Quarterly Report (10-q)

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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from              to             
 
Commission File Number 001-16707
 
Prudential Financial, Inc.
(Exact Name of Registrant as Specified in its Charter) 
New Jersey
22-3703799
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
751 Broad Street
Newark, NJ 07102
(973) 802-6000
(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
Common Stock, Par Value $.01
 PRU
New York Stock Exchange
5.75% Junior Subordinated Notes
PJH
New York Stock Exchange
5.70% Junior Subordinated Notes
PRH
New York Stock Exchange
5.625% Junior Subordinated Notes
PRS
New 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.    Yes  x    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).    Yes  x    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.
 
Large Accelerated Filer
x
 
Accelerated Filer
 
Non-accelerated Filer
 
Smaller Reporting Company
 
 
 
 
Emerging Growth Company
 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    No  x
 
As of April 30, 2020, 395 million shares of the registrant’s Common Stock (par value $0.01) were outstanding.


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
Item 1.
 
 
1
 
2
 
3
 
4
 
5
 
6
 
6
 
7
 
14
 
28
 
30
 
37
 
51
 
53
 
54
 
55
 
56
 
59
 
61
 
65
 
69
Item 2.
70
Item 3.
136
Item 4.
136
 
Item 1.
137
Item 1A.
137
Item 2.
138
Item 6.
140
141
143



Table of Contents

Forward-Looking Statements

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 accelerate our strategy; and (16) costs associated with the acquisition of Assurance IQ, LLC and its integration 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 this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and the Annual Report on Form 10-K for the year ended December 31, 2019 for discussion of certain risks relating to our businesses and investment in our securities.



i

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements
PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Financial Position
March 31, 2020 and December 31, 2019 (in millions, except share amounts)
 
 
March 31,
2020
 
December 31,
2019
ASSETS
 
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost: 2020-$349,665; 2019-$346,574; 2020-net of $158 allowance for credit losses)(1)
 
$
389,714

 
$
391,096

Fixed maturities, held-to-maturity, at amortized cost (2020-net of $9 allowance for credit losses; fair value: 2020-$2,249; 2019-$2,302)(1)(2)
 
1,895

 
1,933

Fixed maturities, trading, at fair value (amortized cost: 2020-$3,931; 2019-$3,917)(1)
 
3,621

 
3,884

Assets supporting experience-rated contractholder liabilities, at fair value(1)
 
21,580

 
21,597

Equity securities, at fair value (cost: 2020-$5,695; 2019-$5,560)(1)
 
6,176

 
7,522

Commercial mortgage and other loans (net of $240 and $121 allowance for credit losses; includes $670 and $228 of loans measured at fair value under the fair value option at March 31, 2020 and December 31, 2019, respectively)(1)(2)
 
63,559

 
63,559

Policy loans
 
12,099

 
12,096

Other invested assets (2020-net of $1 allowance for credit losses; includes $7,895 and $5,646 of assets measured at fair value at March 31, 2020 and December 31, 2019, respectively)(1)(2)
 
18,071

 
15,606

Short-term investments (2020-net of $4 allowance for credit losses)
 
7,961

 
5,467

Total investments
 
524,676

 
522,760

Cash and cash equivalents(1)
 
31,646

 
16,327

Accrued investment income(1)
 
3,221

 
3,330

Deferred policy acquisition costs(2)
 
19,738

 
19,912

Value of business acquired
 
1,070

 
1,110

Other assets(1)(2)
 
20,694

 
20,832

Separate account assets
 
272,667

 
312,281

TOTAL ASSETS
 
$
873,712

 
$
896,552

LIABILITIES AND EQUITY
 
 
 
 
LIABILITIES
 
 
 
 
Future policy benefits
 
$
310,817

 
$
293,527

Policyholders’ account balances
 
155,898

 
152,110

Policyholders’ dividends(2)
 
6,396

 
6,988

Securities sold under agreements to repurchase
 
10,557

 
9,681

Cash collateral for loaned securities
 
3,396

 
4,213

Income taxes(2)
 
11,117

 
11,378

Short-term debt
 
2,539

 
1,933

Long-term debt
 
20,149

 
18,646

Other liabilities(1)(2)
 
17,853

 
20,802

Notes issued by consolidated variable interest entities (includes $799 and $800 measured at fair value under the fair value option at March 31, 2020 and December 31, 2019, respectively)(1)
 
1,251

 
1,274

Separate account liabilities
 
272,667

 
312,281

Total liabilities
 
812,640

 
832,833

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 14)
 

 

EQUITY
 
 
 
 
Preferred Stock ($.01 par value; 10,000,000 shares authorized; none issued)
 
0

 
0

Common Stock ($.01 par value; 1,500,000,000 shares authorized; 666,305,189 shares issued as of both March 31, 2020 and December 31, 2019)
 
6

 
6

Additional paid-in capital
 
25,506

 
25,532

Common Stock held in treasury, at cost (272,456,220 and 267,472,781 shares at March 31, 2020 and December 31, 2019, respectively)
 
(19,841
)
 
(19,453
)
Accumulated other comprehensive income (loss)
 
22,600

 
24,039

Retained earnings
 
32,176

 
32,991

Total Prudential Financial, Inc. equity
 
60,447

 
63,115

Noncontrolling interests
 
625

 
604

Total equity
 
61,072

 
63,719

TOTAL LIABILITIES AND EQUITY
 
$
873,712

 
$
896,552

__________
(1)
See Note 4 for details of balances associated with variable interest entities.
(2)
March 31, 2020 amounts include the impacts of the January 1, 2020 adoption of ASU 2016-13. See Note 2 for details.
See Notes to Unaudited Interim Consolidated Financial Statements

1

Table of Contents

PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Operations
Three Months Ended March 31, 2020 and 2019 (in millions, except per share amounts)
 
 
Three Months Ended
March 31,
 
2020
 
2019
REVENUES
 
 
 
Premiums
$
7,664

 
$
7,900

Policy charges and fee income
1,489

 
1,471

Net investment income
4,202

 
4,216

Asset management and service fees
1,033

 
1,016

Other income (loss)
(2,591
)
 
1,254

Realized investment gains (losses), net
1,667

 
(766
)
Total revenues
13,464

 
15,091

BENEFITS AND EXPENSES
 
 
 
Policyholders’ benefits
9,006

 
8,438

Interest credited to policyholders’ account balances
392

 
1,345

Dividends to policyholders
(77
)
 
577

Amortization of deferred policy acquisition costs
957

 
435

General and administrative expenses
3,524

 
3,156

Total benefits and expenses
13,802

 
13,951

INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES
(338
)
 
1,140

Total income tax expense (benefit)
(58
)
 
232

INCOME (LOSS) BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES
(280
)
 
908

Equity in earnings of operating joint ventures, net of taxes
10

 
29

NET INCOME (LOSS)
(270
)
 
937

Less: Income (loss) attributable to noncontrolling interests
1

 
5

NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.
$
(271
)
 
$
932

EARNINGS PER SHARE
 
 
 
Basic earnings per share-Common Stock:
 
 
 
Net income (loss) attributable to Prudential Financial, Inc.
$
(0.70
)
 
$
2.25

Diluted earnings per share-Common Stock:
 
 
 
Net income (loss) attributable to Prudential Financial, Inc.
$
(0.70
)
 
$
2.22








See Notes to Unaudited Interim Consolidated Financial Statements

2

Table of Contents

PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2020 and 2019 (in millions)
 
 
Three Months Ended
March 31,
 
2020
 
2019
NET INCOME (LOSS)
$
(270
)
 
$
937

Other comprehensive income (loss), before tax:
 
 
 
Foreign currency translation adjustments for the period
(295
)
 
(105
)
Net unrealized investment gains (losses)
(1,354
)
 
8,289

Defined benefit pension and postretirement unrecognized periodic benefit (cost)
72

 
64

Total
(1,577
)
 
8,248

Less: Income tax expense (benefit) related to other comprehensive income (loss)
(138
)
 
1,944

Other comprehensive income (loss), net of taxes
(1,439
)
 
6,304

Comprehensive income (loss)
(1,709
)
 
7,241

Less: Comprehensive income (loss) attributable to noncontrolling interests
1

 
4

Comprehensive income (loss) attributable to Prudential Financial, Inc.
$
(1,710
)
 
$
7,237

 



See Notes to Unaudited Interim Consolidated Financial Statements
 

3

Table of Contents

PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Equity
Three Months Ended March 31, 2020 and 2019 (in millions)
 
 
Prudential Financial, Inc. Equity
 
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Common
Stock
Held In
Treasury
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Prudential
Financial, Inc.
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, December 31, 2019
$
6

 
$
25,532

 
$
32,991

 
$
(19,453
)
 
$
24,039

 
$
63,115

 
$
604

 
$
63,719

Cumulative effect of adoption of accounting changes(1)
 
 
 
 
(99
)
 
 
 
 
 
(99
)
 
 
 
(99
)
Common Stock acquired
 
 
 
 
 
 
(500
)
 
 
 
(500
)
 
 
 
(500
)
Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
31

 
31

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
(11
)
 
(11
)
Stock-based compensation programs
 
 
(26
)
 
 
 
112

 
 
 
86

 
 
 
86

Dividends declared on Common Stock
 
 
 
 
(445
)
 
 
 
 
 
(445
)
 
 
 
(445
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
(271
)
 
 
 
 
 
(271
)
 
1

 
(270
)
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
(1,439
)
 
(1,439
)
 
0

 
(1,439
)
Total comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
(1,710
)
 
1

 
(1,709
)
Balance, March 31, 2020
$
6


$
25,506


$
32,176


$
(19,841
)
 
$
22,600


$
60,447


$
625


$
61,072

    

 
Prudential Financial, Inc. Equity
 
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Common
Stock
Held In
Treasury
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Prudential
Financial, Inc.
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, December 31, 2018
$
6

 
$
24,828

 
$
30,470

 
$
(17,593
)
 
$
10,906

 
$
48,617

 
$
414

 
$
49,031

Cumulative effect of adoption of accounting changes(2)
 
 
 
 
(21
)
 
 
 
7

 
(14
)
 
 
 
(14
)
Common Stock acquired
 
 
 
 
 
 
(500
)
 
 
 
(500
)
 
 
 
(500
)
Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
26

 
26

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
(4
)
 
(4
)
Stock-based compensation programs
 
 
(46
)
 
 
 
131

 
 
 
85

 
 
 
85

Dividends declared on Common Stock
 
 
 
 
(415
)
 
 
 
 
 
(415
)
 
 
 
(415
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
932

 
 
 
 
 
932

 
5

 
937

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
6,305

 
6,305

 
(1
)
 
6,304

Total comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
7,237

 
4

 
7,241

Balance, March 31, 2019
$
6

 
$
24,782

 
$
30,966

 
$
(17,962
)
 
$
17,218

 
$
55,010

 
$
440

 
$
55,450


__________
(1)
Includes the impact from the adoption of ASU 2016-13. See Note 2.
(2)
Includes the impact from the adoption of ASU 2017-08 and 2017-12. See Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information.












See Notes to Unaudited Interim Consolidated Financial Statements

4

Table of Contents

PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Cash Flows
Three Months Ended March 31, 2020 and 2019 (in millions)
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
(270
)
 
$
937

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Realized investment (gains) losses, net
(1,667
)
 
766

Policy charges and fee income
(701
)
 
(601
)
Interest credited to policyholders’ account balances
392

 
1,345

Depreciation and amortization
329

 
20

(Gains) losses on assets supporting experience-rated contractholder liabilities, net
838

 
(454
)
Change in:
 
 
 
Deferred policy acquisition costs
217

 
(326
)
Future policy benefits and other insurance liabilities
2,825

 
2,504

Income taxes
(115
)
 
152

Derivatives, net
15,388

 
(159
)
Other, net
(2,470
)
 
(1,099
)
Cash flows from (used in) operating activities
14,766

 
3,085

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Proceeds from the sale/maturity/prepayment of:
 
 
 
Fixed maturities, available-for-sale
9,997

 
14,063

Fixed maturities, held-to-maturity
40

 
14

Fixed maturities, trading
121

 
77

Assets supporting experience-rated contractholder liabilities
7,219

 
2,992

Equity securities
523

 
675

Commercial mortgage and other loans
1,593

 
1,080

Policy loans
572

 
576

Other invested assets
533

 
374

Short-term investments
8,713

 
8,202

Payments for the purchase/origination of:
 
 
 
Fixed maturities, available-for-sale
(13,379
)
 
(17,395
)
Fixed maturities, trading
(103
)
 
(178
)
Assets supporting experience-rated contractholder liabilities
(7,908
)
 
(3,063
)
Equity securities
(616
)
 
(737
)
Commercial mortgage and other loans
(1,632
)
 
(2,354
)
Policy loans
(505
)
 
(473
)
Other invested assets
(905
)
 
(559
)
Short-term investments
(11,131
)
 
(8,837
)
Derivatives, net
1,106

 
341

Other, net
(18
)
 
(97
)
Cash flows from (used in) investing activities
(5,780
)
 
(5,299
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Policyholders’ account deposits
14,444

 
7,417

Policyholders’ account withdrawals
(9,354
)
 
(6,823
)
Net change in securities sold under agreements to repurchase and cash collateral for loaned securities
59

 
88

Cash dividends paid on Common Stock
(448
)
 
(420
)
Net change in financing arrangements (maturities 90 days or less)
630

 
85

Common Stock acquired
(485
)
 
(484
)
Common Stock reissued for exercise of stock options
45

 
36

Proceeds from the issuance of debt (maturities longer than 90 days)
1,550

 
1,120

Repayments of debt (maturities longer than 90 days)
(1
)
 
(55
)
Proceeds from notes issued by consolidated VIEs
0

 
910

Repayments of notes issued by consolidated VIEs
(16
)
 
(638
)
Other, net
(65
)
 
330

Cash flows from (used in) financing activities
6,359

 
1,566

Effect of foreign exchange rate changes on cash balances
(22
)
 
(2
)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS
15,323

 
(650
)
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, BEGINNING OF YEAR
16,474

 
15,495

CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, END OF PERIOD
$
31,797

 
$
14,845

NON-CASH TRANSACTIONS DURING THE PERIOD
 
 
 
Treasury Stock shares issued for stock-based compensation programs
$
140

 
$
165

RECONCILIATION TO THE UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 
 
 
Cash and cash equivalents
$
31,646

 
$
14,699

Restricted cash and restricted cash equivalents (included in “Other assets”)
151

 
146

Total cash, cash equivalents, restricted cash and restricted cash equivalents
$
31,797

 
$
14,845





See Notes to Unaudited Interim Consolidated Financial Statements

5

Table of Contents

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements
 
1. BUSINESS AND BASIS OF PRESENTATION
 
Prudential Financial, Inc. (“Prudential Financial”) and its subsidiaries (collectively, “Prudential” or the “Company”) provide a wide range of insurance, investment management, and other financial products and services to both individual and institutional customers throughout the United States and in many other countries. Principal products and services provided include life insurance, annuities, retirement-related services, mutual funds and investment management.

The Company’s principal operations are comprised of PGIM (the Company’s global investment management business), the U.S. Businesses (consisting of the U.S. Workplace Solutions, U.S. Individual Solutions, and Assurance IQ divisions), the International Businesses, the Closed Block division, and the Company’s Corporate and Other operations. The U.S. Workplace Solutions division consists of the Retirement and Group Insurance businesses, the U.S. Individual Solutions division consists of the Individual Annuities and Individual Life businesses, and the Assurance IQ division consists of the Assurance IQ business. In October 2019, the Company completed the acquisition of Assurance IQ, LLC (“Assurance IQ”), a leading consumer solutions platform that offers a range of solutions that help meet consumers’ financial needs. The Closed Block division is accounted for as a divested business that is reported separately from the Divested and Run-off Businesses that are included in Corporate and Other. The Company’s Corporate and Other operations include corporate items and initiatives that are not allocated to business segments and businesses that have been or will be divested or placed in run-off, excluding the Closed Block division.
 
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, 2019.

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 fixed annuity products; value of business acquired (“VOBA”) and its amortization; amortization of deferred sales inducements (“DSI”); measurement of goodwill and any related impairment; valuation of investments including derivatives, measurement of allowance for credit losses, and recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; pension and other postretirement benefits; provision for income taxes and valuation of deferred tax assets; and accruals for contingent liabilities, including estimates for losses in connection with unresolved legal and regulatory matters.

COVID-19

During the first quarter of 2020, the outbreak of the novel coronavirus (“COVID-19”) has resulted in extreme stress and disruption in the global economy and financial markets, and has adversely impacted, and may continue to adversely impact, our results of operations, financial condition and cash flows. Due to the highly uncertain nature of these conditions, it is not possible to estimate the ultimate impacts at this time. The risks may have manifested, and may continue to manifest, in our financial

6

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

statements in the areas of, among others, i) investments: increased risk of loss on our investments due to default or deterioration in credit quality or value; ii) insurance liabilities and related balances: potential changes to assumptions regarding investment returns, mortality, morbidity and policyholder behavior which are reflected in our insurance liabilities and certain related balances (e.g., DAC, VOBA, etc.); and iii) goodwill: the macroeconomic environment may also result in the need to recognize an impairment of goodwill which could negatively impact our results of operations and financial condition. We cannot predict what impact the COVID-19 pandemic will ultimately have on the global economy, markets or our businesses.

Reclassifications
 
Certain amounts in prior periods have been reclassified to conform to the current period presentation.

2. SIGNIFICANT 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, 2020, and as of the date of this filing. ASUs not listed below were assessed and determined to be either not applicable or not material.

Adoption of ASU 2016-13

The Company adopted ASU 2016-13, and related ASUs, effective January 1, 2020 using the modified retrospective method for certain financial assets carried at amortized cost and certain off-balance sheet exposures. The modified retrospective method results in a cumulative effect adjustment to opening retained earnings. The Company adopted the guidance related to fixed maturities, available-for-sale on a prospective basis.

This ASU requires the use of a new current expected credit loss (“CECL”) model to account for expected credit losses on certain financial assets reported at amortized cost (e.g., loans held for investment, fixed maturities held-to-maturity, reinsurance receivables, etc.) and certain off-balance sheet credit exposures (e.g., indemnification of serviced mortgage loans and certain loan commitments). The guidance requires an entity to estimate lifetime credit losses related to such financial assets and credit exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that may affect the collectability of the reported amounts. The standard also modifies the other-than-temporary-impairment (“OTTI”) guidance for fixed maturities, available-for-sale requiring the use of an allowance rather than a direct write-down of the investment.

The impacts of this ASU on the Company’s Consolidated Financial Statements primarily include (1) A Cumulative Effect Adjustment Upon Adoption; (2) Changes to the Presentation of the Consolidated Statements of Financial Position and Consolidated Statements of Operations; and (3) Changes to Accounting Policies. Each of these impacts is described below. This section is meant to serve as an update to, and should be read in conjunction with, Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

(1) Cumulative Effect Adjustment Upon Adoption

7

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Summary of Transition Impact on the Consolidated Statements of Financial Position
Upon Adoption on January 1, 2020
 
Increase/(Decrease)
 
(in millions)
Fixed maturities, held-to-maturity
$
(9
)
Commercial mortgage and other loans
(115
)
Other invested assets
(1
)
Deferred policy acquisition costs
9

Other assets
(6
)
Total assets
$
(122
)
 
 
Policyholders' dividends
$
(14
)
Other liabilities
21

Income taxes
(30
)
Total liabilities
(23
)
 
 
Retained earnings
(99
)
Total equity
(99
)
Total liabilities and equity
$
(122
)

The prospective adoption of the portions of the standard related to fixed maturities, available-for-sale resulted in no impact to opening retained earnings.

(2) Changes to the Presentation of the Consolidated Statements of Financial Position and Consolidated Statements of Operations

The allowance for credit losses is presented parenthetically on relevant line items in the Consolidated Statements of Financial Position. In the Consolidated Statements of Operations, realized investment gains (losses), net are presented on one line item and will no longer reflect the breakout of OTTI on fixed maturity securities; OTTI on fixed maturity securities transferred to other comprehensive income (“OCI”); and other realized investment gains (losses), net. The presentation of this detail in prior periods is immaterial.

(3) Changes to Accounting Policies

This section has been updated to include the changes in our accounting policies resulting from the adoption of ASU 2016-13.

Fixed maturities, available-for-sale

Fixed maturities, available-for-sale (“AFS debt securities”) are reported at fair value in the Statements of Financial Position. Interest income, and amortization of premium and accretion of discount are included in “Net investment income” under the effective yield method. For mortgage-backed and asset-backed securities, the effective yield is based on estimated cash flows, including interest rate and prepayment assumptions based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also vary based on other assumptions relating to the underlying collateral, including default rates and changes in value. These assumptions can significantly impact income recognition and the amount of impairments recognized in earnings and OCI. For mortgage-backed and asset-backed securities rated below AA, the effective yield is adjusted prospectively for any changes in the estimated timing and amount of cash flows unless the investment is impaired. For impaired mortgage-backed and asset-backed securities rated below AA, the effective yield is adjusted prospectively only if subsequent favorable or adverse changes in expected cash flows are not reflected in the allowance for credit losses. Prior to the adoption of this standard, the effective yield was adjusted prospectively regardless of whether the investment was impaired or not.

AFS debt securities with unrealized losses are reviewed quarterly to determine whether the amortized cost basis of the security is recoverable. In evaluating whether the amortized cost basis is recoverable, the Company considers several factors including, but not limited to the extent of the decline and the reasons for the decline in value (credit events, currency or interest-rate related, including general credit spread widening), and the financial condition of the issuer.

8

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


When an AFS debt security is in an unrealized loss position and (1) the Company has the intent to sell the AFS debt security, or (2) it is more likely than not the Company will be required to sell the AFS debt security before its anticipated recovery, or (3) the Company has deemed the AFS debt security to be uncollectable, the amortized cost basis of the AFS debt security is written down to fair value and any previously recognized allowance is reversed. The impairment is reported in “Realized investment gains (losses), net.” The new cost basis is not adjusted for subsequent increases in estimated fair value.

For an AFS debt security in an unrealized loss position that does not meet these conditions, the Company analyzes its ability to recover the amortized cost by comparing the net present value of projected future cash flows (the “net present value”) with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the AFS debt security prior to impairment. The Company may use the estimated fair value of collateral, if any, as a proxy for the net present value if it believes that the security is dependent on the liquidation of collateral for recovery of its investment. If the net present value is less than the amortized cost of the investment, an allowance for losses is recognized in earnings for the difference between amortized cost and the net present value and is limited to the difference between amortized cost and fair value of the AFS debt security. Any difference between the fair value and the net present value of the debt security at the impairment measurement date remains in “Other comprehensive income (loss).” Changes in the allowance for losses are reported in “Realized investment gains (losses), net.”

Prior to the adoption of this standard, any impairments on AFS debt securities were reported as an adjustment to the amortized cost basis of the security. Subsequent to the impairment, the AFS debt security was treated as if it were newly acquired at the date of impairment, and any increases in cash flows expected to be collected were accreted into net investment income over the life of the investment.

Fixed maturities, held-to-maturity

Fixed maturities, held-to-maturity are reported in the Statements of Financial Position at amortized cost net of the CECL allowance. The CECL allowance is generally determined based on probability of default and loss given default assumptions according to sector, credit quality and remaining time to maturity. Additions to or releases of the allowance are reported in “Realized investment gains (losses), net.”

Prior to the adoption of this standard, fixed maturities, held-to-maturity deemed to be OTTI were written down to the net present value of expected cash flows. Any difference between the fair value and the net present value of the debt security at the impairment measurement date was recorded in “Other comprehensive income (loss).”

Interest income, and amortization of premium and accretion of discount are included in “Net investment income” under the effective yield method. For mortgage-backed and asset-backed securities, the effective yield is based on estimated timing and amount of cash flows, including interest rate and prepayment assumptions based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also vary based on other assumptions regarding the underlying collateral, including default rates and changes in value. These assumptions can significantly impact income recognition and the amount of impairment recognized in earnings and OCI. For mortgage-backed and asset-backed securities rated below AA, the effective yield is adjusted prospectively for any changes in the estimated timing and amount of cash flows unless the investment is impaired or purchased with credit deterioration. For impaired mortgage-backed and asset-backed securities rated below AA, the effective yield is adjusted prospectively only if subsequent favorable or adverse changes in expected cash flows are not reflected in the allowance for credit losses.

Prior to the adoption of this standard, the effective yield was adjusted prospectively regardless of whether the investment was impaired or not.

Commercial mortgage and other loans

Commercial mortgage and other loans are reported in the Statements of Financial Position at amortized cost net of the CECL allowance. Additionally, certain off-balance sheet credit exposures (e.g., indemnification of serviced mortgage loans, and certain unfunded mortgage loan commitments where the Company cannot unconditionally cancel the commitment) are also subject to a CECL allowance.

The CECL allowance represents the Company’s best estimate of expected credit losses over the remaining life of the assets or off-balance sheet credit exposures. The determination of the allowance considers historical credit loss experience, current

9

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

conditions, and reasonable and supportable forecasts. The allowance is calculated separately for commercial mortgage loans, agricultural mortgage loans, and other collateralized and uncollateralized loans.
 
For commercial mortgage and agricultural mortgage loans (and related unfunded commitments where the Company cannot unconditionally cancel the commitment), the allowance is calculated using an internally developed CECL model.

Key inputs to the CECL model include unpaid principal balances, internal credit ratings, annual expected loss factors, average lives of the loans adjusted for prepayment considerations, current and historical interest rate assumptions, and other factors influencing the Company’s view of the current stage of the economic cycle and future economic conditions. Subjective considerations include a review of whether historical loss experience is representative of current market conditions and the Company’s view of the credit cycle. Model assumptions and factors are reviewed and updated as appropriate. Information about certain key inputs is detailed below.

Key factors in determining the internal credit ratings for commercial mortgage and agricultural mortgage loans include loan-to-value and debt-service-coverage ratios. Other factors include amortization, loan term, and estimated market value growth rate and volatility for the property type and region. The loan-to-value ratio compares the carrying amount of the loan to the fair value of the underlying property or properties collateralizing the loan and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the carrying amount of the loan exceeds the collateral value. A loan-to-value ratio less than 100% indicates an excess of collateral value over the carrying amount of the loan. The debt-service-coverage ratio is a property’s net operating income as a percentage of its debt service payments. Debt-service-coverage ratios less than 1.0 times indicate that a property’s operations do not generate enough income to cover the loan’s current debt payments. A debt-service-coverage ratio greater than 1.0 times indicates an excess of net operating income over the debt service payments. The values utilized in calculating these ratios are developed as part of the Company’s periodic review of the commercial mortgage and agricultural mortgage loan portfolios, which includes an internal appraisal of the underlying collateral value. The Company’s periodic review also includes a credit re-rating process, whereby the internal credit rating originally assigned at underwriting is updated based on current loan, property and market information using a proprietary credit quality rating system. See Note 3 for additional information related to the loan-to-value ratios and debt-service-coverage ratios related to the Company’s commercial mortgage and agricultural mortgage loan portfolios. Generally, every loan is re-rated at least annually.

Annual expected loss rates are based on historical default and loss experience factors. Using average lives, the annual expected loss rates are converted into life-of-loan loss expectations.

When individual loans no longer have the credit risk characteristics of the commercial or agricultural mortgage loan pools, they are removed from the pools and are evaluated individually for an allowance. The allowance is determined based on the outstanding loan balance less the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

The CECL allowance on commercial mortgage and other loans can increase or decrease from period to period based on the factors noted above. The change in allowance is reported in “Realized investment gains (losses), net.” As it relates to unfunded commitments that are in scope of this guidance, the CECL allowance is reported in “Other liabilities,” and the change in the allowance is reported in “Realized investment gains (losses), net.”

When a commercial mortgage or other loan is deemed to be uncollectible, any allowance is reversed and a direct write-down of the carrying amount of the loan is recorded through “Realized investment gains (losses), net.” The carrying amount of the loan is not adjusted for subsequent recoveries in value.

The CECL allowance for other collateralized and uncollateralized loans carried at amortized cost is determined based on probability of default and loss given default assumptions by sector, credit quality and average lives of the loans. Additions to or releases of the allowance are reported in “Realized investment gains (losses), net.”

Prior to the adoption of this standard, the impairments on commercial mortgage and other loans were collectively reviewed at a portfolio level for impairment based on probable incurred but not specifically identified losses with any such losses reflected in an allowance for credit losses. When a loan was individually identified to be impaired, the loan was individually evaluated for an allowance. Changes in these allowances were reported in “Realized investment gains (losses), net.” Additionally, an allowance for credit losses was not required on unfunded loan commitments.


10

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As further described in Note 14, the Company’s PGIM business provides commercial mortgage origination, underwriting and servicing for certain government sponsored entities (“GSEs”). The Company has agreed to indemnify the GSEs for a portion of the credit risk associated with certain of the mortgages it services. Management has established a CECL allowance that factors in historical loss information, current conditions and reasonable and supportable forecasts. The allowance also considers the remaining lives of the loans subject to the indemnification. The CECL allowance is included in “Other liabilities” and changes in the CECL allowance are reported in “Realized investment gains (losses), net.” Prior to the adoption of this standard, a credit loss allowance was not required.

Reinsurance

Reinsurance recoverables are reported on the Statements of Financial Position in “Other Assets” net of the CECL allowance. The CECL allowance considers the credit quality of the reinsurance counterparty and is generally determined based on the probability of default and loss given default assumptions, after considering any applicable collateral arrangements. Additions to or releases of the allowance are reported in “Policyholders’ benefits.”

Prior to the adoption of this standard, an allowance for credit losses for reinsurance recoverables was established only when it was deemed probable that a reinsurer may fail to make payments to us in a timely manner.

Trade Receivables

Trade receivables related to Assurance IQ, are reported in the Statements of Financial Position in “Other assets” net of the CECL allowance. The CECL allowance considers the credit quality of the counterparties and is generally determined based on probability of default and loss given default assumptions. Additions to or releases of the allowance are reported in “General and administrative expenses.” Prior to the adoption of this standard, the reserve was limited to an allowance for doubtful accounts.

Other ASUs adopted during the three months ended March 31, 2020
Standard
 
Description
 
Effective date and method of adoption
 
Effect on the financial statements or other significant matters
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
 
This ASU simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test, which measures a goodwill impairment by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of the goodwill. Under the ASU, a goodwill impairment should be recorded for the amount by which the carrying amount of a reporting unit exceeds its fair value (capped by the total amount of goodwill allocated to the reporting unit).
 
January 1, 2020 using the prospective method.
 
The adoption of the ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

 
This ASU provides optional relief for certain contracts impacted by reference rate reform. The standard permits an entity to consider contract modification due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The ASU also temporarily (until December 31, 2022) allows hedge relationships to continue without de-designation upon changes due to reference rate reform.
 
March 12, 2020 to December 31, 2022 using the prospective method.
 
This ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.

The Company made the election under ASU 2020-04 for all applicable contracts as they converted from the current reference rate to the new reference rate.



ASU issued but not yet adopted as of March 31, 2020 ASU 2018-12

ASU 2018-12, Financial ServicesInsurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASB on August 15, 2018 and is expected to have a significant impact on the Consolidated Financial Statements and Notes to the Consolidated Financial Statements. In October 2019, the FASB issued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of ASU 2018-12 to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. This

11

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

ASU will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. Outlined below are four key areas of change, although there are other less significant changes not noted below. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter.




12

PRUDENTIAL FINANCIAL, INC.
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
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 will apply the amendments to contracts in force 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 “Accumulated other comprehensive income”(“AOCI”) or (2) a full retrospective transition method.
 
The options for method of adoption and the impacts of such methods are under assessment.
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 and will be required to be updated each quarter with the impact recorded through OCI.
 
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 the beginning of the earliest period presented with the impact recorded as a cumulative effect adjustment to AOCI.
 
Upon adoption, under either transition method, there will be an adjustment to AOCI as a result of remeasuring in-force contract liabilities using current upper-medium grade fixed income instrument yields. The adjustment upon adoption will largely reflect the difference between the discount rate locked-in at contract inception versus current discount rates at transition. The magnitude of such adjustment is currently being assessed.
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 will apply the amendments to contracts in force 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 retrospective transition method for DAC and other balances.
 
The options for method of adoption and the impacts of such methods are under assessment. Under the modified retrospective transition method, the Company would 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
 
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 market risk benefit 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 that is 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 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.

 
Upon adoption, the Company expects 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) and an impact from reclassifying the cumulative effect of changes in NPR from retained earnings to AOCI. The magnitude of such adjustments is currently being assessed.



13

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



3. INVESTMENTS
 
Fixed Maturity Securities
 
The following tables set forth the composition of fixed maturity securities (excluding investments classified as trading), as of the dates indicated:
 
 
March 31, 2020
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Allowance for Credit Losses
 
Fair
Value
 
(in millions)
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
32,021

 
$
11,622

 
$
0

 
$
0

 
$
43,643

Obligations of U.S. states and their political subdivisions
10,111

 
1,399

 
21

 
0

 
11,489

Foreign government bonds
97,589

 
19,645

 
113

 
38

 
117,083

U.S. public corporate securities
89,101

 
9,465

 
2,588

 
56

 
95,922

U.S. private corporate securities(1)
34,765

 
1,489

 
772

 
37

 
35,445

Foreign public corporate securities
26,308

 
2,395

 
701

 
26

 
27,976

Foreign private corporate securities
27,765

 
359

 
2,313

 
0

 
25,811

Asset-backed securities(2)
13,859

 
98

 
577

 
0

 
13,380

Commercial mortgage-backed securities
14,951

 
653

 
31

 
1

 
15,572

Residential mortgage-backed securities(3)
3,195

 
207

 
9

 
0

 
3,393

       Total fixed maturities, available-for-sale(1)
$
349,665

 
$
47,332

 
$
7,125

 
$
158

 
$
389,714


 
 
March 31, 2020
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Allowance for Credit Losses
 
Amortized Cost,
Net of Allowance
 
(in millions)
Fixed maturities, held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
Foreign government bonds
$
896

 
$
262

 
$
0

 
$
1,158

 
$
0

 
$
896

Foreign public corporate securities
624

 
58

 
0

 
682

 
9

 
615

Foreign private corporate securities
83

 
2

 
0

 
85

 
0

 
83

Residential mortgage-backed securities(3)
301

 
23

 
0

 
324

 
0

 
301

       Total fixed maturities, held-to-maturity(4)
$
1,904

 
$
345

 
$
0

 
$
2,249

 
$
9

 
$
1,895

__________
(1)
Excludes notes with amortized cost of $5,616 million (fair value, $5,616 million), which have been offset with the associated debt under a netting agreement.
(2)
Includes credit-tranched securities collateralized by loan obligations, auto loans, education loans, home equity loans and other asset types.
(3)
Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(4)
Excludes notes with amortized cost of $4,998 million (fair value, $5,001 million), which have been offset with the associated debt under a netting agreement.
 

14

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
December 31, 2019
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
OTTI in AOCI(4)
 
(in millions)
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
30,625

 
$
5,195

 
$
161

 
$
35,659

 
$
0

Obligations of U.S. states and their political subdivisions
10,068

 
1,437

 
8

 
11,497

 
0

Foreign government bonds
98,356

 
20,761

 
63

 
119,054

 
(34
)
U.S. public corporate securities
87,566

 
11,030

 
257

 
98,339

 
(6
)
U.S. private corporate securities(1)
34,410

 
2,243

 
120

 
36,533

 
0

Foreign public corporate securities
26,841

 
3,054

 
70

 
29,825

 
(1
)
Foreign private corporate securities
27,619

 
1,201

 
580

 
28,240

 
0

Asset-backed securities(2)
13,067

 
147

 
40

 
13,174

 
(77
)
Commercial mortgage-backed securities
14,978

 
610

 
14

 
15,574

 
0

Residential mortgage-backed securities(3)
3,044

 
159

 
2

 
3,201

 
(1
)
       Total fixed maturities, available-for-sale(1)
$
346,574

 
$
45,837

 
$
1,315

 
$
391,096

 
$
(119
)

 
 
December 31, 2019
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in millions)
Fixed maturities, held-to-maturity:
 
 
 
 
 
 
 
Foreign government bonds
$
891

 
$
282

 
$
0

 
$
1,173

Foreign public corporate securities
649

 
64

 
0

 
713

Foreign private corporate securities
83

 
2

 
0

 
85

Residential mortgage-backed securities(3)
310

 
21

 
0

 
331

       Total fixed maturities, held-to-maturity(5)
$
1,933

 
$
369

 
$
0

 
$
2,302

__________
(1)
Excludes notes with amortized cost of $4,751 million (fair value, $4,757 million), which have been offset with the associated debt under a netting agreement.
(2)
Includes collateralized loan obligations, auto loans, education loans, home equity and other asset types.
(3)
Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(4)
Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $362 million of net unrealized gains on impaired available-for-sale securities and $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.
(5)
Excludes notes with amortized cost of $4,998 million (fair value, $5,401 million), which have been offset with the associated debt under a netting agreement.

15

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
The following table sets forth the fair value and gross unrealized losses on available-for-sale fixed maturity securities without an allowance for credit losses aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the date indicated:
 
 
 
March 31, 2020
 
 
Less Than
Twelve Months
 
Twelve Months
or More
 
Total
 
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
 
(in millions)
Fixed maturities, available-for-sale:
 
 
U.S. Treasury securities and obligations of U.S. government authorities and agencies
 
$
468

 
$
3

 
$
187

 
$
0

 
$
655

 
$
3

Obligations of U.S. states and their political subdivisions
 
520

 
21

 
0

 
0

 
520

 
21

Foreign government bonds
 
3,869

 
105

 
56

 
7

 
3,925

 
112

U.S. public corporate securities
 
21,011

 
2,127

 
1,256

 
415

 
22,267

 
2,542

U.S. private corporate securities
 
12,201

 
650

 
1,002

 
122

 
13,203

 
772

Foreign public corporate securities
 
7,756

 
562

 
356

 
105

 
8,112

 
667

Foreign private corporate securities
 
14,218

 
1,236

 
4,829

 
1,078

 
19,047

 
2,314

Asset-backed securities
 
8,565

 
393

 
2,952

 
184

 
11,517

 
577

Commercial mortgage-backed securities
 
1,654

 
28

 
79

 
3

 
1,733

 
31

Residential mortgage-backed securities
 
165

 
9

 
2

 
0

 
167

 
9

Total fixed maturities, available-for-sale
 
$
70,427

 
$
5,134

 
$
10,719

 
$
1,914

 
$
81,146

 
$
7,048

 
The following table sets forth the fair value and gross unrealized losses on fixed maturity securities aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the date indicated:

 
 
December 31, 2019
 
 
Less Than
Twelve Months
 
Twelve Months
or More
 
Total
 
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
 
(in millions)
Fixed maturities(1):
 
 
U.S. Treasury securities and obligations of U.S. government authorities and agencies
 
$
4,950

 
$
161

 
$
267

 
$
0

 
$
5,217

 
$
161

Obligations of U.S. states and their political subdivisions
 
273

 
8

 
0

 
0

 
273

 
8

Foreign government bonds
 
2,332

 
60

 
126

 
3

 
2,458

 
63

U.S. public corporate securities
 
3,944

 
85

 
2,203

 
172

 
6,147

 
257

U.S. private corporate securities
 
2,283

 
44

 
1,563

 
76

 
3,846

 
120

Foreign public corporate securities
 
1,271

 
23

 
496

 
47

 
1,767

 
70

Foreign private corporate securities
 
1,466

 
33

 
5,666

 
547

 
7,132

 
580

Asset-backed securities
 
3,979

 
12

 
4,433

 
28

 
8,412

 
40

Commercial mortgage-backed securities
 
1,193

 
10

 
164

 
4

 
1,357

 
14

Residential mortgage-backed securities
 
207

 
1

 
88

 
1

 
295

 
2

Total
 
$
21,898

 
$
437

 
$
15,006

 
$
878

 
$
36,904

 
$
1,315


16

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

__________ 
(1)
As of December 31, 2019, there were no securities classified as held-to-maturity in a gross unrealized loss position.

As of March 31, 2020, the gross unrealized losses on fixed maturity available-for-sale securities without an allowance were composed of $4,955 million related to “1” highest quality or “2” high quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $2,093 million related to other than high or highest quality securities based on NAIC or equivalent rating. As of March 31, 2020, the $1,914 million of gross unrealized losses of twelve months or more were concentrated in the Company’s corporate securities within the energy, consumer non-cyclical and capital goods sectors.

As of December 31, 2019, the gross unrealized losses on fixed maturity securities were composed of $973 million related to “1” highest quality or “2” high quality securities based on the NAIC or equivalent rating and $342 million related to other than high or highest quality securities based on NAIC or equivalent rating. As of December 31, 2019, the $878 million of gross unrealized losses of twelve months or more were concentrated in the Company’s corporate securities within the energy, consumer non-cyclical and finance sectors.

In accordance with its policy described in Note 2, the Company concluded that an adjustment to earnings for credit losses related to these fixed maturity securities was not warranted at March 31, 2020. These conclusions were based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to general credit spread widening, increases in interest rates, foreign currency exchange rate movements and the financial condition or near-term prospects of the issuer. As of March 31, 2020, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.

The following tables set forth the amortized cost or amortized cost, net of allowance and fair value of fixed maturities by contractual maturities, as of the date indicated:
 
 
March 31, 2020
 
Available-for-Sale
 
Held-to-Maturity
 
Amortized Cost
 
Fair Value
 
Amortized Cost, Net of Allowance
 
Fair Value
 
(in millions)
Fixed maturities:
 
 
 
 
 
 
 
Due in one year or less
$
20,145

 
$
20,478

 
$
0

 
$
0

Due after one year through five years
50,674

 
51,885

 
114

 
116

Due after five years through ten years
65,012

 
69,429

 
588

 
654

Due after ten years(1)
181,829

 
215,577

 
892

 
1,155

Asset-backed securities
13,859

 
13,380

 
0

 
0

Commercial mortgage-backed securities
14,951

 
15,572

 
0

 
0

Residential mortgage-backed securities
3,195

 
3,393

 
301

 
324

Total
$
349,665

 
$
389,714

 
$
1,895

 
$
2,249

__________
(1)
Excludes available-for-sale notes with amortized cost of $5,616 million (fair value, $5,616 million) and held-to-maturity notes with amortized cost of $4,998 million (fair value, $5,001 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 have a single maturity date.
 
The following table sets forth the sources of fixed maturity proceeds and related investment gains (losses), as well as losses on write-downs, impairments and the allowance for credit losses of fixed maturities, for the periods indicated:

17

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
(in millions)
Fixed maturities, available-for-sale:
 
 
 
 
Proceeds from sales(1)
 
$
5,153

 
$
10,162

Proceeds from maturities/prepayments
 
4,883

 
4,488

Gross investment gains from sales and maturities
 
468

 
483

Gross investment losses from sales and maturities
 
(61
)
 
(188
)
OTTI recognized in earnings(2)
 
N/A

 
(35
)
Write-downs recognized in earnings(3)
 
(91
)
 
N/A

(Addition to) release of allowance for credit losses(4)
 
(158
)
 
N/A

Fixed maturities, held-to-maturity:
 
 
 
 
Proceeds from maturities/prepayments(5)
 
$
41

 
$
14

Allowance for credit losses(4)
 
0

 
N/A

__________ 
(1)
Includes $39 million and $587 million of non-cash related proceeds due to the timing of trade settlements for the three months ended March 31, 2020 and 2019, respectively.
(2)
For the three months ended March 31, 2019, amounts exclude the portion of OTTI amounts remaining in “Other comprehensive income (loss)” (“OCI”), representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of impairment.
(3)
For the three months ended March 31, 2020, amounts represent write-downs on securities approaching maturity related to foreign exchange movements and securities actively marketed for sale.
(4)
Effective January 1, 2020, credit losses on available-for-sale and held-to-maturity fixed maturity securities are recorded within the “allowance for credit losses.”
(5)
Includes $1 million and $0 million of non-cash related proceeds due to the timing of trade settlements for the three months ended March 31, 2020 and 2019, respectively.

The following tables set forth the activity in the allowance for credit losses for fixed maturity securities, as of the date indicated: 
 
March 31, 2020
 
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, available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Additions to allowance for credit losses not previously recorded
0

 
38

 
119

 
0

 
1

 
0

 
158

Balance, end of period
$
0

 
$
38

 
$
119

 
$
0

 
$
1

 
$
0

 
$
158




18

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
March 31, 2020
 
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 year
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Cumulative effect of adoption of ASU 2016-13
0

 
0

 
9

 
0

 
0

 
0

 
9

Balance, end of period
$
0

 
$
0

 
$
9

 
$
0

 
$
0

 
$
0

 
$
9



See Note 2 for additional information about the Company’s methodology for developing our allowance and expected losses.

As of March 31, 2020, the allowance for credit losses on available-for-sale securities was primarily related to adverse projected cash flows on public and private corporate securities.

The Company did not have any fixed maturity securities purchased with credit deterioration, as of March 31, 2020.

Assets Supporting Experience-Rated Contractholder Liabilities
 
The following table sets forth the composition of “Assets supporting experience-rated contractholder liabilities,” as of the dates indicated:
 
 
 
March 31, 2020
 
December 31, 2019
 
 
Amortized
Cost or Cost
 
Fair
Value
 
Amortized
Cost or Cost
 
Fair
Value
 
 
(in millions)
Short-term investments and cash equivalents
 
$
1,083

 
$
1,083

 
$
277

 
$
277

Fixed maturities:
 
 
 
 
 
 
 
 
Corporate securities
 
13,102

 
13,110

 
13,143

 
13,603

Commercial mortgage-backed securities
 
1,828

 
1,869

 
1,845

 
1,896

Residential mortgage-backed securities(1)
 
1,208

 
1,243

 
1,134

 
1,158

Asset-backed securities(2)
 
1,637

 
1,607

 
1,639

 
1,662

Foreign government bonds
 
785

 
791

 
802

 
814

U.S. government authorities and agencies and obligations of U.S. states
 
343

 
411

 
341

 
397

Total fixed maturities(3)
 
18,903

 
19,031

 
18,904

 
19,530

Equity securities
 
1,485

 
1,466

 
1,465

 
1,790

Total assets supporting experience-rated contractholder liabilities(4)
 
$
21,471

 
$
21,580

 
$
20,646

 
$
21,597


__________ 
(1)
Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(2)
Includes collateralized loan obligations, auto loans, education loans, home equity and other asset types. Collateralized loan obligations at fair value were $1,009 million and $1,060 million as of March 31, 2020 and December 31, 2019, respectively, all of which were rated AAA.
(3)
As a percentage of amortized cost, 94% of the portfolio was considered high or highest quality based on NAIC or equivalent ratings, as of both March 31, 2020 and December 31, 2019.
(4)
As a percentage of amortized cost, 78% and 77% of the portfolio consisted of public securities as of March 31, 2020 and December 31, 2019, respectively.

