Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2014

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from             to            

 

Commission File Number 001-16707

 

 

 

Prudential Financial, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

New Jersey   22-3703799

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

 

751 Broad Street

Newark, New Jersey 07102

(973) 802-6000

(Address and Telephone Number of Registrant’s Principal Executive Offices)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x   Accelerated filer  ¨   Non-accelerated filer  ¨       Smaller reporting company  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

As of April 30, 2014, 460 million shares of the registrant’s Common Stock (par value $0.01) were outstanding. In addition, 2 million shares of the registrant’s Class B Stock, for which there is no established public trading market, were outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

               Page  

PART I FINANCIAL INFORMATION

  

   Item 1.   

Financial Statements:

  
     

Unaudited Interim Consolidated Statements of Financial Position as of March 31, 2014 and December 31, 2013

     1   
     

Unaudited Interim Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013

     2   
     

Unaudited Interim Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013

     3   
     

Unaudited Interim Consolidated Statements of Equity for the three months ended March  31, 2014 and 2013

     4   
     

Unaudited Interim Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013

     5   
     

Notes to Unaudited Interim Consolidated Financial Statements

     7   
     

1.  Business and Basis of Presentation

     7   
     

2.  Significant Accounting Policies and Pronouncements

     8   
     

3.  Acquisitions and Dispositions

     10   
     

4.  Investments

     11   
     

5.  Variable Interest Entities

     29   
     

6.  Closed Block

     31   
     

7.  Equity

     34   
     

8.  Earnings Per Share

     38   
     

9.  Short-Term and Long-Term Debt

     41   
     

10. Employee Benefit Plans

     44   
     

11. Segment Information

     45   
     

12. Income Taxes

     52   
     

13. Fair Value of Assets and Liabilities

     53   
     

14. Derivative Instruments

     77   
     

15. Commitments and Guarantees, Contingent Liabilities and Litigation and Regulatory Matters

     85   
     

Unaudited Interim Supplemental Combining Financial Information:

  
     

Unaudited Interim Supplemental Combining Statements of Financial Position as of March 31, 2014 and December 31, 2013

     95   
     

Unaudited Interim Supplemental Combining Statements of Operations for the three months ended March 31, 2014 and 2013

     96   
     

Notes to Unaudited Interim Supplemental Combining Financial Information

     97   
   Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     99   
   Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     190   
   Item 4.   

Controls and Procedures

     191   

PART II OTHER INFORMATION

  
   Item 1.   

Legal Proceedings

     192   
   Item 1A.   

Risk Factors

     192   
   Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     192   
   Item 6.   

Exhibits

     193   

SIGNATURES

     194   


Table of Contents

Forward-Looking Statements

 

Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Financial, Inc. and its subsidiaries. There can be no assurance that future developments affecting Prudential Financial, Inc. and its subsidiaries will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) general economic, market and political conditions, including the performance and fluctuations of fixed income, equity, real estate and other financial markets; (2) the availability and cost of additional debt or equity capital or external financing for our operations; (3) interest rate fluctuations or prolonged periods of low interest rates; (4) the degree to which we choose not to hedge risks, or the potential ineffectiveness or insufficiency of hedging or risk management strategies we do implement, with regard to variable annuity or other product guarantees; (5) any inability to access our credit facilities; (6) reestimates of our reserves for future policy benefits and claims; (7) differences between actual experience regarding mortality, longevity, morbidity, persistency, surrender experience, interest rates or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (8) changes in our assumptions related to deferred policy acquisition costs, value of business acquired or goodwill; (9) changes in assumptions for retirement expense; (10) changes in our financial strength or credit ratings; (11) statutory reserve requirements associated with term and universal life insurance policies under Regulation XXX and Guideline AXXX; (12) investment losses, defaults and counterparty non-performance; (13) competition in our product lines and for personnel; (14) difficulties in marketing and distributing products through current or future distribution channels; (15) changes in tax law; (16) economic, political, currency and other risks relating to our international operations; (17) fluctuations in foreign currency exchange rates and foreign securities markets; (18) regulatory or legislative changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act; (19) inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (20) adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities, including in connection with our divestiture or winding down of businesses; (21) domestic or international military actions, natural or man-made disasters including terrorist activities or pandemic disease, or other events resulting in catastrophic loss of life; (22) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (23) effects of acquisitions, divestitures and restructurings, including possible difficulties in integrating and realizing projected results of acquisitions; (24) interruption in telecommunication, information technology or other operational systems or failure to maintain the security, confidentiality or privacy of sensitive data on such systems; (25) changes in statutory or U.S. GAAP accounting principles, practices or policies; (26) Prudential Financial, Inc.’s primary reliance, as a holding company, on dividends or distributions from its subsidiaries to meet debt payment obligations and the ability of the subsidiaries to pay such dividends or distributions in light of our ratings objectives and/or applicable regulatory restrictions; and (27) risks due to the lack of legal separation between our Financial Services Businesses and our Closed Block Business. Prudential Financial, Inc. does not intend, and is under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2013 for discussion of certain risks relating to our businesses and investment in our securities.


Table of Contents

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

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

PRUDENTIAL FINANCIAL, INC.

 

Unaudited Interim Consolidated Statements of Financial Position

March 31, 2014 and December 31, 2013 (in millions, except share amounts)

 

     March 31,
2014
    December 31,
2013
 

ASSETS

    

Fixed maturities, available-for-sale, at fair value (amortized cost: 2014-$272,829; 2013-$268,727)(1)

   $ 295,321     $ 286,866  

Fixed maturities, held-to-maturity, at amortized cost (fair value: 2014-$3,537; 2013-$3,553)(1)

     3,275       3,312  

Trading account assets supporting insurance liabilities, at fair value(1)

     20,935       20,827  

Other trading account assets, at fair value(1)

     8,021       6,453  

Equity securities, available-for-sale, at fair value (cost: 2014-$7,291; 2013-$7,003)

     10,191       9,910  

Commercial mortgage and other loans (includes $124 and $158 measured at fair value under the fair value option at March 31, 2014 and December 31, 2013, respectively)(1)

     42,392       41,008  

Policy loans

     11,833       11,766  

Other long-term investments (includes $885 and $873 measured at fair value under the fair value option at March 31, 2014 and December 31, 2013, respectively)(1)

     10,477       10,328  

Short-term investments

     6,023       7,703  
  

 

 

   

 

 

 

Total investments

     408,468       398,173  

Cash and cash equivalents(1)

     12,472       11,439  

Accrued investment income(1)

     3,134       3,089  

Deferred policy acquisition costs

     16,617       16,512  

Value of business acquired

     3,610       3,675  

Other assets(1)

     14,273       13,833  

Separate account assets

     288,161       285,060  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 746,735     $ 731,781  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

LIABILITIES

    

Future policy benefits

   $ 211,540     $ 206,859  

Policyholders’ account balances(1)

     137,244       136,657  

Policyholders’ dividends

     6,519       5,515  

Securities sold under agreements to repurchase

     8,348       7,898  

Cash collateral for loaned securities

     5,282       5,040  

Income taxes

     6,860       5,422  

Short-term debt

     4,019       2,669  

Long-term debt

     22,565       23,553  

Other liabilities(1)

     13,232       13,925  

Notes issued by consolidated variable interest entities (includes $4,062 and $3,254 measured at fair value under the fair value option at March 31, 2014 and December 31, 2013, respectively)(1)

     4,101       3,302  

Separate account liabilities

     288,161       285,060  
  

 

 

   

 

 

 

Total liabilities

     707,871       695,900  
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 15)

    

EQUITY

    

Preferred Stock ($.01 par value; 10,000,000 shares authorized; none issued)

     0       0  

Common Stock ($.01 par value; 1,500,000,000 shares authorized; 660,111,328 and 660,111,319 shares issued at March 31, 2014 and December 31, 2013, respectively)

     6       6  

Class B Stock ($.01 par value; 10,000,000 shares authorized; 2,000,000 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively)

     0       0  

Additional paid-in capital

     24,435       24,475  

Common Stock held in treasury, at cost (199,684,283 and 199,056,067 shares at March 31, 2014 and December 31, 2013, respectively)

     (12,533     (12,415

Accumulated other comprehensive income (loss)

     10,798       8,681  

Retained earnings

     15,517       14,531  
  

 

 

   

 

 

 

Total Prudential Financial, Inc. equity

     38,223       35,278  
  

 

 

   

 

 

 

Noncontrolling interests

     641       603  
  

 

 

   

 

 

 

Total equity

     38,864       35,881  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 746,735     $ 731,781  
  

 

 

   

 

 

 

 

(1) See Note 5 for details of balances associated with variable interest entities.

