Form: 10-K

Annual report [Section 13 and 15(d), not S-K Item 405]

Documents

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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________ 
FORM 10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED December 31, 2020
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM              TO             
COMMISSION FILE NUMBER 001-16707
____________________________________________ 
Prudential Financial, Inc.
(Exact Name of Registrant as Specified in its Charter)
New Jersey 22-3703799
(State or Other Jurisdiction of
Incorporation or Organization)		 (I.R.S. Employer
Identification Number)
751 Broad Street
Newark, NJ 07102
(973) 802-6000
(Address and Telephone Number of Registrant’s Principal Executive Offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each ClassTrading Symbols(s)Name of Each Exchange on Which Registered
Common Stock, Par Value $.01PRUNew York Stock Exchange
5.625% Junior Subordinated NotesPRSNew York Stock Exchange
4.125% Junior Subordinated NotesPFHNew York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☒    No  ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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  ☒    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  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2020, the aggregate market value of the registrant’s Common Stock (par value $0.01) held by non-affiliates of the registrant was $24.03 billion and 395 million shares of the Common Stock were outstanding. As of January 31, 2021, 397 million shares of the registrant’s Common Stock (par value $0.01) were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from the Registrant’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 11, 2021, to be filed by the Registrant with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the year ended December 31, 2020.

Table of Contents
TABLE OF CONTENTS
 
   Page
PART IItem 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART IIItem 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART IIIItem 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IVItem 15.
Item 16.
 
Forward-Looking Statements

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

Table of Contents
Throughout this Annual Report on Form 10-K, “Prudential Financial” and the “Registrant” refer to Prudential Financial, Inc., the ultimate holding company for all of our companies. “PICA” refers to The Prudential Insurance Company of America. “Prudential,” the “Company,” “we” and “our” refer to our consolidated operations.

PART I
ITEM 1.BUSINESS
 
Table of Contents
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Table of Contents

Overview
 
Prudential Financial, Inc. (“Prudential Financial” or “PFI”), a financial wellness leader and premier global investment manager with approximately $1.721 trillion of assets under management as of December 31, 2020, has operations in the United States, Asia, Europe and Latin America. Through our subsidiaries and affiliates, we offer a wide array of financial products and services, including life insurance, annuities, retirement-related products and services, mutual funds and investment management. We offer these products and services to individual and institutional customers through proprietary and third-party distribution networks. Our principal executive offices are located in Newark, New Jersey, and Prudential Financial’s Common Stock is publicly traded on the New York Stock Exchange under the ticker symbol “PRU”.
 
On December 18, 2001, PICA converted from a mutual life insurance company owned by its policyholders to a stock life insurance company and became a wholly-owned subsidiary of Prudential Financial. The demutualization was carried out under PICA’s Plan of Reorganization, which required us to establish and operate a regulatory mechanism known as the “Closed Block.” The Closed Block includes certain in-force participating insurance and annuity products and corresponding assets that are used for the payment of benefits and policyholders’ dividends on these products, as well as certain related assets and liabilities.

Our principal operations consist of PGIM (our global investment management business), our U.S. Businesses (consisting of our U.S. Workplace Solutions, U.S. Individual Solutions, and Assurance IQ divisions), our International Businesses, the Closed Block division and our Corporate and Other operations. The U.S. Workplace Solutions division consists of our Retirement and Group Insurance businesses; the U.S. Individual Solutions division consists of our Individual Annuities and Individual Life businesses; and the Assurance IQ division consists of our Assurance IQ business, which we acquired in October 2019. See Note 1 to the Consolidated Financial Statements for additional information related to this acquisition. The Closed Block division is accounted for as a divested business that is reported separately from the Divested and Run-off Businesses that are included in Corporate and Other. Divested and Run-off Businesses are composed of businesses that have been, or will be, sold or exited, including businesses that have been placed in wind-down status that do not qualify for “discontinued operations” accounting treatment under generally accepted accounting principles in the United States of America (“U.S. GAAP”). Our Corporate and Other operations include corporate items and initiatives that are not allocated to business segments, and the Divested and Run-off Businesses as described above. See Note 22 to the Consolidated Financial Statements for revenues, income and loss, and total assets by segment.

Our strategy centers on our mix of high-quality protection, retirement and investment management businesses which creates growth potential due to earnings diversification and the opportunity to provide customers with integrated cross-business solutions, as well as capital benefits from a balanced risk profile. We are well-positioned to meet the needs of customers and tap into significant market opportunities through PGIM, our U.S. Businesses and our International Businesses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.

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PGIM

Provides investment management services and solutions related to public fixed income, public equity, real estate debt and equity, private credit and other alternatives, and multi-asset class strategies, to institutional and retail clients globally, as well as our general account.
Products

Our products and services are offered through the following seven businesses: 

•PGIM Fixed Income - provides global active asset management services across public fixed income markets.
•Jennison Associates - provides active fundamental public equity and fixed income asset management services across an array of growth, value, global and specialty equity strategies, as well as long-duration fixed income strategies.
•QMA - provides systematic quantitative equity and global multi-asset strategies as well as customized client solutions.
•PGIM Private Capital - provides private credit solutions across the risk spectrum including investment grade, high yield, direct lending and mezzanine financing.
•PGIM Real Estate - provides a broad range of public and private real estate debt and equity strategies.
•PGIM Investments - manufactures and services retail investment management products primarily utilizing PGIM’s asset managers across U.S. and European retail markets.
•PGIM Global Partners - operates local asset management businesses in Taiwan and India, and has interests in asset management operating joint ventures in China and Italy. Each of these businesses serves both individual and institutional clients.
 
We hold co- and seed investments in some of our investment products for regulatory purposes to co-invest alongside clients or to seed new products or investment strategies to develop a track record.

Marketing and Distribution

We primarily distribute products through the following channels:

•Institutional
◦Proprietary sales force for each PGIM business with independent marketing and client service teams.
◦PGIM’s Institutional Relationship Group, which develops relationships with, and introduces PGIM’s broad capabilities to, large institutions globally.

•Retail
◦Third-party intermediaries and product manufacturers/distributors globally who include our investment options in their products and platforms.
◦Distribution channels associated with other Prudential business segments.
◦Licensed sales professionals within Prudential Advisors, Prudential’s proprietary nationwide sales organization.

•General Account
◦Provide investment management services across a broad array of asset classes for our general account.






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PGIM (Continued)
Revenues and Profitability
Our revenues primarily come from:
•Asset management fees which are typically calculated based upon a percentage of assets under management. In certain asset management arrangements, we also receive performance-based incentive fees when the return on the managed assets exceeds certain benchmark returns or other performance targets.
•Transaction fees earned in connection with the structuring, sale or purchase of assets, primarily related to real estate and private fixed income.
•Investment returns from co- and seed investing.
•Revenues from commercial mortgage origination and servicing.

Our profitability is substantially impacted by:
•Macro market movements (e.g., interest rates, credit spreads and equity market performance).
•Our ability to achieve investment returns above the target benchmarks.
•Our ability to attract and retain client investments.




Competition
We compete with numerous asset managers and other financial institutions. For our investment management products, we compete based on a number of factors, including investment performance, strategy and process, talent, organizational stability and client relationships.

We offer products across multiple asset classes, with specialized investment teams that employ approaches designed to add value in each product area or asset class. Our organizational stability and robust institutional and retail businesses have helped attract and retain talent critical to delivering investment results for clients. Our private credit and commercial real estate lending businesses compete based on price, terms, execution and the strength of our relationship with the borrower.








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U.S. Businesses—U.S. Workplace Solutions Division
Retirement
Develops and distributes retirement investment and income products and services to retirement plan sponsors in the public, private and not-for-profit sectors.
Products
We offer a variety of products and services through the following two businesses:
Full Service
•A broad range of products and services to assist in the design, delivery and administration of defined contribution, defined benefit and non-qualified retirement plans, and retail Individual Retirement Accounts (“IRA”).
•Recordkeeping and administrative services, actuarial consulting services, tailored participant education and communication services, comprehensive investment offerings and consulting services to assist retirement plan sponsors in managing fiduciary obligations.
•General Account and Separate Account Stable Value products - generally contain an obligation to credit interest at a specified rate for a specified period of time and to repay account balances over time, or market value upon contract termination. These products are either fully or partially participating with annual or semi-annual rate resets subject to certain contractual minimums, giving effect to previous investment experience and other factors depending on the products.
•Other investment products - include fee-based products through which customer funds are held in separate accounts, retail mutual funds, institutional funds or bank collective trusts advised by affiliated and non-affiliated investment managers, as well as synthetic guaranteed investment contracts, and guaranteed minimum withdrawal benefit products.

Institutional Investment Products
•Payout Annuities: products that provide a predictable source of monthly income, generally for the life of the annuitant.
◦Pension risk transfer - non-participating group annuity insurance and reinsurance contracts issued to pension plan sponsors and intermediaries, under which we assume all investment and actuarial risk associated with a group of specified participants within a plan in return for a premium typically paid as a lump-sum at inception.
◦Pension risk transfer - longevity reinsurance contracts with counterparties from which we earn a fee for assuming the longevity risk of pension plans that have been insured by third-parties. Premiums for these products are typically paid over the duration of the contract as opposed to a lump-sum at inception.
Products (continued)
•Stable Value: products where our obligations are backed by our general account, where we bear some or all of the investment and asset-liability management risk, depending on the product.
◦Investment-only products - for use in institutional capital markets and qualified plans primarily including fee-based wraps through which customers’ funds are held in a client-owned trust and investment results pass through to the customer. We earn fee revenue for providing a guaranteed minimum interest rate backed by the general account.
◦Guaranteed Investment Contracts and Funding Agreements - contain an obligation to pay interest at a specified rate and to repay principal at maturity or following contract termination.
•Other products: include structured settlements and other group annuities.

Marketing and Distribution
We primarily distribute products through the following channels for the two businesses:
Full Service
•Proprietary sales and support teams.
•Third-party financial advisors, brokers, benefits consultants, and investment consultants.
•Directly to plan sponsors.

Institutional Investment Products
•Pension risk transfer through actuarial consultants and third-party brokers.
•Structured settlements through third-party specialized brokers.
•Voluntary income products and other group annuities through the defined contribution portion of our full service business and directly to plan sponsors.
•Stable value products through our proprietary sales force and third-party intermediaries.


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Retirement (Continued)
Revenues and Profitability

Our revenues primarily come in the form of:
•Premiums associated with insurance and reinsurance contracts and our payout annuities.
•Policy charges and fee income associated with recordkeeping and other administrative services, and investment products (including fee-based stable value) that we offer. Policy charges and fee income are primarily based on account values and/or number of participants.
•Investment income (which contributes to the net spread over interest credited on our products and related expenses).

Our profitability is substantially impacted by our ability to appropriately price our products. We price our products based on pricing models that consider the investment environment and our risk, fees, expenses, profitability targets, and assumptions for mortality and potential for early retirement. These assumptions may be less predictable in certain markets.
Competition
We compete with other large, well-established insurance companies, asset managers, recordkeepers and diversified financial institutions.
Full Service - we compete primarily based on:
•Pricing
•Breadth of our service and investment offerings
•Expertise of our employees
•Investment performance
•Technology
•Our ability to offer product features to meet the retirement income needs of our clients
While we continue to have heightened pricing pressures (driven by competition, contractual limits on fee income, the influence of both intermediaries and regulations requiring more standard and consistent fee disclosures across industry providers), this business has experienced strong persistency in recent years.

Institutional Investment Products - we compete primarily based on:
•Pricing
•Structuring capabilities
•Our ability to offer innovative product solutions and successfully execute large-scale transactions
We are a leader in providing innovative pension risk management solutions to plan sponsors and in the stable value market. We believe the pension risk transfer market continues to offer attractive opportunities that are aligned with our expertise.


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U.S. Businesses—U.S. Workplace Solutions Division
Group Insurance
 
Develops and distributes a full range of group life, long-term and short-term group disability, and group corporate-, bank- and trust-owned life insurance in the U.S. primarily to institutional clients for use in connection with employee and membership benefits plans. Also sells accidental death and dismemberment and other supplemental health solutions and provides plan administration services in connection with its insurance coverages.
Products

We offer a variety of products and services through the following two businesses:

Group Life Insurance

•Employer-paid and employee-paid coverages for term life insurance, group universal life, group variable universal life, basic and optional accidental death and dismemberment insurance. Many of our employee-paid coverages allow employees to retain their coverage when they change employers or retire, and we offer waiver of premium coverage where required premiums are waived in the event the insured suffers a qualifying disability.
 
•Group corporate-, bank- and trust-owned life insurance in the form of group variable life insurance contracts utilizing separate accounts. These products are typically used by large corporations to fund deferred compensation plans and benefit plans for retired employees.

Group Disability Insurance

•Short-term and long-term group disability insurance, which protect against loss of wages due to illness or injury. Short-term disability generally provides weekly benefits for three to six months while long-term disability benefits are typically paid monthly, following a waiting period, and generally continue until the insured returns to work or reaches normal retirement age.
 
•Plan administration and absence management services.

Marketing and Distribution

We primarily distribute products through a proprietary sales force organized around market segments in conjunction with employee benefit brokers and consultants.

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Group Insurance (Continued)

Revenues and Profitability

Our revenues primarily come in the form of:

•Premiums and policy charges for our group life and group disability products.

•Investment income (which contributes to the net spread over interest credited on our products and related expenses).

Our profitability is substantially impacted by our ability to appropriately price our products, many of which include multiple year premium rate guarantees. We price our products based on:

•Underwriting practices and rating systems that consider company, industry and/or other experience.
 
•The expected pay-out of benefits and other costs that we calculate using assumptions for mortality and morbidity rates, interest rates and expenses, depending upon the specific product features.

Competition

We compete with other large, well-established life and health insurance providers in mature markets. We compete primarily based on brand recognition, service capabilities, customer relationships, financial strength, our range of product offerings and price. Our pricing of group insurance products is reflective of the large number of competitors in the marketplace. The majority of our premiums are derived from the National segment, which consists of large corporations, affinity groups and other organizations having over 5,000 insured individuals. We are seeking to grow our client base within the Premier segment, which consists of corporations, affinity groups and other organizations that have between 100 and 5,000 individuals. Employee-paid coverage is important as employers attempt to control costs and shift benefit decisions and funding to employees who continue to value workplace benefits. Our profitability is dependent, in part, on the voluntary coverage marketplace, which will be affected by future employment and compensation rates.
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U.S. Businesses—U.S. Individual Solutions Division
Individual Annuities

Develops and distributes individual variable and fixed annuity products, primarily to U.S. mass affluent (households with investable assets or annual income in excess of $100,000) and affluent (households with investable assets in excess of $250,000) customers with a focus on innovative product design and risk management strategies.
Products
We offer a variety of products to serve different retirement needs and goals:
Variable Annuities
•The Prudential Premier® Investment Variable Annuity (“PPI”) offers tax-deferred asset accumulation, annuitization options and an optional death benefit that guarantees the contractholder’s beneficiary a return of total purchase payments made to the contract, adjusted for any partial withdrawals, upon death.
•MyRockSM Advisors, a fee-based variable annuity launched in August 2019. In April of 2020, an optional Dynamic Income Benefit (“IB”) rider was added that provides longevity protection through a preset withdrawal percentage applied to a variable income base. In addition, the product offers either a basic death benefit, or a Return of Purchase Payment (“ROP”) death benefit. Both the IB and the ROP are available for an additional fee.
Indexed Variable Annuities
•The Prudential FlexGuardSM indexed variable annuity, launched in May 2020, offers the contractholder an opportunity to allocate funds to variable subaccounts and index-based strategies. The strategies provide interest or an interest component linked to, but not an investment in, the selected index, and its performance over the elected term, subject to certain contractual minimums and maximums, and also provides varying levels of downside protection at pre-determined levels and durations. The product also allows for additional deposits and provides an ROP death benefit at no additional charge.
Discontinued Variable Annuities
•The Prudential Premier® Retirement Variable Annuity with Highest Daily Lifetime Income (“HDI”) offers lifetime income based on the highest daily account value plus a compounded deferral credit. Sales of this product have been discontinued as of December 31, 2020.
•The Prudential Premier® Retirement Variable Annuity with Legacy Protection Plus (“LPP”) provides an optional enhanced death benefit based on the purchase payments rolling up at a preset rate on an annual basis until certain events occur, such as the death of the first owner (or annuitant if entity-owned) or the roll-up cap is reached. Sales of this product have been discontinued as of December 31, 2020.
•The Prudential Defined Income® (“PDI”) Variable Annuity provides for guaranteed lifetime withdrawal payments but restricts contractholder investment to a single bond sub-account within the separate accounts. PDI includes a living benefit rider which provides for a specified lifetime income withdrawal rate applied to total purchase payments made to the contract, subject to annual roll-up increases until lifetime withdrawals commence, but does not have a highest daily benefit feature as discussed above. Sales of this product have been discontinued as of December 31, 2020.
Products (continued)
Fixed Annuities
•PruSecure®, and SurePathSM and SurePathSM Income, all single premium fixed index annuities, offer flexibility to allocate account balances between an index-based strategy and a fixed rate strategy. The index-based strategy provides interest or an interest component linked to, but not an investment in, the selected index, and its performance over the elected term (i.e., 1, 3 or 5 years for PruSecure® and 1 or 3 years for SurePathSM and SurePathSM Income), subject to certain contractual minimums and maximums. The fixed rate strategy, not associated with an index, offers a guaranteed growth at a set interest rate for one year and can be renewed annually. Additionally, SurePathSM Income offers a benefit that provides for guaranteed lifetime withdrawal payments.
•The Prudential Fixed Annuity with Daily Advantage Income BenefitSM (“DAI”), a single premium fixed annuity launched in May 2020, provides principal protection as well as a guaranteed lifetime withdrawal income payment for an additional fee. The lifetime income amount increases daily without exposure to the equity market until the contractholder begins taking withdrawals.
•The Prudential Immediate Income Annuity (“PIIA”), a single premium immediate annuity, provides a regular stream of benefit payments. The payments are guaranteed, cannot be changed and are higher than those guaranteed on products that provide liquidity.

Marketing and Distribution
Our distribution efforts, which are supported by a network of internal and external wholesalers, are executed through a diverse group of distributors including:
•Third-party broker-dealers
•Banks and wirehouses
•Independent financial planners
•Financial professionals, including those associated with Prudential Advisors, Prudential’s proprietary nationwide sales organization
•Independent Marketing Organizations (“IMO”) (specifically for SurePathSM and SurePathSM Income)
•LINK by Prudential, a personalized digital platform that connects customers to insurance professionals, through various channels (online, phone, video chat, or in person)
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Individual Annuities (Continued)
Revenues and Profitability
Our revenues primarily come in the form of:
•Fee income from asset management fees and service fees, which represent administrative service and distribution fees from many of our proprietary and non-proprietary mutual funds. The asset management fees are determined as a percentage of the average assets of our proprietary mutual funds in our variable annuity products (net of sub-advisory expenses related to non-proprietary sub-advisors).
•Policy charges and fee income representing mortality, expense and other fees for various insurance-related options and features based on the average daily net asset value of the annuity separate accounts, account value, premium, or guaranteed value, as applicable.
•Investment income (which contributes to the net spread over interest credited on certain products and related expenses).

Our profitability is substantially impacted by our ability to appropriately price our products. We price our products based on:
•An evaluation of the risks assumed and consideration of applicable risk management strategies, including hedging and reinsurance costs.
•Assumptions regarding investment returns and contractholder behavior, including persistency, benefit utilization and the timing and efficiency of withdrawals for contracts with living benefit features, as well as other assumptions.
Competition
We are among the industry’s largest providers of individual annuities and we compete with other providers of retirement savings and accumulation products, including large, well-established insurance and financial services companies. We believe our competitive advantage lies primarily in our innovative product features and our risk management strategies as well as brand recognition, financial strength, the breadth of our distribution platform and our customer service capabilities.
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U.S. Businesses—U.S. Individual Solutions Division
Individual Life
 
Develops and distributes variable life, universal life and term life insurance products primarily to U.S. mass middle (households with investable assets in excess of $25,000 or annual income in excess of $50,000), mass affluent (households with investable assets or annual income in excess of $100,000) and affluent (households with investable assets in excess of $250,000) customers with a focus on providing life insurance solutions to protect individuals, families and businesses and to support estate and wealth transfer planning.
Products

We offer a variety of products that serve different protection needs and goals:

Variable Life - permanent coverage for life with potential to accumulate policy cash value based on underlying investment options

•Our variable life policies offer flexibility in payment options and the potential to accumulate cash value through a suite of underlying investment options or a fixed rate option.
 
•We offer different types of variable life policies that, in addition to the death benefit, are tailored to prioritize different goals, such as protection with moderate risk, growth with higher risk or legacy giving.

Term Life - coverage for a specified number of years with a guaranteed tax-advantaged death benefit

•Most of our term life policies offer an income tax-free death benefit, guaranteed premiums that will stay the same during the level-premium period and access to the death benefit while the policyholder is still alive to help them if they become terminally ill.

•Most of our term life policies also offer a conversion option that allows the policyholder to convert the policy into a permanent policy that can potentially cover the insured for life.

Universal Life - permanent coverage for life with the potential to accumulate policy cash value

•Our universal life policies offer flexibility in payment options and the potential to accumulate cash value in an account that earns interest based on a crediting rate determined by the Company, subject to contractual minimums.
 
•Indexed universal life policies provide interest credited to the cash value that is linked to, but not an investment in, the performance of an external index over a 1-year period, subject to certain cap and participation rates and contractual minimums/maximums.
Marketing and Distribution

Our distribution efforts, which are supported by a network of internal and external wholesalers, are executed through a diverse group of distributors, including:
 
•Third-party distribution
 
◦Independent brokers
◦Banks and wirehouses
◦General agencies and producer groups

•Prudential Advisors (Prudential’s proprietary nationwide sales organization)

◦Distributes Prudential life insurance, annuities and investment products with proprietary and non-proprietary investment options as well as select insurance, annuities and investment products from other carriers.
 
◦Offers certain retail brokerage and retail investment advisory services (through our dually-registered broker-dealer and investment advisor, Pruco Securities, LLC) including brokerage accounts, discretionary and non-discretionary investment advisory programs and financial planning services.
 
◦Continues to execute a solutions-oriented business model centered around client relationships while strengthening and driving Prudential’s brand promise.
 
◦Receives a market-based allowance from other Prudential business segments for distributing their products, which is eliminated between the segments in consolidation.

•Direct-to-Consumer

◦LINK by Prudential, a personalized digital platform that connects customers to insurance professionals, through various channels (online, phone, video chat, or in person).

◦Assurance IQ, a wholly-owned consumer solutions platform that leverages data science and technology to distribute a proprietary term life product (as well as other third-party health and financial wellness solutions) directly to retail shoppers primarily through its digital and agent channels.
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Individual Life (Continued)
Revenues and Profitability

Our revenues primarily come in the form of:

•Premiums that are fixed in accordance with the terms of the policies.
 
•Policy charges and fee income consisting of in-force policy- and/or asset-based fees.
 
•Investment income (which contributes to the net spread over interest credited on our products and related expenses).

Our profitability is substantially impacted by our ability to appropriately price our products. We price our products based on:

•Our assumptions of mortality and morbidity, persistency, interest rates, expenses, premium payment patterns, separate account fund performance and product generated tax deductions.
Competition

We compete with other large, well-established life insurance companies in a mature market. We compete primarily based on price, service (including the speed and ease of underwriting), distribution channel relationships, brand recognition and financial strength. Due to the large number of competitors, pricing is competitive. We periodically adjust product offerings, prices and features based on the market and our strategy, with a goal of achieving customer and enterprise value across a balanced product portfolio and consistent sales growth.
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U.S. Businesses—Assurance IQ Division
Assurance IQ 
Leverages data science and technology to primarily distribute third-party products (such as Medicare, health, life, property and casualty, and personal finance products) and a proprietary term life product directly to retail shoppers, primarily through its digital and agent channels. Additionally, Assurance IQ may help customers fulfill financial wellness needs by matching them with other product providers or intermediaries.
Products

Assurance IQ primarily distributes the following products:

•Medicare - third-party Medicare Supplement and Medicare Advantage for qualifying Medicare beneficiaries.

•Health Under 65 - third-party primary and supplemental health insurance that cover an individual’s medical and prescription expenses, including product coverage provided under the Affordable Care Act.

•Life - third-party life insurance products, including term life, final expense, and whole life protection, as well as a proprietary term life product. Some carriers’ products allow for accelerated underwriting to enable faster policy placement.

•Property and Casualty - third-party auto and home insurance coverage that indemnifies customers for loss caused by accidents, theft, natural disasters and other events where property damage or financial loss may occur.

•Personal Finance - third-party residential mortgage products for retail borrowers.
Marketing and Distribution

The Assurance IQ business model relies primarily on digital marketing and data science to reach prospective customers (“shoppers”) to, in turn, drive traffic to its distribution platform. Digital marketing includes traffic from various sources such as search, email, and social media. To a lesser extent, we also use traditional forms of marketing such as print and TV.

We primarily distribute products through the following channels:
 
•On Demand Agents - Commission-based, independent agents that are located across the United States. They work remotely, and collectively are licensed to sell various products in all 50 states.

•Hub Agents - Licensed agents employed by Assurance IQ who work in certain strategic locations across the U.S. or via work-at-home arrangements. Agents are compensated through a combination of base and incentive pay.

•Third-Party Agent Call Centers - Assurance IQ may contract with licensed agent call centers as a means of serving shoppers, especially during periods of peak shopper demand (e.g., Medicare annual election period in the fourth quarter).

•Digital - Shoppers can price and purchase many of Assurance IQ’s offerings completely online, without the involvement of an agent.

•Third-Party Case Referrals - Assurance IQ transfers shoppers in the form of calls, clicks and leads to selected marketing partners who may be able to alternatively serve a shopper’s specific needs for life, health, Medicare, property and casualty insurance, and various personal finance products.
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Assurance IQ (Continued)
Revenue

Our revenues primarily come in the form of:

•Commissions received from product manufacturers.

•Case referral revenues earned from marketing partners related to the transfer of calls, clicks or leads.
Competition

We compete with large and small life, health and property and casualty retail distributors, third-party brokers, and other fintech and insurtech companies. We compete based on several factors, including: marketing reach and effectiveness; the ability to effectively match shoppers to the right products and solutions using data science; our capacity to meet shoppers’ demands; and the quality of our technology platform, which optimizes the customer experience and enables agents to efficiently service shoppers.
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International Businesses
 
Develops and distributes life insurance, retirement products and certain accident and health products with fixed benefits to mass affluent and affluent customers through our Life Planner operations in Japan, Brazil, Argentina and Mexico. Also provides similar products through our Gibraltar Life and Other operations to broad middle income and mass affluent customers across Japan, our joint ventures in Chile, China, India and Indonesia, and our strategic investment in Ghana through multiple distribution channels (including banks, independent agencies and Life Consultants).
Products

Our products are classified into the following four categories:

Life Insurance Protection Products - include various traditional whole life products that provide either level or increasing coverage, and that offer limited or lifetime premium payment options. We also offer increasing, decreasing and level benefit term insurance products that provide coverage for a specified time period, as well as protection-oriented variable life products. Some of these protection products are denominated in U.S. dollars and some are sold as bundled products that, in addition to death protection, include health benefits or savings elements.

Retirement Products - include retirement income products that combine insurance protection similar to term life with a lifetime income stream that commences at a predefined age, savings-oriented variable life products that provide a non-guaranteed return linked to an underlying investment portfolio of equity and fixed income funds selected by the customer, and endowments that provide payment of the face amount on the earlier of death or policy maturity.

Annuity Products - primarily represented by U.S. dollar-denominated fixed annuities sold by our Gibraltar Life operations in Japan. Sales and surrenders of non-yen denominated products in Japan can be sensitive to foreign currency relationships which are impacted by, among other things, the comparative interest rates in their respective countries. Most of our fixed annuity products impose a market value adjustment if the contract is not held to maturity.

Accident and Health Products - provide benefits to cover accidental death and dismemberment, hospitalization, surgeries, and cancer and other dread diseases, often sold as supplementary riders and not as stand-alone products. We also offer waiver of premium coverage where required premiums are waived in the event the customer suffers a qualifying disability.
Marketing and Distribution

Our marketing and distribution efforts are conducted through the following proprietary agent models and third-party channels:

Proprietary agent models:

•Life Planners - focuses on selling protection-oriented life insurance products on a needs basis to mass affluent and affluent customers, as well as retirement-oriented products to small businesses. We believe that our recruiting and selection process, training programs and compensation packages are key to the Life Planner model and have helped our Life Planner operations achieve higher levels of agent retention, agent productivity and policy persistency.

•Life Consultants - is a proprietary distribution force for products offered by our Gibraltar Life operations. Their focus is to provide individual protection products to the broad middle income market, primarily in Japan, particularly through relationships with affinity groups. Our Life Consultant operation is based on a variable compensation plan designed to improve productivity and persistency that is similar to compensation plans in our Life Planner operations.

Third-party channels:

•Bank Distribution Channel - sells primarily life insurance products intended to provide savings features, premature death protection and estate planning benefits as well as fixed annuity products primarily denominated in U.S. dollars. We view the bank distribution channel as an adjunct to our core Life Planner and Life Consultant distribution channels. A significant portion of our sales in Japan through our bank distribution channel are derived through a single Japanese mega-bank; however, we have relationships with each of Japan’s four largest banks as well as many regional banks, and we continue to explore opportunities to expand our distribution capabilities through this channel, as appropriate.

•Independent Agency Distribution Channel - sells protection products and high cash value products for retirement benefits through the corporate market and a variety of other products including protection and fixed annuity products through the individual market. Our focus is to maintain a diverse mix of independent agency relationships including corporate agencies and other independent agencies with a balanced focus on individual and corporate markets.
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International Businesses (Continued)
Revenues and Profitability
Our revenues primarily come in the form of:
•Premiums that are fixed or flexible in accordance with the terms of the policies.

•Policy charges and fee income consisting of in-force policy- and/or asset-based fees.
 
•Investment income (which contributes to the net spread over interest credited on our products and related expenses).

Our profitability is substantially impacted by our ability to appropriately price our products. We price our products based on:
•Local regulation, which is generally more restrictive for product offerings, pricing and structure than U.S. insurance regulation. Each international insurance operation has its own underwriting department that employs variations of U.S. practices in underwriting individual policy risks. To the extent permitted by local regulation, we base premiums and policy charges for our products on expected death and morbidity benefits, surrender benefits, expenses, required reserves, interest rates, policy persistency and premium payment patterns. In setting underwriting limits, we also consider local industry standards to prevent adverse selection and to stay abreast of industry trends. In addition, we set underwriting limits together with each operation’s reinsurers.
 
•Achieving a targeted rate of return for each operation, taking into account the country-specific costs of capital, risks, and competitive environment. The profitability of our products is impacted by differences between actual mortality, morbidity, expense, and investment experience and the related assumptions used in pricing these policies. As a result, the profitability of our products can fluctuate from period to period. Changes in local tax laws may also affect profitability.
Competition
The life insurance market in Japan is mature and pricing is competitive. Rather than competing primarily based on price, we generally compete on the basis of customer service, including our needs-based approach to selling, the quality and diversity of our distribution capabilities, and our financial strength. Demographic trends in Japan suggest an increasing opportunity for product innovation, introducing insurance products that allow for savings and income as a growing portion of the population prepares for retirement. The ability to sell through multiple and complementary distribution channels is also a competitive advantage; however, competition for sales personnel, as well as access to third-party distribution channels, is intense.
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Corporate and Other
 
Includes corporate items and initiatives that are not allocated to our business segments as well as businesses that have been or will be divested or placed in wind-down status, except for the Closed Block. Results of the Closed Block, along with certain related assets and liabilities, are reported separately from the Divested and Run-off Businesses included in Corporate and Other.

Corporate Operations - consist primarily of: (1) capital that is not deployed in any business segment; (2) investments not allocated to business segments, including debt-financed investment portfolios, and tax credit and other tax-enhanced investments financed by business segments; (3) capital debt, including any related interest expense and financing costs, that is used or will be used to meet the capital requirements of the Company; (4) our qualified and non-qualified pension and other employee benefit plans, after allocations to business segments; (5) corporate-level activities, after allocations to business segments, including strategic expenditures, acquisition and disposition costs, corporate governance, corporate advertising, philanthropic activities, deferred compensation, costs related to certain contingencies and legal matters; (6) expenses associated with the multi-year plan of programs that span across our businesses and the functional areas that support those businesses; (7) certain retained obligations relating to pre-demutualization policyholders; (8) impacts of risk management activities pursuant to our Risk Appetite Framework; (9) the foreign currency income hedging program used to hedge certain non-U.S. dollar denominated earnings in our International Businesses segment; (10) intercompany arrangements with our International Businesses and PGIM segments to translate non-U.S. dollar-denominated earnings at fixed currency exchange rates; and (11) transactions with and between other segments, including the elimination of intercompany transactions for consolidation purposes.

Divested and Run-off Businesses - reflect the results of businesses that have been, or will be, sold or exited, including businesses that have been placed in wind-down status that do not qualify for “discontinued operations” accounting treatment under U.S. GAAP. We exclude these results from our adjusted operating income. Divested and Run-off Businesses include: 
 
•Long-Term Care - in 2012, we discontinued sales of our individual and group long-term care insurance products. We establish reserves for these products in accordance with U.S. GAAP. We use best estimate assumptions as of the most recent loss recognition date when establishing reserves for future policyholder benefits and expenses, including assumptions for morbidity, mortality, mortality improvement, persistency, expenses and investment returns. Our assumptions also include our estimate of the timing and amount of anticipated future premium rate increases and policyholder benefit reductions which will require approval by state regulatory authorities.

•Other - recent transactions include: (1) in 2020, we sold our Korean insurance business and entered into an agreement to sell our Taiwanese insurance business, subject to regulatory approvals and customary closing conditions; (2) in 2019, we sold our Pramerica of Italy subsidiary; and (3) in 2018, we sold our Pramerica of Poland subsidiary and exited our PGIM Brazil operations, including the sale of our minority interest in a Brazilian asset management joint venture.
 
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Closed Block Division
 
In connection with the demutualization in 2001, we ceased offering domestic participating individual life insurance and annuity products under which policyholders are eligible to receive policyholder dividends reflecting experience. The liabilities for our individual in-force participating products were segregated, together with assets to be used exclusively for the payment of benefits and policyholder dividends, expenses and taxes with respect to these products, in the Closed Block. We selected the amount of assets that were expected to generate sufficient cash flow, together with anticipated revenues from the Closed Block policies, over the life of the Closed Block to fund payments of all policyholder benefits, expenses and taxes, and to provide for the continuation of the policyholder dividend scales that were in effect in 2000, assuming experience underlying such scales continued. No policies sold after demutualization have been added to the Closed Block, and its in-force business is expected to decline as we pay policyholder benefits in full.

The results of the Closed Block, along with certain related assets and liabilities, comprise the Closed Block division, which is treated as a divested business under our definition of adjusted operating income and reported separately from the other Divested and Run-off Businesses that are included in our Corporate and Other.
 
As discussed in Note 15 to the Consolidated Financial Statements, if the performance of the Closed Block is more or less favorable than we originally assumed in funding, total dividends paid to Closed Block policyholders in the future may be greater or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales that were in effect in 2000 had been continued. Any experience in excess of amounts assumed may be available for distribution over time to Closed Block policyholders as part of policyholder dividends unless offset by future Closed Block experience that is less favorable than expected. This excess experience will not be available to shareholders. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from PICA’s assets outside of the Closed Block. A policyholder dividend obligation liability is established for any excess experience. Each year, the Board of Directors of PICA determines the dividends payable on participating policies for the following year based on the experience of the Closed Block, including investment income, net realized and unrealized investment gains and losses, mortality experience and other factors. See Note 22 to the Consolidated Financial Statements for revenues, income and loss, and total assets of the Closed Block division.
 
Our strategy is to maintain the Closed Block as required by our Plan of Reorganization over the time period of its gradual diminution as policyholder benefits are paid in full. We are permitted under the Plan of Reorganization, with the prior consent of the Commissioner of Banking and Insurance for the State of New Jersey, to enter into agreements to transfer all or any part of the risks underlying the Closed Block policies.

 
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Seasonality of Key Financial Items

The following chart summarizes our key areas of seasonality in our results of operations:
First QuarterSecond QuarterThird QuarterFourth Quarter
PGIMHigher compensation expense(1)Other related revenues tend to be higher(2)
RetirementReserve gains higher(3)Reserve gains higher(3)Reserve gains lower(3)Reserve gains lower(3)
Individual
Life		Lowest underwriting gainsHighest underwriting gains
Assurance IQLowest revenueHigher revenue driven by annual Medicare enrollment
International BusinessesHighest premiumsLowest premiums
Corporate &
Other		Higher compensation expense(1)
All
Businesses		Impact of annual assumption update(4)Higher expenses(5)
__________
(1)Long-term compensation expense for retirement eligible employees is recognized when awards are granted, typically in the first quarter of each year.
(2)Other related revenues include incentive fees, transaction fees, co- and seed investing results and commercial mortgage revenues.
(3)Reserve gains are typically higher/lower than the quarterly average. Excludes the impact of annual reviews and update of assumptions and other refinements and market experience updates.
(4)Impact of annual reviews and update of assumptions and other refinements. Excludes PGIM and Assurance IQ.
(5)Expenses are typically higher than the quarterly average in the fourth quarter.

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Reinsurance

We regularly enter into reinsurance agreements as either the ceding entity or the assuming entity. As a ceding entity, exposure to the risks reinsured is reduced by transferring certain rights and obligations of the underlying insurance product to a counterparty. Conversely, as an assuming entity, exposure to the risks reinsured is increased by assuming certain rights and obligations of the underlying insurance products from a counterparty. We enter into reinsurance agreements as the ceding entity for a variety of reasons but primarily do so to reduce exposure to loss, reduce risk volatility, provide additional capacity for future growth and for capital management purposes. Under ceded reinsurance, we remain liable to the underlying policyholder if a third-party reinsurer is unable to meet its obligations. On a Company-wide basis, we evaluate the financial condition of reinsurers, monitor the concentration of counterparty risk and maintain collateral, as appropriate, to mitigate this exposure. We enter into reinsurance agreements as the assuming entity as part of our normal product offering process (e.g., certain pension risk transfer products in the Retirement segment) or in order to facilitate an acquisition of a block of business.

The following table summarizes our use of reinsurance in each of our insurance reporting segments.
SegmentPrimary Type
of Reinsurance		Purpose
RetirementAssumedAssumed reinsurance as part of our reinsurance pension risk transfer products and in conjunction with our 2004 acquisition of CIGNA’s defined benefit and defined contribution business.
Group InsuranceCededCeded reinsurance on most products to limit losses from large claims (in response to client requests and for capital management purposes).
Individual AnnuitiesCeded/Assumed
Ceded reinsurance with both third-party reinsurers and affiliates. The third-party reinsurance includes the following products:
•A portion of HDI v.3.0 variable annuity business issued between April 1, 2015 to December 31, 2016; and
•Certain fixed indexed annuity business (specifically for PruSecure® and SurePathSM) issued effective October 15, 2019. Under U.S. GAAP, this agreement is accounted for under deposit accounting.

Assumed reinsurance in conjunction with our 2006 acquisition of The Allstate Corporation (“Allstate”) variable annuity business as well as internally ceded and assumed reinsurance as part of our risk and capital management activities.
Individual LifeCeded/AssumedCeded reinsurance with both third-party reinsurers and affiliates covering a variety of products to mitigate mortality risk and for capital management purposes. On policies sold since 2000, we have reinsured a significant portion of our mortality risk externally, with that portion varying over time depending on market factors and strategic objectives.

Assumed reinsurance in conjunction with our 2013 acquisition of The Hartford’s individual life insurance business.
International BusinessesCededCeded reinsurance with both third-party reinsurers and affiliates to mitigate mortality and morbidity risk for certain products and for capital management purposes.
Closed BlockCededPICA cedes substantially all of the outstanding liabilities of the Closed Block into a statutory guaranteed separate account of a wholly-owned subsidiary, Prudential Legacy Insurance Company of New Jersey, primarily on a coinsurance basis. The reinsurance transaction provides a long-term and comprehensive capital framework for the Closed Block.

Intangible and Intellectual Property
 
We capture and protect the innovation in our financial services products by applying for federal business method patents and implementing trade secret controls, as appropriate. We also use numerous federal, state, common law and foreign service marks, including in particular “Prudential”, the “Prudential logo”, our “Rock” symbol and “PGIM”. We believe that the value associated with many of our patents and trade secrets, and the goodwill associated with many of our service marks, are significant competitive assets.

Since 2004, we have had an agreement with Prudential plc of the United Kingdom (“U.K.”), with whom we have no affiliation, concerning the parties’ respective rights worldwide to use the names “Prudential” and “Pru.” Since 2019, the agreement has also included M&G plc of the U.K., the parent of The Prudential Assurance Company Limited, following its
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demerger from Prudential plc. The agreement restricts use of the “Prudential” and “Pru” names and marks in a number of countries outside the Americas, including Europe and most parts of Asia. Where these limitations apply, we combine our “Rock” symbol with alternative word marks. We believe that these limitations do not materially affect our ability to operate or expand internationally.
 
Regulation
 
Overview
 
Our businesses are subject to comprehensive regulation and supervision. The purpose of these regulations is primarily to protect our customers and the overall financial system and not necessarily our shareholders or debt holders. Many of the laws and regulations to which we are subject are regularly re-examined. Existing or future laws and regulations may become more restrictive or otherwise adversely affect our operations or profitability, increase compliance costs, or increase potential regulatory exposure. In recent years we have experienced, and expect to continue to experience, extensive changes in the laws and regulations, and regulatory frameworks applicable to our businesses in the U.S. and internationally. Such changes may be accelerated or otherwise impacted by the new presidential administration in the United States. We cannot predict how current or future initiatives will further impact existing laws, regulations and regulatory frameworks.

In our international businesses, regulations may apply heightened requirements to non-domestic companies, which can reduce our flexibility as to intercompany transactions, investments and other aspects of business operations and adversely affect our liquidity and profitability. In some instances, regulators of a particular country may impose different, or more rigorous laws and requirements than in the U.S. or other countries to protect customers or their financial system from perceived systemic risk, including regulations governing privacy, consumer protection, employee protection, corporate governance and capital adequacy. In addition, certain of our international operations face political, legal, operational and other risks that we may not face in the U.S., including the risk of discriminatory regulation, labor issues in connection with independent contractor or franchisee status, workers’ associations and trade unions, nationalization or expropriation of assets, price controls and currency exchange controls or other restrictions that limit our ability to transfer funds from these operations out of the countries in which they operate or to convert local currencies we hold into U.S. dollars or other currencies. Some jurisdictions in which we operate joint ventures restrict our maximum percentage of ownership, which exposes us to additional operational, compliance, legal and joint venture partner risks and limits our array of potential remedies in the event of a breach by a partner.

The primary regulatory frameworks applicable to the Company are described further below under the following section headings:

•Dodd-Frank Wall Street Reform and Consumer Protection Act
◦Rescission of Designation
◦Initiatives Regarding Dodd-Frank and Financial Regulation
•ERISA
•Fiduciary Rules and other Standards of Care
•U.S. State Insurance Holding Company Regulation
•U.S. Insurance Operations
◦State Insurance Regulation
◦U.S. Federal and State Securities Regulation Affecting Insurance Operations
◦U.S. Federal and State Health Insurance Plan Regulation
◦Other Consumer Protection Regulation
•International Insurance Regulation
•U.S. Investment and Retirement Products and Investment Management Operations
•U.S. Securities and Commodity Operations
•International Investment and Retirement Products and Investment Management Operations
•Derivatives Regulation
•Privacy and Cybersecurity Regulation
•Anti-Money Laundering and Anti-Bribery Laws
•Environmental Laws and Regulations
•Unclaimed Property Laws
•Taxation
◦U.S. Taxation
◦International Taxation
•International and Global Regulatory Initiatives
•Regulatory Response to the COVID-19 Pandemic
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Several of our domestic and foreign regulators participate in an annual supervisory college facilitated by the New Jersey Department of Banking and Insurance (“NJDOBI”). The purpose of the supervisory college is to promote ongoing supervisory coordination, facilitate the sharing of information among regulators and enhance each regulator’s understanding of the Company’s risk profile. The most recent supervisory college was held in October 2020.

Existing and future accounting rules may also impact our results of operations or financial condition. For a discussion of accounting pronouncements and their potential impact on our business, including Accounting Standards Update (“ASU”) 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, see Note 2 to the Consolidated Financial Statements.

 Dodd-Frank Wall Street Reform and Consumer Protection Act
 
Rescission of Designation

In October 2018, the Financial Stability Oversight Council (“FSOC” or the “Council”) rescinded the Company’s designation as a non-bank financial company (a “Designated Financial Company”) subject to supervision by the Board of Governors of the Federal Reserve System (“FRB”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). As a result of the Council’s rescission of the Company’s Designated Financial Company status, the Company is no longer subject to supervision and examination by the FRB or to the prudential standards applicable to Designated Financial Companies under Dodd-Frank.

The Council maintains the authority to designate entities, including the Company, for FRB supervision if it determines that either (i) material financial distress at the entity, or (ii) the nature, scope, size, scale, concentration, interconnectedness, or mix of the entity’s activities, could pose a threat to domestic financial stability. The Company continues to believe it does not meet the standards for designation.

Initiatives Regarding Dodd-Frank and Financial Regulation

In November 2017, the U.S. Department of the Treasury released a report titled “Financial Stability Oversight Council Designations,” with recommendations on the Council’s standards and processes for the designation and continued designation of Designated Financial Companies. In addition, in October 2017, the U.S. Department of the Treasury released a report titled “A Financial System That Creates Economic Opportunities - Asset Management and Insurance” which recommended, among other things, that primary federal and state regulators should focus on potential systemic risks arising from products and activities, and on implementing regulations that strengthen the asset management and insurance industries as a whole, rather than focus on an entity-based regulatory regime. The report also affirmed the role of the U.S. state-based system of insurance regulation. In December 2019, FSOC revised its interpretive guidance regarding Designated Financial Company determinations. The guidance describes the approach FSOC intends to take in prioritizing its work to identify and address potential risks to U.S. financial stability using an activities-based approach, and enhancing the analytical rigor and transparency in the processes FSOC intends to follow if it were to consider making a Designated Financial Company determination. From time to time Congress has also introduced legislation which, if enacted, would amend certain provisions of Dodd-Frank, including by requiring the Council to prioritize the use of an activities-based approach to mitigate identified systemic risks.

We cannot predict whether the Treasury reports, interpretive guidance, new legislation or other initiatives aimed at revising Dodd-Frank and regulation of the financial system will ultimately form the basis for changes to laws or regulations impacting the Company.

ERISA
 
The Employee Retirement Income Security Act (“ERISA”) is a comprehensive federal statute that applies to U.S. employee benefit plans sponsored by private employers and labor unions. Plans subject to ERISA include pension and profit sharing plans and welfare plans, including health, life and disability plans. ERISA provisions include reporting and disclosure rules, standards of conduct that apply to plan fiduciaries and prohibitions on transactions known as “prohibited transactions,” such as conflict-of-interest transactions and certain transactions between a benefit plan and a party in interest. ERISA also provides for civil and criminal penalties and enforcement. Our insurance, investment management and retirement businesses provide services to employee benefit plans subject to ERISA, including services where we may act as an ERISA fiduciary. In addition to ERISA regulation of businesses providing products and services to ERISA plans, we become subject to ERISA’s prohibited transaction rules for transactions with those plans, which may affect our ability to enter transactions, or the terms on which transactions may be entered, with those plans, even in businesses unrelated to those giving rise to party in interest status.
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Fiduciary Rules and Other Standards of Care

The Company and our distributors are subject to rules regarding the standard of care applicable to sales of our products and the provision of advice to our customers. In recent years, many of these rules have been revised or reexamined, as described below. We cannot predict whether any proposed or new amendments to the existing regulatory framework will ultimately become applicable to our businesses. Any new standards issued by the U.S. Department of Labor (“DOL”), the Securities and Exchange Commission (“SEC”), the National Association of Insurance Commissioners (“NAIC”) or state regulators may affect our businesses, results of operations, cash flows and financial condition. 

DOL Fiduciary Rules

In June 2018, a Fifth Circuit Court of Appeals decision became effective that vacated rules issued by the DOL that redefined who would be considered a “fiduciary” for purposes of transactions with qualified plans, plan participants and Individual Retirement Accounts (“IRAs”), and generally provided that investment advice to a plan participant or IRA owner would be treated as a fiduciary activity. Prior to being vacated, the rules adversely impacted sales in our annuities and retirement businesses and resulted in increased compliance costs. In December 2020, the DOL finalized a new prohibited transaction exemption that became effective on February 16, 2021, which replaces the previously vacated “best interest contract exemption,” and extended its non-enforcement relief to December 2021. The new exemption will allow fiduciaries meeting the requirements of the exemption to receive compensation, including as a result of advice to rollover assets from a tax-qualified plan to an IRA, and to purchase from or sell certain investments to qualified plans and IRAs. The DOL also reinstated the pre-2016 investment advice regulation and provided its current interpretation of that regulation, which could result in rollover recommendations being fiduciary investment advice if certain conditions are met. We are continuing to assess the implications of the final prohibited transaction exemption and accompanying interpretive guidance for our businesses.

SEC Best Interest Regulation

In June 2019, the SEC adopted a package of rulemakings and interpretative guidance that, among other things, requires broker-dealers to act in the best interest of retail customers when recommending securities transactions or investment strategies to them. The guidance also clarifies the SEC’s views of the fiduciary duty that investment advisers owe to their clients. The new best interest standards became effective on June 30, 2020. The new standards apply to recommendations to purchase certain products offered by our PGIM, Retirement, Individual Annuities and Individual Life businesses, and have resulted in increased compliance costs, in particular in our Prudential Advisors distribution system, which we include in the results of our Individual Life segment.

U.S. State Standard of Care Regulation

In February 2020, the NAIC adopted revisions to the model suitability rule applicable to the sale of annuities. The revised model regulation states the insurance salesperson must act “without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interest.” The model rule will become applicable to us as it is adopted in each state. In addition, certain state regulators and legislatures have adopted or are considering adopting best interest standards. For example, in July 2018, the New York State Department of Financial Services (“NY DFS”) issued an amendment to its suitability regulations which imposes a best-interest standard on the sale of annuity and life insurance products in New York. The amendments became effective for annuity products on August 1, 2019 and for life insurance products on February 1, 2020, and the Company has taken steps we believe are necessary to comply with the rules. In addition, in October 2018, the New Jersey Bureau of Securities issued a proposal that would impose a fiduciary standard on all New Jersey investment professionals. Also, the Massachusetts Securities Division adopted a fiduciary standard of conduct which applies to broker-dealers and its agents, which has been enforced since September 1, 2020.

Japan Standard of Care Regulation

Outside the U.S., in 2017 the Japanese Financial Services Agency (“FSA”) announced the “Principles of Fiduciary Duty,” a set of recommended general principles for businesses to adopt when performing client related financial services. The principles have been adopted by The Prudential Life Insurance Company Ltd. (“Prudential of Japan”), Gibraltar Life, and Prudential Gibraltar Financial Life Insurance Company, Ltd. (“PGFL”). The FSA encourages voluntary adoption of these fiduciary principles as a best practice, but adoption is not required by regulation. Companies’ policies regarding their fiduciary duties can be tailored based on their specific business, such as target clients and complexity of products. Once companies adopt the principles and establish a policy, they are required to implement measures to ensure their employees fulfill their fiduciary duties, and periodically assess the measures’ effectiveness.
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U.S. State Insurance Holding Company Regulation
 
We are subject to the insurance holding company laws in the states where our insurance subsidiaries are domiciled, which currently include New Jersey, Arizona, Connecticut and Indiana, or are treated as commercially domiciled, such as New York. These laws generally require each insurance company directly or indirectly owned by the holding company to register with the insurance department in the insurance company’s state of domicile and to furnish annually financial and other information about the operations of companies within the holding company system, including an assessment of the group’s risk management and current and future solvency position. Generally, all transactions affecting the insurers in the holding company system must be fair and reasonable and, if material, require prior notice and approval or non-disapproval by the state’s insurance department.
 
Change of Control

Most states, including the states in which our U.S. insurance companies are domiciled, have insurance laws that require regulatory approval of a direct or indirect change of control of an insurer or an insurer’s holding company. Laws such as these that apply to us prevent any person from acquiring control of Prudential Financial or of our insurance subsidiaries unless that person has filed a statement with specified information with the insurance regulators and has obtained their prior approval. Under most states’ statutes, acquiring 10% or more of the voting stock of an insurance company or its parent company is presumptively considered a change of control, although such presumption may be rebutted. Accordingly, any person who acquires 10% or more of the voting securities of Prudential Financial without the prior approval of the insurance regulators of the states in which our U.S. insurance companies are domiciled will be in violation of these states’ laws and may be subject to injunctive action requiring the disposition or seizure of those securities by the relevant insurance regulator or prohibiting the voting of those securities and to other actions determined by the relevant insurance regulator. In addition, many state insurance laws require prior notification to state insurance departments of a change in control of a non-domiciliary insurance company doing business in that state.
 
Group-Wide Supervision
 
NJDOBI acts as the group-wide supervisor of Prudential Financial pursuant to New Jersey legislation that authorizes group-wide supervision of internationally active insurance groups (“IAIGs”). The law, among other provisions, authorizes NJDOBI to examine Prudential Financial and its subsidiaries, including by ascertaining the financial condition of the insurance companies for purposes of assessing enterprise risk. In accordance with this authority, NJDOBI receives information about the Company’s operations beyond those of its New Jersey domiciled insurance subsidiaries.
  
