Comparison. Adjusted operating income decreased $51 million primarily driven by lower fee income, net of distribution expenses and other associated costs, due to unfavorable impacts from our living benefit guarantees, certain products reaching contractual milestones for fee tier reduction, and lower average separate account values. This decrease was partially offset by higher net investment spread results primarily reflecting a higher level of invested assets net of lower reinvestment yields.
Nine Month Comparison. Adjusted operating income decreased $363 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for 2020 included a $33$136 million net charge from these updates while resultsprimarily driven by unfavorable impacts related to a decrease in long-term interest rate assumptions. Results for the second quarter of 2019 included a $9$12 million net charge from these updates. Excluding this item, resultsadjusted operating income decreased $239 million primarily driven by lower fee income, net of distribution expenses and other associated costs, due to unfavorable impacts from our living benefit guarantees, certain products reaching contractual milestones for fee tier reduction, and lower average account values.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues decreased $103 million primarily driven by lower policy charges and fee income reflecting unfavorable impacts from our living benefit guarantees resulting from declining interest rates, certain products reaching contractual milestones for fee tier reduction, and lower average separate account values resulting from net outflows which were partially offset by market appreciation. Also contributing to the decrease were lower premiums resulting from a decrease in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below. These decreases were partially offset by higher asset management and services fees and other income related to lower capital hedge costs.
Benefits and expenses decreased $52 million primarily driven by lower interest expense on collateral amounts related to investment activities, and lower policyholders’ benefits, including changes in reserves, due to lower reserve provisions resulting from a decrease in single premium immediate annuity sales, with offsets in premiums, as discussed above.
Nine Month Comparison. Revenues decreased $525 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $393 million. The decrease was primarily driven by lower policy charges and fee income reflecting unfavorable impacts from our living benefit guarantees resulting from declining interest rates, certain products reaching contractual milestones for fee tier reductions, and lower average account values resulting from net outflows which were partially offset by market appreciation. Also contributing to the decrease were lower premiums resulting from a decrease in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below. These decreases were partially offset by higher asset management and services fees and other income as a result of lower capital hedge costs.
Benefits and expenses decreased $162 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $154 million primarily driven by lower policyholders’ benefits, including changes in reserves, due to lower reserve provisions 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 second quarterperiods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Twelve
Months
Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 |
| (in millions) |
| Total Individual Annuities(1): | | | | | | | | | |
| Beginning total account value | $ | 159,276 | | | $ | 165,313 | | | $ | 169,681 | | | $ | 151,080 | | | $ | 164,698 | |
| Sales | 1,562 | | | 2,657 | | | 4,835 | | | 7,639 | | | 6,916 | |
| Full surrenders and death benefits | (1,811) | | | (2,568) | | | (5,740) | | | (6,905) | | | (8,209) | |
| Sales, net of full surrenders and death benefits | (249) | | | 89 | | | (905) | | | 734 | | | (1,293) | |
| Partial withdrawals and other benefit payments | (1,205) | | | (1,229) | | | (3,750) | | | (3,694) | | | (5,219) | |
| Net flows | (1,454) | | | (1,140) | | | (4,655) | | | (2,960) | | | (6,512) | |
| Change in market value, interest credited and other activity | 7,270 | | | 1,448 | | | 1,806 | | | 19,310 | | | 9,569 | |
| Policy charges | (894) | | | (923) | | | (2,634) | | | (2,732) | | | (3,557) | |
| Ending total account value | $ | 164,198 | | | $ | 164,698 | | | $ | 164,198 | | | $ | 164,698 | | | $ | 164,198 | |
__________
(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 $158.6 billion and $160.1 billion as of September 30, 2020 and 2019, respectively. Fixed annuity account values were $5.6 billion and $4.6 billion as of September 30, 2020 and 2019, respectively.
The decrease in sales, net of full surrenders and death benefits, for both the first sixthree and nine months ofended September 30, 2020 decreased comparedin comparison to the prior year periods. periods, reflects lower gross sales driven by benefit rate reductions and pricing actions in response to capital market pressures, and lower full surrenders driven by general uncertainty around COVID-19 as well as recent market volatility.
The slight decrease in account values for the twelve months ended September 30, 2020 was driven by net outflows and policy charges on contractholder accounts, largely offset by market value appreciation.
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 exposures of our fixed annuity products relate 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, including 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 contract that help to provide protection for premature withdrawals. In addition, a portion of our fixed products has a market value adjustment provision that provides protection of lapse in the case of rising interest rates. We also manage these risk exposures through external reinsurance for certain of our fixed annuity products.
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) Asset Liability Management Strategy, and iii) Capital Hedge Program as discussed below. We also manage these risk exposures through external reinsurance for certain of our variable annuity products.
i.Product Design Features:
A portion of the variable annuity contracts that we offer 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 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 claims 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, 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. 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 derivatives, including, but not limited to: equity and treasury futures; total return 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.
Under our ALM strategy, 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”) (in order to maximize protection irrespective of the possibility of our own 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:
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| (in millions) |
| U.S. GAAP liability, including NPR, net of reinsurance recoverables(1) | $ | 22,881 | | | $ | 12,612 | |
| NPR adjustment, net of reinsurance recoverables(1) | 5,941 | | | 3,522 | |
| Subtotal | 28,822 | | | 16,134 | |
| Adjustments including risk margins and valuation methodology differences | (7,406) | | | (4,385) | |
| Economic liability managed through the ALM strategy | $ | 21,416 | | | $ | 11,749 | |
________
(1)Prior period amounts have been updated to conform to current period presentation.
As of September 30, 2020, the fair value of our fixed income instruments and derivative assets exceed the economic liability within the entities in which the risks reside.
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 have 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, and the related amortization of DAC and other costs.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Results excluded from adjusted operating income(2) | (in millions)(1) |
| Change in value of U.S. GAAP liability, pre-NPR(3) | $ | 3,852 | | | $ | (4,451) | | | $ | (11,219) | | | $ | (6,716) | |
| Change in the NPR adjustment | (597) | | | 1,197 | | | 2,420 | | | 324 | |
| Change in fair value of hedge assets, excluding capital hedges(4) | (2,391) | | | 2,756 | | | 6,214 | | | 4,021 | |
| Change in fair value of capital hedges(5) | (360) | | | (15) | | | (113) | | | (647) | |
| Other | 14 | | | 105 | | | 173 | | | 385 | |
| Realized investment gains (losses), net, and related adjustments | 518 | | | (408) | | | (2,525) | | | (2,633) | |
| Market experience updates(6) | (58) | | | (120) | | | (686) | | | (130) | |
| Charges related to realized investment gains (losses), net | (166) | | | (84) | | | (67) | | | 106 | |
| Total results excluded from adjusted operating income(7) | $ | 294 | | | $ | (612) | | | $ | (3,278) | | | $ | (2,657) | |
__________
(1)Positive amount represents income; negative amount represents a loss.
(2)Includes the impact of annual reviews and update of assumptions and other refinements.
(3)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.
(4)Represents the change in fair value of the derivatives utilized to hedge potential claims associated with our variable annuity living benefit guarantees.
(5)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.
(6)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.
(7)Excludes amounts from the changes in fair value of fixed income instruments recorded in OCI (versus net income): a loss of $33 million and gain of $587 million for the three months ended September 30, 2020 and 2019, respectively; and a gain of $1,668 million and $1,237 million for the nine months ended September 30, 2020 and 2019, respectively.
For the three months ended September 30, 2020, the gain of $294 million primarily reflected favorable living benefit results. These results were driven by a favorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by tightening of credit spreads and favorable equity market performance, and gains from duration management swaps associated with the living benefit results. These gains were partially offset by an unfavorable NPR adjustment, losses associated with our capital hedge program, and unfavorable hedge breakage driven by credit spreads tightening. These net gains were partially offset by a charge related to the amortization of DAC and other costs.
For the nine months ended September 30, 2020, the loss of $3,278 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates, widening of credit spreads, and unfavorable equity market performance. Also contributing to the results were unfavorable hedge breakage driven by equity market volatility partially offset by credit spreads widening, and losses from duration management swaps associated with the living benefit results. Partially offsetting these losses was a favorable NPR adjustment. A charge related to the amortization of DAC and other costs also contributed to the results.
For the three months ended September 30, 2019, the loss of $612 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates and widening of credit spreads, and losses from duration
management swaps associated with the living benefit results. Partially offsetting these losses was a favorable NPR adjustment. A charge related to the amortization of DAC and other costs also contributed to the results.
For the nine months ended September 30, 2019, the loss of $2,657 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates partially offset by favorable equity market performance, losses from duration management swaps associated with the living benefit results, and losses associated with our capital hedge program. Partial offsets to these losses were a favorable NPR adjustment. These net losses were partially offset by a benefit related to the amortization of DAC and other costs.
Product Specific Risks and Risk Mitigants
As noted above, the risks associated with our products are mitigated through product design features, including automatic rebalancing, as well as through our ALM strategy and external reinsurance. The following table sets forth the risk management profile of our living benefit guarantees and guaranteed minimum death benefit (“GMDB”) features as of the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | | September 30, 2019 |
| | Account
Value | | % of
Total | | Account
Value | | % of
Total | | Account
Value | | % of
Total |
| | ($ in millions) |
| Living benefit/GMDB features(1): | | | | | | | | | | | | |
| Both ALM strategy and automatic rebalancing(2)(3) | | $ | 104,815 | | | 66 | % | | $ | 111,535 | | | 68 | % | | $ | 108,457 | | | 68 | % |
| ALM strategy only(3) | | 6,955 | | | 4 | % | | 7,703 | | | 5 | % | | 7,586 | | | 5 | % |
| Automatic rebalancing only | | 634 | | | 1 | % | | 732 | | | 1 | % | | 747 | | | 1 | % |
| External reinsurance(4) | | 2,944 | | | 2 | % | | 3,150 | | | 2 | % | | 3,055 | | | 2 | % |
| PDI | | 17,888 | | | 11 | % | | 16,296 | | | 9 | % | | 15,624 | | | 9 | % |
| Other products | | 2,306 | | | 1 | % | | 2,457 | | | 1 | % | | 2,396 | | | 1 | % |
| Total living benefit/GMDB features | | $ | 135,542 | | | | | $ | 141,873 | | | | | $ | 137,865 | | | |
| GMDB features and other(5) | | 23,104 | | | 15 | % | | 23,055 | | | 14 | % | | 22,265 | | | 14 | % |
| Total variable annuity account value | | $ | 158,646 | | | | | $ | 164,928 | | | | | $ | 160,130 | | | |
__________
(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.
Individual Life
Operating Results
The following table sets forth Individual Life’s operating results for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Operating results: | | | | | | | |
| Revenues | $ | 1,609 | | | $ | 1,529 | | | $ | 4,702 | | | $ | 4,519 | |
| Benefits and expenses | 1,508 | | | 1,470 | | | 4,685 | | | 4,490 | |
| Adjusted operating income | 101 | | | 59 | | | 17 | | | 29 | |
| Realized investment gains (losses), net, and related adjustments | (49) | | | 168 | | | 500 | | | 445 | |
| Charges related to realized investment gains (losses), net | 97 | | | (29) | | | (256) | | | (197) | |
| Market experience updates(1) | (72) | | | (186) | | | (288) | | | (346) | |
| | | | | | | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 77 | | | $ | 12 | | | $ | (27) | | | $ | (69) | |
__________
(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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
Adjusted Operating Income
Three Month Comparison. Adjusted operating income increased $42 million, primarily reflecting higher net investment spread results, driven by higher income on non-coupon investments, and lower expenses from cost savings initiatives.
Nine Month Comparison. Adjusted operating income decreased $12 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for 2020 included a $92 million net charge from these updates, mainly driven by unfavorable impacts related to a decrease in long-term interest rate assumptions. Results for 2019 included a $208 million net charge from these updates, mainly driven by unfavorable impacts related to mortality assumptions. Excluding this item, adjusted operating income decreased $128 million, primarily reflecting lower underwriting results, driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims, and the absence of a favorable impact from changes in market conditions on estimates of profitability in the market valueprior year period, which beginning with the second quarter of derivatives used for duration management2019 is excluded from adjusted operating income. Also contributing to the decrease were lower net investment spread results driven by lower income on non-coupon investments and lower investment yields, partially offset by business growth. These decreases were partially offset by lower expenses from cost savings initiatives.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues increased $80 million. This increase was primarily driven by higher policy charges and fee income driven by business growth, and higher net investment income due to higher average invested assets resulting from business growth and higher income on non-coupon investments, partially offset by lower investment yields.
Benefits and expenses increased $38 million. This increase was primarily driven by higher policyholders’ benefits, including changes in reserves, due to business growth. The increase was partially offset by lower general and administrative expenses, net of capitalization, reflecting lower expenses, as discussed above.
Nine Month Comparison. Revenues increased $183 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $112 million. This increase was primarily driven by higher policy charges and fee income driven by business growth, and higher net investment income due to higher average invested assets resulting from business growth, partially offset by lower income on non-coupon investments and lower investment yields.
Benefits and expenses increased $195 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $240 million. This increase reflected higher policyholders’ benefits, including changes in reserves, driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims, as well as higher interest credited to account balances driven by business growth. Also contributing to the increase was the absence of a favorable impact from changes in market conditions on estimates of profitability in the market valueprior year period, as discussed above. The increase also reflected higher general and administrative expenses, net of equity securities.capitalization, reflecting increased VOBA amortization, partially offset by lower other expenses, as discussed above.
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 September 30, 2020 | | Three Months Ended September 30, 2019 |
| | Prudential
Advisors | | Third-
Party | | Total | | Prudential
Advisors | | Third-
Party | | Total |
| | (in millions) |
| Term Life | | $ | 6 | | | $ | 28 | | | $ | 34 | | | $ | 7 | | | $ | 42 | | | $ | 49 | |
| Guaranteed Universal Life(1) | | 1 | | | 19 | | | 20 | | | 2 | | | 22 | | | 24 | |
| Other Universal Life(1) | | 3 | | | 17 | | | 20 | | | 9 | | | 26 | | | 35 | |
| Variable Life | | 22 | | | 76 | | | 98 | | | 20 | | | 47 | | | 67 | |
| Total | | $ | 32 | | | $ | 140 | | | $ | 172 | | | $ | 38 | | | $ | 137 | | | $ | 175 | |
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2019 |
| | Prudential
Advisors | | Third-
Party | | Total | | Prudential
Advisors | | Third-
Party | | Total |
| | (in millions) |
| Term Life | | $ | 19 | | | $ | 95 | | | $ | 114 | | | $ | 21 | | | $ | 132 | | | $ | 153 | |
| Guaranteed Universal Life(1) | | 4 | | | 79 | | | 83 | | | 6 | | | 63 | | | 69 | |
| Other Universal Life(1) | | 15 | | | 58 | | | 73 | | | 29 | | | 84 | | | 113 | |
| Variable Life | | 64 | | | 209 | | | 273 | | | 55 | | | 129 | | | 184 | |
| Total | | $ | 102 | | | $ | 441 | | | $ | 543 | | | $ | 111 | | | $ | 408 | | | $ | 519 | |
__________
(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 4% of Guaranteed Universal Life and 2% and 8% of Other Universal Life annualized new business premiums for the three months ended September 30, 2020 and 2019, respectively, and approximately 9% and 6% of Guaranteed Universal Life and 7% and 13% of Other Universal Life annualized new business premiums for the nine months ended September 30, 2020 and 2019, respectively. Prior period percentages have been updated to conform to current period presentation.
Total annualized new business premiums for the third quarter of 2020 decreased $3 million compared to the prior year period, primarily driven by lower sales of term life products due to pricing actions and lower sales of other universal life products due to the absence of large case activity in the third quarter of 2020. The decrease for the first six monthswas partially offset by higher sales of 2020 included an unfavorable impact from changes in the market value of equity securities. This decrease also included lower underwriting results driven by unfavorable policy experience and an increase in reservesvariable life products as a result of an unlocking of assumptions inproduct design and pricing actions. Total annualized new business premiums for the first quarternine months of 2020 increased $24 million compared to the prior year period, primarily driven by higher sales of variable life products, as discussed above, and higher sales of guaranteed universal life products. The increase was partially offset by lower sales of term life products, as discussed above, and lower sales of other universal life products due to the declineabsence of large case activity in interest rates. These decreases were partially offset by a favorable impact fromthe second and third quarters of 2020.
U.S. Businesses—Assurance IQ Division
Assurance IQ
Operating Results
The following table sets forth Assurance IQ’s operating results for the periods indicated.
| | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, 2020 | | Nine Months Ended
September 30, 2020 |
| | (in millions) |
| Operating results: | | | | |
| Revenues | | $ | 75 | | | $ | 194 | |
| Expenses | | 105 | | | 263 | |
| Adjusted operating income | | (30) | | | (69) | |
| Other adjustments(1) | | (12) | | | 65 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | | $ | (42) | | | $ | (4) | |
__________
(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 marketfair value of derivatives usedcontingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for duration management.additional information.
Adjusted Operating Income
Other
. Results
The acquisition of Assurance IQ was completed in October 2019. Adjusted operating income for the secondthird quarter and the first sixnine months of 2020 was $(30) million and $(69) million, respectively, reflecting revenues, net of marketing and distribution expenses, primarily related to our health (Health Under 65) and life insurance product lines. Results for both periods also included operating expenses, including certain expenses incurred in the third quarter in preparation for the fourth quarter 2020 annual Medicare enrollment period, 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 for the third quarter and the first nine months of 2020 were $75 million and $194 million, respectively, primarily reflecting commissions and marketing referral revenues from our health (Health Under 65) and life insurance product lines. Expenses for the third quarter and the first nine months of 2020 were $105 million and $263 million, respectively, driven by marketing and distribution costs, general and administrative operating expenses including certain expenses incurred in the third quarter in preparation for the fourth quarter 2020 annual Medicare enrollment period, and amortization expenses related to intangible assets.
International Businesses
Business Update
•In August 2020, we successfully completed the sale of The Prudential Life Insurance Company of Korea, Ltd. (“POK”) to KB Financial Group Inc., for cash consideration of approximately 2.3 trillion Korean Won, equal to approximately $1.9 billion. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information. Effective in the second quarter of 2020, the results of this business and the impact of its sale were reflected in the Divested and Run-off Businesses that are included in Corporate and Other, and all prior period amounts have been updated to conform to the current period presentation. See “—Divested and Run-off Businesses.”
•In August 2020, we entered into a definitive agreement with Taishin Financial Holding Co, Ltd., a Taiwanese financial services provider, to sell Prudential Life Insurance Company of Taiwan Inc. (“POT”) for cash consideration of approximately $190 million at then current exchange rates, to be paid at closing, and contingent consideration with a fair value of approximately $26 million at September 30, 2020. The transaction is consistent with our strategic focus internationally on Japan and higher-growth emerging markets around the world. The transaction is expected to close in 2021, subject to regulatory approvals and customary closing conditions. In the third quarter of 2020, we reported our investment in POT as “held for sale” and recognized an approximately $300 million after-tax charge to earnings to adjust the carrying value of POT to the fair market value reflected in the purchase price (see Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information). Effective in the third quarter of 2020, the results of this business and the impact of the anticipated sale are reflected in the Divested and Run-off Businesses that are included in Corporate and 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.
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. The exchange rate used was Japanese yen at a rate of 104 yen per USD, which was 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
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Operating results(1): | | | | | | | |
| Revenues: | | | | | | | |
| Life Planner | $ | 2,548 | | | $ | 2,336 | | | $ | 7,591 | | | $ | 7,228 | |
| Gibraltar Life and Other | 2,933 | | | 2,880 | | | 8,610 | | | 8,506 | |
| Total revenues | 5,481 | | | 5,216 | | | 16,201 | | | 15,734 | |
| Benefits and expenses: | | | | | | | |
| Life Planner | 2,134 | | | 2,039 | | | 6,513 | | | 6,140 | |
| Gibraltar Life and Other | 2,572 | | | 2,456 | | | 7,526 | | | 7,230 | |
| Total benefits and expenses | 4,706 | | | 4,495 | | | 14,039 | | | 13,370 | |
| Adjusted operating income: | | | | | | | |
| Life Planner | 414 | | | 297 | | | 1,078 | | | 1,088 | |
| Gibraltar Life and Other | 361 | | | 424 | | | 1,084 | | | 1,276 | |
| Total adjusted operating income | 775 | | | 721 | | | 2,162 | | | 2,364 | |
| Realized investment gains (losses), net, and related adjustments(2) | 168 | | | 439 | | | 843 | | | 1,203 | |
| Charges related to realized investment gains (losses), net | (11) | | | (4) | | | (33) | | | (7) | |
| Market experience updates(3) | 3 | | | (1) | | | (39) | | | (32) | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 8 | | | (28) | | | (22) | | | (86) | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 943 | | | $ | 1,127 | | | $ | 2,911 | | | $ | 3,442 | |
__________
(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.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.
(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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
Adjusted Operating Income
Three Month Comparison. Adjusted operating income from our Life Planner operations increased $117 million, including a net favorable impact of $4 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding this item, adjusted operating income from our Life Planner operations increased $113 million, primarily reflecting lower expenses driven by the absence of updates to legal reserves incurred in the prior year period. Also contributing to the increase were favorable underwriting results due to the growth of business in force in our Japan and Brazil operations, favorable policyholder experience and a favorable impact from mortality experience.
Adjusted operating income from our Gibraltar Life and Other operations decreased $63 million, including a net unfavorable impact of $2 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding this item, adjusted operating income from our Gibraltar Life and Other operations decreased $61 million, primarily reflecting lower earnings from our joint venture investments, as well as higher expenses driven by costs associated with COVID-19 (see “Overview—COVID-19”). Also contributing to the decrease were lower net investment spread results driven by lower reinvestment yields, partially offset by higher income on non-coupon investments. These decreases were partially offset by favorable underwriting results due to the growth of business in force and a favorable impact from mortality experience.
Nine Month Comparison. Adjusted operating income from our Life Planner operations decreased $10 million, including a net favorable impact of $3 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in a $42 million net charge in 2020 compared to a $5 million net benefit in 2019. The net charge in 2020 was primarily driven by unfavorable impacts related to a decrease in long-term interest rate assumptions.
Excluding these items, adjusted operating income from our Life Planner operations increased $34 million primarily reflecting favorable underwriting results due to the growth of business in force in our Japan and Brazil operations and favorable policyholder experience, partially offset by an unfavorable impact from mortality experience. Also contributing to the increase were lower expenses primarily driven by the absence of updates to legal reserves incurred in the prior year period, partially offset by higher costs related to business growth and business initiatives. These increases were partially offset by lower net investment spread results primarily driven by lower reinvestment yields.
Adjusted operating income from our Gibraltar Life and Other operations decreased $192 million, including a net unfavorable impact of $6 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in a $52 million net charge in 2020 compared to a $7 million net benefit in 2019. The net charge in 2020 was primarily driven by updates of reserves reflecting the impact of a decrease in long-term interest rate assumptions, as well as other refinements.
Excluding these items, adjusted operating income from our Gibraltar Life and Other operations decreased $127 million, primarily reflecting lower earnings from our joint venture investments, as well as higher expenses driven by costs associated with COVID-19 (see “Overview—COVID-19”). Also contributing to the decrease were lower net investment spread results driven by lower reinvestment yields, partially offset by higher income on non-coupon investments. These decreases were partially offset by favorable underwriting results driven by the growth of business in force and a favorable impact from mortality experience.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues from our Life Planner operations increased $212 million, including a net unfavorable impact of $38 million from currency fluctuations. Excluding this item, revenues increased $250 million, primarily driven by higher premiums and policy charges and fee income attributable to the growth of business in force, and higher net investment results driven by higher income on non-coupon investments, partially offset by lower reinvestment yields.
Benefits and expenses of our Life Planner operations increased $95 million, including a net favorable impact of $42 million from currency fluctuations. Excluding this item, benefits and expenses increased $137 million, primarily reflecting higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force. This increase was partially offset by lower expenses primarily driven by the absence of updates to legal reserves incurred in the prior year period.
Revenues from our Gibraltar Life and Other operations increased $53 million, including a net favorable impact of $16 million from currency fluctuations. Excluding this item, revenues increased $37 million, primarily reflecting higher premiums driven by the growth of business in force. Partially offsetting the increase were lower other income driven by an unfavorable impact from our joint venture investments, and lower net reinvestment results driven by lower investment yields, partially offset by higher income on non-coupon investments.
Benefits and expenses of our Gibraltar Life and Other operations increased $116 million, including a net unfavorable impact of $18 million from currency fluctuations. Excluding this item, benefits and expenses increased $98 million, primarily driven by higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force.
Nine Month Comparison. Revenues from our Life Planner operations increased $363 million, including a net unfavorable impact of $92 million from currency fluctuations and a net benefit of $33 million from our annual reviews and update of assumptions and other refinements. Excluding these items, revenues increased $422 million, primarily driven by 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 $373 million, including a net favorable impact of $95 million from currency fluctuations and a net charge of $80 million from our annual reviews and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $388 million, primarily reflecting higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force, as well as an unfavorable impact from mortality experience. These increases were partially offset by lower expenses primarily driven by the absence of updates to legal reserves incurred in the prior year period.
Revenues from our Gibraltar Life and Other operations increased $104 million, including a net favorable impact of $36 million from currency fluctuations and a net charge of $9 million from our annual reviews and update of assumptions and other refinements. Excluding these items, revenues increased $77 million, primarily driven by higher premiums attributable to the growth of business in force. The increase was partially offset by lower other income driven by an unfavorable impact from our joint venture investments, and lower net investment results driven by lower reinvestment yields, partially offset by higher income on non-coupon investments.
Benefits and expenses of our Gibraltar Life and Other operations increased $296 million, including a net unfavorable impact of $42 million from currency fluctuations and a net charge of $50 million from our annual reviews and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $204 million, primarily driven by higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force.
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
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Annualized new business premiums(1): | | | | | | | |
| On an actual exchange rate basis: | | | | | | | |
| Life Planner | $ | 381 | | | $ | 250 | | | $ | 839 | | | $ | 833 | |
| Gibraltar Life and Other | 407 | | | 312 | | | 911 | | | 931 | |
| Total | $ | 788 | | | $ | 562 | | | $ | 1,750 | | | $ | 1,764 | |
| On a constant exchange rate basis: | | | | | | | |
| Life Planner | $ | 395 | | | $ | 251 | | | $ | 871 | | | $ | 839 | |
| Gibraltar Life and Other | 408 | | | 313 | | | 915 | | | 936 | |
| Total | $ | 803 | | | $ | 564 | | | $ | 1,786 | | | $ | 1,775 | |
__________
(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 September 30, 2020 | | Three Months Ended September 30, 2019 |
| | Life | | Accident
&
Health | | Retirement(1) | | Annuity | | Total | | Life | | Accident
&
Health | | Retirement(1) | | Annuity | | Total |
| | (in millions) |
| Life Planner(2) | $ | 199 | | | $ | 19 | | | $ | 177 | | | $ | 0 | | | $ | 395 | | | $ | 130 | | | $ | 18 | | | $ | 103 | | | $ | 0 | | | $ | 251 | |
| Gibraltar Life and Other: | | | | | | | | | | | | | | | | | | | |
| Life Consultants | $ | 122 | | | $ | 9 | | | $ | 25 | | | $ | 12 | | | $ | 168 | | | $ | 95 | | | $ | 10 | | | $ | 23 | | | $ | 24 | | | $ | 152 | |
| Banks(3) | 152 | | | 0 | | | 6 | | | 9 | | | 167 | | | 107 | | | 0 | | | 9 | | | 3 | | | 119 | |
| Independent Agency | 43 | | | 1 | | | 28 | | | 1 | | | 73 | | | 18 | | | 1 | | | 21 | | | 2 | | | 42 | |
| Subtotal | 317 | | | 10 | | | 59 | | | 22 | | | 408 | | | 220 | | | 11 | | | 53 | | | 29 | | | 313 | |
| Total | $ | 516 | | | $ | 29 | | | $ | 236 | | | $ | 22 | | | $ | 803 | | | $ | 350 | | | $ | 29 | | | $ | 156 | | | $ | 29 | | | $ | 564 | |
__________
(1)Includes retirement income, endowment and savings variable universal life.
(2)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.
(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 1% and 74%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended September 30, 2020, and 2% and 68%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended September 30, 2019.
Three Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations increased $144 million, primarily driven by higher sales of USD-denominated products ahead of pricing increases in August 2020, as well as an increase in sales activities resulting from easing of COVID-19 restrictions on personal interactions and a greater use of technology (see “Overview—COVID-19”).
Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations increased $95 million. Bank channel and Independent Agency sales increased $48 million and $31 million, respectively, primarily driven by higher sales of USD-denominated products ahead of pricing increases in August 2020. Life Consultants sales also increased $16 million, reflecting higher sales of USD-denominated protection and endowment products ahead of pricing increases in August 2020, partially offset by lower sales of USD-denominated fixed annuity products driven by declines in crediting rates and lower Life Consultant headcount.
The table below presents annualized new business premiums on a constant exchange rate basis, by product and distribution channel, for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2019 |
| | Life | | Accident
&
Health | | Retirement(1) | | Annuity | | Total | | Life | | Accident
&
Health | | Retirement(1) | | Annuity | | Total |
| | (in millions) |
| Life Planner(2) | $ | 448 | | | $ | 54 | | | $ | 369 | | | $ | 0 | | | $ | 871 | | | $ | 460 | | | $ | 70 | | | $ | 308 | | | $ | 1 | | | $ | 839 | |
| Gibraltar Life and Other: | | | | | | | | | | | | | | | | | | | |
| Life Consultants | $ | 263 | | | $ | 25 | | | $ | 49 | | | $ | 51 | | | $ | 388 | | | $ | 266 | | | $ | 31 | | | $ | 65 | | | $ | 125 | | | $ | 487 | |
| Banks(3) | 329 | | | 0 | | | 19 | | | 13 | | | 361 | | | 274 | | | 0 | | | 27 | | | 11 | | | 312 | |
| Independent Agency | 83 | | | 4 | | | 76 | | | 3 | | | 166 | | | 68 | | | 7 | | | 48 | | | 14 | | | 137 | |
| Subtotal | 675 | | | 29 | | | 144 | | | 67 | | | 915 | | | 608 | | | 38 | | | 140 | | | 150 | | | 936 | |
| Total | $ | 1,123 | | | $ | 83 | | | $ | 513 | | | $ | 67 | | | $ | 1,786 | | | $ | 1,068 | | | $ | 108 | | | $ | 448 | | | $ | 151 | | | $ | 1,775 | |
__________
(1)Includes retirement income, endowment and savings variable universal life.
