October 16, 2018

Notice and Explanation of the Basis for the 

Financial Stability Oversight Council’s Rescission of Its Determination 

Regarding Prudential Financial, Inc. (Prudential)

TABLE OF CONTENTS

1. Overview ................................................................................................................................. 2

2. Introduction ............................................................................................................................. 2

2.1 Annual Reevaluation Process........................................................................................... 2

2.2 Summary of Council Basis............................................................................................... 3

2.3 Summary of Annual Reevaluation Conclusion................................................................ 5

2.4 Summary of Prudential’s Submissions to the Council..................................................... 8

3. Legal Framework for Annual Reevaluations of Determinations............................................. 9

3.1 Scope of Reevaluation...................................................................................................... 9

3.2 Prudential’s Status as a Nonbank Financial Company..................................................... 9

4. Overview of Prudential.......................................................................................................... 10

5. Transmission Channel Analysis............................................................................................ 14

5.1 Overview........................................................................................................................ 14

5.2 Exposure Transmission Channel.................................................................................... 14

5.3 Asset Liquidation Transmission Channel ...................................................................... 30

5.4 Critical Function or Service Transmission Channel ...................................................... 50

6. Complexity and Resolvability ............................................................................................... 54

7. Existing Regulatory Scrutiny................................................................................................. 56

7.1 Domestic Regulatory Developments.............................................................................. 56

7.2 Foreign Regulatory Developments................................................................................. 60

7.3 Regulator Consultations................................................................................................. 61

8. Conclusion............................................................................................................................. 61

Appendix A: Consolidated Balance Sheet.................................................................................... 62

Appendix B: Prudential’s U.S. General Account assets............................................................... 63

Appendix C: Fire Sale Model Detail ............................................................................................ 64

Note: Redactions of confidential information submitted to the Council by 

Prudential Financial, Inc. or its regulators are indicated by “[•]”.
2

1. OVERVIEW

Section 113(d) of the Dodd-Frank Act requires the Financial Stability Oversight Council 

(Council) not less frequently than annually to reevaluate its determination that material financial 

distress at Prudential could pose a threat to U.S. financial stability and that Prudential shall be 

subject to supervision by the Board of Governors of the Federal Reserve System (Board of 

Governors) and enhanced prudential standards. In conducting its analysis of Prudential, the 

Council relied on the information and materials cited herein, including written materials 

submitted by Prudential, a meeting between Prudential and staff on the Nonbank Financial 

Company Designations Committee (Nonbank Designations Committee), and consultations with 

the New Jersey Department of Banking and Insurance (NJDOBI), the Connecticut Insurance 

Department (CID), the Arizona Department of Insurance, the Federal Reserve Bank of Boston, 

the Board of Governors, and the Federal Deposit Insurance Corporation (FDIC). For the reasons 

described herein, the Council has rescinded its final determination that material financial distress 

at Prudential could pose a threat to U.S. financial stability and that Prudential shall be supervised 

by the Board of Governors and be subject to enhanced prudential standards.

2. INTRODUCTION

2.1 Annual Reevaluation Process

Pursuant to section 113 of the Dodd-Frank Act, on September 19, 2013, the Council made a

final determination that material financial distress at Prudential could pose a threat to U.S. 

financial stability and that Prudential shall be subject to supervision by the Board of Governors 

and enhanced prudential standards. The Council also determined that Prudential was 

predominantly engaged in financial activities and therefore eligible for a final determination by 

the Council.1 The Council is required to review a final determination not less frequently than 

annually and rescind the determination if the Council, by a vote of not fewer than two-thirds of 

the voting members then serving, including an affirmative vote by the Chairperson of the 

Council, determines that the nonbank financial company no longer meets the statutory 

standards for a determination.2

This reevaluation was conducted in accordance with the Dodd-Frank Act, the Council’s rule 

and interpretive guidance regarding nonbank financial company determinations (Rule and 

 

1 The Council is authorized to determine that a “nonbank financial company” will be subject to supervision by the 

Board of Governors and enhanced prudential standards if either of the two statutory standards established in section 

113 of the Dodd-Frank Act is satisfied. A “nonbank financial company” includes a company that is incorporated or 

organized under the laws of the United States or any state and that is predominantly engaged in financial activities. 

12 U.S.C. § 5311(a)(4)(B). A company is “predominantly engaged in financial activities” if at least 85 percent of 

the company’s and its subsidiaries’ annual gross revenues are derived from, or at least 85 percent of the company’s 

and its subsidiaries’ consolidated assets are related to, “activities that are financial in nature” as defined in section 

4(k) of the Bank Holding Company Act of 1956, as amended (Bank Holding Company Act). See Dodd-Frank Act 

section 102(a)(6), 12 U.S.C. § 5311(a)(6); see also 12 C.F.R. part 242. 

2 Dodd-Frank Act section 113(d), 12 U.S.C. § 5323(d).
3

Interpretive Guidance),3and the Council’s Supplemental Procedures Relating to Nonbank 

Financial Company Determinations (Supplemental Procedures).4

On May 26, 2016, the Council sent a letter to Prudential informing the company that the Council 

was conducting its annual reevaluation of the company. Prudential was notified that it could 

request to meet with staff on the Nonbank Designations Committee to discuss the scope and 

process for the review and to present information regarding any change that may be relevant to 

the threat the company could pose to U.S. financial stability. Prudential was also invited to 

submit any written materials to the Council to contest the determination by July 11, 2016; at 

Prudential’s request this deadline was extended to August 26, 2016. On July 19, 2016, staff on 

the Nonbank Designations Committee met with Prudential, at Prudential’s request, to discuss the 

annual reevaluation. Prudential made a submission to the Council with respect to the Council’s 

annual reevaluation on August 26, 2016 (2016 Prudential Submission), in which Prudential 

notified the Council that it was contesting the Council’s determination. In addition, on August 

26, 2016, [•]. 

On November 17, 2016, Prudential sent a letter to the Council requesting that the Council either 

wait until after the U.S. Court of Appeals for the District of Columbia Circuit issued a ruling in 

MetLife, Inc. v. Financial Stability Oversight Council5 before making a determination with 

respect to the Prudential reevaluation or, in the alternative, toll the period in which Prudential 

could challenge the Council’s determination in its annual reevaluation of Prudential in court until 

30 days after the circuit court’s ruling. 

On November 10, 2017, Prudential sent a letter to the Council requesting that the Council 

resume its reevaluation of Prudential. On January 22, 2018, the Office of Financial Research

(OFR), on behalf of the Council, sent a letter to Prudential requesting certain additional 

nonpublic information from the company that would assist in the Council’s reevaluation 

analysis. On June 5 and June 27, 2018, the Council sent additional information requests to the 

company. Between March 8 and July 16, 2018, Prudential submitted its responses to the 

Council’s requests. Additional letters were submitted to the Council by [•]. The Arizona 

Department of Insurance submitted a letter to the Council on May 31, 2018. On July 16, 2018, 

Prudential provided an additional submission in which the company requested that the Council 

rescind its determination (2018 Prudential Submission). 

2.2 Summary of Council Basis

In making a final determination regarding Prudential in 2013, the Council evaluated the extent to 

which material financial distress at Prudential could be transmitted to other financial firms and 

markets and thereby pose a threat to U.S. financial stability through the following three 

transmission channels: (1) the exposures of creditors, counterparties, investors, and other market 

participants to Prudential; (2) the liquidation of assets by Prudential, which could trigger a fall in 

 

3 Council, Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies, 12 C.F.R. 

part 1310.

4 Council, Supplemental Procedures (Feb. 4, 2015), available at 

https://www.treasury.gov/initiatives/fsoc/designations/Documents/Supplemental%20Procedures%20Related%20to

%20Nonbank%20Financial%20Company%20Determinations%20-%20February%202015.pdf.

5 177 F.Supp.3d 219 (D.D.C. Mar. 30, 2016).
4

asset prices and thereby could significantly disrupt trading or funding in key markets or cause 

significant losses or funding problems for other firms with similar holdings; and (3) the inability 

or unwillingness of Prudential to provide a critical function or service relied upon by market 

participants and for which there are no ready substitutes. The Council considered each of the 

statutory factors set forth in section 113 of the Dodd-Frank Act.

As explained in the Notice of Final Determination and Statement of the Basis for the Financial 

Stability Oversight Council’s Final Determination Regarding Prudential Financial, Inc. issued 

September 19, 2013 (Council Basis),6the Council determined that the threat to U.S. financial 

stability posed by Prudential’s material financial distress arose primarily from the exposure and 

asset liquidation transmission channels, and that the critical function or service transmission 

channel could exacerbate the extent to which the negative effects of the company’s material 

financial distress could be transmitted to the financial system and the broader economy. The 

Council Basis also stated that Prudential’s complexity and the potential difficulty to resolve 

Prudential could exacerbate the risks posed by the company’s material financial distress across 

all three transmission channels.7 The Council Basis contains a detailed explanation of the 

Council’s analysis and conclusions in making a final determination regarding Prudential. This 

memorandum summarizes certain key considerations described in the Council Basis and is not 

intended to summarize all of the relevant factors, analyses, or conclusions addressed in the 

Council Basis.

2.2.1 Exposure Transmission Channel

The Council analyzed the exposures of large corporate and financial entities to Prudential through 

Prudential’s retirement and pension products, bank-, corporate-, and trust-owned life insurance

(BOLI, COLI and TOLI, respectively), and other group insurance products. In addition, the 

Council assessed exposures to Prudential through the capital markets, including exposures of 

derivatives counterparties, creditors, debt and equity investors, and securities lending and 

repurchase agreement counterparties.8 

The Council found that, although counterparties’ direct exposures to Prudential may be small 

relative to their capital, the aggregate exposures across multiple markets and financial products were 

significant enough that Prudential’s material financial distress could aggravate losses to large, 

leveraged financial firms and contribute to material impairment in the functioning of key financial 

markets or the provision of financial services by Prudential’s counterparties. The Council therefore 

determined that the negative effects of Prudential’s material financial distress could be transmitted 

to other financial firms and markets through the exposure channel, which could cause an 

impairment of financial intermediation or financial market functioning sufficiently severe to 

impose significant damage on the broader economy.

9

 

6 For a summary of the Council Basis, see

https://www.treasury.gov/initiatives/fsoc/designations/Documents/Prudential%20Financial%20Inc.pdf.

7 Council Basis, p. 8.

8 Council Basis, p. 32-75.

9 Council Basis, p. 34.
5

2.2.2 Asset Liquidation Transmission Channel

In evaluating the potential threat that material financial distress at Prudential could pose to U.S. 

financial stability through the asset liquidation transmission channel, the Council considered the 

extent to which Prudential held financial assets that, if liquidated quickly, could significantly 

disrupt financial markets or the broader economy. The Council determined that if Prudential 

were to experience material financial distress, the company could experience increased 

redemption and withdrawal requests with regard to its life insurance and annuity products, which

could in turn result in a forced liquidation of a significant amount of assets at fire sale prices in 

order to satisfy the company’s obligations.10 The Council identified other potential triggers of 

asset liquidation, including collateral calls on derivatives and a refusal to renew contracts in 

securities lending and repurchase borrowings. The Council concluded that such a forced 

liquidation of assets could cause significant disruptions to key markets, including corporate debt 

and asset-backed securities markets, particularly during a period of overall stress in the financial 

services industry and in a weak macroeconomic environment.11 

2.2.3 Critical Function or Service Transmission Channel

In evaluating Prudential, the Council determined that Prudential was a leader in several of its key 

markets and products, including life insurance, annuity, retirement, asset management, and 

commercial mortgage servicing.12 The Council determined that, while certain factors could 

aggravate the transmission of stress through this transmission channel, Prudential’s share in these 

generally fragmented and competitive markets did not appear large enough to cause a significant 

disruption in the provision of services if the company were to experience material financial 

distress and were unable or unwilling to provide these services.13

2.2.4 Complexity and Resolvability 

The Council also evaluated Prudential’s legal, funding, and operating structure; cross-border 

operations; intercompany arrangements; and legal resolution framework.14 The Council 

determined that Prudential’s complexity and the potential difficulty to resolve the company could 

aggravate the risk that the company’s material financial distress could materially impair financial 

intermediation and financial market functioning.15

2.3 Summary of Annual Reevaluation Conclusion

Prudential is the largest life insurance organization in the United States, and its material financial 

distress could pose challenges to market participants, counterparties, and regulators. These 

challenges are especially important considering Prudential’s high correlation with equity 

markets, which suggests that distress at Prudential could occur at the same time as weakness in 

financial markets. Certain aspects of Prudential’s business and activities have not changed 

 

10 Council Basis, p. 75-110.

11 Council Basis, p. 76-77.

12 Council Basis, pp. 110-115.

13 Council Basis, pp. 110-111.

14 Council Basis, pp. 123-134.

15 Council Basis, pp. 134.
6

materially since the Council’s final determination regarding the company in 2013. However, the 

Council has identified factors regarding Prudential that materially affect the Council’s 

conclusions with respect to the extent to which Prudential’s material financial distress could pose 

a threat to U.S. financial stability. Following are the Council’s key conclusions regarding the 

potential for material financial distress at Prudential to pose a threat to U.S. financial stability 

through the exposure, asset liquidation, and critical function or service transmission channels.

With respect to the exposure transmission channel:

 Prudential’s aggregate capital markets exposures do not appear to have changed 

significantly. Prudential’s outstanding long-term debt and its advances from Federal 

Home Loan Banks (FHLBs) have decreased, and its repurchase agreements and securities 

lending activities have increased. Prudential’s gross notional amount of derivatives and 

derivatives liabilities have increased, [•]. The notional amount of credit-default swaps

(CDS) for which Prudential is the reference entity has decreased. 

 The aggregate exposures of global systemically important banks (G-SIBs) and other large 

bank holding companies to Prudential have [•], and most individual exposures [•]. 

 Exposures related to Prudential’s institutional insurance products are [•]. While 

Prudential’s material financial distress could impose losses on pension plan sponsors, 

retirement plan participants, and pension plan participants, the products do not appear to 

contribute significantly to the threat that the company’s material financial distress could 

pose to U.S. financial stability.

With respect to the asset liquidation transmission channel:

 Prudential has [•] of U.S. general account liabilities that allow policyholders to withdraw 

cash from the company upon demand.16 Under the terms of the policies, approximately 

[•] of these liabilities can be immediately surrendered for [•] in cash upon demand by 

policyholders, compared to [•] that could be surrendered for [•] in cash in 2012. The 

remaining [•] of U.S. general account liabilities can be surrendered for [•], but [•] of these 

liabilities are not payable within 90 days, and therefore do not contribute significantly to 

Prudential’s asset liquidation risk.

17

 

 Counterparties’ capital markets transactions with Prudential—particularly Prudential’s 

short-term debt, repurchase agreements, securities lending, and derivatives transactions—

could increase the volume of Prudential’s forced asset sales. Prudential has total 

liabilities of $20 billion arising from these activities. 

 

16 A life insurance company’s invested assets are held in two types of accounts: the general account and one or more 

separate accounts. An insurer’s general account assets are obligated to pay claims arising from its insurance and 

annuity policies, debt, derivatives, and other liabilities. Separate accounts consist of funds held by a life insurance 

company that are maintained separately from the insurer’s general assets. Assets in the general account support 

contractual obligations providing guaranteed benefits and are subject to claims by the insurer’s creditors, with 

policyholders given prioritization over unsecured creditors, in the event the insurer becomes insolvent. By contrast, 

for separate accounts, the investment risk is passed through to the contract holder; the income, gains, or losses 

(realized or unrealized) from assets allocated to the separate account are credited to or charged against the separate 

account. Therefore, holders of non-guaranteed separate account liabilities are not generally directly exposed to the 

insurer’s credit risk, because they are insulated from claims of creditors of the insurance company. 

17 Prudential Response to OFR Request B.1 (General Account) (Jan. 22, 2018), p. 17. 
7

 Prudential also has $307 billion of separate account liabilities from individual variable 

annuities, retirement, and other products as of year-end 2017, compared to $253 billion at 

year-end 2012.

 With respect to Prudential’s assets that could be liquidated in the event of increased 

liquidity needs at Prudential, the company’s U.S. general account investment portfolio 

has grown from [•] to [•], including an increase in highly liquid assets from [•] to [•]. 

 Although there is significant uncertainty in estimating Prudential’s liquidity needs in the 

event of its material financial distress, the analysis presented below, which includes

examples that are severe compared to historical evidence of retail and institutional 

investor and policyholder behavior, indicates that there is not a significant risk that a 

forced asset liquidation by Prudential would disrupt trading in key markets or cause 

significant losses or funding problems for other firms with similar holdings. 

 A fire-sale impact analysis suggests that relative to other large financial institutions, the 

market impact of a downward shock to the net worth of Prudential has decreased since 

2012, largely due to a decrease in Prudential’s leverage ratio and increased holding of 

highly liquid assets. As of December 31, 2017, Prudential ranked 11th among large 

financial institutions for an asset shock and 16th for an equity shock. 

With respect to the critical function or service transmission channel:

 Prudential’s market share in its key businesses has been stable since the Council’s final 

determination regarding Prudential. 

 The company is a leading provider of insurance and retirement products, but these are 

highly competitive markets. Prudential has larger market shares in pension risk transfers 

and stable value products, but the provision of these services by Prudential is not critical 

to the functioning of the U.S. economy or financial system.

Prudential’s legal structure remains complex, with hundreds of legal entities. Prudential and its 

subsidiaries continue to exhibit a significant amount of operational and financial 

interconnectedness and inter-dependencies. These complexities continue to present obstacles to 

the resolvability of the firm. Prudential has identified certain actions it has taken, as well as 

certain changes in its regulatory framework that may impact its complexity and resolvability. 

These include internal organizational changes; the creation and dissolution of captive reinsurance 

companies; the restructuring of its closed block business; changes in the firm’s capital and 

liquidity management; and the restructuring of its internal debt. 

A number of changes in Prudential’s regulation by the NJDOBI have occurred since 2012. The 

NJDOBI is the group-wide supervisor of Prudential under New Jersey law; it has implemented 

several new authorities, including powers to conduct and coordinate assessments of enterprise 

risk, examinations of Prudential and affiliates with respect to risks to Prudential’s insurance 

company subsidiaries, and powers to impose measures designed to assure that Prudential can 

recognize and mitigate material risks to the insurers in the group. Changes in New Jersey law 

also authorize the NJDOBI to conduct other group-wide supervisory activities as NJDOBI

considers appropriate. 
8

For the reasons described herein, the Council has rescinded its final determination that material 

financial distress at Prudential could pose a threat to U.S. financial stability and that Prudential 

shall be supervised by the Board of Governors and be subject to enhanced prudential standards.

2.4 Summary of Prudential’s Submissions to the Council

In Prudential’s submissions to the Council during this reevaluation, the company argues that

internal changes in Prudential’s operations and business and external changes affecting 

Prudential, including regulatory reforms, demonstrate that material financial distress at 

Prudential would not significantly harm the U.S. economy and that the Council’s continued 

determination regarding Prudential is no longer necessary or appropriate. Prudential stated that it 

had made a number of internal changes since the Council’s determination, including stating that 

it:

 enhanced its capital and liquidity management by implementing and refining policies and 

internal procedures;

 decreased its leverage;

 decreased its use of senior debt and increased its use of junior subordinated hybrid 

securities and other financial instruments that provide loss absorbency in the event of 

material financial distress;

 simplified its corporate structure, and reduced its capital needs and the exposure of 

certain financial institutions to Prudential, by restructuring its closed block business;

 de-risked its annuity business and products, including by mitigating risks in existing 

products, developing new product designs, eliminating captive reinsurance arrangements 

for managing living benefit guarantee risk, increasing transparency and simplifying 

corporate structures in its annuity business, and using more external reinsurance; and

 refined and optimized its pension and retirement-related risk transfer business.

Prudential’s submissions also highlight regulatory developments since the Council’s 

determination that, among other things, include: 

 The implementation of new provisions of New Jersey law that authorize NJDOBI to act 

as group-wide supervisor;

 Holding company act amendments in Connecticut and Arizona;

 Supervisory colleges and crisis management groups; and

 Initiatives of the National Association of Insurance Commissioners (NAIC) to strengthen

the U.S. state-based system of insurance regulation. 

Prudential also argues that the Council’s previous analyses regarding the scale of potential 

insurance policyholder withdrawals and the potential for a resulting fire sale of assets were 

flawed. In addition, Prudential stated that the district court’s opinion in MetLife, Inc. v. 

