filings.toolsItem 1. BUSINESS
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Item 1. BUSINESS
Table of Contents
Overview
Prudential Financial, Inc. (“Prudential Financial” or “PFI”), a global financial services leader and premier active global investment manager with approximately $1.377 trillion of assets under management as of December 31, 2022, has operations in the United States, Asia, Europe and Latin America. Through our subsidiaries and affiliates we offer a wide array of financial products and services, including life insurance, annuities, retirement-related products and services, mutual funds and investment management. We offer these products and services to individual and institutional customers through proprietary and third-party distribution networks. Our principal executive offices are located in Newark, New Jersey, and Prudential Financial’s Common Stock is publicly traded on the New York Stock Exchange under the ticker symbol “PRU”.
On December 18, 2001, The Prudential Insurance Company of America (“PICA”) converted from a mutual life insurance company owned by its policyholders to a stock life insurance company and became a wholly-owned subsidiary of Prudential Financial. The demutualization was carried out under PICA’s Plan of Reorganization, which required us to establish and operate a regulatory mechanism known as the “Closed Block”. The Closed Block includes certain in-force participating insurance and annuity products and corresponding assets that are used for the payment of benefits and policyholders’ dividends on these products, as well as certain related assets and liabilities.
In October 2021, the Company announced the creation of Retirement Strategies, a new U.S. business that would serve the retirement needs of both its institutional and individual customers by bringing the institutional investment and pension solutions offered through the Retirement business together with the financial solutions and capabilities of the Individual Annuities business. Commencing with the second quarter of 2022, this new structure has been fully operationalized; therefore, the results of the former Retirement segment (now known as the “Institutional Retirement Strategies” operating segment) and the former Individual Annuities segment (now known as the “Individual Retirement Strategies” operating segment) have been aggregated into the Retirement Strategies segment. Prior periods have been updated to conform to this new presentation.
Our principal operations consist of PGIM (our global investment management business), our U.S. Businesses (consisting of our Retirement Strategies, Group Insurance, Individual Life and Assurance IQ businesses), our International Businesses, the Closed Block division and our Corporate and Other operations. The Closed Block division is accounted for as a divested business that is reported separately from the Divested and Run-off Businesses that are included in Corporate and Other. Divested and Run-off Businesses are composed of businesses that have been, or will be, sold or exited, including businesses that have been placed in wind-down status that do not qualify for “discontinued operations” accounting treatment under generally accepted accounting principles in the United States of America (“U.S. GAAP”). Our Corporate and Other operations include corporate items and initiatives that are not allocated to business segments as well as the Divested and Run-off Businesses described above. See Note 22 to the Consolidated Financial Statements for revenues, income and loss, and total assets by segment.
Our strategy centers on our mix of high-quality protection, retirement and investment management businesses which creates growth potential due to earnings diversification and the opportunity to provide customers with integrated cross-business solutions, as well as capital benefits from a balanced risk profile. We are well-positioned to meet the needs of customers and tap into significant market opportunities through PGIM, our U.S. Businesses and our International Businesses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
PGIM
Provides investment management services and solutions related to public fixed income, public equity, real estate debt and equity, private credit and other alternatives, and multi-asset class strategies, to institutional and retail clients globally, as well as our general account.
| Products Our products and services are offered through the following businesses: •PGIM Fixed Income—provides global active asset management services across public fixed income markets. •Jennison Associates—provides active fundamental public equity and fixed income asset management services across an array of growth, value, global and specialty equity strategies, as well as fixed income strategies. •PGIM Quantitative Solutions—provides a range of systematic, customized solutions across equity, multi-asset, and liquid alternative platforms. •PGIM Private Capital—provides private credit solutions across the risk spectrum including investment grade, high yield, direct lending and mezzanine financing. •PGIM Real Estate—provides a broad range of public and private real estate debt and equity strategies as well as private equity investments with a focus on secondary transactions in the small and mid-cap market. •PGIM Investments—offers actively managed investment solutions, including mutual funds, exchange-traded funds (“ETFs”) and separately managed accounts to individual investors and financial intermediaries in the U.S., as well as Undertakings for the Collective Investment in Transferable Securities (“UCITS”) and other investment solutions to financial intermediaries in select countries across Europe, Asia and Latin America. Additionally, operates local asset management businesses in Taiwan and India and has interests in an operating joint venture in China. We hold seed and co-investments in some of our investment products to either (i) seed new products or investment strategies in order to develop a track record prior to obtaining third-party investments, or (ii) co-invest alongside clients in PGIM-managed funds to demonstrate that our interests are aligned with theirs. | Marketing and Distribution We primarily distribute products through the following channels: •Institutional ◦Proprietary sales force for each PGIM business with independent marketing and client service teams. ◦PGIM’s Institutional Relationship Group, which develops relationships with, and introduces PGIM’s broad capabilities to, large institutions globally. •Retail ◦Third-party intermediaries and product manufacturers/distributors globally who include our investment options in their products and platforms. ◦Distribution channels associated with other Prudential business segments. ◦Licensed sales professionals within Prudential Advisors, Prudential’s proprietary nationwide sales organization. •General Account ◦Provide investment management services across a broad array of asset classes for our general account. |
PGIM (Continued)
| Revenues and Profitability Our revenues primarily come from: •Asset management fees, which are typically calculated based upon a percentage of assets under management. In certain asset management arrangements, we also receive performance-based incentive fees when the return on the managed assets exceeds certain benchmark returns or other performance targets. •Revenues from commercial mortgage origination and servicing. •Transaction fees earned in connection with the structuring, sale or purchase of assets, primarily related to real estate and private fixed income. •Investment returns from seed and co-investments. Our profitability is substantially impacted by: •Macro market movements (e.g., interest rates, credit spreads and equity market performance). •Our ability to achieve investment returns above the target benchmarks. •Our ability to attract and retain client investments. | Competition We compete with numerous asset managers and other financial institutions. For our investment management products, we compete based on a number of factors, including investment performance, strategy and process, talent, organizational stability and client relationships. We offer products across multiple asset classes, with specialized investment teams that employ approaches designed to add value in each product area or asset class. Our organizational stability and robust institutional and retail businesses have helped attract and retain talent critical to delivering investment results for clients. Our private credit and commercial real estate lending businesses compete based on price, terms, execution and the strength of our relationship with the borrower. |
U.S. Businesses—Retirement Strategies
Serves the retirement needs of both our institutional and individual customers. Our Institutional Retirement Strategies business develops and distributes retirement investment and income products and services to retirement plan sponsors in the public, private and not-for-profit sectors, both domestically and internationally in the United Kingdom. Our Individual Retirement Strategies business develops and distributes individual variable and fixed annuity products in the U.S., primarily to mass affluent (households with investable assets or annual income in excess of $100,000) and affluent (households with investable assets in excess of $250,000) customers with a focus on innovative product design and risk management strategies.
