Form: 10-Q

Quarterly report [Sections 13 or 15(d)]

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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Transition Period from              to             
 
Commission File Number 001-16707
Prudential Financial, Inc.
(Exact Name of Registrant as Specified in its Charter) 
New Jersey22-3703799
(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 $.01PRUNew York Stock Exchange
5.625% Junior Subordinated NotesPRSNew York Stock Exchange
4.125% Junior Subordinated NotesPFHNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerxAccelerated Filer
Non-accelerated FilerSmaller 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 October 31, 2020, 396 million shares of the registrant’s Common Stock (par value $0.01) were outstanding.


Table of Contents
TABLE OF CONTENTS
 
  Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.



Table of Contents
Forward-Looking Statements

Certain of the statements included in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Financial, Inc. and its subsidiaries. There can be no assurance that future developments affecting Prudential Financial, Inc. and its subsidiaries will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) the ongoing impact of the COVID-19 pandemic on the global economy, financial markets and our business; (2) losses on investments or financial contracts due to deterioration in credit quality or value, or counterparty default; (3) losses on insurance products due to mortality experience, morbidity experience or policyholder behavior experience that differs significantly from our expectations when we price our products; (4) changes in interest rates, equity prices and foreign currency exchange rates that may (a) adversely impact the profitability of our products, the value of separate accounts supporting these products or the value of assets we manage, (b) result in losses on derivatives we use to hedge risk or increase collateral posting requirements and (c) limit opportunities to invest at appropriate returns; (5) guarantees within certain of our products which are market sensitive and may decrease our earnings or increase the volatility of our results of operations or financial position; (6) liquidity needs resulting from (a) derivative collateral market exposure, (b) asset/liability mismatches, (c) the lack of available funding in the financial markets or (d) unexpected cash demands due to severe mortality calamity or lapse events; (7) financial or customer losses, or regulatory and legal actions, due to inadequate or failed processes or systems, external events, and human error or misconduct such as (a) disruption of our systems and data, (b) an information security breach, (c) a failure to protect the privacy of sensitive data, (d) reliance on third-parties or (e) labor and employment matters; (8) changes in the regulatory landscape, including related to (a) financial sector regulatory reform, (b) changes in tax laws, (c) fiduciary rules and other standards of care, (d) U.S. state insurance laws and developments regarding group-wide supervision, capital and reserves, (e) insurer capital standards outside the U.S. and (f) privacy and cybersecurity regulation; (9) technological changes which may adversely impact companies in our investment portfolio or cause insurance experience to deviate from our assumptions; (10) an inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (11) ratings downgrades; (12) market conditions that may adversely affect the sales or persistency of our products; (13) competition; (14) reputational damage; (15) the costs, effects, timing, or success of our plans to accelerate our strategy; and (16) costs associated with the acquisition of Assurance IQ, LLC and its integration into our strategy. Prudential Financial, Inc. does not undertake to update any particular forward-looking statement included in this document. See “Risk Factors” included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 and the Annual Report on Form 10-K for the year ended December 31, 2019 for discussion of certain risks relating to our businesses and investment in our securities.












































i

Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Financial Position
September 30, 2020 and December 31, 2019 (in millions, except share amounts)
September 30,
2020
December 31,
2019
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost: 2020-$346,511; 2019-$346,574; 2020-net of $152 allowance for credit losses)(1)$400,816 $391,096 
Fixed maturities, held-to-maturity, at amortized cost (2020-net of $9 allowance for credit losses; fair value: 2020-$2,264; 2019-$2,302)(1)(2)1,901 1,933 
Fixed maturities, trading, at fair value (amortized cost: 2020-$4,353; 2019-$3,917)(1)4,371 3,884 
Assets supporting experience-rated contractholder liabilities, at fair value(1)23,961 21,597 
Equity securities, at fair value (cost: 2020-$5,395; 2019-$5,560)(1)7,025 7,522 
Commercial mortgage and other loans (net of $235 and $121 allowance for credit losses; includes $915 and $228 of loans measured at fair value under the fair value option at September 30, 2020 and December 31, 2019, respectively)(1)(2)64,541 63,559 
Policy loans11,502 12,096 
Other invested assets (2020-net of $2 allowance for credit losses; includes $5,949 and $5,646 of assets measured at fair value at September 30, 2020 and December 31, 2019, respectively)(1)(2)16,921 15,606 
Short-term investments (2020-net of $1 allowance for credit losses)10,015 5,467 
Total investments541,053 522,760 
Cash and cash equivalents(1)20,658 16,327 
Accrued investment income(1)3,129 3,330 
Deferred policy acquisition costs(2)18,599 19,912 
Value of business acquired1,131 1,110 
Other assets (2020-net of $9 allowance for credit losses)(1)(2)21,536 20,832 
Separate account assets305,483 312,281 
TOTAL ASSETS$911,589 $896,552 
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits$303,733 $293,527 
Policyholders’ account balances159,346 152,110 
Policyholders’ dividends(2)8,978 6,988 
Securities sold under agreements to repurchase10,874 9,681 
Cash collateral for loaned securities3,071 4,213 
Income taxes(2)12,111 11,378 
Short-term debt1,113 1,933 
Long-term debt
20,169 18,646 
Other liabilities (2020-net of $19 allowance for credit losses)(1)(2)18,579 20,802 
Notes issued by consolidated variable interest entities (includes $775 and $800 measured at fair value under the fair value option at September 30, 2020 and December 31, 2019, respectively)(1)1,242 1,274 
Separate account liabilities305,483 312,281 
Total liabilities844,699 832,833 
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 14)
EQUITY
Preferred Stock ($.01 par value; 10,000,000 shares authorized; none issued)
0 0 
Common Stock ($.01 par value; 1,500,000,000 shares authorized; 666,305,189 shares issued as of both September 30, 2020 and December 31, 2019)6 6 
Additional paid-in capital
25,563 25,532 
Common Stock held in treasury, at cost (270,873,244 and 267,472,781 shares at September 30, 2020 and December 31, 2019, respectively)(19,725)(19,453)
Accumulated other comprehensive income (loss)30,001 24,039 
Retained earnings30,372 32,991 
Total Prudential Financial, Inc. equity66,217 63,115 
Noncontrolling interests673 604 
Total equity66,890 63,719 
TOTAL LIABILITIES AND EQUITY$911,589 $896,552 
__________
(1)See Note 4 for details of balances associated with variable interest entities.
(2)September 30, 2020 amounts include the impacts of the January 1, 2020 adoption of ASU 2016-13. See Note 2 for details.

See Notes to Unaudited Interim Consolidated Financial Statements
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PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2020 and 2019 (in millions, except per share amounts)
 
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
REVENUES
Premiums$7,482 $6,937 $22,839 $22,972 
Policy charges and fee income1,464 1,519 4,476 4,463 
Net investment income4,446 4,438 12,834 13,044 
Asset management and service fees1,120 1,038 3,144 3,137 
Other income (loss)992 320 (125)2,217 
Realized investment gains (losses), net(79)853 (2,164)(249)
Total revenues15,425 15,105 41,004 45,584 
BENEFITS AND EXPENSES
Policyholders’ benefits8,312 7,722 25,768 25,037 
Interest credited to policyholders’ account balances1,151 1,106 3,375 3,729 
Dividends to policyholders554 667 1,008 1,681 
Amortization of deferred policy acquisition costs638 591 1,882 1,808 
General and administrative expenses3,323 3,294 10,194 9,588 
Total benefits and expenses13,978 13,380 42,227 41,843 
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES
1,447 1,725 (1,223)3,741 
Total income tax expense (benefit)(50)332 7 726 
INCOME (LOSS) BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES
1,497 1,393 (1,230)3,015 
Equity in earnings of operating joint ventures, net of taxes10 32 62 85 
NET INCOME (LOSS)1,507 1,425 (1,168)3,100 
Less: Income (loss) attributable to noncontrolling interests20 7 25 42 
NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.
$1,487 $1,418 $(1,193)$3,058 
EARNINGS PER SHARE
Basic earnings per share-Common Stock:
Net income (loss) attributable to Prudential Financial, Inc.$3.72 $3.47 $(3.06)$7.45 
Diluted earnings per share-Common Stock:
Net income (loss) attributable to Prudential Financial, Inc.$3.70 $3.44 $(3.06)$7.35 






See Notes to Unaudited Interim Consolidated Financial Statements
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PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Comprehensive Income
Three and Nine Months Ended September 30, 2020 and 2019 (in millions)
 
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
NET INCOME (LOSS)$1,507 $1,425 $(1,168)$3,100 
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments for the period
329 (174)122 (66)
Net unrealized investment gains (losses)(1,853)4,776 6,894 21,571 
Defined benefit pension and postretirement unrecognized periodic benefit (cost)
74 23 218 104 
Total(1,450)4,625 7,234 21,609 
Less: Income tax expense (benefit) related to other comprehensive income (loss)
(620)1,051 1,265 4,961 
Other comprehensive income (loss), net of taxes(830)3,574 5,969 16,648 
Comprehensive income (loss)677 4,999 4,801 19,748 
Less: Comprehensive income (loss) attributable to noncontrolling interests
26 5 32 45 
Comprehensive income (loss) attributable to Prudential Financial, Inc.
$651 $4,994 $4,769 $19,703 
 



See Notes to Unaudited Interim Consolidated Financial Statements
 
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PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Equity
Three and Nine Months Ended September 30, 2020 (in millions)
 
