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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 June 30, 2019
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.
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| | | | | |
| 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 July 31, 2019, 402 million shares of the registrant’s Common Stock (par value $0.01) were outstanding.
TABLE OF CONTENTS
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Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
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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) losses on investments or financial contracts due to deterioration in credit quality or value, or counterparty default; (2) 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; (3) 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; (4) 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; (5) 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; (6) 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 or (d) reliance on third-parties; (7) 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; (8) technological changes which may adversely impact companies in our investment portfolio or cause insurance experience to deviate from our assumptions; (9) ratings downgrades; (10) market conditions that may adversely affect the sales or persistency of our products; (11) competition; (12) reputational damage; and (13) the costs, effects, timing, or success of our plans to accelerate our Financial Wellness strategy. Prudential Financial, Inc. does not undertake to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2018 for discussion of certain risks relating to our businesses and investment in our securities.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Financial Position
June 30, 2019 and December 31, 2018 (in millions, except share amounts)
|
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
ASSETS | | | | |
Fixed maturities, available-for-sale, at fair value (amortized cost: 2019-$340,564; 2018-$331,745)(1) | | $ | 383,390 |
| | $ | 353,656 |
|
Fixed maturities, held-to-maturity, at amortized cost (fair value: 2019-$2,410; 2018-$2,372)(1) | | 2,009 |
| | 2,013 |
|
Fixed maturities, trading, at fair value (amortized cost: 2019-$3,807; 2018-$3,392)(1) | | 3,755 |
| | 3,243 |
|
Assets supporting experience-rated contractholder liabilities, at fair value(1) | | 21,843 |
| | 21,254 |
|
Equity securities, at fair value (cost: 2019-$5,205; 2018-$5,219)(1) | | 6,804 |
| | 6,238 |
|
Commercial mortgage and other loans (includes $645 and $763 measured at fair value under the fair value option at June 30, 2019 and December 31, 2018, respectively)(1) | | 61,228 |
| | 59,830 |
|
Policy loans | | 12,030 |
| | 12,016 |
|
Other invested assets (includes $5,567 and $5,524 measured at fair value at June 30, 2019 and December 31, 2018, respectively)(1) | | 15,081 |
| | 14,526 |
|
Short-term investments | | 5,872 |
| | 6,469 |
|
Total investments | | 512,012 |
| | 479,245 |
|
Cash and cash equivalents(1) | | 15,421 |
| | 15,353 |
|
Accrued investment income(1) | | 3,355 |
| | 3,318 |
|
Deferred policy acquisition costs | | 19,540 |
| | 20,058 |
|
Value of business acquired | | 1,227 |
| | 1,850 |
|
Other assets(1) | | 18,690 |
| | 16,118 |
|
Separate account assets | | 303,580 |
| | 279,136 |
|
TOTAL ASSETS | | $ | 873,825 |
| | $ | 815,078 |
|
LIABILITIES AND EQUITY | | | | |
LIABILITIES | | | | |
Future policy benefits | | $ | 285,527 |
| | $ | 273,846 |
|
Policyholders’ account balances | | 151,428 |
| | 150,338 |
|
Policyholders’ dividends | | 6,558 |
| | 4,110 |
|
Securities sold under agreements to repurchase | | 9,741 |
| | 9,950 |
|
Cash collateral for loaned securities | | 4,235 |
| | 3,929 |
|
Income taxes | | 11,485 |
| | 7,936 |
|
Short-term debt | | 2,659 |
| | 2,451 |
|
Long-term debt | | 17,841 |
| | 17,378 |
|
Other liabilities(1) | | 17,372 |
| | 16,018 |
|
Notes issued by consolidated variable interest entities (includes $816 and $595 measured at fair value under the fair value option at June 30, 2019 and December 31, 2018, respectively)(1) | | 1,246 |
| | 955 |
|
Separate account liabilities | | 303,580 |
| | 279,136 |
|
Total liabilities | | 811,672 |
| | 766,047 |
|
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 15) | |
| |
|
EQUITY | | | | |
Preferred Stock ($.01 par value; 10,000,000 shares authorized; none issued) | | 0 |
| | 0 |
|
Common Stock ($.01 par value; 1,500,000,000 shares authorized; 660,111,339 shares issued at both June 30, 2019 and December 31, 2018) | | 6 |
| | 6 |
|
Additional paid-in capital | | 24,825 |
| | 24,828 |
|
Common Stock held in treasury, at cost (257,129,965 and 249,398,887 shares at June 30, 2019 and December 31, 2018, respectively) | | (18,416 | ) | | (17,593 | ) |
Accumulated other comprehensive income (loss) | | 23,982 |
| | 10,906 |
|
Retained earnings | | 31,263 |
| | 30,470 |
|
Total Prudential Financial, Inc. equity | | 61,660 |
| | 48,617 |
|
Noncontrolling interests | | 493 |
| | 414 |
|
Total equity | | 62,153 |
| | 49,031 |
|
TOTAL LIABILITIES AND EQUITY | | $ | 873,825 |
| | $ | 815,078 |
|
__________
See Notes to Unaudited Interim Consolidated Financial Statements
PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Operations
Three and Six Months Ended June 30, 2019 and 2018 (in millions, except per share amounts)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
REVENUES | | | | | | | |
Premiums | $ | 8,135 |
| | $ | 7,438 |
| | $ | 16,035 |
| | $ | 14,749 |
|
Policy charges and fee income | 1,473 |
| | 1,480 |
| | 2,944 |
| | 2,984 |
|
Net investment income | 4,390 |
| | 4,096 |
| | 8,606 |
| | 8,094 |
|
Asset management and service fees | 1,083 |
| | 1,010 |
| | 2,099 |
| | 2,036 |
|
Other income (loss) | 643 |
| | (54 | ) | | 1,897 |
| | (561 | ) |
Realized investment gains (losses), net: | | | | | | | |
Other-than-temporary impairments on fixed maturity securities | (77 | ) | | (58 | ) | | (112 | ) | | (97 | ) |
Other-than-temporary impairments on fixed maturity securities transferred to Other comprehensive income | 25 |
| | 0 |
| | 13 |
| | 0 |
|
Other realized investment gains (losses), net | (284 | ) | | 743 |
| | (1,003 | ) | | 1,207 |
|
Total realized investment gains (losses), net | (336 | ) | | 685 |
| | (1,102 | ) | | 1,110 |
|
Total revenues | 15,388 |
| | 14,655 |
| | 30,479 |
| | 28,412 |
|
BENEFITS AND EXPENSES | | | | | | | |
Policyholders’ benefits | 8,877 |
| | 9,512 |
| | 17,315 |
| | 17,187 |
|
Interest credited to policyholders’ account balances | 1,278 |
| | 894 |
| | 2,623 |
| | 1,444 |
|
Dividends to policyholders | 437 |
| | 540 |
| | 1,014 |
| | 868 |
|
Amortization of deferred policy acquisition costs | 782 |
| | 613 |
| | 1,217 |
| | 1,201 |
|
General and administrative expenses | 3,138 |
| | 2,846 |
| | 6,294 |
| | 5,769 |
|
Total benefits and expenses | 14,512 |
| | 14,405 |
| | 28,463 |
| | 26,469 |
|
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES | 876 |
| | 250 |
| | 2,016 |
| | 1,943 |
|
Total income tax expense (benefit) | 162 |
| | 68 |
| | 394 |
| | 420 |
|
INCOME (LOSS) BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES | 714 |
| | 182 |
| | 1,622 |
| | 1,523 |
|
Equity in earnings of operating joint ventures, net of taxes | 24 |
| | 18 |
| | 53 |
| | 41 |
|
NET INCOME (LOSS) | 738 |
| | 200 |
| | 1,675 |
| | 1,564 |
|
Less: Income (loss) attributable to noncontrolling interests | 30 |
| | 3 |
| | 35 |
| | 4 |
|
NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC. | $ | 708 |
| | $ | 197 |
| | $ | 1,640 |
| | $ | 1,560 |
|
EARNINGS PER SHARE | | | | | | | |
Basic earnings per share-Common Stock: | | | | | | | |
Net income (loss) attributable to Prudential Financial, Inc. | $ | 1.73 |
| | $ | 0.46 |
| | $ | 3.98 |
| | $ | 3.66 |
|
Diluted earnings per share-Common Stock: | | | | | | | |
Net income (loss) attributable to Prudential Financial, Inc. | $ | 1.71 |
| | $ | 0.46 |
| | $ | 3.93 |
| | $ | 3.62 |
|
See Notes to Unaudited Interim Consolidated Financial Statements
PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Comprehensive Income
Three and Six Months Ended June 30, 2019 and 2018 (in millions)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
NET INCOME (LOSS) | $ | 738 |
| | $ | 200 |
| | $ | 1,675 |
| | $ | 1,564 |
|
Other comprehensive income (loss), before tax: | | | | | | | |
Foreign currency translation adjustments for the period | 213 |
| | (703 | ) | | 108 |
| | (41 | ) |
Net unrealized investment gains (losses) | 8,506 |
| | (3,326 | ) | | 16,795 |
| | (7,992 | ) |
Defined benefit pension and postretirement unrecognized periodic benefit (cost) | 17 |
| | 75 |
| | 81 |
| | 129 |
|
Total | 8,736 |
| | (3,954 | ) | | 16,984 |
| | (7,904 | ) |
Less: Income tax expense (benefit) related to other comprehensive income (loss) | 1,966 |
| | (838 | ) | | 3,910 |
| | (1,682 | ) |
Other comprehensive income (loss), net of taxes | 6,770 |
| | (3,116 | ) | | 13,074 |
| | (6,222 | ) |
Comprehensive income (loss) | 7,508 |
| | (2,916 | ) | | 14,749 |
| | (4,658 | ) |
Less: Comprehensive income (loss) attributable to noncontrolling interests | 36 |
| | (7 | ) | | 40 |
| | 7 |
|
Comprehensive income (loss) attributable to Prudential Financial, Inc. | $ | 7,472 |
| | $ | (2,909 | ) | | $ | 14,709 |