| Products | |||||
| We offer a variety of products and solutions to serve different retirement needs and goals: Institutional Retirement Strategies Payout Annuities: products that provide a predictable source of monthly income, generally for the life of the annuitant. •Pension risk transfer—non-participating group annuity insurance and reinsurance contracts issued to pension plan sponsors and intermediaries, under which we assume all investment and actuarial risk associated with a group of specified participants within a plan in return for a premium typically paid as a lump-sum at inception. •Pension risk transfer—longevity reinsurance contracts with counterparties from which we earn a fee for assuming the longevity risk of pension plans that have been insured by third-parties. Premiums for these products are typically paid over the duration of the contract as opposed to a lump-sum at inception. Stable Value: products where our obligations are backed by our general account, and where we bear some or all of the investment and asset-liability management risk, depending on the product. •Investment-only products—for use in institutional capital markets and qualified plans primarily including fee-based wraps through which customers’ funds are held in a client-owned trust and investment results pass through to the customer. We earn fee revenue for providing a guaranteed minimum interest rate backed by the general account. •Guaranteed Investment Contracts and Funding Agreements—contain an obligation to pay interest at a specified rate and to repay principal at maturity or following contract termination. Other products: includes structured settlements and other group annuities. Individual Retirement Strategies Indexed Variable Annuities •The Prudential FlexGuard® indexed variable annuity, offers the contractholder an opportunity to allocate funds to variable subaccounts and index-based strategies. The strategies provide an interest component linked to, but not an investment in, the selected index, and its performance over the elected term, subject to certain contractual minimums and maximums, and also provides varying levels of downside protection at pre-determined levels and durations. The product also allows for additional deposits and provides a Return of Purchase Payment (“ROP”) death benefit at no additional charge. | **•**The Prudential FlexGuard® Income indexed variable annuity offers similar investment and crediting features as The Prudential FlexGuard® product, with a focus on income protection by providing a protected income benefit for an additional fee. Crediting strategies are limited during the income phase. Traditional Variable Annuities •The Prudential Premier® Investment Variable Annuity (“PPI”) offers tax-deferred asset accumulation, annuitization options and an optional death benefit that guarantees the contractholder’s beneficiary a return of total purchase payments made to the contract, adjusted for any partial withdrawals, upon death. •The Prudential MyRock® Advisor Variable Annuity, a fee-based product that offers an optional Dynamic Income Benefit (“IB”) rider that provides longevity protection through a preset withdrawal percentage applied to a variable income base. In addition, the product offers either a basic death benefit or an ROP death benefit. Both the IB and the ROP are available for an additional fee. Fixed Annuities •PruSecure®, SurePath® and SurePath® Income, all single premium fixed indexed annuities, offer flexibility to allocate account balances between an index-based strategy and a fixed rate strategy. The index-based strategy provides interest or an interest component linked to, but not an investment in, the selected index, and its performance over the elected term (i.e., 1, 3 or 5 years for PruSecure® and 1 or 3 years for SurePath® and SurePath® Income), subject to certain contractual minimums and maximums. The fixed rate strategy, not associated with an index, offers a guaranteed growth at a set interest rate for one year and can be renewed annually. Additionally, SurePath® Income offers a benefit that provides for guaranteed lifetime withdrawal payments. •The Prudential Fixed Annuity with Daily Advantage Income Benefit® (“DAI”), a single premium fixed annuity, provides principal protection as well as a guaranteed lifetime withdrawal income payment for an additional fee. The lifetime income amount increases daily without exposure to the equity market until the contractholder begins taking withdrawals. •The Prudential Immediate Income Annuity (“PIIA”), a single premium immediate annuity, provides a regular stream of benefit payments. The payments are guaranteed, cannot be changed and are higher than those guaranteed on products that provide liquidity. |
Retirement Strategies (Continued)
| Revenues and Profitability Our revenues primarily come in the form of: Institutional Retirement Strategies •Premiums associated with insurance and reinsurance contracts and our payout annuities. •Policy charges and fee income based on account values of our fee-based stable value and longevity reinsurance products. •Investment income (which contributes to the net spread over interest credited on our products and related expenses). Our profitability is substantially impacted by our ability to appropriately price our products. We price our products based on pricing models that consider the investment environment and our risk, fees, expenses, profitability targets, and assumptions for mortality and potential for early retirement. These assumptions may be less predictable in certain markets. Individual Retirement Strategies •Fee income from asset management fees and service fees, which represent administrative service and distribution fees from many of our proprietary and non-proprietary mutual funds. The asset management fees are determined as a percentage of the average assets of our proprietary mutual funds in our variable annuity products (net of sub-advisory expenses related to non-proprietary sub-advisors). •Policy charges and fee income representing mortality, expense and other fees for various insurance-related options and features based on the average daily net asset value of the annuity separate accounts, account value, premium, or guaranteed value, as applicable. •Investment income (which contributes to the net spread over interest credited on certain products and related expenses). Our profitability is substantially impacted by our ability to appropriately price our products. We price our products based on: •An evaluation of the risks assumed and consideration of applicable risk management strategies, including hedging and reinsurance costs. •Assumptions regarding investment returns and contractholder behavior, including persistency, benefit utilization and the timing and efficiency of withdrawals for contracts with living benefit features, as well as other assumptions. | Marketing and Distribution Institutional Retirement Strategies We primarily distribute products through the following channels: •Pension risk transfer through actuarial consultants and third-party brokers. •Structured settlements through third-party specialized brokers. •Voluntary income products and other group annuities directly to plan sponsors. •Stable value products through our proprietary sales force and third-party intermediaries. Individual Retirement Strategies Our distribution efforts, which are supported by a network of internal and external wholesalers, are executed through a diverse group of distributors, including: •Third-party distribution through: ◦Broker-dealers; ◦Banks and wirehouses; ◦Independent financial planners; and ◦Independent Marketing Organizations (“IMO”) (specifically for SurePath® and SurePath® Income). •Financial professionals associated with Prudential Advisors, Prudential’s proprietary nationwide sales organization. Competition Institutional Retirement Strategies We compete with other large, well-established insurance companies, asset managers and diversified financial institutions primarily based on: •Pricing. •Structuring capabilities. •Our ability to offer innovative product solutions and successfully execute large-scale transactions. We are a leader in providing innovative pension risk management solutions to plan sponsors and in the stable value market. We believe the pension risk transfer market continues to offer attractive opportunities that are aligned with our expertise. Individual Retirement Strategies We are among the industry’s largest providers of individual annuities and we compete with other providers of retirement savings and accumulation products, including large, well-established insurance and financial services companies, and private equity firms. We believe our competitive advantage lies primarily in our innovative product features and our risk management strategies as well as brand recognition, financial strength, the breadth of our distribution platform and our customer service capabilities. We periodically adjust product offerings, prices and features based on the market and our strategy, with a goal of achieving customer and enterprise value. |
U.S. Businesses—Group Insurance
Develops and distributes a full range of group life, long-term and short-term group disability, and group corporate-, bank- and trust-owned life insurance in the U.S. primarily to institutional clients for use in connection with employee and membership benefits plans. Also sells accidental death and dismemberment and other supplemental health solutions and provides plan administration services in connection with its insurance coverages.
