PRUDENTIAL FINANCIAL, INC.
TABLE OF CONTENTS
Page
Overview 67
COVID-19 67
Impact of a Low Interest Rate Environment 69
Results of Operations 72
Consolidated Results of Operations 72
Segment Results of Operations 72
Segment Measures 74
Impact of Foreign Currency Exchange Rates 75
Accounting Policies & Pronouncements 77
Results of Operations by Segment 79
PGIM 79
U.S. Businesses 83
Retirement 84
Group Insurance 85
Individual Annuities 87
Individual Life 91
Assurance IQ 92
International Businesses 93
Corporate and Other 97
Divested and Run-off Businesses 97
Closed Block Division 98
Income Taxes 99Experience-Rated Contractholder Liabilities, Assets Supporting Experience-Rated Contractholder Liabilities and Other Related Investments
99
Valuation of Assets and Liabilities 100
General Account Investments 102
Liquidity and Capital Resources 119
Ratings 128
Off-Balance Sheet Arrangements 129
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the consolidated financial condition of Prudential
Financial, Inc. ("Prudential," "Prudential Financial ," "PFI," or "the Company")
as of March 31, 2021 , compared with December 31, 2020 , and its consolidated
results of operations for the three months ended March 31, 2021 and 2020. You
should read the following analysis of our consolidated financial condition and
results of operations in conjunction with the MD&A, the "Risk Factors" section,
and the audited Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2020 , 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 $1.663
trillion of assets under management as of March 31, 2021 , has operations
primarily in the United States of America ("U.S."), Asia , Europe and Latin
America . Through our subsidiaries and affiliates, we offer a wide array of
financial products and services, including life insurance, annuities,
retirement-related services, mutual funds and investment management. We offer
these products and services to individual and institutional customers through
one of the largest distribution networks in the financial services industry.
Our principal operations consist of PGIM (our global investment management
business), our U.S. Businesses (consisting of our Retirement, Group Insurance,
Individual Annuities, 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. While challenges exist in the form of a low interest rate
environment (see "Impact of a Low Interest Rate Environment" below), fee
compression in certain of our businesses and other market factors, including
macroeconomic stress and market disruption resulting from the COVID-19 pandemic
(see "-COVID-19" below), we expect that our businesses will produce appropriate
returns for the current market environment. 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.
In order to further increase our competitive advantage, we are working to
enhance the experience of our customers and the capabilities of our businesses,
which we expect will also help us realize improved margins. In 2019, we launched
programs in pursuit of these objectives that will result in multi-year
investments in technology, systems and employee reskilling, as well as severance
and related charges, which we expect will result in significant expense
efficiencies over the next several years. For the three months ended March 31,
2021 , the impact to the Company's 2021 results from these programs was a benefit
of $112 million and, as of March 31, 2021 , we continue to remain on track to
accumulate approximately $750 million of annual run-rate cost savings by the end
of 2023.
COVID-19
Beginning in the first quarter of 2020, the outbreak of the 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. The pandemic continues to impact our results of operations in the
current period and is expected to continue to be a driver of future impacts to
our results of operations. The Company has taken several measures to manage the
impacts of this crisis. The actual and expected impacts of these events and
other items are included in the following update:
•Outlook. COVID-19 specific outlook considerations for certain of our businesses include the following:
U.S. Businesses: Retirement. Account values in our full service business may continue to be impacted by elevated participant withdrawal activity due to the impacts of COVID-19. In our institutional investment products business, given that many of the products assume longevity risk, elevated levels of mortality resulting from COVID-19 may continue to contribute to a 67 -------------------------------------------------------------------------------- Table of Contents higher level of underwriting gains. The pandemic may also impact sales volumes and the utilization of workplace benefits.Group Insurance . We expect COVID-19 to continue to contribute to elevated levels of mortality resulting in increased life insurance claims in the near-term. In addition, we expect elevated unemployment to drive increased disability claims in this business. The pandemic may also impact sales volumes and the utilization of workplace benefits. Individual Life. We expect COVID-19 to continue to contribute to elevated levels of mortality, resulting in increased life insurance claims in the near-term. In addition, while we have seen strong sales of key products, social distancing associated with COVID-19 could adversely impact sales prospects in the near-term.
International Businesses:
Through the first quarter of 2021, we continued to see an elevated level of claims due to COVID-19, mostly inBrazil andJapan ; however, expenses to support our captive agents have decreased significantly compared to 2020.Japan has declared two COVID-19 driven states of emergency in 2021: one that was in effect from January to March, and a second, more focused on specific prefectures with more concentrated restrictions, that is expected to be in effect from April through mid-May. As the global pandemic continues to evolve, further tightening of COVID-19 restrictions is possible, both inJapan and in other markets, and depending on the specific circumstances and geographies impacted, could adversely impact our sales prospects for a period of time. 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 first quarter of 2021. •Investment Portfolio. While the economy continues to re-open and recover from the impacts of COVID-19, there could still be periods of volatility. The market expectations for credit migration and related losses continue to decrease. The sectors most impacted by the pandemic, including energy, consumer cyclical and retail related investments, have started to recover but may lag the general economic improvement (see "-General Account Investments" for additional information). In certain instances, the Company may agree to modify an investment to provide forbearance, which grants borrowers additional time to make payments. As ofMarch 31, 2021 , approximately 1.6% of total invested assets were modified to allow for limited forbearance. Under the terms of forbearance, the borrower is allowed to defer a portion of current year principal and/or interest payments for a short period (e.g., 6 months). These deferrals accrue additional interest and do not have a material impact on our investment value.
•Sales and Flows. See "-Segment Results of Operations" for a discussion of sales and flows in each of our segments.
•Underwriting Results. In the first quarter of 2021, we estimate that COVID-19 had a net negative impact on our underwriting results reflecting unfavorable mortality impacts in ourGroup Insurance and Individual Life businesses, partially offset by favorable mortality impacts in our Retirement business. Going forward, we estimate that our net underwriting results will be adversely impacted by approximately$85 million for every incremental 100,000 fatalities inthe United States ; however, the ultimate impact on our underwriting results will depend on factors such as: an insured's age; geographic concentration; insured versus uninsured populations among the fatalities; the transmissibility and virulence of the virus, including the potential for further mutation; and the speed and efficacy of the vaccine rollout. While near-term virus transmission remains high, the vaccine rollout continues at an effective pace with almost half of theU.S. adult population receiving at least one dose; consequently, the Company currently expects that the impacts from the pandemic on our domestic businesses will start to moderate in the second quarter of 2021. See "-Results of Operations by Segment" for a discussion of mortality experience in each of our segments, where applicable. •Risk Management. Prudential has a robust risk management framework that seeks to 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 insured deaths per 1,000 lives in the first year) based on a modern-day interpretation of the 1918 Spanish Flu experience that is aligned with most regulatory frameworks. The stress scenario assumes an 68 -------------------------------------------------------------------------------- Table of Contents even distribution of increased mortality across the population, which is more punitive to our business than our current understanding of COVID-19 mortality, which is sharply skewed toward older ages. As the COVID-19 pandemic continues to unfold, we continue to update our analysis and take management actions in response to this specific event. As ofMarch 31, 2021 , the COVID-19 pandemic has not reached the most severe levels of financial impacts included in the Company's stress testing. In addition, we expect the impact of COVID-19 related claims to be moderated by the balance between our mortality exposure (such as in ourIndividual Life and Group Insurance businesses) and our longevity exposure (such as in our Retirement business). •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, 2020 . •Business Continuity. Throughout the COVID-19 pandemic, we have been executing our business continuity protocols to ensure our employees are safe and able to serve our customers. This included effectively transitioning the vast majority of our employees to remote work arrangements. 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.
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
See below for discussions related to the current interest rate environments in our two largest markets, theU.S. andJapan ; 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. While 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 6.8% of the fixed maturity security and commercial mortgage loan portfolios through 2022. The portion of the general account attributable to these operations has approximately$234 billion of such assets (based on net carrying value) as ofMarch 31, 2021 . The average portfolio yield for fixed maturity securities and commercial mortgage loans is approximately 3.8% as ofMarch 31, 2021 . 69 -------------------------------------------------------------------------------- Table of Contents Included in the$234 billion of fixed maturity securities and commercial mortgage loans are approximately$166 billion that are subject to call or redemption features at the issuer's option and have a weighted average interest rate of approximately 4%. Of this$166 billion , approximately 54% contain provisions for prepayment premiums. If we reinvest scheduled payments or prepayments (not subject to a prepayment fee) at rates below the current portfolio yield, including in some cases at rates below those guaranteed under our insurance contracts, future operating results will be impacted to the extent we do not, or are unable to, reduce crediting rates on in-force blocks of business, or effectively utilize other asset/liability management strategies described below, in order to maintain current net interest margins. The following table sets forth the insurance liabilities and policyholder account balances of ourU.S. Operations excluding the Closed Block Division, by type, for the date indicated: As of March 31, 2021 (in billions) Long-duration insurance products with fixed and guaranteed terms $ 142
Contracts with adjustable crediting rates subject to guaranteed minimums
62
Participating contracts where investment income risk ultimately accrues to
contractholders 14
Total $ 218
The $142 billion above relates to long-duration products such as group
annuities, structured settlements and other insurance products that have fixed
and guaranteed terms, for which underlying assets may have to be reinvested at
interest rates that are lower than portfolio rates. We seek to mitigate the
impact of a prolonged low interest rate environment on these contracts through
asset/liability management, as discussed further below.
The $62 billion above relates to contracts with crediting rates that may be
adjusted over the life of the contract, subject to guaranteed minimums. Although
we may have the ability to lower crediting rates for those contracts above
guaranteed minimums, our willingness to do so may be limited by competitive
pressures. The following table sets forth the related account values by range of
guaranteed minimum crediting rates and the related range of the difference, in
basis points ("bps"), between rates being credited to contractholders as of
March 31, 2021 , and the respective guaranteed minimums.
Account Values with Adjustable Crediting Rates Subject to Guaranteed Minimums:
Greater than
1-49 50-99 100-150 150
At bps above bps above bps above bps above
guaranteed guaranteed guaranteed guaranteed guaranteed
minimum minimum minimum minimum minimum Total
($ in billions)
Range of Guaranteed Minimum
Crediting Rates:
Less than 1.00% $ 1.0 $ 1.2 $ 0.2 $ 0.0 $ 0.0 $ 2.4
1.00% - 1.99% 4.3 13.4 2.1 1.6 1.2 22.6
2.00% - 2.99% 1.3 1.5 1.5 1.0 1.5 6.8
3.00% - 4.00% 28.2 0.5 0.1 0.2 0.0 29.0
Greater than 4.00% 0.8 0.0 0.0 0.0 0.0 0.8
Total(1) $ 35.6 $ 16.6 $ 3.9 $ 2.8 $ 2.7 $ 61.6
Percentage of total 58 % 27 % 6 % 5 % 4 % 100 %
__________
(1)Includes approximately
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-yearU.S. Treasury rate is 1.50% (which is reasonably consistent with recent rates) for the period fromApril 1, 2021 throughMarch 31, 2022 (and credit spreads remain unchanged from average levels experienced during the first quarter 2021), we estimate that the unfavorable impact to net investment income of reinvesting activities, including scheduled maturities and estimated prepayments of fixed maturities and commercial mortgage and other loans (excluding assets supporting participating contracts), would be between$50 million and$90 million for the period fromApril 1, 2021 throughMarch 31, 2022 . 70
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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$58 billion of general account assets in the Closed Block division support obligations and liabilities relating to the Closed Block policies only. See Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information on the Closed Block.
International Insurance Operations
While our international insurance operations have experienced a low interest rate environment for many years, the current reinvestment yields for certain blocks of business in our international insurance operations are generally lower than the current portfolio yield supporting these blocks of business. In recent years, the Bank of Japan's monetary policy has resulted in even lower and, at times, negative yields for certain tenors of government bonds. Our international insurance operations employ a proactive asset/liability management program in order to mitigate, to the extent possible, the unfavorable impact that the current interest rate environment has on our net interest margins. In conjunction with this program, we have not purchased negative yielding assets to support the portfolio and we continue to purchase long-term bonds with tenors of 30 years or greater. Additionally, our diverse product portfolio in terms of currency mix and premium payment structure allows us to further mitigate the negative impact from this low interest rate environment. We also regularly examine our product offerings and their profitability. As a result, we may reprice certain products, adjust commissions for certain products and discontinue 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 ofU.S. dollar-denominated products relative to products denominated in other currencies. For additional information on sales within our international insurance operations, see "-International Businesses-Sales Results," below. The following table sets forth the insurance liabilities and policyholder account balances of our Japanese operations, by type, for the date indicated: As of March 31, 2021 (in billions) Insurance products with fixed and guaranteed terms $ 136
Contracts with a market value adjustment if invested amount is not held to maturity
26
Contracts with adjustable crediting rates subject to guaranteed minimums
11
Total $ 173
The $136 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 $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 0.65% and the 10-year U.S. Treasury rate is 1.50% (which is
reasonably consistent with recent rates) for the period from April 1, 2021
through March 31, 2022 (and credit spreads remain unchanged from average levels
experienced during the first quarter 2021), we estimate that the unfavorable
impact to net investment income of reinvesting activities, including scheduled
maturities and estimated
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prepayments of fixed maturities and commercial mortgage and other loans
(excluding assets supporting participating contracts), would be between
Results of OperationsConsolidated Results of Operations
The following table summarizes net income (loss) for the periods presented.
Three Months
Ended
March 31,
2021 2020
(in millions)
Revenues $ 16,952 $ 13,464
Benefits and expenses 13,538 13,802
Income (loss) before income taxes and equity in earnings of operating joint ventures
3,414 (338)
Income tax expense (benefit) 636 (58)
Income (loss) before equity in earnings of operating joint ventures
2,778 (280)
Equity in earnings of operating joint ventures, net of taxes 26 10
Net income (loss) 2,804 (270)
Less: Income attributable to noncontrolling interests (24) 1
Net income (loss) attributable to Prudential Financial, Inc. The$3,099 million increase in "Net income (loss) attributable toPrudential Financial, Inc. " for the first quarter of 2021 compared to the first quarter of 2020 reflected the following notable items: •$2,236 million favorable variance, on a pre-tax basis, reflecting the impact from changes in the value of our embedded derivatives and related hedge positions, net of DAC and other costs, associated with certain variable annuities; •$1,242 million favorable variance, on a pre-tax basis, driven by market experience updates primarily within our Individual Annuities and Individual Life businesses (see Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information); •$951 million favorable variance, on a pre-tax basis, from higher adjusted operating income from our business segments, including a gain from the sale of the Company's 35% ownership stake inPramerica SGR ; (see "Segment Results of Operations" for additional information); and •$373 million favorable variance, on a pre-tax basis, from investment related activities that are 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, partially offset by higher losses from fixed maturity securities designated as trading.
Partially offsetting these increases in "Net income (loss) attributable to
•$1,063 million unfavorable variance, on a pre-tax basis, from realized investment gains (losses) and related charges for PFI excluding Divested and Run-off Businesses, and excluding the impact of the hedging program associated with certain variable annuities and market experience updates discussed above (see "General Account Investments" for additional information); and •$694 million unfavorable variance from a higher tax expense reflecting the increase in pre-tax earnings.
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.
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.
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Three Months
Ended
March 31,
2021 2020(1)
(in millions)
Adjusted operating income before income taxes by segment:
PGIM $ 651 $ 164
U.S. Businesses:
Retirement 623 245
Group Insurance (132) 44
Individual Annuities 444 373
Individual Life (44) (20)
Assurance IQ (39) (23)
Total U.S. Businesses 852 619
International Businesses 871 696
Corporate and Other (286) (342)
Total segment adjusted operating income before income taxes 2,088 1,137
Reconciling items:
Realized investment gains (losses), net, and related adjustments(2) 1,264 299
Charges related to realized investment gains (losses), net(3) (239) (802)
Market experience updates 304 (938)
Divested and Run-off Businesses(4):
Closed Block division 34 (1)
Other Divested and Run-off Businesses 30 (69)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(5)
(54) (9)
Other adjustments(6) (13) 45
Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures
__________
(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)See "-General Account Investments" and Note 13 to the Unaudited Interim
Consolidated Financial Statements for additional information.
(3)Includes charges that represent the impact of realized investment gains
(losses), net, on the amortization of DAC and other costs, and on changes in
reserves. Also includes charges resulting from payments related to market value
adjustment features of certain of our annuity products and the impact of
realized investment gains (losses), net, on the amortization of Unearned Revenue
Reserves ("URR").
(4)Represents income (loss) of Divested and Run-off Businesses that have been or
will be sold or exited, including businesses that have been placed in wind down,
but that did not qualify for "discontinued operations" accounting treatment
under U.S. GAAP. See "-Divested and Run-off Businesses" for additional
information.
(5)Equity in earnings of operating joint ventures are included in adjusted
operating income but excluded from "Income (loss) before income taxes and equity
in earnings of operating joint ventures" as they are reflected on an after-tax
U.S. GAAP basis as a separate line in the Unaudited Interim Consolidated
Statements of Operations. Earnings attributable to noncontrolling interests are
excluded from adjusted operating income but included in "Income (loss) before
income taxes and equity in earnings of operating joint ventures" as they are
reflected on a U.S. GAAP basis as a separate line in the Unaudited Interim
Consolidated Statements of Operations. Earnings attributable to noncontrolling
interests represent the portion of earnings from consolidated entities that
relates to the equity interests of minority investors.
(6)"Other adjustments" include certain components of the consideration for the
Assurance IQ acquisition, which are recognized as compensation expense over the
requisite service periods, as well as changes in the fair value of contingent
consideration. See Note 13 to the Unaudited Interim Consolidated Financial
Statements for additional information.
Segment results for the period presented above reflect the following:
PGIM. Results for the first quarter of 2021 increased in comparison to the prior year period, primarily reflecting a gain from the sale of our 35% ownership stake inPramerica SGR , an asset management joint venture inItaly , as well as higher asset management fees and other related revenues, partially offset by higher expenses. Retirement. Results for the first quarter of 2021 increased in comparison to the prior year period, primarily reflecting higher net investment spread results and higher reserve gains. 73
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Group Insurance . Results for the first quarter of 2021 decreased in comparison to the prior year period, primarily reflecting lower underwriting results in our group life and group disability businesses. Individual Annuities. Results for the first quarter of 2021 increased in comparison to the prior year period, primarily driven by higher net investment spread results and higher fee income, net of distribution expenses and other associated costs.
Individual Life. Results for the first quarter of 2021 decreased in comparison to the prior year period, primarily reflecting lower underwriting results, partially offset by higher net investment spread results.
