•U.S. Workplace Solutions. In our Retirement business, we continue to provide products that respond to the needs of plan sponsors to manage risk and control their benefit costs while ensuring we maintain appropriate pricing and return expectations under changing market conditions. In our full service business, we have experienced strong deposits and sales in recent years and, while we foresee the continuation of spread and fee compression, we believe
The preparation of financial statements in conformity with U.S. GAAP requires the application of accounting policies that often involve a significant degree of judgment. Management, on an ongoing basis, reviews estimates and assumptions used in the preparation of financial statements. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, the Company’s results of operations and financial position as reported in the Consolidated Financial Statements could change significantly.
mortality and recovery rates. The reserve for claims reported but not yet paid is based on the inventory of claims that have been reported but not yet paid. The reserve for claims incurred but not yet reported is estimated using expected patterns of claims reporting.
We determine our discount rate, used to value the pension and postretirement benefit obligations, based upon rates commensurate with current yields on high quality corporate bonds. See Note 18 to the Consolidated Financial Statements for information regarding the December 31, 2019 methodology we employed to determine our discount rate for 2020. Our assumed discount rate for 2020 was 3.30% for our domestic pension plans and 3.25% for our other domestic postretirement benefit plans. Given the amount of pension and postretirement obligations as of December 31, 2019, the beginning of the measurement year, if we had assumed a discount rate for both our domestic pension and other postretirement benefit plans that was 100 bps higher or 100 bps lower than the rates we assumed, the change in our net periodic costs would have been as shown in the table below. The information provided in the table below considers only changes in our assumed discount rate without consideration of possible changes in any of the other assumptions described above that could ultimately accompany any changes in our assumed discount rate.
An increase or decrease in our effective tax rate by one percentage point would have resulted in a decrease or increase in our 2020 “Total income tax expense (benefit)” of $3 million.
The following table sets forth the component changes in PGIM’s assets under management for the periods indicated.
2020 to 2019 Annual Comparison. Adjusted operating income decreased $301 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for 2020 and 2019 included a net benefit from this update of $11 million and $9 million, respectively. Excluding this item, adjusted operating income decreased $303 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience primarily due to COVID-19 impacts on non-experience-rated contracts. The decrease also reflected lower underwriting results in our group disability business driven by the impact to reserves from lower interest rates, and lower net investment spread results driven by lower reinvestment yields and lower prepayment fee income.
As of December 31, 2020, the fair value of our fixed income instruments and derivative assets exceed the economic liability within the entities in which the risks reside.
•General hedge results. For the derivative portion of the ALM strategy, the net hedging impact (the extent to which the changes in value of the hedging instruments offset the change in value of the portion of the economic liability we are hedging) may be impacted by a number of factors, including: cash flow timing differences between our hedging instruments and the corresponding portion of the economic liability we are hedging, basis differences attributable to actual underlying contractholder funds to be hedged versus hedgeable indices, rebalancing costs related to dynamic rebalancing of hedging instruments as markets move, certain elements of the economic liability that may not be hedged (including certain actuarial assumptions), and implied and realized market volatility on the hedge positions relative to the portion of the economic liability we seek to hedge.
(3)Represents the change in the liability (excluding NPR) for our variable annuities living benefit guarantees, which is measured utilizing a valuation methodology that is required under U.S. GAAP. This liability includes such items as risk margins which are required by U.S. GAAP but not included in our best estimate of the liability.
(2)“Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 22 to the Consolidated Financial Statements for additional information.
•In the third quarter of 2020, we entered into a definitive agreement with Taishin Financial Holding Co, Ltd., a Taiwanese financial services provider, to sell Prudential Life Insurance Company of Taiwan Inc. (“POT”) for cash consideration of approximately $195 million at current exchange rates, to be paid at closing, and contingent consideration with a fair value of approximately $15 million at December 31, 2020. The transaction is expected to close in 2021, subject to regulatory approvals and customary closing conditions. Beginning in the third quarter of 2020, we reported our investment in POT as “held for sale” and have recognized an approximate $350 million after-tax charge to earnings, through December 31, 2020, to adjust the carrying value of POT to the fair market value reflected in the purchase price (see Note 1 to the Consolidated Financial Statements for additional information). Also, effective in the third quarter of 2020, the results of this business and the impact of its anticipated sale were reflected in the Divested and Run-off Businesses that are included in Corporate and Other, and all prior period amounts have been updated to conform to the current period presentation. We intend to use the proceeds of the transaction for general corporate purposes.
Results from pension and employee benefits were favorable by $42 million, primarily driven by a decrease in employee health benefit costs.