Additional areas of focus regarding group-wide supervision of insurance holding companies include the following:

•Group Capital Calculation. The NAIC is developing a U.S. group capital calculation that uses a risk-based capital (“RBC”) aggregation methodology. The calculation is intended to serve as an additional tool to help state regulators assess potential risks within and across insurance groups. A final version of the calculation is expected to be adopted in 2021, followed by implementation in 2022.

•Macroprudential Framework. The NAIC is developing a macroprudential framework intended to: (1) improve state insurance regulators’ ability to monitor and respond to the impact of external financial and economic risks on insurers; (2) better monitor and respond to risk emanating from or amplified by insurers that might be transmitted externally; and (3) increase public awareness of NAIC/state monitoring capabilities regarding macroprudential trends. As part of this initiative, the areas identified by the NAIC for potential enhancement include liquidity reporting and stress testing, resolution and recovery, capital stress testing, and counterparty exposure and concentration. The NAIC is currently developing a liquidity stress testing framework and is updating its models and policies to enhance regulators’ resolution and recovery abilities.

•Examination. State insurance departments conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled in their states, generally once every three to five years under guidelines promulgated by the NAIC. As group-wide supervisor, NJDOBI, along with our other insurance regulators, has expanded the periodic examinations to cover Prudential and all of its subsidiaries. In June 2018, NJDOBI, along with the insurance regulators of Arizona, Connecticut and Indiana, completed their first global consolidated group-wide examination of Prudential and its subsidiaries for the five-year period ended December 31, 2016 and had no reportable findings.

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We cannot predict what, if any, additional requirements and compliance costs any new group-wide standards will impose on Prudential Financial.

U.S. Insurance Operations
 
State insurance laws regulate all aspects of our U.S. insurance businesses. State insurance departments in the fifty states, the District of Columbia and various U.S. territories and possessions monitor our insurance operations. PICA is domiciled in New Jersey and its principal insurance regulatory authority is the NJDOBI. Our other U.S. insurance companies are principally regulated by the insurance departments of the states in which they are domiciled. Generally, our insurance products must be approved by the insurance regulators in the state in which they are sold. Our insurance products are substantially affected by federal and state tax laws.
 
State Insurance Regulation
 
State insurance authorities have broad administrative powers with respect to all aspects of the insurance business including: (1) licensing to transact business; (2) licensing agents; (3) admittance of assets to statutory surplus; (4) regulating premium rates for certain insurance products; (5) approving policy forms; (6) regulating unfair trade and claims practices; (7) establishing reserve requirements and solvency standards; (8) fixing maximum interest rates on life insurance policy loans and minimum accumulation or surrender values; (9) regulating the type, amounts and valuations of investments permitted; (10) regulating reinsurance transactions, including the role of captive reinsurers; and (11) other matters.
 
State insurance laws and regulations require our U.S. insurance companies to file financial statements with state insurance departments everywhere they do business in accordance with accounting practices and procedures prescribed or permitted by these departments. The operations of our U.S. insurance companies and accounts are subject to examination by those departments at any time.
  
Financial Regulation
 
Dividend Payment Limitations. New Jersey insurance law and the insurance laws of the other states in which our insurance companies are domiciled regulate the amount of dividends that may be paid by PICA and our other U.S. insurance companies. See Note 16 to the Consolidated Financial Statements for additional information.
 
Risk-Based Capital. We are subject to RBC requirements that are designed to enhance regulation of insurers’ solvency. The RBC calculation, which regulators use to assess the sufficiency of an insurer’s statutory capital, measures the risk characteristics of a company’s assets, liabilities and certain off-balance sheet items. In general, RBC is calculated by applying factors to various asset, premium, claim, expense and reserve items. Within a given risk category, these factors are higher for those items with greater underlying risk and lower for items with lower underlying risk. Insurers that have less statutory capital than required are considered to have inadequate capital and are subject to varying degrees of regulatory action depending upon the level of capital inadequacy.
  
Areas of the RBC framework that have recently been subject to reexamination or revision include the following:

•Bond Factors. The NAIC’s Life Risk-Based Capital Working Group is developing updates to the RBC factors for invested assets. In April 2020, the NAIC adopted changes to expand current NAIC designations into the RBC calculation from six bond structures to twenty in order to conduct an impact analysis for 2020 year-end reporting.

•Longevity/Mortality Risk. The NAIC’s Longevity Risk Subgroup of the Life Insurance and Annuities Committee and Financial Condition Committee is developing recommendations to recognize longevity risk in risk-based capital related to annuities. Statutory reporting requirements on longevity risk were added in 2020 to allow the NAIC to understand the potential impact of risk-based capital changes being considered. The Company assumes this longevity risk primarily in its Retirement and Individual Annuities businesses. The NAIC is also developing updates to the existing mortality risk factors in RBC.

•Operational Risk. In 2018, the NAIC adopted operational risk charges that became effective for the year-end 2018 RBC calculation. The operational risk charges did not materially impact our 2018 RBC ratios given that we hold statutory capital consistent with or in excess of the thresholds established through these new charges. The NAIC is continuing to explore further guidance to improve regulators’ analysis and assessment of
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operational risks.

•Economic Scenario Generator (“ESG”). In 2017, the American Academy of Actuaries notified the NAIC that it did not have the resources to maintain its ESGs used in regulatory reserve and capital calculations. In 2020, the NAIC selected a third-party vendor to provide, maintain, and support the economic scenario generator prescribed for life and annuity statutory reserve and capital calculations. The NAIC is evaluating the vendor’s economic scenarios and other modifications. We cannot predict what impact a new ESG may ultimately have on our businesses.

Due to the ongoing nature of the NAIC’s activities regarding RBC, we cannot determine the ultimate timing of the proposed changes or their impact on RBC or on our financial position.
 
Insurance Reserves and Regulatory Capital. State insurance laws require us to analyze the adequacy of our reserves annually. The respective appointed actuaries for each of our life insurance companies must each submit an opinion that our reserves, when considered in light of the assets we hold with respect to those reserves, make adequate provision for our contractual obligations and related expenses.
 
The reserving framework for certain of our products and the regulatory capital requirements applicable to our business have undergone reexamination and revision in recent years, including in the following areas:

•Principle-Based Reserving for Life Insurance Products. In 2016, the NAIC adopted a principle-based reserving (“PBR”) approach for life insurance products. Principle-based reserving replaces the reserving methods for life insurance products for which the former formulaic basis for reserves may not accurately reflect the risks or costs of the liability or obligations of the insurer. The principle-based reserving approach had a three-year phase-in period. Principle-based reserving will not affect reserves for policies in force prior to January 1, 2017.

The Company has introduced updated versions of its individual life products in conjunction with the requirement to adopt principle-based reserving by January 1, 2020. These updated products are currently priced to support the principle-based statutory reserve level without the need for reserve financing. Certain elements of the implementation of principle-based reserving are yet to be finalized by the NAIC and may have a material impact on statutory reserves. The Company continues to assess the impact of the implementation of principle-based reserving on projected statutory reserve levels, product pricing and the use of financing.

•Variable Annuities Framework for Change. In 2019, the NAIC adopted final revisions to the Valuation Manual (VM-21), Actuarial Guideline 43 (“AG 43”), and risk-based capital instructions to implement a new variable annuity statutory framework for 2020. Changes include: (i) aligning economically-focused hedge assets with liability valuations; (ii) eliminating the Standard Scenario and replacing it with the Standard Projection for AG 43 and C3 Phase II; and (iii) standardizing capital market assumptions and aligning total asset requirements and reserves. There was no material impact to our target capital levels from the revised framework. The NAIC is considering further changes to the Valuation Manual for future years.

•New York Variable Annuity and Life Insurance Product Reserves. As a result of an agreement with the NY DFS regarding our reserving methodologies for certain variable annuity and life insurance products, certain of our New York licensed insurance subsidiaries hold additional statutory reserves on a New York basis, which reduces their New York statutory surplus. None of our U.S. operating insurance companies are domiciled in New York, and these changes do not impact statutory reserves reported in our insurance subsidiaries’ states of domicile, or any states other than New York, and therefore do not impact RBC ratios; however, the agreed reserve methodologies may require us to increase our additional New York statutory reserves in the future. New York’s version of PBR, which became effective in January 2020, allows for modifications to the NAIC valuation model and New York’s modifications might require us to increase our New York statutory reserves. If we were required to establish material additional reserves on a New York statutory accounting basis or post material amounts of additional collateral with respect to annuity or insurance products, our ability to deploy capital held within our U.S. domestic insurance subsidiaries for other purposes could be affected.

•Principle-Based Reserving (“PBR”) for Non-Variable Annuities. The NAIC is developing a principle-based reserving framework for non-variable (fixed) annuity products in the accumulation and payout phases. We cannot predict what impact a new fixed annuity PBR framework may ultimately have on our businesses.

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•Reinsurance. In 2019, the NAIC’s Statutory Accounting Principles Working Group revised the statutory accounting rules regarding reinsurance credit with respect to the risk transfer requirements for group life yearly renewable term reinsurance agreements, effective January 1, 2021. The Company has amended the relevant applicable agreements such that the revisions will not have a material impact on the reinsurance credit we receive for yearly renewable term reinsurance, including in the group life insurance business.

•Yearly Renewable Term Reinsurance Reserve Credit. The NAIC’s Life Actuarial Task Force is also evaluating changes to its Valuation Manual relating to yearly renewable term reinsurance. The NAIC adopted interim changes effective in 2020 that adversely impact statutory reserve credit for yearly renewable term reinsurance related to our individual life insurance products being reserved using a principle-based approach. Field testing has been conducted and discussions are currently underway to develop a long-term solution. We cannot predict what impact a long-term solution may ultimately have on our businesses.

•Credit for Reinsurance Model. During 2019, the NAIC approved revisions to the Credit for Reinsurance Model Law and Credit for Reinsurance Model Regulation to make the models consistent with the provisions of the U.S.’s bilateral covered agreements with the European Union (“E.U.”) and the U.K. with respect to reinsurance collateral requirements. The revisions eliminate reinsurance collateral requirements applicable to E.U. and U.S. reinsurers meeting certain minimum requirements. The revisions also eliminate the requirements to maintain a local presence to do business in the E.U. or U.K. or post collateral in any E.U. jurisdiction or the U.K. The amended model law will become applicable to the Company as it is adopted by each domiciliary state. Each E.U. jurisdiction and the U.K. must also enact the provisions of the covered agreements into local law/regulation.
 
•Surplus Notes. The NAIC’s Statutory Accounting Principles Working Group is evaluating changes to the accounting rules regarding surplus notes with linked assets. These changes could result in the classification of the surplus notes as debt instead of surplus and require linked assets to be treated as non-admitted assets. These changes would materially adversely impact the statutory financial position of the Company’s captive reinsurance subsidiaries that use credit-linked note structures to finance Regulation XXX and Guideline AXXX reserves. Also, in May 2020, the NAIC adopted enhanced disclosures on surplus notes that became effective for year-end 2020 reporting.

Captive Reinsurance Companies.

We use captive reinsurance subsidiaries to finance the portion of the statutory reserves for term and universal life policies that we consider to be non-economic for policies written prior to the implementation of principle-based reserving. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital—Financing Activities—Term and Universal Life Reserve Financing” for a discussion of our life product reserves and reserve financing.
Market Conduct Regulation
 
State insurance laws and regulations include numerous provisions governing the marketplace activities of insurers, including provisions governing the form and content of disclosure to consumers, illustrations, advertising, sales practices and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations. We have been subject to market conduct examinations relating to our marketplace activities, including with respect to the policies and procedures we use to locate guaranteed group annuity customers and establish related reserves. Market conduct examinations by state regulatory authorities have resulted and may in the future result in us increasing statutory reserves, changing operational processes and procedures, and could result in the imposition of fines or other discipline.

Long-Term Care Rate Regulation

During 2019, the NAIC established a new Long-Term Care Insurance Task Force under the Executive Committee. It is charged with (1) developing a consistent national approach for reviewing long-term care insurance rates that result in actuarially appropriate increases being granted by the states in a timely manner and eliminates cross-state rate subsidization, and (2) ensuring consumers are provided with meaningful options to modify their contract benefits in situations where the premiums are no longer affordable due to rate increases. The task force has in turn established several workstreams regarding these and other related issues, including guaranty funds and reserving. We cannot predict whether this initiative will ultimately result in changes to the regulations applicable to our long-term care business, or how those changes will impact the Company.

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Data and Underwriting

During 2020, the NAIC Accelerated Underwriting Working Group evaluated insurers’ use of external data and data analytics in accelerated life insurance underwriting and is considering, if appropriate, drafting guidance for states.
 
Insurance Guaranty Association Assessments
 
Each state has insurance guaranty association laws under which insurers doing business in the state are members and may be assessed by state insurance guaranty associations for certain obligations of insolvent insurance companies to policyholders and claimants. Typically, states assess each member insurer in an amount related to the member insurer’s proportionate share of the business written by all member insurers in the state. The majority of state guaranty association laws provide a tax offset for a percentage of the assessment against future years’ premium taxes. For the years ended December 31, 2020, 2019 and 2018, we paid $1 million, $2 million and $2.3 million, respectively, in assessments pursuant to state insurance guaranty association laws. While we cannot predict the amount and timing of future assessments on our U.S. insurance companies under these laws, we have established estimated reserves totaling approximately $30 million as of December 31, 2020, for future assessments relating to insurance companies that are currently subject to insolvency proceedings, including Penn Treaty Network America Insurance Company, Executive Life of California and Lincoln Memorial Life Insurance Company.

In 2017, the NAIC approved amendments to the Life and Health Insurance Guaranty Association Model Act to address issues relating to long-term care insurance-related insolvencies. The amendments will spread costs from future long-term care insurance-related insolvencies across the entire health and life insurance industry, resulting in increased assessments for life insurers. The amended model law will become applicable to us as it is adopted by each state. Prior insolvencies will not be included under these amendments. Given our current market share of the impacted lines of business, we expect our cost related to future insolvencies, net of premium tax offsets available under current state laws, would be a small percentage of the gross industry liability.
 
U.S. Federal and State Securities Regulation Affecting Insurance Operations
 
Our variable life insurance, variable annuity and mutual fund products generally are “securities” within the meaning of federal securities laws and may be required to be registered under the federal securities laws and subject to regulation by the SEC and the Financial Industry Regulatory Authority (“FINRA”). Certain of our insurance subsidiaries are subject to SEC public reporting and disclosure requirements based on offerings of these products. Federal and some state securities regulation similar to that discussed below under “—U.S. Investment and Retirement Products and Investment Management Operations” and “—U.S. Securities and Commodities Regulation” affect investment advice, sales and related activities with respect to these products.
 
Our mutual funds, and in certain states our variable life insurance and variable annuity products, are also “securities” within the meaning of state securities laws. As securities, these products are subject to filing and certain other requirements. Also, sales activities with respect to these products generally are subject to state securities regulation. Such regulation may affect investment advice, sales and related activities for these products.
  
Federal Insurance Office
 
Dodd-Frank established a Federal Insurance Office (“FIO”) within the Department of the Treasury headed by a director appointed by the Secretary of the Treasury. While the FIO does not have general supervisory or regulatory authority over the business of insurance, the FIO director performs various functions with respect to insurance, including serving as a non-voting member of the Council, monitoring the insurance sector and representing the U.S. on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors (“IAIS”).

U.S. Federal and State Health Insurance Plan Regulation

The Patient Protection and Affordable Care Act (“PPACA”) and The Health Care and Education Reconciliation Act (together, the “Affordable Care Act”), as well as state insurance laws, include numerous provisions governing the marketing and sale of health insurance plans. Congress from time to time considers health care reform that could decrease or increase the attractiveness of health insurance products sold by Assurance IQ, or have an unfavorable or favorable effect on our ability to earn revenues from sales of these products. In addition, the marketing and sale of Medicare Advantage products by Assurance IQ is subject to federal laws, regulations and guidelines issued by the U.S. Centers for Medicare and Medicaid Services.

Other Consumer Protection Regulation
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Assurance IQ engages in certain marketing activities and sales of third-party insurance products and residential mortgage loan products that are subject to a variety of federal and state consumer protection laws and regulations, including the Real Estate Settlement Procedures Act, the Truth in Lending Act, the Federal Trade Commission Act, and other laws and regulations enforced by the Federal Trade Commission, Consumer Financial Protection Bureau, state Attorneys General, and/or state Departments of Banking.

International Insurance Regulation
 
Our international insurance operations are principally supervised by regulatory authorities in the jurisdictions in which they operate, including the Japanese Ministry of Finance and the Japanese FSA, the financial services regulator in Japan. In addition to Japan, we operate insurance companies in Argentina, Bermuda, Brazil, Mexico and Taiwan, and have insurance operations in China, India, Indonesia and Malaysia through joint ventures, and in Ghana through a strategic investment. The insurance regulatory bodies for these businesses typically oversee such issues as: (1) company licensing; (2) the licensing of insurance sales staff; (3) insurance product approvals; (4) sales practices; (5) claims payment practices; (6) permissible investments; (7) solvency and capital adequacy; and (8) insurance reserves, among other items. In some jurisdictions, for certain products, regulators will also mandate premium rates (or components of pricing) or minimum guaranteed interest rates. Periodic examinations of insurance company books and records, financial reporting requirements, market conduct examinations and policy filing requirements are among the techniques used by these regulators to supervise our non-U.S. insurance businesses. Finally, insurance regulatory authorities in the various jurisdictions in which our insurance companies are domiciled, including Japan, must approve any change of control of Prudential Financial or the insurance companies organized under their laws.
 
Solvency Regulation

In order to monitor insurers’ solvency, regulatory authorities in the jurisdictions in which we operate outside the U.S. generally establish some form of minimum solvency requirements for insurance companies, similar in concept to the RBC ratios that are employed by U.S. insurance regulators. These solvency ratios are used by regulators to assess the sufficiency of an insurer’s capital and claims-paying ability and include the impact of transactions with affiliated entities. Certain jurisdictions require the disclosure of solvency ratios to the public. Insurers that have lower solvency ratios than the regulators require are considered to have inadequate capital and are subject to varying degrees of regulatory action depending upon the level of capital inadequacy.

Japan Capital and Solvency Regulation. Our Japan insurance operations are currently subject to a capital standard known as the Solvency Margin Ratio framework (“SMR”). This standard prescribes the manner in which an insurance company’s capital is calculated and is meant to respond to changes in financial markets, improve risk management practices of insurers and consider risks associated with the insurer’s subsidiaries. The Japan FSA has in recent years asked insurance market participants to engage in a series of annual field tests of a new market based alternative to the SMR framework called the Economic Solvency Ratio (ESR) that follows the IAIS’ Risk-based Global Insurance Capital Standard (“ICS”), which is described below under “—Other International and Global Regulatory Initiatives.” We anticipate that the ESR will be implemented by 2025 which aligns with the ICS timeline. The IAIS established 2020 –2024 as the five-year monitoring period for observing how the ICS performs over an economic cycle. It is possible that adjustments to the ICS may be made during this time period. Therefore, the Company will conduct field tests for ICS while the Japan insurance operations will conduct field tests for ESR.

Dividend Payment Limitations

The insurance regulatory bodies in some of the countries where our international insurance businesses are located regulate the amount of dividends that our subsidiaries can pay to shareholders. See Note 16 to the Consolidated Financial Statements for additional information regarding the ability of our international subsidiaries to pay dividends to Prudential Financial.
 
Insurance Guaranty Fund Assessments

Certain of our international insurance operations, including those in Japan, may be subject to assessments, generally based on their proportionate share of business written in the relevant jurisdiction, for certain obligations of insolvent insurance companies to policyholders and claimants. As we cannot predict the timing of future assessments, they may materially affect the results of operations of our international insurance operations in particular quarterly or annual periods. Under the Japanese insurance guaranty law, all licensed life insurers in Japan are required to be members of and are assessed, on a pre-funded basis, by the Japan Policyholders Protection Corporation (“PPC”). These assessments generate a collective fund which is used to satisfy certain obligations of insolvent insurance companies to policyholders and claimants. The PPC assesses each member in
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an amount related to its proportionate share of new business written by all member insurers. For the years ended December 31, 2020, 2019 and 2018, we paid approximately $24 million, $23 million and $22 million, respectively, based on fixed currency exchange rates, in assessments pursuant to Japanese insurance guaranty association laws.

U.S. Investment and Retirement Products and Investment Management Operations
 
Our retirement and investment products and services are subject to federal and state securities and fiduciary laws, ERISA, and other laws and regulations. The SEC, FINRA, the Commodity Futures Trading Commission (“CFTC”), National Futures Association (“NFA”), state securities commissions, state banking and insurance departments, DOL and the Department of the Treasury are the principal U.S. regulators that regulate our retirement and investment management operations. In some cases, our domestic U.S. investment operations are also subject to non-U.S. securities laws and regulations.
  
Some of the separate account, mutual fund and other pooled investment products offered by our businesses, in addition to being registered under the Securities Act, are registered as investment companies under the Investment Company Act of 1940, as amended, and the shares of certain of these entities are qualified for sale in some states and the District of Columbia. Separate account investment products are also subject to state insurance regulation as described above. We also have several subsidiaries that are registered as broker-dealers under the Securities Exchange Act of 1934 (“Exchange Act”), as amended, and are subject to federal and state regulation. In addition, we have subsidiaries that are investment advisers registered under the Investment Advisers Act of 1940, as amended. Our third-party advisors and licensed sales professionals within Prudential Advisors and other employees, insofar as they sell products that are securities, are subject to the Exchange Act and to examination requirements and regulation by the SEC, FINRA and state securities commissioners. Regulation and examination requirements also extend to various Prudential entities that employ or control those individuals.
 
Congress from time to time considers or enacts legislation that could decrease or increase the attractiveness of certain of our retirement products and services to retirement plan sponsors and administrators, or have an unfavorable or favorable effect on our ability to earn revenues from these products and services. Over time, these changes could limit our sales of defined benefit and defined contribution pension products and services and cause sponsors to discontinue existing plans for which we provide investment management, administrative, or other services; conversely, these changes could also increase the attractiveness of certain products and services we offer in connection with such plans.

In December 2019, Congress enacted the Setting Every Community up for Retirement Enhancement (“SECURE”) Act. The SECURE Act is expected to help promote retirement plan coverage and increase retirement plan savings, as well as facilitate access to guaranteed lifetime income solutions. The Act addresses coverage issues by making it easier for small businesses to participate in pooled employer plans and requires coverage of certain long-term, part-time workers. The Act addresses savings issues by raising the cap on amounts contributed through auto-enrollment, increasing the maximum age for required minimum withdrawals to 72 and removing the age cap (70 1/2) for making IRA contributions. The Act also made it easier for employers to include guaranteed lifetime income as part of their plan by providing an annuity provider selection safe harbor, as well as providing for the portability of participant investments in annuity products. In addition, the SECURE Act included provisions that enable participants to withdraw, penalty-free, up to $5,000 for expenses attendant to the birth or adoption of a child and limit the ability of certain IRA beneficiaries to defer tax recognition of their inheritance beyond ten years.

Implementation of the SECURE Act provisions and the issuance of related regulatory guidance is still ongoing and under consideration by plan sponsors and providers; therefore, it is difficult to assess its impact on our businesses at this time.

In March 2020, in response to the COVID-19 pandemic, Congress enacted the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which waived Required Minimum Distributions for 2020, increased the amount qualified individuals may borrow from defined contribution plans from $50,000 to $100,000, and allowed qualified individuals to withdraw from defined contribution plans and individual retirement arrangements up to $100,000 penalty-free through December 31, 2020, with the withdrawal taxed over a three-year period (unless otherwise elected by the individual). The CARES Act also permits the Company to suspend troubled debt restructuring (“TDR”) accounting under GAAP in certain circumstances for a period extending until December 31, 2021.

On December 27, 2020, in response to the COVID-19 pandemic, Congress enacted the Consolidated Appropriations Act of 2021 (“CAA”). The CAA includes a provision that changes the floor interest rates used for Definition of Life Insurance (“DOLI”) testing under Section 7702 of the Internal Revenue Code of 1986, as amended (the “Code”), and Modified Endowment Contract (“MEC”) testing under Section 7702A of the Code. The change is intended to better reflect the current low interest rate environment and, for contracts issued on or after January 1, 2021, may increase the DOLI and MEC limits and
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allow more premium payments relative to the death benefit. We are currently evaluating the impacts that this change will have on our products.
 
U.S. Securities and Commodity Operations
 
We have subsidiaries that are broker-dealers, investment advisers, commodity pool operators or commodity trading advisers. The SEC, the CFTC, state securities authorities, FINRA, the NFA, the Municipal Securities Rulemaking Board, and similar authorities are the principal regulators of these subsidiaries.
 
Our broker-dealer and commodities affiliates are members of, and are subject to regulation by, “self-regulatory organizations,” including FINRA and the NFA. Self-regulatory organizations conduct examinations of, and have adopted rules governing, their members. In addition, state securities and certain other regulators have regulatory and oversight authority over our registered broker-dealers. Broker-dealers and their sales forces in the U.S. and in certain other jurisdictions are subject to regulations that cover many aspects of the securities business, including sales methods and trading practices. The regulations cover the suitability of investments for individual customers, use and safekeeping of customers’ funds and securities, capital adequacy, recordkeeping, financial reporting and the conduct of directors, officers and employees. The SEC, CFTC and other governmental agencies and self-regulatory organizations, as well as state securities commissions in the U.S. and non-U.S. regulatory agencies, have the power to conduct administrative proceedings that can result in censure, fine, the issuance of cease-and-desist orders or suspension, termination or limitation of the activities of a broker-dealer, an investment adviser or commodities firm or its employees. Our U.S. registered broker-dealer subsidiaries are subject to federal net capital requirements that may limit the ability of these subsidiaries to pay dividends to Prudential Financial.

International Investment and Retirement Products and Investment Management Operations

Our non-insurance international operations are supervised primarily by regulatory authorities in the countries in which they operate. We operate investment-related businesses in, among other jurisdictions, Japan, Taiwan, the U.K., Ireland, India, Hong Kong, Mexico, Germany, Luxembourg, the Netherlands, China and Singapore, and participate in investment-related joint ventures in Italy and China and a retirement related joint venture in Chile. These businesses may provide products such as investment management products and services, mutual funds, separately managed accounts and retirement products. The regulatory authorities for these businesses typically oversee such issues as: (1) company licensing; (2) the licensing of investment product sales staff; (3) sales practices; (4) solvency and capital adequacy; (5) mutual fund product approvals and related disclosures; and (6) securities, commodities and related laws, among other items. In some cases, our international investment operations are also subject to U.S. securities laws and regulations.
 
On January 31, 2020, the U.K. exited the E.U. following a non-binding referendum in June 2016, with a transition period in relation to existing laws and regulations which ended on December 31, 2020. The U.K. and E.U. have entered into a new trading relationship under the E.U.-U.K. Cooperation Agreement; however, discussions in relation to financial services remain ongoing. The outcome of the negotiations will determine the ultimate impact of the exit on our operations and investments in those jurisdictions and may lead to volatility in currency exchange rates and asset prices, as well as changes in regulation. In the event the exit results in future restrictions on cross-border trade in financial services and products between the U.K. and the E.U., PGIM may incur additional expenses and operational burdens in order to ensure compliance with such restrictions. In anticipation of the exit, PGIM has implemented a number of steps to minimize disruption to its existing business, including forming new legal entities and securing licenses and permissions in certain E.U. countries, and engaging in client communications.

Derivatives Regulation
 
Prudential Financial and our subsidiaries use derivatives for various purposes, including hedging interest rate, foreign currency and equity market exposures. Dodd-Frank established a framework for regulation of the over-the-counter derivatives markets. This framework sets out requirements regarding the clearing and reporting of derivatives transactions, as well as collateral posting requirements for uncleared swaps. Affiliated swaps entered into between our subsidiaries are generally exempt from most of these requirements.
 
We continue to monitor the potential hedging cost impacts of new initial margin requirements that we will be required to comply with in 2021, and increased capital requirements for derivatives transactions that may be imposed on banks that are our counterparties. Additionally, the increased need to post cash collateral in connection with mandatorily cleared swaps may also require the liquidation of higher yielding assets for cash, resulting in a negative impact on investment income.

Privacy and Cybersecurity Regulation
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We are subject to laws, regulations and directives that require financial institutions and other businesses to protect the security and confidentiality of personal information, including health-related and customer information, and to notify their customers and other individuals of their policies and practices relating to the collection and disclosure of health-related and customer information. In addition, we must comply with international privacy laws, regulations, and directives concerning the cross border transfer or use of employee and customer personal information. These laws, regulations and directives also:
 
•provide additional protections regarding the use and disclosure of certain information such as national identifier numbers (e.g., social security numbers);
•require notice to affected individuals, regulators and others if there is a breach of the security of certain personal information;
•require financial institutions and creditors to implement effective programs to detect, prevent, and mitigate identity theft;
•regulate the process by which financial institutions make telemarketing calls and send e-mail, text, or fax messages to consumers and customers;
•require oversight of third parties that have access to, and handle, personal information; and
•prescribe the permissible uses of certain personal information, including customer information and consumer report information.

Some countries have also instituted laws requiring in-country data processing and/or in-country storage of the personal data of its citizens. Compliance with such laws could result in higher technology, administrative and other costs for us and could affect how products and services are offered or require us to structure our businesses, operations and systems in less efficient ways.

Regulatory and legislative activity in the areas of privacy, data protection and information and cybersecurity continues to increase worldwide. Financial regulators in the U.S. and international jurisdictions in which we operate continue to focus on data privacy and cybersecurity, including in proposed rulemaking, and have communicated heightened expectations and have increased emphasis in this area in their examinations of regulated entities. For example, the E.U.’s General Data Protection Regulation (“GDPR”), which became effective in May 2018, confers additional privacy rights on individuals in the E.U. and establishes significant penalties for violations. In addition, in the U.S., the Federal government has proposed a number of sweeping privacy laws. In California, the California Consumer Privacy Act became effective in 2020 and confers numerous privacy rights on individuals and corresponding obligations on businesses. Additional rights and obligations will be imposed by the California Privacy Rights Act, which we expect to largely become effective in 2023. Internationally, a number of countries such as Brazil and Argentina have enacted or are considering enacting GDPR-like regulations.
 
In October 2017, the NAIC adopted the Insurance Data Security Model Law. The model law requires that insurance companies establish a cybersecurity program and includes specific technical safeguards as well as requirements regarding governance, incident planning, data management, system testing, vendor oversight and regulator notification. The NY DFS adopted a similar regulation effective March 2017 and other states have either implemented the Model Law or are anticipated to implement it in the near future.
 
The Company is monitoring regulatory guidance and rulemaking in these areas, and may be subject to increased compliance costs and regulatory requirements. In order to respond to the threat of security breaches and cyber-attacks, we have developed a program overseen by the Chief Information Security Officer and the Information Security Office that is designed to protect and preserve the confidentiality, integrity, and continued availability of all information owned by, or in the care of the Company. As part of this program, we also maintain an incident response plan. The program provides for the coordination of various corporate functions and governance groups and serves as a framework for the execution of responsibilities across businesses and operational roles. The program establishes security standards for our technological resources and includes training for employees, contractors and third parties. As part of the program, we conduct periodic exercises and a response readiness assessment with outside advisors to gain a third-party independent assessment of our technical program and our internal response preparedness. We regularly engage with the outside security community and monitor cyber threat information.
 
Anti-Money Laundering and Anti-Bribery Laws
 
Our businesses are subject to various anti-money laundering and financial transparency laws and regulations that seek to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. In addition, under current U.S. law and regulations we may be prohibited from dealing with certain individuals or entities in certain circumstances and we may be required to monitor customer activities, which may affect our ability to attract and retain customers. We are also subject to various laws and regulations relating to
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corrupt and illegal payments to government officials and others, including the U.S. Foreign Corrupt Practices Act and the U.K.’s Anti-Bribery Law. The obligation of financial institutions, including the Company, to identify their clients, to monitor for and report suspicious transactions, to monitor dealings with government officials, to respond to requests for information by regulatory authorities and law enforcement agencies, and to share information with other financial institutions, has required the implementation and maintenance of internal practices, procedures and controls. 

Environmental Laws and Regulations
 
Federal, state and local environmental laws and regulations apply to our ownership and operation of real property. Inherent in owning and operating real property are the risks of hidden environmental liabilities and the costs of any required clean-up. Although unexpected environmental liabilities can always arise, we seek to minimize this risk by undertaking environmental assessments, among other measures prior to taking title to real estate.
 
Unclaimed Property Laws
 
We are subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment of unclaimed or abandoned funds, and we are subject to audit and examination for compliance with these requirements. For additional discussion of these matters, see Note 23 to the Consolidated Financial Statements.
 
Taxation

U.S. Taxation
 
The Company and certain domestic subsidiaries file a consolidated federal income tax return that includes both life insurance companies and non-life insurance companies. Certain other domestic subsidiaries file separate tax returns. The principal differences between the Company’s actual income tax expense and the applicable statutory federal income tax rate are generally deductions for non-taxable investment income, including the Dividends Received Deduction (“DRD”), foreign taxes applied at a different tax rate than the U.S. rate and certain tax credits. For tax years prior to 2018, the applicable statutory federal income tax rate was 35%. For tax years starting in 2018, the applicable statutory federal income tax rate is 21%. A future increase in the applicable statutory federal income tax rate above 21% would adversely impact the Company’s tax position. In addition, as discussed further below, the tax attributes of our products may impact both the Company’s and our customers’ tax positions. See “Income Taxes” in Note 2 to the Consolidated Financial Statements and Note 16 to the Consolidated Financial Statements for a description of the Company’s tax position. As discussed further below, new tax legislation and other potential changes to the tax law may impact the Company’s tax position and the attractiveness of our products.

The Tax Act of 2017 was enacted into law on December 22, 2017 and was generally effective starting in 2018. The Tax Act of 2017 changed the taxation of businesses and individuals by lowering tax rates and broadening the tax base through the acceleration of taxable income and the deferral or elimination of certain deductions, as well as changing the system of taxation of earnings of foreign subsidiaries. The most significant changes for the Company were: (1) the reduction of the corporate tax rate from 35% to 21%; (2) revised methodologies for determining deductions for tax reserves and the DRD; (3) an increased capitalization and amortization period for acquisition costs related to certain products; and (4) the change from a worldwide deferred taxation system to a modified territorial system of taxation on applicable earnings of foreign subsidiaries, which includes (a) a new tax on earnings of foreign subsidiaries (the Global Intangible Low-Taxed Income (“GILTI”) provision ) and (b) a new alternative tax with respect to payments to non-U.S. affiliates that are at least 25% owned (the Base Erosion Anti-Abuse Tax (“BEAT”)).

The GILTI provision applies a minimum U.S. tax to earnings of foreign subsidiaries in excess of a 10% deemed return on tangible assets of consolidated foreign subsidiaries by imposing the U.S. tax rate to 50% of earnings of such foreign affiliates and provides for a partial foreign tax credit for foreign income taxes. The amount of tax in any period on GILTI can depend on annual differences between U.S. taxable income recognition rules and taxable income recognition rules in the country of operations and the overall taxable income of U.S. operations, as well as U.S. expense allocation rules which limit the amount of foreign tax credits that can be applied to reduce the U.S. tax on the GILTI. Under certain circumstances, the taxable income of U.S. operations may cause more than 50% of earnings of foreign affiliates to be subject to the GILTI provision. In years that the U.S. consolidated PFI group incurs a net operating loss or has a loss from domestic businesses, the GILTI provision would operate to cause a loss of U.S. tax benefits for some or all of those losses, effectively increasing the tax on foreign earnings.

The BEAT provision could, under certain conditions, increase our tax expense. The BEAT is an alternative tax implicated if tax deductible payments from U.S. companies to foreign affiliates that are at least 25% owned exceed 3% of total U.S. tax
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deductions. If implicated, the BEAT taxes modified taxable income at a rate of 10% in 2019, increasing to 12.5% in 2026 and is due if the calculated BEAT tax amount that is determined without the benefit of foreign and certain other tax credits is greater than the regular corporate tax in any given year. In general, modified taxable income is calculated by adding back to a taxpayer’s regular taxable income the amount of certain “base erosion tax benefits” with respect to payments to foreign affiliates, as well as the “base erosion percentage” of any net operating loss deductions.

Since the enactment of the Tax Act of 2017, the Treasury Department and the Internal Revenue Service (“IRS”) promulgated Proposed and Final Regulations on a number of provisions within or impacted by the Tax Act of 2017, including GILTI, foreign tax credits, net interest deductibility and the BEAT. Regulations were issued making it clear that benefit and claim payments made by our U.S. insurance businesses to our foreign affiliates on reinsurance assumed by the U.S. affiliates should not be considered to be base erosion payments. During 2020, regulations were issued that allow taxpayers to elect to exclude income of foreign subsidiaries from being subject to tax under the GILTI provision if the income of the foreign subsidiary is subject to local tax in excess of 18.9%. Other life insurance and financial services companies may benefit more or less from these tax law changes, which could impact the Company’s overall competitive position. Notwithstanding the enactment of the Tax Act of 2017, the President, and Congress, as well as state and local governments, may continue to consider from time to time legislation that could increase the amount of corporate taxes we pay, thereby reducing earnings.

The U.S. federal tax law provides that an election may be made pursuant to Internal Revenue Code Section 952 (the “952 election”) to subject earnings from certain insurance operations to tax in the U.S. in the tax year earned, net of related foreign tax credits. The Company made the 952 election effective for the 2017 and later tax years with respect to its affiliates incorporated in Brazil. In October 2019, the IRS issued a legal memorandum applicable to all taxpayers in which the IRS argues that the election became inoperable in 1998. The Company disagrees with the IRS’s position and intends to defend its position. If the Company is ultimately not successful, it will not be able to claim a U.S. tax credit for the Brazil taxes in excess of the U.S. tax rate, and thus will have a higher tax expense over time. For additional information on the 952 Election, see Note 16 to the Consolidated Financial Statements.

The Company has a number of subsidiaries incorporated under the laws of non-U.S. jurisdictions. Those non-U.S. subsidiaries intend to operate in a manner that will not cause any to be treated as being engaged in a trade or business within the U.S. or subject to current U.S. federal income taxation on their net income. However, because there is uncertainty as to when a foreign corporation is engaged in a trade or business within the United States, as the determination is highly factual and must be made annually, there can be no assurance that the IRS will not assert that a non-U.S. Company is engaged in a trade or business in the U.S. If a non-U.S. Company were considered to be engaged in a trade or business in the U.S., it could be subject to U.S. federal income taxation and possible state taxation on a net basis on its income that is effectively connected with such U.S. trade or business (including branch profits tax on the portion of its earnings and profits that is attributable to such income). Any such taxation could result in substantial tax liabilities.

U.S. federal tax law generally permits tax deferral on the inside build-up of investment value of certain retirement savings, annuities and life insurance products until there is a contract distribution and, in general, excludes from taxation the death benefit paid under a life insurance contract. The Tax Act of 2017 did not change these rules, though it is possible that some individuals with overall lower effective tax rates could be less attracted to the tax deferral aspect of the Company’s products. The general reduction in individual tax rates and elimination of certain individual deductions may also impact the Company, depending on whether current and potential customers have more or less after-tax income to save for retirement and manage their mortality and longevity risk through the purchase of the Company’s products. Congress from time to time may enact other changes to the tax law that could make our products less attractive to consumers, including legislation that would modify the tax favored treatment of retirement savings, life insurance and annuities products.

The products we sell have different tax characteristics and, in some cases, generate tax deductions and credits for the Company. Changes in either the U.S. or foreign tax laws may negatively impact the deductions and credits available to the Company, including the ability of the Company to claim foreign tax credits with respect to taxes withheld on our investments supporting separate account products. These changes would increase the Company’s actual tax expense and reduce its consolidated net income.

The profitability of certain products is significantly dependent on these characteristics and our ability to continue to generate taxable income, which is taken into consideration when pricing products and is a component of our capital management strategies. Accordingly, changes in tax law, our ability to generate taxable income, or other factors impacting the availability or value of the tax characteristics generated by our products, could impact product pricing, increase our tax expense or require us to reduce our sales of these products or implement other actions that could be disruptive to our businesses.

In March 2020, in response to the COVID-19 pandemic, Congress enacted the CARES Act. One provision of the CARES
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Act amends the Tax Act of 2017 and allows companies with net operating losses (“NOLs”) originating in 2018, 2019 or 2020 to carry back those losses for up to five years. See “Income Taxes” in Note 2 to the Consolidated Financial Statements for more information.

International Taxation

Our international businesses are subject to the tax laws and regulations of the countries in which they are organized and in which they operate. Foreign governments from time to time consider legislation that could impact the amount of taxes that we pay or impact the sales of our products. For example, the Organization of Economic Cooperation and Development (“OECD”) continues to study model global base erosion tax options that may be considered and adopted by foreign governments. Among the possible recommendations being considered by the OECD is a global minimum tax and the disallowance of a tax deduction for certain payments made to affiliates. Such changes could negatively impact sales of our products or reduce our profits if those items are adopted by countries in which our international businesses operate.

The Japan national corporate tax rate is 23.2% for tax years beginning on or after April 1, 2018. In addition, there are local income taxes that are applied to our income earned in Japan. The Japanese consumption tax rate was increased from 8% to 10% on October 1, 2019. Insurance commissions paid to our Life Planners and Life Consultants are subject to consumption tax for individuals exceeding certain earnings thresholds; however, the tax is not charged on employee compensation (other than commissions) or insurance premiums.

In July 2019, the Japan National Tax Authority issued rules limiting policyholders’ tax deductions for premiums paid on certain corporate insurance products. For information on sales of corporate insurance products within our international insurance operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations by Segment—International Businesses.”
 
International and Global Regulatory Initiatives
 
In addition to the adoption of Dodd-Frank in the United States, lawmakers around the world are actively exploring steps to avoid future financial crises. In many respects, this work is being led by the Financial Stability Board (“FSB”), which consists of representatives of national financial authorities of the G20 nations. The G20, the FSB and related bodies have developed proposals to address such issues as financial group supervision, capital and solvency standards, systemic economic risk, corporate governance including executive compensation, and a host of related issues.

In July 2013, we, along with eight other global insurers, were designated by the FSB as a global systemically important insurer (“G-SII”) through a quantitative methodology developed and implemented by the IAIS. We remained designated as a G-SII until November 2018, at which point the FSB announced that it would not engage in an identification of G-SIIs based on the IAIS’ progress with development of the Holistic Framework for Systemic Risk in the Insurance Sector (“Holistic Framework”). The Holistic Framework, which was adopted by the IAIS in November 2019, focuses on employing an Activities Based approach (“ABA”) to assessing and managing potential sources of systemic risk through enhancements to IAIS policy measures pertaining to macroprudential surveillance, enterprise risk management, liquidity management, crisis management and recovery planning. In addition to the ABA elements, the Holistic Framework preserves the IAIS’ annual data collection and monitoring process. Upon the IAIS’ adoption of the Holistic Framework, the FSB announced that it has suspended the annual identification of G-SIIs until November 2022, when it will review the need to either discontinue or re-establish the annual process based on the initial years of implementation of the Holistic Framework.

In addition to its post financial crisis work on systemic risk, the IAIS developed the Common Framework for the Supervision of Internationally Active Insurance Groups (“ComFrame”). Through ComFrame, the IAIS seeks to promote effective and globally consistent supervision of the insurance industry through uniform standards for insurer corporate governance, enterprise risk management and other control functions, group-wide supervision and group capital adequacy. The non-capital related components of ComFrame were adopted by the IAIS in November 2019. The ICS, which is the capital adequacy component of ComFrame, entered a five-year monitoring phase beginning in 2020. During the monitoring phase, IAIGs are encouraged to report ICS results to their group supervisory authorities to support the IAIS’ efforts to obtain feedback on the appropriateness of the framework. The IAIS will use input from supervisory authorities and IAIGs as well as stakeholder feedback on a public consultation and the results of an economic impact assessment to further improve the ICS. The IAIS is scheduled to adopt a final version of the ICS, which it expects its member supervisory authorities to implement, in 2025.

As a standard setting body, the IAIS does not have direct authority to require insurance companies to comply with the policy measures it develops, including the ICS and proposed policy measures within the Holistic Framework. However, we could become subject to these policy measures if they were adopted by either our group supervisor or supervisors of our
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international operations or companies, which could impact the manner in which we deploy our capital, structure and manage our businesses, and otherwise operate both within the U.S. and abroad.

Regulatory Response to the COVID-19 Pandemic

In March 2020, in response to the COVID-19 pandemic, Congress enacted the CARES Act, which provides $2 trillion in economic stimulus to taxpayers, small businesses, and corporations through various grant and loan programs, tax provisions and regulatory relief.

See “U.S. Investment and Retirement Products and Investment Management Operations” and “Taxation - U.S. Taxation” above for more information about how specific provisions of the CARES Act impact our business.

Other governments and regulators, including the Japan FSA, the NAIC and state insurance regulators, have implemented, or are considering, a number of actions in response to the crisis, including delaying implementation of certain regulatory changes, temporarily waiving certain regulatory requirements and requiring or requesting insurers to waive premium payments and policy provisions and exclusions for certain periods of time. We do not know whether such changes will be temporary or permanent and we cannot predict what other actions governments will take in response to the COVID-19 pandemic, and how any new laws, regulations, or state-sponsored programs may impact our business.

Human Capital Resources
 
As of December 31, 2020, our employee population was comprised as set forth in the tables below:

Global Employee Profile
Region
Number of Employees(1)
U.S.16,196 
Non-U.S.25,475 
Total41,671 
 __________
(1)Presented on a full-time equivalent basis. Excludes independent contractors and other individuals classified as non-employees in their respective jurisdictions.

U.S. Employee Profile
Job FunctionWomenPeople of Color
Executive35 %24 %
Management48 %31 %
Non-management64 %37 %
Total50 %32 %

Prudential’s Board of Directors, including its Corporate Governance and Business Ethics Committee, has oversight responsibility for our human capital resources, diversity and inclusion practices and corporate culture. Human capital is discussed by management at every Board meeting and, at least once per year, the Board devotes time to discuss human capital at each business and functional leadership level across the Company.

Attracting Employees

We believe that our success depends on our ability to attract, develop and retain talented, skilled, and motivated employees. We aim to attract individuals who share our commitment to creating accessible financial solutions that meet the long-term objectives of our global customers. Building a diverse and inclusive organization is a component of our strategic business initiative.

Developing Employees

Cultivating talent is a Company-wide priority. Our employee resources foster career development and offer learning and training opportunities for all employees along the career spectrum, such as:
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•Our “Skills Accelerator,” a personalized platform that helps employees discover and develop future skills, explore new opportunities, and build a successful career at Prudential; and
•Our “Leadership Essentials” program that is designed to support leaders in building the skills needed to transition into and function effectively in a leadership role, enhance the impact of those currently in such roles, and enable notable increases in employee performance.

Also, we require U.S. employees to attend training programs addressing core issues such as understanding racism and everyday bias, building cultural intelligence, and using tools and techniques to support an inclusive culture. The goal of these training programs is for all employees to develop a baseline understanding of these concepts, which we expect will better equip us to solve the financial challenges of our increasingly diverse customers.

Retaining Employees

We believe that our rigorous talent acquisition process, provision of opportunities for professional enrichment and advancement throughout our employees’ careers, and our inclusive culture will enhance our ability to retain employees.

Prudential conducts a global employee engagement survey, entitled the “EQ Survey”. The EQ Survey solicits employee feedback addressing our culture, management, career opportunities, compensation and benefits. The results of the EQ Survey influence how we strengthen our culture and implement change within the Company. In 2020, over 83% of our global employees responded to the EQ Survey.

Protecting and supporting our employees is a priority at Prudential. At the outset of the COVID-19 pandemic, we quickly transitioned more than 97% of our U.S. workforce to remote working in a matter of days. Prudential continues to address the challenges our employees and their families face in maintaining balance and well-being during the ongoing pandemic.

Diversity and Inclusion at Prudential

We view inclusion, diversity and racial equity as a moral and business imperative. Our inclusive approach to human capital management starts with our Board of Directors. Our Board embodies diversity: 82 percent of Prudential’s independent directors are diverse. Our commitment to advance racial equity spans our talent practices, how we design and deliver our products, our investments and public policy work, and our support of community institutions.

To reinforce our commitment to diversity and inclusion in practice, in 2018, we instituted a long-term incentive compensation modifier for employees at the senior vice president level and above that is subject to a performance objective intended to improve the representation of diversity among senior management over the 2018 through 2020 performance period. We will report the results of this program in our 2021 proxy statement.
 
Available Information
 
Prudential Financial files periodic and current reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information may be obtained through the SEC’s website (www.sec.gov).
 
You may also access our press releases, financial information and reports filed with the SEC (for example, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to those Forms) online at www.investor.prudential.com. Copies of any documents on our website are available without charge, and reports filed with or furnished to the SEC will be available as soon as reasonably practicable after they are filed with or furnished to the SEC. The information found on our website is not part of this or any other report filed with or furnished to the SEC.

Information About our Executive Officers
 
The names of the executive officers of Prudential Financial and their respective ages and positions, as of February 19, 2021, were as follows:
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NameAgeTitleOther Public Directorships
Charles F. Lowrey63Chairman, Chief Executive Officer and PresidentNone
Robert M. Falzon61Vice ChairNone
Ann M. Kappler63Executive Vice President and General CounselNone
Kenneth Y. Tanji54Executive Vice President and Chief Financial OfficerNone
Scott G. Sleyster61Executive Vice President and Head of International BusinessesNone
Andrew F. Sullivan50Executive Vice President and Head of U.S. BusinessesNone
Lucien A. Alziari61Executive Vice President and Chief Human Resources OfficerNone
Stacey Goodman58Executive Vice President and Chief Information OfficerNone
Candace J. Woods60Senior Vice President and Chief ActuaryNone
Nicholas C. Silitch59Senior Vice President and Chief Risk OfficerNone
Timothy L. Schmidt62Senior Vice President and Chief Investment OfficerNone

Biographical information about Prudential Financial’s executive officers is as follows:

Charles F. Lowrey was elected Chairman of Prudential Financial in April 2019 and Chief Executive Officer, President and Director of Prudential Financial and PICA in December 2018. Previously, he served as Executive Vice President and Chief Operating Officer, International Businesses, of Prudential Financial and PICA from March 2014 to November 2018. He served as Executive Vice President and Chief Operating Officer, U.S. Businesses, of Prudential Financial and PICA from February 2011 to March 2014. He also served as Chief Executive Officer and President of Prudential Investment Management, Inc. from January 2008 to February 2011, and as Chief Executive Officer of Prudential Real Estate Investors (“PREI”) (now known as PGIM Real Estate), our real estate investment management and advisory business from February 2002 to January 2008. He joined the Company in March 2001, after serving as a managing director and Head of the Americas for J.P. Morgan’s Real Estate and Lodging Investment Banking group, where he began his investment banking career in 1988. He also spent four years as a managing partner of an architecture and development firm he founded in New York City.
 
Robert M. Falzon was elected Director of Prudential Financial in August 2019 and has served as Vice Chair of Prudential Financial and PICA since December 2018. Previously, he served as Executive Vice President and Chief Financial Officer of Prudential Financial and PICA from March 2013 to November 2018. Mr. Falzon has been with Prudential since 1983, serving in various positions. He served as Senior Vice President and Treasurer of Prudential Financial and PICA from 2010 to 2013. Previously he had been a managing director at PREI, Head of PREI’s Global Merchant Banking Group and Chief Executive Officer of its European business; a managing director at Prudential Securities; and regional vice president at Prudential Capital Group (now known as PGIM Private Capital).
 
Ann M. Kappler was elected Executive Vice President and General Counsel for Prudential Financial and PICA in September 2020. She served as Senior Vice President, Deputy General Counsel and Head of External Affairs from 2015 to 2020. She had served in various supervisory positions since 2009, including Deputy General Counsel and Head of External Affairs from 2014 to 2015, Chief Legal Officer for Litigation and Regulation from 2012 to 2014 and Chief Legal Officer for Corporate Services from 2009 to 2012. Prior to joining Prudential in 2009, she was a Partner at Wilmer Cutler Pickering Hale and Dorr, General Counsel at Fannie Mae, and a Litigation Partner at Jenner & Block. She started her career as a Judicial Law Clerk at the U.S. Supreme Court and the U.S. Court of Appeals, D.C. Circuit.
 
Kenneth Y. Tanji was elected Executive Vice President and Chief Financial Officer of Prudential Financial and PICA in December 2018. Prior to this role, he was Senior Vice President and Treasurer of Prudential Financial and PICA from March 2013 to November 2018. In 2013, he served as Chief Financial Officer of Prudential’s International Businesses. Previously, he was Senior Financial Officer of Prudential Annuities and was Prudential’s business representative for its retail brokerage joint venture with Wachovia Securities from 2003 through 2009. He also served as Vice President of Finance for Prudential’s asset management business and held various positions with Prudential Securities’ Private Client and Debt Capital Markets Groups. Mr. Tanji joined Prudential in 1988.
 
Scott G. Sleyster was elected Executive Vice President and Head of International Businesses of Prudential Financial and PICA in December 2018. Previously, he served as Senior Vice President and Chief Investment Officer of PICA and Prudential Financial. Mr. Sleyster has been with Prudential since 1987, serving in a variety of positions, including Head of Prudential’s Full Service Retirement business, President of Prudential’s Guaranteed Products business, Chief Financial Officer for Prudential’s Employee Benefits Division, and has held roles in Prudential’s Treasury, Derivatives and Investment Management units.

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Andrew F. Sullivan was elected Executive Vice President and Head of U.S. Businesses in December 2019. Previously, he served as CEO of Prudential’s Workplace Solutions Group, which consists of Prudential Retirement and Prudential Group Insurance. Before joining Prudential in 2011, he served as Senior Vice President at CareFirst BlueCross BlueShield. Previously, he spent eight years at Cigna where he held of a number of senior leadership positions. He also held management roles at Diamond Technology Partners and DaimlerChrysler.
 