Assurance IQ. Results for the first quarter of 2021 decreased in comparison to the prior year period, reflecting an increase in operating expenses supporting business growth, partially offset by higher net revenues. International Businesses. Results for the first quarter of 2021 increased in comparison to the prior year period, inclusive of an unfavorable net impact from foreign currency exchange rates, primarily driven by higher net investment spread results, more favorable underwriting results including from business growth, and higher earnings from our joint venture investments. Corporate and Other. Results for the first quarter of 2021 reflected decreased losses in comparison to the prior year period, primarily reflecting lower net charges from other corporate activities, favorable pension and employee benefit results and lower interest expense on debt, partially offset by lower investment income. Closed Block Division. Results for the first quarter of 2021 increased in comparison to the prior year period, primarily driven by higher net investment activity results, partially offset by an increase in the policyholder dividend obligation. 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 withU.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 withU.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 ourIndividual Life, Group Insurance and International Businesses, we analyze annualized new business premiums, which do not correspond to revenues underU.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 toU.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. 74 -------------------------------------------------------------------------------- Table of Contents Account Values. In managing our Individual Annuities and Retirement businesses, we analyze account values, which do not correspond toU.S. GAAP assets. Net sales (redemptions) in our Individual Annuities business and net additions (withdrawals) in our Retirement business do not correspond to revenues underU.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 aU.S. -based company with significant business operations outside theU.S. , particularly inJapan , we are subject to foreign currency exchange rate movements that could impact ourU.S. dollar ("USD")-equivalent earnings and shareholder return on equity. Our USD-equivalent earnings could be materially affected by currency fluctuations from period to period, even if earnings on a local currency basis are relatively constant. Our USD-equivalent equity is impacted as the value of our investment in international operations may also fluctuate based on changes in foreign currency exchange rates. We seek to mitigate these impacts through various hedging strategies, including the use of derivative contracts and by holding USD-denominated assets in certain of our foreign subsidiaries. In order to reduce earnings volatility from foreign currency exchange rate movements, we enter into forward currency derivative contracts to effectively fix the currency exchange rates for a portion of our prospective non-USD-denominated earnings streams. This forward currency hedging program is primarily associated with our insurance operations inJapan . In order to reduce equity volatility from foreign currency exchange rate movements, we primarily utilize a yen hedging strategy that calibrates the hedge level to preserve the relative contribution of our yen-based business to the Company's overall return on equity on a leverage neutral basis. We implement this hedging strategy utilizing a variety of instruments, including USD-denominated assets, foreign currency derivative contracts, and dual currency and synthetic dual currency investments held locally in our Japanese insurance subsidiaries. The total hedge level may vary based on our periodic assessment of the relative contribution of our yen-based business to the Company's overall return on equity. The table below presents the aggregate amount of instruments that serve to hedge the impact of foreign currency exchange movements on our USD-equivalent shareholder return on equity from our Japanese insurance subsidiaries as of the dates indicated. March 31, December 31, 2021 2020 (in billions) Foreign currency hedging instruments: Hedging USD-equivalent earnings: Forward currency contracts (notional amount outstanding)$ 0.4 $ 0.4 Hedging USD-equivalent equity: USD-denominated assets held in yen-based entities(1) 9.8 10.1 Dual currency and synthetic dual currency investments(2) 0.5 0.5 Total USD-equivalent equity foreign currency hedging instruments 10.3 10.6 Total foreign currency hedges
__________
(1)Includes USD-denominated fixed maturities at amortized cost plus any related accrued investment income, as well as USD notional amount of foreign currency derivative contracts outstanding. Note this amount represents only those USD assets serving to hedge the impact of foreign currency volatility on equity. Separate from this program, our Japanese operations also have$66.5 billion and$65.8 billion as ofMarch 31, 2021 andDecember 31, 2020 , respectively, of USD-denominated assets supporting USD-denominated liabilities related to USD-denominated products. (2)Dual currency and synthetic dual currency investments are held by our yen-based entities in the form of fixed maturities and loans with a yen-denominated principal component and USD-denominated interest income. The amounts shown represent the present value of future USD-denominated cash flows. The USD-denominated investments that hedge the impact of foreign currency exchange rate movements on USD-equivalent earnings and shareholder return on equity from our Japanese insurance operations are reported within yen-based entities and, as a result, foreign currency exchange rate movements will impact their value reported within our yen-based Japanese insurance entities. We seek to mitigate the risk that future unfavorable foreign currency exchange rate movements will decrease the value of these USD-denominated investments reported within our yen-based Japanese insurance entities, and therefore negatively impact their equity and regulatory solvency margins, by having our Japanese insurance operations enter into currency hedging transactions with a subsidiary ofPrudential Financial . These hedging strategies have the economic effect 75 -------------------------------------------------------------------------------- Table of Contents 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 theU.S. andJapan 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 our International Businesses, the fixed currency exchange rates are generally determined in connection with a foreign currency income hedging program designed to mitigate the impact of exchange rate changes on the segment's expected USD-equivalent earnings. Pursuant to this program, our Corporate and Other operations execute forward currency contracts with third-parties to sell the net exposure of projected earnings for certain currencies in exchange for USD at specified exchange rates. The maturities of these contracts correspond with the future periods (typically on a three-year rolling basis) in which the identified non-USD-denominated earnings are expected to be generated. In establishing the level of non-USD-denominated earnings that will be hedged through this program, we exclude the anticipated level of USD-denominated earnings that will be generated by USD-denominated products and investments. For the three months endedMarch 31, 2021 , approximately 12% of the segment's earnings were yen-based and, as ofMarch 31, 2021 , we have hedged 100%, 83% and 39% of expected yen-based earnings for 2021, 2022 and 2023, respectively. To the extent currently unhedged, our International Businesses' future expected USD-equivalent of yen-based earnings will be impacted by yen exchange rate movements. As a result of these arrangements, our International Businesses' results for 2021 and 2020 reflect the impact of translating yen-denominated earnings at fixed currency exchange rates of 103 and104 yen per USD, respectively. Since determination of the fixed currency exchange rates for a given year is impacted by changes in foreign currency exchange rates over time, the segment's future earnings will ultimately be impacted by these changes in exchange rates. For PGIM and certain other currencies within our International Businesses, the fixed currency exchange rates for the current year are predetermined during the third quarter of the prior year using forward currency exchange rates. The table below presents, for the periods indicated, the increase (decrease) to revenues and adjusted operating income for the International Businesses, PGIM and Corporate and Other operations, reflecting the impact of these intercompany arrangements. Three Months Ended March 31, 2021 2020 (in millions) Segment impacts of intercompany arrangements: International Businesses$ 1 $ 12 PGIM 0 0 Impact of intercompany arrangements(1) 1 12 Corporate and Other: Impact of intercompany arrangements(1) (1) (12) Settlement gains (losses) on forward currency contracts(2)(3) 8 22 Net benefit (detriment) to Corporate and Other 7 10
Net impact on consolidated revenues and adjusted operating income
$ 8 $ 22 76 -------------------------------------------------------------------------------- Table of Contents __________ (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 ofMarch 31, 2021 and 2020, the total notional amounts of these forward currency contracts within our Corporate and Other operations were$0.9 billion and$1.2 billion , respectively, of which$0.4 billion and$0.5 billion , respectively, were related to our Japanese insurance operations. (3)Excludes impacts related to POK. Prior period amounts have been updated to conform to current period presentation. Effective second quarter of 2020, the intercompany arrangement for the Korean won between our International Businesses and Corporate and Other operations was terminated and the related hedges were repurposed in relation to the anticipated sale of POK. Effective second quarter of 2020, Korean won-denominated earnings for 2020 that were translated at fixed currency exchange rates of1,090 Korean won per USD are excluded from the International Businesses and are included in the Divested and Run-off Businesses included in Corporate and Other.
Impact of products denominated in non-local currencies on
While our international insurance operations offer products denominated in local
currency, several also offer products denominated in non-local currencies. This
is most notable in our Japanese operations, which currently offer primarily
USD-denominated products, but have also historically offered Australian dollar
("AUD")-denominated products. The non-local currency-denominated insurance
liabilities related to these products are supported by investments denominated
in corresponding currencies, including a significant portion designated as
available-for-sale. While the impact from foreign currency exchange rate
movements on these non-local currency-denominated assets and liabilities is
economically matched, differences in the accounting for changes in the value of
these assets and liabilities due to changes in foreign currency exchange rate
movements have historically resulted in volatility in U.S. GAAP earnings.
In 2015, we implemented a structure in Gibraltar Life's operations that
disaggregated the USD- and AUD-denominated businesses into separate divisions,
each with its own functional currency that aligns with the underlying products
and investments. The result of this alignment was to reduce differences in the
accounting for changes in the value of these assets and liabilities that arise
due to changes in foreign currency exchange rate movements. For the USD- and
AUD-denominated assets that were transferred under this structure, the net
cumulative unrealized investment gains associated with foreign exchange
remeasurement that were recorded in "Accumulated other comprehensive income
(loss)" ("AOCI") totaled $2.3 billion as of both March 31, 2021 and December 31,
2020 , and will be recognized in earnings within "Realized investment gains
(losses), net" over time as these assets mature or are sold. Absent the sale of
any of these assets prior to their stated maturity, approximately 11% of the
$2.3 billion balance as of March 31, 2021 will be recognized throughout the
remainder of 2021, approximately 12% will be recognized in 2022, and the
remaining balance will be recognized from 2023 through 2051.
Highly inflationary economy in
Our insurance operations inArgentina , Prudential ofArgentina ("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 effectiveJuly 1, 2018 . UnderU.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 inArgentina , 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 withU.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:
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•DAC, deferred sales inducements ("DSI") and VOBA;
•Policyholder liabilities;
•Goodwill;
•Valuation of investments including derivatives, measurement of allowance for
credit losses, and recognition of other-than-temporary impairments ("OTTI");
•Pension and other postretirement benefits;
•Taxes on income; and
•Reserves for contingencies, including reserves for losses in connection with
unresolved legal matters.
Market Performance - Equity and Interest Rate Assumptions
DAC, DSI and VOBA, associated with the variable and universal life policies of our Individual Life and International Businesses segments and the variable and fixed annuity contracts of our Individual Annuities and International Businesses segments, are generally amortized over the expected lives of these policies in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. The quarterly adjustments for market performance reflect the impact of changes to our estimate of total gross profits to reflect actual fund performance and market conditions. A significant portion of gross profits for our variable annuity contracts and, to a lesser degree, our variable life contracts are dependent upon the total rate of return on assets held in separate account investment options. This rate of return influences the fees we earn on variable annuity and variable life contracts, costs we incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts, as well as other sources of profit. Returns that are higher than our expectations for a given period produce higher than expected account balances, which increase the future fees we expect to earn on variable annuity and variable life contracts and decrease the future costs we expect to incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts. The opposite occurs when returns are lower than our expectations. The changes in future expected gross profits are used to recognize a cumulative adjustment to all prior periods' amortization. Furthermore, the calculation of the estimated liability for future policy benefits related to certain insurance products includes an estimate of associated revenues and expenses that are dependent on both historical market performance as well as estimates of market performance in the future. Similar to DAC, DSI and VOBA described above, these liabilities are subject to quarterly adjustments for experience including market performance, in addition to annual adjustments resulting from our annual reviews of assumptions. The weighted average rate of return assumptions used in developing estimated market returns consider many factors specific to each product type, including asset durations, asset allocations and other factors. With regard to equity market assumptions, the near-term future rate of return assumption used in evaluating DAC, DSI and VOBA and liabilities for future policy benefits for certain of our products, primarily our domestic variable annuity and domestic and international variable life insurance products, is generally updated each quarter and is derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the "near-term") so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15.0%, we use our maximum future rate of return. If the near-term projected future rate of return is lower than our near-term minimum future rate of return of 0%, we use our minimum future rate of return. As ofMarch 31, 2021 , our domestic variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 0.7% near-term mean reversion equity expected rate of return, and our international variable life insurance business assumes a 4.8% long-term equity expected rate of return and a 0% near-term mean reversion equity expected rate of return. With regard to interest rate assumptions used in evaluating DAC, DSI and VOBA and liabilities for future policy benefits for certain of our products, we update the long-term and near-term future rates used to project fixed income returns annually and quarterly, respectively. As a result of our 2020 annual reviews and update of assumptions and other refinements, which were performed in the second quarter, we reduced our long-term expectation of the (i) 10-yearU.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 endedDecember 31, 2020 . 78
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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 theFinancial Accounting Standards Board ("FASB") onAugust 15, 2018 and is expected to have a significant impact on the Consolidated Financial Statements and Notes to the Consolidated Financial Statements. InOctober 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 toJanuary 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date ofJanuary 1, 2021 . As a result of the COVID-19 pandemic, inNovember 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 fromJanuary 1, 2022 toJanuary 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 ofJanuary 1, 2020 orJanuary 1, 2021 (and record transition adjustments as ofJanuary 1, 2020 orJanuary 1, 2021 , respectively) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would apply the guidance as ofJanuary 1, 2021 (and record transition adjustments as ofJanuary 1, 2021 ) in the 2023 financial statements. The Company currently intends to adopt ASU 2018-12 effectiveJanuary 1, 2023 . ASU 2018-12 will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. In addition to the impacts to the balance sheet upon transition, the Company also expects an impact to the pattern of earnings emergence following the transition date. See Note 2 to the Unaudited Interim Consolidated Financial Statements for a more detailed discussion of ASU 2018-12, as well as other accounting pronouncements issued but not yet adopted and newly adopted accounting pronouncements. Results of Operations by Segment PGIM Business Update •In the first quarter of 2021, we sold our 35% ownership stake inPramerica SGR , an asset management joint venture inItaly , to our partnerUBI Banca , which was acquired in 2020 byIntesa Sanpaolo Group , resulting in a pre-tax gain of$378 million . See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information. Operating Results The following table sets forth PGIM's operating results for the periods indicated. Three Months EndedMarch 31, 2021 2020 (in millions)
Operating results(1): Revenues$ 1,314 $ 778 Expenses 663 614 Adjusted operating income 651 164 Realized investment gains (losses), net, and related adjustments (2) 4
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests
(28) (36)
Income (loss) before income taxes and equity in earnings of operating
joint ventures $ 621 $ 132
__________
(1)Certain of PGIM's investment activities are based in currencies other than
the U.S. dollar and are therefore subject to foreign currency exchange rate
risk. The financial results of PGIM include the impact of an intercompany
arrangement with our Corporate and Other operations designed to mitigate the
impact of exchange rate changes on PGIM's U.S. dollar-equivalent earnings. For
more information related to this intercompany arrangement, see "-Results of
Operations-Impact of Foreign Currency Exchange Rates," above.
Adjusted Operating Income
Adjusted operating income increased $487 million , primarily reflecting an
increase in service, distribution and other revenues driven by a gain from the
sale of our Pramerica SGR joint venture and higher asset management fees, net of
related expenses, due to higher average assets under management as a result of
market appreciation and strong investment performance. Also contributing to the
increase were higher other related revenues, net of related expenses, primarily
driven by
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the absence of co- and seed investment losses resulting from widening credit
spreads in the prior year period and higher commercial mortgage origination
revenue driven by higher loan production and profitability.
Revenues and Expenses
The following table sets forth PGIM's revenues, presented on a basis consistent with the table above under "-Operating Results," by type.
Three Months Ended
March 31,
2021 2020
(in millions)
Revenues by type:
Asset management fees by source:
Institutional customers $ 348 $ 328
Retail customers(1) 302 229
General account 145 136
Total asset management fees 795 693
Other related revenues by source:
Incentive fees 27 18
Transaction fees 5 4
Co- and seed investments 5 (27)
Commercial mortgage(2) 45 27
Total other related revenues 82 22
Service, distribution and other revenues 437 63
Total revenues $ 1,314 $ 778
__________
(1)Consists of fees from: individual mutual funds and variable annuities and
variable life insurance separate account assets; funds invested in proprietary
mutual funds through our defined contribution plan products; and third-party
sub-advisory relationships. Revenues from fixed annuities and the fixed-rate
accounts of variable annuities and variable life insurance are included in the
general account.
(2)Includes mortgage origination revenues from our commercial mortgage
origination and servicing business.
Revenues increased $536 million . Service, distribution and other revenues
increased primarily reflecting a gain from the sale of our Pramerica SGR joint
venture, as discussed above. Asset management fees increased primarily
reflecting higher average assets under management as a result of market
appreciation and strong investment performance. Other related revenues increased
primarily driven by the absence of co- and seed investment losses resulting from
widening credit spreads in the prior year period, and higher commercial mortgage
origination revenue driven by higher loan production and profitability.
Expenses increased $49 million . This increase primarily reflects higher variable
expenses associated with an increase in overall segment earnings and higher
compensation expenses driven by business growth and certain long-term employee
compensation plans tied to performance factors, partially offset by lower
expenses related to travel and entertainment resulting from COVID-19.
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Assets Under Management
The following table sets forth assets under management by asset class as of the
dates indicated.
December 31, March 31,
March 31, 2021 2020 2020(1)
(in billions)
Assets Under Management(2) (at fair value):
Public equity $ 199.3 $ 202.4 $ 131.7
Public fixed income 951.8 1,004.5 882.0
Real estate 121.1 121.5 116.4
Private credit and other alternatives 103.5 106.5 95.9
Multi-asset 75.6 63.7 69.7
Total PGIM assets under management $
1,451.3
Assets under management within other reporting segments(3) 212.1 222.3 185.7 Total PFI assets under management $
1,663.4
__________
(1)Prior period amounts have been updated to conform to current period presentation. (2)"Public equity" represents stock ownership interest in a corporation or partnership (excluding hedge funds) or real estate investment trust. "Public fixed income" represents debt instruments that pay interest and usually have a maturity (excluding mortgages). "Real estate" includes direct real estate equity and real estate mortgages. "Private credit and other alternatives" includes private credit, private equity, hedge funds and other alternative strategies. "Multi-asset" includes funds or products that invest in more than one asset class, balancing equity and fixed income funds and target date funds. (3)Primarily includes certain product-related assets in ourU.S. Businesses and certain general account assets in our International Businesses. These assets are not directly managed by PGIM, but rather are invested in non-proprietary funds or are managed by either the divisions themselves or by our Chief Investment Officer Organization. PGIM's assets under management as ofMarch 31, 2021 increased$156 billion in comparison to the prior year quarter, primarily reflecting market appreciation and strong investment performance, and decreased$47 billion in comparison to the prior quarter, primarily reflecting market depreciation. The following table sets forth assets under management by source as of the dates indicated. December 31, March 31, 2021 2020 March 31, 2020 (in billions) Assets Under Management(1) (at fair value): Institutional customers $ 591.8$ 614.9 $ 524.8 Retail customers 381.0 372.0 282.4 General account 478.5 511.7 488.5 Total PGIM assets under management $
1,451.3
Assets under management within other reporting segments(2) 212.1 222.3 185.7 Total PFI assets under management $
1,663.4
__________
(1)"Institutional customers" consist of third-party institutional assets and group insurance contracts. "Retail customers" consist of individual mutual funds and variable annuities and variable life insurance separate account assets, funds invested in proprietary mutual funds through our defined contribution plan products, and third-party sub-advisory relationships. "General account" also includes fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance. (2)Primarily includes certain product-related assets in ourU.S. Businesses and certain general account assets in our International Businesses. These assets are not directly managed by PGIM, but rather are invested in non-proprietary funds or are managed by either the divisions themselves or by our Chief Investment Officer Organization. 81
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Table of Contents The following table sets forth the component changes in PGIM's assets under management for the periods indicated.