Long-Term Care. Results for the year ended December 31, 2020 decreased $118 million compared to 2019, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for 2020 included a $33 million net charge from these updates, while results for 2019 included a $9 million net charge from these updates. Excluding these items, results decreased $94 million primarily reflecting less favorable underwriting results including less favorable claim experience, an increase in reserves as a result of an unlocking of assumptions in the first quarter of 2020 due to the decline in interest rates, and a less favorable increase in the market value of equity securities. These decreases were partially offset by a more favorable increase in the market value of derivatives used for duration management.
The Company’s liability for income taxes includes the liability for unrecognized tax benefits and interest that relate to tax years still subject to review by the Internal Revenue Service or other taxing authorities. The completion of review or the expiration of the Federal statute of limitations for a given audit period could result in an adjustment to the liability for income taxes. The total unrecognized benefit as of December 31, 2020, 2019 and 2018 was $17 million, $18 million and $20 million, respectively. We do not anticipate any significant changes within the next twelve months to our total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.
•assets of our investment management operations, including investments managed for third-parties; and
(1)Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments and other miscellaneous investments.
The increase in general account investments related to our Japanese insurance operations in 2020 was primarily attributable to a decrease in interest rates, the reinvestment of net investment income and net business inflows.
As of December 31, 2020, PFI excluding the Closed Block division had energy related exposure with a market value of approximately $14 billion including a net unrealized gain of $1 billion, which was reflected in AOCI. This $14 billion represented investments in public and private corporate fixed maturity securities (excluding trading securities) and was comprised of the midstream (43%), independent energy (25%), integrated energy (20%), oil field services (6%) and refining (6%) sub-sectors. As of December 31, 2020, the credit quality of energy sector fixed maturity securities was 86% investment grade and 14% below investment grade. Energy related investment realized losses were approximately $184 million, comprised of $126 million of write-downs and $58 million of addition to credit loss allowances for the year ended December 31, 2020. Our investments in the energy sector could experience future valuation declines or losses if energy prices maintain their recent levels or continue to decline for an extended period of time. Our assessment that securities are other-than-temporarily impaired may change due to new developments, including those developments related to COVID-19.
The following table sets forth our fixed maturity, available-for-sale portfolio by NAIC Designation or equivalent rating attributable to PFI excluding the Closed Block division, as of the dates indicated:
(2)There was no allowance for credit losses as of December 31, 2020.
The current expected credit loss (“CECL”) allowance represents the Company’s best estimate of expected credit losses over the remaining life of the assets. The determination of the allowance considers historical credit loss experience, current
The following table sets forth the change in allowance for credit losses for our commercial mortgage and other loans portfolio, as of the dates indicated:
“Invested Assets of Other Entities and Operations” presented below includes investments held outside the general account and primarily represents investments associated with our investment management operations and derivative operations. Our derivative operations act on behalf of affiliates primarily to manage interest rate, foreign currency, credit and equity exposures. Assets within our investment management operations that are managed for third-parties and those assets classified as “Separate account assets” on our balance sheet are not included.
“Other invested assets” primarily include assets of our derivative operations used to manage interest rate, foreign currency, credit, and equity exposures.
•In March, we issued $1.5 billion of senior notes, with maturities ranging from 2026 to 2040, for general corporate purposes, including pre-funding part of our senior notes maturing through 2021. Of these senior notes, $500 million were issued in the form of “green bonds,” where proceeds are allocated to existing or future investments in assets, businesses or projects that provide environmental benefits;
See Note 19 to the Consolidated Financial Statements for information on specific dividend restrictions.
willingness to extend repurchase and/or securities lending arrangements, commitments to invest and market volatility. We closely manage these risks through our credit risk management process and regular monitoring of our liquidity position.
Income Hedges-We hedge a portion of our prospective yen-based earnings streams by entering into external forward currency derivative contracts that effectively fix the currency exchange rates for that portion of earnings, thereby reducing volatility from foreign currency exchange rate movements. As of December 31, 2020, we have hedged 100%, 72%, and 31%, of expected yen-based earnings for 2021, 2022 and 2023, respectively.
In addition to asset-based financing as discussed below, Prudential Financial and certain subsidiaries have access to other sources of liquidity, including syndicated, unsecured committed credit facilities, membership in the Federal Home Loan Banks, commercial paper programs, and a put option agreement. In May 2020, we entered into a facility agreement with a Delaware trust, pursuant to which Prudential Financial may issue and sell to the trust at any time over a ten-year period up to $1.5 billion of senior notes due May 15, 2030 and receive in exchange a corresponding amount of U.S. Treasury securities, thereby augmenting our alternative sources of liquidity. For more information on these sources of liquidity, see Note 17 to the Consolidated Financial Statements.
(2)Includes utilization of external funding facilities for PGIM’s commercial mortgage origination business.