Lucien A. Alziari is Executive Vice President and Chief Human Resources Officer for Prudential Financial and PICA. Starting in June 2017, he served as Senior Vice President and Chief Human Resources Officer for Prudential Financial and PICA. From 2012 to 2017, Mr. Alziari served as Executive Vice President and Chief Human Resources Officer of A.P. Moller-Maersk. From 2004 to 2012, he was the Chief Human Resources Officer and Head of Corporate Responsibility for Avon Products, Inc. Prior to Avon Products, Inc., Mr. Alziari held roles with Mars Confectionary in the United Kingdom and PepsiCo Inc. in New York, Vienna and Dubai.

Stacey Goodman was elected Executive Vice President and Chief Information Officer of Prudential Financial and Prudential Insurance in July 2019. Previously, she served as the Chief Information Officer at Freddie Mac, where she was responsible for the technology division, and served as a member of the Senior Operating Committee. Prior to Freddie Mac, Ms. Goodman was Executive Vice President and Chief Information and Operations Officer for CIT Group, Inc., where she was a member of the Executive Management Committee. Previously, Ms. Goodman was the Divisional Chief Information Officer of Global Technology and Operations at Bank of America. She also held global leadership positions at UBS and PaineWebber. Ms. Goodman began her career at Salomon Brothers.

Candace J. Woods was elected Senior Vice President and Chief Actuary of Prudential Financial and PICA in November 2017. Prior to her current role, Ms. Woods served as Vice President and Chief Actuary for the Actuarial Center of Excellence within PICA. Also, Ms. Woods served as Vice President and Actuary from 2012 to 2013 and Vice President and Chief Actuary from 2013 to 2017 for Prudential’s International Businesses. From 2010 to 2012, Ms. Woods was Vice President and Actuary in Corporate Actuarial, and the appointed actuary for Pruco Life Insurance Company and Pruco Reinsurance. Ms. Woods joined Prudential in 1982.
 
Nicholas C. Silitch was elected Senior Vice President and Chief Risk Officer of Prudential Financial and PICA in May 2012. He is Chairman of the organization’s Enterprise Risk Committee and is a member of Prudential’s Senior Management Council. He joined Prudential in 2010 as Chief Credit Officer and Head of Investment Risk Management. Prior to joining Prudential, Mr. Silitch held the position of Chief Risk Officer of the Alternative Investment Services, Broker Dealer Services and Pershing businesses within Bank of New York Mellon.

Timothy L. Schmidt was elected Senior Vice President and Chief Investment Officer of Prudential Financial and PICA in December 2018. He chairs the Senior Asset Liability Committee and serves as Prudential’s representative to the Institute of International Finance’s Committee on Asset and Investment Management. Previously, Mr. Schmidt was the Head of Global Portfolio Management for Prudential from 2012 to 2018 and he was responsible for the overall asset/liability management for Prudential’s Retirement and Group Insurance businesses from 2010 to 2012. Prior to joining Prudential in July 2010, he served as Chief Financial Officer for MetLife’s Individual Business and had headed MetLife’s Wealth Strategy Group. Earlier in his 25-year tenure at MetLife, Schmidt held various positions in the investment organization, including Head of MetLife’s Portfolio Management Unit, as well as its Structured Finance and Government Securities unit.

ITEM 1A.RISK FACTORS
 
You should carefully consider the following risks. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our businesses described elsewhere in this Annual Report on Form 10-K. Many of these risks are interrelated and could occur under similar business and economic conditions, and the occurrence of certain of them may in turn cause the emergence or exacerbate the effect of others. Such a combination could materially increase the severity of the impact of these risks on our businesses, results of operations, financial condition and liquidity.
 
Overview

The Company’s risk management framework documents the definition, potential manifestation, and management of its risks. The Company has categorized its risks into tactical and strategic risks. Tactical risks may cause damage to the Company, and the Company seeks to manage and mitigate them through models, metrics and the overall risk framework. The Company’s tactical risks include investment, insurance, market, liquidity, and operational risk. Strategic risks can cause the Company’s fundamental business model to change, either through a shift in the businesses in which it is engaged or a change in execution.
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The Company’s strategic risks include regulatory and technological changes and other external factors. These risks, as well as the sub-risks that may impact the Company, are discussed below. The Company’s risk management framework is described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management.”

Investment Risk

Our investment portfolios are subject to the risk of loss due to default or deterioration in credit quality or value.

We are exposed to investment risk through our investments, which primarily consist of public and private fixed maturity securities, commercial mortgage and other loans, equity securities and alternative assets including private equity, hedge funds and real estate. For a discussion of our general account investments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—General Account Investments.” We are also exposed to investment risk through a potential counterparty default.

Investment risk may result from (1) economic conditions, (2) adverse capital market conditions, including disruptions in individual market sectors or a lack of buyers in the marketplace, (3) volatility, (4) credit spread changes, (5) benchmark interest rate changes, (6) changes in foreign currency exchange rates and (7) declines in value of underlying collateral. These factors may impact the credit quality, liquidity and value of our investments and derivatives, potentially resulting in higher capital charges and unrealized or realized losses. Also, certain investments we hold, regardless of market conditions, are relatively illiquid and our ability to promptly sell these assets for their full value may be limited. Additionally, our valuation of investments may include methodologies, inputs and assumptions which are subject to change and different interpretation and could result in changes to investment valuations that may materially impact our results of operations or financial condition. For information about the valuation of our investments, see Note 6 to the Consolidated Financial Statements.

Our investment portfolio is subject to credit risk, which is the risk that an obligor (or guarantor) is unable or unwilling to meet its contractual payment obligations on its fixed maturity security, loan or other obligations. Credit risk may manifest in an idiosyncratic manner (i.e., specific to an individual borrower or industry) or through market-wide credit cycles. Financial deterioration of the obligor increases the risk of default and may increase the capital charges required under such regimes as the NAIC RBC, the FSA SMR or other constructs to hold the investment and in turn, potentially limit our overall capital flexibility. Credit defaults (as well as credit impairments, realized losses on credit-related sales, and increases in credit related reserves) may result in losses which adversely impact earnings, capital and our ability to appropriately match our liabilities and meet future obligations.

Some of our insurance operations are in emerging markets where we may be required to hold capital in local sovereign obligations. Investment risk is heightened in these markets, in particular for obligations that are not denominated in the local currency.

Our Company is subject to counterparty risk, which is the risk that the counterparty to a transaction could default or deteriorate in creditworthiness before or at the final settlement of a transaction. In the normal course of business, we enter into financial contracts to manage risks (such as derivatives to manage market risk and reinsurance treaties to manage insurance risk), improve the return on investments (such as securities lending and repurchase transactions) and provide sources of liquidity or financing (such as credit agreements, securities lending agreements and repurchase agreements). These transactions expose the Company to counterparty risk. Counterparties include commercial banks, investment banks, broker-dealers and insurance and reinsurance companies. In the event of a counterparty deterioration or default, the magnitude of the losses will depend on then current market conditions and the length of time required to enter into a replacement transaction with a new counterparty. Losses are likely to be higher under stressed conditions.

Our investment portfolio is subject to equity risk, which is the risk of loss due to deterioration in market value of public equity or alternative assets. We include public equity and alternative assets (including private equity, hedge funds and real estate) in our portfolio constructions, as these asset classes can provide returns over longer periods of time, aligning with the long-term nature of certain of our liabilities. Public equity and alternative assets have varying degrees of price transparency. Equities traded on stock exchanges (public equities) have significant price transparency, as transactions are often required to be disclosed publicly. Assets for which price transparency is more opaque include private equity (joint ventures/limited partnerships) and direct real estate. As these investments typically do not trade on public markets and indications of realizable market value may not be readily available, valuations can be infrequent and/or more volatile. A sustained decline in public equity and alternative markets may reduce the returns earned by our investment portfolio through lower than expected dividend income, property operating income, and capital gains, thereby adversely impacting earnings, capital, and product pricing assumptions. These assets may also produce volatility in earnings as a result of uneven distributions on the underlying investments.
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The COVID-19 pandemic has increased and may continue to increase investment risk. The COVID-19 pandemic and its impact on the global economy has increased and may continue to increase the risk of loss on our investments due to default or deterioration in credit quality or value as described further under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—General Account Investments—COVID-19.”

Insurance Risk

We have significant liabilities for policyholders’ benefits which are subject to insurance risk. Insurance risk is the risk that actual experience deviates adversely from our insurance assumptions, including mortality, morbidity, and policyholder behavior assumptions.

We provide a variety of insurance products, on both an individual and group basis, that are designed to help customers protect against a variety of financial uncertainties. Our insurance products protect customers against their potential risk of loss by transferring those risks to the Company, where those risks can be managed more efficiently through pooling and diversification over a larger number of independent exposures. During this transfer process, we assume the risk that actual losses experienced in our insurance products deviates significantly from what we expect. More specifically, insurance risk is concerned with the deviations that impact our future liabilities. Our profitability may decline if mortality experience, morbidity experience or policyholder behavior experience differ significantly from our expectations when we price our products. In addition, if we experience higher than expected claims our liquidity position may be adversely impacted, and we may incur losses on investments if we are required to sell assets in order to pay claims. If it is necessary to sell assets at a loss, our results of operations and financial condition could be adversely impacted. For a discussion of the impact of changes in insurance assumptions on our financial condition, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting Policies and Pronouncements—Application of Critical Accounting Estimates—Insurance Liabilities.”

Certain of our insurance products are subject to mortality risk, which is the risk that actual deaths experienced deviate adversely from our expectations. Mortality risk is a biometric risk that can manifest in the following ways:

•Mortality calamity is the risk that mortality rates in a single year deviate adversely from what is expected as the result of pandemics, such as the COVID-19 pandemic, as discussed below, natural or man-made disasters, military actions or terrorism. A mortality calamity event will reduce our earnings and capital and we may be forced to liquidate assets before maturity in order to pay the excess claims. Mortality calamity risk is more pronounced in respect of specific geographic areas (including major metropolitan centers, where we have concentrations of customers, including under group and individual life insurance), concentrations of employees or significant operations, and in respect of countries and regions in which we operate that are subject to a greater potential threat of military action or conflict. Ultimate losses would depend on several factors, including the rates of mortality and morbidity among various segments of the insured population, the collectability of reinsurance, the possible macroeconomic effects on our investment portfolio, the effect on lapses and surrenders of existing policies, as well as sales of new policies and other variables.
•Mortality trend is the risk that mortality improvements in the future deviate adversely from what is expected. Mortality trend is a long-term risk in that it can emerge gradually over time. Longevity products, such as annuities, pension risk transfer and long-term care, may experience adverse impacts due to higher-than-expected mortality improvement. Mortality products, such as life insurance, experience adverse impacts due to lower-than-expected mortality improvement. If this risk were to emerge, the Company would update assumptions used to calculate reserves for in-force business, which may result in additional assets needed to meet the higher expected annuity claims or earlier expected life claims. An increase in reserves due to revised assumptions has an immediate impact on our results of operations and financial condition; however, economically the impact is generally long term as the excess outflow is paid over time.
•Mortality base is the risk that actual base mortality deviates adversely from what is expected in pricing and valuing our products. Base mortality risk can arise from a lack of credible data on which to base the assumptions.

We use a variety of strategies to manage our mortality risks, including the use of reinsurance and derivative instruments. These strategies, however, may not be fully effective and may lead to payments to counterparties in excess of recoveries depending on how actual mortality experience emerges and on future changes in the level of premiums we pay to reinsurers. We may also benefit from offsetting impacts between our mortality and longevity products in adverse mortality or longevity scenarios, however the extent of this offset may vary.

Certain of our insurance products are subject to morbidity risk, which is the risk that either incidence or continuation experience deviates adversely from what is expected. Morbidity risk is a biometric risk that can manifest in the following ways:
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•Morbidity incidence is the risk that the rate at which policyholders become unhealthy (and qualify for benefits under insurance policies) deviates adversely from what is expected. We are primarily exposed to morbidity incidence risk through short-term disability products, long-term disability products, long-term care products, and the accident and health products we sell in Japan and Taiwan.
•Morbidity continuation is the risk that the length of time for which policyholders remain unhealthy deviates adversely from what is expected. This risk is primarily in our disability and long-term care products.

In each case, an increase in claims, or an increase in reserves due to revised morbidity assumptions can have an immediate impact on our results of operations and financial condition; however, economically the impact of morbidity risk for products that pay out for ongoing illness or disability generally emerges over the longer term as the morbidity claims are paid.

Certain of our insurance products are subject to policyholder behavior risk, which is the risk that actual policyholder behavior deviates adversely from what is expected. Policyholder behavior risk includes the following components:

•Lapse calamity is the risk that lapse rates over the short-term deviate adversely from what is expected, for example, surrenders of certain insurance products may increase following a downgrade of our financial strength ratings or adverse publicity. Only certain products are exposed to this risk. Products that offer a cash surrender value that resides in the general account, such as general account stable value products, could pose a potential short-term lapse calamity risk. Surrender of these products can impact liquidity, and it may be necessary in certain market conditions to sell assets to meet surrender demands. Lapse calamity can also impact our earnings through its impact on estimated future profits.
•Policyholder behavior efficiency is the risk that the behavior of our customers or policyholders deviates adversely from what is expected. Policyholder behavior efficiency risk arises through product features which provide some degree of choice or flexibility for the policyholder, which can impact the amount and/or timing of claims. Such choices include surrender, lapse, partial withdrawal, policy loan utilization, and premium payment rates for contracts with flexible premiums. While some behavior is driven by macro factors such as market movements, policyholder behavior at a fundamental level is driven primarily by policyholders’ individual needs, which may differ significantly from product to product depending on many factors including the features offered, the approach taken to market each product, and competitor pricing. For example, persistency (the probability that a policy or contract will remain in force) within our annuities business may be significantly impacted by the value of guaranteed minimum benefits contained in many of our variable annuity products being higher than current account values in light of poor market performance as well as other factors. Many of our products also provide our customers with wide flexibility with respect to the amount and timing of premium deposits and the amount and timing of withdrawals from the policy’s value. Results may vary based on differences between actual and expected premium deposits and withdrawals for these products, especially if these product features are relatively new to the marketplace. The pricing of certain of our variable annuity products that contain certain living benefit guarantees is also based on assumptions about utilization rates, or the percentage of contracts that will utilize the benefit during the contract duration, including the timing of the first withdrawal. Results may vary based on differences between actual and expected benefit utilization. We may also be impacted by customers seeking to sell their benefits. In particular, the development of a secondary market for life insurance, including life settlements or “viaticals” and investor owned life insurance, and third-party investor strategies in the annuities business, could adversely affect the profitability of existing business and our pricing assumptions for new business. Policyholder behavior efficiency is generally a long-term risk that emerges over time. An increase in reserves due to revised assumptions has an immediate impact on our results of operations and financial condition; however, from an economic or cash flow perspective, the impact is generally long term as the excess outflow is paid over time.

Our ability to reprice products is limited and may not compensate for deviations from our expected insurance assumptions. Although some of our products permit us to increase premiums or adjust other charges and credits during the life of the policy or contract, the adjustments permitted under the terms of the policies or contracts may not be sufficient to maintain profitability or may cause the policies or contracts to lapse. For example, for our long-term care insurance products, our assumptions for reserves for future policy benefits have factored in an estimate of the timing and amount of anticipated and yet-to-be-filed premium rate increases which will require state approval. Our actual experience obtaining pricing increases could be materially different than what we have assumed, resulting in further policy liability increases which could be material. Many of our products do not permit us to increase premiums or adjust other charges and credits or limit those adjustments during the life of the policy or contract. Even if permitted under the policy or contract, we may not be able or willing to raise premiums or adjust other charges sufficiently, or at all. Accordingly, significant deviations in actual experience from our pricing assumptions could have an adverse effect on the profitability of our products.

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The COVID-19 pandemic has increased and may continue to increase insurance risk. We expect COVID-19 to drive elevated levels of mortality in the near-term. The COVID-19 pandemic has caused and may continue to cause a mortality calamity. Elevated losses will reduce our earnings and capital, and we may be forced to liquidate assets before maturity in order to pay the excess claims. The pandemic situation may worsen depending on the evolution of the virus’s transmissibility and virulence, including the potential for further mutation, effectiveness of public health measures and availability and effectiveness of vaccines and treatments. Ultimate losses would depend on several factors, including the rates of mortality and morbidity among various segments of the insured population, age and geographic distribution of associated deaths, collectability of reinsurance, performance of our investment portfolio, effect on lapses and surrenders of existing policies, as well as sales of new policies and other variables.

The pandemic may also result in a change in policyholder behavior, such as policyholders choosing to defer or stop paying insurance premiums. It may also result in a lapse calamity, as discussed above.

Additionally, as a result of COVID-19, we may experience elevated disability claims in our Group Insurance business.

Finally, we cannot predict whether COVID-19 will ultimately lead to longer-term deviations from the mortality, policyholder behavior or morbidity assumptions we used to price our products.

Market Risk

The profitability of many of our insurance and annuity products, as well as the fees we earn in our investment management business, are subject to market risk. Market risk is the risk of loss from changes in interest rates, equity prices and foreign currency exchange rates.

The profitability of many of our insurance and annuity products depends in part on the value of the separate accounts supporting these products, which can fluctuate substantially depending on market conditions. Market conditions resulting in reductions in the value of assets we manage has an adverse effect on the revenues and profitability of our investment management business, which depends on fees related primarily to the value of assets under management, and could decrease the value of our strategic investments.

Derivative instruments we use to hedge and manage foreign exchange, interest rate and equity market risks associated with our products and businesses, and other risks might not perform as intended or expected, resulting in higher than expected realized losses and stresses on liquidity. Market conditions can limit availability of hedging instruments, require us to post additional collateral, and further increase the cost of executing product related hedges and such costs may not be recovered in the pricing of the underlying products being hedged.

Market risk may limit opportunities for investment of available funds at appropriate returns, including due to the current low interest rate environment, or other factors, with possible negative impacts on our overall results. Limited opportunities for attractive investments may lead to holding cash for long periods of time and increased use of derivatives for duration management and other portfolio management purposes. The increased use of derivatives may increase the volatility of our U.S. GAAP results and our statutory capital.

Our investments, results of operations and financial condition may also be adversely affected by developments in the global economy, in the U.S. economy (including as a result of actions by the Federal Reserve with respect to monetary policy, and adverse political developments), and in the Japanese economy (including due to the effects of inflation or deflation, interest rate volatility, changes in the Japan sovereign credit rating, and material changes in the value of the Japanese yen relative to the U.S. dollar). Global, U.S. or Japanese economic activity and financial markets may in turn be negatively affected by adverse developments or conditions in specific geographical regions.

For a discussion of the impact of changes in market conditions on our financial condition see Item 7A “Quantitative and Qualitative Disclosures About Market Risk.”

Our insurance and annuity products and certain of our investment products, and our investment returns, are subject to interest rate risk, which is the risk of loss arising from asset/liability duration mismatches within our general account investments as well as invested assets of other entities and operations. The risk of mismatch in asset/liability duration is mainly driven by the specific dynamics of product liabilities. Some product liabilities are expected to have only modest risk related to interest rates because cash flows can be matched by available assets in the investable space. The interest rate risk emerges primarily from their tail cash flows (30 years or more), which cannot be matched by assets for sale in the marketplace, exposing the Company to future reinvestment risk. In addition, certain of our products provide for recurring premiums which
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may be invested at interest rates lower than the rates included in our pricing assumptions. Market-sensitive cash flows exist with other product liabilities including products whose cash flows can be linked to market performance through secondary guarantees, minimum crediting rates, and/or changes in insurance assumptions.

Our exposure to interest rates can manifest over years as in the case of earnings compression or in the short term by creating volatility in both earnings and capital. For example, some of our products expose us to the risk that changes in interest rates will reduce the spread between the amounts that we are required to pay under contracts and the rate of return we are able to earn on our general account investments supporting these contracts. When interest rates decline or remain low, as they have in recent years, we must invest in lower-yielding instruments, potentially reducing net investment income and constraining our ability to offer certain products. This risk is increased as more policyholders may retain their policies in a low rate environment. Since many of our policies and contracts have guaranteed minimum crediting rates or limit the resetting of crediting rates, the spreads could decrease or go negative.

Alternatively, when interest rates rise, we may not be able to replace the assets in our general account with the higher-yielding assets as quickly as needed to fund the higher crediting rates necessary to keep these products and contracts competitive. It is possible that fewer policyholders may retain their policies and annuity contracts as they pursue higher crediting rates, which could expose the Company to losses and liquidity stress. In addition, rising interest rates could cause a decline in the market value of fixed income assets the Company manages which in turn could result in lower asset management fees earned.

Our mitigation efforts with respect to interest rate risk are primarily focused on maintaining an investment portfolio with diversified maturities that has a key rate duration profile that is approximately equal to the key rate duration profile of our liability and surplus benchmarks; however, these benchmarks are based on estimates of the liability cash flow profiles which are complex and could turn out to be inaccurate, especially when markets are volatile. In addition, there are practical and capital market limitations on our ability to accomplish this matching. Due to these and other factors we may need to liquidate investments prior to maturity at a loss in order to satisfy liabilities or be forced to reinvest funds in a lower rate environment.

Our significant business operations outside the U.S. subject us to foreign exchange risk, which is the risk of loss arising from assets that are invested in a different currency than the related liability, as well as the unhedged portion of the Company’s earnings from, and capital supporting, operations in a foreign currency. As a U.S.-based company with significant business operations outside of the U.S., particularly in Japan, we are exposed to foreign currency exchange rate risk related to these operations, as well as in our investment portfolio. Fluctuations in foreign currency exchange rates could adversely affect our profitability, financial condition and cash flows, as well as increase the volatility of our results of operations under U.S. GAAP. In the short-term, solvency margins in our Japan businesses can also be impacted by fluctuations in exchange rates.

For our International Businesses’ operations, our Retirement segment’s earnings on non-U.S. dollar-denominated longevity reinsurance contracts and PGIM’s investment activities based in currencies other than the U.S. dollar, changes in foreign currency exchange rates create risk that we may experience volatility in the U.S. dollar-equivalent earnings and equity of these operations. We seek to manage this risk through various hedging strategies, including the use of foreign currency hedges and through holding U.S. dollar-denominated securities in the investment portfolios of certain of these operations. Additionally, our Japanese insurance operations offer a variety of non-Japanese yen denominated products. We seek to mitigate this risk by holding investments in corresponding currencies. For certain of our international insurance operations outside of Japan, we elect to not hedge the risk of changes in our subsidiary equity investments due to foreign exchange rate movements.

For our domestic investment portfolios supporting our U.S. insurance operations and other proprietary investment portfolios, our foreign currency exchange rate risk arises primarily from investments that are denominated in foreign currencies. We manage this risk by hedging substantially all domestic foreign currency-denominated fixed-income investments into U.S. dollars. We generally do not hedge all of the foreign currency risk of our investments in equity securities of unaffiliated foreign entities. The value and liquidity of our foreign currency investments could be adversely affected by local market, economic and financial conditions.

There can be no assurance that our hedging and other strategies will effectively mitigate foreign exchange risk. For a discussion of our hedging program and the impact of foreign currency exchange rates on our business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of Foreign Currency Exchange Rates.” For a discussion of the impact of the U.K.’s exit from the European Union on our operations, see “Business—Regulation—International Investment and Retirement Products and Investment Management Operations.”

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Guarantees within certain of our products, in particular our variable annuities and to a lesser extent certain individual life and international insurance products, are market sensitive and may decrease our earnings or increase the volatility of our results of operations or financial position under U.S. GAAP. Certain of our products, particularly our variable annuity products and to a lesser extent certain international insurance products, include guarantees of minimum surrender values or income streams for stated periods or for life, which may be in excess of account values. Downturns in equity markets, increased equity volatility, increased credit spreads, or (as discussed above) reduced interest rates could result in an increase in the valuation of liabilities associated with such guarantees, resulting in increases in reserves and reductions in net income. We use a variety of hedging and risk management strategies, including product features, to mitigate these risks in part and we may periodically change our strategies over time. These strategies may, however, not be fully effective. In addition, we may be unable or may choose not to fully hedge these risks. Hedging instruments may not effectively offset the costs of guarantees or may otherwise be insufficient in relation to our obligations. Hedging instruments also may not change in value correspondingly with associated liabilities due to equity market or interest rate conditions, non-performance risk or other reasons. We may choose to hedge these risks on a basis that does not correspond to their anticipated or actual impact upon our results of operations or financial position under U.S. GAAP. Changes from period to period in the valuation of these policy benefits, and in the amount of our obligations effectively hedged, will result in volatility in our results of operations and financial position under U.S. GAAP and the statutory capital levels of our insurance subsidiaries. Estimates and assumptions we make in connection with hedging activities may fail to reflect or correspond to our actual long-term exposure from our guarantees. Further, the risk of increases in the costs of our guarantees not covered by our hedging and other capital and risk management strategies may become more significant due to changes in policyholder behavior driven by market conditions or other factors. The above factors, individually or collectively, may have a material adverse effect on our results of operations, financial condition or liquidity.

Our valuation of the liabilities for the minimum benefits contained in many of our variable annuity products requires us to consider the market perception of our risk of non-performance, and a decrease in our own credit spreads resulting from ratings upgrades or other events or market conditions could cause the recorded value of these liabilities to increase, which in turn could adversely affect our results of operations and financial position.

The COVID-19 pandemic has increased and may continue to increase market risk. During 2020, the COVID-19 pandemic caused market disruptions and volatility. Continued market disruptions and volatility may negatively impact the profitability of many of our insurance and annuity products, which depends in part on the value of the separate accounts supporting these products which can fluctuate substantially depending on market conditions. Market volatility and reduced liquidity may reduce our ability to implement asset-liability management and hedging strategies. In addition, market conditions may further reduce the value of assets that we manage in our investment management business, which depends on fees related primarily to the value of assets under management. The decline in interest rates, in particular, may result in lower investment income, higher reserve levels and other consequences as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of a Low Interest Rate Environment.” Finally, low interest rates and poor equity market returns may result in increased pension and other postretirement benefit plan expenses and reduce our profitability.

Liquidity Risk

As a financial services company, we are exposed to liquidity risk, which is the risk that the Company is unable to meet near-term obligations as they come due.

Liquidity risk is a manifestation of events that are driven by other risk types (market, insurance, investment, operational). A liquidity shortfall may arise in the event of insufficient funding sources or an immediate and significant need for cash or collateral. In addition, it is possible that expected liquidity sources, such as our credit facilities, may be unavailable or inadequate to satisfy the liquidity demands described below.

The Company has four primary sources of liquidity exposure and associated drivers that trigger material liquidity demand. Those sources are:

•Derivative collateral market exposure: Abrupt changes to interest rate, equity, and/or currency markets may increase collateral requirements to counterparties and create liquidity risk for the Company.
•Asset liability mismatch: There are liquidity risks associated with liabilities coming due prior to the matching asset cash flows. Structural maturities mismatch can occur in activities such as securities lending, where the liabilities are effectively overnight open transactions used to fund longer term assets.
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•Wholesale funding: The Company depends upon the financial markets for funding (such as through the issuance of commercial paper, securities lending and repurchase arrangements and other forms of borrowings in the capital markets). These sources might not be available during times of stress, or may only be available on unfavorable terms, which can result in a decrease in our profitability and a significant reduction in our financial flexibility.
•Insurance cash flows: The Company faces potential liquidity risks from unexpected cash demands due to severe mortality calamity, customer withdrawals or lapse events. If such events were to occur, the Company may face unexpectedly high levels of claim payments to policyholders.

For a discussion of the Company’s liquidity and sources and uses of liquidity, including information about legal and regulatory limits on the ability of our subsidiaries to pay dividends, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity.”

The COVID-19 pandemic has increased and may continue to increase liquidity risk. During 2020, the Company took significant actions to support liquidity as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Nevertheless, the impact of the COVID-19 crisis and related market dislocations could strain our existing liquidity and cause us to increase the use of our alternative sources of liquidity, which could result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings. Furthermore, certain sources of liquidity might not be available during times of stress, or may only be available on unfavorable terms, which can result in a decrease in our profitability and a significant reduction in our financial flexibility.

Operational Risk

Our operations are exposed to the risk of loss resulting from inadequate or failed processes or systems, human error or misconduct, and as a result of external events.

An operational risk failure may result in one or more actual or potential impacts to the Company. Operational risk may be elevated as a result of organizational changes, including recent and planned changes related to the Company’s business transformation efforts. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview” for additional information.

Operational Risk Types

•Processes: Processing failure; failure to safeguard or retain documents/records; errors in valuation/pricing models and processes; project management or execution failures; improper sales practices; improper administration of our products; failure to adhere to clients’ investment guidelines.
•Systems: Failures during the development and implementation of new systems; systems failures.
•People: Internal fraud, breaches of employment law, unauthorized activities; loss or lack of key personnel, inadequate training; inadequate supervision.
•External Events: External crime; cyber-attack, outsourcing risk; vendor risk; natural and other disasters; changes in laws/regulations.
•Legal: Legal and regulatory compliance failures. See “Business—Regulation” for a discussion of the regulations applicable to the Company.

Potential Impacts

•Financial losses: The Company experiences a financial loss. This loss may originate from various causes including, but not limited to, transaction processing errors and fraud.
•Customer impacts: The Company may not be able to service customers. This may result if the Company is unable to continue operations during a business continuation event or if systems are compromised due to malware or virus.
•Regulatory fines or sanctions: When the Company fails to comply with applicable laws or regulations, regulatory fines or sanctions may be imposed. In addition, possible restrictions on business activities may result.
•Legal actions: Failure to comply with laws and regulations also exposes the Company to litigation risk. This may also result in financial losses.

Liabilities we may incur as a result of operational failures are described further under “Contingent Liabilities” in Note 23 to the Consolidated Financial Statements. In addition, certain pending regulatory and litigation matters affecting us, and certain risks to our businesses presented by such matters, are discussed in Note 23 to the Consolidated Financial Statements. We may become subject to additional regulatory and legal actions in the future.

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Key Enterprise Operational Risks - Key enterprise operational risks include, among others, the following:

We are subject to business continuation risk, which is the risk that our operations, systems or data may be disrupted. We may experience a business continuation event as a result of:

•Severe pandemic, as we saw in 2020 with the COVID-19 pandemic, either naturally occurring or intentionally manipulated pathogens.
•Geo-political risks, including armed conflict and civil unrest.
•Terrorist events.
•Significant natural or accidental disasters.
•Cyber-attacks.

We depend heavily on our telecommunication, information technology and other operational systems and on the integrity and timeliness of data we use to run our businesses and service our customers. These systems may fail to operate properly or become disabled as a result of events or circumstances wholly or partly beyond our control.

Further, we face the risk of operational and technology failures by others, including clearing agents, exchanges and other financial intermediaries and of vendors and parties to which we outsource the provision of services or business operations.

We are subject to the risk that we may not adequately maintain information security. There continues to be significant and organized cyber-attack activity against western organizations, including but not limited to the financial services sector and no organization is fully immune to cyber-attacks. Risks related to cyber-attack arise in the following areas:

•Protecting both “structured” and “unstructured” sensitive information is a constant need. However, some risks cannot be fully mitigated using technology or otherwise.
•Unsuspecting employees represent a primary avenue for external parties to gain access to our network and systems. Many attacks, even from sophisticated actors, include rudimentary techniques such as coaxing an internal user to click on a malicious attachment or link to introduce malware or steal their username and password.
•The risk associated with wrongdoers encrypting data (i.e., ransomware) or disrupting communications (i.e., denial of service) for the purposes of extortion continues to increase.
•Insurance and retirement services companies are increasingly being targeted by hackers and fraudulent actors seeking to monetize personally identifiable information or extort money.
•Nation-state sponsored organizations are engaged in cyber-attacks but not only for monetization purposes. Nation states appear to be motivated by the desire to gain information about foreign citizens and governments or to influence or cause disruptions in commerce or political affairs.
•We have also seen an increase in non-technical attempts to commit fraud or solicit information via call centers and interactive voice response systems, and we anticipate the attempts will become more common.
•We rely on third-parties to provide services as described further below. While we maintain certain standards for all vendors that provide us services, our vendors, and in turn, their own service providers, may become subject to a security breach, including as a result of their failure to perform in accordance with contractual arrangements.

We may not adequately ensure the privacy of sensitive data. In the course of our ordinary business we collect, store and share with various third-parties (e.g., service providers, reinsurers, etc.) substantial amounts of private and confidential information, including in some instances sensitive health-related information. We are subject to the risk that the privacy of this information may be compromised, including as a result of an information security breach described above. We have experienced cyber-security breaches as a result of which confidential and sensitive health-related information of our customers has been compromised. Any compromise or perceived compromise of our security by us or by one of our vendors could damage our reputation, cause the termination of relationships with distributors, government-run health insurance exchanges, marketing partners and insurance carriers, reduce demand for our services and subject us to significant liability and expense as well as regulatory action and lawsuits, which would harm our business, operating results and financial condition.

Third-parties (outsourcing providers, vendors and suppliers and joint venture partners) present added operational risk to our enterprise. The Company's business model relies heavily on the use of third-parties to deliver contracted services in a broad range of areas. This presents the risk that the Company is unable to meet legal, regulatory, financial or customer obligations because third-parties fail to deliver contracted services, or that the Company is exposed to reputational damage because third-parties operate in a poorly controlled manner. We use affiliates and third-party vendors located outside the U.S. to provide certain services and functions, which also exposes us to business disruptions and political risks as a result of risks inherent in conducting business outside of the United States. In our investments in which we hold a minority interest, or that are
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managed by third-parties, we lack management and operational control over operations, which may subject us to additional operational, compliance and legal risks and prevent us from taking or causing to be taken actions to protect or increase the value of those investments. In those jurisdictions where we are constrained by law from owning a majority interest in jointly owned operations, our remedies in the event of a breach by a joint venture partner may be limited (e.g., we may have no ability to exercise a “call” option).

Affiliate and third-party distributors of our products present added regulatory, competitive and other risks to our enterprise. Our products are sold primarily through our captive/affiliated distributors and third-party distributing firms. We also distribute third-parties’ products through our captive/affiliate distributors, including as part of our Assurance IQ business. Our captive/affiliated distributors are made up of large numbers of decentralized sales personnel who are compensated based on commissions. The third-party distributing firms generally are not dedicated to us exclusively and may frequently recommend and/or market products of our competitors. Accordingly, we must compete intensely for their services. Our sales could be adversely affected if we are unable to attract, retain or motivate third-party distributing firms or if we do not adequately provide support, training, compensation, and education to this sales network regarding our products, or if our products are not competitive and not appropriately aligned with consumer needs. While third-party distributing firms have an independent regulatory accountability, some regulators have been clear with expectations that product manufacturers retain significant sales practices accountability.

The Company and our distributors are subject to rules regarding the standard of care applicable to sales of our products and the provision of advice to our customers, and in recent years many of these rules have been revised or re-examined. In addition, there have been a number of investigations regarding the marketing practices of brokers and agents selling financial services products and the payments they receive. Furthermore, sales practices and investor protection have increasingly become areas of focus in regulatory examinations. These investigations and examinations have resulted in enforcement actions against companies in our industry and brokers and agents marketing and selling those companies’ products. Enforcement actions could result in penalties and the imposition of corrective action plans and/or changes to industry practices, which could adversely affect our ability to market our products. If our products are distributed in an inappropriate manner, or to customers for whom they are unsuitable, or distributors of our products otherwise engage in misconduct, we may suffer reputational and other harm to our business and be subject to regulatory action, penalties or damages. Our business may also be harmed if captive/affiliate distributors engage in inappropriate conduct in connection with the sale of third-party products.

Additionally, certain of our affiliated distributors engage in direct marketing to consumers through telemarketing, email marketing and other lead generation activities that subject us to various federal and state telemarketing regulations, including the Telephone Consumer Protection Act. Violations of these regulations could subject our affiliated distributors to litigation and regulatory inquiries that result in penalties or damages.

Many of our distribution personnel are independent contractors or franchisees. From time to time, their status has been challenged in courts and by government agencies, and various legislative or regulatory proposals have been introduced addressing the criteria for determining the status of independent contractors’ classification as employees for, among other things, employment tax purposes or other employment benefits. The costs associated with potential changes with respect to these independent contractor and franchisee classifications have impacted our results previously and could have a material adverse effect on our business in the future.

Although we distribute our products through a wide variety of distribution channels, we do maintain relationships with certain key distributors. For example, a significant amount of our sales in Japan through banks is derived through a single major Japanese bank and a significant portion of our sales in Japan through Life Consultants is derived through a single association relationship. We periodically negotiate the terms of these relationships, and there can be no assurance that such terms will remain acceptable to us or such third-parties. An interruption in certain key relationships could materially affect our ability to market our products and could have a material adverse effect on our business, operating results and financial condition. Distributors may elect to reduce or terminate their distribution relationships with us, including for such reasons as adverse developments in our business, adverse rating agency actions or concerns about market-related risks. We are also at risk that key distribution partners may merge, change their business models in ways that affect how our products are sold, or terminate their distribution contracts with us, or that new distribution channels could emerge and adversely impact the effectiveness of our distribution efforts. An increase in bank and broker-dealer consolidation activity could increase competition for access to distributors, result in greater distribution expenses and impair our ability to market products through these channels. Consolidation of distributors and/or other industry changes may also increase the likelihood that distributors will try to renegotiate the terms of any existing selling agreements to terms less favorable to us. Finally, we also may be challenged by new technologies and marketplace entrants that could interfere with our existing relationships.

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As a financial services company, we are exposed to model risk, which is the risk of financial loss or reputational damage or adverse regulatory impacts caused by model errors or limitations, incorrect implementation of models, or misuse of or overreliance upon models. Models are utilized by our businesses and corporate areas primarily to project future cash flows associated with pricing products, calculating reserves and valuing assets, as well as in evaluating risk and determining capital requirements, among other uses. These models may not operate properly and may rely on assumptions and projections that are inherently uncertain. As our businesses continue to grow and evolve, the number and complexity of models we utilize expands, increasing our exposure to error in the design, implementation or use of models, including the associated input data and assumptions. Furthermore, our models might change as the result of new or changing laws or regulations.

We may not be able to protect our intellectual property and may be subject to infringement claims. We rely on a combination of contractual rights with employees and third-parties and on copyright, trademark, patent and trade secret laws to establish and protect our intellectual property. Although we endeavor to protect our rights, third-parties may infringe or misappropriate our intellectual property. We may have to litigate to enforce and protect our copyrights, trademarks, patents, trade secrets and know-how or to determine their scope, validity or enforceability. This would represent a diversion of resources that may be significant, and our efforts may not prove successful. The inability to secure, protect or retain our intellectual property assets could have a material adverse effect on our business and our ability to compete.

We may be subject to claims by third-parties for (i) copyright, trademark or patent infringement; (ii) breach of copyright, trademark or license usage rights; or (iii) misappropriation of trade secrets. Any such claims and any resulting litigation could result in significant expense and liability for damages. If we were found to have infringed or misappropriated a third-party patent or other intellectual property right, we could in some circumstances be enjoined from providing certain products or services to our customers or from utilizing and benefiting from certain methods, processes, copyrights, trademarks, trade secrets or licenses. Alternatively, we could be required to enter into costly licensing arrangements with third-parties or implement a costly work around. Any of these scenarios could have a material adverse effect on our business and results of operations.

The COVID-19 pandemic has increased and may continue to increase operational risk. One of the main impacts of the COVID-19 crisis has been executing our business continuity protocols to ensure our employees are safe and able to serve our customers. This included transitioning the vast majority of our global workforce to remote work arrangements. We have also made a number of operational changes to accommodate our customers as further described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—COVID-19.”

In this environment, there is an elevated risk that weaknesses or failures in our business continuation plans could lead to disruption of our operations, liability to clients, exposure to disciplinary action or harm to our reputation. Furthermore, weaknesses or failures within a vendor’s business continuation plan can materially disrupt our business operations. Our information systems and those of our vendors and service providers may be more vulnerable to cyber-attacks, computer viruses or other computer related attacks, programming errors and similar disruptive problems during a business continuation event.

Strategic Risk

We are subject to the risk of events that can cause our fundamental business model to change, either through a shift in the businesses in which we are engaged or a change in our execution.

In addition, tactical risks may become strategic risks. For example, we have considered and must continue to consider the impact of the prolonged low interest rate environment on new product development and continued sales of interest sensitive products.

Changes in the regulatory landscape may be unsettling to our business model. New laws and regulations are being considered in the U.S. and our other countries of operation at an increasing pace, as there has been greater scrutiny on financial regulation over the past several years. Proposed or unforeseen changes in law or regulation may adversely impact our business. See “Business—Regulation” for a discussion of certain recently enacted and pending proposals by international, federal and state regulatory authorities and their potential impact on our business, including in the following areas:

•Financial sector regulatory reform.
•U.S. federal, state and local and non-U.S. tax laws, including BEAT and GILTI.
•Fiduciary rules and other standards of care.
•Our regulation under U.S. state insurance laws and developments regarding group-wide supervision and capital standards, accounting rules, RBC factors for invested assets and reserves for life insurance, variable annuities and other products.
•Insurer capital standards in Japan and other non-U.S. jurisdictions.
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•Privacy and cybersecurity regulation.

Changes in accounting rules applicable to our business may also have an adverse impact on our results of operations or financial condition. For a discussion of accounting pronouncements and their potential impact on our business, including Accounting Standards Update (“ASU”) 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, see Note 2 to the Consolidated Financial Statements.

Changes in technology and other external factors may be unsettling to our business model. We believe the following aspects of technological and other changes would significantly impact our business model. There may be other unforeseen changes in technology and the external environment which may have a significant impact on our business model.

•Interaction with customers. Technology is moving rapidly and as it does, it puts pressure on existing business models. Some of the changes we can anticipate are increased choices about how customers want to interact with the Company or how they want the Company to interact with them. Evolving customer preferences may drive a need to redesign products. Our distribution channels may change to become more automated, at the place and time of the customer’s choosing. Such changes clearly have the potential to disrupt our business model.
•Investment Portfolio. Technology may have a significant impact on the companies in which the Company invests. For example, environmental concerns spur scientific inquiry which may reposition the relative attractiveness of wind or sun power over oil and gas. The transportation industry may favor alternative modes of conveyance of goods which may shift trucking or air transport out of favor. Consumers may change their purchasing behavior to favor online activity which would change the role of malls and retail properties.
•Medical Advances. The Company is exposed to the impact of medical advances in two major ways. Genetic testing and the availability of that information unequally to consumers and insurers can bring anti-selection risks. Specifically, data from genetic testing can give our prospective customers a clearer view into their future, allowing them to select products protecting them against likelihoods of mortality or longevity with more precision. Also, technologies that extend lives will challenge our actuarial assumptions especially in the annuity-based businesses.

The COVID-19 pandemic has increased and may continue to increase strategic risk. The COVID-19 pandemic has caused and could continue to cause an economic downturn, higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending. In such an environment, the demand for our products and our investment returns could be materially adversely affected. In addition, we expect near-term sales to be slowed by the impact of social distancing and financial hardship on our customers.

Finally, we expect that account values in our Full Service business will be impacted by the CARES Act, which provided qualified individuals the ability to withdraw from defined contribution plans and individual retirement accounts up to $100,000 penalty-free through December 31, 2020, with the withdrawal taxed over a three-year period (unless otherwise elected by the individual). We cannot predict what other actions governments will take in response to the COVID-19 pandemic, and how any new laws, regulations, or state-sponsored programs may impact our business.

The following items are examples of other factors which could have a meaningful impact on our business.

•We may not realize or sustain the expected benefits from programs we have announced, and these efforts could have a materially adverse effect on our business, operations, financial condition, results of operations and competitive position. In 2019, we began implementing a multi-year plan of programs designed to accelerate margin growth. If we do not successfully manage and execute these programs, or if they are inadequate or ineffective, we may fail to meet our financial goals and achieve anticipated benefits, improvements may be delayed, not sustained or not realized and our business, operations and competitive position could be adversely affected. These programs could result in unintended consequences or unforeseen costs, including distraction of our management and employees, attrition, inability to attract or retain key personnel, and reduced employee productivity, which could adversely affect our business, financial condition, and results of operations.

•We are subject to risks relating to the acquisition, and post-acquisition operations, of Assurance IQ, Inc. (“Assurance IQ”). In October 2019, we completed the acquisition of Assurance IQ (the “Acquisition”). For a description of Assurance IQ and the Acquisition, see Note 1 to the Consolidated Financial Statements. We are subject to certain risks relating to the Acquisition and the ongoing operations of Assurance IQ, and these risks could adversely affect, possibly materially, our business, results of operations, financial position or liquidity or prevent us from realizing the expected benefits from the Acquisition. These risks include the following:

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◦We may not realize the growth, earnings, cost savings, efficiencies or synergies that we anticipated at the time of the Acquisition. This may result in the need to recognize an impairment of goodwill which could adversely affect our results of operations and financial condition.
◦There is the risk that we will be exposed to obligations and liabilities of Assurance IQ that are not adequately covered, in amount, scope or duration, by the indemnification provisions in the merger agreement or representation and warranty insurance policy, or reflected or reserved for in the financial statements of Assurance IQ.
◦The roles and responsibilities of certain members of the senior leadership of Assurance IQ have changed since the acquisition and may continue to change. There is a risk that Assurance IQ will lose key personnel or experience higher than expected employee attrition that could adversely affect the performance of the business.
◦Pursuant to the merger agreement, the Company has agreed to take, or refrain from taking, certain actions with respect to Assurance IQ prior to 2023, and a violation of this agreement may accelerate payment of the full amount of contingent payments.
◦The integration of Assurance IQ into our strategy is ongoing but it may take longer than expected. The integration has required and will continue to require the dedication of significant management resources, which may distract management’s attention from day-to-day business operations.
◦The business of Assurance IQ is subject to certain regulation concerning its digital distribution model and diverse product offerings, which we were not subject to prior to the Acquisition.

•A downgrade in our financial strength or credit ratings could potentially, among other things, adversely impact our business prospects, results of operations, financial condition and liquidity. For a discussion of our ratings and the potential impact of a ratings downgrade on our business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Ratings.” We cannot predict what additional actions rating agencies may take, or what actions we may take in response to the actions of rating agencies, which could adversely affect our business. Our ratings could be downgraded at any time and without notice by any rating agency. In addition, a sovereign downgrade could result in a downgrade of our subsidiaries operating in that jurisdiction, and ultimately of Prudential Financial and our other subsidiaries. For example, in September 2015, S&P downgraded Japan's sovereign rating to A+ with a 'Stable' outlook citing uncertainties around the strength of economic growth and weak fiscal positions. As a result, S&P subsequently lowered the ratings of a number of institutions in Japan, including our Japanese insurance subsidiaries. It is possible that Japan’s sovereign rating could be subject to further downgrades, which would result in further downgrades of our insurance subsidiaries in Japan. Given the importance of our operations in Japan to our overall results, such downgrades could lead to a downgrade of Prudential Financial and our domestic insurance companies.

•The elimination of London Inter-Bank Offered Rate (“LIBOR”) may adversely affect certain derivatives and floating rate securities we hold and floating rate securities we have issued, certain real estate lending and other activities conducted in PGIM, and any other assets or liabilities whose value is tied to LIBOR. Actions by regulators have resulted in the establishment of alternative reference rates to LIBOR in most major currencies. Recent supervisory guidance reinforces the importance of market participants preparing for LIBOR to be phased out beginning at the end of 2021 through June 30, 2023. However, it remains unclear if, how and in what form, LIBOR will continue to exist. The U.S. Federal Reserve, based on the recommendations of the New York Federal Reserve’s Alternative Reference Rate Committee (constituted of major derivative market participants and their regulators), has begun publishing a Secured Overnight Funding Rate (“SOFR”) which is intended to replace U.S. dollar LIBOR, and SOFR-based investment products have been issued in the United States. Proposals for alternative reference rates for other currencies have also been announced or have already begun publication. Markets are developing in response to these new rates and questions around liquidity in these rates and how to appropriately adjust these rates to eliminate any economic value transfer at the time of transition remain a significant concern for us and others in the marketplace. The effect of any changes or reforms to LIBOR or discontinuation of LIBOR on new or existing financial instruments to which we have exposure or the activities in our businesses will vary depending on (1) existing fallback provisions in individual contracts, (2) the adoption of fallback provisions through the Inter-Bank Offered Rate (“IBOR”) Fallbacks Protocol produced by the International Swaps and Derivatives Association, and (3) whether, how, and when industry participants develop and widely adopt new reference rates and fallbacks for both legacy and new products or instruments. Accordingly, it is difficult to predict the full impact of the transition away from LIBOR on certain derivatives and floating rate securities we hold, securities we have issued, real estate lending, and other activities we conduct in PGIM, and any other assets or liabilities, as well as contractual rights and obligations, whose value is tied to LIBOR. The value or profitability of these products and instruments may be adversely affected.

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•The changing competitive landscape may adversely affect the Company. In each of our businesses, we face intense competition from insurance companies, asset managers and diversified financial institutions, both for the ultimate customers for our products and, in many businesses, for distribution through non-affiliated distribution channels. Technological advances, changing customer expectations, including related to digital offerings, access to customer data, or other changes in the marketplace may present opportunities for new or smaller companies without established products or distribution channels to meet consumers’ increased expectations more efficiently than us. Fintech and insurtech companies and companies in other industries with greater access to customers and data have the potential to disrupt industries globally, and many participants have been partially funded by industry players. For example, in PGIM, we expect to see continued pressure on fees given the focus on passive investment and the growth of the robo-advice channel.

•Climate change may increase the severity and frequency of calamities, or adversely affect our investment portfolio or investor sentiment. Climate change may increase the frequency and severity of weather-related disasters and pandemics. In addition, climate change regulation may affect the prospects of companies and other entities whose securities we hold, or our willingness to continue to hold their securities. It may also impact other counterparties, including reinsurers, and affect the value of investments, including real estate investments we hold or manage for others. We cannot predict the long-term impacts on us from climate change or related regulation. Climate change may also influence investor sentiment with respect to the Company and investments in our portfolio.

•Market conditions and other factors may adversely impact product sales or increase expenses. Examples include:
◦A change in market conditions, such as high inflation and high interest rates, could cause a change in consumer sentiment and behavior adversely affecting sales and persistency of our savings and protection products. Conversely, low inflation and low interest rates could cause persistency of these products to vary from that anticipated and adversely affect profitability. Similarly, changing economic conditions and unfavorable public perception of financial institutions can influence customer behavior, including increasing claims or surrenders in certain products.
◦Sales of our investment-based and asset management products and services may decline, and lapses and surrenders of certain insurance products and withdrawals of assets from investment products may increase if a market downturn, increased market volatility or other market conditions result in customers becoming dissatisfied with their investments or products.
◦Changes in our discount rate, expected rate of return, life expectancy, health care cost and assumptions regarding compensation increases for our pension and other postretirement benefit plans may result in increased expenses and reduce our profitability.

•Our reputation may be adversely impacted if any of the risks described in this section are realized. Reputational risk could manifest from any of the risks as identified in the Company’s risk identification process. Failure to effectively manage risks across a broad range of risk issues exposes the Company to reputational harm. If the Company were to suffer a significant loss in reputation, both policyholders and counterparties could seek to exit existing relationships. Additionally, large changes in credit worthiness, especially credit ratings, could impact access to funding markets while creating additional collateral requirements for existing relationships. The mismanagement of any such risks may potentially damage our reputational asset. Our business is anchored in the strength of our brand, our alignment to our values, and our proven commitment to keep our promises to our customers. Any negative public perception, founded or otherwise, can be widely and rapidly shared over social media or other means, and could cause damage to our reputation.

•Each of the risks identified in this section relating to the COVID-19 pandemic could also manifest in the event of future pandemics, epidemics or other public health crises.

ITEM 1B.UNRESOLVED STAFF COMMENTS
 
None.

ITEM 2.PROPERTIES
 
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We own our headquarters building located at 751 Broad Street, Newark, New Jersey. Excluding our headquarters building and properties used by our International Businesses and the international investment operations of PGIM, which are discussed below, as of December 31, 2020, we conduct our business and home office functions in both owned and leased locations throughout the United States. We also conduct back-office functions in leased properties outside of the United States.
 
For our International Businesses, as of December 31, 2020, we own and lease home offices located in Japan, Argentina, Brazil, Mexico, Malaysia and Taiwan. We also conduct our business in owned and leased properties, primarily field offices, located throughout these same countries. For PGIM’s international investment operations, as of December 31, 2020, we lease home offices located in Japan and Taiwan. We also lease principal properties and other branch and field offices in other countries where PGIM conducts business.
 
We believe our properties are adequate and suitable for our business as currently conducted and are adequately maintained. The above properties do not include properties we own solely for investment purposes.

At our domestic home office properties, we are developing programs to reduce emissions. These programs include seeking ways to expand energy efficiency. For home office properties in the U.S., Brazil and Taiwan, we are also developing waste diversion measures including internal recycling and composting infrastructures and availing ourselves of third-party waste diversion programs. Our Prudential Tower home office property in Newark, New Jersey and our data center located in Plymouth, Minnesota have been awarded LEED Gold Certification from the U.S. Green Building Council.

ITEM 3.LEGAL PROCEEDINGS
 
See Note 23 to the Consolidated Financial Statements under “—Litigation and Regulatory Matters” for a description of certain pending litigation and regulatory matters affecting us, and certain risks to our businesses presented by such matters.

 ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

General
 
Prudential Financial’s Common Stock trades on the New York Stock Exchange under the symbol “PRU.” On January 31, 2021, there were 1,171,000 registered holders of record for the Common Stock and 397 million shares outstanding.