| | $ | (4,665 | ) |
See Notes to Unaudited Interim Consolidated Financial Statements
PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Equity
Three and Six Months Ended June 30, 2019 and 2018 (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, 2018 | $ | 6 |
| | $ | 24,828 |
| | $ | 30,470 |
| | $ | (17,593 | ) | | $ | 10,906 |
| | $ | 48,617 |
| | $ | 414 |
| | $ | 49,031 |
|
Cumulative effect of adoption of accounting changes(1) | | | | | (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 |
|
Common Stock acquired | | | | | | | (500 | ) | | | | (500 | ) | | | | (500 | ) |
Contributions from noncontrolling interests | | | | | | | | | | | | | 25 |
| | 25 |
|
Distributions to noncontrolling interests | | | | | | | | | | | | | (16 | ) | | (16 | ) |
Consolidations (deconsolidations) of noncontrolling interests | | | | | | | | | | | | | 8 |
| | 8 |
|
Stock-based compensation programs | | | 43 |
| | | | 46 |
| | | | 89 |
| | | | 89 |
|
Dividends declared on Common Stock | | | | | (411 | ) | | | | | | (411 | ) | | | | (411 | ) |
Comprehensive income: | | | | | | | | | | | | | | | |
Net income (loss) | | | | | 708 |
| | | | | | 708 |
| | 30 |
| | 738 |
|
Other comprehensive income (loss), net of tax | | | | | | | | | 6,764 |
| | 6,764 |
| | 6 |
| | 6,770 |
|
Total comprehensive income (loss) | | | | | | | | | | | 7,472 |
| | 36 |
| | 7,508 |
|
Balance, June 30, 2019 | $ | 6 |
| | $ | 24,825 |
| | $ | 31,263 |
| | $ | (18,416 | ) | | $ | 23,982 |
| | $ | 61,660 |
| | $ | 493 |
| | $ | 62,153 |
|
| | | | | | | | | | | | | | | |
| 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, 2017 | $ | 6 |
| | $ | 24,769 |
| | $ | 28,671 |
| | $ | (16,284 | ) | | $ | 17,074 |
| | $ | 54,236 |
| | $ | 275 |
| | $ | 54,511 |
|
Cumulative effect of adoption of ASU 2016-01 | | | | | 904 |
| | | | (847 | ) | | 57 |
| | | | 57 |
|
Cumulative effect of adoption of ASU 2018-02 | | | | | (1,653 | ) | | | | 1,653 |
| | 0 |
| | | | 0 |
|
Common Stock acquired | | | | | | | (375 | ) | | | | (375 | ) | | | | (375 | ) |
Contributions from noncontrolling interests | | | | | | | | | | | | | 61 |
| | 61 |
|
Distributions to noncontrolling interests | | | | | | | | | | | | | (5 | ) | | (5 | ) |
Stock-based compensation programs | | | (47 | ) | | | | 102 |
| | | | 55 |
| | | | 55 |
|
Dividends declared on Common Stock | | | | | (387 | ) | | | | | | (387 | ) | | | | (387 | ) |
Comprehensive income: | | | | | | | | | | | | | | | |
Net income (loss) | | | | | 1,363 |
| | | | | | 1,363 |
| | 1 |
| | 1,364 |
|
Other comprehensive income (loss), net of tax | | | | | | | | | (3,119 | ) | | (3,119 | ) | | 13 |
| | (3,106 | ) |
Total comprehensive income (loss) | | | | | | | | | | | (1,756 | ) | | 14 |
| | (1,742 | ) |
Balance, March 31, 2018 | 6 |
| | 24,722 |
| | 28,898 |
| | (16,557 | ) | | 14,761 |
| | 51,830 |
| | 345 |
| | 52,175 |
|
Common Stock acquired | | | | | | | (375 | ) | | | | (375 | ) | | | | (375 | ) |
Contributions from noncontrolling interests | | | | | | | | | | | | | 38 |
| | 38 |
|
Distributions to noncontrolling interests | | | | | | | | | | | | | (16 | ) | | (16 | ) |
Stock-based compensation programs | | | 41 |
| | | | 27 |
| | | | 68 |
| | | | 68 |
|
Dividends declared on Common Stock | | | | | (382 | ) | | | | | | (382 | ) | | | | (382 | ) |
Comprehensive income: | | | | | | | | | | | | | | | |
Net income (loss) | | | | | 197 |
| | | | | | 197 |
| | 3 |
| | 200 |
|
Other comprehensive income (loss), net of tax | | | | | | | | | (3,106 | ) | | (3,106 | ) | | (10 | ) | | (3,116 | ) |
Total comprehensive income (loss) | | | | | | | | | | | (2,909 | ) | | (7 | ) | | (2,916 | ) |
Balance, June 30, 2018 | $ | 6 |
| | $ | 24,763 |
| | $ | 28,713 |
| | $ | (16,905 | ) | | $ | 11,655 |
| | $ | 48,232 |
| | $ | 360 |
| | $ | 48,592 |
|
__________ | |
| Includes the impact from the adoption of ASU 2017-08 and 2017-12. See Note 2. |
See Notes to Unaudited Interim Consolidated Financial Statements
PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Cash Flows
Six Months Ended June 30, 2019 and 2018 (in millions)
|
| | | | | | | |
| 2019 | | 2018 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | |
Net income (loss) | $ | 1,675 |
| | $ | 1,564 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Realized investment (gains) losses, net | 1,102 |
| | (1,110 | ) |
Policy charges and fee income | (1,483 | ) | | (1,058 | ) |
Interest credited to policyholders’ account balances | 2,623 |
| | 1,444 |
|
Depreciation and amortization | (89 | ) | | 48 |
|
(Gains) losses on assets supporting experience-rated contractholder liabilities, net | (741 | ) | | 596 |
|
Change in: | | | |
Deferred policy acquisition costs | (258 | ) | | (203 | ) |
Future policy benefits and other insurance liabilities | 5,603 |
| | 5,762 |
|
Income taxes | (382 | ) | | (96 | ) |
Derivatives, net | 2,010 |
| | (1,041 | ) |
Other, net | (1,736 | ) | | 769 |
|
Cash flows from (used in) operating activities | 8,324 |
| | 6,675 |
|
CASH FLOWS FROM INVESTING ACTIVITIES | | | |
Proceeds from the sale/maturity/prepayment of: | | | |
Fixed maturities, available-for-sale | 25,681 |
| | 30,599 |
|
Fixed maturities, held-to-maturity | 35 |
| | 56 |
|
Fixed maturities, trading | 187 |
| | 410 |
|
Assets supporting experience-rated contractholder liabilities | 9,014 |
| | 9,650 |
|
Equity securities | 1,377 |
| | 1,965 |
|
Commercial mortgage and other loans | 2,885 |
| | 2,572 |
|
Policy loans | 1,154 |
| | 1,176 |
|
Other invested assets | 724 |
| | 908 |
|
Short-term investments | 16,682 |
| | 18,190 |
|
Payments for the purchase/origination of: | | | |
Fixed maturities, available-for-sale | (32,847 | ) | | (34,922 | ) |
Fixed maturities, trading | (570 | ) | | (483 | ) |
Assets supporting experience-rated contractholder liabilities | (8,813 | ) | | (9,560 | ) |
Equity securities | (1,376 | ) | | (1,826 | ) |
Commercial mortgage and other loans | (4,352 | ) | | (5,525 | ) |
Policy loans | (945 | ) | | (1,002 | ) |
Other invested assets | (1,011 | ) | | (1,154 | ) |
Short-term investments | (16,278 | ) | | (17,138 | ) |
Derivatives, net | 638 |
| | (271 | ) |
Other, net | (222 | ) | | (134 | ) |
Cash flows from (used in) investing activities | (8,037 | ) | | (6,489 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | |
Policyholders’ account deposits | 13,280 |
| | 14,826 |
|
Policyholders’ account withdrawals | (13,045 | ) | | (14,076 | ) |
Net change in securities sold under agreements to repurchase and cash collateral for loaned securities | 97 |
| | 1,094 |
|
Cash dividends paid on Common Stock | (827 | ) | | (769 | ) |
Net change in financing arrangements (maturities 90 days or less) | 166 |
| | (103 | ) |
Common Stock acquired | (983 | ) | | (739 | ) |
Common Stock reissued for exercise of stock options | 75 |
| | 74 |
|
Proceeds from the issuance of debt (maturities longer than 90 days) | 1,439 |
| | 1,194 |
|
Repayments of debt (maturities longer than 90 days) | (924 | ) | | (848 | ) |
Proceeds from notes issued by consolidated VIEs | 925 |
| | 0 |
|
Repayments of notes issued by consolidated VIEs | (638 | ) | | 0 |
|
Other, net | 196 |
| | (244 | ) |
Cash flows from (used in) financing activities | (239 | ) | | 409 |
|
Effect of foreign exchange rate changes on cash balances | 27 |
| | (71 | ) |
NET INCREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS | 75 |
| | 524 |
|
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, BEGINNING OF YEAR | 15,495 |
| | 14,536 |
|
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, END OF PERIOD | $ | 15,570 |
| | $ | 15,060 |
|
NON-CASH TRANSACTIONS DURING THE PERIOD | | | |
Treasury Stock shares issued for stock-based compensation programs | $ | 168 |
| | $ | 132 |
|
Significant Pension Risk Transfer transactions: | | | |
Assets received, excluding cash and cash equivalents | $ | 445 |
| | $ | 0 |
|
Liabilities assumed | 447 |
| | 977 |
|
Net cash received | $ | 2 |
| | $ | 977 |
|
RECONCILIATION TO THE UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION | | | |
Cash and cash equivalents | $ | 15,421 |
| | $ | 14,918 |
|
Restricted cash and restricted cash equivalents (included in “Other assets”) | 149 |
| | 142 |
|
Total cash, cash equivalents, restricted cash and restricted cash equivalents | $ | 15,570 |
| | $ | 15,060 |
|
See Notes to Unaudited Interim Consolidated Financial Statements
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 five divisions, which together encompass seven segments, and its Corporate and Other operations. The PGIM division is comprised of the PGIM segment, the global investment management businesses of the Company. The U.S. Workplace Solutions division consists of the Retirement and Group Insurance segments. The U.S. Individual Solutions division consists of the Individual Annuities and Individual Life segments. The Company also collectively refers to the U.S. Workplace Solutions division and the U.S. Individual Solutions division as the U.S. Financial Wellness businesses. The International Insurance division is comprised of the International Insurance segment, and the Closed Block division is comprised of the Closed Block segment. 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 the Company’s Corporate and Other operations. 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.
