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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| ☒ | 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
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| ☐ | 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)
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| New Jersey | 22-3703799 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
751 Broad Street
Newark, NJ 07102
(973) 802-6000
(Address and Telephone Number of Registrant’s Principal Executive Offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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| Title of Each Class | Trading Symbols(s) | Name of Each Exchange on Which Registered |
| Common Stock, Par Value $.01 | PRU | New York Stock Exchange |
| 5.625% Junior Subordinated Notes | PRS | New York Stock Exchange |
| 4.125% Junior Subordinated Notes | PFH | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large Accelerated Filer | x | | Accelerated Filer | ☐ |
| Non-accelerated Filer | ☐ | | Smaller Reporting Company | ☐ |
| | | | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
As of October 31, 2020, 396 million shares of the registrant’s Common Stock (par value $0.01) were outstanding.
TABLE OF CONTENTS
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| Item 1A. | | |
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| Item 6. | | |
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Forward-Looking Statements
Certain of the statements included in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Financial, Inc. and its subsidiaries. There can be no assurance that future developments affecting Prudential Financial, Inc. and its subsidiaries will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) 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.
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)
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| | 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 loans | | 11,502 | | | 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 investments | | 541,053 | | | 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 acquired | | 1,131 | | | 1,110 | |
| Other assets (2020-net of $9 allowance for credit losses)(1)(2) | | 21,536 | | | 20,832 | |
| Separate account assets | | 305,483 | | | 312,281 | |
| TOTAL ASSETS | | $ | 911,589 | | | $ | 896,552 | |
| LIABILITIES AND EQUITY | | | | |
| LIABILITIES | | | | |
| Future policy benefits | | $ | 303,733 | | | $ | 293,527 | |
| Policyholders’ account balances | | 159,346 | | | 152,110 | |
| Policyholders’ dividends(2) | | 8,978 | | | 6,988 | |
| Securities sold under agreements to repurchase | | 10,874 | | | 9,681 | |
| Cash collateral for loaned securities | | 3,071 | | | 4,213 | |
| Income taxes(2) | | 12,111 | | | 11,378 | |
| Short-term debt | | 1,113 | | | 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 $800 measured at fair value under the fair value option at September 30, 2020 and December 31, 2019, respectively)(1) | | 1,242 | | | 1,274 | |
| Separate account liabilities | | 305,483 | | | 312,281 | |
| Total liabilities | | 844,699 | | | 832,833 | |
| COMMITMENTS AND CONTINGENT LIABILITIES (See Note 14) | | | | |
| EQUITY | | | | |
Preferred Stock ($.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 earnings | | 30,372 | | | 32,991 | |
| Total Prudential Financial, Inc. equity | | 66,217 | | | 63,115 | |
| Noncontrolling interests | | 673 | | | 604 | |
| Total equity | | 66,890 | | | 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
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, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| REVENUES | | | | | | | |
| Premiums | $ | 7,482 | | | $ | 6,937 | | | $ | 22,839 | | | $ | 22,972 | |
| Policy charges and fee income | 1,464 | | | 1,519 | | | 4,476 | | | 4,463 | |
| Net investment income | 4,446 | | | 4,438 | | | 12,834 | | | 13,044 | |
| Asset management and service fees | 1,120 | | | 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 revenues | 15,425 | | | 15,105 | | | 41,004 | | | 45,584 | |
| BENEFITS AND EXPENSES | | | | | | | |
| Policyholders’ benefits | 8,312 | | | 7,722 | | | 25,768 | | | 25,037 | |
| Interest credited to policyholders’ account balances | 1,151 | | | 1,106 | | | 3,375 | | | 3,729 | |
| Dividends to policyholders | 554 | | | 667 | | | 1,008 | | | 1,681 | |
| Amortization of deferred policy acquisition costs | 638 | | | 591 | | | 1,882 | | | 1,808 | |
| General and administrative expenses | 3,323 | | | 3,294 | | | 10,194 | | | 9,588 | |
| Total benefits and expenses | 13,978 | | | 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 taxes | 10 | | | 32 | | | 62 | | | 85 | |
| | | | | | | |
| | | | | | | |
| NET INCOME (LOSS) | 1,507 | | | 1,425 | | | (1,168) | | | 3,100 | |
| Less: Income (loss) attributable to noncontrolling interests | 20 | | | 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
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, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| 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
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 interests | | | | | | | | | | | | | 31 | | | 31 | |
| Distributions to noncontrolling interests | | | | | | | | | | | | | (11) | | | (11) | |
| | | | | | | | | | | | | | | |
| Stock-based compensation programs | | | (26) | | | | | 112 | | | | | 86 | | | | | 86 | |
| Dividends declared on Common Stock | | | | | (445) | | | | | | | (445) | | | | | (445) | |
| Comprehensive income: | | | | | | | | | | | | | | | |
| Net income (loss) | | | | | (271) | | | | | | | (271) | | | 1 | | | (270) | |
| Other comprehensive income (loss), net of tax | | | | | | | | | (1,439) | | | (1,439) | | | 0 | | | (1,439) | |
| Total comprehensive income (loss) | | | | | | | | | | | (1,710) | | | 1 | | | (1,709) | |
| Balance, March 31, 2020 | 6 | | | 25,506 | | | 32,176 | | | (19,841) | | | 22,600 | | | 60,447 | | | 625 | | | 61,072 | |
| Common Stock acquired | | | | | | | | | | | | | | | |
| Contributions from noncontrolling interests | | | | | | | | | | | | | 4 | | | 4 | |
| Distributions to noncontrolling interests | | | | | | | | | | | | | (23) | | | (23) | |
| | | | | | | | | | | | | | | |
| Stock-based compensation programs | | | 7 | | | | | 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 tax | | | | | | | | | 8,237 | | | 8,237 | | | 1 | | | 8,238 | |
| Total comprehensive income (loss) | | | | | | | | | | | 5,828 | | | 5 | | | 5,833 | |