Twelve
Months
Three Months Ended Ended
March 31, March 31,
2021 2020(1) 2021
(in billions)
Beginning assets under management
1.1 4.2 (0.1)
Retail third-party flows 4.4 (1.3) 22.9
Total third-party flows 5.5 2.9 22.8
Affiliated flows(2) (3.4) 10.8 (22.7)
Market appreciation (depreciation)(3) (43.3) (63.7) 167.1
Foreign exchange rate impact (7.4) (1.8) 1.2
Net money market activity and other increases (decreases) 1.3 16.5 (12.8)
Ending assets under management __________
(1)Prior period amounts have been updated to conform to current period presentation. (2)Represents assets that PGIM manages for the benefit of other reporting segments within the Company. Additions and withdrawals of these assets are attributable to third-party product inflows and outflows in other reporting segments. (3)Includes income reinvestment, where applicable.
Private Capital Deployment
Private capital deployment is indicative of the pace and magnitude of capital that is invested and will result in future revenues that may include management fees, transaction fees, incentive fees and servicing revenues, as well as future costs to manage these assets. Private capital deployment represents the gross value of private capital invested in real estate debt and equity, and private credit and equity asset classes. Assets under management resulting from private capital deployment are included in "Real estate" and "Private credit and other alternatives" in the "-Assets Under Management- by asset class table" above. As ofMarch 31, 2021 , these assets decreased approximately$3 billion , primarily reflecting market depreciation and capital returned to investors, partially offset by private capital deployed. Private capital deployment includes PGIM's real estate agency debt business, which consists of agency commercial loans that are originated and sold to third party investors. PGIM continues to service these commercial loans; however, they are not included in assets under management. The following table sets forth PGIM's private capital deployed by asset class for the periods indicated. Three Months Ended March 31, 2021 2020 (in billions) Private capital deployed: Real estate debt and equity$ 5.8 $ 4.3 Private credit and equity 2.1 2.4 Total private capital deployed$ 7.9 $ 6.7 Co- and Seed Investments The following table sets forth PGIM's co- and seed investments at carrying value (including the value of derivative instruments used to mitigate equity market and currency risk) by asset class and source as of the dates indicated. 82
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March 31, 2021 December 31, 2020
(in millions)
Co-Investments:
Public fixed income $ 440 $ 489
Real estate 168 170
Private credit and other alternatives 25 26
Seed Investments:
Public equity 727 675
Public fixed income 339 356
Real estate 37 33
Private credit and other alternatives 90 79
Multi-asset 58 62
Total $ 1,884 $ 1,890
The decrease of $6 million in co- and seed investments was primarily driven by a
decrease in public fixed income reflecting fund redemptions and the impact of
higher interest rates, partially offset by the impact of favorable equity
markets on public equity and private credit and other alternatives.
Operating Results
The following table sets forth the operating results for ourU.S. Businesses for the periods indicated. Three Months Ended March 31, 2021 2021 2020 (in millions) Adjusted operating income before income taxes:U.S. Businesses: Retirement$ 623 $ 245 Group Insurance (132) 44 Individual Annuities 444 373 Individual Life (44) (20) Assurance IQ (39) (23) Total U.S. Businesses 852 619 Reconciling Items: Realized investment gains (losses), net, and related adjustments 1,889 (240) Charges related to realized investment gains (losses), net (236) (816) Market experience updates 307 (940) Other adjustments(1) (13) 45
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests
0 1
Income (loss) before income taxes and equity in earnings of operating joint
ventures $ 2,799 $ (1,331)
________
(1)Represents adjustments not included in the above reconciling items. "Other
adjustments" include certain components of the consideration for the Assurance
IQ acquisition, which are recognized as compensation expense over the requisite
service periods, as well as changes in the fair value of contingent
consideration. See Note 13 to the Unaudited Interim Consolidated Financial
Statements for additional information.
Adjusted operating income for our
•Higher net investment spread results driven by higher income on non-coupon investments; and
•Higher fee income, net of distribution expenses and other associated costs, in our Individual Annuities and Individual Life businesses.
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•Partially offsetting these increases were lower underwriting results primarily
driven by COVID-19 related mortality claims in our Individual Life and Group
Insurance businesses, partially offset by favorable COVID-19 related mortality
gains in our Retirement business.
Retirement
Operating Results
The following table sets forth Retirement's operating results for the periods
indicated.
Three Months
Ended
March 31,
2021 2020
(in millions)Operating results: Revenues$ 2,591 $ 2,437 Benefits and expenses 1,968 2,192 Adjusted operating income 623 245 Realized investment gains (losses), net, and related adjustments (480) (21) Charges related to realized investment gains (losses), net 13 (23)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests
0 1
Income (loss) before income taxes and equity in earnings of operating
joint ventures $ 156 $ 202
Adjusted Operating Income
Adjusted operating income increased
Revenues, Benefits and Expenses
Revenues increased
Benefits and expenses decreased$224 million . Policyholders' benefits, including the change in policy reserves, decreased as a result of 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 as 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."
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Twelve
Months
Three Months Ended Ended
March 31, March 31,
2021 2020 2021
(in millions)
Full Service:
Beginning total account value $ 315,227 $ 272,448 $ 238,435
Deposits and sales 10,933 8,952 42,895
Withdrawals and benefits (9,360) (8,668) (35,344)Change in market value, interest credited and interest income and other activity
9,356 (34,297) 80,170
Ending total account value $ 326,156 $ 238,435 $ 326,156
Institutional Investment Products:
Beginning total account value $ 243,387 $ 227,596 $ 227,346
Additions(1) 9,760 6,893 25,336
Withdrawals and benefits (5,642) (5,510) (18,420)
Change in market value, interest credited and interest
income (653) 2,435 5,766
Other(2) 644 (4,068) 7,468
Ending total account value $ 247,496 $ 227,346 $ 247,496
__________
(1)Additions primarily include: group annuities and funded pension reinsurance
calculated based on premiums received; unfunded longevity reinsurance contracts
calculated as the present value of future projected benefits; investment-only
stable value contracts calculated as the fair value of customers' funds held in
a client-owned trust; and funding agreements issued.
(2)"Other" activity includes the effect of foreign exchange rate changes
associated with our British pounds sterling denominated longevity reinsurance
business and changes in asset balances for externally-managed accounts. For the
three months ended March 31, 2021 and 2020, "Other" activity also includes $722
million in receipts offset by $765 million in payments and $2,752 million in
receipts offset by $2,536 million in payments, respectively, related to funding
agreements backed by commercial paper which typically have maturities of less
than 90 days.
The increase in Full Service account values for the three and twelve months
ended
The increase in Institutional Investment Products account values for the three months endedMarch 31, 2021 reflected net additions primarily driven by pension risk transfer activity, including a large unfunded longevity reinsurance sale in the current quarter. Account values for the twelve months endedMarch 31, 2021 reflected net additions primarily driven by pension risk transfer activity, including a large unfunded longevity reinsurance sale in the current quarter, a favorable change in the market value of account values, and an increase in other activity primarily driven by the positive impact of foreign exchange rate changes.Group Insurance Operating Results
The following table sets forth
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Three Months
Ended
March 31,
2021 2020
($ in millions)Operating results: Revenues$ 1,556 $ 1,424 Benefits and expenses 1,688 1,380 Adjusted operating income (132) 44 Realized investment gains (losses), net, and related adjustments (34) 81 Income (loss) before income taxes and equity in earnings of operating joint ventures$ (166) $ 125 Benefits ratio(1)(3): Group life 104.2 % 88.4 % Group disability 80.5 % 76.0 %Total Group Insurance 99.0 % 85.6 % Administrative operating expense ratio(2)(3): Group life 10.8 % 12.4 % Group disability 32.2 % 24.8 %Total Group Insurance 15.8 % 15.1 % __________ (1)Ratio of policyholder benefits to earned premiums plus policy charges and fee income. (2)Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income. (3)The benefit and administrative ratios are measures used to evaluate profitability and efficiency.
Adjusted Operating Income
Adjusted operating income decreased$176 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, and less favorable underwriting results in our group disability business driven by a less favorable impact from claim experience on long-term disability contracts.
Revenues, Benefits and Expenses
Revenues increased$132 million . The increase primarily reflected higher premiums and policy charges and fee income driven by lower premium returns in our group life business due to COVID-19 impacts on experience-rated contracts, with offsets in policyholders' benefits and changes in reserves, as discussed below, as well as growth in our group life and group disability businesses. Benefits and expenses increased$308 million . The increase primarily reflected higher policyholders' benefits and changes in reserves, including increases in our group life business mostly due to COVID-19 impacts on experience- and non-experience-rated contracts, and increases in our group disability business driven by a less favorable impact from claim experience on long-term disability contracts. Sales Results The following table sets forthGroup Insurance's annualized new business premiums, as defined under "-Segment Measures" above, for the periods indicated. Three Months Ended March 31, 2021 2020 (in millions) Annualized new business premiums(1): Group life$ 175 $ 173 Group disability 120 108 Total$ 295 $ 281 86
-------------------------------------------------------------------------------- Table of Contents __________ (1)Amounts exclude new premiums resulting from rate changes on existing policies, from additional coverage under ourServicemembers' 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 endedMarch 31, 2021 increased$14 million compared to the prior year period, primarily driven by higher sales in our group disability business within the existing Premier and National client base. Individual Annuities Operating Results The following table sets forth Individual Annuities' operating results for the periods indicated. Three Months EndedMarch 31, 2021 2020 (in millions)
Operating results: Revenues$ 1,199 $ 1,148 Benefits and expenses 755 775 Adjusted operating income 444 373 Realized investment gains (losses), net, and related adjustments 2,555 (865) Charges related to realized investment gains (losses), net (407) (375) Market experience updates 176 (646) Income (loss) before income taxes and equity in earnings of operating joint ventures$ 2,768 $ (1,513)
Adjusted Operating Income
Adjusted operating income increased$71 million primarily driven by higher net investment spread results reflecting higher income on non-coupon investments and higher fee income, net of distribution expenses and other associated costs, resulting from higher average separate account values due to favorable equity markets, partially offset by net outflows, certain products reaching contractual milestones for fee tier reduction and product mix changes. Also contributing to the increase were lower operating expenses, primarily due to cost savings initiatives.
Revenues, Benefits and Expenses
Revenues increased$51 million primarily driven by higher net investment income reflecting higher income on non-coupon investments, and higher policy charges and fee income reflecting higher average separate account values due to favorable equity markets, partially offset by net outflows, certain products reaching contractual milestones for fee tier reduction and product mix changes. Also contributing to the increase were higher asset management and services fees, with offsets in general and administrative expenses, as described below. Benefits and expenses decreased$20 million primarily driven by lower interest expense, partially offset by higher general and administrative expenses, net of capitalization, driven by higher distribution and asset management expenses reflecting higher average separate account values, partially offset by lower operating expenses, 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:
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Twelve
Months
Three Months Ended Ended
March 31, March 31,
2021 2020 2021
(in millions)
Total Individual Annuities(1):
Beginning total account value $ 176,280 $ 169,681 $ 143,976
Sales 1,855 1,927 6,743
Full surrenders and death benefits (2,492) (2,519) (7,818)
Sales, net of full surrenders and death benefits (637) (592) (1,075)
Partial withdrawals and other benefit payments (1,429) (1,399) (5,221)
Net flows (2,066) (1,991) (6,296)
Change in market value, interest credited and other
activity 3,142 (22,822) 42,324
Policy charges (914) (892) (3,562)
Ending total account value $ 176,442 $ 143,976 $ 176,442
__________
(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 $170.6 billion and $139.0 billion as of March 31, 2021 and
2020, respectively. Fixed annuity account values were $5.8 billion and $4.9
billion as of March 31, 2021 and 2020, respectively.
Sales, net of full surrenders and death benefits, for the three months ended
March 31, 2021 declined in comparison to the prior year period. Sales in the
current quarter reflect the product pivot strategy and consisted largely of
indexed variable annuities, as sales of traditional variable annuities with
guaranteed living benefit riders have been discontinued as of December 31, 2020 .
The increase in account values for the twelve months ended March 31, 2021 was
driven by market value appreciation, partially offset by net outflows and policy
charges on contractholder accounts.
Risks and Risk Mitigants
The following is a summary of certain risks associated with Individual Annuities' products, certain strategies in mitigating those risks including any updates to those strategies since the previous year-end, and the related financial results.
Fixed Annuity Risks and Risk Mitigants. The primary risk exposure of our fixed
annuity products relates 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, which include interest rate
fluctuations and/or sustained periods of low interest rates, and credit risk
related to the underlying investments. We manage these risk exposures primarily
through our investment strategies and product design features, which include
credit rate resetting subject to the minimum guaranteed interest rate as well as
surrender charges applied during the early years of the contract that help to
provide protection for premature withdrawals. In addition, a portion of our
fixed products has a market value adjustment provision that affords 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.
Indexed Variable Annuity Risks and Risk Mitigants. The primary risk exposure of
our indexed variable annuity products relates to the investment risks we bear in
order to credit to the customer's account balance the required crediting rate
based on the performance of the elected indices at the end of each term. We
manage this risk primarily through our investment strategies including
derivatives and product design features, which include credit rate resetting
subject to contractual minimums as well as surrender charges applied during the
early years of the contract that help to provide protection for premature
withdrawals. In addition, our indexed variable annuity strategies have an
interim value provision that provides protection from lapse in the case of
rising interest rates.
Variable Annuity Risks and Risk Mitigants. The primary risk exposures of our
variable annuity contracts relate to actual deviations from, or changes to, the
assumptions used in the original pricing of these products, including capital
markets assumptions such as equity market returns, interest rates and market
volatility, along with actuarial assumptions such as contractholder mortality,
the timing and amount of annuitization and withdrawals, and contract lapses. For
these risk exposures, achievement of our expected returns is subject to the risk
that actual experience will differ from the assumptions used in the original
pricing of these products. We manage our exposure to certain risks driven by
fluctuations in capital markets primarily
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through a combination of i) Product Design Features, ii) our Asset Liability
Management Strategy, and iii) our Capital Hedge Program, as discussed below. We
also manage these risk exposures through external reinsurance for certain of our
variable annuity products. Sales of traditional variable annuities with
guaranteed living benefit riders have been discontinued as of December 31, 2020 .
i.Product Design Features:
A portion of the variable annuity contracts that we offered 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 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 meet expected liabilities associated with
our variable annuity living benefit guarantees. The economic liability we manage
with this ALM strategy consists of expected living benefit claims under less
severe market conditions, which are managed using fixed income instruments,
derivatives, or a combination thereof, and potential living benefit claims
resulting from more severe market conditions, which are hedged using derivative
instruments. For our Prudential Defined Income ("PDI") variable annuity, we
utilize fixed income instruments to meet expected liabilities. For the portion
of our ALM strategy executed with derivatives, we enter into a range of
exchange-traded and over-the-counter ("OTC") equity, interest rate and credit
derivatives, including, but not limited to: equity and treasury futures; total
return, credit default and interest rate swaps; and options including equity
options, swaptions, and floors and caps. The intent of this strategy is to more
efficiently manage the capital and liquidity associated with these products
while continuing to mitigate fluctuations in net income due to movements in
capital markets. To achieve this, we periodically review and recalibrate the ALM
strategy by optimizing the mix of derivatives and fixed income instruments to
achieve expected outcomes.
The difference between the change in value of our hedging instruments and the
change in value of the portion of the economic liability that is being hedged,
has historically been reflected in adjusted operating income over time.
Beginning with the second quarter of 2020, this impact is excluded from adjusted
operating income which the Company believes enhances the understanding of
underlying performance trends.
The valuation of the economic liability we seek to defray excludes certain items
that are included within the U.S. GAAP liability, such as non-performance risk
("NPR") 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:
March 31, December 31,
2021 2020
(in millions)
U.S. GAAP liability, including NPR, net of reinsurance recoverables $ 11,194 $ 18,537
NPR adjustment, net of reinsurance recoverables 3,219 4,103
Subtotal 14,413 22,640
Adjustments including risk margins and valuation methodology differences
(3,034) (5,080)
Economic liability managed through the ALM strategy $
11,379
As of
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Under our ALM strategy, we expect differences in the U.S. GAAP net income impact
between the changes in value of the fixed income instruments (either designated
as available-for-sale or designated as trading) and derivatives as compared to
the changes in the embedded derivative liability these assets support. These
differences can be primarily attributed to three distinct areas:
•Different valuation methodologies in measuring the liability we intend to cover
with fixed income instruments and derivatives versus the liability reported
under U.S. GAAP. The valuation methodology utilized in estimating the economic
liability we intend to defray with fixed income instruments and derivatives is
different from that required to be utilized to measure the liability under U.S.
GAAP. Additionally, the valuation of the economic liability excludes certain
items that are included within the U.S. GAAP liability, such as NPR in order to
maximize protection irrespective of the possibility of our own default and risk
margins (required by U.S. GAAP but different from our best estimate).
•Different accounting treatment between liabilities and assets supporting those
liabilities. Under U.S. GAAP, changes in the fair value of the embedded
derivative liability, derivative instruments and fixed income instruments
designated as trading are immediately reflected in net income, while changes in
the fair value of fixed income instruments that are designated as
available-for-sale are recorded as unrealized gains (losses) in other
comprehensive income.
