PRUDENTIAL FINANCIAL, INC.
TABLE OF CONTENTS
Page
Overview 79
COVID-19 80
Impact of a Low Interest Rate Environment 81
Results of Operations 84
Consolidated Results of Operations 84
Segment Results of Operations 85
Segment Measures 88
Impact of Foreign Currency Exchange Rates 89
Accounting Policies & Pronouncements 91
Results of Operations by Segment 93
PGIM 93
U.S. Businesses 97
Retirement Strategies 98
Group Insurance 106
Individual Life 108
Assurance IQ 109
International Businesses 110
Corporate and Other 115
Divested and Run-off Businesses 115
Closed Block Division 116
Income Taxes 118Experience-Rated Contractholder Liabilities, Assets Supporting Experience-Rated Contractholder Liabilities and Other Related Investments
118
Valuation of Assets and Liabilities 119
General Account Investments 121
Liquidity and Capital Resources 141
Ratings 151
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 June 30, 2022 , compared with December 31, 2021 , and its consolidated
results of operations for the three and six months ended June 30, 2022 and 2021.
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, 2021 , as
well as the statements under "Forward-Looking Statements," and the Unaudited
Interim Consolidated Financial Statements included elsewhere in this Quarterly
Report on Form 10-Q.
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Overview
Prudential Financial , a financial services leader with approximately $1.410
trillion of assets under management as of June 30, 2022 , 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
solutions, 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.
In October 2021 , we announced the creation of Retirement Strategies, a new U.S.
business that would serve the retirement needs of both our institutional and
individual customers by bringing the institutional investment and pension
solutions offered through our Retirement business together with the financial
solutions and capabilities of our Individual Annuities business. As of the
second quarter of 2022, this new structure has been fully operationalized;
therefore, the results of our former Retirement segment (now known as the
"Institutional Retirement Strategies" operating segment) and our former
Individual Annuities segment (now known as the "Individual Retirement
Strategies" operating segment) have been aggregated into the Retirement
Strategies segment. Prior periods have been updated to conform to this new
presentation.
Consequently, our principal operations now consist of PGIM (our global
investment management business), our U.S. Businesses (consisting of our
Retirement Strategies, Group Insurance, Individual Life and Assurance IQ
businesses), our International Businesses, the Closed Block division, and our
Corporate and Other operations. 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 consist 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 as well as the Divested and Run-off
Businesses described above.
We attribute financing costs to each segment based on the amount of financing
used by each segment, excluding financing costs associated with corporate debt,
which are reflected in our Corporate and Other operations. The net investment
income of each segment includes earnings on the amount of capital that
management believes is necessary to support the risks of that segment.
Management expects that results will continue to benefit from our differentiated
mix of market-leading businesses that complement each other to provide
competitive advantages, earnings diversification and capital benefits from a
balanced risk profile. We believe we are well-positioned to tap into market
opportunities to meet the evolving needs of individual customers, workplace
clients, and society at large. Our mix of high-quality protection, retirement
and investment management businesses enables us to offer solutions that cover a
broad range of financial needs and to engage with our clients through multiple
channels, including the ability to sell solutions across a broad socio-economic
spectrum through Assurance IQ's digital platform. We aim to expand our
addressable market, build deeper and longer-lasting relationships with customers
and clients, and meaningfully improve their financial wellness. While challenges
have existed in the form of a sustained low interest rate environment, interest
rates have recently risen from historically low levels. In the short term,
higher interest rates will cause a decrease in our assets under management and
associated fee income in our fee-based businesses, while over the longer term,
higher interest rates will drive an increase in investment income from higher
portfolio reinvestment rates.
In order to further increase our competitive advantage, we are working to
enhance the experience of our customers and the capabilities of our businesses,
which we expect will also help us realize improved margins. In 2019, we launched
programs in pursuit of these objectives that have resulted and will continue to
result in multi-year investments in technology, systems and employee reskilling,
as well as severance and related charges. For the three and six months ended
June 30, 2022 , we incurred approximately $38 million and $63 million of costs,
respectively, in connection with these programs. We expect these programs will
generate significant expense efficiencies over several years that will mitigate
the impact from increases in other expenses due to inflation and business growth
initiatives. For the three months and six months ended June 30, 2022 , the
Company estimates that these programs generated cost savings of approximately
$174 million and $344 million , respectively, and, as of June 30, 2022 , we expect
to accumulate approximately $750 million of annual run-rate cost savings by the
end of 2022, which is one year ahead of our target date.