| Balance, June 30, 2020 | 6 | | | 25,513 | | | 29,326 | | | (19,785) | | | 30,837 | | | 65,897 | | | 611 | | | 66,508 | |
| | | | | | | | | | | | | | | |
| Common Stock acquired | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Contributions from noncontrolling interests | | | | | | | | | | | | | 50 | | | 50 | |
| Distributions to noncontrolling interests | | | | | | | | | | | | | (14) | | | (14) | |
| Consolidations (deconsolidations) of noncontrolling interests | | | | | | | | | | | | | 0 | | | 0 | |
| Stock-based compensation programs | | | 50 | | | | | 60 | | | | 110 | | | | | 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
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 interests | | | | | | | | | | | | | 26 | | | 26 | |
| Distributions to noncontrolling interests | | | | | | | | | | | | | (4) | | | (4) | |
| | | | | | | | | | | | | | | |
| Stock-based compensation programs | | | (46) | | | | | 131 | | | | | 85 | | | | | 85 | |
| Dividends declared on Common Stock | | | | | (415) | | | | | | | (415) | | | | | (415) | |
| Comprehensive income: | | | | | | | | | | | | | | | |
| Net income (loss) | | | | | 932 | | | | | | | 932 | | | 5 | | | 937 | |
| Other comprehensive income (loss), net of tax | | | | | | | | | 6,305 | | | 6,305 | | | (1) | | | 6,304 | |
| Total comprehensive income (loss) | | | | | | | | | | | 7,237 | | | 4 | | | 7,241 | |
| Balance, March 31, 2019 | 6 | | | 24,782 | | | 30,966 | | | (17,962) | | | 17,218 | | | 55,010 | | | 440 | | | 55,450 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Common Stock acquired | | | | | | | (500) | | | | | (500) | | | | | (500) | |
| | | | | | | | | | | | | | | |
| Contributions from noncontrolling interests | | | | | | | | | | | | | 25 | | | 25 | |
| Distributions to noncontrolling interests | | | | | | | | | | | | | (16) | | | (16) | |
| Consolidations (deconsolidations) of noncontrolling interests | | | | | | | | | | | | | 8 | | | 8 | |
| Stock-based compensation programs | | | 43 | | | | | 46 | | | | | 89 | | | | | 89 | |
| Dividends declared on Common Stock | | | | | (411) | | | | | | | (411) | | | | | (411) | |
| Comprehensive income: | | | | | | | | | | | | | | | |
| Net income (loss) | | | | | 708 | | | | | | | 708 | | | 30 | | | 738 | |
| Other comprehensive income (loss), net of tax | | | | | | | | | 6,764 | | | 6,764 | | | 6 | | | 6,770 | |
| Total comprehensive income (loss) | | | | | | | | | | | 7,472 | | | 36 | | | 7,508 | |
| Balance, June 30, 2019 | 6 | | | 24,825 | | | 31,263 | | | (18,416) | | | 23,982 | | | 61,660 | | | 493 | | | 62,153 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Common Stock acquired | | | | | | | (1,000) | | | | | (1,000) | | | | | (1,000) | |
| Exchangeable Surplus Notes conversion | | | 502 | | | | | | | | 502 | | | | 502 | |
| Contributions from noncontrolling interests | | | | | | | | | | | | | 54 | | | 54 | |
| Distributions to noncontrolling interests | | | | | | | | | | | | | (36) | | | (36) | |
| | | | | | | | | | | | | | | |
| Stock-based compensation programs | | | 24 | | | | | 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 tax | | | | | | | | | 3,576 | | | 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
PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2020 and 2019 (in millions)
| | | | | | | | | | | |
| 2020 | | 2019 |
| 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, net | 2,164 | | | 249 | |
| Policy charges and fee income | (1,995) | | | (2,117) | |
| Interest credited to policyholders’ account balances | 3,375 | | | 3,729 | |
| Depreciation and amortization | 448 | | | 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 liabilities | 7,656 | | | 7,718 | |
| Income taxes | (331) | | | (245) | |
| Derivatives, net | 6,477 | | | 5,225 | |
| Other, net | (3,146) | | | (1,125) | |
| Cash flows from (used in) operating activities | 12,881 | | | 15,640 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | |
| Proceeds from the sale/maturity/prepayment of: | | | |
| Fixed maturities, available-for-sale | 31,989 | | | 38,356 | |
| Fixed maturities, held-to-maturity | 76 | | | 84 | |
| Fixed maturities, trading | 444 | | | 284 | |
| Assets supporting experience-rated contractholder liabilities | 22,534 | | | 11,631 | |
| Equity securities | 1,974 | | | 2,087 | |
| Commercial mortgage and other loans | 3,629 | | | 4,483 | |
| Policy loans | 1,862 | | | 1,717 | |
| Other invested assets | 1,376 | | | 1,074 | |
| Short-term investments | 35,401 | | | 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 disposed | 1,454 | | | 0 | |
| Derivatives, net | 434 | | | 1,170 | |
| Other, net | (225) | | | (339) | |
| Cash flows from (used in) investing activities | (13,739) | | | (13,116) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | |
| Policyholders’ account deposits | 33,268 | | | 21,140 | |
| Policyholders’ account withdrawals | (26,944) | | | (19,734) | |
| Net change in securities sold under agreements to repurchase and cash collateral for loaned securities | 50 | | | 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 options | 106 | | | 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 VIEs | 0 | | | 925 | |
| Repayments of notes issued by consolidated VIEs | (19) | | | (638) | |
| | | |
| Other, net | (349) | | | 94 | |
| Cash flows from (used in) financing activities | 5,066 | | | 358 | |
| Effect of foreign exchange rate changes on cash balances | 122 | | | 56 | |
| NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS | 4,330 | | | 2,938 | |
| CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, BEGINNING OF YEAR | 16,474 | | | 15,495 | |
| CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, END OF PERIOD | $ | 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 assumed | 584 | | | 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
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
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
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 costs | 9 | |
| Other assets | (6) | |
Total assets | $ | (122) | |
| |
| Policyholders' dividends | $ | (14) | |
| Other liabilities | 21 | |
| Income taxes | (30) | |
Total liabilities | (23) | |
| |
| Retained earnings | (99) | |
Total equity | (99) | |
Total liabilities and equity | $ | (122) | |
The prospective adoption of the portions of the standard related to fixed maturities, available-for-sale resulted in no impact to opening retained earnings.