Financial Stability Oversight Council supported the company’s argument that the determination 

regarding Prudential should be rescinded. [•]
9

3. LEGAL FRAMEWORK FOR ANNUAL REEVALUATIONS OF 

DETERMINATIONS

3.1 Scope of Reevaluation

Section 113(d) of the Dodd-Frank Act provides that the Council shall, not less frequently than 

annually, reevaluate each final determination regarding a nonbank financial company and rescind 

that determination if the Council determines that the company no longer meets the statutory 

standards for a determination.18 The Council made its final determination with respect to 

Prudential under the first standard for a determination under section 113(a) of the Dodd-Frank 

Act—that material financial distress at Prudential could pose a threat to U.S. financial stability.19 

Pursuant to the second standard under section 113(a), the Council may determine that the nature, 

scope, size, scale, concentration, interconnectedness, or mix of the activities of a nonbank 

financial company could pose a threat to the financial stability of the United States. The Council 

may subject a nonbank financial company to Board of Governors supervision and prudential 

standards if either the first or second determination standard is met.20 

Consistent with the statutory text, the Council described its process for annual reevaluations of 

determinations when it adopted the Rule and Interpretive Guidance implementing its authority 

under section 113. The Council has stated that it expects that its reevaluations “will focus on any 

material changes with respect to the nonbank financial company or the markets in which it 

operates since the Council’s previous review.”21 In addition, the Interpretive Guidance states 

that for purposes of considering whether material financial distress at a nonbank financial 

company could pose a threat to U.S. financial stability, the Council intends to assess the impact 

of the company’s material financial distress “in the context of a period of overall stress in the 

financial services industry and in a weak macroeconomic environment.” This analysis 

summarizes certain key findings from the Council Basis and focuses both on material changes 

since the Council’s prior annual reevaluation and on the cumulative effect of any changes since 

the Council’s final determination regarding Prudential. 

Certain developments in Prudential’s business are described herein to provide an understanding 

of the current state of the company and to respond to the items raised in Prudential’s

submissions. In this annual reevaluation, the Council has relied on the information and analysis 

set forth or cited herein.

3.2 Prudential’s Status as a Nonbank Financial Company

The Council’s determination that Prudential was a “U.S. nonbank financial company” was made 

on the basis of the company’s assets and revenues, as explained in the Council Basis.22 Although 

only one of the two tests for being “predominantly engaged in financial activities” is required to 

be met for a U.S. company to be a “U.S. nonbank financial company,” the Council determined 

 

18 Dodd-Frank Act section 113(d), 12 U.S.C. § 5323(d); see also 12 C.F.R. § 1310.23.

19 Council Basis, p. 11.

20 Dodd-Frank Act section 113(a), 12 U.S.C. § 5323(a).

21 77 Fed. Reg. 21650 (April 11, 2012).

22 Council Basis, pp. 22-28.
10

that both tests had been met. The Council specifically found that: (1) more than 85 percent of 

the revenues of Prudential and its subsidiaries are derived from activities that are financial in 

nature, and (2) more than 85 percent of the assets of Prudential and its subsidiaries are related to 

activities that are financial in nature.23 In submissions related to the Council’s final 

determination, Prudential stated that it [•].

24

In light of the developments at Prudential since the Council’s final determination, no changes 

have been identified that would affect the Council’s determination that Prudential is 

predominantly engaged in financial activities under both the revenue test and asset test cited 

above, based independently on (1) more than 85 percent of the revenues of Prudential and its 

subsidiaries being derived from activities that are financial in nature under section 4(k)(4) of the 

Bank Holding Company Act, including subparagraphs (B) and (I), and (2) more than 85 percent 

of the assets of Prudential and its subsidiaries being related to25 activities that are financial in 

nature under section 4(k)(4) of the Bank Holding Company Act, including subparagraphs (B) 

and (I).26 This conclusion is based on an evaluation of Prudential’s balance sheet and income 

statement, which reveal that nearly all of the company’s U.S. and foreign revenues are derived 

from its insurance activities and that nearly all of its assets are related to its insurance activities.

4. OVERVIEW OF PRUDENTIAL 

Prudential was founded as the Prudential Insurance Company of America, a New Jersey mutual 

life insurance company, in 1875. In 2001, Prudential Insurance Company of America, the top 

holding company insurer of the insurance group, demutualized, and the group reorganized under 

a new holding company, Prudential Financial, Inc., a publicly traded corporation. Prudential is

headquartered in Newark, New Jersey. One of the largest financial services companies in the 

United States, it is also internationally active, with operations in more than 40 countries, 

covering the Americas, Asia-Pacific, Europe, the Middle East, and Africa.

27

 Through its 

subsidiaries, Prudential provides a wide array of financial services, including life insurance, 

annuities, retirement-related services, mutual funds, and asset management. As of December 31, 

2017, Prudential had roughly $3.7 trillion of gross life insurance in-force,28 and approximately 

$1.4 trillion in assets under management, including general account assets, separate account 

assets, and off-balance-sheet assets managed for third-party retail and institutional investors.29 

Much of its revenues are generated from, and a large portion of its assets are located, outside the 

 

23 Id. [•]

24 Prudential, Memorandum Concerning the Notice of Proposed Determination (July 13, 2013), p. 15.

25 The “related to” assets-based test, set forth in section 102(a)(6)(B) of the Dodd-Frank Act, 12 U.S.C. §

5311(a)(6)(B), is broader in scope than the “derived from” revenues-based test, set forth in section 102(a)(6)(A) of

the Dodd-Frank Act, 12 U.S.C. § 5311(a)(6)(A).

26 12 U.S.C. § 1843(k).

27 “Prudential Fact Sheet,” http://news.prudential.com/presskits/prudential-financial-fact-sheet.htm (Feb. 16, 2018); 

“Global Presence,” https://www.prudential.com/links/about/worldwide-locations/. 

28 “Prudential Fact Sheet,” http://news.prudential.com/presskits/prudential-financial-fact-sheet.htm (Feb. 16, 2018).

29 Prudential Annual Report on Form 10-K for the year ended December 31, 2017, p. 3. 
11

United States—particularly in Japan.30 As of January 31, 2018, Prudential’s market 

capitalization was $50 billion.31 

4.1.1 Balance Sheet Overview

As of year-end 2017, Prudential had total assets of $832 billion ($211 billion of which were 

international), a 17 percent increase from year-end 2012.32 Since year-end 2012, Prudential’s 

total investments increased 16 percent, from $406 billion to $470 billion, and its separate account 

assets increased 21 percent, from $253 billion to $307 billion.33 During that period, Prudential’s 

use of leverage—measured by its ratio of either debt to equity or total assets to total equity—has 

decreased, primarily due to a decrease in its outstanding long-term debt and an increase in 

equity. While total liabilities increased 16 percent, from $670 billion to $778 billion, long-term 

debt decreased 31 percent, from $25 billion to $17 billion.34 Total equity increased 38 percent,

from $39 billion to $54 billion.35 (See Appendix A for Prudential’s consolidated balance sheet).

Table 1: Select Financial Information

12/31/2012 06/30/2015 12/31/2017

Total Assets 709.3 762.7 831.9

Total Debt 28.8 31.3 20.1

Total Revenue 84.8 57.4 59.7

Debt-to-Equity Ratio 0.7x 0.7x 0.4x

Leverage Ratio 11.6x 11.0x 9.7x

Short-Term Debt Ratio 2.7% 3.3% 2.7%

Source: Prudential Annual Report on Form 10-K for the years ended December 31, 2012, December 31, 2014, and 

December 31, 2017; Prudential Quarterly Report on Form 10-Q for the quarters ending June 30, 2014, and June 

30, 2015. 

Note: Total debt excludes repurchase agreements and securities lending. The leverage ratio is calculated as total 

assets (excluding separate account assets) divided by total equity. The short-term debt ratio is calculated as shortterm debt (comprising the current portion of long-term debt, commercial paper, securities lending payable, and 

repurchase agreements) divided by total assets (excluding separate account assets, which increased from $253 

billion in 2012 to $307 billion in 2017).

4.1.2 Comparison to Peers 

Table 2 compares Prudential to the largest bank holding companies and other large insurers,

sorted by total assets. Prudential’s ranking on this list has risen one spot since 2012, due in part

 

30 Prudential Annual Report on Form 10-K for the year ended December 31, 2017, p. 12. 

31 Prudential had 422 million shares outstanding and a market price of $118.82 per share. Prudential Annual Report 

on Form 10-K for the year ended December 31, 2017, p. 1.

32 Prudential Annual Reports on Form 10-K for the years ended December 31, 2012, p. 206, and December 31, 

2017, p. 152.

33 Prudential Annual Reports on Form 10-K for the years ended December 31, 2012, p. 206, and December 31, 

2017, p. 152.

34 Prudential Annual Reports on Form 10-K for the years ended December 31, 2012, p. 206, and December 31, 

2017, p. 152.

35 Prudential Annual Reports on Form 10-K for the years ended December 31, 2012, p. 206, and December 31, 

2017, p. 152.

13

contract accounts), as of 2017 the contract account values totaled [•].

36

 As of 2013, these 

volumes were [•].

37

 

Since 2011, the company’s PRT has expanded to cover over 730,000 retirees and over 300 

pension plans in the U.S. and UK, representing 11 companies.38 Prudential’s notable 

transactions in the U.S. PRT market since 2012 include Motorola Solutions ($3.1 billion),

39

Bristol-Myers Squibb ($1.4 billion),

40 Kimberly-Clark ($1.3 billion),41 WestRock ($2.5 

billion),

42 United Technologies ($0.8 billion),43 The Hartford ($1.6 billion),44 International Paper 

($1.3 billion),

45 and Raytheon ($0.9 billion).46

Prudential ranks [•] in annual U.S. PRT sales, with a market share of [•] percent as of September 

30, 2017, [•].

47

 

36 Prudential Response to OFR Request A.2 (Jan. 22, 2018), p. 4.

37 Prudential Response to OFR Request A.2 (Jan. 22, 2018), p. 4. 

38 Prudential Financial, Inc. Debt Investors Update (March 2017), p. 17. 

39 Bloomberg, “Motorola Solutions Cuts Pension Benefit Burden by $4.2 Billion,” 

https://www.bloomberg.com/news/articles/2014-09-25/motorola-solutions-moves-4-2-billion-in-pensions-toprudential, (Sept. 25, 2014).

40 WSJ, “Prudential signs pension transfer agreement with Bristol Myers Squibb,” 

https://www.wsj.com/articles/bristol-myers-squibb-to-transfer-1-4-billion-in-u-s-pension-obligations-1412113382 

(Sept. 30, 2014).

41 Prudential, “Kimberly-Clark Corporation to Purchase Pension Annuity Contracts from Prudential, MassMutual,” 

http://pensionrisk.prudential.com/insights/kimberly-clark-transaction.php (Feb. 23, 2015).

42 Prudential, “WestRock signs $2.5 billion pension risk transfer agreement with Prudential,” 

http://pensionrisk.prudential.com/insights/westrock-news.php (Sept. 9, 2016).

43 Reuters, “United Tech to cut pension liabilities by $1.77 billion,” https://www reuters.com/article/us-utcpensions-idUSKCN1262OI (Oct. 6, 2016).

44 Prudential, “The Hartford signs agreement with Prudential to help secure $1.6 billion in pension obligations,” 

http://pensionrisk.prudential.com/insights/the-hartford-news.php (June 30, 2017).

45 Reuters, “International Paper unloads $1.3 billion in pension liabilities” https://www reuters.com/article/us-intlpaper-pensions-prudential-finl/international-paper-unloads-1-3-billion-in-pension-liabilities-idUSKCN1C71CS 

(Oct. 2, 2017).

46 Reuters, “Prudential Financial to take over $923 mln in pension benefits from Raytheon,” 

https://www.reuters.com/article/prudential-finl-raytheon-pensions/prudential-financial-to-take-over-923-mln-inpension-benefits-from-raytheon-idUSFWN1UM0YA (July 26, 2018). 

47 Prudential Response to OFR Request A.2 (Jan. 22, 2018), p. 3.
14

5. TRANSMISSION CHANNEL ANALYSIS

5.1 Overview

As described in the Interpretive Guidance, the Council has identified three transmission channels 

as most likely to facilitate the transmission of the negative effects of a nonbank financial

company’s material financial distress or activities to other financial firms and markets:48

 Exposure. A nonbank financial company’s creditors, counterparties, investors, or other 

market participants have exposure to the nonbank financial company that is significant 

enough to materially impair those creditors, counterparties, investors, or other market 

participants and thereby pose a threat to U.S. financial stability.

 Asset liquidation. A nonbank financial company holds assets that, if liquidated quickly, 

would cause a fall in asset prices and thereby significantly disrupt trading or funding in 

key markets or cause significant losses or funding problems for other firms with similar 

holdings.

 Critical function or service. A nonbank financial company is no longer able or willing to 

provide a critical function or service that is relied upon by market participants and for 

which there are no ready substitutes.

In its final determination regarding Prudential in 2013, the Council concluded that the threat to 

U.S. financial stability posed by Prudential’s material financial distress arose primarily from the 

exposure and asset liquidation transmission channels, and that under certain circumstances, the 

critical function or service transmission channel might exacerbate the extent to which the 

company’s material financial distress could be transmitted to the broader financial system and 

economy.49 The Council further concluded that Prudential’s complexity and potential difficulty 

to resolve aggravate the risk that the company’s material financial distress could materially 

impair financial intermediation and financial market functioning.50

Based on its analysis, the Council has identified significant developments and conducted 

additional analyses that materially affect the conclusions set forth in the Council Basis. 

5.2 Exposure Transmission Channel

As noted above, under the exposure transmission channel, the Council considers the exposures 

that a nonbank financial company’s creditors, counterparties, investors, or other market 

participants have to the nonbank financial company.51

At the time of the final determination, the Council determined that large corporate and financial 

entities had exposures to Prudential through Prudential’s retirement and pension products, BOLI, 

COLI and TOLI, and other group insurance products. With respect to retail policyholders’ 

exposures to Prudential, the Council focused on the potential for policyholders to withdraw from 

Prudential, which could, in turn force Prudential to liquidate assets to satisfy its obligations. As 

 

48 See Rule and Interpretive Guidance. 

49 Council Basis, p. 8. 

50 Council Basis, p. 8. 

51 See Rule and Interpretive Guidance. 
15

a result, much of the Council’s analysis regarding the exposures of retail policyholders related 

more to the potential transmission of risk through the asset liquidation transmission channel. 

Those potential asset liquidation risks are addressed in section 5.3 below. The Council also 

focused on the potential for state guaranty associations (GAs) to mitigate or exacerbate the risks 

arising from policyholders’ exposures; the GAs are discussed below in section 5.2.3.

The Council Basis also analyzed the extent to which the financial system was exposed to 

Prudential through the capital markets, including as derivatives counterparties, creditors, debt 

and equity investors, and securities lending and repurchase agreement counterparties. The 

Council determined that individual exposures of firms to Prudential may be small relative to the 

firms’ capital, but that the aggregate exposures were significant enough that Prudential’s material 

financial distress could aggravate losses to financial firms and contribute to material impairment 

in the functioning of key financial markets or the provision of financial services by Prudential’s 

counterparties, and that the resulting contraction in the availability of credit could damage the 

broader economy. 

Based on the analysis below, aggregate capital markets exposures to Prudential appear little 

changed, but the exposures of G-SIBs and other large bank holding companies have decreased. 

Exposures arising from Prudential’s insurance products do not appear to contribute significantly

to the threat that the company’s material financial distress could pose to U.S. financial stability 

through the exposure transmission channel. Key factors include the following:

 With respect to capital markets exposures, Prudential’s outstanding long-term debt and its 

advances from FHLBs have decreased, and repurchase agreements and securities lending 

activities have increased. Prudential’s gross notional amount of derivatives and 

derivatives liabilities have increased [•]. The notional amount of CDS for which 

Prudential is the reference entity has decreased. 

 The aggregate exposures of G-SIBs and other large bank holding companies to Prudential 

have [•], and the exposures of most individual firms [•]. 

 Exposures related to Prudential’s’ institutional insurance products are generally [•] than 

in 2012. While Prudential’s material financial distress could impose losses on pension 

plan sponsors, retirement plan participants and pension plan participants, the products do 

not appear to contribute significantly to the threat that the company’s material financial 

distress could pose to U.S. financial stability.

5.2.1 Exposures Arising from Prudential’s Capital Markets Activities

Direct and indirect exposures of financial market participants to a nonbank financial company 

experiencing material financial distress can impair those market participants or the financial 

markets in which they participate and thereby pose a threat to financial stability. Even if 

individual exposures are relatively small, the direct and indirect exposures can be large enough 

in the aggregate for a firm’s material financial distress to have a destabilizing effect on financial 

markets. At Prudential, exposures arising through the capital markets include the company’s 

outstanding securities, derivatives, repurchase agreements, securities lending activities, lines of 

credit, and commercial paper.
16

Aggregate exposures to Prudential through its capital markets activities do not appear to have

changed significantly since the Council’s original determination, but exposures of G-SIBs and 

other large bank holding companies to Prudential have decreased:

 Long-term debt decreased by $7.6 billion from 2012 to 2017, to $17 billion, while 

repurchase agreements and securities lending increased from $9.8 billion to $13 billion.

 The aggregate gross notional amount of Prudential’s derivatives, which remain primarily 

composed of interest rate, equity, and foreign exchange derivatives, increased from $230 

billion at year-end 2012 to $315 billion; the amount of uncleared derivatives [•].

 The gross notional amount of single-name CDS outstanding for which Prudential is the 

reference entity decreased by 38 percent, from $11 billion to $6.6 billion.

 Total estimated capital markets exposures of G-SIBs and other large bank holding 

companies to Prudential [•], and most individual exposures [•]. No G-SIB or large bank 

holding company had exposure to Prudential that exceeds [•] percent of the 

counterparty’s equity.

Table 3: Summary Capital Markets Exposures ($ Billions)

12/31/2012 06/30/2015 12/31/2017

Long-Term Debt 24.7 28.8 17.2

Derivatives (notional / fair value of liabilities) 230.0 / 5.2 381.9 / 5.8 315.1 / 6.0

Securities Lending Payable 3.9 3.8 4.4

Repurchase Agreements 5.8 7.8 8.4

CDS as a Reference Entity 10.6 8.4 6.6

Short-Term Debt 2.5 3.6 1.4

Sources: Prudential Annual Reports on Form 10-K for the years ended December 31, 2012 and December 31, 2017; 

Prudential Quarterly Report on Form 10-Q for the quarter ending June 30, 2015; DTCC Trade Information 

Warehouse.

Note: Notional and fair value of derivative liabilities are presented on a gross basis and exclude synthetic guaranteed 

investment contracts (GICs) and embedded derivatives. Derivatives liabilities reflects the gross fair value of 

derivatives liabilities, before taking into account netting effects of master netting agreements and collateral posted. 

Short-term debt includes commercial paper outstanding, short-term FHLB advances, and the current portion of longterm debt. 


19

percent of the fair value of the securities sold.

58

 These securities are marked to market daily, and 

margin calls are made to maintain the collateral amounts. Prudential stated that investments 

purchased with the cash received in these transactions are [•].

59

 The credit quality of the 

investments purchased with cash collateral, measured by the weighted average rating of the 

collateral, has [•].

60 In addition, as of December 31, 2017, Prudential [•].61

 

 

Prudential’s counterparties in repurchase and securities lending transactions are a mix of G-SIBs 

and asset managers, and [•]. The largest counterparties in which Prudential is a borrower of cash 

are shown in Table 6. 

Table 6: Top Repurchase Agreement and Securities Lending Counterparties to 

Prudential ($ Millions)

Company Average Collateral Received

[•] [•]

Source: Prudential Response to OFR Request A.13 (Jan. 22, 2018), pp. 5-7. 

Note: Average monthly balances as of 2017; counterparty entities and funds are aggregated by parent entity 

or fund sponsor. 

Derivatives 

Prudential’s derivatives activity is another source of capital markets exposure to the company. 

Some of Prudential’s equity and interest rate derivatives activity is a result of its asset-liability 

management strategy to hedge the liability associated with living benefit guarantees in the 

annuities segment, as well as its capital hedge program to hedge its individual annuities business 

from more severe equity market impacts.

62 In addition, Prudential uses foreign exchange

derivatives primarily to hedge earnings volatility associated with its Japanese and Korean 

insurance operations.63 The majority of Prudential’s derivatives counterparties are other large 

financial intermediaries that are interconnected with one another and the financial sector. 

