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68: R58 Derivative Instruments (Narrative) (Details) HTML 58K
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84: R74 Closed Block (Closed Block Liabilities and Assets HTML 89K
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(Address and Telephone Number of Registrant’s Principal Executive Offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class
Trading Symbols(s)
Name of Each Exchange on Which Registered
iCommon
Stock, Par Value $.01
iPRU
iNew York Stock Exchange
i5.625%
Junior Subordinated Notes
iPRS
iNew York Stock Exchange
i4.125%
Junior Subordinated Notes
iPFH
iNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesx No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File
required to be submitted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesx No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
Accelerated Filer
x
Accelerated Filer
☐
Non-accelerated Filer
☐
Smaller Reporting Company
i☐
Emerging
Growth Company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No x
Certain of the statements included in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,”“believes,”“anticipates,”“includes,”“plans,”“assumes,”“estimates,”“projects,”“intends,”“should,”“will,”“shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Financial, Inc. and its subsidiaries. There can be no assurance that
future developments affecting Prudential Financial, Inc. and its subsidiaries will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) the ongoing impact of the COVID-19 pandemic on the global economy, financial markets and our business; (2) losses on investments or financial contracts due to deterioration in credit quality or value, or counterparty default; (3) losses on insurance products due to mortality experience, morbidity experience or policyholder behavior experience that differs
significantly from our expectations when we price our products; (4) changes in interest rates, equity prices and foreign currency exchange rates that may (a) adversely impact the profitability of our products, the value of separate accounts supporting these products or the value of assets we manage, (b) result in losses on derivatives we use to hedge risk or increase collateral posting requirements and (c) limit opportunities to invest at appropriate returns; (5) guarantees within certain of our products which are market sensitive and may decrease our earnings or increase the volatility of our results of operations or financial position; (6) liquidity needs resulting from (a) derivative collateral market exposure, (b) asset/liability mismatches, (c) the lack of available funding in the financial markets or (d) unexpected cash demands due to severe mortality calamity or lapse events; (7) financial or customer losses, or regulatory and legal actions, due to inadequate
or failed processes or systems, external events, and human error or misconduct such as (a) disruption of our systems and data, (b) an information security breach, (c) a failure to protect the privacy of sensitive data, (d) reliance on third-parties or (e) labor and employment matters; (8) changes in the regulatory landscape, including related to (a) financial sector regulatory reform, (b) changes in tax laws, (c) fiduciary rules and other standards of care, (d) U.S. state insurance laws and developments regarding group-wide supervision, capital and reserves, (e) insurer capital standards outside the U.S. and (f) privacy and cybersecurity regulation; (9) technological changes which may adversely impact companies in our investment portfolio or cause insurance experience to deviate from our assumptions; (10) an inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (11) ratings downgrades; (12) market
conditions that may adversely affect the sales or persistency of our products; (13) competition; (14) reputational damage; (15) the costs, effects, timing, or success of our plans to execute our strategy; and (16) the integration of Assurance IQ, LLC into our strategy. Prudential Financial, Inc. does not undertake to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2021 for discussion of certain risks relating to our businesses and investment in our securities.
Fixed maturities, available-for-sale, at fair value (allowance for credit losses: 2022-$i192; 2021-$i114)
(amortized cost: 2022-$i332,640; 2021-$i333,459)(1)
$
i344,957
$
i372,410
Fixed
maturities, held-to-maturity, at amortized cost, net of allowance for credit losses (allowance for credit losses: 2022-$i4; 2021-$i5) (fair value:
2022-$i1,679; 2021-$i1,803)(1)
i1,432
i1,514
Fixed
maturities, trading, at fair value (amortized cost: 2022-$i8,262; 2021-$i8,741)(1)
i7,724
i8,823
Assets
supporting experience-rated contractholder liabilities, at fair value
i3,184
i3,358
Equity
securities, at fair value (cost: 2022-$i4,872; 2021-$i5,815)(1)
i7,397
i8,574
Commercial
mortgage and other loans (net of $i121 and $i119 allowance for credit losses; includes $i241
and $i1,263 of loans measured at fair value under the fair value option at March 31, 2022 and December 31, 2021, respectively)(1)
i59,304
i58,666
Policy
loans
i10,207
i10,386
Other
invested assets (net of $i2 and $i2 allowance for credit losses; includes $i7,209
and $i8,046 of assets measured at fair value at March 31, 2022 and December 31, 2021, respectively)(1)
i21,540
i21,833
Short-term
investments (net of allowance for credit losses: 2022-$i0; 2021-$i0)
i4,592
i6,635
Total
investments
i460,337
i492,199
Cash
and cash equivalents(1)
i14,086
i12,888
Accrued
investment income(1)
i2,838
i2,855
Deferred
policy acquisition costs
i18,479
i18,192
Value
of business acquired
i714
i771
Assets
held-for-sale(2)
i142,139
i153,793
Other
assets (net of allowance for credit losses: 2022-$i20; 2021-$i19)(1)
i9,852
i10,739
Separate
account assets
i229,621
i246,145
TOTAL
ASSETS
$
i878,066
$
i937,582
LIABILITIES
AND EQUITY
LIABILITIES
Future policy benefits
$
i284,380
$
i290,784
Policyholders’
account balances
i122,465
i122,633
Policyholders’
dividends
i5,585
i8,731
Securities
sold under agreements to repurchase
i9,085
i10,185
Cash
collateral for loaned securities
i4,771
i4,251
Income
taxes
i4,501
i9,513
Short-term
debt
i544
i722
Long-term
debt
i19,689
i18,622
Liabilities
held-for-sale(2)
i142,257
i151,359
Other
liabilities (including allowance for credit losses: 2022-$i19; 2021-$i21 )(1)
i10,230
i11,755
Notes
issued by consolidated variable interest entities(1)
i260
i274
Separate
account liabilities
i229,621
i246,145
Total
liabilities
i833,388
i874,974
COMMITMENTS
AND CONTINGENT LIABILITIES (See Note 14)
i
i
EQUITY
Preferred
Stock ($ii0.01/ par value; ii10,000,000/
shares authorized; iinone/ issued)
i0
i0
Common
Stock ($ii0.01/ par value; ii1,500,000,000/
shares authorized; ii666,305,189/ shares issued as of both March
31, 2022 and December 31, 2021)
i6
i6
Additional
paid-in capital
i25,659
i25,732
Common
Stock held in treasury, at cost (i290,607,225 and i290,018,851 shares at March 31, 2022 and December 31, 2021,
respectively)
(i22,051)
(i21,838)
Accumulated
other comprehensive income (loss)
i4,205
i21,324
Retained
earnings
i36,159
i36,652
Total
Prudential Financial, Inc. equity
i43,978
i61,876
Noncontrolling
interests
i700
i732
Total equity
i44,678
i62,608
TOTAL
LIABILITIES AND EQUITY
$
i878,066
$
i937,582
__________
(1)See
Note 4 for details of balances associated with variable interest entities.
(2)See Note 1 for details of the assets and liabilities classified as “held-for-sale”.
See Notes to Unaudited Interim Consolidated Financial Statements
Notes to Unaudited Interim
Consolidated Financial Statements
1. iBUSINESS AND BASIS OF PRESENTATION
Prudential Financial, Inc. (“Prudential Financial”) and its subsidiaries
(collectively, “Prudential” or the “Company”) provide a wide range of insurance, investment management, and other financial products and services to both individual and institutional customers throughout the United States and in many other countries. Principal products and services provided include life insurance, annuities, retirement solutions, mutual funds and investment management.
The Company’s principal operations consist of PGIM (the Company’s global investment management business), the U.S. Businesses (consisting of the Retirement, Group Insurance, Individual Annuities, Individual Life and Assurance IQ businesses), the International Businesses, the Closed Block division, and the
Company’s 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 operations. 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 U.S. GAAP. The Company’s Corporate and Other operations include corporate items and initiatives that are not allocated to business segments as well as the Divested and Run-off Businesses described above.
i
Basis
of Presentation
The Unaudited Interim Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). The Unaudited Interim Consolidated Financial Statements include the accounts of Prudential Financial, entities over which the Company exercises control, including majority-owned subsidiaries and minority-owned entities such as limited partnerships in which the
Company is the general partner and variable interest entities (“VIEs”) in which the Company is considered the primary beneficiary. See Note 4 for additional information on the Company’s consolidated variable interest entities. Intercompany balances and transactions have been eliminated.
In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the
Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
i
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining deferred policy acquisition costs (“DAC”) and related amortization; policyholders’ account balances related to the fair value of embedded derivative instruments associated with the index-linked features of certain universal life and annuity products; value of business acquired (“VOBA”) and its amortization; amortization of deferred sales inducements (“DSI”); measurement of goodwill and any related impairment; valuation of investments including derivatives, measurement of allowance for credit losses, and the recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; pension and other
postretirement benefits; provision for income taxes and valuation of deferred tax assets; and accruals for contingent liabilities, including estimates for losses in connection with unresolved legal and regulatory matters.
i
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the current period presentation.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
COVID-19
Since the first quarter of 2020, the novel coronavirus (“COVID-19”) has resulted in extreme stress and disruption in the global economy and financial markets. While markets have rebounded, the pandemic has adversely impacted, and may continue to adversely impact, the Company’s results of operations, financial condition and cash flows. Due to the highly uncertain nature of these conditions, it is not possible to estimate the ultimate impacts at this time. The risks may have manifested, and may continue to manifest, in the
Company’s financial statements in the areas of, among others, i) insurance liabilities and related balances: potential changes to assumptions regarding investment returns, mortality, morbidity and policyholder behavior which are reflected in our insurance liabilities and certain related balances (e.g., DAC, VOBA, etc.) and; ii) investments: increased risk of loss on our investments due to default or deterioration in credit quality or value. The Company cannot predict what impact the COVID-19 pandemic will ultimately have on its businesses.
Business Dispositions
Prudential Annuities Life Assurance Corporation, Representing a Portion of Individual Annuities’ Traditional Variable Annuity Block of Business
In
September 2021, the Company entered into a definitive agreement to sell its equity interest in Prudential Annuities Life Assurance Corporation (“PALAC”), which represents a portion of its in-force traditional variable annuity block of business, to Fortitude Group Holdings, LLC (“Fortitude”). The PALAC block primarily consists of non-New York traditional variable annuities with guaranteed living benefits that were issued prior to 2011, which constitute approximately $i30 billion
or i18% of Prudential’s total in-force individual annuity account values as of March 31, 2022.
Beginning in the third quarter of 2021, the Company reported the assets and liabilities of this block of business as “held-for-sale” while continuing to report its results within the Individual
Annuities segment.
On April 1, 2022, the Company completed the sale and generated a transaction value of approximately $i2.6 billion, subject to customary post-closing adjustments, which included cash consideration received, net capital released and a tax benefit. The expected gain on sale will be recognized in the second quarter of 2022 as part of adjusted
operating income within the Individual Annuities segment.
Full Service Retirement Business
In July 2021, the Company entered into a definitive agreement with Great-West Life & Annuity Insurance Company (“Great-West”) pursuant to which the Company agreed to sell to Great-West the Company’s Full Service Retirement business, primarily through a combination of (i) the sale of all of the outstanding equity interests of certain legal entities, including Prudential Retirement Insurance and Annuity Company (“PRIAC”); (ii) the ceding of certain
insurance policies through reinsurance; and (iii) the sale, transfer and/or novation of certain in-scope contracts and brokerage accounts.
Beginning in the third quarter of 2021, the Company reported the assets and liabilities of the Full Service Retirement business as “held-for-sale” and has transferred the results of this business to Divested and Run-off Businesses within Corporate and Other operations. All prior period amounts have been restated, which impacts both segment reporting and adjusted operating income, but does not impact results reported under GAAP. The Full Service Retirement business generated a pre-tax loss of $i206 million
and pre-tax income of $i15 million for the three months ended March 31, 2022 and March 31, 2021, respectively. These amounts exclude the impact of overhead costs, retained in the Company’s Corporate and
Other operations, that will not be transferred to the buyer or eliminated with the sale.
On April 1, 2022, the Company completed the sale and generated a transaction value of approximately $i2.8 billion, subject to customary post-closing adjustments, which included cash consideration received for the sale of PRIAC, ceding commission for the reinsured
business and capital available to be released from PICA. Separately, the Company expects to incur approximately $i400 million of taxes and transaction related costs. The expected gain on sale will be recognized in the second quarter of 2022 as part of Corporate & Other operations within Divested Businesses and excluded from adjusted operating income.
iThe
tables below reflect the carrying amounts of assets and liabilities held-for-sale related to the dispositions described above, as of the dates indicated:
Fixed maturities, available-for-sale, at fair value(2)(3)
$
i4,478
$
i8,283
$
i12,761
Fixed
maturities, trading, at fair value
i339
i26
i365
Assets
supporting experience-rated contractholder liabilities, at fair value
i18,196
i0
i18,196
Equity
securities
i0
i201
i201
Commercial
mortgage and other loans(2)(3)
i4,871
i0
i4,871
Policy
loans
i0
i11
i11
Other
invested assets
i6
i116
i122
Short-term
investments
i0
i174
i174
Cash
and cash equivalents
i129
i1,576
i1,705
Accrued
investment income
i173
i60
i233
Deferred
policy acquisition costs
i98
i990
i1,088
Value
of business acquired
i183
i27
i210
Other
assets(4)
i618
i10,904
i11,522
Separate
account assets
i61,254
i29,426
i90,680
Total
assets held-for-sale
$
i90,345
$
i51,794
$
i142,139
Liabilities
held-for-sale(1):
Future policy benefits
$
i111
$
i3,844
$
i3,955
Policyholders’
account balances
i27,632
i11,663
i39,295
Cash
collateral for loaned securities
i0
i205
i205
Other
liabilities
i297
i7,825
i8,122
Separate
account liabilities
i61,254
i29,426
i90,680
Total
liabilities held-for-sale
$
i89,294
$
i52,963
$
i142,257
__________
(1)Under
the terms of the sales agreements, certain of these assets and liabilities held-for-sale may be subject to capital transactions or substituted for other similar items prior to the closing of each transaction.
(2)Approximately $i1.7 billion of commercial mortgage and other loans and fixed maturities, available-for-sale, held by PALAC are not classified as held-for-sale as of March 31, 2022. The economics of these
assets have been transferred on April 1, 2022 to Fortitude via participation agreements, but the Company has retained legal ownership and control over the participated assets, and Fortitude cannot freely pledge or exchange them. As a result, these assets will continue to be reported on the Company’s Consolidated Statements of Financial Position along with the recognition of an offsetting secured borrowing liability on April 1, 2022.
(3)Includes “Fixed maturities, available-for-sale, at fair value” with an allowance for credit losses of $i1 million
and “Commercial mortgage and other loans” net of allowance for credit losses of $i10 million as of March 31, 2022, respectively.
(4)Includes $i455
million of goodwill associated with the Retirement Full Service business as of March 31, 2022.
Fixed maturities, available-for-sale, at fair value(2)
$
i4,798
$
i8,771
$
i13,569
Fixed
maturities, trading, at fair value
i374
i27
i401
Assets
supporting experience-rated contractholder liabilities, at fair value
i18,818
i0
i18,818
Equity
securities
i0
i322
i322
Commercial
mortgage and other loans(2)
i5,068
i1,497
i6,565
Policy
loans
i0
i12
i12
Other
invested assets
i10
i94
i104
Short-term
investments
i3
i875
i878
Cash
and cash equivalents
i56
i2,015
i2,071
Accrued
investment income
i160
i61
i221
Deferred
policy acquisition costs
i100
i1,097
i1,197
Value
of business acquired
i185
i30
i215
Other
assets(3)
i674
i10,644
i11,318
Separate
account assets
i65,835
i32,267
i98,102
Total
assets held-for-sale
$
i96,081
$
i57,712
$
i153,793
Liabilities
held-for-sale(1):
Future policy benefits
$
i157
$
i4,505
$
i4,662
Policyholders’
account balances
i28,164
i11,750
i39,914
Other
liabilities
i374
i8,307
i8,681
Separate
account liabilities
i65,835
i32,267
i98,102
Total
liabilities held-for-sale
$
i94,530
$
i56,829
$
i151,359
__________
(1)Under
the terms of the sales agreements, certain of these assets and liabilities held-for-sale may be subject to capital transactions or substituted for other similar items prior to the closing of each transaction.
(2)Includes “Fixed maturities, available-for-sale, at fair value” with an allowance for credit losses of $i1 million and “Commercial mortgage and other loans” net of allowance for credit losses of $i15 million
as of December 31, 2021, respectively.
(3)Includes $i455 million of goodwill associated with the Retirement Full Service business as of December 31, 2021.
The Prudential Life Insurance Company of Taiwan Inc.
In June 2021, Prudential International Insurance Holdings, Ltd. (“PIIH”),
a subsidiary of Prudential Financial, completed the sale of The Prudential Life Insurance Company of Taiwan Inc. (“POT”) to Taishin Financial Holding Co, Ltd. (the “Buyer”) for cash consideration of approximately NTi5.5 billion, equal to approximately $i200 million
at then current exchange rates, and contingent consideration with a fair value of approximately $i100 million as of March 31, 2022. The fair value of the contingent consideration is tied to the level of yields for the 10-year Taiwanese Government bond for two years after the signing of the transaction and can result in a maximum payout of $i100 million
if yields increase by 40 basis points. In connection with the transaction, the Company recognized a liability with a fair value of approximately $i34 million as of March 31, 2022, representing its financial guarantee of certain insurance obligations of POT.
The after-tax loss on the sale of POT was approximately $i400 million,
of which approximately $i350 million was recorded during 2020, and approximately $i50 million was recorded during 2021.
Prior
to the sale, in the third quarter of 2020, the Company transferred the results of POT and the anticipated impact of its sale from the International Businesses segment to Divested and Run-off Businesses within Corporate & Other operations. Prior period amounts were restated at that time, which impacted both segment reporting and adjusted operating income, but did not impact results reported under GAAP.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Pramerica
SGR (PGIM Italy Joint Venture)
In March 2021, the Company sold its i35% ownership stake in Pramerica SGR, PGIM’s asset management joint venture in Italy, to its partner UBI Banca, which was acquired in 2020 by Intesa Sanpaolo Group. The after-tax gain on the sale of Pramerica SGR was approximately $i330 million,
which was recognized in adjusted operating income in the first quarter of 2021.
2. iSIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS
Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial
Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASUs”) to the FASB Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs. ASUs listed below include those that have been adopted during the current fiscal year and/or those that have been issued but not yet adopted as of March 31, 2022, and as of the date of this filing. ASUs not listed below were assessed and determined to be either not applicable or not material.
i
ASU
issued but not yet adopted as of March 31, 2022— ASU 2018-12
ASU 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASB on August 15, 2018, and was amended by ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date, issued in October 2019, and ASU 2020-11, Financial Services—Insurance (Topic 944): Effective Date and Early Application, issued in November 2020. The
Company will adopt ASU 2018-12 effective January 1, 2023 using the modified retrospective transition method where permitted, and apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements.
The Company has an established governance framework to manage the implementation of the standard. The Company’s implementation efforts continue to progress including, but not limited to, implementing refinements to key accounting policy decisions, modifications to actuarial valuation models, updates to data
sourcing capabilities, automation of key financial reporting and analytical processes and updates to internal control over financial reporting.
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. While the magnitude of impacts is still being assessed, the Company expects the standard to result in a significant decrease to “Total equity”, primarily from remeasuring in-force contract liabilities using upper-medium
grade fixed income instrument yields as of the adoption date through “Accumulated other comprehensive income (loss)”. The standard also requires a significant increase in disclosures. In addition to the significant impacts to the balance sheet, the Company also expects an impact to the pattern of earnings emergence following the transition date. Outlined below are four key areas of change, although there are other less significant policy changes not noted below.
ASU
2018-12 Amended Topic
Description
Method of adoption
Effect on the financial statements or other significant matters
Cash flow assumptions used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products
Requires an entity to review and, if necessary, update the cash flow assumptions used to measure the liability for future policy benefits, for both changes in future assumptions and actual experience, at least annually using a retrospective update method with a cumulative catch-up
adjustment recorded in a separate line item in the Consolidated Statements of Operations.
An entity may choose one of two adoption methods for the liability for future policy benefits: (1) a modified retrospective transition method whereby the entity may choose to apply the amendments to contracts in force as of the beginning of the prior year (if early adoption is elected) or as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) a full retrospective transition method.
The Company will adopt this guidance
effective January 1, 2023 using the modified retrospective transition method. As a result of the modified retrospective transition method, the Company expects the vast majority of the impact of updating cash flow assumptions as of the transition date to be reflected in the pattern of earnings in subsequent periods. The Company also expects some decrease to “Retained earnings” upon adoption from cash flow assumption updates isolated to the impact on certain issue year cohorts.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
ASU 2018-12 Amended Topic
Description
Method of adoption
Effect
on the financial statements or other significant matters
Discount rate assumption used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products
Requires discount rate assumptions to be based on an upper-medium grade fixed income instrument yield, which will be updated each quarter with the impact recorded through OCI. An entity shall maximize the use of relevant observable information and minimize the use of unobservable information in determining the discount rate assumptions.
As noted above, an entity may choose either a modified retrospective transition method or full retrospective transition method for the liability for future
policy benefits. Under either method, for balance sheet remeasurement purposes, the liability for future policy benefits will be remeasured using current discount rates as of either the beginning of the prior year (if early adoption is elected) or the beginning of the earliest period presented with the impact recorded as a cumulative effect adjustment to AOCI.
As noted above, the Company will adopt the guidance for the liability for future policy benefits effective January 1, 2023 using the modified retrospective transition method. The Company expects a decrease to AOCI as a result of remeasuring in-force contract
liabilities using upper-medium grade fixed income instrument yields as of the adoption date. The adjustment will largely reflect the difference between discount rates locked-in at contract inception versus discount rates as of the adoption date.
Amortization of deferred acquisition costs (DAC) and other balances
Requires DAC and other balances, such as unearned revenue reserves and DSI, to be amortized on a constant level basis over the expected term of the related contract, independent of expected profitability.
An entity may apply one of two
adoption methods: (1) a modified retrospective transition method whereby the entity may choose to apply the amendments to contracts in force as of the beginning of the prior year (if early adoption is elected) or as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) if an entity chooses a full retrospective transition method for its liability for future policy benefits, as described above, it is required to also use a full retrospective transition method for DAC and other balances.
The Company will adopt this guidance effective January 1, 2023
using the modified retrospective transition method. Under the modified retrospective transition method, the Company does not expect a significant impact to the balance sheet, other than the impact of the removal of any related amounts in AOCI.
Market Risk Benefits (“MRB”)
Requires an entity to measure all market risk benefits (e.g., living benefit and death benefit guarantees associated with variable annuities) at fair value, and record MRB assets and liabilities separately on the Consolidated Statements of Financial Position. Changes in fair value of market risk benefits are recorded in net income, except for the portion of the change in MRB liabilities attributable to changes in an entity’s NPR, which is recognized in OCI.
An
entity shall adopt the guidance for market risk benefits using the retrospective transition method, which includes a cumulative effect adjustment on the balance sheet as of either the beginning of prior year (if early adoption is elected) or the beginning of the earliest period presented. An entity shall maximize the use of relevant observable information and minimize the use of unobservable information in determining the balance of the market risk benefits upon adoption.
The Company will adopt this guidance effective January 1, 2023 using the retrospective transition method. Upon adoption, the Company expects a decrease to“Retained
earnings” and offsetting increase to AOCI from reclassifying the cumulative effect of changes in NPR from retained earnings to AOCI. There will also be an impact to “Retained earnings” for the difference between the fair value and carrying value of benefits not currently measured at fair value (e.g., guaranteed minimum death benefits on variable annuities).
This ASU eliminates the accounting guidance for Troubled Debt Restructurings (“TDR”) for creditors and adds enhanced disclosure requirements for certain loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty. Following adoption of the ASU, all loan refinancings and restructurings are subject to the modification guidance in ASC 310-20.
This ASU also amends the guidance on the vintage disclosures to require disclosure of current-period gross write-offs by year of origination.
January 1, 2023
using the prospective method with an option to apply a modified retrospective transition method for the recognition and measurement of TDRs which will include a cumulative effect adjustment on the balance sheet in the period of adoption. Early adoption is permitted beginning January 1, 2022, including adoption in an interim period provided guidance is applied as of the beginning of the year.
The Company does not expect the adoption of the ASU to have a significant impact on the Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
(1)Excludes
“Assets held-for-sale” with amortized cost of $i13,142 million, fair value of $i12,761 million,
unrealized gains of $i143 million, unrealized losses of $i523 million
and allowance for credit losses of $i1 million. See Note 1 for additional information.
(2)Excludes notes with amortized cost of $i6,041
million (fair value, $i6,041 million), which have been offset with the associated debt under a netting agreement.
(3)Includes credit-tranched securities collateralized by loan obligations, education loans, auto loans, home equity loans and other asset types.
(4)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(5)Excludes
notes with amortized cost of $i4,750 million (fair value, $i4,882 million), which have been offset with the associated debt under a netting agreement.
(1)Excludes
“Assets held-for-sale” with amortized cost of $i13,145 million, fair value of $i13,569 million,
unrealized gains of $i572 million, unrealized losses of $i147
million and allowance for credit losses of $i1 million . See Note 1 for additional information.
(2)Excludes notes with amortized cost of $i5,941
million (fair value, $i5,995 million), which have been offset with the associated debt under a netting agreement.
(3)Includes credit-tranched securities collateralized loan obligations, education loans, auto loans, credit cards and other asset types.
(4)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(5)Excludes
notes with amortized cost of $i4,750 million (fair value, $i5,394 million), which have been offset with the associated debt under a netting agreement.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
i
The following tables set forth the fair value and gross unrealized losses on available-for-sale fixed maturity securities without an allowance for credit losses aggregated by investment category and length of time that individual fixed maturity securities had
been in a continuous unrealized loss position, as of the dates indicated:
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
i8,898
$
i635
$
i94
$
i19
$
i8,992
$
i654
Obligations
of U.S. states and their political subdivisions
i1,545
i143
i73
i15
i1,618
i158
Foreign
government bonds
i15,209
i692
i5,897
i649
i21,106
i1,341
U.S.
public corporate securities
i34,698
i2,808
i2,891
i503
i37,589
i3,311
U.S.
private corporate securities
i16,293
i773
i1,408
i172
i17,701
i945
Foreign
public corporate securities
i7,395
i486
i1,121
i132
i8,516
i618
Foreign
private corporate securities
i17,158
i1,255
i1,777
i286
i18,935
i1,541
Asset-backed
securities
i9,084
i90
i536
i4
i9,620
i94
Commercial
mortgage-backed securities
i6,854
i197
i314
i33
i7,168
i230
Residential
mortgage-backed securities
i1,073
i16
i423
i43
i1,496
i59
Total
fixed maturities, available-for-sale(1)
$
i118,207
$
i7,095
$
i14,534
$
i1,856
$
i132,741
$
i8,951
__________
(1)Excludes
“Assets held-for-sale” with fair value of $i8,613 million and gross unrealized losses of $i523
million. See Note 1 for additional information.