Basis of Presentation
The Unaudited Interim Consolidated Financial Statements have been prepared in accordance with 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”). Intercompany balances and transactions have been eliminated. The Unaudited Interim Consolidated Financial Statements include the accounts of Prudential Financial, entities over which the Company exercises control, including majority-owned subsidiaries and variable interest entities (“VIEs”) in which the Company is considered the primary beneficiary. See Note 4 for more information on the Company’s consolidated variable interest entities.
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, 2018.
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; 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 and the recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; pension and other postretirement benefits; provision for income taxes and valuation of deferred tax assets; and accruals for contingent liabilities, including estimates for losses in connection with unresolved legal and regulatory matters.
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
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASU”) to the FASB Accounting Standards Codification. The Company considers the applicability and impact of all ASU. ASU 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 the date of this filing. ASU not listed below were assessed and determined to be either not applicable or not material.
Adoption of ASU 2016-02
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), using the optional transition method with a cumulative-effect adjustment recorded as of the beginning of the period of adoption. This ASU substantially changes a lessee’s accounting for leases and requires the recording, on balance sheet, using a dual lease accounting model, of a “right-of-use” asset and lease liability. Leases are to be classified as either operating or finance leases. Under the standard, for operating leases, lessees recognize total lease expenses using a straight-line method and finance leases are treated as the purchase of an asset on a financing basis. For lessors, the standard modifies classification criteria and accounting for sales-type and direct financing leases and requires a lessor to derecognize the carrying value of the leased asset that is considered to have been transferred to a lessee and record a lease receivable and residual asset (“receivable and residual” approach). The standard also eliminates the leveraged lease accounting model for lessors and real estate specific provisions (i.e., those related to sale-leaseback transactions); it does allow, however, a grandfathering of the leveraged lease accounting model for those existing leases that are being accounted for using such model.
In addition, the Company elected the package of practical expedients permitted under the transition guidance within the standard which eliminated the need to reassess: (a) whether any existing contracts are, or contain, leases; (b) the lease classification for any existing leases (i.e., all existing lessee arrangements that were classified as operating leases before are now classified as operating leases, and all existing lessee arrangements that were classified as capital leases before are now classified as finance leases); and (c) initial direct costs for any existing leases. The Company did not elect the practical expedient, which may be applied separately, to use hindsight in determining the lease term and in assessing impairment of the Company’s right-of-use assets.
Adoption of the standard resulted in the recording of right-of-use assets and lease liabilities related to existing operating leases of approximately $600 million as of January 1, 2019. Adoption of the standard also resulted in additional required disclosures. See Note 7 for additional information.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Other ASU adopted during the six months ended June 30, 2019
|
| | | | | | |
Standard | | Description | | Effective date and method of adoption | | Effect on the financial statements or other significant matters |
| | | | | | |
ASU 2017-08, Receivables -Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities
| | This ASU requires certain premiums on callable debt securities to be amortized to the earliest call date.
| | January 1, 2019 using the modified retrospective method which included cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.
| | Adoption of the ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements. The impact of the cumulative-effect adjustment to retained earnings was immaterial.
|
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
| | This ASU makes targeted changes to the existing hedge accounting model to better portray the economics of an entity’s risk management activities and to simplify the use of hedge accounting. The ASU eliminates separate measurement and recording of hedge ineffectiveness. It requires entities to present the earnings effect of the hedging instrument in the same income statement line item in which the hedged item is reported and also requires expanded disclosures. | | January 1, 2019 using the modified retrospective method which included cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption. | | Adoption of the ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements. The impact of the cumulative-effect adjustment to retained earnings and accumulated other comprehensive income (loss) (“AOCI”) related to ineffectiveness of the hedge instruments outstanding at the date of adoption was immaterial. See Note 5 for additional required disclosures. |
ASU issued but not yet adopted as of June 30, 2019 — ASU 2018-12
ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASB on August 15, 2018 and is expected to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements. In July 2019, the FASB made a tentative decision to defer the effective date of this ASU to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. A final decision regarding the effective date is expected in the third quarter of 2019. 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. 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.
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 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 Other Comprehensive Income (“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 deferred sales inducements, 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 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 with changes in value attributable to changes in an entity’s non-performance risk (“NPR”) recognized in OCI.
| | An entity will apply a retrospective transition method which will include a cumulative-effect adjustment on the balance sheet as of the earliest period presented.
| | 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. |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Other ASU issued but not yet adopted as of June 30, 2019
|
| | | | | | |
Standard | | Description | | Effective date and method of adoption | | Effect on the financial statements or other significant matters |
| | | | | | |
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
| | This ASU provides a new current expected credit loss model to account for credit losses on certain financial assets and off-balance sheet exposures (e.g., loans held for investment, debt securities held to maturity, reinsurance receivables, net investments in leases and loan commitments). The model requires an entity to estimate lifetime credit losses related to such financial assets and exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The standard also modifies the current OTTI standard for available-for-sale debt securities to require the use of an allowance rather than a direct write down of the investment, and replaces the existing standard for purchased credit deteriorated loans and debt securities. | | January 1, 2020 using the modified retrospective method which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption. However, prospective application is required for purchased credit deteriorated assets previously accounted for under ASU 310-30 and for debt securities for which an OTTI was recognized prior to the date of adoption. Early adoption is permitted beginning January 1, 2019. | | The Company is continuing to develop its expected credit loss models and related systems, processes and controls for assets held on the Consolidated Statement of Financial Position at amortized cost, the most significant of which are the commercial mortgage and other loans. The allowance for credit losses will likely increase when the ASU is adopted to cover expected credit losses over the lifetime of the commercial mortgage and other loans, incorporating reasonable and supportable forecasts and expected changes in future economic conditions. The extent of the impact of adoption of this ASU on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements will depend on various factors including the economic environment and the size and type of the commercial mortgage and other loans held on the date of adoption. |
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 in current U.S. GAAP, 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 (with early adoption permitted).