(2) Changes to the Presentation of the Consolidated Statements of Financial Position and Consolidated Statements of Operations
The allowance for credit losses is presented parenthetically on relevant line items in the Consolidated Statements of Financial Position. In the Consolidated Statements of Operations, realized investment gains (losses), net are presented on one
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.”
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.
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.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Other ASUs adopted during the nine months ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | |
| Standard | | Description | | Effective date and method of adoption | | Effect on the financial statements or other significant matters |
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
| | This ASU simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test, which measures a goodwill impairment by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of the goodwill. Under the ASU, a goodwill impairment should be recorded for the amount by which the carrying amount of a reporting unit exceeds its fair value (capped by the total amount of goodwill allocated to the reporting unit). | | January 1, 2020 using the prospective method. | | The adoption of the ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements. |
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
| | This ASU provides optional relief for certain contracts impacted by reference rate reform. The standard permits an entity to consider contract modification due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The ASU also temporarily (until December 31, 2022) allows hedge relationships to continue without de-designation upon changes due to reference rate reform. | | March 12, 2020 to December 31, 2022 using the prospective method. | | This ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
The Company made the election under ASU 2020-04 for all applicable contracts as they converted from the current reference rate to the new reference rate.
|
ASU issued but not yet adopted as of 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.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | |
| ASU 2018-12 Amended Topic | | Description | | Method of adoption | | Effect on the financial statements or other significant matters |
Cash flow assumptions used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products
| | Requires an entity to review, and if necessary, update the cash flow assumptions used to measure the liability for future policy benefits, for both changes in future assumptions and actual experience, at least annually using a retrospective update method with a cumulative catch-up adjustment recorded in a separate line item in the Consolidated Statements of Operations. | | An entity may choose one of two adoption methods for the liability for future policy benefits: (1) a modified retrospective transition method whereby the entity 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. |
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 Losses | | Fair 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 subdivisions | 10,555 | | | 2,052 | | | 4 | | | 0 | | | 12,603 | |
| Foreign government bonds | 90,915 | | | 16,317 | | | 195 | | | 1 | | | 107,036 | |
| U.S. public corporate securities | 92,988 | | | 16,259 | | | 454 | | | 64 | | | 108,729 | |
| U.S. private corporate securities(1) | 35,846 | | | 3,586 | | | 192 | | | 29 | | | 39,211 | |
| Foreign public corporate securities | 25,131 | | | 3,408 | | | 185 | | | 24 | | | 28,330 | |
| Foreign private corporate securities | 27,934 | | | 1,785 | | | 485 | | | 30 | | | 29,204 | |
| Asset-backed securities(2) | 14,070 | | | 168 | | | 104 | | | 0 | | | 14,134 | |
| Commercial mortgage-backed securities | 15,096 | | | 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 Losses | | Amortized Cost, Net of Allowance |
| | (in millions) |
| Fixed maturities, held-to-maturity: | | | | | | | | | | | |
| Foreign government bonds | $ | 915 | | | $ | 265 | | | $ | 0 | | | $ | 1,180 | | | $ | 0 | | | $ | 915 | |
| Foreign public corporate securities | 637 | | | 66 | | | 0 | | | 703 | | | 9 | | | 628 | |
| Foreign private corporate securities | 85 | | | 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.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI(4) |
| | (in millions) |
| Fixed maturities, available-for-sale: | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 30,625 | | | $ | 5,195 | | | $ | 161 | | | $ | 35,659 | | | $ | 0 | |
| Obligations of U.S. states and their political subdivisions | 10,068 | | | 1,437 | | | 8 | | | 11,497 | | | 0 | |
| Foreign government bonds | 98,356 | | | 20,761 | | | 63 | | | 119,054 | | | (34) | |
| U.S. public corporate securities | 87,566 | | | 11,030 | | | 257 | | | 98,339 | | | (6) | |
| U.S. private corporate securities(1) | 34,410 | | | 2,243 | | | 120 | | | 36,533 | | | 0 | |
| Foreign public corporate securities | 26,841 | | | 3,054 | | | 70 | | | 29,825 | | | (1) | |
| Foreign private corporate securities | 27,619 | | | 1,201 | | | 580 | | | 28,240 | | | 0 | |
| Asset-backed securities(2) | 13,067 | | | 147 | | | 40 | | | 13,174 | | | (77) | |
| Commercial mortgage-backed securities | 14,978 | | | 610 | | | 14 | | | 15,574 | | | 0 | |
| Residential mortgage-backed securities(3) | 3,044 | | | 159 | | | 2 | | | 3,201 | | | (1) | |
| Total fixed maturities, available-for-sale(1) | $ | 346,574 | | | $ | 45,837 | | | $ | 1,315 | | | $ | 391,096 | | | $ | (119) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | (in millions) |
| Fixed maturities, held-to-maturity: | | | | | | | |
| Foreign government bonds | $ | 891 | | | $ | 282 | | | $ | 0 | | | $ | 1,173 | |
| Foreign public corporate securities | 649 | | | 64 | | | 0 | | | 713 | |
| Foreign private corporate securities | 83 | | | 2 | | | 0 | | | 85 | |
| | | | | | | |
| | | | | | | |
| Residential mortgage-backed securities(3) | 310 | | | 21 | | | 0 | | | 331 | |
| Total fixed maturities, held-to-maturity(5) | $ | 1,933 | | | $ | 369 | | | $ | 0 | | | $ | 2,302 | |
__________
(1)Excludes notes with amortized cost of $4,751 million (fair value, $4,757 million), which have been offset with the associated debt under a netting agreement.
(2)Includes 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.