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
i1,521
$
i15
$
i269
$
i16
$
i1,790
$
i31
Obligations
of U.S. states and their political subdivisions
i289
i5
i71
i3
i360
i8
Foreign
government bonds
i4,534
i244
i6,945
i282
i11,479
i526
U.S.
public corporate securities
i12,403
i219
i2,947
i152
i15,350
i371
U.S.
private corporate securities
i4,362
i84
i848
i78
i5,210
i162
Foreign
public corporate securities
i3,652
i76
i802
i42
i4,454
i118
Foreign
private corporate securities
i6,350
i270
i1,604
i169
i7,954
i439
Asset-backed
securities
i6,568
i13
i170
i1
i6,738
i14
Commercial
mortgage-backed securities
i921
i11
i263
i11
i1,184
i22
Residential
mortgage-backed securities
i751
i13
i18
i1
i769
i14
Total
fixed maturities, available-for-sale(1)
$
i41,351
$
i950
$
i13,937
$
i755
$
i55,288
$
i1,705
__________
(1)Excludes
“Assets held-for-sale” with fair value of $i4,644 million and gross unrealized losses of $i147
million. See Note 1 for additional information.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
As of March 31, 2022 and December 31, 2021, the gross unrealized losses on fixed maturity available-for-sale
securities without an allowance were composed of $i7,948 million and $i1,242
million, respectively, related to “1” highest quality or “2” high quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $i1,003 million and $i463
million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of March 31, 2022, the $i1,856 million of gross unrealized losses of twelve months or more were concentrated in the consumer non-cyclical, finance and utility sectors within corporate securities and foreign government securities. As of December 31,
2021, the $i755 million of gross unrealized losses of twelve months or more were concentrated in consumer non-cyclical, utility and finance sectors within corporate securities.
In accordance with its policy described in Note 2 to the Consolidated Financial Statements included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2021, the Company concluded that an adjustment to earnings for credit losses related to these fixed maturity securities was not warranted at March 31, 2022. This conclusion was based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to increases in interest rates, general credit spread widening, foreign currency exchange rate movements and the financial condition or near-term prospects of the issuer. As of March 31, 2022, the Company did not intend to sell these securities, and it was not more likely
than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.
i
The following table sets forth the amortized cost or amortized cost, net of allowance and fair value of fixed maturities by contractual maturities, as of the date indicated:
(1)Excludes
“Assets held-for-sale” with amortized cost of $i13,142 million and fair value of $i12,761
million. See Note 1 for additional information.
(2)Excludes available-for-sale notes with amortized cost of $i6,041 million(fair value, $i6,041
million) and held-to-maturity notes with amortized cost of $i4,750 million (fair value, $i4,882 million), which have been offset with the associated debt under a netting
agreement.
/
Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Asset-backed, commercial mortgage-backed and residential mortgage-backed securities are shown separately in the table above, as they do not havea single maturity date.
iThe
following table sets forth the sources of fixed maturity proceeds and related investment gains (losses), as well as losses on write-downs and the allowance for credit losses of fixed maturities, for the periods indicated:
(Addition
to) release of allowance for credit losses
(i77)
i2
Fixed
maturities, held-to-maturity:
Proceeds from maturities/prepayments(3)
$
i9
$
i12
(Addition
to) release of allowance for credit losses
i0
i2
__________
(1)Excludes
activity from non-cash related proceeds due to the timing of trade settlements of $(i148) million and $(i114)
million for the three months ended March 31, 2022 and 2021, respectively.
(2)Amounts represent write-downs on credit adverse securities, write-downs on securities approaching maturity related to foreign exchange movements and securities actively marketed for sale.
(3)Excludes activity from non-cash related proceeds due to the timing of trade settlements of less than $i1
million and less than $(i1) million for the three months ended March 31, 2022 and 2021, respectively.
i
The
following tables set forth the activity in the allowance for credit losses for fixed maturity securities, as of the dates indicated:
U.S. Treasury Securities and Obligations of U.S. States
Foreign Government Bonds
U.S. and Foreign Corporate Securities
Asset-Backed Securities
Commercial Mortgage-Backed Securities
Residential Mortgage-Backed Securities
Total
(in millions)
Fixed
maturities, held-to-maturity:
Balance, beginning of period
$
i0
$
i0
$
i9
$
i0
$
i0
$
i0
$
i9
Current-period
allowance for expected credit losses
i0
i0
(i2)
i0
i0
i0
(i2)
Balance,
end of period
$
i0
$
i0
$
i7
$
i0
$
i0
$
i0
$
i7
For
additional information about the Company’s methodology for developing our allowance and expected losses, 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, 2021.
For the three months ended March 31, 2022, the net increase in the allowance for credit losses on available-for-sale securities was primarily related to net additions in the communications, utility and foreign agency sectors within corporate
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
securities due to adverse projected cash flows. For the three months ended March 31, 2021, the net decrease in the allowance for credit losses on available-for-sale securities was primarily related to public corporate securities within the energy sector, partially offset by an addition to the allowance for private corporate securities within the energy, utility and consumer cyclical sectors.
U.S.
government authorities and agencies and obligations of U.S. states
i181
i192
i262
i295
i182
i193
i344
i400
Total
fixed maturities(4)
i1,031
i1,030
i18,163
i17,757
i1,044
i1,057
i17,232
i17,706
Equity
securities
i1,719
i2,154
i328
i297
i1,787
i2,271
i328
i326
Total
assets supporting experience-rated contractholder liabilities(5)
$
i2,750
$
i3,184
$
i18,633
$
i18,196
$
i2,861
$
i3,358
$
i18,346
$
i18,818
__________
(1)See
Note 1 for additional information.
(2)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(3)Includes collateralized loan obligations, auto loans, education loans, home equity and other asset types. Collateralized loan obligations at fair value, including “Assets held-for-sale” were $i1,669 million and $i1,607
million as of March 31, 2022 and December 31, 2021, respectively, all of which were rated AA or higher.
(4)As a percentage of amortized cost, i97% of the portfolio including “Assets held-for-sale” was considered high or highest quality based on NAIC or equivalent ratings, as of both March 31, 2022
and December 31, 2021, respectively.
(5)As a percentage of amortized cost, ii95/%
of the portfolio including “Assets held-for-sale” consisted of public securities as of both March 31, 2022 and December 31, 2021.
/
The net change in unrealized gains (losses) from assets supporting experience-rated contractholder liabilities including “Assets held-for-sale” still held at period end, recorded within “Other income (loss),” was $(i972)
million and $(i459) million during the three months ended March 31, 2022 and 2021, respectively.
Equity Securities
The net change in unrealized gains (losses) from equity securities still held at period end, including “Assets held-for-sale” recorded within “Other income (loss),” was $(i257)
million and $i352 million during the three months ended March 31, 2022 and 2021, respectively.
Notes
to Unaudited Interim Consolidated Financial Statements—(Continued)
Concentrations of Financial Instruments
The Company monitors its concentrations of financial instruments and mitigates credit risk by maintaining a diversified investment portfolio which limits exposure to any single issuer.
i
As
of the dates indicated, the Company’s exposure to concentrations of credit risk of single issuers greater than 10% of the Company’s equity included securities of the U.S. government and certain U.S. government agencies and securities guaranteed by the U.S. government, as well as the securities disclosed below:
Commercial mortgage and agricultural property loans by property type:
Office
$
i10,388
i17.7
%
$
i10,225
i17.6
%
Retail
i6,427
i10.9
i6,779
i11.7
Apartments/Multi-Family
i16,198
i27.5
i16,742
i28.8
Industrial
i13,775
i23.5
i13,009
i22.4
Hospitality
i1,817
i3.1
i1,876
i3.2
Other
i4,091
i7.0
i3,936
i6.8
Total
commercial mortgage loans
i52,696
i89.7
i52,567
i90.5
Agricultural
property loans
i6,020
i10.3
i5,520
i9.5
Total
commercial mortgage and agricultural property loans
i58,716
i100.0
%
i58,087
i100.0
%
Allowance
for credit losses
(i117)
(i115)
Total
net commercial mortgage and agricultural property loans
i58,599
i57,972
Other
loans:
Uncollateralized loans
i533
i561
Residential
property loans
i59
i67
Other
collateralized loans
i117
i70
Total
other loans
i709
i698
Allowance
for credit losses
(i4)
(i4)
Total
net other loans
i705
i694
Total
net commercial mortgage and other loans(1)(2)
$
i59,304
$
i58,666
__________
(1)Excludes
“Assets held-for-sale” of $i4,871 million net of allowance for credit losses of $i10 million and $i6,565
million net of allowance for credit losses of $i15 million as of March 31, 2022 and December 31, 2021, respectively. See Note 1 for additional information.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
(2)Includes loans which are carried at fair value under the fair value option and are collateralized primarily by apartment complexes. As of March 31, 2022 and December 31, 2021, the net carrying value of these loans were $i241
million and $i1,263 million, respectively.
As of March 31, 2022, the commercial mortgage and agricultural property loans were secured by properties geographically dispersed throughout the United States with the largest concentrations in California (i30%),
Texas (i8%) and New York (i6%) and included loans secured by properties in Europe (i7%),
Asia (i2%) and Australia (i1%).
i
The
following tables set forth the activity in the allowance for credit losses for commercial mortgage and other loans, as of the dates indicated:
Addition
to (release of) allowance for expected losses
(i9)
(i1)
i0
i0
i0
(i10)
Other
i0
i0
i0
(i1)
i0
(i1)
Allowance,
end of period
$
i209
$
i8
$
i0
$
i2
$
i5
$
i224
/
For
additional information about the Company’s methodology for developing our allowance and expected losses, 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, 2021.
For the three months ended March 31, 2022, the allowance for credit losses on commercial mortgage and other loans was relatively unchanged. For the three months ended March 31, 2021, the net decrease in the allowance for credit losses on commercial mortgage and other loans was primarily related to the improving credit environment.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
i
The following tables set forth key credit quality indicators based upon the recorded investment gross of allowance for credit losses, as of the dates indicated:
(1)Excludes
“Assets held-for-sale” of $i6,580 million. See Note 1 for additional information.
For additional information about the Company’s commercial mortgage and other loans credit quality monitoring process, 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,
2021.
i
The following tables set forth an aging of past due commercial mortgage and other loans based upon the recorded investment gross of allowance for credit losses, as well as the amount of commercial mortgage and other loans on non-accrual status, as of the dates indicated:
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
__________
(1)As of March 31, 2022, there were ino loans in this category accruing interest.
(2)For additional
information regarding the Company’s policies for accruing interest on loans, 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, 2021.
(3)Excludes “Assets held-for-sale” of $i4,881 million. See Note 1 for additional
information.
(1)As
of December 31, 2021, there were ino loans in this category accruing interest.
(2)For additional information regarding the Company’s policies for accruing interest on loans, 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, 2021.
(3)Excludes “Assets held-for-sale” of $i6,580 million. See Note 1 for additional information.
Loans on non-accrual status recognized interest income of less than $ii1/ million
for both the three months ended March 31, 2022 and 2021. Loans on non-accrual status that did not have a related allowance for credit losses were $ii15/
million as of both March 31, 2022 and December 31, 2021.
The Company did iino/t
have any significant losses on commercial mortgage and other loans purchased with credit deterioration as of both March 31, 2022 and December 31, 2021, respectively.
(1)As
of March 31, 2022 and December 31, 2021, real estate held through direct ownership had mortgage debt of $i303 million and $i274
million, respectively.
(2)Primarily includes strategic investments made by investment management operations, leveraged leases and member and activity stock held in the Federal Home Loan Banks of New York and Boston. For additional information regarding the Company’s 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, 2021.
(3)Excludes “Assets held-for-sale” of $i122
million and $i104 million as of March 31, 2022 and December 31, 2021, respectively. See Note 1 for additional information.
/
Accrued Investment Income
i
The
following table sets forth the composition of “Accrued investment income,” as of the dates indicated:
(1)Excludes
“Assets held-for-sale” of $i233 million and $i221 million as of March 31, 2022 and December 31,
2021, respectively. See Note 1 for additional information.
/
Write-downs on accrued investment income were $i1 million and less than $i1
million for the three months ended March 31, 2022 and 2021, respectively.
(1)Includes
income on credit-linked notes which are reported on the same financial statement line items as related surplus notes, as conditions are met for right to offset.
/
Realized Investment Gains (Losses), Net
i
The following table sets forth “Realized investment gains (losses), net” by investment type,
for the periods indicated:
(1)Includes
fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading.
Fixed maturity securities, available-for-sale with an allowance(1)
$
i8
$
i23
Fixed
maturity securities, available-for-sale without an allowance(1)
i12,121
i39,467
Derivatives
designated as cash flow hedges(2)
i1,155
i1,019
Derivatives
designated as fair value hedges(2)
(i24)
(i35)
Other
investments(3)
(i13)
(i7)
Net
unrealized gains (losses) on investments
$
i13,247
$
i40,467
__________
(1)Includes
net unrealized gains (losses) of $(i380) million and $i425 million on “Assets held-for-sale” as of March 31, 2022
and December 31, 2021, respectively.
(2)For additional information on cash flow and fair value hedges, see Note 5.
(3)As of March 31, 2022 there were ino net unrealized losses on held-to-maturity securities that were previously transferred from available-for-sale. Includes net unrealized gains on certain joint ventures that are strategic
in nature and are included in “Other assets.”
/
Repurchase Agreements and Securities Lending
In the normal course of business, the Company sells securities under agreements to repurchase and enters into securities lending transactions. iThe
following table sets forth the composition of “Securities sold under agreements to repurchase,” as of the dates indicated:
Remaining Contractual Maturities of the Agreements
Remaining Contractual Maturities of the Agreements
Overnight & Continuous
Up to 30 Days
30 to 90 Days
Total
Overnight
& Continuous
Up to 30 Days
30 to 90 Days
Total
(in millions)
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
i7,863
$
i672
$
i250
$
i8,785
$
i9,044
$
i0
$
i438
$
i9,482
Commercial
mortgage-backed securities
i104
i0
i0
i104
i486
i0
i0
i486
Residential
mortgage-backed securities
i196
i0
i0
i196
i217
i0
i0
i217
Total
securities sold under agreements to repurchase
$
i8,163
$
i672
$
i250
$
i9,085
$
i9,747
$
i0
$
i438
$
i10,185
.
The
following table sets forth the composition of “Cash collateral for loaned securities” which represents the liability to return cash collateral received for the following types of securities loaned, as of the dates indicated:
Remaining Contractual Maturities of the Agreements
Remaining Contractual Maturities of the Agreements
Overnight & Continuous
Up to 30 Days
Total
Overnight & Continuous
Up
to 30 Days
Total
(in millions)
U.S. Treasury securities and obligations of U.S.
government authorities and agencies
$
i1
$
i0
$
i1
$
i1
$
i0
$
i1
Obligations
of U.S. states and their political
subdivisions
i76
i0
i76
i84
i0
i84
Foreign
government bonds
i365
i0
i365
i205
i0
i205
U.S.
public corporate securities
i3,373
i0
i3,373
i2,834
i0
i2,834
Foreign
public corporate securities
i853
i0
i853
i643
i0
i643
Equity
securities
i103
i0
i103
i484
i0
i484
Total
cash collateral for loaned securities(1)(2)
$
i4,771
$
i0
$
i4,771
$
i4,251
$
i0
$
i4,251
__________
(1)The
Company did iino/t
have any agreements with remaining contractual maturities greater than thirty days, as of the dates indicated.
(2)Excludes "Liabilities held-for-sale" of $i205 million and $i0
million as of March 31, 2022 and December 31, 2021, respectively.
4. iVARIABLE INTEREST ENTITIES
In the normal course of its activities, the
Company enters into relationships with various special-purpose entities and other entities that are deemed to be variable interest entities (“VIEs”). For additional information, see Note 4 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Consolidated Variable Interest Entities
i
The
table below reflects the carrying amount and balance sheet caption in which the assets and liabilities of consolidated VIEs are reported. The liabilities primarily comprise obligations under debt instruments issued by the VIEs. The creditors of these VIEs do not have recourse to the Company in excess of the assets contained within the VIEs.
Consolidated VIEs for which the Company
is the Investment Manager(1)
(1)Total
assets of consolidated VIEs reflect $i2,952 million and $i2,885 million as of March 31, 2022 and December 31, 2021, respectively, related to VIEs whose beneficial interests
are wholly-owned by consolidated subsidiaries.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
(2)Recourse is limited to the assets of the respective VIE and does not extend to the general credit of the
Company. As of March 31, 2022, the maturity of this obligation was within i3 years.
Unconsolidated Variable Interest Entities
The Company has determined that it is not the primary beneficiary of certain VIEs for which it is the investment manager. The Company’s
maximum exposure to loss resulting from its relationship with unconsolidated VIEs for which it is the investment manager is limited to its investment in the VIEs, which was $i931 million and $i997
million at March 31, 2022 and December 31, 2021, respectively. These investments are reflected in “Fixed maturities, available-for-sale,”“Fixed maturities, trading,”“Equity securities” and “Other invested assets.” There are ino liabilities associated with these unconsolidated VIEs on the Company’s Unaudited Interim Consolidated Statements of Financial Position.
In
the normal course of its activities, the Company will invest in limited partnerships and limited liability companies (“LPs/LLCs”), which include hedge funds, private equity funds and real estate-related funds and may or may not be VIEs. The Company’s maximum exposure to loss on these investments, both VIEs and non-VIEs, is limited to the amount of its investment. The Company classifies these investments as “Other invested assets” and its maximum exposure to loss associated with these entities, excluding “Assets held-for-sale,” was $i16,436
million and $i15,966 million as of March 31, 2022 and December 31, 2021, respectively.
In addition, in the normal course of its activities, the Company will invest in structured investments including VIEs for which it is not the investment
manager. These structured investments typically invest in fixed income investments and are managed by third-parties and include asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities. The Company’s maximum exposure to loss on these structured investments, both VIEs and non-VIEs, is limited to the amount of its investment. See Note 3 for details regarding the carrying amounts and classification of these assets. The Company has not provided material financial or other support that was not contractually required to these structures. The Company has determined that it is not the primary beneficiary of these structures due to the fact that it does not control these
entities.
i
5. DERIVATIVES AND HEDGING
Types of Derivative and Hedging Instruments
The
Company utilizes various derivatives and hedging instruments to manage its risk. Commonly used derivative and non-derivative hedging instruments include, but are not necessarily limited to:
•Interest rate contracts: futures, swaps, forwards, options, caps and floors
•Equity contracts: futures, options and total return swaps
For
detailed information on these contracts and the related strategies, see Note 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Primary Risks Managed by Derivatives
iThe
table below provides a summary of the gross notional amount and fair value of derivatives contracts by the primary underlying risks, excluding embedded derivatives and associated reinsurance recoverables. Many derivative instruments contain multiple underlying risks. The fair value amounts below represent the value of derivative contracts prior to taking into account the netting effects of master netting agreements and cash collateral. This netting impact results in total derivative assets of $i2,612
million and $i3,266 million as of March 31, 2022 and December 31, 2021, respectively, and total derivative liabilities of $i1,417
million and $i2,278 million as of March 31, 2022 and December 31, 2021, respectively, reflected in the Unaudited Interim Consolidated Statements of Financial Position./
Derivatives Designated as Hedge Accounting Instruments:
Interest Rate
Interest
Rate Swaps
$
i3,769
$
i493
$
(i81)
$
i3,591
$
i805
$
(i69)
Interest
Rate Forwards
i397
i0
(i14)
i248
i15
(i2)
Foreign
Currency
Foreign Currency Forwards
i4,975
i63
(i161)
i4,789
i62
(i107)
Currency/Interest
Rate
Foreign Currency Swaps
i24,436
i1,489
(i297)
i21,272
i1,151
(i193)
Total
Derivatives Designated as Hedge Accounting Instruments
$
i33,577
$
i2,045
$
(i553)
$
i29,900
$
i2,033
$
(i371)
Derivatives
Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps
$
i193,041
$
i7,357
$
(i13,292)
$
i196,124
$
i10,515
$
(i14,430)
Interest
Rate Futures
i17,206
i58
(i16)
i17,429
i76
(i9)
Interest
Rate Options
i16,728
i608
(i301)
i15,353
i710
(i265)
Interest
Rate Forwards
i3,775
i19
(i74)
i4,709
i41
(i11)
Foreign
Currency
Foreign Currency Forwards
i31,456
i1,296
(i1,602)
i28,235
i1,046
(i1,209)
Foreign
Currency Options
i0
i0
i0
i0
i0
i0
Currency/Interest
Rate
Foreign Currency Swaps
i12,058
i859
(i246)
i12,683
i751
(i216)
Credit
Credit
Default Swaps
i7,167
i103
(i6)
i3,489
i128
(i1)
Equity
Equity
Futures
i4,884
i3
(i69)
i6,178
i1
(i10)
Equity
Options
i25,070
i244
(i312)
i60,057
i2,065
(i2,640)
Total
Return Swaps
i12,746
i127
(i202)
i13,850
i49
(i430)
Other
Other(1)
i1,252
i0
i0
i1,255
i0
i0
Synthetic
GICs
i82,719
i1
i0
i81,984
i1
i0
Total
Derivatives Not Qualifying as Hedge Accounting Instruments
$
i408,102
$
i10,675
$
(i16,120)
$
i441,346
$
i15,383
$
(i19,221)
Total
Derivatives(2)(3)(4)
$
i441,679
$
i12,720
$
(i16,673)
$
i471,246
$
i17,416
$
(i19,592)
__________
(1)“Other”
primarily includes derivative contracts used to improve the balance of the Company’s tail longevity and mortality risk. Under these contracts, the Company’s gains (losses) are capped at the notional amount.
(2)Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks. The fair value of these embedded derivatives was a net liability of $i9,857
million and $i10,245 million as of March 31, 2022 and December 31, 2021, respectively, primarily included in “Future policy benefits.”
(3)Recorded in “Other invested assets” and “Other liabilities” on the Unaudited Interim Consolidated Statements of Financial Position.
(4)Excludes
“Assets held-for-sale” with fair value of $i950 million and $i1,643 million as of March 31,
2022 and December 31, 2021, respectively, and “Liabilities held-for-sale” with fair value of $i1,423 million and $i1,503
million as of March 31, 2022 and December 31, 2021, respectively, with outstanding gross notional amounts of $i37,989 million and $i41,179
million as of March 31, 2022 and December 31, 2021, respectively. See Note 1 for additional information.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
i
As
of March 31, 2022, the following amounts were recorded on the Unaudited Interim Consolidated Statements of Financial Position related to the carrying amount of the hedged assets (liabilities) and cumulative basis adjustments included in the carrying amount for fair value hedges.
Balance Sheet Line Item in which Hedged Item is Recorded
Carrying Amount of the Hedged Assets (Liabilities)
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets (Liabilities)(1)
Carrying Amount of the Hedged Assets (Liabilities)
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets (Liabilities)(1)
(in
millions)
Fixed maturities, available-for-sale, at fair value
$
i586
$
i72
$
i641
$
i63
Commercial
mortgage and other loans
$
i7
$
i0
$
i17
$
i1
Policyholders’
account balances
$
(i1,420)
$
(i24)
$
(i1,552)
$
(i170)
Future
policy benefits
$
(i2,784)
$
(i64)
$
(i3,001)
$
(i279)
__________
(1)There
were no material fair value hedging adjustments for hedged assets and liabilities for which hedge accounting has been discontinued.
/
Most of the Company’s derivatives do not qualify for hedge accounting for various reasons. For example: (i) derivatives that economically hedge embedded derivatives do not qualify for hedge accounting because changes in the fair value of the embedded derivatives are already recorded in net income; (ii) derivatives that are utilized as macro hedges of the Company’s exposure to various risks typically do not
qualify for hedge accounting because they do not meet the criteria required under portfolio hedge accounting rules; and (iii) synthetic GICs, which are product standalone derivatives, do not qualify as hedging instruments under hedge accounting rules.
Offsetting Assets and Liabilities
ii
The
following table presents recognized derivative instruments (excluding embedded derivatives and associated reinsurance recoverables), and repurchase and reverse repurchase agreements that are offset in the Unaudited Interim Consolidated Statements of Financial Position, and/or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the Unaudited Interim Consolidated Statements of Financial Position.
Gross Amounts Offset in the Statements of Financial Position
Net Amounts Presented in the Statements of Financial Position
Financial Instruments/ Collateral(1)
Net Amount
(in millions)
Offsetting of Financial Assets:(2)
Derivatives
$
i17,272
$
(i14,150)
$
i3,122
$
(i802)
$
i2,320
Securities
purchased under agreement to resell
i704
i0
i704
(i704)
i0
Total
assets
$
i17,976
$
(i14,150)
$
i3,826
$
(i1,506)
$
i2,320
Offsetting
of Financial Liabilities:(2)
Derivatives
$
i19,587
$
(i17,314)
$
i2,273
$
(i797)
$
i1,476
Securities
sold under agreement to repurchase
i10,185
i0
i10,185
(i9,699)
i486
Total
liabilities
$
i29,772
$
(i17,314)
$
i12,458
$
(i10,496)
$
i1,962
__________
(1)Amounts
exclude the excess of collateral received/pledged from/to the counterparty.
(2)Excludes “Assets held-for-sale” with fair value of $i950 million and $i1,643
million as of March 31, 2022 and December 31, 2021, respectively, and “Liabilities held-for-sale” with fair value of $i1,423 million and $i1,503
million as of March 31, 2022 and December 31, 2021, respectively. See Note 1 for additional information.
For information regarding the rights of offset associated with the derivative assets and liabilities in the table above, see “—Counterparty Credit Risk” below. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the
Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company’s accounting policy for securities repurchase and resale agreements, see Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2021.
Cash Flow, Fair Value and Net Investment Hedges
The
primary derivative and non-derivative instruments used by the Company in its fair value, cash flow and net investment hedge accounting relationships are interest rate swaps, currency swaps, currency forwards, and foreign currency denominated debts. These instruments are only designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, or equity derivatives in any of its fair value, cash flow or net investment hedge accounting relationships.
iThe
following table provides the financial statement classification and impact of derivatives used in qualifying and non-qualifying hedge relationships, including the offset of the hedged item in fair value hedge relationships.
Interest Credited to Policyholders’ Account Balances
Policyholders’ Benefits
Change in AOCI(1)
(in
millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Gains
(losses) on derivatives designated as hedge instruments:
Interest Rate
$
i21
$
(i2)
$
i0
$
i0
$
(i192)
$
(i170)
$
i0
Currency
(i2)
i0
i0
i0
i0
i7
i0
Total
gains (losses) on derivatives designated as hedge instruments
i19
(i2)
i0
i0
(i192)
(i163)
i0
Gains
(losses) on the hedged item:
Interest Rate
(i20)
i4
i0
i0
i207
i180
i0
Currency
i1
i0
i0
i0
i0
(i7)
i0
Total
gains (losses) on hedged item
(i19)
i4
i0
i0
i207
i173
i0
Amortization
for gains (losses) excluded from assessment of the effectiveness
Currency
i0
i0
i0
i0
i0
(i2)
i2
Total
amortization for gain (loss) excluded from assessment of the effectiveness
i0
i0
i0
i0
i0
(i2)
i2
Total
gains (losses) on fair value hedges net of hedged item
i0
i2
i0
i0
i15
i8
i2
Cash
flow hedges
Interest Rate
i5
i0
i0
i0
i0
i0
(i47)
Currency
(i1)
i0
i0
i0
i0
i0
(i17)
Currency/Interest
Rate
i25
i71
i53
i0
i0
i0
i73
Total
gains (losses) on cash flow hedges
i29
i71
i53
i0
i0
i0
i9
Net
investment hedges
Currency
i0
i0
i8
i0
i0
i0
i0
Currency/Interest
Rate
i0
i0
i0
i0
i0
i0
i0
Total
gains (losses) on net investment hedges
i0
i0
i8
i0
i0
i0
i0
Derivatives
Not Qualifying as Hedge Accounting Instruments:
Interest Rate
(i5,925)
i0
i0
i0
i0
i0
i0
Currency
(i278)
i0
i8
i0
i0
i0
i0
Currency/Interest
Rate
i282
i0
i0
i0
i0
i0
i0
Credit
i4
i0
i0
i0
i0
i0
i0
Equity
(i989)
i0
i0
i0
i0
i0
i0
Other
i1
i0
i0
i0
i0
i0
i0
Embedded
Derivatives
i7,651
i0
i0
i0
i0
i0
i0
Total
gains (losses) on derivatives not qualifying as hedge accounting instruments
i746
i0
i8
i0
i0
i0
i0
Total
$
i775
$
i73
$
i69
$
i0
$
i15
$
i8
$
i11
__________
(1)Excluding
changes related to net investment hedges using non-derivative instruments of $i30 million for the three months ended March 31, 2022, and $ii11/
million for the three months ended March 31, 2021, respectively.
