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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 20192020
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 Jersey22-3703799
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
751 Broad Street
Newark, NJ 07102
(973) 802-6000
(Address and Telephone Number of Registrant’s Principal Executive Offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Trading Symbols(s)Name of Each Exchange on Which Registered
Common Stock, Par Value $.01 PRUNew York Stock Exchange
5.75% Junior Subordinated NotesPJHNew York Stock Exchange
5.70% Junior Subordinated NotesPRHNew York Stock Exchange
5.625% Junior Subordinated NotesPRSNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 Large Accelerated Filerx Accelerated Filer
 Non-accelerated Filer Smaller Reporting Company
    Emerging Growth Company
 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐  No  x
 
As of July 31, 2019, 4022020, 395 million shares of the registrant’s Common Stock (par value $0.01) were outstanding.

TABLE OF CONTENTS
 
  Page
 
Item 1. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 6.


Forward-Looking Statements

Certain of the statements included in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Financial, Inc. and its subsidiaries. There can be no assurance that future developments affecting Prudential Financial, Inc. and its subsidiaries will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) the ongoing impact of the COVID-19 pandemic on the global economy, financial markets and our business; (2) losses on investments or financial contracts due to deterioration in credit quality or value, or counterparty default; (2)(3) losses on insurance products due to mortality experience, morbidity experience or policyholder behavior experience that differs significantly from our expectations when we price our products; (3)(4) changes in interest rates, equity prices and foreign currency exchange rates that may (a) adversely impact the profitability of our products, the value of separate accounts supporting these products or the value of assets we manage, (b) result in losses on derivatives we use to hedge risk or increase collateral posting requirements and (c) limit opportunities to invest at appropriate returns; (4)(5) guarantees within certain of our products which are market sensitive and may decrease our earnings or increase the volatility of our results of operations or financial position; (5)(6) liquidity needs resulting from (a) derivative collateral market exposure, (b) asset/liability mismatches, (c) the lack of available funding in the financial markets or (d) unexpected cash demands due to severe mortality calamity or lapse events; (6)(7) financial or customer losses, or regulatory and legal actions, due to inadequate or failed processes or systems, external events, and human error or misconduct such as (a) disruption of our systems and data, (b) an information security breach, (c) a failure to protect the privacy of sensitive data, or (d) reliance on third-parties; (7)third-parties or (e) labor and employment matters; (8) changes in the regulatory landscape, including related to (a) financial sector regulatory reform, (b) changes in tax laws, (c) fiduciary rules and other standards of care, (d) U.S. state insurance laws and developments regarding group-wide supervision, capital and reserves, (e) insurer capital standards outside the U.S. and (f) privacy and cybersecurity regulation; (8)(9) technological changes which may adversely impact companies in our investment portfolio or cause insurance experience to deviate from our assumptions; (9)(10) an inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (11) ratings downgrades; (10)(12) market conditions that may adversely affect the sales or persistency of our products; (11)(13) competition; (12)(14) reputational damage; and (13)(15) the costs, effects, timing, or success of our plans to accelerate our Financial Wellnessstrategy; and (16) costs associated with the acquisition of Assurance IQ, LLC and its integration into our strategy. Prudential Financial, Inc. does not undertake to update any particular forward-looking statement included in this document. See “Risk Factors” included in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 and the Annual Report on Form 10-K for the year ended December 31, 20182019 for discussion of certain risks relating to our businesses and investment in our securities.



i


PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements
PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Financial Position
June 30, 20192020 and December 31, 20182019 (in millions, except share amounts)
 June 30,
2019
 December 31,
2018
 June 30,
2020
 December 31,
2019
ASSETS        
Fixed maturities, available-for-sale, at fair value (amortized cost: 2019-$340,564; 2018-$331,745)(1) $383,390
 $353,656
Fixed maturities, held-to-maturity, at amortized cost (fair value: 2019-$2,410; 2018-$2,372)(1) 2,009
 2,013
Fixed maturities, trading, at fair value (amortized cost: 2019-$3,807; 2018-$3,392)(1) 3,755
 3,243
Fixed maturities, available-for-sale, at fair value (amortized cost: 2020-$353,812; 2019-$346,574; 2020-net of $238 allowance for credit losses)(1)(3) $407,944
 $391,096
Fixed maturities, held-to-maturity, at amortized cost (2020-net of $9 allowance for credit losses; fair value: 2020-$2,231; 2019-$2,302)(1)(2) 1,875
 1,933
Fixed maturities, trading, at fair value (amortized cost: 2020-$4,089; 2019-$3,917)(1) 3,933
 3,884
Assets supporting experience-rated contractholder liabilities, at fair value(1) 21,843
 21,254
 23,245
 21,597
Equity securities, at fair value (cost: 2019-$5,205; 2018-$5,219)(1) 6,804
 6,238
Commercial mortgage and other loans (includes $645 and $763 measured at fair value under the fair value option at June 30, 2019 and December 31, 2018, respectively)(1) 61,228
 59,830
Equity securities, at fair value (cost: 2020-$5,704; 2019-$5,560)(1)(3) 7,010
 7,522
Commercial mortgage and other loans (net of $245 and $121 allowance for credit losses; includes $682 and $228 of loans measured at fair value under the fair value option at June 30, 2020 and December 31, 2019, respectively)(1)(2)(3) 63,469
 63,559
Policy loans(3) 12,030
 12,016
 12,283
 12,096
Other invested assets (includes $5,567 and $5,524 measured at fair value at June 30, 2019 and December 31, 2018, respectively)(1) 15,081
 14,526
Other invested assets (2020-net of $2 allowance for credit losses; includes $6,280 and $5,646 of assets measured at fair value at June 30, 2020 and December 31, 2019, respectively)(1)(2)(3) 16,757
 15,606
Short-term investments(3) 5,872
 6,469
 11,416
 5,467
Total investments 512,012
 479,245
 547,932
 522,760
Cash and cash equivalents(1)(3) 15,421
 15,353
 21,149
 16,327
Accrued investment income(1)(3) 3,355
 3,318
 3,296
 3,330
Deferred policy acquisition costs(3) 19,540
 20,058
 19,667
 19,912
Value of business acquired 1,227
 1,850
 1,040
 1,110
Other assets(1) 18,690
 16,118
Other assets (2020-net of $8 allowance for credit losses)(1)(2)(3) 21,301
 20,832
Separate account assets(3) 303,580
 279,136
 301,002
 312,281
TOTAL ASSETS $873,825
 $815,078
 $915,387
 $896,552
LIABILITIES AND EQUITY        
LIABILITIES        
Future policy benefits(3) $285,527
 $273,846
 $312,759
 $293,527
Policyholders’ account balances(3) 151,428
 150,338
 158,237
 152,110
Policyholders’ dividends(3) 6,558
 4,110
 8,623
 6,988
Securities sold under agreements to repurchase 9,741
 9,950
 10,488
 9,681
Cash collateral for loaned securities 4,235
 3,929
 3,447
 4,213
Income taxes(3) 11,485
 7,936
 13,261
 11,378
Short-term debt 2,659
 2,451
 1,130
 1,933
Long-term debt 17,841
 17,378
 20,162
 18,646
Other liabilities(1) 17,372
 16,018
Notes issued by consolidated variable interest entities (includes $816 and $595 measured at fair value under the fair value option at June 30, 2019 and December 31, 2018, respectively)(1) 1,246
 955
Other liabilities (2020-net of $19 allowance for credit losses)(1)(2)(3) 18,573
 20,802
Notes issued by consolidated variable interest entities (includes $741 and $800 measured at fair value under the fair value option at June 30, 2020 and December 31, 2019, respectively)(1) 1,197
 1,274
Separate account liabilities(3) 303,580
 279,136
 301,002
 312,281
Total liabilities 811,672
 766,047
 848,879
 832,833
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 15) 

 

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 14) 

 

EQUITY        
Preferred Stock ($.01 par value; 10,000,000 shares authorized; none issued) 0
 0
 0
 0
Common Stock ($.01 par value; 1,500,000,000 shares authorized; 660,111,339 shares issued at both June 30, 2019 and December 31, 2018) 6
 6
Common Stock ($.01 par value; 1,500,000,000 shares authorized; 666,305,189 shares issued as of both June 30, 2020 and December 31, 2019) 6
 6
Additional paid-in capital 24,825
 24,828
 25,513
 25,532
Common Stock held in treasury, at cost (257,129,965 and 249,398,887 shares at June 30, 2019 and December 31, 2018, respectively) (18,416) (17,593)
Common Stock held in treasury, at cost (271,694,260 and 267,472,781 shares at June 30, 2020 and December 31, 2019, respectively) (19,785) (19,453)
Accumulated other comprehensive income (loss) 23,982
 10,906
 30,837
 24,039
Retained earnings 31,263
 30,470
 29,326
 32,991
Total Prudential Financial, Inc. equity 61,660
 48,617
 65,897
 63,115
Noncontrolling interests 493
 414
 611
 604
Total equity 62,153
 49,031
 66,508
 63,719
TOTAL LIABILITIES AND EQUITY $873,825
 $815,078
 $915,387
 $896,552
__________
(1)See Note 4 for details of balances associated with variable interest entities.



(2)June 30, 2020 amounts include the impacts of the January 1, 2020 adoption of ASU 2016-13. See Note 2 for details.
(3)June 30, 2020 amounts include assets and liabilities held for sale which aggregate to $20,835 million and $17,141 million, respectively, related to the pending sale of The Prudential Life Insurance Company of Korea, Ltd. See Note 1 for details of these balances.
See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Operations
Three and Six Months Ended June 30, 20192020 and 20182019 (in millions, except per share amounts)
 
Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
REVENUES              
Premiums$8,135
 $7,438
 $16,035
 $14,749
$7,693
 $8,135
 $15,357
 $16,035
Policy charges and fee income1,473
 1,480
 2,944
 2,984
1,523
 1,473
 3,012
 2,944
Net investment income4,390
 4,096
 8,606
 8,094
4,186
 4,390
 8,388
 8,606
Asset management and service fees1,083
 1,010
 2,099
 2,036
991
 1,083
 2,024
 2,099
Other income (loss)643
 (54) 1,897
 (561)1,474
 643
 (1,117) 1,897
Realized investment gains (losses), net:       
Other-than-temporary impairments on fixed maturity securities(77) (58) (112) (97)
Other-than-temporary impairments on fixed maturity securities transferred to Other comprehensive income25
 0
 13
 0
Other realized investment gains (losses), net(284) 743
 (1,003) 1,207
Total realized investment gains (losses), net(336) 685
 (1,102) 1,110
Realized investment gains (losses), net(3,752) (336) (2,085) (1,102)
Total revenues15,388
 14,655
 30,479
 28,412
12,115
 15,388
 25,579
 30,479
BENEFITS AND EXPENSES              
Policyholders’ benefits8,877
 9,512
 17,315
 17,187
8,450
 8,877
 17,456
 17,315
Interest credited to policyholders’ account balances1,278
 894
 2,623
 1,444
1,832
 1,278
 2,224
 2,623
Dividends to policyholders437
 540
 1,014
 868
531
 437
 454
 1,014
Amortization of deferred policy acquisition costs782
 613
 1,217
 1,201
287
 782
 1,244
 1,217
General and administrative expenses3,138
 2,846
 6,294
 5,769
3,347
 3,138
 6,871
 6,294
Total benefits and expenses14,512
 14,405
 28,463
 26,469
14,447
 14,512
 28,249
 28,463
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES876
 250
 2,016
 1,943
(2,332) 876
 (2,670) 2,016
Total income tax expense (benefit)162
 68
 394
 420
115
 162
 57
 394
INCOME (LOSS) BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES714
 182
 1,622
 1,523
(2,447) 714
 (2,727) 1,622
Equity in earnings of operating joint ventures, net of taxes24
 18
 53
 41
42
 24
 52
 53
NET INCOME (LOSS)738
 200
 1,675
 1,564
(2,405) 738
 (2,675) 1,675
Less: Income (loss) attributable to noncontrolling interests30
 3
 35
 4
4
 30
 5
 35
NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.$708
 $197
 $1,640
 $1,560
$(2,409) $708
 $(2,680) $1,640
EARNINGS PER SHARE              
Basic earnings per share-Common Stock:              
Net income (loss) attributable to Prudential Financial, Inc.$1.73
 $0.46
 $3.98
 $3.66
$(6.12) $1.73
 $(6.80) $3.98
Diluted earnings per share-Common Stock:              
Net income (loss) attributable to Prudential Financial, Inc.$1.71
 $0.46
 $3.93
 $3.62
$(6.12) $1.71
 $(6.80) $3.93







See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Comprehensive Income
Three and Six Months Ended June 30, 20192020 and 20182019 (in millions)
 
Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
NET INCOME (LOSS)$738
 $200
 $1,675
 $1,564
$(2,405) $738
 $(2,675) $1,675
Other comprehensive income (loss), before tax:              
Foreign currency translation adjustments for the period213
 (703) 108
 (41)88
 213
 (207) 108
Net unrealized investment gains (losses)8,506
 (3,326) 16,795
 (7,992)10,101
 8,506
 8,747
 16,795
Defined benefit pension and postretirement unrecognized periodic benefit (cost)17
 75
 81
 129
72
 17
 144
 81
Total8,736
 (3,954) 16,984
 (7,904)10,261
 8,736
 8,684
 16,984
Less: Income tax expense (benefit) related to other comprehensive income (loss)1,966
 (838) 3,910
 (1,682)2,023
 1,966
 1,885
 3,910
Other comprehensive income (loss), net of taxes6,770
 (3,116) 13,074
 (6,222)8,238
 6,770
 6,799
 13,074
Comprehensive income (loss)7,508
 (2,916) 14,749
 (4,658)5,833
 7,508
 4,124
 14,749
Less: Comprehensive income (loss) attributable to noncontrolling interests36
 (7) 40
 7
5
 36
 6
 40
Comprehensive income (loss) attributable to Prudential Financial, Inc.$7,472
 $(2,909) $14,709
 $(4,665)$5,828
 $7,472
 $4,118
 $14,709
 



See Notes to Unaudited Interim Consolidated Financial Statements
 

PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Equity
Three and Six Months Ended June 30, 20192020 and 20182019 (in millions)
 Prudential Financial, Inc. Equity    
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Common
Stock
Held In
Treasury
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Prudential
Financial, Inc.
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, December 31, 2019$6
 $25,532
 $32,991
 $(19,453) $24,039
 $63,115
 $604
 $63,719
Cumulative effect of adoption of accounting changes(1)    (99)     (99)   (99)
Common Stock acquired      (500)   (500)   (500)
Contributions from noncontrolling interests            31
 31
Distributions to noncontrolling interests            (11) (11)
Stock-based compensation programs  (26)   112
   86
   86
Dividends declared on Common Stock    (445)     (445)   (445)
Comprehensive income:               
Net income (loss)    (271)     (271) 1
 (270)
Other comprehensive income (loss), net of tax        (1,439) (1,439) 0
 (1,439)
Total comprehensive income (loss)          (1,710) 1
 (1,709)
Balance, March 31, 20206

25,506

32,176

(19,841) 22,600

60,447

625

61,072
Common Stock acquired              

Contributions from noncontrolling interests            4
 4
Distributions to noncontrolling interests            (23) (23)
Stock-based compensation programs  7
   56
   63
   63
Dividends declared on Common Stock    (441)     (441)   (441)
Comprehensive income:               
Net income (loss)    (2,409)     (2,409) 4
 (2,405)
Other comprehensive income (loss), net of tax        8,237
 8,237
 1
 8,238
Total comprehensive income (loss)          5,828
 5
 5,833
Balance, June 30, 2020$6
 $25,513
 $29,326
 $(19,785) $30,837
 $65,897
 $611
 $66,508

Prudential Financial, Inc. Equity    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
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Common
Stock
Held In
Treasury
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Prudential
Financial, Inc.
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, December 31, 2018$6
 $24,828
 $30,470
 $(17,593) $10,906
 $48,617
 $414
 $49,031
$6
 $24,828
 $30,470
 $(17,593) $10,906
 $48,617
 $414
 $49,031
Cumulative effect of adoption of accounting changes(1)(2)    (21)   7
 (14) 

 (14)    (21)   7
 (14)   (14)
Common Stock acquired      (500)   (500)   (500)      (500)   (500)   (500)
Contributions from noncontrolling interests            26
 26
            26
 26
Distributions to noncontrolling interests            (4) (4)            (4) (4)
Stock-based compensation programs  (46)   131
   85
   85
  (46)   131
   85
   85
Dividends declared on Common Stock    (415)     (415)   (415)    (415)     (415)   (415)
Comprehensive income:                              
Net income (loss)    932
     932
 5
 937
    932
     932
 5
 937
Other comprehensive income (loss), net of tax        6,305
 6,305
 (1) 6,304
        6,305
 6,305
 (1) 6,304
Total comprehensive income (loss)          7,237
 4
 7,241
          7,237
 4
 7,241
Balance, March 31, 20196

24,782

30,966

(17,962) 17,218

55,010

440

55,450
6
 24,782
 30,966
 (17,962) 17,218
 55,010
 440
 55,450
Common Stock acquired      (500)   (500)   (500)      (500)   (500)   (500)
Contributions from noncontrolling interests            25
 25
            25
 25
Distributions to noncontrolling interests            (16) (16)            (16) (16)
Consolidations (deconsolidations) of noncontrolling interests            8
 8
            8
 8
Stock-based compensation programs  43
   46
   89
   89
  43
   46
   89
   89
Dividends declared on Common Stock    (411)     (411)   (411)    (411)     (411)   (411)
Comprehensive income:                              
Net income (loss)    708
     708
 30
 738
    708
     708
 30
 738
Other comprehensive income (loss), net of tax        6,764
 6,764
 6
 6,770
        6,764
 6,764
 6
 6,770
Total comprehensive income (loss)          7,472
 36
 7,508
          7,472
 36
 7,508
Balance, June 30, 2019$6
 $24,825
 $31,263
 $(18,416) $23,982
 $61,660
 $493
 $62,153
$6
 $24,825
 $31,263
 $(18,416) $23,982
 $61,660
 $493
 $62,153
               
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, 2017$6
 $24,769
 $28,671
 $(16,284) $17,074
 $54,236
 $275
 $54,511
Cumulative effect of adoption of ASU 2016-01    904
   (847) 57
   57
Cumulative effect of adoption of ASU 2018-02    (1,653)   1,653
 0
   0
Common Stock acquired      (375)   (375)   (375)
Contributions from noncontrolling interests            61
 61
Distributions to noncontrolling interests            (5) (5)
Stock-based compensation programs  (47)   102
   55
   55
Dividends declared on Common Stock    (387)     (387)   (387)
Comprehensive income:               
Net income (loss)    1,363
     1,363
 1
 1,364
Other comprehensive income (loss), net of tax        (3,119) (3,119) 13
 (3,106)
Total comprehensive income (loss)          (1,756) 14
 (1,742)
Balance, March 31, 20186
 24,722
 28,898
 (16,557) 14,761
 51,830
 345
 52,175
Common Stock acquired      (375)   (375)   (375)
Contributions from noncontrolling interests            38
 38
Distributions to noncontrolling interests            (16) (16)
Stock-based compensation programs  41
   27
   68
   68
Dividends declared on Common Stock    (382)     (382)   (382)
Comprehensive income:               
Net income (loss)    197
     197
 3
 200
Other comprehensive income (loss), net of tax        (3,106) (3,106) (10) (3,116)
Total comprehensive income (loss)          (2,909) (7) (2,916)
Balance, June 30, 2018$6
 $24,763
 $28,713
 $(16,905) $11,655
 $48,232
 $360
 $48,592

__________
(1)Includes the impact from the adoption of ASU 2016-13. See Note 2.
(2)Includes the impact from the adoption of ASU 2017-08 and 2017-12. See Note 2.2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information.


See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.
Unaudited Interim Consolidated Statements of Cash Flows
Six Months Ended June 30, 20192020 and 20182019 (in millions)
2019 20182020 2019
CASH FLOWS FROM OPERATING ACTIVITIES      
Net income (loss)$1,675
 $1,564
$(2,675) $1,675
Adjustments to reconcile net income to net cash provided by operating activities:   
Adjustments to reconcile net income (loss) to net cash provided by operating activities:   
Realized investment (gains) losses, net1,102
 (1,110)2,085
 1,102
Policy charges and fee income(1,483) (1,058)(1,366) (1,483)
Interest credited to policyholders’ account balances2,623
 1,444
2,224
 2,623
Depreciation and amortization(89) 48
383
 (89)
(Gains) losses on assets supporting experience-rated contractholder liabilities, net(741) 596
(142) (741)
Change in:      
Deferred policy acquisition costs(258) (203)(120) (258)
Future policy benefits and other insurance liabilities5,603
 5,762
5,186
 5,603
Income taxes(382) (96)(4) (382)
Derivatives, net2,010
 (1,041)10,629
 2,010
Other, net(1,736) 769
(2,721) (1,736)
Cash flows from (used in) operating activities8,324
 6,675
13,479
 8,324
CASH FLOWS FROM INVESTING ACTIVITIES      
Proceeds from the sale/maturity/prepayment of:      
Fixed maturities, available-for-sale25,681
 30,599
20,664
 25,681
Fixed maturities, held-to-maturity35
 56
58
 35
Fixed maturities, trading187
 410
276
 187
Assets supporting experience-rated contractholder liabilities9,014
 9,650
14,015
 9,014
Equity securities1,377
 1,965
1,274
 1,377
Commercial mortgage and other loans2,885
 2,572
2,639
 2,885
Policy loans1,154
 1,176
1,291
 1,154
Other invested assets724
 908
939
 724
Short-term investments16,682
 18,190
21,107
 16,682
Payments for the purchase/origination of:      
Fixed maturities, available-for-sale(32,847) (34,922)(26,815) (32,847)
Fixed maturities, trading(570) (483)(446) (570)
Assets supporting experience-rated contractholder liabilities(8,813) (9,560)(15,453) (8,813)
Equity securities(1,376) (1,826)(1,370) (1,376)
Commercial mortgage and other loans(4,352) (5,525)(2,463) (4,352)
Policy loans(945) (1,002)(1,288) (945)
Other invested assets(1,011) (1,154)(1,435) (1,011)
Short-term investments(16,278) (17,138)(27,076) (16,278)
Derivatives, net638
 (271)841
 638
Other, net(222) (134)(107) (222)
Cash flows from (used in) investing activities(8,037) (6,489)(13,349) (8,037)
CASH FLOWS FROM FINANCING ACTIVITIES      
Policyholders’ account deposits13,280
 14,826
25,452
 13,280
Policyholders’ account withdrawals(13,045) (14,076)(20,306) (13,045)
Net change in securities sold under agreements to repurchase and cash collateral for loaned securities97
 1,094
41
 97
Cash dividends paid on Common Stock(827) (769)(886) (827)
Net change in financing arrangements (maturities 90 days or less)166
 (103)306
 166
Common Stock acquired(983) (739)(500) (983)
Common Stock reissued for exercise of stock options75
 74
73
 75
Proceeds from the issuance of debt (maturities longer than 90 days)1,439
 1,194
1,563
 1,439
Repayments of debt (maturities longer than 90 days)(924) (848)(791) (924)
Proceeds from notes issued by consolidated VIEs925
 0
0
 925
Repayments of notes issued by consolidated VIEs(638) 0
(18) (638)
Other, net196
 (244)(247) 196
Cash flows from (used in) financing activities(239) 409
4,687
 (239)
Effect of foreign exchange rate changes on cash balances27
 (71)6
 27
NET INCREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS75
 524
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS4,823
 75
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, BEGINNING OF YEAR15,495
 14,536
16,474
 15,495
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, END OF PERIOD$15,570
 $15,060
$21,297
 $15,570
NON-CASH TRANSACTIONS DURING THE PERIOD      
Treasury Stock shares issued for stock-based compensation programs$168
 $132
$144
 $168
Significant Pension Risk Transfer transactions:      
Assets received, excluding cash and cash equivalents$445
 $0
$238
 $445
Liabilities assumed447
 977
505
 447
Net cash received$2
 $977
$267
 $2
RECONCILIATION TO THE UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION      
Cash and cash equivalents$15,421
 $14,918
$21,149
 $15,421
Restricted cash and restricted cash equivalents (included in “Other assets”)149
 142
148
 149
Total cash, cash equivalents, restricted cash and restricted cash equivalents$15,570
 $15,060
$21,297
 $15,570

See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements
 
1. BUSINESS AND BASIS OF PRESENTATION
 
Prudential Financial, Inc. (“Prudential Financial”) and its subsidiaries (collectively, “Prudential” or the “Company”) provide a wide range of insurance, investment management, and other financial products and services to both individual and institutional customers throughout the United States and in many other countries. Principal products and services provided include life insurance, annuities, retirement-related services, mutual funds and investment management.

The Company’s principal operations are comprised of five divisions, which together encompass seven segments,PGIM (the Company’s global investment management business), the U.S. Businesses (consisting of the U.S. Workplace Solutions, U.S. Individual Solutions, and itsAssurance IQ divisions), the International Businesses, the Closed Block division, and the Company’s Corporate and Other operations. The PGIM division is comprised of the PGIM segment, the global investment management businesses of the Company. The U.S. Workplace Solutions division consists of the Retirement and Group Insurance segments. Thebusinesses, the U.S. Individual Solutions division consists of the Individual Annuities and Individual Life segments. The Company also collectively refers to the U.S. Workplace Solutions divisionbusinesses, and the U.S. Individual SolutionsAssurance IQ division as the U.S. Financial Wellness businesses. The International Insurance division is comprisedconsists of the International Insurance segment, andAssurance IQ business. In October 2019, the Closed Block division is comprisedCompany completed the acquisition of the Closed Block segment.Assurance IQ, LLC (“Assurance IQ”), a leading consumer solutions platform that offers a range of solutions that help meet consumers’ financial needs. The Closed Block division is accounted for as a divested business that is reported separately from the Divested and Run-off Businesses that are included in the Company’s Corporate and Other operations. Divested and Run-off Businesses are comprised of businesses that have been, or will be, sold or exited, including businesses that have been placed in wind down status that do not qualify for “discontinued operations” accounting treatment under generally accepted accounting principles in the United States of America (“U.S. GAAP”).Other. The Company’s Corporate and Other operations include corporate items and initiatives that are not allocated to business segments and businesses that have been or will be divested or placed in run-off, excluding the Closed Block division.
 
Basis of Presentation
 
The Unaudited Interim Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAPGAAP”) 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. The Unaudited Interim Consolidated Financial Statements include the accounts of Prudential Financial, entities over which the Company exercises control, including majority-owned subsidiaries and minority-owned entities such as limited partnerships in which the Company is the general partner and variable interest entities (“VIEs”) in which the Company is considered the primary beneficiary. See Note 4 for moreadditional information on the Company’s consolidated variable interest entities. Intercompany balances and transactions have been eliminated.

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.

Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
The most significant estimates include those used in determining deferred policy acquisition costs (“DAC”) and related amortization; policyholders’ account balances related to the fair value of embedded derivative instruments associated with the index-linked features of certain universal life and fixed annuity products; value of business acquired (“VOBA”) and its amortization; amortization of deferred sales inducements (“DSI”); measurement of goodwill and any related impairment; valuation of investments including derivatives, measurement of allowance for credit losses, and the recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; pension and other postretirement benefits; provision for income taxes and valuation of deferred tax assets; and accruals for contingent liabilities, including estimates for losses in connection with unresolved legal and regulatory matters.

ReclassificationsCOVID-19

Certain amountsBeginning in prior periods have been reclassifiedthe first quarter of 2020, the outbreak of the novel coronavirus (“COVID-19”) has resulted in extreme stress and disruption in the global economy and financial markets, and has adversely impacted, and may continue to conformadversely impact, our results of operations, financial condition and cash flows. Due to the current period presentation.
2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

Recent Accounting Pronouncementshighly uncertain nature of these conditions, it is not possible to estimate the ultimate impacts at this time. The risks may have manifested, and may continue to manifest, in our financial

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

statements in the areas of, among others, i) investments: increased risk of loss on our investments due to default or deterioration in credit quality or value; ii) insurance liabilities and related balances: potential changes to assumptions regarding investment returns, mortality, morbidity and policyholder behavior which are reflected in our insurance liabilities and certain related balances (e.g., DAC, VOBA, etc.); and iii) goodwill: the macroeconomic environment may also result in the need to recognize an impairment of goodwill which could negatively impact our results of operations and financial condition. We cannot predict what impact the COVID-19 pandemic will ultimately have on the global economy, markets or our businesses.

Business Held for Sale

On April 10, 2020, Prudential International Insurance Holdings, Ltd. (“PIIH”), a subsidiary of Prudential Financial, entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with KB Financial Group Inc. (the “Buyer”), pursuant to which PIIH has agreed to sell to the Buyer all of the issued and outstanding capital stock of The Prudential Life Insurance Company of Korea, Ltd. (“POK”), the Company’s Korean insurance business, for cash consideration of approximately 2.3 trillion Korean Won, equal to approximately U.S. $1.9 billion at then current exchange rates, to be paid at closing.
The Share Purchase Agreement contains customary warranties and covenants of PIIH and the Buyer. The Company expects the transaction to close by the end of 2020, subject to regulatory approval and the satisfaction of customary closing conditions.
Beginning with the second quarter of 2020, the Company reported its investment in POK as “held for sale” and recognized an after-tax charge to earnings, primarily within “Other income”, of approximately $700 million to adjust the carrying value of POK to the fair market value as reflected in the purchase price. The after-tax charge excludes the impact of currency hedging transactions that the Company expects to settle at transaction closing, the fair value of which was approximately $40 million in assets at June 30, 2020. The ultimate after-tax loss, as well as the settlement value of the hedging transactions, will be based on balances at the closing date and could vary materially from the charge recorded in the second quarter. In addition, upon closing of the transaction, the Company expects to recognize an approximately $100 million tax expense, with an offsetting benefit to accumulated other comprehensive income (“AOCI”), related to the release of legacy tax balances resulting from prior year changes in tax law.
The Company intends to use the proceeds of the transaction for general corporate purposes.
The table below reflects the carrying amounts of assets and liabilities held for sale related to the pending sale of POK.

7

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 June 30, 2020
 (in millions)(1)
Assets held for sale: 
Fixed maturities, available-for-sale$14,402
Equity securities264
Commercial mortgage and other loans3
Policy loans777
Other invested assets109
Short-term investments69
Cash and cash equivalents218
Accrued investment income134
Deferred policy acquisition costs1,178
Other assets(2)254
Separate account assets3,427
Total assets held for sale$20,835
Liabilities held for sale: 
Future policy benefits$10,527
Policyholders’ account balances1,357
Policyholders’ dividends26
Income taxes989
Other liabilities(2)815
Separate account liabilities3,427
Total liabilities held for sale$17,141
_________
(1)These amounts held for sale are included, where applicable, in the remaining Notes to the Unaudited Interim Consolidated Financial Statements and are presented within the line items noted in this table.
(2)Includes POK’s lower of cost or fair market value adjustment.

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

2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

Recent Accounting Pronouncements

Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASU”ASUs”) to the FASB Accounting Standards Codification.Codification (“ASC”). The Company considers the applicability and impact of all ASU. ASUASUs. ASUs listed below include those that have been adopted during the current fiscal year and/or those that have been issued but not yet adopted as of June 30, 2020, and as of the date of this filing. ASUASUs not listed below were assessed and determined to be either not applicable or not material.

Adoption of ASU 2016-022016-13

Effective January 1, 2019, theThe Company adopted ASU 2016-02, Leases (Topic 842),2016-13, and related ASUs, effective January 1, 2020 using the optional transitionmodified retrospective method withfor certain financial assets carried at amortized cost and certain off-balance sheet exposures. The modified retrospective method results in a cumulative-effectcumulative effect adjustment recorded asto opening retained earnings. The Company adopted the guidance related to fixed maturities, available-for-sale on a prospective basis.

This ASU requires the use of a new current expected credit loss (“CECL”) model to account for expected credit losses on certain financial assets reported at amortized cost (e.g., loans held for investment, fixed maturities held-to-maturity, reinsurance receivables, etc.) and certain off-balance sheet credit exposures (e.g., indemnification of serviced mortgage loans and certain loan commitments). The guidance requires an entity to estimate lifetime credit losses related to such financial assets and credit exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that may affect the collectability of the beginningreported amounts. The standard also modifies the OTTI guidance for fixed maturities, available-for-sale requiring the use of an allowance rather than a direct write-down of the periodinvestment.

8

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


The impacts of this ASU on the Company’s Consolidated Financial Statements primarily include (1) A Cumulative Effect Adjustment Upon Adoption; (2) Changes to the Presentation of the Consolidated Statements of Financial Position and Consolidated Statements of Operations; and (3) Changes to Accounting Policies. Each of these impacts is described below. This section is meant to serve as an update to, and should be read in conjunction with, Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

(1) Cumulative Effect Adjustment Upon Adoption
Summary of Transition Impact on the Consolidated Statements of Financial Position
Upon Adoption on January 1, 2020
 Increase/(Decrease)
 (in millions)
Fixed maturities, held-to-maturity$(9)
Commercial mortgage and other loans(115)
Other invested assets(1)
Deferred policy acquisition costs9
Other assets(6)
Total assets$(122)
  
Policyholders' dividends$(14)
Other liabilities21
Income taxes(30)
Total liabilities(23)
  
Retained earnings(99)
Total equity(99)
Total liabilities and equity$(122)

The prospective adoption of the portions of the standard related to fixed maturities, available-for-sale resulted in no impact to opening retained earnings.

(2) Changes to the Presentation of the Consolidated Statements of Financial Position and Consolidated Statements of Operations

The allowance for credit losses is presented parenthetically on relevant line items in the Consolidated Statements of Financial Position. In the Consolidated Statements of Operations, realized investment gains (losses), net are presented on one line item and will no longer reflect the breakout of OTTI on fixed maturity securities; OTTI on fixed maturity securities transferred to other comprehensive income (“OCI”); and other realized investment gains (losses), net. The presentation of this detail in prior periods is immaterial.

(3) Changes to Accounting Policies

This section has been updated to include the following changes in our accounting policies resulting from the adoption of ASU substantially2016-13.

Fixed maturities, available-for-sale

Fixed maturities, available-for-sale (“AFS debt securities”) are reported at fair value in the Statements of Financial Position. Interest income, and amortization of premium and accretion of discount are included in “Net investment income” under the effective yield method. For mortgage-backed and asset-backed securities, the effective yield is based on estimated cash flows, including interest rate and prepayment assumptions based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also vary based on other assumptions relating to the underlying collateral, including default rates and changes a lessee’s accountingin value. These assumptions can significantly impact income recognition and the amount of impairments recognized in earnings and OCI. For mortgage-backed and asset-backed securities rated below

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

AA, the effective yield is adjusted prospectively for leasesany changes in the estimated timing and requiresamount of cash flows unless the recording, on balance sheet, using a dual lease accounting model,investment is impaired or purchased with credit deterioration. For impaired mortgage-backed and asset-backed securities rated below AA, the effective yield is adjusted prospectively only if subsequent favorable or adverse changes in expected cash flows are not reflected in the allowance for credit losses. Prior to the adoption of a “right-of-use” assetthis standard, the effective yield was adjusted prospectively regardless of whether the investment was impaired or not.

AFS debt securities with unrealized losses are reviewed quarterly to determine whether the amortized cost basis of the security is recoverable. In evaluating whether the amortized cost basis is recoverable, the Company considers several factors including, but not limited to the extent of the decline and lease liability. Leases arethe reasons for the decline in value (credit events, currency or interest-rate related, including general credit spread widening), and the financial condition of the issuer.

When an AFS debt security is in an unrealized loss position and (1) the Company has the intent to sell the AFS debt security, or (2) it is more likely than not the Company will be required to sell the AFS debt security before its anticipated recovery, or (3) the Company has deemed the AFS debt security to be classifieduncollectable, the amortized cost basis of the AFS debt security is written down to fair value and any previously recognized allowance is reversed. The impairment is reported in “Realized investment gains (losses), net.” The new cost basis is not adjusted for subsequent increases in estimated fair value.

For an AFS debt security in an unrealized loss position that does not meet these conditions, the Company analyzes its ability to recover the amortized cost by comparing the net present value of projected future cash flows (the “net present value”) with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the AFS debt security at the date of acquisition. The Company may use the estimated fair value of collateral, if any, as either operating or finance leases. Undera proxy for the standard,net present value if it believes that the security is dependent on the liquidation of collateral for operating leases, lessees recognize total lease expenses using a straight-line methodrecovery of its investment. If the net present value is less than the amortized cost of the investment, an allowance for losses is recognized in earnings for the difference between amortized cost and finance leases are treated as the purchase of an asset on a financing basis. For lessors,net present value and is limited to the standard modifies classification criteriadifference between amortized cost and accounting for sales-type and direct financing leases and requires a lessor to derecognize the carryingfair value of the leased asset thatAFS debt security. Any difference between the fair value and the net present value of the debt security at the impairment measurement date remains in “Other comprehensive income (loss).” Changes in the allowance for losses are reported in “Realized investment gains (losses), net.”

Prior to the adoption of this standard, any impairments on AFS debt securities were reported as an adjustment to the amortized cost basis of the security. Subsequent to the impairment, the AFS debt security was treated as if it were newly acquired at the date of impairment, and any increases in cash flows expected to be collected were accreted into net investment income over the life of the investment.

Fixed maturities, held-to-maturity

Fixed maturities, held-to-maturity are reported in the Statements of Financial Position at amortized cost net of the CECL allowance. The CECL allowance is consideredgenerally determined based on probability of default and loss given default assumptions according to have been transferredsector, credit quality and remaining time to maturity. Additions to or releases of the allowance are reported in “Realized investment gains (losses), net.”

Prior to the adoption of this standard, fixed maturities, held-to-maturity deemed to be OTTI were written down to the net present value of expected cash flows. Any difference between the fair value and the net present value of the debt security at the impairment measurement date was recorded in “Other comprehensive income (loss).”

Interest income, and amortization of premium and accretion of discount are included in “Net investment income” under the effective yield method. For mortgage-backed and asset-backed securities, the effective yield is based on estimated timing and amount of cash flows, including interest rate and prepayment assumptions based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also vary based on other assumptions regarding the underlying collateral, including default rates and changes in value. These assumptions can significantly impact income recognition and the amount of impairment recognized in earnings and OCI. For mortgage-backed and asset-backed securities rated below AA, the effective yield is adjusted prospectively for any changes in the estimated timing and amount of cash flows unless the investment is impaired or purchased with credit deterioration. For impaired mortgage-backed and asset-backed securities rated below AA, the effective yield is adjusted prospectively only if subsequent favorable or adverse changes in expected cash flows are not reflected in the allowance for credit losses.

Prior to the adoption of this standard, the effective yield was adjusted prospectively regardless of whether the investment was impaired or not.

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


Commercial mortgage and other loans

Commercial mortgage and other loans are reported in the Statements of Financial Position at amortized cost net of the CECL allowance. Additionally, certain off-balance sheet credit exposures (e.g., indemnification of serviced mortgage loans, and certain unfunded mortgage loan commitments where the Company cannot unconditionally cancel the commitment) are also subject to a lessee and record a lease receivable and residual asset (“receivable and residual” approach). CECL allowance.

The standard also eliminatesCECL allowance represents the leveraged lease accounting model for lessors and real estate specific provisions (i.e., those related to sale-leaseback transactions); it does allow, however, a grandfatheringCompany’s best estimate of expected credit losses over the remaining life of the leveraged lease accounting modelassets or off-balance sheet credit exposures. The determination of the allowance considers historical credit loss experience, current conditions, and reasonable and supportable forecasts. The allowance is calculated separately for those existing leases that are being accounted for using such model.commercial mortgage loans, agricultural mortgage loans, and other collateralized and uncollateralized loans.
In addition,
For commercial mortgage and agricultural mortgage loans (and related unfunded commitments where the Company electedcannot unconditionally cancel the packagecommitment), the allowance is calculated using an internally developed CECL model.

Key inputs to the CECL model include unpaid principal balances, internal credit ratings, annual expected loss factors, average lives of practical expedients permitted under the transition guidance withinloans adjusted for prepayment considerations, current and historical interest rate assumptions, and other factors influencing the standard which eliminatedCompany’s view of the need to reassess: (a)current stage of the economic cycle and future economic conditions. Subjective considerations include a review of whether any existing contractshistorical loss experience is representative of current market conditions and the Company’s view of the credit cycle. Model assumptions and factors are or contain, leases; (b) the lease classification for any existing leases (i.e., all existing lessee arrangements that were classifiedreviewed and updated as operating leases before are now classified as operating leases, and all existing lessee arrangements that were classified as capital leases before are now classified as finance leases); and (c) initial direct costs for any existing leases. The Company did not elect the practical expedient, which may be applied separately, to use hindsightappropriate. Information about certain key inputs is detailed below.

Key factors in determining the leaseinternal credit ratings for commercial mortgage and agricultural mortgage loans include loan-to-value and debt-service-coverage ratios. Other factors include amortization, loan term, and estimated market value growth rate and volatility for the property type and region. The loan-to-value ratio compares the carrying amount of the loan to the fair value of the underlying property or properties collateralizing the loan and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the carrying amount of the loan exceeds the collateral value. A loan-to-value ratio less than 100% indicates an excess of collateral value over the carrying amount of the loan. The debt-service-coverage ratio is a property’s net operating income as a percentage of its debt service payments. Debt-service-coverage ratios less than 1.0 times indicate that a property’s operations do not generate enough income to cover the loan’s current debt payments. A debt-service-coverage ratio greater than 1.0 times indicates an excess of net operating income over the debt service payments. The values utilized in assessing impairmentcalculating these ratios are developed as part of the Company’s right-of-use assets.
Adoptionperiodic review of the standard resultedcommercial mortgage and agricultural mortgage loan portfolios, which includes an internal appraisal of the underlying collateral value. The Company’s periodic review also includes a credit re-rating process, whereby the internal credit rating originally assigned at underwriting is updated based on current loan, property and market information using a proprietary credit quality rating system. See Note 3 for additional information related to the loan-to-value ratios and debt-service-coverage ratios related to the Company’s commercial mortgage and agricultural mortgage loan portfolios. Generally, every loan is re-rated at least annually.

Annual expected loss rates are based on historical default and loss experience factors. Using average lives, the annual expected loss rates are converted into life-of-loan loss expectations.

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

The CECL allowance on commercial mortgage and other loans can increase or decrease from period to period based on the factors noted above. The change in allowance is reported in “Realized investment gains (losses), net.” As it relates to unfunded commitments that are in scope of this guidance, the CECL allowance is reported in “Other liabilities,” and the change in the recording of right-of-use assetsallowance is reported in “Realized investment gains (losses), net.”

When a commercial mortgage or other loan is deemed to be uncollectible, any allowance is reversed and lease liabilities related to existing operating leases of approximately $600 million as of January 1, 2019. Adoptiona direct write-down of the standard also resultedcarrying amount of the loan is recorded through “Realized investment gains (losses), net.” The carrying amount of the loan is not adjusted for subsequent recoveries in additional required disclosures. See Note 7 for additional information.value.


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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The CECL allowance for other collateralized and uncollateralized loans carried at amortized cost is determined based on probability of default and loss given default assumptions by sector, credit quality and average lives of the loans. Additions to or releases of the allowance are reported in “Realized investment gains (losses), net.”

Prior to the adoption of this standard, the impairments on commercial mortgage and other loans were collectively reviewed at a portfolio level for impairment based on probable incurred but not specifically identified losses with any such losses reflected in an allowance for credit losses. When a loan was individually identified to be impaired, the loan was individually evaluated for an allowance. Changes in these allowances were reported in “Realized investment gains (losses), net.” Additionally, an allowance for credit losses was not required on unfunded loan commitments.

As further described in Note 14, the Company’s PGIM business provides commercial mortgage origination, underwriting and servicing for certain government sponsored entities (“GSEs”). The Company has agreed to indemnify the GSEs for a portion of the credit risk associated with certain of the mortgages it services. Management has established a CECL allowance that factors in historical loss information, current conditions and reasonable and supportable forecasts. The allowance also considers the remaining lives of the loans subject to the indemnification. The CECL allowance is included in “Other liabilities” and changes in the CECL allowance are reported in “Realized investment gains (losses), net.” Prior to the adoption of this standard, a credit loss allowance was not required.

Reinsurance

Reinsurance recoverables are reported on the Statements of Financial Position in “Other Assets” net of the CECL allowance. The CECL allowance considers the credit quality of the reinsurance counterparty and is generally determined based on the probability of default and loss given default assumptions, after considering any applicable collateral arrangements. Additions to or releases of the allowance are reported in “Policyholders’ benefits.”

Prior to the adoption of this standard, an allowance for credit losses for reinsurance recoverables was established only when it was deemed probable that a reinsurer may fail to make payments to us in a timely manner.

Trade Receivables

Trade receivables related to Assurance IQ are reported in the Statements of Financial Position in “Other assets” net of the CECL allowance. The CECL allowance considers the credit quality of the counterparties and is generally determined based on probability of default and loss given default assumptions. Additions to or releases of the allowance are reported in “General and administrative expenses.” Prior to the adoption of this standard, the reserve was limited to an allowance for doubtful accounts.


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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Other ASUASUs adopted during the six months ended June 30, 20192020
Standard Description Effective date and method of adoption Effect on the financial statements or other significant matters
ASU 2017-082017-04, Receivables -Nonrefundable FeesIntangibles - Goodwill and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities(Topic 350): Simplifying the Test for Goodwill Impairment


 
This ASU requires certain premiums on callable debt securities tosimplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test, which measures a goodwill impairment by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of the goodwill. Under the ASU, a goodwill impairment should be amortizedrecorded for the amount by which the carrying amount of a reporting unit exceeds its fair value (capped by the total amount of goodwill allocated to the earliest call date.



reporting unit).
 
January 1, 20192020 using the modified retrospective method which included cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.



prospective method.
 
AdoptionThe adoption of the ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements. The impact of the cumulative-effect adjustment to retained earnings was immaterial.




ASU 2017-122020-04, , Derivatives and HedgingReference Rate Reform (Topic 815)848): Targeted Improvements to Accounting for Hedging ActivitiesFacilitation of the Effects of Reference Rate Reform on Financial Reporting

 This ASU makes targeted changesprovides optional relief for certain contracts impacted by reference rate reform. The standard permits an entity to consider contract modification due to reference rate reform to be an event that does not require contract remeasurement at the existing hedgemodification date or reassessment of a previous accounting model to better portray the economics of an entity’s risk management activities and to simplify the use of hedge accounting.determination. The ASU eliminates separate measurement and recording ofalso temporarily (until December 31, 2022) allows hedge ineffectiveness. It requires entitiesrelationships to present the earnings effect of the hedging instrument in the same income statement line item in which the hedged item is reported and also requires expanded disclosures.continue without de-designation upon changes due to reference rate reform. January 1, 2019March 12, 2020 to December 31, 2022 using the modified retrospective method which included cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.prospective method. Adoption of the
This ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.

The impact ofCompany made the cumulative-effect adjustmentelection under ASU 2020-04 for all applicable contracts as they converted from the current reference rate to retained earnings and accumulated other comprehensive income (loss) (“AOCI”) related to ineffectiveness of the hedge instruments outstanding at the date of adoption was immaterial. See Note 5 for additional required disclosures.new reference rate.



ASU issued but not yet adopted as of June 30, 20192020 ASU 2018-12

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASB on August 15, 2018 and is expected to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements. In JulyOctober 2019, the FASB made a tentativeissued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of this ASU 2018-12 to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. A final decision regardingAs a result of the COVID-19 pandemic, the FASB voted in June 2020 to tentatively defer for an additional one year the current effective date isof ASU 2018-12 from January 1, 2022 to January 1, 2023, and to provide transition relief to facilitate the early adoption of the ASU. Subsequently in July 2020, the FASB issued a proposed ASU with comment deadline of August 24, 2020 to obtain additional feedback on the tentative decisions, which are expected into be finalized during the third quarter of 2019. This2020. The transition relief would allow large calendar-year public companies that early adopt ASU 2018-12 to apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would also apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements. ASU 2018-12 will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. Outlined below are four key areas of change, although there are other less significant changes not noted below. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter.



8

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

ASU 2018-12 Amended Topic Description Method of adoption Effect on the financial statements or other significant matters
Cash flow assumptions used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products

 
Requires an entity to review, and if necessary, update the cash flow assumptions used to measure the liability for future policy benefits, for both changes in future assumptions and actual experience, at least annually using a retrospective update method with a cumulative catch-up adjustment recorded in a separate line item in the Consolidated Statements of Operations.

 
An entity may choose one of two adoption methods for the liability for future policy benefits: (1) a modified retrospective transition method whereby the entity will apply the amendments to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) a full retrospective transition method.

 
The options for method of adoption and the impacts of such methods are under assessment.

Discount rate assumption used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products

 
Requires discount rate assumptions to be based on an upper-medium grade fixed income instrument yield and will be required to be updated each quarter with the impact recorded through Other Comprehensive Income (“OCI”).

OCI.
 
As noted above, an entity may choose either a modified retrospective transition method or full retrospective transition method for the liability for future policy benefits. Under either method, for balance sheet remeasurement purposes, the liability for future policy benefits will be remeasured using current discount rates as of the beginning of the earliest period presented with the impact recorded as a cumulative effect adjustment to AOCI.

 
Upon adoption, under either transition method, there will be an adjustment to AOCI as a result of remeasuring in-force contract liabilities using current upper-medium grade fixed income instrument yields. The adjustment upon adoption will largely reflect the difference between the discount rate locked-in at contract inception versus current discount rates at transition. The magnitude of such adjustment is currently being assessed.

Amortization of deferred acquisition costs (DAC) and other balances

 
Requires DAC and other balances, such as unearned revenue reserves and deferred sales inducements,DSI, to be amortized on a constant level basis over the expected term of the related contract, independent of expected profitability.

 An entity may apply one of two adoption methods: (1) a modified retrospective transition method whereby the entity will apply the amendments to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) if an entity chooses a full retrospective transition method for its liability for future policy benefits, as described above, it is required to also use a retrospective transition method for DAC and other balances. 
The options for method of adoption and the impacts of such methods are under assessment. Under the modified retrospective transition method, the Company would not expect a significant impact to the balance sheet, other than the impact of the removal of any related amounts in AOCI.

Market Risk Benefits

 
Requires an entity to measure all market risk benefits (e.g., living benefit and death benefit guarantees associated with variable annuities) at fair value, with changesand record market risk benefit assets and liabilities separately on the Consolidated Statements of Financial Position. Changes in fair value of market risk benefits are recorded in net income, except for the portion of the change that is attributable to changes in an entity’s non-performance risk (“NPR”) which is recognized in OCI.

 
An entity will apply ashall adopt the guidance for market risk benefits using the retrospective transition method, which will includeincludes a cumulative-effectcumulative effect adjustment on the balance sheet as of the earliest period presented. An entity shall maximize the use of relevant observable information and minimize the use of unobservable information in determining the balance of the market risk benefits upon adoption.

 Upon adoption, the Company expects an impact to retained earnings for the difference between the fair value and carrying value of benefits not currently measured at fair value (e.g., guaranteed minimum death benefits on variable annuities) and an impact from reclassifying the cumulative effect of changes in NPR from retained earnings to AOCI. The magnitude of such adjustments is currently being assessed.



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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Other ASU issued but not yet adopted as of June 30, 2019
StandardDescriptionEffective date and method of adoptionEffect on the financial statements or other significant matters
ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326):
Measurement of
Credit Losses on
Financial
Instruments

This ASU provides a new current expected credit loss model to account for credit losses on certain financial assets and off-balance sheet exposures (e.g., loans held for investment, debt securities held to maturity, reinsurance receivables, net investments in leases and loan commitments). The model requires an entity to estimate lifetime credit losses related to such financial assets and exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The standard also modifies the current OTTI standard for available-for-sale debt securities to require the use of an allowance rather than a direct write down of the investment, and replaces the existing standard for purchased credit deteriorated loans and debt securities.January 1, 2020 using the modified retrospective method which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption. However, prospective application is required for purchased credit deteriorated assets previously accounted for under ASU 310-30 and for debt securities for which an OTTI was recognized prior to the date of adoption. Early adoption is permitted beginning January 1, 2019.The Company is continuing to develop its expected credit loss models and related systems, processes and controls for assets held on the Consolidated Statement of Financial Position at amortized cost, the most significant of which are the commercial mortgage and other loans. The allowance for credit losses will likely increase when the ASU is adopted to cover expected credit losses over the lifetime of the commercial mortgage and other loans, incorporating reasonable and supportable forecasts and expected changes in future economic conditions. The extent of the impact of adoption of this ASU on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements will depend on various factors including the economic environment and the size and type of the commercial mortgage and other loans held on the date of adoption.
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

This ASU simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test in current U.S. GAAP, which measures a goodwill impairment by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of the goodwill. Under the ASU, a goodwill impairment should be recorded for the amount by which the carrying amount of a reporting unit exceeds its fair value (capped by the total amount of goodwill allocated to the reporting unit).
January 1, 2020 using the prospective method (with early adoption permitted).

The Company does not plan to early adopt this ASU. The Company does not expect the adoption of the ASU to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.




3. INVESTMENTS
 
Fixed Maturity Securities
 
The following tables set forth the composition of fixed maturity securities (excluding investments classified as trading), as of the dates indicated:
 
 June 30, 2020
 Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Allowance for Credit Losses 
Fair
Value
 (in millions)
Fixed maturities, available-for-sale:         
U.S. Treasury securities and obligations of U.S. government authorities and agencies$31,731
 $11,309
 $19
 $0
 $43,021
Obligations of U.S. states and their political subdivisions10,387
 2,012
 1
 0
 12,398
Foreign government bonds98,357
 18,657
 206
 38
 116,770
U.S. public corporate securities91,777
 15,518
 627
 51
 106,617
U.S. private corporate securities(1)35,145
 3,281
 215
 52
 38,159
Foreign public corporate securities26,070
 3,328
 248
 32
 29,118
Foreign private corporate securities28,167
 1,145
 925
 64
 28,323
Asset-backed securities(2)13,989
 152
 205
 0
 13,936
Commercial mortgage-backed securities15,089
 1,181
 7
 1
 16,262
Residential mortgage-backed securities(3)3,100
 241
 1
 0
 3,340
       Total fixed maturities, available-for-sale(1)$353,812
 $56,824
 $2,454
 $238
 $407,944

 June 30, 2020
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 Allowance for Credit Losses 
Amortized Cost,
Net of Allowance
 (in millions)
Fixed maturities, held-to-maturity:           
Foreign government bonds$896
 $261
 $0
 $1,157
 $0
 $896
Foreign public corporate securities625
 61
 0
 686
 9
 616
Foreign private corporate securities83
 2
 0
 85
 0
 83
Residential mortgage-backed securities(3)280
 23
 0
 303
 0
 280
       Total fixed maturities, held-to-maturity(4)$1,884
 $347
 $0
 $2,231
 $9
 $1,875
__________
(1)
Excludes notes with amortized cost of $6,466 million(fair value, $6,466 million), which have been offset with the associated debt under a netting agreement.
(2)Includes credit-tranched securities collateralized by loan obligations, auto loans, education loans, home equity loans and other asset types.
(3)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(4)Excludes notes with amortized cost of $4,998 million (fair value, $5,603 million), which have been offset with the associated debt under a netting agreement.

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

June 30, 2019December 31, 2019
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
OTTI
in AOCI(4)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 OTTI in AOCI(4)
(in millions)(in millions)
Fixed maturities, available-for-sale:                  
U.S. Treasury securities and obligations of U.S. government authorities and agencies$29,571
 $4,973
 $89
 $34,455
 $0
$30,625
 $5,195
 $161
 $35,659
 $0
Obligations of U.S. states and their political subdivisions9,889
 1,314
 1
 11,202
 0
10,068
 1,437
 8
 11,497
 0
Foreign government bonds98,745
 22,407
 70
 121,082
 0
98,356
 20,761
 63
 119,054
 (34)
U.S. public corporate securities85,282
 8,653
 417
 93,518
 0
87,566
 11,030
 257
 98,339
 (6)
U.S. private corporate securities(1)33,043
 2,121
 186
 34,978
 0
34,410
 2,243
 120
 36,533
 0
Foreign public corporate securities27,450
 2,980
 119
 30,311
 (3)26,841
 3,054
 70
 29,825
 (1)
Foreign private corporate securities26,383
 1,057
 672
 26,768
 0
27,619
 1,201
 580
 28,240
 0
Asset-backed securities(2)12,602
 174
 41
 12,735
 (90)13,067
 147
 40
 13,174
 (77)
Commercial mortgage-backed securities14,556
 607
 9
 15,154
 0
14,978
 610
 14
 15,574
 0
Residential mortgage-backed securities(3)3,043
 148
 4
 3,187
 (1)3,044
 159
 2
 3,201
 (1)
Total fixed maturities, available-for-sale(1)$340,564
 $44,434
 $1,608
 $383,390
 $(94)$346,574
 $45,837
 $1,315
 $391,096
 $(119)

 
June 30, 2019December 31, 2019
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
(in millions)(in millions)
Fixed maturities, held-to-maturity:              
Foreign government bonds$900
 $303
 $0
 $1,203
$891
 $282
 $0
 $1,173
Foreign public corporate securities671
 70
 0
 741
649
 64
 0
 713
Foreign private corporate securities(5)96
 3
 0
 99
83
 2
 0
 85
Residential mortgage-backed securities(3)342
 25
 0
 367
310
 21
 0
 331
Total fixed maturities, held-to-maturity(5)$2,009
 $401
 $0
 $2,410
$1,933
 $369
 $0
 $2,302
__________
(1)Excludes notes with amortized cost of $4,356$4,751 million (fair value, $4,356$4,757 million), which have been offset with the associated payablesdebt under a netting agreement.
(2)Includes credit-tranched securities collateralized by loan obligations, auto loans, education loans, auto loans, sub-prime mortgages, credit cardshome equity and other asset types.
(3)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(4)Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $372$362 million of net unrealized gains on impaired available-for-sale securities and $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.
(5)Excludes notes with amortized cost of $4,879$4,998 million (fair value, $5,190$5,401 million), which have been offset with the associated payables under a netting agreement.

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 December 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
OTTI
in AOCI(4)
 (in millions)
Fixed maturities, available-for-sale:         
U.S. Treasury securities and obligations of U.S. government authorities and agencies$28,242
 $2,994
 $642
 $30,594
 $0
Obligations of U.S. states and their political subdivisions9,880
 676
 63
 10,493
 0
Foreign government bonds96,710
 16,714
 314
 113,110
 0
U.S. public corporate securities82,257
 3,912
 2,754
 83,415
 (2)
U.S. private corporate securities(1)32,450
 1,151
 581
 33,020
 0
Foreign public corporate securities27,671
 2,061
 531
 29,201
 (3)
Foreign private corporate securities25,314
 434
 1,217
 24,531
 0
Asset-backed securities(2)12,888
 162
 77
 12,973
 (160)
Commercial mortgage-backed securities13,396
 99
 180
 13,315
 0
Residential mortgage-backed securities(3)2,937
 99
 32
 3,004
 (1)
       Total fixed maturities, available-for-sale(1)$331,745
 $28,302
 $6,391
 $353,656
 $(166)

 December 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 (in millions)
Fixed maturities, held-to-maturity:       
Foreign government bonds$885
 $269
 $0
 $1,154
Foreign public corporate securities668
 64
 0
 732
Foreign private corporate securities(5)95
 3
 0
 98
Residential mortgage-backed securities(3)365
 23
 0
 388
       Total fixed maturities, held-to-maturity(5)$2,013
 $359
 $0
 $2,372
__________
(1)Excludes notes with amortized cost of $4,216 million (fair value, $4,216 million), which have been offset with the associated payables under a netting agreement.
(2)Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, auto loans, credit cards, education loans and other asset types.
(3)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(4)Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $356 million of net unrealized gains on impaired available-for-sale securities and $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.
(5)Excludes notes with amortized cost of $4,879 million (fair value, $4,879 million), which have been offset with the associated payablesdebt under a netting agreement.

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
The following tables settable sets forth the fair value and gross unrealized losses on available-for-sale fixed maturity securities without an allowance for credit losses aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the datesdate indicated:
 
 June 30, 2019 June 30, 2020
 Less Than
Twelve Months
 Twelve Months
or More
 Total Less Than
Twelve Months
 Twelve Months
or More
 Total
 Fair
Value
 Gross
Unrealized
Losses
 Fair
Value
 Gross
Unrealized
Losses
 Fair
Value
 Gross
Unrealized
Losses
 Fair
Value
 Gross
Unrealized
Losses
 Fair
Value
 Gross
Unrealized
Losses
 Fair
Value
 Gross
Unrealized
Losses
 (in millions) (in millions)
Fixed maturities(1):  
Fixed maturities, available-for-sale:  
U.S. Treasury securities and obligations of U.S. government authorities and agencies $370
 $0
 $2,153
 $89
 $2,523
 $89
 $950
 $22
 $0
 $0
 $950
 $22
Obligations of U.S. states and their political subdivisions 2
 0
 49
 1
 51
 1
 47
 1
 0
 0
 47
 1
Foreign government bonds 393
 56
 503
 14
 896
 70
 4,589
 192
 31
 3
 4,620
 195
U.S. public corporate securities 2,895
 88
 6,607
 329
 9,502
 417
 6,595
 372
 1,504
 236
 8,099
 608
U.S. private corporate securities 1,124
 67
 2,816
 119
 3,940
 186
 2,393
 118
 1,017
 97
 3,410
 215
Foreign public corporate securities 595
 32
 1,124
 87
 1,719
 119
 2,875
 169
 400
 60
 3,275
 229
Foreign private corporate securities 1,663
 28
 7,243
 644
 8,906
 672
 5,775
 245
 5,223
 675
 10,998
 920
Asset-backed securities 2,768
 18
 4,035
 23
 6,803
 41
 6,741
 120
 3,510
 85
 10,251
 205
Commercial mortgage-backed securities 20
 0
 852
 9
 872
 9
 105
 4
 75
 3
 180
 7
Residential mortgage-backed securities 137
 0
 336
 4
 473
 4
 24
 0
 2
 0
 26
 0
Total $9,967
 $289
 $25,718
 $1,319
 $35,685
 $1,608
Total fixed maturities, available-for-sale $30,094
 $1,243
 $11,762
 $1,159
 $41,856
 $2,402
__________ 
(1)As of June 30, 2019, there were no securities classified as held-to-maturity in a gross unrealized loss position.
The following table sets forth the fair value and gross unrealized losses on fixed maturity securities aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the date indicated:

  December 31, 2018
  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 $3,007
 $67
 $6,986
 $575
 $9,993
 $642
Obligations of U.S. states and their political subdivisions 1,725
 25
 999
 38
 2,724
 63
Foreign government bonds 2,369
 136
 3,515
 178
 5,884
 314
U.S. public corporate securities 34,064
 1,570
 13,245
 1,184
 47,309
 2,754
U.S. private corporate securities 8,923
 225
 7,985
 356
 16,908
 581
Foreign public corporate securities 7,363
 308
 2,928
 223
 10,291
 531
Foreign private corporate securities 12,218
 692
 4,468
 525
 16,686
 1,217
Asset-backed securities 8,255
 70
 669
 7
 8,924
 77
Commercial mortgage-backed securities 1,781
 14
 4,733
 166
 6,514
 180
Residential mortgage-backed securities 194
 1
 1,042
 31
 1,236
 32
Total $79,899
 $3,108
 $46,570
 $3,283
 $126,469
 $6,391
__________ 
(1)As of December 31, 2018, there was $13 million of fair value and less than $1 million of gross unrealized losses, which are not reflected in AOCI, on securities classified as held-to-maturity.

  December 31, 2019
  Less Than
Twelve Months
 Twelve Months
or More
 Total
  Fair
Value
 Gross
Unrealized
Losses
 Fair
Value
 Gross
Unrealized
Losses
 Fair
Value
 Gross
Unrealized
Losses
  (in millions)
Fixed maturities(1):  
U.S. Treasury securities and obligations of U.S. government authorities and agencies $4,950
 $161
 $267
 $0
 $5,217
 $161
Obligations of U.S. states and their political subdivisions 273
 8
 0
 0
 273
 8
Foreign government bonds 2,332
 60
 126
 3
 2,458
 63
U.S. public corporate securities 3,944
 85
 2,203
 172
 6,147
 257
U.S. private corporate securities 2,283
 44
 1,563
 76
 3,846
 120
Foreign public corporate securities 1,271
 23
 496
 47
 1,767
 70
Foreign private corporate securities 1,466
 33
 5,666
 547
 7,132
 580
Asset-backed securities 3,979
 12
 4,433
 28
 8,412
 40
Commercial mortgage-backed securities 1,193
 10
 164
 4
 1,357
 14
Residential mortgage-backed securities 207
 1
 88
 1
 295
 2
Total $21,898
 $437
 $15,006
 $878
 $36,904
 $1,315

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

__________ 
(1)As of December 31, 2019, there were no securities classified as held-to-maturity in a gross unrealized loss position.

As of June 30, 2019 and December 31, 2018,2020, the gross unrealized losses on fixed maturity available-for-sale securities without an allowance were composed of $1,096$1,450 million and $5,391 million, respectively, related to “1” highest quality or “2” high quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $512$952 million and $1,000 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of June 30, 2019,2020, the $1,319$1,159 million of gross unrealized losses of twelve months or more were concentrated in the Company’s corporate securities within the energy, finance and consumer non-cyclical energy and utility sectors.

As of December 31, 2018,2019, the $3,283gross unrealized losses on fixed maturity securities were composed of $973 million related to “1” highest quality or “2” high quality securities based on the NAIC or equivalent rating and $342 million related to other than high or highest quality securities based on NAIC or equivalent rating. As of December 31, 2019, the $878 million of gross unrealized losses of twelve months or more were concentrated in U.S. government bonds and in the Company’s corporate securities within the utility,energy, consumer non-cyclical and finance sectors.

In accordance with its policy described in Note 2, to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, the Company concluded that an adjustment to earnings for OTTI forcredit losses related to these fixed maturity securities was not warranted at either June 30, 2019 or December 31, 2018.2020. These conclusions were based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to general credit spread widening, increases in interest rates, and foreign currency exchange rate movements.movements and the financial condition or near-term prospects of the issuer. As of June 30, 2019,2020, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.

The following table sets forth the amortized cost or amortized cost, net of allowance and fair value of fixed maturities by contractual maturities, as of the date indicated:
 
June 30, 2019June 30, 2020
Available-for-Sale Held-to-MaturityAvailable-for-Sale Held-to-Maturity
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Amortized Cost Fair Value Amortized Cost, Net of Allowance Fair Value
(in millions)(in millions)
Fixed maturities:              
Due in one year or less$16,207
 $16,756
 $60
 $61
$17,494
 $18,078
 $114
 $116
Due after one year through five years50,780
 54,131
 114
 117
51,138
 54,309
 0
 0
Due after five years through ten years66,712
 72,924
 596
 666
67,575
 75,812
 588
 659
Due after ten years(1)176,664
 208,503
 897
 1,199
185,427
 226,207
 893
 1,153
Asset-backed securities12,602
 12,735
 0
 0
13,989
 13,936
 0
 0
Commercial mortgage-backed securities14,556
 15,154
 0
 0
15,089
 16,262
 0
 0
Residential mortgage-backed securities3,043
 3,187
 342
 367
3,100
 3,340
 280
 303
Total$340,564
 $383,390
 $2,009
 $2,410
$353,812
 $407,944
 $1,875
 $2,231
__________
(1)
Excludes available-for-sale notes with amortized cost of $4,356$6,466 million (fair(fair value, $4,356$6,466 million) and held-to-maturity notes with amortized cost of $4,879$4,998 million (fair value, $5,190$5,603 million), which have been offset with the associated payablesdebt under a netting agreement.

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Asset-backed, commercial mortgage-backed and residential mortgage-backed securities are shown separately in the table above, as they do not have a single maturity date.
 
The following table sets forth the sources of fixed maturity proceeds and related investment gains (losses), as well as losses on write-downs, impairments and the allowance for credit losses of fixed maturities, for the periods indicated:
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
 (in millions)
Fixed maturities, available-for-sale:       
Proceeds from sales(1)$6,659
 $9,489
 $16,821
 $19,074
Proceeds from maturities/prepayments4,704
 6,553
 9,192
 11,779
Gross investment gains from sales and maturities228
 410
 711
 784
Gross investment losses from sales and maturities(95) (187) (283) (444)
OTTI recognized in earnings(2)(64) (58) (99) (97)
Fixed maturities, held-to-maturity:       
Proceeds from maturities/prepayments(3)$23
 $23
 $37
 $59

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
 (in millions)
Fixed maturities, available-for-sale:       
Proceeds from sales(1)$5,217
 $6,659
 $10,370
 $16,821
Proceeds from maturities/prepayments5,539
 4,704
 10,422
 9,192
Gross investment gains from sales and maturities405
 228
 873
 711
Gross investment losses from sales and maturities(149) (95) (210) (283)
OTTI recognized in earnings(2)N/A
 (64) N/A
 (99)
Write-downs recognized in earnings(3)(64) N/A
 (155) N/A
(Addition to) release of allowance for credit losses(4)(80) N/A
 (238) N/A
Fixed maturities, held-to-maturity:       
Proceeds from maturities/prepayments(5)$22
 $23
 $63
 $37
(Addition to) release of allowance for credit losses(4)0
 N/A
 0
 N/A
__________ 
(1)Includes $332$128 million and $254$332 million of non-cash related proceeds due to the timing of trade settlements for the six months ended June 30, 20192020 and 2018,2019, respectively.
(2)ExcludesFor the three and six months ended June 30, 2019, amounts exclude the portion of OTTI amounts remaining in OCI, representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of impairment.
(3)For the three and six months ended June 30, 2020, amounts represent write-downs on securities approaching maturity related to foreign exchange movements and securities actively marketed for sale.
(4)Effective January 1, 2020, credit losses on available-for-sale and held-to-maturity fixed maturity securities are recorded within the “allowance for credit losses.”
(5)Includes $2$5 million and $3$2 million of non-cash related proceeds due to the timing of trade settlements for the six months ended June 30, 20192020 and 2018,2019, respectively.

The following table setstables set forth a rollforward of pre-tax amounts remainingthe activity in OCI related tothe allowance for credit losses for fixed maturity securities, with credit loss impairments recognized in earnings, foras of the periodsdate indicated: 
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2019 2018 2019 2018
 (in millions)
Credit loss impairments:       
Balance, beginning of period$149
 $203
 $140
 $319
New credit loss impairments4
 0
 20
 0
Additional credit loss impairments on securities previously impaired8
 0
 8
 0
Increases due to the passage of time on previously recorded credit losses2
 4
 3
 6
Reductions for securities which matured, paid down, prepaid or were sold during the period(20) (42) (27) (155)
Reductions for securities impaired to fair value during the period(1)0
 0
 0
 (4)
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected(1) (2) (2) (3)
       Balance, end of period$142
 $163
 $142
 $163
 June 30, 2020
 U.S. Treasury Securities and Obligations of U.S. States Foreign Government Bonds U.S. and Foreign Corporate Securities Asset-Backed Securities Commercial Mortgage-Backed Securities Residential Mortgage-Backed Securities Total
 (in millions)
Fixed maturities, available-for-sale:             
Balance, beginning of year$0
 $0
 $0
 $0
 $0
 $0
 $0
Additions to allowance for credit losses not previously recorded0
 38
 205
 0
 1
 0
 244
Reductions for securities sold during the period0
 0
 (28) 0
 0
 0
 (28)
Additions/reductions on securities with previous allowance0
 0
 22
 0
 0
 0
 22
Balance, end of period$0
 $38
 $199
 $0
 $1
 $0
 $238
__________ 
(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.


19

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 June 30, 2020
 U.S. Treasury Securities and Obligations of U.S. States Foreign Government Bonds U.S. and Foreign Corporate Securities Asset-Backed Securities Commercial Mortgage-Backed Securities Residential Mortgage-Backed Securities Total
 (in millions)
Fixed maturities, held-to-maturity:             
Balance, beginning of year$0
 $0
 $0
 $0
 $0
 $0
 $0
Cumulative effect of adoption of ASU 2016-130
 0
 9
 0
 0
 0
 9
Balance, end of period$0
 $0
 $9
 $0
 $0
 $0
 $9


See Note 2 for additional information about the Company’s methodology for developing our allowance and expected losses.

As of June 30, 2020, the allowance for credit losses on available-for-sale securities was primarily related to adverse projected cash flows on public and private corporate securities.

The Company did not have any fixed maturity securities purchased with credit deterioration, as of June 30, 2020.

Assets Supporting Experience-Rated Contractholder Liabilities
 
The following table sets forth the composition of “Assets supporting experience-rated contractholder liabilities,” as of the dates indicated:
 
 June 30, 2019 December 31, 2018 June 30, 2020 December 31, 2019
 Amortized
Cost or Cost
 
Fair
Value
 Amortized
Cost or Cost
 
Fair
Value
 Amortized
Cost or Cost
 Fair
Value
 Amortized
Cost or Cost
 Fair
Value
 (in millions) (in millions)
Short-term investments and cash equivalents $371
 $371
 $215
 $215
 $1,234
 $1,234
 $277
 $277
Fixed maturities:                
Corporate securities 13,257
 13,630
 13,258
 13,119
 13,492
 14,190
 13,143
 13,603
Commercial mortgage-backed securities 2,239
 2,297
 2,346
 2,324
 1,832
 1,921
 1,845
 1,896
Residential mortgage-backed securities(1) 1,002
 1,014
 828
 811
 1,142
 1,200
 1,134
 1,158
Asset-backed securities(2) 1,595
 1,626
 1,649
 1,665
 1,762
 1,772
 1,639
 1,662
Foreign government bonds 852
 870
 1,087
 1,083
 803
 808
 802
 814
U.S. government authorities and agencies and obligations of U.S. states 351
 402
 538
 577
 354
 437
 341
 397
Total fixed maturities(3) 19,296
 19,839
 19,706
 19,579
 19,385
 20,328
 18,904
 19,530
Equity securities 1,452
 1,633
 1,378
 1,460
 1,533
 1,683
 1,465
 1,790
Total assets supporting experience-rated contractholder liabilities(4) $21,119
 $21,843
 $21,299
 $21,254
 $22,152
 $23,245
 $20,646
 $21,597


15

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

__________ 
(1)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(2)Includes collateralized loan obligations, auto loans, education loans, credit-tranched securities collateralized by sub-prime mortgageshome equity and other asset types. Collateralized loan obligations at fair value were $1,025$1,141 million and $1,028$1,060 million as of June 30, 20192020 and December 31, 2018,2019, respectively, all of which were rated AAA.
(3)As a percentage of amortized cost, 93% and 94% of the portfolio was considered high or highest quality based on NAIC or equivalent ratings, as of both June 30, 20192020 and December 31, 2018.2019, respectively.
(4)As a percentage of amortized cost, 78% and 77% of the portfolio consisted of public securities as of both June 30, 20192020 and December 31, 2018.2019, respectively.

The net change in unrealized gains (losses) from assets supporting experience-rated contractholder liabilities still held at period end, recorded within “Other income (loss),” was $300$984 million and $(198)$300 million during the three months ended June 30, 20192020 and 2018,2019, respectively, and $769$142 million and $(596)$769 million during the six months ended June 30, 2020 and 2019, and 2018, respectively.


20

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Equity Securities
 
The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Other income (loss),” was $51$825 million and $(80)$51 million during the three months ended June 30, 20192020 and 2018,2019, respectively, and $581$(656) million and $(271)$581 million during the six months ended June 30, 20192020 and 2018,2019, respectively.

Concentrations of Financial Instruments
 
The Company monitors its concentrations of financial instruments and mitigates credit risk by maintaining a diversified investment portfolio which limits exposure to any single issuer.
 
As of the dates indicated, the Company’s exposure to concentrations of credit risk of single issuers greater than 10% of the Company’s equity included securities of the U.S. government and certain U.S. government agencies and securities guaranteed by the U.S. government, as well as the securities disclosed below:
 
 June 30, 2019 December 31, 2018 June 30, 2020 December 31, 2019
 Amortized
Cost
 
Fair
Value
 Amortized
Cost
 
Fair
Value
 Amortized
Cost
 
Fair
Value
 Amortized
Cost
 
Fair
Value
 (in millions) (in millions)
Investments in Japanese government and government agency securities:                
Fixed maturities, available-for-sale $73,570
 $90,438
 $71,952
 $84,461
 $74,765
 $87,747
 $74,118
 $89,546
Fixed maturities, held-to-maturity 878
 1,173
 864
 1,127
 874
 1,127
 869
 1,143
Fixed maturities, trading 23
 23
 22
 22
 23
 22
 23
 23
Assets supporting experience-rated contractholder liabilities 664
 682
 691
 697
 647
 652
 653
 664
Total $75,135
 $92,316
 $73,529
 $86,307
 $76,309
 $89,548
 $75,663
 $91,376
 
 June 30, 2019 December 31, 2018 June 30, 2020 December 31, 2019
 Amortized
Cost
 
Fair
Value
 Amortized
Cost
 
Fair
Value
 Amortized
Cost
 
Fair
Value
 Amortized
Cost
 
Fair
Value
 (in millions) (in millions)
Investments in South Korean government and government agency securities:                
Fixed maturities, available-for-sale $10,364
 $13,098
 $10,339
 $12,586
 $10,783
 $13,402
 $10,823
 $13,322
Fixed maturities, held-to-maturity 0
 0
 0
 0
Fixed maturities, trading 0
 0
 0
 0
Assets supporting experience-rated contractholder liabilities 15
 16
 15
 15
 15
 16
 15
 16
Total $10,379
 $13,114
 $10,354
 $12,601
 $10,798
 $13,418
 $10,838
 $13,338

 

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Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Commercial Mortgage and Other Loans
 
The following table sets forth the composition of “Commercial mortgage and other loans,” as of the dates indicated:
 
 June 30, 2019 December 31, 2018 June 30, 2020 December 31, 2019
 
Amount
(in millions)
 
% of
Total
 
Amount
(in millions)
 
% of
Total
 
Amount
(in millions)
 
% of
Total
 
Amount
(in millions)
 
% of
Total
Commercial mortgage and agricultural property loans by property type:                
Office $12,984
 21.4% $13,280
 22.4% $12,642
 20.2% $13,462
 21.4%
Retail 8,411
 13.9
 8,639
 14.6
 7,739
 12.3
 8,379
 13.3
Apartments/Multi-Family 16,752
 27.7
 16,538
 28.0
 18,031
 28.8
 17,348
 27.6
Industrial 12,866
 21.2
 11,574
 19.6
 13,292
 21.2
 13,226
 21.1
Hospitality 2,168
 3.6
 1,931
 3.3
 2,378
 3.8
 2,415
 3.9
Other 3,913
 6.5
 3,846
 6.5
 4,617
 7.4
 4,533
 7.2
Total commercial mortgage loans 57,094
 94.3
 55,808
 94.4
 58,699
 93.7
 59,363
 94.5
Agricultural property loans 3,420
 5.7
 3,316
 5.6
 3,978
 6.3
 3,472
 5.5
Total commercial mortgage and agricultural property loans by property type 60,514
 100.0% 59,124
 100.0% 62,677
 100.0% 62,835
 100.0%
Allowance for credit losses (115)   (123)   (238)   (117)  
Total net commercial mortgage and agricultural property loans by property type 60,399
   59,001
   62,439
   62,718
  
Other loans:   
   
   
   
Uncollateralized loans 664
 
 660
 
 680
 
 656
 
Residential property loans 143
 
 157
 
 109
 
 124
 
Other collateralized loans 27
 
 17
 
 248
 
 65
 
Total other loans 834
 
 834
 
 1,037
 
 845
 
Allowance for credit losses (5) 
 (5) 
 (7) 
 (4) 
Total net other loans 829
 
 829
 
 1,030
 
 841
 
Total commercial mortgage and other loans(1) $61,228
 
 $59,830
 
 $63,469
 
 $63,559
 
__________ 
(1)Includes loans held for sale which are carried at fair value and are collateralized primarily by apartment complexes. As of June 30, 20192020 and December 31, 2018,2019, the net carrying value of these loans was $645$682 million and $763$228 million, respectively.

As of June 30, 2019,2020, the commercial mortgage and agricultural property loans were secured by properties geographically dispersed throughout the United States (with the largest concentrations in California (27%(28%), Texas (10%(9%) and New York (7%(8%)) and included loans secured by properties in Europe (6%(7%), Australia (1%Asia (2%) and AsiaAustralia (1%).


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Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following table sets forth the activity in the allowance for credit losses for commercial mortgage and other loans, as of the dates indicated:
 
Commercial
Mortgage
Loans
 
Agricultural
Property
Loans
 
Residential
Property
Loans
 
Other
Collateralized
Loans
 
Uncollateralized
Loans
 Total 
Commercial
Mortgage
Loans
 
Agricultural
Property
Loans
 
Residential
Property
Loans
 
Other
Collateralized
Loans
 
Uncollateralized
Loans
 Total
 (in millions) (in millions)
Balance at December 31, 2017 $97
 $3
 $1
 $0
 $5
 $106
Addition to (release of) allowance for credit losses 23
 0
 (1) 0
 0
 22
Charge-offs, net of recoveries 0
 0
 0
 0
 0
 0
Change in foreign exchange 0
 0
 0
 0
 0
 0
Balance at December 31, 2018 120
 3
 0
 0
 5
 128
 $120
 $3
 $0
 $0
 $5
 $128
Addition to (release of) allowance for credit losses (8) 0
 0
 0
 0
 (8) (5) 0
 0
 0
 (1) (6)
Charge-offs, net of recoveries 0
 0
 0
 0
 0
 0
 (1) 0
 0
 0
 0
 (1)
Change in foreign exchange 0
 0
 0
 0
 0
 0
 0
 0
 0
 0
 0
 0
Balance at June 30, 2019 $112
 $3
 $0
 $0
 $5
 $120
Balance at December 31, 2019 114
 3
 0
 0
 4
 121
Cumulative effect of adoption of ASU 2016-13 110
 5
 0
 0
 0
 115
Addition to (release of) allowance for expected losses 6
 0
 0
 0
 0
 6
Other 0
 0
 0
 3
 0
 3
Balance at June 30, 2020 $230
 $8
 $0
 $3
 $4
 $245
 
The following tables set forthSee Note 2 for additional information about the Company’s methodology for developing our allowance and expected losses.

As of June 30, 2020, the increase in the allowance for credit losses and the recorded investment inon commercial mortgage and other loans aswas primarily related to the cumulative effect of the dates indicated:
  June 30, 2019
  
Commercial
Mortgage
Loans
 
Agricultural
Property
Loans
 
Residential
Property
Loans
 
Other
Collateralized
Loans
 
Uncollateralized
Loans
 Total
  (in millions)
Allowance for credit losses:            
Individually evaluated for impairment $8
 $0
 $0
 $0
 $0
 $8
Collectively evaluated for impairment 104
 3
 0
 0
 5
 112
       Total ending balance(1) $112
 $3
 $0
 $0
 $5
 $120
             
Recorded investment(2):            
Individually evaluated for impairment $42
 $19
 $0
 $0
 $0
 $61
Collectively evaluated for impairment 57,052
 3,401
 143
 27
 664
 61,287
       Total ending balance(1) $57,094
 $3,420
 $143
 $27
 $664
 $61,348
__________ 
(1)As of June 30, 2019, there were no loans acquired with deteriorated credit quality.
(2)Recorded investment reflects the carrying value gross of related allowance.
  December 31, 2018
  
Commercial
Mortgage
Loans
 
Agricultural
Property
Loans
 
Residential
Property
Loans
 
Other
Collateralized
Loans
 
Uncollateralized
Loans
 Total
  (in millions)
Allowance for credit losses:            
Individually evaluated for impairment $19
 $0
 $0
 $0
 $0
 $19
Collectively evaluated for impairment 101
 3
 0
 0
 5
 109
       Total ending balance(1) $120
 $3
 $0
 $0
 $5
 $128
             
Recorded investment(2):            
Individually evaluated for impairment $67
 $35
 $0
 $0
 $2
 $104
Collectively evaluated for impairment 55,741
 3,281
 157
 17
 658
 59,854
       Total ending balance(1) $55,808
 $3,316
 $157
 $17
 $660
 $59,958

18

Tableadoption of ContentsASU 2016-13.
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

__________
(1)As of December 31, 2018, there were no loans acquired with deteriorated credit quality.
(2)Recorded investment reflects the carrying value gross of related allowance.

The following tables set forth certain key credit quality indicators based upon the recorded investment gross of allowance for credit losses, as of the date indicated:
Commercial mortgage loans
  June 30, 2019
  Debt Service Coverage Ratio  
  
>1.2X
 1.0X to <1.2X < 1.0X Total
  (in millions)
Loan-to-Value Ratio:        
0%-59.99% $30,536
 $653
 $81
 $31,270
60%-69.99% 17,370
 596
 0
 17,966
70%-79.99% 6,638
 690
 9
 7,337
80% or greater 309
 92
 120
 521
       Total commercial mortgage loans $54,853
 $2,031
 $210
 $57,094
Agricultural property loans
  June 30, 2019
  Debt Service Coverage Ratio  
  
>1.2X
 1.0X to <1.2X < 1.0X Total
  (in millions)
Loan-to-Value Ratio:        
0%-59.99% $3,152
 $168
 $17
 $3,337
60%-69.99% 83
 0
 0
 83
70%-79.99% 0
 0
 0
 0
80% or greater 0
 0
 0
 0
       Total agricultural property loans $3,235
 $168
 $17
 $3,420
Total commercial mortgage and agricultural property loans

  June 30, 2019
  Debt Service Coverage Ratio  
  
>1.2X
 1.0X to <1.2X < 1.0X Total
  (in millions)
Loan-to-Value Ratio:        
0%-59.99% $33,688
 $821
 $98
 $34,607
60%-69.99% 17,453
 596
 0
 18,049
70%-79.99% 6,638
 690
 9
 7,337
80% or greater 309
 92
 120
 521
       Total commercial mortgage and agricultural property loans $58,088
 $2,199
 $227
 $60,514


19

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following tables set forth certain key credit quality indicators based upon the recorded investment gross of allowance for credit losses, as of the date indicated:

23

Commercial mortgage loansTable of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


 June 30, 2020
 Amortized Cost by Origination Year
 2020 2019 2018 2017 2016 Prior Revolving Loans Total
 (in millions)
Loan-to-Value Ratio:               
Commercial mortgage loans               
0%-59.99%$346
 $2,791
 $3,067
 $3,462
 $3,296
 $17,859
 $0
 $30,821
60%-69.99%1,265
 4,057
 3,457
 2,668
 2,886
 4,506
 0
 18,839
70%-79.99%809
 3,021
 2,531
 1,091
 570
 720
 0
 8,742
80% or greater0
 10
 0
 18
 61
 208
 0
 297
Subtotal2,420
 9,879
 9,055
 7,239
 6,813
 23,293
 0
 58,699
Agricultural property loans               
0%-59.99%534
 483
 376
 555
 400
 1,410
 0
 3,758
60%-69.99%112
 71
 34
 3
 0
 0
 0
 220
70%-79.99%0
 0
 0
 0
 0
 0
 0
 0
80% or greater0
 0
 0
 0
 0
 0
 0
 0
Subtotal646
 554
 410
 558
 400
 1,410
 0
 3,978
Total commercial mortgage and agricultural property loans               
0%-59.99%880
 3,274
 3,443
 4,017
 3,696
 19,269
 0
 34,579
60%-69.99%1,377
 4,128
 3,491
 2,671
 2,886
 4,506
 0
 19,059
70%-79.99%809
 3,021
 2,531
 1,091
 570
 720
 0
 8,742
80% or greater0
 10
 0
 18
 61
 208
 0
 297
Total commercial mortgage and agricultural property loans$3,066
 $10,433
 $9,465
 $7,797
 $7,213
 $24,703
 $0
 $62,677

  December 31, 2018
  Debt Service Coverage Ratio  
  
>1.2X
 1.0X to <1.2X < 1.0X Total
  (in millions)
Loan-to-Value Ratio:        
0%-59.99% $30,325
 $538
 $161
 $31,024
60%-69.99% 16,538
 621
 0
 17,159
70%-79.99% 6,324
 754
 41
 7,119
80% or greater 332
 142
 32
 506
       Total commercial mortgage loans $53,519
 $2,055
 $234
 $55,808
Agricultural property loans
 June 30, 2020 December 31, 2019
 Commercial Mortgage Loans Agricultural Property Loans Commercial Mortgage Loans Agricultural Property Loans
 (in millions)
Debt Service Coverage Ratio:       
Greater or Equal to 1.2x$55,921
 $3,870
 $56,346
 $3,401
1.0 - 1.2x2,465
 80
 2,708
 57
Less than 1.0x313
 28
 309
 14
Total$58,699
 $3,978
 $59,363
 $3,472

  December 31, 2018
  Debt Service Coverage Ratio  
  
>1.2X
 1.0X to <1.2X < 1.0X Total
  (in millions)
Loan-to-Value Ratio:        
0%-59.99% $2,997
 $198
 $57
 $3,252
60%-69.99% 64
 0
 0
 64
70%-79.99% 0
 0
 0
 0
80% or greater 0
 0
 0
 0
       Total agricultural property loans $3,061
 $198
 $57
 $3,316

TotalSee Note 2 for additional information about the Company’s commercial mortgage and agricultural propertyother loans
  December 31, 2018
  Debt Service Coverage Ratio  
  
>1.2X
 1.0X to <1.2X < 1.0X Total
  (in millions)
Loan-to-Value Ratio:        
0%-59.99% $33,322
 $736
 $218
 $34,276
60%-69.99% 16,602
 621
 0
 17,223
70%-79.99% 6,324
 754
 41
 7,119
80% or greater 332
 142
 32
 506
       Total commercial mortgage and agricultural property loans $56,580
 $2,253
 $291
 $59,124

credit quality monitoring process.
 
The following tables set forth an aging of past due commercial mortgage and other loans based upon the recorded investment gross of allowance for credit losses, as well as the amount of commercial mortgage and other loans on non-accrual status, as of the dates indicated:
 

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Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 June 30, 2019 June 30, 2020
 Current 
30-59 Days
Past Due
 
60-89 Days
Past Due
 90 Days or More Past Due(1) 
Total Past
Due
 Total
Loans
 Non-Accrual
Status(2)
 Current 
30-59 Days
Past Due
 
60-89 Days
Past Due
 90 Days or More Past Due(1) 
Total Past
Due
 Total
Loans
 Non-Accrual
Status(2)
 (in millions) (in millions)
Commercial mortgage loans $57,088
 $6
 $0
 $0
 $6
 $57,094
 $21
 $58,386
 $0
 $313
 $0
 $313
 $58,699
 $44
Agricultural property loans 3,402
 0
 0
 18
 18
 3,420
 22
 3,971
 0
 1
 6
 7
 3,978
 15
Residential property loans 140
 1
 0
 2
 3
 143
 2
 107
 1
 0
 1
 2
 109
 1
Other collateralized loans 27
 0
 0
 0
 0
 27
 0
 248
 0
 0
 0
 0
 248
 0
Uncollateralized loans 664
 0
 0
 0
 0
 664
 0
 680
 0
 0
 0
 0
 680
 4
Total $61,321
 $7
 $0
 $20
 $27
 $61,348
 $45
 $63,392
 $1
 $314
 $7
 $322
 $63,714
 $64
 __________
(1)As of June 30, 2019,2020, there were no0 loans in this category accruing interest.
(2)For additional information regarding the Company’s policies for accruing interest on loans, see Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.

 December 31, 2018 December 31, 2019
 Current 
30-59 Days
Past Due
 
60-89 Days
Past Due
 90 Days or More Past Due(1) 
Total Past
Due
 Total
Loans
 Non-Accrual
Status(2)
 Current 
30-59 Days
Past Due
 
60-89 Days
Past Due
 90 Days or More Past Due(1) 
Total Past
Due
 Total
Loans
 Non-Accrual
Status(2)
 (in millions) (in millions)
Commercial mortgage loans $55,808
 $0
 $0
 $0
 $0
 $55,808
 $66
 $59,363
 $0
 $0
 $0
 $0
 $59,363
 $44
Agricultural property loans 3,301
 0
 0
 15
 15
 3,316
 18
 3,458
 1
 0
 13
 14
 3,472
 13
Residential property loans 154
 1
 0
 2
 3
 157
 3
 121
 1
 0
 2
 3
 124
 2
Other collateralized loans 17
 0
 0
 0
 0
 17
 0
 65
 0
 0
 0
 0
 65
 0
Uncollateralized loans 660
 0
 0
 0
 0
 660
 0
 656
 0
 0
 0
 0
 656
 0
Total $59,940
 $1
 $0
 $17
 $18
 $59,958
 $87
 $63,663
 $2
 $0
 $15
 $17
 $63,680
 $59

__________
(1)As of December 31, 2018,2019, there were no0 loans in this category accruing interest.
(2)For additional information regarding the Company’s policies for accruing interest on loans, see Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.

Loans on non-accrual status recognized interest income of $2 million for both the three months and six months ended June 30, 2020, respectively, and $19 million of these loans did not have a related allowance for credit losses as of June 30, 2020.

The Company did not have any significant losses on commercial mortgage and other loans purchased with credit deterioration as of June 30, 2020.


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Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


Other Invested Assets
 
The following table sets forth the composition of “Other invested assets,” as of the dates indicated:

 June 30, 2019 December 31, 2018 June 30, 2020 December 31, 2019
 (in millions) (in millions)
LPs/LLCs:        
Equity method:        
Private equity $3,305
 $3,182
 $3,830
 $3,625
Hedge funds 1,548
 1,337
 2,166
 1,947
Real estate-related 1,240
 1,207
 1,381
 1,372
Subtotal equity method 6,093
 5,726
 7,377
 6,944
Fair value:        
Private equity 1,637
 1,684
 1,548
 1,705
Hedge funds 2,128
 2,135
 2,100
 2,172
Real estate-related 324 296 331 336
Subtotal fair value 4,089
 4,115
 3,979
 4,213
Total LPs/LLCs 10,182
 9,841
 11,356
 11,157
Real estate held through direct ownership(1) 2,730
 2,466
 2,451
 2,388
Derivative instruments 1,053
 1,155 1,655
 877
Other(2) 1,116
 1,064
 1,295
 1,184
Total other invested assets $15,081
 $14,526
 $16,757
 $15,606
_________ 
(1)As of June 30, 20192020 and December 31, 2018,2019, real estate held through direct ownership had mortgage debt of $799$459 million and $776$537 million, respectively.
(2)Primarily includes strategic investments made by investment management operations, leveraged leases and member and activity stock held in the Federal Home Loan Banks of New York and Boston. For additional information regarding the Company’s holdings in the Federal Home Loan Banks of New York and Boston, see Note 1617 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.


Accrued Investment Income

The following table sets forth the composition of “Accrued investment income,” as of the date indicated:

22
 June 30, 2020
 (in millions)
Fixed maturities$2,739
Equity securities9
Commercial mortgage and other loans198
Policy loans301
Other invested assets36
Short-term investments and cash equivalents13
Total accrued investment income$3,296


There were $9 million and $12 million of write-downs on accrued investment income for the three months and six months ended June 30, 2020, respectively.


26

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


Net Investment Income
 
The following table sets forth “Net investment income” by investment type, for the periods indicated:
 
Three Months Ended
June 30,
 Six Months Ended
June 30,
 Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 2018 2020 2019 2020 2019
(in millions) (in millions)
Fixed maturities, available-for-sale(1)$3,150
 $3,001
 $6,238
 $5,955
 $3,067
 $3,150
 $6,179
 $6,238
Fixed maturities, held-to-maturity(1)58
 57
 115
 112
 58
 58
 117
 115
Fixed maturities, trading38
 30
 72
 61
 34
 38
 68
 72
Assets supporting experience-rated contractholder liabilities, at fair value182
 181
 367
 372
Equity securities, at fair value51
 59
 81
 94
Assets supporting experience-rated contractholder liabilities 164
 182
 348
 367
Equity securities 55
 51
 83
 81
Commercial mortgage and other loans627
 594
 1,227
 1,163
 618
 627
 1,258
 1,227
Policy loans152
 156
 303
 308
 150
 152
 303
 303
Other invested assets271
 163
 476
 304
 147
 271
 278
 476
Short-term investments and cash equivalents115
 82
 233
 154
 65
 115
 152
 233
Gross investment income4,644
 4,323
 9,112
 8,523
 4,358
 4,644
 8,786
 9,112
Less: investment expenses(254) (227) (506) (429) (172) (254) (398) (506)
Net investment income$4,390
 $4,096
 $8,606
 $8,094
 $4,186
 $4,390
 $8,388
 $8,606
__________ 
(1)Includes income on credit-linked notes which are reported on the same financial statement line item as related surplus notes, as conditions are met for right to offset.

Realized Investment Gains (Losses), Net
 
The following table sets forth “Realized investment gains (losses), net” by investment type, for the periods indicated:
 
Three Months Ended
June 30,
 Six Months Ended
June 30,
 Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 2018 2020 2019 2020 2019
(in millions) (in millions)
Fixed maturities(1)$69
 $165
 $329
 $243
 $112
 $69
 $270
 $329
Commercial mortgage and other loans4
 5
 14
 17
 2
 4
 24
 14
Investment real estate0
 60
 0
 62
 11
 0
 10
 0
LPs/LLCs2
 10
 (3) 16
 (3) 2
 (6) (3)
Derivatives(2)(411) 445
 (1,443) 773
 (3,881) (411) (2,389) (1,443)
Other0
 0
 1
 (1) 7
 0
 6
 1
Realized investment gains (losses), net$(336) $685
 $(1,102) $1,110
 $(3,752) $(336) $(2,085) $(1,102)
__________ 
(1)Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading.
(2)Includes the hedged items offset in qualifying fair value hedge accounting relationships.
 

Net Unrealized Gains (Losses) on Investments within AOCI

The following table sets forth net unrealized gains (losses) on investments, as of the dates indicated:

2327

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

June 30,
2019
 December 31,
2018
June 30,
2020
 December 31,
2019
(in millions)(in millions)
Fixed maturity securities, available-for-sale—with OTTI(1)$278
 $190
$                    N/A
 $243
Fixed maturity securities, available-for-sale—all other(1)42,548
 21,721
N/A
 44,279
Derivatives designated as cash flow hedges(1)1,017
 811
Other investments(2)(23) (2)
Fixed maturity securities, available-for-sale with an allowance(40) N/A
Fixed maturity securities, available-for-sale without an allowance54,410
 N/A
Derivatives designated as cash flow hedges(2)2,498
 832
Other investments(3)(2) (15)
Net unrealized gains (losses) on investments$43,820
 $22,720
$56,866
 $45,339
__________ 
(1)Effective January 1, 2020, per ASU 2016-13, fixed maturity securities, available-for-sale are no longer required to be disclosed “with OTTI” and “all other.”
(2)For moreadditional information on cash flow hedges, see Note 5.
(2)(3)As of June 30, 2019,2020, there were no0 net unrealized losses on held-to-maturity securities that were previously transferred from available-for-sale. Includes net unrealized gains on certain joint ventures that are strategic in nature and are included in “Other assets.”