The net change in unrealized gains (losses) from assets supporting experience-rated contractholder liabilities still held at period end, recorded within “Other income (loss),” was $(842) million and $469 million during the three months ended March 31, 2020 and 2019, respectively.


19

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Equity Securities
 
The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Other income (loss),” was $(1,481) million and $529 million during the three months ended March 31, 2020 and 2019, respectively.

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.
 
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:
 
 
 
March 31, 2020
 
December 31, 2019
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
 
(in millions)
Investments in Japanese government and government agency securities:
 
 
 
 
 
 
 
 
Fixed maturities, available-for-sale
 
$
74,584

 
$
89,377

 
$
74,118

 
$
89,546

Fixed maturities, held-to-maturity
 
873

 
1,128

 
869

 
1,143

Fixed maturities, trading
 
22

 
22

 
23

 
23

Assets supporting experience-rated contractholder liabilities
 
652

 
659

 
653

 
664

Total
 
$
76,131

 
$
91,186

 
$
75,663

 
$
91,376

 
 
 
March 31, 2020
 
December 31, 2019
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
 
(in millions)
Investments in South Korean government and government agency securities:
 
 
 
 
 
 
 
 
Fixed maturities, available-for-sale
 
$
10,488

 
$
12,926

 
$
10,823

 
$
13,322

Assets supporting experience-rated contractholder liabilities
 
15

 
16

 
15

 
16

Total
 
$
10,503

 
$
12,942

 
$
10,838

 
$
13,338


 

20

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Commercial Mortgage and Other Loans
 
The following table sets forth the composition of “Commercial mortgage and other loans,” as of the dates indicated:
 
 
 
March 31, 2020
 
December 31, 2019
 
 
Amount
(in millions)
 
% of
Total
 
Amount
(in millions)
 
% of
Total
Commercial mortgage and agricultural property loans by property type:
 
 
 
 
 
 
 
 
Office
 
$
12,908

 
20.6
%
 
$
13,462

 
21.4
%
Retail
 
7,967

 
12.7

 
8,379

 
13.3

Apartments/Multi-Family
 
18,171

 
28.9

 
17,348

 
27.6

Industrial
 
13,217

 
21.0

 
13,226

 
21.1

Hospitality
 
2,401

 
3.8

 
2,415

 
3.9

Other
 
4,503

 
7.2

 
4,533

 
7.2

Total commercial mortgage loans
 
59,167

 
94.2

 
59,363

 
94.5

Agricultural property loans
 
3,665

 
5.8

 
3,472

 
5.5

Total commercial mortgage and agricultural property loans by property type
 
62,832

 
100.0
%
 
62,835

 
100.0
%
Allowance for credit losses
 
(233
)
 
 
 
(117
)
 
 
Total net commercial mortgage and agricultural property loans by property type
 
62,599

 
 
 
62,718

 
 
Other loans:
 
 
 

 
 
 

Uncollateralized loans
 
660

 

 
656

 

Residential property loans
 
115

 

 
124

 

Other collateralized loans
 
192

 

 
65

 

Total other loans
 
967

 

 
845

 

Allowance for credit losses
 
(7
)
 

 
(4
)
 

Total net other loans
 
960

 

 
841

 

Total commercial mortgage and other loans(1)
 
$
63,559

 

 
$
63,559

 

__________ 
(1)
Includes loans held for sale which are carried at fair value and are collateralized primarily by apartment complexes. As of March 31, 2020 and December 31, 2019, the net carrying value of these loans was $670 million and $228 million, respectively.

As of March 31, 2020, the commercial mortgage and agricultural property loans were secured by properties geographically dispersed throughout the United States (with the largest concentrations in California (27%), Texas (9%) and New York (8%)) and included loans secured by properties in Europe (7%), Asia (2%) and Australia (1%).


21

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following table sets forth the activity in the allowance for credit losses for commercial mortgage and other loans, as of the dates indicated:
 
 
Commercial
Mortgage
Loans
 
Agricultural
Property
Loans
 
Residential
Property
Loans
 
Other
Collateralized
Loans
 
Uncollateralized
Loans
 
Total
 
 
(in millions)
Balance at December 31, 2018
 
$
120

 
$
3

 
$
0

 
$
0

 
$
5

 
$
128

Addition to (release of) allowance for credit losses
 
(5
)
 
0

 
0

 
0

 
(1
)
 
(6
)
Charge-offs, net of recoveries
 
(1
)
 
0

 
0

 
0

 
0

 
(1
)
Change in foreign exchange
 
0

 
0

 
0

 
0

 
0

 
0

Balance at December 31, 2019
 
114

 
3

 
0

 
0

 
4

 
121

Cumulative effect of adoption of ASU 2016-13
 
110

 
5

 
0

 
0

 
0

 
115

Addition to (release of) allowance for expected losses
 
1

 
0

 
0

 
0

 
0

 
1

Other
 
0

 
0

 
0

 
3

 
0

 
3

Balance at March 31, 2020
 
$
225

 
$
8

 
$
0

 
$
3

 
$
4

 
$
240

 
See Note 2 for additional information about the Company’s methodology for developing our allowance and expected losses.

As of March 31, 2020, the increase in the allowance for credit losses on commercial mortgage and other loans was primarily related to the cumulative effect of adoption of ASU 2016-13.

The following table sets forth loan-to-value ratios based upon the recorded investment gross of allowance for credit losses, as of the date indicated:

22

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


 
March 31, 2020
 
Amortized Cost by Origination Year
 
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
Revolving Loans
 
Total
 
(in millions)
Loan-to-Value Ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0%-59.99%
$
316

 
$
2,748

 
$
3,046

 
$
3,698

 
$
3,407

 
$
18,365

 
$
0

 
$
31,580

60%-69.99%
859

 
4,060

 
3,319

 
2,381

 
2,805

 
4,704

 
0

 
18,128

70%-79.99%
807

 
3,017

 
2,782

 
1,102

 
573

 
832

 
0

 
9,113

80% or greater
0

 
11

 
0

 
53

 
61

 
221

 
0

 
346

Subtotal
1,982

 
9,836

 
9,147

 
7,234

 
6,846

 
24,122

 
0

 
59,167

Agricultural property loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0%-59.99%
168

 
483

 
379

 
564

 
404

 
1,406

 
0

 
3,404

60%-69.99%
108

 
74

 
38

 
0

 
0

 
41

 
0

 
261

70%-79.99%
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

80% or greater
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Subtotal
276

 
557

 
417

 
564

 
404

 
1,447

 
0

 
3,665

Total commercial mortgage and agricultural property loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0%-59.99%
484

 
3,231

 
3,425

 
4,262

 
3,811

 
19,771

 
0

 
34,984

60%-69.99%
967

 
4,134

 
3,357

 
2,381

 
2,805

 
4,745

 
0

 
18,389

70%-79.99%
807

 
3,017

 
2,782

 
1,102

 
573

 
832

 
0

 
9,113

80% or greater
0

 
11

 
0

 
53

 
61

 
221

 
0

 
346

Total commercial mortgage and agricultural property loans
$
2,258

 
$
10,393

 
$
9,564

 
$
7,798

 
$
7,250

 
$
25,569

 
$
0

 
$
62,832



See Note 2 for additional information about the Company’s commercial mortgage and other loans credit quality monitoring process.

The following tables set forth certain key credit quality indicators based upon the recorded investment gross of allowance for credit losses, as of the date indicated:

Commercial mortgage loans 
 
 
December 31, 2019
 
 
Debt Service Coverage Ratio
 
 
 
 
>1.2X
 
1.0X to <1.2X
 
< 1.0X
 
Total
 
 
(in millions)
Loan-to-Value Ratio:
 
 
 
 
 
 
 
 
0%-59.99%
 
$
31,027

 
$
701

 
$
217

 
$
31,945

60%-69.99%
 
17,090

 
1,145

 
42

 
18,277

70%-79.99%
 
8,020

 
719

 
28

 
8,767

80% or greater
 
209

 
143

 
22

 
374

       Total commercial mortgage loans
 
$
56,346

 
$
2,708

 
$
309

 
$
59,363

 

23

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Agricultural property loans
 
 
December 31, 2019
 
 
Debt Service Coverage Ratio
 
 
 
 
>1.2X
 
1.0X to <1.2X
 
< 1.0X
 
Total
 
 
(in millions)
Loan-to-Value Ratio:
 
 
 
 
 
 
 
 
0%-59.99%
 
$
3,289

 
$
57

 
$
14

 
$
3,360

60%-69.99%
 
112

 
0

 
0

 
112

70%-79.99%
 
0

 
0

 
0

 
0

80% or greater
 
0

 
0

 
0

 
0

       Total agricultural property loans
 
$
3,401

 
$
57

 
$
14

 
$
3,472

 
Total commercial mortgage and agricultural property loans
 
 
December 31, 2019
 
 
Debt Service Coverage Ratio
 
 
 
 
>1.2X
 
1.0X to <1.2X
 
< 1.0X
 
Total
 
 
(in millions)
Loan-to-Value Ratio:
 
 
 
 
 
 
 
 
0%-59.99%
 
$
34,316

 
$
758

 
$
231

 
$
35,305

60%-69.99%
 
17,202

 
1,145

 
42

 
18,389

70%-79.99%
 
8,020

 
719

 
28

 
8,767

80% or greater
 
209

 
143

 
22

 
374

       Total commercial mortgage and agricultural property loans
 
$
59,747

 
$
2,765

 
$
323

 
$
62,835


 
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:
 
 
 
March 31, 2020
 
 
Current
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or More Past Due(1)
 
Total Past
Due
 
Total
Loans
 
Non-Accrual
Status(2)
 
 
(in millions)
Commercial mortgage loans
 
$
59,157

 
$
2

 
$
8

 
$
0

 
$
10

 
$
59,167

 
$
44

Agricultural property loans
 
3,642

 
10

 
0

 
13

 
23

 
3,665

 
13

Residential property loans
 
113

 
1

 
0

 
1

 
2

 
115

 
1

Other collateralized loans
 
192

 
0

 
0

 
0

 
0

 
192

 
0

Uncollateralized loans
 
660

 
0

 
0

 
0

 
0

 
660

 
4

Total
 
$
63,764

 
$
13

 
$
8

 
$
14

 
$
35

 
$
63,799

 
$
62

 __________
(1)
As of March 31, 2020, there were no 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, 2019.

24

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
 
December 31, 2019
 
 
Current
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or More Past Due(1)
 
Total Past
Due
 
Total
Loans
 
Non-Accrual
Status(2)
 
 
(in millions)
Commercial mortgage loans
 
$
59,363

 
$
0

 
$
0

 
$
0

 
$
0

 
$
59,363

 
$
44

Agricultural property loans
 
3,458

 
1

 
0

 
13

 
14

 
3,472

 
13

Residential property loans
 
121

 
1

 
0

 
2

 
3

 
124

 
2

Other collateralized loans
 
65

 
0

 
0

 
0

 
0

 
65

 
0

Uncollateralized loans
 
656

 
0

 
0

 
0

 
0

 
656

 
0

Total
 
$
63,663

 
$
2

 
$
0

 
$
15

 
$
17

 
$
63,680

 
$
59


__________
(1)
As of December 31, 2019, there were no 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, 2019.

Loans on non-accrual status recognized interest income of less than $1 million for the three months ended March 31, 2020, and $14 million of these loans did not have a related allowance for credit losses as of March 31, 2020.

The Company did not have any significant losses on commercial mortgage and other loans purchased with credit deterioration as of March 31, 2020.


Other Invested Assets
 
The following table sets forth the composition of “Other invested assets,” as of the dates indicated:

 
 
March 31, 2020
 
December 31, 2019
 
 
(in millions)
LPs/LLCs:
 
 
 
 
Equity method:
 
 
 
 
Private equity
 
$
3,889

 
$
3,625

Hedge funds
 
1,864

 
1,947

Real estate-related
 
1,404

 
1,372

Subtotal equity method
 
7,157

 
6,944

Fair value:
 
 
 
 
Private equity
 
1,769

 
1,705

Hedge funds
 
2,018

 
2,172

Real estate-related
 
344
 
336
Subtotal fair value
 
4,131

 
4,213

Total LPs/LLCs
 
11,288

 
11,157

Real estate held through direct ownership(1)
 
2,410

 
2,388

Derivative instruments
 
3,188

 
877
Other(2)
 
1,185

 
1,184

Total other invested assets
 
$
18,071

 
$
15,606

_________ 
(1)
As of March 31, 2020 and December 31, 2019, real estate held through direct ownership had mortgage debt of $548 million and $537 million, respectively.
(2)
Primarily includes 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, 2019.


25

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


Accrued Investment Income

The following table sets forth the composition of “Accrued investment income,” as of the date indicated:

 
March 31, 2020
 
(in millions)
Fixed maturities
$
2,642

Equity securities
24

Commercial mortgage and other loans
195

Policy loans
304

Other invested assets
37

Short-term investments and cash equivalents
19

Total accrued investment income
$
3,221



There were no significant write-downs on accrued investment income for the three months ended March 31, 2020.

Net Investment Income
 
The following table sets forth “Net investment income” by investment type, for the periods indicated:
 
 
 
Three Months Ended
March 31,
 
 
2020
 
2019
 
 
(in millions)
Fixed maturities, available-for-sale(1)
 
$
3,112

 
$
3,088

Fixed maturities, held-to-maturity(1)
 
59

 
57

Fixed maturities, trading
 
34

 
34

Assets supporting experience-rated contractholder liabilities
 
184

 
185

Equity securities
 
28

 
30

Commercial mortgage and other loans
 
640

 
600

Policy loans
 
153

 
151

Other invested assets
 
131

 
205

Short-term investments and cash equivalents
 
87

 
118

Gross investment income
 
4,428

 
4,468

Less: investment expenses
 
(226
)
 
(252
)
Net investment income
 
$
4,202

 
$
4,216

__________ 
(1)
Includes income on credit-linked notes which are reported on the same financial statement line item as related surplus notes, as conditions are met for right to offset.

26

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


Realized Investment Gains (Losses), Net
 
The following table sets forth “Realized investment gains (losses), net” by investment type, for the periods indicated:
 
 
 
Three Months Ended
March 31,
 
 
2020
 
2019
 
 
(in millions)
Fixed maturities(1)
 
$
158

 
$
260

Commercial mortgage and other loans
 
22

 
10

Investment real estate
 
(1
)
 
0

LPs/LLCs
 
(3
)
 
(5
)
Derivatives
 
1,492

 
(1,032
)
Other
 
(1
)
 
1

Realized investment gains (losses), net
 
$
1,667

 
$
(766
)
__________ 
(1)
Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading.
 

Net Unrealized Gains (Losses) on Investments within AOCI

The following table sets forth net unrealized gains (losses) on investments, as of the dates indicated:
 
March 31,
2020
 
December 31,
2019
 
(in millions)
Fixed maturity securities, available-for-sale—with OTTI(1)
N/A

 
$
243

Fixed maturity securities, available-for-sale—all other(1)
N/A

 
44,279

Fixed maturity securities, available-for-sale with an allowance
(118
)
 
N/A

Fixed maturity securities, available-for-sale without an allowance
40,325

 
N/A

Derivatives designated as cash flow hedges(2)
3,186

 
832

Other investments(3)
(22
)
 
(15
)
       Net unrealized gains (losses) on investments
$
43,371

 
$
45,339

__________ 
(1)
Effective January 1, 2020, per ASU 2016-13, fixed maturity securities, available-for-sale are no longer required to be disclosed “with OTTI” and “all other.”
(2)
For additional information on cash flow hedges, see Note 5.
(3)
As of March 31, 2020, there were no 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.”



27

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


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. The following table sets forth the composition of “Securities sold under agreements to repurchase,” as of the dates indicated:

 
March 31, 2020
 
December 31, 2019
 
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
$
9,586

 
$
553

 
$
10,139

 
$
9,431

 
$
0

 
$
9,431

U.S. public corporate securities
0

 
0

 
0

 
0

 
0

 
0

Residential mortgage-backed securities
418

 
0

 
418

 
250

 
0

 
250

Total securities sold under agreements to repurchase(1)
$
10,004

 
$
553

 
$
10,557

 
$
9,681

 
$
0

 
$
9,681

__________ 
(1)
The Company did not have any agreements with remaining contractual maturities greater than thirty days, as of the dates indicated.

The following table sets forth the composition of “Cash collateral for loaned securities,” which represents the liability to return cash collateral received for the following types of securities loaned, as of the dates indicated:

 
March 31, 2020
 
December 31, 2019
 
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
$
0

 
$
0

 
$
0

 
$
9

 
$
0

 
$
9

Obligations of U.S. states and their political
subdivisions
69

 
0

 
69

 
33

 
0

 
33

Foreign government bonds
484

 
0

 
484

 
244

 
0

 
244

U.S. public corporate securities
2,208

 
0

 
2,208

 
2,996

 
0

 
2,996

Foreign public corporate securities
546

 
0

 
546

 
762

 
0

 
762

Commercial mortgage-backed securities
2

 
0

 
2

 
2

 
0

 
2

Equity securities
87

 
0

 
87

 
167

 
0

 
167

       Total cash collateral for loaned securities(1)
$
3,396

 
$
0

 
$
3,396

 
$
4,213

 
$
0

 
$
4,213


__________ 
(1)
The Company did not have any agreements with remaining contractual maturities greater than thirty days, as of the dates indicated.


4. VARIABLE INTEREST ENTITIES
 
In the normal course of its activities, the Company enters into relationships with various special-purpose entities and other entities that are deemed to be variable interest entities (“VIEs”). For additional information, see Note 4 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
 

28

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Consolidated Variable Interest Entities
 
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)
 
Other Consolidated VIEs(1)
 
March 31,
2020
 
December 31,
2019
 
March 31,
2020
 
December 31,
2019
 
(in millions)
Fixed maturities, available-for-sale
$
99

 
$
104

 
$
284

 
$
285

Fixed maturities, held-to-maturity
83

 
83

 
844

 
839

Fixed maturities, trading
1,121

 
1,112

 
0

 
0

Assets supporting experience-rated contractholder liabilities
0

 
0

 
3

 
4

Equity securities
39

 
47

 
0

 
0

Commercial mortgage and other loans
944

 
883

 
0

 
0

Other invested assets
2,222

 
2,199

 
161

 
89

Cash and cash equivalents
203

 
166

 
0

 
0

Accrued investment income
4

 
4

 
4

 
4

Other assets
426

 
450

 
618

 
689

Total assets of consolidated VIEs
$
5,141

 
$
5,048

 
$
1,914

 
$
1,910

Other liabilities
$
382

 
$
304

 
$
35

 
$
13

Notes issued by consolidated VIEs(2)
1,251

 
1,274

 
0

 
0

Total liabilities of consolidated VIEs
$
1,633

 
$
1,578

 
$
35

 
$
13


 __________
(1)
Total assets of consolidated VIEs reflect $2,663 million and $2,668 million as of March 31, 2020 and December 31, 2019, respectively, related to VIEs whose beneficial interests are wholly-owned by consolidated subsidiaries.
(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, 2020, the maturities of these obligations were between 4 and 9 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 $824 million and $1,021 million at March 31, 2020 and December 31, 2019, respectively. These investments are reflected in “Fixed maturities, available-for-sale,” “Fixed maturities, trading,” “Equity securities” and “Other invested assets.” There are no liabilities associated with these unconsolidated VIEs on the Company’s Unaudited Interim Consolidated Statements of Financial Position.
 
In the normal course of its activities, the Company will invest in limited partnerships and limited liability companies (“LPs/LLCs”), which include hedge funds, private equity funds and real estate-related funds and may or may not be VIEs. The Company’s maximum exposure to loss on these investments, both VIEs and non-VIEs, is limited to the amount of its investment. The Company classifies these investments as “Other invested assets” and its maximum exposure to loss associated with these entities was $11,288 million and $11,157 million as of March 31, 2020 and December 31, 2019, respectively.
 
In addition, in the normal course of its activities, the Company will invest in structured investments including VIEs for which it is not the investment manager. These structured investments typically invest in fixed income investments and are managed by third-parties and include asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities. The Company’s maximum exposure to loss on these structured investments, both VIEs and non-VIEs, is limited to the amount of its investment. See Note 3 for details regarding the carrying amounts and classification of these assets. The Company has not provided material financial or other support that was not contractually required to these structures. The Company has determined that it is not the primary beneficiary of these structures due to the fact that it does not control these entities.


29

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

5. DERIVATIVE INSTRUMENTS
 
Types of Derivative Instruments and Derivative Strategies

The Company utilizes various derivatives instruments and strategies to manage its risk. Commonly used derivative 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
Foreign exchange contracts: futures, options, forwards and swaps
Credit contracts: single and index reference credit default swaps

Other types of financial contracts that the Company accounts for as derivatives are:
To-be-announced (“TBA”) forward contracts, loan commitments, embedded derivatives and synthetic guaranteed investment contracts (“GICs”).

For detailed information on these contracts and the related strategies, see Note 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Primary Risks Managed by Derivatives
 
The table below provides a summary of the gross notional amount and fair value of derivatives contracts by the primary underlying risks, excluding embedded derivatives and associated reinsurance recoverables. Many derivative instruments contain multiple underlying risks. The fair value amounts below represent the value of derivative contracts prior to taking into account the netting effects of master netting agreements and cash collateral. This netting impact results in total derivative assets of $3,184 million and $867 million as of March 31, 2020 and December 31, 2019, respectively, and total derivative liabilities of $904 million and $831 million as of March 31, 2020 and December 31, 2019, respectively, reflected in the Unaudited Interim Consolidated Statements of Financial Position.


30

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Primary Underlying Risk /Instrument Type
March 31, 2020
 
December 31, 2019
 
 
Fair Value
 
 
 
Fair Value
Gross Notional
 
Assets
 
Liabilities
 
Gross Notional
 
Assets
 
Liabilities
 
(in millions)
Derivatives Designated as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swaps
$
3,232

 
$
1,239

 
$
(106
)
 
$
3,257

 
$
628

 
$
(73
)
Interest Rate Forwards
205

 
51

 
0

 
205

 
4

 
(1
)
Foreign Currency
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Forwards
1,442

 
79

 
(3
)
 
1,461

 
22

 
(57
)
Currency/Interest Rate
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Swaps
23,188

 
3,795

 
(60
)
 
22,746

 
1,467

 
(302
)
Total Derivatives Designated as Hedge Accounting Instruments
$
28,067

 
$
5,164

 
$
(169
)
 
$
27,669

 
$
2,121

 
$
(433
)
Derivatives Not Qualifying as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swaps
$
152,646

 
$
22,455

 
$
(11,144
)
 
$
141,162

 
$
10,249

 
$
(4,861
)
Interest Rate Futures
18,595

 
42

 
(132
)
 
17,095

 
4

 
(38
)
Interest Rate Options
16,343

 
2,102

 
(328
)
 
16,496

 
339

 
(238
)
Interest Rate Forwards
2,821

 
82

 
0

 
2,218

 
18

 
(3
)
Foreign Currency
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Forwards
27,940

 
458

 
(163
)
 
26,604

 
208

 
(214
)
Foreign Currency Options
0

 
0

 
0

 
0

 
0

 
0

Currency/Interest Rate
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Swaps
13,107

 
1,409

 
(397
)
 
13,874

 
740

 
(345
)
Credit
 
 
 
 
 
 
 
 
 
 
 
Credit Default Swaps
1,659

 
2

 
(29
)
 
798

 
21

 
0

Equity
 
 
 
 
 
 
 
 
 
 
 
Equity Futures
4,804

 
18

 
(1
)
 
1,802

 
0

 
(3
)
Equity Options
28,769

 
428

 
(546
)
 
32,657

 
679

 
(765
)
Total Return Swaps
23,241

 
2,903

 
(376
)
 
18,218

 
6

 
(636
)
Other
 
 
 
 
 
 
 
 
 
 
 
Other(1)
1,257

 
0

 
0

 
1,258

 
0

 
0

Synthetic GICs
80,984

 
1

 
0

 
80,009

 
1

 
0

Total Derivatives Not Qualifying as Hedge Accounting Instruments
$
372,166

 
$
29,900

 
$
(13,116
)
 
$
352,191

 
$
12,265

 
$
(7,103
)
Total Derivatives(2)(3)
$
400,233

 
$
35,064

 
$
(13,285
)
 
$
379,860

 
$
14,386

 
$
(7,536
)
__________
(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 $28,769 million and $14,035 million as of March 31, 2020 and December 31, 2019, 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.


31

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As of March 31, 2020, 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.
 
March 31, 2020
 
December 31, 2019
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
$
371

 
$
92

 
$
389

 
$
64

Commercial mortgage and other loans
$
23

 
$
2

 
$
23

 
$
2

Policyholders’ account balances
$
(1,712
)
 
$
(430
)
 
$
(1,376
)
 
$
(107
)
Future policy benefits
$
(961
)
 
$
(450
)
 
$
(676
)
 
$
(172
)
__________
(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
 
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.
 
 
March 31, 2020
 
Gross
Amounts of
Recognized
Financial
Instruments
 
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:
 
 
 
 
 
 
 
 
 
Derivatives(1)
$
34,905

 
$
(31,880
)
 
$
3,025

 
$
(2,109
)
 
$
916

Securities purchased under agreement to resell
325

 
0

 
325

 
(325
)
 
0

Total assets
$
35,230

 
$
(31,880
)
 
$
3,350

 
$
(2,434
)
 
$
916

Offsetting of Financial Liabilities:
 
 
 
 
 
 
 
 
 
Derivatives(1)
$
13,259

 
$
(12,381
)
 
$
878

 
$
(9
)
 
$
869

Securities sold under agreement to repurchase
10,557

 
0

 
10,557

 
(10,557
)
 
0

Total liabilities
$
23,816

 
$
(12,381
)
 
$
11,435

 
$
(10,566
)
 
$
869

 

32

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
December 31, 2019
 
Gross
Amounts of
Recognized
Financial
Instruments
 
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:
 
 
 
 
 
 
 
 
 
Derivatives(1)
$
14,303

 
$
(13,519
)
 
$
784

 
$
(607
)
 
$
177

Securities purchased under agreement to resell
1,012

 
0

 
1,012

 
(1,012
)
 
0

Total assets
$
15,315

 
$
(13,519
)
 
$
1,796

 
$
(1,619
)
 
$
177

Offsetting of Financial Liabilities:
 
 
 
 
 
 
 
 
 
Derivatives(1)
$
7,528

 
$
(6,705
)
 
$
823

 
$
(244
)
 
$
579

Securities sold under agreement to repurchase
9,681

 
0

 
9,681

 
(9,681
)
 
0

Total liabilities
$
17,209

 
$
(6,705
)
 
$
10,504

 
$
(9,925
)
 
$
579

__________
(1)
Amounts exclude the excess of collateral received/pledged from/to the counterparty.

For information regarding the rights of offset associated with the derivative assets and liabilities in the table above, see “—Counterparty Credit Risk” below. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company’s accounting policy for securities repurchase and resale agreements, see Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.
 
Cash Flow, Fair Value and Net Investment Hedges
 
The primary derivative instruments used by the Company in its fair value, cash flow and net investment hedge accounting relationships are interest rate swaps, currency swaps and currency forwards. 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.
 
The following table provides the financial statement classification and impact of derivatives used in qualifying and non-qualifying hedge relationships, including the offset of the hedged item in fair value hedge relationships.
 

33

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
Three Months Ended March 31, 2020
 
Realized
Investment
Gains
(Losses)
 
Net
Investment
Income
 
Other
Income (Loss)
 
Interest
Expense
 
Interest
Credited to
Policyholders’
Account
Balances
 
Policyholders’ Benefits
 
AOCI(1)
 
(in millions)
Derivatives Designated as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on derivatives designated as hedge instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
$
(30
)
 
$
(2
)
 
$
0

 
$
0

 
$
324

 
$
280

 
$
0

Currency
2

 
0

 
0

 
0

 
0

 
0

 
0

Total gains (losses) on derivatives designated as hedge instruments
(28
)
 
(2
)
 
0

 
0

 
324

 
280

 
0

Gains (losses) on the hedged item:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
30

 
5

 
0

 
0

 
(322
)
 
(278
)
 
0

Currency
(1
)
 
0

 
0

 
0

 
0

 
0

 
0

Total gains (losses) on hedged item
29

 
5

 
0

 
0

 
(322
)
 
(278
)
 
0

Total gains (losses) on fair value hedges net of hedged item
1

 
3

 
0

 
0

 
2

 
2

 
0

Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
(1
)
 
0

 
0

 
0

 
0

 
0

 
52

Currency
1

 
0

 
0

 
0

 
0

 
0

 
102

Currency/Interest Rate
18

 
79

 
291

 
0

 
0

 
0

 
2,200

Total gains (losses) on cash flow hedges
18

 
79

 
291

 
0

 
0

 
0

 
2,354

Net investment hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency
0

 
0

 
0

 
0

 
0

 
0

 
13

Currency/Interest Rate
0

 
0

 
0

 
0

 
0

 
0

 
0

Total gains (losses) on net investment hedges
0

 
0

 
0

 
0

 
0

 
0

 
13

Derivatives Not Qualifying as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
9,224

 
0

 
0

 
0

 
0

 
0

 
0

Currency
333

 
0

 
(7
)
 
0

 
0

 
0

 
0

Currency/Interest Rate
816

 
0

 
2

 
0

 
0

 
0

 
0

Credit
(41
)
 
0

 
0

 
0

 
0

 
0

 
0

Equity
5,436

 
0

 
0

 
0

 
0

 
0

 
0

Other
0

 
0

 
0

 
0

 
0

 
0

 
0

Embedded Derivatives
(14,295
)
 
0

 
0

 
0

 
0

 
0

 
0

Total gains (losses) on derivatives not qualifying as hedge accounting instruments
1,473

 
0

 
(5
)
 
0

 
0

 
0

 
0

Total
$
1,492

 
$
82

 
$
286

 
$
0

 
$
2

 
$
2

 
$
2,367


34

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
Three Months Ended March 31, 2019
 
Realized
Investment
Gains
(Losses)
 
Net
Investment
Income
 
Other
Income (Loss)
 
Interest
Expense
 
Interest
Credited to
Policyholders’
Account
Balances
 
Policyholders’ Benefits
 
AOCI(1)
 
(in millions)
Derivatives Designated as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on derivatives designated as hedge instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
$
(5
)
 
$
(2
)
 
$
0

 
$
0

 
$
68

 
$
51

 
$
0

Currency
(1
)
 
0

 
0

 
0

 
0

 
0

 
0

Total gains (losses) on derivatives designated as hedge instruments
(6
)
 
(2
)
 
0

 
0

 
68

 
51

 
0

Gains (losses) on the hedged item:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
2

 
5

 
0

 
0

 
(66
)
 
(46
)
 
0

Currency
1

 
1

 
0

 
0

 
0

 
0

 
0

Total gains (losses) on hedged item
3

 
6

 
0

 
0

 
(66
)
 
(46
)
 
0

Total gains (losses) on fair value hedges net of hedged item
(3
)
 
4

 
0

 
0

 
2

 
5

 
0

Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
(1
)
 
0

 
0

 
0

 
0

 
0

 
23

Currency
1

 
0

 
0

 
0

 
0

 
0

 
(9
)
Currency/Interest Rate
(8
)
 
68

 
(45
)
 
0

 
0

 
0

 
(58
)
Total gains (losses) on cash flow hedges
(8
)
 
68

 
(45
)
 
0

 
0

 
0

 
(44
)
Net investment hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency
0

 
0

 
0

 
0

 
0

 
0

 
1

Currency/Interest Rate
0

 
0

 
0

 
0

 
0

 
0

 
0

Total gains (losses) on net investment hedges
0

 
0

 
0

 
0

 
0

 
0

 
1

Derivatives Not Qualifying as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
1,389

 
0

 
0

 
0

 
0

 
0

 
0

Currency
(39
)
 
0

 
4

 
0

 
0

 
0

 
0

Currency/Interest Rate
184

 
0

 
0

 
0

 
0

 
0

 
0

Credit
69

 
0

 
0

 
0

 
0

 
0

 
0

Equity
(1,811
)
 
0

 
0

 
0

 
0

 
0

 
0

Other
0

 
0

 
0

 
0

 
0

 
0

 
0

Embedded Derivatives
(812
)
 
0

 
0

 
0

 
0

 
0

 
0

Total gains (losses) on derivatives not qualifying as hedge accounting instruments
(1,020
)
 
0

 
4

 
0

 
0

 
0

 
0

Total
$
(1,031
)
 
$
72

 
$
(41
)
 
$
0

 
$
2

 
$
5

 
$
(43
)
_________
(1)
Net change in AOCI.



 

35

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:  
 
(in millions)
Balance, December 31, 2019
$
832

Amount recorded in AOCI
 
    Interest Rate
51

    Currency
103

    Currency/Interest Rate
2,588

Total amount recorded in AOCI
2,742

Amount reclassified from AOCI to income
 
    Interest Rate
1

    Currency
(1
)
    Currency/Interest Rate
(388
)
Total amount reclassified from AOCI to income
(388
)
Balance, March 31, 2020
$
3,186



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, 2020 values, it is estimated that a pre-tax gain of approximately $354 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending March 31, 2021.

The exposures the Company is hedging with these qualifying cash flow hedges include the variability of future cash flows from forecasted transactions denominated in foreign currencies, the purchases of invested assets, and the receipt or payment of variable interest on existing financial instruments. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions is 10 years.

There were no material amounts reclassified from AOCI into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging. In addition, there were no instances in which the Company discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.
 
For effective net investment hedges, the amounts, before applicable taxes, recorded in the cumulative translation adjustment within AOCI were $549 million and $536 million as of March 31, 2020 and December 31, 2019, respectively. 

Credit Derivatives
 
The following table provides a summary of the notional and fair value of written credit protection. The Company’s maximum amount at risk under these credit derivatives, assuming the value of the underlying referenced securities become worthless, is equal to the notional amounts. These credit derivatives have maturities of less than 1 year and less than 27 years for single name and index references, respectively.

 
March 31, 2020
 
NAIC Rating Designation of Underlying Credit Obligation(1)
 
NAIC 1
NAIC 2
NAIC 3
NAIC 4
NAIC 5
NAIC 6
Total
 
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)
$
48

$
0

$
48

$
0

$
4

$
0

$
0

$
0

$
0

$
0

$
0

$
0

$
100

$
0

Index reference(2)
49

0

0

0

790

(8
)
0

0

0

0

483

(20
)
1,322

(28
)
Total
$
97

$
0

$
48

$
0

$
794

$
(8
)
$
0

$
0

$
0

$
0

$
483

$
(20
)
$
1,422

$
(28
)


36

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
December 31, 2019
 
NAIC Rating Designation of Underlying Credit Obligation(1)
 
NAIC 1
NAIC 2
NAIC 3
NAIC 4
NAIC 5
NAIC 6
Total
 
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)
$
36

$
0

$
60

$
1

$
4

$
0

$
0

$
0

$
0

$
0

$
0

$
0

$
100

$
1

Index reference(2)
50

0

0

0

570

13

0

0

0

0

72

7

692

20

Total
$
86

$
0

$
60

$
1

$
574

$
13

$
0

$
0

$
0

$
0

$
72

$
7

$
792

$
21

_________
(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 CDS 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.

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, 2020 and December 31, 2019, the Company had $237 million and $6 million of outstanding notional amounts and reported at fair value as an asset of $1 million and $0 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, 2020, 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.


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.
 

37

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 Level 3—Fair value is based on at least one significant unobservable input for the asset or liability. The assets and liabilities in this category may require significant judgment or estimation in determining the fair value.

For a discussion of Company’s valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 6 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 Assets and Liabilities by Hierarchy Level—The tables below present the balances of assets and liabilities reported at fair value on a recurring basis, as of the dates indicated.

38

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
As of March 31, 2020
 
Level 1
 
Level 2
 
Level 3
 
Netting(1)
 
Total
 
(in millions)
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
0

 
$
43,528

 
$
115

 
$
 
$
43,643

Obligations of U.S. states and their political subdivisions
0

 
11,485

 
4

 
 
 
11,489

Foreign government bonds
0

 
117,062

 
21

 
 
 
117,083

U.S. corporate public securities
0

 
95,434

 
488

 
 
 
95,922

U.S. corporate private securities(2)
0

 
33,755

 
1,690

 
 
 
35,445

Foreign corporate public securities
0

 
27,915

 
61

 
 
 
27,976

Foreign corporate private securities
0

 
23,554

 
2,257

 
 
 
25,811

Asset-backed securities(3)
0

 
12,639

 
741

 
 
 
13,380

Commercial mortgage-backed securities
0

 
15,572

 
0

 
 
 
15,572

Residential mortgage-backed securities
0

 
3,186

 
207

 
 
 
3,393

Subtotal
0

 
384,130

 
5,584

 
 
 
389,714

Assets supporting experience-rated contractholder liabilities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government authorities and agencies
0

 
200

 
0

 
 
 
200

Obligations of U.S. states and their political subdivisions
0

 
211

 
0

 
 
 
211

Foreign government bonds
0

 
767

 
24

 
 
 
791

Corporate securities
0

 
12,507

 
603

 
 
 
13,110

Asset-backed securities(3)
0

 
1,543

 
64

 
 
 
1,607

Commercial mortgage-backed securities
0

 
1,869

 
0

 
 
 
1,869

Residential mortgage-backed securities
0

 
1,130

 
113

 
 
 
1,243

Equity securities
1,233

 
233

 
0

 
 
 
1,466

All other(4)
0

 
886

 
7

 
 
 
893

Subtotal
1,233

 
19,346

 
811

 
 
 
21,390

Fixed maturities, trading
0

 
3,372

 
249

 
 
 
3,621

Equity securities
4,571

 
874

 
594

 
 
 
6,039

Commercial mortgage and other loans
0

 
670

 
0

 
 
 
670

Other invested assets(5)
133

 
34,930

 
581

 
(31,880
)
 
3,764

Short-term investments
2,096

 
3,963

 
53

 
 
 
6,112

Cash equivalents
1,442

 
19,729

 
1

 
 
 
21,172

Other assets
0

 
0

 
382

 
 
 
382

Separate account assets(6)(7)
39,056

 
208,460

 
1,528

 
 
 
249,044

Total assets
$
48,531

 
$
675,474

 
$
9,783

 
$
(31,880
)
 
$
701,908

Future policy benefits(8)
$
0

 
$
0

 
$
27,935

 
$
 
$
27,935

Policyholders’ account balances
0

 
0

 
1,206

 
 
 
1,206

Other liabilities
135

 
13,149

 
47

 
(12,381
)
 
950

Notes issued by consolidated VIEs
0

 
0

 
799

 
 
 
799

Total liabilities
$
135

 
$
13,149

 
$
29,987

 
$
(12,381
)
 
$
30,890

 

39

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
As of December 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Netting(1)
 
Total
 
(in millions)
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
0

 
$
35,554

 
$
105

 
$
 
$
35,659

Obligations of U.S. states and their political subdivisions
0

 
11,493

 
4

 
 
 
11,497

Foreign government bonds
0

 
119,032

 
22

 
 
 
119,054

U.S. corporate public securities
0

 
97,959

 
380

 
 
 
98,339

U.S. corporate private securities(2)
0

 
34,749

 
1,784

 
 
 
36,533

Foreign corporate public securities
0

 
29,756

 
69

 
 
 
29,825

Foreign corporate private securities
0

 
27,237

 
1,003

 
 
 
28,240

Asset-backed securities(3)
0

 
12,238

 
936

 
 
 
13,174

Commercial mortgage-backed securities
0

 
15,574

 
0

 
 
 
15,574

Residential mortgage-backed securities
0

 
3,189

 
12

 
 
 
3,201

Subtotal
0

 
386,781

 
4,315

 
 
 
391,096

Assets supporting experience-rated contractholder liabilities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government authorities and agencies
0

 
185

 
0

 
 
 
185

Obligations of U.S. states and their political subdivisions
0

 
212

 
0

 
 
 
212

Foreign government bonds
0

 
790

 
24

 
 
 
814

Corporate securities
0

 
12,966

 
637

 
 
 
13,603

Asset-backed securities(3)
0

 
1,593

 
69

 
 
 
1,662

Commercial mortgage-backed securities
0

 
1,896

 
0

 
 
 
1,896

Residential mortgage-backed securities
0

 
1,158

 
0

 
 
 
1,158

Equity securities
1,505

 
285

 
0

 
 
 
1,790

All other(4)
0

 
261

 
0

 
 
 
261

Subtotal
1,505

 
19,346

 
730

 
 
 
21,581

Fixed maturities, trading
0

 
3,597

 
287

 
 
 
3,884

Equity securities
5,813

 
939

 
633

 
 
 
7,385

Commercial mortgage and other loans
0

 
228

 
0

 
 
 
228

Other invested assets(5)
6

 
14,379

 
567

 
(13,519
)
 
1,433

Short-term investments
1,806

 
1,975

 
155

 
 
 
3,936

Cash equivalents
2,079

 
6,796

 
131

 
 
 
9,006

Other assets
0

 
0

 
113

 
 
 
113

Separate account assets(6)(7)
46,574

 
240,433

 
1,717

 
 
 
288,724

Total assets
$
57,783

 
$
674,474

 
$
8,648

 
$
(13,519
)
 
$
727,386

Future policy benefits(8)
$
0

 
$
0

 
$
12,831

 
$
 
$
12,831

Policyholders’ account balances
0

 
0

 
1,316

 
 
 
1,316

Other liabilities
41

 
7,495

 
105

 
(6,705
)
 
936

Notes issued by consolidated VIEs
0

 
0

 
800

 
 
 
800

Total liabilities
$
41

 
$
7,495

 
$
15,052

 
$
(6,705
)
 
$
15,883

__________
(1)
“Netting” amounts represent cash collateral of $19,499 million and $6,814 million as of March 31, 2020 and December 31, 2019, respectively.
(2)
Excludes notes with fair value of $5,616 million (carrying amount of $5,616 million) and $4,757 million (carrying amount of $4,751 million) as of March 31, 2020 and December 31, 2019, respectively, which have been offset with the associated payables under a netting agreement.
(3)
Includes credit-tranched securities collateralized by syndicated bank loans, sub-prime mortgages, auto loans, credit cards, education loans and other asset types.
(4)
All other represents cash equivalents and short-term investments.
(5)
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, 2020 and December 31, 2019, the fair values of such investments were $4,131 million and $4,213 million respectively.

40

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(6)
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, 2020 and December 31, 2019, the fair value of such investments was $23,623 million and $23,557 million, respectively.
(7)
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.
(8)
As of March 31, 2020, the net embedded derivative liability position of $27.9 billion includes $0.2 billion of embedded derivatives in an asset position and $28.1 billion of embedded derivatives in a liability position. As of December 31, 2019, the net embedded derivative liability position of $12.8 billion includes $0.7 billion of embedded derivatives in an asset position and $13.5 billion of embedded derivatives in a liability position.

Quantitative Information Regarding Internally-Priced Level 3 Assets and Liabilities—The tables below present quantitative information on significant internally-priced Level 3 assets and liabilities.
 
As of March 31, 2020
  
Fair Value
 
Valuation
Techniques
 
Unobservable Inputs
 
Minimum
 
Maximum
 
Weighted
Average
 
Impact of
Increase in
Input on
Fair
Value(1)
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities(2)
$
2,929

 
Discounted 
cash flow(4)
 
Discount rate
 
0.48%
 
25%
 
6.61%
 
Decrease
 
 
 
Market comparables
 
EBITDA multiples(3)
 
5.7X
 
9.2X
 
7.1X
 
Increase
 
 
 
Liquidation
 
Liquidation value
 
14.12%
 
74.63%
 
54.70%
 
Increase
Equity securities
$
187

 
Discounted cash flow(4)
 
Discount rate
 
10%
 
30%
 
 
 
Decrease
 
 
 
Market comparables
 
EBITDA multiples(3)
 
1X
 
9.8X
 
5.0X
 
Increase
 
 
 
Net Asset Value
 
Share price
 
$1
 
$1,353
 
$723
 
Increase
Separate account assets-commercial mortgage loans(5)
$
773

 
Discounted
cash flow
 
Spread
 
2.44%
 
3.59%
 
2.65%
 
Decrease
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Future policy benefits(6)
$
27,935

 
Discounted
cash flow
 
Lapse rate(8)
 
1%
 
18%
 
 
 
Decrease
 
 
 
 
 
Spread over LIBOR(9)
 
1.40%
 
2.02%
 
 
 
Decrease
 
 
 
 
 
Utilization rate(10)
 
43%
 
97%
 
 
 
Increase
 
 
 
 
 
Withdrawal rate
 
See table footnote (11) below.
 