 Prudential Financial, Inc. Equity  
 Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Common
Stock
Held In
Treasury
Accumulated
Other
Comprehensive
Income (Loss)
Total
Prudential
Financial, Inc.
Equity
Noncontrolling
Interests
Total
Equity
Balance, December 31, 2019$6 $25,532 $32,991 $(19,453)$24,039 $63,115 $604 $63,719 
Cumulative effect of adoption of accounting changes(1)(99)(99)(99)
Common Stock acquired(500)(500)(500)
Contributions from noncontrolling interests31 31 
Distributions to noncontrolling interests(11)(11)
Stock-based compensation programs(26)112 86 86 
Dividends declared on Common Stock(445)(445)(445)
Comprehensive income:
Net income (loss)(271)(271)1 (270)
Other comprehensive income (loss), net of tax(1,439)(1,439)0 (1,439)
Total comprehensive income (loss)(1,710)1 (1,709)
Balance, March 31, 20206 25,506 32,176 (19,841)22,600 60,447 625 61,072 
Common Stock acquired
Contributions from noncontrolling interests4 4 
Distributions to noncontrolling interests(23)(23)
Stock-based compensation programs7 56 63 63 
Dividends declared on Common Stock(441)(441)(441)
Comprehensive income:
Net income (loss)(2,409)(2,409)4 (2,405)
Other comprehensive income (loss), net of tax8,237 8,237 1 8,238 
Total comprehensive income (loss)5,828 5 5,833 
Balance, June 30, 20206 25,513 29,326 (19,785)30,837 65,897 611 66,508 
Common Stock acquired
Contributions from noncontrolling interests50 50 
Distributions to noncontrolling interests(14)(14)
Consolidations (deconsolidations) of noncontrolling interests0 0 
Stock-based compensation programs50 60110 110 
Dividends declared on Common Stock(441)(441)(441)
Comprehensive income:
 Net income (loss)1,487 1,487 20 1,507 
Other comprehensive income (loss), net of tax(836)(836)6 (830)
Total comprehensive income (loss)651 26 677 
Balance, September 30, 2020$6 $25,563 $30,372 $(19,725)$30,001 $66,217 $673 $66,890 
__________
(1)Includes the impact from the adoption of ASU 2016-13. See Note 2.










See Notes to Unaudited Interim Consolidated Financial Statements
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PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Equity—Continued
Three and Nine Months Ended September 30, 2019 (in millions)
 Prudential Financial, Inc. Equity  
 Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Common
Stock
Held In
Treasury
Accumulated
Other
Comprehensive
Income (Loss)
Total
Prudential
Financial, Inc.
Equity
Noncontrolling
Interests
Total
Equity
Balance, December 31, 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 interests26 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 tax6,305 6,305 (1)6,304 
Total comprehensive income (loss)7,237 4 7,241 
Balance, March 31, 20196 24,782 30,966 (17,962)17,218 55,010 440 55,450 
Common Stock acquired(500)(500)(500)
Contributions from noncontrolling interests25 25 
Distributions to noncontrolling interests(16)(16)
Consolidations (deconsolidations) of noncontrolling interests8 8 
Stock-based compensation programs43 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 tax6,764 6,764 6 6,770 
Total comprehensive income (loss)7,472 36 7,508 
Balance, June 30, 20196 24,825 31,263 (18,416)23,982 61,660 493 62,153 
Common Stock acquired(1,000)(1,000)(1,000)
Exchangeable Surplus Notes conversion502502502 
Contributions from noncontrolling interests54 54 
Distributions to noncontrolling interests(36)(36)
Stock-based compensation programs24 30 54 54 
Dividends declared on Common Stock(412)(412)(412)
Comprehensive income:
Net income (loss)1,418 1,418 7 1,425 
Other comprehensive income (loss), net of tax3,576 3,576 (2)3,574 
Total comprehensive income (loss)4,994 5 4,999 
Balance, September 30, 2019$6 $25,351 $32,269 $(19,386)$27,558 $65,798 $516 $66,314 
__________
(1)Includes the impact from the adoption of ASU 2017-08 and 2017-12. See Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information.


See Notes to Unaudited Interim Consolidated Financial Statements
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PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2020 and 2019 (in millions)
20202019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)$(1,168)$3,100 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Realized investment (gains) losses, net2,164 249 
Policy charges and fee income(1,995)(2,117)
Interest credited to policyholders’ account balances3,375 3,729 
Depreciation and amortization448 352 
(Gains) losses on assets supporting experience-rated contractholder liabilities, net(393)(832)
Change in:
Deferred policy acquisition costs(206)(414)
Future policy benefits and other insurance liabilities7,656 7,718 
Income taxes(331)(245)
Derivatives, net6,477 5,225 
Other, net(3,146)(1,125)
Cash flows from (used in) operating activities12,881 15,640 
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale31,989 38,356 
Fixed maturities, held-to-maturity76 84 
Fixed maturities, trading444 284 
Assets supporting experience-rated contractholder liabilities22,534 11,631 
Equity securities1,974 2,087 
Commercial mortgage and other loans3,629 4,483 
Policy loans1,862 1,717 
Other invested assets1,376 1,074 
Short-term investments35,401 27,675 
Payments for the purchase/origination of:
Fixed maturities, available-for-sale(39,692)(48,162)
Fixed maturities, trading(869)(733)
Assets supporting experience-rated contractholder liabilities(24,390)(11,731)
Equity securities(2,025)(2,094)
Commercial mortgage and other loans(3,913)(6,807)
Policy loans(1,700)(1,440)
Other invested assets(2,089)(1,667)
Short-term investments(40,009)(28,704)
Dispositions, net of cash disposed1,454 0 
Derivatives, net434 1,170 
Other, net(225)(339)
Cash flows from (used in) investing activities(13,739)(13,116)
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholders’ account deposits33,268 21,140 
Policyholders’ account withdrawals(26,944)(19,734)
Net change in securities sold under agreements to repurchase and cash collateral for loaned securities50 89 
Cash dividends paid on Common Stock(1,325)(1,237)
Net change in financing arrangements (maturities 90 days or less)(56)(33)
Common Stock acquired(500)(1,940)
Common Stock reissued for exercise of stock options106 107 
Proceeds from the issuance of debt (maturities longer than 90 days)2,948 2,923 
Repayments of debt (maturities longer than 90 days)(2,113)(1,338)
Proceeds from notes issued by consolidated VIEs0 925 
Repayments of notes issued by consolidated VIEs(19)(638)
Other, net(349)94 
Cash flows from (used in) financing activities5,066 358 
Effect of foreign exchange rate changes on cash balances122 56 
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS4,330 2,938 
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, BEGINNING OF YEAR16,474 15,495 
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, END OF PERIOD$20,804 $18,433 
NON-CASH TRANSACTIONS DURING THE PERIOD
Treasury Stock shares issued for stock-based compensation programs$147 $174 
Conversion of surplus notes into Common Stock$0 $502 
Significant Pension Risk Transfer transactions:
Assets received, excluding cash and cash equivalents$317 $445 
Liabilities assumed584 447 
                   Net cash received$267 $2 
RECONCILIATION TO THE UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Cash and cash equivalents$20,658 $18,289 
Restricted cash and restricted cash equivalents (included in “Other assets”)146 144 
Total cash, cash equivalents, restricted cash and restricted cash equivalents$20,804 $18,433 
See Notes to Unaudited Interim Consolidated Financial Statements
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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements
 
1. BUSINESS AND BASIS OF PRESENTATION
 
Prudential Financial, Inc. (“Prudential Financial”) and its subsidiaries (collectively, “Prudential” or the “Company”) provide a wide range of insurance, investment management, and other financial products and services to both individual and institutional customers throughout the United States and in many other countries. Principal products and services provided include life insurance, annuities, retirement-related services, mutual funds and investment management.

The Company’s principal operations are comprised of PGIM (the Company’s global investment management business), the U.S. Businesses (consisting of the U.S. Workplace Solutions, U.S. Individual Solutions, and Assurance IQ divisions), the International Businesses, the Closed Block division, and the Company’s Corporate and Other operations. The U.S. Workplace Solutions division consists of the Retirement and Group Insurance businesses, the U.S. Individual Solutions division consists of the Individual Annuities and Individual Life businesses, and the Assurance IQ division consists of the Assurance IQ business. In October 2019, the Company completed the acquisition of Assurance IQ, LLC (“Assurance IQ”), a leading consumer solutions platform that offers a range of solutions that help meet consumers’ financial needs. The Closed Block division is accounted for as a divested business that is reported separately from the Divested and Run-off Businesses that are included in Corporate and Other. The Company’s Corporate and Other operations include corporate items and initiatives that are not allocated to business segments and businesses that have been or will be divested or placed in run-off, excluding the Closed Block division.
 
Basis of Presentation
 
The Unaudited Interim Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). The Unaudited Interim Consolidated Financial Statements include the accounts of Prudential Financial, entities over which the Company exercises control, including majority-owned subsidiaries and minority-owned entities such as limited partnerships in which the Company is the general partner and variable interest entities (“VIEs”) in which the Company is considered the primary beneficiary. See Note 4 for additional information on the Company’s consolidated variable interest entities. Intercompany balances and transactions have been eliminated.

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
The most significant estimates include those used in determining deferred policy acquisition costs (“DAC”) and related amortization; policyholders’ account balances related to the fair value of embedded derivative instruments associated with the index-linked features of certain universal life and fixed annuity products; value of business acquired (“VOBA”) and its amortization; amortization of deferred sales inducements (“DSI”); measurement of goodwill and any related impairment; valuation of investments including derivatives, measurement of allowance for credit losses, and recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; pension and other postretirement benefits; provision for income taxes and valuation of deferred tax assets; and accruals for contingent liabilities, including estimates for losses in connection with unresolved legal and regulatory matters.