Repurchase Agreements and Securities Lending

In the normal course of business, the Company sells securities under agreements to repurchase and enters into securities lending transactions. The following table sets forth the composition of “Securities sold under agreements to repurchase,” as of the dates indicated:

 June 30, 2019 December 31, 2018
 Remaining Contractual Maturities of the Agreements   Remaining Contractual Maturities of the Agreements  
  Overnight & Continuous Up to 30 Days Total  Overnight & Continuous Up to 30 Days Total
 (in millions)
U.S. Treasury securities and obligations of U.S.
government authorities and agencies(1)
$9,412
 $20
 $9,432
 $9,418
 $171
 $9,589
U.S. public corporate securities0
 0
 0
 19
 0
 19
Residential mortgage-backed securities(1)309
 0
 309
 342
 0
 342
Total securities sold under agreements to repurchase(1)(2)$9,721
 $20
 $9,741
 $9,779
 $171
 $9,950
 June 30, 2020 December 31, 2019
 Remaining Contractual Maturities of the Agreements   Remaining Contractual Maturities of the Agreements  
  Overnight & Continuous Up to 30 Days Total  Overnight & Continuous Up to 30 Days Total
 (in millions)
U.S. Treasury securities and obligations of U.S.
government authorities and agencies
$9,516
 $558
 $10,074
 $9,431
 $0
 $9,431
Residential mortgage-backed securities414
 0
 414
 250
 0
 250
Total securities sold under agreements to repurchase(1)$9,930
 $558
 $10,488
 $9,681
 $0
 $9,681
__________ 
(1)Prior period amounts have been updated to conform to current period presentation.
(2)The Company did not0t have any agreements with remaining contractual maturities ofgreater than thirty days, or greater, as of the dates indicated.



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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following table sets forth the composition of “Cash collateral for loaned securities,” which represents the liability to return cash collateral received for the following types of securities loaned, as of the dates indicated:

June 30, 2019 December 31, 2018June 30, 2020 December 31, 2019
Remaining Contractual Maturities of the Agreements   Remaining Contractual Maturities of the Agreements  Remaining Contractual Maturities of the Agreements   Remaining Contractual Maturities of the Agreements  
 Overnight & Continuous Up to 30 Days Total  Overnight & Continuous Up to 30 Days Total Overnight & Continuous Up to 30 Days Total  Overnight & Continuous Up to 30 Days Total
(in millions)(in millions)
U.S. Treasury securities and obligations of U.S.
government authorities and agencies
$80
 $0
 $80
 $105
 $0
 $105
$0
 $0
 $0
 $9
 $0
 $9
Obligations of U.S. states and their political
subdivisions
58
 0
 58
 88
 0
 88
101
 0
 101
 33
 0
 33
Foreign government bonds499
 0
 499
 325
 0
 325
381
 0
 381
 244
 0
 244
U.S. public corporate securities2,615
 0
 2,615
 2,563
 0
 2,563
2,375
 0
 2,375
 2,996
 0
 2,996
Foreign public corporate securities773
 0
 773
 693
 0
 693
536
 0
 536
 762
 0
 762
Commercial mortgage-backed securities2
 0
 2
 2
 0
 2
Equity securities210
 0
 210
 155
 0
 155
52
 0
 52
 167
 0
 167
Total cash collateral for loaned securities(1)$4,235
 $0
 $4,235
 $3,929
 $0
 $3,929
$3,447
 $0
 $3,447
 $4,213
 $0
 $4,213

__________ 
(1)The Company did not0t have any agreements with remaining contractual maturities ofgreater than thirty days, or greater, as of the dates indicated.


4. VARIABLE INTEREST ENTITIES
 
In the normal course of its activities, the Company enters into relationships with various special-purpose entities and other entities that are deemed to be variable interest entities (“VIEs”). For additional information, see Note 4 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
 
Consolidated Variable Interest Entities
 
The table below reflects the carrying amount and balance sheet caption in which the assets and liabilities of consolidated VIEs are reported. The liabilities primarily comprise obligations under debt instruments issued by the VIEs. The creditors of these VIEs do not have recourse to the Company in excess of the assets contained within the VIEs.
 
Consolidated VIEs for which the
Company is the Investment
Manager(1)
 Other Consolidated VIEs(1)
 June 30,
2019
 December 31,
2018
 June 30,
2019
 December 31,
2018
 (in millions)
Fixed maturities, available-for-sale$100
 $73
 $291
 $282
Fixed maturities, held-to-maturity97
 95
 846
 831
Fixed maturities, trading1,126
 1,076
 0
 0
Assets supporting experience-rated contractholder liabilities0
 0
 5
 8
Equity securities45
 41
 0
 0
Commercial mortgage and other loans763
 730
 0
 0
Other invested assets1,866
 1,526
 84
 77
Cash and cash equivalents166
 131
 0
 0
Accrued investment income5
 5
 4
 4
Other assets451
 463
 748
 721
Total assets of consolidated VIEs$4,619
 $4,140
 $1,978
 $1,923
Other liabilities$290
 $295
 $14
 $17
Notes issued by consolidated VIEs(2)1,246
 955
 0
 0
Total liabilities of consolidated VIEs$1,536
 $1,250
 $14
 $17


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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
Consolidated VIEs for which the
Company is the Investment
Manager(1)
 Other Consolidated VIEs(1)
 June 30,
2020
 December 31,
2019
 June 30,
2020
 December 31,
2019
 (in millions)
Fixed maturities, available-for-sale$99
 $104
 $284
 $285
Fixed maturities, held-to-maturity83
 83
 843
 839
Fixed maturities, trading1,043
 1,112
 0
 0
Assets supporting experience-rated contractholder liabilities0
 0
 2
 4
Equity securities29
 47
 0
 0
Commercial mortgage and other loans943
 883
 0
 0
Other invested assets2,379
 2,199
 151
 89
Cash and cash equivalents153
 166
 0
 0
Accrued investment income5
 4
 4
 4
Other assets422
 450
 663
 689
Total assets of consolidated VIEs$5,156
 $5,048
 $1,947
 $1,910
Other liabilities$386
 $304
 $15
 $13
Notes issued by consolidated VIEs(2)1,197
 1,274
 0
 0
Total liabilities of consolidated VIEs$1,583
 $1,578
 $15
 $13

 __________
(1)Total assets of consolidated VIEs reflect $2,323$2,742 million and $2,013$2,668 million as of June 30, 20192020 and December 31, 2018,2019, respectively, related to VIEs whose beneficial interests are wholly-owned by consolidated subsidiaries.
(2)
Recourse is limited to the assets of the respective VIE and does not extend to the general credit of the Company. As of June 30, 2019 and December 31, 2018,2020, the maturities of these obligations were greater than fivebetween 4 and 9 years.

 
Unconsolidated Variable Interest Entities
 
The Company has determined that it is not the primary beneficiary of certain VIEs for which it is the investment manager. The Company’s maximum exposure to loss resulting from its relationship with unconsolidated VIEs for which it is the investment manager is limited to its investment in the VIEs, which was $929$1,015 million and $836$1,021 million at June 30, 20192020 and December 31, 2018,2019, respectively. These investments are reflected in “Fixed maturities, available-for-sale,” “Fixed maturities, trading,” “Equity securities” and “Other invested assets.” There are no0 liabilities associated with these unconsolidated VIEs on the Company’s Unaudited Interim Consolidated Statements of Financial Position.
 
In the normal course of its activities, the Company will invest in limited partnerships and limited liability companies (“LPs/LLCs”), which include hedge funds, private equity funds and real estate-related funds and may or may not be VIEs. The Company’s maximum exposure to loss on these investments, both VIEs and non-VIEs, is limited to the amount of its investment. The Company classifies these investments as “Other invested assets” and its maximum exposure to loss associated with these entities was $10,182$11,356 million and $9,841$11,157 million as of June 30, 20192020 and December 31, 2018,2019, respectively.
 
In addition, in the normal course of its activities, the Company will invest in structured investments including VIEs for which it is not the investment manager. These structured investments typically invest in fixed income investments and are managed by third-parties and include asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities. The Company’s maximum exposure to loss on these structured investments, both VIEs and non-VIEs, is limited to the amount of its investment. See Note 3 for details regarding the carrying amounts and classification of these assets. The Company has not provided material financial or other support that was not contractually required to these structures. The Company has determined that it is not the primary beneficiary of these structures due to the fact that it does not control these entities.

5. DERIVATIVE INSTRUMENTS
 
Types of Derivative Instruments and Derivative Strategies

The Company utilizes various derivatives instruments and strategies to manage its risk. Commonly used derivative instruments include, but are not necessarily limited to:
Interest rate contracts: futures, swaps, forwards, options, swaptions, caps and floors
Equity contracts: futures, options and total return swaps

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Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Foreign exchange contracts: futures, options, forwards and swaps
Credit contracts: single and index reference credit default swaps

Other types of financial contracts that the Company accounts for as derivatives are:
To-be-announced (“TBA”) forward contracts, loan commitments, embedded derivatives and synthetic guaranteed investment contracts (“GICs”).

For detailed information on these contracts and the related strategies, see Note 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.

Primary Risks Managed by Derivatives
 
The table below provides a summary of the gross notional amount and fair value of derivatives contracts by the primary underlying risks, excluding embedded derivatives and associated reinsurance recoverables. Many derivative instruments contain multiple underlying risks. The fair value amounts below represent the value of derivative contracts prior to taking into account the netting effects of master netting agreements and cash collateral and non-performance risk (“NPR”).collateral. This netting impact results in total derivative assets of $1,043$1,644 million and $1,148$867 million as of June 30, 20192020 and December 31, 2018,2019, respectively, and total derivative liabilities of $557$684 million and $127$831 million as of June 30, 20192020 and December 31, 2018,2019, respectively, reflected in the Unaudited Interim Consolidated Statements of Financial Position.


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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Primary Underlying Risk /Instrument TypeJune 30, 2019 December 31, 2018June 30, 2020 December 31, 2019
 Fair Value   Fair Value  Fair Value   Fair Value
Gross Notional Assets Liabilities Gross Notional Assets LiabilitiesGross Notional Assets Liabilities Gross Notional Assets Liabilities
(in millions)(in millions)
Derivatives Designated as Hedge Accounting Instruments:                      
Interest Rate                      
Interest Rate Swaps$3,315
 $596
 $(78) $3,885
 $305
 $(67)$3,227
 $1,220
 $(105) $3,257
 $628
 $(73)
Interest Rate Forwards53
 1
 0
 600
 26
 0
202
 36
 (1) 205
 4
 (1)
Foreign Currency                      
Foreign Currency Forwards858
 34
 (2) 722
 26
 (2)2,155
 73
 (12) 1,461
 22
 (57)
Currency/Interest Rate                      
Foreign Currency Swaps21,245
 1,670
 (336) 20,724
 1,520
 (358)23,372
 3,049
 (59) 22,746
 1,467
 (302)
Total Derivatives Designated as Hedge Accounting Instruments$25,471
 $2,301
 $(416) $25,931
 $1,877
 $(427)$28,956
 $4,378
 $(177) $27,669
 $2,121
 $(433)
Derivatives Not Qualifying as Hedge Accounting Instruments:                      
Interest Rate                      
Interest Rate Swaps$138,186
 $9,604
 $(4,641) $140,963
 $5,792
 $(3,435)$153,866
 $22,286
 $(11,151) $141,162
 $10,249
 $(4,861)
Interest Rate Futures17,213
 3
 (7) 13,991
 23
 (2)17,326
 6
 (44) 17,095
 4
 (38)
Interest Rate Options20,798
 327
 (220) 24,002
 147
 (314)14,518
 1,813
 (267) 16,496
 339
 (238)
Interest Rate Forwards2,353
 21
 0
 5,049
 72
 0
2,745
 28
 0
 2,218
 18
 (3)
Foreign Currency               ��      
Foreign Currency Forwards24,444
 312
 (120) 19,849
 246
 (138)30,785
 308
 (235) 26,604
 208
 (214)
Foreign Currency Options1
 0
 0
 2
 0
 0
0
 0
 0
 0
 0
 0
Currency/Interest Rate                      
Foreign Currency Swaps14,066
 827
 (420) 13,784
 773
 (421)12,819
 1,243
 (337) 13,874
 740
 (345)
Credit                      
Credit Default Swaps3,165
 103
 (2) 5,207
 33
 (23)2,529
 20
 (17) 798
 21
 0
Equity                      
Equity Futures1,329
 0
 (5) 1,141
 0
 (8)7,243
 2
 (84) 1,802
 0
 (3)
Equity Options68,244
 570
 (792) 58,693
 384
 (554)45,519
 494
 (302) 32,657
 679
 (765)
Total Return Swaps17,945
 38
 (302) 17,309
 1,131
 (86)24,798
 184
 (1,071) 18,218
 6
 (636)
Other                      
Other(1)1,258
 0
 0
 508
 0
 0
1,260
 0
 0
 1,258
 0
 0
Synthetic GICs80,337
 1
 0
 79,215
 2
 0
82,325
 1
 0
 80,009
 1
 0
Total Derivatives Not Qualifying as Hedge Accounting Instruments$389,339
 $11,806
 $(6,509) $379,713
 $8,603
 $(4,981)$395,733
 $26,385
 $(13,508) $352,191
 $12,265
 $(7,103)
Total Derivatives(2)(3)$414,810
 $14,107
 $(6,925) $405,644
 $10,480
 $(5,408)$424,689
 $30,763
 $(13,685) $379,860
 $14,386
 $(7,536)
__________
(1)“Other” primarily includes derivative contracts used to improve the balance of the Company’s tail longevity and mortality risk. Under these contracts, the Company’s gains (losses) are capped at the notional amount.
(2)Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks. The fair value of these embedded derivatives was a net liability of $13,672$27,110 million and $8,959$14,035 million as of June 30, 20192020 and December 31, 2018,2019, respectively, primarily included in “Future policy benefits.”
(3)Recorded in “Other invested assets” and “Other liabilities” on the Unaudited Interim Consolidated Statements of Financial Position.


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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As of June 30, 2019,2020, the following amounts were recorded on the Unaudited Interim Consolidated Statements of Financial Position related to the carrying amount of the hedged assets (liabilities) and cumulative basis adjustments included in the carrying amount for fair value hedges.

June 30, 2020 December 31, 2019
Balance Sheet Line Item in which Hedged Item is RecordedCarrying Amount of the Hedged Assets (Liabilities) 
Cumulative Amount of
Fair Value Hedging Adjustment Included in the
Carrying Amount of the Hedged
Assets (Liabilities)(1)
Carrying Amount of the Hedged Assets (Liabilities) 
Cumulative Amount of
Fair Value Hedging Adjustment Included in the
Carrying Amount of the Hedged
Assets (Liabilities)(1)
 Carrying Amount of the Hedged Assets (Liabilities) Cumulative Amount of
Fair Value Hedging Adjustment Included in the
Carrying Amount of the Hedged
Assets (Liabilities)(1)
(in millions)(in millions)
Fixed maturities, available-for-sale, at fair value$441
 $62
$397
 $92
 $389
 $64
Commercial mortgage and other loans$24
 $2
$22
 $2
 $23
 $2
Policyholders’ account balances$(1,327) $(85)$(1,721) $(425) $(1,376) $(107)
Future policy benefits$(642) $(150)$(1,277) $(443) $(676) $(172)
__________________
(1)There arewere no material fair value hedging adjustments for hedged assets and liabilities for which hedge accounting has been discontinued.

Most of the Company’s derivatives do not qualify for hedge accounting for various reasons. For example: (i) derivatives that economically hedge embedded derivatives do not qualify for hedge accounting because changes in the fair value of the embedded derivatives are already recorded in net income; (ii) derivatives that are utilized as macro hedges of the Company’s exposure to various risks typically do not qualify for hedge accounting because they do not meet the criteria required under portfolio hedge accounting rules; and (iii) synthetic GICs, which are product standalone derivatives, do not qualify as hedging instruments under hedge accounting rules.


Offsetting Assets and Liabilities
 
The following table presents recognized derivative instruments (excluding embedded derivatives and associated reinsurance recoverables), and repurchase and reverse repurchase agreements that are offset in the Unaudited Interim Consolidated Statements of Financial Position, and/or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the Unaudited Interim Consolidated Statements of Financial Position.
 
June 30, 2019June 30, 2020
Gross
Amounts of
Recognized
Financial
Instruments
 
Gross
Amounts
Offset in the
Statements
of Financial
Position
 
Net
Amounts
Presented in
the Statements
of Financial
Position
 
Financial
Instruments/
Collateral(1)
 
Net
Amount
Gross
Amounts of
Recognized
Financial
Instruments
 
Gross
Amounts
Offset in the
Statements
of Financial
Position
 
Net
Amounts
Presented in
the Statements
of Financial
Position
 
Financial
Instruments/
Collateral(1)
 
Net
Amount
(in millions)(in millions)
Offsetting of Financial Assets:                  
Derivatives(1)$14,033
 $(13,063) $970
 $(633) $337
$30,611
 $(29,119) $1,492
 $(849) $643
Securities purchased under agreement to resell1,257
 0
 1,257
 (1,257) 0
2,355
 0
 2,355
 (2,355) 0
Total assets$15,290
 $(13,063) $2,227
 $(1,890) $337
$32,966
 $(29,119) $3,847
 $(3,204) $643
Offsetting of Financial Liabilities:                  
Derivatives(1)$6,913
 $(6,368) $545
 $(191) $354
$13,676
 $(13,001) $675
 $(40) $635
Securities sold under agreement to repurchase9,741
 0
 9,741
 (9,741) 0
10,488
 0
 10,488
 (10,488) 0
Total liabilities$16,654
 $(6,368) $10,286
 $(9,932) $354
$24,164
 $(13,001) $11,163
 $(10,528) $635
 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

December 31, 2018December 31, 2019
Gross
Amounts of
Recognized
Financial
Instruments
 
Gross
Amounts
Offset in the
Statements
of Financial
Position
 
Net
Amounts
Presented in
the Statements
of Financial
Position
 Financial
Instruments/
Collateral(1)
 
Net
Amount
Gross
Amounts of
Recognized
Financial
Instruments
 
Gross
Amounts
Offset in the
Statements
of Financial
Position
 
Net
Amounts
Presented in
the Statements
of Financial
Position
 Financial
Instruments/
Collateral(1)
 
Net
Amount
(in millions)(in millions)
Offsetting of Financial Assets:                  
Derivatives(1)$10,407
 $(9,331) $1,076
 $(614) $462
$14,303
 $(13,519) $784
 $(607) $177
Securities purchased under agreement to resell986
 0
 986
 (986) 0
1,012
 0
 1,012
 (1,012) 0
Total assets$11,393
 $(9,331) $2,062
 $(1,600) $462
$15,315
 $(13,519) $1,796
 $(1,619) $177
Offsetting of Financial Liabilities:                  
Derivatives(1)$5,387
 $(5,281) $106
 $(45) $61
$7,528
 $(6,705) $823
 $(244) $579
Securities sold under agreement to repurchase9,950
 0
 9,950
 (9,950) 0
9,681
 0
 9,681
 (9,681) 0
Total liabilities$15,337
 $(5,281) $10,056
 $(9,995) $61
$17,209
 $(6,705) $10,504
 $(9,925) $579
__________
(1)Amounts exclude the excess of collateral received/pledged from/to the counterparty.

For information regarding the rights of offset associated with the derivative assets and liabilities in the table above, see “—Counterparty Credit Risk” below. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company’s accounting policy for securities repurchase and resale agreements, see Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2018.2019.
 
Cash Flow, Fair Value Cash Flow and Net Investment Hedges
 
The primary derivative instruments used by the Company in its fair value, cash flow and net investment hedge accounting relationships are interest rate swaps, currency swaps and currency forwards. These instruments are only designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, equity or embeddedequity derivatives in any of its fair value, cash flow or net investment hedge accounting relationships.
 
The following table provides the financial statement classification and impact of derivatives used in qualifying and non-qualifying hedge relationships, including the offset of the hedged item in fair value hedge relationships.




















 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 Three Months Ended June 30, 2020
 Realized
Investment
Gains
(Losses)
 Net
Investment
Income
 Other
Income (Loss)
 Interest
Expense
 Interest
Credited to
Policyholders’
Account
Balances
 Policyholders’ Benefits AOCI(1)
 (in millions)
Derivatives Designated as Hedge Accounting Instruments:             
Fair value hedges             
Gains (losses) on derivatives designated as hedge instruments:             
Interest Rate$1
 $(2) $0
 $0
 $6
 $(1) $0
Currency0
 0
 0
 0
 0
 2
 0
Total gains (losses) on derivatives designated as hedge instruments1
 (2) 0
 0
 6
 1
 0
Gains (losses) on the hedged item:             
Interest Rate(1) 4
 0
 0
 5
 9
 0
Currency0
 0
 0
 0
 0
 (2) 0
Total gains (losses) on hedged item(1) 4
 0
 0
 5
 7
 0
Amortization for gains (losses) excluded from assessment of the effectiveness             
Currency0
 0
 0
 0
 0
 0
 (3)
Total Amortization for Gain (Loss) Excluded from Assessment of the Effectiveness0
 0
 0
 0
 0
 0
 (3)
Total gains (losses) on fair value hedges net of hedged item0
 2
 0
 0
 11
 8
 (3)
Cash flow hedges             
Interest Rate10
 0
 0
 0
 0
 0
 (8)
Currency2
 0
 0
 0
 0
 0
 (10)
Currency/Interest Rate49
 82
 (99) 0
 0
 0
 (669)
Total gains (losses) on cash flow hedges61
 82
 (99) 0
 0
 0
 (687)
Net investment hedges             
Currency0
 0
 0
 0
 0
 0
 (4)
Currency/Interest Rate0
 0
 0
 0
 0
 0
 0
Total gains (losses) on net investment hedges0
 0
 0
 0
 0
 0
 (4)
Derivatives Not Qualifying as Hedge Accounting Instruments:             
Interest Rate(232) 0
 0
 0
 0
 0
 0
Currency(103) 0
 0
 0
 0
 0
 0
Currency/Interest Rate(86) 0
 0
 0
 0
 0
 0
Credit(1) 0
 0
 0
 0
 0
 0
Equity(5,221) 0
 0
 0
 0
 0
 0
Other1
 0
 0
 0
 0
 0
 0
Embedded Derivatives1,702
 0
 0
 0
 0
 0
 0
Total gains (losses) on derivatives not qualifying as hedge accounting instruments(3,940) 0
 0
 0
 0
 0
 0
Total$(3,879) $84
 $(99) $0
 $11
 $8
 $(694)









35

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 Six Months Ended June 30, 2020
 Realized
Investment
Gains
(Losses)
 Net
Investment
Income
 Other
Income (Loss)
 Interest
Expense
 Interest
Credited to
Policyholders’
Account
Balances
 Policyholders’ Benefits AOCI(1)
 (in millions)
Derivatives Designated as Hedge Accounting Instruments:             
Fair value hedges             
Gains (losses) on derivatives designated as hedge instruments:             
Interest Rate$(29) $(4) $0
 $0
 $330
 $279
 $0
Currency2
 0
 0
 0
 0
 2
 0
Total gains (losses) on derivatives designated as hedge instruments(27) (4) 0
 0
 330
 281
 0
Gains (losses) on the hedged item:             
Interest Rate29
 9
 0
 0
 (318) (270) 0
Currency(1) 1
 0
 0
 0
 (2) 0
Total gains (losses) on hedged item28
 10
 0
 0
 (318) (272) 0
Amortization for gains (losses) excluded from assessment of the effectiveness             
Currency0
 0
 0
 0
 0
 0
 (3)
Total Amortization for Gain (Loss) Excluded from Assessment of the Effectiveness0
 0
 0
 0
 0
 0
 (3)
Total gains (losses) on fair value hedges net of hedged item1
 6
 0
 0
 12
 9
 (3)
Cash flow hedges             
Interest Rate8
 0
 0
 0
 0
 0
 44
Currency4
 0
 0
 0
 0
 0
 91
Currency/Interest Rate67
 160
 193
 0
 0
 0
 1,531
Total gains (losses) on cash flow hedges79
 160
 193
 0
 0
 0
 1,666
Net investment hedges             
Currency0
 0
 0
 0
 0
 0
 10
Currency/Interest Rate0
 0
 0
 0
 0
 0
 0
Total gains (losses) on net investment hedges0
 0
 0
 0
 0
 0
 10
Derivatives Not Qualifying as Hedge Accounting Instruments:             
Interest Rate8,992
 0
 0
 0
 0
 0
 0
Currency230
 0
 (7) 0
 0
 0
 0
Currency/Interest Rate731
 0
 2
 0
 0
 0
 0
Credit(42) 0
 0
 0
 0
 0
 0
Equity216
 0
 0
 0
 0
 0
 0
Other1
 0
 0
 0
 0
 0
 0
Embedded Derivatives(12,593) 0
 0
 0
 0
 0
 0
Total gains (losses) on derivatives not qualifying as hedge accounting instruments(2,465) 0
 (5) 0
 0
 0
 0
Total$(2,385) $166
 $188
 $0
 $12
 $9
 $1,673







36

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 Three Months Ended June 30, 2019
 Realized
Investment
Gains
(Losses)
 Net
Investment
Income
 Other
Income (Loss)
 Interest
Expense
 Interest
Credited to
Policyholders’
Account
Balances
 Policyholders’ Benefits AOCI(1)
 (in millions)
Derivatives Designated as Hedge Accounting Instruments:             
Fair value hedges             
Gains (losses) on derivatives designated as hedge instruments:             
Interest Rate$(9) $(2) $0
 $0
 $101
 $80
 $0
Currency2
 0
 0
 0
 0
 0
 0
Total gains (losses) on derivatives designated as hedge instruments(7) (2) 0
 0
 101
 80
 0
Gains (losses) on the hedged item:             
Interest Rate9
 5
 0
 0
 (98) (73) 0
Currency(1) 1
 0
 0
 0
 0
 0
Total gains (losses) on hedged item8
 6
 0
 0
 (98) (73) 0
Total gains (losses) on fair value hedges net of hedged item1
 4
 0
 0
 3
 7
 0
Cash flow hedges             
Interest Rate0
 0
 0
 0
 0
 0
 (1)
Currency1
 0
 0
 0
 0
 0
 14
Currency/Interest Rate47
 69
 40
 0
 0
 0
 229
Total gains (losses) on cash flow hedges48
 69
 40
 0
 0
 0
 242
Net investment hedges             
Currency0
 0
 0
 0
 0
 0
 1
Currency/Interest Rate0
 0
 0
 0
 0
 0
 0
Total gains (losses) on net investment hedges0
 0
 0
 0
 0
 0
 1
Derivatives Not Qualifying as Hedge Accounting Instruments:             
Interest Rate2,346
 0
 0
 0
 0
 0
 0
Currency122
 0
 (5) 0
 0
 0
 0
Currency/Interest Rate20
 0
 0
 0
 0
 0
 0
Credit36
 0
 0
 0
 0
 0
 0
Equity(617) 0
 0
 0
 0
 0
 0
Other0
 0
 0
 0
 0
 0
 0
Embedded Derivatives(2,368) 0
 0
 0
 0
 0
 0
Total gains (losses) on derivatives not qualifying as hedge accounting instruments(461) 0
 (5) 0
 0
 0
 0
Total$(412) $73
 $35
 $0
 $3
 $7
 $243


30






37

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 Six Months Ended June 30, 2019
 Realized
Investment
Gains
(Losses)
 Net
Investment
Income
 Other
Income (Loss)
 Interest
Expense
 Interest
Credited to
Policyholders’
Account
Balances
 Policyholders’ Benefits AOCI(1)
 (in millions)
Derivatives Designated as Hedge Accounting Instruments:             
Fair value hedges             
Gains (losses) on derivatives designated as hedge instruments:             
Interest Rate$(15) $(4) $0
 $0
 $168
 $131
 $0
Currency1
 0
 0
 0
 0
 0
 0
Total gains (losses) on derivatives designated as hedge instruments(14) (4) 0
 0
 168
 131
 0
Gains (losses) on the hedged item:             
Interest Rate11
 11
 0
 0
 (164) (119) 0
Currency0
 2
 0
 0
 0
 0
 0
Total gains (losses) on hedged item11
 13
 0
 0
 (164) (119) 0
Total gains (losses) on fair value hedges net of hedged item(3) 9
 0
 0
 4
 12
 0
Cash flow hedges             
Interest Rate(1) 0
 0
 0
 0
 0
 22
Currency2
 0
 0
 0
 0
 0
 5
Currency/Interest Rate40
 137
 (6) 0
 0
 0
 170
Total gains (losses) on cash flow hedges41
 137
 (6) 0
 0
 0
 197
Net investment hedges             
Currency0
 0
 0
 0
 0
 0
 2
Currency/Interest Rate0
 0
 0
 0
 0
 0
 0
Total gains (losses) on net investment hedges0
 0
 0
 0
 0
 0
 2
Derivatives Not Qualifying as Hedge Accounting Instruments:             
Interest Rate3,734
 0
 0
 0
 0
 0
 0
Currency84
 0
 0
 0
 0
 0
 0
Currency/Interest Rate204
 0
 0
 0
 0
 0
 0
Credit104
 0
 0
 0
 0
 0
 0
Equity(2,427) 0
 0
 0
 0
 0
 0
Other0
 0
 0
 0
 0
 0
 0
Embedded Derivatives(3,180) 0
 0
 0
 0
 0
 0
Total gains (losses) on derivatives not qualifying as hedge accounting instruments(1,481) 0
 0
 0
 0
 0
 0
Total$(1,443) $146
 $(6) $0
 $4
 $12
 $199



31

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 Three Months Ended June 30, 2018(2)
 Realized
Investment
Gains
(Losses)
 Net
Investment
Income
 Other
Income (Loss)
 Interest
Expense
 Interest
Credited to
Policyholders’
Account
Balances
 AOCI(1)
 (in millions)
Derivatives Designated as Hedge Accounting Instruments:           
Fair value hedges           
Gains (losses) on derivatives designated as hedge instruments:           
Interest Rate$5
 $(2) $0
 $0
 $(28) $0
Currency1
 0
 0
 0
 0
 0
Total gains (losses) on derivatives designated as hedge instruments6
 (2) 0
 0
 (28) 0
Gains (losses) on the hedged item:           
Interest Rate(5) 5
 0
 0
 29
 0
Currency(1) 1
 0
 0
 0
 0
Total gains (losses) on hedged item(6) 6
 0
 0
 29
 0
Total gains (losses) on fair value hedges net of hedged item0
 4
 0
 0
 1
 0
Cash flow hedges           
Interest Rate2
 0
 0
 0
 0
 (1)
Currency3
 0
 0
 0
 0
 18
Currency/Interest Rate33
 52
 209
 0
 0
 704
Total gains (losses) on cash flow hedges38
 52
 209
 0
 0
 721
Net investment hedges           
Currency2
 0
 0
 0
 0
 5
Currency/Interest Rate0
 0
 0
 0
 0
 0
Total gains (losses) on net investment hedges2
 0
 0
 0
 0
 5
Derivatives Not Qualifying as Hedge Accounting Instruments:           
Interest Rate(434) 0
 0
 0
 0
 0
Currency(133) 0
 (1) 0
 0
 0
Currency/Interest Rate573
 0
 2
 0
 0
 0
Credit(1) 0
 0
 0
 0
 0
Equity(258) 0
 0
 0
 0
 0
Other(1) 0
 0
 0
 0
 0
Embedded Derivatives658
 0
 0
 0
 0
 0
Total gains (losses) on derivatives not qualifying as hedge accounting instruments404
 0
 1
 0
 0
 0
Total$444
 $56
 $210
 $0
 $1
 $726

32

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 Six Months Ended June 30, 2018(2)
 Realized
Investment
Gains
(Losses)
 Net
Investment
Income
 Other
Income (Loss)
 Interest
Expense
 Interest
Credited to
Policyholders’
Account
Balances
 AOCI(1)
 (in millions)
Derivatives Designated as Hedge Accounting Instruments:           
Fair value hedges           
Gains (losses) on derivatives designated as hedge instruments:           
Interest Rate$22
 $(6) $0
 $0
 $(111) $0
Currency3
 0
 0
 0
 0
 0
Total gains (losses) on derivatives designated as hedge instruments25
 (6) 0
 0
 (111) 0
Gains (losses) on the hedged item:           
Interest Rate(24) 19
 0
 0
 115
 0
Currency(3) 2
 0
 0
 0
 0
Total gains (losses) on hedged item(27) 21
 0
 0
 115
 0
Total gains (losses) on fair value hedges net of hedged item(2) 15
 0
 0
 4
 0
Cash flow hedges           
Interest Rate2
 0
 0
 (1) 0
 6
Currency0
 0
 0
 0
 0
 9
Currency/Interest Rate27
 100
 118
 0
 0
 123
Total gains (losses) on cash flow hedges29
 100
 118
 (1) 0
 138
Net investment hedges           
Currency0
 0
 0
 0
 0
 3
Currency/Interest Rate0
 0
 0
 0
 0
 0
Total gains (losses) on net investment hedges0
 0
 0
 0
 0
 3
Derivatives Not Qualifying as Hedge Accounting Instruments:           
Interest Rate(1,949) 0
 0
 0
 0
 0
Currency279
 0
 0
 0
 0
 0
Currency/Interest Rate25
 0
 1
 0
 0
 0
Credit(5) 0
 0
 0
 0
 0
Equity(248) 0
 0
 0
 0
 0
Other(1) 0
 0
 0
 0
 0
Embedded Derivatives2,637
 0
 0
 0
 0
 0
Total gains (losses) on derivatives not qualifying as hedge accounting instruments738
 0
 1
 0
 0
 0
Total$765
 $115
 $119
 $(1) $4
 $141
_________
(1)Net change in AOCI.
(2)Prior period amounts have been updated to conform to current period presentation.


 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:  
(in millions)(in millions)
Balance, December 31, 2018$811
Cumulative-effect adjustment from the adoption of ASU 2017-12(1)9
Balance, December 31, 2019$832
Amount recorded in AOCI  
Interest Rate21
52
Currency7
95
Currency/Interest Rate341
1,951
Total amount recorded in AOCI369
2,098
Amount reclassified from AOCI to income  
Interest Rate1
(8)
Currency(2)(4)
Currency/Interest Rate(171)(420)
Total amount reclassified from AOCI to income(172)(432)
Balance, June 30, 2019$1,017
Balance, June 30, 2020$2,498

_________
(1)See Note 2 for details.

The changes in fair value of cash flow hedges are deferred in AOCI and are included in “Net unrealized investment gains (losses)” in the Unaudited Interim Consolidated Statements of Comprehensive Income; these amounts are then reclassified to earnings when the hedged item affects earnings. Using June 30, 20192020 values, it is estimated that a pre-tax gain of approximately $251$328 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending June 30, 2020, offset by amounts pertaining to the hedged items.2021.

The exposures the Company is hedging with these qualifying cash flow hedges include the variability of future cash flows from forecasted transactions denominated in foreign currencies, the purchases of invested assets, and the receipt or payment of variable interest on existing financial instruments. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions is 510 years.

There were no material amounts reclassified from AOCI into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging. In addition, there were no instances in which the Company discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.

For effective net investment hedges, the amounts, before applicable taxes, recorded in the cumulative translation adjustment within AOCI were $534$546 million and $532$536 million as of June 30, 20192020 and December 31, 2018,2019, respectively. 

Credit Derivatives
 
Credit derivatives, whereThe following table provides a summary of the Company hasnotional and fair value of written credit protection on a single name reference, had outstanding notional amounts of $100 million and $110 million as of June 30, 2019 and December 31, 2018, respectively. These credit derivatives are reported at fair value as an asset of $1 million as of both June 30, 2019 and December 31, 2018. As of June 30, 2019, the notional amount of these credit derivatives had the following NAIC ratings: $36 million in NAIC 1; $60 million in NAIC 2; and $4 million in NAIC 3. The Company has also written credit protection on certain index references with notional amounts of $2,984 million and $4,953 million as of June 30, 2019 and December 31, 2018, respectively. These credit derivatives are reported at fair value as an asset of $100 million and $10 million as of June 30, 2019 and December 31, 2018, respectively. As of June 30, 2019, the notional amount of these credit derivatives had the following NAIC ratings: $51 million in NAIC 1; $1,908 million in NAIC 3; and $1,025 million NAIC 6. NAIC designations are based on the lowest rated single name reference included in the index.
protection. The Company’s maximum amount at risk under these credit derivatives, equals the aforementioned notional amounts and assumesassuming the value of the underlying referenced securities become worthless. The single nameworthless, is equal to the notional amounts. These credit derivatives have maturities of less than 21 year and less than 27 years while thefor single name and index references, have maturitiesrespectively.

 June 30, 2020
 NAIC Rating Designation of Underlying Credit Obligation(1)
 NAIC 1NAIC 2NAIC 3NAIC 4NAIC 5NAIC 6Total
 Gross NotionalFair ValueGross NotionalFair ValueGross NotionalFair ValueGross NotionalFair ValueGross NotionalFair ValueGross NotionalFair ValueGross NotionalFair Value
 (in millions)
Single name reference(2)$48
$0
$48
$0
$4
$0
$0
$0
$0
$0
$0
$0
$100
$0
Index reference(2)50
1
0
0
0
0
1,940
13
0
0
0
0
1,990
14
Total$98
$1
$48
$0
$4
$0
$1,940
$13
$0
$0
$0
$0
$2,090
$14


39

Table of less than 43 years.Contents
PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 December 31, 2019
 NAIC Rating Designation of Underlying Credit Obligation(1)
 NAIC 1NAIC 2NAIC 3NAIC 4NAIC 5NAIC 6Total
 Gross NotionalFair ValueGross NotionalFair ValueGross NotionalFair ValueGross NotionalFair ValueGross NotionalFair ValueGross NotionalFair ValueGross NotionalFair Value
 (in millions)
Single name reference(2)$36
$0
$60
$1
$4
$0
$0
$0
$0
$0
$0
$0
$100
$1
Index reference(2)50
0
0
0
570
13
0
0
0
0
72
7
692
20
Total$86
$0
$60
$1
$574
$13
$0
$0
$0
$0
$72
$7
$792
$21
_________
(1)The NAIC rating designations are based on availability and the lowest ratings among Moody's Investors Service, Inc. ("Moody's"), Standard & Poor’s Rating Services (“S&P”) and Fitch Ratings Inc. (“Fitch”). If no rating is available from a rating agency, a NAIC 6 rating is used.
(2)Single name credit default swaps may reference to the credit of corporate debt, sovereign debt, and structured finance. Index references NAIC designations are based on the lowest rated single name reference included in the index.

In addition to writing credit protection, the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. As of June 30, 20192020 and December 31, 2018,2019, the Company had $82$440 million and $145$6 million of outstanding notional amounts and reported at fair value as a liability of $0$10 million and $1$0 million, respectively. 

Counterparty Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial derivative transactions with a positive fair value. The Company manages credit risk by: (i) entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties governed by master netting agreements, as applicable; (ii) trading through central clearing and over-the-counter (“OTC”) parties; (iii) obtaining collateral, such as cash and securities, when appropriate; and (iv) setting limits on single party credit exposures which are subject to periodic management review.

Substantially all of the Company’s derivative agreements have zero thresholds which require daily full collateralization by the party in a liability position. In addition, certain of the Company’s derivative agreements contain credit-risk related contingent features; if the credit rating of one of the parties to the derivative agreement is to fall below a certain level, the party with positive fair value could request termination at the then fair value or demand immediate full collateralization from the party whose credit rating fell and is in a net liability position.

As of June 30, 2019,2020, there were no net liability derivative positions with counterparties with credit risk-related contingent features; as such, allfeatures. All derivatives have been appropriately collateralized by the Company or the counterparty in accordance with the terms of the derivative agreements.


6. FAIR VALUE OF ASSETS AND LIABILITIES
 
Fair Value Measurement—Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative fair value guidance establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
 
Level 1—Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities.

Level 2—Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, and other market observable inputs.
 

40

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 Level 3—Fair value is based on at least one significant unobservable input for the asset or liability. The assets and liabilities in this category may require significant judgment or estimation in determining the fair value.

For a discussion of Company’s valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 6 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.

 Assets and Liabilities by Hierarchy Level—The tables below present the balances of assets and liabilities reported at fair value on a recurring basis, as of the dates indicated.

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Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As of June 30, 2019As of June 30, 2020
Level 1 Level 2 Level 3 Netting(1) TotalLevel 1 Level 2 Level 3 Netting(1) Total
(in millions)(in millions)
Fixed maturities, available-for-sale:                  
U.S. Treasury securities and obligations of U.S. government authorities and agencies$0
 $34,361
 $94
 $ $34,455
$0
 $42,899
 $122
 $ $43,021
Obligations of U.S. states and their political subdivisions0
 11,198
 4
   11,202
0
 12,394
 4
   12,398
Foreign government bonds0
 121,058
 24
   121,082
0
 116,749
 21
   116,770
U.S. corporate public securities0
 93,402
 116
   93,518
0
 106,181
 436
   106,617
U.S. corporate private securities(2)0
 33,213
 1,765
   34,978
0
 36,305
 1,854
   38,159
Foreign corporate public securities0
 30,240
 71
   30,311
0
 29,033
 85
   29,118
Foreign corporate private securities0
 25,928
 840
   26,768
0
 25,794
 2,529
   28,323
Asset-backed securities(3)0
 11,937
 798
   12,735
0
 13,246
 690
   13,936
Commercial mortgage-backed securities0
 15,109
 45
   15,154
0
 16,262
 0
   16,262
Residential mortgage-backed securities0
 3,169
 18
   3,187
0
 3,229
 111
   3,340
Subtotal0
 379,615
 3,775
   383,390
0
 402,092
 5,852
   407,944
Assets supporting experience-rated contractholder liabilities:                  
U.S. Treasury securities and obligations of U.S. government authorities and agencies0
 192
 0
   192
0
 208
 0
   208
Obligations of U.S. states and their political subdivisions0
 210
 0
   210
0
 229
 0
   229
Foreign government bonds0
 844
 26
   870
0
 784
 24
   808
Corporate securities0
 13,077
 553
   13,630
0
 13,566
 624
   14,190
Asset-backed securities(3)0
 1,569
 57
   1,626
0
 1,673
 99
   1,772
Commercial mortgage-backed securities0
 2,297
 0
   2,297
0
 1,921
 0
   1,921
Residential mortgage-backed securities0
 1,014
 0
   1,014
0
 1,200
 0
   1,200
Equity securities1,360
 272
 1
   1,633
1,444
 239
 0
   1,683
All other(4)0
 365
 1
   366
360
 548
 7
   915
Subtotal1,360
 19,840
 638
   21,838
1,804
 20,368
 754
��  22,926
Fixed maturities, trading0
 3,459
 296
   3,755
0
 3,697
 236
   3,933
Equity securities5,212
 831
 624
   6,667
5,249
 1,030
 594
   6,873
Commercial mortgage and other loans0
 645
 0
   645
0
 682
 0
   682
Other invested assets(5)4
 14,101
 436
 (13,063) 1,478
69
 30,693
 658
 (29,119) 2,301
Short-term investments1,888
 2,450
 288
   4,626
2,685
 6,247
 44
   8,976
Cash equivalents778
 7,138
 1
   7,917
4,653
 5,439
 1
   10,093
Other assets0
 0
 98
   98
0
 0
 377
   377
Separate account assets(6)(7)44,622
 232,742
 1,708
   279,072
47,429
 228,772
 1,684
   277,885
Total assets$53,864
 $660,821
 $7,864
 $(13,063) $709,486
$61,889
 $699,020
 $10,200
 $(29,119) $741,990
Future policy benefits(8)$0
 $0
 $12,723
 $ $12,723
$0
 $0
 $26,439
 $ $26,439
Policyholders’ account balances0
 0
 1,047
   1,047
0
 0
 1,441
   1,441
Other liabilities13
 6,912
 0
 (6,368) 557
130
 13,163
 0
 (13,001) 292
Notes issued by consolidated VIEs0
 0
 816
   816
0
 0
 741
   741
Total liabilities$13
 $6,912
 $14,586
 $(6,368) $15,143
$130
 $13,163
 $28,621
 $(13,001) $28,913
 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As of December 31, 2018As of December 31, 2019
Level 1 Level 2 Level 3 Netting(1) TotalLevel 1 Level 2 Level 3 Netting(1) Total
(in millions)(in millions)
Fixed maturities, available-for-sale:                  
U.S. Treasury securities and obligations of U.S. government authorities and agencies$0
 $30,513
 $81
 $ $30,594
$0
 $35,554
 $105
 $ $35,659
Obligations of U.S. states and their political subdivisions0
 10,488
 5
   10,493
0
 11,493
 4
   11,497
Foreign government bonds0
 112,985
 125
   113,110
0
 119,032
 22
   119,054
U.S. corporate public securities0
 83,282
 133
   83,415
0
 97,959
 380
   98,339
U.S. corporate private securities(2)0
 31,265
 1,755
   33,020
0
 34,749
 1,784
   36,533
Foreign corporate public securities0
 29,148
 53
   29,201
0
 29,756
 69
   29,825
Foreign corporate private securities0
 23,787
 744
   24,531
0
 27,237
 1,003
   28,240
Asset-backed securities(3)0
 11,726
 1,247
   12,973
0
 12,238
 936
   13,174
Commercial mortgage-backed securities0
 13,302
 13
   13,315
0
 15,574
 0
   15,574
Residential mortgage-backed securities0
 2,925
 79
   3,004
0
 3,189
 12
   3,201
Subtotal0
 349,421
 4,235
   353,656
0
 386,781
 4,315
   391,096
Assets supporting experience-rated contractholder liabilities:                  
U.S. Treasury securities and obligations of U.S. government authorities and agencies0
 381
 0
   381
0
 185
 0
   185
Obligations of U.S. states and their political subdivisions0
 196
 0
   196
0
 212
 0
   212
Foreign government bonds0
 858
 225
   1,083
0
 790
 24
   814
Corporate securities0
 12,675
 444
   13,119
0
 12,966
 637
   13,603
Asset-backed securities(3)0
 1,516
 149
   1,665
0
 1,593
 69
   1,662
Commercial mortgage-backed securities0
 2,324
 0
   2,324
0
 1,896
 0
   1,896
Residential mortgage-backed securities0
 811
 0
   811
0
 1,158
 0
   1,158
Equity securities1,222
 237
 1
   1,460
1,505
 285
 0
   1,790
All other(4)0
 215
 0
   215
0
 261
 0
   261
Subtotal1,222
 19,213
 819
   21,254
1,505
 19,346
 730
   21,581
Fixed maturities, trading0
 3,037
 206
   3,243
0
 3,597
 287
   3,884
Equity securities4,819
 610
 671
   6,100
5,813
 939
 633
   7,385
Commercial mortgage and other loans0
 763
 0
   763
0
 228
 0
   228
Other invested assets(5)23
 10,454
 263
 (9,331) 1,409
6
 14,379
 567
 (13,519) 1,433
Short-term investments2,713
 2,691
 89
   5,493
1,806
 1,975
 155
   3,936
Cash equivalents2,848
 6,553
 77
   9,478
2,079
 6,796
 131
   9,006
Other assets0
 0
 25
   25
0
 0
 113
   113
Separate account assets(6)(7)39,534
 212,998
 1,534
   254,066
46,574
 240,433
 1,717
   288,724
Total assets$51,159
 $605,740
 $7,919
 $(9,331) $655,487
$57,783
 $674,474
 $8,648
 $(13,519) $727,386
Future policy benefits(8)$0
 $0
 $8,926
 $ $8,926
$0
 $0
 $12,831
 $ $12,831
Policyholders’ account balances0
 0
 56
   56
0
 0
 1,316
   1,316
Other liabilities18
 5,398
 0
 (5,281) 135
41
 7,495
 105
 (6,705) 936
Notes issued by consolidated VIEs0
 0
 595
   595
0
 0
 800
   800
Total liabilities$18
 $5,398
 $9,577
 $(5,281) $9,712
$41
 $7,495
 $15,052
 $(6,705) $15,883
__________
(1)“Netting” amounts represent cash collateral of $6,695$16,118 million and $4,050$6,814 million as of June 30, 20192020 and December 31, 2018, respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting arrangements.2019, respectively.
(2)Excludes notes with fair value of $4,356$6,466 million (carrying amount of $4,356$6,466 million) and $4,216$4,757 million (carrying amount of $4,216$4,751 million) as of June 30, 20192020 and December 31, 2018,2019, respectively, which have been offset with the associated payables under a netting agreement.
(3)Includes credit-tranched securities collateralized by syndicated bank loans, sub-prime mortgages, auto loans, credit cards, education loans and other asset types.
(4)All other represents cash equivalents and short-term investments.

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(5)Other invested assets excluded from the fair value hierarchy include certain hedge funds, private equity funds and other funds for which fair value is measured at net asset value (“NAV”) per share (or its equivalent) as a practical expedient. As of June 30, 20192020 and December 31, 2018,2019, the fair values of such investments were $4,089$3,979 million and $4,115$4,213 million respectively.

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(6)Separate account assets included in the fair value hierarchy exclude investments in entities that calculate NAV per share (or its equivalent) as a practical expedient. Such investments excluded from the fair value hierarchy include investments in real estate, hedge funds and other invested assets. As of June 30, 20192020 and December 31, 2018,2019, the fair value of such investments was $24,508$23,117 million and $25,070$23,557 million, respectively.
(7)Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Unaudited Interim Consolidated Statements of Financial Position.
(8)As of June 30, 2019,2020, the net embedded derivative liability position of $12.7$26.4 billion includes $0.6$0.3 billion of embedded derivatives in an asset position and $13.3$26.7 billion of embedded derivatives in a liability position. As of December 31, 2018,2019, the net embedded derivative liability position of $8.9$12.8 billion includes $0.7 billion of embedded derivatives in an asset position and $9.6$13.5 billion of embedded derivatives in a liability position.

Quantitative Information Regarding Internally-Priced Level 3 Assets and Liabilities—The tables below present quantitative information on significant internally-priced Level 3 assets and liabilities.
 As of June 30, 2019As of June 30, 2020
 Fair Value 
Valuation
Techniques
 Unobservable Inputs Minimum Maximum 
Weighted
Average
 
Impact of
Increase in
Input on
Fair
Value(1)
Fair Value 
Valuation
Techniques
 Unobservable Inputs Minimum Maximum 
Weighted
Average
 
Impact of
Increase in
Input on
Fair
Value(1)
 (in millions) (in millions) 
Assets:     
Corporate securities(2) $1,441
 
Discounted 
cash flow
 Discount rate 0.36%-20% 8.37% Decrease$3,382
 
Discounted 
cash flow(4)
 Discount rate 0.56% 30% 5.31% Decrease
   Market comparables EBITDA multiples(3) 4.5X-9.2X 7.0X Increase  Market comparables EBITDA multiples(3) 6.5X 15.0X 9.3X Increase
   Liquidation Liquidation value 3.98%-100% 58.42% Increase  Liquidation Liquidation value 14.98% 92.79% 67.50% Increase
Separate account assets-commercial mortgage loans(4) $860
 
Discounted
cash flow
 Spread 1.06%-2.44% 1.21% Decrease
Equity securities$185
 Discounted cash flow(4) Discount rate 10% 30% Decrease
  Market comparables EBITDA multiples(3) 1X 9.0X 1.7X Increase
  Net Asset Value Share price $1 $1,414 $450 Increase
Separate account assets-commercial mortgage loans(5)$803
 
Discounted
cash flow
 Spread 1.83% 3.18% 2.05% Decrease
Liabilities:     
Future policy benefits(5) $12,723
 
Discounted
cash flow
 Lapse rate(7) 1%-18% Decrease
Future policy benefits(6)$26,439
 
Discounted
cash flow
 Lapse rate(8) 1% 20% Decrease
   Spread over LIBOR(8) 0.16%-1.24% Decrease  Spread over LIBOR(9) 0.17% 1.69% Decrease
   Utilization rate(9) 43%-97% Increase  Utilization rate(10) 39% 96% Increase
   Withdrawal rate See table footnote (10) below.  Withdrawal rate See table footnote (11) below.
   Mortality rate(11) 0%-15% Decrease  Mortality rate(12) 0% 15% Decrease
     Equity volatility curve 13%-23%   Increase    Equity volatility curve 18% 29%   Increase
Policyholders’ account balances(6) $1,047
 
Discounted
cash flow
 Lapse rate(7) 1%-42% Decrease
Policyholders’ account balances(7)$1,441
 
Discounted
cash flow
 Lapse rate(8) 1% 42% Decrease
   Spread over LIBOR(8) 0.16%-1.24% Decrease  Spread over LIBOR(9) 0.17% 1.69% Decrease
   Mortality rate(11) 0%-24% Decrease  Mortality rate(12) 0% 24% Decrease
   Equity volatility curve 10%-23% Increase  Equity volatility curve 6% 38% Increase
 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 As of December 31, 2018As of December 31, 2019
 Fair Value 
Valuation
Techniques
 Unobservable Inputs Minimum Maximum 
Weighted
Average
 
Impact of
Increase in
Input on
Fair
Value(1)
Fair Value 
Valuation
Techniques
 Unobservable Inputs Minimum Maximum 
Weighted
Average
 
Impact of
Increase in
Input on
Fair
Value(1)
 (in millions) (in millions) 
Assets:     
Corporate securities(2) $1,392
 
Discounted 
cash flow
 Discount rate 0.57%-20% 8.58% Decrease$1,424
 
Discounted 
cash flow(4)
 Discount rate 0.49% 20% 7.41% Decrease
   Market comparables EBITDA multiples(3) 4.5X-8.5X 8.1X Increase  Market comparables EBITDA multiples(3) 5.7X
9.2X 7.3X Increase
   Liquidation Liquidation value 11.77%-94% 32.16% Increase  Liquidation Liquidation value 14.25% 83.61% 59.47% Increase
Separate account assets-commercial mortgage loans(4) $785
 
Discounted
cash flow
 Spread 1.12%-2.55% 1.29% Decrease
Equity securities$210
 Discounted cash flow(4) Discount rate 10% 30% Decrease
  Market comparables EBITDA multiples(3) 1X 10.1X 5.4X Increase
  Net Asset Value Share price $5 $1,353 $451 Increase
Separate account assets-commercial mortgage loans(5)$796
 
Discounted
cash flow
 Spread 1.11% 1.85% 1.26% Decrease
Liabilities:     
Future policy benefits(5) $8,926
 
Discounted
cash flow
 Lapse rate(7) 1%-13% Decrease
Future policy benefits(6)$12,831
 
Discounted
cash flow
 Lapse rate(8) 1% 18% Decrease
   Spread over LIBOR(8) 0.36%-1.60% Decrease  Spread over LIBOR(9) 0.10% 1.23% Decrease
   Utilization rate(9) 50%-97% Increase  Utilization rate(10) 43% 97% Increase
   Withdrawal rate See table footnote (10) below.  Withdrawal rate See table footnote (11) below.
   Mortality rate(11) 0%-15% Decrease  Mortality rate(12) 0% 15% Decrease
     Equity volatility curve 18%-22%   Increase    Equity volatility curve 13% 23%   Increase
Policyholders’ account balances(7)$1,316
 
Discounted
cash flow
 Lapse rate(8) 1% 42% Decrease
  Spread over LIBOR(9) 0.10% 1.23% Decrease
  Mortality rate(12) 0% 24% Decrease
  Equity volatility curve 6% 25% Increase
__________ 
(1)Conversely, the impact of a decrease in input would have the opposite impact on fair value as that presented in the table.
(2)Includes assets classified as fixed maturities available-for-sale, assets supporting experience-rated contractholder liabilities and fixed maturities trading.
(3)Represents multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”), and are amounts used when the Company has determined that market participants would use such multiples when valuing the investments.
(4)These investments typically use a range of discount rates (10% to 20%), therefore presenting a range, rather than a weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.
(5)Changes in the fair value of separate account assets are borne by customers and thus are offset by changes in separate account liabilities on the Company’s Unaudited Interim Consolidated Statements of Financial Position. As a result, changes in value associated with these investments are not reflected in the Company’s Unaudited Interim Consolidated Statements of Operations.
(5)(6)Future policy benefits primarily represent general account liabilities for the living benefit features of the Company’s variable annuity contracts which are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.
(6)(7)Policyholders’ account balances primarily represent general account liabilities for the index-linked interest credited on certain of the Company’s life and annuity products that are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(7)(8)Lapse rates for contracts with living benefit guarantees are adjusted at the contract level based on the in-the-moneyness of the living benefit and reflect other factors, such as the applicability of any surrender charges. Lapse rates are reduced when contracts are more in-the-money. Lapse rates for contracts with index-linked crediting guarantees may be adjusted at the contract level based on the applicability of any surrender charges, product type, and market related factors such as interest rates. Lapse rates are also generally assumed to be lower for the period where surrender charges apply. For any given contract, lapse rates vary throughout the period over which cash flows are projected for the purposes of valuing these embedded derivatives.
(8)(9)The spread over the London Inter-Bank Offered Rate (“LIBOR”) swap curve represents the premium added to the proxy for the risk-free rate (LIBOR) to reflect the Company’s estimates of rates that a market participant would use to value the living benefits in both the accumulation and payout phases and index-linked interest crediting guarantees. This spread includes an estimate of NPR, which is the risk that the obligation will not be fulfilled by the Company. NPR is primarily estimated by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium. In order to reflect the financial strength ratings of the Company, credit spreads associated with funding agreements, as opposed to credit spread associated with debt, are utilized in developing this estimate because funding agreements, living benefit guarantees, and index-linked interest crediting guarantees are insurance liabilities and are therefore senior to debt.
(9)(10)The utilization rate assumption estimates the percentage of contracts that will utilize the benefit during the contract duration and begin lifetime withdrawals at various time intervals from contract inception. The remaining contractholders are assumed to either begin lifetime withdrawals immediately or never utilize the benefit. Utilization assumptions may vary by product type, tax status and age. The impact of changes in these assumptions is highly dependent on the product type, the age of the contractholder at the time of the sale and the timing of the first lifetime income withdrawal. Range reflects the utilization rate for the vast majority of business with living benefits.
(10)(11)The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These assumptions vary based on the age of the contractholder, the tax status of the contract and the duration since the contractholder began lifetime withdrawals. As of June 30, 20192020 and December 31, 2018,2019, the minimum withdrawal rate assumption is 76% and 78% respectively. As of June 30, 2020 and December 31, 2019, the maximum withdrawal rate assumption may be greater than 100%. The fair value of the liability will generally increase the closer the withdrawal rate is to 100% and decrease as the withdrawal rate moves further away from 100%.

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Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(11)(12)The range reflects the mortality rates for the vast majority of business with living benefits and other contracts, with policyholders ranging from 45 to 90 years old. While the majority of living benefits have a minimum age requirement, certain other contracts do not have an age restriction. This results in contractholders with mortality rates approaching 0% for certain benefits. Mortality rates may vary by product, age, and duration. A mortality improvement assumption is also incorporated into the overall mortality table.

Interrelationships Between Unobservable InputsIn addition to the sensitivities of fair value measurements to changes in each unobservable input in isolation, as reflected in the table above, interrelationships between these inputs may also exist, such that a change in one unobservable input may give rise to a change in another or multiple inputs. For the discussionExamples of the relationships between unobservable inputs as well as market factors that may affect the range of inputs used in the valuation ofsuch interrelationships for significant internally-priced Level 3 assets and liabilities see Note 6are as follows:

Corporate Securities—The rate used to discount future cash flows reflects current risk-free rates plus credit and liquidity spread requirements that market participants would use to value an asset. The discount rate may be influenced by many factors, including market cycles, expectations of default, collateral, term, and asset complexity. Each of these factors can influence discount rates, either in isolation, or in response to other factors. During weaker economic cycles, as the expectations of default increases, credit spreads widen, which results in a decrease in fair value.

Asset-Backed Securities—Interrelationships may exist between the prepayment rate, the default rate and/or loss severity, depending on specific market conditions. In stronger economic cycles, prepayment rates are generally driven by overall market interest rates and accompanied by lower default rates and loss severity. During weaker economic cycles, prepayments may decline, as default rates and loss severity increase. Additionally, the impact of these factors on average life varies with the structure and subordination. Generally, a change in the assumption used for the probability of default would have been accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.

Future Policy Benefits—The Company expects efficient benefit utilization and withdrawal rates to generally be correlated with lapse rates. However, behavior is highly dependent on the facts and circumstances surrounding the individual contractholder, such as their liquidity needs or tax situation, which could drive lapse behavior independent of other contractholder behavior assumptions. To the extent that more efficient contractholder behavior results in greater in-the-moneyness at the contract level, lapse rates may decline for those contracts. Similarly, to the Consolidated Financial Statements includedextent that increases in equity volatility are correlated with overall declines in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.capital markets, lapse rates may decline as contracts become more in-the-money.

Changes in Level 3 Assets and Liabilities—The following tables describe changes in fair values of Level 3 assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods. When a determination is made to classify assets and liabilities within Level 3, the determination is based on significance of the unobservable inputs in the overall fair value measurement. All transfers are based on changes in the observability of the valuation inputs, including the availability of pricing service information that the Company can validate. All transfersTransfers into Level 3 are generally reported at the valueresult of unobservable inputs utilized within valuation methodologies and the use of indicative broker quotes for assets that were previously valued using observable inputs. Transfers out of Level 3 are generally due to the use of observable inputs in valuation methodologies as well as the availability of pricing service information for certain assets that the beginning of the quarter in which transfers occur for any such assets still held at the end of the quarter.Company can validate.

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


 Three Months Ended June 30, 2020
 Fair Value, beginning of periodTotal realized and unrealized gains (losses)PurchasesSalesIssuancesSettlementsOther(1)
Transfers into
Level 3
Transfers out of Level 3Fair Value, end of periodUnrealized gains (losses) for assets still held(2)
 (in millions)
Fixed maturities, available-for-sale:           
U.S. government$115
$0
$7
$0
$0
$0
$0
$0
$0
$122
$0
U.S. states4
0
0
0
0
0
0
0
0
4
0
Foreign government21
0
0
0
0
0
0
1
(1)21
(1)
Corporate securities(3)4,496
318
125
(5)0
(95)0
196
(131)4,904
316
Structured securities(4)948
4
73
0
0
(197)0
80
(107)801
11
Assets supporting experience-rated contractholder liabilities:           
Foreign government24
0
0
0
0
0
0
0
0
24
0
Corporate securities(3)603
19
0
1
0
(20)0
29
(8)624
17
Structured securities(4)177
2
39
0
0
(6)0
0
(113)99
2
Equity securities0
0
0
0
0
0
0
0
0
0
0
All other activity7
0
0
0
0
0
0
0
0
7
0
Other assets:           
Fixed maturities, trading249
(1)4
(26)0
0
10
0
0
236
(1)
Equity securities594
(14)19
(5)0
0
0
0
0
594
(16)
Other invested assets581
(4)54
0
4
(3)26
0
0
658
3
Short-term investments53
0
1
0
0
0
(10)0
0
44
0
Cash equivalents1
0
0
0
0
0
0
0
0
1
0
Other assets382
(24)19
0
0
0
0
0
0
377
(22)
Separate account assets(5)1,528
114
48
(8)0
(15)0
26
(9)1,684
112
Liabilities:           
Future policy benefits(27,935)1,820
0
0
(322)0
(2)0
0
(26,439)1,565
Policyholders’ account balances(6)(1,206)(134)0
0
(101)0
0
0
0
(1,441)(127)
Other liabilities(47)47
0
0
0
0
0
0
0
0
47
Notes issued by consolidated VIEs(799)58
0
0
0
0
0
0
0
(741)59

 Three Months Ended June 30, 2020
 Total realized and unrealized gains (losses) Unrealized gains (losses) for assets still held(2)
 Realized investment gains (losses), netOther income (loss)Interest credited to policyholders’ account balancesIncluded in other comprehensive income (loss)Net investment income Realized investment gains (losses), netOther income (loss)Interest credited to policyholders’ account balancesIncluded in other comprehensive income (loss)(7)
 (in millions)
Fixed maturities, available-for-sale$(88)$0
$0
$407
$3
 $(80)$0
$0
406
Assets supporting experience-rated contractholder liabilities0
18
0
0
3
 0
19
0
0
Other assets:          
Fixed maturities, trading0
(2)0
0
1
 0
(1)0
0
Equity securities0
(14)0
0
0
 0
(16)0
0
Other invested assets0
(4)0
0
0
 7
(4)0
0
Short-term investments0
0
0
0
0
 0
0
0
0
Cash equivalents0
0
0
0
0
 0
0
0
0
Other assets(24)0
0
0
0
 (22)0
0
0
Separate account assets(5)0
0
114
0
0
 0
0
112
0
Liabilities:          
Future policy benefits1,820
0
0
0
0
 1,565
0
0
0
Policyholders’ account balances(134)0
0
0
0
 (127)0
0
0
Other liabilities0
47
0
0
0
 0
47
0
0
Notes issued by consolidated VIEs(1)59
0
0
0
 0
59
0
0

47

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


 Six Months Ended June 30, 2020
 Fair Value, beginning of periodTotal realized and unrealized gains (losses)PurchasesSalesIssuancesSettlementsOther(1)
Transfers into
Level 3
Transfers out of Level 3Fair Value, end of periodUnrealized gains (losses) for assets still held(2)
 (in millions)
Fixed maturities, available-for-sale:           
U.S. government$105
$0
$17
$0
$0
$0
$0
$0
$0
$122
$0
U.S. states4
0
0
0
0
0
0
0
0
4
0
Foreign government22
(1)0
0
0
0
0
1
(1)21
(1)
Corporate securities(3)3,236
(182)419
(118)0
(330)1
2,023
(145)4,904
(175)
Structured securities(4)948
(3)388
(17)0
(297)155
92
(465)801
(4)
Assets supporting experience-rated contractholder liabilities:           
Foreign government24
0
0
0
0
0
0
0
0
24
0
Corporate securities(3)637
(27)4
(9)0
(65)0
92
(8)624
(27)
Structured securities(4)69
(2)155
0
0
(10)0
0
(113)99
2
Equity securities0
0
0
0
0
0
0
0
0
0
0
All other activity0
0
7
0
0
0
0
0
0
7
0
Other assets:           
Fixed maturities, trading287
(16)22
(32)0
0
8
15
(48)236
(16)
Equity securities633
(58)28
(10)0
0
1
0
0
594
(60)
Other invested assets567
4
81
0
4
(4)6
0
0
658
5
Short-term investments155
2
44
0
0
(110)(47)0
0
44
0
Cash equivalents131
0
0
0
0
0
(130)0
0
1
0
Other assets113
228
36
0
0
0
0
0
0
377
229
Separate account assets(5)1,717
(26)104
(21)0
(33)0
33
(90)1,684
(17)
Liabilities:           
Future policy benefits(12,831)(12,969)0
0
(641)0
2
0
0
(26,439)(13,183)
Policyholders’ account balances(6)(1,316)72
0
0
(197)0
0
0
0
(1,441)63
Other liabilities(105)105
0
0
0
0
0
0
0
0
104
Notes issued by consolidated VIEs(800)59
0
0
0
0
0
0
0
(741)59

 Six Months Ended June 30, 2020
 Total realized and unrealized gains (losses) Unrealized gains (losses) for assets still held(2)
 Realized investment gains (losses), netOther income (loss)Interest credited to policyholders’ account balancesIncluded in other comprehensive income (loss)Net investment income Realized investment gains (losses), netOther income (loss)Interest credited to policyholders’ account balancesIncluded in other comprehensive income (loss)(7)
 (in millions)
Fixed maturities, available-for-sale$(115)$0
$0
$(76)$5
 $(106)$0
$0
$(74)
Assets supporting experience-rated contractholder liabilities0
(29)0
0
0
 0
(25)0
0
Other assets:          
Fixed maturities, trading0
(17)0
0
1
 0
(16)0
0
Equity securities0
(58)0
0
0
 0
(60)0
0
Other invested assets0
4
0
0
0
 1
4
0
0
Short-term investments2
0
0
0
0
 0
0
0
0
Cash equivalents0
0
0
0
0
 0
0
0
0
Other assets228
0
0
0
0
 229
0
0
0
Separate account assets(5)0
0
(26)0
0
 0
0
(17)0
Liabilities:          
Future policy benefits(12,969)0
0
0
0
 (13,183)0
0
0
Policyholders’ account balances72
0
0
0
0
 63
0
0
0
Other liabilities0
105
0
0
0
 0
104
0
0
Notes issued by consolidated VIEs0
59
0
0
0
 0
59
0
0

48

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


 Three Months Ended June 30, 2019
 Fair Value, beginning of periodTotal realized and unrealized gains (losses)PurchasesSalesIssuancesSettlementsOther(1)
Transfers into
Level 3
Transfers out of Level 3Fair Value, end of periodUnrealized gains (losses) for assets still held(2)
 (in millions)
Fixed maturities, available-for-sale:           
U.S. government$88
$0
$6
$0
$0
$0
$0
$0
$0
$94
$0
U.S. states4
0
0
0
0
0
0
0
0
4
0
Foreign government138
(1)0
0
0
0
(2)0
(111)24
0
Corporate securities(3)2,757
6
288
(17)0
(225)1
19
(37)2,792
(5)
Structured securities(4)1,915
8
113
(47)0
(101)9
17
(1,053)861
0
Assets supporting experience-rated contractholder liabilities:           
Foreign government29
0
0
0
0
(3)0
0
0
26
0
Corporate securities(3)592
5
14
0
0
(67)0
10
(1)553
11
Structured securities(4)60
1
0
0
0
(4)0
0
0
57
1
Equity securities1
1
0
(1)0
0
0
0
0
1
0
All other activity0
0
3
0
0
(2)0
0
0
1
0
Other assets:           
Fixed maturities, trading240
(7)36
(13)0
0
1
39
0
296
(7)
Equity securities674
16
23
(13)0
(59)6
1
(24)624
15
Other invested assets373
0
61
0
0
0
2
0
0
436
0
Short-term investments168
0
273
0
0
(153)0
0
0
288
0
Cash equivalents1
0
0
0
0
0
0
0
0
1
0
Other assets48
42
8
0
0
0
0
0
0
98
41
Separate account assets(5)1,635
44
139
(6)0
(27)0
0
(77)1,708
41
Liabilities:           
Future policy benefits(10,025)(2,400)0
0
(298)0
0
0
0
(12,723)(2,503)
Policyholders’ account balances(6)(146)(828)0
0
(73)0
0
0
0
(1,047)(821)
Other liabilities0
0
0
0
0
0
0
0
0
0
0
Notes issued by consolidated VIEs(817)1
0
0
0
0
0
0
0
(816)1

Three Months Ended June 30, 2019Three Months Ended June 30, 2019
Total realized and unrealized gains (losses) Unrealized gains (losses) for assets still held(2)Total realized and unrealized gains (losses) Unrealized gains (losses) for assets still held(2)
Realized investment gains (losses), netOther incomeInterest credited to policyholders’ account balancesIncluded in other comprehensive income (losses)Net investment income Realized investment gains (losses), netOther incomeInterest credited to policyholders’ account balancesRealized investment gains (losses), netOther income (loss)Interest credited to policyholders’ account balancesIncluded in other comprehensive income (loss)Net investment income Realized investment gains (losses), netOther income (loss)Interest credited to policyholders’ account balances
(in millions)(in millions)
Fixed maturities, available-for-sale$(11)$0
$0
$18
$6
 $(5)$0
$0
$(11)$0
$0
$18
$6
 $(5)$0
$0
Assets supporting experience-rated contractholder liabilities0
6
0
0
1
 0
12
0
0
6
0
0
1
 0
12
0
Other assets:      
Fixed maturities, trading0
(8)0
0
1
 0
(7)0
0
(8)0
0
1
 0
(7)0
Equity securities0
16
0
0
0
 0
15
0
0
16
0
0
0
 0
15
0
Other invested assets0
0
0
0
0
 0
0
0
0
0
0
0
0
 0
0
0
Short-term investments0
0
0
0
0
 0
0
0
0
0
0
0
0
 0
0
0
Cash equivalents0
0
0
0
0
 0
0
0
0
0
0
0
0
 0
0
0
Other assets42
0
0
0
0
 41
0
0
42
0
0
0
0
 41
0
0
Separate account assets(5)0
0
43
0
1
 0
0
41
0
0
43
0
1
 0
0
41
Liabilities:      
Future policy benefits(2,400)0
0
0
0
 (2,503)0
0
(2,400)0
0
0
0
 (2,503)0
0
Policyholders’ account balances(828)0
0
0
0
 (821)0
0
(828)0
0
0
0
 (821)0
0
Other liabilities0
0
0
0
0
 0
0
0
0
0
0
0
0
 0
0
0
Notes issued by consolidated VIEs1
0
0
0
0
 1
0
0
1
0
0
0
0
 1
0
0

4149

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


 Six Months Ended June 30, 2019
 Fair Value, beginning of periodTotal realized and unrealized gains (losses)PurchasesSalesIssuancesSettlementsOther(1)
Transfers into
Level 3
Transfers out of Level 3Fair Value, end of periodUnrealized gains (losses) for assets still held(2)
 (in millions)
Fixed maturities, available-for-sale:           
U.S. government$81
$0
$13
$0
$0
$0
$0
$0
$0
$94
$0
U.S. states5
0
0
0
0
(1)0
0
0
4
0
Foreign government125
2
0
0
0
0
(1)9
(111)24
0
Corporate securities(3)2,685
10
607
(29)0
(604)(1)183
(59)2,792
(26)
Structured securities(4)1,339
25
431
(47)0
(332)7
750
(1,312)861
0
Assets supporting experience-rated contractholder liabilities:           
Foreign government225
0
0
0
0
(3)(196)0
0
26
0
Corporate securities(3)444
10
41
0
0
(143)196
10
(5)553
6
Structured securities(4)149
1
6
0
0
(25)0
0
(74)57
1
Equity securities1
1
0
(1)0
0
0
0
0
1
1
All other activity0
0
3
0
0
(2)0
0
0
1
0
Other assets:           
Fixed maturities, trading206
(11)74
(14)0
0
3
39
(1)296
(7)
Equity securities671
24
46
(24)0
(74)4
1
(24)624
22
Other invested assets263
(1)218
0
0
(42)(2)0
0
436
(1)
Short-term investments89
0
426
0
0
(227)0
0
0
288
0
Cash equivalents77
0
1
0
0
(77)0
0
0
1
0
Other assets25
56
17
0
0
0
0
0
0
98
55
Separate account assets(5)1,534
125
228
(17)0
(50)0
0
(112)1,708
115
Liabilities:           
Future policy benefits(8,926)(3,210)0
0
(588)0
1
0
0
(12,723)(3,364)
Policyholders’ account balances(6)(56)(879)0
0
(109)0
(3)0
0
(1,047)(872)
Other liabilities0
0
0
0
0
0
0
0
0
0
0
Notes issued by consolidated VIEs(595)(1)0
0
(858)638
0
0
0
(816)(1)

Six Months Ended June 30, 2019Six Months Ended June 30, 2019
Total realized and unrealized gains (losses) Unrealized gains (losses) for assets still held(2)Total realized and unrealized gains (losses) Unrealized gains (losses) for assets still held(2)
Realized investment gains (losses), netOther income (loss)Interest credited to policyholders’ account balancesIncluded in other comprehensive income (losses)Net investment income Realized investment gains (losses), netOther income (loss)Interest credited to policyholders’ account balancesRealized investment gains (losses), netOther income (loss)Interest credited to policyholders’ account balancesIncluded in other comprehensive income (loss)Net investment income Realized investment gains (losses), netOther income (loss)Interest credited to policyholders’ account balances
(in millions)(in millions)
Fixed maturities, available-for-sale$(13)$0
$0
$40
$10
 $(26)$0
$0
$(13)$0
$0
$40
$10
 $(26)$0
$0
Assets supporting experience-rated contractholder liabilities0
9
0
0
3
 0
8
0
0
9
0
0
3
 0
8
0
Other assets:      
Fixed maturities, trading0
(12)0
0
1
 0
(7)0
0
(12)0
0
1
 0
(7)0
Equity securities0
24
0
0
0
 0
22
0
0
24
0
0
0
 0
22
0
Other invested assets(1)0
0
0
0
 (1)0
0
(1)0
0
0
0
 (1)0
0
Short-term investments0
0
0
0
0
 0
0
0
0
0
0
0
0
 0
0
0
Cash equivalents0
0
0
0
0
 0
0
0
0
0
0
0
0
 0
0
0
Other assets56
0
0
0
0
 55
0
0
56
0
0
0
0
 55
0
0
Separate account assets(5)0
0
123
0
2
 0
0
115
0
0
123
0
2
 0
0
115
Liabilities:      
Future policy benefits(3,210)0
0
0
0
 (3,364)0
0
(3,210)0
0
0
0
 (3,364)0
0
Policyholders’ account balances(879)0
0
0
0
 (872)0
0
(879)0
0
0
0
 (872)0
0
Other liabilities0
0
0
0
0
 0
0
0
0
0
0
0
0
 0
0
0
Notes issued by consolidated VIEs(1)0
0
0
0
 (1)0
0
(1)0
0
0
0
 (1)0
0

42

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


 Three Months Ended June 30, 2018
 Fair Value, beginning of periodTotal realized and unrealized gains (losses)PurchasesSalesIssuancesSettlementsOther(1)
Transfers into
Level 3
Transfers out of Level 3Fair Value, end of periodUnrealized gains (losses) for assets still held(2)
 (in millions)
Fixed maturities, available-for-sale:           
U.S. government$59
$0
$8
$0
$0
$0
$0
$0
$0
$67
$0
U.S. states5
0
0
0
0
0
0
0
0
5
0
Foreign government128
(2)0
0
0
0
(4)15
0
137
0
Corporate securities(3)2,735
(29)257
(3)0
(286)(31)69
(21)2,691
(21)
Structured securities(4)6,899
(9)441
(278)0
(668)(24)62
(4,759)1,664
0
Assets supporting experience-rated contractholder liabilities:           
Foreign government220
4
0
0
0
(3)0
0
0
221
2
Corporate securities(3)468
(10)41
0
0
(51)0
40
0
488
(10)
Structured securities(4)664
(2)16
0
0
(129)0
5
(447)107
(1)
Equity securities5
0
0
(1)0
0
0
0
0
4
0
All other activity7
0
24
0
0
(26)0
0
0
5
0
Other assets:           
Fixed maturities, trading204
5
9
(38)0
(3)(2)1
(3)173
0
Equity securities785
(12)35
(15)0
(2)(11)3
0
783
(15)
Other invested assets144
(4)0
(12)0
0
(6)0
0
122
(3)
Short-term investments10
0
8
0
0
(14)(3)0
0
1
0
Cash equivalents0
0
9
0
0
(7)0
0
0
2
0
Other assets0
0
0
0
0
0
0
0
0
0
0
Separate account assets(5)2,360
22
253
(14)0
(140)0
29
(694)1,816
21
Liabilities:           
Future policy benefits(6,981)683
0
0
(287)0
0
0
0
(6,585)612
Policyholders’ account balances(6)(40)(8)0
0
0
6
0
0
0
(42)(8)
Other liabilities(16)(10)8
0
0
0
0
0
0
(18)(10)
Notes issued by consolidated VIEs(612)3
0
0
0
0
0
0
0
(609)3

 Three Months Ended June 30, 2018
 Total realized and unrealized gains (losses) Unrealized gains (losses) for assets still held(2)
 Realized investment gains (losses), netOther income (loss)Interest credited to policyholders’ account balancesIncluded in other comprehensive income (losses)Net investment income Realized investment gains (losses), netOther income (loss)Interest credited to policyholders’ account balances
 (in millions)
Fixed maturities, available-for-sale$(19)$0
$0
$(25)$4
 $(21)$0
$0
Assets supporting experience-rated contractholder liabilities0
(11)0
0
3
 0
(9)0
Other assets:         
Fixed maturities, trading1
4
0
0
0
 0
0
0
Equity securities0
(12)0
0
0
 0
(15)0
Other invested assets(4)0
0
0
0
 (3)0
0
Short-term investments0
0
0
0
0
 0
0
0
Cash equivalents0
0
0
0
0
 0
0
0
Other assets0
0
0
0
0
 0
0
0
Separate account assets(5)0
0
22
0
0
 0
0
21
Liabilities:         
Future policy benefits683
0
0
0
0
 612
0
0
Policyholders’ account balances(8)0
0
0
0
 (8)0
0
Other liabilities(10)0
0
0
0
 (10)0
0
Notes issued by consolidated VIEs3
0
0
0
0
 3
0
0

43

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


 Six Months Ended June 30, 2018
 Fair Value, beginning of periodTotal realized and unrealized gains (losses)PurchasesSalesIssuancesSettlementsOther(1)Transfers into Level 3Transfers out of Level 3Fair Value, end of periodUnrealized gains (losses) for assets still held(2)
 (in millions)
Fixed maturities, available-for-sale:           
U.S. government$52
$0
$15
$0
$0
$0
$0
$0
$0
$67
$0
U.S. states5
0
0
0
0
0
0
0
0
5
0
Foreign government148
(2)0
0
0
0
(3)20
(26)137
0
Corporate securities(3)2,776
(18)375
(4)0
(455)(19)129
(93)2,691
(30)
Structured securities(4)6,715
(24)1,989
(344)0
(1,317)6
1,133
(6,494)1,664
0
Assets supporting experience-rated contractholder liabilities:           
Foreign government223
1
0
0
0
(3)0
0
0
221
(2)
Corporate securities(3)462
(9)65
0
0
(69)0
40
(1)488
(9)
Structured securities(4)722
(2)19
0
0
(142)0
33
(523)107
(1)
Equity securities4
1
0
(1)0
0
0
0
0
4
1
All other activity7
0
43
0
0
(45)0
0
0
5
0
Other assets:           
Fixed maturities, trading156
3
49
(42)0
(3)3
12
(5)173
4
Equity securities795
2
42
(32)0
(39)15
3
(3)783
(1)
Other invested assets137
4
1
(12)0
0
(8)0
0
122
2
Short-term investments8
(1)22
0
0
(26)(2)0
0
1
(1)
Cash equivalents0
0
9
0
0
(7)0
0
0
2
0
Other assets13
(13)0
0
0
0
0
0
0
0
(13)
Separate account assets(5)2,122
(11)490
(22)0
(261)0
224
(726)1,816
(5)
Liabilities:           
Future policy benefits(8,720)2,709
0
0
(574)0
0
0
0
(6,585)2,529
Policyholders’ account balances(6)(47)(3)0
0
0
8
0
0
0
(42)(3)
Other liabilities(3)(34)18
0
0
0
1
0
0
(18)(33)
Notes issued by consolidated VIEs(1,196)0
0
0
0
0
587
0
0
(609)0

 Six Months Ended June 30, 2018
 Total realized and unrealized gains (losses) Unrealized gains (losses) for assets still held(2)
 Realized investment gains (losses), netOther income (loss)Interest credited to policyholders’ account balancesIncluded in other comprehensive income (losses)Net investment income Realized investment gains (losses), netOther income (loss)Interest credited to policyholders’ account balances
 (in millions)
Fixed maturities, available-for-sale$(13)$0
$0
$(39)$8
 $(30)$0
$0
Assets supporting experience-rated contractholder liabilities0
(13)0
0
4
 0
(11)0
Other assets:         
Fixed maturities, trading1
2
0
0
0
 0
4
0
Equity securities0
2
0
0
0
 0
(1)0
Other invested assets4
0
0
0
0
 2
0
0
Short-term investments(1)0
0
0
0
 (1)0
0
Cash equivalents0
0
0
0
0
 0
0
0
Other assets(13)0
0
0
0
 (13)0
0
Separate account assets(5)0
0
(11)0
0
 0
0
(5)
Liabilities:         
Future policy benefits2,709
0
0
0
0
 2,529
0
0
Policyholders’ account balances(3)0
0
0
0
 (3)0
0
Other liabilities(34)0
0
0
0
 (33)0
0
Notes issued by consolidated VIEs0
0
0
0
0
 0
0
0

4450

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

__________
(1)“Other,” for the periods ended June 30, 20192020 and June 30, 2018,2019, primarily represent deconsolidation of VIE, reclassifications of certain assets between reporting categories and foreign currency translation.
(2)Unrealized gains or losses related to assets still held at the end of the period do not include amortization or accretion of premiums and discounts.
(3)Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities.
(4)Includes asset-backed, commercial mortgage-backed and residential mortgage-backed securities.
(5)Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Unaudited Interim Consolidated Statements of Financial Position.
(6)Issuances and settlements for Policyholders’ account balances are presented net in the rollforward. Prior year amounts are restated
(7)
Effective January 1, 2020, the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period were added prospectively due to conformadoption of ASU 2018-13. Fair Value Measurement (Topic 820): Disclosure Framework - Changes to current year presentation.the Disclosure Requirements for Fair Value Measurement.

Derivative Fair Value Information
 
The following tables present the balances of derivative assets and liabilities measured at fair value on a recurring basis, as of the date indicated, by primary underlying risk. These tables include NPR and exclude embedded derivatives and associated reinsurance recoverables. The derivative assets and liabilities shown below are included in “Other invested assets” or “Other liabilities” in the tables contained within the sections “—Assets and Liabilities by Hierarchy Level” and “—Changes in Level 3 Assets and Liabilities,” above.
As of June 30, 2019As of June 30, 2020
Level 1 Level 2 Level 3 Netting(1) TotalLevel 1 Level 2 Level 3 Netting(1) Total
(in millions)(in millions)
Derivative Assets:      
Interest Rate$3
 $10,548
 $1
 $ $10,552
$6
 $25,383
 $1
 $ $25,390
Currency0
 346
 0
   346
0
 381
 0
   381
Credit0
 103
 0
   103
0
 20
 0
   20
Currency/Interest Rate0
 2,497
 0
   2,497
0
 4,292
 0
   4,292
Equity1
 607
 0
   608
63
 617
 0
   680
Other0
 0
 0
   0
0
 0
 0
   0
Netting(1)      (13,063) (13,063)      (29,119) (29,119)
Total derivative assets$4
 $14,101
 $1
 $(13,063) $1,043
$69
 $30,693
 $1
 $(29,119) $1,644
Derivative Liabilities:                  
Interest Rate$8
 $4,938
 $0
 $ $4,946
$44
 $11,524
 $0
 $ $11,568
Currency0
 122
 0
   122
0
 247
 0
   247
Credit0
 2
 0
   2
0
 17
 0
   17
Currency/Interest Rate0
 756
 0
   756
0
 396
 0
   396
Equity5
 1,094
 0
   1,099
84
 1,373
 0
   1,457
Other0
 0
 0
   0
0
 0
 0
   0
Netting(1)      (6,368) (6,368)      (13,001) (13,001)
Total derivative liabilities$13
 $6,912
 $0
 $(6,368) $557
$128
 $13,557
 $0
 $(13,001) $684


4551

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As of December 31, 2018As of December 31, 2019
Level 1 Level 2 Level 3 Netting(1) TotalLevel 1 Level 2 Level 3 Netting(1) Total
(in millions)(in millions)
Derivative Assets:      
Interest Rate$23
 $6,341
 $2
 $ $6,366
$4
 $11,238
 $1
 $ $11,243
Currency0
 273
 0
   273
0
 230
 0
   230
Credit0
 33
 0
   33
0
 21
 0
   21
Currency/Interest Rate0
 2,292
 0
   2,292
0
 2,207
 0
   2,207
Equity0
 1,515
 0
   1,515
2
 683
 0
   685
Other0
 0
 0
   0
0
 0
 0
   0
Netting(1)

 

 

 (9,331) (9,331)

 

 

 (13,519) (13,519)
Total derivative assets$23
 $10,454
 $2
 $(9,331) $1,148
$6
 $14,379
 $1
 $(13,519) $867
Derivative Liabilities:                  
Interest Rate$2
 $3,818
 $0
 $ $3,820
$38
 $5,176
 $0
 $ $5,214
Currency0
 140
 0
   140
0
 271
 0
   271
Credit0
 23
 0
   23
0
 0
 0
   0
Currency/Interest Rate0
 778
 0
   778
0
 647
 0
   647
Equity7
 640
 0
   647
3
 1,401
 0
   1,404
Other0
 0
 0
   0
0
 0
 0
   0
Netting(1)

 

 

 (5,281) (5,281)

 

 

 (6,705) (6,705)
Total derivative liabilities$9
 $5,399
 $0
 $(5,281) $127
$41
 $7,495
 $0
 $(6,705) $831
__________ 
(1)“Netting” amounts represent cash collateral and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting agreement.

Changes in Level 3 derivative assets and liabilities—The following tables provide a summary of the changes in fair value of Level 3 derivative assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income, attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods.


Three Months Ended June 30, 2019Three Months Ended June 30, 2020
Fair Value, beginning of periodTotal realized and unrealized gains (losses)(1)PurchasesSalesIssuancesSettlementsOtherTransfers into
Level 3(2)
Transfers out of Level 3(2)Fair Value, end of periodUnrealized gains (losses) for assets still held(1)Fair Value, beginning of periodTotal realized and unrealized gains (losses)(1)PurchasesSalesIssuancesSettlementsOtherTransfers into
Level 3(2)
Transfers out of Level 3(2)Fair Value, end of periodUnrealized gains (losses) for assets still held(1)
(in millions)(in millions)
Net Derivative - Equity$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Net Derivative - Interest Rate1
0
0
0
0
0
0
0
0
1
0
1
0
0
0
0
0
0
0
0
1
0

 Six Months Ended June 30, 2020
 Fair Value, beginning of periodTotal realized and unrealized gains (losses)(1)PurchasesSalesIssuancesSettlementsOtherTransfers into
Level 3(2)
Transfers out of Level 3(2)Fair Value, end of periodUnrealized gains (losses) for assets still held(1)
 (in millions)
Net Derivative - Equity$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Net Derivative - Interest Rate1
0
0
0
0
0
0
0
0
1
0


 Six Months Ended June 30, 2019
 Fair Value, beginning of periodTotal realized and unrealized gains (losses)(1)PurchasesSalesIssuancesSettlementsOther(3)Transfers into
Level 3(2)
Transfers out of Level 3(2)Fair Value, end of periodUnrealized gains (losses) for assets still held(1)
 (in millions)
Net Derivative - Equity$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Net Derivative - Interest Rate2
(1)0
0
0
0
0
0
0
1
(1)


4652

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 Three Months Ended June 30, 2018
 Fair Value, beginning of periodTotal realized and unrealized gains (losses)(1)PurchasesSalesIssuancesSettlementsOtherTransfers into
Level 3(2)
Transfers out of Level 3(2)Fair Value, end of periodUnrealized gains (losses) for assets still held(1)
 (in millions)
Net Derivative - Equity$6
$0
$0
$0
$0
$0
$(4)$0
$0
$2
$0
Net Derivative - Interest Rate6
(4)0
0
0
0
0
0
0
2
4

 Three Months Ended June 30, 2019
 Fair Value, beginning of periodTotal realized and unrealized gains (losses)(1)PurchasesSalesIssuancesSettlementsOtherTransfers into
Level 3(2)
Transfers out of Level 3(2)Fair Value, end of periodUnrealized gains (losses) for assets still held(1)
 (in millions)
Net Derivative - Equity$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Net Derivative - Interest Rate1
0
0
0
0
0
0
0
0
1
0

Six Months Ended June 30, 2018Six Months Ended June 30, 2019
Fair Value, beginning of periodTotal realized and unrealized gains (losses)(1)PurchasesSalesIssuancesSettlementsOther(3)Transfers into
Level 3(2)
Transfers out of Level 3(2)Fair Value, end of periodUnrealized gains (losses) for assets still held(1)Fair Value, beginning of periodTotal realized and unrealized gains (losses)(1)PurchasesSalesIssuancesSettlementsOtherTransfers into
Level 3(2)
Transfers out of Level 3(2)Fair Value, end of periodUnrealized gains (losses) for assets still held(1)
(in millions)(in millions)
Net Derivative - Equity$10
$1
$0
$0
$0
$0
$(9)$0
$0
$2
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Net Derivative - Interest Rate(3)5
0
0
0
0
0
0
0
2
5
2
(1)0
0
0
0
0
0
0
1
(1)

______ 
(1)Total realized and unrealized gains (losses) as well as unrealized gains (losses) for assets still held at the end of the period are recorded in “Realized investment gains (losses), net.”
(2)Transfers into or out of Level 3 are generally reported at the value as of the beginning of the quarter in which the transfers occur for any such positions still held at the end of the quarter.
(3)Represents conversion of warrants to equity shares.

Nonrecurring Fair Value Measurements—The following tables represent information for assets measured at fair value on a nonrecurring basis. The fair value measurement is nonrecurring as these assets are measured at fair value only when there is a triggering event (e.g., an evidence of impairment). Assets included in the table are those that were impaired during the respective reporting periods and that are still held as of the reporting date. The estimated fair values for these amounts were determined using significant unobservable inputs (Level 3).

Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
(in millions)(in millions)
Realized investment gains (losses) net:              
Commercial mortgage loans(1)$0
 $(13) $0
 $(13)$(3) $0
 $(3) $0
Mortgage servicing rights(2)$(1) $2
 $(2) $4
$(26) $(1) $(29) $(2)

June 30, 2019 December 31, 2018June 30, 2020 December 31, 2019
(in millions)(in millions)
Carrying value after measurement as of period end:      
Commercial mortgage loans(1)$14
 $47
$11
 $15
Mortgage servicing rights(2)$66
 $73
$280
 $87
__________ 
(1)Commercial mortgage loans are valued based on discounted cash flows utilizing market rates or the fair value of the underlying real estate collateral.
(2)Mortgage servicing rights are valued using a discounted cash flow model. The model incorporates assumptions for servicing revenues, which are adjusted for expected prepayments, delinquency rates, escrow deposit income and estimated loan servicing expenses. The discount rates incorporated into the model are determined based on the estimated returns a market participant would require for this business including a liquidity and risk premium. This estimate includes available relevant data from any active market sales of mortgage servicing rights.

4753

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Fair Value Option
 
The fair value option allows the Company to elect fair value as an alternative measurement for selected financial assets and financial liabilities not otherwise reported at fair value. Such elections have been made by the Company to help mitigate volatility in earnings that result from different measurement attributes. Electing the fair value option also allows the Company to achieve consistent accounting for certain assets and liabilities. Changes in fair value are reflected in “Realized investment gains (losses), net” for commercial mortgage and other loans and “Other income (loss)” for other assets and notes issued by consolidated VIEs. Changes in fair value due to instrument-specific credit risk are estimated using changes in credit spreads and quality ratings for the period reported. Interest income on commercial mortgage and other loans is included in “Net investment income.” Interest income on these loans is recorded based on the effective interest ratesrate as determined at the closing of the loan.
 
The following tables present information regarding assets and liabilities where the fair value option has been elected.

Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
(in millions)(in millions)
Liabilities:              
Notes issued by consolidated VIEs:              
Changes in fair value$(1) $(3) $1
 $0
$(59) $(1) $(59) $1

 
Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
(in millions)(in millions)
Commercial mortgage and other loans:              
Interest income$5
 $4
 $11
 $6
$4
 $5
 $6
 $11
Notes issued by consolidated VIEs:              
Interest expense$13
 $9
 $22
 $18
$11
 $13
 $22
 $22

June 30, 2019 December 31, 2018June 30, 2020 December 31, 2019
(in millions)(in millions)
Commercial mortgage and other loans(1):      
Fair value as of period end$645
 $763
$682
 $228
Aggregate contractual principal as of period end$639
 $754
$670
 $224
Other assets:      
Fair value as of period end$10
 $10
$10
 $10
Notes issued by consolidated VIEs:      
Fair value as of period end$816
 $595
$741
 $800
Aggregate contractual principal as of period end$857
 $632
$857
 $857
__________ 
(1)As of June 30, 2019,2020, for loans for which the fair value option has been elected, there were no0 loans in non-accrual status and noneNaN of the loans were more than 90 days past due and still accruing.


Fair Value of Financial Instruments
 
The table below presents the carrying amount and fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. The financial instruments presented below are reported at carrying value on the Company’s Unaudited Interim Consolidated Statements of Financial Position. In some cases, as described below, the carrying amount equals or approximates fair value.

4854

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 
June 30, 2019June 30, 2020
Fair Value 
Carrying
Amount(1)
Fair Value 
Carrying
Amount(1)
Level 1 Level 2 Level 3 Total TotalLevel 1 Level 2 Level 3 Total Total
(in millions)(in millions)
Assets:                  
Fixed maturities, held-to-maturity(2)$0
 $2,310
 $100
 $2,410
 $2,009
$0
 $2,146
 $85
 $2,231
 $1,875
Assets supporting experience-rated contractholders liabilities5
 0
 0
 5
 5
Assets supporting experience-rated contractholder liabilities219
 100
 0
 319
 319
Commercial mortgage and other loans0
 111
 62,873
 62,984
 60,583
0
 108
 65,666
 65,774
 62,787
Policy loans0
 0
 12,030
 12,030
 12,030
0
 0
 12,283
 12,283
 12,283
Other invested assets0
 36
 0
 36
 36
0
 200
 0
 200
 200
Short-term investments1,065
 181
 0
 1,246
 1,246
2,351
 89
 0
 2,440
 2,440
Cash and cash equivalents6,222
 1,282
 0
 7,504
 7,504
8,785
 2,271
 0
 11,056
 11,056
Accrued investment income0
 3,355
 0
 3,355
 3,355
0
 3,296
 0
 3,296
 3,296
Other assets149
 2,707
 546
 3,402
 3,400
148
 2,548
 276
 2,972
 2,971
Total assets$7,441
 $9,982
 $75,549
 $92,972
 $90,168
$11,503
 $10,758
 $78,310
 $100,571
 $97,227
Liabilities:                  
Policyholders’ account balances—investment contracts$0
 $31,849
 $69,964
 $101,813
 $100,934
$0
 $37,374
 $71,832
 $109,206
 $106,501
Securities sold under agreements to repurchase0
 9,741
 0
 9,741
 9,741
0
 10,488
 0
 10,488
 10,488
Cash collateral for loaned securities0
 4,235
 0
 4,235
 4,235
0
 3,447
 0
 3,447
 3,447
Short-term debt0
 1,870
 926
 2,796
 2,659
0
 1,036
 102
 1,138
 1,130
Long-term debt(3)1,909
 16,780
 1,334
 20,023
 17,841
1,900
 19,884
 1,206
 22,990
 20,162
Notes issued by consolidated VIEs0
 0
 430
 430
 430
0
 0
 456
 456
 456
Other liabilities0
 6,431
 545
 6,976
 6,976
0
 7,546
 48
 7,594
 7,594
Separate account liabilities—investment contracts0
 74,167
 24,792
 98,959
 98,959
0
 77,492
 23,687
 101,179
 101,179
Total liabilities$1,909
 $145,073
 $97,991
 $244,973
 $241,775
$1,900
 $157,267
 $97,331
 $256,498
 $250,957
 

4955

Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

December 31, 2018December 31, 2019
Fair Value 
Carrying
Amount(1)
Fair Value 
Carrying
Amount(1)
Level 1 Level 2 Level 3 Total TotalLevel 1 Level 2 Level 3 Total Total
(in millions)(in millions)
Assets:                  
Fixed maturities, held-to-maturity(2)$0
 $1,468
 $904
 $2,372
 $2,013
$0
 $2,217
 $85
 $2,302
 $1,933
Assets supporting experience-rated contractholders liabilities0
 0
 0
 0
 0
Assets supporting experience-rated contractholder liabilities16
 0
 0
 16
 16
Commercial mortgage and other loans0
 109
 59,106
 59,215
 59,067
0
 107
 65,558
 65,665
 63,331
Policy loans0
 0
 12,016
 12,016
 12,016
0
 0
 12,096
 12,096
 12,096
Other invested assets0
 40
 0
 40
 40
0
 36
 0
 36
 36
Short-term investments951
 25
 0
 976
 976
1,492
 39
 0
 1,531
 1,531
Cash and cash equivalents4,871
 1,004
 0
 5,875
 5,875
6,278
 1,043
 0
 7,321
 7,321
Accrued investment income0
 3,318
 0
 3,318
 3,318
0
 3,330
 0
 3,330
 3,330
Other assets141
 2,189
 483
 2,813
 2,813
147
 2,526
 643
 3,316
 3,315
Total assets$5,963
 $8,153
 $72,509
 $86,625
 $86,118
$7,933
 $9,298
 $78,382
 $95,613
 $92,909
Liabilities:                  
Policyholders’ account balances—investment contracts$0
 $31,422
 $67,006
 $98,428
 $99,829
$0
 $32,940
 $69,216
 $102,156
 $101,241
Securities sold under agreements to repurchase0
 9,950
 0
 9,950
 9,950
0
 9,681
 0
 9,681
 9,681
Cash collateral for loaned securities0
 3,929
 0
 3,929
 3,929
0
 4,213
 0
 4,213
 4,213
Short-term debt0
 1,854
 658
 2,512
 2,451
0
 1,748
 205
 1,953
 1,933
Long-term debt(3)1,734
 15,057
 1,181
 17,972
 17,378
1,950
 18,188
 1,186
 21,324
 18,646
Notes issued by consolidated VIEs0
 0
 360
 360
 360
0
 0
 474
 474
 474
Other liabilities0
 6,338
 510
 6,848
 6,848
0
 6,403
 579
 6,982
 6,982
Separate account liabilities—investment contracts0
 66,914
 26,022
 92,936
 92,936
0
 77,134
 24,407
 101,541
 101,541
Total liabilities$1,734
 $135,464
 $95,737
 $232,935
 $233,681
$1,950
 $150,307
 $96,067
 $248,324
 $244,711
__________ 
(1)Carrying values presented herein differ from those in the Company’s Unaudited Interim Consolidated Statements of Financial Position because certain items within the respective financial statement captions are not considered financial instruments or are out of scope under authoritative guidance relating to disclosures of the fair value of financial instruments.
(2)Excludes notes with fair value of $5,190$5,603 million (carrying amount of $4,879$4,998 million) and $4,879$5,401 million (carrying amount of $4,879$4,998 million) as of June 30, 20192020 and December 31, 2018,2019, respectively, which have been offset with the associated payables under a netting agreement.
(3)Includes notes with fair value of $9,546$12,069 million (carrying amount of $9,235$11,464 million) and $9,095$10,158 million (carrying amount of $9,095$9,749 million) as of June 30, 20192020 and December 31, 2018,2019, respectively, which have been offset with the associated receivables under a netting agreement.