(2)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.
(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 3% and 72%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the nine months ended September 30, 2020, and 1% and 67%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the nine months ended September 30, 2019.
Nine Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations increased $32 million primarily driven by higher sales of USD-denominated products ahead of pricing increases in August 2020. The increase was partially offset by lower sales due to COVID-19 impacts, as well as lower sales of corporate term products in Japan driven by the corporate product tax rule change effective July 2019.
Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations decreased $21 million. Life Consultants sales decreased $99 million, primarily driven by COVID-19 impacts, as well as lower sales of USD-denominated fixed annuity products driven by declines in crediting rates and lower Life Consultant headcount. Bank channel sales increased $49 million, reflecting higher sales of USD-denominated protection products ahead of pricing increases in August 2020, partially offset by lower sales due to COVID-19 impacts. Independent Agency sales increased $29 million, reflecting higher sales of USD-denominated protection and endowment products ahead of pricing increases in August 2020, partially offset by lower sales of USD-denominated fixed annuity products.
Closed Block Division
Substantially all of the $61 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 regularly examine our product offerings and their profitability. As a result, we have repriced certain products, adjusted commissions for certain products and have discontinued 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
September 30, 2020 |
| (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 | |
The $136 billion above is primarily comprised of long-duration insurance products that have fixed and guaranteed 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 $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 0.60% and the 10-year U.S. Treasury rate is 0.65% (which is reasonably consistent with recent rates) for the period from October 1, 2020 through September 30, 2021 (and credit spreads remain unchanged from average levels experienced during the third quarter 2020), 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 million and $80 million for the period from October 1, 2020 through September 30, 2021.
Results of Operations
Consolidated Results of Operations
The following table summarizes net income (loss) for the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Revenues | $ | 15,425 | | | $ | 15,105 | | | $ | 41,004 | | | $ | 45,584 | |
| Benefits and expenses | 13,978 | | | 13,380 | | | 42,227 | | | 41,843 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | 1,447 | | | 1,725 | | | (1,223) | | | 3,741 | |
| Income tax expense (benefit) | (50) | | | 332 | | | 7 | | | 726 | |
| Income (loss) before equity in earnings of operating joint ventures | 1,497 | | | 1,393 | | | (1,230) | | | 3,015 | |
| Equity in earnings of operating joint ventures, net of taxes | 10 | | 32 | | | 62 | | | 85 | |
| | | | | | | |
| | | | | | | |
| Net income (loss) | 1,507 | | | 1,425 | | | (1,168) | | | 3,100 | |
| Less: Income attributable to noncontrolling interests | 20 | | | 7 | | | 25 | | | 42 | |
| Net income (loss) attributable to Prudential Financial, Inc. | $ | 1,487 | | | $ | 1,418 | | | $ | (1,193) | | | $ | 3,058 | |
Three Month Comparison. The $69 million increase in “Net income (loss) attributable to Prudential Financial, Inc.” for the third quarter of 2020 compared to the third quarter of 2019 reflected the following notable items:
•$711 million favorable 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);
•$382 million favorable variance reflecting a tax benefit in the current period compared to a tax expense in the prior year period; and
•$307 million favorable variance, on a pre-tax basis, from investment related activities that are primarily within “Other income (loss)” for PFI excluding our Divested and Run-off Businesses. These favorable impacts were primarily driven by unrealized gains (losses) from fixed maturity securities designated as trading.
Partially offsetting these increases in “Net income (loss) attributable to Prudential Financial, Inc.” was the following item:
•$1,219 million unfavorable variance, on a pre-tax basis, from realized investment gains and losses for PFI excluding the Divested and Run-off Businesses, and excluding the impact of the hedging program associated with certain variable annuities discussed above (see “General Account Investments” for additional information).
Nine Month Comparison. The $4,251 million decrease in “Net income (loss) attributable to Prudential Financial, Inc.” for the first nine months of 2020 compared to the first nine months of 2019 reflected the following notable items:
•$1,386 million unfavorable variance, on a pre-tax basis, from a loss in the current period from our Divested and Run-off Businesses compared to a gain in the prior year period (see “Results of Operations by Segment—Divested and Run-off Businesses” for additional information);
•$1,083 million unfavorable variance, on a pre-tax basis, from lower adjusted operating income from our business segments (see “Segment Results of Operations” for additional information);
•$1,096 million unfavorable variance, on a pre-tax basis, from realized investment gains and losses for PFI excluding Divested and Run-off Businesses, and excluding the impact of the hedging program associated with certain variable annuities discussed below (see “General Account Investments” for additional information);
•$589 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); and
•$526 million unfavorable variance, on a pre-tax basis, from investment related activities that are primarily within “Other income (loss)” for PFI excluding our Divested and Run-off Businesses. These unfavorable impacts were primarily driven by unrealized gains (losses) from equity securities.
Partially offsetting these decreases in “Net income (loss) attributable to Prudential Financial, Inc.” was the following item:
•$719 million favorable variance from a lower tax expense.
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
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Adjusted operating income before income taxes by segment: | | | | | | | |
| PGIM | $ | 370 | | | $ | 232 | | | $ | 858 | | | $ | 710 | |
| U.S. Businesses: | | | | | | | |
| U.S. Workplace Solutions division: | | | | | | | |
| Retirement | 372 | | | 302 | | | 898 | | | 1,020 | |
| Group Insurance | 22 | | | 90 | | | 71 | | | 224 | |
| Total U.S. Workplace Solutions division | 394 | | | 392 | | | 969 | | | 1,244 | |
| U.S. Individual Solutions division: | | | | | | | |
| Individual Annuities | 408 | | | 459 | | | 1,030 | | | 1,393 | |
| Individual Life | 101 | | | 59 | | | 17 | | | 29 | |
| Total U.S. Individual Solutions division | 509 | | | 518 | | | 1,047 | | | 1,422 | |
| Assurance IQ division(1): | | | | | | | |
| Assurance IQ | (30) | | | 0 | | | (69) | | | 0 | |
| Total Assurance IQ division | (30) | | | 0 | | | (69) | | | 0 | |
| Total U.S. Businesses | 873 | | | 910 | | | 1,947 | | | 2,666 | |
| International Businesses(2) | 775 | | | 721 | | | 2,162 | | | 2,364 | |
| Corporate and Other | (455) | | | (281) | | | (1,338) | | | (1,028) | |
| Total segment adjusted operating income before income taxes | 1,563 | | | 1,582 | | | 3,629 | | | 4,712 | |
| Reconciling items: | | | | | | | |
| Realized investment gains (losses), net, and related adjustments(3) | 223 | | | 331 | | | (2,746) | | | (882) | |
| Charges related to realized investment gains (losses), net(4) | (70) | | | (92) | | | (353) | | | (149) | |
| Market experience updates(5) | (134) | | | (314) | | | (1,016) | | | (515) | |
| Divested and Run-off Businesses(6): | | | | | | | |
| Closed Block division | 8 | | | 45 | | | (15) | | | 5 | |
| Other Divested and Run-off Businesses(2) | (132) | | | 207 | | | (725) | | | 641 | |
| Other adjustments(7) | (12) | | | 0 | | | 65 | | | 0 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(8) | 1 | | | (34) | | | (62) | | | (71) | |
| Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 1,447 | | | $ | 1,725 | | | $ | (1,223) | | | $ | 3,741 | |
__________
(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)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.
(3)Represents “Realized investment gains (losses), net,” and related adjustments. See “—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.
(4)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.
(5)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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(6)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.”
(7)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.
(8)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.
Segment results for the period presented above reflect the following:
PGIM. Results for both the third quarter of 2020 and the first nine months of 2020 increased in comparison to the prior year periods, primarily reflecting increases in asset management fees and other related revenues, partially offset by higher expenses.
Retirement. Results for the third quarter of 2020 increased in comparison to the prior year period, primarily reflecting higher net investment spread results and higher reserve gains. Results for the first nine months of 2020 decreased in comparison to the prior year period, primarily reflecting an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results increased compared to the prior year period, primarily driven by higher reserve gains, partially offset by lower net investment spread results.
Group Insurance. Results for the third quarter of 2020 decreased in comparison to the prior year period, primarily reflecting lower underwriting results in our group life business, partially offset by higher underwriting results in our group disability business. Results for the first nine months of 2020 decreased in comparison to the prior year period, primarily reflecting lower underwriting results in our group life business and lower net investment spread results.
Individual Annuities. Results for the third 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, partially offset by higher net investment spread results. Results for the first nine months of 2020 decreased in comparison to the prior year period, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results decreased primarily driven by lower fee income, net of distribution expenses and other associated costs.
Individual Life. Results for the third quarter of 2020 increased in comparison to the prior year period, primarily reflecting higher net investment spread results and lower expenses. Results for the first nine months of 2020 decreased in comparison to the prior year period, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results decreased primarily reflecting lower underwriting results, lower net investment spread results, and the absence of 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). These decreases were partially offset by lower expenses.
Assurance IQ. The acquisition of Assurance IQ was completed in October 2019. Results for both the third quarter and the first nine months of 2020 include 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 third quarter of 2020 increased in comparison to the prior year period, inclusive of a favorable net impact from foreign currency exchange rates, primarily reflecting lower expenses and favorable underwriting results including business growth, partially offset by lower earnings from our joint venture investments and lower net investment spread results. Results for the first nine months of 2020 decreased in comparison to the prior year periods, inclusive of an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results decreased driven by lower net investment spread results and lower earnings from our joint venture investments, partially offset by favorable underwriting results including business growth.
Corporate and Other. Results for both the third quarter and the first nine months of 2020 reflected increased losses in comparison to the prior year periods, primarily reflecting higher net charges from other corporate activities, lower investment income and higher interest expense on debt. The results for the third quarter reflected lower income from pension and employee benefit plans, while the results for the first nine months of 2020 reflected higher income from pension and employee benefit plans.
Closed Block Division. Results for both the third quarter and the first nine months of 2020 decreased in comparison to the prior year periods, primarily driven by a decrease in the policyholder dividend obligation as a result of lower net investment activity results.
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, 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 operation in 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.
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| | (in billions) |
| Foreign currency hedging instruments: | | | |
| Hedging USD-equivalent earnings: | | | |
| Forward currency contracts (notional amount outstanding) | $ | 0.4 | | | $ | 0.6 | |
| Hedging USD-equivalent equity: | | | |
| USD-denominated assets held in yen-based entities(1) | 10.4 | | | 13.1 | |
| Dual currency and synthetic dual currency investments(2) | 0.6 | | | 0.6 | |
| Total USD-equivalent equity foreign currency hedging instruments | 11.0 | | | 13.7 | |
| Total foreign currency hedges | $ | 11.4 | | | $ | 14.3 | |
__________
(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 $64.2 billion and $57.8 billion as of September 30, 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.
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 are 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 these segments’ non-USD-denominated earnings are translated at fixed currency exchange rates. Results of our Corporate and Other operations include 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 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 nine months ended September 30, 2020, approximately 5% of the segment’s earnings were yen-based and, as of September 30, 2020, we have hedged 100%, 97% and 61% of expected yen-based earnings for 2020, 2021 and 2022, 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 2020 and 2019 reflect the impact of translating yen-denominated earnings at fixed currency exchange rates of 104 and 105 yen per USD, respectively. We expect our 2021 results to reflect the impact of translating yen-denominated earnings at a fixed currency exchange rate of 103 yen per USD. 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
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Segment impacts of intercompany arrangements: | | | | | | | |
| International Businesses(3) | $ | 15 | | | $ | 6 | | | $ | 46 | | | $ | 32 | |
| PGIM | (3) | | | 1 | | | (1) | | | 4 | |
| Impact of intercompany arrangements(1) | 12 | | | 7 | | | 45 | | | 36 | |
| Corporate and Other: | | | | | | | |
| Impact of intercompany arrangements(1)(3) | (12) | | | (7) | | | (45) | | | (36) | |
| Settlement gains (losses) on forward currency contracts(2)(3) | 15 | | | 14 | | | 57 | | | 43 | |
| Net benefit (detriment) to Corporate and Other | 3 | | | 7 | | | 12 | | | 7 | |
| Net impact on consolidated revenues and adjusted operating income | $ | 15 | | | $ | 14 | | | $ | 57 | | | $ | 43 | |
__________
(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 September 30, 2020 and 2019, the total notional amounts of these forward currency contracts within our Corporate and Other operations were $1.0 billion and $1.6 billion, respectively, of which $0.4 billion and $0.8 billion, respectively, were related to our Japanese insurance operations. Prior period total notional amount of these forward currency contracts has been updated to conform to current period presentation.
(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 and 2019 that were translated at fixed currency exchange rates of 1,090 and 1,110 Korean won per USD, respectively, are excluded from the International Businesses and are included in the Divested and Run-off Businesses included in Corporate and Other. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
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, most notably our Japanese operations, which offer USD- and 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 $2.4 billion and $2.7 billion as of September 30, 2020 and December 31, 2019, respectively, 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 3% of the $2.4 billion balance as of September 30, 2020 will be recognized throughout the remainder of 2020, approximately 13% will be recognized in 2021, and the remaining balance will be recognized from 2022 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. As of September 30, 2020, our domestic variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 3.5% 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 3.9% 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 2020 annual reviews and update of assumptions and other refinements, we reduced 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 yield by 30 basis points and now grade to a rate of 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, 2019.
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. As 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. 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, the Company also expects an impact to how earnings emerge thereafter. 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
Operating Results
The following table sets forth PGIM’s operating results for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Operating results(1): | | | | | | | |
| Revenues | $ | 1,066 | | | $ | 855 | | | $ | 2,801 | | | $ | 2,651 | |
| Expenses | 696 | | | 623 | | | 1,943 | | | 1,941 | |
| Adjusted operating income | 370 | | | 232 | | | 858 | | | 710 | |
| Realized investment gains (losses), net, and related adjustments | (2) | | | 0 | | | 1 | | | 1 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 15 | | | (7) | | | (27) | | | 28 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 383 | | | $ | 225 | | | $ | 832 | | | $ | 739 | |
__________
(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
Three Month Comparison. Adjusted operating income increased $138 million, primarily reflecting an increase in asset management fees, net of related expenses, due to higher average assets under management as a result of market appreciation and fixed income inflows. The increase also reflected an increase in other related revenues, net of related expenses, primarily due to higher co- and seed investment results driven by strong underlying investment performance, higher commercial mortgage origination revenue driven by higher loan production and profitability, and higher net performance-based incentive fees. These increases were partially offset by a decrease in service, distribution and other revenues primarily reflecting the absence of fees in the current year period related to the Wells Fargo agreement (see the “Revenues by type” table in “—Revenues and Expenses,” below).
Nine Month Comparison. Adjusted operating income increased $148 million, primarily reflecting an increase in asset management fees, net of related expenses, due to higher average assets under management as a result of market appreciation and fixed income inflows. The increase also reflected an increase in other related revenues, net of related expenses, primarily due to higher co- and seed investment results driven by strong underlying investment performance and higher commercial mortgage origination revenue driven by higher loan production and profitability. These increases were partially offset by a decrease in service, distribution and other revenues primarily reflecting the absence of fees in the current year period related to the Wells Fargo agreement.
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
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Revenues by type: | | | | | | | |
| Asset management fees by source: | | | | | | | |
| Institutional customers | $ | 345 | | | $ | 323 | | | $ | 998 | | | $ | 954 | |
| Retail customers(1) | 262 | | | 223 | | | 718 | | | 652 | |
| General account | 143 | | | 130 | | | 417 | | | 385 | |
| Total asset management fees | 750 | | | 676 | | | 2,133 | | | 1,991 | |
| Other related revenues by source: | | | | | | | |
| Incentive fees | 43 | | | 10 | | | 78 | | | 108 | |
| Transaction fees | 5 | | | 5 | | | 13 | | | 17 | |
| Co- and seed investments | 50 | | | 3 | | | 87 | | | 57 | |
| Commercial mortgage(2) | 67 | | | 32 | | | 126 | | | 83 | |
| Total other related revenues | 165 | | | 50 | | | 304 | | | 265 | |
| Service, distribution and other revenues(3) | 151 | | | 129 | | | 364 | | | 395 | |
| Total revenues | $ | 1,066 | | | $ | 855 | | | $ | 2,801 | | | $ | 2,651 | |
__________
(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)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 $15 million for the three months ended September 30, 2019 and $45 million for the nine months ended September 30, 2019.
Three Month Comparison. Revenues increased $211 million. Asset management fees increased primarily reflecting higher average assets under management as a result of market appreciation and fixed income inflows. Other related revenues increased primarily reflecting higher co- and seed investment results driven by strong underlying investment performance, higher commercial mortgage origination revenue driven by higher loan production and profitability, and higher performance-based incentive fees. Service, distribution and other revenues increased primarily reflecting higher revenues from certain consolidated funds (which were fully offset by higher expenses related to noncontrolling interests in these funds), partially offset by the absence of fees in the current year period related to the Wells Fargo agreement.
Expenses increased $73 million. Expenses for service, distribution and other revenues increased primarily driven by higher revenues associated with certain consolidated funds as discussed above. Also contributing to the increase were higher variable expenses associated with an increase in performance-based incentive fee revenues as well as higher overall segment earnings, and higher expenses due to certain long-term employee compensation plans tied to performance factors. Partially offsetting these increases were lower expenses driven by a decrease in travel and entertainment due to COVID-19.
Nine Month Comparison. Revenues increased $150 million. Asset management fees increased primarily reflecting higher average assets under management as a result of market appreciation and fixed income inflows. Other related revenues increased primarily reflecting higher co- and seed investment results driven by strong underlying investment performance and higher commercial mortgage origination revenue driven by higher loan production and profitability, partially offset by lower performance-based incentive fees. Service, distribution and other revenues decreased primarily reflecting the absence of fees in the current year period related to the Wells Fargo agreement.
Expenses increased $2 million. Higher variable expenses reflecting higher overall segment earnings, which were largely offset by lower expenses associated with lower performance-based incentive fee revenues, and a decrease in travel and entertainment due to COVID-19.
Assets Under Management
The following table sets forth assets under management by asset class and source as of the dates indicated.
| | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 | | September 30, 2019 |
| (in billions) |
| Assets Under Management(1) (at fair value): | | | | | |
| Institutional customers: | | | | | |
| Public equity | $ | 53.5 | | | $ | 57.1 | | | $ | 52.9 | |
| Public fixed income | 458.4 | | | 418.6 | | | 410.5 | |
| Real estate | 48.8 | | | 49.1 | | | 48.4 | |
| Private credit and other alternatives | 25.0 | | | 23.5 | | | 23.8 | |
| Multi-asset | 5.3 | | | 4.5 | | | 4.2 | |
| Institutional customers(2) | 591.0 | | | 552.8 | | | 539.8 | |
| Retail customers: | | | | | |
| Public equity | 121.3 | | | 104.2 | | | 100.0 | |
| Public fixed income | 163.5 | | | 138.7 | | | 130.0 | |
| Real estate | 1.8 | | | 2.0 | | | 1.9 | |
| Private credit and other alternatives | 0.6 | | | 0.5 | | | 0.5 | |
| Multi-asset | 55.8 | | | 60.2 | | | 58.9 | |
| Retail customers(3) | 343.0 | | | 305.6 | | | 291.3 | |
| General account: | | | | | |
| Public equity | 4.2 | | | 4.4 | | | 4.2 | |
| Public fixed income | 359.1 | | | 328.6 | | | 333.2 | |
| Real estate | 68.1 | | | 66.0 | | | 64.7 | |
| Private credit and other alternatives | 77.7 | | | 73.5 | | | 72.5 | |
| Multi-asset | 0.0 | | | 0.1 | | | 0.1 | |
| General account | 509.1 | | | 472.6 | | | 474.7 | |
| Total PGIM assets under management(4) | $ | 1,443.1 | | | $ | 1,331.0 | | | $ | 1,305.8 | |
| | | | | |
| Assets under management within other reporting segments(4)(5) | $ | 205.0 | | | $ | 219.9 | | | $ | 213.0 | |
| Total PFI assets under management | $ | 1,648.1 | | | $ | 1,550.9 | | | $ | 1,518.8 | |
__________
(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.
(2)Consists of third-party institutional assets and group insurance contracts.
(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.
(4)Effective first quarter of 2020, certain assets have been reclassified from the U.S. Individual Solutions division to PGIM.
(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.
PGIM’s assets under managementincreased $137 billion and $112 billion in comparison to the prior year quarter and prior year end, respectively, reflecting market appreciation and public fixed income inflows, partially offset by public equity outflows.
The following table sets forth the component changes in PGIM’s assets under management by asset source for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Twelve
Months
Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 |
| (in billions) |
| Institutional Customers: | | | | | | | | | |
| Beginning assets under management | $ | 571.2 | | | $ | 534.9 | | | $ | 552.8 | | | $ | 493.5 | | | $ | 539.8 | |
| Net additions (withdrawals), excluding money market activity: | | | | | | | | | |
| Third-party | 2.0 | | | (2.2) | | | 0.5 | | | (7.2) | | | 1.2 | |
| Third-party via affiliates(1) | 0.1 | | | (0.4) | | | (1.0) | | | 0.1 | | | (0.9) | |
| Total | 2.1 | | | (2.6) | | | (0.5) | | | (7.1) | | | 0.3 | |
| Market appreciation (depreciation)(2) | 17.0 | | | 10.0 | | | 29.8 | | | 50.9 | | | 41.2 | |
| Other increases (decreases)(3) | 0.7 | | | (2.5) | | | 8.9 | | | 2.5 | | | 9.7 | |
| Ending assets under management | 591.0 | | | 539.8 | | | 591.0 | | | 539.8 | | | 591.0 | |
| Retail Customers(4): | | | | | | | | | |
| Beginning assets under management | 320.2 | | | 287.9 | | | 305.6 | | | 260.2 | | | 291.3 | |
| Net additions (withdrawals), excluding money market activity: | | | | | | | | | |
| Third-party | 5.3 | | | 3.0 | | | 13.4 | | | 4.5 | | | 14.6 | |
| Third-party via affiliates(1) | (3.7) | | | (1.4) | | | (6.8) | | | (8.2) | | | (8.8) | |
| Total | 1.6 | | | 1.6 | | | 6.6 | | | (3.7) | | | 5.8 | |
| Market appreciation (depreciation)(2) | 21.0 | | | 2.0 | | | 30.4 | | | 34.9 | | | 44.9 | |
| Other increases (decreases)(3) | 0.2 | | | (0.2) | | | 0.4 | | | (0.1) | | | 1.0 | |
| Ending assets under management | 343.0 | | | 291.3 | | | 343.0 | | | 291.3 | | | 343.0 | |
| General Account: | | | | | | | | | |
| Beginning assets under management | 503.1 | | | 459.8 | | | 472.6 | | | 427.8 | | | 474.7 | |
| Net additions (withdrawals), excluding money market activity: | | | | | | | | | |
| Third-party | 0.0 | | | 0.0 | | | 0.0 | | | 0.0 | | | 0.0 | |
| Affiliated | 2.1 | | | (0.4) | | | 2.9 | | | 1.2 | | | 7.8 | |
| Total | 2.1 | | | (0.4) | | | 2.9 | | | 1.2 | | | 7.8 | |
| Market appreciation (depreciation)(2) | 5.0 | | | 10.6 | | | 22.4 | | | 39.0 | | | 20.3 | |
| Other increases (decreases)(3) | (1.1) | | | 4.7 | | | 11.2 | | | 6.7 | | | 6.3 | |
| Ending assets under management | 509.1 | | | 474.7 | | | 509.1 | | | 474.7 | | | 509.1 | |
| Total assets under management(4) | $ | 1,443.1 | | | $ | 1,305.8 | | | $ | 1,443.1 | | | $ | 1,305.8 | | | $ | 1,443.1 | |
__________
(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 gain of $3.4 billion and a loss of $0.5 billion for the three months ended September 30, 2020 and 2019, respectively, and a gain of $2.7 billion and $0.2 billion for the nine months ended September 30, 2020 and 2019, respectively; and a gain of $3.0 billion for the twelve months ended September 30, 2020.
(4)Prior period amounts have been updated to conform to current period presentation.
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.
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (in millions) |
| Co-Investments(1): | | | |
| Public fixed income | $ | 467 | | | $ | 462 | |
| Real estate | 154 | | | 228 | |
| Private credit and other alternatives | 22 | | | 19 | |
| Seed Investments(1): | | | |
| Public equity | 717 | | | 671 | |
| Public fixed income | 349 | | | 325 | |
| Real estate | 32 | | | 34 | |
| Private credit and other alternatives | 74 | | | 59 | |
| Multi-asset | 65 | | | 74 | |
| Total | $ | 1,880 | | | $ | 1,872 | |
__________
(1)Prior period amounts have been updated to conform to current period presentation. For more information, see the “Assets Under Management” table above.
The increase of $8 million in co- and seed investments was primarily driven by strong equity and fixed income seed investment performance, partially offset by a significant liquidation of a real estate co-investment.
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
September 30, | | Nine Months Ended September 30, 2020 |
| | 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Adjusted operating income before income taxes: | | | | | | | |
| U.S. Businesses: | | | | | | | |
| U.S. Workplace Solutions division: | | | | | | | |
| Retirement | $ | 372 | | | $ | 302 | | | $ | 898 | | | $ | 1,020 | |
| Group Insurance | 22 | | | 90 | | | 71 | | | 224 | |
| Total U.S. Workplace Solutions division | 394 | | | 392 | | | 969 | | | 1,244 | |
| U.S. Individual Solutions division: | | | | | | | |
| Individual Annuities | 408 | | | 459 | | | 1,030 | | | 1,393 | |
| Individual Life | 101 | | | 59 | | | 17 | | | 29 | |
| Total U.S. Individual Solutions division | 509 | | | 518 | | | 1,047 | | | 1,422 | |
| Assurance IQ division(1): | | | | | | | |
| Assurance IQ | (30) | | | 0 | | | (69) | | | 0 | |
| Total Assurance IQ division | (30) | | | 0 | | | (69) | | | 0 | |
| Total U.S. Businesses | 873 | | | 910 | | | 1,947 | | | 2,666 | |
| Reconciling Items: | | | | | | | |
| Realized investment gains (losses), net, and related adjustments(2) | 571 | | | (40) | | | (1,857) | | | (1,811) | |
| Charges related to realized investment gains (losses), net | (63) | | | (123) | | | (328) | | | (90) | |
| Market experience updates(3) | (130) | | | (306) | | | (974) | | | (476) | |
| Other adjustments(4) | (12) | | | 0 | | | 65 | | | 0 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 1 | | | 0 | | | 2 | | | 1 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 1,240 | | | $ | 441 | | | $ | (1,145) | | | $ | 290 | |
________
(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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
Three Month Comparison. Adjusted operating income for our U.S. Businesses decreased by $37 million primarily due to:
•Lower fee income, net of distribution expenses and other associated costs, in our Individual Annuities business; and
•Lower underwriting results primarily driven by COVID-19 related net mortality experience.
•Partially offsetting these decreases were higher net investment spread results driven by higher income on non-coupon investments.
Nine Month Comparison. Adjusted operating income for our U.S. Businesses decreased by $719 million primarily due to:
•Lower fee income, net of distribution expenses and other associated costs, in our Individual Annuities business;
•Lower net investment spread results driven by lower income on non-coupon investments;
•An unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements; and
•Lower underwriting results primarily driven by COVID-19 related net mortality experience.
•Partially offsetting these decreases were lower expenses, including those associated with cost savings initiatives.
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
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Operating results: | | | | | | | |
| Revenues | $ | 2,690 | | | $ | 2,261 | | | $ | 8,119 | | | $ | 8,486 | |
| Benefits and expenses | 2,318 | | | 1,959 | | | 7,221 | | | 7,466 | |
| Adjusted operating income | 372 | | | 302 | | | 898 | | | 1,020 | |
| Realized investment gains (losses), net, and related adjustments(1) | 98 | | | 200 | | | 93 | | | 368 | |
| Charges related to realized investment gains (losses), net | 6 | | | (10) | | | (5) | | | 1 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 1 | | | 0 | | | 2 | | | 1 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 477 | | | $ | 492 | | | $ | 988 | | | $ | 1,390 | |
__________
(1)Prior period amounts have been updated to conform to current period presentation.
Adjusted Operating Income
Three Month Comparison. Adjusted operating income increased $70 million, primarily driven by higher net investment spread results and higher reserve gains. The increase in net investment spread results primarily reflected higher income on non-coupon investments and the impact of lower crediting rates, partially offset by lower reinvestment yields. The higher contribution from reserve experience was primarily driven by COVID-19 related mortality gains.
Nine Month Comparison. Adjusted operating income decreased $122 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for 2020 included a net charge of
$22 million from these updates primarily driven by an increase in expected benefit payments, while results for 2019 included a net benefit of $154 million from these updates, primarily driven by a reduction in expected benefit payments. Excluding this item, adjusted operating income increased $54 million, primarily driven by higher reserve gains, partially offset by lower net investment spread results. The higher contribution from reserve experience was primarily driven by COVID-19 related mortality gains. The decrease in net investment spread results primarily reflected lower income on non-coupon investments and lower reinvestment yields, partially offset by the impact of lower crediting rates.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues increased $429 million. This increase primarily reflected higher pension risk transfer premiums with corresponding offsets in policyholders’ benefits, as discussed below. This increase also reflected higher net investment income, primarily driven by higher income on non-coupon investments, partially offset by lower reinvestment yields.