| | The Company does not plan to early adopt this ASU. The Company does not expect the adoption of the ASU to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
|
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:
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 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 | $ | 29,571 |
| | $ | 4,973 |
| | $ | 89 |
| | $ | 34,455 |
| | $ | 0 |
|
Obligations of U.S. states and their political subdivisions | 9,889 |
| | 1,314 |
| | 1 |
| | 11,202 |
| | 0 |
|
Foreign government bonds | 98,745 |
| | 22,407 |
| | 70 |
| | 121,082 |
| | 0 |
|
U.S. public corporate securities | 85,282 |
| | 8,653 |
| | 417 |
| | 93,518 |
| | 0 |
|
U.S. private corporate securities(1) | 33,043 |
| | 2,121 |
| | 186 |
| | 34,978 |
| | 0 |
|
Foreign public corporate securities | 27,450 |
| | 2,980 |
| | 119 |
| | 30,311 |
| | (3 | ) |
Foreign private corporate securities | 26,383 |
| | 1,057 |
| | 672 |
| | 26,768 |
| | 0 |
|
Asset-backed securities(2) | 12,602 |
| | 174 |
| | 41 |
| | 12,735 |
| | (90 | ) |
Commercial mortgage-backed securities | 14,556 |
| | 607 |
| | 9 |
| | 15,154 |
| | 0 |
|
Residential mortgage-backed securities(3) | 3,043 |
| | 148 |
| | 4 |
| | 3,187 |
| | (1 | ) |
Total fixed maturities, available-for-sale(1) | $ | 340,564 |
| | $ | 44,434 |
| | $ | 1,608 |
| | $ | 383,390 |
| | $ | (94 | ) |
|
| | | | | | | | | | | | | | | |
| June 30, 2019 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (in millions) |
Fixed maturities, held-to-maturity: | | | | | | | |
Foreign government bonds | $ | 900 |
| | $ | 303 |
| | $ | 0 |
| | $ | 1,203 |
|
Foreign public corporate securities | 671 |
| | 70 |
| | 0 |
| | 741 |
|
Foreign private corporate securities(5) | 96 |
| | 3 |
| | 0 |
| | 99 |
|
Residential mortgage-backed securities(3) | 342 |
| | 25 |
| | 0 |
| | 367 |
|
Total fixed maturities, held-to-maturity(5) | $ | 2,009 |
| | $ | 401 |
| | $ | 0 |
| | $ | 2,410 |
|
__________
| |
(1) | Excludes notes with amortized cost of $4,356 million (fair value, $4,356 million), which have been offset with the associated payables under a netting agreement. |
| |
(2) | Includes credit-tranched securities collateralized by loan obligations, education loans, auto loans, sub-prime mortgages, credit cards 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 $372 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 $4,879 million (fair value, $5,190 million), which have been offset with the associated payables under a netting agreement. |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| 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 | $ | 28,242 |
| | $ | 2,994 |
| | $ | 642 |
| | $ | 30,594 |
| | $ | 0 |
|
Obligations of U.S. states and their political subdivisions | 9,880 |
| | 676 |
| | 63 |
| | 10,493 |
| | 0 |
|
Foreign government bonds | 96,710 |
| | 16,714 |
| | 314 |
| | 113,110 |
| | 0 |
|
U.S. public corporate securities | 82,257 |
| | 3,912 |
| | 2,754 |
| | 83,415 |
| | (2 | ) |
U.S. private corporate securities(1) | 32,450 |
| | 1,151 |
| | 581 |
| | 33,020 |
| | 0 |
|
Foreign public corporate securities | 27,671 |
| | 2,061 |
| | 531 |
| | 29,201 |
| | (3 | ) |
Foreign private corporate securities | 25,314 |
| | 434 |
| | 1,217 |
| | 24,531 |
| | 0 |
|
Asset-backed securities(2) | 12,888 |
| | 162 |
| | 77 |
| | 12,973 |
| | (160 | ) |
Commercial mortgage-backed securities | 13,396 |
| | 99 |
| | 180 |
| | 13,315 |
| | 0 |
|
Residential mortgage-backed securities(3) | 2,937 |
| | 99 |
| | 32 |
| | 3,004 |
| | (1 | ) |
Total fixed maturities, available-for-sale(1) | $ | 331,745 |
| | $ | 28,302 |
| | $ | 6,391 |
| | $ | 353,656 |
| | $ | (166 | ) |
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (in millions) |
Fixed maturities, held-to-maturity: | | | | | | | |
Foreign government bonds | $ | 885 |
| | $ | 269 |
| | $ | 0 |
| | $ | 1,154 |
|
Foreign public corporate securities | 668 |
| | 64 |
| | 0 |
| | 732 |
|
Foreign private corporate securities(5) | 95 |
| | 3 |
| | 0 |
| | 98 |
|
Residential mortgage-backed securities(3) | 365 |
| | 23 |
| | 0 |
| | 388 |
|
Total fixed maturities, held-to-maturity(5) | $ | 2,013 |
| | $ | 359 |
| | $ | 0 |
| | $ | 2,372 |
|
__________
| |
(1) | Excludes notes with amortized cost of $4,216 million (fair value, $4,216 million), which have been offset with the associated payables under a netting agreement. |
| |
(2) | Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, auto loans, credit cards, education loans 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 $356 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 $4,879 million (fair value, $4,879 million), which have been offset with the associated payables under a netting agreement. |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
The following tables set forth the fair value and gross unrealized losses aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the dates indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 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 | | $ | 370 |
| | $ | 0 |
| | $ | 2,153 |
| | $ | 89 |
| | $ | 2,523 |
| | $ | 89 |
|
Obligations of U.S. states and their political subdivisions | | 2 |
| | 0 |
| | 49 |
| | 1 |
| | 51 |
| | 1 |
|
Foreign government bonds | | 393 |
| | 56 |
| | 503 |
| | 14 |
| | 896 |
| | 70 |
|
U.S. public corporate securities | | 2,895 |
| | 88 |
| | 6,607 |
| | 329 |
| | 9,502 |
| | 417 |
|
U.S. private corporate securities | | 1,124 |
| | 67 |
| | 2,816 |
| | 119 |
| | 3,940 |
| | 186 |
|
Foreign public corporate securities | | 595 |
| | 32 |
| | 1,124 |
| | 87 |
| | 1,719 |
| | 119 |
|
Foreign private corporate securities | | 1,663 |
| | 28 |
| | 7,243 |
| | 644 |
| | 8,906 |
| | 672 |
|
Asset-backed securities | | 2,768 |
| | 18 |
| | 4,035 |
| | 23 |
| | 6,803 |
| | 41 |
|
Commercial mortgage-backed securities | | 20 |
| | 0 |
| | 852 |
| | 9 |
| | 872 |
| | 9 |
|
Residential mortgage-backed securities | | 137 |
| | 0 |
| | 336 |
| | 4 |
| | 473 |
| | 4 |
|
Total | | $ | 9,967 |
| | $ | 289 |
| | $ | 25,718 |
| | $ | 1,319 |
| | $ | 35,685 |
| | $ | 1,608 |
|
__________
| |
(1) | As of June 30, 2019, there were no securities classified as held-to-maturity in a gross unrealized loss position. |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | 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 | | $ | 3,007 |
| | $ | 67 |
| | $ | 6,986 |
| | $ | 575 |
| | $ | 9,993 |
| | $ | 642 |
|
Obligations of U.S. states and their political subdivisions | | 1,725 |
| | 25 |
| | 999 |
| | 38 |
| | 2,724 |
| | 63 |
|
Foreign government bonds | | 2,369 |
| | 136 |
| | 3,515 |
| | 178 |
| | 5,884 |
| | 314 |
|
U.S. public corporate securities | | 34,064 |
| | 1,570 |
| | 13,245 |
| | 1,184 |
| | 47,309 |
| | 2,754 |
|
U.S. private corporate securities | | 8,923 |
| | 225 |
| | 7,985 |
| | 356 |
| | 16,908 |
| | 581 |
|
Foreign public corporate securities | | 7,363 |
| | 308 |
| | 2,928 |
| | 223 |
| | 10,291 |
| | 531 |
|
Foreign private corporate securities | | 12,218 |
| | 692 |
| | 4,468 |
| | 525 |
| | 16,686 |
| | 1,217 |
|
Asset-backed securities | | 8,255 |
| | 70 |
| | 669 |
| | 7 |
| | 8,924 |
| | 77 |
|
Commercial mortgage-backed securities | | 1,781 |
| | 14 |
| | 4,733 |
| | 166 |
| | 6,514 |
| | 180 |
|
Residential mortgage-backed securities | | 194 |
| | 1 |
| | 1,042 |
| | 31 |
| | 1,236 |
| | 32 |
|
Total | | $ | 79,899 |
| | $ | 3,108 |
| | $ | 46,570 |
| | $ | 3,283 |
| | $ | 126,469 |
| | $ | 6,391 |
|
__________
| |
(1) | As of December 31, 2018, there was $13 million of fair value and less than $1 million of gross unrealized losses, which are not reflected in AOCI, on securities classified as held-to-maturity. |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
As of June 30, 2019 and December 31, 2018, the gross unrealized losses on fixed maturity securities were composed of $1,096 million and $5,391 million, respectively, related to “1” highest quality or “2” high quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $512 million and $1,000 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of June 30, 2019, the $1,319 million of gross unrealized losses of twelve months or more were concentrated in the Company’s corporate securities within the consumer non-cyclical, energy and utility sectors. As of December 31, 2018, the $3,283 million of gross unrealized losses of twelve months or more were concentrated in U.S. government bonds and in the Company’s corporate securities within the utility, consumer non-cyclical and finance sectors. In accordance with its policy described in Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, the Company concluded that an adjustment to earnings for OTTI for these fixed maturity securities was not warranted at either June 30, 2019 or December 31, 2018. 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 and foreign currency exchange rate movements. As of June 30, 2019, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.
The following table sets forth the amortized cost and fair value of fixed maturities by contractual maturities, as of the date indicated:
|
| | | | | | | | | | | | | | | |
| June 30, 2019 |
| Available-for-Sale | | Held-to-Maturity |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| (in millions) |
Fixed maturities: | | | | | | | |
Due in one year or less | $ | 16,207 |