The changes in fair value of cash flow
hedges are deferred in AOCI and are included in “Net unrealized investment gains (losses)” in the Unaudited Interim Consolidated Statements of Comprehensive Income; these amounts are then reclassified to earnings when the hedged item affects earnings. Using March 31, 2022 values, it is estimated that a pre-tax gain of approximately $i275 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending
March 31, 2023.
The exposures the Company is hedging with these qualifying cash flow hedges include the variability of future cash flows from forecasted transactions denominated in foreign currencies, the purchases of invested assets, and the receipt or payment of variable interest on existing financial instruments. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions is i29
years.
There were no material amounts reclassified from AOCI into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging. In addition, there were no instances in which the Company discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.
For net investment hedges, in addition to derivatives, the
Company uses foreign currency denominated debt to hedge the risk of change in the net investment in a foreign subsidiary due to changes in exchange rates. For effective net investment hedges, the amounts, before applicable taxes, recorded in the cumulative translation adjustment within AOCI were $i18 million for the three months ended March 31, 2022 and $i11
million for the three months ended March 31, 2021.
Credit Derivatives
iThe following table provides a summary of the notional and fair value of written credit protection, presented as assets (liabilities). The
Company’s maximum amount at risk under these credit derivatives, assuming the value of the underlying referenced securities become worthless, is equal to the notional amounts. These credit derivatives have maturities of less than i25 years for Index Reference./
NAIC Rating Designation of Underlying Credit Obligation(1)
NAIC 1
NAIC 2
NAIC 3
NAIC 4
NAIC 5
NAIC 6
Total(3)
Gross Notional
Fair Value
Gross
Notional
Fair Value
Gross Notional
Fair Value
Gross Notional
Fair Value
Gross Notional
Fair Value
Gross Notional
Fair Value
Gross Notional
Fair Value
(in millions)
Single
name reference(2)
$
i0
$
i0
$
i0
$
i0
$
i0
$
i0
$
i0
$
i0
$
i0
$
i0
$
i0
$
i0
$
i0
$
i0
Index
reference(2)
i49
i0
i0
i0
i2,397
i41
i0
i0
i0
i0
i928
i87
i3,374
i128
Total
$
i49
$
i0
$
i0
$
i0
$
i2,397
$
i41
$
i0
$
i0
$
i0
$
i0
$
i928
$
i87
$
i3,374
$
i128
_________
(1)The
NAIC rating designations are based on availability and the lowest ratings among Moody's Investors Service, Inc. ("Moody's"), Standard & Poor’s Rating Services (“S&P”) and Fitch Ratings Inc. (“Fitch”). If no rating is available from a rating agency, a NAIC 6 rating is used.
(2)Single name credit default swaps may reference to the credit of corporate debt, sovereign debt, and structured finance. Index references NAIC designations are based on the lowest rated single name reference included in the index.
(3)Excludes “Assets held-for-sale” with fair value of $i4
million as of March 31, 2022 and $i54 million as of December 31, 2021 and “Liabilities held-for-sale” with fair value of $ii0
million/ for both March 31, 2022 and December 31, 2021, respectively, with outstanding notional amounts of $i75 million and $i1,971 million
as of March 31, 2022 and December 31, 2021, respectively. See Note 1 for additional information.
In addition to writing credit protection, the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. As of March 31, 2022 and December 31, 2021, the Company had $i893
million and $i115 million of outstanding notional amounts and reported at fair value as a liability of $i2
million and $i1 million, respectively.
Counterparty Credit Risk
The Company is exposed to losses in the event of non-performance by counterparties to financial derivative
transactions with a positive fair value. The Company manages credit risk by: (i) entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties governed by master netting agreements, as applicable; (ii) trading through central clearing and over-the-counter (“OTC”) parties; (iii) obtaining collateral, such as cash and securities, when appropriate; and (iv) setting limits on single party credit exposures which are subject to periodic management review.
Substantially all of the Company’s derivative agreements have zero thresholds which require daily full collateralization by the party in a
liability position. In addition, certain of the Company’s derivative agreements contain credit-risk related contingent features; if the credit rating of one of the parties to the derivative agreement is to fall below a certain level, the party with positive fair value could request termination at the then fair value or demand immediate full collateralization from the party whose credit rating fell and is in a net liability position.
As of March 31, 2022, there were no net liability derivative positions with counterparties with credit risk-related contingent features. All derivatives have been appropriately collateralized by the Company or the counterparty in accordance
with the terms of the derivative agreements.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
i
6. FAIR
VALUE OF ASSETS AND LIABILITIES
Fair Value Measurement—Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative fair value guidance establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
Level 1—Fair value is based on unadjusted quoted prices in active markets that are accessible to the
Company for identical assets or liabilities.
Level 2—Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, and other market observable inputs.
Level 3—Fair value is based on at least one significant unobservable input for the asset or liability. The assets and liabilities in this category may require significant judgment or estimation in determining the fair value.
For
a discussion of Company’s valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 6 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Assets and Liabilities
by Hierarchy Level—iThe tables below present the balances of assets and liabilities reported at fair value on a recurring basis, as of the dates indicated.
U.S. Treasury securities and obligations of U.S. government authorities and agencies
i0
i193
i0
i193
Obligations
of U.S. states and their political subdivisions
i0
i0
i0
i0
Foreign
government bonds
i0
i761
i0
i761
Corporate
securities
i0
i103
i0
i103
Asset-backed
securities(4)
i0
i0
i0
i0
Commercial
mortgage-backed securities
i0
i0
i0
i0
Residential
mortgage-backed securities
i0
i0
i0
i0
Equity
securities
i862
i1,409
i0
i2,271
All
other(5)
i2
i18
i0
i20
Subtotal
i864
i2,484
i0
i3,348
Fixed
maturities, trading
i0
i8,402
i421
i8,823
Equity
securities
i7,386
i192
i799
i8,377
Commercial
mortgage and other loans
i0
i1,263
i0
i1,263
Other
invested assets(6)
i409
i17,004
i493
(i14,150)
i3,756
Short-term
investments
i1,199
i4,114
i330
i5,643
Cash
equivalents
i753
i4,436
i70
i5,259
Other
assets
i0
i0
i164
i164
Separate
account assets(7)(8)
i12,305
i206,383
i1,283
i219,971
Total
assets
$
i22,916
$
i609,368
$
i10,880
$
(i14,150)
$
i629,014
Future
policy benefits(9)
$
i0
$
i0
$
i9,068
$
$
i9,068
Policyholders’
account balances
i0
i0
i1,436
i1,436
Other
liabilities
i33
i19,141
i0
(i17,314)
i1,860
Notes
issued by consolidated VIEs
i0
i0
i0
i0
Total
liabilities
$
i33
$
i19,141
$
i10,504
$
(i17,314)
$
i12,364
__________
(1)Excludes
amounts for financial instruments reclassified to “Assets held-for-sale” of $i118,458 million and $i129,579 million, “Liabilities held-for-sale” of $i5,381 million
and $i6,214 million as of March 31, 2022 and December 31, 2021, respectively. Assets held-for-sale and liabilities held-for-sale are valued on a basis consistent with similar instruments described herein. See Note 1 for additional information.
(2)“Netting” amounts represent cash collateral of $(i5,148)
million and $(i3,164) million as of March 31, 2022 and December 31, 2021, respectively.
(3)Excludes notes with fair value of $i6,041
million (carrying amount of $i6,041 million) and $i5,995 million (carrying amount of $i5,941
million) as of March 31, 2022 and December 31, 2021, respectively, which have been offset with the associated payables under a netting agreement.
(4)Includes credit-tranched securities collateralized by syndicated bank loans, sub-prime mortgages, auto loans, credit cards, education loans and other asset types.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
(5)All
other represents cash equivalents and short-term investments.
(6)Other invested assets excluded from the fair value hierarchy include certain hedge funds, private equity funds and other funds for which fair value is measured at net asset value (“NAV”) per share (or its equivalent) as a practical expedient. As of March 31, 2022 and December 31, 2021, the fair values of such investments were $i4,096 million and $i4,290
million respectively.
(7)Separate account assets included in the fair value hierarchy exclude investments in entities that calculate NAV per share (or its equivalent) as a practical expedient. Such investments excluded from the fair value hierarchy include investments in real estate, hedge funds and other invested assets. As of March 31, 2022 and December 31, 2021, the fair value of such investments was $i26,335 million and
$i26,174 million, respectively.
(8)Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities are not included in the above table as they are reported at contract
value and not fair value in the Company’s Unaudited Interim Consolidated Statements of Financial Position.
(9)As of March 31, 2022, the net embedded derivative liability position of $i6,984 million includes $i634
million of embedded derivatives in an asset position and $i7,618 million of embedded derivatives in a liability position. As of December 31, 2021, the net embedded derivative liability position of $i9,069
million includes $i611 million of embedded derivatives in an asset position and $i9,680
million of embedded derivatives in a liability position.
Quantitative Information Regarding Internally-Priced Level 3 Assets and Liabilities—iThe tables below present quantitative information on significant internally-priced Level
3 assets and liabilities.
Separate
account assets-commercial mortgage loans(6)
$
i150
Discounted cash flow
Spread
i1.05%
i1.98%
i1.18%
Decrease
Liabilities:
Future
policy benefits(7)
$
i9,068
Discounted cash flow
Lapse rate(9)
i1%
i20%
Decrease
Spread
over LIBOR(10)
i0.03%
i1.14%
Decrease
Utilization
rate(11)
i39%
i96%
Increase
Withdrawal
rate
See table footnote (12) below.
Mortality rate(13)
i0%
i15%
Decrease
Equity
volatility curve
i16%
i25%
Increase
Policyholders’
account balances(8)
$
i1,436
Discounted cash flow
Lapse rate(9)
i1%
i6%
Decrease
Spread
over LIBOR(10)
i0.03%
i1.14%
Decrease
Mortality
rate(13)
i0%
i23%
Decrease
Equity
volatility curve
i12%
i27%
Increase
__________
(1)Conversely,
the impact of a decrease in input would have the opposite impact on fair value as that presented in the table.
(2)Includes assets classified as fixed maturities available-for-sale, assets supporting experience-rated contractholder liabilities and fixed maturities trading.
(3)Excludes notes which have been offset with the associated payables under a netting agreement.
(4)Represents multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”), and are amounts used when the Company has determined that market participants would use such multiples when valuing the investments.
(5)For these
investments, a range of discount rates is typically used (10% to 20%) and is therefore a more meaningful representation of the unobservable inputs used in the valuation rather than weighted average.
(6)Changes in the fair value of separate account assets are borne by customers and thus are offset by changes in separate account liabilities on the Company’s Unaudited Interim Consolidated Statements of Financial Position. As a result, changes in value associated with these investments are not reflected in the Company’s Unaudited Interim Consolidated Statements of Operations.
(7)Future policy benefits primarily represent general account liabilities for the living benefit
features of the Company’s variable annuity contracts which are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.
(8)Policyholders’ account balances primarily represent general account liabilities for the index-linked interest credited on certain of the Company’s life and annuity products
that are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.
(9)Lapse rates for contracts with living benefit guarantees are adjusted at the contract level based on the in-the-moneyness of the living benefit and reflect other factors, such as the applicability of any surrender charges. Lapse rates are reduced when contracts
are more in-the-money. Lapse rates for contracts with index-linked crediting guarantees may be adjusted at the contract level based on the applicability of any surrender charges, product type, and market
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
related factors such as interest rates. Lapse rates are also generally assumed to be lower
for the period where surrender charges apply. For any given contract, lapse rates vary throughout the period over which cash flows are projected for the purposes of valuing these embedded derivatives.
(10)The spread over the London Inter-Bank Offered Rate (“LIBOR”) swap curve represents the premium added to the proxy for the risk-free rate (LIBOR) to reflect the Company’s estimates of rates that a market participant would use to value the living benefits in both the accumulation and payout phases and index-linked interest crediting guarantees. This spread includes an estimate of NPR, which is the risk that the obligation will not be fulfilled by the
Company. NPR is primarily estimated by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium. In order to reflect the financial strength ratings of the Company, credit spreads associated with funding agreements, as opposed to credit spread associated with debt, are utilized in developing this estimate because funding agreements, living benefit guarantees, and index-linked interest crediting guarantees are insurance liabilities and are therefore senior to debt.
(11)The utilization rate assumption estimates the percentage of contracts that will utilize the benefit during the contract
duration and begin lifetime withdrawals at various time intervals from contract inception. The remaining contractholders are assumed to either begin lifetime withdrawals immediately or never utilize the benefit. Utilization assumptions may vary by product type, tax status and age. The impact of changes in these assumptions is highly dependent on the product type, the age of the contractholder at the time of the sale and the timing of the first lifetime income withdrawal. Range reflects the utilization rate for the vast majority of business with living benefits.
(12)The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These
assumptions vary based on the age of the contractholder, the tax status of the contract and the duration since the contractholder began lifetime withdrawals. As of March 31, 2022 and December 31, 2021, the minimum withdrawal rate assumption is ii76/%
and the maximum withdrawal rate assumption may be greater than ii100/%. The fair value of the liability will generally
increase the closer the withdrawal rate is to 100% and decrease as the withdrawal rate moves further away from 100%.
(13)The range reflects the mortality rates for the vast majority of business with living benefits and other contracts, with policyholders ranging from i45 to i90
years old. While the majority of living benefits have a minimum age requirement, certain other contracts do not have an age restriction. This results in contractholders with mortality rates approaching i0% for certain benefits. Mortality rates may vary by product, age, and duration. A mortality improvement assumption is also incorporated into the overall mortality table.
Interrelationships Between Unobservable Inputs—In
addition to the sensitivities of fair value measurements to changes in each unobservable input in isolation, as reflected in the table above, interrelationships between these inputs may also exist, such that a change in one unobservable input may give rise to a change in another or multiple inputs. Examples of such interrelationships for significant internally-priced Level 3 assets and liabilities are as follows:
Corporate Securities—The rate used to discount future cash flows reflects current risk-free rates plus credit and liquidity spread requirements that market participants would use to value an asset. The discount rate may be influenced by many factors, including market cycles, expectations of default, collateral, term, and asset complexity. Each of these factors can influence discount rates, either in isolation, or in response to other factors. During weaker
economic cycles, as the expectations of default increases, credit spreads widen, which results in a decrease in fair value.
Asset-Backed Securities—Interrelationships may exist between the prepayment rate, the default rate and/or loss severity, depending on specific market conditions. In stronger economic cycles, prepayment rates are generally driven by overall market interest rates and accompanied by lower default rates and loss severity. During weaker economic cycles, prepayments may decline, as default rates and loss severity increase. Additionally, the impact of these factors on average life varies with the structure and subordination. Generally, a change in the assumption used for the probability of default would have been accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the
assumption used for prepayment rates.
Future Policy Benefits—The Company expects efficient benefit utilization and withdrawal rates to generally be correlated with lapse rates. However, behavior is highly dependent on the facts and circumstances surrounding the individual contractholder, such as their liquidity needs or tax situation, which could drive lapse behavior independent of other contractholder behavior assumptions. To the extent that more efficient contractholder behavior results in greater in-the-moneyness at the contract level, lapse rates may decline for those contracts. Similarly,
to the extent that increases in equity volatility are correlated with overall declines in the capital markets, lapse rates may decline as contracts become more in-the-money.
Changes in Level 3 Assets and Liabilities—iiThe
following tables describe changes in fair values of Level 3 assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods. When a determination is made to classify assets and liabilities within Level 3, the determination is based on significance of the unobservable inputs in the overall fair value measurement. All transfers are based on changes in the observability of the valuation inputs, including the availability of pricing service information that the Company can validate. Transfers into Level 3 are generally the result of unobservable inputs utilized within valuation methodologies and the use of indicative broker quotes for assets that were previously valued using observable inputs. Transfers out of
Level 3 are generally due to the use of observable inputs in valuation methodologies as well as the availability of pricing service information for certain assets that the Company can validate./
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
__________
(1)“Other,” for the periods ended March 31, 2022 and March 31, 2021, primarily represents the deconsolidation of VIEs, reclassifications of certain assets between reporting categories and foreign currency translation.
(2)Unrealized gains or losses related to assets still held at the end of the period do not include amortization or accretion of premiums and discounts.
(3)Includes U.S. corporate public, U.S.
corporate private, foreign corporate public and foreign corporate private securities.
(4)Includes asset-backed, commercial mortgage-backed and residential mortgage-backed securities.
(5)Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the
Company’s Unaudited Interim Consolidated Statements of Financial Position.
(6)Issuances and settlements for Policyholders’ account balances are presented net in the rollforward.
(7)Effective January 1, 2020, the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period were added prospectively due to adoption of ASU 2018-13.
Derivative Fair Value Information
i
The
following tables present the balances of certain derivative assets and liabilities measured at fair value on a recurring basis, as of the date indicated, by primary underlying risks. These tables include NPR and exclude embedded derivatives and associated reinsurance recoverables. The derivative assets and liabilities shown below are included in “Other invested assets” or “Other liabilities” in the tables contained within the sections “—Assets and Liabilities by Hierarchy Level” and “—Changes in Level 3 Assets and Liabilities,” above.
(1)“Netting”
amounts represent cash collateral and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting agreement.
(2)Excludes “Assets held-for-sale” with fair value of $i950 million and $i1,643
million as of March 31, 2022 and December 31, 2021, respectively, and “Liabilities held-for-sale” with fair value of $i1,423 million and $i1,503
million as of March 31, 2022 and December 31, 2021, respectively. See Note 1 for additional information.
Changes in Level 3 derivative assets and liabilities—iThe following tables provide a summary of the changes in
fair value of Level 3 derivative assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income, attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods.
Unrealized gains (losses) for assets still
held(1)
(in millions)
Net Derivative - Equity
$
i0
$
i0
$
i0
$
i0
$
i0
$
i0
$
i0
$
i0
$
i0
$
i0
$
i0
Net
Derivative - Interest Rate
i0
i0
i0
i0
i0
i0
i0
i0
i0
i0
i0
______
(1)Total
realized and unrealized gains (losses) as well as unrealized gains (losses) for assets still held at the end of the period are recorded in “Realized investment gains (losses), net”.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
(2)Transfers into or out of Level 3 are generally reported at the value as of the beginning of the quarter in which the transfers occur for any such positions still held at the end of the quarter.
Nonrecurring
Fair Value Measurements—iThe following tables represent information for assets measured at fair value on a nonrecurring basis. The fair value measurement is nonrecurring as these assets are measured at fair value only when there is a triggering event (e.g., an evidence of impairment). Assets included in the table are those that were impaired during the respective reporting periods and that are still held as of the reporting date. The estimated fair values for these amounts were determined using significant unobservable
inputs (Level 3).
Carrying value after measurement as of period end:
Mortgage servicing rights(1)
$
i78
$
i75
Investment
real estate
$
i1
$
i326
Goodwill(2)
$
i0
$
i1,080
__________
(1)Mortgage
servicing rights are valued using a discounted cash flow model. The model incorporates assumptions for servicing revenues, which are adjusted for expected prepayments, delinquency rates, escrow deposit income and estimated loan servicing expenses. The discount rates incorporated into the model are determined based on the estimated returns a market participant would require for this business including a liquidity and risk premium. This estimate includes available relevant data from any active market sales of mortgage servicing rights.
(2)Based on the goodwill impairment test performed as of December 31, 2021, the Company recognized a goodwill impairment charge for Assurance IQ. See Note 10 to the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2021 for more information on the valuation of Assurance IQ and the resulting impairment charge.
Fair Value Option
The fair value option allows the Company to elect fair value as an alternative measurement for selected financial assets and financial liabilities not otherwise reported at fair value. Such elections have been made by the Company to help mitigate volatility in earnings that
result from different measurement attributes. Electing the fair value option also allows the Company to achieve consistent accounting for certain assets and liabilities. Changes in fair value are reflected in “Realized investment gains (losses), net” for commercial mortgage and other loans and “Other income (loss)” for other assets and notes issued by consolidated VIEs. Changes in fair value due to instrument-specific credit risk are estimated using changes in credit spreads and quality ratings for the period reported. Interest income on commercial mortgage and other loans is included in “Net investment income.” Interest income on these loans is recorded based on the effective interest rate as determined at the closing of the loan.
i
The
following tables present information regarding assets and liabilities where the fair value option has been elected.
(1)As
of March 31, 2022, for loans for which the fair value option has been elected, there were ino loans in non-accrual status and inone
of the loans were more than 90 days past due and still accruing.
Fair Value of Financial Instruments
i
The table below presents the carrying amount and fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. The financial
instruments presented below are reported at carrying value on the Company’s Unaudited Interim Consolidated Statements of Financial Position. In some cases, as described below, the carrying amount equals or approximates fair value.
(1)Excludes
amounts for financial instruments reclassified to “Assets held-for-sale” of $i4,940 million and $i6,936 million,“Liabilities held-for-sale” of $i63,630 million
and $i101,992 million as of March 31, 2022 and December 31, 2021, respectively. See Note 1 for additional information.
(2)Carrying values presented herein differ from those in the Company’s Unaudited Interim Consolidated Statements of Financial Position because certain items within the respective financial statement
captions are not considered financial instruments or are out of scope under authoritative guidance relating to disclosures of the fair value of financial instruments.
(3)Excludes notes with fair value of $i4,882 million (carrying amount of $i4,750
million) and $i5,394 million (carrying amount of $i4,750 million) as of March 31, 2022 and December 31,
2021, respectively, which have been offset with the associated payables under a netting agreement.
(4)Includes notes with fair value of $i10,923 million (carrying amount of $i10,791
million) and $i11,389 million (carrying amount of $i10,691 million) as of March 31, 2022 and December 31,
2021, respectively, which have been offset with the associated receivables under a netting agreement.
7. iCLOSED BLOCK
On December 18, 2001, the date of demutualization, The Prudential Insurance Company of America (“PICA”) established
a closed block for certain in-force participating insurance policies and annuity products, along with corresponding assets used for the payment of benefits and policyholders’ dividends on these products, (collectively the “Closed Block”), and ceased offering these participating products. The recorded assets and liabilities were allocated to the Closed Block at their historical carrying amounts. The Closed Block forms the principal component of the Closed Block division. For additional information on the Closed Block, see Note 15 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2021.
As of March 31, 2022 and December 31,
2021, the Company recognized a policyholder dividend obligation of $i4,283 million and $i4,387
million, respectively, to Closed Block policyholders for the excess of actual cumulative earnings over expected cumulative earnings. Additionally, accumulated net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block have been reflected as a policyholder dividend obligation of $i582 million and $i3,640
million at March 31, 2022 and December 31, 2021, respectively, to be paid to Closed Block policyholders unless offset by future experience, with a corresponding amount reported in AOCI.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
i
Closed
Block liabilities and assets designated to the Closed Block, as well as maximum future earnings to be recognized from these liabilities and assets, are as follows:
Interest
credited to policyholders’ account balances
i30
i31
Dividends
to policyholders
i211
i581
General
and administrative expenses
i73
i79
Total
Closed Block benefits and expenses
i941
i1,325
Closed
Block revenues, net of Closed Block benefits and expenses, before income taxes
i26
i44
Income
tax expense (benefit)
i1
i29
Closed
Block revenues, net of Closed Block benefits and expenses and income taxes
$
i25
$
i15
/
8. iINCOME
TAXES
The Company uses a full year projected effective tax rate approach to calculate year-to-date taxes. In addition, certain items impacting total income tax expense are recorded in the periods in which they occur. The projected effective tax rate is the ratio of projected “Total income tax expense” divided by projected “Income before income taxes and equity in earnings of operating joint ventures.” Taxes attributable to operating joint ventures are recorded within “Equity in earnings of operating joint ventures, net of taxes.” The interim period tax expense (or benefit) is the difference between the year-to-date income tax provision and the amounts reported for the previous interim periods of the fiscal year.
The
Company’s income tax provision, on a consolidated basis, amounted to an income tax benefit of $(i69) million, or i60.0% of income (loss) before income taxes and equity in earnings of
operating joint ventures, in the first three months of 2022, compared to an income tax expense of $i636 million, or i18.6%, in the first three months of 2021. The
Company’s current and prior effective tax rates differ from the U.S. statutory rate of i21% primarily due to non-taxable investment income, tax credits, foreign earnings taxed at higher rates than the U.S. statutory rate, and the items discussed below.
Foreign Tax Credit Regulations.The Treasury Department and the IRS published Final Regulations in the Federal Register
on January 4, 2022, which affect the creditability of certain foreign taxes for U.S. federal income tax purposes. The Final Regulations create uncertainty as to whether a U.S. foreign tax credit may be claimed for taxes paid to Brazil. The ability to claim a foreign tax credit for taxes paid to Brazil impacts the benefit of the election made pursuant to Internal Revenue Code Section 952 to subject earnings from the Company’s insurance operations in Brazil to tax in the U.S. in the tax year earned, net of related foreign tax credits. Based on the Company’s analysis and current interpretation of the Final Regulations, a $i26 million
tax benefit is reflected as part of the Company’s results for the first quarter of 2022. The Final Regulations are complex and have broad application that may also impact the creditability of taxes paid to other foreign jurisdictions, and their full impact to the Company is still being evaluated.
GILTI High Tax Exclusion.On July 20, 2020, the U.S. Treasury and the Internal Revenue Service issued Final Regulations which allows an annual election to exclude from the U.S. tax return certain GILTI amounts when the taxes paid by a foreign affiliate exceed i18.9%
(i90% of U.S. statutory rate of i21%) of the GILTI amount
for that foreign affiliate (the “high-tax exception”). These regulations are effective for the 2021 taxable year with an election to apply to any taxable year beginning after 2017. In many of the countries in which the Company operates, including Japan, there are differences between local tax rules used to determine the tax base and the U.S. tax principles used to determine GILTI. Also, the Company’s Japan affiliates have a different tax year than the U.S. calendar tax year used to determine GILTI; therefore, while many of the countries, including Japan, have a statutory tax rate above the i18.9%
threshold, separate affiliates may not meet the i18.9% threshold each year and, as such, may not qualify for this annual exclusion. The Company anticipates making the high-tax
Notes
to Unaudited Interim Consolidated Financial Statements—(Continued)
exception election for the 2021 and 2022 tax years and reflected the impact of the election in its full year projected effective tax rate used to calculate year-to-date taxes for the first three months of 2021 and 2022.
9. iSHORT-TERM AND LONG-TERM DEBT
Short-term
Debt
i
The table below presents the Company’s short-term debt as of the dates indicated:
Portion of commercial paper borrowings due overnight
$
i100
$
i150
Daily
average commercial paper outstanding for the quarter ended
$
i1,117
$
i1,414
Weighted
average maturity of outstanding commercial paper, in days
i12
i16
Weighted average interest rate on outstanding commercial paper
i0.31
%
i0.08
%
_________
(1)The
surplus notes have corresponding assets where rights to set-off exist, thereby reducing the amount of surplus notes included in short-term debt.