COVID-19
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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Beginning in the first quarter of 2020, the outbreak of the novel coronavirus (“COVID-19”) has resulted in extreme stress and disruption in the global economy and financial markets, and has adversely impacted, and may continue to adversely impact, our results of operations, financial condition and cash flows. Due to the highly uncertain nature of these conditions, it is not possible to estimate the ultimate impacts at this time. The risks may have manifested, and may continue to manifest, in our financial statements in the areas of, among others, i) investments: increased risk of loss on our investments due to default or deterioration in credit quality or value; ii) insurance liabilities and related balances: potential changes to assumptions regarding investment returns, mortality, morbidity and policyholder behavior which are reflected in our insurance liabilities and certain related balances (e.g., DAC, VOBA, etc.); and iii) goodwill: the macroeconomic environment may also result in the need to recognize an impairment of goodwill which could negatively impact our results of operations and financial condition. We cannot predict what impact the COVID-19 pandemic will ultimately have on the global economy, markets or our businesses.

Business Dispositions

The Prudential Life Insurance Company of Korea, Ltd.

On August 31, 2020, Prudential International Insurance Holdings, Ltd. (“PIIH”), a subsidiary of Prudential Financial, successfully completed the sale of The Prudential Life Insurance Company of Korea, Ltd. (“POK”) to KB Financial Group Inc., for cash consideration of approximately 2.3 trillion Korean Won, equal to approximately U.S. $1.9 billion.

The after-tax loss on the sale of POK was approximately $800 million, including approximately $700 million of which was recorded during the second quarter of 2020 at the time the Company reported its investment in POK as “held for sale”, and approximately $100 million of which was recognized in the third quarter of 2020 reflective of final balances at the completion of the sale.

Prudential Life Insurance Company of Taiwan Inc.

On August 11, 2020, PIIH entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with Taishin Financial Holding Co, Ltd. (the “Buyer”), pursuant to which PIIH has agreed to sell to the Buyer all of the issued and outstanding capital stock of Prudential Life Insurance Company of Taiwan Inc. (“POT”), the Company’s insurance business in Taiwan, for cash consideration of approximately 5.5 billion New Taiwan Dollars, equal to approximately U.S. $190 million at then current exchange rates, to be paid at closing, and contingent consideration with a fair value of approximately $26 million as of September 30, 2020. The fair value of the contingent consideration is tied to the level of yields for the 10-year Taiwanese Government bond two years after the signing of the transaction and can result in a maximum payout of $100 million if yields increase by 40 basis points.

The Share Purchase Agreement contains customary warranties and covenants of PIIH and the Buyer. The Company expects the transaction to close in 2021, subject to regulatory approval and the satisfaction of customary closing conditions.

In the third quarter of 2020, the Company is reporting its investment in POT as “held for sale” and recognized an estimated $300 million after-tax charge to earnings to adjust the carrying value of POT to the fair market value reflected in the purchase price. The ultimate after-tax loss will be based on balances at the closing date and could vary materially from the charge recorded in the third quarter.

The Company intends to use the proceeds of the transaction for general corporate purposes.

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

2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

Recent Accounting Pronouncements

Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASUs”) to the FASB Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs. ASUs listed below include those that have been adopted during the current fiscal year
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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
and/or those that have been issued but not yet adopted as of September 30, 2020, and as of the date of this filing. ASUs not listed below were assessed and determined to be either not applicable or not material.

Adoption of ASU 2016-13

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

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

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

(1) Cumulative Effect Adjustment Upon Adoption
Summary of Transition Impact on the Consolidated Statements of Financial Position
Upon Adoption on January 1, 2020
Increase/(Decrease)
(in millions)
Fixed maturities, held-to-maturity$(9)
Commercial mortgage and other loans(115)
Other invested assets(1)
Deferred policy acquisition costs9 
Other assets(6)
Total assets
$(122)
Policyholders' dividends$(14)
Other liabilities21 
Income taxes(30)
Total liabilities
(23)
Retained earnings(99)
Total equity
(99)
Total liabilities and equity
$(122)

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

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

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

(3) Changes to Accounting Policies

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

Fixed maturities, available-for-sale

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

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

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

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

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

Fixed maturities, held-to-maturity

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

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

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

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

Commercial mortgage and other loans

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

The CECL allowance represents the Company’s best estimate of expected credit losses over the remaining life of the assets or off-balance sheet credit exposures. The determination of the allowance considers historical credit loss experience, current conditions, and reasonable and supportable forecasts. The allowance is calculated separately for commercial mortgage loans, agricultural mortgage loans, and other collateralized and uncollateralized loans.
For commercial mortgage and agricultural mortgage loans (and related unfunded commitments where the Company cannot unconditionally cancel the commitment), the allowance is calculated using an internally developed CECL model.

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

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

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

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

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

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

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

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

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

Reinsurance Recoverables

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

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

Trade Receivables

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

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Other ASUs adopted during the nine months ended September 30, 2020
StandardDescriptionEffective date and method of adoptionEffect on the financial statements or other significant matters
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
This ASU simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test, which measures a goodwill impairment by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of the goodwill. Under the ASU, a goodwill impairment should be recorded for the amount by which the carrying amount of a reporting unit exceeds its fair value (capped by the total amount of goodwill allocated to the reporting unit).January 1, 2020 using the prospective method.The adoption of the ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

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

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

ASU issued but not yet adopted as of September 30, 2020 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 Consolidated Financial Statements and Notes to the Consolidated Financial Statements. In October 2019, the FASB issued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of ASU 2018-12 to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. As a result of the COVID-19 pandemic, in November 2020 the FASB issued ASU 2020-11, Financial Services—Insurance (Topic 944): Effective Date and Early Application to defer for an additional one year the effective date of ASU 2018-12 from January 1, 2022 to January 1, 2023, and to provide transition relief to facilitate the early adoption of the ASU. The transition relief would allow large calendar-year public companies that early adopt ASU 2018-12 to apply the guidance either as of January 1, 2020 or January 1, 2021 (and record transition adjustments as of January 1, 2020 or January 1, 2021, respectively) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements. ASU 2018-12 will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. 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.



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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
ASU 2018-12 Amended TopicDescriptionMethod of adoptionEffect on the financial statements or other significant matters
Cash flow assumptions used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products
Requires an entity to review, and if necessary, update the cash flow assumptions used to measure the liability for future policy benefits, for both changes in future assumptions and actual experience, at least annually using a retrospective update method with a cumulative catch-up adjustment recorded in a separate line item in the Consolidated Statements of Operations.An entity may choose one of two adoption methods for the liability for future policy benefits: (1) a modified retrospective transition method whereby the entity may choose to apply the amendments to contracts in force as of the beginning of the prior year (if early adoption is elected) or as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in Accumulated other comprehensive income (loss) (“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, which will be updated each quarter with the impact recorded through OCI. An entity shall maximize the use of relevant observable information and minimize the use of unobservable information in determining the discount rate assumptions.As noted above, an entity may choose either a modified retrospective transition method or full retrospective transition method for the liability for future policy benefits. Under either method, for balance sheet remeasurement purposes, the liability for future policy benefits will be remeasured using current discount rates as of either the beginning of the prior year (if early adoption is elected) or the beginning of the earliest period presented with the impact recorded as a cumulative effect adjustment to AOCI.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 discount rates locked-in at contract inception versus current discount rates at transition. The magnitude of such adjustment is currently being assessed.
Amortization of deferred acquisition costs (DAC) and other balances
Requires DAC and other balances, such as unearned revenue reserves and DSI, to be amortized on a constant level basis over the expected term of the related contract, independent of expected profitability.An entity may apply one of two adoption methods: (1) a modified retrospective transition method whereby the entity may choose to apply the amendments to contracts in force as of the beginning of the prior year (if early adoption is elected) or as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) if an entity chooses a full retrospective transition method for its liability for future policy benefits, as described above, it is required to also use a full retrospective transition method for DAC and other balances.The 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 (MRB)
Requires an entity to measure all market risk benefits (e.g., living benefit and death benefit guarantees associated with variable annuities) at fair value, and record MRB assets and liabilities separately on the Consolidated Statements of Financial Position. Changes in fair value of market risk benefits are recorded in net income, except for the portion of the change in MRB liabilities attributable to changes in an entity’s non-performance risk (“NPR”) which is recognized in OCI.
An entity shall adopt the guidance for market risk benefits using the retrospective transition method, which includes a cumulative effect adjustment on the balance sheet as of either the beginning of prior year (if early adoption is elected) or the beginning of the earliest period presented. An entity shall maximize the use of relevant observable information and minimize the use of unobservable information in determining the balance of the market risk benefits upon adoption.
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.
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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

3. INVESTMENTS
 
Fixed Maturity Securities
 
The following tables set forth the composition of fixed maturity securities (excluding investments classified as trading), as of the dates indicated:
 
 September 30, 2020
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Allowance for Credit LossesFair
Value
 (in millions)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$31,095 $11,040 $23 $0 $42,112 
Obligations of U.S. states and their political subdivisions10,555 2,052 4 0 12,603 
Foreign government bonds90,915 16,317 195 1 107,036 
U.S. public corporate securities92,988 16,259 454 64 108,729 
U.S. private corporate securities(1)35,846 3,586 192 29 39,211 
Foreign public corporate securities25,131 3,408 185 24 28,330 
Foreign private corporate securities27,934 1,785 485 30 29,204 
Asset-backed securities(2)14,070 168 104 0 14,134 
Commercial mortgage-backed securities15,096 1,263 6 4 16,349 
Residential mortgage-backed securities(3)2,881 228 1 0 3,108 
       Total fixed maturities, available-for-sale(1)$346,511 $56,106 $1,649 $152 $400,816 
 
 September 30, 2020
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Allowance for Credit LossesAmortized Cost,
Net of Allowance
 (in millions)
Fixed maturities, held-to-maturity:
Foreign government bonds$915 $265 $0 $1,180 $0 $915 
Foreign public corporate securities637 66 0 703 9 628 
Foreign private corporate securities85 2 0 87 0 85 
Residential mortgage-backed securities(3)273 21 0 294 0 273 
       Total fixed maturities, held-to-maturity(4)$1,910 $354 $0 $2,264 $9 $1,901 
__________
(1)Excludes notes with amortized cost of $6,466 million (fair value, $6,594 million), which have been offset with the associated debt under a netting agreement.
(2)Includes credit-tranched securities collateralized by loan obligations, auto loans, education loans, credit cards and other asset types.
(3)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(4)Excludes notes with amortized cost of $4,998 million (fair value, $5,814 million), which have been offset with the associated debt under a netting agreement.
 