| | $ | 16,756 |
| | $ | 60 |
| | $ | 61 |
|
Due after one year through five years | 50,780 |
| | 54,131 |
| | 114 |
| | 117 |
|
Due after five years through ten years | 66,712 |
| | 72,924 |
| | 596 |
| | 666 |
|
Due after ten years(1) | 176,664 |
| | 208,503 |
| | 897 |
| | 1,199 |
|
Asset-backed securities | 12,602 |
| | 12,735 |
| | 0 |
| | 0 |
|
Commercial mortgage-backed securities | 14,556 |
| | 15,154 |
| | 0 |
| | 0 |
|
Residential mortgage-backed securities | 3,043 |
| | 3,187 |
| | 342 |
| | 367 |
|
Total | $ | 340,564 |
| | $ | 383,390 |
| | $ | 2,009 |
| | $ | 2,410 |
|
__________
| |
(1) | Excludes available-for-sale notes with amortized cost of $4,356 million (fair value, $4,356 million) and held-to-maturity notes with amortized cost of $4,879 million (fair value, $5,190 million), which have been offset with the associated payables 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 impairments of fixed maturities, for the periods indicated:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (in millions) |
Fixed maturities, available-for-sale: | | | | | | | |
Proceeds from sales(1) | $ | 6,659 |
| | $ | 9,489 |
| | $ | 16,821 |
| | $ | 19,074 |
|
Proceeds from maturities/prepayments | 4,704 |
| | 6,553 |
| | 9,192 |
| | 11,779 |
|
Gross investment gains from sales and maturities | 228 |
| | 410 |
| | 711 |
| | 784 |
|
Gross investment losses from sales and maturities | (95 | ) | | (187 | ) | | (283 | ) | | (444 | ) |
OTTI recognized in earnings(2) | (64 | ) | | (58 | ) | | (99 | ) | | (97 | ) |
Fixed maturities, held-to-maturity: | | | | | | | |
Proceeds from maturities/prepayments(3) | $ | 23 |
| | $ | 23 |
| | $ | 37 |
| | $ | 59 |
|
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
__________
| |
(1) | Includes $332 million and $254 million of non-cash related proceeds due to the timing of trade settlements for the six months ended June 30, 2019 and 2018, respectively. |
| |
(2) | Excludes the portion of OTTI amounts remaining in 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) | Includes $2 million and $3 million of non-cash related proceeds due to the timing of trade settlements for the six months ended June 30, 2019 and 2018, respectively. |
The following table sets forth a rollforward of pre-tax amounts remaining in OCI related to fixed maturity securities with credit loss impairments recognized in earnings, for the periods indicated:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (in millions) |
Credit loss impairments: | | | | | | | |
Balance, beginning of period | $ | 149 |
| | $ | 203 |
| | $ | 140 |
| | $ | 319 |
|
New credit loss impairments | 4 |
| | 0 |
| | 20 |
| | 0 |
|
Additional credit loss impairments on securities previously impaired | 8 |
| | 0 |
| | 8 |
| | 0 |
|
Increases due to the passage of time on previously recorded credit losses | 2 |
| | 4 |
| | 3 |
| | 6 |
|
Reductions for securities which matured, paid down, prepaid or were sold during the period | (20 | ) | | (42 | ) | | (27 | ) | | (155 | ) |
Reductions for securities impaired to fair value during the period(1) | 0 |
| | 0 |
| | 0 |
| | (4 | ) |
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected | (1 | ) | | (2 | ) | | (2 | ) | | (3 | ) |
Balance, end of period | $ | 142 |
| | $ | 163 |
| | $ | 142 |
| | $ | 163 |
|
__________
| |
(1) | Represents circumstances where the Company determined in the current period that it intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of the security’s amortized cost. |
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:
|
| | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | Amortized Cost or Cost | | Fair Value | | Amortized Cost or Cost | | Fair Value |
| | (in millions) |
Short-term investments and cash equivalents | | $ | 371 |
| | $ | 371 |
| | $ | 215 |
| | $ | 215 |
|
Fixed maturities: | | | | | | | | |
Corporate securities | | 13,257 |
| | 13,630 |
| | 13,258 |
| | 13,119 |
|
Commercial mortgage-backed securities | | 2,239 |
| | 2,297 |
| | 2,346 |
| | 2,324 |
|
Residential mortgage-backed securities(1) | | 1,002 |
| | 1,014 |
| | 828 |
| | 811 |
|
Asset-backed securities(2) | | 1,595 |
| | 1,626 |
| | 1,649 |
| | 1,665 |
|
Foreign government bonds | | 852 |
| | 870 |
| | 1,087 |
| | 1,083 |
|
U.S. government authorities and agencies and obligations of U.S. states | | 351 |
| | 402 |
| | 538 |
| | 577 |
|
Total fixed maturities(3) | | 19,296 |
| | 19,839 |
| | 19,706 |
| | 19,579 |
|
Equity securities | | 1,452 |
| | 1,633 |
| | 1,378 |
| | 1,460 |
|
Total assets supporting experience-rated contractholder liabilities(4) | | $ | 21,119 |
| | $ | 21,843 |
| | $ | 21,299 |
| | $ | 21,254 |
|
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
__________
| |
(1) | Includes publicly-traded agency pass-through securities and collateralized mortgage obligations. |
| |
(2) | Includes collateralized loan obligations, auto loans, education loans, credit-tranched securities collateralized by sub-prime mortgages and other asset types. Collateralized loan obligations at fair value were $1,025 million and $1,028 million as of June 30, 2019 and December 31, 2018, respectively, all of which were rated AAA. |
| |
(3) | As a percentage of amortized cost, 93% of the portfolio was considered high or highest quality based on NAIC or equivalent ratings, as of both June 30, 2019 and December 31, 2018. |
| |
(4) | As a percentage of amortized cost, 78% of the portfolio consisted of public securities as of both June 30, 2019 and December 31, 2018. |
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 $300 million and $(198) million during the three months ended June 30, 2019 and 2018, respectively, and $769 million and $(596) million during the six months ended June 30, 2019 and 2018, respectively.
Equity Securities
The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Other income (loss),” was $51 million and $(80) million during the three months ended June 30, 2019 and 2018, respectively, and $581 million and $(271) million during the six months ended June 30, 2019 and 2018, 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:
|
| | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | (in millions) |
Investments in Japanese government and government agency securities: | | | | | | | | |
Fixed maturities, available-for-sale | | $ | 73,570 |
| | $ | 90,438 |
| | $ | 71,952 |
| | $ | 84,461 |
|
Fixed maturities, held-to-maturity | | 878 |
| | 1,173 |
| | 864 |
| | 1,127 |
|
Fixed maturities, trading | | 23 |
| | 23 |
| | 22 |
| | 22 |
|
Assets supporting experience-rated contractholder liabilities | | 664 |
| | 682 |
| | 691 |
| | 697 |
|
Total | | $ | 75,135 |
| | $ | 92,316 |
| | $ | 73,529 |
| | $ | 86,307 |
|
|
| | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | (in millions) |
Investments in South Korean government and government agency securities: | | | | | | | | |
Fixed maturities, available-for-sale | | $ | 10,364 |
| | $ | 13,098 |
| | $ | 10,339 |
| | $ | 12,586 |
|
Fixed maturities, held-to-maturity | | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Fixed maturities, trading | | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Assets supporting experience-rated contractholder liabilities | | 15 |
| | 16 |
| | 15 |
| | 15 |
|
Total | | $ | 10,379 |
| | $ | 13,114 |
| | $ | 10,354 |
| | $ | 12,601 |
|
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:
|
| | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | Amount (in millions) | | % of Total | | Amount (in millions) | | % of Total |
Commercial mortgage and agricultural property loans by property type: | | | | | | | | |
Office | | $ | 12,984 |
| | 21.4 | % | | $ | 13,280 |
| | 22.4 | % |
Retail | | 8,411 |
| | 13.9 |
| | 8,639 |
| | 14.6 |
|
Apartments/Multi-Family | | 16,752 |
| | 27.7 |
| | 16,538 |
| | 28.0 |
|
Industrial | | 12,866 |
| | 21.2 |
| | 11,574 |
| | 19.6 |
|
Hospitality | | 2,168 |
| | 3.6 |
| | 1,931 |
| | 3.3 |
|
Other | | 3,913 |
| | 6.5 |
| | 3,846 |
| | 6.5 |
|
Total commercial mortgage loans | | 57,094 |
| | 94.3 |
| | 55,808 |
| | 94.4 |
|
Agricultural property loans | | 3,420 |
| | 5.7 |
| | 3,316 |
| | 5.6 |
|
Total commercial mortgage and agricultural property loans by property type | | 60,514 |
| | 100.0 | % | | 59,124 |
| | 100.0 | % |
Allowance for credit losses | | (115 | ) | | | | (123 | ) | | |
Total net commercial mortgage and agricultural property loans by property type | | 60,399 |
| | | | 59,001 |
| | |
Other loans: | | | |
| | | |
|
Uncollateralized loans | | 664 |
| |
| | 660 |
| |
|
Residential property loans | | 143 |
| |
| | 157 |
| |
|
Other collateralized loans | | 27 |
| |
| | 17 |
| |
|
Total other loans | | 834 |
| |
| | 834 |
| |
|
Allowance for credit losses | | (5 | ) | |
| | (5 | ) | |
|
Total net other loans | | 829 |
| |
| | 829 |
| |
|
Total commercial mortgage and other loans(1) | | $ | 61,228 |
| |
| | $ | 59,830 |
| |
|
__________
| |
(1) | Includes loans held for sale which are carried at fair value and are collateralized primarily by apartment complexes. As of June 30, 2019 and December 31, 2018, the net carrying value of these loans was $645 million and $763 million, respectively. |
As of June 30, 2019, 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 (10%) and New York (7%)) and included loans secured by properties in Europe (6%), Australia (1%) and Asia (1%).