Issuer Purchases of Equity Securities
 
(c) The following table provides information about purchases by the Company during the three months ended December 31, 2020, of its Common Stock: 
PeriodTotal Number of
Shares
Purchased(1)		Average
Price Paid
per Share		Total Number of
Shares Purchased
as Part of
Publicly Announced
Program(2)		Approximate Dollar Value of Shares that May Yet Be Purchased under the Program(2)
October 1, 2020 through October 31, 202011,441 $66.34 0 
November 1, 2020 through November 30, 20203,032 $73.13 0 
December 1, 2020 through December 31, 20208,319 $77.04 0 
Total22,792 $74.34 0 $0 
__________
(1)Includes shares of Common Stock withheld from participants for income tax withholding purposes whose shares of restricted stock units vested during the period. Such restricted stock units were originally issued to participants pursuant to the Prudential Financial Inc. Omnibus Incentive Plan.
(2)In December 2019, the Board authorized the Company to repurchase, at management’s discretion, up to $2.0 billion of its outstanding Common Stock during the period from January 1, 2020 through December 31, 2020. The Company suspended Common Stock repurchases under this authorization beginning April 1, 2020, after purchasing $500 million of shares of Prudential Financial’s Common Stock in the first quarter of 2020.

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On February 4, 2021, Prudential Financial’s Board of Directors authorized the Company to repurchase, at management’s discretion, up to $1.5 billion of its outstanding Common Stock during the period from January 1, 2021 through December 31, 2021.

ITEM 6.    SELECTED FINANCIAL DATA
 
We derived the selected consolidated income statement data for the years ended December 31, 2020, 2019 and 2018 and the selected consolidated balance sheet data as of December 31, 2020 and 2019, from the Consolidated Financial Statements included elsewhere herein. We derived the selected consolidated income statement data for the years ended December 31, 2017 and 2016, and the selected consolidated balance sheet data as of December 31, 2018, 2017 and 2016, from consolidated financial statements not included herein.
 
Prior to January 1, 2018, the Company’s Gibraltar Life Insurance Company, Ltd. (“Gibraltar Life”) consolidated operations used a November 30 fiscal year end for purposes of inclusion in the Company’s Consolidated Financial Statements. The result of this reporting date difference was a one-month reporting lag for Gibraltar Life. As a result, the Company’s consolidated balance sheet as of December 31 previously included the assets and liabilities of Gibraltar Life as of November 30 for each respective year, and the Company’s consolidated income statement data for the years ended December 31 included Gibraltar Life’s results of operations for the twelve months ended November 30 for each respective year.

Effective January 1, 2018, the Company converted its Gibraltar Life operations to a December 31 fiscal year end. This action eliminated the one-month reporting lag so that the reporting dates and periods of financial balances and results of Gibraltar Life are consistent with those of the Company. The establishment of a new fiscal year end for Gibraltar Life is considered a change in accounting principle to a preferable method and requires retrospective application. The Company believes this change in accounting principle is preferable given that it aligns the reporting dates of Prudential Financial and its subsidiaries, which allows for a more timely and consistent basis of reporting the financial position and results of Gibraltar Life. In order to effect this elimination, the Company restated prior periods’ equity which increased “Retained Earnings” by approximately $167 million as of December 31, 2016 and 2017. The impact to the Statements of Operations, Statements of Cash Flows, Statements of Comprehensive Income and other balance sheet captions, as a result of the elimination of the reporting lag, was not material for any of the periods presented.
 
This selected consolidated financial information should be read in conjunction with our MD&A and Consolidated Financial Statements included elsewhere herein.
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 Year Ended December 31,
 20202019201820172016
 (in millions, except per share and ratio information)
Income Statement Data:
Revenues:
Premiums$31,140 $34,202 $35,779 $32,091 $30,964 
Policy charges and fee income6,029 5,978 6,002 5,303 5,906 
Net investment income17,410 17,585 16,176 16,435 15,520 
Asset management and service fees4,391 4,239 4,100 4,127 3,752 
Other income (loss)1,950 3,262 (1,042)1,301 443 
Realized investment gains (losses), net(3,887)(459)1,977 432 2,194 
Total revenues57,033 64,807 62,992 59,689 58,779 
Benefits and expenses:
Policyholders’ benefits35,059 36,820 39,404 33,794 33,632 
Interest credited to policyholders’ account balances4,538 4,880 3,196 3,822 3,761 
Dividends to policyholders1,625 2,274 1,336 2,091 2,025 
Amortization of deferred policy acquisition costs2,221 2,332 2,273 1,580 1,877 
General and administrative expenses13,913 13,416 11,949 11,915 11,779 
Total benefits and expenses57,356 59,722 58,158 53,202 53,074 
Income (loss) before income taxes and equity in earnings of operating joint ventures(323)5,085 4,834 6,487 5,705 
Total income tax expense (benefit)(81)947 822 (1,438)1,335 
Income (loss) before equity in earnings of operating joint ventures(242)4,138 4,012 7,925 4,370 
Equity in earnings of operating joint ventures, net of taxes96 100 76 49 49 
Net income (loss)(146)4,238 4,088 7,974 4,419 
Less: Income (loss) attributable to noncontrolling interests228 52 14 111 51 
Net income (loss) attributable to Prudential Financial, Inc.$(374)$4,186 $4,074 $7,863 $4,368 
EARNINGS PER SHARE
Basic earnings per share—Common Stock:
Income (loss) from continuing operations attributable to Prudential Financial, Inc.
$(1.00)$10.23 $9.64 $18.19 $9.85 
Net income (loss) attributable to Prudential Financial, Inc.$(1.00)$10.23 $9.64 $18.19 $9.85 
Diluted earnings per share—Common Stock:
Income (loss) from continuing operations attributable to Prudential Financial, Inc.
$(1.00)$10.11 $9.50 $17.86 $9.71 
Net income (loss) attributable to Prudential Financial, Inc.$(1.00)$10.11 $9.50 $17.86 $9.71 
Dividends declared per share—Common Stock$4.40 $4.00 $3.60 $3.00 $2.80 

 As of December 31,
 20202019201820172016
 (in millions)
Balance Sheet Data:
Total investments excluding policy loans$542,349 $510,664 $467,229 $457,980 $432,485 
Separate account assets327,277 312,281 279,136 306,617 287,636 
Total assets940,722 896,552 815,078 832,136 784,177 
Future policy benefits and policyholders’ account balances468,025 445,637 424,184 405,506 386,113 
Separate account liabilities327,277 312,281 279,136 306,617 287,636 
Short-term debt925 1,933 2,451 1,380 1,133 
Long-term debt19,718 18,646 17,378 17,172 18,041 
Total liabilities872,512 832,833 766,047 777,625 737,922 
Prudential Financial, Inc. equity67,425 63,115 48,617 54,236 46,030 
Noncontrolling interests785 604 414 275 225 
Total equity$68,210 $63,719 $49,031 $54,511 $46,255 

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
TABLE OF CONTENTS
 
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Certain of the statements included in this section constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. 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. Prudential Financial, Inc.’s actual results may differ, possibly materially, from expectations or estimates reflected in such forward-looking statements. Certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements can be found in the “Risk Factors” and “Forward-Looking Statements” sections herein.

Pursuant to the FAST Act Modernization and Simplification of Regulation S-K, discussions related to the results of operations for the year ended December 31, 2019 in comparison to the year ended December 31, 2018 have been omitted. For such omitted discussions, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Overview
 
Our principal operations consist of PGIM (our global investment management business), our U.S. Businesses (consisting of our U.S. Workplace Solutions, U.S. Individual Solutions, and Assurance IQ divisions), our International Businesses, the Closed Block division, and our Corporate and Other operations. The U.S. Workplace Solutions division consists of our Retirement and Group Insurance businesses; the U.S. Individual Solutions division consists of our Individual Annuities and Individual Life businesses; and the Assurance IQ division consists of our Assurance IQ business, which we acquired in October 2019 (see Note 1 to the Consolidated Financial Statements for additional information). The Closed Block division is accounted for as a divested business that is reported separately from the Divested and Run-off Businesses that are included in Corporate and Other. Our Corporate and Other operations include corporate items and initiatives that are not allocated to business segments and businesses that have been or will be divested or placed in run-off, excluding the Closed Block division. See “Business—” for a description of our sources of revenue and details on how our profitability is impacted. In addition, our profitability is impacted by our ability to effectively deploy capital, utilize our tax capacity and manage expenses.

Management expects that results in 2021 will continue to benefit from our differentiated mix of market-leading businesses that complement each other to provide competitive advantages, earnings diversification and capital benefits from a balanced risk profile. While challenges exist in the form of a low interest rate environment (see “Impact of a Low Interest Rate Environment” below), fee compression in certain of our businesses and other market factors, including macroeconomic stress and market disruption resulting from the COVID-19 pandemic (see “—COVID-19” below), we expect that our businesses will produce appropriate returns for the current market environment. We believe we are well-positioned to tap into market opportunities to meet the evolving needs of individual customers, workplace clients, and society at large. Our mix of high-quality protection, retirement and investment management businesses enables us to offer solutions that cover a broad range of financial needs and to engage with our clients through multiple channels, including the ability to sell solutions across a broad socio-economic spectrum through Assurance IQ’s digital platform. We aim to expand our addressable market, build deeper and longer-lasting relationships with customers and clients, and meaningfully improve their financial wellness.

In order to further increase our competitive advantage, we are working to enhance the experience of our customers and the capabilities of our businesses, which we expect will also help us realize improved margins. In 2019, we launched programs in pursuit of these objectives that will result in multi-year investments in technology, systems and employee reskilling, as well as severance and related charges. The implementation of these programs resulted in approximately $400 million of costs in 2019, including a charge related to the Company’s Voluntary Separation Program offered to certain eligible U.S.-based employees whose employment end dates occurred in 2020. Over the course of 2020, we incurred $194 million of additional implementation costs related to these programs, resulting in cumulative implementation costs of approximately $594 million as of December 31, 2020.

Over the next several years, we also expect to see significant expense efficiencies. The impact to the Company’s 2020 results from these programs was a benefit of $216 million and, as of December 31, 2020, we have achieved approximately $400 million in run-rate cost savings, which we expect will accumulate to approximately $750 million by the end of 2023.

COVID-19

Beginning in the first quarter of 2020, the outbreak of COVID-19 created extreme stress and disruption in the global economy and financial markets and elevated mortality and morbidity experience for the global population. These events impacted our results of operations throughout 2020 and are expected to impact our results of operations in 2021. The Company
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has taken several measures to manage the impacts of this crisis. The actual and expected impacts of these events and other items are set forth below:

•Liquidity. As of December 31, 2020, we had $5.6 billion in highly liquid assets at Prudential Financial. Since the beginning of 2020, we took several steps to proactively manage liquidity, including refinancing $1.3 billion of junior subordinated debt to reduce our financing costs, entering into a $1.5 billion facility agreement with a Delaware trust to increase our alternative sources of liquidity and issuing $1.5 billion in senior debt in part to pre-fund 2020 and 2021 maturities. We suspended Common Stock repurchases beginning April 1, 2020 under our existing repurchase authorization, after repurchasing $500 million of shares of Prudential Financial’s Common Stock in the first quarter of 2020. We did not resume share repurchases in 2020 as the duration and severity of the pandemic and its effect on the economy remained uncertain. On February 4, 2021, we announced that our Board of Directors has authorized the repurchase of up to $1.5 billion of our outstanding Common Stock during the period from January 1, 2021 through December 31, 2021. The impact of COVID-19 and related market dislocations could further strain our existing liquidity and cause us to increase the use of our alternative sources of liquidity, which could result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings or ratings outlooks. See “—Liquidity and Capital Resources—Liquidity” for a discussion of our liquidity.
•Capital Resources. As of December 31, 2020, all of our significant insurance subsidiaries maintained capital levels consistent with their ratings targets; however, market conditions could negatively impact the statutory capital of our insurance companies and constrain our overall capital flexibility, including as a result of credit migration and losses in our investment portfolio, as discussed below. Adverse market conditions could require us to take additional management actions for our insurance subsidiaries to maintain capital consistent with their ratings objectives, which may include redeploying financial resources from internal sources, or using available external sources of capital or seeking additional sources. See “—Liquidity and Capital Resources—Capital” for a discussion of our capital resources.

•Investment Portfolio. Net unrealized gains (losses) on fixed maturity investments (excluding securities classified as trading) were a net unrealized gain of $58,928 million as of December 31, 2020, compared to a net unrealized gain of $44,891 million as of December 31, 2019. Gross unrealized gains increased from $46,206 million as of December 31, 2019 to $59,980 million as of December 31, 2020, and gross unrealized losses decreased from $1,315 million to $980 million for the same period. The increase in gross unrealized gains and the decrease in gross unrealized losses was primarily due to a decrease in U.S. interest rates. The continued impact of COVID-19 on the global economy and corporate credit may continue to result in negative credit migration and possible losses in our investment portfolio. Due to the highly uncertain nature of these conditions, it is not possible to estimate the overall impacts at this time. The sectors most impacted by the COVID-19 crisis include energy, consumer cyclical and retail related investments (see “—General Account Investments” for additional information). During 2020, approximately 1.4% of total invested assets were modified to allow for limited forbearance. Under the terms of forbearance, the borrower is allowed to defer a portion of current year principal and/or interest payments for a short period (e.g., 6 months). These deferrals accrue additional interest and do not have a material impact on our investment value.

•Underwriting Results. In 2020, we estimate that COVID-19 had a net negative impact on our underwriting results, reflecting unfavorable mortality impacts in our Group Insurance and Individual Life businesses, partially offset by favorable mortality impacts in our Retirement business. Going forward, we estimate that our net underwriting results will be adversely impacted by approximately $85 million for every incremental 100,000 fatalities in the United States; however, the ultimate impact on our underwriting results will depend on factors such as: an insured’s age; geographic concentration; insured versus uninsured populations among the fatalities; the transmissibility and virulence of the virus, including the potential of further mutation; and the speed and efficacy of the vaccine rollout. In addition, see “—Results of Operations by Segment” for a discussion of mortality experience in each of our segments, where applicable.

•Expenses. We experienced higher expenses of approximately $150 million in 2020 from costs associated with COVID-19, primarily related to agent compensation, as well as technology and third-party vendor capabilities related to remote work functionality and protecting our employees’ health. However, we also experienced cost savings associated with COVID-19 of approximately $110 million in 2020, primarily from lower travel and entertainment costs.

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

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

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

In addition to the considerations disclosed above, other COVID-19 related impacts are discussed in the following sections of this document:

•Business Outlooks. See “—Outlook” for a discussion of specific outlook considerations for each of our businesses, including impacts related to COVID-19.

•Results of Operations by Segment. See “—Results of Operations by Segment” for a discussion of COVID-19 impacts on segment results, where applicable.

•Sales and Flows. See “—Segment Results of Operations” for a discussion of sales and flows in each of our segments.

•Risk Management. See “—Risk Management—COVID-19” for a discussion of our risk management framework and its incorporation of pandemic stress scenarios.

•Risk Factors. See “Risk Factors” for a discussion of the risks to our businesses posed by the COVID-19 pandemic.

•CARES Act and Other Regulatory Developments. See “Business—Regulation—Regulatory Response to the COVID-19 Pandemic” for additional information.

Outlook

We feel confident about our prospects for the future based on the foundation of our integrated and complementary businesses. We plan to continue our transformation by executing on our cost savings plan and taking additional steps to increase our growth potential and reduce our market sensitivity. Specifically, we plan to reallocate capital across the businesses with the intention of doubling the earnings contribution from our higher-growth businesses and reducing the earnings contribution from our Individual Annuities business.

Specific outlook considerations for each of our businesses include the following:

•PGIM. Our global investment management business, PGIM, is focused on maintaining strong investment performance while leveraging the scale of its approximately $1.499 trillion of assets under management through its distinctive multi-manager model. In addition to providing solutions for its third-party clients, PGIM provides our U.S. and International Businesses with a competitive advantage through its investment expertise across a broad array of asset classes. Despite the impact of the COVID-19 pandemic, PGIM has experienced favorable equity market and credit conditions, strong performance, continued positive flows across both institutional and retail investors, gains from our seed capital and co-investments and increased levels of production and profitability from the agency business demonstrating the counter cyclical nature of the business. There remain risks to earnings across the asset management industry, including PGIM, if economic conditions remain unstable, markets decline or credit spreads widen. An economic downturn could also have impacts on real estate prices as well as transaction volumes in certain private asset classes. Adverse changes in market conditions could lead to lower fee-based revenues, incentive fees taking longer to be realized and losses emerging in our co- and seed investment portfolio. We believe PGIM’s uniquely diversified global platform is well positioned to be resilient in the face of market and industry headwinds. Underpinning our growth strategy is our ability to continue to deliver robust investment performance, and to attract and retain high-caliber investment talent.

U.S. Businesses:

•U.S. Workplace Solutions. In our Retirement business, we continue to provide products that respond to the needs of plan sponsors to manage risk and control their benefit costs while ensuring we maintain appropriate pricing and return expectations under changing market conditions. In our full service business, we have experienced strong deposits and sales in recent years and, while we foresee the continuation of spread and fee compression, we believe
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these are manageable headwinds. During 2020, account values in our full-service business were impacted by the CARES Act, which provided qualified individuals the ability to withdraw from defined contribution plans and individual retirement accounts up to $100,000 penalty-free, with the withdrawal taxed over a three-year period (unless otherwise elected by the individual). We expect the impact on account values of the withdrawals made in 2020 to continue into 2021. In our pension risk transfer business, we expect our differentiated capabilities and demonstrated execution to drive our business momentum in the face of increasing competition while we maintain appropriate pricing and return expectations under changing market conditions. We expect, however, that growth will not be linear given the episodic nature of larger cases. Given that many of the products in our institutional investment products business assume longevity risk, elevated levels of mortality resulting from COVID-19 may continue to contribute to a higher level of underwriting gains in this business. In our Group Insurance business, we continue to focus on expanding our Premier market segment and affinity relations, while maintaining a leadership position in the National segment. However, we expect COVID-19 to continue to contribute to elevated levels of mortality resulting in increased life insurance claims in the near-term. In addition, we expect elevated unemployment to drive increased disability claims in this business. Market conditions may also continue to impact sales volumes and the utilization of workplace benefits across our Workplace Solutions businesses.

•U.S. Individual Solutions. Our Individual Annuities business remains focused on helping its customers meet their investment and retirement needs. During 2020, we took actions to pivot to less interest rate-sensitive products and ensure we realize appropriate returns for the current economic environment, including the decision to discontinue sales of traditional variable annuities with guaranteed living benefits after December 31, 2020. We expect to continue to shift our focus to products that provide protected outcomes for our customers through simpler, technology-enabled channels and that deliver shareholder value across a wide range of economic environments. We also expect account values, fee income, and spread income to continue to be impacted by market conditions. Our Individual Life business continues to focus on making life insurance solutions more available to consumers and financial professionals, including building omnichannel distribution capabilities enabled by digital platforms. During 2020, we also took pricing and product actions to ensure we realize appropriate returns for the current economic environment and to diversify our product mix to further limit our sensitivity to interest rates, including the suspension of our single life guaranteed universal life product. We expect COVID-19 to continue to contribute to elevated levels of mortality, resulting in increased life insurance claims in the near-term. Across our Individual Solutions businesses, mandated social distancing has limited in-person engagement between customers and financial professionals. We have taken actions to expand our digital capabilities, which has mitigated the impact of these limitations; however, collectively, we expect the product actions we have taken along with the constrained distribution environment to adversely impact our sales prospects in the near-term.

•Assurance IQ. Assurance IQ leverages data science and technology to distribute Medicare, health, life, property and casualty, and personal finance products directly to retail customers, primarily through its digital and independent agent channels. Assurance uses an open architecture platform, and the products it currently distributes are predominantly offered by third-parties. We expect that Assurance IQ will contribute to the growth of our U.S. Businesses and has the potential to enhance the growth of our International Businesses over time. We expect the impacts of COVID-19 on our Assurance IQ business to be limited as the business does not have direct exposure to capital market conditions or mortality; however, consumer financial hardships and uncertainty created by the current economic conditions could negatively impact persistency and expected sales levels. In addition, during 2020 we experienced headwinds related to adapting components of the Assurance IQ distribution model to the remote work environment caused by COVID-19; however, we expect to mitigate these headwinds going forward through continued operational enhancements.

•International Businesses. Our International Businesses remain focused on meeting customers’ protection and financial needs as well as maintaining the underlying strength of our distribution channels. We continue to strengthen our position in Japan and seek to expand our footprint in select high-growth emerging markets. We continue to invest in our existing businesses and regularly assess acquisition opportunities to build scale, complement our businesses, and support our long-term growth aspirations. We also regularly evaluate strategic options for our businesses as part of ensuring their alignment with our broader business goals and strategic vision, and in 2020 we sold our life insurance operations in Korea and entered into an agreement to sell our life insurance operations in Taiwan. For additional information on our strategic acquisitions and dispositions, see “—Results of Operations by Segment—International Insurance Division—International Insurance” below.

In 2020, we saw a slightly elevated level of claims due to COVID-19 and increased expenses from supporting our captive agents. Sales throughout 2020 were impacted by the global implementation of social distancing protocols that limited in-person engagement between customers and advisors within both our captive agent and third-party distribution channels; however, our distribution channels adapted quickly to employ virtual tools to adjust to these
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limitations. In January 2021, Japan declared its second state of emergency regarding COVID-19, which again installed social distancing protocols, although less restrictive than the first time. While the current state of emergency in Japan is not countrywide and is more focused on social activities, further tightening of COVID-19 restrictions on personal interactions either in Japan or in other markets is possible and, depending on the specific circumstances and geographies impacted, could adversely impact our sales prospects for a period of time. We believe our needs-based selling and death protection focus are even more valuable to consumers based on the global experience of COVID-19 and will help support the continued growth of our businesses.

Industry Trends

Our U.S. and International Businesses are impacted by financial markets, economic conditions, regulatory oversight, and a variety of trends that affect the industries in which we compete.

Financial and Economic Environment:

•U.S. Businesses. As discussed further under “—Impact of a Low Interest Rate Environment” below, interest rates in the U.S. have experienced a sustained period of historically low levels, which continue to negatively impact our investment-related activity, including our investment income returns, net investment spread results, and portfolio income and reinvestment yields. In addition, we are subject to financial impacts associated with movements in equity markets and the evolution of the credit cycle as discussed in “—Segment Results of Operations” where applicable and more broadly in “Risk Factors”.

•International Businesses. While our International Businesses’ operations, especially in Japan, have successfully managed a low interest rate environment for many years, as discussed under “—Impact of a Low Interest Rate Environment” below, these low rates continue to negatively impact our investment-related activity, including our investment income returns, net investment spread results, and portfolio income and reinvestment yields. The current reinvestment yields for certain blocks of business are now generally lower than the current portfolio yields supporting these blocks of business. The continuation of low interest rates in the U.S., along with their relation to interest rates in Japan, may impact the relative attractiveness of U.S. dollar-denominated products compared to yen-denominated products in Japan. In addition, we are subject to financial impacts associated with movements in foreign currency rates, particularly the Japanese yen. Fluctuations in the value of the yen can impact the relative attractiveness to customers of both yen-denominated and non-yen denominated products. In addition, we are subject to financial impacts associated with movements in equity markets and the evolution of the credit cycle as discussed in “—Segment Results of Operations” where applicable and more broadly in “Risk Factors”.

Demographics:

•U.S. Businesses. Customer demographics continue to evolve and new opportunities present themselves in different consumer segments such as the millennial and multicultural markets. Consumer expectations and preferences are changing. We believe existing customers and potential customers are increasingly looking for cost-effective solutions that they can easily understand and access through technology-enabled devices. At the same time, income protection, wealth accumulation and the needs of retiring baby boomers are continuing to shape the insurance industry. A persistent retirement security gap exists in terms of both savings and protection. Despite the ongoing phenomenon of the risk and responsibility of retirement savings shifting from employers to employees, employers are becoming increasingly focused on the financial wellness of the individuals they employ.

•International Businesses. Japan has an aging population as well as a large pool of household assets invested in low-yielding deposit and savings vehicles. The aging of Japan’s population, along with strains on government pension and healthcare programs, have led to a growing demand for insurance products with a significant savings element (to meet savings and retirement needs as the population prepares for retirement) as well as health-related products.

Regulatory Environment. See “Business—Regulation” for a discussion of regulatory developments that may impact the Company and the associated risks.

Competitive Environment. See “Business—” for a discussion of the competitive environment and the basis on which we compete in each of our segments.

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

For more information on interest rate risks, see “Risk Factors—Market Risk”.

See below for discussions related to the current interest rate environments in our two largest markets, the U.S. and Japan; the composition of our insurance liabilities and policyholder account balances; and the hypothetical impacts to our investment-related results if these interest rate environments are sustained.

U.S. Operations excluding the Closed Block Division
 
Interest rates in the U.S. have experienced a sustained period of historically low levels with certain benchmarks reaching significant lows. While market conditions and events make uncertain the timing, amount and impact of any monetary policy decisions by the Federal Reserve, changes in interest rates may impact our reinvestment yields, primarily for our investments in fixed maturity securities and commercial mortgage loans. As interest rates decline, our reinvestment yield may be below our overall portfolio yield, resulting in an unfavorable impact to earnings. Conversely, as interest rates rise, our reinvestment yield may exceed the overall portfolio yield resulting in a favorable impact to earnings.

For the general account supporting our U.S. Individual Solutions division, U.S. Workplace Solutions division and our Corporate and Other operations, we estimate annual principal payments and prepayments that we would be required to reinvest to be approximately 5.4% of the fixed maturity security and commercial mortgage loan portfolios through 2022. The portion of the general account attributable to these operations has approximately $251 billion of such assets (based on net carrying value) as of December 31, 2020. The average portfolio yield for fixed maturity securities and commercial mortgage loans is approximately 3.9%, as of December 31, 2020.

Included in the $251 billion of fixed maturity securities and commercial mortgage loans are approximately $172 billion that are subject to call or redemption features at the issuer’s option and have a weighted average interest rate of approximately 4%. Of this $172 billion, approximately 53% contain provisions for prepayment premiums. If we reinvest scheduled payments or prepayments (not subject to a prepayment fee) at rates below the current portfolio yield, including in some cases at rates below those guaranteed under our insurance contracts, future operating results will be impacted to the extent we do not, or are unable to, reduce crediting rates on in-force blocks of business, or effectively utilize other asset/liability management strategies described below, in order to maintain current net interest margins.

The following table sets forth the insurance liabilities and policyholder account balances of our U.S. Operations excluding the Closed Block Division, by type, for the date indicated:
As of
December 31, 2020
(in billions)
Long-duration insurance products with fixed and guaranteed terms$154 
Contracts with adjustable crediting rates subject to guaranteed minimums62 
Participating contracts where investment income risk ultimately accrues to contractholders14 
Total$230 

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The $154 billion above relates to long-duration products such as group annuities, structured settlements and other insurance products that have fixed and guaranteed terms, for which underlying assets may have to be reinvested at interest rates that are lower than portfolio rates. We seek to mitigate the impact of a prolonged low interest rate environment on these contracts through asset/liability management, as discussed further below.

The $62 billion above relates to contracts with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. Although we may have the ability to lower crediting rates for those contracts above guaranteed minimums, our willingness to do so may be limited by competitive pressures. The following table sets forth the related account values by range of guaranteed minimum crediting rates and the related range of the difference, in basis points (“bps”), between rates being credited to contractholders as of December 31, 2020, and the respective guaranteed minimums. 
 Account Values with Adjustable Crediting Rates Subject to Guaranteed Minimums:
 At
guaranteed
minimum		1-49
bps above
guaranteed
minimum		50-99
bps above
guaranteed
minimum		100-150
bps above
guaranteed
minimum		Greater than
150
bps above
guaranteed
minimum		Total
 ($ in billions)
Range of Guaranteed Minimum Crediting Rates:
Less than 1.00%$0.9 $1.2 $0.3 $0.0 $0.0 $2.4 
1.00% - 1.99%1.4 15.3 2.7 2.0 1.2 22.6 
2.00% - 2.99%1.3 0.9 2.0 1.2 1.3 6.7 
3.00% - 4.00%28.1 0.4 0.1 0.2 0.2 29.0 
Greater than 4.00%0.9 0.0 0.0 0.0 0.0 0.9 
Total(1)$32.6 $17.8 $5.1 $3.4 $2.7 $61.6 
Percentage of total53 %29 %8 %6 %4 %100 %
 __________
(1)Includes approximately $0.56 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity.

The remaining $14 billion of insurance liabilities and policyholder account balances in these operations relates to participating contracts for which the investment income risk is expected to ultimately accrue to contractholders. The crediting rates for these contracts are periodically adjusted based on the return earned on the related assets.

Assuming a hypothetical scenario where the average 10-year U.S. Treasury rate is 0.85% (which is reasonably consistent with recent rates) for the period from January 1, 2021 through December 31, 2021 (and credit spreads remain unchanged from average levels experienced during the fourth quarter 2020), we estimate that the unfavorable impact to net investment income of reinvesting activities, including scheduled maturities and estimated prepayments of fixed maturities and commercial mortgage and other loans (excluding assets supporting participating contracts) would be between $120 million and $160 million for the period from January 1, 2021 through December 31, 2021.

In order to mitigate the unfavorable impact that a low interest rate environment has on our net interest margins, we employ a proactive asset/liability management program, which includes strategic asset allocation and hedging strategies within a disciplined risk management framework. These strategies seek to match the characteristics of our products, and to closely approximate the interest rate sensitivity of the assets with the estimated interest rate sensitivity of the product liabilities. Our asset/liability management program also helps manage duration gaps, currency and other risks between assets and liabilities through the use of derivatives. We adjust this dynamic process as products change, as customer behavior changes and as changes in the market environment occur. As a result, our asset/liability management process has permitted us to manage the interest rate risk associated with our products through several market cycles. Our interest rate exposure is also mitigated by our business mix, which includes lines of business for which fee-based and insurance underwriting earnings play a more prominent role in product profitability. We also regularly examine our product offerings and their profitability. As a result, we may reprice certain products and discontinue sales of other products that do not meet our profit expectations.

Closed Block Division
Substantially all of the $61 billion of general account assets in the Closed Block division support obligations and liabilities relating to the Closed Block policies only. See Note 15 to the Consolidated Financial Statements for additional information on the Closed Block.

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

The following table sets forth the insurance liabilities and policyholder account balances of our Japanese operations, by type, for the date indicated:
As of
December 31, 2020
 (in billions)
Insurance products with fixed and guaranteed terms$140 
Contracts with a market value adjustment if invested amount is not held to maturity26 
Contracts with adjustable crediting rates subject to guaranteed minimums12 
Total$178 

The $140 billion is primarily comprised of long-duration insurance products that have fixed and guaranteed terms, for which underlying assets may have to be reinvested at interest rates that are lower than current portfolio yields. The remaining insurance liabilities and policyholder account balances include $26 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity and $12 billion related to contracts with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. Most of the current crediting rates on these contracts, however, are at or near contractual minimums. Although we have the ability in some cases to lower crediting rates for those contracts that are above guaranteed minimum crediting rates, the majority of this business has interest crediting rates that are determined by formula.

Assuming a hypothetical scenario where the average 30-year Japanese Government Bond yield is 0.65% and the 10-year U.S. Treasury rate is 0.85% (which is reasonably consistent with recent rates) for the period from January 1, 2021 through December 31, 2021 (and credit spreads remain unchanged from average levels experienced during the fourth quarter 2020), we estimate that the unfavorable impact to net investment income of reinvesting activities, including scheduled maturities and estimated prepayments of fixed maturities and commercial mortgage and other loans (excluding assets supporting participating contracts) would be between $40 million and $80 million for the period from January 1, 2021 through December 31, 2021.

Results of Operations
 
Consolidated Results of Operations

The following table summarizes net income (loss) for the periods presented:
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 Year ended December 31,
 202020192018
 (in millions)
Revenues$57,033 $64,807 $62,992 
Benefits and expenses57,356 59,722 58,158 
Income (loss) before income taxes and equity in earnings of operating joint ventures(323)5,085 4,834 
Income tax expense (benefit)(81)947 822 
Income (loss) before equity in earnings of operating joint ventures(242)4,138 4,012 
Equity in earnings of operating joint ventures, net of taxes96 100 76 
Net income (loss)(146)4,238 4,088 
Less: Income attributable to noncontrolling interests228 52 14 
Net income (loss) attributable to Prudential Financial, Inc.$(374)$4,186 $4,074 
 
2020 to 2019 Annual Comparison. The $4,560 million decrease in “Net income (loss) attributable to Prudential Financial, Inc.” reflected the following notable items:

•$2,801 million unfavorable variance, on a pre-tax basis, from realized investment gains and losses for Prudential Financial, Inc. excluding Divested and Run-off Businesses, and excluding the impact of the hedging program associated with certain variable annuities discussed below (see “General Account Investments” for additional information);
•$1,444 million unfavorable variance, on a pre-tax basis, from a loss in the current period from our Divested and Run-off Businesses compared to a gain in the prior year period (see “Results of Operations by Segment—Divested and Run-off Businesses” for additional information);
•$707 million unfavorable variance, on a pre-tax basis, from lower adjusted operating income from our business segments (see “Segment Results of Operations” for additional information);
•$351 million unfavorable variance, on a pre-tax basis, reflecting the impact from changes in the value of our embedded derivatives and related hedge positions, net of DAC and other costs, associated with certain variable annuities (see “Results of Operations by Segment—U.S. Businesses—U.S. Individual Solutions Division—Individual Annuities—Risks and Risk Mitigants” for additional information); and
•$339 million unfavorable variance, on a pre-tax basis, from investment related activities that are primarily within “Other income (loss)” for PFI excluding our Divested and Run-off Businesses. These unfavorable impacts were primarily driven by unrealized gains (losses) from equity securities.

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

•$1,028 million favorable variance from a lower tax expense.

Segment Results of Operations
 
We analyze the performance of our segments and Corporate and Other operations using a measure of segment profitability called adjusted operating income. See “—Segment Measures” for a discussion of adjusted operating income and its use as a measure of segment operating performance.

Shown below are the adjusted operating income contributions of each segment and Corporate and Other operations for the periods indicated and a reconciliation of this segment measure of performance to “Income (loss) before income taxes and equity in earnings of operating joint ventures” as presented in the Consolidated Statements of Operations.
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 Year ended December 31,
 202020192018
 (in millions)
Adjusted operating income before income taxes by segment:
PGIM$1,262 $998 $959 
U.S. Businesses:
U.S. Workplace Solutions division:
Retirement
1,436 1,301 1,049 
Group Insurance
(16)285 229 
Total U.S. Workplace Solutions division
1,420 1,586 1,278 
U.S. Individual Solutions division:
Individual Annuities
1,470 1,843 1,925 
Individual Life
(48)87 223 
Total U.S. Individual Solutions division
1,422 1,930 2,148 
Assurance IQ division(1):
Assurance IQ
(88)(9)0 
Total Assurance IQ division(88)(9)0 
Total U.S. Businesses
2,754 3,507 3,426 
International Businesses(2)2,952 3,112 3,019 
Corporate and Other(1,824)(1,766)(1,283)
Total segment adjusted operating income before income taxes
5,144 5,851 6,121 
Reconciling items:
Realized investment gains (losses), net, and related adjustments(3)(4,156)(835)611 
Charges related to realized investment gains (losses), net(4)(159)(123)(315)
Market experience updates(5)(640)(449)0 
Divested and Run-off Businesses(6):
Closed Block division(24)36 (62)
Other Divested and Run-off Businesses(2)(629)755 (1,434)
Other adjustments(7)51 (47)0 
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(8)90 (103)(87)
Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures$(323)$5,085 $4,834 
__________
(1)Assurance IQ was acquired by the Company in October 2019. See Note 1 to the Consolidated Financial Statements and “—Assurance IQ” for additional information.
(2)Effective second quarter of 2020, the results of POK and the impact of its sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Effective third quarter of 2020, the results of POT and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Consolidated Financial Statements for additional information.
(3)Represents “Realized investment gains (losses), net,” and related adjustments. See “—General Account Investments” and Note 22 to the Consolidated Financial Statements for additional information. Prior period amounts have been updated to conform to current period presentation.
(4)Includes charges that represent the impact of realized investment gains (losses), net, on the amortization of DAC and other costs, and on changes in reserves. Also includes charges resulting from payments related to market value adjustment features of certain of our annuity products and the impact of realized investment gains (losses), net, on the amortization of Unearned Revenue Reserves (“URR”). Prior period amounts have been updated to conform to current period presentation.
(5)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 22 to the Consolidated Financial Statements for additional information. Prior period amounts have been updated to conform to current period presentation.
(6)Represents the contribution to income (loss) of Divested and Run-off Businesses that have been or will be sold or exited, including businesses that have been placed in wind down, but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP. See “—Divested and Run-off Businesses” for additional information.
(7)Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 22 to the Consolidated Financial Statements for additional information.
(8)Equity in earnings of operating joint ventures are included in adjusted operating income but excluded from “Income (loss) before income taxes and equity in earnings of operating joint ventures” as they are reflected on an after-tax U.S. GAAP basis as a separate line in the Consolidated Statements of Operations. Earnings attributable to noncontrolling interests are excluded from adjusted operating income but included in “Income (loss) before income taxes and equity in earnings of operating joint ventures” as they are reflected on a U.S. GAAP basis as a separate line in the Consolidated Statements of Operations. Earnings attributable to noncontrolling interests represent the portion of earnings from consolidated entities that relates to the equity interests of minority investors.

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Segment results for 2020 presented above reflect the following:
 
PGIM. Results for 2020 increased in comparison to 2019, primarily reflecting an increase in asset management fees and other related revenues, partially offset by higher expenses.

Retirement. Results for 2020 increased in comparison to 2019, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results increased primarily driven by higher reserve gains and lower expenses.

Group Insurance. Results for 2020 decreased in comparison to 2019, primarily reflecting less favorable underwriting results in our group life and group disability businesses, and lower net investment spread results.

Individual Annuities. Results for 2020 decreased in comparison to 2019, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results decreased primarily driven by lower fee income, net of distribution expenses and other associated costs.

Individual Life. Results for 2020 decreased in comparison to 2019, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results decreased primarily reflecting lower underwriting results, and a change in business practice related to the level of premiums collected on certain policies that resulted in reserve refinements.

Assurance IQ. Results for 2020 were $(88) million in our first full year of reporting since our acquisition of the business in October 2019. The loss reflects net revenues that were more than offset by operating expenses as well as amortization expenses related to intangible assets recognized as part of purchase accounting (see Note 1 and Note 10 to the Consolidated Financial Statements for additional information).

International Businesses. Results for 2020 decreased in comparison to 2019, inclusive of unfavorable net impacts from foreign currency exchange rates and unfavorable comparative net impacts from our annual reviews and update of assumptions and other refinements. Excluding these items, results decreased primarily reflecting lower net investment spread results and lower earnings from our joint venture investments, partially offset by favorable underwriting results including business growth.

Corporate and Other. Results for 2020 reflected increased losses in comparison to 2019, primarily driven by lower investment income and higher interest expense on debt, partially offset by lower charges related to corporate costs and initiatives, as well as favorable pension and employee benefit results.

Closed Block Division. Results for 2020 decreased in comparison to 2019, primarily driven by lower net investment activity results, partially offset by a decrease in the policyholder dividend obligation.

Segment Measures
 
Adjusted Operating Income. In managing our business, we analyze our segments’ operating performance using “adjusted operating income.” Adjusted operating income does not equate to “Income (loss) before income taxes and equity in earnings of operating joint ventures” or “Net income (loss)” as determined in accordance with U.S. GAAP, but is the measure of segment profit or loss we use to evaluate segment performance and allocate resources, and consistent with authoritative guidance, is our measure of segment performance. The adjustments to derive adjusted operating income are important to an understanding of our overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and our definition of adjusted operating income may differ from that used by other companies; however, we believe that the presentation of adjusted operating income as we measure it for management purposes enhances the understanding of our results of operations by highlighting the results from ongoing operations and the underlying profitability of our businesses. See Note 22 to the Consolidated Financial Statements for additional information on the presentation of segment results and our definition of adjusted operating income.
 
Annualized New Business Premiums. In managing our Individual Life, Group Insurance and International Businesses, we analyze annualized new business premiums, which do not correspond to revenues under U.S. GAAP. Annualized new business premiums measure the current sales performance of the business, while revenues primarily reflect the renewal persistency of policies written in prior years and net investment income, in addition to current sales. Annualized new business premiums include 10% of first year premiums or deposits from single pay products. No other adjustments are made for limited pay contracts.

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

Assets Under Management. In managing our PGIM business, we analyze assets under management (which do not correspond directly to U.S. GAAP assets) because the principal source of revenues is fees based on assets under management. Assets under management represent the fair market value or account value of assets which we manage directly for institutional clients, retail clients, and for our general account, as well as assets invested in our products that are managed by third-party managers.
Account Values. In managing our Individual Annuities and Retirement businesses, we analyze account values, which do not correspond to U.S. GAAP assets. Net sales (redemptions) in our Individual Annuities business and net additions (withdrawals) in our Retirement business do not correspond to revenues under U.S. GAAP, but are used as a relevant measure of business activity.
Impact of Foreign Currency Exchange Rates

Foreign currency exchange rate movements and related hedging strategies
 
As a U.S.-based company with significant business operations outside the U.S., particularly in Japan, we are subject to foreign currency exchange rate movements that could impact our U.S. dollar (“USD”)-equivalent earnings and shareholder return on equity. Our USD-equivalent earnings could be materially affected by currency fluctuations from period to period, even if earnings on a local currency basis are relatively constant. Our USD-equivalent equity is impacted as the value of our investment in international operations may also fluctuate based on changes in foreign currency exchange rates. We seek to mitigate these impacts through various hedging strategies, including the use of derivative contracts and by holding USD-denominated assets in certain of our foreign subsidiaries.
 
In order to reduce earnings volatility from foreign currency exchange rate movements, we enter into forward currency derivative contracts to effectively fix the currency exchange rates for a portion of our prospective non-USD-denominated earnings streams. This forward currency hedging program is primarily associated with our insurance operations in Japan.
 
In order to reduce equity volatility from foreign currency exchange rate movements, we primarily utilize a yen hedging strategy that calibrates the hedge level to preserve the relative contribution of our yen-based business to the Company’s overall return on equity on a leverage neutral basis. We implement this hedging strategy utilizing a variety of instruments, including USD-denominated assets, foreign currency derivative contracts, and dual currency and synthetic dual currency investments held locally in our Japanese insurance subsidiaries. The total hedge level may vary based on our periodic assessment of the relative contribution of our yen-based business to the Company’s overall return on equity.
 
The table below presents the aggregate amount of instruments that serve to hedge the impact of foreign currency exchange movements on our USD-equivalent shareholder return on equity from our Japanese insurance subsidiaries as of the dates indicated.
 December 31,
 20202019
 (in billions)
Foreign currency hedging instruments:
Hedging USD-equivalent earnings:
Forward currency contracts (notional amount outstanding)$0.4 $0.6 
Hedging USD-equivalent equity:
USD-denominated assets held in yen-based entities(1)10.1 13.1 
Dual currency and synthetic dual currency investments(2)0.5 0.6 
Total USD-equivalent equity foreign currency hedging instruments10.6 13.7 
Total foreign currency hedges$11.0 $14.3 
__________
(1)Includes USD-denominated fixed maturities at amortized cost plus any related accrued investment income, as well as USD notional amount of foreign currency derivative contracts outstanding. Note this amount represents only those USD assets serving to hedge the impact of foreign currency volatility on equity. Separate from this program, our Japanese operations also have $65.8 billion and $57.8 billion as of December 31, 2020 and 2019, respectively, of USD-denominated assets supporting USD-denominated liabilities related to USD-denominated products.
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(2)Dual currency and synthetic dual currency investments are held by our yen-based entities in the form of fixed maturities and loans with a yen-denominated principal component and USD-denominated interest income. The amounts shown represent the present value of future USD-denominated cash flows.
 
The USD-denominated investments that hedge the impact of foreign currency exchange rate movements on USD-equivalent earnings and shareholder return on equity from our Japanese insurance operations are reported within yen-based entities and, as a result, foreign currency exchange rate movements will impact their value reported within our yen-based Japanese insurance entities. We seek to mitigate the risk that future unfavorable foreign currency exchange rate movements will decrease the value of these USD-denominated investments reported within our yen-based Japanese insurance entities, and therefore negatively impact their equity and regulatory solvency margins, by having our Japanese insurance operations enter into currency hedging transactions. Those hedges are with a subsidiary of Prudential Financial. These hedging strategies have the economic effect of moving the change in value of these USD-denominated investments due to foreign currency exchange rate movements from our Japanese yen-based entities to our USD-based entities.
 
These USD-denominated investments also pay a coupon which is generally higher than what a similar yen-denominated investment would pay. The incremental impact of this higher yield on our USD-denominated investments, as well as our dual currency and synthetic dual currency investments, will vary over time, and is dependent on the duration of the underlying investments as well as interest rate environments in both the U.S. and Japan at the time of the investments.
 
Impact of intercompany foreign currency exchange rate arrangements on segment results of operations
 
The financial results of our International Businesses and PGIM reflect the impact of intercompany arrangements with our Corporate and Other operations pursuant to which these segments’ non-USD-denominated earnings are translated at fixed currency exchange rates. Results of our Corporate and Other operations include differences between the translation adjustments recorded by the segments at the fixed currency exchange rate versus the actual average rate during the period. In addition, specific to our International Businesses where we hedge certain currencies, the results of our Corporate and Other operations also include the impact of any gains or losses recorded from the forward currency contracts that settled during the period, which include the impact of any over or under hedging of actual earnings that differ from projected earnings.
 
For International Businesses, the fixed currency exchange rates are generally determined in connection with a foreign currency income hedging program designed to mitigate the impact of exchange rate changes on the segment’s expected USD-equivalent earnings. Pursuant to this program, our Corporate and Other operations execute forward currency contracts with third parties to sell the net exposure of projected earnings for certain currencies in exchange for USD at specified exchange rates. The maturities of these contracts correspond with the future periods (typically on a three-year rolling basis) in which the identified non-USD-denominated earnings are expected to be generated. In establishing the level of non-USD-denominated earnings that will be hedged through this program, we exclude the anticipated level of USD-denominated earnings that will be generated by USD-denominated products and investments. For the year ended December 31, 2020, approximately 2% of the segment’s earnings were yen-based and, as of December 31, 2020, we have hedged 100%, 72% and 31% of expected yen-based earnings for 2021, 2022 and 2023, respectively. To the extent currently unhedged, our International Businesses’ future expected USD-equivalent of yen-based earnings will be impacted by yen exchange rate movements.
 
As a result of these arrangements, our International Businesses’ results for 2020, 2019 and 2018 reflect the impact of translating yen-denominated earnings at fixed currency exchange rates of 104, 105, and 111 yen per USD, respectively. We expect our 2021 results to reflect the impact of translating yen-denominated earnings at a fixed currency exchange rate of 103 yen per USD. Since determination of the fixed currency exchange rates for a given year is impacted by changes in foreign currency exchange rates over time, the segment’s future earnings will ultimately be impacted by these changes in exchange rates.

For PGIM and certain other currencies within our International Businesses, the fixed currency exchange rates for the current year are predetermined during the third quarter of the prior year using forward currency exchange rates.
 
The table below presents, for the periods indicated, the increase (decrease) to revenues and adjusted operating income for the International Businesses, PGIM and Corporate and Other operations, reflecting the impact of these intercompany arrangements.
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 Year ended December 31,
 202020192018
 (in millions)
Segment impacts of intercompany arrangements:
International Businesses(3)$64 $39 $21 
PGIM(4)6 0 
Impact of intercompany arrangements(1)60 45 21 
Corporate and Other:
Impact of intercompany arrangements(1)(3)(60)(45)(21)
Settlement gains (losses) on forward currency contracts(2)(3)67 55 (1)
Net benefit (detriment) to Corporate and Other7 10 (22)
Net impact on consolidated revenues and adjusted operating income$67 $55 $(1)
__________
(1)Represents the difference between non-USD-denominated earnings translated on the basis of weighted average monthly currency exchange rates versus fixed currency exchange rates determined in connection with the foreign currency income hedging program.
(2)As of December 31, 2020, 2019 and 2018, the total notional amounts of these forward currency contracts within our Corporate and Other operations were $1.0 billion, $1.3 billion and $2.1 billion, respectively, of which $0.4 billion, $0.6 billion and $1.3 billion, respectively, were related to our Japanese insurance operations.
(3)Excludes impacts related to POK. Prior period amounts have been updated to conform to current period presentation. Effective second quarter of 2020, the intercompany arrangement for the Korean won between our International Businesses and Corporate and Other operations was terminated and the related hedges were repurposed in relation to the anticipated sale of POK. Effective second quarter of 2020, Korean won-denominated earnings for 2020 and 2019 that were translated at fixed currency exchange rates of 1,090 and 1,110 Korean won per USD, respectively, are excluded from the International Businesses and are included in the Divested and Run-off Businesses included in Corporate and Other. See Note 1 to the Consolidated Financial Statements for additional information.
 
Impact of products denominated in non-local currencies on U.S. GAAP earnings
 
While our international insurance operations offer products denominated in local currency, several also offer products denominated in non-local currencies. This is most notable in our Japanese operations, which currently offer primarily USD-denominated products, but have also historically offered Australian dollar (“AUD”)-denominated products. The non-local currency-denominated insurance liabilities related to these products are supported by investments denominated in corresponding currencies, including a significant portion designated as available-for-sale. While the impact from foreign currency exchange rate movements on these non-local currency-denominated assets and liabilities is economically matched, differences in the accounting for changes in the value of these assets and liabilities due to changes in foreign currency exchange rate movements have historically resulted in volatility in U.S. GAAP earnings.

In 2015, we implemented a structure in Gibraltar Life’s operations that disaggregated the USD- and AUD-denominated businesses into separate divisions, each with its own functional currency that aligns with the underlying products and investments. The result of this alignment was to reduce differences in the accounting for changes in the value of these assets and liabilities that arise due to changes in foreign currency exchange rate movements. For the USD- and AUD-denominated assets that were transferred under this structure, the net cumulative unrealized investment gains associated with foreign exchange remeasurement that were recorded in “Accumulated other comprehensive income (loss)” (“AOCI”) totaled $2.3 billion and $2.7 billion as of December 31, 2020 and 2019, respectively, and will be recognized in earnings within “Realized investment gains (losses), net” over time as these assets mature or are sold. Absent the sale of any of these assets prior to their stated maturity, approximately 13% of the $2.3 billion balance as of December 31, 2020 will be recognized in 2021, approximately 11% will be recognized in 2022, and the remaining balance will be recognized from 2023 through 2051.
 
Highly inflationary economy in Argentina
 
Our insurance operations in Argentina, Prudential of Argentina (“POA”), have historically utilized the Argentine peso as the functional currency given it is the currency of the primary economic environment in which the entity operates. During 2018, Argentina experienced a cumulative inflation rate that exceeded 100% over a 3-year period. As a result, Argentina’s economy was deemed to be highly inflationary resulting in reporting changes effective July 1, 2018. Under U.S. GAAP, the financial statements of a foreign entity in a highly inflationary economy are to be remeasured as if its functional currency (formerly the Argentine peso) is the reporting currency of its parent reporting entity (the USD) on a prospective basis. While this changed how the results of POA are remeasured and/or translated into USD, the impact to our financial statements was not material nor is it expected to be material in future periods given the relative size of our POA operations. It should also be noted that due to the macroeconomic environment in Argentina, substantially all of POA’s balance sheet consists of USD-denominated product liabilities supported by USD-denominated assets. As a result, this accounting change serves to reduce the remeasurement
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impact reflected in net income given that the functional currency and currency in which the assets and liabilities are denominated will be more closely aligned.

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

The following sections discuss the accounting policies applied in preparing our financial statements that management believes are most dependent on the application of estimates and assumptions and require management’s most difficult, subjective, or complex judgments.

Insurance Assets

Deferred Policy Acquisition Costs and Deferred Sales Inducements

We capitalize costs that are directly related to the acquisition or renewal of insurance and annuity contracts. These costs primarily include commissions, as well as costs of policy issuance and underwriting and certain other expenses that are directly related to successfully negotiated contracts. We have also deferred costs associated with sales inducements related to our variable and fixed annuity contracts primarily within our Individual Annuities segment. Sales inducements are amounts that are credited to the policyholders’ account balances mainly as an inducement to purchase the contract. For additional information about sales inducements, see Note 13 to the Consolidated Financial Statements. We generally amortize DAC and deferred sales inducements (“DSI”) over the expected lives of the contracts, based on our estimates of the level and timing of gross premiums, gross profits, or gross margins, depending on the type of contract. As described in more detail below, in calculating DAC and DSI amortization, we are required to make assumptions about investment returns, mortality, persistency, and other items that impact our estimates of the level and timing of gross margins, gross profits, or gross premiums. We also periodically evaluate the recoverability of our DAC and DSI. For certain contracts, this evaluation is performed as part of our premium deficiency testing, as discussed further below in “—Insurance Liabilities—Future Policy Benefits.” As of December 31, 2020, DAC and DSI for PFI excluding the Closed Block division were $18.8 billion and $0.8 billion, respectively, and DAC in our Closed Block division was $209 million.

Amortization methodologies
 
Gross Premiums. DAC, associated with the non-participating term life policies of our Individual Life segment and the whole life, term life, endowment and health policies of our International Businesses segment, is primarily amortized in proportion to gross premiums. Gross premiums are defined as the premiums charged to a policyholder for an insurance contract.
 