7.LEASES
The Company occupies leased office space and other facilities in many locations under various long-term leases and has entered into numerous leases covering the long-term use of computers and other equipment. The leases, depending on their specific terms, are classified as either operating or finance with the vast majority of leases falling under the operating classification. The leases in the Company’s portfolio have remaining lease terms from less than one year to 30 years, some of which include options to extend the leases for up to 18 years, and some of which include options to terminate the leases within 8 years. An analysis of all economic and non-economic factors associated with leases containing certain options, including factors such as the existence of cancellation penalties, leasehold improvements made to the underlying assets and location of the underlying assets, is conducted to determine whether those leases are reasonably certain to renew, and, hence, should be included in the lease term that is used to establish the right-of-use assets and lease liabilities for those arrangements.

The Company does not have residual guarantees associated with its lessee arrangements, nor are there any restrictions or covenants associated with its lease arrangements.


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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Lessee
Supplemental balance sheet information related to leases where the Company is the lessee is included below. Right-of-use assets and lease liabilities are included within “Other assets” and “Other liabilities” respectively.
  June 30, 2019
  (in millions)
Operating Leases:  
   
Right-of-use assets $561
Lease liabilities $589
   
Weighted average remaining lease term 6 years
Weighted average discount rate 2.62%


Maturities of operating lease liabilities are as follows:
  June 30, 2019
  (in millions)
2019 (July — December) $85
2020 141
2021 122
2022 88
2023 65
Thereafter 144
Total lease payments 645
Less imputed interest (56)
Total $589


Lease expense is included in “General and administrative expenses.” The expense was comprised of operating lease costs and short-term lease costs of $35 million and $26 million, respectively, for the three months ended June 30, 2019, and $69 million and $50 million, respectively, for the six months ended June 30, 2019. Short-term lease costs relate to those leases with terms of twelve months or less that do not include an option to purchase the underlying asset that is reasonably certain of exercise.

Lessor

The Company directly owns real estate properties within its investment portfolio. Such real estate is leased to third-parties, with the Company serving as the lessor. The terms of the leases vary depending on property type (e.g., commercial or residential). In most cases, the lessee has an option to renew the lease contract based on market rates but does not have an option to purchase the property. The terms of the leases may also include provisions for the use of common areas. Such non-lease components are not separately accounted for by the Company, as a result of applying the practical expedient discussed in Note 2. Lease income included in “Net investment income” was $50 million and $100 million for the three and six months ended June 30, 2019, respectively.

8.7. CLOSED BLOCK
 
On December 18, 2001, the date of demutualization, The Prudential Insurance Company of America (“PICA”) established a closed block for certain in-force participating insurance policies and annuity products, along with corresponding assets used for the payment of benefits and policyholders’ dividends on these products, (collectively the “Closed Block”), and ceased offering these participating products. 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 division. For moreadditional information on the Closed Block, see Note 1415 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2018.2019.
 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As of June 30, 20192020 and December 31, 2018,2019, the Company recognized a policyholder dividend obligation of $2,359$2,450 million and $2,252$2,816 million, respectively, to Closed Block policyholders for the excess of actual cumulative earnings over expected cumulative earnings. Additionally, accumulated net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block have been reflected as a policyholder dividend obligation of $3,201$5,305 million and $899$3,332 million at June 30, 20192020 and December 31, 2018,2019, respectively, to be paid to Closed Block policyholders unless offset by future experience, with a corresponding amount reported in AOCI.
 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Closed Block liabilities and assets designated to the Closed Block, as well as maximum future earnings to be recognized from these liabilities and assets, are as follows:
 June 30,
2019
 December 31,
2018
 June 30,
2020
 December 31,
2019
 (in millions) (in millions)
Closed Block liabilities        
Future policy benefits $47,940
 $48,282
 $47,142
 $47,613
Policyholders’ dividends payable 810
 812
 728
 717
Policyholders’ dividend obligation 5,560
 3,150
 7,755
 6,149
Policyholders’ account balances 5,011
 5,061
 4,914
 4,973
Other Closed Block liabilities 4,282
 3,955
 3,322
 4,049
Total Closed Block liabilities 63,603
 61,260
 63,861
 63,501
Closed Block assets        
Fixed maturities, available-for-sale, at fair value 40,602
 38,538
 42,058
 41,146
Fixed maturities, trading, at fair value 236
 195
 239
 256
Equity securities, at fair value 2,055
 1,784
 2,047
 2,245
Commercial mortgage and other loans 8,451
 8,782
 8,388
 8,629
Policy loans 4,328
 4,410
 4,158
 4,264
Other invested assets 3,291
 3,316
 3,259
 3,333
Short-term investments 659
 477
 95
 227
Total investments 59,622
 57,502
 60,244
 60,100
Cash and cash equivalents 633
 467
 462
 191
Accrued investment income 460
 466
 436
 456
Other Closed Block assets 199
 105
 86
 93
Total Closed Block assets 60,914
 58,540
 61,228
 60,840
Excess of reported Closed Block liabilities over Closed Block assets 2,689
 2,720
 2,633
 2,661
Portion of above representing accumulated other comprehensive income (loss):        
Net unrealized investment gains (losses) 3,156
 857
 5,250
 3,280
Allocated to policyholder dividend obligation (3,201) (899) (5,305) (3,332)
Future earnings to be recognized from Closed Block assets and Closed Block liabilities $2,644
 $2,678
 $2,578
 $2,609


Information regarding the policyholder dividend obligation is as follows:
 Six Months Ended
June 30, 2019
 Six Months Ended
June 30, 2020
 (in millions) (in millions)
Balance, December 31, 2018 $3,150
Balance, December 31, 2019 $6,149
Cumulative effect adjustment from the adoption of ASU 2016-13(1) (13)
Impact from earnings allocable to policyholder dividend obligation 107
 (353)
Change in net unrealized investment gains (losses) allocated to policyholder dividend obligation 2,303
 1,972
Balance, June 30, 2019 $5,560
Balance, June 30, 2020 $7,755

__________
(1)See Note 2 for more information.


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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Closed Block revenues and benefits and expenses are as follows for the periods indicated:
Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
(in millions)(in millions)
Revenues              
Premiums$581
 $602
 $1,108
 $1,152
$519
 $581
 $999
 $1,108
Net investment income576
 593
 1,141
 1,190
515
 576
 1,063
 1,141
Realized investment gains (losses), net49
 110
 105
 108
(8) 49
 248
 105
Other income (loss)97
 85
 325
 107
318
 97
 (285) 325
Total Closed Block revenues1,303
 1,390
 2,679
 2,557
1,344
 1,303
 2,025
 2,679
Benefits and Expenses              
Policyholders’ benefits780
 778
 1,489
 1,506
725
 780
 1,372
 1,489
Interest credited to policyholders’ account balances32
 33
 64
 66
32
 32
 64
 64
Dividends to policyholders415
 508
 968
 816
517
 415
 423
 968
General and administrative expenses89
 92
 178
 184
82
 89
 167
 178
Total Closed Block benefits and expenses1,316
 1,411
 2,699
 2,572
1,356
 1,316
 2,026
 2,699
Closed Block revenues, net of Closed Block benefits and expenses, before income taxes(13) (21) (20) (15)(12) (13) (1) (20)
Income tax expense (benefit)(29) (36) (53) (45)(28) (29) (34) (53)
Closed Block revenues, net of Closed Block benefits and expenses and income taxes$16
 $15
 $33
 $30
$16
 $16
 $33
 $33

 
9.8. INCOME TAXES
 
The Company uses a full year projected effective tax rate approach to calculate year-to-date taxes. In addition, certain items impacting total income tax expense are recorded in the periods in which they occur. The projected effective tax rate is the ratio of projected “Total income tax expense” divided by projected “Income before income taxes and equity in earnings of operating joint ventures.” Taxes attributable to operating joint ventures are recorded within “Equity in earnings of operating joint ventures, net of taxes.” The interim period tax expense (or benefit) is the difference between the year-to-date income tax provision and the amounts reported for the previous interim periods of the fiscal year.

The Company’s income tax provision, on a consolidated basis, amounted to an income tax expense of $394$57 million, or 19.5%(2.1)% of income (loss) before income taxes and equity in earnings of operating joint ventures, in the first six months of 2019,2020, compared to $420an income tax expense of $394 million, or 21.6%19.5%, in the first six months of 2018.2019. The Company’s current and prior effective tax rates differeddiffer from the U.S. statutory rate of 21% primarily due to non-taxable investment income, tax credits and foreign earnings taxed at higher rates than the U.S. statutory rate. In addition,

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted into law. One provision of the CARES Act amends the Tax Cuts and Jobs Act (“TCJA”) and allows companies with net operating losses (“NOLs”) originating in 2018, 2019 or 2020 to carry back those losses for five years. The Company has incorporated into the full year projected effective tax rate an income tax benefit of $512 million that would result from carrying the estimated 2020 NOL back to tax years that have a 35% tax rate. The projected tax benefit related to the NOL carryback was partially offset by an incremental Global Intangible Low-Taxed Income (“GILTI”) tax expense of $140 million driven by projected overall domestic losses (“ODLs”) which resulted in a reduced GILTI foreign tax credit. These amounts are estimates and will change if the amount of, and sources of, 2020 net taxable income are different from forecast. The inclusion of these two amounts in the full year projected effective tax rate results in a projected negative effective tax rate for the year, which when applied to the year-to-date pre-tax loss resulted in a $781 million increase to our income tax expense for the first six months of 20182020. The first six months of 2020 also includesinclude a $27$47 million reduction in income tax expense primarilyrecorded as a discrete item from the carryback of 2018 NOL and related ODL.

On July 20, 2020, the U.S. Treasury and the Internal Revenue Service issued Final Regulations which will allow an annual election to refinementsexclude from the U.S. tax return certain GILTI amounts when the taxes paid by a foreign affiliate exceeds 18.9% (90% of U.S. statutory rate of 21%) of the Company’s provisional estimates relatedGILTI amount for that foreign affiliate (the “high-tax exception”). These regulations are effective for the 2021 taxable year with an election to apply to any taxable year beginning after 2017. In many of the countries in which we operate, including Japan, there are differences between local tax rules used to determine the tax base and the U.S. Tax Cuts and Jobs Act of 2017.


tax principles used to determine GILTI. Also, our Japan affiliates have a different tax year than the U.S. calendar tax year used to

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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

10.determine GILTI. Therefore, while many of the countries, including Japan, have a statutory tax rate above the 18.9% threshold, separate affiliates may not meet the 18.9% threshold each year and, as such, may not qualify for this exclusion. The Company is in the process of reviewing and estimating the impacts of the regulations and will record any such impacts in the third quarter of 2020.

The Treasury Department and the IRS also issued Proposed Regulations on July 20th which would require that, if a high-tax exception election is made with respect to GILTI in any year, an election having the same effect must also be made with regard to income taxed under Subpart F of the Tax Code. Such an election under Subpart F of the Tax Code would apply to the Full Inclusion election made by the Company for its insurance operations in Brazil, thereby increasing the tax rate applied to our Brazil insurance operations. The Proposed Regulations will be effective for taxable years beginning after they are issued in final form.


9. SHORT-TERM AND LONG-TERM DEBT
 
Short-term Debt
 
The table below presents the Company’s short-term debt as of the dates indicated:
 
June 30, 2019 December 31, 2018June 30, 2020 December 31, 2019
($ in millions)($ in millions)
Commercial paper:      
Prudential Financial$25
 $15
$25
 $25
Prudential Funding, LLC820
 727
475
 524
Subtotal commercial paper845
 742
500
 549
Mortgage Debt(1)52
 53
Current portion of long-term debt(2)1,756
 1,656
Other(3)6
 0
Total short-term debt(4)$2,659
 $2,451
Current portion of long-term debt:   
Senior Notes528
 1,179
Mortgage Debt95
 192
Surplus notes subject to set-off arrangements (1)250
 0
Subtotal current portion of long-term debt873
 1,371
Other(2)7
 13
Subtotal1,380
 1,933
Less: assets under set-off arrangements(1)250
 0
Total short-term debt(3)$1,130
 $1,933
Supplemental short-term debt information:      
Portion of commercial paper borrowings due overnight$220
 $301
$240
 $224
Daily average commercial paper outstanding$1,676
 $1,554
Daily average commercial paper outstanding for the quarter ended$1,869
 $1,702
Weighted average maturity of outstanding commercial paper, in days11
 12
14
 6
Weighted average interest rate on outstanding commercial paper2.42% 1.90%0.13% 1.61%
___________________
(1)The surplus notes have corresponding assets where rights to set-off exist, thereby reducing the amount of surplus notes.
(2)Includes $7 million drawn on a revolving line of credit held by a subsidiary at June 30, 2020.
(1) Includes $52 million and $53 million of mortgage debt denominated in foreign currency at June 30, 2019 and December 31, 2018, respectively.
(2) Includes $1,003 million and $1,100 million of senior notes at June 30, 2019 and December 31, 2018, respectively, and $253 million and $57 million of mortgage debt that has recourse only to real estate investment property at June 30, 2019 and December 31, 2018, respectively.
(3) Includes $6 million drawn on a revolving line of credit held by a subsidiary at June 30, 2019.
(4) Includes Prudential Financial debt of $1,027$553 million and $1,115$1,204 million at June 30, 20192020 and December 31, 2018,2019, respectively.


Prudential Financial and certain subsidiaries have access to external sources of liquidity, including membership in the Federal Home Loan Banks, commercial paper programs and a contingent financing facilityfacilities in the form of a put option agreement and facility agreement. The Company also maintains syndicated, unsecured committed credit facilities as an alternative source of liquidity. At June 30, 2019, no2020, 0 amounts were drawn on these credit facilities. For additional information on these sources of liquidity, see Note 1617 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.

Federal Home Loan Bank of New York (“FHLBNY”)

In the first quarter of 2020, PICA issued $3.6 billion in funding agreements under the FHLBNY facility. As of June 30, 2020, $3.6 billion of funding agreements remain outstanding under this facility with maturities ranging from five months to seven years

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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

and rates from 0.430% to 1.925%. These funding agreements are reflected as “Policyholders’ account balances” on the Consolidated Statements of Financial Position and as such are not included in the foregoing table. For additional information on this facility, see Note 17 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Facility Agreement for Senior Debt Issuance

In May 2020, Prudential Financial entered into a ten-year facility agreement with a Delaware trust upon the completion of the sale of $1.5 billion of trust securities by that Delaware trust in a Rule 144A private placement. The trust invested the proceeds from the sale of the trust securities in a portfolio of principal and/or interest strips of U.S. Treasury securities. The facility agreement provides Prudential Financial the right to issue and sell to the trust from time to time up to $1.5 billion of 2.850% senior notes due May 15, 2030 and receive in exchange a corresponding amount of the U.S. Treasury securities held by the trust. In return, the Company agreed to pay a semi-annual facility fee to the trust at a rate of 2.175% per annum applied to the maximum amount of senior notes that the Company could issue and sell to the trust. The facility agreement with the trust provides Prudential Financial with a source of liquid assets in exchange for notes and is similar to the Company’s existing put option agreement in respect of $1.5 billion of senior notes that expires in 2023.
The right to issue senior notes described above will be exercised automatically in full upon the Company’s failure to make certain payments to the trust, such as paying the facility fee or reimbursing the trust for its expenses, if the Company’s failure to pay is not cured within 30 days, and upon an event involving its bankruptcy. The Company is also required to exercise this issuance right if its consolidated stockholders’ equity, calculated in accordance with U.S. GAAP but excluding AOCI, falls below $9.0 billion, subject to adjustment in certain cases. Prior to any involuntary exercise of the issuance right, the Company has the right to repurchase any of its senior notes then held by the trust in exchange for U.S. Treasury securities. Finally, Prudential Financial may redeem any outstanding senior notes, in whole or in part, prior to February 15, 2030, at a redemption price equal to the greater of par or a make-whole price, or thereafter, redeem the senior notes, in whole or in part, at par.

Long-term Debt

The table below presents the Company’s long-term debt as of the dates indicated:
 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

  June 30, 2019 December 31, 2018
 
  (in millions)
 Fixed-rate obligations:   
 Surplus notes$342
 $341
 Surplus notes subject to set-off arrangements(1)7,035
 6,895
 Senior notes9,106
 8,774
 Mortgage debt(2)160
 237
 Floating-rate obligations:   
 Line of credit299
 0
 Surplus notes subject to set-off arrangements(1)2,200
 2,200
 Senior notes29
 29
 Mortgage debt(3)333
 429
 Junior subordinated notes(4)7,572
 7,568
 Subtotal27,076
 26,473
 Less: assets under set-off arrangements(1)9,235
 9,095
        Total long-term debt(5)$17,841
 $17,378
 June 30, 2020 December 31, 2019
 (in millions)
Fixed-rate obligations:   
Surplus notes$343
 $342
Surplus notes subject to set-off arrangements(1)8,884
 7,484
Senior notes11,575
 10,084
Mortgage debt(2)100
 104
Floating-rate obligations:   
Line of credit300
 300
Surplus notes subject to set-off arrangements(1)2,330
 2,265
Mortgage debt(3)264
 241
Junior subordinated notes(4)7,580
 7,575
Subtotal31,376
 28,395
Less: assets under set-off arrangements(1)11,214
 9,749
       Total long-term debt(5)$20,162
 $18,646
 __________    
(1)The surplus notes have corresponding assets where rights to set-off exist, thereby reducing the amount of surplus notes included in long-term debt.
(2)
Includes $99$40 million and $101$43 million of debt denominated in foreign currency at June 30, 20192020 and December 31, 2018,2019, respectively.
(3)
Includes $166$50 million and $206$53 million of debt denominated in foreign currency at June 30, 20192020 and December 31, 2018,2019, respectively.
(4)Includes Prudential Financial debt of $7,514$7,522 million and $7,518 million at June 30, 2019.2020 and December 31, 2019, respectively. Also includes subsidiary debt of $58 million and $57 million denominated in foreign currency at June 30, 2019.2020 and December 31, 2019, respectively.
(5)
Includes Prudential Financial debt of $16,475$18,925 million and $16,141$17,430 million at June 30, 20192020 and December 31, 2018,2019, respectively.

At June 30, 20192020 and December 31, 2018,2019, the Company was in compliance with all debt covenants related to the borrowings in the table above.


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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

LineSurplus Notes. In March 2020, Prudential Legacy Insurance Company of Credit. PGIM entered into a $300New Jersey issued $800 million syndicated credit facility in April 2019 that is secured by certain of PGIM’s fund investments.  The facility has a three-year term and extends for additional one-year periods unless terminated.  The lenders on the facility have recourse only to the collateral pledged by PGIM.  The facility was fully drawn assurplus notes under its $4 billion reserve financing facility. As of June 30, 2020, an aggregate of $900 million of surplus notes was outstanding under the facility and no credit-linked note payments have been required. For additional information on this facility, see Note 17 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

In June 2020, the Company established a new $1.2 billion captive financing facility to finance non-economic reserves required under Guideline AXXX. Similar to the Company’s other captive financing facilities, a captive reinsurance subsidiary may issue surplus notes under the facility in exchange for credit-linked notes issued by a special-purpose affiliate that are held to support non-economic reserves. The credit-linked notes are redeemable for cash upon the occurrence of a liquidity stress event affecting the captive and external counterparties have agreed to fund these payments. Prudential Arizona Reinsurance Universal Company issued $700 million of surplus notes under this facility in June 2020. As of June 30, 2020, an aggregate of $700 million of surplus notes was outstanding under the facility and no credit-linked note payments have been required.

Senior Notes. As of June 30, 2019,2020, the outstanding balance of the Company’s senior notes was $10.14$12.1 billion, an increase of $0.2$0.8 billion from December 31, 2018.2019. The increase wasis due to the issuance in the first quarter of $1$1.5 billion of medium-term notes in March 2020: $500 million with an interest rate of 4.350%1.5% maturing in February 2050,March 2026, $500 million with an interest rate of 2.1% maturing in March 2030, and $500 million with an interest rate of 3.0% maturing in March 2040, offset by $0.8 billion in$651 million of debt maturities in the second quarter.

Mortgage Debt. As of June 30, 2019, the Company’s subsidiaries had mortgage debt of $799 million that has recourse only to real estate property held for investment by those subsidiaries. This represents an increase of $23 million from December 31, 2018, due to a $28 million increase from new borrowings, offset by a $5 million decrease from foreign currency exchange rate fluctuations.2020.


11.10. EMPLOYEE BENEFIT PLANS
 
Pension and Other Postretirement Plans
 
The Company has funded and non-funded non-contributory defined benefit pension plans (“Pension Benefits”), which cover substantially all of its employees. For some employees, benefits are based on final average earnings and length of service, while benefits for other employees are based on an account balance that takes into consideration age, service and earnings during their career.
 
The Company provides certain health care and life insurance benefits for its retired employees, their beneficiaries and covered dependents (“Other Postretirement Benefits”). The health care plan is contributory; the life insurance plan is non-contributory. Substantially all of the Company’s U.S. employees may become eligible to receive Other Postretirement Benefits if they retire after age 55 with at least 10 years of service or under certain circumstances after age 50 with at least 20 years of continuous service.
 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Net periodic (benefit) cost included in “General and administrative expenses” includes the following components:
 
Three Months Ended June 30,Three Months Ended June 30,
Pension Benefits Other Postretirement BenefitsPension Benefits Other Postretirement Benefits
2019 2018 2019 20182020 2019 2020 2019
(in millions)(in millions)
Components of net periodic (benefit) cost:              
Service cost$72
 $79
 $5
 $6
$81
 $72
 $6
 $5
Interest cost123
 112
 20
 17
107
 123
 16
 20
Expected return on plan assets(204) (205) (23) (27)(202) (204) (25) (23)
Amortization of prior service cost(1) (1) 1
 0
(1) (1) 1
 1
Amortization of actuarial (gain) loss, net54
 54
 6
 5
66
 54
 4
 6
Settlements48
 0
 0
 0
4
 48
 0
 0
Special termination benefits1
 1
 0
 0
Special termination benefits(1)(2)0
 1
 0
 0
Net periodic (benefit) cost$93
 $40
 $9
 $1
$55
 $93
 $2
 $9
              
Six Months Ended June 30,Six Months Ended June 30,
Pension Benefits Other Postretirement BenefitsPension Benefits Other Postretirement Benefits
2019 2018 2019 20182020 2019 2020 2019
(in millions)(in millions)
Components of net periodic (benefit) cost:              
Service cost$145
 $158
 $11
 $12
$161
 $145
 $12
 $11
Interest cost246
 224
 39
 35
215
 246
 32
 39
Expected return on plan assets(408) (409) (47) (54)(403) (408) (50) (47)
Amortization of prior service cost(2) (2) 2
 0
(2) (2) 3
 2
Amortization of actuarial (gain) loss, net108
 107
 12
 9
131
 108
 8
 12
Settlements48
 0
 0
 0
4
 48
 0
 0
Special termination benefits1
 1
 0
 0
Special termination benefits(1)(2)2
 1
 0
 0
Net periodic (benefit) cost$138
 $79
 $17
 $2
$108
 $138
 $5
 $17

__________ 

(1)For 2020 certain employees were provided special termination benefits under non-qualified plans in the form of unreduced early retirement benefits as a result of their involuntary termination or participation in the Voluntary Separation Program that was offered to eligible U.S.-based employees in 2019.
(2)For 2019 certain employees were provided special termination benefits under non-qualified plans in the form of unreduced early retirement benefits as a result of their involuntary termination.

12.11. EQUITY
 
The changes in the number of shares of Common Stock issued, held in treasury and outstanding, are as follows for the periods indicated:
Common StockCommon Stock
Issued 
Held In
Treasury
 OutstandingIssued 
Held In
Treasury
 Outstanding
(in millions)(in millions)
Balance, December 31, 2018660.1
 249.4
 410.7
Balance, December 31, 2019666.3
 267.5
 398.8
Common Stock issued0.0
 0.0
 0.0
0.0
 0.0
 0.0
Common Stock acquired0.0
 10.4
 (10.4)0.0
 6.7
 (6.7)
Stock-based compensation programs(1)0.0
 (2.7) 2.7
0.0
 (2.5) 2.5
Balance, June 30, 2019660.1
 257.1
 403.0
Balance, June 30, 2020666.3
 271.7
 394.6
__________ 
(1)Represents net shares issued from treasury pursuant to the Company’s stock-based compensation programs.

In December 2018,2019, Prudential Financial’s Board of Directors (the “Board”) authorized the Company to repurchase at management’s discretion up to $2.0 billion of its outstanding Common Stock during the period from January 1, 20192020 through December 31, 2019. As of June 30, 2019, 10.4 million shares of the Company’s Common Stock were repurchased under this authorization at a total cost of $1.0 billion.


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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

December 31, 2020. As of June 30, 2020, 6.7 million shares of the Company’s Common Stock were repurchased under this authorization at a total cost of $500 million. The Company temporarily suspended Common Stock repurchases under the existing repurchase authorization beginning April 1, 2020; however, the Company continues to evaluate the resumption of share repurchases under the existing Board authorization.

The timing and amount of share repurchases are determined by management based upon market conditions and other considerations, and repurchases may be effected in the open market, through derivative, accelerated repurchase and other negotiated transactions and through prearranged trading plans complying with Rule 10b5-1(c) under the Securities Exchange Act of 1934 (the “Exchange Act”). Numerous factors could affect the timing and amount of any future repurchases under the share repurchase authorization, including increased capital needs of the Company due to changes in regulatory capital requirements, opportunities for growth and acquisitions, and the effect of adverse market conditions on the segments.

Dividends declared per share of Common Stock are as follows for the periods indicated:
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2019 2018 2019 2018
Dividends declared per share of Common Stock$1.00
 $0.90
 $2.00
 $1.80
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
Dividends declared per share of Common Stock$1.10
 $1.00
 $2.20
 $2.00


Accumulated Other Comprehensive Income (Loss)
 
AOCI represents the cumulative OCI items that are reported separate from net income and detailed on the Unaudited Interim Consolidated Statements of Comprehensive Income. The balance of and changes in each component of AOCI as of and for the six months ended June 30, 20192020 and 2018,2019, are as follows:

Accumulated Other Comprehensive Income (Loss) Attributable to
Prudential Financial, Inc.
Accumulated Other Comprehensive Income (Loss) Attributable to
Prudential Financial, Inc.
Foreign Currency
Translation
Adjustment
 
Net Unrealized
Investment Gains
(Losses)(1)
 
Pension and
Postretirement
Unrecognized Net
Periodic Benefit
(Cost)
 
Total
Accumulated
Other
Comprehensive
Income (Loss)
Foreign Currency
Translation
Adjustment
 
Net Unrealized
Investment Gains
(Losses)(1)
 
Pension and
Postretirement
Unrecognized Net
Periodic Benefit
(Cost)
 
Total
Accumulated
Other
Comprehensive
Income (Loss)
(in millions)(in millions)
Balance, December 31, 2018$(564) $14,745
 $(3,275) $10,906
Balance, December 31, 2019$(536) $28,112
 $(3,537) $24,039
Change in OCI before reclassifications98
 17,296
 (39) 17,355
(213) 9,449
 4
 9,240
Amounts reclassified from AOCI5
 (501) 120
 (376)5
 (702) 140
 (557)
Income tax benefit (expense)8
 (3,899) (19) (3,910)28
 (1,881) (32) (1,885)
Cumulative effect of adoption of ASU 2017-120
 7
 0
 7
Balance, June 30, 2019$(453) $27,648
 $(3,213) $23,982
Balance, June 30, 2020$(716) $34,978
 $(3,425) $30,837

 
Accumulated Other Comprehensive Income (Loss) Attributable to
Prudential Financial, Inc.
 
Foreign Currency
Translation
Adjustment
 
Net Unrealized
Investment Gains
(Losses)(1)
 
Pension and
Postretirement
Unrecognized Net
Periodic Benefit
(Cost)
 
Total
Accumulated
Other
Comprehensive
Income (Loss)
 (in millions)
Balance, December 31, 2017$(269) $19,968
 $(2,625) $17,074
Change in OCI before reclassifications(44) (7,502) 15
 (7,531)
Amounts reclassified from AOCI0
 (490) 114
 (376)
Income tax benefit (expense)6
 1,704
 (28) 1,682
Cumulative effect of adoption of ASU 2016-010
 (847) 0
 (847)
Cumulative effect of adoption of ASU 2018-02(231) 2,282
 (398) 1,653
Balance, June 30, 2018$(538) $15,115
 $(2,922) $11,655
 
Accumulated Other Comprehensive Income (Loss) Attributable to
Prudential Financial, Inc.
 
Foreign Currency
Translation
Adjustment
 
Net Unrealized
Investment Gains
(Losses)(1)
 
Pension and
Postretirement
Unrecognized Net
Periodic Benefit
(Cost)
 
Total
Accumulated
Other
Comprehensive
Income (Loss)
 (in millions)
Balance, December 31, 2018$(564) $14,745
 $(3,275) $10,906
Change in OCI before reclassifications98
 17,296
 (39) 17,355
Amounts reclassified from AOCI5
 (501) 120
 (376)
Income tax benefit (expense)8
 (3,899) (19) (3,910)
Cumulative effect of adoption of ASU 2017-120
 7
 0
 7
Balance, June 30, 2019$(453) $27,648
 $(3,213) $23,982
__________
(1)Includes cash flow hedges of $2,498 million and $832 million as of June 30, 2020 and December 31, 2019, respectively, and $1,017 million and $811 million as of June 30, 2019 and December 31, 2018, respectively, and $99fair value hedges of $(3) million and $(39)$0 million as of June 30, 20182020 and December 31, 2017,2019, respectively.
 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Reclassifications out of Accumulated Other Comprehensive Income (Loss)

Three Months Ended
June 30,
 Six Months Ended
June 30,
 Affected line item in Consolidated Statements of OperationsThree Months Ended
June 30,
 Six Months Ended
June 30,
 Affected line item in Consolidated Statements of Operations
2019 2018 2019 2018 2020 2019 2020 2019 
(in millions)  (in millions)  
Amounts reclassified from AOCI(1)(2):                
Foreign currency translation adjustment:                
Foreign currency translation adjustments$0
 $0
 $(5) $0
 Realized investment gains (losses), net$(2) $0
 $(5) $(5) Realized investment gains (losses), net
Foreign currency translation adjustments0
 0
 0
 0
 Other income (loss)0
 0
 0
 0
 Other income (loss)
Total foreign currency translation adjustment0
 0
 (5) 0
 (2) 0
 (5) (5) 
Net unrealized investment gains (losses):                
Cash flow hedges—Interest rate0
 2
 (1) 2
 (3)9
 0
 8
 (1) (3)
Cash flow hedges—Currency1
 3
 2
 0
 (3)3
 1
 4
 2
 (3)
Cash flow hedges—Currency/Interest rate156
 294
 171
 245
 (3)32
 156
 420
 171
 (3)
Net unrealized investment gains (losses) on available-for-sale securities69
 165
 329
 243
 112
 69
 270
 329
 
Total net unrealized investment gains (losses)226
 464
 501
 490
 (4)156
 226
 702
 501
 (4)
Amortization of defined benefit pension items:                
Prior service cost0
 1
 0
 2
 (5)0
 0
 (1) 0
 (5)
Actuarial gain (loss)(60) (59) (120) (116) (5)(70) (60) (139) (120) (5)
Total amortization of defined benefit pension items(60) (58) (120) (114) (70) (60) (140) (120) 
Total reclassifications for the period$166
 $406
 $376
 $376
 $84
 $166
 $557
 $376
 
__________
(1)All amounts are shown before tax.
(2)Positive amounts indicate gains/benefits reclassified out of AOCI. Negative amounts indicate losses/costs reclassified out of AOCI.
(3)See Note 5 for additional information on cash flow hedges.
(4)See table below for additional information on unrealized investment gains (losses), including the impact on deferred policy acquisition and other costs, future policy benefits and policyholders’ dividends.
(5)See Note 1110 for information on employee benefit plans.
 
Net Unrealized Investment Gains (Losses)
 
Net unrealized investment gains (losses) on available-for-sale fixed maturity securities classified as available-for-sale and certain other invested assets and other assets are included in the Company’s Unaudited Interim Consolidated Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from “Other comprehensive income (loss)” those items that are included as part of “Net income (loss)” for a period that had been part of “Other comprehensive income (loss)” in earlier periods. The amounts for the periods indicated below, split between amounts related to available-for-sale fixed maturity securities on which an OTTI lossallowance for credit losses has been recognized, and all other net unrealized investment gains (losses), are as follows:
 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Net Unrealized Investment Gains (Losses) on Available-for-sale Fixed Maturity Securities on which an OTTI lossallowance for credit losses has been recognized

Net Unrealized
Gains (Losses)
on Investments
 DAC, DSI, VOBA and Reinsurance Recoverables 
Future Policy
Benefits,
Policyholders’
Account
Balances and
Reinsurance Payables
 
Policyholders’
Dividends
 Deferred
Income
Tax
(Liability)
Benefit
 Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)Net Unrealized
Gains (Losses)
on Investments
 DAC, DSI, VOBA and Reinsurance Recoverables 
Future Policy
Benefits,
Policyholders’
Account
Balances and
Reinsurance Payables
 
Policyholders’
Dividends
 Deferred
Income
Tax
(Liability)
Benefit
 Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)
(in millions)(in millions)
Balance, December 31, 2018$189
 $(1) $4
 $(23) $(61) $108
Balance, December 31, 2019(1)$0
 $0
 $0
 $0
 $0
 $0
Net investment gains (losses) on investments arising during the period118
       (27) 91
34
       (7) 27
Reclassification adjustment for (gains) losses included in net income(29)       7
 (22)13
       (3) 10
Reclassification adjustment for OTTI losses excluded from net income(1)0
       0
 0
Increase (Decrease) due to non-credit related losses recognized in AOCI during the period(87)       19
 (68)
Impact of net unrealized investment (gains) losses on DAC, DSI, VOBA and reinsurance recoverables  0
     0
 0
  2
     0
 2
Impact of net unrealized investment (gains) losses on future policy benefits and policyholders’ account balances and reinsurance payables    (4)   1
 (3)
Impact of net unrealized investment (gains) losses on future policy benefits, policyholders’ account balances and reinsurance payables    0
   0
 0
Impact of net unrealized investment (gains) losses on policyholders’ dividends      (4) 1
 (3)      (5) 1
 (4)
Balance, June 30, 2019$278
 $(1) $0
 $(27) $(79) $171
Balance, June 30, 2020$(40) $2
 $0
 $(5) $10
 $(33)
__________
(1)Represents “transfers in” related to the portion of OTTIAllowance for credit losses recognized during the period that were not recognized in earnings foron available-for-sale fixed maturity securities with no prior OTTI loss.effective January 1, 2020.

 All Other Net Unrealized Investment Gains (Losses) in AOCI
 
Net Unrealized
Gains (Losses)
on Investments(1)
 DAC, DSI, VOBA and Reinsurance Recoverables 
Future Policy
Benefits,
Policyholders’
Account
Balances and
Reinsurance Payables
 
Policyholders’
Dividends
 
Deferred
Income
Tax
(Liability)
Benefit
 Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)
 (in millions)
Balance, December 31, 2018$22,531
 $(738) $(791) $(894) $(5,471) $14,637
Net investment gains (losses) on investments arising during the period21,474
       (4,925) 16,549
Reclassification adjustment for (gains) losses included in net income(472)       108
 (364)
Reclassification adjustment for OTTI losses excluded from net income(2)0
       0
 0
Impact of net unrealized investment (gains) losses on DAC, DSI, VOBA and reinsurance recoverables  (1,180)     251
 (929)
Impact of net unrealized investment (gains) losses on future policy benefits and policyholders’ account balances and reinsurance payables    (798)   201
 (597)
Impact of net unrealized investment (gains) losses on policyholders’ dividends      (2,312) 486
 (1,826)
Cumulative effect of adoption of ASU 2017-129
       (2) 7
Balance, June 30, 2019$43,542
 $(1,918) $(1,589) $(3,206) $(9,352) $27,477
 
Net Unrealized
Gains (Losses)
on Investments(1)
 DAC, DSI, VOBA and Reinsurance Recoverables 
Future Policy
Benefits,
Policyholders’
Account
Balances and
Reinsurance Payables
 
Policyholders’
Dividends
 
Deferred
Income
Tax
(Liability)
Benefit
 Accumulated Other Comprehensive Income (Loss) Related to Net Unrealized Investment Gains (Losses)
 (in millions)
Balance, December 31, 2019(2)$45,339
 $(1,585) $(2,909) $(3,366) $(9,367) $28,112
Net investment gains (losses) on investments arising during the period12,195
       (2,599) 9,596
Reclassification adjustment for (gains) losses included in net income(715)       152
 (563)
Reclassification due to allowance for credit losses recorded during the period87
       (19) 68
Impact of net unrealized investment (gains) losses on DAC, DSI, VOBA and reinsurance recoverables  226
     (40) 186
Impact of net unrealized investment (gains) losses on future policy benefits, policyholders’ account balances and reinsurance payables    (1,036)   202
 (834)
Impact of net unrealized investment (gains) losses on policyholders’ dividends      (1,967) 413
 (1,554)
Balance, June 30, 2020$56,906
 $(1,359) $(3,945) $(5,333) $(11,258) $35,011
__________
(1)Includes cash flow and fair value hedges. See Note 5 for information on cash flow and fair value hedges.
(2)Represents “transfers out” related to the portion ofIncludes net unrealized gains (losses) for which an OTTI losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss.loss had been previously recognized.

59

12. EARNINGS PER SHARE

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Table of Contents
PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

13. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and diluted per share computations of Common Stock based on the consolidated earnings of Prudential Financial for the periods indicated is as follows:
 Three Months Ended June 30,
 2020 2019
 Income 
Weighted
Average
Shares
 
Per Share
Amount
 Income 
Weighted
Average
Shares
 
Per Share
Amount
 (in millions, except per share amounts)
Basic earnings per share           
Net income (loss)$(2,405)     $738
    
Less: Income (loss) attributable to noncontrolling interests4
     30
    
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards6
     8
    
Net income (loss) attributable to Prudential Financial available to holders of Common Stock$(2,415) 394.6
 $(6.12) $700
 405.3
 $1.73
Effect of dilutive securities and compensation programs           
Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic$6
     $8
    
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted6
     8
    
Stock options  0.0
     1.3
  
Deferred and long-term compensation programs  0.0
     1.1
  
Exchangeable Surplus Notes0
 0.0
   6
 6.2
  
Diluted earnings per share(1)           
Net income (loss) attributable to Prudential Financial available to holders of Common Stock$(2,415) 394.6
 $(6.12) $706
 413.9
 $1.71
__________ 
 Three Months Ended June 30,
 2019 2018
 Income 
Weighted
Average
Shares
 
Per Share
Amount
 Income 
Weighted
Average
Shares
 
Per Share
Amount
 (in millions, except per share amounts)
Basic earnings per share           
Net income (loss)$738
     $200
    
Less: Income (loss) attributable to noncontrolling interests30
     3
    
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards8
     4
    
Net income (loss) attributable to Prudential Financial available to holders of Common Stock$700
 405.3
 $1.73
 $193
 419.5
 $0.46
Effect of dilutive securities and compensation programs           
Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic$8
     $4
    
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted8
     4
    
Stock options  1.3
     1.5
  
Deferred and long-term compensation programs  1.1
     1.1
  
Exchangeable Surplus Notes6
 6.2
   6
 5.9
  
Diluted earnings per share           
Net income (loss) attributable to Prudential Financial available to holders of Common Stock$706
 413.9
 $1.71
 $199
 428.0
 $0.46


(1)For the three months ended June 30, 2020, weighted average shares for basic earnings per share is also used for calculating diluted earnings per share because dilutive shares and dilutive earnings per share are not applicable when a net loss is reported. As a result of the net loss attributable to Prudential Financial available to holders of Common Stock for the three months ended June 30, 2020, all potential stock options and compensation programs were considered antidilutive.

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Six Months Ended June 30,Six Months Ended June 30,
2019 20182020 2019
Income 
Weighted
Average
Shares
 
Per Share
Amount
 Income 
Weighted
Average
Shares
 
Per Share
Amount
Income 
Weighted
Average
Shares
 
Per Share
Amount
 Income 
Weighted
Average
Shares
 
Per Share
Amount
(in millions, except per share amounts)(in millions, except per share amounts)
Basic earnings per share                      
Net income (loss)$1,675
     $1,564
    $(2,675)     $1,675
    
Less: Income (loss) attributable to noncontrolling interests35
     4
    5
     35
    
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards18
     18
    11
     18
    
Net income (loss) attributable to Prudential Financial available to holders of Common Stock$1,622
 407.3
 $3.98
 $1,542
 420.8
 $3.66
$(2,691) 395.8
 $(6.80) $1,622
 407.3
 $3.98
Effect of dilutive securities and compensation programs                      
Add: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Basic$18
     $18
    $11
     $18
    
Less: Dividends and undistributed earnings allocated to participating unvested share-based payment awards—Diluted18
     18
    11
     18
    
Stock options  1.2
     1.7
    0.0
     1.2
  
Deferred and long-term compensation programs  1.1
     1.1
    0.0
     1.1
  
Exchangeable Surplus Notes11
 6.2
   11
 5.9
  0
 0.0
   11
 6.2
  
Diluted earnings per share(1)                      
Net income (loss) attributable to Prudential Financial available to holders of Common Stock$1,633
 415.8
 $3.93
 $1,553
 429.5
 $3.62
$(2,691) 395.8
 $(6.80) $1,633
 415.8
 $3.93

__________ 
(1)For the six months ended June 30, 2020, weighted average shares for basic earnings per share is also used for calculating diluted earnings per share because dilutive shares and dilutive earnings per share are not applicable when a net loss is reported. As a result of the net loss attributable to Prudential Financial available to holders of Common Stock for the six months ended June 30, 2020, all potential stock options and compensation programs were considered antidilutive.

Unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and included in the computation of earnings per share pursuant to the two-class method. Under this method, earnings attributable to Prudential Financial are allocated between Common Stock and the participating awards, as if the awards were a second class of stock. During periods of net income available to holders of Common Stock, the calculation of earnings per share excludes the income attributable to participating securities in the numerator and the dilutive impact of these securities from the denominator. In the event of a net loss available to holders of Common Stock, undistributed earnings are not allocated to participating securities and the denominator excludes the dilutive impact of these securities as they do not share in the losses of the Company. Undistributed earnings allocated to participating unvested share-based payment awards for the three months ended June 30, 20192020 and 2018,2019, as applicable, were based on 4.55.0 million and 4.94.5 million of such awards, respectively, and for the six months ended June 30, 20192020 and 2018,2019, as applicable, were based on 4.65.0 million and 4.94.6 million of such awards, respectively, weighted for the period they were outstanding.
 
Stock options and shares related to deferred and long-term compensation programs that are considered antidilutive are excluded from the computation of diluted earnings per share. Stock options are considered antidilutive based on application of the treasury stock method or in the event of a net loss available to holders of Common Stock. Shares related to deferred and long-term compensation programs are considered antidilutive in the event of a net loss available to holders of Common Stock. For the periods indicated, the number of stock options and shares related to deferred and long-term compensation programs that were considered antidilutive and were excluded from the computation of diluted earnings per share, weighted for the portion of the period they were outstanding, are as follows:



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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 Three Months Ended June 30,
 2019 2018
 Shares 
Exercise Price
Per Share
 Shares 
Exercise Price
Per Share
 (in millions, except per share amounts, based on weighted average)
Antidilutive stock options based on application of the treasury stock method0.9
 $105.95
 0.8
 $108.61
Antidilutive stock options due to net loss available to holders of Common Stock0.0
   0.0
  
Antidilutive shares based on application of the treasury stock method0.0
   0.0
  
Antidilutive shares due to net loss available to holders of Common Stock0.0
   0.0
  
Total antidilutive stock options and shares0.9
   0.8
  

 Three Months Ended June 30,
 2020 2019
 Shares 
Exercise Price
Per Share
 Shares 
Exercise Price
Per Share
 (in millions, except per share amounts, based on weighted average)
Antidilutive stock options based on application of the treasury stock method4.7
 $74.92
 0.9
 $105.95
Antidilutive stock options due to net loss available to holders of Common Stock0.2
   0.0
  
Antidilutive shares based on application of the treasury stock method0.2
   0.0
  
Antidilutive shares due to net loss available to holders of Common Stock1.3
   0.0
  
Total antidilutive stock options and shares6.4
   0.9
  
Six Months Ended June 30,Six Months Ended June 30,
2019 20182020 2019
Shares 
Exercise Price
Per Share
 Shares 
Exercise Price
Per Share
Shares 
Exercise Price
Per Share
 Shares 
Exercise Price
Per Share
(in millions, except per share amounts, based on weighted average)(in millions, except per share amounts, based on weighted average)
Antidilutive stock options based on application of the treasury stock method1.0
 $104.57
 0.5
 $108.35
3.5
 $79.06
 1.0
 $104.57
Antidilutive stock options due to net loss available to holders of Common Stock0.0
   0.0
  0.5
   0.0
  
Antidilutive shares based on application of the treasury stock method0.0
   0.0
  0.2
   0.0
  
Antidilutive shares due to net loss available to holders of Common Stock0.0
   0.0
  1.5
   0.0
  
Total antidilutive stock options and shares1.0
   0.5
  5.7
   1.0
  

In September 2009, the Company issued $500 million of surplus notes with an interest rate of 5.36% per annum which were exchangeable at the option of the note holders for shares of Common Stock. As of June 30, 2019, the exchange rate for the notes was 12.3877 shares of Common Stock per each $1,000 principal amount of surplus notes, which is equivalent to approximately 6.2 million shares and an exchange price per share of Common Stock of $80.73. In calculating diluted earnings per share under the if-converted method, the potential shares that would be issued assuming a hypothetical exchange, weighted for the period the notes are outstanding, are added to the denominator, and the related interest expense, net of tax, is excluded from the numerator, if the overall effect is dilutive. In July 2019, the note holders delivered notice to the Company indicating their intention to exercise the exchange option. In August 2019, as a result of the note holders’ exercise of the exchange option, the Company issued approximately 6.2 million shares of Common Stock at an exchange rate equal to 12.3877 shares of Common Stock per each $1,000 principal amount of surplus notes. The Company’s obligations under the surplus notes are now satisfied. In calculating diluted earnings per share under the if-converted method, for the three and six months ended June 30, 2019, the potential shares that would be issued assuming a hypothetical exchange, weighted for the period the notes were outstanding, are added to the denominator, and the related interest expense, net of tax, is excluded from the numerator, if the overall effect is dilutive.

14.13. SEGMENT INFORMATION
 
Segments
 
The Company’s principal operations are comprised of five divisions, which together encompass seven segments,PGIM (the Company’s global investment management business), the U.S. Businesses (consisting of the U.S. Workplace Solutions, U.S. Individual Solutions, and itsAssurance IQ divisions), the International Businesses, the Closed Block division, and the Company’s Corporate and Other operations. The PGIM division consists of the PGIM segment. The U.S. Workplace Solutions division consists of the Retirement and Group Insurance segments. Thebusinesses, the U.S. Individual Solutions division consists of the Individual Annuities and Individual Life segments. The Company also collectively refers to the U.S. Workplace Solutions divisionbusinesses, and the U.S. Individual Solutions division as the U.S. Financial Wellness businesses. The International InsuranceAssurance IQ division consists of the International Insurance segment. The Closed Block division consistsAssurance IQ business. In October 2019, the Company completed the acquisition of the Closed Block segment.Assurance IQ, LLC (“Assurance IQ”), a leading consumer solutions platform that offers a range of solutions that help meet consumers’ financial needs. The Closed Block division is accounted for as a divested business that is reported separately from the Divested and Run-off Businesses that are included in Corporate and Other operations.Other. Divested and Run-off Businesses are comprised of businesses that have been, or will be, sold or exited, including businesses that have been placed in wind down status that do not qualify for “discontinued operations” accounting treatment under U.S. GAAP. The Company’s Corporate and Other operations include corporate items and initiatives that are not allocated to business segments and businesses that have been or will be divested or placed in run-off, excluding the Closed BlackBlock division.


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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Adjusted Operating Income
 
The Company analyzes the operating performance of each segment using “adjusted operating income.” Adjusted operating income does not equate to “Income (loss) before income taxes and equity in earnings of operating joint ventures” or “Net income (loss)” as determined in accordance with U.S. GAAP but is the measure of segment profit or loss used by the Company’s chief operating decision maker to evaluate segment performance and allocate resources, and consistent with authoritative guidance, is the measure of segment performance presented below. Adjusted operating income is calculated by adjusting each segment’s “Income (loss) before income taxes and equity in earnings of operating joint ventures” for the following items:

realizedRealized investment gains (losses), net, and related adjustments;
chargesCharges related to realized investment gains (losses), net;
marketMarket experience updates;
net investment gains (losses) on assets supporting experience-rated contractholder liabilitiesDivested and changes in experience-rated contractholder liabilities due to asset value changes;Run-off Businesses;
divested and run-off businesses;Other adjustments; and
equityEquity in earnings of operating joint ventures and earnings attributable to noncontrolling interests.
 
These items are important to an understanding of overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and the Company’s definition of adjusted operating income may differ from that used by other companies. The Company, however, believes that the presentation of adjusted operating income as measured for management purposes enhances the understanding of results of operations by highlighting the results from ongoing operations and the underlying profitability factors of its businesses. For moreadditional information on these reconciling items, see Note 2122 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019. The Company has historically recognizedreflected the immediate impacts from changesresults of its variable annuities hedging programs in current market conditions on estimates of profitability in current period adjusted operating income.income over time. Beginning with the second quarter of 2019,2020, these impacts are excluded from adjustedadjusted operating income which the Company believes enhances the understanding of underlying performance trends. These amounts represent the impact of those changes on DAC and other costs and reserves, primarily resulting from variable annuity and variable and universal life products.

Reconciliation of adjusted operating income to net income (loss)

The table below reconciles “Adjusted operating income before income taxes” to “Income (loss) before income taxes and equity in earnings of operating joint ventures”:
 

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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 2018Three Months Ended
June 30,
 Six Months Ended
June 30,
(in millions)2020 2019 2020 2019
Adjusted operating income before income taxes by segment:       (in millions)
PGIM$264
 $254
 $478
 $486
$324
 $264
 $488
 $478
Total PGIM division264
 254
 478
 486
U.S. Businesses:       
U.S. Workplace Solutions division:       
Retirement467
 277
 718
 594
281
 467
 526
 718
Group Insurance81
 82
 134
 137
5
 81
 49
 134
Total U.S. Workplace Solutions division548
 359
 852
 731
286
 548
 575
 852
U.S. Individual Solutions division:       
Individual Annuities(1)462
 507
 934
 1,026
249
 462
 622
 934
Individual Life(135) 43
 (30) 79
(64) (135) (84) (30)
Total U.S. Individual Solutions division327
 550
 904
 1,105
185
 327
 538
 904
International Insurance849
 784
 1,771
 1,640
Total International Insurance division849
 784
 1,771
 1,640
Corporate and Other operations(335) (286) (747) (580)
Total Corporate and Other(335) (286) (747) (580)
Assurance IQ division(2):       
Assurance IQ(16) 0
 (39) 0
Total Assurance IQ division(16) 0
 (39) 0
Total U.S. Businesses455
 875
 1,074
 1,756
International Businesses(3)693
 790
 1,391
 1,649
Corporate and Other(541) (335) (883) (747)
Total segment adjusted operating income before income taxes1,653
 1,661
 3,258
 3,382
931
 1,594
 2,070
 3,136
Reconciling items:              
Realized investment gains (losses), net, and related adjustments(548) 393
 (1,211) 480
Realized investment gains (losses), net, and related adjustments(4)(3,191) (572) (2,982) (1,194)
Charges related to realized investment gains (losses), net(82) (116) (57) (139)519
 (82) (283) (57)
Market experience updates(2)(208) 0
 (208) 0
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net287
 (193) 741
 (596)
Change in experience-rated contractholder liabilities due to asset value changes(313) 85
 (716) 503
Divested and Run-off businesses:       
Market experience updates(5)55
 (207) (886) (207)
Divested and Run-off Businesses:       
Closed Block division(21) (31) (40) (40)(22) (21) (23) (40)
Other Divested and Run-off businesses112
 (1,526) 286
 (1,598)
Other Divested and Run-off Businesses(3)(602) 168
 (580) 415
Other adjustments(6)32
 0
 77
 0
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(4) (23) (37) (49)(54) (4) (63) (37)
Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures$876
 $250
 $2,016
 $1,943
Income (loss) before income taxes and equity in earnings of operating joint ventures per Unaudited Interim Consolidated Financial Statements$(2,332) $876
 $(2,670) $2,016

__________________
(1)Individual Annuities segment results reflect DAC as if the individual annuityIndividual Annuities business is a stand-alone operation. The elimination of intersegment costs capitalized in accordance with this policy is included in consolidating adjustments within Corporate and Other operations.
(2)RepresentsAssurance IQ was acquired by the immediate impactsCompany in current period results from changesOctober 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in current market conditionsthe Company’s Annual Report on estimates of profitability, which are excluded from adjusted operating income beginning withForm 10-K for the second quarter ofyear ended December 31, 2019. The Company has historically recognized these impacts in adjusted operating income.

Reconciliation of selected financial information

The table below presents total revenues and assets for the Company’s reportable segments and its Corporate and Other operations for the periods and as of the dates indicated:

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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 Revenues Total Assets
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 June 30,
2019
 December 31,
2018
 2019 2018 2019 2018 
 (in millions)
PGIM$926
 $816
 $1,796
 $1,642
 $47,681
 $47,690
Total PGIM division926
 816
 1,796
 1,642
 47,681
 47,690
Retirement3,586
 2,988
 6,225
 5,077
 187,907
 175,525
Group Insurance1,461
 1,424
 2,902
 2,840
 43,699
 41,727
Total U.S. Workplace Solutions division5,047
 4,412
 9,127
 7,917
 231,606
 217,252
Individual Annuities1,288
 1,266
 2,523
 2,518
 184,220
 167,899
Individual Life1,508
 1,451
 2,990
 2,876
 91,245
 83,739
Total U.S. Individual Solutions division2,796
 2,717
 5,513
 5,394
 275,465
 251,638
International Insurance5,501
 5,288
 11,653
 11,328
 238,608
 222,633
Total International Insurance division5,501
 5,288
 11,653

11,328

238,608

222,633
Corporate and Other operations(164) (190) (335) (363) 19,053
 16,826
Total Corporate and Other(164) (190) (335) (363) 19,053
 16,826
Total14,106
 13,043
 27,754

25,918

812,413

756,039
Reconciling items:           
Realized investment gains (losses), net, and related adjustments(548) 393
 (1,211) 480
    
Charges related to realized investment gains (losses), net(54) (92) (126) (163)    
Market experience updates(1)(7) 0 (7) 0    
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net287
 (193) 741
 (596)    
Divested and Run-off businesses:           
Closed Block division1,301
 1,388
 2,675
 2,551
 61,412
 59,039
Other Divested and Run-off businesses336
 143
 724
 275
    
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(33) (27) (71) (53)    
Total per Unaudited Interim Consolidated Financial Statements$15,388
 $14,655
 $30,479
 $28,412
 $873,825
 $815,078

__________
(1)(3)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 for additional information.
(4)Prior period amounts have been updated to conform to current period presentation.
(5)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019.
(6)Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration.

Reconciliation of select financial information

The tables below present certain financial information for the Company’s segments and its Corporate and Other operations, including assets by segment and revenues by segment on an adjusted operating income basis, and the reconciliation of the segment totals to amounts reported in the Consolidated Financial Statements.

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 June 30,
2020
 December 31,
2019
Assets by segment:(in millions)
PGIM$47,722
 $47,655
U.S. Businesses:   
U.S. Workplace Solutions division:   
Retirement203,191
 198,153
Group Insurance43,900
 43,712
Total U.S. Workplace Solutions division247,091
 241,865
U.S. Individual Solutions division:   
Individual Annuities191,259
 189,040
Individual Life100,429
 96,072
Total U.S. Individual Solutions division291,688
 285,112
Assurance IQ division(1):   
Assurance IQ2,599
 2,639
Total Assurance IQ division2,599
 2,639
Total U.S. Businesses541,378
 529,616
International Businesses(2)226,611
 220,381
Corporate and Other(2)37,927
 37,573
Closed Block division61,749
 61,327
Total assets per Unaudited Interim Consolidated Financial Statements$915,387
 $896,552
__________
(1)Assurance IQ was acquired by the Company has historically recognized thesein October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
(2)Effective second quarter of 2020, the carrying amounts of assets of POK are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 for additional information.

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
Revenues on an adjusted operating income basis:(in millions)
PGIM$957
 $926
 $1,735
 $1,796
U.S. Businesses:       
U.S. Workplace Solutions division:       
Retirement2,992
 3,586
 5,429
 6,225
Group Insurance1,471
 1,461
 2,895
 2,902
Total U.S. Workplace Solutions division4,463
 5,047
 8,324
 9,127
U.S. Individual Solutions division:       
Individual Annuities953
 1,288
 2,101
 2,523
Individual Life1,563
 1,508
 3,093
 2,990
Total U.S. Individual Solutions division2,516
 2,796
 5,194
 5,513
Assurance IQ division(1):       
Assurance IQ59
 0
 119
 0
Total Assurance IQ division59
 0
 119
 0
Total U.S. Businesses7,038
 7,843
 13,637
 14,640
International Businesses(2)5,233
 5,058
 11,010
 10,782
Corporate and Other(150) (164) (355) (335)
Total revenues on an adjusted operating income basis13,078
 13,663
 26,027

26,883
Reconciling items:       
Realized investment gains (losses), net, and related adjustments(3)(2,241) (259) (2,695) (478)
Charges related to realized investment gains (losses), net(20) (54) (81) (125)
Market experience updates(4)(14) (7) (348) (7)
Divested and Run-off Businesses:       
Closed Block division1,340
 1,301
 2,017
 2,675
Other Divested and Run-off Businesses(2)(18) 777
 623
 1,602
Other adjustments(5)47
 0
 105
 0
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(57) (33) (69) (71)
Total revenues per Unaudited Interim Consolidated Financial Statements$12,115
 $15,388
 $25,579
 $30,479

__________
(1)Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
(2)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 for additional information.
(3)Prior period amounts have been updated to conform to current period presentation.
(4)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income.income beginning with the second quarter of 2019.
(5)Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration.

Intersegment revenues

Management has determined the intersegment revenues with reference to market rates. Intersegment revenues are eliminated in consolidation in Corporate and Other operations. The PGIM segment revenues include intersegment revenues, primarily consisting of asset-based management and administration fees, as follows: 
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2019 2018 2019 2018
 (in millions)
PGIM segment intersegment revenues$194
 $185
 $374
 $369
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
PGIM segment intersegment revenues$208
 $194
 $425
 $374

 

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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Segments may also enter into internal derivative contracts with other segments. For adjusted operating income, each segment accounts for the internal derivative results consistent with the manner in which that segment accounts for other similar external derivatives.


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PRUDENTIAL FINANCIAL, INC.
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Asset management and service fees

The table below presents asset management and service fees, predominantly related to investment management activities, for the periods indicated:
 
Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018Three Months Ended June 30, Six Months Ended June 30,
(in millions)2020 2019 2020 2019
       (in millions)
Asset-based management fees$872
 $856
 $1,715
 $1,717
$840
 $872
 $1,715
 $1,715
Performance-based incentive fees62
 6
 98
 11
16
 62
 30
 98
Other fees149
 148
 286
 308
135
 149
 279
 286
Total asset management and service fees$1,083
 $1,010
 $2,099
 $2,036
$991
 $1,083
 $2,024
 $2,099



15.14. COMMITMENTS AND CONTINGENT LIABILITIES
 
Commitments and Guarantees
 
Commercial Mortgage Loan Commitments
June 30,
2019
 December 31,
2018
June 30,
2020
 December 31,
2019
(in millions)(in millions)
Total outstanding mortgage loan commitments$2,293
 $3,299
$1,754
 $2,129
Portion of commitment where prearrangement to sell to investor exists$538
 $1,490
$787
 $751

 
In connection with the Company’s commercial mortgage operations, it originates commercial mortgage loans. Commitments for loans that will be held for sale are recognized as derivatives and recorded at fair value. In certain of these transactions, the Company pre-arranges that it will sell the loan to an investor, including to government sponsored entities as discussed below, after the Company funds the loan. The above amount includes unfunded commitments that are not unconditionally cancellable. For related credit exposure, there was an allowance for credit losses of $2 million as of June 30, 2020, which is a change of $0 million and $(1) million for the three and six months ended June 30, 2020, respectively.
 
Commitments to Purchase Investments (excluding Commercial Mortgage Loans)
June 30,
2019
 December 31,
2018
June 30,
2020
 December 31,
2019
(in millions)(in millions)
Expected to be funded from the general account and other operations outside the separate accounts$7,133
 $6,941
$8,394
 $7,372
Expected to be funded from separate accounts$402
 $147
$53
 $49


The Company has other commitments to purchase or fund investments, some of which are contingent upon events or circumstances not under the Company’s control, including those at the discretion of the Company’s counterparties. The Company anticipates a portion of these commitments will ultimately be funded from its separate accounts. The above amount includes unfunded commitments that are not unconditionally cancellable. There were 0 related charges for credit losses for the three and six ended June 30, 2020.

Indemnification of Securities Lending and Securities Repurchase Transactions
 June 30,
2019
 December 31,
2018
 (in millions)
Indemnification provided to certain clients for securities lending and securities repurchase transactions(1)$6,520
 $5,399
Fair value of related collateral associated with above indemnifications(1)$6,650
 $5,503
Accrued liability associated with guarantee$0
 $0

__________ 
(1)
As of June 30, 2019, indemnification provided to certain clients and fair value of related collateral associated with such indemnification include $64 million and $63 million, respectively, related to securities repurchase transactions.

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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Indemnification of Securities Lending and Securities Repurchase Transactions
 June 30,
2020
 December 31,
2019
 (in millions)
Indemnification provided to certain clients for securities lending and securities repurchase transactions(1)$7,167
 $5,071
Fair value of related collateral associated with above indemnifications(2)$7,317
 $5,204
Accrued liability associated with guarantee$0
 $0

__________ 
(1)Includes $34 million and $38 million related to securities repurchase transactions as of June 30, 2020 and December 31, 2019, respectively.
(2)Includes $34 million and $37 million related to securities repurchase transactions as of June 30, 2020 and December 31, 2019, respectively.

In the normal course of business, the Company may facilitate securities lending or securities repurchase transactions on behalf of certain client accounts (collectively, “the accounts”). In certain of these arrangements, the Company has provided an indemnification to the accounts to hold them harmless against losses caused by counterparty (i.e., borrower) defaults associated with such transactions facilitated by the Company. In securities lending transactions, collateral is provided by the counterparty to the accounts at the inception of the transaction in an amount at least equal to 102% of the fair value of the loaned securities and the collateral is maintained daily to equal at least 102% of the fair value of the loaned securities. In securities repurchase transactions, collateral is provided by the counterparty to the accounts at the inception of the transaction in an amount at least equal to 95% of the fair value of the securities subject to repurchase and the collateral is maintained daily to equal at least 95% of the fair value of the securities subject to repurchase. The Company is only at risk if the counterparty to the transaction defaults and the value of the collateral held is less than the value of the securities loaned to, or subject to repurchase from, such counterparty. The Company believes the possibility of any payments under these indemnities is remote.
 
Credit Derivatives Written
 
As discussed further in Note 5, the Company writes credit derivatives under which the Company is obligated to pay the counterparty the referenced amount of the contract and receive in return the defaulted security or similar security.
 
Guarantees of Asset Values
June 30,
2019
 December 31,
2018
June 30,
2020
 December 31,
2019
(in millions)(in millions)
Guaranteed value of third-parties’ assets$80,337
 $79,215
$82,325
 $80,009
Fair value of collateral supporting these assets$81,338
 $77,897
$86,247
 $81,604
Asset (liability) associated with guarantee, carried at fair value$1
 $2
$1
 $1

 
Certain contracts underwritten by the Retirement segment include guarantees related to financial assets owned by the guaranteed party. These contracts are accounted for as derivatives and carried at fair value. The collateral supporting these guarantees is not reflected on the Unaudited Interim Consolidated Statements of Financial Position.
 
Indemnification of Serviced Mortgage Loans
June 30,
2019
 December 31,
2018
June 30,
2020
 December 31,
2019
(in millions)(in millions)
Maximum exposure under indemnification agreements for mortgage loans serviced by the Company$1,980
 $1,828
$2,278
 $2,113
First-loss exposure portion of above$584
 $543
$668
 $622
Accrued liability associated with guarantees(1)$18
 $17
$37
 $19

__________
(1)As of June 30, 2020, the accrued liability associated with guarantees includes an allowance for credit losses of $17 million, which is a change of $0 million and $(1) million for the three and six months ended June 30, 2020, respectively.
 
As part of the commercial mortgage activities of the Company’s PGIM segment, the Company provides commercial mortgage origination, underwriting and servicing for certain government sponsored entities, such as Fannie Mae and Freddie Mac. The Company has agreed to indemnify the government sponsored entities for a portion of the credit risk associated with certain of the mortgages it services through a delegated authority arrangement. Under these arrangements, the Company originates multi-family

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mortgages for sale to the government sponsored entities based on underwriting standards they specify, and makes payments to them for a specified percentage share of losses they incur on certain loans serviced by the Company. The Company’s percentage share of losses incurred generally varies from 2%4% to 20% of the loan balance, and is typically based on a first-loss exposure for a stated percentage of the loan balance, plus a shared exposure with the government sponsored entity for any losses in excess of the stated first-loss percentage, subject to a contractually specified maximum percentage. The Company determines the liability related to this exposure using historical loss experience, and the size and remaining life of the asset. The Company serviced $15,560$18,154 million and $14,335$16,878 million of mortgages subject to these loss-sharing arrangements as of June 30, 20192020 and December 31, 2018,2019, respectively, all of which are collateralized by first priority liens on the underlying multi-family residential properties. As of June 30, 2019,2020, these mortgages had a weighted-average debt service coverage ratio of 1.891.96 times and a weighted-average loan-to-value ratio of 61%62%. As of December 31, 2018,2019, these mortgages had a weighted average debt service coverage ratio of 1.831.88 times and a weighted-average loan-to-value ratio of 62%61%. The Company had no0 losses related to indemnifications that were settled for both the six months ended June 30, 20192020 and 2018.2019.
 

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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Other Guarantees
June 30,
2019
 December 31,
2018
June 30,
2020
 December 31,
2019
(in millions)(in millions)
Other guarantees where amount can be determined$55
 $77
$51
 $55
Accrued liability for other guarantees and indemnifications$0
 $0
$0
 $0

 
The Company is also subject to other financial guarantees and indemnity arrangements. The Company has provided indemnities and guarantees related to acquisitions, dispositions, investments and other transactions that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential obligation is subject to contractual limitations, while in other cases such limitations are not specified or applicable. Included above are $12reflects $9 million and $13$12 million as of June 30, 20192020 and December 31, 2018,2019, respectively, of yield maintenance guarantees related to certain investments the Company sold. The Company does not expect to make any payments on these guarantees and is not carrying any liabilities associated with these guarantees.
 
Since certain of these obligations are not subject to limitations, it is not possible to determine the maximum potential amount due under these guarantees. The accrued liabilities identified above do not include retained liabilities associated with sold businesses.

Assurance IQ Contingent Consideration Liability

On October 10, 2019, the Company completed its acquisition of Assurance IQ, a leading consumer solutions platform that offers a range of solutions that help meet consumers’ financial needs. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Pursuant to the merger agreement, contingent consideration as well as additional compensation awards are payable in 2023 in a mix of approximately 25% cash and 75% Prudential Financial Common Stock, contingent upon Assurance IQ’s achievement of certain targets for gross revenues net of associated selling expenses (“Variable Profits”) over the period from January 1, 2020 through December 31, 2022 as follows:
If Variable Profits are less than $900 million, 0 additional amount is payable.
If Variable Profits are greater than $1,300 million, an additional amount of $1,150 million is payable.
If Variable Profits are greater than $900 million but less than or equal to $1,300 million, an additional amount is payable equal to the product of (i) the quotient of (A) an amount equal to (1) Variable Profits achieved minus (2) $900 million divided by (B) $400 million and (ii) $1,150 million.

Payment of the additional amount may be accelerated if the Company violates certain provisions of the merger agreement requiring it to take or refrain from taking certain actions, including with respect to the management and operation of Assurance IQ.

The contingent consideration liability referred to above is reported at fair value. Fair value is determined based on the present value of expected payments under the arrangement described above, using an internally developed option pricing model based on a number of assumptions, including certain unobservable assumptions for future Variable Profits and the future price of Prudential Financial Common Stock. The fair value of the liability is updated each reporting period, with changes in fair value reported within

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“Other income.” The fair value of the contingent consideration liability was less than $1 million as of June 30, 2020 and $105 million as of December 31, 2019 (see Note 6 for additional information). The stock-based component of contingent consideration impacts the share count for purposes of calculating the Company’s diluted earnings per share when Assurance IQ’s actual Variable Profits achieved as of the end of the reporting period is in excess of $900 million, as if the contingent consideration performance period ended on the applicable reporting date. The number of shares issued as part of the contingent consideration payable in 2023 will be based on a $83.71 price per share.

Contingent Liabilities
 
On an ongoing basis, the Company and its regulators review its operations including, but not limited to, sales and other customer interface procedures and practices, and procedures for meeting obligations to its customers and other parties. These reviews may result in the modification or enhancement of processes or the imposition of other action plans, including concerning management oversight, sales and other customer interface procedures and practices, and the timing or computation of payments to customers and other parties. In certain cases, if appropriate, the Company may offer customers or other parties remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.
 
The Company is subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment of unclaimed or abandoned funds, and is subject to audit and examination for compliance with these requirements. For additional discussion of these matters, see “Litigation and Regulatory Matters” below.
 
It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be materially affected as a result of payments in connection with the matters discussed above or other matters depending, in part, upon the results of operations or cash flow for such period. Management believes, however, that ultimate payments in connection with these matters, after consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on the Company’s financial position.

Litigation and Regulatory Matters
The Company is subject to legal and regulatory actions in the ordinary course of its businesses. Pending legal and regulatory actions include proceedings relating to aspects of the Company’s businesses and operations that are specific to it and proceedings that are typical of the businesses in which it operates, including in both cases businesses that have been either divested or placed in wind down status. Some of these proceedings have been brought on behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. The outcome of litigation or a regulatory matter, and the amount or range of potential loss at any particular time, is often inherently uncertain.
The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established but the matter, if potentially material, is disclosed, including matters discussed below. The Company estimates that as of June 30, 2019,2020, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is less than $250 million. Any estimate is not an indication of expected loss, if any, or the Company’s maximum possible loss exposure on such matters. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.

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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following discussion of litigation and regulatory matters provides an update of those matters discussed in Note 2223 to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, and should be read in conjunction with the complete descriptions provided in the Form 10-K.
Individual Annuities, Individual Life, and Group Insurance

Behfarin v. Pruco Life
HuffmanIn June 2020, the court issued an order: (i) granting plaintiffs’ motion for certification of the settlement class; (ii) approving the proposed nationwide class settlement agreement; (iii) approving the class notice; (iv) awarding attorneys’ fees and costs to plaintiffs and a reduced incentive award to Behfarin; and (v) dismissing the action with prejudice, but maintaining jurisdiction over the settlement.
Securities Litigation
City of Warren v. The Prudential Insurance Company of AmericaPFI, et al

In April 2019,March 2020, the court entered a Final Judgmentissued an order consolidating this action with Donald P. Crawford v. PFI, et al. under the caption In re Prudential Financial, Inc. Securities Litigation. In June 2020, plaintiffs filed an amended complaint and Order of Dismissal. This matter is now closed.added Robert M. Falzon, PFI’s vice chairman, as an individual defendant.

Escheatment Litigation

Total Asset Recovery Services, LLCDonald P. Crawford v. MetLife, Inc., et al., Prudential Financial, Inc., The Prudential Insurance Company of America, and Prudential Insurance Agency, LLC

In April 2019, defendants’ motion to dismiss the Second Amended Complaint was granted and plaintiff subsequently filed a Notice of Appeal with the New York State Supreme Court, First Department.

Residential Mortgage-Backed Securities (“RMBS”) Trustee Litigation

PICA et al. v. HSBC,PFI, et al.

In May 2019,March 2020, the court dismissedissued an order consolidating this action with City of Warren v. PFI, et al. under the casecaption In re Prudential Financial, Inc. Securities Litigation. Case updates are consolidated with prejudice. This matter is now closed.the City of Warren action.

PICA et al. v. U.S. Bank N.A.Shareholder Demands

In January 2020, the Board of Directors received a shareholder demand letter containing allegations: (i) of wrongdoing similar to those alleged in the City of Warren and Crawford complaints; and (ii) that certain of the Company’s current and former directors and executive officers breached their fiduciary duties of loyalty, due care and candor. The demand letter requests that the Board of Directors investigate and commence legal proceedings against the named individuals to recover for the Company’s benefit the damages purportedly sustained by the Company as a result of the alleged breaches. In February 2020, the Board of Directors authorized the creation of a special committee to investigate the allegations set forth in the shareholder demand letter. In April 2019, a decision2020, the Company received additional shareholder demands raising allegations similar to those contained in the January 2020 demand, and order was issued dismissing plaintiffs’ state court action with prejudice.

PICA et al. v. Wells Fargo Bank, et al.

In May 2019, the state court entered an Order and Final Judgment approving the class action settlement and dismissing the case with prejudice.may be subject prospectively to additional activity relating to these matters.

LIBOR Litigation

Prudential Investment Portfolios 2, f/k/a Dryden Core Investment Fund, o/b/o Prudential Core Short-Term Bond Fund and Prudential Core Taxable Money Market Fund v. Bank of America Corporation, et al.

In June 2019,May 2020, the court issued two orders approving stipulations dismissing with prejudice Prudential’s claims against Citigroup Inc., Citibank, N.A., Citigroup FundingBarclays Bank PLC, Barclays Capital Inc., and Citigroup Global Markets Inc.Barclays PLC.

Regulatory Matters
Securities Lending and Foreign Tax Reclaim Matter
In 2016, the Company self-reported to the SEC and the U.S. Department of Labor (“DOL”), and notified other regulators, that in some cases it failed to maximize securities lending income for the benefit of certain separate account investments due to a long-standing restriction benefiting the Company that limited the availability of loanable securities. The Company has removed the restriction and implemented a remediation plan for the benefit of customers. As part of the Company’s review of this matter, in 2018 it further self-reported to the SEC, and notified other regulators, that in some cases it failed to timely process foreign tax reclaims for the separate account investments. The Company has corrected the foreign tax reclaim process and has implemented a remediation plan for the benefit of customers.
The DOL’s review of the securities lending matter is closed. The Company is cooperating with the SEC in its review of the securities lending and foreign tax reclaim matters (which includes a review of the remediation plans) and has entered into discussions with the SEC staff regarding a possible settlement of both matters that would potentially involve charges under the Investment Advisers Act and financial remedies. The Company cannot predict the outcome of the discussions with the SEC regarding these matters.

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Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Summary

The Company’s litigation and regulatory matters are subject to many uncertainties, and given their complexity and scope, their outcome cannot be predicted. It is possible that the Company’s results of operations or cash flow in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters depending, in part, upon the results of operations or cash flow for such period. In light of the unpredictability of the Company’s litigation and regulatory matters, it is also possible that in certain cases an ultimate unfavorable resolution of one or more pending litigation or regulatory matters could have a material adverse effect on the Company’s financial position. Management believes, however, that, based on information currently known to it, the ultimate outcome of all pending litigation and regulatory matters, after consideration of applicable reserves and rights to indemnification, is not likely to have a material adverse effect on the Company’s financial position.


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the consolidated financial condition of Prudential Financial, Inc. (“Prudential,” “Prudential Financial,” “PFI,” or “the Company”) as of June 30, 2019,2020, compared with December 31, 2018,2019, and its consolidated results of operations for the three and six months ended June 30, 20192020 and 2018.2019. You should read the following analysis of our consolidated financial condition and results of operations in conjunction with the MD&A, the “Risk Factors” section, and the audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, as well as the statements under “Forward-Looking Statements”Statements,” the “Risk Factors” section, and the Unaudited Interim Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.


Overview

Prudential Financial, a financial services leader with approximately $1.497$1.605 trillion of assets under management as of June 30, 2019,2020, has operations primarily in the United States of America (“U.S.”), Asia, Europe and Latin America. Through our subsidiaries and affiliates, we offer a wide array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management. We offer these products and services to individual and institutional customers through one of the largest distribution networks in the financial services industry.

Our principal operations are comprised of five divisions, which together encompass seven segments,PGIM (our global investment management business), our U.S. Businesses (consisting of our U.S. Workplace Solutions, U.S. Individual Solutions, and Assurance IQ divisions), our International Businesses, the Closed Block division, and our Corporate and Other operations. The PGIM division is comprised of the PGIM segment, our global investment management businesses. The U.S. Workplace Solutions division consists of our Retirement and Group Insurance segments, andbusinesses, the U.S. Individual Solutions division consists of our Individual Annuities and Individual Life segments. We also collectively refer to the U.S. Workplace Solutions divisionbusinesses, and the U.S. Individual Solutions division as our U.S. Financial Wellness businesses, as described further below. The International InsuranceAssurance IQ division consists of our International Insurance segment. The Closed Block division consistsAssurance IQ business. In October 2019, we completed the acquisition of our Closed Block segment.Assurance IQ, LLC (“Assurance IQ”), a leading consumer solutions platform that offers a range of solutions that help meet consumers’ financial needs (see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information). The Closed Block division is accounted for as a divested business that is reported separately from the Divested and Run-off Businesses that are included in Corporate and Other operations.Other. Divested and Run-off Businesses are comprised of businesses that have been, or will be, sold or exited, including businesses that have been placed in wind down status that do not qualify for “discontinued operations” accounting treatment under generally accepted accounting principles in the United States of America (“U.S. GAAP”). Our Corporate and Other operations include corporate items and initiatives that are not allocated to business segments and businesses that have been or will be divested or placed in run-off, excluding the Closed Block division.

Our strategy centers on our mix of high-quality protection, retirement and investment management businesses which creates growth potential due to earnings diversification and the opportunity to provide customers with integrated cross-business solutions, as well as capital benefits from a balanced risk profile. We are well positioned to meet the needs of customers and tap into significant market opportunities through our U.S. Financial Wellness businesses (represented by our U.S. Workplace Solutions and U.S. Individual Solutions Divisions),Businesses, PGIM (our investment management business) and our International Insurance business.Businesses.

We attribute financing costs to each segment based on the amount of financing used by each segment, excluding financing costs associated with corporate debt which are reflected in our Corporate and Other operations. The net investment income of each segment includes earnings on the amount of capital that management believes is necessary to support the risks of that segment.

U.S. Financial Wellness
COVID-19

Each componentBeginning in the first quarter of 2020, the outbreak of the 2019 novel coronavirus (“COVID-19”) created extreme stress and disruption in the global economy and financial markets and elevated mortality and morbidity experience for the global population. These events impacted our U.S. Financial Wellness businesses operates at scale,results of operations in the current period and together, they leverageare expected to drive future impacts to our broad setresults of capabilitiesoperations. The Company has taken several measures to meetmanage the evolving needsimpacts of customers.this crisis. The actual and expected impacts of these events and other items are included in the following update:

We seeOutlook

PGIM. Our global investment management business, PGIM, is focused on maintaining strong investment performance while leveraging the scale of its approximately $1.4 trillion of assets under management through its distinctive multi-manager model. Although equity markets have largely recovered and credit spreads have compressed from their highs, there remain risks to earnings across the asset management industry, including PGIM, if economic conditions remain unstable and markets decline or credit spreads widen further. The economic downturn is also having an impact on real estate prices as well as transaction volume in certain private asset classes. These factors could lead to lower fee-based revenues, incentive fees taking longer to be realized and losses emerging in our strategic investing portfolio. While the impacts of COVID-19 are a net negative for PGIM, and the overall asset management industry, we believe there is an opportunity for earnings growth as markets recover, potentially leading to addresshigher asset management fees, incentive fees and transaction activity. We believe PGIM’s uniquely diversified global platform is well positioned to be resilient in the evolving needsface of market and industry headwinds. Underpinning our growth strategy is our ability to continue to deliver robust investment performance, and to attract and retain high-caliber investment talent.
U.S. Businesses:

U.S. Workplace Solutions. In our Retirement business, we expect that account values in our full-service business will be impacted by market volatility and by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provides qualified individuals the ability to withdraw from defined contribution plans and individual customers, workplace clients, and society at large throughretirement accounts up to $100,000 penalty-free, with the withdrawal taxed over a three-year period (unless otherwise elected by the individual). Market conditions are also likely to have an impact on Retirement sales volume. We continue to maintain pricing discipline to ensure we are achieving appropriate returns in the current market, including in our financial wellness solutions. We possessfunded pension risk transfer business, where we have seen a slowdown in the key components to executepipeline as a result of the impact of these market conditions on this strategy, including workplace solutions covering approximately twenty million individuals; solutions that cover protection, retirement, savings, income, andpension plan funding levels. Given many of the products in our institutional investment needs; and a customer-centric approach with different ways to engage with our clients through multiple channels such as meeting with oneproducts business assume longevity risk, elevated levels of our financial advisors, calling or video-conferencing with an advisor, or interacting with usmortality resulting from COVID-19 may continue, resulting in a purely digital manner. Our goal ishigher level of underwriting gains in this business. In our Group Insurance business, we expect COVID-19 to meet our customers’ needs when, where and how they want. By leveraging technology and our scale, we aim to significantly expand our presencedrive elevated levels of mortality resulting in increased life insurance claims in the market, build deepernear-term. In both Retirement and longer-lasting relationships with customers and clients, and make a meaningful differenceGroup Insurance, we believe over time COVID-19 may contribute to heightened interest in the solutions we offer to help improve the financial wellness of their lives.individuals at the workplace; however, we expect near-term revenue growth prospects to be slowed by the impact of social distancing on new business sales and the impact of employee financial hardships on utilization of workplace benefits.

We are uniquely positioned to capture this opportunity, helping more customers and clients and driving long-term sustainable growth. We are thus accelerating the transformation of this strategy, to increaseU.S. Individual Solutions. In our competitive advantage by enhancing the experience of our customers and enabling the capabilities of our businesses, to more rapidly realize the benefits of our margins and growth rate. The catalyst for this transformation is our financial wellness initiative, and at the center of it, is improving the customer experience by re-imagining our end-to-end operations, leveraging state-of-the-art technology, and investing in our talent.

In 2019, we began implementing a multi-year plan of programs that span across our U.S. Financial Wellness businesses and the functional areas that support those businesses. In order to implement these programs on an accelerated basis,Individual Life insurance business, we expect COVID-19 to incur significant expenses related to technology, systems, severance, reskillingdrive elevated levels of mortality, resulting in increased life insurance claims in the near-term. In our Individual Annuities business, we expect account values and related charges. Over the next several years, we also expect to see significant expense efficiencies including from our streamlined technology-enabled processes. In the longer-term, the higher quality customer experience should accelerate revenue growth, resulting from increased revenues in our Workplace Solutions businesses due to the competitiveness of our financial wellness platform and the increased utilization of the existing employer-offered benefitsfee income will be impacted by our clients’ employees, and increased revenues inmarket volatility. Across our Individual Solutions businesses, we have taken pricing and product actions, including the suspension of our single life guaranteed universal life product in July 2020, to ensure we realize appropriate returns for the current economic environment, and to diversify our product mix to further limit our sensitivity to interest rates, while maintaining a solid value proposition for our customers. In addition, while our distribution platforms include a suite of digital, hybrid advisory, and in-person advisory options, mandated social distancing has limited in-person engagement between customers and advisors. Collectively, we expect the product actions we have taken and the constrained distribution environment to adversely impact our sales prospects in the near-term. Sales to employees of our Workplace Solutions clients may also be delayed as a result of current economic conditions, as we encourage employees to prioritize workplace benefits to regain or retain their financial wellness. We continue to expect to offer our Individual Solutions products on the Assurance IQ platform over time, beginning with an Individual Life product offering added in the second quarter.

Assurance IQ. We expect the impacts of COVID-19 on our Assurance IQ business to be limited, as this business does not have direct exposure to capital markets conditions or mortality, and its distribution is not dependent on in-person engagement with consumers; however, consumer financial hardships created by the current economic conditions could negatively impact persistency and expected sales levels.
International Businesses. Our International Businesses remain focused on meeting customers’ protection and financial needs and maintaining the underlying strength of our distribution channels. With the implementation of social distancing protocols globally, in-person engagement between customers and advisors has been reduced within both our captive agent and third-party distribution channels. Reflective of the disruptions in the global financial markets and the low interest rate environment, certain pricing and product actions have been implemented and we expect we will take additional actions as needed as we move forward to ensure we maintain appropriate returns, while maintaining a solid value proposition for our customers. Collectively, we expect the constrained distribution environment and potential product actions may adversely impact our sales prospects in the near-term. However, we expect the adverse impacts to be mitigated over time and we have seen a degree of relaxation of social distancing protocols in some markets and increased usage of virtual tools to connect with customers. We also expect an increased level of claims in the near-term and temporary higher expenses mostly related to supporting our captive agents. We believe over time COVID-19 may contribute to heightened interest in protection products, particularly the death protection products that are at the core of our needs-based selling approach.

Corporate and Other Operations. In our Corporate and Other operations, if equity markets and interest rates decline through December 31, 2020, it will potentially result in higher expenses in the future associated with the Company’s pension and post retirement plans due to our ability to provide additional solutions to our clients’ employeeslower than expected returns on plan assets and to other retail customers.increases in plan obligations.
Results of Operations. For the three months and six months ended June 30, 2020 we reported a net loss of $(2,409) million and $(2,680) million, respectively, as unfavorable financial market conditions had a substantial negative effect on the reported results of our businesses. See “Results of Operations” and “Results of Operations by Segment” for a discussion of results for second quarter and first half of the year.

Liquidity. As of June 30, 2020, we had $4,517 million in highly liquid assets at Prudential Financial. During the first half of the year, we took several steps to proactively manage liquidity, including entering into a $1.5 billion facility agreement with a Delaware trust to increase our alternative sources of liquidity and issuing $1.5 billion in senior debt in part to pre-

Business Updatefund 2020 and 2021 maturities. We temporarily suspended Common Stock repurchases beginning April 1, 2020 under our existing repurchase authorization, after repurchasing $500 million of shares of Prudential Financial’s Common Stock in the first quarter of 2020. We continue to evaluate the resumption of share repurchases under our existing Board authorization for 2020. The impact of COVID-19 and related market dislocations could strain our existing liquidity and cause us to increase the use of our alternative sources of liquidity, which could result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings or ratings outlooks. See “Liquidity and Capital Resources—Liquidity” for a discussion of our liquidity.

Capital Resources. As of June 30, 2020, all of our significant insurance subsidiaries maintained capital levels consistent with their ratings targets. However, market conditions could negatively impact the statutory capital of our insurance companies and constrain our overall capital flexibility, including as a result of credit migration and losses in our investment portfolio as discussed below. Adverse market conditions could require us to take additional management actions for our insurance subsidiaries to maintain capital consistent with their ratings objectives, which may include redeploying financial resources from internal sources, or using available external sources of capital or seeking additional sources. See “Liquidity and Capital Resources—Capital” for a discussion of our capital resources.

Investment Portfolio. Net unrealized gains (losses) on fixed maturity investments (excluding securities classified as trading) were a net unrealized gain of $54,717 million as of June 30, 2020, compared to a net unrealized gain of $44,891 million as of December 31, 2019. Gross unrealized gains increased from $46,206 million as of December 31, 2019 to $57,171 million as of June 30, 2020 and gross unrealized losses increased from $1,315 million to $2,454 million for the same period. The increase in gross unrealized gains was primarily due to a decrease in U.S. interest rates, while the increase in gross unrealized losses was primarily due to credit spread widening and liquidity concerns. The continued impact of COVID-19 on the global economy and corporate credit may continue to result in negative credit migration and possible losses in our investment portfolio. Due to the highly uncertain nature of these conditions, it is not possible to estimate the overall impacts at this time. The sectors most impacted by the COVID-19 crisis include energy, consumer cyclical and retail related investments (see “—General Account Investments” for additional information). During 2020, approximately 1% of total invested assets were modified to allow for limited forbearance. Under the terms of forbearance, the borrower is allowed to defer a portion of current year principal and/or interest payments for a short period (e.g., 6 months). These deferrals accrue additional interest and do not have a material impact on our investment value.

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

Underwriting Results. See “Segment Results of Operations” for a discussion of mortality experience in each of our segments.

In the second quarter of 2020, we estimate that COVID-19 had a net positive impact on our underwriting results reflecting the complementary risk profile of our mortality and longevity exposures. Going forward, we estimate that our net underwriting results will be adversely impacted by approximately $70 million for every incremental 100,000 fatalities in the U.S. However, the ultimate impact on our underwriting results will depend on factors such as age, geographic location, and insured versus uninsured populations among the fatalities.

Expenses. We expect higher expenses in 2020 from costs associated with COVID-19, including approximately $80 million incurred in the second quarter of 2020 and approximately $60 million expected in the second half of 2020. These higher expenses are primarily related to agent compensation, as well as technology and third-party vendor capabilities related to remote work functionality and protecting our employees’ health. However, we also expect cost savings associated with COVID-19 of approximately $60 million in 2020, including approximately $30 million of cost savings expected to be realized in aggregate over the third and fourth quarters of 2020. These cost savings are from lower employee health and welfare claims, and lower travel, meeting, meal and entertainment costs.

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

Risk Management. Prudential has a robust risk management framework that seeks to ensure we can fulfill our customer, regulatory, and other stakeholder obligations under a range of stress scenarios by maintaining the appropriate balance between the Company’s resources and risks. We evaluate the Company’s exposure to stress under four lenses (economic, STAT, GAAP, and liquidity).


Our risk management framework incorporates severe to very severe stresses across equities, interest rates, credit migration and defaults, currencies and pandemics. This framework includes a specific “pandemic and sell-off” scenario with a mortality calamity (1.5 extra deaths per 1,000 lives in the first year) based on a modern-day interpretation of the 1918 Spanish Flu experience that is aligned with most regulatory frameworks. The stress scenario assumes an even distribution of increased mortality across the population, while current COVID-19 mortality is sharply skewed toward older ages. As the COVID-19 event continues to unfold, we continue to update our existing businessesanalysis and may seektake management actions in response to deploy capitalthis specific event. As of June 30, 2020 the COVID-19 pandemic has not reached the most severe levels included in supportthe Company’s stress testing.

In addition, we expect the impact of COVID-19-related claims to be moderated by the balance between our mortality exposure (such as in our individual and group life businesses) and our longevity exposure (such as in our retirement business).

Risk Factors. The COVID-19 pandemic has adversely impacted our results of operations, financial position, investment portfolio, new business opportunities and operations, and these impacts are expected to continue. For additional information on the risks to our business posed by the COVID-19 pandemic, see “Risk Factors.”

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

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

CARES Act and Other Regulatory Developments. In March 2020 Congress enacted the CARES Act, which provides $2 trillion in economic stimulus to taxpayers, small businesses, and corporations through various grant and loan programs, tax provisions and regulatory relief. One provision of the CARES Act amends the Tax Cuts and Jobs Act (“TCJA”) and allows companies with net operating losses (“NOLs”) originating in 2018, 2019 or 2020 to carry back those losses for five years. See Note 8 to the Unaudited Interim Financial Statements for more information. We are continuing to analyze the CARES Act and its potential impact on Prudential, and implementing operational changes necessary in our Retirement, Annuities and PGIM businesses to accommodate the CARES Act.

Other governments and regulators, including the Japan FSA, the NAIC and state insurance regulators, have implemented, or are considering, a number of actions in response to exit an operation if itthe crisis, including delaying implementation of certain regulatory changes, temporarily waiving certain regulatory requirements and requiring or requesting insurers to waive premium payments and policy provisions and exclusions for certain periods of time.

The Company is determinednot aware of any new or proposed government mandates that it no longer aligns with our broader strategy. We continue to invest in our businesses and assess acquisition opportunities to build scalecould materially impact the Company’s solvency or complement our businesses. For additional information on our strategic acquisitions and dispositions, see “—Results of Operations by Segment” below.liquidity position.


Regulatory Developments

Japan Corporate Product TaxDOL Fiduciary Rules

In July 2019,June 2020, the Japan National Tax Authority issued rules limiting policyholders’ tax deductions for premiums paid onDOL announced that it is proposing a new exemption to replace the previously vacated “best interest contract exemption.” This proposed exemption would allow fiduciaries meeting the requirements of the exemption to receive compensation, including as a result of advice to roll over assets from a qualified plan to an Individual Retirement Account (“IRA”), and to purchase from or sell certain corporate insurance products.investments to qualified plans and IRAs. The CompanyDOL also reinstated the prior investment advice regulation and other life insurers in Japan suspended sales of these products earlier in 2019 in anticipationexisting exemptions and provided its current interpretation of the new rules. The Company is currently evaluating the rules’ impact on the covered products. For additional information on sales within our international insurance operations, see “—Results of Operations by Segment—International Insurance Division—International Insurance” below.

SEC Best Interest Regulation

In June 2019, the SEC adopted a package of rulemakings and interpretative guidance that, among other things, requires broker-dealers to act in the best interest of retail customers when recommending securities transactions orpre-2016 fiduciary investment strategies to them. The guidance also clarifies the SEC’s views of the fiduciary duty that investment advisers owe to their clients. The new best interest standards will become effective on June 30, 2020. We are evaluating the impact of the new standards and believe that they will apply to recommendations to purchase certain products offered by our PGIM, Retirement, Individual Annuities and Individual Life segments, and will result in increased compliance costs, in particular in our Prudential Advisors distribution system, which we include in the results of our Individual Life segment.

SECURE Act

In May 2019, the U.S. House of Representatives passed the Setting Every Community up for Retirement Enhancement (“SECURE”) Act. If enacted into law in its current form, the SECURE Act would help promote retirement plan coverage by expanding access to and use of Multiple Employer Plans; facilitate access to lifetime income disclosures for plan participants to better understand how their retirement savings translate into monthly lifetime income in retirement; improve upon the current annuity selection safe harbor; and provide lifetime income portability.advice regulation. We cannot predict whetherwhat impact the SECURE Actnewly proposed exemption or interpretative guidance will ultimately be adopted, or its impact on our businesses.

For additional informationhave on the potential impacts of regulation on the Company, see “Business—Regulation” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.Company.

Impact of a Low Interest Rate Environment

As a global financial services company, market interest rates are a key driver of our results of operations and financial condition. Changes in interest rates can affect our results of operations and/or our financial condition in several ways, including favorable or adverse impacts to:

investment-related activity, including: investment income returns, net interest margins, net investment spread results, new money rates, mortgage loan prepayments and bond redemptions;
insurance reserve levels, market experience true-ups and amortization of both deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”);
customer account values, including their impact on fee income;
fair value of, and possible impairments on, intangible assets such as goodwill;
product offerings, design features, crediting rates and sales mix; and
policyholder behavior, including surrender or withdrawal activity.

For more information on interest rate risks, see “Risk Factors” in this Quarterly Report on Form 10-Q and “Risk Factors—Market Risk” included in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.


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

U.S. Operations excluding the Closed Block Division
 
Interest rates in the U.S. have experienced a sustained period of historically low levels with certain benchmarks reaching significant lows in large part due to Federal Reserve efforts to assist with the economic recovery subsequent to the financial crisisfirst quarter of 2008.2020. While market conditions and events make uncertain the timing, amount and impact of any monetary policy decisions by the Federal Reserve, changes in interest rates may impact our reinvestment yields, primarily for our investments in fixed maturity securities and commercial mortgage loans. As interest rates rise, our reinvestment yield may exceed the overall portfolio yield resulting in a favorable impact to earnings. Conversely, if interest rates were to decline, our reinvestment yield may be below our overall portfolio yield, resulting in an unfavorable impact to earnings. Conversely, as interest rates rise, our reinvestment yield may exceed the overall portfolio yield resulting in a favorable impact to earnings.

For the general account supporting our U.S. Individual Solutions division, U.S. Workplace Solutions division, PGIM division and our Corporate and Other operations, we estimate annual principal payments and prepayments that we would be required to reinvest to be approximately 6.1%5.5% of the fixed maturity security and commercial mortgage loan portfolios through 2020.2021. The portion of the general account attributable to these operations has approximately $214$248 billion of such assets (based on net carrying value) as of June 30, 2019.2020. The average portfolio yield for fixed maturity securities and commercial mortgage loans is approximately 4.3%4.1% as of June 30, 2019.2020.