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, 2017 | | $ | 97 |
| | $ | 3 |
| | $ | 1 |
| | $ | 0 |
| | $ | 5 |
| | $ | 106 |
|
Addition to (release of) allowance for credit losses | | 23 |
| | 0 |
| | (1 | ) | | 0 |
| | 0 |
| | 22 |
|
Charge-offs, net of recoveries | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Change in foreign exchange | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Balance at December 31, 2018 | | 120 |
| | 3 |
| | 0 |
| | 0 |
| | 5 |
| | 128 |
|
Addition to (release of) allowance for credit losses | | (8 | ) | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (8 | ) |
Charge-offs, net of recoveries | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Change in foreign exchange | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Balance at June 30, 2019 | | $ | 112 |
| | $ | 3 |
| | $ | 0 |
| | $ | 0 |
| | $ | 5 |
| | $ | 120 |
|
The following tables set forth the allowance for credit losses and the recorded investment in commercial mortgage and other loans, as of the dates indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 |
| | Commercial Mortgage Loans | | Agricultural Property Loans | | Residential Property Loans | | Other Collateralized Loans | | Uncollateralized Loans | | Total |
| | (in millions) |
Allowance for credit losses: | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 8 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 8 |
|
Collectively evaluated for impairment | | 104 |
| | 3 |
| | 0 |
| | 0 |
| | 5 |
| | 112 |
|
Total ending balance(1) | | $ | 112 |
| | $ | 3 |
| | $ | 0 |
| | $ | 0 |
| | $ | 5 |
| | $ | 120 |
|
| | | | | | | | | | | | |
Recorded investment(2): | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 42 |
| | $ | 19 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 61 |
|
Collectively evaluated for impairment | | 57,052 |
| | 3,401 |
| | 143 |
| | 27 |
| | 664 |
| | 61,287 |
|
Total ending balance(1) | | $ | 57,094 |
| | $ | 3,420 |
| | $ | 143 |
| | $ | 27 |
| | $ | 664 |
| | $ | 61,348 |
|
__________
| |
(1) | As of June 30, 2019, there were no loans acquired with deteriorated credit quality. |
| |
(2) | Recorded investment reflects the carrying value gross of related allowance. |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Commercial Mortgage Loans | | Agricultural Property Loans | | Residential Property Loans | | Other Collateralized Loans | | Uncollateralized Loans | | Total |
| | (in millions) |
Allowance for credit losses: | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 19 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 19 |
|
Collectively evaluated for impairment | | 101 |
| | 3 |
| | 0 |
| | 0 |
| | 5 |
| | 109 |
|
Total ending balance(1) | | $ | 120 |
| | $ | 3 |
| | $ | 0 |
| | $ | 0 |
| | $ | 5 |
| | $ | 128 |
|
| | | | | | | | | | | | |
Recorded investment(2): | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 67 |
| | $ | 35 |
| | $ | 0 |
| | $ | 0 |
| | $ | 2 |
| | $ | 104 |
|
Collectively evaluated for impairment | | 55,741 |
| | 3,281 |
| | 157 |
| | 17 |
| | 658 |
| | 59,854 |
|
Total ending balance(1) | | $ | 55,808 |
| | $ | 3,316 |
| | $ | 157 |
| | $ | 17 |
| | $ | 660 |
| | $ | 59,958 |
|
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
__________
| |
(1) | As of December 31, 2018, there were no loans acquired with deteriorated credit quality. |
| |
(2) | Recorded investment reflects the carrying value gross of related allowance. |
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
|
| | | | | | | | | | | | | | | | |
| | June 30, 2019 |
| | Debt Service Coverage Ratio | | |
| | >1.2X | | 1.0X to <1.2X | | < 1.0X | | Total |
| | (in millions) |
Loan-to-Value Ratio: | | | | | | | | |
0%-59.99% | | $ | 30,536 |
| | $ | 653 |
| | $ | 81 |
| | $ | 31,270 |
|
60%-69.99% | | 17,370 |
| | 596 |
| | 0 |
| | 17,966 |
|
70%-79.99% | | 6,638 |
| | 690 |
| | 9 |
| | 7,337 |
|
80% or greater | | 309 |
| | 92 |
| | 120 |
| | 521 |
|
Total commercial mortgage loans | | $ | 54,853 |
| | $ | 2,031 |
| | $ | 210 |
| | $ | 57,094 |
|
Agricultural property loans
|
| | | | | | | | | | | | | | | | |
| | June 30, 2019 |
| | Debt Service Coverage Ratio | | |
| | >1.2X | | 1.0X to <1.2X | | < 1.0X | | Total |
| | (in millions) |
Loan-to-Value Ratio: | | | | | | | | |
0%-59.99% | | $ | 3,152 |
| | $ | 168 |
| | $ | 17 |
| | $ | 3,337 |
|
60%-69.99% | | 83 |
| | 0 |
| | 0 |
| | 83 |
|
70%-79.99% | | 0 |
| | 0 |
| | 0 |
| | 0 |
|
80% or greater | | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Total agricultural property loans | | $ | 3,235 |
| | $ | 168 |
| | $ | 17 |
| | $ | 3,420 |
|
Total commercial mortgage and agricultural property loans
|
| | | | | | | | | | | | | | | | |
| | June 30, 2019 |
| | Debt Service Coverage Ratio | | |
| | >1.2X | | 1.0X to <1.2X | | < 1.0X | | Total |
| | (in millions) |
Loan-to-Value Ratio: | | | | | | | | |
0%-59.99% | | $ | 33,688 |
| | $ | 821 |
| | $ | 98 |
| | $ | 34,607 |
|
60%-69.99% | | 17,453 |
| | 596 |
| | 0 |
| | 18,049 |
|
70%-79.99% | | 6,638 |
| | 690 |
| | 9 |
| | 7,337 |
|
80% or greater | | 309 |
| | 92 |
| | 120 |
| | 521 |
|
Total commercial mortgage and agricultural property loans | | $ | 58,088 |
| | $ | 2,199 |
| | $ | 227 |
| | $ | 60,514 |
|
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
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, 2018 |
| | Debt Service Coverage Ratio | | |
| | >1.2X | | 1.0X to <1.2X | | < 1.0X | | Total |
| | (in millions) |
Loan-to-Value Ratio: | | | | | | | | |
0%-59.99% | | $ | 30,325 |
| | $ | 538 |
| | $ | 161 |
| | $ | 31,024 |
|
60%-69.99% | | 16,538 |
| | 621 |
| | 0 |
| | 17,159 |
|
70%-79.99% | | 6,324 |
| | 754 |
| | 41 |
| | 7,119 |
|
80% or greater | | 332 |
| | 142 |
| | 32 |
| | 506 |
|
Total commercial mortgage loans | | $ | 53,519 |
| | $ | 2,055 |
| | $ | 234 |
| | $ | 55,808 |
|
Agricultural property loans
|
| | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Debt Service Coverage Ratio | | |
| | >1.2X | | 1.0X to <1.2X | | < 1.0X | | Total |
| | (in millions) |
Loan-to-Value Ratio: | | | | | | | | |
0%-59.99% | | $ | 2,997 |
| | $ | 198 |
| | $ | 57 |
| | $ | 3,252 |
|
60%-69.99% | | 64 |
| | 0 |
| | 0 |
| | 64 |
|
70%-79.99% | | 0 |
| | 0 |
| | 0 |
| | 0 |
|
80% or greater | | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Total agricultural property loans | | $ | 3,061 |
| | $ | 198 |
| | $ | 57 |
| | $ | 3,316 |
|
Total commercial mortgage and agricultural property loans
|
| | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Debt Service Coverage Ratio | | |
| | >1.2X | | 1.0X to <1.2X | | < 1.0X | | Total |
| | (in millions) |
Loan-to-Value Ratio: | | | | | | | | |
0%-59.99% | | $ | 33,322 |
| | $ | 736 |
| | $ | 218 |
| | $ | 34,276 |
|
60%-69.99% | | 16,602 |
| | 621 |
| | 0 |
| | 17,223 |
|
70%-79.99% | | 6,324 |
| | 754 |
| | 41 |
| | 7,119 |
|
80% or greater | | 332 |
| | 142 |
| | 32 |
| | 506 |
|
Total commercial mortgage and agricultural property loans | | $ | 56,580 |
| | $ | 2,253 |
| | $ | 291 |
| | $ | 59,124 |
|
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:
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 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 | | $ | 57,088 |
| | $ | 6 |
| | $ | 0 |
| | $ | 0 |
| | $ | 6 |
| | $ | 57,094 |
| | $ | 21 |
|
Agricultural property loans | | 3,402 |
| | 0 |
| | 0 |
| | 18 |
| | 18 |
| | 3,420 |
| | 22 |
|
Residential property loans | | 140 |
| | 1 |
| | 0 |
| | 2 |
| | 3 |
| | 143 |
| | 2 |
|
Other collateralized loans | | 27 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 27 |
| | 0 |
|
Uncollateralized loans | | 664 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 664 |
| | 0 |
|
Total | | $ | 61,321 |
| | $ | 7 |
| | $ | 0 |
| | $ | 20 |
| | $ | 27 |
| | $ | 61,348 |
| | $ | 45 |
|
__________
| |
(1) | As of June 30, 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, 2018. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | 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 | | $ | 55,808 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 55,808 |
| | $ | 66 |
|
Agricultural property loans | | 3,301 |
| | 0 |
| | 0 |
| | 15 |
| | 15 |
| | 3,316 |
| | 18 |
|
Residential property loans | | 154 |
| | 1 |
| | 0 |
| | 2 |
| | 3 |
| | 157 |
| | 3 |
|
Other collateralized loans | | 17 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 17 |
| | 0 |
|
Uncollateralized loans | | 660 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 660 |
| | 0 |
|
Total | | $ | 59,940 |
| | $ | 1 |
| | $ | 0 |
| | $ | 17 |
| | $ | 18 |
| | $ | 59,958 |
| | $ | 87 |
|
__________
| |
(1) | As of December 31, 2018, 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, 2018. |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Other Invested Assets
The following table sets forth the composition of “Other invested assets,” as of the dates indicated:
|
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | (in millions) |
LPs/LLCs: | | | | |
Equity method: | | | | |
Private equity | | $ | 3,305 |
| | $ | 3,182 |
|
Hedge funds | | 1,548 |
| | 1,337 |
|
Real estate-related | | 1,240 |
| | 1,207 |
|
Subtotal equity method | | 6,093 |
| | 5,726 |
|
Fair value: | | | | |
Private equity | | 1,637 |
| | 1,684 |
|
Hedge funds | | 2,128 |
| | 2,135 |
|
Real estate-related | | 324 | | 296 |
Subtotal fair value | | 4,089 |
| | 4,115 |
|
Total LPs/LLCs | | 10,182 |
| | 9,841 |
|
Real estate held through direct ownership(1) | | 2,730 |
| | 2,466 |
|
Derivative instruments | | 1,053 |
| | 1,155 |
Other(2) | | 1,116 |
| | 1,064 |
|
Total other invested assets | | $ | 15,081 |
| | $ | 14,526 |
|
_________ | |
(1) | As of June 30, 2019 and December 31, 2018, real estate held through direct ownership had mortgage debt of $799 million and $776 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 16 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Net Investment Income
The following table sets forth “Net investment income” by investment type, for the periods indicated:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (in millions) |
Fixed maturities, available-for-sale(1) | $ | 3,150 |
| | $ | 3,001 |
| | $ | 6,238 |
| | $ | 5,955 |
|
Fixed maturities, held-to-maturity(1) | 58 |
| | 57 |
| | 115 |
| | 112 |
|
Fixed maturities, trading | 38 |
| | 30 |
| | 72 |
| | 61 |
|
Assets supporting experience-rated contractholder liabilities, at fair value | 182 |
| | 181 |
| | 367 |