 

See Notes to Unaudited Interim Consolidated Financial Statements

 

1


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Unaudited Interim Consolidated Statements of Operations

Three Months Ended March 31, 2014 and 2013 (in millions, except per share amounts)

 

     Three Months Ended
March 31,
 
        2014           2013     

REVENUES

    

Premiums

   $ 5,868     $ 7,084  

Policy charges and fee income

     1,501       1,356  

Net investment income

     3,838       3,638  

Asset management and service fees

     904       820  

Other income

     535       (2,004

Realized investment gains (losses), net:

    

Other-than-temporary impairments on fixed maturity securities

     (79     (308

Other-than-temporary impairments on fixed maturity securities transferred to Other Comprehensive Income

     63       238  

Other realized investment gains (losses), net

     224       (653
  

 

 

   

 

 

 

Total realized investment gains (losses), net

     208       (723
  

 

 

   

 

 

 

Total revenues

     12,854       10,171  
  

 

 

   

 

 

 

BENEFITS AND EXPENSES

    

Policyholders’ benefits

     6,386       7,219  

Interest credited to policyholders’ account balances

     1,015       1,050  

Dividends to policyholders

     600       560  

Amortization of deferred policy acquisition costs

     437       218  

General and administrative expenses

     2,698       2,683  
  

 

 

   

 

 

 

Total benefits and expenses

     11,136       11,730  
  

 

 

   

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES

     1,718       (1,559
  

 

 

   

 

 

 

Income tax expense (benefit)

     473       (827
  

 

 

   

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES

     1,245       (732

Equity in earnings of operating joint ventures, net of taxes

     0       46  
  

 

 

   

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

     1,245       (686

Income (loss) from discontinued operations, net of taxes

     4       1  
  

 

 

   

 

 

 

NET INCOME (LOSS)

     1,249       (685

Less: Income (loss) attributable to noncontrolling interests

     11       35  
  

 

 

   

 

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC

   $ 1,238     $ (720
  

 

 

   

 

 

 

EARNINGS PER SHARE (See Note 8)

    

Financial Services Businesses

    

Basic earnings per share-Common Stock:

    

Income (loss) from continuing operations attributable to Prudential Financial, Inc.

   $ 2.62     $ (1.58

Income (loss) from discontinued operations, net of taxes

     0.01       0.00  
  

 

 

   

 

 

 

Net income (loss) attributable to Prudential Financial, Inc.

   $ 2.63     $ (1.58
  

 

 

   

 

 

 

Diluted earnings per share-Common Stock:

    

Income (loss) from continuing operations attributable to Prudential Financial, Inc.

   $ 2.58     $ (1.58

Income (loss) from discontinued operations, net of taxes

     0.01       0.00  
  

 

 

   

 

 

 

Net income (loss) attributable to Prudential Financial, Inc.

   $ 2.59     $ (1.58
  

 

 

   

 

 

 

Dividends declared per share of Common Stock

   $ 0.53     $ 0.40  
  

 

 

   

 

 

 

Closed Block Business

    

Basic and Diluted earnings per share-Class B Stock:

    

Income (loss) from continuing operations attributable to Prudential Financial, Inc.

   $ 7.50     $ 5.50  

Income (loss) from discontinued operations, net of taxes

     0.00       0.00  
  

 

 

   

 

 

 

Net income (loss) attributable to Prudential Financial, Inc.

   $ 7.50     $ 5.50  
  

 

 

   

 

 

 

Dividends declared per share of Class B Stock

   $ 2.41     $ 2.41  
  

 

 

   

 

 

 

 

See Notes to Unaudited Interim Consolidated Financial Statements

 

2


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PRUDENTIAL FINANCIAL, INC.

 

Unaudited Interim Consolidated Statements of Comprehensive Income

Three Months Ended March 31, 2014 and 2013 (in millions)

 

     Three Months Ended
March 31,
 
        2014            2013     

NET INCOME (LOSS)

   $ 1,249      $ (685

Other comprehensive income (loss), before tax:

     

Foreign currency translation adjustments for the period

     80        (901

Net unrealized investment gains (losses)

     3,068        4,278  

Defined benefit pension and postretirement unrecognized periodic benefit

     23        50  
  

 

 

    

 

 

 

Total

     3,171        3,427  
  

 

 

    

 

 

 

Less: Income tax expense (benefit) related to other comprehensive income (loss)

     1,047        1,223  
  

 

 

    

 

 

 

Other comprehensive income (loss), net of taxes

     2,124        2,204  
  

 

 

    

 

 

 

Comprehensive income (loss)

     3,373        1,519  

Less: Comprehensive income (loss) attributable to noncontrolling interests

     18        35  
  

 

 

    

 

 

 

Comprehensive income (loss) attributable to Prudential Financial, Inc.

   $ 3,355      $ 1,484  
  

 

 

    

 

 

 

 

See Notes to Unaudited Interim Consolidated Financial Statements

 

3


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Unaudited Interim Consolidated Statements of Equity(1)

Three Months Ended March 31, 2014 and 2013 (in millions)

 

    Prudential Financial, Inc. Equity              
    Common
Stock
    Additional
Paid-in
Capital
    Retained
Earnings
    Common
Stock
Held In
Treasury
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Prudential
Financial, Inc.
Equity
    Noncontrolling
Interests
    Total
Equity
 

Balance December 31, 2013

  $ 6     $ 24,475     $ 14,531     $ (12,415   $ 8,681     $ 35,278     $ 603     $ 35,881  

Common Stock acquired

          (250       (250       (250

Contributions from noncontrolling interests

              0       0       0  

Distributions to noncontrolling interests

              0       (36     (36

Consolidations/(deconsolidations) of noncontrolling interests

              0       56       56  

Stock-based compensation programs

      (40     0       132         92         92  

Dividends declared on Common Stock

        (247         (247       (247

Dividends declared on Class B Stock

        (5         (5       (5

Comprehensive income:

               

Net income (loss)

        1,238           1,238       11       1,249  

Other comprehensive income (loss), net of tax

            2,117       2,117       7       2,124  
           

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

              3,355       18       3,373  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2014

  $ 6     $ 24,435     $ 15,517     $ (12,533   $ 10,798     $ 38,223     $ 641     $ 38,864  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Prudential Financial, Inc. Equity              
    Common
Stock
    Additional
Paid-in
Capital
    Retained
Earnings
    Common
Stock
Held In
Treasury
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Prudential
Financial, Inc.
Equity
    Noncontrolling
Interests
    Total
Equity
 

Balance, December 31, 2012

  $ 6     $ 24,380     $ 16,066     $ (12,163   $ 10,214     $ 38,503     $ 609     $ 39,112  

Common Stock acquired

              0         0  

Contributions from noncontrolling interests

              0       1       1  

Distributions to noncontrolling

                  0  

interests

              0       (56     (56

Consolidations/(deconsolidations) of noncontrolling interests

              0         0  

Stock-based compensation programs

      (26     (36     145         83         83  

Dividends declared on Common Stock

        (188         (188       (188

Dividends declared on Class B Stock

        (5         (5       (5

Comprehensive income:

               

Net income (loss)

        (720         (720     35       (685

Other comprehensive income (loss), net of tax

            2,204       2,204       0       2,204  
           

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

              1,484       35       1,519  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2013

  $ 6     $ 24,354     $ 15,117     $ (12,018   $ 12,418     $ 39,877     $ 589     $ 40,466  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Class B Stock is not presented as the amounts are immaterial.

 

See Notes to Unaudited Interim Consolidated Financial Statements

 

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Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Unaudited Interim Consolidated Statements of Cash Flows

Three Months Ended March 31, 2014 and 2013 (in millions)

 

     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income (loss)

   $ 1,249     $ (685

Adjustments to reconcile net income to net cash provided by operating activities:

    

Realized investment (gains) losses, net

     (208     723  

Policy charges and fee income

     (509     (514

Interest credited to policyholders’ account balances

     1,015       1,050  

Depreciation and amortization

     41       109  

Gains on trading account assets supporting insurance liabilities, net

     (101     (93

Change in:

    

Deferred policy acquisition costs

     (231     (645

Future policy benefits and other insurance liabilities

     1,568       2,545  

Other trading account assets

     (14     (10

Income taxes

     388       (1,653

Other, net

     (1,219     (640
  

 

 

   

 

 

 

Cash flows from operating activities

     1,979       187  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from the sale/maturity/prepayment of:

    

Fixed maturities, available-for-sale

     13,437       11,805  

Fixed maturities, held-to-maturity

     93       125  

Trading account assets supporting insurance liabilities and other trading account assets

     3,066       5,658  

Equity securities, available-for-sale

     994       1,003  

Commercial mortgage and other loans

     573       1,287  

Policy loans

     537       572  

Other long-term investments

     195       499  

Short-term investments

     16,822       9,311  

Payments for the purchase/origination of:

    

Fixed maturities, available-for-sale

     (15,701     (13,564

Fixed maturities, held-to-maturity

     (22     (14

Trading account assets supporting insurance liabilities and other trading account assets

     (3,892     (6,498

Equity securities, available-for-sale

     (1,094     (985

Commercial mortgage and other loans

     (1,926     (2,008

Policy loans

     (465     (441

Other long-term investments

     (495     (633

Short-term investments

     (15,270     (9,053

Acquisition of business, net of cash acquired

     (23     (488

Other, net

     202       (228
  

 

 

   

 

 

 

Cash flows used in investing activities

     (2,969     (3,652
  

 

 

   

 

 

 

 

See Notes to Unaudited Interim Consolidated Financial Statements

 

 

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Table of Contents
     2014     2013  

CASH FLOWS FROM FINANCING ACTIVITIES

    

Policyholders’ account deposits

   $ 5,751     $ 5,881  

Policyholders’ account withdrawals

     (5,368     (6,438

Net change in securities sold under agreements to repurchase and cash collateral for loaned securities

     691       344  

Cash dividends paid on Common Stock

     (247     (206

Cash dividends paid on Class B Stock

     (5     (5

Net change in financing arrangements (maturities 90 days or less)