•General hedge results. For the derivative portion of the ALM strategy, the net
hedging impact (the extent to which the changes in value of the hedging
instruments offset the change in value of the portion of the economic liability
we are hedging) may be impacted by a number of factors, including: cash flow
timing differences between our hedging instruments and the corresponding portion
of the economic liability we are hedging, basis differences attributable to
actual underlying contractholder funds to be hedged versus hedgeable indices,
rebalancing costs related to dynamic rebalancing of hedging instruments as
markets move, certain elements of the economic liability that may not be hedged
(including certain actuarial assumptions), and implied and realized market
volatility on the hedge positions relative to the portion of the economic
liability we seek to hedge.
iii. Capital Hedge Program:
We employ a capital hedge program to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets. The capital hedge program is conducted using equity derivatives which include equity call and put options, total return swaps and futures contracts. The changes in value of these derivatives 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
Three Months
Ended
March 31,
2021 2020
(in millions)(1)
Results excluded from adjusted operating
income:
Change in value of U.S. GAAP liability,
pre-NPR(2) $ 8,392 $ (20,538)
Change in the NPR adjustment (884) 6,599
Change in fair value of hedge assets, excluding capital hedges(3) (4,992)
11,954
Change in fair value of capital hedges(4) (295)
952
Other 334
168
Realized investment gains (losses), net, and related adjustments 2,555
(865)
Market experience updates(5) 176
(646)
Charges related to realized investment gains (losses), net (407)
(375)
Total results excluded from adjusted operating income(6)$ 2,324 $ (1,886) 90
-------------------------------------------------------------------------------- Table of Contents __________ (1)Positive amounts represent income; negative amounts represent a loss. (2)Represents the change in the liability (excludingNPR ) for our variable annuities living benefit guarantees which is measured utilizing a valuation methodology that is required underU.S. GAAP. This liability includes such items as risk margins which are required byU.S. GAAP but not included in our best estimate of the liability. (3)Represents the change in fair value of the derivatives utilized to hedge potential claims associated with our variable annuity living benefit guarantees. (4)Represents the changes in fair value of equity derivatives of the capital hedge program intended to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets. (5)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability. (6)Excludes amounts from the change in unrealized gains and losses on fixed income instruments recorded in OCI (versus net income) of$(1,870) million , and$1,706 million for the three months endedMarch 31, 2021 and 2020, respectively. For the three months endedMarch 31, 2021 , the gain of$2,324 million was driven by a favorable impact related to theU.S. GAAP liability beforeNPR , net of the change in fair value of hedge assets (excluding capital hedges) largely due to rising interest rates and favorable equity market performance, as well as favorable market experience updates from the impact of favorable equity markets and higher interest rates. These impacts were partially offset by an unfavorableNPR adjustment driven by higher interest rates and losses associated with our capital hedge program. For the three months endedMarch 31, 2020 , the loss of$1,886 million was driven by an unfavorable impact related to theU.S. GAAP liability beforeNPR , net of the change in fair value of hedge assets (excluding capital hedges) largely due to widening credit spreads, declining interest rates, and unfavorable equity market performance, as well as unfavorable market experience updates from the impact of unfavorable equity markets and lower interest rates. These impacts were partially offset by a favorableNPR adjustment driven by widening credit spreads and gains associated with our capital hedge program. Product Specific Risks and Risk Mitigants As noted above, the risks associated with our products are mitigated through product design features, including automatic rebalancing, as well as through our ALM strategy and external reinsurance. The following table sets forth the risk management profile of our living benefit guarantees and guaranteed minimum death benefit ("GMDB") features as of the periods indicated: March 31, 2021 December 31, 2020 March 31, 2020 Account % of Account % of Account % of Value Total Value Total Value Total ($ in millions) Living benefit/GMDB features(1): Both ALM strategy and automatic rebalancing(2)(3)$ 111,948 66 %$ 112,177 66 %$ 92,692 67 % ALM strategy only(3) 7,362 4 % 7,410 4 % 6,188 4 % Automatic rebalancing only 617 1 % 634 1 % 644 1 % External reinsurance(4) 3,201 2 % 3,173 2 % 2,617 2 % PDI 17,122 10 % 18,540 11 % 15,802 11 % Other products 2,487 1 % 2,492 1 % 1,955 1 % Total living benefit/GMDB features$ 142,737 $ 144,426 $ 119,898 GMDB features and other(5) 27,893 16 % 26,120 15 % 19,149 14 % Total variable annuity account value$ 170,630 $ 170,546 $ 139,047
__________
(1)All contracts with living benefit guarantees also contain GMDB features,
which cover the same insured contract.
(2)Contracts with living benefits that are included in our ALM strategy and that
have an automatic rebalancing feature.
(3)Excludes PDI which is presented separately within this table.
(4)Represents contracts subject to a reinsurance transaction with an external
counterparty covering certain 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.
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Three Months
Ended
March 31,
2021 2020
(in millions)Operating results: Revenues$ 1,635 $ 1,530 Benefits and expenses 1,679 1,550 Adjusted operating income (44) (20) Realized investment gains (losses), net, and related adjustments (152) 565 Charges related to realized investment gains (losses), net 158 (418) Market experience updates 131 (294) Income (loss) before income taxes and equity in earnings of operating joint ventures$ 93 $ (167) Adjusted Operating Income Adjusted operating income decreased$24 million , primarily reflecting lower underwriting results, driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims. This decrease was partially offset by higher net investment spread results driven by higher income on non-coupon investments.
Revenues, Benefits and Expenses
Revenues increased$105 million . This increase was primarily driven by higher income on non-coupon investments and higher net investment income due to higher average invested assets, partially offset by lower investment yields. The increase also reflected higher policy charges and fee income driven by business growth. Benefits and expenses increased$129 million . This increase reflected higher policyholders' benefits driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims, partially offset by lower operating expenses resulting from cost savings initiatives. Sales Results
The following table sets forth Individual Life's annualized new business premiums, as defined under "-Results of Operations-Segment Measures" above, by distribution channel and product, for the periods indicated.
Three Months Ended March 31, 2021 Three Months Ended March 31, 2020
Prudential Third- Prudential Third-
Advisors Party Total Advisors Party Total
(in millions)
Term Life $ 6 $ 25 $ 31 $ 6 $ 34 $ 40
Guaranteed Universal Life(1) 0 12 12 2 27 29
Other Universal Life(1) 2 13 15 7 23 30
Variable Life 28 118 146 20 68 88
Total $ 36 $ 168 $ 204 $ 35 $ 152 $ 187
__________
(1)Single pay life premiums and excess (unscheduled) premiums are included in
annualized new business premiums based on a 10% credit and represented
approximately 0% and 5% of Guaranteed Universal Life and 2% and 7% of Other
Universal Life annualized new business premiums for the three months ended
Total annualized new business premiums for the three months endedMarch 31, 2021 increased$17 million compared to the prior year period, driven by higher sales of variable life products as a result of pricing actions, partially offset by lower sales across all other products. Assurance IQ Operating Results
The following table sets forth Assurance IQ's operating results for the periods indicated.
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Three Months Ended
March 31,
2021 2020
(in millions)Operating results: Revenues$ 108 $ 60 Expenses 147 83 Adjusted operating income (39) (23) Other adjustments(1) (13) 45 Income (loss) before income taxes and equity in earnings of operating joint ventures$ (52) $ 22 __________ (1)"Other adjustments" include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
Adjusted Operating Income
Adjusted operating income decreased
Revenues and Expenses
Revenues increased$48 million , primarily due to commissions and case referral revenues from the Medicare product line, driven by business growth and from a strategic shift by the business to emphasize Medicare products, as well as from higher case referral sales in the Life product line. Expenses increased$64 million , driven by higher marketing and distribution costs primarily related to the Medicare product line, and higher general and administrative operating expenses supporting business growth.
International Businesses
Business Updates
•In the first quarter of 2021, the Company acquired a 24% interest (through a private equity limited partnership managed by LeapFrog Investments) inICEA LION , aKenya -based insurer and asset manager, for approximately$100 million . This investment is consistent with the Company's strategic focus internationally on higher-growth emerging markets, and furthers the partnership's specific objective to identify and make strategic investments in high quality financial services companies in selected African geographies. •In the third quarter of 2020, the Company entered into a definitive agreement with Taishin Financial Holding Co, Ltd., a Taiwanese financial services provider, to sellPrudential Life Insurance Company of Taiwan Inc. ("POT") for cash consideration of approximately$195 million at then current exchange rates, to be paid at closing, and contingent consideration with a fair value of approximately$30 million atMarch 31, 2021 . If regulatory approvals are obtained and customary closing conditions are satisfied, we expect the transaction to close in 2021. Beginning in the third quarter of 2020, we reported our investment in POT as "held for sale" and have cumulatively recognized an approximate$390 million after-tax charge to earnings, throughMarch 31, 2021 , to adjust the carrying value of POT to the fair market value reflected in the purchase price (see Note 1 to the Consolidated Financial Statements for additional information). Also, effective in the third quarter of 2020, the results of this business and the impact of its anticipated 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. 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
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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. For our Japan operations, we
used an exchange rate of 103 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
March 31,
2021 2020(1)
(in millions)Operating results: Revenues: Life Planner$ 2,930 $ 2,718 Gibraltar Life and Other 3,001 2,918 Total revenues 5,931 5,636 Benefits and expenses: Life Planner 2,466 2,356 Gibraltar Life and Other 2,594 2,584 Total benefits and expenses 5,060 4,940 Adjusted operating income: Life Planner 464 362 Gibraltar Life and Other 407 334 Total adjusted operating income 871 696 Realized investment gains (losses), net, and related adjustments (789) 575 Charges related to realized investment gains (losses), net (14) (7) Market experience updates 0 (6)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests
(22) 4
Income (loss) before income taxes and equity in earnings of operating joint
ventures $ 46 $ 1,262
__________
(1)Effective second quarter of 2020, the results of POK and the impact of its
sale are excluded from the International Businesses and are included in the
Divested and Run-off Businesses in Corporate and Other. Effective third quarter
of 2020, the results of POT and the impact of its anticipated sale are excluded
from the International Businesses and are included in the Divested and Run-off
Businesses in Corporate and Other. Prior period amounts have been updated to
conform to current period presentation. See Note 1 to the Unaudited Interim
Consolidated Financial Statements for additional information.
Adjusted Operating Income
Adjusted operating income from our Life Planner operations increased$102 million , including a net unfavorable impact of$3 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding this item, adjusted operating income from our Life Planner operations increased$105 million primarily reflecting more favorable underwriting results due to the growth of business in force in ourJapan andBrazil operations, and favorable impacts from mortality and policyholder experience. Also contributing to the increase were higher net investment spread results driven by higher income on non-coupon investments, partially offset by lower reinvestment yields. Adjusted operating income from our Gibraltar Life and Other operations increased$73 million , including a net$0 million impact from currency fluctuations, inclusive of the currency hedging program discussed above, primarily reflecting higher net investment spread results driven by higher income on non-coupon investments, partially offset by lower reinvestment yields. Also contributing to the increase were higher earnings from our joint venture investments, as well as more favorable underwriting results primarily due to favorable policyholder experience.
Revenues, Benefits and Expenses
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Revenues from our Life Planner operations increased $212 million , including a
net favorable impact of $5 million from currency fluctuations. Excluding this
item, revenues increased $207 million , primarily reflecting higher net
investment income driven by higher income on non-coupon investments, partially
offset by lower reinvestment yields. Also contributing to the increase were
higher premiums and policy charges and fee income attributable to the growth of
business in force.
Benefits and expenses of our Life Planner operations increased $110 million ,
including a net unfavorable impact of $8 million from currency fluctuations.
Excluding this item, benefits and expenses increased $102 million , primarily
reflecting higher policyholders' benefits, including changes in reserves, driven
by the growth of business in force, partially offset by favorable impacts from
mortality and policyholder experience.
Revenues from our Gibraltar Life and Other operations increased $83 million ,
including a net favorable impact of $46 million from currency fluctuations.
Excluding this item, revenues increased $37 million , primarily reflecting higher
net investment income driven by higher income on non-coupon investments,
partially offset by lower reinvestment yields. Also contributing to the increase
was higher other income driven by a favorable impact from our joint venture
investments.
Benefits and expenses of our Gibraltar Life and Other operations increased $10
million , including a net unfavorable impact of $46 million from currency
fluctuations. Excluding this item, benefits and expenses decreased $36 million ,
primarily driven by lower policyholders' benefits, including changes in
reserves.
Sales Results
The following table sets forth annualized new business premiums, as defined under "-Results of Operations-Segment Measures" above, on an actual and constant exchange rate basis for the periods indicated.
Three Months Ended
March 31,
2021 2020(1)
(in millions)
Annualized new business premiums:
On an actual exchange rate basis:
Life Planner $ 248 $ 303
Gibraltar Life and Other 258 307
Total $ 506 $ 610
On a constant exchange rate basis:
Life Planner $ 259 $ 306
Gibraltar Life and Other 259 309
Total $ 518 $ 615
__________
(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.
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The table below presents annualized new business premiums on a constant exchange
rate basis, by product and distribution channel, for the periods indicated.
Three Months Ended March 31, 2021
Three Months Ended
Accident Accident
& &
Life Health Retirement(2) Annuity Total Life Health Retirement(2) Annuity Total
(in millions)
Life Planner $ 142 $ 19 $ 98 $ 0 $ 259 $ 164 $ 21 $ 121 $ 0 $ 306
Gibraltar Life and Other:
Life Consultants $ 73 $ 7 $ 9 $ 16 $ 105 $ 83 $ 9 $ 18 $ 22 $ 132
Banks(3) 100 0 3 15 118 120 0 10 2 132
Independent Agency 18 1 16 1 36 21 1 21 2 45
Subtotal 191 8 28 32 259 224 10 49 26 309
Total $ 333 $ 27 $ 126 $ 32 $ 518 $ 388 $ 31 $ 170 $ 26 $ 615
__________
(1)Effective second quarter of 2020, the results of POK and the impact of its
sale are excluded from the International Businesses and are included in the
Divested and Run-off Businesses in Corporate and Other. Effective third quarter
of 2020, the results of POT and the impact of its anticipated sale are excluded
from the International Businesses and are included in the Divested and Run-off
Businesses in Corporate and Other. Prior period amounts have been updated to
conform to current period presentation. See Note 1 to the Unaudited Interim
Consolidated Financial Statements for additional information.
(2)Includes retirement income, endowment and savings variable universal life.
(3)Single pay life annualized new business premiums, which include 10% of first
year premiums, and 3-year limited pay annualized new business premiums, which
include 100% of new business premiums, represented 8% and 67%, respectively, of
total Japanese bank distribution channel annualized new business premiums,
excluding annuity products, for the three months ended March 31, 2021 , and 4%
and 67%, respectively, of total Japanese bank distribution channel annualized
new business premiums, excluding annuity products, for the three months ended
March 31, 2020 .
Annualized new business premiums, on a constant exchange rate basis, from our
Life Planner operations decreased $47 million , primarily driven by lower sales
due to COVID-19 impacts on distribution, as well as lower sales of
USD-denominated products resulting from pricing increases in the third quarter
of 2020.
Annualized new business premiums, on a constant exchange rate basis, from our
Gibraltar Life and Other operations decreased $50 million . Life Consultants
sales decreased $27 million , primarily driven by COVID-19 impacts on
distribution and lower sales of USD-denominated protection and retirement
products resulting from pricing increases in the third quarter of 2020. Bank
channel and Independent Agency sales decreased $14 million and $9 million ,
respectively, primarily driven by COVID-19 impacts on distribution and lower
sales of USD-denominated products resulting from pricing increases in the third
quarter of 2020.
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Corporate and Other
Corporate and Other includes corporate operations, after allocations to our
business segments, and Divested and Run-off Businesses other than those that
qualify for "discontinued operations" accounting treatment under
Three Months
Ended
March 31,
2021 2020(1)
(in millions)Operating results: Interest expense on debt(2)$ (208) $ (219) Investment income(2) 36 49 Pension and employee benefits 62 50 Other corporate activities(3) (176) (222) Adjusted operating income (286) (342) Realized investment gains (losses), net, and related adjustments 166 (40) Charges related to realized investment gains (losses), net 11 21 Market experience updates (3) 8 Divested and Run-off Businesses 30 (69)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests
(4) 22
Income (loss) before income taxes and equity in earnings of operating joint
ventures $ (86) $ (400)
__________
(1)Effective second quarter of 2020, the results of POK and the impact of its
sale are excluded from the International Businesses and are included in the
Divested and Run-off Businesses in Corporate and Other. Effective third quarter
of 2020, the results of POT and the impact of its anticipated sale are excluded
from the International Businesses and are included in the Divested and Run-off
Businesses in Corporate and Other. Prior period amounts have been updated to
conform to current period presentation. See Note 1 to the Unaudited Interim
Consolidated Financial Statements for additional information.
(2)Prior period amounts have been updated to conform to current period
presentation.
(3)Includes consolidating adjustments.
The loss from Corporate and Other operations, on an adjusted operating income
basis, decreased $56 million . Net charges from other corporate activities
decreased $46 million primarily reflecting lower expenses. Also contributing to
the decrease were favorable results of $12 million from pension and employee
benefits, primarily driven by higher income from our qualified pension plan as a
result of incurring lower interest costs on plan obligations, as well as an $11
million decrease from interest expense on debt, primarily reflecting lower
average interest rates. These decreases were partially offset by lower
investment income of $13 million , primarily driven by lower income on both
highly liquid assets and coupon investments due to lower investment yields,
partially offset by higher income on non-coupon investments.
Divested and Run-off Businesses
Divested and Run-off Businesses Included in Corporate and Other
Income from our Divested and Run-off Businesses includes results from several businesses that have been or will be sold or exited, including businesses that have been placed in wind down status that do not qualify for "discontinued operations" accounting treatment underU.S. GAAP. The results of these Divested and Run-off Businesses are reflected in our Corporate and Other operations, but are excluded from adjusted operating income. A summary of the results of the Divested and Run-off Businesses reflected in our Corporate and Other operations is as follows for the periods indicated: Three Months Ended March 31, 2021 2020 (in millions) Long-Term Care$ 3 $ 81 Other(1) 27 (150) Total Divested and Run-off Businesses income (loss) excluded from adjusted operating income$ 30 $ (69) 97
-------------------------------------------------------------------------------- Table of Contents __________ (1)Effective second quarter of 2020, the results of POK and the impact of its sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Effective third quarter of 2020, the results of POT and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information. Long-Term Care. Results for the first quarter of 2021 decreased$78 million compared to the prior year period driven by an unfavorable impact from changes in the market value of derivatives used for duration management. This decrease was partially offset by a favorable impact from changes in the market value of equity securities, and higher underwriting results driven by favorable policy and claim experience. Other. Results for both the first quarter of 2021 and the first quarter of 2020 primarily reflect the results of POT and the impact of its anticipated sale, while results for the prior year period also include the results of POK and the impact of its sale. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
Closed Block Division
The Closed Block division includes certain in-force traditional domestic participating life insurance and annuity products and assets that are used for the payment of benefits and policyholder dividends on these policies (collectively the "Closed Block"), as well as certain related assets and liabilities. We no longer offer these traditional domestic participating policies. See Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information. Each year, the Board of Directors ofThe 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 byU.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 ofMarch 31, 2021 , the excess of actual cumulative earnings over the expected cumulative earnings was$3,166 million , which was recorded as a policyholder dividend obligation. Actual cumulative earnings, as required byU.S. GAAP, reflect the recognition of realized investment gains and losses in the current period, as well as changes in assets and related liabilities that support the Closed Block policies. Additionally, the accumulation of net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block has been reflected as a policyholder dividend obligation of$3,244 million atMarch 31, 2021 , to be paid to Closed Block policyholders unless offset by future experience, with a corresponding amount reported in AOCI.
Operating Results
The following table sets forth the Closed Block division's results for the
periods indicated.