| | 372 |
|
Equity securities, at fair value | 51 |
| | 59 |
| | 81 |
| | 94 |
|
Commercial mortgage and other loans | 627 |
| | 594 |
| | 1,227 |
| | 1,163 |
|
Policy loans | 152 |
| | 156 |
| | 303 |
| | 308 |
|
Other invested assets | 271 |
| | 163 |
| | 476 |
| | 304 |
|
Short-term investments and cash equivalents | 115 |
| | 82 |
| | 233 |
| | 154 |
|
Gross investment income | 4,644 |
| | 4,323 |
| | 9,112 |
| | 8,523 |
|
Less: investment expenses | (254 | ) | | (227 | ) | | (506 | ) | | (429 | ) |
Net investment income | $ | 4,390 |
| | $ | 4,096 |
| | $ | 8,606 |
| | $ | 8,094 |
|
__________
| |
(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. |
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 June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (in millions) |
Fixed maturities(1) | $ | 69 |
| | $ | 165 |
| | $ | 329 |
| | $ | 243 |
|
Commercial mortgage and other loans | 4 |
| | 5 |
| | 14 |
| | 17 |
|
Investment real estate | 0 |
| | 60 |
| | 0 |
| | 62 |
|
LPs/LLCs | 2 |
| | 10 |
| | (3 | ) | | 16 |
|
Derivatives(2) | (411 | ) | | 445 |
| | (1,443 | ) | | 773 |
|
Other | 0 |
| | 0 |
| | 1 |
| | (1 | ) |
Realized investment gains (losses), net | $ | (336 | ) | | $ | 685 |
| | $ | (1,102 | ) | | $ | 1,110 |
|
__________
| |
(1) | Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading. |
| |
(2) | Includes the hedged items offset in qualifying fair value hedge accounting relationships. |
Net Unrealized Gains (Losses) on Investments within AOCI
The following table sets forth net unrealized gains (losses) on investments, as of the dates indicated:
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| (in millions) |
Fixed maturity securities, available-for-sale—with OTTI | $ | 278 |
| | $ | 190 |
|
Fixed maturity securities, available-for-sale—all other | 42,548 |
| | 21,721 |
|
Derivatives designated as cash flow hedges(1) | 1,017 |
| | 811 |
|
Other investments(2) | (23 | ) | | (2 | ) |
Net unrealized gains (losses) on investments | $ | 43,820 |
| | $ | 22,720 |
|
__________
| |
(1) | For more information on cash flow hedges, see Note 5. |
| |
(2) | As of June 30, 2019, 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.” |
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:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| 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(1) | $ | 9,412 |
| | $ | 20 |
| | $ | 9,432 |
| | $ | 9,418 |
| | $ | 171 |
| | $ | 9,589 |
|
U.S. public corporate securities | 0 |
| | 0 |
| | 0 |
| | 19 |
| | 0 |
| | 19 |
|
Residential mortgage-backed securities(1) | 309 |
| | 0 |
| | 309 |
| | 342 |
| | 0 |
| | 342 |
|
Total securities sold under agreements to repurchase(1)(2) | $ | 9,721 |
| | $ | 20 |
| | $ | 9,741 |
| | $ | 9,779 |
| | $ | 171 |
| | $ | 9,950 |
|
__________
| |
(1) | Prior period amounts have been updated to conform to current period presentation. |
| |
(2) | The Company did not have any agreements with remaining contractual maturities of thirty days or greater, as of the dates indicated. |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
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:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| 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 | $ | 80 |
| | $ | 0 |
| | $ | 80 |
| | $ | 105 |
| | $ | 0 |
| | $ | 105 |
|
Obligations of U.S. states and their political subdivisions | 58 |
| | 0 |
| | 58 |
| | 88 |
| | 0 |
| | 88 |
|
Foreign government bonds | 499 |
| | 0 |
| | 499 |
| | 325 |
| | 0 |
| | 325 |
|
U.S. public corporate securities | 2,615 |
| | 0 |
| | 2,615 |
| | 2,563 |
| | 0 |
| | 2,563 |
|
Foreign public corporate securities | 773 |
| | 0 |
| | 773 |
| | 693 |
| | 0 |
| | 693 |
|
Equity securities | 210 |
| | 0 |
| | 210 |
| | 155 |
| | 0 |
| | 155 |
|
Total cash collateral for loaned securities(1) | $ | 4,235 |
| | $ | 0 |
| | $ | 4,235 |
| | $ | 3,929 |
| | $ | 0 |
| | $ | 3,929 |
|
__________
| |
(1) | The Company did not have any agreements with remaining contractual maturities of thirty days or greater, 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, 2018.
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) |
| June 30, 2019 | | December 31, 2018 | | June 30, 2019 | | December 31, 2018 |
| (in millions) |
Fixed maturities, available-for-sale | $ | 100 |
| | $ | 73 |
| | $ | 291 |
| | $ | 282 |
|
Fixed maturities, held-to-maturity | 97 |
| | 95 |
| | 846 |
| | 831 |
|
Fixed maturities, trading | 1,126 |
| | 1,076 |
| | 0 |
| | 0 |
|
Assets supporting experience-rated contractholder liabilities | 0 |
| | 0 |
| | 5 |
| | 8 |
|
Equity securities | 45 |
| | 41 |
| | 0 |
| | 0 |
|
Commercial mortgage and other loans | 763 |
| | 730 |
| | 0 |
| | 0 |
|
Other invested assets | 1,866 |
| | 1,526 |
| | 84 |
| | 77 |
|
Cash and cash equivalents | 166 |
| | 131 |
| | 0 |
| | 0 |
|
Accrued investment income | 5 |
| | 5 |
| | 4 |
| | 4 |
|
Other assets | 451 |
| | 463 |
| | 748 |
| | 721 |
|
Total assets of consolidated VIEs | $ | 4,619 |
| | $ | 4,140 |
| | $ | 1,978 |
| | $ | 1,923 |
|
Other liabilities | $ | 290 |
| | $ | 295 |
| | $ | 14 |
| | $ | 17 |
|
Notes issued by consolidated VIEs(2) | 1,246 |
| | 955 |
| | 0 |
| | 0 |
|
Total liabilities of consolidated VIEs | $ | 1,536 |
| | $ | 1,250 |
| | $ | 14 |
| | $ | 17 |
|
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
__________
| |
(1) | Total assets of consolidated VIEs reflect $2,323 million and $2,013 million as of June 30, 2019 and December 31, 2018, 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 June 30, 2019 and December 31, 2018, the maturities of these obligations were greater than five 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 $929 million and $836 million at June 30, 2019 and December 31, 2018, 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 $10,182 million and $9,841 million as of June 30, 2019 and December 31, 2018, respectively.
In addition, in the normal course of its activities, the Company will invest in structured investments including VIEs for which it is not the investment manager. These structured investments typically invest in fixed income investments and are managed by third-parties and include asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities. The Company’s maximum exposure to loss on these structured investments, both VIEs and non-VIEs, is limited to the amount of its investment. See Note 3 for details regarding the carrying amounts and classification of these assets. The Company has not provided material financial or other support that was not contractually required to these structures. The Company has determined that it is not the primary beneficiary of these structures due to the fact that it does not control these entities.
5. DERIVATIVE 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, swaptions, 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, 2018.
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, cash collateral and non-performance risk (“NPR”). This netting impact results in total derivative assets of $1,043 million and $1,148 million as of June 30, 2019 and December 31, 2018, respectively, and total derivative liabilities of $557 million and $127 million as of June 30, 2019 and December 31, 2018, respectively, reflected in the Unaudited Interim Consolidated Statements of Financial Position.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
Primary Underlying Risk /Instrument Type | June 30, 2019 | | December 31, 2018 |
| | 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 | $ | 3,315 |
| | $ | 596 |
| | $ | (78 | ) | | $ | 3,885 |
| | $ | 305 |
| | $ | (67 | ) |
Interest Rate Forwards | 53 |
| | 1 |
| | 0 |
| | 600 |
| | 26 |
| | 0 |
|
Foreign Currency | | | | | | | | | | | |
Foreign Currency Forwards | 858 |
| | 34 |
| | (2 | ) | | 722 |
| | 26 |
| | (2 | ) |
Currency/Interest Rate | | | | | | | | | | | |
Foreign Currency Swaps | 21,245 |
| | 1,670 |
| | (336 | ) | | 20,724 |
| | 1,520 |
| | (358 | ) |
Total Derivatives Designated as Hedge Accounting Instruments | $ | 25,471 |
| | $ | 2,301 |
| | $ | (416 | ) | | $ | 25,931 |
| | $ | 1,877 |
| | $ | (427 | ) |
Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | | | | | |
Interest Rate | | | | | | | | | | | |
Interest Rate Swaps | $ | 138,186 |
| | $ | 9,604 |
| | $ | (4,641 | ) | | $ | 140,963 |
| | $ | 5,792 |
| | $ | (3,435 | ) |
Interest Rate Futures | 17,213 |
| | 3 |
| | (7 | ) | | 13,991 |
| | 23 |
| | (2 | ) |
Interest Rate Options | 20,798 |
| | 327 |
| | (220 | ) | | 24,002 |
| | 147 |
| | (314 | ) |
Interest Rate Forwards | 2,353 |
| | 21 |
| | 0 |
| | 5,049 |
| | 72 |
| | 0 |
|
Foreign Currency | | | | | | | | | | | |
Foreign Currency Forwards | 24,444 |
| | 312 |
| | (120 | ) | | 19,849 |
| | 246 |
| | (138 | ) |
Foreign Currency Options | 1 |
| | 0 |
| | 0 |
| | 2 |
| | 0 |
| | 0 |
|
Currency/Interest Rate | | | | | | | | | | | |
Foreign Currency Swaps | 14,066 |
| | 827 |
| | (420 | ) | | 13,784 |
| | 773 |
| | (421 | ) |
Credit | | | | | | | | | | | |
Credit Default Swaps | 3,165 |
| | 103 |
| | (2 | ) | | 5,207 |
| | 33 |
| | (23 | ) |
Equity | | | | | | | | | | | |
Equity Futures | 1,329 |
| | 0 |
| | (5 | ) | | 1,141 |
| | 0 |
| | (8 | ) |
Equity Options | 68,244 |
| | 570 |
| | (792 | ) | | 58,693 |
| | 384 |
| | (554 | ) |
Total Return Swaps | 17,945 |
| | 38 |
| | (302 | ) | | 17,309 |
| | 1,131 |
| | (86 | ) |
Other | | | | | | | | | | | |
Other(1) | 1,258 |
| | 0 |
| | 0 |
| | 508 |
| | 0 |
| | 0 |
|
Synthetic GICs | 80,337 |
| | 1 |
| | 0 |
| | 79,215 |
| | 2 |
| | 0 |
|
Total Derivatives Not Qualifying as Hedge Accounting Instruments | $ | 389,339 |
| | $ | 11,806 |
| | $ | (6,509 | ) | | $ | 379,713 |
| | $ | 8,603 |
| | $ | (4,981 | ) |
Total Derivatives(2)(3) | $ | 414,810 |
| | $ | 14,107 |
| | $ | (6,925 | ) | | $ | 405,644 |
| | $ | 10,480 |
| | $ | (5,408 | ) |
__________
| |
(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 $13,672 million and $8,959 million as of June 30, 2019 and December 31, 2018, 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. |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
As of June 30, 2019, the following amounts were recorded on the Unaudited Interim Consolidated Statements of Financial Position related to the carrying amount of the hedged assets (liabilities) and cumulative basis adjustments included in the carrying amount for fair value hedges.