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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
 December 31, 2019
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
OTTI in AOCI(4)
 (in millions)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$30,625 $5,195 $161 $35,659 $0 
Obligations of U.S. states and their political subdivisions10,068 1,437 8 11,497 0 
Foreign government bonds98,356 20,761 63 119,054 (34)
U.S. public corporate securities87,566 11,030 257 98,339 (6)
U.S. private corporate securities(1)34,410 2,243 120 36,533 0 
Foreign public corporate securities26,841 3,054 70 29,825 (1)
Foreign private corporate securities27,619 1,201 580 28,240 0 
Asset-backed securities(2)13,067 147 40 13,174 (77)
Commercial mortgage-backed securities14,978 610 14 15,574 0 
Residential mortgage-backed securities(3)3,044 159 2 3,201 (1)
       Total fixed maturities, available-for-sale(1)$346,574 $45,837 $1,315 $391,096 $(119)
 
 December 31, 2019
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 (in millions)
Fixed maturities, held-to-maturity:
Foreign government bonds$891 $282 $0 $1,173 
Foreign public corporate securities649 64 0 713 
Foreign private corporate securities83 2 0 85 
Residential mortgage-backed securities(3)310 21 0 331 
       Total fixed maturities, held-to-maturity(5)$1,933 $369 $0 $2,302 
__________
(1)Excludes notes with amortized cost of $4,751 million (fair value, $4,757 million), which have been offset with the associated debt under a netting agreement.
(2)Includes credit-tranched securities collateralized by loan obligations, auto loans, education loans, home equity and other asset types.
(3)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(4)Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $362 million of net unrealized gains on impaired available-for-sale securities and $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.
(5)Excludes notes with amortized cost of $4,998 million (fair value, $5,401 million), which have been offset with the associated debt under a netting agreement.
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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
 
The following table sets forth the fair value and gross unrealized losses on available-for-sale fixed maturity securities without an allowance for credit losses aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the date indicated:
 
 September 30, 2020
 Less Than
Twelve Months
Twelve Months
or More
Total
 Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
 (in millions)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$1,068 $23 $0 $0 $1,068 $23 
Obligations of U.S. states and their political subdivisions
200 4 0 0 200 4 
Foreign government bonds5,548 190 44 5 5,592 195 
U.S. public corporate securities6,939 261 1,332 174 8,271 435 
U.S. private corporate securities2,452 105 847 86 3,299 191 
Foreign public corporate securities2,022 126 367 52 2,389 178 
Foreign private corporate securities3,442 105 3,311 376 6,753 481 
Asset-backed securities5,145 48 4,742 56 9,887 104 
Commercial mortgage-backed securities160 4 94 2 254 6 
Residential mortgage-backed securities148 1 0 0 148 1 
Total fixed maturities, available-for-sale$27,124 $867 $10,737 $751 $37,861 $1,618 
 
The following table sets forth the fair value and gross unrealized losses on fixed maturity securities aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the date indicated:
 December 31, 2019
 Less Than
Twelve Months
Twelve Months
or More
Total
 Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
 (in millions)
Fixed maturities(1):
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$4,950 $161 $267 $0 $5,217 $161 
Obligations of U.S. states and their political subdivisions
273 8 0 0 273 8 
Foreign government bonds2,332 60 126 3 2,458 63 
U.S. public corporate securities3,944 85 2,203 172 6,147 257 
U.S. private corporate securities2,283 44 1,563 76 3,846 120 
Foreign public corporate securities1,271 23 496 47 1,767 70 
Foreign private corporate securities1,466 33 5,666 547 7,132 580 
Asset-backed securities3,979 12 4,433 28 8,412 40 
Commercial mortgage-backed securities1,193 10 164 4 1,357 14 
Residential mortgage-backed securities207 1 88 1 295 2 
Total$21,898 $437 $15,006 $878 $36,904 $1,315 
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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
__________ 
(1)As of December 31, 2019, there were no securities classified as held-to-maturity in a gross unrealized loss position.

As of September 30, 2020, the gross unrealized losses on fixed maturity available-for-sale securities without an allowance were composed of $970 million related to “1” highest quality or “2” high quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $648 million related to other than high or highest quality securities based on NAIC or equivalent rating. As of September 30, 2020, the $751 million of gross unrealized losses of twelve months or more were concentrated in the Company’s corporate securities within the energy, finance and utility sectors.

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

In accordance with its policy described in Note 2, the Company concluded that an adjustment to earnings for credit losses related to these fixed maturity securities was not warranted at September 30, 2020. These conclusions were based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to general credit spread widening, increases in interest rates, foreign currency exchange rate movements and the financial condition or near-term prospects of the issuer. As of September 30, 2020, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.

The following table sets forth the amortized cost or amortized cost, net of allowance and fair value of fixed maturities by contractual maturities, as of the date indicated:
 
September 30, 2020
Available-for-SaleHeld-to-Maturity
 Amortized CostFair ValueAmortized Cost, Net of AllowanceFair Value
(in millions)
Fixed maturities:
Due in one year or less $13,497 $14,096 $117 $118 
Due after one year through five years50,428 53,969 0 0 
Due after five years through ten years66,321 74,393 600 676 
Due after ten years(1)184,218 224,767 911 1,176 
Asset-backed securities 14,070 14,134 0 0 
Commercial mortgage-backed securities15,096 16,349 0 0 
Residential mortgage-backed securities2,881 3,108 273 294 
Total$346,511 $400,816 $1,901 $2,264 
__________
(1)Excludes available-for-sale notes with amortized cost of $6,466 million (fair value, $6,594 million) and held-to-maturity notes with amortized cost of $4,998 million (fair value, $5,814 million), which have been offset with the associated debt under a netting agreement.

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Asset-backed, commercial mortgage-backed and residential mortgage-backed securities are shown separately in the table above, as they do not have a single maturity date.
 
The following table sets forth the sources of fixed maturity proceeds and related investment gains (losses), as well as losses on write-downs, impairments and the allowance for credit losses of fixed maturities, for the periods indicated:
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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
 (in millions)
Fixed maturities, available-for-sale:
Proceeds from sales(1)$4,284 $7,190 $14,654 $24,011 
Proceeds from maturities/prepayments7,181 5,315 17,603 14,507 
Gross investment gains from sales and maturities578 565 1,451 1,276 
Gross investment losses from sales and maturities(129)(62)(339)(345)
OTTI recognized in earnings(2)N/A(143)N/A(242)
Write-downs recognized in earnings(3)(134)N/A(289)N/A
(Addition to) release of allowance for credit losses(4)86 N/A(152)N/A
Fixed maturities, held-to-maturity:
Proceeds from maturities/prepayments(5)$14 $47 $77 $84 
(Addition to) release of allowance for credit losses(4)0 N/A0 N/A
__________ 
(1)Includes $268 million and $162 million of non-cash related proceeds due to the timing of trade settlements for the nine months ended September 30, 2020 and 2019, respectively.
(2)For the three and nine months ended September 30, 2019, amounts exclude 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)For the three and nine months ended September 30, 2020, amounts represent write-downs of credit adverse securities, write-downs on securities approaching maturity related to foreign exchange movements and securities actively marketed for sale.
(4)Effective January 1, 2020, credit losses on available-for-sale and held-to-maturity fixed maturity securities are recorded within the “allowance for credit losses.”
(5)Includes $1 million and less than $1 million of non-cash related proceeds due to the timing of trade settlements for the nine months ended September 30, 2020 and 2019, respectively.

The following tables set forth the activity in the allowance for credit losses for fixed maturity securities, as of the date indicated: 
Three Months Ended September 30, 2020
U.S. Treasury Securities and Obligations of U.S. StatesForeign Government BondsU.S. and Foreign Corporate SecuritiesAsset-Backed SecuritiesCommercial Mortgage-Backed SecuritiesResidential Mortgage-Backed SecuritiesTotal
(in millions)
Fixed maturities, available-for-sale:
Balance, beginning of period$0 $38 $199 $0 $1 $0 $238 
Additions to allowance for credit losses not previously recorded
0 1 33 0 0 0 34 
Reductions for securities sold during the period
0 0 (8)0 0 0 (8)
Additions (reductions) on securities with previous allowance0 0 (12)0 3 0 (9)
Write-downs charged against the allowance
0 (38)(65)0 0 0 (103)
Balance, end of period$0 $1 $147 $0 $4 $0 $152 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Nine Months Ended September 30, 2020
U.S. Treasury Securities and Obligations of U.S. StatesForeign Government BondsU.S. and Foreign Corporate SecuritiesAsset-Backed SecuritiesCommercial Mortgage-Backed SecuritiesResidential Mortgage-Backed SecuritiesTotal
(in millions)
Fixed maturities, available-for-sale:
Balance, beginning of year$0 $0 $0 $0 $0 $0 $0 
Additions to allowance for credit losses not previously recorded
0 39 238 0 1 0 278 
Reductions for securities sold during the period
0 0 (36)0 0 0 (36)
Additions (reductions) on securities with previous allowance0 0 10 0 3 0 13 
Write-downs charged against the allowance
0 (38)(65)0 0 0 (103)
Balance, end of period$0 $1 $147 $0 $4 $0 $152 


Three Months Ended September 30, 2020
U.S. Treasury Securities and Obligations of U.S. StatesForeign Government BondsU.S. and Foreign Corporate SecuritiesAsset-Backed SecuritiesCommercial Mortgage-Backed SecuritiesResidential Mortgage-Backed SecuritiesTotal
(in millions)
Fixed maturities, held-to-maturity:
Balance, beginning of period$0 $0 $9 $0 $0 $0 $9 
Balance, end of period$0 $0 $9 $0 $0 $0 $9 

Nine Months Ended September 30, 2020
U.S. Treasury Securities and Obligations of U.S. StatesForeign Government BondsU.S. and Foreign Corporate SecuritiesAsset-Backed SecuritiesCommercial Mortgage-Backed SecuritiesResidential Mortgage-Backed SecuritiesTotal
(in millions)
Fixed maturities, held-to-maturity:
Balance, beginning of year$0 $0 $0 $0 $0 $0 $0 
Cumulative effect of adoption of ASU 2016-13
0 0 9 0 0 0 9 
Balance, end of period$0 $0 $9 $0 $0 $0 $9 


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

For the nine months ended September 30, 2020, the increase in the allowance for credit losses on available-for-sale securities was primarily related to adverse projected cash flows on public and private corporate securities.
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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The Company did not have any fixed maturity securities purchased with credit deterioration, as of September 30, 2020.