Three Months
Ended
March 31,
2021 2020
(in millions)U.S. GAAP results: Revenues$ 1,365 $ 677 Benefits and expenses 1,331 678 Income (loss) before income taxes and equity in earnings of operating joint ventures$ 34 $ (1)
Income (loss) Before Income Taxes and Equity in Earnings of
Income (loss) before income taxes and equity in earnings of operating joint
ventures increased
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securities, partially offset by a decrease in realized investment gains driven
by unfavorable changes in the fair value of derivatives used in risk management
activities. Net insurance activity results reflected a favorable comparative
change driven by a decrease in the 2021 dividend scale and run-off of the
business in force. As a result of the above and other variances, a $246 million
increase in the policyholder dividend obligation was recorded in the first
quarter of 2021, compared to a $483 million reduction in the first quarter of
2020. If actual cumulative earnings fall below expected cumulative earnings in
future periods, earnings volatility in the Closed Block division, which is
primarily due to changes in investment results, may not be offset by changes in
the cumulative earnings policyholder dividend obligation. For a discussion of
the Closed Block division's realized investment gains (losses), net, see
"-General Account Investments."
Revenues, Benefits and Expenses
Revenues increased
Benefits and expenses increased$653 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. 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.
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The following table sets forth the impact on results for the periods indicated of these items that are excluded from adjusted operating income:
Three Months
Ended
March 31,
2021 2020
(in millions)
Retirement:Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net
$ (435) $ (289)
Change in experience-rated contractholder liabilities due to asset value changes
438 327
Gains (losses), net, on experienced rated contracts(1)(2) $ 3 $ 38
International Businesses:
Investment gains (losses) on assets supporting experience-rated contractholder
liabilities, net $ 180 $ (336) Change in experience-rated contractholder liabilities due to asset value changes
(180) 336
Gains (losses), net, on experienced rated contracts $ 0 $ 0 Total:
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net
$ (255) $ (625)
Change in experience-rated contractholder liabilities due to asset value changes
258 663
Gains (losses), net, on experienced rated contracts(1)(2) $ 3 $ 38 __________
(1)Decreases to contractholder liabilities due to asset value changes are limited by certain floors and therefore do not reflect cumulative declines in recorded asset values of$3 million and$14 million as ofMarch 31, 2021 and 2020, respectively. We have recovered and expect to recover in future periods these declines in recorded asset values through subsequent increases in recorded asset values or reductions in crediting rates on contractholder liabilities. (2)Included in the amounts above related to the change in the liability to contractholders as a result of commercial mortgage and other loans are an increase of$11 million and a decrease of$37 million for the three months endedMarch 31, 2021 and 2020, respectively. As prescribed byU.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 inPrudential 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. 100
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As of March 31, 2021 As of December 31, 2020
Closed Block Closed Block
PFI excluding Closed Block Division Division PFI excluding Closed Block Division Division
Total at Total Total at Total Total at Total Total at Total
Fair Value Level 3(1) Fair Value Level 3(1) Fair Value Level 3(1) Fair Value Level 3(1)
(in millions)
Fixed maturities, available-for-
sale $ 339,679 $ 5,105 5,005$ 42,224 $ 1,038 Assets supporting experience-rated contractholder liabilities: Fixed maturities 21,302 776 0 0 21,414 615 0 0 Equity securities 2,296 0 0 0 2,043 0 0 0 All other(2) 398 20 0 0 619 20 0 0 Subtotal 23,996 796 0 0 24,076 635 0 0 Fixed maturities, trading 5,932 230 270 12 3,636 230 278 13 Equity securities 5,785 632 2,563 96 5,653 576 2,345 84 Commercial mortgage and other loans 500 0 0 0 1,092 0 0 0 Other invested assets(3) 2,225 378 0 0 2,268 366 3 0 Short-term investments 4,207 342 97 54 6,222 146 88 31 Cash equivalents 6,382 4 619 0 5,241 1 241 0 Other assets 144 144 0 0 268 268 0 0 Separate account assets 302,905 1,306 0 0 304,270 1,821 0 0 Total assets$ 691,755 $ 8,937 $ 42,466 $ 1,329 $ 723,407 $ 9,048 $ 45,179 $ 1,166 Future policy benefits$ 11,314 $ 11,314
$ 0 $ 0
2,171 2,171 0 0 1,914 1,914 0 0
Other liabilities(3) 1,152 0 3 0 385 0 0 0
Total liabilities $ 14,637 $ 13,485 $ 3 $ 0 $ 21,178 $ 20,793 $ 0 $ 0
__________
(1)Level 3 assets expressed as a percentage of total assets measured at fair
value on a recurring basis for PFI excluding the Closed Block division and for
the Closed Block division totaled 1.3% and 3.1%, respectively, as of March 31,
2021 , and 1.3% and 2.6%, respectively, as of December 31, 2020 .
(2)"All other" represents cash equivalents and short-term investments.
(3)"Other invested assets" and "Other liabilities" primarily include
derivatives. The amounts include the impact of netting subject to master netting
agreements.
The determination of fair value, which for certain assets and liabilities is
dependent on the application of estimates and assumptions, can have a
significant impact on our results of operations and may require the application
of a greater degree of judgment depending on market conditions, as the ability
to value assets and liabilities can be significantly impacted by a decrease in
market activity or a lack of transactions executed in an orderly manner. The
continued impact of the COVID-19 pandemic on the global economy may have adverse
effects on the valuation of assets and liabilities. Due to the highly uncertain
nature of these conditions, it is not possible to estimate the overall impacts
at this time.
Fixed maturity securities included in Level 3 in our fair value hierarchy are
generally priced based on internally-developed valuations or indicative broker
quotes. For certain private fixed maturity and equity securities, the internal
valuation models use significant unobservable inputs and, accordingly, such
securities are included in Level 3 in our fair value hierarchy. Level 3 fixed
maturity securities for PFI excluding the Closed Block division included
approximately $1.6 billion of public fixed maturities as of March 31, 2021 , with
values primarily based on indicative broker quotes, and approximately $4.6
billion of private fixed maturities, with values primarily based on
internally-developed models. Significant unobservable inputs used in their
valuation included: issue specific spread adjustments, material non-public
financial information, management judgment, estimation of future earnings and
cash flows, default rate assumptions, liquidity assumptions and indicative
quotes from market makers. Separate account assets included in Level 3 in our
fair value hierarchy primarily include corporate securities and commercial
mortgage loans.
Embedded derivatives reported in "Future policy benefits" and "Policyholders'
account balances" that are included in level 3 of our fair value hierarchy
represent general account liabilities pertaining to living benefit features of
the Company's
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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, 2020 .
General Account InvestmentsPortfolio Composition
Our investment portfolio consists of public and private fixed maturity
securities, commercial mortgage and other loans, policy loans and non-coupon
investments, which include equity securities and other invested assets such as
limited partnerships and limited liability companies ("LPs/LLCs"), real estate
held through direct ownership, derivative instruments and seed money investments
in separate accounts. The composition of our general account reflects, within
the discipline provided by our risk management approach, our need for
competitive results and the selection of diverse investment alternatives
available primarily through our PGIM segment. The size of our portfolio enables
us to invest in asset classes that may be unavailable to the typical investor.
The following tables set forth the composition of our general account investment
portfolio apportioned between PFI excluding the Closed Block division and the
Closed Block division, as of the dates indicated:
March 31, 2021
PFI Excluding Closed Block
Closed Block Division Division Total
($ in millions)
Fixed maturities:
Public, available-for-sale, at fair value $ 280,849 61.7 % $ 26,863 $ 307,712 Public, held-to-maturity, at amortized cost, net of allowance
1,608 0.4 0 1,608
Private, available-for-sale, at fair value 58,268 12.8 12,054 70,322
Private, held-to-maturity, at amortized cost, net of allowance
193 0.1 0 193
Fixed maturities, trading, at fair value 5,732 1.3 271 6,003
Assets supporting experience-rated contractholder
liabilities, at fair value 24,027 5.3 0 24,027
Equity securities, at fair value 5,227 1.1 2,563 7,790
Commercial mortgage and other loans, at book value, net of allowance
55,738 12.3 8,297 64,035
Policy loans, at outstanding balance 7,006 1.4 3,984 10,990
Other invested assets, net of allowance(1) 11,174 2.5 3,730 14,904
Short-term investments, net of allowance 5,135 1.1 132 5,267
Total general account investments 454,957 100.0 % 57,894 512,851
Invested assets of other entities and operations(2) 5,978 0 5,978
Total investments $ 460,935 $ 57,894 $ 518,829
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December 31, 2020
PFI Excluding Closed Block
Closed Block Division Division Total
($ in millions)
Fixed maturities:
Public, available-for-sale, at fair value $ 309,813 63.7 % $ 29,475 $ 339,288 Public, held-to-maturity, at amortized cost, net of allowance
1,719 0.4 0 1,719
Private, available-for-sale, at fair value 60,224 12.4 12,749 72,973
Private, held-to-maturity, at amortized cost, net of allowance
211 0.1 0 211
Fixed maturities, trading, at fair value 3,425 0.7 277 3,702
Assets supporting experience-rated contractholder
liabilities, at fair value 24,115 5.0 0 24,115
Equity securities, at fair value 5,108 1.1 2,345 7,453
Commercial mortgage and other loans, at book value, net of allowance
55,892 11.5 8,421 64,313
Policy loans, at outstanding balance 7,207 1.5 4,064 11,271
Other invested assets, net of allowance(1) 10,716 2.1 3,610 14,326
Short-term investments, net of allowance 7,640 1.5 124 7,764
Total general account investments 486,070 100.0 % 61,065 547,135
Invested assets of other entities and operations(2) 6,485 0 6,485
Total investments $ 492,555 $ 61,065 $ 553,620
__________
(1) Other invested assets consist of investments in LPs/LLCs, investment real
estate held through direct ownership, derivative instruments and other
miscellaneous investments. For additional information regarding these
investments, see "-Other Invested Assets" below.
(2)Includes invested assets of our investment management and derivative
operations. Excludes assets of our investment management operations that are
managed for third-parties and those assets classified as "Separate account
assets" on our balance sheet. For additional information regarding these
investments, see "-Invested Assets of Other Entities and Operations" below.
The decrease in general account investments attributable to PFI excluding the
Closed Block division in the first three months of 2021 was primarily due to an
increase in interest rates and the translation impact of the U.S. dollar
strengthening against the yen, partially offset by the reinvestment of net
investment income. 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 March 31, 2021 and December 31, 2020 , 44% and 43%, respectively, of our
general account investments attributable to PFI excluding the Closed Block
division related to our Japanese insurance operations. The following table sets
forth the composition of the investments of our Japanese insurance operations'
general account, as of the dates indicated:
December 31,
March 31, 2021 2020
(in millions)
Fixed maturities:
Public, available-for-sale, at fair value $ 142,899 $ 154,261
Public, held-to-maturity, at amortized cost, net of allowance 1,608 1,719
Private, available-for-sale, at fair value 20,955 21,748
Private, held-to-maturity, at amortized cost, net of allowance 193 211
Fixed maturities, trading, at fair value 530 550
Assets supporting experience-rated contractholder liabilities, at fair value
3,255 3,149
Equity securities, at fair value 2,186 2,134
Commercial mortgage and other loans, at book value, net of allowance
20,026 19,915
Policy loans, at outstanding balance 2,905 3,078
Other invested assets(1) 2,745 3,045
Short-term investments, net of allowance 775 438
Total Japanese general account investments $
198,077
__________
(1)Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments and other miscellaneous investments.
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The decrease in general account investments related to our Japanese insurance
operations in the first three months of 2021 was primarily due to an increase in
U.S. interest rates and the translation impact of the U.S. dollar strengthening
against the yen, partially offset by the reinvestment of net investment income
and portfolio growth as a result of net business inflows.
As of March 31, 2021 , our Japanese insurance operations had $85.1 billion , at
carrying value, of investments denominated in U.S. dollars, including $1.9
billion that were hedged to yen through third-party derivative contracts and
$71.0 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, 2020 , our Japanese insurance
operations had $89.2 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 $74.8 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 $4.1 billion
decrease in the carrying value of U.S. dollar-denominated investments from
December 31, 2020 was primarily attributable to an increase in U.S. treasury
bond rates, partially offset by reinvestment of net investment income and
portfolio growth as a result of net business inflows.
Our Japanese insurance operations had $9.8 billion and $10.2 billion , at
carrying value, of investments denominated in Australian dollars that support
liabilities denominated in Australian dollars as of March 31, 2021 and
December 31, 2020 , respectively. The $0.4 billion decrease in the carrying value
of Australian dollar-denominated investments from December 31, 2020 was
primarily attributable to the increase in Australian government bond rates. For
additional information regarding U.S. and Australian dollar investments held in
our Japanese insurance operations and a discussion of our yen hedging strategy,
see "-Results of Operations by Segment-Impact of Foreign Currency Exchange
Rates" above.
Investment Results
The following tables set forth the investment results of our general account apportioned between PFI excluding the Closed Block division, and the Closed Block division, for the periods indicated. The yields are based on net investment income as reported underU.S. GAAP and as such do not include certain interest-related items, such as settlements of duration management swaps which are included in "Realized investment gains (losses), net." Three Months Ended March 31, 2021 PFI Excluding Closed Block Division and Japanese PFI Excluding Closed Block Closed Block Operations Japanese Insurance Operations Division Division Total(5) Yield(1) Amount Yield(1) Amount Yield(1) Amount Amount Amount ($ in millions) Fixed maturities(2) 4.51 %$ 1,787 2.67 %$ 969 3.63 %$ 2,756 $ 364 $ 3,120 Assets supporting experience-rated contractholder liabilities 2.84 148 1.14 9 2.61 157 0 157 Equity securities 0.87 7 0.80 4 0.84 11 12 23 Commercial mortgage and other loans 3.84 342 3.73 186 3.80 528 85 613 Policy loans 4.95 51 4.76 35 4.87 86 58 144 Short-term investments and cash equivalents 0.30 8 0.34 1 0.30 9 0 9 Gross investment income 4.02 2,343 2.76 1,204 3.48 3,547 519 4,066 Investment expenses (0.14) (70) (0.13) (56) (0.13) (126) (31) (157) Investment income after investment expenses 3.88 % 2,273 2.63 % 1,148 3.35 % 3,421 488 3,909 Other invested assets(3) 256 93 349 98 447 Investment results of other entities and operations(4) 26 0 26 0 26 Total investment income$ 2,555 $ 1,241 $ 3,796 $ 586 $ 4,382 104
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Three Months Ended March 31, 2020
PFI Excluding Closed Block
Division and Japanese PFI Excluding Closed Block Closed Block
Operations Japanese Insurance Operations Division Division Total(5)
Yield(1) Amount Yield(1) Amount Yield(1) Amount Amount Amount
($ in millions)
Fixed maturities(2) 4.52 % $ 1,895 2.76 % $ 946 3.73 % $ 2,841 $ 399 $ 3,240
Assets supporting experience-rated
contractholder liabilities 3.39 160 3.20 21 3.37 181 0 181
Equity securities 2.00 11 1.10 6 1.57 17 12 29
Commercial mortgage and other
loans 4.01 355 3.99 189 4.00 544 93 637
Policy loans 5.12 63 3.99 29 4.70 92 61 153
Short-term investments and cash
equivalents 1.28 71 1.62 7 1.31 78 3 81
Gross investment income 4.06 2,555 2.90 1,198 3.60 3,753 568 4,321
Investment expenses (0.12) (85) (0.14) (68) (0.13) (153) (43) (196)
Investment income after investment
expenses 3.94 % 2,470 2.76 % 1,130 3.47 % 3,600 525 4,125
Other invested assets(3) 81 (27) 54 20 74
Investment results of other
entities and operations(4) 3 0 3 0 3
Total investment income $ 2,554 $ 1,103 $ 3,657 $ 545 $ 4,202
__________
(1)For interim periods, yields are annualized. The denominator in the yield
percentage is based on quarterly average carrying values for all asset types
except for fixed maturities which are based on amortized cost, net of allowance.
Amounts for fixed maturities, short-term investments and cash equivalents are
also netted for securities lending activity (i.e., income netted for rebate
expenses and asset values netted for securities lending liabilities). A yield is
not presented for other invested assets as it is not considered a meaningful
measure of investment performance. Yields exclude investment income and assets
related to other invested assets.
(2)Includes fixed maturity securities classified as available-for-sale and
held-to-maturity and excludes fixed maturity securities classified as trading,
which are included in other invested assets.
(3)Other invested assets consist of investments in LPs/LLCs, investment real
estate held through direct ownership, derivative instruments, fixed maturities
classified as trading and other miscellaneous investments.
(4)Includes net investment income of our investment management operations.
(5)The total yield was 3.42% and 3.55% for the three months ended March 31, 2021
and 2020, respectively.
The decrease in investment income after investment expenses yield attributable
to our general account investments, excluding both the Closed Block division and
the Japanese insurance operations' portfolio, for the three months ended
March 31, 2021 , compared to the three months ended March 31, 2020 , 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
March 31, 2021 , compared to the three months ended March 31, 2020 , was primarily
the result of lower fixed income reinvestment rates.
Both the U.S. dollar-denominated and Australian dollar-denominated fixed
maturities that are not hedged to yen through third-party derivative contracts
provide a yield that is substantially higher than the yield on comparable
yen-denominated fixed maturities. The average amortized cost of U.S.
dollar-denominated fixed maturities that are not hedged to yen through
third-party derivative contracts was approximately $57.4 billion and $51.9
billion for the three months ended March 31, 2021 and 2020, respectively. The
majority of U.S. dollar-denominated fixed maturities support liabilities that
are denominated in U.S. dollars. The average amortized cost of Australian
dollar-denominated fixed maturities that are not hedged to yen through
third-party derivative contracts was approximately $8.5 billion and $7.9 billion
for the three months ended March 31, 2021 and 2020, respectively. The majority
of Australian dollar-denominated fixed maturities support liabilities that are
denominated in Australian dollars. For additional information regarding U.S. and
Australian dollar investments held in our Japanese insurance operations, see
"-Results of Operations by Segment-Impact of Foreign Currency Exchange Rates"
above.