Included in the $214$248 billion of fixed maturity securities and commercial mortgage loans are approximately $136$155 billion that are subject to call or redemption features at the issuer’s option and have a weighted average interest rate of approximately 4%. Of this $136$155 billion, approximately 58%55% contain provisions for prepayment premiums. If we reinvest scheduled payments or prepayments (not subject to a prepayment fee) at rates below the current portfolio yield, including in some cases at rates below those guaranteed under our insurance contracts, future operating results will be impacted to the extent we do not, or are unable to, reduce crediting rates on in-force blocks of business, or effectively utilize other asset/liability management strategies described below, in order to maintain current net interest margins.

The following table sets forth the insurance liabilities and policyholder account balances of our U.S. Operations excluding the Closed Block Division, by type, for the date indicated:
As of
June 30, 2019
As of
June 30, 2020
(in billions)(in billions)
Long-duration insurance products with fixed and guaranteed terms$129
$157
Contracts with adjustable crediting rates subject to guaranteed minimums57
60
Participating contracts where investment income risk ultimately accrues to contractholders16
14
Total$202
$231

The $129$157 billion above relates to long-duration products such as group annuities, structured settlements and other insurance products that have fixed and guaranteed terms, for which underlying assets may have to be reinvested at interest rates that are lower than portfolio rates. We seek to mitigate the impact of a prolonged low interest rate environment on these contracts through asset/liability management, as discussed further below.

The $57$60 billion above relates to contracts with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. Although we may have the ability to lower crediting rates for those contracts above guaranteed minimums,

our willingness to do so may be limited by competitive pressures. The following table sets forth the related account values by range of guaranteed minimum crediting rates and the related range of the difference, in basis points (“bps”), between rates being credited to contractholders as of June 30, 2019,2020, and the respective guaranteed minimums. 


Account Values with Adjustable Crediting Rates Subject to Guaranteed Minimums:Account Values with Adjustable Crediting Rates Subject to Guaranteed Minimums:
At
guaranteed
minimum
 
1-49
bps above
guaranteed
minimum
 
50-99
bps above
guaranteed
minimum
 
100-150
bps above
guaranteed
minimum
 
Greater than
150
bps above
guaranteed
minimum
 Total
At
guaranteed
minimum
 
1-49
bps above
guaranteed
minimum
 
50-99
bps above
guaranteed
minimum
 
100-150
bps above
guaranteed
minimum
 
Greater than
150
bps above
guaranteed
minimum
 Total
($ in billions)($ in billions)
Range of Guaranteed Minimum
Crediting Rates:
                      
Less than 1.00%$0.6
 $1.3
 $0.4
 $0.1
 $0.0
 $2.4
$0.6
 $1.3
 $0.4
 $0.1
 $0.0
 $2.4
1.00% - 1.99%1.0
 3.9
 11.8
 1.6
 0.8
 19.1
1.1
 5.0
 11.5
 2.6
 1.1
 21.3
2.00% - 2.99%1.3
 0.8
 1.9
 1.1
 0.9
 6.0
1.3
 0.9
 0.5
 2.6
 1.2
 6.5
3.00% - 4.00%26.4
 2.0
 0.1
 0.2
 0.0
 28.7
24.8
 3.8
 0.2
 0.2
 0.0
 29.0
Greater than 4.00%0.9
 0.0
 0.0
 0.0
 0.0
 0.9
0.9
 0.0
 0.0
 0.0
 0.0
 0.9
Total(1)$30.2
 $8.0
 $14.2
 $3.0
 $1.7
 $57.1
$28.7
 $11.0
 $12.6
 $5.5
 $2.3
 $60.1
Percentage of total53% 14% 25% 5% 3% 100%48% 18% 21% 9% 4% 100%
 __________
(1)Includes approximately $0.74$0.68 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity.

The remaining $16$14 billion of insurance liabilities and policyholder account balances in these operations relates to participating contracts for which the investment income risk is expected to ultimately accrue to contractholders. The crediting rates for these contracts are periodically adjusted based on the return earned on the related assets.

Assuming a hypothetical scenario where the average 10-year U.S. Treasury rate is 2.05%, which0.65% (which is reasonably consistent with the current rate,recent rates) for the period from July 1, 20192020 through December 31, 2020, andJune 30, 2021 (and credit spreads remain unchanged from levels as of June 30, 2019,2020), we estimate that the unfavorable impact to pre-tax adjusted operatingnet investment income of reinvesting in such an environment, compared to the yields onactivities, including scheduled maturities and expectedestimated prepayments of fixed maturities and commercial mortgage and other loans (excluding assets supporting participating contracts) would not be significantbetween $40 million and $80 million for the period from July 1, 20192020 through December 31, 2020.June 30, 2021.

In order to mitigate the unfavorable impact that a low interest rate environment has on our net interest margins, we employ a proactive asset/liability management program, which includes strategic asset allocation and hedging strategies within a disciplined risk management framework. These strategies seek to match the characteristics of our products, and to closely approximate the interest rate sensitivity of the assets with the estimated interest rate sensitivity of the product liabilities. Our asset/liability management program also helps manage duration gaps, currency and other risks between assets and liabilities through the use of derivatives. We adjust this dynamic process as products change, as customer behavior changes and as changes in the market environment occur. As a result, our asset/liability management process has permitted us to manage the interest rate risk associated with our products through several market cycles. Our interest rate exposure is also mitigated by our business mix, which includes lines of business for which fee-based and insurance underwriting earnings play a more prominent role in product profitability.

Closed Block Division
Substantially all of the $60$61 billion of general account assets in the Closed Block division support obligations and liabilities relating to the Closed Block policies only. See Note 87 to the Unaudited Interim Consolidated Financial Statements for furtheradditional information on the Closed Block.


International Insurance Operations

While our international insurance operations have experienced a low interest rate environment for many years, the current reinvestment yields for certain blocks of business in our international insurance operations are generally lower than the current portfolio yield supporting these blocks of business. In recent years, the Bank of Japan’s monetary policy has resulted in even lower and, at times, negative yields for certain tenors of government bonds. Our international insurance operations employ a proactive asset/liability management program in order to mitigate, to the extent possible, the unfavorable impact that the current interest rate environment has on our net interest margins. In conjunction with this program, we have not purchased negative yielding assets to support the portfolio and we continue to purchase long-term bonds with tenors of 30 years or greater. Additionally, our diverse product portfolio in terms of currency mix and premium payment structure allows us to further mitigate the negative impact from

this low interest rate environment. We regularly examine our product offerings and their profitability. As a result, we have repriced certain products, adjusted commissions for certain products and have discontinued sales of other products that do not meet our profit expectations. The impact of these actions coupled withand the strengthening of the yen against the U.S. dollar and introduction of certain new products, has resulted in an increase in sales of U.S. dollar-denominated products relative to products denominated in other currencies. For additional information on sales within our international insurance operations, see “—International Insurance Division—International Insurance—Businesses—Sales Results,” below.

The following table sets forth the insurance liabilities and policyholder account balances of our Japanese operations, by type, for the date indicated:
As of
June 30, 2019
As of
June 30, 2020
(in billions)(in billions)
Long-duration insurance products with fixed and guaranteed terms$125
Insurance products with fixed and guaranteed terms$132
Contracts with a market value adjustment if invested amount is not held to maturity26
25
Contracts with adjustable crediting rates subject to guaranteed minimums11
11
Total$162
$168

The $125$132 billion above is predominantlyprimarily comprised of long-duration insurance products that have fixed and guaranteed terms, for which underlying assets may have to be reinvested at interest rates that are lower than current portfolio yields. The remaining insurance liabilities and policyholder account balances include $26$25 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity and $11 billion related to contracts with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. Most of the current crediting rates on these contracts, however, are at or near contractual minimums. Although we have the ability in some cases to lower crediting rates for those contracts that are above guaranteed minimum crediting rates, the majority of this business has interest crediting rates that are determined by formula.

Assuming a hypothetical scenario within ourwhere the average 30-year Japanese operations where new money yields would be 25 bps lower than projected,Government Bond yield is 0.60% and applying these lower new money yields to annualized investment of renewal premiums, proceedsthe 10-year U.S. Treasury rate is 0.65% (which is reasonably consistent with recent rates) for the period from investment disposition and reinvestment of investment income, we estimate thatJuly 1, 2020 through June 30, 2021 (and credit spreads remain unchanged from levels as of June 30, 20192020), we estimate that the unfavorable impact to net investment income of reinvesting activities, including scheduled maturities and estimated prepayments of fixed maturities and commercial mortgage and other loans (excluding assets supporting participating contracts) would reduce adjusted operating income overbe between $40 million and $80 million for the next twelve months by approximately $15 million. This hypothetical scenario excludes first-year premium, single pay premium, multi-currency fixed annuity cash flows, any potential benefitperiod from repricing products and any impact from other factors, including but not limited to new business, contractholder behavior, changes in competitive conditions, changes in capital markets and the effect of derivative instruments.July 1, 2020 through June 30, 2021.


Results of Operations

Consolidated Results of Operations

The following table summarizes net income (loss) for the periods presented.
Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
(in millions)(in millions)
Revenues$15,388
 $14,655
 $30,479
 $28,412
$12,115
 $15,388
 $25,579
 $30,479
Benefits and expenses14,512
 14,405
 28,463
 26,469
14,447
 14,512
 28,249
 28,463
Income (loss) before income taxes and equity in earnings of operating joint ventures876
 250
 2,016
 1,943
(2,332) 876
 (2,670) 2,016
Income tax expense (benefit)162
 68
 394
 420
115
 162
 57
 394
Income (loss) before equity in earnings of operating joint ventures714
 182
 1,622
 1,523
(2,447) 714
 (2,727) 1,622
Equity in earnings of operating joint ventures, net of taxes24
 18
 53
 41
42
 24
 52
 53
Net income (loss)738
 200
 1,675
 1,564
(2,405) 738
 (2,675) 1,675
Less: Income attributable to noncontrolling interests30
 3
 35
 4
4
 30
 5
 35
Net income (loss) attributable to Prudential Financial, Inc.$708
 $197
 $1,640
 $1,560
$(2,409) $708
 $(2,680) $1,640

Three Month Comparison. The $511$3,117 million increasedecrease in “Net income (loss) attributable to Prudential Financial, Inc.” for the second quarter of 20192020 compared to the second quarter of 20182019 reflected the following notable items:

$1,6242,136 million favorableunfavorable variance, on a pre-tax basis, from adjustments to reserves as well as DAC and other costs, reflecting the impact of our annual reviews and update of assumptions and other refinements. This excludes the impact associated with the variable annuity hedging program discussed below (see “—Results of Operations by Segment—U.S. Financial Wellness Businesses - U.S. Individual Solutions Division—Individual Annuities” for additional information); and

$205 million net favorable variance, on a pre-tax basis, primarily from income in the current period from our Divested and Run-off Businesses compared to a loss in the prior period, excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above.

Partially offsetting these increases in “Net income (loss) attributable to Prudential Financial, Inc.” were the following items:

$463 million unfavorable variance from net pre-tax realized investment gains and losses for PFI excluding the Closed Block division,Divested and Run-off Businesses, and excluding the impact of the hedging program associated with certain variable annuities discussed below (see “—General“General Account Investments” for additional information);

$771 million unfavorable variance, on a pre-tax basis, from a loss in the current period from our Divested and Run-off Businesses compared to a gain in the prior period (see “Results of Operations by Segment—Divested and Run-off Businesses” for additional information);
$382663 million unfavorable variance, on a pre-tax basis, from lower adjusted operating income from our business segments (see “—Segment Results of Operations” for additional information); and
$491 million unfavorable variance, on a pre-tax basis, reflecting the net impact from changes in the value of our embedded derivatives and related hedge positions associated with certain variable annuities (see “—Results“Results of Operations by Segment—U.S. Financial Wellness Businesses - Businesses—U.S. Individual Solutions Division—Individual Annuities—Variable Annuity Risks and Risk Mitigants” for additional information); and.

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

$208446 million unfavorablefavorable variance, on a pre-tax basis, from investment related activities that are primarily within “Other income (loss)” for PFI excluding our Divested and Run-off Businesses. These favorable impacts were primarily driven by unrealized gains (losses) from equity securities as well as fixed maturity securities designated as trading; and
$258 million favorable variance, on a pre-tax basis, driven by market experience updates.updates excluding those impacts related to the hedging program associated with certain variable annuities discussed above.

Six Month Comparison. The $80$4,320 million increasedecrease in “Net income (loss) attributable to Prudential Financial, Inc.” for the first six months of 20192020 compared to the first six months of 20182019 reflected the following notable items:
$1,624 million favorable variance, on a pre-tax basis, from adjustments to reserves as well as DAC and other costs, reflecting the impact of our annual reviews and update of assumptions and other refinements. This excludes the impact associated with the variable annuity hedging program discussed below (see “—Results of Operations by Segment—U.S. Financial Wellness Businesses - U.S. Individual Solutions Division—Individual Annuities” for additional information); and

$425 million net favorable variance, on a pre-tax basis, primarily from income in the current period from our Divested and Run-off Businesses compared to a loss in the prior period, excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above.


Partially offsetting these increases in “Net income (loss) attributable to Prudential Financial, Inc.” were the following items:
$1,3171,300 million unfavorable variance, on a pre-tax basis, reflecting the net impact from changes in the value of our embedded derivatives and related hedge positions associated with certain variable annuities (see “—Results“Results of Operations by Segment—U.S. Financial Wellness Businesses - Businesses—U.S. Individual Solutions Division—Individual Annuities—Variable Annuity Risks and Risk Mitigants” for additional information);
$1,066 million unfavorable variance, on a pre-tax basis, from lower adjusted operating income from our business segments (see “Segment Results of Operations” for additional information);
$978 million unfavorable variance, on a pre-tax basis, from a loss in the current period from our Divested and Run-off Businesses compared to a gain in the prior period (see “Results of Operations by Segment—Divested and Run-off Businesses” for additional information);
$859 million unfavorable variance, on a pre-tax basis, from investment related activities that are primarily within “Other income (loss)” for PFI excluding our Divested and Run-off Businesses. These unfavorable impacts were primarily driven by unrealized gains (losses) from equity securities as well as fixed maturity securities designated as trading; and
$326 million unfavorable variance, on a pre-tax basis, driven by market experience updates excluding those impacts related to the hedging program associated with certain variable annuities discussed above.

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

$510114 million unfavorablefavorable variance, on a pre-tax basis, from net pre-tax realized investment gains and losses for PFI excluding the Closed Block division,Divested and Run-off Businesses, and excluding the impact of the hedging program associated with certain variable annuities discussed above (see “—General“General Account Investments” for additional information).


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


Annual Reviews and Update of Assumptions and Other Refinements

Annually during the second quarter of each year, we perform a comprehensive review of actuarial assumptions utilized in measuring insurance liabilities and expected gross profits used in amortizing deferred acquisition costs, sales inducement costs, unearned revenue reserves and value of business acquired. The assumptions reviewed include, but are not necessarily limited to, inputs such as mortality, morbidity, contractholder behavior and expected future rates of returns on investments. As part of this review, we may update these assumptions and make refinements to our models based upon emerging experience, future expectations and other data, including any observable market data. These assumptions are generally updated annually during the second quarter of each year, unless a material change in experience that we feel is indicative of a long-term trend is observed during an interim period.

Shown below are the impacts on our adjusted operating income from our annual reviews and updateupdates of actuarial assumptions and other refinements.refinements as discussed above. The information below is presented by each segment and Corporate and Other operations and includes a reconciliation of these impacts to the impacts within income (loss) before income taxes and equity in earnings of operating joint ventures.


Three and Six Months Ended
June 30,
Three and Six Months Ended
June 30,
2019 20182020 2019
(in millions)(in millions)
Favorable (unfavorable) impact to adjusted operating income before income taxes by segment:      
U.S. Businesses:   
U.S Workplace Solutions division:   
Retirement$154
 $(68)$(22) $154
Group Insurance9
 31
11
 9
Total U.S. Workplace Solutions division163
 (37)(11) 163
U.S. Individual Solutions division:   
Individual Annuities(12) 10
(136) (12)
Individual Life(208) (65)(92) (208)
Total U.S. Individual Solutions division(220) (55)(228) (220)
International Insurance8
 (81)
Total International Insurance division8
 (81)
Corporate and Other operations0
 3
Total Corporate and Other0
 3
Total U.S. Businesses(239) (57)
International Businesses(1)(95) 11
Corporate and Other0
 0
Total segment favorable (unfavorable) impact to adjusted operating income before income taxes(49) (170)(334) (46)
Reconciling items:      
Realized investment gains (losses), net, and related adjustments9
 (229)302
 9
Charges related to realized investment gains (losses), net16
 4
(41) 16
Divested businesses:   
Divested and Run-off Businesses:   
Closed Block division(7) (1)0
 (7)
Other divested businesses(9) (1,458)
Other Divested and Run-off Businesses(1)(33) (12)
Favorable (unfavorable) impact to consolidated income (loss) before income taxes and equity in earnings of operating joint ventures$(40) $(1,854)$(106) $(40)
__________
(1)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.

See “—Results of Operations by Segment” for a discussion of the impacts of our annual reviews and update of assumptions and other refinements.


Summary of Results of Operations by Segment

Shown below are the adjusted operating income contributions of each segment and Corporate and Other operations for the periods indicated and a reconciliation of this segment measure of performance to “Income (loss) before income taxes and equity in earnings of operating joint ventures” as presented in ourthe Unaudited Interim Consolidated Statements of Operations.


Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
(in millions)(in millions)
Adjusted operating income before income taxes by segment:              
PGIM$264
 $254
 $478
 $486
$324
 $264
 $488
 $478
Total PGIM division264
 254
 478
 486
U.S. Businesses:       
U.S. Workplace Solutions division:
 
 
 
Retirement467
 277
 718
 594
281
 467
 526
 718
Group Insurance81
 82
 134
 137
5
 81
 49
 134
Total U.S. Workplace Solutions division548
 359
 852
 731
286
 548
 575
 852
U.S. Individual Solutions division:       
Individual Annuities462
 507
 934
 1,026
249
 462
 622
 934
Individual Life(135) 43
 (30) 79
(64) (135) (84) (30)
Total U.S. Individual Solutions division327
 550
 904
 1,105
185
 327
 538
 904
International Insurance849
 784
 1,771
 1,640
Total International Insurance division849
 784
 1,771
 1,640
Corporate and Other operations(335) (286) (747) (580)
Total Corporate and Other(335) (286) (747) (580)
Assurance IQ division(1):       
Assurance IQ(16) 0
 (39) 0
Total Assurance IQ division(16) 0
 (39) 0
Total U.S. Businesses455
 875
 1,074
 1,756
International Businesses(2)693
 790
 1,391
 1,649
Corporate and Other(541) (335) (883) (747)
Total segment adjusted operating income before income taxes1,653
 1,661
 3,258
 3,382
931
 1,594
 2,070
 3,136
Reconciling items:              
Realized investment gains (losses), net, and related adjustments(1)(548) 393
 (1,211) 480
Charges related to realized investment gains (losses), net(2)(82) (116) (57) (139)
Market experience updates(3)(208) 0
 (208) 0
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net(4)287
 (193) 741
 (596)
Change in experience-rated contractholder liabilities due to asset value changes(5)(313) 85
 (716) 503
Realized investment gains (losses), net, and related adjustments(3)(3,191) (572) (2,982) (1,194)
Charges related to realized investment gains (losses), net(4)519
 (82) (283) (57)
Market experience updates(5)55
 (207) (886) (207)
Divested and Run-off Businesses(6):              
Closed Block division(21) (31) (40) (40)(22) (21) (23) (40)
Other Divested and Run-off Businesses112
 (1,526) 286
 (1,598)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(7)(4) (23) (37) (49)
Other Divested and Run-off Businesses(2)(602) 168
 (580) 415
Other adjustments(7)32
 0
 77
 0
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(8)(54) (4) (63) (37)
Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures$876
 $250
 $2,016
 $1,943
$(2,332) $876
 $(2,670) $2,016
__________
(1)Represents “Realized investment gains (losses), net,”Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
(2)Effective second quarter of 2020, the results of POK and related adjustments.the impact of its anticipated sale are excluded from the International Businesses and included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See “—General Account Investments” and Note 141 to ourthe Unaudited Interim Consolidated Financial Statements for additional information.
(2)(3)
Represents “Realized investment gains (losses), net,” and related adjustments. See “General Account Investments” and Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. Prior period amounts have been updated to conform to current period presentation.
(4)Includes charges that represent the impact of realized investment gains (losses), net, on the amortization of DAC and other costs, and on changes in reserves. Also includes charges resulting from payments related to market value adjustment features of certain of our annuity products and the impact of realized investment gains (losses), net, on the amortization of unearned revenue reserves.
(3)(5)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company has historically recognized these impacts in adjusted operating income. See Note 1413 to ourthe Unaudited Interim Consolidated Financial Statements for additional information.
(4)Represents net investment gains (losses) on assets supporting experience-rated contractholder liabilities. See “—Experience-Rated Contractholder Liabilities, Assets Supporting Experience-Rated Contractholder Liabilities and Other Related Investments.”
(5)Represents changes in contractholder liabilities due to asset value changes in the pool of investments supporting these experience-rated contracts. See “—Experience-Rated Contractholder Liabilities, Assets Supporting Experience-Rated Contractholder Liabilities and Other Related Investments.”
(6)Represents the contribution to income (loss) of Divested and Run-off Businesses that have been or will be sold or exited, including businesses that have been placed in wind down, but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP. See “—Divested and Run-off Businesses.”

(7)Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(8)Equity in earnings of operating joint ventures are included in adjusted operating income but excluded from “Income (loss) before income taxes and equity in earnings of operating joint ventures” as they are reflected on an after-tax U.S. GAAP basis as a separate line in ourthe Unaudited Interim Consolidated Statements of Operations. Earnings attributable to noncontrolling interests are excluded from adjusted operating income but included in “Income (loss) before income taxes and equity in earnings of operating joint ventures” as they are reflected on a U.S. GAAP basis as a separate line in ourthe Unaudited Interim Consolidated Statements of Operations. Earnings attributable to noncontrolling interests represent the portion of earnings from consolidated entities that relates to the equity interests of minority investors.

ResultsSegment results for the periodsperiod presented above reflect the following:


PGIM. Segment resultsResults for the second quarter of 20192020 increased in comparison to the prior year period, reflecting higher asset management fees and other related revenues, partially offset by higher expenses. Results for the first six months of 2019 decreased in comparison to the prior year period, reflecting increases in asset management fees and other related revenues, that were more thanand decreases in expenses. Results for the first six months of 2020 increased in comparison to the prior year period, reflecting increases in asset management fees and decreases in expenses, partially offset by higher expenses.decreases in other related revenues.

Retirement. Segment resultsResults for both the second quarter and the first six months of 2019 increased in comparison to the prior year periods, primarily reflecting a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results for the second quarter of 2019 decreased driven by less favorable reserve experience, partially offset by higher net investment spread results, while results for the first six months of 2019 decreased driven by less favorable reserve experience, lower net investment spread results and higher expenses.

Group Insurance. Segment results for both the second quarter and first six months of 2019 decreased modestly in comparison to the prior year periods, primarily reflecting a less favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, segment results for both periods increased in comparison to the prior year period, reflecting a higher contribution from net investment spread results and lower expenses. Underwriting results remained flat in comparison to the prior year periods.

Individual Annuities. Segment results for both the second quarter and the first six months of 2019 decreased in comparison to the prior year periods, inclusive of an unfavorable comparative net impact from our annual reviews and update of assumptions and other reserve refinements. Excluding this item, segment results for both periods decreased in comparison to the prior year periods, driven by lower net fee income and higher expenses, partially offset by higher net investment income.

Individual Life. Segment results for both the second quarter and the first six months of 20192020 decreased in comparison to the prior year periods, primarily reflecting an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, segment results for the second quarter of 2019both periods decreased primarily driven by lower underwriting results and higher expenses, partially offset by a higher contribution from net investment spread results. Results for the first six months of 2019 increased driven by a favorable net impact in the first quarter of 2019 from changes in the estimated profitability of the business driven by equity market performance on policyholder accounts, and a higher contribution from net investment spread results, partially offset by lower underwriting results and higher expenses.reserve gains.

International InsuranceGroup Insurance.. Segment results Results for both the second quarter and the first six months of 2019 increased2020 decreased in comparison to the prior year periods, inclusive of a favorable net impact from foreign currency exchange rates andincluding a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding these items, segmentthis item, results for both periods decreased primarily reflecting lower underwriting results and lower net investment spread results.

Individual Annuities. Results for both the second quarter and the first six months of 2020 decreased in comparison to the prior year periods, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results for both periods decreased primarily driven by lower fee income, net of distribution expenses and other associated costs. The results for the second quarter of 2019 decreased primarily driven by higher expenses,were partially offset by business growth.higher net investment spread results.

Individual Life. Results for the second quarter of 2020 reflected a decrease in losses in comparison to the prior year period, and results for the first six months of 2019 increased2020 reflected an increase in losses in comparison to the prior year period. Both periods include a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, adjusted operating income decreased for both periods, primarily reflecting lower net investment spread results and lower underwriting results driven by business growth and more favorable underwriting results,an unfavorable impact from mortality experience, net of reinsurance, partially offset by higherlower expenses.

CorporateAssurance IQ. The acquisition of Assurance IQ was completed in October 2019. Results for both the second quarter and Other operationsthe first six months of 2020 include revenues, net of marketing and distribution expenses, operating expenses and amortization expenses related to intangible assets recognized as part of purchase accounting (see Note 1 and Note 10 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information).
International Businesses. Results for both the second quarter and the first six months of 20192020 decreased in comparison to the prior year periods, inclusive of an unfavorable net impact from foreign currency exchange rates and an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding these items, results for the second
quarter of 2020 increased driven by favorable underwriting results and higher earnings from our joint venture investments, partially offset by lower net investment spread results and higher expenses, while results for the first six months of 2020 decreased driven by lower net investment spread results, higher expenses and lower earnings from our joint venture investments, partially offset by favorable underwriting results.
Corporate and Other. Results for both the second quarter of 2020 and the first six months of 2020 reflected increased losses in comparison to the prior year periods, reflecting higher net charges from other corporate activities driven by increases to legal reserves, lower investment income and higher levels of corporate expenses, higher capital debt interest expense and lower income from our qualified pension plan,on debt, partially offset by higher net investment income.favorable pension and employee benefit results.


Closed Block Division. The Closed Block division resultsResults for the second quarter of 20192020 reflected decreasedan increase in losses in comparison to the prior year period, primarily reflecting an increase in the policyholder dividend obligation as a result of higher net investment activity results. Results for the first six months of 2020 reflected a decrease in losses in comparison to the prior year period, primarily reflecting a decrease in the policyholder dividend obligation as a result of lower net realized investment gains and related activity lower net insurance activity and lower net investment income. Results for the first six months of 2019 remained flat when compared to the prior year period.results.

Segment Measures

Adjusted Operating Income. In managing our business, we analyze our segments’ operating performance using “adjusted operating income.” Adjusted operating income does not equate to “Income (loss) before income taxes and equity in earnings of operating joint ventures” or “Net income (loss)” as determined in accordance with U.S. GAAP, but is the measure of segment profit or loss we use to evaluate segment performance and allocate resources, and consistent with authoritative guidance, is our measure of segment performance. The adjustments to derive adjusted operating income are important to an understanding of our overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and our definition of adjusted operating income may differ from that used by other companies. However, we believe that the presentation of adjusted operating income as we measure it for management purposes enhances the understanding of our results of operations by highlighting the results from ongoing operations and the underlying profitability of our businesses.


See Note 1413 to the Unaudited Interim Consolidated Financial Statements for furtheradditional information on the presentation of segment results and our definition of adjusted operating income.

Annualized New Business Premiums. In managing our Individual Life, Group Insurance and International Insurance businesses,Businesses, we analyze annualized new business premiums, which do not correspond to revenues under U.S. GAAP. Annualized new business premiums measure the current sales performance of the business, while revenues primarily reflect the renewal persistency of policies written in prior years and net investment income, in addition to current sales. Annualized new business premiums include 10% of first year premiums or deposits from single pay products. No other adjustments are made for limited pay contracts.

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

Assets Under Management. In managing our PGIM business, we analyze assets under management (which do not correspond directly to U.S. GAAP assets) because the principal source of revenues is fees based on assets under management. Assets under management represent the fair market value or account value of assets which we manage directly for institutional clients, retail clients, and for our general account, as well as assets invested in our products that are managed by third-party managers.

Account Values. In managing our Individual Annuities and Retirement businesses, we analyze account values, which do not correspond to U.S. GAAP assets. Net sales (redemptions) in our Individual Annuities business and net additions (withdrawals) in our Retirement business do not correspond to revenues under U.S. GAAP, but are used as a relevant measure of business activity.

Impact of Foreign Currency Exchange Rates

Foreign currency exchange rate movements and related hedging strategies
 
As a U.S.-based company with significant business operations outside the U.S., particularly in Japan, we are subject to foreign currency exchange rate movements that could impact our U.S. dollar (“USD”)-equivalent earnings and shareholder return on equity. Our USD-equivalent earnings could be materially affected by currency fluctuations from period to period, even if earnings on a local currency basis are relatively constant. Our USD-equivalent equity is impacted as the value of our investment in international operations may also fluctuate based on changes in foreign currency exchange rates. We seek to mitigate these impacts through various hedging strategies, including the use of derivative contracts and by holding USD-denominated assets in certain of our foreign subsidiaries.

In order to reduce earnings volatility from foreign currency exchange rate movements, we enter into forward currency derivative contracts to effectively fix the currency exchange rates for a portion of our prospective non-USD-denominated earnings streams. This forward currency hedging program is primarily associated with our insurance operations in Japan and Korea.

In order to reduce equity volatility from foreign currency exchange rate movements, we primarily utilize a yen hedging strategy that calibrates the hedge level to preserve the relative contribution of our yen-based business to the Company’s overall return on equity on a leverage neutral basis. We implement this hedging strategy utilizing a variety of instruments, including USD-denominatedUSD-

denominated assets, foreign currency derivative contracts, and dual currency and synthetic dual currency investments held locally in our Japanese insurance subsidiaries. The total hedge level may vary based on our periodic assessment of the relative contribution of our yen-based business to the Company’s overall return on equity.

The table below presents the aggregate amount of instruments that serve to hedge the impact of foreign currency exchange movements on our USD-equivalent shareholder return on equity from our Japanese insurance subsidiaries as of the dates indicated.


June 30,
2019
 December 31,
2018
June 30,
2020
 December 31,
2019
(in billions)(in billions)
Foreign currency hedging instruments:      
Hedging USD-equivalent earnings:      
Forward currency contracts (notional amount outstanding)$1.2
 $1.3
$0.4
 $0.6
Hedging USD-equivalent equity:      
USD-denominated assets held in yen-based entities(1)12.9
 13.5
10.9
 13.1
Dual currency and synthetic dual currency investments(2)0.6
 0.6
0.6
 0.6
Total USD-equivalent equity foreign currency hedging instruments13.5
 14.1
11.5
 13.7
Total foreign currency hedges$14.7
 $15.4
$11.9
 $14.3
__________
(1)Includes USD-denominated fixed maturities at amortized cost plus any related accrued investment income, as well as USD notional amount of foreign currency derivative contracts outstanding. Note this amount represents only those USD assets serving to hedge the impact of foreign currency volatility on equity. Separate from this program, our Japanese operations also have $55.5$62.2 billion and $48.9$57.8 billion as of June 30, 20192020 and December 31, 2018,2019, respectively, of USD-denominated assets supporting USD-denominated liabilities related to USD-denominated products.
(2)Dual currency and synthetic dual currency investments are held by our yen-based entities in the form of fixed maturities and loans with a yen-denominated principal component and USD-denominated interest income. The amounts shown represent the present value of future USD-denominated cash flows.

The USD-denominated investments that hedge the impact of foreign currency exchange rate movements on USD-equivalent earnings and shareholder return on equity from our Japanese insurance operations are reported within yen-based entities and, as a result, foreign currency exchange rate movements will impact their value reported within our yen-based Japanese insurance entities. We seek to mitigate the risk that future unfavorable foreign currency exchange rate movements will decrease the value of these USD-denominated investments reported within our yen-based Japanese insurance entities, and therefore negatively impact their equity and regulatory solvency margins, by having our Japanese insurance operations enter into currency hedging transactions. Those hedges are with a subsidiary of Prudential Financial. These hedging strategies have the economic effect of moving the change in value of these USD-denominated investments due to foreign currency exchange rate movements from our Japanese yen-based entities to our USD-based entities.

These USD-denominated investments also pay a coupon which is generally higher than what a similar yen-denominated investment would pay. The incremental impact of this higher yield on our USD-denominated investments, as well as our dual currency and synthetic dual currency investments, will vary over time, and is dependent on the duration of the underlying investments as well as interest rate environments in both the U.S. and Japan at the time of the investments.

Impact of intercompany foreign currency exchange rate arrangements on segment results of operations
 
The financial results of our International InsuranceBusinesses and PGIM segments reflect the impact of intercompany arrangements with our Corporate and Other operations pursuant to which certain of these segments’ non-USD-denominated earnings are translated at fixed currency exchange rates. Results of our Corporate and Other operations include any differences between the translation adjustments recorded by the segments at the fixed currency exchange rate versus the actual average rate during the period. In addition, specific to our International Insurance segmentBusinesses where we hedge certain currencies, the results of our Corporate and Other operations also include the impact of any gains or losses recorded from the forward currency contracts that settled during the period, which include the impact of any over or under hedging of actual earnings that differ from projected earnings.


For International Insurance,Businesses, the fixed currency exchange rates are generally determined in connection with a foreign currency income hedging program designed to mitigate the impact of exchange rate changes on the segment’s expected USD-equivalent earnings. Pursuant to this program, our Corporate and Other operations execute forward currency contracts with third-parties to sell the net exposure of projected earnings for certain currencies in exchange for USD at specified exchange rates. The maturities of these contracts correspond with the future periods (typically on a three-year rolling basis) in which the identified non-USD-denominated earnings are expected to be generated. In establishing the level of non-USD-denominated earnings that will be hedged through this program, we exclude the anticipated level of USD-denominated earnings that will be generated by USD-denominated products and investments. For the six months ended June 30, 2019,2020, approximately 15%4% of the segment’s earnings were yen-based and, as of June 30, 2019,2020, we have hedged 100% of expected yen-based earnings for 2019, and, 92% and 50% of expected yen-based earnings for 2020, 2021 and 2021,2022, respectively. To the extent currently unhedged, our International Insurance segment’sBusinesses’ future expected USD-equivalent of yen-based earnings will be impacted by yen exchange rate movements.
 

As a result of these arrangements, our International Insurance segment’sBusinesses’ results for 20192020 and 20182019 reflect the impact of translating yen-denominated earnings at fixed currency exchange rates of 104 and 105 and 111 yen per USD, respectively, and Korean won-denominated earnings at fixed currency exchange rates of 1110 and 1150 Korean won per USD, respectively. Since determination of the fixed currency exchange rates for a given year is impacted by changes in foreign currency exchange rates over time, the segment’s future earnings will ultimately be impacted by these changes in exchange rates.

As a result of these arrangements, forFor PGIM and certain other currencies within our International Insurance,Businesses, the fixed currency exchange rates for the current year are predetermined during the third quarter of the prior year using forward currency exchange rates.
 
The table below presents, for the periods indicated, the increase (decrease) to revenues and adjusted operating income for the International InsuranceBusinesses, PGIM and PGIM segments and for Corporate and Other operations, reflecting the impact of these intercompany arrangements.
 
Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
(in millions)(in millions)
Segment impacts of intercompany arrangements:              
International Insurance$14
 $(6) $29
 $(21)
International Businesses(3)$19
 $11
 $31
 $26
PGIM2
 0
 3
 (1)2
 2
 2
 3
Impact of intercompany arrangements(1)16
 (6) 32
 (22)21
 13
 33
 29
Corporate and Other operations:       
Corporate and Other:       
Impact of intercompany arrangements(1)(3)(16) 6
 (32) 22
(21) (13) (33) (29)
Settlement gains (losses) on forward currency contracts(2)(3)20
 (7) 32
 (30)20
 16
 42
 29
Net benefit (detriment) to Corporate and Other operations4
 (1) 0
 (8)
Net benefit (detriment) to Corporate and Other(1) 3
 9
 0
Net impact on consolidated revenues and adjusted operating income$20
 $(7) $32
 $(30)$20
 $16
 $42
 $29
__________ 
(1)Represents the difference between non-USD-denominated earnings translated on the basis of weighted average monthly currency exchange rates versus fixed currency exchange rates determined in connection with the foreign currency income hedging program.
(2)As of June 30, 2020 and 2019, and 2018, the total notional amounts of these forward currency contracts within our Corporate and Other operations were $2.5$1.1 billion and $2.8$2.0 billion, respectively, of which $1.2$0.4 billion and $1.5$1.2 billion, respectively, were related to our Japanese insurance operations. Prior period total notional amount of these forward currency contracts has been updated to conform to current period presentation.
(3)Excludes impacts related to POK. Prior period amounts have been updated to conform to current period presentation. Effective second quarter of 2020, the intercompany arrangement for the Korean won between our International Businesses and Corporate and Other operations was terminated and the related hedges were repurposed in relation to the anticipated sale of POK. Effective second quarter of 2020, Korean won-denominated earnings for 2020 and 2019 that were translated at fixed currency exchange rates of 1,090 and 1,110 Korean won per USD, respectively, are excluded from the International Businesses and are included in the Divested and Run-off Businesses included in Corporate and Other. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.

Impact of products denominated in non-local currencies on U.S. GAAP earnings
 
While our international insurance operations offer products denominated in local currency, several also offer products denominated in non-local currencies, most notably our Japanese operations, which offer USD- and Australian dollar (“AUD”)-denominated products. The non-local currency-denominated insurance liabilities related to these products are supported by investments denominated in corresponding currencies, including a significant portion designated as available-for-sale. While the impact from foreign currency exchange rate movements on these non-local currency-denominated assets and liabilities is economically matched, differences in the accounting for changes in the value of these assets and liabilities due to changes in foreign currency exchange rate movements have historically resulted in volatility in U.S. GAAP earnings.


In the first quarter of 2015, we implemented a structure in Gibraltar Life’s operations that disaggregated the USD- and AUD-denominated businesses into separate divisions, each with its own functional currency that aligns with the underlying products and investments. The result of this alignment was to reduce differences in the accounting for changes in the value of these assets and liabilities that arise due to changes in foreign currency exchange rate movements. For the USD- and AUD-denominated assets that were transferred under this structure, the net cumulative unrealized investment gains associated with foreign exchange remeasurement that were recorded in “Accumulated other comprehensive income (loss)” (“AOCI”) totaled $3.0$2.5 billion and $3.2$2.7 billion as of June 30, 20192020 and December 31, 2018,2019, respectively, and will be recognized in earnings within “Realized investment gains (losses), net” over time as these assets mature or are sold. Absent the sale of any of these assets prior to their stated maturity, approximately 6%7% of the $3.0$2.5 billion balance as of June 30, 20192020 will be recognized throughout the remainder of 2019,2020, approximately 13% will be recognized in 2020,2021, and a majority of the remaining balance will be recognized from 20212022 through 2024.2051.


Highly inflationary economy in Argentina

Our insurance operations in Argentina, Prudential of Argentina (“POA”), have historically utilized the Argentine peso as the functional currency given it is the currency of the primary economic environment in which the entity operates. During 2018, Argentina experienced a cumulative inflation rate that exceeded 100% over a 3-year period. As a result, Argentina’s economy was deemed to be highly inflationary resulting in reporting changes effective July 1, 2018. Under U.S. GAAP, the financial statements of a foreign entity in a highly inflationary economy are to be remeasured as if its functional currency (formerly the Argentine peso) is the reporting currency of its parent reporting entity (the USD) on a prospective basis. While this changed how the results of POA are remeasured and/or translated into USD, the impact to our financial statements was not material nor is it expected to be material in future periods given the relative size of our POA operations. It should also be noted that due to the macroeconomic environment in Argentina, POA’s sales are predominantly denominated in USD and therefore substantially all of POA’s balance sheet consists of USD-denominated product liabilities supported by USD-denominated assets. As a result, this accounting change serves to reduce the remeasurement impact reflected in net income given that the functional currency and currency in which the assets and liabilities are denominated will be more closely aligned.


Accounting Policies & Pronouncements

Application of Critical Accounting Estimates

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

Management believes the accounting policies relating to the following areas are most dependent on the application of estimates and assumptions and require management’s most difficult, subjective, or complex judgments:

DAC, deferred sales inducements (“DSI”) and VOBA;
Policyholder liabilities;
Goodwill;
Valuation of investments including derivatives, measurement of allowance for credit losses, and the recognition of other-than-temporary impairments (“OTTI”);
Pension and other postretirement benefits;
Taxes on income; and
Reserves for contingencies, including reserves for losses in connection with unresolved legal matters.

Market Performance - Equity and Interest Rate Assumptions 

DAC, DSI and VOBA associated with the variable and universal life policies of our Individual Life and International InsuranceBusinesses segments and the variable and fixed annuity contracts of our Individual Annuities and International InsuranceBusinesses segments are generally amortized over the expected lives of these policies in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. The quarterly adjustments for market performance reflect the impact of changes to our estimate of total gross profits to reflect actual fund performance and market conditions. A significant portion of gross profits for our variable annuity contracts and, to a lesser degree, our variable life policiescontracts are dependent upon the total rate of return on assets held in separate account investment options. This rate of return influences the fees we earn on variable annuity and variable life contracts, costs we incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts, as well as other sources of profit. Returns that are higher than our expectations for a given period produce higher than expected account

balances, which increase the future fees we expect to earn on variable annuity and variable life contracts and decrease the future costs we expect to incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts. The opposite occurs when returns are lower than our expectations. The changes in future expected gross profits are used to recognize a cumulative adjustment to all prior periods’ amortization.

Furthermore, the calculation of the estimated liability for future policy benefits related to certain insurance products includes an estimate of associated revenues and expenses that are dependent on both historical market performance as well as estimates of market performance in the future. Similar to DAC, DSI and VOBA described above, these liabilities are subject to quarterly adjustments for experience including market performance, in addition to annual adjustments resulting from our annual reviews of assumptions.


The weighted average rate of return assumptions used in developing estimated market returns consider many factors specific to each business,product type, including asset durations, asset allocations and other factors. With regard to equity market assumptions, the near-term future rate of return assumption used in evaluating DAC, DSI and VOBA and liabilities for future policy benefits for certain of our products, primarily our domestic variable annuity and domestic and international variable life insurance products, is generally updated each quarter and is derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15.0%, we use our maximum future rate of return. As of June 30, 2019,2020, our domestic variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 4.3%5.1% near-term mean reversion equity expected rate of return, and our international variable life insurance business assumes a 4.8% long-term equity expected rate of return and a 5.0% near-term mean reversion equity expected rate of return.

With regard to interest rate assumptions used in evaluating DAC, DSI and VOBA and liabilities for future policy benefits for certain of our products, we generally update the long-term and near-term future interest rates used to project fixed income returns annually.annually and quarterly, respectively. As a result of our 20192020 annual reviews and update of assumptions and other refinements, we keptreduced our long-term expectation of the (i) 10-year U.S. Treasury rate by 50 basis points and now grade to a rate of 3.25% over ten years, and (ii) 10-year Japanese Government Bond yields unchangedyield by 30 basis points and continue tonow grade to ratesa rate of 3.75% and 1.30%, respectively,1.00% over ten years. As part of our quarterly market experience updates, in the second quarter of 2019, we updatedupdate our near-term projections of interest rates to reflect a decreasechanges in current rates.

For a discussion of the impact that could result from changes in certain key assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting Policies and Pronouncements—Sensitivities for Insurance Assets and Liabilities” in our Annual Report on Form 10-K for the year ended December 31, 2019

Future Adoption of New Accounting Pronouncements

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASBFinancial Accounting Standards Board (“FASB”) on August 15, 2018 and is expected to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements. In JulyOctober 2019, the FASB made a tentativeissued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of this ASU 2018-12 to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. A final decision regardingAs a result of the COVID-19 pandemic, the FASB voted in June 2020 to tentatively defer for an additional one year the current effective date isof ASU 2018-12 from January 1, 2022 to January 1, 2023, and to provide transition relief to facilitate the early adoption of the ASU. Subsequently in July 2020, the FASB issued a proposed ASU with comment deadline of August 24, 2020 to obtain additional feedback on the tentative decisions, which are expected into be finalized during the third quarter of 2019.2020. The transition relief would allow large calendar-year public companies that early adopt ASU 2018-12 to apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would also apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements. ASU 2018-12 will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter. See Note 2 to ourthe Unaudited Interim Consolidated Financial Statements for a more detailed discussion of ASU 2018-12, as well as other accounting pronouncements issued but not yet adopted and newly adopted accounting pronouncement.pronouncements.



Results of Operations by Segment

PGIM Division

PGIM

Business Update

In the first quarter of 2019, we completed the acquisition of Wadhwani Asset Management LLP, a London-based quantitative macro-focused investment management firm, and renamed the firm QMA Wadhwani LLP, which now operates as part of our QMA business.

In July 2019, we completed the acquisition of our joint venture partner’s shares of our India-based asset management joint venture, DHFL Pramerica Asset Managers, and re-named the business PGIM India Asset Management.


Operating Results

The following table sets forth the PGIM segment’sPGIM’s operating results for the periods indicated.


Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
(in millions)(in millions)
Operating results(1):              
Revenues$926
 $816
 $1,796
 $1,642
$957
 $926
 $1,735
 $1,796
Expenses662
 562
 1,318
 1,156
633
 662
 1,247
 1,318
Adjusted operating income264
 254
 478
 486
324
 264
 488
 478
Realized investment gains (losses), net, and related adjustments1
 0
 1
 (12)(1) 1
 3
 1
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests30
 (11) 35
 (19)(6) 30
 (42) 35
Income (loss) before income taxes and equity in earnings of operating joint ventures$295
 $243
 $514
 $455
$317
 $295
 $449
 $514
 __________
(1)Certain of our PGIM segment’sPGIM’s investment activities are based in currencies other than the U.S. dollar and are therefore subject to foreign currency exchange rate risk. The financial results of our PGIM segment include the impact of an intercompany arrangement with our Corporate and Other operations designed to mitigate the impact of exchange rate changes on the segment’sPGIM’s U.S. dollar-equivalent earnings. For more information related to this intercompany arrangement, see “—Results of Operations—Impact of Foreign Currency Exchange Rates,” above.
 
Adjusted Operating Income

Three Month Comparison. Adjusted operating income increased $10$60 million. The increase primarily reflected higheran increase in asset management fees due to an increase inhigher average assets under management as a result of market appreciation and net flows, partially offset by higher relatedfixed income inflows, as well as a decrease in expenses driven by the higher asset management fees and certainlower costs of long-term employee compensation plans tied to Company stockperformance factors and equity market performance. Also contributinga temporary pause in travel and entertainment due to theCOVID-19. The increase were higheralso reflected an increase in other related revenues, net of associatedrelated expenses, primarily due to higher strategic investing results driven by higherspread tightening impacting fixed income investment strategies and strong equity investment performance, partially offset by lower net performance-based incentive fees.fees driven by the absence of a significant fee earned in the prior year period. These increases were partially offset by a decrease in service, distribution and other revenues primarily reflecting the absence of fees in the current year period related to the Wells Fargo agreement (see “—Revenue and Expenses,” below).

Six Month Comparison. Adjusted operating income decreased $8increased $10 million. HigherThis increase primarily reflected an increase in asset management fees, reflecting an increase innet of related expenses, due to higher average assets under management driven byas a result of market appreciation and net flows, were more than offset by higher related expenses driven by the higher asset management fees and certain long-term employee compensation plans tied to Company stock and equity market performance.fixed income inflows. The decrease also reflected charges associated with a joint venture and higher non-compensation expenses, including those supporting business growth initiatives. These decreases wereincrease was partially offset by highera decrease in other related revenues, net of associatedrelated expenses, primarily driven by higherdue to lower net performance-based incentive fees.fees driven by the absence of significant fees earned in the prior year, and lower strategic investing results driven by spread widening impacting fixed income investment strategies. The increase was also partially offset by a decrease in service, distribution and other revenues primarily due to the absence of fees in the current year period related to the Wells Fargo agreement.

Revenues and Expenses

The following table sets forth the PGIM segment’sPGIM’s revenues, presented on a basis consistent with the table above under “—Operating Results,” by type.



Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
(in millions)(in millions)
Revenues by type:              
Asset management fees by source:              
Institutional customers$319
 $295
 $631
 $591
$325
 $319
 $653
 $631
Retail customers(1)220
 219
 429
 436
227
 220
 456
 429
General account132
 115
 255
 235
138
 132
 274
 255
Total asset management fees671
 629
 1,315
 1,262
690
 671
 1,383
 1,315
Other related revenues by source:              
Incentive fees62
 6
 98
 11
17
 62
 35
 98
Transaction fees10
 4
 12
 18
4
 10
 8
 12
Strategic investing18
 19
 54
 53
64
 18
 37
 54
Commercial mortgage(2)25
 36
 51
 56
32
 25
 59
 51
Total other related revenues(3)115

65

215

138
117

115

139

215
Service, distribution and other revenues(4)140
 122
 266
 242
150
 140
 213
 266
Total revenues$926
 $816
 $1,796
 $1,642
$957
 $926
 $1,735
 $1,796
__________
(1)Consists of fees from: individual mutual funds and variable annuities and variable life insurance separate account assets; funds invested in proprietary mutual funds through our defined contribution plan products; and third-party sub-advisory relationships. Revenues from fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance are included in the general account.
(2)Includes mortgage origination and spread lending revenues from our commercial mortgage origination and servicing business.
(3)Future revenues will be impacted by the level and diversification of our strategic investments, the commercial real estate market, and other domestic and international markets.
(4)IncludesPrior period amount includes payments from Wells Fargo under an agreement dated as of July 30, 2004, implementing arrangements with respect to money market mutual funds in connection with the combination of our retail securities brokerage and clearing operations with those of Wells Fargo. The agreement extendsextended for ten years after termination offrom the Wachovia Securities joint venture which occurred ontermination date of December 31, 2009.2009 to December 31, 2019. The revenue from Wells Fargo under this agreement was $15 million and $18 million for the three months ended June 30, 2019 and 2018, respectively, and $31 million and $37 million for the six months ended June 30, 2019 and 2018, respectively.2019.

Three Month Comparison. Revenues as shown in the table above under “—Operating Results,” increased $110$31 million. Asset management fees increased $42 million driven byprimarily reflecting an increase in average assets under management as a result of market appreciation and fixed income flows.inflows. Other related revenues increased $50 million primarily due toreflecting higher gross performance-based incentive fees,strategic investing results driven by spread tightening impacting fixed income investment strategies and strong equity investment performance, partially offset by lower commercial mortgage results.performance-based incentive fees driven by the absence of a significant fee earned in the prior year period. Service, distribution and other revenues increased primarily reflecting higher revenues from certain consolidated funds (which were fully offset by higher expenses related to noncontrolling interests in these funds), partially offset by the absence of fees in the current year period related to the Wells Fargo agreement.

Expenses as shown in the table above under “—Operating Results,” increased $100 million,decreased $29 million. Expenses decreased, primarily reflecting higher compensation expenses attributable to growth in incentive fees and higher earnings, anddriven by lower costs for certain long-term employee compensation plans tied to performance factors and a temporary pause in travel and entertainment due to COVID-19. Also contributing to the decrease were lower expenses associated with lower performance-based incentive fee revenues. These decreases were partially offset by an increase in expenses for service, distribution and other revenues primarily driven by higher revenues associated with certain consolidated funds as discussed above.

Six Month Comparison. Revenues increased $154decreased $61 million. Asset management fees increased $53 million driven byprimarily reflecting an increase in average assets under management as a result of market appreciation and fixed income flows, partially offset by equity outflows.inflows. Other related revenues increased $77 milliondecreased primarily reflecting lower performance-based incentive fees due to higher gross performance-based incentive fees. These increasesthe absence of a significant fee earned in the prior year period, and lower strategic investing results driven by spread widening impacting fixed income investment strategies. Service, distribution and other revenues decreased primarily reflecting lower revenues from certain consolidated funds, which were partiallyfully offset by charges associated with a joint venture.lower expenses related to noncontrolling interests in these funds, and the absence of fees in the current year related to the Wells Fargo agreement.

Expenses increased $162 million,decreased $71 million. Expenses for service, distribution and other revenues decreased primarily reflecting higher compensation expenses attributable to growth in incentive fees and higher earnings, and costs fordriven by lower revenues associated with certain long-term employee compensation plans,consolidated funds as discussed above. Also contributing to the increasedecrease were higher non-compensationlower expenses including those supporting business growth initiatives.associated with lower performance-based incentive fee revenues and a temporary pause in travel and entertainment due to COVID-19.


Assets Under Management

The following table sets forth assets under management by asset class and source as of the dates indicated.

 June 30, 2019 December 31, 2018 June 30, 2018
 (in billions)
Assets Under Management (at fair value):     
Institutional customers:     
Equity$60.4
 $54.7
 $62.2
Fixed income431.4
 395.1
 386.1
Real estate43.1
 43.7
 42.5
Institutional customers(1)534.9
 493.5
 490.8
Retail customers:     
Equity130.3
 112.9
 133.4
Fixed income132.7
 125.2
 117.1
Real estate1.9
 2.0
 1.5
Retail customers(2)264.9
 240.1
 252.0
General account:     
Equity5.5
 5.1
 5.5
Fixed income452.3
 420.8
 405.9
Real estate2.0
 1.9
 1.9
General account459.8
 427.8
 413.3
Total assets under management$1,259.6
 $1,161.4
 $1,156.1
      
Assets under management within other operating segments(3)$237.8
 $215.9
 $232.1
Total PFI assets under management$1,497.4
 $1,377.3
 $1,388.2
 June 30, 2020 December 31, 2019 June 30, 2019
 (in billions)
Assets Under Management(1) (at fair value):     
Institutional customers:     
Public equity$48.9
 $57.1
 $54.9
Public fixed income443.9
 418.6
 404.7
Real estate48.9
 49.1
 48.3
Private credit and other alternatives24.7
 23.5
 23.0
Multi-asset4.8
 4.5
 4.0
Institutional customers(2)571.2
 552.8
 534.9
Retail customers:     
Public equity109.7
 104.2
 105.2
Public fixed income152.0
 138.7
 119.7
Real estate1.8
 2.0
 1.9
Private credit and other alternatives0.5
 0.5
 0.3
Multi-asset56.2
 60.2
 60.8
Retail customers(3)320.2
 305.6
 287.9
General account:     
Public equity4.0
 4.4
 4.0
Public fixed income354.8
 328.6
 321.9
Real estate67.2
 66.0
 63.5
Private credit and other alternatives77.1
 73.5
 70.3
Multi-asset0.0
 0.1
 0.1
General account503.1
 472.6
 459.8
Total PGIM assets under management(4)$1,394.5
 $1,331.0
 $1,282.6
      
Assets under management within other reporting segments(4)(5)$210.8
 $219.9
 $214.8
Total PFI assets under management$1,605.3
 $1,550.9
 $1,497.4
__________
(1)Prior period amounts have been updated to conform to current period presentation. “Public equity” represents stock ownership interest in a corporation or partnership (excluding hedge funds) or real estate investment trust. “Public fixed income” represents debt instruments that pay interest and usually have a maturity (excluding mortgages). “Real estate” includes direct real estate equity and real estate mortgages. “Private credit and other alternatives” includes private credit, private equity, hedge funds, agricultural debt and equity and other alternative strategies. “Multi-asset” includes funds or products that invest in more than one asset class balancing equity and fixed income funds and target date funds.
(2)Consists of third-party institutional assets and group insurance contracts.
(2)(3)Consists of individual mutual funds and variable annuities and variable life insurance separate account assets; funds invested in proprietary mutual funds through our defined contribution plan products; and third-party sub-advisory relationships. Fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance are included in the general account.
(3)(4)These amounts primarilyEffective first quarter of 2020, certain assets have been reclassified from the U.S. Individual Solutions division to PGIM.
(5)Primarily include certain assets related to annuity and variable life products in our U.S. Individual Solutions division, retirement and group life products in our U.S. Workplace Solutions division and certain general account assets of our International Insurance division.Businesses. These assets are not directly managed by PGIM, but rather are invested in non-proprietary funds or are managed by either the divisions themselves or our Chief Investment Officer Organization.

PGIM’s assets under management increased $112 billion in comparison to the prior year quarter primarily reflecting market appreciation and public fixed income inflows, partially offset by public equity outflows. PGIM’s assets under management increased $64 billion in comparison to the prior year-end primarily reflecting market appreciation and public fixed income inflows, partially offset by public equity outflows.

The following table sets forth the component changes in PGIM’s assets under management by asset source for the periods indicated.



Three Months Ended
June 30,
 Six Months Ended
June 30,
 Twelve
Months
Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
 Twelve
Months
Ended
June 30,
2019 2018 2019 2018 20192020 2019 2020 2019 2020
(in billions)(in billions)
Institutional Customers:                  
Beginning assets under management$524.0
 $489.6
 $493.5
 $489.5
 $490.8
$524.8
 $524.0
 $552.8
 $493.5
 $534.9
Net additions (withdrawals), excluding money market activity:                  
Third-party(6.0) 5.5
 (5.0) 5.3
 3.8
(5.7) (6.0) (1.5) (5.0) (3.0)
Third-party via affiliates(1)0.8
 0.3
 0.5
 (0.4) 0.4
(0.3) 0.8
 (1.1) 0.5
 (1.4)
Total(5.2) 5.8
 (4.5) 4.9
 4.2
(6.0) (5.2) (2.6) (4.5) (4.4)
Market appreciation (depreciation)(3)16.6
 (4.0) 40.9
 (5.2) 35.8
Other increases (decreases)(2)(0.5) (0.6) 5.0
 1.6
 4.1
Market appreciation (depreciation)(2)43.3
 16.6
 12.8
 40.9
 34.2
Other increases (decreases)(3)9.1
 (0.5) 8.2
 5.0
 6.5
Ending assets under management$534.9
 $490.8
 $534.9
 $490.8
 $534.9
571.2
 534.9
 571.2
 534.9
 571.2
Retail Customers:         
Retail Customers(4):         
Beginning assets under management$256.4
 $246.2
 $240.1
 $245.6
 $252.0
282.4
 279.1
 305.6
 260.2
 287.9
Net additions (withdrawals), excluding money market activity:                  
Third-party1.1
 1.8
 1.5
 2.8
 (1.7)9.4
 1.1
 8.1
 1.5
 12.3
Third-party via affiliates(1)0.2
 (1.0) (6.7) (1.2) (3.2)(14.0) (0.3) (3.1) (6.8) (6.5)
Total1.3
 0.8
 (5.2) 1.6
 (4.9)(4.6) 0.8
 5.0
 (5.3) 5.8
Market appreciation (depreciation)(3)(2)7.1
 4.8
 30.0
 5.0
 17.8
42.0
 7.8
 9.4
 32.9
 25.9
Other increases (decreases)(2)(3)0.1
 0.2
 0.0
 (0.2) 0.0
0.4
 0.2
 0.2
 0.1
 0.6
Ending assets under management$264.9
 $252.0
 $264.9
 $252.0
 $264.9
320.2
 287.9
 320.2
 287.9
 320.2
General Account:                  
Beginning assets under management$441.0
 $420.0
 $427.8
 $420.2
 $413.3
488.5
 441.0
 472.6
 427.8
 459.8
Net additions (withdrawals), excluding money market activity:                  
Third-party0.0
 0.0
 0.0
 0.0
 0.0
0.0
 0.0
 0.0
 0.0
 0.0
Affiliated1.0
 (0.6) 1.6
 1.4
 9.4
0.1
 1.0
 0.8
 1.6
 5.3
Total1.0
 (0.6) 1.6
 1.4
 9.4
0.1
 1.0
 0.8
 1.6
 5.3
Market appreciation (depreciation)(3)14.2
 (1.6) 28.4
 (6.7) 30.9
Other increases (decreases)(2)3.6
 (4.5) 2.0
 (1.6) 6.2
Market appreciation (depreciation)(2)18.0
 14.2
 17.4
 28.4
 25.9
Other increases (decreases)(3)(3.5) 3.6
 12.3
 2.0
 12.1
Ending assets under management$459.8
 $413.3
 $459.8
 $413.3
 $459.8
503.1
 459.8
 503.1
 459.8
 503.1
Total assets under management(4)$1,259.6
 $1,156.1
 $1,259.6
 $1,156.1
 $1,259.6
$1,394.5
 $1,282.6
 $1,394.5
 $1,282.6
 $1,394.5
__________
(1)Represents assets that our PGIM segment manages for the benefit of other reporting segments within the Company. Additions and withdrawals of these assets are attributable to third-party product inflows and outflows in other reporting segments.
(2)Includes income reinvestment, where applicable.
(3)Includes the effect of foreign exchange rate changes, net money market activity and the impact of acquired business. The impact from foreign currency fluctuations, which primarily impact the general account, resulted in a gain of $1.9$1.1 billion and a loss of $4.9$1.9 billion for the three months ended June 30, 2020 and 2019, respectively, and 2018, respectively; a gainloss of $0.7 billion and a gain of $0.5$0.7 billion for the six months ended June 30, 20192020 and 2018,2019, respectively; and a gainloss of $1.4$0.9 billion for the twelve months ended June 30, 2019.2020.
(3)(4)Includes income reinvestment, where applicable.Prior period amounts have been updated to conform to current period presentation.

Strategic Investments

The following table sets forth thePGIM’s strategic investments of the PGIM segment at carrying value (including the value of derivative instruments used to mitigate equity market and currency risk) by asset class and source as of the dates indicated.



June 30, 2019 December 31, 2018June 30, 2020 December 31, 2019
(in millions)(in millions)
Co-Investments:   
Co-Investments(1):   
Public fixed income$441
 $462
Real estate$190
 $207
210
 228
Fixed income441
 438
Seed Investments:   
Private credit and other alternatives22
 19
Seed Investments(1):   
Public equity635
 671
Public fixed income343
 325
Real estate58
 50
31
 34
Public equity731
 738
Fixed income312
 272
Private credit and other alternatives61
 59
Multi-asset63
 74
Total$1,732
 $1,705
$1,806
 $1,872
__________
(1)Prior period amounts have been updated to conform to current period presentation. For more information, see the “Assets Under Management” table above.

The increasedecrease of $27$66 million in strategic investments was primarily driven by favorable investment performance across all asset classes.PGIM’s redemptions of invested seed capital and unfavorable market conditions impacting public fixed income and real estate co-investments.

U.S. Businesses

Operating Results
The following table sets forth the operating results for our U.S. Businesses for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended June 30, 2020
 2020 2019 2020 2019
 (in millions)
Adjusted operating income before income taxes:       
U.S. Businesses:       
U.S. Workplace Solutions division:       
Retirement$281
 $467
 $526
 $718
Group Insurance5
 81
 49
 134
Total U.S. Workplace Solutions division286
 548
 575
 852
U.S. Individual Solutions division:       
Individual Annuities249
 462
 622
 934
Individual Life(64) (135) (84) (30)
Total U.S. Individual Solutions division185
 327
 538
 904
Assurance IQ division(1):       
Assurance IQ(16) 0
 (39) 0
Total Assurance IQ division(16) 0
 (39) 0
Total U.S. Businesses455
 875
 1,074
 1,756
Reconciling Items:       
Realized investment gains (losses), net, and related adjustments(2)(2,188) (677) (2,428) (1,771)
Charges related to realized investment gains (losses), net551
 2
 (265) 33
Market experience updates(3)96
 (170) (844) (170)
Other adjustments(4)32
 0
 77
 0
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests0
 1
 1
 1
Income (loss) before income taxes and equity in earnings of operating joint ventures$(1,054) $31
 $(2,385) $(151)
________
(1)Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
(2)Prior period amounts have been updated to conform to current period presentation.

(3)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(4)Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Three Month Comparison. Adjusted operating income for our U.S. Businesses decreased by $420 million primarily due to:

Lower net investment spread results driven by lower income on non-coupon investments;

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

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

Partially offsetting these decreases were the following items:

Higher underwriting results primarily driven by our Retirement business due to higher reserve gains driven by COVID-19 related mortality gains; and

Lower expenses, including costs associated with strategic initiatives.

Six Month Comparison. Adjusted operating income for our U.S. Businesses decreased by $682 million primarily due to:

Lower net investment spread results driven by lower income on non-coupon investments;

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

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

A favorable impact from changes in market conditions on estimates of profitability in the prior year period, which beginning with the second quarter of 2019 is excluded from adjusted operating income (see Note 13 to the Unaudited Interim Consolidated Financial WellnessStatements for additional information).

Partially offsetting these decreases was the following item:

Lower expenses, including costs associated with strategic initiatives.

U.S. Businesses - U.S. Workplace Solutions Division

Retirement

Operating Results

The following table sets forth the Retirement segment’sRetirement’s operating results for the periods indicated.

Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
(in millions)(in millions)
Operating results:              
Revenues$3,586
 $2,988
 $6,225
 $5,077
$2,992
 $3,586
 $5,429
 $6,225
Benefits and expenses3,119
 2,711
 5,507
 4,483
2,711
 3,119
 4,903
 5,507
Adjusted operating income467
 277
 718
 594
281
 467
 526
 718
Realized investment gains (losses), net, and related adjustments(1)64
 122
 143
 (33)16
 38
 (5) 168
Related charges8
 (15) 11
 (16)
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net305
 (219) 635
 (508)
Change in experience-rated contractholder liabilities due to asset value changes(331) 111
 (610) 415
Charges related to realized investment gains (losses), net12
 8
 (11) 11
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests0
 1
 1
 1
Income (loss) before income taxes and equity in earnings of operating joint ventures$513
 $276
 $897
 $452
$309
 $514
 $511
 $898

__________ 
(1)Prior period amounts have been updated to conform to current period presentation.

Adjusted Operating Income

Three Month Comparison. Comparison. Adjusted operating income increased $190decreased $186 million, primarily reflecting a favorablean unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for the second quarter of 2020 included a net charge of $22 million from these updates primarily driven by an increase in expected benefit payments, while results for the second quarter of 2019 included a net benefit of $154 million from this annual reviewthese updates, primarily driven by a reduction in expected benefit payments. Results for the second quarter of 2018 included a net charge of $68 million from these updates, primarily driven by updates to our assumptions for benefit payments. Excluding this item, adjusted operating income decreased $32$10 million, primarily driven by less favorable reserve experience,lower net investment spread results, partially offset by higher net investment spread results.reserve gains. The lower contribution from reserve experience primarily reflected lower mortality gains on a comparative basis within our pension risk transfer business. The increasedecrease in net investment spread results primarily reflected higherlower income on non-coupon investments andinvestments. The higher asset balances, including growth within our pension risk transfer business, partially offsetcontribution from reserve experience was primarily driven by the impact of higher crediting rates on full service account values.COVID-19 related mortality gains.

Six Month Comparison. Comparison. Adjusted operating income increased $124decreased $192 million, primarily reflecting a favorablean unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements, as discussed above. Excluding this item, adjusted operating income decreased $98$16 million, primarily driven by less favorable reserve experience, lower net investment

spread results, andpartially offset by higher expenses. The lower contribution from reserve experience primarily reflected lower mortality gains on a comparative basis within our pension risk transfer business.gains. The decrease in net investment spread results primarily reflected the impact of higher crediting rates on full service account values, partially offset by higherlower income on non-coupon investments andinvestments. The higher asset balances, including growth within our pension risk transfer business. The increase in expensescontribution from reserve experience was primarily driven by higher costs supporting business growth initiatives.COVID-19 related mortality gains.

Revenues, Benefits and Expenses

Three Month Comparison. Comparison. Revenues as shown in the table above under “—Operating Results,” increased $598decreased $594 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $604decreased $600 million. Premiums increased $507 million,This decrease primarily driven byreflected lower pension risk transfer transactions. This increase in premiums resulted in awith corresponding increaseoffsets in policyholders’ benefits, as discussed below. InvestmentThis decrease also reflected lower net investment income, increased $88 million, primarily reflecting higherlower income on non-coupon investments and higher asset balances, including growth within our pension risk transfer business.investments.

Benefits and expenses as shown in the table above under “—Operating Results,” increaseddecreased $408 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $636decreased $590 million. Policyholders’ benefits, including the change in policy reserves, increased $613 million,decreased primarily related to the increase in premiums discussed above, driven by growthdecrease in pension risk transfer transactions including interest onpremiums discussed above, as well as a higher contribution from reserve experience primarily driven by higher COVID-19 related reserves.mortality gains.

Six Month Comparison. Comparison. Revenues increased $1,148decreased $796 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $1,154decreased $802 million. Premiums increased $1,015 million,This decrease primarily driven byreflected lower pension risk transfer transactions. This increase in premiums resulted in awith corresponding increaseoffsets in policyholders’ benefits, as discussed below. InvestmentThis decrease also reflected lower net investment income, increased $146 million, primarily reflecting higher asset balances, including growth within our pension risk transfer business, and higherlower income on non-coupon investments.

Benefits and expenses increased $1,024decreased $604 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $1,252decreased $786 million. Policyholders’ benefits, including the change in policy reserves, increased $1,168 million,decreased primarily related to the increase in premiums discussed above, driven by growthdecrease in pension risk transfer transactions including interest onpremiums discussed above, as well as a higher contribution from reserve experience primarily driven by higher COVID-19 related reserves. Interest credited to policyholders’ account balances increased $47 million, including the impact of higher crediting rates on experience-rated account balances.mortality gains.

Account Values

Account values are a significant driver of our operating results, and are primarily driven by net additions (withdrawals) and the impact of market changes. The income we earn on most of our fee-based products varies with the level of fee-based account values, since many policy fees are determined by these values. The investment income and interest we credit to policyholders on our spread-based products varies with the level of general account values. To a lesser extent, changes in account values impact our pattern of amortization of DAC and VOBA and general and administrative expenses. The following table shows the changes in the account values and net additions (withdrawals) of Retirement segmentRetirement’s products for the periods indicated. Net additions (withdrawals) are plan sales and participant deposits or additions, as applicable, minus plan and participant withdrawals and benefits. Account values include both internally- and externally-managed client balances as the total balances drive revenue for the Retirement segment.business. For more information on internally-managed balances, see “—PGIM.”


Three Months Ended
June 30,
 Six Months Ended
June 30,
 Twelve
Months
Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
 Twelve
Months
Ended
June 30,
2019 2018 2019 2018 20192020 2019 2020 2019 2020
(in millions)(in millions)
Full Service:                  
Beginning total account value$251,071
 $236,120
 $231,669
 $234,616
 $240,922
$238,435
 $251,071
 $272,448
 $231,669
 $262,133
Deposits and sales11,047
 7,712
 20,614
 17,634
 36,096
5,455
 11,047
 14,407
 20,614
 30,187
Withdrawals and benefits(7,259) (6,470) (16,364) (14,624) (28,169)(7,040) (7,259) (15,708) (16,364) (35,050)
Change in market value, interest credited and interest income and other activity7,274
 3,560
 26,214
 3,296
 13,284
29,583
 7,274
 (4,714) 26,214
 9,163
Ending total account value$262,133
 $240,922
 $262,133
 $240,922
 $262,133
$266,433
 $262,133
 $266,433
 $262,133
 $266,433
Institutional Investment Products:                  
Beginning total account value$203,101
 $191,518
 $200,759
 $194,492
 $191,722
$227,346
 $203,101
 $227,596
 $200,759
 $215,978
Additions(1)15,044
 5,461
 17,291
 6,149
 32,452
4,545
 15,044
 11,438
 17,291
 25,248
Withdrawals and benefits(4,161) (3,851) (7,810) (8,740) (14,479)(3,527) (4,161) (9,037) (7,810) (17,970)
Change in market value, interest credited and interest income2,826
 1,198
 5,470
 984
 7,789
3,000
 2,826
 5,435
 5,470
 9,054
Other(2)(832) (2,604) 268
 (1,163) (1,506)(222) (832) (4,290) 268
 (1,168)
Ending total account value$215,978
 $191,722
 $215,978
 $191,722
 $215,978
$231,142
 $215,978
 $231,142
 $215,978
 $231,142
__________
(1)Additions primarily include: group annuities calculated based on premiums received; funding agreements issued; unfunded longevity reinsurance contracts calculated as the present value of future projected benefits; and investment-only stable value contracts calculated as the fair value of customers’ funds held in a client-owned trust.
(2)“Other” activity includes the effect of foreign exchange rate changes associated with our British pounds sterling denominated longevity reinsurance business and changes in asset balances for externally-managed accounts. For the three months ended June 30, 2020 and 2019, and 2018, “other”“Other” activity also includes $2,614 million in receipts offset by $2,740 million in payments and $792 million in receipts offset by $577 million in payments and $1,031 million in receipts offset by $1,024 million in payments, respectively, and for the six months ended June 30, 2020 and 2019, includes $5,366 million in receipts offset by $5,276 million in payments and 2018, includes $1,403 million in receipts offset by $1,194 million in payments and $2,231 million in receipts offset by $2,189 million in payments, respectively, related to funding agreements backed by commercial paper which typically have maturities of less than 90 days.

The increase in full service account values for the three months ended June 30, 2019, the six months ended June 30, 2019, and the twelve months ended June 30, 2019,2020 primarily reflected the favorable changes in the market value of customer funds, partially offset by net withdrawals and positive net plan sales, including a large defined contribution transactionbenefits. The decrease in full service account values for the six months ended June 30, 2020 primarily reflected unfavorable changes in the second quartermarket value of 2019.customer funds and net withdrawals and benefits.

The increase in institutional investment products account values for the three months, ended June 30, 2019, the six months ended June 30, 2019 and the twelve months ended June 30, 2019, primarily2020 reflected net additions from pension risk transfer transactions and the favorable changes in the market value of account assets. Account values for the three months ended June 30, 2020 also reflected net additions from pension risk transfer activity and investment-only stable value accounts. Account values for the six months ended June 30, 2020 also reflected net additions from collateralized funding agreements and investment-only stable value accounts, which were partially offset by pension risk transfer activity, and a decrease in other activity primarily driven by the negative impacts of foreign exchange rate changes. Account values for the twelve months ended June 30, 2020 also reflected net additions from pension risk transfer activity and collateralized funding agreements.

Group Insurance

Operating Results

The following table sets forth the Group Insurance segment’sInsurance’s operating results and benefits and administrative operating expense ratios for the periods indicated.

Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
($ in millions)($ in millions)
Operating results:              
Revenues$1,461
 $1,424
 $2,902
 $2,840
$1,471
 $1,461
 $2,895
 $2,902
Benefits and expenses1,380
 1,342
 2,768
 2,703
1,466
 1,380
 2,846
 2,768
Adjusted operating income81
 82
 134
 137
5
 81
 49
 134
Realized investment gains (losses), net, and related adjustments8
 21
 9
 (9)(10) 8
 71
 9
Income (loss) before income taxes and equity in earnings of operating joint ventures$89
 $103
 $143
 $128
$(5) $89
 $120
 $143
Benefits ratio(1):       
Benefits ratio(1)(4):       
Group life(2)90.2% 87.5% 89.6% 87.3%93.0% 90.2% 90.7% 89.6%
Group disability(2)65.3% 64.0% 69.9% 71.4%74.0% 65.3% 75.0% 69.9%
Total Group Insurance(2)84.7% 82.8% 85.3% 84.2%89.0% 84.7% 87.3% 85.3%
Administrative operating expense ratio(3):       
Administrative operating expense ratio(3)(4):       
Group life12.2% 12.6% 11.9% 12.1%11.8% 12.2% 12.1% 11.9%
Group disability24.2% 26.4% 25.5% 26.7%26.1% 24.2% 25.4% 25.5%
Total Group Insurance14.8% 15.3% 14.8% 14.9%14.9% 14.8% 15.0% 14.8%
__________ 
(1)Ratio of policyholder benefits to earned premiums plus policy charges and fee income.
(2)BenefitsBenefit ratios reflect the impactsimpact of our annual reviews and updatesupdate of assumptions and other refinements. Excluding these impacts, the group life, group disability and total Group Insurance benefitsbenefit ratios were 93.4%, 75.7% and 89.6% for the three months ended June 30, 2020, respectively, 90.9%, 75.8% and 87.6% for the six months ended June 30, 2020, respectively, 88.5%, 74.5% and 85.5% for the three months ended June 30, 2019, respectively, and 88.7%, 74.6% and 85.7% for the six months ended June 30, 2019, respectively, 88.6%, 71.6% and 85.3% for the three months ended June 30, 2018, respectively, and 87.9%, 75.3% and 85.4% for the six months ended June 30, 2018, respectively.
(3)Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income.
(4)The benefit and administrative ratios are measures used to evaluate profitability and efficiency.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $1$76 million, including an unfavorablea favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for both the second quarter of 20192020 and 20182019 included a net benefit from this update of $11 million and $9 million, and $31 million, respectively. The net benefit in both periods was primarily driven by favorable experience related to our group disability business. Excluding this item, adjusted operating income increased $21decreased $78 million, primarily reflecting a higher contribution fromlower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts. The decrease also reflected lower net investment spread results driven by higherlower income on non-coupon investments, and lower expenses driven by the absence of costs related to the termination of a third-party underwriting service provider contract in the prior year period. The underwriting results for both our group life and group disability businesses remained flat compared to the prior year period.investments.

Six Month Comparison. Adjusted operating income decreased $3$85 million, including an unfavorablea favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, adjusted operating income increased $19decreased $87 million, primarily driven by more favorable underwriting results in our group disability business, a higher contribution from net investment spread results driven by higher income on non-coupon investments, andreflecting lower expenses driven by the absence of costs related to the termination of a third-party underwriting service provider contract in the prior year period. The underwriting results in our group disability business were driven by growth in the business and a favorable impact from claim experience on long-term contracts. These increases were partially offset by less favorable underwriting results in our group life business driven by an unfavorable impact from claim experience.experience mostly due to COVID-19 impacts on non-experience-rated contracts. The decrease also reflected lower net investment spread results driven by lower income on non-coupon investments.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues as shown in the table above under “—Operating Results,” increased $37$10 million. Excluding an unfavorable comparativethe impact of $10 million resultingour annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $21 million. The decrease primarily reflected lower net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below, partially offset by higher premiums and policy charges and fee income driven by growth in our group life business.

Benefits and expenses increased $86 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $57 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, which reflected increases in our group life business mostly due to COVID-19 impacts. The increase was partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.

Six Month Comparison. Revenues decreased $7 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $47decreased $38 million. The increasedecrease primarily reflected lower net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below, partially offset by higher premiums and policy charges and fee income driven by growth in our group life and disability business, and higher net investment income driven by higher income on non-coupon investments.businesses.


Benefits and expenses as shown in the table above under “—Operating Results,” increased $38$78 million. Excluding an unfavorable comparativethe impact of $12 million resulting from our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $26$49 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, which reflected increases in our group disabilitylife business driven by claim experience,mostly due to COVID-19 impacts. The increase was partially offset by a decreaselower interest credited to policyholder account balances, with partial offsets in general and administrative expenses driven by the absence of costs related to the termination of a third-party underwriting service provider contract in the prior year period.

Six Month Comparison. Revenues increased $62 million. Excluding an unfavorable comparative impact of $10 million resulting from our annual reviews and updates of assumptions and other refinements, as discussed above, revenues increased $72 million. The increase primarily reflected higher premiums and policy charges and fee income driven by growth in our group disability business, and higher net investment income, driven by higher income on non-coupon investments.

Benefits and expenses increased $65 million. Excluding an unfavorable comparative impact of $12 million resulting from our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $53 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves in both our group disability and group life businesses driven by claim experience, partially offset by a decrease in general and administrative expenses driven by the absence of costs related to the termination of a third-party underwriting service provider contract in the prior year period.above.

Sales Results
 
The following table sets forth the Group Insurance segment’sInsurance’s annualized new business premiums, as defined under “—Segment Measures” above, for the periods indicated.
Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
(in millions)(in millions)
Annualized new business premiums(1):              
Group life$17
 $46
 $191
 $289
$8
 $17
 $181
 $191
Group disability16
 14
 135
 154
18
 16
 126
 135
Total$33
 $60
 $326
 $443
$26
 $33
 $307
 $326
__________ 
(1)Amounts exclude new premiums resulting from rate changes on existing policies, from additional coverage under our Servicemembers’ Group Life Insurance contract and from excess premiums on group universal life insurance that build cash value but do not purchase face amounts.

Total annualized new business premiums for the three months ended June 30, 20192020 decreased $27$7 million compared to the prior year period, reflectingdriven by lower sales in our group life business, partially offset by higher sales in our group disability business. Total annualized new business premiums for the six months ended June 30, 20192020 decreased $117$19 million compared to the prior year period, primarily driven by large clientlower sales in our group life and group disability businesses. Sales levels reflect pricing competitiveness and reduced levels of client case movement within the prior year period.large market.


U.S. Financial Wellness Businesses - U.S. Individual Solutions Division

Individual AnnuitiesAccount Values

Account values are a significant driver of our operating results, and are primarily driven by net additions (withdrawals) and the impact of market changes. The income we earn on most of our fee-based products varies with the level of fee-based account values, since many policy fees are determined by these values. The investment income and interest we credit to policyholders on our spread-based products varies with the level of general account values. To a lesser extent, changes in account values impact our pattern of amortization of DAC and VOBA and general and administrative expenses. The following table shows the changes in the account values and net additions (withdrawals) of Retirement’s products for the periods indicated. Net additions (withdrawals) are plan sales and participant deposits or additions, as applicable, minus plan and participant withdrawals and benefits. Account values include both internally- and externally-managed client balances as the total balances drive revenue for the Retirement business. For more information on internally-managed balances, see “—PGIM.”


 Three Months Ended
June 30,
 Six Months Ended
June 30,
 Twelve
Months
Ended
June 30,
 2020 2019 2020 2019 2020
 (in millions)
Full Service:         
Beginning total account value$238,435
 $251,071
 $272,448
 $231,669
 $262,133
Deposits and sales5,455
 11,047
 14,407
 20,614
 30,187
Withdrawals and benefits(7,040) (7,259) (15,708) (16,364) (35,050)
Change in market value, interest credited and interest income and other activity29,583
 7,274
 (4,714) 26,214
 9,163
Ending total account value$266,433
 $262,133
 $266,433
 $262,133
 $266,433
Institutional Investment Products:         
Beginning total account value$227,346
 $203,101
 $227,596
 $200,759
 $215,978
Additions(1)4,545
 15,044
 11,438
 17,291
 25,248
Withdrawals and benefits(3,527) (4,161) (9,037) (7,810) (17,970)
Change in market value, interest credited and interest income3,000
 2,826
 5,435
 5,470
 9,054
Other(2)(222) (832) (4,290) 268
 (1,168)
Ending total account value$231,142
 $215,978
 $231,142
 $215,978
 $231,142
__________
(1)Additions primarily include: group annuities calculated based on premiums received; funding agreements issued; unfunded longevity reinsurance contracts calculated as the present value of future projected benefits; and investment-only stable value contracts calculated as the fair value of customers’ funds held in a client-owned trust.
(2)“Other” activity includes the effect of foreign exchange rate changes associated with our British pounds sterling denominated longevity reinsurance business and changes in asset balances for externally-managed accounts. For the three months ended June 30, 2020 and 2019, “Other” activity also includes $2,614 million in receipts offset by $2,740 million in payments and $792 million in receipts offset by $577 million in payments, respectively, and for the six months ended June 30, 2020 and 2019, includes $5,366 million in receipts offset by $5,276 million in payments and $1,403 million in receipts offset by $1,194 million in payments, respectively, related to funding agreements backed by commercial paper which typically have maturities of less than 90 days.

The increase in full service account values for the three months and twelve months ended June 30, 2020 primarily reflected favorable changes in the market value of customer funds, partially offset by net withdrawals and benefits. The decrease in full service account values for the six months ended June 30, 2020 primarily reflected unfavorable changes in the market value of customer funds and net withdrawals and benefits.

The increase in institutional investment products account values for the three months, six months and twelve months ended June 30, 2020 reflected favorable changes in the market value of account assets. Account values for the three months ended June 30, 2020 also reflected net additions from pension risk transfer activity and investment-only stable value accounts. Account values for the six months ended June 30, 2020 also reflected net additions from collateralized funding agreements and investment-only stable value accounts, which were partially offset by pension risk transfer activity, and a decrease in other activity primarily driven by the negative impacts of foreign exchange rate changes. Account values for the twelve months ended June 30, 2020 also reflected net additions from pension risk transfer activity and collateralized funding agreements.

Group Insurance

Operating Results

The following table sets forth the Individual Annuities segment’sGroup Insurance’s operating results and benefits and administrative operating expense ratios for the periods indicated.


Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
(in millions)($ in millions)
Operating results:              
Revenues$1,288
 $1,266
 $2,523
 $2,518
$1,471
 $1,461
 $2,895
 $2,902
Benefits and expenses826
 759
 1,589
 1,492
1,466
 1,380
 2,846
 2,768
Adjusted operating income462
 507
 934
 1,026
5
 81
 49
 134
Realized investment gains (losses), net, and related adjustments(881) (70) (2,225) 528
(10) 8
 71
 9
Related charges56
 (95) 190
 (221)
Market experience updates(1)(10) 0 (10) 0
Income (loss) before income taxes and equity in earnings of operating joint ventures$(373) $342
 $(1,111) $1,333
$(5) $89
 $120
 $143
Benefits ratio(1)(4):       
Group life(2)93.0% 90.2% 90.7% 89.6%
Group disability(2)74.0% 65.3% 75.0% 69.9%
Total Group Insurance(2)89.0% 84.7% 87.3% 85.3%
Administrative operating expense ratio(3)(4):       
Group life11.8% 12.2% 12.1% 11.9%
Group disability26.1% 24.2% 25.4% 25.5%
Total Group Insurance14.9% 14.8% 15.0% 14.8%
__________________ 
(1)RepresentsRatio of policyholder benefits to earned premiums plus policy charges and fee income.
(2)Benefit ratios reflect the immediate impacts in current period results from changes in current market conditions on estimatesimpact of profitability, which are excluded from adjusted operating income beginning with the second quarterour annual reviews and update of 2019. The Company has historically recognizedassumptions and other refinements. Excluding these impacts, in adjusted operatingthe group life, group disability and total Group Insurance benefit ratios were 93.4%, 75.7% and 89.6% for the three months ended June 30, 2020, respectively, 90.9%, 75.8% and 87.6% for the six months ended June 30, 2020, respectively, 88.5%, 74.5% and 85.5% for the three months ended June 30, 2019, respectively, and 88.7%, 74.6% and 85.7% for the six months ended June 30, 2019, respectively.
(3)Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income. See Note 14
(4)The benefit and administrative ratios are measures used to our Unaudited Interim Consolidated Financial Statements for additional information.evaluate profitability and efficiency.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $45$76 million, including an unfavorablea favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results from this annual review included a net charge of $12 million and a net benefit of $10 million infor both the second quarter of 2020 and 2019 included a net benefit from this update of $11 million and 2018,$9 million, respectively. Excluding this item, adjusted operating income decreased $23$78 million, primarily driven byreflecting lower net fee income and higher expenses, partially offset by higher net investment income. Asset-based fee income, net of distribution expenses and other associated costs, declined due to lower average account values largely resulting from negative net flows, partially offset by market appreciation. Also contributing to this decrease were lower average fee ratesunderwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts from our living benefit guarantees, and certain products reaching contractual milestones for fee tier reduction.on non-experience-rated contracts. The increase in expenses was primarilydecrease also reflected lower net investment spread results driven by business growth. The increase in net investment income reflected a higher level of invested assets and higherlower income on non-coupon investments.

Six Month Comparison. Adjusted operating income decreased $92$85 million, including an unfavorablea favorable comparative net impact from our annual reviews and update of assumptions and other refinements, as discussed above.refinements. Excluding this item, adjusted operating income decreased $70$87 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts. The decrease also reflected lower net investment spread results driven by lower net fee income, higher expenses, and unfavorable changes in the estimated profitability of the business, partially offset by higher net investment income.

Asset-based fee income, net of distribution expenses and other associated costs, declined due to lower average account values largely resulting from negative net flows, partially offset by market appreciation. Also contributing to this decrease were lower average fee rates driven by unfavorable impacts from our living benefit guarantees, and certain products reaching contractual milestones for fee tier reduction. The increase in expenses was primarily driven by business growth. The unfavorable impact of changes in the estimated profitability of the business was driven by changes in the first quarter of 2019 compared to the first quarter of 2018 due to impacts of equity market performance on policyholder accounts. Beginning in the second quarter of 2019, this activity is excluded from adjusted operating income (see Note 14 to the Unaudited Interim Consolidated Financial Statements for further information). The increase in net investment income reflected a higher level of invested assets and higher income on non-coupon investments.


Revenues, Benefits and Expenses

Three Month Comparison. Comparison. Revenues as shown in the table above under “—Operating Results,” increased $22$10 million. Excluding an $18 million net decrease related to the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $40decreased $21 million. The increase wasdecrease primarily reflected lower net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below, partially offset by higher premiums primarily reflecting an increase in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below, and higher net investment income reflecting a higher level of invested assets and higher income on non-coupon investments. These increases were partially offset by lower policy charges and fee income as well as lower asset management and service fees and other income reflecting, lower average account values largely resulting from negative net flows, partially offset by market appreciation. Also contributing to this decrease were lower average fee rates driven by unfavorable impacts fromgrowth in our living benefit guarantees, and certain products reaching contractual milestones for fee tier reduction.group life business.

Benefits and expenses as shown in the table above under “—Operating Results,” increased $67$86 million. Excluding a $4 million net increase related tothe impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $63 million$57 million. The increase primarily driven byreflected higher policyholders’ benefits includingand changes in reserves, which reflected increases in our group life business mostly due to higher reserve provisions resulting from anCOVID-19 impacts. The increase in single premium immediate annuity sales,was partially offset by lower interest credited to policyholder account balances, with partial offsets in premiums,net investment income, as discussed above.


Six Month Comparison. Revenues increased $5decreased $7 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $23decreased $38 million. The increase wasdecrease primarily reflected lower net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below, partially offset by higher premiums primarily reflecting an increase in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below, and higher net investment income reflecting a higher level of invested assets and higher income on non-coupon investments. These increases were partially offset by lower policy charges and fee income as well as lower asset management and service fees and other income reflecting, lower average account values largely resulting from negative net flows, partially offset by market appreciation. Also contributing to this decrease were lower average fee rates driven by unfavorable impacts fromgrowth in our living benefit guarantees,group life and certain products reaching contractual milestones for fee tier reduction.disability businesses.

Benefits and expenses increased $97$78 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $93 million$49 million. The increase primarily driven byreflected higher policyholders’ benefits includingand changes in reserves, which reflected increases in our group life business mostly due to higher reserve provisions resulting from anCOVID-19 impacts. The increase in single premium immediate annuity sales,was partially offset by lower interest credited to policyholder account balances, with partial offsets in premiums,net investment income, as discussed above.

Sales Results
The following table sets forth Group Insurance’s annualized new business premiums, as defined under “—Segment Measures” above, for the periods indicated.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Annualized new business premiums(1):       
Group life$8
 $17
 $181
 $191
Group disability18
 16
 126
 135
Total$26
 $33
 $307
 $326
__________ 
(1)Amounts exclude new premiums resulting from rate changes on existing policies, from additional coverage under our Servicemembers’ Group Life Insurance contract and from excess premiums on group universal life insurance that build cash value but do not purchase face amounts.

Total annualized new business premiums for the three months ended June 30, 2020 decreased $7 million compared to the prior year period, driven by lower sales in our group life business. Total annualized new business premiums for the six months ended June 30, 2020 decreased $19 million compared to the prior year period, driven by lower sales in our group life and group disability businesses. Sales levels reflect pricing competitiveness and reduced levels of client case movement within the large market.

U.S. BusinessesU.S. Individual Solutions Division

Account Values

Account values are a significant driver of our operating results, and are primarily driven by net additions (withdrawals) and the impact of market changes. The income we earn on most of our fee-based products varies with the level of fee-based account values, since many policy fees are determined by these values. The investment income and interest we credit to policyholders on our spread-based products varies with the level of general account values. To a lesser extent, changes in account values impact our pattern of amortization of DAC and VOBA and general and administrative expenses. The following table shows the changes in the account values and net additions (withdrawals) of Retirement’s products for the periods indicated. Net additions (withdrawals) are plan sales and participant deposits or additions, as applicable, minus plan and participant withdrawals and benefits. Account values include both internally- and externally-managed client balances as the total balances drive revenue for the Retirement business. For more information on internally-managed balances, see “—PGIM.”


 Three Months Ended
June 30,
 Six Months Ended
June 30,
 Twelve
Months
Ended
June 30,
 2020 2019 2020 2019 2020
 (in millions)
Full Service:         
Beginning total account value$238,435
 $251,071
 $272,448
 $231,669
 $262,133
Deposits and sales5,455
 11,047
 14,407
 20,614
 30,187
Withdrawals and benefits(7,040) (7,259) (15,708) (16,364) (35,050)
Change in market value, interest credited and interest income and other activity29,583
 7,274
 (4,714) 26,214
 9,163
Ending total account value$266,433
 $262,133
 $266,433
 $262,133
 $266,433
Institutional Investment Products:         
Beginning total account value$227,346
 $203,101
 $227,596
 $200,759
 $215,978
Additions(1)4,545
 15,044
 11,438
 17,291
 25,248
Withdrawals and benefits(3,527) (4,161) (9,037) (7,810) (17,970)
Change in market value, interest credited and interest income3,000
 2,826
 5,435
 5,470
 9,054
Other(2)(222) (832) (4,290) 268
 (1,168)
Ending total account value$231,142
 $215,978
 $231,142
 $215,978
 $231,142
__________
(1)Additions primarily include: group annuities calculated based on premiums received; funding agreements issued; unfunded longevity reinsurance contracts calculated as the present value of future projected benefits; and investment-only stable value contracts calculated as the fair value of customers’ funds held in a client-owned trust.
(2)“Other” activity includes the effect of foreign exchange rate changes associated with our British pounds sterling denominated longevity reinsurance business and changes in asset balances for externally-managed accounts. For the three months ended June 30, 2020 and 2019, “Other” activity also includes $2,614 million in receipts offset by $2,740 million in payments and $792 million in receipts offset by $577 million in payments, respectively, and for the six months ended June 30, 2020 and 2019, includes $5,366 million in receipts offset by $5,276 million in payments and $1,403 million in receipts offset by $1,194 million in payments, respectively, related to funding agreements backed by commercial paper which typically have maturities of less than 90 days.

The increase in full service account values for the three months and twelve months ended June 30, 2020 primarily reflected favorable changes in the market value of customer funds, partially offset by net withdrawals and benefits. The decrease in full service account values for the six months ended June 30, 2020 primarily reflected unfavorable changes in the market value of customer funds and net withdrawals and benefits.

The increase in institutional investment products account values for the three months, six months and twelve months ended June 30, 2020 reflected favorable changes in the market value of account assets. Account values for the three months ended June 30, 2020 also reflected net additions from pension risk transfer activity and investment-only stable value accounts. Account values for the six months ended June 30, 2020 also reflected net additions from collateralized funding agreements and investment-only stable value accounts, which were partially offset by pension risk transfer activity, and a decrease in other activity primarily driven by the negative impacts of foreign exchange rate changes. Account values for the twelve months ended June 30, 2020 also reflected net additions from pension risk transfer activity and collateralized funding agreements.

Group Insurance

Operating Results

The following table sets forth Group Insurance’s operating results and benefits and administrative operating expense ratios for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 ($ in millions)
Operating results:       
Revenues$1,471
 $1,461
 $2,895
 $2,902
Benefits and expenses1,466
 1,380
 2,846
 2,768
Adjusted operating income5
 81
 49
 134
Realized investment gains (losses), net, and related adjustments(10) 8
 71
 9
Income (loss) before income taxes and equity in earnings of operating joint ventures$(5) $89
 $120
 $143
Benefits ratio(1)(4):       
Group life(2)93.0% 90.2% 90.7% 89.6%
Group disability(2)74.0% 65.3% 75.0% 69.9%
Total Group Insurance(2)89.0% 84.7% 87.3% 85.3%
Administrative operating expense ratio(3)(4):       
Group life11.8% 12.2% 12.1% 11.9%
Group disability26.1% 24.2% 25.4% 25.5%
Total Group Insurance14.9% 14.8% 15.0% 14.8%
__________ 
(1)Ratio of policyholder benefits to earned premiums plus policy charges and fee income.
(2)Benefit ratios reflect the impact of our annual reviews and update of assumptions and other refinements. Excluding these impacts, the group life, group disability and total Group Insurance benefit ratios were 93.4%, 75.7% and 89.6% for the three months ended June 30, 2020, respectively, 90.9%, 75.8% and 87.6% for the six months ended June 30, 2020, respectively, 88.5%, 74.5% and 85.5% for the three months ended June 30, 2019, respectively, and 88.7%, 74.6% and 85.7% for the six months ended June 30, 2019, respectively.
(3)Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income.
(4)The benefit and administrative ratios are measures used to evaluate profitability and efficiency.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $76 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for both the second quarter of 2020 and 2019 included a net benefit from this update of $11 million and $9 million, respectively. Excluding this item, adjusted operating income decreased $78 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts. The decrease also reflected lower net investment spread results driven by lower income on non-coupon investments.

Six Month Comparison. Adjusted operating income decreased $85 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, adjusted operating income decreased $87 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts. The decrease also reflected lower net investment spread results driven by lower income on non-coupon investments.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues increased $10 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $21 million. The decrease primarily reflected lower net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below, partially offset by higher premiums and policy charges and fee income driven by growth in our group life business.

Benefits and expenses increased $86 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $57 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, which reflected increases in our group life business mostly due to COVID-19 impacts. The increase was partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.

Six Month Comparison. Revenues decreased $7 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $38 million. The decrease primarily reflected lower net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below, partially offset by higher premiums and policy charges and fee income driven by growth in our group life and disability businesses.

Benefits and expenses increased $78 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $49 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, which reflected increases in our group life business mostly due to COVID-19 impacts. The increase was partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.

Sales Results
The following table sets forth Group Insurance’s annualized new business premiums, as defined under “—Segment Measures” above, for the periods indicated.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Annualized new business premiums(1):       
Group life$8
 $17
 $181
 $191
Group disability18
 16
 126
 135
Total$26
 $33
 $307
 $326
__________ 
(1)Amounts exclude new premiums resulting from rate changes on existing policies, from additional coverage under our Servicemembers’ Group Life Insurance contract and from excess premiums on group universal life insurance that build cash value but do not purchase face amounts.

Total annualized new business premiums for the three months ended June 30, 2020 decreased $7 million compared to the prior year period, driven by lower sales in our group life business. Total annualized new business premiums for the six months ended June 30, 2020 decreased $19 million compared to the prior year period, driven by lower sales in our group life and group disability businesses. Sales levels reflect pricing competitiveness and reduced levels of client case movement within the large market.

U.S. BusinessesU.S. Individual Solutions Division

Individual Annuities

Operating Results

The following table sets forth Individual Annuities’ operating results for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Operating results:       
Revenues$953
 $1,288
 $2,101
 $2,523
Benefits and expenses704
 826
 1,479
 1,589
Adjusted operating income249
 462
 622
 934
Realized investment gains (losses), net, and related adjustments(2,178) (881) (3,043) (2,225)
Charges related to realized investment gains (losses), net474
 56
 99
 190
Market experience updates(1)18
 (10) (628) (10)
Income (loss) before income taxes and equity in earnings of operating joint ventures$(1,437) $(373) $(2,950) $(1,111)

________
(1)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $213 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for the second quarter of 2020 included a $136 million net charge from these updates primarily driven by unfavorable impacts related to a decrease in long-term interest rate assumptions. Results for the second quarter of 2019 included a $12 million net charge from these updates. Excluding this item, adjusted operating income decreased $89 million primarily driven by lower fee income, net of distribution expenses and other associated costs, due to lower average account values, unfavorable impacts from our living benefit guarantees, and certain products reaching contractual milestones for fee tier reduction. This decrease was partially offset by higher net investment spread results due to a higher level of invested assets.