Gross Profits. DAC and DSI, associated with the variable and universal life policies of our Individual Life and International Businesses segments and the variable and fixed annuity contracts of our Individual Annuities and International Businesses segments, are generally amortized over the expected lives of these policies in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. Gross profits are defined as: i) amounts assessed for mortality, contract administration, surrender charges, and other assessments plus amounts earned from investment of policyholder balances, less ii) benefits in excess of policyholder balances, costs incurred for contract administration, the net cost of reinsurance for certain businesses, interest credited to policyholder balances and other credits. If significant negative gross profits are expected in any periods, the amount of insurance in force is generally substituted as the base for computing amortization. U.S. GAAP gross profits and amortization rates also include the impacts of the embedded derivatives associated with certain of the optional living benefit features of our variable annuity contracts, and index-linked crediting features of certain universal life and annuity contracts and related hedging activities. For additional information on the significant inputs to the valuation models for these embedded derivatives including capital market assumptions and actuarially-determined assumptions, see below “—Insurance Liabilities—Future Policy Benefits.” In calculating amortization expense, we estimate the amounts of gross profits that will be included in our U.S. GAAP results and in adjusted operating income, and utilize these estimates to calculate distinct amortization rates and expense amounts. We also regularly evaluate and adjust the related DAC and DSI balances with a corresponding charge or credit to current period earnings for the impact of actual gross profits and changes in our projections of estimated future gross profits on our DAC and DSI amortization rates. Adjustments to the DAC and DSI balances include the impact to our estimate of total gross profits of the annual review of assumptions, our
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quarterly adjustments for current period experience, and our quarterly adjustments for market performance. Each of these adjustments is further discussed below in “—Annual assumptions review and quarterly adjustments.”
 
Gross Margins. DAC associated with the traditional participating products of our Closed Block is amortized over the expected lives of these contracts in proportion to total gross margins. Total gross margins are defined as: i) amounts received from premiums, earned from investment of policyholder balances and other assessments, less ii) benefits paid, costs for contract administration, changes in the net level premium reserve for death and endowment benefits, annual policyholder dividends and other credits. We evaluate our estimates of future gross margins and adjust the related DAC balance with a corresponding charge or credit to current period earnings for the effects of actual gross margins and changes in our expected future gross margins. DAC adjustments for these participating products generally have not created significant volatility in our results of operations since many of the factors that affect gross margins are also included in the determination of our dividends to these policyholders and, during most years, the Closed Block has recognized a cumulative policyholder dividend obligation expense in “Policyholders’ dividends,” for the excess of actual cumulative earnings over expected cumulative earnings as determined at the time of demutualization. However, if actual cumulative earnings fall below expected cumulative earnings in future periods, thereby eliminating the cumulative policyholder dividend obligation expense, changes in gross margins and DAC amortization would result in a net impact to the Closed Block results of operations. As of December 31, 2020, the excess of actual cumulative earnings over the expected cumulative earnings was $2,920 million.

The amortization methodologies for products not discussed above primarily relate to less significant DAC and DSI balances associated with products in our Group Insurance and Retirement segments, which comprised approximately 2% of the Company’s total DAC and DSI balances as of December 31, 2020.
 
Annual assumptions review and quarterly adjustments
 
Annually, we perform a comprehensive review of the assumptions used in estimating gross profits for future periods. Over the last several years, the Company’s most significant assumption updates that have resulted in a change to expected future gross profits and the amortization of DAC and DSI have been related to lapse and other contractholder behavior assumptions, mortality, and revisions to expected future rates of returns on investments. These assumptions may also cause potential significant variability in amortization expense in the future. The impact on our results of operations of changes in these assumptions can be offsetting and we are unable to predict their movement or offsetting impact over time.

The quarterly adjustments for current period experience referred to above reflect the impact of differences between actual gross profits for a given period and the previously estimated expected gross profits for that period. To the extent each period’s actual experience differs from the previous estimate for that period, the assumed level of total gross profits may change. In these cases, we recognize a cumulative adjustment to all previous periods’ amortization, also referred to as an experience true-up adjustment.

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

The weighted average rate of return assumptions used in developing estimated market returns consider many factors specific to each product type, including asset durations, asset allocations and other factors. With regard to equity market assumptions, the near-term future rate of return assumption used in evaluating DAC and DSI for our domestic variable annuity and domestic and international variable life insurance products is derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15.0%, we use our maximum future rate of return. As of December 31, 2020, our domestic variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 1.3% near-term mean reversion equity expected rate of return, and our
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international variable life insurance business assumes a 4.8% long-term equity expected rate of return and a 1.5% near-term mean reversion equity expected rate of return.

With regard to interest rate assumptions used in evaluating DAC and DSI, we update the long-term and near-term future rates used to project fixed income returns annually and quarterly, respectively. As a result of our 2020 annual reviews and update of assumptions and other refinements, we reduced our long-term expectation of the (i) 10-year U.S. Treasury rate by 50 basis points and now grade to a rate of 3.25% over ten years, and (ii) 10-year Japanese Government Bond yield by 30 basis points and now grade to a rate of 1.00% over ten years. As part of our quarterly market experience updates, we update our near-term projections of interest rates to reflect changes in current rates.

Value of Business Acquired
 
In addition to DAC and DSI, we also recognize an asset for VOBA. VOBA is an intangible asset that represents an adjustment to the stated value of acquired in-force insurance contract liabilities to present them at fair value, determined as of the acquisition date. VOBA is amortized over the expected life of the acquired contracts using the same methodology and assumptions used to amortize DAC and DSI (see “—Deferred Policy Acquisition Costs and Deferred Sales Inducements” above for additional information). VOBA is also subject to recoverability testing. As of December 31, 2020, VOBA was $1.1 billion, and included $0.9 billion related to the acquisition from American International Group (“AIG”) of AIG Star Life Insurance Co., Ltd, AIG Edison Life Insurance Company, AIG Financial Assurance Japan K.K. and AIG Edison Service Co., Ltd. (collectively, the “Star and Edison Businesses”) in 2011. The remaining $0.2 billion primarily relates to previously-acquired traditional life, deferred annuity, defined contribution and defined benefit businesses. The VOBA associated with the in-force contracts of the Star and Edison Businesses is less sensitive to assumption changes, as the majority is amortized in proportion to gross premiums which are more predictably stable compared to gross profits.
 
Insurance Liabilities
 
Future Policy Benefits
 
Future Policy Benefit Reserves, including Unpaid Claims and Claim Adjustment Expenses
 
We establish reserves for future policy benefits to, or on behalf of, policyholders using methodologies prescribed by U.S. GAAP. The reserving methodologies used include the following:
 
•For most long-duration contracts, we utilize a net premium valuation methodology in measuring the liability for future policy benefits. Under this methodology, a liability for future policy benefits is accrued when premium revenue is recognized. The liability, which represents the present value of future benefits to be paid to or on behalf of policyholders and related expenses less the present value of future net premiums (portion of the gross premium required to provide for all benefits and expenses), is estimated using methods that include assumptions applicable at the time the insurance contracts are made with provisions for the risk of adverse deviation, as appropriate. Original assumptions continue to be used in subsequent accounting periods to determine changes in the liability for future policy benefits (often referred to as the “lock-in concept”), unless a premium deficiency exists. The result of the net premium valuation methodology is that the liability at any point in time represents an accumulation of the portion of premiums received to date expected to be needed to fund future benefits (i.e., net premiums received to date), less any benefits and expenses already paid. The liability does not necessarily reflect the full policyholder obligation the Company expects to pay at the conclusion of the contract since a portion of that obligation would be funded by net premiums received in the future and would be recognized in the liability at that time. We perform premium deficiency tests using best estimate assumptions as of the testing date without provisions for adverse deviation. If the liabilities determined based on these best estimate assumptions are greater than the net reserves (i.e., GAAP reserves net of any DAC, DSI or VOBA asset), the existing net reserves are adjusted by first reducing these assets by the amount of the deficiency or to zero through a charge to current period earnings. If the deficiency is more than these asset balances for insurance contracts, we then increase the net reserves by the excess, again through a charge to current period earnings. If a premium deficiency is recognized, the assumptions as of the premium deficiency test date are locked-in and used in subsequent valuations and the net reserves continue to be subject to premium deficiency testing. In addition, for limited-payment contracts, future policy benefit reserves also include a deferred profit liability representing gross premiums received in excess of net premiums. The deferred profits are generally recognized in revenue in a constant relationship with insurance in force or with the amount of expected future benefit payments.
•For certain contract features, such as those related to guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”) and no-lapse guarantees, a liability is established when associated assessments (which include policy charges for administration, mortality, expense, surrender, and other, regardless of how characterized) are recognized. This liability is established using current best estimate assumptions and is based on the
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ratio of the present value of total expected excess payments (e.g., payments in excess of account value) over the life of the contract divided by the present value of total expected assessments (i.e., benefit ratio). The liability equals the current benefit ratio multiplied by cumulative assessments recognized to date, plus interest, less cumulative excess payments to date. The result of the benefit ratio method is that the liability at any point in time represents an accumulation of the portion of assessments received to date expected to be needed to fund future excess payments, less any excess payments already paid. The liability does not necessarily reflect the full policyholder obligation the Company expects to pay at the conclusion of the contract since a portion of that excess payment would be funded by assessments received in the future and would be recognized in the liability at that time. Similar to as described above for DAC, the reserves are subject to adjustments based on annual reviews of assumptions and quarterly adjustments for experience, including market performance. These adjustments reflect the impact on the benefit ratio of using actual historical experience from the issuance date to the balance sheet date plus updated estimates of future experience. The updated benefit ratio is then applied to all prior periods’ assessments to derive an adjustment to the reserve recognized through a benefit or charge to current period earnings.
•For certain product guarantees, primarily certain optional living benefit features of the variable annuity products in our Individual Annuities segment including guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum income and withdrawal benefits (“GMIWB”), the benefits are accounted for as embedded derivatives using a fair value accounting framework. The fair value of these contracts is calculated as the present value of expected future benefit payments to contractholders less the present value of assessed rider fees attributable to the embedded derivative feature. Under U.S. GAAP, the fair values of these benefit features are based on assumptions a market participant would use in valuing these embedded derivatives. Changes in the fair value of the embedded derivatives are recorded quarterly through a benefit or charge to current period earnings. For additional information regarding the valuation of these embedded derivatives, see Note 6 to the Consolidated Financial Statements.
•In certain instances, the policyholder liability for a particular line of business may not be deficient in the aggregate to trigger loss recognition, but the pattern of earnings may be such that profits are expected to be recognized in earlier years followed by losses in later years. In these situations, accounting standards require that an additional liability (Profits Followed by Losses or “PFL” liability) be recognized by an amount necessary to sufficiently offset the losses that would be recognized in later years. The PFL liability is based on our current estimate of the present value of the amount necessary to offset losses anticipated in future periods. Because the liability is measured on a discounted basis, there will also be accretion into future earnings through an interest charge, and the liability will ultimately be released into earnings as an offset to future losses. Historically, the Company’s PFL liabilities have been predominantly associated with certain universal life contracts that measure net GAAP reserves using current best estimate assumptions and accordingly, have been updated each quarter using current in-force and market data and as part of the annual assumption update. At the target accrual date (i.e., date of peak deficiency), the PFL liability transitions to a premium deficiency reserve and, for universal life products, will continue to be updated each quarter using current in-force and market data and as part of the annual assumption update.

The assumptions used in establishing reserves are generally based on the Company’s experience, industry experience and/or other factors, as applicable. We update our actuarial assumptions, such as mortality, morbidity, retirement and policyholder behavior assumptions, annually, unless a material change is observed in an interim period that we feel is indicative of a long-term trend. Generally, we do not expect trends to change significantly in the short-term and, to the extent these trends may change, we expect such changes to be gradual over the long-term. In a sustained low interest rate environment, there is an increased likelihood that the reserves determined based on best estimate assumptions may be greater than the net liabilities.
 
The following paragraphs provide additional details about the reserves we have established:
 
International Businesses. The reserves for future policy benefits of our International Businesses, which as of December 31, 2020, represented 42% of our total future policy benefit reserves, primarily relate to non-participating whole life and term life products and endowment contracts, and are generally calculated using the net premium valuation methodology, as described above. The primary assumptions used in determining expected future benefits and expenses include mortality, lapse, morbidity, investment yield and maintenance expense assumptions. Reserves also include claims reported but not yet paid, and claims incurred but not yet reported. In addition, future policy benefit reserves for certain contracts also include amounts related to our deferred profit liability, as described above.
 
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Retirement. The reserves for future policy benefits of our Retirement segment, which as of December 31, 2020, represented 22% of our total future policy benefit reserves, primarily relate to our non-participating life contingent group annuity and structured settlement products and are generally calculated using the net premium valuation methodology, as described above. The primary assumptions used in establishing these reserves include mortality, retirement, maintenance expense and investment yield assumptions. In addition, future policy benefit reserves for certain contracts also include amounts related to our deferred profit liability, as described above.

Individual Annuities. The reserves for future policy benefits of our Individual Annuities segment, which as of December 31, 2020, represented 7% of our total future policy benefit reserves, primarily relate to reserves for the GMDB and GMIB features of our variable annuities, and for the optional living benefit features that are accounted for as embedded derivatives. As discussed above, in establishing reserves for GMDBs and GMIBs, we utilize current best estimate assumptions. The primary assumptions used in establishing these reserves generally include annuitization, lapse, withdrawal and mortality assumptions, as well as interest rate and equity market return assumptions. Lapse rates are adjusted at the contract level based on the in-the-moneyness of the benefit and reflect other factors, such as the applicability of any surrender charges. Lapse rates are reduced when contracts are more in-the-money. Lapse rates are also generally assumed to be lower for the period where surrender charges apply. For life contingent payout annuity contracts, we establish reserves using best estimate assumptions with provisions for adverse deviations as of inception or best estimate assumptions as of the most recent loss recognition event.

The reserves for certain optional living benefit features, including GMAB, GMWB and GMIWB are accounted for as embedded derivatives at fair value, as described above. This methodology could result in either a liability or contra-liability balance, given changing capital market conditions and various actuarial assumptions. Since there is no observable active market for the transfer of these obligations, the valuations are calculated using internally-developed models with option pricing techniques. The models are based on a risk neutral valuation framework and incorporate premiums for risks inherent in valuation techniques, inputs, and the general uncertainty around the timing and amount of future cash flows. The significant inputs to the valuation models for these embedded derivatives include capital market assumptions, such as interest rate levels and volatility assumptions, the Company’s market-perceived risk of its own non-performance risk (“NPR”), as well as actuarially-determined assumptions, including mortality rates and contractholder behavior, such as lapse rates, benefit utilization rates and withdrawal rates. Capital market inputs and actual contractholders’ account values are updated each quarter based on capital market conditions as of the end of the quarter, including interest rates, equity markets and volatility. In the risk neutral valuation, the initial swap curve drives the total returns used to grow the contractholders’ account values. The Company’s discount rate assumption is based on the London Inter-Bank Offered Rate (“LIBOR”) swap curve adjusted for an additional spread, which includes an estimate of NPR. Actuarial assumptions, including contractholder behavior and mortality, are reviewed at least annually, and updated based upon emerging experience, future expectations and other data, including any observable market data, such as available industry studies or market transactions such as acquisitions and reinsurance transactions. For additional information regarding the valuation of these optional living benefit features, see Note 6 to the Consolidated Financial Statements.

Individual Life. The reserves for future policy benefits of our Individual Life segment, which as of December 31, 2020, represented 7% of our total future policy benefit reserves, primarily relate to term life, universal life and variable life products. For term life contracts, the future policy benefit reserves are generally calculated using the net premium valuation methodology, as described above. The primary assumptions used in determining expected future benefits and expenses include mortality, lapse, investment yield and maintenance expense assumptions. For variable and universal life products, which include universal life contracts that contain no-lapse guarantees, reserves for future policy benefits are primarily established using the reserving methodology for GMDB and GMIB contracts. As discussed above, in establishing reserves for GMDBs and GMIBs, we utilize current best estimate assumptions. The primary assumptions used in establishing these reserves generally include mortality, lapse, and premium pattern, as well as interest rate and equity market return assumptions. Reserves also include claims reported but not yet paid, and claims incurred but not yet reported.

Group Insurance. The reserves for future policy benefits of our Group Insurance segment, which as of December 31, 2020, represented 2% of our total future policy benefit reserves, primarily relate to reserves for group life and disability benefits. For short-duration contracts, a liability is established when the claim is incurred. The reserves for group life and disability benefits also include a liability for unpaid claims and claim adjustment expenses, which relates primarily to the group long-term disability product. This liability represents our estimate of future disability claim payments and expenses as well as estimates of claims that have been incurred, but have not yet been reported, as of the balance sheet date. The liability is determined as the present value of expected future claim payments and expenses. The primary assumptions used in determining expected future claim payments are claim termination factors, an assumed interest rate and expected Social Security offsets. The remaining reserves for future policy benefits for group life and disability benefits relate primarily to our group life business, and include reserves for waiver of premium, claims reported but not yet paid, and claims incurred but not yet reported. The waiver of premium reserve is calculated as the present value of future benefits and utilizes assumptions such as expected
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mortality and recovery rates. The reserve for claims reported but not yet paid is based on the inventory of claims that have been reported but not yet paid. The reserve for claims incurred but not yet reported is estimated using expected patterns of claims reporting.

Corporate and Other. The reserves for future policy benefits of our Corporate & Other operations, which as of December 31, 2020, represented 5% of our total future policy benefit reserves, primarily relate to our long-term care products and are generally calculated using the net premium valuation methodology, as described above. Due to the recognition of a premium deficiency in the first quarter of 2020 as a result of the decline in interest rates, most contracts are valued with the best estimate assumptions at that time. The primary assumptions used in establishing these reserves include interest rate, morbidity, mortality, lapse, premium rate increase and maintenance expense assumptions. In addition, certain less significant reserves for our long-term care products, such as our disabled life reserves, are established using current best estimate actuarial assumptions.
 
Closed Block Division. The future policy benefit reserves for the traditional participating life insurance products of the Closed Block division, which as of December 31, 2020, represented 15% of our total future policy benefit reserves are determined using the net premium valuation methodology, as described above. Under this method, the future policy benefit reserves are accrued as a level proportion of the premium paid by the policyholder. In applying this method, we use mortality assumptions to determine our expected future benefits and expected future premiums, and apply an interest rate to determine the present value of both of these amounts. The mortality assumptions are based on standard industry mortality tables that were used to determine the cash surrender value of the policies, and the interest rates used are the interest rates used to calculate the cash surrender value of the policies.

Policyholders’ Account Balances

Policyholders’ account balances liability represents the contract value that has accrued to the benefit of the policyholder as of the balance sheet date. This liability is primarily associated with the accumulated account deposits, plus interest credited, less policyholder withdrawals and other charges assessed against the account balance, as applicable. Our unearned revenue reserve also reported as a component of “Policyholders’ account balances” primarily relates to the variable and universal life products within our Individual Life and International Businesses segments and represents policy charges for services to be provided in future periods. The charges are deferred as unearned revenue and are generally amortized over the expected life of the contract in proportion to the product’s estimated gross profits, similar to DAC and DSI as discussed above. Policyholders’ account balances also include amounts representing the fair value of embedded derivative instruments associated with the index-linked features of certain universal life and annuity products. For additional information regarding the valuation of these embedded derivatives, see Note 6 to the Consolidated Financial Statements.

Sensitivities for Insurance Assets and Liabilities

The following table summarizes the aggregate impact that could result on each of the listed financial statement balances from changes in certain key assumptions. The figures below are presented in aggregate for the Company. The information below is for illustrative purposes and includes only the hypothetical direct impact on December 31, 2020 balances of changes in a single assumption and not changes in any combination of assumptions. Additionally, the illustration of the insurance assumption impacts below reflects a parallel shift in the insurance assumptions across the Company; however, these may be non-parallel in practice and only applicable to specific businesses. Changes in current assumptions could result in impacts to financial statement balances that are in excess of the amounts illustrated. A description of the estimates and assumptions used in the preparation of each of these financial statement balances is provided above. For traditional long-duration and limited-payment contracts, U.S. GAAP requires the original assumptions used when the contracts are issued to be locked-in and that those assumptions be used in all future liability calculations as long as the resulting liabilities are adequate to provide for the future benefits and expenses (i.e., there is no premium deficiency). Therefore, these products are not reflected in the sensitivity table below unless the hypothetical change in assumption would result in an adverse impact that would cause a premium deficiency. Similarly, the impact of any favorable change in assumptions for traditional long-duration and limited-payment contracts is not reflected in the table below given that the current assumption is required to remain locked-in, and instead the positive impacts would be recognized into net income over the life of the policies in force.

The impacts presented within this table exclude the following:

•The impacts of our asset liability management strategy, which seeks to offset the changes in the balances presented within this table and is primarily composed of investments and derivatives. See further below for a discussion of the estimates and assumptions involved with the application of U.S. GAAP accounting policies for these instruments and “Quantitative and Qualitative Disclosures about Market Risk” for hypothetical impacts on related balances as a result of changes in certain significant assumptions.

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•The impacts of our Long-Term Care business, a component of our Divested and Run-off Businesses within our Corporate and Other operations. Long-Term Care business sensitivities are presented separately from the immediately following table (see “—Sensitivities for the Long-Term Care business within our Corporate and Other operations”). While the accounting for long-term care products primarily follows the locked-in assumptions model described above, as a result of the decline in interest rates in the first quarter of 2020, this business recognized a premium deficiency and unlocked and updated the previously locked-in assumptions used in the valuation model. Sensitivities are presented separately in order to provide stand-alone and supplementary information.
 December 31, 2020
Increase (Decrease) in
Hypothetical change in current assumptions:Deferred Policy Acquisition Costs, Deferred Sales Inducements and Value of Business AcquiredFuture Policy Benefits and Policyholders’ Account BalancesNet Impact
(in millions)
Long-term interest rate:
Increase by 25 basis points$55 $(60)$115 
Decrease by 25 basis points$(50)$45 $(95)
Long-term equity expected rate of return:
Increase by 50 basis points$185 $(140)$325 
Decrease by 50 basis points$(165)$145 $(310)
NPR credit spread:
Increase by 50 basis points$(485)$(2,275)$1,790 
Decrease by 50 basis points$545 $2,535 $(1,990)
Mortality:
Increase by 1%$(45)$(165)$120 
Decrease by 1%$45 $165 $(120)
Lapse:
Increase by 10%$(150)$(980)$830 
Decrease by 10%$160 $1,010 $(850)

Sensitivities for the Long-Term Care Business within Corporate and Other

The following table summarizes certain significant assumptions made in establishing reserves for long-term care products and the net impact that could result from changes in these assumptions should they occur. Under U.S. GAAP, reserves for long-term care products are primarily calculated using the locked-in assumptions concept described above. As such, the adverse hypothetical impacts illustrated in the table below are those that would increase our best estimate reserves and, when compared to our GAAP reserves, may cause a premium deficiency that would require us to unlock and update our assumptions and record a charge to net income. The favorable hypothetical impacts in the table below would decrease our best estimate reserves but they would not result in an immediate decrease to our GAAP reserves (given that we would be required to leave the current assumptions locked-in); rather, the positive impacts would be recognized into net income over the life of the policies in force.

The information below is for illustrative purposes and includes the impacts of changes in a single assumption and not changes in any combination of assumptions. As a result of emerging experience, changes in current assumptions and the related impact that could result in the listed financial statement balances that are in excess of the amounts illustrated may occur in future periods.
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 December 31, 2020
AssumptionCurrent AssumptionAssumption Change
Increase (Decrease) in Best Estimate Reserve
(in millions)
Mortality ImprovementBased on “G2” industry mortality improvement scale, grossed up to apply to only healthy livesRemove all mortality improvement on healthy lives$(350)
Claim IncidenceBased on Company and industry experience. No reflection of future claim management efficienciesIncrease / decrease in expected incidence: +5% to -5%$300 - $(300)
Average Ultimate Lapse RateIndividual: 0.7%
Group: 0.7%		-10 basis points to +10 basis points$125 - $(125)
Investment Rate(1)Weighted average of 4.74%-25 basis points to +25 basis points$400 - $(400)
Expected Future Premium Rate Increase ApprovalsApproximately $0.5 billion for the rate increase program(2)Decrease / increase unapproved rate increases by: -10% to +10%$50 - $(50)
__________
(1)Investment rate reflects the expected investment yield over the life of the block of business, and is derived from the portfolio yield, current reinvestment rates and our intermediate and long-term assumption for investment yields.
(2)Includes expected future premium rate increases and benefit reductions in lieu of rate increases, not yet approved.

Goodwill
 
As of December 31, 2020, our goodwill balance of $3,035 million is primarily reflected in the following reporting units: $2,140 million for Assurance IQ, $455 million for Retirement’s Full Service business, $258 million for PGIM, and $136 million for Gibraltar Life and Other.

We test goodwill for impairment on an annual basis, as of December 31 of each year, or more frequently if events or circumstances indicate the potential for impairment is more likely than not. The goodwill impairment analysis is performed at the reporting unit level, which is the same as, or one level below, our operating segments. Although accounting guidance provides for an optional qualitative assessment for testing goodwill impairment, all of our reporting units elected to perform the quantitative test, which compares each reporting unit’s fair value to its carrying value. The carrying value represents the capital that the business would require if operating as a standalone entity. For additional information on goodwill and our reporting segments, see Note 2 and Note 10 to the Consolidated Financial Statements.
 
As of December 31, 2019, the Company performed a qualitative goodwill impairment assessment for Assurance IQ, following the acquisition of the business in October 2019. A quantitative impairment assessment of the goodwill allocated to Assurance IQ was performed for the first time as of December 31, 2020. The assessment included both a discounted cash flow approach and a market approach based on sales, Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and earnings multiples. The estimated fair value of Assurance IQ as of December 31, 2020 was based on weighting the results of each approach.

The discounted cash flow approach calculated the value of Assurance IQ by applying a discount rate, derived from a capital asset pricing model and reflecting a market expected rate of return for the reporting unit, to its projected future cash flows. The projected future cash flows involved significant judgement and were based on our internal forecasts and a terminal value, which incorporates an expected long-term growth rate and market-based multiples. The internal forecasts were based on management’s current outlook on the product mix and future performance of the business and incorporated expected industry and market conditions and trends.

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The market approach derived the value of Assurance IQ based on comparable publicly traded companies. Each comparable company was assigned a relative weight based on various factors, primarily focused on the comparability of lines of business and business mix, with additional considerations given to comparability of business lifecycle, growth and profitability. Market multiples were developed for the comparable companies using independent analysts’ consensus estimates for each company’s forecasted sales, EBITDA and earnings. The market multiples were then applied to Assurance IQ’s forecasted results, and a control premium, reflective of observable premiums paid for comparable change-in-control transactions, was added to determine a total estimated fair value for the reporting unit. The market multiples used to determine the fair value of Assurance IQ were higher as of December 31, 2020, when compared to the prior year. See “Risk Factors—Strategic Risk” for additional information on risks that may impact the performance and fair value of Assurance IQ.

The estimated fair value of Assurance IQ, based on a weighted average of the valuation approaches described above, exceeded the carrying value by 10%, as of December 31, 2020.

Gibraltar Life and Other and PGIM completed a quantitative impairment analysis using an earnings multiple approach, while Retirement’s Full Service business used a discounted cash flow approach to estimate its fair value as of December 31, 2020. The significant inputs and considerations applied under each approach are similar to the ones applied by Assurance IQ. The fair value of the reporting units, excluding Assurance IQ, exceeded their carrying value by a weighted average of 229% as of December 31, 2020.
 
Estimating the fair value of reporting units is a subjective process that involves the use of significant estimates by management. For all reporting units tested, unanticipated changes in business performance or the regulatory environment, market declines or other events impacting the fair value of these businesses, including changes in market multiples, discount rates, interest rates and growth rate assumptions or increases in the level of equity required to support these businesses, could cause an impairment of goodwill, resulting in a charge to income.
 
Valuation of Investments, Including Derivatives, Measurement of Allowance for Credit Losses, and the Recognition of Other-than-Temporary Impairments
 
Our investment portfolio consists of public and private fixed maturity securities, commercial mortgage and other loans, equity securities, other invested assets, and derivative financial instruments. Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices or the values of securities or commodities. Derivative financial instruments we generally use include swaps, futures, forwards and options and may be exchange-traded or contracted in the over-the-counter (“OTC”) market. We are also party to financial instruments that contain derivative instruments that are “embedded” in the financial instruments. Management believes the following accounting policies related to investments, including derivatives, are most dependent on the application of estimates and assumptions. Each of these policies is discussed further within other relevant disclosures related to investments and derivatives, as referenced below:
 
•Valuation of investments, including derivatives;
•Measurement of the allowance for credit losses on fixed maturity securities classified as available-for-sale or held-to-maturity, commercial mortgage loans, and other loans; and
•Recognition of other-than-temporary impairments (“OTTI”) for equity method investments.
 
We present at fair value in the statements of financial position our debt security investments classified as available-for-sale, investments classified as trading such as our assets supporting experience-rated contractholder liabilities and certain fixed maturities, equity securities, and certain investments within “Other invested assets,” such as derivatives. For additional information regarding the key estimates and assumptions surrounding the determination of fair value of fixed maturity and equity securities, as well as derivative instruments, embedded derivatives and other investments, see Note 6 to the Consolidated Financial Statements and “—Valuation of Assets and Liabilities—Fair Value of Assets and Liabilities.”
 
For our investments classified as available-for-sale, the impact of changes in fair value is recorded as an unrealized gain or loss in AOCI, a separate component of equity. For our investments classified as trading and equity securities, the impact of changes in fair value is recorded within “Other income (loss).” Our investments classified as held-to-maturity are carried at the acquisition price, net of any unamortized premiums or discounts. Our commercial mortgage and other loans are carried primarily at unpaid principal balances, net of unamortized deferred loan origination fees and expenses and unamortized premiums or discounts and a valuation allowance for losses.

In addition, an allowance for credit losses is measured each quarter for available-for-sale fixed maturity securities, held-to-maturity fixed maturity securities, commercial mortgage and other loans. For additional information regarding our policies regarding the measurement of credit losses, see Note 2 to the Consolidated Financial Statements.

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For equity method investments, the carrying value of these investments is written down or impaired to fair value when a decline in value is considered to be other-than-temporary.

Pension and Other Postretirement Benefits
 
We sponsor pension and other postretirement benefit plans covering employees who meet specific eligibility requirements. Our net periodic costs for these plans consider an assumed discount (interest) rate, an expected rate of return on plan assets, expected increases in compensation levels, mortality and trends in health care costs. Of these assumptions, our expected rate of return assumptions and our discount rate assumptions have historically had the most significant effect on our net period costs associated with these plans.
  
We determine our expected rate of return on plan assets based upon a building block approach that considers plan asset mix, risk free rates, inflation, real return, term premium, credit spreads, equity risk premium and capital appreciation as well as expenses, the effect of active management and the effect of rebalancing for the equity, debt and real estate asset mix applied on a weighted average basis to our pension asset portfolio. See Note 18 to the Consolidated Financial Statements for our actual asset allocations by asset category and the asset allocation ranges prescribed by our investment policy guidelines for both our pension and other postretirement benefit plans. Our assumed long-term rate of return for 2020 was 6.50% for our domestic pension plans and 7.00% for our other postretirement benefit plans. Given the amount of plan assets as of December 31, 2019, the beginning of the measurement year, if we had assumed an expected rate of return for both our domestic pension and other domestic postretirement benefit plans that was 100 bps higher or 100 bps lower than the rates we assumed, the change in our net periodic costs would have been as shown in the table below. The information provided in the table below considers only changes in our assumed long-term rate of return given the level and mix of invested assets at the beginning of the measurement year, without consideration of possible changes in any of the other assumptions described above that could ultimately accompany any changes in our assumed long-term rate of return.
 
 For the year ended December 31, 2020
 Increase/(Decrease) in Net
Periodic Pension Cost		Increase/(Decrease) in Net
Periodic Other Postretirement Cost
 (in millions)
Increase in expected rate of return by 100 bps$(132)$(15)
Decrease in expected rate of return by 100 bps$132 $15 
 
Foreign pension plans represent 5% of plan assets at the beginning of 2020. An increase in expected rate of return by 100 bps would result in a decrease in net periodic pension costs of $6 million; conversely, a decrease in expected rate of return by 100 bps would result in an increase in net periodic pension costs of $4 million.
 
We determine our discount rate, used to value the pension and postretirement benefit obligations, based upon rates commensurate with current yields on high quality corporate bonds. See Note 18 to the Consolidated Financial Statements for information regarding the December 31, 2019 methodology we employed to determine our discount rate for 2020. Our assumed discount rate for 2020 was 3.30% for our domestic pension plans and 3.25% for our other domestic postretirement benefit plans. Given the amount of pension and postretirement obligations as of December 31, 2019, the beginning of the measurement year, if we had assumed a discount rate for both our domestic pension and other postretirement benefit plans that was 100 bps higher or 100 bps lower than the rates we assumed, the change in our net periodic costs would have been as shown in the table below. The information provided in the table below considers only changes in our assumed discount rate without consideration of possible changes in any of the other assumptions described above that could ultimately accompany any changes in our assumed discount rate. 
 For the year ended December 31, 2020
 Increase/(Decrease) in Net
Periodic Pension Cost		Increase/(Decrease) in Net
Periodic Other Postretirement Cost
 (in millions)
Increase in discount rate by 100 bps$(136)$(7)
Decrease in discount rate by 100 bps$159 $4 
 
Foreign pension plans represent 14% of plan obligations at the beginning of 2020. An increase in discount rate by 100 bps would result in a decrease in net periodic pension costs of $14 million; conversely, a decrease in discount rate by 100 bps would result in an increase in net periodic pension costs of $9 million.

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Given the application of the authoritative guidance for accounting for pensions, and the deferral and amortization of actuarial gains and losses arising from changes in our assumed discount rate, the change in net periodic pension cost arising from an increase in the assumed discount rate by 100 bps would not always be expected to equal the change in net periodic pension cost arising from a decrease in the assumed discount rate by 100 bps.

For a discussion of our expected rate of return on plan assets and discount rate for our qualified pension plan in 2020, see “—Results of Operations by Segment—Corporate and Other.”
 
For purposes of calculating pension income from our own qualified pension plan for the year ended December 31, 2021, we decreased the discount rate to 2.55% from 3.30% in 2020. The expected rate of return on plan assets will decrease to 5.75% in 2021 from 6.00% in 2020, and the assumed rate of increase in compensation will remain unchanged at 4.5%.
 
In addition to the effect of changes in our assumptions, the net periodic cost or benefit from our pension and other postretirement benefit plans may change due to factors such as actual experience being different from our assumptions, special benefits to terminated employees, or changes in benefits provided under the plans.
 
At December 31, 2020, the sensitivity of our domestic and foreign pension and postretirement obligations to a 100 basis point change in discount rate was as follows. 
 December 31, 2020
 Increase/(Decrease) in
Pension  Benefits Obligation		Increase/(Decrease) in
Accumulated Postretirement
Benefits Obligation
 (in millions)
Increase in discount rate by 100 bps$(1,690)$(190)
Decrease in discount rate by 100 bps$2,056 $228 

Taxes on Income
 
Our effective tax rate is based on income, non-taxable and non-deductible items, tax credits, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. Inherent in determining our annual tax rate are judgments regarding business plans, planning opportunities and expectations about future outcomes. The Dividend Received Deduction (“DRD”) is a major reason for the difference between the Company’s effective tax rate and the U.S. federal statutory rate. The DRD is an estimate that incorporates the prior and current year information, as well as the current year’s equity market performance. Both the current estimate of the DRD and the DRD in future periods can vary based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of distributions received from underlying fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD.

In December 2017, Securities and Exchange Commission (“SEC”) staff issued “Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which allowed the registrants to record provisional amounts during a ‘measurement period’ not to extend beyond one year. Under the relief provided by SAB 118, a company could recognize provisional amounts when it did not have the necessary information available, prepared or analyzed in reasonable detail to complete its accounting for the change in tax law. See Note 16 to the Consolidated Financial Statements for a discussion of refinements to provisional amounts related to The United States Tax Cuts and Jobs Act of 2017 (“Tax Act of 2017”) included in “Total income tax expense (benefit) before equity in earnings of operating joint ventures” in 2018.

The Tax Act of 2017 includes a provision causing post-1986 unremitted foreign earnings of at least 10% owned non-U.S. affiliates to be included in the Company’s U.S. income tax base, with an election to pay the associated tax on an eight-year installment basis. Unremitted foreign earnings from certain operations in foreign jurisdictions that impose a withholding tax on dividends are considered to be permanently reinvested for purposes of determining the applicable withholding tax expense. See Note 16 to the Consolidated Financial Statements for a discussion of unremitted earnings for which the Company provides U.S. income taxes.

An increase or decrease in our effective tax rate by one percentage point would have resulted in a decrease or increase in our 2020 “Total income tax expense (benefit)” of $3 million.

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The CARES Act. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted into law. One provision of the CARES Act amends the Tax Act of 2017 and allows companies with net operating losses (“NOLs”) originating in 2018, 2019, or 2020 to carry back those losses up to five years. For 2020, the Company has recorded an income tax benefit of $51 million and $149 million from carrying the 2018 NOL and estimated 2020 NOL back to tax years that have a 35% tax rate.

Contingencies
 
A contingency is an existing condition that involves a degree of uncertainty that will ultimately be resolved upon the occurrence of future events. Under U.S. GAAP, accruals for contingencies are required to be established when the future event is probable and its impact can be reasonably estimated, such as in connection with an unresolved legal matter. The initial reserve reflects management’s best estimate of the probable cost of ultimate resolution of the matter and is revised accordingly as facts and circumstances change and, ultimately, when the matter is brought to closure.
 
Other Accounting Policies

For digital insurance brokerage placement services, the Company earns both initial and renewal commissions as compensation for the placement of insurance policies with insurance carriers. At the effective date of the policy, the Company records within “Other income” the expected lifetime revenue for the initial and renewal commissions considering estimates of the timing of future policy cancellations. These estimates are reassessed each reporting period and any changes in estimates are reflected in the current period.

Adoption of New Accounting Pronouncements
 
ASU 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the Financial Accounting Standards Board (“FASB”) on August 15, 2018 and is expected to have a significant impact on the Consolidated Financial Statements and Notes to the Consolidated Financial Statements. In October 2019, the FASB issued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of ASU 2018-12 to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. 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. The Company currently intends to adopt ASU 2018-12 effective January 1, 2023. 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. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter. See Note 2 to the Consolidated Financial Statements for a more detailed discussion of ASU 2018-12, as well as other accounting pronouncements issued but not yet adopted and newly adopted accounting pronouncements.

Results of Operations by Segment
PGIM

Operating Results
 
The following table sets forth PGIM’s operating results for the periods indicated:
 
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 Year ended December 31,
 202020192018
 (in millions)
Operating results(1):
Revenues$4,153 $3,589 $3,294 
Expenses2,891 2,591 2,335 
Adjusted operating income1,262 998 959 
Realized investment gains (losses), net, and related adjustments0 (1)(10)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests159 8 (21)
Income (loss) before income taxes and equity in earnings of operating joint ventures$1,421 $1,005 $928 
 __________
(1)Certain of PGIM’s investment activities are based in currencies other than the U.S. dollar and are therefore subject to foreign currency exchange rate risk. The financial results of PGIM include the impact of an intercompany arrangement with our Corporate and Other operations designed to mitigate the impact of exchange rate changes on PGIM’s U.S. dollar-equivalent earnings. For more information related to this intercompany arrangement, see “—Results of Operations—Impact of Foreign Currency Exchange Rates,” above.

Adjusted Operating Income
 
2020 to 2019 Annual Comparison. Adjusted operating income increased $264 million, primarily reflecting an increase in asset management fees, net of related expenses, due to higher average assets under management as a result of market appreciation, strong investment performance and public fixed income inflows. The increase also reflected an increase in other related revenues, net of related expenses, primarily due to higher commercial mortgage origination revenue driven by higher loan production and profitability, higher net performance-based incentive fees, and favorable co- and seed investment results driven by strong underlying investment performance. These increases were partially offset by higher expenses primarily reflecting higher compensation driven by business growth, as well as a decrease in service, distribution and other revenues primarily due to the absence of fees in the current year period related to the Wells Fargo agreement (see the “Revenues by type” table in “—Revenues and Expenses,” below).

Revenues and Expenses
 
The following table sets forth PGIM’s revenues, presented on a basis consistent with the table above under “—Operating Results,” by type: 
 Year ended December 31,
 202020192018
 (in millions)
Revenues by type:
Asset management fees by source:
Institutional customers$1,350 $1,283 $1,204 
Retail customers(1)1,003 878 867 
General account557 521 471 
Total asset management fees2,910 2,682 2,542 
Other related revenues by source:
Incentive fees206 169 59 
Transaction fees26 22 33 
Co- and seed investments122 79 57 
Commercial mortgage(2)198 110 121 
Total other related revenues552 380 270 
Service, distribution and other revenues(3)691 527 482 
Total revenues$4,153 $3,589 $3,294 
__________
(1)Consists of fees from: individual mutual funds and variable annuities and variable life insurance separate account assets; funds invested in proprietary mutual funds through our defined contribution plan products; and third-party sub-advisory relationships. Revenues from fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance are included in the general account.
(2)Includes mortgage origination revenues from our commercial mortgage origination and servicing business.
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(3)Includes payments from Wells Fargo under an agreement dated as of July 30, 2004, implementing arrangements with respect to money market mutual funds in connection with the combination of our retail securities brokerage and clearing operations with those of Wells Fargo. The agreement extended for ten years from the Wachovia Securities joint venture termination date of December 31, 2009 to December 31, 2019. The revenue from Wells Fargo under this agreement was $60 million and $70 million for the years ended December 31, 2019 and 2018, respectively.
 
2020 to 2019 Annual Comparison. Revenues increased $564 million. Asset management fees increased primarily reflecting higher average assets under management as a result of market appreciation, strong investment performance and public fixed income inflows. Other related revenues increased primarily reflecting higher commercial mortgage origination revenue driven by higher loan production and profitability, favorable co- and seed investment results driven by strong underlying investment performance, and higher performance-based incentive fees. Service, distribution and other revenues increased primarily reflecting higher revenues from certain consolidated funds (which were fully offset by higher expenses related to noncontrolling interests in these funds), partially offset by the absence of fees in the current year period related to the Wells Fargo agreement.

Expenses increased $300 million. This increase primarily reflects higher expenses for service, distribution and other revenues largely driven by higher revenues associated with certain consolidated funds, as discussed above. The increase also includes higher variable expenses associated with an increase in overall segment earnings and higher performance-based incentive fee revenues, higher compensation expenses driven by business growth, and expenses related to the startup of a closed-end retail fund in the current year period. These increases were partially offset by lower expenses related to travel and entertainment resulting from COVID-19.

Assets Under Management
 
The following table sets forth assets under management by asset class as of the dates indicated.
 
 December 31,
 202020192018
 (in billions)
Assets Under Management(1) (at fair value):
Public equity$202.4 $165.7 $147.0 
Public fixed income1,004.5 885.9 773.1 
Real estate121.5 117.1 110.3 
Private credit and other alternatives106.5 97.5 87.1 
Multi-asset63.7 64.8 64.0 
Total PGIM assets under management(2)$1,498.6 $1,331.0 $1,181.5 
Assets under management within other reporting segments(2)(3)222.3 219.9 195.8 
Total PFI assets under management$1,720.9 $1,550.9 $1,377.3 
__________
(1)Prior period amounts have been updated to conform to current period presentation. “Public equity” represents stock ownership interest in a corporation or partnership (excluding hedge funds) or real estate investment trust. “Public fixed income” represents debt instruments that pay interest and usually have a maturity (excluding mortgages). “Real estate” includes direct real estate equity and real estate mortgages. “Private credit and other alternatives” includes private credit, private equity, hedge funds and other alternative strategies. “Multi-asset” includes funds or products that invest in more than one asset class, balancing equity and fixed income funds and target date funds.
(2)Effective first quarter of 2020, certain assets have been reclassified from the U.S. Individual Solutions division to PGIM. Prior period amounts have been updated to conform to current period presentation.
(3)Primarily includes certain assets related to annuity and variable life products in our U.S. Individual Solutions division, retirement and group life products in our U.S. Workplace Solutions division and certain general account assets of our International Businesses. These assets are not directly managed by PGIM, but rather are invested in non-proprietary funds or are managed by either the divisions themselves or by our Chief Investment Officer Organization.

2020 to 2019 Annual Comparison. PGIM’s assets under management increased $168 billion in 2020, primarily reflecting market appreciation, strong investment performance and public fixed income inflows.
 
The following table sets forth assets under management by source as of the dates indicated.

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 December 31,
 202020192018
 (in billions)
Assets Under Management(1) (at fair value):
Institutional customers$614.9 $552.8 $493.5 
Retail customers372.0 305.6 260.2 
General account511.7 472.6 427.8 
Total PGIM assets under management(2)$1,498.6 $1,331.0 $1,181.5 
Assets under management within other reporting segments(2)(3)222.3 219.9 195.8 
Total PFI assets under management$1,720.9 $1,550.9 $1,377.3 
__________
(1)Prior period amounts have been updated to conform to current period presentation. “Institutional customers” consist of third-party institutional assets and group insurance contracts. “Retail customers” consist of individual mutual funds and variable annuities and variable life insurance separate account assets, funds invested in proprietary mutual funds through our defined contribution plan products, and third-party sub-advisory relationships. “General account” also includes fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance.
(2)Effective first quarter of 2020, certain assets have been reclassified from the U.S. Individual Solutions division to PGIM. Prior period amounts have been updated to conform to current period presentation.
(3)Primarily includes certain assets related to annuity and variable life products in our U.S. Individual Solutions division, retirement and group life products in our U.S. Workplace Solutions division and certain general account assets of our International Businesses. These assets are not directly managed by PGIM, but rather are invested in non-proprietary funds or are managed by either the divisions themselves or by our Chief Investment Officer Organization.

The following table sets forth the component changes in PGIM’s assets under management for the periods indicated.
 
 December 31,
202020192018
 (in billions)
Beginning assets under management$1,331.0 $1,181.5 $1,180.0 
Institutional third-party flows3.0 (6.5)14.1 
Retail third-party flows17.2 5.7 (0.4)
Total third-party flows20.2 (0.8)13.7 
Affiliated flows(1)(8.5)(3.9)7.9 
Market appreciation (depreciation)(2)146.7 148.6 (23.0)
Foreign exchange rate impact6.8 0.5 1.2 
Net money market activity and other increases (decreases)2.4 5.1 1.7 
Ending assets under management(3)$1,498.6 $1,331.0 $1,181.5 
__________
(1)Represents assets that PGIM manages for the benefit of other reporting segments within the Company. Additions and withdrawals of these assets are attributable to third-party product inflows and outflows in other reporting segments.
(2)Includes income reinvestment, where applicable.
(3)Prior period amounts have been updated to conform to current period presentation.

Private Capital Deployment

Private capital deployment is indicative of the pace and magnitude of capital that is invested and will result in future revenues that may include management fees, transaction fees, incentive fees and servicing revenues, as well as future costs to manage these assets.

Private capital deployment represents the gross value of private capital invested in real estate debt and equity, and private credit and equity asset classes. Assets under management resulting from private capital deployment are included in “Real estate” and “Private credit and other alternatives” in the “—Assets Under Management— by asset class table” above, and these accounted for a net increase of approximately $12 billion of assets under management in 2020. The increase was primarily driven by private debt originations and real estate equity acquisitions, partially offset by maturities and capital returned to investors.

Private capital deployment includes PGIM’s real estate agency debt business, which consists of agency commercial loans that are originated and sold to third party investors. PGIM continues to service these commercial loans; however, they are not included in assets under management.

The following table sets forth PGIM’s private capital deployed by asset class for the periods indicated.

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 December 31,
202020192018
 (in billions)
Private capital deployed:
Real estate debt and equity$24.4 $26.1 $25.6 
Private credit and equity12.6 13.2 12.5 
Total private capital deployed$37.0 $39.3 $38.1 
 
Co- and Seed Investments

The following table sets forth PGIM’s co- and seed investments at carrying value (including the value of derivative instruments used to mitigate equity market and currency risk) by asset class and source as of the dates indicated.
 December 31,
 20202019(1)
 (in millions)
Co-Investments:
Public fixed income$489 $462 
Real estate170 228 
Private credit and other alternatives26 19 
Seed Investments:
Public equity675 671 
Public fixed income356 325 
Real estate33 34 
Private credit and other alternatives79 59 
Multi-asset62 74 
Total$1,890 $1,872 
__________
(1)Prior period amounts have been updated to conform to current period presentation.

The increase of $18 million in co- and seed investments was primarily driven by strong public fixed income and private credit and other alternatives investment performance, partially offset by a liquidation of a significant real estate co-investment.

U.S. Businesses

Operating Results
 
The following table sets forth the operating results for our U.S. Businesses for the periods indicated:
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 Year ended December 31,
 202020192018
(in millions)
Adjusted operating income before income taxes:
U.S. Businesses:
U.S. Workplace Solutions division:
Retirement$1,436 $1,301 $1,049 
Group Insurance(16)285 229 
Total U.S. Workplace Solutions division1,420 1,586 1,278 
U.S. Individual Solutions division:
Individual Annuities1,470 1,843 1,925 
Individual Life(48)87 223 
Total U.S. Individual Solutions division1,422 1,930 2,148 
Assurance IQ division(1):
Assurance IQ
(88)(9)0 
Total Assurance IQ division
(88)(9)0 
Total U.S. Businesses2,754 3,507 3,426 
Reconciling Items:
Realized investment gains (losses), net, and related adjustments(2)(2,526)(1,881)88 
Charges related to realized investment gains (losses), net(120)(58)(333)
Market experience updates(3)(591)(408)0 
Other adjustments(4)51 (47)0 
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests4 2 (1)
Income (loss) before income taxes and equity in earnings of operating joint ventures$(428)$1,115 $3,180 
________
(1)Assurance IQ was acquired by the Company in October 2019. See Note 1 to the Consolidated Financial Statements for additional information.
(2)Prior period amounts have been updated to conform to current period presentation.
(3)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 22 to the Consolidated Financial Statements for additional information.
(4)Represents certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 22 to the Consolidated Financial Statements for additional information.

2020 to 2019 Annual Comparison. Adjusted operating income for our U.S. Businesses decreased by $753 million primarily due to:

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

•Lower underwriting results primarily driven by COVID-19 related net mortality experience; and

•An unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements.

•Partially offsetting these decreases were lower expenses, including those associated with cost savings initiatives.


U.S. Businesses—U.S. Workplace Solutions Division

Retirement
 
Operating Results
 
The following table sets forth Retirement’s operating results for the periods indicated:
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 Year ended December 31,
 202020192018
 (in millions)
Operating results:
Revenues$12,034 $15,064 $16,825 
Benefits and expenses10,598 13,763 15,776 
Adjusted operating income1,436 1,301 1,049 
Realized investment gains (losses), net, and related adjustments(23)332 (402)
Charges related to realized investment gains (losses), net0 4 (5)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests3 2 (1)
Income (loss) before income taxes and equity in earnings of operating joint ventures$1,416 $1,639 $641 

Adjusted Operating Income
 
2020 to 2019 Annual Comparison. Adjusted operating income increased $135 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for 2020 included a net charge of $22 million from these updates primarily driven by an increase in expected benefit payments, while results for 2019 included a net benefit of $154 million from these updates, primarily driven by a reduction in expected benefit payments. Excluding this item, adjusted operating income increased $311 million, primarily driven by higher reserve gains due to COVID-19 related mortality gains, and lower expenses primarily due to lower costs resulting from expense savings initiatives. Net investment spread results remained relatively flat as lower reinvestment yields were largely offset by higher income on non-coupon investments and the impact of lower crediting rates.
 
Revenues, Benefits and Expenses
 
2020 to 2019 Annual Comparison. Revenues decreased $3,030 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $3,037 million. This decrease primarily reflected lower pension risk transfer premiums with corresponding offsets in policyholders’ benefits, as discussed below.

Benefits and expenses decreased $3,165 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $3,348 million. Policyholders’ benefits, including the change in policy reserves, decreased primarily related to the decrease in pension risk transfer premiums discussed above, as well as more favorable reserve experience primarily driven by COVID-19 related mortality gains.

Account Values
 
Account values are a significant driver of our operating results, and are primarily driven by net additions (withdrawals) and the impact of market changes. The income we earn on most of our fee-based products varies with the level of fee-based account values, since many policy fees are determined by these values. The investment income and interest we credit to policyholders on our spread-based products varies with the level of general account values. To a lesser extent, changes in account values impact our pattern of amortization of DAC and VOBA and general and administrative expenses.

The following table shows the changes in the account values and net additions (withdrawals) of Retirement’s products for the periods indicated. Net additions (withdrawals) are plan sales and participant deposits or additions, as applicable, minus plan
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and participant withdrawals and benefits. Account values include both internally- and externally-managed client balances as the total balances drive revenue for the Retirement business. For more information on internally-managed balances, see “—PGIM.”

 Year ended December 31,
 202020192018
 (in millions)
Full Service:
Beginning total account value$272,448 $231,669 $234,616 
Deposits and sales40,914 36,394 33,116 
Withdrawals and benefits(34,652)(35,706)(26,429)
Change in market value, interest credited and interest income and other activity36,517 40,091 (9,634)
Ending total account value$315,227 $272,448 $231,669 
Institutional Investment Products:
Beginning total account value$227,596 $200,759 $194,492 
Additions(1)22,469 31,101 21,310 
Withdrawals and benefits(18,288)(16,743)(15,409)
Change in market value, interest credited and interest income8,854 9,089 3,303 
Other(2)2,756 3,390 (2,937)
Ending total account value$243,387 $227,596 $200,759 
__________
(1)Additions primarily include: group annuities and funded pension reinsurance calculated based on premiums received; funding agreements issued; unfunded longevity reinsurance contracts calculated as the present value of future projected benefits; and investment-only stable value contracts calculated as the fair value of customers’ funds held in a client-owned trust.
(2)“Other” activity includes the effect of foreign exchange rate changes associated with our British pounds sterling denominated longevity reinsurance business and changes in asset balances for externally-managed accounts. For the years ended December 31, 2020 and 2019, “Other” activity also includes $6,989 million in receipts offset by $6,695 million in payments and $3,804 million in receipts offset by $3,104 million in payments, respectively, related to funding agreements backed by commercial paper which typically have maturities of less than 90 days.
 