(2)Includes $i5 million and $i7 million
drawn on a revolving line of credit held by a subsidiary, and a $i0 million and $i98 million bridge loan at March 31, 2022 and December 31, 2021, respectively.
Prudential Financial and certain subsidiaries have access to external sources of liquidity, including 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. The Company also maintains syndicated, unsecured committed credit facilities as an alternative source of liquidity. At March 31, 2022, ino
amounts were drawn on these syndicated, unsecured committed credit facilities. For additional information on these sources of liquidity, 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, 2021.
(1)The
surplus notes have corresponding assets where rights to set-off exist, thereby reducing the amount of surplus notes included in long-term debt.
(2)Includes $i32 million and $i29
million of debt denominated in foreign currency at March 31, 2022 and December 31, 2021, respectively.
(3)Includes Prudential Financial debt of $i8,556 million and $i7,564
million at March 31, 2022 and December 31, 2021, respectively. Also includes subsidiary debt of $i51 million and $i54
million denominated in foreign currency at March 31, 2022 and December 31, 2021, respectively.
(4)Includes Prudential Financial debt of $i18,668 million and $i17,673
million at March 31, 2022 and December 31, 2021, respectively.
In February 2022, the
Company issued $i1 billion in aggregate principal amount of i5.125% junior subordinated notes due in March 2052.
Mortgage
Debt
In January 2022, a new yen-denominated non-recourse mortgage loan program was established by the Company’s Gibraltar Life Insurance Company Ltd. subsidiary. The loan program has an authorized capacity of Ąi20 billion that can be increased to Ąi46.7 billion
and a term of 10 years that can be extended. As of March 31, 2022, $i33 million (Ąi4 billion) in mortgage debt was outstanding under the loan program.
10.
iEMPLOYEE BENEFIT PLANS
Pension and Other Postretirement Plans
The Company has funded and non-funded non-contributory defined benefit pension plans (“Pension Benefits”), which cover substantially all of its employees. For some employees, benefits are based on final average earnings and length
of service (the “traditional formula”), while benefits for other employees are based on an account balance that takes into consideration age, length of service and earnings during their career (the “cash balance formula”).
The Company provides certain health care and life insurance benefits for its retired employees, their beneficiaries and covered dependents (“Other Postretirement Benefits”). The health care plan is contributory; the life insurance plan is non-contributory. Substantially all of the Company’s U.S. employees may become eligible to receive certain other postretirement benefits if they retire after age i55
with at least i10 years of service or under certain circumstances after age i50 with at least i20
years of continuous service.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
i
Net periodic (benefit) cost included in “General
and administrative expenses” includes the following components:
Three Months Ended March 31,
Pension Benefits
Other Postretirement
Benefits
2022
2021
2022
2021
(in millions)
Components of net periodic (benefit) cost:
Service cost
$
i80
$
i83
$
i4
$
i6
Interest
cost
i97
i90
i12
i12
Expected
return on plan assets
(i213)
(i205)
(i27)
(i25)
Amortization
of prior service cost
i0
(i1)
(i2)
i2
Amortization
of actuarial (gain) loss, net
i51
i62
i1
i4
Settlements
i1
i1
i0
i0
Special
termination benefits(1)
i1
i1
i0
i0
Net
periodic (benefit) cost
$
i17
$
i31
$
(i12)
$
(i1)
__________
(1)For
2022 and 2021, certain employees were provided special termination benefits under non-qualified plans in the form of unreduced early retirement benefits as a result of their involuntary termination or participation in the Voluntary Separation Program that was offered to eligible U.S.-based employees in 2019.
/
11. iEQUITY
i
The
changes in the number of shares of Common Stock issued, held in treasury and outstanding, are as follows for the periods indicated:
(1)Represents
net shares issued from treasury pursuant to the Company’s stock-based compensation programs.
/
In November 2021, Prudential Financial’s Board of Directors (the “Board”) authorized the Company to repurchase at management’s discretion up to $i1.5
billion of its outstanding Common Stock during the period from January 1, 2022 through December 31, 2022. As of March 31, 2022, i3.3 million shares of the Company’s Common Stock were repurchased under this authorization at a total cost of $i375
million.
The timing and amount of share repurchases are determined by management based upon market conditions and other considerations, and repurchases may be executed in the open market, through derivative, accelerated repurchase and other negotiated transactions and through prearranged trading plans complying with Rule 10b5-1(c) under the Securities Exchange Act of 1934 (the “Exchange Act”). Numerous factors could affect the timing and amount of any future repurchases under the share repurchase authorization, including, but not limited to: compliance with laws, increased capital needs of the Company due to changes in regulatory capital requirements, opportunities for growth and acquisitions, and the effect of adverse market conditions.
i
Dividends
declared per share of Common Stock are as follows for the periods indicated:
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Accumulated Other Comprehensive Income (Loss)
AOCI represents the cumulative OCI items that are reported separate from net income and detailed on the Unaudited Interim Consolidated Statements of Comprehensive Income. iThe
balance of and changes in each component of AOCI as of and for the three months ended March 31, 2022 and 2021, are as follows:
Accumulated Other Comprehensive Income (Loss) Attributable to Prudential Financial, Inc.
Foreign Currency Translation Adjustment
Net Unrealized Investment Gains (Losses)(1)
Pension
and Postretirement Unrecognized Net Periodic Benefit (Cost)
Total Accumulated Other Comprehensive Income (Loss)
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
i
Reclassifications
out of Accumulated Other Comprehensive Income (Loss)
Three Months Ended March 31,
Affected line item in Consolidated Statements of Operations
2022
2021
(in
millions)
Amounts reclassified from AOCI(1)(2):
Foreign currency translation adjustment:
Foreign currency translation adjustments
$
(i10)
$
i0
Realized investment gains
(losses), net
Foreign currency translation adjustments
i0
i3
Other
income (loss)
Total foreign currency translation adjustment
(i10)
i3
Net
unrealized investment gains (losses):
Cash flow hedges—Interest rate
(i4)
i5
(3)
Cash
flow hedges—Currency
i1
(i1)
(3)
Cash
flow hedges—Currency/Interest rate
i154
i148
(3)
Fair
value hedges—Currency
(i2)
(i2)
(3)
Net
unrealized investment gains (losses) on available-for-sale securities
(i411)
i1,216
Realized investment gains
(losses), net
Total net unrealized investment gains (losses)
(i262)
i1,366
(4)
Amortization
of defined benefit items:
Prior service cost
i2
(i1)
(5)
Actuarial
gain (loss)
(i52)
(i66)
(5)
Total
amortization of defined benefit items
(i50)
(i67)
Total
reclassifications for the period
$
(i322)
$
i1,302
__________
(1)All
amounts are shown before tax.
(2)Positive amounts indicate gains/benefits reclassified out of AOCI. Negative amounts indicate losses/costs reclassified out of AOCI.
(3)See Note 5 for additional information on cash flow and fair value hedges.
(4)See table below for additional information on unrealized investment gains (losses), including the impact on deferred policy acquisition and other costs, future policy benefits and policyholders’ dividends.
(5)See Note 10 for information on employee benefit plans.
/
Net
Unrealized Investment Gains (Losses)
Net unrealized investment gains (losses) on available-for-sale fixed maturity securities and certain other invested assets and other assets are included in the Company’s Unaudited Interim Consolidated Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from “Other comprehensive income (loss)” those items that are included as part of “Net income (loss)” for a period that had been part of “Other comprehensive income (loss)” in earlier periods. iThe
amounts for the periods indicated below, split between amounts related to available-for-sale fixed maturity securities on which an allowance for credit losses has been recorded, and all other net unrealized investment gains (losses), are as follows:
(1)Includes
cash flow and fair value hedges. See Note 5 for additional information.
12. iEARNINGS PER SHARE
i
A
reconciliation of the numerators and denominators of the basic and diluted per share computations of Common Stock based on the consolidated earnings of Prudential Financial for the periods indicated is as follows:
Less:
Income (loss) attributable to noncontrolling interests
(i13)
(i24)
Less:
Dividends and undistributed earnings allocated to participating unvested share-based payment awards
i7
i44
Net
income (loss) attributable to Prudential Financial available to holders of Common Stock
$
(i38)
i376.1
$
(i0.10)
$
i2,784
i396.3
$
i7.02
Effect
of dilutive securities and compensation programs
Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic
$
i7
$
i44
Less:
Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted
i7
i44
Stock
options
i0.0
i0.6
Deferred
and long-term compensation programs
i0.0
i1.9
Diluted
earnings per share(1)
Net income (loss) attributable to Prudential Financial available to holders of Common Stock
$
(i38)
i376.1
$
(i0.10)
$
i2,784
i398.8
$
i6.98
__________
(1)For
the three months ended March 31, 2022, weighted average shares for basic earnings per share is also used for calculating diluted earnings per share because dilutive shares and dilutive earnings per share are not applicable when a net loss is reported. As a result of the net loss attributable to Prudential Financial available to holders of Common Stock for the three months ended March 31, 2022, all potential stock options and compensation programs were considered antidilutive.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and included in the computation of earnings per share pursuant to the two-class method. Under this method, earnings attributable to Prudential Financial are allocated between Common Stock and the participating awards, as if the awards were a second class of stock. During periods of net income available to holders of Common Stock, the calculation of earnings per share excludes the income attributable to participating securities in the numerator and the dilutive impact of these securities from the denominator. In the event of a net loss available to holders of Common Stock, undistributed earnings are not allocated
to participating securities and the denominator excludes the dilutive impact of these securities as they do not share in the losses of the Company. Undistributed earnings allocated to participating unvested share-based payment awards for the three months ended March 31, 2022 and 2021, as applicable, were based on i5.1
million and i6.0 million of such awards, respectively, weighted for the period they were outstanding.
Stock options and shares related to deferred and long-term compensation programs that are considered antidilutive are excluded from the computation of diluted earnings per share. Stock options are considered antidilutive
based on application of the treasury stock method or in the event of a net loss available to holders of Common Stock. Shares related to deferred and long-term compensation programs are considered antidilutive in the event of a net loss available to holders of Common Stock. iFor the periods indicated, the number of stock options and shares related to deferred and long-term compensation programs that were considered antidilutive and were excluded from the computation of diluted
earnings per share, weighted for the portion of the period they were outstanding, are as follows:
(in millions, except per share amounts, based on weighted average)
Antidilutive stock options based on application of the treasury stock method
i0.0
$
i0.00
i2.1
$
i97.46
Antidilutive
stock options due to net loss available to holders of Common Stock
i0.7
i0.0
Antidilutive
shares based on application of the treasury stock method
i0.1
i0.0
Antidilutive
shares due to net loss available to holders of Common Stock
i2.3
i0.0
Total
antidilutive stock options and shares
i3.1
i2.1
13. iSEGMENT
INFORMATION
Segments
The Company’s principal operations consist of PGIM (the Company’s global investment management business), the U.S. Businesses (consisting of the Retirement, Group Insurance, Individual Annuities, Individual Life and Assurance IQ businesses), the International Businesses, the Closed Block division, and the Company’s 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
operations. 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 U.S. GAAP. The Company’s Corporate and Other operations include corporate items and initiatives that are not allocated to business segments as well as the Divested and Run-off Businesses described above.
Adjusted Operating Income
The Company analyzes the operating performance of each segment using “adjusted operating income.” Adjusted operating income does not equate
to “Income (loss) before income taxes and equity in earnings of operating joint ventures” or “Net income (loss)” as determined in accordance with U.S. GAAP but is the measure of segment profit or loss used by the Company’s chief operating decision maker to evaluate segment performance and allocate resources, and consistent with authoritative guidance, is the measure of segment performance presented below. Adjusted operating income is calculated by adjusting each segment’s “Income (loss) before income taxes and equity in earnings of operating joint ventures” for the following items:
•Realized investment gains (losses), net, and related adjustments;
•Charges related to realized investment
gains (losses), net;
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
•Market experience updates;
•Divested and Run-off Businesses;
•Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests; and
•Other adjustments.
These
items are important to an understanding of overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and the Company’s definition of adjusted operating income may differ from that used by other companies. The Company, however, believes that the presentation of adjusted operating income as measured for management purposes enhances the understanding of results of operations by highlighting the results from ongoing operations and the underlying profitability factors of its businesses. For additional information on these reconciling items, see Note 22 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2021.
Reconciliation of adjusted operating income to net income (loss)
i
The table below reconciles “Adjusted operating income before income taxes” to “Income (loss) before income taxes and equity in earnings of operating joint ventures”:
Adjusted operating income before income taxes by segment:
PGIM
$
i188
$
i651
U.S.
Businesses:
Retirement
i568
i614
Group
Insurance
(i111)
(i132)
Individual
Annuities(2)
i472
i444
Individual
Life
i51
(i44)
Assurance
IQ
(i37)
(i39)
Total
U.S. Businesses
i943
i843
International
Businesses
i801
i871
Corporate
and Other
(i366)
(i322)
Total
segment adjusted operating income before income taxes
i1,566
i2,043
Reconciling
items:
Realized investment gains (losses), net, and related adjustments
(i1,021)
i1,294
Charges
related to realized investment gains (losses), net
(i339)
(i239)
Market
experience updates
(i6)
i304
Divested
and Run-off Businesses:
Closed Block division
i23
i34
Other
Divested and Run-off Businesses
(i299)
i45
Equity
in earnings of operating joint ventures and earnings attributable to noncontrolling interests
(i22)
(i54)
Other
adjustments(3)
(i17)
(i13)
Income
(loss) before income taxes and equity in earnings of operating joint ventures per Unaudited Interim Consolidated Financial Statements
$
(i115)
$
i3,414
________
(1)Effective
third quarter of 2021, the results of the Full Service Retirement business are excluded from the Retirement segment and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 for additional information regarding this disposition.
(2)Individual Annuities segment results reflect DAC as if the Individual Annuities business is a stand-alone operation. The elimination of intersegment costs capitalized in accordance with this policy is included in consolidating adjustments within Corporate and Other operations.
(3)Includes components of consideration for business acquisitions, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent
consideration.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Reconciliation of select financial information
i
The
tables below present certain financial information for the Company’s segments and its Corporate and Other operations, including assets by segment and revenues by segment on an adjusted operating income basis, and the reconciliation of the segment totals to amounts reported in the Unaudited Interim Consolidated Financial Statements.
Total
assets per Unaudited Interim Consolidated Financial Statements
$
i878,066
$
i937,582
________
(1)Effective
third quarter of 2021, the results of the Full Service Retirement business are excluded from the Retirement segment and are included in the Divested and Run-off Businesses in Corporate and Other. See Note 1 for additional information.
(2)Certain assets are classified as “held-for-sale”. See Note 1 for additional information.
Total
revenues on an adjusted operating income basis
i13,657
i13,756
Reconciling
items:
Realized investment gains (losses), net, and related adjustments
(i1,061)
i1,472
Charges
related to realized investment gains (losses), net
(i78)
(i76)
Market
experience updates
i76
i101
Divested
and Run-off Businesses:
Closed Block division
i965
i1,365
Other
Divested and Run-off Businesses
(i334)
i362
Equity
in earnings of operating joint ventures and earnings attributable to noncontrolling interests
(i10)
(i28)
Total
revenues per Unaudited Interim Consolidated Financial Statements
$
i13,215
$
i16,952
__________
(1)Effective
third quarter of 2021, the results of the Full Service Retirement business are excluded from the Retirement segment and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 for additional information.
Intersegment revenues
Management has determined the intersegment revenues with reference to market rates. Intersegment revenues are eliminated in consolidation in Corporate and Other operations. iThe
PGIM segment revenues include intersegment revenues, primarily consisting of asset-based management and administration fees, as follows:
Segments
may also enter into internal derivative contracts with other segments. For adjusted operating income, each segment accounts for the internal derivative results consistent with the manner in which that segment accounts for other similar external derivatives.
Portion
of commitment where prearrangement to sell to investor exists
$
i995
$
i1,102
__________
(1)Includes
commitments of $i16 million and $i21 million related to held-for-sale operations as of March 31, 2022 and December 31,
2021, respectively. See Note 1 for additional information.
/
In connection with the Company’s commercial mortgage operations, it originates commercial mortgage loans. Commitments for loans that will be held for sale are recognized as derivatives and recorded at fair value. In certain of these transactions, the Company prearranges that it will sell the loan to an investor, including to government sponsored entities as discussed below, after the Company funds the loan. The above amount
includes unfunded commitments that are not unconditionally cancellable. For related credit exposure, there was an allowance for credit losses of $ii1/
million as of both March 31, 2022 and December 31, 2021. The change in allowance is $i0 million and an increase of $i1
million for the three months ended March 31, 2022 and 2021, respectively.
i
Commitments to Purchase Investments (excluding Commercial Mortgage Loans)
Expected to be funded from the general account and other operations outside the separate accounts(1)
$
i10,450
$
i10,347
Expected
to be funded from separate accounts
$
i444
$
i236
__________
(1)Includes
commitments of $i90 million and $i118 million related to held-for-sale operations as of March 31, 2022 and December 31, 2021,
respectively. See Note 1 for additional information.
/
The Company has other commitments to purchase or fund investments, some of which are contingent upon events or circumstances not under the Company’s control, including those at the discretion of the Company’s counterparties. The Company anticipates a portion of these commitments will ultimately be funded from its separate accounts. The above amount includes
unfunded commitments that are not unconditionally cancellable. There were iino/
related charges for credit losses for either the three months ended March 31, 2022 or 2021.
Indemnification provided to certain clients for securities lending and securities repurchase transactions(1)
$
i7,114
$
i6,499
Fair
value of related collateral associated with above indemnifications(2)
$
i7,275
$
i6,635
Accrued
liability associated with guarantee
$
i0
$
i0
__________
(1)Includes
$i28 million and $i30 million related to securities repurchase transactions as of March 31, 2022 and December 31, 2021, respectively
(2)Includes
$i28 million and $i29 million related to securities repurchase transactions as of March 31,
2022 and December 31, 2021, respectively.
In the normal course of business, the Company may facilitate securities lending or securities repurchase transactions on behalf of certain client accounts (collectively, “the accounts”). In certain of these arrangements, the Company has provided an indemnification to the accounts to hold them harmless against losses caused by counterparty (i.e., borrower) defaults associated with such transactions facilitated by the Company. In securities lending transactions, collateral is provided by the counterparty to the accounts at the inception of
the transaction in an amount at least equal to i102% of the fair value of the loaned securities and the collateral is maintained daily to equal at least i102%
of the fair value of the loaned securities. In securities repurchase transactions, collateral is provided by the counterparty to the accounts at the inception of the transaction in an amount at least equal to i95% of the fair value of the securities subject to repurchase and the collateral is maintained daily to equal at least i95%
of the fair value of the securities subject to repurchase. The Company is only at risk if the counterparty to the transaction defaults and the value of the collateral held is less than the value of the securities loaned to, or subject to repurchase from, such counterparty. The Company believes the possibility of any payments under these indemnities is remote.
Credit Derivatives Written
As discussed further in Note 5, the Company writes credit derivatives under which the Company
is obligated to pay the counterparty the referenced amount of the contract and receive in return the defaulted security or similar security.
Asset
(liability) associated with guarantee, carried at fair value
$
i1
$
i1
/
Certain
contracts underwritten by the Retirement segment include guarantees related to financial assets owned by the guaranteed party. These contracts are accounted for as derivatives and carried at fair value. The collateral supporting these guarantees is not reflected on the Unaudited Interim Consolidated Statements of Financial Position.
Maximum exposure under indemnification agreements for mortgage loans serviced by the Company
$
i2,917
$
i2,930
First-loss
exposure portion of above
$
i848
$
i854
Accrued
liability associated with guarantees(1)
$
i36
$
i41
__________
(1)The
accrued liability associated with guarantees includes an allowance for credit losses of $i18 million and $i20 million as of March 31,
2022 and December 31, 2021, respectively. The change in allowance is a reduction of $i3 million and $i1
million for the three months ended March 31, 2022, and 2021, respectively.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
As part of the commercial mortgage activities of the
Company’s PGIM segment, the Company provides commercial mortgage origination, underwriting and servicing for certain government sponsored entities, such as Fannie Mae and Freddie Mac. The Company has agreed to indemnify the government sponsored entities for a portion of the credit risk associated with certain of the mortgages it services through a delegated authority arrangement. Under these arrangements, the Company originates multi-family mortgages for sale to the government sponsored entities based on underwriting standards they specify, and makes payments to them for a specified percentage share of losses they incur on certain loans serviced by the
Company. The Company’s percentage share of losses incurred generally varies from i4% to i20% of the loan balance, and is typically based on a first-loss exposure for a stated percentage of the loan balance, plus a shared
exposure with the government sponsored entity for any losses in excess of the stated first-loss percentage, subject to a contractually specified maximum percentage. The Company determines the liability related to this exposure using historical loss experience, and the size and remaining life of the asset. The Company serviced $i22,887 million and $i22,963
million of mortgages subject to these loss-sharing arrangements as of March 31, 2022 and December 31, 2021, respectively, all of which are collateralized by first priority liens on the underlying multi-family residential properties. As of March 31, 2022, these mortgages had a weighted-average debt service coverage ratio of i1.97 times and a weighted-average loan-to-value
ratio of i63%. As of December 31, 2021, these mortgages had a weighted-average debt service coverage ratio of i1.93
times and a weighted-average loan-to-value ratio of i63%. The Company had iino/
losses related to indemnifications that were settled for either the three months ended March 31, 2022 or 2021.
Accrued
liability for other guarantees and indemnifications
$
i34
$
i34
/
The
Company is also subject to other financial guarantees and indemnity arrangements. The Company has provided indemnities and guarantees related to acquisitions, dispositions, investments and other transactions that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential obligation is subject to contractual limitations, while in other cases such limitations are not specified or applicable.
Since
certain of these obligations are not subject to limitations, it is not possible to determine the maximum potential amount due under these guarantees. The accrued liability identified above relates to the sale of POT and represents a financial guarantee of certain insurance obligations of POT. See Note 1 for additional information regarding the sale.
Assurance IQ Contingent Consideration Liability
In October 2019, the Company completed its acquisition of Assurance IQ. For additional information regarding the transaction, including the contingent consideration liability, see Note 1 to the Consolidated
Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The contingent consideration liability is reported at fair value, which is determined based on the present value of expected payments under the arrangement, using an internally-developed option pricing model based on a number of assumptions, including certain unobservable assumptions discounted at an estimated market interest rate. The fair value of the liability is updated each reporting period, with changes in fair value reported within “Other income.” The fair value of the contingent consideration liability was iizero/
as of March 31, 2022 and December 31, 2021.
Contingent Liabilities
On an ongoing basis, the Company and its regulators review its operations including, but not limited to, sales and other customer interface procedures and practices, and procedures for meeting obligations to its customers and other parties. These reviews may result in the modification or enhancement of processes or the imposition of other action plans, including concerning management oversight, sales and other customer
interface procedures and practices, and the timing or computation of payments to customers and other parties. In certain cases, if appropriate, the Company may offer customers or other parties remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
The
Company is subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment of unclaimed or abandoned funds, and is subject to audit and examination for compliance with these requirements.
It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be materially affected as a result of payments in connection with the matters discussed above or other matters depending, in part, upon the results of operations or cash flow for such period. Management believes, however, that ultimate payments in connection with these matters, after consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on the
Company’s financial position.
Litigation and Regulatory Matters
The Company is subject to legal and regulatory actions in the ordinary course of its businesses. Pending legal and regulatory actions include proceedings relating to aspects of the Company’s businesses and operations that are specific to it and proceedings that are typical of the businesses in which it operates, including in both cases businesses that have been either divested or placed in wind-down status. Some of these proceedings have been brought on behalf of various alleged classes of complainants.
In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. The outcome of litigation or a regulatory matter, and the amount or range of potential loss at any particular time, is often inherently uncertain.
The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established but the matter, if potentially material, is disclosed, including matters discussed below. The Company
estimates that as of March 31, 2022, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is less than $i250 million. Any estimate is not an indication of expected loss, if any, or the Company’s maximum possible loss exposure on such matters. The
Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.
The following discussion of litigation and regulatory matters provides an update of those matters discussed in Note 23 to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and should be read in conjunction with the complete descriptions provided in the Form 10-K.
Assurance
IQ, LLC
William James Griffin, et al. v. Benefytt Technologies, Inc., et al. and Assurance IQ, LLC
In March 2022, the court issued an order granting Assurance IQ, LLC’s motion to dismiss the claims for declaratory and injunctive relief and denying the motion to dismiss as to the remaining claims.
LIBOR Litigation
Prudential Investment Portfolios 2, f/k/a Dryden Core Investment Fund, o/b/o Prudential Core Short-Term Bond Fund and Prudential Core Taxable Money Market Fund v. Bank of America Corporation, et al.
In March 2022, defendants petitioned the United
States Supreme Court for a writ of certiorari to review the Second Circuit Court of Appeals judgment that personal jurisdiction extends to foreign defendants.
Summary
The Company’s litigation and regulatory matters are subject to many uncertainties, and given their complexity and scope, their outcome cannot be predicted. It is possible that the Company’s results of operations or cash flow in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters depending, in part, upon the results of operations or cash flow for such period. In light of
the unpredictability of the Company’s litigation and regulatory matters, it is also possible that in certain cases an ultimate unfavorable resolution of one or more pending litigation or regulatory matters could have a material adverse effect on the Company’s financial statements. Management believes, however, that, based on information currently known to it, the ultimate outcome of all pending litigation
Notes to Unaudited
Interim Consolidated Financial Statements—(Continued)
and regulatory matters, after consideration of applicable reserves and rights to indemnification, is not likely to have a material adverse effect on the Company’s financial statements.
15.iSUBSEQUENT
EVENTS
On April 1, 2022, the Company closed the sale of its equity interest in PALAC, which represents a portion of its in-force traditional variable annuity block of business, to Fortitude Group Holdings, LLC.
Separately, on April 1, 2022, the Company closed the sale of its Full Service Retirement business to Great-West.
See Note 1 for more information regarding these dispositions.
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, 2022, compared with December 31, 2021, and its consolidated results of operations for the three months ended March 31, 2022 and 2021. You should read the following analysis of our consolidated financial condition and results of operations in conjunction with the MD&A, the “Risk Factors” section, and the audited Consolidated Financial Statements included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as well as the statements under “Forward-Looking Statements,” and the Unaudited Interim Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Prudential Financial, a financial services leader with approximately $1.620 trillion of assets under
management as of March 31, 2022, has operations primarily in the United States of America (“U.S.”), Asia, Europe and Latin America. Through our subsidiaries and affiliates, we offer a wide array of financial products and services, including life insurance, annuities, retirement-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.
In October 2021, we announced the creation of Retirement Strategies, a new U.S. business that will serve the retirement needs of both individual and institutional customers. This business will bring the financial solutions and capabilities of our Individual Annuities business together with the institutional investment and pension solutions offered through our Retirement business. The new leadership team continues to make decisions around the business’s operating structure. When this new structure is finalized and operational, the presentation of our segment results may be modified to conform to this new structure.