Realized Investment Gains and Losses
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The following table sets forth "Realized investment gains (losses), net" of our
general account apportioned between PFI excluding Closed Block division, and the
Closed Block division, by investment type as well as "Charges related to
realized investment gains (losses), net" and adjustments, for the periods
indicated:
Three Months Ended
March 31,
2021 2020
(in millions)
PFI excluding Closed Block Division:
Realized investment gains (losses), net:
(Addition to) release of allowance for credit losses on fixed maturities $ 11 $ (150)
Write-downs on fixed maturities (1) 0 (72)
Net gains (losses) on sales and maturities 1,050 311
Fixed maturity securities(2) 1,061 89
Commercial mortgage and other loans 10 6
Derivatives 842 1,109
OTTI losses on other invested assets recognized in earnings (9) 0
(Addition to) release of allowance for credit losses on other invested assets (1) (4)
Other net gains (losses) 65 (3)
Other 55 (7)
Subtotal 1,968 1,197
Investment results of other entities and operations(3) 39 214
Total - PFI excluding Closed Block Division $ 2,007 $ 1,411
Related adjustments(4) $ (743) $ (1,112)
Realized investment gains (losses), net, and related adjustments 1,264 299
Charges related to realized investment gains (losses), net(4) (239) (802)
Realized investment gains (losses), net, and charges related to realized investment gains (losses), net and adjustments
$ 1,025 $ (503) Closed Block Division: Realized investment gains (losses), net: (Addition to) release of allowance for credit losses on fixed maturities$ (7) $ (8) Write-downs on fixed maturities (1) 0 (19) Net gains (losses) on sales and maturities 161 96 Fixed maturity securities(2) 154 69 Commercial mortgage and other loans 1 4 Derivatives (82) 184 Other net gains (losses) (1) (1) Other (1) (1) Subtotal - Closed Block Division 72 256 Consolidated PFI realized investment gains (losses), net
__________
(1)Amounts represent write-downs of credit adverse securities, write-downs on securities approaching maturities related to foreign exchange movements and securities actively marketed for sale. (2)Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading. (3)Includes "realized investment gains (losses), net" of our investment management operations. (4)Prior period amounts have been updated to conform to current period presentation. Net gains on sales and maturities of fixed maturity securities were$1,050 million for the first quarter of 2021 primarily driven by sales ofU.S. treasuries acquired in a higher interest-rate environment within our domestic segments. Net gains on sales and maturities of fixed maturity securities were$311 million for the first quarter of 2020 primarily driven by the impact of foreign currency exchange rate movements onU.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. 106 -------------------------------------------------------------------------------- Table of Contents For the first quarter of 2021, the$11 million release of allowance for credit losses for fixed maturities was due to modifications on public securities within the energy sector, partially offset by an addition to the allowance for credit losses within the energy, utilities and consumer cyclical sectors. In the first quarter of 2020, the$150 million addition to allowance for credit losses for fixed maturities was concentrated in the energy and communications sectors within corporate securities and foreign government securities. This credit loss allowance was primarily related to securities with liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers.
Net realized gains on derivative instruments of
•$2,874 million of gains on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts;
Partially offsetting these gains were:
•$1,727 million of losses on interest rate derivatives due to increases in swap andU.S. Treasury rates; and •$331 million of losses on capital hedges due to increases in equity indices.
Net realized gains on derivative instruments of
•$2,355 million of gains on interest rate derivatives due to decreases in swap andU.S. Treasury rates; •$1,113 million of gains on capital hedges due to decreases in equity indices; •$1,001 million of gains on foreign currency hedges due toU.S. dollar appreciation versus the euro and British pound and due to USD interest rates declining more than foreign rates; and •$33 million of gains for fees earned on fee-based synthetic GICs;
Partially offsetting these gains were:
•$3,390 million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts; and •$41 million of losses on credit default swaps primarily due to spreads widening.
For a discussion of living benefit guarantees and related hedge positions in our
Individual Annuities segment, see "-Results of Operations by Segment-
Related adjustments include the portions of "Realized investment gains (losses), net" that are included in adjusted operating income and the portions of "Other income (loss)" and "Net investment income" that are excluded from adjusted operating income. These adjustments are made to arrive at "Realized investment gains (losses), net, and related adjustments" which are excluded from adjusted operating income. Results for the first quarter of 2021 and 2020 reflected net negative related adjustments of$743 million and$1,112 million , respectively. Both periods' results were primarily driven by changes in the fair value of equity securities and fixed income securities designated as trading, as well as settlements and changes in value of derivatives. Charges that relate to "Realized investment gains (losses), net" are also excluded from adjusted operating income and may be reflected as net charges or net benefits. Results for the first quarter of 2021 and 2020 reflected net related charges of$239 million and$802 million , respectively. Both periods' results were primarily driven by the impact of derivative activity on the amortization of DAC and other costs, and certain policyholder reserves.
Credit Losses
The level of credit losses generally reflects current and expected economic
conditions and is expected to increase when economic conditions worsen and to
decrease when economic conditions improve. Historically, the causes of credit
losses have been specific to each individual issuer and have not directly
resulted in credit losses to other securities within the same industry or
geographic region. We may also realize additional credit and interest
rate-related losses through sales of investments pursuant to our credit risk and
portfolio management objectives.
We maintain separate monitoring processes for public and private fixed
maturities and create watch lists to highlight securities that require special
scrutiny and management. For private placements, our credit and portfolio
management processes help ensure prudent controls over valuation and management.
We have separate pricing and authorization processes to establish "checks and
balances" for new investments. We apply consistent standards of credit analysis
and due diligence for all
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transactions, whether they originate through our own in-house staff or through
agents. Our regional offices closely monitor the portfolios in their regions. We
set all valuation standards centrally, and we assess the fair value of all
investments quarterly. Our public and private fixed maturity investment managers
formally review all public and private fixed maturity holdings on a quarterly
basis and more frequently when necessary to identify potential credit
deterioration whether due to ratings downgrades, unexpected price variances
and/or company or industry-specific concerns.
For LPs/LLCs accounted for using the equity method and for wholly-owned
investment real estate, the carrying value of these investments is written down
or impaired to fair value when a decline in value is considered to be
other-than-temporary. For additional information regarding our OTTI policies,
see Note 2 to the Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2020 .
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 certain sectors in our investment portfolio that were impacted by COVID-19. Energy Related Investments As ofMarch 31, 2021 , PFI excluding the Closed Block division had energy related exposure with a market value of$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 (44%), independent energy (24%), integrated energy (20%), oil field services (6%) and refining (6%) sub-sectors. As ofMarch 31, 2021 , the credit quality of energy sector fixed maturity securities was 87% investment grade and 13% below investment grade. Energy related investment realized gains were approximately$28 million primarily due to a release of allowance for credit losses for the quarter endedMarch 31, 2021 . Consumer Cyclical Related Investments As ofMarch 31, 2021 , 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 approximately$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 (39%), automotive (21%), restaurants (8%), leisure (7%), gaming (5%) and lodging (2%). As ofMarch 31, 2021 , the credit quality of consumer cyclical sector fixed maturity securities was 75% investment grade and 25% below investment grade. For additional information regarding "-Retail Related Investments," see below. Retail Related Investments As ofMarch 31, 2021 , 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 90% 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 57% and weighted-average debt service coverage ratio of 2.15 times; and$1 billion of real estate held through direct ownership and real estate-related LPs/LLCs. In addition, we held approximately$11 billion of commercial mortgage-backed securities, of which approximately 99% and 1% were ratedAAA (super senior) and AA to A, respectively, and comprised of diversified collateral pools. Approximately 30% of the collateral pools were comprised of retail-related investments, with no pools solely collateralized by retail-related investments. For additional information regarding commercial mortgage-backed securities, see "-Fixed Maturity Securities-Fixed Maturity Securities Credit Quality" below. 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 inPrudential 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. 108
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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.
The following table sets forth the composition of the portion of our fixed
maturity, available-for-sale portfolio by industry category attributable to PFI
excluding the Closed Block division and the associated gross unrealized gains
and losses, as well as the allowance for credit losses ("ACL"), as of the dates
indicated:
March 31, 2021 December 31, 2020
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Industry(1) Cost Gains Losses ACL Value Cost Gains Losses ACL Value
(in millions)
Corporate securities:
Finance $ 37,669 $ 3,174 $ 256 $ 0 $ 40,587 $ 37,577 $ 5,240 $ 70 $ 0 $ 42,747
Consumer non-cyclical 28,983 3,169 317 0 31,835 28,891 5,085 52 0 33,924
Utility 24,352 2,662 221 17 26,776 24,235 4,504 60 11 28,668
Capital goods 13,718 1,302 131 0 14,889 13,711 1,947 49 2 15,607
Consumer cyclical 10,582 1,019 68 11 11,522 11,196 1,536 52 13 12,667
Foreign agencies 5,475 721 37 0 6,159 5,323 903 11 0 6,215
Energy 12,145 1,097 132 30 13,080 12,257 1,583 118 58 13,664
Communications 5,979 938 50 39 6,828 6,013 1,343 35 22 7,299
Basic industry 6,166 629 44 0 6,751 5,895 914 17 0 6,792
Transportation 9,926 1,006 55 0 10,877 10,067 1,568 40 0 11,595
Technology 4,398 281 53 0 4,626 3,717 381 14 0 4,084
Industrial other 4,397 466 57 0 4,806 4,485 778 21 0 5,242
Total corporate securities 163,790 16,464 1,421 97 178,736 163,367 25,782 539 106 188,504
Foreign government(2) 88,481 13,646 321 0 101,806 93,521 16,229 236 0 109,514
Residential mortgage-backed(3) 2,822 162 15 0 2,969 2,572 198 0 0 2,770
Asset-backed 10,734 142 7 0 10,869 11,584 137 67 0 11,654
Commercial mortgage-backed 10,205 574 30 0 10,749 10,296 883 8 0 11,171
U.S. Government 18,800 3,931 209 0 22,522 25,959 8,348 15 0 34,292
State & Municipal 9,978 1,514 26 0 11,466 10,142 1,991 1 0 12,132
Total fixed maturities,
available-for-sale(4) $ 304,810 $ 36,433 $ 2,029 $ 97 $ 339,117 $ 317,441 $ 53,568 $ 866 $ 106 $ 370,037
__________
(1)Investment data has been classified based on standard industry
categorizations for domestic public holdings and similar classifications by
industry for all other holdings.
(2)As of March 31, 2021 and December 31, 2020 , based on amortized cost, 85% and
86%, respectively, represent Japanese government bonds held by our Japanese
insurance operations with no other individual country representing more than 4%
of the balance.
(3)As of both March 31, 2021 and December 31, 2020 , based on amortized cost, 97%
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.
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The decrease in net unrealized gains from December 31, 2020 to March 31, 2021
was primarily due to an increase in U.S. interest rates.
The following table sets forth the composition of the portion of our fixed
maturity, held-to-maturity portfolio by industry category attributable to PFI
excluding the Closed Block division and the associated gross unrealized gains
and losses, as well as the allowance for credit losses, as of the dates
indicated:
March 31, 2021 December 31, 2020
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Industry(1) Cost Gains Losses Value ACL Cost Gains Losses Value ACL
(in millions)
Corporate securities:
Finance $ 612 $ 60 $ 0 $ 672 $ 7 $ 651 $ 67 $ 0 $ 718 $ 9
Basic industry 82 1 0 83 0 87 2 0 89 0
Total corporate securities 694 61 0 755 7 738 69 0 807 9
Foreign government(2) 872 239 0 1,111 0 935 270 0 1,205 0
Residential mortgage-backed(3) 242 17 0 259 0 266 20 0 286 0
Total fixed maturities,
held-to-maturity(4) $ 1,808 $ 317 $ 0 $ 2,125 $ 7 $ 1,939 $ 359 $ 0 $ 2,298 $ 9
__________
(1)Investment data has been classified based on standard industry
categorizations for domestic public holdings and similar classifications by
industry for all other holdings.
(2)As of both March 31, 2021 and December 31, 2020 , based on amortized cost, 98%
represent Japanese government bonds held by our Japanese insurance operations.
(3)As of both March 31, 2021 and December 31, 2020 , 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.
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The following table sets forth our fixed maturity, available-for-sale portfolio
by NAIC Designation or equivalent rating attributable to PFI excluding the
Closed Block division, as of the dates indicated:
March 31, 2021 December 31, 2020
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
NAIC Designation(1) (2) Cost Gains Losses(3) ACL Value Cost Gains Losses(3) ACL Value
(in millions)
1 $ 216,471 $ 28,298 $ 1,242 $ 0 $ 243,527 $ 229,951 $ 41,311 $ 381 $ 0 $ 270,881
2 69,860 6,930 502 0 76,288 68,458 10,683 180 0 78,961
Subtotal High or
Highest Quality
Securities(4) 286,331 35,228 1,744 0 319,815 298,409 51,994 561 0 349,842
3 11,480 865 107 0 12,238 11,913 1,192 95 0 13,010
4 4,954 200 114 34 5,006 5,119 211 119 23 5,188
5 1,736 114 56 28 1,766 1,629 123 67 16 1,669
6 309 26 8 35 292 371 48 24 67 328
Subtotal Other
Securities(5) (6) 18,479 1,205 285 97 19,302 19,032 1,574 305 106 20,195
Total fixed maturities,
available-for-sale $ 304,810 $ 36,433 $ 2,029 $ 97 $ 339,117 $ 317,441 $ 53,568 $ 866 $ 106 $ 370,037
__________
(1)Reflects equivalent ratings for investments of the international insurance
operations.
(2)Includes, as of March 31, 2021 and December 31, 2020 , 722 securities with
amortized cost of $4,975 million (fair value, $4,965 million ) and 102 securities
with amortized cost of $356 million (fair value, $382 million ), respectively,
that have been categorized based on expected NAIC Designations pending receipt
of SVO ratings.
(3)As of March 31, 2021 , includes gross unrealized losses of $148 million on
public fixed maturities and $137 million on private fixed maturities considered
to be other than high or highest quality and, as of December 31, 2020 , includes
gross unrealized losses of $184 million on public fixed maturities and $121
million on private fixed maturities considered to be other than high or highest
quality.
(4)On an amortized cost basis, as of March 31, 2021 , includes $240,784 million
of public fixed maturities and $45,547 million of private fixed maturities and,
as of December 31, 2020 , includes $253,387 million of public fixed maturities
and $45,022 million of private fixed maturities.
(5)On an amortized cost basis, as of March 31, 2021 , includes $9,228 million of
public fixed maturities and $9,251 million of private fixed maturities and, as
of December 31, 2020 , includes $9,592 million of public fixed maturities and
$9,440 million of private fixed maturities.
(6)On an amortized cost basis, as of March 31, 2021 , securities considered below
investment grade based on low issue composite ratings total $15,656 million , or
5% of the total fixed maturities, and include securities considered high or
highest quality by the NAIC based on the rules described above.
The following table sets forth our fixed maturity, held-to-maturity portfolio by
NAIC Designation or equivalent rating attributable to PFI excluding the Closed
Block division, as of the dates indicated:
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March 31, 2021 December 31, 2020
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
NAIC Designation(1) Cost Gains Losses(2) Value ACL Cost Gains Losses(2) Value ACL
(in millions)
1 $ 1,714 $ 307 $ 0 $ 2,021 $ 5 $ 1,839 $ 349 $ 0 $ 2,188 $ 7
2 94 10 0 104 2 100 10 0 110 2
Subtotal High or
Highest Quality
Securities(3) 1,808 317 0 2,125 7 1,939 359 0 2,298 9
3 0 0 0 0 0 0 0 0 0 0
4 0 0 0 0 0 0 0 0 0 0
5 0 0 0 0 0 0 0 0 0 0
6 0 0 0 0 0 0 0 0 0 0
Subtotal Other
Securities 0 0 0 0 0 0 0 0 0 0
Total fixed
maturities,
held-to-maturity $ 1,808 $ 317 $ 0 $ 2,125 $ 7 $ 1,939 $ 359 $ 0 $ 2,298 $ 9
__________
(1)Reflects equivalent ratings for investments of the international insurance
operations.
(2)As of both March 31, 2021 and December 31, 2020 , there were no gross
unrealized losses on public fixed maturities and private fixed maturities
considered to be other than high or highest quality.
(3)On an amortized cost basis, as of March 31, 2021 , includes $1,615 million of
public fixed maturities and $193 million of private fixed maturities and, as of
December 31, 2020 , includes $1,728 million of public fixed maturities and $211
million of private fixed maturities.
The following table sets forth the amortized cost and fair value of asset-backed and commercial mortgage-backed securities within our fixed maturity available-for-sale portfolio attributable to PFI excluding the Closed Block division by credit quality, as of the dates indicated:
March 31, 2021 December 31, 2020
Asset-Backed Commercial Mortgage-Backed Asset-Backed Commercial Mortgage-Backed
Securities(2) Securities(3) Securities(2) Securities(3)
Low Issue Composite Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Rating(1) Cost Value Cost Value Cost Value Cost Value
(in millions)
AAA $ 10,458 $ 10,516 $ 10,192 $ 10,737 $ 11,327 $ 11,323 $ 10,284 11,159
AA 165 172 2 2 139 144 1 2
A 7 8 2 2 16 17 2 2
BBB 14 15 9 8 12 13 9 8
BB and below 90 158 0 0 90 157 0 0
Total(4) $ 10,734 $ 10,869 $ 10,205 $ 10,749 $ 11,584 $ 11,654 $ 10,296 $ 11,171
__________
(1)The table above provides ratings as assigned by nationally recognized rating
agencies as of March 31, 2021, including S&P, Moody's, Fitch Ratings, Inc.
("Fitch") and Morningstar, Inc. ("Morningstar"). Low issue composite rating uses
ratings from the major credit rating agencies or if these are not available an
equivalent internal rating. For securities where the ratings assigned are not
equivalent, the second lowest rating is utilized.
(2)Includes collateralized loan obligations ("CLOs"), credit-tranched securities
collateralized by auto loans, education loans, credit card and other asset
types.
(3)As of both March 31, 2021 and December 31, 2020, based on amortized cost, 98%
were securities with vintages of 2013 or later.
(4)Excludes fixed maturity securities classified as "Assets supporting
experience-rated contractholder liabilities" and "Fixed maturities, trading," as
well as securities held outside the general account in other entities and
operations.
Included in "Asset-backed securities" above are investments in CLOs. The following table sets forth information pertaining to these investments in CLOs within our fixed maturity available-for-sale portfolio attributable to PFI excluding the Closed Block division, as of the dates indicated:
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March 31, 2021 December 31, 2020
Collateralized Loan Obligations
Fair Fair
Low Issue Composite Rating(1) Amortized Cost Value Amortized Cost Value
(in millions)
AAA $ 8,969 $ 8,993 $ 9,554 $ 9,506
AA 7 7 2 2
A 5 5 1 1
BBB 5 5 1 1
BB and below 6 6 1 1
Total(2)(3) $ 8,992 $ 9,016 $ 9,559 $ 9,511
__________
(1)The table above provides ratings as assigned by nationally recognized rating
agencies as of March 31, 2021, including S&P, Moody's, Fitch and Morningstar.
Low issue composite rating uses ratings from the major credit rating agencies or
if these are not available an equivalent internal rating. For securities where
the ratings assigned are not equivalent, the second lowest rating is utilized.
(2)There was no allowance for credit losses as of both March 31, 2021 and
December 31, 2020.
(3)Excludes fixed maturity securities classified as "Assets supporting
experience-rated contractholder liabilities" and "Fixed maturities, trading," as
well as securities held outside the general account in other entities and
operations.