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 bonds | | 5,548 | | | 190 | | | 44 | | | 5 | | | 5,592 | | | 195 | |
| U.S. public corporate securities | | 6,939 | | | 261 | | | 1,332 | | | 174 | | | 8,271 | | | 435 | |
| U.S. private corporate securities | | 2,452 | | | 105 | | | 847 | | | 86 | | | 3,299 | | | 191 | |
| Foreign public corporate securities | | 2,022 | | | 126 | | | 367 | | | 52 | | | 2,389 | | | 178 | |
| Foreign private corporate securities | | 3,442 | | | 105 | | | 3,311 | | | 376 | | | 6,753 | | | 481 | |
| Asset-backed securities | | 5,145 | | | 48 | | | 4,742 | | | 56 | | | 9,887 | | | 104 | |
| Commercial mortgage-backed securities | | 160 | | | 4 | | | 94 | | | 2 | | | 254 | | | 6 | |
| Residential mortgage-backed securities | | 148 | | | 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 bonds | | 2,332 | | | 60 | | | 126 | | | 3 | | | 2,458 | | | 63 | |
| U.S. public corporate securities | | 3,944 | | | 85 | | | 2,203 | | | 172 | | | 6,147 | | | 257 | |
| U.S. private corporate securities | | 2,283 | | | 44 | | | 1,563 | | | 76 | | | 3,846 | | | 120 | |
| Foreign public corporate securities | | 1,271 | | | 23 | | | 496 | | | 47 | | | 1,767 | | | 70 | |
| Foreign private corporate securities | | 1,466 | | | 33 | | | 5,666 | | | 547 | | | 7,132 | | | 580 | |
| Asset-backed securities | | 3,979 | | | 12 | | | 4,433 | | | 28 | | | 8,412 | | | 40 | |
| Commercial mortgage-backed securities | | 1,193 | | | 10 | | | 164 | | | 4 | | | 1,357 | | | 14 | |
| Residential mortgage-backed securities | | 207 | | | 1 | | | 88 | | | 1 | | | 295 | | | 2 | |
| Total | | $ | 21,898 | | | $ | 437 | | | $ | 15,006 | | | $ | 878 | | | $ | 36,904 | | | $ | 1,315 | |
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-Sale | | Held-to-Maturity |
| | Amortized Cost | | Fair Value | | Amortized Cost, Net of Allowance | | Fair Value |
| (in millions) |
| Fixed maturities: | | | | | | | |
| Due in one year or less | $ | 13,497 | | | $ | 14,096 | | | $ | 117 | | | $ | 118 | |
| Due after one year through five years | 50,428 | | | 53,969 | | | 0 | | | 0 | |
| Due after five years through ten years | 66,321 | | | 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 securities | 15,096 | | | 16,349 | | | 0 | | | 0 | |
| Residential mortgage-backed securities | 2,881 | | | 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:
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Fixed maturities, available-for-sale: | | | | | | | |
| Proceeds from sales(1) | $ | 4,284 | | | $ | 7,190 | | | $ | 14,654 | | | $ | 24,011 | |
| Proceeds from maturities/prepayments | 7,181 | | | 5,315 | | | 17,603 | | | 14,507 | |
| Gross investment gains from sales and maturities | 578 | | | 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/A | | 0 | | | 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. States | | Foreign Government Bonds | | U.S. and Foreign Corporate Securities | | Asset-Backed Securities | | Commercial Mortgage-Backed Securities | | Residential Mortgage-Backed Securities | | Total |
| (in millions) |
| Fixed maturities, available-for-sale: | | | | | | | | | | | | | |
| Balance, beginning of 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 allowance | 0 | | | 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 | |
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. States | | Foreign Government Bonds | | U.S. and Foreign Corporate Securities | | Asset-Backed Securities | | Commercial Mortgage-Backed Securities | | Residential Mortgage-Backed Securities | | Total |
| (in millions) |
| Fixed maturities, available-for-sale: | | | | | | | | | | | | | |
| Balance, beginning of year | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
Additions to allowance for credit losses not previously recorded | 0 | | | 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 allowance | 0 | | | 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. States | | Foreign Government Bonds | | U.S. and Foreign Corporate Securities | | Asset-Backed Securities | | Commercial Mortgage-Backed Securities | | Residential Mortgage-Backed Securities | | Total |
| (in millions) |
| Fixed maturities, held-to-maturity: | | | | | | | | | | | | | |
| Balance, beginning of period | $ | 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. States | | Foreign Government Bonds | | U.S. and Foreign Corporate Securities | | Asset-Backed Securities | | Commercial Mortgage-Backed Securities | | Residential Mortgage-Backed Securities | | Total |
| (in millions) |
| Fixed maturities, held-to-maturity: | | | | | | | | | | | | | |
| Balance, beginning of year | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
Cumulative effect of adoption of ASU 2016-13 | 0 | | | 0 | | | 9 | | | 0 | | | 0 | | | 0 | | | 9 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Balance, end of period | $ | 0 | | | $ | 0 | | | $ | 9 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 9 | |
See Note 2 for additional information about the Company’s methodology for developing our allowance and expected losses.
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.
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, 2020 | | December 31, 2019 |
| | | Amortized Cost or Cost | | Fair Value | | Amortized Cost or Cost | | Fair Value |
| | | (in millions) |
| Short-term investments and cash equivalents | | $ | 1,103 | | | $ | 1,103 | | | $ | 277 | | | $ | 277 | |
| Fixed maturities: | | | | | | | | |
| Corporate securities | | 14,060 | | | 14,909 | | | 13,143 | | | 13,603 | |
| Commercial mortgage-backed securities | | 1,845 | | | 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 bonds | | 889 | | | 898 | | | 802 | | | 814 | |
| U.S. government authorities and agencies and obligations of U.S. states | | 358 | | | 438 | | | 341 | | | 397 | |
| Total fixed maturities(3) | | 19,907 | | | 21,033 | | | 18,904 | | | 19,530 | |
| Equity securities | | 1,603 | | | 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:
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2020 | | December 31, 2019 |
| | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | | (in millions) |
| Investments in Japanese government and government agency securities: | | | | | | | | |
| Fixed maturities, available-for-sale | | $ | 77,749 | | | $ | 90,480 | | | $ | 74,118 | | | $ | 89,546 | |
| Fixed maturities, held-to-maturity | | 892 | | | 1,148 | | | 869 | | | 1,143 | |
| Fixed maturities, trading | | 24 | | | 24 | | | 23 | | | 23 | |
| Assets supporting experience-rated contractholder liabilities | | 826 | | | 831 | | | 653 | | | 664 | |
| | | | | | | | |
| | | | | | | | |
| Total | | $ | 79,491 | | | $ | 92,483 | | | $ | 75,663 | | | $ | 91,376 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2020 | | December 31, 2019 |
| | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | | (in millions) |
| Investments in South Korean government and government agency securities: | | | | | | | | |
| Fixed maturities, available-for-sale | | $ | 26 | | | $ | 34 | | | $ | 10,823 | | | $ | 13,322 | |
| | | | | | | | |
| | | | | | | | |
| Assets supporting experience-rated contractholder liabilities | | 15 | | | 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.