     472       591  

Common Stock acquired

     (250     0  

Common Stock reissued for exercise of stock options

     77       46  

Proceeds from the issuance of debt (maturities longer than 90 days)

     1,146       1,593  

Repayments of debt (maturities longer than 90 days)

     (225     (1,240

Excess tax benefits from share-based payment arrangements

     14       8  

Other, net

     (59     (225
  

 

 

   

 

 

 

Cash flows from financing activities

     1,997       349  
  

 

 

   

 

 

 

Effect of foreign exchange rate changes on cash balances

     26       (507

NET DECREASE IN CASH AND CASH EQUIVALENTS

     1,033       (3,623

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

     11,439       18,100  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 12,472     $ 14,477  
  

 

 

   

 

 

 

NON-CASH TRANSACTIONS DURING THE PERIOD

    

Treasury Stock shares issued for stock-based compensation programs

   $ 92     $ 101  

Acquisition of UniAsia Life Assurance Berhad (See Note 3):

    

Assets acquired, excluding cash and cash equivalents acquired

   $ 659     $ 0  

Liabilities assumed

     589       0  

Noncontrolling interest assumed

     47       0  
  

 

 

   

 

 

 

Net cash paid on acquisition

   $ 23     $ 0  
  

 

 

   

 

 

 

Acquisition of The Hartford’s individual life business (See Note 3):

    

Assets acquired, excluding cash and cash equivalents acquired

   $ 0     $ 11,056  

Liabilities assumed

     0       10,568  
  

 

 

   

 

 

 

Net cash paid on acquisition

   $ 0     $ 488  
  

 

 

   

 

 

 

 

See Notes to Unaudited Interim Consolidated Financial Statements

 

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Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements

 

1. BUSINESS AND BASIS OF PRESENTATION

 

Prudential Financial, Inc. (“Prudential Financial”) and its subsidiaries (collectively, “Prudential” or the “Company”) provide a wide range of insurance, investment management, and other financial products and services to both individual and institutional customers throughout the United States and in many other countries. Principal products and services provided include life insurance, annuities, retirement-related services, mutual funds, and investment management. The Company has organized its principal operations into the Financial Services Businesses and the Closed Block Business. The Financial Services Businesses operate through three operating divisions: U.S. Retirement Solutions and Investment Management, U.S. Individual Life and Group Insurance, and International Insurance. The Company’s businesses that are not sufficiently material to warrant separate disclosure and divested businesses, are included in Corporate and Other operations within the Financial Services Businesses. The Closed Block Business, which includes the Closed Block (see Note 6), is managed separately from the Financial Services Businesses. The Closed Block Business was established on the date of demutualization and includes the Company’s in force participating insurance and annuity products and assets that are used for the payment of benefits and policyholders’ dividends on these products, as well as other assets and equity that support these products and related liabilities. In connection with the demutualization, the Company ceased offering these participating products.

 

Basis of Presentation

 

The Unaudited Interim Consolidated Financial Statements include the accounts of Prudential Financial, entities over which the Company exercises control, including majority-owned subsidiaries and minority-owned entities such as limited partnerships in which the Company is the general partner, and variable interest entities in which the Company is considered the primary beneficiary. See Note 5 for more information on the Company’s consolidated variable interest entities. The Unaudited Interim Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated.

 

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

The Company’s Gibraltar Life Insurance Company, Ltd. (“Gibraltar Life”) consolidated operations, use a November 30 fiscal year end for purposes of inclusion in the Company’s Consolidated Financial Statements. Therefore, the Unaudited Interim Consolidated Financial Statements as of March 31, 2014, include the assets and liabilities of Gibraltar Life and its results of operations as of, and for the three months ended, February 28, 2014, respectively.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

The most significant estimates include those used in determining deferred policy acquisition costs and related amortization; value of business acquired and its amortization; amortization of sales inducements; measurement of goodwill and any related impairment; valuation of investments including derivatives and the recognition of other-than-temporary impairments; future policy benefits including guarantees; pension and other postretirement benefits; provision for income taxes and valuation of deferred tax assets; and reserves for contingent liabilities, including reserves for losses in connection with unresolved legal matters.

 

Reclassifications

 

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

 

2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

 

This section supplements, and should be read in conjunction with, Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Adoption of New Accounting Pronouncements

 

In December 2013, the Financial Accounting Standards Board (“FASB”) issued updated guidance establishing a single definition of a public entity for use in financial accounting and reporting guidance. This new guidance is effective for all current and future reporting periods and did not have a significant effect on the Company’s consolidated financial position, results of operations, or financial statement disclosures.

 

In July 2013, the FASB issued new guidance regarding derivatives. The guidance permits the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting, in addition to the United States Treasury rate and London Inter-Bank Offered Rate (“LIBOR”). The guidance also removes the restriction on using different benchmark rates for similar hedges. The guidance is effective for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013, and should be applied prospectively. Adoption of the guidance did not have a significant effect on the Company’s consolidated financial position, results of operations, and financial statement disclosures.

 

In July 2013, the FASB issued updated guidance regarding the presentation of unrecognized tax benefits when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This new guidance is effective for interim or annual reporting periods that begin after December 15, 2013, and should be applied prospectively, with early application permitted. Adoption of the guidance did not have a significant effect on the Company’s consolidated financial position, results of operations, and financial statement disclosures.

 

In June 2013, the FASB issued updated guidance clarifying the characteristics of an investment company and requiring new disclosures. Under the guidance, all entities regulated under the Investment Company Act of 1940 automatically qualify as investment companies, while all other entities need to consider both the fundamental and typical characteristics of an investment company in determining whether they qualify as investment companies. This new guidance is effective for interim or annual reporting periods that begin after December 15, 2013, and should be applied prospectively. Adoption of the guidance did not have a significant effect on the Company’s consolidated financial position, results of operations, and financial statement disclosures.

 

In March 2013, the FASB issued updated guidance regarding the recognition in net income of the cumulative translation adjustment upon the sale or loss of control of a business or group of assets residing in a

 

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Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

foreign subsidiary, or a loss of control of a foreign investment. The guidance is effective for the first interim or annual reporting period beginning after December 15, 2013, and should be applied prospectively. The amendments require an entity that ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity to release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. For an equity method investment that is a foreign entity, the partial sale guidance still applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. Adoption of the guidance did not have a significant effect on the Company’s consolidated financial position, results of operations, and financial statement disclosures.

 

In February 2013, the FASB issued updated guidance regarding the presentation of comprehensive income. Under the guidance, an entity is required to separately present information about significant items reclassified out of accumulated other comprehensive income by component as well as changes in accumulated other comprehensive income balances by component in either the financial statements or the notes to the financial statements. The guidance does not change the items that are reported in other comprehensive income, does not change when an item of other comprehensive income must be reclassified to net income, and does not amend any existing requirements for reporting net income or other comprehensive income. The guidance is effective for the first interim or annual reporting period beginning after December 15, 2012, and should be applied prospectively. The disclosures required by this guidance are included in Note 7.

 

In December 2011 and January 2013, the FASB issued updated guidance regarding the disclosure of recognized derivative instruments (including bifurcated embedded derivatives), repurchase agreements and securities borrowing/lending transactions that are offset in the statement of financial position or are subject to an enforceable master netting arrangement or similar agreement (irrespective of whether they are offset in the statement of financial position). This new guidance requires an entity to disclose information on both a gross and net basis about instruments and transactions within the scope of this guidance. This new guidance is effective for interim or annual reporting periods beginning on or after January 1, 2013, and should be applied retrospectively for all comparative periods presented. The disclosures required by this guidance are included in Note 14.

 

Future Adoption of New Accounting Pronouncements

 

In January 2014, the FASB issued updated guidance regarding investments in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. Under the guidance, an entity is permitted to make an accounting policy election to amortize the initial cost of its investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the statement of operations as a component of income tax expense (benefit) if certain conditions are met. The new guidance is effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014, and should be applied retrospectively to all periods presented. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations, and financial statement disclosures.

 

In January 2014, the FASB issued updated guidance for troubled debt restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2014. This guidance can be elected for prospective adoption or by using a modified retrospective transition method. This guidance is not expected to have a significant impact on the Company’s consolidated financial position, results of operations, or financial statement disclosures.

 

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Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

In April 2014, the FASB issued updated guidance that changes the criteria for reporting discontinued operations and introduces new disclosures. The new guidance is effective prospectively to new disposals and new classifications of disposal groups as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Early adoption is permitted for new disposals or new classifications as held for sale that have not been reported in financial statements previously issued. This guidance is not expected to have a significant impact on the Company’s consolidated financial position, results of operations, or financial statement disclosures.

 

3. ACQUISITIONS AND DISPOSITIONS

 

Acquisition of UniAsia Life Assurance

 

On January 2, 2014, the Company completed the acquisition of UniAsia Life Assurance Berhad, an established life insurance company in Malaysia, through the formation of a joint venture with Bank Simpanan Nasional (“BSN”), a bank owned by the Malaysian government. The joint venture paid cash consideration of $158 million, 70% of which was provided by Prudential Insurance and 30% of which was provided by BSN. This acquisition is part of the Company’s strategic initiative to further expand its business into Southeast Asian markets.

 

The assets acquired and liabilities assumed have been included in the Company’s Unaudited Interim Consolidated Financial Statements as of the acquisition date. Total assets acquired were $747 million, including $88 million of cash and cash equivalents and $22 million of goodwill, none of which is deductible for local tax purposes, and total liabilities assumed were $589 million.