Benefits and expenses increased $359 million. Policyholders’ benefits, including the change in policy reserves, increased primarily related to the increase in pension risk transfer premiums discussed above, partially offset by more favorable reserve experience primarily driven by COVID-19 related mortality gains.
Nine Month Comparison. Revenues decreased $367 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $373 million. This decrease primarily reflected lower pension risk transfer premiums with corresponding offsets in policyholders’ benefits, as discussed below. This decrease also reflected lower net investment income, primarily reflecting lower income on non-coupon investments and lower reinvestment yields.
Benefits and expenses decreased $245 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $427 million. Policyholders’ benefits, including the change in policy reserves, decreased primarily related to the decrease in pension risk transfer premiums discussed above, as well as more favorable reserve experience primarily driven by COVID-19 related mortality 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, since 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
September 30, | | Nine Months Ended
September 30, | | Twelve
Months
Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 |
| (in millions) |
| Full Service: | | | | | | | | | |
| Beginning total account value | $ | 266,433 | | | $ | 262,133 | | | $ | 272,448 | | | $ | 231,669 | | | $ | 259,946 | |
| Deposits and sales | 14,705 | | | 7,458 | | | 29,112 | | | 28,072 | | | 37,434 | |
| Withdrawals and benefits | (9,465) | | | (10,758) | | | (25,173) | | | (27,122) | | | (33,757) | |
| Change in market value, interest credited and interest income and other activity | 13,337 | | | 1,113 | | | 8,623 | | | 27,327 | | | 21,387 | |
| Ending total account value | $ | 285,010 | | | $ | 259,946 | | | $ | 285,010 | | | $ | 259,946 | | | $ | 285,010 | |
| Institutional Investment Products: | | | | | | | | | |
| Beginning total account value | $ | 231,142 | | | $ | 215,978 | | | $ | 227,596 | | | $ | 200,759 | | | $ | 217,580 | |
| Additions(1) | 2,780 | | | 5,235 | | | 14,218 | | | 22,526 | | | 22,793 | |
| Withdrawals and benefits | (4,189) | | | (4,626) | | | (13,226) | | | (12,436) | | | (17,533) | |
| Change in market value, interest credited and interest income | 1,944 | | | 2,406 | | | 7,379 | | | 7,876 | | | 8,592 | |
| Other(2) | 3,019 | | | (1,413) | | | (1,271) | | | (1,145) | | | 3,264 | |
| Ending total account value | $ | 234,696 | | | $ | 217,580 | | | $ | 234,696 | | | $ | 217,580 | | | $ | 234,696 | |
__________
(1)Additions primarily include: group annuities calculated based on premiums received; funding agreements issued; unfunded 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 September 30, 2020 and 2019, “Other” activity also includes $869 million in receipts offset by $831 million in payments and $1,418 million in receipts offset by $1,024 million in payments, respectively, and for the nine months ended September 30, 2020 and 2019, includes $6,235 million in receipts offset by $6,107 million in payments and $2,822 million in receipts offset by $2,218 million in payments, respectively, related to funding agreements backed by commercial paper which typically have maturities of less than 90 days.
The increase in Full Service account values for the three months, nine months and twelve months ended September 30, 2020 primarily reflected favorable changes in the market value of customer funds and net deposits and sales.
Institutional Investment Products account values for the three months ended September 30, 2020 reflected an increase in other activity, primarily driven by the positive impacts of foreign exchange rate changes, and a favorable change in the market value of account assets, partially offset by net withdrawals driven by pension risk transfer activity. Account values for the nine months ended September 30, 2020 reflected a favorable change in the market value of account assets and net additions driven by collateralized funding agreements and investment-only stable value accounts, which were partially offset by pension risk transfer activity. Account values for the twelve months ended September 30, 2020 reflected a favorable change in the market value of account values, net additions driven by collateralized funding agreements, pension risk transfer activity and investment-only stable value accounts, and an increase in other activity primarily driven by the positive impacts of foreign exchange rate changes.
Group Insurance
Operating Results
The following table sets forth Group Insurance’s operating results and benefits and administrative operating expense ratios for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| ($ in millions) |
| Operating results: | | | | | | | |
| Revenues | $ | 1,457 | | | $ | 1,438 | | | $ | 4,352 | | | $ | 4,340 | |
| Benefits and expenses | 1,435 | | | 1,348 | | | 4,281 | | | 4,116 | |
| Adjusted operating income | 22 | | | 90 | | | 71 | | | 224 | |
| Realized investment gains (losses), net, and related adjustments | 4 | | | 0 | | | 75 | | | 9 | |
| | | | | | | |
| | | | | | | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 26 | | | $ | 90 | | | $ | 146 | | | $ | 233 | |
| Benefits ratio(1)(4): | | | | | | | |
| Group life(2) | 93.9 | % | | 84.7 | % | | 91.8 | % | | 88.0 | % |
| Group disability(2) | 73.5 | % | | 79.4 | % | | 74.5 | % | | 73.1 | % |
| Total Group Insurance(2) | 89.4 | % | | 83.5 | % | | 88.0 | % | | 84.7 | % |
| Administrative operating expense ratio(3)(4): | | | | | | | |
| Group life | 12.2 | % | | 13.1 | % | | 12.1 | % | | 12.3 | % |
| Group disability | 25.2 | % | | 22.0 | % | | 25.4 | % | | 24.3 | % |
| Total Group Insurance | 15.1 | % | | 15.2 | % | | 15.0 | % | | 14.9 | % |
__________
(1)Ratio of policyholder benefits to earned premiums plus policy charges and fee income.
(2)Benefit ratios for the nine months ended September 30, 2020 and 2019 reflect the impact of our annual reviews and update of assumptions and other refinements. Excluding these impacts, the group life, group disability and total Group Insurance benefit ratios were 91.9%, 75.0% and 88.2% for the nine months ended September 30, 2020, respectively, and 87.4%, 76.2% and 85.0% for the nine months ended September 30, 2019, respectively.
(3)Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income.
(4)The benefit and administrative ratios are measures used to evaluate profitability and efficiency.
Adjusted Operating Income
Three Month Comparison. Adjusted operating income decreased $68 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts, partially offset by more favorable underwriting results in our group disability business driven by a favorable impact from claim experience on long-term disability products.
Nine Month Comparison. Adjusted operating income decreased $153 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for both 2020 and 2019 included a net benefit from this update of $11 million and $9 million, respectively. Excluding this item, adjusted operating income decreased $155 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts. The decrease also reflected lower net investment spread results driven by lower income on non-coupon investments.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues increased $19 million. The increase primarily reflected higher premiums and policy charges and fee income driven by growth in our group life business, partially offset by lower net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below.
Benefits and expenses increased $87 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, including increases in our group life business mostly due to COVID-19 impacts, partially offset by decreases in our group disability business driven by a favorable impact from claim experience on long-term disability products. The increase was also partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.
Nine Month Comparison. Revenues increased $12 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $19 million. The decrease primarily reflected lower
net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below. Partially offsetting the decrease were higher premiums and policy charges and fee income driven by growth in our group life business.
Benefits and expenses increased $165 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $136 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, including increases in our group life business mostly due to COVID-19 impacts. The increase was partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.
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
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Annualized new business premiums(1): | | | | | | | |
| Group life | $ | 46 | | | $ | 42 | | | $ | 227 | | | $ | 233 | |
| Group disability | 17 | | | 18 | | | 143 | | | 153 | |
| Total | $ | 63 | | | $ | 60 | | | $ | 370 | | | $ | 386 | |
__________
(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 September 30, 2020 increased $3 million compared to the prior year period, driven by higher sales in our group life business. Total annualized new business premiums for the nine months ended September 30, 2020 decreased $16 million compared to the prior year period, driven by lower sales in our group life and group disability businesses. Sales levels reflect pricing competitiveness and reduced levels of client case movement within the large market.
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
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Operating results: | | | | | | | |
| Revenues | $ | 1,148 | | | $ | 1,251 | | | $ | 3,249 | | | $ | 3,774 | |
| Benefits and expenses | 740 | | | 792 | | | 2,219 | | | 2,381 | |
| Adjusted operating income | 408 | | | 459 | | | 1,030 | | | 1,393 | |
| Realized investment gains (losses), net, and related adjustments | 518 | | | (408) | | | (2,525) | | | (2,633) | |
| Charges related to realized investment gains (losses), net | (166) | | | (84) | | | (67) | | | 106 | |
| Market experience updates(1) | (58) | | | (120) | | | (686) | | | (130) | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 702 | | | $ | (153) | | | $ | (2,248) | | | $ | (1,264) | |
________
(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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
Adjusted Operating Income
Three Month Comparison. Adjusted operating income decreased $51 million primarily driven by lower fee income, net of distribution expenses and other associated costs, due to unfavorable impacts from our living benefit guarantees, certain products reaching contractual milestones for fee tier reduction, and lower average separate account values. This decrease was partially offset by higher net investment spread results primarily reflecting a higher level of invested assets net of lower reinvestment yields.
Nine Month Comparison. Adjusted operating income decreased $363 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for 2020 included a $136 million net charge from these updates primarily driven by unfavorable impacts related to a decrease in long-term interest rate assumptions. Results for 2019 included a $12 million net charge from these updates. Excluding this item, adjusted operating income decreased $239 million primarily driven by lower fee income, net of distribution expenses and other associated costs, due to unfavorable impacts from our living benefit guarantees, certain products reaching contractual milestones for fee tier reduction, and lower average account values.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues decreased $103 million primarily driven by lower policy charges and fee income reflecting unfavorable impacts from our living benefit guarantees resulting from declining interest rates, certain products reaching contractual milestones for fee tier reduction, and lower average separate account values resulting from net outflows which were partially offset by market appreciation. Also contributing to the decrease were lower premiums resulting from a decrease in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below. These decreases were partially offset by higher asset management and services fees and other income related to lower capital hedge costs.
Benefits and expenses decreased $52 million primarily driven by lower interest expense on collateral amounts related to investment activities, and lower policyholders’ benefits, including changes in reserves, due to lower reserve provisions resulting from a decrease in single premium immediate annuity sales, with offsets in premiums, as discussed above.
Nine Month Comparison. Revenues decreased $525 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $393 million. The decrease was primarily driven by lower policy charges and fee income reflecting unfavorable impacts from our living benefit guarantees resulting from declining interest rates, certain products reaching contractual milestones for fee tier reductions, and lower average account values resulting from net outflows which were partially offset by market appreciation. Also contributing to the decrease were lower premiums resulting from a decrease in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below. These decreases were partially offset by higher asset management and services fees and other income as a result of lower capital hedge costs.
Benefits and expenses decreased $162 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $154 million primarily driven by lower policyholders’ benefits, including changes in reserves, due to lower reserve provisions 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
September 30, | | Nine Months Ended
September 30, | | Twelve
Months
Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 |
| (in millions) |
| Total Individual Annuities(1): | | | | | | | | | |
| Beginning total account value | $ | 159,276 | | | $ | 165,313 | | | $ | 169,681 | | | $ | 151,080 | | | $ | 164,698 | |
| Sales | 1,562 | | | 2,657 | | | 4,835 | | | 7,639 | | | 6,916 | |
| Full surrenders and death benefits | (1,811) | | | (2,568) | | | (5,740) | | | (6,905) | | | (8,209) | |
| Sales, net of full surrenders and death benefits | (249) | | | 89 | | | (905) | | | 734 | | | (1,293) | |
| Partial withdrawals and other benefit payments | (1,205) | | | (1,229) | | | (3,750) | | | (3,694) | | | (5,219) | |
| Net flows | (1,454) | | | (1,140) | | | (4,655) | | | (2,960) | | | (6,512) | |
| Change in market value, interest credited and other activity | 7,270 | | | 1,448 | | | 1,806 | | | 19,310 | | | 9,569 | |
| Policy charges | (894) | | | (923) | | | (2,634) | | | (2,732) | | | (3,557) | |
| Ending total account value | $ | 164,198 | | | $ | 164,698 | | | $ | 164,198 | | | $ | 164,698 | | | $ | 164,198 | |
__________
(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 $158.6 billion and $160.1 billion as of September 30, 2020 and 2019, respectively. Fixed annuity account values were $5.6 billion and $4.6 billion as of September 30, 2020 and 2019, respectively.
The decrease in sales, net of full surrenders and death benefits, for both the three and nine months ended September 30, 2020 in comparison to the prior year periods, reflects lower gross sales driven by benefit rate reductions and pricing actions in response to capital market pressures, and lower full surrenders driven by general uncertainty around COVID-19 as well as recent market volatility.
The slight decrease in account values for the twelve months ended September 30, 2020 was driven by net outflows and policy charges on contractholder accounts, largely offset by market value appreciation.
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 exposures of our fixed annuity products relate 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, including 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 contract that help to provide protection for premature withdrawals. In addition, a portion of our fixed products has a market value adjustment provision that provides protection of lapse in the case of rising interest rates. We also manage these risk exposures through external reinsurance for certain of our fixed annuity products.
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) Asset Liability Management Strategy, and iii) Capital Hedge Program as discussed below. We also manage these risk exposures through external reinsurance for certain of our variable annuity products.
i.Product Design Features:
A portion of the variable annuity contracts that we offer 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 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 claims 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, 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. 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 derivatives, including, but not limited to: equity and treasury futures; total return 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.
Under our ALM strategy, 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”) (in order to maximize protection irrespective of the possibility of our own 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:
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| (in millions) |
| U.S. GAAP liability, including NPR, net of reinsurance recoverables(1) | $ | 22,881 | | | $ | 12,612 | |
| NPR adjustment, net of reinsurance recoverables(1) | 5,941 | | | 3,522 | |
| Subtotal | 28,822 | | | 16,134 | |
| Adjustments including risk margins and valuation methodology differences | (7,406) | | | (4,385) | |
| Economic liability managed through the ALM strategy | $ | 21,416 | | | $ | 11,749 | |
________
(1)Prior period amounts have been updated to conform to current period presentation.
As of September 30, 2020, the fair value of our fixed income instruments and derivative assets exceed the economic liability within the entities in which the risks reside.
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 have 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, and the related amortization of DAC and other costs.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Results excluded from adjusted operating income(2) | (in millions)(1) |
| Change in value of U.S. GAAP liability, pre-NPR(3) | $ | 3,852 | | | $ | (4,451) | | | $ | (11,219) | | | $ | (6,716) | |
| Change in the NPR adjustment | (597) | | | 1,197 | | | 2,420 | | | 324 | |
| Change in fair value of hedge assets, excluding capital hedges(4) | (2,391) | | | 2,756 | | | 6,214 | | | 4,021 | |
| Change in fair value of capital hedges(5) | (360) | | | (15) | | | (113) | | | (647) | |
| Other | 14 | | | 105 | | | 173 | | | 385 | |
| Realized investment gains (losses), net, and related adjustments | 518 | | | (408) | | | (2,525) | | | (2,633) | |
| Market experience updates(6) | (58) | | | (120) | | | (686) | | | (130) | |
| Charges related to realized investment gains (losses), net | (166) | | | (84) | | | (67) | | | 106 | |
| Total results excluded from adjusted operating income(7) | $ | 294 | | | $ | (612) | | | $ | (3,278) | | | $ | (2,657) | |
__________
(1)Positive amount represents income; negative amount represents a loss.
(2)Includes the impact of annual reviews and update of assumptions and other refinements.
(3)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.
(4)Represents the change in fair value of the derivatives utilized to hedge potential claims associated with our variable annuity living benefit guarantees.
(5)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.
(6)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.
(7)Excludes amounts from the changes in fair value of fixed income instruments recorded in OCI (versus net income): a loss of $33 million and gain of $587 million for the three months ended September 30, 2020 and 2019, respectively; and a gain of $1,668 million and $1,237 million for the nine months ended September 30, 2020 and 2019, respectively.
For the three months ended September 30, 2020, the gain of $294 million primarily reflected favorable living benefit results. These results were driven by a favorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by tightening of credit spreads and favorable equity market performance, and gains from duration management swaps associated with the living benefit results. These gains were partially offset by an unfavorable NPR adjustment, losses associated with our capital hedge program, and unfavorable hedge breakage driven by credit spreads tightening. These net gains were partially offset by a charge related to the amortization of DAC and other costs.
For the nine months ended September 30, 2020, the loss of $3,278 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates, widening of credit spreads, and unfavorable equity market performance. Also contributing to the results were unfavorable hedge breakage driven by equity market volatility partially offset by credit spreads widening, and losses from duration management swaps associated with the living benefit results. Partially offsetting these losses was a favorable NPR adjustment. A charge related to the amortization of DAC and other costs also contributed to the results.
For the three months ended September 30, 2019, the loss of $612 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates and widening of credit spreads, and losses from duration
management swaps associated with the living benefit results. Partially offsetting these losses was a favorable NPR adjustment. A charge related to the amortization of DAC and other costs also contributed to the results.
For the nine months ended September 30, 2019, the loss of $2,657 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates partially offset by favorable equity market performance, losses from duration management swaps associated with the living benefit results, and losses associated with our capital hedge program. Partial offsets to these losses were a favorable NPR adjustment. These net losses were partially offset by a benefit related to the amortization of DAC and other costs.
Product Specific Risks and Risk Mitigants
As noted above, the risks associated with our products are mitigated through product design features, including automatic rebalancing, as well as through our ALM strategy and external reinsurance. The following table sets forth the risk management profile of our living benefit guarantees and guaranteed minimum death benefit (“GMDB”) features as of the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | | September 30, 2019 |
| | Account
Value | | % of
Total | | Account
Value | | % of
Total | | Account
Value | | % of
Total |
| | ($ in millions) |
| Living benefit/GMDB features(1): | | | | | | | | | | | | |
| Both ALM strategy and automatic rebalancing(2)(3) | | $ | 104,815 | | | 66 | % | | $ | 111,535 | | | 68 | % | | $ | 108,457 | | | 68 | % |
| ALM strategy only(3) | | 6,955 | | | 4 | % | | 7,703 | | | 5 | % | | 7,586 | | | 5 | % |
| Automatic rebalancing only | | 634 | | | 1 | % | | 732 | | | 1 | % | | 747 | | | 1 | % |
| External reinsurance(4) | | 2,944 | | | 2 | % | | 3,150 | | | 2 | % | | 3,055 | | | 2 | % |
| PDI | | 17,888 | | | 11 | % | | 16,296 | | | 9 | % | | 15,624 | | | 9 | % |
| Other products | | 2,306 | | | 1 | % | | 2,457 | | | 1 | % | | 2,396 | | | 1 | % |
| Total living benefit/GMDB features | | $ | 135,542 | | | | | $ | 141,873 | | | | | $ | 137,865 | | | |
| GMDB features and other(5) | | 23,104 | | | 15 | % | | 23,055 | | | 14 | % | | 22,265 | | | 14 | % |
| Total variable annuity account value | | $ | 158,646 | | | | | $ | 164,928 | | | | | $ | 160,130 | | | |
__________
(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.
Individual Life
Operating Results
The following table sets forth Individual Life’s operating results for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Operating results: | | | | | | | |
| Revenues | $ | 1,609 | | | $ | 1,529 | | | $ | 4,702 | | | $ | 4,519 | |
| Benefits and expenses | 1,508 | | | 1,470 | | | 4,685 | | | 4,490 | |
| Adjusted operating income | 101 | | | 59 | | | 17 | | | 29 | |
| Realized investment gains (losses), net, and related adjustments | (49) | | | 168 | | | 500 | | | 445 | |
| Charges related to realized investment gains (losses), net | 97 | | | (29) | | | (256) | | | (197) | |
| Market experience updates(1) | (72) | | | (186) | | | (288) | | | (346) | |
| | | | | | | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 77 | | | $ | 12 | | | $ | (27) | | | $ | (69) | |
__________
(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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
Adjusted Operating Income
Three Month Comparison. Adjusted operating income increased $42 million, primarily reflecting higher net investment spread results, driven by higher income on non-coupon investments, and lower expenses from cost savings initiatives.
Nine Month Comparison. Adjusted operating income decreased $12 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for 2020 included a $92 million net charge from these updates, mainly driven by unfavorable impacts related to a decrease in long-term interest rate assumptions. Results for 2019 included a $208 million net charge from these updates, mainly driven by unfavorable impacts related to mortality assumptions. Excluding this item, adjusted operating income decreased $128 million, primarily reflecting lower underwriting results, driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims, and the absence of 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. Also contributing to the decrease were lower net investment spread results driven by lower income on non-coupon investments and lower investment yields, partially offset by business growth. These decreases were partially offset by lower expenses from cost savings initiatives.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues increased $80 million. This increase was primarily driven by higher policy charges and fee income driven by business growth, and higher net investment income due to higher average invested assets resulting from business growth and higher income on non-coupon investments, partially offset by lower investment yields.
Benefits and expenses increased $38 million. This increase was primarily driven by higher policyholders’ benefits, including changes in reserves, due to business growth. The increase was partially offset by lower general and administrative expenses, net of capitalization, reflecting lower expenses, as discussed above.
Nine Month Comparison. Revenues increased $183 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $112 million. This increase was primarily driven by higher policy charges and fee income driven by business growth, and higher net investment income due to higher average invested assets resulting from business growth, partially offset by lower income on non-coupon investments and lower investment yields.
Benefits and expenses increased $195 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $240 million. This increase reflected higher policyholders’ benefits, including changes in reserves, driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims, as well as higher interest credited to account balances driven by business growth. Also contributing to the increase was the absence of a favorable impact from changes in market conditions on estimates of profitability in the prior year period, as discussed above. The increase also reflected higher general and administrative expenses, net of capitalization, reflecting increased VOBA amortization, partially offset by lower other expenses, as discussed above.
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 September 30, 2020 | | Three Months Ended September 30, 2019 |
| | Prudential
Advisors | | Third-
Party | | Total | | Prudential
Advisors | | Third-
Party | | Total |
| | (in millions) |
| Term Life | | $ | 6 | | | $ | 28 | | | $ | 34 | | | $ | 7 | | | $ | 42 | | | $ | 49 | |
| Guaranteed Universal Life(1) | | 1 | | | 19 | | | 20 | | | 2 | | | 22 | | | 24 | |
| Other Universal Life(1) | | 3 | | | 17 | | | 20 | | | 9 | | | 26 | | | 35 | |
| Variable Life | | 22 | | | 76 | | | 98 | | | 20 | | | 47 | | | 67 | |
| Total | | $ | 32 | | | $ | 140 | | | $ | 172 | | | $ | 38 | | | $ | 137 | | | $ | 175 | |
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2019 |
| | Prudential
Advisors | | Third-
Party | | Total | | Prudential
Advisors | | Third-
Party | | Total |
| | (in millions) |
| Term Life | | $ | 19 | | | $ | 95 | | | $ | 114 | | | $ | 21 | | | $ | 132 | | | $ | 153 | |
| Guaranteed Universal Life(1) | | 4 | | | 79 | | | 83 | | | 6 | | | 63 | | | 69 | |
| Other Universal Life(1) | | 15 | | | 58 | | | 73 | | | 29 | | | 84 | | | 113 | |
| Variable Life | | 64 | | | 209 | | | 273 | | | 55 | | | 129 | | | 184 | |
| Total | | $ | 102 | | | $ | 441 | | | $ | 543 | | | $ | 111 | | | $ | 408 | | | $ | 519 | |
__________
(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 4% of Guaranteed Universal Life and 2% and 8% of Other Universal Life annualized new business premiums for the three months ended September 30, 2020 and 2019, respectively, and approximately 9% and 6% of Guaranteed Universal Life and 7% and 13% of Other Universal Life annualized new business premiums for the nine months ended September 30, 2020 and 2019, respectively. Prior period percentages have been updated to conform to current period presentation.
Total annualized new business premiums for the third quarter of 2020 decreased $3 million compared to the prior year period, primarily driven by lower sales of term life products due to pricing actions and lower sales of other universal life products due to the absence of large case activity in the third quarter of 2020. The decrease was partially offset by higher sales of variable life products as a result of product design and pricing actions. Total annualized new business premiums for the first nine months of 2020 increased $24 million compared to the prior year period, primarily driven by higher sales of variable life products, as discussed above, and higher sales of guaranteed universal life products. The increase was partially offset by lower sales of term life products, as discussed above, and lower sales of other universal life products due to the absence of large case activity in the second and third quarters of 2020.
U.S. Businesses—Assurance IQ Division
Assurance IQ
Operating Results
The following table sets forth Assurance IQ’s operating results for the periods indicated.
| | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, 2020 | | Nine Months Ended
September 30, 2020 |
| | (in millions) |
| Operating results: | | | | |
| Revenues | | $ | 75 | | | $ | 194 | |
| Expenses | | 105 | | | 263 | |
| Adjusted operating income | | (30) | | | (69) | |
| Other adjustments(1) | | (12) | | | 65 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | | $ | (42) | | | $ | (4) | |
__________
(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 third quarter and the first nine months of 2020 was $(30) million and $(69) million, respectively, reflecting revenues, net of marketing and distribution expenses, primarily related to our health (Health Under 65) and life insurance product lines. Results for both periods also included operating expenses, including certain expenses incurred in the third quarter in preparation for the fourth quarter 2020 annual Medicare enrollment period, 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 for the third quarter and the first nine months of 2020 were $75 million and $194 million, respectively, primarily reflecting commissions and marketing referral revenues from our health (Health Under 65) and life insurance product lines. Expenses for the third quarter and the first nine months of 2020 were $105 million and $263 million, respectively, driven by marketing and distribution costs, general and administrative operating expenses including certain expenses incurred in the third quarter in preparation for the fourth quarter 2020 annual Medicare enrollment period, and amortization expenses related to intangible assets.
International Businesses
Business Update
•In August 2020, we successfully completed the sale of The Prudential Life Insurance Company of Korea, Ltd. (“POK”) to KB Financial Group Inc., for cash consideration of approximately 2.3 trillion Korean Won, equal to approximately $1.9 billion. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information. Effective in the second quarter of 2020, the results of this business and the impact of its sale were reflected in the Divested and Run-off Businesses that are included in Corporate and Other, and all prior period amounts have been updated to conform to the current period presentation. See “—Divested and Run-off Businesses.”
•In August 2020, we entered into a definitive agreement with Taishin Financial Holding Co, Ltd., a Taiwanese financial services provider, to sell Prudential Life Insurance Company of Taiwan Inc. (“POT”) for cash consideration of approximately $190 million at then current exchange rates, to be paid at closing, and contingent consideration with a fair value of approximately $26 million at September 30, 2020. The transaction is consistent with our strategic focus internationally on Japan and higher-growth emerging markets around the world. The transaction is expected to close in 2021, subject to regulatory approvals and customary closing conditions. In the third quarter of 2020, we reported our investment in POT as “held for sale” and recognized an approximately $300 million after-tax charge to earnings to adjust the carrying value of POT to the fair market value reflected in the purchase price (see Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information). Effective in the third quarter of 2020, the results of this business and the impact of the anticipated sale are reflected in the Divested and Run-off Businesses that are included in Corporate and 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.
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. The exchange rate used was Japanese yen at a rate of 104 yen per USD, which was 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
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Operating results(1): | | | | | | | |
| Revenues: | | | | | | | |
| Life Planner | $ | 2,548 | | | $ | 2,336 | | | $ | 7,591 | | | $ | 7,228 | |
| Gibraltar Life and Other | 2,933 | | | 2,880 | | | 8,610 | | | 8,506 | |
| Total revenues | 5,481 | | | 5,216 | | | 16,201 | | | 15,734 | |
| Benefits and expenses: | | | | | | | |
| Life Planner | 2,134 | | | 2,039 | | | 6,513 | | | 6,140 | |
| Gibraltar Life and Other | 2,572 | | | 2,456 | | | 7,526 | | | 7,230 | |
| Total benefits and expenses | 4,706 | | | 4,495 | | | 14,039 | | | 13,370 | |
| Adjusted operating income: | | | | | | | |
| Life Planner | 414 | | | 297 | | | 1,078 | | | 1,088 | |
| Gibraltar Life and Other | 361 | | | 424 | | | 1,084 | | | 1,276 | |
| Total adjusted operating income | 775 | | | 721 | | | 2,162 | | | 2,364 | |
| Realized investment gains (losses), net, and related adjustments(2) | 168 | | | 439 | | | 843 | | | 1,203 | |
| Charges related to realized investment gains (losses), net | (11) | | | (4) | | | (33) | | | (7) | |
| Market experience updates(3) | 3 | | | (1) | | | (39) | | | (32) | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | 8 | | | (28) | | | (22) | | | (86) | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 943 | | | $ | 1,127 | | | $ | 2,911 | | | $ | 3,442 | |
__________
(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)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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
Adjusted Operating Income
Three Month Comparison. Adjusted operating income from our Life Planner operations increased $117 million, including a net favorable impact of $4 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding this item, adjusted operating income from our Life Planner operations increased $113 million, primarily reflecting lower expenses driven by the absence of updates to legal reserves incurred in the prior year period. Also contributing to the increase were favorable underwriting results due to the growth of business in force in our Japan and Brazil operations, favorable policyholder experience and a favorable impact from mortality experience.
Adjusted operating income from our Gibraltar Life and Other operations decreased $63 million, including a net unfavorable impact of $2 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding this item, adjusted operating income from our Gibraltar Life and Other operations decreased $61 million, primarily reflecting lower earnings from our joint venture investments, as well as higher expenses driven by costs associated with COVID-19 (see “Overview—COVID-19”). Also contributing to the decrease were lower net investment spread results driven by lower reinvestment yields, partially offset by higher income on non-coupon investments. These decreases were partially offset by favorable underwriting results due to the growth of business in force and a favorable impact from mortality experience.
Nine Month Comparison. Adjusted operating income from our Life Planner operations decreased $10 million, including a net favorable impact of $3 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in a $42 million net charge in 2020 compared to a $5 million net benefit in 2019. The net charge in 2020 was primarily driven by unfavorable impacts related to a decrease in long-term interest rate assumptions.