Management
expects that results will continue to benefit from our differentiated mix of market-leading businesses that complement each other to provide competitive advantages, earnings diversification and capital benefits from a balanced risk profile. We believe we are well-positioned to tap into market opportunities to meet the evolving needs of individual customers, workplace clients, and society at large. Our mix of high-quality protection, retirement and investment management businesses enables us to offer solutions that cover a broad range of financial needs and to engage with our clients through multiple channels, including the ability to sell solutions across a broad socio-economic spectrum through Assurance IQ’s digital platform. We aim to expand our addressable market, build deeper and longer-lasting relationships with customers and clients, and meaningfully improve their financial wellness. While challenges have existed in the form of a sustained low interest rate environment,
interest rates have begun to rise from historically low levels. In the short term, rising interest rates will cause a decrease in our assets under management and associated fee income in our fee-based businesses, while over the longer term, rising interest rates will drive an increase in investment income from higher portfolio reinvestment rates.
In order to further increase our competitive advantage, we are working to enhance the experience of our customers and the capabilities of our businesses, which we expect will also help us realize improved margins. In 2019, we launched programs in pursuit of these objectives that have resulted and will continue to result in multi-year investments in technology, systems and employee reskilling, as well as severance and related charges. For the three months ended March 31, 2022, we incurred approximately $25
million of costs in connection with these programs. We expect these programs will generate significant expense efficiencies over several years that will mitigate the impact from increases in other expenses due to inflation and business growth initiatives. For the three months ended March 31, 2022, the Company estimates that these programs generated cost savings of approximately $170 million and, as of March 31, 2022, we remain on track to accumulate approximately $750 million of annual run-rate cost savings by the end of 2023.
Annually during the second quarter of each year, we perform a comprehensive review of actuarial assumptions. As part of this review, we may update these assumptions and make refinements
to our models based upon emerging experience, future expectations and other data, including any observable market data. For additional information, see “—Accounting Policies & Pronouncements—Application of Critical Accounting Estimates” below as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Since
the first quarter of 2020, the COVID-19 pandemic has caused extreme stress and disruption in the global economy and financial markets and elevated mortality and morbidity for the global population. The COVID-19 pandemic impacted our results of operations in the current period and is expected to impact our results of operations in future periods.
The Company has taken several measures to manage the impacts of this crisis. The actual and expected impacts of these events and other items are included in the following update:
•Outlook.
U.S. Businesses:
The
United States has experienced multiple waves of COVID-19, with the severity of each wave depending on such factors as seasonality, varying levels of population immunity, and the evolution of the virus itself into different variants. Throughout the course of the pandemic, deaths from COVID-19 in the United States have ranged from a few hundred to several thousand per day. In December 2021, the Omicron variant emerged in the U.S. and quickly became the dominant strain, causing many more infections but with a smaller percentage of infections resulting in hospitalizations and deaths compared to prior waves, though still causing deaths to spike during the first quarter of 2022. Vaccines and other therapeutics, such as antiviral treatments, are now widely available and non-pharmaceutical interventions, such as mandatory social distancing and mask wearing, are being relaxed in most communities; however, the future evolution of the virus, among other factors, could cause the
actual course of the pandemic and its impact on our business to differ from our current expectations.
Specific outlook considerations for certain of our U.S. businesses include the following:
Retirement. As many of the products in our Institutional Investment Products business assume longevity risk, elevated levels of mortality resulting from COVID-19 may continue to contribute to higher levels of underwriting gains.
Group Insurance. We anticipate that COVID-19 will continue to contribute in the near-term to elevated levels of mortality resulting in increased life insurance claims. In addition, we are continuing to monitor the potential impact of the pandemic on our disability business,
overall sales volumes, and the utilization of our workplace benefit offerings.
Individual Life. We expect COVID-19 to continue to contribute in the near-term to elevated levels of mortality, resulting in increased life insurance claims.
International Businesses:
Our Japanese operations experienced an elevated level of COVID-19 claims due to the spread of the Omicron variant in the first quarter of 2022. In response to this spread, Japanese authorities enacted control measures, which disrupted sales and agent recruiting while these measures were in place; however, these restrictions were subsequently lifted towards the end of the quarter. Although we have seen signs of improvement across all key markets, the situation
remains fluid and COVID-19 might impact future claims and sales depending on the state of the pandemic in the geographic markets in which we operate. We believe our needs-based selling and death protection focus are even more valuable to consumers based on the global experience of COVID-19 and will help support the continued long-term growth of our businesses.
•Results of Operations. See “—Results of Operations” and “—Results of Operations by Segment” for a discussion of results for the first quarter of 2022.
•Investment Portfolio. The economy continues to recover and remains on a path to re-opening. Credit migration and defaults were low in 2021 and have remained limited
in 2022. The sectors most impacted from COVID-19 have started to recover but could be influenced by periods of volatility due to the possibility of additional variants emerging.
•Sales and Flows. See “—Segment Results of Operations” for a discussion of sales and flows in each of our segments.
•Underwriting Results. Through the first three months of 2022, we estimate that COVID-19 had a significant net negative impact on our underwriting results reflecting unfavorable mortality impacts in our Group Insurance, Individual Life and International businesses, partially offset by favorable mortality impacts in our Retirement business. For the
second quarter of 2022, the Company expects underwriting results to be adversely impacted by approximately $40 million in our U.S. Businesses, predominantly in our Group Insurance business, and approximately $25 million in our International Businesses; however, the ultimate impact on our underwriting results will depend on various factors including: an insured’s age; geographic concentration; insured versus uninsured populations among the fatalities; the transmissibility and virulence of the virus, including the potential for further mutation; and the ongoing acceptance and efficacy of the vaccines and other therapeutics.
•Risk Management. Prudential has a robust
risk management framework that seeks to ensure we can fulfill our customer, regulatory, and other stakeholder obligations under a range of stress scenarios by maintaining the appropriate balance between the Company’s resources and risks. We evaluate the Company’s exposure to stress under four lenses (economic, STAT, GAAP, and liquidity).
Our risk management framework incorporates severe to very severe stresses across equities, interest rates, credit migration and defaults, currencies and mortality. This framework includes a specific “pandemic and sell-off” scenario with a mortality calamity (1.5 extra deaths per 1,000 lives in the first year) based on a modern-day interpretation of
the 1918 Spanish Flu experience that is aligned with most regulatory frameworks. The stress scenario assumes an even distribution of increased mortality across the population, which is more adversely impactful to the Company than our current understanding of COVID-19 mortality, which is skewed toward older ages. As the COVID-19 pandemic continues to unfold, we continue to update our analysis and take management actions in response to this specific event.
As of March 31, 2022, the COVID-19 pandemic has not reached the most severe levels of financial impacts included in the Company’s stress testing. In addition, the net mortality impact of COVID-19 has been moderated
by the balance between our mortality exposure (such as in our Individual Life and Group Insurance businesses) and our offsetting longevity exposure (such as in our Retirement business), and is influenced by the age distribution of U.S. COVID-19 mortality. The future evolution of the virus, among other factors, could cause the actual course of the pandemic to differ from our current expectations.
•Risk Factors. The COVID-19 pandemic has adversely impacted our results of operations, financial position, investment portfolio, new business opportunities and operations, and these impacts are expected to continue. For additional information on the risks to our business posed by the COVID-19 pandemic, see “Risk Factors” included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2021.
•Business Continuity. Throughout the COVID-19 pandemic, we have been executing our business continuity protocols to ensure our employees are safe and able to serve our customers. This included effectively transitioning the vast majority of our employees to remote work arrangements. In March 2022, our offices were reopened to employees and we expect that most of our workforce will adopt a hybrid arrangement for the foreseeable future.
We believe all of our businesses can sustain long-term hybrid or fully remote work arrangements while ensuring that critical business operations are sustained. In addition, we are managing COVID-19 related impacts on
third-party provided services, and do not anticipate significant interruption in critical operations.
Impact of a Low Interest Rate Environment
As a global financial services company, market interest rates are a key driver of our results of operations and financial condition. Changes in interest rates can affect our results of operations and/or our financial condition in several ways, including favorable or adverse impacts to:
•investment-related activity, including: investment income returns, net interest margins, net investment spread results, new money rates, mortgage loan prepayments and bond redemptions;
•hedging
costs and other risk mitigation activities;
•insurance reserve levels, market experience true-ups and amortization of both deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”);
•customer account values, including their impact on fee income;
•fair value of, and possible impairments on, intangible assets such as goodwill;
•product offerings, design features, crediting rates and sales mix; and
•policyholder behavior, including surrender or withdrawal activity.
For more information on interest rate risks, see
“Risk Factors—Market Risk” included in our Annual Report on Form 10-K for the year ended December 31, 2021.
See below for discussions related to the current interest rate environments in our two largest markets, the U.S. and Japan; the composition of our insurance liabilities and policyholder account balances; and the hypothetical impacts to our investment related results if these interest rate environments are sustained.
U.S. Operations excluding the Closed Block Division
Interest
rates in the U.S. have experienced a sustained period of historically low levels with certain benchmarks reaching significant lows in recent years, while increasing more recently. Although more recent impacts of inflation in the U.S., along with other varying market conditions and events, make uncertain the timing, amount and impact of any monetary policy decisions by the Federal Reserve, changes in interest rates may impact our reinvestment yields, primarily for our investments in fixed maturity securities and commercial mortgage loans. As interest rates decline, our reinvestment yield may be below our overall portfolio yield, resulting in an unfavorable impact to earnings. Conversely, as interest rates rise, our reinvestment yield may exceed the overall portfolio yield resulting in a favorable impact to earnings.
For the general account supporting our U.S. Businesses and our Corporate
and Other operations, we estimate annual principal payments and prepayments that we would be required to reinvest to be approximately 5.6% of the fixed maturity security and commercial mortgage loan portfolios through 2023. The portion of the general account attributable to these operations has approximately $224 billion of such assets (based on net carrying value and including assets classified as “held-for-sale”) as of March 31, 2022. The average portfolio yield for fixed maturity securities and commercial mortgage loans is approximately 3.7% as of March 31, 2022.
Included in the $224 billion of fixed maturity securities and commercial mortgage loans are approximately $174 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 $174 billion, approximately 51% contain provisions for prepayment premiums. If we reinvest scheduled payments or prepayments (not subject to a prepayment fee) at rates below the current portfolio yield, including in some cases at rates below those guaranteed under our insurance contracts, future operating results will be impacted to the extent we do not, or are unable to, reduce crediting rates on in-force blocks of business, or effectively utilize other asset/liability management strategies described below, in order to maintain current net interest margins.
The following table sets forth the insurance liabilities and policyholder account balances of our U.S. operations excluding the Closed Block Division, by type, for the date indicated:
Long-duration insurance products with fixed and guaranteed terms
$
150
Contracts with adjustable crediting rates subject to guaranteed minimums
61
Participating contracts where investment income risk ultimately accrues
to contractholders
13
Total
$
224
The $150 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
$61 billion above relates to contracts with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. Although we may have the ability to lower crediting rates for those contracts above guaranteed minimums, our willingness to do so may be limited by competitive pressures. The following table sets forth the related account values by range of guaranteed minimum crediting rates and the related range of the difference, in basis points (“bps”), between rates being credited to contractholders as of March 31, 2022, and the respective guaranteed minimums.
Account Values with Adjustable Crediting Rates Subject to Guaranteed Minimums:
At guaranteed minimum
1-49 bps
above guaranteed minimum
50-99 bps above guaranteed minimum
100-150 bps above guaranteed minimum
Greater than 150 bps above guaranteed minimum
Total
($ in billions)
Range of Guaranteed Minimum Crediting Rates:
Less
than 1.00%
$
1.1
$
1.1
$
0.1
$
0.0
$
0.0
$
2.3
1.00% - 1.99%
4.3
13.4
1.9
0.8
2.4
22.8
2.00%
- 2.99%
1.3
0.0
1.2
1.4
3.3
7.2
3.00% - 4.00%
25.7
0.0
1.7
0.7
0.1
28.2
Greater
than 4.00%
0.8
0.0
0.0
0.0
0.0
0.8
Total(1)
$
33.2
$
14.5
$
4.9
$
2.9
$
5.8
$
61.3
Percentage
of total
54
%
24
%
8
%
5
%
9
%
100
%
__________
(1)Includes approximately $0.52 billion related to contracts
that impose a market value adjustment if the invested amount is not held to maturity.
The remaining $13 billion of insurance liabilities and policyholder account balances in these operations relates to participating contracts for which the investment income risk is expected to ultimately accrue to contractholders. The crediting rates for these contracts are periodically adjusted based on the return earned on the related assets.
Assuming a hypothetical scenario where the average 10-year U.S. Treasury rate is 2.50% (which is reasonably consistent with recent rates) for the period from April
1, 2022 through March 31, 2023 (and credit spreads remain unchanged from average levels experienced during the first quarter 2022), we estimate that the impact to net investment income of reinvesting activities, including scheduled maturities and estimated prepayments of fixed maturities and commercial mortgage and other loans (excluding assets supporting participating contracts), would be between $0 million and $(20) million over this period.
In order to mitigate the unfavorable impact that a low interest rate environment has on our net interest margins, we employ a proactive asset/liability management program, which includes strategic asset allocation and hedging strategies within a disciplined risk management framework. These strategies
seek to match the characteristics of our products, and to closely approximate the interest rate sensitivity of the assets with the estimated interest rate sensitivity of the product liabilities. Our asset/liability management program also helps manage duration gaps, currency and other risks between assets and liabilities through the use of derivatives. We adjust this dynamic process as products change, as customer behavior changes and as changes in the market environment occur. As a result, our asset/liability management process has permitted us to manage the interest rate risk associated with our products through several market cycles. Our interest rate exposure is also mitigated by our business mix, which includes lines of business for which fee-based and insurance underwriting earnings play a more prominent role in product profitability. We also regularly examine our product offerings and their profitability. As a result, we may reprice certain products and discontinue
sales of other products that do not meet our profit expectations.
Closed Block Division
Substantially all of the $55 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 of U.S. dollar-denominated products relative to products denominated in other currencies. For additional information on sales within our international insurance operations, see “—International Businesses—Sales Results,” below.
The following table sets forth the insurance liabilities and policyholder account balances of our Japanese operations, by type, for the date indicated:
Insurance products with fixed and guaranteed terms
$
137
Contracts with a market value adjustment if invested amount is not held to maturity
25
Contracts with adjustable crediting rates subject
to guaranteed minimums
10
Total
$
172
The $137 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 $25 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity and $10 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 0.90% and the 10-year U.S. Treasury rate is 2.50% (which is reasonably consistent with recent
rates) for the period from April 1, 2022 through March 31, 2023 (and credit spreads remain unchanged from average levels experienced during the first quarter 2022), we estimate that there would be no material 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), over this period.
Results of Operations
Consolidated Results of Operations
The
following table summarizes net income (loss) for the periods presented.
Income (loss) before income taxes and equity in earnings of operating joint ventures
(115)
3,414
Income
tax expense (benefit)
(69)
636
Income (loss) before equity in earnings of operating joint ventures
(46)
2,778
Equity in earnings of operating joint ventures, net of taxes
2
26
Net
income (loss)
(44)
2,804
Less: Income attributable to noncontrolling interests
(13)
(24)
Net income (loss) attributable to Prudential Financial, Inc.
$
(31)
$
2,828
The
$2,859 decrease in “Net income (loss) attributable to Prudential Financial, Inc.” for the first quarter of 2022 compared to the first quarter of 2021 reflected the following notable items on a pre-tax basis:
•$1,546 million unfavorable variance from realized investment gains (losses), net, and related charges and adjustments for PFI, excluding the impact of the hedging program associated with certain variable annuities (see “General Account Investments” for additional information);
•$869 million unfavorable variance
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;
•$477 million unfavorable variance from lower adjusted operating income from our business segments, including the absence of a gain from the sale of the Company’s 35% ownership stake in Pramerica SGR recorded in the prior year period (see “Segment Results of Operations” for additional information);
•$355 million unfavorable variance from a loss in the current period from our Divested and Run-off Businesses compared to income in the prior year period; and
•$310 million unfavorable variance driven by
market experience updates primarily within our Individual Annuities and Individual Life businesses.
Partially offsetting these decreases in “Net income (loss) attributable to Prudential Financial, Inc.” was a $705 million favorable variance from income taxes reflecting the decrease 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.
(1)Effective third quarter of 2021, the results of the Full Service Retirement business are excluded from the Retirement segment and are included in Divested and Run-off Businesses. 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 the contribution to income (loss) of Divested and Run-off Businesses that have been or will be sold or exited, including businesses that have been placed in wind-down, but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP. See “—Divested and Run-off Businesses” 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)Includes certain components of consideration for business acquisitions, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration.
Segment
results for the period presented above reflect the following:
PGIM. Results for the first quarter of 2022 decreased in comparison to the prior year period, primarily reflecting the absence of a gain in the prior year period from the sale of our 35% ownership stake in Pramerica SGR, higher expenses and lower other related revenues, partially offset by an increase in asset management fees.
Retirement. Results for the first quarter of 2022 decreased in comparison to the prior year period, primarily driven by less favorable
reserve experience, partially offset by higher net investment spread results.
Group Insurance. Results for the first quarter of 2022 increased in comparison to the prior year period, driven by more favorable underwriting results, partially offset by higher expenses.
Individual Annuities. Results for the first quarter of 2022 increased in comparison to the prior year period, primarily driven by higher net investment spread results and lower expenses, partially offset by lower fee income, net of distribution expenses
and other associated costs.
Individual Life. Results for the first quarter of 2022 increased in comparison to the prior year period, primarily driven by less unfavorable underwriting results and higher net investment spread results.
Assurance IQ. Results for the first quarter of 2022 were relatively flat in comparison to the prior year period as an increase in the Medicare line was mostly offset by a decrease in the Health Under 65 line.
International
Businesses. Results for the first quarter of 2022 decreased in comparison to the prior year period, inclusive of an unfavorable net impact from foreign currency exchange rates, primarily driven by lower net investment spread results and lower earnings from our joint venture investments, partially offset by more favorable underwriting results.
Corporate and Other. Results for the first quarter of 2022 reflected increased losses in comparison to the prior year period, primarily driven by higher net charges from other corporate activities and lower investment income, partially offset by favorable pension and employee benefit results and lower interest expense on debt.
Closed
Block Division. Results for the first quarter of 2022 decreased in comparison to the prior year period, primarily driven by lower net investment activity results, partially offset by a reduction in the policyholder dividend obligation.
Adjusted Operating Income. In managing our business, we analyze our segments’ operating performance using “adjusted operating
income.” Adjusted operating income does not equate to “Income (loss) before income taxes and equity in earnings of operating joint ventures” or “Net income (loss)” as determined in accordance with U.S. GAAP, but is the measure of segment profit or loss we use to evaluate segment performance and allocate resources and, consistent with authoritative guidance, is our measure of segment performance. The adjustments to derive adjusted operating income are important to an understanding of our overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and our definition of adjusted operating income may differ from that used by other companies; however, we believe that the presentation of adjusted operating income as we measure it for management purposes enhances the understanding of our results of operations by highlighting the results from ongoing operations and the underlying profitability
of our businesses.
See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information on the presentation of segment results and our definition of adjusted operating income.
Annualized New Business Premiums. In managing our Individual Life, Group Insurance and International Businesses, we analyze annualized new business premiums, which do not correspond to revenues under U.S. GAAP. Annualized new business premiums measure the current sales performance of the business, while revenues primarily reflect the renewal persistency of policies written in prior years and net investment income, in addition to current sales. Annualized new business premiums include 10% of first year premiums or deposits from single pay products. No other adjustments are made
for limited pay contracts.
The amount of annualized new business premiums for any given period can be significantly impacted by several factors, including but not limited to: addition of new products, discontinuation of existing products, changes in credited interest rates for certain products and other product modifications, changes in premium rates, changes in tax laws, changes in regulations or changes in the competitive environment. Sales volume may increase or decrease prior to certain of these changes becoming effective, and then fluctuate in the other direction following such changes.
Assets Under Management. In managing our PGIM business, we analyze assets under management (which
do not correspond directly to U.S. GAAP assets) because the principal source of revenues is fees based on assets under management. Assets under management represent the fair market value or account value of assets that we manage directly for institutional clients, retail clients, and for our general account, as well as assets invested in our products that are managed by third-party managers.
Account Values. In managing our Individual Annuities and Retirement businesses, we analyze account values, which do not correspond directly to U.S. GAAP assets. Net sales (redemptions) in our Individual Annuities business and net additions (withdrawals) in our Retirement business do not correspond to revenues under U.S. GAAP, but are used as a relevant measure of business activity.
Impact
of Foreign Currency Exchange Rates
Foreign currency exchange rate movements and related hedging strategies
As a U.S.-based company with significant business operations outside the U.S., particularly in Japan, we are subject to foreign currency exchange rate movements that could impact our U.S. dollar (“USD”)-equivalent earnings and shareholder return on equity. Our USD-equivalent earnings could be materially affected by currency fluctuations from period to period, even if earnings on a local currency basis are relatively constant. Our USD-equivalent equity is impacted as the value of our investment in international operations may also fluctuate based on changes in foreign currency exchange rates. We seek to mitigate these impacts through various hedging strategies, including the use of derivative contracts
and by holding USD-denominated assets in certain of our foreign subsidiaries.
In order to reduce earnings volatility from foreign currency exchange rate movements, we enter into forward currency derivative contracts to effectively fix the currency exchange rates for a portion of our prospective non-USD-denominated earnings streams. This forward currency hedging program is primarily associated with our insurance operations in Japan.
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.
USD-denominated assets held in yen-based entities(1)
9.4
9.5
Dual currency and synthetic dual currency investments(2)
0.4
0.5
Total USD-equivalent equity foreign currency hedging instruments
9.8
10.0
Total
foreign currency hedges
$
9.8
$
10.0
__________
(1)Includes USD-denominated fixed maturities at amortized cost plus any related accrued investment income, as well as USD notional amount of foreign currency derivative contracts outstanding. Note this amount represents only those USD assets serving to hedge the impact of foreign currency volatility on equity. Separate from this program, our Japanese operations also have $75.1 billion and $74.3 billion as of March 31, 2022
and December 31, 2021, 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 of Prudential Financial. These hedging strategies have the economic effect of moving the change in value of these USD-denominated investments due to foreign currency exchange rate movements from our Japanese yen-based entities to our USD-based entities.
These USD-denominated investments also pay a coupon which is generally higher than what a similar yen-denominated investment would pay. The incremental impact of this higher yield on our USD-denominated investments, as
well as our dual currency and synthetic dual currency investments, will vary over time, and is dependent on the duration of the underlying investments as well as interest rate environments in both the U.S. and Japan at the time of the investments.
Impact of intercompany foreign currency exchange rate arrangements on segment results of operations
The financial results of our International Businesses and PGIM reflect the impact of intercompany arrangements with our Corporate and Other operations pursuant to which these segments’ non-USD-denominated earnings are translated at fixed currency exchange rates. Results of our Corporate and Other operations include differences between the translation adjustments recorded by the segments at the fixed currency exchange rate versus the actual average rate during the period. In addition, specific
to our International Businesses where we hedge certain currencies, the results of our Corporate and Other operations also include the impact of any gains or losses recorded from the forward currency contracts that settled during the period, which include the impact of any over or under hedging of actual earnings that differ from projected earnings.
For 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
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.
Settlement
gains (losses) on forward currency contracts(2)
11
8
Net benefit (detriment) to Corporate and Other
6
7
Net impact on consolidated revenues and adjusted operating income
$
11
$
8
__________
(1)Represents
the difference between non-USD-denominated earnings translated on the basis of weighted average monthly currency exchange rates versus fixed currency exchange rates determined in connection with the foreign currency income hedging program.
(2)As of March 31, 2022 and 2021, the total notional amounts of these forward currency contracts within our Corporate and Other operations were $0.6 billion and $0.9 billion, respectively, of which $0.0 billion and $0.4 billion, respectively, were related to our Japanese insurance operations.
Impact of products denominated in non-local currencies on U.S. GAAP earnings
While
our international insurance operations offer products denominated in local currency, several also offer products denominated in non-local currencies. 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.
As
a result, 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 $1.8 billion and $2.0 billion as of March 31, 2022 and December 31, 2021, respectively, and will be recognized in earnings within “Realized investment
gains (losses), net” over time as these assets mature or are sold. Absent the sale of any of these assets prior to their stated maturity, approximately 10% of the $1.8 billion balance as of March 31, 2022 will be recognized throughout the remainder of 2022, approximately 3% will be recognized in 2023, and the remaining balance will be recognized from 2024 through 2051.
Highly inflationary economy in Argentina
Our insurance operations in Argentina, Prudential of Argentina (“POA”), have historically utilized the Argentine peso as the functional currency given it is the currency of the primary economic environment in which the entity operates. During 2018, Argentina experienced a cumulative inflation rate that exceeded 100% over a 3-year period. As a result, Argentina’s
economy was deemed to be highly inflationary, resulting in reporting changes effective July 1, 2018. Under U.S. GAAP, the financial
statements of a foreign entity in a highly inflationary economy are to be remeasured as if its functional currency (formerly the Argentine peso) is the reporting currency of its parent reporting entity (the USD) on a prospective basis. While this changed how the results of POA are remeasured and/or translated into USD, the impact to our financial statements was not material nor is it expected to be material in future periods given the relative size of our POA operations. It should
also be noted that due to the macroeconomic environment in Argentina, the majority of POA’s balance sheet consists of USD-denominated product liabilities supported by USD-denominated assets. As a result, this accounting change serves to reduce the remeasurement impact reflected in net income given that the functional currency and currency in which the assets and liabilities are denominated will be more closely aligned.
Accounting Policies & Pronouncements
Application of Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the application of accounting policies that
often involve a significant degree of judgment. Management, on an ongoing basis, reviews estimates and assumptions used in the preparation of financial statements. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, the Company’s results of operations and financial position as reported in the Unaudited Interim Consolidated Financial Statements could change significantly.
Management believes the accounting policies relating to the following areas are most dependent on the application of estimates and assumptions and require management’s most difficult, subjective, or complex judgments:
•DAC, deferred sales inducements (“DSI”) and VOBA;
•Policyholder
liabilities;
•Goodwill;
•Valuation of investments including derivatives, measurement of allowance for credit losses, and recognition of other-than-temporary impairments (“OTTI”);
•Pension and other postretirement benefits;
•Taxes on income; and
•Reserves for contingencies, including reserves for losses in connection with unresolved legal matters.
Market Performance - Equity and Interest Rate Assumptions
DAC, DSI and VOBA, associated with the
variable and universal life policies of our Individual Life and International Businesses segments and the variable and fixed annuity contracts of our Individual Annuities and International Businesses segments, are generally amortized over the expected lives of these policies in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. The quarterly adjustments for market performance reflect the impact of changes to our estimate of total gross profits to reflect actual fund performance and market conditions. A significant portion of gross profits for our variable annuity contracts and, to a lesser degree, our variable life contracts
are dependent upon the total rate of return on assets held in separate account investment options. This rate of return influences the fees we earn on variable annuity and variable life contracts, costs we incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts, as well as other sources of profit. Returns that are higher than our expectations for a given period produce higher than expected account balances, which increase the future fees we expect to earn on variable annuity and variable life contracts
and decrease the future costs we expect to incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts. The opposite occurs when returns are lower than our expectations. The changes in future expected gross profits are used to recognize a cumulative adjustment to all prior periods’ amortization.
Furthermore, the calculation of the estimated liability for future policy benefits related to certain insurance products includes an estimate of associated revenues and expenses that are dependent on both historical market performance as well as estimates of market performance
in the future. Similar to DAC, DSI and VOBA described above, these liabilities are subject to quarterly adjustments for experience including market performance, in addition to annual adjustments resulting from our annual reviews of assumptions.