Assets Supporting Experience-Rated Contractholder Liabilities
 
The following table sets forth the composition of “Assets supporting experience-rated contractholder liabilities,” as of the dates indicated:
 September 30, 2020December 31, 2019
 Amortized
Cost or Cost
Fair
Value
Amortized
Cost or Cost
Fair
Value
 (in millions)
Short-term investments and cash equivalents$1,103 $1,103 $277 $277 
Fixed maturities:
Corporate securities14,060 14,909 13,143 13,603 
Commercial mortgage-backed securities1,845 1,946 1,845 1,896 
Residential mortgage-backed securities(1)1,064 1,126 1,134 1,158 
Asset-backed securities(2)1,691 1,716 1,639 1,662 
Foreign government bonds889 898 802 814 
U.S. government authorities and agencies and obligations of U.S. states358 438 341 397 
Total fixed maturities(3)19,907 21,033 18,904 19,530 
Equity securities1,603 1,825 1,465 1,790 
Total assets supporting experience-rated contractholder liabilities(4)$22,613 $23,961 $20,646 $21,597 
__________ 
(1)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(2)Includes collateralized loan obligations, auto loans, education loans, home equity and other asset types. Collateralized loan obligations at fair value were $1,133 million and $1,060 million as of September 30, 2020 and December 31, 2019, respectively, all of which were rated AAA.
(3)As a percentage of amortized cost, 94% of the portfolio was considered high or highest quality based on NAIC or equivalent ratings, as of both September 30, 2020 and December 31, 2019.
(4)As a percentage of amortized cost, 79% and 77% of the portfolio consisted of public securities as of September 30, 2020 and December 31, 2019, respectively.

The net change in unrealized gains (losses) from assets supporting experience-rated contractholder liabilities still held at period end, recorded within “Other income (loss),” was $255 million and $99 million during the three months ended September 30, 2020 and 2019, respectively, and $397 million and $868 million during the nine months ended September 30, 2020 and 2019, respectively.

Equity Securities
 
The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Other income (loss),” was $324 million and $52 million during the three months ended September 30, 2020 and 2019, respectively, and $(332) million and $632 million during the nine months ended September 30, 2020 and 2019, respectively.

Concentrations of Financial Instruments
 
The Company monitors its concentrations of financial instruments and mitigates credit risk by maintaining a diversified investment portfolio which limits exposure to any single issuer.
 
As of the dates indicated, the Company’s exposure to concentrations of credit risk of single issuers greater than 10% of the Company’s equity included securities of the U.S. government and certain U.S. government agencies and securities guaranteed by the U.S. government, as well as the securities disclosed below:
 
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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
 September 30, 2020December 31, 2019
 Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
 (in millions)
Investments in Japanese government and government agency securities:
Fixed maturities, available-for-sale$77,749 $90,480 $74,118 $89,546 
Fixed maturities, held-to-maturity892 1,148 869 1,143 
Fixed maturities, trading24 24 23 23 
Assets supporting experience-rated contractholder liabilities826 831 653 664 
Total$79,491 $92,483 $75,663 $91,376 
 
 September 30, 2020December 31, 2019
 Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
 (in millions)
Investments in South Korean government and government agency securities:
Fixed maturities, available-for-sale$26 $34 $10,823 $13,322 
Assets supporting experience-rated contractholder liabilities15 16 15 16 
Total$41 $50 $10,838 $13,338 

The decrease in South Korean government and government agency securities from December 31, 2019 to September 30, 2020 was due to the sale of POK which was completed in August 2020.
 
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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:
 
 September 30, 2020December 31, 2019
 Amount
(in millions)
% of
Total
Amount
(in millions)
% of
Total
Commercial mortgage and agricultural property loans by property type:
Office$12,677 19.9 %$13,462 21.4 %
Retail7,677 12.0 8,379 13.3 
Apartments/Multi-Family18,385 28.8 17,348 27.6 
Industrial13,639 21.4 13,226 21.1 
Hospitality2,390 3.7 2,415 3.9 
Other5,051 7.9 4,533 7.2 
Total commercial mortgage loans59,819 93.7 59,363 94.5 
Agricultural property loans4,015 6.3 3,472 5.5 
Total commercial mortgage and agricultural property loans63,834 100.0 %62,835 100.0 %
Allowance for credit losses(227)(117)
Total net commercial mortgage and agricultural property loans63,607 62,718 
Other loans:
Uncollateralized loans723 656 
Residential property loans104 124 
Other collateralized loans115 65 
Total other loans942 845 
Allowance for credit losses(8)(4)
Total net other loans934 841 
Total net commercial mortgage and other loans(1)$64,541 $63,559 
__________ 
(1)Includes loans held for sale which are carried at fair value and are collateralized primarily by apartment complexes. As of September 30, 2020 and December 31, 2019, the net carrying value of these loans was $915 million and $228 million, respectively.

As of September 30, 2020, the commercial mortgage and agricultural property loans were secured by properties geographically dispersed throughout the United States (with the largest concentrations in California (27%), Texas (9%) and New York (8%)) and included loans secured by properties in Europe (7%), Asia (2%) and Australia (1%).

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
The following tables set forth the activity in the allowance for credit losses for commercial mortgage and other loans, as of the dates indicated:

Three Months Ended September 30, 2020
 Commercial
Mortgage
Loans
Agricultural
Property
Loans
Residential
Property
Loans
Other
Collateralized
Loans
Uncollateralized
Loans
Total
(in millions)
Balance, beginning of period$230 $8 $0 $3 $4 $245 
Addition to (release of) allowance for expected losses(5)1 0 0 1 (3)
Write-downs charged against the allowance(7)0 0 0 0 (7)
Other0 0 0 0 0 0 
Balance, end of period$218 $9 $0 $3 $5 $235 

Nine Months Ended September 30, 2020
 Commercial
Mortgage
Loans
Agricultural
Property
Loans
Residential
Property
Loans
Other
Collateralized
Loans
Uncollateralized
Loans
Total
(in millions)
Balance at December 31, 2019$114 $3 $0 $0 $4 $121 
Cumulative effect of adoption of ASU 2016-13110 5 0 0 0 115 
Addition to (release of) allowance for expected losses1 1 0 0 1 3 
Write-downs charged against the allowance (7)0 0 0 0 (7)
Other0 0 0 3 0 3 
Balance at September 30, 2020$218 $9 $0 $3 $5 $235 
 
See Note 2 for additional information about the Company’s methodology for developing our allowance and expected losses.

For the nine months ended September 30, 2020, the increase in the allowance for credit losses on commercial mortgage and other loans was primarily related to the cumulative effect of adoption of ASU 2016-13.

The following tables set forth key credit quality indicators based upon the recorded investment gross of allowance for credit losses, as of the date indicated:
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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
September 30, 2020
Amortized Cost by Origination Year
20202019201820172016PriorRevolving LoansTotal
(in millions)
Commercial Mortgage Loans
Loan-to-Value Ratio:
0%-59.99%$650 $2,824 $3,105 $3,309 $3,381 $17,616 $0 $30,885 
60%-69.99%1,480 4,152 3,437 2,913 2,801 4,282 0 19,065 
70%-79.99%1,744 3,138 2,530 1,010 613 654 0 9,689 
80% or greater0 10 0 18 24 128 0 180 
Total$3,874 $10,124 $9,072 $7,250 $6,819 $22,680 $0 $59,819 
Debt Service Coverage Ratio:
Greater or Equal to 1.2x$3,759 $9,490 $8,590 $7,009 $6,525 $21,045 $0 $56,418 
1.0 - 1.2x114 518 453 241 286 1,499 0 3,111 
Less than 1.0x1 116 29 0 8 136 0 290 
Total$3,874 $10,124 $9,072 $7,250 $6,819 $22,680 $0 $59,819 
Agricultural Property Loans
Loan-to-Value Ratio:
0%-59.99%$724 $482 $360 $531 $397 $1,320 $0 $3,814 
60%-69.99%87 72 39 3 0 0 0 201 
70%-79.99%0 0 0 0 0 0 0 0 
80% or greater0 0 0 0 0 0 0 0 
Total$811 $554 $399 $534 $397 $1,320 $0 $4,015 
Debt Service Coverage Ratio:
Greater or Equal to 1.2x$801 $553 $398 $471 $377 $1,303 $0 $3,903 
1.0 - 1.2x10 0 1 59 5 5 0 80 
Less than 1.0x0 1 0 4 15 12 0 32 
Total$811 $554 $399 $534 $397 $1,320 $0 $4,015 

Commercial mortgage loans 
December 31, 2019
 Debt Service Coverage Ratio
 
>1.2X
1.0X to <1.2X< 1.0XTotal
(in millions)
Loan-to-Value Ratio:
0%-59.99%$31,027 $701 $217 $31,945 
60%-69.99%17,090 1,145 42 18,277 
70%-79.99%8,020 719 28 8,767 
80% or greater209 143 22 374 
       Total commercial mortgage loans$56,346 $2,708 $309 $59,363 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Agricultural property loans    
 December 31, 2019
Debt Service Coverage Ratio
 
>1.2X
1.0X to <1.2X< 1.0XTotal
 (in millions)
Loan-to-Value Ratio:
0%-59.99%$3,289 $57 $14 $3,360 
60%-69.99%112 0 0 112 
70%-79.99%0 0 0 0 
80% or greater0 0 0 0 
       Total agricultural property loans$3,401 $57 $14 $3,472 

See Note 2 for additional information about the Company’s commercial mortgage and other loans credit quality monitoring process.
 