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, 2020 | | December 31, 2019 |
| | | Amount (in millions) | | % of Total | | Amount (in millions) | | % of Total |
| Commercial mortgage and agricultural property loans by property type: | | | | | | | | |
| Office | | $ | 12,677 | | | 19.9 | % | | $ | 13,462 | | | 21.4 | % |
| Retail | | 7,677 | | | 12.0 | | | 8,379 | | | 13.3 | |
| Apartments/Multi-Family | | 18,385 | | | 28.8 | | | 17,348 | | | 27.6 | |
| Industrial | | 13,639 | | | 21.4 | | | 13,226 | | | 21.1 | |
| Hospitality | | 2,390 | | | 3.7 | | | 2,415 | | | 3.9 | |
| Other | | 5,051 | | | 7.9 | | | 4,533 | | | 7.2 | |
| Total commercial mortgage loans | | 59,819 | | | 93.7 | | | 59,363 | | | 94.5 | |
| Agricultural property loans | | 4,015 | | | 6.3 | | | 3,472 | | | 5.5 | |
| Total commercial mortgage and agricultural property loans | | 63,834 | | | 100.0 | % | | 62,835 | | | 100.0 | % |
| Allowance for credit losses | | (227) | | | | | (117) | | | |
| Total net commercial mortgage and agricultural property loans | | 63,607 | | | | | 62,718 | | | |
| Other loans: | | | | | | | | |
| Uncollateralized loans | | 723 | | | | | 656 | | | |
| Residential property loans | | 104 | | | | | 124 | | | |
| Other collateralized loans | | 115 | | | | | 65 | | | |
| Total other loans | | 942 | | | | | 845 | | | |
| Allowance for credit losses | | (8) | | | | | (4) | | | |
| Total net other loans | | 934 | | | | | 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%).
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) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Other | | 0 | | | 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 2016-13 | | 110 | | | 5 | | | 0 | | | 0 | | | 0 | | | 115 | |
| Addition to (release of) allowance for expected losses | | 1 | | | 1 | | | 0 | | | 0 | | | 1 | | | 3 | |
| | | | | | | | | | | | |
| Write-downs charged against the allowance | | (7) | | | 0 | | | 0 | | | 0 | | | 0 | | | (7) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Other | | 0 | | | 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:
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| Amortized Cost by Origination Year |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans | | Total |
| (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 greater | 0 | | | 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 - 1.2x | 114 | | | 518 | | | 453 | | | 241 | | | 286 | | | 1,499 | | | 0 | | | 3,111 | |
| Less than 1.0x | 1 | | | 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 greater | 0 | | | 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 - 1.2x | 10 | | | 0 | | | 1 | | | 59 | | | 5 | | | 5 | | | 0 | | | 80 | |
| Less than 1.0x | 0 | | | 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 | | < 1.0X | | Total |
| | (in millions) |
| Loan-to-Value Ratio: | | |
| 0%-59.99% | | $ | 31,027 | | | $ | 701 | | | $ | 217 | | | $ | 31,945 | |
| 60%-69.99% | | 17,090 | | | 1,145 | | | 42 | | | 18,277 | |
| 70%-79.99% | | 8,020 | | | 719 | | | 28 | | | 8,767 | |
| 80% or greater | | 209 | | | 143 | | | 22 | | | 374 | |
| Total commercial mortgage loans | | $ | 56,346 | | | $ | 2,708 | | | $ | 309 | | | $ | 59,363 | |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Agricultural property loans | | | | | | | | |
| | | December 31, 2019 |
| | Debt Service Coverage Ratio | | |
| | | >1.2X | | 1.0X to <1.2X | | < 1.0X | | Total |
| | | (in millions) |
| Loan-to-Value Ratio: | | |
| 0%-59.99% | | $ | 3,289 | | | $ | 57 | | | $ | 14 | | | $ | 3,360 | |
| 60%-69.99% | | 112 | | | 0 | | | 0 | | | 112 | |
| 70%-79.99% | | 0 | | | 0 | | | 0 | | | 0 | |
| 80% or greater | | 0 | | | 0 | | | 0 | | | 0 | |
| Total agricultural property loans | | $ | 3,401 | | | $ | 57 | | | $ | 14 | | | $ | 3,472 | |
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 |
| | | Current | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due(1) | | Total Past Due | | Total Loans | | Non-Accrual Status(2) |
| | | (in millions) |
| Commercial mortgage loans | | $ | 59,794 | | | $ | 0 | | | $ | 24 | | | $ | 1 | | | $ | 25 | | | $ | 59,819 | | | $ | 27 | |
| Agricultural property loans | | 4,014 | | | 0 | | | 0 | | | 1 | | | 1 | | | 4,015 | | | 15 | |
| Residential property loans | | 102 | | | 1 | | | 0 | | | 1 | | | 2 | | | 104 | | | 1 | |
| Other collateralized loans | | 115 | | | 0 | | | 0 | | | 0 | | | 0 | | | 115 | | | 0 | |
| Uncollateralized loans | | 723 | | | 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 |
| | | Current | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due(1) | | Total Past Due | | Total Loans | | Non-Accrual Status(2) |
| | | (in millions) |
| Commercial mortgage loans | | $ | 59,363 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 59,363 | | | $ | 44 | |
| Agricultural property loans | | 3,458 | | | 1 | | | 0 | | | 13 | | | 14 | | | 3,472 | | | 13 | |
| Residential property loans | | 121 | | | 1 | | | 0 | | | 2 | | | 3 | | | 124 | | | 2 | |
| Other collateralized loans | | 65 | | | 0 | | | 0 | | | 0 | | | 0 | | | 65 | | | 0 | |
| Uncollateralized loans | | 656 | | | 0 | | | 0 | | | 0 | | | 0 | | | 656 | | | 0 | |
| Total | | $ | 63,663 | | | $ | 2 | | | $ | 0 | | | $ | 15 | | | $ | 17 | | | $ | 63,680 | | | $ | 59 | |
__________
(1)As of December 31, 2019, there were no loans in this category accruing interest.