The weighted average rate of return assumptions used in developing estimated market returns consider many factors specific to each product type, including asset durations, asset allocations and other factors. With regard to equity market assumptions, the near-term future rate of return assumption used in evaluating DAC, DSI and VOBA and liabilities for future policy benefits for certain of our products, primarily our domestic variable annuity and domestic and international variable life insurance products, is generally updated each quarter and is derived using a reversion to the mean approach, a common industry
practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15.0%, we use our maximum future rate of return. If the near-term projected future rate of return is lower than our near-term minimum future rate of return of 0%, we use our minimum future rate of return. As of March 31, 2022, our domestic variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 0.9% 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 1.6% 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 2021 annual reviews and update of assumptions and other refinements, we kept our long-term expectation of the 10-year U.S. Treasury rate and 10-year Japanese Government Bond yield unchanged and continue to grade to rates of 3.25% and 1.00%, respectively, 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.
In accordance
with our established practice, we will update actuarial assumptions during the second quarter of 2022. We have a comprehensive process that will include, among other things, the review of long-term interest rates, inflation, COVID-19 mortality experience, and industry studies, including evaluating industry data as to its applicability to the Company’s experience. We have recently obtained industry data that reflects experience that is more adverse than the assumptions we currently use in our Individual Life segment. We are evaluating the applicability of this information to our block of business and the extent to which it would cause an increase in reserves and corresponding decline in earnings within Individual Life. The overall process to update assumptions is ongoing and the outcome across our businesses is uncertain.
For
further discussion of impacts 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—Application of Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2021.
Future Adoption of New Accounting Pronouncements
ASU 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASB on August 15, 2018, and was amended
by ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date, issued in October 2019, and ASU 2020-11, Financial Services—Insurance (Topic 944): Effective Date and Early Application, issued in November 2020. The Company will adopt ASU 2018-12 effective January 1, 2023 using the modified retrospective transition method where permitted, and apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements.
The
Company has an established governance framework to manage the implementation of the standard. The Company’s implementation efforts continue to progress including, but not limited to, implementing refinements to key accounting policy decisions, modifications to actuarial valuation models, updates to data sourcing capabilities, automation of key financial reporting and analytical processes and updates to internal controls over financial reporting.
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. While
the magnitude of impacts is still being assessed, the Company expects the standard to result in a significant decrease to “Total equity”, primarily from remeasuring in-force contract liabilities using upper-medium grade fixed income instrument yields as of the adoption date through “Accumulated other comprehensive income (loss)”. The standard also requires a significant increase in disclosures. In addition to the significant impacts to the balance sheet, 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
Operating Results
The following table sets forth PGIM’s operating results for the periods indicated:
Realized investment gains (losses), net, and related adjustments
(3)
(2)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests
7
(28)
Other
adjustments(3)
(12)
0
Income (loss) before income taxes and equity in earnings of operating joint ventures
$
180
$
621
__________
(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.
(2)2021 includes a $378 million pre-tax gain related to the sale of our 35% ownership stake in Pramerica SGR, an asset management joint venture in Italy.
(3)Includes certain components of consideration for business acquisitions, which are recognized as compensation expense over the requisite service periods.
Adjusted
Operating Income
Adjusted operating income decreased $463 million, primarily reflecting a decrease in service, distribution and other revenues, primarily driven by the absence of a gain in the prior year period from the sale of our Pramerica SGR joint venture, higher compensation expenses associated with business growth, and lower other related revenues, net of related expenses. These impacts were partially offset by higher asset management fees, net of related expenses.
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:
(1)Consists
of fees from: individual mutual funds and variable annuities and variable life insurance separate account assets; funds invested in proprietary mutual funds through our defined contribution plan products; and third-party sub-advisory relationships. Revenues from fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance are included in the general account.
(2)Includes mortgage origination revenues from our commercial mortgage origination and servicing business.
(3)2021 includes a $378 million pre-tax gain related to the sale of our 35% ownership stake in Pramerica SGR, an asset management joint venture in Italy.
Revenues decreased $388 million. Service, distribution and other revenues decreased, primarily reflecting the absence of a gain in the prior year period from the sale of our Pramerica SGR joint venture, partially offset by more favorable revenues from certain consolidated funds (which were fully offset by higher expenses related to noncontrolling interests in these funds). Also contributing to the decrease were lower other related revenues primarily driven by a decrease in seed and co-investments reflecting investment underperformance, lower performance-based incentive fees due to more favorable fees earned in the prior year period, and lower commercial mortgage origination revenues primarily driven by higher interest rates. These impacts were partially offset by higher asset management fees, net of related expenses, primarily reflecting an increase in higher
fee yielding strategies, partially offset by lower average assets under management, primarily driven by market depreciation reflecting higher interest rates and spreads.
Expenses increased $75 million, reflecting higher compensation and operating expenses driven by business growth, and higher variable expenses primarily associated with an increase in revenues of certain consolidated funds, as discussed above.
Assets Under Management
The following table sets forth assets under management by asset class as of the dates indicated:
Assets under management within other reporting segments(2)
205.5
218.5
212.1
Total
PFI assets under management
$
1,620.1
$
1,742.3
$
1,663.4
__________
(1)“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.
(2)Primarily includes assets related to certain annuity, variable life, retirement and group life products in our U.S. Businesses and Corporate & Other operations, and certain general account assets in our International Businesses. These assets are not directly managed by PGIM, but rather are invested in non-proprietary funds or are managed by either the divisions themselves or by our Chief Investment Officer Organization.
PGIM’s assets under management as of March 31, 2022decreased
$37 billion in comparison to the prior year quarter, primarily driven by market depreciation, resulting from higher interest rates and spreads, and unfavorable foreign exchange rate impacts. PGIM’s assets under management as of March 31, 2022 decreased $109 billion in comparison to the prior quarter, primarily driven by market depreciation resulting from higher interest rates and spreads, and lower equity markets.
The following table sets forth assets under management by source as of the dates indicated:
(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 assets related to certain annuity, variable life, retirement and group life products in our U.S. Businesses and Corporate & Other operations, 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.
The following table sets forth the component changes in PGIM’s assets under management for the periods indicated:
Net
money market activity and other increases (decreases)
0.0
1.3
2.1
Ending assets under management
$
1,414.6
$
1,451.3
$
1,414.6
__________
(1)Represents
assets that PGIM manages for the benefit of other reporting segments within the Company. Additions and withdrawals of these assets are attributable to third-party product inflows and outflows in other reporting segments.
(2)Includes income reinvestment, where applicable.
Private Capital Deployment
Private capital deployment is indicative of the pace and magnitude of capital that is invested and will result in future revenues that may include management fees, transaction fees, incentive fees and servicing revenues, as well as future costs to manage these assets.
Private
capital deployment represents the gross value of private capital invested in real estate debt and equity, and private credit and equity asset classes. Assets under management resulting from private capital deployment are included in “Real estate” and “Private credit and other alternatives” in the “—Assets Under Management— by asset class table” above. As of March 31, 2022, these assets decreased approximately $4.3 billion compared to December 31, 2021, primarily reflecting market depreciation partially offset by net private capital inflows.
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:
As of March 31, 2022 and December 31,
2021, PGIM had approximately $1,067 million and $1,175 million of seed investments and $504 million and $517 million of co-investments at carrying value, respectively, primarily consisting of public fixed income, public equity and real estate investments.
U.S. Businesses
Operating Results
The following table sets forth the operating results for our U.S. Businesses for the periods indicated:
Realized investment gains (losses), net, and related adjustments
(295)
1,919
Charges
related to realized investment gains (losses), net
(344)
(236)
Market experience updates
(4)
307
Other adjustments(2)
(5)
(13)
Equity
in earnings of operating joint ventures and earnings attributable to noncontrolling interests
1
0
Income (loss) before income taxes and equity in earnings of operating joint ventures
$
296
$
2,820
________
(1)Effective
third quarter of 2021, the results of the Full Service Retirement business 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 certain components of consideration for business acquisitions, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration.
Adjusted operating income for our U.S. Businesses increased by $100 million primarily due to:
•Higher net investment spread results driven by portfolio growth and higher
interest rates, as well as higher income on non-coupon investments; and
•Higher underwriting results primarily driven by lower COVID-19 related mortality claims in our Individual Life business and more favorable disability results in our Group Insurance business, partially offset by lower COVID-19 related mortality gains in our Retirement business.
•Partially offsetting these increases was lower fee income, net of distribution expenses and other associated costs, primarily in our Individual Annuities business.
•In April 2022, the Company completed the sale of its Full Service Retirement business to Great-West Life & Annuity Insurance Company (“Great-West”). The transaction involved the sale of legal entities, reinsurance, and the transfer of contracts and brokerage accounts.See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
Beginning in the
third quarter of 2021, the Company reported the assets and liabilities of the Full Service Retirement business as “held-for-sale” and transferred the results of this business to Divested and Run-off Businesses within Corporate and Other operations. As such, the following results are now solely reflective of Retirement’s Institutional Investment Products business. All prior period amounts have been restated to conform to current period presentation.
Operating Results
The following table sets forth Retirement’s operating results for the periods indicated:
Realized investment gains (losses), net, and related adjustments
(534)
(450)
Charges
related to realized investment gains (losses), net
(10)
13
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests
1
0
Income (loss) before income taxes and equity in earnings of operating joint ventures
$
25
$
177
Adjusted
Operating Income
Adjusted operating income decreased $46 million, primarily driven by less favorable reserve experience due to lower COVID-19 related mortality gains, partially offset by higher net investment spread results.
Revenues, Benefits and Expenses
Revenues increased $541 million. This increase primarily reflected higher pension risk transfer premiums due to new sales in the current quarter, with corresponding offsets in policyholders’ benefits, as discussed below, and higher net investment income.
Benefits and expenses increased $587 million. Policyholders’ benefits, including the change in policy reserves, increased primarily related
to the higher pension risk transfer premiums discussed above.
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 investment income and interest we credit to policyholders on our spread-based products varies with the level of general account values. 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 following table shows the changes in the account values of Retirement’s products for the periods indicated. 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.”
Change in market value, interest credited and interest income
(1,570)
(653)
964
Other(2)
(2,427)
644
(3,761)
Ending
total account value
$
239,102
$
247,496
$
239,102
__________
(1)Additions primarily include: group annuities and funded pension reinsurance calculated based on premiums received; international 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 calculated based on premiums received.
(2)“Other” activity includes the effect of foreign exchange rate changes associated with our British pounds sterling denominated international reinsurance business and changes in asset balances for externally-managed accounts. For the three months ended March 31, 2022 and 2021, “Other” activity also includes $819 million in receipts offset by $841 million in payments and $722 million in receipts offset by $765 million in payments, respectively, related to funding agreements backed by commercial
paper which typically have maturities of less than 90 days.
The decrease in account values for the three months and twelve months ended March 31, 2022 both reflect net withdrawals primarily driven by net account run-off, and decreases in other activity primarily driven by the negative impact of foreign exchange rate changes. Account values for the three months ended March 31, 2022 also reflect a decline in the market value of account assets.
Group Insurance
Operating Results
The
following table sets forth Group Insurance’s operating results and benefits and administrative operating expense ratios for the periods indicated:
Adjusted operating income increased $21 million, primarily reflecting more favorable
underwriting results in our group disability business driven by favorable claims experience and the impact to reserves from higher interest rates on long-term disability contracts, as well as business growth. Also contributing to the increase were less unfavorable underwriting results in our group life business driven by business growth. These increases were partially offset by higher expenses.
Revenues, Benefits and Expenses
Revenues decreased $12 million. The decrease primarily reflected lower premiums and policy charges and fee income in our group life business due to lower COVID-19 impacts on experience-rated contracts,
with offsets in policyholders’ benefits and changes in reserves, as discussed below, partially offset by business growth.
Benefits and expenses decreased $33 million. The decrease primarily reflected lower policyholders’ benefits, including changes in reserves, in our group life business mostly due to lower COVID-19 impacts on experience-rated contracts, and decreases in our group disability business driven by a favorable impact from claims experience on long-term disability contracts, partially offset by higher expenses driven by increased commissions from business growth.
Sales Results
The
following table sets forth Group Insurance’s annualized new business premiums, as defined under “—Segment Measures” above, for the periods indicated:
(1)Amounts
exclude new premiums resulting from rate changes on existing policies, from additional coverage under our Servicemembers’ Group Life Insurance contract and from excess premiums on group universal life insurance that build cash value but do not purchase face amounts.
Total annualized new business premiums for the three months ended March 31, 2022 increased $15 million compared to the prior year period, driven by higher sales in our group disability business, reflecting an increase in supplemental health product sales in the Premier and National segments.
Individual
Annuities
Business Update
•In April 2022, the Company completed the sale of its equity interest in Prudential Annuities Life Assurance Corporation (“PALAC”), which represents a portion of its in-force traditional variable annuity block of business, to Fortitude Group Holdings, LLC. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
Beginning in the third quarter of 2021, the Company reported the assets and liabilities of this block of business as
“held-for-sale” with the results continuing to be reported within Individual Annuities’ operating results until the completion of the sale.
Realized investment gains (losses), net, and related adjustments
764
2,555
Charges
related to realized investment gains (losses), net
(377)
(407)
Market experience updates
(100)
176
Income (loss) before income taxes and equity in earnings of operating joint ventures
$
759
$
2,768
Adjusted
Operating Income
Adjusted operating income increased $28 million primarily due to higher net investment spread results, driven by business growth in our indexed variable annuities as well as higher income on non-coupon investments, and lower operating expenses. These impacts were partially offset by lower fee income, net of distribution expenses and other associated costs, resulting from lower average separate account values due to net outflows, partially offset by equity market appreciation and favorable impacts from our living benefits guarantees.
Revenues, Benefits and Expenses
Revenues increased $8 million as higher net
investment income was partially offset by lower policy charges and fee income, as discussed above.
Benefits and expenses decreased $20 million primarily driven by lower general and administrative expenses, net of capitalization, reflecting lower operating expenses.
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:
Change
in market value, interest credited and other activity
(10,547)
3,142
5,499
Policy charges
(852)
(914)
(3,587)
Ending
total account value(2)
$
168,794
$
176,442
$
168,794
__________
(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 $162.9 billion
and $170.6 billion as of March 31, 2022 and 2021, respectively. Fixed annuity account values were $5.9 billion and $5.8 billion as of March 31, 2022 and 2021, respectively.
(2)Includes approximately $30 billion of account values that are classified as “held-for-sale” as of March 31, 2022 in relation to the PALAC sale, as discussed above.
Sales, net of full surrenders and death benefits, for the three months ended March 31,
2022 were relatively flat in comparison to the prior year period as a decrease in surrender activity was mostly offset by lower sales.
The decrease in account values for the three months ended March 31, 2022 was primarily driven by market value depreciation and net outflows. The decrease in account values for the twelve months ended March 31, 2022 was driven by net outflows and policy charges on contractholder accounts, partially offset by market value appreciation.
Risks and Risk Mitigants
The following is a summary of certain risks associated with Individual Annuities’
products, certain strategies in mitigating those risks including any updates to those strategies since the previous year-end, and the related financial results.
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 a certain level of protection from lapse in the case of rising interest rates.
Variable Annuity Risks and Risk Mitigants. The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital markets assumptions such as equity market returns, interest rates and market volatility, along with actuarial assumptions such as contractholder mortality, the timing and amount of annuitization
and withdrawals, and contract lapses. For these risk exposures, achievement of our expected returns is subject to the risk that actual experience will differ from the assumptions used in the original pricing of these products. We manage our exposure to certain risks driven by fluctuations in capital markets primarily
through a combination of i) Product Design Features, ii) our Asset Liability Management Strategy, and iii) our Capital Hedge Program, as discussed below. We also manage these risk exposures through external reinsurance for certain of our variable annuity
products. Sales of traditional variable annuities with guaranteed living benefit riders were discontinued as of December 31, 2020, and, in April of 2022, the Company completed the sale of a portion of our in-force traditional variable annuity block, as discussed above.
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. 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 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, which includes the portion of the traditional variable annuities block of business that is classified as “held-for-sale”, as discussed above, 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:
U.S. GAAP liability, including NPR, net of reinsurance recoverables
$
10,318
$
13,028
NPR adjustment, net of reinsurance recoverables
3,530
2,832
Subtotal
13,848
15,860
Adjustments
including risk margins and valuation methodology differences
(3,177)
(3,444)
Economic liability managed through the ALM strategy
$
10,671
$
12,416
As of March 31, 2022, the fair value of our fixed income instruments and derivative assets exceed the economic liability within the entities in which the risks reside.
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. Changes in value of these derivatives are excluded from adjusted operating income, which the Company believes
enhances the understanding of underlying performance trends.
Results excluded from adjusted operating income
The following table provides the net impact to the Unaudited Interim Consolidated Statements of Operations from the results excluded from adjusted operating income, which is primarily driven by the changes in the U.S. GAAP embedded derivative liability and hedge positions under the ALM strategy as described above, and the related amortization of DAC and other costs:
Change in value of U.S. GAAP liability, pre-NPR(2)
$
2,200
$
8,392
Change
in the NPR adjustment
697
(884)
Change in fair value of hedge assets, excluding capital hedges(3)
(1,986)
(4,992)
Change in fair value of capital hedges(4)
225
(295)
Other
(372)
334
Realized
investment gains (losses), net, and related adjustments
764
2,555
Market experience updates(5)
(100)
176
Charges related to realized investment gains (losses), net
(377)
(407)
Total
results excluded from adjusted operating income(6)
$
287
$
2,324
__________
(1)Positive amounts represent income; negative amounts represent a loss.
(2)Represents the change in the liability (excluding NPR) for our variable annuities living benefit guarantees which is measured utilizing a valuation methodology that is required under U.S. GAAP. This liability includes such items as risk margins which are required by U.S. GAAP but not
included in our best estimate of the liability.
(3)Represents the change in fair value of the derivatives utilized to hedge potential claims associated with our variable annuity living benefit guarantees.
(4)Represents the changes in fair value of equity derivatives of the capital hedge program intended to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets.
(5)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability.
(6)Excludes amounts from the change in unrealized gains and losses on fixed income instruments recorded in OCI (versus net income) of $(185) million, and $(1,870) million for the three months ended March 31, 2022 and 2021, respectively.
For the three months ended March 31, 2022, the gain of $287 million was driven by a favorable NPR adjustment largely due to widening credit spreads, gains associated with our capital hedge program driven by declining equity markets as well as favorable impact related to the U.S. GAAP liability before NPR, net of the change in fair value of hedge
assets (excluding capital hedges) largely due to higher interest rates, partially offset by unfavorable hedge breakage. This was partially offset by charges related to the amortization of DAC and other costs, as well as unfavorable market experience updates resulting from unfavorable equity market performance, net of the impact from higher interest rates.
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:
(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.
(6)Includes approximately $30 billion of account values that are classified as “held-for-sale” as of March 31, 2022 in relation to the PALAC sale, as discussed above.
Individual
Life
Operating Results
The following table sets forth Individual Life’s operating results for the periods indicated:
Adjusted operating income increased $95 million, primarily reflecting less unfavorable underwriting results, driven by the impact from mortality experience, net of reinsurance, primarily attributable to lower COVID-19 related claims, and higher net investment spread results, driven by business growth and higher income on non-coupon investments.
Revenues, Benefits and Expenses
Revenues increased $122 million, primarily driven by higher premiums due to lower ceded reinsurance, which was mostly offset in policyholders’ benefits below, higher policy charges and fee income due to account value
growth, and higher net investment income from higher income on non-coupon investments and higher average invested assets.
Benefits and expenses increased $27 million, reflecting higher policyholders’ benefits driven by the absence of favorable reserve changes in the prior year period, and lower ceded reinsurance, as described above, partially offset by a favorable comparative impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims. The increase also reflected higher interest credited to policyholders’ account balances due to business growth.
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:
(1)Prior
period amounts have been updated to conform to current period presentation.
Total annualized new business premiums for the first quarter of 2022 decreased $54 million compared to the prior year period primarily from lower third-party sales across variable life, term life and universal life products, primarily due to pricing and product actions impacting the prior year period.
Assurance IQ
Operating Results
The following table sets forth Assurance IQ’s operating results for the periods indicated:
Income (loss) before income taxes and equity in earnings of operating joint ventures
$
(42)
$
(52)
__________
(1)Includes
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 associated contingent consideration. For additional information regarding contingent consideration, see Note 14 to the Unaudited Interim Consolidated Financial Statements.
Adjusted operating income was relatively flat in comparison to the prior year period, primarily driven by an increase in the Medicare line mostly
offset by a decrease in the Health Under 65 line.
Revenues and Expenses
Revenues decreased $1 million, primarily reflecting decreases in commission revenue from the Health Under 65 and Life lines. These decreases were mostly offset by higher commission revenue from the Medicare line, driven by business growth and a strategic shift by the business to emphasize Medicare products, partially offset by updated persistency experience and assumptions.
Expenses decreased $3 million, driven by lower variable expenses from the Health Under 65 and Life lines, mostly offset by higher variable expenses primarily from the Medicare line, as well as higher general and administrative operating expenses supporting business growth.
International
Businesses
Business Update
•In March 2022, the Company announced its agreement to acquire (through a private equity limited partnership managed by LeapFrog Investments) a minority interest in Alexander Forbes Group Holdings Limited, a leading provider of financial advice, retirement, investment and holistic wealth management services in South Africa. 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.
Operating Results
The results of our International Businesses’ operations are translated on the basis of weighted average monthly exchange rates, inclusive of the effects of the intercompany arrangement discussed in “—Results of Operations—Impact of Foreign Currency Exchange Rates” above. To provide a better understanding of operating performance within the International Businesses, where indicated below, we have analyzed our results of operations excluding the effect of the year over year change in foreign currency exchange rates. Our results of operations, excluding the effect of foreign currency fluctuations, were derived by translating foreign currencies to USD at uniform exchange rates for all periods presented, including for constant dollar information discussed below. For
our Japan operations, we used an exchange rate of 104 yen per USD, which was determined in connection with the foreign currency income hedging program discussed in “—Results of Operations—Impact of Foreign Currency Exchange Rates” above. In addition, for constant dollar information discussed below, activity denominated in USD is generally reported based on the amounts as transacted in USD. Annualized new business premiums presented on a constant exchange rate basis in the “Sales Results” section below reflect translation based on these same uniform exchange rates.
The following table sets forth the International Businesses’ operating results for the periods indicated:
Realized investment gains (losses), net, and related adjustments
(757)
(789)
Charges related to realized investment gains (losses), net
(2)
(14)
Market
experience updates
0
0
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests
(6)
(22)
Income (loss) before income taxes and equity in earnings of operating joint ventures
$
36
$
46
Adjusted
Operating Income
Adjusted operating income from our Life Planner operations increased $14 million, including a net unfavorable impact of $6 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding this item, adjusted operating income from our Life Planner operations increased $20 million primarily reflecting higher underwriting results driven by the growth of business in force in our Japan and Brazil operations and more favorable underwriting experience, including lower COVID-19 claims in Brazil, partially offset by higher expenses and lower net investment spread results reflecting lower reinvestment yields.
Adjusted operating income from our Gibraltar Life and Other operations decreased $84 million, including a net favorable impact of $2 million from currency
fluctuations, inclusive of the currency hedging program discussed above. Excluding this item, adjusted operating income from our Gibraltar Life and Other operations decreased $86 million primarily reflecting lower net investment spread results driven by lower reinvestment yields and lower income on non-coupon investments. Also contributing to the decrease were unfavorable underwriting experience and lower earnings from our joint venture investments.
Revenues, Benefits and Expenses
Revenues from our Life Planner operations decreased $6 million, including a net unfavorable impact of $104 million from currency fluctuations. Excluding this item, revenues increased $98 million, primarily reflecting higher premiums and policy charges and fee income, and higher net investment income, driven by the growth of
business in force.
Benefits and expenses of our Life Planner operations decreased $20 million, including a net favorable impact of $98 million from currency fluctuations. Excluding this item, benefits and expenses increased $78 million, primarily reflecting higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force, and higher operating expenses.
Revenues from our Gibraltar Life and Other operations decreased $199 million, including a net unfavorable impact of $125 million from currency fluctuations. Excluding this item, revenues decreased $74 million, primarily reflecting lower premiums and policy charges and fee income due to the decline of business in force, and lower other income from a decline in earnings from our joint venture investments.
Benefits and expenses of our Gibraltar Life and Other operations decreased $115 million, including a net favorable impact of $127 million from currency fluctuations. Excluding this item, benefits and expenses increased $12 million, primarily driven by higher policyholders’ benefits, including changes in reserves, reflecting unfavorable underwriting experience, partially offset by lower expenses primarily due to the absence of certain costs associated with COVID-19 incurred in the prior year period.
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:
The
amount of annualized new business premiums and the sales mix in terms of types and currency denomination of products for any given period can be significantly impacted by several factors, including but not limited to: the addition of new products, discontinuation of existing products, changes in credited interest rates for certain products and other product modifications, changes in premium rates, changes in interest rates or fluctuations in currency markets, changes in tax laws, changes in life insurance regulations or changes in the competitive environment. Sales volume may increase or decrease prior to certain of these changes becoming effective, and then fluctuate in the other direction following such changes.
Our diverse product portfolio in Japan, in terms of currency mix and premium payment structure, allows us to adapt to changing market and competitive dynamics, including the
extremely low interest rate environment. We regularly examine our product offerings and their related profitability and, as a result, we have repriced or discontinued sales of certain products that do not meet our profit expectations. The impact of these actions, coupled with the introduction of certain new products, has generally resulted in an increase in sales of products denominated in USD relative to products denominated in other currencies.
The table below presents annualized new business premiums on a constant exchange rate basis, by product category and distribution channel, for the periods indicated:
(2)Single pay life annualized new business premiums, which include 10% of first year premiums, and 3-year limited pay annualized new business premiums, which include 100% of new business premiums, represented 0% and 59%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended March 31, 2022, and 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.
Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations increased $14 million, primarily driven by higher life product sales in Brazil and Argentina.
Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations decreased $52 million. Bank channel and Life Consultants sales decreased $66 million and $4 million, respectively, reflecting continued impacts from COVID-19 and lower USD-denominated life sales in the bank channel. Independent Agency sales increased $18 million, primarily driven by USD-denominated endowment products.
Corporate
and Other
Corporate and Other includes corporate operations, after allocations to our business segments, and Divested and Run-off Businesses other than those that qualify for “discontinued operations” accounting treatment under U.S. GAAP.
Realized investment gains (losses), net, and related adjustments
34
166
Charges related to realized investment gains (losses), net
7
11
Market
experience updates
(2)
(3)
Divested and Run-off Businesses
(299)
45
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests
(24)
(4)
Income
(loss) before income taxes and equity in earnings of operating joint ventures
$
(650)
$
(107)
__________
(1)Effective third quarter of 2020, the results of the Prudential Life Insurance Company of Taiwan Inc. (“POT”) and the impact of its sale are excluded from the International Businesses and are included herein. Effective third quarter of 2021, the results of the Full Service Retirement business are excluded from the Retirement segment and are included in Divested and Run-off Businesses.
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 regarding these dispositions.
The loss from Corporate and Other operations, on an adjusted operating income basis, increased $44 million. Net charges from other corporate activities increased $63 million primarily driven by higher expenses, including an increase in advertising and other corporate costs. Also contributing to the increased loss was lower investment income of $9 million, primarily reflecting a decrease in income on non-coupon investments. These impacts were partially offset by favorable results of $18 million from pension and employee benefits, primarily driven by higher earnings from our qualified pension plan as a result of higher expected returns on plan assets, and a
favorable impact from design changes to the Company’s Retiree Medical Savings Account plan, as well as a $10 million decrease in interest expense on debt, primarily reflecting lower average debt balances.