 
 
 
 
Mortality rate(12)
 
0%
 
15%
 
 
 
Decrease
 
 
 
 
 
Equity volatility curve
 
18%
 
33%
 
 
 
Increase
Policyholders’ account balances(7)
$
1,206

 
Discounted
cash flow
 
Lapse rate(8)
 
1%
 
42%
 
 
 
Decrease
 
 
 
 
 
Spread over LIBOR(9)
 
1.40%
 
2.02%
 
 
 
Decrease
 
 
 
 
 
Mortality rate(12)
 
0%
 
24%
 
 
 
Decrease
 
 
 
 
 
Equity volatility curve
 
6%
 
53%
 
 
 
Increase
 

41

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
As of December 31, 2019
  
Fair Value
 
Valuation
Techniques
 
Unobservable Inputs
 
Minimum
 
Maximum
 
Weighted
Average
 
Impact of
Increase in
Input on
Fair
Value(1)
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities(2)
$
1,424

 
Discounted 
cash flow(4)
 
Discount rate
 
0.49%
 
20%
 
7.41%
 
Decrease
 
 
 
Market comparables
 
EBITDA multiples(3)
 
5.7X

9.2X
 
7.3X
 
Increase
 
 
 
Liquidation
 
Liquidation value
 
14.25%
 
83.61%
 
59.47%
 
Increase
Equity securities
$
210

 
Discounted cash flow(4)
 
Discount rate
 
10%
 
30%
 
 
 
Decrease
 
 
 
Market comparables
 
EBITDA multiples(3)
 
1X
 
10.1X
 
5.4X
 
Increase
 
 
 
Net Asset Value
 
Share price
 
$5
 
$1,353
 
$451
 
Increase
Separate account assets-commercial mortgage loans(5)
$
796

 
Discounted
cash flow
 
Spread
 
1.11%
 
1.85%
 
1.26%
 
Decrease
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Future policy benefits(6)
$
12,831

 
Discounted
cash flow
 
Lapse rate(8)
 
1%
 
18%
 
 
 
Decrease
 
 
 
 
 
Spread over LIBOR(9)
 
0.10%
 
1.23%
 
 
 
Decrease
 
 
 
 
 
Utilization rate(10)
 
43%
 
97%
 
 
 
Increase
 
 
 
 
 
Withdrawal rate
 
See table footnote (11) below.
 
 
 
 
 
Mortality rate(12)
 
0%
 
15%
 
 
 
Decrease
 
 
 
 
 
Equity volatility curve
 
13%
 
23%
 
 
 
Increase
Policyholders’ account balances(7)
$
1,316

 
Discounted
cash flow
 
Lapse rate(8)
 
1%
 
42%
 
 
 
Decrease
 
 
 
 
 
Spread over LIBOR(9)
 
0.10%
 
1.23%
 
 
 
Decrease
 
 
 
 
 
Mortality rate(12)
 
0%
 
24%
 
 
 
Decrease
 
 
 
 
 
Equity volatility curve
 
6%
 
25%
 
 
 
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)
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.
(4)
These investments typically use a range of discount rates (10% to 20%), therefore presenting a range, rather than a weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.
(5)
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.
(6)
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.
(7)
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.

42

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(8)
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 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.
(9)
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.
(10)
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.
(11)
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, 2020 and December 31, 2019, the minimum withdrawal rate assumption is 78% and the maximum withdrawal rate assumption may be greater than 100%. 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%.
(12)
The range reflects the mortality rates for the vast majority of business with living benefits and other contracts, with policyholders ranging from 45 to 90 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 0% 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 InputsIn 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—The 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.

43

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


 
Three Months Ended March 31, 2020
 
Fair Value, beginning of period
Total realized and unrealized gains (losses)
Purchases
Sales
Issuances
Settlements
Other(1)
Transfers into
Level 3
Transfers out of Level 3
Fair Value, end of period
Unrealized gains (losses) for assets still held(2)
 
(in millions)
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. government
$
105

$
0

$
10

$
0

$
0

$
0

$
0

$
0

$
0

$
115

$
0

U.S. states
4

0

0

0

0

0

0

0

0

4

0

Foreign government
22

(1
)
0

0

0

0

0

0

0

21

0

Corporate securities(3)
3,236

(500
)
294

(113
)
0

(235
)
1

1,827

(14
)
4,496

(492
)
Structured securities(4)
948

(7
)
315

(17
)
0

(100
)
155

12

(358
)
948

(16
)
Assets supporting experience-rated contractholder liabilities:
 
 
 
 
 
 
 
 
 
 
 
Foreign government
24

0

0

0

0

0

0

0

0

24

0

Corporate securities(3)
637

(46
)
4

(10
)
0

(45
)
0

63

0

603

(44
)
Structured securities(4)
69

(4
)
116

0

0

(4
)
0

0

0

177

0

Equity securities
0

0

0

0

0

0

0

0

0

0

0

All other activity
0

0

7

0

0

0

0

0

0

7

0

Other assets:
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities, trading
287

(15
)
18

(6
)
0

0

(2
)
15

(48
)
249

(16
)
Equity securities
633

(44
)
9

(5
)
0

0

1

0

0

594

(44
)
Other invested assets
567

8

27

0

0

(1
)
(20
)
0

0

581

8

Short-term investments
155

2

43

0

0

(110
)
(37
)
0

0

53

0

Cash equivalents
131

0

0

0

0

0

(130
)
0

0

1

0

Other assets
113

252

17

0

0

0

0

0

0

382

252

Separate account assets(5)
1,717

(140
)
56

(13
)
0

(18
)
0

7

(81
)
1,528

(128
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Future policy benefits
(12,831
)
(14,789
)
0

0

(319
)
0

4

0

0

(27,935
)
(14,923
)
Policyholders’ account balances(6)
(1,316
)
206

0

0

(96
)
0

0

0

0

(1,206
)
209

Other liabilities
(105
)
58

0

0

0

0

0

0

0

(47
)
58

Notes issued by consolidated VIEs
(800
)
1

0

0

0

0

0

0

0

(799
)
0


 
Three Months Ended March 31, 2020
 
Total realized and unrealized gains (losses)
 
Unrealized gains (losses) for assets still held(2)
 
Realized investment gains (losses), net
Other income (loss)
Interest credited to policyholders’ account balances
Included in other comprehensive income (loss)
Net investment income
 
Realized investment gains (losses), net
Other income (loss)
Interest credited to policyholders’ account balances
Included in other comprehensive income (loss)(7)
 
(in millions)
Fixed maturities, available-for-sale
$
(27
)
$
0

$
0

$
(483
)
$
2

 
$
(27
)
$
0

$
0

$
(481
)
Assets supporting experience-rated contractholder liabilities
0

(47
)
0

0

(3
)
 
0

(44
)
0

0

Other assets:
 
 
 
 
 
 
 
 
 
 
Fixed maturities, trading
0

(15
)
0

0

0

 
0

(16
)
0

0

Equity securities
0

(44
)
0

0

0

 
0

(44
)
0

0

Other invested assets
0

8

0

0

0

 
0

8

0

0

Short-term investments
2

0

0

0

0

 
0

0

0

0

Cash equivalents
0

0

0

0

0

 
0

0

0

0

Other assets
252

0

0

0

0

 
252

0

0

0

Separate account assets(5)
0

0

(140
)
0

0

 
0

0

(128
)
0

Liabilities:
 
 
 
 
 
 
 
 
 
 
Future policy benefits
(14,789
)
0

0

0

0

 
(14,923
)
0

0

0

Policyholders’ account balances
206

0

0

0

0

 
209

0

0

0

Other liabilities
0

58

0

0

0

 
0

58

0

0

Notes issued by consolidated VIEs
1

0

0

0

0

 
0

0

0

0


44

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


 
Three Months Ended March 31, 2019
 
Fair Value, beginning of period
Total realized and unrealized gains (losses)
Purchases
Sales
Issuances
Settlements
Other(1)
Transfers into
Level 3
Transfers out of Level 3
Fair Value, end of period
Unrealized gains (losses) for assets still held(2)
 
(in millions)
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. government
$
81

$
0

$
7

$
0

$
0

$
0

$
0

$
0

$
0

$
88

$
0

U.S. states
5

0

0

0

0

(1
)
0

0

0

4

0

Foreign government
125

3

0

0

0

0

1

9

0

138

0

Corporate securities(3)
2,685

4

319

(12
)
0

(379
)
(2
)
164

(22
)
2,757

(21
)
Structured securities(4)
1,339

17

318

0

0

(231
)
(2
)
733

(259
)
1,915

0

Assets supporting experience-rated contractholder liabilities:
 
 
 
 
 
 
 
 
 
 
 
Foreign government
225

0

0

0

0

0

(196
)
0

0

29

0

Corporate securities(3)
444

5

27

0

0

(76
)
196

0

(4
)
592

(5
)
Structured securities(4)
149

0

6

0

0

(21
)
0

0

(74
)
60

0

Equity securities
1

0

0

0

0

0

0

0

0

1

0

All other activity
0

0

0

0

0

0

0

0

0

0

0

Other assets:
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities, trading
206

(4
)
38

(1
)
0

0

2

0

(1
)
240

0

Equity securities
671

8

23

(11
)
0

(15
)
(2
)
0

0

674

7

Other invested assets
263

(1
)
157

0

0

(42
)
(4
)
0

0

373

(1
)
Short-term investments
89

0

153

0

0

(74
)
0

0

0

168

0

Cash equivalents
77

0

1

0

0

(77
)
0

0

0

1

0

Other assets
25

14

9

0

0

0

0

0

0

48

14

Separate account assets(5)
1,534

81

89

(11
)
0

(23
)
0

0

(35
)
1,635

74

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Future policy benefits
(8,926
)
(810
)
0

0

(290
)
0

1

0

0

(10,025
)
(879
)
Policyholders’ account balances(6)
(56
)
(51
)
0

0

(36
)
0

(3
)
0

0

(146
)
(51
)
Other liabilities
0

0

0

0

0

0

0

0

0

0

0

Notes issued by consolidated VIEs
(595
)
(2
)
0

0

(858
)
638

0

0

0

(817
)
(2
)

 
Three Months Ended March 31, 2019
 
Total realized and unrealized gains (losses)
 
Unrealized gains (losses) for assets still held(2)
 
Realized investment gains (losses), net
Other income (loss)
Interest credited to policyholders’ account balances
Included in other comprehensive income (loss)
Net investment income
 
Realized investment gains (losses), net
Other income (loss)
Interest credited to policyholders’ account balances
 
(in millions)
Fixed maturities, available-for-sale
$
(2
)
$
0

$
0

$
22

$
4

 
$
(21
)
$
0

$
0

Assets supporting experience-rated contractholder liabilities
0

3

0

0

2

 
0

(5
)
0

Other assets:
 
 
 
 
 
 
 
 
 
Fixed maturities, trading
0

(4
)
0

0

0

 
0

0

0

Equity securities
0

8

0

0

0

 
0

7

0

Other invested assets
(1
)
0

0

0

0

 
(1
)
0

0

Short-term investments
0

0

0

0

0

 
0

0

0

Cash equivalents
0

0

0

0

0

 
0

0

0

Other assets
14

0

0

0

0

 
14

0

0

Separate account assets(5)
0

0

80

0

1

 
0

0

74

Liabilities:
 
 
 
 
 
 
 
 
 
Future policy benefits
(810
)
0

0

0

0

 
(879
)
0

0

Policyholders’ account balances
(51
)
0

0

0

0

 
(51
)
0

0

Other liabilities
0

0

0

0

0

 
0

0

0

Notes issued by consolidated VIEs
(2
)
0

0

0

0

 
(2
)
0

0


45

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

__________
(1)
“Other,” for the periods ended March 31, 2020 and March 31, 2019, primarily represent deconsolidation of VIE, 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. Prior period have been updated to conform to current period presentation.
(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. Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.

Derivative Fair Value Information
 
The following tables present the balances of derivative assets and liabilities measured at fair value on a recurring basis, as of the date indicated, by primary underlying risk. These tables include NPR and exclude embedded derivatives and associated reinsurance recoverables. The derivative assets and liabilities shown below are included in “Other invested assets” or “Other liabilities” in the tables contained within the sections “—Assets and Liabilities by Hierarchy Level” and “—Changes in Level 3 Assets and Liabilities,” above.
 
As of March 31, 2020
 
Level 1
 
Level 2
 
Level 3
 
Netting(1)
 
Total
 
(in millions)
Derivative Assets:
 
 
 
Interest Rate
$
42

 
$
25,929

 
$
1

 
$
 
$
25,972

Currency
0

 
537

 
0

 
 
 
537

Credit
0

 
2

 
0

 
 
 
2

Currency/Interest Rate
0

 
5,204

 
0

 
 
 
5,204

Equity
90

 
3,259

 
0

 
 
 
3,349

Other
0

 
0

 
0

 
 
 
0

Netting(1)
 
 
 
 
 
 
(31,880
)
 
(31,880
)
Total derivative assets
$
132

 
$
34,931

 
$
1

 
$
(31,880
)
 
$
3,184

Derivative Liabilities:
 
 
 
 
 
 
 
 
 
Interest Rate
$
131

 
$
11,579

 
$
0

 
$
 
$
11,710

Currency
0

 
166

 
0

 
 
 
166

Credit
0

 
29

 
0

 
 
 
29

Currency/Interest Rate
0

 
457

 
0

 
 
 
457

Equity
1

 
922

 
0

 
 
 
923

Other
0

 
0

 
0

 
 
 
0

Netting(1)
 
 
 
 
 
 
(12,381
)
 
(12,381
)
Total derivative liabilities
$
132

 
$
13,153

 
$
0

 
$
(12,381
)
 
$
904



46

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
As of December 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Netting(1)
 
Total
 
(in millions)
Derivative Assets:
 
 
 
Interest Rate
$
4

 
$
11,238

 
$
1

 
$
 
$
11,243

Currency
0

 
230

 
0

 
 
 
230

Credit
0

 
21

 
0

 
 
 
21

Currency/Interest Rate
0

 
2,207

 
0

 
 
 
2,207

Equity
2

 
683

 
0

 
 
 
685

Other
0

 
0

 
0

 
 
 
0

Netting(1)


 


 


 
(13,519
)
 
(13,519
)
Total derivative assets
$
6

 
$
14,379

 
$
1

 
$
(13,519
)
 
$
867

Derivative Liabilities:
 
 
 
 
 
 
 
 
 
Interest Rate
$
38

 
$
5,176

 
$
0

 
$
 
$
5,214

Currency
0

 
271

 
0

 
 
 
271

Credit
0

 
0

 
0

 
 
 
0

Currency/Interest Rate
0

 
647

 
0

 
 
 
647

Equity
3

 
1,401

 
0

 
 
 
1,404

Other
0

 
0

 
0

 
 
 
0

Netting(1)


 


 


 
(6,705
)
 
(6,705
)
Total derivative liabilities
$
41

 
$
7,495

 
$
0

 
$
(6,705
)
 
$
831

__________ 
(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.

Changes in Level 3 derivative assets and liabilities—The 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.


 
Three Months Ended March 31, 2020
 
Fair Value, beginning of period
Total realized and unrealized gains (losses)(1)
Purchases
Sales
Issuances
Settlements
Other
Transfers into
Level 3(2)
Transfers out of Level 3(2)
Fair Value, end of period
Unrealized gains (losses) for assets still held(1)
 
(in millions)
Net Derivative - Equity
$
0

$
0

$
0

$
0

$
0

$
0

$
0

$
0

$
0

$
0

$
0

Net Derivative - Interest Rate
1

0

0

0

0

0

0

0

0

1

0



 
Three Months Ended March 31, 2019
 
Fair Value, beginning of period
Total realized and unrealized gains (losses)(1)
Purchases
Sales
Issuances
Settlements
Other
Transfers into
Level 3(2)
Transfers out of Level 3(2)
Fair Value, end of period
Unrealized gains (losses) for assets still held(1)
 
(in millions)
Net Derivative - Equity
$
0

$
0

$
0

$
0

$
0

$
0

$
0

$
0

$
0

$
0

$
0

Net Derivative - Interest Rate
2

(1
)
0

0

0

0

0

0

0

1

(1
)
______ 
(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.”

47

PRUDENTIAL FINANCIAL, INC.
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—The 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).

 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Realized investment gains (losses) net:
 
 
 
Commercial mortgage loans(1)
$
1

 
$
0

Mortgage servicing rights(2)
$
(3
)
 
$
(1
)

 
March 31, 2020
 
December 31, 2019
 
(in millions)
Carrying value after measurement as of period end:
 
 
 
Commercial mortgage loans(1)
$
15

 
$
15

Mortgage servicing rights(2)
$
80

 
$
87

__________ 
(1)
Commercial mortgage loans are valued based on discounted cash flows utilizing market rates or the fair value of the underlying real estate collateral.
(2)
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.

48

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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.
 
The following tables present information regarding assets and liabilities where the fair value option has been elected.

 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Liabilities:
 
 
 
Notes issued by consolidated VIEs:
 
 
 
Changes in fair value
$
0

 
$
2


 
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Commercial mortgage and other loans:
 
 
 
Interest income
$
2

 
$
6

Notes issued by consolidated VIEs:
 
 
 
Interest expense
$
11

 
$
9


 
March 31, 2020
 
December 31, 2019
 
(in millions)
Commercial mortgage and other loans(1):
 
 
 
Fair value as of period end
$
670

 
$
228

Aggregate contractual principal as of period end
$
662

 
$
224

Other assets:
 
 
 
Fair value as of period end
$
10

 
$
10

Notes issued by consolidated VIEs:
 
 
 
Fair value as of period end
$
799

 
$
800

Aggregate contractual principal as of period end
$
857

 
$
857

__________ 
(1)
As of March 31, 2020, for loans for which the fair value option has been elected, there were no loans in non-accrual status and none of the loans were more than 90 days past due and still accruing.


Fair Value of Financial Instruments
 
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.

49

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
 
March 31, 2020
 
Fair Value
 
Carrying
Amount(1)
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Total
 
(in millions)
Assets:
 
 
 
 
 
 
 
 
 
Fixed maturities, held-to-maturity(2)
$
0

 
$
2,164

 
$
85

 
$
2,249

 
$
1,895

Assets supporting experience-rated contractholder liabilities
110

 
80

 
0

 
190

 
190

Commercial mortgage and other loans
0

 
109

 
64,261

 
64,370

 
62,889

Policy loans
0

 
0

 
12,099

 
12,099

 
12,099

Other invested assets
0

 
196

 
0

 
196

 
196

Short-term investments
1,764

 
85

 
0

 
1,849

 
1,849

Cash and cash equivalents
10,216

 
258

 
0

 
10,474

 
10,474

Accrued investment income
0

 
3,221

 
0

 
3,221

 
3,221

Other assets
151

 
2,584

 
177

 
2,912

 
2,910

Total assets
$
12,241

 
$
8,697

 
$
76,622

 
$
97,560

 
$
95,723

Liabilities:
 
 
 
 
 
 
 
 
 
Policyholders’ account balances—investment contracts
$
0

 
$
36,747

 
$
68,583

 
$
105,330

 
$
104,660

Securities sold under agreements to repurchase
0

 
10,557

 
0

 
10,557

 
10,557

Cash collateral for loaned securities
0

 
3,396

 
0

 
3,396

 
3,396

Short-term debt
0

 
2,339

 
208

 
2,547

 
2,539

Long-term debt(3)
1,836

 
17,488

 
1,157

 
20,481

 
20,149

Notes issued by consolidated VIEs
0

 
0

 
452

 
452

 
452

Other liabilities
0

 
6,806

 
47

 
6,853

 
6,853

Separate account liabilities—investment contracts
0

 
67,654

 
23,928

 
91,582

 
91,582

Total liabilities
$
1,836

 
$
144,987

 
$
94,375

 
$
241,198

 
$
240,188

 

50

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
December 31, 2019
 
Fair Value
 
Carrying
Amount(1)
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Total
 
(in millions)
Assets:
 
 
 
 
 
 
 
 
 
Fixed maturities, held-to-maturity(2)
$
0

 
$
2,217

 
$
85

 
$
2,302

 
$
1,933

Assets supporting experience-rated contractholder liabilities
16

 
0

 
0

 
16

 
16

Commercial mortgage and other loans
0

 
107

 
65,558

 
65,665

 
63,331

Policy loans
0

 
0

 
12,096

 
12,096

 
12,096

Other invested assets
0

 
36

 
0

 
36

 
36

Short-term investments
1,492

 
39

 
0

 
1,531

 
1,531

Cash and cash equivalents
6,278

 
1,043

 
0

 
7,321

 
7,321

Accrued investment income
0

 
3,330

 
0

 
3,330

 
3,330

Other assets
147

 
2,526

 
643

 
3,316

 
3,315

Total assets
$
7,933

 
$
9,298

 
$
78,382

 
$
95,613

 
$
92,909

Liabilities:
 
 
 
 
 
 
 
 
 
Policyholders’ account balances—investment contracts
$
0

 
$
32,940

 
$
69,216

 
$
102,156

 
$
101,241

Securities sold under agreements to repurchase
0

 
9,681

 
0

 
9,681

 
9,681

Cash collateral for loaned securities
0

 
4,213

 
0

 
4,213

 
4,213

Short-term debt
0

 
1,748

 
205

 
1,953

 
1,933

Long-term debt(3)
1,950

 
18,188

 
1,186

 
21,324

 
18,646

Notes issued by consolidated VIEs
0

 
0

 
474

 
474

 
474

Other liabilities
0

 
6,403

 
579

 
6,982

 
6,982

Separate account liabilities—investment contracts
0

 
77,134

 
24,407

 
101,541

 
101,541

Total liabilities
$
1,950

 
$
150,307

 
$
96,067

 
$
248,324

 
$
244,711

__________ 
(1)
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.
(2)
Excludes notes with fair value of $5,001 million (carrying amount of $4,998 million) and $5,401 million (carrying amount of $4,998 million) as of March 31, 2020 and December 31, 2019, respectively, which have been offset with the associated payables under a netting agreement.
(3)
Includes notes with fair value of $10,617 million (carrying amount of $10,614 million) and $10,158 million (carrying amount of $9,749 million) as of March 31, 2020 and December 31, 2019, respectively, which have been offset with the associated receivables under a netting agreement.


7. CLOSED 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, 2019.
 
As of March 31, 2020 and December 31, 2019, the Company recognized a policyholder dividend obligation of $2,320 million and $2,816 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 $3,208 million and $3,332 million at March 31, 2020 and December 31, 2019, respectively, to be paid to Closed Block policyholders unless offset by future experience, with a corresponding amount reported in AOCI.
 

51

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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:
 
 
March 31,
2020
 
December 31,
2019
 
 
(in millions)
Closed Block liabilities
 
 
 
 
Future policy benefits
 
$
47,351

 
$
47,613

Policyholders’ dividends payable
 
747

 
717

Policyholders’ dividend obligation
 
5,528

 
6,149

Policyholders’ account balances
 
4,942

 
4,973

Other Closed Block liabilities
 
3,436

 
4,049

Total Closed Block liabilities
 
62,004

 
63,501

Closed Block assets
 
 
 
 
Fixed maturities, available-for-sale, at fair value
 
40,260

 
41,146

Fixed maturities, trading, at fair value
 
218

 
256

Equity securities, at fair value
 
1,691

 
2,245

Commercial mortgage and other loans
 
8,439

 
8,629

Policy loans
 
4,210

 
4,264

Other invested assets
 
3,335

 
3,333

Short-term investments
 
179

 
227

Total investments
 
58,332

 
60,100

Cash and cash equivalents
 
473

 
191

Accrued investment income
 
467

 
456

Other Closed Block assets
 
85

 
93

Total Closed Block assets
 
59,357

 
60,840

Excess of reported Closed Block liabilities over Closed Block assets
 
2,647

 
2,661

Portion of above representing accumulated other comprehensive income (loss):
 
 
 
 
Net unrealized investment gains (losses)
 
3,155

 
3,280

Allocated to policyholder dividend obligation
 
(3,208
)
 
(3,332
)
Future earnings to be recognized from Closed Block assets and Closed Block liabilities
 
$
2,594

 
$
2,609



Information regarding the policyholder dividend obligation is as follows:
  
 
Three Months Ended
March 31, 2020
 
 
(in millions)
Balance, December 31, 2019
 
$
6,149

Cumulative effect adjustment from the adoption of ASU 2016-13(1)
 
(13
)
Impact from earnings allocable to policyholder dividend obligation
 
(483
)
Change in net unrealized investment gains (losses) allocated to policyholder dividend obligation
 
(125
)
Balance, March 31, 2020
 
$
5,528


__________
(1)
See Note 2 for more information.


52

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Closed Block revenues and benefits and expenses are as follows for the periods indicated:
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Revenues
 
 
 
Premiums
$
480

 
$
527

Net investment income
548

 
565

Realized investment gains (losses), net
256

 
56

Other income (loss)
(603
)
 
228

Total Closed Block revenues
681

 
1,376

Benefits and Expenses
 
 
 
Policyholders’ benefits
647

 
709

Interest credited to policyholders’ account balances
32

 
32

Dividends to policyholders
(94
)
 
553

General and administrative expenses
85

 
89

Total Closed Block benefits and expenses
670

 
1,383

Closed Block revenues, net of Closed Block benefits and expenses, before income taxes
11

 
(7
)
Income tax expense (benefit)
(6
)
 
(24
)
Closed Block revenues, net of Closed Block benefits and expenses and income taxes
$
17

 
$
17


 
8. INCOME 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 $(58) million, or 17.2% of income (loss) before income taxes and equity in earnings of operating joint ventures, in the first three months of 2020, compared to an income tax expense of $232 million, or 20.4%, in the first three months of 2019. The Company’s current and prior effective tax rates differ from the U.S. statutory rate of 21% primarily due to non-taxable investment income, tax credits and foreign earnings taxed at higher rates than the U.S. statutory rate.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted into law. The CARES Act includes temporary changes to income tax laws, some of which were enacted under the Tax Cuts and Jobs Act (TCJA) in 2017. For interim reporting, income tax effects of new legislation are recognized in the interim period which includes the enactment date. One of the key provisions is to allow companies with net operating losses (“NOLs”) originating in 2018, 2019 or 2020 to carry back those losses for five years. However, this provision is elective and the Company is still in the process of evaluating the temporary tax law changes and its overall effect, including the sequencing of and interaction between its provisions and other federal tax laws. As a result, the tax provision for the first quarter of 2020 does not include any estimate for the impact of these changes.


53

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

9. SHORT-TERM AND LONG-TERM DEBT
 
Short-term Debt
 
The table below presents the Company’s short-term debt as of the dates indicated:
 
 
March 31, 2020
 
December 31, 2019
 
($ in millions)
Commercial paper:
 
 
 
Prudential Financial
$
453

 
$
25

Prudential Funding, LLC
700

 
524

Subtotal commercial paper
1,153

 
549

Current portion of long-term debt:
 
 
 
Senior Notes
1,179

 
1,179

Mortgage Debt
191

 
192

Subtotal current portion of long-term debt
1,370

 
1,371

Other(1)
16

 
13

Total short-term debt(2)
$
2,539

 
$
1,933

Supplemental short-term debt information:
 
 
 
Portion of commercial paper borrowings due overnight
$
576

 
$
224

Daily average commercial paper outstanding for the quarter ended
$
1,495

 
$
1,702

Weighted average maturity of outstanding commercial paper, in days
9

 
6

Weighted average interest rate on outstanding commercial paper
0.79
%
 
1.61
%
_________
(1) Includes $16 million drawn on a revolving line of credit held by a subsidiary at March 31, 2020.
(2) Includes Prudential Financial debt of $1,632 million and $1,204 million at March 31, 2020 and December 31, 2019, 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 a contingent financing facility in the form of a put option agreement. The Company also maintains syndicated, unsecured committed credit facilities as an alternative source of liquidity. At March 31, 2020, no amounts were drawn on these 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, 2019.

Federal Home Loan Bank of New York (“FHLBNY”)

During the first quarter of 2020, PICA issued $3.6 billion in funding agreements under the FHLBNY facility with maturities ranging from one month to seven years and rates from 0.560% to 1.925%. These funding agreements are reflected as “Policyholders’ account balances” on the Consolidated Statements of Financial Position and as such are not included in the foregoing table. For additional information on this facility, see Note 17 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Long-term Debt

The table below presents the Company’s long-term debt as of the dates indicated:
 

54

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
March 31, 2020
 
December 31, 2019
 
(in millions)
Fixed-rate obligations:
 
 
 
Surplus notes
$
342

 
$
342

Surplus notes subject to set-off arrangements(1)
8,284

 
7,484

Senior notes
11,573

 
10,084

Mortgage debt(2)
103

 
104

Floating-rate obligations:
 
 
 
Line of credit
300

 
300

Surplus notes subject to set-off arrangements(1)
2,330

 
2,265

Mortgage debt(3)
253

 
241

Junior subordinated notes(4)
7,578

 
7,575

Subtotal
30,763

 
28,395

Less: assets under set-off arrangements(1)
10,614

 
9,749

       Total long-term debt(5)
$
20,149

 
$
18,646

 __________    
(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 $43 million of debt denominated in foreign currency at both March 31, 2020 and December 31, 2019.
(3)
Includes $52 million and $53 million of debt denominated in foreign currency at March 31, 2020 and December 31, 2019, respectively.
(4)
Includes Prudential Financial debt of $7,520 million and $7,518 million at March 31, 2020 and December 31, 2019, respectively. Also includes subsidiary debt of $58 million and $57 million denominated in foreign currency at March 31, 2020 and December 31, 2019, respectively.
(5)
Includes Prudential Financial debt of $18,920 million and $17,430 million at March 31, 2020 and December 31, 2019, respectively.

At March 31, 2020 and December 31, 2019, the Company was in compliance with all debt covenants related to the borrowings in the table above.

Surplus Notes. In March 2020, Prudential Legacy Insurance Company of New Jersey issued $800 million of surplus notes under its $4 billion reserve financing facility. As of March 31, 2020, an aggregate of $900 million of surplus notes were outstanding under the facility and no credit-linked note payments have been required. For additional information on this facility, see Note 17 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Senior Notes. In March 2020, the Company issued $1.5 billion of medium-term notes: $500 million with an interest rate of 1.5% maturing in March 2026, $500 million with an interest rate of 2.1% maturing in March 2030, and $500 million with an interest rate of 3.0% maturing in March 2040. As of March 31, 2020, the outstanding balance of the Company’s senior notes was $12.75 billion, an increase of $1.5 billion from December 31, 2019.

10. EMPLOYEE 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, while benefits for other employees are based on an account balance that takes into consideration age, service and earnings during their career.
 
The Company provides certain health care and life insurance benefits for its retired employees, their beneficiaries and covered dependents (“Other Postretirement Benefits”). The health care plan is contributory; the life insurance plan is non-contributory. Substantially all of the Company’s U.S. employees may become eligible to receive Other Postretirement Benefits if they retire after age 55 with at least 10 years of service or under certain circumstances after age 50 with at least 20 years of continuous service.
 

55

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Net periodic (benefit) cost included in “General and administrative expenses” includes the following components:
 
 
Three Months Ended March 31,
 
Pension Benefits
 
Other Postretirement Benefits
 
2020
 
2019
 
2020
 
2019
 
(in millions)
Components of net periodic (benefit) cost:
 
 
 
 
 
 
 
Service cost
$
80

 
$
73

 
$
6

 
$
6

Interest cost
108

 
123

 
16

 
19

Expected return on plan assets
(201
)
 
(204
)
 
(25
)
 
(24
)
Amortization of prior service cost
(1
)
 
(1
)
 
2

 
1

Amortization of actuarial (gain) loss, net
65

 
54

 
4

 
6

Settlements
0

 
0

 
0

 
0

Special termination benefits(1)
2

 
0

 
0

 
0

Net periodic (benefit) cost
$
53

 
$
45

 
$
3

 
$
8

__________ 
(1)
For 2020 certain employees were provided special termination benefits under non-qualified plans in the form of unreduced early retirement benefits as a result of their involuntary termination or participation in the Voluntary Separation Program that was offered to eligible U.S.-based employees in 2019.

11. EQUITY
 
The changes in the number of shares of Common Stock issued, held in treasury and outstanding, are as follows for the periods indicated:
 
Common Stock
 
Issued
 
Held In
Treasury
 
Outstanding
 
(in millions)
Balance, December 31, 2019
666.3

 
267.5

 
398.8

Common Stock issued
0.0

 
0.0

 
0.0

Common Stock acquired
0.0

 
6.7

 
(6.7
)
Stock-based compensation programs(1)
0.0

 
(1.7
)
 
1.7

Balance, March 31, 2020
666.3

 
272.5

 
393.8

__________ 
(1)
Represents net shares issued from treasury pursuant to the Company’s stock-based compensation programs.

In December 2019, Prudential Financial’s Board of Directors (the “Board”) authorized the Company to repurchase at management’s discretion up to $2.0 billion of its outstanding Common Stock during the period from January 1, 2020 through December 31, 2020. As of March 31, 2020, 6.7 million shares of the Company’s Common Stock were repurchased under this authorization at a total cost of $500 million. The Company temporarily suspended Common Stock repurchases under the existing repurchase authorization beginning April 1, 2020; however, the Company will continue to evaluate the resumption of share repurchases under the existing Board authorization for 2020.

The timing and amount of share repurchases are determined by management based upon market conditions and other considerations, and repurchases may be effected in the open market, through derivative, accelerated repurchase and other negotiated transactions and through prearranged trading plans complying with Rule 10b5-1(c) under the Securities Exchange Act of 1934 (the “Exchange Act”). Numerous factors could affect the timing and amount of any future repurchases under the share repurchase authorization, including increased capital needs of the Company due to changes in regulatory capital requirements, opportunities for growth and acquisitions, and the effect of adverse market conditions on the segments.

Dividends declared per share of Common Stock are as follows for the periods indicated:

56

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
Three Months Ended
March 31,
 
2020
 
2019
Dividends declared per share of Common Stock
$
1.10

 
$
1.00



Accumulated Other Comprehensive Income (Loss)
 
AOCI represents the cumulative OCI items that are reported separate from net income and detailed on the Unaudited Interim Consolidated Statements of Comprehensive Income. The balance of and changes in each component of AOCI as of and for the three months ended March 31, 2020 and 2019, are as follows:

 
Accumulated Other Comprehensive Income (Loss) Attributable to
Prudential Financial, Inc.
 
Foreign Currency
Translation
Adjustment
 
Net Unrealized
Investment Gains
(Losses)(1)
 
Pension and
Postretirement
Unrecognized Net
Periodic Benefit
(Cost)
 
Total
Accumulated
Other
Comprehensive
Income (Loss)
 
(in millions)
Balance, December 31, 2019
$
(536
)
 
$
28,112

 
$
(3,537
)
 
$
24,039

Change in OCI before reclassifications
(298
)
 
(808
)
 
2

 
(1,104
)
Amounts reclassified from AOCI
3

 
(546
)
 
70

 
(473
)
Income tax benefit (expense)
(25
)
 
179

 
(16
)
 
138

Balance, March 31, 2020
$
(856
)
 
$
26,937

 
$
(3,481
)
 
$
22,600


 
Accumulated Other Comprehensive Income (Loss) Attributable to
Prudential Financial, Inc.
 
Foreign Currency
Translation
Adjustment
 
Net Unrealized
Investment Gains
(Losses)(1)
 
Pension and
Postretirement
Unrecognized Net
Periodic Benefit
(Cost)
 
Total
Accumulated
Other
Comprehensive
Income (Loss)
 
(in millions)
Balance, December 31, 2018
$
(564
)
 
$
14,745

 
$
(3,275
)
 
$
10,906

Change in OCI before reclassifications
(109
)
 
8,564

 
4

 
8,459

Amounts reclassified from AOCI
5

 
(275
)
 
60

 
(210
)
Income tax benefit (expense)
(3
)
 
(1,926
)
 
(15
)
 
(1,944
)
Cumulative effect of adoption of ASU 2017-12
0

 
7

 
0

 
7

Balance, March 31, 2019
$
(671
)
 
$
21,115

 
$
(3,226
)
 
$
17,218

__________
(1)
Includes cash flow hedges of $3,186 million and $832 million as of March 31, 2020 and December 31, 2019, respectively, and $776 million and $811 million as of March 31, 2019 and December 31, 2018, respectively.
 

57

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Reclassifications out of Accumulated Other Comprehensive Income (Loss)

 
Three Months Ended
March 31,
 
Affected line item in Consolidated Statements of Operations
 
2020
 
2019
 
 
(in millions)
 
Amounts reclassified from AOCI(1)(2):
 
 
 
 
 
Foreign currency translation adjustment:
 
 
 
 
 
Foreign currency translation adjustments
$
(3
)
 
$
(5
)
 
Realized investment gains (losses), net
Foreign currency translation adjustments
0

 
0

 
Other income (loss)
Total foreign currency translation adjustment
(3
)
 
(5
)
 
 
Net unrealized investment gains (losses):
 
 
 
 
 
Cash flow hedges—Interest rate
(1
)
 
(1
)
 
(3)
Cash flow hedges—Currency
1

 
1

 
(3)
Cash flow hedges—Currency/Interest rate
388

 
15

 
(3)
Net unrealized investment gains (losses) on available-for-sale securities
158

 
260

 
 
Total net unrealized investment gains (losses)
546

 
275

 
(4)
Amortization of defined benefit pension items:
 
 
 
 
 
Prior service cost
(1
)
 
0

 
(5)
Actuarial gain (loss)
(69
)
 
(60
)
 
(5)
Total amortization of defined benefit pension items
(70
)
 
(60
)
 
 
Total reclassifications for the period
$
473

 
$
210

 
 
__________
(1)
All amounts are shown before tax.
(2)
Positive amounts indicate gains/benefits reclassified out of AOCI. Negative amounts indicate losses/costs reclassified out of AOCI.
(3)
See Note 5 for additional information on cash flow hedges.
(4)
See table below for additional information on unrealized investment gains (losses), including the impact on deferred policy acquisition and other costs, future policy benefits and policyholders’ dividends.
(5)
See Note 10 for information on employee benefit plans.
 
Net Unrealized Investment Gains (Losses)
 
Net unrealized investment gains (losses) on available-for-sale fixed maturity securities and certain other invested assets and other assets are included in the Company’s Unaudited Interim Consolidated Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from “Other comprehensive income (loss)” those items that are included as part of “Net income (loss)” for a period that had been part of “Other comprehensive income (loss)” in earlier periods. The amounts for the periods indicated below, split between amounts related to available-for-sale fixed maturity securities on which an allowance for credit losses has been recognized, and all other net unrealized investment gains (losses), are as follows:
 

58

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Net Unrealized Investment Gains (Losses) on Available-for-sale Fixed Maturity Securities on which an allowance for credit losses has been recognized

 
Net Unrealized
Gains (Losses)
on Investments
 
DAC, DSI, VOBA and Reinsurance Recoverables
 
Future Policy
Benefits,
Policyholders’
Account
Balances and
Reinsurance Payables
 
Policyholders’
Dividends
 
Deferred
Income
Tax
(Liability)
Benefit
 
Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)
 
(in millions)
Balance, December 31, 2019(1)
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Net investment gains (losses) on investments arising during the period
0

 
 
 
 
 
 
 
0

 
0

Reclassification adjustment for (gains) losses included in net income
(38
)
 
 
 
 
 
 
 
6

 
(32
)
Increase (Decrease) due to non-credit related losses recognized in AOCI during the period
(80
)
 
 
 
 
 
 
 
13

 
(67
)
Impact of net unrealized investment (gains) losses on DAC, DSI, VOBA and reinsurance recoverables
 
 
2

 
 
 
 
 
0

 
2

Impact of net unrealized investment (gains) losses on future policy benefits, policyholders’ account balances and reinsurance payables
 
 
 
 
(5
)
 
 
 
1

 
(4
)
Impact of net unrealized investment (gains) losses on policyholders’ dividends
 
 
 
 
 
 
4

 
(1
)
 
3

Balance, March 31, 2020
$
(118
)
 
$
2

 
$
(5
)
 
$
4

 
$
19

 
$
(98
)
__________
(1)
Allowance for credit losses on available-for-sale fixed maturity securities effective January 1, 2020.

 All Other Net Unrealized Investment Gains (Losses) in AOCI
 
Net Unrealized
Gains (Losses)
on Investments(1)
 
DAC, DSI, VOBA and Reinsurance Recoverables
 
Future Policy
Benefits,
Policyholders’
Account
Balances and
Reinsurance Payables
 
Policyholders’
Dividends
 
Deferred
Income
Tax
(Liability)
Benefit
 
Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)
 
(in millions)
Balance, December 31, 2019(2)
$
45,339

 
$
(1,585
)
 
$
(2,909
)
 
$
(3,366
)
 
$
(9,367
)
 
$
28,112

Net investment gains (losses) on investments arising during the period
(1,422
)
 
 
 
 
 
 
 
225

 
(1,197
)
Reclassification adjustment for (gains) losses included in net income
(508
)
 
 
 
 
 
 
 
81

 
(427
)
Reclassification due to allowance for credit losses recorded during the period
80

 
 
 
 
 
 
 
(13
)
 
67

Impact of net unrealized investment (gains) losses on DAC, DSI, VOBA and reinsurance recoverables
 
 
419

 
 
 
 
 
(90
)
 
329

Impact of net unrealized investment (gains) losses on future policy benefits, policyholders’ account balances and reinsurance payables
 
 
 
 
62

 
 
 
(15
)
 
47

Impact of net unrealized investment (gains) losses on policyholders’ dividends
 
 
 
 
 
 
132

 
(28
)
 
104

Balance, March 31, 2020
$
43,489

 
$
(1,166
)
 
$
(2,847
)
 
$
(3,234
)
 
$
(9,207
)
 
$
27,035

__________
(1)
Includes cash flow hedges. See Note 5 for information on cash flow hedges.
(2)
Includes net unrealized gains (losses) for which an OTTI loss had been previously recognized.

12. EARNINGS PER SHARE
 

59

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

A reconciliation of the numerators and denominators of the basic and diluted per share computations of Common Stock based on the consolidated earnings of Prudential Financial for the periods indicated, is as follows:
 
Three Months Ended March 31,
 
2020
 
2019
 
Income
 
Weighted
Average
Shares
 
Per Share
Amount
 
Income
 
Weighted
Average
Shares
 
Per Share
Amount
 
(in millions, except per share amounts)
Basic earnings per share
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(270
)
 
 
 
 
 
$
937

 
 
 
 
Less: Income (loss) attributable to noncontrolling interests
1

 
 
 
 
 
5

 
 
 
 
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards
5

 
 
 
 
 
10

 
 
 
 
Net income (loss) attributable to Prudential Financial available to holders of Common Stock
$
(276
)
 
397.0

 
$
(0.70
)
 
$
922

 
409.2

 
$
2.25

Effect of dilutive securities and compensation programs
 
 
 
 
 
 
 
 
 
 
 
Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic
$
5

 
 
 
 
 
$
10

 
 
 
 
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted
5

 
 
 
 
 
10

 
 
 
 
Stock options
 
 
0.0

 
 
 
 
 
1.2

 
 
Deferred and long-term compensation programs
 
 
0.0

 
 
 
 
 
1.1

 
 
Exchangeable Surplus Notes
0

 
0.0

 
 
 
5

 
6.1

 
 
Diluted earnings per share(1)
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to Prudential Financial available to holders of Common Stock
$
(276
)
 
397.0

 
$
(0.70
)
 
$
927

 
417.6

 
$
2.22

__________ 
(1)
For the three months ended March 31, 2020, weighted average shares for basic earnings per share is also used for calculating diluted earnings per share because dilutive shares and dilutive earnings per share are not applicable when a net loss is reported. As a result of the net loss attributable to Prudential Financial available to holders of Common Stock for the three months ended March 31, 2020, all potential stock options and compensation programs were considered antidilutive.

Unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and included in the computation of earnings per share pursuant to the two-class method. Under this method, earnings attributable to Prudential Financial are allocated between Common Stock and the participating awards, as if the awards were a second class of stock. During periods of net income available to holders of Common Stock, the calculation of earnings per share excludes the income attributable to participating securities in the numerator and the dilutive impact of these securities from the denominator. In the event of a net loss available to holders of Common Stock, undistributed earnings are not allocated to participating securities and the denominator excludes the dilutive impact of these securities as they do not share in the losses of the Company. Undistributed earnings allocated to participating unvested share-based payment awards for the three months ended March 31, 2020 and 2019, as applicable, were based on 5.1 million and 4.6 million of such awards, respectively, weighted for the period they were outstanding.
 
Stock options and shares related to deferred and long-term compensation programs that are considered antidilutive are excluded from the computation of diluted earnings per share. Stock options are considered antidilutive based on application of the treasury stock method or in the event of a net loss available to holders of Common Stock. Shares related to deferred and long-term compensation programs are considered antidilutive in the event of a net loss available to holders of Common Stock. For the periods indicated, the number of stock options and shares related to deferred and long-term compensation programs that were considered antidilutive and were excluded from the computation of diluted earnings per share, weighted for the portion of the period they were outstanding, are as follows:



60

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
Three Months Ended March 31,
 
2020
 
2019
 
Shares
 
Exercise Price
Per Share
 
Shares
 
Exercise Price
Per Share
 
(in millions, except per share amounts, based on weighted average)
Antidilutive stock options based on application of the treasury stock method
2.3

 
$
87.62

 
1.1

 
$
103.47

Antidilutive stock options due to net loss available to holders of Common Stock
0.9

 
 
 
0.0

 
 
Antidilutive shares based on application of the treasury stock method
0.2

 
 
 
0.0

 
 
Antidilutive shares due to net loss available to holders of Common Stock
1.7

 
 
 
0.0

 
 
Total antidilutive stock options and shares
5.1

 
 
 
1.1

 
 

In September 2009, the Company issued $500 million of surplus notes with an interest rate of 5.36% per annum which were exchangeable at the option of the note holders for shares of Common Stock. In August 2019, as a result of the note holders’ exercise of the exchange option, the Company issued approximately 6.2 million shares of Common Stock at an exchange rate equal to 12.3877 shares of Common Stock per each $1,000 principal amount of surplus notes. The Company’s obligations under the surplus notes are now satisfied. In calculating diluted earnings per share under the if-converted method, for the three months ended March 31, 2019, the potential shares that would be issued assuming a hypothetical exchange, weighted for the period the notes were outstanding, are added to the denominator, and the related interest expense, net of tax, is excluded from the numerator, if the overall effect is dilutive.