Excluding these items, adjusted operating income from our Life Planner operations increased $34 million primarily reflecting favorable underwriting results due to the growth of business in force in our Japan and Brazil operations and favorable policyholder experience, partially offset by an unfavorable impact from mortality experience. Also contributing to the increase were lower expenses primarily driven by the absence of updates to legal reserves incurred in the prior year period, partially offset by higher costs related to business growth and business initiatives. These increases were partially offset by lower net investment spread results primarily driven by lower reinvestment yields.
Adjusted operating income from our Gibraltar Life and Other operations decreased $192 million, including a net unfavorable impact of $6 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in a $52 million net charge in 2020 compared to a $7 million net benefit in 2019. The net charge in 2020 was primarily driven by updates of reserves reflecting the impact of a decrease in long-term interest rate assumptions, as well as other refinements.
Excluding these items, adjusted operating income from our Gibraltar Life and Other operations decreased $127 million, primarily reflecting lower earnings from our joint venture investments, as well as higher expenses driven by costs associated with COVID-19 (see “Overview—COVID-19”). Also contributing to the decrease were lower net investment spread results driven by lower reinvestment yields, partially offset by higher income on non-coupon investments. These decreases were partially offset by favorable underwriting results driven by the growth of business in force and a favorable impact from mortality experience.
Revenues, Benefits and Expenses
Three Month Comparison. Revenues from our Life Planner operations increased $212 million, including a net unfavorable impact of $38 million from currency fluctuations. Excluding this item, revenues increased $250 million, primarily driven by higher premiums and policy charges and fee income attributable to the growth of business in force, and higher net investment results driven by higher income on non-coupon investments, partially offset by lower reinvestment yields.
Benefits and expenses of our Life Planner operations increased $95 million, including a net favorable impact of $42 million from currency fluctuations. Excluding this item, benefits and expenses increased $137 million, primarily reflecting higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force. This increase was partially offset by lower expenses primarily driven by the absence of updates to legal reserves incurred in the prior year period.
Revenues from our Gibraltar Life and Other operations increased $53 million, including a net favorable impact of $16 million from currency fluctuations. Excluding this item, revenues increased $37 million, primarily reflecting higher premiums driven by the growth of business in force. Partially offsetting the increase were lower other income driven by an unfavorable impact from our joint venture investments, and lower net reinvestment results driven by lower investment yields, partially offset by higher income on non-coupon investments.
Benefits and expenses of our Gibraltar Life and Other operations increased $116 million, including a net unfavorable impact of $18 million from currency fluctuations. Excluding this item, benefits and expenses increased $98 million, primarily driven by higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force.
Nine Month Comparison. Revenues from our Life Planner operations increased $363 million, including a net unfavorable impact of $92 million from currency fluctuations and a net benefit of $33 million from our annual reviews and update of assumptions and other refinements. Excluding these items, revenues increased $422 million, primarily driven by 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 $373 million, including a net favorable impact of $95 million from currency fluctuations and a net charge of $80 million from our annual reviews and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $388 million, primarily reflecting higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force, as well as an unfavorable impact from mortality experience. These increases were partially offset by lower expenses primarily driven by the absence of updates to legal reserves incurred in the prior year period.
Revenues from our Gibraltar Life and Other operations increased $104 million, including a net favorable impact of $36 million from currency fluctuations and a net charge of $9 million from our annual reviews and update of assumptions and other refinements. Excluding these items, revenues increased $77 million, primarily driven by higher premiums attributable to the growth of business in force. The increase was partially offset by lower other income driven by an unfavorable impact from our joint venture investments, and lower net investment results driven by lower reinvestment yields, partially offset by higher income on non-coupon investments.
Benefits and expenses of our Gibraltar Life and Other operations increased $296 million, including a net unfavorable impact of $42 million from currency fluctuations and a net charge of $50 million from our annual reviews and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $204 million, primarily driven by higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force.
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
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Annualized new business premiums(1): | | | | | | | |
| On an actual exchange rate basis: | | | | | | | |
| Life Planner | $ | 381 | | | $ | 250 | | | $ | 839 | | | $ | 833 | |
| Gibraltar Life and Other | 407 | | | 312 | | | 911 | | | 931 | |
| Total | $ | 788 | | | $ | 562 | | | $ | 1,750 | | | $ | 1,764 | |
| On a constant exchange rate basis: | | | | | | | |
| Life Planner | $ | 395 | | | $ | 251 | | | $ | 871 | | | $ | 839 | |
| Gibraltar Life and Other | 408 | | | 313 | | | 915 | | | 936 | |
| Total | $ | 803 | | | $ | 564 | | | $ | 1,786 | | | $ | 1,775 | |
__________
(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 September 30, 2020 | | Three Months Ended September 30, 2019 |
| | Life | | Accident
&
Health | | Retirement(1) | | Annuity | | Total | | Life | | Accident
&
Health | | Retirement(1) | | Annuity | | Total |
| | (in millions) |
| Life Planner(2) | $ | 199 | | | $ | 19 | | | $ | 177 | | | $ | 0 | | | $ | 395 | | | $ | 130 | | | $ | 18 | | | $ | 103 | | | $ | 0 | | | $ | 251 | |
| Gibraltar Life and Other: | | | | | | | | | | | | | | | | | | | |
| Life Consultants | $ | 122 | | | $ | 9 | | | $ | 25 | | | $ | 12 | | | $ | 168 | | | $ | 95 | | | $ | 10 | | | $ | 23 | | | $ | 24 | | | $ | 152 | |
| Banks(3) | 152 | | | 0 | | | 6 | | | 9 | | | 167 | | | 107 | | | 0 | | | 9 | | | 3 | | | 119 | |
| Independent Agency | 43 | | | 1 | | | 28 | | | 1 | | | 73 | | | 18 | | | 1 | | | 21 | | | 2 | | | 42 | |
| Subtotal | 317 | | | 10 | | | 59 | | | 22 | | | 408 | | | 220 | | | 11 | | | 53 | | | 29 | | | 313 | |
| Total | $ | 516 | | | $ | 29 | | | $ | 236 | | | $ | 22 | | | $ | 803 | | | $ | 350 | | | $ | 29 | | | $ | 156 | | | $ | 29 | | | $ | 564 | |
__________
(1)Includes retirement income, endowment and savings variable universal life.
(2)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.
(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 1% and 74%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended September 30, 2020, and 2% and 68%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended September 30, 2019.
Three Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations increased $144 million, primarily driven by higher sales of USD-denominated products ahead of pricing increases in August 2020, as well as an increase in sales activities resulting from easing of COVID-19 restrictions on personal interactions and a greater use of technology (see “Overview—COVID-19”).
Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations increased $95 million. Bank channel and Independent Agency sales increased $48 million and $31 million, respectively, primarily driven by higher sales of USD-denominated products ahead of pricing increases in August 2020. Life Consultants sales also increased $16 million, reflecting higher sales of USD-denominated protection and endowment products ahead of pricing increases in August 2020, partially offset by lower sales of USD-denominated fixed annuity products driven by declines in crediting rates and lower Life Consultant headcount.
The table below presents annualized new business premiums on a constant exchange rate basis, by product and distribution channel, for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2019 |
| | Life | | Accident
&
Health | | Retirement(1) | | Annuity | | Total | | Life | | Accident
&
Health | | Retirement(1) | | Annuity | | Total |
| | (in millions) |
| Life Planner(2) | $ | 448 | | | $ | 54 | | | $ | 369 | | | $ | 0 | | | $ | 871 | | | $ | 460 | | | $ | 70 | | | $ | 308 | | | $ | 1 | | | $ | 839 | |
| Gibraltar Life and Other: | | | | | | | | | | | | | | | | | | | |
| Life Consultants | $ | 263 | | | $ | 25 | | | $ | 49 | | | $ | 51 | | | $ | 388 | | | $ | 266 | | | $ | 31 | | | $ | 65 | | | $ | 125 | | | $ | 487 | |
| Banks(3) | 329 | | | 0 | | | 19 | | | 13 | | | 361 | | | 274 | | | 0 | | | 27 | | | 11 | | | 312 | |
| Independent Agency | 83 | | | 4 | | | 76 | | | 3 | | | 166 | | | 68 | | | 7 | | | 48 | | | 14 | | | 137 | |
| Subtotal | 675 | | | 29 | | | 144 | | | 67 | | | 915 | | | 608 | | | 38 | | | 140 | | | 150 | | | 936 | |
| Total | $ | 1,123 | | | $ | 83 | | | $ | 513 | | | $ | 67 | | | $ | 1,786 | | | $ | 1,068 | | | $ | 108 | | | $ | 448 | | | $ | 151 | | | $ | 1,775 | |
__________
(1)Includes retirement income, endowment and savings variable universal life.
(2)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.
(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 3% and 72%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the nine months ended September 30, 2020, and 1% and 67%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the nine months ended September 30, 2019.
Nine Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations increased $32 million primarily driven by higher sales of USD-denominated products ahead of pricing increases in August 2020. The increase was partially offset by lower sales due to COVID-19 impacts, as well as lower sales of corporate term products in Japan driven by the corporate product tax rule change effective July 2019.
Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations decreased $21 million. Life Consultants sales decreased $99 million, primarily driven by COVID-19 impacts, as well as lower sales of USD-denominated fixed annuity products driven by declines in crediting rates and lower Life Consultant headcount. Bank channel sales increased $49 million, reflecting higher sales of USD-denominated protection products ahead of pricing increases in August 2020, partially offset by lower sales due to COVID-19 impacts. Independent Agency sales increased $29 million, reflecting higher sales of USD-denominated protection and endowment products ahead of pricing increases in August 2020, partially offset by lower sales of USD-denominated fixed annuity products.
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
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Operating results: | | | | | | | |
| Interest expense on debt(1) | $ | (233) | | | $ | (210) | | | $ | (678) | | | $ | (649) | |
| Investment income(1) | 25 | | | 69 | | | 100 | | | 195 | |
| Pension and employee benefits | 40 | | | 56 | | | 148 | | | 116 | |
| Other corporate activities(2) | (287) | | | (196) | | | (908) | | | (690) | |
| Adjusted operating income | (455) | | | (281) | | | (1,338) | | | (1,028) | |
| Realized investment gains (losses), net, and related adjustments | (514) | | | (68) | | | (1,733) | | | (275) | |
| Charges related to realized investment gains (losses), net | 4 | | | 35 | | | 8 | | | (52) | |
| Market experience updates(3) | (7) | | | (7) | | | (3) | | | (7) | |
| Divested and Run-off Businesses(4) | (132) | | | 207 | | | (725) | | | 641 | |
| Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests | (23) | | | 1 | | | (15) | | | (14) | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | (1,127) | | | $ | (113) | | | $ | (3,806) | | | $ | (735) | |
__________
(1)Prior period amounts have been updated to conform to current period presentation.
(2)Includes consolidating adjustments.
(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. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(4)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.
Three Month Comparison. The loss from Corporate and Other operations, on an adjusted operating income basis, increased $174 million. Net charges from other corporate activities increased $91 million primarily driven by higher costs for deferred and long-term compensation plans tied to Company stock and equity market performance, and a charge related to the early extinguishment of debt in the current year period. Investment income decreased $44 million primarily driven by lower average invested assets and lower income on highly liquid assets due to lower investment yields. Interest expense on debt increased $23 million primarily reflecting higher average debt balances. Results from pension and employee benefits decreased $16 million primarily driven by an increase in employee health benefit costs.
Nine Month Comparison. The loss from Corporate and Other operations, on an adjusted operating income basis, increased $310 million. Net charges from other corporate activities increased $218 million primarily driven by increases to legal reserves. Investment income decreased $95 million primarily driven by lower average invested assets and lower income on highly liquid assets due to lower investment yields as well as lower income on non-coupon investments. Interest expense on debt increased $29 million primarily reflecting higher average debt balances. Results from pension and employee benefits increased $32 million primarily driven by a decrease in employee health benefit costs.
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
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Long-Term Care | $ | 78 | | | $ | 147 | | | $ | 266 | | | $ | 456 | |
| Other(1) | (210) | | | 60 | | | (991) | | | 185 | |
| Total Divested and Run-off Businesses income (loss) excluded from adjusted operating income | $ | (132) | | | $ | 207 | | | $ | (725) | | | $ | 641 | |
__________
(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 third quarter of 2020 decreased compared to the prior year period driven by an unfavorable impact from changes in the market value of derivatives used for duration management, partially offset by a favorable impact from changes in the market value of equity securities, and higher income on non-coupon investments. Results for the first nine months of 2020 decreased compared to the prior year period, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for 2020 included a $33 million net charge from these updates, while results for 2019 included a $9 million net charge from these updates. Excluding this item, results decreased primarily reflecting lower underwriting results driven by unfavorable policy experience and an increase in reserves as a result of an unlocking of assumptions in the first quarter of 2020 due to the decline in interest rates. Also contributing to the decrease was an unfavorable impact from changes in the market value of equity securities.
Other. Results for the third quarter and the first nine months of 2020 primarily reflect the results of POK and the impact of its sale which was completed in August 2020, as well as the results of POT and the impact of its anticipated 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 JuneSeptember 30, 2020, the excess of actual cumulative earnings over the expected cumulative earnings was $2,450$2,611 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 $5,305$5,530 million at JuneSeptember 30, 2020, 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
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) | | (in millions) |
| U.S. GAAP results: | | | | | | | | U.S. GAAP results: | |
| Revenues | $ | 1,340 |
| | $ | 1,301 |
| | $ | 2,017 |
| | $ | 2,675 |
| Revenues | $ | 1,301 | | | $ | 1,482 | | | $ | 3,318 | | | $ | 4,157 | |
| Benefits and expenses | 1,362 |
| | 1,322 |
| | 2,040 |
| | 2,715 |
| Benefits and expenses | 1,293 | | | 1,437 | | | 3,333 | | | 4,152 | |
| Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | (22 | ) | | $ | (21 | ) | | $ | (23 | ) | | $ | (40 | ) | Income (loss) before income taxes and equity in earnings of operating joint ventures | $ | 8 | | | $ | 45 | | | $ | (15) | | | $ | 5 | |
Income (loss) Before Income Taxes and Equity in Earnings of Operating Joint Ventures
Three Month Comparison. LossIncome (loss) before income taxes and equity in earnings of operating joint ventures increased $1decreased $37 million. Net investment activity results increaseddecreased primarily reflecting a decrease in realized investment gains driven by unfavorable changes in the value of derivatives used in risk management activities, partially offset by an increase in other income driven by favorable changes in the value of equity securities, partially offset by a decrease in realized investment gains (losses) driven by a decrease in the value of derivatives used in risk management activities, and a decrease in net investment income driven by lower income on non-coupon investments and lower investment yields.securities. Net insurance activity results reflected a favorable comparative change driven by a decrease in the 2020 dividend scale and run-off of the business in force. As a result of the above and other variances, a $130$161 million increase in the policyholder dividend obligation was recorded in the secondthird quarter of 2020, compared to a $17$227 million reductionincrease in the secondthird quarter of 2019. 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.”
SixNine Month Comparison. LossIncome (loss) before income taxes and equity in earnings of operating joint ventures decreased $17$20 million. Net investment activity results decreased primarily reflecting a decrease in other income driven by unfavorable changes in the value of equity securities, and a decrease in net investment income driven by lower income on non-coupon investments and lower investment yields, partially offset by an increase in realized investment gains driven by gains from salesunfavorable changes in the fair value of fixed maturities.derivatives used in risk management activities. Net insurance activity results reflected a favorable comparative change driven by a decrease in the 2020 dividend scale and run-off of the business in force. As a result of the above and other variances, a $353$192 million reduction in the policyholder dividend obligation was recorded in the first sixnine months of 2020, compared to a $106$334 million increase in the first sixnine months of 2019. 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
Three Month Comparison. Revenues increased $39decreased $181 million primarily driven by an increase in other income, partially offset by a decrease in realized investment gains, (losses) and net investment income, and lower premiums due to runoff of policies in force, as discussed above.
Benefits and expenses increased $40 million primarily driven by an increase in dividends to policyholders, reflecting an increase in the policyholder dividend obligation expense due to changes in cumulative earnings, as discussed above.
Six Month Comparison. Revenues decreased $658 million primarily driven by a decrease in other income and lower premiums due to runoff of policies in force, partially offset by an increase in net realized investment gains,other income, as discussed above.
Benefits and expenses decreased $675$144 million primarily driven by a decrease in dividends to policyholders, reflecting a decrease in the policyholder dividend obligation expense due to changes in cumulative earnings, as discussed above.
Nine Month Comparison. Revenues decreased $839 million primarily driven by a decrease in other income, a decrease in net realized investment gains, and lower premiums due to runoff of policies in force, as discussed above.
Benefits and expenses decreased $819 million primarily driven by a decrease in dividends to policyholders, reflecting a decrease 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
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) | | (in millions) |
| Retirement: | | | | | | | | Retirement: | |
| Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net(1) | $ | 768 |
| | $ | 318 |
| | $ | 479 |
| | $ | 644 |
| Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net(1) | $ | 77 | | | $ | 106 | | | $ | 556 | | | $ | 750 | |
| Change in experience-rated contractholder liabilities due to asset value changes | (787 | ) | | (331 | ) | | (460 | ) | | (610 | ) | Change in experience-rated contractholder liabilities due to asset value changes | (93) | | | (112) | | | (553) | | | (722) | |
| Gains (losses), net, on experienced rated contracts(2)(3) | $ | (19 | ) | | $ | (13 | ) | | $ | 19 |
| | $ | 34 |
| Gains (losses), net, on experienced rated contracts(2)(3) | $ | (16) | | | $ | (6) | | | $ | 3 | | | $ | 28 | |
| International Businesses: | | | | | | | | International Businesses: | | | | | | | |
| Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net | $ | 163 |
| | $ | (18 | ) | | $ | (173 | ) | | $ | 106 |
| Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net | $ | 76 | | | $ | 48 | | | $ | (97) | | | $ | 154 | |
| Change in experience-rated contractholder liabilities due to asset value changes | (163 | ) | | 18 |
| | 173 |
| | (106 | ) | Change in experience-rated contractholder liabilities due to asset value changes | (76) | | | (48) | | | 97 | | | (154) | |
| Gains (losses), net, on experienced rated contracts | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| Gains (losses), net, on experienced rated contracts | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Total: | | | | | | | | Total: | | | | | | | |
| Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net(1) | $ | 931 |
| | $ | 300 |
| | $ | 306 |
| | $ | 750 |
| Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net(1) | $ | 153 | | | $ | 154 | | | $ | 459 | | | $ | 904 | |
| Change in experience-rated contractholder liabilities due to asset value changes | (950 | ) | | (313 | ) | | (287 | ) | | (716 | ) | Change in experience-rated contractholder liabilities due to asset value changes | (169) | | | (160) | | | (456) | | | (876) | |
| Gains (losses), net, on experienced rated contracts(2)(3) | $ | (19 | ) | | $ | (13 | ) | | $ | 19 |
| | $ | 34 |
| Gains (losses), net, on experienced rated contracts(2)(3) | $ | (16) | | | $ | (6) | | | $ | 3 | | | $ | 28 | |
__________
| |
(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 $3 million and $9 million as of June 30, 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 increases of $31 million and $26 million for the three months ended June 30, 2020 and 2019, respectively, and a decrease of $6 million and an increase of $55 million for the six months ended June 30, 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)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 $3 million and $7 million as of September 30, 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 increases of $5 million and $7 million for the three months ended September 30, 2020 and 2019, respectively, and a decrease of $1 million and an increase of $62 million for the nine months ended September 30, 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.
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 June 30, 2020 | | As of December 31, 2019 | | As of September 30, 2020 | | As of December 31, 2019 |
| | 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 | $ | 365,612 |
| | $ | 4,753 |
| | $ | 42,332 |
| | $ | 1,099 |
| | $ | 349,720 |
| | $ | 3,570 |
| | $ | 41,376 |
| | $ | 745 |
| Fixed maturities, available-for- sale | $ | 358,569 | | | $ | 4,771 | | | $ | 42,247 | | | $ | 1,044 | | | $ | 349,720 | | | $ | 3,570 | | | $ | 41,376 | | | $ | 745 | |
| Assets supporting experience-rated contractholder liabilities: | | | | | | | | | | | | | | | | Assets supporting experience-rated contractholder liabilities: | |
| Fixed maturities | 20,328 |
| | 747 |
| | 0 |
| | 0 |
| | 19,530 |
| | 730 |
| | 0 |
| | 0 |
| Fixed maturities | 21,033 | | | 710 | | | 0 | | | 0 | | | 19,530 | | | 730 | | | 0 | | | 0 | |
| Equity securities | 1,683 |
| | 0 |
| | 0 |
| | 0 |
| | 1,790 |
| | 0 |
| | 0 |
| | 0 |
| Equity securities | 1,825 | | | 0 | | | 0 | | | 0 | | | 1,790 | | | 0 | | | 0 | | | 0 | |
| All other(2) | 915 |
| | 7 |
| | 0 |
| | 0 |
| | 261 |
| | 0 |
| | 0 |
| | 0 |
| All other(2) | 1,072 | | | 110 | | | 0 | | | 0 | | | 261 | | | 0 | | | 0 | | | 0 | |
| Subtotal | 22,926 |
| | 754 |
| | 0 |
| | 0 |
| | 21,581 |
| | 730 |
| | 0 |
| | 0 |
| Subtotal | 23,930 | | | 820 | | | 0 | | | 0 | | | 21,581 | | | 730 | | | 0 | | | 0 | |
| Fixed maturities, trading | 3,694 |
| | 225 |
| | 239 |
| | 11 |
| | 3,628 |
| | 275 |
| | 256 |
| | 12 |
| Fixed maturities, trading | 4,115 | | | 229 | | | 256 | | | 11 | | | 3,628 | | | 275 | | | 256 | | | 12 | |
| Equity securities | 4,826 |
| | 523 |
| | 2,047 |
| | 71 |
| | 5,140 |
| | 557 |
| | 2,245 |
| | 76 |
| Equity securities | 4,814 | | | 589 | | | 2,074 | | | 84 | | | 5,140 | | | 557 | | | 2,245 | | | 76 | |
Commercial mortgage and other loans | 682 |
| | 0 |
| | 0 |
| | 0 |
| | 228 |
| | 0 |
| | 0 |
| | 0 |
| Commercial mortgage and other loans | 915 | | | 0 | | | 0 | | | 0 | | | 228 | | | 0 | | | 0 | | | 0 | |
| Other invested assets(3) | 2,301 |
| | 658 |
| | 0 |
| | 0 |
| | 1,433 |
| | 567 |
| | 0 |
| | 0 |
| Other invested assets(3) | 1,972 | | | 782 | | | 0 | | | 0 | | | 1,433 | | | 567 | | | 0 | | | 0 | |
| Short-term investments | 8,892 |
| | 34 |
| | 84 |
| | 10 |
| | 3,789 |
| | 119 |
| | 147 |
| | 36 |
| Short-term investments | 8,082 | | | 172 | | | 58 | | | 11 | | | 3,789 | | | 119 | | | 147 | | | 36 | |
| Cash equivalents | 9,867 |
| | 1 |
| | 226 |
| | 0 |
| | 8,855 |
| | 99 |
| | 151 |
| | 32 |
| Cash equivalents | 11,741 | | | 1 | | | 344 | | | 0 | | | 8,855 | | | 99 | | | 151 | | | 32 | |
| Other assets | 377 |
| | 377 |
| | 0 |
| | 0 |
| | 113 |
| | 113 |
| | 0 |
| | 0 |
| Other assets | 332 | | | 332 | | | 0 | | | 0 | | | 113 | | | 113 | | | 0 | | | 0 | |
| Separate account assets | 277,885 |
| | 1,684 |
| | 0 |
| | 0 |
| | 288,724 |
| | 1,717 |
| | 0 |
| | 0 |
| Separate account assets | 282,444 | | | 1,801 | | | 0 | | | 0 | | | 288,724 | | | 1,717 | | | 0 | | | 0 | |
| Total assets | $ | 697,062 |
| | $ | 9,009 |
| | $ | 44,928 |
| | $ | 1,191 |
| | $ | 683,211 |
| | $ | 7,747 |
| | $ | 44,175 |
| | $ | 901 |
| Total assets | $ | 696,914 | | | $ | 9,497 | | | $ | 44,979 | | | $ | 1,150 | | | $ | 683,211 | | | $ | 7,747 | | | $ | 44,175 | | | $ | 901 | |
| Future policy benefits | $ | 26,439 |
| | $ | 26,439 |
| | $ | 0 |
| | $ | 0 |
| | $ | 12,831 |
| | $ | 12,831 |
| | $ | 0 |
| | $ | 0 |
| Future policy benefits | $ | 23,340 | | | $ | 23,340 | | | $ | 0 | | | $ | 0 | | | $ | 12,831 | | | $ | 12,831 | | | $ | 0 | | | $ | 0 | |
| Policyholders’ account balances | 1,441 |
| | 1,441 |
| | 0 |
| | 0 |
| | 1,316 |
| | 1,316 |
| | 0 |
| | 0 |
| Policyholders’ account balances | 1,549 | | | 1,549 | | | 0 | | | 0 | | | 1,316 | | | 1,316 | | | 0 | | | 0 | |
| Other liabilities(3) | 287 |
| | 0 |
| | 5 |
| | 0 |
| | 928 |
| | 105 |
| | 8 |
| | 0 |
| Other liabilities(3) | 163 | | | 0 | | | 8 | | | 0 | | | 928 | | | 105 | | | 8 | | | 0 | |
Notes issued by consolidated variable interest entities (“VIEs”) | 741 |
| | 741 |
| | 0 |
| | 0 |
| | 800 |
| | 800 |
| | 0 |
| | 0 |
| Notes issued by consolidated variable interest entities (“VIEs”) | 775 | | | 775 | | | 0 | | | 0 | | | 800 | | | 800 | | | 0 | | | 0 | |
| Total liabilities | $ | 28,908 |
| | $ | 28,621 |
| | $ | 5 |
| | $ | 0 |
| | $ | 15,875 |
| | $ | 15,052 |
| | $ | 8 |
| | $ | 0 |
| Total liabilities | $ | 25,827 | | | $ | 25,664 | | | $ | 8 | | | $ | 0 | | | $ | 15,875 | | | $ | 15,052 | | | $ | 8 | | | $ | 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 June 30, 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 1.4% and 2.6%, respectively, as of September 30, 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.
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 $1.7$1.5 billion of public fixed maturities as of JuneSeptember 30, 2020, with values primarily based on indicative broker quotes, and approximately $4$4.2 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.