Six Month Comparison. Adjusted operating income decreased $312 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements, as discussed above. Excluding this item, adjusted operating income decreased $188 million. The decrease was primarily driven by lower fee income, net of distribution expenses and other associated costs, due to unfavorable impacts from our living benefit guarantees, certain products reaching contractual milestones for fee tier reduction, and lower average account values.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues decreased $335 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $203 million. The decrease was primarily driven by lower policy charges and fee income, as well as a decrease in asset management and service fees and other income, reflecting lower average account values resulting from net outflows, unfavorable impacts from our living benefit guarantees resulting from declining interest rates and certain products reaching contractual milestones for fee tier reductions. Also contributing to the decrease were lower premiums resulting from a decrease in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below. These decreases were partially offset by higher net investment income reflecting a higher level of invested assets.

Benefits and expenses decreased $122 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $114 million primarily driven by policyholders’ benefits, including changes in reserves, due to lower reserve provisions resulting from a decrease in single premium immediate annuity sales, with offsets in premiums, as discussed above. Also contributing to the decrease were lower general and administrative expenses, net of capitalization, driven by lower distribution expenses reflecting lower average account values.

Six Month Comparison. Revenues decreased $422 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $290 million. The decrease was primarily driven by lower policy charges and fee income, as well as a decrease in asset management and service fees and other income, reflecting unfavorable impacts from our living benefit guarantees resulting from declining interest rates, certain products reaching contractual milestones for fee tier reductions, and lower average account values resulting from net outflows. Also contributing to the decrease were lower premiums resulting from a decrease in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below.

Benefits and expenses decreased $110 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $102 million primarily driven by policyholders’ benefits, including changes in reserves, due to lower reserve provisions resulting from a decrease in single premium immediate annuity sales, with offsets in premiums, as discussed above. Also contributing to the decrease were lower general and administrative expenses, net of capitalization, driven by lower distribution expenses reflecting lower average account values.

Account Values

Account values are a significant driver of our operating results. Since most fees are determined by the level of separate account assets, fee income varies according toprimarily based on the level of account values. Additionally, our fee income generally drives other items such as the pattern of amortization of DAC and other costs. Account values are driven by net flows from new business sales, surrenders, withdrawals and benefit payments, policy charges and the impact of positive or negative market value changes.

The annuity industry’s competitive and regulatory landscapes, which have been dynamic over the last few years, may impact our net flows, including new business sales. The following table sets forth account value information for the periods indicated.


 Three Months Ended
June 30,
 Six Months Ended
June 30,
 Twelve
Months
Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
 Twelve
Months
Ended
June 30,
 2019 2018 2019 2018 20192020 2019 2020 2019 2020
 (in millions)(in millions)
Total Individual Annuities(1):                   
Beginning total account value $161,890
 $164,651
 $151,080
 $168,626
 $163,645
$143,976
 $161,890
 $169,681
 $151,080
 $165,313
Sales 2,675
 2,067
 4,982
 3,791
 9,461
1,346
 2,675
 3,273
 4,982
 8,011
Full surrenders and death benefits(2) (2,397) (2,368) (4,337) (4,605) (8,690)(1,410) (2,397) (3,929) (4,337) (8,966)
Sales, net of full surrenders and death benefits(2) 278
 (301) 645
 (814) 771
(64) 278
 (656) 645
 (955)
Partial withdrawals and other benefit payments(2) (1,229) (1,145) (2,465) (2,340) (4,939)(1,146) (1,229) (2,545) (2,465) (5,243)
Net flows (951) (1,446) (1,820) (3,154) (4,168)(1,210) (951) (3,201) (1,820) (6,198)
Change in market value, interest credited and other activity 5,289
 1,369
 17,862
 40
 9,481
17,358
 5,289
 (5,464) 17,862
 3,747
Policy charges (915) (929) (1,809) (1,867) (3,645)(848) (915) (1,740) (1,809) (3,586)
Ending total account value $165,313
 $163,645
 $165,313
 $163,645
 $165,313
$159,276
 $165,313
 $159,276
 $165,313
 $159,276
__________
(1)Includes gross variable and fixed annuities sold as retail investment products. Investments sold through defined contribution plan products are included with such products within theour Retirement segment.business. Variable annuity account values were $161.0$154.1 billion and $160.1$161.0 billion as of June 30, 20192020 and 2018,2019, respectively. Fixed annuity account values were $4.3$5.2 billion and $3.5$4.3 billion as of June 30, 2020 and 2019, and 2018, respectively.
(2)Prior period amounts have been reclassified to conform to current period presentation.

The increase in account values for both the three months ended June 30, 2020 and the decrease for the six months ended June 30, 2019 primarily reflected2020 were largely driven by market value appreciation. Gross sales forappreciation and depreciation, respectively. For both the three and six months ended June 30, 2019, increasedperiods, in comparison to the prior year periods,period, the decrease in net flows primarily attributable to certain distribution, product designreflected a decline in gross sales largely driven by benefit rate reductions and pricing actions implementedin response to enhance product competitiveness. The introduction of a new fixed index annuity product in 2018 also contributed to the increase in gross sales.capital market pressures.

The increasedecrease in account values for the twelve months ended June 30, 20192020 was largely driven by favorable changes in the market value of contractholder funds, partially offset by partial withdrawals and other benefit payments on contracts as well as policy charges on contractholder accounts.accounts, partially offset by market value appreciation.

Variable Annuity Risks and Risk Mitigants

The following is a summary of: (i)of certain risks associated with Individual Annuities’ products; (ii)products, certain strategies in mitigating those risks including any updates to those strategies since the previous year-end;year-end, and (iii) the related financial results. For a more detailed description of these items and their related accounting treatment, refer to the complete descriptions provided in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.

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

Variable Annuity Risks and Risk Mitigants. The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital markets assumptions such as equity market returns, interest rates and market volatility, along with actuarial assumptions such as contractholder mortality, the timing and amount of annuitization and withdrawals, and contract lapses. For these risk exposures, achievement of our expected returns and profitability is subject to the risk that actual experience will differ from the assumptions used in the original pricing of these products. We currently manage our exposure to certain risks driven by fluctuations in capital markets primarily through a combination of i) Product Design Features, anii) Asset Liability Management (“ALM”) Strategy, aand iii) Capital Hedge Program and External Reinsurance.as discussed below. We also manage these risk exposures through external reinsurance for certain of our variable annuity products.

i.Product Design FeaturesFeatures:


A portion of the variable annuity contracts that we offer include an automatic rebalancing feature, also referred to as an asset transfer feature. This feature is implemented at the contract level, and transfers assets between certain variable investment sub-accounts selected by the annuity contractholder and, depending on the benefit feature, a fixed-rate account in the general account or a bond fund sub-account within the separate accounts. The objective of the automatic rebalancing feature is to reduce our exposure to equity market risk and market volatility. Other product design features we utilize include, among others, asset allocation restrictions, minimum issuance age requirements and certain limitations on the amount of contractholder deposits,purchase payments, as well as a required minimum allocation to our general account for certain of our products. We continue to introduce products that diversify our risk profile and have incorporated provisions in product design allowing frequent revisions of key pricing elements for certain of our products. In addition, there is diversity in our fee arrangements, as certain fees are primarily based on the benefit guarantee amount, the contractholder account value and/or premiums, which helps preserve certain revenue streams when market fluctuations cause account values to decline.

ALMii.Asset Liability Management (“ALM”) Strategy (including fixed income instruments and derivatives):

Our currentWe employ an ALM strategy that utilizes a combination of both traditional fixed income instruments and derivatives to help defray potential claims associated with our variable annuity living benefit guarantees. The economic liability we manage with this ALM strategy consists of expected living benefit claims under less severe market conditions, which are managed using a traditionalan ALM strategy through the accumulation of fixed income and derivative instruments, and potential living benefit claims resulting from more severe market conditions, which are hedged using derivative instruments. For our Prudential Defined Income (“PDI”) variable annuity, we utilize fixed income instruments to help defray potential claims. For the portion of our ALM strategy executed with derivatives, we enter into a range of exchange-traded cleared, and over-the-counter (“OTC”) equity and interest rate derivatives, including, but not limited to: equity and treasury futures; total return and interest rate swaps; and options including equity options, swaptions, and floors and caps. The intent of this strategy is to more efficiently manage the capital and liquidity associated with these products while continuing to mitigate fluctuations in net income due to movements in capital markets.

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

The valuation of the economic liability we seek to defray excludes certain items that are included within the U.S. GAAP liability, such as non-performance risk (“NPR”) (in order to maximize protection irrespective of the possibility of our own default), as well as risk margins (required by U.S. GAAP but different from our best estimate) and valuation methodology differences. The following table provides a reconciliation between the liability reported under U.S. GAAP and the economic liability we manage through our ALM strategy as of the datesperiods indicated:

 June 30, 2019 December 31, 2018
June 30,
2020
 
December 31,
2019
 (in millions)(in millions)
U.S. GAAP liability (including NPR) $12,606
 $8,860
NPR adjustment 3,673
 4,619
U.S. GAAP liability, including NPR, net of reinsurance recoverables(1)$25,777
 $12,612
NPR adjustment, net of reinsurance recoverables(1)6,539
 3,522
Subtotal 16,279
 13,479
32,316
 16,134
Adjustments including risk margins and valuation methodology differences (4,618) (4,084)(8,907) (4,385)
Economic liability managed through the ALM strategy $11,661
 $9,395
$23,409
 $11,749
________
(1)Prior period amounts have been updated to conform to current period presentation.

As of June 30, 2019,2020, the fair value of our fixed income instruments and derivative assets exceed the economic liability within the entities in which the risks reside.

The following table illustrates the net impact to our Unaudited Interim Consolidated Statements of Operations from changes in the U.S. GAAP embedded derivative liability and hedge positions under the ALM strategy, and the related amortization of DAC and other costs, that are excluded from adjusted operating income.

  Three Months Ended
June 30,
 Six Months Ended
June 30,
  2019 2018 2019 2018
  (in millions)(1)
Excluding impact of assumption updates and other refinements:        
Net hedging impact(2) $(35) $10
 $(90) $(140)
Change in portions of U.S. GAAP liability, before NPR(3) (831) 127
 (511) 497
Change in the NPR adjustment 229
 (53) (834) 131
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions (637) 84
 (1,435) 488
Related benefit (charge) to amortization of DAC and other costs 88
 (61) 249
 (167)
Net impact of assumption updates and other refinements 17
 (173) 17
 (173)
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs—reported in Individual Annuities $(532) $(150) $(1,169) $148
__________
(1)Positive amount represents income; negative amount represents a loss.
(2)Net hedging impact represents the difference between the change in fair value of the risk we seek to hedge using derivatives and the change in fair value of the derivatives utilized with respect to that risk.
(3)Represents risk margins and valuation methodology differences between the economic liability managed by the ALM strategy and the U.S. GAAP liability.

For the three and six months ended June 30, 2019, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs, was a net charge of $532 million and $1,169 million, respectively. The net impact from changes in the U.S. GAAP embedded derivative and hedge positions resulted in a net charge of $637 million in the second quarter of 2019 primarily reflecting declining interest rates, and a net charge of $1,435 million in the first six months of 2019 driven by tightening credit spreads used in measuring our living benefit contracts and declining interest rates.iii.Capital Hedge Program:

For the three months ended June 30, 2018, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs was a net charge of $150 million which primarily reflected the impact of a $173 million net charge from our annual reviews and update of assumptions and other refinements, including updates to expected withdrawal rates, as well as economic assumptions. For the six months ended June 30, 2018, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs was a benefit of $148 million which primarily reflected a $488 million net impact from changes in the U.S. GAAP embedded derivative and hedge positions as a result of a widening of credit spreads used in measuring our living benefit contracts. This benefit was partially offset by the impact of a $173 million net charge from our annual reviews and update of assumptions and other refinements, including updates to expected withdrawal rates, as well as economic assumptions; and by the impact of $167 million of related charges to amortization of DAC and other costs.
For information regarding the Capital Protection Framework (the “Framework”) we use to evaluate and support the risks of the ALM strategy, see “—Liquidity and Capital Resources—Capital.”

Capital Hedge Program


We employ a capital hedge program within the Individual Annuities segment to hedge equity market impacts. The program is intended to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets. The capital hedge program is conducted using equity derivatives which include equity call and put options, total return swaps and futures contracts. The changes in value of these derivatives arehave historically been recognized in adjusted operating income over the expected duration of the capital hedge program. Beginning with the second quarter of 2020, these impacts are excluded from adjusted operating income which the Company believes enhances the understanding of underlying performance trends.

External ReinsuranceResults excluded from adjusted operating income

AsThe following table provides the net impact to the Unaudited Interim Consolidated Statements of Operations from the results excluded from adjusted operating income, which is primarily driven by the changes in the U.S. GAAP embedded derivative liability and hedge positions under the ALM strategy, and the related amortization of DAC and other costs.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
Results excluded from adjusted operating income(2)(in millions)(1)
Change in value of U.S. GAAP liability, pre-NPR(3)$5,467
 $(2,545) $(15,071) $(2,265)
Change in the NPR adjustment(3,582) 190
 3,017
 (873)
Change in fair value of hedge assets, excluding capital hedges(4)(3,349) 1,410
 8,605
 1,265
Change in fair value of capital hedges(5)(704) (159) 248
 (631)
Other(10) 223
 158
 279
Realized investment gains (losses), net, and related adjustments(2,178) (881) (3,043) (2,225)
Market experience updates(6)18
 (10) (628) (10)
Charges related to realized investment gains (losses), net474
 56
 99
 190
Total results excluded from adjusted operating income(7)$(1,686) $(835) $(3,572) $(2,045)
__________
(1)Positive amount represents income; negative amount represents a loss.
(2)Includes the impact of annual reviews and update of assumptions and other refinements.
(3)Represents the change in the liability (excluding NPR) for our variable annuities living benefit guarantees which is measured utilizing a valuation methodology that is required under U.S. GAAP. This liability includes such items as risk margins which are required by U.S. GAAP but not included in our best estimate of the liability.
(4)Represents the change in fair value of the derivatives utilized to hedge potential claims associated with our variable annuity living benefit guarantees.
(5)Represents the changes in fair value of equity derivatives of the capital hedge program intended to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets.
(6)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019.
(7)Excludes amounts from the changes in fair value of fixed income instruments recorded in OCI (versus net income): a loss of $4 million and gain of $391 million for the three months ended June 30, 2020 and 2019, respectively; and a gain of $1,702 million and $651 million for the six months ended June 30, 2020 and 2019, respectively.

For the three months ended June 30, 2020, the loss of $1,686 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable NPR adjustment, unfavorable hedge breakage driven by credit spreads tightening, and losses associated with our capital hedge program, partially offset by a favorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by tightening of credit spreads. These net losses were partially offset by a benefit related to the amortization of DAC and other costs.
For the six months ended June 30, 2020, the loss of $3,572 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates, widening of credit spreads, and unfavorable equity market performance. Also contributing to the results were unfavorable hedge breakage driven by credit spreads tightening and losses from duration management swaps associated with the living benefit results, partially offset by a favorable NPR adjustment. These net losses were partially offset by a benefit related to the amortization of DAC and other costs.
For the three months ended June 30, 2019, the loss of $835 million primarily reflected unfavorable living benefit guaranteesresults. These results were driven by an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates with partial offsets driven by favorable equity market performance, losses associated with $3.1 billionour capital hedge program, and losses from duration management swaps associated with the living benefit results. Partially offsetting these losses was a favorable NPR adjustment. These net losses were partially offset by a benefit related to the amortization of Highest Daily Lifetime Income (“HDI”) v.3.0 account values are reinsuredDAC and other costs.

For the six months ended June 30, 2019, the loss of $2,045 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable NPR adjustment, an unfavorable impact related to Union Hamilton Reinsurance Ltd., an external counterparty, pursuant to a quota share agreement that covered approximately 50%the portions of new business between April 1, 2015 and December 31, 2016. HDI v.3.0 is the current version ofU.S. GAAP liability before NPR (excluded from our “highest daily” living benefits guarantee that is availablehedge target) driven by declining interest rates with partial offsets driven by favorable equity market performance, losses associated with our Prudential Premier® Retirement Variable Annuity. New salescapital hedge program, and losses from duration management swaps associated with the living benefit results. These net losses were partially offset by a benefit related to the amortization of HDI v.3.0 subsequent to December 31, 2016 are not covered by this external reinsurance agreement.DAC and other costs.

Product Specific Risks and Risk Mitigants

As noted above, the risks associated with our products are mitigated through product design features, including automatic rebalancing, as well as through our ALM strategy and external reinsurance. The following table sets forth the risk management profile of our living benefit guarantees and guaranteed minimum death benefit (“GMDB”) features as of the periods indicated.

 June 30, 2019 December 31, 2018 June 30, 2018 June 30, 2020 December 31, 2019 June 30, 2019
 
Account
Value
 
% of
Total
 
Account
Value
 
% of
Total
 
Account
Value
 
% of
Total
 
Account
Value
 
% of
Total
 
Account
Value
 
% of
Total
 
Account
Value
 
% of
Total
 ($ in millions) ($ in millions)
Living benefit/GMDB features(1):                        
Both ALM strategy and automatic rebalancing(2)(3) $109,819
 68% $101,496
 69% $111,146
 69% $102,137
 66% $111,535
 68% $109,819
 68%
ALM strategy only(3) 7,855
 5% 7,520
 5% 8,676
 5% 6,836
 4% 7,703
 5% 7,855
 5%
Automatic rebalancing only 778
 1% 804
 1% 909
 1% 646
 1% 732
 1% 778
 1%
External reinsurance(3)(4) 3,096
 2% 2,873
 2% 3,146
 2% 2,855
 2% 3,150
 2% 3,096
 2%
Prudential Defined Income Variable Annuity 14,248
 9% 11,237
 7% 10,142
 6%
PDI 17,646
 12% 16,296
 9% 14,248
 9%
Other products 2,475
 1% 2,306
 2% 2,651
 2% 2,225
 1% 2,457
 1% 2,475
 1%
Total living benefit/GMDB features $138,271
   $126,236
   $136,670
   $132,345
   $141,873
   $138,271
  
GMDB features and other(4)(5) 22,746
 14% 21,103
 14% 23,473
 15% 21,734
 14% 23,055
 14% 22,746
 14%
Total variable annuity account value $161,017
   $147,339
   $160,143
   $154,079
   $164,928
   $161,017
  
__________
(1)All contracts with living benefit guarantees also contain GMDB features, which cover the same insured contract.
(2)Contracts with living benefits that are included in theour ALM strategy and that have an automatic rebalancing feature.
(3)Excludes PDI which is presented separately within this table.
(4)Represents contracts subject to a reinsurance transaction with an external counterparty that coveredcovering certain new HDIHighest Daily Lifetime Income (“HDI”) v.3.0 business fromfor the period April 1, 2015 through December 31, 2016. These contracts with living benefits also have an automatic rebalancing feature.
(4)(5)Includes contracts that have a GMDB feature and do not have an automatic rebalancing feature.

Individual Life

Operating Results

The following table sets forth the Individual Life segment’sLife’s operating results for the periods indicated.

Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
(in millions)(in millions)
Operating results:              
Revenues$1,508
 $1,451
 $2,990
 $2,876
$1,563
 $1,508
 $3,093
 $2,990
Benefits and expenses1,643
 1,408
 3,020
 2,797
1,627
 1,643
 3,177
 3,020
Adjusted operating income(135) 43
 (30) 79
(64) (135) (84) (30)
Realized investment gains (losses), net, and related adjustments158
 (84) 277
 (272)(16) 158
 549
 277
Related charges(62) (8) (168) 93
Charges related to realized investment gains (losses), net65
 (62) (353) (168)
Market experience updates(1)(160) 0
 (160) 0
78
 (160) (216) (160)
Income (loss) before income taxes and equity in earnings of operating joint ventures$(199) $(49) $(81) $(100)$63
 $(199) $(104) $(81)

__________
(1)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company has historically recognized these impacts in adjusted operating income. See Note 1413 to ourthe Unaudited Interim Consolidated Financial Statements for additional information.


Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $178reflected a decrease in losses of $71 million, primarily reflecting an unfavorablea favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for the second quarter of 2020 included a $92 million net charge from these updates, mainly driven by unfavorable impacts related to a decrease in long-term interest rate assumptions. Results for the second quarter of 2019 included a $208 million net charge from this annual review,these updates, mainly driven by unfavorable impacts related to mortality rate assumptions. Results for the second quarter of 2018 included a $65 million net charge from this annual review, mainly driven by unfavorable impacts related to lapse and mortality rate assumptions. Excluding this item, adjusted operating income decreased $35$45 million, primarily reflecting lower net investment spread results driven by lower income on non-coupon investments and lower investment yields, partially offset by business growth. Also contributing to the decrease were lower underwriting results driven by the unfavorable ongoing impact from our second quarter 2019 assumption update on current quarter results and a morean unfavorable impact from mortality experience, net of reinsurance, and higher expenses.primarily attributable to COVID-19 related claims. These decreases were partially offset by a higher contributionlower expenses from net investment spread results driven by continued business growth and higher income on non-coupon investments.cost savings initiatives, as well as the absence of certain expenses incurred in the prior year period.

Six Month Comparison. Adjusted operating income decreased $109reflected an increase in losses of $54 million, primarily reflecting an unfavorableincluding a favorable comparative net impact from our annual reviews and update of assumptions and other refinements, as discussed above. Excluding this item, adjusted operating income increased $34decreased $170 million, primarily reflecting a favorable net impact in the first quarter of 2019 from changes in our estimated profitability of the businesslower underwriting results, driven by equity market performance on policyholder accounts. Beginning in the second quarteran unfavorable impact from mortality experience, net of 2019, this activity is excluded from adjusted operating income (see Note 14reinsurance, primarily attributable to the Unaudited Interim Consolidated Financial Statements for further information). Also contributing to the increase was a higher contribution fromCOVID-19 related claims, and lower net investment spread results driven by continued business growth and higherlower income on non-coupon investments.investments and lower investment yields, partially offset by business growth. Also contributing to the decrease was the absence of a favorable impact from changes in market conditions on estimates of profitability in the prior year period, which beginning with the second quarter of 2019, is excluded from adjusted operating income. These increasesdecreases were partially offset by lower underwriting results driven byexpenses from cost savings initiatives, as well as the unfavorable ongoing impact from our second quarter 2019 assumption update on current period results and higher expenses.absence of certain expenses incurred in the prior year period.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues as shown in the table above under “—Operating Results,” increased $57$55 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $94decreased $16 million. This increasedecrease was primarily driven by an increase inlower net investment income fromdue to lower income on non-coupon investments and lower investment yields, partially offset by the impact of higher average invested assets resulting from continued business growth,growth. The decrease was partially offset by higher investmentpolicy charges and fee income from unaffiliated reserve financing activity that resulted in a corresponding increase in interest expense, as discussed below, and higher income on non-coupon investments.driven by business growth.

Benefits and expenses as shown in the table above under “—Operating Results,” increased $235decreased $16 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $129$29 million. This increase was primarily driven by higher general and administrative expenses, net of capitalization, reflecting increased VOBA amortization, partially offset by lower expenses as discussed above. Also contributing to this increase were higher policyholders’ benefits and interest credited to account balances attributable to continued business growth, the ongoing impact of the assumption update, as discussed above, anddriven by an unfavorable impact from mortality experience, net of reinsurance. Also contributingreinsurance, primarily attributable to the increase wasCOVID-19 related claims, as well as higher reserve financing costs, as discussed above.interest credited to account balances driven by business growth.

Six Month Comparison. Revenues increased $114$103 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $151$32 million. This increase was primarily driven by an increase in net investmenthigher policy charges and fee income from higher average invested assets resulting from continueddriven by business growth, higher investment income from unaffiliated reserve financing activity that resulted in a corresponding increase in interest expense, as discussed below, and higher income on non-coupon investments.growth.

Benefits and expenses increased $223$157 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $117$202 million. This increase was primarily driven byreflected higher policyholders’ benefits anddriven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims, as well as higher interest credited to account balances attributable to continueddriven by business growth and the ongoing impact of the assumption update, as discussed above.growth. Also contributing to the increase was the absence of a favorable impact from changes in market conditions on estimates of profitability in the prior year period, as discussed above. The increase also reflected higher reserve financing costs,general and administrative expenses, net of capitalization, reflecting increased VOBA amortization, partially offset by lower expenses as discussed above.


Sales Results

The following table sets forth individual life insuranceIndividual Life’s annualized new business premiums, as defined under “—Results of Operations—Segment Measures” above, by distribution channel and product, for the periods indicated.

 Three Months Ended June 30, 2019 Three Months Ended June 30, 2018 Three Months Ended June 30, 2020 Three Months Ended June 30, 2019
 
Prudential
Advisors
 
Third-
Party
 Total 
Prudential
Advisors
 
Third-
Party
 Total 
Prudential
Advisors
 
Third-
Party
 Total 
Prudential
Advisors
 
Third-
Party
 Total
 (in millions) (in millions)
Term Life $7
 $46
 $53
 $7
 $47
 $54
 $7
 $33
 $40
 $7
 $46
 $53
Guaranteed Universal Life(1) 2
 22
 24
 2
 22
 24
 1
 33
 34
 2
 22
 24
Other Universal Life(1) 11
 37
 48
 11
 18
 29
 5
 18
 23
 11
 37
 48
Variable Life 19
 37
 56
 13
 22
 35
 22
 65
 87
 19
 37
 56
Total $39
 $142
 $181
 $33
 $109
 $142
 $35
 $149
 $184
 $39
 $142
 $181
                        
 Six Months Ended June 30, 2019 Six Months Ended June 30, 2018 Six Months Ended June 30, 2020 Six Months Ended June 30, 2019
 
Prudential
Advisors
 
Third-
Party
 Total 
Prudential
Advisors
 
Third-
Party
 Total 
Prudential
Advisors
 
Third-
Party
 Total 
Prudential
Advisors
 
Third-
Party
 Total
 (in millions) (in millions)
Term Life $14
 $90
 $104
 $14
 $89
 $103
 $13
 $67
 $80
 $14
 $90
 $104
Guaranteed Universal Life(1) 4
 41
 45
 5
 40
 45
 3
 60
 63
 4
 41
 45
Other Universal Life(1) 20
 58
 78
 20
 35
 55
 12
 41
 53
 20
 58
 78
Variable Life 35
 82
 117
 24
 40
 64
 42
 133
 175
 35
 82
 117
Total $73
 $271
 $344
 $63
 $204
 $267
 $70
 $301
 $371
 $73
 $271
 $344
__________
(1)Single pay life premiums and excess (unscheduled) premiums are included in annualized new business premiums based on a 10% credit and represented approximately 5%12% and 5%7% of Guaranteed Universal Life and 0%11% and 0%17% of Other Universal Life annualized new business premiums for the three months ended June 30, 20192020 and 2018,2019, respectively, and approximately 6%9% and 14%7% of Guaranteed Universal Life and 0%10% and 0%14% of Other Universal Life annualized new business premiums for the six months ended June 30, 2020 and 2019, and 2018, respectively. Prior period percentages have been updated to conform to current period presentation.

Total annualized new business premiums for the second quarter and the first six months of 20192020 increased $39$3 million and $77$27 million, respectively, compared to the prior year periods primarily driven by higher sales of variable life products as a result of product design and pricing actions, implemented in September 2018.and higher sales of guaranteed universal life products. The increases for both periods were also drivenpartially offset by higherlower sales of term life products due to pricing actions and lower other universal life products as a resultdue to the absence of large case activity in the second quarter of 2020.

U.S. Businesses—Assurance IQ Division
Assurance IQ

Operating Results

The following table sets forth Assurance IQ’s operating results for the period indicated.
  Three Months Ended
June 30, 2020
 Six Months Ended
June 30, 2020
  (in millions)
Operating results:    
Revenues $59
 $119
Expenses 75
 158
Adjusted operating income (16) (39)
Other adjustments(1) 32
 77
Income (loss) before income taxes and equity in earnings of operating joint ventures $16
 $38
__________
(1)“Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Adjusted Operating Income

The acquisition of Assurance IQ was completed in October 2019. Adjusted operating income for the second quarter and the first six months of 2020 was $(16) million and $(39) million, respectively, reflecting revenues, net of marketing and distribution expenses, primarily related to our health (Health Under 65) and life insurance product lines. Results also included operating expenses and amortization expenses related to intangible assets recognized as part of purchase accounting (see Note 1 and Note 10 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information).

Revenues and Expenses

Revenues for the second quarter and the first six months of 2020 were $59 million and $119 million, respectively, primarily reflecting commissions and marketing referral revenues from our health (Health Under 65) and life insurance product lines. Expenses for the second quarter and the first six months of 2020 were $75 million and $158 million, respectively, driven by marketing and distribution costs, general and administrative operating expenses, and amortization expenses related to intangible assets.

International Insurance DivisionBusinesses
 
InternationalBusiness Update

In April 2020, we entered into a definitive agreement with KB Financial Group, Inc., a Korean financial services provider, to sell The Prudential Life Insurance Company of Korea, Ltd. (“POK”) for cash consideration of approximately $1.9 billion (based on current exchange rates) to be paid at closing. The transaction is consistent with our strategic focus internationally on Japan and higher-growth emerging markets around the world. The transaction is expected to close by the end of 2020, subject to regulatory approvals and customary closing conditions. In the second quarter of 2020, we reported our investment in POK as “held for sale” and recognized an approximately $700 million after-tax charge to earnings to adjust the carrying value of POK to the fair market value reflected in the purchase price (see Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information). Effective in the second quarter of 2020, the results of this business and the impact of the anticipated sale are reflected in the Divested and Run-off Businesses that are included in Corporate and Other, and all prior period amounts have been updated to conform to the current period presentation. We intend to use the proceeds of the transaction for general corporate purposes.

We are exploring strategic options for our Taiwanese insurance business, which may include a sale.

Operating Results
 
The results of our International InsuranceBusinesses’ operations are translated on the basis of weighted average monthly exchange rates, inclusive of the effects of the intercompany arrangement discussed in “—Results of Operations—Impact of Foreign Currency Exchange Rates” above. To provide a better understanding of operating performance within the International Insurance segment,Businesses, where indicated below, we have analyzed our results of operations excluding the effect of the year over year change in foreign currency exchange rates. Our results of operations, excluding the effect of foreign currency fluctuations, were derived by translating foreign currencies to U.S. dollarsUSD at uniform exchange rates for all periods presented, including for constant dollar information discussed below. The exchange ratesrate used werewas Japanese yen at a rate of 105104 yen per U.S. dollar and Korean won at a rate of 1110 won per U.S. dollar, both ofUSD, which werewas determined in connection with the foreign currency income hedging program discussed in “—Results of Operations—Impact of Foreign Currency Exchange Rates” above. In addition, for constant dollar information discussed below, activity denominated in U.S. dollarsUSD is generally reported based on the amounts as transacted in U.S. dollars.USD. Annualized new business premiums presented on a constant exchange rate basis in the “Sales Results” section below reflect translation based on these same uniform exchange rates.
 
The following table sets forth the International Insurance segment’sBusinesses’ operating results for the periods indicated.
 

Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
(in millions)(in millions)
Operating results:       
Operating results(1):       
Revenues:              
Life Planner operations$2,852
 $2,687
 $6,027
 $5,765
Gibraltar Life and Other operations2,649
 2,601
 5,626
 5,563
Life Planner$2,474
 $2,409
 $5,333
 $5,156
Gibraltar Life and Other2,759
 2,649
 5,677
 5,626
Total revenues5,501
 5,288
 11,653
 11,328
5,233
 5,058
 11,010
 10,782
Benefits and expenses:              
Life Planner operations2,414
 2,311
 5,108
 4,973
Gibraltar Life and Other operations2,238
 2,193
 4,774
 4,715
Life Planner2,170
 2,030
 4,665
 4,359
Gibraltar Life and Other2,370
 2,238
 4,954
 4,774
Total benefits and expenses4,652
 4,504
 9,882
 9,688
4,540
 4,268
 9,619
 9,133
Adjusted operating income:              
Life Planner operations438
 376
 919
 792
Gibraltar Life and Other operations411
 408
 852
 848
Life Planner304
 379
 668
 797
Gibraltar Life and Other389
 411
 723
 852
Total adjusted operating income849
 784
 1,771
 1,640
693
 790
 1,391
 1,649
Realized investment gains (losses), net, and related adjustments(2)259
 205
 791
 50
177
 261
 662
 783
Related charges(3) 1
 (3) 1
Charges related to realized investment gains (losses), net(15) (3) (22) (3)
Market experience updates(1)(3)(38) 0
 (38) 0
(37) (37) (46) (37)
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net(18) 26
 106
 (88)
Change in experience-rated contractholder liabilities due to asset value changes18
 (26) (106) 88
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(28) (16) (58) (33)(34) (28) (30) (58)
Income (loss) before income taxes and equity in earnings of operating joint ventures$1,039
 $974
 $2,463
 $1,658
$784
 $983
 $1,955
 $2,334
__________
(1)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
(2)Prior period amounts have been updated to conform to current period presentation.
(3)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. The Company has historically recognized these impacts in adjusted operating income. See Note 1413 to ourthe Unaudited Interim Consolidated Financial Statements for additional information.

Adjusted Operating Income
 
Three Month Comparison.Adjusted operating income from our Life Planner operations increased $62decreased $75 million, including a net unfavorable impact of $3 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in a $43 million net charge in the second quarter of 2020 compared to a $4 million net benefit in the second quarter of 2019. The net charge in 2020 is primarily driven by unfavorable impacts related to a decrease in long-term interest rate assumptions.

Excluding these items, adjusted operating income from our Life Planner operations decreased $25 million, primarily reflecting lower net investment spread results driven by lower investment yields and lower income on non-coupon investments. Also contributing to the decrease were higher expenses driven by costs associated with COVID-19 (see “Overview—COVID-19”). These decreases were partially offset by favorable underwriting results primarily due to the growth of business in force in our Japan and Brazil operations.

Adjusted operating income from our Gibraltar Life and Other operations decreased $22 million, including a net unfavorable impact of $2 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in a $1 million net benefit in the second quarter of 2019 compared to a $49$52 million net charge in the second quarter of 2018. The net charge in 2018 was primarily driven by the impact from unfavorable economic assumption updates driven by a lower long-term interest rate assumption in Japan.

Excluding these items, adjusted operating income increased $10 million, primarily reflecting the growth of business in force in our Japan and Brazil operations and higher underwriting results driven by a favorable impact from mortality experience and policyholders’ behavior. These increases were mostly offset by higher expenses driven by business growth and costs associated with business initiatives.

Adjusted operating income from our Gibraltar Life and Other operations increased $3 million, including a net favorable impact of $3 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in2020 compared to a $7 million net benefit in the second quarter of 2019 compared to a $32 million net charge in the second quarter of 2018. The net benefit in 2019 reflected a net positive impact primarily related to updates to lapse assumptions.2019. The net charge in 20182020 was primarily driven by updates of reserves reflecting the impact from unfavorable economic assumption updates driven byof a lowerdecrease in long-term interest rate assumption in Japan,assumptions, as well as other refinements.


Excluding these items, adjusted operating income from our Gibraltar Life and Other operations decreasedincreased $39 million, primarily reflecting higher earnings from our joint venture investments due to market performance and lower expenses includingdriven by lower costs associated with business initiatives, and lowerpartially offset by costs associated with COVID-19 (see “Overview—COVID-19”).

Also contributing to the increase were favorable underwriting results driven by a less favorable impact from mortality experience. These decreases wereexperience, and higher net investment spread results driven by higher income on non-coupon investments, partially offset by growth of business in force and more favorable results from joint venture investments.lower investment yields.

Six Month Comparison. Adjusted operating income from our Life Planner operations increased $127decreased $129 million, including a net favorableunfavorable impact of $7$3 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, adjusted operating income increased $70from our Life Planner operations decreased $79 million primarily reflecting lower net investment spread results driven by lower income on non-coupon investments and lower investment yields. Also contributing to the decrease were higher expenses driven by updates to legal reserves, as well as higher costs related to business growth and business initiatives, and costs associated with COVID-19 (see “Overview—COVID-19”). These decreases were partially offset by favorable underwriting results due to the growth of business in force in our Japan and Brazil operations, and higher underwriting results drivenpartially offset by a favorablean unfavorable impact from mortality experience and policyholders’ behavior. Also contributing to the increase was a favorable net impact in the first quarter of 2019 from changes in our profitability of the business driven by equity market performance on policyholder accounts. Beginning in the second quarter of 2019, this activity is excluded from adjusted operating income (see Note 14 to the Unaudited Interim Consolidated Financial Statements for further information). These increases were partially offset by higher expenses, driven by business growth and costs associated with business initiatives.experience.

Adjusted operating income from our Gibraltar Life and Other operations increased $4decreased $129 million, including a net favorableunfavorable impact of $9$4 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, adjusted operating income from our Gibraltar Life and Other operations decreased $44$66 million, primarily reflecting higher expenses, including costs associated with business initiatives.lower net investment spread results driven by lower investment yields and lower income on non-coupon investments. Also contributing to the decrease were lower underwriting resultsearnings from our joint venture investments due to market performance, as well as higher expenses driven by a less favorable impact from mortality experience.costs associated with COVID-19 (see “Overview—COVID-19”), partially offset by lower costs related to business initiatives. These decreases were partially offset by favorable underwriting results driven by the growth of business in force as well as higher net investment results driven by higher average invested assets resultingand a favorable impact from continued business growth.mortality experience.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues from our Life Planner operations as shown in the table above under “—Operating Results,” increased $165$65 million, including a net unfavorable impact of $53$21 million from currency fluctuations and a net chargebenefit of $16$33 million from our annual reviews and update of assumptions and other refinements. Excluding these items, revenues increased $234$53 million, primarily driven by higher premiums and policy charges and fee income relatedattributable to the growth of business in force.force, partially offset by lower net investment results driven by lower investment yields and lower income on non-coupon investments.

Benefits and expenses of our Life Planner operations as shown in the table above under “—Operating Results,” increased $103$140 million, including a net favorable impact of $55$18 million from currency fluctuations and a net benefitcharge of $66 million from our annual review and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $224 million. This increase primarily reflects higher policyholders’ benefits, including changes in reserves, driven by business growth, and higher expenses.

Revenues from our Gibraltar Life and Other operations, as shown in the table above under “—Operating Results,” increased $48 million, including a net unfavorable impact of $4 million from currency fluctuations. Excluding this item, revenues increased $52 million, primarily reflecting higher net investment income driven by higher non-coupon investments and higher average invested assets resulting from business growth. Also contributing to the increase were higher other income driven by more favorable results from joint venture investments.

Benefits and expenses of our Gibraltar Life and Other operations, as shown in the table above under “—Operating Results,” increased $45 million, including a net favorable impact of $7 million from currency fluctuations and a net benefit of $39$80 million from our annual reviews and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $91$78 million, primarily driven by an increase inreflecting higher policyholders’ benefits, including changes in reserves, driven by continuedthe growth of business growth,in force, and higher expenses includingdriven by costs associated with business initiatives.COVID-19.

Six Month Comparison. Revenues from our Gibraltar Life Plannerand Other operations increased $262$110 million, including a net unfavorablefavorable impact of $137$18 million from currency fluctuations and a net charge of $16$9 million from our annual reviews and update of assumptions and other refinements. Excluding these items, revenues increased $415$101 million, primarily reflecting higher premiums driven by the growth of business in force, and higher other income driven by a favorable impact from our joint venture investments due to market performance.

Benefits and expenses of our Gibraltar Life and Other operations increased $132 million, including a net unfavorable impact of $20 million from currency fluctuations and a net charge of $50 million from our annual reviews and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $62 million, primarily driven by higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force. The increase was partially offset by lower expenses driven by lower costs associated with business initiatives, partially offset by costs associated with COVID-19.

Six Month Comparison. Revenues from our Life Planner operations increased $177 million, including a net unfavorable impact of $45 million from currency fluctuations. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, revenues increased $189 million, primarily driven by higher premiums and policy charges and fee income relatedattributable to the growth of business in force.

Benefits and expenses of our Life Planner operations increased $135$306 million, including a net favorable impact of $144$42 million from currency fluctuations. Excluding the impact of currency fluctuations, and a net benefit of $66 millionas well as the impact from our annual reviewreviews and update of assumptions and other refinements. Excluding these items,refinements as discussed above, benefits and expenses increased $345 million. This increase$268 million, primarily reflectsreflecting higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force, as well as an unfavorable

impact from mortality experience. Also contributing to the decrease were higher expenses driven by updates to legal reserves, as well as higher costs related to business growth and higher expenses.business initiatives, and costs associated with COVID-19.


Revenues from our Gibraltar Life and Other operations increased $63$51 million, including a net unfavorablefavorable impact of $34$20 million from currency fluctuations. Excluding this item,the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, revenues increased $97$40 million, primarily reflectingdriven by higher net investmentpremiums attributable to the growth of business in force. The increase was partially offset by lower other income driven by higher average invested assets resultingan unfavorable impact from continued business growth.our joint venture investments due to market performance, and lower net investment results driven by lower investment yields and lower income on non-coupon investments.

Benefits and expenses of our Gibraltar Life and Other operations increased $59$180 million, including a net favorableunfavorable impact of $43$24 million from currency fluctuations. Excluding the impact of currency fluctuations, and a net benefit of $39 millionas well as the impact from our annual reviews and update of assumptions and other refinements. Excluding these items,refinements as discussed above, benefits and expenses increased $141$106 million, primarily driven by an increase inhigher policyholders’ benefits, including changes in reserves, driven by the growth of business growth, andin force. Also contributing to the increase was higher expenses includingdriven by costs associated with COVID-19, partially offset by lower costs associated with business initiatives.

Sales Results

The following table sets forth annualized new business premiums, as defined under “—Results of Operations—Segment Measures” above, on an actual and constant exchange rate basis for the periods indicated.
 
 Three Months Ended
June 30,
 Six Months Ended
June 30,
  
2019 2018 2019 2018
 (in millions)
Annualized new business premiums:       
On an actual exchange rate basis:       
Life Planner operations$224
 $296
 $628
 $647
Gibraltar Life271
 399
 594
 806
Total$495
 $695
 $1,222
 $1,453
On a constant exchange rate basis:       
Life Planner operations$309
 $295
 $718
 $639
Gibraltar Life297
 401
 622
 809
Total$606
 $696
 $1,340
 $1,448
 Three Months Ended
June 30,
 Six Months Ended
June 30,
  
2020 2019 2020 2019
 (in millions)
Annualized new business premiums(1):       
On an actual exchange rate basis:       
Life Planner$166
 $253
 $487
 $608
Gibraltar Life and Other197
 296
 504
 619
Total$363
 $549
 $991
 $1,227
On a constant exchange rate basis:       
Life Planner$178
 $255
 $505
 $613
Gibraltar Life and Other198
 298
 507
 623
Total$376
 $553
 $1,012
 $1,236
__________
(1)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.

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

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

The table below presents annualized new business premiums on a constant exchange rate basis, by product and distribution channel, for the periods indicated.

Three Months Ended June 30, 2019 Three Months Ended June 30, 2018Three Months Ended June 30, 2020 Three Months Ended June 30, 2019
Life 
Accident
&
Health
 Retirement(1) Annuity Total Life 
Accident
&
Health
 Retirement(1) Annuity TotalLife 
Accident
&
Health
 Retirement(1) Annuity Total Life 
Accident
&
Health
 Retirement(1) Annuity Total
(in millions)(in millions)
Life Planner(2)$166
 $26
 $96
 $21
 $309
 $165
 $27
 $77
 $26
 $295
$89
 $18
 $71
 $0
 $178
 $137
 $23
 $95
 $0
 $255
Gibraltar Life:                   
Gibraltar Life and Other:                   
Life Consultants$84
 $10
 $18
 $56
 $168
 $73
 $11
 $24
 $127
 $235
$59
 $7
 $6
 $17
 $89
 $84
 $10
 $19
 $56
 $169
Banks(2)(3)73
 0
 9
 3
 85
 88
 0
 6
 10
 104
57
 0
 3
 2
 62
 73
 0
 9
 3
 85
Independent Agency19
 3
 18
 4
 44
 32
 5
 18
 7
 62
18
 2
 27
 0
 47
 19
 3
 18
 4
 44
Subtotal176
 13
 45
 63
 297
 193
 16
 48
 144
 401
134
 9
 36
 19
 198
 176
 13
 46
 63
 298
Total$342
 $39
 $141
 $84
 $606
 $358
 $43
 $125
 $170
 $696
$223
 $27
 $107
 $19
 $376
 $313
 $36
 $141
 $63
 $553
__________
(1)Includes retirement income, endowment and savings variable universal life.
(2)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
(3)Single pay life annualized new business premiums, which include 10% of first year premiums, and 3-year limited pay annualized new business premiums, which include 100% of new business premiums, represented 3% and 75%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended June 30, 2020, and 0% and 68%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended June 30, 2019, and 0% and 75%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended June 30, 2018.2019.

Three Month Comparison.Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations increased $14decreased $77 million, primarily reflecting higher sales in our Brazil operation driven by growthrestrictions in Life Planner headcount.sales activities due to COVID-19 (see “Overview—COVID-19”), which resulted in lower sales across products.

Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations decreased $104$100 million. Life Consultants and Bank channel sales decreased $67$80 million and $23 million, respectively, primarily reflectingdriven by COVID-19 impacts. Life Consultants sales also reflected lower sales of USD-denominated fixed annuity products driven by declines in crediting rates and prioritization of our strategy to focus on recurring pay protection products. Bank channellower Life Consultant headcount. These decreases were partially offset by a $3 million increase in Independent Agency sales decreased $19 million, primarily from lowerdriven by higher sales of USD-denominated life products due to increased competition. Independent Agency sales decreased $18 million, primarily driven by the suspension of corporate term products in the first quarter of 2019 (see “Overview—Regulatory Developments—Japan Corporate Product Tax Rules”) and declines in crediting rates for fixed annuityendowment products.

The table below presents annualized new business premiums on a constant exchange rate basis, by product and distribution channel, for the periods indicated.
Six Months Ended June 30, 2019 Six Months Ended June 30, 2018Six Months Ended June 30, 2020 Six Months Ended June 30, 2019
Life 
Accident
&
Health
 Retirement(1) Annuity Total Life 
Accident
&
Health
 Retirement(1) Annuity TotalLife 
Accident
&
Health
 Retirement(1) Annuity Total Life 
Accident
&
Health
 Retirement(1) Annuity Total
(in millions)(in millions)
Life Planner(2)$403
 $62
 $212
 $41
 $718
 $348
 $57
 $186
 $48
 $639
$268
 $42
 $194
 $1
 $505
 $345
 $56
 $209
 $3
 $613
Gibraltar Life:                   
Gibraltar Life and Other:                   
Life Consultants$171
 $21
 $41
 $101
 $334
 $150
 $23
 $53
 $206
 $432
$141
 $16
 $24
 $39
 $220
 $171
 $21
 $42
 $101
 $335
Banks(2)(3)167
 0
 18
 8
 193
 224
 0
 14
 24
 262
177
 0
 13
 4
 194
 167
 0
 18
 8
 193
Independent Agency50
 6
 27
 12
 95
 58
 8
 34
 15
 115
40
 3
 48
 2
 93
 50
 6
 27
 12
 95
Subtotal388
 27
 86
 121
 622
 432
 31
 101
 245
 809
358
 19
 85
 45
 507
 388
 27
 87
 121
 623
Total$791
 $89
 $298
 $162
 $1,340
 $780
 $88
 $287
 $293
 $1,448
$626
 $61
 $279
 $46
 $1,012
 $733
 $83
 $296
 $124
 $1,236
__________
(1)Includes retirement income, endowment and savings variable universal life.
(2)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
(3)Single pay life annualized new business premiums, which include 10% of first year premiums, and 3-year limited pay annualized new business premiums, which include 100% of new business premiums, represented 4% and 70%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the six months ended June 30, 2020, and 0% and 66%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the six months ended June 30, 2019, and 0% and 73%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the six months ended June 30, 2018.2019.


Six Month Comparison.Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations increased $79decreased $108 million primarily reflecting higherdriven by COVID-19 impacts. Also contributing to the decrease were lower sales of USD-denominatedcorporate term products in Japan driven by growth in Life Planner headcount, as well as higher average premium sizes, in our Japan and Brazil operations.the corporate product tax rule change effective July 2019.

Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations decreased $187$116 million. Life Consultants sales decreased $98$115 million, primarily reflectingdriven by COVID-19 impacts, as well as lower sales of U.S. dollar-denominatedUSD-denominated fixed

annuity products driven by declines in crediting rates and prioritization of our strategy to focus on recurring pay protection products.lower Life Consultant headcount. Bank channel sales decreased $69 million, primarily fromremained relatively flat reflecting higher sales of USD-denominated protection products, offset by lower sales due to COVID-19 impacts. Independent Agency sales also remained flat reflecting lower sales of USD-denominated lifeprotection and fixed annuity products, due to increased competition. Independent Agencyoffset by higher sales decreased $20 million, primarily driven by the suspension of corporate term products in the first quarter of 2019 (see “Overview—Regulatory Developments—Japan Corporate Product Tax Rules”) and declines in crediting rates for fixed annuityUSD-denominated endowment products.

CorporateClosed Block Division
Substantially all of the $61 billion of general account assets in the Closed Block division support obligations and Otherliabilities relating to the Closed Block policies only. See Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information on the Closed Block.

CorporateInternational Insurance Operations

While our international insurance operations have experienced a low interest rate environment for many years, the current reinvestment yields for certain blocks of business in our international insurance operations are generally lower than the current portfolio yield supporting these blocks of business. In recent years, the Bank of Japan’s monetary policy has resulted in even lower and, Other includes corporateat times, negative yields for certain tenors of government bonds. Our international insurance operations after allocationsemploy a proactive asset/liability management program in order to mitigate, to the extent possible, the unfavorable impact that the current interest rate environment has on our net interest margins. In conjunction with this program, we have not purchased negative yielding assets to support the portfolio and we continue to purchase long-term bonds with tenors of 30 years or greater. Additionally, our diverse product portfolio in terms of currency mix and premium payment structure allows us to further mitigate the negative impact from

this low interest rate environment. We regularly examine our product offerings and their profitability. As a result, we have repriced certain products, adjusted commissions for certain products and have discontinued sales of other products that do not meet our profit expectations. The impact of these actions and the introduction of certain new products, has resulted in an increase in sales of U.S. dollar-denominated products relative to products denominated in other currencies. For additional information on sales within our international insurance operations, see “—International Businesses—Sales Results,” below.

The following table sets forth the insurance liabilities and policyholder account balances of our Japanese operations, by type, for the date indicated:
 
As of
June 30, 2020
 (in billions)
Insurance products with fixed and guaranteed terms$132
Contracts with a market value adjustment if invested amount is not held to maturity25
Contracts with adjustable crediting rates subject to guaranteed minimums11
Total$168

The $132 billion above is primarily comprised of long-duration insurance products that have fixed and guaranteed terms, for which underlying assets may have to be reinvested at interest rates that are lower than current portfolio yields. The remaining insurance liabilities and policyholder account balances include $25 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity and $11 billion related to contracts with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. Most of the current crediting rates on these contracts, however, are at or near contractual minimums. Although we have the ability in some cases to lower crediting rates for those contracts that are above guaranteed minimum crediting rates, the majority of this business segments,has interest crediting rates that are determined by formula.

Assuming a hypothetical scenario where the average 30-year Japanese Government Bond yield is 0.60% and the 10-year U.S. Treasury rate is 0.65% (which is reasonably consistent with recent rates) for the period from July 1, 2020 through June 30, 2021 (and credit spreads remain unchanged from levels as of June 30, 2020), we estimate that the unfavorable impact to net investment income of reinvesting activities, including scheduled maturities and estimated prepayments of fixed maturities and commercial mortgage and other loans (excluding assets supporting participating contracts) would be between $40 million and $80 million for the period from July 1, 2020 through June 30, 2021.
Results of Operations

Consolidated Results of Operations

The following table summarizes net income (loss) for the periods presented.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Revenues$12,115
 $15,388
 $25,579
 $30,479
Benefits and expenses14,447
 14,512
 28,249
 28,463
Income (loss) before income taxes and equity in earnings of operating joint ventures(2,332) 876
 (2,670) 2,016
Income tax expense (benefit)115
 162
 57
 394
Income (loss) before equity in earnings of operating joint ventures(2,447) 714
 (2,727) 1,622
Equity in earnings of operating joint ventures, net of taxes42
 24
 52
 53
Net income (loss)(2,405) 738
 (2,675) 1,675
Less: Income attributable to noncontrolling interests4
 30
 5
 35
Net income (loss) attributable to Prudential Financial, Inc.$(2,409) $708
 $(2,680) $1,640

Three Month Comparison. The $3,117 million decrease in “Net income (loss) attributable to Prudential Financial, Inc.” for the second quarter of 2020 compared to the second quarter of 2019 reflected the following notable items:

$2,136 million unfavorable variance, on a pre-tax basis, from realized investment gains and losses for PFI excluding the Divested and Run-off Businesses, other thanand excluding the impact of the hedging program associated with certain variable annuities discussed below (see “General Account Investments” for additional information);
$771 million unfavorable variance, on a pre-tax basis, from a loss in the current period from our Divested and Run-off Businesses compared to a gain in the prior period (see “Results of Operations by Segment—Divested and Run-off Businesses” for additional information);
$663 million unfavorable variance, on a pre-tax basis, from lower adjusted operating income from our business segments (see “—Segment Results of Operations” for additional information); and
$491 million unfavorable variance, on a pre-tax basis, reflecting the net impact from changes in the value of our embedded derivatives and related hedge positions associated with certain variable annuities (see “Results of Operations by Segment—U.S. Businesses—U.S. Individual Solutions Division—Individual Annuities—Variable Annuity Risks and Risk Mitigants” for additional information).

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

$446 million favorable variance, on a pre-tax basis, from investment related activities that are primarily within “Other income (loss)” for PFI excluding our Divested and Run-off Businesses. These favorable impacts were primarily driven by unrealized gains (losses) from equity securities as well as fixed maturity securities designated as trading; and
$258 million favorable variance, on a pre-tax basis, driven by market experience updates excluding those impacts related to the hedging program associated with certain variable annuities discussed above.

Six Month Comparison. The $4,320 million decrease in “Net income (loss) attributable to Prudential Financial, Inc.” for the first six months of 2020 compared to the first six months of 2019 reflected the following notable items:

$1,300 million unfavorable variance, on a pre-tax basis, reflecting the net impact from changes in the value of our embedded derivatives and related hedge positions associated with certain variable annuities (see “Results of Operations by Segment—U.S. Businesses—U.S. Individual Solutions Division—Individual Annuities—Variable Annuity Risks and Risk Mitigants” for additional information);
$1,066 million unfavorable variance, on a pre-tax basis, from lower adjusted operating income from our business segments (see “Segment Results of Operations” for additional information);
$978 million unfavorable variance, on a pre-tax basis, from a loss in the current period from our Divested and Run-off Businesses compared to a gain in the prior period (see “Results of Operations by Segment—Divested and Run-off Businesses” for additional information);
$859 million unfavorable variance, on a pre-tax basis, from investment related activities that qualifyare primarily within “Other income (loss)” for “discontinued operations” accounting treatment under U.S. GAAP.PFI excluding our Divested and Run-off Businesses. These unfavorable impacts were primarily driven by unrealized gains (losses) from equity securities as well as fixed maturity securities designated as trading; and
$326 million unfavorable variance, on a pre-tax basis, driven by market experience updates excluding those impacts related to the hedging program associated with certain variable annuities discussed above.

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

$114 million favorable variance, on a pre-tax basis, from realized investment gains and losses for PFI excluding Divested and Run-off Businesses, and excluding the impact of the hedging program associated with certain variable annuities discussed above (see “General Account Investments” for additional information).


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

Annual Reviews and Update of Assumptions and Other Refinements

Annually during the second quarter of each year, we perform a comprehensive review of actuarial assumptions utilized in measuring insurance liabilities and expected gross profits used in amortizing deferred acquisition costs, sales inducement costs, unearned revenue reserves and value of business acquired. The assumptions reviewed include, but are not necessarily limited to, inputs such as mortality, morbidity, contractholder behavior and expected future rates of returns on investments. As part of this review, we may update these assumptions and make refinements to our models based upon emerging experience, future expectations and other data, including any observable market data. These assumptions are generally updated annually during the second quarter of each year, unless a material change in experience that we feel is indicative of a long-term trend is observed during an interim period.

Shown below are the impacts on our adjusted operating income from updates of actuarial assumptions and other refinements as discussed above. The information below is presented by each segment and Corporate and Other operations and includes a reconciliation of these impacts to the impacts within income (loss) before income taxes and equity in earnings of operating joint ventures.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2019 2018 2019 2018
 (in millions)
Operating results:       
Capital debt interest expense$(200) $(172) $(399) $(353)
Investment income, net of operating debt interest expense42
 9
 86
 36
Pension and employee benefits36
 56
 60
 96
Other corporate activities(1)(213) (179) (494) (359)
Adjusted operating income(335) (286) (747) (580)
Realized investment gains (losses), net, and related adjustments(157) 199
 (207) 228
Related charges(81) 1
 (87) 4
Divested and Run-off Businesses112
 (1,526) 286
 (1,598)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(7) 4
 (15) 3
Income (loss) before income taxes and equity in earnings of operating joint ventures$(468) $(1,608) $(770) $(1,943)
 Three and Six Months Ended
June 30,
 2020 2019
 (in millions)
Favorable (unfavorable) impact to adjusted operating income before income taxes by segment:   
U.S. Businesses:   
U.S Workplace Solutions division:   
Retirement$(22) $154
Group Insurance11
 9
Total U.S. Workplace Solutions division(11) 163
U.S. Individual Solutions division:   
Individual Annuities(136) (12)
Individual Life(92) (208)
Total U.S. Individual Solutions division(228) (220)
Total U.S. Businesses(239) (57)
International Businesses(1)(95) 11
Corporate and Other0
 0
Total segment favorable (unfavorable) impact to adjusted operating income before income taxes(334) (46)
Reconciling items:   
Realized investment gains (losses), net, and related adjustments302
 9
Charges related to realized investment gains (losses), net(41) 16
Divested and Run-off Businesses:   
     Closed Block division0
 (7)
     Other Divested and Run-off Businesses(1)(33) (12)
Favorable (unfavorable) impact to consolidated income (loss) before income taxes and equity in earnings of operating joint ventures$(106) $(40)
__________
(1)Includes consolidating adjustments.Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.

Three Month Comparison. The loss fromSee “—Results of Operations by Segment” for a discussion of the impacts of our annual reviews and update of assumptions and other refinements.


Summary of Results of Operations by Segment

Shown below are the adjusted operating income contributions of each segment and Corporate and Other operations on an adjusted operatingfor the periods indicated and a reconciliation of this segment measure of performance to “Income (loss) before income basis, increased $49 million. Net charges from other corporate activities increased $34 million, primarily reflecting higher costs for long-term and deferred employee compensation plans tied to Company stocktaxes and equity market performance, and increases in other corporate costs, including higher expenses related to corporate initiatives partially offset by lower enhanced supervision costs. Capital debt interest expense increased $28 million, reflecting higher average debt balances. Results from pension and employee benefits decreased $20 million, primarily reflecting lower income from our qualified pension plan, due to higher interest costs on plan obligations driven by the increase in interest rates in 2018. Results for investment income, netearnings of operating debt interest expense, increased $33 million, including higher income on highly liquid assets.joint ventures” as presented in the Unaudited Interim Consolidated Statements of Operations.

Six Month Comparison. The loss from Corporate and Other operations, on an adjusted operating income basis, increased $167 million. Net charges from other corporate activities increased $135 million, primarily reflecting higher costs for long-term and deferred employee compensation plans tied to Company stock and equity market performance, and increases in other corporate costs, including higher expenses related to corporate initiatives partially offset by lower enhanced supervision costs. Capital debt interest expense increased $46 million, reflecting higher average debt balances. Results from pension and employee benefits decreased $36 million, primarily reflecting lower income from our qualified pension plan, due to higher interest costs on plan obligations driven by the increase in interest rates in 2018. Results for investment income, net of operating debt interest expense, increased $50 million, primarily reflecting higher income on highly liquid assets.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Adjusted operating income before income taxes by segment:       
PGIM$324
 $264
 $488
 $478
U.S. Businesses:       
U.S. Workplace Solutions division:
 
 
 
Retirement281
 467
 526
 718
Group Insurance5
 81
 49
 134
Total U.S. Workplace Solutions division286
 548
 575
 852
U.S. Individual Solutions division:       
Individual Annuities249
 462
 622
 934
Individual Life(64) (135) (84) (30)
Total U.S. Individual Solutions division185
 327
 538
 904
Assurance IQ division(1):       
Assurance IQ(16) 0
 (39) 0
Total Assurance IQ division(16) 0
 (39) 0
Total U.S. Businesses455
 875
 1,074
 1,756
International Businesses(2)693
 790
 1,391
 1,649
Corporate and Other(541) (335) (883) (747)
Total segment adjusted operating income before income taxes931
 1,594
 2,070
 3,136
Reconciling items:       
Realized investment gains (losses), net, and related adjustments(3)(3,191) (572) (2,982) (1,194)
Charges related to realized investment gains (losses), net(4)519
 (82) (283) (57)
Market experience updates(5)55
 (207) (886) (207)
Divested and Run-off Businesses(6):       
     Closed Block division(22) (21) (23) (40)
     Other Divested and Run-off Businesses(2)(602) 168
 (580) 415
Other adjustments(7)32
 0
 77
 0
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(8)(54) (4) (63) (37)
Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures$(2,332) $876
 $(2,670) $2,016
__________
(1)Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
(2)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
(3)
Represents “Realized investment gains (losses), net,” and related adjustments. See “General Account Investments” and Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. Prior period amounts have been updated to conform to current period presentation.
(4)Includes charges that represent the impact of realized investment gains (losses), net, on the amortization of DAC and other costs, and on changes in reserves. Also includes charges resulting from payments related to market value adjustment features of certain of our annuity products and the impact of realized investment gains (losses), net, on the amortization of unearned revenue reserves.
(5)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(6)Represents the contribution to income (loss) of Divested and Run-off Businesses that have been or will be sold or exited, including businesses that have been placed in wind down, but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP. See “—Divested and Run-off Businesses.”

(7)Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(8)Equity in earnings of operating joint ventures are included in adjusted operating income but excluded from “Income (loss) before income taxes and equity in earnings of operating joint ventures” as they are reflected on an after-tax U.S. GAAP basis as a separate line in the Unaudited Interim Consolidated Statements of Operations. Earnings attributable to noncontrolling interests are excluded from adjusted operating income but included in “Income (loss) before income taxes and equity in earnings of operating joint ventures” as they are reflected on a U.S. GAAP basis as a separate line in the Unaudited Interim Consolidated Statements of Operations. Earnings attributable to noncontrolling interests represent the portion of earnings from consolidated entities that relates to the equity interests of minority investors.

Divested and Run-off Businesses

Divested and Run-off Businesses Included in Corporate and Other
Income from our Divested and Run-off Businesses includesSegment results from several businesses that have been or will be sold or exited, including businesses that have been placed in wind down status that do not qualify for “discontinued operations” accounting treatment under U.S. GAAP. The results of these Divested and Run-off Businesses are reflected in our Corporate and Other operations, but are excluded from adjusted operating income. A summary of the results of the Divested and Run-off Businesses reflected in our Corporate and Other operations is as follows for the periods indicated:

 Three Months Ended
June 30,
 Six Months Ended
June 30,
  
2019 2018 2019 2018
 (in millions)
Long-Term Care$145
 $(1,425) $309
 $(1,498)
Other(33) (101) (23) (100)
Total Divested and Run-off Businesses income (loss) excluded from adjusted operating income$112
 $(1,526) $286
 $(1,598)
period presented above reflect the following:

Long-Term CarePGIM.. Results for the second quarter of 2020 increased in comparison to the prior year period, reflecting increases in asset management fees and other related revenues, and decreases in expenses. Results for the first six months of 2020 increased in comparison to the prior year period, reflecting increases in asset management fees and decreases in expenses, partially offset by decreases in other related revenues.

Retirement. Results for both the second quarter and the first six months of 2020 decreased in comparison to the prior year periods, primarily reflecting an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results for both periods decreased primarily driven by lower net investment spread results, partially offset by higher reserve gains.

Group Insurance. Results for both the second quarter and the first six months of 2020 decreased in comparison to the prior year periods, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results for both periods decreased primarily reflecting lower underwriting results and lower net investment spread results.

Individual Annuities. Results for both the second quarter and the first six months of 2020 decreased in comparison to the prior year periods, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results for both periods decreased primarily driven by lower fee income, net of distribution expenses and other associated costs. The results for the second quarter were partially offset by higher net investment spread results.

Individual Life. Results for the second quarter of 2020 reflected a decrease in losses in comparison to the prior year period, and results for the first six months of 2020 reflected an increase in losses in comparison to the prior year period. Both periods include a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, adjusted operating income decreased for both periods, primarily reflecting lower net investment spread results and lower underwriting results driven by an unfavorable impact from mortality experience, net of reinsurance, partially offset by lower expenses.

Assurance IQ. The acquisition of Assurance IQ was completed in October 2019. Results for both the second quarter and the first six months of 2020 include revenues, net of marketing and distribution expenses, operating expenses and amortization expenses related to intangible assets recognized as part of purchase accounting (see Note 1 and Note 10 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information).
International Businesses. Results for both the second quarter and the first six months of 2020 decreased in comparison to the prior year periods, inclusive of an unfavorable net impact from foreign currency exchange rates and an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding these items, results for the second
quarter of 2020 increased driven by favorable underwriting results and higher earnings from our joint venture investments, partially offset by lower net investment spread results and higher expenses, while results for the first six months of 2020 decreased driven by lower net investment spread results, higher expenses and lower earnings from our joint venture investments, partially offset by favorable underwriting results.
Corporate and Other. Results for both the second quarter of 2020 and the first six months of 2020 reflected increased losses in comparison to the prior year periods, reflecting higher net charges from other corporate activities driven by increases to legal reserves, lower investment income and higher interest expense on debt, partially offset by favorable pension and employee benefit results.


Closed Block Division. Results for the second quarter of 2020 reflected an increase in losses in comparison to the prior year period, primarily reflecting an increase in the policyholder dividend obligation as a result of higher net investment activity results. Results for the first six months of 2020 reflected a decrease in losses in comparison to the prior year period, primarily reflecting a decrease in the policyholder dividend obligation as a result of lower net investment activity results.

Segment Measures

Adjusted Operating Income. In managing our business, we analyze our segments’ operating performance using “adjusted operating income.” Adjusted operating income does not equate to “Income (loss) before income taxes and equity in earnings of operating joint ventures” or “Net income (loss)” as determined in accordance with U.S. GAAP, but is the measure of segment profit or loss we use to evaluate segment performance and allocate resources, and consistent with authoritative guidance, is our measure of segment performance. The adjustments to derive adjusted operating income are important to an understanding of our overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and our definition of adjusted operating income may differ from that used by other companies. However, we believe that the presentation of adjusted operating income as we measure it for management purposes enhances the understanding of our results of operations by highlighting the results from ongoing operations and the underlying profitability of our businesses.

See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information on the presentation of segment results and our definition of adjusted operating income.

Annualized New Business Premiums. In managing our Individual Life, Group Insurance and International Businesses, we analyze annualized new business premiums, which do not correspond to revenues under U.S. GAAP. Annualized new business premiums measure the current sales performance of the business, while revenues primarily reflect the renewal persistency of policies written in prior years and net investment income, in addition to current sales. Annualized new business premiums include 10% of first year premiums or deposits from single pay products. No other adjustments are made for limited pay contracts.

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

Assets Under Management. In managing our PGIM business, we analyze assets under management (which do not correspond directly to U.S. GAAP assets) because the principal source of revenues is fees based on assets under management. Assets under management represent the fair market value or account value of assets which we manage directly for institutional clients, retail clients, and for our general account, as well as assets invested in our products that are managed by third-party managers.

Account Values. In managing our Individual Annuities and Retirement businesses, we analyze account values, which do not correspond to U.S. GAAP assets. Net sales (redemptions) in our Individual Annuities business and net additions (withdrawals) in our Retirement business do not correspond to revenues under U.S. GAAP, but are used as a relevant measure of business activity.

Impact of Foreign Currency Exchange Rates

Foreign currency exchange rate movements and related hedging strategies
As a U.S.-based company with significant business operations outside the U.S., particularly in Japan, we are subject to foreign currency exchange rate movements that could impact our U.S. dollar (“USD”)-equivalent earnings and shareholder return on equity. Our USD-equivalent earnings could be materially affected by currency fluctuations from period to period, even if earnings on a local currency basis are relatively constant. Our USD-equivalent equity is impacted as the value of our investment in international operations may also fluctuate based on changes in foreign currency exchange rates. We seek to mitigate these impacts through various hedging strategies, including the use of derivative contracts and by holding USD-denominated assets in certain of our foreign subsidiaries.

In order to reduce earnings volatility from foreign currency exchange rate movements, we enter into forward currency derivative contracts to effectively fix the currency exchange rates for a portion of our prospective non-USD-denominated earnings streams. This forward currency hedging program is primarily associated with our insurance operations in Japan and Korea.

In order to reduce equity volatility from foreign currency exchange rate movements, we primarily utilize a yen hedging strategy that calibrates the hedge level to preserve the relative contribution of our yen-based business to the Company’s overall return on equity on a leverage neutral basis. We implement this hedging strategy utilizing a variety of instruments, including USD-

denominated assets, foreign currency derivative contracts, and dual currency and synthetic dual currency investments held locally in our Japanese insurance subsidiaries. The total hedge level may vary based on our periodic assessment of the relative contribution of our yen-based business to the Company’s overall return on equity.

The table below presents the aggregate amount of instruments that serve to hedge the impact of foreign currency exchange movements on our USD-equivalent shareholder return on equity from our Japanese insurance subsidiaries as of the dates indicated.

 June 30,
2020
 December 31,
2019
 (in billions)
Foreign currency hedging instruments:   
Hedging USD-equivalent earnings:   
Forward currency contracts (notional amount outstanding)$0.4
 $0.6
Hedging USD-equivalent equity:   
USD-denominated assets held in yen-based entities(1)10.9
 13.1
Dual currency and synthetic dual currency investments(2)0.6
 0.6
Total USD-equivalent equity foreign currency hedging instruments11.5
 13.7
Total foreign currency hedges$11.9
 $14.3
__________
(1)Includes USD-denominated fixed maturities at amortized cost plus any related accrued investment income, as well as USD notional amount of foreign currency derivative contracts outstanding. Note this amount represents only those USD assets serving to hedge the impact of foreign currency volatility on equity. Separate from this program, our Japanese operations also have $62.2 billion and $57.8 billion as of June 30, 2020 and December 31, 2019, respectively, of USD-denominated assets supporting USD-denominated liabilities related to USD-denominated products.
(2)Dual currency and synthetic dual currency investments are held by our yen-based entities in the form of fixed maturities and loans with a yen-denominated principal component and USD-denominated interest income. The amounts shown represent the present value of future USD-denominated cash flows.

The USD-denominated investments that hedge the impact of foreign currency exchange rate movements on USD-equivalent earnings and shareholder return on equity from our Japanese insurance operations are reported within yen-based entities and, as a result, foreign currency exchange rate movements will impact their value reported within our yen-based Japanese insurance entities. We seek to mitigate the risk that future unfavorable foreign currency exchange rate movements will decrease the value of these USD-denominated investments reported within our yen-based Japanese insurance entities, and therefore negatively impact their equity and regulatory solvency margins, by having our Japanese insurance operations enter into currency hedging transactions. Those hedges are with a subsidiary of Prudential Financial. These hedging strategies have the economic effect of moving the change in value of these USD-denominated investments due to foreign currency exchange rate movements from our Japanese yen-based entities to our USD-based entities.

These USD-denominated investments also pay a coupon which is generally higher than what a similar yen-denominated investment would pay. The incremental impact of this higher yield on our USD-denominated investments, as well as our dual currency and synthetic dual currency investments, will vary over time, and is dependent on the duration of the underlying investments as well as interest rate environments in both the U.S. and Japan at the time of the investments.

Impact of intercompany foreign currency exchange rate arrangements on segment results of operations
The financial results of our International Businesses and PGIM reflect the impact of intercompany arrangements with our Corporate and Other operations pursuant to which these segments’ non-USD-denominated earnings are translated at fixed currency exchange rates. Results of our Corporate and Other operations include differences between the translation adjustments recorded by the segments at the fixed currency exchange rate versus the actual average rate during the period. In addition, specific to our International Businesses where we hedge certain currencies, the results of our Corporate and Other operations also include the impact of any gains or losses recorded from the forward currency contracts that settled during the period, which include the impact of any over or under hedging of actual earnings that differ from projected earnings.


For International Businesses, the fixed currency exchange rates are generally determined in connection with a foreign currency income hedging program designed to mitigate the impact of exchange rate changes on the segment’s expected USD-equivalent earnings. Pursuant to this program, our Corporate and Other operations execute forward currency contracts with third-parties to sell the net exposure of projected earnings for certain currencies in exchange for USD at specified exchange rates. The maturities of these contracts correspond with the future periods (typically on a three-year rolling basis) in which the identified non-USD-denominated earnings are expected to be generated. In establishing the level of non-USD-denominated earnings that will be hedged through this program, we exclude the anticipated level of USD-denominated earnings that will be generated by USD-denominated products and investments. For the six months ended June 30, 2020, approximately 4% of the segment’s earnings were yen-based and, as of June 30, 2020, we have hedged 100%, 92% and 50% of expected yen-based earnings for 2020, 2021 and 2022, respectively. To the extent currently unhedged, our International Businesses’ future expected USD-equivalent of yen-based earnings will be impacted by yen exchange rate movements.
As a result of these arrangements, our International Businesses’ results for 2020 and 2019 reflect the impact of translating yen-denominated earnings at fixed currency exchange rates of 104 and 105 yen per USD, respectively. Since determination of the fixed currency exchange rates for a given year is impacted by changes in foreign currency exchange rates over time, the segment’s future earnings will ultimately be impacted by these changes in exchange rates.

For PGIM and certain other currencies within our International Businesses, the fixed currency exchange rates for the current year are predetermined during the third quarter of the prior year using forward currency exchange rates.
The table below presents, for the periods indicated, the increase (decrease) to revenues and adjusted operating income for the International Businesses, PGIM and Corporate and Other operations, reflecting the impact of these intercompany arrangements.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Segment impacts of intercompany arrangements:       
International Businesses(3)$19
 $11
 $31
 $26
PGIM2
 2
 2
 3
Impact of intercompany arrangements(1)21
 13
 33
 29
Corporate and Other:       
Impact of intercompany arrangements(1)(3)(21) (13) (33) (29)
Settlement gains (losses) on forward currency contracts(2)(3)20
 16
 42
 29
Net benefit (detriment) to Corporate and Other(1) 3
 9
 0
Net impact on consolidated revenues and adjusted operating income$20
 $16
 $42
 $29
__________ 
(1)Represents the difference between non-USD-denominated earnings translated on the basis of weighted average monthly currency exchange rates versus fixed currency exchange rates determined in connection with the foreign currency income hedging program.
(2)As of June 30, 2020 and 2019, the total notional amounts of these forward currency contracts within our Corporate and Other operations were $1.1 billion and $2.0 billion, respectively, of which $0.4 billion and $1.2 billion, respectively, were related to our Japanese insurance operations. Prior period total notional amount of these forward currency contracts has been updated to conform to current period presentation.
(3)Excludes impacts related to POK. Prior period amounts have been updated to conform to current period presentation. Effective second quarter of 2020, the intercompany arrangement for the Korean won between our International Businesses and Corporate and Other operations was terminated and the related hedges were repurposed in relation to the anticipated sale of POK. Effective second quarter of 2020, Korean won-denominated earnings for 2020 and 2019 that were translated at fixed currency exchange rates of 1,090 and 1,110 Korean won per USD, respectively, are excluded from the International Businesses and are included in the Divested and Run-off Businesses included in Corporate and Other. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.

Impact of products denominated in non-local currencies on U.S. GAAP earnings
While our international insurance operations offer products denominated in local currency, several also offer products denominated in non-local currencies, most notably our Japanese operations, which offer USD- and Australian dollar (“AUD”)-denominated products. The non-local currency-denominated insurance liabilities related to these products are supported by investments denominated in corresponding currencies, including a significant portion designated as available-for-sale. While the impact from foreign currency exchange rate movements on these non-local currency-denominated assets and liabilities is economically matched, differences in the accounting for changes in the value of these assets and liabilities due to changes in foreign currency exchange rate movements have historically resulted in volatility in U.S. GAAP earnings.


In 2015, we implemented a structure in Gibraltar Life’s operations that disaggregated the USD- and AUD-denominated businesses into separate divisions, each with its own functional currency that aligns with the underlying products and investments. The result of this alignment was to reduce differences in the accounting for changes in the value of these assets and liabilities that arise due to changes in foreign currency exchange rate movements. For the USD- and AUD-denominated assets that were transferred under this structure, the net cumulative unrealized investment gains associated with foreign exchange remeasurement that were recorded in “Accumulated other comprehensive income (loss)” (“AOCI”) totaled $2.5 billion and $2.7 billion as of June 30, 2020 and December 31, 2019, respectively, and will be recognized in earnings within “Realized investment gains (losses), net” over time as these assets mature or are sold. Absent the sale of any of these assets prior to their stated maturity, approximately 7% of the $2.5 billion balance as of June 30, 2020 will be recognized throughout the remainder of 2020, approximately 13% will be recognized in 2021, and the remaining balance will be recognized from 2022 through 2051.

Highly inflationary economy in Argentina

Our insurance operations in Argentina, Prudential of Argentina (“POA”), have historically utilized the Argentine peso as the functional currency given it is the currency of the primary economic environment in which the entity operates. During 2018, Argentina experienced a cumulative inflation rate that exceeded 100% over a 3-year period. As a result, Argentina’s economy was deemed to be highly inflationary resulting in reporting changes effective July 1, 2018. Under U.S. GAAP, the financial statements of a foreign entity in a highly inflationary economy are to be remeasured as if its functional currency (formerly the Argentine peso) is the reporting currency of its parent reporting entity (the USD) on a prospective basis. While this changed how the results of POA are remeasured and/or translated into USD, the impact to our financial statements was not material nor is it expected to be material in future periods given the relative size of our POA operations. It should also be noted that due to the macroeconomic environment in Argentina, substantially all of POA’s balance sheet consists of USD-denominated product liabilities supported by USD-denominated assets. As a result, this accounting change serves to reduce the remeasurement impact reflected in net income given that the functional currency and currency in which the assets and liabilities are denominated will be more closely aligned.


Accounting Policies & Pronouncements

Application of Critical Accounting Estimates

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

Management believes the accounting policies relating to the following areas are most dependent on the application of estimates and assumptions and require management’s most difficult, subjective, or complex judgments:

DAC, deferred sales inducements (“DSI”) and VOBA;
Policyholder liabilities;
Goodwill;
Valuation of investments including derivatives, measurement of allowance for credit losses, and recognition of other-than-temporary impairments (“OTTI”);
Pension and other postretirement benefits;
Taxes on income; and
Reserves for contingencies, including reserves for losses in connection with unresolved legal matters.

Market Performance - Equity and Interest Rate Assumptions

DAC, DSI and VOBA associated with the variable and universal life policies of our Individual Life and International Businesses segments and the variable and fixed annuity contracts of our Individual Annuities and International Businesses segments are generally amortized over the expected lives of these policies in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. The quarterly adjustments for market performance reflect the impact of changes to our estimate of total gross profits to reflect actual fund performance and market conditions. A significant portion of gross profits for our variable annuity contracts and, to a lesser degree, our variable life contracts are dependent upon the total rate of return on assets held in separate account investment options. This rate of return influences the fees we earn on variable annuity and variable life contracts, costs we incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts, as well as other sources of profit. Returns that are higher than our expectations for a given period produce higher than expected account

balances, which increase the future fees we expect to earn on variable annuity and variable life contracts and decrease the future costs we expect to incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts. The opposite occurs when returns are lower than our expectations. The changes in future expected gross profits are used to recognize a cumulative adjustment to all prior periods’ amortization.

Furthermore, the calculation of the estimated liability for future policy benefits related to certain insurance products includes an estimate of associated revenues and expenses that are dependent on both historical market performance as well as estimates of market performance in the future. Similar to DAC, DSI and VOBA described above, these liabilities are subject to quarterly adjustments for experience including market performance, in addition to annual adjustments resulting from our annual reviews of assumptions.

The weighted average rate of return assumptions used in developing estimated market returns consider many factors specific to each product type, including asset durations, asset allocations and other factors. With regard to equity market assumptions, the near-term future rate of return assumption used in evaluating DAC, DSI and VOBA and liabilities for future policy benefits for certain of our products, primarily our domestic variable annuity and domestic and international variable life insurance products, is generally updated each quarter and is derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15.0%, we use our maximum future rate of return. As of June 30, 2020, our domestic variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 5.1% near-term mean reversion equity expected rate of return, and our international variable life insurance business assumes a 4.8% long-term equity expected rate of return and a 5.0% near-term mean reversion equity expected rate of return.

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

For a discussion of the impact that could result from changes in certain key assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting Policies and Pronouncements—Sensitivities for Insurance Assets and Liabilities” in our Annual Report on Form 10-K for the year ended December 31, 2019

Future Adoption of New Accounting Pronouncements

ASU 2018-12, Financial ServicesInsurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the Financial Accounting Standards Board (“FASB”) on August 15, 2018 and is expected to have a significant impact on the Consolidated Financial Statements and Notes to the Consolidated Financial Statements. In October 2019, the FASB issued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of ASU 2018-12 to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. As a result of the COVID-19 pandemic, the FASB voted in June 2020 to tentatively defer for an additional one year the current effective date of ASU 2018-12 from January 1, 2022 to January 1, 2023, and to provide transition relief to facilitate the early adoption of the ASU. Subsequently in July 2020, the FASB issued a proposed ASU with comment deadline of August 24, 2020 to obtain additional feedback on the tentative decisions, which are expected to be finalized during the third quarter of 2020. The transition relief would allow large calendar-year public companies that early adopt ASU 2018-12 to apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would also apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements. ASU 2018-12 will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter. See Note 2 to the Unaudited Interim Consolidated Financial Statements for a more detailed discussion of ASU 2018-12, as well as other accounting pronouncements issued but not yet adopted and newly adopted accounting pronouncements.

Results of Operations by Segment

PGIM


Operating Results

The following table sets forth PGIM’s operating results for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Operating results(1):       
Revenues$957
 $926
 $1,735
 $1,796
Expenses633
 662
 1,247
 1,318
Adjusted operating income324
 264
 488
 478
Realized investment gains (losses), net, and related adjustments(1) 1
 3
 1
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(6) 30
 (42) 35
Income (loss) before income taxes and equity in earnings of operating joint ventures$317
 $295
 $449
 $514
__________
(1)Certain of PGIM’s investment activities are based in currencies other than the U.S. dollar and are therefore subject to foreign currency exchange rate risk. The financial results of PGIM include the impact of an intercompany arrangement with our Corporate and Other operations designed to mitigate the impact of exchange rate changes on PGIM’s U.S. dollar-equivalent earnings. For more information related to this intercompany arrangement, see “—Results of Operations—Impact of Foreign Currency Exchange Rates,” above.
Adjusted Operating Income

Three Month Comparison. Adjusted operating income increased $60 million. The increase primarily reflected an increase in asset management fees due to higher average assets under management as a result of market appreciation and fixed income inflows, as well as a decrease in expenses driven by lower costs of long-term employee compensation plans tied to performance factors and a temporary pause in travel and entertainment due to COVID-19. The increase also reflected an increase in other related revenues, net of related expenses, primarily due to higher strategic investing results driven by spread tightening impacting fixed income investment strategies and strong equity investment performance, partially offset by lower net performance-based incentive fees driven by the absence of a significant fee earned in the prior year period. These increases were partially offset by a decrease in service, distribution and other revenues primarily reflecting the absence of fees in the current year period related to the Wells Fargo agreement (see “—Revenue and Expenses,” below).

Six Month Comparison. Adjusted operating income increased $10 million. This increase primarily reflected an increase in asset management fees, net of related expenses, due to higher average assets under management as a result of market appreciation and fixed income inflows. The increase was partially offset by a decrease in other related revenues, net of related expenses, primarily due to lower net performance-based incentive fees driven by the absence of significant fees earned in the prior year, and lower strategic investing results driven by spread widening impacting fixed income investment strategies. The increase was also partially offset by a decrease in service, distribution and other revenues primarily due to the absence of fees in the current year period related to the Wells Fargo agreement.

Revenues and Expenses

The following table sets forth PGIM’s revenues, presented on a basis consistent with the table above under “—Operating Results,” by type.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Revenues by type:       
Asset management fees by source:       
Institutional customers$325
 $319
 $653
 $631
Retail customers(1)227
 220
 456
 429
General account138
 132
 274
 255
Total asset management fees690
 671
 1,383
 1,315
Other related revenues by source:       
Incentive fees17
 62
 35
 98
Transaction fees4
 10
 8
 12
Strategic investing64
 18
 37
 54
Commercial mortgage(2)32
 25
 59
 51
Total other related revenues(3)117

115

139

215
Service, distribution and other revenues(4)150
 140
 213
 266
Total revenues$957
 $926
 $1,735
 $1,796
__________
(1)Consists of fees from: individual mutual funds and variable annuities and variable life insurance separate account assets; funds invested in proprietary mutual funds through our defined contribution plan products; and third-party sub-advisory relationships. Revenues from fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance are included in the general account.
(2)Includes mortgage origination revenues from our commercial mortgage origination and servicing business.
(3)Future revenues will be impacted by the level and diversification of our strategic investments, the commercial real estate market, and other domestic and international markets.
(4)Prior period amount includes payments from Wells Fargo under an agreement dated as of July 30, 2004, implementing arrangements with respect to money market mutual funds in connection with the combination of our retail securities brokerage and clearing operations with those of Wells Fargo. The agreement extended for ten years from the Wachovia Securities joint venture termination date of December 31, 2009 to December 31, 2019. The revenue from Wells Fargo under this agreement was $15 million for the three months ended June 30, 2019 and $31 million for the six months ended June 30, 2019.

Three Month Comparison. Revenues increased $31 million. Asset management fees increased primarily reflecting an increase in average assets under management as a result of market appreciation and fixed income inflows. Other related revenues increased primarily reflecting higher strategic investing results driven by spread tightening impacting fixed income investment strategies and strong equity investment performance, partially offset by lower performance-based incentive fees driven by the absence of a significant fee earned in the prior year period. Service, distribution and other revenues increased primarily reflecting higher revenues from certain consolidated funds (which were fully offset by higher expenses related to noncontrolling interests in these funds), partially offset by the absence of fees in the current year period related to the Wells Fargo agreement.

Expenses decreased $29 million. Expenses decreased, primarily driven by lower costs for certain long-term employee compensation plans tied to performance factors and a temporary pause in travel and entertainment due to COVID-19. Also contributing to the decrease were lower expenses associated with lower performance-based incentive fee revenues. These decreases were partially offset by an increase in expenses for service, distribution and other revenues primarily driven by higher revenues associated with certain consolidated funds as discussed above.

Six Month Comparison. Revenues decreased $61 million. Asset management fees increased primarily reflecting an increase in average assets under management as a result of market appreciation and fixed income inflows. Other related revenues decreased primarily reflecting lower performance-based incentive fees due to the absence of a significant fee earned in the prior year period, and lower strategic investing results driven by spread widening impacting fixed income investment strategies. Service, distribution and other revenues decreased primarily reflecting lower revenues from certain consolidated funds, which were fully offset by lower expenses related to noncontrolling interests in these funds, and the absence of fees in the current year related to the Wells Fargo agreement.

Expenses decreased $71 million. Expenses for service, distribution and other revenues decreased primarily driven by lower revenues associated with certain consolidated funds as discussed above. Also contributing to the decrease were lower expenses associated with lower performance-based incentive fee revenues and a temporary pause in travel and entertainment due to COVID-19.


Assets Under Management

The following table sets forth assets under management by asset class and source as of the dates indicated.
 June 30, 2020 December 31, 2019 June 30, 2019
 (in billions)
Assets Under Management(1) (at fair value):     
Institutional customers:     
Public equity$48.9
 $57.1
 $54.9
Public fixed income443.9
 418.6
 404.7
Real estate48.9
 49.1
 48.3
Private credit and other alternatives24.7
 23.5
 23.0
Multi-asset4.8
 4.5
 4.0
Institutional customers(2)571.2
 552.8
 534.9
Retail customers:     
Public equity109.7
 104.2
 105.2
Public fixed income152.0
 138.7
 119.7
Real estate1.8
 2.0
 1.9
Private credit and other alternatives0.5
 0.5
 0.3
Multi-asset56.2
 60.2
 60.8
Retail customers(3)320.2
 305.6
 287.9
General account:     
Public equity4.0
 4.4
 4.0
Public fixed income354.8
 328.6
 321.9
Real estate67.2
 66.0
 63.5
Private credit and other alternatives77.1
 73.5
 70.3
Multi-asset0.0
 0.1
 0.1
General account503.1
 472.6
 459.8
Total PGIM assets under management(4)$1,394.5
 $1,331.0
 $1,282.6
      
Assets under management within other reporting segments(4)(5)$210.8
 $219.9
 $214.8
Total PFI assets under management$1,605.3
 $1,550.9
 $1,497.4
__________
(1)Prior period amounts have been updated to conform to current period presentation. “Public equity” represents stock ownership interest in a corporation or partnership (excluding hedge funds) or real estate investment trust. “Public fixed income” represents debt instruments that pay interest and usually have a maturity (excluding mortgages). “Real estate” includes direct real estate equity and real estate mortgages. “Private credit and other alternatives” includes private credit, private equity, hedge funds, agricultural debt and equity and other alternative strategies. “Multi-asset” includes funds or products that invest in more than one asset class balancing equity and fixed income funds and target date funds.
(2)Consists of third-party institutional assets and group insurance contracts.
(3)Consists of individual mutual funds and variable annuities and variable life insurance separate account assets; funds invested in proprietary mutual funds through our defined contribution plan products; and third-party sub-advisory relationships. Fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance are included in the general account.
(4)Effective first quarter of 2020, certain assets have been reclassified from the U.S. Individual Solutions division to PGIM.
(5)Primarily include certain assets related to annuity and variable life products in our U.S. Individual Solutions division, retirement and group life products in our U.S. Workplace Solutions division and certain general account assets of our International Businesses. These assets are not directly managed by PGIM, but rather are invested in non-proprietary funds or are managed by either the divisions themselves or our Chief Investment Officer Organization.

PGIM’s assets under management increased $112 billion in comparison to the prior year quarter primarily reflecting market appreciation and public fixed income inflows, partially offset by public equity outflows. PGIM’s assets under management increased $64 billion in comparison to the prior year-end primarily reflecting market appreciation and public fixed income inflows, partially offset by public equity outflows.

The following table sets forth the component changes in PGIM’s assets under management by asset source for the periods indicated.



 Three Months Ended
June 30,
 Six Months Ended
June 30,
 Twelve
Months
Ended
June 30,
 2020 2019 2020 2019 2020
 (in billions)
Institutional Customers:         
Beginning assets under management$524.8
 $524.0
 $552.8
 $493.5
 $534.9
Net additions (withdrawals), excluding money market activity:         
Third-party(5.7) (6.0) (1.5) (5.0) (3.0)
Third-party via affiliates(1)(0.3) 0.8
 (1.1) 0.5
 (1.4)
Total(6.0) (5.2) (2.6) (4.5) (4.4)
Market appreciation (depreciation)(2)43.3
 16.6
 12.8
 40.9
 34.2
Other increases (decreases)(3)9.1
 (0.5) 8.2
 5.0
 6.5
Ending assets under management571.2
 534.9
 571.2
 534.9
 571.2
Retail Customers(4):         
Beginning assets under management282.4
 279.1
 305.6
 260.2
 287.9
Net additions (withdrawals), excluding money market activity:         
Third-party9.4
 1.1
 8.1
 1.5
 12.3
Third-party via affiliates(1)(14.0) (0.3) (3.1) (6.8) (6.5)
Total(4.6) 0.8
 5.0
 (5.3) 5.8
Market appreciation (depreciation)(2)42.0
 7.8
 9.4
 32.9
 25.9
Other increases (decreases)(3)0.4
 0.2
 0.2
 0.1
 0.6
Ending assets under management320.2
 287.9
 320.2
 287.9
 320.2
General Account:         
Beginning assets under management488.5
 441.0
 472.6
 427.8
 459.8
Net additions (withdrawals), excluding money market activity:         
Third-party0.0
 0.0
 0.0
 0.0
 0.0
Affiliated0.1
 1.0
 0.8
 1.6
 5.3
Total0.1
 1.0
 0.8
 1.6
 5.3
Market appreciation (depreciation)(2)18.0
 14.2
 17.4
 28.4
 25.9
Other increases (decreases)(3)(3.5) 3.6
 12.3
 2.0
 12.1
Ending assets under management503.1
 459.8
 503.1
 459.8
 503.1
Total assets under management(4)$1,394.5
 $1,282.6
 $1,394.5
 $1,282.6
 $1,394.5
__________
(1)Represents assets that PGIM manages for the benefit of other reporting segments within the Company. Additions and withdrawals of these assets are attributable to third-party product inflows and outflows in other reporting segments.
(2)Includes income reinvestment, where applicable.
(3)Includes the effect of foreign exchange rate changes, net money market activity and the impact of acquired business. The impact from foreign currency fluctuations, which primarily impact the general account, resulted in a gain of $1.1 billion and $1.9 billion for the three months ended June 30, 2020 and 2019, respectively, and a loss of $0.7 billion and gain of $0.7 billion for the six months ended June 30, 2020 and 2019, respectively; and a loss of $0.9 billion for the twelve months ended June 30, 2020.
(4)Prior period amounts have been updated to conform to current period presentation.

Strategic Investments

The following table sets forth PGIM’s strategic investments at carrying value (including the value of derivative instruments used to mitigate equity market and currency risk) by asset class and source as of the dates indicated.



 June 30, 2020 December 31, 2019
 (in millions)
Co-Investments(1):   
Public fixed income$441
 $462
Real estate210
 228
Private credit and other alternatives22
 19
Seed Investments(1):   
Public equity635
 671
Public fixed income343
 325
Real estate31
 34
Private credit and other alternatives61
 59
Multi-asset63
 74
Total$1,806
 $1,872
__________
(1)Prior period amounts have been updated to conform to current period presentation. For more information, see the “Assets Under Management” table above.

The decrease of $66 million in strategic investments was primarily driven by PGIM’s redemptions of invested seed capital and unfavorable market conditions impacting public fixed income and real estate co-investments.

U.S. Businesses

Operating Results
The following table sets forth the operating results for our U.S. Businesses for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended June 30, 2020
 2020 2019 2020 2019
 (in millions)
Adjusted operating income before income taxes:       
U.S. Businesses:       
U.S. Workplace Solutions division:       
Retirement$281
 $467
 $526
 $718
Group Insurance5
 81
 49
 134
Total U.S. Workplace Solutions division286
 548
 575
 852
U.S. Individual Solutions division:       
Individual Annuities249
 462
 622
 934
Individual Life(64) (135) (84) (30)
Total U.S. Individual Solutions division185
 327
 538
 904
Assurance IQ division(1):       
Assurance IQ(16) 0
 (39) 0
Total Assurance IQ division(16) 0
 (39) 0
Total U.S. Businesses455
 875
 1,074
 1,756
Reconciling Items:       
Realized investment gains (losses), net, and related adjustments(2)(2,188) (677) (2,428) (1,771)
Charges related to realized investment gains (losses), net551
 2
 (265) 33
Market experience updates(3)96
 (170) (844) (170)
Other adjustments(4)32
 0
 77
 0
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests0
 1
 1
 1
Income (loss) before income taxes and equity in earnings of operating joint ventures$(1,054) $31
 $(2,385) $(151)
________
(1)Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
(2)Prior period amounts have been updated to conform to current period presentation.

(3)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(4)Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Three Month Comparison. Adjusted operating income for our U.S. Businesses decreased by $420 million primarily due to:

Lower net investment spread results driven by lower income on non-coupon investments;

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

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

Partially offsetting these decreases were the following items:

Higher underwriting results primarily driven by our Retirement business due to higher reserve gains driven by COVID-19 related mortality gains; and

Lower expenses, including costs associated with strategic initiatives.

Six Month Comparison. Adjusted operating income for our U.S. Businesses decreased by $682 million primarily due to:

Lower net investment spread results driven by lower income on non-coupon investments;

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

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

A favorable impact from changes in market conditions on estimates of profitability in the prior year period, which beginning with the second quarter of 2019 is excluded from adjusted operating income (see Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information).

Partially offsetting these decreases was the following item:

Lower expenses, including costs associated with strategic initiatives.

U.S. BusinessesU.S. Workplace Solutions Division

Retirement

Operating Results

The following table sets forth Retirement’s operating results for the periods indicated.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Operating results:       
Revenues$2,992
 $3,586
 $5,429
 $6,225
Benefits and expenses2,711
 3,119
 4,903
 5,507
Adjusted operating income281
 467
 526
 718
Realized investment gains (losses), net, and related adjustments(1)16
 38
 (5) 168
Charges related to realized investment gains (losses), net12
 8
 (11) 11
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests0
 1
 1
 1
Income (loss) before income taxes and equity in earnings of operating joint ventures$309
 $514
 $511
 $898
__________ 
(1)Prior period amounts have been updated to conform to current period presentation.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $186 million, primarily reflecting an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for the second quarter of 2020 included a net charge of $22 million from these updates primarily driven by an increase in expected benefit payments, while results for the second quarter of 2019 included a net benefit of $154 million from these updates, primarily driven by a reduction in expected benefit payments. Excluding this item, adjusted operating income decreased $10 million, primarily driven by lower net investment spread results, partially offset by higher reserve gains. The decrease in net investment spread results primarily reflected lower income on non-coupon investments. The higher contribution from reserve experience was primarily driven by higher COVID-19 related mortality gains.

Six Month Comparison. Adjusted operating income decreased $192 million, primarily reflecting an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements, as discussed above. Excluding this item, adjusted operating income decreased $16 million, primarily driven by lower net investment spread results, partially offset by higher reserve gains. The decrease in net investment spread results primarily reflected lower income on non-coupon investments. The higher contribution from reserve experience was primarily driven by higher COVID-19 related mortality gains.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues decreased $594 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $600 million. This decrease primarily reflected lower pension risk transfer premiums with corresponding offsets in policyholders’ benefits, as discussed below. This decrease also reflected lower net investment income, primarily reflecting lower income on non-coupon investments.

Benefits and expenses decreased $408 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $590 million. Policyholders’ benefits, including the change in policy reserves, decreased primarily related to the decrease in pension risk transfer premiums discussed above, as well as a higher contribution from reserve experience primarily driven by higher COVID-19 related mortality gains.