 

Prudential Financial intends to make a Section 338(g) election under the Internal Revenue Code with respect to this acquisition, resulting in the acquired entity being treated for U.S. tax purposes as a newly-incorporated company. Under such election, the U.S. tax basis of the assets acquired and liabilities assumed of the UniAsia Life Assurance Berhad were adjusted as of January 2, 2014, to reflect the consequences of the Section 338(g) election.

 

Acquisition of The Hartford’s Individual Life Insurance Business

 

On January 2, 2013, the Company acquired The Hartford Financial Services Group’s (“The Hartford”) individual life insurance business through a reinsurance transaction. Under the agreement, the Company paid The Hartford cash consideration of $615 million, primarily in the form of a ceding commission, to provide reinsurance for approximately 700,000 life insurance policies with a net retained face amount in force of approximately $141 billion. This acquisition increased the Company’s scale in the U.S. individual life insurance market, particularly universal life products, and provided complementary distribution opportunities through expanded wirehouse and bank distribution channels.

 

The assets acquired and liabilities assumed have been included in the Company’s Unaudited Interim Consolidated Financial Statements as of the acquisition date. Total assets acquired were $11.2 billion, including $1.4 billion of value of business acquired and $0.1 billion of cash, and total liabilities assumed were $10.6 billion. There is no goodwill, including tax deductible goodwill, associated with the acquisition.

 

Sale of Wealth Management Solutions Business

 

In April 2013, the Company signed a definitive agreement to sell its wealth management solutions business to Envestnet Inc. The transaction, which does not have a material impact to the Company’s financial results, closed on July 1, 2013. Due to the existence of an ongoing contractual relationship between the Company and these operations, this disposition did not qualify for discontinued operations treatment under U.S. GAAP.

 

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Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Discontinued Operations

 

Income from discontinued operations, including charges upon disposition, are as follows:

 

     Three Months Ended
March 31,
 
     2014      2013  
     (in millions)  

Real estate investments sold or held for sale(1)

   $ 6      $ 0  

Global commodities business

     0        2  
  

 

 

    

 

 

 

Income from discontinued operations before income taxes

     6        2  

Income tax expense

     2        1  
  

 

 

    

 

 

 

Income from discontinued operations, net of taxes

   $ 4      $ 1  
  

 

 

    

 

 

 

 

(1) Reflects the income from discontinued real estate investments.

 

Charges recorded in connection with the disposals of businesses include estimates that are subject to subsequent adjustment.

 

The Company’s Unaudited Interim Consolidated Statements of Financial Position include total assets and total liabilities related to discontinued operations as follows:

 

     March 31,
2014
     December 31,
2013
 
     (in millions)  

Total assets

   $ 14      $ 15  

Total liabilities

   $ 7      $ 7  

 

4. INVESTMENTS

 

Fixed Maturities and Equity Securities

 

The following tables provide information relating to fixed maturities and equity securities (excluding investments classified as trading) as of the dates indicated:

 

     March 31, 2014  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
     Other-than-
temporary
Impairments
in AOCI(3)
 
     (in millions)  

Fixed maturities, available-for-sale

              

U.S. Treasury securities and obligations of U.S. government authorities and agencies

   $ 13,485      $ 2,327      $ 24      $ 15,788      $ 0  

Obligations of U.S. states and their political subdivisions

     4,154        427        60        4,521        0  

Foreign government bonds

     77,016        7,991        239        84,768        1  

Corporate securities

     147,194        13,420        2,007        158,607        (2

Asset-backed securities(1)

     10,614        235        223        10,626        (670

Commercial mortgage-backed securities

     14,127        394        107        14,414        0  

Residential mortgage-backed securities(2)

     6,239        380        22        6,597        (6
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities, available-for-sale

   $ 272,829      $ 25,174      $ 2,682      $ 295,321      $ (677
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities, available-for-sale

   $ 7,291      $ 2,940      $ 40      $ 10,191     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

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Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

     March 31, 2014  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in millions)  

Fixed maturities, held-to-maturity

           

Foreign government bonds

   $ 956      $ 131      $ 0      $ 1,087  

Corporate securities(4)

     912        57        22        947  

Asset-backed securities(1)

     674        46        0        720  

Commercial mortgage-backed securities

     137        14        0        151  

Residential mortgage-backed securities(2)

     596        36        0        632  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities, held-to-maturity(4)

   $ 3,275      $ 284      $ 22      $ 3,537  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes credit-tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans and other asset types.
(2) Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(3) Represents the amount of other-than-temporary impairment losses in Accumulated Other Comprehensive Income (“AOCI”), which were not included in earnings. Amount excludes $872 million of net unrealized gains on impaired available-for-sale securities and less than $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.
(4) Excludes notes with amortized cost of $2,400 million (fair value, $2,555 million) which have been offset with the associated payables under a netting agreement.

 

     December 31, 2013  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
     Other-than-
temporary
Impairments
in AOCI(3)
 
     (in millions)  

Fixed maturities, available-for-sale

              

U.S. Treasury securities and obligations of U.S. government authorities and agencies

   $ 13,754      $ 1,742      $ 96      $ 15,400      $ 0  

Obligations of U.S. states and their political subdivisions

     3,598        274        137        3,735        0  

Foreign government bonds

     75,595        7,459        266        82,788        1  

Corporate securities

     145,091        12,095        3,408        153,778        (4

Asset-backed securities(1)

     10,691        214        316        10,589        (755

Commercial mortgage-backed securities

     13,633        403        163        13,873        0  

Residential mortgage-backed securities(2)

     6,365        379        41        6,703        (7
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities, available-for-sale

   $ 268,727      $ 22,566      $ 4,427      $ 286,866      $ (765
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities, available-for-sale

   $ 7,003      $ 2,931      $ 24      $ 9,910     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

12


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

     December 31, 2013  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in millions)  

Fixed maturities, held-to-maturity

           

Foreign government bonds

   $ 938      $ 117      $ 0      $ 1,055  

Corporate securities(4)

     904        50        24        930  

Asset-backed securities(1)

     693        46        0        739  

Commercial mortgage-backed securities

     166        18        0        184  

Residential mortgage-backed securities(2)

     611        34        0        645  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities, held-to-maturity(4)

   $ 3,312      $ 265      $ 24      $ 3,553  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes credit-tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans, and other asset types.
(2) Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(3) Represents the amount of other-than-temporary impairment losses in AOCI, which were not included in earnings. Amount excludes $875 million of net unrealized gains on impaired available-for-sale securities and $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.
(4) Excludes notes with amortized cost of $2,400 million (fair value, $2,461 million) which have been offset with the associated payables under a netting agreement.

 

The amortized cost and fair value of fixed maturities by contractual maturities at March 31, 2014, are as follows:

 

     Available-for-Sale      Held-to-Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (in millions)  

Due in one year or less

   $ 14,078      $ 14,658      $ 41      $ 41  

Due after one year through five years

     48,181        52,947        13        13  

Due after five years through ten years

     55,464        60,487        327        338  

Due after ten years(1)

     124,126        135,592        1,487        1,642  

Asset-backed securities

     10,614        10,626        674        720  

Commercial mortgage-backed securities

     14,127        14,414        137        151  

Residential mortgage-backed securities

     6,239        6,597        596        632  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 272,829      $ 295,321      $ 3,275      $ 3,537  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excludes notes with amortized cost of $2,400 million (fair value, $2,555 million) which have been offset with the associated payables under a netting agreement.

 

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Asset-backed, commercial mortgage-backed, and residential mortgage-backed securities are shown separately in the table above, as they are not due at a single maturity date.

 

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Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

The following table depicts the sources of fixed maturity proceeds and related investment gains / (losses), as well as losses on impairments of both fixed maturities and equity securities:

 

     Three Months Ended
March 31,
 
         2014             2013      
     (in millions)  

Fixed maturities, available-for-sale

    

Proceeds from sales

   $ 8,578     $ 6,495  

Proceeds from maturities/repayments

     4,859       5,739  

Gross investment gains from sales, prepayments, and maturities

     425       229  

Gross investment losses from sales and maturities

     (152     (106

Fixed maturities, held-to-maturity

    

Gross investment gains from prepayments

   $ 0     $ 0  

Proceeds from maturities/repayments

     94       125  

Equity securities, available-for-sale

    

Proceeds from sales

   $ 1,165     $ 1,048  

Gross investment gains from sales

     133       107  

Gross investment losses from sales

     (39     (23

Fixed maturity and equity security impairments

    

Net writedowns for other-than-temporary impairment losses on fixed maturities recognized in earnings(1)

   $ (16   $ (70

Writedowns for impairments on equity securities

     (10     (7

 

(1) Excludes the portion of other-than-temporary impairments recorded in “Other comprehensive income (loss),” representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of impairment.

 

As discussed in Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2013, a portion of certain other-than-temporary impairment (“OTTI”) losses on fixed maturity securities are recognized in “Other comprehensive income (loss)” (“OCI”). For these securities, the net amount recognized in earnings (“credit loss impairments”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in OCI. The following table sets forth the amount of pre-tax credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts.