Assets Supporting Experience-Rated Contractholder Liabilities
For information regarding the composition of "Assets supporting experience-rated contractholder liabilities," see Note 3 to the Unaudited Interim Consolidated Financial Statements.
Commercial Mortgage and Other Loans
Investment Mix
The following table sets forth the composition of our commercial mortgage and
other loans portfolio attributable to PFI excluding the Closed Block division,
as of the dates indicated:
March 31, 2021 December 31, 2020
(in millions)
Commercial mortgage and agricultural property loans $ 55,151 $ 55,223
Uncollateralized loans 583 655
Residential property loans 86 101
Other collateralized loans 114 120
Total recorded investment gross of allowance(1) 55,934 56,099
Allowance for credit losses (196) (207)
Total net commercial mortgage and other loans(2) $ 55,738 $ 55,892
__________
(1)As a percentage of recorded investment gross of allowance, more than 99% of these assets were current as of both March 31, 2021 and December 31, 2020. (2)Excluded from the table above are commercial mortgage and other loans held outside the general account in other entities and operations. For additional information regarding commercial mortgage and other loans held outside the general account, see "-Invested Assets of Other Entities and Operations" below. We originate commercial mortgage and agricultural property loans using a dedicated sales and underwriting staff through our various regional offices in theU.S. and international offices primarily inLondon andTokyo . 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 held by the Company's international insurance operations.
Residential property loans primarily include Japanese recourse loans. Upon
default of these recourse loans, we can make a claim against the personal assets
of the property owner, in addition to the mortgaged property. These loans are
also backed by third-party guarantors.
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Other collateralized loans include consumer loans.
Composition of Commercial Mortgage and Agricultural Property Loans
Our commercial mortgage and agricultural property loan portfolio strategy
emphasizes diversification by property type and geographic location. The
following tables set forth the breakdown of the gross carrying values of
commercial mortgage and agricultural property loans attributable to PFI
excluding the Closed Block division by geographic region and property type, as
of the dates indicated:
March 31, 2021 December 31, 2020
Gross Gross
Carrying % of Carrying % of
Value Total Value Total
($ in millions)
Commercial mortgage and agricultural property loans
by region:
U.S. Regions(1):
Pacific $ 19,345 35.1 % $ 19,186 34.7 %
South Atlantic 8,630 15.6 8,710 15.8
Middle Atlantic 6,468 11.7 6,500 11.8
East North Central 2,959 5.4 3,018 5.5
West South Central 5,509 10.0 5,426 9.8
Mountain 2,199 4.0 2,239 4.1
New England 1,598 2.9 1,664 3.0
West North Central 469 0.8 531 0.9
East South Central 865 1.6 836 1.5
Subtotal-U.S. 48,042 87.1 48,110 87.1
Europe 4,706 8.5 4,605 8.3
Asia 914 1.7 979 1.8
Other 1,489 2.7 1,529 2.8
Total commercial mortgage and agricultural property
loans $ 55,151 100.0 % $ 55,223 100.0 %
__________(1)Regions as defined by the United States Census Bureau.
March 31, 2021 December 31, 2020
Gross Gross
Carrying % of Carrying % of
Value Total Value Total
($ in millions)
Commercial mortgage and agricultural property loans by property
type:
Industrial $ 14,093 25.5 % $ 13,819 25.0 %
Retail 5,635 10.2 5,718 10.4
Office 10,567 19.2 10,719 19.4
Apartments/Multi-Family 15,194 27.5 15,316 27.7
Agricultural properties 3,338 6.1 3,273 5.9
Hospitality 2,079 3.8 2,056 3.7
Other 4,245 7.7 4,322 7.9
Total commercial mortgage and agricultural property loans $ 55,151 100.0 % $ 55,223 100.0 %
Loan-to-value and debt service coverage ratios are measures commonly used to
assess the quality of commercial mortgage and agricultural property loans. The
loan-to-value ratio compares the amount of the loan to the fair value of the
underlying property collateralizing the loan and is commonly expressed as a
percentage. A loan-to-value ratio less than 100% indicates an excess of
collateral value over the loan amount. Loan-to-value ratios greater than 100%
indicate that the loan amount exceeds
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the collateral value. The debt service coverage ratio compares a property's net
operating income to its debt service payments. Debt service coverage ratios less
than 1.0 times indicate that property operations do not generate enough income
to cover the loan's current debt payments. A debt service coverage ratio greater
than 1.0 times indicates an excess of net operating income over the debt service
payments.
As of March 31, 2021, our commercial mortgage and agricultural property loans
attributable to PFI excluding the Closed Block division had a weighted-average
debt service coverage ratio of 2.48 times and a weighted-average loan-to-value
ratio of 58%. As of March 31, 2021, 94% of commercial mortgage and agricultural
property loans were fixed rate loans. For those commercial mortgage and
agricultural property loans that were originated in 2021, the weighted-average
debt service coverage ratio was 3.03 times, and the weighted-average
loan-to-value ratio was 62%.
The values utilized in calculating these loan-to-value ratios are developed as
part of our periodic review of the commercial mortgage and agricultural property
loan portfolio, which includes an internal evaluation of the underlying
collateral value. Our periodic review also includes a credit quality re-rating
process, whereby we update the internal quality rating originally assigned at
underwriting based on the proprietary quality rating system mentioned above. As
discussed below, the internal credit quality rating is a key input in
determining our allowance for credit losses.
For loans with collateral under construction, renovation or lease-up, a
stabilized value and projected net operating income are used in the calculation
of the loan-to-value and debt service coverage ratios. Our commercial mortgage
and agricultural property loan portfolio included $2.6 billion and $2.4 billion
of such loans as of March 31, 2021 and December 31, 2020, respectively. All else
being equal, these loans are inherently riskier than those collateralized by
properties that have already stabilized. As of March 31, 2021 and December 31,
2020, there were less than $1 million and $1 million, respectively, of
allowances related to these loans. In addition, these unstabilized loans are
included in the calculation of our portfolio reserve, as discussed below.
The following table sets forth the gross carrying value of our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division by loan-to-value and debt service coverage ratios, as of the date indicated:
March 31, 2021
Debt Service Coverage Ratio
Total
Commercial Mortgage
1.0x and Agricultural
to Property
> 1.2x < 1.2x < 1.0x Loans
Loan-to-Value Ratio
(in millions)
0%-59.99% $ 26,011 $ 679 $ 426 $ 27,116
60%-69.99% 16,874 1,436 227 18,537
70%-79.99% 8,086 748 213 9,047
80% or greater 139 300 12 451
Total commercial mortgage and agricultural property
loans $ 51,110 $ 3,163 $ 878 $ 55,151
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Table of Contents The following table sets forth the breakdown of our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division by year of origination, as of the date indicated:
March 31, 2021
Gross
Carrying % of
Value Total
Year of Origination ($ in millions)
2021 $ 1,527 2.8 %
2020 5,296 9.6
2019 9,890 17.9
2018 8,438 15.3
2017 7,016 12.7
2016 6,283 11.4
2015 5,650 10.2
2014 & Prior 11,051 20.1 Total commercial mortgage and agricultural property loans $ 55,151 100.0 %
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:
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March 31, 2021 December 31, 2020
(in millions)
Allowance, beginning of year $ 207 $ 102
Cumulative effect of adoption of ASU 2016-13 0 101
Addition to (release of) allowance for credit losses (10) 1
Other (1) 3
Allowance, end of period $ 196 $ 207
The allowance for credit losses as of March 31, 2021 decreased compared to December 31, 2020, primarily reflecting the improving credit environment.
Equity Securities
The equity securities attributable to PFI excluding the Closed Block division
consist principally of investments in Common and Preferred Stock of
publicly-traded companies, as well as mutual fund shares. The following table
sets forth the composition of our equity securities portfolio and the associated
gross unrealized gains and losses, as of the dates indicated:
March 31, 2021 December 31, 2020
Gross Gross Gross Gross
Unrealized Unrealized Fair Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
(in millions)
Mutual funds $ 1,386 $ 468 $ 22 $ 1,832 $ 1,481 $ 410 $ 5 $ 1,886
Other Common Stocks 2,160 1,169 26 3,303 2,201 1,013 62 3,152
Non-redeemable Preferred Stocks 79 19 6 92 54 22 6 70
Total equity securities, at fair
value(1) $ 3,625 $ 1,656 $ 54 $ 5,227 $ 3,736 $ 1,445 $ 73 $ 5,108
__________(1)Amounts presented exclude investments in private equity and hedge funds and other investments which are reported in "Other invested assets."
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 $230 million and $(758) million during the three months ended March 31, 2021 and 2020, respectively.
Other Invested Assets
The following table sets forth the composition of "Other invested assets" attributable to PFI excluding the Closed Block division, as of the dates indicated:
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March 31, 2021 December 31, 2020
(in millions)
LPs/LLCs:
Equity method:
Private equity(1) $ 3,743 $ 3,411
Hedge funds 1,997 1,770
Real estate-related(1) 1,251 1,214
Subtotal equity method 6,991 6,395
Fair value:
Private equity 1,112 1,063
Hedge funds 1,057 1,111
Real estate-related 42 41
Subtotal fair value 2,211 2,215
Total LPs/LLCs 9,202 8,610
Real estate held through direct ownership(2) 1,060 1,176
Derivative instruments 229 199
Other(3) 683 731
Total other invested assets $ 11,174 $ 10,716
__________
(1)Prior period amounts have been updated to conform to current period
presentation.
(2)As of March 31, 2021 and December 31, 2020, real estate held through direct
ownership had mortgage debt of $354 million and $409 million, respectively.
(3)Primarily includes leveraged leases and member and activity stock held in the
Federal Home Loan Banks of New York and Boston . For additional information
regarding our holdings in the Federal Home Loan Banks of New York and Boston ,
see Note 17 to the Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2020.
Invested Assets of Other Entities and Operations
"Invested Assets of Other Entities and Operations" presented below includes
investments held outside the general account and primarily represents
investments associated with our investment management operations and derivative
operations. Our derivative operations act on behalf of affiliates primarily to
manage interest rate, foreign currency, credit and equity exposures. Assets
within our investment management operations that are managed for third-parties
and those assets classified as "Separate account assets" on our balance sheet
are not included.
March 31, 2021 December 31, 2020
(in millions)
Fixed maturities:
Public, available-for-sale, at fair value(1) $ 562 $ 644
Fixed maturities, trading, at fair value(1) 199 212
Equity securities, at fair value 702 682
Commercial mortgage and other loans, at book value(2) 519 1,112
Other invested assets 3,959 3,799
Short-term investments 37 36
Total investments $ 5,978 $ 6,485
__________
(1)As of March 31, 2021 and December 31, 2020, balances include investments in
CLOs with fair value of $405 million and $496 million, respectively.
(2)Book value is generally based on unpaid principal balance, net of any
allowance for credit losses, or at fair value, when the fair value option has
been elected.
Fixed Maturities, Trading
"Fixed maturities, trading, at fair value" are primarily related to assets associated with consolidated VIEs for which the Company is the investment manager. The assets of the consolidated VIEs are generally offset by liabilities for which the fair
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value option has been elected. For further 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, theFederal 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 ResourcesOverview
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. Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity ofPrudential 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 ofPrudential Financial and its subsidiaries. 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 and liquidity management. 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, 2020.
From the beginning of 2021 through the date of this report, we took the following significant actions that impacted our liquidity and capital position:
•In February 2021,Prudential Financial's Board of Directors (the "Board") authorized the Company to repurchase at management's discretion up to $1.5 billion of its outstanding Common Stock during the period from January 1, 2021 through December 31, 2021. On May 4, 2021, the Board increased this current share repurchase authorization by $500 million, bringing the aggregate share repurchase authorization for calendar year 2021 to $2.0 billion. 119 -------------------------------------------------------------------------------- Table of Contents Capital The primary components of the Company's capitalization consist of equity and outstanding capital debt, including junior subordinated debt. As shown in the table below, as of March 31, 2021, the Company had $52.3 billion in capital, all of which was available to support the aggregate capital requirements of its businesses and its Corporate and Other operations. Based on our assessment of these businesses and operations, we believe this level of capital is consistent with our ratings targets. March 31, 2021 December 31, 2020 (in millions) Equity(1) $ 38,817 $ 36,687 Junior subordinated debt (including hybrid securities) 7,613 7,615 Other capital debt 5,879 5,856 Total capital $ 52,309 $ 50,158 __________
(1)Amounts attributable to
We manage PICA, ThePrudential Life Insurance Company, Ltd. ("Prudential ofJapan "), 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, 2020, the most recent statutory fiscal year-end and RBC reporting date for these subsidiaries.
Ratio(1)
PICA(2) 394 %
411 %
__________
(1)The RBC ratio calculations are intended to assist insurance regulators in
measuring an insurer's solvency and ability to pay future claims. The reporting
of RBC measures is not intended for the purpose of ranking any insurance company
or for use in connection with any marketing, advertising or promotional
activities, but is available to the public.
(2)Includes Prudential Retirement Insurance and Annuity Company ("PRIAC"), Pruco
Life Insurance Company ("Pruco Life"), Pruco Life Insurance Company of New
Jersey ("PLNJ"), which is a subsidiary of Pruco Life, and Prudential Legacy
Insurance Company of New Jersey ("PLIC").
(3)Includes PICA and its subsidiaries, as noted above, and PALAC. Composite RBC
is not reported to regulators and is based on the summation of total adjusted
capital and risk charges for the included companies as determined under
statutory accounting and RBC guidance to calculate a composite numerator and
denominator, respectively, for purposes of calculating the composite ratio.
Similar to the RBC ratios that are employed by U.S. insurance regulators,
regulatory authorities in the international jurisdictions in which we operate
generally establish some form of minimum solvency margin requirements for
insurance companies based on local statutory accounting practices. These
solvency margins are a primary measure of the capital adequacy of our
international insurance operations. Maintenance of our solvency margins at
certain levels is also important to our competitive positioning, as in certain
jurisdictions, such as Japan , these solvency margins are required to be
disclosed to the public and therefore impact the public perception of an
insurer's financial strength.
The table below presents the solvency margin ratios of our most significant international insurance subsidiaries as of December 31, 2020, the most recent date for which this information is available.
Ratio
Prudential of Japan consolidated(1) 929 %
Gibraltar Life consolidated(2) 991 %
__________
(1)Includes Prudential Trust Co., Ltd., a subsidiary of Prudential ofJapan . (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. 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 120 -------------------------------------------------------------------------------- Table of Contents 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, 2020.
Captive Reinsurance Companies
See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Capital-Captive Reinsurance Companies" included in our Annual Report on Form 10-K for the year ended December 31, 2020, for a discussion of our use of captive reinsurance companies.
Shareholder Distributions
Share Repurchase Program and Shareholder Dividends
In February 2021,Prudential Financial's Board of Directors authorized the Company to repurchase, at management's discretion, up to $1.5 billion of its outstanding Common Stock during the period from January 1, 2021 through December 31, 2021. On May 4, 2021, the Board increased this share repurchase authorization by $500 million, bringing the aggregate share repurchase authorization for calendar year 2021 to $2.0 billion. In 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 ofPrudential Financial's Common Stock, for the three months ended March 31, 2021. Dividend Amount Shares
Repurchased
Three months ended: Per Share Aggregate Shares
Total Cost
(in millions, except per share data)
March 31, 2021 $ 1.15 $ 467 4.3 $ 375
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.
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.
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As of March 31, 2021, Prudential Financial had highly liquid assets with a
carrying value totaling $5,695 million, a decrease of $784 million from
December 31, 2020. Highly liquid assets predominantly include cash, short-term
investments, U.S. Treasury securities, obligations of other U.S. government
authorities and agencies, and/or foreign government bonds. We maintain an
intercompany liquidity account that is designed to optimize the use of cash by
facilitating the lending and borrowing of funds between Prudential Financial and
its subsidiaries on a daily basis. Excluding the net borrowings from this
intercompany liquidity account, Prudential Financial had highly liquid assets of
$4,926 million as of March 31, 2021, a decrease of $634 million from
December 31, 2020.
The following table sets forth
Three Months Ended March 31,
2021 2020
(in millions)
Highly Liquid Assets, beginning of period $ 5,560 $ 4,061
Dividends and/or returns of capital from subsidiaries(1) 508 558 Capital contributions to subsidiaries(2) (26) 0 Total Business Capital Activity 482 558 Share repurchases(3) (359) (485) Common stock dividends(4) (471) (448) Disposition activity(5) 0 0 Total Share Repurchases, Dividends and Disposition Activity (830) (933) Proceeds from the issuance of debt 0 1,486 Total Debt Activity 0 1,486
Proceeds from stock-based compensation and exercise of stock options
86 72
Net income tax receipts & payments 16 31
Affiliated (borrowings)/loans - (operating activities)(6) (34) (33)
Interest paid on external debt (210) (208)
Other, net (144) 259
Total Other Activity (286) 121
Net increase/(decrease) in highly liquid assets (634) 1,232
Highly Liquid Assets, end of period $ 4,926 $ 5,293
__________
(1)2021 includes $210 million from Prudential Annuities Holding Company, $186 million from PGIM subsidiaries, and $112 million from international insurance subsidiaries. 2020 includes $241 million from international insurance subsidiaries, $207 million from PALAC, $63 million from PGIM subsidiaries, $43 million from Prudential Annuities Holding Company, and $4 million from other subsidiaries. (2)2021 includes capital contributions of $17 million to international insurance subsidiaries and $9 million to PGIM subsidiaries. (3)Excludes cash payments made on trades that settled in the subsequent period. (4)Includes cash payments made on dividends declared in prior periods. (5)2021 excludes cash proceeds from the sale of the Company's interest inPramerica SGR in March 2021, which were received by PFI in April 2021. (6)Represent loans to and from subsidiaries to support business operating needs.
Dividends and Returns of Capital from Subsidiaries
Domestic insurance subsidiaries. During the first three months of 2021,
International insurance subsidiaries. During the first three months of 2021,Prudential Financial received dividends of $112 million from its international insurance subsidiaries. In addition to paying Common Stock dividends, our international insurance operations may return capital toPrudential Financial by other means, such as the repayment of preferred stock obligations held byPrudential Financial or other affiliates, affiliated lending, affiliated derivatives and reinsurance withU.S. - andBermuda -based affiliates.
Other subsidiaries. During the first three months of 2021,
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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, market conditions could negatively impact
capital positions of our insurance companies, which could further restrict their
ability to pay dividends. More generally, the payment of dividends by any of our
subsidiaries is subject to declaration by their Board of Directors and can be
affected by market conditions and other factors.
With respect to our domestic insurance subsidiaries, PICA is permitted to pay
ordinary dividends based on calculations specified under New Jersey insurance
law, subject to prior notification to the New Jersey Department of Banking and
Insurance ("NJDOBI"). Any distributions above this amount in any twelve-month
period are considered to be "extraordinary" dividends, and the approval of the
NJDOBI is required prior to payment. The laws regulating dividends of the states
where our other domestic insurance companies are domiciled are similar, but not
identical, to New Jersey's .