Six Month Comparison. Revenues decreased $796 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $802 million. This decrease primarily reflected lower pension risk transfer premiums with corresponding offsets in policyholders’ benefits, as discussed below. This decrease also reflected lower net investment income, primarily reflecting lower income on non-coupon investments.

Benefits and expenses decreased $604 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $786 million. Policyholders’ benefits, including the change in policy reserves, decreased primarily related to the decrease in pension risk transfer premiums discussed above, as well as a higher contribution from reserve experience primarily driven by higher COVID-19 related mortality gains.

Account Values

Account values are a significant driver of our operating results, and are primarily driven by net additions (withdrawals) and the impact of market changes. The income we earn on most of our fee-based products varies with the level of fee-based account values, since many policy fees are determined by these values. The investment income and interest we credit to policyholders on our spread-based products varies with the level of general account values. To a lesser extent, changes in account values impact our pattern of amortization of DAC and VOBA and general and administrative expenses. The following table shows the changes in the account values and net additions (withdrawals) of Retirement’s products for the periods indicated. Net additions (withdrawals) are plan sales and participant deposits or additions, as applicable, minus plan and participant withdrawals and benefits. Account values include both internally- and externally-managed client balances as the total balances drive revenue for the Retirement business. For more information on internally-managed balances, see “—PGIM.”


 Three Months Ended
June 30,
 Six Months Ended
June 30,
 Twelve
Months
Ended
June 30,
 2020 2019 2020 2019 2020
 (in millions)
Full Service:         
Beginning total account value$238,435
 $251,071
 $272,448
 $231,669
 $262,133
Deposits and sales5,455
 11,047
 14,407
 20,614
 30,187
Withdrawals and benefits(7,040) (7,259) (15,708) (16,364) (35,050)
Change in market value, interest credited and interest income and other activity29,583
 7,274
 (4,714) 26,214
 9,163
Ending total account value$266,433
 $262,133
 $266,433
 $262,133
 $266,433
Institutional Investment Products:         
Beginning total account value$227,346
 $203,101
 $227,596
 $200,759
 $215,978
Additions(1)4,545
 15,044
 11,438
 17,291
 25,248
Withdrawals and benefits(3,527) (4,161) (9,037) (7,810) (17,970)
Change in market value, interest credited and interest income3,000
 2,826
 5,435
 5,470
 9,054
Other(2)(222) (832) (4,290) 268
 (1,168)
Ending total account value$231,142
 $215,978
 $231,142
 $215,978
 $231,142
__________
(1)Additions primarily include: group annuities calculated based on premiums received; funding agreements issued; unfunded longevity reinsurance contracts calculated as the present value of future projected benefits; and investment-only stable value contracts calculated as the fair value of customers’ funds held in a client-owned trust.
(2)“Other” activity includes the effect of foreign exchange rate changes associated with our British pounds sterling denominated longevity reinsurance business and changes in asset balances for externally-managed accounts. For the three months ended June 30, 2020 and 2019, “Other” activity also includes $2,614 million in receipts offset by $2,740 million in payments and $792 million in receipts offset by $577 million in payments, respectively, and for the six months ended June 30, 2020 and 2019, includes $5,366 million in receipts offset by $5,276 million in payments and $1,403 million in receipts offset by $1,194 million in payments, respectively, related to funding agreements backed by commercial paper which typically have maturities of less than 90 days.

The increase in full service account values for the three months and twelve months ended June 30, 2020 primarily reflected favorable changes in the market value of customer funds, partially offset by net withdrawals and benefits. The decrease in full service account values for the six months ended June 30, 2020 primarily reflected unfavorable changes in the market value of customer funds and net withdrawals and benefits.

The increase in institutional investment products account values for the three months, six months and twelve months ended June 30, 2020 reflected favorable changes in the market value of account assets. Account values for the three months ended June 30, 2020 also reflected net additions from pension risk transfer activity and investment-only stable value accounts. Account values for the six months ended June 30, 2020 also reflected net additions from collateralized funding agreements and investment-only stable value accounts, which were partially offset by pension risk transfer activity, and a decrease in other activity primarily driven by the negative impacts of foreign exchange rate changes. Account values for the twelve months ended June 30, 2020 also reflected net additions from pension risk transfer activity and collateralized funding agreements.

Group Insurance

Operating Results

The following table sets forth Group Insurance’s operating results and benefits and administrative operating expense ratios for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 ($ in millions)
Operating results:       
Revenues$1,471
 $1,461
 $2,895
 $2,902
Benefits and expenses1,466
 1,380
 2,846
 2,768
Adjusted operating income5
 81
 49
 134
Realized investment gains (losses), net, and related adjustments(10) 8
 71
 9
Income (loss) before income taxes and equity in earnings of operating joint ventures$(5) $89
 $120
 $143
Benefits ratio(1)(4):       
Group life(2)93.0% 90.2% 90.7% 89.6%
Group disability(2)74.0% 65.3% 75.0% 69.9%
Total Group Insurance(2)89.0% 84.7% 87.3% 85.3%
Administrative operating expense ratio(3)(4):       
Group life11.8% 12.2% 12.1% 11.9%
Group disability26.1% 24.2% 25.4% 25.5%
Total Group Insurance14.9% 14.8% 15.0% 14.8%
__________ 
(1)Ratio of policyholder benefits to earned premiums plus policy charges and fee income.
(2)Benefit ratios reflect the impact of our annual reviews and update of assumptions and other refinements. Excluding these impacts, the group life, group disability and total Group Insurance benefit ratios were 93.4%, 75.7% and 89.6% for the three months ended June 30, 2020, respectively, 90.9%, 75.8% and 87.6% for the six months ended June 30, 2020, respectively, 88.5%, 74.5% and 85.5% for the three months ended June 30, 2019, respectively, and 88.7%, 74.6% and 85.7% for the six months ended June 30, 2019, respectively.
(3)Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income.
(4)The benefit and administrative ratios are measures used to evaluate profitability and efficiency.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $76 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for both the second quarter of 2020 and 2019 included a net benefit from this update of $11 million and $9 million, respectively. Excluding this item, adjusted operating income decreased $78 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts. The decrease also reflected lower net investment spread results driven by lower income on non-coupon investments.

Six Month Comparison. Adjusted operating income decreased $85 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, adjusted operating income decreased $87 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts. The decrease also reflected lower net investment spread results driven by lower income on non-coupon investments.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues increased $10 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $21 million. The decrease primarily reflected lower net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below, partially offset by higher premiums and policy charges and fee income driven by growth in our group life business.

Benefits and expenses increased $86 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $57 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, which reflected increases in our group life business mostly due to COVID-19 impacts. The increase was partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.

Six Month Comparison. Revenues decreased $7 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $38 million. The decrease primarily reflected lower net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below, partially offset by higher premiums and policy charges and fee income driven by growth in our group life and disability businesses.

Benefits and expenses increased $78 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $49 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, which reflected increases in our group life business mostly due to COVID-19 impacts. The increase was partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.

Sales Results
The following table sets forth Group Insurance’s annualized new business premiums, as defined under “—Segment Measures” above, for the periods indicated.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Annualized new business premiums(1):       
Group life$8
 $17
 $181
 $191
Group disability18
 16
 126
 135
Total$26
 $33
 $307
 $326
__________ 
(1)Amounts exclude new premiums resulting from rate changes on existing policies, from additional coverage under our Servicemembers’ Group Life Insurance contract and from excess premiums on group universal life insurance that build cash value but do not purchase face amounts.

Total annualized new business premiums for the three months ended June 30, 2020 decreased $7 million compared to the prior year period, driven by lower sales in our group life business. Total annualized new business premiums for the six months ended June 30, 2020 decreased $19 million compared to the prior year period, driven by lower sales in our group life and group disability businesses. Sales levels reflect pricing competitiveness and reduced levels of client case movement within the large market.

U.S. BusinessesU.S. Individual Solutions Division

Individual Annuities

Operating Results

The following table sets forth Individual Annuities’ operating results for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Operating results:       
Revenues$953
 $1,288
 $2,101
 $2,523
Benefits and expenses704
 826
 1,479
 1,589
Adjusted operating income249
 462
 622
 934
Realized investment gains (losses), net, and related adjustments(2,178) (881) (3,043) (2,225)
Charges related to realized investment gains (losses), net474
 56
 99
 190
Market experience updates(1)18
 (10) (628) (10)
Income (loss) before income taxes and equity in earnings of operating joint ventures$(1,437) $(373) $(2,950) $(1,111)

________
(1)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $213 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for the second quarter of 2020 included a $136 million net charge from these updates primarily driven by unfavorable impacts related to a decrease in long-term interest rate assumptions. Results for the second quarter of 2019 included a $12 million net charge from these updates. Excluding this item, adjusted operating income decreased $89 million primarily driven by lower fee income, net of distribution expenses and other associated costs, due to lower average account values, unfavorable impacts from our living benefit guarantees, and certain products reaching contractual milestones for fee tier reduction. This decrease was partially offset by higher net investment spread results due to a higher level of invested assets.

Six Month Comparison. Adjusted operating income decreased $312 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements, as discussed above. Excluding this item, adjusted operating income decreased $188 million. The decrease was primarily driven by lower fee income, net of distribution expenses and other associated costs, due to unfavorable impacts from our living benefit guarantees, certain products reaching contractual milestones for fee tier reduction, and lower average account values.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues decreased $335 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $203 million. The decrease was primarily driven by lower policy charges and fee income, as well as a decrease in asset management and service fees and other income, reflecting lower average account values resulting from net outflows, unfavorable impacts from our living benefit guarantees resulting from declining interest rates and certain products reaching contractual milestones for fee tier reductions. Also contributing to the decrease were lower premiums resulting from a decrease in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below. These decreases were partially offset by higher net investment income reflecting a higher level of invested assets.

Benefits and expenses decreased $122 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $114 million primarily driven by policyholders’ benefits, including changes in reserves, due to lower reserve provisions resulting from a decrease in single premium immediate annuity sales, with offsets in premiums, as discussed above. Also contributing to the decrease were lower general and administrative expenses, net of capitalization, driven by lower distribution expenses reflecting lower average account values.

Six Month Comparison. Revenues decreased $422 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $290 million. The decrease was primarily driven by lower policy charges and fee income, as well as a decrease in asset management and service fees and other income, reflecting unfavorable impacts from our living benefit guarantees resulting from declining interest rates, certain products reaching contractual milestones for fee tier reductions, and lower average account values resulting from net outflows. Also contributing to the decrease were lower premiums resulting from a decrease in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below.

Benefits and expenses decreased $110 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $102 million primarily driven by policyholders’ benefits, including changes in reserves, due to lower reserve provisions resulting from a decrease in single premium immediate annuity sales, with offsets in premiums, as discussed above. Also contributing to the decrease were lower general and administrative expenses, net of capitalization, driven by lower distribution expenses reflecting lower average account values.

Account Values

Account values are a significant driver of our operating results. Since most fees are determined by the level of separate account assets, fee income varies primarily based on the level of account values. Additionally, our fee income generally drives other items such as the pattern of amortization of DAC and other costs. Account values are driven by net flows from new business sales, surrenders, withdrawals and benefit payments, policy charges and the impact of positive or negative market value changes.

The annuity industry’s competitive and regulatory landscapes, which have been dynamic over the last few years, may impact our net flows, including new business sales. The following table sets forth account value information for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 Twelve
Months
Ended
June 30,
 2020 2019 2020 2019 2020
 (in millions)
Total Individual Annuities(1):         
Beginning total account value$143,976
 $161,890
 $169,681
 $151,080
 $165,313
Sales1,346
 2,675
 3,273
 4,982
 8,011
Full surrenders and death benefits(1,410) (2,397) (3,929) (4,337) (8,966)
Sales, net of full surrenders and death benefits(64) 278
 (656) 645
 (955)
Partial withdrawals and other benefit payments(1,146) (1,229) (2,545) (2,465) (5,243)
Net flows(1,210) (951) (3,201) (1,820) (6,198)
Change in market value, interest credited and other activity17,358
 5,289
 (5,464) 17,862
 3,747
Policy charges(848) (915) (1,740) (1,809) (3,586)
Ending total account value$159,276
 $165,313
 $159,276
 $165,313
 $159,276
__________
(1)Includes gross variable and fixed annuities sold as retail investment products. Investments sold through defined contribution plan products are included with such products within our Retirement business. Variable annuity account values were $154.1 billion and $161.0 billion as of June 30, 2020 and 2019, respectively. Fixed annuity account values were $5.2 billion and $4.3 billion as of June 30, 2020 and 2019, respectively.

The increase in account values for the three months ended June 30, 2020 and the decrease for the six months ended June 30, 2020 were largely driven by market value appreciation and depreciation, respectively. For both periods, in comparison to the prior year period, the decrease in net flows primarily reflected a decline in gross sales largely driven by benefit rate reductions and pricing actions in response to capital market pressures.

The decrease in account values for the twelve months ended June 30, 2020 was largely driven by partial withdrawals and other benefit payments on contracts as well as policy charges on contractholder accounts, partially offset by market value appreciation.

Risks and Risk Mitigants

The following is a summary of certain risks associated with Individual Annuities’ products, certain strategies in mitigating those risks including any updates to those strategies since the previous year-end, and the related financial results. For a more detailed description of these items and their related accounting treatment, refer to the complete descriptions provided in our Annual Report on Form 10-K for the year ended December 31, 2019.

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

Variable Annuity Risks and Risk Mitigants. The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital markets assumptions such as equity market returns, interest rates and market volatility, along with actuarial assumptions such as contractholder mortality, the timing and amount of annuitization and withdrawals, and contract lapses. For these risk exposures, achievement of our expected returns is subject to the risk that actual experience will differ from the assumptions used in the original pricing of these products. We manage our exposure to certain risks driven by fluctuations in capital markets primarily through a combination of i) Product Design Features, ii) Asset Liability Management Strategy, and iii) Capital Hedge Program as discussed below. We also manage these risk exposures through external reinsurance for certain of our variable annuity products.

i.Product Design Features:

A portion of the variable annuity contracts that we offer include an automatic rebalancing feature, also referred to as an asset transfer feature. This feature is implemented at the contract level, and transfers assets between certain variable investment sub-accounts selected by the annuity contractholder and, depending on the benefit feature, a fixed-rate account in the general account or a bond fund sub-account within the separate accounts. The objective of the automatic rebalancing feature is to reduce our exposure to equity market risk and market volatility. Other product design features we utilize include, among others, asset allocation restrictions, minimum issuance age requirements and certain limitations on the amount of contractholder purchase payments, as well as a required minimum allocation to our general account for certain of our products. We continue to introduce products that diversify our risk profile and have incorporated provisions in product design allowing frequent revisions of key pricing elements for certain of our products. In addition, there is diversity in our fee arrangements, as certain fees are primarily based on the benefit guarantee amount, the contractholder account value and/or premiums, which helps preserve certain revenue streams when market fluctuations cause account values to decline.

ii.Asset Liability Management (“ALM”) Strategy (including fixed income instruments and derivatives):

We employ an ALM strategy that utilizes a combination of both traditional fixed income instruments and derivatives to help defray potential claims associated with our variable annuity living benefit guarantees. The economic liability we manage with this ALM strategy consists of expected living benefit claims under less severe market conditions, which are managed using an ALM strategy through the accumulation of fixed income and derivative instruments, and potential living benefit claims resulting from more severe market conditions, which are hedged using derivative instruments. For our Prudential Defined Income (“PDI”) variable annuity, we utilize fixed income instruments to help defray potential claims. For the portion of our ALM strategy executed with derivatives, we enter into a range of exchange-traded and over-the-counter (“OTC”) equity and interest rate derivatives, including, but not limited to: equity and treasury futures; total return and interest rate swaps; and options including equity options, swaptions, and floors and caps. The intent of this strategy is to more efficiently manage the capital and liquidity associated with these products while continuing to mitigate fluctuations in net income due to movements in capital markets.

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

The valuation of the economic liability we seek to defray excludes certain items that are included within the U.S. GAAP liability, such as non-performance risk (“NPR”) (in order to maximize protection irrespective of the possibility of our own default), as well as risk margins (required by U.S. GAAP but different from our best estimate) and valuation methodology differences. The following table provides a reconciliation between the liability reported under U.S. GAAP and the economic liability we manage through our ALM strategy as of the periods indicated:
 
June 30,
2020
 
December 31,
2019
 (in millions)
U.S. GAAP liability, including NPR, net of reinsurance recoverables(1)$25,777
 $12,612
NPR adjustment, net of reinsurance recoverables(1)6,539
 3,522
Subtotal32,316
 16,134
Adjustments including risk margins and valuation methodology differences(8,907) (4,385)
Economic liability managed through the ALM strategy$23,409
 $11,749
________
(1)Prior period amounts have been updated to conform to current period presentation.

As of June 30, 2020, the fair value of our fixed income instruments and derivative assets exceed the economic liability within the entities in which the risks reside.

iii.Capital Hedge Program:


We employ a capital hedge program to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets. The capital hedge program is conducted using equity derivatives which include equity call and put options, total return swaps and futures contracts. The changes in value of these derivatives have historically been recognized in adjusted operating income over the expected duration of the capital hedge program. Beginning with the second quarter of 2020, these impacts are excluded from adjusted operating income which the Company believes enhances the understanding of underlying performance trends.

Results excluded from adjusted operating income

The following table provides the net impact to the Unaudited Interim Consolidated Statements of Operations from the results excluded from adjusted operating income, which is primarily driven by the changes in the U.S. GAAP embedded derivative liability and hedge positions under the ALM strategy, and the related amortization of DAC and other costs.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
Results excluded from adjusted operating income(2)(in millions)(1)
Change in value of U.S. GAAP liability, pre-NPR(3)$5,467
 $(2,545) $(15,071) $(2,265)
Change in the NPR adjustment(3,582) 190
 3,017
 (873)
Change in fair value of hedge assets, excluding capital hedges(4)(3,349) 1,410
 8,605
 1,265
Change in fair value of capital hedges(5)(704) (159) 248
 (631)
Other(10) 223
 158
 279
Realized investment gains (losses), net, and related adjustments(2,178) (881) (3,043) (2,225)
Market experience updates(6)18
 (10) (628) (10)
Charges related to realized investment gains (losses), net474
 56
 99
 190
Total results excluded from adjusted operating income(7)$(1,686) $(835) $(3,572) $(2,045)
__________
(1)Positive amount represents income; negative amount represents a loss.
(2)Includes the impact of annual reviews and update of assumptions and other refinements.
(3)Represents the change in the liability (excluding NPR) for our variable annuities living benefit guarantees which is measured utilizing a valuation methodology that is required under U.S. GAAP. This liability includes such items as risk margins which are required by U.S. GAAP but not included in our best estimate of the liability.
(4)Represents the change in fair value of the derivatives utilized to hedge potential claims associated with our variable annuity living benefit guarantees.
(5)Represents the changes in fair value of equity derivatives of the capital hedge program intended to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets.
(6)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019.
(7)Excludes amounts from the changes in fair value of fixed income instruments recorded in OCI (versus net income): a loss of $4 million and gain of $391 million for the three months ended June 30, 2020 and 2019, respectively; and a gain of $1,702 million and $651 million for the six months ended June 30, 2020 and 2019, respectively.

For the three months ended June 30, 2020, the loss of $1,686 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable NPR adjustment, unfavorable hedge breakage driven by credit spreads tightening, and losses associated with our capital hedge program, partially offset by a favorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by tightening of credit spreads. These net losses were partially offset by a benefit related to the amortization of DAC and other costs.
For the six months ended June 30, 2020, the loss of $3,572 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates, widening of credit spreads, and unfavorable equity market performance. Also contributing to the results were unfavorable hedge breakage driven by credit spreads tightening and losses from duration management swaps associated with the living benefit results, partially offset by a favorable NPR adjustment. These net losses were partially offset by a benefit related to the amortization of DAC and other costs.
For the three months ended June 30, 2019, the loss of $835 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates with partial offsets driven by favorable equity market performance, losses associated with our capital hedge program, and losses from duration management swaps associated with the living benefit results. Partially offsetting these losses was a favorable NPR adjustment. These net losses were partially offset by a benefit related to the amortization of DAC and other costs.

For the six months ended June 30, 2019, the loss of $2,045 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable NPR adjustment, an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates with partial offsets driven by favorable equity market performance, losses associated with our capital hedge program, and losses from duration management swaps associated with the living benefit results. These net losses were partially offset by a benefit related to the amortization of DAC and other costs.
Product Specific Risks and Risk Mitigants

As noted above, the risks associated with our products are mitigated through product design features, including automatic rebalancing, as well as through our ALM strategy and external reinsurance. The following table sets forth the risk management profile of our living benefit guarantees and guaranteed minimum death benefit (“GMDB”) features as of the periods indicated.

  June 30, 2020 December 31, 2019 June 30, 2019
  
Account
Value
 
% of
Total
 
Account
Value
 
% of
Total
 
Account
Value
 
% of
Total
  ($ in millions)
Living benefit/GMDB features(1):            
Both ALM strategy and automatic rebalancing(2)(3) $102,137
 66% $111,535
 68% $109,819
 68%
ALM strategy only(3) 6,836
 4% 7,703
 5% 7,855
 5%
Automatic rebalancing only 646
 1% 732
 1% 778
 1%
External reinsurance(4) 2,855
 2% 3,150
 2% 3,096
 2%
PDI 17,646
 12% 16,296
 9% 14,248
 9%
Other products 2,225
 1% 2,457
 1% 2,475
 1%
Total living benefit/GMDB features $132,345
   $141,873
   $138,271
  
GMDB features and other(5) 21,734
 14% 23,055
 14% 22,746
 14%
Total variable annuity account value $154,079
   $164,928
   $161,017
  
__________
(1)All contracts with living benefit guarantees also contain GMDB features, which cover the same insured contract.
(2)Contracts with living benefits that are included in our ALM strategy and that have an automatic rebalancing feature.
(3)Excludes PDI which is presented separately within this table.
(4)Represents contracts subject to a reinsurance transaction with an external counterparty covering certain new Highest Daily Lifetime Income (“HDI”) v.3.0 business for the period April 1, 2015 through December 31, 2016. These contracts with living benefits also have an automatic rebalancing feature.
(5)Includes contracts that have a GMDB feature and do not have an automatic rebalancing feature.

Individual Life

Operating Results

The following table sets forth Individual Life’s operating results for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Operating results:       
Revenues$1,563
 $1,508
 $3,093
 $2,990
Benefits and expenses1,627
 1,643
 3,177
 3,020
Adjusted operating income(64) (135) (84) (30)
Realized investment gains (losses), net, and related adjustments(16) 158
 549
 277
Charges related to realized investment gains (losses), net65
 (62) (353) (168)
Market experience updates(1)78
 (160) (216) (160)
Income (loss) before income taxes and equity in earnings of operating joint ventures$63
 $(199) $(104) $(81)

__________
(1)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income reflected a decrease in losses of $71 million, primarily reflecting a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for the second quarter of 20192020 included a $9 million net charge from these updates. Results for the prior period included a $1,458$92 million net charge from these updates, mainly driven by unfavorable impacts related to a decrease in long-term interest rate assumptions. Results for the second quarter of 2019 included a $208 million net charge from these updates, mainly driven by unfavorable impacts related to mortality assumptions. Excluding this item, adjusted operating income decreased $45 million, primarily reflecting lower net investment spread results driven by lower income on non-coupon investments and lower investment yields, partially offset by business growth. Also contributing to the decrease were lower underwriting results driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims. These decreases were partially offset by lower expenses from cost savings initiatives, as well as the absence of certain expenses incurred in the prior year period.

Six Month Comparison. Adjusted operating income reflected an increase in losses of $54 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements, as discussed above. Excluding this item, adjusted operating income decreased $170 million, primarily reflecting lower underwriting results, driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims, and lower net investment spread results driven by lower income on non-coupon investments and lower investment yields, partially offset by business growth. Also contributing to the removaldecrease was the absence of a favorable impact from changes in market conditions on estimates of profitability in the prior year period, which beginning with the second quarter of 2019, is excluded from adjusted operating income. These decreases were partially offset by lower expenses from cost savings initiatives, as well as the absence of certain expenses incurred in the prior year period.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues increased $55 million. Excluding the impact of our assumptionannual reviews and update of expected future morbidity improvement,assumptions and other refinements, as discussed above, revenues decreased $16 million. This decrease was primarily driven by lower net investment income due to lower income on non-coupon investments and lower investment yields, partially offset by the impact of higher average invested assets resulting from business growth. The decrease was partially offset by higher policy charges and fee income driven by business growth.

Benefits and expenses decreased $16 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $29 million. This increase was primarily driven by higher general and administrative expenses, net of capitalization, reflecting increased VOBA amortization, partially offset by lower expenses as discussed above. Also contributing to this increase were higher policyholders’ benefits driven by an unfavorable morbidityimpact from mortality experience, relativenet of reinsurance, primarily attributable to COVID-19 related claims, as well as higher interest credited to account balances driven by business growth.

Six Month Comparison. Revenues increased $103 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $32 million. This increase was primarily driven by higher policy charges and fee income driven by business growth.

Benefits and expenses increased $157 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $202 million. This increase reflected higher policyholders’ benefits driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims, as well as higher interest credited to account balances driven by business growth. Also contributing to the increase was the absence of a favorable impact from changes in market conditions on estimates of profitability in the prior expectations. Excluding these items, resultsyear period, as discussed above. The increase also reflected higher general and administrative expenses, net of capitalization, reflecting increased VOBA amortization, partially offset by lower expenses as discussed above.


Sales Results

The following table sets forth Individual Life’s annualized new business premiums, as defined under “—Results of Operations—Segment Measures” above, by distribution channel and product, for the periods indicated.
  Three Months Ended June 30, 2020 Three Months Ended June 30, 2019
  
Prudential
Advisors
 
Third-
Party
 Total 
Prudential
Advisors
 
Third-
Party
 Total
  (in millions)
Term Life $7
 $33
 $40
 $7
 $46
 $53
Guaranteed Universal Life(1) 1
 33
 34
 2
 22
 24
Other Universal Life(1) 5
 18
 23
 11
 37
 48
Variable Life 22
 65
 87
 19
 37
 56
Total $35
 $149
 $184
 $39
 $142
 $181
             
  Six Months Ended June 30, 2020 Six Months Ended June 30, 2019
  
Prudential
Advisors
 
Third-
Party
 Total 
Prudential
Advisors
 
Third-
Party
 Total
  (in millions)
Term Life $13
 $67
 $80
 $14
 $90
 $104
Guaranteed Universal Life(1) 3
 60
 63
 4
 41
 45
Other Universal Life(1) 12
 41
 53
 20
 58
 78
Variable Life 42
 133
 175
 35
 82
 117
Total $70
 $301
 $371
 $73
 $271
 $344
__________
(1)Single pay life premiums and excess (unscheduled) premiums are included in annualized new business premiums based on a 10% credit and represented approximately 12% and 7% of Guaranteed Universal Life and 11% and 17% of Other Universal Life annualized new business premiums for the three months ended June 30, 2020 and 2019, respectively, and approximately 9% and 7% of Guaranteed Universal Life and 10% and 14% of Other Universal Life annualized new business premiums for the six months ended June 30, 2020 and 2019, respectively. Prior period percentages have been updated to conform to current period presentation.

Total annualized new business premiums for the second quarter and the first six months of 20192020 increased $3 million and $27 million, respectively, compared to the prior year periods reflecting net realized investment gainsprimarily driven by higher sales of variable life products as a result of product design and pricing actions, and higher sales of guaranteed universal life products. The increases for both periods were partially offset by lower sales of term life products due to pricing actions and lower other universal life products due to the absence of large case activity in the current periods compared to net realized investment losses in the prior year periods, driven by the favorable comparative change in market valuessecond quarter of derivatives used for duration management. The increases also reflect the favorable comparative increase in the market value of investments in equity securities.2020.

U.S. Businesses—Assurance IQ Division
Assurance IQ

Operating Results

The following table sets forth Assurance IQ’s operating results for the period indicated.
  Three Months Ended
June 30, 2020
 Six Months Ended
June 30, 2020
  (in millions)
Operating results:    
Revenues $59
 $119
Expenses 75
 158
Adjusted operating income (16) (39)
Other adjustments(1) 32
 77
Income (loss) before income taxes and equity in earnings of operating joint ventures $16
 $38
Other. Results__________
(1)“Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Adjusted Operating Income

The acquisition of Assurance IQ was completed in October 2019. Adjusted operating income for the second quarter and the first six months of 2019 reflect less unfavorable results compared2020 was $(16) million and $(39) million, respectively, reflecting revenues, net of marketing and distribution expenses, primarily related to our health (Health Under 65) and life insurance product lines. Results also included operating expenses and amortization expenses related to intangible assets recognized as part of purchase accounting (see Note 1 and Note 10 to the prior year periods primarily reflecting lower comparative lossesConsolidated Financial Statements included in the current period related toCompany’s Annual Report on Form 10-K for the anticipated sale of our Pramerica of Italy subsidiaryyear ended December 31, 2019 for additional information).

Revenues and the exit of our PGIM Brazil operations inExpenses

Revenues for the second quarter and the first six months of 2018. 2020 were $59 million and $119 million, respectively, primarily reflecting commissions and marketing referral revenues from our health (Health Under 65) and life insurance product lines. Expenses for the second quarter and the first six months of 2020 were $75 million and $158 million, respectively, driven by marketing and distribution costs, general and administrative operating expenses, and amortization expenses related to intangible assets.

International Businesses
Business Update

In August 2019,April 2020, we entered into ana definitive agreement with KB Financial Group, Inc., a Korean financial services provider, to sell The Prudential Life Insurance Company of Korea, Ltd. (“POK”) for cash consideration of approximately $1.9 billion (based on current exchange rates) to be paid at closing. The transaction is consistent with our Pramericastrategic focus internationally on Japan and higher-growth emerging markets around the world. The transaction is expected to close by the end of Italy subsidiary,2020, subject to regulatory approvals and customary closing conditions. In the second quarter of 2020, we reported our investment in POK as “held for sale” and recognized an approximately $700 million after-tax charge to earnings to adjust the carrying value of POK to the fair market value reflected in the purchase price (see Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information). Effective in the second quarter of 2020, the results of this business and the impact of the anticipated sale are reflected in the Divested and Run-off Businesses that are included in Corporate and Other, and all prior period amounts have been updated to conform to the current period presentation. We intend to use the proceeds of the transaction for general corporate purposes.

We are exploring strategic options for our Taiwanese insurance business, which may include a sale.

Operating Results
The results of our International Businesses’ operations are translated on the basis of weighted average monthly exchange rates, inclusive of the effects of the intercompany arrangement discussed in “—Results of Operations—Impact of Foreign Currency Exchange Rates” above. To provide a better understanding of operating performance within the International Businesses, where indicated below, we have analyzed our results of operations excluding the effect of the year over year change in foreign currency exchange rates. Our results of operations, excluding the effect of foreign currency fluctuations, were derived by translating foreign currencies to USD at uniform exchange rates for all periods presented, including for constant dollar information discussed below. The exchange rate used was Japanese yen at a rate of 104 yen per USD, which was determined in connection with the foreign currency income hedging program discussed in “—Results of Operations—Impact of Foreign Currency Exchange Rates” above. In addition, for constant dollar information discussed below, activity denominated in USD is generally reported based on the amounts as transacted in USD. Annualized new business premiums presented on a constant exchange rate basis in the “Sales Results” section below reflect translation based on these same uniform exchange rates.
The following table sets forth the International Businesses’ operating results for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Operating results(1):       
Revenues:       
Life Planner$2,474
 $2,409
 $5,333
 $5,156
Gibraltar Life and Other2,759
 2,649
 5,677
 5,626
Total revenues5,233
 5,058
 11,010
 10,782
Benefits and expenses:       
Life Planner2,170
 2,030
 4,665
 4,359
Gibraltar Life and Other2,370
 2,238
 4,954
 4,774
Total benefits and expenses4,540
 4,268
 9,619
 9,133
Adjusted operating income:       
Life Planner304
 379
 668
 797
Gibraltar Life and Other389
 411
 723
 852
Total adjusted operating income693
 790
 1,391
 1,649
Realized investment gains (losses), net, and related adjustments(2)177
 261
 662
 783
Charges related to realized investment gains (losses), net(15) (3) (22) (3)
Market experience updates(3)(37) (37) (46) (37)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(34) (28) (30) (58)
Income (loss) before income taxes and equity in earnings of operating joint ventures$784
 $983
 $1,955
 $2,334
__________
(1)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
(2)Prior period amounts have been updated to conform to current period presentation.
(3)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Adjusted Operating Income
Three Month Comparison. Adjusted operating income from our Life Planner operations decreased $75 million, including a net unfavorable impact of $3 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in a $43 million net charge in the second quarter of 2020 compared to a $4 million net benefit in the second quarter of 2019. The net charge in 2020 is primarily driven by unfavorable impacts related to a decrease in long-term interest rate assumptions.

Excluding these items, adjusted operating income from our Life Planner operations decreased $25 million, primarily reflecting lower net investment spread results driven by lower investment yields and lower income on non-coupon investments. Also contributing to the decrease were higher expenses driven by costs associated with COVID-19 (see “Overview—COVID-19”). These decreases were partially offset by favorable underwriting results primarily due to the growth of business in force in our Japan and Brazil operations.

Adjusted operating income from our Gibraltar Life and Other operations decreased $22 million, including a net unfavorable impact of $2 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in a $52 million net charge in the second quarter of 2020 compared to a $7 million net benefit in the second quarter of 2019. The net charge in 2020 was primarily driven by updates of reserves reflecting the impact of a decrease in long-term interest rate assumptions, as well as other refinements.

Excluding these items, adjusted operating income from our Gibraltar Life and Other operations increased $39 million, primarily reflecting higher earnings from our joint venture investments due to market performance and lower expenses driven by lower costs associated with business initiatives, partially offset by costs associated with COVID-19 (see “Overview—COVID-19”).

Also contributing to the increase were favorable underwriting results driven by a favorable impact from mortality experience, and higher net investment spread results driven by higher income on non-coupon investments, partially offset by lower investment yields.

Six Month Comparison. Adjusted operating income from our Life Planner operations decreased $129 million, including a net unfavorable impact of $3 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, adjusted operating income from our Life Planner operations decreased $79 million primarily reflecting lower net investment spread results driven by lower income on non-coupon investments and lower investment yields. Also contributing to the decrease were higher expenses driven by updates to legal reserves, as well as higher costs related to business growth and business initiatives, and costs associated with COVID-19 (see “Overview—COVID-19”). These decreases were partially offset by favorable underwriting results due to the growth of business in force in our Japan and Brazil operations, partially offset by an unfavorable impact from mortality experience.

Adjusted operating income from our Gibraltar Life and Other operations decreased $129 million, including a net unfavorable impact of $4 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, adjusted operating income from our Gibraltar Life and Other operations decreased $66 million, primarily reflecting lower net investment spread results driven by lower investment yields and lower income on non-coupon investments. Also contributing to the decrease were lower earnings from our joint venture investments due to market performance, as well as higher expenses driven by costs associated with COVID-19 (see “Overview—COVID-19”), partially offset by lower costs related to business initiatives. These decreases were partially offset by favorable underwriting results driven by the growth of business in force and a favorable impact from mortality experience.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues from our Life Planner operations increased $65 million, including a net unfavorable impact of $21 million from currency fluctuations and a net benefit of $33 million from our annual reviews and update of assumptions and other refinements. Excluding these items, revenues increased $53 million, primarily driven by higher premiums and policy charges and fee income attributable to the growth of business in force, partially offset by lower net investment results driven by lower investment yields and lower income on non-coupon investments.

Benefits and expenses of our Life Planner operations increased $140 million, including a net favorable impact of $18 million from currency fluctuations and a net charge of $80 million from our annual reviews and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $78 million, primarily reflecting higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force, and higher expenses driven by costs associated with COVID-19.

Revenues from our Gibraltar Life and Other operations increased $110 million, including a net favorable impact of $18 million from currency fluctuations and a net charge of $9 million from our annual reviews and update of assumptions and other refinements. Excluding these items, revenues increased $101 million, primarily reflecting higher premiums driven by the growth of business in force, and higher other income driven by a favorable impact from our joint venture investments due to market performance.

Benefits and expenses of our Gibraltar Life and Other operations increased $132 million, including a net unfavorable impact of $20 million from currency fluctuations and a net charge of $50 million from our annual reviews and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $62 million, primarily driven by higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force. The increase was partially offset by lower expenses driven by lower costs associated with business initiatives, partially offset by costs associated with COVID-19.

Six Month Comparison. Revenues from our Life Planner operations increased $177 million, including a net unfavorable impact of $45 million from currency fluctuations. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, revenues increased $189 million, primarily driven by higher premiums and policy charges and fee income attributable to the growth of business in force.

Benefits and expenses of our Life Planner operations increased $306 million, including a net favorable impact of $42 million from currency fluctuations. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, benefits and expenses increased $268 million, primarily reflecting higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force, as well as an unfavorable

impact from mortality experience. Also contributing to the decrease were higher expenses driven by updates to legal reserves, as well as higher costs related to business growth and business initiatives, and costs associated with COVID-19.

Revenues from our Gibraltar Life and Other operations increased $51 million, including a net favorable impact of $20 million from currency fluctuations. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, revenues increased $40 million, primarily driven by higher premiums attributable to the growth of business in force. The increase was partially offset by lower other income driven by an unfavorable impact from our joint venture investments due to market performance, and lower net investment results driven by lower investment yields and lower income on non-coupon investments.

Benefits and expenses of our Gibraltar Life and Other operations increased $180 million, including a net unfavorable impact of $24 million from currency fluctuations. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, benefits and expenses increased $106 million, primarily driven by higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force. Also contributing to the increase was higher expenses driven by costs associated with COVID-19, partially offset by lower costs associated with business initiatives.

Sales Results

The following table sets forth annualized new business premiums, as defined under “—Results of Operations—Segment Measures” above, on an actual and constant exchange rate basis for the periods indicated.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
  
2020 2019 2020 2019
 (in millions)
Annualized new business premiums(1):       
On an actual exchange rate basis:       
Life Planner$166
 $253
 $487
 $608
Gibraltar Life and Other197
 296
 504
 619
Total$363
 $549
 $991
 $1,227
On a constant exchange rate basis:       
Life Planner$178
 $255
 $505
 $613
Gibraltar Life and Other198
 298
 507
 623
Total$376
 $553
 $1,012
 $1,236
__________
(1)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.

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

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

The table below presents annualized new business premiums on a constant exchange rate basis, by product and distribution channel, for the periods indicated.

 Three Months Ended June 30, 2020 Three Months Ended June 30, 2019
 Life 
Accident
&
Health
 Retirement(1) Annuity Total Life 
Accident
&
Health
 Retirement(1) Annuity Total
 (in millions)
Life Planner(2)$89
 $18
 $71
 $0
 $178
 $137
 $23
 $95
 $0
 $255
Gibraltar Life and Other:                   
Life Consultants$59
 $7
 $6
 $17
 $89
 $84
 $10
 $19
 $56
 $169
Banks(3)57
 0
 3
 2
 62
 73
 0
 9
 3
 85
Independent Agency18
 2
 27
 0
 47
 19
 3
 18
 4
 44
Subtotal134
 9
 36
 19
 198
 176
 13
 46
 63
 298
Total$223
 $27
 $107
 $19
 $376
 $313
 $36
 $141
 $63
 $553
__________
(1)Includes retirement income, endowment and savings variable universal life.
(2)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
(3)Single pay life annualized new business premiums, which include 10% of first year premiums, and 3-year limited pay annualized new business premiums, which include 100% of new business premiums, represented 3% and 75%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended June 30, 2020, and 0% and 68%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended June 30, 2019.

Three Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations decreased $77 million, primarily driven by restrictions in sales activities due to COVID-19 (see “Overview—COVID-19”), which resulted in lower sales across products.

Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations decreased $100 million. Life Consultants and Bank channel sales decreased $80 million and $23 million, respectively, primarily driven by COVID-19 impacts. Life Consultants sales also reflected lower sales of USD-denominated fixed annuity products driven by declines in crediting rates and lower Life Consultant headcount. These decreases were partially offset by a $3 million increase in Independent Agency sales driven by higher sales of USD-denominated endowment products.

The table below presents annualized new business premiums on a constant exchange rate basis, by product and distribution channel, for the periods indicated.
 Six Months Ended June 30, 2020 Six Months Ended June 30, 2019
 Life 
Accident
&
Health
 Retirement(1) Annuity Total Life 
Accident
&
Health
 Retirement(1) Annuity Total
 (in millions)
Life Planner(2)$268
 $42
 $194
 $1
 $505
 $345
 $56
 $209
 $3
 $613
Gibraltar Life and Other:                   
Life Consultants$141
 $16
 $24
 $39
 $220
 $171
 $21
 $42
 $101
 $335
Banks(3)177
 0
 13
 4
 194
 167
 0
 18
 8
 193
Independent Agency40
 3
 48
 2
 93
 50
 6
 27
 12
 95
Subtotal358
 19
 85
 45
 507
 388
 27
 87
 121
 623
Total$626
 $61
 $279
 $46
 $1,012
 $733
 $83
 $296
 $124
 $1,236
__________
(1)Includes retirement income, endowment and savings variable universal life.
(2)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
(3)Single pay life annualized new business premiums, which include 10% of first year premiums, and 3-year limited pay annualized new business premiums, which include 100% of new business premiums, represented 4% and 70%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the six months ended June 30, 2020, and 0% and 66%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the six months ended June 30, 2019.


Six Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations decreased $108 million primarily driven by COVID-19 impacts. Also contributing to the decrease were lower sales of corporate term products in Japan driven by the corporate product tax rule change effective July 2019.

Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations decreased $116 million. Life Consultants sales decreased $115 million, primarily driven by COVID-19 impacts, as well as lower sales of USD-denominated fixed annuity products driven by declines in crediting rates and lower Life Consultant headcount. Bank channel sales remained relatively flat reflecting higher sales of USD-denominated protection products, offset by lower sales due to COVID-19 impacts. Independent Agency sales also remained flat reflecting lower sales of USD-denominated protection and fixed annuity products, offset by higher sales of USD-denominated endowment products.

Closed Block Division
Substantially all of the $61 billion of general account assets in the Closed Block division support obligations and liabilities relating to the Closed Block policies only. See Note 7 to the Unaudited Interim Consolidated Financial Statements for additional information on the Closed Block.

International Insurance Operations

While our international insurance operations have experienced a low interest rate environment for many years, the current reinvestment yields for certain blocks of business in our international insurance operations are generally lower than the current portfolio yield supporting these blocks of business. In recent years, the Bank of Japan’s monetary policy has resulted in even lower and, at times, negative yields for certain tenors of government bonds. Our international insurance operations employ a proactive asset/liability management program in order to mitigate, to the extent possible, the unfavorable impact that the current interest rate environment has on our net interest margins. In conjunction with this program, we have not purchased negative yielding assets to support the portfolio and we continue to purchase long-term bonds with tenors of 30 years or greater. Additionally, our diverse product portfolio in terms of currency mix and premium payment structure allows us to further mitigate the negative impact from

this low interest rate environment. We regularly examine our product offerings and their profitability. As a result, we have repriced certain products, adjusted commissions for certain products and have discontinued sales of other products that do not meet our profit expectations. The impact of these actions and the introduction of certain new products, has resulted in an increase in sales of U.S. dollar-denominated products relative to products denominated in other currencies. For additional information on sales within our international insurance operations, see “—International Businesses—Sales Results,” below.

The following table sets forth the insurance liabilities and policyholder account balances of our Japanese operations, by type, for the date indicated:
 
As of
June 30, 2020
 (in billions)
Insurance products with fixed and guaranteed terms$132
Contracts with a market value adjustment if invested amount is not held to maturity25
Contracts with adjustable crediting rates subject to guaranteed minimums11
Total$168

The $132 billion above is primarily comprised of long-duration insurance products that have fixed and guaranteed terms, for which underlying assets may have to be reinvested at interest rates that are lower than current portfolio yields. The remaining insurance liabilities and policyholder account balances include $25 billion related to contracts that impose a market value adjustment if the invested amount is not held to maturity and $11 billion related to contracts with crediting rates that may be adjusted over the life of the contract, subject to guaranteed minimums. Most of the current crediting rates on these contracts, however, are at or near contractual minimums. Although we have the ability in some cases to lower crediting rates for those contracts that are above guaranteed minimum crediting rates, the majority of this business has interest crediting rates that are determined by formula.

Assuming a hypothetical scenario where the average 30-year Japanese Government Bond yield is 0.60% and the 10-year U.S. Treasury rate is 0.65% (which is reasonably consistent with recent rates) for the period from July 1, 2020 through June 30, 2021 (and credit spreads remain unchanged from levels as of June 30, 2020), we estimate that the unfavorable impact to net investment income of reinvesting activities, including scheduled maturities and estimated prepayments of fixed maturities and commercial mortgage and other loans (excluding assets supporting participating contracts) would be between $40 million and $80 million for the period from July 1, 2020 through June 30, 2021.
Results of Operations

Consolidated Results of Operations

The following table summarizes net income (loss) for the periods presented.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Revenues$12,115
 $15,388
 $25,579
 $30,479
Benefits and expenses14,447
 14,512
 28,249
 28,463
Income (loss) before income taxes and equity in earnings of operating joint ventures(2,332) 876
 (2,670) 2,016
Income tax expense (benefit)115
 162
 57
 394
Income (loss) before equity in earnings of operating joint ventures(2,447) 714
 (2,727) 1,622
Equity in earnings of operating joint ventures, net of taxes42
 24
 52
 53
Net income (loss)(2,405) 738
 (2,675) 1,675
Less: Income attributable to noncontrolling interests4
 30
 5
 35
Net income (loss) attributable to Prudential Financial, Inc.$(2,409) $708
 $(2,680) $1,640

Three Month Comparison. The $3,117 million decrease in “Net income (loss) attributable to Prudential Financial, Inc.” for the second quarter of 2020 compared to the second quarter of 2019 reflected the following notable items:

$2,136 million unfavorable variance, on a pre-tax basis, from realized investment gains and losses for PFI excluding the Divested and Run-off Businesses, and excluding the impact of the hedging program associated with certain variable annuities discussed below (see “General Account Investments” for additional information);
$771 million unfavorable variance, on a pre-tax basis, from a loss in the current period from our Divested and Run-off Businesses compared to a gain in the prior period (see “Results of Operations by Segment—Divested and Run-off Businesses” for additional information);
$663 million unfavorable variance, on a pre-tax basis, from lower adjusted operating income from our business segments (see “—Segment Results of Operations” for additional information); and
$491 million unfavorable variance, on a pre-tax basis, reflecting the net impact from changes in the value of our embedded derivatives and related hedge positions associated with certain variable annuities (see “Results of Operations by Segment—U.S. Businesses—U.S. Individual Solutions Division—Individual Annuities—Variable Annuity Risks and Risk Mitigants” for additional information).

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

$446 million favorable variance, on a pre-tax basis, from investment related activities that are primarily within “Other income (loss)” for PFI excluding our Divested and Run-off Businesses. These favorable impacts were primarily driven by unrealized gains (losses) from equity securities as well as fixed maturity securities designated as trading; and
$258 million favorable variance, on a pre-tax basis, driven by market experience updates excluding those impacts related to the hedging program associated with certain variable annuities discussed above.

Six Month Comparison. The $4,320 million decrease in “Net income (loss) attributable to Prudential Financial, Inc.” for the first six months of 2020 compared to the first six months of 2019 reflected the following notable items:

$1,300 million unfavorable variance, on a pre-tax basis, reflecting the net impact from changes in the value of our embedded derivatives and related hedge positions associated with certain variable annuities (see “Results of Operations by Segment—U.S. Businesses—U.S. Individual Solutions Division—Individual Annuities—Variable Annuity Risks and Risk Mitigants” for additional information);
$1,066 million unfavorable variance, on a pre-tax basis, from lower adjusted operating income from our business segments (see “Segment Results of Operations” for additional information);
$978 million unfavorable variance, on a pre-tax basis, from a loss in the current period from our Divested and Run-off Businesses compared to a gain in the prior period (see “Results of Operations by Segment—Divested and Run-off Businesses” for additional information);
$859 million unfavorable variance, on a pre-tax basis, from investment related activities that are primarily within “Other income (loss)” for PFI excluding our Divested and Run-off Businesses. These unfavorable impacts were primarily driven by unrealized gains (losses) from equity securities as well as fixed maturity securities designated as trading; and
$326 million unfavorable variance, on a pre-tax basis, driven by market experience updates excluding those impacts related to the hedging program associated with certain variable annuities discussed above.

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

$114 million favorable variance, on a pre-tax basis, from realized investment gains and losses for PFI excluding Divested and Run-off Businesses, and excluding the impact of the hedging program associated with certain variable annuities discussed above (see “General Account Investments” for additional information).


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

Annual Reviews and Update of Assumptions and Other Refinements

Annually during the second quarter of each year, we perform a comprehensive review of actuarial assumptions utilized in measuring insurance liabilities and expected gross profits used in amortizing deferred acquisition costs, sales inducement costs, unearned revenue reserves and value of business acquired. The assumptions reviewed include, but are not necessarily limited to, inputs such as mortality, morbidity, contractholder behavior and expected future rates of returns on investments. As part of this review, we may update these assumptions and make refinements to our models based upon emerging experience, future expectations and other data, including any observable market data. These assumptions are generally updated annually during the second quarter of each year, unless a material change in experience that we feel is indicative of a long-term trend is observed during an interim period.

Shown below are the impacts on our adjusted operating income from updates of actuarial assumptions and other refinements as discussed above. The information below is presented by each segment and Corporate and Other operations and includes a reconciliation of these impacts to the impacts within income (loss) before income taxes and equity in earnings of operating joint ventures.

 Three and Six Months Ended
June 30,
 2020 2019
 (in millions)
Favorable (unfavorable) impact to adjusted operating income before income taxes by segment:   
U.S. Businesses:   
U.S Workplace Solutions division:   
Retirement$(22) $154
Group Insurance11
 9
Total U.S. Workplace Solutions division(11) 163
U.S. Individual Solutions division:   
Individual Annuities(136) (12)
Individual Life(92) (208)
Total U.S. Individual Solutions division(228) (220)
Total U.S. Businesses(239) (57)
International Businesses(1)(95) 11
Corporate and Other0
 0
Total segment favorable (unfavorable) impact to adjusted operating income before income taxes(334) (46)
Reconciling items:   
Realized investment gains (losses), net, and related adjustments302
 9
Charges related to realized investment gains (losses), net(41) 16
Divested and Run-off Businesses:   
     Closed Block division0
 (7)
     Other Divested and Run-off Businesses(1)(33) (12)
Favorable (unfavorable) impact to consolidated income (loss) before income taxes and equity in earnings of operating joint ventures$(106) $(40)
__________
(1)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.

See “—Results of Operations by Segment” for a discussion of the impacts of our annual reviews and update of assumptions and other refinements.


Summary of Results of Operations by Segment

Shown below are the adjusted operating income contributions of each segment and Corporate and Other operations for the periods indicated and a reconciliation of this segment measure of performance to “Income (loss) before income taxes and equity in earnings of operating joint ventures” as presented in the Unaudited Interim Consolidated Statements of Operations.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Adjusted operating income before income taxes by segment:       
PGIM$324
 $264
 $488
 $478
U.S. Businesses:       
U.S. Workplace Solutions division:
 
 
 
Retirement281
 467
 526
 718
Group Insurance5
 81
 49
 134
Total U.S. Workplace Solutions division286
 548
 575
 852
U.S. Individual Solutions division:       
Individual Annuities249
 462
 622
 934
Individual Life(64) (135) (84) (30)
Total U.S. Individual Solutions division185
 327
 538
 904
Assurance IQ division(1):       
Assurance IQ(16) 0
 (39) 0
Total Assurance IQ division(16) 0
 (39) 0
Total U.S. Businesses455
 875
 1,074
 1,756
International Businesses(2)693
 790
 1,391
 1,649
Corporate and Other(541) (335) (883) (747)
Total segment adjusted operating income before income taxes931
 1,594
 2,070
 3,136
Reconciling items:       
Realized investment gains (losses), net, and related adjustments(3)(3,191) (572) (2,982) (1,194)
Charges related to realized investment gains (losses), net(4)519
 (82) (283) (57)
Market experience updates(5)55
 (207) (886) (207)
Divested and Run-off Businesses(6):       
     Closed Block division(22) (21) (23) (40)
     Other Divested and Run-off Businesses(2)(602) 168
 (580) 415
Other adjustments(7)32
 0
 77
 0
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(8)(54) (4) (63) (37)
Consolidated income (loss) before income taxes and equity in earnings of operating joint ventures$(2,332) $876
 $(2,670) $2,016
__________
(1)Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
(2)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
(3)
Represents “Realized investment gains (losses), net,” and related adjustments. See “General Account Investments” and Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information. Prior period amounts have been updated to conform to current period presentation.
(4)Includes charges that represent the impact of realized investment gains (losses), net, on the amortization of DAC and other costs, and on changes in reserves. Also includes charges resulting from payments related to market value adjustment features of certain of our annuity products and the impact of realized investment gains (losses), net, on the amortization of unearned revenue reserves.
(5)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(6)Represents the contribution to income (loss) of Divested and Run-off Businesses that have been or will be sold or exited, including businesses that have been placed in wind down, but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP. See “—Divested and Run-off Businesses.”

(7)Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(8)Equity in earnings of operating joint ventures are included in adjusted operating income but excluded from “Income (loss) before income taxes and equity in earnings of operating joint ventures” as they are reflected on an after-tax U.S. GAAP basis as a separate line in the Unaudited Interim Consolidated Statements of Operations. Earnings attributable to noncontrolling interests are excluded from adjusted operating income but included in “Income (loss) before income taxes and equity in earnings of operating joint ventures” as they are reflected on a U.S. GAAP basis as a separate line in the Unaudited Interim Consolidated Statements of Operations. Earnings attributable to noncontrolling interests represent the portion of earnings from consolidated entities that relates to the equity interests of minority investors.

Segment results for the period presented above reflect the following:

PGIM. Results for the second quarter of 2020 increased in comparison to the prior year period, reflecting increases in asset management fees and other related revenues, and decreases in expenses. Results for the first six months of 2020 increased in comparison to the prior year period, reflecting increases in asset management fees and decreases in expenses, partially offset by decreases in other related revenues.

Retirement. Results for both the second quarter and the first six months of 2020 decreased in comparison to the prior year periods, primarily reflecting an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results for both periods decreased primarily driven by lower net investment spread results, partially offset by higher reserve gains.

Group Insurance. Results for both the second quarter and the first six months of 2020 decreased in comparison to the prior year periods, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results for both periods decreased primarily reflecting lower underwriting results and lower net investment spread results.

Individual Annuities. Results for both the second quarter and the first six months of 2020 decreased in comparison to the prior year periods, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, results for both periods decreased primarily driven by lower fee income, net of distribution expenses and other associated costs. The results for the second quarter were partially offset by higher net investment spread results.

Individual Life. Results for the second quarter of 2020 reflected a decrease in losses in comparison to the prior year period, and results for the first six months of 2020 reflected an increase in losses in comparison to the prior year period. Both periods include a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, adjusted operating income decreased for both periods, primarily reflecting lower net investment spread results and lower underwriting results driven by an unfavorable impact from mortality experience, net of reinsurance, partially offset by lower expenses.

Assurance IQ. The acquisition of Assurance IQ was completed in October 2019. Results for both the second quarter and the first six months of 2020 include revenues, net of marketing and distribution expenses, operating expenses and amortization expenses related to intangible assets recognized as part of purchase accounting (see Note 1 and Note 10 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information).
International Businesses. Results for both the second quarter and the first six months of 2020 decreased in comparison to the prior year periods, inclusive of an unfavorable net impact from foreign currency exchange rates and an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding these items, results for the second
quarter of 2020 increased driven by favorable underwriting results and higher earnings from our joint venture investments, partially offset by lower net investment spread results and higher expenses, while results for the first six months of 2020 decreased driven by lower net investment spread results, higher expenses and lower earnings from our joint venture investments, partially offset by favorable underwriting results.
Corporate and Other. Results for both the second quarter of 2020 and the first six months of 2020 reflected increased losses in comparison to the prior year periods, reflecting higher net charges from other corporate activities driven by increases to legal reserves, lower investment income and higher interest expense on debt, partially offset by favorable pension and employee benefit results.


Closed Block Division. Results for the second quarter of 2020 reflected an increase in losses in comparison to the prior year period, primarily reflecting an increase in the policyholder dividend obligation as a result of higher net investment activity results. Results for the first six months of 2020 reflected a decrease in losses in comparison to the prior year period, primarily reflecting a decrease in the policyholder dividend obligation as a result of lower net investment activity results.

Segment Measures

Adjusted Operating Income. In managing our business, we analyze our segments’ operating performance using “adjusted operating income.” Adjusted operating income does not equate to “Income (loss) before income taxes and equity in earnings of operating joint ventures” or “Net income (loss)” as determined in accordance with U.S. GAAP, but is the measure of segment profit or loss we use to evaluate segment performance and allocate resources, and consistent with authoritative guidance, is our measure of segment performance. The adjustments to derive adjusted operating income are important to an understanding of our overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and our definition of adjusted operating income may differ from that used by other companies. However, we believe that the presentation of adjusted operating income as we measure it for management purposes enhances the understanding of our results of operations by highlighting the results from ongoing operations and the underlying profitability of our businesses.

See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information on the presentation of segment results and our definition of adjusted operating income.

Annualized New Business Premiums. In managing our Individual Life, Group Insurance and International Businesses, we analyze annualized new business premiums, which do not correspond to revenues under U.S. GAAP. Annualized new business premiums measure the current sales performance of the business, while revenues primarily reflect the renewal persistency of policies written in prior years and net investment income, in addition to current sales. Annualized new business premiums include 10% of first year premiums or deposits from single pay products. No other adjustments are made for limited pay contracts.

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

Assets Under Management. In managing our PGIM business, we analyze assets under management (which do not correspond directly to U.S. GAAP assets) because the principal source of revenues is fees based on assets under management. Assets under management represent the fair market value or account value of assets which we manage directly for institutional clients, retail clients, and for our general account, as well as assets invested in our products that are managed by third-party managers.

Account Values. In managing our Individual Annuities and Retirement businesses, we analyze account values, which do not correspond to U.S. GAAP assets. Net sales (redemptions) in our Individual Annuities business and net additions (withdrawals) in our Retirement business do not correspond to revenues under U.S. GAAP, but are used as a relevant measure of business activity.

Impact of Foreign Currency Exchange Rates

Foreign currency exchange rate movements and related hedging strategies
As a U.S.-based company with significant business operations outside the U.S., particularly in Japan, we are subject to foreign currency exchange rate movements that could impact our U.S. dollar (“USD”)-equivalent earnings and shareholder return on equity. Our USD-equivalent earnings could be materially affected by currency fluctuations from period to period, even if earnings on a local currency basis are relatively constant. Our USD-equivalent equity is impacted as the value of our investment in international operations may also fluctuate based on changes in foreign currency exchange rates. We seek to mitigate these impacts through various hedging strategies, including the use of derivative contracts and by holding USD-denominated assets in certain of our foreign subsidiaries.

In order to reduce earnings volatility from foreign currency exchange rate movements, we enter into forward currency derivative contracts to effectively fix the currency exchange rates for a portion of our prospective non-USD-denominated earnings streams. This forward currency hedging program is primarily associated with our insurance operations in Japan and Korea.

In order to reduce equity volatility from foreign currency exchange rate movements, we primarily utilize a yen hedging strategy that calibrates the hedge level to preserve the relative contribution of our yen-based business to the Company’s overall return on equity on a leverage neutral basis. We implement this hedging strategy utilizing a variety of instruments, including USD-

denominated assets, foreign currency derivative contracts, and dual currency and synthetic dual currency investments held locally in our Japanese insurance subsidiaries. The total hedge level may vary based on our periodic assessment of the relative contribution of our yen-based business to the Company’s overall return on equity.

The table below presents the aggregate amount of instruments that serve to hedge the impact of foreign currency exchange movements on our USD-equivalent shareholder return on equity from our Japanese insurance subsidiaries as of the dates indicated.

 June 30,
2020
 December 31,
2019
 (in billions)
Foreign currency hedging instruments:   
Hedging USD-equivalent earnings:   
Forward currency contracts (notional amount outstanding)$0.4
 $0.6
Hedging USD-equivalent equity:   
USD-denominated assets held in yen-based entities(1)10.9
 13.1
Dual currency and synthetic dual currency investments(2)0.6
 0.6
Total USD-equivalent equity foreign currency hedging instruments11.5
 13.7
Total foreign currency hedges$11.9
 $14.3
__________
(1)Includes USD-denominated fixed maturities at amortized cost plus any related accrued investment income, as well as USD notional amount of foreign currency derivative contracts outstanding. Note this amount represents only those USD assets serving to hedge the impact of foreign currency volatility on equity. Separate from this program, our Japanese operations also have $62.2 billion and $57.8 billion as of June 30, 2020 and December 31, 2019, respectively, of USD-denominated assets supporting USD-denominated liabilities related to USD-denominated products.
(2)Dual currency and synthetic dual currency investments are held by our yen-based entities in the form of fixed maturities and loans with a yen-denominated principal component and USD-denominated interest income. The amounts shown represent the present value of future USD-denominated cash flows.

The USD-denominated investments that hedge the impact of foreign currency exchange rate movements on USD-equivalent earnings and shareholder return on equity from our Japanese insurance operations are reported within yen-based entities and, as a result, foreign currency exchange rate movements will impact their value reported within our yen-based Japanese insurance entities. We seek to mitigate the risk that future unfavorable foreign currency exchange rate movements will decrease the value of these USD-denominated investments reported within our yen-based Japanese insurance entities, and therefore negatively impact their equity and regulatory solvency margins, by having our Japanese insurance operations enter into currency hedging transactions. Those hedges are with a subsidiary of Prudential Financial. These hedging strategies have the economic effect of moving the change in value of these USD-denominated investments due to foreign currency exchange rate movements from our Japanese yen-based entities to our USD-based entities.

These USD-denominated investments also pay a coupon which is generally higher than what a similar yen-denominated investment would pay. The incremental impact of this higher yield on our USD-denominated investments, as well as our dual currency and synthetic dual currency investments, will vary over time, and is dependent on the duration of the underlying investments as well as interest rate environments in both the U.S. and Japan at the time of the investments.

Impact of intercompany foreign currency exchange rate arrangements on segment results of operations
The financial results of our International Businesses and PGIM reflect the impact of intercompany arrangements with our Corporate and Other operations pursuant to which these segments’ non-USD-denominated earnings are translated at fixed currency exchange rates. Results of our Corporate and Other operations include differences between the translation adjustments recorded by the segments at the fixed currency exchange rate versus the actual average rate during the period. In addition, specific to our International Businesses where we hedge certain currencies, the results of our Corporate and Other operations also include the impact of any gains or losses recorded from the forward currency contracts that settled during the period, which include the impact of any over or under hedging of actual earnings that differ from projected earnings.


For International Businesses, the fixed currency exchange rates are generally determined in connection with a foreign currency income hedging program designed to mitigate the impact of exchange rate changes on the segment’s expected USD-equivalent earnings. Pursuant to this program, our Corporate and Other operations execute forward currency contracts with third-parties to sell the net exposure of projected earnings for certain currencies in exchange for USD at specified exchange rates. The maturities of these contracts correspond with the future periods (typically on a three-year rolling basis) in which the identified non-USD-denominated earnings are expected to be generated. In establishing the level of non-USD-denominated earnings that will be hedged through this program, we exclude the anticipated level of USD-denominated earnings that will be generated by USD-denominated products and investments. For the six months ended June 30, 2020, approximately 4% of the segment’s earnings were yen-based and, as of June 30, 2020, we have hedged 100%, 92% and 50% of expected yen-based earnings for 2020, 2021 and 2022, respectively. To the extent currently unhedged, our International Businesses’ future expected USD-equivalent of yen-based earnings will be impacted by yen exchange rate movements.
As a result of these arrangements, our International Businesses’ results for 2020 and 2019 reflect the impact of translating yen-denominated earnings at fixed currency exchange rates of 104 and 105 yen per USD, respectively. Since determination of the fixed currency exchange rates for a given year is impacted by changes in foreign currency exchange rates over time, the segment’s future earnings will ultimately be impacted by these changes in exchange rates.

For PGIM and certain other currencies within our International Businesses, the fixed currency exchange rates for the current year are predetermined during the third quarter of the prior year using forward currency exchange rates.
The table below presents, for the periods indicated, the increase (decrease) to revenues and adjusted operating income for the International Businesses, PGIM and Corporate and Other operations, reflecting the impact of these intercompany arrangements.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Segment impacts of intercompany arrangements:       
International Businesses(3)$19
 $11
 $31
 $26
PGIM2
 2
 2
 3
Impact of intercompany arrangements(1)21
 13
 33
 29
Corporate and Other:       
Impact of intercompany arrangements(1)(3)(21) (13) (33) (29)
Settlement gains (losses) on forward currency contracts(2)(3)20
 16
 42
 29
Net benefit (detriment) to Corporate and Other(1) 3
 9
 0
Net impact on consolidated revenues and adjusted operating income$20
 $16
 $42
 $29
__________ 
(1)Represents the difference between non-USD-denominated earnings translated on the basis of weighted average monthly currency exchange rates versus fixed currency exchange rates determined in connection with the foreign currency income hedging program.
(2)As of June 30, 2020 and 2019, the total notional amounts of these forward currency contracts within our Corporate and Other operations were $1.1 billion and $2.0 billion, respectively, of which $0.4 billion and $1.2 billion, respectively, were related to our Japanese insurance operations. Prior period total notional amount of these forward currency contracts has been updated to conform to current period presentation.
(3)Excludes impacts related to POK. Prior period amounts have been updated to conform to current period presentation. Effective second quarter of 2020, the intercompany arrangement for the Korean won between our International Businesses and Corporate and Other operations was terminated and the related hedges were repurposed in relation to the anticipated sale of POK. Effective second quarter of 2020, Korean won-denominated earnings for 2020 and 2019 that were translated at fixed currency exchange rates of 1,090 and 1,110 Korean won per USD, respectively, are excluded from the International Businesses and are included in the Divested and Run-off Businesses included in Corporate and Other. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.

Impact of products denominated in non-local currencies on U.S. GAAP earnings
While our international insurance operations offer products denominated in local currency, several also offer products denominated in non-local currencies, most notably our Japanese operations, which offer USD- and Australian dollar (“AUD”)-denominated products. The non-local currency-denominated insurance liabilities related to these products are supported by investments denominated in corresponding currencies, including a significant portion designated as available-for-sale. While the impact from foreign currency exchange rate movements on these non-local currency-denominated assets and liabilities is economically matched, differences in the accounting for changes in the value of these assets and liabilities due to changes in foreign currency exchange rate movements have historically resulted in volatility in U.S. GAAP earnings.


In 2015, we implemented a structure in Gibraltar Life’s operations that disaggregated the USD- and AUD-denominated businesses into separate divisions, each with its own functional currency that aligns with the underlying products and investments. The result of this alignment was to reduce differences in the accounting for changes in the value of these assets and liabilities that arise due to changes in foreign currency exchange rate movements. For the USD- and AUD-denominated assets that were transferred under this structure, the net cumulative unrealized investment gains associated with foreign exchange remeasurement that were recorded in “Accumulated other comprehensive income (loss)” (“AOCI”) totaled $2.5 billion and $2.7 billion as of June 30, 2020 and December 31, 2019, respectively, and will be recognized in earnings within “Realized investment gains (losses), net” over time as these assets mature or are sold. Absent the sale of any of these assets prior to their stated maturity, approximately 7% of the $2.5 billion balance as of June 30, 2020 will be recognized throughout the remainder of 2020, approximately 13% will be recognized in 2021, and the remaining balance will be recognized from 2022 through 2051.

Highly inflationary economy in Argentina

Our insurance operations in Argentina, Prudential of Argentina (“POA”), have historically utilized the Argentine peso as the functional currency given it is the currency of the primary economic environment in which the entity operates. During 2018, Argentina experienced a cumulative inflation rate that exceeded 100% over a 3-year period. As a result, Argentina’s economy was deemed to be highly inflationary resulting in reporting changes effective July 1, 2018. Under U.S. GAAP, the financial statements of a foreign entity in a highly inflationary economy are to be remeasured as if its functional currency (formerly the Argentine peso) is the reporting currency of its parent reporting entity (the USD) on a prospective basis. While this changed how the results of POA are remeasured and/or translated into USD, the impact to our financial statements was not material nor is it expected to be material in future periods given the relative size of our POA operations. It should also be noted that due to the macroeconomic environment in Argentina, substantially all of POA’s balance sheet consists of USD-denominated product liabilities supported by USD-denominated assets. As a result, this accounting change serves to reduce the remeasurement impact reflected in net income given that the functional currency and currency in which the assets and liabilities are denominated will be more closely aligned.


Accounting Policies & Pronouncements

Application of Critical Accounting Estimates

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

Management believes the accounting policies relating to the following areas are most dependent on the application of estimates and assumptions and require management’s most difficult, subjective, or complex judgments:

DAC, deferred sales inducements (“DSI”) and VOBA;
Policyholder liabilities;
Goodwill;
Valuation of investments including derivatives, measurement of allowance for credit losses, and recognition of other-than-temporary impairments (“OTTI”);
Pension and other postretirement benefits;
Taxes on income; and
Reserves for contingencies, including reserves for losses in connection with unresolved legal matters.

Market Performance - Equity and Interest Rate Assumptions

DAC, DSI and VOBA associated with the variable and universal life policies of our Individual Life and International Businesses segments and the variable and fixed annuity contracts of our Individual Annuities and International Businesses segments are generally amortized over the expected lives of these policies in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. The quarterly adjustments for market performance reflect the impact of changes to our estimate of total gross profits to reflect actual fund performance and market conditions. A significant portion of gross profits for our variable annuity contracts and, to a lesser degree, our variable life contracts are dependent upon the total rate of return on assets held in separate account investment options. This rate of return influences the fees we earn on variable annuity and variable life contracts, costs we incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts, as well as other sources of profit. Returns that are higher than our expectations for a given period produce higher than expected account

balances, which increase the future fees we expect to earn on variable annuity and variable life contracts and decrease the future costs we expect to incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts. The opposite occurs when returns are lower than our expectations. The changes in future expected gross profits are used to recognize a cumulative adjustment to all prior periods’ amortization.

Furthermore, the calculation of the estimated liability for future policy benefits related to certain insurance products includes an estimate of associated revenues and expenses that are dependent on both historical market performance as well as estimates of market performance in the future. Similar to DAC, DSI and VOBA described above, these liabilities are subject to quarterly adjustments for experience including market performance, in addition to annual adjustments resulting from our annual reviews of assumptions.

The weighted average rate of return assumptions used in developing estimated market returns consider many factors specific to each product type, including asset durations, asset allocations and other factors. With regard to equity market assumptions, the near-term future rate of return assumption used in evaluating DAC, DSI and VOBA and liabilities for future policy benefits for certain of our products, primarily our domestic variable annuity and domestic and international variable life insurance products, is generally updated each quarter and is derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15.0%, we use our maximum future rate of return. As of June 30, 2020, our domestic variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 5.1% near-term mean reversion equity expected rate of return, and our international variable life insurance business assumes a 4.8% long-term equity expected rate of return and a 5.0% near-term mean reversion equity expected rate of return.

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

For a discussion of the impact that could result from changes in certain key assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting Policies and Pronouncements—Sensitivities for Insurance Assets and Liabilities” in our Annual Report on Form 10-K for the year ended December 31, 2019

Future Adoption of New Accounting Pronouncements

ASU 2018-12, Financial ServicesInsurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the Financial Accounting Standards Board (“FASB”) on August 15, 2018 and is expected to have a significant impact on the Consolidated Financial Statements and Notes to the Consolidated Financial Statements. In October 2019, the FASB issued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of ASU 2018-12 to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. As a result of the COVID-19 pandemic, the FASB voted in June 2020 to tentatively defer for an additional one year the current effective date of ASU 2018-12 from January 1, 2022 to January 1, 2023, and to provide transition relief to facilitate the early adoption of the ASU. Subsequently in July 2020, the FASB issued a proposed ASU with comment deadline of August 24, 2020 to obtain additional feedback on the tentative decisions, which are expected to be finalized during the third quarter of 2020. The transition relief would allow large calendar-year public companies that early adopt ASU 2018-12 to apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would also apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements. ASU 2018-12 will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter. See Note 2 to the Unaudited Interim Consolidated Financial Statements for a more detailed discussion of ASU 2018-12, as well as other accounting pronouncements issued but not yet adopted and newly adopted accounting pronouncements.

Results of Operations by Segment

PGIM


Operating Results

The following table sets forth PGIM’s operating results for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Operating results(1):       
Revenues$957
 $926
 $1,735
 $1,796
Expenses633
 662
 1,247
 1,318
Adjusted operating income324
 264
 488
 478
Realized investment gains (losses), net, and related adjustments(1) 1
 3
 1
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(6) 30
 (42) 35
Income (loss) before income taxes and equity in earnings of operating joint ventures$317
 $295
 $449
 $514
__________
(1)Certain of PGIM’s investment activities are based in currencies other than the U.S. dollar and are therefore subject to foreign currency exchange rate risk. The financial results of PGIM include the impact of an intercompany arrangement with our Corporate and Other operations designed to mitigate the impact of exchange rate changes on PGIM’s U.S. dollar-equivalent earnings. For more information related to this intercompany arrangement, see “—Results of Operations—Impact of Foreign Currency Exchange Rates,” above.
Adjusted Operating Income

Three Month Comparison. Adjusted operating income increased $60 million. The increase primarily reflected an increase in asset management fees due to higher average assets under management as a result of market appreciation and fixed income inflows, as well as a decrease in expenses driven by lower costs of long-term employee compensation plans tied to performance factors and a temporary pause in travel and entertainment due to COVID-19. The increase also reflected an increase in other related revenues, net of related expenses, primarily due to higher strategic investing results driven by spread tightening impacting fixed income investment strategies and strong equity investment performance, partially offset by lower net performance-based incentive fees driven by the absence of a significant fee earned in the prior year period. These increases were partially offset by a decrease in service, distribution and other revenues primarily reflecting the absence of fees in the current year period related to the Wells Fargo agreement (see “—Revenue and Expenses,” below).

Six Month Comparison. Adjusted operating income increased $10 million. This increase primarily reflected an increase in asset management fees, net of related expenses, due to higher average assets under management as a result of market appreciation and fixed income inflows. The increase was partially offset by a decrease in other related revenues, net of related expenses, primarily due to lower net performance-based incentive fees driven by the absence of significant fees earned in the prior year, and lower strategic investing results driven by spread widening impacting fixed income investment strategies. The increase was also partially offset by a decrease in service, distribution and other revenues primarily due to the absence of fees in the current year period related to the Wells Fargo agreement.

Revenues and Expenses

The following table sets forth PGIM’s revenues, presented on a basis consistent with the table above under “—Operating Results,” by type.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Revenues by type:       
Asset management fees by source:       
Institutional customers$325
 $319
 $653
 $631
Retail customers(1)227
 220
 456
 429
General account138
 132
 274
 255
Total asset management fees690
 671
 1,383
 1,315
Other related revenues by source:       
Incentive fees17
 62
 35
 98
Transaction fees4
 10
 8
 12
Strategic investing64
 18
 37
 54
Commercial mortgage(2)32
 25
 59
 51
Total other related revenues(3)117

115

139

215
Service, distribution and other revenues(4)150
 140
 213
 266
Total revenues$957
 $926
 $1,735
 $1,796
__________
(1)Consists of fees from: individual mutual funds and variable annuities and variable life insurance separate account assets; funds invested in proprietary mutual funds through our defined contribution plan products; and third-party sub-advisory relationships. Revenues from fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance are included in the general account.
(2)Includes mortgage origination revenues from our commercial mortgage origination and servicing business.
(3)Future revenues will be impacted by the level and diversification of our strategic investments, the commercial real estate market, and other domestic and international markets.
(4)Prior period amount includes payments from Wells Fargo under an agreement dated as of July 30, 2004, implementing arrangements with respect to money market mutual funds in connection with the combination of our retail securities brokerage and clearing operations with those of Wells Fargo. The agreement extended for ten years from the Wachovia Securities joint venture termination date of December 31, 2009 to December 31, 2019. The revenue from Wells Fargo under this agreement was $15 million for the three months ended June 30, 2019 and $31 million for the six months ended June 30, 2019.

Three Month Comparison. Revenues increased $31 million. Asset management fees increased primarily reflecting an increase in average assets under management as a result of market appreciation and fixed income inflows. Other related revenues increased primarily reflecting higher strategic investing results driven by spread tightening impacting fixed income investment strategies and strong equity investment performance, partially offset by lower performance-based incentive fees driven by the absence of a significant fee earned in the prior year period. Service, distribution and other revenues increased primarily reflecting higher revenues from certain consolidated funds (which were fully offset by higher expenses related to noncontrolling interests in these funds), partially offset by the absence of fees in the current year period related to the Wells Fargo agreement.

Expenses decreased $29 million. Expenses decreased, primarily driven by lower costs for certain long-term employee compensation plans tied to performance factors and a temporary pause in travel and entertainment due to COVID-19. Also contributing to the decrease were lower expenses associated with lower performance-based incentive fee revenues. These decreases were partially offset by an increase in expenses for service, distribution and other revenues primarily driven by higher revenues associated with certain consolidated funds as discussed above.

Six Month Comparison. Revenues decreased $61 million. Asset management fees increased primarily reflecting an increase in average assets under management as a result of market appreciation and fixed income inflows. Other related revenues decreased primarily reflecting lower performance-based incentive fees due to the absence of a significant fee earned in the prior year period, and lower strategic investing results driven by spread widening impacting fixed income investment strategies. Service, distribution and other revenues decreased primarily reflecting lower revenues from certain consolidated funds, which were fully offset by lower expenses related to noncontrolling interests in these funds, and the absence of fees in the current year related to the Wells Fargo agreement.

Expenses decreased $71 million. Expenses for service, distribution and other revenues decreased primarily driven by lower revenues associated with certain consolidated funds as discussed above. Also contributing to the decrease were lower expenses associated with lower performance-based incentive fee revenues and a temporary pause in travel and entertainment due to COVID-19.


Assets Under Management

The following table sets forth assets under management by asset class and source as of the dates indicated.
 June 30, 2020 December 31, 2019 June 30, 2019
 (in billions)
Assets Under Management(1) (at fair value):     
Institutional customers:     
Public equity$48.9
 $57.1
 $54.9
Public fixed income443.9
 418.6
 404.7
Real estate48.9
 49.1
 48.3
Private credit and other alternatives24.7
 23.5
 23.0
Multi-asset4.8
 4.5
 4.0
Institutional customers(2)571.2
 552.8
 534.9
Retail customers:     
Public equity109.7
 104.2
 105.2
Public fixed income152.0
 138.7
 119.7
Real estate1.8
 2.0
 1.9
Private credit and other alternatives0.5
 0.5
 0.3
Multi-asset56.2
 60.2
 60.8
Retail customers(3)320.2
 305.6
 287.9
General account:     
Public equity4.0
 4.4
 4.0
Public fixed income354.8
 328.6
 321.9
Real estate67.2
 66.0
 63.5
Private credit and other alternatives77.1
 73.5
 70.3
Multi-asset0.0
 0.1
 0.1
General account503.1
 472.6
 459.8
Total PGIM assets under management(4)$1,394.5
 $1,331.0
 $1,282.6
      
Assets under management within other reporting segments(4)(5)$210.8
 $219.9
 $214.8
Total PFI assets under management$1,605.3
 $1,550.9
 $1,497.4
__________
(1)Prior period amounts have been updated to conform to current period presentation. “Public equity” represents stock ownership interest in a corporation or partnership (excluding hedge funds) or real estate investment trust. “Public fixed income” represents debt instruments that pay interest and usually have a maturity (excluding mortgages). “Real estate” includes direct real estate equity and real estate mortgages. “Private credit and other alternatives” includes private credit, private equity, hedge funds, agricultural debt and equity and other alternative strategies. “Multi-asset” includes funds or products that invest in more than one asset class balancing equity and fixed income funds and target date funds.
(2)Consists of third-party institutional assets and group insurance contracts.
(3)Consists of individual mutual funds and variable annuities and variable life insurance separate account assets; funds invested in proprietary mutual funds through our defined contribution plan products; and third-party sub-advisory relationships. Fixed annuities and the fixed-rate accounts of variable annuities and variable life insurance are included in the general account.
(4)Effective first quarter of 2020, certain assets have been reclassified from the U.S. Individual Solutions division to PGIM.
(5)Primarily include certain assets related to annuity and variable life products in our U.S. Individual Solutions division, retirement and group life products in our U.S. Workplace Solutions division and certain general account assets of our International Businesses. These assets are not directly managed by PGIM, but rather are invested in non-proprietary funds or are managed by either the divisions themselves or our Chief Investment Officer Organization.

PGIM’s assets under management increased $112 billion in comparison to the prior year quarter primarily reflecting market appreciation and public fixed income inflows, partially offset by public equity outflows. PGIM’s assets under management increased $64 billion in comparison to the prior year-end primarily reflecting market appreciation and public fixed income inflows, partially offset by public equity outflows.

The following table sets forth the component changes in PGIM’s assets under management by asset source for the periods indicated.



 Three Months Ended
June 30,
 Six Months Ended
June 30,
 Twelve
Months
Ended
June 30,
 2020 2019 2020 2019 2020
 (in billions)
Institutional Customers:         
Beginning assets under management$524.8
 $524.0
 $552.8
 $493.5
 $534.9
Net additions (withdrawals), excluding money market activity:         
Third-party(5.7) (6.0) (1.5) (5.0) (3.0)
Third-party via affiliates(1)(0.3) 0.8
 (1.1) 0.5
 (1.4)
Total(6.0) (5.2) (2.6) (4.5) (4.4)
Market appreciation (depreciation)(2)43.3
 16.6
 12.8
 40.9
 34.2
Other increases (decreases)(3)9.1
 (0.5) 8.2
 5.0
 6.5
Ending assets under management571.2
 534.9
 571.2
 534.9
 571.2
Retail Customers(4):         
Beginning assets under management282.4
 279.1
 305.6
 260.2
 287.9
Net additions (withdrawals), excluding money market activity:         
Third-party9.4
 1.1
 8.1
 1.5
 12.3
Third-party via affiliates(1)(14.0) (0.3) (3.1) (6.8) (6.5)
Total(4.6) 0.8
 5.0
 (5.3) 5.8
Market appreciation (depreciation)(2)42.0
 7.8
 9.4
 32.9
 25.9
Other increases (decreases)(3)0.4
 0.2
 0.2
 0.1
 0.6
Ending assets under management320.2
 287.9
 320.2
 287.9
 320.2
General Account:         
Beginning assets under management488.5
 441.0
 472.6
 427.8
 459.8
Net additions (withdrawals), excluding money market activity:         
Third-party0.0
 0.0
 0.0
 0.0
 0.0
Affiliated0.1
 1.0
 0.8
 1.6
 5.3
Total0.1
 1.0
 0.8
 1.6
 5.3
Market appreciation (depreciation)(2)18.0
 14.2
 17.4
 28.4
 25.9
Other increases (decreases)(3)(3.5) 3.6
 12.3
 2.0
 12.1
Ending assets under management503.1
 459.8
 503.1
 459.8
 503.1
Total assets under management(4)$1,394.5
 $1,282.6
 $1,394.5
 $1,282.6
 $1,394.5
__________
(1)Represents assets that PGIM manages for the benefit of other reporting segments within the Company. Additions and withdrawals of these assets are attributable to third-party product inflows and outflows in other reporting segments.
(2)Includes income reinvestment, where applicable.
(3)Includes the effect of foreign exchange rate changes, net money market activity and the impact of acquired business. The impact from foreign currency fluctuations, which primarily impact the general account, resulted in a gain of $1.1 billion and $1.9 billion for the three months ended June 30, 2020 and 2019, respectively, and a loss of $0.7 billion and gain of $0.7 billion for the six months ended June 30, 2020 and 2019, respectively; and a loss of $0.9 billion for the twelve months ended June 30, 2020.
(4)Prior period amounts have been updated to conform to current period presentation.

Strategic Investments

The following table sets forth PGIM’s strategic investments at carrying value (including the value of derivative instruments used to mitigate equity market and currency risk) by asset class and source as of the dates indicated.



 June 30, 2020 December 31, 2019
 (in millions)
Co-Investments(1):   
Public fixed income$441
 $462
Real estate210
 228
Private credit and other alternatives22
 19
Seed Investments(1):   
Public equity635
 671
Public fixed income343
 325
Real estate31
 34
Private credit and other alternatives61
 59
Multi-asset63
 74
Total$1,806
 $1,872
__________
(1)Prior period amounts have been updated to conform to current period presentation. For more information, see the “Assets Under Management” table above.

The decrease of $66 million in strategic investments was primarily driven by PGIM’s redemptions of invested seed capital and unfavorable market conditions impacting public fixed income and real estate co-investments.

U.S. Businesses

Operating Results
The following table sets forth the operating results for our U.S. Businesses for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended June 30, 2020
 2020 2019 2020 2019
 (in millions)
Adjusted operating income before income taxes:       
U.S. Businesses:       
U.S. Workplace Solutions division:       
Retirement$281
 $467
 $526
 $718
Group Insurance5
 81
 49
 134
Total U.S. Workplace Solutions division286
 548
 575
 852
U.S. Individual Solutions division:       
Individual Annuities249
 462
 622
 934
Individual Life(64) (135) (84) (30)
Total U.S. Individual Solutions division185
 327
 538
 904
Assurance IQ division(1):       
Assurance IQ(16) 0
 (39) 0
Total Assurance IQ division(16) 0
 (39) 0
Total U.S. Businesses455
 875
 1,074
 1,756
Reconciling Items:       
Realized investment gains (losses), net, and related adjustments(2)(2,188) (677) (2,428) (1,771)
Charges related to realized investment gains (losses), net551
 2
 (265) 33
Market experience updates(3)96
 (170) (844) (170)
Other adjustments(4)32
 0
 77
 0
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests0
 1
 1
 1
Income (loss) before income taxes and equity in earnings of operating joint ventures$(1,054) $31
 $(2,385) $(151)
________
(1)Assurance IQ was acquired by the Company in October 2019. For additional information, see Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
(2)Prior period amounts have been updated to conform to current period presentation.

(3)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(4)Represents adjustments not included in the above reconciling items. “Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Three Month Comparison. Adjusted operating income for our U.S. Businesses decreased by $420 million primarily due to:

Lower net investment spread results driven by lower income on non-coupon investments;

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

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

Partially offsetting these decreases were the following items:

Higher underwriting results primarily driven by our Retirement business due to higher reserve gains driven by COVID-19 related mortality gains; and

Lower expenses, including costs associated with strategic initiatives.

Six Month Comparison. Adjusted operating income for our U.S. Businesses decreased by $682 million primarily due to:

Lower net investment spread results driven by lower income on non-coupon investments;

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

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

A favorable impact from changes in market conditions on estimates of profitability in the prior year period, which beginning with the second quarter of 2019 is excluded from adjusted operating income (see Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information).

Partially offsetting these decreases was the following item:

Lower expenses, including costs associated with strategic initiatives.

U.S. BusinessesU.S. Workplace Solutions Division

Retirement

Operating Results

The following table sets forth Retirement’s operating results for the periods indicated.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Operating results:       
Revenues$2,992
 $3,586
 $5,429
 $6,225
Benefits and expenses2,711
 3,119
 4,903
 5,507
Adjusted operating income281
 467
 526
 718
Realized investment gains (losses), net, and related adjustments(1)16
 38
 (5) 168
Charges related to realized investment gains (losses), net12
 8
 (11) 11
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests0
 1
 1
 1
Income (loss) before income taxes and equity in earnings of operating joint ventures$309
 $514
 $511
 $898
__________ 
(1)Prior period amounts have been updated to conform to current period presentation.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $186 million, primarily reflecting an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for the second quarter of 2020 included a net charge of $22 million from these updates primarily driven by an increase in expected benefit payments, while results for the second quarter of 2019 included a net benefit of $154 million from these updates, primarily driven by a reduction in expected benefit payments. Excluding this item, adjusted operating income decreased $10 million, primarily driven by lower net investment spread results, partially offset by higher reserve gains. The decrease in net investment spread results primarily reflected lower income on non-coupon investments. The higher contribution from reserve experience was primarily driven by higher COVID-19 related mortality gains.

Six Month Comparison. Adjusted operating income decreased $192 million, primarily reflecting an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements, as discussed above. Excluding this item, adjusted operating income decreased $16 million, primarily driven by lower net investment spread results, partially offset by higher reserve gains. The decrease in net investment spread results primarily reflected lower income on non-coupon investments. The higher contribution from reserve experience was primarily driven by higher COVID-19 related mortality gains.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues decreased $594 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $600 million. This decrease primarily reflected lower pension risk transfer premiums with corresponding offsets in policyholders’ benefits, as discussed below. This decrease also reflected lower net investment income, primarily reflecting lower income on non-coupon investments.

Benefits and expenses decreased $408 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $590 million. Policyholders’ benefits, including the change in policy reserves, decreased primarily related to the decrease in pension risk transfer premiums discussed above, as well as a higher contribution from reserve experience primarily driven by higher COVID-19 related mortality gains.

Six Month Comparison. Revenues decreased $796 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $802 million. This decrease primarily reflected lower pension risk transfer premiums with corresponding offsets in policyholders’ benefits, as discussed below. This decrease also reflected lower net investment income, primarily reflecting lower income on non-coupon investments.

Benefits and expenses decreased $604 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $786 million. Policyholders’ benefits, including the change in policy reserves, decreased primarily related to the decrease in pension risk transfer premiums discussed above, as well as a higher contribution from reserve experience primarily driven by higher COVID-19 related mortality gains.

Account Values

Account values are a significant driver of our operating results, and are primarily driven by net additions (withdrawals) and the impact of market changes. The income we earn on most of our fee-based products varies with the level of fee-based account values, since many policy fees are determined by these values. The investment income and interest we credit to policyholders on our spread-based products varies with the level of general account values. To a lesser extent, changes in account values impact our pattern of amortization of DAC and VOBA and general and administrative expenses. The following table shows the changes in the account values and net additions (withdrawals) of Retirement’s products for the periods indicated. Net additions (withdrawals) are plan sales and participant deposits or additions, as applicable, minus plan and participant withdrawals and benefits. Account values include both internally- and externally-managed client balances as the total balances drive revenue for the Retirement business. For more information on internally-managed balances, see “—PGIM.”


 Three Months Ended
June 30,
 Six Months Ended
June 30,
 Twelve
Months
Ended
June 30,
 2020 2019 2020 2019 2020
 (in millions)
Full Service:         
Beginning total account value$238,435
 $251,071
 $272,448
 $231,669
 $262,133
Deposits and sales5,455
 11,047
 14,407
 20,614
 30,187
Withdrawals and benefits(7,040) (7,259) (15,708) (16,364) (35,050)
Change in market value, interest credited and interest income and other activity29,583
 7,274
 (4,714) 26,214
 9,163
Ending total account value$266,433
 $262,133
 $266,433
 $262,133
 $266,433
Institutional Investment Products:         
Beginning total account value$227,346
 $203,101
 $227,596
 $200,759
 $215,978
Additions(1)4,545
 15,044
 11,438
 17,291
 25,248
Withdrawals and benefits(3,527) (4,161) (9,037) (7,810) (17,970)
Change in market value, interest credited and interest income3,000
 2,826
 5,435
 5,470
 9,054
Other(2)(222) (832) (4,290) 268
 (1,168)
Ending total account value$231,142
 $215,978
 $231,142
 $215,978
 $231,142
__________
(1)Additions primarily include: group annuities calculated based on premiums received; funding agreements issued; unfunded longevity reinsurance contracts calculated as the present value of future projected benefits; and investment-only stable value contracts calculated as the fair value of customers’ funds held in a client-owned trust.
(2)“Other” activity includes the effect of foreign exchange rate changes associated with our British pounds sterling denominated longevity reinsurance business and changes in asset balances for externally-managed accounts. For the three months ended June 30, 2020 and 2019, “Other” activity also includes $2,614 million in receipts offset by $2,740 million in payments and $792 million in receipts offset by $577 million in payments, respectively, and for the six months ended June 30, 2020 and 2019, includes $5,366 million in receipts offset by $5,276 million in payments and $1,403 million in receipts offset by $1,194 million in payments, respectively, related to funding agreements backed by commercial paper which typically have maturities of less than 90 days.

The increase in full service account values for the three months and twelve months ended June 30, 2020 primarily reflected favorable changes in the market value of customer funds, partially offset by net withdrawals and benefits. The decrease in full service account values for the six months ended June 30, 2020 primarily reflected unfavorable changes in the market value of customer funds and net withdrawals and benefits.

The increase in institutional investment products account values for the three months, six months and twelve months ended June 30, 2020 reflected favorable changes in the market value of account assets. Account values for the three months ended June 30, 2020 also reflected net additions from pension risk transfer activity and investment-only stable value accounts. Account values for the six months ended June 30, 2020 also reflected net additions from collateralized funding agreements and investment-only stable value accounts, which were partially offset by pension risk transfer activity, and a decrease in other activity primarily driven by the negative impacts of foreign exchange rate changes. Account values for the twelve months ended June 30, 2020 also reflected net additions from pension risk transfer activity and collateralized funding agreements.

Group Insurance

Operating Results

The following table sets forth Group Insurance’s operating results and benefits and administrative operating expense ratios for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 ($ in millions)
Operating results:       
Revenues$1,471
 $1,461
 $2,895
 $2,902
Benefits and expenses1,466
 1,380
 2,846
 2,768
Adjusted operating income5
 81
 49
 134
Realized investment gains (losses), net, and related adjustments(10) 8
 71
 9
Income (loss) before income taxes and equity in earnings of operating joint ventures$(5) $89
 $120
 $143
Benefits ratio(1)(4):       
Group life(2)93.0% 90.2% 90.7% 89.6%
Group disability(2)74.0% 65.3% 75.0% 69.9%
Total Group Insurance(2)89.0% 84.7% 87.3% 85.3%
Administrative operating expense ratio(3)(4):       
Group life11.8% 12.2% 12.1% 11.9%
Group disability26.1% 24.2% 25.4% 25.5%
Total Group Insurance14.9% 14.8% 15.0% 14.8%
__________ 
(1)Ratio of policyholder benefits to earned premiums plus policy charges and fee income.
(2)Benefit ratios reflect the impact of our annual reviews and update of assumptions and other refinements. Excluding these impacts, the group life, group disability and total Group Insurance benefit ratios were 93.4%, 75.7% and 89.6% for the three months ended June 30, 2020, respectively, 90.9%, 75.8% and 87.6% for the six months ended June 30, 2020, respectively, 88.5%, 74.5% and 85.5% for the three months ended June 30, 2019, respectively, and 88.7%, 74.6% and 85.7% for the six months ended June 30, 2019, respectively.
(3)Ratio of general and administrative expenses (excluding commissions) to gross premiums plus policy charges and fee income.
(4)The benefit and administrative ratios are measures used to evaluate profitability and efficiency.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $76 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for both the second quarter of 2020 and 2019 included a net benefit from this update of $11 million and $9 million, respectively. Excluding this item, adjusted operating income decreased $78 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts. The decrease also reflected lower net investment spread results driven by lower income on non-coupon investments.

Six Month Comparison. Adjusted operating income decreased $85 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Excluding this item, adjusted operating income decreased $87 million, primarily reflecting lower underwriting results in our group life business driven by unfavorable claim experience mostly due to COVID-19 impacts on non-experience-rated contracts. The decrease also reflected lower net investment spread results driven by lower income on non-coupon investments.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues increased $10 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $21 million. The decrease primarily reflected lower net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below, partially offset by higher premiums and policy charges and fee income driven by growth in our group life business.

Benefits and expenses increased $86 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $57 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, which reflected increases in our group life business mostly due to COVID-19 impacts. The increase was partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.

Six Month Comparison. Revenues decreased $7 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $38 million. The decrease primarily reflected lower net investment income driven by lower income on non-coupon investments, with partial offsets in interest credited to policyholder account balances, as discussed below, partially offset by higher premiums and policy charges and fee income driven by growth in our group life and disability businesses.

Benefits and expenses increased $78 million. Excluding the impact from our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $49 million. The increase primarily reflected higher policyholders’ benefits and changes in reserves, which reflected increases in our group life business mostly due to COVID-19 impacts. The increase was partially offset by lower interest credited to policyholder account balances, with partial offsets in net investment income, as discussed above.

Sales Results
The following table sets forth Group Insurance’s annualized new business premiums, as defined under “—Segment Measures” above, for the periods indicated.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Annualized new business premiums(1):       
Group life$8
 $17
 $181
 $191
Group disability18
 16
 126
 135
Total$26
 $33
 $307
 $326
__________ 
(1)Amounts exclude new premiums resulting from rate changes on existing policies, from additional coverage under our Servicemembers’ Group Life Insurance contract and from excess premiums on group universal life insurance that build cash value but do not purchase face amounts.

Total annualized new business premiums for the three months ended June 30, 2020 decreased $7 million compared to the prior year period, driven by lower sales in our group life business. Total annualized new business premiums for the six months ended June 30, 2020 decreased $19 million compared to the prior year period, driven by lower sales in our group life and group disability businesses. Sales levels reflect pricing competitiveness and reduced levels of client case movement within the large market.

U.S. BusinessesU.S. Individual Solutions Division

Individual Annuities

Operating Results

The following table sets forth Individual Annuities’ operating results for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Operating results:       
Revenues$953
 $1,288
 $2,101
 $2,523
Benefits and expenses704
 826
 1,479
 1,589
Adjusted operating income249
 462
 622
 934
Realized investment gains (losses), net, and related adjustments(2,178) (881) (3,043) (2,225)
Charges related to realized investment gains (losses), net474
 56
 99
 190
Market experience updates(1)18
 (10) (628) (10)
Income (loss) before income taxes and equity in earnings of operating joint ventures$(1,437) $(373) $(2,950) $(1,111)

________
(1)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income decreased $213 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for the second quarter of 2020 included a $136 million net charge from these updates primarily driven by unfavorable impacts related to a decrease in long-term interest rate assumptions. Results for the second quarter of 2019 included a $12 million net charge from these updates. Excluding this item, adjusted operating income decreased $89 million primarily driven by lower fee income, net of distribution expenses and other associated costs, due to lower average account values, unfavorable impacts from our living benefit guarantees, and certain products reaching contractual milestones for fee tier reduction. This decrease was partially offset by higher net investment spread results due to a higher level of invested assets.

Six Month Comparison. Adjusted operating income decreased $312 million, including an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements, as discussed above. Excluding this item, adjusted operating income decreased $188 million. The decrease was primarily driven by lower fee income, net of distribution expenses and other associated costs, due to unfavorable impacts from our living benefit guarantees, certain products reaching contractual milestones for fee tier reduction, and lower average account values.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues decreased $335 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $203 million. The decrease was primarily driven by lower policy charges and fee income, as well as a decrease in asset management and service fees and other income, reflecting lower average account values resulting from net outflows, unfavorable impacts from our living benefit guarantees resulting from declining interest rates and certain products reaching contractual milestones for fee tier reductions. Also contributing to the decrease were lower premiums resulting from a decrease in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below. These decreases were partially offset by higher net investment income reflecting a higher level of invested assets.