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COVID-19
Since the first quarter of 2020, the COVID-19 pandemic has caused extreme stress and disruption in the global economy and financial markets and elevated mortality and morbidity for the global population. The COVID-19 pandemic impacted our results of operations in the current period and is expected to impact our results of operations in future periods.
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.U.S. Businesses:The United States has experienced multiple waves of COVID-19, with the severity of each wave depending on such factors as seasonality, varying levels of population immunity, and the evolution of the virus itself into different variants. Throughout the course of the pandemic, deaths from COVID-19 inthe United States have ranged from a few hundred to several thousand per day. SinceDecember 2021 , the Omicron variant and several of its subvariants have emerged in theU.S. and quickly became the dominant strains, causing many more infections but with a smaller percentage of infections resulting in hospitalizations and deaths compared to prior waves, though still causing deaths to spike during the first half of 2022. Vaccines and other therapeutics, such as antiviral treatments, are now widely available and non-pharmaceutical interventions, such as mandatory social distancing and mask wearing, are being relaxed in most communities; however, the future evolution of the virus, among other factors, could cause the actual course of the pandemic and its impact on our business to differ from our current expectations.
Specific outlook considerations for certain of our
Retirement Strategies. As many of the products in our Institutional Retirement Strategies business assume longevity risk, elevated levels of mortality resulting from COVID-19 may contribute to higher levels of underwriting gains.
Group Insurance . COVID-19 may contribute to elevated levels of mortality, which would result in increased life insurance claims. In addition, we continue to monitor the potential impact of the pandemic on our disability business, overall sales volumes, and the utilization of our workplace benefit offerings.
Individual Life. COVID-19 may contribute to elevated levels of mortality, resulting in increased life insurance claims.
International Businesses:
Our Japanese operations experienced an elevated level of COVID-19 claims due to the continued spread of the Omicron variant in the first half of 2022 as well as a regulatory requirement that extends hospitalization benefits for at-home recoveries. Additionally, we continued to experience modest disruptions to sales and agent recruiting inJapan after the expiration of certain control measures enacted by Japanese authorities. The situation remains fluid and COVID-19 might impact future claims and sales depending on the state of the pandemic in the geographic markets in which we operate. We believe our needs-based selling and death protection focus are even more valuable to consumers based on the global experience of COVID-19 and will help support the continued long-term growth of our businesses. •Results of Operations. See "-Results of Operations" and "-Results of Operations by Segment" for a discussion of results for the second quarter and the first six months of 2022. •Investment Portfolio. Credit migration and defaults were low in 2021 and have remained limited in 2022. The sectors most impacted by COVID-19 have started to recover but could be influenced by periods of volatility due to the possibility of additional variants emerging.
•Sales and Flows. See "-Segment Results of Operations" for a discussion of sales and flows in each of our segments.