Exposures of these counterparties to Prudential could result in direct losses to those firms in the 

event of Prudential’s material financial distress. 

Prudential’s gross notional amount of derivatives outstanding has increased from $230 billion in 

2012 to $315 billion in 2017, and its derivatives liability increased from $5.2 billion to $6.0 

billion.

64

 Prudential’s largest derivatives counterparties are shown in Table 7. The share of the 

gross notional amount of derivatives outstanding associated with the top 10 counterparties [•]

from [•] percent as of September 30, 2012, to [•] percent as of year-end 2017.65 

 

58 Prudential Annual Report on Form 10-K for the year ended December 31, 2017, p. 168.

59 Prudential Response to OFR Request A.13 (Jan. 22, 2018), p. 2. 

60 Council Basis, p. 94; Prudential Response to OFR Request E.7-E.9 (Oct. 31, 2012), p. 8; Prudential Response to 

OFR Request A.12 (Jan. 22, 2018), p. 2. 

61 Prudential Response to OFR Request A.13 (Jan. 22, 2018), p. 1. 

62 Prudential Annual Report on Form 10-K for the year ended December 31, 2017, p. 132.

63 Prudential Annual Report on Form 10-K for the year ended December 31, 2017, p. 56.

64 Prudential Annual Reports on Form 10-K for the years ended December 31, 2012, p. 337, and December 31, 

2017, p. 276.

65 Prudential Response to OFR Request A.10 (Jan. 22, 2018), p. 3. 
20

Table 7: Top 10 Bilateral Derivatives Counterparties ($ Millions)

Counterparty Gross Notional

Net Fair 

Value Net Exposure

[•] [•] [•] [•]

Total (Top 10 Counterparties) [•] [•] [•]

Prudential Total Outstanding [•] [•] [•]

Source: Prudential Response to OFR Request A.10 (Jan. 22, 2018), p. 3.

Note: Top 10 excludes [•] in gross notional derivatives cleared through [•]. Net exposure is calculated as net fair 

value minus total collateral. A Prudential submission to the Council reported [•] of gross notional derivatives 

outstanding (see Prudential Response to OFR Request A.10), while Prudential’s annual report on Form 10-K for 

the year ended December 31, 2017, p. 276, reported $315 billion of gross notional derivatives outstanding, 

excluding synthetic GICs. 

According to Prudential, its derivatives portfolio consists [•].

66

 As shown in Table 8, most of the 

company’s derivatives portfolio consists of [•]. Prudential’s derivatives portfolio also includes

total return swaps, interest rate options, foreign currency options, foreign currency swaps, and 

equity options. 

Table 8: Prudential’s Derivatives By Gross Notional Amount ($ Millions)

Derivative Type Cleared Uncleared

% of Total 

Gross Notional

Interest Rate [•] [•] [•]

Foreign Exchange [•] [•] [•]

Total Return [•] [•] [•]

Credit [•] [•] [•]

Equity [•] [•] [•]

Treasury Futures [•] [•] [•]

Commodity Futures [•] [•] [•]

Total [•] [•] [•]

Source: Prudential Response to OFR Request A.11 (Jan. 22, 2018), p. 2.

Cleared derivatives represented [•] percent of Prudential’s total notional derivatives outstanding 

at year-end 2017, [•].

67 Prudential clears its interest rate swaps and CDS through futures 

commission merchants, including subsidiaries of [•].

68

 

 

66 Prudential Response to OFR Request A.11 (Jan. 22, 2018), p. 1.

67 Prudential Response to OFR Request A.10 (Jan. 22, 2018), p. 1; Prudential Response to OFR Request A.11 (Jan. 

22, 2018), p. 2.

68 Prudential Response to OFR Request A.11 (Jan. 22, 2018), p. 2. 
21

Prudential also stated that its derivatives positions are collateralized with high-quality, liquid, 

and non-volatile collateral.69 Over [•] percent of the collateral Prudential has posted to 

counterparties is in the form of cash and government securities; however, the other [•] percent is 

corporate bonds, which impose greater risk on the counterparty.

70

CDS as Reference Entity 

Like many financial institutions, Prudential is a reference entity on CDS contracts. For some 

CDS contracts with Prudential as a reference entity, risk is merely being transferred between 

counterparties. However, in cases in which protection buyers do not hold Prudential’s securities,

a new exposure to Prudential is created, so these transactions are relevant to the exposure 

transmission channel analysis even though Prudential is not a party to these CDS contracts. 

Outstanding single-name CDS referencing Prudential has fallen from $11 billion to $6.6 billion 

as of year-end 2017.

71

Arrangements with Federal Home Loan Banks 

FHLB borrowing has become a common source of liquidity for many financial institutions. 

Prudential Retirement Insurance and Annuity Company (PRIAC) is a member of the FHLB of 

Boston, and the Prudential Insurance Company of America (PICA) is a member of the FHLB of 

New York. Membership provides Prudential with access to collateralized advances (classified as 

short-term debt or long-term debt, depending on the maturity date of the obligation). Prudential 

is generally subject to the risk that the FHLB lender will declare all advances due and payable or 

increase the level of haircuts assigned to pledged collateral.

Prudential’s outstanding advances from FHLBs [•].

72

 Prudential’s total volume of eligible 

securities that can be pledged is an indication of the scale of additional FHLB advances the 

company could seek, and therefore of the FHLBs’ potential exposures to Prudential; this amount

has [•].

73

 If Prudential were to take significant advances against eligible collateral and 

subsequently default on its obligations to the FHLBs, the FHLBs would bear the risks associated 

with the pledged securities. 

Capital Markets Exposures of Top Counterparties to Prudential

The exposures of other large financial institutions to a nonbank financial company could serve as 

a mechanism by which its material financial distress could be transmitted to those firms and to 

financial markets more broadly. Table 9 summarizes the exposures of G-SIBs and large bank 

holding companies to Prudential through various types of capital markets transactions. Total 

exposures of G-SIBs and other large bank holding companies to Prudential [•], and most 

 

69 Prudential Response to OFR Request A.10 (Jan. 22, 2018), p. 1.

70 Prudential Response to OFR Request A.10 (Jan. 22, 2018), p. 3.

71 DTCC Trade Information Warehouse.

72 Prudential Response to OFR Request A.14 (Jan. 22, 2018), p. 1.

73 Prudential Response to OFR Request A.14 (Jan. 22, 2018), p. 2; includes securities already pledged for 

outstanding advances.
22

individual exposures [•].

74

 No G-SIB or large bank holding company had exposure to Prudential 

that exceeds [•] percent of the counterparty’s equity.75

Most categories of capital market exposures among these counterparties have [•] since 2012. 

Securities lending and repurchase agreements exposure [•]; debt exposure [•]; commercial paper 

exposure [•]; and credit lines and letters of credit exposure [•].

76

 [•]77

Table 9: Capital Market Exposures of G-SIBs and Other Large Bank Holding Companies to 

Prudential ($ Millions)

Firm

Derivatives

Net Liab. + 

Potential

Exposure

Sec Lend/ 

Repo

Net Liab. + 

Potential

Exposure Debt

Lines/

Letters of 

Credit Total

% of Total 

Counterparty

Equity or 

AUM 

12/31/2017 

% of Total 

Counterparty

Equity or 

AUM 

09/30/2012 

[•] [•] [•] [•] [•] [•] [•] [•]

Sources: Prudential Response to Council’s Notice of Consideration (Feb. 8, 2013), p. 28; Prudential Response to OFR 

Request A.8 (Jan. 22, 2018), pp. 6-7. 

Note: [•]

5.2.2 Exposures to Prudential’s Insurance Products

The impact of Prudential’s material financial distress could include the losses on pension 

investments or institutional insurance products for institutional customers, and the loss of 

insurance protection or retirement savings for individual policyholders. As of December 31, 

2017, Prudential had approximately $412 billion of general account insurance liabilities, 

compared to $358 billion as of December 31, 2012.78 Prudential’s institutional products 

comprise [•] of this amount.79 

Exposures of Institutional Policyholders and Annuity Contract Holders 

Prudential offers various institutional insurance products, including guaranteed interest accounts 

and other stable value products, funding agreements, GICs, synthetic GICs, group annuity and 

life insurance products, and BOLI/COLI/TOLI products. Prudential provides retirement 

products and many of its insurance products to employee benefit retirement plans sponsored by 

various types of institutions, including large corporations, state and local governments, and 

unions. Generally, the retirement plans or the plan participants, not the sponsoring institutions, 

have direct exposures to Prudential. Prudential’s BOLI/COLI/TOLI policies are held directly by 

institutions, and most are separate account products providing the owners with the option to 

 

74 Prudential Response to Council’s Notice of Consideration (Feb. 8, 2013), p. 28; Prudential Response to OFR 

Request A.8 (Jan. 22, 2018), pp. 6-7.

75 Prudential Response to Council’s Notice of Consideration (Feb. 8, 2013), p. 28; Prudential Response to OFR 

Request A.8 (Jan. 22, 2018), pp. 6-7.

76 Prudential Response to Council’s Notice of Consideration (Feb. 8, 2013), p. 28; Prudential Response to OFR 

Request A.8 (Jan. 22, 2018), p. 7.

77 Prudential e-mail, “Re: Information submission” (April 13, 2018). [•]. Prudential Response to OFR Request A.7 

(Oct. 31, 2012), p. 12. 

78 Prudential Annual Reports on Form 10-K for the years ended December 31, 2012, p. 206, and December 31, 

2017, p. 152.

79 Prudential Response to OFR Request A.1 (Jan. 22, 2018), p. 1. 
23

surrender the policies in exchange for the market value of the separate account assets; the 

institutional counterparties are exposed to Prudential’s material financial distress only to the 

extent that the market value of these assets is less than any guarantees provided by Prudential.

Exposures of institutional policyholders arising from Prudential’s general account insurance 

products are generally slightly higher than in 2012. While Prudential’s material financial distress 

could impose losses on pension plan sponsors, retirement plan participants, and pension plan 

participants, financial institutions’ exposures to Prudential from these products do not appear to 

be significant, and the products do not appear to contribute significantly to the threat that the 

company’s material financial distress could pose to U.S. financial stability.

Guaranteed Interest Accounts and Other Stable Value Products (on Balance Sheet) 

These contracts generally serve as a fixed-rate guaranteed investment option for defined 

contribution plans in the United States. They involve group annuity contracts supported by 

assets in Prudential’s general account, or in some cases, by assets in a separate account. Under 

these contracts, funds are generally accumulated under individual employee “accounts” that are 

tracked on an internal recordkeeping system. The benefit for each participant is limited to the 

accumulated value in the participant’s account. Policyholders would face losses if Prudential 

were to default on its guarantee.

As of December 31, 2017, Prudential had [•] of general account balances and [•] of separate 

account balances associated with guaranteed interest accounts, compared to [•] as of September 

30, 2012.80 

Table 10: Retirement Plans Owning Guaranteed Interest Accounts and Other On–

Balance Sheet Stable Value Contracts with Liabilities Over $500 Million ($ Millions)

Client Liability

[•] [•]

Source: Prudential Response to OFR Request A.1 (Jan. 22, 2018), p. 3.

Guaranteed Investment Contracts

Through GICs, Prudential provides a guaranteed rate of return over a specified period (typically 

three to five years) in an investment contract and is obligated to pay the principal upon contract 

termination. Prudential issues GIC contracts to tax-qualified pension and profit sharing plans. 

As of December 31, 2017, Prudential had [•] of general account balances associated with GICs,

compared to [•] as of September 30, 2012, with [•] contract holders having an exposure over 

[•].

81

 

 

80 Prudential, Response to OFR Data Request K.10 (2013), p. 3; Prudential Response to OFR Request 1 (June 27, 

2018), p. 2. 

81 Prudential, Response to OFR Data Request K.10 (2013), p. 3; Prudential Response to OFR Request 1 (June 5, 

2018), p. 1; Prudential Response to OFR Request A.1 (Jan. 22, 2018), p. 1. 
24

Funding Agreements 

Funding agreements are investment products issued out of the general account of an insurer into 

the institutional market. In a funding agreement-backed note program, typically an insurance 

company issues a funding agreement out of its general account to a special-purpose vehicle; the 

special-purpose vehicle issues notes to third-party investors that provide the note holders with a 

security interest in the funding agreement. Prudential had [•] of funding agreements outstanding 

as of December 31, 2017, [•] as of September 30, 2012.82 Of the outstanding amount, [•] were 

related to funding agreement-backed notes ([•] as of September 30, 2012), [•] were issued to the 

FHLB of New York as collateral for advances ([•] as of September 30, 2012), and [•] was other 

funding agreements ([•] as of September 30, 2012). 

Group Annuities 

Prudential offers both participating and non-participating group annuity products. Nonparticipating annuities are essentially fixed annuity products. Participating annuities provide a 

minimum guarantee but allow the plan sponsor to retain investment and actuarial risks. These 

products can be structured in two ways: (1) the plan sponsor can maintain the group annuity as a 

plan asset; or (2) the plan sponsor can transfer its legal obligation to Prudential. In the former 

case, losing the benefit of Prudential’s guarantee in the event of the company’s insolvency, or 

even facing the potential of losing the guarantee, would change the risk characteristics of the 

plan’s assets and could cause plan sponsors to take action to reduce their risk, either by pulling 

back activity in other areas or selling assets to reduce risk. In the case of a plan sponsor that 

transfers its obligation to Prudential, the risk is borne by the individual policyholder, subject to 

any state GA protection. 

As of December 31, 2017, the company had [•] of participating annuity separate account 

balances and [•] of non-participating general account balances, compared to [•] as of September 

30, 2012.83

Synthetic GICs

Synthetic GICs provide an insurer’s client retirement plans with a minimum interest rate 

guarantee on their investments and a guarantee related to the excess of the contract value over 

the market value of the account assets. Unlike other GICs, the underlying reference assets are 

owned and controlled by the plan rather than by Prudential; the assets are not consolidated onto 

Prudential’s balance sheet. Prudential is required to make payments if the underlying assets are 

insufficient to pay a guaranteed benefit. Further, if Prudential were to experience material 

financial distress, the retirement plan contract holders could suffer losses through the forced 

write-down of their assets from book to market value. As of December 31, 2017, Prudential had 

[•] of assets underlying synthetic GICs, compared to [•] as of September 30, 2012.

84

 

82 Prudential, Response to OFR Data Request K.10 (2013), p. 3; Prudential Response to OFR Request 2 (June 5, 

2018), p. 1. 

83 Prudential Response to OFR Request 3 (June 5, 2018), p. 1; Council Basis, p. 38. 

84 Prudential Response to OFR Request A.1 (Jan. 22, 2018), p. 1; Council Basis, p. 40. 
25

Table 11: Retirement Plans Owning Synthetic GICs with Underlying Account 

Balances Over $500 Million ($ Millions)

Client Account Balance

[•] [•]

Source: Prudential Response to OFR Request A.1 (Jan. 22, 2018), pp. 3-4.

BOLI/COLI/TOLI

Prudential offers BOLI, COLI, and TOLI products. These are group life insurance products used 

by employers to fund retiree medical benefits, supplemental executive retirement plans, nonqualified deferred compensation plans, and other non-qualified benefits. These policies are held 

directly by institutions, and most are separate account products providing the owners with the 

option to surrender the policies in exchange for the market value of the separate account assets; 

holders are directly exposed to losses arising from Prudential’s material financial distress only to 

the extent that the market values of these assets are less than any guarantees provided by 

Prudential.

As of December 31, 2017, Prudential had [•] of BOLI/COLI/TOLI separate account balances and 

[•] of general account liabilities associated with these contracts, with the top 10 institutional 

customers having an aggregate separate account balance of [•].

85

 In comparison, as of 

September 30, 2012, Prudential had [•] of separate account balances and [•] of associated general 

account liabilities, and the top 10 customers had an aggregate balance of [•].

86

 As of December 

31, 2017, Prudential had [•] of separate account balances associated with BOLI/COLI/TOLI 

variable life policies and [•] of general account liabilities associated with BOLI/COLI/TOLI

whole life policies, [•] from year-end 2012.

87

Table 12: Ten Largest Group Life Insurance BOLI/COLI/TOLI Contract Holders 

($ Millions)

Client Separate Account Balance

[•] [•]

Source: Prudential Response to OFR Request A.1 (Jan. 22, 2018), p. 4.

As shown in Table 13, Prudential also offers term group life insurance and accidental death and 

disability policies to employee benefit plans. Other insurance products include short- and longterm disability and long-term care insurance.

 

85 Prudential Response to OFR Request A.1 (Jan. 22, 2018), pp. 2-3; Prudential Response to OFR Request 1 (June 

27, 2018), p. 2. 

86 Prudential Response to OFR Request A.3 (Oct. 31, 2012) pp. 22-23.

87 Prudential Response to OFR Request 1 (June 27, 2018), p. 2; Council Basis, p. 42.
26

Table 13: Prudential’s Other Group Insurance Product Offerings ($ Millions)

Product 09/30/2012 12/31/2017

Group Term Life Insurance & Accidental Death and Disability [•] [•]

Group Universal Life (UL) & Group Variable Universal Life (VUL) [•] [•]

Long-Term Disability [•] [•]

Short-Term Disability [•] [•]

Long-Term Care Insurance [•] [•]

Sources: Prudential Response to Follow-Up Request K.10 (2013), p. 3; Prudential Response to OFR Request 1 (June 

27, 2018), p. 2.

Note: Figures are general account liabilities under GAAP. 

5.2.3 Exposures of Retail Policyholders and State Guaranty Associations

Following is an analysis of exposures of retail policyholders and the state GAs to Prudential. 

Retail Policyholders

As of year-end 2017, Prudential’s life and retirement subsidiaries reported 30 million policies in 

force, compared to 35 million policies in 2012.88 In the Council Basis, the discussion of retail 

policyholders’ exposures to Prudential focused on the potential for policyholder concerns about 

the potential losses they could incur in the event of Prudential’s material financial distress to lead 

policyholders to withdraw from Prudential, which in turn could force Prudential to liquidate 

assets to satisfy its obligations. As a result, that discussion included an analysis of the potential 

for state GAs to mitigate the risks arising from policyholders’ exposures and an evaluation of the 

potential for stress to be transmitted to other life insurance companies if the GAs were required 

to assess premiums on other life insurance companies to fund GA liabilities associated with 

Prudential’s insolvency. For purposes of this reevaluation, the potential asset liquidation risk 

arising from policyholder withdrawals is addressed in section 5.3 below. Apart from the 

potential risks related to the state GAs, discussed below, it appears that the exposures of retail 

policyholders to Prudential do not contribute significantly to the risks that material financial 

distress at the company could pose to U.S. financial stability through the exposure transmission 

channel, based on the size and product mix of Prudential’s retail insurance business, the longterm nature of these liabilities, and the protection offered by the GAs.

Impact on State Guaranty Association Capacity

State GAs for U.S. life insurance companies protect holders of certain insurance and annuity 

products in the event of insolvency of the insurance company issuing those products. Upon the 

filing of a court order of liquidation against an insurer in its state of domicile, the GA of each 

state where the insolvent insurer’s policyholders reside is then triggered to provide coverage of 

 

88 SNL Financial. Calculated as the sum of all in-force life, annuities, and accident and health contracts and 

certificates. Prudential had 9.7 million total policies in force, excluding group life and annuity certificates, in 2017, 

compared to 10.5 million in 2012. 
27

claims of the failed insurer’s policyholders in that state to the extent the insurer’s existing assets 

cannot satisfy policyholder liabilities, up to statutorily prescribed limits.89, 90 

Obligations under certain products are not protected by state GAs, either because the products 

are not eligible for coverage or because a portion of the policy value exceeds the coverage limit 

provided under the laws of a particular state. For example, many state GAs do not provide 

coverage for GICs or most commercial policies.91 Other institutional products, particularly 

unallocated annuities issued to benefit plans, may be covered by state GAs, but the coverage is 

dependent on how the annuity is issued. To the extent that Prudential’s policies are not protected 

by the GAs and are obligations of the company (as opposed to unguaranteed separate account 

products where the policyholder bears the risk), the policyholders will experience losses if 

Prudential is unable to satisfy its obligations.