13. SEGMENT INFORMATION
 
Segments
 
The Company’s principal operations are comprised of PGIM (the Company’s global investment management business), the U.S. Businesses (consisting of the U.S. Workplace Solutions, U.S. Individual Solutions, and Assurance IQ divisions), the International Businesses, the Closed Block division, and the Company’s Corporate and Other operations. The U.S. Workplace Solutions division consists of the Retirement and Group Insurance businesses, the U.S. Individual Solutions division consists of the Individual Annuities and Individual Life businesses, and the Assurance IQ division consists of the Assurance IQ business. In October 2019, the Company completed the acquisition of Assurance IQ, LLC (“Assurance IQ”), a leading consumer solutions platform that offers a range of solutions that help meet consumers’ financial needs. The Closed Block division is accounted for as a divested business that is reported separately from the Divested and Run-off Businesses that are included in Corporate and Other. Divested and Run-off Businesses are comprised of businesses that have been, or will be, sold or exited, including businesses that have been placed in wind down status that do not qualify for “discontinued operations” accounting treatment under generally accepted accounting principles in the United States of America (“U.S. GAAP”). The Company’s Corporate and Other operations include corporate items and initiatives that are not allocated to business segments and businesses that have been or will be divested or placed in run-off, excluding the Closed Block division.

Adjusted Operating Income
 
The Company analyzes the operating performance of each segment using “adjusted operating income.” Adjusted operating income does not equate to “Income (loss) before income taxes and equity in earnings of operating joint ventures” or “Net income (loss)” as determined in accordance with U.S. GAAP but is the measure of segment profit or loss used by the Company’s chief operating decision maker to evaluate segment performance and allocate resources, and consistent with authoritative guidance, is the measure of segment performance presented below. Adjusted operating income is calculated by adjusting each segment’s “Income (loss) before income taxes and equity in earnings of operating joint ventures” for the following items:

Realized investment gains (losses), net, and related adjustments;
Charges related to realized investment gains (losses), net;
Market experience updates;
Divested and Run-off Businesses;
Other adjustments; and
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests.
 

61

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

These items are important to an understanding of overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and the Company’s definition of adjusted operating income may differ from that used by other companies. The Company, however, believes that the presentation of adjusted operating income as measured for management purposes enhances the understanding of results of operations by highlighting the results from ongoing operations and the underlying profitability factors of its businesses. For additional information on these reconciling items, see Note 22 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
 
Reconciliation of adjusted operating income to net income (loss)

The table below reconciles “Adjusted operating income before income taxes” to “Income (loss) before income taxes and equity in earnings of operating joint ventures”:
 
 
Three Months Ended
March 31,
 
2020
 
2019
Adjusted operating income before income taxes by segment:
(in millions)
PGIM
$
164

 
$
214

U.S. Businesses:
 
 
 
U.S. Workplace Solutions division:
 
 
 
Retirement
245

 
251

Group Insurance
44

 
53

Total U.S. Workplace Solutions division
289

 
304

U.S. Individual Solutions division:
 
 
 
Individual Annuities(1)
373

 
472

Individual Life
(20
)
 
105

Total U.S. Individual Solutions division
353

 
577

Assurance IQ division(2):
 
 
 
Assurance IQ
(23
)
 
0

Total Assurance IQ division
(23
)
 
0

Total U.S. Businesses
619

 
881

International Businesses
751

 
922

Corporate and Other
(342
)
 
(412
)
Total segment adjusted operating income before income taxes
1,192

 
1,605

Reconciling items:
 
 
 
Realized investment gains (losses), net, and related adjustments(3)
105

 
(612
)
Charges related to realized investment gains (losses), net
(803
)
 
25

Market experience updates(4)
(947
)
 
0

Divested and Run-off Businesses:
 
 
 
Closed Block division
(1
)
 
(19
)
Other Divested and Run-off Businesses
80

 
174

Other adjustments(5)
45

 
0

Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests
(9
)
 
(33
)
Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures
$
(338
)
 
$
1,140


________
(1)
Individual Annuities segment results reflect DAC as if the individual annuity business is a stand-alone operation. The elimination of intersegment costs capitalized in accordance with this policy is included in consolidating adjustments within Corporate and Other operations.
(2)
Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
(3)
Prior period amounts have been updated to conform to current period presentation.

62

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(4)
Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company had historically recognized these impacts in adjusted operating income.
(5)
Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration.

Reconciliation of select financial information

The tables below present certain financial information for the Company’s segments and its Corporate and Other operations, including assets by segment and revenues by segment on an adjusted operating income basis, and the reconciliation of the segment totals to amounts reported in the Consolidated Financial Statements.
 
 
March 31,
2020
 
December 31,
2019
Assets by segment:
(in millions)
PGIM
$
47,099

 
$
47,655

U.S. Businesses:
 
 
 
U.S. Workplace Solutions division:
 
 
 
Retirement
187,992

 
198,153

Group Insurance
43,706

 
43,712

Total U.S. Workplace Solutions division
231,698

 
241,865

U.S. Individual Solutions division:
 
 
 
Individual Annuities
179,366

 
189,040

Individual Life
92,364

 
96,072

Total U.S. Individual Solutions division
271,730

 
285,112

Assurance IQ division(1):
 
 
 
Assurance IQ
2,618

 
2,639

Total Assurance IQ division
2,618

 
2,639

Total U.S. Businesses
506,046

 
529,616

International Businesses
243,012

 
241,071

Corporate and Other
17,673

 
16,883

Closed Block division
59,882

 
61,327

Total assets per Unaudited Interim Consolidated Financial Statements
$
873,712

 
$
896,552

 __________
(1)
Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.


63

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
Three Months Ended
March 31,
 
2020
 
2019
Revenues on an adjusted operating income basis:
(in millions)
PGIM
$
778

 
$
870

U.S. Businesses:
 
 
 
U.S. Workplace Solutions division:
 
 
 
Retirement
2,437

 
2,639

Group Insurance
1,424

 
1,441

Total U.S. Workplace Solutions division
3,861

 
4,080

U.S. Individual Solutions division:
 
 
 
Individual Annuities
1,148

 
1,235

Individual Life
1,530

 
1,482

Total U.S. Individual Solutions division
2,678

 
2,717

Assurance IQ division(1):
 
 
 
Assurance IQ
60

 
0

Total Assurance IQ division
60

 
0

Total U.S. Businesses
6,599

 
6,797

International Businesses
6,162

 
6,152

Corporate and Other
(205
)
 
(171
)
Total revenues on an adjusted operating income basis
13,334


13,648

Reconciling items:
 
 
 
Realized investment gains (losses), net, and related adjustments(2)
(558
)
 
(209
)
Charges related to realized investment gains (losses), net
(62
)
 
(72
)
Market experience updates(3)
(332
)
 
0
Divested and Run-off Businesses:
 
 
 
Closed Block division
677

 
1,374

Other Divested and Run-off Businesses
359

 
388

Other adjustments(4)
58

 
0

Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests
(12
)
 
(38
)
Total revenues per Unaudited Interim Consolidated Financial Statements
$
13,464

 
$
15,091


__________
(1)
Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
(2)
Prior period amounts have been updated to conform to current period presentation.
(3)
Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company had historically recognized these impacts in adjusted operating income.
(4)
Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration.

Intersegment revenues

Management has determined the intersegment revenues with reference to market rates. Intersegment revenues are eliminated in consolidation in Corporate and Other operations. The PGIM segment revenues include intersegment revenues, primarily consisting of asset-based management and administration fees, as follows: 
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
PGIM segment intersegment revenues
$
217

 
$
180


 
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.


64

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Asset management and service fees

The table below presents asset management and service fees, predominantly related to investment management activities, for the periods indicated:
 
 
Three Months Ended March 31,
 
2020
 
2019
 
(in millions)
Asset-based management fees
$
875

 
$
843

Performance-based incentive fees
14

 
35

Other fees
144

 
138

Total asset management and service fees
$
1,033

 
$
1,016




14. COMMITMENTS AND CONTINGENT LIABILITIES
 
Commitments and Guarantees
 
Commercial Mortgage Loan Commitments
 
March 31,
2020
 
December 31,
2019
 
(in millions)
Total outstanding mortgage loan commitments
$
2,137

 
$
2,129

Portion of commitment where prearrangement to sell to investor exists
$
837

 
$
751


 
In connection with the Company’s commercial mortgage operations, it originates commercial mortgage loans. Commitments for loans that will be held for sale are recognized as derivatives and recorded at fair value. In certain of these transactions, the Company pre-arranges that it will sell the loan to an investor, including to government sponsored entities as discussed below, after the Company funds the loan. The above amount includes unfunded commitments that are not unconditionally cancellable. For related credit exposure, there was a reduction to the allowance for credit losses of less than $1 million for the three months ended March 31, 2020.
 
Commitments to Purchase Investments (excluding Commercial Mortgage Loans)
 
March 31,
2020
 
December 31,
2019
 
(in millions)
Expected to be funded from the general account and other operations outside the separate accounts
$
6,729

 
$
7,372

Expected to be funded from separate accounts
$
124

 
$
49



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 no related charges for credit losses for the three months ended March 31, 2020.


65

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 Indemnification of Securities Lending and Securities Repurchase Transactions
 
March 31,
2020
 
December 31,
2019
 
(in millions)
Indemnification provided to certain clients for securities lending and securities repurchase transactions(1)
$
5,244

 
$
5,071

Fair value of related collateral associated with above indemnifications(2)
$
5,360

 
$
5,204

Accrued liability associated with guarantee
$
0

 
$
0


__________ 
(1)
Includes $39 million and $38 million related to securities repurchase transactions as of March 31, 2020 and December 31, 2019, respectively.
(2)
Includes $38 million and $37 million related to securities repurchase transactions as of March 31, 2020 and December 31, 2019, respectively.

In the normal course of business, the Company may facilitate securities lending or securities repurchase transactions on behalf of certain client accounts (collectively, “the accounts”). In certain of these arrangements, the Company has provided an indemnification to the accounts to hold them harmless against losses caused by counterparty (i.e., borrower) defaults associated with such transactions facilitated by the Company. In securities lending transactions, collateral is provided by the counterparty to the accounts at the inception of the transaction in an amount at least equal to 102% of the fair value of the loaned securities and the collateral is maintained daily to equal at least 102% of the fair value of the loaned securities. In securities repurchase transactions, collateral is provided by the counterparty to the accounts at the inception of the transaction in an amount at least equal to 95% of the fair value of the securities subject to repurchase and the collateral is maintained daily to equal at least 95% of the fair value of the securities subject to repurchase. The Company is only at risk if the counterparty to the transaction defaults and the value of the collateral held is less than the value of the securities loaned to, or subject to repurchase from, such counterparty. The Company believes the possibility of any payments under these indemnities is remote.
 
Credit Derivatives Written
 
As discussed further in Note 5, the Company writes credit derivatives under which the Company is obligated to pay the counterparty the referenced amount of the contract and receive in return the defaulted security or similar security.
 
Guarantees of Asset Values
 
March 31,
2020
 
December 31,
2019
 
(in millions)
Guaranteed value of third-parties’ assets
$
80,984

 
$
80,009

Fair value of collateral supporting these assets
$
83,568

 
$
81,604

Asset (liability) associated with guarantee, carried at fair value
$
1

 
$
1


 
Certain contracts underwritten by the Retirement segment include guarantees related to financial assets owned by the guaranteed party. These contracts are accounted for as derivatives and carried at fair value. The collateral supporting these guarantees is not reflected on the Unaudited Interim Consolidated Statements of Financial Position.
 
Indemnification of Serviced Mortgage Loans
 
March 31,
2020
 
December 31,
2019
 
(in millions)
Maximum exposure under indemnification agreements for mortgage loans serviced by the Company
$
2,154

 
$
2,113

First-loss exposure portion of above
$
633

 
$
622

Accrued liability associated with guarantees
$
17

 
$
19


 
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

66

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

share of losses incurred generally varies from 4% to 20% of the loan balance, and is typically based on a first-loss exposure for a stated percentage of the loan balance, plus a shared exposure with the government sponsored entity for any losses in excess of the stated first-loss percentage, subject to a contractually specified maximum percentage. The Company determines the liability related to this exposure using historical loss experience, and the size and remaining life of the asset. The Company serviced $17,243 million and $16,878 million of mortgages subject to these loss-sharing arrangements as of March 31, 2020 and December 31, 2019, respectively, all of which are collateralized by first priority liens on the underlying multi-family residential properties. As of March 31, 2020, these mortgages had a weighted-average debt service coverage ratio of 1.92 times and a weighted-average loan-to-value ratio of 62%. As of December 31, 2019, these mortgages had a weighted average debt service coverage ratio of 1.88 times and a weighted-average loan-to-value ratio of 61%. The Company had no losses related to indemnifications that were settled for both the three months ended March 31, 2020 and 2019. For related credit exposure, there was a reduction to the allowance for credit losses of $1 million for the three months ended March 31, 2020.
 
Other Guarantees
 
March 31,
2020
 
December 31,
2019
 
(in millions)
Other guarantees where amount can be determined
$
54

 
$
55

Accrued liability for other guarantees and indemnifications
$
0

 
$
0


 
The Company is also subject to other financial guarantees and indemnity arrangements. The Company has provided indemnities and guarantees related to acquisitions, dispositions, investments and other transactions that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential obligation is subject to contractual limitations, while in other cases such limitations are not specified or applicable. Included above reflects $12 million for both March 31, 2020 and December 31, 2019, respectively, of yield maintenance guarantees related to certain investments the Company sold. The Company does not expect to make any payments on these guarantees and is not carrying any liabilities associated with these guarantees.
 
Since certain of these obligations are not subject to limitations, it is not possible to determine the maximum potential amount due under these guarantees. The accrued liabilities identified above do not include retained liabilities associated with sold businesses. 

Assurance IQ Contingent Consideration Liability

On October 10, 2019, the Company completed its acquisition of Assurance IQ, a leading consumer solutions platform that offers a range of solutions that help meet consumers’ financial needs. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Pursuant to the merger agreement, contingent consideration as well as additional compensation awards are payable in 2023 in a mix of approximately 25% cash and 75% Prudential Financial Common Stock, contingent upon Assurance IQ’s achievement of certain targets for gross revenues net of associated selling expenses (“Variable Profits”) over the period from January 1, 2020 through December 31, 2022 as follows:
If Variable Profits are less than $900 million, no additional amount is payable.
If Variable Profits are greater than $1,300 million, an additional amount of $1,150 million is payable.
If Variable Profits are greater than $900 million but less than or equal to $1,300 million, an additional amount is payable equal to the product of (i) the quotient of (A) an amount equal to (1) Variable Profits achieved minus (2) $900 million divided by (B) $400 million and (ii) $1,150 million.

Payment of the additional amount may be accelerated if the Company violates certain provisions of the merger agreement requiring it to take or refrain from taking certain actions, including with respect to the management and operation of Assurance IQ.

The contingent consideration liability referred to above is reported at fair value. Fair value is determined based on the present value of expected payments under the arrangement described above, using an internally developed option pricing model based on a number of assumptions, including certain unobservable assumptions for future Variable Profits and the future price of Prudential Financial Common Stock. The fair value of the liability is updated each reporting period, with changes in fair value reported within “Other income.” The fair value of the contingent consideration liability was $47 million as of March 31, 2020 and $105 million

67

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

as of December 31, 2019 (see Note 6 for additional information). The stock-based component of contingent consideration impacts the share count for purposes of calculating the Company’s diluted earnings per share when Assurance IQ’s actual Variable Profits achieved as of the end of the reporting period is in excess of $900 million, as if the contingent consideration performance period ended on the applicable reporting date. The number of shares issued as part of the contingent consideration payable in 2023 will be based on a $83.71 price per share.

Contingent Liabilities
 
On an ongoing basis, the Company and its regulators review its operations including, but not limited to, sales and other customer interface procedures and practices, and procedures for meeting obligations to its customers and other parties. These reviews may result in the modification or enhancement of processes or the imposition of other action plans, including concerning management oversight, sales and other customer interface procedures and practices, and the timing or computation of payments to customers and other parties. In certain cases, if appropriate, the Company may offer customers or other parties remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.
 
The Company is subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment of unclaimed or abandoned funds, and is subject to audit and examination for compliance with these requirements. For additional discussion of these matters, see “Litigation and Regulatory Matters” below.
 
It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be materially affected as a result of payments in connection with the matters discussed above or other matters depending, in part, upon the results of operations or cash flow for such period. Management believes, however, that ultimate payments in connection with these matters, after consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on the Company’s financial position.

Litigation and Regulatory Matters
The Company is subject to legal and regulatory actions in the ordinary course of its businesses. Pending legal and regulatory actions include proceedings relating to aspects of the Company’s businesses and operations that are specific to it and proceedings that are typical of the businesses in which it operates, including in both cases businesses that have been either divested or placed in wind down status. Some of these proceedings have been brought on behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. The outcome of litigation or a regulatory matter, and the amount or range of potential loss at any particular time, is often inherently uncertain.
The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established but the matter, if potentially material, is disclosed, including matters discussed below. The Company estimates that as of March 31, 2020, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is less than $250 million. Any estimate is not an indication of expected loss, if any, or the Company’s maximum possible loss exposure on such matters. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.
The following discussion of litigation and regulatory matters provides an update of those matters discussed in Note 23 to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and should be read in conjunction with the complete descriptions provided in the Form 10-K.
Securities Litigation
City of Warren v. PFI, et al

In March 2020, the court issued an order consolidating this action with Donald P. Crawford v. PFI, et al. under the caption In re Prudential Financial, Inc. Securities Litigation.

Donald P. Crawford v. PFI, et al.

In March 2020, the court issued an order consolidating this action with City of Warren v. PFI, et al. under the caption In re Prudential Financial, Inc. Securities Litigation. Future updates will be consolidated with the City of Warren action.

68

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


Shareholder Demands

In January 2020, the Board of Directors received a shareholder demand letter containing allegations: (i) of wrongdoing similar to those alleged in the City of Warren and Crawford complaints; and (ii) that certain of the Company’s current and former directors and executive officers breached their fiduciary duties of loyalty, due care and candor. The demand letter requests that the Board of Directors investigate and commence legal proceedings against the named individuals to recover for the Company’s benefit the damages purportedly sustained by the Company as a result of the alleged breaches. In February 2020, the Board of Directors authorized the creation of a special committee to investigate the allegations set forth in the shareholder demand letter. In April 2020, the Company received additional shareholder demands raising allegations similar to those contained in the January 2020 demand, and may be subject prospectively to additional activity relating to these matters.

Summary

The Company’s litigation and regulatory matters are subject to many uncertainties, and given their complexity and scope, their outcome cannot be predicted. It is possible that the Company’s results of operations or cash flow in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters depending, in part, upon the results of operations or cash flow for such period. In light of the unpredictability of the Company’s litigation and regulatory matters, it is also possible that in certain cases an ultimate unfavorable resolution of one or more pending litigation or regulatory matters could have a material adverse effect on the Company’s financial position. Management believes, however, that, based on information currently known to it, the ultimate outcome of all pending litigation and regulatory matters, after consideration of applicable reserves and rights to indemnification, is not likely to have a material adverse effect on the Company’s financial position.

15. SUBSEQUENT EVENTS

On April 10, 2020, Prudential International Insurance Holdings, Ltd. (“PIIH”), a subsidiary of Prudential Financial, entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with KB Financial Group Inc. (the “Buyer”), pursuant to which PIIH has agreed to sell to the Buyer all of the issued and outstanding capital stock of The Prudential Life Insurance Company of Korea, Ltd. (“POK”), the Company’s Korean insurance business, for cash consideration of approximately 2.3 trillion Korean Won, equal to approximately U.S. $1.9 billion at then current exchange rates, to be paid at closing.
The Share Purchase Agreement contains customary warranties and covenants of PIIH and the Buyer. The Company expects the transaction to close by the end of 2020, subject to regulatory approval and the satisfaction of customary closing conditions.
POK’s 2019 and first quarter 2020 pre-tax adjusted operating income were $228 million and $53 million, respectively. In the second quarter of 2020, the Company will report its investment in POK as “held for sale” and expects to recognize a $600 million after-tax charge to earnings to adjust the book value of POK to the market value reflected in the purchase price. The after-tax charge excludes the impact of currency hedging transactions that the Company expects to settle at transaction closing, the fair value of which was approximately $70 million in assets at March 31, 2020. The ultimate after-tax loss, as well as the settlement value of the hedging transactions, will be based on balances at the closing date and could vary materially from the charge recorded in the second quarter. In addition, upon closing of the transaction, the Company expects to recognize an approximately $100 million tax expense, with an offsetting benefit to AOCI, related to the release of legacy tax balances resulting from prior year changes in tax law.
The Company intends to use the proceeds of the transaction for general corporate purposes.


69


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

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 Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the consolidated financial condition of Prudential Financial, Inc. (“Prudential,” “Prudential Financial,” “PFI,” or “the Company”) as of March 31, 2020, compared with December 31, 2019, and its consolidated results of operations for the three months ended March 31, 2020 and 2019. You should read the following analysis of our consolidated financial condition and results of operations in conjunction with the MD&A, the “Risk Factors” section, and the audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as well as the statements under “Forward-Looking Statements,” the “Risk Factors” section, and the Unaudited Interim Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

70

Table of Contents


Overview

Prudential Financial, a financial services leader with approximately $1.481 trillion of assets under management as of March 31, 2020, has operations primarily in the United States of America (“U.S.”), Asia, Europe and Latin America. Through our subsidiaries and affiliates, we offer a wide array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management. We offer these products and services to individual and institutional customers through one of the largest distribution networks in the financial services industry.

Our principal operations are comprised of PGIM (our global investment management business), our U.S. Businesses (consisting of our U.S. Workplace Solutions, U.S. Individual Solutions, and Assurance IQ divisions), our International Businesses, the Closed Block division, and our Corporate and Other operations. The U.S. Workplace Solutions division consists of our Retirement and Group Insurance businesses, the U.S. Individual Solutions division consists of our Individual Annuities and Individual Life businesses, and the Assurance IQ division consists of our Assurance IQ business. In October 2019, we completed the acquisition of Assurance IQ, LLC (“Assurance IQ”), a leading consumer solutions platform that offers a range of solutions that help meet consumers’ financial needs (see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information). The Closed Block division is accounted for as a divested business that is reported separately from the Divested and Run-off Businesses that are included in Corporate and Other. Divested and Run-off Businesses are comprised of businesses that have been, or will be, sold or exited, including businesses that have been placed in wind down status that do not qualify for “discontinued operations” accounting treatment under generally accepted accounting principles in the United States of America (“U.S. GAAP”). Our Corporate and Other operations include corporate items and initiatives that are not allocated to business segments and businesses that have been or will be divested or placed in run-off, excluding the Closed Block division.

Our strategy centers on our mix of high-quality protection, retirement and investment management businesses which creates growth potential due to earnings diversification and the opportunity to provide customers with integrated cross-business solutions, as well as capital benefits from a balanced risk profile. We are well positioned to meet the needs of customers and tap into significant market opportunities through our U.S. Businesses, PGIM (our investment management business) and our International Businesses.

We attribute financing costs to each segment based on the amount of financing used by each segment, excluding financing costs associated with corporate debt which are reflected in Corporate and Other operations. The net investment income of each segment includes earnings on the amount of capital that management believes is necessary to support the risks of that segment.


COVID-19

During the first quarter of 2020, the outbreak of the 2019 novel coronavirus (“COVID-19”) created extreme stress and disruption in the global economy and financial markets and elevated mortality and morbidity experience for the global population. These events impacted our results of operations in the current period and are expected to drive future impacts to our results of operations. The Company has taken several measures to manage the impacts of this crisis. The actual and expected impacts of these events and other items are included in the following update:
Outlook

PGIM. Our global investment management business, PGIM, is focused on maintaining strong investment performance while leveraging the scale of its approximately $1.3 trillion of assets under management through its distinctive multi-manager model. We expect that earnings across the asset management industry, including PGIM, will be negatively impacted in 2020 by the continued effects of credit spreads widening, lower equity market values, lower transaction volume in private asset classes, and a slowdown in client activity. In addition, our average fee yield has decreased slightly in 2020 due to fee pressures in some strategies and a continued mix shift in our assets under management from public equities to public fixed income. These factors could lead to lower fee-based revenues, incentive fees taking longer to be realized and additional losses in our strategic investing portfolio. Nevertheless, we believe PGIM’s uniquely diversified global platform is well positioned to be resilient in the face of market and industry headwinds. Underpinning our growth strategy is our ability to continue to deliver robust investment performance, and to attract and retain high-caliber investment talent.
U.S. Businesses:
U.S. Workplace Solutions. In our Retirement business, we expect that account values in our full-service business will be impacted by market volatility and by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which

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provides qualified individuals the ability to withdraw from defined contribution plans up to $100,000 penalty-free, with the withdrawal taxed over a three-year period (unless otherwise elected by the individual). Market conditions are also likely to have an impact on Retirement sales volume. We continue to maintain pricing discipline to ensure we are achieving appropriate returns in the current market, including in our funded pension risk transfer business, where we have seen a slowdown in the pipeline as a result of the impact of these market conditions on pension plan funding levels. Given many of the products in our institutional investment products business assume longevity risk, elevated levels of mortality resulting from COVID-19 may result in a higher level of underwriting gains in this business. In our Group Insurance business, we expect COVID-19 to drive elevated levels of mortality resulting in increased life insurance claims in the near-term. In both Retirement and Group Insurance, we believe over time COVID-19 may contribute to heightened interest in the solutions we offer to help improve the financial wellness of individuals at the workplace; however, we expect near-term revenue growth prospects to be slowed by the impact of social distancing on new business sales and the impact of employee financial hardships on utilization of workplace benefits.

U.S. Individual Solutions. In our Individual Life insurance business, we expect COVID-19 to drive elevated levels of mortality, resulting in increased life insurance claims in the near-term. In our Individual Annuities business, we expect account values and fee income will be impacted by market volatility. Across our Individual Solutions businesses, we have taken pricing and product actions to ensure we realize appropriate returns for the current economic environment, and to diversify our product mix to further limit our sensitivity to interest rates, while maintaining a solid value proposition for our customers. In addition, while our distribution platforms include a suite of digital, hybrid advisory, and in-person advisory options, mandated social distancing has limited in-person engagement between customers and advisors. Collectively, we expect the product actions we have taken and the constrained distribution environment to adversely impact our sales prospects in the near-term. Sales to employees of our Workplace Solutions clients may also be delayed as a result of current economic conditions, as we encourage employees to prioritize workplace benefits to regain or retain their financial wellness. We continue to expect to offer our Individual Solutions products on the Assurance IQ platform over time, beginning with an Individual Life product offering added in the second quarter.

Assurance IQ. We expect the impacts of COVID-19 on our Assurance IQ business to be limited, as this business does not have direct exposure to capital markets conditions or mortality, and its distribution is not dependent on in-person engagement with consumers; however, consumer financial hardships created by the current economic conditions could negatively impact persistency and expected sales levels.
International Businesses. Our International Businesses remain focused on meeting customers’ protection and financial needs and maintaining the underlying strength of our distribution channels. With the implementation of social distancing protocols globally, in-person engagement between customers and advisors will be limited in the near-term within both our captive agent and third-party distribution channels. Reflective of the disruptions in the global financial markets, certain pricing and product actions have been implemented and we expect we will take additional actions as needed as we move forward to ensure we maintain appropriate returns, while maintaining a solid value proposition for our customers. Collectively, we expect the constrained distribution environment and potential product actions will adversely impact our sales prospects in the near-term. We also expect an increased level of claims in the near-term as a result of elevated levels of mortality from COVID-19. We believe over time COVID-19 may contribute to heightened interest in protection products, particularly the death protection products that are at the core of our needs-based selling approach.

Corporate and Other Operations. In our Corporate & Other operations, the Company will likely see a short-term increase in medical and disability claims associated with our active employee population resulting from COVID-19. These plans are self-insured (“pay as you go”), where 100% of claims are incurred and paid out of the Company’s Corporate & Other operations. Also, the Company is providing reimbursement for certain dependent care costs for eligible employees. Like medical and disability, these costs will be borne by the Company’s Corporate and Other operations. Lastly, if equity market and interest rate declines are sustained through December 31, 2020, it will likely result in higher expenses in the future associated with the Company’s pension and post retirement plans due to lower than expected returns on plan assets and increases in plan obligations.
Results of Operations. For the three months ended March 31, 2020 we reported a net loss of $(271) million, as unfavorable financial market conditions had a substantial negative effect on the reported results of our businesses. See “Results of Operations” and “Segment Results of Operations” for a discussion of first quarter results.

Liquidity. As of March 31, 2020, we had $5,293 million in highly liquid assets at Prudential Financial. During the first quarter we took several steps to proactively manage liquidity, including issuing $1.5 billion in senior debt in part to pre-fund 2020 and 2021 maturities. We temporarily suspended Common Stock repurchases beginning April 1, 2020 under our existing repurchase authorization, after repurchasing $500 million of shares of Prudential Financial’s Common Stock in

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the first quarter of 2020. We will continue to evaluate the resumption of share repurchases under our existing Board authorization for 2020. The impact of COVID-19 and related market dislocations could strain our existing liquidity and cause us to increase the use of our alternative sources of liquidity, which could result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings or ratings outlooks. See “Liquidity and Capital Resources—Liquidity” for a discussion of our liquidity.

Capital Resources. As of March 31, 2020, all of our significant insurance subsidiaries maintained capital levels consistent with their ratings targets. However, market conditions could negatively impact the statutory capital of our insurance companies and constrain our overall capital flexibility. Continued adverse market conditions could require us to take additional management actions for our insurance subsidiaries to maintain capital consistent with their ratings objectives, which may include redeploying financial resources from internal sources or, if markets continue to decline, using available external sources of capital or seeking additional sources. See “Liquidity and Capital Resources—Capital” for a discussion of our capital resources.

Investment Portfolio. Net unrealized gains (losses) on fixed maturity investments (excluding securities classified as trading) were a net unrealized gain of $40,552 million as of March 31, 2020, compared to a net unrealized gain of $44,891 million as of December 31, 2019. Gross unrealized gains increased from $46,206 million as of December 31, 2019 to $47,677 million as of March 31, 2020 and gross unrealized losses increased from $1,315 million to $7,125 million for the same period. The increase in gross unrealized losses was primarily due to credit spread widening and liquidity concerns. The continued impact of COVID-19 on the global economy and corporate credit may result in credit migration and losses in our investment portfolio. Due to the highly uncertain nature of these conditions, it is not possible to estimate the overall impacts at this time. The sectors most impacted by the COVID-19 crisis include energy, consumer cyclical and retail related investments (see “—General Account Investments” for additional information). Specific to our equity investments in LPs/LLCs where we apply the equity method, we use financial information provided by the investee, generally on a one to three-month lag. As such, as a result of the lag, any unfavorable impacts from these investments that were not recorded in the current period will be reflected in the next reporting period.

Sales and Flows. First quarter sales and flows were not significantly impacted by COVID-19. See “Segment Results of Operations” for a discussion of sales and flows in each of our segments.

Underwriting Results. First quarter mortality experience was not significantly impacted by COVID-19. See “Segment Results of Operations” for a discussion of mortality experience in each of our segments.

We expect COVID-19 could ultimately have an adverse impact on our underwriting results of approximately $200 million in the aggregate across our businesses, with more than half of this impact being in the second quarter of 2020. This estimate gives effect to offsetting underwriting benefits and expenses, assumes 100,000 deaths across the total U.S. population and 40,000 deaths in Japan, and adjusts for factors such as age, geographic location, and insured versus uninsured populations.

Expenses. We expect higher expenses of approximately $230 million in 2020 from costs associated with COVID-19, with more than half of this impact being in the second quarter of 2020. These higher expenses are primarily related to agent compensation, as well as technology and third-party vendor capabilities related to remote work functionality and protecting our employees’ health. We also expect some offsets to these higher expenses from lower travel, meeting, meal and entertainment costs. Expenses incurred for the first quarter of 2020 were not significantly impacted by COVID-19.

We have initiated a number of customer accommodations in response to the COVID-19 pandemic, including in some cases extending grace periods for premium payments, expediting claim payments and withdrawal requests, waiving certain claims payment requirements, waiving certain transaction fees, and wiring funds at the Company’s expense.

Risk Management. Prudential has a robust risk management framework that seeks to ensure we can fulfill our customer, regulatory, and other stakeholder obligations under a range of stress scenarios by maintaining the appropriate balance between the Company’s resources and risks. We evaluate the Company’s exposure to stress under four lenses (economic, STAT, GAAP, and liquidity).

Our risk management framework incorporates severe to very severe stresses across equities, interest rates, credit migration and defaults, currencies and pandemics. This framework includes a specific “pandemic and sell-off” scenario with a mortality calamity (1.5 extra deaths per 1,000 lives in the first year) based on a modern-day interpretation of the 1918 Spanish Flu experience that is aligned with most regulatory frameworks. The stress scenario assumes an even distribution of increased mortality across the population, while current COVID-19 mortality is sharply skewed toward older ages. As the COVID-19 event continues to unfold, we continue to update our analysis and take management actions in response to

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this specific event. As of March 31, 2020 the COVID-19 pandemic has not reached the most severe levels included in the Company’s stress testing.

In addition, we expect the impact of COVID-19-related claims to be moderated by the balance between our mortality exposure (such as in our individual and group life businesses) and our longevity exposure (such as in our retirement business).

Risk Factors. The COVID-19 pandemic has adversely impacted our results of operations, financial position, investment portfolio, new business opportunities and operations, and these impacts are expected to continue. For additional information on the risks to our business posed by the COVID-19 pandemic, see “Risk Factors.”

Business Continuity. One of the main impacts of the COVID-19 pandemic has been executing our business continuity protocols to ensure our employees are safe and able to serve our customers. This included effectively transitioning the vast majority of our employees to remote work arrangements.

We believe all of our businesses can sustain remote work and social distancing for an indefinite period while ensuring that critical business operations are sustained. In addition, we are managing COVID-19-related impacts on third-party provided services, and do not anticipate significant interruption in critical operations.

CARES Act and Other Regulatory Developments. In March, 2020 Congress enacted the CARES Act, which provides $2 trillion in economic stimulus to taxpayers, small businesses, and corporations through various grant and loan programs, tax provisions and regulatory relief. We are analyzing the CARES Act and its potential impact on Prudential, and implementing operational changes necessary in our Retirement, Annuities and PGIM businesses to accommodate the CARES Act.

Other governments and regulators, including the Japan FSA, the NAIC and state insurance regulators, have implemented, or are considering, a number of actions in response to the crisis, including delaying implementation of certain regulatory changes, temporarily waiving certain regulatory requirements and requiring or requesting insurers to waive premium payments and policy provisions and exclusions for certain periods of time.

The Company is not aware of any new or proposed government mandates that could materially impact the Company’s solvency or liquidity position.

Impact of a Low Interest Rate Environment

As a global financial services company, market interest rates are a key driver of our results of operations and financial condition. Changes in interest rates can affect our results of operations and/or our financial condition in several ways, including favorable or adverse impacts to:
investment-related activity, including: investment income returns, net interest margins, net investment spread results, new money rates, mortgage loan prepayments and bond redemptions;
insurance reserve levels, market experience true-ups and amortization of both deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”);
customer account values, including their impact on fee income;
fair value of, and possible impairments on, intangible assets such as goodwill;
product offerings, design features, crediting rates and sales mix; and
policyholder behavior, including surrender or withdrawal activity.

For more information on interest rate risks, see the “Risk Factors” section and “Risk Factors—Market Risk” included in our Annual Report on Form 10-K for the year ended December 31, 2019.

See below for discussions related to the current interest rate environments in our two largest markets, the U.S. and Japan; the composition of our insurance liabilities and policyholder account balances; and the hypothetical impacts to our investment results if these interest rate environments are sustained.
U.S. Operations excluding the Closed Block Division
 
Interest rates in the U.S. have experienced a sustained period of historically low levels with certain benchmarks reaching significant lows in the first quarter of 2020. While market conditions and events make uncertain the timing, amount and impact of any monetary policy decisions by the Federal Reserve, changes in interest rates may impact our reinvestment yields, primarily for our investments in fixed maturity securities and commercial mortgage loans. As interest rates decline, our reinvestment yield

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may be below our overall portfolio yield, resulting in an unfavorable impact to earnings. Conversely, as interest rates rise, our reinvestment yield may exceed the overall portfolio yield resulting in a favorable impact to earnings.

For the general account supporting our U.S. Individual Solutions division, U.S. Workplace Solutions division and our Corporate and Other operations, we estimate annual principal payments and prepayments that we would be required to reinvest to be approximately 6.7% of the fixed maturity security and commercial mortgage loan portfolios through 2021. The portion of the general account attributable to these operations has approximately $221 billion of such assets (based on net carrying value) as of March 31, 2020. The average portfolio yield for fixed maturity securities and commercial mortgage loans is approximately 4.2% as of March 31, 2020.

Included in the $221 billion of fixed maturity securities and commercial mortgage loans are approximately $143 billion that are subject to call or redemption features at the issuer’s option and have a weighted average interest rate of approximately 4%. Of this $143 billion, approximately 57% contain provisions for prepayment premiums. If we reinvest scheduled payments or prepayments (not subject to a prepayment fee) at rates below the current portfolio yield, including in some cases at rates below those guaranteed under our insurance contracts, future operating results will be impacted to the extent we do not, or are unable to, reduce crediting rates on in-force blocks of business, or effectively utilize other asset/liability management strategies described below, in order to maintain current net interest margins.

The following table sets forth the insurance liabilities and policyholder account balances of our U.S. Operations excluding the Closed Block Division, by type, for the date indicated:
 
As of
March 31, 2020
 
(in billions)
Long-duration insurance products with fixed and guaranteed terms
$
156

Contracts with adjustable crediting rates subject to guaranteed minimums
59

Participating contracts where investment income risk ultimately accrues to contractholders
15

Total
$
230


The $156 billion above relates to long-duration products such as group annuities, structured settlements and other insurance products that have fixed and guaranteed terms, for which underlying assets may have to be reinvested at interest rates that are lower than portfolio rates. We seek to mitigate the impact of a prolonged low interest rate environment on these contracts through asset/liability management, as discussed further below.

The $59 billion above relates to contracts with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. Although we may have the ability to lower crediting rates for those contracts above guaranteed minimums, our willingness to do so may be limited by competitive pressures. The following table sets forth the related account values by range of guaranteed minimum crediting rates and the related range of the difference, in basis points (“bps”), between rates being credited to contractholders as of March 31, 2020, 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%
$
0.6

 
$
1.4

 
$
0.5

 
$
0.0

 
$
0.0

 
$
2.5

1.00% - 1.99%
1.0

 
2.8

 
13.3

 
2.5

 
1.0

 
20.6

2.00% - 2.99%
1.3

 
0.9

 
0.5

 
2.7

 
1.2

 
6.6

3.00% - 4.00%
26.1

 
2.2

 
0.1

 
0.2

 
0.2

 
28.8

Greater than 4.00%
0.9

 
0.0

 
0.0

 
0.0

 
0.0

 
0.9

Total(1)
$
29.9

 
$
7.3

 
$
14.4

 
$
5.4

 
$
2.4

 
$
59.4

Percentage of total
50
%
 
13
%
 
24
%
 
9
%
 
4
%
 
100
%
 __________
(1)
Includes approximately $0.79 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity.

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The remaining $15 billion of insurance liabilities and policyholder account balances in these operations relates to participating contracts for which the investment income risk is expected to ultimately accrue to contractholders. The crediting rates for these contracts are periodically adjusted based on the return earned on the related assets.

Assuming a hypothetical scenario where the average 10-year U.S. Treasury rate is 0.70% (which is reasonably consistent with recent rates) for the period from April 1, 2020 through March 31, 2021 (and credit spreads remain unchanged from levels as of March 31, 2020), we estimate that the unfavorable impact to net investment income of reinvesting activities, including scheduled maturities and estimated prepayments of fixed maturities and commercial mortgage and other loans (excluding assets supporting participating contracts) would be between $40 million and $80 million for the period from April 1, 2020 through March 31, 2021.

In order to mitigate the unfavorable impact that a low interest rate environment has on our net interest margins, we employ a proactive asset/liability management program, which includes strategic asset allocation and hedging strategies within a disciplined risk management framework. These strategies seek to match the characteristics of our products, and to closely approximate the interest rate sensitivity of the assets with the estimated interest rate sensitivity of the product liabilities. Our asset/liability management program also helps manage duration gaps, currency and other risks between assets and liabilities through the use of derivatives. We adjust this dynamic process as products change, as customer behavior changes and as changes in the market environment occur. As a result, our asset/liability management process has permitted us to manage the interest rate risk associated with our products through several market cycles. Our interest rate exposure is also mitigated by our business mix, which includes lines of business for which fee-based and insurance underwriting earnings play a more prominent role in product profitability.

Closed Block Division
Substantially all of the $59 billion of general account assets in the Closed Block division support obligations and liabilities relating to the Closed Block policies only. See Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information on the Closed Block.

International Insurance Operations

While our international insurance operations have experienced a low interest rate environment for many years, the current reinvestment yields for certain blocks of business in our international insurance operations are generally lower than the current portfolio yield supporting these blocks of business. In recent years, the Bank of Japan’s monetary policy has resulted in even lower and, at times, negative yields for certain tenors of government bonds. Our international insurance operations employ a proactive asset/liability management program in order to mitigate, to the extent possible, the unfavorable impact that the current interest rate environment has on our net interest margins. In conjunction with this program, we have not purchased negative yielding assets to support the portfolio and we continue to purchase long-term bonds with tenors of 30 years or greater. Additionally, our diverse product portfolio in terms of currency mix and premium payment structure allows us to further mitigate the negative impact from this low interest rate environment. We regularly examine our product offerings and their profitability. As a result, we have repriced certain products, adjusted commissions for certain products and have discontinued sales of other products that do not meet our profit expectations. The impact of these actions and the introduction of certain new products, has resulted in an increase in sales of U.S. dollar-denominated products relative to products denominated in other currencies. For additional information on sales within our international insurance operations, see “—International Businesses—Sales Results,” below.

The following table sets forth the insurance liabilities and policyholder account balances of our Japanese operations, by type, for the date indicated:
 
As of
March 31, 2020
 
(in billions)
Insurance products with fixed and guaranteed terms
$
130

Contracts with a market value adjustment if invested amount is not held to maturity
25

Contracts with adjustable crediting rates subject to guaranteed minimums
11

Total
$
166


The $130 billion above is primarily comprised of long-duration insurance products that have fixed and guaranteed terms, for which underlying assets may have to be reinvested at interest rates that are lower than current portfolio yields. The remaining insurance liabilities and policyholder account balances include $25 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity and $11 billion related to contracts with crediting rates that may be adjusted over

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the life of the contract, subject to guaranteed minimums. Most of the current crediting rates on these contracts, however, are at or near contractual minimums. Although we have the ability in some cases to lower crediting rates for those contracts that are above guaranteed minimum crediting rates, the majority of this business has interest crediting rates that are determined by formula.

Assuming a hypothetical scenario where the average 30-year Japanese Government Bond yield is 0.40% and the 10-year U.S. Treasury rate is 0.70% (which is reasonably consistent with recent rates) for the period from April 1, 2020 through March 31, 2021 (and credit spreads remain unchanged from levels as of March 31, 2020), we estimate that the unfavorable impact to net investment income of reinvesting activities, including scheduled maturities and estimated prepayments of fixed maturities and commercial mortgage and other loans (excluding assets supporting participating contracts) would be between $40 million and $80 million for the period from April 1, 2020 through March 31, 2021.
Results of Operations

Consolidated Results of Operations

The following table summarizes net income (loss) for the periods presented.
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Revenues
$
13,464

 
$
15,091

Benefits and expenses
13,802

 
13,951

Income (loss) before income taxes and equity in earnings of operating joint ventures
(338
)
 
1,140

Income tax expense (benefit)
(58
)
 
232

Income (loss) before equity in earnings of operating joint ventures
(280
)
 
908

Equity in earnings of operating joint ventures, net of taxes
10

 
29

Net income (loss)
(270
)
 
937

Less: Income attributable to noncontrolling interests
1

 
5

Net income (loss) attributable to Prudential Financial, Inc.
$
(271
)
 
$
932


The $1,203 million decrease in “Net income (loss) attributable to Prudential Financial, Inc.” for the first quarter of 2020 compared to the first quarter of 2019 reflected the following notable items:

$1,383 million unfavorable variance, on a pre-tax basis, from investment related activities that are recorded within “Other income (loss)” for PFI excluding our Divested and Run-off Businesses. These unfavorable impacts were primarily driven by unrealized gains (losses) from equity securities and fixed maturity securities designated as trading;
$1,006 million unfavorable variance, on a pre-tax basis, driven by market experience updates primarily from our Individual Annuities and Individual Life businesses; and
$809 million unfavorable variance, on a pre-tax basis, reflecting the net impact from changes in the value of our embedded derivatives and related hedge positions associated with certain variable annuities (see “—Results of Operations by Segment—U.S. Businesses—U.S. Individual Solutions Division—Individual Annuities—Variable Annuity Risks and Risk Mitigants” for additional information).

Partially offsetting these decreases in “Net income (loss) attributable to Prudential Financial, Inc.” was the following item:

$2,444 million favorable variance, on a pre-tax basis, from realized investment gains and losses for PFI excluding our Divested and Run-off Businesses, and excluding the impact of the hedging program associated with certain variable annuities discussed above (see “—General Account Investments” for additional information).

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.


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Summary of Results of Operations by Segment

Shown below are the adjusted operating income contributions of each segment and Corporate and Other operations for the periods indicated and a reconciliation of this segment measure of performance to “Income (loss) before income taxes and equity in earnings of operating joint ventures” as presented in the Unaudited Interim Consolidated Statements of Operations.