2020 to 2019 Annual Comparison. The increase in Full Service account values primarily reflected favorable changes in the market value of customer funds and net deposits and sales.

The increase in Institutional Investment Products account values primarily reflected a favorable change in the market value of account values, net additions driven by investment-only stable value accounts and collateralized funding agreements.

Group Insurance
 
Operating Results
 
The following table sets forth Group Insurance’s operating results and benefits and administrative operating expense ratios for the periods indicated:
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 Year ended December 31,
 202020192018
 (in millions)
Operating results:
Revenues$5,786$5,750 $5,685 
Benefits and expenses5,802 5,465 5,456 
Adjusted operating income(16)285 229 
Realized investment gains (losses), net, and related adjustments48 (20)(38)
Income (loss) before income taxes and equity in earnings of operating joint ventures$32 $265 $191 
Benefits ratio(1)(4):
Group life(2)93.4 %87.4 %87.2 %
Group disability(2)78.4 %75.4 %75.8 %
       Total Group Insurance(2)90.2 %84.7 %84.9 %
Administrative operating expense ratio(3)(4):
Group life12.4 %12.7 %12.2 %
Group disability26.1 %24.1 %27.1 %
       Total Group Insurance15.4 %15.2 %15.1 %
__________
(1)Ratio of policyholder benefits to earned premiums plus policy charges and fee income.
(2)Benefits ratios reflect the impacts of our annual reviews and update of assumptions and other refinements. Excluding these impacts, the group life, group disability and total Group Insurance benefits ratios were 93.6%, 78.8% and 90.4% for 2020, respectively, 87.0%, 77.7% and 84.9% for 2019, respectively, and 87.4%, 77.8% and 85.5% for 2018, respectively.
(3)Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income.
(4)The benefit and administrative ratios are measures used to evaluate profitability and efficiency.
 
Adjusted Operating Income
 
2020 to 2019 Annual Comparison. Adjusted operating income decreased $301 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for 2020 and 2019 included a net benefit from this update of $11 million and $9 million, respectively. Excluding this item, adjusted operating income decreased $303 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience primarily due to COVID-19 impacts on non-experience-rated contracts. The decrease also reflected lower underwriting results in our group disability business driven by the impact to reserves from lower interest rates, and lower net investment spread results driven by lower reinvestment yields and lower prepayment fee income.

Revenues, Benefits and Expenses
 
2020 to 2019 Annual Comparison. Revenues increased $36 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $5 million. The increase primarily reflected higher premiums and policy charges and fee income driven by growth in our group life business, mostly offset by lower net investment income driven by lower reinvestment yields and lower prepayment fee income, with partial offsets in interest credited to policyholder account balances, as discussed below.

Benefits and expenses increased $337 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $308 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, including increases in our group life business mostly due to COVID-19 impacts. The increase was partially offset by lower interest credited to policyholder account balances, offset in net investment income, as discussed above.
 
Sales Results
 
The following table sets forth Group Insurance’s annualized new business premiums, as defined under “—Segment Measures” above, for the periods indicated:
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 Year ended December 31,
 202020192018
 (in millions)
Annualized new business premiums(1):
Group life$243 $254 $376 
Group disability163 159 183 
Total$406 $413 $559 
__________
(1)Amounts exclude new premiums resulting from rate changes on existing policies, from additional coverage under our Servicemembers’ Group Life Insurance contract and from excess premiums on group universal life insurance that build cash value but do not purchase face amounts.
 
2020 to 2019 Annual Comparison. Total annualized new business premiums decreased $7 million compared to 2019, primarily driven by lower sales in our group life business, partially offset by higher sales in our group disability business. Sales levels reflect pricing competitiveness and reduced levels of client case movement within the National segment.

U.S. Businesses—U.S. Individual Solutions Division
 
Individual Annuities
 
Our Individual Annuities business includes both fixed and variable annuities which may include optional guaranteed living benefit riders (e.g., GMIB, GMAB, GMWB and GMIWB), and/or optional death benefit riders (e.g., GMDB). We also offer fixed annuities that provide a guarantee of principal and interest credited at rates we determine (subject to certain contractual minimums) or at rates based upon the performance of an index (subject to caps or participation rates), as well as indexed variable annuities that provide several index crediting strategies and varying levels of downside protection at predetermined levels and durations. The drivers of our business results are generally included in adjusted operating income, with exceptions related to certain guarantees, as discussed below.
The U.S. GAAP accounting and our adjusted operating income treatment for our guarantees differ depending upon the specific contractual features. Under U.S. GAAP, the reserves for GMIB and GMDB are accounted for in accordance with an insurance fulfillment accounting framework and the results are included in adjusted operating income in a manner generally consistent with U.S. GAAP.
In contrast, certain of our guaranteed living benefit riders (e.g., GMAB, GMWB and GMIWB) are accounted for under U.S. GAAP as embedded derivatives and reported using a fair value accounting framework. For purposes of measuring segment performance, adjusted operating income excludes the changes in fair value and instead reflects the performance of these riders using an insurance fulfillment accounting framework. Under this framework, adjusted operating income recognized each period reflects the rider fees earned during the period, less the portion of such fees estimated to be required to cover future benefit payments and hedging costs. Sales of traditional variable annuities with guaranteed living benefit riders have been discontinued as of December 31, 2020. See “Business—Individual Annuities” for more information about these products.
 
Operating Results
 
The following table sets forth Individual Annuities’ operating results for the periods indicated:
 Year ended December 31,
 202020192018
 (in millions)
Operating results:
Revenues$4,440 $4,995 $4,966 
Benefits and expenses2,970 3,152 3,041 
Adjusted operating income1,470 1,843 1,925 
Realized investment gains (losses), net, and related adjustments(2,911)(2,551)846 
Charges related to realized investment gains (losses), net4 59 (407)
       Market experience updates(1)(324)(100)0 
Income (loss) before income taxes and equity in earnings of operating joint ventures$(1,761)$(749)$2,364 
________
(1)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 22 to the Consolidated Financial Statements for additional information.
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Adjusted Operating Income
 
2020 to 2019 Annual Comparison. Adjusted operating income decreased $373 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for 2020 included a $136 million net charge from these updates primarily driven by unfavorable impacts related to a decrease in long-term interest rate assumptions. Results for 2019 included a $12 million net charge from these updates. Excluding this item, adjusted operating income decreased $249 million primarily driven by lower fee income, net of distribution expenses and other associated costs, due to unfavorable impacts from our traditional living benefit guarantees resulting from declining interest rates, as well as certain products reaching contractual milestones for fee tier reduction.

Revenues, Benefits and Expenses
 
2020 to 2019 Annual Comparison. Revenues decreased $555 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $423 million. The decrease was primarily driven by lower policy charges and fee income reflecting unfavorable impacts from our traditional living benefit guarantees resulting from declining interest rates, as well as certain products reaching contractual milestones for fee tier reductions. Also contributing to the decrease were lower premiums resulting from lower single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below.

Benefits and expenses decreased $182 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $174 million primarily driven by lower policyholders’ benefits, including changes in reserves, due to lower reserve provisions resulting from a decrease in single premium immediate annuity sales, with offsets in premiums, as discussed above.

Account Values
 
Account values are a significant driver of our operating results. Since most fees are determined by the level of separate account assets, fee income varies primarily based on the level of account values. Additionally, our fee income generally drives other items such as the pattern of amortization of DAC and other costs. Account values are driven by net flows from new business sales, surrenders, withdrawals and benefit payments, policy charges and the impact of positive or negative market value changes. The annuity industry’s competitive and regulatory landscapes, which have been dynamic over the last few years, may impact our net flows, including new business sales. The following table sets forth account value information for the periods indicated:
 Year ended December 31,
 202020192018
 (in millions)
Total Individual Annuities(1):
Beginning total account value$169,681 $151,080 $168,626 
Sales6,815 9,720 8,270 
Full surrenders and death benefits(7,845)(9,374)(8,958)
Sales, net of full surrenders and death benefits(1,030)346 (688)
Partial withdrawals and other benefit payments(5,191)(5,163)(4,814)
Net flows(6,221)(4,817)(5,502)
Change in market value, interest credited and other activity16,360 27,072 (8,341)
Policy charges(3,540)(3,654)(3,703)
Ending total account value$176,280 $169,681 $151,080 
__________
(1)Includes gross variable and fixed annuities sold as retail investment products. Investments sold through defined contribution plan products are included with such products within our Retirement business. Variable annuity account values were $170.5 billion, $164.9 billion and $147.3 billion as of December 31, 2020, 2019 and 2018, respectively. Fixed annuity account values were $5.7 billion, $4.8 billion and $3.7 billion as of December 31, 2020, 2019 and 2018, respectively.

2020 to 2019 Annual Comparison. The increase in account values during 2020 was primarily driven by favorable changes in the market value of contractholder funds, partially offset by net outflows and policy charges.

The decrease in sales, net of full surrenders and death benefits, reflects lower gross sales driven by benefit rate reductions and pricing actions in response to capital market conditions, and lower full surrenders driven by general uncertainty around COVID-19 as well as recent market volatility.
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Risks and Risk Mitigants

Fixed Annuity Risks and Risk Mitigants. The primary risk exposure of our fixed annuity products relates to investment risks we bear for providing customers a minimum guaranteed interest rate or an index-linked interest rate required to be credited to the customer’s account value, which include interest rate fluctuations and/or sustained periods of low interest rates, and credit risk related to the underlying investments. We manage these risk exposures primarily through our investment strategies and product design features, which include credit rate resetting subject to the minimum guaranteed interest rate as well as surrender charges applied during the early years of the contract that help to provide protection for premature withdrawals. In addition, a portion of our fixed products has a market value adjustment provision that affords protection of lapse in the case of rising interest rates. We also manage these risk exposures through external reinsurance for certain of our fixed annuity products. For information on our external reinsurance agreements, see “Business—Individual Annuities” and Note 14 to the Consolidated Financial Statements.

Indexed Variable Annuity Risks and Risk Mitigants. The primary risk exposure of our indexed variable annuity products relates to the investment risks we bear in order to credit to the customer’s account balance the required crediting rate based on the performance of the elected indices at the end of each term. We manage this risk primarily through our investment strategies including derivatives and product design features, which include credit rate resetting subject to contractual minimums as well as surrender charges applied during the early years of the contract that help to provide protection for premature withdrawals. In addition, our indexed variable annuity strategies have an interim value provision that provides protection from lapse in the case of rising interest rates.

Variable Annuity Risks and Risk Mitigants. The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital markets assumptions such as equity market returns, interest rates and market volatility, along with actuarial assumptions such as contractholder mortality, the timing and amount of annuitization and withdrawals, and contract lapses. For these risk exposures, achievement of our expected returns is subject to the risk that actual experience will differ from the assumptions used in the original pricing of these products. We manage our exposure to certain risks driven by fluctuations in capital markets primarily through a combination of i) Product Design Features, ii) our Asset Liability Management Strategy, and iii) our Capital Hedge Program, as discussed below. We also manage these risk exposures through external reinsurance for certain of our variable annuity products. For information on our external reinsurance agreements, see “Business—Individual Annuities” and Note 14 to the Consolidated Financial Statements. Sales of traditional variable annuities with guaranteed living benefit riders have been discontinued as of December 31, 2020. See “Business—Individual Annuities” for more information about these products.

i.Product Design Features:
A portion of the variable annuity contracts that we offer include an automatic rebalancing feature, also referred to as an asset transfer feature. This feature is implemented at the contract level, and transfers assets between certain variable investment sub-accounts selected by the annuity contractholder and, depending on the benefit feature, a fixed-rate account in the general account or a bond fund sub-account within the separate accounts. The objective of the automatic rebalancing feature is to reduce our exposure to equity market risk and market volatility. Other product design features we utilize include, among others, asset allocation restrictions, minimum issuance age requirements and certain limitations on the amount of purchase payments, as well as a required minimum allocation to our general account for certain of our products. We continue to introduce products that diversify our risk profile and have incorporated provisions in product design allowing frequent revisions of key pricing elements for certain of our products. In addition, there is diversity in our fee arrangements as certain fees are primarily based on the benefit guarantee amount, the contractholder account value and/or premiums, which helps preserve certain revenue streams when market fluctuations cause account values to decline.
ii.Asset Liability Management (“ALM”) Strategy (including fixed income instruments and derivatives):
We employ an ALM strategy that utilizes a combination of both traditional fixed income instruments and derivatives to help defray potential claims associated with our variable annuity living benefit guarantees. The economic liability we manage with this ALM strategy consists of expected living benefit claims under less severe market conditions, which are managed using fixed income and derivative instruments, and potential living benefit claims resulting from more severe market conditions, which are hedged using derivative instruments. For our Prudential Defined Income (“PDI”) variable annuity, we utilize fixed income instruments to help defray potential claims. For the portion of our ALM strategy executed with derivatives, we enter into a range of exchange-traded and OTC equity, interest rate and credit derivatives, including, but not limited to: equity and treasury futures; total return, credit default and interest rate swaps; and options, including equity options, swaptions, and floors and caps. The intent of this strategy is to more efficiently manage the capital and liquidity associated with these products while continuing to mitigate fluctuations in net income due to movements in capital markets.

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Under our ALM strategy, the difference between the change in value of our hedging instruments and the change in value of the portion of the economic liability that is being hedged, has historically been reflected in adjusted operating income over time. Beginning with the second quarter of 2020, this impact is excluded from adjusted operating income, which the Company believes enhances the understanding of underlying performance trends.

The valuation of the economic liability we seek to defray excludes certain items that are included within the U.S. GAAP liability, such as NPR in order to maximize protection irrespective of the possibility of our own default, as well as risk margins (required by U.S. GAAP but different from our best estimate) and valuation methodology differences. The following table provides a reconciliation between the liability reported under U.S. GAAP and the economic liability we manage through our ALM strategy as of the periods indicated.
 December 31,
 20202019
 (in millions)
U.S. GAAP liability, including NPR, net of reinsurance recoverables(1)$18,537 $12,612 
NPR adjustment, net of reinsurance recoverables(1)4,103 3,522 
Subtotal22,640 16,134 
Adjustments including risk margins and valuation methodology differences(5,080)(4,385)
Economic liability managed through the ALM strategy$17,560 $11,749 
________
(1) Prior period amounts have been updated to conform to current period presentation.

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

Under our ALM strategy, we expect differences in the U.S. GAAP net income impact between the changes in value of the fixed income instruments and derivatives as compared to the changes in the embedded derivative liability these assets support. These differences can be primarily attributed to three distinct areas:

•Different valuation methodologies in measuring the liability we intend to cover with fixed income instruments and derivatives versus the liability reported under U.S. GAAP. The valuation methodology utilized in estimating the economic liability we intend to defray with fixed income instruments and derivatives is different from that required to be utilized to measure the liability under U.S. GAAP. Additionally, the valuation of the economic liability excludes certain items that are included within the U.S. GAAP liability, such as NPR in order to maximize protection irrespective of the possibility of our own default and risk margins (required by U.S. GAAP but different from our best estimate).

•Different accounting treatment between liabilities and assets supporting those liabilities. Under U.S. GAAP, changes in value of the embedded derivative liability and derivative instruments used to hedge a portion of the economic liability are immediately reflected in net income. In contrast, changes in fair value of fixed income instruments that support a portion of the economic liability are designated as available-for-sale and are recorded as unrealized gains (losses) in other comprehensive income versus net income.

•General hedge results. For the derivative portion of the ALM strategy, the net hedging impact (the extent to which the changes in value of the hedging instruments offset the change in value of the portion of the economic liability we are hedging) may be impacted by a number of factors, including: cash flow timing differences between our hedging instruments and the corresponding portion of the economic liability we are hedging, basis differences attributable to actual underlying contractholder funds to be hedged versus hedgeable indices, rebalancing costs related to dynamic rebalancing of hedging instruments as markets move, certain elements of the economic liability that may not be hedged (including certain actuarial assumptions), and implied and realized market volatility on the hedge positions relative to the portion of the economic liability we seek to hedge.
iii.Capital Hedge Program:
We employ a capital hedge program to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets. The capital hedge program is conducted using equity derivatives which include equity call and put options, total return swaps and futures contracts. The changes in value of these derivatives have historically been recognized in adjusted operating income over the expected duration of the capital hedge program. Beginning with the second quarter of 2020, changes in value of these derivatives are excluded from adjusted operating income which the Company believes enhances the understanding of underlying performance trends.

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Results excluded from adjusted operating income

The following table provides the net impact to the Consolidated Statements of Operations from the results excluded from adjusted operating income, which is primarily driven by the changes in the U.S. GAAP embedded derivative liability and hedge positions under the ALM strategy as described above, and the related amortization of DAC and other costs.
Year ended December 31,
202020192018
Results excluded from adjusted operating income(2)(in millions)(1)
Change in value of U.S. GAAP liability, pre-NPR(3)$(4,979)$(1,510)$(681)
Change in the NPR adjustment581 (1,103)1,394 
Change in fair value of hedge assets, excluding capital hedges(4)2,251 695 (427)
Change in fair value of capital hedges(5)(900)(1,024)404 
Other136 391 156 
Realized investment gains (losses), net, and related adjustments
(2,911)(2,551)846 
Market experience updates(6)
(324)(100)0 
Charges related to realized investment gains (losses), net4 59 (407)
Total results excluded from adjusted operating income(7)$(3,231)$(2,592)$439 
__________
(1)Positive amounts represent income; negative amounts represent a loss.
(2)Includes the impact of annual reviews and update of assumptions and other refinements.
(3)Represents the change in the liability (excluding NPR) for our variable annuities living benefit guarantees, which is measured utilizing a valuation methodology that is required under U.S. GAAP. This liability includes such items as risk margins which are required by U.S. GAAP but not included in our best estimate of the liability.
(4)Represents the change in fair value of the derivatives utilized to hedge potential claims associated with our variable annuity living benefit guarantees.
(5)Represents the changes in fair value of equity derivatives of the capital hedge program intended to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets.
(6)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019.
(7)Excludes amounts from the changes in fair value of fixed income instruments recorded in OCI (versus net income): a gain of $1,384 million, a gain of $845 million and a loss of $14 million as of December 31, 2020, 2019 and 2018, respectively.

For 2020, the loss of $3,231 million was driven by an unfavorable impact related to the portions of the U.S. GAAP liability before NPR, net of the change in fair value of hedge assets (excluding the change in fair value of capital hedges) largely due to unfavorable hedge breakage resulting from equity market volatility, as well as the unfavorable impact on the unhedged portion of the economic liability as a result of declining interest rates, partially offset by favorable equity market performance. Contributing to the overall loss were losses associated with our capital hedge program. Partially offsetting these items was a favorable NPR adjustment.

For 2019, the loss of $2,592 million was driven by an unfavorable NPR adjustment, losses associated with our capital hedge program, and an unfavorable impact related to the portions of the U.S. GAAP liability before NPR, net of the change in fair value of hedge assets (excluding the change in fair value of capital hedges) largely due to declining interest rates, partially offset by favorable equity market performance.

Product Specific Risks and Risk Mitigants

For certain living benefit guarantees, claims will primarily represent the funding of contractholder lifetime withdrawals after the cumulative withdrawals have first exhausted the contractholder account value. Due to the age of the in-force block, limited claim payments have occurred to date, and they are not expected to increase significantly within the next five years, based upon current assumptions. The timing and amount of future claims will depend on actual returns on contractholder account value and actual contractholder behavior relative to our assumptions. The majority of our current living benefit guarantees provide for guaranteed lifetime contractholder withdrawal payments inclusive of a “highest daily” contract value guarantee. Our Prudential Defined Income variable annuity complements our variable annuity products with the highest daily benefit and provides for guaranteed lifetime contractholder withdrawal payments, but restricts contractholder asset allocation to a single bond fund sub-account within the separate accounts.
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The majority of our traditional variable annuity contracts with living benefit guarantees, and contracts sold with our highest daily living benefit features, include risk mitigants in the form of an automatic rebalancing feature and/or inclusion in our ALM strategy. We may also utilize external reinsurance as a form of additional risk mitigation. The risks associated with the guaranteed benefits of certain legacy products that were sold prior to our development of the automatic rebalancing feature are also managed through our ALM strategy. Certain legacy products with GMAB rider options include the automatic rebalancing feature but are not included in the ALM strategy. As discussed above, sales of traditional variable annuities with living benefit guarantees and automatic rebalancing features have been discontinued as of December 31, 2020. See “Business—Individual Annuities” for more information about these products.
For our GMDBs, we provide a benefit payable in the event of death. Our base GMDB is generally equal to a return of cumulative deposits adjusted for any partial withdrawals. Certain products include an optional enhanced GMDB based on the greater of a minimum return on the contract value or an enhanced value. We have retained the risk that the total amount of death benefit payable may be greater than the contractholder account value; however, a substantial portion of the account values associated with GMDBs are subject to an automatic rebalancing feature because the contractholder also selected a living benefit guarantee which includes an automatic rebalancing feature. All of the variable annuity account values with living benefit guarantees also contain GMDBs. The living and death benefit features for these contracts cover the same insured life and, consequently, we have insured both the longevity and mortality risk on these contracts.
The following table sets forth the risk management profile of our living benefit guarantees and guaranteed minimum death benefit (“GMDB”) features as of the periods indicated:
 December 31,
 202020192018
Account Value% of TotalAccount Value% of TotalAccount Value% of Total
 (in millions)
Living benefit/GMDB features(1):
Both ALM strategy and automatic rebalancing(2)(3)$112,177 66 %$111,535 68 %$101,496 69 %
ALM strategy only(3)7,410 4 %7,703 5 %7,520 5 %
Automatic rebalancing only634 1 %732 1 %804 1 %
External reinsurance(4)3,173 2 %3,150 2 %2,873 2 %
PDI18,540 11 %16,296 9 %11,237 7 %
Other products2,492 1 %2,457 1 %2,306 2 %
Total living benefit/GMDB features$144,426 $141,873 $126,236 
GMDB features and other(5)26,120 15 %23,055 14 %21,103 14 %
Total variable annuity account value$170,546 $164,928 $147,339 
_________
(1)All contracts with living benefit guarantees also contain GMDB features, which cover the same insured contract.
(2)Contracts with living benefits that are included in our ALM strategy and that have an automatic rebalancing feature.
(3)Excludes PDI which is presented separately within this table.
(4)Represents contracts subject to a reinsurance transaction with an external counterparty covering certain Highest Daily Lifetime Income (“HDI”) v.3.0 business for the period April 1, 2015 through December 31, 2016. These contracts with living benefits also have an automatic rebalancing feature. See Note 14 to the Consolidated Financial Statements for additional information.
(5)Includes contracts that have a GMDB feature and do not have an automatic rebalancing feature.

Individual Life
 
Operating Results
 
The following table sets forth Individual Life’s operating results for the periods indicated:
 
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 Year ended December 31,
 202020192018
 (in millions)
Operating results:
Revenues$6,398 $6,115 $5,831 
Benefits and expenses6,446 6,028 5,608 
Adjusted operating income(48)87 223 
Realized investment gains (losses), net, and related adjustments359 358 (318)
Charges related to realized investment gains (losses), net(124)(121)79 
       Market experience updates(1)(267)(308)0 
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests1 0 0 
Income (loss) before income taxes and equity in earnings of operating joint ventures$(79)$16 $(16)
________
(1)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 22 to the Consolidated Financial Statements for additional information.
Adjusted Operating Income
 
2020 to 2019 Annual Comparison. Adjusted operating income decreased $135 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for 2020 included a $92 million net charge from these updates, mainly driven by unfavorable impacts related to a decrease in long-term interest rate assumptions. Results for 2019 included a $208 million net charge from these updates, mainly driven by unfavorable impacts related to mortality assumptions. Excluding this item, adjusted operating income decreased $251 million, primarily reflecting lower underwriting results, driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims, a change in business practice related to the level of premiums collected on certain policies that resulted in reserve refinements, and the absence of a favorable impact from changes in market conditions on estimates of profitability in the prior year period. These decreases were partially offset by lower expenses from cost savings initiatives.

Revenues, Benefits and Expenses
 
2020 to 2019 Annual Comparison. Revenues increased $283 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $212 million. This increase was primarily driven by higher policy charges and fee income driven by business growth, and higher net investment income due to higher average invested assets resulting from business growth, partially offset by lower investment yields.

Benefits and expenses increased $418 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $463 million. This increase reflected higher policyholders’ benefits, including changes in reserves, driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims as well as a change in business practice related to the level of premiums collected on certain policies that resulted in reserve refinements and the absence of a favorable impact from changes in market conditions on estimates of profitability in the prior year period, as discussed above. The increase also reflected higher general and administrative expenses, net of capitalization, due to an increase in VOBA amortization, partially offset by lower expenses from cost savings initiatives.

Sales Results
 
The following table sets forth Individual Life’s annualized new business premiums, as defined under “—Results of Operations—Segment Measures” above, by distribution channel and product, for the periods indicated:
 
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 202020192018
 Prudential
Advisors		Third
Party		TotalPrudential
Advisors		Third
Party		TotalPrudential
Advisors		Third
Party		Total
 (in millions)
Term Life$26 $122 $148 $27 $173 $200 $28 $185 $213 
Guaranteed Universal Life(1)3 91 94 8 87 95 8 89 97 
Other Universal Life(1)17 74 91 38 117 155 45 105 150 
Variable Life100 349 449 78 200 278 54 109 163 
Total$146 $636 $782 $151 $577 $728 $135 $488 $623 
__________
(1)Single pay life premiums and excess (unscheduled) premiums are included in annualized new business premiums based on a 10% credit and represented approximately 7%, 9% and 13% of Guaranteed Universal Life and 7%, 14% and 26% of Other Universal Life annualized new business premiums for the years ended December 31, 2020, 2019 and 2018, respectively. Prior period percentages have been updated to conform to current period presentation.
 
2020 to 2019 Annual Comparison. Total annualized new business premiums increased $54 million, primarily reflecting higher sales of variable life products throughout the year including the impact of increased sales prior to pricing actions taken in the fourth quarter of 2020, partially offset by lower sales of other universal life products due to the absence of large case activity in 2020 and lower sales of term life products due to pricing actions.

U.S. Businesses—Assurance IQ Division
Assurance IQ

Operating Results

The following table sets forth Assurance IQ’s operating results for the periods indicated. Results for 2019 only reflect activity from October 10, 2019 (“acquisition date”) through December 31, 2019.
 20202019(1)
(in millions)
Operating results:
Revenues$391 $101 
Expenses479 110 
Adjusted operating income(88)(9)
Realized investment gains (losses), net, and related adjustments1 0 
Other adjustments(2)51 (47)
Income (loss) before income taxes and equity in earnings of operating joint ventures$(36)$(56)
  __________
(1)Represents activity from the acquisition date through December 31, 2019. See Note 1 to the Consolidated Financial Statements for additional information.
(2)“Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 22 to the Consolidated Financial Statements for additional information.

Adjusted Operating Income

Adjusted operating income for the year ended December 31, 2020 was $(88) million, reflecting revenues, net of marketing and distribution expenses, primarily related to our health (Medicare and Health Under 65) and life insurance product lines. Results also include amortization expenses related to intangible assets recognized as part of purchase accounting (see Note 1 and Note 10 to the Consolidated Financial Statements for additional information).

For the period from the acquisition date through December 31, 2019, adjusted operating income was $(9) million, reflecting the starting period of Assurance IQ’s earnings with Prudential and includes revenues, net of marketing and distribution expenses, related to seasonal enrollments within our health product line, as well as operating expenses and amortization expenses related to intangible assets recognized as part of purchase accounting.

Revenues and Expenses

Revenues for the year ended December 31, 2020 were $391 million, primarily reflecting commissions and marketing referral revenues from our health (Medicare and Health Under 65) and life insurance product lines. Expenses for the year ended
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December 31, 2020 were $479 million driven by marketing and distribution costs, general and administrative operating expenses including certain expenses (e.g., advertising costs) incurred in preparation for the annual Medicare enrollment period, and amortization expenses related to intangible assets.

Revenues for the period from the acquisition date through December 31, 2019 were $101 million, primarily reflecting commissions and marketing referral revenues from our health, life insurance, and property and casualty product lines. Expenses for the period from the acquisition date through December 31, 2019 were $110 million driven by marketing and distribution costs, general and administrative operating expenses, and amortization expenses related to intangible assets.

International Businesses

Business Updates

•In the third quarter of 2020, we 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 $1.9 billion. See Note 1 to the Consolidated Financial Statements for additional information. Effective in the second quarter of 2020, the results of this business and the impact of its sale were reflected in the Divested and Run-off Businesses that are included in Corporate and Other, and all prior period amounts have been updated to conform to the current period presentation. See “—Divested and Run-off Businesses” for additional information.

•In the third quarter of 2020, we entered into a definitive agreement with Taishin Financial Holding Co, Ltd., a Taiwanese financial services provider, to sell Prudential Life Insurance Company of Taiwan Inc. (“POT”) for cash consideration of approximately $195 million at current exchange rates, to be paid at closing, and contingent consideration with a fair value of approximately $15 million at December 31, 2020. The transaction is expected to close in 2021, subject to regulatory approvals and customary closing conditions. Beginning in the third quarter of 2020, we reported our investment in POT as “held for sale” and have recognized an approximate $350 million after-tax charge to earnings, through December 31, 2020, to adjust the carrying value of POT to the fair market value reflected in the purchase price (see Note 1 to the Consolidated Financial Statements for additional information). Also, effective in the third quarter of 2020, the results of this business and the impact of its anticipated sale were reflected in the Divested and Run-off Businesses that are included in Corporate and Other, and all prior period amounts have been updated to conform to the current period presentation. We intend to use the proceeds of the transaction for general corporate purposes.
 
Operating Results
 
The results of our International Businesses’ operations are translated on the basis of weighted average monthly exchange rates, inclusive of the effects of the intercompany arrangement discussed in “—Results of Operations—Impact of Foreign Currency Exchange Rates” above. To provide a better understanding of operating performance within the International Businesses, where indicated below, we have analyzed our results of operations excluding the effect of the year over year change in foreign currency exchange rates. Our results of operations, excluding the effect of foreign currency fluctuations, were derived by translating foreign currencies to USD at uniform exchange rates for all periods presented, including for constant dollar information discussed below. For our Japan operations, we used an exchange rate of 104 yen per USD, which was determined in connection with the foreign currency income hedging program discussed in “—Results of Operations—Impact of Foreign Currency Exchange Rates” above. In addition, for constant dollar information discussed below, activity denominated in USD is generally reported based on the amounts as transacted in USD. Annualized new business premiums presented on a constant exchange rate basis in the “Sales Results” section below reflect translation based on these same uniform exchange rates.
 
The following table sets forth the International Businesses’ operating results for the periods indicated:
 
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 Year ended December 31,
 202020192018
 (in millions)
Operating results(1):
Revenues:
Life Planner $10,122 $9,605 $9,000 
Gibraltar Life and Other 11,454 11,331 11,058 
Total revenues21,576 20,936 20,058 
Benefits and expenses:
Life Planner8,618 8,172 7,657 
Gibraltar Life and Other 10,006 9,652 9,382 
Total benefits and expenses18,624 17,824 17,039 
Adjusted operating income:
Life Planner 1,504 1,433 1,343 
Gibraltar Life and Other 1,448 1,679 1,676 
Total adjusted operating income2,952 3,112 3,019 
Realized investment gains (losses), net, and related adjustments(2)727 1,240 317 
Charges related to realized investment gains (losses), net(42)(12)11 
Market experience updates(3)(39)(31)0 
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(48)(107)(69)
Income (loss) before income taxes and equity in earnings of operating joint ventures$3,550 $4,202 $3,278 
   __________
(1)Effective second quarter of 2020, the results of POK and the impact of its sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Effective third quarter of 2020, the results of POT and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Consolidated Financial Statements for additional information.
(2)Prior period amounts have been updated to conform to current period presentation.
(3)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 22 to the Consolidated Financial Statements for additional information.

Adjusted Operating Income
 
2020 to 2019 Annual Comparison. Adjusted operating income from our Life Planner operations increased $71 million including a net unfavorable impact of $1 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in a $42 million net charge in 2020 compared to a $5 million net benefit in 2019. The net charge in 2020 was primarily driven by unfavorable impacts related to a decrease in long-term interest rate assumptions.

Excluding these items, adjusted operating income from our Life Planner operations increased $119 million, primarily reflecting favorable underwriting results due to the growth of business in force in our Japan and Brazil operations and favorable policyholder experience, partially offset by an unfavorable impact from mortality experience. Also contributing to the increase were lower expenses primarily driven by the absence of updates to legal reserves incurred in the prior year period, partially offset by higher expenses driven by costs associated with COVID-19 (see “Overview—COVID-19—Expenses”) and higher costs related to business growth and business initiatives. These increases were partially offset by lower net investment spread results primarily driven by lower reinvestment yields.

Adjusted operating income from our Gibraltar Life and Other operations decreased $231 million including a net unfavorable impact of $9 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in a $52 million net charge in 2020 compared to a $7 million net benefit in 2019. The net charge in 2020 was primarily driven by updates of reserves reflecting the impact of a decrease in long-term interest rate assumptions, as well as other refinements.

Excluding these items, adjusted operating income from our Gibraltar Life and Other operations decreased $163 million, primarily reflecting lower net investment spread results driven by lower reinvestment yields, and lower earnings from our joint venture investments, as well as higher expenses driven by costs associated with COVID-19 (see “Overview—COVID-19—Expenses”). These decreases were partially offset by favorable underwriting results and a favorable impact from mortality experience.
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Revenues, Benefits and Expenses
 
2020 to 2019 Annual Comparison. Revenues from our Life Planner operations increased $517 million including a net unfavorable impact of $109 million from currency fluctuations and a net benefit of $33 million from our annual reviews and update of assumptions and other refinements. Excluding these items, revenues increased $593 million, primarily driven by higher premiums and policy charges and fee income attributable to the growth of business in force.
 
Benefits and expenses from our Life Planner operations increased $446 million including a net favorable impact of $108 million from currency fluctuations and a net charge of $80 million from our annual reviews and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $474 million, primarily reflecting higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force, as well as an unfavorable impact from mortality experience. These increases were partially offset by lower expenses primarily driven by the absence of updates to legal reserves incurred in the prior year period, partially offset by higher expenses driven by costs associated with COVID-19 impacts.

Revenues from our Gibraltar Life and Other operations increased $123 million, including a net favorable impact of $98 million from currency fluctuations and a net charge of $9 million from our annual reviews and update of assumptions and other refinements. Excluding these items, revenues increased $34 million primarily driven by higher premiums, partially offset by lower net investment results driven by lower reinvestment yields, and lower other income driven by an unfavorable impact from our joint venture investments.
Benefits and expenses from our Gibraltar Life and Other operations increased $354 million including a net unfavorable impact of $107 million from currency fluctuations and a net charge of $50 million from our annual reviews and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $197 million, primarily reflecting higher policyholders’ benefits, including changes in reserves, as well as higher expenses driven by costs associated with COVID-19 impacts.

Sales Results
 
The following table sets forth annualized new business premiums, as defined under “—Results of Operations—Segment Measures” above, on an actual and constant exchange rate basis for the periods indicated:
 
 Year ended December 31,
 202020192018
 (in millions)
Annualized new business premiums(1):
On an actual exchange rate basis:
Life Planner $1,041 $1,097 $1,023 
Gibraltar Life and Other1,149 1,213 1,483 
Total$2,190 $2,310 $2,506 
On a constant exchange rate basis:
Life Planner 1,087 1,105 1,021 
Gibraltar Life and Other1,153 1,220 1,492 
Total$2,240 $2,325 $2,513 
__________
(1)Effective second quarter of 2020, the results of POK and the impact of its sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Effective third quarter of 2020, the results of POT and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Consolidated Financial Statements for additional information.

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

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

2020 to 2019 Annual Comparison. The table below presents annualized new business premiums on a constant exchange rate basis, by product category and distribution channel, for the periods indicated:
 
 Year Ended December 31, 2020Year Ended December 31, 2019
 LifeAccident
&
Health		Retirement
(1)		AnnuityTotalLifeAccident
&
Health		Retirement
(1)		AnnuityTotal
 (in millions)
Life Planner(2)$578 $71 $438 $0 $1,087 $607 $92 $405 $1 $1,105 
Gibraltar Life and Other:
Life Consultants340 33 58 63 494 349 40 82 142 613 
Banks(3)418 0 23 18 459 378 0 37 12 427 
Independent Agency100 4 91 5 200 88 8 68 16 180 
Subtotal858 37 172 86 1,153 815 48 187 170 1,220 
Total$1,436 $108 $610 $86 $2,240 $1,422 $140 $592 $171 $2,325 
__________
(1)Includes retirement income, endowment and savings variable universal life.
(2)Effective second quarter of 2020, the results of POK and the impact of its sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Effective third quarter of 2020, the results of POT and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Consolidated Financial Statements for additional information.
(3)Single pay life annualized new business premiums, which include 10% of first year premiums, and 3-year limited pay annualized new business premiums, which include 100% of new business premiums, represented 3% and 71%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the year ended December 31, 2020, and 1% and 66%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the year ended December 31, 2019.
 
Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations decreased $18 million primarily driven by lower sales due to COVID-19 impacts, lower sales of corporate term products in Japan driven by the corporate product tax rule change effective July 2019, and lower Life Planner headcount, as discussed below. The decreases were partially offset by higher sales of USD-denominated products ahead of pricing increases in the third quarter of 2020.

Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations decreased $67 million. Life Consultants sales decreased $119 million, primarily driven by COVID-19 impacts, lower sales of USD-denominated fixed annuity products driven by declines in crediting rates, and lower Life Consultant headcount (as discussed under “Sales Force” below). Bank channel sales increased $32 million, reflecting higher sales of USD-denominated protection products ahead of pricing increases in the third quarter of 2020, partially offset by lower sales due to COVID-19 impacts. Independent Agency sales increased $20 million, reflecting higher sales of USD-denominated protection and endowment products ahead of pricing increases in the third quarter of 2020, partially offset by lower sales of USD-denominated fixed annuity products.

Sales Force
 
The following table sets forth the number of Life Planners and Life Consultants for the periods indicated:
 
 As of December 31,
 202020192018
Life Planners:
Japan4,555 4,356 4,183 
All other countries(1)1,511 1,833 1,640 
Gibraltar Life Consultants7,254 7,403 7,964 
Total13,320 13,592 13,787 
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__________
(1)Effective second quarter of 2020, the results of POK and the impact of its sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Effective third quarter of 2020, the results of POT and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Consolidated Financial Statements for additional information.

2020 to 2019 Comparison. The number of Life Planners decreased by 123, driven by a decrease of 322 in other operations, primarily attributable to a decrease in Brazil as a result of increased terminations related to enhanced agency contract requirements. Life Planners in Japan increased by 199 as a result of recruiting efforts and fewer terminations. The number of Gibraltar Life Consultants decreased by 136, primarily reflecting more selective recruiting efforts and retention standards.

Corporate and Other
 
Corporate and Other includes corporate operations, after allocations to our business segments, and Divested and Run-off Businesses other than those that qualify for “discontinued operations” accounting treatment under U.S. GAAP.
 
 Year ended December 31,
 202020192018
 (in millions)
Operating results:
Interest expense on debt(1)$(894)$(866)$(809)
Investment income(1)134 250 169 
Pension and employee benefits191 149 195 
Other corporate activities(2)(1,255)(1,299)(838)
Adjusted operating income(1,824)(1,766)(1,283)
Realized investment gains (losses), net, and related adjustments(2,357)(193)216 
Charges related to realized investment gains (losses), net3 (53)7 
Market experience updates(3)(10)(10)0 
Divested and Run-off Businesses(4)(629)755 (1,434)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(25)(6)4 
Income (loss) before income taxes and equity in earnings of operating joint ventures$(4,842)$(1,273)$(2,490)
__________
(1)Prior period amounts have been updated to conform to current period presentation.
(2)Includes consolidating adjustments.
(3)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 22 to the Consolidated Financial Statements for additional information.
(4)Effective second quarter of 2020, the results of POK and the impact of its sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Effective third quarter of 2020, the results of POT and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Consolidated Financial Statements for additional information.
 
2020 to 2019 Annual Comparison. The loss from Corporate and Other operations, on an adjusted operating income basis, increased $58 million. Investment income decreased $116 million primarily driven by lower income on highly liquid assets due to lower investment yields, a decrease in average invested assets and lower income on non-coupon investments. Interest expense on debt increased $28 million, reflecting higher average debt balances. Net charges from other corporate activities decreased $44 million, primarily reflecting higher charges in the prior year period for certain corporate costs and initiatives, including a significant charge related to the implementation of the Company’s Voluntary Separation Program (see “—Overview” above), partially offset by increases to legal reserves in the current year period.

Results from pension and employee benefits were favorable by $42 million, primarily driven by a decrease in employee health benefit costs.

For purposes of calculating pension income from our qualified pension plan for the year ended December 31, 2021, we decreased the discount rate from 3.30% to 2.55% as of December 31, 2020. The expected rate of return on plan assets will decrease from 6.00% in 2020 to 5.75% in 2021. The assumed rate of increase in compensation will remain unchanged at 4.50%. Giving effect to the foregoing assumptions and other factors, we expect income from our qualified pension plan in 2021 to be
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approximately $85 million to $90 million higher than 2020 levels. The increase is driven by lower interest costs on the plan obligation due to the lower discount rate.
 
For purposes of calculating postretirement benefit expenses for the year ended December 31, 2021, we decreased the discount rate from 3.25% to 2.40% as of December 31, 2020. The expected rate of return on plan assets will remain unchanged at 6.75%. Giving effect to the foregoing assumptions and other factors, we expect postretirement income in 2021 to be approximately $15 million to $20 million higher than 2020 levels. The increase is driven by lower interest costs on the plan obligation due to the lower discount rate.
 
In 2021, pension and other postretirement benefit service costs related to active employees will continue to be allocated to our business segments. For further information regarding our pension and postretirement plans, see Note 18 to the Consolidated Financial Statements.

Divested and Run-off Businesses

Divested and Run-off Businesses Included in Corporate and Other

Income from our Divested and Run-off Businesses includes results from several businesses that have been or will be sold or exited, including businesses that have been placed in wind down status that do not qualify for “discontinued operations” accounting treatment under U.S. GAAP. The results of these Divested and Run-off Businesses are reflected in our Corporate and Other operations, but are excluded from adjusted operating income. A summary of the results of the Divested and Run-off Businesses reflected in our Corporate and Other operations is as follows for the periods indicated:
 Year ended December 31,
 202020192018
 (in millions)
Long-Term Care$351 $469 $(1,458)
Other(1)(980)286 24 
Total Divested and Run-off Businesses income (loss) excluded from adjusted operating income$(629)$755 $(1,434)
 __________
(1)Effective second quarter of 2020, the results of POK and the impact of its sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Effective third quarter of 2020, the results of POT and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Consolidated Financial Statements for additional information.

Long-Term Care. Results for the year ended December 31, 2020 decreased $118 million compared to 2019, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for 2020 included a $33 million net charge from these updates, while results for 2019 included a $9 million net charge from these updates. Excluding these items, results decreased $94 million primarily reflecting less favorable underwriting results including less favorable claim experience, an increase in reserves as a result of an unlocking of assumptions in the first quarter of 2020 due to the decline in interest rates, and a less favorable increase in the market value of equity securities. These decreases were partially offset by a more favorable increase in the market value of derivatives used for duration management.

Other. Results for the year ended December 31, 2020 primarily reflect the results of POK and the impact of its sale which was completed in August 2020, as well as the results of POT and the impact of its anticipated sale. See Note 1 to the Consolidated Financial Statements for additional information.
 
Closed Block Division
 
The Closed Block division includes certain in-force traditional domestic participating life insurance and annuity products and assets that are used for the payment of benefits and policyholder dividends on these policies (collectively, the “Closed Block”), as well as certain related assets and liabilities. We no longer offer these traditional domestic participating policies. See Note 15 to the Consolidated Financial Statements for additional information.
 
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Each year, the Board of Directors of The Prudential Insurance Company of America (“PICA”) determines the dividends payable on participating policies for the following year based on the experience of the Closed Block, including investment income, net realized and unrealized investment gains (losses), mortality experience and other factors. Although the Closed Block experience for dividend action decisions is based upon statutory results, at the time the Closed Block was established, we developed, as required by U.S. GAAP, an actuarial calculation of the timing of the maximum future earnings from the policies included in the Closed Block. If actual cumulative earnings in any given period are greater than the cumulative earnings we expected, we record this excess as a policyholder dividend obligation. We will subsequently pay this excess to Closed Block policyholders as an additional dividend unless it is otherwise offset by future Closed Block performance that is less favorable than we originally expected. The policyholder dividends we charge to expense within the Closed Block division will include any change in our policyholder dividend obligation that we recognize for the excess of actual cumulative earnings in any given period over the cumulative earnings we expected in addition to the actual policyholder dividends declared by the Board of Directors of PICA.
 
As of December 31, 2020, the excess of actual cumulative earnings over the expected cumulative earnings was $2,920 million, which was recorded as a policyholder dividend obligation. Actual cumulative earnings, as required by U.S. GAAP, reflect the recognition of realized investment gains and losses in the current period, as well as changes in assets and related liabilities that support the Closed Block policies. Additionally, the accumulation of net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block has been reflected as a policyholder dividend obligation of $5,867 million at December 31, 2020, to be paid to Closed Block policyholders unless offset by future experience, with a corresponding amount reported in AOCI.
 
Operating Results
 
The following table sets forth the Closed Block division’s results for the periods indicated:
 Year ended December 31,
 202020192018
 (in millions)
U.S. GAAP results:
Revenues$4,766 $5,642 $4,678 
Benefits and expenses4,790 5,606 4,740 
Income (loss) before income taxes and equity in earnings of operating joint ventures$(24)$36 $(62)

Income (loss) Before Income Taxes and Equity in Earnings of Operating Joint Ventures
 
2020 to 2019 Annual Comparison. Income (loss) before income taxes and equity in earnings of operating joint ventures decreased $60 million. Net investment activity results decreased primarily reflecting lower realized investment gains driven by unfavorable changes in the value of derivatives used in risk management activities, and a decrease in other income driven by less favorable changes in the value of equity securities. Net insurance activity results reflected a favorable comparative change driven by a decrease in the 2021 dividend scale and runoff of policies in force. As a result of the above and other variances, a $117 million increase in the policyholder dividend obligation was recorded in 2020, compared to a $564 million increase in 2019. If actual cumulative earnings fall below expected cumulative earnings in future periods, earnings volatility in the Closed Block division, which is primarily due to changes in investment results, may not be offset by changes in the cumulative earnings policyholder dividend obligation. For a discussion of the Closed Block division’s realized investment gains (losses), net, see “—General Account Investments.”
 
Revenues, Benefits and Expenses
 
2020 to 2019 Annual Comparison. Revenues decreased $876 million primarily driven by a decrease in net realized investment gains, a decrease in other income, and lower premiums due to runoff of policies in force, as discussed above.

Benefits and expenses decreased $816 million primarily driven by a decrease in dividends to policyholders, reflecting a decrease in the policyholder dividend obligation expense due to changes in cumulative earnings, as discussed above.

Income Taxes
 
The differences between income taxes expected at the U.S. federal statutory income tax rate of 21% applicable for 2020, 2019 and 2018, and the reported income tax (benefit) expense are provided in the following table:
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 Year Ended December 31,
 20202019(1)2018(1)
 (in millions)
Expected federal income tax expense (benefit) at federal statutory rate$(68)$1,068 $1,015 
Non-taxable investment income(228)(270)(250)
Foreign taxes at other than U.S. rate252 234 347 
Low-income housing and other tax credits(112)(118)(112)
Changes in tax law(194)(2)(321)
Sale of subsidiary277 4 10 
Non-controlling interest(48)(11)0 
Non-deductible expenses14 23 33 
Change in valuation allowance17 (1)(6)
State taxes10 1 6 
Other(1)19 100 
Reported income tax expense (benefit)$(81)$947 $822 
Effective tax rate25.1 %18.6 %17.0 %
  __________
(1)Prior period amounts have been updated to conform to current period presentation.

Effective Tax Rate

The effective tax rate is the ratio of “Total income tax expense (benefit)” divided by “Income before income taxes and equity in earnings of operating joint ventures.” Our effective tax rate for fiscal years 2020, 2019 and 2018 was 25.1%, 18.6%, and 17.0%, respectively. For a detailed description of the nature of each significant reconciling item, see Note 16 to the Consolidated Financial Statements. The change in the effective tax rate from 18.6% in 2019 to 25.0% in 2020 was primarily driven by a decrease in pre-tax net income, the sale of a subsidiary and the impact of the CARES Act. The increase in the effective tax rate from 17.0% in 2018 to 18.6% in 2019 was primarily driven by the impacts of the Tax Act of 2017 in 2018.

Unrecognized Tax Benefits

The Company’s liability for income taxes includes the liability for unrecognized tax benefits and interest that relate to tax years still subject to review by the Internal Revenue Service or other taxing authorities. The completion of review or the expiration of the Federal statute of limitations for a given audit period could result in an adjustment to the liability for income taxes. The total unrecognized benefit as of December 31, 2020, 2019 and 2018 was $17 million, $18 million and $20 million, respectively. We do not anticipate any significant changes within the next twelve months to our total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.

Income Tax Expense vs. Income Tax Paid in Cash

Income tax expense recorded under U.S. GAAP routinely differs from the income taxes paid in cash in any given year. Income tax expense recorded under U.S. GAAP is based on income reported in our Consolidated Statements of Operations for the current period and it includes both current and deferred taxes. Income taxes paid during the year include tax installments made for the current year as well as tax payments and refunds related to prior periods.

For additional information on income tax related items, see “Business—Regulation” and Note 16 to the Consolidated Financial Statements.

Experience-Rated Contractholder Liabilities,
Assets Supporting Experience-Rated Contractholder Liabilities and Other Related Investments
 
Certain products included in the Retirement and International Businesses segments are experience-rated in that investment results associated with these products are expected to ultimately accrue to contractholders. The majority of investments supporting these experience-rated products are carried at fair value. These investments are reflected on the Consolidated Statements of Financial Position as “Assets supporting experience-rated contractholder liabilities, at fair value.” Realized and unrealized gains (losses) for these investments are reported in “Other income (loss).” Interest and dividend income for these
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investments is reported in “Net investment income.” To a lesser extent, these experience-rated products are also supported by derivatives and commercial mortgage and other loans. The derivatives that support these experience-rated products are reflected on the Consolidated Statements of Financial Position as “Other invested assets” and are carried at fair value, and the realized and unrealized gains (losses) are reported in “Realized investment gains (losses), net.” The commercial mortgage and other loans that support these experience-rated products are carried at unpaid principal, net of unamortized discounts and an allowance for losses, and are reflected on the Consolidated Statements of Financial Position as “Commercial mortgage and other loans.” Gains (losses) on sales and changes in the valuation allowance for commercial mortgage and other loans are reported in “Realized investment gains (losses), net.”
 
Our Retirement segment has two types of experience-rated products that are supported by assets supporting experience-rated contractholder liabilities and other related investments. Fully participating products are those for which the entire return on underlying investments is passed back to the policyholders through a corresponding adjustment to the related liability, primarily classified in the Consolidated Statements of Financial Position as “Policyholders’ account balances.” The adjustment to the liability is based on changes in the fair value of all of the related assets, including commercial mortgage and other loans, which are carried at amortized cost, less any valuation allowance. Partially participating products are those for which only a portion of the return on underlying investments is passed back to the policyholders over time through changes to the contractual crediting rates. The crediting rates are typically reset semiannually, often subject to a minimum crediting rate, and returns are required to be passed back within ten years.
 
In our International Businesses, the experience-rated products are fully participating. As a result, the entire return on the underlying investments is passed back to policyholders through a corresponding adjustment to the related liability.
 
Adjusted operating income excludes net investment gains (losses) on assets supporting experience-rated contractholder liabilities, related derivatives and commercial mortgage and other loans. This is consistent with the exclusion of realized investment gains (losses) with respect to other investments supporting insurance liabilities managed on a consistent basis. In addition, to be consistent with the historical treatment of charges related to realized investment gains (losses) on investments, adjusted operating income also excludes the change in contractholder liabilities due to asset value changes in the pool of investments (including changes in the fair value of commercial mortgage and other loans) supporting these experience-rated contracts, which are reflected in “Interest credited to policyholders’ account balances.” The result of this approach is that adjusted operating income for these products includes net fee revenue and interest spread we earn on these experience-rated contracts, and excludes changes in fair value of the pool of investments, both realized and unrealized, that we expect will ultimately accrue to the contractholders.
 
The following table sets forth the impact on results for the periods indicated of these items that are excluded from adjusted operating income:
 
 Year ended December 31,
 202020192018
 (in millions)
Retirement:
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net(1)$602 $699 $(472)
Change in experience-rated contractholder liabilities due to asset value changes(625)(682)435 
Gains (losses), net, on experienced rated contracts(2)(3)$(23)$17 $(37)
International Businesses:
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net$68 $267 $(275)
Change in experience-rated contractholder liabilities due to asset value changes(68)(267)275 
Gains (losses), net, on experienced rated contracts$0 $0 $0 
Total:
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net(1)$670 $966 $(747)
Change in experience-rated contractholder liabilities due to asset value changes(693)(949)710 
Gains (losses), net, on experienced rated contracts(2)(3)$(23)$17 $(37)
__________
(1)Prior period amounts have been updated to conform to current period presentation.
(2)Decreases to contractholder liabilities due to asset value changes are limited by certain floors and therefore do not reflect cumulative declines in recorded asset values of $3 million, $7 million and $99 million as of December 31, 2020, 2019 and 2018, respectively. We have recovered, and expect to recover in future periods, these declines in recorded asset values through subsequent increases in recorded asset values or reductions in crediting rates on contractholder liabilities.
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(3)Included in the amounts above related to the change in the liability to contractholders as a result of commercial mortgage and other loans are increases of $6 million and $57 million, and a decrease of $23 million for the years ended December 31, 2020, 2019 and 2018, respectively. As prescribed by U.S. GAAP, changes in the fair value of commercial mortgage and other loans held for investment in our general account, other than when associated with impairments, are not recognized in income in the current period, while the impact of these changes in fair value are reflected as a change in the liability to fully participating contractholders in the current period.
 