 

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Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Credit losses recognized in earnings on fixed maturity securities held by the Company for which a portion of the OTTI loss was recognized in OCI

 

     Three Months Ended
March 31,
 
         2014             2013      
     (in millions)  

Balance, beginning of period

   $ 968     $ 1,166  

Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period

     (140     (97

Credit loss impairments previously recognized on securities impaired to fair value during the period(1)

     0       0  

Credit loss impairment recognized in the current period on securities not previously impaired

     2       1  

Additional credit loss impairments recognized in the current period on securities previously impaired

     4       12  

Increases due to the passage of time on previously recorded credit losses

     9       12  

Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected

     (5     (5
  

 

 

   

 

 

 

Balance, end of period

   $ 838     $ 1,089  
  

 

 

   

 

 

 

 

(1) Represents circumstances where the Company determined in the current period that it intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of the security’s amortized cost.

 

Trading Account Assets Supporting Insurance Liabilities

 

The following table sets forth the composition of “Trading account assets supporting insurance liabilities” as of the dates indicated:

 

     March 31, 2014      December 31, 2013  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (in millions)  

Short-term investments and cash equivalents

   $ 805      $ 805      $ 697      $ 697  

Fixed maturities:

           

Corporate securities

     11,987        12,612        12,109        12,616  

Commercial mortgage-backed securities

     2,447        2,480        2,417        2,441  

Residential mortgage-backed securities(1)

     1,824        1,813        1,857        1,830  

Asset-backed securities(2)

     1,089        1,103        1,096        1,107  

Foreign government bonds

     599        618        579        596  

U.S. government authorities and agencies and obligations of U.S. states

     296        342        303        341  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     18,242        18,968        18,361        18,931  

Equity securities

     966        1,162        913        1,199  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading account assets supporting insurance liabilities

   $ 20,013      $ 20,935      $ 19,971      $ 20,827  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(2) Includes credit tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans and other asset types.

 

15


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

The net change in unrealized gains/(losses) from trading account assets supporting insurance liabilities still held at period end, recorded within “Other income”, was $66 million and $104 million during the three months ended March 31, 2014 and 2013, respectively.

 

Other Trading Account Assets

 

The following table sets forth the composition of the “Other trading account assets” as of the dates indicated:

 

     March 31, 2014      December 31, 2013  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (in millions)  

Short-term investments and cash equivalents

   $ 124      $ 126      $ 105      $ 106  

Fixed maturities

     5,549        5,647        4,653        4,723  

Equity securities

     991        1,113        1,051        1,177  

Other

     3        8        3        7  
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

   $ 6,667        6,894      $ 5,812        6,013  
  

 

 

       

 

 

    

Derivative instruments

        1,127           440  
     

 

 

       

 

 

 

Total other trading account assets

      $ 8,021         $ 6,453  
     

 

 

       

 

 

 

 

The net change in unrealized gains/(losses) from other trading account assets, excluding derivatives instruments, still held at period end, recorded within “Other income”, was $26 million and $74 million during the three months ended March 31, 2014 and 2013, respectively.

 

Concentrations of Financial Instruments

 

The Company monitors its concentrations of financial instruments on an on-going basis, and mitigates credit risk by maintaining a diversified investment portfolio which limits exposure to any one issuer.

 

As of both March 31, 2014 and December 31, 2013, the Company’s exposure to concentrations of credit risk of single issuers greater than 10% of the Company’s stockholders’ equity included securities of the U.S. government, certain U.S. government agencies and certain securities guaranteed by the U.S. government, as well as the securities disclosed below.

 

     March 31, 2014      December 31, 2013  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (in millions)  

Investments in Japanese government and government agency securities:

  

Fixed maturities, available-for-sale

   $ 60,898      $ 66,958      $ 59,775      $ 65,389  

Fixed maturities, held-to-maturity

     934        1,063        916        1,032  

Trading account assets supporting insurance liabilities

     470        479        451        458  

Other trading account assets

     39        39        38        39  

Short-term investments

     0        0        0        0  

Cash equivalents

     382        382        107        107  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 62,723      $ 68,921      $ 61,287      $ 67,025  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

     March 31, 2014      December 31, 2013  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (in millions)  

Investments in South Korean government and government agency securities:

           

Fixed maturities, available-for-sale

   $ 6,760      $ 7,409      $ 6,672      $ 7,277  

Fixed maturities, held-to-maturity

     0        0        0        0  

Trading account assets supporting insurance liabilities

     61        62        61        61  

Other trading account assets

     0        0        0        0  

Short-term investments

     0        0        0        0  

Cash equivalents

     0        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,821      $ 7,471      $ 6,733      $ 7,338  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Commercial Mortgage and Other Loans

 

The Company’s commercial mortgage and other loans are comprised as follows, as of the dates indicated:

 

     March 31, 2014     December 31, 2013  
     Amount
(in millions)
    % of
Total
    Amount
(in millions)
    % of
Total
 

Commercial and agricultural mortgage loans by property type:

        

Office

   $ 8,170       20.2   $ 7,762       19.9

Retail

     8,649       21.4       8,698       22.3  

Apartments/Multi-Family

     8,357       20.7       7,492       19.2  

Industrial

     7,537       18.6       7,390       18.9  

Hospitality

     2,053       5.1       2,050       5.2  

Other

     3,543       8.8       3,464       8.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial mortgage loans

     38,309       94.8       36,856       94.4  

Agricultural property loans

     2,156       5.2       2,183       5.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial and agricultural mortgage loans by property type

     40,465       100.0     39,039       100.0
    

 

 

     

 

 

 

Valuation allowance

     (200       (195  
  

 

 

     

 

 

   

Total net commercial and agricultural mortgage loans by property type

     40,265         38,844    
  

 

 

     

 

 

   

Other loans:

        

Uncollateralized loans

     1,289         1,306    

Residential property loans

     526         544    

Other collateralized loans

     331         335    
  

 

 

     

 

 

   

Total other loans

     2,146         2,185    

Valuation allowance

     (19       (21  
  

 

 

     

 

 

   

Total net other loans

     2,127         2,164    
  

 

 

     

 

 

   

Total commercial mortgage and other loans(1)

   $ 42,392       $ 41,008    
  

 

 

     

 

 

   

 

(1) Includes loans held at fair value.

 

17


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

The commercial mortgage and agricultural property loans are geographically dispersed throughout the United States, Canada and Asia with the largest concentrations in California (26%), New York (10%), and Texas (8%) at March 31, 2014.

 

Activity in the allowance for losses for all commercial mortgage and other loans, as of the dates indicated, is as follows:

 

    March 31, 2014  
    Commercial
Mortgage
Loans
    Agricultural
Property
Loans
    Residential
Property
Loans
    Other
Collateralized
Loans
    Uncollateralized
Loans
    Total  
    (in millions)  

Allowance for losses, beginning of year

  $ 188     $ 7     $ 6     $ 3     $ 12     $ 216  

Addition to / (release of) allowance of losses

    5       0       0       0       0       5  

Charge-offs, net of recoveries

    0       0       0       (2     0       (2

Change in foreign exchange

    0       0       0       0       0       0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending balance

  $ 193     $ 7     $ 6     $ 1     $ 12     $ 219  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    December 31, 2013  
    Commercial
Mortgage
Loans
    Agricultural
Property
Loans
    Residential
Property
Loans
    Other
Collateralized
Loans
    Uncollateralized
Loans
    Total  
    (in millions)  

Allowance for losses, beginning of year

  $ 209     $ 20     $ 11     $ 12     $ 17     $ 269  

Addition to / (release of) allowance of losses

    12       (7     (3     (9     (2     (9

Charge-offs, net of recoveries

    (33     (6     0       0       0       (39

Change in foreign exchange

    0       0       (2     0       (3     (5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending balance

  $ 188     $ 7     $ 6     $ 3     $ 12     $ 216  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

The following tables set forth the allowance for credit losses and the recorded investment in commercial mortgage and other loans as of the dates indicated:

 

    March 31, 2014  
    Commercial
Mortgage
Loans
    Agricultural
Property
Loans
    Residential
Property
Loans
    Other
Collateralized
Loans
    Uncollateralized
Loans
    Total  
    (in millions)  

Allowance for Credit Losses:

 

Ending balance: individually evaluated for impairment

  $ 19     $ 0     $ 0     $ 1     $ 0     $ 20  

Ending balance: collectively evaluated for impairment

    174       7       6       0       12       199  

Ending balance: loans acquired with deteriorated credit quality

    0       0       0       0       0       0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending balance

  $ 193     $ 7     $ 6     $ 1     $ 12     $ 219  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recorded Investment:(1)

           

Ending balance gross of reserves: individually evaluated for impairment

  $ 385     $ 5     $ 0     $ 4     $ 2     $ 396  

Ending balance gross of reserves: collectively evaluated for impairment

    37,924       2,151       526       327       1,287       42,215  

Ending balance gross of reserves: loans acquired with deteriorated credit quality

    0       0       0       0       0       0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending balance, gross of reserves

  $ 38,309     $ 2,156     $ 526     $ 331     $ 1,289     $ 42,611  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Recorded investment reflects the balance sheet carrying value gross of related allowance.