 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Adjusted operating income before income taxes by segment:
 
 
 
PGIM
$
164

 
$
214

U.S. Businesses:
 
 
 
U.S. Workplace Solutions division:

 

Retirement
245

 
251

Group Insurance
44

 
53

Total U.S. Workplace Solutions division
289

 
304

U.S. Individual Solutions division:
 
 
 
Individual Annuities
373

 
472

Individual Life
(20
)
 
105

Total U.S. Individual Solutions division
353

 
577

Assurance IQ division(1):
 
 
 
Assurance IQ
(23
)
 
0

Total Assurance IQ division
(23
)
 
0

Total U.S. Businesses
619

 
881

International Businesses
751

 
922

Corporate and Other
(342
)
 
(412
)
Total segment adjusted operating income before income taxes
1,192

 
1,605

Reconciling items:
 
 
 
Realized investment gains (losses), net, and related adjustments(2)
105

 
(612
)
Charges related to realized investment gains (losses), net(3)
(803
)
 
25

Market experience updates(4)
(947
)
 
0

Divested and Run-off Businesses(5):
 
 
 
     Closed Block division
(1
)
 
(19
)
     Other Divested and Run-off Businesses
80

 
174

Other adjustments(6)
45

 
0

Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(7)
(9
)
 
(33
)
Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures
$
(338
)
 
$
1,140

__________
(1)
Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
(2)
Represents “Realized investment gains (losses), net,” and related adjustments. See “General Account Investments” and Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. Prior period amounts have been updated to conform to current period presentation.
(3)
Includes charges that represent the impact of realized investment gains (losses), net, on the amortization of DAC and other costs, and on changes in reserves. Also includes charges resulting from payments related to market value adjustment features of certain of our annuity products and the impact of realized investment gains (losses), net, on the amortization of unearned revenue reserves.
(4)
Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company had historically recognized these impacts in adjusted operating income. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(5)
Represents the contribution to income (loss) of Divested and Run-off Businesses that have been or will be sold or exited, including businesses that have been placed in wind down, but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP. See “—Divested and Run-off Businesses.”
(6)
Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

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(7)
Equity in earnings of operating joint ventures are included in adjusted operating income but excluded from “Income (loss) before income taxes and equity in earnings of operating joint ventures” as they are reflected on an after-tax U.S. GAAP basis as a separate line in the Unaudited Interim Consolidated Statements of Operations. Earnings attributable to noncontrolling interests are excluded from adjusted operating income but included in “Income (loss) before income taxes and equity in earnings of operating joint ventures” as they are reflected on a U.S. GAAP basis as a separate line in the Unaudited Interim Consolidated Statements of Operations. Earnings attributable to noncontrolling interests represent the portion of earnings from consolidated entities that relates to the equity interests of minority investors.

Segment results for the period presented above reflect the following:

PGIM. Results for the first quarter of 2020 decreased in comparison to the prior year period, reflecting an increase in asset management fees that was more than offset by lower other related revenues and higher expenses.

Retirement. Results for the first quarter of 2020 decreased in comparison to the prior year period, primarily reflecting lower reserve gains, partially offset by higher fee income and net investment spread results and lower expenses.

Group Insurance. Results for the first quarter of 2020 decreased in comparison to the prior year period, primarily reflecting lower net investment spread results.

Individual Annuities. Results for the first quarter of 2020 decreased in comparison to the prior year period, primarily driven by lower fee income, net of distribution expenses and other associated costs, lower net investment spread results, and the absence of a favorable impact in the prior year period from changes in our estimated profitability of the business, which beginning with the second quarter of 2019 is excluded from adjusted operating income.

Individual Life. Results for the first quarter of 2020 decreased in comparison to the prior year period, primarily reflecting less favorable underwriting results and the absence of a favorable impact in the prior year period from changes in our estimated profitability of the business, which beginning with the second quarter of 2019 is excluded from adjusted operating income.

Assurance IQ. The acquisition of Assurance IQ was completed in October 2019. Results for the first quarter of 2020 includes revenues, net of marketing and distribution expenses, operating expenses and amortization expenses related to intangible assets recognized as part of purchase accounting (see Note 1 and Note 10 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information).
International Businesses. Results for the first quarter of 2020 decreased in comparison to the prior year period, inclusive of an unfavorable net impact from foreign currency exchange rates, driven by lower net investment spread results, higher expenses, lower earnings from our joint venture investments and lower underwriting results, partially offset by business growth.

Corporate and Other. Results for the first quarter of 2020 reflected decreased losses in comparison to the prior year period, driven by lower net charges from other corporate activities, including lower long-term and deferred compensation expenses, and favorable pension and employee benefit results, partially offset by lower net investment income.

Closed Block Division. Results for the first quarter of 2020 reflected decreased losses in comparison to the prior year period, primarily reflecting a decrease in the policyholder dividend obligation as a result of lower net investment activity results.

Segment Measures

Adjusted Operating Income. In managing our business, we analyze our segments’ operating performance using “adjusted operating income.” Adjusted operating income does not equate to “Income (loss) before income taxes and equity in earnings of operating joint ventures” or “Net income (loss)” as determined in accordance with U.S. GAAP, but is the measure of segment profit or loss we use to evaluate segment performance and allocate resources, and consistent with authoritative guidance, is our measure of segment performance. The adjustments to derive adjusted operating income are important to an understanding of our overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and our definition of adjusted operating income may differ from that used by other companies. However, we believe that the presentation of adjusted operating income as we measure it for management purposes enhances the understanding of our results of operations by highlighting the results from ongoing operations and the underlying profitability of our businesses.

See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information on the presentation of segment results and our definition of adjusted operating income.


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Annualized New Business Premiums. In managing our Individual Life, Group Insurance and International Businesses, we analyze annualized new business premiums, which do not correspond to revenues under U.S. GAAP. Annualized new business premiums measure the current sales performance of the business, while revenues primarily reflect the renewal persistency of policies written in prior years and net investment income, in addition to current sales. Annualized new business premiums include 10% of first year premiums or deposits from single pay products. No other adjustments are made for limited pay contracts.

The amount of annualized new business premiums for any given period can be significantly impacted by several factors, including but not limited to: addition of new products, discontinuation of existing products, changes in credited interest rates for certain products and other product modifications, changes in premium rates, changes in tax laws, changes in regulations or changes in the competitive environment. Sales volume may increase or decrease prior to certain of these changes becoming effective, and then fluctuate in the other direction following such changes.

Assets Under Management. In managing our PGIM business, we analyze assets under management (which do not correspond directly to U.S. GAAP assets) because the principal source of revenues is fees based on assets under management. Assets under management represent the fair market value or account value of assets which we manage directly for institutional clients, retail clients, and for our general account, as well as assets invested in our products that are managed by third-party managers.

Account Values. In managing our Individual Annuities and Retirement businesses, we analyze account values, which do not correspond to U.S. GAAP assets. Net sales (redemptions) in our Individual Annuities business and net additions (withdrawals) in our Retirement business do not correspond to revenues under U.S. GAAP, but are used as a relevant measure of business activity.

Impact of Foreign Currency Exchange Rates

Foreign currency exchange rate movements and related hedging strategies
 
As a U.S.-based company with significant business operations outside the U.S., particularly in Japan, we are subject to foreign currency exchange rate movements that could impact our U.S. dollar (“USD”)-equivalent earnings and shareholder return on equity. Our USD-equivalent earnings could be materially affected by currency fluctuations from period to period, even if earnings on a local currency basis are relatively constant. Our USD-equivalent equity is impacted as the value of our investment in international operations may also fluctuate based on changes in foreign currency exchange rates. We seek to mitigate these impacts through various hedging strategies, including the use of derivative contracts and by holding USD-denominated assets in certain of our foreign subsidiaries.

In order to reduce earnings volatility from foreign currency exchange rate movements, we enter into forward currency derivative contracts to effectively fix the currency exchange rates for a portion of our prospective non-USD-denominated earnings streams. This forward currency hedging program is primarily associated with our insurance operations in Japan and Korea.

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.


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March 31,
2020
 
December 31,
2019
 
(in billions)
Foreign currency hedging instruments:
 
 
 
Hedging USD-equivalent earnings:
 
 
 
Forward currency contracts (notional amount outstanding)
$
0.5

 
$
0.6

Hedging USD-equivalent equity:
 
 
 
USD-denominated assets held in yen-based entities(1)
13.6

 
13.1

Dual currency and synthetic dual currency investments(2)
0.6

 
0.6

Total USD-equivalent equity foreign currency hedging instruments
14.2

 
13.7

Total foreign currency hedges
$
14.7

 
$
14.3

__________
(1)
Includes USD-denominated fixed maturities at amortized cost plus any related accrued investment income, as well as USD notional amount of foreign currency derivative contracts outstanding. Note this amount represents only those USD assets serving to hedge the impact of foreign currency volatility on equity. Separate from this program, our Japanese operations also have $60.3 billion and $57.8 billion as of March 31, 2020 and December 31, 2019, respectively, of USD-denominated assets supporting USD-denominated liabilities related to USD-denominated products.
(2)
Dual currency and synthetic dual currency investments are held by our yen-based entities in the form of fixed maturities and loans with a yen-denominated principal component and USD-denominated interest income. The amounts shown represent the present value of future USD-denominated cash flows.

The USD-denominated investments that hedge the impact of foreign currency exchange rate movements on USD-equivalent earnings and shareholder return on equity from our Japanese insurance operations are reported within yen-based entities and, as a result, foreign currency exchange rate movements will impact their value reported within our yen-based Japanese insurance entities. We seek to mitigate the risk that future unfavorable foreign currency exchange rate movements will decrease the value of these USD-denominated investments reported within our yen-based Japanese insurance entities, and therefore negatively impact their equity and regulatory solvency margins, by having our Japanese insurance operations enter into currency hedging transactions. Those hedges are with a subsidiary of Prudential Financial. These hedging strategies have the economic effect of moving the change in value of these USD-denominated investments due to foreign currency exchange rate movements from our Japanese yen-based entities to our USD-based entities.

These USD-denominated investments also pay a coupon which is generally higher than what a similar yen-denominated investment would pay. The incremental impact of this higher yield on our USD-denominated investments, as well as our dual currency and synthetic dual currency investments, will vary over time, and is dependent on the duration of the underlying investments as well as interest rate environments in both the U.S. and Japan at the time of the investments.

Impact of intercompany foreign currency exchange rate arrangements on segment results of operations
 
The financial results of our International Businesses and PGIM reflect the impact of intercompany arrangements with our Corporate and Other operations pursuant to which certain of these segments’ non-USD-denominated earnings are translated at fixed currency exchange rates. Results of our Corporate and Other operations include any differences between the translation adjustments recorded by the segments at the fixed currency exchange rate versus the actual average rate during the period. In addition, specific to our International Businesses where we hedge certain currencies, the results of our Corporate and Other operations also include the impact of any gains or losses recorded from the forward currency contracts that settled during the period, which include the impact of any over or under hedging of actual earnings that differ from projected earnings.

For 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 USD-equivalent earnings. Pursuant to this program, our Corporate and Other operations execute forward currency contracts with third-parties to sell the net exposure of projected earnings for certain currencies in exchange for USD at specified exchange rates. The maturities of these contracts correspond with the future periods (typically on a three-year rolling basis) in which the identified non-USD-denominated earnings are expected to be generated. In establishing the level of non-USD-denominated earnings that will be hedged through this program, we exclude the anticipated level of USD-denominated earnings that will be generated by USD-denominated products and investments. For the three months ended March 31, 2020, approximately 12% of the segment’s earnings were yen-based and, as of March 31, 2020, we have hedged 100%, 83% and 39% of expected yen-based earnings for 2020, 2021 and 2022, respectively. To the extent currently unhedged, our International Businesses’ future expected USD-equivalent of yen-based earnings will be impacted by yen exchange rate movements.
 

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As a result of these arrangements, our International Businesses’ results for 2020 and 2019 reflect the impact of translating yen-denominated earnings at fixed currency exchange rates of 104 and 105 yen per USD, respectively, and Korean won-denominated earnings at fixed currency exchange rates of 1,090 and 1,110 Korean won per USD, respectively. Since determination of the fixed currency exchange rates for a given year is impacted by changes in foreign currency exchange rates over time, the segment’s future earnings will ultimately be impacted by these changes in exchange rates.

For PGIM and certain other currencies within our International Businesses, the fixed currency exchange rates for the current year are predetermined during the third quarter of the prior year using forward currency exchange rates.
 
The table below presents, for the periods indicated, the increase (decrease) to revenues and adjusted operating income for the International Businesses, PGIM and Corporate and Other operations, reflecting the impact of these intercompany arrangements.
 
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Segment impacts of intercompany arrangements:
 
 
 
International Businesses
$
12

 
$
15

PGIM
0

 
1

Impact of intercompany arrangements(1)
12

 
16

Corporate and Other:
 
 
 
Impact of intercompany arrangements(1)
(12
)
 
(16
)
Settlement gains (losses) on forward currency contracts(2)
29

 
12

Net benefit (detriment) to Corporate and Other
17

 
(4
)
Net impact on consolidated revenues and adjusted operating income
$
29

 
$
12

__________ 
(1)
Represents the difference between non-USD-denominated earnings translated on the basis of weighted average monthly currency exchange rates versus fixed currency exchange rates determined in connection with the foreign currency income hedging program.
(2)
As of March 31, 2020 and 2019, the notional amounts of these forward currency contracts within our Corporate and Other operations were $2.4 billion and $2.5 billion, respectively, of which $0.5 billion and $1.2 billion, respectively, were related to our Japanese insurance operations.

Impact of products denominated in non-local currencies on U.S. GAAP earnings
 
While our international insurance operations offer products denominated in local currency, several also offer products denominated in non-local currencies, most notably our Japanese operations, which offer USD- and Australian dollar (“AUD”)-denominated products. The non-local currency-denominated insurance liabilities related to these products are supported by investments denominated in corresponding currencies, including a significant portion designated as available-for-sale. While the impact from foreign currency exchange rate movements on these non-local currency-denominated assets and liabilities is economically matched, differences in the accounting for changes in the value of these assets and liabilities due to changes in foreign currency exchange rate movements have historically resulted in volatility in U.S. GAAP earnings.

In 2015, we implemented a structure in Gibraltar Life’s operations that disaggregated the USD- and AUD-denominated businesses into separate divisions, each with its own functional currency that aligns with the underlying products and investments. The result of this alignment was to reduce differences in the accounting for changes in the value of these assets and liabilities that arise due to changes in foreign currency exchange rate movements. For the USD- and AUD-denominated assets that were transferred under this structure, the net cumulative unrealized investment gains associated with foreign exchange remeasurement that were recorded in “Accumulated other comprehensive income (loss)” (“AOCI”) totaled $2.6 billion and $2.7 billion as of March 31, 2020 and December 31, 2019, respectively, and will be recognized in earnings within “Realized investment gains (losses), net” over time as these assets mature or are sold. Absent the sale of any of these assets prior to their stated maturity, approximately 10% of the $2.6 billion balance as of March 31, 2020 will be recognized throughout the remainder of 2020, approximately 13% will be recognized in 2021, and the remaining balance will be recognized from 2022 through 2051.

Highly inflationary economy in Argentina

Our insurance operations in Argentina, Prudential of Argentina (“POA”), have historically utilized the Argentine peso as the functional currency given it is the currency of the primary economic environment in which the entity operates. During 2018, Argentina experienced a cumulative inflation rate that exceeded 100% over a 3-year period. As a result, Argentina’s economy was

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deemed to be highly inflationary resulting in reporting changes effective July 1, 2018. Under U.S. GAAP, the financial statements of a foreign entity in a highly inflationary economy are to be remeasured as if its functional currency (formerly the Argentine peso) is the reporting currency of its parent reporting entity (the USD) on a prospective basis. While this changed how the results of POA are remeasured and/or translated into USD, the impact to our financial statements was not material nor is it expected to be material in future periods given the relative size of our POA operations. It should also be noted that due to the macroeconomic environment in Argentina, substantially all of POA’s balance sheet consists of USD-denominated product liabilities supported by USD-denominated assets. As a result, this accounting change serves to reduce the remeasurement impact reflected in net income given that the functional currency and currency in which the assets and liabilities are denominated will be more closely aligned.


Accounting Policies & Pronouncements

Application of Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the application of accounting policies that often involve a significant degree of judgment. Management, on an ongoing basis, reviews estimates and assumptions used in the preparation of financial statements. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, the Company’s results of operations and financial position as reported in the Unaudited Interim Consolidated Financial Statements could change significantly.

Management believes the accounting policies relating to the following areas are most dependent on the application of estimates and assumptions and require management’s most difficult, subjective, or complex judgments:

DAC, deferred sales inducements (“DSI”) and VOBA;
Policyholder liabilities;
Goodwill;
Valuation of investments including derivatives, measurement of allowance for credit losses, and recognition of other-than-temporary impairments (“OTTI”);
Pension and other postretirement benefits;
Taxes on income; and
Reserves for contingencies, including reserves for losses in connection with unresolved legal matters.

Market Performance - Equity and Interest Rate Assumptions 

DAC, DSI and VOBA associated with the variable and universal life policies of our Individual Life and International Businesses segments and the variable and fixed annuity contracts of our Individual Annuities and International Businesses segments are generally amortized over the expected lives of these policies in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. The quarterly adjustments for market performance reflect the impact of changes to our estimate of total gross profits to reflect actual fund performance and market conditions. A significant portion of gross profits for our variable annuity contracts and, to a lesser degree, our variable life contracts are dependent upon the total rate of return on assets held in separate account investment options. This rate of return influences the fees we earn on variable annuity and variable life contracts, costs we incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts, as well as other sources of profit. Returns that are higher than our expectations for a given period produce higher than expected account balances, which increase the future fees we expect to earn on variable annuity and variable life contracts and decrease the future costs we expect to incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts. The opposite occurs when returns are lower than our expectations. The changes in future expected gross profits are used to recognize a cumulative adjustment to all prior periods’ amortization.

Furthermore, the calculation of the estimated liability for future policy benefits related to certain insurance products includes an estimate of associated revenues and expenses that are dependent on both historical market performance as well as estimates of market performance in the future. Similar to DAC, DSI and VOBA described above, these liabilities are subject to quarterly adjustments for experience including market performance, in addition to annual adjustments resulting from our annual reviews of assumptions.

The weighted average rate of return assumptions used in developing estimated market returns consider many factors specific to each product type, including asset durations, asset allocations and other factors. With regard to equity market assumptions, the near-term future rate of return assumption used in evaluating DAC, DSI and VOBA and liabilities for future policy benefits for

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certain of our products, primarily our domestic variable annuity and domestic and international variable life insurance products, is generally updated each quarter and is derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15.0%, we use our maximum future rate of return. As of March 31, 2020, our domestic variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 9.7% near-term mean reversion equity expected rate of return, and our international variable life insurance business assumes a 4.8% long-term equity expected rate of return and a 7.7% 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 2019 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 yields unchanged and continue to grade to rates of 3.75% and 1.30%, 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.

For a discussion of the impact that could result from changes in certain key assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting Policies and Pronouncements—Sensitivities for Insurance Assets and Liabilities” in our Annual Report on Form 10-K for the year ended December 31, 2019

Future Adoption of New Accounting Pronouncements

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the Financial Accounting Standards Board (“FASB”) on August 15, 2018 and is expected to have a significant impact on the Consolidated Financial Statements and Notes to the Consolidated Financial Statements. In October 2019, the FASB issued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of ASU 2018-12 to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. This ASU will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter. See Note 2 to the Unaudited Interim Consolidated Financial Statements for a more detailed discussion of ASU 2018-12, as well as other accounting pronouncements issued but not yet adopted and newly adopted accounting pronouncements.

Results of Operations by Segment

PGIM

Operating Results

The following table sets forth PGIM’s operating results for the periods indicated.

 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Operating results(1):
 
 
 
Revenues
$
778

 
$
870

Expenses
614

 
656

Adjusted operating income
164

 
214

Realized investment gains (losses), net, and related adjustments
4

 
0

Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests
(36
)
 
5

Income (loss) before income taxes and equity in earnings of operating joint ventures
$
132

 
$
219

 __________
(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.
 

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Adjusted Operating Income

Adjusted operating income decreased $50 million. Higher asset management fees, net of related expenses, were more than offset by lower other related revenues, net of related expenses, and higher operational and variable expenses. Asset management fees, net of related expenses, reflected an increase in average assets under management over the last twelve months as a result of market appreciation and net inflows. Other related revenues, net of related expenses, primarily reflected lower strategic investment results, driven by credit spread widening, and lower net performance-based incentive fees, driven by the absence of a significant fee earned in the prior year period. Operational and variable expenses reflected those supporting business growth, and higher retail sales and average assets under management, respectively.

Revenues and Expenses

The following table sets forth PGIM’s revenues, presented on a basis consistent with the table above under “—Operating Results,” by type.
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Revenues by type:
 
 
 
Asset management fees by source:
 
 
 
Institutional customers
$
328

 
$
312

Retail customers(1)
229

 
209

General account
136

 
123

Total asset management fees
693

 
644

Other related revenues by source:
 
 
 
Incentive fees
18

 
36

Transaction fees
4

 
2

Strategic investing
(27
)
 
36

Commercial mortgage(2)
27

 
26

Total other related revenues(3)
22


100

Service, distribution and other revenues(4)
63

 
126

Total revenues
$
778

 
$
870

__________
(1)
Consists of fees from: individual mutual funds and variable annuities and variable life insurance separate account assets; funds invested in proprietary mutual funds through our defined contribution plan products; and third-party sub-advisory relationships. Revenues from fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance are included in the general account.
(2)
Includes mortgage origination revenues from our commercial mortgage origination and servicing business.
(3)
Future revenues will be impacted by the level and diversification of our strategic investments, the commercial real estate market, and other domestic and international markets.
(4)
Prior period amount includes payments from Wells Fargo under an agreement dated as of July 30, 2004, implementing arrangements with respect to money market mutual funds in connection with the combination of our retail securities brokerage and clearing operations with those of Wells Fargo. The agreement extended for ten years from the Wachovia Securities joint venture termination date of December 31, 2009 to December 31, 2019. The revenue from Wells Fargo under this agreement was $16 million for the three months ended March 31, 2019.

Revenues decreased $92 million. Higher asset management fees, primarily reflecting an increase in average assets under management as a result of market appreciation and net inflows over the last twelve months, were more than offset by lower other related revenues, primarily driven by lower strategic investment results and lower performance-based incentive fees, and lower service, distribution and other revenues, primarily driven by lower revenues from certain consolidated funds, which were fully offset by lower expenses related to noncontrolling interests in these funds.

Expenses decreased $42 million. Higher compensation and operational expenses related to business growth and higher variable expenses reflecting increases in retail sales and average assets under management were more than offset by lower expenses related to revenues associated with certain consolidated funds, as discussed above.

Assets Under Management

The following table sets forth assets under management by asset class and source as of the dates indicated.

85


 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
 
(in billions)
Assets Under Management(1) (at fair value):
 
 
 
 
 
Institutional customers:
 
 
 
 
 
Public equity
$
45.3

 
$
57.1

 
$
55.2

Public fixed income
402.9

 
418.6

 
393.9

Real estate
49.2

 
49.1

 
48.8

Private credit and other alternatives
23.3

 
23.5

 
22.6

Multi-asset
4.1

 
4.5

 
3.5

Institutional customers(2)
524.8

 
552.8

 
524.0

Retail customers:
 
 
 
 
 
Public equity
82.9

 
104.2

 
105.3

Public fixed income
131.7

 
138.7

 
110.9

Real estate
1.8

 
2.0

 
1.9

Private credit and other alternatives
0.4

 
0.5

 
0.4

Multi-asset
65.6

 
60.2

 
60.6

Retail customers(3)
282.4

 
305.6

 
279.1

General account:
 
 
 
 
 
Public equity
3.5

 
4.4

 
4.0

Public fixed income
347.4

 
328.6

 
306.9

Real estate
65.4

 
66.0

 
61.7

Private credit and other alternatives
72.2

 
73.5

 
68.4

Multi-asset
0.0

 
0.1

 
0.0

General account
488.5

 
472.6

 
441.0

Total PGIM assets under management(4)
$
1,295.7

 
$
1,331.0

 
$
1,244.1

 
 
 
 
 
 
Assets under management within other reporting segments(4)(5)
$
185.7

 
$
219.9

 
$
211.4

Total PFI assets under management
$
1,481.4

 
$
1,550.9

 
$
1,455.5

__________
(1)
Prior period amounts have been updated to conform to current period presentation. “Public equity” represents stock ownership interest in a corporation or partnership (excluding hedge funds) or real estate investment trust. “Public fixed income” represents debt instruments that pay interest and usually have a maturity (excluding mortgages). “Real estate” includes direct real estate equity and real estate mortgages. “Private credit and other alternatives” includes private credit, private equity, hedge funds, agricultural debt and equity and other alternative strategies. “Multi-asset” includes funds or products that invest in more than one asset class balancing equity and fixed income funds and target date funds.
(2)
Consists of third-party institutional assets and group insurance contracts.
(3)
Consists of individual mutual funds and variable annuities and variable life insurance separate account assets; funds invested in proprietary mutual funds through our defined contribution plan products; and third-party sub-advisory relationships. Fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance are included in the general account.
(4)
Effective first quarter of 2020, certain assets have been reclassified from the U.S. Individual Solutions division to PGIM.
(5)
Primarily include certain assets related to annuity and variable life products in our U.S. Individual Solutions division, retirement and group life products in our U.S. Workplace Solutions division and certain general account assets of our International Businesses. These assets are not directly managed by PGIM, but rather are invested in non-proprietary funds or are managed by either the divisions themselves or our Chief Investment Officer Organization.

PGIM’s assets under management increased $52 billion in comparison to the prior year quarter primarily reflecting market appreciation and public fixed income inflows, partially offset by equity outflows. PGIM’s assets under management decreased $35 billion in comparison to the prior quarter primarily reflecting market depreciation, partially offset by public fixed income and multi-asset inflows.

The following table sets forth the component changes in PGIM’s assets under management by asset source for the periods indicated.



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Three Months Ended
March 31,
 
Twelve
Months
Ended
March 31,
 
2020
 
2019
 
2020
 
(in billions)
Institutional Customers:
 
 
 
 
 
Beginning assets under management
$
552.8

 
$
493.5

 
$
524.0

Net additions (withdrawals), excluding money market activity:
 
 
 
 
 
Third-party
4.2

 
1.0

 
(3.3
)
Third-party via affiliates(1)
(0.8
)
 
(0.3
)
 
(0.3
)
Total
3.4

 
0.7

 
(3.6
)
Market appreciation (depreciation)(2)
(30.5
)
 
24.3

 
6.4

Other increases (decreases)(3)
(0.9
)
 
5.5

 
(2.0
)
Ending assets under management
524.8

 
524.0

 
524.8

Retail Customers(4):
 
 
 
 
 
Beginning assets under management
305.6

 
260.2

 
279.1

Net additions (withdrawals), excluding money market activity:
 
 
 
 
 
Third-party
(1.3
)
 
0.4

 
4.0

Third-party via affiliates(1)
10.9

 
(6.5
)
 
7.2

Total
9.6

 
(6.1
)
 
11.2

Market appreciation (depreciation)(2)
(32.6
)
 
25.1

 
(8.2
)
Other increases (decreases)(3)
(0.2
)
 
(0.1
)
 
0.3

Ending assets under management
282.4

 
279.1

 
282.4

General Account:
 
 
 
 
 
Beginning assets under management
472.6

 
427.8

 
441.0

Net additions (withdrawals), excluding money market activity:
 
 
 
 
 
Third-party
0.0

 
0.0

 
0.0

Affiliated
0.7

 
0.6

 
6.2

Total
0.7

 
0.6

 
6.2

Market appreciation (depreciation)(2)
(0.6
)
 
14.2

 
22.2

Other increases (decreases)(3)
15.8

 
(1.6
)
 
19.1

Ending assets under management
488.5

 
441.0

 
488.5

Total assets under management(4)
$
1,295.7

 
$
1,244.1

 
$
1,295.7

__________
(1)
Represents assets that PGIM manages for the benefit of other reporting segments within the Company. Additions and withdrawals of these assets are attributable to third-party product inflows and outflows in other reporting segments.
(2)
Includes income reinvestment, where applicable.
(3)
Includes the effect of foreign exchange rate changes, net money market activity and the impact of acquired business. The impact from foreign currency fluctuations, which primarily impact the general account, resulted in a loss of $1.8 billion and $1.2 billion for the three months ended March 31, 2020 and 2019, respectively; and a gain of less than $0.1 billion for the twelve months ended March 31, 2020.
(4)
Prior period amounts have been updated to conform to current period presentation.

Strategic Investments

The following table sets forth PGIM’s strategic investments at carrying value (including the value of derivative instruments used to mitigate equity market and currency risk) by asset class and source as of the dates indicated.



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March 31, 2020
 
December 31, 2019
 
(in millions)
Co-Investments(1):
 
 
 
Public fixed income
$
373

 
$
462

Real estate
217

 
228

Private credit and other alternatives
21

 
19

Seed Investments(1):
 
 
 
Public equity
626

 
671

Public fixed income
294

 
325

Real estate
26

 
34

Private credit and other alternatives
60

 
59

Multi-asset
62

 
74

Total
$
1,679

 
$
1,872

__________
(1)
Prior period amounts have been updated to conform to current period presentation. For more information, see the “Assets Under Management” table above.

The decrease of $193 million in strategic investments was primarily driven by unfavorable fixed income investment performance as a result of credit spread widening. The decrease also reflects PGIM’s redemption of public fixed income and public equity seed investments.

U.S. Businesses

Operating Results
 
The following table sets forth the operating results for our U.S. Businesses for the periods indicated.

 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Adjusted operating income before income taxes:
 
 
 
U.S. Businesses:
 
 
 
U.S. Workplace Solutions division:
 
 
 
Retirement
$
245

 
$
251

Group Insurance
44

 
53

Total U.S. Workplace Solutions division
289

 
304

U.S. Individual Solutions division:
 
 
 
Individual Annuities
373

 
472

Individual Life
(20
)
 
105

Total U.S. Individual Solutions division
353

 
577

Assurance IQ division(1):
 
 
 
Assurance IQ
(23
)
 
0

Total Assurance IQ division
(23
)
 
0

Total U.S. Businesses
619

 
881

Reconciling Items:
 
 
 
Realized investment gains (losses), net, and related adjustments(2)
(240
)
 
(1,094
)
Charges related to realized investment gains (losses), net
(816
)
 
31

Market experience updates(3)
(940
)
 
0

Other adjustments(4)
45

 
0

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
$
(1,331
)
 
$
(182
)
________
(1)
Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
(2)
Prior period amounts have been updated to conform to current period presentation.

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(3)
Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company had historically recognized these impacts in adjusted operating income. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(4)
Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Adjusted operating income for our U.S. Businesses decreased by $262 million primarily due to:

Lower underwriting results in our Individual Life and Retirement businesses;

A favorable impact from changes in market conditions on estimates of profitability in the prior year period, which beginning with the second quarter of 2019 is excluded from adjusted operating income (see Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information);

Lower net investment spread results driven by lower income on non-coupon investments and lower investment yields due to a decline in interest rates; and

Lower fee income, net of distribution expenses and other associated costs, in our Individual Annuities business.

Partially offsetting these decreases was the following item:

Lower expenses, including costs associated with business initiatives.

U.S. BusinessesU.S. Workplace Solutions Division

Retirement

Operating Results

The following table sets forth Retirement’s operating results for the periods indicated.
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Operating results:
 
 
 
Revenues
$
2,437

 
$
2,639

Benefits and expenses
2,192

 
2,388

Adjusted operating income
245

 
251

Realized investment gains (losses), net, and related adjustments(1)
(21
)
 
130

Charges related to realized investment gains (losses), net
(23
)
 
3

Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests
1

 
0

Income (loss) before income taxes and equity in earnings of operating joint ventures
$
202

 
$
384

__________ 
(1)
Prior period amounts have been updated to conform to current period presentation.

Adjusted Operating Income

Adjusted operating income decreased $6 million, driven by lower reserve gains, partially offset by higher fee income and net investment spread results and lower expenses. The lower contribution from reserve experience primarily reflected lower mortality gains on a comparative basis within our pension risk transfer business. The increase in fee income primarily reflected higher longevity risk transfer account values resulting from 2019 sales activity. The increase in net investment spread results primarily reflected higher prepayment fee income. The lower expenses primarily reflected the absence of certain costs incurred in the prior year period to support business initiatives.

Revenues, Benefits and Expenses

Revenues decreased $202 million. The decrease primarily reflected lower pension risk transfer premiums with corresponding offsets in policyholders’ benefits, as discussed below. This decrease was partially offset by higher net investment income, primarily reflecting higher prepayment fee income, and higher policy charges and fee income driven by higher longevity risk transfer account

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values.

Benefits and expenses decreased $196 million. Policyholders’ benefits, including the change in policy reserves, decreased primarily related to the decrease in premiums discussed above, driven by a decrease in pension risk transfer premiums, partially offset by lower mortality gains within our pension risk transfer business.

Account Values

Account values are a significant driver of our operating results, and are primarily driven by net additions (withdrawals) and the impact of market changes. The income we earn on most of our fee-based products varies with the level of fee-based account values, since many policy fees are determined by these values. The investment income and interest we credit to policyholders on our spread-based products varies with the level of general account values. To a lesser extent, changes in account values impact our pattern of amortization of DAC and VOBA and general and administrative expenses. The following table shows the changes in the account values and net additions (withdrawals) of Retirement’s products for the periods indicated. Net additions (withdrawals) are plan sales and participant deposits or additions, as applicable, minus plan and participant withdrawals and benefits. Account values include both internally- and externally-managed client balances as the total balances drive revenue for the Retirement business. For more information on internally-managed balances, see “—PGIM.”

 
Three Months Ended
March 31,
 
Twelve
Months
Ended
March 31,
 
2020
 
2019
 
2020
 
(in millions)
Full Service:
 
 
 
 
 
Beginning total account value
$
272,448

 
$
231,669

 
$
251,071

Deposits and sales
8,952

 
9,567

 
35,779

Withdrawals and benefits
(8,668
)
 
(9,105
)
 
(35,269
)
Change in market value, interest credited and interest income and other activity
(34,297
)
 
18,940

 
(13,146
)
Ending total account value
$
238,435

 
$
251,071

 
$
238,435

Institutional Investment Products:
 
 
 
 
 
Beginning total account value
$
227,596

 
$
200,759

 
$
203,101

Additions(1)
6,893

 
2,247

 
35,747

Withdrawals and benefits
(5,510
)
 
(3,649
)
 
(18,604
)
Change in market value, interest credited and interest income
2,435

 
2,644

 
8,880

Other(2)
(4,068
)
 
1,100

 
(1,778
)
Ending total account value
$
227,346

 
$
203,101

 
$
227,346

__________
(1)
Additions primarily include: group annuities calculated based on premiums received; funding agreements issued; longevity reinsurance contracts calculated as the present value of future projected benefits; and investment-only stable value contracts calculated as the fair value of customers’ funds held in a client-owned trust.
(2)
“Other” activity includes the effect of foreign exchange rate changes associated with our British pounds sterling denominated longevity reinsurance business and changes in asset balances for externally-managed accounts. For the three months ended March 31, 2020 and 2019, “Other” activity also includes $2,752 million in receipts offset by $2,536 million in payments and $611 million in receipts offset by $617 million in payments, respectively, related to funding agreements backed by commercial paper which typically have maturities of less than 90 days.

The decrease in full service account values for the three months and twelve months ended March 31, 2020 reflected unfavorable changes in the market value of customer funds.

The decrease in institutional investment products account values for the three months ended March 31, 2020 reflected a decrease in other activity primarily driven by the negative impacts of foreign exchange rate changes, and from pension risk transfer benefit payments. These decreases were largely offset by additions from investment-only stable value accounts and collateralized funding agreements, and the impact of favorable changes in the market value of account assets. The increase in account values for the twelve months ended March 31, 2020 reflected net additions from pension risk transfer activity and favorable changes in the market value of account assets.

Group Insurance

Operating Results

90



The following table sets forth Group Insurance’s operating results and benefits and administrative operating expense ratios for the periods indicated.
 
Three Months Ended
March 31,
 
2020
 
2019
 
($ in millions)
Operating results:
 
 
 
Revenues
$
1,424

 
$
1,441

Benefits and expenses
1,380

 
1,388

Adjusted operating income
44

 
53

Realized investment gains (losses), net, and related adjustments
81

 
1

Income (loss) before income taxes and equity in earnings of operating joint ventures
$
125

 
$
54

Benefits ratio(1)(3):
 
 
 
Group life
88.4
%
 
89.0
%
Group disability
76.0
%
 
74.6
%
Total Group Insurance
85.6
%
 
85.9
%
Administrative operating expense ratio(2)(3):
 
 
 
Group life
12.4
%
 
11.7
%
Group disability
24.8
%
 
26.9
%
Total Group Insurance
15.1
%
 
14.9
%
__________ 
(1)
Ratio of policyholder benefits to earned premiums plus policy charges and fee income.
(2)
Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income.
(3)
The benefit and administrative ratios are measures used to evaluate profitability and efficiency.

Adjusted Operating Income

Adjusted operating income decreased $9 million, primarily reflecting lower net investment spread results driven by lower income on non-coupon investments, and less favorable underwriting results in our group disability business driven by lower interest rates, partially offset by more favorable underwriting results in our group life business.

Revenues, Benefits and Expenses

Revenues decreased $17 million. The decrease primarily reflected lower net investment income driven by lower income on non-coupon investments, with offsets in interest credited to policyholder account balances, as discussed below, partially offset by higher premiums and policy charges and fee income driven by growth in our group disability business.

Benefits and expenses decreased $8 million. The decrease primarily reflected lower interest credited to policyholder account balances, with offsets in net investment income, as discussed above. The decrease was partially offset by higher policyholders’ benefits and changes in reserves, which reflected increases in our group disability business partially offset by decreases in our group life business.

Sales Results
 
The following table sets forth Group Insurance’s annualized new business premiums, as defined under “—Segment Measures” above, for the periods indicated.

91


 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Annualized new business premiums(1):
 
 
 
Group life
$
173

 
$
174

Group disability
108

 
119

Total
$
281

 
$
293

__________ 
(1)
Amounts exclude new premiums resulting from rate changes on existing policies, from additional coverage under our Servicemembers’ Group Life Insurance contract and from excess premiums on group universal life insurance that build cash value but do not purchase face amounts.

Total annualized new business premiums for the three months ended March 31, 2020 decreased $12 million compared to the prior year period, driven by lower sales in our group disability business.

U.S. BusinessesU.S. Individual Solutions Division

Individual Annuities

Operating Results

The following table sets forth Individual Annuities’ operating results for the periods indicated.

 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Operating results:
 
 
 
Revenues
$
1,148

 
$
1,235

Benefits and expenses
775

 
763

Adjusted operating income
373

 
472

Realized investment gains (losses), net, and related adjustments
(865
)
 
(1,344
)
Charges related to realized investment gains (losses), net
(375
)
 
134

Market experience updates(1)
(646
)
 
0
Income (loss) before income taxes and equity in earnings of operating joint ventures
$
(1,513
)
 
$
(738
)
________
(1)
Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company had historically recognized these impacts in adjusted operating income. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Adjusted Operating Income

Adjusted operating income decreased $99 million. The decrease was primarily driven by lower fee income, net of distribution expenses and other associated costs, due to unfavorable impacts from our living benefit guarantees, certain products reaching contractual milestones for fee tier reduction, partially offset by higher average account values. Also contributing to the decrease were lower net investment spread results reflecting lower investment income on non-coupon investments, and the absence of a favorable impact in the prior year period from changes in our estimated profitability of the business, which beginning with the second quarter of 2019 is excluded from adjusted operating income.

Revenues, Benefits and Expenses

Revenues decreased $87 million. The decrease was primarily driven by lower premiums resulting from a decrease in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below. Also contributing to the decrease was lower policy charges and fee income due to unfavorable impacts from our living benefit guarantees resulting from equity market performance and declining interest rates, certain products reaching contractual milestones for fee tier reduction, partially offset by higher average account values resulting from market appreciation which was partially offset by net outflows. Partially

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offsetting these decreases was an increase in asset management and service fees and other income reflecting a favorable impact from changes in market conditions on estimates of profitability in the prior year period as discussed above.

Benefits and expenses increased $12 million. The increase was driven by higher amortization costs and reserve provisions due to equity market performance and declining interest rates. Policyholders’ benefits, including changes in reserves, reflected an unfavorable impact of changes in the estimates of profitability in the prior year period as discussed above, and a favorable impact resulting from a decrease in single premium immediate annuity sales, with offsets in premiums as discussed above.

Account Values

Account values are a significant driver of our operating results. Since most fees are determined by the level of separate account assets, fee income varies primarily based on the level of account values. Additionally, our fee income generally drives other items such as the pattern of amortization of DAC and other costs. Account values are driven by net flows from new business sales, surrenders, withdrawals and benefit payments, policy charges and the impact of positive or negative market value changes. The annuity industry’s competitive and regulatory landscapes, which have been dynamic over the last few years, may impact our net flows, including new business sales. The following table sets forth account value information for the periods indicated.

 
Three Months Ended
March 31,
 
Twelve
Months
Ended
March 31,
 
2020
 
2019
 
2020
 
(in millions)
Total Individual Annuities(1):
 
 
 
 
 
Beginning total account value
$
169,681

 
$
151,080

 
$
161,890

Sales
1,927

 
2,307

 
9,340

Full surrenders and death benefits(2)
(2,519
)
 
(1,940
)
 
(9,953
)
Sales, net of full surrenders and death benefits(2)
(592
)
 
367

 
(613
)
Partial withdrawals and other benefit payments(2)
(1,399
)
 
(1,236
)
 
(5,326
)
Net flows
(1,991
)
 
(869
)
 
(5,939
)
Change in market value, interest credited and other activity
(22,822
)
 
12,573

 
(8,323
)
Policy charges
(892
)
 
(894
)
 
(3,652
)
Ending total account value
$
143,976

 
$
161,890

 
$
143,976

__________
(1)
Includes gross variable and fixed annuities sold as retail investment products. Investments sold through defined contribution plan products are included with such products within our Retirement business. Variable annuity account values were $139.0 billion and $157.9 billion as of March 31, 2020 and 2019, respectively. Fixed annuity account values were $4.9 billion and $4.0 billion as of March 31, 2020 and 2019, respectively.
(2)
Prior period amounts have been reclassified to conform to current period presentation.

The decrease in account values for the twelve months ended March 31, 2020 was largely driven by unfavorable changes in the market value of contractholder funds, partial withdrawals and other benefit payments on contracts as well as policy charges on contractholder accounts.

The decrease in sales, net of full surrenders and death benefits, for the three months ended March 31, 2020 in comparison to the prior year period, reflects higher full surrenders driven by a large block of business exiting the surrender charge period, higher death benefits and lower gross sales. The decline in gross sales was largely driven by benefit rate reductions, across most products, in response to capital market pressures.

Risks and Risk Mitigants

The following is a summary of certain risks associated with Individual Annuities’ products, certain strategies in mitigating those risks including any updates to those strategies since the previous year-end, and the related financial results. For a more detailed description of these items and their related accounting treatment, refer to the complete descriptions provided in our Annual Report on Form 10-K for the year ended December 31, 2019.

Fixed Annuity Risks and Risk Mitigants. The primary risk exposures of our fixed annuity products relate to investment risks we bear for providing customers a minimum guaranteed interest rate or an index-linked interest rate required to be credited to the customer’s account value, including interest rate fluctuations and/or sustained periods of low interest rates, and credit risk

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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 policy that help to provide protection for premature withdrawals. In addition, a portion of our fixed products have a market value adjustment provision that provides protection of lapse in the case of rising interest rates. We also manage these risk exposures through external reinsurance.

Variable Annuity Risks and Risk Mitigants. The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital markets assumptions such as equity market returns, interest rates and market volatility, along with actuarial assumptions such as contractholder mortality, the timing and amount of annuitization and withdrawals, and contract lapses. For these risk exposures, achievement of our expected returns is subject to the risk that actual experience will differ from the assumptions used in the original pricing of these products. We manage our exposure to certain risks driven by fluctuations in capital markets primarily through a combination of i) Product Design Features, ii) Asset Liability Management Strategy, and iii) Capital Hedge Program as discussed below. We also manage these risk exposures through external reinsurance.

i.Product Design Features:

A portion of the variable annuity contracts that we offer include an automatic rebalancing feature, also referred to as an asset transfer feature. This feature is implemented at the contract level, and transfers assets between certain variable investment sub-accounts selected by the annuity contractholder and, depending on the benefit feature, a fixed-rate account in the general account or a bond fund sub-account within the separate accounts. The objective of the automatic rebalancing feature is to reduce our exposure to equity market risk and market volatility. Other product design features we utilize include, among others, asset allocation restrictions, minimum issuance age requirements and certain limitations on the amount of contractholder deposits, as well as a required minimum allocation to our general account for certain of our products. We continue to introduce products that diversify our risk profile and have incorporated provisions in product design allowing frequent revisions of key pricing elements for certain of our products. In addition, there is diversity in our fee arrangements, as certain fees are primarily based on the benefit guarantee amount, the contractholder account value and/or premiums, which helps preserve certain revenue streams when market fluctuations cause account values to decline.

ii.Asset Liability Management (“ALM”) Strategy (including fixed income instruments and derivatives):

We employ an ALM strategy that utilizes a combination of both traditional fixed income instruments and derivatives to help defray potential claims associated with our variable annuity living benefit guarantees. The economic liability we manage with this ALM strategy consists of expected living benefit claims under less severe market conditions, which are managed using an ALM strategy through the accumulation of fixed income and derivative instruments, and potential living benefit claims resulting from more severe market conditions, which are hedged using derivative instruments. For our Prudential Defined Income (“PDI”) variable annuity, we utilize fixed income instruments to help defray potential claims. For the portion of our ALM strategy executed with derivatives, we enter into a range of exchange-traded and over-the-counter (“OTC”) equity and interest rate derivatives, including, but not limited to: equity and treasury futures; total return and interest rate swaps; and options including equity options, swaptions, and floors and caps. The intent of this strategy is to more efficiently manage the capital and liquidity associated with these products while continuing to mitigate fluctuations in net income due to movements in capital markets.