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:
 
 September 30, 2020
 Current30-59 Days
Past Due
60-89 Days
Past Due
90 Days or More Past Due(1)Total Past
Due
Total
Loans
Non-Accrual
Status(2)
 (in millions)
Commercial mortgage loans$59,794 $0 $24 $1 $25 $59,819 $27 
Agricultural property loans4,014 0 0 1 1 4,015 15 
Residential property loans102 1 0 1 2 104 1 
Other collateralized loans115 0 0 0 0 115 0 
Uncollateralized loans723 0 0 0 0 723 0 
Total$64,748 $1 $24 $3 $28 $64,776 $43 
 __________
(1)As of September 30, 2020, there were no loans in this category accruing interest.
(2)For additional information regarding the Company’s policies for accruing interest on loans, see Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 December 31, 2019
 Current30-59 Days
Past Due
60-89 Days
Past Due
90 Days or More Past Due(1)Total Past
Due
Total
Loans
Non-Accrual
Status(2)
 (in millions)
Commercial mortgage loans$59,363 $0 $0 $0 $0 $59,363 $44 
Agricultural property loans3,458 1 0 13 14 3,472 13 
Residential property loans121 1 0 2 3 124 2 
Other collateralized loans65 0 0 0 0 65 0 
Uncollateralized loans656 0 0 0 0 656 0 
Total$63,663 $2 $0 $15 $17 $63,680 $59 
__________
(1)As of December 31, 2019, there were no loans in this category accruing interest.
(2)For additional information regarding the Company’s policies for accruing interest on loans, see Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Loans on non-accrual status recognized interest income of $2 million for both the three months and nine months ended September 30, 2020, respectively, and $17 million of these loans did not have a related allowance for credit losses as of September 30, 2020.

The Company did not have any significant losses on commercial mortgage and other loans purchased with credit deterioration as of September 30, 2020.

Other Invested Assets
 
The following table sets forth the composition of “Other invested assets,” as of the dates indicated:
September 30, 2020December 31, 2019
 (in millions)
LPs/LLCs:
Equity method:
Private equity$4,139 $3,625 
Hedge funds2,333 1,947 
Real estate-related1,409 1,372 
Subtotal equity method7,881 6,944 
Fair value:
Private equity1,679 1,705 
Hedge funds1,965 2,172 
Real estate-related333 336 
Subtotal fair value3,977 4,213 
Total LPs/LLCs11,858 11,157 
Real estate held through direct ownership(1)2,517 2,388 
Derivative instruments1,201 877 
Other(2)1,345 1,184 
Total other invested assets$16,921 $15,606 
_________ 
(1)As of September 30, 2020 and December 31, 2019, real estate held through direct ownership had mortgage debt of $436 million and $537 million, respectively.
(2)Primarily includes strategic investments made by investment management operations, leveraged leases and member and activity stock held in the Federal Home Loan Banks of New York and Boston. For additional information regarding the Company’s holdings in the Federal Home Loan Banks of New York and Boston, see Note 17 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Accrued Investment Income

The following table sets forth the composition of “Accrued investment income,” as of the date indicated:
 September 30, 2020
 (in millions)
Fixed maturities$2,586 
Equity securities17 
Commercial mortgage and other loans203 
Policy loans289 
Other invested assets28 
Short-term investments and cash equivalents6 
Total accrued investment income$3,129 

There were $3 million and $15 million of write-downs on accrued investment income for the three and nine months ended September 30, 2020, respectively.
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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
September 30,
Nine Months Ended
September 30,
 2020201920202019
 (in millions)
Fixed maturities, available-for-sale(1)$3,113 $3,191 $9,292 $9,429 
Fixed maturities, held-to-maturity(1)59 58176 173 
Fixed maturities, trading 32 37100 109 
Assets supporting experience-rated contractholder liabilities179 191527 558 
Equity securities36 38119 119 
Commercial mortgage and other loans608 6361,866 1,863 
Policy loans147 160450 463 
Other invested assets415 251693 727 
Short-term investments and cash equivalents30 123182 356 
Gross investment income4,619 4,685 13,405 13,797 
Less: investment expenses(173)(247)(571)(753)
Net investment income$4,446 $4,438 $12,834 $13,044 
__________ 
(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
September 30,
Nine Months Ended
September 30,
 2020201920202019
 (in millions)
Fixed maturities(1)$401 $360 $671 $689 
Commercial mortgage and other loans41 20 65 34 
Investment real estate5 38 15 38 
LPs/LLCs8 2 2 (1)
Derivatives(537)433 (2,926)(1,010)
Other3 0 9 1 
Realized investment gains (losses), net$(79)$853 $(2,164)$(249)
__________ 
(1)Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading.
 










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Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Net Unrealized Gains (Losses) on Investments within AOCI

The following table sets forth net unrealized gains (losses) on investments, as of the dates indicated:
September 30,
2020
December 31,
2019
 (in millions)
Fixed maturity securities, available-for-sale—with OTTI(1)
$ N/A
$243 
Fixed maturity securities, available-for-sale—all other(1)N/A44,279 
Fixed maturity securities, available-for-sale with an allowance(23)N/A
Fixed maturity securities, available-for-sale without an allowance54,480 N/A
Derivatives designated as cash flow hedges(2)1,407 832 
Other investments(3)(20)(15)
       Net unrealized gains (losses) on investments$55,844 $45,339 
__________ 
(1)Effective January 1, 2020, per ASU 2016-13, fixed maturity securities, available-for-sale are no longer required to be disclosed “with OTTI” and “all other.”
(2)For additional information on cash flow hedges, see Note 5.
(3)As of September 30, 2020, there were no net unrealized losses on held-to-maturity securities that were previously transferred from available-for-sale. Includes net unrealized gains on certain joint ventures that are strategic in nature and are included in “Other assets.”


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:
September 30, 2020December 31, 2019
Remaining Contractual Maturities of the AgreementsRemaining Contractual Maturities of the Agreements
 Overnight & ContinuousUp to 30 DaysTotal  Overnight & ContinuousUp to 30 DaysTotal
(in millions)
U.S. Treasury securities and obligations of U.S.
government authorities and agencies
$9,944 $553 $10,497 $9,431 $0 $9,431 
Residential mortgage-backed securities377 0 377 250 0 250 
Total securities sold under agreements to repurchase(1)
$10,321 $553 $10,874 $9,681 $0 $9,681 
__________ 
(1)The Company did not have any agreements with remaining contractual maturities greater than thirty days, as of the dates indicated.

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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:
September 30, 2020December 31, 2019
Remaining Contractual Maturities of the AgreementsRemaining Contractual Maturities of the Agreements
 Overnight & ContinuousUp to 30 DaysTotal  Overnight & ContinuousUp to 30 DaysTotal
(in millions)
U.S. Treasury securities and obligations of U.S.
government authorities and agencies
$0 $0 $0 $9 $0 $9 
Obligations of U.S. states and their political
subdivisions
108 0 108 33 0 33 
Foreign government bonds353 0 353 244 0 244 
U.S. public corporate securities2,161 0 2,161 2,996 0 2,996 
Foreign public corporate securities425 0 425 762 0 762 
Commercial mortgage-backed securities0 0 0 2 0 2 
Equity securities24 0 24 167 0 167 
       Total cash collateral for loaned securities(1)$3,071 $0 $3,071 $4,213 $0 $4,213 
__________ 
(1)The Company did not have any agreements with remaining contractual maturities greater than thirty days, as of the dates indicated.


4. VARIABLE INTEREST ENTITIES
 
In the normal course of its activities, the Company enters into relationships with various special-purpose entities and other entities that are deemed to be variable interest entities (“VIEs”). For additional information, see Note 4 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
 
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)
 September 30,
2020
December 31,
2019
September 30,
2020
December 31,
2019
 (in millions)
Fixed maturities, available-for-sale$107 $104 $290 $285 
Fixed maturities, held-to-maturity85 83 863 839 
Fixed maturities, trading1,081 1,112 0 0 
Assets supporting experience-rated contractholder liabilities0 0 1 4 
Equity securities44 47 0 0 
Commercial mortgage and other loans976 883 0 0 
Other invested assets2,502 2,199 152 89 
Cash and cash equivalents140 166 0 0 
Accrued investment income6 4 4 4 
Other assets424 450 689 689 
Total assets of consolidated VIEs$5,365 $5,048 $1,999 $1,910 
Other liabilities$291 $304 $11 $13 
Notes issued by consolidated VIEs(2)1,242 1,274 0 0 
Total liabilities of consolidated VIEs$1,533 $1,578 $11 $13 
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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
 __________
(1)Total assets of consolidated VIEs reflect $2,892 million and $2,668 million as of September 30, 2020 and December 31, 2019, respectively, related to VIEs whose beneficial interests are wholly-owned by consolidated subsidiaries.
(2)Recourse is limited to the assets of the respective VIE and does not extend to the general credit of the Company. As of September 30, 2020, the maturities of these obligations were between 3 and 9 years.