| Products We offer a variety of products, through both non-experience rated contracts (where we assume all mortality/morbidity risk) and experience rated contracts (where mortality/morbidity experience is shared between us and the clients), and services through the following businesses: Group Life Insurance •Employer-paid, employee-paid and member-paid coverages for term life, group universal life and group variable universal life insurance, as well as accidental death and dismemberment insurance. Certain coverages allow employees to retain their coverage when they change employers or retire, and we offer waiver of premium coverage in the event the insured suffers a qualifying disability. •Group corporate-, bank- and trust-owned life insurance in the form of group variable life insurance contracts utilizing separate accounts. These products are typically used by large corporations to fund deferred compensation plans and benefit plans for retired employees. Group Disability Insurance •Short-term and long-term group disability insurance, which protect against loss of wages due to illness or injury. Short-term disability generally provides weekly benefits for three to six months while long-term disability benefits are typically paid monthly, following a waiting period, and generally continue until the insured either returns to work or reaches normal retirement age. •Other supplemental health solutions, including accident and critical illness insurance. •Plan administration and absence management services. | Marketing and Distribution We primarily distribute products through a proprietary sales force organized around market segments in conjunction with employee benefit brokers and consultants. We define our market segments as follows: •National—large corporations and other organizations having over 5,000 individuals. •Premier—corporations and other organizations that have between 100 and 5,000 individuals. •Association—affinity groups, regardless of size. |
Group Insurance (Continued)
| Revenues and Profitability Our revenues primarily come in the form of: •Premiums and policy charges for our group life and group disability products. •Investment income (which contributes to the net spread over interest credited on our products and related expenses). Our profitability is substantially impacted by our ability to appropriately price our products, many of which include multiple year premium rate guarantees. We price our products based on: •Underwriting practices and rating systems that consider company, industry and/or other experience. •The expected pay-out of benefits and other costs that we calculate using assumptions for mortality and morbidity rates, interest rates and expenses, depending upon the specific product features. | Competition We compete with other large, well-established life and health insurance providers in mature markets. We compete primarily based on brand recognition, service capabilities, customer relationships, financial strength, our range of product offerings and price. Our pricing of group insurance products is reflective of the large number of competitors in the marketplace. While the majority of our premiums are derived from the National segment, we are actively seeking to grow our Premier and Association segments. Employee-paid coverage is important as employers attempt to control costs and shift benefit decisions and funding to employees who continue to value workplace benefits. Our profitability is dependent, in part, on the voluntary coverage marketplace, which will be affected by future employment and compensation rates. |
U.S. Businesses—Individual Life
Develops and distributes variable life, universal life and term life insurance products primarily to U.S. mass middle (households with investable assets in excess of $25,000 or annual income in excess of $50,000), mass affluent (households with investable assets or annual income in excess of $100,000) and affluent (households with investable assets in excess of $250,000) customers with a focus on providing life insurance solutions to protect individuals, families and businesses and to support estate and wealth transfer planning.
| Products We offer a variety of products, consisting of base contracts and riders, that serve different protection needs and goals, including: Variable Life—permanent coverage for life with potential to accumulate policy cash value based on underlying investment options. •Our variable life policies offer flexibility in payment options and the potential to accumulate cash value through a suite of underlying investment options or a fixed rate option. •Indexed variable life policies provide index-linked investment options (index strategies) in addition to a suite of underlying investment options or a fixed rate option. Index strategies credit interest to the cash value that is linked to, but not an investment in, the performance of an external index, subject to certain parameters such as cap, step, participation, and buffer rates, and contractual minimums/maximums. Universal Life—permanent coverage for life with the potential to accumulate policy cash value. ◦Our universal life policies offer flexibility in payment options and the potential to accumulate cash value in an account that earns interest based on a crediting rate determined by the Company, subject to contractual minimums. ◦Indexed universal life policies provide interest credited to the cash value that is linked to, but not an investment in, the performance of an external index subject to certain cap and participation rates and contractual minimums/maximums. Term Life—coverage for a specified number of years with a guaranteed tax-advantaged death benefit. •Most of our term life policies offer an income tax-free death benefit and guaranteed premiums that will stay the same during the level-premium period. •Most of our term life policies also offer a conversion option that allows the policyholder to convert the policy into a permanent policy that can potentially cover the insured for life. Other •Final Expense Insurance—a whole life product that provides coverage in smaller face amounts, typically used for funeral expenses. | Marketing and Distribution Our distribution efforts, which are supported by a network of internal and external wholesalers, are executed through a diverse group of distributors, including: *•*Third-party distribution through: ◦Independent brokers; ◦Banks and wirehouses; and ◦General agencies and producer groups. •Prudential Advisors (Prudential’s proprietary nationwide sales organization), which: ◦Distributes Prudential life insurance, annuities and investment products with proprietary and non-proprietary investment options as well as select insurance, annuities and investment products from other financial services firms. ◦Offers certain retail brokerage and retail investment advisory services (through our dually-registered broker-dealer and investment advisor, Pruco Securities, LLC) including brokerage accounts, discretionary and non-discretionary investment advisory programs and financial planning services. ◦Executes a solutions-oriented business model centered around client relationships while strengthening and driving Prudential’s brand promise. ◦Receives a market-based allowance from other Prudential business segments for distributing their products, which is eliminated between the segments in consolidation. •Assurance IQ: ◦A wholly-owned consumer solutions platform that leverages data science and technology to distribute proprietary simplified products consisting of term life and final expense insurance (as well as other third-party life, health and financial wellness solutions) directly to retail shoppers primarily through its digital and agent channels. •Direct-to-Consumer through: ◦The digital platform, Prudential.com, provides distribution of our simplified products online. ◦Personal Advisory Group is Prudential’s sales desk where customers can speak to an agent via phone to fulfill their insurance or investment needs. |
Individual Life (Continued)
| Revenues and Profitability Our revenues primarily come in the form of: •Premiums that are fixed in accordance with the terms of the policies. •Policy charges and fee income consisting of in-force policy- and/or asset-based fees. •Investment income (which contributes to the net spread over interest credited on our products and related expenses). Our profitability is substantially impacted by our ability to appropriately price our products. We price our products based on our assumptions of future: •Mortality and morbidity; •Policyholder behavior; •Interest rates; •Expenses; •Premium payment patterns; •Performance of ceded reinsurance; •Separate account fund performance; and •Product-generated tax deductions. | Competition We compete with other large, well-established life insurance companies in a mature market. We compete primarily based on price, service (including the speed and ease of underwriting), distribution channel relationships, brand recognition and financial strength. Due to the large number of competitors, pricing is competitive. We periodically adjust product offerings, prices and features based on the market and our strategy, with a goal of achieving customer and enterprise value. |
U.S. Businesses—Assurance IQ
Leverages data science and technology to primarily distribute third-party products (Medicare, life, health, and property and casualty products) and proprietary insurance products directly to retail shoppers through its digital and agent channels. Additionally, Assurance IQ may help customers fulfill financial wellness needs by matching them with other product providers or intermediaries.