Benefits and expenses decreased $122 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $114 million primarily driven by policyholders’ benefits, including changes in reserves, due to lower reserve provisions resulting from a decrease in single premium immediate annuity sales, with offsets in premiums, as discussed above. Also contributing to the decrease were lower general and administrative expenses, net of capitalization, driven by lower distribution expenses reflecting lower average account values.

Six Month Comparison. Revenues decreased $422 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $290 million. The decrease was primarily driven by lower policy charges and fee income, as well as a decrease in asset management and service fees and other income, reflecting unfavorable impacts from our living benefit guarantees resulting from declining interest rates, certain products reaching contractual milestones for fee tier reductions, and lower average account values resulting from net outflows. Also contributing to the decrease were lower premiums resulting from a decrease in single premium immediate annuity sales, with offsets in policyholders’ benefits as discussed below.

Benefits and expenses decreased $110 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased $102 million primarily driven by policyholders’ benefits, including changes in reserves, due to lower reserve provisions resulting from a decrease in single premium immediate annuity sales, with offsets in premiums, as discussed above. Also contributing to the decrease were lower general and administrative expenses, net of capitalization, driven by lower distribution expenses reflecting lower average account values.

Account Values

Account values are a significant driver of our operating results. Since most fees are determined by the level of separate account assets, fee income varies primarily based on the level of account values. Additionally, our fee income generally drives other items such as the pattern of amortization of DAC and other costs. Account values are driven by net flows from new business sales, surrenders, withdrawals and benefit payments, policy charges and the impact of positive or negative market value changes.

The annuity industry’s competitive and regulatory landscapes, which have been dynamic over the last few years, may impact our net flows, including new business sales. The following table sets forth account value information for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 Twelve
Months
Ended
June 30,
 2020 2019 2020 2019 2020
 (in millions)
Total Individual Annuities(1):         
Beginning total account value$143,976
 $161,890
 $169,681
 $151,080
 $165,313
Sales1,346
 2,675
 3,273
 4,982
 8,011
Full surrenders and death benefits(1,410) (2,397) (3,929) (4,337) (8,966)
Sales, net of full surrenders and death benefits(64) 278
 (656) 645
 (955)
Partial withdrawals and other benefit payments(1,146) (1,229) (2,545) (2,465) (5,243)
Net flows(1,210) (951) (3,201) (1,820) (6,198)
Change in market value, interest credited and other activity17,358
 5,289
 (5,464) 17,862
 3,747
Policy charges(848) (915) (1,740) (1,809) (3,586)
Ending total account value$159,276
 $165,313
 $159,276
 $165,313
 $159,276
__________
(1)Includes gross variable and fixed annuities sold as retail investment products. Investments sold through defined contribution plan products are included with such products within our Retirement business. Variable annuity account values were $154.1 billion and $161.0 billion as of June 30, 2020 and 2019, respectively. Fixed annuity account values were $5.2 billion and $4.3 billion as of June 30, 2020 and 2019, respectively.

The increase in account values for the three months ended June 30, 2020 and the decrease for the six months ended June 30, 2020 were largely driven by market value appreciation and depreciation, respectively. For both periods, in comparison to the prior year period, the decrease in net flows primarily reflected a decline in gross sales largely driven by benefit rate reductions and pricing actions in response to capital market pressures.

The decrease in account values for the twelve months ended June 30, 2020 was largely driven by partial withdrawals and other benefit payments on contracts as well as policy charges on contractholder accounts, partially offset by market value appreciation.

Risks and Risk Mitigants

The following is a summary of certain risks associated with Individual Annuities’ products, certain strategies in mitigating those risks including any updates to those strategies since the previous year-end, and the related financial results. For a more detailed description of these items and their related accounting treatment, refer to the complete descriptions provided in our Annual Report on Form 10-K for the year ended December 31, 2019.

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

Variable Annuity Risks and Risk Mitigants. The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital markets assumptions such as equity market returns, interest rates and market volatility, along with actuarial assumptions such as contractholder mortality, the timing and amount of annuitization and withdrawals, and contract lapses. For these risk exposures, achievement of our expected returns is subject to the risk that actual experience will differ from the assumptions used in the original pricing of these products. We manage our exposure to certain risks driven by fluctuations in capital markets primarily through a combination of i) Product Design Features, ii) Asset Liability Management Strategy, and iii) Capital Hedge Program as discussed below. We also manage these risk exposures through external reinsurance for certain of our variable annuity products.

i.Product Design Features:

A portion of the variable annuity contracts that we offer include an automatic rebalancing feature, also referred to as an asset transfer feature. This feature is implemented at the contract level, and transfers assets between certain variable investment sub-accounts selected by the annuity contractholder and, depending on the benefit feature, a fixed-rate account in the general account or a bond fund sub-account within the separate accounts. The objective of the automatic rebalancing feature is to reduce our exposure to equity market risk and market volatility. Other product design features we utilize include, among others, asset allocation restrictions, minimum issuance age requirements and certain limitations on the amount of contractholder purchase payments, as well as a required minimum allocation to our general account for certain of our products. We continue to introduce products that diversify our risk profile and have incorporated provisions in product design allowing frequent revisions of key pricing elements for certain of our products. In addition, there is diversity in our fee arrangements, as certain fees are primarily based on the benefit guarantee amount, the contractholder account value and/or premiums, which helps preserve certain revenue streams when market fluctuations cause account values to decline.

ii.Asset Liability Management (“ALM”) Strategy (including fixed income instruments and derivatives):

We employ an ALM strategy that utilizes a combination of both traditional fixed income instruments and derivatives to help defray potential claims associated with our variable annuity living benefit guarantees. The economic liability we manage with this ALM strategy consists of expected living benefit claims under less severe market conditions, which are managed using an ALM strategy through the accumulation of fixed income and derivative instruments, and potential living benefit claims resulting from more severe market conditions, which are hedged using derivative instruments. For our Prudential Defined Income (“PDI”) variable annuity, we utilize fixed income instruments to help defray potential claims. For the portion of our ALM strategy executed with derivatives, we enter into a range of exchange-traded and over-the-counter (“OTC”) equity and interest rate derivatives, including, but not limited to: equity and treasury futures; total return and interest rate swaps; and options including equity options, swaptions, and floors and caps. The intent of this strategy is to more efficiently manage the capital and liquidity associated with these products while continuing to mitigate fluctuations in net income due to movements in capital markets.

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

The valuation of the economic liability we seek to defray excludes certain items that are included within the U.S. GAAP liability, such as non-performance risk (“NPR”) (in order to maximize protection irrespective of the possibility of our own default), as well as risk margins (required by U.S. GAAP but different from our best estimate) and valuation methodology differences. The following table provides a reconciliation between the liability reported under U.S. GAAP and the economic liability we manage through our ALM strategy as of the periods indicated:
 
June 30,
2020
 
December 31,
2019
 (in millions)
U.S. GAAP liability, including NPR, net of reinsurance recoverables(1)$25,777
 $12,612
NPR adjustment, net of reinsurance recoverables(1)6,539
 3,522
Subtotal32,316
 16,134
Adjustments including risk margins and valuation methodology differences(8,907) (4,385)
Economic liability managed through the ALM strategy$23,409
 $11,749
________
(1)Prior period amounts have been updated to conform to current period presentation.

As of June 30, 2020, the fair value of our fixed income instruments and derivative assets exceed the economic liability within the entities in which the risks reside.

iii.Capital Hedge Program:


We employ a capital hedge program to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets. The capital hedge program is conducted using equity derivatives which include equity call and put options, total return swaps and futures contracts. The changes in value of these derivatives have historically been recognized in adjusted operating income over the expected duration of the capital hedge program. Beginning with the second quarter of 2020, these impacts are excluded from adjusted operating income which the Company believes enhances the understanding of underlying performance trends.

Results excluded from adjusted operating income

The following table provides the net impact to the Unaudited Interim Consolidated Statements of Operations from the results excluded from adjusted operating income, which is primarily driven by the changes in the U.S. GAAP embedded derivative liability and hedge positions under the ALM strategy, and the related amortization of DAC and other costs.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
Results excluded from adjusted operating income(2)(in millions)(1)
Change in value of U.S. GAAP liability, pre-NPR(3)$5,467
 $(2,545) $(15,071) $(2,265)
Change in the NPR adjustment(3,582) 190
 3,017
 (873)
Change in fair value of hedge assets, excluding capital hedges(4)(3,349) 1,410
 8,605
 1,265
Change in fair value of capital hedges(5)(704) (159) 248
 (631)
Other(10) 223
 158
 279
Realized investment gains (losses), net, and related adjustments(2,178) (881) (3,043) (2,225)
Market experience updates(6)18
 (10) (628) (10)
Charges related to realized investment gains (losses), net474
 56
 99
 190
Total results excluded from adjusted operating income(7)$(1,686) $(835) $(3,572) $(2,045)
__________
(1)Positive amount represents income; negative amount represents a loss.
(2)Includes the impact of annual reviews and update of assumptions and other refinements.
(3)Represents the change in the liability (excluding NPR) for our variable annuities living benefit guarantees which is measured utilizing a valuation methodology that is required under U.S. GAAP. This liability includes such items as risk margins which are required by U.S. GAAP but not included in our best estimate of the liability.
(4)Represents the change in fair value of the derivatives utilized to hedge potential claims associated with our variable annuity living benefit guarantees.
(5)Represents the changes in fair value of equity derivatives of the capital hedge program intended to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets.
(6)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019.
(7)Excludes amounts from the changes in fair value of fixed income instruments recorded in OCI (versus net income): a loss of $4 million and gain of $391 million for the three months ended June 30, 2020 and 2019, respectively; and a gain of $1,702 million and $651 million for the six months ended June 30, 2020 and 2019, respectively.

For the three months ended June 30, 2020, the loss of $1,686 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable NPR adjustment, unfavorable hedge breakage driven by credit spreads tightening, and losses associated with our capital hedge program, partially offset by a favorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by tightening of credit spreads. These net losses were partially offset by a benefit related to the amortization of DAC and other costs.
For the six months ended June 30, 2020, the loss of $3,572 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates, widening of credit spreads, and unfavorable equity market performance. Also contributing to the results were unfavorable hedge breakage driven by credit spreads tightening and losses from duration management swaps associated with the living benefit results, partially offset by a favorable NPR adjustment. These net losses were partially offset by a benefit related to the amortization of DAC and other costs.
For the three months ended June 30, 2019, the loss of $835 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates with partial offsets driven by favorable equity market performance, losses associated with our capital hedge program, and losses from duration management swaps associated with the living benefit results. Partially offsetting these losses was a favorable NPR adjustment. These net losses were partially offset by a benefit related to the amortization of DAC and other costs.

For the six months ended June 30, 2019, the loss of $2,045 million primarily reflected unfavorable living benefit results. These results were driven by an unfavorable NPR adjustment, an unfavorable impact related to the portions of the U.S. GAAP liability before NPR (excluded from our hedge target) driven by declining interest rates with partial offsets driven by favorable equity market performance, losses associated with our capital hedge program, and losses from duration management swaps associated with the living benefit results. These net losses were partially offset by a benefit related to the amortization of DAC and other costs.
Product Specific Risks and Risk Mitigants

As noted above, the risks associated with our products are mitigated through product design features, including automatic rebalancing, as well as through our ALM strategy and external reinsurance. The following table sets forth the risk management profile of our living benefit guarantees and guaranteed minimum death benefit (“GMDB”) features as of the periods indicated.

  June 30, 2020 December 31, 2019 June 30, 2019
  
Account
Value
 
% of
Total
 
Account
Value
 
% of
Total
 
Account
Value
 
% of
Total
  ($ in millions)
Living benefit/GMDB features(1):            
Both ALM strategy and automatic rebalancing(2)(3) $102,137
 66% $111,535
 68% $109,819
 68%
ALM strategy only(3) 6,836
 4% 7,703
 5% 7,855
 5%
Automatic rebalancing only 646
 1% 732
 1% 778
 1%
External reinsurance(4) 2,855
 2% 3,150
 2% 3,096
 2%
PDI 17,646
 12% 16,296
 9% 14,248
 9%
Other products 2,225
 1% 2,457
 1% 2,475
 1%
Total living benefit/GMDB features $132,345
   $141,873
   $138,271
  
GMDB features and other(5) 21,734
 14% 23,055
 14% 22,746
 14%
Total variable annuity account value $154,079
   $164,928
   $161,017
  
__________
(1)All contracts with living benefit guarantees also contain GMDB features, which cover the same insured contract.
(2)Contracts with living benefits that are included in our ALM strategy and that have an automatic rebalancing feature.
(3)Excludes PDI which is presented separately within this table.
(4)Represents contracts subject to a reinsurance transaction with an external counterparty covering certain new Highest Daily Lifetime Income (“HDI”) v.3.0 business for the period April 1, 2015 through December 31, 2016. These contracts with living benefits also have an automatic rebalancing feature.
(5)Includes contracts that have a GMDB feature and do not have an automatic rebalancing feature.

Individual Life

Operating Results

The following table sets forth Individual Life’s operating results for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Operating results:       
Revenues$1,563
 $1,508
 $3,093
 $2,990
Benefits and expenses1,627
 1,643
 3,177
 3,020
Adjusted operating income(64) (135) (84) (30)
Realized investment gains (losses), net, and related adjustments(16) 158
 549
 277
Charges related to realized investment gains (losses), net65
 (62) (353) (168)
Market experience updates(1)78
 (160) (216) (160)
Income (loss) before income taxes and equity in earnings of operating joint ventures$63
 $(199) $(104) $(81)

__________
(1)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Adjusted Operating Income

Three Month Comparison. Adjusted operating income reflected a decrease in losses of $71 million, primarily reflecting a favorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for the second quarter of 2020 included a $92 million net charge from these updates, mainly driven by unfavorable impacts related to a decrease in long-term interest rate assumptions. Results for the second quarter of 2019 included a $208 million net charge from these updates, mainly driven by unfavorable impacts related to mortality assumptions. Excluding this item, adjusted operating income decreased $45 million, primarily reflecting lower net investment spread results driven by lower income on non-coupon investments and lower investment yields, partially offset by business growth. Also contributing to the decrease were lower underwriting results driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims. These decreases were partially offset by lower expenses from cost savings initiatives, as well as the absence of certain expenses incurred in the prior year period.

Six Month Comparison. Adjusted operating income reflected an increase in losses of $54 million, including a favorable comparative net impact from our annual reviews and update of assumptions and other refinements, as discussed above. Excluding this item, adjusted operating income decreased $170 million, primarily reflecting lower underwriting results, driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims, and lower net investment spread results driven by lower income on non-coupon investments and lower investment yields, partially offset by business growth. Also contributing to the decrease was the absence of a favorable impact from changes in market conditions on estimates of profitability in the prior year period, which beginning with the second quarter of 2019, is excluded from adjusted operating income. These decreases were partially offset by lower expenses from cost savings initiatives, as well as the absence of certain expenses incurred in the prior year period.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues increased $55 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues decreased $16 million. This decrease was primarily driven by lower net investment income due to lower income on non-coupon investments and lower investment yields, partially offset by the impact of higher average invested assets resulting from business growth. The decrease was partially offset by higher policy charges and fee income driven by business growth.

Benefits and expenses decreased $16 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $29 million. This increase was primarily driven by higher general and administrative expenses, net of capitalization, reflecting increased VOBA amortization, partially offset by lower expenses as discussed above. Also contributing to this increase were higher policyholders’ benefits driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims, as well as higher interest credited to account balances driven by business growth.

Six Month Comparison. Revenues increased $103 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased $32 million. This increase was primarily driven by higher policy charges and fee income driven by business growth.

Benefits and expenses increased $157 million. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses increased $202 million. This increase reflected higher policyholders’ benefits driven by an unfavorable impact from mortality experience, net of reinsurance, primarily attributable to COVID-19 related claims, as well as higher interest credited to account balances driven by business growth. Also contributing to the increase was the absence of a favorable impact from changes in market conditions on estimates of profitability in the prior year period, as discussed above. The increase also reflected higher general and administrative expenses, net of capitalization, reflecting increased VOBA amortization, partially offset by lower expenses as discussed above.


Sales Results

The following table sets forth Individual Life’s annualized new business premiums, as defined under “—Results of Operations—Segment Measures” above, by distribution channel and product, for the periods indicated.
  Three Months Ended June 30, 2020 Three Months Ended June 30, 2019
  
Prudential
Advisors
 
Third-
Party
 Total 
Prudential
Advisors
 
Third-
Party
 Total
  (in millions)
Term Life $7
 $33
 $40
 $7
 $46
 $53
Guaranteed Universal Life(1) 1
 33
 34
 2
 22
 24
Other Universal Life(1) 5
 18
 23
 11
 37
 48
Variable Life 22
 65
 87
 19
 37
 56
Total $35
 $149
 $184
 $39
 $142
 $181
             
  Six Months Ended June 30, 2020 Six Months Ended June 30, 2019
  
Prudential
Advisors
 
Third-
Party
 Total 
Prudential
Advisors
 
Third-
Party
 Total
  (in millions)
Term Life $13
 $67
 $80
 $14
 $90
 $104
Guaranteed Universal Life(1) 3
 60
 63
 4
 41
 45
Other Universal Life(1) 12
 41
 53
 20
 58
 78
Variable Life 42
 133
 175
 35
 82
 117
Total $70
 $301
 $371
 $73
 $271
 $344
__________
(1)Single pay life premiums and excess (unscheduled) premiums are included in annualized new business premiums based on a 10% credit and represented approximately 12% and 7% of Guaranteed Universal Life and 11% and 17% of Other Universal Life annualized new business premiums for the three months ended June 30, 2020 and 2019, respectively, and approximately 9% and 7% of Guaranteed Universal Life and 10% and 14% of Other Universal Life annualized new business premiums for the six months ended June 30, 2020 and 2019, respectively. Prior period percentages have been updated to conform to current period presentation.

Total annualized new business premiums for the second quarter and the first six months of 2020 increased $3 million and $27 million, respectively, compared to the prior year periods primarily driven by higher sales of variable life products as a result of product design and pricing actions, and higher sales of guaranteed universal life products. The increases for both periods were partially offset by lower sales of term life products due to pricing actions and lower other universal life products due to the absence of large case activity in the second quarter of 2020.

U.S. Businesses—Assurance IQ Division
Assurance IQ

Operating Results

The following table sets forth Assurance IQ’s operating results for the period indicated.
  Three Months Ended
June 30, 2020
 Six Months Ended
June 30, 2020
  (in millions)
Operating results:    
Revenues $59
 $119
Expenses 75
 158
Adjusted operating income (16) (39)
Other adjustments(1) 32
 77
Income (loss) before income taxes and equity in earnings of operating joint ventures $16
 $38
__________
(1)“Other adjustments” include certain components of the consideration for the Assurance IQ acquisition, which are recognized as compensation expense over the requisite service periods, as well as changes in the fair value of contingent consideration. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Adjusted Operating Income

The acquisition of Assurance IQ was completed in October 2019. Adjusted operating income for the second quarter and the first six months of 2020 was $(16) million and $(39) million, respectively, reflecting revenues, net of marketing and distribution expenses, primarily related to our health (Health Under 65) and life insurance product lines. Results also included operating expenses and amortization expenses related to intangible assets recognized as part of purchase accounting (see Note 1 and Note 10 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information).

Revenues and Expenses

Revenues for the second quarter and the first six months of 2020 were $59 million and $119 million, respectively, primarily reflecting commissions and marketing referral revenues from our health (Health Under 65) and life insurance product lines. Expenses for the second quarter and the first six months of 2020 were $75 million and $158 million, respectively, driven by marketing and distribution costs, general and administrative operating expenses, and amortization expenses related to intangible assets.

International Businesses
Business Update

In April 2020, we entered into a definitive agreement with KB Financial Group, Inc., a Korean financial services provider, to sell The Prudential Life Insurance Company of Korea, Ltd. (“POK”) for cash consideration of approximately $1.9 billion (based on current exchange rates) to be paid at closing. The transaction is consistent with our strategic focus internationally on Japan and higher-growth emerging markets around the world. The transaction is expected to close by the end of 2020, subject to regulatory approvals and customary closing conditions. In the second quarter of 2020, we reported our investment in POK as “held for sale” and recognized an approximately $700 million after-tax charge to earnings to adjust the carrying value of POK to the fair market value reflected in the purchase price (see Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information). Effective in the second quarter of 2020, the results of this business and the impact of the anticipated sale are reflected in the Divested and Run-off Businesses that are included in Corporate and Other, and all prior period amounts have been updated to conform to the current period presentation. We intend to use the proceeds of the transaction for general corporate purposes.

We are exploring strategic options for our Taiwanese insurance business, which may include a sale.

Operating Results
The results of our International Businesses’ operations are translated on the basis of weighted average monthly exchange rates, inclusive of the effects of the intercompany arrangement discussed in “—Results of Operations—Impact of Foreign Currency Exchange Rates” above. To provide a better understanding of operating performance within the International Businesses, where indicated below, we have analyzed our results of operations excluding the effect of the year over year change in foreign currency exchange rates. Our results of operations, excluding the effect of foreign currency fluctuations, were derived by translating foreign currencies to USD at uniform exchange rates for all periods presented, including for constant dollar information discussed below. The exchange rate used was Japanese yen at a rate of 104 yen per USD, which was determined in connection with the foreign currency income hedging program discussed in “—Results of Operations—Impact of Foreign Currency Exchange Rates” above. In addition, for constant dollar information discussed below, activity denominated in USD is generally reported based on the amounts as transacted in USD. Annualized new business premiums presented on a constant exchange rate basis in the “Sales Results” section below reflect translation based on these same uniform exchange rates.
The following table sets forth the International Businesses’ operating results for the periods indicated.

 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Operating results(1):       
Revenues:       
Life Planner$2,474
 $2,409
 $5,333
 $5,156
Gibraltar Life and Other2,759
 2,649
 5,677
 5,626
Total revenues5,233
 5,058
 11,010
 10,782
Benefits and expenses:       
Life Planner2,170
 2,030
 4,665
 4,359
Gibraltar Life and Other2,370
 2,238
 4,954
 4,774
Total benefits and expenses4,540
 4,268
 9,619
 9,133
Adjusted operating income:       
Life Planner304
 379
 668
 797
Gibraltar Life and Other389
 411
 723
 852
Total adjusted operating income693
 790
 1,391
 1,649
Realized investment gains (losses), net, and related adjustments(2)177
 261
 662
 783
Charges related to realized investment gains (losses), net(15) (3) (22) (3)
Market experience updates(3)(37) (37) (46) (37)
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(34) (28) (30) (58)
Income (loss) before income taxes and equity in earnings of operating joint ventures$784
 $983
 $1,955
 $2,334
__________
(1)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
(2)Prior period amounts have been updated to conform to current period presentation.
(3)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.

Adjusted Operating Income
Three Month Comparison. Adjusted operating income from our Life Planner operations decreased $75 million, including a net unfavorable impact of $3 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in a $43 million net charge in the second quarter of 2020 compared to a $4 million net benefit in the second quarter of 2019. The net charge in 2020 is primarily driven by unfavorable impacts related to a decrease in long-term interest rate assumptions.

Excluding these items, adjusted operating income from our Life Planner operations decreased $25 million, primarily reflecting lower net investment spread results driven by lower investment yields and lower income on non-coupon investments. Also contributing to the decrease were higher expenses driven by costs associated with COVID-19 (see “Overview—COVID-19”). These decreases were partially offset by favorable underwriting results primarily due to the growth of business in force in our Japan and Brazil operations.

Adjusted operating income from our Gibraltar Life and Other operations decreased $22 million, including a net unfavorable impact of $2 million from currency fluctuations, inclusive of the currency hedging program discussed above. Both periods also include the impact of our annual reviews and update of assumptions and other refinements, which resulted in a $52 million net charge in the second quarter of 2020 compared to a $7 million net benefit in the second quarter of 2019. The net charge in 2020 was primarily driven by updates of reserves reflecting the impact of a decrease in long-term interest rate assumptions, as well as other refinements.

Excluding these items, adjusted operating income from our Gibraltar Life and Other operations increased $39 million, primarily reflecting higher earnings from our joint venture investments due to market performance and lower expenses driven by lower costs associated with business initiatives, partially offset by costs associated with COVID-19 (see “Overview—COVID-19”).

Also contributing to the increase were favorable underwriting results driven by a favorable impact from mortality experience, and higher net investment spread results driven by higher income on non-coupon investments, partially offset by lower investment yields.

Six Month Comparison. Adjusted operating income from our Life Planner operations decreased $129 million, including a net unfavorable impact of $3 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, adjusted operating income from our Life Planner operations decreased $79 million primarily reflecting lower net investment spread results driven by lower income on non-coupon investments and lower investment yields. Also contributing to the decrease were higher expenses driven by updates to legal reserves, as well as higher costs related to business growth and business initiatives, and costs associated with COVID-19 (see “Overview—COVID-19”). These decreases were partially offset by favorable underwriting results due to the growth of business in force in our Japan and Brazil operations, partially offset by an unfavorable impact from mortality experience.

Adjusted operating income from our Gibraltar Life and Other operations decreased $129 million, including a net unfavorable impact of $4 million from currency fluctuations, inclusive of the currency hedging program discussed above. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, adjusted operating income from our Gibraltar Life and Other operations decreased $66 million, primarily reflecting lower net investment spread results driven by lower investment yields and lower income on non-coupon investments. Also contributing to the decrease were lower earnings from our joint venture investments due to market performance, as well as higher expenses driven by costs associated with COVID-19 (see “Overview—COVID-19”), partially offset by lower costs related to business initiatives. These decreases were partially offset by favorable underwriting results driven by the growth of business in force and a favorable impact from mortality experience.

Revenues, Benefits and Expenses

Three Month Comparison. Revenues from our Life Planner operations increased $65 million, including a net unfavorable impact of $21 million from currency fluctuations and a net benefit of $33 million from our annual reviews and update of assumptions and other refinements. Excluding these items, revenues increased $53 million, primarily driven by higher premiums and policy charges and fee income attributable to the growth of business in force, partially offset by lower net investment results driven by lower investment yields and lower income on non-coupon investments.

Benefits and expenses of our Life Planner operations increased $140 million, including a net favorable impact of $18 million from currency fluctuations and a net charge of $80 million from our annual reviews and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $78 million, primarily reflecting higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force, and higher expenses driven by costs associated with COVID-19.

Revenues from our Gibraltar Life and Other operations increased $110 million, including a net favorable impact of $18 million from currency fluctuations and a net charge of $9 million from our annual reviews and update of assumptions and other refinements. Excluding these items, revenues increased $101 million, primarily reflecting higher premiums driven by the growth of business in force, and higher other income driven by a favorable impact from our joint venture investments due to market performance.

Benefits and expenses of our Gibraltar Life and Other operations increased $132 million, including a net unfavorable impact of $20 million from currency fluctuations and a net charge of $50 million from our annual reviews and update of assumptions and other refinements. Excluding these items, benefits and expenses increased $62 million, primarily driven by higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force. The increase was partially offset by lower expenses driven by lower costs associated with business initiatives, partially offset by costs associated with COVID-19.

Six Month Comparison. Revenues from our Life Planner operations increased $177 million, including a net unfavorable impact of $45 million from currency fluctuations. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, revenues increased $189 million, primarily driven by higher premiums and policy charges and fee income attributable to the growth of business in force.

Benefits and expenses of our Life Planner operations increased $306 million, including a net favorable impact of $42 million from currency fluctuations. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, benefits and expenses increased $268 million, primarily reflecting higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force, as well as an unfavorable

impact from mortality experience. Also contributing to the decrease were higher expenses driven by updates to legal reserves, as well as higher costs related to business growth and business initiatives, and costs associated with COVID-19.

Revenues from our Gibraltar Life and Other operations increased $51 million, including a net favorable impact of $20 million from currency fluctuations. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, revenues increased $40 million, primarily driven by higher premiums attributable to the growth of business in force. The increase was partially offset by lower other income driven by an unfavorable impact from our joint venture investments due to market performance, and lower net investment results driven by lower investment yields and lower income on non-coupon investments.

Benefits and expenses of our Gibraltar Life and Other operations increased $180 million, including a net unfavorable impact of $24 million from currency fluctuations. Excluding the impact of currency fluctuations, as well as the impact from our annual reviews and update of assumptions and other refinements as discussed above, benefits and expenses increased $106 million, primarily driven by higher policyholders’ benefits, including changes in reserves, driven by the growth of business in force. Also contributing to the increase was higher expenses driven by costs associated with COVID-19, partially offset by lower costs associated with business initiatives.

Sales Results

The following table sets forth annualized new business premiums, as defined under “—Results of Operations—Segment Measures” above, on an actual and constant exchange rate basis for the periods indicated.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
  
2020 2019 2020 2019
 (in millions)
Annualized new business premiums(1):       
On an actual exchange rate basis:       
Life Planner$166
 $253
 $487
 $608
Gibraltar Life and Other197
 296
 504
 619
Total$363
 $549
 $991
 $1,227
On a constant exchange rate basis:       
Life Planner$178
 $255
 $505
 $613
Gibraltar Life and Other198
 298
 507
 623
Total$376
 $553
 $1,012
 $1,236
__________
(1)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.

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

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

The table below presents annualized new business premiums on a constant exchange rate basis, by product and distribution channel, for the periods indicated.

 Three Months Ended June 30, 2020 Three Months Ended June 30, 2019
 Life 
Accident
&
Health
 Retirement(1) Annuity Total Life 
Accident
&
Health
 Retirement(1) Annuity Total
 (in millions)
Life Planner(2)$89
 $18
 $71
 $0
 $178
 $137
 $23
 $95
 $0
 $255
Gibraltar Life and Other:                   
Life Consultants$59
 $7
 $6
 $17
 $89
 $84
 $10
 $19
 $56
 $169
Banks(3)57
 0
 3
 2
 62
 73
 0
 9
 3
 85
Independent Agency18
 2
 27
 0
 47
 19
 3
 18
 4
 44
Subtotal134
 9
 36
 19
 198
 176
 13
 46
 63
 298
Total$223
 $27
 $107
 $19
 $376
 $313
 $36
 $141
 $63
 $553
__________
(1)Includes retirement income, endowment and savings variable universal life.
(2)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
(3)Single pay life annualized new business premiums, which include 10% of first year premiums, and 3-year limited pay annualized new business premiums, which include 100% of new business premiums, represented 3% and 75%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended June 30, 2020, and 0% and 68%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the three months ended June 30, 2019.

Three Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations decreased $77 million, primarily driven by restrictions in sales activities due to COVID-19 (see “Overview—COVID-19”), which resulted in lower sales across products.

Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations decreased $100 million. Life Consultants and Bank channel sales decreased $80 million and $23 million, respectively, primarily driven by COVID-19 impacts. Life Consultants sales also reflected lower sales of USD-denominated fixed annuity products driven by declines in crediting rates and lower Life Consultant headcount. These decreases were partially offset by a $3 million increase in Independent Agency sales driven by higher sales of USD-denominated endowment products.

The table below presents annualized new business premiums on a constant exchange rate basis, by product and distribution channel, for the periods indicated.
 Six Months Ended June 30, 2020 Six Months Ended June 30, 2019
 Life 
Accident
&
Health
 Retirement(1) Annuity Total Life 
Accident
&
Health
 Retirement(1) Annuity Total
 (in millions)
Life Planner(2)$268
 $42
 $194
 $1
 $505
 $345
 $56
 $209
 $3
 $613
Gibraltar Life and Other:                   
Life Consultants$141
 $16
 $24
 $39
 $220
 $171
 $21
 $42
 $101
 $335
Banks(3)177
 0
 13
 4
 194
 167
 0
 18
 8
 193
Independent Agency40
 3
 48
 2
 93
 50
 6
 27
 12
 95
Subtotal358
 19
 85
 45
 507
 388
 27
 87
 121
 623
Total$626
 $61
 $279
 $46
 $1,012
 $733
 $83
 $296
 $124
 $1,236
__________
(1)Includes retirement income, endowment and savings variable universal life.
(2)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.
(3)Single pay life annualized new business premiums, which include 10% of first year premiums, and 3-year limited pay annualized new business premiums, which include 100% of new business premiums, represented 4% and 70%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the six months ended June 30, 2020, and 0% and 66%, respectively, of total Japanese bank distribution channel annualized new business premiums, excluding annuity products, for the six months ended June 30, 2019.


Six Month Comparison. Annualized new business premiums, on a constant exchange rate basis, from our Life Planner operations decreased $108 million primarily driven by COVID-19 impacts. Also contributing to the decrease were lower sales of corporate term products in Japan driven by the corporate product tax rule change effective July 2019.

Annualized new business premiums, on a constant exchange rate basis, from our Gibraltar Life and Other operations decreased $116 million. Life Consultants sales decreased $115 million, primarily driven by COVID-19 impacts, as well as lower sales of USD-denominated fixed annuity products driven by declines in crediting rates and lower Life Consultant headcount. Bank channel sales remained relatively flat reflecting higher sales of USD-denominated protection products, offset by lower sales due to COVID-19 impacts. Independent Agency sales also remained flat reflecting lower sales of USD-denominated protection and fixed annuity products, offset by higher sales of USD-denominated endowment products.

Corporate and Other
Corporate and Other includes corporate operations, after allocations to our business segments, and Divested and Run-off Businesses other than those that qualify for “discontinued operations” accounting treatment under U.S. GAAP.
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Operating results:       
Interest expense on debt(1)$(227) $(222) $(445) $(439)
Investment income(1)26
 64
 74
 126
Pension and employee benefits58
 36
 108
 60
Other corporate activities(2)(398) (213) (620) (494)
Adjusted operating income(541) (335) (883) (747)
Realized investment gains (losses), net, and related adjustments(1,179) (157) (1,219) (207)
Charges related to realized investment gains (losses), net(17) (81) 4
 (87)
Market experience updates(3)(4) 0
 4
 0
Divested and Run-off Businesses(4)(602) 168
 (580) 415
Equity in earnings of operating joint ventures and earnings attributable to noncontrolling interests(14) (7) 8
 (15)
Income (loss) before income taxes and equity in earnings of operating joint ventures$(2,357) $(412) $(2,666) $(641)
__________ 
(1)Prior period amounts have been updated to conform to current period presentation.
(2)Includes consolidating adjustments.
(3)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability, which are excluded from adjusted operating income beginning with the second quarter of 2019. See Note 13 to the Unaudited Interim Consolidated Financial Statements for additional information.
(4)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.

Three Month Comparison. The loss from Corporate and Other operations, on an adjusted operating income basis, increased $206 million. Net charges from other corporate activities increased $185 million primarily driven by increases to legal reserves, partially offset by lower costs related to corporate initiatives. Investment income decreased $38 million primarily due to lower income on non-coupon investments and highly liquid assets. Interest expense on debt increased $5 million reflecting higher average debt balances. Results from pension and employee benefits increased $22 million primarily driven by a decrease in employee health benefit costs.

Six Month Comparison. The loss from Corporate and Other operations, on an adjusted operating income basis, increased $136 million. Net charges from other corporate activities increased $126 million primarily driven by increases to legal reserves, partially offset by lower costs for deferred and long-term compensation plans tied to Company stock and equity market performance, as well as lower costs related to corporate initiatives. Investment income decreased $52 million primarily driven by lower income on non-coupon investments and highly liquid assets. Interest expense on debt increased $6 million reflecting higher average debt balances. Results from pension and employee benefits increased $48 million primarily driven by a decrease in employee health benefit costs.

Divested and Run-off Businesses

Divested and Run-off Businesses Included in Corporate and Other
Income from our Divested and Run-off Businesses includes results from several businesses that have been or will be sold or exited, including businesses that have been placed in wind down status that do not qualify for “discontinued operations” accounting treatment under U.S. GAAP. The results of these Divested and Run-off Businesses are reflected in our Corporate and Other operations, but are excluded from adjusted operating income. A summary of the results of the Divested and Run-off Businesses reflected in our Corporate and Other operations is as follows for the periods indicated:
 Three Months Ended
June 30,
 Six Months Ended
June 30,
  
2020 2019 2020 2019
 (in millions)
Long-Term Care$107
 $145
 $188
 $309
Other(1)(709) 23
 (768) 106
Total Divested and Run-off Businesses income (loss) excluded from adjusted operating income$(602) $168
 $(580) $415
__________
(1)Effective second quarter of 2020, the results of POK and the impact of its anticipated sale are excluded from the International Businesses and are included in the Divested and Run-off Businesses in Corporate and Other. Prior period amounts have been updated to conform to current period presentation. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.

Long-Term Care. Results for the second quarter and the first six months of 2020 decreased compared to the prior year periods, including the impact of an unfavorable comparative net impact from our annual reviews and update of assumptions and other refinements. Results for the second quarter of 2020 included a $33 million net charge from these updates, while results for the second quarter of 2019 included a $9 million net charge from these updates. Excluding this item, results for the second quarter and the first six months of 2020 decreased compared to the prior year periods. The decrease for the second quarter of 2020 included an unfavorable impact from changes in the market value of derivatives used for duration management and lower income on non-coupon investments, partially offset by a favorable impact from changes in the market value of equity securities. The decrease for the first six months of 2020 included an unfavorable impact from changes in the market value of equity securities. This decrease also included lower underwriting results driven by unfavorable policy experience and an increase in reserves as a result of an unlocking of assumptions in the first quarter of 2020 due to the decline in interest rates. These decreases were partially offset by a favorable impact from changes in the market value of derivatives used for duration management.

Other. Results for the second quarter and the first six months of 2020 primarily reflect the results of POK and the impact of its anticipated sale. See Note 1 to the Unaudited Interim Consolidated Financial Statements for additional information.

Closed Block Division
 
The Closed Block division includes certain in-force traditional domestic participating life insurance and annuity products and assets that are used for the payment of benefits and policyholder dividends on these policies (collectively the “Closed Block”), as well as certain related assets and liabilities. We no longer offer these traditional domestic participating policies. See Note 87 to the Unaudited Interim Consolidated Financial Statements for additional details.information.
 
Each year, the Board of Directors of The Prudential Insurance Company of America (“PICA”) determines the dividends payable on participating policies for the following year based on the experience of the Closed Block, including investment income, net realized and unrealized investment gains (losses), mortality experience and other factors. Although the Closed Block experience for dividend action decisions is based upon statutory results, at the time the Closed Block was established, we developed, as required by U.S. GAAP, an actuarial calculation of the timing of the maximum future earnings from the policies included in the Closed Block. If actual cumulative earnings in any given period are greater than the cumulative earnings we expected, we record this excess as a policyholder dividend obligation. We will subsequently pay this excess to Closed Block policyholders as an additional dividend unless it is otherwise offset by future Closed Block performance that is less favorable than we originally expected. The policyholder dividends we charge to expense within the Closed Block division will include any change in our policyholder dividend obligation that we recognize for the excess of actual cumulative earnings in any given period over the cumulative earnings we expected in addition to the actual policyholder dividends declared by the Board of Directors of PICA.
 

As of June 30, 2019,2020, the excess of actual cumulative earnings over the expected cumulative earnings was $2,359$2,450 million, which was recorded as a policyholder dividend obligation. Actual cumulative earnings, as required by U.S. GAAP, reflect the recognition of realized investment gains and losses in the current period, as well as changes in assets and related liabilities that support the Closed Block policies. Additionally, the accumulation of net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block has been reflected as a policyholder dividend obligation of $3,201$5,305 million at June 30, 2019,2020, to be paid to Closed Block policyholders unless offset by future experience, with a corresponding amount reported in AOCI.
 

Operating Results
 
The following table sets forth the Closed Block division’s results for the periods indicated.
  Three Months Ended
June 30,
 Six Months Ended
June 30,
 
  2019 2018 2019 2018
  (in millions)
 U.S. GAAP results:       
 Revenues$1,301
 $1,388
 $2,675
 $2,551
 Benefits and expenses1,322
 1,419
 2,715
 2,591
 Income (loss) before income taxes and equity in earnings of operating joint ventures$(21) $(31) $(40) $(40)
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
U.S. GAAP results:       
Revenues$1,340
 $1,301
 $2,017
 $2,675
Benefits and expenses1,362
 1,322
 2,040
 2,715
Income (loss) before income taxes and equity in earnings of operating joint ventures$(22) $(21) $(23) $(40)
 
Income (loss) Before Income Taxes and Equity in Earnings of Operating Joint Ventures

Three Month Comparison.Income (loss) Loss before income taxes and equity in earnings of operating joint ventures decreased $10increased $1 million. Net investment activity results increased primarily reflecting an increase in other income driven by favorable changes in the value of equity securities, partially offset by a decrease in realized investment gains and related activity decreased $52 million primarily due to lower gains from(losses) driven by a decrease in the value of derivatives used in risk management activities, partially offsetand a decrease in net investment income driven by gains from salesof fixed maturities.lower income on non-coupon investments and lower investment yields. Net insurance activity results decreased $19 million primarily due to higher benefit payments. Net investment income decreased $17 million, primarily due to lower prepayment fee income.reflected a favorable comparative change driven by a decrease in the 2020 dividend scale and run-off of the business in force. As a result of the above and other variances, a $17$130 million reductionincrease in the policyholder dividend obligation was recorded in the second quarter of 2019,2020, compared to a $64$17 million increasereduction in the second quarter of 2018.2019. If actual cumulative earnings fall below expected cumulative earnings in future periods, earnings volatility in the Closed Block division, which is primarily due to changes in investment results, may not be offset by changes in the cumulative earnings policyholder dividend obligation. For a discussion of the Closed Block divisiondivision’s realized investment gains (losses), net, see “—General Account Investments.”

Six Month Comparison.Income (loss) Loss before income taxes and equity in earnings of operating joint ventures remained flat.decreased $17 million. Net realized investment gains and related activity increased $214 millionresults decreased primarily due to favorablereflecting a decrease in other income driven by unfavorable changes in the value of equity securities. Netsecurities, and a decrease in net investment income decreased $47 million, primarily due todriven by lower income on coupon and non-coupon investments and prepayment fee income.lower investment yields, partially offset by an increase in realized investment gains driven by gains from sales of fixed maturities. Net insurance activity results decreased $26 million primarily due to higher benefit payments.reflected a favorable comparative change driven by a decrease in the 2020 dividend scale and run-off of the business in force. As a result of the above and other variances, a $106$353 million increasereduction in the policyholder dividend obligation was recorded in the first six months 2019,of 2020, compared to a $75$106 million reductionincrease in the first six months of 2018.2019. If actual cumulative earnings fall below expected cumulative earnings in future periods, earnings volatility in the Closed Block division, which is primarily due to changes in investment results, may not be offset by changes in the cumulative earnings policyholder dividend obligation. For a discussion of the Closed Block divisiondivision’s realized investment gains (losses), net, see “—General Account Investments.”

Revenues, Benefits and Expenses
 
Three Month Comparison.Revenues as shownincreased $39 million primarily driven by an increase in the table above under “—U.S. GAAP results,” decreased $87 million due to lower netother income, partially offset by a decrease in realized investment gains (losses) and related activity, as discussed above,net investment income, and lower premiums due to runoff of policies in force, and lower net investment income, as discussed above.

Benefits and expenses as shownincreased $40 million primarily driven by an increase in dividends to policyholders, reflecting an increase in the table above under “—U.S. GAAP results,”policyholder dividend obligation expense due to changes in cumulative earnings, as discussed above.

Six Month Comparison. Revenues decreased $97$658 million primarily driven by a decrease in other income and lower premiums due to runoff of policies in force, partially offset by an increase in net realized investment gains, as discussed above.

Benefits and expenses decreased $675 million primarily driven by a $95 million decrease in dividends to policyholders, reflecting a decrease in the policyholder dividend obligation expense due to changes in cumulative earnings.

Six Month Comparison. Revenues increased $124 million due to increases in net realized investment gains and related activity, partially offset by lower net investment income,earnings, as discussed above, and lower premiums due to runoff of policies in force.above.

Benefits and expenses increased $124 million, primarily due to a $150 million increase in dividends to policyholders, reflecting an increase in the policyholder dividend obligation expense due to changes in cumulative earnings.


 
Income Taxes
 
For information regarding income taxes, see Note 98 to the Unaudited Interim Consolidated Financial Statements.


Experience-Rated Contractholder Liabilities,
Assets Supporting Experience-Rated Contractholder Liabilities and Other Related Investments
 
Certain products included in the Retirement and International InsuranceBusinesses segments are experience-rated in that investment results associated with these products are expected to ultimately accrue to contractholders. The majority of investments supporting these experience-rated products are carried at fair value. These investments are reflected on the Unaudited Interim Consolidated Statements of Financial Position as “Assets supporting experience-rated contractholder liabilities, at fair value.” Realized and unrealized gains (losses) for these investments are reported in “Other income (loss).” Interest and dividend income for these investments is reported in “Net investment income.” To a lesser extent, these experience-rated products are also supported by derivatives and commercial mortgage and other loans. The derivatives that support these experience-rated products are reflected on the Unaudited Interim Consolidated Statements of Financial Position as “Other invested assets” and are carried at fair value, and the realized and unrealized gains (losses) are reported in “Realized investment gains (losses), net.” The commercial mortgage and other loans that support these experience-rated products are carried at unpaid principal, net of unamortized discounts and an allowance for losses, and are reflected on the Unaudited Interim Consolidated Statements of Financial Position as “Commercial mortgage and other loans.” Gains (losses) on sales and changes in the valuation allowance for commercial mortgage and other loans are reported in “Realized investment gains (losses), net.”
 
Our Retirement segment has two types of experience-rated products that are supported by assets supporting experience-rated contractholder liabilities and other related investments. Fully participating products are those for which the entire return on underlying investments is passed back to the policyholders through a corresponding adjustment to the related liability, primarily classified in the Unaudited Interim Consolidated Statements of Financial Position as “Policyholders’ account balances.” The adjustment to the liability is based on changes in the fair value of all of the related assets, including commercial mortgage and other loans, which are carried at amortized cost, less any valuation allowance. Partially participating products are those for which only a portion of the return on underlying investments is passed back to the policyholders over time through changes to the contractual crediting rates. The crediting rates are typically reset semiannually, often subject to a minimum crediting rate, and returns are required to be passed back within ten years.
 
In our International Insurance segment,Businesses, the experience-rated products are fully participating. As a result, the entire return on the underlying investments is passed back to policyholders through a corresponding adjustment to the related liability.
 
Adjusted operating income excludes net investment gains (losses) on assets supporting experience-rated contractholder liabilities, related derivatives and commercial mortgage and other loans. This is consistent with the exclusion of realized investment gains (losses) with respect to other investments supporting insurance liabilities managed on a consistent basis. In addition, to be consistent with the historical treatment of charges related to realized investment gains (losses) on investments, adjusted operating income also excludes the change in contractholder liabilities due to asset value changes in the pool of investments (including changes in the fair value of commercial mortgage and other loans) supporting these experience-rated contracts, which are reflected in “Interest credited to policyholders’ account balances.” The result of this approach is that adjusted operating income for these products includes net fee revenue and interest spread we earn on these experience-rated contracts, and excludes changes in fair value of the pool of investments, both realized and unrealized, that we expect will ultimately accrue to the contractholders.


The following table sets forth the impact on results for the periods indicated of these items that are excluded from adjusted operating income:
 
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2019 2018 2019 2018
 (in millions)
Retirement Segment:       
Investment gains (losses) on:       
Assets supporting experience-rated contractholder liabilities, net$305
 $(219) $635
 $(508)
Derivatives17
 77
 14
 40
Commercial mortgages and other loans(4) 1
 (5) 3
Change in experience-rated contractholder liabilities due to asset value changes(1)(2)(331) 111
 (610) 415
Net gains (losses)$(13) $(30) $34
 $(50)
International Insurance Segment:       
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net$(18) $26
 $106
 $(88)
Change in experience-rated contractholder liabilities due to asset value changes18
 (26) (106) 88
Net gains (losses)$0
 $0
 $0
 $0
Total:       
Investment gains (losses) on:       
Assets supporting experience-rated contractholder liabilities, net$287
 $(193) $741
 $(596)
Derivatives17
 77
 14
 40
Commercial mortgages and other loans(4) 1
 (5) 3
Change in experience-rated contractholder liabilities due to asset value changes(1)(2)(313) 85
 (716) 503
Net gains (losses)$(13) $(30) $34
 $(50)
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 2020 2019 2020 2019
 (in millions)
Retirement:       
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net(1)$768
 $318
 $479
 $644
Change in experience-rated contractholder liabilities due to asset value changes(787) (331) (460) (610)
Gains (losses), net, on experienced rated contracts(2)(3)$(19) $(13) $19
 $34
International Businesses:       
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net$163
 $(18) $(173) $106
Change in experience-rated contractholder liabilities due to asset value changes(163) 18
 173
 (106)
Gains (losses), net, on experienced rated contracts$0
 $0
 $0
 $0
Total:       
Investment gains (losses) on assets supporting experience-rated contractholder liabilities, net(1)$931
 $300
 $306
 $750
Change in experience-rated contractholder liabilities due to asset value changes(950) (313) (287) (716)
Gains (losses), net, on experienced rated contracts(2)(3)$(19) $(13) $19
 $34
__________ 
(1)Prior period amounts have been reclassified to conform to current period presentation.
(2)Decreases to contractholder liabilities due to asset value changes are limited by certain floors and therefore do not reflect cumulative declines in recorded asset values of $9$3 million and $122$9 million as of June 30, 20192020 and 2018,2019, respectively. We have recovered and expect to recover in future periods these declines in recorded asset values through subsequent increases in recorded asset values or reductions in crediting rates on contractholder liabilities.
(2)(3)Included in the amounts above related to the change in the liability to contractholders as a result of commercial mortgage and other loans are an increaseincreases of $26$31 million and a decrease of $13$26 million for the three months ended June 30, 2020 and 2019, respectively, and 2018, respectively,a decrease of $6 million and an increase of $55 million and a decrease of $30 million for the six months ended June 30, 20192020 and 2018,2019, respectively. As prescribed by U.S. GAAP, changes in the fair value of commercial mortgage and other loans held for investment in our general account, other than when associated with impairments, are not recognized in income in the current period, while the impact of these changes in fair value are reflected as a change in the liability to fully participating contractholders in the current period.
 
The net impacts, for the Retirement segment, of changes in experience-rated contractholder liabilities and investment gains (losses) on assets supporting experience-rated contractholder liabilities and other related investments reflect timing differences between the recognition of the mark-to-market adjustments and the recognition of the recovery of these adjustments in future periods through subsequent increases in asset values or reductions in crediting rates on contractholder liabilities for partially participating products. These impacts also reflect the difference between the fair value of the underlying commercial mortgages and other loans and the amortized cost, less any valuation allowance, of these loans, as described above.
 
Valuation of Assets and Liabilities
 
Fair Value of Assets and Liabilities
 
The authoritative guidance related to fair value measurement establishes a framework that includes a three-level hierarchy used to classify the inputs used in measuring fair value. The level in the hierarchy within which the fair value falls is determined based on the lowest level input that is significant to the measurement. The fair values of assets and liabilities classified as Level 3 include at least one significant unobservable input in the measurement. See Note 6 to the Unaudited Interim Consolidated Financial Statements for an additional description of the valuation hierarchy levels as well as for the balances of assets and liabilities measured at fair value on a recurring basis by hierarchy level presented on a consolidated basis.


The table below presents the balances of assets and liabilities measured at fair value on a recurring basis, as of the periods indicated, and the portion of such assets and liabilities that are classified in Level 3 of the valuation hierarchy. The table also provides details about these assets and liabilities excluding those held in the Closed Block division. We believe the amounts excluding the Closed Block division are most relevant to an understanding of our operations that are pertinent to investors in Prudential Financial because substantially all Closed Block division assets support obligations and liabilities relating to the Closed Block policies only. See Note 87 to the Unaudited Interim Consolidated Financial Statements for furtheradditional information on the Closed Block.

As of June 30, 2019 As of December 31, 2018As of June 30, 2020 As of December 31, 2019
PFI excluding Closed Block Division 
Closed Block
Division
 PFI excluding Closed Block Division 
Closed Block
Division
PFI excluding Closed Block Division 
Closed Block
Division
 PFI excluding Closed Block Division 
Closed Block
Division
Total at
Fair Value
 
Total
Level 3(1)
 
Total at
Fair Value
 
Total
Level 3(1)
 
Total at
Fair Value
 
Total
Level 3(1)
 
Total at
Fair Value
 
Total
Level 3(1)
Total at
Fair Value
 
Total
Level 3(1)
 
Total at
Fair Value
 
Total
Level 3(1)
 
Total at
Fair Value
 
Total
Level 3(1)
 
Total at
Fair Value
 
Total
Level 3(1)
(in millions)(in millions)
Fixed maturities, available-for-
sale
$342,562
 $3,069
 $40,828
 $706
 $314,911
 $3,455
 $38,745
 $780
$365,612
 $4,753
 $42,332
 $1,099
 $349,720
 $3,570
 $41,376
 $745
Assets supporting experience-rated contractholder liabilities:                              
Fixed maturities19,839
 636
 0
 0
 19,579
 818
 0
 0
20,328
 747
 0
 0
 19,530
 730
 0
 0
Equity securities1,633
 1
 0
 0
 1,460
 1
 0
 0
1,683
 0
 0
 0
 1,790
 0
 0
 0
All other(2)366
 1
 0
 0
 215
 0
 0
 0
915
 7
 0
 0
 261
 0
 0
 0
Subtotal21,838
 638
 0
 0
 21,254
 819
 0
 0
22,926
 754
 0
 0
 21,581
 730
 0
 0
Fixed maturities, trading3,519
 285
 236
 11
 3,048
 204
 195
 2
3,694
 225
 239
 11
 3,628
 275
 256
 12
Equity securities4,612
 549
 2,055
 75
 4,316
 604
 1,784
 67
4,826
 523
 2,047
 71
 5,140
 557
 2,245
 76
Commercial mortgage and other
loans
645
 0
 0
 0
 763
 0
 0
 0
682
 0
 0
 0
 228
 0
 0
 0
Other invested assets(3)1,478
 436
 0
 0
 1,404
 263
 5
 0
2,301
 658
 0
 0
 1,433
 567
 0
 0
Short-term investments4,057
 214
 569
 74
 5,040
 65
 453
 24
8,892
 34
 84
 10
 3,789
 119
 147
 36
Cash equivalents7,387
 1
 530
 0
 9,027
 59
 451
 18
9,867
 1
 226
 0
 8,855
 99
 151
 32
Other assets98
 98
 0
 0
 25
 25
 0
 0
377
 377
 0
 0
 113
 113
 0
 0
Separate account assets279,072
 1,708
 0
 0
 254,066
 1,534
 0
 0
277,885
 1,684
 0
 0
 288,724
 1,717
 0
 0
Total assets$665,268
 $6,998
 $44,218
 $866
 $613,854
 $7,028
 $41,633
 $891
$697,062
 $9,009
 $44,928
 $1,191
 $683,211
 $7,747
 $44,175
 $901
Future policy benefits$12,723
 $12,723
 $0
 $0
 $8,926
 $8,926
 $0
 $0
$26,439
 $26,439
 $0
 $0
 $12,831
 $12,831
 $0
 $0
Policyholders’ account balances1,047
 1,047
 0
 0
 56
 56
 0
 0
1,441
 1,441
 0
 0
 1,316
 1,316
 0
 0
Other liabilities(3)556
 0
 1
 0
 135
 0
 0
 0
287
 0
 5
 0
 928
 105
 8
 0
Notes issued by consolidated
variable interest entities
(“VIEs”)
816
 816
 0
 0
 595
 595
 0
 0
741
 741
 0
 0
 800
 800
 0
 0
Total liabilities$15,142
 $14,586
 $1
 $0
 $9,712
 $9,577
 $0
 $0
$28,908
 $28,621
 $5
 $0
 $15,875
 $15,052
 $8
 $0
__________
(1)Level 3 assets expressed as a percentage of total assets measured at fair value on a recurring basis for PFI excluding the Closed Block division and for the Closed Block division totaled 1.3% and 2.7%, respectively, as of June 30, 2020, and 1.1% and 2.0%, respectively, as of June 30, 2019, and 1.1% and 2.1%, respectively, as of December 31, 2018.2019.
(2)“All other” represents cash equivalents and short-term investments.
(3)“Other invested assets” and “Other liabilities” primarily include derivatives. The amounts include the impact of netting subject to master netting agreements.

The determination of fair value, which for certain assets and liabilities is dependent on the application of estimates and assumptions, can have a significant impact on our results of operations and may require the application of a greater degree of judgment depending on market conditions, as the ability to value assets and liabilities can be significantly impacted by a decrease in market activity or a lack of transactions executed in an orderly manner. The following sections provide information regarding certaincontinued impact of the COVID-19 pandemic on the global economy may have adverse effects on the valuation of assets and liabilities which are valued using Level 3 inputs and could have a significant impact on our resultsliabilities. Due to the highly uncertain nature of operations.these conditions, it is not possible to estimate the overall impacts at this time.

Fixed Maturity and Equity Securities

Fixed maturity securities included in Level 3 in our fair value hierarchy are generally priced based on internally-developed valuations or indicative broker quotes. For certain private fixed maturity and equity securities, the internal valuation models use significant unobservable inputs and, accordingly, such securities are included in Level 3 in our fair value hierarchy. Level 3 fixed maturity securities for PFI excluding the Closed Block division included approximately $1.4$1.7 billion of public fixed maturities as of June 30, 2019,2020, with values primarily based on indicative broker quotes, and approximately $2.6$4 billion of private fixed maturities, with values primarily based on internally-developed models. Significant unobservable inputs used in their valuation included: issue specific spread adjustments, material non-public financial information, management judgment, estimation of future earnings and cash flows, default rate assumptions, liquidity assumptions and indicative quotes from market makers. These inputs are usually considered unobservable, as not all market participants have access to this data.
The Company’s determination to classify assets and liabilities within Level 3 is based on significance of the unobservable inputs in the overall fair value measurement. Periodically, transfers between levels are made to reflect changes in observability of inputs and market activity. All transfers are generally reported at the value as of the beginning of the quarter in which transfers occur for any such assets still held at the end of the quarter.

The impact that fair value changes of fixed maturity securities have on the results of operations is dependent on the classification of the security as trading, available-for-sale, or held-to-maturity. For investments classified as trading, changes in fair value are recorded within “Other income (loss).” For investments classified as available-for-sale, changes in fair value are recorded as an unrealized gain or loss in AOCI, a separate component of equity. Investments classified as held-to-maturity are carried at amortized cost and the changes in fair value have no impact on the results of operations.

Separate Account Assets
Separate account assets included in Level 3 in our fair value hierarchy primarily include corporate securities and commercial mortgage loans. The valuation


Embedded derivatives reported in “Future policy benefits” and “Policyholders’ account balances” that are included in level 3 of corporate securities is determined as described above for fixed maturity and equity securities. See Note 6 to the Unaudited Interim Consolidated Financial Statements for additional information on the valuation of commercial mortgage loans. Separateour fair value hierarchy represent general account liabilities are reported at contract value and not at fair value.
Variable Annuity Living Benefit Features
Future policy benefits classified in Level 3 primarily include liabilities relatedpertaining to guarantees associated with the living benefit features of certainthe Company’s variable annuity contracts offered by our Individual Annuities segment, including Guaranteed Minimum Accumulation Benefits (“GMAB”), Guaranteed Minimum Withdrawal Benefits (“GMWB”) and Guaranteed Minimum Incomethe index-linked interest credited features on certain life and Withdrawal Benefits (“GMIWB”).annuity products. These benefits are accounted for as embedded derivatives and carried at fair value with changes in fair value included in “Realized investment gains (losses), net.” The fair values of the GMAB, GMWB and GMIWB liabilitiesThese embedded derivatives are calculated as the present value of future expected benefit payments to customers less the present value of future rider fees attributable to the embedded derivative feature. This methodology could result in either a liability or contra-liability balance, based on capital market conditions and various policyholder behavior assumptions. Since there is no observable active market for the transfer of these obligations, the valuations are calculatedvalued using internally-developed models with option pricing techniques. These models utilizethat require significant estimates and assumptions that are primarily unobservable, includingdeveloped by management. Changes in these estimates and assumptions as to lapse rates, NPR, utilization rates, withdrawal rates, mortality rates and equity market volatility. Future policy benefits classified as Level 3 for PFI excludingcan have a significant impact on the Closed Block division were a net liabilityresults of $12.7 billion as of June 30, 2019. For additional information, see “—Results of Operations by Segment—U.S. Individual Solutions Division—Individual Annuities.”
Notes Issued by Consolidated VIEs
As discussed in Note 4 to the Unaudited Interim Consolidated Financial Statements, notes issued by consolidated VIEs represent non-recourse notes issued by certain asset-backed investment vehicles, primarily collateralized loan obligations (“CLOs”), which we are required to consolidate. We have elected the fair value option for these notes, which are valued based on corresponding bank loan collateral.our operations.
 
For additional information about the valuation techniques and the key estimates and assumptions used in our determination of fair value, see Note 6 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
 

114


General Account Investments
 
Portfolio Composition
 
Our investment portfolio consists of public and private fixed maturity securities, commercial mortgage and other loans, policy loans and non-coupon investments, which include equity securities and other invested assets such as limited partnerships and limited liability companies (“LPs/LLCs”), real estate held through direct ownership, derivative instruments and seed money investments in separate accounts. The composition of our general account reflects, within the discipline provided by our risk management approach, our need for competitive results and the selection of diverse investment alternatives available primarily through our PGIM segment. The size of our portfolio enables us to invest in asset classes that may be unavailable to the typical investor.
 
The following tables set forth the composition of our general account investment portfolio apportioned between PFI excluding the Closed Block division and the Closed Block division, as of the dates indicated:
 
 June 30, 2019 June 30, 2020
 
PFI Excluding
Closed Block Division
 
Closed Block
Division
 Total 
PFI Excluding
Closed Block Division
 
Closed Block
Division
 Total
 ($ in millions) ($ in millions)
Fixed maturities:                
Public, available-for-sale, at fair value $292,636
 65.5% $28,176
 $320,812
 $310,203
 64.6% $30,264
 $340,467
Public, held-to-maturity, at amortized cost 1,754
 0.4
 0
 1,754
Public, held-to-maturity, at amortized cost, net of allowance 1,662
 0.3
 0
 1,662
Private, available-for-sale, at fair value 49,421
 11.1
 12,652
 62,073
 54,793
 11.4
 12,069
 66,862
Private, held-to-maturity, at amortized cost 255
 0.1
 0
 255
Private, held-to-maturity, at amortized cost, net of allowance 213
 0.1
 0
 213
Fixed maturities, trading, at fair value 2,316
 0.5
 236
 2,552
 2,610
 0.6
 239
 2,849
Assets supporting experience-rated contractholder liabilities, at fair value 21,843
 4.9
 0
 21,843
 23,245
 4.8
 0
 23,245
Equity securities, at fair value 4,125
 0.9
 2,055
 6,180
 4,314
 0.9
 2,047
 6,361
Commercial mortgage and other loans, at book value 52,100
 11.7
 8,451
 60,551
Commercial mortgage and other loans, at book value, net of allowance 54,377
 11.3
 8,389
 62,766
Policy loans, at outstanding balance 7,702
 1.7
 4,328
 12,030
 8,125
 1.7
 4,158
 12,283
Other invested assets(1) 8,825
 2.0
 3,291
 12,116
Short-term investments 5,198
 1.2
 660
 5,858
Other invested assets, net of allowance(1) 9,578
 2.0
 3,259
 12,837
Short-term investments, net of allowance 11,286
 2.3
 94
 11,380
Total general account investments 446,175
 100.0% 59,849
 506,024
 480,406
 100.0% 60,519
 540,925
Invested assets of other entities and operations(2) 5,988
 

 0
 5,988
 7,007
 

 0
 7,007
Total investments $452,163
 

 $59,849
 $512,012
 $487,413
 

 $60,519
 $547,932


 December 31, 2018 December 31, 2019
 
PFI Excluding
Closed Block Division
 
Closed Block
Division
 Total 
PFI Excluding
Closed Block Division
 
Closed Block
Division
 Total
 ($ in millions) ($ in millions)
Fixed maturities:                
Public, available-for-sale, at fair value $269,109
 64.8% $26,203
 $295,312
 $296,382
 64.9% $29,011
 $325,393
Public, held-to-maturity, at amortized cost 1,745
 0.4
 0
 1,745
 1,705
 0.4
 0
 1,705
Private, available-for-sale, at fair value 45,328
 10.9
 12,542
 57,870
 52,750
 11.6
 12,365
 65,115
Private, held-to-maturity, at amortized cost 268
 0.1
 0
 268
 228
 0.1
 0
 228
Fixed maturities, trading, at fair value 1,893
 0.5
 195
 2,088
 2,467
 0.5
 256
 2,723
Assets supporting experience-rated contractholder liabilities, at fair value 21,254
 5.1
 0
 21,254
 21,597
 4.7
 0
 21,597
Equity securities, at fair value 3,849
 0.9
 1,784
 5,633
 4,586
 1.0
 2,245
 6,831
Commercial mortgage and other loans, at book value 50,251
 12.1
 8,782
 59,033
Commercial mortgage and other loans, at book value, net of allowance 54,671
 12.0
 8,629
 63,300
Policy loans, at outstanding balance 7,606
 1.8
 4,410
 12,016
 7,832
 1.7
 4,264
 12,096
Other invested assets(1) 8,407
 2.0
 3,316
 11,723
 9,210
 2.0
 3,334
 12,544
Short-term investments 5,948
 1.4
 478
 6,426
 5,223
 1.1
 227
 5,450
Total general account investments 415,658
 100.0% 57,710
 473,368
 456,651
 100.0% 60,331
 516,982
Invested assets of other entities and operations(2) 5,877
 
 0
 5,877
 5,778
 
 0
 5,778
Total investments $421,535
 
 $57,710
 $479,245
 $462,429
 
 $60,331
 $522,760
__________
(1)Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments and other miscellaneous investments. For additional information regarding these investments, see “—Other Invested Assets” below.
(2)Includes invested assets of our investment management and derivative operations. Excludes assets of our investment management operations that are managed for third-parties and those assets classified as “Separate account assets” on our balance sheet. For additional information regarding these investments, see “—Invested Assets of Other Entities and Operations” below.

The increase in general account investments attributable to PFI excluding the Closed Block division in the first six months of 20192020 was primarily due to market appreciation from a decrease in U.S. and Japan interest rates in excess of spread widening, net business inflows and tighter credit spreads, the reinvestment of net investment income and net business inflows.income. For information regarding the methodology used in determining the fair value of our fixed maturities, see Note 6 to the Unaudited Interim Consolidated Financial Statements.
 
As of both June 30, 20192020 and December 31, 2018, 43%2019, 41% and 42%, respectively, of our general account investments attributable to PFI excluding the Closed Block division related to our Japanese insurance operations. The following table sets forth the composition of the investments of our Japanese insurance operations’ general account, as of the dates indicated:

 June 30, 2019 December 31, 2018 June 30, 2020 December 31, 2019
 (in millions) (in millions)
Fixed maturities:        
Public, available-for-sale, at fair value $143,741
 $133,084
 $146,391
 $142,220
Public, held-to-maturity, at amortized cost 1,754
 1,745
Public, held-to-maturity, at amortized cost, net of allowance 1,662
 1,705
Private, available-for-sale, at fair value 17,765
 16,222
 19,953
 19,189
Private, held-to-maturity, at amortized cost 255
 268
Private, held-to-maturity, at amortized cost, net of allowance 213
 228
Fixed maturities, trading, at fair value 452
 328
 472
 492
Assets supporting experience-rated contractholder liabilities, at fair value 2,632
 2,441
 2,603
 2,777
Equity securities, at fair value 2,011
 1,972
 1,927
 2,185
Commercial mortgage and other loans, at book value 18,312
 17,228
Commercial mortgage and other loans, at book value, net of allowance 19,214
 19,138
Policy loans, at outstanding balance 2,825
 2,715
 3,257
 2,859
Other invested assets(1) 2,296
 1,957
 2,687
 2,187
Short-term investments 303
 451
 658
 165
Total Japanese general account investments $192,346
 $178,411
 $199,037
 $193,145
__________ 
(1)Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments and other miscellaneous investments.

The increase in general account investments related to our Japanese insurance operations in the first six months of 20192020 was primarily attributable to market appreciation from a decrease in U.S. and Japan interest rates and tighter credit spreads,the reinvestment of net investment income, net business inflows and reinvestmenta decrease in interest rates in excess of net investment income.spread widening.

As of June 30, 2019,2020, our Japanese insurance operations had $74.5$84.7 billion, at carrying value, of investments denominated in U.S. dollars, including $2.3$1.8 billion that were hedged to yen through third-party derivative contracts and $59.4$70.4 billion that support liabilities denominated in U.S. dollars, with the remainder as part of the hedging ourof foreign currency exchange rate exposure to U.S. dollar-equivalent equity. As of December 31, 2018,2019, our Japanese insurance operations had $64.9$77.1 billion, at carrying value, of investments denominated in U.S. dollars, including $2.5$2.1 billion that were hedged to yen through third-party derivative contracts and $50.0$62.4 billion that support liabilities denominated in U.S. dollars, with the remainder as part of the hedging ourof foreign currency exchange rate exposure of U.S. dollar-equivalent equity. The $9.6$7.6 billion increase in the carrying value of U.S. dollar-denominated investments from December 31, 20182019 was primarily attributable to a decrease in U.S. treasury bond rates, portfolio growth as a result of net business inflows and reinvestment of net investment income, and the impact of the decrease in the U.S. treasury bond rates.income.

Our Japanese insurance operations had $10.3$9.5 billion and $10.1$9.9 billion, at carrying value, of investments denominated in Australian dollars that support liabilities denominated in Australian dollars as of June 30, 20192020 and December 31, 2018,2019, respectively. The $0.2$0.4 billion increasedecrease in the carrying value of Australian dollar-denominated investments from December 31, 20182019 was primarily attributable to the translation impact of the decrease in Australian government bond rates.dollar weakening against the U.S. dollar and run off of the portfolio. For additional information regarding U.S. and Australian dollar investments held in our Japanese insurance operations and a discussion of our yen hedging strategy, see “—Results of Operations by Segment—Impact of Foreign Currency Exchange Rates” above.

Investment Results
 
The following tables set forth the investment results of our general account apportioned between PFI excluding the Closed Block division and the Closed Block division, for the periods indicated. The yields are based on net investment income as reported under U.S. GAAP and as such do not include certain interest-related items, such as settlements of duration management swaps which are included in “Realized investment gains (losses), net.”

20192020 to 20182019 Three Month Comparison

Three Months Ended June 30, 2019Three Months Ended June 30, 2020
PFI Excluding Closed Block Division and Japanese Operations Japanese Insurance Operations PFI Excluding Closed Block Division Closed Block Division Total(5)PFI Excluding Closed Block Division and Japanese Operations Japanese Insurance Operations PFI Excluding Closed Block Division Closed Block Division Total(5)
Yield(1) Amount Yield(1) Amount Yield(1) Amount Amount AmountYield(1) Amount Yield(1) Amount Yield(1) Amount Amount Amount
($ in millions)($ in millions)
Fixed maturities(2)4.63 % $1,887
 2.83 % $955
 3.82 % $2,842
 $426
 $3,268
4.42 % $1,852
 2.77 % $952
 3.68 % $2,804
 $395
 $3,199
Assets supporting experience-rated contractholder liabilities3.66
 175
 1.17
 7
 3.36
 182
 0
 182
3.12
 155
 1.11
 7
 2.89
 162
 0
 162
Equity securities1.82
 10
 5.48
 27
 3.60
 37
 14
 51
1.72
 10
 7.21
 33
 4.23
 43
 11
 54
Commercial mortgage and other loans4.15
 350
 3.87
 174
 4.05
 524
 98
 622
3.94
 345
 3.79
 180
 3.88
 525
 89
 614
Policy loans5.25
 64
 3.81
 26
 4.73
 90
 62
 152
5.19
 63
 3.20
 25
 4.42
 88
 63
 151
Short-term investments and cash equivalents2.85
 94
 2.91
 6
 2.85
 100
 10
 110
0.87
 60
 0.89
 3
 0.87
 63
 2
 65
Gross investment income4.38
 2,580
 2.97
 1,195
 3.81
 3,775
 610
 4,385
3.88
 2,485
 2.90
 1,200
 3.49
 3,685
 560
 4,245
Investment expenses(0.12) (103) (0.13) (71) (0.13) (174) (55) (229)(0.11) (62) (0.14) (56) (0.12) (118) (32) (150)
Investment income after investment expenses4.26 % 2,477
 2.84 % 1,124
 3.68 % 3,601
 555
 4,156
3.77 % 2,423
 2.76 % 1,144
 3.37 % 3,567
 528
 4,095
Other invested assets(3)  132
   52
   184
 19
 203
  (62)   79
   17
 (17) 0
Investment results of other entities and operations(4)  31
   0
   31
 0
 31
  91
   0
   91
 0
 91
Total investment income  $2,640
   $1,176
   $3,816
 $574
 $4,390
  $2,452
   $1,223
   $3,675
 $511
 $4,186


Three Months Ended June 30, 2018Three Months Ended June 30, 2019
PFI Excluding Closed Block Division and Japanese Operations Japanese Insurance Operations PFI Excluding Closed Block Division Closed Block Division Total(5)PFI Excluding Closed Block Division and Japanese Operations Japanese Insurance Operations PFI Excluding Closed Block Division Closed Block Division Total(5)
Yield(1) Amount Yield(1) Amount Yield(1) Amount Amount AmountYield(1) Amount Yield(1) Amount Yield(1) Amount Amount Amount
($ in millions)($ in millions)
Fixed maturities(2)4.68 % $1,747
 2.87 % $922
 3.84 % $2,669
 $433
 $3,102
4.63 % $1,887
 2.83 % $955
 3.82 % $2,842
 $426
 $3,268
Assets supporting experience-rated contractholder liabilities3.69
 174
 1.14
 7
 3.38
 181
 0
 181
3.66
 175
 1.17
 7
 3.36
 182
 0
 182
Equity securities1.56
 9
 5.48
 30
 3.50
 39
 14
 53
1.82
 10
 5.48
 27
 3.60
 37
 14
 51
Commercial mortgage and other loans3.98
 328
 3.93
 156
 3.97
 484
 105
 589
4.15
 350
 3.87
 174
 4.05
 524
 98
 622
Policy loans5.35
 65
 3.83
 25
 4.81
 90
 66
 156
5.25
 64
 3.81
 26
 4.73
 90
 62
 152
Short-term investments and cash equivalents2.02
 61
 1.92
 10
 2.01
 71
 9
 80
2.85
 94
 2.91
 6
 2.85
 100
 10
 110
Gross investment income4.35
 2,384
 3.00
 1,150
 3.79
 3,534
 627
 4,161
4.38
 2,580
 2.97
 1,195
 3.81
 3,775
 610
 4,385
Investment expenses(0.15) (99) (0.12) (60) (0.14) (159) (52) (211)(0.12) (103) (0.13) (71) (0.13) (174) (55) (229)
Investment income after investment expenses4.20 % 2,285
 2.88 % 1,090
 3.65 % 3,375
 575
 3,950
4.26 % 2,477
 2.84 % 1,124
 3.68 % 3,601
 555
 4,156
Other invested assets(3)  66
   33
   99
 16
 115
  132
   52
   184
 19
 203
Investment results of other entities and operations(4)  31
   0
   31
 0
 31
  31
   0
   31
 0
 31
Total investment income  $2,382
   $1,123
   $3,505
 $591
 $4,096
  $2,640
   $1,176
   $3,816
 $574
 $4,390
__________ 
(1)For interim periods, yields are annualized. The denominator in the yield percentage is based on quarterly average carrying values for all asset types except for fixed maturities which are based on amortized cost.cost, net of allowance. Amounts for fixed maturities, short-term investments and cash equivalents are also netted for securities lending activity (i.e., income netted for rebate expenses and asset values netted for securities lending liabilities). A yield is not presented for other invested assets as it is not considered a meaningful measure of investment performance. Total yieldsYields exclude investment income and assets related to other invested assets. Prior period yields have been revised to conform to current period presentation.
(2)Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading, which are included in other invested assets.
(3)Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments, fixed maturities classified as trading and other miscellaneous investments.
(4)Includes net investment income of our investment management operations.
(5)The total yield was 3.46% and 3.76% for both the three months ended June 30, 2020 and 2019, and 2018. Prior period yield has been revised to conform to current period presentation.respectively.

The increasedecrease in investment income after investment expenses yield attributable to our general account investments, excluding both the Closed Block division and the Japanese insurance operations’ portfolio, for the three months ended June 30, 2019,2020, compared to the three months ended June 30, 2018,2019, was primarily the result of higher returns on short-term investments based on an increase in short-termlower fixed income reinvestment rates.

The decrease in investment income after investment expenses yield attributable to the Japanese insurance operations’ portfolio, for the three months ended June 30, 2019,2020, compared to the three months ended June 30, 2018,2019, was primarily the result of lower fixed income reinvestment rates.

Both the U.S. dollar-denominated and Australian dollar-denominated fixed maturities that are not hedged to yen through third-party derivative contracts provide a yield that is substantially higher than the yield on comparable yen-denominated fixed maturities. The average amortized cost of U.S. dollar-denominated fixed maturities that are not hedged to yen through third-party derivative contracts was approximately $47.9$53.2 billion and $43.6$47.9 billion for the three months ended June 30, 20192020 and 2018,2019, respectively. The majority of U.S. dollar-denominated fixed maturities support liabilities that are denominated in U.S. dollars. The average amortized cost of Australian dollar-denominated fixed maturities that are not hedged to yen through third-party derivative contracts was approximately $9.0$7.7 billion and $10.0$9.0 billion for the three months ended June 30, 20192020 and 2018,2019, respectively. The majority of Australian dollar-denominated fixed maturities support liabilities that are denominated in Australian dollars. For additional information regarding U.S. and Australian dollar investments held in our Japanese insurance operations, see “—Results of Operations by Segment—Impact of Foreign Currency Exchange Rates” above.

20192020 to 20182019 Six Month Comparison

Six Months Ended June 30, 2019Six Months Ended June 30, 2020
PFI Excluding Closed Block Division and Japanese Operations Japanese Insurance Operations PFI Excluding Closed Block Division Closed Block Division Total(5)PFI Excluding Closed Block Division and Japanese Operations Japanese Insurance Operations PFI Excluding Closed Block Division Closed Block Division Total(5)
Yield(1) Amount Yield(1) Amount Yield(1) Amount Amount AmountYield(1) Amount Yield(1) Amount Yield(1) Amount Amount Amount
($ in millions)($ in millions)
Fixed maturities(2)4.64 % $3,735
 2.83 % $1,892
 3.82 % $5,627
 $845
 $6,472
4.49 % $3,747
 2.77 % $1,898
 3.72 % $5,645
 $794
 $6,439
Assets supporting experience-rated contractholder liabilities3.60
 340
 2.15
 27
 3.43
 367
 0
 367
3.25
 315
 2.14
 28
 3.12
 343
 0
 343
Equity securities2.12
 22
 3.48
 34
 2.79
 56
 25
 81
1.82
 21
 3.99
 39
 2.83
 60
 23
 83
Commercial mortgage and other loans4.10
 682
 3.85
 339
 4.02
 1,021
 193
 1,214
3.99
 700
 3.90
 369
 3.96
 1,069
 182
 1,251
Policy loans5.21
 126
 3.84
 52
 4.72
 178
 125
 303
5.19
 126
 3.58
 54
 4.58
 180
 124
 304
Short-term investments and cash equivalents2.80
 189
 3.43
 14
 2.82
 203
 19
 222
1.13
 131
 1.28
 10
 1.14
 141
 5
 146
Gross investment income4.37
 5,094
 2.96
 2,358
 3.80
 7,452
 1,207
 8,659
4.01
 5,040
 2.91
 2,398
 3.58
 7,438
 1,128
 8,566
Investment expenses(0.13) (209) (0.13) (139) (0.13) (348) (109) (457)(0.12) (147) (0.14) (124) (0.13) (271) (75) (346)
Investment income after investment expenses4.24 % 4,885
 2.83 % 2,219
 3.67 % 7,104
 1,098
 8,202
3.89 % 4,893
 2.77 % 2,274
 3.45 % 7,167
 1,053
 8,220
Other invested assets(3)  170
   103
   273
 39
 312
  19
   52
   71
 3
 74
Investment results of other entities and operations(4)  92
   0
   92
 0
 92
  94
   0
   94
 0
 94
Total investment income  $5,147
   $2,322
   $7,469
 $1,137
 $8,606
  $5,006
   $2,326
   $7,332
 $1,056
 $8,388

Six Months Ended June 30, 2018Six Months Ended June 30, 2019
PFI Excluding Closed Block Division and Japanese Operations Japanese Insurance Operations PFI Excluding Closed Block Division Closed Block Division Total(5)PFI Excluding Closed Block Division and Japanese Operations Japanese Insurance Operations PFI Excluding Closed Block Division Closed Block Division Total(5)
Yield(1) Amount Yield(1) Amount Yield(1) Amount Amount AmountYield(1) Amount Yield(1) Amount Yield(1) Amount Amount Amount
($ in millions)($ in millions)
Fixed maturities(2)4.65 % $3,449
 2.92 % $1,845
 3.86 % $5,294
 $857
 $6,151
4.64 % $3,735
 2.83 % $1,892
 3.82 % $5,627
 $845
 $6,472
Assets supporting experience-rated contractholder liabilities3.66
 347
 1.94
 25
 3.45
 372
 0
 372
3.60
 340
 2.15
 27
 3.43
 367
 0
 367
Equity securities1.68
 19
 3.54
 38
 2.61
 57
 24
 81
2.12
 22
 3.48
 34
 2.79
 56
 25
 81
Commercial mortgage and other loans3.99
 647
 3.92
 299
 3.97
 946
 208
 1,154
4.10
 682
 3.85
 339
 4.02
 1,021
 193
 1,214
Policy loans5.34
 128
 3.86
 50
 4.82
 178
 130
 308
5.21
 126
 3.84
 52
 4.72
 178
 125
 303
Short-term investments and cash equivalents1.81
 115
 1.91
 17
 1.82
 132
 17
 149
2.80
 189
 3.43
 14
 2.82
 203
 19
 222
Gross investment income4.31
 4,705
 3.03
 2,274
 3.79
 6,979
 1,236
 8,215
4.37
 5,094
 2.96
 2,358
 3.80
 7,452
 1,207
 8,659
Investment expenses(0.14) (185) (0.12) (113) (0.14) (298) (101) (399)(0.13) (209) (0.13) (139) (0.13) (348) (109) (457)
Investment income after investment expenses4.17 % 4,520
 2.91 % $2,161
 3.65 % 6,681
 1,135
 7,816
4.24 % 4,885
 2.83 % 2,219
 3.67 % 7,104
 1,098
 8,202
Other invested assets(3)  120
   60
   180
 49
 229
  170
   103
   273
 39
 312
Investment results of other entities and operations(4)  49
   0
   49
 0
 49
  92
   0
   92
 0
 92
Total investment income  $4,689
   $2,221
   $6,910
 $1,184
 $8,094
  $5,147
   $2,322
   $7,469
 $1,137
 $8,606
__________ 
(1)For interim periods, yields are annualized. The denominator in the yield percentage is based on quarterly average carrying values for all asset types except for fixed maturities which are based on amortized cost.cost, net of allowance. Amounts for fixed maturities, short-term investments and cash equivalents are also netted for securities lending activity (i.e., income netted for rebate expenses and asset values netted for securities lending liabilities). A yield is not presented for other invested assets as it is not considered a meaningful measure of investment performance. Total yieldsYields exclude investment income and assets related to other invested assets. Prior period yields have been revised to conform to current period presentation.

(2)Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading, which are included in other invested assets.
(3)Other invested assets consist of investments in LPs/LLCs, investment real estate held through direct ownership, derivative instruments, fixed maturities classified as trading and other miscellaneous investments.
(4)Includes net investment income of our investment management operations.
(5)The total yield was 3.53% and 3.75% for both the six months ended June 30, 2020 and 2019, and 2018. Prior period yield has been revised to conform to current period presentation.respectively.

The increasedecrease in investment income after investment expenses yield attributable to our general account investments, excluding both the Closed Block division and the Japanese insurance operations’ portfolio, for the six months ended June 30, 2019,2020, compared to the six months ended June 30, 2018,2019, was primarily the result of higher returns on short-term investments based on an increase in short-termlower fixed income reinvestment rates.

The decrease in investment income after investment expenses yield attributable to the Japanese insurance operations’ portfolio, for the six months ended June 30, 2019,2020, compared to the six months ended June 30, 2018,2019, was primarily the result of lower fixed income reinvestment rates.

Both the U.S. dollar-denominated and Australian dollar-denominated fixed maturities that are not hedged to yen through third-party derivative contracts provide a yield that is substantially higher than the yield on comparable yen-denominated fixed maturities. The average amortized cost of U.S. dollar-denominated fixed maturities that are not hedged to yen through third-party derivative contracts was approximately $47.2$52.4 billion and $43.6$47.2 billion for the six months ended June 30, 20192020 and 2018,2019, respectively. The majority of U.S. dollar-denominated fixed maturities support liabilities that are denominated in U.S. dollars. The average amortized cost of Australian dollar-denominated fixed maturities that are not hedged to yen through third-party derivative contracts was approximately $9.0$8.0 billion and $10.1$9.0 billion for the six months ended June 30, 20192020 and 2018,2019, respectively. The majority of Australian dollar-denominated fixed maturities support liabilities that are denominated in Australian dollars. For additional information regarding U.S. and Australian dollar investments held in our Japanese insurance operations, see “—Results of Operations by Segment—Impact of Foreign Currency Exchange Rates” above.

Realized Investment Gains and Losses

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

Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2019 2018 2019 20182020 2019 2020 2019
(in millions)(in millions)
PFI excluding Closed Block Division:              
Realized investment gains (losses), net:              
Due to foreign exchange movements on securities approaching maturity$(16) $(8) $(16) $(16)
Due to securities actively marketed for sale0
 (3) (1) (11)
Due to credit or adverse conditions of the respective issuer(1)(12) (24) (42) (39)
OTTI losses on fixed maturities recognized in earnings(2)(28) (35) (59) (66)
Due to foreign exchange movements on securities approaching maturity(2)$(16) $(16) $(19) $(16)
Due to securities actively marketed for sale(2)(12) 0
 (81) (1)
Due to credit or adverse conditions of the respective issuer(1)(3)N/A
 (12) N/A
 (42)
Allowance for credit losses on fixed maturities(1)(3)(68) N/A
 (218) N/A
Net gains (losses) on sales and maturities103
 233
 372
 315
144
 103
 455
 372
Fixed maturities(3)75
 198
 313
 249
Fixed maturity securities(4)48
 75
 137
 313
Commercial mortgage and other loans(8) (13) (11) (14)0
 (8) 6
 (11)
Derivatives(463) 277
 (1,469) 626
(3,710) (463) (2,601) (1,469)
OTTI losses on other invested assets recognized in earnings(4)0
 (3) 0
 (6)
OTTI losses on other invested assets recognized in earnings(3)(9) 0
 (9) 0
Allowance for credit losses on other invested assets(3)4
 N/A
 0
 N/A
Other net gains (losses)5
 69
 6
 79
24
 5
 21
 6
Other5
 66
 6
 73
19
 5
 12
 6
Subtotal(391) 528
 (1,161) 934
(3,643) (391) (2,446) (1,161)
Investment results of other entities and operations(5)6
 47
 (46) 68
(101) 6
 113
 (46)
Total — PFI excluding Closed Block Division(385) 575
 (1,207) 1,002
(3,744) (385) (2,333) (1,207)
Related adjustments(163) (182) (4) (522)
Realized investment gains (losses), net, and related adjustments(548) 393
 (1,211) 480
Related charges(82) (116) (57) (139)
Realized investment gains (losses), net, and related charges and adjustments$(630) $277
 $(1,268) $341
Related adjustments(6)553
 (187) (649) 13
Realized investment gains (losses), net, and related adjustments(6)(3,191) (572) (2,982) (1,194)
Charges related to realized investment gains (losses), net519
 (82) (283) (57)
Realized investment gains (losses), net, and charges related to realized investment gains (losses), net and adjustments(6)$(2,672) $(654) $(3,265) $(1,251)
Closed Block Division:    
 
       
Realized investment gains (losses), net:    
 
       
Due to foreign exchange movements on securities approaching maturity$(34) $(14) $(34) $(22)
Due to securities actively marketed for sale0
 (2) 0
 (2)
Due to credit or adverse conditions of the respective issuer(1)(2) (7) (6) (7)
OTTI losses on fixed maturities recognized in earnings(2)(36) (23) (40) (31)
Due to foreign exchange movements on securities approaching maturity(2)$(38) $(34) $(47) $(34)
Due to securities actively marketed for sale(2)1
 0
 (9) 0
Due to credit or adverse conditions of the respective issuer(1)(3)N/A
 (2) N/A
 (6)
Allowance for credit losses on fixed maturities(1)(3)(12) N/A
 (20) N/A
Net gains (losses) on sales and maturities30
 (10) 56
 25
112
 30
 208
 56
Fixed maturities(3)(6) (33) 16
 (6)
Fixed maturity securities(4)63
 (6) 132
 16
Commercial mortgage and other loans0
 (3) 0
 (2)(4) 0
 0
 0
Derivatives54
 142
 93
 112
(64) 54
 120
 93
OTTI losses on other invested assets recognized in earnings(4)0
 0
 0
 (1)
OTTI losses on other invested assets recognized in earnings(3)N/A
 0
 N/A
 0
Allowance for credit losses on other invested assets(3)0
 N/A
 0
 N/A
Other net gains (losses)1
 4
 (4) 5
(3) 1
 (4) (4)
Other1
 4
 (4) 4
(3) 1
 (4) (4)
Subtotal — Closed Block Division49
 110
 105
 108
(8) 49
 248
 105
Consolidated PFI realized investment gains (losses), net$(336) $685
 $(1,102) $1,110
$(3,752) $(336) $(2,085) $(1,102)
__________
(1)Represents circumstances where we believe credit events or other adverse conditions of the respective issuers have caused or will lead to a deficiency in the contractual cash flows related to the investment. The amount of the impairment or allowance recorded in earnings is the difference between the amortized cost of the debt security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment.impairment (2019) or allowance (2020).
(2)ExcludesRepresents the portion of OTTI recorded in OCI, representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flowsamortized cost at the time of impairment.the write-down.
(3)Effective January 1, 2020, due to the implementation of ASU 2016-13, OTTI is no longer recorded.

(4)Includes fixed maturity securities classified as available-for-sale and held-to-maturity and excludes fixed maturity securities classified as trading.
(4)Primarily includes OTTI related to investments in LPs/LLCs and real estate held through direct ownership.
(5)Includes “Realized“realized investment gains (losses), net” of our investment management operations.
(6)Prior period amounts have been updated to conform to current period presentation.


Three Month Comparison. Net gains on sales and maturities of fixed maturity securities were $103$144 million and $233$103 million for the second quarter of 20192020 and 2018,2019, respectively, primarily driven by the impact of foreign currency exchange rate movements ofon U.S. and Australian dollar-denominated securities that matured or were sold within our International Insurance segment.Businesses segment and other sales of fixed maturity securities within our domestic segments from interest rate declines during the investment holding period.

The addition to the allowance for credit losses related to fixed maturity securities was $68 million in the second quarter of 2020 and was concentrated in the consumer cyclical, energy and communication sectors within corporate securities. This credit loss allowance was primarily related to securities with liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers. Fixed maturity credit impairments were $12 million in the second quarter of 2019 and were concentrated in the energy and communications sectors within corporate securities. These credit impairments were primarily related to securities with liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers.

Net realized losses on derivative instruments of $(463)$3,710 million for the second quarter of 20192020 primarily included:

$(1,219)2,202 million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts;
$(177)1,345 million of losses on capital hedges due to increases in equity indices;
$147 million of losses on interest rate derivatives due to increases in the 30-year swap and U.S. Treasury rates; and
$104 million of losses on foreign currency hedges due to U.S. dollar depreciation versus the euro and Australian dollar.

Net realized losses on derivative instruments of $463 million for the second quarter of 2019 primarily included:

$1,219 million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts; and
$177 million of losses on capital hedges due to increases in equity indices;

Partially offsetting these losses were:

$676 million of gains on interest rate derivatives due to decreases in swap and U.S. Treasury rates;
$145 million of gains on foreign currency hedges due to U.S. dollar appreciation versus the British pound and Japanese yen appreciation;pound;
$36 million of gains on credit default swaps primarily due to spreads tightening; and
$36 million of gains for fees earned on fee-based synthetic guaranteed investment contracts (“GICs”).

Net realized gains on derivative instruments of $277 million for the second quarter of 2018 primarily included:

$338 million of gains on foreign currency hedges due to U.S. dollar appreciation versus the euro and British pound, partially offset by Japanese yen appreciation,
$33 million of gains for fees earned on fee-based synthetic GICs; and
$(73) million of losses on interest rate derivatives due to increases in swap and U.S. Treasury rates.GICs.

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

Related adjustments include the portions of “Realized investment gains (losses), net” that are included in adjusted operating income and the portions of “Other income (loss)” and “Net investment income” that are excluded from adjusted operating income. These adjustments are made to arrive at “Realized investment gains (losses), net, and related adjustments” which are excluded from adjusted operating income. Results for the second quarter of 2019 and 20182020 reflected net negative related adjustments of $163net positive $553 million and $182primarily due to changes in the fair value of equity securities as well as fixed income securities designated as trading. Results for the second quarter of 2019 reflected related adjustments of net negative $187 million respectively. Both periods’ results were primarily driven by settlements and changes in values related toon interest rate and currency derivatives. The second quarter of 2018 was also driven by the impact of foreign currency exchange rate movements on certain non-local currency denominated assets and liabilities within the International Insurance segment, for which the majority of the foreign currency exposure is hedged and offset in “Realized Investment gains (losses), net.”

Charges that relate to “Realized investment gains (losses), net” are also excluded from adjusted operating income and may be reflected as net charges or net benefits. Results for the second quarter of 2019 and 20182020 reflected a net related chargesbenefit of $519 million, compared to a net related charge of $82 million and $116 million, respectively.for the second quarter of 2019. Both periods’ results were driven by the impact of derivative activity on the amortization of DAC, other costs and certain policyholder reserves.

Six Month Comparison. Net gains on sales and maturities of fixed maturity securities were $372$455 million and $315$372 million for the first six months of 20192020 and 2018,2019, respectively, primarily driven by the impact of foreign currency exchange rate movements ofon U.S. and Australian dollar-denominated securities that matured or were sold within our International Insurance segment.Businesses segment and

other sales of fixed maturity securities within our domestic segments from interest rate declines during the investment holding period.

The addition to the allowance for credit losses related to fixed maturity securities was $218 million in the first six months of 2020 and was concentrated in the energy and communications sectors within corporate securities and foreign government securities. This credit loss allowance was primarily related to securities with liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers. Fixed maturity credit impairments were $42 million in the first six months of 2019 and were concentrated in the utility and energy sectors within corporate securities. These credit impairments were primarily related to securities with liquidity concerns, downgrades in credit, bankruptcy or other adverse financial conditions of the respective issuers.

Net realized losses on derivative instruments of $(1,469)$2,601 million for the first six months of 20192020 primarily included:

$(2,419)5,592 million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts; and
$(663)232 million of losses on capital hedges due to increases in equity indices;

Partially offsetting these losses were:

$2,207 million of gains on interest rate derivatives due to decreases in swap and U.S. Treasury rates; and
$897 million of gains on foreign currency hedges due to U.S. dollar appreciation versus the British pound and due to USD interest rates declining more than foreign interest rates.

Net realized losses on derivative instruments of $1,469 million for the first six months of 2019 primarily included:

$2,419 million of losses on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts; and
$663 million of losses on capital hedges due to increases in equity indices;

Partially offsetting these losses were:

$1,104 million of gains on interest rate derivatives due to decreases in swap and U.S. Treasury rates;
$245 million of gains on foreign currency hedges due to U.S. dollar appreciation versus the euro and British pound and Japanese yen appreciation;
$104 million of gains on credit default swaps primarily due to spreads tightening; and
$72 million of gains for fees earned on fee-based synthetic GICs.

Net realized gains on derivative instruments of $626 million for the first six months of 2018 primarily included:

$800 million of gains on product-related embedded derivatives and related hedge positions associated with certain variable annuity contracts;

$233 million of gains on foreign currency hedges due to U.S. dollar appreciation versus the euro and British pound and Japanese yen appreciation;
$76 million of gains for fees earned on fee-based synthetic GICs; and
$(451) million of losses on interest rate derivatives due to increases in swap and U.S. Treasury rates.

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

Results for the first six months of 2020 and 2019 and 2018 included a net negative related adjustmentsadjustment of $4$649 million and $522a net positive related adjustment of $13 million, respectively. Both periods’ results were primarily driven by settlements andreflected changes in values related tothe fair value of equity securities as well as fixed income securities designated as trading, and settlements on interest rate and currency derivatives. The first six months of 2019 results also included changes in fair value of equity securities recorded in “Other income (loss),” while the first six months of 2018 results also included the impact of foreign currency exchange rate movements on certain non-local currency denominated assets and liabilities within the International Insurance segment, for which the majority of the foreign currency exposure is hedged and offset in “Realized Investment gains (losses), net.”

Results for the first six months of 20192020 and 20182019 reflected net related charges of $57$283 million and $139$57 million, respectively. Both periods’ results were driven by the impact of derivative activity on the amortization of DAC, other costs and certain policyholder reserves.

ImpairmentsCredit Losses

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

We maintain separate monitoring processes for public and private fixed maturities and create watch lists to highlight securities that require special scrutiny and management. For private placements, our credit and portfolio management processes help ensure prudent controls over valuation and management. We have separate pricing and authorization processes to establish “checks and

balances” for new investments. We apply consistent standards of credit analysis and due diligence for all transactions, whether they originate through our own in-house origination staff or through agents. Our regional offices closely monitor the portfolios in their regions. We set all valuation standards centrally, and we assess the fair value of all investments quarterly. Our public and private fixed maturity investment managers formally review all public and private fixed maturity holdings on a quarterly basis and more frequently when necessary to identify potential credit deterioration whether due to ratings downgrades, unexpected price variances and/or company or industry-specific concerns.