 
Unconsolidated Variable Interest Entities
 
The Company has determined that it is not the primary beneficiary of certain VIEs for which it is the investment manager. The Company’s maximum exposure to loss resulting from its relationship with unconsolidated VIEs for which it is the investment manager is limited to its investment in the VIEs, which was $1,098 million and $1,021 million at September 30, 2020 and December 31, 2019, respectively. These investments are reflected in “Fixed maturities, available-for-sale,” “Fixed maturities, trading,” “Equity securities” and “Other invested assets.” There are no liabilities associated with these unconsolidated VIEs on the Company’s Unaudited Interim Consolidated Statements of Financial Position.
 
In the normal course of its activities, the Company will invest in limited partnerships and limited liability companies (“LPs/LLCs”), which include hedge funds, private equity funds and real estate-related funds and may or may not be VIEs. The Company’s maximum exposure to loss on these investments, both VIEs and non-VIEs, is limited to the amount of its investment. The Company classifies these investments as “Other invested assets” and its maximum exposure to loss associated with these entities was $11,858 million and $11,157 million as of September 30, 2020 and December 31, 2019, respectively.
 
In addition, in the normal course of its activities, the Company will invest in structured investments including VIEs for which it is not the investment manager. These structured investments typically invest in fixed income investments and are managed by third-parties and include asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities. The Company’s maximum exposure to loss on these structured investments, both VIEs and non-VIEs, is limited to the amount of its investment. See Note 3 for details regarding the carrying amounts and classification of these assets. The Company has not provided material financial or other support that was not contractually required to these structures. The Company has determined that it is not the primary beneficiary of these structures due to the fact that it does not control these entities.

5. DERIVATIVES AND HEDGING
 
Types of Derivative and Hedging Instruments

The Company utilizes various derivatives and hedging instruments to manage its risk. Commonly used derivative and non-derivative hedging instruments include, but are not necessarily limited to:
Interest rate contracts: futures, swaps, forwards, options, caps and floors
Equity contracts: futures, options and total return swaps
Foreign exchange contracts: futures, options, forwards, swaps, and foreign currency debt instruments
Credit contracts: single and index reference credit default swaps

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

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

Primary Risks Managed by Derivatives
 
The table below provides a summary of the gross notional amount and fair value of derivatives contracts by the primary underlying risks, excluding embedded derivatives and associated reinsurance recoverables. Many derivative instruments contain multiple underlying risks. The fair value amounts below represent the value of derivative contracts prior to taking into account the netting effects of master netting agreements and cash collateral. This netting impact results in total derivative assets of $1,190 million and $867 million as of September 30, 2020 and December 31, 2019, respectively, and total derivative liabilities of $573 million and $831 million as of September 30, 2020 and December 31, 2019, respectively, reflected in the Unaudited Interim Consolidated Statements of Financial Position.

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Primary Underlying Risk /Instrument TypeSeptember 30, 2020December 31, 2019
 Fair Value Fair Value
Gross NotionalAssetsLiabilitiesGross NotionalAssetsLiabilities
 (in millions)
Derivatives Designated as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps$3,101 $1,128 $(100)$3,257 $628 $(73)
Interest Rate Forwards249 11 (2)205 4 (1)
Foreign Currency
Foreign Currency Forwards2,194 51 (48)1,461 22 (57)
Currency/Interest Rate
Foreign Currency Swaps21,885 2,023 (246)22,746 1,467 (302)
Total Derivatives Designated as Hedge Accounting Instruments$27,429 $3,213 $(396)$27,669 $2,121 $(433)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps$151,469 $20,256 $(10,295)$141,162 $10,249 $(4,861)
Interest Rate Futures16,651 12 (77)17,095 4 (38)
Interest Rate Options13,418 1,353 (257)16,496 339 (238)
Interest Rate Forwards3,077 22 0 2,218 18 (3)
Foreign Currency
Foreign Currency Forwards36,539 746 (517)26,604 208 (214)
Foreign Currency Options0 0 0 0 0 0 
Currency/Interest Rate
Foreign Currency Swaps14,164 814 (355)13,874 740 (345)
Credit
Credit Default Swaps1,667 10 (23)798 21 0 
Equity
Equity Futures7,742 7 (31)1,802 0 (3)
Equity Options46,829 854 (403)32,657 679 (765)
Total Return Swaps24,407 134 (409)18,218 6 (636)
Other
Other(1)1,262 0 0 1,258 0 0 
Synthetic GICs84,088 1 0 80,009 1 0 
Total Derivatives Not Qualifying as Hedge Accounting Instruments$401,313 $24,209 $(12,367)$352,191 $12,265 $(7,103)
Total Derivatives(2)(3)$428,742 $27,422 $(12,763)$379,860 $14,386 $(7,536)
__________
(1)“Other” primarily includes derivative contracts used to improve the balance of the Company’s tail longevity and mortality risk. Under these contracts, the Company’s gains (losses) are capped at the notional amount.
(2)Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks. The fair value of these embedded derivatives was a net liability of $24,153 million and $14,035 million as of September 30, 2020 and December 31, 2019, respectively, primarily included in “Future policy benefits.”
(3)Recorded in “Other invested assets” and “Other liabilities” on the Unaudited Interim Consolidated Statements of Financial Position.

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
As of September 30, 2020, the following amounts were recorded on the Unaudited Interim Consolidated Statements of Financial Position related to the carrying amount of the hedged assets (liabilities) and cumulative basis adjustments included in the carrying amount for fair value hedges.
September 30, 2020December 31, 2019
Balance Sheet Line Item in which Hedged Item is RecordedCarrying Amount of the Hedged Assets (Liabilities)Cumulative Amount of
Fair Value Hedging Adjustment Included in the
Carrying Amount of the Hedged
Assets (Liabilities)(1)
Carrying Amount of the Hedged Assets (Liabilities)Cumulative Amount of
Fair Value Hedging Adjustment Included in the
Carrying Amount of the Hedged
Assets (Liabilities)(1)
(in millions)
Fixed maturities, available-for-sale, at fair value$402 $86 $389 $64 
Commercial mortgage and other loans$21 $2 $23 $2 
Policyholders’ account balances$(1,686)$(376)$(1,376)$(107)
Future policy benefits$(1,248)$(410)$(676)$(172)
__________
(1)There were no material fair value hedging adjustments for hedged assets and liabilities for which hedge accounting has been discontinued.

Most of the Company’s derivatives do not qualify for hedge accounting for various reasons. For example: (i) derivatives that economically hedge embedded derivatives do not qualify for hedge accounting because changes in the fair value of the embedded derivatives are already recorded in net income; (ii) derivatives that are utilized as macro hedges of the Company’s exposure to various risks typically do not qualify for hedge accounting because they do not meet the criteria required under portfolio hedge accounting rules; and (iii) synthetic GICs, which are product standalone derivatives, do not qualify as hedging instruments under hedge accounting rules.

Offsetting Assets and Liabilities
 
The following table presents recognized derivative instruments (excluding embedded derivatives and associated reinsurance recoverables), and repurchase and reverse repurchase agreements that are offset in the Unaudited Interim Consolidated Statements of Financial Position, and/or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the Unaudited Interim Consolidated Statements of Financial Position.
 
 September 30, 2020
 Gross
Amounts of
Recognized
Financial
Instruments
Gross
Amounts
Offset in the
Statements
of Financial
Position
Net
Amounts
Presented in
the Statements
of Financial
Position
Financial
Instruments/
Collateral(1)
Net
Amount
 (in millions)
Offsetting of Financial Assets:
Derivatives(1)$27,270 $(26,232)$1,038 $(569)$469 
Securities purchased under agreement to resell641 0 641 (641)0 
Total assets$27,911 $(26,232)$1,679 $(1,210)$469 
Offsetting of Financial Liabilities:
Derivatives(1)$12,757 $(12,190)$567 $(140)$427 
Securities sold under agreement to repurchase10,874 0 10,874 (10,874)0 
Total liabilities$23,631 $(12,190)$11,441 $(11,014)$427 
 
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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
 December 31, 2019
 Gross
Amounts of
Recognized
Financial
Instruments
Gross
Amounts
Offset in the
Statements
of Financial
Position
Net
Amounts
Presented in
the Statements
of Financial
Position
Financial
Instruments/
Collateral(1)
Net
Amount
 (in millions)
Offsetting of Financial Assets:
Derivatives(1)$14,303 $(13,519)$784 $(607)$177 
Securities purchased under agreement to resell1,012 0 1,012 (1,012)0 
Total assets$15,315 $(13,519)$1,796 $(1,619)$177 
Offsetting of Financial Liabilities:
Derivatives(1)$7,528 $(6,705)$823 $(244)$579 
Securities sold under agreement to repurchase9,681 0 9,681 (9,681)0 
Total liabilities$17,209 $(6,705)$10,504 $(9,925)$579 
__________
(1)    Amounts exclude the excess of collateral received/pledged from/to the counterparty.

For information regarding the rights of offset associated with the derivative assets and liabilities in the table above, see “—Counterparty Credit Risk” below. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company’s accounting policy for securities repurchase and resale agreements, see Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.
 
Cash Flow, Fair Value and Net Investment Hedges
 
The primary derivative and non-derivative instruments used by the Company in its fair value, cash flow and net investment hedge accounting relationships are interest rate swaps, currency swaps, currency forwards, and foreign currency denominated debts. These instruments are only designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, or equity derivatives in any of its fair value, cash flow or net investment hedge accounting relationships.
 
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.




