Insurers are required to be members of the GAs in the states where they are licensed to transact 

insurance business. To provide funding for payments of covered claims, each GA may, on an 

after-the-fact basis, assess all licensed insurance companies doing business in that state and those 

companies writing policies in the same lines of business as the insolvent insurer. Assessments 

may continue for a number of years, as necessary, to fund the GA for its payments of covered 

claims. Assessments are typically based on a percentage of each solvent insurer’s average 

annual premium in each state during the three calendar years prior to the year of insolvency, 

subject to a 2 percent annual cap.92 

If Prudential were to become insolvent, the various GAs’ funding needs would depend on the 

shortfall of assets to cover policyholder liabilities, and on the timing of claims over the life of the 

company’s liquidation.93 In the event of the insolvency of one or more of Prudential’s insurers, 

assessments would be paid by other insurers in response to claims that come due over 

time. Given the size and scope of Prudential’s insurance operations, GA assessment 

commitments could contribute to industry stress at a time when insurers may already be capital 

constrained. However, assessments are typically limited to 2 percent of annual premiums written 

by insurance companies writing covered lines of business within the state. An additional 

potential mitigant to the impact on other life insurance companies is that many states allow 

insurers to offset guaranty assessments against premium tax liabilities in varying degrees. These 

 

89 The various GAs are not activated until a receivership of an insurer results in a state court placing the insurer’s 

estate into liquidation based upon a finding that the insurer is insolvent (i.e., it cannot pay its obligations as they 

become due or its assets are inadequate to meet its liabilities). The GAs may also be activated prior to insolvency if 

a state court finds that an insurer is impaired and places the insurer into rehabilitation or conservation. This 

subsection addresses the implications of insolvency at Prudential or its significant subsidiaries in order to consider 

certain potential effects of the company’s failure.

90 See “The Life & Health Insurance Guaranty Association System: The Nation’s Safety Net,” National 

Organization of Life and Health Guaranty Associations (NOLHGA) (2016), pp. 3-4, available at 

https://www.nolhga.com/resource/code/file.cfm?ID=2515.

91 See American Council of Life Insurers, “Insurance Guaranty Associations: Frequently Asked Questions” 

(accessed May 9, 2018), available at https://www.acli.com/-/media/ACLI/Public/Files/PDFs-PUBLIC-SITE/PublicPublic-Policy/guarantee-associations-FAQ.ashx

92 See NAIC Life and Health Insurance Guaranty Association Model Act, Section 9, available at 

http://www naic.org/store/free/MDL-520.pdf

93 See J. David Cummins and Mary A. Weiss, “Systemic Risk and the U.S. Insurance Sector,” Journal of Risk and 

Insurance volume 91, issue 3 (2014), pp. 489-527, 508.
28

tax offsets enable the other insurance companies to recoup a portion of the assessments 

contributed to their state GA.

Concerns about guaranty fund capacity could be more acute to the extent that policyholders are 

concentrated in certain states. Each state’s guaranty fund exists only to protect the residents of 

its state up to the guarantee limits in that state. If the insolvency funding needs in one state 

exceeded that state’s 2 percent per year assessment maximum, the assessment would extend into 

subsequent years until the GA obligations are fully funded. 

In the event of the liquidation of Prudential’s insurers, any remaining assets of the insolvent 

insurers would be available to make payments to Prudential’s policyholders. The GAs would 

only be obligated to make up any shortfalls if these assets were insufficient to fully satisfy 

covered obligations to policyholders up to the statutory GA limits. Applying historical asset-toliability shortfalls to these exposures in each state is useful to more accurately assess the extent 

to which Prudential’s insolvency could transmit stress directly to the GAs and indirectly to other 

insurers through potential GA assessments. Typical shortfalls for previous life insurer 

liquidations have ranged from 5 to 15 percent.94 The GAs have never experienced the 

insolvency of a life insurance company with the size and scope of Prudential’s subsidiaries, and 

any ranges are indications of potential outcomes rather than estimates of the shortfall that could 

occur in an Prudential insolvency.

As shown in Table 14, GAs’ potential obligations with respect to Prudential’s liabilities 

associated with annuities, taking into account the statutory limits on amounts covered by the

individual GAs, is [•] (approximately [•] percent of the statutory liabilities), and the amount 

covered by the GAs related to Prudential’s life insurance liabilities is [•]. 

 

94 Joint Comments of NOLHGA and the National Conference of Insurance Guaranty Funds in Response to the 

Federal Insurance Office’s Request for Public Input, December 16, 2011, p. 5, available at 

https://www.nolhga.com/pressroom/articles/NOLHGA-NCIGF%20FIO%20SUBMISSION.PDF.

In one case, the resolution of Executive Life Insurance Company and its affiliate Executive Life Insurance Company 

of New York, the shortfall was an estimated 54 percent of GA-covered obligations. However, there have also been 

significant changes to the regulatory environment for insurance companies since this example occurred, including 

risk-based capital requirements that penalize insurers for owning higher-risk investments; risk-focused regulatory 

examination procedures; and the Own Risk and Solvency Assessment project, described in Section 7.
29

Table 14: Potential State Guaranty Coverage ($ Millions)

Business Segment Products

Greater of 

Statutory

Reserves or 

Cash 

Surrender 

Value

Capped by 

State GA 

Limit Capped %

Individual Life UL/VUL [•] [•] [•]

Individual Life Whole Life/Term [•] [•] [•]

Individual Life Alliance Account [•] [•] [•]

Group Life Alliance Account [•] [•] [•]

Life Total [•] [•] [•]

Annuities Variable Annuity [•] [•] [•]

Retirement PRT [•] [•] [•]

Retirement

Structured 

Settlements

[•] [•] [•]

Retirement Non-Particp. Annuity [•] [•] [•]

Annuity Total [•] [•] [•]

Grand Total [•] [•] [•]

Source: Prudential Response OFR Information Request A.9 (State GA Coverage) (Jan. 22, 2018), p. 6. 

Note: Statutory reserve is a proportion of the death benefit amount capped by a state limit. Cash value is capped by 

the state limit. The final capped amount is the greater of the two. 

Over [•] percent of the state GAs’ annuities exposure is concentrated in 10 states, with the largest 

annuities guaranty fund exposure, assuming no assets are available from the insolvent insurers,

of [•].

95

 In the event of a 15 percent shortfall, the aggregate annuities obligations of the GAs 

would be [•], and the obligations of the 10 GAs with the largest annuities exposures would range 

from [•] to [•] times their annual assessment obligations.96 However, these obligations are highly 

unlikely to come due in a single year given the long-term nature of these Prudential products.

97

 

In addition, as stated above, GAs’ assessments to fund GA obligations are limited to 2 percent of 

the premium volume of the other life insurance companies doing business in each state where the 

affected insureds reside. Such assessments would be made in succeeding years until all of the 

GA annuities obligations are fully funded. Lastly, in this regard, GAs maintain credit facilities 

and can borrow funds secured against future assessments if necessary.

With respect to state GAs’ life insurance obligations, payments would come due over time in 

response to life insurance claims filed upon the deaths of individual insureds. In the event of a 

 

95 Prudential Response to OFR Data Request A.9 (State GA Coverage) (Jan. 22, 2018), pp. 6-7.

96 Prudential Response to OFR Data Request A.9 (Jan. 22, 2018), pp. 6-7; NOLHGA, State Capacity, Assessments 

Called and Refunded Summary, available at https://www nolhga.com/resource/file/capacity/R4/ALL%20States.pdf. 

The New York GA’s [•], but it is excluded from these comparisons because its assessment capacity is not currently 

calculable in a manner comparable to other states. 

97 Prudential Response to OFR Data Request A.9 (Jan. 22, 2018), p. 6. [•] Unlike the remainder of this analysis, in 

order to indicate the scope of exposures to Prudential, the quantitative estimates in this paragraph are calculated 

based on the failure of all Prudential’s U.S. insurance subsidiaries.
30

15 percent shortfall in the remaining assets of the insolvent insurers, the aggregate life insurance 

obligations of the GAs would be [•].

98

 In 2016, the nationwide annual assessment capacity of the 

life GA system was $3.2 billion, and a 10-year forecast indicates over $30 billion of system 

capacity assuming that assessable premiums remain at 2016 levels, although the elimination of 

Prudential from the assessment base in the event of the company’s failure would decrease the 

aggregate annual GA assessment capacity.99

5.2.4 Reinsurance 

Reinsurance is insurance purchased by an insurance company to cover portions of risk of 

insurance policies issued by that company. The use of captive reinsurance may allow for 

otherwise non-admitted assets to support reserves of certain life insurance products, which could 

lower the quality of capital available for policyholders, creditors, and other customers, and 

potentially increase their exposure to loss if Prudential were to experience material financial 

distress. Prudential’s captive programs involve (1) reinsurance to isolate the business in a 

captive, and (2) financing structures to obtain assets to back the liabilities reinsured. To the 

extent applicable, these transactions are subject to regulatory actuarial guidelines (in the case of 

captives, actuarial guideline 48). Further, as of January 1, 2017, states adopted principles-based 

reserving in an effort to better calibrate reserving requirements with the risks posed by life and 

annuity products, which may reduce incentives to use captive reinsurers.100

As of December 31, 2017, total assets in Prudential captives was [•].

101

 According to Prudential, 

“the reserve levels held for the business reinsured to the captives, plus those reserves retained at 

the ceding company, are, in the aggregate, at least equal to the reserves that would be held had 

there been no reinsurance with the captive.”102 

5.3 Asset Liquidation Transmission Channel

The second channel identified by the Council through which the negative effects of a nonbank 

financial company’s material financial distress could be transmitted to other firms or markets is 

the asset liquidation transmission channel.103 Under the asset liquidation transmission channel, 

the Council considers whether a nonbank financial company holds assets that, if liquidated 

quickly, could significantly disrupt the operation of key markets or cause significant losses or 

funding problems for other firms with similar holdings. During a period of overall stress in the 

financial services industry and in a weak macroeconomic environment, deterioration in asset 

prices or market functioning resulting from a rapid liquidation of assets could pressure other 

financial firms to sell their holdings of affected assets in order to maintain adequate capital and 

liquidity. This, in turn, could produce a cycle of asset sales that could lead to further market 

disruptions.

 

98 Prudential Response to OFR Data Request A.9 (State GA Coverage) (Jan. 22, 2018), pp. 6-7.

99 NOLHGA Nationwide Capacity, Assessment Called and Refunded Summary, available at 

https://www.nolhga.com/resource/file/capacity/R1.pdf. 

100 Prudential Response to OFR Data Request A.6b (Jan. 22, 2018), p. 1.

101 Prudential Response to OFR Data Request A.6a (Jan. 22, 2018), pp. 2-4; Council Basis, p. 48. 

102 Prudential Response to OFR Data Request A.4 (Jan. 22, 2018), p. 2.

103 See Rule and Interpretive Guidance. 
31

The two key factors in assessing the potential for a nonbank financial company’s asset 

liquidation to pose risks to other firms or markets are the amount and the nature of the assets the 

company may be forced to sell. In evaluating these factors, relevant considerations include the 

liquidity risk of the company’s liabilities; the size and composition of the company’s asset 

portfolio that would be liquidated; and any fire-sale discount, which depends on the liquidity of 

the assets. All other things being equal, the liquidation of larger or less-liquid asset portfolios 

poses a greater risk of disrupting financial markets than does the liquidation of smaller or moreliquid asset portfolios. In addition, asset sales over a relatively short period of time that lead to 

larger price discounts would be more likely to disrupt financial markets than asset liquidations 

over a longer period of time that lead to smaller discounts. More-leveraged firms may be forced 

to liquidate more assets in a shorter time than less-leveraged firms. Finally, sales of assets that 

are widely held or that are commonly used as collateral by large financial intermediaries in 

critical funding markets would generally be more disruptive than sales of assets that are held or 

used less widely.

In the event of material financial distress, Prudential could be forced to liquidate assets to satisfy 

its obligations to counterparties, contract holders, policyholders, and others. The greatest source 

of potential liquidity strains that could cause or contribute to such a forced asset liquidation by 

Prudential is the company’s life and retirement liabilities. At the same time, there are important 

mitigants to the potential for Prudential to conduct a fire sale of assets, including that 

policyholders have contractual, tax, and other disincentives associated with early withdrawals; 

Prudential’s insurance company subsidiaries have the contractual right to defer payments on 

certain products; and Prudential’s state insurance regulators can impose stays on discretionary 

policyholder withdrawals. However, as discussed below, there could be broader negative 

consequences if a deferral or stay were imposed on withdrawals or surrenders.

At the time of the final determination, the Council determined that although Prudential’s life 

insurance and annuity products are generally considered to be long-term liabilities, some of these 

liabilities were available for discretionary withdrawal within seven days and with little or no 

penalty and therefore could, in practice, have characteristics of short-term liabilities. The 

Council further determined that in the event of Prudential’s material financial distress, a rapid 

liquidation of assets could occur. A forced liquidation of a significant portion of Prudential’s 

assets as a result of policyholder surrenders or withdrawals could cause significant disruptions to 

key markets, including corporate debt and asset-backed securities (ABS) markets, particularly 

during a period of overall stress in the financial services industry and in a weak macroeconomic 

environment. Moreover, the fact that the investment portfolios of many large insurance firms 

contain similar assets could amplify the severity of the disruption caused by a forced liquidation 

of Prudential’s assets, which could result in significant reductions in asset values and losses for 

those firms. Significant outflows from Prudential also could put other large life insurers at risk 

of similar outflows if they are also perceived as vulnerable. This potential erosion of capital and 

de-leveraging could cause fire sales that could result in significant losses or funding problems for 

other firms with similar holdings. The Council also analyzed other potential triggers of asset 

liquidation.104

 

104 Council Basis, pp. 76-77. 
32

Additional consideration of incentives and disincentives for retail policyholders to surrender 

policies, including analysis of historical evidence of retail and institutional investor behavior, 

indicate that there is not a significant risk that asset liquidation by Prudential would disrupt 

trading in key markets or cause significant losses or funding problems for other firms with 

similar holdings. Relevant factors in this determination include the following:

 Prudential has [•] of U.S. general account liabilities that allow policyholders to withdraw 

cash from the company upon demand. Under the terms of the policies, approximately [•]

of these liabilities can be immediately surrendered for [•] in cash upon demand by 

policyholders, compared to [•] that could be surrendered for [•] in cash on September 30,

2012.105 Prudential also has [•] of separate account liabilities from individual variable 

annuities, retirement and other products as of year-end 2017, compared to [•] at year-end 

2012. Additional consideration of the effects of incentives and disincentives for retail 

policyholders to surrender policies, including analysis of historical evidence of retail and 

institutional investor behavior, indicate that there is not a significant risk that a forced 

asset liquidation by Prudential would disrupt trading in key markets or cause significant 

losses or funding problems for other firms with similar holdings.

 Counterparties’ capital markets transactions with Prudential—particularly short-term 

debt, repurchase agreements, securities lending, and derivatives transactions—could 

increase the volume of Prudential’s forced asset sales. Prudential has total liabilities of 

$20 billion arising from these activities. While counterparties could terminate or refuse 

to roll over a significant portion of these liabilities, the resulting effect on the amounts of 

assets Prudential could be forced to sell still appear to be manageable.

 With respect to Prudential’s assets that could be liquidated in the event of increased 

liquidity needs at Prudential, the company’s U.S. general account investment portfolio 

has [•], including [•] in highly liquid assets from [•] to [•]. 

 A fire-sale impact analysis suggests that relative to other large financial institutions, the 

market impact of a downward shock to the net worth of Prudential has decreased since

2012, largely due to a decrease in Prudential’s leverage ratio and increased holding of 

highly liquid assets. As of December 31, 2017, Prudential ranked 11th among large 

financial institutions for an asset shock and 16th for an equity shock. 

5.3.1 Liquidity of Prudential’s Liabilities

As noted above, a key factor in assessing the risks posed by a company’s liquidation of assets is 

the liquidity characteristics of the company’s liabilities. Liabilities that may be terminated by the 

counterparty in the event of Prudential’s material financial distress, such as insurance products 

that allow policyholders to withdraw cash value from the company, could impose liquidity 

strains on Prudential that would force the company to sell assets to satisfy its obligations. In 

contrast, Prudential products such as term life insurance policies do not accumulate cash value 

that a policyholder can withdraw and therefore do not contribute to the risk of asset liquidation. 

 

105 Council Basis, p. 83.
33

General Account Liabilities

Prudential’s general account liabilities include (1) contractual obligations coming due and (2) 

liabilities that may be withdrawn at the discretion of the counterparty or policyholder, subject to 

applicable restrictions and limitations. 

With respect to contractual obligations coming due, as of year-end 2017, the current portion of 

Prudential’s long-term debt was $0.8 billion.

106

 In addition, terminations of Prudential’s 

outstanding capital markets arrangements could contribute to liquidity pressures at Prudential. In 

particular, Prudential has fair value derivative liabilities of $6.0 billion, $4.4 billion of securities 

lending payable, $8.4 billion of repurchase agreements, and $0.6 billion of commercial paper.

107

 

As of December 31, 2017, Prudential had [•] of U.S. insurance liabilities, which has [•] from [•]

as of September 30, 2012.

108

 These liabilities represented a mix of reserves for future policy 

benefits on insurance contracts, account balances on annuity and other products, and payables for 

accrued dividends. To assess Prudential’s liabilities that may be withdrawn by policyholders, the 

withdrawal risk associated with Prudential’s life insurance and annuity products can be grouped 

into three categories: (1) not surrenderable; (2) policies and contracts available for surrender but 

not immediately payable; and (3) policies and contracts with a cash surrender value available for 

immediate withdrawal (within seven days). The following table details the surrender or 

withdrawal features of nearly all of Prudential’s U.S. liabilities subject to discretionary 

withdrawal or surrenders, based on these three categories. It includes products that have account 

balances, such as annuities, stable value and other retirement products, and life insurance policies 

with cash value. The table shows [•] of Prudential’s [•] of U.S. insurance liabilities. Other U.S. 

liabilities not shown in the table include future policy benefits on life and annuity policies that 

have no or minimal cash surrender value or are not subject to discretionary withdrawal.

 

106 Prudential Annual Report on Form 10-K for the year ended December 31, 2017, pp. 194, 210, 276. 

107 Prudential Annual Report on Form 10-K for the year ended December 31, 2017, p. 210. 

108 Council Basis, p. 78; Prudential Response to OFR Request B.1 (General Account) (Jan. 22, 2018), p. 17.
34

Table 16: Total Cash Surrender Value of U.S. General Account Liabilities ($ Millions)

Balance

Cash 

Surrender 

Value

Liabilities with no or minimal surrender value

 GICs, funding agreements, and other stable value products [•] [•]

 Closed block business policyholder dividends accrued, not paid [•] [•]

 Total – no or minimal surrender value for liabilities [•] [•]

Liabilities with cash surrender value

Liabilities with surrender not immediately payable

 Stable value products [•] [•]

 Group insurance policy balances [•] [•]

 Total – not immediately payable [•] [•]

Liabilities with cash surrender value immediately payable (within 7 days)

 Closed block business [•] [•]

 Closed block policyholder account balances [•] [•]

 Individual Annuities [•] [•]

 BOLI/COLI/TOLI and VUL and UL fund values [•] [•]

 Total retained assets [•] [•]

 Individual whole life policies [•] [•]

 Total – immediately payable [•] [•]

Total Payable [•] [•]

Source: Prudential Response to OFR Request B.1 (General Account) (Jan. 22, 2018), pp. 7-16. 

As shown in Table 16, Prudential has [•] in general account insurance liabilities that can be 

surrendered or withdrawn for a cash surrender value of [•] of the general account insurance 

liabilities, of which [•] can be surrendered or withdrawn immediately for [•] in cash surrender 

value. 

In comparison, on September 30, 2012, Prudential had [•] of liabilities that could be surrendered 

or withdrawn for a cash surrender value of [•], of which [•] represented immediately payable 

cash surrender value.

109

 As discussed below, there are a number of factors to consider in 

assessing the extent to which policyholders that can surrender or withdraw would do so. 

 

109 Council Basis, p. 80. 
35

Assessing the Potential for Policyholders to Withdraw from Prudential

Many factors may affect the magnitude of withdrawals from Prudential in the event of the 

company’s material financial distress, and there are substantial uncertainties regarding the extent 

to which policyholders might withdraw cash value from or surrender their policies. Due to this 

uncertainty, at the time of the final determination the Council considered the total cash value of 

all of Prudential’s annuity contracts and life insurance policies that could be surrendered 

immediately pursuant to their contractual terms. The Council also considered a 30-day stress 

calculation based on an adapted version of an A.M. Best liquidity stress model.