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:
|
| | | | | | | | | | | | | | | |
| | | June 30, 2020 |
| | | PFI Excluding Closed Block Division | | Closed Block Division | | Total |
| | | ($ in millions) |
| Fixed maturities: | | | | | | | | |
| Public, available-for-sale, at fair value | | $ | 310,203 |
| | 64.6 | % | | $ | 30,264 |
| | $ | 340,467 |
|
| Public, held-to-maturity, at amortized cost, net of allowance | | 1,662 |
| | 0.3 |
| | 0 |
| | 1,662 |
|
| Private, available-for-sale, at fair value | | 54,793 |
| | 11.4 |
| | 12,069 |
| | 66,862 |
|
| Private, held-to-maturity, at amortized cost, net of allowance | | 213 |
| | 0.1 |
| | 0 |
| | 213 |
|
| Fixed maturities, trading, at fair value | | 2,610 |
| | 0.6 |
| | 239 |
| | 2,849 |
|
| Assets supporting experience-rated contractholder liabilities, at fair value | | 23,245 |
| | 4.8 |
| | 0 |
| | 23,245 |
|
| Equity securities, at fair value | | 4,314 |
| | 0.9 |
| | 2,047 |
| | 6,361 |
|
| Commercial mortgage and other loans, at book value, net of allowance | | 54,377 |
| | 11.3 |
| | 8,389 |
| | 62,766 |
|
| Policy loans, at outstanding balance | | 8,125 |
| | 1.7 |
| | 4,158 |
| | 12,283 |
|
| Other invested assets, net of allowance(1) | | 9,578 |
| | 2.0 |
| | 3,259 |
| | 12,837 |
|
| Short-term investments, net of allowance | | 11,286 |
| | 2.3 |
| | 94 |
| | 11,380 |
|
| Total general account investments | | 480,406 |
| | 100.0 | % | | 60,519 |
| | 540,925 |
|
| Invested assets of other entities and operations(2) | | 7,007 |
| |
|
| | 0 |
| | 7,007 |
|
| Total investments | | $ | 487,413 |
| |
|
| | $ | 60,519 |
| | $ | 547,932 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2020 |
| | | PFI Excluding
Closed Block Division | | Closed Block
Division | | Total |
| | | ($ in millions) |
| Fixed maturities: | | | | | | | | |
| Public, available-for-sale, at fair value | | $ | 301,402 | | | 63.6 | % | | $ | 29,949 | | | $ | 331,351 | |
| Public, held-to-maturity, at amortized cost, net of allowance | | 1,689 | | | 0.4 | | | 0 | | | 1,689 | |
| Private, available-for-sale, at fair value | | 56,531 | | | 11.9 | | | 12,298 | | | 68,829 | |
| Private, held-to-maturity, at amortized cost, net of allowance | | 212 | | | 0.1 | | | 0 | | | 212 | |
| Fixed maturities, trading, at fair value | | 2,989 | | | 0.6 | | | 257 | | | 3,246 | |
| Assets supporting experience-rated contractholder liabilities, at fair value | | 23,961 | | | 5.1 | | | 0 | | | 23,961 | |
| Equity securities, at fair value | | 4,295 | | | 0.9 | | | 2,074 | | | 6,369 | |
| Commercial mortgage and other loans, at book value, net of allowance | | 55,186 | | | 11.7 | | | 8,419 | | | 63,605 | |
| Policy loans, at outstanding balance | | 7,396 | | | 1.6 | | | 4,106 | | | 11,502 | |
| Other invested assets, net of allowance(1) | | 10,011 | | | 2.1 | | | 3,418 | | | 13,429 | |
| Short-term investments, net of allowance | | 9,900 | | | 2.0 | | | 79 | | | 9,979 | |
| Total general account investments | | 473,572 | | | 100.0 | % | | 60,600 | | | 534,172 | |
| Invested assets of other entities and operations(2) | | 6,881 | | | | | 0 | | | 6,881 | |
| Total investments | | $ | 480,453 | | | | | $ | 60,600 | | | $ | 541,053 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2019 |
| | | PFI Excluding
Closed Block Division | | Closed Block
Division | | Total |
| | | ($ in millions) |
| Fixed maturities: | | | | | | | | |
| Public, available-for-sale, at fair value | | $ | 296,382 | | | 64.9 | % | | $ | 29,011 | | | $ | 325,393 | |
| Public, held-to-maturity, at amortized cost | | 1,705 | | | 0.4 | | | 0 | | | 1,705 | |
| Private, available-for-sale, at fair value | | 52,750 | | | 11.6 | | | 12,365 | | | 65,115 | |
| Private, held-to-maturity, at amortized cost | | 228 | | | 0.1 | | | 0 | | | 228 | |
| Fixed maturities, trading, at fair value | | 2,467 | | | 0.5 | | | 256 | | | 2,723 | |
| Assets supporting experience-rated contractholder liabilities, at fair value | | 21,597 | | | 4.7 | | | 0 | | | 21,597 | |
| Equity securities, at fair value | | 4,586 | | | 1.0 | | | 2,245 | | | 6,831 | |
| Commercial mortgage and other loans, at book value, net of allowance | | 54,671 | | | 12.0 | | | 8,629 | | | 63,300 | |
| Policy loans, at outstanding balance | | 7,832 | | | 1.7 | | | 4,264 | | | 12,096 | |
| Other invested assets(1) | | 9,210 | | | 2.0 | | | 3,334 | | | 12,544 | |
| Short-term investments | | 5,223 | | | 1.1 | | | 227 | | | 5,450 | |
| Total general account investments | | 456,651 | | | 100.0 | % | | 60,331 | | | 516,982 | |
| Invested assets of other entities and operations(2) | | 5,778 | | | | | 0 | | | 5,778 | |
| Total investments | | $ | 462,429 | | | | | $ | 60,331 | | | $ | 522,760 | |
__________
| |
(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 increase in general account investments attributable to PFI excluding the Closed Block division in the first sixnine months of 2020 was primarily due to a decrease in interest rates in excess of spreadcredit spreads widening, net business inflows and the reinvestment of net investment 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 JuneSeptember 30, 2020 and December 31, 2019, 41%43% and 42%, 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:
| | | | | June 30, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 |
| | | (in millions) | | (in millions) |
| Fixed maturities: | | | | | Fixed maturities: | |
| Public, available-for-sale, at fair value | | $ | 146,391 |
| | $ | 142,220 |
| Public, available-for-sale, at fair value | | $ | 150,762 | | | $ | 142,220 | |
| Public, held-to-maturity, at amortized cost, net of allowance | | 1,662 |
| | 1,705 |
| Public, held-to-maturity, at amortized cost, net of allowance | | 1,689 | | 1,705 | |
| Private, available-for-sale, at fair value | | 19,953 |
| | 19,189 |
| Private, available-for-sale, at fair value | | 20,576 | | 19,189 | |
| Private, held-to-maturity, at amortized cost, net of allowance | | 213 |
| | 228 |
| Private, held-to-maturity, at amortized cost, net of allowance | | 212 | | 228 | |
| Fixed maturities, trading, at fair value | | 472 |
| | 492 |
| Fixed maturities, trading, at fair value | | 513 | | 492 |
| Assets supporting experience-rated contractholder liabilities, at fair value | | 2,603 |
| | 2,777 |
| Assets supporting experience-rated contractholder liabilities, at fair value | | 2,846 | | 2,777 | |
| Equity securities, at fair value | | 1,927 |
| | 2,185 |
| Equity securities, at fair value | | 2,010 | | 2,185 | |
| Commercial mortgage and other loans, at book value, net of allowance | | 19,214 |
| | 19,138 |
| Commercial mortgage and other loans, at book value, net of allowance | | 19,505 | | 19,138 | |
| Policy loans, at outstanding balance | | 3,257 |
| | 2,859 |
| Policy loans, at outstanding balance | | 3,291 | | 2,859 | |
| Other invested assets(1) | | 2,687 |
| | 2,187 |
| Other invested assets(1) | | 2,870 | | 2,187 | |
| Short-term investments | | 658 |
| | 165 |
| Short-term investments | | 432 | | 165 | |
| Total Japanese general account investments | | $ | 199,037 |
| | $ | 193,145 |
| Total Japanese general account investments | | $ | 204,706 | | | $ | 193,145 | |
__________
| |
(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 increase in general account investments related to our Japanese insurance operations in the first sixnine months of 2020 was primarily attributable to the reinvestment of net investment income, net business inflows and a decrease in interest rates in excess of spread widening.credit spreads widening, the reinvestment of net investment income and net business inflows.
As of JuneSeptember 30, 2020, our Japanese insurance operations had $84.7$87.3 billion, at carrying value, of investments denominated in U.S. dollars, including $1.8 billion that were hedged to yen through third-party derivative contracts and $70.4$72.9 billion that support liabilities denominated in U.S. dollars, with the remainder as part of the hedging of foreign currency exchange rate exposure to U.S. dollar-equivalent equity. As of December 31, 2019, our Japanese insurance operations had $77.1 billion, at carrying value, of investments denominated in U.S. dollars, including $2.1 billion that were hedged to yen through third-party derivative contracts and $62.4 billion that support liabilities denominated in U.S. dollars, with the remainder as part of the hedging of foreign currency exchange rate exposure of U.S. dollar-equivalent equity. The $7.6$10.2 billion increase in the carrying value of U.S. dollar-denominated investments from December 31, 2019 was primarily attributable to a decrease in U.S. treasury bond rates, 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 $9.5$9.7 billion and $9.9 billion, at carrying value, of investments denominated in Australian dollars that support liabilities denominated in Australian dollars as of JuneSeptember 30, 2020 and December 31, 2019, respectively. The $0.4$0.2 billion decrease in the carrying value of Australian dollar-denominated investments from December 31, 2019 was primarily attributable to the translation impact of the Australian dollar weakening against the U.S. dollar and run off of the portfolio. For additional information regarding U.S. and Australian dollar investments held in our Japanese insurance operations and a discussion of our yen hedging strategy, see “—Results of Operations by Segment—Impact of Foreign Currency Exchange Rates” above.
Investment Results
The following tables set forth the investment results of our general account apportioned between PFI excluding the Closed Block division and the Closed Block division, for the periods indicated. The yields are based on net investment income as reported under U.S. GAAP and as such do not include certain interest-related items, such as settlements of duration management swaps which are included in “Realized investment gains (losses), net.”
2020 to 2019 Three Month Comparison
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| PFI Excluding Closed Block Division and Japanese Operations | | Japanese Insurance Operations | | PFI Excluding Closed Block Division | | Closed Block Division | | Total(5) |
| Yield(1) | | Amount | | Yield(1) | | Amount | | Yield(1) | | Amount | | Amount | | Amount |
| ($ in millions) |
| Fixed maturities(2) | 4.55 | % | | $ | 1,859 | | | 2.80 | % | | $ | 986 | | | 3.74 | % | | $ | 2,845 | | | $ | 398 | | | $ | 3,243 | |
| Assets supporting experience-rated contractholder liabilities | 3.09 | | | 161 | | | 2.21 | | | 15 | | | 2.99 | | | 176 | | | 0 | | | 176 | |
| Equity securities | 3.32 | | | 19 | | | 1.17 | | | 6 | | | 2.34 | | | 25 | | | 11 | | | 36 | |
| Commercial mortgage and other loans | 3.81 | | | 335 | | | 3.75 | | | 181 | | | 3.79 | | | 516 | | | 87 | | | 603 | |
| Policy loans | 5.35 | | | 60 | | | 3.02 | | | 24 | | | 4.37 | | | 84 | | | 61 | | | 145 | |
| Short-term investments and cash equivalents | 0.48 | | | 27 | | | 0.43 | | | 2 | | | 0.48 | | | 29 | | | 1 | | | 30 | |
| Gross investment income | 3.96 | | | 2,461 | | | 2.86 | | | 1,214 | | | 3.52 | | | 3,675 | | | 558 | | | 4,233 | |
| Investment expenses | (0.13) | | | (65) | | | (0.14) | | | (60) | | | (0.13) | | | (125) | | | (31) | | | (156) | |
| Investment income after investment expenses | 3.83 | % | | 2,396 | | | 2.72 | % | | 1,154 | | | 3.39 | % | | 3,550 | | | 527 | | | 4,077 | |
| Other invested assets(3) | | | 138 | | | | | 85 | | | | | 223 | | | 55 | | | 278 | |
| Investment results of other entities and operations(4) | | | 91 | | | | | 0 | | | | | 91 | | | 0 | | | 91 | |
| Total investment income | | | $ | 2,625 | | | | | $ | 1,239 | | | | | $ | 3,864 | | | $ | 582 | | | $ | 4,446 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 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) | 4.42 | % | | $ | 1,852 |
| | 2.77 | % | | $ | 952 |
| | 3.68 | % | | $ | 2,804 |
| | $ | 395 |
| | $ | 3,199 |
|
| Assets supporting experience-rated contractholder liabilities | 3.12 |
| | 155 |
| | 1.11 |
| | 7 |
| | 2.89 |
| | 162 |
| | 0 |
| | 162 |
|
| Equity securities | 1.72 |
| | 10 |
| | 7.21 |
| | 33 |
| | 4.23 |
| | 43 |
| | 11 |
| | 54 |
|
| Commercial mortgage and other loans | 3.94 |
| | 345 |
| | 3.79 |
| | 180 |
| | 3.88 |
| | 525 |
| | 89 |
| | 614 |
|
| Policy loans | 5.19 |
| | 63 |
| | 3.20 |
| | 25 |
| | 4.42 |
| | 88 |
| | 63 |
| | 151 |
|
| Short-term investments and cash equivalents | 0.87 |
| | 60 |
| | 0.89 |
| | 3 |
| | 0.87 |
| | 63 |
| | 2 |
| | 65 |
|
| Gross investment income | 3.88 |
| | 2,485 |
| | 2.90 |
| | 1,200 |
| | 3.49 |
| | 3,685 |
| | 560 |
| | 4,245 |
|
| Investment expenses | (0.11 | ) | | (62 | ) | | (0.14 | ) | | (56 | ) | | (0.12 | ) | | (118 | ) | | (32 | ) | | (150 | ) |
| Investment income after investment expenses | 3.77 | % | | 2,423 |
| | 2.76 | % | | 1,144 |
| | 3.37 | % | | 3,567 |
| | 528 |
| | 4,095 |
|
| Other invested assets(3) | | | (62 | ) | | | | 79 |
| | | | 17 |
| | (17 | ) | | 0 |
|
| Investment results of other entities and operations(4) | | | 91 |
| | | | 0 |
| | | | 91 |
| | 0 |
| | 91 |
|
| Total investment income | | | $ | 2,452 |
| | | | $ | 1,223 |
| | | | $ | 3,675 |
| | $ | 511 |
| | $ | 4,186 |
|
| | | | Three Months Ended June 30, 2019 | | Three Months Ended September 30, 2019 |
| | 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) | 4.63 | % | | $ | 1,887 |
| | 2.83 | % | | $ | 955 |
| | 3.82 | % | | $ | 2,842 |
| | $ | 426 |
| | $ | 3,268 |
| Fixed maturities(2) | 4.63 | % | | $ | 1,899 | | | 2.87 | % | | $ | 983 | | | 3.83 | % | | $ | 2,882 | | | $ | 428 | | | $ | 3,310 | |
| Assets supporting experience-rated contractholder liabilities | 3.66 |
| | 175 |
| | 1.17 |
| | 7 |
| | 3.36 |
| | 182 |
| | 0 |
| | 182 |
| Assets supporting experience-rated contractholder liabilities | 3.58 | | | 173 | | | 2.45 | | | 16 | | | 3.45 | | | 189 | | | 0 | | | 189 | |
| Equity securities | 1.82 |
| | 10 |
| | 5.48 |
| | 27 |
| | 3.60 |
| | 37 |
| | 14 |
| | 51 |
| Equity securities | 3.83 | | | 20 | | | 1.25 | | | 7 | | | 2.56 | | | 27 | | | 11 | | | 38 | |
| Commercial mortgage and other loans | 4.15 |
| | 350 |
| | 3.87 |
| | 174 |
| | 4.05 |
| | 524 |
| | 98 |
| | 622 |
| Commercial mortgage and other loans | 4.09 | | | 344 | | | 4.11 | | | 190 | | | 4.10 | | | 534 | | | 96 | | | 630 | |
| Policy loans | 5.25 |
| | 64 |
| | 3.81 |
| | 26 |
| | 4.73 |
| | 90 |
| | 62 |
| | 152 |
| Policy loans | 5.43 | | | 66 | | | 3.94 | | | 28 | | | 4.88 | | | 94 | | | 66 | | | 160 | |
| Short-term investments and cash equivalents | 2.85 |
| | 94 |
| | 2.91 |
| | 6 |
| | 2.85 |
| | 100 |
| | 10 |
| | 110 |
| Short-term investments and cash equivalents | 2.53 | | | 100 | | | 4.82 | | | 7 | | | 2.61 | | | 107 | | | 10 | | | 117 | |
| Gross investment income | 4.38 |
| | 2,580 |
| | 2.97 |
| | 1,195 |
| | 3.81 |
| | 3,775 |
| | 610 |
| | 4,385 |
| Gross investment income | 4.34 | | | 2,602 | | | 3.01 | | | 1,231 | | | 3.80 | | | 3,833 | | | 611 | | | 4,444 | |
| Investment expenses | (0.12 | ) | | (103 | ) | | (0.13 | ) | | (71 | ) | | (0.13 | ) | | (174 | ) | | (55 | ) | | (229 | ) | Investment expenses | (0.12) | | | (101) | | | (0.14) | | | (72) | | | (0.13) | | | (173) | | | (53) | | | (226) | |
| Investment income after investment expenses | 4.26 | % | | 2,477 |
| | 2.84 | % | | 1,124 |
| | 3.68 | % | | 3,601 |
| | 555 |
| | 4,156 |
| Investment income after investment expenses | 4.22 | % | | 2,501 | | | 2.87 | % | | 1,159 | | | 3.67 | % | | 3,660 | | | 558 | | | 4,218 | |
| Other invested assets(3) | | | 132 |
| | | | 52 |
| | | | 184 |
| | 19 |
| | 203 |
| Other invested assets(3) | | | 127 | | | | | 34 | | | | | 161 | | | 32 | | | 193 | |
| Investment results of other entities and operations(4) | | | 31 |
| | | | 0 |
| | | | 31 |
| | 0 |
| | 31 |
| Investment results of other entities and operations(4) | | 27 | | | 0 | | | 27 | | | 0 | | | 27 | |
| Total investment income | | | $ | 2,640 |
| | | | $ | 1,176 |
| | | | $ | 3,816 |
| | $ | 574 |
| | $ | 4,390 |
| Total investment income | | $ | 2,655 | | | $ | 1,193 | | | $ | 3,848 | | | $ | 590 | | | $ | 4,438 | |
__________
| |
(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 3.46% and 3.76% for the three months ended June 30, 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 3.48% and 3.76% for the three months ended September 30, 2020 and 2019, 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 JuneSeptember 30, 2020, compared to the three months ended JuneSeptember 30, 2019, was primarily the result of lower fixed income reinvestment rates.
The decrease in investment income after investment expenses yield attributable to the Japanese insurance operations’ portfolio, for the three months ended JuneSeptember 30, 2020, compared to the three months ended JuneSeptember 30, 2019, 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 $53.2$55.3 billion and $47.9$50.5 billion for the three months ended JuneSeptember 30, 2020 and 2019, 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 $7.7$8.1 billion and $9.0$8.6 billion for the three months ended JuneSeptember 30, 2020 and 2019, respectively. The majority of Australian dollar-denominated fixed maturities support liabilities that are denominated in Australian dollars. For additional information regarding U.S. and Australian dollar investments held in our Japanese insurance operations, see “—Results of Operations by Segment—Impact of Foreign Currency Exchange Rates” above.
2020 to 2019 SixNine Month Comparison
| | | | Six Months Ended June 30, 2020 | | Nine Months Ended September 30, 2020 |
| | PFI Excluding Closed Block Division and Japanese Operations | | Japanese Insurance Operations | | PFI Excluding Closed Block Division | | Closed Block Division | | Total(5) | | PFI Excluding Closed Block Division and Japanese Operations | | Japanese Insurance Operations | | PFI Excluding Closed Block Division | | Closed Block Division | | Total(5) |
| | Yield(1) | | Amount | | Yield(1) | | Amount | | Yield(1) | | Amount | | Amount | | Amount | | Yield(1) | | Amount | | Yield(1) | | Amount | | Yield(1) | | Amount | | Amount | | Amount |
| | ($ in millions) | | ($ in millions) |
| Fixed maturities(2) | 4.49 | % | | $ | 3,747 |
| | 2.77 | % | | $ | 1,898 |
| | 3.72 | % | | $ | 5,645 |
| | $ | 794 |
| | $ | 6,439 |
| Fixed maturities(2) | 4.58 | % | | $ | 5,606 | | | 2.79 | % | | $ | 2,884 | | | 3.76 | % | | $ | 8,490 | | | $ | 1,192 | | | $ | 9,682 | |
| Assets supporting experience-rated contractholder liabilities | 3.25 |
| | 315 |
| | 2.14 |
| | 28 |
| | 3.12 |
| | 343 |
| | 0 |
| | 343 |
| Assets supporting experience-rated contractholder liabilities | 3.22 | | | 476 | | | 2.16 | | | 43 | | | 3.09 | | | 519 | | | 0 | | | 519 | |
| Equity securities | 1.82 |
| | 21 |
| | 3.99 |
| | 39 |
| | 2.83 |
| | 60 |
| | 23 |
| | 83 |
| Equity securities | 2.36 | | | 40 | | | 3.05 | | | 45 | | | 2.68 | | | 85 | | | 34 | | | 119 | |
| Commercial mortgage and other loans | 3.99 |
| | 700 |
| | 3.90 |
| | 369 |
| | 3.96 |
| | 1,069 |
| | 182 |
| | 1,251 |
| Commercial mortgage and other loans | 3.95 | | | 1,035 | | | 3.87 | | | 550 | | | 3.92 | | | 1,585 | | | 269 | | | 1,854 | |
| Policy loans | 5.19 |
| | 126 |
| | 3.58 |
| | 54 |
| | 4.58 |
| | 180 |
| | 124 |
| | 304 |
| Policy loans | 5.36 | | | 186 | | | 3.42 | | | 78 | | | 4.59 | | | 264 | | | 185 | | | 449 | |
| Short-term investments and cash equivalents | 1.13 |
| | 131 |
| | 1.28 |
| | 10 |
| | 1.14 |
| | 141 |
| | 5 |
| | 146 |
| Short-term investments and cash equivalents | 0.92 | | | 158 | | | 0.95 | | | 12 | | | 0.93 | | | 170 | | | 6 | | | 176 | |
| Gross investment income | 4.01 |
| | 5,040 |
| | 2.91 |
| | 2,398 |
| | 3.58 |
| | 7,438 |
| | 1,128 |
| | 8,566 |
| Gross investment income | 4.05 | | | 7,501 | | | 2.90 | | | 3,612 | | | 3.59 | | | 11,113 | | | 1,686 | | | 12,799 | |
| Investment expenses | (0.12 | ) | | (147 | ) | | (0.14 | ) | | (124 | ) | | (0.13 | ) | | (271 | ) | | (75 | ) | | (346 | ) | Investment expenses | (0.12) | | | (212) | | | (0.14) | | | (184) | | | (0.13) | | | (396) | | | (106) | | | (502) | |
| Investment income after investment expenses | 3.89 | % | | 4,893 |
| | 2.77 | % | | 2,274 |
| | 3.45 | % | | 7,167 |
| | 1,053 |
| | 8,220 |
| Investment income after investment expenses | 3.93 | % | | 7,289 | | | 2.76 | % | | 3,428 | | | 3.46 | % | | 10,717 | | | 1,580 | | | 12,297 | |
| Other invested assets(3) | | | 19 |
| | | | 52 |
| | | | 71 |
| | 3 |
| | 74 |
| Other invested assets(3) | | | 157 | | | | | 137 | | | | | 294 | | | 58 | | | 352 | |
| Investment results of other entities and operations(4) | | | 94 |
| | | | 0 |
| | | | 94 |
| | 0 |
| | 94 |
| Investment results of other entities and operations(4) | | 185 | | | 0 | | | 185 | | | 0 | | | 185 | |
| Total investment income | | | $ | 5,006 |
| | | | $ | 2,326 |
| | | | $ | 7,332 |
| | $ | 1,056 |
| | $ | 8,388 |
| Total investment income | | $ | 7,631 | | | $ | 3,565 | | | $ | 11,196 | | | $ | 1,638 | | | $ | 12,834 | |
| | | | Six Months Ended June 30, 2019 | | Nine Months Ended September 30, 2019 |
| | 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) | 4.64 | % | | $ | 3,735 |
| | 2.83 | % | | $ | 1,892 |
| | 3.82 | % | | $ | 5,627 |
| | $ | 845 |
| | $ | 6,472 |
| Fixed maturities(2) | 4.67 | % | | $ | 5,634 | | | 2.86 | % | | $ | 2,875 | | | 3.85 | % | | $ | 8,509 | | | $ | 1,273 | | | $ | 9,782 | |
| Assets supporting experience-rated contractholder liabilities | 3.60 |
| | 340 |
| | 2.15 |
| | 27 |
| | 3.43 |
| | 367 |
| | 0 |
| | 367 |
| Assets supporting experience-rated contractholder liabilities | 3.61 | | | 513 | | | 2.26 | | | 43 | | | 3.45 | | | 556 | | | 0 | | | 556 | |
| Equity securities | 2.12 |
| | 22 |
| | 3.48 |
| | 34 |
| | 2.79 |
| | 56 |
| | 25 |
| | 81 |
| Equity securities | 2.72 | | | 42 | | | 2.72 | | | 41 | | | 2.72 | | | 83 | | | 36 | | | 119 | |
| Commercial mortgage and other loans | 4.10 |
| | 682 |
| | 3.85 |
| | 339 |
| | 4.02 |
| | 1,021 |
| | 193 |
| | 1,214 |
| Commercial mortgage and other loans | 4.13 | | | 1,026 | | | 3.97 | | | 529 | | | 4.07 | | | 1,555 | | | 289 | | | 1,844 | |
| Policy loans | 5.21 |
| | 126 |
| | 3.84 |
| | 52 |
| | 4.72 |
| | 178 |
| | 125 |
| | 303 |
| Policy loans | 5.33 | | | 192 | | | 3.91 | | | 80 | | | 4.81 | | | 272 | | | 191 | | | 463 | |
| Short-term investments and cash equivalents | 2.80 |
| | 189 |
| | 3.43 |
| | 14 |
| | 2.82 |
| | 203 |
| | 19 |
| | 222 |
| Short-term investments and cash equivalents | 2.71 | | | 289 | | | 4.23 | | | 21 | | | 2.77 | | | 310 | | | 29 | | | 339 | |
| Gross investment income | 4.37 |
| | 5,094 |
| | 2.96 |
| | 2,358 |
| | 3.80 |
| | 7,452 |
| | 1,207 |
| | 8,659 |
| Gross investment income | 4.38 | | | 7,696 | | | 3.00 | | | 3,589 | | | 3.82 | | | 11,285 | | | 1,818 | | | 13,103 | |
| Investment expenses | (0.13 | ) | | (209 | ) | | (0.13 | ) | | (139 | ) | | (0.13 | ) | | (348 | ) | | (109 | ) | | (457 | ) | Investment expenses | (0.13) | | | (310) | | | (0.14) | | | (211) | | | (0.13) | | | (521) | | | (162) | | | (683) | |
| Investment income after investment expenses | 4.24 | % | | 4,885 |
| | 2.83 | % | | 2,219 |
| | 3.67 | % | | 7,104 |
| | 1,098 |
| | 8,202 |
| Investment income after investment expenses | 4.25 | % | | 7,386 | | | 2.86 | % | | 3,378 | | | 3.69 | % | | 10,764 | | | 1,656 | | | 12,420 | |
| Other invested assets(3) | | | 170 |
| | | | 103 |
| | | | 273 |
| | 39 |
| | 312 |
| Other invested assets(3) | | | 297 | | | | | 137 | | | | | 434 | | | 71 | | | 505 | |
| Investment results of other entities and operations(4) | | | 92 |
| | | | 0 |
| | | | 92 |
| | 0 |
| | 92 |
| Investment results of other entities and operations(4) | | 119 | | | 0 | | | 119 | | | 0 | | | 119 | |
| Total investment income | | | $ | 5,147 |
| | | | $ | 2,322 |
| | | | $ | 7,469 |
| | $ | 1,137 |
| | $ | 8,606 |
| Total investment income | | $ | 7,802 | | | $ | 3,515 | | | $ | 11,317 | | | $ | 1,727 | | | $ | 13,044 | |
__________
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(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. |
(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. |
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(4) | Includes net investment income of our investment management operations. |
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(5) | The total yield was 3.53% and 3.75% for the six months ended June 30, 2020 and 2019, respectively. |
(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 3.54% and 3.78% for the nine months ended September 30, 2020 and 2019, 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 sixnine months ended JuneSeptember 30, 2020, compared to the sixnine months ended JuneSeptember 30, 2019, was primarily the result of lower fixed income reinvestment rates.