| Products Assurance IQ distributes the following products: •Medicare—third-party Medicare Supplement and Medicare Advantage for qualifying Medicare beneficiaries. •Life—third-party life insurance products, including term life, final expense, and whole life protection, as well as simplified products consisting of proprietary term life and final expense insurance. Most carriers’ products allow for simplified underwriting to enable faster policy placement. •Health Under 65—third-party primary and supplemental health insurance that help cover an individual’s medical and prescription expenses, including product coverage provided under the Affordable Care Act. •Property and Casualty—primarily third-party auto and home insurance coverage that indemnifies customers for loss caused by accidents, theft, natural disasters and other events where property damage or financial loss may occur. | Marketing and Distribution The Assurance IQ business model relies primarily on digital marketing and data science to reach prospective customers (“shoppers”) to, in turn, drive traffic to its distribution platform. Digital marketing includes traffic from various sources such as search, email, and social media. To a lesser extent, we also use traditional forms of marketing such as direct mail and television. We primarily distribute products through the following channels: *•*Hub Agents—Licensed agents employed by Assurance IQ who work in certain strategic locations across the U.S. or via remote arrangements. Agents are compensated through a combination of base and incentive pay. *•*On Demand Agents—Commission-based, independent agents that are located across the United States. They work remotely, and collectively are licensed to sell various products in all 50 states. •Third-Party Agent Call Centers—Assurance IQ may contract with licensed agent call centers as a means of serving shoppers, especially during periods of peak shopper demand (e.g., Medicare annual election period in the fourth quarter). •Digital—Shoppers can price and purchase many of Assurance IQ’s offerings completely online, without the involvement of an agent. •Third-Party Case Referrals—Assurance IQ transfers shoppers in the form of calls, clicks and leads to selected marketing partners who may be able to alternatively serve a shopper’s specific needs for Medicare, property and casualty insurance, and various personal finance, life and health products. |
Assurance IQ (Continued)
| Revenues and Profitability Our revenues primarily come in the form of: •Commissions received from product manufacturers. •Case referral revenues earned from marketing partners related to the transfer of calls, clicks or leads. Our profitability will be substantially impacted by (i) our ability to achieve scale in the long-term and (ii) the impact of our customer retention experience and assumptions on our revenue valuation. | Competition We compete with large and small Medicare, life, health and property and casualty retail distributors, third-party brokers, and other fintech and insurtech companies. We compete based on several factors, including: marketing reach and effectiveness; the ability to effectively match shoppers to products and solutions using data science; our capacity to meet shoppers’ demands; and the quality of our technology platform, which optimizes the customer experience and enables agents to efficiently service shoppers. |
International Businesses
Develops and distributes life insurance, retirement products and certain accident and health products with fixed benefits to mass affluent and affluent customers through our Life Planner operations in Japan, Brazil, Argentina and Mexico. Our Gibraltar Life and Other operations also provide similar products, as well as advisory and administration services to broad middle income and mass affluent customers across Japan, and through our joint ventures in Chile, China, India and Indonesia, and our strategic investments in Ghana, Kenya and South Africa through multiple distribution channels (including banks, independent agencies and Life Consultants).