Divested and Run-off Businesses
Divested and Run-off Businesses Included in Corporate and Other
Income from our Divested and Run-off Businesses includes results from several businesses that have been or will be sold or exited, including businesses that have been placed in wind down status that do not qualify for “discontinued operations”
accounting treatment under U.S. GAAP. The results of these Divested and Run-off Businesses are reflected in our Corporate and Other operations, but are excluded from adjusted operating income. A summary of the results of the Divested and Run-off Businesses reflected in our Corporate and Other operations is as follows for the periods indicated:
Total
Divested and Run-off Businesses income (loss) excluded from adjusted operating income
$
(299)
$
45
__________
(1)Effective third quarter of 2020, the results of POT and the impact of its sale are excluded from the International Businesses and are included herein. Effective third quarter of 2021, the results of the Full Service Retirement business are excluded from the Retirement segment and are included herein. 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 about these divestitures.
Long-Term Care
Results decreased $113 million compared to the prior year period primarily driven by an unfavorable impact from changes in the market value of equity securities, partially offset by a less unfavorable impact from changes in the market value of derivatives used for duration management.
Other Divested and Run-off Businesses
Results decreased $231 million compared to the prior year period primarily from losses related to the Full Service Retirement business in the current quarter, largely driven by the impact
of rising interest rates on the market value of assets supporting experience-rated contractholder liabilities. For more information, see “—Experience-Rated Contractholder Liabilities, Assets Supporting Experience-Rated Contractholder Liabilities and Other Related Investments.”
Closed Block Division
The Closed Block division includes certain in-force traditional domestic participating life insurance and annuity products and assets that are used for the payment of benefits and policyholder dividends on these policies (collectively the “Closed Block”), as well as certain related assets and liabilities. We no longer offer these traditional domestic participating policies. See
Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information.
Each year, the Board of Directors of The Prudential Insurance Company of America (“PICA”) determines the dividends payable on participating policies for the following year based on the experience of the Closed Block, including investment income, net realized and unrealized investment gains (losses), mortality experience and other factors. Although the Closed Block experience for dividend action decisions is based upon statutory results, at the time the Closed Block was established, we developed, as required by U.S. GAAP, an actuarial calculation of the timing of the maximum future earnings from the policies included in the Closed Block. If actual cumulative earnings in any given period are greater than the cumulative earnings we expected, we record this excess as a policyholder
dividend obligation. We will subsequently pay this excess to Closed Block policyholders as an additional dividend unless it is otherwise offset by future Closed Block performance that is less favorable than we originally expected. The policyholder dividends we charge to expense within the Closed Block division will include any change in our policyholder dividend obligation that we recognize for the excess of actual cumulative earnings in any given period over the cumulative earnings we expected in addition to the actual policyholder dividends declared by the Board of Directors of PICA.
As of March 31, 2022, the excess of actual cumulative earnings over the expected cumulative earnings was $4,283 million, which was recorded as a policyholder dividend obligation. Actual cumulative earnings, as required by U.S. GAAP, reflect the recognition
of realized investment gains and losses in the current period, as well as changes in assets and related liabilities that support the Closed Block policies. Additionally, the accumulation of net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block has been reflected as a policyholder dividend obligation of $582 million at March 31, 2022, to be paid to Closed Block policyholders unless offset by future experience, with a corresponding amount reported in AOCI.
Income
(loss) before income taxes and equity in earnings of operating joint ventures
$
23
$
34
Income (loss) Before Income Taxes and Equity in Earnings of Operating Joint Ventures
Income (loss) before income taxes and equity in earnings of operating joint ventures decreased $11 million. Net investment activity results decreased primarily reflecting lower other income driven by unfavorable changes in the value of equity securities, and
lower net investment income on coupon investments, partially offset by an increase in realized investment gains driven by net favorable changes in the fair value of derivatives used in risk management activities. Net insurance activity results reflected an unfavorable comparative change driven by lower premiums due to the runoff of policies in force, partially offset by a favorable comparative change in claims experience. As a result of the above and other variances, a $104 million reduction in the policyholder dividend obligation was recorded in the first three months of 2022, compared to a $246 million increase in the first three months of 2021. If actual cumulative earnings fall below expected cumulative earnings in future periods, earnings volatility in the Closed Block division, which is primarily due to changes in investment results, may not be offset by changes in the cumulative earnings policyholder dividend obligation. For a discussion of the Closed Block division’s
realized investment gains (losses), net, see “—General Account Investments.”
Revenues, Benefits and Expenses
Revenues decreased $400 million primarily driven by a decrease in other income, net investment income and lower premiums, as discussed above, partially offset by an increase in net realized investment gains.
Benefits and expenses decreased $389 million primarily driven by a decrease in dividends to policyholders, reflecting a reduction 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 our International Businesses and our Full Service Retirement business 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.
International Businesses. 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. 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)” while interest and dividend income are reported in “Net investment income.” As these experience-rated products are fully participating, the entire return on the underlying investments is passed back to policyholders through a corresponding adjustment to the related liability, primarily classified
in the Unaudited Interim Consolidated Statements of Financial Position as “Policyholders’ account balances.”
Adjusted operating income excludes net investment gains (losses) on assets supporting experience-rated contractholder liabilities. 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 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.
Full Service Retirement Business. Our Full Service Retirement business 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. 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.
Beginning in the third quarter of 2021, in connection with the announced sale to Great-West, the Company reported the assets and liabilities of the Full Service Retirement business as “held-for-sale,” and transferred the results of this business from the Retirement segment to the Divested and Run-off Businesses within Corporate & Other operations, which are excluded from adjusted operating income.
See Note 1 to the Consolidated Financial Statements for additional information regarding this transaction.
As a result of this “held-for-sale” classification, the assets and liabilities associated with these products for the current reporting period are included in the Unaudited Interim Consolidated Statements of Financial Position as “Assets held-for-sale” and “Liabilities held-for-sale,” respectively; however, for prior periods, the assets and liabilities associated with these products are presented similar to how they are described in “International Businesses” above.
The following table sets forth the impact on results for the periods indicated of these items that are excluded from adjusted operating income:
Investment
gains (losses) on assets supporting experience-rated contractholder liabilities, net
$
(44)
$
180
Change in experience-rated contractholder liabilities due to asset value changes
44
(180)
Gains (losses), net, on experienced
rated contracts
$
0
$
0
Divested and Run-off Businesses:
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net
$
(950)
$
(435)
Change
in experience-rated contractholder liabilities due to asset value changes
818
438
Gains (losses), net, on experienced rated contracts(1)(2)
$
(132)
$
3
Total:
Investment
gains (losses) on assets supporting experience-rated contractholder liabilities, net
$
(994)
$
(255)
Change in experience-rated contractholder liabilities due to asset value changes
862
258
Gains (losses), net, on
experienced rated contracts(1)(2)
$
(132)
$
3
__________
(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 $422 million and $3 million as of March 31, 2022 and 2021, respectively.
(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 a decrease of $87 million and an increase of $11 million for the three months ended March 31, 2022 and 2021, respectively. As prescribed by U.S. GAAP, changes in the fair value of commercial mortgage and other loans held for investment in our general account, other than when associated with impairments, are not recognized in income in the current period, while the impact of these changes in fair value are reflected as a change in the liability to fully participating contractholders in the current period.
For our Full Service Retirement business reported within Divested and Run-off Businesses, the net impact of changes in experience-rated contractholder liabilities
and investment gains (losses) on assets supporting experience-rated contractholder liabilities and other related investments reflects 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. This includes certain assets that are designated as available-for-sale where mark-to-market adjustments are recorded as unrealized gains (losses) in “Other
comprehensive income”. These
impacts also reflect the difference between the fair value of underlying commercial mortgages and other loans and the amortized cost, less any valuation allowance, of these loans.
Valuation of Assets and Liabilities
Fair Value of Assets and Liabilities
The authoritative guidance related to fair value measurement establishes a framework that includes a three-level hierarchy used to classify the inputs used in measuring fair value. The level in the hierarchy within which the fair value falls is determined based on the lowest level input that is significant to the measurement. The fair values of assets and liabilities classified
as Level 3 include at least one significant unobservable input in the measurement. See Note 6 to the Unaudited Interim Consolidated Financial Statements for an additional description of the valuation hierarchy levels as well as for the balances of assets and liabilities measured at fair value on a recurring basis by hierarchy level presented on a consolidated basis.
The table below presents the balances of assets and liabilities measured at fair value on a recurring basis, as of the periods indicated, and the portion of such assets and liabilities that are classified in Level 3 of the valuation hierarchy. The table also provides details about these assets and liabilities excluding those held in the Closed Block division. We believe the amounts excluding the Closed Block division are most relevant to an understanding of our operations that are pertinent to investors in Prudential Financial
because substantially all Closed Block division assets support obligations and liabilities relating to the Closed Block policies only. See Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information on the Closed Block.
(1)Excludes
amounts for financial instruments reclassified to “Assets held-for-sale” of $118,458 million and “Liabilities held-for-sale” of $5,381 million. Assets held-for-sale and liabilities held-for-sale are valued on a basis consistent with similar instruments described herein. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
(2)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 1.6% and 3.9%, respectively, as of March 31, 2022, and 1.6% and 4.0%, respectively, as of December 31, 2021.
(3)“All other” represents cash equivalents and short-term investments.
(4)“Other invested assets” and “Other liabilities” primarily include derivatives. The amounts include the impact of netting subject to master netting agreements.
The determination of fair value, which for certain assets and liabilities is dependent on the application of estimates and assumptions, can have a significant impact on our results of operations and may require the application of a greater degree of judgment depending on market conditions, as the ability to value assets and liabilities can be significantly impacted by a decrease in market activity or a lack of transactions executed in an orderly manner. The continued impact of the
COVID-19 pandemic on the global economy may have adverse effects on the valuation of assets and liabilities. Due to the highly uncertain nature of these conditions, it is not possible to estimate the overall impacts at this time.
Fixed maturity securities included in Level 3 in our fair value hierarchy are generally priced based on internally-developed valuations or indicative broker quotes. For certain private fixed maturity and equity securities, the internal valuation models use significant unobservable inputs and, accordingly, such securities are included in Level 3 in our fair value hierarchy. Level 3 fixed maturity securities for PFI excluding the Closed Block division included approximately $1.9 billion of public fixed maturities as of March 31, 2022, with values primarily based on indicative broker quotes, and approximately $4.4
billion of private fixed maturities, with values primarily based on internally-developed models. Significant unobservable inputs used in their valuation included: issue specific spread adjustments, material non-public financial information, management judgment, estimation of future earnings and cash flows, default rate assumptions, liquidity assumptions and indicative quotes from market makers. Separate account assets included in Level 3 in our fair value hierarchy primarily include corporate securities and commercial mortgage loans.
Embedded derivatives reported in “Future policy benefits” and “Policyholders’ account balances” that are included in Level 3 of our fair value hierarchy represent general account liabilities pertaining to living benefit features of the Company’s variable
annuity contracts and the index-linked interest credited features on certain life and annuity products. These are carried at fair value with changes in fair value included in “Realized investment gains (losses), net.” These embedded derivatives are valued using internally-developed models that require significant estimates and assumptions developed by management. Changes in these estimates and assumptions can have a significant impact on the results of our operations.
For additional information about the valuation techniques and the key estimates and assumptions used in our determination of fair value, see Note 6 to the Consolidated Financial Statements included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2021.
General Account Investments
Portfolio Composition
Our investment portfolio consists of public and private fixed maturity securities, commercial mortgage and other loans, policy loans and non-coupon investments, which include equity securities and other invested assets such as limited partnerships and limited liability companies (“LPs/LLCs”), real estate held through direct ownership, derivative instruments and seed money investments in separate accounts. The composition of our general account reflects, within the
discipline provided by our risk management approach, our need for competitive results and the selection of diverse investment alternatives available primarily through our PGIM segment. The size of our portfolio enables us to invest in asset classes that may be unavailable to the typical investor.
The following tables set forth the composition of our general account investment portfolio apportioned between PFI excluding the Closed Block division and the Closed Block division, as of the dates indicated:
Public,
held-to-maturity, at amortized cost, net of allowance
1,413
0.3
0
1,413
Private, available-for-sale, at fair value
56,660
13.3
10,237
66,897
Private,
held-to-maturity, at amortized cost, net of allowance
101
0.1
0
101
Fixed maturities, trading, at fair value
7,473
1.8
1,137
8,610
Assets
supporting experience-rated contractholder liabilities, at fair value
3,358
0.8
0
3,358
Equity securities, at fair value
5,587
1.3
2,288
7,875
Commercial
mortgage and other loans, at book value, net of allowance
49,146
11.6
8,241
57,387
Policy loans, at outstanding balance
6,571
1.5
3,815
10,386
Other
invested assets, net of allowance(2)
12,485
2.9
4,358
16,843
Short-term investments, net of allowance
6,043
1.4
557
6,600
Total
general account investments
425,705
100.0
%
58,800
484,505
Invested assets of other entities and operations(3)
7,694
0
7,694
Total
investments
$
433,399
$
58,800
$
492,199
__________
(1) Excludes “Assets held-for-sale” of $36,701 million and $40,669 million as of March 31, 2022 and December 31, 2021, respectively. See Note 1 of the Unaudited Interim Consolidated Statements for additional information.
(2)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.
(3)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 2022 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 net business inflows. For
information regarding the methodology used in determining the fair value of our fixed maturities, see Note 6 to the Unaudited Interim Consolidated Financial Statements.
As of both March 31, 2022 and December 31, 2021, 48% 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:
Public, held-to-maturity, at amortized cost, net of allowance
1,340
1,413
Private,
available-for-sale, at fair value
19,977
21,079
Private, held-to-maturity, at amortized cost, net of allowance
92
101
Fixed maturities, trading, at fair value
760
839
Assets supporting experience-rated contractholder liabilities, at fair value
3,184
3,328
Equity
securities, at fair value
2,033
2,187
Commercial mortgage and other loans, at book value, net of allowance
19,754
19,969
Policy loans, at outstanding balance
2,654
2,726
Other invested assets(1)
4,471
4,203
Short-term
investments, net of allowance
194
692
Total Japanese general account investments
$
189,850
$
203,137
__________
(1)Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments and other miscellaneous investments.
The
decrease in general account investments related to our Japanese insurance operations in the first three months of 2022 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 net business inflows and the reinvestment of net investment income.
As of March 31, 2022, our Japanese insurance operations had $88.1 billion, at carrying value, of investments denominated in U.S. dollars, including $2.1 billion that were hedged to yen through third-party derivative contracts and $75.6 billion that support liabilities denominated in U.S. dollars, with the remainder constituting part of the hedging of foreign currency exchange rate exposure to U.S. dollar-equivalent
equity. As of December 31, 2021, our Japanese insurance operations had $92.5 billion, at carrying value, of investments denominated in U.S. dollars, including $2.1 billion that were hedged to yen through third-party derivative contracts and $80.2 billion that support liabilities denominated in U.S. dollars, with the remainder constituting part of the hedging of foreign currency exchange rate exposure of U.S. dollar-equivalent equity. The $4.4 billion decrease in the carrying value of U.S. dollar-denominated investments from December 31, 2021 was primarily attributable to an increase in U.S. interest rates partially offset by reinvestment of net investment income and portfolio growth as a result of net business inflows.
Our
Japanese insurance operations had $7.6 billion and $8.0 billion, at carrying value, of investments denominated in Australian dollars that support liabilities denominated in Australian dollars as of March 31, 2022 and December 31, 2021, respectively. The $0.4 billion decrease in the carrying value of Australian dollar-denominated investments from December 31, 2021 was primarily attributable to run-off of the portfolio and an 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 under U.S. GAAP and as such do not include certain interest-related items, such as settlements of duration management swaps which are included in “Realized investment gains (losses), net.”
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
__________
(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 3.36% and 3.42% for the three months ended March 31, 2022 and 2021, respectively.
(6)The denominator in the yield percentage includes “Assets held-for-sale”. See Note 1 of the Unaudited Interim Consolidated Statement for additional information.
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, 2022, compared to the three months ended March 31, 2021, was primarily the result of fixed income reinvestment rates remaining lower than the portfolio yield.
The decrease in investment income after investment expenses yield attributable to the Japanese insurance operations’ portfolio, for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, was primarily the result of fixed income reinvestment rates remaining lower
than the portfolio yield.
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 $61.3 billion and $57.4 billion for the three months ended March 31, 2022 and 2021, respectively. The majority of U.S. dollar-denominated fixed maturities support liabilities
that are denominated in U.S. dollars. The average amortized cost of Australian dollar-denominated fixed maturities that are not hedged to yen through third-party derivative contracts was approximately $7.1 billion and $8.5 billion for the three months ended March 31, 2022 and 2021, respectively. The majority of Australian dollar-denominated fixed maturities support liabilities that are denominated in Australian dollars. For additional information regarding U.S. and Australian dollar investments held in our Japanese insurance operations, see “—Results of Operations by Segment—Impact of Foreign Currency Exchange Rates” above.
Realized Investment Gains and Losses
The
following table sets forth “Realized investment gains (losses), net” of our general account apportioned between PFI excluding Closed Block division, and the Closed Block division, by investment type as well as “Related adjustments” and “Charges related to realized investment gains (losses), net” for the periods indicated:
(Addition to) release of allowance for credit losses on fixed maturities
$
(42)
$
11
Write-downs on fixed maturities(1)
(1)
0
Net
gains (losses) on sales and maturities
(336)
1,050
Fixed maturity securities(2)
(379)
1,061
(Addition to) release of allowance for credit losses on loans
3
9
Net
gains (losses) on sales and maturities
0
1
Commercial mortgage and other loans
3
10
Derivatives
(109)
842
OTTI
losses on other invested assets recognized in earnings
0
(9)
(Addition to) release of allowance for credit losses on other invested assets
(2)
(1)
Other net gains (losses)
3
65
Other
1
55
Subtotal
(484)
1,968
Investment
results of other entities and operations(3)
68
39
Total — PFI excluding Closed Block Division
(416)
2,007
Related adjustments(4)
(605)
(713)
Realized
investment gains (losses), net, and related adjustments
(1,021)
1,294
Charges related to realized investment gains (losses), net
(339)
(239)
Realized investment gains (losses), net, and charges related to realized investment gains (losses), net and adjustments
$
(1,360)
$
1,055
Closed
Block Division:
Realized investment gains (losses), net:
(Addition to) release of allowance for credit losses on fixed maturities
$
(35)
$
(7)
Write-downs
on fixed maturities(1)
(5)
0
Net gains (losses) on sales and maturities
8
161
Fixed maturity securities(2)
(32)
154
(Addition
to) release of allowance for credit losses on loans
1
1
Net gains (losses) on sales and maturities
0
0
Commercial mortgage and other loans
1
1
Derivatives
140
(82)
Other
net gains (losses)
(9)
(1)
Other
(9)
(1)
Subtotal — Closed Block Division
100
72
Consolidated
PFI realized investment gains (losses), net
$
(316)
$
2,079
__________
(1)Amounts represent 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.
(4)Prior period amount has been updated to conform to current period presentation.
Net losses on sales and maturities of fixed maturity securities were $336 million for the first quarter of 2022 primarily driven by relative value trading in a higher interest rate environment, partially offset by the impact of foreign currency exchange rate movements on U.S. and Australian dollar-denominated securities that matured or were sold within our International Businesses segment. Net gains on sales and maturities of fixed maturity securities were $1,050 million for the first quarter of 2021 primarily driven by sales of U.S. treasuries acquired in a higher interest-rate environment within our domestic segments.
Net realized losses on derivative instruments of $109 million, for the first quarter of 2022 primarily included:
•$1,425 million of losses on interest rate derivatives due to an increase in the swap and U.S. Treasury rates;
•$113 million of losses on foreign currency hedges due to Japanese yen depreciation versus the U.S. dollar; and
•$18 million of losses on credit default swaps due to spreads widening.
Partially offsetting these losses were:
•$1,350
million of gains on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts; and
•$124 million of gains on capital hedges due to decreases in equity indices.
Net realized gains on derivative instruments of $842 million, for the first quarter of 2021 primarily included:
•$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 the swap and U.S. Treasury rates; and
•$331 million of losses on capital hedges due to increase in equity indices.
For a discussion of living benefit guarantees and related hedge positions in our Individual Annuities segment, see “—Results of Operations by Segment—U.S. Businesses—Individual Annuities” above.
Included in the table above are “Related adjustments,” which include the portions of “Realized investment gains (losses), net” that are either (1) included in adjusted operating income or (2) included
in other reconciling line items to adjusted operating income, such as “Market experience updates” and “Divested and Run-off Businesses.”“Related adjustments” also includes 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 is excluded from adjusted operating income. See Note 13 for additional details on adjusted operating income and its reconciliation to “Income (loss) before income taxes and equity in earnings of operating joint ventures.” Results for the first quarter of 2022 and 2021 reflect net related adjustments of $(605) million and $(713) million, respectively. Both periods include changes in the fair value of equity securities and fixed income securities that are designated as trading, as well as settlements and changes in the value of
derivatives.
Also included in the table above are “Charges related to realized investment gains (losses), net,” which are excluded from adjusted operating income and which may be reflected as either a net charge or net benefit. Results for the first quarter of 2022 and 2021 reflect net charges of $339 million and $239 million, respectively, and were primarily driven by the impact of derivative activity on the amortization of DAC and other costs, and certain policyholder reserves.
Credit Losses
The level of credit losses generally reflects current and expected economic conditions and is expected to increase when economic conditions worsen and to decrease when economic conditions improve. Historically, the causes
of credit losses have been specific to each individual issuer and have not directly resulted in credit losses to other securities within the same industry or geographic region. We may also realize additional credit and interest rate-related losses through sales of investments pursuant to our credit risk and portfolio management objectives.
We maintain separate monitoring processes for public and private fixed maturities and create watch lists to highlight securities that require special scrutiny and management. For private placements, our credit and portfolio management processes help ensure prudent controls over valuation and management. We have separate pricing and authorization processes to establish “checks and balances” for new investments. We apply consistent standards of credit analysis and due diligence for all transactions, whether they originate through our own in-house
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, 2021.
COVID-19
We believe our investment portfolio has been diligently constructed with a strong focus on ALM discipline, risk management, and capital preservation. Throughout the COVID-19 pandemic, our portfolio has remained resilient, bolstered by our portfolio construction, investment strategy and our experience in managing highly specialized
asset classes throughout credit cycles. The economy continues to recover and remains on a path to re-opening. Credit migration and defaults were low in 2021 and have remained limited in 2022. The sectors most impacted from COVID-19 have started to recover but could be influenced by periods of volatility due to variants emerging. We continue to monitor our portfolio for potential credit issues and opportunities as part of our overall portfolio and risk management process.
Russia and Ukraine Exposure
As of March 31, 2022, our consolidated direct investment exposure in Russia and Ukraine was approximately $58 million and $0 million, respectively, based on amortized cost. In April 2022, we divested all of our holdings in Russian sovereign and state-owned enterprises and have no direct investment
exposure in either country as of the date of this filing.
General Account Investments of PFI excluding Closed Block Division
In the following sections, we provide details about our investment portfolio, excluding investments held in the Closed Block division. We believe the details of the composition of our investment portfolio excluding the Closed Block division are most relevant to an understanding of our operations that are pertinent to investors in Prudential Financial, Inc. because substantially all Closed Block division assets support obligations and liabilities relating to the Closed Block policies only. See Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information on the Closed Block.
Fixed Maturity Securities
In
the following sections, we provide details about our fixed maturity securities portfolio, which excludes fixed maturity securities classified as assets supporting experience-rated contractholder liabilities and classified as trading.
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:
(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, 2022 and December 31, 2021, based on amortized cost, 88% and 89%, respectively, represent Japanese government bonds held by our Japanese insurance operations with no other individual country representing more than 4% of the balance, respectively.
(4)Excluded from the table above are securities
held outside the general account in other entities and operations. For additional information regarding investments held outside the general account, see “—Invested Assets of Other Entities and Operations” below. Also excludes “Assets held-for-sale” of $12,761 million (amortized cost of $13,142 million) as of March 31, 2022 and $13,569 million (amortized cost of $13,145 million) as of December 31, 2021, respectively. Unrealized gains of $143 million and $572 million, unrealized losses of $523 million and $147 million and the allowance for credit losses of $1 million and $1 million as of March 31, 2022 and December 31, 2021, respectively, related to these held for sale assets are also excluded from the presentation. See Note 1 of the Unaudited Interim Consolidated
Financial Statements for additional information.
The decrease in net unrealized gains from December 31, 2021 to March 31, 2022 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:
(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, 2022 and December 31, 2021, based on amortized cost, 97% represent Japanese government bonds held by our Japanese insurance operations.
The Securities
Valuation Office (“SVO”) of the National Association of Insurance Commissioners (“NAIC”) evaluates the investments of insurers for statutory reporting purposes and assigns fixed maturity securities to one of six categories called “NAIC Designations.” In general, NAIC Designations of “1” highest quality, or “2” high quality, include fixed maturities considered investment grade, which include securities rated Baa3 or higher by Moody’s Investor Service, Inc. (“Moody’s”) or BBB- or higher by Standard & Poor’s Rating Services (“S&P”). NAIC Designations of “3” through “6” generally include fixed maturities referred to as below investment grade, which include securities rated Ba1 or lower by Moody’s and BB+ or lower by S&P. The NAIC Designations for commercial mortgage-backed securities and non-agency residential mortgage-backed securities, including our asset-backed securities collateralized by sub-prime
mortgages, are based on security level expected losses as modeled by an independent third-party (engaged by the NAIC) and the statutory carrying value of the security, including any purchase discounts or impairment charges previously recognized.
As a result of time lags between the funding of investments, the finalization of legal documents, and the completion of the SVO filing process, the fixed maturity portfolio includes certain securities that have not yet been designated by the SVO as of each balance sheet date. Pending receipt of SVO designations, the categorization of these securities by NAIC Designation is based on the expected ratings indicated by internal analysis.
Investments of our international insurance companies are not subject to NAIC guidelines. Investments of our Japanese insurance
operations are regulated locally by the Financial Services Agency (“FSA”), an agency of the Japanese government. The FSA has its own investment quality criteria and risk control standards. Our Japanese insurance companies comply with the FSA’s credit quality review and risk monitoring guidelines. The credit quality ratings of the investments of our Japanese insurance companies are based on ratings assigned by nationally recognized credit rating agencies, including Moody’s and S&P, or rating equivalents based on ratings assigned by Japanese credit ratings agencies.
The following table sets forth our fixed
maturity, available-for-sale portfolio by NAIC Designation or equivalent rating attributable to PFI excluding the Closed Block division, as of the dates indicated:
(1)Reflects
equivalent ratings for investments of the international insurance operations.
(2)Includes, as of March 31, 2022 and December 31, 2021, 698 securities with amortized cost of $5,798 million (fair value, $5,457 million) and 617 securities with amortized cost of $4,547 million (fair value, $4,596 million), respectively, that have been categorized based on expected NAIC Designations pending receipt of SVO ratings.
(3)As of March 31, 2022, includes gross unrealized losses of $577 million on public fixed maturities and $319 million on private fixed maturities considered to be other than high or highest quality and, as of December 31, 2021, includes
gross unrealized losses of $295 million on public fixed maturities and $147 million on private fixed maturities considered to be other than high or highest quality.
(4)On an amortized cost basis, as of March 31, 2022, includes $231,318 million of public fixed maturities and $46,024 million of private fixed maturities and, as of December 31, 2021, includes $234,323 million of public fixed maturities and $44,040 million of private fixed maturities.