(2)For additional information regarding the Company’s policies for accruing interest on loans, see Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
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, 2020 | | December 31, 2019 |
| | | (in millions) |
| LPs/LLCs: | | | | |
| Equity method: | | | | |
| Private equity | | $ | 4,139 | | | $ | 3,625 | |
| Hedge funds | | 2,333 | | | 1,947 | |
| Real estate-related | | 1,409 | | | 1,372 | |
| Subtotal equity method | | 7,881 | | | 6,944 | |
| Fair value: | | | | |
| Private equity | | 1,679 | | | 1,705 | |
| Hedge funds | | 1,965 | | | 2,172 | |
| Real estate-related | | 333 | | | 336 | |
| Subtotal fair value | | 3,977 | | | 4,213 | |
| Total LPs/LLCs | | 11,858 | | | 11,157 | |
| Real estate held through direct ownership(1) | | 2,517 | | | 2,388 | |
| Derivative instruments | | 1,201 | | | 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 securities | 17 | |
| Commercial mortgage and other loans | 203 | |
| Policy loans | 289 | |
| Other invested assets | 28 | |
| Short-term investments and cash equivalents | 6 | |
| 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.
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, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | (in millions) |
| Fixed maturities, available-for-sale(1) | | $ | 3,113 | | | $ | 3,191 | | | $ | 9,292 | | | $ | 9,429 | |
| Fixed maturities, held-to-maturity(1) | | 59 | | | 58 | | 176 | | | 173 | |
| Fixed maturities, trading | | 32 | | | 37 | | 100 | | | 109 | |
| Assets supporting experience-rated contractholder liabilities | | 179 | | | 191 | | 527 | | | 558 | |
| Equity securities | | 36 | | | 38 | | 119 | | | 119 | |
| Commercial mortgage and other loans | | 608 | | | 636 | | 1,866 | | | 1,863 | |
| Policy loans | | 147 | | | 160 | | 450 | | | 463 | |
| | | | | | | | |
| Other invested assets | | 415 | | | 251 | | 693 | | | 727 | |
| Short-term investments and cash equivalents | | 30 | | | 123 | | 182 | | | 356 | |
| Gross investment income | | 4,619 | | | 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, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | (in millions) |
| Fixed maturities(1) | | $ | 401 | | | $ | 360 | | | $ | 671 | | | $ | 689 | |
| Commercial mortgage and other loans | | 41 | | | 20 | | | 65 | | | 34 | |
| Investment real estate | | 5 | | | 38 | | | 15 | | | 38 | |
| LPs/LLCs | | 8 | | | 2 | | | 2 | | | (1) | |
| Derivatives | | (537) | | | 433 | | | (2,926) | | | (1,010) | |
| Other | | 3 | | | 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.
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/A | | 44,279 | |
| Fixed maturity securities, available-for-sale with an allowance | (23) | | | N/A |
| Fixed maturity securities, available-for-sale without an allowance | 54,480 | | | 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, 2020 | | December 31, 2019 |
| Remaining Contractual Maturities of the Agreements | | | | | | Remaining Contractual Maturities of the Agreements | | | | |
| Overnight & Continuous | | Up to 30 Days | | | | Total | | Overnight & Continuous | | Up to 30 Days | | | | Total |
| (in millions) |
U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 9,944 | | | $ | 553 | | | | | $ | 10,497 | | | $ | 9,431 | | | $ | 0 | | | | | $ | 9,431 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Residential mortgage-backed securities | 377 | | | 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.