The net impacts, for the Retirement segment, of changes in experience-rated contractholder liabilities and investment gains (losses) on assets supporting experience-rated contractholder liabilities and other related investments reflect timing differences between the recognition of the mark-to-market adjustments and the recognition of the recovery of these adjustments in future periods through subsequent increases in asset values or reductions in crediting rates on contractholder liabilities for partially participating products. These impacts also reflect the difference between the fair value of the underlying commercial mortgages and other loans and the amortized cost, less any valuation allowance, of these loans, as described above.
 
Valuation of Assets and Liabilities
 
Fair Value of Assets and Liabilities
 
The authoritative guidance related to fair value measurement establishes a framework that includes a three-level hierarchy used to classify the inputs used in measuring fair value. The level in the hierarchy within which the fair value falls is determined based on the lowest level input that is significant to the measurement. The fair values of assets and liabilities classified as Level 3 include at least one significant unobservable input in the measurement. See Note 6 to the Consolidated Financial Statements for an additional description of the valuation hierarchy levels as well as for the balances of assets and liabilities measured at fair value on a recurring basis by hierarchy level presented on a consolidated basis.
 
The table below presents the balances of assets and liabilities measured at fair value on a recurring basis, as of the periods indicated, and the portion of such assets and liabilities that are classified in Level 3 of the valuation hierarchy. The table also provides details about these assets and liabilities excluding those held in the Closed Block division. We believe the amounts excluding the Closed Block division are most relevant to an understanding of our operations that are pertinent to investors in Prudential Financial because substantially all Closed Block division assets support obligations and liabilities relating to the Closed Block policies only. See Note 15 to the Consolidated Financial Statements for further information on the Closed Block.
 
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 As of December 31, 2020As of December 31, 2019
 PFI excluding Closed Block DivisionClosed Block DivisionPFI excluding Closed Block DivisionClosed Block Division
 Total at
Fair Value		Total
Level 3(1)		Total at
Fair Value		Total
Level 3(1)		Total at
Fair Value		Total
Level 3(1)		Total at
Fair Value		Total
Level 3(1)
 (in millions)
Fixed maturities, available-for-sale$370,681 $5,005 $42,224 $1,038 $349,720 $3,570 $41,376 $745 
Assets supporting experience-rated contractholder liabilities:
Fixed maturities21,414 615 0 0 19,530 730 0 0 
Equity securities2,043 0 0 0 1,790 0 0 0 
All other(2)619 20 0 0 261 0 0 0 
Subtotal24,076 635 0 0 21,581 730 0 0 
Fixed maturities, trading
3,636 230 278 13 3,628 275 256 12 
Equity securities
5,653 576 2,345 84 5,140 557 2,245 76 
Commercial mortgage and other loans1,092 0 0 0 228 0 0 0 
Other invested assets(3)
2,268 366 3 0 1,433 567 0 0 
Short-term investments6,222 146 88 31 3,789 119 147 36 
Cash equivalents5,241 1 241 0 8,855 99 151 32 
Other assets268 268 0 0 113 113 0 0 
Separate account assets304,270 1,821 0 0 288,724 1,717 0 0 
Total assets$723,407 $9,048 $45,179 $1,166 $683,211 $7,747 $44,175 $901 
Future policy benefits$18,879 $18,879 $0 $0 $12,831 $12,831 $0 $0 
Policyholders’ account balances
1,914 1,914 0 0 1,316 1,316 0 0 
Other liabilities(3)385 0 0 0 928 105 8 0 
Notes issued by consolidated variable interest entities (“VIEs”)0 0 0 0 800 800 0 0 
Total liabilities$21,178 $20,793 $0 $0 $15,875 $15,052 $8 $0 
__________
(1)Level 3 assets expressed as a percentage of total assets measured at fair value on a recurring basis for PFI excluding the Closed Block division and for the Closed Block division totaled 1.3% and 2.6%, respectively, as of December 31, 2020 and 1.1% and 2.0%, respectively, as of December 31, 2019.
(2)“All other” represents cash equivalents and short-term investments.
(3)“Other invested assets” and “Other liabilities” primarily include derivatives. The amounts include the impact of netting subject to master netting agreements.
 
The determination of fair value, which for certain assets and liabilities is dependent on the application of estimates and assumptions, can have a significant impact on our results of operations and may require the application of a greater degree of judgment depending on market conditions, as the ability to value assets and liabilities can be significantly impacted by a decrease in market activity or a lack of transactions executed in an orderly manner.
 
Fixed maturity securities included in Level 3 in our fair value hierarchy are generally priced based on internally-developed valuations or indicative broker quotes. For certain private fixed maturity and equity securities, the internal valuation models use significant unobservable inputs and, accordingly, such securities are included in Level 3 in our fair value hierarchy. Level 3 fixed maturity securities for PFI excluding the Closed Block division included approximately $1.3 billion of public fixed maturities as of December 31, 2020 with values primarily based on indicative broker quotes, and approximately $4.6 billion of private fixed maturities, with values primarily based on internally-developed models. Significant unobservable inputs used in their valuation included: issue specific spread adjustments, material non-public financial information, management judgment, estimation of future earnings and cash flows, default rate assumptions, liquidity assumptions and indicative quotes from market makers. Separate account assets included in Level 3 in our fair value hierarchy primarily include corporate securities and commercial mortgage loans.
 
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Embedded derivatives reported in “Future policy benefits” and “Policyholders’ account balances” that are included in level 3 of our fair value hierarchy represent general account liabilities pertaining to living benefit features of the Company’s variable annuity contracts and the index-linked interest credited features on certain life and annuity products. These are carried at fair value with changes in fair value included in “Realized investment gains (losses), net.” These embedded derivatives are valued using internally-developed models that require significant estimates and assumptions developed by management. Changes in these estimates and assumptions can have a significant impact on the results of our operations.

For additional information about the valuation techniques and the key estimates and assumptions used in our determination of fair value, see Note 6 to the Consolidated Financial Statements.
 
General Account Investments

We maintain diversified investment portfolios in our general account to support our liabilities to customers as well as our other general liabilities. Investments and other assets that do not support general account liabilities, and are therefore excluded from our general account, are as follows:

•assets of our derivative operations;
•assets of our investment management operations, including investments managed for third-parties; and
•those assets classified as “Separate account assets” on our balance sheet.

The general account portfolios are managed pursuant to the distinct objectives and investment policy statements of PFI excluding the Closed Block division and of the Closed Block division. The primary investment objectives of PFI excluding the Closed Block division include:

•hedging and otherwise managing the market risk characteristics of the major product liabilities and other obligations of the Company;
•optimizing investment income yield within risk constraints over time; and
•for certain portfolios, optimizing total return, including both investment income yield and capital appreciation, within risk constraints over time, while managing the market risk exposures associated with the corresponding product liabilities.
We pursue our objective to optimize investment income yield for PFI excluding the Closed Block division over time through:

•the investment of net operating cash flows, including new product premium inflows, and proceeds from investment sales, repayments and prepayments into investments with attractive risk-adjusted yields; and
•the sale of investments, where appropriate, either to meet various cash flow needs or to manage the portfolio's risk exposure profile with respect to duration, credit, currency and other risk factors, while considering the impact on taxes and capital.

The primary investment objectives of the Closed Block division include:

•providing for the reasonable dividend expectations of the participating policyholders within the Closed Block division; and
•optimizing total return, including both investment income yield and capital appreciation, within risk constraints, while managing the market risk exposures associated with the major products in the Closed Block division.

Our portfolio management approach, while emphasizing our investment income yield and asset/liability risk management objectives, also takes into account the capital and tax implications of portfolio activity and our assertions regarding our ability and intent to hold debt securities to recovery. For a further discussion of our allowance for credit losses, including our assertions regarding any intention or requirement to sell debt securities before anticipated recovery, see “—Realized Investment Gains and Losses—Credit Losses” below.

Management of Investments

The Investment Committee of our Board of Directors (“Board”) oversees our proprietary investments, including our general account portfolios, and regularly reviews performance and risk positions. Our Chief Investment Officer Organization (“CIO Organization”) develops investment policies subject to risk limits proposed by our Enterprise Risk Management (“ERM”) group for the general account portfolios of our domestic and international insurance subsidiaries and directs and
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oversees management of the general account portfolios within risk limits and exposure ranges approved annually by the Investment Committee.

The CIO Organization, including related functions within our insurance subsidiaries, works closely with product actuaries and ERM to understand the characteristics of our products and their associated market risk exposures. This information is incorporated into the development of target asset portfolios that manage market risk exposures associated with the liability characteristics and establish investment risk exposures, within tolerances prescribed by Prudential’s investment risk limits, on which we expect to earn an attractive risk-adjusted return. We develop asset strategies for specific classes of product liabilities and attributed or accumulated surplus, each with distinct risk characteristics. Market risk exposures associated with the liabilities include interest rate risk, which is addressed through the duration characteristics of the target asset mix, and currency risk, which is addressed by the currency profile of the target asset mix. In certain of our smaller markets outside of the U.S. and Japan, capital markets limitations hinder our ability to hedge interest rate exposure to the same extent we do for our U.S. and Japan businesses and lead us to accept a higher degree of interest rate risk in these smaller portfolios. General account portfolios typically include allocations to credit and other investment risks as a means to enhance investment yields and returns over time.

Most of our products can be categorized into the following three classes:

•interest-crediting products for which the rates credited to customers are periodically adjusted to reflect market and competitive forces and actual investment experience, such as fixed annuities and universal life insurance;
•participating individual and experience-rated group products in which customers participate in actual investment and business results through annual dividends, interest or return of premium; and
•products with fixed or guaranteed terms, such as traditional whole life and endowment products, guaranteed investment contracts (“GICs”), funding agreements and payout annuities.

Our total investment portfolio is composed of a number of operating portfolios. Each operating portfolio backs a specific set of liabilities, and the portfolios have a target asset mix that supports the liability characteristics, including duration, cash flow, liquidity needs and other criteria. As of December 31, 2020, the average duration of our domestic general account investment portfolios attributable to PFI excluding the Closed Block division, including the impact of derivatives, was between 7 and 8 years. As of December 31, 2020, the average duration of our international general account portfolios attributable to our Japanese insurance operations, including the impact of derivatives, was between 12 and 13 years and represented a blend of yen-denominated and U.S. dollar and Australian dollar-denominated investments, which have distinct average durations supporting the insurance liabilities we have issued in those currencies. Our asset/liability management process has enabled us to manage our portfolios through several market cycles.

We implement our portfolio strategies primarily through investment in a broad range of fixed income assets, including government and agency securities, public and private corporate bonds and structured securities and commercial mortgage loans. In addition, we hold allocations of non-coupon investments, which include equity securities and other invested assets such as LPs/LLCs, real estate held through direct ownership, derivative instruments, and seed money investments in separate accounts.

We manage our public fixed maturity portfolio to a risk profile directed or overseen by the CIO Organization and ERM groups and to a profile that also reflects the market environments impacting both our domestic and international insurance portfolios. The return that we earn on the portfolio will be reflected in investment income and in realized gains or losses on investments.

We use privately-placed corporate debt securities and commercial mortgage loans, which consist of mortgages on diversified properties in terms of geography, property type and borrowers, to enhance the yield on our portfolio and to improve the overall diversification of the portfolios. Private placements typically offer enhanced yields due to an illiquidity premium and generally offer enhanced credit protection in the form of covenants. Our origination capability offers the opportunity to lead transactions and gives us the opportunity for better terms, including covenants and call protection, and to take advantage of innovative deal structures.

Derivative strategies are employed in the context of our risk management framework to enhance our ability to manage interest rate and currency risk exposures of the asset portfolio relative to the liabilities and to manage credit and equity positions in the investment portfolios. For a discussion of our risk management process, see “Quantitative and Qualitative Disclosures About Market Risk” below.

Our portfolio asset allocation reflects our emphasis on diversification across asset classes, sectors and issuers. The CIO Organization, directly and through related functions within the insurance subsidiaries, implements portfolio strategies primarily through various investment management units within Prudential’s PGIM segment. Activities of the PGIM segment on behalf of
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the general account portfolios are directed and overseen by the CIO Organization and monitored by ERM for compliance with investment risk limits.

In executing the activities on behalf of the general account portfolio, Prudential investment management units are incorporating environmental, social and governance factors into their respective investment processes as appropriate. These factors include investing in opportunities to support diversity and inclusion and to help mitigate climate change by pursuing relevant investments across asset classes.

Portfolio Composition
 
Our investment portfolio consists of public and private fixed maturity securities, commercial mortgage and other loans, policy loans and non-coupon investments as defined above. The composition of our general account reflects, within the discipline provided by our risk management approach, our need for competitive results and the selection of diverse investment alternatives available primarily through our PGIM segment. The size of our portfolio enables us to invest in asset classes that may be unavailable to the typical investor.

 

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The following tables set forth the composition of our general account investment portfolio apportioned between PFI excluding the Closed Block division and the Closed Block division, as of the dates indicated:
 December 31, 2020
 PFI Excluding
Closed Block Division		Closed Block DivisionTotal
 ($ in millions)
Fixed maturities:
Public, available-for-sale, at fair value$309,813 63.7 %$29,475 $339,288 
Public, held-to-maturity, at amortized cost, net of allowance1,719 0.4 0 1,719 
Private, available-for-sale, at fair value60,224 12.4 12,749 72,973 
Private, held-to-maturity, at amortized cost, net of allowance211 0.1 0 211 
Fixed maturities, trading, at fair value 3,425 0.7 277 3,702 
Assets supporting experience-rated contractholder liabilities, at fair value24,115 5.0 0 24,115 
Equity securities, at fair value5,108 1.1 2,345 7,453 
Commercial mortgage and other loans, at book value, net of allowance55,892 11.5 8,421 64,313 
Policy loans, at outstanding balance7,207 1.5 4,064 11,271 
Other invested assets, net of allowance(1)10,716 2.1 3,610 14,326 
Short-term investments, net of allowance7,640 1.5 124 7,764 
Total general account investments486,070 100.0 %61,065 547,135 
Invested assets of other entities and operations(2)6,485 0 6,485 
Total investments$492,555 $61,065 $553,620 
 December 31, 2019
 PFI Excluding
Closed Block Division		Closed Block DivisionTotal
 ($ in millions)
Fixed maturities:
Public, available-for-sale, at fair value$296,382 64.9 %$29,011 $325,393 
Public, held-to-maturity, at amortized cost1,705 0.4 0 1,705 
Private, available-for-sale, at fair value52,750 11.6 12,365 65,115 
Private, held-to-maturity, at amortized cost228 0.1 0 228 
Fixed maturities, trading, at fair value 2,467 0.5 256 2,723 
Assets supporting experience-rated contractholder liabilities, at fair value21,597 4.7 0 21,597 
Equity securities, at fair value4,586 1.0 2,245 6,831 
Commercial mortgage and other loans, at book value, net of allowance54,671 12.0 8,629 63,300 
Policy loans, at outstanding balance7,832 1.7 4,264 12,096 
Other invested assets(1)9,210 2.0 3,334 12,544 
Short-term investments5,223 1.1 227 5,450 
Total general account investments456,651 100.0 %60,331 516,982 
Invested assets of other entities and operations(2)5,778 0 5,778 
Total investments$462,429 $60,331 $522,760 
__________
(1)Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments and other miscellaneous investments. For additional information regarding these investments, see “—Other Invested Assets” below.
(2)Includes invested assets of our investment management and derivative operations. Excludes assets of our investment management operations that are managed for third-parties and those assets classified as “Separate account assets” on our balance sheet. For additional information regarding these investments, see “—Invested Assets of Other Entities and Operations” below.

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The increase in general account investments attributable to PFI excluding the Closed Block division in 2020 was primarily due to a decrease in interest rates, the reinvestment of net investment income and net business inflows. For information regarding the methodology used in determining the fair value of our fixed maturities, see Note 6 to the Consolidated Financial Statements.
 
As of December 31, 2020 and 2019, 43% and 42%, respectively, of our general account investments attributable to PFI excluding the Closed Block division related to our Japanese insurance operations. The following table sets forth the composition of the investments of our Japanese insurance operations’ general account, as of the dates indicated:
 
December 31,
 20202019
 (in millions)
Fixed maturities:
Public, available-for-sale, at fair value$154,261 $142,220 
Public, held-to-maturity, at amortized cost, net of allowance1,719 1,705 
Private, available-for-sale, at fair value21,748 19,189 
Private, held-to-maturity, at amortized cost, net of allowance211 228 
Fixed maturities, trading, at fair value 550 492 
Assets supporting experience-rated contractholder liabilities, at fair value 3,149 2,777 
Equity securities, at fair value2,134 2,185 
Commercial mortgage and other loans, at book value, net of allowance19,915 19,138 
Policy loans, at outstanding balance3,078 2,859 
Other invested assets(1)3,045 2,187 
Short-term investments, net of allowance438 165 
Total Japanese general account investments$210,248 $193,145 
__________
(1)Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments and other miscellaneous investments.
 
The increase in general account investments related to our Japanese insurance operations in 2020 was primarily attributable to a decrease in interest rates, the reinvestment of net investment income and net business inflows.

As of December 31, 2020, our Japanese insurance operations had $89.2 billion, at carrying value, of investments denominated in U.S. dollars, including $1.8 billion that were hedged to yen through third-party derivative contracts and $74.8 billion that support liabilities denominated in U.S. dollars, with the remainder as part of the hedging of foreign currency exchange rate exposure to U.S. dollar-equivalent equity. As of December 31, 2019, our Japanese insurance operations had $77.1 billion, at carrying value, of investments denominated in U.S. dollars, including $2.1 billion that were hedged to yen through third-party derivative contracts and $62.4 billion that support liabilities denominated in U.S. dollars, with the remainder as part of the hedging of foreign currency exchange rate exposure of U.S. dollar-equivalent equity. The $12.1 billion increase in the carrying value of U.S. dollar-denominated investments from December 31, 2019 was primarily attributable to a decrease in the U.S. treasury bond rates, reinvestment of net investment income and portfolio growth as a result of net business inflows.

Our Japanese insurance operations had $10.2 billion and $9.9 billion, at carrying value, of investments denominated in Australian dollars that support liabilities denominated in Australian dollars as of December 31, 2020 and 2019, respectively. The $0.3 billion increase in the carrying value of Australian dollar-denominated investments from December 31, 2019 was primarily attributable to the translation impact of the Australian dollar strengthening against the U.S. dollar, partially offset by run off of the portfolio. For additional information regarding U.S. and Australian dollar investments held in our Japanese insurance operations and a discussion of our yen hedging strategy, see “—Results of Operations by Segment—Impact of Foreign Currency Exchange Rates” above.
 
 Investment Results
 
The following tables set forth the investment results of our general account apportioned between PFI excluding the Closed Block division and the Closed Block division, for the periods indicated. The yields are based on net investment income as
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reported under U.S. GAAP and as such do not include certain interest-related items, such as settlements of duration management swaps which are included in “Realized investment gains (losses), net.”
Year Ended December 31, 2020
PFI Excluding Closed Block Division and Japanese OperationsJapanese Insurance OperationsPFI Excluding Closed Block DivisionClosed Block DivisionTotal(5)
Yield(1)AmountYield(1)AmountYield(1)AmountAmountAmount
($ in millions)
Fixed maturities(2)4.59 %$7,416 2.78 %$3,875 3.75 %$11,291 $1,566 $12,857 
Assets supporting experience-rated contractholder liabilities 3.22 637 1.88 52 3.06 689 0 689 
Equity securities2.01 48 3.62 72 2.74 120 42 162 
Commercial mortgage and other loans3.95 1,377 2.89 731 3.91 2,108 358 2,466 
Policy loans5.31 238 3.23 98 4.47 336 247 583 
Short-term investments and cash equivalents0.83 171 0.86 14 0.83 185 6 191 
Gross investment income4.06 9,887 2.89 4,842 3.58 14,729 2,219 16,948 
Investment expenses(0.12)(272)(0.14)(245)(0.13)(517)(136)(653)
Investment income after investment expenses3.94 %9,615 2.75 %4,597 3.45 %14,212 2,083 16,295 
Other invested assets(3)
413 245 658 157 815 
Investment results of other entities and operations(4)300 0 300 0 300 
Total investment income$10,328 $4,842 $15,170 $2,240 $17,410 
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Year Ended December 31, 2019
PFI Excluding Closed Block Division and Japanese OperationsJapanese Insurance OperationsPFI Excluding Closed Block DivisionClosed Block DivisionTotal(5)
Yield(1)AmountYield(1)AmountYield(1)AmountAmountAmount
($ in millions)
Fixed maturities(2)4.71 %$7,567 2.87 %$3,842 3.87 %$11,409 $1,713 $13,122 
Assets supporting experience-rated contractholder liabilities 3.61 678 1.99 52 3.42 730 0 730 
Equity securities2.30 49 3.27 66 2.77 115 45 160 
Commercial mortgage and other loans4.21 1,406 4.29 767 4.24 2,173 388 2,561 
Policy loans5.36 256 3.92 107 4.84 363 255 618 
Short-term investments and cash equivalents2.58 373 3.40 27 2.62 400 32 432 
Gross investment income4.41 10,329 3.04 4,861 3.86 15,190 2,433 17,623 
Investment expenses(0.13)(400)(0.14)(280)(0.13)(680)(209)(889)
Investment income after investment expenses4.28 %9,929 2.90 %4,581 3.73 %14,510 2,224 16,734 
Other invested assets(3)
378 184 562 99 661 
Investment results of other entities and operations(4)190 0 190 0 190 
Total investment income$10,497 $4,765 $15,262 $2,323 $17,585 

Year Ended December 31, 2018
PFI Excluding Closed Block Division and Japanese OperationsJapanese Insurance OperationsPFI Excluding Closed Block DivisionClosed Block DivisionTotal(5)
Yield(1)AmountYield(1)AmountYield(1)AmountAmountAmount
($ in millions)
Fixed maturities(2)4.68 %$7,004 2.93 %$3,707 3.87 %$10,711 $1,692 $12,403 
Assets supporting experience-rated contractholder liabilities 3.62 674 1.81 46 3.41 720 0 720 
Equity securities2.28 48 3.45 72 2.86 120 45 165 
Commercial mortgage and other loans4.03 1,299 3.96 623 4.01 1,922 407 2,329 
Policy loans5.44 258 3.92 101 4.91 359 263 622 
Short-term investments and cash equivalents2.20 265 2.83 33 2.25 298 30 328 
Gross investment income4.36 9,548 3.04 4,582 3.82 14,130 2,437 16,567 
Investment expenses(0.15)(397)(0.13)(237)(0.14)(634)(204)(838)
Investment income after investment expenses4.21 %9,151 2.91 %4,345 3.68 %13,496 2,233 15,729 
Other invested assets(3)
221 93 314 55 369 
Investment results of other entities and operations(4)78 0 78 0 78 
Total investment income$9,450 $4,438 $13,888 $2,288 $16,176 
__________
(1)The denominator in the yield percentage is based on quarterly average carrying values for all asset types except for fixed maturities which are based on amortized cost (2019 and 2018) and amortized cost, net of allowance (2020). Amounts for fixed maturities, short-term investments and cash equivalents are also netted for securities lending activity (i.e., income netted for rebate expenses and asset values netted for securities lending liabilities). A yield is not presented for other invested assets as it is not considered a meaningful measure of investment performance. Total yields exclude investment income and assets related to other invested assets.
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(2)Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading, which are included in other invested assets.
(3)Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments, fixed maturities classified as trading and other miscellaneous investments.
(4)Includes net investment income of our investment management operations.
(5)The total yield was 3.54%, 3.81% and 3.77% for the years ended December 31, 2020, 2019 and 2018, respectively.

The decrease in investment income after investment expenses yield attributable to our general account investments, excluding both the Closed Block division and the Japanese insurance operations’ portfolio, for 2020 compared to 2019 was primarily the result of lower fixed income reinvestment rates.

The decrease in investment income after investment expenses yield attributable to the Japanese insurance operations’ portfolio for 2020 compared to 2019 was primarily the result of lower fixed income reinvestment rates.

Both the U.S. dollar-denominated and Australian dollar-denominated fixed maturities that are not hedged to yen through third-party derivative contracts provide a yield that is substantially higher than the yield on comparable yen-denominated fixed maturities. The average amortized cost of U.S. dollar-denominated fixed maturities that are not hedged to yen through third-party derivative contracts was approximately $54.2 billion and $47.5 billion, for the years ended December 31, 2020 and 2019, respectively. The majority of U.S. dollar-denominated fixed maturities support liabilities that are denominated in U.S. dollars. The average amortized cost of Australian dollar-denominated fixed maturities that are not hedged to yen through third-party derivative contracts was approximately $8.2 billion and $8.4 billion, for the years ended December 31, 2020 and 2019, respectively. The majority of Australian dollar-denominated fixed maturities support liabilities that are denominated in Australian dollars. For additional information regarding U.S. and Australian dollar investments held in our Japanese insurance operations, see “—Results of Operations by Segment—Impact of Foreign Currency Exchange Rates” above.

Realized Investment Gains and Losses

The following table sets forth “Realized investment gains (losses), net” of our general account apportioned between PFI excluding Closed Block division and the Closed Block division by investment type as well as “Charges related to realized investment gains (losses), net” and adjustments, for the periods indicated:

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 Years Ended December 31,
 202020192018
 (in millions)
PFI excluding Closed Block Division:
Realized investment gains (losses), net:
Due to foreign exchange movements on securities approaching maturity(2)$(26)$(53)$(23)
Due to securities actively marketed for sale(2)(83)(4)(24)
Due to credit or adverse conditions of the respective issuer(1)(3)(111)(175)(169)
Allowance for credit losses on fixed maturities(1)(3)(105)N/AN/A
Net gains (losses) on sales and maturities 777 867 504 
Fixed maturity securities(4)452 635 288 
Commercial mortgage and other loans10 (6)(15)
Derivatives(4,571)(1,623)1,249 
OTTI losses on other invested assets recognized in earnings(33)(18)(7)
Allowance for credit losses on other invested assets (1)N/AN/A
Other net gains (losses)17 70 106 
Other(17)52 99 
Subtotal (4,126)(942)1,621 
Investment results of other entities and operations(5)57 (38)226 
Total — PFI excluding Closed Block Division(4,069)(980)1,847 
Related adjustments(6)(87)145 (1,236)
Realized investment gains (losses), net, and related adjustments(6)(4,156)(835)611 
Charges related to realized investment gains (losses), net(159)(123)(315)
Realized investment gains (losses), net, and charges related to realized investment gains (losses), net and adjustments(6)$(4,315)$(958)$296 
Closed Block Division:
Realized investment gains (losses), net:
Due to foreign exchange movements on securities approaching maturity(2)$(69)$(56)$(28)
Due to securities actively marketed for sale(2)(9)0 (9)
Due to credit or adverse conditions of the respective issuer(1)(3)(6)(27)(26)
Allowance for credit losses on fixed maturities(1)(3)(27)N/AN/A
Net gains (losses) on sales and maturities388 417 3 
Fixed maturity securities(4)277 334 (60)
Commercial mortgage and other loans0 3 (6)
Derivatives(87)193 193 
OTTI losses on other invested assets recognized in earnings0 0 (1)
Allowance for credit losses on other invested assets0 N/AN/A
Other net gains (losses)(8)(9)4 
Other(8)(9)3 
Subtotal — Closed Block Division182 521 130 
Consolidated PFI realized investment gains (losses), net $(3,887)$(459)$1,977 
__________
(1)Represents circumstances where we believe credit events or other adverse conditions of the respective issuers have caused or will lead to a deficiency in the contractual cash flows related to the investment. The amount of the impairment or allowance recorded in earnings is the difference between the amortized cost of the debt security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment (2019 and 2018) or allowance (2020).
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(2)Represents the difference between the fair value of the debt security and the amortized cost at the time of the write-down.
(3)Beginning January 1, 2020, related to the implementation of ASU 2016-13, write-offs of credit adverse securities are reported as OTTI.
(4)Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading.
(5)Includes “realized investment gains (losses), net” of our investment management operations.
(6)Prior period amounts have been updated to conform to current period presentation.

2020 to 2019 Annual Comparison

Net gains on sales and maturities of fixed maturity securities were $777 million and $867 million for the years ended December 31, 2020 and 2019, respectively, primarily driven by the impact of foreign currency exchange rate movements of U.S. and Australian dollar-denominated securities that matured or were sold within our International Businesses segment and other sales of fixed maturity securities within our domestic segments driven by interest rate declines during the investment holding period.

Net realized losses on derivative instruments of $4,571 million, for the year ended December 31, 2020, primarily included:

•$3,957 million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts; and
•$2,362 million of losses on capital hedges due to increases in equity indices.

Partially offsetting these losses were:

•$1,483 million of gains on interest rate derivatives due to decreases in swap and U.S. Treasury rates;
•$139 million of gains for fees earned on fee-based synthetic GICs; and
•$61 million of gains on foreign currency hedges due to Japanese yen strengthening against U.S. dollar.

Net realized losses on derivative instruments of $1,623 million, for the year ended December 31, 2019, primarily included:

•$2,677 million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts; and
•$1,070 million of losses on capital hedges due to increases in equity indices.

Partially offsetting these losses were:

•$1,354 million of gains on interest rate derivatives due to decreases in swap and U.S. Treasury rates;
•$378 million of gains on foreign currency hedges due to U.S. dollar appreciation versus the euro;
•$145 million of gains for fees earned on fee-based synthetic GICs; and
•$124 million of gains on credit default swaps primarily due to spreads tightening.

For a discussion of living benefit guarantees and related hedge positions in our Individual Annuities segment, see “—Results of Operations by Segment—U.S. Businesses—U.S. Individual Solutions Division—Individual Annuities” above.

Related adjustments include the portions of “Realized investment gains (losses), net” that are included in adjusted operating income and the portions of “Other income (loss)” and “Net investment income” that are excluded from adjusted operating income. These adjustments are made to arrive at “Realized investment gains (losses), net, and related adjustments” which are excluded from adjusted operating income. Results for the years ended December 31, 2020 and 2019 reflected related adjustments of net negative $87 million and net positive $145 million, respectively. Both periods’ results reflected settlements and changes in value related to interest rate and currency derivatives, as well as changes in the fair value of equity securities and fixed income securities designated as trading. Additionally, the results for 2020 included the impact of foreign currency exchange rate movements on certain non-local currency denominated assets and liabilities, for which the majority of the foreign currency exposure is hedged and offset in “Realized Investment gains (losses), net.”

Charges that relate to “Realized investment gains (losses), net” are also excluded from adjusted operating income and may be reflected as net charges or net benefits. Results for the years ended December 31, 2020 and 2019 reflected net related charges of $159 million and $123 million, respectively. Both periods’ results were primarily driven by the impact of derivative activity on the amortization of DAC and other costs, and certain policyholder reserves.

Credit Losses
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The level of credit losses generally reflects current and expected economic conditions and is expected to increase when economic conditions worsen and to decrease when economic conditions improve. Historically, the causes of credit losses have been specific to each individual issuer and have not directly resulted in credit losses to other securities within the same industry or geographic region. We may also realize additional credit and interest rate-related losses through sales of investments pursuant to our credit risk and portfolio management objectives.

We maintain separate monitoring processes for public and private fixed maturities and create watch lists to highlight securities that require special scrutiny and management. For private placements, our credit and portfolio management processes help ensure prudent controls over valuation and management. We have separate pricing and authorization processes to establish “checks and balances” for new investments. We apply consistent standards of credit analysis and due diligence for all transactions, whether they originate through our own in-house origination staff or through agents. Our regional offices closely monitor the portfolios in their regions. We set all valuation standards centrally, and we assess the fair value of all investments quarterly. Our public and private fixed maturity investment managers formally review all public and private fixed maturity holdings on a quarterly basis and more frequently when necessary to identify potential credit deterioration whether due to ratings downgrades, unexpected price variances and/or company or industry-specific concerns.

For LPs/LLCs accounted for using the equity method and for wholly-owned investment real estate, the carrying value of these investments is written down or impaired to fair value when a decline in value is considered to be other-than-temporary.

COVID-19

A continued impact of COVID-19 on the global economy and corporate credit may result in losses and credit migration in our investment portfolio. Due to the highly uncertain nature of these conditions, it is not possible to estimate the overall impacts at this time. We believe our investment portfolio has been diligently constructed with a strong focus on ALM discipline, risk management, and capital preservation; and although certain industries will likely be more impacted by COVID-19 driven market conditions, we expect to benefit from our experience in managing highly specialized asset classes through multiple credit cycles. The following represents some of the sectors in our investment portfolio most impacted by COVID-19.

Energy Related Investments

As of December 31, 2020, PFI excluding the Closed Block division had energy related exposure with a market value of approximately $14 billion including a net unrealized gain of $1 billion, which was reflected in AOCI. This $14 billion represented investments in public and private corporate fixed maturity securities (excluding trading securities) and was comprised of the midstream (43%), independent energy (25%), integrated energy (20%), oil field services (6%) and refining (6%) sub-sectors. As of December 31, 2020, the credit quality of energy sector fixed maturity securities was 86% investment grade and 14% below investment grade. Energy related investment realized losses were approximately $184 million, comprised of $126 million of write-downs and $58 million of addition to credit loss allowances for the year ended December 31, 2020. Our investments in the energy sector could experience future valuation declines or losses if energy prices maintain their recent levels or continue to decline for an extended period of time. Our assessment that securities are other-than-temporarily impaired may change due to new developments, including those developments related to COVID-19.

Consumer Cyclical Related Investments

As of December 31, 2020, PFI excluding the Closed Block division had consumer cyclical related exposure with a market value of approximately $13 billion and a net unrealized gain of $1 billion, which was reflected in AOCI. This $13 billion represented investments in public and private corporate fixed maturity securities (excluding trading securities) and included exposures in retail (37%), automotive (18%), leisure (7%), restaurants (7%), gaming (4%) and lodging (1%). As of December 31, 2020, the credit quality of consumer cyclical sector fixed maturity securities was 79% investment grade and 21% below investment grade. For additional information regarding “—Retail Related Investments,” see below.

Retail Related Investments

As of December 31, 2020, PFI excluding the Closed Block division had retail related investments of approximately $13 billion consisting primarily of $6 billion of corporate fixed maturities of which 89% were considered investment grade (also included in “—Consumer Cyclical Related Investments”); $6 billion of commercial mortgage loans with a weighted-average loan-to-value ratio of approximately 58% and weighted-average debt service coverage ratio of 2.13 times; and $1 billion of real estate held through direct ownership and real estate-related LPs/LLCs. In addition, we held approximately $11 billion of commercial mortgage-backed securities, of which approximately 99% and 1% were rated AAA (super-senior) and AA to A,
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respectively, and comprised of diversified collateral pools. Approximately 30% of the collateral pools were comprised of retail-related investments, with no pools solely collateralized by retail related investments. For additional information regarding commercial mortgage-backed securities, see “—Fixed Maturity Securities—Fixed Maturity Securities Credit Quality” below.

Airline Related Investments

As of December 31, 2020, PFI excluding the Closed Block division had $0.1 billion of airline related corporate fixed maturities within the transportation sector of which 97% were investment grade.

General Account Investments of PFI excluding Closed Block Division
 
In the following sections, we provide details about our investment portfolio, excluding investments held in the Closed Block division. We believe the details of the composition of our investment portfolio excluding the Closed Block division are most relevant to an understanding of our operations that are pertinent to investors in Prudential Financial, Inc. because substantially all Closed Block division assets support obligations and liabilities relating to the Closed Block policies only. See Note 15 to the Consolidated Financial Statements for further information on the Closed Block.

Fixed Maturity Securities

In the following sections, we provide details about our fixed maturity securities portfolio, which excludes fixed maturity securities classified as assets supporting experienced-rated contractholder liabilities and classified as trading.
 
Fixed Maturity Securities by Contractual Maturity Date
 
The following table sets forth the breakdown of the amortized cost of our fixed maturity securities portfolio by contractual maturity, as of the date indicated:
 
 December 31, 2020
 Amortized
Cost		% of Total
 ($ in millions)
Corporate & government securities:
Maturing in 2021$10,141 3.2 %
Maturing in 20229,391 2.9 
Maturing in 202311,618 3.6 
Maturing in 202412,550 3.9 
Maturing in 202512,836 4.0 
Maturing in 202613,795 4.3 
Maturing in 202714,401 4.5 
Maturing in 202810,584 3.3 
Maturing in 202912,285 3.9 
Maturing in 203011,356 3.6 
Maturing in 20319,066 2.9 
Maturing in 2032 and beyond166,639 52.1 
Total corporate & government securities294,662 92.2 
Asset-backed securities11,584 3.6 
Commercial mortgage-backed securities10,296 3.2 
Residential mortgage-backed securities2,838 1.0 
Total fixed maturities$319,380 100.0 %
 
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Fixed Maturity Securities by Industry

The following table sets forth the composition of the portion of our fixed maturity, available-for-sale portfolio by industry category attributable to PFI excluding the Closed Block division and the associated gross unrealized gains and losses, as well as the allowance for credit losses, as of the dates indicated: 
 December 31, 2020December 31, 2019
Industry(1)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Allowance for Credit
Losses (5)		Fair
Value		Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
 (in millions)
Corporate securities:
Finance$37,577 $5,240 $70 $0 $42,747 $34,710 $2,796 $85 $37,421 
Consumer non-cyclical28,891 5,085 52 0 33,924 24,941 2,846 112 27,675 
Utility24,235 4,504 60 11 28,668 22,341 2,498 81 24,758 
Capital goods13,711 1,947 49 2 15,607 12,287 1,150 83 13,354 
Consumer cyclical11,196 1,536 52 13 12,667 10,871 994 45 11,820 
Foreign agencies5,323 903 11 0 6,215 5,649 928 10 6,567 
Energy12,257 1,583 118 58 13,664 12,922 1,126 186 13,862 
Communications6,013 1,343 35 22 7,299 5,916 939 34 6,821 
Basic industry5,895 914 17 0 6,792 5,866 497 38 6,325 
Transportation10,067 1,568 40 0 11,595 9,443 833 34 10,242 
Technology3,717 381 14 0 4,084 3,395 278 13 3,660 
Industrial other4,485 778 21 0 5,242 3,894 351 33 4,212 
Total corporate securities163,367 25,782 539 106 188,504 152,235 15,236 754 166,717 
Foreign government(2)93,521 16,229 236 0 109,514 97,880 20,658 63 118,475 
Residential mortgage-backed(3)2,572 198 0 0 2,770 2,955 154 1 3,108 
Asset-backed11,584 137 67 0 11,654 9,832 123 34 9,921 
Commercial mortgage-backed10,296 883 8 0 11,171 10,211 441 9 10,643 
U.S. Government25,959 8,348 15 0 34,292 24,938 4,511 94 29,355 
State & Municipal10,142 1,991 1 0 12,132 9,593 1,327 7 10,913 
Total fixed maturities, available-for-sale(4)(5)$317,441 $53,568 $866 $106 $370,037 $307,644 $42,450 $962 $349,132 
__________
(1)Investment data has been classified based on standard industry categorizations for domestic public holdings and similar classifications by industry for all other holdings.
(2)As of December 31, 2020 and 2019, based on amortized cost, 86% and 76%, respectively, represent Japanese government bonds held by our Japanese insurance operations with no other individual country representing more than 4% and 11% of the balance, respectively.
(3)As of December 31, 2020 and 2019, based on amortized cost, 97% and more than 99% were rated A or higher, respectively.
(4)Excluded from the table above are securities held outside the general account in other entities and operations. For additional information regarding investments held outside the general account, see “—Invested Assets of Other Entities and Operations” below.
(5)Effective January 1, 2020, due to the implementation of ASU 2016-13, an allowance for credit losses is now presented for available-for-sale securities. Prior period amounts have been updated to exclude held-to-maturity securities to conform to current period presentation.

The increase in net unrealized gains from December 31, 2019 to December 31, 2020 was primarily due to a decrease in U.S. interest rates.

The following table sets forth the composition of the portion of our fixed maturity, held-to-maturity portfolio by industry category attributable to PFI excluding the Closed Block division and the associated gross unrealized gains and losses, as well as the allowance for credit losses, as of the dates indicated:

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 December 31, 2020December 31, 2019
Industry(1)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value		Allowance for Credit
Losses		Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
 (in millions)
Corporate securities:
Finance$651 $67 $0 $718 $9 $628 $64 $0 $692 
Foreign agencies0 0 0 0 0 21 0 0 21 
Basic industry87 2 0 89 0 83 2 0 85 
Total corporate securities738 69 0 807 9 732 66 0 798 
Foreign government(2)935 270 0 1,205 0 891 282 0 1,173 
Residential mortgage-backed(3)266 20 0 286 0 310 21 0 331 
Total fixed maturities, held-to-maturity(4)$1,939 $359 $0 $2,298 $9 $1,933 $369 $0 $2,302 
__________
(1)Investment data has been classified based on standard industry categorizations for domestic public holdings and similar classifications by industry for all other holdings.
(2)As of both December 31, 2020 and 2019, based on amortized cost, 98% represent Japanese government bonds held by our Japanese insurance operations.
(3)As of both December 31, 2020 and 2019, based on amortized cost, all were rated A or higher.
(4)Excluded from the table above are securities held outside the general account in other entities and operations. For additional information regarding investments held outside the general account, see “—Invested Assets of Other Entities and Operations” below.
 
Fixed Maturity Securities Credit Quality
 
The Securities Valuation Office (“SVO”) of the National Association of Insurance Commissioners (“NAIC”) evaluates the investments of insurers for statutory reporting purposes and assigns fixed maturity securities to one of six categories called “NAIC Designations.” In general, NAIC Designations of “1” highest quality, or “2” high quality, include fixed maturities considered investment grade, which include securities rated Baa3 or higher by Moody's Investor Service, Inc. (“Moody’s”) or BBB- or higher by Standard & Poor's Rating Services (“S&P”). NAIC Designations of “3” through “6” generally include fixed maturities referred to as below investment grade, which include securities rated Ba1 or lower by Moody’s and BB+ or lower by S&P. The NAIC Designations for commercial mortgage-backed securities and non-agency residential mortgage-backed securities, including our asset-backed securities collateralized by sub-prime mortgages, are based on security level expected losses as modeled by an independent third-party (engaged by the NAIC) and the statutory carrying value of the security, including any purchase discounts or impairment charges previously recognized.
As a result of time lags between the funding of investments, the finalization of legal documents, and the completion of the SVO filing process, the fixed maturity portfolio includes certain securities that have not yet been designated by the SVO as of each balance sheet date. Pending receipt of SVO designations, the categorization of these securities by NAIC Designation is based on the expected ratings indicated by internal analysis.
Investments of our international insurance companies are not subject to NAIC guidelines. Investments of our Japanese insurance operations are regulated locally by the Financial Services Agency (“FSA”), an agency of the Japanese government. The FSA has its own investment quality criteria and risk control standards. Our Japanese insurance companies comply with the FSA’s credit quality review and risk monitoring guidelines. The credit quality ratings of the investments of our Japanese insurance companies are based on ratings assigned by nationally recognized credit rating agencies, including Moody’s and S&P, or rating equivalents based on ratings assigned by Japanese credit ratings agencies.
The following table sets forth our fixed maturity, available-for-sale portfolio by NAIC Designation or equivalent rating attributable to PFI excluding the Closed Block division, as of the dates indicated:
 
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December 31, 2020December 31, 2019
NAIC Designation(1)(2)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses(3)		Allowance for Credit
Losses(7)		Fair
Value		Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses(3)		Fair
Value
 (in millions)
1$229,951 $41,311 $381 $0 $270,881 $232,039 $35,923 $287 $267,675 
268,458 10,683 180 0 78,961 59,114 5,198 384 63,928 
Subtotal High or Highest Quality Securities(4)298,409 51,994 561 0 349,842 291,153 41,121 671 331,603 
311,913 1,192 95 0 13,010 10,033 854 93 10,794 
45,119 211 119 23 5,188 4,914 248 98 5,064 
51,629 123 67 16 1,669 1,280 196 83 1,393 
6371 48 24 67 328 264 31 17 278 
Subtotal Other Securities(5)(6)19,032 1,574 305 106 20,195 16,491 1,329 291 17,529 
Total fixed maturities, available-for-sale(7)$317,441 $53,568 $866 $106 $370,037 $307,644 $42,450 $962 $349,132 
__________
(1)Reflects equivalent ratings for investments of the international insurance operations.
(2)Includes, as of December 31, 2020 and 2019, 102 securities with amortized cost of $356 million (fair value, $382 million) and 796 securities with amortized cost of $3,073 million (fair value, $3,130 million), respectively, that have been categorized based on expected NAIC Designations pending receipt of SVO ratings.
(3)As of December 31, 2020, includes gross unrealized losses of $184 million on public fixed maturities and $121 million on private fixed maturities considered to be other than high or highest quality and, as of December 31, 2019, includes gross unrealized losses of $188 million on public fixed maturities and $103 million on private fixed maturities considered to be other than high or highest quality.
(4)On an amortized cost basis, as of December 31, 2020, includes $253,387 million of public fixed maturities and $45,022 million of private fixed maturities and, as of December 31, 2019, includes $248,179 million of public fixed maturities and $42,974 million of private fixed maturities.
(5)On an amortized cost basis, as of December 31, 2020, includes $9,592 million of public fixed maturities and $9,440 million of private fixed maturities and, as of December 31, 2019, includes $9,049 million of public fixed maturities and $7,442 million of private fixed maturities.
(6)On an amortized cost basis, as of December 31, 2020, securities considered below investment grade based on low issue composite ratings total $15,747 million, or 5% of the total fixed maturities, and include securities considered high or highest quality by the NAIC based on the rules described above.
(7)Effective January 1, 2020, due to the implementation of ASU 2016-13, an allowance for credit losses is now presented for available-for-sale securities. Prior period amounts have been updated to exclude held-to-maturity securities to conform to current period presentation.


The following table sets forth our fixed maturity, held-to-maturity portfolio by NAIC Designation or equivalent rating attributable to PFI excluding the Closed Block division, as of the dates indicated:

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December 31, 2020December 31, 2019
NAIC Designation(1)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses(2)		Fair
Value		Allowance for Credit LossesAmortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses(2)		Fair
Value
 (in millions)
1$1,839 $349 $0 $2,188 $7 $1,743 $351 $0 $2,094 
2100 10 0 110 2 190 18 0 208 
Subtotal High or Highest Quality Securities(3)1,939 359 0 2,298 9 1,933 369 0 2,302 
30 0 0 0 0 0 0 0 0 
40 0 0 0 0 0 0 0 0 
50 0 0 0 0 0 0 0 0 
60 0 0 0 0 0 0 0 0 
Subtotal Other Securities0 0 0 0 0 0 0 0 0 
Total fixed maturities, held-to-maturity$1,939 $359 $0 $2,298 $9 $1,933 $369 $0 $2,302 
__________ 
(1)Reflects equivalent ratings for investments of the international insurance operations.
(2)As of both December 31, 2020 and December 31, 2019, there were no gross unrealized losses on public fixed maturities and private fixed maturities considered to be other than high or highest quality.
(3)On an amortized cost basis, as of December 31, 2020, includes $1,728 million of public fixed maturities and $211 million of private fixed maturities and, as of December 31, 2019, includes $1,705 million of public fixed maturities and $228 million of private fixed maturities.

Asset-Backed and Commercial Mortgage-Backed Securities

The following table sets forth the amortized cost and fair value of asset-backed and commercial mortgage-backed securities within our fixed maturity available-for-sale portfolio attributable to PFI excluding the Closed Block division by credit quality, as of the dates indicated:
December 31, 2020December 31, 2019
Asset-Backed
Securities(2)		Commercial Mortgage-Backed Securities(3)Asset-Backed
Securities(2)		Commercial Mortgage-Backed Securities(3)
Low Issue Composite Rating(1)Amortized CostFair ValueAmortized CostFair ValueAmortized CostFair ValueAmortized CostFair Value
(in millions)
AAA$11,327 $11,323 $10,284 $11,159 $9,585 $9,594 $10,196 $10,627 
AA139 144 1 2 83 86 0 0 
A16 17 2 2 40 41 6 7 
BBB12 13 9 8 19 21 9 9 
BB and below90 157 0 0 105 179 0 0 
Total(4)(5)$11,584 $11,654 $10,296 $11,171 $9,832 $9,921 $10,211 $10,643 
__________ 
(1)The table above provides ratings as assigned by nationally recognized rating agencies as of December 31, 2020, including S&P, Moody’s, Fitch Ratings Inc. (“Fitch”) and Morningstar, Inc. (“Morningstar”). Low issue composite rating uses ratings from the major credit rating agencies or if these are not available an equivalent internal rating. For securities where the ratings assigned are not equivalent, the second lowest rating is utilized.
(2)Includes collateralized loan obligations (“CLOs”), credit-tranched securities collateralized by auto loans, education loans, credit cards and other asset types.
(3)As of December 31, 2020 and 2019, based on amortized cost, 98% and 97% were securities with vintages of 2013 or later, respectively.
(4)Excludes fixed maturity securities classified as “Assets supporting experience-rated contractholder liabilities” and “Fixed maturities, trading” as well as securities held outside the general account in other entities and operations.
(5)Prior period amounts have been updated to conform to current period presentation.

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Included in “Asset-backed securities” above are investments in CLOs. The following table sets forth information pertaining to these investments in CLOs within our fixed maturity available-for-sale portfolio attributable to PFI excluding the Closed Block division, as of the dates indicated:
December 31, 2020December 31, 2019
Collateralized Loan Obligations
Low Issue Composite Rating(1)Amortized CostFair ValueAmortized CostFair Value
(in millions)
AAA$9,554 $9,506 $7,294 $7,271 
AA2 2 0 0 
A1 1 0 0 
BBB1 1 0 0 
BB and below1 1 0 0 
Total(2)(3)(4)$9,559 $9,511 $7,294 $7,271 
__________ 
(1)The table above provides ratings as assigned by nationally recognized rating agencies as of December 31, 2020, including S&P, Moody’s, Fitch and Morningstar. Low issue composite rating uses ratings from the major credit rating agencies or if these are not available an equivalent internal rating. For securities where the ratings assigned are not equivalent, the second lowest rating is utilized.
(2)There was no allowance for credit losses as of December 31, 2020.
(3)Excludes fixed maturity securities classified as “Assets supporting experience-rated contractholder liabilities” and “Fixed maturities, trading” as well as securities held outside the general account in other entities and operations.
(4)Prior period amounts have been updated to conform to current period presentation.

Assets Supporting Experience-Rated Contractholder Liabilities
 
For information regarding the composition of “Assets supporting experience-rated contractholder liabilities,” see Note 3 to the Consolidated Financial Statements.
 
Commercial Mortgage and Other Loans
 
Investment Mix
 
The following table sets forth the composition of our commercial mortgage and other loans portfolio attributable to PFI excluding the Closed Block division, as of the dates indicated:
 December 31, 2020December 31, 2019
 (in millions)
Commercial mortgage and agricultural property loans$55,223 $53,928 
Uncollateralized loans655 656 
Residential property loans101 124 
Other collateralized loans120 65 
Total recorded investment gross of allowance(1)56,099 54,773 
Allowance for credit losses(207)(102)
Total net commercial mortgage and other loans(2)$55,892 $54,671 
__________
(1)As a percentage of recorded investment gross of allowance, more than 99% of these assets were current as of both December 31, 2020 and 2019.
(2)Excluded from the table above are commercial mortgage and other loans held outside the general account in other entities and operations. For additional information regarding commercial mortgage and other loans held outside the general account, see “—Invested Assets of Other Entities and Operations” below.
 
We originate commercial mortgage and agricultural property loans using a dedicated sales and underwriting staff through our various regional offices in the U.S. and international offices primarily in London and Tokyo. All loans are underwritten consistently to our standards using a proprietary quality rating system that has been developed from our industry experience in real estate and mortgage lending.

Uncollateralized loans primarily represent reverse dual currency loans and corporate loans held by the company’s international insurance operations.
 
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Residential property loans primarily include Japanese recourse loans. Upon default of these recourse loans, we can make a claim against the personal assets of the property owner, in addition to the mortgaged property. These loans are also backed by third-party guarantors.

Other collateralized loans include consumer loans.

Composition of Commercial Mortgage and Agricultural Property Loans
 
Our commercial mortgage and agricultural property loan portfolio strategy emphasizes diversification by property type and geographic location. The following tables set forth the breakdown of the gross carrying values of commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division by geographic region and property type, as of the dates indicated:
 
 December 31, 2020December 31, 2019
 Gross
Carrying
Value		% of
Total		Gross
Carrying
Value		% of
Total
 ($ in millions)
Commercial mortgage and agricultural property loans by region:
U.S. Regions(1):
Pacific$19,186 34.7 %$18,061 33.5 %
South Atlantic8,710 15.8 8,943 16.6 
Middle Atlantic6,500 11.8 6,664 12.4 
East North Central3,018 5.5 3,413 6.3 
West South Central5,426 9.8 5,439 10.1 
Mountain2,239 4.1 2,442 4.5 
New England1,664 3.0 1,902 3.5 
West North Central531 0.9 454 0.8 
East South Central836 1.5 622 1.2 
Subtotal-U.S.48,110 87.1 47,940 88.9 
Europe4,605 8.3 3,781 7.0 
Asia979 1.8 886 1.6 
Other1,529 2.8 1,321 2.5 
Total commercial mortgage and agricultural property loans$55,223 100.0 %$53,928 100.0 %
__________
(1)Regions as defined by the United States Census Bureau.