 

19


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

     December 31, 2013  
     Commercial
Mortgage
Loans
     Agricultural
Property
Loans
     Residential
Property
Loans
     Other
Collateralized
Loans
     Uncollateralized
Loans
     Total  
     (in millions)  

Allowance for Credit Losses:

  

Ending balance: individually evaluated for impairment

   $ 16      $ 0      $ 0      $ 3      $ 0      $ 19  

Ending balance: collectively evaluated for impairment

     172        7        6        0        12        197  

Ending balance: loans acquired with deteriorated credit quality

     0        0        0        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending balance

   $ 188      $ 7      $ 6      $ 3      $ 12      $ 216  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Recorded Investment:(1)

                 

Ending balance gross of reserves: individually evaluated for impairment

   $ 429      $ 5      $ 0      $ 7      $ 2      $ 443  

Ending balance gross of reserves: collectively evaluated for impairment

     36,427        2,178        544        328        1,304        40,781  

Ending balance gross of reserves: loans acquired with deteriorated credit quality

     0        0        0        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending balance, gross of reserves

   $ 36,856      $ 2,183      $ 544      $ 335      $ 1,306      $ 41,224  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Recorded investment reflects the balance sheet carrying value gross of related allowance.

 

20


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Impaired loans include those loans for which it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. Impaired commercial mortgage and other loans identified in management’s specific review of probable loan losses and the related allowance for losses, as of the dates indicated, are as follows:

 

     March 31, 2014  
     Recorded
Investment(1)
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
Before
Allowance(2)
     Interest
Income
Recognized(3)
 
     (in millions)  

With no related allowance recorded:

              

Commercial mortgage loans

   $ 25      $ 26      $ 0      $ 29      $ 0  

Agricultural property loans

     5        5        0        5        0  

Residential property loans

     0        0        0        0        0  

Other collateralized loans

     0        0        0        0        0  

Uncollateralized loans

     0        2        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total with no related allowance

   $ 30      $ 33      $ 0      $ 34      $ 0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Commercial mortgage loans

   $ 50      $ 51      $ 19      $ 52      $ 0  

Agricultural property loans

     0        0        0        0        0  

Residential property loans

     0        0        0        0        0  

Other collateralized loans

     3        3        0        4        0  

Uncollateralized loans

     0        0        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total with related allowance

   $ 53      $ 54      $ 19      $ 56      $ 0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Commercial mortgage loans

   $ 75      $ 77      $ 19      $ 81      $ 0  

Agricultural property loans

     5        5        0        5        0  

Residential property loans

     0        0        0        0        0  

Other collateralized loans

     3        3        0        4        0  

Uncollateralized loans

     0        2        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 83      $ 87      $ 19      $ 90      $ 0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Recorded investment reflects the balance sheet carrying value gross of related allowance.
(2) Average recorded investment represents the average of the beginning-of-period and end-of-period balances.
(3) The interest income recognized is for the year-to-date of income regardless of when the impairments occurred.

 

21


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

     December 31, 2013  
     Recorded
Investment(1)
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
Before
Allowance(2)
     Interest
Income
Recognized(3)
 
     (in millions)  

With no related allowance recorded:

              

Commercial mortgage loans

   $ 33      $ 33      $ 0      $ 30      $ 1  

Agricultural property loans

     5        5        0        2        0  

Residential property loans

     0        0        0        0        0  

Other collateralized loans

     0        0        0        0        0  

Uncollateralized loans

     0        2        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total with no related allowance

   $ 38      $ 40      $ 0      $ 32      $ 1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Commercial mortgage loans

   $ 54      $ 55      $ 16      $ 121      $ 1  

Agricultural property loans

     0        0        0        10        0  

Residential property loans

     0        0        0        0        0  

Other collateralized loans

     5        5        3        8        3  

Uncollateralized loans

     0        0        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total with related allowance

   $ 59      $ 60      $ 19      $ 139      $ 4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Commercial mortgage loans

   $ 87      $ 88      $ 16      $ 151      $ 2  

Agricultural property loans

     5        5        0        12        0  

Residential property loans

     0        0        0        0        0  

Other collateralized loans

     5        5        3        8        3  

Uncollateralized loans

     0        2        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 97      $ 100      $ 19      $ 171      $ 5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Recorded investment reflects the balance sheet carrying value gross of related allowance.
(2) Average recorded investment represents the average of the beginning-of-period and all subsequent quarterly end-of-period balances.
(3) The interest income recognized is for the year-to-date of income regardless of when the impairments occurred.

 

The net carrying value of commercial and other loans held for sale by the Company as of March 31, 2014 and December 31, 2013, was $124 million and $158 million, respectively. In all these transactions, the Company pre-arranges that it will sell the loan to an investor. As of both March 31, 2014 and December 31, 2013, all of the Company’s commercial and other loans held for sale were collateralized, with collateral primarily consisting of office buildings, retail properties, apartment complexes and industrial buildings.

 

22


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

The following tables set forth the credit quality indicators as of March 31, 2014, based upon the recorded investment gross of allowance for credit losses.

 

Commercial mortgage loans

 

     Debt Service Coverage Ratio—March 31, 2014  
     Greater than
1.2X
     1.0X to <1.2X      Less than
1.0X
     Total  
     (in millions)  

Loan-to-Value Ratio

           

0%-59.99%

   $ 19,392      $ 648      $ 289      $ 20,329  

60%-69.99%

     11,674        442        79        12,195  

70%-79.99%

     4,213        482        265        4,960  

Greater than 80%

     476        154        195        825  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial mortgage loans

   $ 35,755      $ 1,726      $ 828      $ 38,309  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Agricultural property loans

 

     Debt Service Coverage Ratio—March 31, 2014  
     Greater than
1.2X
     1.0X to <1.2X      Less than
1.0X
     Total  
     (in millions)  

Loan-to-Value Ratio

           

0%-59.99%

   $ 2,005      $ 137      $ 0      $ 2,142  

60%-69.99%

     14        0        0        14  

70%-79.99%

     0        0        0        0  

Greater than 80%

     0        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total agricultural property loans

   $ 2,019      $ 137      $ 0      $ 2,156  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Total commercial and agricultural mortgage loans

 

     Debt Service Coverage Ratio—March 31, 2014  
     Greater than
1.2X
     1.0X to <1.2X      Less than
1.0X
     Total  
     (in millions)  

Loan-to-Value Ratio

           

0%-59.99%

   $ 21,397      $ 785      $ 289      $ 22,471  

60%-69.99%

     11,688        442        79        12,209  

70%-79.99%

     4,213        482        265        4,960  

Greater than 80%

     476        154        195        825  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and agricultural mortgage loans

   $ 37,774      $ 1,863      $ 828      $ 40,465  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

The following tables set forth the credit quality indicators as of December 31, 2013, based upon the recorded investment gross of allowance for credit losses.

 

Commercial mortgage loans

 

     Debt Service Coverage Ratio—December 31, 2013  
     Greater than
1.2X
     1.0X to <1.2X      Less than
1.0X
     Total  
     (in millions)  

Loan-to-Value Ratio

           

0%-59.99%

   $ 19,089      $ 597      $ 179      $ 19,865  

60%-69.99%

     11,101        379        95        11,575  

70%-79.99%

     4,005        422        216        4,643  

Greater than 80%

     325        173        275        773  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial mortgage loans

   $ 34,520      $ 1,571      $ 765      $ 36,856  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Agricultural property loans

 

     Debt Service Coverage Ratio—December 31, 2013  
     Greater than
1.2X
     1.0X to <1.2X      Less than
1.0X
     Total  
     (in millions)  

Loan-to-Value Ratio

           

0%-59.99%

   $ 2,023      $ 137      $ 0      $ 2,160  

60%-69.99%

     23        0        0        23  

70%-79.99%

     0        0        0        0  

Greater than 80%

     0        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total agricultural property loans

   $ 2,046      $ 137      $ 0      $ 2,183  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Total commercial and agricultural mortgage loans

 

     Debt Service Coverage Ratio—December 31, 2013  
     Greater than
1.2X
     1.0X to <1.2X      Less than
1.0X
     Total  
     (in millions)  

Loan-to-Value Ratio

           

0%-59.99%

   $ 21,112      $ 734      $ 179      $ 22,025  

60%-69.99%

     11,124        379        95        11,598  

70%-79.99%

     4,005        422        216        4,643  

Greater than 80%

     325        173        275        773  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and agricultural mortgage loans

   $ 36,566      $ 1,708      $ 765      $ 39,039  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

The following tables provide an aging of past due commercial mortgage and other loans as of the dates indicated, based upon the recorded investment gross of allowance for credit losses, as well as the amount of commercial mortgage loans on nonaccrual status as of the dates indicated.

 

    March 31, 2014  
    Current     30-59 Days
Past Due
    60-89 Days
Past Due
    Greater
Than 90
Days -
Accruing
    Greater
Than 90
Days - Not
Accruing
    Total Past
Due
    Total
Commercial
Mortgage
and other
Loans
    Non
Accrual
Status
 
    (in millions)  

Commercial mortgage loans

  $ 38,248     $ 27     $ 0     $ 0     $ 34     $ 61     $ 38,309     $ 70  

Agricultural property loans

    2,155       0       0       0       1       1       2,156       2  

Residential property loans

    502       10       5       0       9       24       526       9  

Other collateralized loans

    331       0       0       0       0       0       331       3  

Uncollateralized loans

    1,289       0       0       0       0       0       1,289       3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 42,525     $ 37     $ 5     $ 0     $ 44     $ 86     $ 42,611     $ 87  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    December 31, 2013  
    Current     30-59 Days
Past Due
    60-89 Days
Past Due
    Greater
Than 90
Days -
Accruing
    Greater
Than 90
Days - Not
Accruing
    Total Past
Due
    Total
Commercial
Mortgage
and other
Loans
    Non
Accrual
Status
 
    (in millions)  

Commercial mortgage loans

  $ 36,821     $ 16     $ 0     $ 0     $ 19     $ 35     $ 36,856     $ 154  

Agricultural property loans

    2,182       0       0       0       1       1       2,183       2  

Residential property loans

    520       11       3       0       10       24       544       10  

Other collateralized loans

    334       0       0       0       1       1       335       5  

Uncollateralized loans

    1,306       0       0       0       0       0       1,306       2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 41,163     $ 27     $ 3     $ 0     $ 31     $ 61     $ 41,224     $ 173  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2013, for further discussion regarding nonaccrual status loans.