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, 2020 | | December 31, 2019 |
| Remaining Contractual Maturities of the Agreements | | | | Remaining Contractual Maturities of the Agreements | | |
| Overnight & Continuous | | Up to 30 Days | | Total | | Overnight & Continuous | | Up to 30 Days | | Total |
| (in millions) |
U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 9 | | | $ | 0 | | | $ | 9 | |
Obligations of U.S. states and their political subdivisions | 108 | | | 0 | | | 108 | | | 33 | | | 0 | | | 33 | |
| Foreign government bonds | 353 | | | 0 | | | 353 | | | 244 | | | 0 | | | 244 | |
| U.S. public corporate securities | 2,161 | | | 0 | | | 2,161 | | | 2,996 | | | 0 | | | 2,996 | |
| Foreign public corporate securities | 425 | | | 0 | | | 425 | | | 762 | | | 0 | | | 762 | |
| Commercial mortgage-backed securities | 0 | | | 0 | | | 0 | | | 2 | | | 0 | | | 2 | |
| | | | | | | | | | | |
| Equity securities | 24 | | | 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-maturity | 85 | | | 83 | | | 863 | | | 839 | |
| Fixed maturities, trading | 1,081 | | | 1,112 | | | 0 | | | 0 | |
| Assets supporting experience-rated contractholder liabilities | 0 | | | 0 | | | 1 | | | 4 | |
| Equity securities | 44 | | | 47 | | | 0 | | | 0 | |
| Commercial mortgage and other loans | 976 | | | 883 | | | 0 | | | 0 | |
| Other invested assets | 2,502 | | | 2,199 | | | 152 | | | 89 | |
| Cash and cash equivalents | 140 | | | 166 | | | 0 | | | 0 | |
| Accrued investment income | 6 | | | 4 | | | 4 | | | 4 | |
| Other assets | 424 | | | 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 | |
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.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Primary Underlying Risk /Instrument Type | September 30, 2020 | | December 31, 2019 |
| | | Fair Value | | | | Fair Value |
| Gross Notional | | Assets | | Liabilities | | Gross Notional | | Assets | | Liabilities |
| | (in millions) |
| Derivatives Designated as Hedge Accounting Instruments: | | | | | | | | | | | |
| Interest Rate | | | | | | | | | | | |
| Interest Rate Swaps | $ | 3,101 | | | $ | 1,128 | | | $ | (100) | | | $ | 3,257 | | | $ | 628 | | | $ | (73) | |
| Interest Rate Forwards | 249 | | | 11 | | | (2) | | | 205 | | | 4 | | | (1) | |
| Foreign Currency | | | | | | | | | | | |
| Foreign Currency Forwards | 2,194 | | | 51 | | | (48) | | | 1,461 | | | 22 | | | (57) | |
| Currency/Interest Rate | | | | | | | | | | | |
| Foreign Currency Swaps | 21,885 | | | 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 Futures | 16,651 | | | 12 | | | (77) | | | 17,095 | | | 4 | | | (38) | |
| Interest Rate Options | 13,418 | | | 1,353 | | | (257) | | | 16,496 | | | 339 | | | (238) | |
| Interest Rate Forwards | 3,077 | | | 22 | | | 0 | | | 2,218 | | | 18 | | | (3) | |
| Foreign Currency | | | | | | | | | | | |
| Foreign Currency Forwards | 36,539 | | | 746 | | | (517) | | | 26,604 | | | 208 | | | (214) | |
| Foreign Currency Options | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Currency/Interest Rate | | | | | | | | | | | |
| Foreign Currency Swaps | 14,164 | | | 814 | | | (355) | | | 13,874 | | | 740 | | | (345) | |
| Credit | | | | | | | | | | | |
| Credit Default Swaps | 1,667 | | | 10 | | | (23) | | | 798 | | | 21 | | | 0 | |
| Equity | | | | | | | | | | | |
| Equity Futures | 7,742 | | | 7 | | | (31) | | | 1,802 | | | 0 | | | (3) | |
| Equity Options | 46,829 | | | 854 | | | (403) | | | 32,657 | | | 679 | | | (765) | |
| Total Return Swaps | 24,407 | | | 134 | | | (409) | | | 18,218 | | | 6 | | | (636) | |
| Other | | | | | | | | | | | |
| Other(1) | 1,262 | | | 0 | | | 0 | | | 1,258 | | | 0 | | | 0 | |
| Synthetic GICs | 84,088 | | | 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.
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, 2020 | | December 31, 2019 | |
| Balance Sheet Line Item in which Hedged Item is Recorded | Carrying Amount of the Hedged Assets (Liabilities) | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets (Liabilities)(1) | | Carrying Amount of the Hedged Assets (Liabilities) | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets (Liabilities)(1) | |
| | | | | | | | |
| (in millions) |
| Fixed maturities, available-for-sale, at fair value | $ | 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 resell | 641 | | | 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 repurchase | 10,874 | | | 0 | | | 10,874 | | | (10,874) | | | 0 | |
| Total liabilities | $ | 23,631 | | | $ | (12,190) | | | $ | 11,441 | | | $ | (11,014) | | | $ | 427 | |
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | Gross Amounts of Recognized Financial Instruments | | Gross Amounts Offset in the Statements of Financial Position | | Net Amounts Presented in the Statements of Financial Position | | Financial Instruments/ Collateral(1) | | Net Amount |
| | (in millions) |
| Offsetting of Financial Assets: | | | | | | | | | |
| Derivatives(1) | $ | 14,303 | | | $ | (13,519) | | | $ | 784 | | | $ | (607) | | | $ | 177 | |
| Securities purchased under agreement to resell | 1,012 | | | 0 | | | 1,012 | | | (1,012) | | | 0 | |
| Total assets | $ | 15,315 | | | $ | (13,519) | | | $ | 1,796 | | | $ | (1,619) | | | $ | 177 | |
| Offsetting of Financial Liabilities: | | | | | | | | | |
| Derivatives(1) | $ | 7,528 | | | $ | (6,705) | | | $ | 823 | | | $ | (244) | | | $ | 579 | |
| Securities sold under agreement to repurchase | 9,681 | | | 0 | | | 9,681 | | | (9,681) | | | 0 | |
| Total liabilities | $ | 17,209 | | | $ | (6,705) | | | $ | 10,504 | | | $ | (9,925) | | | $ | 579 | |
__________
(1) Amounts exclude the excess of collateral received/pledged from/to the counterparty.
For information regarding the rights of offset associated with the derivative assets and liabilities in the table above, see “—Counterparty Credit Risk” below. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company’s accounting policy for securities repurchase and resale agreements, see Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.
Cash Flow, Fair Value and Net Investment Hedges
The primary derivative 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.