(5)The estimated cash flows due by period for insurance liabilities reflect future estimated cash payments to be made to policyholders and others for future policy benefits, policyholders’ account balances, policyholder’s dividends, reinsurance payables and separate account liabilities, net of premium receipts and reinsurance recoverables. Contractual obligations are contingent upon the receipt of premiums. These future estimated cash flows for current policies in force generally reflect our best estimate economic and actuarial assumptions. These cash flows are undiscounted with respect to interest. Therefore, the sum of the cash flows shown for all years in the table of $1,182 billion exceeds the corresponding liability amounts of approximately $809 billion included in the Consolidated Financial Statements as of December 31, 2020. Separate account liabilities are legally insulated from general account obligations, and it is generally expected these liabilities will be fully funded by separate account assets and their related cash flows. We have made significant assumptions to determine the future estimated cash flows related to the underlying policies and contracts. Due to the significance of the assumptions used and the contingent nature of contractual terms, actual cash flows and their timing will differ, possibly materially, from these estimates. Timing of cash flows in the “2025 and thereafter” category include long term liabilities that may extend beyond 100 years.
(6)The estimated payments due by period for other liabilities includes securities sold under agreements to repurchase, cash collateral for loaned securities, liabilities for unrecognized tax benefits, bank customer liabilities, and other miscellaneous liabilities. Amounts presented in the table also exclude $305 million of notes issued by consolidated VIE’s which recourse for these obligations is limited to the assets of the respective VIE and do not have recourse to the general credit of the company.
•Investment Committee: investment risk, market risk, and review of investment performance and risk positions. The Investment Committee approves investment and market risk limits based on asset class, issuer, credit quality and geography; and
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing herein.
time to maturity. Changes in the allowance are reported in “Realized investment gains (losses), net.” Once the Company has deemed all or a portion of the amortized cost uncollectible, the uncollectible portion of the allowance is removed from the balance sheet by writing down the amortized cost basis of the security. Prior to the adoption of ASU 2016-13, credit impairments were recognized as a direct write down to the cost basis of the security and the credit impairment recognized was measured based upon the net present value of expected cash flows.
The Company carries certain commercial mortgage loans originated within the Company’s commercial mortgage operations at fair value where the fair value option has been elected. Loans held for sale where the Company has not elected the fair value option are carried at the lower of cost or fair value. Commercial mortgage and other loans acquired, including those related to the acquisition of a business, are recorded at fair value when purchased, reflecting any premiums or discounts to unpaid principal balances. Interest income, and the amortization of the related premiums or discounts, are included in “Net investment income” under the effective yield method. Prepayment fees are also included in “Net investment income.”
Income taxes primarily represents the net deferred tax liability and the Company’s estimated taxes payable for the current year and open audit years.
For the year ended December 31, 2020, the increase in the allowance for credit losses on available-for-sale securities was primarily related to adverse projected cash flows on public and private corporate securities.
(1)As of December 31, 2019, there were no loans in this category accruing interest.
(1)Total assets of consolidated VIEs reflect $2,538 million and $2,668 million as of December 31, 2020 and 2019, respectively, related to VIEs whose beneficial interests are wholly-owned by consolidated subsidiaries.
(5)Includes certain investments where enterprise value is less than the amount needed to support senior and subordinated claims. These investments typically use a range of discount rates (10% to 20%), therefore presenting a range, rather than a weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.
(10)The spread over the London Inter-Bank Offered Rate (“LIBOR”) swap curve represents the premium added to the proxy for the risk-free rate (LIBOR) to reflect the Company’s estimates of rates that a market participant would use to value the living benefits in both the accumulation and payout phases and index-linked interest crediting guarantees. This spread includes an estimate of NPR, which is the risk that the obligation will not be fulfilled by the Company. NPR is primarily estimated by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium. In order to reflect the financial strength ratings of the Company, credit spreads associated with funding agreements, as opposed to credit spread associated with debt, are utilized in developing this estimate because funding agreements, living benefit guarantees, and index-linked interest crediting guarantees are insurance liabilities and are therefore senior to debt.
The following table provides estimated future amortization for the periods indicated:
(2)This category primarily consists of cash and cash equivalents, short-term investments, payables and receivables, and open future contract positions (including fixed income collateral).
(2)Represents “transfers out” related to the portion of OTTI losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss.
The Japan Financial Services Agency (“FSA”) utilizes a solvency margin ratio to evaluate the capital adequacy of Japanese insurance companies. The solvency margin ratio considers the level of solvency margin capital to a solvency margin risk amount, which is calculated in a similar manner to RBC. As of December 31, 2020, the Company expects The Prudential Life Insurance Company Ltd. (“Prudential of Japan”) and Gibraltar Life both had solvency margin capital in excess of 3.5 times the regulatory required minimums that would require corrective action.
assessments paid through full or partial premium tax offsets. In addition, Japan has established the Japan Policyholders Protection Corporation as a contingency to protect policyholders against the insolvency of life insurance companies in Japan through assessments to companies licensed to provide life insurance.