| Products Our products are classified into the following four categories: Life Insurance Protection Products—include various traditional whole life products that provide either level or increasing coverage, and that offer limited or lifetime premium payment options. •We also offer increasing, decreasing and level benefit term insurance products that provide coverage for a specified time period, as well as protection-oriented variable life products. •Some of these protection products are denominated in U.S. dollars and some are sold as bundled products that, in addition to death protection, include health benefits or savings elements. Retirement Products—include retirement income products that combine insurance protection similar to term life with: •A lifetime income stream that commences at a predefined age; •A savings-oriented variable life product that provides a non-guaranteed return linked to an underlying investment portfolio of equity and fixed income funds selected by the customer; and •Endowments that provide payment of the face amount on the earlier of death or policy maturity. Investment Products—primarily represented by U.S. dollar-denominated investment contracts sold by our Gibraltar Life operations in Japan. •Represents single-pay whole life products where credited interest rates are reset periodically for certain products. •Most of our investment contracts impose a market value adjustment if the contract is not held to maturity. Accident and Health Products—that provide the following: •Benefits to cover accidental death and dismemberment, hospitalization, surgeries, as well as costs of cancer and other dread diseases often sold as supplementary riders and not as stand-alone products; and •Waiver of premium coverage where required premiums are waived in the event the customer suffers a qualifying disability. | Marketing and Distribution Our marketing and distribution efforts are conducted through the following proprietary agent models and third-party channels: •Proprietary agent models: ◦Life Planners*—focus on selling protection-oriented life insurance products on a needs basis to mass affluent and affluent customers, as well as retirement-oriented products to small businesses. We believe that our recruiting and selection process, training programs and compensation packages are key to the Life Planner model and have helped our Life Planner operations achieve higher levels of agent retention, agent productivity and policy persistency. ◦Life Consultants—a proprietary distribution force for products offered by our Gibraltar Life operations. Their focus is to provide individual protection products to the broad middle income market, primarily in Japan, particularly through relationships with affinity groups. Our Life Consultant operation is based on a variable compensation plan designed to improve productivity and persistency that is similar to compensation plans in our Life Planner operations. •Third-party channels: ◦Bank Distribution Channel—sells primarily life insurance products intended to provide savings features, premature death protection and estate planning benefits as well as investment products primarily denominated in U.S. dollars. We view this channel as an adjunct to our core Life Planner and Life Consultant distribution channels. We have relationships with each of Japan’s four largest banks, as well as many regional banks, and we continue to explore opportunities to expand our distribution capabilities through this channel, as appropriate. ◦Independent Agency Distribution Channel—*sells protection products and high cash value products for retirement benefits through the corporate market, and a variety of other products including protection and investment products through the individual market. Our focus is to maintain a diverse mix of independent agency relationships, including corporate agencies and other independent agencies, with a balanced focus on individual and corporate markets. |
International Businesses (Continued)
| Revenues and Profitability Our revenues primarily come in the form of: •Premiums that are fixed or flexible in accordance with the terms of the policies. •Policy charges and fee income consisting of in-force policy- and/or asset-based fees. •Investment income (which contributes to the net spread over interest credited on our products and related expenses). Our profitability is substantially impacted by our ability to appropriately price our products. Sales and surrenders of non-yen denominated products in Japan can be sensitive to foreign currency relationships which are impacted by, among other things, the comparative interest rates in their respective countries. We price our products based on: •Local regulation, which is generally more restrictive for product offerings, pricing and structure than U.S. insurance regulation. Each international insurance operation has its own underwriting department that employs variations of U.S. practices in underwriting individual policy risks. To the extent permitted by local regulation, we base premiums and policy charges for our products on expected death and morbidity benefits, surrender benefits, expenses, required reserves, interest rates, policy persistency and premium payment patterns. In setting underwriting limits, we also consider local industry standards to prevent adverse selection and to stay abreast of industry trends. In addition, we set underwriting limits together with each operation’s reinsurers. •Achieving a targeted rate of return for each operation, taking into account the country-specific costs of capital, risks, and competitive environment. The profitability of our products is impacted by differences between actual mortality, morbidity, expense, and investment experience and the related assumptions used in pricing these policies. As a result, the profitability of our products can fluctuate from period to period. Changes in local tax laws may also affect profitability. | Competition The life insurance market in Japan is mature and pricing is competitive. Rather than competing primarily based on price, we generally compete on the basis of customer service, including our needs-based approach to selling, the quality and diversity of our distribution capabilities, and our financial strength. Demographic trends in Japan suggest an increasing opportunity for product innovation, such as introducing insurance products that allow for savings and income and offering differentiated health products with value added services as a growing portion of the population prepares for retirement. The ability to sell through multiple and complementary distribution channels is also a competitive advantage; however, competition for sales personnel, as well as access to third-party distribution channels, is intense. |
Corporate and Other
Includes corporate items and initiatives that are not allocated to our business segments as well as businesses that have been or will be divested or placed in wind-down status, except for the Closed Block. Results of the Closed Block, along with certain related assets and liabilities, are reported separately from the Divested and Run-off Businesses included in Corporate and Other.
*Corporate Operations—*Consists primarily of: (1) capital that is not deployed in any business segment; (2) investments not allocated to business segments, including debt-financed investment portfolios, and tax credit and other tax-enhanced investments financed by business segments; (3) capital debt, including any related interest expense and financing costs, that is used or will be used to meet the capital requirements of the Company; (4) our qualified and non-qualified pension and other employee benefit plans, after allocations to business segments; (5) corporate-level activities, after allocations to business segments, including strategic expenditures, acquisition and disposition costs, corporate governance, corporate advertising, philanthropic activities, deferred compensation, and costs related to certain contingencies and legal matters; (6) expenses associated with the multi-year plan of programs that span across our businesses and the functional areas that support those businesses; (7) certain retained obligations relating to pre-demutualization policyholders; (8) impacts of risk management activities pursuant to our Risk Appetite Framework; (9) the foreign currency income hedging program used to hedge certain non-U.S. dollar denominated earnings in our International Businesses segment; (10) intercompany arrangements with our International Businesses and PGIM segments to translate certain non-U.S. dollar-denominated earnings at fixed currency exchange rates; and (11) transactions with and between other segments, including the elimination of intercompany transactions for consolidation purposes.
*Divested and Run-off Businesses—*Reflects the results of businesses that have been, or will be, sold or exited, including businesses that have been placed in wind-down status that do not qualify for “discontinued operations” accounting treatment under U.S. GAAP. We exclude these results from our adjusted operating income. Divested and Run-off Businesses include:
- *Long-Term Care—*In 2012, we discontinued sales of our individual and group long-term care insurance products. We establish reserves for these products in accordance with U.S. GAAP. We use best estimate assumptions as of the most recent loss recognition date when establishing reserves for future policyholder benefits and expenses, including assumptions for morbidity, mortality, mortality improvement, persistency, expenses and investment returns. Our assumptions also include our estimate of the timing and amount of anticipated future premium rate increases and policyholder benefit reductions, including those which may require approval by state regulatory authorities.
*•**Full Service Retirement Business—*In the third quarter of 2021, we entered into a definitive agreement to sell our Full Service Retirement business. The results of this business and the impact of its anticipated sale were transferred from the Retirement segment to Divested and Run-off Businesses at that time. The sale was completed in the second quarter of 2022.
*•**The Prudential Life Insurance Company of Taiwan Inc.—*In the third quarter of 2020, we entered into a Share Purchase Agreement to sell our insurance business in Taiwan. The results of this business and the impact of its anticipated sale were transferred from the International Businesses segment to Divested and Run-off Businesses at that time. The sale was completed in the second quarter of 2021.
- *The Prudential Life Insurance Company of Korea, Ltd.—*In the second quarter of 2020, we entered into a Share Purchase Agreement to sell our insurance business in Korea. The results of this business and the impact of its anticipated sale were transferred from the International Businesses segment to Divested and Run-off Businesses at that time. The sale was completed in the third quarter of 2020.