The valuation of the economic liability we seek to defray excludes certain items that are included within the U.S. GAAP liability, such as non-performance risk (“NPR”) (in order to maximize protection irrespective of the possibility of our own default), as well as risk margins (required by U.S. GAAP but different from our best estimate) and valuation methodology differences. The following table provides a reconciliation between the liability reported under U.S. GAAP and the economic liability we manage through our ALM strategy as of the periods indicated:
 
March 31,
2020
 
December 31,
2019
 
(in millions)
U.S. GAAP liability (including NPR)
$
27,563

 
$
12,697

NPR adjustment
9,771

 
3,437

Subtotal
37,334

 
16,134

Adjustments including risk margins and valuation methodology differences
(11,897
)
 
(4,385
)
Economic liability managed through the ALM strategy
$
25,437

 
$
11,749



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Table of Contents

As of March 31, 2020, our fixed income instruments and derivative assets exceed the economic liability within the entities in which the risks reside.

The following table illustrates the net impact to the Unaudited Interim Consolidated Statements of Operations from changes in the U.S. GAAP embedded derivative liability and hedge positions under the ALM strategy, and the related amortization of DAC and other costs, that are excluded from adjusted operating income.
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)(1)
Excluding impact of assumption updates and other refinements:
 
 
 
Net hedging impact(2)
$
(176
)
 
$
(55
)
Change in portions of U.S. GAAP liability, before NPR(3)
(7,693
)
 
320

Change in the NPR adjustment
6,599

 
(1,063
)
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions
(1,270
)
 
(798
)
Related benefit (charge) to amortization of DAC and other costs
(176
)
 
161

Net impact of assumption updates and other refinements
0

 
0

Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs
$
(1,446
)
 
$
(637
)
__________
(1)
Positive amount represents income; negative amount represents a loss.
(2)
Net hedging impact represents the difference between the change in fair value of the risk we seek to hedge using derivatives and the change in fair value of the derivatives utilized with respect to that risk.
(3)
Represents risk margins and valuation methodology differences between the economic liability managed by the ALM strategy and the U.S. GAAP liability.

The amounts in the table above exclude the impacts of $952 million of gains and $473 million of losses, for the three months ended March 31, 2020 and 2019, respectively, associated with our capital hedge program which is intended to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets. See “—iii. Capital Hedge Program” below for more information.

For the first quarter of 2020, the loss of $1,446 million primarily reflected the impact of a $1,270 million net charge from the changes in the U.S. GAAP embedded derivative and hedge positions. This net charge was primarily driven by an unfavorable impact related to the portions of the U.S. GAAP liability before NPR, that are excluded from our hedge target, primarily driven by widening of credit spreads, declining interest rates (with offsets in changes in the fair value of fixed income instruments that are recorded in OCI versus net income) and unfavorable equity market performance. This decrease was partially offset by an increase in the NPR adjustment driven by widening of credit spreads used in measuring our living benefit liabilities. Also contributing to the net charge was a charge related to the amortization of DAC and other costs of $176 million.

For the first quarter of 2019, the loss of $637 million primarily reflected the impact of a $798 million net charge from the changes in the U.S. GAAP embedded derivative and hedge positions. This net charge was driven by a decrease in the NPR adjustment driven by tightening of credit spreads used in measuring our living benefit liabilities. This decrease was partially offset by a favorable impact related to the portions of the U.S. GAAP liability before NPR, that are excluded from our hedge target, primarily driven by tightening of credit spreads and declining interest rates (with offsets in changes in the fair value of fixed income instruments that are recorded in OCI versus net income), partially offset by favorable equity market performance. The net charge was partially offset by a benefit related to the amortization of DAC and other costs of $161 million.

For information regarding the Risk Appetite Framework we use to evaluate and support the risks of the ALM strategy, see “—Liquidity and Capital Resources—Capital.”

iii. Capital Hedge Program:

We employ a capital hedge program to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets. The capital hedge program is conducted using equity derivatives which include equity call and put options, total return swaps and futures contracts. The changes in value of these derivatives are recognized in adjusted operating income over the expected duration of the capital hedge program.


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Product Specific Risks and Risk Mitigants

As noted above, the risks associated with our products are mitigated through product design features, including automatic rebalancing, as well as through our ALM strategy and external reinsurance. The following table sets forth the risk management profile of our living benefit guarantees and guaranteed minimum death benefit (“GMDB”) features as of the periods indicated.

 
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
 
 
Account
Value
 
% of
Total
 
Account
Value
 
% of
Total
 
Account
Value
 
% of
Total
 
 
($ in millions)
Living benefit/GMDB features(1):
 
 
 
 
 
 
 
 
 
 
 
 
Both ALM strategy and automatic rebalancing(2)(3)
 
$
92,692

 
67
%
 
$
111,535

 
68
%
 
$
108,390

 
68
%
ALM strategy only(3)
 
6,188

 
4
%
 
7,703

 
5
%
 
7,936

 
5
%
Automatic rebalancing only
 
644

 
1
%
 
732

 
1
%
 
801

 
1
%
External reinsurance(4)
 
2,617

 
2
%
 
3,150

 
2
%
 
3,059

 
2
%
PDI
 
15,802

 
11
%
 
16,296

 
9
%
 
12,649

 
8
%
Other products
 
1,955

 
1
%
 
2,457

 
1
%
 
2,474

 
2
%
Total living benefit/GMDB features
 
$
119,898

 
 
 
$
141,873

 
 
 
$
135,309

 
 
GMDB features and other(5)
 
19,149

 
14
%
 
23,055

 
14
%
 
22,587

 
14
%
Total variable annuity account value
 
$
139,047

 
 
 
$
164,928

 
 
 
$
157,896

 
 
__________
(1)
All contracts with living benefit guarantees also contain GMDB features, which cover the same insured contract.
(2)
Contracts with living benefits that are included in our ALM strategy and that have an automatic rebalancing feature.
(3)
Excludes PDI which is presented separately within this table.
(4)
Represents contracts subject to a reinsurance transaction with an external counterparty covering certain new Highest Daily Lifetime Income (“HDI”) v.3.0 business for the period April 1, 2015 through December 31, 2016. These contracts with living benefits also have an automatic rebalancing feature.
(5)
Includes contracts that have a GMDB feature and do not have an automatic rebalancing feature.

Individual Life

Operating Results

The following table sets forth Individual Life’s operating results for the periods indicated.

 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Operating results:
 
 
 
Revenues
$
1,530

 
$
1,482

Benefits and expenses
1,550

 
1,377

Adjusted operating income
(20
)
 
105

Realized investment gains (losses), net, and related adjustments
565

 
119

Charges related to realized investment gains (losses), net
(418
)
 
(106
)
Market experience updates(1)
(294)

 
0

Income (loss) before income taxes and equity in earnings of operating joint ventures
$
(167
)
 
$
118

__________
(1)
Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company had historically recognized these impacts in adjusted operating income. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.


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Adjusted Operating Income

Adjusted operating income decreased $125 million, primarily reflecting lower underwriting results, driven by an unfavorable impact from mortality experience, net of reinsurance, and the unfavorable ongoing impact of our annual reviews and update of assumptions and other refinements, partially offset by business growth. Also contributing to the decrease was the absence of a favorable impact in the prior year period from changes in our estimated profitability of the business driven by equity market performance on policyholder accounts. Beginning with the second quarter of 2019, this activity is excluded from adjusted operating income.

Revenues, Benefits and Expenses

Revenues increased $48 million. This increase was primarily driven by higher policy charges and fee income driven by business growth, and an increase in net investment income from higher average invested assets resulting from business growth, partially offset by lower investment yields due to a decline in interest rates.

Benefits and expenses increased $173 million. This increase reflected higher policyholders’ benefits driven by an unfavorable impact from mortality experience, net of reinsurance, and the unfavorable ongoing impact of the assumption update and other refinements, as well as higher interest credited to account balances driven by business growth, as discussed above. Also contributing to the increase was the absence of a favorable impact in the prior year period from changes in our estimated profitability of the business driven by equity market performance on policyholder accounts, as discussed above.

Sales Results

The following table sets forth Individual Life’s annualized new business premiums, as defined under “—Results of Operations—Segment Measures” above, by distribution channel and product, for the periods indicated.
 
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
 
 
Prudential
Advisors
 
Third-
Party
 
Total
 
Prudential
Advisors
 
Third-
Party
 
Total
 
 
(in millions)
Term Life
 
$
6

 
$
34

 
$
40

 
$
7

 
$
44

 
$
51

Guaranteed Universal Life(1)
 
2

 
27

 
29

 
2

 
19

 
21

Other Universal Life(1)
 
7

 
23

 
30

 
9

 
21

 
30

Variable Life
 
20

 
68

 
88

 
16

 
45

 
61

Total
 
$
35

 
$
152

 
$
187

 
$
34

 
$
129

 
$
163

__________
(1)
Single pay life premiums and excess (unscheduled) premiums are included in annualized new business premiums based on a 10% credit and represented approximately 5% and 6% of Guaranteed Universal Life and 7% and 6% of Other Universal Life annualized new business premiums for the three months ended March 31, 2020 and 2019, respectively. Prior period percentages have been updated to conform to current period presentation.

Total annualized new business premiums for the three months ended March 31, 2020 increased $24 million compared to the prior year period, primarily driven by higher sales of variable life insurance products, as a result of product design and pricing actions, partially offset by lower sales of term life products.

U.S. Businesses—Assurance IQ Division
Assurance IQ

Operating Results

The following table sets forth Assurance IQ’s operating results for the period indicated.

97


 
 
Three Months Ended
March 31, 2020
 
 
(in millions)
Operating results:
 
 
Revenues
 
$
60

Expenses
 
83

Adjusted operating income
 
(23
)
Other adjustments(1)
 
45

Income (loss) before income taxes and equity in earnings of operating joint ventures
 
$
22

 __________
(1)
“Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Adjusted Operating Income

The acquisition of Assurance IQ was completed in October 2019. Adjusted operating income for the first quarter of 2020 was $(23) million, reflecting revenues, net of marketing and distribution expenses, primarily related to our health (Health Under 65) and life insurance product lines. Results also included operating expenses and amortization expenses related to intangible assets recognized as part of purchase accounting (see Note 1 and Note 10 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information).

Revenues and Expenses

Revenues were $60 million, primarily reflecting commissions and marketing referral revenues from our health (Health Under 65) and life insurance product lines. Expenses were $83 million driven by marketing and distribution costs, general and administrative operating expenses, and amortization expenses related to intangible assets.

International Businesses
 
Business Update

In April 2020, we entered into a definitive agreement with KB Financial Group, Inc., a Korean financial services provider, to sell The Prudential Life Insurance Company of Korea, Ltd. (“POK”) for cash consideration of approximately $1.9 billion at current exchange rates, to be paid at closing. The transaction is consistent with our strategic focus internationally on Japan and higher-growth emerging markets around the world. The transaction is expected to close by the end of 2020, subject to regulatory approvals and customary closing conditions. In the second quarter of 2020, we will report our investment in POK as “held for sale” and expect to recognize a $600 million after-tax charge to earnings to adjust the book value of POK to the market value reflected in the purchase price (see Note 15 to the Unaudited Interim Consolidated Financial Statements for additional information). Effective in the second quarter of 2020, the results of this business and the impact of the anticipated sale will be reflected in the Divested and Run-off Businesses that are included in Corporate and Other. We intend to use the proceeds of the transaction for general corporate purposes.

We are exploring strategic options for our Taiwanese insurance business, which may include a sale.

Operating Results
 
The results of our International Businesses’ operations are translated on the basis of weighted average monthly exchange rates, inclusive of the effects of the intercompany arrangement discussed in “—Results of Operations—Impact of Foreign Currency Exchange Rates” above. To provide a better understanding of operating performance within the International Businesses, where indicated below, we have analyzed our results of operations excluding the effect of the year over year change in foreign currency exchange rates. Our results of operations, excluding the effect of foreign currency fluctuations, were derived by translating foreign currencies to USD at uniform exchange rates for all periods presented, including for constant dollar information discussed below. The exchange rates used were Japanese yen at a rate of 104 yen per USD and Korean won at a rate of 1,090 won per USD, both of which were 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.

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The following table sets forth the International Businesses’ operating results for the periods indicated.
 
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Operating results:
 
 
 
Revenues:
 
 
 
Life Planner
$
3,244

 
$
3,175

Gibraltar Life and Other
2,918

 
2,977

Total revenues
6,162

 
6,152

Benefits and expenses:
 
 
 
Life Planner
2,827

 
2,694

Gibraltar Life and Other
2,584

 
2,536

Total benefits and expenses
5,411

 
5,230

Adjusted operating income:
 
 
 
Life Planner
417

 
481

Gibraltar Life and Other
334

 
441

Total adjusted operating income
751

 
922

Realized investment gains (losses), net, and related adjustments(1)
381

 
532

Charges related to realized investment gains (losses), net
(8
)
 
0

Market experience updates(2)
(15
)
 
0

Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests
4

 
(30
)
Income (loss) before income taxes and equity in earnings of operating joint ventures
$
1,113

 
$
1,424

__________
(1)
Prior period amounts have been updated to conform to current period presentation.
(2)
Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company had historically recognized these impacts in adjusted operating income. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Adjusted Operating Income
 
Adjusted operating income from our Life Planner operations decreased $64 million, including a $0 million net impact from currency fluctuations, inclusive of the currency hedging program discussed above, primarily reflecting lower net investment spread results driven by lower income on non-coupon investments and lower investment yields. Also contributing to the decrease were higher expenses driven by updates to legal reserves, as well as higher costs related to business growth and business initiatives, and lower underwriting results driven by an unfavorable impact from mortality experience. These decreases were partially offset by the growth of business in force in our Japan and Brazil operations.

Adjusted operating income from our Gibraltar Life and Other operations decreased $107 million, including a net unfavorable impact of $3 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding this item, adjusted operating income from our Gibraltar Life and Other operations decreased $104 million, primarily reflecting lower net investment spread results driven by lower income on non-coupon investments and lower investment yields. Also contributing to the decrease were lower earnings from our joint venture investments due to market performance, as well as higher expenses, including costs associated with business initiatives.

Revenues, Benefits and Expenses

Revenues from our Life Planner operations increased $69 million, including a net unfavorable impact of $45 million from currency fluctuations. Excluding this item, revenues increased $114 million, primarily driven by higher premiums attributable to the growth of business in force.


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Benefits and expenses of our Life Planner operations increased $133 million, including a net favorable impact of $45 million from currency fluctuations. Excluding this item, benefits and expenses increased $178 million, primarily reflecting higher policyholders’ benefits, including changes in reserves, driven by an unfavorable impact from mortality experience as well as business growth. Also contributing to the increase were higher expenses driven by updates to legal reserves, as well as higher costs related to business growth and business initiatives.

Revenues from our Gibraltar Life and Other operations decreased $59 million, including a net favorable impact of $1 million from currency fluctuations. Excluding this item, revenues decreased $60 million, primarily reflecting lower net investment results driven by lower income on non-coupon investments and lower investment yields due to a decline in interest rates. Also contributing to the decrease was lower other income driven by an unfavorable impact from our joint venture investments due to market performance.

Benefits and expenses of our Gibraltar Life and Other operations increased $48 million, including a net unfavorable impact of $4 million from currency fluctuations. Excluding this item, benefits and expenses increased $44 million, primarily driven by higher expenses, including costs associated with business initiatives, and higher policyholders’ benefits, including changes in reserves.

Sales Results

The following table sets forth annualized new business premiums, as defined under “—Results of Operations—Segment Measures” above, on an actual and constant exchange rate basis for the periods indicated.
 
 
Three Months Ended
March 31,
  
2020
 
2019
 
(in millions)
Annualized new business premiums:
 
 
 
On an actual exchange rate basis:
 
 
 
Life Planner
$
378

 
$
404

Gibraltar Life and Other
307

 
323

Total
$
685

 
$
727

On a constant exchange rate basis:
 
 
 
Life Planner
$
386

 
$
408

Gibraltar Life and Other
309

 
325

Total
$
695

 
$
733


The amount of annualized new business premiums and the sales mix in terms of types and currency denomination of products for any given period can be significantly impacted by several factors, including but not limited to: the addition of new products, discontinuation of existing products, changes in credited interest rates for certain products and other product modifications, changes in premium rates, changes in interest rates or fluctuations in currency markets, changes in tax laws, changes in life insurance regulations or changes in the competitive environment. Sales volume may increase or decrease prior to certain of these changes becoming effective, and then fluctuate in the other direction following such changes.

Our diverse product portfolio in Japan, in terms of currency mix and premium payment structure, allows us to adapt to changing market and competitive dynamics, including the extremely low interest rate environment. We regularly examine our product offerings and their related profitability and, as a result, we have repriced or discontinued sales of certain products that do not meet our profit expectations. The impact of these actions, coupled with the introduction of certain new products, has generally resulted in an increase in sales of products denominated in USD relative to products denominated in other currencies.

The table below presents annualized new business premiums on a constant exchange rate basis, by product and distribution channel, for the periods indicated.

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Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
 
Life
 
Accident
&
Health
 
Retirement(1)
 
Annuity
 
Total
 
Life
 
Accident
&
Health
 
Retirement(1)
 
Annuity
 
Total
 
(in millions)
Life Planner
$
207

 
$
26

 
$
121

 
$
32

 
$
386

 
$
235

 
$
36

 
$
116

 
$
21

 
$
408

Gibraltar Life and Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Life Consultants
$
82

 
$
9

 
$
18

 
$
22

 
$
131

 
$
87

 
$
11

 
$
23

 
$
45

 
$
166

Banks(2)
120

 
0

 
10

 
2

 
132

 
94

 
0

 
9

 
5

 
108

Independent Agency
22

 
1

 
21

 
2

 
46

 
31

 
3

 
9

 
8

 
51

Subtotal
224

 
10

 
49

 
26

 
309

 
212

 
14

 
41

 
58

 
325

Total
$
431

 
$
36

 
$
170

 
$
58

 
$
695

 
$
447

 
$
50

 
$
157

 
$
79

 
$
733

__________
(1)
Includes retirement income, endowment and savings variable universal life.
(2)
Single pay life annualized new business premiums, which include 10% of first year premiums, and 3-year limited pay annualized new business premiums, which include 100% of new business premiums, represented 4% and 67%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended March 31, 2020, and 0% and 65%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended March 31, 2019.

Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations decreased $22 million, primarily reflecting lower sales in Japan driven by the corporate product tax rule change effective July 2019, partially offset by higher sales of USD-denominated protection products supported by growth in Life Planner headcount. Also partially offsetting the decrease was higher sales in our Korea, Taiwan and Brazil operations driven by growth in Life Planner headcount.

Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations decreased $16 million. Life Consultants sales decreased $35 million, primarily reflecting lower sales of USD-denominated fixed annuity products driven by declines in crediting rates and lower Life Consultant headcount. Independent Agency sales decreased $5 million, primarily driven by the suspension of corporate term products in the first quarter of 2019, and lower sales of USD-denominated fixed annuity products, partially offset by higher sales of USD-denominated protection products. These decreases were partially offset by a $24 million increase in Bank channel sales primarily driven by higher sales of USD-denominated protection products.

Corporate and Other
 
Corporate and Other includes corporate operations, after allocations to our business segments, and Divested and Run-off Businesses other than those that qualify for “discontinued operations” accounting treatment under U.S. GAAP.
 
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Operating results:
 
 
 
Capital debt interest expense
$
(198
)
 
$
(199
)
Investment income, net of operating debt interest expense
28

 
44

Pension and employee benefits
50

 
24

Other corporate activities(1)
(222
)
 
(281
)
Adjusted operating income
(342
)
 
(412
)
Realized investment gains (losses), net, and related adjustments
(40
)
 
(50
)
Charges related to realized investment gains (losses), net
21

 
(6
)
Market experience updates(2)
8

 
0

Divested and Run-off Businesses
80

 
174

Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests
22

 
(8
)
Income (loss) before income taxes and equity in earnings of operating joint ventures
$
(251
)
 
$
(302
)
__________ 
(1)
Includes consolidating adjustments.

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Table of Contents

(2)
Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company had historically recognized these impacts in adjusted operating income. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

The loss from Corporate and Other operations, on an adjusted operating income basis, decreased $70 million. Net charges from other corporate activities decreased $59 million, primarily driven by lower costs for deferred and long-term compensation plans tied to Company stock and equity market performance, reflecting certain changes implemented in the fourth quarter of 2019 to reduce market-based earnings volatility. The decrease also reflected favorable results of $26 million from pension and employee benefits, primarily driven by a decrease in employee health benefit costs. Investment income, net of operating debt interest expense, decreased $16 million, driven by lower income on highly liquid assets.

Divested and Run-off Businesses

Divested and Run-off Businesses Included in Corporate and Other
 
Income from our Divested and Run-off Businesses includes results from several businesses that have been or will be sold or exited, including businesses that have been placed in wind down status that do not qualify for “discontinued operations” accounting treatment under U.S. GAAP. The results of these Divested and Run-off Businesses are reflected in our Corporate and Other operations, but are excluded from adjusted operating income. A summary of the results of the Divested and Run-off Businesses reflected in our Corporate and Other operations is as follows for the periods indicated:
 
Three Months Ended
March 31,
  
2020
 
2019
 
(in millions)
Long-Term Care
$
81

 
$
164

Other
(1
)
 
10

Total Divested and Run-off Businesses income (loss) excluded from adjusted operating income
$
80

 
$
174


Long-Term Care. Results for the first quarter of 2020 decreased compared to the prior year period, reflecting an unfavorable comparative change in the market value of investments in equity securities, an increase in reserves as a result of an unlocking of assumptions driven by a decline in interest rates in the current period, and lower underwriting results driven by unfavorable policy experience. These decreases were partially offset by higher net realized investment gains in the current period driven by more favorable changes in the market value of derivatives used for duration management.

Closed Block Division
 
The Closed Block division includes certain in-force traditional domestic participating life insurance and annuity products and assets that are used for the payment of benefits and policyholder dividends on these policies (collectively the “Closed Block”), as well as certain related assets and liabilities. We no longer offer these traditional domestic participating policies. See Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information.
 
Each year, the Board of Directors of The Prudential Insurance Company of America (“PICA”) determines the dividends payable on participating policies for the following year based on the experience of the Closed Block, including investment income, net realized and unrealized investment gains (losses), mortality experience and other factors. Although the Closed Block experience for dividend action decisions is based upon statutory results, at the time the Closed Block was established, we developed, as required by U.S. GAAP, an actuarial calculation of the timing of the maximum future earnings from the policies included in the Closed Block. If actual cumulative earnings in any given period are greater than the cumulative earnings we expected, we record this excess as a policyholder dividend obligation. We will subsequently pay this excess to Closed Block policyholders as an additional dividend unless it is otherwise offset by future Closed Block performance that is less favorable than we originally expected. The policyholder dividends we charge to expense within the Closed Block division will include any change in our policyholder dividend obligation that we recognize for the excess of actual cumulative earnings in any given period over the cumulative earnings we expected in addition to the actual policyholder dividends declared by the Board of Directors of PICA.
 
As of March 31, 2020, the excess of actual cumulative earnings over the expected cumulative earnings was $2,320 million, which was recorded as a policyholder dividend obligation. Actual cumulative earnings, as required by U.S. GAAP, reflect the recognition of realized investment gains and losses in the current period, as well as changes in assets and related liabilities that support the Closed Block policies. Additionally, the accumulation of net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block has been reflected as a policyholder dividend obligation of $3,208 million at March 31, 2020, to be paid to Closed Block policyholders unless offset by future experience, with a corresponding amount reported in AOCI.

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Operating Results
 
The following table sets forth the Closed Block division’s results for the periods indicated.
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
U.S. GAAP results:
 
 
 
Revenues
$
677

 
$
1,374

Benefits and expenses
678

 
1,393

Income (loss) before income taxes and equity in earnings of operating joint ventures
$
(1
)
 
$
(19
)
 
Income (loss) Before Income Taxes and Equity in Earnings of Operating Joint Ventures

 Loss before income taxes and equity in earnings of operating joint ventures decreased $18 million. Net investment activity results decreased primarily reflecting a decrease in other income, driven by unfavorable changes in the value of equity securities, partially offset by an increase in realized investment gains, driven by an increase in the value of derivatives used in risk management activities. Net insurance activity results reflected a favorable comparative change driven by a decrease in the 2020 dividend scale. As a result of the above and other variances, a $483 million reduction in the policyholder dividend obligation was recorded in the first quarter of 2020, compared to a $123 million increase in the first quarter of 2019. If actual cumulative earnings fall below expected cumulative earnings in future periods, earnings volatility in the Closed Block division, which is primarily due to changes in investment results, may not be offset by changes in the cumulative earnings policyholder dividend obligation. For a discussion of the Closed Block division’s realized investment gains (losses), net, see “—General Account Investments.”

Revenues, Benefits and Expenses
 
Revenues decreased $697 million primarily driven by a decrease in other income, partially offset by an increase in net realized investment gains, as discussed above.

Benefits and expenses decreased $715 million primarily driven by a decrease in dividends to policyholders, reflecting a decrease in the policyholder dividend obligation expense due to changes in cumulative earnings, as discussed above.
 
Income Taxes
 
For information regarding income taxes, see Note 8 to the Unaudited Interim Consolidated Financial Statements.

Experience-Rated Contractholder Liabilities,
Assets Supporting Experience-Rated Contractholder Liabilities and Other Related Investments
 
Certain products included in the Retirement and International Businesses segments are experience-rated in that investment results associated with these products are expected to ultimately accrue to contractholders. The majority of investments supporting these experience-rated products are carried at fair value. These investments are reflected on the Unaudited Interim Consolidated Statements of Financial Position as “Assets supporting experience-rated contractholder liabilities, at fair value.” Realized and unrealized gains (losses) for these investments are reported in “Other income (loss).” Interest and dividend income for these investments is reported in “Net investment income.” To a lesser extent, these experience-rated products are also supported by derivatives and commercial mortgage and other loans. The derivatives that support these experience-rated products are reflected on the Unaudited Interim Consolidated Statements of Financial Position as “Other invested assets” and are carried at fair value, and the realized and unrealized gains (losses) are reported in “Realized investment gains (losses), net.” The commercial mortgage and other loans that support these experience-rated products are carried at unpaid principal, net of unamortized discounts and an allowance for losses, and are reflected on the Unaudited Interim Consolidated Statements of Financial Position as “Commercial mortgage and other loans.” Gains (losses) on sales and changes in the valuation allowance for commercial mortgage and other loans are reported in “Realized investment gains (losses), net.”
 

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Our Retirement segment has two types of experience-rated products that are supported by assets supporting experience-rated contractholder liabilities and other related investments. Fully participating products are those for which the entire return on underlying investments is passed back to the policyholders through a corresponding adjustment to the related liability, primarily classified in the Unaudited Interim Consolidated Statements of Financial Position as “Policyholders’ account balances.” The adjustment to the liability is based on changes in the fair value of all of the related assets, including commercial mortgage and other loans, which are carried at amortized cost, less any valuation allowance. Partially participating products are those for which only a portion of the return on underlying investments is passed back to the policyholders over time through changes to the contractual crediting rates. The crediting rates are typically reset semiannually, often subject to a minimum crediting rate, and returns are required to be passed back within ten years.
 
In our International Businesses, the experience-rated products are fully participating. As a result, the entire return on the underlying investments is passed back to policyholders through a corresponding adjustment to the related liability.
 
Adjusted operating income excludes net investment gains (losses) on assets supporting experience-rated contractholder liabilities, related derivatives and commercial mortgage and other loans. This is consistent with the exclusion of realized investment gains (losses) with respect to other investments supporting insurance liabilities managed on a consistent basis. In addition, to be consistent with the historical treatment of charges related to realized investment gains (losses) on investments, adjusted operating income also excludes the change in contractholder liabilities due to asset value changes in the pool of investments (including changes in the fair value of commercial mortgage and other loans) supporting these experience-rated contracts, which are reflected in “Interest credited to policyholders’ account balances.” The result of this approach is that adjusted operating income for these products includes net fee revenue and interest spread we earn on these experience-rated contracts, and excludes changes in fair value of the pool of investments, both realized and unrealized, that we expect will ultimately accrue to the contractholders.

The following table sets forth the impact on results for the periods indicated of these items that are excluded from adjusted operating income:
 
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Retirement:
 
 
 
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net(1)
$
(289
)
 
$
326

Change in experience-rated contractholder liabilities due to asset value changes
327

 
(279
)
Gains (losses), net, on experienced rated contracts(2)(3)
$
38

 
$
47

International Businesses:
 
 
 
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net
$
(336
)
 
$
124

Change in experience-rated contractholder liabilities due to asset value changes
336

 
(124
)
Gains (losses), net, on experienced rated contracts
$
0

 
$
0

Total:
 
 
 
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net(1)
$
(625
)
 
$
450

Change in experience-rated contractholder liabilities due to asset value changes
663

 
(403
)
Gains (losses), net, on experienced rated contracts(2)(3)
$
38

 
$
47

__________ 
(1)
Prior period amounts have been reclassified to conform to current period presentation.
(2)
Decreases to contractholder liabilities due to asset value changes are limited by certain floors and therefore do not reflect cumulative declines in recorded asset values of $14 million and $24 million as of March 31, 2020 and 2019, respectively. We have recovered and expect to recover in future periods these declines in recorded asset values through subsequent increases in recorded asset values or reductions in crediting rates on contractholder liabilities.
(3)
Included in the amounts above related to the change in the liability to contractholders as a result of commercial mortgage and other loans are a decrease of $37 million and an increase of $29 million for the three months ended March 31, 2020 and 2019, respectively. As prescribed by U.S. GAAP, changes in the fair value of commercial mortgage and other loans held for investment in our general account, other than when associated with impairments, are not recognized in income in the current period, while the impact of these changes in fair value are reflected as a change in the liability to fully participating contractholders in the current period.
 

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The net impacts, for the Retirement segment, of changes in experience-rated contractholder liabilities and investment gains (losses) on assets supporting experience-rated contractholder liabilities and other related investments reflect timing differences between the recognition of the mark-to-market adjustments and the recognition of the recovery of these adjustments in future periods through subsequent increases in asset values or reductions in crediting rates on contractholder liabilities for partially participating products. These impacts also reflect the difference between the fair value of the underlying commercial mortgages and other loans and the amortized cost, less any valuation allowance, of these loans, as described above.
 
Valuation of Assets and Liabilities
 
Fair Value of Assets and Liabilities
 
The authoritative guidance related to fair value measurement establishes a framework that includes a three-level hierarchy used to classify the inputs used in measuring fair value. The level in the hierarchy within which the fair value falls is determined based on the lowest level input that is significant to the measurement. The fair values of assets and liabilities classified as Level 3 include at least one significant unobservable input in the measurement. See Note 6 to the Unaudited Interim Consolidated Financial Statements for an additional description of the valuation hierarchy levels as well as for the balances of assets and liabilities measured at fair value on a recurring basis by hierarchy level presented on a consolidated basis.

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis, as of the periods indicated, and the portion of such assets and liabilities that are classified in Level 3 of the valuation hierarchy. The table also provides details about these assets and liabilities excluding those held in the Closed Block division. We believe the amounts excluding the Closed Block division are most relevant to an understanding of our operations that are pertinent to investors in Prudential Financial because substantially all Closed Block division assets support obligations and liabilities relating to the Closed Block policies only. See Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information on the Closed Block.

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As of March 31, 2020
 
As of December 31, 2019
 
PFI excluding Closed Block Division
 
Closed Block
Division
 
PFI excluding Closed Block Division
 
Closed Block
Division
 
Total at
Fair Value
 
Total
Level 3(1)
 
Total at
Fair Value
 
Total
Level 3(1)
 
Total at
Fair Value
 
Total
Level 3(1)
 
Total at
Fair Value
 
Total
Level 3(1)
 
(in millions)
Fixed maturities, available-for-
sale
$
349,179

 
$
4,525

 
$
40,535

 
$
1,059

 
$
349,720

 
$
3,570

 
$
41,376

 
$
745

Assets supporting experience-rated contractholder liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
19,031

 
804

 
0

 
0

 
19,530

 
730

 
0

 
0

Equity securities
1,466

 
0

 
0

 
0

 
1,790

 
0

 
0

 
0

All other(2)
893

 
7

 
0

 
0

 
261

 
0

 
0

 
0

Subtotal
21,390

 
811

 
0

 
0

 
21,581

 
730

 
0

 
0

Fixed maturities, trading
3,403

 
240

 
218

 
9

 
3,628

 
275

 
256

 
12

Equity securities
4,348

 
527

 
1,691

 
67

 
5,140

 
557

 
2,245

 
76

Commercial mortgage and other
loans
670

 
0

 
0

 
0

 
228

 
0

 
0

 
0

Other invested assets(3)
3,763

 
581

 
1

 
0

 
1,433

 
567

 
0

 
0

Short-term investments
6,013

 
43

 
99

 
10

 
3,789

 
119

 
147

 
36

Cash equivalents
20,640

 
1

 
532

 
0

 
8,855

 
99

 
151

 
32

Other assets
382

 
382

 
0

 
0

 
113

 
113

 
0

 
0

Separate account assets
249,044

 
1,528

 
0

 
0

 
288,724

 
1,717

 
0

 
0

Total assets
$
658,832

 
$
8,638

 
$
43,076

 
$
1,145

 
$
683,211

 
$
7,747

 
$
44,175

 
$
901

Future policy benefits
$
27,935

 
$
27,935

 
$
0

 
$
0

 
$
12,831

 
$
12,831

 
$
0

 
$
0

Policyholders’ account balances
1,206

 
1,206

 
0

 
0

 
1,316

 
1,316

 
0

 
0

Other liabilities(3)
925

 
47

 
25

 
0

 
928

 
105

 
8

 
0

Notes issued by consolidated
variable interest entities
(“VIEs”)
799

 
799

 
0

 
0

 
800

 
800

 
0

 
0

Total liabilities
$
30,865

 
$
29,987

 
$
25

 
$
0

 
$
15,875

 
$
15,052

 
$
8

 
$
0

__________
(1)
Level 3 assets expressed as a percentage of total assets measured at fair value on a recurring basis for PFI excluding the Closed Block division and for the Closed Block division totaled 1.3% and 2.7%, respectively, as of March 31, 2020, and 1.1% and 2.0%, respectively, as of December 31, 2019.
(2)
“All other” represents cash equivalents and short-term investments.
(3)
“Other invested assets” and “Other liabilities” primarily include derivatives. The amounts include the impact of netting subject to master netting agreements.

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, 2020, with values primarily based on indicative broker quotes, and approximately $3.6 billion of private fixed maturities, with values primarily based on internally-developed models. Significant unobservable inputs used in their valuation included: issue specific spread adjustments, material non-public financial information, management judgment, estimation of future earnings and cash flows, default rate assumptions, liquidity assumptions and indicative quotes from market makers. Separate account assets included in Level 3 in our fair value hierarchy primarily include corporate securities and commercial mortgage loans.


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Embedded derivatives reported in “Future policy benefits” and “Policyholders’ account balances” that are included in level 3 of our fair value hierarchy represent general account liabilities pertaining to living benefit features of the Company’s variable annuity contracts and the index-linked interest credited features on certain life and annuity products. These are carried at fair value with changes in fair value included in “Realized investment gains (losses), net.” These embedded derivatives are valued using internally-developed models that require significant estimates and assumptions developed by management. Changes in these estimates and assumptions can have a significant impact on the results of our operations.
 
For additional information about the valuation techniques and the key estimates and assumptions used in our determination of fair value, see Note 6 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
 
General Account Investments
 
Portfolio Composition
 
Our investment portfolio consists of public and private fixed maturity securities, commercial mortgage and other loans, policy loans and non-coupon investments, which include equity securities and other invested assets such as limited partnerships and limited liability companies (“LPs/LLCs”), real estate held through direct ownership, derivative instruments and seed money investments in separate accounts. The composition of our general account reflects, within the discipline provided by our risk management approach, our need for competitive results and the selection of diverse investment alternatives available primarily through our PGIM segment. The size of our portfolio enables us to invest in asset classes that may be unavailable to the typical investor.
 
The following tables set forth the composition of our general account investment portfolio apportioned between PFI excluding the Closed Block division and the Closed Block division, as of the dates indicated:
 
 
 
March 31, 2020
 
 
PFI Excluding
Closed Block Division
 
Closed Block
Division
 
Total
 
 
($ in millions)
Fixed maturities:
 
 
 
 
 
 
 
 
Public, available-for-sale, at fair value
 
$
298,348

 
65.1
%
 
$
29,226

 
$
327,574

Public, held-to-maturity, at amortized cost, net of allowance
 
1,672

 
0.4

 
0

 
1,672

Private, available-for-sale, at fair value
 
50,289

 
11.0

 
11,309

 
61,598

Private, held-to-maturity, at amortized cost, net of allowance
 
223

 
0.1

 
0

 
223

Fixed maturities, trading, at fair value
 
2,254

 
0.5

 
218

 
2,472

Assets supporting experience-rated contractholder liabilities, at fair value
 
21,580

 
4.7

 
0

 
21,580

Equity securities, at fair value
 
3,921

 
0.8

 
1,691

 
5,612

Commercial mortgage and other loans, at book value, net of allowance
 
54,423

 
11.9

 
8,439

 
62,862

Policy loans, at outstanding balance
 
7,889

 
1.7

 
4,210

 
12,099

Other invested assets, net of allowance(1)
 
9,426

 
2.1

 
3,336

 
12,762

Short-term investments, net of allowance
 
7,767

 
1.7

 
178

 
7,945

Total general account investments
 
457,792

 
100.0
%
 
58,607

 
516,399

Invested assets of other entities and operations(2)
 
8,277

 


 
0

 
8,277

Total investments
 
$
466,069

 


 
$
58,607

 
$
524,676



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December 31, 2019
 
 
PFI Excluding
Closed Block Division
 
Closed Block
Division
 
Total
 
 
($ in millions)
Fixed maturities:
 
 
 
 
 
 
 
 
Public, available-for-sale, at fair value
 
$
296,382

 
64.9
%
 
$
29,011

 
$
325,393

Public, held-to-maturity, at amortized cost
 
1,705

 
0.4

 
0

 
1,705

Private, available-for-sale, at fair value
 
52,750

 
11.6

 
12,365

 
65,115

Private, held-to-maturity, at amortized cost
 
228

 
0.1

 
0

 
228

Fixed maturities, trading, at fair value
 
2,467

 
0.5

 
256

 
2,723

Assets supporting experience-rated contractholder liabilities, at fair value
 
21,597

 
4.7

 
0

 
21,597

Equity securities, at fair value
 
4,586

 
1.0

 
2,245

 
6,831

Commercial mortgage and other loans, at book value, net of allowance
 
54,671

 
12.0

 
8,629

 
63,300

Policy loans, at outstanding balance
 
7,832

 
1.7

 
4,264

 
12,096

Other invested assets(1)
 
9,210

 
2.0

 
3,334

 
12,544

Short-term investments
 
5,223

 
1.1

 
227

 
5,450

Total general account investments
 
456,651

 
100.0
%
 
60,331

 
516,982

Invested assets of other entities and operations(2)
 
5,778

 

 
0

 
5,778

Total investments
 
$
462,429

 

 
$
60,331

 
$
522,760

__________
(1)
Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments and other miscellaneous investments. For additional information regarding these investments, see “—Other Invested Assets” below.
(2)
Includes invested assets of our investment management and derivative operations. Excludes assets of our investment management operations that are managed for third-parties and those assets classified as “Separate account assets” on our balance sheet. For additional information regarding these investments, see “—Invested Assets of Other Entities and Operations” below.

The increase in general account investments attributable to PFI excluding the Closed Block division in the first three months of 2020 was primarily due to the reinvestment of net investment income and net business inflows, partially offset by a decrease in fair value due to overall interest rate increases driven by credit spread widening that was only partially offset by other rate declines. 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, 2020 and December 31, 2019, 42% of our general account investments attributable to PFI excluding the Closed Block division related to our Japanese insurance operations. The following table sets forth the composition of the investments of our Japanese insurance operations’ general account, as of the dates indicated:

 
 
March 31, 2020
 
December 31, 2019
 
 
(in millions)
Fixed maturities:
 
 
 
 
Public, available-for-sale, at fair value
 
$
144,121

 
$
142,220

Public, held-to-maturity, at amortized cost, net of allowance
 
1,672

 
1,705

Private, available-for-sale, at fair value
 
18,290

 
19,189

Private, held-to-maturity, at amortized cost, net of allowance
 
223

 
228

Fixed maturities, trading, at fair value
 
431

 
492

Assets supporting experience-rated contractholder liabilities, at fair value
 
2,463

 
2,777

Equity securities, at fair value
 
1,855

 
2,185

Commercial mortgage and other loans, at book value, net of allowance
 
18,987

 
19,138

Policy loans, at outstanding balance
 
2,952

 
2,859

Other invested assets(1)
 
2,618

 
2,187

Short-term investments
 
519

 
165

Total Japanese general account investments
 
$
194,131

 
$
193,145


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Table of Contents

__________ 
(1)
Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments and other miscellaneous investments.

The increase in general account investments related to our Japanese insurance operations in the first three months of 2020 was primarily attributable to the reinvestment of net investment income and net business inflows, partially offset by a decrease in fair value due to overall interest rate increases driven by credit spread widening that was only partially offset by other rate declines.

As of March 31, 2020, our Japanese insurance operations had $80.1 billion, at carrying value, of investments denominated in U.S. dollars, including $1.9 billion that were hedged to yen through third-party derivative contracts and $66.3 billion that support liabilities denominated in U.S. dollars, with the remainder hedging our foreign currency exchange rate exposure to U.S. dollar-equivalent equity. As of December 31, 2019, our Japanese insurance operations had $77.1 billion, at carrying value, of investments denominated in U.S. dollars, including $2.1 billion that were hedged to yen through third-party derivative contracts and $62.4 billion that support liabilities denominated in U.S. dollars, with the remainder hedging our foreign currency exchange rate exposure of U.S. dollar-equivalent equity. The $3.0 billion increase in the carrying value of U.S. dollar-denominated investments from December 31, 2019 was primarily attributable to a decrease in the U.S. treasury bond rates, portfolio growth as a result of net business inflows and reinvestment of net investment income.

Our Japanese insurance operations had $8.5 billion and $9.9 billion, at carrying value, of investments denominated in Australian dollars that support liabilities denominated in Australian dollars as of March 31, 2020 and December 31, 2019, respectively. The $1.4 billion decrease in the carrying value of Australian dollar-denominated investments from December 31, 2019 was primarily attributable to the translation impact of the Australian dollar weakening against the U.S. dollar and run off of the portfolio. For additional information regarding U.S. and Australian dollar investments held in our Japanese insurance operations and a discussion of our yen hedging strategy, see “—Results of Operations by Segment—Impact of Foreign Currency Exchange Rates” above.

Investment Results
 
The following tables set forth the investment results of our general account apportioned between PFI excluding the Closed Block division and the Closed Block division, for the periods indicated. The yields are based on net investment income as reported under U.S. GAAP and as such do not include certain interest-related items, such as settlements of duration management swaps which are included in “Realized investment gains (losses), net.”
 
Three Months Ended March 31, 2020
 
PFI Excluding Closed Block Division and Japanese Operations
 
Japanese Insurance Operations
 
PFI Excluding Closed Block Division
 
Closed Block Division
 
Total(5)
 
Yield(1)
 
Amount
 
Yield(1)
 
Amount
 
Yield(1)
 
Amount
 
Amount
 
Amount
 
($ in millions)
Fixed maturities(2)
4.52
 %
 
$
1,895

 
2.76
 %
 
$
946

 
3.73
 %
 
$
2,841

 
$
399

 
$
3,240

Assets supporting experience-rated contractholder liabilities
3.39

 
160

 
3.20

 
21

 
3.37

 
181

 
0

 
181

Equity securities
2.00

 
11

 
1.10

 
6

 
1.57

 
17

 
12

 
29

Commercial mortgage and other loans
4.01

 
355

 
3.99

 
189

 
4.00

 
544

 
93

 
637

Policy loans
5.12

 
63

 
3.99

 
29

 
4.70

 
92

 
61

 
153

Short-term investments and cash equivalents
1.28

 
71

 
1.62

 
7

 
1.31

 
78

 
3

 
81

Gross investment income
4.06

 
2,555

 
2.90

 
1,198

 
3.60

 
3,753

 
568

 
4,321

Investment expenses
(0.12
)
 
(85
)
 
(0.14
)
 
(68
)
 
(0.13
)
 
(153
)
 
(43
)
 
(196
)
Investment income after investment expenses
3.94
 %
 
2,470

 
2.76
 %
 
1,130

 
3.47
 %
 
3,600

 
525

 
4,125

Other invested assets(3)
 
 
81

 
 
 
(27
)
 
 
 
54

 
20

 
74

Investment results of other entities and operations(4)
 
 
3

 
 
 
0

 
 
 
3

 
0

 
3

Total investment income
 
 
$
2,554

 
 
 
$
1,103

 
 
 
$
3,657

 
$
545

 
$
4,202


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Three Months Ended March 31, 2019
 
PFI Excluding Closed Block Division and Japanese Operations
 
Japanese Insurance Operations
 
PFI Excluding Closed Block Division
 
Closed Block Division
 
Total(5)
 
Yield(1)
 
Amount
 
Yield(1)
 
Amount
 
Yield(1)
 
Amount
 
Amount
 
Amount
 
($ in millions)
Fixed maturities(2)
4.61
 %
 
$
1,848

 
2.83
 %
 
$
937

 
3.80
 %
 
$
2,785

 
$
419

 
$
3,204

Assets supporting experience-rated contractholder liabilities
3.50

 
165

 
3.14

 
20

 
3.46

 
185

 
0

 
185

Equity securities
2.37

 
12

 
1.43

 
7

 
1.90

 
19

 
11

 
30

Commercial mortgage and other loans
3.98

 
332

 
3.81

 
165

 
3.92

 
497

 
95

 
592

Policy loans
5.11

 
62

 
3.85

 
26

 
4.66

 
88

 
63

 
151

Short-term investments and cash equivalents
2.70

 
95

 
2.90

 
8

 
2.71

 
103

 
9

 
112

Gross investment income
4.31

 
2,514

 
2.94

 
1,163

 
3.76

 
3,677

 
597

 
4,274

Investment expenses
(0.13
)
 
(106
)
 
(0.13
)
 
(68
)
 
(0.13
)
 
(174
)
 
(54
)
 
(228
)
Investment income after investment expenses
4.18
 %
 
2,408

 
2.81
 %
 
1,095

 
3.63
 %
 
3,503

 
543

 
4,046

Other invested assets(3)
 
 
38

 
 
 
51

 
 
 
89

 
20

 
109

Investment results of other entities and operations(4)
 
 
61

 
 
 
0

 
 
 
61

 
0

 
61

Total investment income
 
 
$
2,507

 
 
 
$
1,146

 
 
 
$
3,653

 
$
563

 
$
4,216

__________ 
(1)
For interim periods, yields are annualized. The denominator in the yield percentage is based on quarterly average carrying values for all asset types except for fixed maturities which are based on amortized cost, net of allowance. Amounts for fixed maturities, short-term investments and cash equivalents are also netted for securities lending activity (i.e., income netted for rebate expenses and asset values netted for securities lending liabilities). A yield is not presented for other invested assets as it is not considered a meaningful measure of investment performance. Yields exclude investment income and assets related to other invested assets.
(2)
Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading, which are included in other invested assets.
(3)
Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments, fixed maturities classified as trading and other miscellaneous investments.
(4)
Includes net investment income of our investment management operations.
(5)
The total yield was 3.55% and 3.71% for the three months ended March 31, 2020 and 2019, respectively.