The decrease in investment income after investment expenses yield attributable to the Japanese insurance operations’ portfolio, for the sixnine months ended JuneSeptember 30, 2020, compared to the sixnine months ended JuneSeptember 30, 2019, 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 $52.4$53.3 billion and $47.2$47.4 billion for the sixnine months ended JuneSeptember 30, 2020 and 2019, 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 $8.0 billion and $9.0$8.7 billion for the sixnine months ended JuneSeptember 30, 2020 and 2019, 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
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) | | (in millions) |
| PFI excluding Closed Block Division: | | | | | | | | PFI excluding Closed Block Division: | |
| Realized investment gains (losses), net: | | | | | | | | Realized investment gains (losses), net: | |
| Due to foreign exchange movements on securities approaching maturity(2) | $ | (16 | ) | | $ | (16 | ) | | $ | (19 | ) | | $ | (16 | ) | Due to foreign exchange movements on securities approaching maturity(2) | $ | (7) | | | $ | (29) | | | $ | (26) | | | $ | (45) | |
| Due to securities actively marketed for sale(2) | (12 | ) | | 0 |
| | (81 | ) | | (1 | ) | Due to securities actively marketed for sale(2) | (2) | | | (3) | | | (83) | | | (4) | |
| Due to credit or adverse conditions of the respective issuer(1)(3) | N/A |
| | (12 | ) | | N/A |
| | (42 | ) | Due to credit or adverse conditions of the respective issuer(1)(3) | (97) | | | (94) | | | (97) | | | (136) | |
| Allowance for credit losses on fixed maturities(1)(3) | (68 | ) | | N/A |
| | (218 | ) | | N/A |
| Allowance for credit losses on fixed maturities(1)(3) | 89 | | | N/A | | (129) | | | N/A |
| Net gains (losses) on sales and maturities | 144 |
| | 103 |
| | 455 |
| | 372 |
| Net gains (losses) on sales and maturities | 329 | | | 319 | | | 784 | | | 691 | |
| Fixed maturity securities(4) | 48 |
| | 75 |
| | 137 |
| | 313 |
| Fixed maturity securities(4) | 312 | | | 193 | | | 449 | | | 506 | |
| Commercial mortgage and other loans | 0 |
| | (8 | ) | | 6 |
| | (11 | ) | Commercial mortgage and other loans | 2 | | | 6 | | | 8 | | | (5) | |
| Derivatives | (3,710 | ) | | (463 | ) | | (2,601 | ) | | (1,469 | ) | Derivatives | (416) | | | 222 | | | (3,017) | | | (1,247) | |
| OTTI losses on other invested assets recognized in earnings(3) | (9 | ) | | 0 |
| | (9 | ) | | 0 |
| |
| Allowance for credit losses on other invested assets(3) | 4 |
| | N/A |
| | 0 |
| | N/A |
| |
| OTTI losses on other invested assets recognized in earnings | | OTTI losses on other invested assets recognized in earnings | 0 | | | (1) | | | (9) | | | (1) | |
| Allowance for credit losses on other invested assets | | Allowance for credit losses on other invested assets | 0 | | | N/A | | 0 | | | N/A |
| Other net gains (losses) | 24 |
| | 5 |
| | 21 |
| | 6 |
| Other net gains (losses) | 1 | | | 39 | | | 22 | | | 44 | |
| Other | 19 |
| | 5 |
| | 12 |
| | 6 |
| Other | 1 | | | 38 | | | 13 | | | 43 | |
| Subtotal | (3,643 | ) | | (391 | ) | | (2,446 | ) | | (1,161 | ) | Subtotal | (101) | | | 459 | | | (2,547) | | | (703) | |
| Investment results of other entities and operations(5) | (101 | ) | | 6 |
| | 113 |
| | (46 | ) | Investment results of other entities and operations(5) | 4 | | | 44 | | | 117 | | | (1) | |
| Total — PFI excluding Closed Block Division | (3,744 | ) | | (385 | ) | | (2,333 | ) | | (1,207 | ) | Total — PFI excluding Closed Block Division | (97) | | | 503 | | | (2,430) | | | (704) | |
| Related adjustments(6) | 553 |
| | (187 | ) | | (649 | ) | | 13 |
| Related adjustments(6) | 320 | | | (172) | | | (316) | | | (178) | |
| Realized investment gains (losses), net, and related adjustments(6) | (3,191 | ) | | (572 | ) | | (2,982 | ) | | (1,194 | ) | Realized investment gains (losses), net, and related adjustments(6) | 223 | | | 331 | | | (2,746) | | | (882) | |
| Charges related to realized investment gains (losses), net | 519 |
| | (82 | ) | | (283 | ) | | (57 | ) | Charges related to realized investment gains (losses), net | (70) | | | (92) | | | (353) | | | (149) | |
| Realized investment gains (losses), net, and charges related to realized investment gains (losses), net and adjustments(6) | $ | (2,672 | ) | | $ | (654 | ) | | $ | (3,265 | ) | | $ | (1,251 | ) | Realized investment gains (losses), net, and charges related to realized investment gains (losses), net and adjustments(6) | $ | 153 | | | $ | 239 | | | $ | (3,099) | | | $ | (1,031) | |
| Closed Block Division: | | | | | | | | Closed Block Division: | | | | | | | |
| Realized investment gains (losses), net: | | | | | | | | Realized investment gains (losses), net: | |
| Due to foreign exchange movements on securities approaching maturity(2) | $ | (38 | ) | | $ | (34 | ) | | $ | (47 | ) | | $ | (34 | ) | Due to foreign exchange movements on securities approaching maturity(2) | $ | (21) | | | $ | (11) | | | $ | (68) | | | $ | (45) | |
| Due to securities actively marketed for sale(2) | 1 |
| | 0 |
| | (9 | ) | | 0 |
| Due to securities actively marketed for sale(2) | 0 | | | 0 | | | (9) | | | 0 | |
| Due to credit or adverse conditions of the respective issuer(1)(3) | N/A |
| | (2 | ) | | N/A |
| | (6 | ) | Due to credit or adverse conditions of the respective issuer(1)(3) | (6) | | | (6) | | | (6) | | | (12) | |
| Allowance for credit losses on fixed maturities(1)(3) | (12 | ) | | N/A |
| | (20 | ) | | N/A |
| Allowance for credit losses on fixed maturities(1)(3) | (3) | | | N/A | | (23) | | | N/A |
| Net gains (losses) on sales and maturities | 112 |
| | 30 |
| | 208 |
| | 56 |
| Net gains (losses) on sales and maturities | 121 | | | 185 | | | 329 | | | 241 | |
| Fixed maturity securities(4) | 63 |
| | (6 | ) | | 132 |
| | 16 |
| Fixed maturity securities(4) | 91 | | | 168 | | | 223 | | | 184 | |
| Commercial mortgage and other loans | (4 | ) | | 0 |
| | 0 |
| | 0 |
| Commercial mortgage and other loans | 2 | | | 0 | | | 2 | | | 0 | |
| Derivatives | (64 | ) | | 54 |
| | 120 |
| | 93 |
| Derivatives | (71) | | | 182 | | | 49 | | | 275 | |
| OTTI losses on other invested assets recognized in earnings(3) | N/A |
| | 0 |
| | N/A |
| | 0 |
| |
| Allowance for credit losses on other invested assets(3) | 0 |
| | N/A |
| | 0 |
| | N/A |
| |
| OTTI losses on other invested assets recognized in earnings | | OTTI losses on other invested assets recognized in earnings | 0 | | | 0 | | | 0 | | | 0 | |
| Allowance for credit losses on other invested assets | | Allowance for credit losses on other invested assets | 0 | | | N/A | | 0 | | | N/A |
| Other net gains (losses) | (3 | ) | | 1 |
| | (4 | ) | | (4 | ) | Other net gains (losses) | (4) | | | 0 | | | (8) | | | (4) | |
| Other | (3 | ) | | 1 |
| | (4 | ) | | (4 | ) | Other | (4) | | | 0 | | | (8) | | | (4) | |
| Subtotal — Closed Block Division | (8 | ) | | 49 |
| | 248 |
| | 105 |
| Subtotal — Closed Block Division | 18 | | | 350 | | | 266 | | | 455 | |
| Consolidated PFI realized investment gains (losses), net | $ | (3,752 | ) | | $ | (336 | ) | | $ | (2,085 | ) | | $ | (1,102 | ) | Consolidated PFI realized investment gains (losses), net | $ | (79) | | | $ | 853 | | | $ | (2,164) | | | $ | (249) | |
__________
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(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 cost of the debt security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment (2019) or allowance (2020). |
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(2) | Represents the difference between the fair value of the debt security and the amortized cost at the time of the write-down. |
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(3) | Effective January 1, 2020, due to the implementation of ASU 2016-13, OTTI is no longer recorded. |
(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 cost of the debt security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment (2019) or allowance (2020).
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(4) | Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading. |
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(5) | Includes “realized investment gains (losses), net” of our investment management operations. |
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(6) | Prior period amounts have been updated to conform to current period presentation. |
(2)Represents the difference between the fair value of the debt security and the amortized cost at the time of the write-down.
(3)Beginning January 1, 2020, related to the implementation of ASU 2016-13, write-offs of credit adverse securities are reported as OTTI.
(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.
Three Month Comparison. Net gains on sales and maturities of fixed maturity securities were $144$329 million and $103$319 million for the secondthird 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 fromdriven by interest rate declines during the investment holding period.
The additionRealized losses due to the allowance forsecurities with credit losses related to fixed maturityor adverse conditions primarily reflected write-downs of restructured securities was $68 million in the second quarter of 2020 and was concentrated in the consumer cyclical, energy and communication sectorssector within corporate securities. Thissecurities and foreign government securities along with other credit loss allowance was primarilyimpairments related to securities withthat had liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers. These write-downs were largely offset by releases of the allowance for credit losses associated with certain of these securities. Fixed maturity credit impairments were $12$94 million in the secondthird quarter of 2019 and were concentrated in the energytechnology and communicationsutility sectors within corporate securities. These credit impairments were primarily related to securities with liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers.
Net realized losses on derivative instruments of $3,710$416 million for the secondthird quarter of 2020 primarily included:
•$2,202 million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts;
$1,345839 million of losses on capital hedges due to increases in equity indices;
•$147 million of losses on interest rate derivatives due to increases in the 30-year swap and U.S. Treasury rates; and
$104289 million of losses on foreign currency hedges due to U.S. dollar depreciation versus the British pound, euro and Australian dollar.dollar; and
•$207 million of losses on interest rate derivatives due to increases in the swap and U.S. Treasury rates;
Partially offsetting these losses were:
•$883 million of gains on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts.
Net realized lossesgains on derivative instruments of $463$222 million for the secondthird quarter of 2019 primarily included:
•$1,219880 million of gains on interest rate derivatives due to decreases in swap and U.S. Treasury rates;
•$451 million of gains on foreign currency hedges due to U.S. dollar appreciation versus the euro and British pound; and
•$37 million of gains for fees earned on fee-based synthetic guaranteed investment contracts (“GICs”);
Partially offsetting these gains were:
•$1,136 million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts; and
•$17737 million of losses on capital hedges due to increases in equity indices;indices.
Partially offsetting these losses were:
$676 million of gains on interest rate derivatives due to decreases in swap and U.S. Treasury rates;
$145 million of gains on foreign currency hedges due to U.S. dollar appreciation versus the British pound;
$36 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 secondthird quarter of 2020 and 2019 reflected net related adjustments of net positive $553$320 million primarily due toand negative $172 million, respectively. Both periods’ results reflected changes in the fair value of equity securities as well as fixed income securities designated as trading. Results for the second quarter of 2019 reflected related adjustments of net negative $187 million primarily driven bytrading, settlements on interest rate and currency derivatives.derivatives and the impact of foreign currency exchange rate movements on certain non-local currency denominated assets and liabilities, for which the majority of the foreign currency exposure is hedged and offset in “Realized Investment gains (losses), net.”
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 secondthird quarter of 2020 and 2019 reflected a net related benefitcharges of $519 $70
million compared to a net related charge of $82and $92 million, for the second quarter of 2019.respectively. Both periods’ results were driven by the impact of derivative activity on the amortization of DAC, other costs and certain policyholder reserves.
SixNine Month Comparison. Net gains on sales and maturities of fixed maturity securities were $455$784 million and $372$691 million for the first sixnine months 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 during the investment holding period.
The addition to the allowance for credit losses related to fixed maturity securities was $218$129 million in the first sixnine months of 2020 and was concentrated in the energy, communications and communicationsconsumer cyclical 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 $42$136 million in the first sixnine months of 2019 and were concentrated in the utility and energytechnology sectors within corporate securities. These credit impairments were primarily related to securities with liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers.
Net realized losses on derivative instruments of $2,601$3,017 million for the first sixnine months of 2020 primarily included:
•$5,5924,708 million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts; and
•$2321,071 million of losses on capital hedges due to increases in equity indices;
Partially offsetting these losses were:
•$2,2072,000 million of gains on interest rate derivatives due to decreases in swap and U.S. Treasury rates; and
•$897608 million of gains on foreign currency hedges due to U.S. dollar appreciation versus the British pound and due to USD interest rates declining more than foreign interest rates.rates; and
•$102 million of gains for fees earned on fee-based synthetic GICs.
Net realized losses on derivative instruments of $1,469$1,247 million for the first sixnine months of 2019 primarily included:
•$2,4193,555 million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts; and
•$663700 million of losses on capital hedges due to increases in equity indices;
Partially offsetting these losses were:
•$1,1041,984 million of gains on interest rate derivatives due to decreases in swap and U.S. Treasury rates;
•$245696 million of gains on foreign currency hedges due to U.S. dollar appreciation versus the euro and British pound and Japanese yen appreciation;
•$104109 million of gains for fees earned on fee-based synthetic GICs; and
•$108 million of gains on credit default swaps primarily due to credit spreads tightening; andtightening.
$72 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.
Results for the first sixnine months of 2020 and 2019 included a net negative related adjustmentadjustments of $649$316 million and a net positive related adjustment of $13$178 million, respectively. Both periods’ results reflected changes in the fair value of equity securities as well as fixed income securities designated as trading, and settlements on interest rate and currency derivatives. Additionally, the results for the first nine months of 2019 included the impact of foreign currency exchange rate movements on certain non-local currency denominated assets and liabilities, for which the majority of the foreign currency exposure is hedged and offset in “Realized Investment gains (losses), net.”
Results for the first sixnine months of 2020 and 2019 reflected net related charges of $283$353 million and $57$149 million, respectively. Both periods’ results were driven by the impact of derivative activity on the amortization of DAC, 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, 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.
COVID-19
A 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 the sectors in our investment portfolio most impacted by COVID-19.
Energy Related Investments
As of JuneSeptember 30, 2020, PFI excluding the Closed Block division had energy related exposure with a market value of approximately $13 billion including a net unrealized gain of approximately $1 billion, which was reflected in AOCI. This $13 billion represented investments in public and private corporate fixed maturity securities (excluding trading securities) and was comprised of the midstream (40%(41%), independent energy (25%), integrated energy (22%), oil field services (6%) and refining (7%(6%) sub-sectors. As of JuneSeptember 30, 2020, the credit quality of energy sector fixed maturity securities was 80%79% investment grade and 20%21% below investment grade. Energy related investment realized losses were approximately $2$17 million, fromcomprised of $59 million of write-downs, and $28partially offset by a $42 million fromrelease of credit loss allowances for the three months ended JuneSeptember 30, 2020 and $542020. Energy related investments realized losses were approximately $179 million, fromcomprised of $114 million of write-downs and $107$65 million fromof additions to credit loss allowances for the sixnine months ended JuneSeptember 30, 2020, respectively.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.
Consumer Cyclical Related Investments
As of JuneSeptember 30, 2020, PFI excluding the Closed Block division had consumer cyclical related exposure with a market value of approximately $12 billion and a net unrealized gain of less than $1 billion, which was reflected in AOCI. This $12 billion represented investments in public and private corporate fixed maturity securities (excluding trading securities) and included exposures in retail (37%(38%), automotive (18%), restaurants (9%(17%), leisure (8%), restaurants (7%), gaming (4%) and lodging (2%). As of JuneSeptember 30, 2020, the credit quality of consumer cyclical sector fixed maturity securities was 77% investment grade and 23% below investment grade. The remaining exposure of less than $1 billion was comprised of private equity investments and real estate-related LPs/LLCs. For additional information regarding “—Retail Related Investments,” see below.
Retail Related Investments
As of JuneSeptember 30, 2020, PFI excluding the Closed Block division had retail-related investments of approximately $13 billion consisting primarily of $6 billion of corporate fixed maturities of which 89% were 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%50% and weighted-average debt service coverage ratio of 2.462.45 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%80% and 21%20% were rated AAA (super senior) and AA, 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 JuneSeptember 30, 2020, PFI excluding the Closed Block division had $0.1 billion of airline related corporate fixed maturities within the transportation sector of which 97%98% were 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, as of the dates indicated:
| | | | | June 30, 2020 | | December 31, 2019 | | | September 30, 2020 | | December 31, 2019 |
| 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 | | Allowance for Credit Losses (5) | | Fair
Value | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| | | (in millions) | | | (in millions) |
| Corporate securities: | | | | | | | | | | | | | | | | | | | Corporate securities: | |
| Finance | | $ | 36,123 |
| | $ | 3,973 |
| | $ | 189 |
| | $ | 0 |
| | $ | 39,907 |
| | $ | 34,710 |
| | $ | 2,796 |
| | $ | 85 |
| | $ | 37,421 |
| Finance | | $ | 36,035 | | | $ | 4,344 | | | $ | 130 | | | $ | 0 | | | $ | 40,249 | | | $ | 34,710 | | | $ | 2,796 | | | $ | 85 | | | $ | 37,421 | |
| Consumer non-cyclical | | 26,249 |
| | 4,300 |
| | 134 |
| | 1 |
| | 30,414 |
| | 24,941 |
| | 2,846 |
| | 112 |
| | 27,675 |
| Consumer non-cyclical | | 27,410 | | | 4,529 | | | 95 | | | 0 | | | 31,844 | | | 24,941 | | | 2,846 | | | 112 | | | 27,675 | |
| Utility | | 23,326 |
| | 3,782 |
| | 83 |
| | 0 |
| | 27,025 |
| | 22,341 |
| | 2,498 |
| | 81 |
| | 24,758 |
| Utility | | 23,650 | | | 4,009 | | | 92 | | | 5 | | | 27,562 | | | 22,341 | | | 2,498 | | | 81 | | | 24,758 | |
| Capital goods | | 12,896 |
| | 1,426 |
| | 196 |
| | 5 |
| | 14,121 |
| | 12,287 |
| | 1,150 |
| | 83 |
| | 13,354 |
| Capital goods | | 13,134 | | | 1,582 | | | 106 | | | 3 | | | 14,607 | | | 12,287 | | | 1,150 | | | 83 | | | 13,354 | |
| Consumer cyclical | | 11,455 |
| | 1,207 |
| | 236 |
| | 30 |
| | 12,396 |
| | 10,871 |
| | 994 |
| | 45 |
| | 11,820 |
| Consumer cyclical | | 10,949 | | | 1,286 | | | 109 | | | 26 | | | 12,100 | | | 10,871 | | | 994 | | | 45 | | | 11,820 | |
| Foreign agencies | | 5,275 |
| | 919 |
| | 47 |
| | 0 |
| | 6,147 |
| | 5,649 |
| | 928 |
| | 10 |
| | 6,567 |
| Foreign agencies | | 5,226 | | | 896 | | | 45 | | | 0 | | | 6,077 | | | 5,649 | | | 928 | | | 10 | | | 6,567 | |
| Energy | | 12,283 |
| | 1,005 |
| | 405 |
| | 107 |
| | 12,776 |
| | 12,922 |
| | 1,126 |
| | 186 |
| | 13,862 |
| Energy | | 12,086 | | | 1,047 | | | 319 | | | 65 | | | 12,749 | | | 12,922 | | | 1,126 | | | 186 | | | 13,862 | |
| Communications | | 5,978 |
| | 1,178 |
| | 60 |
| | 36 |
| | 7,060 |
| | 5,916 |
| | 939 |
| | 34 |
| | 6,821 |
| Communications | | 5,949 | | | 1,206 | | | 53 | | | 30 | | | 7,072 | | | 5,916 | | | 939 | | | 34 | | | 6,821 | |
| Basic industry | | 5,985 |
| | 648 |
| | 48 |
| | 0 |
| | 6,585 |
| | 5,866 |
| | 497 |
| | 38 |
| | 6,325 |
| Basic industry | | 5,974 | | | 768 | | | 26 | | | 0 | | | 6,716 | | | 5,866 | | | 497 | | | 38 | | | 6,325 | |
| Transportation | | 9,896 |
| | 1,076 |
| | 120 |
| | 0 |
| | 10,852 |
| | 9,443 |
| | 833 |
| | 34 |
| | 10,242 |
| Transportation | | 9,885 | | | 1,287 | | | 54 | | | 0 | | | 11,118 | | | 9,443 | | | 833 | | | 34 | | | 10,242 | |
| Technology | | 3,579 |
| | 341 |
| | 23 |
| | 0 |
| | 3,897 |
| | 3,395 |
| | 278 |
| | 13 |
| | 3,660 |
| Technology | | 3,551 | | | 346 | | | 16 | | | 0 | | | 3,881 | | | 3,395 | | | 278 | | | 13 | | | 3,660 | |
| Industrial other | | 4,317 |
| | 559 |
| | 42 |
| | 0 |
| | 4,834 |
| | 3,894 |
| | 351 |
| | 33 |
| | 4,212 |
| Industrial other | | 4,402 | | | 597 | | | 33 | | | 0 | | | 4,966 | | | 3,894 | | | 351 | | | 33 | | | 4,212 | |
| Total corporate securities | | 157,362 |
| | 20,414 |
| | 1,583 |
| | 179 |
| | 176,014 |
| | 152,235 |
| | 15,236 |
| | 754 |
| | 166,717 |
| Total corporate securities | | 158,251 | | | 21,897 | | | 1,078 | | | 129 | | | 178,941 | | | 152,235 | | | 15,236 | | | 754 | | | 166,717 | |
| Foreign government(2) | | 97,841 |
| | 18,540 |
| | 201 |
| | 39 |
| | 116,141 |
| | 97,880 |
| | 20,658 |
| | 63 |
| | 118,475 |
| Foreign government(2) | | 90,335 | | | 16,188 | | | 191 | | | 0 | | | 106,332 | | | 97,880 | | | 20,658 | | | 63 | | | 118,475 | |
| Residential mortgage-backed(3) | | 2,980 |
| | 233 |
| | 0 |
| | 0 |
| | 3,213 |
| | 2,955 |
| | 154 |
| | 1 |
| | 3,108 |
| Residential mortgage-backed(3) | | 2,764 | | | 220 | | | 1 | | | 0 | | | 2,983 | | | 2,955 | | | 154 | | | 1 | | | 3,108 | |
| Asset-backed | | 10,869 |
| | 124 |
| | 164 |
| | 0 |
| | 10,829 |
| | 9,832 |
| | 123 |
| | 34 |
| | 9,921 |
| Asset-backed | | 11,033 | | | 134 | | | 90 | | | 0 | | | 11,077 | | | 9,832 | | | 123 | | | 34 | | | 9,921 | |
| Commercial mortgage-backed | | 10,314 |
| | 821 |
| | 4 |
| | 0 |
| | 11,131 |
| | 10,211 |
| | 441 |
| | 9 |
| | 10,643 |
| Commercial mortgage-backed | | 10,310 | | | 865 | | | 5 | | | 0 | | | 11,170 | | | 10,211 | | | 441 | | | 9 | | | 10,643 | |
| U.S. Government | | 26,317 |
| | 9,593 |
| | 21 |
| | 0 |
| | 35,889 |
| | 24,938 |
| | 4,511 |
| | 94 |
| | 29,355 |
| U.S. Government | | 26,064 | | | 9,431 | | | 26 | | | 0 | | | 35,469 | | | 24,938 | | | 4,511 | | | 94 | | | 29,355 | |
| State & Municipal | | 9,919 |
| | 1,861 |
| | 1 |
| | 0 |
| | 11,779 |
| | 9,593 |
| | 1,327 |
| | 7 |
| | 10,913 |
| State & Municipal | | 10,067 | | | 1,897 | | | 3 | | | 0 | | | 11,961 | | | 9,593 | | | 1,327 | | | 7 | | | 10,913 | |
| Total fixed maturities, available-for-sale(4)(5) | | $ | 315,602 |
| | $ | 51,586 |
| | $ | 1,974 |
| | $ | 218 |
| | $ | 364,996 |
| | $ | 307,644 |
| | $ | 42,450 |
| | $ | 962 |
| | $ | 349,132 |
| Total fixed maturities, available-for-sale(4)(5) | | $ | 308,824 | | | $ | 50,632 | | | $ | 1,394 | | | $ | 129 | | | $ | 357,933 | | | $ | 307,644 | | | $ | 42,450 | | | $ | 962 | | | $ | 349,132 | |
__________
| |
(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 JuneSeptember 30, 2020 and December 31, 2019, based on amortized cost, 77%86% and 76%, respectively, represent Japanese government bonds held by our Japanese insurance operations with no other individual country representing more than 4% and 11% of the balance.balance, respectively.
(3) As of JuneSeptember 30, 2020 and December 31, 2019, based on amortized cost, 96%97% and more than 99% were rated A or higher, respectively.
(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, 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.
The increase in net unrealized gains from December 31, 2019 to JuneSeptember 30, 2020 was primarily due to a decrease 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:
| | | | | June 30, 2020 | | December 31, 2019 | | | September 30, 2020 | | December 31, 2019 |
| 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 | | Allowance for Credit Losses | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| | | (in millions) | | | (in millions) |
| Corporate securities: | | | | | | | | | | | | | | | | | | | Corporate securities: | |
| Finance | | $ | 625 |
| | $ | 61 |
| | $ | 0 |
| | $ | 686 |
| | $ | 9 |
| | $ | 628 |
| | $ | 64 |
| | $ | 0 |
| | $ | 692 |
| Finance | | $ | 637 | | | $ | 66 | | | $ | 0 | | | $ | 703 | | | $ | 9 | | | $ | 628 | | | $ | 64 | | | $ | 0 | | | $ | 692 | |
| | Foreign agencies | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 21 |
| | 0 |
| | 0 |
| | 21 |
| Foreign agencies | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 21 | | | 0 | | | 0 | | | 21 | |
| | Basic industry | | 83 |
| | 2 |
| | 0 |
| | 85 |
| | 0 |
| | 83 |
| | 2 |
| | 0 |
| | 85 |
| Basic industry | | 85 | | | 2 | | | 0 | | | 87 | | | 0 | | | 83 | | | 2 | | | 0 | | | 85 | |
| | Total corporate securities | | 708 |
| | 63 |
| | 0 |
| | 771 |
| | 9 |
| | 732 |
| | 66 |
| | 0 |
| | 798 |
| Total corporate securities | | 722 | | | 68 | | | 0 | | | 790 | | | 9 | | | 732 | | | 66 | | | 0 | | | 798 | |
| Foreign government(2) | | 896 |
| | 261 |
| | 0 |
| | 1,157 |
| | 0 |
| | 891 |
| | 282 |
| | 0 |
| | 1,173 |
| Foreign government(2) | | 915 | | | 265 | | | 0 | | | 1,180 | | | 0 | | | 891 | | | 282 | | | 0 | | | 1,173 | |
| Residential mortgage-backed(3) | | 280 |
| | 23 |
| | 0 |
| | 303 |
| | 0 |
| | 310 |
| | 21 |
| | 0 |
| | 331 |
| Residential mortgage-backed(3) | | 273 | | | 21 | | | 0 | | | 294 | | | 0 | | | 310 | | | 21 | | | 0 | | | 331 | |
| | Total fixed maturities, held-to-maturity(4) | | $ | 1,884 |
| | $ | 347 |
| | $ | 0 |
| | $ | 2,231 |
| | $ | 9 |
| | $ | 1,933 |
| | $ | 369 |
| | $ | 0 |
| | $ | 2,302 |
| Total fixed maturities, held-to-maturity(4) | | $ | 1,910 | | | $ | 354 | | | $ | 0 | | | $ | 2,264 | | | $ | 9 | | | $ | 1,933 | | | $ | 369 | | | $ | 0 | | | $ | 2,302 | |
__________
| |
(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 June 30, 2020 and December 31, 2019, based on amortized cost, 98% represent Japanese government bonds held by our Japanese insurance operations. |
| |
(3) | As of June 30, 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. |
(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 September 30, 2020 and December 31, 2019, based on amortized cost, 98% represent Japanese government bonds held by our Japanese insurance operations.
(3)As of September 30, 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.
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:
| | | | June 30, 2020 | | December 31, 2019 | | September 30, 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) | 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 |
| | (in millions) | | (in millions) |
| 1 | $ | 232,891 |
| | $ | 43,319 |
| | $ | 511 |
| | $ | 0 |
| | $ | 275,699 |
| | $ | 232,039 |
| | $ | 35,923 |
| | $ | 287 |
| | $ | 267,675 |
| 1 | $ | 224,784 | | | $ | 41,261 | | | $ | 436 | | | $ | 0 | | | $ | 265,609 | | | $ | 232,039 | | | $ | 35,923 | | | $ | 287 | | | $ | 267,675 | |
| 2 | 64,892 |
| | 7,365 |
| | 615 |
| | 0 |
| | 71,642 |
| | 59,114 |
| | 5,198 |
| | 384 |
| | 63,928 |
| 2 | 65,941 | | | 8,416 | | | 376 | | | 0 | | | 73,981 | | | 59,114 | | | 5,198 | | | 384 | | | 63,928 | |
| Subtotal High or Highest Quality Securities(4) | 297,783 |
| | 50,684 |
| | 1,126 |
| | 0 |
| | 347,341 |
| | 291,153 |
| | 41,121 |
| | 671 |
| | 331,603 |
| Subtotal High or Highest Quality Securities(4) | 290,725 | | | 49,677 | | | 812 | | | 0 | | | 339,590 | | | 291,153 | | | 41,121 | | | 671 | | | 331,603 | |
| 3 | 10,583 |
| | 557 |
| | 390 |
| | 11 |
| | 10,739 |
| | 10,033 |
| | 854 |
| | 93 |
| | 10,794 |
| 3 | 11,289 | | | 673 | | | 272 | | | 10 | | | 11,680 | | | 10,033 | | | 854 | | | 93 | | | 10,794 | |
| 4 | 5,318 |
| | 132 |
| | 270 |
| | 58 |
| | 5,122 |
| | 4,914 |
| | 248 |
| | 98 |
| | 5,064 |
| 4 | 4,935 | | | 147 | | | 186 | | | 19 | | | 4,877 | | | 4,914 | | | 248 | | | 98 | | | 5,064 | |
| 5 | 1,583 |
| | 77 |
| | 143 |
| | 50 |
| | 1,467 |
| | 1,280 |
| | 196 |
| | 83 |
| | 1,393 |
| 5 | 1,484 | | | 94 | | | 86 | | | 22 | | | 1,470 | | | 1,280 | | | 196 | | | 83 | | | 1,393 | |
| 6 | 335 |
| | 136 |
| | 45 |
| | 99 |
| | 327 |
| | 264 |
| | 31 |
| | 17 |
| | 278 |
| 6 | 391 | | | 41 | | | 38 | | | 78 | | | 316 | | | 264 | | | 31 | | | 17 | | | 278 | |
| Subtotal Other Securities(5)(6) | 17,819 |
| | 902 |
| | 848 |
| | 218 |
| | 17,655 |
| | 16,491 |
| | 1,329 |
| | 291 |
| | 17,529 |
| Subtotal Other Securities(5)(6) | 18,099 | | | 955 | | | 582 | | | 129 | | | 18,343 | | | 16,491 | | | 1,329 | | | 291 | | | 17,529 | |
| Total fixed maturities, available-for-sale(7) | $ | 315,602 |
| | $ | 51,586 |
| | $ | 1,974 |
| | $ | 218 |
| | $ | 364,996 |
| | $ | 307,644 |
| | $ | 42,450 |
| | $ | 962 |
| | $ | 349,132 |
| Total fixed maturities, available-for-sale(7) | $ | 308,824 | | | $ | 50,632 | | | $ | 1,394 | | | $ | 129 | | | $ | 357,933 | | | $ | 307,644 | | | $ | 42,450 | | | $ | 962 | | | $ | 349,132 | |
__________
| |
(1) | Reflects equivalent ratings for investments of the international insurance operations. |
| |
(2) | Includes, as of June 30, 2020 and December 31, 2019, 868 securities with amortized cost of $4,168 million (fair value, $4,307 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 June 30, 2020, includes gross unrealized losses of $552 million on public fixed maturities and $296 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 June 30, 2020, includes $254,054 million of public fixed maturities and $43,729 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 June 30, 2020, includes $9,452 million of public fixed maturities and $8,367 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 June 30, 2020, securities considered below investment grade based on lowest of external rating agency ratings total $17,997 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 September 30, 2020 and December 31, 2019, 750 securities with amortized cost of $3,551 million (fair value, $3,639 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 September 30, 2020, includes gross unrealized losses of $395 million on public fixed maturities and $187 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 September 30, 2020, includes $246,889 million of public fixed maturities and $43,836 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 September 30, 2020, includes $9,291 million of public fixed maturities and $8,808 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 September 30, 2020, securities considered below investment grade based on lowest of external rating agency ratings total $18,150 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.