Closed Block Division
In connection with the demutualization in 2001, we ceased offering domestic participating individual life insurance and annuity products under which policyholders are eligible to receive policyholder dividends reflecting experience. The liabilities for our individual in-force participating products were segregated, together with assets to be used exclusively for the payment of benefits and policyholder dividends, expenses and taxes with respect to these products, in the Closed Block. We selected the amount of assets that were expected to generate sufficient cash flow, together with anticipated revenues from the Closed Block policies, over the life of the Closed Block to fund payments of all policyholder benefits, expenses and taxes, and to provide for the continuation of the policyholder dividend scales that were in effect in 2000, assuming experience underlying such scales continued. No policies sold after demutualization have been added to the Closed Block, and its in-force business is expected to decline as we pay policyholder benefits in full.
The results of the Closed Block, along with certain related assets and liabilities, comprise the Closed Block division, which is treated as a divested business under our definition of adjusted operating income and reported separately from the other Divested and Run-off Businesses that are included in our Corporate and Other operations.
As discussed in Note 15 to the Consolidated Financial Statements, if the performance of the Closed Block is more or less favorable than we originally assumed in funding, total dividends paid to Closed Block policyholders in the future may be greater or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales that were in effect in 2000 had been continued. A policyholder dividend obligation liability is established for any excess experience, which may be available for distribution over time to Closed Block policyholders as part of policyholder dividends, unless offset by future Closed Block experience that is less favorable than expected. This excess experience will not be available to shareholders. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from PICA’s assets outside of the Closed Block. Each year, the Board of Directors of PICA determines the dividends payable on participating policies for the following year based on the experience of the Closed Block, including investment income, net realized and unrealized investment gains and losses, mortality experience and other factors. See Note 22 to the Consolidated Financial Statements for revenues, income and loss, and total assets of the Closed Block division.
Our strategy is to maintain the Closed Block as required by our Plan of Reorganization over the time period of its gradual diminution as policyholder benefits are paid in full. We are permitted under the Plan of Reorganization, with the prior consent of the Commissioner of Banking and Insurance for the State of New Jersey, to enter into agreements to transfer all or any part of the risks underlying the Closed Block policies.
Seasonality of Key Financial Items
The following chart summarizes our key areas of seasonality in our results of operations:
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||
| PGIM | Higher compensation expense(1) | Other related revenues tend to be higher(2) | ||||||||||||
| Retirement Strategies - Institutional | Higher reserve gains(3) | Higher reserve gains(3) | Lower reserve gains(3) | Lower reserve gains(3) | ||||||||||
| Individual Life | Lowest underwriting gains | Highest underwriting gains | ||||||||||||
| Assurance IQ | Higher expenses ahead of annual Medicare enrollment | Higher revenue, and associated variable expenses, driven by annual Medicare enrollment | ||||||||||||
| International Businesses | Highest premiums | Lowest premiums | ||||||||||||
| Corporate & Other | Higher compensation expense(1) | |||||||||||||
| All Businesses | Impact of annual assumption updates(4) | Higher expenses(5) |
(1)Long-term compensation expense for retirement eligible employees is recognized when awards are granted, typically in the first quarter of each year.
(2)Other related revenues include incentive fees, transaction fees, seed and co-investment results and commercial mortgage revenues.
(3)Reserve gains are typically higher/lower than the quarterly average. Excludes the impact of annual reviews and update of assumptions and other refinements and market experience updates.
(4)Impact of annual reviews and update of assumptions and other refinements. Excludes PGIM.
(5)Expenses are typically higher than the quarterly average in the fourth quarter. Excludes Assurance IQ.
Reinsurance
We regularly enter into third-party reinsurance agreements as either the ceding entity or the assuming entity. We also enter into affiliated reinsurance agreements as both the ceding and assuming entity for capital management purposes. As a ceding entity, exposure to the risks reinsured is reduced by transferring certain rights and obligations of the underlying insurance product to a counterparty. Conversely, as an assuming entity, exposure to the risks reinsured is increased by assuming certain rights and obligations of the underlying insurance products from a counterparty.
We enter into reinsurance agreements as the ceding entity for a variety of reasons, but primarily do so to reduce exposure to loss, reduce risk volatility, provide additional capacity for future growth, facilitate the disposition of a block of business, and for capital management purposes. Under ceded reinsurance, we remain liable to the underlying policyholder if a third-party reinsurer is unable to meet its obligations. On a Company-wide basis, we evaluate the financial condition of reinsurers, monitor the concentration of counterparty risk and maintain collateral, as appropriate, to mitigate this exposure.
We enter into reinsurance agreements as the assuming entity as part of our normal product offering process (e.g., certain pension risk transfer products in our Institutional Retirement Strategies business) or in order to facilitate an acquisition of a block of business.
The following table summarizes our current uses of third-party reinsurance in each of the applicable reporting segments. For additional details related to certain of these agreements, see Note 14 to the Consolidated Financial Statements.
| Segment | Primary Type of Reinsurance | Purpose | ||||||
| Corporate & Other | Ceded | Ceded reinsurance of certain retirement products in conjunction with our 2022 sale of the Full Service Retirement business. See Note 1 to the Consolidated Financial Statements for additional information regarding this sale. | ||||||
| Retirement Strategies | Ceded/Assumed | Institutional Retirement Strategies Assumed reinsurance as part of our international reinsurance pension risk transfer products. Individual Retirement Strategies Ceded reinsurance includes the following products: •A portion of HDI v.3.0 variable annuity business issued between April 1, 2015 to December 31, 2016; •Certain fixed indexed annuity business (specifically for PruSecure® and SurePath®) issued effective October 15, 2019; and •Fixed indexed annuities and fixed annuities with guaranteed lifetime withdrawal benefits issued between July 1, 2019 and December 31, 2022. Assumed reinsurance in conjunction with our 2006 acquisition of The Allstate Corporation (“Allstate”) variable annuity business and reinsurance of certain annuity products retained in connection with the sale of PALAC. See Note 1 to the Consolidated Financial Statements for additional information regarding this sale. | ||||||
| Group Insurance | Ceded | Ceded reinsurance on most products to limit losses from large claims (in response to client requests and for capital management purposes). | ||||||
| Individual Life | Ceded/Assumed | Ceded reinsurance covering a variety of products to mitigate mortality risk. On policies sold since 2000, we have reinsured a significant portion of our mortality risk externally, with that portion varying over time depending on market factors and strategic objectives. Assumed reinsurance in conjunction with our 2013 acquisition of The Hartford’s individual life insurance business. | ||||||
| International Businesses | Ceded | Ceded reinsurance to mitigate mortality and morbidity risk for certain products. |
Intangible and Intellectual Property
We capture and protect the innovation in our financial services products by applying for federal business method patents and implementing copyright and trade secret controls, as appropriate. We also use numerous federal, state, common law and foreign service marks, including in particular “Prudential”, the “Prudential logo”, our “Rock” symbol and “PGIM”. We believe that the value associated with many of our patents, copyrights and trade secrets, and the goodwill associated with many of our service marks, are significant competitive assets.