For LPs/LLCs accounted for using the equity method, the carrying value of these investments is written down or impaired to fair value when a decline in value is considered to be other-than-temporary. For additional information regarding our OTTI policies, see Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Retail-RelatedCOVID-19

A continued impact of COVID-19 on the global economy and corporate credit may result in losses and credit migration in our investment portfolio. Due to the highly uncertain nature of these conditions, it is not possible to estimate the overall impacts at this time. We believe our investment portfolio has been diligently constructed with a strong focus on ALM discipline, risk management, and capital preservation; and although certain industries will likely be more impacted by COVID-19 driven market conditions, we expect to benefit from our experience in managing highly specialized asset classes through multiple credit cycles. The following represents some of the sectors in our investment portfolio most impacted by COVID-19.
Energy Related Investments
As of June 30, 2020, PFI excluding the Closed Block division had energy related exposure with a market value of approximately $13 billion including a net unrealized gain of approximately $1 billion, which was reflected in AOCI. This $13 billion represented investments in public and private corporate fixed maturity securities (excluding trading securities) and was comprised of the midstream (40%), independent energy (25%), integrated energy (22%), oil field services (6%) and refining (7%) sub-sectors. As of June 30, 2020, the credit quality of energy sector fixed maturity securities was 80% investment grade and 20% below investment grade. Energy investment realized losses were approximately $2 million from write-downs and $28 million from credit loss allowances for the three months ended June 30, 2020 and $54 million from write-downs and $107 million from credit loss allowances for the six months ended June 30, 2020, respectively. Our investments in the energy sector could experience future valuation declines or losses if energy prices maintain their recent levels or continue to decline for an extended period of time. Our assessment that securities are other-than temporarily impaired may change due to new developments, including those developments related to COVID-19.
Consumer Cyclical Related Investments
As of June 30, 2020, PFI excluding the Closed Block division had consumer cyclical related exposure with a market value of approximately $12 billion and a net unrealized gain of $1 billion, which was reflected in AOCI. This $12 billion represented investments in public and private corporate fixed maturity securities (excluding trading securities) and included exposures in retail (37%), automotive (18%), restaurants (9%), leisure (8%), gaming (4%) and lodging (2%). As of June 30, 2020, the credit quality of consumer cyclical sector fixed maturity securities was 77% investment grade and 23% below investment grade. The remaining exposure of less than $1 billion was comprised of private equity investments and real estate-related LPs/LLCs. For additional information regarding “—Retail Related Investments,” see below.
Retail Related Investments

As of June 30, 2019,2020, PFI excluding the Closed Block division had retail-related investments of approximately $14$13 billion consisting primarily of $6 billion of corporate fixed maturities of which 89% were considered investment grade; $7grade (also included in “—Consumer Cyclical Related Investments”); $6 billion of commercial mortgage loans with a weighted-average loan-to-value ratio of approximately 50%51% and a weighted-average debt service coverage ratio of 2.412.46 times; and $1 billion of real estate held through direct ownership and real estate-related LPs/LLCs.

In addition, we held approximately $11 billion of commercial mortgage-backed securities, of which approximately 79% and 20%21% were rated AAA (super-senior)(super senior) and AA, respectively, and comprised of diversified collateral pools. Approximately 30% of the collateral pools were comprised of retail-related investments, with no pools solely collateralized by retail-related investments. For additional information regarding commercial mortgage-backed securities, see “—Fixed Maturity Securities—Fixed Maturity Securities Credit Quality” below.




Airline Related Investments


As of June 30, 2020, PFI excluding the Closed Block division had $0.1 billion of airline related corporate fixed maturities within the transportation sector of which 97% were investment grade.
General Account Investments of PFI excluding Closed Block Division

In the following sections, we provide details about our investment portfolio, excluding investments held in the Closed Block division. We believe the details of the composition of our investment portfolio excluding the Closed Block division are most relevant to an understanding of our operations that are pertinent to investors in Prudential Financial, Inc. because substantially all Closed Block division assets support obligations and liabilities relating to the Closed Block policies only. See Note 87 to the Unaudited Interim Consolidated Financial Statements for furtheradditional information on the Closed Block.

Fixed Maturity Securities
 
In the following sections, we provide details about our fixed maturity securities portfolio, which excludes fixed maturity securities classified as assets supporting experience-rated contractholder liabilities and classified as trading.
    
Fixed Maturity Securities and Unrealized Gains and Losses by Industry
 
The following table sets forth the composition of the portion of our fixed maturity, securitiesavailable-for-sale portfolio by industry category attributable to PFI excluding the Closed Block division and the associated gross unrealized gains and losses, as well as the allowance for credit losses, as of the dates indicated:
 

June 30, 2019 December 31, 2018 June 30, 2020 December 31, 2019
Industry(1)
Amortized
Cost
 
Gross
Unrealized
Gains(2)
 
Gross
Unrealized
Losses(2)
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains(2)
 
Gross
Unrealized
Losses(2)
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Allowance for Credit Losses (5) 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
(in millions) (in millions)
Corporate securities:                                 
Finance$32,398
 $2,184
 $108
 $34,474
 $29,831
 $726
 $724
 $29,833
 $36,123
 $3,973
 $189
 $0
 $39,907
 $34,710
 $2,796
 $85
 $37,421
Consumer non-cyclical24,997
 2,365
 167
 27,195
 24,136
 1,172
 748
 24,560
 26,249
 4,300
 134
 1
 30,414
 24,941
 2,846
 112
 27,675
Utility21,785
 2,009
 131
 23,663
 22,179
 1,073
 624
 22,628
 23,326
 3,782
 83
 0
 27,025
 22,341
 2,498
 81
 24,758
Capital goods12,135
 1,004
 106
 13,033
 11,623
 561
 386
 11,798
 12,896
 1,426
 196
 5
 14,121
 12,287
 1,150
 83
 13,354
Consumer cyclical11,157
 825
 96
 11,886
 11,001
 429
 330
 11,100
 11,455
 1,207
 236
 30
 12,396
 10,871
 994
 45
 11,820
Foreign agencies5,936
 1,010
 35
 6,911
 5,946
 785
 91
 6,640
 5,275
 919
 47
 0
 6,147
 5,649
 928
 10
 6,567
Energy12,392
 993
 180
 13,205
 11,753
 524
 553
 11,724
 12,283
 1,005
 405
 107
 12,776
 12,922
 1,126
 186
 13,862
Communications6,029
 782
 51
 6,760
 6,163
 455
 234
 6,384
 5,978
 1,178
 60
 36
 7,060
 5,916
 939
 34
 6,821
Basic industry5,709
 438
 49
 6,098
 5,431
 238
 158
 5,511
 5,985
 648
 48
 0
 6,585
 5,866
 497
 38
 6,325
Transportation8,908
 760
 51
 9,617
 8,633
 428
 225
 8,836
 9,896
 1,076
 120
 0
 10,852
 9,443
 833
 34
 10,242
Technology3,569
 243
 41
 3,771
 3,855
 155
 99
 3,911
 3,579
 341
 23
 0
 3,897
 3,395
 278
 13
 3,660
Industrial other3,728
 301
 54
 3,975
 3,764
 151
 154
 3,761
 4,317
 559
 42
 0
 4,834
 3,894
 351
 33
 4,212
Total corporate securities148,743
 12,914
 1,069
 160,588
 144,315
 6,697
 4,326
 146,686
 157,362
 20,414
 1,583
 179
 176,014
 152,235
 15,236
 754
 166,717
Foreign government(3)(2)99,069
 22,615
 68
 121,616
 97,087
 16,942
 301
 113,728
 97,841
 18,540
 201
 39
 116,141
 97,880
 20,658
 63
 118,475
Residential mortgage-backed(4)(3)3,283
 167
 4
 3,446
 3,205
 120
 31
 3,294
 2,980
 233
 0
 0
 3,213
 2,955
 154
 1
 3,108
Asset-backed9,775
 144
 34
 9,885
 9,803
 122
 62
 9,863
 10,869
 124
 164
 0
 10,829
 9,832
 123
 34
 9,921
Commercial mortgage-backed10,052
 442
 5
 10,489
 8,953
 87
 86
 8,954
 10,314
 821
 4
 0
 11,131
 10,211
 441
 9
 10,643
U.S. Government23,717
 4,134
 85
 27,766
 22,290
 2,563
 569
 24,284
 26,317
 9,593
 21
 0
 35,889
 24,938
 4,511
 94
 29,355
State & Municipal9,471
 1,207
 1
 10,677
 9,456
 607
 63
 10,000
 9,919
 1,861
 1
 0
 11,779
 9,593
 1,327
 7
 10,913
Total(5)$304,110
 $41,623
 $1,266
 $344,467
 $295,109
 $27,138
 $5,438
 $316,809
Total fixed maturities, available-for-sale(4)(5) $315,602
 $51,586
 $1,974
 $218
 $364,996
 $307,644
 $42,450
 $962
 $349,132
__________ 
(1)Investment data has been classified based on standard industry categorizations for domestic public holdings and similar classifications by industry for all other holdings.
(2) As of June 30, 2020 and December 31, 2019, based on amortized cost, 77% and 76%, respectively, represent Japanese government bonds held by our Japanese insurance operations with no other individual country representing more than 11% of the balance.
(3) As of June 30, 2020 and December 31, 2019, based on amortized cost, 96% and more than 99% were rated A or higher, respectively.
(4) Excluded from the table above are securities held outside the general account in other entities and operations. For additional information regarding investments held outside the general account, see “—Invested Assets of Other Entities and Operations” below.
(5) Effective January 1, 2020, due to the implementation of ASU 2016-13, an allowance for credit losses is now presented for available-for-sale securities. Prior period amounts have been updated to exclude held-to-maturity securities to conform to current period presentation.

The increase in net unrealized gains from December 31, 2019 to June 30, 2020 was primarily due to a decrease in U.S. interest rates.

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


  June 30, 2020 December 31, 2019
Industry(1) 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value Allowance for Credit Losses 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
  (in millions)
Corporate securities:                  
Finance $625
 $61
 $0
 $686
 $9
 $628
 $64
 $0
 $692
Foreign agencies 0
 0
 0
 0
 0
 21
 0
 0
 21
Basic industry 83
 2
 0
 85
 0
 83
 2
 0
 85
Total corporate securities 708
 63
 0
 771
 9
 732
 66
 0
 798
Foreign government(2) 896
 261
 0
 1,157
 0
 891
 282
 0
 1,173
Residential mortgage-backed(3) 280
 23
 0
 303
 0
 310
 21
 0
 331
Total fixed maturities, held-to-maturity(4) $1,884
 $347
 $0
 $2,231
 $9
 $1,933
 $369
 $0
 $2,302
__________ 
(1)Investment data has been classified based on standard industry categorizations for domestic public holdings and similar classifications by industry for all other holdings.
(2)Includes $401 millionAs of gross unrealized gains and no gross unrealized losses, as ofboth June 30, 2019, compared to $359 million of gross unrealized gains2020 and less than $1 million of gross unrealized losses, as of December 31, 2018,2019, based on securities classified as held-to-maturity.amortized cost, 98% represent Japanese government bonds held by our Japanese insurance operations.
(3)As of both June 30, 20192020 and December 31, 2018,2019, based on amortized cost, 76% represent Japanese government bonds held by our Japanese insurance operations with no other individual country representing more than 10% and 11% of the balance, respectively.all were rated A or higher.
(4)As of both June 30, 2019 and December 31, 2018, based on amortized cost, more than 99% were rated A or higher.

(5)Excluded from the table above are securities held outside the general account in other entities and operations. For additional information regarding investments held outside the general account, see “—Invested Assets of Other Entities and Operations” below.

The increase in net unrealized gains from December 31, 2018 to June 30, 2019 was primarily due to a decrease in U.S. interest rates and credit spread tightening.

Fixed Maturity Securities Credit Quality
 
The Securities Valuation Office (“SVO”) of the National Association of Insurance Commissioners (“NAIC”) evaluates the investments of insurers for statutory reporting purposes and assigns fixed maturity securities to one of six categories called “NAIC Designations.” In general, NAIC Designations of “1” highest quality, or “2” high quality, include fixed maturities considered investment grade, which include securities rated Baa3 or higher by Moody’s Investor Service, Inc. (“Moody’s”) or BBB- or higher by Standard & Poor’s Rating Services (“S&P”). NAIC Designations of “3” through “6” generally include fixed maturities referred to as below investment grade, which include securities rated Ba1 or lower by Moody’s and BB+ or lower by S&P. The NAIC Designations for commercial mortgage-backed securities and non-agency residential mortgage-backed securities, including our asset-backed securities collateralized by sub-prime mortgages, are based on security level expected losses as modeled by an independent third-party (engaged by the NAIC) and the statutory carrying value of the security, including any purchase discounts or impairment charges previously recognized.
 
As a result of time lags between the funding of investments, the finalization of legal documents, and the completion of the SVO filing process, the fixed maturity portfolio includes certain securities that have not yet been designated by the SVO as of each balance sheet date. Pending receipt of SVO designations, the categorization of these securities by NAIC Designation is based on the expected ratings indicated by internal analysis.
 
Investments of our international insurance companies are not subject to NAIC guidelines. Investments of our Japanese insurance operations are regulated locally by the Financial Services Agency (“FSA”), an agency of the Japanese government. The FSA has its own investment quality criteria and risk control standards. Our Japanese insurance companies comply with the FSA’s credit quality review and risk monitoring guidelines. The credit quality ratings of the investments of our Japanese insurance companies are based on ratings assigned by nationally recognized credit rating agencies, including Moody’s and S&P, or rating equivalents based on ratings assigned by Japanese credit ratings agencies.
 
The following table sets forth our fixed maturity, available-for-sale portfolio by NAIC Designation or equivalent rating attributable to PFI excluding the Closed Block division, as of the dates indicated:


June 30, 2019 December 31, 2018June 30, 2020 December 31, 2019
NAIC Designation(1)(2)
Amortized
Cost
 
Gross
Unrealized
Gains(3)
 
Gross
Unrealized
Losses(3)(4)
 Fair Value 
Amortized
Cost
 
Gross
Unrealized
Gains(3)
 
Gross
Unrealized
Losses(3)(4)
 Fair Value
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses(3)
 Allowance for Credit Losses(7) Fair Value 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses(3)
 Fair Value
(in millions)(in millions)
1$230,753
 $36,081
 $285
 $266,549
 $222,290
 $24,138
 $2,568
 $243,860
$232,891
 $43,319
 $511
 $0
 $275,699
 $232,039
 $35,923
 $287
 $267,675
256,348
 4,414
 544
 60,218
 55,768
 2,267
 1,999
 56,036
64,892
 7,365
 615
 0
 71,642
 59,114
 5,198
 384
 63,928
Subtotal High or Highest Quality Securities(5)(4)287,101
 40,495
 829
 326,767
 278,058
 26,405
 4,567
 299,896
297,783
 50,684
 1,126
 0
 347,341
 291,153
 41,121
 671
 331,603
310,027
 687
 137
 10,577
 10,149
 330
 408
 10,071
10,583
 557
 390
 11
 10,739
 10,033
 854
 93
 10,794
45,438
 326
 244
 5,520
 5,254
 291
 368
 5,177
5,318
 132
 270
 58
 5,122
 4,914
 248
 98
 5,064
51,280
 85
 45
 1,320
 1,395
 99
 77
 1,417
1,583
 77
 143
 50
 1,467
 1,280
 196
 83
 1,393
6264
 30
 11
 283
 253
 13
 18
 248
335
 136
 45
 99
 327
 264
 31
 17
 278
Subtotal Other Securities(7)(6)17,009
 1,128
 437
 17,700
 17,051
 733
 871
 16,913
17,819
 902
 848
 218
 17,655
 16,491
 1,329
 291
 17,529
Total fixed maturities$304,110
 $41,623
 $1,266
 $344,467
 $295,109
 $27,138
 $5,438
 $316,809
Total fixed maturities, available-for-sale(7)$315,602
 $51,586
 $1,974
 $218
 $364,996
 $307,644
 $42,450
 $962
 $349,132
__________ 
(1)Reflects equivalent ratings for investments of the international insurance operations.
(2)Includes, as of June 30, 20192020 and December 31, 2018, 1,0132019, 868 securities with amortized cost of $4,541$4,168 million (fair value, $4,768$4,307 million) and 1,744796 securities with amortized cost of $9,079$3,073 million (fair value, $9,135$3,130 million), respectively, that have been categorized based on expected NAIC Designations pending receipt of SVO ratings.
(3)Includes $401 million of gross unrealized gains and no gross unrealized losses, as of June 30, 2019, compared to $359 million of gross unrealized gains and less than $1 million of gross unrealized losses, as of December 31, 2018, on securities classified as held-to-maturity.

(4)As of June 30, 2019,2020, includes gross unrealized losses of $279$552 million on public fixed maturities and $158$296 million on private fixed maturities considered to be other than high or highest quality and, as of December 31, 2018,2019, includes gross unrealized losses of $591$188 million on public fixed maturities and $280$103 million on private fixed maturities considered to be other than high or highest quality.
(4)On an amortized cost basis, as of June 30, 2020, includes $254,054 million of public fixed maturities and $43,729 million of private fixed maturities and, as of December 31, 2019, includes $248,179 million of public fixed maturities and $42,974 million of private fixed maturities.
(5)On an amortized cost basis, as of June 30, 2019,2020, includes $246,294$9,452 million of public fixed maturities and $40,807$8,367 million of private fixed maturities and, as of December 31, 2018,2019, includes $238,824$9,049 million of public fixed maturities and $39,234$7,442 million of private fixed maturities.
(6)On an amortized cost basis, as of June 30, 2019, includes $10,118 million of public fixed maturities and $6,891 million of private fixed maturities and, as of December 31, 2018, includes $10,588 million of public fixed maturities and $6,463 million of private fixed maturities.
(7)On an amortized cost basis, as of June 30, 2019,2020, securities considered below investment grade based on lowest of external rating agency ratings total $19,468$17,997 million, or 6% of the total fixed maturities, and include securities considered high or highest quality by the NAIC based on the rules described above.
(7)Effective January 1, 2020, due to the implementation of ASU 2016-13, an allowance for credit losses is now presented for available-for-sale securities. Prior period amounts have been updated to exclude held-to-maturity securities to conform to current period presentation.

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



 June 30, 2020 December 31, 2019
NAIC Designation(1)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses(2)
 Fair Value Allowance for Credit Losses 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses(2)
 Fair Value
 (in millions)
1$1,692
 $328
 $0
 $2,020
 $4
 $1,743
 $351
 $0
 $2,094
2192
 19
 0
 211
 5
 190
 18
 0
 208
Subtotal High or Highest Quality Securities(3)1,884
 347
 0
 2,231
 9
 1,933
 369
 0
 2,302
30
 0
 0
 0
 0
 0
 0
 0
 0
40
 0
 0
 0
 0
 0
 0
 0
 0
50
 0
 0
 0
 0
 0
 0
 0
 0
60
 0
 0
 0
 0
 0
 0
 0
 0
Subtotal Other Securities0
 0
 0
 0
 0
 0
 0
 0
 0
Total fixed maturities, held-to-maturity$1,884
 $347
 $0
 $2,231
 $9
 $1,933
 $369
 $0
 $2,302
__________ 
(1)Reflects equivalent ratings for investments of the international insurance operations.
(2)As of both June 30, 2020 and December 31, 2019, there were no gross unrealized losses on public fixed maturities and private fixed maturities considered to be other than high or highest quality.
(3)On an amortized cost basis, as of June 30, 2020, includes $1,670 million of public fixed maturities and $214 million of private fixed maturities and, as of December 31, 2019, includes $1,705 million of public fixed maturities and $228 million of private fixed maturities.

Asset-Backed and Commercial Mortgage-Backed Securities

The following table sets forth the amortized cost and fair value of asset-backed and commercial mortgage-backed securities within our fixed maturity available-for-sale portfolio attributable to PFI excluding the Closed Block division by credit quality, as of the dates indicated:

June 30, 2019 December 31, 2018June 30, 2020 December 31, 2019
Asset-Backed
Securities(2)
 Commercial Mortgage-Backed Securities(3) 
Asset-Backed
Securities(2)
 Commercial Mortgage-Backed Securities(3)
Asset-Backed
Securities(2)
 Commercial Mortgage-Backed Securities(3) 
Asset-Backed
Securities(2)
 Commercial Mortgage-Backed Securities(3)
Lowest Rating Agency Rating(1)Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair ValueAmortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
(in millions)(in millions)
AAA$9,287
 $9,289
 $7,991
 $8,338
 $9,188
 $9,151
 $7,523
 $7,528
$10,306
 $10,195
 $8,262
 $8,836
 $9,381
 $9,377
 $8,128
 $8,454
AA299
 320
 2,046
 2,135
 405 430 1,415
 1,410
358
 363
 2,039
 2,282
 288 304 2,068
 2,173
A16
 22
 6
 7
 30 36 6 783
 84
 4
 5
 5 6 6 7
BBB11
 11
 9
 9
 15 15 9 93
 3
 9
 8
 12 12 9 9
BB and below162
 243
 0
 0
 165 231 0 0119
 184
 0
 0
 146 222 0 0
Total(4)$9,775
 $9,885
 $10,052
 $10,489
 $9,803
 $9,863
 $8,953
 $8,954
$10,869
 $10,829
 $10,314
 $11,131
 $9,832
 $9,921
 $10,211
 $10,643
__________ 
(1)The table above provides ratings as assigned by nationally recognized rating agencies as of June 30, 2019,2020, including S&P, Moody’s, Fitch Ratings, Inc. (“Fitch”) and Morningstar, Inc. (“Morningstar”).
(2)Includes CLOs,collateralized loan obligations (“CLOs”), credit-tranched securities collateralized by auto loans, education loans, autocredit card loans, sub-prime mortgages, credit cards, and other asset types.
(3)As of both June 30, 20192020 and December 31, 2018,2019, based on amortized cost, 97% and 96% were securities with vintages of 2013 or later, respectively.later.
(4)Excludes fixed maturity securities classified as “Assets supporting experience-rated contractholder liabilities” and “Fixed maturities, trading,” as well as securities held outside the general account in other entities and operations.

Included in “Asset-backed securities” above are investments in CLOs. The following table sets forth information pertaining to these investments in CLOs within our fixed maturity available-for-sale portfolio attributable to PFI excluding the Closed Block division, as of the dates indicated:

June 30, 2019 December 31, 2018June 30, 2020 December 31, 2019
Collateralized Loan ObligationsCollateralized Loan Obligations
Lowest Rating Agency Rating(1)Amortized Cost Fair Value Amortized Cost Fair ValueAmortized Cost Fair Value Amortized Cost Fair Value
(in millions)(in millions)
AAA$7,460
 $7,438
 $7,355
 $7,318
$8,481
 $8,335
 $7,294
 $7,271
AA0
 0
 0
 0
0
 0
 0
 0
A0
 0
 0
 0
0
 0
 0
 0
BBB0
 0
 0
 0
0
 0
 0
 0
BB and below0
 0
 0
 0
0
 0
 0
 0
Total(2)(3)$7,460
 $7,438
 $7,355
 $7,318
$8,481
 $8,335
 $7,294
 $7,271
__________ 
(1)The table above provides ratings as assigned by nationally recognized rating agencies as of June 30, 2019,2020, including S&P, Moody’s, Fitch Ratings, Inc. (“Fitch”) and Morningstar.Morningstar, Inc. (“Morningstar”).
(2)There was no allowance for credit losses as of June 30, 2020.
(3)Excludes fixed maturity securities classified as “Assets supporting experience-rated contractholder liabilities” and “Fixed maturities, trading,” as well as securities held outside the general account in other entities and operations.


Assets Supporting Experience-Rated Contractholder Liabilities
 
For information regarding the composition of “Assets supporting experience-rated contractholder liabilities,” see Note 3 to the Unaudited Interim Consolidated Financial Statements.

Commercial Mortgage and Other Loans
 
Investment Mix

The following table sets forth the composition of our commercial mortgage and other loans portfolio attributable to PFI excluding the Closed Block division, as of the dates indicated:
 June 30, 2019 December 31, 2018 June 30, 2020 December 31, 2019
 (in millions) (in millions)
Commercial mortgage and agricultural property loans $51,364
 $49,524
 $53,596
 $53,928
Uncollateralized loans 664
 658
 680
 656
Residential property loans 143
 158
 109
 124
Other collateralized loans 27
 17
 202
 65
Total recorded investment gross of allowance(1) 52,198
 50,357
 54,587
 54,773
Allowance for credit losses (98) (106) (210) (102)
Total net commercial mortgage and other loans(2) $52,100
 $50,251
 $54,377
 $54,671
__________
(1)As a percentage of recorded investment gross of allowance, more than 99% of these assets were current as of both June 30, 20192020 and December 31, 2018.2019.
(2)Excluded from the table above are commercial mortgage and other loans held outside the general account in other entities and operations. For additional information regarding commercial mortgage and other loans held outside the general account, see “—Invested Assets of Other Entities and Operations” below.

We originate commercial mortgage and agricultural property loans using a dedicated sales and underwriting staff through our various regional offices in the U.S. and international offices primarily in London and Tokyo. All loans are underwritten consistently to our standards using a proprietary quality rating system that has been developed from our industry experience in real estate and mortgage lending.

Uncollateralized loans primarily represent corporate loans which do not meet the definition of a security under authoritative accounting guidance.
 
Residential property loans primarily include Japanese recourse loans. Upon default of these recourse loans, we can make a claim against the personal assets of the property owner, in addition to the mortgaged property. These loans are also backed by third-party guarantors.


Other collateralized loans include consumer loans.

Composition of Commercial Mortgage and Agricultural Property Loans
 
Our commercial mortgage and agricultural property loan portfolio strategy emphasizes diversification by property type and geographic location. The following tables set forth the breakdown of the gross carrying values of commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division by geographic region and property type, as of the dates indicated:
 

 June 30, 2019 December 31, 2018 June 30, 2020 December 31, 2019
 
Gross
Carrying
Value
 
% of
Total
 
Gross
Carrying
Value
 
% of
Total
 
Gross
Carrying
Value
 
% of
Total
 
Gross
Carrying
Value
 
% of
Total
 ($ in millions) ($ in millions)
Commercial mortgage and agricultural property loans by region:                
U.S. Regions(1):                
Pacific $16,919
 32.9% $16,553
 33.4% $18,460
 34.4% $18,061
 33.5%
South Atlantic 8,813
 17.2
 8,633
 17.4
 8,593
 16.0
 8,943
 16.6
Middle Atlantic 6,387
 12.4
 6,088
 12.3
 6,377
 11.9
 6,664
 12.4
East North Central 3,358
 6.5
 2,813
 5.7
 3,265
 6.1
 3,413
 6.3
West South Central 5,512
 10.7
 5,044
 10.2
 5,571
 10.4
 5,439
 10.1
Mountain 2,546
 5.0
 2,508
 5.0
 2,291
 4.3
 2,442
 4.5
New England 1,880
 3.7
 1,879
 3.8
 1,730
 3.2
 1,902
 3.5
West North Central 448
 0.9
 476
 1.0
 485
 0.9
 454
 0.8
East South Central 582
 1.1
 595
 1.2
 599
 1.1
 622
 1.2
Subtotal-U.S. 46,445
 90.4
 44,589
 90.0
 47,371
 88.3
 47,940
 88.9
Europe 3,016
 5.9
 3,077
 6.2
 3,895
 7.3
 3,781
 7.0
Asia 766
 1.5
 733
 1.5
 948
 1.8
 886
 1.6
Other 1,137
 2.2
 1,125
 2.3
 1,382
 2.6
 1,321
 2.5
Total commercial mortgage and agricultural property loans $51,364
 100.0% $49,524
 100.0% $53,596
 100.0% $53,928
 100.0%
__________
(1)Regions as defined by the United States Census Bureau.

 June 30, 2019 December 31, 2018 June 30, 2020 December 31, 2019
 
Gross
Carrying
Value
 
% of
Total
 
Gross
Carrying
Value
 
% of
Total
 
Gross
Carrying
Value
 
% of
Total
 
Gross
Carrying
Value
 
% of
Total
 ($ in millions) ($ in millions)
Commercial mortgage and agricultural property loans by property type:                
Industrial $11,831
 23.0% $10,490
 21.2% $12,270
 22.9% $12,224
 22.7%
Retail 6,514
 12.7
 6,693
 13.5
 6,029
 11.2
 6,524
 12.1
Office 10,771
 21.0
 10,971
 22.1
 10,594
 19.8
 11,203
 20.8
Apartments/Multi-Family 14,214
 27.7
 13,818
 27.9
 15,395
 28.7
 15,176
 28.1
Other 3,384
 6.6
 3,255
 6.6
Agricultural properties 2,817
 5.5
 2,710
 5.5
 3,316
 6.2
 2,856
 5.3
Hospitality 1,833
 3.5
 1,587
 3.2
 2,035
 3.8
 2,066
 3.8
Other 3,957
 7.4
 3,879
 7.2
Total commercial mortgage and agricultural property loans $51,364
 100.0% $49,524
 100.0% $53,596
 100.0% $53,928
 100.0%
 
Loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial mortgage and agricultural property loans. The loan-to-value ratio compares the amount of the loan to the fair value of the underlying property collateralizing the loan and is commonly expressed as a percentage. A loan-to-value ratio less than 100% indicates an excess of

collateral value over the loan amount. Loan-to-value ratios greater than 100% indicate that the loan amount exceeds the collateral value. The debt service coverage ratio compares a property’s net operating income to its debt service payments. Debt service coverage ratios less than 1.0 times indicate that property operations do not generate enough income to cover the loan’s current debt payments. A debt service coverage ratio greater than 1.0 times indicates an excess of net operating income over the debt service payments.


As of June 30, 2019,2020, our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division had a weighted-average debt service coverage ratio of 2.402.45 times and a weighted-average loan-to-value ratio of 56%. As of June 30, 2019, 97%2020, 95% of commercial mortgage and agricultural property loans were fixed rate loans. For those commercial mortgage and agricultural property loans that were originated in 2019,2020, the weighted-average debt service coverage ratio was 2.322.54 times, and the weighted-average loan-to-value ratio was 64%63%.

The values utilized in calculating these loan-to-value ratios are developed as part of our periodic review of the commercial mortgage and agricultural property loan portfolio, which includes an internal evaluation of the underlying collateral value. Our periodic review also includes a credit quality re-rating process, whereby we update the internal quality rating originally assigned at underwriting based on the proprietary quality rating system mentioned above. As discussed below, the internal credit quality rating is a key input in determining our allowance for credit losses.

For loans with collateral under construction, renovation or lease-up, a stabilized value and projected net operating income are used in the calculation of the loan-to-value and debt service coverage ratios. Our commercial mortgage and agricultural property loan portfolio included $1.1 billion and $0.7$1.8 billion of such loans as of both June 30, 20192020 and December 31, 2018,2019, respectively. All else being equal, these loans are inherently riskier than those collateralized by properties that have already stabilized. As of June 30, 2020 and December 31, 2019, there were no loan-specific reserves$1.3 million and $0 million, respectively, of allowance related to these loans. In addition, these unstabilized loans are included in the calculation of our portfolio reserve, as discussed below.

The following table sets forth the gross carrying value of our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division by loan-to-value and debt service coverage ratios, as of the date indicated: 
 June 30, 2019 June 30, 2020
 Debt Service Coverage Ratio   Debt Service Coverage Ratio  
 
> 1.2x
 
1.0x
to
< 1.2x
 < 1.0x 
Total
Commercial Mortgage
and Agricultural
Property
Loans
 
> 1.2x
 
1.0x
to
< 1.2x
 < 1.0x 
Total
Commercial Mortgage
and Agricultural
Property
Loans
Loan-to-Value Ratio (in millions) (in millions)
0%-59.99% $27,661
 $690
 $92
 $28,443
 $28,065
 $738
 $99
 $28,902
60%-69.99% 15,246
 530
 0
 15,776
 15,323
 720
 140
 16,183
70%-79.99% 6,210
 574
 0
 6,784
 7,623
 596
 73
 8,292
80% or greater 208
 83
 70
 361
 125
 92
 2
 219
Total commercial mortgage and agricultural property loans $49,325
 $1,877
 $162
 $51,364
 $51,136
 $2,146
 $314
 $53,596
 

The following table sets forth the breakdown of our commercial mortgage and agricultural property loans attributable to PFI excluding the Closed Block division by year of origination, as of the date indicated:
 June 30, 2019 June 30, 2020
 
Gross
Carrying
Value
 
% of
Total
 
Gross
Carrying
Value
 
% of
Total
Year of Origination ($ in millions) ($ in millions)
2020 $2,319
 4.3%
2019 $4,118
 8.0% 9,720
 18.1
2018 8,935
 17.4
 8,512
 15.9
2017 7,856
 15.3
 7,171
 13.4
2016 6,813
 13.3
 6,291
 11.7
2015 6,664
 13.0
 5,611
 10.5
2014 5,444
 10.6
 4,675
 8.7
2013 5,260
 10.2
2012 & Prior 6,274
 12.2
2013 & Prior 9,297
 17.4
Total commercial mortgage and agricultural property loans $51,364
 100.0% $53,596
 100.0%


Commercial Mortgage and Other Loans Quality
 
The commercial mortgage and other loans portfolio is monitored on an ongoing basis. If certain criteria are met, loans are assigned to either of the following “watch list” categories:

(1) “Closely Monitored,” which includes a variety of considerations, such as when loan metrics fall below acceptable levels, the borrower is not cooperative or has requested a material modification, or the portfolio manager has directed a change in category; or
(2) “Not in Good Standing,” which includes loans in default or with a high probability of loss of principal, such as when the loan is in the process of foreclosure or the borrower is in bankruptcy.
Our workout and special servicing professionals manage the loans on the watch list.

We establish anThe current expected credit loss (“CECL”) allowance forrepresents the Company’s best estimate of expected credit losses to provide forover the risk of credit losses inherent in the lending process. The allowance includes loan-specific reserves for loans that are determined to be impaired as a result of our loan review process and a portfolio reserve for probable incurred but not specifically identified losses for loans which are not on the watch list. We define an impaired loan as a loan for which we estimate it is probable that amounts due according to the contractual termsremaining life of the loan agreement will not be collected.assets. The loan-specific portiondetermination of the allowance considers historical credit loss experience, current conditions, and reasonable and supportable forecasts. The allowance is calculated separately for commercial mortgage loans, agricultural mortgage loans, uncollateralized loans, other collateralized loans and residential property loans.

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

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

When individual loans no longer have the credit risk characteristics of the commercial or agricultural mortgage loan pools, they are removed from the pools and are evaluated individually for an allowance. The allowance is determined based on our assessment as to ultimate collectability ofthe outstanding loan principal and interest. An allowance for credit losses for an impaired loan is recorded based onbalance less the present value of expected future cash flows discounted at the loan’s effective interest rate or based on the fair value of the collateral if the loan is collateral dependent.

The portfolio reserveCECL allowance for incurred but not specifically identified losses considers the currentother collateralized and uncollateralized loans carried at amortized cost is determined based on probability of default and loss given default assumptions by sector, credit compositionquality and average lives of the portfolio based on the internal quality ratings mentioned above. The portfolio reserves are determined using past loan experience, including historical credit migration, loss probability and loss severity factors by property type. These factors are reviewed and updated as appropriate. The allowance for credit losses for commercial mortgage and other loans can increase or decrease from period to period based on these factors.loans.

The following table sets forth the change in allowance for credit losses for our commercial mortgage and other loans portfolio, as of the dates indicated:

 June 30, 2019 December 31, 2018 June 30, 2020 December 31, 2019
 (in millions) (in millions)
Allowance, beginning of year $106
 $91
 $102
 $106
Cumulative effect of adoption of ASU 2016-13 101
 0
Addition to (release of) allowance for credit losses (8) 15
 4
 (4)
Charge-offs, net of recoveries 0
 0
Write-downs charged against the allowance 0
 0
Recoveries of amounts previously written-down 0
 N/A
Change in foreign exchange 0
 0
 0
 0
Other 3
 0
Allowance, end of period $98
 $106
 $210
 $102
Loan-specific reserve $0
 $11
Portfolio reserve $98
 $95
 
The allowance for credit losses as of June 30, 2019 decreased2020 increased compared to December 31, 2018,2019, primarily due to the payoffcumulative effect of a loan included in the loan-specific reserve.adopting ASU 2016-13.

Equity Securities
 
The equity securities attributable to PFI excluding the Closed Block division consist principally of investments in commonCommon and preferred stockPreferred Stock of publicly-traded companies, as well as mutual fund shares. The following table sets forth the composition of our equity securities portfolio and the associated gross unrealized gains and losses, as of the dates indicated:

  June 30, 2019 December 31, 2018
  Cost 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 Cost 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
  (in millions)
Mutual funds $786
 $186
 $0
 $972
 $769
 $87
 $13
 $843
Other common stocks 2,273
 912
 64
 3,121
 2,353
 751
 118
 2,986
Non-redeemable preferred stocks 33
 4
 5
 32
 24
 0
 4
 20
Equity securities, at fair value(1) $3,092
 $1,102
 $69
 $4,125
 $3,146
 $838
 $135
 $3,849
  June 30, 2020 December 31, 2019
  Cost 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 Cost 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
  (in millions)
Mutual funds $926
 $218
 $13
 $1,131
 $817
 $258
 $1
 $1,074
Other Common Stocks 2,428
 834
 135
 3,127
 2,429
 1,091
 57
 3,463
Non-redeemable Preferred Stocks 57
 5
 6
 56
 51
 3
 5
 49
Total equity securities, at fair value(1) $3,411
 $1,057
 $154
 $4,314
 $3,297
 $1,352
 $63
 $4,586
__________  
(1)Amounts presented exclude investments in private equity and hedge funds and other investments which are reported in “Other invested assets.”
 
The net change in unrealized gains (losses) from equity securities attributable to PFI excluding Closed Block division still held at period end, recorded within “Other income (loss),” was $81$372 million and $(34)$81 million during the three months ended June 30, 20192020 and 2018,2019, respectively, and $330$(386) million and $(111)$330 million during the six months ended June 30, 20192020 and 2018,2019, respectively.

Other Invested Assets
 
The following table sets forth the composition of “Other invested assets” attributable to PFI excluding the Closed Block division, as of the dates indicated:

 June 30, 2019 December 31, 2018 June 30, 2020 December 31, 2019
 (in millions) (in millions)
LPs/LLCs:        
Equity method:        
Private equity $2,465
 $2,318
 $2,938
 $2,740
Hedge funds 1,048
 836
 1,552
 1,362
Real estate-related 580
 544
 795
 792
Subtotal equity method 4,093
 3,698
 5,285
 4,894
Fair value:        
Private equity 925
 938
 912
 990
Hedge funds 1,233
 1,256
 1,110
 1,233
Real estate-related 49
 44
 45
 50
Subtotal fair value 2,207
 2,238
 2,067
 2,273
Total LPs/LLCs 6,300
 5,936
 7,352
 7,167
Real estate held through direct ownership(1) 1,819
 1,777
 1,330
 1,350
Derivative instruments 74
 42
 164
 73
Other(2) 632
 652
 732
 620
Total other invested assets $8,825
 $8,407
 $9,578
 $9,210
__________ 
(1)As of June 30, 20192020 and December 31, 2018,2019, real estate held through direct ownership had mortgage debt of $799$459 million and $776$537 million, respectively.
(2)Primarily includes leveraged leases and member and activity stock held in the Federal Home Loan Banks of New York and Boston. For additional information regarding our holdings in the Federal Home Loan Banks of New York and Boston, see Note 1617 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
 
Invested Assets of Other Entities and Operations

“Invested Assets of Other Entities and Operations” presented below includes investments held outside the general account and primarily represents investments associated with our investment management operations and derivative operations. Our derivative operations act on behalf of affiliates primarily to manage interest rate, foreign currency, credit and equity exposures. Assets within our investment management operations that are managed for third-parties and those assets classified as “Separate account assets” on our balance sheet are not included.

 June 30, 2019 December 31, 2018 June 30, 2020 December 31, 2019
 (in millions) (in millions)
Fixed maturities:        
Public, available-for-sale, at fair value(1) $504
 $473
 $614
 $587
Private, available-for-sale, at fair value 1
 1
 1
 1
Fixed maturities, trading, at fair value(1) 1,203
 1,155
 1,084
 1,161
Equity securities, at fair value 624
 605
 649
 691
Commercial mortgage and other loans, at book value(2) 677
 797
 703
 259
Other invested assets(1) 2,965
 2,803
 3,920
 3,062
Short-term investments 14
 43
 36
 17
Total investments $5,988
 $5,877
 $7,007
 $5,778
__________ 
(1)As of June 30, 20192020 and December 31, 2018,2019, balances include investments in collateralized loan obligationsCLOs with fair value of $427$448 million and $408$438 million, respectively.
(2)Book value is generally based on unpaid principal balance, net of any allowance for credit losses, or at fair value, when the fair value option has been elected.

Fixed Maturities, Trading

“Fixed maturities, trading, at fair value” are primarily related to assets associated with consolidated VIEs for which the Company is the investment manager. The assets of the consolidated VIEs are generally offset by liabilities for which the fair value option has been elected. For furtheradditional information on these consolidated VIEs, see Note 4 to the Unaudited Interim Consolidated Financial Statements.


Commercial Mortgage and Other Loans
 
Our investment management operations include our commercial mortgage operations, which provide mortgage origination, investment management and servicing for our general account, institutional clients, the Federal Housing Administration and government-sponsored entities such as Fannie Mae and Freddie Mac.

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

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

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


Liquidity and Capital Resources
 
Overview
 
Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of our businesses, fund business growth, and provide a cushion to withstand adverse circumstances. Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of our businesses, general economic conditions and our access to the capital markets and the alternate sources of liquidity and capital described herein. The principles of our liquidity and capital management framework are described in an enterprise wide policy that is reviewed and approved by our Board.
Our businesses are subject to comprehensive regulation and supervision by domestic and international regulators. These regulations currently include requirements (many of which are the subject of ongoing rule-making) relating to capital, leverage, liquidity, stress-testing, overall risk management, credit exposure reporting and credit concentration. For information on these regulatory initiatives and their potential impact on us, see “Business—Regulation” and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2019.
COVID-19 and Related Market Disruptions

Beginning in the first quarter of 2020, broad market concerns over the impact of COVID-19 have led to significant volatility and disruptions in the global economy and financial markets. Given this macro environment and the global pandemic, as examined through our stress testing, in the first half of the year we took the following significant management actions to enhance our liquidity and capital position:

We augmented our alternative sources of liquidity by entering into a facility agreement with a Delaware trust, pursuant to which Prudential Financial may issue and sell to the trust at any time over a ten-year period up to $1.5 billion of 2.850% senior notes due May 15, 2030 and receive in exchange a corresponding amount of U.S. Treasury securities. The facility agreement is similar to our existing put option agreement that allows us to issue up to $1.5 billion of senior notes to a trust, which we established in 2013 and expires in 2023;
We temporarily suspended Common Stock repurchases under our existing repurchase authorization beginning April 1, 2020, after repurchasing $500 million of shares of Prudential Financial’s Common Stock in the first quarter of 2020. We continue to evaluate the resumption of share repurchases under our existing Board authorization for 2020, as informed by the market environment and any alternative opportunities for capital deployment;

In March 2020, we issued $1.5 billion of senior notes, with maturities ranging from 2026 to 2040 for general corporate purposes, including pre-funding part of our senior notes maturing through 2021. Of these senior notes, $500 million were issued in the form of “green bonds,” where proceeds are allocated to existing or future investments in assets, businesses or projects that provide environmental benefits;
We executed additional capital hedges that protect the capital position of our U.S. insurance subsidiaries against additional declines in the equity markets;
Prudential Legacy Insurance Company of New Jersey issued $800 million of surplus notes under its $4 billion reserve financing facility to enhance the statutory surplus of the Closed Block. This facility, established in 2015, is intended to alleviate any temporary impact to the Closed Block’s surplus due to the timing difference between the mark to market on assets and the decision on the level of the policyholder dividend; and
We accelerated our product diversification strategy and repriced certain products, which are expected to support the capital position of our insurance subsidiaries over time.

Liquidity. The Company continues to operate with significant liquid resources and maintains access to substantial alternative sources of liquidity, such as committed credit facilities, membership in the Federal Home Loan Banks, commercial paper programs, and agreements that allow us to issue senior debt to trust entities. As of June 30, 2020, Prudential Financial had highly liquid assets of $4.5 billion, excluding the net borrowings from an intercompany liquidity account. Nevertheless, adverse developments related to COVID-19 and associated market dislocations could strain our existing liquidity. For example, capital or liquidity needs at our subsidiaries resulting from market conditions or business operations could require us to use our highly liquid assets or tap alternative sources of liquidity, and our access to traditional funding sources, such as commercial paper borrowings, could become limited due to market conditions. Any need to increase the use of our alternative sources of liquidity may result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings or ratings outlooks.

Capital. As of June 30, 2020, all of our significant insurance subsidiaries maintained capital levels consistent with their ratings targets. However, market conditions could negatively impact the statutory capital of our insurance companies and constrain our overall capital flexibility. For example, adverse market conditions may lead to increased defaults and/or further deterioration in the credit quality or fair values of our investment portfolio, which would negatively impact the statutory capital of our insurance subsidiaries. Adverse market conditions could require us to take additional management actions for our insurance subsidiaries to maintain capital consistent with their ratings objectives, which may include redeploying financial resources from internal sources or using available external sources of capital or seeking additional sources.

Liquidity and Capital Risk Management.Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity of Prudential Financial and its subsidiaries on a daily basis and projects borrowing and capital needs over a multi-year time horizon throughhorizon. We use a Risk Appetite Framework (“RAF”) to ensure that all risks taken across the Company align with our periodic planning process.capacity and willingness to take those risks. The RAF provides a dynamic assessment of capital and liquidity stress impacts, including scenarios similar to, and more severe than, those occurring due to COVID-19, and is intended to ensure that sufficient resources are available to absorb those impacts. We believe that cash flows from the sources of funds available to usour capital and liquidity resources are sufficient to satisfy the currentcapital and liquidity requirements of Prudential Financial and its subsidiaries, including under reasonably foreseeable stress scenarios. We have a capital management framework in place that governs the allocation of capital and approval of capital uses. We also employ a Capital Protection Framework to ensure the availability of capital resources to maintain adequate capitalization on a consolidated basis and for our insurance subsidiaries under various stress scenarios.
Our businesses are subject to comprehensive regulation and supervision by domestic and international regulators. These regulations currently include, or may include in the future requirements and limitations (many of which are the subject of ongoing rule-making) relating to capital, leverage, liquidity, stress-testing, overall risk management, credit exposure reporting and credit concentration. For information on regulation and its potential impact, see “Business—Regulation” and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2018 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Regulatory Developments” within this Form 10-Q.
During the six months ended June 30, 2019, we took the following significant actions that impacted our liquidity and capital position:

We repurchased $1.0 billion of shares of our Common Stock and declared aggregate Common Stock dividends of $826 million;
We issued $1.0 billion of senior notes to be utilized for general corporate purposes, which may include refinancing portions of our senior notes maturing during 2019; and
In the second quarter of 2019, PGIM closed on a $300 million limited-recourse credit facility that is secured by certain of PGIM’s fund investments.subsidiaries.

In July 2019, the holders of Prudential Insurance’s $500 million of exchangeable surplus notes delivered notice to the Company indicating their intention to exercise the exchange option. In August 2019, we issued approximately 6.2 million shares of our Common Stock to the note holders as a result of the exchange. The Company’s obligations under the surplus notes are now satisfied.

Capital
 
The primary components of the Company’s capitalization consist of equity and outstanding capital debt, including junior subordinated debt. As shown in the table below, as of June 30, 2019,2020, the Company had $51.3$49.0 billion in capital, all of which was available to support the aggregate capital requirements of its divisionsbusinesses and its Corporate and Other operations. Based on our assessment of these businesses and operations, we believe this level of capital is consistent with our ratings targets.
 
June 30, 2019 December 31, 2018June 30, 2020 December 31, 2019
(in millions)(in millions)
Equity(1)$37,678
 $37,711
$35,060
 $39,076
Junior subordinated debt (including hybrid securities)7,572
 7,568
7,580
 7,575
Other capital debt6,024
 5,793
6,354
 7,001
Total capital$51,274
 $51,072
$48,994
 $53,652
__________
(1)Amounts attributable to Prudential Financial, excluding AOCI.


We manage PICA, The Prudential Life Insurance Company, Ltd. (“Prudential of Japan”), Gibraltar Life, and other significant insurance subsidiaries to regulatory capital levels consistent with our “AA” ratings targets. We utilize the risk-based capital (“RBC”) ratio as a primary measure of the capital adequacy of our domestic insurance subsidiaries and the solvency margin ratio as a primary measure of the capital adequacy of our Japanese insurance subsidiaries.
 
The table below presents the RBC ratios of our most significant domestic insurance subsidiaries as of December 31, 2018,2019, the most recent statutory fiscal year-end and RBC reporting date for these subsidiaries.

 
 Ratio(1)
PICA(2)385411%
Prudential Annuities Life Assurance Corporation (“PALAC”)511484%
Composite Major U.S. Insurance Subsidiaries(3)417426%
__________ 
(1)The RBC ratio calculations are intended to assist insurance regulators in measuring an insurer’s solvency and ability to pay future claims. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities, but is available to the public.
(2)Includes Prudential Retirement Insurance and Annuity Company (“PRIAC”), Pruco Life Insurance Company (“Pruco Life”), Pruco Life Insurance Company of New Jersey (“PLNJ”), which is a subsidiary of Pruco Life, and Prudential Legacy Insurance Company of New Jersey (“PLIC”).
(3)Includes PICA and its subsidiaries, as noted above, and PALAC. Composite RBC is not reported to regulators and is based on the summation of total adjusted capital and risk charges for the included companies as determined under statutory accounting and RBC guidance to calculate a composite numerator and denominator, respectively, for purposes of calculating the composite ratio.

The table below presents the solvency margin ratios of our most significant international insurance subsidiaries as of March 31, 2019,2020, the most recent date for which this information is available.
 Ratio
Prudential of Japan consolidated(1)806818%
Gibraltar Life consolidated(2)884835%
__________ 
(1)Includes Prudential Trust Co., Ltd., a subsidiary of Prudential of Japan.
(2)Includes Prudential Gibraltar Financial Life Insurance Co., Ltd. (“PGFL”), a subsidiary of Gibraltar Life.

All of our domestic and significant international insurance subsidiaries have capital levels that substantially exceed the minimum level required by applicable insurance regulations. However, market conditions could negatively impact the statutory capital of our insurance companies and constrain our overall capital flexibility. Adverse market conditions could require us to take additional management actions for our insurance subsidiaries to maintain capital consistent with their ratings objectives, which may include redeploying financial resources from internal sources or using available external sources of capital or seeking additional sources. Our regulatory capital levels also may be affected in the future by changes to the applicable regulations, proposals for which are currently under consideration by both domestic and international insurance regulators. For furtheradditional information on the calculation of RBC and solvency margin ratios, as well as regulatory minimums, see Note 1819 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Capital Protection Framework
We employ a Capital Protection Framework (the “Framework”) to ensure that sufficient capital resources are available to maintain adequate capitalization on a consolidated basis for our insurance subsidiaries under various stress scenarios. The Framework incorporates the potential impacts from market-related stresses, including equity markets, real estate, interest rates, credit losses and foreign currency exchange rates. In evaluating these potential impacts, we assess risk holistically at the enterprise level, recognizing that our business mix may produce results that partially offset on a net basis.
The Framework accommodates periodic volatility within ranges that we deem acceptable, while also providing for additional potential sources of capital, including on-balance sheet capital capacity and contingent sources of capital. We believe we currently have access to sufficient resources to maintain adequate capitalization under a range of potential stress scenarios.2019.

Captive Reinsurance Companies
 
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital—Captive Reinsurance Companies” included in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, for a discussion of our use of captive reinsurance companies. 
    
Shareholder Distributions
 
Share Repurchase Program and Shareholder Dividends

In December 2018, our2019, the Board of Directors (the “Board”) authorized the Company to repurchase at management’s discretion up to $2.0 billion of its outstanding Common Stock during the period from January 1, 20192020 through December 31, 2019. 2020. We temporarily suspended Common Stock repurchases under our existing repurchase authorization beginning April 1, 2020; however, we continue to evaluate the resumption of share repurchases under this Board authorization.


The timing and amount of share repurchases are determined by management based on market conditions and other considerations, including any increased capital needs of our businesses due to, among other things, changes in regulatory capital requirements and opportunities for growth and acquisitions. Repurchases may be executed in the open market, through derivative, accelerated repurchase and other negotiated transactions and through plans designed to comply with Rule 10b5-1(c) under the Securities Exchange Act of 1934.


The following table sets forth information about declarations of Common Stock dividends, as well as repurchases of shares of Prudential Financial’s Common Stock, for the six months ended June 30, 2019.2020.
 
 Dividend Amount Shares Repurchased
Three months ended:Per Share Aggregate Shares Total Cost
 (in millions, except per share data)
March 31, 2019$1.00
 $415
 5.4
 $500
June 30, 2019$1.00
 $411
 5.0
 $500
 Dividend Amount Shares Repurchased
Three months ended:Per Share Aggregate Shares Total Cost
 (in millions, except per share data)
March 31, 2020$1.10
 $445
 6.7
 $500
June 30, 2020$1.10
 $441
 0.0
 $0
 
Liquidity
 
The principles of our liquidity management framework are described in an enterprise-wide Liquidity Management Policy that is reviewed and approved by the Board. Liquidity management and stress testing are performed on a legal entity basis as the ability to transfer funds between subsidiaries is limited due in part to regulatory restrictions. Liquidity needs are determined through daily and quarterly cash flow forecasting at the holding company and within our operating subsidiaries. We seek to maintain a minimum balance of highly liquid assets of $1.3 billion to ensure that adequate liquidity is available at Prudential Financial to cover fixed expenses in the event that we experience reduced cash flows from our operating subsidiaries at a time when access to capital markets is also not available. The level of this minimum balance is reviewed and approved annually by the Board.
 
We seek to mitigate the risk of having limited or no access to financing due to stressed market conditions by generally pre-funding debt in advance of maturity. In the first quarter of 2020, we issued $1.5 billion of Prudential Financial senior notes, of which $1 billion were issued for general corporate purposes, including pre-funding in part our senior notes maturing through 2021. We mitigate the refinancing risk associated with our debt that is used to fund operating needs by matching the term of debt with the assets financed. To ensure adequate liquidity in stress scenarios, stress testing is performed for our major operating subsidiaries. We seek to further mitigate liquidity risk by maintaining our access to alternative sources of liquidity, as discussed below.
 
Liquidity of Prudential Financial
 
The principal sources of funds available to Prudential Financial, the parent holding company, are dividends, returns of capital and loans from subsidiaries, and proceeds from debt issuances and certain stock-based compensation activity. These sources of funds may be supplemented by Prudential Financial’s access to the capital markets as well as the “—Alternative Sources of Liquidity” described below.
 
The primary uses of funds at Prudential Financial include servicing debt, making capital contributions and loans to subsidiaries, making acquisitions, paying declared shareholder dividends and repurchasing outstanding shares of Common Stock executed under authority from the Board.
 
As of June 30, 2019,2020, Prudential Financial had highly liquid assets with a carrying value totaling $5,664$5,105 million, a decreasean increase of $535$1 million from December 31, 2018.2019. Highly liquid assets predominantly include cash, short-term investments, U.S. Treasury securities, obligations of other U.S. government authorities and agencies, and/or foreign government bonds. We maintain an intercompany liquidity account that is designed to optimize the use of cash by facilitating the lending and borrowing of funds between Prudential Financial and its subsidiaries on a daily basis. Excluding the balance ofnet borrowings from this intercompany liquidity account, Prudential Financial had highly liquid assets of $4,867$4,517 million as of June 30, 2019, a decrease2020, an increase of $681$456 million from December 31, 2018.2019.
 

The following table sets forth Prudential Financial’s principal sources and uses of highly liquid assets, excluding net borrowings from our intercompany liquidity account, for the periodperiods indicated.
 
Sources and Uses of Holding Company Highly Liquid Assets(1): Six Months Ended June 30,
  2020 2019
  (in millions)
Highly Liquid Assets, beginning of period $4,061
 $5,548
Dividends and/or returns of capital from subsidiaries(2) 1,016
 929
Capital contributions to subsidiaries(3) 0
 (268)
Total Business Capital Activity 1,016
 661
Share repurchases(4) (500) (983)
Common stock dividends(5) (886) (827)
Total Share Repurchases and Dividends (1,386) (1,810)
Proceeds from the issuance of debt 1,486
 989
Repayments of debt (651) (761)
Total Debt Activity(6) 835
 228
Proceeds from stock-based compensation and exercise of stock options 156
 154
Net income tax receipts & payments 176
 (491)
Affiliated (borrowings)/loans - (operating activities)(7) 288
 1,065
Interest paid on external debt (493) (480)
Other, net(6) (136) (8)
Total Other Activity (9) 240
Net increase/(decrease) in highly liquid assets 456
 (681)
Highly Liquid Assets, end of period $4,517
 $4,867
 Six Months Ended
June 30, 2019
 (in millions)
Sources: 
Net receipts under intercompany loans agreements(1)$1,064
Proceeds from the issuance of debt989
Dividends and/or returns of capital from subsidiaries(2)929
Proceeds from stock-based compensation and exercise of stock options243
Interest income from subsidiaries on intercompany agreements, net of interest paid10
Total sources3,235
Uses: 
Share repurchases(3)983
Common stock dividends(4)827
Repayments on external debt761
Capital contributions to subsidiaries(5)268
Net income tax payments491
Interest paid on external debt480
Other, net106
Total uses3,916
Net increase (decrease) in highly liquid assets$(681)
__________ 
(1)Includes net receipts of $817 million from International insurance subsidiaries, $250 million from PGIM subsidiaries and payments of $3 millionPrior period amounts have been updated to other subsidiaries.conform to current period presentation.
(2)Includes dividends and/or returns of capital of2020 includes $444 million from international insurance subsidiaries, $380 million from PALAC, $108 million from PGIM subsidiaries, $80 million from Prudential Annuities Holding Company, and $4 million from other subsidiaries. 2019 includes $492 million from PALAC, $223 million from PGIM subsidiaries, $126 million from international insurance subsidiaries, $79 million from Prudential Annuities Holding Company, and $9 million from other subsidiaries.
(3)Excludes $172019 includes capital contributions of $200 million related to trades that settled in July 2019.PICA and $68 million to PGIM subsidiaries.
(4)Excludes cash payments made on trades that settled in the subsequent period.
(5)Includes cash payments made on dividends declared in prior periods.
(5)(6)Includes capital contributions of $200 million to PICA and $68 million to PGIM subsidiaries.“Total Debt Activity” excludes changes in PFI commercial paper. These changes are captured in “Other, net” in the “Total Other Activity” section.
(7) Represent loans to and from subsidiaries to support business operating needs.

Dividends and Returns of Capital from Subsidiaries
 
Domestic insurance subsidiaries. During the first six months of 2019,2020, Prudential Financial received dividendsreturns of $492capital of $380 million from PALAC and $79dividends of $80 million from Prudential Annuities Holding Company.

International insurance subsidiaries. During the first six months of 2019,2020, Prudential Financial received dividends of $126$444 million from its international insurance subsidiaries. In addition to paying common stockCommon Stock dividends, our international insurance operations may return capital to Prudential Financial through or facilitated by other means, such as the repayment of preferred stock obligations held by Prudential Financial or other affiliates, affiliated lending, affiliated derivatives and reinsurance with U.S.- and Bermuda-based affiliates. Effective January 1, 2019, our Japan insurance operations entered into a reinsurance agreement with Gibraltar Re, our Bermuda-based reinsurance affiliate, to reinsure the mortality and morbidity risk associated with a portion of the in-force contracts for certain products, which we expect will allow us to more efficiently manage our capital and risk profile.

Other subsidiaries. During the first six months of 2019,2020, Prudential Financial received dividends and returns of $223capital of $108 million from PGIM subsidiaries and $9dividends of $4 million from other subsidiaries.
Restriction on dividends and returns of capital from subsidiaries. Our insurance companies are subject to limitations on the payment of dividends and other transfers of funds to Prudential Financial and other affiliates under applicable insurance law and regulation. Also, moreFurther, as discussed above, recent market conditions could negatively impact capital positions of our insurance companies, which could further restrict their ability to pay dividends. More generally, the payment of dividends by any of our subsidiaries is subject to declaration by their Board of Directors and can be affected by market conditions and other factors.

 
With respect to our domestic insurance subsidiaries, PICA is permitted to pay ordinary dividends based on calculations specified under New Jersey insurance law, subject to prior notification to the New Jersey Department of Banking and Insurance (“NJDOBI”). Any distributions above this amount in any twelve-month period are considered to be “extraordinary” dividends, and the approval of the NJDOBI is required prior to payment. The laws regulating dividends of the states where our other domestic insurance companies are domiciled are similar, but not identical, to New Jersey’s.


Capital redeployment from our international insurance subsidiaries is subject to local regulatory requirements in the international jurisdictions in which they operate. Our most significant international insurance subsidiaries, Prudential of Japan and Gibraltar Life, are permitted to pay common stock dividends based on calculations specified by Japanese insurance law, subject to prior notification to the FSA. Dividends in excess of these amounts and other forms of capital distribution require the prior approval of the FSA.

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

See Note 1819 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, for detailsinformation on specific dividend restrictions.
    
Liquidity of Insurance Subsidiaries
 
We manage the liquidity of our insurance operations to ensure stable, reliable and cost-effective sources of cash flows to meet all of our obligations. Liquidity within each of our insurance subsidiaries is provided by a variety of sources, including portfolios of liquid assets. The investment portfolios of our subsidiaries are integral to the overall liquidity of our insurance operations. We segment our investment portfolios and employ an asset/liability management approach specific to the requirements of each of our product lines. This enhances the discipline applied in managing the liquidity, as well as the interest rate and credit risk profiles, of each portfolio in a manner consistent with the unique characteristics of the product liabilities.

Liquidity is measured against internally-developed benchmarks that take into account the characteristics of both the asset portfolio and the liabilities that they support. We consider attributes of the various categories of liquid assets (for example, type of asset and credit quality) in calculating internal liquidity measures to evaluate our insurance operations’ liquidity under various stress scenarios, including company-specific and market-wide events. We continue to believe that cash generated by ongoing operations and the liquidity profile of our assets provide sufficient liquidity under reasonably foreseeable stress scenarios for each of our insurance subsidiaries.
 
The principal sources of liquidity for our insurance subsidiaries are premiums, investment and fee income, investment maturities, sales of investments, and sales associated with our insurance and annuity operations, as well as internal and external borrowings. The principal uses of that liquidity include benefits, claims and dividends paid to policyholders, and payments to policyholders and contractholders in connection with surrenders, withdrawals and net policy loan activity. Other uses of liquidity may include commissions, general and administrative expenses, purchases of investments, the payment of dividends to the parent holding company, hedging and reinsurance activity and payments in connection with financing activities.
 
The following table sets forth the fair value of certain of our domestic insurance operations’ portfolio of liquid assets, as of the dates indicated.
 
June 30, 2019  June 30, 2020  
Prudential
Insurance
 PLIC PRIAC PALAC Pruco Life Total December 31, 2018
Prudential
Insurance
 PLIC PRIAC PALAC Pruco Life Total December 31, 2019
(in billions)(in billions)
Cash and short-term investments$5.3
 $1.3
 $0.4
 $4.0
 $0.4
 $11.4
 $11.1
$9.9
 $0.5
 $1.3
 $10.2
 $0.8
 $22.7
 $11.9
Fixed maturity investments(1):                          
High or highest quality120.1
 36.6
 19.6
 12.2
 5.6
 194.1
 179.2
133.9
 37.9
 20.1
 16.8
 5.8
 214.5
 201.3
Other than high or highest quality7.2
 2.7
 1.3
 0.5
 0.4
 12.1
 11.3
8.0
 3.0
 1.3
 0.7
 0.4
 13.4
 12.2
Subtotal127.3
 39.3
 20.9
 12.7
 6.0
 206.2
 190.5
141.9
 40.9
 21.4
 17.5
 6.2
 227.9
 213.5
Public equity securities, at fair value0.1
 2.0
 0.0
 0.0
 0.0
 2.1
 1.9
0.2
 2.0
 0.1
 0.1
 0.0
 2.4
 2.5
Total$132.7
 $42.6
 $21.3
 $16.7
 $6.4
 $219.7
 $203.5
$152.0
 $43.4
 $22.8
 $27.8
 $7.0
 $253.0
 $227.9

__________ 
(1)Excludes fixed maturities designated as held-to-maturity. Credit quality is based on NAIC or equivalent rating.

The following table sets forth the fair value of our international insurance operations’ portfolio of liquid assets, as of the dates indicated. 

June 30, 2019  June 30, 2020  
Prudential
of Japan
 
Gibraltar
Life(1)
 
All
Other(2)
 Total December 31, 2018
Prudential
of Japan
 
Gibraltar
Life(1)
 
All
Other(2)
 Total December 31, 2019
(in billions)(in billions)
Cash and short-term investments$0.8
 $1.9
 $1.5
 $4.2
 $4.1
$1.6
 $3.2
 $1.3
 $6.1
 $5.0
Fixed maturity investments(3):                  
High or highest quality(4)43.3
 94.4
 22.2
 159.9
 149.1
41.6
 93.8
 11.2
 146.6
 157.2
Other than high or highest quality0.8
 3.2
 2.1
 6.1
 6.2
0.6
 2.4
 1.4
 4.4
 5.4
Subtotal44.1
 97.6
 24.3
 166.0
 155.3
42.2
 96.2
 12.6
 151.0
 162.6
Public equity securities1.9
 1.7
 0.7
 4.3
 4.0
1.8
 1.6
 0.4
 3.8
 4.7
Total$46.8
 $101.2
 $26.5
 $174.5
 $163.4
$45.6
 $101.0
 $14.3
 $160.9
 $172.3
__________ 
(1)Includes PGFL.
(2)Represents our international insurance operations, excluding Japan.
(3)Excludes fixed maturities designated as held-to-maturity. Credit quality is based on NAIC or equivalent rating.
(4)As of June 30, 2019, $121.72020, $110.4 billion, or 76%75%, were invested in government or government agency bonds.
 
Liquidity associated with other activities
 
Hedging activities associated with Individual Annuities
 
For the portion of our Individual Annuities’ ALM strategy executed through hedging, as well as the capital hedge program, we enter into a range of exchange-traded, cleared and other OTC equity and interest rate derivatives in order to hedge certain capital market risks related to more severe market conditions. For a full discussion of our Individual Annuities’ risk management strategy, see “—Results of Operations by Segment—U.S. Businesses—U.S. Individual Solutions Division—Individual Annuities.” This portion of our Individual Annuities’ ALM strategy and capital hedge program requires access to liquidity to meet payment obligations relating to these derivatives, such as payments for periodic settlements, purchases, maturities and terminations. These liquidity needs can vary materially due to, among other items, changes in interest rates, equity markets, mortality and policyholder behavior.
 
The hedging portion of our Individual Annuities’ ALM strategy and capital hedge program may also result in derivative-relatedderivative related collateral postings to (when we are in a net pay position) or from (when we are in a net receive position) counterparties. The net collateral position depends on changes in interest rates and equity markets related to the amount of the exposures hedged. Depending on market conditions, the collateral posting requirements can result in material liquidity needs when we are in a net pay position. As of June 30, 2019,2020, the derivatives comprising the hedging portion of our ALM strategy and capital hedge program were in a net receive position of $4.6$11.9 billion compared to a net receive position of $2.9$4.7 billion as of December 31, 2018.2019. The change in collateral position was driven by a net positive impact from declining interest rates partially offset by risingand equity markets.

Foreign exchange hedging activities
 
We employ various hedging strategies to manage potential exposure to foreign currency exchange rate movements, particularly those associated with the yen. Our overall yen hedging strategy calibrates the hedge level to preserve the relative contribution of our yen-based business to the Company’s overall return on equity on a leverage neutral basis. The hedging strategy includes two primary components:

Income Hedges—We hedge a portion of our prospective yen-based earnings streams by entering into external forward currency derivative contracts that effectively fix the currency exchange rates for that portion of earnings, thereby reducing volatility from foreign currency exchange rate movements. As of June 30, 2019,2020, we have hedged 100%, 92%, and 50% and 8% of expected yen-based earnings for 2019, 2020, 2021 and 2022, respectively.
 
Equity Hedges—We hold both internal and external hedges primarily to hedge our USD-equivalent equity. These hedges also mitigate volatility in the solvency margins of yen-based subsidiaries resulting from changes in the market value of their USD-denominated investments hedging our U.S. dollar-equivalentUSD-equivalent equity attributable to changes in the yen-U.S. dollaryen-USD exchange rate.


For additional information on our hedging strategy, see “—Results of Operations—Impact of Foreign Currency Exchange Rates.”


Cash settlements from these hedging activities result in cash flows between subsidiaries of Prudential Financial and either international-based subsidiaries or external parties. The cash flows are dependent on changes in foreign currency exchange rates and the notional amount of the exposures hedged. For example, a significant yen depreciation over an extended period of time could result in net cash inflows, while a significant yen appreciation could result in net cash outflows. The following tables set forth information about net cash settlements and the net asset or liability resulting from these hedging activities related to the yen and other currencies for the and as of periods indicated.

Six Months Ended
June 30,
Six Months Ended
June 30,
Cash Settlements: Received (Paid)2019 20182020 2019
(in millions)(in millions)
Income Hedges (External)(1)$32
 $(30)$55
 $32
Equity Hedges:      
Internal(2)233
 14
120
 233
External(3)4
 154
102
 4
Total Equity Hedges237
 168
222
 237
Total Cash Settlements$269
 $138
$277
 $269
      
June 30, December 31,June 30, December 31,
Assets (Liabilities):2019 20182020 2019
(in millions)(in millions)
Income Hedges (External)(4)$54
 $67
$132
 $60
Equity Hedges:      
Internal(2)360
 436
814
 506
External(5)148
 78
45
 43
Total Equity Hedges(6)508
 514
859
 549
Total Assets (Liabilities)$562
 $581
$991
 $609
__________
(1)Includes non-yen related cash settlements of $46 million, primarily denominated in Brazilian real, Korean won and Australian dollar and $17 million, primarily denominated in Australian dollar, Chilean peso, Korean won and Brazilian real and $(17) million, primarily denominated in Korean won, Chilean peso and Australian dollar, for the six months ended June 30, 20192020 and 2018,2019, respectively.
(2)Represents internal transactions between international-based and U.S.-based entities. Amounts noted are from the U.S.-based entities’ perspectives.
(3)Includes non-yen related cash settlements of $33 million and $5 million, denominated in Korean won for the six months ended June 30, 2019.2020 and 2019, respectively.
(4)Includes non-yen related assets of $41$111 million, primarily denominated in Brazilian real, Korean won and Australian dollar, and assets of $37 million, primarily denominated in Korean won, Australian dollar and Brazilian real, and assets of $44 million, primarily denominated in Australian dollar and Brazilian real,Chilean peso, as of June 30, 20192020 and December 31, 2018,2019, respectively.
(5)Includes non-yen related assets of $15$8 million, denominated in Korean won, and liabilitiesassets of $(2)$1 million, denominated in Korean won, as of June 30, 20192020 and December 31, 2018,2019, respectively.
(6)As of June 30, 2019,2020, approximately $305$131 million, $287$391 million, $214 million and $(84)$123 million of the net market values are scheduled to settle in 2019, 2020, 2021, 2022 and thereafter, respectively. The net market value of the assets (liabilities) will vary with changing market conditions to the extent there are no corresponding offsetting positions.

PGIM operations
 
The principal sources of liquidity for our fee-based PGIM businesses include asset management fees and commercial mortgage origination and servicing fees. The principal uses of liquidity include general and administrative expenses, facilitating our commercial mortgage loan business, and distributions of dividends and returns of capital to Prudential Financial. The primary liquidity risks for our fee-based PGIM businesses relate to their profitability, which is impacted by market conditions, and our investment management performance.performance and client redemptions. We believe the cash flows from our fee-based PGIM businesses are adequate to satisfy the current liquidity requirements of these operations, as well as requirements that could arise under reasonably foreseeable stress scenarios, which are monitored through the use of internal measures.
 

The principal sources of liquidity for our strategic investments held in our PGIM businesses are cash flows from investments, the ability to liquidate investments, borrowing lines from internal sources, including Prudential Financial and Prudential Funding, LLC (“Prudential Funding”), a wholly-owned subsidiary of PICA, and external sources.sources, including PGIM’s limited-recourse credit facility. The principal use of liquidity for our strategic investments includes making investments to support business growth and paying interest expense from the internal and external borrowings used to fund those investments. The primary liquidity risks include the inability to sell assets in a timely manner, declines in the value of assets and credit defaults. There have been no material changes to the liquidity position of our PGIM operations since December 31, 2018.2019.
 

Alternative Sources of Liquidity
 
In addition to asset-based financing as discussed below, Prudential Financial and certain subsidiaries have access to other sources of liquidity, including syndicated, unsecured committed credit facilities, membership in the Federal Home Loan Banks, commercial paper programs, and a put option agreement. In May 2020, we entered into a facility agreement with a Delaware trust, pursuant to which Prudential Financial may issue and sell to the trust at any time over a ten-year period up to $1.5 billion of senior notes due May 15, 2030 and receive in exchange a corresponding amount of U.S. Treasury securities, thereby augmenting our alternative sources of liquidity. For more information on these sources of liquidity, see Note 109 to the Unaudited Interim Consolidated Financial Statements contained herein and Note 1617 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2018.2019.
 
Asset-based Financing
 
We conduct asset-based or secured financing within our insurance and other subsidiaries, including transactions such as securities lending, repurchase agreements and mortgage dollar rolls, to earn spread income, to borrow funds, or to facilitate trading activity. These programs are primarily driven by portfolio holdings of securities that are lendable based on counterparty demand for these securities in the marketplace. The collateral received in connection with these programs is primarily used to purchase securities in the short-term spread portfolios of our insurance entities. Investments held in the short-term spread portfolios include cash and cash equivalents, short-term investments (primarily corporate bonds), mortgage loans and fixed maturities (primarily collateralized loan obligations and other structured securities), with a weighted average life at time of purchase by the short-term portfolios of four years or less. Floating rate assets comprise the majority of our short-term spread portfolio. These short-term portfolios are subject to specific investment policy statements, which among other things, do not allow for significant asset/liability interest rate duration mismatch.
 
The following table sets forth our liabilities under asset-based or secured financing programs as of the dates indicated.
 
June 30, 2019 December 31, 2018June 30, 2020 December 31, 2019
PFI
Excluding
Closed Block
Division
 
Closed
Block
Division
 Consolidated 
PFI
Excluding
Closed Block
Division
 
Closed
Block
Division
 Consolidated
PFI
Excluding
Closed Block
Division
 
Closed
Block
Division
 Consolidated 
PFI
Excluding
Closed Block
Division
 
Closed
Block
Division
 Consolidated
($ in millions)($ in millions)
Securities sold under agreements to repurchase$6,727
 $3,014
 $9,741
 $6,982
 $2,968
 $9,950
$7,805
 $2,683
 $10,488
 $6,834
 $2,847
 $9,681
Cash collateral for loaned securities3,318
 917
 4,235
 3,063
 866
 3,929
3,056
 391
 3,447
 3,228
 986
 4,214
Securities sold but not yet purchased0
 0
 0
 9
 0
 9
1
 0
 1
 0
 0
 0
Total(1)$10,045
 $3,931
 $13,976
 $10,054
 $3,834
 $13,888
$10,862
 $3,074
 $13,936
 $10,062
 $3,833
 $13,895
Portion of above securities that may be returned to the Company overnight requiring immediate return of the cash collateral(2)$10,025
 $3,931
 $13,956
 $9,875
 $3,834
 $13,709
$10,303
 $3,074
 $13,377
 $10,062
 $3,833
 $13,895
Weighted average maturity, in days(3)(2)8
 0
   10
 0
  27
 N/A
   N/A
 N/A
  
__________ 
(1)The daily weighted average outstanding balance for the three and six months ended June 30, 20192020 was $10,598$11,475 million and $10,574$11,139 million, respectively, for PFI excluding the Closed Block division, and $4,161$3,823 million and $4,137$3,500 million, respectively, for the Closed Block division.
(2)Prior period amounts have been updated to conform to current period presentation.
(3)Excludes securities that may be returned to the Company overnight. “N/A” reflects that all outstanding balances may be returned to the Company overnight.

As of June 30, 2019,2020, our domestic insurance entities had assets eligible for the asset-based or secured financing programs of $121.5$128.0 billion, of which $14.1$14.0 billion were on loan. Taking into account market conditions and outstanding loan balances as of June 30, 2019,2020, we believe approximately $17.4$20.0 billion of the remaining eligible assets are readily lendable, including approximately $12.6$13.8 billion relating to PFI excluding the Closed Block division, of which $4.0$3.8 billion relates to certain separate accounts and may only be used for financing activities related to those accounts, and the remaining $4.8$6.2 billion relating to the Closed Block division.
 

Financing Activities
 
As of June 30, 2019,2020, total short-term and long-term debt of the Company on a consolidated basis was $20.5$21.3 billion, an increase of $0.7 billion from December 31, 2018.2019. The following table sets forth total consolidated borrowings of the Company as of the dates indicated. We may, from time to time, seek to redeem or repurchase our outstanding debt securities through open market purchases, individually negotiated transactions or otherwise. Any such actions will depend on prevailing market conditions, our liquidity position and other factors.
 

June 30, 2019 December 31, 2018June 30, 2020 December 31, 2019
Borrowings:
Prudential
Financial
 Subsidiaries Consolidated 
Prudential
Financial
 Subsidiaries Consolidated
Prudential
Financial
 Subsidiaries Consolidated 
Prudential
Financial
 Subsidiaries Consolidated
(in millions)(in millions)
General obligation short-term debt:                      
Commercial paper$25
 $820
 $845
 $15
 $727
 $742
$25
 $475
 $500
 $25
 $524
 $549
Current portion of long-term debt1,003
 500
 1,503
 1,100
 499
 1,599
528
 0
 528
 1,179
 0
 1,179
Subtotal1,028
 1,320
 2,348
 1,115
 1,226
 2,341
553
 475
 1,028
 1,204
 524
 1,728
General obligation long-term debt:                      
Senior debt8,961
 173
 9,134
 8,630
 173
 8,803
11,402
 173
 11,575
 9,912
 172
 10,084
Junior subordinated debt7,514
 58
 7,572
 7,511
 57
 7,568
7,522
 58
 7,580
 7,518
 57
 7,575
Surplus notes(1)0
 342
 342
 0
 341
 341
0
 343
 343
 0
 342
 342
Subtotal16,475
 573
 17,048
 16,141
 571
 16,712
18,924
 574
 19,498
 17,430
 571
 18,001
Total general obligations17,503
 1,893
 19,396
 17,256
 1,797
 19,053
19,477
 1,049
 20,526
 18,634
 1,095
 19,729
Limited and non-recourse borrowings(2):                      
Short-term debt0
 58
 58
 0
 53
 53
0
 7
 7
 0
 13
 13
Current portion of long-term debt0
 253
 253
 0
 57
 57
0
 95
 95
 0
 192
 192
Long-term debt0
 793
 793
 0
 666
 666
0
 664
 664
 0
 645
 645
Total limited and non-recourse borrowings0
 1,104
 1,104
 0
 776
 776
0
 766
 766
 0
 850
 850
Total borrowings$17,503
 $2,997
 $20,500
 $17,256
 $2,573
 $19,829
$19,477
 $1,815
 $21,292
 $18,634
 $1,945
 $20,579
__________ 
(1)Amounts are net of assets under set-off arrangements of $9,235$11,464 million and $9,095$9,749 million as of June 30, 20192020 and December 31, 2018,2019, respectively.
(2)Limited and non-recourse borrowing primarily represents mortgage debt of our subsidiaries that has recourse only to real estate investment property of $799$459 million and $776$537 million as of June 30, 20192020 and December 31, 2018,2019, respectively, and a $300 million draw on a credit facility withthat has recourse only to collateral pledged by the Company of $299 million and $0 as of both June 30, 20192020 and December 31, 2018, respectively.2019.

As of June 30, 2019,2020, and December 31, 2018,2019, we were in compliance with all debt covenants related to the borrowings in the table above. For furtheradditional information on our short- and long-term debt obligations, see Note 109 to the Unaudited Interim Consolidated Financial Statements contained herein and Note 1617 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2018.2019.
 
Prudential Financial’s borrowings increased $247 million$0.8 billion from December 31, 2018, primarily2019, driven by the issuance, net of related costs, of $989 million$1.5 billion of senior debt, and a $10 million increase in commercial paper outstanding, offset by $750$651 million in debt maturities. Borrowings of our subsidiaries increased $424decreased $130 million from December 31, 2018,2019, primarily driven by $97 million in debt maturities, a $299$49 million draw on a credit facility, a $93 million increasedecrease in commercial paper, a $23 million increase in mortgage debt, and a $6 million decrease in short-term borrowings, offset by a $19 million increase in short-term debt.long-term limited recourse borrowings.
 
Term and Universal Life Reserve Financing

We use captive reinsurance subsidiaries to finance the portion of the statutory reserves required to be held by our domestic life insurance companies under Regulation XXX and Guideline AXXX that we consider to be non-economic. The financing arrangements involve the reinsurance of term and universal life business to our captive reinsurers and the issuance of surplus notes by those captives that are treated as capital for statutory purposes. These surplus notes are subordinated to policyholder obligations, and the payment of principal and interest on the surplus notes can only be made with prior insurance regulatory approval.
 

We have entered into agreements with external counterparties providing for the issuance of surplus notes by our captive reinsurers in return for the receipt of credit-linked notes (“Credit-Linked Note Structures”). As of June 30, 2019,2020, we had Credit-Linked Note Structures with an aggregate issuance capacity of $13,700$14,825 million, of which $11,535$12,849 million was outstanding, as compared to an aggregate issuance capacity of $13,750$13,700 million, of which $11,445$12,009 million was outstanding, as of December 31, 2018.2019. These amounts reflect a $1,200 million Credit Link Note Structure entered into in June 2020 for Guideline AXXX reserves, of which $700 million was outstanding as of June 30, 2020, as reflected in the table below. Under the agreements, the captive receives in exchange for the surplus notes one or more credit-linked notes issued by a special-purpose affiliate of the Company with an aggregate principal amount equal to the surplus notes outstanding. The captive holds the credit-linked notes as assets supporting Regulation XXX or Guideline AXXX non-economic reserves, as applicable. For more information on our Credit-Linked Note Structures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities” in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
 

The following table summarizes our Credit-Linked Note Structures, which are reported on a net basis, as of June 30, 2019.2020.

Surplus Notes 
Outstanding
as of
June 30, 2019
  Surplus Notes 
Outstanding
as of
June 30, 2020
  
Credit-Linked Note Structures:
Original
Issue Dates
 
Maturity
Dates
 
Facility
Size
Original
Issue Dates
 
Maturity
Dates
 
Facility
Size
($ in millions)($ in millions)
XXX2011-2014 2021-2024 $1,750
(1) $1,750
2011-2014 2021-2024 $1,750
(1) $1,750
AXXX2013 2033 3,129
 3,500
2013 2033 3,248
 3,500
XXX2014-2018 2021-2034 2,300
(2) 2,450
2014-2018 2021-2034 2,285
(2) 2,375
XXX2014-2017 2024,2037 2,200
 2,400
2014-2017 2024-2037 2,330
 2,400
AXXX2017 2037 1,466
 2,000
2017 2037 1,466
 2,000
XXX2018 2038 690
 1,600
2018 2038 1,070
 1,600
AXXX2020 2032 700
 1,200
Total Credit-Linked Note Structures $11,535
 $13,700
 $12,849
 $14,825
__________
(1)Prudential Financial has agreed to reimburse any amounts paid under the credit-linked notes issued in this structure.structure up to $0.5 billion. During the fourth quarter of 2019, this financing facility was restructured to allow for an extension through 2036.
(2)The $2.3 billion of surplus notes represents an intercompany transaction that eliminates upon consolidation. Prudential Financial has agreed to reimburse amounts paid under credit-linked notes issued in this structure up to $1.0 billion.
 
As of June 30, 2019,2020, we also had outstanding an aggregate of $2.3 billion of debt issued for the purpose of financing Regulation XXX and Guideline AXXX non-economic reserves, of which approximately $0.6$0.7 billion relates to Regulation XXX reserves and approximately $1.7$1.6 billion relates to Guideline AXXX reserves. In addition, as of June 30, 2019,2020, for purposes of financing Guideline AXXX reserves, one of our captives had approximately $4.0 billion of surplus notes outstanding that were issued to affiliates.
 
The Company has introduced updated versions of several products in its individual life product portfolioproducts in conjunction with the requirement to adopt principle-based reserving by January 1, 2020. Notably, the Company adopted principle-based reserving for its guaranteed universal lifeThese updated products and introduced updated versions of these products in 2017. The guaranteed universal life updated productsare currently priced to support the principle-based statutory reserve level without the need for financing through captive reinsurance.reserve financing. Certain elements of the implementation of principle-based reserving are yet to be finalized by the NAIC and may have a material impact on statutory reserves. The Company is continuingcontinues to assess the impact of current and proposed amendments tothe implementation of principle-based reserving on projected statutory reserve levels, product pricing and product pricing. The Company is on track to adopt principle-based reserving for its remaining portfoliothe use of individual life product offerings by January 1, 2020.financing.

Ratings

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Ratings” in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, for a discussion of our financial strength and credit ratings and their impact on our business.

The following is a summary ofThere have been no significant changes or actions in ratings and ratingor ratings outlooks for our Company that have occurred from January 1,since the filing of our Form 10-K for the year ended December 31, 2019 through the date of this filing.

On May 9, 2019, In 2020, Moody’s, Investors Service upgradedFitch, and AM Best revised their Outlook on the financial strength rating of Prudential Insurance, Pruco Life and PRIACU.S. life insurance industry from Stable to ‘Aa3’ from ‘A1’with a Stable outlook. Moody’s also upgraded Prudential Financial’s long-term senior debt rating to ‘A3’ from ‘Baa1’ with a Stable outlook.Negative.
    

Off-Balance Sheet Arrangements
 
Guarantees, Other Contingencies and Other Contingent Commitments
 
In the course of our business, we provide certain guarantees and indemnities to third-parties pursuant to which we may be contingently required to make payments in the future. We also have other commitments, some of which are contingent upon events or circumstances not under our control, including those at the discretion of our counterparties. See “—Commitments and Guarantees” within Note 1514 to the Unaudited Interim Consolidated Financial Statements for additional information. For further discussion of certain of these commitments that relate to our separate accounts, also see “—Liquidity—Liquidity associated with other activities—PGIM operations.”
 

Other Off-Balance Sheet Arrangements
In May 2020, Prudential Financial entered into a ten-year facility agreement with a Delaware trust that gives Prudential Financial the right, at any time over a ten-year period, to issue up to $1.5 billion of senior notes to the trust in return for principal and interest strips of U.S. Treasury securities that are held by the trust.
 
In November 2013, we entered into a put option agreement with a Delaware trust that gives Prudential Financial the right, at any time over a ten-year period, to issue up to $1.5 billion of senior notes to the trust in return for principal and interest strips of U.S. Treasury securities that are held by the trust. In 2014, Prudential Financial entered into financing transactions, pursuant to which it issued $500 million of limited-recourse notes and, in return, obtained $500 million of asset-backed notes from a Delaware master trust and ultimately contributed the asset-backed notes to its subsidiary, PRIAC. As of June 30, 2019,2020, no principal payments have been received or are currently due on the asset-backed notes and, as a result, there was no payment obligation under the limited-recourse notes. Accordingly, none of the notes are reflected in the Company’s Unaudited Interim Consolidated Financial Statements as of that date.
 
Other than as described above, we do not have retained or contingent interests in assets transferred to unconsolidated entities, or variable interests in unconsolidated entities or other similar transactions, arrangements or relationships that serve as credit, liquidity or market risk support, that we believe are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or our access to or requirements for capital resources. In addition, other than the agreements referred to above, we do not have relationships with any unconsolidated entities that are contractually limited to narrow activities that facilitate our transfer of or access to associated assets.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of fluctuations in the value of financial instruments as a result of absolute or relative changes in interest rates, foreign currency exchange rates, equity prices or commodity prices. To varying degrees, our products and services, and the investment activities supporting them, generate exposure to market risk. The market risk incurred, and our strategies for managing this risk, vary by product. As of June 30, 2019,2020, there have been no material changes in our economic exposure to market risk from December 31, 2018,2019, a description of which may be found in our Annual Report on Form 10-K, for the year ended December 31, 2018,2019, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” filed with the Securities and Exchange Commission. See “Risk Factors” in this Quarterly Report on Form 10-Q and Item 1A, “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2018,2019, for a discussion of how difficult conditions in the financial markets and the economy generally may materially adversely affect our business and results of our operations.

ITEM 4. CONTROLS AND PROCEDURES

In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized, and reported on a timely basis, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of June 30, 2019.2020. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2019,2020, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), occurred during the quarter ended June 30, 2019,2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART IIOTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 1514 to the Unaudited Interim Consolidated Financial Statements under “—Litigation and Regulatory Matters” for a description of certain pending litigation and regulatory matters affecting us, and certain risks to our businesses presented by such matters, which is incorporated herein by reference.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. These risks could materially affect our business, results of operations or financial condition, cause the trading price of our Common Stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by, or on behalf of, the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” and the risks of our businesses described elsewhere in this Quarterly Report on Form 10-Q. The following should be read in conjunction with and supplements and amends the section titled “Risk Factors” in our Annual Report on Form 10-K.

The COVID-19 pandemic has resulted in extreme stress and disruption in the global economy and financial markets, and has adversely impacted, and may continue to adversely impact, our results of operations, financial condition and prospects.

During the first half of 2020, the COVID-19 crisis (i) caused unfavorable financial market conditions which had a substantial negative effect on reported results of our businesses and market values in our investment portfolio, (ii) negatively impacted the statutory capital of our insurance companies and constrained our overall capital flexibility primarily due to asset value declines and the need to strengthen reserves, and (iii) caused us to lower our outlook for the future, as described further under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—COVID-19.”

We cannot predict what impact the COVID-19 pandemic will ultimately have on the global economy, markets or our businesses. The pandemic could exacerbate existing areas of concern, such as the pace of economic growth, equity market performance, and continued low interest rates, among others. Changes in consumer spending, business investment, and government debt and spending as a result of the crisis may negatively impact our businesses.

These risks may have manifested, and may continue to manifest, in our businesses in the following areas, among others:

Investment Risk. The COVID-19 pandemic and its impact on the global economy has increased the risk of loss on our investments due to default or deterioration in credit quality or value as described further under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—General Account Investments—COVID-19.”

Insurance Risk. We expect COVID-19 to drive elevated levels of mortality in the near-term. The COVID-19 pandemic may ultimately result in a mortality calamity, which is the risk that short-term mortality rates deviate adversely from what is expected as a result of pandemics or other disasters. Elevated losses will reduce our earnings and capital, and we may be forced to liquidate assets before maturity in order to pay the excess claims. The pandemic situation may worsen depending on the evolution of the virus’s transmissibility and virulence, effectiveness of public health measures and availability of potential vaccines and treatments. Ultimate losses would depend on several factors, including the rates of mortality and morbidity among various segments of the insured population, age distribution of associated deaths, collectability of reinsurance, performance of our investment portfolio, effect on lapses and surrenders of existing policies, as well as sales of new policies and other variables.

The pandemic may also result in a change in policyholder behavior, such as policyholders choosing to defer or stop paying insurance premiums. It may also result in a lapse calamity, which is the risk that lapse rates over the short-term deviate adversely from what is expected. For example, surrenders of cash surrender value products by customers in need of liquidity can impact our liquidity, and it may be necessary in certain market conditions to sell assets to meet surrender demands. Lapse calamity can also impact our earnings through its impact on estimated future profits.

As a result of COVID-19 we also expect to experience elevated short-term disability claims in our Group Insurance business and may experience elevated claims in our Long-Term Care business.

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


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

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

In particular, abrupt changes to interest rate, equity, and/or currency markets could lead to increased collateral requirements to counterparties, and cash demands due to severe mortality calamity, customer withdrawals or lapse events.

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

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

Strategic Risk. The COVID-19 pandemic could ultimately generate an economic downturn; higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending. In such an environment, the demand for our products and our investment returns could be materially adversely affected. In addition, we expect near-term sales to be slowed by the impact of social distancing and financial hardship on our customers.

The macroeconomic environment may also result in the need to recognize an impairment of goodwill which could negatively impact our results of operations and financial condition.

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

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) The following table provides information about purchases by the Company during the three months ended June 30, 2019,2020, of its Common Stock:

Period 
Total Number
of Shares
Purchased(1)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased
as Part of
Publicly Announced
Program(2)
 Approximate Dollar Value of Shares that May Yet Be Purchased under the Program(2)
April 1, 2019 through April 30, 2019 1,657,498
 $100.74
 1,654,250
  
May 1, 2019 through May 31, 2019 1,681,255
 $99.22
 1,679,816
  
June 1, 2019 through June 30, 2019 1,693,860
 $98.76
 1,684,690
  
Total 5,032,613
 $99.57
 5,018,756
 $1,000,000,000
Period 
Total Number
of Shares
Purchased(1)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased
as Part of
Publicly Announced
Program(2)
 Approximate Dollar Value of Shares that May Yet Be Purchased under the Program(2)
April 1, 2020 through April 30, 2020 10,713
 $55.93
 0
  
May 1, 2020 through May 31, 2020 8,092
 $52.93
 0
  
June 1, 2020 through June 30, 2020 3,734
 $64.54
 0
  
Total 22,539
 $56.28
 0
 $1,500,000,000
__________
(1)Includes shares of Common Stock withheld from participants for income tax withholding purposes whose shares of restricted stock units vested during the period. Such restricted stock units were originally issued to participants pursuant to the Prudential Financial Inc. Omnibus Incentive Plan.
(2)In December 2018,2019, Prudential Financial’s Board of Directors authorized the Company to repurchase, at management’s discretion, up to $2.0 billion of its outstanding Common Stock during the period from January 1, 20192020 through December 31, 2019.2020. The Company temporarily suspended Common Stock repurchases under its existing repurchase authorization beginning April 1, 2020; however, the Company continues to evaluate the resumption of share repurchases under the existing Board authorization.


ITEM 6. EXHIBITS

EXHIBIT INDEX
  
  
  
101.INS - XBRLInstance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
  
101.SCH - XBRLTaxonomy Extension Schema Document.
  
101.CAL - XBRLTaxonomy Extension Calculation Linkbase Document.
  
101.LAB - XBRLTaxonomy Extension Label Linkbase Document.
  
101.PRE - XBRLTaxonomy Extension Presentation Linkbase Document.
  
101.DEF - XBRLTaxonomy Extension Definition Linkbase Document.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
__________
* Certain confidential information contained in this exhibit, marked by [***], has been omitted because it (i) is not material and (ii) would likely cause competitive harm to the Company if it were to be publicly disclosed.

Prudential Financial, Inc. will furnish upon request a copy of any exhibit listed above upon the payment of a reasonable fee covering the expense of furnishing the copy. Requests should be directed to:

Shareholder Services
Prudential Financial, Inc.
751 Broad Street, 21st Floor
Newark, New Jersey 07102



GLOSSARY

Throughout this Quarterly Report on Form 10-Q, the Company may use certain abbreviations, acronyms and terms which are defined below.
Prudential Entities
     
Assurance IQAssurance IQ, LLCPOKThe Prudential Life Insurance Company of Korea, Ltd.
CompanyPrudential Financial, Inc. and its subsidiaries Pruco LifePRIACPruco LifePrudential Retirement Insurance and Annuity Company
PALACPrudential Annuities Life Assurance Corporation PrudentialPruco LifePrudential Financial, Inc. and its subsidiariesPruco Life Insurance Company
PFIPrudential Financial, Inc. and its subsidiaries Prudential FinancialPrudential Financial, Inc. and its subsidiaries
PGFLPrudential Gibraltar Financial Life Insurance Co., Ltd.Prudential FinancialPrudential Financial, Inc.
PIIHPrudential International Insurance Holdings, Ltd. Prudential FundingPrudential Funding, LLC
PLICPrudential Legacy Insurance Company of New Jersey Prudential Insurance/PICAThe Prudential Insurance Company of America
PLNJPruco Life Insurance Company of New Jersey Prudential of JapanThe Prudential Life Insurance Company, Ltd.
POAPrudential of Argentina RegistrantPrudential Financial, Inc.
PRIACPrudential Retirement Insurance and Annuity Company



Defined Terms
     
BoardPrudential Financial's Board of Directors Other Postretirement BenefitsCertain health care and life insurance benefits provided by the Company for its retired employees, their beneficiaries and covered dependents
Closed BlockCertain in-force traditional domestic participating insurance policies and annuity products, andalong with corresponding assets that are used for the payment of benefits and policyholders' dividends on these products Pension BenefitsFunded and non-funded non-contributory defined benefit pension plans which cover substantially all of the Company’s employees
Exchange ActThe Securities Exchange Act of 1934 PGIMThe Global Investment Management Businessesglobal investment management businesses of Prudential Financial, Inc.
FitchFitch Ratings Inc. Regulation XXXValuation of Life Insurance Policies Model Regulation
FrameworkPrudential's capital protection frameworkS&PStandard & Poor's Rating Services
Guideline AXXXThe Application of the Valuation of Life Insurance Policies Model Regulation Tax Act of 2017S&PThe United States Tax Cuts and Jobs Act of 2017Standard & Poor's Rating Services
Moody'sMoody's InvestorInvestors Service, Inc. U.S. GAAPGenerally accepted accounting principles in the United States of America
MorningstarMorningstar, Inc.   


Acronyms
     
ALMAsset Liability Management LIBORLondon Inter-Bank Offered Rate
AOCIAccumulated Other Comprehensive Income (Loss)LPs/LLCsLimited Partnerships and Limited Liability Companies
ASUAOCIAccounting Standards UpdateAccumulated Other Comprehensive Income (Loss) MD&AManagement's Discussion and Analysis of Financial Condition and Results of Operations
AUDASUAustralian DollarAccounting Standards Update NAICNational Association of Insurance Commissioners
bpsAUDBasis PointsAustralian Dollar NAVNet Asset Value
DACbpsDeferred Policy Acquisition CostsBasis Points NJDOBINew Jersey Department of Banking and Insurance
DOLCARES ActU.S. Department of LaborCoronavirus Aid, Relief, and Economic Security ActNOLsNet Operating Losses
CECLCurrent Expected Credit Loss NPRNon-Performance Risk
CLOCollateralized Loan ObligationsOCIOther Comprehensive Income (Loss)
COVID-192019 Novel CoronavirusODLOverall Domestic Losses
DACDeferred Policy Acquisition CostsOTCOver-The-Counter
DSIDeferred Sales Inducements OCIOTTIOther Comprehensive Income (Loss)Other-Than-Temporary Impairments
EBITDAEarnings Before Interest, Taxes, Depreciation and Amortization OTCPDIOver-The-CounterPrudential Defined Income
FASBFinancial Accounting Standards Board OTTIRAFOther-Than-Temporary ImpairmentsRisk Appetite Framework
FHLBNYFederal Home Loan Bank of New YorkRBCRisk-Based Capital
FSAFinancial Services Agency (an agency of the Japanese government) RBCSECRisk-Based CapitalSecurities and Exchange Commission
GICsGuaranteed Investment Contracts SECSecurities and Exchange Commission
GMABGuaranteed Minimum Accumulation BenefitsSVOSecurities Valuation Office
GILTIGlobal Intangible Low-Taxed IncomeTBATo Be Announced
GMDBGuaranteed Minimum Death BenefitsTCJATax Cuts and Jobs Act
GSEGovernment Sponsored Entities U.S.The United States of America
GMIWBHDIGuaranteed MinimumHighest Daily Lifetime Income and Withdrawal Benefits USDU.S. Dollar
GMWBLIBORGuaranteed Minimum Withdrawal BenefitsLondon Inter-Bank Offered Rate VIEsVariable Interest Entities
HDIIRAHighest Daily Lifetime IncomeIndividual Retirement Account VOBAValue of Business Acquired



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  Prudential Financial, Inc.
  By:
/S/    KENNETH Y. TANJI        
   
Kenneth Y. Tanji
Executive Vice President and Chief Financial Officer
(Authorized signatory and principal financial officer)

Date: August 2, 20196, 2020

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