 

For the three months ended March 31, 2014, there were no new commercial mortgage and other loans acquired, other than those through direct origination. Additionally, there were no commercial mortgage and other loans sold, other than those classified as held-for-sale. For the three months ended March 31, 2013, there were $718 million of commercial mortgage and other loans acquired, other than those through direct origination. Additionally, there were no commercial mortgage and other loans sold, other than those classified as held-for-sale.

 

The Company’s commercial mortgage and other loans may occasionally be involved in a troubled debt restructuring. As of March 31, 2014 and December 31, 2013, the Company had no significant commitments to fund to borrowers that have been involved in a troubled debt restructuring. During the three months ended March 31, 2014 and 2013, respectively, there were no new troubled debt restructurings related to commercial mortgage loans, and no payment defaults on commercial mortgage and other loans that were modified as a troubled debt restructuring within the 12 months preceding each respective period. For additional information relating to the accounting for troubled debt restructurings, see Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2013.

 

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Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Net Investment Income

 

Net investment income for the three months ended March 31, 2014 and 2013, was from the following sources:

 

     Three Months Ended
March 31,
 
         2014             2013      
     (in millions)  

Fixed maturities, available-for-sale

   $ 2,617     $ 2,651  

Fixed maturities, held-to-maturity

     40       31  

Equity securities, available-for-sale

     84       78  

Trading account assets

     258       238  

Commercial mortgage and other loans

     498       490  

Policy loans

     154       148  

Short-term investments and cash equivalents

     9       10  

Other long-term investments

     342       133  
  

 

 

   

 

 

 

Gross investment income

     4,002       3,779  

Less: investment expenses

     (164     (141
  

 

 

   

 

 

 

Net investment income

   $ 3,838     $ 3,638  
  

 

 

   

 

 

 

 

Realized Investment Gains (Losses), Net

 

Realized investment gains (losses), net, for the three months ended March 31, 2014 and 2013, were from the following sources:

 

     Three Months Ended
March 31,
 
         2014             2013      
     (in millions)  

Fixed maturities

   $ 257     $ 53  

Equity securities

     85       77  

Commercial mortgage and other loans

     8       13  

Investment real estate

     0       0  

Joint ventures and limited partnerships

     1       (1

Derivatives(1)

     (145     (870

Other

     2       5  
  

 

 

   

 

 

 

Realized investment gains (losses), net

   $ 208     $ (723
  

 

 

   

 

 

 

 

(1) Includes the offset of hedged items in qualifying effective hedge relationships prior to maturity or termination.

 

26


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Net Unrealized Gains (Losses) on Investments by Asset Class

 

The table below presents net unrealized gains / (losses) on investments by asset class as of the dates indicated:

 

     March 31,     December 31,  
         2014             2013      
     (in millions)  

Fixed maturity securities on which an OTTI loss has been recognized

   $ 194     $ 110  

Fixed maturity securities, available-for-sale—all other

     22,298       18,029  

Equity securities, available-for-sale

     2,900       2,907  

Derivatives designated as cash flow hedges(1)

     (475     (446

Other investments(2)

     9       4  
  

 

 

   

 

 

 

Net unrealized gains (losses) on investments

   $ 24,926     $ 20,604  
  

 

 

   

 

 

 

 

(1) See Note 14 for more information on cash flow hedges.
(2) As of March 31, 2014, includes $14 million of net unrealized losses on held-to-maturity securities that were previously transferred from available-for-sale. Also includes net unrealized gains on certain joint ventures that are strategic in nature and are included in “Other assets.”

 

Duration of Gross Unrealized Loss Positions for Fixed Maturities and Equity Securities

 

The following table shows the fair value and gross unrealized losses aggregated by investment category and length of time that individual fixed maturity securities and equity securities have been in a continuous unrealized loss position, as of the dates indicated:

 

     March 31, 2014  
     Less than twelve months      Twelve months or more      Total  
     Fair Value      Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
 
     (in millions)  

Fixed maturities(1)

                 

U.S. Treasury securities and obligations of U.S. government authorities and agencies

   $ 1,641      $ 23      $ 7      $ 1      $ 1,648      $ 24  

Obligations of U.S. states and their political subdivisions

     1,024        55        46        5        1,070        60  

Foreign government bonds

     3,203        190        677        49        3,880        239  

Corporate securities

     21,092        731        14,104        1,298        35,196        2,029  

Commercial mortgage-backed securities

     2,702        69        726        38        3,428        107  

Asset-backed securities

     2,432        17        2,380        206        4,812        223  

Residential mortgage-backed securities

     1,253        18        184        4        1,437        22  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 33,347      $ 1,103      $ 18,124      $ 1,601      $ 51,471      $ 2,704  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities, available-for-sale

   $ 591      $ 40      $ 1      $ 0      $ 592      $ 40  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes $174 million of fair value and $22 million of gross unrealized losses at March 31, 2014, on securities classified as held-to-maturity, a portion of which are not reflected in AOCI.

 

27


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

     December 31, 2013  
     Less than twelve months      Twelve months or more      Total  
     Fair Value      Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
 
     (in millions)  

Fixed maturities(1)

                 

U.S. Treasury securities and obligations of U.S. government authorities and agencies

   $ 3,913      $ 95      $ 6      $ 1      $ 3,919      $ 96  

Obligations of U.S. states and their political subdivisions

     1,187        129        43        8        1,230        137  

Foreign government bonds

     3,260        211        438        55        3,698        266  

Corporate securities

     29,574        1,618        14,094        1,814        43,668        3,432  

Commercial mortgage-backed securities

     4,267        128        605        35        4,872        163  

Asset-backed securities

     3,007        42        2,556        274        5,563        316  

Residential mortgage-backed securities

     1,590        34        239        7        1,829        41  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 46,798      $ 2,257      $ 17,981      $ 2,194      $ 64,779      $ 4,451  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities, available-for-sale

   $ 586      $ 24      $ 1      $ 0      $ 587      $ 24  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes $210 million of fair value and $24 million of gross unrealized losses at December 31, 2013, on securities classified as held-to-maturity, a portion of which are not reflected in AOCI.

 

The gross unrealized losses on fixed maturity securities at March 31, 2014 and December 31, 2013, are composed of $2,519 million and $4,178 million related to high or highest quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $185 million and $274 million, related to other than high or highest quality securities based on NAIC or equivalent rating, respectively. At March 31, 2014, the $1,601 million of gross unrealized losses of twelve months or more were concentrated in the consumer non-cyclical, utility, and capital goods sectors of the Company’s corporate securities. At December 31, 2013, the $2,194 million of gross unrealized losses of twelve months or more were concentrated in consumer non-cyclical, utility, and capital goods sectors of the Company’s corporate securities. In accordance with its policy described in Note 2 to the Company’s Consolidated Financial Statements included in its 2013 Annual Report on Form 10-K, the Company concluded that an adjustment to earnings for other-than-temporary impairments for these securities was not warranted at March 31, 2014 or December 31, 2013. These conclusions are based on a detailed analysis of the underlying credit and cash flows on each security. The gross unrealized losses are primarily attributable to foreign currency exchange rate movements, general credit spread widening and increased liquidity discounts. At March 31, 2014, the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before the anticipated recovery of its remaining amortized cost basis.

 

At March 31, 2014, $15 million of the gross unrealized losses on equity securities represented declines in value of greater than 20%, all of which had been in that position for less than six months. At December 31, 2013, $4 million of the gross unrealized losses on equity securities represented declines in value of greater than 20%, all of which had been in that position for less than six months. In accordance with its policy described in Note 2 to the Company’s Consolidated Financial Statements included in its 2013 Annual Report on Form 10-K, the Company concluded that an adjustment for other-than-temporary impairments for these equity securities was not warranted at March 31, 2014 or December 31, 2013.

 

28


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

5. VARIABLE INTEREST ENTITIES

 

In the normal course of its activities, the Company enters into relationships with various special purpose entities and other entities that are deemed to be variable interest entities (“VIEs”). A VIE is an entity that either (1) has equity investors that lack certain essential characteristics of a controlling financial interest (including the ability to control activities of the entity, the obligation to absorb the entity’s expected losses and the right to receive the entity’s expected residual returns) or (2) lacks sufficient equity to finance its own activities without financial support provided by other entities, which in turn would be expected to absorb at least some of the expected losses of the VIE.