Since 2004, we have had an agreement with Prudential plc of the United Kingdom (“U.K.”), with whom we have no affiliation, concerning the parties’ respective rights worldwide to use the names “Prudential” and “Pru.” Since 2019, the agreement has also included M&G plc of the U.K., the parent of The Prudential Assurance Company Limited, following its demerger from Prudential plc. The agreement restricts use of the “Prudential” and “Pru” names and marks in a number of countries outside the Americas, including Europe, Africa and most parts of Asia. Where these limitations apply, we combine our “Rock” symbol with alternative word marks. We believe that these limitations do not materially affect our ability to operate or expand internationally.
Regulation
Overview
Our businesses are subject to comprehensive regulation and supervision. The purpose of these regulations is primarily to protect our customers and the overall financial system and not necessarily our shareholders or debt holders. Many of the laws and regulations to which we are subject are regularly re-examined. Existing or future laws and regulations may become more restrictive or otherwise adversely affect our operations or profitability, increase compliance costs, or increase potential regulatory exposure. In recent years we have experienced, and expect to continue to experience, extensive changes in the laws and regulations, and regulatory frameworks applicable to our businesses in the U.S. and internationally. We cannot predict how current or future initiatives will further impact existing laws, regulations and regulatory frameworks.
In our international businesses, regulations may apply heightened requirements to non-domestic companies, which can reduce our flexibility as to intercompany transactions, investments and other aspects of business operations and adversely affect our liquidity and profitability. In some instances, regulators of a particular country may impose different, or more rigorous laws and requirements than in the U.S. or other countries to protect customers or their financial system from perceived systemic risk, including regulations governing privacy, consumer protection, employee protection, corporate governance and capital adequacy. In addition, certain of our international operations face political, legal, operational and other risks that we may not face in the U.S., including the risk of discriminatory regulation, labor issues in connection with independent contractor or franchisee status, workers’ associations and trade unions, nationalization or expropriation of assets, price controls and currency exchange controls or other restrictions that limit our ability to transfer funds from these operations out of the countries in which they operate or to convert local currencies we hold into U.S. dollars or other currencies. Some jurisdictions in which we operate joint ventures restrict our maximum percentage of ownership, which exposes us to additional operational, compliance, legal and joint venture partner risks and limits our array of potential remedies in the event of a breach by a partner.
The primary regulatory frameworks applicable to the Company are described further below under the following section headings:
*•*Dodd-Frank Wall Street Reform and Consumer Protection Act
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ERISA
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Fiduciary Rules and other Standards of Care
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U.S. State Insurance Holding Company Regulation
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U.S. Insurance Operations
◦State Insurance Regulation
◦U.S. Federal and State Securities Regulation Affecting Insurance Operations
◦U.S. Federal and State Health Insurance Plan Regulation
◦Other Consumer Protection Regulation
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International Insurance Regulation
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U.S. Investment and Retirement Products and Investment Management Operations
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U.S. Securities and Commodity Operations
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International Investment and Retirement Products and Investment Management Operations
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Derivatives Regulation
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Privacy and Cybersecurity Regulation
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Anti-Money Laundering and Anti-Bribery Laws
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Environmental Laws and Regulations
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Unclaimed Property Laws
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Taxation
◦U.S. Taxation
◦International Taxation
- International and Global Regulatory Initiatives
Several of our domestic and foreign regulators participate in an annual supervisory college facilitated by the New Jersey Department of Banking and Insurance (“NJDOBI”). The purpose of the supervisory college is to promote ongoing supervisory coordination, facilitate the sharing of information among regulators and enhance each regulator’s understanding of the Company’s risk profile. The most recent supervisory college was held in October 2022.
Existing and future accounting rules may also impact our results of operations or financial condition. For a discussion of accounting pronouncements and their potential impact on our business, including Accounting Standards Update (“ASU”) 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, see Note 2 to the Consolidated Financial Statements.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) increased the potential for federal regulation of our businesses. The Financial Stability Oversight Council (“FSOC” or the “Council”) may designate certain financial companies as a non-bank financial company (a “Designated Financial Company”) subject to supervision by the Board of Governors of the Federal Reserve System (“FRB”). In October 2017, the U.S. Department of the Treasury released a report titled “A Financial System That Creates Economic Opportunities - Asset Management and Insurance” which recommended, among other things, that primary federal and state regulators should focus on potential systemic risks arising from products and activities, and on implementing regulations that strengthen the asset management and insurance industries as a whole, rather than focus on an entity-based regulatory regime. The report also affirmed the role of the U.S. state-based system of insurance regulation. In December 2019, FSOC revised its interpretive guidance regarding Designated Financial Company determinations. The guidance describes the approach FSOC intends to take in prioritizing its work to identify and address potential risks to U.S. financial stability using an activities-based approach, and enhancing the analytical rigor and transparency in the processes FSOC intends to follow if it were to consider making a Designated Financial Company determination.
The Council maintains the authority to designate entities, including the Company, for FRB supervision if it determines that either (i) material financial distress at the entity, or (ii) the nature, scope, size, scale, concentration, interconnectedness, or mix of the entity’s activities, could pose a threat to domestic financial stability. The Company continues to believe it does not meet the standards for designation.
We cannot predict whether Treasury reports, interpretive guidance, new legislation or other initiatives aimed at revising Dodd-Frank and regulation of the financial system will ultimately form the basis for changes to laws or regulations impacting the Company.