 December 31, 2020December 31, 2019
 Gross
Carrying
Value		% of
Total		Gross
Carrying
Value		% of
Total
 ($ in millions)
Commercial mortgage and agricultural property loans by property type:
Industrial$13,819 25.0 %$12,224 22.7 %
Retail5,718 10.4 6,524 12.1 
Office10,719 19.4 11,203 20.8 
Apartments/Multi-Family15,316 27.7 15,176 28.1 
Agricultural properties3,273 5.9 2,856 5.3 
Hospitality2,056 3.7 2,066 3.8 
Other4,322 7.9 3,879 7.2 
Total commercial mortgage and agricultural property loans$55,223 100.0 %$53,928 100.0 %

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Loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial mortgage and agricultural property loans. The loan-to-value ratio compares the amount of the loan to the fair value of the underlying property collateralizing the loan and is commonly expressed as a percentage. A loan-to-value ratio less than 100% indicates an excess of collateral value over the loan amount. Loan-to-value ratios greater than 100% indicate that the loan amount exceeds the collateral value. The debt service coverage ratio compares a property’s net operating income to its debt service payments. Debt service coverage ratios less than 1.0 times indicate that property operations do not generate enough income to cover the loan’s current debt payments. A debt service coverage ratio greater than 1.0 times indicates an excess of net operating income over the debt service payments.
 
As of December 31, 2020, our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division had a weighted-average debt service coverage ratio of 2.46 times and a weighted-average loan-to-value ratio of 58%. As of December 31, 2020, 94% of commercial mortgage and agricultural property loans were fixed rate loans. For those commercial mortgage and agricultural property loans that were originated in 2020, the weighted-average debt service coverage ratio was 2.71 times, and the weighted-average loan-to-value ratio was 65%.
 
The values utilized in calculating these loan-to-value ratios are developed as part of our periodic review of the commercial mortgage and agricultural property loan portfolio, which includes an internal evaluation of the underlying collateral value. Our periodic review also includes a credit quality re-rating process, whereby we update the internal quality rating originally assigned at underwriting based on the proprietary quality rating system mentioned above. As discussed below, the internal quality rating is a key input in determining our allowance for credit losses.
 
For loans with collateral under construction, renovation or lease-up, a stabilized value and projected net operating income are used in the calculation of the loan-to-value and debt service coverage ratios. Our commercial mortgage and agricultural property loan portfolio included $2.4 billion and $1.8 billion of such loans as of December 31, 2020 and 2019, respectively. All else being equal, these loans are inherently riskier than those collateralized by properties that have already stabilized. As of December 31, 2020 and 2019, there were $1 million and $0 million, respectively, of allowances related to these loans. In addition, these unstabilized loans are included in the calculation of our portfolio reserve, as discussed below.
 
The following table sets forth the gross carrying value of our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division by loan-to-value and debt service coverage ratios, as of the date indicated:
 
 December 31, 2020
 Debt Service Coverage Ratio
 
> 1.2x
1.0x
to
< 1.2x		< 1.0xTotal
Commercial Mortgage and Agricultural Property
Loans
Loan-to-Value Ratio(in millions)
0%-59.99%$26,359 $742 $467 $27,568 
60%-69.99%16,692 1,305 233 18,230 
70%-79.99%7,897 799 214 8,910 
80% or greater199 304 12 515 
Total commercial mortgage and agricultural property loans$51,147 $3,150 $926 $55,223 
 
The following table sets forth the breakdown of our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division by year of origination, as of the date indicated:
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 December 31, 2020
Gross
Carrying
Value		% of
Total
Year of Origination($ in millions)
2020$5,468 9.9 %
201910,103 18.3 
20188,504 15.4 
20177,119 12.9 
20166,278 11.4 
20155,513 9.9 
20144,405 8.0 
2013 & Prior7,833 14.2 
Total commercial mortgage and agricultural property loans$55,223 100.0 %

Commercial Mortgage and Other Loans by Contractual Maturity Date
 
The following table sets forth the breakdown of our commercial mortgage and other loans portfolio by contractual maturity, as of the date indicated:
 December 31, 2020
 Gross
Carrying Value		% of Total
Vintage($ in millions)
Maturing in 2021$2,604 4.6 %
Maturing in 20223,822 6.8 
Maturing in 20233,856 6.9 
Maturing in 20245,790 10.3 
Maturing in 20256,881 12.3 
Maturing in 20266,270 11.2 
Maturing in 20275,727 10.2 
Maturing in 20285,280 9.4 
Maturing in 20294,949 8.8 
Maturing in 20303,634 6.5 
Maturing in 2031815 1.5 
Maturing in 2032 and beyond6,471 11.5 
Total commercial mortgage and other loans$56,099 100.0 %
 
Commercial Mortgage and Other Loans Quality
 
The commercial mortgage and other loans portfolio is monitored on an ongoing basis. If certain criteria are met, loans are assigned to either of the following “watch list” categories:

(1) “Closely Monitored,” which includes a variety of considerations, such as when loan metrics fall below acceptable levels, the borrower is not cooperative or has requested a material modification, or the portfolio manager has directed a change in category; or

(2) “Not in Good Standing,” which includes loans in default or with a high probability of loss of principal, such as when the loan is in the process of foreclosure or the borrower is in bankruptcy.

Our workout and special servicing professionals manage the loans on the watch list.

The current expected credit loss (“CECL”) allowance represents the Company’s best estimate of expected credit losses over the remaining life of the assets. The determination of the allowance considers historical credit loss experience, current
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conditions, and reasonable and supportable forecasts. The allowance is calculated separately for commercial mortgage loans, agricultural mortgage loans, uncollateralized loans, other collateralized loans and residential property loans.

For commercial mortgage and agricultural mortgage loans, the allowance is calculated using an internally developed CECL model.

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

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

The CECL allowance for other collateralized and uncollateralized loans carried at amortized cost is determined based on probability of default and loss given default assumptions by sector, credit quality and average lives of the loans.

The following table sets forth the change in allowance for credit losses for our commercial mortgage and other loans portfolio, as of the dates indicated:
 
 December 31, 2020December 31, 2019
 (in millions)
Allowance, beginning of year$102 $106 
Cumulative effect of adoption of ASU 2016-13101 0 
Addition to (release of) allowance for credit losses 1 (4)
Recoveries of amounts previously written-down0 N/A
Other3 0 
Allowance, end of period$207 $102 

The allowance for credit losses as of December 31, 2020 increased compared to December 31, 2019, primarily due to the cumulative effect of adopting ASU 2016-13.
 
Equity Securities
 
The equity securities attributable to PFI excluding the Closed Block division consist principally of investments in Common and Preferred Stock of publicly-traded companies, as well as mutual fund shares. The following table sets forth the composition of our equity securities portfolio and the associated gross unrealized gains and losses, as of the dates indicated:
 December 31, 2020December 31, 2019
 CostGross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value		CostGross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
 (in millions)
Mutual funds$1,481 $410 $5 $1,886 $817 $258 $1 $1,074 
Other Common Stocks2,201 1,013 62 3,152 2,429 1,091 57 3,463 
Non-redeemable Preferred Stocks54 22 6 70 51 3 5 49 
Total equity securities, at fair value(1)$3,736 $1,445 $73 $5,108 $3,297 $1,352 $63 $4,586 
__________
(1)Amounts presented exclude investments in private equity and hedge funds and other investments which are reported in “Other invested assets.”

The net change in unrealized gains (losses) from equity securities attributable to PFI excluding Closed Block division still held at period end, recorded within “Other income (loss),” was $83 million and $586 million during the year ended December 31, 2020 and 2019, respectively.
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Other Invested Assets
 
The following table sets forth the composition of “Other invested assets” attributable to PFI excluding the Closed Block division, as of the dates indicated:
 December 31, 2020December 31, 2019
(in millions)
LPs/LLCs:
Equity method:
Private equity$3,547 $2,740 
Hedge funds1,770 1,362 
Real estate-related1,078 792 
Subtotal equity method6,395 4,894 
Fair value:
Private equity1,063 990 
Hedge funds1,111 1,233 
Real estate-related41 50 
Subtotal fair value2,215 2,273 
Total LPs/LLCs8,610 7,167 
Real estate held through direct ownership(1)1,176 1,350 
Derivative instruments 199 73 
Other(2)731 620 
Total other invested assets$10,716 $9,210 
__________
(1)As of December 31, 2020 and 2019, real estate held through direct ownership had mortgage debt of $409 million and $537 million, respectively.
(2)Primarily includes leveraged leases and member and activity stock held in the Federal Home Loan Banks of New York and Boston. For additional information regarding our holdings in the Federal Home Loan Banks of New York and Boston, see Note 17 to the Consolidated Financial Statements.

 
Invested Assets of Other Entities and Operations
 
“Invested Assets of Other Entities and Operations” presented below includes investments held outside the general account and primarily represents investments associated with our investment management operations and derivative operations. Our derivative operations act on behalf of affiliates primarily to manage interest rate, foreign currency, credit and equity exposures. Assets within our investment management operations that are managed for third-parties and those assets classified as “Separate account assets” on our balance sheet are not included.
  
 December 31, 2020December 31, 2019
 (in millions)
Fixed maturities:
Public, available-for-sale, at fair value(1)$644 $587 
Private, available-for-sale, at fair value0 1 
Fixed maturities, trading, at fair value(1) 212 1,161 
Equity securities, at fair value682 691 
Commercial mortgage and other loans, at book value(2)1,112 259 
Other invested assets(1)3,799 3,062 
Short-term investments36 17 
Total investments$6,485 $5,778 
__________
(1)As of December 31, 2020 and 2019, balances include investments in CLOs with fair value of $496 million and $438 million, respectively.
(2)Book value is generally based on unpaid principal balance, net of any allowance for credit losses, or at fair value, when the fair value option has been elected.

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Fixed Maturities, Trading

“Fixed maturities, trading, at fair value” are primarily related to assets associated with consolidated variable interest entities (“VIEs”) for which the Company is the investment manager. The assets of the consolidated VIEs are generally offset by liabilities for which the fair value option has been elected. For further information on these consolidated VIEs, see Note 4 to the Consolidated Financial Statements.
 
Commercial Mortgage and Other Loans
 
Our investment management operations include our commercial mortgage operations, which provide mortgage origination, investment management and servicing for our general account, institutional clients, the Federal Housing Administration and government-sponsored entities such as Fannie Mae and Freddie Mac.

The mortgage loans of our commercial mortgage operations are included in “Commercial mortgage and other loans.” Derivatives and other hedging instruments related to our commercial mortgage operations are primarily included in “Other invested assets.”

Other Invested Assets
 
“Other invested assets” primarily include assets of our derivative operations used to manage interest rate, foreign currency, credit, and equity exposures.

Furthermore, other invested assets include strategic investments made as part of our investment management operations. We make these strategic investments in real estate, as well as fixed income, public equity and real estate securities, including controlling interests. Certain of these investments are made primarily for purposes of co-investment in our managed funds and structured products. Other strategic investments are made with the intention to sell or syndicate to investors, including our general account, or for placement in funds and structured products that we offer and manage (seed investments). As part of our investment management operations, we also make loans to our managed funds that are secured by equity commitments from investors or assets of the funds. “Other invested assets” also includes certain assets in consolidated investment funds where the Company is deemed to exercise control over the funds.

 
Liquidity and Capital Resources
 
Overview
 
Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of our businesses, fund business growth, and provide a cushion to withstand adverse circumstances. Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of our businesses, general economic conditions and our access to the capital markets and the alternate sources of liquidity and capital described herein. The principles of our liquidity and capital management framework are described in an enterprise wide policy that is reviewed and approved by our Board.
 
Our businesses are subject to comprehensive regulation and supervision by domestic and international regulators. These regulations currently include requirements (many of which are the subject of ongoing rule-making) relating to capital and liquidity management. For information on these regulatory initiatives and their potential impact on us, see “Business—Regulation” and “Risk Factors.”

COVID-19 and Related Market Disruptions
Beginning in the first quarter of 2020, broad market concerns over the impact of COVID-19 have led to significant volatility and disruptions in the global economy and financial markets. In 2020 we took the following significant management actions that impacted our liquidity and capital position, including in response to this macro environment and the global pandemic:

•We executed transactions to reduce our ongoing financing costs in August by issuing $1.3 billion of junior subordinated notes at interest rates of 3.70% and 4.125% and with maturities ranging from 2050 to 2060 and using the proceeds to redeem in September our $710 million 5.70% junior subordinated notes due in 2053 and our $575 million 5.75% junior subordinated notes due in 2052;
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•In May, we augmented our alternative sources of liquidity by entering into a facility agreement with a Delaware trust, pursuant to which Prudential Financial may issue and sell to the trust at any time over a ten-year period up to $1.5 billion of 2.850% senior notes due May 15, 2030 and receive in exchange a corresponding amount of U.S. Treasury securities. The facility agreement is similar to our existing put option agreement that allows us to issue up to $1.5 billion of senior notes to a trust, which we established in 2013 and expires in 2023;
•We suspended Common Stock repurchases under our existing repurchase authorization beginning April 1, 2020, after repurchasing $500 million of shares of Prudential Financial’s Common Stock in the first quarter of 2020. On February 4, 2021, the Board authorized the Company to repurchase, at management’s discretion, up to $1.5 billion of its outstanding Common Stock during the period from January 1, 2021 through December 31, 2021;
•In March, we issued $1.5 billion of senior notes, with maturities ranging from 2026 to 2040, for general corporate purposes, including pre-funding part of our senior notes maturing through 2021. Of these senior notes, $500 million were issued in the form of “green bonds,” where proceeds are allocated to existing or future investments in assets, businesses or projects that provide environmental benefits;
•In March, Prudential Legacy Insurance Company of New Jersey issued $800 million of surplus notes under its $4 billion reserve financing facility to enhance the statutory surplus of the Closed Block. Following a partial redemption in December 2020, the facility had $400 million of surplus notes outstanding as of December 31, 2020. Established in 2015, this facility is intended to alleviate any temporary impact to the Closed Block’s surplus due to the timing difference between the mark to market on assets and the decision on the level of the policyholder dividend;
•We executed additional capital hedges that protect the capital position of our U.S. insurance subsidiaries against additional declines in the equity markets; and
•We accelerated our product diversification strategy and repriced certain products, which are expected to support the capital position of our insurance subsidiaries over time.

Liquidity. The Company continues to operate with significant liquid resources and maintains access to substantial alternative sources of liquidity, such as committed credit facilities, membership in the Federal Home Loan Banks, commercial paper programs, and agreements that allow us to issue senior debt to trust entities. As of December 31, 2020, Prudential Financial had highly liquid assets of $5.6 billion, excluding the net borrowings from an intercompany liquidity account. Nevertheless, adverse developments related to COVID-19 and associated market dislocations could strain our existing liquidity. For example, capital or liquidity needs at our subsidiaries resulting from market conditions or business operations could require us to use our highly liquid assets or tap alternative sources of liquidity, and our access to traditional funding sources, such as commercial paper borrowings, could become limited due to market conditions. Any need to increase the use of our alternative sources of liquidity may result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings or ratings outlooks.

Capital. As of December 31, 2020, all of our significant insurance subsidiaries maintained capital levels consistent with their ratings targets. However, market conditions could negatively impact the statutory capital of our insurance companies and constrain our overall capital flexibility. For example, adverse market conditions may lead to increased defaults and/or further deterioration in the credit quality or fair values of our investment portfolio, which would negatively impact the statutory capital of our insurance subsidiaries. Adverse market conditions could require us to take additional management actions for our insurance subsidiaries to maintain capital consistent with their ratings objectives, which may include redeploying financial resources from internal sources or using available external sources of capital or seeking additional sources.

Liquidity and Capital Risk Management. Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity of Prudential Financial and its subsidiaries on a daily basis and projects borrowing and capital needs over a multi-year time horizon. We use a Risk Appetite Framework (“RAF”) to ensure that all risks taken across the Company align with our capacity and willingness to take those risks. The RAF provides a dynamic assessment of capital and liquidity stress impacts, including scenarios similar to, and more severe than, those occurring due to COVID-19, and is intended to ensure that sufficient resources are available to absorb those impacts. We believe that our capital and liquidity resources are sufficient to satisfy the capital and liquidity requirements of Prudential Financial and its subsidiaries.

Capital
 
Our capital management framework is primarily based on statutory Risk-Based Capital (“RBC”) and solvency margin measures. Due to our diverse mix of businesses and applicable regulatory requirements, we apply certain refinements to the framework that are designed to more appropriately reflect risks associated with our businesses on a consistent basis across the Company.
 
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We believe Prudential Financial’s capitalization and financial profile are consistent with its ratings targets. Our long-term senior debt rating targets for Prudential Financial are “A” for S&P, Moody’s, and Fitch, and “a” for A.M. Best Company (“A.M. Best”). Our financial strength rating targets for our life insurance companies are “AA/Aa/AA” for S&P, Moody’s and Fitch, respectively, and “A+” for A.M. Best. Some entities may currently be rated below these targets, and not all life insurance companies are rated by each of these rating agencies. See “—Ratings” below for a description of the potential impacts of ratings downgrades.

Capital Governance
 
Our capital management framework is ultimately reviewed and approved by our Board. The Board has authorized our Chairman and Chief Executive Officer and Vice Chair to approve certain capital actions on behalf of the Company and to further delegate authority with respect to capital actions to appropriate officers, up to specified limits. Any capital commitment that exceeds the authority granted to senior management must be separately authorized by the Board.

In addition, our Capital and Finance Committee (“CFC”) reviews the use and allocation of capital above certain threshold amounts to promote the efficient use of capital, consistent with our strategic objectives, ratings aspirations and other goals and targets. This management committee provides a multi-disciplinary due diligence review of specific initiatives or transactions requiring the use of capital, including mergers and acquisitions. The CFC also reviews our annual capital plan (and updates to this plan), as well as our capital, liquidity and financial position, borrowing plans, and related matters prior to the discussion of these items with the Board.
 
Capitalization
 
The primary components of the Company’s capitalization consist of equity and outstanding capital debt, including junior subordinated debt. As shown in the table below, as of December 31, 2020, the Company had $50.2 billion in capital, all of which was available to support the aggregate capital requirements of its businesses and its Corporate and Other operations. Based on our assessment of these businesses and operations, we believe this level of capital is consistent with our ratings targets.
 
 December 31,
 20202019
 (in millions)
Equity(1)$36,687 $39,076 
Junior subordinated debt (including hybrid securities)7,615 7,575 
Other capital debt5,856 7,001 
Total capital$50,158 $53,652 
__________ 
(1)Amounts attributable to Prudential Financial, excluding AOCI. 

Insurance Regulatory Capital
 
We manage PICA, The Prudential Life Insurance Company, Ltd. (“Prudential of Japan”), Gibraltar Life, and other significant insurance subsidiaries to regulatory capital levels consistent with our “AA” ratings targets. We utilize the RBC ratio as a primary measure of the capital adequacy of our domestic insurance subsidiaries and the solvency margin ratio as a primary measure of the capital adequacy of our Japanese insurance subsidiaries.

RBC is calculated based on statutory financial statements and risk formulas consistent with the practices of the NAIC. RBC considers, among other things, risks related to the type and quality of the invested assets, insurance-related risks associated with an insurer’s products and liabilities, interest rate risks and general business risks. RBC ratio calculations are intended to assist insurance regulators in measuring an insurer’s solvency and ability to pay future claims. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities, but is available to the public.
 
The table below presents the RBC ratios of our most significant domestic insurance subsidiaries as of December 31, 2019, the most recent statutory fiscal year-end for these subsidiaries for which RBC information has been filed:
Ratio
PICA(1)411 %
Prudential Annuities Life Assurance Corporation (“PALAC”)484 %
Composite Major U.S. Insurance Subsidiaries(2)426 %
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__________ 
(1)Includes Prudential Retirement Insurance and Annuity Company (“PRIAC”), Pruco Life Insurance Company (“Pruco Life”), Pruco Life Insurance Company of New Jersey (“PLNJ”), which is a subsidiary of Pruco Life, and Prudential Legacy Insurance Company of New Jersey (“PLIC”).
(2)Includes PICA and its subsidiaries, as noted above, and PALAC. Composite RBC is not reported to regulators and is based on the summation of total adjusted capital and risk charges for the included companies as determined under statutory accounting and RBC guidance to calculate a composite numerator and denominator, respectively, for purposes of calculating the composite ratio.

Although not yet filed, we expect our RBC ratios as of December 31, 2020 to be above our “AA” financial strength target levels.

Similar to the RBC ratios that are employed by U.S. insurance regulators, regulatory authorities in the international jurisdictions in which we operate generally establish some form of minimum solvency margin requirements for insurance companies based on local statutory accounting practices. These solvency margins are a primary measure of the capital adequacy of our international insurance operations. Maintenance of our solvency margins at certain levels is also important to our competitive positioning, as in certain jurisdictions, such as Japan, these solvency margins are required to be disclosed to the public and therefore impact the public perception of an insurer’s financial strength.

The table below presents the solvency margin ratios of our most significant international insurance subsidiaries as of September 30, 2020, the most recent date for which this information is available:
Ratio
Prudential of Japan consolidated(1)907 %
Gibraltar Life consolidated(2)956 %
__________ 
(1)Includes Prudential Trust Co., Ltd., a subsidiary of Prudential of Japan.
(2)Includes Prudential Gibraltar Financial Life Insurance Co., Ltd. (“PGFL”), a subsidiary of Gibraltar Life.

Although not yet filed, we expect the solvency margin ratio for each of these subsidiaries to be greater than 700% (3.5 times the regulatory required minimums) as of December 31, 2020.

All of our domestic and significant international insurance subsidiaries have capital levels that substantially exceed the minimum level required by applicable insurance regulations. However, as discussed above, market conditions could negatively impact the statutory capital of our insurance companies and constrain our overall capital flexibility. Our regulatory capital levels also may be affected in the future by changes to the applicable regulations, proposals for which are currently under consideration by both domestic and international insurance regulators. For additional information on the calculation of RBC and solvency margin ratios, as well as regulatory minimums, see Note 19 to the Consolidated Financial Statements.

Captive Reinsurance Companies
 
We use captive reinsurance companies to more effectively manage our reserves and capital on an economic basis and to enable the aggregation and transfer of risks. Our captive reinsurance companies assume business from affiliates only. To support the risks they assume, our captives are capitalized to a level we believe is consistent with the “AA” financial strength rating targets of our insurance subsidiaries. All of our captives are subject to internal policies governing their activities. In the normal course of business, we contribute capital to the captives to support business growth and other needs. Prudential Financial has also entered into support agreements with several of the captives in connection with financing arrangements. For a description of captive reinsurance company financing activities, see below under “—Financing Activities—Subsidiary Borrowings—Term and Universal Life Reserve Financing.”
 
Shareholder Distributions
 
Share Repurchase Program and Shareholder Dividends
 
In December 2019, the Board authorized the Company to repurchase, at management’s discretion, up to $2.0 billion of its outstanding Common Stock during the period from January 1, 2020 through December 31, 2020. We suspended Common Stock repurchases under this authorization beginning April 1, 2020, after purchasing $500 million of shares of Prudential Financial’s Common Stock in the first quarter of 2020. On February 4, 2021, the Board authorized the Company to repurchase, at management’s discretion, up to $1.5 billion of its outstanding Common Stock during the period from January 1, 2021 through December 31, 2021.

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In general, the timing and amount of share repurchases are determined by management based on market conditions and other considerations, including any increased capital needs of our businesses due to, among other things, credit migration and losses in our investment portfolio, changes in regulatory capital requirements and opportunities for growth and acquisitions. Repurchases may be executed in the open market, through derivative, accelerated repurchase and other negotiated transactions and through plans designed to comply with Rule 10b5-1(c) under the Securities Exchange Act of 1934.
 
The following table sets forth information about declarations of Common Stock dividends, as well as repurchases of shares of Prudential Financial’s Common Stock, for each of the quarterly periods in 2020 and for the prior four years:
 
 Dividend AmountShares Repurchased
Quarterly period ended:Per ShareAggregateSharesTotal Cost
 (in millions, except per share data)
December 31, 2020$1.10 $442 0.0 $0 
September 30, 2020$1.10 $441 0.0 $0 
June 30, 2020$1.10 $441 0.0 $0 
March 31, 2020$1.10 $445 6.7 $500 
 
 Dividend AmountShares Repurchased
Year ended:Per ShareAggregateSharesTotal Cost
 (in millions, except per share data)
December 31, 2020$4.40 $1,769 6.7 $500 
December 31, 2019$4.00 $1,644 27.2 $2,500 
December 31, 2018$3.60 $1,525 14.9 $1,500 
December 31, 2017$3.00 $1,300 11.5 $1,250 
December 31, 2016$2.80 $1,245 25.1 $2,000 
 
In addition, on February 4, 2021, Prudential Financial’s Board of Directors declared a cash dividend of $1.15 per share of Common Stock, payable on March 11, 2021 to shareholders of record as of February 16, 2021.

Liquidity

Liquidity management and stress testing are performed on a legal entity basis as the ability to transfer funds between subsidiaries is limited due in part to regulatory restrictions. Liquidity needs are determined through daily and quarterly cash flow forecasting at the holding company and within our operating subsidiaries. We seek to maintain a minimum balance of highly liquid assets to ensure that adequate liquidity is available at Prudential Financial to cover fixed expenses in the event that we experience reduced cash flows from our operating subsidiaries at a time when access to capital markets is also not available.

We seek to mitigate the risk of having limited or no access to financing due to stressed market conditions by generally pre-funding debt in advance of maturity. During 2020, we issued $1.5 billion of senior notes, of which $1 billion were issued for general corporate purposes, including pre-funding in part our senior notes maturing through 2021. We mitigate the refinancing risk associated with our debt that is used to fund operating needs by matching the term of debt with the assets financed. To ensure adequate liquidity in stress scenarios, stress testing is performed for our major operating subsidiaries. We seek to further mitigate liquidity risk by maintaining our access to alternative sources of liquidity, as discussed below.

Liquidity of Prudential Financial
 
The principal sources of funds available to Prudential Financial, the parent holding company, are dividends, returns of capital and loans from subsidiaries, and proceeds from debt issuances and certain stock-based compensation activity. These sources of funds may be supplemented by Prudential Financial’s access to the capital markets as well as the “—Alternative Sources of Liquidity” described below.
 
The primary uses of funds at Prudential Financial include servicing debt, making capital contributions and loans to subsidiaries, making acquisitions, paying declared shareholder dividends and repurchasing outstanding shares of Common Stock executed under authority from the Board.
 
As of December 31, 2020, Prudential Financial had highly liquid assets with a carrying value totaling $6,479 million, an increase of $1,375 million from December 31, 2019. Highly liquid assets predominantly include cash, short-term investments, U.S. Treasury securities, obligations of other U.S. government authorities and agencies, and/or foreign government bonds. We maintain an intercompany liquidity account that is designed to optimize the use of cash by facilitating the lending and
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borrowing of funds between Prudential Financial and its subsidiaries on a daily basis. Excluding the net borrowings from this intercompany liquidity account, Prudential Financial had highly liquid assets of $5,560 million as of December 31, 2020, an increase of $1,499 million from December 31, 2019.
 
The following table sets forth Prudential Financial’s principal sources and uses of highly liquid assets, excluding net borrowings from our intercompany liquidity account, for the periods indicated:
Sources and Uses of Holding Company Highly Liquid AssetsYear Ended December 31,
 20202019
 (in millions)
Highly Liquid Assets, beginning of period$4,061 $5,548 
Dividends and/or returns of capital from subsidiaries(1)3,698 3,282 
Affiliated loans/(borrowings) - (capital activities)(2)(1,017)818 
Capital contributions to subsidiaries(3)(386)(521)
Total Business Capital Activity2,295 3,579 
Share repurchases(500)(2,500)
Common stock dividends(4)(1,766)(1,641)
Acquisition/Disposition Activity(5)1,627 (1,831)
Total Share Repurchases, Dividends and Acquisition/Disposition Activity(639)(5,972)
Proceeds from the issuance of debt2,768 2,465 
Repayments of debt(2,467)(1,114)
Total Debt Activity301 1,351 
Proceeds from stock-based compensation and exercise of stock options293 418 
Interest income from subsidiaries on intercompany agreements, net of interest paid223 199 
Swap terminations(7)(190)(92)
Net income tax receipts & payments482 103 
Interest paid on external debt(988)(952)
Affiliated (borrowings)/loans - (operating activities)(6)(283)(115)
Other, net(7)5 (6)
Total Other Activity(458)(445)
Net increase (decrease) in highly liquid assets1,499 (1,487)
Highly Liquid Assets, end of period$5,560 $4,061 
__________
(1)Includes $470 million in the form of in-kind dividends in 2020. See “Item 15—Schedule II—Notes to Condensed Financial Information of Registrant—Dividends and Returns of Capital” for dividends and returns of capital by subsidiary.
(2)Represents the investment and deployment of capital to and from our businesses in the form of loans. 2020 includes net lending of $1,017 million from international insurance subsidiaries including $470 million received by PFI in the form of the extinguishment of debt held by international subsidiaries (offset by the in-kind dividends referred to in footnote 1 above). 2019 includes net receipts of $818 million from international subsidiaries.
(3)2020 primarily includes capital contributions of $217 million to PGIM, and $170 million to international insurance subsidiaries. 2019 includes capital contributions of $200 million to PICA, $180 million to international insurance subsidiaries, $73 million to PGIM, and $68 million to Assurance IQ.
(4)Includes cash payments made on dividends declared in prior periods.
(5)2020 represents the net proceeds from the sale of POK that were distributed to PFI. 2019 represents costs related to the acquisition of Assurance IQ, including $1,758 million of purchase consideration and $73 million of compensation expense, which is recognized over the requisite service periods.
(6)Represents loans to and from affiliated subsidiaries to support business operating needs.
(7)Prior period amounts have been updated to conform to current period presentation.

Dividends and Returns of Capital from Subsidiaries
 
Domestic insurance subsidiaries. During 2020, Prudential Financial received returns of capital of $760 million from PALAC, dividends of $500 million from PICA and $120 million from Prudential Annuities Holding Company.
    
International insurance subsidiaries. During 2020, Prudential Financial received dividends of $3,531 million from its international insurance subsidiaries, which includes $1,627 million net proceeds from the sale of POK and $470 million of in-kind dividends in the form of the extinguishment of debt held by international insurance subsidiaries. In addition to paying Common Stock dividends, our international insurance operations may return capital to Prudential Financial through or facilitated by other means, such as the repayment of preferred stock obligations held by Prudential Financial or other affiliates, affiliated lending, affiliated derivatives and reinsurance with U.S.- and Bermuda-based affiliates.
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Other subsidiaries. During 2020, Prudential Financial received dividends and returns of capital of $399 million from PGIM subsidiaries and dividends of $14 million from other subsidiaries.
Restriction on dividends and returns of capital from subsidiaries. Our insurance companies are subject to limitations on the payment of dividends and other transfers of funds to Prudential Financial and other affiliates under applicable insurance law and regulation. Further, as discussed above, recent market conditions could negatively impact capital positions of our insurance companies, which could further restrict their ability to pay dividends. More generally, the payment of dividends by any of our subsidiaries is subject to declaration by their Board of Directors and can be affected by market conditions and other factors.
 
With respect to our domestic insurance subsidiaries, PICA is permitted to pay ordinary dividends based on calculations specified under New Jersey insurance law, subject to prior notification to the New Jersey Department of Banking and Insurance (“NJDOBI”). Any distributions above this amount in any twelve-month period are considered to be “extraordinary” dividends, and the approval of the NJDOBI is required prior to payment. The laws regulating dividends of the states where our other domestic insurance companies are domiciled are similar, but not identical, to New Jersey’s.

Capital redeployment from our international insurance subsidiaries is subject to local regulatory requirements in the international jurisdictions in which they operate. Our most significant international insurance subsidiaries, Prudential of Japan and Gibraltar Life, are permitted to pay common stock dividends based on calculations specified by Japanese insurance law, subject to prior notification to the FSA. Dividends in excess of these amounts and other forms of capital distribution require the prior approval of the FSA. The regulatory fiscal year end for both Prudential of Japan and Gibraltar Life is March 31, 2021, after which time the common stock dividend amount permitted to be paid without prior approval from the FSA can be determined.

The ability of our PGIM subsidiaries and the majority of our other operating subsidiaries to pay dividends is largely unrestricted from a regulatory standpoint.

See Note 19 to the Consolidated Financial Statements for information on specific dividend restrictions.
 
Liquidity of Insurance Subsidiaries
 
We manage the liquidity of our insurance operations to ensure stable, reliable and cost-effective sources of cash flows to meet all of our obligations. Liquidity within each of our insurance subsidiaries is provided by a variety of sources, including portfolios of liquid assets. The investment portfolios of our subsidiaries are integral to the overall liquidity of our insurance operations. We segment our investment portfolios and employ an asset/liability management approach specific to the requirements of each of our product lines. This enhances the discipline applied in managing the liquidity, as well as the interest rate and credit risk profiles, of each portfolio in a manner consistent with the unique characteristics of the product liabilities.
 
Liquidity is measured against internally-developed benchmarks that take into account the characteristics of both the asset portfolio and the liabilities that they support. We consider attributes of the various categories of liquid assets (for example, type of asset and credit quality) in calculating internal liquidity measures to evaluate our insurance operations’ liquidity under various stress scenarios, including company-specific and market-wide events. We continue to believe that cash generated by ongoing operations and the liquidity profile of our assets provide sufficient liquidity under reasonably foreseeable stress scenarios for each of our insurance subsidiaries.
 
Cash Flow
 
The principal sources of liquidity for our insurance subsidiaries are premiums, investment and fee income, investment maturities, sales of investments, and sales associated with our insurance and annuity operations, as well as internal and external borrowings. The principal uses of liquidity include benefits, claims and dividends paid to policyholders, and payments to policyholders and contractholders in connection with surrenders, withdrawals and net policy loan activity. Other uses of liquidity may include commissions, general and administrative expenses, purchases of investments, the payment of dividends to the parent holding company, hedging and reinsurance activity and payments in connection with financing activities.
 
In each of our major insurance subsidiaries, we believe that the cash flows from operations are adequate to satisfy current liquidity requirements. The continued adequacy of this liquidity will depend upon factors such as future securities market conditions, changes in interest rate levels, policyholder perceptions of our financial strength, policyholder behavior, catastrophic events and the relative safety and attractiveness of competing products, each of which could lead to reduced cash inflows or increased cash outflows. Our insurance operations’ cash flows from investment activities result from repayments of principal, proceeds from maturities and sales of invested assets and investment income, net of amounts reinvested. The primary liquidity risks with respect to these cash flows are the risk of default by debtors or bond insurers, our counterparties’
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willingness to extend repurchase and/or securities lending arrangements, commitments to invest and market volatility. We closely manage these risks through our credit risk management process and regular monitoring of our liquidity position.
 
Domestic insurance operations. In managing the liquidity of our domestic insurance operations, we consider the risk of policyholder and contractholder withdrawals of funds earlier than our assumptions when selecting assets to support these contractual obligations. We use surrender charges and other contract provisions to mitigate the extent, timing and profitability impact of withdrawals of funds by customers. The following table sets forth the liabilities for future policy benefits and policyholders’ account balances of certain of our domestic insurance subsidiaries as of the dates indicated:
 
 December 31,
 20202019
 (in billions)
PICA$227.2 $216.7 
PLIC50.9 51.8 
Pruco Life56.7 48.1 
PRIAC29.0 26.1 
PALAC27.7 19.1 
Other(1)(102.9)(96.0)
Total future policy benefits and policyholders’ account balances(2)$288.6 $265.8 
__________
(1)Includes the impact of intercompany eliminations.
(2)Amounts are reflected gross of affiliated reinsurance recoverables.
 
The liabilities presented above are primarily supported by invested assets in our general account. As noted above, when selecting assets to support these contractual obligations, we consider the risk of policyholder and contractholder withdrawals of funds earlier than our assumptions. As a result, assets will include both liquid assets, as discussed below, and other assets that we believe adequately support our liabilities.
 
For PICA and other subsidiaries, the liabilities presented above primarily include annuity reserves and deposit liabilities and individual life insurance policy reserves. Individual life insurance policies may impose surrender charges and policyholders may be subject to a new underwriting process in order to obtain a new insurance policy. PICA’s reserves for group annuity contracts primarily relate to pension risk transfer contracts, which are generally not subject to early withdrawal. For our individual annuity contracts, to encourage persistency, most of our variable and fixed annuities have surrender or withdrawal charges for a specified number of years. In addition, certain fixed annuities impose a market value adjustment if the invested amount is not held to maturity. The living benefit features of our variable annuities also encourage persistency because the potential value of the living benefit is fully realized only if the contract persists.
 
For PRIAC, the liabilities presented above primarily include reserves for stable value contracts. Although many of these contracts are subject to discretionary withdrawal, withdrawals are typically at the market value of the underlying assets. Risk is further reduced by the high persistency of clients driven in part by our competitive position in our target markets and contractual provisions such as deferred payouts.
 
Gross account withdrawals for our domestic insurance operations’ products in 2020 were generally consistent with our assumptions in asset/liability management, and the associated cash outflows did not have a material adverse impact on our overall liquidity.
 
International insurance operations. As with our domestic operations, in managing the liquidity of our international insurance operations, we consider the risk of policyholder and contractholder withdrawals of funds earlier than our assumptions in selecting assets to support these contractual obligations. The following table sets forth the liabilities for future policy benefits and policyholders’ account balances of certain of our international insurance subsidiaries as of the dates indicated:
 
 December 31,
 20202019
 (in billions)
Prudential of Japan(1)$63.3 $56.4 
Gibraltar Life(2)114.6 108.0 
All other international insurance subsidiaries(3)1.5 15.4 
Total future policy benefits and policyholders’ account balances(4)$179.4 $179.8 
__________
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(1)As of December 31, 2020 and 2019, $18.3 billion and $15.7 billion, respectively, of the insurance-related liabilities for Prudential of Japan are associated with U.S. dollar-denominated products that are coinsured to our domestic insurance operations and supported by U.S. dollar-denominated assets. As of December 31, 2020, $1.4 billion of the insurance-related liabilities for Prudential of Japan are primarily associated with yen- and U.S. dollar-denominated products that are coinsured to Gibraltar Re, our Bermuda-based reinsurance affiliate, and primarily supported by yen- and U.S. dollar-denominated assets. As of December 31, 2019, $0.7 billion of the insurance-related liabilities for Prudential of Japan are primarily associated with yen-denominated products that are coinsured to Gibraltar Re and primarily supported by yen-denominated assets.
(2)Includes PGFL. As of December 31, 2020 and 2019, $7.1 billion and $5.5 billion, respectively, of the insurance-related liabilities for PGFL are associated with U.S. dollar-denominated products that are coinsured to our domestic insurance operations and supported by U.S. dollar-denominated assets. As of December 31, 2020, $4.5 billion of the insurance-related liabilities for Gibraltar Life are primarily associated with yen- and U.S. dollar-denominated products that are coinsured to Gibraltar Re and primarily supported by yen- and U.S. dollar-denominated assets. As of December 31, 2019, $2.0 billion of the insurance-related liabilities for Gibraltar Life are primarily associated with yen-denominated products that are coinsured to Gibraltar Re and primarily supported by yen-denominated assets.
(3)Represents our international insurance operations, excluding Japan.
(4)Amounts are reflected gross of affiliated reinsurance recoverables.
 
The liabilities presented above are primarily supported by invested assets in our general account. When selecting assets to support these contractual obligations, we consider the risk of policyholder and contractholder withdrawals of funds earlier than our assumptions. As a result, assets will include both liquid assets, as discussed below, and other assets that we believe adequately support our liabilities.
 
We believe most of the longer-term recurring pay individual life insurance policies sold by our Japanese operations do not have significant withdrawal risk because policyholders may incur surrender charges and must undergo a new underwriting process to obtain a new insurance policy.
 
Gibraltar Life sells fixed annuities, denominated in U.S. and Australian dollars, that may be subject to increased surrenders should the yen depreciate in relation to these currencies or if interest rates in Australia and the U.S. decline relative to Japan. A significant portion of the liabilities associated with these contracts include a market value adjustment feature, which mitigates the profitability impact from surrenders. As of December 31, 2020, products with a market value adjustment feature represented $26.1 billion of our Japan operations’ insurance-related liabilities, which included $22.8 billion attributable to non-yen denominated fixed annuities.

Liquid Assets
 
Liquid assets include cash and cash equivalents, short-term investments, U.S. Treasury securities, fixed maturities that are not designated as held-to-maturity and public equity securities. In addition to access to substantial investment portfolios, our insurance companies’ liquidity is managed through access to a variety of instruments available for funding and/or managing cash flow mismatches, including from time to time those arising from claim levels in excess of projections. Our ability to utilize assets and liquidity between our subsidiaries is limited by regulatory and other constraints. We believe that ongoing operations and the liquidity profile of our assets provide sufficient liquidity under reasonably foreseeable stress scenarios for each of our insurance subsidiaries.
 
The following table sets forth the fair value of certain of our domestic insurance operations’ portfolio of liquid assets, as of the dates indicated:
 
 December 31, 2020 
 Prudential
Insurance(1)		PLICPRIACPALACPruco LifeTotalDecember 31, 2019
 (in billions)
Cash and short-term investments$6.4 $0.4 $0.7 $1.4 $0.5 $9.4 $11.9 
Fixed maturity investments(2):
High or highest quality138.2 37.4 21.2 18.9 6.7 222.4 201.3 
Other than high or highest quality9.4 3.5 1.3 0.8 0.4 15.4 12.2 
Subtotal147.6 40.9 22.5 19.7 7.1 237.8 213.5 
Public equity securities, at fair value0.4 2.3 0.1 0.3 0.1 3.2 2.5 
Total$154.4 $43.6 $23.3 $21.4 $7.7 $250.4 $227.9 
__________
(1)Represents a legal entity view and as such includes both domestic and international sleeves.
(2)Excludes fixed maturities designated as held-to-maturity. Credit quality is based on NAIC or equivalent rating.
 
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The following table sets forth the fair value of our international insurance operations’ portfolio of liquid assets, as of the dates indicated:
 
 December 31, 2020 
 Prudential
of Japan		Gibraltar
Life(1)		All
Other(2)		TotalDecember 31, 2019
 (in billions)
Cash and short-term investments$1.3 $3.4 $1.3 $6.0 $5.0 
Fixed maturity investments(3):
High or highest quality(4)44.1 97.4 6.2 147.7 157.2 
Other than high or highest quality0.7 2.2 1.9 4.8 5.4 
Subtotal44.8 99.6 8.1 152.5 162.6 
Public equity securities1.7 1.9 0.0 3.6 4.7 
Total$47.8 $104.9 $9.4 $162.1 $172.3 
__________
(1)Includes PGFL.
(2)Represents our international insurance operations, excluding Japan.
(3)Excludes fixed maturities designated as held-to-maturity. Credit quality is based on NAIC or equivalent rating.
(4)As of December 31, 2020, $112.9 billion, or 76%, were invested in government or government agency bonds.
 
Given the size and liquidity profile of our investment portfolios, we believe that claim experience, including policyholder withdrawals and surrenders, varying from our projections does not constitute a significant liquidity risk. Our asset/liability management process takes into account the expected maturity of investments and expected claim payments as well as the specific nature and risk profile of the liabilities. To the extent we need to pay claims in excess of projections, we may borrow temporarily or sell investments sooner than anticipated to pay these claims, which may result in increased borrowing costs or realized investment gains or losses, including from changes in interest rates or credit spreads. The payment of claims and sale of investments earlier than anticipated would have an impact on the reported level of cash flow from operating, investing, and financing activities, in our financial statements. Historically, there has been no significant variation between the expected maturities of our investments and the payment of claims. 

Liquidity associated with other activities
 
Hedging activities associated with Individual Annuities
 
For the portion of our Individual Annuities’ ALM strategy executed through hedging, as well as the capital hedge program, we enter into a range of exchange-traded, cleared and other OTC equity and interest rate derivatives in order to hedge certain capital market risks related to more severe market conditions. For a full discussion of our Individual Annuities’ risk management strategy, see “—Results of Operations by Segment—U.S. Businesses—U.S. Individual Solutions Division—Individual Annuities.” This portion of our Individual Annuities’ ALM strategy and capital hedge program requires access to liquidity to meet payment obligations relating to these derivatives, such as payments for periodic settlements, purchases, maturities and terminations. These liquidity needs can vary materially due to, among other items, changes in interest rates, equity markets, mortality and policyholder behavior.
 
The hedging portion of our Individual Annuities’ ALM strategy and capital hedge program may also result in derivative related collateral postings to (when we are in a net pay position) or from (when we are in a net receive position) counterparties. The net collateral position depends on changes in interest rates and equity markets related to the amount of the exposures hedged. Depending on market conditions, the collateral posting requirements can result in material liquidity needs when we are in a net pay position. As of December 31, 2020, the derivatives comprising the hedging portion of our ALM strategy and capital hedge program were in a net receive position of $3.4 billion compared to a net receive position of $4.7 billion as of December 31, 2019. The change in collateral position was primarily driven by a negative impact from increasing equities, partially offset by decreasing interest rates.
 
Foreign exchange hedging activities
 
We employ various hedging strategies to manage potential exposure to foreign currency exchange rate movements, particularly those associated with the yen. Our overall yen hedging strategy calibrates the hedge level to preserve the relative contribution of our yen-based business to the Company’s overall return on equity on a leverage neutral basis. The hedging strategy includes two primary components:
 
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Income Hedges—We hedge a portion of our prospective yen-based earnings streams by entering into external forward currency derivative contracts that effectively fix the currency exchange rates for that portion of earnings, thereby reducing volatility from foreign currency exchange rate movements. As of December 31, 2020, we have hedged 100%, 72%, and 31%, of expected yen-based earnings for 2021, 2022 and 2023, respectively.

Equity Hedges—We hold both internal and external hedges primarily to hedge our USD-equivalent equity. These hedges also mitigate volatility in the solvency margins of yen-based subsidiaries resulting from changes in the market value of their USD-denominated investments hedging our USD-equivalent equity attributable to changes in the yen-USD exchange rate.
 
For additional information on our hedging strategy, see “—Results of Operations—Impact of Foreign Currency Exchange Rates.”
 
Cash settlements from these hedging activities result in cash flows between subsidiaries of Prudential Financial and either international-based subsidiaries or external parties. The cash flows are dependent on changes in foreign currency exchange rates and the notional amount of the exposures hedged. For example, a significant yen depreciation over an extended period of time could result in net cash inflows, while a significant yen appreciation could result in net cash outflows. The following tables set forth information about net cash settlements and the net asset or liability resulting from these hedging activities related to the yen and other currencies for the periods indicated:
 
 Year ended December 31,
Cash Settlements: Received (Paid)20202019
 (in millions)
Income Hedges (External)(1)$74 $67 
Equity Hedges:
Internal(2)188 432 
External(3)230 143 
Total Equity Hedges418 575 
Total Cash Settlements$492 $642 

 As of December 31,
Assets (Liabilities):20202019
 (in millions)
Income Hedges (External)(4)$3 $60 
Equity Hedges:
Internal(2)291 506 
External(5)(56)43 
Total Equity Hedges(6)
235 549 
Total Assets (Liabilities)$238 $609 
__________
(1)Includes non-yen related cash settlements of $60 million, primarily denominated in Brazilian real, Australian dollar and Chilean peso and $41 million, primarily denominated in Australian dollar, Korean won and Brazilian real for the year ended December 31, 2020 and 2019, respectively.
(2)Represents internal transactions between international-based and U.S.-based entities. Amounts noted are from the U.S.-based entities’ perspectives.
(3)Includes non-yen related cash settlements of $23 million and $17 million, denominated in Korean won for the year ended December 31, 2020 and 2019, respectively.
(4)Includes non-yen related assets of $2 million, primarily denominated in Brazilian real, Chilean peso and Australian dollar and assets of $37 million, primarily denominated in Korean won, Australian dollar and Chilean peso, as of December 31, 2020 and 2019, respectively.
(5)Includes non-yen related assets of $1 million, denominated in Korean won, as of December 31, 2019.
(6)As of December 31, 2020, approximately $324 million, $117 million and $(207) million of the net market values are scheduled to settle in 2021, 2022 and thereafter, respectively. The net market value of the assets (liabilities) will vary with changing market conditions to the extent there are no corresponding offsetting positions.
 
PGIM operations
 
The principal sources of liquidity for our fee-based PGIM businesses include asset management fees, commercial mortgage origination and servicing fees, and internal and external funding facilities. The principal uses of liquidity include general and administrative expenses, facilitating our commercial mortgage loan business, and distributions of dividends and returns of capital to Prudential Financial. The primary liquidity risks for our fee-based PGIM businesses relate to their profitability, which is impacted by market conditions, our investment management performance and client redemptions. We believe the cash flows from our fee-based PGIM businesses are adequate to satisfy the current liquidity requirements of these operations, as well as requirements that could arise under reasonably foreseeable stress scenarios, which are monitored through the use of internal measures.
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The principal sources of liquidity for our co- and seed investments held in our PGIM businesses are cash flows from investments, the ability to liquidate investments, borrowing lines from internal sources, including Prudential Financial and Prudential Funding, LLC (“Prudential Funding”), a wholly-owned subsidiary of PICA, and external sources, including PGIM’s limited-recourse credit facility. The principal use of liquidity for our co- and seed investments includes making investments to support business growth and paying interest expense from the internal and external borrowings used to fund those investments. The primary liquidity risks include the inability to sell assets in a timely manner, declines in the value of assets and credit defaults. There have been no material changes to the liquidity position of our PGIM operations since December 31, 2020.
 
Alternative Sources of Liquidity
 
In addition to asset-based financing as discussed below, Prudential Financial and certain subsidiaries have access to other sources of liquidity, including syndicated, unsecured committed credit facilities, membership in the Federal Home Loan Banks, commercial paper programs, and a put option agreement. In May 2020, we entered into a facility agreement with a Delaware trust, pursuant to which Prudential Financial may issue and sell to the trust at any time over a ten-year period up to $1.5 billion of senior notes due May 15, 2030 and receive in exchange a corresponding amount of U.S. Treasury securities, thereby augmenting our alternative sources of liquidity. For more information on these sources of liquidity, see Note 17 to the Consolidated Financial Statements.
 
Asset-based Financing
 
We conduct asset-based or secured financing within our insurance and other subsidiaries, including transactions such as securities lending, repurchase agreements and mortgage dollar rolls, to earn spread income, to borrow funds, or to facilitate trading activity. These programs are primarily driven by portfolio holdings of securities that are lendable based on counterparty demand for these securities in the marketplace. The collateral received in connection with these programs is primarily used to purchase securities in the short-term spread portfolios of our insurance entities. Investments held in the short-term spread portfolios include cash and cash equivalents, short-term investments (primarily corporate bonds), mortgage loans and fixed maturities (primarily collateralized loan obligations and other structured securities), with a weighted average life at time of purchase by the short-term portfolios of four years or less. Floating rate assets comprise the majority of our short-term spread portfolio. These short-term portfolios are subject to specific investment policy statements, which among other things, do not allow for significant asset/liability interest rate duration mismatch.
 
The following table sets forth our liabilities under asset-based or secured financing programs as of the dates indicated:
 
 December 31, 2020December 31, 2019
 PFI
Excluding
Closed Block Division		Closed
Block Division		ConsolidatedPFI
Excluding
Closed Block Division		Closed
Block Division		Consolidated
 ($ in millions)
Securities sold under agreements to repurchase$8,092 $2,802 $10,894 $6,834 $2,847 $9,681 
Cash collateral for loaned securities3,379 120 3,499 3,228 986 4,214 
Securities sold but not yet purchased2 0 2 0 0 0 
Total(1)(2)$11,473 $2,922 $14,395 $10,062 $3,833 $13,895 
Portion of above securities that may be returned to the Company overnight requiring immediate return of the cash collateral(3)$10,463 $2,922 $13,385 $10,062 $3,833 $13,895 
Weighted average maturity, in days(3)28 N/AN/AN/A
__________
(1)The daily weighted average outstanding balance for the year ended December 31, 2020 and 2019 was $11,464 million and $10,524 million, respectively, for PFI excluding the Closed Block division, and $3,290 million and $4,152 million, respectively, for the Closed Block division.
(2)Includes utilization of external funding facilities for PGIM’s commercial mortgage origination business.
(3)Excludes securities that may be returned to the Company overnight. “N/A” reflects that all outstanding balances may be returned to the Company overnight.
 
As of December 31, 2020, our domestic insurance entities had assets eligible for the asset-based or secured financing programs of $132.0 billion, of which $14.1 billion were on loan. Taking into account market conditions and outstanding loan balances as of December 31, 2020, we believe approximately $16.1 billion of the remaining eligible assets are readily lendable, including approximately $11.1 billion relating to PFI excluding the Closed Block division, of which $2.9 billion relates to certain separate accounts and may only be used for financing activities related to those accounts, and the remaining $5.0 billion relating to the Closed Block division.
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Financing Activities
 
As of December 31, 2020, total short-term and long-term debt of the Company on a consolidated basis was $20.6 billion, an increase of $0.1 billion from December 31, 2019. The following table sets forth total consolidated borrowings of the Company as of the dates indicated. We may, from time to time, seek to redeem or repurchase our outstanding debt securities through open market purchases, individually negotiated transactions or otherwise. Any such actions will depend on prevailing market conditions, our liquidity position and other factors.
 December 31, 2020December 31, 2019
 Prudential
Financial
Subsidiaries		ConsolidatedPrudential
Financial
Subsidiaries