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:
| | | | June 30, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 |
| 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 | | Allowance for Credit Losses | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses(2) | | Fair
Value |
| | (in millions) | | (in millions) |
| 1 | $ | 1,692 |
| | $ | 328 |
| | $ | 0 |
| | $ | 2,020 |
| | $ | 4 |
| | $ | 1,743 |
| | $ | 351 |
| | $ | 0 |
| | $ | 2,094 |
| 1 | $ | 1,715 | | | $ | 332 | | | $ | 0 | | | $ | 2,047 | | | $ | 5 | | | $ | 1,743 | | | $ | 351 | | | $ | 0 | | | $ | 2,094 | |
| 2 | 192 |
| | 19 |
| | 0 |
| | 211 |
| | 5 |
| | 190 |
| | 18 |
| | 0 |
| | 208 |
| 2 | 195 | | | 22 | | | 0 | | | 217 | | | 4 | | | 190 | | | 18 | | | 0 | | | 208 | |
| Subtotal High or Highest Quality Securities(3) | 1,884 |
| | 347 |
| | 0 |
| | 2,231 |
| | 9 |
| | 1,933 |
| | 369 |
| | 0 |
| | 2,302 |
| Subtotal High or Highest Quality Securities(3) | 1,910 | | | 354 | | | 0 | | | 2,264 | | | 9 | | | 1,933 | | | 369 | | | 0 | | | 2,302 | |
| 3 | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| 3 | 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 | |
| 5 | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| 5 | 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 | |
| Subtotal Other Securities | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| Subtotal Other Securities | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total fixed maturities, held-to-maturity | $ | 1,884 |
| | $ | 347 |
| | $ | 0 |
| | $ | 2,231 |
| | $ | 9 |
| | $ | 1,933 |
| | $ | 369 |
| | $ | 0 |
| | $ | 2,302 |
| Total fixed maturities, held-to-maturity | $ | 1,910 | | | $ | 354 | | | $ | 0 | | | $ | 2,264 | | | $ | 9 | | | $ | 1,933 | | | $ | 369 | | | $ | 0 | | | $ | 2,302 | |
__________
| |
(1) | Reflects equivalent ratings for investments of the international insurance operations. |
| |
(2) | As of both June 30, 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 June 30, 2020, includes $1,670 million of public fixed maturities and $214 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 September 30, 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 September 30, 2020, includes $1,698 million of public fixed maturities and $212 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.
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:
| | | | June 30, 2020 | | December 31, 2019 | | September 30, 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 | Lowest Rating Agency Rating(1) | Amortized Cost | | Fair
Value | | Amortized Cost | | Fair
Value | | Amortized Cost | | Fair
Value | | Amortized Cost | | Fair
Value |
| | (in millions) | | (in millions) |
| AAA | $ | 10,306 |
| | $ | 10,195 |
| | $ | 8,262 |
| | $ | 8,836 |
| | $ | 9,381 |
| | $ | 9,377 |
| | $ | 8,128 |
| | $ | 8,454 |
| AAA | $ | 10,529 | | | $ | 10,490 | | | $ | 8,286 | | | $ | 8,910 | | | $ | 9,381 | | | $ | 9,377 | | | $ | 8,128 | | | $ | 8,454 | |
| AA | 358 |
| | 363 |
| | 2,039 |
| | 2,282 |
| | 288 | | 304 | | 2,068 |
| | 2,173 |
| AA | 350 | | | 363 | | | 2,011 | | | 2,247 | | | 288 | | 304 | | 2,068 | | | 2,173 | |
| A | 83 |
| | 84 |
| | 4 |
| | 5 |
| | 5 | | 6 | | 6 | | 7 | A | 35 | | | 36 | | | 4 | | | 5 | | | 5 | | 6 | | 6 | | 7 |
| BBB | 3 |
| | 3 |
| | 9 |
| | 8 |
| | 12 | | 12 | | 9 | | 9 | BBB | 3 | | | 3 | | | 9 | | | 8 | | | 12 | | 12 | | 9 | | 9 |
| BB and below | 119 |
| | 184 |
| | 0 |
| | 0 |
| | 146 | | 222 | | 0 | | 0 | BB and below | 116 | | | 185 | | | 0 | | | 0 | | | 146 | | 222 | | 0 | | | 0 | |
| Total(4) | $ | 10,869 |
| | $ | 10,829 |
| | $ | 10,314 |
| | $ | 11,131 |
| | $ | 9,832 |
| | $ | 9,921 |
| | $ | 10,211 |
| | $ | 10,643 |
| Total(4) | $ | 11,033 | | | $ | 11,077 | | | $ | 10,310 | | | $ | 11,170 | | | $ | 9,832 | | | $ | 9,921 | | | $ | 10,211 | | | $ | 10,643 | |
__________
| |
(1) | The table above provides ratings as assigned by nationally recognized rating agencies as of June 30, 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, credit card loans, and other asset types. |
| |
(3) | As of both June 30, 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 September 30, 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, credit card and other asset types.
(3)As of both September 30, 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.
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:
| | | | June 30, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 |
| | Collateralized Loan Obligations | | Collateralized Loan Obligations |
| Lowest Rating Agency Rating(1) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | Lowest Rating Agency Rating(1) | Amortized Cost | | Fair
Value | | Amortized Cost | | Fair
Value |
| | (in millions) | | (in millions) |
| AAA | $ | 8,481 |
| | $ | 8,335 |
| | $ | 7,294 |
| | $ | 7,271 |
| AAA | $ | 8,834 | | | $ | 8,759 | | | $ | 7,294 | | | $ | 7,271 | |
| AA | 0 |
| | 0 |
| | 0 |
| | 0 |
| AA | 0 | | | 0 | | | 0 | | | 0 | |
| A | 0 |
| | 0 |
| | 0 |
| | 0 |
| A | 0 | | | 0 | | | 0 | | | 0 | |
| BBB | 0 |
| | 0 |
| | 0 |
| | 0 |
| BBB | 0 | | | 0 | | | 0 | | | 0 | |
| BB and below | 0 |
| | 0 |
| | 0 |
| | 0 |
| BB and below | 0 | | | 0 | | | 0 | | | 0 | |
| Total(2)(3) | $ | 8,481 |
| | $ | 8,335 |
| | $ | 7,294 |
| | $ | 7,271 |
| Total(2)(3) | $ | 8,834 | | | $ | 8,759 | | | $ | 7,294 | | | $ | 7,271 | |
__________
| |
(1) | The table above provides ratings as assigned by nationally recognized rating agencies as of June 30, 2020, including S&P, Moody’s, Fitch Ratings, Inc. (“Fitch”) and Morningstar, Inc. (“Morningstar”). |
| |
(2) | There was no allowance for credit losses as of June 30, 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 September 30, 2020, including S&P, Moody’s, Fitch and Morningstar.
(2)There was no allowance for credit losses as of September 30, 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:
| | | | | June 30, 2020 | | December 31, 2019 | | | September 30, 2020 | | December 31, 2019 |
| | | (in millions) | | | (in millions) |
| Commercial mortgage and agricultural property loans | | $ | 53,596 |
| | $ | 53,928 |
| Commercial mortgage and agricultural property loans | | $ | 54,453 | | | $ | 53,928 | |
| Uncollateralized loans | | 680 |
| | 656 |
| Uncollateralized loans | | 723 | | | 656 | |
| Residential property loans | | 109 |
| | 124 |
| Residential property loans | | 104 | | | 124 | |
| Other collateralized loans | | 202 |
| | 65 |
| Other collateralized loans | | 114 | | | 65 | |
| Total recorded investment gross of allowance(1) | | 54,587 |
| | 54,773 |
| Total recorded investment gross of allowance(1) | | 55,394 | | | 54,773 | |
| Allowance for credit losses | | (210 | ) | | (102 | ) | Allowance for credit losses | | (208) | | | (102) | |
| Total net commercial mortgage and other loans(2) | | $ | 54,377 |
| | $ | 54,671 |
| Total net commercial mortgage and other loans(2) | | $ | 55,186 | | | $ | 54,671 | |
__________
| |
(1) | As a percentage of recorded investment gross of allowance, more than 99% of these assets were current as of both June 30, 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 September 30, 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.
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 meet the definition of a security under authoritative accounting guidance.
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:
| | | | | June 30, 2020 | | December 31, 2019 | | | September 30, 2020 | | December 31, 2019 |
| | | 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 | | $ | 18,460 |
| | 34.4 | % | | $ | 18,061 |
| | 33.5 | % | Pacific | | $ | 19,015 | | | 34.9 | % | | $ | 18,061 | | | 33.5 | % |
| South Atlantic | | 8,593 |
| | 16.0 |
| | 8,943 |
| | 16.6 |
| South Atlantic | | 8,491 | | | 15.6 | | | 8,943 | | | 16.6 | |
| Middle Atlantic | | 6,377 |
| | 11.9 |
| | 6,664 |
| | 12.4 |
| Middle Atlantic | | 6,428 | | | 11.8 | | | 6,664 | | | 12.4 | |
| East North Central | | 3,265 |
| | 6.1 |
| | 3,413 |
| | 6.3 |
| East North Central | | 3,226 | | | 5.9 | | | 3,413 | | | 6.3 | |
| West South Central | | 5,571 |
| | 10.4 |
| | 5,439 |
| | 10.1 |
| West South Central | | 5,518 | | | 10.1 | | | 5,439 | | | 10.1 | |
| Mountain | | 2,291 |
| | 4.3 |
| | 2,442 |
| | 4.5 |
| Mountain | | 2,273 | | | 4.2 | | | 2,442 | | | 4.5 | |
| New England | | 1,730 |
| | 3.2 |
| | 1,902 |
| | 3.5 |
| New England | | 1,725 | | | 3.2 | | | 1,902 | | | 3.5 | |
| West North Central | | 485 |
| | 0.9 |
| | 454 |
| | 0.8 |
| West North Central | | 477 | | | 0.9 | | | 454 | | | 0.8 | |
| East South Central | | 599 |
| | 1.1 |
| | 622 |
| | 1.2 |
| East South Central | | 768 | | | 1.4 | | | 622 | | | 1.2 | |
| Subtotal-U.S. | | 47,371 |
| | 88.3 |
| | 47,940 |
| | 88.9 |
| Subtotal-U.S. | | 47,921 | | | 88.0 | | | 47,940 | | | 88.9 | |
| Europe | | 3,895 |
| | 7.3 |
| | 3,781 |
| | 7.0 |
| Europe | | 4,111 | | | 7.6 | | | 3,781 | | | 7.0 | |
| Asia | | 948 |
| | 1.8 |
| | 886 |
| | 1.6 |
| Asia | | 982 | | | 1.8 | | | 886 | | | 1.6 | |
| Other | | 1,382 |
| | 2.6 |
| | 1,321 |
| | 2.5 |
| Other | | 1,439 | | | 2.6 | | | 1,321 | | | 2.5 | |
| Total commercial mortgage and agricultural property loans | | $ | 53,596 |
| | 100.0 | % | | $ | 53,928 |
| | 100.0 | % | Total commercial mortgage and agricultural property loans | | $ | 54,453 | | | 100.0 | % | | $ | 53,928 | | | 100.0 | % |
__________
| |
(1) | Regions as defined by the United States Census Bureau. |
| | | | | June 30, 2020 | | December 31, 2019 | | | September 30, 2020 | | December 31, 2019 |
| | | 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 | | $ | 12,270 |
| | 22.9 | % | | $ | 12,224 |
| | 22.7 | % | Industrial | | $ | 12,610 | | | 23.1 | % | | $ | 12,224 | | | 22.7 | % |
| Retail | | 6,029 |
| | 11.2 |
| | 6,524 |
| | 12.1 |
| Retail | | 5,993 | | | 11.0 | | | 6,524 | | | 12.1 | |
| Office | | 10,594 |
| | 19.8 |
| | 11,203 |
| | 20.8 |
| Office | | 10,647 | | | 19.5 | | | 11,203 | | | 20.8 | |
| Apartments/Multi-Family | | 15,395 |
| | 28.7 |
| | 15,176 |
| | 28.1 |
| Apartments/Multi-Family | | 15,497 | | | 28.5 | | | 15,176 | | | 28.1 | |
| Agricultural properties | | 3,316 |
| | 6.2 |
| | 2,856 |
| | 5.3 |
| Agricultural properties | | 3,263 | | | 6.0 | | | 2,856 | | | 5.3 | |
| Hospitality | | 2,035 |
| | 3.8 |
| | 2,066 |
| | 3.8 |
| Hospitality | | 2,048 | | | 3.8 | | | 2,066 | | | 3.8 | |
| Other | | 3,957 |
| | 7.4 |
| | 3,879 |
| | 7.2 |
| Other | | 4,395 | | | 8.1 | | | 3,879 | | | 7.2 | |
| Total commercial mortgage and agricultural property loans | | $ | 53,596 |
| | 100.0 | % | | $ | 53,928 |
| | 100.0 | % | Total commercial mortgage and agricultural property loans | | $ | 54,453 | | | 100.0 | % | | $ | 53,928 | | | 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 JuneSeptember 30, 2020, our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division had a weighted-average debt service coverage ratio of 2.452.47 times and a weighted-average loan-to-value ratio of 56%. As of JuneSeptember 30, 2020, 95% of commercial mortgage and agricultural property loans were fixed rate loans. For those commercial mortgage and agricultural property loans that were originated in 2020, the weighted-average debt service coverage ratio was 2.542.59 times, and the weighted-average loan-to-value ratio was 63%64%.
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 $2.4 billion and $1.8 billion of such loans as of both JuneSeptember 30, 2020 and December 31, 2019, respectively. All else being equal, these loans are inherently riskier than those collateralized by properties that have already stabilized. As of JuneSeptember 30, 2020 and December 31, 2019, there were $1.3$1 million and $0 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:
| | | | | June 30, 2020 | | | September 30, 2020 |
| | | 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% | | $ | 28,065 |
| | $ | 738 |
| | $ | 99 |
| | $ | 28,902 |
| 0%-59.99% | | $ | 27,912 | | | $ | 743 | | | $ | 102 | | | $ | 28,757 | |
| 60%-69.99% | | 15,323 |
| | 720 |
| | 140 |
| | 16,183 |
| 60%-69.99% | | 15,393 | | | 1,078 | | | 139 | | | 16,610 | |
| 70%-79.99% | | 7,623 |
| | 596 |
| | 73 |
| | 8,292 |
| 70%-79.99% | | 8,136 | | | 727 | | | 73 | | | 8,936 | |
| 80% or greater | | 125 |
| | 92 |
| | 2 |
| | 219 |
| 80% or greater | | 7 | | | 141 | | | 2 | | | 150 | |
| Total commercial mortgage and agricultural property loans | | $ | 51,136 |
| | $ | 2,146 |
| | $ | 314 |
| | $ | 53,596 |
| Total commercial mortgage and agricultural property loans | | $ | 51,448 | | | $ | 2,689 | | | $ | 316 | | | $ | 54,453 | |
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:
| | | | | | | | | | | | | | |
| | September 30, 2020 |
| | Gross
Carrying
Value | | % of
Total |
| Year of Origination | | ($ in millions) |
| 2020 | | $ | 3,518 | | | 6.5 | % |
| 2019 | | 9,971 | | | 18.3 | |
| 2018 | | 8,516 | | | 15.6 | |
| 2017 | | 7,159 | | | 13.1 | |
| 2016 | | 6,294 | | | 11.6 | |
| 2015 | | 5,613 | | | 10.3 | |
| 2014 | | 4,500 | | | 8.3 | |
| 2013 & Prior | | 8,882 | | | 16.3 | |
| Total commercial mortgage and agricultural property loans | | $ | 54,453 | | | 100.0 | % |
|
| | | | | | | |
| | | June 30, 2020 |
| | | Gross Carrying Value | | % of Total |
| Year of Origination | | ($ in millions) |
| 2020 | | $ | 2,319 |
| | 4.3 | % |
| 2019 | | 9,720 |
| | 18.1 |
|
| 2018 | | 8,512 |
| | 15.9 |
|
| 2017 | | 7,171 |
| | 13.4 |
|
| 2016 | | 6,291 |
| | 11.7 |
|
| 2015 | | 5,611 |
| | 10.5 |
|
| 2014 | | 4,675 |
| | 8.7 |
|
| 2013 & Prior | | 9,297 |
| | 17.4 |
|
| Total commercial mortgage and agricultural property loans | | $ | 53,596 |
| | 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 current 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 residential 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:
| | | | | June 30, 2020 | | December 31, 2019 | | | September 30, 2020 | | December 31, 2019 |
| | | (in millions) | | | (in millions) |
| Allowance, beginning of year | | $ | 102 |
| | $ | 106 |
| Allowance, beginning of year | | $ | 102 | | | $ | 106 | |
| Cumulative effect of adoption of ASU 2016-13 | | 101 |
| | 0 |
| Cumulative effect of adoption of ASU 2016-13 | | 101 | | | 0 | |
| Addition to (release of) allowance for credit losses | | 4 |
| | (4 | ) | Addition to (release of) allowance for credit losses | | 2 | | | (4) | |
| Write-downs charged against the allowance | | 0 |
| | 0 |
| |
| | Recoveries of amounts previously written-down | | 0 |
| | N/A |
| Recoveries of amounts previously written-down | | 0 | | | N/A |
| Change in foreign exchange | | 0 |
| | 0 |
| |
| | Other | | 3 |
| | 0 |
| Other | | 3 | | | 0 | |
| Allowance, end of period | | $ | 210 |
| | $ | 102 |
| Allowance, end of period | | $ | 208 | | | $ | 102 | |
The allowance for credit losses as of JuneSeptember 30, 2020 increased compared to December 31, 2019, primarily due to the cumulative effect of adopting ASU 2016-13.
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:
| | | | | June 30, 2020 | | December 31, 2019 | | | September 30, 2020 | | December 31, 2019 |
| | | 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 | | $ | 926 |
| | $ | 218 |
| | $ | 13 |
| | $ | 1,131 |
| | $ | 817 |
| | $ | 258 |
| | $ | 1 |
| | $ | 1,074 |
| Mutual funds | | $ | 937 | | | $ | 294 | | | $ | 7 | | | $ | 1,224 | | | $ | 817 | | | $ | 258 | | | $ | 1 | | | $ | 1,074 | |
| Other Common Stocks | | 2,428 |
| | 834 |
| | 135 |
| | 3,127 |
| | 2,429 |
| | 1,091 |
| | 57 |
| | 3,463 |
| Other Common Stocks | | 2,188 | | | 921 | | | 108 | | | 3,001 | | | 2,429 | | | 1,091 | | | 57 | | | 3,463 | |
| Non-redeemable Preferred Stocks | | 57 |
| | 5 |
| | 6 |
| | 56 |
| | 51 |
| | 3 |
| | 5 |
| | 49 |
| Non-redeemable Preferred Stocks | | 54 | | | 22 | | | 6 | | | 70 | | | 51 | | | 3 | | | 5 | | | 49 | |
| Total equity securities, at fair value(1) | | $ | 3,411 |
| | $ | 1,057 |
| | $ | 154 |
| | $ | 4,314 |
| | $ | 3,297 |
| | $ | 1,352 |
| | $ | 63 |
| | $ | 4,586 |
| Total equity securities, at fair value(1) | | $ | 3,179 | | | $ | 1,237 | | | $ | 121 | | | $ | 4,295 | | | $ | 3,297 | | | $ | 1,352 | | | $ | 63 | | | $ | 4,586 | |
__________
| |
(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 $372$213 million and $81$80 million during the three months ended JuneSeptember 30, 2020 and 2019, respectively, and $(386)$(173) million and $330$410 million during the sixnine months ended JuneSeptember 30, 2020 and 2019, 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:
| | | | | June 30, 2020 | | December 31, 2019 | | | September 30, 2020 | | December 31, 2019 |
| | | (in millions) | | (in millions) |
| LPs/LLCs: | | | | | LPs/LLCs: | |
| Equity method: | | | | | Equity method: | |
| Private equity | | $ | 2,938 |
| | $ | 2,740 |
| Private equity | | $ | 3,191 | | | $ | 2,740 | |
| Hedge funds | | 1,552 |
| | 1,362 |
| Hedge funds | | 1,683 | | | 1,362 | |
| Real estate-related | | 795 |
| | 792 |
| Real estate-related | | 854 | | | 792 | |
| Subtotal equity method | | 5,285 |
| | 4,894 |
| Subtotal equity method | | 5,728 | | | 4,894 | |
| Fair value: | | | | | Fair value: | |
| Private equity | | 912 |
| | 990 |
| Private equity | | 994 | | | 990 | |
| Hedge funds | | 1,110 |
| | 1,233 |
| Hedge funds | | 1,090 | | | 1,233 | |
| Real estate-related | | 45 |
| | 50 |
| Real estate-related | | 44 | | | 50 | |
| Subtotal fair value | | 2,067 |
| | 2,273 |
| Subtotal fair value | | 2,128 | | | 2,273 | |
| Total LPs/LLCs | | 7,352 |
| | 7,167 |
| Total LPs/LLCs | | 7,856 | | | 7,167 | |
| Real estate held through direct ownership(1) | | 1,330 |
| | 1,350 |
| Real estate held through direct ownership(1) | | 1,272 | | | 1,350 | |
| Derivative instruments | | 164 |
| | 73 |
| Derivative instruments | | 165 | | | 73 | |
| Other(2) | | 732 |
| | 620 |
| Other(2) | | 718 | | | 620 | |
| Total other invested assets | | $ | 9,578 |
| | $ | 9,210 |
| Total other invested assets | | $ | 10,011 | | | $ | 9,210 | |
__________
| |
(1) | As of June 30, 2020 and December 31, 2019, real estate held through direct ownership had mortgage debt of $459 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)As of September 30, 2020 and December 31, 2019, real estate held through direct ownership had mortgage debt of $436 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.
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.
| | | | | June 30, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 |
| | | (in millions) | | | (in millions) |
| Fixed maturities: | | | | | Fixed maturities: | |
| Public, available-for-sale, at fair value(1) | | $ | 614 |
| | $ | 587 |
| Public, available-for-sale, at fair value(1) | | $ | 635 | | | $ | 587 | |
| Private, available-for-sale, at fair value | | 1 |
| | 1 |
| Private, available-for-sale, at fair value | | 1 | | | 1 | |
| Fixed maturities, trading, at fair value(1) | | 1,084 |
| | 1,161 |
| Fixed maturities, trading, at fair value(1) | | 1,125 | | | 1,161 | |
| Equity securities, at fair value | | 649 |
| | 691 |
| Equity securities, at fair value | | 656 | | | 691 | |
| Commercial mortgage and other loans, at book value(2) | | 703 |
| | 259 |
| Commercial mortgage and other loans, at book value(2) | | 936 | | | 259 | |
| Other invested assets(1) | | 3,920 |
| | 3,062 |
| Other invested assets(1) | | 3,492 | | | 3,062 | |
| Short-term investments | | 36 |
| | 17 |
| Short-term investments | | 36 | | | 17 | |
| Total investments | | $ | 7,007 |
| | $ | 5,778 |
| Total investments | | $ | 6,881 | | | $ | 5,778 | |
__________
| |
(1) | As of June 30, 2020 and December 31, 2019, balances include investments in CLOs with fair value of $448 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 September 30, 2020 and December 31, 2019, balances include investments in CLOs with fair value of $501 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.
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 additional 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 invested assets 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. The principles of our liquidity and capital management framework are described in an enterprise wide policy that is reviewed and approved by our Board.
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
Beginning in the first quarter of 2020, 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, inIn the first halfnine months of the year we took the following significant management actions to enhancethat impacted our liquidity and capital position:position, including in response to this macro environment and the global pandemic:
•We executed transactions to reduce our ongoing financing costs in August by issuing $1.3 billion of junior subordinated notes at interest rates of 3.70% and 4.125% and with maturities ranging from 2050 to 2060 and using the proceeds to redeem in September our $710 million 5.70% junior subordinated notes due in 2053 and our $575 million 5.75% junior subordinated notes due in 2052;
•In May, we augmented our alternative sources of liquidity by entering into a facility agreement with a Delaware trust, pursuant to which Prudential Financial may issue and sell to the trust at any time over a ten-year period up to $1.5 billion of 2.850% senior notes due May 15, 2030 and receive in exchange a corresponding amount of U.S. Treasury securities. The facility agreement is similar to our existing put option agreement that allows us to issue up to $1.5 billion of senior notes to a trust, which we established in 2013 and expires in 2023;
•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 continuedo not intend to resume share repurchases this year as the duration and severity of the pandemic and its effect on the economy remain uncertain. We will evaluate the resumption of share repurchases under our existing Board authorization for 2020, as informed by the market environment and any alternative opportunities for capital deployment;
•In March, 2020, we issued $1.5 billion of senior notes, with maturities ranging from 2026 to 2040, for general corporate purposes, including pre-funding part of our senior notes maturing through 2021. 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;
We executed additional capital hedges that protect the capital position of our U.S. insurance subsidiaries against additional declines in the equity markets;
•In March, 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 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 and maintains access to substantial alternative sources of liquidity, such as committed credit facilities, membership in the Federal Home Loan Banks, commercial paper programs, and agreements that allow us to issue senior debt to trust entities. As of JuneSeptember 30, 2020, Prudential Financial had highly liquid assets of $4.5$6.1 billion, excluding the net borrowings from an intercompany liquidity account. Nevertheless, adverse developments related to COVID-19 and associated market dislocations could strain our existing liquidity. For example, capital or liquidity needs at our subsidiaries resulting from market conditions or business operations could require us to use our highly liquid assets or tap alternative sources of liquidity, and our access to traditional funding sources, such as commercial paper borrowings, could become limited due to market conditions. Any need to increase the use of our alternative sources of liquidity may result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings or ratings outlooks.
Capital. As of JuneSeptember 30, 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. For example, adverse market conditions may lead to increased defaults and/or further deterioration in the credit quality or fair values of our investment portfolio, which would negatively impact the statutory capital of our insurance subsidiaries. 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 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.
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 JuneSeptember 30, 2020, the Company had $49.0$50.2 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.
| | | | June 30, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 |
| | (in millions) | | (in millions) |
| Equity(1) | $ | 35,060 |
| | $ | 39,076 |
| Equity(1) | $ | 36,216 | | | $ | 39,076 | |
| Junior subordinated debt (including hybrid securities) | 7,580 |
| | 7,575 |
| Junior subordinated debt (including hybrid securities) | 7,611 | | | 7,575 | |
| Other capital debt | 6,354 |
| | 7,001 |
| Other capital debt | 6,355 | | | 7,001 | |
| Total capital | $ | 48,994 |
| | $ | 53,652 |
| Total capital | $ | 50,182 | | | $ | 53,652 | |
__________
| |
(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, the most recent statutory fiscal year-end and RBC reporting date for these subsidiaries.
|
| | | | |
| Ratio(1) |
| PICA(2) | 411 | % |
| Prudential Annuities Life Assurance Corporation (“PALAC”) | 484 | % |
| Composite Major U.S. Insurance Subsidiaries(3) | 426 | % |
__________
| |
(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.
The table below presents the solvency margin ratios of our most significant international insurance subsidiaries as of March 31,June 30, 2020, the most recent date for which this information is available.
|
| | | | |
| Ratio |
| Prudential of Japan consolidated(1) | 818883 | % |
| Gibraltar Life consolidated(2) | 835920 | % |
__________
| |
(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, market conditions could negatively impact the statutory capital of our insurance companies and constrain our overall capital flexibility. 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 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.
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, for a discussion of our use of captive reinsurance companies.
Shareholder Distributions
Share Repurchase Program and Shareholder Dividends
In December 2019, the Board 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. We temporarily suspended Common Stock repurchases under our existing repurchasethis authorization beginning April 1, 2020; however, we continue2020, after purchasing $500 million of shares of Prudential Financial’s Common Stock in the first quarter of 2020. We do not intend to resume share repurchases this year as the duration and severity of the pandemic and its effect on the economy remain uncertain. We will evaluate the resumption of share repurchases under this Board authorization.as informed by the market environment and any alternative opportunities for capital deployment.
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.
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 sixnine months ended JuneSeptember 30, 2020.
| | | | Dividend Amount | | Shares Repurchased | | Dividend Amount | | Shares Repurchased |
| Three months ended: | Per Share | | Aggregate | | Shares | | Total Cost | Three months ended: | Per Share | | Aggregate | | Shares | | Total Cost |
| | (in millions, except per share data) | | (in millions, except per share data) |
| March 31, 2020 | $ | 1.10 |
| | $ | 445 |
| | 6.7 |
| | $ | 500 |
| March 31, 2020 | $ | 1.10 | | | $ | 445 | | | 6.7 | | | $ | 500 | |
| June 30, 2020 | $ | 1.10 |
| | $ | 441 |
| | 0.0 |
| | $ | 0 |
| June 30, 2020 | $ | 1.10 | | | $ | 441 | | | 0.0 | | | $ | 0 | |
| September 30, 2020 | | September 30, 2020 | $ | 1.10 | | | $ | 441 | | | 0.0 | | | $ | 0 | |
|
Liquidity
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. InDuring the first quarternine months 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 JuneSeptember 30, 2020, Prudential Financial had highly liquid assets with a carrying value totaling $5,105$6,712 million, an increase of $1$1,608 million from December 31, 2019. 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 $4,517$6,089 million as of JuneSeptember 30, 2020, an increase of $456$2,028 million from December 31, 2019.
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.