The decrease in investment income after investment expenses yield attributable to our general account investments, excluding both the Closed Block division and the Japanese insurance operations’ portfolio, for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, was primarily the result of lower fixed income reinvestment rates and lower returns on short-term investments based on a decrease in short-term rates.

The decrease in investment income after investment expenses yield attributable to the Japanese insurance operations’ portfolio, for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, was primarily the result of lower fixed income reinvestment rates.

Both the U.S. dollar-denominated and Australian dollar-denominated fixed maturities that are not hedged to yen through third-party derivative contracts provide a yield that is substantially higher than the yield on comparable yen-denominated fixed maturities. The average amortized cost of U.S. dollar-denominated fixed maturities that are not hedged to yen through third-party derivative contracts was approximately $51.9 billion and $44.9 billion for the three months ended March 31, 2020 and 2019, respectively. The majority of U.S. dollar-denominated fixed maturities support liabilities that are denominated in U.S. dollars. The average amortized cost of Australian dollar-denominated fixed maturities that are not hedged to yen through third-party derivative contracts was approximately $7.9 billion and $9.1 billion for the three months ended March 31, 2020 and 2019, respectively. The majority of Australian dollar-denominated fixed maturities support liabilities that are denominated in Australian dollars. For additional information regarding U.S. and Australian dollar investments held in our Japanese insurance operations, see “—Results of Operations by Segment—Impact of Foreign Currency Exchange Rates” above.

Realized Investment Gains and Losses

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The following table sets forth “Realized investment gains (losses), net” of our general account apportioned between PFI excluding Closed Block division and the Closed Block division by investment type as well as “Charges related to realized investment gains (losses), net” and adjustments, for the periods indicated:
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
PFI excluding Closed Block Division:
 
 
 
Realized investment gains (losses), net:
 
 
 
Due to foreign exchange movements on securities approaching maturity(2)
$
(3
)
 
$
0

Due to securities actively marketed for sale(2)
(69
)
 
(1
)
Due to credit or adverse conditions of the respective issuer(1)(3)
N/A

 
(30
)
Allowance for credit losses on fixed maturities(1)(3)
(150
)
 
N/A

Net gains (losses) on sales and maturities
311

 
269

Fixed maturity securities(4)
89

 
238

Commercial mortgage and other loans
6

 
(3
)
Derivatives
1,109

 
(1,006
)
OTTI losses on other invested assets recognized in earnings(3)
N/A

 
0

Allowance for credit losses on other invested assets(3)
(4
)
 
N/A

Other net gains (losses)
(3
)
 
1

Other
(7
)
 
1

Subtotal
1,197

 
(770
)
Investment results of other entities and operations(5)
214

 
(52
)
Total — PFI excluding Closed Block Division
1,411

 
(822
)
Related adjustments(6)
(1,306
)
 
210

Realized investment gains (losses), net, and related adjustments(6)
105

 
(612
)
Charges related to realized investment gains (losses), net
(803
)
 
25

Realized investment gains (losses), net, and charges related to realized investment gains (losses), net and adjustments(6)
$
(698
)
 
$
(587
)
Closed Block Division:
 
 
 
Realized investment gains (losses), net:
 
 
 
Due to foreign exchange movements on securities approaching maturity(2)
$
(9
)
 
$
0

Due to securities actively marketed for sale(2)
(10
)
 
0

Due to credit or adverse conditions of the respective issuer(1)(3)
N/A

 
(4
)
Allowance for credit losses on fixed maturities(1)(3)
(8
)
 
N/A

Net gains (losses) on sales and maturities
96

 
26

Fixed maturity securities(4)
69

 
22

Commercial mortgage and other loans
4

 
0

Derivatives
184

 
39

OTTI losses on other invested assets recognized in earnings(3)
N/A

 
0

Allowance for credit losses on other invested assets(3)
0

 
N/A

Other net gains (losses)
(1
)
 
(5
)
Other
(1
)
 
(5
)
Subtotal — Closed Block Division
256

 
56

Consolidated PFI realized investment gains (losses), net
$
1,667

 
$
(766
)
__________
(1)
Represents circumstances where we believe credit events or other adverse conditions of the respective issuers have caused or will lead to a deficiency in the contractual cash flows related to the investment. The amount of the impairment or allowance recorded in earnings is the difference between the amortized

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cost of the debt security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment (2019) or allowance (2020).
(2)
Represents the difference between the fair value of the debt security and the amortized cost at the time of the write-down.
(3)
Effective January 1, 2020, due to the implementation of ASU 2016-13, OTTI is no longer recorded.
(4)
Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading.
(5)
Includes “realized investment gains (losses), net” of our investment management operations.
(6)
Prior period amounts have been updated to conform to current period presentation.

Net gains on sales and maturities of fixed maturity securities were $311 million and $269 million for the first quarter of 2020 and 2019, respectively, primarily driven by the impact of foreign currency exchange rate movements on U.S. and Australian dollar-denominated securities that matured or were sold within our International Businesses segment and other sales of fixed maturity securities within our domestic segments from interest rate declines during the investment holding period.

Fixed maturity security allowance for credit losses was $150 million in the first quarter of 2020 and was concentrated in the energy and communications sectors within corporate securities and foreign government securities. This credit loss allowance was primarily related to securities with liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers. Fixed maturity credit impairments were $30 million in the first quarter of 2019 and were concentrated in the utility and energy sectors within corporate securities. These credit impairments were primarily related to securities with liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers.

Net realized gains on derivative instruments of $1,109 million for the first quarter of 2020 primarily included:

$2,355 million of gains on interest rate derivatives due to decreases in swap and U.S. Treasury rates;
$1,113 million of gains on capital hedges due to decreases in equity indices;
$1,001 million of gains on foreign currency hedges due to U.S. dollar appreciation versus the euro and British pound and due to USD interest rates declining more than foreign rates; and
$33 million of gains for fees earned on fee-based synthetic guaranteed investment contracts (“GICs”);
                   
Partially offsetting these gains were:

$3,390 million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts; and
$41 million of losses on credit default swaps primarily due to spreads widening.

Net realized losses on derivative instruments of $1,006 million for the first quarter of 2019 primarily included:

$1,201 million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts; and
$487 million of losses on capital hedges due to increases in equity indices;

Partially offsetting these losses were:

$428 million of gains on interest rate derivatives due to decreases in swap and U.S. Treasury rates;
$102 million of gains on foreign currency hedges due to U.S. dollar appreciation;
$68 million of gains on credit default swaps primarily due to spreads tightening; and
$36 million of gains for fees earned on fee-based synthetic GICs.

For a discussion of living benefit guarantees and related hedge positions in our Individual Annuities segment, see “—Results of Operations by Segment—U.S. Businesses—U.S. Individual Solutions Division—Individual Annuities” above.

Related adjustments include the portions of “Realized investment gains (losses), net” that are included in adjusted operating income and the portions of “Other income (loss)” and “Net investment income” that are excluded from adjusted operating income. These adjustments are made to arrive at “Realized investment gains (losses), net, and related adjustments” which are excluded from adjusted operating income. Results for the first quarter of 2020 reflected related adjustments of net negative $1,306 million primarily due to settlements on interest rate and currency derivatives as well as changes in the fair value of equity securities and fixed income securities designated as trading which are recorded in “Other income (loss).” Results for the first quarter of 2019 reflected related adjustments of net positive $210 million primarily due to changes in the fair value of equity securities which are recorded in “Other income (loss).”


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Charges that relate to “Realized investment gains (losses), net” are also excluded from adjusted operating income and may be reflected as net charges or net benefits. Results for the first quarter of 2020 reflected a net related charge of $803 million, compared to a net related benefit of $25 million for the first quarter of 2019. Both periods’ results were driven by the impact of derivative activity on the amortization of DAC, other costs and certain policyholder reserves.

Credit Losses

The level of credit losses generally reflects economic conditions and is expected to increase when economic conditions worsen and to decrease when economic conditions improve. Historically, the causes of credit losses have been specific to each individual issuer and have not directly resulted in credit losses to other securities within the same industry or geographic region. We may also realize additional credit and interest rate-related losses through sales of investments pursuant to our credit risk and portfolio management objectives.

We maintain separate monitoring processes for public and private fixed maturities and create watch lists to highlight securities that require special scrutiny and management. For private placements, our credit and portfolio management processes help ensure prudent controls over valuation and management. We have separate pricing and authorization processes to establish “checks and balances” for new investments. We apply consistent standards of credit analysis and due diligence for all transactions, whether they originate through our own in-house origination staff or through agents. Our regional offices closely monitor the portfolios in their regions. We set all valuation standards centrally, and we assess the fair value of all investments quarterly. Our public and private fixed maturity investment managers formally review all public and private fixed maturity holdings on a quarterly basis and more frequently when necessary to identify potential credit deterioration whether due to ratings downgrades, unexpected price variances and/or company or industry-specific concerns.

For LPs/LLCs accounted for using the equity method, the carrying value of these investments is written down or impaired to fair value when a decline in value is considered to be other-than-temporary. For additional information regarding our OTTI policies, see Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
COVID-19

The continued impact of COVID-19 on the global economy and corporate credit may result in losses and credit migration in our investment portfolio. Due to the highly uncertain nature of these conditions, it is not possible to estimate the overall impacts at this time. We believe our investment portfolio has been diligently constructed with a strong focus on ALM discipline, risk management, and capital preservation; and although certain industries will likely be more impacted by COVID-19 driven market conditions, we expect to benefit from our experience in managing highly specialized asset classes through multiple credit cycles. The following represents some of the sectors in our investment portfolio most impacted by COVID-19.
Energy Related Investments
As of March 31, 2020, PFI excluding the Closed Block division had energy related exposure with a market value of approximately $11 billion including a net unrealized loss of approximately $1 billion, which was reflected in AOCI. This $11 billion represented investments in public and private corporate fixed maturity securities (excluding trading securities) and was comprised of the midstream (40%), integrated energy (24%), independent energy (23%), oil field services (7%) and refining (6%) sub-sectors. As of March 31, 2020, the credit quality of energy sector fixed maturity securities was 82% investment grade and 18% below investment grade. Energy investment realized losses were approximately $52 million from write-downs and $79 million from credit loss allowances for the quarter ended March 31, 2020. Our investments in the energy sector could experience future valuation declines or losses if energy prices maintain their recent levels or continue to decline for an extended period of time. Our assessment that securities are other-than temporarily impaired may change due to new developments, including those developments related to COVID-19.
Consumer Cyclical Related Investments
As of March 31, 2020, PFI excluding the Closed Block division had consumer cyclical related exposure with a market value of approximately $11 billion including a net unrealized gain of less than $1 billion, which was reflected in AOCI. This $11 billion represented investments in public and private corporate fixed maturity securities (excluding trading securities) and included exposures in retail (37%), automotive (20%), restaurants (8%), leisure (8%), gaming (3%) and lodging (2%). As of March 31, 2020, the credit quality of consumer cyclical sector fixed maturity securities was 78% investment grade and 22% below investment grade. For additional information regarding “—Retail Related Investments,” see below.

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Retail Related Investments

As of March 31, 2020, PFI excluding the Closed Block division had retail-related investments of approximately $12 billion consisting primarily of $5 billion of corporate fixed maturities of which 90% was investment grade (also included in “—Consumer Cyclical Related Investments”); $6 billion of commercial mortgage loans with a weighted-average loan-to-value ratio of approximately 51% and weighted-average debt service coverage ratio of 2.45 times; and $1 billion of real estate held through direct ownership and real estate-related LPs/LLCs. In addition, we held approximately $11 billion of commercial mortgage-backed securities, of which approximately 79% and 21% were rated AAA (super senior) and AA, respectively, and comprised of diversified collateral pools. Approximately 30% of the collateral pools were comprised of retail-related investments, with no pools solely collateralized by retail-related investments. For additional information regarding commercial mortgage-backed securities, see “—Fixed Maturity Securities—Fixed Maturity Securities Credit Quality” below.
Airline Related Investments

As of March 31, 2020, PFI excluding the Closed Block division had $0.1 billion of airline related corporate fixed maturities within the transportation sector of which 99% was investment grade.
General Account Investments of PFI excluding Closed Block Division

In the following sections, we provide details about our investment portfolio, excluding investments held in the Closed Block division. We believe the details of the composition of our investment portfolio excluding the Closed Block division are most relevant to an understanding of our operations that are pertinent to investors in Prudential Financial, Inc. because substantially all Closed Block division assets support obligations and liabilities relating to the Closed Block policies only. See Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information on the Closed Block.

Fixed Maturity Securities
 
In the following sections, we provide details about our fixed maturity securities portfolio, which excludes fixed maturity securities classified as assets supporting experience-rated contractholder liabilities and classified as trading.
    
Fixed Maturity Securities and Unrealized Gains and Losses by Industry
 
The following table sets forth the composition of the portion of our fixed maturity, available-for-sale portfolio by industry category attributable to PFI excluding the Closed Block division and the associated gross unrealized gains and losses, as well as the allowance for credit losses, as of the dates indicated:
 

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March 31, 2020
 
December 31, 2019
Industry(1)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Allowance for Credit Losses (5)
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
(in millions)
Corporate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance
 
$
35,665

 
$
1,955

 
$
656

 
$
0

 
$
36,964

 
$
34,710

 
$
2,796

 
$
85

 
$
37,421

Consumer non-cyclical
 
25,442

 
2,811

 
429

 
3

 
27,821

 
24,941

 
2,846

 
112

 
27,675

Utility
 
22,809

 
2,154

 
351

 
4

 
24,608

 
22,341

 
2,498

 
81

 
24,758

Capital goods
 
12,339

 
865

 
409

 
1

 
12,794

 
12,287

 
1,150

 
83

 
13,354

Consumer cyclical
 
11,189

 
730

 
566

 
2

 
11,351

 
10,871

 
994

 
45

 
11,820

Foreign agencies
 
5,048

 
758

 
125

 
0

 
5,681

 
5,649

 
928

 
10

 
6,567

Energy
 
12,745

 
408

 
1,713

 
79

 
11,361

 
12,922

 
1,126

 
186

 
13,862

Communications
 
6,099

 
795

 
151

 
23

 
6,720

 
5,916

 
939

 
34

 
6,821

Basic industry
 
5,834

 
373

 
184

 
0

 
6,023

 
5,866

 
497

 
38

 
6,325

Transportation
 
9,519

 
651

 
307

 
0

 
9,863

 
9,443

 
833

 
34

 
10,242

Technology
 
3,359

 
223

 
77

 
0

 
3,505

 
3,395

 
278

 
13

 
3,660

Industrial other
 
3,995

 
367

 
210

 
0

 
4,152

 
3,894

 
351

 
33

 
4,212

Total corporate securities
 
154,043

 
12,090

 
5,178

 
112

 
160,843

 
152,235

 
15,236

 
754

 
166,717

Foreign government(2)
 
97,078

 
19,572

 
103

 
38

 
116,509

 
97,880

 
20,658

 
63

 
118,475

Residential mortgage-backed(3)
 
3,087

 
199

 
8

 
0

 
3,278

 
2,955

 
154

 
1

 
3,108

Asset-backed
 
10,621

 
84

 
430

 
0

 
10,275

 
9,832

 
123

 
34

 
9,921

Commercial mortgage-backed
 
10,207

 
479

 
17

 
0

 
10,669

 
10,211

 
441

 
9

 
10,643

U.S. Government
 
26,373

 
9,786

 
2

 
0

 
36,157

 
24,938

 
4,511

 
94

 
29,355

State & Municipal
 
9,636

 
1,289

 
19

 
0

 
10,906

 
9,593

 
1,327

 
7

 
10,913

Total fixed maturities, available-for-sale(4)(5)
 
$
311,045

 
$
43,499

 
$
5,757

 
$
150

 
$
348,637

 
$
307,644

 
$
42,450

 
$
962

 
$
349,132

__________ 
(1)
Investment data has been classified based on standard industry categorizations for domestic public holdings and similar classifications by industry for all other holdings.
(2) As of March 31, 2020 and December 31, 2019, based on amortized cost, 77% and 76%, respectively, represent Japanese government bonds held by our Japanese insurance operations with no other individual country representing more than 11% of the balance.
(3) As of March 31, 2020 and December 31, 2019, based on amortized cost, 96% and more than 99% were rated A or higher, respectively.
(4) Excluded from the table above are securities held outside the general account in other entities and operations. For additional information regarding investments held outside the general account, see “—Invested Assets of Other Entities and Operations” below.
(5) Effective January 1, 2020, due to the implementation of ASU 2016-13, an allowance for credit losses is now presented for available-for-sale securities. Prior period amounts have been updated to exclude held-to-maturity securities to conform to current period presentation.

The 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:


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March 31, 2020
 
December 31, 2019
Industry(1)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
Allowance for Credit Losses
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
(in millions)
Corporate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance
 
$
624

 
$
57

 
$
0

 
$
681

 
$
9

 
$
628

 
$
64

 
$
0

 
$
692

Foreign agencies
 
0

 
0

 
0

 
0

 
0

 
21

 
0

 
0

 
21

Basic industry
 
83

 
2

 
0

 
85

 
0

 
83

 
2

 
0

 
85

Total corporate securities
 
707

 
59

 
0

 
766

 
9

 
732

 
66

 
0

 
798

Foreign government(2)
 
896

 
263

 
0

 
1,159

 
0

 
891

 
282

 
0

 
1,173

Residential mortgage-backed(3)
 
301

 
23

 
0

 
324

 
0

 
310

 
21

 
0

 
331

Total fixed maturities, held-to-maturity(4)
 
$
1,904

 
$
345

 
$
0

 
$
2,249

 
$
9

 
$
1,933

 
$
369

 
$
0

 
$
2,302

__________ 
(1)
Investment data has been classified based on standard industry categorizations for domestic public holdings and similar classifications by industry for all other holdings.
(2)
As of both March 31, 2020 and December 31, 2019, based on amortized cost, 98% represent Japanese government bonds held by our Japanese insurance operations.
(3)
As of both March 31, 2020 and December 31, 2019, based on amortized cost, all were rated A or higher.
(4)
Excluded from the table above are securities held outside the general account in other entities and operations. For additional information regarding investments held outside the general account, see “—Invested Assets of Other Entities and Operations” below.

The decrease in net unrealized gains from December 31, 2019 to March 31, 2020 was primarily due to credit spread widening and the translation impact of the Japanese yen strengthening against the U.S. dollar, partially offset by a decrease in U.S. interest rates.

Fixed Maturity Securities Credit Quality
 
The Securities Valuation Office (“SVO”) of the National Association of Insurance Commissioners (“NAIC”) evaluates the investments of insurers for statutory reporting purposes and assigns fixed maturity securities to one of six categories called “NAIC Designations.” In general, NAIC Designations of “1” highest quality, or “2” high quality, include fixed maturities considered investment grade, which include securities rated Baa3 or higher by Moody’s Investor Service, Inc. (“Moody’s”) or BBB- or higher by Standard & Poor’s Rating Services (“S&P”). NAIC Designations of “3” through “6” generally include fixed maturities referred to as below investment grade, which include securities rated Ba1 or lower by Moody’s and BB+ or lower by S&P. The NAIC Designations for commercial mortgage-backed securities and non-agency residential mortgage-backed securities, including our asset-backed securities collateralized by sub-prime mortgages, are based on security level expected losses as modeled by an independent third-party (engaged by the NAIC) and the statutory carrying value of the security, including any purchase discounts or impairment charges previously recognized.
 
As a result of time lags between the funding of investments, the finalization of legal documents, and the completion of the SVO filing process, the fixed maturity portfolio includes certain securities that have not yet been designated by the SVO as of each balance sheet date. Pending receipt of SVO designations, the categorization of these securities by NAIC Designation is based on the expected ratings indicated by internal analysis.
 
Investments of our international insurance companies are not subject to NAIC guidelines. Investments of our Japanese insurance operations are regulated locally by the Financial Services Agency (“FSA”), an agency of the Japanese government. The FSA has its own investment quality criteria and risk control standards. Our Japanese insurance companies comply with the FSA’s credit quality review and risk monitoring guidelines. The credit quality ratings of the investments of our Japanese insurance companies are based on ratings assigned by nationally recognized credit rating agencies, including Moody’s and S&P, or rating equivalents based on ratings assigned by Japanese credit ratings agencies.
 

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The following table sets forth our fixed maturity, available-for-sale portfolio by NAIC Designation or equivalent rating attributable to PFI excluding the Closed Block division, as of the dates indicated:
 
March 31, 2020
 
December 31, 2019
NAIC Designation(1)(2)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses(3)
 
Allowance for Credit Losses(7)
 
Fair Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses(3)
 
Fair Value
 
(in millions)
1
$
231,376

 
$
39,633

 
$
1,229

 
$
0

 
$
269,780

 
$
232,039

 
$
35,923

 
$
287

 
$
267,675

2
62,747

 
3,312

 
2,688

 
0

 
63,371

 
59,114

 
5,198

 
384

 
63,928

Subtotal High or Highest Quality Securities(4)
294,123

 
42,945

 
3,917

 
0

 
333,151

 
291,153

 
41,121

 
671

 
331,603

3
9,982

 
269

 
897

 
2

 
9,352

 
10,033

 
854

 
93

 
10,794

4
5,330

 
109

 
697

 
65

 
4,677

 
4,914

 
248

 
98

 
5,064

5
1,336

 
154

 
230

 
46

 
1,214

 
1,280

 
196

 
83

 
1,393

6
274

 
22

 
16

 
37

 
243

 
264

 
31

 
17

 
278

Subtotal Other Securities(5)(6)
16,922

 
554

 
1,840

 
150

 
15,486

 
16,491

 
1,329

 
291

 
17,529

Total fixed maturities, available-for-sale(7)
$
311,045

 
$
43,499

 
$
5,757

 
$
150

 
$
348,637

 
$
307,644

 
$
42,450

 
$
962

 
$
349,132

__________ 
(1)
Reflects equivalent ratings for investments of the international insurance operations.
(2)
Includes, as of March 31, 2020 and December 31, 2019, 882 securities with amortized cost of $3,964 million (fair value, $3,780 million) and 796 securities with amortized cost of $3,073 million (fair value, $3,130 million), respectively, that have been categorized based on expected NAIC Designations pending receipt of SVO ratings.
(3)
As of March 31, 2020, includes gross unrealized losses of $1,179 million on public fixed maturities and $661 million on private fixed maturities considered to be other than high or highest quality and, as of December 31, 2019, includes gross unrealized losses of $188 million on public fixed maturities and $103 million on private fixed maturities considered to be other than high or highest quality.
(4)
On an amortized cost basis, as of March 31, 2020, includes $250,593 million of public fixed maturities and $43,530 million of private fixed maturities and, as of December 31, 2019, includes $248,179 million of public fixed maturities and $42,974 million of private fixed maturities.
(5)
On an amortized cost basis, as of March 31, 2020, includes $9,206 million of public fixed maturities and $7,716 million of private fixed maturities and, as of December 31, 2019, includes $9,049 million of public fixed maturities and $7,442 million of private fixed maturities.
(6)
On an amortized cost basis, as of March 31, 2020, securities considered below investment grade based on lowest of external rating agency ratings total $17,975 million, or 6% of the total fixed maturities, and include securities considered high or highest quality by the NAIC based on the rules described above.
(7)
Effective January 1, 2020, due to the implementation of ASU 2016-13, an allowance for credit losses is now presented for available-for-sale securities. Prior period amounts have been updated to exclude held-to-maturity securities to conform to current period presentation.

The following table sets forth our fixed maturity, held-to-maturity portfolio by NAIC Designation or equivalent rating attributable to PFI excluding the Closed Block division, as of the dates indicated:



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March 31, 2020
 
December 31, 2019
NAIC Designation(1)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses(2)
 
Fair Value
 
Allowance for Credit Losses
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses(2)
 
Fair Value
 
(in millions)
1
$
1,713

 
$
329

 
$
0

 
$
2,042

 
$
4

 
$
1,743

 
$
351

 
$
0

 
$
2,094

2
191

 
16

 
0

 
207

 
5

 
190

 
18

 
0

 
208

Subtotal High or Highest Quality Securities(3)
1,904

 
345

 
0

 
2,249

 
9

 
1,933

 
369

 
0

 
2,302

3
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

4
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

5
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

6
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Subtotal Other Securities
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Total fixed maturities, held-to-maturity
$
1,904

 
$
345

 
$
0

 
$
2,249

 
$
9

 
$
1,933

 
$
369

 
$
0

 
$
2,302

__________ 
(1)
Reflects equivalent ratings for investments of the international insurance operations.
(2)
As of both March 31, 2020 and December 31, 2019, there were no gross unrealized losses on public fixed maturities and private fixed maturities considered to be other than high or highest quality.
(3)
On an amortized cost basis, as of March 31, 2020, includes $1,681 million of public fixed maturities and $223 million of private fixed maturities and, as of December 31, 2019, includes $1,705 million of public fixed maturities and $228 million of private fixed maturities.

Asset-Backed and Commercial Mortgage-Backed Securities

The following table sets forth the amortized cost and fair value of asset-backed and commercial mortgage-backed securities within our fixed maturity available-for-sale portfolio attributable to PFI excluding the Closed Block division by credit quality, as of the dates indicated:
 
March 31, 2020
 
December 31, 2019
 
Asset-Backed
Securities(2)
 
Commercial Mortgage-Backed Securities(3)
 
Asset-Backed
Securities(2)
 
Commercial Mortgage-Backed Securities(3)
Lowest Rating Agency Rating(1)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
(in millions)
AAA
$
10,038

 
$
9,635

 
$
8,146

 
$
8,408

 
$
9,381

 
$
9,377

 
$
8,128

 
$
8,454

AA
440

 
442

 
2,047

 
2,247

 
288
 
304
 
2,068

 
2,173

A
5

 
5

 
5

 
5

 
5
 
6
 
6
 
7
BBB
5

 
4

 
9

 
9

 
12
 
12
 
9
 
9
BB and below
133

 
189

 
0

 
0

 
146
 
222
 
0
 
0
Total(4)
$
10,621

 
$
10,275

 
$
10,207

 
$
10,669

 
$
9,832

 
$
9,921

 
$
10,211

 
$
10,643

__________ 
(1)
The table above provides ratings as assigned by nationally recognized rating agencies as of March 31, 2020, including S&P, Moody’s, Fitch Ratings, Inc. (“Fitch”) and Morningstar, Inc. (“Morningstar”).
(2)
Includes collateralized loan obligations (“CLOs”), credit-tranched securities collateralized by auto loans, education loans, home equity loans, and other asset types.
(3)
As of both March 31, 2020 and December 31, 2019, based on amortized cost, 97% were securities with vintages of 2013 or later.
(4)
Excludes fixed maturity securities classified as “Assets supporting experience-rated contractholder liabilities” and “Fixed maturities, trading,” as well as securities held outside the general account in other entities and operations.

Included in “Asset-backed securities” above are investments in CLOs. The following table sets forth information pertaining to these investments in CLOs within our fixed maturity available-for-sale portfolio attributable to PFI excluding the Closed Block division, as of the dates indicated:

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March 31, 2020
 
December 31, 2019
 
Collateralized Loan Obligations
Lowest Rating Agency Rating(1)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
(in millions)
AAA
$
7,997

 
$
7,593

 
$
7,294

 
$
7,271

AA
0

 
0

 
0

 
0

A
0

 
0

 
0

 
0

BBB
0

 
0

 
0

 
0

BB and below
0

 
0

 
0

 
0

Total(2)(3)
$
7,997

 
$
7,593

 
$
7,294

 
$
7,271

__________ 
(1)
The table above provides ratings as assigned by nationally recognized rating agencies as of March 31, 2020, including S&P, Moody’s, Fitch Ratings, Inc. (“Fitch”) and Morningstar, Inc. (“Morningstar”).
(2)
There was no allowance for credit losses as of March 31, 2020.
(3)
Excludes fixed maturity securities classified as “Assets supporting experience-rated contractholder liabilities” and “Fixed maturities, trading,” as well as securities held outside the general account in other entities and operations.

Assets Supporting Experience-Rated Contractholder Liabilities
 
For information regarding the composition of “Assets supporting experience-rated contractholder liabilities,” see Note 3 to the Unaudited Interim Consolidated Financial Statements.

Commercial Mortgage and Other Loans
 
Investment Mix

The following table sets forth the composition of our commercial mortgage and other loans portfolio attributable to PFI excluding the Closed Block division, as of the dates indicated:
 
 
March 31, 2020
 
December 31, 2019
 
 
(in millions)
Commercial mortgage and agricultural property loans
 
$
53,709

 
$
53,928

Uncollateralized loans
 
660

 
656

Residential property loans
 
115

 
124

Other collateralized loans
 
146

 
65

Total recorded investment gross of allowance(1)
 
54,630

 
54,773

Allowance for credit losses
 
(207
)
 
(102
)
Total net commercial mortgage and other loans(2)
 
$
54,423

 
$
54,671

__________
(1)
As a percentage of recorded investment gross of allowance, more than 99% of these assets were current as of both March 31, 2020 and December 31, 2019.
(2)
Excluded from the table above are commercial mortgage and other loans held outside the general account in other entities and operations. For additional information regarding commercial mortgage and other loans held outside the general account, see “—Invested Assets of Other Entities and Operations” below.

We originate commercial mortgage and agricultural property loans using a dedicated sales and underwriting staff through our various regional offices in the U.S. and international offices primarily in London and Tokyo. All loans are underwritten consistently to our standards using a proprietary quality rating system that has been developed from our industry experience in real estate and mortgage lending.

Uncollateralized loans primarily represent corporate loans which do not meet the definition of a security under authoritative accounting guidance.
 
Residential property loans primarily include Japanese recourse loans. Upon default of these recourse loans, we can make a claim against the personal assets of the property owner, in addition to the mortgaged property. These loans are also backed by third-party guarantors.


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Other collateralized loans include consumer loans.

Composition of Commercial Mortgage and Agricultural Property Loans
 
Our commercial mortgage and agricultural property loan portfolio strategy emphasizes diversification by property type and geographic location. The following tables set forth the breakdown of the gross carrying values of commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division by geographic region and property type, as of the dates indicated:
 
 
 
March 31, 2020
 
December 31, 2019
 
 
Gross
Carrying
Value
 
% of
Total
 
Gross
Carrying
Value
 
% of
Total
 
 
($ in millions)
Commercial mortgage and agricultural property loans by region:
 
 
 
 
 
 
 
 
U.S. Regions(1):
 
 
 
 
 
 
 
 
Pacific
 
$
18,258

 
34.0
%
 
$
18,061

 
33.5
%
South Atlantic
 
8,828

 
16.4

 
8,943

 
16.6

Middle Atlantic
 
6,605

 
12.3

 
6,664

 
12.4

East North Central
 
3,283

 
6.1

 
3,413

 
6.3

West South Central
 
5,467

 
10.2

 
5,439

 
10.1

Mountain
 
2,448

 
4.6

 
2,442

 
4.5

New England
 
1,677

 
3.1

 
1,902

 
3.5

West North Central
 
508

 
0.9

 
454

 
0.8

East South Central
 
545

 
1.0

 
622

 
1.2

Subtotal-U.S.
 
47,619

 
88.6

 
47,940

 
88.9

Europe
 
3,869

 
7.2

 
3,781

 
7.0

Asia
 
950

 
1.8

 
886

 
1.6

Other
 
1,271

 
2.4

 
1,321

 
2.5

Total commercial mortgage and agricultural property loans
 
$
53,709

 
100.0
%
 
$
53,928

 
100.0
%
__________
(1)
Regions as defined by the United States Census Bureau.

 
 
March 31, 2020
 
December 31, 2019
 
 
Gross
Carrying
Value
 
% of
Total
 
Gross
Carrying
Value
 
% of
Total
 
 
($ in millions)
Commercial mortgage and agricultural property loans by property type:
 
 
 
 
 
 
 
 
Industrial
 
$
12,181

 
22.7
%
 
$
12,224

 
22.7
%
Retail
 
6,249

 
11.6

 
6,524

 
12.1

Office
 
10,794

 
20.1

 
11,203

 
20.8

Apartments/Multi-Family
 
15,526

 
28.9

 
15,176

 
28.1

Agricultural properties
 
3,046

 
5.7

 
2,856

 
5.3

Hospitality
 
2,056

 
3.8

 
2,066

 
3.8

Other
 
3,857

 
7.2

 
3,879

 
7.2

Total commercial mortgage and agricultural property loans
 
$
53,709

 
100.0
%
 
$
53,928

 
100.0
%
 
Loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial mortgage and agricultural property loans. The loan-to-value ratio compares the amount of the loan to the fair value of the underlying property collateralizing the loan and is commonly expressed as a percentage. A loan-to-value ratio less than 100% indicates an excess of

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collateral value over the loan amount. Loan-to-value ratios greater than 100% indicate that the loan amount exceeds the collateral value. The debt service coverage ratio compares a property’s net operating income to its debt service payments. Debt service coverage ratios less than 1.0 times indicate that property operations do not generate enough income to cover the loan’s current debt payments. A debt service coverage ratio greater than 1.0 times indicates an excess of net operating income over the debt service payments.

As of March 31, 2020, our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division had a weighted-average debt service coverage ratio of 2.47 times and a weighted-average loan-to-value ratio of 56%. As of March 31, 2020, 95% of commercial mortgage and agricultural property loans were fixed rate loans. For those commercial mortgage and agricultural property loans that were originated in 2020, the weighted-average debt service coverage ratio was 2.87 times, and the weighted-average loan-to-value ratio was 64%.

The values utilized in calculating these loan-to-value ratios are developed as part of our periodic review of the commercial mortgage and agricultural property loan portfolio, which includes an internal evaluation of the underlying collateral value. Our periodic review also includes a 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 quality rating is a key input in determining our allowance for credit losses.

For loans with collateral under construction, renovation or lease-up, a stabilized value and projected net operating income are used in the calculation of the loan-to-value and debt service coverage ratios. Our commercial mortgage and agricultural property loan portfolio included $0.7 billion and $1.8 billion of such loans as of March 31, 2020 and December 31, 2019, respectively. All else being equal, these loans are inherently riskier than those collateralized by properties that have already stabilized. As of March 31, 2020 and December 31, 2019, there were $1.6 million and $0 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: 
 
 
March 31, 2020
 
 
Debt Service Coverage Ratio
 
 
 
 
> 1.2x
 
1.0x
to
< 1.2x
 
< 1.0x
 
Total
Commercial Mortgage
and Agricultural
Property
Loans
Loan-to-Value Ratio
 
(in millions)
0%-59.99%
 
$
28,491

 
$
657

 
$
150

 
$
29,298

60%-69.99%
 
14,724

 
905

 
141

 
15,770

70%-79.99%
 
7,690

 
656

 
28

 
8,374

80% or greater
 
168

 
97

 
2

 
267

Total commercial mortgage and agricultural property loans
 
$
51,073

 
$
2,315

 
$
321

 
$
53,709

 

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The following table sets forth the breakdown of our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division by year of origination, as of the date indicated:
 
 
March 31, 2020
 
 
Gross
Carrying
Value
 
% of
Total
Year of Origination
 
($ in millions)
2020
 
$
1,644

 
3.1
%
2019
 
9,645

 
18.0

2018
 
8,611

 
16.0

2017
 
7,114

 
13.2

2016
 
6,360

 
11.8

2015
 
5,797

 
10.8

2014
 
4,769

 
8.9

2013 & Prior
 
9,769

 
18.2

Total commercial mortgage and agricultural property loans
 
$
53,709

 
100.0
%

Commercial Mortgage and Other Loans Quality
 
The commercial mortgage and other loans portfolio is monitored on an ongoing basis. If certain criteria are met, loans are assigned to either of the following “watch list” categories:

(1) “Closely Monitored,” which includes a variety of considerations, such as when loan metrics fall below acceptable levels, the borrower is not cooperative or has requested a material modification, or the portfolio manager has directed a change in category; or
(2) “Not in Good Standing,” which includes loans in default or with a high probability of loss of principal, such as when the loan is in the process of foreclosure or the borrower is in bankruptcy.
Our workout and special servicing professionals manage the loans on the watch list.

The 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, other collateralized loans and uncollateralized loans.

For commercial mortgage and agricultural mortgage loans, the allowance is calculated using an internally developed CECL model.

Key inputs to the CECL model include unpaid principal balances, internal credit ratings, annual expected loss factors, average lives of the loans adjusted for prepayment considerations, current and historical interest rate assumptions and other factors influencing the Company’s view of the current stage of the economic cycle and future economic conditions. Subjective considerations include a review of whether historical loss experience is representative of current market conditions and the Company’s view of the credit cycle. Model assumptions and factors are reviewed and updated as appropriate.

When individual loans no longer have the credit risk characteristics of the commercial or agricultural mortgage loan pools, they are removed from the pools and are evaluated individually for an allowance. The allowance is determined based on the outstanding loan balance less the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

The CECL allowance for other collateralized and uncollateralized loans carried at amortized cost is determined based on probability of default and loss given default assumptions by sector, credit quality and average lives of the loans.

The following table sets forth the change in allowance for credit losses for our commercial mortgage and other loans portfolio, as of the dates indicated:

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March 31, 2020
 
December 31, 2019
 
 
(in millions)
Allowance, beginning of year
 
$
102

 
$
106

Cumulative effect of adoption of ASU 2016-13
 
101

 
0

Addition to (release of) allowance for credit losses
 
1

 
(4
)
Write-downs charged against the allowance
 
0

 
0

Recoveries of amounts previously written-down
 
0

 
N/A

Change in foreign exchange
 
0

 
0

       Other
 
3

 
0

Allowance, end of period
 
$
207

 
$
102

 
The allowance for credit losses as of March 31, 2020 increased compared to December 31, 2019, primarily due to the cumulative effect of adopting ASU 2016-13.

Equity Securities
 
The equity securities attributable to PFI excluding the Closed Block division consist principally of investments in Common and Preferred Stock of publicly-traded companies, as well as mutual fund shares. The following table sets forth the composition of our equity securities portfolio and the associated gross unrealized gains and losses, as of the dates indicated:
 
 
March 31, 2020
 
December 31, 2019
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
(in millions)
Mutual funds
 
$
913

 
$
90

 
$
9

 
$
994

 
$
817

 
$
258

 
$
1

 
$
1,074

Other Common Stocks
 
2,425

 
699

 
242

 
2,882

 
2,429

 
1,091

 
57

 
3,463

Non-redeemable Preferred Stocks
 
52

 
3

 
10

 
45

 
51

 
3

 
5

 
49

Total equity securities, at fair value(1)
 
$
3,390

 
$
792

 
$
261

 
$
3,921

 
$
3,297

 
$
1,352

 
$
63

 
$
4,586

__________  
(1)
Amounts presented exclude investments in private equity and hedge funds and other investments which are reported in “Other invested assets.”
 
The net change in unrealized gains (losses) from equity securities attributable to PFI excluding Closed Block division still held at period end, recorded within “Other income (loss),” was $(758) million and $249 million during the three months ended March 31, 2020 and 2019, respectively.

Other Invested Assets
 
The following table sets forth the composition of “Other invested assets” attributable to PFI excluding the Closed Block division, as of the dates indicated:

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March 31, 2020
 
December 31, 2019
 
 
(in millions)
LPs/LLCs:
 
 
 
 
Equity method:
 
 
 
 
Private equity
 
$
2,965

 
$
2,740

Hedge funds
 
1,316

 
1,362

Real estate-related
 
811

 
792

Subtotal equity method
 
5,092

 
4,894

Fair value:
 
 
 
 
Private equity
 
1,033

 
990

Hedge funds
 
1,082

 
1,233

Real estate-related
 
49

 
50

Subtotal fair value
 
2,164

 
2,273

Total LPs/LLCs
 
7,256

 
7,167

Real estate held through direct ownership(1)
 
1,356

 
1,350

Derivative instruments
 
60

 
73

Other(2)
 
754

 
620

Total other invested assets
 
$
9,426

 
$
9,210

__________ 
(1)
As of March 31, 2020 and December 31, 2019, real estate held through direct ownership had mortgage debt of $548 million and $537 million, respectively.
(2)
Primarily includes leveraged leases and member and activity stock held in the Federal Home Loan Banks of New York and Boston. For additional information regarding our holdings in the Federal Home Loan Banks of New York and Boston, see Note 17 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
 
Invested Assets of Other Entities and Operations

“Invested Assets of Other Entities and Operations” presented below includes investments held outside the general account and primarily represents investments associated with our investment management operations and derivative operations. Our derivative operations act on behalf of affiliates primarily to manage interest rate, foreign currency, credit and equity exposures. Assets within our investment management operations that are managed for third-parties and those assets classified as “Separate account assets” on our balance sheet are not included.
 
 
March 31, 2020
 
December 31, 2019
 
 
(in millions)
Fixed maturities:
 
 
 
 
Public, available-for-sale, at fair value(1)
 
$
541

 
$
587

Private, available-for-sale, at fair value
 
1

 
1

Fixed maturities, trading, at fair value(1)
 
1,149

 
1,161

Equity securities, at fair value
 
564

 
691

Commercial mortgage and other loans, at book value(2)
 
697

 
259

Other invested assets(1)
 
5,309

 
3,062

Short-term investments
 
16

 
17

Total investments
 
$
8,277

 
$
5,778

__________ 
(1)
As of March 31, 2020 and December 31, 2019, balances include investments in CLOs with fair value of $375 million and $438 million, respectively.
(2)
Book value is generally based on unpaid principal balance, net of any allowance for credit losses, or at fair value, when the fair value option has been elected.

Fixed Maturities, Trading

“Fixed maturities, trading, at fair value” are primarily related to assets associated with consolidated VIEs for which the Company is the investment manager. The assets of the consolidated VIEs are generally offset by liabilities for which the fair value option has been elected. For additional information on these consolidated VIEs, see Note 4 to the Unaudited Interim Consolidated Financial Statements.


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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.
 
Our businesses are subject to comprehensive regulation and supervision by domestic and international regulators. These regulations currently include requirements (many of which are the subject of ongoing rule-making) relating to capital, leverage, liquidity, stress-testing, overall risk management, credit exposure reporting and credit concentration. For information on these regulatory initiatives and their potential impact on us, see “Business—Regulation” and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2019.
 
COVID-19 and Related Market Disruptions

During the first quarter of 2020 and continuing into the second quarter, broad market concerns over the impact of COVID-19 have led to significant volatility and disruptions in the global economy and financial markets. Given this macro environment and the global pandemic, as examined through our stress testing, in the first quarter we took the following significant management actions to enhance our liquidity and capital position:

We issued $1.5 billion of senior notes, with maturities ranging from 2026 to 2040. Of these senior notes, $500 million were issued in the form of “green bonds,” where proceeds are allocated to existing or future investments in assets, businesses or projects that provide environmental benefits, and $1 billion were issued for general corporate purposes, including pre-funding in part our senior notes maturing through 2021;
We temporarily suspended Common Stock repurchases under our existing repurchase authorization beginning April 1, 2020, after repurchasing $500 million of shares of Prudential Financial’s Common Stock in the first quarter of 2020. We will continue to evaluate the resumption of share repurchases under our existing Board authorization for 2020;
Prudential Legacy Insurance Company of New Jersey issued $800 million of surplus notes under its $4 billion reserve financing facility to enhance the statutory surplus of the Closed Block. This facility, established in 2015, is intended to alleviate any temporary impact to the Closed Block’s surplus due to the timing difference between the mark to market on assets and the decision on the level of the policyholder dividend;

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We executed additional capital hedges that protect a portion of the capital position of our U.S. insurance subsidiaries against additional declines in the equity markets; and
We accelerated our product diversification strategy and repriced certain products, which are expected to support the capital position of our insurance subsidiaries over time.

Liquidity. The Company continues to operate with significant liquid resources. As of March 31, 2020, Prudential Financial had highly liquid assets of $5.3 billion, excluding the net borrowings from an intercompany liquidity account. Nevertheless, the impact of COVID-19 and related market dislocations could strain our existing liquidity and cause us to increase the use of our alternative sources of liquidity, which could result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings or ratings outlooks.

Capital. As of March 31, 2020, all of our significant insurance subsidiaries maintained capital levels consistent with their ratings targets. However, market conditions could negatively impact the statutory capital of our insurance companies and constrain our overall capital flexibility. Continued adverse market conditions could require us to take additional management actions for our insurance subsidiaries to maintain capital consistent with their ratings objectives, which may include redeploying financial resources from internal sources or, if markets continue to decline, using available external sources of capital or seeking additional sources.

Liquidity and Capital Risk Management. Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity of Prudential Financial and its subsidiaries on a daily basis and projects borrowing and capital needs over a multi-year time horizon. We use a Risk Appetite Framework (“RAF”) to ensure that all risks taken across the Company align with our capacity and willingness to take those risks. The RAF provides a dynamic assessment of capital and liquidity stress impacts, including scenarios similar to, and more severe than, those occurring due to COVID-19, and is intended to ensure that sufficient resources are available to absorb those impacts. We believe that our capital and liquidity resources are sufficient to satisfy the capital and liquidity requirements of Prudential Financial and its subsidiaries.