|
| | | | | | | |
Balance Sheet Line Item in which Hedged Item is Recorded | Carrying Amount of the Hedged Assets (Liabilities) | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets (Liabilities)(1) |
| (in millions) |
Fixed maturities, available-for-sale, at fair value | $ | 441 |
| | $ | 62 |
|
Commercial mortgage and other loans | $ | 24 |
| | $ | 2 |
|
Policyholders’ account balances | $ | (1,327 | ) | | $ | (85 | ) |
Future policy benefits | $ | (642 | ) | | $ | (150 | ) |
________
| |
(1) | There are no 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.
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 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) | $ | 14,033 |
| | $ | (13,063 | ) | | $ | 970 |
| | $ | (633 | ) | | $ | 337 |
|
Securities purchased under agreement to resell | 1,257 |
| | 0 |
| | 1,257 |
| | (1,257 | ) | | 0 |
|
Total assets | $ | 15,290 |
| | $ | (13,063 | ) | | $ | 2,227 |
| | $ | (1,890 | ) | | $ | 337 |
|
Offsetting of Financial Liabilities: | | | | | | | | | |
Derivatives(1) | $ | 6,913 |
| | $ | (6,368 | ) | | $ | 545 |
| | $ | (191 | ) | | $ | 354 |
|
Securities sold under agreement to repurchase | 9,741 |
| | 0 |
| | 9,741 |
| | (9,741 | ) | | 0 |
|
Total liabilities | $ | 16,654 |
| | $ | (6,368 | ) | | $ | 10,286 |
| | $ | (9,932 | ) | | $ | 354 |
|
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| 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) | $ | 10,407 |
| | $ | (9,331 | ) | | $ | 1,076 |
| | $ | (614 | ) | | $ | 462 |
|
Securities purchased under agreement to resell | 986 |
| | 0 |
| | 986 |
| | (986 | ) | | 0 |
|
Total assets | $ | 11,393 |
| | $ | (9,331 | ) | | $ | 2,062 |
| | $ | (1,600 | ) | | $ | 462 |
|
Offsetting of Financial Liabilities: | | | | | | | | | |
Derivatives(1) | $ | 5,387 |
| | $ | (5,281 | ) | | $ | 106 |
| | $ | (45 | ) | | $ | 61 |
|
Securities sold under agreement to repurchase | 9,950 |
| | 0 |
| | 9,950 |
| | (9,950 | ) | | 0 |
|
Total liabilities | $ | 15,337 |
| | $ | (5,281 | ) | | $ | 10,056 |
| | $ | (9,995 | ) | | $ | 61 |
|
__________
| |
(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, 2018.
Fair Value, Cash Flow 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, equity or embedded 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.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 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 | $ | (9 | ) | | $ | (2 | ) | | $ | 0 |
| | $ | 0 |
| | $ | 101 |
| | $ | 80 |
| | $ | 0 |
|
Currency | 2 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Total gains (losses) on derivatives designated as hedge instruments | (7 | ) | | (2 | ) | | 0 |
| | 0 |
| | 101 |
| | 80 |
| | 0 |
|
Gains (losses) on the hedged item: | | | | | | | | | | | | | |
Interest Rate | 9 |
| | 5 |
| | 0 |
| | 0 |
| | (98 | ) | | (73 | ) | | 0 |
|
Currency | (1 | ) | | 1 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Total gains (losses) on hedged item | 8 |
| | 6 |
| | 0 |
| | 0 |
| | (98 | ) | | (73 | ) | | 0 |
|
Total gains (losses) on fair value hedges net of hedged item | 1 |
| | 4 |
| | 0 |
| | 0 |
| | 3 |
| | 7 |
| | 0 |
|
Cash flow hedges | | | | | | | | | | | | | |
Interest Rate | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (1 | ) |
Currency | 1 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 14 |
|
Currency/Interest Rate | 47 |
| | 69 |
| | 40 |
| | 0 |
| | 0 |
| | 0 |
| | 229 |
|
Total gains (losses) on cash flow hedges | 48 |
| | 69 |
| | 40 |
| | 0 |
| | 0 |
| | 0 |
| | 242 |
|
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 | 2,346 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Currency | 122 |
| | 0 |
| | (5 | ) | | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Currency/Interest Rate | 20 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Credit | 36 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Equity | (617 | ) | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Other | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Embedded Derivatives | (2,368 | ) | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Total gains (losses) on derivatives not qualifying as hedge accounting instruments | (461 | ) | | 0 |
| | (5 | ) | | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Total | $ | (412 | ) | | $ | 73 |
| | $ | 35 |
| | $ | 0 |
| | $ | 3 |
| | $ | 7 |
| | $ | 243 |
|
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 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 | $ | (15 | ) | | $ | (4 | ) | | $ | 0 |
| | $ | 0 |
| | $ | 168 |
| | $ | 131 |
| | $ | 0 |
|
Currency | 1 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Total gains (losses) on derivatives designated as hedge instruments | (14 | ) | | (4 | ) | | 0 |
| | 0 |
| | 168 |
| | 131 |
| | 0 |
|
Gains (losses) on the hedged item: | | | | | | | | | | | | | |
Interest Rate | 11 |
| | 11 |
| | 0 |
| | 0 |
| | (164 | ) | | (119 | ) | | 0 |
|
Currency | 0 |
| | 2 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Total gains (losses) on hedged item | 11 |
| | 13 |
| | 0 |
| | 0 |
| | (164 | ) | | (119 | ) | | 0 |
|
Total gains (losses) on fair value hedges net of hedged item | (3 | ) | | 9 |
| | 0 |
| | 0 |
| | 4 |
| | 12 |
| | 0 |
|
Cash flow hedges | | | | | | | | | | | | | |
Interest Rate | (1 | ) | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 22 |
|
Currency | 2 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 5 |
|
Currency/Interest Rate | 40 |
| | 137 |
| | (6 | ) | | 0 |
| | 0 |
| | 0 |
| | 170 |
|
Total gains (losses) on cash flow hedges | 41 |
| | 137 |
| | (6 | ) | | 0 |
| | 0 |
| | 0 |
| | 197 |
|
Net investment hedges | | | | | | | | | | | | | |
Currency | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 2 |
|
Currency/Interest Rate | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Total gains (losses) on net investment hedges | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 2 |
|
Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | | | | | | | |
Interest Rate | 3,734 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Currency | 84 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Currency/Interest Rate | 204 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Credit | 104 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Equity | (2,427 | ) | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Other | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Embedded Derivatives | (3,180 | ) | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Total gains (losses) on derivatives not qualifying as hedge accounting instruments | (1,481 | ) | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Total | $ | (1,443 | ) | | $ | 146 |
| | $ | (6 | ) | | $ | 0 |
| | $ | 4 |
| | $ | 12 |
| | $ | 199 |
|
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018(2) |
| Realized Investment Gains (Losses) | | Net Investment Income | | Other Income (Loss) | | Interest Expense | | Interest Credited to Policyholders’ Account Balances | | 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 |
| | $ | (28 | ) | | $ | 0 |
|
Currency | 1 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Total gains (losses) on derivatives designated as hedge instruments | 6 |
| | (2 | ) | | 0 |
| | 0 |
| | (28 | ) | | 0 |
|
Gains (losses) on the hedged item: | | | | | | | | | | | |
Interest Rate | (5 | ) | | 5 |
| | 0 |
| | 0 |
| | 29 |
| | 0 |
|
Currency | (1 | ) | | 1 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Total gains (losses) on hedged item | (6 | ) | | 6 |
| | 0 |
| | 0 |
| | 29 |
| | 0 |
|
Total gains (losses) on fair value hedges net of hedged item | 0 |
| | 4 |
| | 0 |
| | 0 |
| | 1 |
| | 0 |
|
Cash flow hedges | | | | | | | | | | | |
Interest Rate | 2 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (1 | ) |
Currency | 3 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 18 |
|
Currency/Interest Rate | 33 |
| | 52 |
| | 209 |
| | 0 |
| | 0 |
| | 704 |
|
Total gains (losses) on cash flow hedges | 38 |
| | 52 |
| | 209 |
| | 0 |
| | 0 |
| | 721 |
|
Net investment hedges | | | | | | | | | | | |
Currency | 2 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 5 |
|
Currency/Interest Rate | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Total gains (losses) on net investment hedges | 2 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 5 |
|
Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | | | | | |
Interest Rate | (434 | ) | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Currency | (133 | ) | | 0 |
| | (1 | ) | | 0 |
| | 0 |
| | 0 |
|
Currency/Interest Rate | 573 |
| | 0 |
| | 2 |
| | 0 |
| | 0 |
| | 0 |
|
Credit | (1 | ) | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Equity | (258 | ) | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Other | (1 | |