This reevaluation of the Council’s determination regarding Prudential includes additional 

analyses related to the potential for policyholders to rapidly withdraw cash value or surrender 

their policies from Prudential if the company experienced material financial distress. Based on 

factors described below, it is highly unlikely that the full amount of [•] in cash surrender value 

immediately available would be withdrawn. In order to consider the scale of potential 

withdrawals, for purposes of this reevaluation, the Council has conducted additional analysis 

compared to the analysis in the Council Basis regarding the effects of incentives and 

disincentives for retail policyholders to surrender their policies in the event of Prudential’s 

material financial distress, including analysis of historical evidence of retail and institutional 

investor behavior in order to assess a broader range of potential outcomes.

Purpose of product. The withdrawal incentives of Prudential’s general account liabilities vary 

by product type or marketing line. Most individuals or entities that purchase life insurance 

products do so with the expectation that they will hold the product as a long-term investment in 

order to accumulate assets for savings or retirement or to pay death benefits in the event of the 

death of the insured. A significant disincentive is that early withdrawal from certain products 

results in the loss of insurance coverage or the loss of equivalent product guarantees, which may 

be contrary to these products’ purposes. A policyholder can mitigate this loss by seeking a 

replacement policy from another provider, but economic benefits of the original product could be 

lost, and in some cases the replacement of insurance coverage or product guarantees may be 

costly or impossible. In particular, with respect to insurance coverage with an underwriting 

component (for example, where the policyholder’s health has diminished or credit has 

deteriorated), a policyholder may become uninsurable or may have to pay substantially higher 

premium rates.

However, loss of coverage is only a compelling disincentive for insurance products with an 

underwriting component, such as universal or whole life insurance. Fixed deferred annuity 

products, for example, have little or no underwriting component and can be readily replaced with 

other annuities or financial market products. 

In some previous cases, retail policyholders have submitted withdrawal requests at a slower pace 

and in smaller numbers than institutional owners of financial products in stressed market 

conditions. For example, in 2008, institutional investors withdrew funds from money market 
36

mutual funds more quickly than retail investors.110 However, retail annuity products have been 

marketed by Prudential and other life insurance companies as financial assets with guaranteed 

liquidity and other features that allow policyholders to access the funds in times of need.111 

These features may attract customers who have shorter investment time horizons or greater needs 

for liquidity.

With respect to Prudential’s products that are held for investment purposes, if Prudential’s 

policyholders were to lose confidence in the ability of Prudential to satisfy their obligations, they 

may prefer to surrender their policies instead of risking potentially larger losses. Moreover, if 

policyholders wanted to keep their life insurance policies in effect, they could take out policy 

loans (as described below), which could also subject Prudential’s life insurance subsidiaries to a 

liquidity strain. 

Contractual and economic incentives. Contractual and other disincentives may act as a deterrent 

to policyholder surrenders and withdrawals. Factors that may influence withdrawal decisions 

include a product’s contractual claim or benefit features (for example, a waiting period may be 

involved before a contract holder may elect an action) and the condition of the issuing insurer 

and the broader financial system. Prudential includes surrender charges in certain of these 

products.

112

 In general, policyholders may be more likely to withdraw cash value from 

Prudential or surrender their policies if there are no or minimal withdrawal penalties than if the 

withdrawal would trigger a moderate or significant penalty.

However, in the event of a company’s material financial distress, these disincentives could be 

overridden by a policyholder’s desire for perceived safety and liquidity with financial products 

offered by another insurance company, a bank, or another type of financial institution, especially 

where there is no meaningful surrender penalty. If policyholders have doubts about Prudential’s 

ability to satisfy its obligations due to the company’s material financial distress, policyholders 

would need to weigh the certainty of return of cash value (inclusive of any applicable penalties 

or tax consequences) against an uncertain and contingent future benefit due from a company that 

is in material financial distress. 

Tax penalties. Tax penalties provide another potential disincentive for early withdrawal, 

especially for annuity contract holders who are under 59.5 years of age. In the event of a 

surrender (before the age of 59.5), annuity contract holders and retirement plan participants 

generally are subject to a 10 percent penalty on the taxable portion of any amount withdrawn. 

However, unlike annuities, life insurance products that accumulate cash value (e.g., whole life or 

universal life) are not subject to the 10 percent tax penalty and offer various withdrawal options 

 

110 See Patrick E. McCabe, “The Cross Section of Money Market Fund Risks and Financial Crises,” Federal Reserve 

Board, Finance and Economics Discussion Series (Sept. 12, 2010), available at 

https://www.federalreserve.gov/pubs/feds/2010/201051/201051pap.pdf. 

111 For example, Prudential’s marketing materials note that its annuities offer “guaranteed protection against market 

loss and the opportunity to grow your money,” “the option of withdrawing a portion of your funds,” and benefits 

“that essentially insure your future income, without giving up total control of your money.” See

https://www.prudential.com/personal/annuities/products, 

https://www.prudential.com/personal/annuities/education/myths-misconceptions, 

https://www.prudential.com/personal/annuities/education/create-retirement-income.

112 Prudential Annual Report on Form 10-K for the year ended December 31, 2017, p. 129. 
37

that mitigate the ordinary income tax disincentives on withdrawal. Withdrawals and other 

distributions from life insurance products (as opposed to annuities) are generally treated first as a 

tax-free recovery of basis and then as taxable income. Policyholders may have the ability to 

avoid certain income tax disincentives through partial cash value surrenders up to the 

policyholders’ tax basis (typically paid-in premium less withdrawals). Moreover, policyholders 

may be able to withdraw an even larger portion of the cash value of a policy by taking a partial

cash value surrender up to the policy’s tax basis and then policy loans thereafter. In addition, 

policyholders can avoid tax consequences if they exchange their life insurance policy or annuity 

for a policy or contract issued by another insurer, although this decision may slow the rate of 

surrenders.

Stays on withdrawals; potential contagion. Another potential mitigant of a forced liquidation of 

assets due to policyholder surrenders may be the imposition of a stay on discretionary 

withdrawals. In many cases, Prudential’s insurance company subsidiaries have the contractual 

right to defer payouts on the immediately payable cash surrender value for up to six months from 

the time of each individual withdrawal request. Such deferrals could slow or terminate the 

company’s asset liquidation and thereby largely eliminate the potential for a fire sale of 

Prudential’s assets. However, this action, if taken at a time when the company is experiencing 

material financial distress but has not been placed into liquidation, could send a negative signal 

to counterparties, policyholders, and investors, thereby creating concern and market uncertainty 

about the current health and future of Prudential and resulting in significant negative effects for 

the broader industry. Actions to restrict customer access to withdrawable policies could cause 

concern about access to funds at other insurance companies with similar asset and product 

profiles, especially in a time of financial market stress. 

In addition to the company’s contractual right to defer payments, state insurance commissioners 

have authority to impose a temporary stay on policyholder withdrawals and surrenders (except in 

situations where a policyholder faces a hardship), to limit outflows from the general account. A 

stay imposed by a state insurance commissioner would delay the payment of insurance and 

annuity benefits and cash surrenders to policyholders and contract holders (notwithstanding 

certain hardship exceptions).113 While invoking a suspension on surrenders or withdrawals from 

one of the largest insurance companies might address liquidity concerns, it could potentially 

undermine confidence in the broader life insurance industry and spread uncertainty to the 

customers of other insurance companies with similar products, particularly during a period of 

financial stress and macroeconomic weakness. 

An additional mechanism for the spread of contagion in this manner is a nonbank financial 

company’s interconnectedness with other market participants as a result of the company’s capital 

markets activities, because capital market participants may engage in protective behavior such as 

reducing exposures to counterparties and customers or ceasing certain activities to increase 

 

113 Stays could also be imposed by the courts during a receivership process. See NAIC Insurer Receivership Model 

Act, section 108 (Oct. 2007), available at http://www naic.org/store/free/MDL-555.pdf. Section 108A of the 

Receivership Model Act provides that the state court handling the insurance receivership may issue orders as 

necessary, including stays. Section 108C of the Receivership Model Act provides that the commencement of a 

receivership proceeding operates as a stay.
38

liquidity in anticipation of a potential shock.114, 115 Given the relatively low level of Prudential’s 

capital markets activities, there is little risk of contagion arising through this mechanism in the 

event of Prudential’s material financial distress. 

Historical analysis. Little data exists regarding policyholder withdrawal behavior in the context 

of the material financial distress of a company the size of Prudential absent government 

intervention. In light of the paucity of data from comparable examples, the Council Basis 

described historical examples of policyholder withdrawals but did not include any estimates 

based on case studies of historical insurance failures. However, applying the available historical 

policyholder withdrawal rates to Prudential is useful for analyzing Prudential’s liquidity risk 

because it provides context for the range of potential life insurance and annuity policyholder 

withdrawals that could occur from an insurer experiencing material financial distress. Therefore, 

the following discussion includes information the Council considered at the time of its 

determination regarding Prudential in 2013 as well as additional examples applying historical 

policyholder withdrawal rates to Prudential. 

At the time of the Council’s determination, Prudential stated that it “has historically experienced 

consistently low surrender rates, including during and after the financial crisis.”

116 However, its 

surrender experience in 2008 and 2009 may not indicate what it would be in the event of the 

company’s material financial distress in a period of overall stress in the financial services 

industry and a weak macroeconomic environment. For example, AIG saw significant increases 

in surrenders after it was downgraded by Standard & Poor’s in September 2008.117 For AIG 

Domestic Retirement Services, surrender rates on all products were about twice as high in the 

fourth quarter of 2008 compared to the fourth quarter of 2007. AIG experienced significant 

increases in surrender rates in other business units as well. The usefulness of this example is 

limited due to the government intervention in September 2008 that helped to prevent AIG’s 

disorderly failure; in the absence of such intervention, surrender rates likely would have been 

higher. Nonetheless, AIG’s experience underscores the potential for increased surrender rates as 

a reaction to questions about the parent company’s financial strength.118

Other historical examples provide additional insight into policyholder withdrawal behavior, but 

their direct applicability to Prudential may be somewhat limited given that the failed insurers 

were substantially smaller than Prudential and their failures did not occur during a period of 

overall stress in the financial services industry. During the late 1980s, a number of U.S. life 

insurance companies reacted to higher interest rates by investing heavily in high-yield assets to 

 

114 See Hal Scott, “Interconnectedness and Contagion, Financial Panics and the Crisis of 2008” (Nov. 20, 2012), 

available at http://ssrn.com/abstract=2178475; see also Scott G. Alvarez, General Counsel, Board of Governors, 

Remarks at the American Enterprise Institute Conference on Professor Hal Scott’s Paper on Interconnectedness and 

Contagion (Feb. 8, 2013), available at http://www.aei.org/files/2013/02/08/-scottalvarezremarks 163346998313.pdf.

115 See Ricardo J. Caballero, “Macroeconomics After the Crisis: Time to Deal with the Pretense-of-Knowledge 

Syndrome,” Journal of Economic Perspectives volume 24, issue 4 (2010), pp. 85-102.

116 Council Basis, p. 86.

117 Council Basis, p. 86. 

118 Council Basis, p. 87. 
39

cover the high rates paid to policyholders.119 The failures of First Executive (the parent of 

Executive Life Insurance Company and Executive Life Insurance Company of New York) and 

First Capital in 1991 resulted in significant increases in policyholder withdrawal rates.120 First 

Executive policyholders withdrew at an estimated quarterly rate of 20.3 percent of annuities and 

9.5 percent of life insurance policies during the first quarter of 1990, and First Capital 

policyholders withdrew at an estimated quarterly rate of 15.6 percent during the second week of 

May 1991.121 Regulatory stays were imposed at Executive Life that stopped any further runs. In 

another example, over a six-week period in June and July of 1991, pension liabilities were 

withdrawn from Mutual Benefit at a rate of 37.7 percent per quarter.122 Given its size and 

prominence, if Prudential were to experience material financial distress during a period of overall 

stress in the financial services industry and in a weak macroeconomic environment, there could 

be a more significant policyholder response.123 However, there have also been significant 

changes to the regulatory environment for insurance companies since these examples occurred, 

including risk-based capital requirements that penalize insurers for owning higher-risk 

investments; risk-focused regulatory examination procedures; and the ORSA, which requires 

larger insurers to report annually on material risks and how the company’s capital planning is 

adequate to satisfy those risks.124

 

119 See Richard L. Fogel, “Insurer Failures: Regulators Failed to Respond in Timely and Forceful Manner in Four 

Large Life Insurer Failures,” GAO/T-GGD- 92-43 (Sept. 9, 1992), p. 2, available at 

http://www.gao.gov/assets/110/104752.pdf.

120 When First Executive announced a significant loss on its bond portfolio in early 1990, its policyholders withdrew 

a total of about $4 billion in that year. According to GAO testimony to Congress, the subsequent takeover of 

Executive Life by regulators spurred policyholder runs at two unrelated institutions. In testimony to Congress in 

1992 regarding the findings of a GAO review, the Assistant Comptroller General stated, “According to regulators, 

the April 1991 takeovers of Executive Life and Executive Life of New York spurred policyholder runs on junk bond 

laden First Capital and Fidelity Bankers.” Richard L. Fogel, “Insurer Failures: Regulators Failed to Respond in 

Timely and Forceful Manner in Four Large Life Insurer Failures,” GAO/T-GGD-92-43 (Sept. 9, 1992), p. 6, 

available at http://www.gao.gov/assets/110/104752.pdf.

121 See Harry DeAngelo, Linda DeAngelo, and Stuart Gilson, “The Collapse of First Executive Corporation: Junk 

Bonds, Adverse Publicity, and the ‘Run on the Bank’ Phenomenon,” Journal of Financial Economics volume 36, 

issue 3 (Dec. 1994), pp. 287-336; Executive Life Insurance Company Annual Statement for the year ended 

December 31, 1990, available at 

https://www.caclo.org/perl/index.pl?document id=317042a38288ea7a2e49fda53fe5e746; Harry DeAngelo, Linda 

DeAngelo, and Stuart Gilson, “Perceptions and the Politics of Finance: Junk Bonds and the Regulatory Seizure of 

First Capital Life,” Journal of Financial Economics volume 41, issue 3 (July 1996), pp. 475-511. Withdrawal rates 

at individual insurance companies can be significantly higher. For example, the annuity portfolio of Executive Life 

Insurance Company experienced a surrender rate of 42 percent for annuities (excluding single premium immediate 

annuities), and more than 40 percent of its annuities were single premium immediate annuities or structured 

settlements with no cash value. The text above cites the surrender rates for First Executive as a consolidated 

organization in order to compare it to Prudential as a consolidated organization.

122 Laurie Cohen and Charles Storch, “The Run that Shook Mutual Benefit,” Chicago Tribune (August 11, 1991), 

available at http://www.chicagotribune.com/news/ct-xpm-1991-08-11-9103270714-story html; Eric N. Berg, 

“Mutual Benefit Backs State Control,” The New York Times (July 16, 1991), available at 

https://www.nytimes.com/1991/07/16/business/mutual-benefit-backs-state-control.html.

123 The year before its failure, Executive Life had $13 billion in assets and was the 33rd largest life insurer in the 

United States. See “The Collapse of Executive Life Insurance Co. and its Impact on Policyholders,” hearing before 

the House Committee on Government Reform, 107th Congress (2002), available at 

https://www.gpo.gov/fdsys/pkg/CHRG-107hhrg83976/pdf/CHRG-107hhrg83976.pdf.

124 In addition, the Council Basis considered data from the NAIC, based on insurance company statutory filings. 

These data show that, for general account liabilities, aggregate industry life and annuity surrenders, as a percentage 
40

A.M. Best calculates a short-term (30-day) stress liquidity ratio to evaluate the overall liquidity 

strength of life insurance companies. This test assumes that 15 percent of life policies and 50 

percent of general account fixed annuities are surrendered in one month, several multiples higher 

than the historical examples cited above.125

Table 17 below applies this range of sample surrender rates to Prudential’s current life and 

retirement portfolio, and also presents the aggregate amount of Prudential’s surrenderable life 

insurance and annuity liabilities. The second column applies the surrender rates experienced by 

AIG in 2008; the third column applies the withdrawal rates from the smaller insurance

companies that failed in 1991; and the fourth column applies the assumptions in the A.M. Best 

liquidity model. The amount of surrenders based on these rates ranges from [•] in one quarter to 

[•] in one month. Given the absence of comparable experiences to the material financial distress 

of a company the size of Prudential and the differences in size, products, and regulatory 

environment among these examples, these figures are best viewed as potential outcomes, or as 

context for the range of potential life insurance and annuity policyholder withdrawals that could 

occur from an insurer experiencing material financial distress, rather than estimates of likely 

withdrawals from Prudential. 

 

of net policy reserves, were actually slightly lower in 2008 and 2009 than in 2007. The decline in the surrender rate 

may have been due, in part, to the general decline in interest rates over the same period, as well as the effect of a 

declining stock market on variable annuities. There was significant variation across the largest institutions, 

however, as some experienced increased surrenders. [•] Council Basis, pp. 87-88. 

125 See A.M. Best, “A.M. Best’s Stress Liquidity Ratio for U.S. Life Insurers,” October 13, 2017, available at 

http://www3.ambest.com/ambv/ratingmethodology/OpenPDF.aspx?rc=197655. On a call with staff on June 8, 

2017, A.M. Best analysts did not cite specific data or historical examples that were used to support the A.M. Best 

liquidity model assumptions, but did note that the company provides industry with periodic opportunities to 

comment on its model, which may indicate that industry participants view the model’s assumptions as reasonable. 

A.M. Best’s stress liquidity ratio does not include assumptions for separate account products, given that a 

company’s equity and debt holders do not have a legal claim on separate account assets. 

42

The levels of Prudential’s forced asset sales could be more or less than shown below in Table 20, 

but these figures provide indicative amounts. Among the additional factors that could affect the 

volume of Prudential’s asset sales are its policyholder loans (described below) and $20 billion of 

capital markets transactions that Prudential’s counterparties could terminate or refuse to roll over 

in a short period. 

Capital Market Transactions

As discussed in section 5.2.1, the value of securities pledged by Prudential to counterparties in 

securities lending and repurchase agreements is $13 billion. In addition, Prudential has 

derivatives liabilities of $6.0 billion and $1.4 billion of short-term debt that is subject to rollover 

risk. In the event of Prudential’s material financial distress, counterparties seeking to reduce 

exposures to Prudential would have a strong incentive to terminate securities lending, repurchase 

agreement, and derivatives transactions, and to refuse to roll over Prudential’s short-term debt, 

resulting in additional withdrawals that could contribute to asset liquidation risks. 

Policyholder Loans 

In addition to policyholder surrenders and withdrawals as described above, Prudential could face 

additional liquidity strain through the loan features that apply to many of its life insurance 

policies and annuity contracts. A sudden increase in loan requests by policyholders when the 

company is experiencing material financial distress could add to the liquidity strain. 

As required under state law, life insurance products that accrue a cash value (e.g., universal and 

whole life insurance policies) offer policyholders loans against their outstanding policies.126 

Policy loans allow policyholders to borrow from the company using the cash value of their life 

insurance contract as collateral. Policy loans thereby offer policyholders the ability to access the 

full cash value of their policies in a manner that may not trigger the most significant 

disincentives associated with a full or partial surrender of their policies (such as income taxes or 

loss of benefits). Further, if policyholders have lost confidence in the ability of Prudential to 

perform on future payment obligations due to the company’s material financial distress, 

disincentives such as being charged interest on their loan may be secondary to the incentive to 

quickly reduce exposure to Prudential. Policy loans may be an attractive first alternative to 

surrenders or may be used in combination with partial surrenders by policyholders who want to 

avoid or reduce the immediate consequences of an early surrender.

The maximum potential amounts policyholders may access in the form of loans is approximately

[•] for Prudential’s U.S. general account business, assuming generally [•] of the cash value is 

available for loans.127 On [•], Prudential has rights to postpone loan availability by up to six 

months under the policy loan contract provisions. In addition, state regulators may, subject to 

approval by state courts, impose temporary moratoriums on policy loans. 

 

126 See, e.g., 18 Del. C. 2911(a) (2014); N.J. Stat. Ann. 17B:25-8 (West 2014); N.Y. Ins. Law 3203(8)(A) 

(McKinney 2014).

127 Prudential Response to OFR Request B.2 (Jan. 22, 2018), p. 3.
43

As of December 31, 2017, Prudential had [•] in policy loans outstanding with an average interest 

rate of [•] percent, [•] from 2012.