Capital
 
The primary components of the Company’s capitalization consist of equity and outstanding capital debt, including junior subordinated debt. As shown in the table below, as of March 31, 2020, the Company had $52.4 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.
 
 
March 31, 2020
 
December 31, 2019
 
(in millions)
Equity(1)
$
37,847

 
$
39,076

Junior subordinated debt (including hybrid securities)
7,578

 
7,575

Other capital debt
7,004

 
7,001

Total capital
$
52,429

 
$
53,652

__________
(1)
Amounts attributable to Prudential Financial, excluding AOCI.

We manage PICA, The Prudential Life Insurance Company, Ltd. (“Prudential of Japan”), Gibraltar Life, and other significant insurance subsidiaries to regulatory capital levels consistent with our “AA” ratings targets. We utilize the risk-based capital (“RBC”) ratio as a primary measure of the capital adequacy of our domestic insurance subsidiaries and the solvency margin ratio as a primary measure of the capital adequacy of our Japanese insurance subsidiaries.
 
The table below presents the RBC ratios of our most significant domestic insurance subsidiaries as of December 31, 2019, the most recent statutory fiscal year-end and RBC reporting date for these subsidiaries.
 
 
Ratio(1)
PICA(2)
411
%
Prudential Annuities Life Assurance Corporation (“PALAC”)
484
%
Composite Major U.S. Insurance Subsidiaries(3)
426
%

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__________ 
(1)
The RBC ratio calculations are intended to assist insurance regulators in measuring an insurer’s solvency and ability to pay future claims. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities, but is available to the public.
(2)
Includes Prudential Retirement Insurance and Annuity Company (“PRIAC”), Pruco Life Insurance Company (“Pruco Life”), Pruco Life Insurance Company of New Jersey (“PLNJ”), which is a subsidiary of Pruco Life, and Prudential Legacy Insurance Company of New Jersey (“PLIC”).
(3)
Includes PICA and its subsidiaries, as noted above, and PALAC. Composite RBC is not reported to regulators and is based on the summation of total adjusted capital and risk charges for the included companies as determined under statutory accounting and RBC guidance to calculate a composite numerator and denominator, respectively, for purposes of calculating the composite ratio.

The table below presents the solvency margin ratios of our most significant international insurance subsidiaries as of December 31, 2019, the most recent date for which this information is available.
 
Ratio
Prudential of Japan consolidated(1)
911
%
Gibraltar Life consolidated(2)
929
%
__________ 
(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. Continued adverse market conditions could require us to take additional management actions for our insurance subsidiaries to maintain capital consistent with their ratings objectives, which may include redeploying financial resources from internal sources or, if markets continue to decline, using available external sources of capital or seeking additional sources. Our regulatory capital levels also may be affected in the future by changes to the applicable regulations, proposals for which are currently under consideration by both domestic and international insurance regulators. For additional information on the calculation of RBC and solvency margin ratios, as well as regulatory minimums, see Note 19 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Captive Reinsurance Companies
 
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital—Captive Reinsurance Companies” included in our Annual Report on Form 10-K for the year ended December 31, 2019, for a discussion of our use of captive reinsurance companies. 
    
Shareholder Distributions
 
Share Repurchase Program and Shareholder Dividends

In December 2019, the Board authorized the Company to repurchase at management’s discretion up to $2.0 billion of its outstanding Common Stock during the period from January 1, 2020 through December 31, 2020.

The timing and amount of share repurchases are determined by management based on market conditions and other considerations, including any increased capital needs of our businesses due to, among other things, changes in regulatory capital requirements and opportunities for growth and acquisitions. Repurchases may be executed in the open market, through derivative, accelerated repurchase and other negotiated transactions and through plans designed to comply with Rule 10b5-1(c) under the Securities Exchange Act of 1934. We temporarily suspended Common Stock repurchases under our existing repurchase authorization beginning April 1, 2020; however, we will continue to evaluate the resumption of share repurchases under our existing Board authorization for 2020.

The following table sets forth information about declarations of Common Stock dividends, as well as repurchases of shares of Prudential Financial’s Common Stock, for the three months ended March 31, 2020.
 
 
Dividend Amount
 
Shares Repurchased
Three months ended:
Per Share
 
Aggregate
 
Shares
 
Total Cost
 
(in millions, except per share data)
March 31, 2020
$
1.10

 
$
445

 
6.7

 
$
500

 

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Liquidity
 
The principles of our liquidity management framework are described in an enterprise-wide policy that is reviewed and approved by the Board. Liquidity management and stress testing are performed on a legal entity basis as the ability to transfer funds between subsidiaries is limited due in part to regulatory restrictions. Liquidity needs are determined through daily and quarterly cash flow forecasting at the holding company and within our operating subsidiaries. We seek to maintain a minimum balance of highly liquid assets to ensure that adequate liquidity is available at Prudential Financial to cover fixed expenses in the event that we experience reduced cash flows from our operating subsidiaries at a time when access to capital markets is also not available.
 
We seek to mitigate the risk of having limited or no access to financing due to stressed market conditions by generally pre-funding debt in advance of maturity. In the first quarter of 2020, we issued $1.5 billion of Prudential Financial senior notes, of which $1 billion were issued for general corporate purposes, including pre-funding in part our senior notes maturing through 2021. We mitigate the refinancing risk associated with our debt that is used to fund operating needs by matching the term of debt with the assets financed. To ensure adequate liquidity in stress scenarios, stress testing is performed for our major operating subsidiaries. We seek to further mitigate liquidity risk by maintaining our access to alternative sources of liquidity, as discussed below.
 
Liquidity of Prudential Financial
 
The principal sources of funds available to Prudential Financial, the parent holding company, are dividends, returns of capital and loans from subsidiaries, and proceeds from debt issuances and certain stock-based compensation activity. These sources of funds may be supplemented by Prudential Financial’s access to the capital markets as well as the “—Alternative Sources of Liquidity” described below.
 
The primary uses of funds at Prudential Financial include servicing debt, making capital contributions and loans to subsidiaries, making acquisitions, paying declared shareholder dividends and repurchasing outstanding shares of Common Stock executed under authority from the Board.
 
As of March 31, 2020, Prudential Financial had highly liquid assets with a carrying value totaling $5,992 million, an increase of $888 million from December 31, 2019. Highly liquid assets predominantly include cash, short-term investments, U.S. Treasury securities, obligations of other U.S. government authorities and agencies, and/or foreign government bonds. We maintain an intercompany liquidity account that is designed to optimize the use of cash by facilitating the lending and borrowing of funds between Prudential Financial and its subsidiaries on a daily basis. Excluding the net borrowings from this intercompany liquidity account, Prudential Financial had highly liquid assets of $5,293 million as of March 31, 2020, an increase of $1,232 million from December 31, 2019.
 

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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.
 
Sources and Uses of Holding Company Highly Liquid Assets(1):
 
Three Months Ended March 31
 
 
2020
 
2019
 
 
(in millions)
Highly Liquid Assets, beginning of period
 
$
4,061

 
$
5,548

Dividends and/or returns of capital from subsidiaries(2)
 
558

 
479

Capital contributions to subsidiaries(3)
 
0

 
(268
)
Total Business Capital Activity
 
558

 
211

Share repurchases(4)
 
(485
)
 
(484
)
Common stock dividends(5)
 
(448
)
 
(420
)
Total Share Repurchases and Dividends
 
(933
)
 
(904
)
Proceeds from the issuance of debt
 
1,486

 
989

Total Debt Activity(6)
 
1,486

 
989

Proceeds from stock-based compensation and exercise of stock options
 
72

 
59

Net income tax receipts & payments
 
31

 
17

Affiliated (borrowings)/loans - (operating activities)(7)
 
(33
)
 
(81
)
Interest paid on external debt
 
(208
)
 
(165
)
Other, net(6)
 
259

 
(129
)
Total Other Activity
 
121

 
(299
)
Net increase/(decrease) in highly liquid assets
 
1,232

 
(3
)
Highly Liquid Assets, end of period
 
$
5,293

 
$
5,545

__________ 
(1)
Prior period amounts have been updated to conform to current period presentation.
(2)
2020 includes $241 million from international insurance subsidiaries, $207 million from PALAC, $63 million from PGIM subsidiaries, $43 million from Prudential Annuities Holding Company, and $4 million from other subsidiaries. 2019 includes $245 million from PALAC, $133 million from PGIM subsidiaries, $61 million from international insurance subsidiaries and $40 million from Prudential Annuities Holding Company.
(3)
2019 includes capital contributions of $200 million to PICA and $68 million to PGIM subsidiaries.
(4)
Excludes cash payments made on trades that settled in the subsequent period.
(5)
Includes cash payments made on dividends declared in prior periods.
(6)
“Total Debt Activity” excludes changes in PFI Commercial Paper. These changes are captured in “Other, net” in the “Total Other Activity” section.
(7) Represent loans to and from affiliated subsidiaries to support business operating needs.

Dividends and Returns of Capital from Subsidiaries
 
Domestic insurance subsidiaries. During the first three months of 2020, Prudential Financial received returns of capital of $207 million from PALAC and dividends of $43 million from Prudential Annuities Holding Company.

International insurance subsidiaries. During the first three months of 2020, Prudential Financial received dividends of $241 million from its international insurance subsidiaries. In addition to paying Common Stock dividends, our international insurance operations may return capital to Prudential Financial through or facilitated by other means, such as the repayment of preferred stock obligations held by Prudential Financial or other affiliates, affiliated lending, affiliated derivatives and reinsurance with U.S.- and Bermuda-based affiliates.

Other subsidiaries. During the first three months of 2020, Prudential Financial received dividends and returns of capital of $63 million from PGIM subsidiaries and dividends of $4 million from other subsidiaries.
Restriction on dividends and returns of capital from subsidiaries. Our insurance companies are subject to limitations on the payment of dividends and other transfers of funds to Prudential Financial and other affiliates under applicable insurance law and regulation. Further, as discussed above, recent market conditions could negatively impact capital positions of our insurance companies, which could further restrict their ability to pay dividends. More generally, the payment of dividends by any of our subsidiaries is subject to declaration by their Board of Directors and can be affected by market conditions and other factors.
 

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With respect to our domestic insurance subsidiaries, PICA is permitted to pay ordinary dividends based on calculations specified under New Jersey insurance law, subject to prior notification to the New Jersey Department of Banking and Insurance (“NJDOBI”). Any distributions above this amount in any twelve-month period are considered to be “extraordinary” dividends, and the approval of the NJDOBI is required prior to payment. The laws regulating dividends of the states where our other domestic insurance companies are domiciled are similar, but not identical, to New Jersey’s.

Capital redeployment from our international insurance subsidiaries is subject to local regulatory requirements in the international jurisdictions in which they operate. Our most significant international insurance subsidiaries, Prudential of Japan and Gibraltar Life, are permitted to pay common stock dividends based on calculations specified by Japanese insurance law, subject to prior notification to the FSA. Dividends in excess of these amounts and other forms of capital distribution require the prior approval of the FSA. The regulatory fiscal year end for both Prudential of Japan and Gibraltar Life is March 31, 2020, after which time the common stock dividend amount permitted to be paid without prior approval from the FSA can be determined.

The ability of our PGIM subsidiaries and the majority of our other operating subsidiaries to pay dividends is largely unrestricted from a regulatory standpoint.

See Note 19 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, for information on specific dividend restrictions.
    
Liquidity of Insurance Subsidiaries
 
We manage the liquidity of our insurance operations to ensure stable, reliable and cost-effective sources of cash flows to meet all of our obligations. Liquidity within each of our insurance subsidiaries is provided by a variety of sources, including portfolios of liquid assets. The investment portfolios of our subsidiaries are integral to the overall liquidity of our insurance operations. We segment our investment portfolios and employ an asset/liability management approach specific to the requirements of each of our product lines. This enhances the discipline applied in managing the liquidity, as well as the interest rate and credit risk profiles, of each portfolio in a manner consistent with the unique characteristics of the product liabilities.

Liquidity is measured against internally-developed benchmarks that take into account the characteristics of both the asset portfolio and the liabilities that they support. We consider attributes of the various categories of liquid assets (for example, type of asset and credit quality) in calculating internal liquidity measures to evaluate our insurance operations’ liquidity under various stress scenarios, including company-specific and market-wide events. We continue to believe that cash generated by ongoing operations and the liquidity profile of our assets provide sufficient liquidity under reasonably foreseeable stress scenarios for each of our insurance subsidiaries.
 
The principal sources of liquidity for our insurance subsidiaries are premiums, investment and fee income, investment maturities, sales of investments, and sales associated with our insurance and annuity operations, as well as internal and external borrowings. The principal uses of that liquidity include benefits, claims and dividends paid to policyholders, and payments to policyholders and contractholders in connection with surrenders, withdrawals and net policy loan activity. Other uses of liquidity may include commissions, general and administrative expenses, purchases of investments, the payment of dividends to the parent holding company, hedging and reinsurance activity and payments in connection with financing activities.
 
The following table sets forth the fair value of certain of our domestic insurance operations’ portfolio of liquid assets, as of the dates indicated.
 
 
March 31, 2020
 
 
 
Prudential
Insurance
 
PLIC
 
PRIAC
 
PALAC
 
Pruco Life
 
Total
 
December 31, 2019
 
(in billions)
Cash and short-term investments
$
9.4

 
$
0.8

 
$
1.3

 
$
16.0

 
$
0.7

 
$
28.2

 
$
11.9

Fixed maturity investments(1):
 
 
 
 
 
 
 
 
 
 
 
 
 
High or highest quality
126.6

 
36.7

 
19.0

 
15.1

 
5.3

 
202.7

 
201.3

Other than high or highest quality
6.7

 
2.5

 
1.1

 
0.6

 
0.3

 
11.2

 
12.2

Subtotal
133.3

 
39.2

 
20.1

 
15.7

 
5.6

 
213.9

 
213.5

Public equity securities, at fair value
0.2

 
1.7

 
0.0

 
0.1

 
0.0

 
2.0

 
2.5

Total
$
142.9

 
$
41.7

 
$
21.4

 
$
31.8

 
$
6.3

 
$
244.1

 
$
227.9


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__________ 
(1)
Excludes fixed maturities designated as held-to-maturity. Credit quality is based on NAIC or equivalent rating.

The following table sets forth the fair value of our international insurance operations’ portfolio of liquid assets, as of the dates indicated. 
 
March 31, 2020
 
 
 
Prudential
of Japan
 
Gibraltar
Life(1)
 
All
Other(2)
 
Total
 
December 31, 2019
 
(in billions)
Cash and short-term investments
$
1.3

 
$
3.9

 
$
1.9

 
$
7.1

 
$
5.0

Fixed maturity investments(3):
 
 
 
 
 
 
 
 
 
High or highest quality(4)
43.1

 
91.6

 
24.5

 
159.2

 
157.2

Other than high or highest quality
0.6

 
2.3

 
1.6

 
4.5

 
5.4

Subtotal
43.7

 
93.9

 
26.1

 
163.7

 
162.6

Public equity securities
1.7

 
1.5

 
0.6

 
3.8

 
4.7

Total
$
46.7

 
$
99.3

 
$
28.6

 
$
174.6

 
$
172.3

__________ 
(1)
Includes PGFL.
(2)
Represents our international insurance operations, excluding Japan.
(3)
Excludes fixed maturities designated as held-to-maturity. Credit quality is based on NAIC or equivalent rating.
(4)
As of March 31, 2020, $123.6 billion, or 78%, were invested in government or government agency bonds.
 
Liquidity associated with other activities
 
Hedging activities associated with Individual Annuities
 
For the portion of our Individual Annuities’ ALM strategy executed through hedging, as well as the capital hedge program, we enter into a range of exchange-traded, cleared and other OTC equity and interest rate derivatives in order to hedge certain capital market risks related to more severe market conditions. For a full discussion of our Individual Annuities’ risk management strategy, see “—Results of Operations by Segment—U.S. Businesses—U.S. Individual Solutions Division—Individual Annuities.” This portion of our Individual Annuities’ ALM strategy and capital hedge program requires access to liquidity to meet payment obligations relating to these derivatives, such as payments for periodic settlements, purchases, maturities and terminations. These liquidity needs can vary materially due to, among other items, changes in interest rates, equity markets, mortality and policyholder behavior.
 
The hedging portion of our Individual Annuities’ ALM strategy and capital hedge program may also result in derivative related collateral postings to (when we are in a net pay position) or from (when we are in a net receive position) counterparties. The net collateral position depends on changes in interest rates and equity markets related to the amount of the exposures hedged. Depending on market conditions, the collateral posting requirements can result in material liquidity needs when we are in a net pay position. As of March 31, 2020, the derivatives comprising the hedging portion of our ALM strategy and capital hedge program were in a net receive position of $15.3 billion compared to a net receive position of $4.7 billion as of December 31, 2019. The change in collateral position was driven by a positive impact from declining interest rates and equity markets.

Foreign exchange hedging activities
 
We employ various hedging strategies to manage potential exposure to foreign currency exchange rate movements, particularly those associated with the yen. Our overall yen hedging strategy calibrates the hedge level to preserve the relative contribution of our yen-based business to the Company’s overall return on equity on a leverage neutral basis. The hedging strategy includes two primary components:

Income Hedges—We hedge a portion of our prospective yen-based earnings streams by entering into external forward currency derivative contracts that effectively fix the currency exchange rates for that portion of earnings, thereby reducing volatility from foreign currency exchange rate movements. As of March 31, 2020, we have hedged 100%, 83% and 39% of expected yen-based earnings for 2020, 2021 and 2022, respectively.
 
Equity Hedges—We hold both internal and external hedges primarily to hedge our USD-equivalent equity. These hedges also mitigate volatility in the solvency margins of yen-based subsidiaries resulting from changes in the market value of their USD-denominated investments hedging our USD-equivalent equity attributable to changes in the yen-USD exchange rate.


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For additional information on our hedging strategy, see “—Results of Operations—Impact of Foreign Currency Exchange Rates.”

Cash settlements from these hedging activities result in cash flows between subsidiaries of Prudential Financial and either international-based subsidiaries or external parties. The cash flows are dependent on changes in foreign currency exchange rates and the notional amount of the exposures hedged. For example, a significant yen depreciation over an extended period of time could result in net cash inflows, while a significant yen appreciation could result in net cash outflows. The following tables set forth information about net cash settlements and the net asset or liability resulting from these hedging activities related to the yen and other currencies for the periods indicated.

 
Three Months Ended
March 31,
Cash Settlements: Received (Paid)
2020
 
2019
 
(in millions)
Income Hedges (External)(1)
$
29

 
$
12

Equity Hedges:
 
 
 
Internal(2)
104

 
92

External(3)
45

 
37

Total Equity Hedges
149

 
129

Total Cash Settlements
$
178

 
$
141

 
 
 
 
 
March 31,
 
December 31,
Assets (Liabilities):
2020
 
2019
 
(in millions)
Income Hedges (External)(4)
$
180

 
$
60

Equity Hedges:
 
 
 
Internal(2)
699

 
506

External(5)
89

 
43

Total Equity Hedges(6)
788

 
549

Total Assets (Liabilities)
$
968

 
$
609

__________
(1)
Includes non-yen related cash settlements of $23 million, primarily denominated in Korean won, Australian dollar and Brazilian real and $5.5 million, primarily denominated in Australian dollar, Chilean peso and Brazilian real, for the three months ended March 31, 2020 and 2019, respectively.
(2)
Represents internal transactions between international-based and U.S.-based entities. Amounts noted are from the U.S.-based entities’ perspectives.
(3)
Includes non-yen related cash settlements of $23 million and $1 million, denominated in Korean won for the three months ended March 31, 2020 and 2019, respectively.
(4)
Includes non-yen related assets of $158 million, primarily denominated in Brazilian real, Australian dollar and Korean won, and assets of $37 million, primarily denominated in Korean won, Australian dollar and Chilean peso, as of March 31, 2020 and December 31, 2019, respectively.
(5)
Includes non-yen related assets of $31 million, denominated in Korean won, and assets of $1 million, denominated in Korean won, as of March 31, 2020 and December 31, 2019, respectively.
(6)
As of March 31, 2020, approximately $218 million, $378 million, $185 million and $7 million of the net market values are scheduled to settle in 2020, 2021, 2022 and thereafter, respectively. The net market value of the assets (liabilities) will vary with changing market conditions to the extent there are no corresponding offsetting positions.

PGIM operations
 
The principal sources of liquidity for our fee-based PGIM businesses include asset management fees and commercial mortgage origination and servicing fees. The principal uses of liquidity include general and administrative expenses, facilitating our commercial mortgage loan business, and distributions of dividends and returns of capital to Prudential Financial. The primary liquidity risks for our fee-based PGIM businesses relate to their profitability, which is impacted by market conditions and our investment management performance. 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.
 

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The principal sources of liquidity for our strategic investments held in our PGIM businesses are cash flows from investments, the ability to liquidate investments, borrowing lines from internal sources, including Prudential Financial and Prudential Funding, LLC (“Prudential Funding”), a wholly-owned subsidiary of PICA, and external sources, including PGIM’s limited-recourse credit facility. The principal use of liquidity for our strategic investments includes making investments to support business growth and paying interest expense from the internal and external borrowings used to fund those investments. The primary liquidity risks include the inability to sell assets in a timely manner, declines in the value of assets and credit defaults. There have been no material changes to the liquidity position of our PGIM operations since December 31, 2019.
 
Alternative Sources of Liquidity
 
In addition to asset-based financing as discussed below, Prudential Financial and certain subsidiaries have access to other sources of liquidity, including syndicated, unsecured committed credit facilities, membership in the Federal Home Loan Banks, commercial paper programs, and a put option agreement. For more information on these sources of liquidity, see Note 9 to the Unaudited Interim Consolidated Financial Statements contained herein and Note 17 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.
 
Asset-based Financing
 
We conduct asset-based or secured financing within our insurance and other subsidiaries, including transactions such as securities lending, repurchase agreements and mortgage dollar rolls, to earn spread income, to borrow funds, or to facilitate trading activity. These programs are primarily driven by portfolio holdings of securities that are lendable based on counterparty demand for these securities in the marketplace. The collateral received in connection with these programs is primarily used to purchase securities in the short-term spread portfolios of our insurance entities. Investments held in the short-term spread portfolios include cash and cash equivalents, short-term investments (primarily corporate bonds), mortgage loans and fixed maturities (primarily collateralized loan obligations and other structured securities), with a weighted average life at time of purchase by the short-term portfolios of four years or less. Floating rate assets comprise the majority of our short-term spread portfolio. These short-term portfolios are subject to specific investment policy statements, which among other things, do not allow for significant asset/liability interest rate duration mismatch.
 
The following table sets forth our liabilities under asset-based or secured financing programs as of the dates indicated.
 
 
March 31, 2020
 
December 31, 2019
 
PFI
Excluding
Closed Block
Division
 
Closed
Block
Division
 
Consolidated
 
PFI
Excluding
Closed Block
Division
 
Closed
Block
Division
 
Consolidated
 
($ in millions)
Securities sold under agreements to repurchase
$
7,841

 
$
2,716

 
$
10,557

 
$
6,834

 
$
2,847

 
$
9,681

Cash collateral for loaned securities
2,980

 
416

 
3,396

 
3,228

 
986

 
4,214

Securities sold but not yet purchased
2

 
0

 
2

 
0

 
0

 
0

Total(1)
$
10,823

 
$
3,132

 
$
13,955

 
$
10,062

 
$
3,833

 
$
13,895

Portion of above securities that may be returned to the Company overnight requiring immediate return of the cash collateral(2)
$
10,268

 
$
3,132

 
$
13,400

 
$
10,062

 
$
3,833

 
$
13,895

Weighted average maturity, in days(2)
23

 
N/A

 
 
 
N/A

 
N/A

 
 
__________ 
(1)
The daily weighted average outstanding balance for the three months ended March 31, 2020 was $10,803 million for PFI excluding the Closed Block division, and $3,717 million for the Closed Block division.
(2)
Excludes securities that may be returned to the Company overnight. “N/A” reflects that all outstanding balances may be returned to the Company overnight.

As of March 31, 2020, our domestic insurance entities had assets eligible for the asset-based or secured financing programs of $120.4 billion, of which $14.0 billion were on loan. Taking into account market conditions and outstanding loan balances as of March 31, 2020, we believe approximately $19.7 billion of the remaining eligible assets are readily lendable, including approximately $13.6 billion relating to PFI excluding the Closed Block division, of which $3.8 billion relates to certain separate accounts and may only be used for financing activities related to those accounts, and the remaining $6.1 billion relating to the Closed Block division.
 

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Financing Activities
 
As of March 31, 2020, total short-term and long-term debt of the Company on a consolidated basis was $22.7 billion, an increase of $2.1 billion from December 31, 2019. The following table sets forth total consolidated borrowings of the Company as of the dates indicated. We may, from time to time, seek to redeem or repurchase our outstanding debt securities through open market purchases, individually negotiated transactions or otherwise. Any such actions will depend on prevailing market conditions, our liquidity position and other factors.
 
 
March 31, 2020
 
December 31, 2019
Borrowings:
Prudential
Financial
 
Subsidiaries
 
Consolidated
 
Prudential
Financial
 
Subsidiaries
 
Consolidated
 
(in millions)
General obligation short-term debt:
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
453

 
$
700

 
$
1,153

 
$
25

 
$
524

 
$
549

Current portion of long-term debt
1,179

 
0

 
1,179

 
1,179

 
0

 
1,179

Subtotal
1,632

 
700

 
2,332

 
1,204

 
524

 
1,728

General obligation long-term debt:
 
 
 
 
 
 
 
 
 
 
 
Senior debt
11,400

 
173

 
11,573

 
9,912

 
172

 
10,084

Junior subordinated debt
7,520

 
58

 
7,578

 
7,518

 
57

 
7,575

Surplus notes(1)
0

 
342

 
342

 
0

 
342

 
342

Subtotal
18,920

 
573

 
19,493

 
17,430

 
571

 
18,001

Total general obligations
20,552

 
1,273

 
21,825

 
18,634

 
1,095

 
19,729

Limited and non-recourse borrowings(2):
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
0

 
16

 
16

 
0

 
13

 
13

Current portion of long-term debt
0

 
191

 
191

 
0

 
192

 
192

Long-term debt
0

 
656

 
656

 
0

 
645

 
645

Total limited and non-recourse borrowings
0

 
863

 
863

 
0

 
850

 
850

Total borrowings
$
20,552

 
$
2,136

 
$
22,688

 
$
18,634

 
$
1,945

 
$
20,579

__________ 
(1)
Amounts are net of assets under set-off arrangements of $10,614 million and $9,749 million as of March 31, 2020 and December 31, 2019, respectively.
(2)
Limited and non-recourse borrowing primarily represents mortgage debt of our subsidiaries that has recourse only to real estate investment property of $548 million and $537 million as of March 31, 2020 and December 31, 2019, respectively, and a draw on a credit facility with recourse only to collateral pledged by the Company of $300 million as of both March 31, 2020 and December 31, 2019.

As of March 31, 2020, and December 31, 2019, we were in compliance with all debt covenants related to the borrowings in the table above. For additional information on our short- and long-term debt obligations, see Note 9 to the Unaudited Interim Consolidated Financial Statements contained herein and Note 17 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.
 
Prudential Financial’s borrowings increased $1.92 billion from December 31, 2019, driven by the issuance, net of related costs, of $1.5 billion of senior debt and a $428 million increase in commercial paper outstanding. Borrowings of our subsidiaries increased $191 million from December 31, 2019, driven by a $176 million increase in commercial paper, an $11 million increase in mortgage debt, and a $3 million increase in short-term debt.
 
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.
 

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We have entered into agreements with external counterparties providing for the issuance of surplus notes by our captive reinsurers in return for the receipt of credit-linked notes (“Credit-Linked Note Structures”). As of March 31, 2020, we had Credit-Linked Note Structures with an aggregate issuance capacity of $13,625 million, of which $11,999 million was outstanding, as compared to an aggregate issuance capacity of $13,700 million, of which $12,009 million was outstanding, as of December 31, 2019. Under the agreements, the captive receives in exchange for the surplus notes one or more credit-linked notes issued by a special-purpose affiliate of the Company with an aggregate principal amount equal to the surplus notes outstanding. The captive holds the credit-linked notes as assets supporting Regulation XXX or Guideline AXXX non-economic reserves, as applicable. For more information on our Credit-Linked Note Structures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities” in our Annual Report on Form 10-K for the year ended December 31, 2019.
 
The following table summarizes our Credit-Linked Note Structures, which are reported on a net basis, as of March 31, 2020.

 
Surplus Notes
 
Outstanding
as of
March 31, 2020
 
 
Credit-Linked Note Structures:
Original
Issue Dates
 
Maturity
Dates
 
 
Facility
Size
 
($ in millions)
XXX
2011-2014
 
2021-2024
 
$
1,750

(1)
 
$
1,750

AXXX
2013
 
2033
 
3,248

 
 
3,500

XXX
2014-2018
 
2021-2034
 
2,285

(2)
 
2,375

XXX
2014-2017
 
2024-2037
 
2,330

 
 
2,400

AXXX
2017
 
2037
 
1,466

 
 
2,000

XXX
2018
 
2038
 
920

 
 
1,600

Total Credit-Linked Note Structures
 
 
 
 
$
11,999

 
 
$
13,625

__________
(1)
Prudential Financial has agreed to reimburse amounts paid under the credit-linked notes issued in this structure up to $0.5 billion. During the fourth quarter of 2019, this financing facility was restructured to allow for an extension through 2036.
(2)
The $2.3 billion of surplus notes represents an intercompany transaction that eliminates upon consolidation. Prudential Financial has agreed to reimburse amounts paid under credit-linked notes issued in this structure up to $1.0 billion.
 
As of March 31, 2020, we also had outstanding an aggregate of $2.6 billion of debt issued for the purpose of financing Regulation XXX and Guideline AXXX non-economic reserves, of which approximately $0.7 billion relates to Regulation XXX reserves and approximately $1.9 billion relates to Guideline AXXX reserves. In addition, as of March 31, 2020, for purposes of financing Guideline AXXX reserves, one of our captives had approximately $4.0 billion of surplus notes outstanding that were issued to affiliates.
 
The Company has introduced updated versions of its individual life products in conjunction with the requirement to adopt principle-based reserving by January 1, 2020. These updated products are currently priced to support the principle-based statutory reserve level without the need for reserve financing. Certain elements of the implementation of principle-based reserving are yet to be finalized by the NAIC and may have a material impact on statutory reserves. The Company continues to assess the impact of the implementation of principle-based reserving on projected statutory reserve levels, product pricing and the use of financing.

Ratings

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Ratings” in our Annual Report on Form 10-K for the year ended December 31, 2019, for a discussion of our financial strength and credit ratings and their impact on our business.

There have been no significant changes or actions in ratings or ratings outlooks for our Company that have occurred since the filing of our Form 10-K for the year ended December 31, 2019 through the date of this filing. In 2020, Moody’s, Fitch, and AM Best revised their Outlook on the U.S. life insurance industry from Stable to Negative.



    

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Table of Contents

Off-Balance Sheet Arrangements
 
Guarantees, Other Contingencies and Other Contingent Commitments
 
In the course of our business, we provide certain guarantees and indemnities to third-parties pursuant to which we may be contingently required to make payments in the future. We also have other commitments, some of which are contingent upon events or circumstances not under our control, including those at the discretion of our counterparties. See “—Commitments and Guarantees” within Note 14 to the Unaudited Interim Consolidated Financial Statements for additional information. For further discussion of certain of these commitments that relate to our separate accounts, also see “—Liquidity—Liquidity associated with other activities—PGIM operations.”
 
Other Off-Balance Sheet Arrangements
 
In November 2013, we entered into a put option agreement with a Delaware trust that gives Prudential Financial the right, at any time over a ten-year period, to issue up to $1.5 billion of senior notes to the trust in return for principal and interest strips of U.S. Treasury securities that are held by the trust. In 2014, Prudential Financial entered into financing transactions, pursuant to which it issued $500 million of limited-recourse notes and, in return, obtained $500 million of asset-backed notes from a Delaware master trust and ultimately contributed the asset-backed notes to its subsidiary, PRIAC. As of March 31, 2020, no principal payments have been received or are currently due on the asset-backed notes and, as a result, there was no payment obligation under the limited-recourse notes. Accordingly, none of the notes are reflected in the Company’s Unaudited Interim Consolidated Financial Statements as of that date.
 
Other than as described above, we do not have retained or contingent interests in assets transferred to unconsolidated entities, or variable interests in unconsolidated entities or other similar transactions, arrangements or relationships that serve as credit, liquidity or market risk support, that we believe are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or our access to or requirements for capital resources. In addition, other than the agreements referred to above, we do not have relationships with any unconsolidated entities that are contractually limited to narrow activities that facilitate our transfer of or access to associated assets.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of fluctuations in the value of financial instruments as a result of absolute or relative changes in interest rates, foreign currency exchange rates, equity prices or commodity prices. To varying degrees, our products and services, and the investment activities supporting them, generate exposure to market risk. The market risk incurred, and our strategies for managing this risk, vary by product. As of March 31, 2020, there have been no material changes in our economic exposure to market risk from December 31, 2019, a description of which may be found in our Annual Report on Form 10-K, for the year ended December 31, 2019, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” filed with the Securities and Exchange Commission. See the “Risk Factors” section and Item 1A, “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2019, for a discussion of how difficult conditions in the financial markets and the economy generally may materially adversely affect our business and results of our operations.

ITEM 4. CONTROLS AND PROCEDURES

In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized, and reported on a timely basis, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of March 31, 2020. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2020, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), occurred during the quarter ended March 31, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART IIOTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 14 to the Unaudited Interim Consolidated Financial Statements under “—Litigation and Regulatory Matters” for a description of certain pending litigation and regulatory matters affecting us, and certain risks to our businesses presented by such matters, which is incorporated herein by reference.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019. These risks could materially affect our business, results of operations or financial condition, cause the trading price of our Common Stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by, or on behalf of, the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” and the risks of our businesses described elsewhere in this Quarterly Report on Form 10-Q. The following should be read in conjunction with and supplements and amends the section titled “Risk Factors” in our Annual Report on Form 10-K.

The COVID-19 pandemic has resulted in extreme stress and disruption in the global economy and financial markets, and has adversely impacted, and may continue to adversely impact, our results of operations, financial condition and prospects.

During the first quarter of 2020 the COVID-19 crisis (i) caused unfavorable financial market conditions which had a substantial negative effect on reported results of our businesses and market values in our investment portfolio, (ii) negatively impacted the statutory capital of our insurance companies and constrained our overall capital flexibility primarily due to asset value declines and the need to strengthen reserves, and (iii) caused us to lower our outlook for the future, as described further under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—COVID-19.”

We cannot predict what impact the COVID-19 pandemic will ultimately have on the global economy, markets or our businesses. The pandemic could exacerbate existing areas of concern, such as the pace of economic growth, equity market performance, and continued low interest rates, among others. Changes in consumer spending, business investment, and government debt and spending as a result of the crisis may negatively impact our businesses.

These risks may have manifested, and may continue to manifest, in our business in the following areas, among others:

Investment Risk. The COVID-19 pandemic and its impact on the global economy has increased the risk of loss on our investments due to default or deterioration in credit quality or value as described further under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—General Account Investments—COVID-19.”

Insurance Risk. We expect COVID-19 to drive elevated levels of mortality in the near-term. The COVID-19 pandemic may ultimately result in a mortality calamity, which is the risk that short-term mortality rates deviate adversely from what is expected as a result of pandemics or other disasters. Elevated losses will reduce our earnings and capital, and we may be forced to liquidate assets before maturity in order to pay the excess claims. The pandemic situation may worsen depending on the evolution of the virus’s transmissibility and virulence, effectiveness of public health measures and availability of potential vaccines and treatments. Ultimate losses would depend on several factors, including the rates of mortality and morbidity among various segments of the insured population, age distribution of associated deaths, collectability of reinsurance, performance of our investment portfolio, effect on lapses and surrenders of existing policies, as well as sales of new policies and other variables.

The pandemic may also result in a change in policyholder behavior, such as policyholders choosing to defer or stop paying insurance premiums. It may also result in a lapse calamity, which is the risk that lapse rates over the short-term deviate adversely from what is expected. For example, surrenders of cash surrender value products by customers in need of liquidity can impact our liquidity, and it may be necessary in certain market conditions to sell assets to meet surrender demands. Lapse calamity can also impact our earnings through its impact on estimated future profits.

As a result of COVID-19 we also expect to experience elevated short-term disability claims in our Group Insurance business and may experience elevated claims in our Long-Term Care business.

Finally, we cannot predict whether COVID-19 will ultimately lead to longer-term deviations from the mortality, policyholder behavior or morbidity assumptions we used to price our products.


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Market Risk. Continued market disruptions and volatility may further negatively impact the profitability of many of our insurance and annuity products, which depends in part on the value of the separate accounts supporting these products which can fluctuate substantially depending on market conditions. Market volatility and reduced liquidity may reduce our ability to implement asset-liability management and hedging strategies. In addition, market conditions may further reduce the value of assets that we manage in our investment management business, which depends on fees related primarily to the value of assets under management. The decline in interest rates, in particular, may result in lower investment income, higher reserve levels and other consequences as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of a Low Interest Rate Environment.” Finally, low interest rates and poor equity market returns will likely result in increased pension and other postretirement benefit plan expenses and reduce our profitability.

Liquidity Risk. During the first quarter of 2020, the Company took significant actions to support liquidity as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Nevertheless, the impact of the COVID-19 crisis and related market dislocations could strain our existing liquidity and cause us to increase the use of our alternative sources of liquidity, which could result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings. Furthermore, certain sources of liquidity might not be available during times of stress, or may only be available on unfavorable terms, which can result in a decrease in our profitability and a significant reduction in our financial flexibility.

In particular, abrupt changes to interest rate, equity, and/or currency markets could lead to increased collateral requirements to counterparties, and cash demands due to severe mortality calamity, customer withdrawals or lapse events.

Operational Risk. One of the main impacts of the COVID-19 crisis has been executing our business continuity protocols to ensure our employees are safe and able to serve our customers. This included transitioning the vast majority of our employees to remote work arrangements. We have also made a number of operational changes to accommodate our customers as further described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—COVID-19.”

In this environment, there is an elevated risk that weaknesses or failures in our business continuation plans could lead to disruption of our operations, liability to clients, exposure to disciplinary action or harm to our reputation. Furthermore, weaknesses or failures within a vendor’s business continuation plan can materially disrupt our business operations. Our information systems and those of our vendors and service providers may be more vulnerable to cyber-attacks, computer viruses or other computer related attacks, programming errors and similar disruptive problems during a business continuation event.

Strategic Risk. The COVID-19 pandemic could ultimately generate an economic downturn; higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending. In such an environment, the demand for our products and our investment returns could be materially adversely affected. In addition, we expect near-term sales to be slowed by the impact of social distancing and financial hardship on our customers.

The macroeconomic environment may also result in the need to recognize an impairment of goodwill which could negatively impact our results of operations and financial condition.

Finally, we expect that account values in our Full Service business will be impacted by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provides qualified individuals the ability to withdraw from defined contribution plans up to $100,000 penalty-free, with the withdrawal taxed over a three-year period (unless otherwise elected by the individual). We cannot predict what other actions governments will take in response to the COVID-19 pandemic, and how any new laws, regulations, or state-sponsored programs may impact our business.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) The following table provides information about purchases by the Company during the three months ended March 31, 2020, of its Common Stock:

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Period
 
Total Number
of Shares
Purchased(1)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased
as Part of
Publicly Announced
Program(2)
 
Approximate Dollar Value of Shares that May Yet Be Purchased under the Program(2)
January 1, 2020 through January 31, 2020
 
1,781,319

 
$
93.92

 
1,774,536

 
 
February 1, 2020 through February 29, 2020
 
2,504,845

 
$
91.90

 
1,835,907

 
 
March 1, 2020 through March 31, 2020
 
3,120,892

 
$
53.50

 
3,115,209

 
 
Total
 
7,407,056

 
$
76.21

 
6,725,652

 
$
1,500,000,000

__________
(1)
Includes shares of Common Stock withheld from participants for income tax withholding purposes whose shares of restricted stock units vested during the period. Such restricted stock units were originally issued to participants pursuant to the Prudential Financial Inc. Omnibus Incentive Plan.
(2)
In December 2019, Prudential Financial’s Board of Directors authorized the Company to repurchase, at management’s discretion, up to $2.0 billion of its outstanding Common Stock during the period from January 1, 2020 through December 31, 2020. The Company temporarily suspended Common Stock repurchases under its existing repurchase authorization beginning April 1, 2020; however, the Company will continue to evaluate the resumption of share repurchases under the existing Board authorization for 2020.

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ITEM 6. EXHIBITS

EXHIBIT INDEX
2.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS - XBRL
Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
101.SCH - XBRL
Taxonomy Extension Schema Document.
 
 
101.CAL - XBRL
Taxonomy Extension Calculation Linkbase Document.
 
 
101.LAB - XBRL
Taxonomy Extension Label Linkbase Document.
 
 
101.PRE - XBRL
Taxonomy Extension Presentation Linkbase Document.
 
 
101.DEF - XBRL
Taxonomy Extension Definition Linkbase Document.
 
 
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
__________
* Certain confidential information contained in this exhibit, marked by [***], has been omitted because it (i) is not material and (ii) would likely cause competitive harm to the Company if it were to be publicly disclosed.
** This exhibit is a management contract or compensatory plan or arrangement.

Prudential Financial, Inc. will furnish upon request a copy of any exhibit listed above upon the payment of a reasonable fee covering the expense of furnishing the copy. Requests should be directed to:

Shareholder Services
Prudential Financial, Inc.
751 Broad Street, 21st Floor
Newark, New Jersey 07102

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GLOSSARY

Throughout this Quarterly Report on Form 10-Q, the Company may use certain abbreviations, acronyms and terms which are defined below.
Prudential Entities
 
 
 
 
 
Company
Prudential Financial, Inc. and its subsidiaries
 
PRIAC
Prudential Retirement Insurance and Annuity Company
PALAC
Prudential Annuities Life Assurance Corporation
 
Pruco Life
Pruco Life Insurance Company
PFI
Prudential Financial, Inc. and its subsidiaries
 
Prudential
Prudential Financial, Inc. and its subsidiaries
PGFL
Prudential Gibraltar Financial Life Insurance Co., Ltd.
 
Prudential Financial
Prudential Financial, Inc.
PIIH
Prudential International Insurance Holdings, Ltd.
 
Prudential Funding
Prudential Funding, LLC
PLIC
Prudential Legacy Insurance Company of New Jersey
 
Prudential Insurance/PICA
The Prudential Insurance Company of America
PLNJ
Pruco Life Insurance Company of New Jersey
 
Prudential of Japan
The Prudential Life Insurance Company, Ltd.
POA
Prudential of Argentina
 
Registrant
Prudential Financial, Inc.
POK
The Prudential Life Insurance Company of Korea, Ltd.
 
 
 



Defined Terms
 
 
 
 
 
Assurance IQ
Assurance IQ, LLC
 
Morningstar
Morningstar, Inc.
Board
Prudential Financial's Board of Directors
 
Other Postretirement Benefits
Certain health care and life insurance benefits provided by the Company for its retired employees, their beneficiaries and covered dependents
Closed Block
Certain in-force participating insurance policies and annuity products, along with corresponding assets used for the payment of benefits and policyholders' dividends on these products
 
Pension Benefits
Funded and non-funded non-contributory defined benefit pension plans which cover substantially all of the Company’s employees
Exchange Act
The Securities Exchange Act of 1934
 
PGIM
The global investment management businesses of Prudential Financial, Inc.
Fitch
Fitch Ratings Inc.
 
Regulation XXX
Valuation of Life Insurance Policies Model Regulation
Guideline AXXX
The Application of the Valuation of Life Insurance Policies Model Regulation
 
S&P
Standard & Poor's Rating Services
Moody's
Moody's Investors Service, Inc.
 
U.S. GAAP
Generally accepted accounting principles in the United States of America


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Acronyms
 
 
 
 
 
ALM
Asset Liability Management
 
MD&A
Management's Discussion and Analysis of Financial Condition and Results of Operations
AOCI
Accumulated Other Comprehensive Income (Loss)
 
NAIC
National Association of Insurance Commissioners
ASU
Accounting Standards Update
 
NAV
Net Asset Value
AUD
Australian Dollar
 
NJDOBI
New Jersey Department of Banking and Insurance
bps
Basis Points
 
NPR
Non-Performance Risk
CECL
Current Expected Credit Loss
 
OCI
Other Comprehensive Income (Loss)
CLO
Collateralized Loan Obligations
 
OTC
Over-The-Counter
COVID-19
2019 Novel Coronavirus
 
OTTI
Other-Than-Temporary Impairments
DAC
Deferred Policy Acquisition Costs
 
PDI
Prudential Defined Income
DSI
Deferred Sales Inducements
 
RAF
Risk Appetite Framework
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization
 
RBC
Risk-Based Capital
FASB
Financial Accounting Standards Board
 
SEC
Securities and Exchange Commission
FSA
Financial Services Agency (an agency of the Japanese government)
 
SVO
Securities Valuation Office
GICs
Guaranteed Investment Contracts
 
TBA
To Be Announced
GMDB
Guaranteed Minimum Death Benefits
 
U.S.
The United States of America
GSE
Government Sponsored Entities
 
USD
U.S. Dollar
HDI
Highest Daily Lifetime Income
 
VIEs
Variable Interest Entities
LIBOR
London Inter-Bank Offered Rate
 
VOBA
Value of Business Acquired
LPs/LLCs
Limited Partnerships and Limited Liability Companies
 
 
 



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
Prudential Financial, Inc.
 
 
By:
/S/    KENNETH Y. TANJI        
 
 
 
Kenneth Y. Tanji
Executive Vice President and Chief Financial Officer
(Authorized signatory and principal financial officer)

Date: May 8, 2020

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