(5)On an amortized cost basis, as of March 31, 2022, includes $10,276 million of public fixed maturities and $9,253 million of private fixed maturities and, as of December 31, 2021, includes $9,824
million of public fixed maturities and $9,753 million of private fixed maturities.
(6)On an amortized cost basis, as of March 31, 2022, securities considered below investment grade based on low issue composite ratings total $16,463 million, or 6% of the total fixed maturities, and include securities considered high or highest quality by the NAIC based on the rules described above.
(7)Excludes “Assets held-for-sale” of $12,761 million and $13,569 million at fair value as of March 31, 2022 and December 31, 2021, respectively. See Note 1 of the Unaudited Interim Consolidated Financial Statements for additional information.
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:
(1)Reflects
equivalent ratings for investments of the international insurance operations.
(2)As of both March 31, 2022 and December 31, 2021, 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, 2022, includes $1,344 million of public fixed maturities and $92 million of private fixed maturities and, as of December 31, 2021, includes $1,418 million of public fixed maturities and $101 million of private fixed maturities.
Asset-Backed and
Commercial Mortgage-Backed Securities
The following table sets forth the amortized cost and fair value of asset-backed and commercial mortgage-backed securities within our fixed maturity available-for-sale portfolio attributable to PFI excluding the Closed Block division by credit quality, as of the dates indicated:
(1)The
table above provides ratings as assigned by nationally recognized rating agencies as of March 31, 2022, 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 home equity and other asset types.
(3)As of both March 31, 2022 and December 31, 2021, based on amortized cost, more than 99%, 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. Also excludes “Assets held-for-sale” of $1,323 million and $921 million at fair value of asset-backed securities and commercial mortgage-backed securities, as of March 31, 2022, and $1,391 million and $1,024 million at fair value of asset-backed securities and commercial mortgage-backed securities, as of December 31, 2021, respectively. See Note 1 of the Unaudited Interim Consolidated Financial Statements for additional information.
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:
(1)The
table above provides ratings as assigned by nationally recognized rating agencies as of March 31, 2022, 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.
(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. Also excludes “Assets held-for-sale” of $1,216 million and $1,277 million at fair value as of March 31, 2022 and December 31, 2021, respectively. See Note 1 of the Unaudited Interim Consolidated Financial Statements for additional information.
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:
Commercial mortgage and agricultural property loans
$
50,295
$
48,550
Uncollateralized loans
534
561
Residential property loans
59
67
Other
collateralized loans
117
70
Total recorded investment gross of allowance(1)
51,005
49,248
Allowance for credit losses
(105)
(102)
Total net commercial mortgage and other loans(2)
$
50,900
$
49,146
__________
(1)As
a percentage of recorded investment gross of allowance, more than 99% of these assets were current as of both March 31, 2022 and December 31, 2021, respectively.
(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. Also excluded are “Assets held-for-sale” of $4,871 million net of allowance for credit losses of $10 million as of March 31, 2022, and $6,565 million net of allowance for credit losses of $15 million as of December 31, 2021, respectively.
See Note 1 of the Unaudited Interim Consolidated Financial Statements for additional information.
We originate commercial mortgage and agricultural property loans using a dedicated sales and underwriting staff through our various regional offices in the U.S. and international offices primarily in London and Tokyo. All loans are underwritten consistently to our standards using a proprietary quality rating system that has been developed from our industry experience in real estate and mortgage lending.
Uncollateralized loans primarily
represent corporate loans held by the Company’s international insurance operations.
Residential property loans primarily include Japanese recourse loans. To the extent there is a default on these recourse loans, we can make a claim against the personal assets of the property owner, in addition to the mortgaged property. These loans are also backed by third-party guarantors.
Other collateralized loans include mezzanine real estate debt investments and 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:
Commercial mortgage and agricultural property loans by region:
U.S.
Regions(1):
Pacific
$
18,332
36.4
%
$
17,744
36.5
%
South Atlantic
7,728
15.4
7,570
15.6
Middle
Atlantic
5,508
11.0
5,179
10.7
East North Central
2,486
4.9
2,490
5.1
West
South Central
5,347
10.6
4,965
10.2
Mountain
2,192
4.4
2,203
4.5
New
England
1,416
2.8
1,409
2.9
West North Central
462
0.9
468
1.0
East
South Central
1,209
2.4
1,099
2.3
Subtotal-U.S.
44,680
88.8
43,127
88.8
Europe
3,476
6.9
3,308
6.8
Asia
895
1.8
919
1.9
Other
1,244
2.5
1,196
2.5
Total
commercial mortgage and agricultural property loans(2)
$
50,295
100.0
%
$
48,550
100.0
%
__________
(1)Regions as defined by the United States Census Bureau.
(2)Excludes “Assets held-for-sale” of $4,881 million and $6,580 million as of March 31,
2022 and December 31, 2021, respectively. See Note 1 of the Unaudited Interim Consolidated Financial Statements for additional information.
Commercial mortgage and agricultural property loans by property type:
Industrial
$
12,508
24.9
%
$
11,773
24.3
%
Retail
5,118
10.2
5,294
10.9
Office
8,621
17.1
8,454
17.4
Apartments/Multi-Family
14,254
28.3
13,734
28.3
Agricultural
properties
4,784
9.6
4,375
9.0
Hospitality
1,566
3.1
1,601
3.3
Other
3,444
6.8
3,319
6.8
Total
commercial mortgage and agricultural property loans(1)
$
50,295
100.0
%
$
48,550
100.0
%
__________
(1)Excludes “Assets held-for-sale” of $4,881 million and $6,580 million as of March 31, 2022 and December 31, 2021,
respectively. See Note 1 of the Unaudited Interim Consolidated Financial Statements for additional information.
Loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial mortgage and agricultural property loans. The loan-to-value ratio compares the amount of the loan to the fair value of the underlying property collateralizing the loan and is commonly expressed as a percentage. A loan-to-value ratio less than 100% indicates an excess of collateral value over the loan amount. Loan-to-value ratios greater than 100% indicate that the loan amount exceeds the collateral value. The debt service coverage ratio compares a property’s net operating income to its debt service payments. Debt service coverage ratios less than 1.0 times indicate that property operations do not generate enough income to cover the loan’s current debt payments. A debt
service coverage ratio greater than 1.0 times indicates an excess of net operating income over the debt service payments.
As of March 31, 2022, our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division had a weighted-average debt service coverage ratio of 2.46 times and a weighted-average loan-to-value ratio of 57%. As of March 31, 2022, 95% of commercial mortgage and agricultural property loans were fixed rate loans. For those commercial mortgage and agricultural property loans that were originated in 2022, the weighted-average debt service coverage ratio was 2.71 times, and the weighted-average loan-to-value ratio was 65%.
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 $2.8 billion and $2.3 billion of such
loans as of March 31, 2022 and December 31, 2021, respectively. All else being equal, these loans are inherently riskier than those collateralized by properties that have already stabilized. As of both March 31, 2022 and December 31, 2021, there were less than $1 million, respectively, of allowance 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:
Total Commercial Mortgage and Agricultural Property Loans
Loan-to-Value Ratio
(in millions)
0%-59.99%
$
22,956
$
968
$
1,316
$
25,240
60%-69.99%
14,922
1,496
531
16,949
70%-79.99%
6,519
542
486
7,547
80%
or greater
186
228
145
559
Total commercial mortgage and agricultural property loans(1)
$
44,583
$
3,234
$
2,478
$
50,295
__________
(1)Excludes
“Assets held-for-sale” of $4,881 million. See Note 1 of the Unaudited Interim Consolidated Financial Statements for additional information.
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:
Total commercial mortgage and agricultural property loans(1)
$
50,295
100.0
%
__________
(1)Excludes
“Assets held-for-sale” of $4,881 million. See Note 1 of the Unaudited Interim Consolidated Financial Statements for additional information.
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:
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:
(1)Amounts
presented exclude investments in private equity and hedge funds and other investments which are reported in “Other invested assets”. Excludes “Assets held-for-sale” of $201 million and $322 million at fair value as of March 31, 2022 and December 31, 2021, respectively. See Note 1 of the Unaudited Interim Consolidated Financial Statements for additional information.
The net change in unrealized gains (losses) from equity securities attributable to PFI excluding Closed
Block division, including “Assets held-for-sale” still held at period end, recorded within “Other income (loss),” was $(145) million and $230 million during the three months ended March 31, 2022 and 2021, 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:
(1)As of March 31, 2022 and December 31, 2021, real estate held through direct ownership had mortgage debt of $303 million and $274 million, respectively.
(2)Primarily includes leveraged leases and member and activity stock held in the Federal Home Loan Banks of New York and Boston. For additional information regarding
our holdings in the Federal Home Loan Banks of New York and Boston, see Note 17 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
(3)Excludes “Assets held-for-sale” of $122 million and $104 million as of March 31, 2022 and December 31, 2021, respectively. See Note 1 of the Unaudited Interim Consolidated Financial Statements for additional information.
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.
(2)Book value is generally based on unpaid principal balance, net of any allowance for credit losses, or at fair value, when the fair value option has been elected.
Fixed Maturities, Trading
“Fixed maturities, trading, at fair value” are primarily related to assets associated with consolidated VIEs for which the Company is the investment manager. The assets of the consolidated VIEs are generally offset by liabilities for which the fair value option has been elected. For 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, the Federal Housing Administration and government-sponsored entities such as Fannie Mae and Freddie Mac.
The mortgage loans of our commercial mortgage operations are included in “Commercial mortgage and other loans.” Derivatives and other hedging instruments related to our commercial mortgage operations are primarily included in “Other invested assets.”
Other Invested Assets
“Other invested assets” primarily include
assets of our derivative operations used to manage interest rate, foreign currency, credit, and equity exposures.
Furthermore, other invested assets include strategic investments made as part of our investment management operations. We make these strategic investments in real estate, as well as fixed income, public equity and real estate securities, including controlling interests. Certain of these investments are made primarily for purposes of co-investment in our managed funds and structured products. Other strategic investments are made with the intention to sell or syndicate to investors, including our general account, or for placement in funds and structured products that we offer and manage (seed investments). As part of our investment management operations, we also make loans to our managed funds that are secured by equity commitments from investors or assets of the funds. “Other
invested assets” also include certain assets in consolidated investment funds where the Company is deemed to exercise control over the funds.
Liquidity and Capital Resources
Overview
Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of our businesses, fund business growth,
and provide a cushion to withstand adverse circumstances. Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of our businesses, general economic conditions and our access to the capital markets and the alternate sources of liquidity and capital described herein.
Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity of Prudential Financial and its subsidiaries on a daily basis and projects borrowing and capital needs over a multi-year time horizon. We use a Risk Appetite Framework (“RAF”) to ensure that all risks taken across the Company align with our capacity and willingness to take
those risks. The RAF provides a dynamic assessment of capital and liquidity stress impacts, including scenarios similar to, and more severe than, those occurring due to COVID-19, and is intended to ensure that sufficient resources are available to absorb those impacts. We believe that our capital and liquidity resources are sufficient to satisfy the capital and liquidity requirements of Prudential Financial and its subsidiaries.
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, 2021.
From the beginning of 2022 through the date of this report, we took the following significant actions that have impacted, or are expected to impact, our liquidity and capital positions:
•In February, we issued $1.0 billion of junior subordinated notes. We intend to use these proceeds for general corporate purposes, which may include the redemption or repurchase
of our $1.0 billion of junior subordinated notes due in 2042.
•In April, we completed the sale of our Full Service Retirement business and generated a transaction value of approximately $2.8 billion, subject to customary post-closing adjustments, which included cash consideration received for the sale of PRIAC, ceding commission for the reinsured business and capital available to be released from PICA. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
•In April, we completed the sale of a portion of our in-force traditional variable annuities block of business through the sale of all the equity interests in PALAC and generated a transaction value of approximately $2.6 billion, subject to customary post-closing adjustments, which included cash consideration received, net capital released
and a tax benefit. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
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, 2022, the Company had $53.4 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.
(1)Amounts attributable
to Prudential Financial, excluding AOCI.
We manage PICA, The Prudential Life Insurance Company, Ltd. (“Prudential of Japan”), Gibraltar Life, and other significant insurance subsidiaries to regulatory capital levels consistent with our “AA” ratings targets. We utilize the risk-based capital (“RBC”) ratio as a primary measure of the capital adequacy of our domestic insurance subsidiaries and the solvency margin ratio as a primary measure of the capital adequacy of our Japanese insurance subsidiaries.
The
table below presents the RBC ratios of our most significant domestic insurance subsidiaries as of December 31, 2021, the most recent statutory fiscal year-end and RBC reporting date for these subsidiaries.
Ratio(1)
PICA(2)
456
%
Prudential Annuities Life
Assurance Corporation (“PALAC”)
(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, 2021,
the most recent date for which this information is available.
(1)Includes
Prudential Trust Co., Ltd., a subsidiary of Prudential of Japan.
(2)Includes Prudential Gibraltar Financial Life Insurance Co., Ltd. (“PGFL”), a subsidiary of Gibraltar Life.
All of our domestic and significant international insurance subsidiaries have capital levels that substantially exceed the minimum level required by applicable insurance regulations; however, market conditions could negatively impact the statutory capital of our insurance companies and constrain our overall capital flexibility. Our regulatory capital levels also may be affected in the future by changes to the applicable regulations, proposals for which are currently under consideration by both domestic and international insurance regulators. For additional
information on the calculation of RBC and solvency margin ratios, as well as regulatory minimums, see Note 19 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
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, 2021,
for a discussion of our use of captive reinsurance companies.
Shareholder Distributions
Share Repurchase Program and Shareholder Dividends
In November 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, 2022 through December 31, 2022.
In
general, the timing and amount of share repurchases are determined by management based on market conditions and other considerations, including compliance with applicable laws and any increased capital needs of our businesses due to, among other things, credit migration and losses in our investment portfolio, changes in regulatory capital requirements and opportunities for growth and acquisitions. Repurchases may be executed in the open market, through derivative, accelerated repurchase and other negotiated transactions and through plans designed to comply with Rule 10b5-1(c) under the Securities Exchange Act of 1934.
The following table sets forth information about declarations of Common Stock dividends, as well as repurchases of shares of Prudential Financial’s Common Stock, for the three months ended March 31, 2022.
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.
The principal sources of funds available to Prudential Financial, the parent holding company, are dividends, returns of capital and loans from subsidiaries, and proceeds from debt issuances and certain stock-based compensation activity. These sources of funds may be supplemented by Prudential Financial’s access to the capital markets as well as the “—Alternative Sources of Liquidity” described below.
The primary uses of funds at Prudential Financial include servicing debt, making capital contributions and loans to subsidiaries,
making acquisitions, paying declared shareholder dividends and repurchasing outstanding shares of Common Stock executed under authority from the Board.
As of March 31, 2022, Prudential Financial had highly liquid assets with a carrying value totaling $4,645 million, an increase of $419 million from December 31, 2021. 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 $3,596 million as of March 31, 2022, an increase of $43 million from December 31, 2021.
The following table sets forth Prudential Financial’s principal sources and uses of highly liquid assets, excluding net borrowings from our intercompany liquidity account, for the periods indicated.
(1)2022 includes $338 million from Prudential Annuities Holding Company, $89 million from PGIM subsidiaries, and $5 million from other subsidiaries. 2021 includes $210 million from Prudential Annuities Holding Company, $186 million from PGIM subsidiaries, and
$112 million from international insurance and investment subsidiaries.
(2)2022 includes capital contributions of $780 million to an international reinsurance subsidiary and $102 million to international insurance subsidiaries. The majority of the capital contribution to our international reinsurance subsidiary was to fund the payment of ceding commissions to our domestic insurance subsidiaries. 2021 includes $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)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 2022, Prudential Financial received dividends of $338 million from Prudential Annuities Holding Company, of which $306 million was from PALAC. In addition to paying Common Stock dividends, our domestic insurance operations may return capital to Prudential Financial by other means, such as affiliated lending, and reinsurance with Bermuda-based affiliates.
International insurance subsidiaries. During the first three months of 2022, Prudential Financial did not receive dividends from its international insurance subsidiaries.
In addition to paying Common Stock dividends, our international insurance operations may return capital to Prudential Financial by other means, such as the repayment of preferred stock obligations held by Prudential Financial or other affiliates, affiliated lending, affiliated derivatives and reinsurance with U.S.- and Bermuda-based affiliates.
Other subsidiaries. During the first three months of 2022, Prudential Financial received dividends and returns of capital of $89 million from PGIM subsidiaries and dividends of $5 million from other subsidiaries.
Restriction
on dividends and returns of capital from subsidiaries. Our insurance companies are subject to limitations on the payment of dividends and other transfers of funds to Prudential Financial and other affiliates under applicable insurance law and regulation. Further, 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 those of New Jersey.
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, 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, 2021, for information on specific dividend restrictions.
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 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.
(1)Represents
legal entity view and as such includes both domestic and international activity.
(2)In April 2022, the Company completed the sale of its equity interests in both PRIAC and PALAC. See Note 1 to the Unaudited Consolidated Financial Statements for more information about these dispositions.
(3)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.
(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, 2022, $95.3 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 post 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 post position. As of March 31, 2022, the derivatives comprising the hedging portion of our Individual Annuities’ ALM strategy and
capital hedge program were in a net post position of $6.9 billion compared to a net post position of $5.5 billion as of December 31, 2021. The change in collateral position was primarily driven by the impact of increasing interest rates partially offset by equity market depreciation.
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.
Equity Hedges—We hold both internal and external hedges primarily to hedge our USD-equivalent equity. These hedges also mitigate volatility in the solvency margins of yen-based subsidiaries resulting from changes
in the market value of their USD-denominated investments hedging our USD-equivalent equity attributable to changes in the yen-USD exchange rate.
For additional information on our hedging strategy, see “—Results of Operations—Impact of Foreign Currency Exchange Rates.”
Cash settlements from these hedging activities result in cash flows between subsidiaries of Prudential Financial and either international-based subsidiaries or external parties. The cash flows are dependent on changes in foreign currency exchange rates and the notional amount of the exposures hedged. For example, a significant yen depreciation over
an extended period of time could result in net cash inflows, while a significant yen appreciation could result in net cash outflows. The following tables set forth information about net cash settlements and the net asset or liability resulting from these hedging activities related to the yen and other currencies for the periods indicated.
(1)Includes non-yen related cash settlements of $3 million, primarily denominated in Chilean Peso, Brazilian real, and Australian dollar, and $5 million, primarily denominated in Brazilian real, Australian dollar, and Chilean Peso for the three months ended March 31,
2022 and 2021, respectively.
(2)Represents internal transactions between international-based and U.S.-based entities. Amounts noted are from the U.S.-based entities’ perspectives.
(3)Includes non-yen related liabilities of $(38) million, primarily denominated in Brazilian real, Australian dollar and Chilean Peso as of March 31, 2022 and assets of $28 million, primarily denominated in Brazilian real, Chilean peso and Australian dollar, as of December 31,
2021.
(4)As of March 31, 2022, approximately $198 million, $581 million, $237 million and $106 million of the net market values are scheduled to settle in 2022, 2023, 2024, 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 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 seed and co-investments held in our PGIM businesses are cash flows from 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 seed and co-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, 2021.
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, 2021.
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.
Portion
of above securities that may be returned to the Company overnight requiring immediate return of the cash collateral
$
10,113
$
2,923
$
13,036
$
10,637
$
2,874
$
13,511
Weighted
average maturity, in days(4)
18
N/A
31
N/A
__________
(1)Excludes “Liabilities held-for-sale” of $205 million and $0 million as of March 31, 2022 and December 31, 2021, respectively.
(2)The daily weighted average outstanding balance for the three months ended March 31,
2022 was $11,052 million for PFI excluding the Closed Block division, and $3,051 million for the Closed Block division.
(3)Includes utilization of external funding facilities for PGIM’s commercial mortgage origination business.
(4)Excludes securities that may be returned to the Company overnight. “N/A” reflects that all outstanding balances may be returned to the Company overnight.
As of March 31, 2022, our domestic insurance entities had assets eligible for the asset-based or secured financing programs of $124.3 billion,
of which $13.5 billion were on loan. Taking into account market conditions and outstanding loan balances as of March 31, 2022, we believe approximately $14.5 billion of the remaining eligible assets are readily lendable, including approximately $10.1 billion relating to PFI excluding the Closed Block division, of which $2.8 billion relates to certain separate accounts and may only be used for financing activities related to those accounts, and the remaining $4.4 billion relating to the Closed Block division.
Financing Activities
As of March 31, 2022, total short-term and long-term
debt of the Company on a consolidated basis was $20.2 billion, an increase of $0.9 billion from December 31, 2021. 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.
(1)Amounts
are net of assets under set-off arrangements of $10,791 million and $10,691 million as of March 31, 2022 and December 31, 2021, respectively.
(2)Limited and non-recourse borrowing primarily represents mortgage debt of our subsidiaries that has recourse only to real estate investment property of $303 million and $274 million as of March 31, 2022 and December 31, 2021, 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,
2022 and December 31, 2021.
As of March 31, 2022, and December 31, 2021, the Company was in compliance with all debt covenants related to the borrowings in the table above. For additional information on the Company’s 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,
2021.
Prudential Financial’s consolidated borrowings increased $889 million from December 31, 2021, primarily driven by a $995 million increase in Prudential Financial borrowings and a $106 million decrease in subsidiary borrowings. On February 28, 2022, the Company issued $1 billion in aggregate principal amount of 5.125% junior subordinated notes due in March 2052.
Term and Universal Life Reserve Financing
We use captive reinsurance subsidiaries
to finance the portion of the statutory reserves required to be held by our domestic life insurance companies under Regulation XXX and Guideline AXXX that we consider to be non-economic. The financing arrangements involve the reinsurance of term and universal life business to our captive reinsurers and the issuance of surplus notes by those captives that are treated as capital for statutory purposes. These surplus notes are subordinated to policyholder obligations, and the payment of principal and interest on the surplus notes can only be made with prior insurance regulatory approval.
We have entered into agreements with external counterparties providing for the issuance of surplus notes by our captive reinsurers in return for the receipt of credit-linked notes (“Credit-Linked Note Structures”). As of March 31, 2022, we had
Credit-Linked Note Structures with an aggregate issuance capacity of $14,600 million, of which $12,821 million was outstanding, as compared to an aggregate issuance capacity of $14,600 million, of which $12,721 million was outstanding, as of December 31, 2021. 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, 2021.
(1)Prudential Financial has agreed to reimburse amounts paid under the credit-linked notes issued in this structure up to $500 million.
(2)The $2,130 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, 2022, we also had outstanding an aggregate of $3,025 million of debt issued for the purpose of financing Regulation XXX and Guideline AXXX non-economic reserves, of which $1,125 million relates to Regulation XXX reserves and $1,900 million relates to Guideline AXXX reserves. In addition, as of March 31, 2022, 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.
Off-Balance Sheet Arrangements
See additional information on off-balance sheet arrangements in Note 9 and other commitments in Note 14 to the Unaudited Interim Consolidated Financial Statements.
In 2014, Prudential Financial entered into financing transactions, pursuant to which it issued $500 million of limited-recourse notes and, in return,
obtained $500 million of asset-backed notes from a Delaware master trust and ultimately contributed the asset-backed notes to its subsidiary, PRIAC. As of March 31, 2022, 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. As a result of the Company’s sale of its Full Service Retirement business to Great-West, which included the sale of all of the outstanding equity interests of PRIAC, the $500 million of limited-recourse notes were canceled as of April 1,
2022.
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, 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.
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, 2021, 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 the Company that have occurred since the filing of our Form 10-K for the year ended December 31, 2021. On April 1, 2022 Prudential completed the previously announced sales of PALAC to Fortitude Group Holdings, LLC and PRIAC to Great-West Life & Annuity Insurance Company. As a result, PALAC and PRIAC
will no longer fall under Prudential Financial’s group ratings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of fluctuations in the value of financial instruments as a result of absolute or relative changes in interest rates, foreign currency exchange rates, equity prices or commodity prices. To varying degrees, our products and services, and the investment activities supporting
them, generate exposure to market risk. The market risk incurred, and our strategies for managing this risk, vary by product. As of March 31, 2022, there have been no material changes in our economic exposure to market risk from December 31, 2021, a description of which may be found in our Annual Report on Form 10-K, for the year ended December 31, 2021, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” filed with the Securities and Exchange Commission. See Item 1A, “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2021, for a discussion of how difficult conditions in the financial markets and the economy generally may materially adversely affect our business and results of our operations.
ITEM 4.
CONTROLS AND PROCEDURES
In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized, and reported on a timely basis, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of March 31, 2022. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2022, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), occurred during
the quarter ended March 31, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
See
Note 14 to the Unaudited Interim Consolidated Financial Statements under “—Litigation and Regulatory Matters” for a description of certain pending litigation and regulatory matters affecting us, and certain risks to our businesses presented by such matters, which is incorporated herein by reference.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021. These risks could materially affect our business, results of operations or financial condition, cause the trading price of our Common Stock to decline
materially or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by, or on behalf of, the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” and the risks of our businesses described elsewhere in this Quarterly Report on Form 10-Q.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) The following table provides information about purchases by the
Company during the three months ended March 31, 2022, of its Common Stock:
Period
Total Number of Shares Purchased(1)
Average Price Paid per
Share
Total Number of Shares Purchased as Part of Publicly Announced Program(2)
Approximate Dollar Value of Shares that May Yet Be Purchased under the Program(2)
(1)Includes
shares of Common Stock withheld from participants for income tax withholding purposes whose shares of restricted stock units vested during the period. Such restricted stock units were originally issued to participants pursuant to the Prudential Financial, Inc. Omnibus Incentive Plan.
(2)In November 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, 2022 through December 31, 2022.
Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Prudential Gibraltar Financial Life Insurance Co., Ltd.
Prudential
Financial
Prudential Financial, Inc.
PIIH
Prudential International Insurance Holdings, Ltd.
Prudential Funding
Prudential Funding, LLC
PLIC
Prudential Legacy Insurance Company of New Jersey
Prudential Insurance/PICA
The Prudential Insurance Company of America
PLNJ
Pruco Life Insurance Company of New Jersey
Prudential
of Japan
The Prudential Life Insurance Company, Ltd.
POA
Prudential of Argentina
Registrant
Prudential Financial, Inc.
Defined Terms
Board
Prudential
Financial's Board of Directors
Morningstar
Morningstar, Inc.
Closed Block
Certain in-force participating insurance policies and annuity products, along with corresponding assets used for the payment of benefits and policyholders' dividends on these products
Other Postretirement Benefits
Certain health care and life insurance benefits provided by the Company for its retired employees, their beneficiaries and covered dependents
Exchange Act
The
Securities Exchange Act of 1934
Pension Benefits
Funded and non-funded non-contributory defined benefit pension plans which cover substantially all of the Company’s employees
Fitch
Fitch Ratings Inc.
PGIM
The global investment management businesses of Prudential Financial, Inc.
Fortitude
Fortitude Group Holdings, LLC
Regulation
XXX
Valuation of Life Insurance Policies Model Regulation
Great-West
Great-West Life & Annuity Insurance Company
S&P
Standard & Poor's Rating Services
Guideline AXXX
The Application of the Valuation of Life Insurance Policies Model Regulation
U.S. GAAP
Generally accepted accounting principles in the United States of America
Moody's
Moody's
Investors Service, Inc.
Variable Profits
Assurance IQ’s achievement of certain targets for gross revenues net of associated selling expenses
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Prudential Financial, Inc.
By:
/S/ KENNETH Y. TANJI
Kenneth
Y. Tanji Executive Vice President and Chief Financial Officer (Authorized signatory and principal financial officer)