128

Separate Account Liabilities

Prudential has $307 billion of separate account liabilities from individual variable annuity, 

retirement, and other products as of year-end 2017, compared to $253 billion at year-end 2012, 

and [•] of these liabilities can be surrendered or withdrawn immediately at or near market 

value.129 However, with separate account products, the customer, not Prudential, retains most of 

the investment risk, and the company’s equity and debt holders do not have a legal claim on 

separate account assets. As a result, separate account policyholders do not have the same 

incentives as general account policyholders to surrender their policies if the company 

experiences material financial distress. Prudential’s separate account holders may have other 

disincentives, including surrender charges, loss of contractual guarantees or insurance coverage,

or tax penalties, for surrendering policies.

[•] of Prudential’s separate account liabilities are variable annuities with a general account 

guarantee.

130

 These guarantees provide principal protection and a variety of guaranteed 

increases in values, including based on stated interest rates, account investment values, 

withdrawal amounts, and death benefits. These guarantees are covered by applicable state GAs 

up to statutorily prescribed limits. In the event of the company’s liquidation in a receivership 

proceeding, the company’s obligation to pay these guarantees would be pooled with other 

general account obligations to policyholders. In such circumstances, policyholders may receive 

less than what they might have recovered had the company not gone into liquidation. Thus, if 

Prudential were to experience material financial distress, it could increase the surrender 

incentives for policyholders. On the other hand, during a period of broader market stress, a 

decline in financial asset values would cause the nominal value of the general account guarantee 

on these variable annuity products to increase, which could decrease surrender rates.131

While the potential amount of surrenders or withdrawals from separate accounts that might occur 

if Prudential were to experience material financial distress is uncertain, any increase could lead 

to additional asset liquidations that could add to the effects of general account surrenders. 

However, that effect would be mitigated by the extent to which Prudential’s separate and general 

account assets are invested in different asset classes. For example, [•] percent of Prudential’s 

separate account assets are invested in equities, compared to [•] percent of general account 

assets.

132

 Given the size and liquidity of the equity markets, asset liquidation related to the 

 

128 Prudential Response to OFR Request B.2 (Jan. 22, 2018), pp. 2-3; Council Basis, p. 96.

129 Prudential Annual Reports on Form 10-K for the years ended December 31, 2012, p. 206, and December 31, 

2017, p. 152; Prudential Response to OFR Request B.1 (Separate Account) (Jan. 22, 2018), pp. 3-6.

130 Prudential Response to OFR Request B.1 (Separate Account) (Jan. 22, 2018), p. 3

131 Peter Sun and Xiaohong Mo, “Variable Annuity Dynamic Lapse Study: A Data Mining Approach,” Milliman 

Research Report (June 2011), available at http://us.milliman.com/uploadedFiles/insight/research/life-rr/variableannuity-dynamic-lapse.pdf; Christian Knoller, Gunther Kraut, and Pascal Schoenmaekers, “On the Propensity to 

Surrender a Variable Annuity Contract: An Empirical Analysis of Dynamic Policyholder Behavior,” Journal of Risk 

and Insurance volume 38, issue 4 (2016), pp. 979-1006. 

132 Prudential Response to OFR Prudential Request B.3 (Jan. 22, 2018), pp. 7-9.
44

separate accounts would be more easily absorbed by the market. In addition, separate account 

products could potentially be transferred to other insurance companies through the sale of a 

Prudential subsidiary or a block of business.

Third-Party Asset Management

Prudential had [•] of third-party assets under management as of December 31, 2017, a substantial 

increase from [•] as of September 30, 2012.133 Third-party asset management customers differ 

from owners of variable annuities and certain other separate account products with contractual 

guarantees because they do not have potential claims on the general account assets of the 

company, and Prudential’s debt and equity holders have no claims on its third-party assets under 

management. However, there is reputational risk to this business from distress emanating from 

other parts of the company. Prudential’s third-party asset management business appears to be 

transferrable—it has low capital requirements, generates consistent fee income, and does not 

appear to engage in unusual or complex financial transactions—which could increase the 

potential for other market participants to purchase this business in the event of Prudential’s 

material financial distress. The potential extent of investor withdrawals from this business 

depends on the mix of assets under management and the degree to which these assets are 

transferred to or reinvested with other asset managers in a timely manner. 

5.3.2 Prudential Investment Portfolio

If Prudential were faced with a large volume of policyholder withdrawals or other liquidity 

demands, the company could be forced to liquidate some of its assets. Prudential’s on-balance 

sheet assets include the company’s investment portfolio, cash and cash equivalents, and separate 

account assets. As discussed above, separate account assets can generally be expected to 

experience less liquidation risk than the company’s other assets.

Prudential’s investment portfolio is diversified and predominantly investment grade. 

Factors affecting the liquidity of Prudential’s bond portfolio include the type of security, the 

securities’ credit ratings, and whether the securities are publicly traded (in which case they are 

generally more liquid than privately traded bonds). Approximately [•] percent of Prudential’s 

U.S. general account asset holdings are investment grade, [•] percent are below investment 

grade, and the rest do not have a rating available.134 

As shown in Table 18, Prudential’s U.S. general account investment portfolio [•], of which liquid 

assets (cash, short-term investments, U.S. Treasury securities, U.S. agency securities, and nonU.S. sovereign debt) [•]. 

 

133 Prudential Response to OFR Request 4 (June 27, 2018), p. 1; Council Basis, p. 95. 

134 Prudential Response to OFR Request 2 (June 27, 2018), p. 4.
45

Table 18: Prudential U.S. General Account Cash and Invested Assets ($ Billions)

2012 (Total) 2017 (Total)

Asset Amount

% of 

Total Amount % of Total 

Liquid

Cash [•] [•] [•] [•]

Short-Term Investments/Others [•] [•] [•] [•]

U.S. Treasury Securities [•] [•] [•] [•]

U.S. Agency Securities and Agency 

Mortgage-Backed Securities [•] [•] [•] [•]

Foreign Government Bonds [•] [•] [•] [•]

Total Liquid Assets [•] [•] [•] [•]

Other Invested Assets

Corporate Fixed Income Securities [•] [•] [•] [•]

Equities, Mortgages, and ABS [•] [•] [•] [•]

Other Assets [•] [•] [•] [•]

Total Cash and Invested Assets [•] [•] [•] [•]

Sources: 2012 estimates based on Council Basis, p. 97, and Prudential Annual Report on Form 10-K for the year 

ended December 31, 2012, pp. 142, 183; Prudential Response to OFR Request 2 (June 27, 2018), p. 4.

5.3.3 Potential Impact of Prudential Asset Liquidation

The broader market implications of asset liquidation depend on a number of factors, including 

the size and composition of the liquidated asset portfolio; any fire-sale discount, which depends 

on the risk and liquidity of the assets; and the extent to which other financial market participants 

may be forced or incentivized to sell similar assets. All other things being equal, the liquidation 

of larger or less-liquid asset portfolios poses greater risk of disrupting financial markets than the 

liquidation of smaller or more-liquid asset portfolios. In addition, fire sales of assets that are 

widely held, or commonly used as collateral in critical funding markets by large financial 

intermediaries, would generally have a greater impact on market function than fire sales of assets 

that are held or used more narrowly.

The order in which Prudential may liquidate assets in the event of its material financial distress is 

a factor in the extent of any fire-sale risk, but is subject to considerable uncertainties. Prudential 

could liquidate a significant portion of its highly liquid assets rapidly, reducing the likelihood 

that the company would be forced to liquidate illiquid assets in the event of its material financial 

distress. However, in the event of the company’s material financial distress, Prudential may also 

be expected to seek to maintain risk-based capital ratios and other requirements above the level 

at which state regulatory authorities would be legally obligated to intervene. Doing so might 

require Prudential to sell a mix of assets across a number of asset classes, rather than proceed 

with sales of assets in order from most liquid to least liquid. Further, in the event of a significant 

market disruption, there could be a meaningful first-mover advantage to selling less-liquid assets 

first. For example, markets for less-liquid assets, such as private and public corporate bonds and 

ABS, could be prone to disruption in the event that a forced seller liquidated a large portion of its 

portfolio of those assets. Given these potential discounts, in some circumstances Prudential may

be incentivized to sell a portion of its less-liquid assets first and to hold U.S. government 

securities and agency mortgage-backed securities (MBS), which tend to increase in value during 
46

a period of market turmoil. Further, Prudential’s holdings of liquid assets could be reduced 

before the company enters material financial distress. 

To the extent that Prudential’s highly liquid assets are encumbered, Prudential would need to sell 

less-liquid assets to support surrender payments and other liquidity needs. Securities pledged are 

investment securities Prudential owns that are pledged as collateral to unaffiliated parties, such 

as in securities lending, repurchase, derivative, or collateralized borrowing transactions. In 

addition, some of Prudential’s assets are restricted because they are on deposit with 

governmental authorities or trustees, including certain restricted cash balances and securities, 

assets held in voluntary trusts, and securities restricted as to sale. Of the [•] of Prudential’s U.S. 

general account assets that are encumbered or restricted, a large majority are pledged in 

connection with Prudential’s securities lending, repurchase agreement, and derivatives 

transactions (see Appendix B for detail regarding Prudential’s general account assets).

135

One approach to assessing the potential fire-sale impact of a rapid liquidation of assets by 

Prudential is to compare the total amount of individual asset types in Prudential’s bond portfolio 

to the average daily trading volume (ADTV) of those assets on a market-wide basis. This ratio 

provides insight into the ability of the market to absorb Prudential’s assets if Prudential were 

forced to liquidate, or if the market were concerned that the company might liquidate, its entire 

bond portfolio. As shown in Table 19, changes in these ratios since 2012 [•].

Table 19: Prudential U.S. General Account Unencumbered Bond Portfolio Compared to 

ADTV ($ Billions)

2012 2017

Asset ADTV

General 

Account

General 

Account / 

ADTV ADTV

General 

Account

General 

Account / 

ADTV

CMBS & NonAgency MBS 4.5 [•] [•] 2.5 [•] [•]

Non-Agency ABS 1.5 [•] [•] 1.4 [•] [•]

U.S. Investment 

Grade Corporates 11.9 [•] [•] 16.8 [•] [•]

Sources: Securities Industry and Financial Markets Association (2012 and 2017 ADTVs), available at 

https://www.sifma.org/resources/research/us-bond-market-trading-volume and 

https://www.sifma.org/resources/research/us-corporate-bond-trading-volume; Council Basis, p. 97; Prudential 

Response to OFR Request 2 (June 27, 2018), pp. 3, 5.

Note: The 2012 unencumbered asset allocations to individual portfolio types are estimates based on Prudential’s 

2017 allocations. 

A refinement to this approach is to assess the potential effects if, as a result of policyholder 

withdrawals, Prudential sells a pro rata portion of certain segments of its bond portfolio, and 

compare the amount of each asset sold to the market-wide ADTV for that asset type. Less-liquid 

asset categories such as U.S. private placements and commercial mortgages are excluded 

because their relative illiquidity would make them more difficult to sell rapidly. Table 20 shows

 

135 Prudential Response to OFR Request B.4 (Jan. 22, 2018), p. 1.
47

the assets that could be expected to be sold from Prudential’s U.S. general account investment 

portfolio and the corresponding pro rata sales amounts under the various short-term stress 

scenarios. 

Table 20: Pro Rata Sales of Prudential U.S. General Account Portfolio in Various ShortTerm Stress Scenarios ($ Millions) 

Asset Total

[•] of Sales 

Over 90 Days 

(Q4 2008 AIG 

Rate)

[•] of Sales 

Over 90 Days 

(Historical 

Analysis Rate)

[•] of Sales 

Over 30 Days 

(A.M. Best 

Liquidity 

Model Rate)

Cash [•] [•] [•] [•]

U.S. Treasuries [•] [•] [•] [•]

Other Foreign Govt. Bonds [•] [•] [•] [•]

U.S. Agencies and Agency MBS [•] [•] [•] [•]

IG U.S. Public Corporates [•] [•] [•] [•]

IG Non-U.S. Public Corporates [•] [•] [•] [•]

Equities [•] [•] [•] [•]

CMBS and Non-Agency RMBS [•] [•] [•] [•]

Non-Agency ABS [•] [•] [•] [•]

Short-Term Investments/Others [•] [•] [•] [•]

Total [•] [•] [•] [•]

Source: Table 17; Appendix B. 

As shown in Table 21, in the first example of [•] of total asset sales, the amounts of CMBS and 

non-agency MBS, non-agency ABS, and U.S. investment grade corporate bonds that Prudential 

would sell in this example are [•] ADTV in those markets. Using the middle example of [•], the 

highest ratio is [•], and in the [•] example, the highest ratio is [•]. It is important to note, 

however, that these ADTVs represent market activity in 2017; trading volumes could be 

significantly lower in a period of financial market stress.136 In addition, the shorter the period 

over which assets are sold, the greater is the potential market impact. 

 

136 Securities Industry and Financial Markets Association, U.S. Bond Market Trading Volume, available at 

https://www.sifma.org/resources/research/us-bond-market-trading-volume; Securities Industry and Financial 

Markets Association, U.S. Corporate Bond Trading Volume, available at 

https://www.sifma.org/resources/research/us-corporate-bond-trading-volume. The ADTV for U.S. investment-grade 

corporate securities was $8.4 billion in 2008 and $12.1 billion in 2009. ADTV data for CMBS and non-agency 

MBS and non-agency ABS are not available before 2011. The lowest ADTV for CMBS and non-agency MBS was 

in 2017 at $2.5 billion. The lowest ADTV for non-agency ABS was in 2013 and 2016 at $1.3 billion. 
48

Table 21: Example Pro Rata Sales of Prudential General Account Bond Portfolio 

Compared to ADTV ($ Billions)

[•] of Sales Over 

90 Days (Q4 2008 

AIG Rate)

[•] of Sales Over 90 

Days (Historical 

Analysis Rate)

[•] of Sales Over 30 

Days (A.M. Best 

Liquidity Model 

Rate)

Asset Amount

Amount 

/ ADTV Amount

Amount 

/ ADTV Amount

Amount 

/ ADTV

CMBS and Non-Agency MBS [•] [•] [•] [•] [•] [•]

Non-Agency ABS [•] [•] [•] [•] [•] [•]

U.S. Investment Grade 

Corporates [•] [•] [•] [•] [•] [•]

Sources: Securities Industry and Financial Markets Association (2017 ADTVs); Table 20. 

Prudential has additional liquidity sources besides its highly liquid assets that could be used to 

satisfy some policyholder demands. The company has access to FHLB borrowing facilities. 

Prudential’s outstanding advances from FHLBs total [•], but Prudential’s total volume of eligible 

securities that can be pledged is [•].

137

 

Another approach to analyzing the potential effects of the liquidation of assets by Prudential is to 

assess the relative impact that fire sales by various financial institutions could have on other 

financial institutions.

138

 This analysis attempts to assess the price effect of a firm’s fire sale on 

the balance sheet of other firms holding the same or similar assets. The analysis starts by 

assuming a downward shock to the net worth of a firm or group of firms (an “equity shock”). 

Such a shock would raise the firm’s leverage and decrease the equity cushion protecting the 

firm’s creditors. In attempting to return to the company’s original leverage, the firm would have 

to rapidly sell assets. Such a fire sale of assets could directly affect the balance sheets of firms 

that hold the same or similar assets, thus spreading the negative effects of its distress to other 

firms. As a check on the strength of this analysis, it employs a second scenario, and assumes a 

downward shock to the value of assets of a firm or group of firms (an “asset shock”).139

As noted above, a firm’s asset size and leverage relative to other financial firms will affect the 

relative impact of a rapid liquidation of assets by that firm. For instance, a firm that is small 

relative to the market can sell a volume of assets that can be easily absorbed, but larger firms will 

necessarily sell larger volumes of assets that may not be so easily absorbed. In addition, the 

market impact of asset sales by a financial firm will also depend on the firm’s asset profile 

because rapid fire sales of assets that are held by other financial firms would likely have a more 

pronounced effect on the financial system.

 

137 Prudential Response to OFR Request A.14 (Jan. 22, 2018), p. 2. 

138 This analysis considers the framework proposed in: Robin Greenwood, Augustin Landier, and David Thesmar, 

“Vulnerable Banks,” Journal of Financial Economics volume 115, issue 3 (March 2015), pp. 471-485. 

139 While more leveraged firms must sell more assets in both scenarios, the asset shock scenario requires leveraged 

firms to sell significantly more assets to return to their steady state. 
49

As of December 31, 2017, Prudential ranked 11th and 16th, respectively, with respect to the 

impact of asset and equity shocks, out of a sample of financial companies, compared to 9th and 

13th in 2012. (See Appendix C.) 

The drivers of these changes in rankings are Prudential’s decreased leverage ratio and increased 

holding of highly liquid assets; however, Prudential’s general account assets have grown, 

increasing the amount of assets that would likely be liquidated in the event of Prudential’s 

material financial distress. Prudential’s rankings place it near MetLife (10th) and Pacific Mutual 

Holding Company (12th) for an asset shock and BB&T (15th) and SunTrust (17th) for an equity 

shock.

This analysis indicates that there is not a significant risk that asset liquidation by Prudential 

would disrupt trading or funding in key markets or cause significant losses or funding problems 

with other firms with similar holdings to an extent that would materially increase borrowers’ 

costs of funds.

5.3.4 Other Analyses 

There are a number of other analyses that market participants or researchers use for measuring 

the importance and impact of certain firms. For example, SRISK combines key characteristics of 

systemic risk, including size, leverage, and interconnectedness, and attempts to quantify the 

amount of capital a financial firm would need to raise in order to function normally in the event 

of a severe financial crisis. By this measure, Prudential ranks near the top among large U.S. 

financial institutions. 

One reason for its high ranking is that Prudential has a relatively high market beta compared to 

other large financial institutions; that is, its returns are highly correlated with the market.140 One 

explanation for this high correlation is that Prudential may have significant exposure to the 

equities market through, for example, general account guarantees on the company’s variable 

annuity products and fee income generated by its large asset management business. Prudential 

uses derivatives to hedge its market risks, and in 2017 it introduced a capital hedge program in 

its Individual Annuities segment to further hedge equity market impacts.141 In the event that 

these hedging strategies are insufficient, broader market stress may exacerbate Prudential’s 

material financial distress. The high SRISK indicates that Prudential’s material financial distress 

would be more likely to occur during a period of overall stress in the financial services industry, 

which could contribute to the effect the company’s material financial distress could have on 

financial markets and firms.

It is important to note, however, that similar to other models, the use of SRISK alone has

limitations, including that estimating the expected capital shortfall of a firm does not necessarily 

capture its interconnectedness with the broader financial markets. In addition, some have argued 

 

140 Since 2012, Prudential’s SRISK has been consistently in the range of $30 to $40 billion. Federal Reserve Board 

staff analysis based on: Christian Brownlees and Robert Engle, “SRISK: A Conditional Capital Shortfall Model of 

Systemic Risk,” Review of Financial Studies volume 30, issue 1 (2017), pp. 48-79. 

141 Prudential Response to OFR Request A.6a (Jan. 22, 2018), p. 2.
50

that SRISK does not fit the long-term nature of the insurance business model; rather than focus 

on market capitalization, they suggest that regulatory capital is a more appropriate measure of 

the solvency and financial strength of insurance companies.

142

Prudential’s Liquidity Stress Testing

Prudential uses a liquidity stress testing (LST) model that applies deterministic scenarios of 

market and insurance events to stress key activities that may expose Prudential to liquidity risk at 

the enterprise, legal entity, and business unit levels. [•]143 While these scenarios are not 

determinative for purposes of the Council’s analysis, they are included here as context.

Table 22: Prudential Assumptions for LST

Scenario Description [•] [•] [•] [•] [•] [•]

[•] [•] [•] [•] [•] [•] [•] [•]

Source: Prudential Response to OFR Request B.7 (Jan. 22, 2018), p. 14. [•].

[•]

Table 23: Prudential Estimate of Asset Liquidation Under LST Scenarios ($ Billions)

Legal Entity [•]

PICA [•]

PLAZ [•]

PRIAC [•]

PLIC [•]

GUL Re/UPARC [•]

PIISC [•]

Total [•]

Source: Prudential Response to OFR Request B.7 (Jan. 22, 2018), p. 10. The entities included in this table are 

Prudential Insurance Company of America (PICA), Pruco Life Insurance Company (PLAZ), Prudential 

Retirement Insurance and Annuity Company (PRIAC), Prudential Legacy Insurance Company of New Jersey 

(PLIC), Gibraltar Universal Life Reinsurance Company/Universal Prudential Arizona Reinsurance Captive 

Company (GUL Re/UPARC), and Prudential International Insurance Service Company, LLC (PIISC). 