•Underwriting. Throughout the pandemic, COVID-19 had a significant net negative impact on our underwriting results, reflecting unfavorable mortality impacts in ourGroup Insurance , Individual Life and International businesses, partially offset by favorable mortality impacts in the Institutional portion of our Retirement Strategies business. In the second quarter of 2022, our overall mortality results were within expected ranges, inclusive of impacts from COVID-19, which we have seen decrease throughout the year. As such, beginning with the third quarter of 2022, the Company will embed 80 -------------------------------------------------------------------------------- Table of Contents COVID-19 considerations within the Company's best estimate assumptions of future expected mortality impacts for its applicableU.S. -based businesses. The ultimate impact on our underwriting results, however, will continue to depend on various factors including: an insured's age; geographic concentration; insured versus uninsured populations among the fatalities; the transmissibility and virulence of the virus, including the potential for further mutation; and the ongoing acceptance and efficacy of the vaccines and other therapeutics. •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 mortality. 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, which is more adversely impactful to the Company than our current understanding of COVID-19 mortality, which is skewed toward older ages. As the COVID-19 pandemic continues to unfold, we continue to update our analysis and take management actions in response to this specific event. As ofJune 30, 2022 , the COVID-19 pandemic has not reached the most severe levels of financial impacts included in the Company's stress testing. In addition, the net mortality impact of COVID-19 has been moderated by the balance between our mortality exposure (such as in ourIndividual Life and Group Insurance businesses) and our offsetting longevity exposure (such as in our Institutional Retirement Strategies business), and is influenced by the age distribution ofU.S. COVID-19 mortality. The future evolution of the virus, among other factors, could cause the actual course of the pandemic to differ from our current expectations. •Risk Factors. The COVID-19 pandemic has adversely impacted our results of operations, financial position, investment portfolio, new business opportunities and operations, and these impacts are expected to continue. For additional information on the risks to our business posed by the COVID-19 pandemic, see "Risk Factors" included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . •Business Continuity. Throughout the COVID-19 pandemic, we have been executing our business continuity protocols to ensure our employees are safe and able to serve our customers. This included effectively transitioning the vast majority of our employees to remote work arrangements. InMarch 2022 , our offices were reopened to employees and we expect that most of our workforce will adopt a hybrid arrangement for the foreseeable future. We believe all of our businesses can sustain long-term hybrid or fully remote work arrangements 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.
Impact of a Low Interest Rate Environment
As a global financial services company, market interest rates are a key driver
of our results of operations and financial condition. Changes in interest rates
can affect our results of operations and/or our financial condition in several
ways, including favorable or adverse impacts to:
•investment-related activity, including: investment income returns, net interest
margins, net investment spread results, new money rates, mortgage loan
prepayments and bond redemptions;
•hedging costs and other risk mitigation activities;
•insurance reserve levels, market experience true-ups and amortization of both
deferred policy acquisition costs ("DAC") and value of business acquired
("VOBA");
•customer account values, including their impact on fee income;
•fair value of, and possible impairments on, intangible assets such as goodwill;
•product offerings, design features, crediting rates and sales mix; and
•policyholder behavior, including surrender or withdrawal activity.
For more information on interest rate risks, see "Risk Factors-Market Risk"
included in our Annual Report on Form 10-K for the year ended
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See below for discussions related to the current interest rate environments in
our two largest markets, the U.S. and Japan ; the composition of our insurance
liabilities and policyholder account balances; and the hypothetical impacts to
our investment related results if these interest rate environments are
sustained.
Interest rates in theU.S. have experienced a sustained period of historically low levels with certain benchmarks reaching significant lows in recent years, while increasing more recently. Although more recent impacts of inflation in theU.S. , along with other varying market conditions and events, make uncertain the timing, amount and impact of any monetary policy decisions by theFederal 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 ourU.S. Businesses and our Corporate and Other operations, we estimate annual principal payments and prepayments that we would be required to reinvest to be approximately 7.4% of the fixed maturity security and commercial mortgage loan portfolios through 2023. The portion of the general account attributable to these operations has approximately$168 billion of such assets (based on net carrying value) as ofJune 30, 2022 . The average portfolio yield for fixed maturity securities and commercial mortgage loans is approximately 4% as ofJune 30, 2022 . Included in the$168 billion of fixed maturity securities and commercial mortgage loans are approximately$135 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$135 billion , approximately 55% 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 ourU.S. operations excluding the Closed Block