 

If the Company determines that it is the VIE’s “primary beneficiary” it consolidates the VIE. There are currently two models for determining whether or not the Company is the “primary beneficiary” of a VIE. The first (the “Investment Company Model”) relates to those VIEs that have the characteristics of an investment company and for which certain other conditions are true. These conditions are that (1) the Company does not have the implicit or explicit obligation to fund losses of the VIE and (2) the VIE is not a securitization entity, asset-backed financing entity or an entity that was formerly considered a qualified special-purpose entity. In this model the Company is the primary beneficiary if it stands to absorb a majority of the VIE’s expected losses or to receive a majority of the VIE’s expected residual returns.

 

For all other VIEs, the Company is the primary beneficiary if the Company has (1) the power to direct the activities of the VIE that most significantly impact the economic performance of the entity and (2) the obligation to absorb losses of the entity that could be potentially significant to the VIE or the right to receive benefits from the entity that could be potentially significant.

 

Consolidated Variable Interest Entities

 

The Company is the investment manager of certain asset-backed investment vehicles (commonly referred to as collateralized loan obligations, or “CLOs”) and certain other vehicles for which the Company earns fee income for investment management services, including certain investment structures in which the Company’s asset management business invests with other co-investors in investment funds referred to as feeder funds. The Company sells or syndicates investments through these vehicles, principally as part of the strategic investing activity of the Company’s asset management businesses. Additionally, the Company may invest in securities issued by these vehicles. CLOs raise capital by issuing debt securities, and use the proceeds to purchase investments, typically interest-bearing financial instruments. The Company has analyzed these relationships and determined that for certain CLOs and other investment structures it is the primary beneficiary and consolidates these entities. This analysis includes a review of (1) the Company’s rights and responsibilities as investment manager, (2) fees received by the Company and (3) other interests (if any) held by the Company. The assets of these VIEs are restricted and must be used first to settle liabilities of the VIE. The Company is not required to provide, and has not provided, material financial or other support to any of these VIEs.

 

Additionally, the Company is the primary beneficiary of certain VIEs in which the Company has invested, as part of its investment activities, but for which it is not the investment manager. These include structured investments issued by a VIE that manages yen-denominated investments coupled with cross-currency coupon swap agreements thereby creating synthetic dual currency investments. The Company’s involvement in the structuring of these investments combined with its economic interest indicates that the Company is the primary beneficiary. The Company has not provided material financial support or other support that was not contractually required to these VIEs.

 

29


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

The table below reflects the carrying amount and balance sheet caption in which the assets and liabilities of consolidated VIEs are reported. The liabilities primarily comprise obligations under debt instruments issued by the VIEs that are non-recourse to the Company. The creditors of these VIE do not have recourse to the Company in excess of the assets contained within the VIE.

 

     Consolidated VIE’s for
Which the Company is the
Investment Manager
     Other Consolidated VIE’s  
     March 31,
2014
     December 31,
2013
     March 31,
2014
    December 31,
2013
 
     (in millions)  

Fixed maturities, available-for-sale

   $ 64      $ 68      $ 112     $ 108  

Fixed maturities, held-to-maturity

     0        0        888       871  

Trading account assets supporting insurance liabilities

     0        0        11       11  

Other trading account assets

     4,685        3,832        0       0  

Commercial mortgage and other loans

     13        23        300       300  

Other long-term investments

     0        0        92       87  

Cash and cash equivalents

     583        566        (4     (3

Accrued investment income

     23        19        4       4  

Other assets

     208        132        0       0  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets of consolidated VIEs

   $ 5,576      $ 4,640      $ 1,403     $ 1,378  
  

 

 

    

 

 

    

 

 

   

 

 

 

Notes issued by consolidated VIEs

   $ 4,101        3,302        0       0  

Other liabilities

     651        631        1       1  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities of consolidated VIEs

   $ 4,752      $ 3,933      $ 1     $ 1  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

As included in the table above, notes issued by consolidated VIEs are classified in the line item on the Consolidated Statements of Financial Position titled, “Notes issued by consolidated VIEs.” Recourse is limited to the assets of the respective VIE and does not extend to the general credit of Prudential Financial. As of March 31, 2014, the maturities of these obligations were over five years.

 

In addition, not reflected in the table above, the Company has created a trust that is a VIE, to facilitate Prudential Insurance’s Funding Agreement Notes Issuance Program (“FANIP”). The trust issues medium-term notes secured by funding agreements issued to the trust by Prudential Insurance with the proceeds of such notes. The trust is the beneficiary of an indemnity agreement with the Company that provides that the Company is responsible for costs related to the notes issued with limited exception. As a result, the Company has determined that it is the primary beneficiary of the trust, which is therefore consolidated.

 

The funding agreements represent an intercompany transaction that is eliminated upon consolidation. However, in recognition of the security interest in such funding agreements, the trust’s medium-term note liability of $2,381 million at both March 31, 2014 and December 31, 2013, is classified within “Policyholders’ account balances.” Creditors of the trust have recourse to Prudential Insurance if the trust fails to make contractual payments on the medium-term notes. The Company has not provided material financial or other support to the trust that was not contractually required.

 

Unconsolidated Variable Interest Entities

 

The Company has determined that it is not the primary beneficiary of certain VIEs for which it is the investment manager. These VIEs consist primarily of investment funds for which the Company utilizes the

 

30


Table of Contents

PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

Investment Company Model to assess consolidation. Accordingly, the Company has determined that it is not the primary beneficiary of these entities because it does not stand to absorb a majority of the VIE’s expected losses or to receive a majority of the VIE’s expected residual returns. For all other investment structures, the Company has determined that it is not the primary beneficiary as it does not have both (1) the power to direct the activities of the VIE that most significantly impact the economic performance of the entity and (2) the obligation to absorb losses of the entity that could be potentially significant to the VIE or the right to receive benefits from the entity that could be potentially significant. The Company’s maximum exposure to loss resulting from its relationship with unconsolidated VIEs for which it is the investment manager is limited to its investment in the VIEs, which was $455 million and $489 million at March 31, 2014 and December 31, 2013, respectively. These investments are reflected in “Fixed maturities, available-for-sale,” “Other trading account assets, at fair value” and “Other long-term investments.” The fair value of assets held within these unconsolidated VIEs was $9,021 million and $9,426 million as of March 31, 2014 and December 31, 2013, respectively. There are no liabilities associated with these unconsolidated VIEs on the Company’s balance sheet.

 

In the normal course of its activities, the Company will invest in joint ventures and limited partnerships. These ventures include hedge funds, private equity funds and real estate-related funds and may or may not be VIEs. The Company’s maximum exposure to loss on these investments, both VIEs and non-VIEs, is limited to the amount of its investment. The Company has determined that it is not required to consolidate these entities because either (1) it does not control them or (2) it does not have the obligation to absorb losses of the entities that could be potentially significant to the entities or the right to receive benefits from the entities that could be potentially significant. The Company classifies these investments as “Other long-term investments” and its maximum exposure to loss associated with these entities was $7,258 million and $7,244 million as of March 31, 2014 and December 31, 2013, respectively.

 

In addition, in the normal course of its activities, the Company will invest in structured investments including VIEs for which it is not the investment manager. These structured investments typically invest in fixed income investments and are managed by third parties and include asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities. The Company’s maximum exposure to loss on these structured investments, both VIEs and non-VIEs, is limited to the amount of its investment. See Note 4 for details regarding the carrying amounts and classification of these assets. The Company has not provided material financial or other support that was not contractually required to these structures. The Company has determined that it is not the primary beneficiary of these structures due to the fact that it does not control these entities.

 

6. CLOSED BLOCK

 

On the date of demutualization, Prudential Insurance established a Closed Block for certain individual life insurance policies and annuities issued by Prudential Insurance in the U.S. The recorded assets and liabilities were allocated to the Closed Block at their historical carrying amounts. The Closed Block forms the principal component of the Closed Block Business.

 

The policies included in the Closed Block are specified individual life insurance policies and individual annuity contracts that were in force on the effective date of the Plan of Reorganization and for which Prudential Insurance is currently paying or expects to pay experience-based policy dividends. Assets have been allocated to the Closed Block in an amount that has been determined to produce cash flows which, together with revenues from policies included in the Closed Block, are expected to be sufficient to support obligations and liabilities relating to these policies, including provision for payment of benefits, certain expenses, and taxes and to provide for continuation of the policyholder dividend scales in effect in 2000, assuming experience underlying such scales continues. To the extent that, over time, cash flows from the assets allocated to the Closed Block and claims and other experience related to the Closed Block are, in the aggregate, more or less favorable than what

 

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PRUDENTIAL FINANCIAL, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 

was assumed when the Closed Block was established, total dividends paid to Closed Block policyholders may be greater than or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in effect in 2000 had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to Closed Block policyholders and will not be available to stockholders. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside of the Closed Block. The Closed Block will continue in effect as long as any policy in the Closed Block remains in force unless, with the consent of the New Jersey insurance regulator, it is terminated earlier.

 

The excess of Closed Block Liabilities over Closed Block Assets at the date of the demutualization (adjusted to eliminate the impact of related amounts in AOCI) represented the estimated maximum future earnings at that date from the Closed Block expected to result from operations attributed to the Closed Block after income taxes. In establishing the Closed Block, the Company developed an actuarial calculation of the timing of such maximum future earnings. If actual cumulative earnings of the Closed Block from inception through the end of any given period are greater than the expected cumulative earnings, only the expected earnings will be recognized in income. Any excess of actual cumulative earnings over expected cumulative earnings will represent undistributed accumulated earnings a