5.4 Critical Function or Service Transmission Channel

Under the critical function or service transmission channel, the Council considers whether a 

nonbank financial company may no longer be able or willing to provide a critical function or 

service that is relied upon by market participants or customers and for which there are no ready 

substitutes.144 The Council Basis noted that Prudential is a leader in several of its markets and 

products but concluded that it did not appear that Prudential had a large enough share of any of 

these markets to cause a significant disruption in the provision of services if it experiences 

material financial distress and is unable or unwilling to provide services. 

 

142 Hal S. Scott, Kristin Ricci, and Aaron Sarfatti, “SRISK as a Measure of Systemic Risk for Insurers: 

Oversimplified and Inappropriate” (Sep. 28, 2016), available at https://ssrn.com/abstract=2837784.

143 Prudential Response to OFR Request B.7 (Jan. 22, 2018), p. 8.

144 See Rule and Interpretive Guidance. 
51

Prudential’s market share of its key businesses and products has been relatively stable since 

2013, as seen in Table 24 below. The company has dominant market shares of two businesses—

pension risk transfers and stable value products— but Prudential’s provision of these services is 

not critical to the functioning of the U.S. economy or financial system. Therefore, it appears that 

Prudential does not provide a critical function or service whose termination could contribute 

meaningfully to a threat to U.S. financial stability through this transmission channel. 

Table 24: Prudential Market Share of Key Businesses

9/30/2012 9/30/2017

Line of Business Market Share Rank

Market 

Share Rank

Group Life Insurance [•] [•] [•] [•]

Annuities [•] [•] [•] [•]

Japan Life Insurance [•] [•] [•] [•]

Group Long Term Disability [•] [•] [•] [•]

Group Short Term Disability [•] [•] [•] [•]

Retirement* [•] [•] [•] [•]

U.S. Life Insurance [•] [•] [•] [•]

Asset Management – Open-End Mutual Funds [•] [•] [•] [•]

Retirement - Pension Risk Transfer [•] [•] [•] [•]

Retirement - Stable Value* [•] [•] [•] [•]

Source: Council Basis, p. 112; Prudential Response to OFR Request C.1 (Jan. 22, 2018), pp. 2-3.

* As of December 2016.

5.4.1 Core Insurance Products

Prudential is a leading provider of insurance and retirement products, commanding [•] market 

share in each of its core products. However, these are highly competitive markets, and 

Prudential has less than [•] percent market shares in all but two products. Its market share in all 

but one of its key insurance and retirement products [•].

Retirement—Pension Risk Transfer

Prudential’s reported market share of the PRT market was [•] percent as of September 30, 2017, 

but this market is relatively small, with $23 billion of total buyout sales in 2017, and the 

provision of this service by Prudential it is not likely a critical function in the U.S. economy.145

Prudential’s reported market share may be somewhat misleading because of the nature of this 

particular market, where PRT transactions tend to vary considerably from year to year and 

market share can be skewed by large one-time transactions. Prudential asserted that a more 

accurate measure of market share is (1) the total amount of pension risk transferred that is 

currently under management by Prudential, compared to (2) the total pool of defined benefit 

 

145 Prudential Response to OFR Request C.1 (Jan. 22, 2018), p. 2; LIMRA Secure Retirement Institute, Group 

Annuity Risk Transfer Survey (2017, 4th Quarter), 

https://www.limra.com/Posts/PR/News Releases/LIMRA Secure Retirement Institute U S Single Premium P

ension Buy-out Sales Nearly Double in the Fourth Quarter.aspx. 
52

liabilities potentially available for transfer to a third party; the differential between these amounts 

is over [•]. By this measure, Prudential commands [•] of the available market.146 However, this 

approach likely significantly understates Prudential’s importance to the PRT market by assuming 

that all pension risk may be transferred. 

Retirement—Stable Value

Prudential reported that its market share of stable value products was [•] percent based on assets 

as of December 31, 2016. This includes a [•] percent market share of the stable value wrap 

business and a [•] percent market share for insurance company general and separate account 

stable value investment options.147 According to the company, [•]. Stable value fund managers 

impose diversification limits that restrict the allocation to any individual wrap provider to [•].

148

5.4.2 Asset Management

Prudential has a third-party asset management business that offers open-end mutual funds, but 

the total assets under management are small in comparison to the broader market. Prudential had 

[•] of assets under management as of December 31, 2017, compared to [•] as of September 30, 

2012.149 Prudential’s mutual fund business is [•] largest in the industry and manages [•] percent 

of the assets under management in the industry.150 Prudential ranks [•] by global assets under 

management.151 This is a highly competitive market, with many large participants that could 

easily absorb capacity created by distress at Prudential. For example, the five largest asset 

managers represent [•] of global assets under management.

152 As stated in the Council Basis, [•] 

Prudential’s assets under management are held in external third-party custody accounts and 

could be transferred to a new investment manager if Prudential experienced material financial 

distress.153

5.4.3 Mortgage Servicing 

Prudential continues to play an important role in the commercial mortgage business as one of the 

10 largest servicers of commercial mortgages and one of the five largest servicers of Federal 

Housing Administration and Government National Mortgage Association (Ginnie Mae) loans in 

the United States. As was the case in 2012, the potential effects of Prudential’s distress on these 

markets would likely be mitigated by the smaller size of its origination business and the 

transferability of its servicing business to other entities—despite being one of the 10 largest 

commercial mortgage servicers, Prudential services only 2 percent of the outstanding loans in 

 

146 Prudential Response to OFR Request C.1 (Jan. 22, 2018), p. 4. 

147 Prudential Response to OFR Request C.1 (Jan. 22, 2018), pp. 7-8. 

148 Prudential Response to OFR Request C.1 (Jan. 22, 2018), p. 7.

149 Prudential Response to OFR Request 4 (June 27, 2018), p. 1; Council Basis, p. 5. 

150 Prudential Response to OFR Request C.1 (Jan. 22, 2018), p. 3.

151 Prudential Response to OFR Request C.1 (Jan. 22, 2018), p. 3. 

152 Prudential Response to OFR Request C.1 (Jan. 22, 2018), p. 4.

153 Council Basis, p. 112. 
53

this market. Prudential’s share of Federal Housing Administration and Ginnie Mae loans is only 

slightly higher, accounting for 4.5 percent of loans outstanding.154

Prudential serviced 4,631 commercial mortgage loans valued at $90 billion as of December 31, 

2017, which ranked 10th by number of loans and sixth in dollar value.155 This accounts for 2 

percent of loans serviced and 3 percent by dollar value.156 There are more than 40 competitors in 

the commercial loan servicing space, and the largest servicer services more than 10 times the 

number of loans serviced by Prudential, while the second-largest provider services more than 

five times the number of loans serviced by Prudential. Prudential’s market share indicates that it 

is not a crucial participant in this market. 

5.4.4 Provision of Credit to State and Local Governments

Prudential’s holdings of state and local government obligations have [•]. As of December 31, 

2017, Prudential held approximately [•] of investments in state and local government debt 

obligations in its general account and in the guaranteed portion of its separate accounts.157 This 

is [•] of such investments in 2012 [•] of U.S. municipal debt outstanding.158 [•] it does not 

appear that financial distress at Prudential would have a meaningful adverse impact on the 

availability of credit for these borrowers.

Table 25: Investments in State and Local Government Securities ($ Millions)

Entity Investment 

[•] [•] [•]

Source: Prudential Response to OFR Request C.2 (Jan. 22, 2018), p. 1. 

5.4.5 Provision of Credit to Low-Income, Minority or Under-Served Communities

In 2017, Prudential Global Investment Management Real Estate Finance originated [•] in 

multifamily mortgages nationwide, or [•] percent of an estimated [•] of multifamily mortgages 

originated nationwide.159 Prudential’s volume has [•].

160

 Only a small portion of this market 

represents low-income, minority, or under-served communities, and Prudential estimates that it 

provided [•] in credit to affordable apartments in 2017, representing [•] percent of the total credit 

 

154 Mortgage Bankers Association, “Mortgage Bankers Association Servicing Year End Survey” (2017), 

https://www.mba.org/2018-press-releases/february/mba-releases-2017-year-end-commercial/multifamily-servicerrankings. 

155 Mortgage Bankers Association, “Mortgage Bankers Association Servicing Year End Survey” (2017), 

https://www.mba.org/2018-press-releases/february/mba-releases-2017-year-end-commercial/multifamily-servicerrankings. 

156 Mortgage Bankers Association, Mortgage Bankers Association Servicing Year End Survey (2017), 

https://www.mba.org/2018-press-releases/february/mba-releases-2017-year-end-commercial/multifamily-servicerrankings. 

157 Prudential Response to OFR Request C.2 (Jan. 22, 2018), p. 2.

158 Prudential Response to OFR Request C.2 (Jan. 22, 2018), p. 2.

159 Prudential Response to OFR Request C.3 (Jan. 22, 2018), p. 2.

160 Council Basis, p. 114. 
54

for multifamily affordable lending in these communities.161 However, assuming Prudential does 

less affordable lending in target markets because Prudential is not subject to Community 

Reinvestment Act requirements, Prudential estimates that it originated [•] in multifamily credit in 

these communities, resulting in a market share of [•] percent.162

Prudential also has a [•] portfolio of social investments. At year-end 2017, the unit’s investments 

in community development financial institutions totaled [•]. Prudential also participates in 

Treasury’s Minority Banking Program, under which Prudential has invested [•].

163

In sum, Prudential plays a small role in the provision of credit for low-income, minority, or 

under-served communities.

6. COMPLEXITY AND RESOLVABILITY

The Council Basis evaluated Prudential’s complexity and resolvability.164 The Council 

considered whether any threat that material financial distress at Prudential could pose to U.S. 

financial stability could be mitigated or aggravated by its complexity, the opacity of its 

operations, or the difficulty of resolving it. The Council concluded that the complexity and 

interconnectedness of Prudential, including its operations in all 50 states and numerous foreign

countries, could increase the obstacles to the company’s rapid and orderly resolution and delay 

or complicate steps to resolve Prudential in an orderly fashion that would minimize disruption to 

financial stability.165 The Council also noted that a coordinated resolution of Prudential would 

require accommodations with local supervisory authorities, as well as cooperation among a 

number of home and host jurisdiction supervisory authorities and courts. 

As noted above, Prudential is seventh on the list of largest bank holding companies and insurers 

in the United States, based on total assets.166 It is the largest U.S. life insurance company, with 

$3.7 trillion of in-force life insurance167 and the [•] asset manager worldwide.168 As of 

December 2017, Prudential had [•].

169

 Prudential continues to operate in all 50 states and 

through its subsidiaries provides services to institutional and individual customers in more than 

 

161 Prudential Response to OFR Request C.3 (Jan. 22, 2018), p. 2.

162 Prudential Response to OFR Request C.1 (Jan. 22, 2018), pp. 7-8. 

162 Prudential Response to OFR Request C.3 (Jan. 22, 2018), p. 3. 

163 Prudential Response to OFR Request C.3 (Jan. 22, 2018), pp. 3-4. 

164 Council Basis, pp. 123-134.

165 The Council Basis noted Prudential’s operations in 35 countries (p. 123); currently Prudential has operations in 

more than 40 countries. Japan continues to represent a significant share of consolidated revenues (33 percent) and 

of insurance liabilities (31 percent) as of year-end 2017. Prudential’s International Insurance division comprised 45 

percent of total revenues in 2017. See section 7.2 below.

166 See Table 2, which compares certain of Prudential’s financial metrics to those of the largest bank holding 

companies and insurers. 

167 Prudential Fact Sheet (Aug. 1, 2018), available at http://news.prudential.com/presskits/prudential-financial-factsheet htm.

168 Prudential Response to OFR Request C.1 (Jan. 22, 2018), p. 3.

169 Prudential Response to OFR Request D.2 (Jan. 22, 2018), p. 2.
55

40 countries;170 [•];

171 and it is subject to multiple regulatory regimes in each state and each 

country. The number of authorities and regimes that would be involved in the resolution of the 

firm remains unchanged. The Council Basis noted that [•].

172 In addition, the Council found that 

Prudential’s subsidiaries [•]173 Prudential’s legal structure [•].

174

 Prudential and its subsidiaries 

[•].

175

 In addition, as discussed in section 5.2.3, the failure of an institution the size of Prudential 

could stress the capacity of the state GAs and thereby transmit stress to other life insurance 

companies. These complexities continue to present obstacles to the resolvability of the firm. 

Prudential has identified certain actions it has taken, as well as certain changes in its regulatory 

framework, that may impact its complexity and resolvability. These include internal 

organizational changes; the creation and dissolution of captive reinsurance companies; the 

restructuring of its closed block business; changes in the firm’s capital and liquidity 

management; and the restructuring of its internal debt. Finally, Prudential (as well as its state 

regulators) highlighted various regulatory reforms.

Prudential has both created and eliminated captive insurers since 2013, with the result that the 

number of captive reinsurers remains seven.176 However, it has taken steps to simplify the use of 

captives.177 Prudential also notes that it restructured and simplified its closed block business, 

which has $61 billion in general account assets. 178 Prudential points to changes to its capital and 

liquidity management. Prudential also highlights the restructuring of some of its debt, by 

reducing its use of senior debt and increasing its use of junior subordinated hybrid securities as 

additional loss-absorbing capacity that may be available in the event of the company’s material 

financial distress. [•]179

In sum, Prudential remains a large and complex enterprise. Its multi-jurisdictional operations,

the various regulatory regimes under which the organization conducts business, and its 

intercompany funding arrangements, continue to contribute to its complexity and could pose 

obstacles to its orderly resolution. However, in light of the conclusions set forth in section 5

regarding the transmission channel analysis, the difficulty to resolve Prudential and the potential 

for the company’s disorderly resolution do not lead to a conclusion that Prudential’s material 

financial distress could pose a threat to U.S. financial stability.

 

170 Prudential Fact Sheet (Aug. 1, 2018), available at http://news.prudential.com/presskits/prudential-financial-factsheet htm.

171 [•]

172 Council Basis, pp. 128-129.

173 Council Basis, p. 124.

174 [•] 

175 Prudential Response to OFR Request D.3, D.7 (Jan. 22, 2018).

176 Council Basis, p. 48; Prudential Response to OFR Request A.4 (Jan. 22, 2018). 

177 Prudential Response to OFR Request D.1 (Jan. 22, 2018).

178 Prudential Response to OFR Request D.1 (Jan. 22, 2018).

179 See 2016 Prudential Submission, p. 13. 
56

7. EXISTING REGULATORY SCRUTINY

Section 113 of the Dodd-Frank Act requires the Council to consider, as one of ten factors, the 

degree to which Prudential is already regulated by one or more primary financial regulatory 

agencies.180 

7.1 Domestic Regulatory Developments

7.1.1 Federal 

Prudential has been subject to supervision by the Board of Governors since the Council’s 

determination regarding the firm, with supervision conducted by examiners at the Federal 

Reserve Bank of Boston. The Dodd-Frank Act gives the Board of Governors the authority to 

“require each nonbank financial company supervised by the Board of Governors and any 

subsidiary thereof, to submit reports under oath, to keep the Board of Governors informed as to 

the financial condition of the company or subsidiary, systems of the company or subsidiary for 

monitoring and controlling financial, operating, and other risks, and the extent to which the 

activities and operations of the company or subsidiary pose a threat to the financial stability of 

the United States.”181 In addition, the Dodd-Frank Act provides that “the Board of Governors 

may examine any nonbank financial company supervised by the Board of Governors and any 

subsidiary of such company” regarding any of the aforementioned matters182 and take 

enforcement action against Prudential or any of its subsidiaries.183 

The Federal Reserve Bank of Boston stated that it conducts both continuous supervision of 

Prudential, which is facilitated by the presence of several examiners on site at Prudential, and 

targeted reviews of particular areas.184 The Federal Reserve Bank of Boston stated that it 

conducts approximately 10 to 12 supervisory events a year, such as reviews of resolution 

planning and capital planning. The Federal Reserve Bank of Boston also participates in the 

supervisory colleges sponsored by Prudential’s state regulators, discussed below.

7.1.2 New Jersey 

The NJDOBI, historically the lead state for state-based insurance supervision since the firm’s 

inception, has been the group-wide supervisor of Prudential since February 2015. Prudential’s 

insurance company subsidiaries are also subject to supervision by the Arizona Department of 

Insurance, the CID, and the Indiana Department of Insurance, and are subject to regulatory filing 

requirements, market conduct rules, and other consumer protection measures with regard to the 

 

180 12 U.S.C. § 5323(a)(2)(H). 

181 Dodd-Frank Act § 161(a)(1), 12 U.S.C. § 5361(a)(1).

182 Id. § 161(b), 12 U.S.C. § 5361(b)(1).

183 Id. § 162, 12 U.S.C. § 5362. In 2016, the Board of Governors published several proposals for enhanced 

prudential standards under section 165 of the Dodd-Frank Act that, if adopted, would apply to Prudential, including: 

(1) an advance notice of proposed rulemaking inviting comment on conceptual frameworks for capital standards; (2) 

a proposed rule to apply enhanced prudential standards pursuant to section 165 of the Dodd-Frank Act; and (3) a 

reporting proposal to collect financial data on a consolidated basis. See 81 Fed. Reg. 24097 (April 25, 2016); 81 

Fed. Reg. 38610 (June 14, 2016); 81 Fed. Reg. 38631 (June 14, 2016).

184 As of the time of the consultation, the Federal Reserve Bank of Boston stated that it had six examiners on site.
57

products sold in all 50 U.S. states, the District of Columbia, the five U.S. territories, and 

numerous foreign countries. 

Overview of Current Authorities

As Prudential’s group-wide supervisor, New Jersey law provides NJDOBI with the power to 

conduct and coordinate the following, among other things: (1) the assessment of enterprise risk 

within Prudential to ensure that the material financial condition and liquidity risks to the insurers 

in the group are identified by management and reasonable and effective mitigation measures are 

in place for the risks without regard to their source; (2) requests for information from any 

Prudential entity to assess enterprise risk including, but not limited to, information regarding 

governance, risk assessment and management, capital adequacy, and material intercompany 

transactions; (3) compelling the development and implementation of reasonable measures 

designed to assure that Prudential is able to timely recognize and mitigate material risks to the 

insurers in the group; and (4) other group-wide supervisory activities considered appropriate.185 

New Jersey law provides that NJDOBI may examine any New Jersey-registered insurer “and its

affiliates to ascertain the financial condition of the insurer, including the enterprise risk to the

insurer by the ultimate controlling party, or by any entity or combination of entities within the

insurance holding company system, or by the insurance holding company system on a

consolidated basis.”186 In addition, New Jersey law provides that NJDOBI has the power to

order any New Jersey-registered insurer “to produce such records, books, or other information

papers in the possession of the insurer or its affiliates as shall be necessary to ascertain the

financial condition of the insurer or to determine compliance with [New Jersey’s insurance

holding company statute].”187 New Jersey law provides that, “[i]n the event such insurer fails to

comply with such order, NJDOBI shall have the power to examine such affiliates to obtain such

information.”188 Furthermore, New Jersey law provides that NJDOBI has “power to issue

subpoenas, to administer oaths, and to examine under oath any person for purposes of

determining compliance with [the examination statute].”189 Additionally, New Jersey’s 

insurance statute was amended, consistent with the NAIC’s Solvency Modernization Initiative, 

to expand the scope of NJDOBI examinations, require the filing of an ORSA with NJDOBI, 

require enterprise-wide risk reporting to NJDOBI, and subject additional inter-affiliate 

transactions to prior approval by NJDOBI.

190

 

185 N.J.S.A. § 17:27A-5.2.

186 N.J.S.A. § 17:27A-5(a).

187 Id. 

188 Id. See also N.J.S.A. § 17:27A-5(e).

189 N.J.S.A. § § 17:27A-5(e). Under New Jersey law, affiliate includes any entity—insurer or non-insurer—that

“directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control

with [the registered insurer].” See N.J.S.A. § 17:27A-1a. See also N.J.S.A. § 17:27A-1c (defining “control”).

190 See P.L. 2014. c. 81. (the “Solvency Modernization Act”) § 3 (enterprise risk reporting, codified at N.J.S.A. § 

17:27A–3(k)); § 4 (inter-affiliate transactions, codified at N.J.S.A. 17:27A–4(a)); § 6 (examination powers, codified 

at N.J.S.A. § 17:27A–5); § 50 (ORSA, codified at N.J.S.A. § 17:23–31). The Solvency Modernization Act also 

provided for group-wide supervision for certain international insurance groups. Id. § 8 (codified at N.J.S.A. 