Capital redeployment from our international insurance subsidiaries is subject to
local regulatory requirements in the international jurisdictions in which they
operate. Our most significant international insurance subsidiaries, Prudential
of Japan and Gibraltar Life, are permitted to pay common stock dividends based
on calculations specified by Japanese insurance law, subject to prior
notification to the FSA. Dividends in excess of these amounts and other forms of
capital distribution require the prior approval of the FSA. The regulatory
fiscal year end for both Prudential of Japan and Gibraltar Life is March 31,
2021, after which time the common stock dividend amount permitted to be paid
without prior approval from the FSA can be determined.
The ability of our PGIM subsidiaries and the majority of our other operating subsidiaries to pay dividends is largely unrestricted from a regulatory standpoint.
See Note 19 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2020, for information on specific dividend restrictions.
Liquidity of Insurance Subsidiaries
We manage the liquidity of our insurance operations to ensure stable, reliable and cost-effective sources of cash flows to meet all of our obligations. Liquidity within each of our insurance subsidiaries is provided by a variety of sources, including portfolios of liquid assets. The investment portfolios of our subsidiaries are integral to the overall liquidity of our insurance operations. We segment our investment portfolios and employ an asset/liability management approach specific to the requirements of each of our product lines. This enhances the discipline applied in managing the liquidity, as well as the interest rate and credit risk profiles, of each portfolio in a manner consistent with the unique characteristics of the product liabilities. Liquidity is measured against internally-developed benchmarks that take into account the characteristics of both the asset portfolio and the liabilities that they support. We consider attributes of the various categories of liquid assets (for example, type of asset and credit quality) in calculating internal liquidity measures to evaluate our insurance operations' liquidity under various stress scenarios, including company-specific and market-wide events. We continue to believe that cash generated by ongoing operations and the liquidity profile of our assets provide sufficient liquidity under reasonably foreseeable stress scenarios for each of our insurance subsidiaries. The principal sources of liquidity for our insurance subsidiaries are premiums, investment and fee income, investment maturities, sales of investments, and sales associated with our insurance and annuity operations, as well as internal and external borrowings. The principal uses of 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.
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March 31, 2021
Prudential December 31,
Insurance(1) PLIC PRIAC PALAC Pruco Life Total 2020
(in billions)
Cash and short-term investments $ 6.0 $ 1.0 $ 0.5 $ 1.8 $ 0.3 $ 9.6 $ 9.4
Fixed maturity investments(2):
High or highest quality 126.9 34.1 21.0 14.3 6.7 203.0 222.4
Other than high or highest quality 9.0 3.6 1.4 0.8 0.4 15.2 15.4 Subtotal 135.9 37.7 22.4 15.1 7.1 218.2 237.8 Public equity securities, at fair value 0.4 2.5 0.1 0.3 0.0 3.3 3.2 Total $ 142.3 $ 41.2 $ 23.0 $ 17.2 $ 7.4 $ 231.1 $ 250.4 __________ (1)Represents legal entity view and as such includes both domestic and international activity. (2)Excludes fixed maturities designated as held-to-maturity. Credit quality is based on NAIC or equivalent rating.
The following table sets forth the fair value of our international insurance operations' portfolio of liquid assets, as of the dates indicated.
March 31, 2021
Prudential Gibraltar All December 31,
of Japan Life(1) Other(2) Total 2020
(in billions)
Cash and short-term investments $ 1.6 $ 3.8 $ 1.2 $ 6.6 $ 6.0 Fixed maturity investments(3): High or highest quality(4)
41.8 88.6 8.1 138.5 147.7
Other than high or highest quality 0.7 2.2 1.9 4.8 4.8
Subtotal 42.5 90.8 10.0 143.3 152.5
Public equity securities 2.2 2.0 0.1 4.3 3.6
Total $ 46.3 $ 96.6 $ 11.3 $ 154.2 $ 162.1
__________
(1)Includes PGFL.
(2)Represents our international insurance operations, excluding Japan .
(3)Excludes fixed maturities designated as held-to-maturity. Credit quality is
based on NAIC or equivalent rating.
(4)As of March 31, 2021, $104.1 billion, or 75%, were invested in government or
government agency bonds.
Liquidity associated with other activities
Hedging activities associated with Individual Annuities
For the portion of our Individual Annuities' ALM strategy executed through hedging, as well as the capital hedge program, we enter into a range of exchange-traded, cleared and other OTC equity and interest rate derivatives in order to hedge certain capital market risks related to more severe market conditions. For a full discussion of our Individual Annuities' risk management strategy, see "-Results of Operations by Segment-U.S. Businesses-Individual Annuities." This portion of our Individual Annuities' ALM strategy and capital hedge program requires access to liquidity to meet payment obligations relating to these derivatives, such as payments for periodic settlements, purchases, maturities and terminations. These liquidity needs can vary materially due to, among other items, changes in interest rates, equity markets, mortality and policyholder behavior. The hedging portion of our Individual Annuities' ALM strategy and capital hedge program may also result in derivative related collateral postings to (when we are in a net pay position) or from (when we are in a net receive position) counterparties. The net collateral position depends on changes in interest rates and equity markets related to the amount of the exposures hedged. Depending on market conditions, the collateral posting requirements can result in material liquidity needs when we are in a net pay position. As of March 31, 2021, the derivatives comprising the hedging portion of our Individual Annuities' ALM strategy and capital hedge program were in a net post position of $6.5 billion compared to a net receive position of $3.4 billion as of December 31, 2020. The change in collateral position was primarily driven by the impact of increasing interest rates and equity markets. 124 -------------------------------------------------------------------------------- Table of Contents Foreign exchange hedging activities We employ various hedging strategies to manage potential exposure to foreign currency exchange rate movements, particularly those associated with the yen. Our overall yen hedging strategy calibrates the hedge level to preserve the relative contribution of our yen-based business to the Company's overall return on equity on a leverage neutral basis. The hedging strategy includes two primary components: Income Hedges-We hedge a portion of our prospective yen-based earnings streams by entering into external forward currency derivative contracts that effectively fix the currency exchange rates for that portion of earnings, thereby reducing volatility from foreign currency exchange rate movements. As of March 31, 2021, we have hedged 100%, 83% and 39%, of expected yen-based earnings for 2021, 2022 and 2023, respectively. Equity Hedges-We hold both internal and external hedges primarily to hedge our USD-equivalent equity. These hedges also mitigate volatility in the solvency margins of yen-based subsidiaries resulting from changes in the market value of their USD-denominated investments hedging our USD-equivalent equity attributable to changes in the yen-USD exchange rate.
For additional information on our hedging strategy, see "-Results of Operations-Impact of Foreign Currency Exchange Rates."
Cash settlements from these hedging activities result in cash flows between subsidiaries ofPrudential Financial and either international-based subsidiaries or external parties. The cash flows are dependent on changes in foreign currency exchange rates and the notional amount of the exposures hedged. For example, a significant yen depreciation over an extended period of time could result in net cash inflows, while a significant yen appreciation could result in net cash outflows. The following tables set forth information about net cash settlements and the net asset or liability resulting from these hedging activities related to the yen and other currencies for the periods indicated. Three Months Ended March 31, Cash Settlements: Received (Paid) 2021 2020 (in millions) Income Hedges (External)(1) $ 8 $ 29 Equity Hedges: Internal(2) 100 104 External(3) 7 45 Total Equity Hedges 107 149 Total Cash Settlements $ 115 $ 178 Assets (Liabilities): March 31, 2021 December 31, 2020 (in millions) Income Hedges (External)(4) $ 40 $ 3 Equity Hedges: Internal(2) 821 291 External (143) (56) Total Equity Hedges(5) 678 235 Total Assets (Liabilities) $ 718 $ 238 __________ (1)Includes non-yen related cash settlements of $5 million, primarily denominated in Brazilian real, Australian dollar and Chilean peso and $23 million, primarily denominated in Korean won, Australian dollar and Brazilian real for the three months ended March 31, 2021 and 2020, respectively. (2)Represents internal transactions between international-based andU.S. -based entities. Amounts noted are from theU.S. -based entities' perspectives. (3)Includes non-yen related cash settlements of $23 million, denominated in Korean won for the three months ended March 31, 2020. (4)Includes non-yen related assets of $18 million, primarily denominated in Brazilian real, Australian dollar and Chilean peso and assets of $2 million, primarily denominated in Brazilian real, Chilean peso and Australian dollar, as of March 31, 2021 and December 31, 2020, respectively. (5)As of March 31, 2021, approximately $225 million, $188 million, $260 million and $5 million of the net market values are scheduled to settle in 2021, 2022, 2023 and thereafter, respectively. The net market value of the assets (liabilities) will vary with changing market conditions to the extent there are no corresponding offsetting positions.
PGIM operations
The principal sources of liquidity for our fee-based PGIM businesses include
asset management fees, commercial mortgage origination and servicing fees, and
internal and external funding facilities. The principal uses of liquidity
include general and administrative expenses, facilitating our commercial
mortgage loan business, and distributions of dividends and
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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 co- 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 uses of liquidity for our co- and seed
investments include 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, 2020.
Alternative Sources of Liquidity
In addition to asset-based financing as discussed below,Prudential Financial and certain subsidiaries have access to other sources of liquidity, including syndicated, unsecured committed credit facilities, membership in the Federal Home Loan Banks, commercial paper programs, and contingent financing facilities in the form of a put option agreement and facility agreement. For more information on these sources of liquidity, see Note 9 to the Unaudited Interim Consolidated Financial Statements contained herein and Note 17 to the Company's Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2020.
Asset-based Financing
We conduct asset-based or secured financing within our insurance and other subsidiaries, including transactions such as securities lending, repurchase agreements and mortgage dollar rolls, to earn spread income, to borrow funds, or to facilitate trading activity. These programs are primarily driven by portfolio holdings of securities that are lendable based on counterparty demand for these securities in the marketplace. The collateral received in connection with these programs is primarily used to purchase securities in the short-term spread portfolios of our insurance entities. Investments held in the short-term spread portfolios include cash and cash equivalents, short-term investments (primarily corporate bonds), mortgage loans and fixed maturities (primarily collateralized loan obligations and other structured securities), with a weighted average life at time of purchase by the short-term portfolios of four years or less. Floating rate assets comprise the majority of our short-term spread portfolio. These short-term portfolios are subject to specific investment policy statements, which among other things, do not allow for significant asset/liability interest rate duration mismatch.
The following table sets forth our liabilities under asset-based or secured financing programs as of the dates indicated.
March 31, 2021 December 31, 2020
PFI PFI
Excluding Closed Excluding Closed
Closed Block Block Closed Block Block
Division Division Consolidated Division Division Consolidated
($ in millions)
Securities sold under agreements to
repurchase $ 6,679 $ 2,705 $ 9,384 $ 8,092 $ 2,802 $
10,894
Cash collateral for loaned securities 4,487 186 4,673 3,379 120
3,499
Securities sold but not yet purchased 3 0 3 2 0 2 Total(1)(2) $ 11,169 $ 2,891 $ 14,060 $ 11,473 $ 2,922 $ 14,395 Portion of above securities that may be returned to the Company overnight requiring immediate return of the cash collateral(3) $ 10,550 $ 2,891
$ 13,441 $ 10,463 $ 2,922 $
13,385
Weighted average maturity, in days(3) 26 N/A 28 N/A
__________
(1)The daily weighted average outstanding balance for the three months ended
March 31, 2021 was $11,550 million for PFI excluding the Closed Block division,
and $2,936 million for the Closed Block division.
(2)Includes utilization of external funding facilities for PGIM's commercial
mortgage origination business.
(3)Excludes securities that may be returned to the Company overnight. "N/A"
reflects that all outstanding balances may be returned to the Company overnight.
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As of March 31, 2021, our domestic insurance entities had assets eligible for
the asset-based or secured financing programs of $122.7 billion, of which $13.8
billion were on loan. Taking into account market conditions and outstanding loan
balances as of March 31, 2021, we believe approximately $13.4 billion of the
remaining eligible assets are readily lendable, including approximately $9.3
billion relating to PFI excluding the Closed Block division, of which $2.6
billion relates to certain separate accounts and may only be used for financing
activities related to those accounts, and the remaining $4.1 billion relating to
the Closed Block division.
Financing Activities
As of March 31, 2021, total short-term and long-term debt of the Company on a
consolidated basis was $20.6 billion, a decrease of less than $0.1 billion from
December 31, 2020. The following table sets forth total consolidated borrowings
of the Company as of the dates indicated. We may, from time to time, seek to
redeem or repurchase our outstanding debt securities through open market
purchases, individually negotiated transactions or otherwise. Any such actions
will depend on prevailing market conditions, our liquidity position, and other
factors.
March 31, 2021 December 31, 2020
Prudential Prudential
Borrowings: Financial Subsidiaries Consolidated Financial Subsidiaries Consolidated
(in millions)
General obligation short-term debt:
Commercial paper $ 25 $ 371 $ 396 $ 25 $ 355
$ 380
Current portion of long-term debt 400 0 400 399 0 399
Subtotal 425 371 796 424 355 779
General obligation long-term debt:
Senior debt 11,009 173 11,182 11,007 173 11,179
Junior subordinated debt 7,556 57 7,613 7,554 60 7,615
Surplus notes(1) 0 343 343 0 343 343
Subtotal 18,565 573 19,138 18,561 576 19,137
Total general obligations 18,990 944 19,934 18,985 931 19,916
Limited and non-recourse borrowings(2):
Short-term debt 0 9 9 0 18 18
Current portion of long-term debt 0 62 62 0 128 128
Long-term debt 0 592 592 0 581 581
Total limited and non-recourse borrowings 0 663 663 0 727 727
Total borrowings $ 18,990 $ 1,607 $ 20,597 $ 18,985 $ 1,658 $ 20,643
__________
(1)Amounts are net of assets under set-off arrangements of $10,514 million and
$10,964 million as of March 31, 2021 and December 31, 2020, respectively.
(2)Limited and non-recourse borrowing primarily represents mortgage debt of our
subsidiaries that has recourse only to real estate investment property of $354
million and $409 million as of March 31, 2021 and December 31, 2020,
respectively, and a $300 million draw on a credit facility that has recourse
only to collateral pledged by the Company as of both March 31, 2021 and
December 31, 2020.
As of March 31, 2021, and December 31, 2020, we were in compliance with all debt
covenants related to the borrowings in the table above. For additional
information on our short- and long-term debt obligations, see Note 9 to the
Unaudited Interim Consolidated Financial Statements contained herein and Note 17
to the Company's Consolidated Financial Statements included in the Annual Report
on Form 10-K for the year ended December 31, 2020.
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
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obligations, and the payment of principal and interest on the surplus notes can
only be made with prior insurance regulatory approval.
We have entered into agreements with external counterparties providing for the
issuance of surplus notes by our captive reinsurers in return for the receipt of
credit-linked notes ("Credit-Linked Note Structures"). As of March 31, 2021, we
had Credit-Linked Note Structures with an aggregate issuance capacity of $14,700
million, of which $12,644 million was outstanding, as compared to an aggregate
issuance capacity of $14,825 million, of which $12,919 million was outstanding,
as of December 31, 2020. Under the agreements, the captive receives in exchange
for the surplus notes one or more credit-linked notes issued by a
special-purpose affiliate of the Company with an aggregate principal amount
equal to the surplus notes outstanding. The captive holds the credit-linked
notes as assets supporting Regulation XXX or Guideline AXXX non-economic
reserves, as applicable. For more information on our Credit-Linked Note
Structures, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources-Financing Activities" in
our Annual Report on Form 10-K for the year ended December 31, 2020.
The following table summarizes our Credit-Linked Note Structures, which are reported on a net basis, as of March 31, 2021.
Surplus Notes Outstanding
Original Maturity as of Facility
Credit-Linked Note Structures: Issue Dates Dates March 31, 2021 Size
($ in millions)
XXX 2011-2021 2021-2036 $ 1,600 (1) $ 1,750
AXXX 2013 2033 3,248 3,500
XXX 2014-2018 2021-2034 2,230 (2) 2,250
XXX 2014-2017 2024-2037 2,330 2,400
AXXX 2017 2037 1,466 2,000
XXX 2018 2038 1,070 1,600
AXXX 2020 2032 700 1,200
Total Credit-Linked Note Structures $ 12,644 $ 14,700__________
(1)Prudential Financial has agreed to reimburse amounts paid under the credit-linked notes issued in this structure up to $500 million. (2)The $2,230 million of surplus notes represents an intercompany transaction that eliminates upon consolidation.Prudential Financial has agreed to reimburse amounts paid under credit-linked notes issued in this structure up to $1,000 million. As of March 31, 2021, we also had outstanding an aggregate of $2,775 million of debt issued for the purpose of financing Regulation XXX and Guideline AXXX non-economic reserves, of which $1,175 million relates to Regulation XXX reserves and $1,600 million relates to Guideline AXXX reserves. In addition, as of March 31, 2021, for purposes of financing Guideline AXXX reserves, one of our captives had $3,982 million of surplus notes outstanding that were issued to affiliates. The Company has introduced updated versions of its individual life products in conjunction with the requirement to adopt principle-based reserving by January 1, 2020. These updated products are currently priced to support the principle-based statutory reserve level without the need for reserve financing. Certain elements of the implementation of principle-based reserving are yet to be finalized by the NAIC and may have a material impact on statutory reserves. The Company continues to assess the impact of the implementation of principle-based reserving on projected statutory reserve levels, product pricing and the use of financing. Ratings See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Ratings" in our Annual Report on Form 10-K for the year ended December 31, 2020, for a discussion of our financial strength and credit ratings and their impact on our business. There have been no significant changes or actions in ratings or ratings outlooks for our Company that have occurred since the filing of our Form 10-K for the year ended December 31, 2020. 128
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Off-Balance Sheet ArrangementsGuarantees, 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 aDelaware trust that givesPrudential 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 ofU.S. Treasury securities that are held by the trust. In November 2013, we entered into a put option agreement with aDelaware trust that givesPrudential 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 ofU.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 aDelaware master trust and ultimately contributed the asset-backed notes to its subsidiary, PRIAC. As of March 31, 2021, no principal payments have been received or are currently due on the asset-backed notes and, as a result, there was no payment obligation under the limited-recourse notes. Accordingly, none of the notes are reflected in the Company's Unaudited Interim Consolidated Financial Statements as of that date. Other than as described above, we do not have retained or contingent interests in assets transferred to unconsolidated entities, or variable interests in unconsolidated entities or other similar transactions, arrangements or relationships that serve as credit, liquidity or market risk support, that we believe are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or our access to or requirements for capital resources. In addition, other than the agreements referred to above, we do not have relationships with any unconsolidated entities that are contractually limited to narrow activities that facilitate our transfer of or access to associated assets.
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