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’ Benefits | | AOCI(1) |
| | (in millions) |
| Derivatives Designated as Hedge Accounting Instruments: | | | | | | | | | | | | | |
| Fair value hedges | | | | | | | | | | | | | |
| Gains (losses) on derivatives designated as hedge instruments: | | | | | | | | | | | | | |
| Interest Rate | $ | 5 | | | $ | (2) | | | $ | 0 | | | $ | 0 | | | $ | (35) | | | $ | (37) | | | $ | 0 | |
| Currency | (1) | | | 0 | | | 0 | | | 0 | | | 0 | | | 15 | | | 0 | |
| Total gains (losses) on derivatives designated as hedge instruments | 4 | | | (2) | | | 0 | | | 0 | | | (35) | | | (22) | | | 0 | |
| Gains (losses) on the hedged item: | | | | | | | | | | | | | |
| Interest Rate | (6) | | | 4 | | | 0 | | | 0 | | | 49 | | | 48 | | | 0 | |
| Currency | 0 | | | 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 | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Currency | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (1) | | | 2 | |
| Total Amortization for Gain (Loss) Excluded from Assessment of the Effectiveness | 0 | | | 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 Rate | 19 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (15) | |
| Currency | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (65) | |
| Currency/Interest Rate | 55 | | | 78 | | | (210) | | | 0 | | | 0 | | | 0 | | | (1,011) | |
| Total gains (losses) on cash flow hedges | 74 | | | 78 | | | (210) | | | 0 | | | 0 | | | 0 | | | (1,091) | |
| Net investment hedges | | | | | | | | | | | | | |
| Currency | (6) | | | 0 | | | 142 | | | 0 | | | 0 | | | 0 | | | (143) | |
| Currency/Interest Rate | 0 | | | 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 | |
| Other | 1 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Embedded Derivatives | 3,254 | | | 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) | |
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’ Benefits | | AOCI(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 | |
| Currency | 1 | | | 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 Rate | 23 | | | 13 | | | 0 | | | 0 | | | (269) | | | (222) | | | 0 | |
| Currency | (1) | | | 1 | | | 0 | | | 0 | | | 0 | | | (17) | | | 0 | |
| Total gains (losses) on hedged item | 22 | | | 14 | | | 0 | | | 0 | | | (269) | | | (239) | | | 0 | |
| Amortization for gains (losses) excluded from assessment of the effectiveness | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Currency | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (1) | | | (1) | |
| Total Amortization for Gain (Loss) Excluded from Assessment of the Effectiveness | 0 | | | 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 Rate | 27 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 29 | |
| Currency | 4 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 27 | |
| Currency/Interest Rate | 121 | | | 239 | | | (17) | | | 0 | | | 0 | | | 0 | | | 519 | |
| Total gains (losses) on cash flow hedges | 152 | | | 239 | | | (17) | | | 0 | | | 0 | | | 0 | | | 575 | |
| Net investment hedges | | | | | | | | | | | | | |
| Currency | (6) | | | 0 | | | 142 | | | 0 | | | 0 | | | 0 | | | (133) | |
| Currency/Interest Rate | 0 | | | 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 Rate | 7,829 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Currency | 186 | | | 0 | | | (5) | | | 0 | | | 0 | | | 0 | | | 0 | |
| Currency/Interest Rate | 337 | | | 0 | | | (1) | | | 0 | | | 0 | | | 0 | | | 0 | |
| Credit | (56) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Equity | (2,028) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Other | 1 | | | 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 | |
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’ Benefits | | AOCI(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 | |
| Currency | 1 | | | 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 Rate | 10 | | | 5 | | | 0 | | | 0 | | | (116) | | | (103) | | | 0 | |
| Currency | (1) | | | 1 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total gains (losses) on hedged item | 9 | | | 6 | | | 0 | | | 0 | | | (116) | | | (103) | | | 0 | |
| Total gains (losses) on fair value hedges net of hedged item | 0 | | | 4 | | | 0 | | | 0 | | | (1) | | | (1) | | | 0 | |
| Cash flow hedges | | | | | | | | | | | | | |
| Interest Rate | 56 | | | 1 | | | 0 | | | 0 | | | 0 | | | 0 | | | (38) | |
| Currency | 3 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 4 | |
| Currency/Interest Rate | 57 | | | 70 | | | 140 | | | 0 | | | 0 | | | 0 | | | 601 | |
| Total gains (losses) on cash flow hedges | 116 | | | 71 | | | 140 | | | 0 | | | 0 | | | 0 | | | 567 | |
| Net investment hedges | | | | | | | | | | | | | |
| Currency | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 9 | |
| Currency/Interest Rate | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total gains (losses) on net investment hedges | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 9 | |
| Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | | | | | | | |
| Interest Rate | 3,356 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Currency | 158 | | | 0 | | | 5 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Currency/Interest Rate | 364 | | | 0 | | | 2 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Credit | 4 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Equity | (133) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Other | 0 | | | 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 instruments | 322 | | | 0 | | | 7 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | $ | 438 | | | $ | 75 | | | $ | 147 | | | $ | 0 | | | $ | (1) | | | $ | (1) | | | $ | 576 | |
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’ Benefits | | AOCI(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 | |
| Currency | 2 | | | 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 Rate | 21 | | | 16 | | | 0 | | | 0 | | | (280) | | | (222) | | | 0 | |
| Currency | (1) | | | 2 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total gains (losses) on hedged item | 20 | | | 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 Rate | 55 | | | 1 | | | 0 | | | 0 | | | 0 | | | 0 | | | (16) | |
| Currency | 5 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 9 | |
| Currency/Interest Rate | 96 | | | 207 | | | 135 | | | 0 | | | 0 | | | 0 | | | 771 | |
| Total gains (losses) on cash flow hedges | 156 | | | 208 | | | 135 | | | 0 | | | 0 | | | 0 | | | 764 | |
| Net investment hedges | | | | | | | | | | | | | |
| Currency | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 12 | |
| Currency/Interest Rate | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total gains (losses) on net investment hedges | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 12 | |
| Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | | | | | | | |
| Interest Rate | 7,090 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Currency | 242 | | | 0 | | | 4 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Currency/Interest Rate | 568 | | | 0 | | | 2 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Credit | 107 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Equity | (2,560) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Other | 0 | | | 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.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:
| | | | | |
| | (in millions) |
| Balance, December 31, 2019 | $ | 832 | |
| Amount recorded in AOCI | |
| Interest Rate | 56 | |
| Currency | 31 | |
| Currency/Interest Rate | 862 | |
| Total amount recorded in AOCI | 949 | |
| 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.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| NAIC Rating Designation of Underlying Credit Obligation(1) |
| NAIC 1 | NAIC 2 | NAIC 3 | NAIC 4 | NAIC 5 | NAIC 6 | Total |
| Gross Notional | Fair Value | Gross Notional | Fair Value | Gross Notional | Fair Value | Gross Notional | Fair Value | Gross Notional | Fair Value | Gross Notional | Fair Value | Gross Notional | Fair Value |
| (in millions) |
| Single name reference(2) | $ | 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 | |