Division, by type, for the date indicated: As of June 30, 2022 (in billions) Long-duration insurance products with fixed and guaranteed terms $ 147 Contracts with adjustable crediting rates subject to guaranteed minimums 36 Participating contracts where investment income risk ultimately accrues to contractholders 2 Total $ 185 The$147 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$36 billion above relates to contracts with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. Although we may have the ability to lower crediting rates for those contracts above guaranteed minimums, our willingness to do so may be limited by competitive pressures. The following table sets forth the related account values by range of guaranteed minimum crediting rates and the related range of the difference, in basis points ("bps"), between rates being credited to contractholders as ofJune 30, 2022 , and the respective guaranteed minimums. 82
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Account Values with Adjustable Crediting Rates Subject to Guaranteed Minimums:
Greater than
1-49 50-99 100-150 150
At bps above bps above bps above bps above
guaranteed guaranteed guaranteed guaranteed guaranteed
minimum minimum minimum minimum minimum Total
($ in billions)
Range of Guaranteed Minimum
Crediting Rates:
Less than 1.00% $ 1.0 $ 0.8 $ 0.1 $ 0.0 $ 0.0 $ 1.9
1.00% - 1.99% 1.3 0.1 0.0 0.8 2.4 4.6
2.00% - 2.99% 1.1 0.0 1.2 1.4 3.3 7.0
3.00% - 4.00% 19.0 0.0 1.6 0.7 0.1 21.4
Greater than 4.00% 0.8 0.0 0.0 0.0 0.0 0.8
Total(1) $ 23.2 $ 0.9 $ 2.9 $ 2.9 $ 5.8 $ 35.7
Percentage of total 65 % 3 % 8 % 8 % 16 % 100 %
__________
(1)Includes approximately
The remaining$2 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-yearU.S. Treasury rate is 3.00% (which is reasonably consistent with recent rates) for the period fromJuly 1, 2022 throughJune 30, 2023 (and credit spreads remain unchanged from average levels experienced during the second quarter 2022), we estimate that the favorable 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$0 million and$45 million over this period. In order to mitigate the unfavorable impact that a low interest rate environment has on our net interest margins, we employ a proactive asset/liability management program, which includes strategic asset allocation and hedging strategies within a disciplined risk management framework. These strategies seek to match the characteristics of our products, and to closely approximate the interest rate sensitivity of the assets with the estimated interest rate sensitivity of the product liabilities. Our asset/liability management program also helps manage duration gaps, currency and other risks between assets and liabilities through the use of derivatives. We adjust this dynamic process as products change, as customer behavior changes and as changes in the market environment occur. As a result, our asset/liability management process has permitted us to manage the interest rate risk associated with our products through several market cycles. Our interest rate exposure is also mitigated by our business mix, which includes lines of business for which fee-based and insurance underwriting earnings play a more prominent role in product profitability. We also regularly examine our product offerings and their profitability. As a result, we may reprice certain products and discontinue sales of other products that do not meet our profit expectations.
Closed Block Division
Substantially all of the$51 billion of general account assets in the Closed Block division support obligations and liabilities relating to the Closed Block policies only. See Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information on the Closed Block.
International Insurance Operations
While our international insurance operations have experienced a low interest
rate environment for many years, the current reinvestment yields for certain
blocks of business in our international insurance operations are generally lower
than the current portfolio yield supporting these blocks of business. In recent
years, the Bank of Japan's monetary policy has resulted in even lower and, at
times, negative yields for certain tenors of government bonds. Our international
insurance operations employ a proactive asset/liability management program in
order to mitigate, to the extent possible, the unfavorable impact that the
current interest rate environment has on our net interest margins. In
conjunction with this program, we have not purchased negative yielding assets to
support the portfolio and we continue to purchase long-term bonds with tenors of
30 years or greater. Additionally, our diverse product portfolio in terms of
currency mix and premium payment structure allows us to further mitigate the
negative impact from this low interest rate environment. We also regularly
examine our product offerings and their profitability. As a result, we may
reprice certain products, adjust commissions for certain products and
discontinue sales of
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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
June 30, 2022
(in billions)
Insurance products with fixed and guaranteed terms $ 128 Contracts with a market value adjustment if invested amount is not held to maturity
24
Contracts with adjustable crediting rates subject to guaranteed minimums
9
Total $ 161
The $128 billion 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 $24
billion related to contracts that impose a market value adjustment if the
invested amount is not held to maturity and $9 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 1.20% and the 10-year U.S. Treasury rate is 3.00% (which is
reasonably consistent with recent rates) for the period from July 1, 2022
through June 30, 2023 (and credit spreads remain unchanged from average levels
experienced during the second quarter 2022), we estimate that the favorable
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 $0 million and $45 million over this period.
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