17:27A–5.2). It is pursuant to this provision that NJDOBI has acted as the group-wide supervisor of Prudential 

since 2015, as discussed above. 
58

Submissions from Prudential [•] and the Arizona Insurance Department

Prudential’s submissions discussed developments in New Jersey’s supervision and regulation of 

insurance companies that it argues supports rescission of the Council’s determination.191 Among 

other things, Prudential’s submission describes New Jersey state law changes from 2014, 

referenced above, authorizing NJDOBI to act as the group-wide insurance supervisor for any 

international insurance group if the international insurance group’s ultimate controlling person is 

domiciled in New Jersey or under certain other circumstances.192 Prudential’s submission also 

described the state law as enabling NJDOBI to monitor and assess risks of the entire Prudential 

enterprise, including risks and activities of the holding company and all of its insurer and noninsurer affiliates.193

 [•]

Based on the information received from [•] the Arizona Insurance Department, and Prudential, 

below is a description of the actions the NJDOBI is taking to implement its supervisory 

authorities with regard to Prudential.

Group-wide Financial Examination

[•]194

Specific Supervisory Actions

[•]195 [•]196 [•]197 [•]198 [•]199 [•]200 [•]201 [•]202 [•]203 

Own Risk and Solvency Assessment

Prudential is required to file an ORSA. Under New Jersey law, an ORSA is a “confidential 

internal assessment, appropriate to the nature, scale, and complexity of an insurer or insurance 

group, conducted by that insurer or insurance group of the material and relevant risks associated 

with the insurer or insurance group’s current business plan, and the sufficiency of capital 

 

191 2016 Prudential Submission, pp. 27-30; 2018 Prudential Submission, pp. 18–19, 34–36.

192 Id. 

193 Id.

194 See Report on the Group-Wide Examination of Prudential Financial, Inc. as of Dec. 31, 2016 (filed June 1, 

2018); Coordination Examination Report relating to the Condition of Prudential Insurance Company of America as 

of Dec. 31, 2016 (filed Jun. 1, 2018); Coordination Examination Report relating to the Condition of Pruco Life 

Insurance Company of New Jersey as of Dec. 31, 2016 (filed June 1, 2018); and Prudential Legacy Insurance 

Company of America as of Dec. 31, 2016 (filed June 1, 2018).

195 [•]

196 [•]

197 [•]

198 [•] XXX and AXXX policies are those required to be valued under Section 6 or 7 in the NAIC Valuation of Life 

Insurance Policies Model Regulation. 

199 [•]

200 [•] 

201 [•]

202 [•]

203 [•]
59

resources to support those risks.”204 According to the NAIC, the primary goals of an ORSA are 

to (1) foster an effective level of enterprise risk management at all insurers and (2) provide a 

group-level perspective on risk and capital, as a supplement to the existing legal-entity review.205 

Prudential submits an ORSA report annually to NJDOBI, supplemented by quarterly updates and 

in-person reviews with Prudential senior management. The report is required to include 

Prudential’s self-assessment of its group-wide risk management framework; its process for 

assessing risk under various stress conditions; and its capital adequacy as compared to its 

identified risks on a going concern basis. [•]206 [•]207 

Supervisory Colleges and Crisis Management Groups

For U.S.-domiciled insurance holding companies with operations in multiple jurisdictions, state 

insurance regulators may convene “supervisory colleges” on a periodic basis. [•]208 The 

objective of the CMG is to enhance preparedness for, and facilitate the management and 

resolution of, a cross-border financial crisis affecting Prudential.209 [•]210 Prudential argues that 

the supervisory college and CMG provide an effective forum for Prudential’s principal regulators 

to cooperate and collaborate on regulatory and business issues affecting Prudential, as well as to 

identify, analyze, and mitigate any potential group-wide risks for Prudential.211

Resolution and Recovery

[•]212 [•]213

Additional Authorities

[•]214 [•]215 [•]216 [•]

7.1.3 Connecticut and Arizona 

Prudential states that Connecticut and Arizona have adopted amendments to their insurance 

holding company acts since 2013. Prudential states that these amendments require enterprise 

risk reporting and an ORSA and expressly authorize initiating and participating in supervisory 

colleges.217 Prudential also states that the commissioners of the Connecticut and Arizona 

 

204 N.J.S.A. § 17:23-28.

205 NAIC, ORSA Guidance Manual, p. 1, available at http://www.naic.org/store/free/ORSA manual.pdf.

206 [•]

207 [•]

208 [•]

209 2016 Prudential Submission, p. 31.

210 [•]

211 2016 Prudential Submission, p. 31.

212 [•]

213 [•]

214 [•]

215 [•]

216 [•]

217 2016 Prudential Submission, p. 30.
60

insurance departments have expressly recognized NJDOBI as the group-wide supervisor of 

Prudential and that the three state regulators are in regular communication with each other

regarding Prudential’s regulation and supervision.218 

7.1.4 NAIC

Prudential states that since the Council’s final determination regarding the company, the NAIC 

has made significant strides in modernizing the U.S. state-based system of insurance regulation, 

much of which has been implemented or is in the process of being implemented.219 The reforms 

identified by Prudential include: (1) adoption of a reserving methodology applicable to insurers 

engaged in reinsurance captive transactions; (2) development of a framework to revise variable 

annuity regulations; (3) implementation of principles-based reserving; (4) development of a 

state-based group capital requirement; and (5) adoption of corporate governance and financial 

reporting standards.220 [•]221 More recently, the NAIC has initiated a macroprudential project 

that includes enhancing the regulation of liquidity risk for large life insurance companies through 

stress testing and other measures. The NAIC has stated that the objective of this project is to 

evaluate existing regulatory tools and data relating to liquidity risk, identify any gaps, and 

propose enhancements.222 Specific areas of focus in addition to liquidity stress testing include 

the liquidity characteristics of insurers’ liabilities and liquidity risk management. This effort 

may ultimately lead to beneficial changes that enhance the regulatory oversight of liquidity risks 

at large life insurance companies. The Council intends to monitor the extent to which any 

resulting reforms address risks to U.S. financial stability.

7.2 Foreign Regulatory Developments

Prudential states that the Japan FSA has been recently working to develop and enhance the 

domestic supervisory framework to address risks associated with financial institutions in Japan, 

and to align domestic financial regulation with current international standards. This work has 

been undertaken by the Japan FSA in response to similar developments at the Financial Stability 

Board (FSB) and International Association of Insurance Supervisors (IAIS).223 

Of the $60 billion of consolidated revenues generated by Prudential in 2017, $20 billion came 

from Prudential’s operations in Japan.224 Additionally, Prudential reported $159 billion in 

insurance liabilities and policyholder account balances in Japan at the end of 2017, representing 

39 percent of Prudential’s consolidated total insurance liabilities and policyholder account 

balances.225 The bulk of these liabilities are predominantly composed of long-duration insurance 

 

218 2016 Prudential Submission, p. 30.

219 2016 Prudential Submission, p. 32.

220 2016 Prudential Submission, p. 32. 

221 [•] 

222 NAIC, Financial Stability Task Force Proposal for Liquidity Assessment Subgroup, available at 

http://naic.org/meetings1708/cmte ex financial stability tf 2017 summer nm materials 3.pdf?150228654254. 

223 2016 Prudential Submission, p. 33.

224 Prudential Annual Report on Form 10-K for the Year Ended December 31, 2017, p. 289 and 292. Total Japanese 

operations include asset management. 

225 Id., pp. 50, 152.
61

products with fixed and guaranteed terms,226 such as non-participating whole life and term life 

products, and endowment contracts.227 [•]

7.3 Regulator Consultations 

On October 31, 2016, the Nonbank Designations Committee consulted with staff from the 

Federal Reserve Bank of Boston with supervisory responsibilities for Prudential. On November 

1, 2016, the Nonbank Designations Committee consulted with staff from the Board of Governors 

and the FDIC and discussed the resolution plan submitted by Prudential in December 2015. On 

November 3, 2016 and June 7, 2018, the Nonbank Designations Committee consulted with staff 

from NJDOBI, the CID, and the Arizona Department of Insurance regarding certain state 

regulatory and supervisory developments. On September 13, 2018, the Nonbank Designations 

Committee consulted with the Federal Reserve Bank of Boston regarding its supervision of 

Prudential. Matters raised during these consultations have been addressed herein where relevant.

8. CONCLUSION

Based on the Council’s analysis of Prudential and on changes since September 2013 that could 

be material to the Council’s conclusions, and in light of the statutory considerations, the Council

has rescinded its final determination that material financial distress at Prudential could pose a 

threat to U.S. financial stability and that Prudential shall be supervised by the Board of 

Governors and be subject to enhanced prudential standards.

 

226 Prudential Annual Report on Form 10-K for the Year Ended December 31, 2017, p. 50.

227 Id., p. 62.
62

APPENDIX A: CONSOLIDATED BALANCE SHEET 

($ Millions)

As of: 12/31/2012 6/30/2015 12/31/2017

Fixed maturities, available-for-sale, at fair value $301,336 $290,063 $346,780

Fixed maturities, held-to-maturity, at amortized cost 4,268 2,396 2,049

Trading account assets supporting insurance liabilities, at fair 

value 20,590 20,267 22,097

Other trading account assets, at fair value 6,328 12,749 5,752

Equity securities, available-for-sale, at fair value 8,277 9,901 6,174

Commercial mortgage and other loans 36,733 48,569 56,045

Policy loans 11,575 11,752 11,891

Other long-term investments 10,028 10,678 12,308

Short-term investments 6,447 5,669 6,775

 Total investments 405,582 411,944 469,871

Cash and cash equivalents 18,100 17,038 14,490

Accrued investment income 3,127 3,117 3,325

Deferred policy acquisition costs 14,100 16,569 18,992

Value of business acquired 3,248 2,994 1,591

Other assets 11,887 14,728 17,035

Separate account assets 253,254 296,341 306,617

 TOTAL ASSETS $709,298 $762,731 $831,921

Future policy benefits $216,050 216,555 $257,317

Policyholders' account balances 134,413 135,630 148,189

Policyholders' dividends 7,507 6,528 6,411

Securities sold under agreements to repurchase 5,818 7,863 8,400

Cash collateral for loaned securities 3,941 3,808 4,354

Income taxes 8,551 9,239 9,600

Short-term debt 2,484 3,621 1,380

Long-term debt 24,729 20,264 17,172

Other liabilities 11,683 13,135 16,619

Notes issued by consolidated variable interest entities 1,577 7,455 1,518

Separate account liabilities 253,254 296,341 306,617

 TOTAL LIABILITIES $670,007 $720,439 $777,577

Preferred stock 0 0 0

Common stock 6 6 6

Class B Stock 0 0 0

Additional paid-in capital 24,380 24,397 24,769

Common stock held in treasury, at cost (12,163) (13,398) (16,284)

Accumulated other comprehensive income (loss) 10,214 13,404 17,074

Retained earnings 16,138 17,314 28,504

Noncontrolling interests 716 569 275

 TOTAL EQUITY $39,291 $42,292 54,069

Source: Prudential Annual Report on Form 10-K for the year ended December 31, 2012, p. 206; Prudential 

Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, p. 1; Prudential Annual Report on Form 10-K 

for the year ended December 31, 2017, p. 152. 
63

APPENDIX B: PRUDENTIAL’S U.S. GENERAL ACCOUNT ASSETS

($ Millions)

Asset 

U.S. General 

Account

U.S. General 

Account 

Encumbered

U.S. General 

Account Not 

Encumbered

Sovereign Securities [•] [•] [•]

Japanese Government Bonds [•] [•] [•]

Other Foreign Government Bonds [•] [•] [•]

U.S. Treasuries [•] [•] [•]

U.S. Agencies and Agency MBS [•] [•] [•]

Corporate Fixed Income 

Securities

[•] [•] [•]

U.S. Investment Grade Public 

Corporates

[•] [•] [•]

U.S. Non-Investment Grade 

Public Corporates

[•] [•] [•]

Non-U.S. Public IG Corporates [•] [•] [•]

U.S. Private Placements [•] [•] [•]

Equities, Mortgages and ABS [•] [•] [•]

Equities [•] [•] [•]

Commercial Mortgages [•] [•] [•]

CMBS [•] [•] [•]

RMBS [•] [•] [•]

ABS [•] [•] [•]

Other Assets [•] [•] [•]

Non-U.S. Private Placements [•] [•] [•]

Cash [•] [•] [•]

Policyholder Loans [•] [•] [•]

Short-Term Investments/Others [•] [•] [•]

Other – Real Estate Related [•] [•] [•]

Investments in Joint Ventures [•] [•] [•]

Other [•] [•] [•]

Total [•] [•] [•]

Source: Prudential Annual Report on Form 10-K for the year ended December 31, 2017, p. 310; Prudential 

Response to OFR Request 2 (June 27, 2018), p. 4. 

Note: All encumbered or restricted U.S. public corporates are assumed to be investment grade. 
64

APPENDIX C: FIRE SALE MODEL DETAIL

The Council Basis included a supplemental analysis of the relative impact of negative shocks to 

the equity or assets of certain financial institutions on other financial institutions. For the 

purposes of the reevaluation of Prudential, the analysis has been updated as of December 31, 

2017.228 See section 5.3.3 for a discussion of this model in the context of the asset liquidation 

channel. 

The analysis assumed that a negative shock to the net worth of a firm (or group of firms) can 

force the firm to rapidly liquidate assets. Such a shock would raise the firm’s leverage and 

decrease the equity cushion protecting the firm’s creditors. In order to quickly return to its 

original degree of leverage, the firm would have to rapidly sell assets. Such a fire sale of assets 

could directly affect the balance sheets of firms that hold a similar portfolio, thus spreading the 

negative effects of its distress to other firms.

A firm’s asset size, leverage, and asset composition relative to other financial firms will affect 

the relative impact of a rapid liquidation of assets by that firm. For instance, a firm that is small 

relative to the market can sell a quantity of assets that can be easily absorbed, but larger firms 

will necessarily sell larger volumes of assets that may not be so easily accommodated. In 

addition, the market impact of asset sales will also depend on the firm’s asset profile relative to 

other financial firms, since rapid fire sales of assets that are widely held by others would likely 

have a more pronounced effect on the financial system.

The results indicate that Prudential’s fire-sale effect places it below the top ten largest effects 

among financial institutions in 2017, and that its ranking has slipped some since 2012. For a 

shock to equity, Prudential produces a fire-sale effect that ranks 16th among financial 

institutions, compared to 13th in 2012. For a shock to assets, Prudential’s fire-sale effect places 

it at 11th among financial institutions, compared to 9th in 2012. A summary of the analysis of the 

relative impact on other financial institutions of negative shocks based on firms’ equity and 

assets is shown in the table below.

229

 

228 For this analysis, data on the asset holdings of the largest 50 bank holding companies and the largest 25 insurance 

companies were collected.

229 The analysis considers the framework proposed in Robin Greenwood, Augustin Landier and David Thesmar 

(2015), “Vulnerable Banks,” Journal of Financial Economics volume 115, issue 3 and extensions by Duarte and 

Eisenbach (2015), “Fire-Sale Spillovers and Systemic Risk,” FRBNY Staff Report 645. 
65

Mean Scores for the Magnitude of Firm's Fire-Sale Effects (2017)

Equity Shock Asset Shock

Rank Firm

Mean 

Score 

(%)

Firm

Mean 

Score 

(%)

1 JPMorgan Chase & Co. 98.5 JPMorgan Chase & Co. 99.7

2 Bank of America Corporation 95.7 Wells Fargo & Company 92.0

3 Wells Fargo & Company 95.6 Bank of America Corporation 83.7

4 Citigroup, Inc. 51.7 Citigroup, Inc. 48.2

5 Morgan Stanley 25.8 Morgan Stanley 28.6

6 U.S. Bancorp 25.4 Goldman Sachs Group, Inc., The 27.3

7 Goldman Sachs Group, Inc., The 24.2 Brighthouse Financial, Inc. 27.1

8 Berkshire Hathaway Inc. 23.4 U.S. Bancorp 24.3

9 PNC Financial Services Group, Inc., 19.8 PNC Financial Services Group, Inc. 16.3

10 Brighthouse Financial, Inc. 17.2 MetLife, Inc. 14.3

11 MetLife, Inc. 16.0 Prudential Financial, Inc. 12.6

12 American International Group, Inc. 15.1 Pacific Mutual Holding Company 12.4

13 Capital One Financial Corporation 14.8 TD Group US Holdings LLC 11.8

14 TD Group US Holdings LLC 14.5 Capital One Financial Corporation 11.3

15 BB&T Corporation 14.0 BB&T Corporation 10.7

16 Prudential Financial, Inc. 12.7 SunTrust Banks, Inc. 10.1

17 SunTrust Banks, Inc. 12.0 Ally Financial Inc. 9.9

18 Pacific Mutual Holding Company 10.5 HSBC North America Holdings Inc. 9.6

19 Bank Of New York Mellon Corporation 9.9 American International Group, Inc. 9.6

20 Citizens Financial Group, Inc. 9.1 Bank Of New York Mellon Corporation 9.0

21 HSBC North America Holdings Inc. 9.1 MUFG Americas Holdings Corporation 7.8

22 MUFG Americas Holdings Corporation 9.0 Keycorp 7.4

23 Liberty Mutual Holding Company Inc. 8.7 Citizens Financial Group, Inc. 7.0

24 M&T Bank Corporation 8.5 State Street Corporation 6.9

25 Keycorp 7.9 Fifth Third Bancorp 6.8

Sources: Annual reports on form 10-K for the year ended December 31, 2017; Consolidated Financial Statements 

for Holding Companies on form FR Y-9C; Board of Governors calculations.

There are a number of changes at Prudential that have affected its relative ranking among other 

financial institutions. In particular, Prudential has decreased its leverage ratio, as measured by 

total general account assets to total equity, from 11.6x to 9.7x. All else equal, lower leverage 

means that a shock to the firm’s balance sheet will erode less of the buffer protecting creditors, 

potentially requiring the company to sell fewer assets to rebuild some, or all, of that buffer. In 

addition, its holdings of highly liquid assets, defined as cash, Treasury securities, and Agency 

securities, have increased by 13 percent, from $35.9 billion to $40.6 billion; its holdings of other 

assets, including residential MBS, US corporate debt securities, and equity securities, have 

decreased by 25 percent, from $179.0 billion to $134.2 billion. On the other hand, Prudential has 

increased its general account assets by 15 percent since 2012, increasing the amount of assets 

that would likely be liquidated in the event of Prudential’s material financial distress. In 

addition, its holdings of some assets, including U.S. state and municipal obligations, foreign debt 

securities, and loans, have increased by 83 percent, from $129.8 billion to $237.1 billion. 

The major differences in the asset composition of Prudential’s balance sheet relative to other 

financial holding companies tend to limit the spillover effects captured by this model. In 

particular, relative to bank holding companies, Prudential’s balance sheet is much more heavily 

weighted toward securities than loans; between 40 percent and 50 percent of the average bank 

holding company’s assets are loans, while only 13 percent of Prudential’s assets are loans. In 
66

addition, the composition of its securities portfolio is very different from those of banks. For 

example, compared to the average bank holding company, Prudential holds a much larger share 

of its portfolio in “other domestic debt securities” and “foreign debt securities.” “Other domestic 

debt securities,” which are largely domestic corporate bonds, account for 32 percent of 

Prudential’s securities portfolio; “foreign debt securities,” which are largely foreign corporate 

bonds and foreign government debt, account for 41 percent of Prudential’s securities portfolio. 

Each of these categories account for less than 5 percent of the average bank holding company’s 

securities portfolio. On the other hand, Prudential holds significantly fewer Treasury and 

Agency securities and RMBS than bank holding companies, with only 8 percent of its portfolio 

invested in these securities, compared to over 50 percent at the average bank holding company. 

In short, while Prudential would likely be forced to sell greater quantities of illiquid securities, 

the fact that these securities are not widely held by other holding companies could reduce some 

of the impact.

There are elements that the fire sale model does not take into account that could affect the 

results. For example, separate accounts are not included in this model. Generally, variable 

annuities, which usually blend a tax-deferred investment and a guarantee on the investment’s 

performance backed by the insurer’s general account, are a substantial share of separate account 

assets. During a market downturn, these guarantees could potentially serve as a trigger for 

general account asset liquidation. Within its separate account, Prudential has [•] in variable 

annuity reserves, a large proportion of which have guarantees from the general account.230

 

230 Prudential Response to OFR Request B.1 (Jan. 22, 2018), p. 4.