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | | 2020 | | 2019 (1) |
| | (in millions) |
| Highly Liquid Assets, beginning of period | | $ | 4,061 | | | $ | 5,548 | |
| | | | |
| Dividends and/or returns of capital from subsidiaries(2) | | 2,821 | | | 2,289 | |
| Affiliated (borrowings)/loans - (capital activities)(3) | | (668) | | | 818 | |
| Capital contributions to subsidiaries(4) | | (85) | | | (268) | |
| Total Business Capital Activity | | 2,068 | | | 2,839 | |
| | | | |
| Sale of Prudential of Korea(5) | | 1,627 | | | 0 | |
| Share repurchases(6) | | (500) | | | (1,940) | |
| Common stock dividends(7) | | (1,325) | | | (1,237) | |
| | | | |
| Total Share Repurchases, Dividends and Disposition Activity | | (198) | | | (3,177) | |
| | | | |
| Proceeds from the issuance of debt | | 2,768 | | | 2,465 | |
| Repayments of debt | | (1,937) | | | (1,113) | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total Debt Activity(8) | | 831 | | | 1,352 | |
| Proceeds from stock-based compensation and exercise of stock options | | 212 | | | 298 | |
| Net income tax receipts & payments | | 136 | | | (60) | |
| Affiliated loans - (operating activities)(9) | | 44 | | | 153 | |
| Interest paid on external debt | | (727) | | | (666) | |
| Swap termination payments | | (153) | | | (67) | |
| | | | |
| | | | |
| Other, net(8) | | (185) | | | (3) | |
| Total Other Activity | | (673) | | | (345) | |
| | | | |
| Net increase/(decrease) in highly liquid assets | | 2,028 | | | 669 | |
| | | | |
| Highly Liquid Assets, end of period | | $ | 6,089 | | | $ | 6,217 | |
|
| | | | | | | | |
| Sources and Uses of Holding Company Highly Liquid Assets(1): | | Six Months Ended June 30, |
| | | 2020 | | 2019 |
| | | (in millions) |
| Highly Liquid Assets, beginning of period | | $ | 4,061 |
| | $ | 5,548 |
|
| Dividends and/or returns of capital from subsidiaries(2) | | 1,016 |
| | 929 |
|
| Capital contributions to subsidiaries(3) | | 0 |
| | (268 | ) |
| Total Business Capital Activity | | 1,016 |
| | 661 |
|
| Share repurchases(4) | | (500 | ) | | (983 | ) |
| Common stock dividends(5) | | (886 | ) | | (827 | ) |
| Total Share Repurchases and Dividends | | (1,386 | ) | | (1,810 | ) |
| Proceeds from the issuance of debt | | 1,486 |
| | 989 |
|
| Repayments of debt | | (651 | ) | | (761 | ) |
| Total Debt Activity(6) | | 835 |
| | 228 |
|
| Proceeds from stock-based compensation and exercise of stock options | | 156 |
| | 154 |
|
| Net income tax receipts & payments | | 176 |
| | (491 | ) |
| Affiliated (borrowings)/loans - (operating activities)(7) | | 288 |
| | 1,065 |
|
| Interest paid on external debt | | (493 | ) | | (480 | ) |
| Other, net(6) | | (136 | ) | | (8 | ) |
| Total Other Activity | | (9 | ) | | 240 |
|
| Net increase/(decrease) in highly liquid assets | | 456 |
| | (681 | ) |
| Highly Liquid Assets, end of period | | $ | 4,517 |
| | $ | 4,867 |
|
(1)Prior period amounts have been updated to conform to current period presentation.
| |
(1) | Prior period amounts have been updated to conform to current period presentation. |
| |
(2) | 2020 includes $444 million from international insurance subsidiaries, $380 million from PALAC, $108 million from PGIM subsidiaries, $80 million from Prudential Annuities Holding Company, and $4 million from other subsidiaries. 2019 includes $492 million from PALAC, $223 million from PGIM subsidiaries, $126 million from international insurance subsidiaries, $79 million from Prudential Annuities Holding Company, and $9 million from other subsidiaries. |
| |
(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. |
(2)2020 includes $1,905 million from international insurance subsidiaries, (including $470 million in the form of in-kind dividends), $572 million from PALAC, $238 million from PGIM subsidiaries, $98 million from Prudential Annuities Holding Company, and $8 million from other subsidiaries. 2019 includes $1,018 million from international insurance subsidiaries, $737 million from PALAC, $406 million from PGIM subsidiaries, $119 million from Prudential Annuities Holding Company, and $9 million from other subsidiaries.
(3)Represents the investment and deployment of capital to and from our businesses in the form of loans. 2020 includes $470 million received by PFI in the form of the extinguishment of debt held by international subsidiaries (offset by the in-kind dividends referred to in footnote 2 above).
(4)2020 includes capital contributions of $85 million to international insurance subsidiaries. 2019 includes capital contributions of $200 million to PICA and $68 million to PGIM subsidiaries.
(5)Represents net proceeds from the sale of Prudential of Korea that were distributed to PFI.
(6)Excludes cash payments made on trades that settled in the subsequent period.
(7)Includes cash payments made on dividends declared in prior periods.
(8)“Total Debt Activity” excludes changes in PFI commercial paper. These changes are captured in “Other, net” in the “Total Other Activity” section.
(9)Represent loans to and from subsidiaries to support business operating needs.
Dividends and Returns of Capital from Subsidiaries
Domestic insurance subsidiaries. During the first sixnine months of 2020, Prudential Financial received returns of capital of $380$572 million from PALAC and dividends of $80$98 million from Prudential Annuities Holding Company.
International insurance subsidiaries. During the first sixnine months of 2020, Prudential Financial received dividends of $444$3,531 million from its international insurance subsidiaries, which includes $1,627 million net proceeds from the sale of POK and $470 million of in-kind dividends in the form of the extinguishment of debt held by 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 sixnine months of 2020, Prudential Financial received dividends and returns of capital of $108$238 million from PGIM subsidiaries and dividends of $4$8 million from other subsidiaries.
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 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, 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.
| | | | June 30, 2020 | | | | September 30, 2020 | | |
| | Prudential Insurance | | PLIC | | PRIAC | | PALAC | | Pruco Life | | Total | | December 31, 2019 | | Prudential
Insurance | | PLIC | | PRIAC | | PALAC | | Pruco Life | | Total | | December 31, 2019 |
| | (in billions) | | (in billions) |
| Cash and short-term investments | $ | 9.9 |
| | $ | 0.5 |
| | $ | 1.3 |
| | $ | 10.2 |
| | $ | 0.8 |
| | $ | 22.7 |
| | $ | 11.9 |
| Cash and short-term investments | $ | 9.4 | | | $ | 0.4 | | | $ | 1.2 | | | $ | 7.3 | | | $ | 0.8 | | | $ | 19.1 | | | $ | 11.9 | |
| Fixed maturity investments(1): | | | | | | | | | | | | | | Fixed maturity investments(1): | |
| High or highest quality | 133.9 |
| | 37.9 |
| | 20.1 |
| | 16.8 |
| | 5.8 |
| | 214.5 |
| | 201.3 |
| High or highest quality | 135.1 | | | 37.7 | | | 20.8 | | | 17.5 | | | 6.0 | | | 217.1 | | | 201.3 | |
| Other than high or highest quality | 8.0 |
| | 3.0 |
| | 1.3 |
| | 0.7 |
| | 0.4 |
| | 13.4 |
| | 12.2 |
| Other than high or highest quality | 8.4 | | | 3.2 | | | 1.3 | | | 0.8 | | | 0.4 | | | 14.1 | | | 12.2 | |
| Subtotal | 141.9 |
| | 40.9 |
| | 21.4 |
| | 17.5 |
| | 6.2 |
| | 227.9 |
| | 213.5 |
| Subtotal | 143.5 | | | 40.9 | | | 22.1 | | | 18.3 | | | 6.4 | | | 231.2 | | | 213.5 | |
| Public equity securities, at fair value | 0.2 |
| | 2.0 |
| | 0.1 |
| | 0.1 |
| | 0.0 |
| | 2.4 |
| | 2.5 |
| Public equity securities, at fair value | 0.2 | | | 2.1 | | | 0.1 | | | 0.0 | | | 0.0 | | | 2.4 | | | 2.5 | |
| Total | $ | 152.0 |
| | $ | 43.4 |
| | $ | 22.8 |
| | $ | 27.8 |
| | $ | 7.0 |
| | $ | 253.0 |
| | $ | 227.9 |
| Total | $ | 153.1 | | | $ | 43.4 | | | $ | 23.4 | | | $ | 25.6 | | | $ | 7.2 | | | $ | 252.7 | | | $ | 227.9 | |
__________
| |
(1) | Excludes fixed maturities designated as held-to-maturity. Credit quality is based on NAIC or equivalent rating. |
(1)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.
| | | | June 30, 2020 | | | | September 30, 2020 | | |
| | 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, 2019 |
| | (in billions) | | (in billions) |
| Cash and short-term investments | $ | 1.6 |
| | $ | 3.2 |
| | $ | 1.3 |
| | $ | 6.1 |
| | $ | 5.0 |
| Cash and short-term investments | $ | 1.1 | | | $ | 3.4 | | | $ | 1.3 | | | $ | 5.8 | | | $ | 5.0 | |
| Fixed maturity investments(3): | | | | | | | | | | Fixed maturity investments(3): | |
| High or highest quality(4) | 41.6 |
| | 93.8 |
| | 11.2 |
| | 146.6 |
| | 157.2 |
| High or highest quality(4) | 43.0 | | | 95.7 | | | 5.9 | | | 144.6 | | | 157.2 | |
| Other than high or highest quality | 0.6 |
| | 2.4 |
| | 1.4 |
| | 4.4 |
| | 5.4 |
| Other than high or highest quality | 0.7 | | | 2.2 | | | 1.7 | | | 4.6 | | | 5.4 | |
| Subtotal | 42.2 |
| | 96.2 |
| | 12.6 |
| | 151.0 |
| | 162.6 |
| Subtotal | 43.7 | | | 97.9 | | | 7.6 | | | 149.2 | | | 162.6 | |
| Public equity securities | 1.8 |
| | 1.6 |
| | 0.4 |
| | 3.8 |
| | 4.7 |
| Public equity securities | 1.5 | | | 0.2 | | | 0.0 | | | 1.7 | | | 4.7 | |
| Total | $ | 45.6 |
| | $ | 101.0 |
| | $ | 14.3 |
| | $ | 160.9 |
| | $ | 172.3 |
| Total | $ | 46.3 | | | $ | 101.5 | | | $ | 8.9 | | | $ | 156.7 | | | $ | 172.3 | |
__________
| |
(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 June 30, 2020, $110.4 billion, or 75%, 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 September 30, 2020, $110.3 billion, or 76%, 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 JuneSeptember 30, 2020, the derivatives comprising the hedging portion of our ALM strategy and capital hedge program were in a net receive position of $11.9$11.1 billion compared to a net receive position of $4.7 billion as of December 31, 2019. The change in collateral position was primarily driven by a positive impact from declining interest rates and equity markets.rates.
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 JuneSeptember 30, 2020, we have hedged 100%, 92%97%, and 50%61%, of expected yen-based earnings for 2020, 2021, and 2022, 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.
| | | | Six Months Ended
June 30, | | Nine Months Ended
September 30, |
| Cash Settlements: Received (Paid) | 2020 | | 2019 | Cash Settlements: Received (Paid) | 2020 | | 2019 |
| | (in millions) | | (in millions) |
| Income Hedges (External)(1) | $ | 55 |
| | $ | 32 |
| Income Hedges (External)(1) | $ | 65 | | | $ | 51 | |
| Equity Hedges: | | | | Equity Hedges: | |
| Internal(2) | 120 |
| | 233 |
| Internal(2) | 163 | | | 314 | |
| External(3) | 102 |
| | 4 |
| External(3) | 113 | | | 100 | |
| Total Equity Hedges | 222 |
| | 237 |
| Total Equity Hedges | 276 | | | 414 | |
| Total Cash Settlements | $ | 277 |
| | $ | 269 |
| Total Cash Settlements | $ | 341 | | | $ | 465 | |
| | | | | | | | |
| | June 30, | | December 31, | | September 30, | | December 31, |
| Assets (Liabilities): | 2020 | | 2019 | Assets (Liabilities): | 2020 | | 2019 |
| | (in millions) | | (in millions) |
| Income Hedges (External)(4) | $ | 132 |
| | $ | 60 |
| Income Hedges (External)(4) | $ | 67 | | | $ | 60 | |
| Equity Hedges: | | | | Equity Hedges: | |
| Internal(2) | 814 |
| | 506 |
| Internal(2) | 551 | | | 506 | |
| External(5) | 45 |
| | 43 |
| External(5) | 36 | | | 43 | |
| Total Equity Hedges(6) | 859 |
| | 549 |
| Total Equity Hedges(6) | 587 | | | 549 | |
| Total Assets (Liabilities) | $ | 991 |
| | $ | 609 |
| Total Assets (Liabilities) | $ | 654 | | | $ | 609 | |
__________
| |
(1) | Includes non-yen related cash settlements of $46 million, primarily denominated in Brazilian real, Korean won and Australian dollar and $17 million, primarily denominated in Australian dollar, Chilean peso, Korean won and Brazilian real for the six months ended June 30, 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 $33 million and $5 million, denominated in Korean won for the six months ended June 30, 2020 and 2019, respectively. |
| |
(4) | Includes non-yen related assets of $111 million, primarily denominated in Brazilian real, Korean won and Australian dollar, and assets of $37 million, primarily denominated in Korean won, Australian dollar and Chilean peso, as of June 30, 2020 and December 31, 2019, respectively. |
| |
(5) | Includes non-yen related assets of $8 million, denominated in Korean won, and assets of $1 million, denominated in Korean won, as of June 30, 2020 and December 31, 2019, respectively. |
| |
(6) | As of June 30, 2020, approximately $131 million, $391 million, $214 million and $123 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. |
(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 $12 million, denominated in Korean won for the nine months ended September 30, 2020 and 2019, respectively.
(4)Includes non-yen related assets of $57 million, primarily denominated in Brazilian real and assets of $37 million, primarily denominated in Korean won, Australian dollar and Chilean peso, as of September 30, 2020 and December 31, 2019, respectively.
(5)Includes non-yen related assets of $1 million, denominated in Korean won, as of December 31, 2019.
(6)As of September 30, 2020, approximately $59 million, $376 million, $159 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.
PGIM operations
The principal sources of liquidity for our fee-based PGIM businesses include asset management fees and commercial mortgage origination and servicing fees. 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, our investment management 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 use of liquidity for our strategicco- and seed investments includes 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.
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 a put option agreement. In May 2020, we entered into a facility agreement with a Delaware trust, pursuant to which Prudential Financial may issue and sell to the trust at any time over a ten-year period up to $1.5 billion of senior notes due May 15, 2030 and receive in exchange a corresponding amount of U.S. Treasury securities, thereby augmenting our alternative sources of liquidity. 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.
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| | PFI
Excluding
Closed Block
Division | | Closed
Block
Division | | Consolidated | | PFI
Excluding
Closed Block
Division | | Closed
Block
Division | | Consolidated |
| | ($ in millions) |
| Securities sold under agreements to repurchase | $ | 8,064 | | | $ | 2,810 | | | $ | 10,874 | | | $ | 6,834 | | | $ | 2,847 | | | $ | 9,681 | |
| Cash collateral for loaned securities | 2,925 | | | 146 | | | 3,071 | | | 3,228 | | | 986 | | | 4,214 | |
| Securities sold but not yet purchased | 2 | | | 0 | | | 2 | | | 0 | | | 0 | | | 0 | |
| Total(1) | $ | 10,991 | | | $ | 2,956 | | | $ | 13,947 | | | $ | 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) | $ | 10,436 | | | $ | 2,956 | | | $ | 13,392 | | | $ | 10,062 | | | $ | 3,833 | | | $ | 13,895 | |
| Weighted average maturity, in days(2) | 28 | | N/A | | | | N/A | | N/A | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
| | PFI Excluding Closed Block Division | | Closed Block Division | | Consolidated | | PFI Excluding Closed Block Division | | Closed Block Division | | Consolidated |
| | ($ in millions) |
| Securities sold under agreements to repurchase | $ | 7,805 |
| | $ | 2,683 |
| | $ | 10,488 |
| | $ | 6,834 |
| | $ | 2,847 |
| | $ | 9,681 |
|
| Cash collateral for loaned securities | 3,056 |
| | 391 |
| | 3,447 |
| | 3,228 |
| | 986 |
| | 4,214 |
|
| Securities sold but not yet purchased | 1 |
| | 0 |
| | 1 |
| | 0 |
| | 0 |
| | 0 |
|
| Total(1) | $ | 10,862 |
| | $ | 3,074 |
| | $ | 13,936 |
| | $ | 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) | $ | 10,303 |
| | $ | 3,074 |
| | $ | 13,377 |
| | $ | 10,062 |
| | $ | 3,833 |
| | $ | 13,895 |
|
| Weighted average maturity, in days(2) | 27 |
| | N/A |
| | | | N/A |
| | N/A |
| | |
__________
| |
(1) | The daily weighted average outstanding balance for the three and six months ended June 30, 2020 was $11,475 million and $11,139 million, respectively, for PFI excluding the Closed Block division, and $3,823 million and $3,500 million, respectively, 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 and nine months ended September 30, 2020 was $11,506 million and $11,262 million, respectively, for PFI excluding the Closed Block division, and $3,062 million and $3,353 million, respectively, 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.
As of JuneSeptember 30, 2020, our domestic insurance entities had assets eligible for the asset-based or secured financing programs of $128.0$130.8 billion, of which $14.0 billion were on loan. Taking into account market conditions and outstanding loan balances as of JuneSeptember 30, 2020, we believe approximately $20.0$19.7 billion of the remaining eligible assets are readily lendable, including approximately $13.8$14.1 billion relating to PFI excluding the Closed Block division, of which $3.8 billion relates to certain separate accounts and may only be used for financing activities related to those accounts, and the remaining $6.2$5.6 billion relating to the Closed Block division.
Financing Activities
As of JuneSeptember 30, 2020, total short-term and long-term debt of the Company on a consolidated basis was $21.3 billion, an increase of $0.7 billion from December 31, 2019. 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.
| | | | June 30, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 |
| 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 | $ | 25 |
| | $ | 475 |
| | $ | 500 |
| | $ | 25 |
| | $ | 524 |
| | $ | 549 |
| Commercial paper | $ | 25 | | | $ | 455 | | | $ | 480 | | | $ | 25 | | | $ | 524 | | | $ | 549 | |
| Current portion of long-term debt | 528 |
| | 0 |
| | 528 |
| | 1,179 |
| | 0 |
| | 1,179 |
| Current portion of long-term debt | 529 | | | 0 | | | 529 | | | 1,179 | | | 0 | | | 1,179 | |
| Subtotal | 553 |
| | 475 |
| | 1,028 |
| | 1,204 |
| | 524 |
| | 1,728 |
| Subtotal | 554 | | | 455 | | | 1,009 | | | 1,204 | | | 524 | | | 1,728 | |
| General obligation long-term debt: | | | | | | | | | | | | General obligation long-term debt: | | | | | | | | | | | |
| Senior debt | 11,402 |
| | 173 |
| | 11,575 |
| | 9,912 |
| | 172 |
| | 10,084 |
| Senior debt | 11,404 | | | 173 | | | 11,577 | | | 9,912 | | | 172 | | | 10,084 | |
| Junior subordinated debt | 7,522 |
| | 58 |
| | 7,580 |
| | 7,518 |
| | 57 |
| | 7,575 |
| Junior subordinated debt | 7,552 | | | 59 | | | 7,611 | | | 7,518 | | | 57 | | | 7,575 | |
| Surplus notes(1) | 0 |
| | 343 |
| | 343 |
| | 0 |
| | 342 |
| | 342 |
| Surplus notes(1) | 0 | | | 343 | | | 343 | | | 0 | | | 342 | | | 342 | |
| Subtotal | 18,924 |
| | 574 |
| | 19,498 |
| | 17,430 |
| | 571 |
| | 18,001 |
| Subtotal | 18,956 | | | 575 | | | 19,531 | | | 17,430 | | | 571 | | | 18,001 | |
| Total general obligations | 19,477 |
| | 1,049 |
| | 20,526 |
| | 18,634 |
| | 1,095 |
| | 19,729 |
| Total general obligations | 19,510 | | | 1,030 | | | 20,540 | | | 18,634 | | | 1,095 | | | 19,729 | |
| Limited and non-recourse borrowings(2): | | | | | | | | | | | | Limited and non-recourse borrowings(2): | | | | | | | | | | | |
| Short-term debt | 0 |
| | 7 |
| | 7 |
| | 0 |
| | 13 |
| | 13 |
| Short-term debt | 0 | | | 7 | | | 7 | | | 0 | | | 13 | | | 13 | |
| Current portion of long-term debt | 0 |
| | 95 |
| | 95 |
| | 0 |
| | 192 |
| | 192 |
| Current portion of long-term debt | 0 | | | 97 | | | 97 | | | 0 | | | 192 | | | 192 | |
| Long-term debt | 0 |
| | 664 |
| | 664 |
| | 0 |
| | 645 |
| | 645 |
| Long-term debt | 0 | | | 638 | | | 638 | | | 0 | | | 645 | | | 645 | |
| Total limited and non-recourse borrowings | 0 |
| | 766 |
| | 766 |
| | 0 |
| | 850 |
| | 850 |
| Total limited and non-recourse borrowings | 0 | | | 742 | | | 742 | | | 0 | | | 850 | | | 850 | |
| Total borrowings | $ | 19,477 |
| | $ | 1,815 |
| | $ | 21,292 |
| | $ | 18,634 |
| | $ | 1,945 |
| | $ | 20,579 |
| Total borrowings | $ | 19,510 | | | $ | 1,772 | | | $ | 21,282 | | | $ | 18,634 | | | $ | 1,945 | | | $ | 20,579 | |
__________
| |
(1) | Amounts are net of assets under set-off arrangements of $11,464 million and $9,749 million as of June 30, 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 $459 million and $537 million as of June 30, 2020 and December 31, 2019, respectively, and a $300 million draw on a credit facility that has recourse only to collateral pledged by the Company as of both June 30, 2020 and December 31, 2019. |
(1)Amounts are net of assets under set-off arrangements of $11,464 million and $9,749 million as of September 30, 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 $436 million and $537 million as of September 30, 2020 and December 31, 2019, respectively, and a $300 million draw on a credit facility that has recourse only to collateral pledged by the Company as of both September 30, 2020 and December 31, 2019.
As of JuneSeptember 30, 2020, and December 31, 2019, 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.
We executed transactions to reduce our ongoing financing costs in August 2020 by issuing $1.3 billion of junior subordinated notes at interest rates of 3.70% and 4.125% and with maturities ranging from 2050 to 2060 and using the proceeds to redeem in September 2020 our $710 million 5.70% junior subordinated notes due in 2053 and our $575 million 5.75% junior subordinated notes due in 2052.
Prudential Financial’s borrowings increased $0.8$0.9 billion from December 31, 2019, driven by the issuance, net of related costs, of $1.5 billion of senior debt and $1.3 billion of junior subordinated notes, offset by $651 million$1.3 billion in prepayments and $0.6 billion in debt maturities. Borrowings of our subsidiaries decreased $130$173 million from December 31, 2019, primarily driven by $97$95 million in debt maturities, a $49$69 million decrease in commercial paper, and a $6 million decrease in short-term borrowings, offset byand a $19$7 million increasedecrease in long-term limited recourse borrowings.
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 JuneSeptember 30, 2020, we had Credit-Linked Note Structures with an aggregate issuance capacity of $14,825 million, of which $12,849 million was outstanding, as compared to an aggregate issuance capacity of $13,700 million, of which $12,009 million was outstanding, as of December 31, 2019. These amounts reflect a $1,200 million Credit Link Note Structure entered into in June 2020 for Guideline AXXX reserves, of which $700 million was outstanding as of JuneSeptember 30, 2020, as reflected in the table below. Under the agreements, the captive receives in exchange for the surplus notes one or more credit-linked notes issued by a special-purpose affiliate of the Company with an aggregate principal amount equal to the surplus notes outstanding. The captive holds the credit-linked notes as assets supporting Regulation XXX or Guideline AXXX non-economic reserves, as applicable. For more information on our Credit-Linked Note Structures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities” in our Annual Report on Form 10-K for the year ended December 31, 2019.
The following table summarizes our Credit-Linked Note Structures, which are reported on a net basis, as of JuneSeptember 30, 2020.
| | | | Surplus Notes | | Outstanding as of June 30, 2020 | | | | Surplus Notes | | Outstanding
as of
September 30, 2020 | |
| Credit-Linked Note Structures: | Original Issue Dates | | Maturity Dates | | Facility Size | Credit-Linked Note Structures: | Original
Issue Dates | | Maturity
Dates | | Facility
Size |
| | ($ in millions) | | ($ in millions) |
| XXX | 2011-2014 | | 2021-2024 | | $ | 1,750 |
| (1) | | $ | 1,750 |
| XXX | 2011-2014 | | 2021-2024 | | $ | 1,750 | | (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 | | 2,285 | | (2) | | 2,375 | |
| 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 | | 1,070 |
| | 1,600 |
| XXX | 2018 | | 2038 | | 1,070 | | | 1,600 | |
| AXXX | 2020 | | 2032 | | 700 |
| | 1,200 |
| AXXX | 2020 | | 2032 | | 700 | | | 1,200 | |
| Total Credit-Linked Note Structures | | $ | 12,849 |
| | $ | 14,825 |
| Total Credit-Linked Note Structures | | $ | 12,849 | | | $ | 14,825 | |
__________
| |
(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 $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.
As of JuneSeptember 30, 2020, we also had outstanding an aggregate of $2.3 billion of debt issued for the purpose of financing Regulation XXX and Guideline AXXX non-economic reserves, of which approximately $0.7 billion relates to Regulation XXX reserves and approximately $1.6 billion relates to Guideline AXXX reserves. In addition, as of JuneSeptember 30, 2020, for purposes of financing Guideline AXXX reserves, one of our captives had approximately $4.0 billion 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, 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 JuneSeptember 30, 2020, 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 JuneSeptember 30, 2020, there have been no material changes in our economic exposure to market risk from December 31, 2019, a description of which may be found in our Annual Report on
Form 10-K, for the year ended December 31, 2019, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” filed with the Securities and Exchange Commission. See “Risk Factors” in this Quarterly Report on Form 10-Q and Item 1A, “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2019, 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 JuneSeptember 30, 2020. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of JuneSeptember 30, 2020, 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 JuneSeptember 30, 2020, 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. 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 halfnine months 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 businesses 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 halfnine months 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 and individual retirement accounts 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 JuneSeptember 30, 2020, 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) |
| April 1, 2020 through April 30, 2020 | | 10,713 |
| | $ | 55.93 |
| | 0 |
| | |
| May 1, 2020 through May 31, 2020 | | 8,092 |
| | $ | 52.93 |
| | 0 |
| | |
| June 1, 2020 through June 30, 2020 | | 3,734 |
| | $ | 64.54 |
| | 0 |
| | |
| Total | | 22,539 |
| | $ | 56.28 |
| | 0 |
| | $ | 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) |
| July 1, 2020 through July 31, 2020 | | 4,444 | | | $ | 63.96 | | | 0 | | | |
| August 1, 2020 through August 31, 2020 | | 6,631 | | | $ | 69.30 | | | 0 | | | |
| September 1, 2020 through September 30, 2020 | | 2,530 | | | $ | 68.07 | | | 0 | | | |
| Total | | 13,605 | | | $ | 67.33 | | | 0 | | | $ | 1,500,000,000 | |
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(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. |
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(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 continues to evaluate the resumption of share repurchases under the existing Board authorization. |
(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 suspended Common Stock repurchases under its existing repurchase authorization beginning April 1, 2020 and does not intend to resume share repurchases this year as the duration and severity of the pandemic and its effect on the economy remain uncertain. The Company will evaluate the resumption of share repurchases as informed by the market environment and any alternative opportunities for capital deployment.
ITEM 6. EXHIBITS
EXHIBIT INDEX
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| 4.1 | Upon the request of the Securities and Exchange Commission, the Registrant will furnish copies of all instruments defining the rights of holders of long-term debt of the Registrant. |
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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). |
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* Certain confidential information contained in thisThis 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.a management contract or compensatory plan or arrangement.
Prudential Financial, Inc. will furnish upon request a copy of any exhibit listed above upon the payment of a reasonable fee covering the expense of furnishing the copy. Requests should be directed to:
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.
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| Prudential Entities |
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Prudential Entities |
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| Assurance IQ | Assurance IQ, LLC | | POKPOT | Prudential Life Insurance Company of Taiwan Inc. |
| 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. |
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. |
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| Defined Terms |
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Defined Terms |
| Board | | | | |
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. | | | |
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| Acronyms |
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Acronyms |
| ALM | | | | |
ALM | Asset Liability Management | | LPs/LLCs | Limited Partnerships and Limited Liability Companies |
| AOCI | Accumulated Other Comprehensive Income (Loss) | | MD&A | Management's Discussion and Analysis of Financial Condition and Results of Operations |
| ASU | Accounting Standards Update | | NAIC | National Association of Insurance Commissioners |
| AUD | Australian Dollar | | NAV | Net Asset Value |
| bps | Basis Points | | NJDOBI | New Jersey Department of Banking and Insurance |
| CARES Act | Coronavirus Aid, Relief, and Economic Security Act | | NOLs | Net Operating Losses |
| CECL | Current Expected Credit Loss | | NPR | Non-Performance Risk |
| CLO | Collateralized Loan Obligations | | OCI | Other Comprehensive Income (Loss) |
| COVID-19 | 2019 Novel Coronavirus | | ODL | Overall Domestic Losses |
| DAC | Deferred Policy Acquisition Costs | | OTC | Over-The-Counter |
| DSI | Deferred Sales Inducements | | OTTI | Other-Than-Temporary Impairments |
| EBITDA | Earnings Before Interest, Taxes, Depreciation and Amortization | | PDI | Prudential Defined Income |
| FASB | Financial Accounting Standards Board | | RAF | Risk Appetite Framework |
| FHLBNY | Federal Home Loan Bank of New York | | RBC | Risk-Based Capital |
| FSA | Financial Services Agency (an agency of the Japanese government) | | SEC | Securities and Exchange Commission |
| GICs | Guaranteed Investment Contracts | | SVO | Securities Valuation Office |
| GILTI | Global Intangible Low-Taxed Income | | TBA | To Be Announced |
| GMDB | Guaranteed Minimum Death Benefits | | TCJA | Tax Cuts and Jobs Act |
| GSE | Government Sponsored Entities | | U.S. | The United States of America |
| HDI | Highest Daily Lifetime Income | | USD | U.S. Dollar |
| LIBOR | London Inter-Bank Offered Rate | | VIEs | Variable Interest Entities |
| IRA | Individual Retirement Account | | VOBA | Value of Business Acquired |
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.
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| | Prudential Financial, Inc. |
| | By: | /S/ KENNETH Y. TANJI |
| | | Kenneth Y. Tanji
Executive Vice President and Chief Financial Officer
(Authorized signatory and principal financial officer)
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Date: August 6,November 5, 2020