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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
 
 Three Months Ended September 30, 2020
 Realized
Investment
Gains
(Losses)
Net
Investment
Income
Other
Income (Loss)
Interest
Expense
Interest
Credited to
Policyholders’
Account
Balances
Policyholders’ BenefitsAOCI(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 $(35)$(37)$0 
Currency(1)0 0 0 0 15 0 
Total gains (losses) on derivatives designated as hedge instruments4 (2)0 0 (35)(22)0 
Gains (losses) on the hedged item:
Interest Rate(6)4 0 0 49 48 0 
Currency0 0 0 0 0 (15)0 
Total gains (losses) on hedged item(6)4 0 0 49 33 0 
Amortization for gains (losses) excluded from assessment of the effectiveness
Currency0 0 0 0 0 (1)2 
Total Amortization for Gain (Loss) Excluded from Assessment of the Effectiveness0 0 0 0 0 (1)2 
Total gains (losses) on fair value hedges net of hedged item(2)2 0 0 14 10 2 
Cash flow hedges
Interest Rate19 0 0 0 0 0 (15)
Currency0 0 0 0 0 0 (65)
Currency/Interest Rate55 78 (210)0 0 0 (1,011)
Total gains (losses) on cash flow hedges74 78 (210)0 0 0 (1,091)
Net investment hedges
Currency(6)0 142 0 0 0 (143)
Currency/Interest Rate0 0 0 0 0 0 0 
Total gains (losses) on net investment hedges(6)0 142 0 0 0 (143)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate(1,163)0 0 0 0 0 0 
Currency(44)0 2 0 0 0 0 
Currency/Interest Rate(394)0 (3)0 0 0 0 
Credit(15)0 0 0 0 0 0 
Equity(2,243)0 0 0 0 0 0 
Other1 0 0 0 0 0 0 
Embedded Derivatives3,254 0 0 0 0 0 0 
Total gains (losses) on derivatives not qualifying as hedge accounting instruments(604)0 (1)0 0 0 0 
Total$(538)$80 $(69)$0 $14 $10 $(1,232)






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

 Nine Months Ended September 30, 2020
 Realized
Investment
Gains
(Losses)
Net
Investment
Income
Other
Income (Loss)
Interest
Expense
Interest
Credited to
Policyholders’
Account
Balances
Policyholders’ BenefitsAOCI(1)
 (in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Gains (losses) on derivatives designated as hedge instruments:
Interest Rate$(24)$(6)$0 $0 $295 $242 $0 
Currency1 0 0 0 0 17 0 
Total gains (losses) on derivatives designated as hedge instruments(23)(6)0 0 295 259 0 
Gains (losses) on the hedged item:
Interest Rate23 13 0 0 (269)(222)0 
Currency(1)1 0 0 0 (17)0 
Total gains (losses) on hedged item22 14 0 0 (269)(239)0 
Amortization for gains (losses) excluded from assessment of the effectiveness
Currency0 0 0 0 0 (1)(1)
Total Amortization for Gain (Loss) Excluded from Assessment of the Effectiveness0 0 0 0 0 (1)(1)
Total gains (losses) on fair value hedges net of hedged item(1)8 0 0 26 19 (1)
Cash flow hedges
Interest Rate27 0 0 0 0 0 29 
Currency4 0 0 0 0 0 27 
Currency/Interest Rate121 239 (17)0 0 0 519 
Total gains (losses) on cash flow hedges152 239 (17)0 0 0 575 
Net investment hedges
Currency(6)0 142 0 0 0 (133)
Currency/Interest Rate0 0 0 0 0 0 0 
Total gains (losses) on net investment hedges(6)0 142 0 0 0 (133)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate7,829 0 0 0 0 0 0 
Currency186 0 (5)0 0 0 0 
Currency/Interest Rate337 0 (1)0 0 0 0 
Credit(56)0 0 0 0 0 0 
Equity(2,028)0 0 0 0 0 0 
Other1 0 0 0 0 0 0 
Embedded Derivatives(9,339)0 0 0 0 0 0 
Total gains (losses) on derivatives not qualifying as hedge accounting instruments(3,070)0 (6)0 0 0 0 
Total$(2,925)$247 $119 $0 $26 $19 $441 





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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
 Three Months Ended September 30, 2019
 Realized
Investment
Gains
(Losses)
Net
Investment
Income
Other
Income (Loss)
Interest
Expense
Interest
Credited to
Policyholders’
Account
Balances
Policyholders’ BenefitsAOCI(1)
 (in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Gains (losses) on derivatives designated as hedge instruments:
Interest Rate$(10)$(2)$0 $0 $115 $102 $0 
Currency1 0 0 0 0 0 0 
Total gains (losses) on derivatives designated as hedge instruments(9)(2)0 0 115 102 0 
Gains (losses) on the hedged item:
Interest Rate10 5 0 0 (116)(103)0 
Currency(1)1 0 0 0 0 0 
Total gains (losses) on hedged item9 6 0 0 (116)(103)0 
Total gains (losses) on fair value hedges net of hedged item0 4 0 0 (1)(1)0 
Cash flow hedges
Interest Rate56 1 0 0 0 0 (38)
Currency3 0 0 0 0 0 4 
Currency/Interest Rate57 70 140 0 0 0 601 
Total gains (losses) on cash flow hedges116 71 140 0 0 0 567 
Net investment hedges
Currency0 0 0 0 0 0 9 
Currency/Interest Rate0 0 0 0 0 0 0 
Total gains (losses) on net investment hedges0 0 0 0 0 0 9 
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate3,356 0 0 0 0 0 0 
Currency158 0 5 0 0 0 0 
Currency/Interest Rate364 0 2 0 0 0 0 
Credit4 0 0 0 0 0 0 
Equity(133)0 0 0 0 0 0 
Other0 0 0 0 0 0 0 
Embedded Derivatives(3,427)0 0 0 0 0 0 
Total gains (losses) on derivatives not qualifying as hedge accounting instruments322 0 7 0 0 0 0 
Total$438 $75 $147 $0 $(1)$(1)$576 







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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
 Nine Months Ended September 30, 2019
 Realized
Investment
Gains
(Losses)
Net
Investment
Income
Other
Income (Loss)
Interest
Expense
Interest
Credited to
Policyholders’
Account
Balances
Policyholders’ BenefitsAOCI(1)
 (in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Gains (losses) on derivatives designated as hedge instruments:
Interest Rate$(24)$(5)$0 $0 $283 $233 $0 
Currency2 0 0 0 0 0 0 
Total gains (losses) on derivatives designated as hedge instruments(22)(5)0 0 283 233 0 
Gains (losses) on the hedged item:
Interest Rate21 16 0 0 (280)(222)0 
Currency(1)2 0 0 0 0 0 
Total gains (losses) on hedged item20 18 0 0 (280)(222)0 
Total gains (losses) on fair value hedges net of hedged item(2)13 0 0 3 11 0 
Cash flow hedges
Interest Rate55 1 0 0 0 0 (16)
Currency5 0 0 0 0 0 9 
Currency/Interest Rate96 207 135 0 0 0 771 
Total gains (losses) on cash flow hedges156 208 135 0 0 0 764 
Net investment hedges
Currency0 0 0 0 0 0 12 
Currency/Interest Rate0 0 0 0 0 0 0 
Total gains (losses) on net investment hedges0 0 0 0 0 0 12 
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate7,090 0 0 0 0 0 0 
Currency242 0 4 0 0 0 0 
Currency/Interest Rate568 0 2 0 0 0 0 
Credit107 0 0 0 0 0 0 
Equity(2,560)0 0 0 0 0 0 
Other0 0 0 0 0 0 0 
Embedded Derivatives(6,607)0 0 0 0 0 0 
Total gains (losses) on derivatives not qualifying as hedge accounting instruments(1,160)0 6 0 0 0 0 
Total$(1,006)$221 $141 $0 $3 $11 $776 
_________
(1)Net change in AOCI, excluding changes related to net investment hedges using non-derivative instruments of ($17) million for both the three and nine months ended September 30, 2020, and $0 million for both the three and nine months ended September 30, 2019.


 
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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:
 (in millions)
Balance, December 31, 2019$832 
Amount recorded in AOCI
    Interest Rate56 
    Currency31 
    Currency/Interest Rate862 
Total amount recorded in AOCI949 
Amount reclassified from AOCI to income
    Interest Rate(27)
    Currency(4)
    Currency/Interest Rate(343)
Total amount reclassified from AOCI to income(374)
Balance, September 30, 2020$1,407 

The changes in fair value of cash flow hedges are deferred in AOCI and are included in “Net unrealized investment gains (losses)” in the Unaudited Interim Consolidated Statements of Comprehensive Income; these amounts are then reclassified to earnings when the hedged item affects earnings. Using September 30, 2020 values, it is estimated that a pre-tax gain of approximately $271 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending September 30, 2021.

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

There were no material amounts reclassified from AOCI into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging. In addition, there were no instances in which the Company discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.

For net investment hedges, in addition to derivatives, the Company uses foreign currency denominated debt to hedge the risk of change in the net investment in a foreign subsidiary due to changes in exchange rates. For effective net investment hedges, the amounts, before applicable taxes, recorded in the cumulative translation adjustment within AOCI were ($160) million and ($150) million for the three and nine months ended September 30, 2020, respectively, and $9 million and $12 million for the three and nine months ended September 30, 2019, respectively.

Credit Derivatives
 
The following table provides a summary of the notional and fair value of written credit protection. The Company’s maximum amount at risk under these credit derivatives, assuming the value of the underlying referenced securities become worthless, is equal to the notional amounts. These credit derivatives have maturities of less than 27 years for index references.
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Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
September 30, 2020
NAIC Rating Designation of Underlying Credit Obligation(1)
NAIC 1NAIC 2NAIC 3NAIC 4NAIC 5NAIC 6Total
Gross NotionalFair ValueGross NotionalFair ValueGross NotionalFair ValueGross NotionalFair ValueGross NotionalFair ValueGross NotionalFair ValueGross NotionalFair Value
(in millions)
Single name reference(2)$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 
Index reference(2)50 0 0 0 577 6 600 2 0 0 0 0 1,227 8 
Total$50 $0 $0 $0 $577 $6 $600 $2 $0 $0 $0 $0