ERISA
The Employee Retirement Income Security Act (“ERISA”) is a comprehensive federal statute that applies to U.S. employee benefit plans sponsored by private employers and labor unions. Plans subject to ERISA include pension and profit sharing plans and welfare plans, including health, life and disability plans. ERISA provisions include reporting and disclosure rules, standards of conduct that apply to plan fiduciaries and prohibitions on transactions known as “prohibited transactions,” such as conflict-of-interest transactions and certain transactions between a benefit plan and a party in interest. ERISA also provides for civil and criminal penalties and enforcement. Our insurance, investment management and retirement businesses provide services to employee benefit plans subject to ERISA, including services where we may act as an ERISA fiduciary. In addition to ERISA regulation of businesses providing products and services to ERISA plans, we become subject to ERISA’s prohibited transaction rules for transactions with those plans, which may affect our ability to enter transactions, or the terms on which transactions may be entered, with those plans, even in businesses unrelated to those giving rise to party in interest status. For some of the services we provide to employee benefit plans subject to ERISA, we rely on an exemption from the prohibited transaction rules available, under certain circumstances, to qualified professional asset managers (“QPAMs”). Were we to lose our status as a QPAM, our investment management business could be adversely impacted. The loss of QPAM status could result from, among other things, us or an affiliate (potentially including a joint venture partner over whom we exercise no or limited control) being convicted of a “covered” crime in the U.S. or in a foreign jurisdiction.
Fiduciary Rules and Other Standards of Care
The Company and our distributors are subject to rules regarding the standard of care applicable to sales of our products and the provision of advice to our customers. In recent years, many of these rules have been revised or reexamined, as described below. We cannot predict whether any proposed or new amendments to the existing regulatory framework will ultimately become applicable to our businesses. Any new standards issued by the U.S. Department of Labor (“DOL”), the Securities and Exchange Commission (“SEC”), the National Association of Insurance Commissioners (“NAIC”) or state regulators may affect our businesses, results of operations, cash flows and financial condition.
DOL Fiduciary Rules
In 2016, the DOL issued a rule that redefined who would be considered a “fiduciary” for purposes of transactions with qualified plans, plan participants and Individual Retirement Accounts (“IRAs”), and generally provided that investment advice to a plan participant or IRA owner would be treated as a fiduciary activity (the “2016 Rules”). In 2018, the Fifth Circuit Court of Appeals vacated the 2016 Rules. Prior to being vacated, the 2016 Rules adversely impacted sales in our Retirement Strategies businesses and resulted in increased compliance costs. In December 2020, the DOL issued a new prohibited transaction exemption, which became effective on February 16, 2021, that replaced the previously vacated “best interest contract exemption.” The new exemption allows fiduciaries meeting the requirements of the exemption to receive compensation, including as a result of advice to rollover assets from a tax-qualified plan to an IRA, and to purchase from or sell certain investments to qualified plans and IRAs. The DOL also reinstated the pre-2016 investment advice regulation and provided its current interpretation of that regulation, which could result in rollover recommendations being fiduciary investment advice if certain conditions are met. Compliance with the new exemption has resulted in increased costs, in particular in the Prudential Advisors distribution system, which we include in the results of our Individual Life segment.
SEC Best Interest Regulation
In June 2019, the SEC adopted a package of rulemakings and interpretative guidance that, among other things, requires broker-dealers to act in the best interest of retail customers when recommending securities transactions or investment strategies to them. The guidance also clarifies the SEC’s views of the fiduciary duty that investment advisers owe to their clients. The best interest standards became effective on June 30, 2020. The standards apply to recommendations to purchase certain products offered by our PGIM, Retirement Strategies and Individual Life businesses, and have resulted in increased compliance costs, in particular in our Prudential Advisors distribution system, which we include in the results of our Individual Life segment.
U.S. State Standard of Care Regulation
In February 2020, the NAIC adopted revisions to the model suitability rule applicable to the sale of annuities. The revised model regulation states the insurance salesperson must act “without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interest.” The model rule will become applicable to us as it is adopted in each state, with 30 states having adopted the model to date. In addition, certain state regulators and legislatures have adopted or are considering adopting best interest standards. For example, in July 2018, the New York State Department of Financial Services (“NY DFS”) issued an amendment to its suitability regulations which imposes a best-interest standard on the sale of annuity and life insurance products in New York. The amendments became effective for annuity products on August 1, 2019 and for life insurance products on February 1, 2020. Also, the Massachusetts Securities Division has adopted a fiduciary standard of conduct which applies to broker-dealers and its agents.
Japan Standard of Care Regulation
Outside the U.S., in 2017 the Japanese Financial Services Agency (“FSA”) announced the “Principles for Customer-Oriented Business Conduct,” a set of recommended general principles for financial institutions to adopt when performing client related financial services, which was further amended in 2021. The principles have been adopted by The Prudential Life Insurance Company Ltd. (“Prudential of Japan”), Gibraltar Life, and The Prudential Gibraltar Financial Life Insurance Co., Ltd. (“PGFL”). The FSA encourages voluntary adoption of these fiduciary principles as a best practice, but adoption is not required by regulation. Companies’ policies regarding their fiduciary duties can be tailored based on their specific business, such as target clients and complexity of products. Once companies adopt the principles and establish a policy, they are required to publicly disclose the policy, implement measures to ensure their employees fulfill their fiduciary duties, periodically assess the measures’ effectiveness and publish the progress of these measures.
U.S. State Insurance Holding Company Regulation
We are subject to the insurance holding company laws in the states where our insurance subsidiaries are domiciled, which currently include New Jersey, Arizona and Indiana, or are treated as commercially domiciled, such as New York. These laws generally require each insurance company directly or indirectly owned by the holding company to register with the insurance department in the insurance company’s state of domicile and to furnish annually financial and other information about the operations of companies within the holding company system, including an assessment of the group’s risk management and current and future solvency position. Generally, all transactions affecting the insurers in the holding company system must be fair and reasonable and, if material, require prior notice and approval or non-disapproval by the state’s insurance department.
Change of Control
Most states, including the states in which our U.S. insurance companies are domiciled, have insurance laws that require regulatory approval of a direct or indirect change of control of an insurer or an insurer’s holding company. Laws such as these that apply to us prevent any person from acquiring control of Prudential Financial or of our insurance subsidiaries unless that person has filed a statement with specified information with the insurance regulators and has obtained their prior approval. Under most states’ statutes, acquiring 10% or more of the voting stock of an insurance company or its parent company is presumptively considered a change of control, although such presumption may be rebutted. As of January 2022, New Jersey has recognized an additional presumption of control upon the holding or controlling of enough proxies to elect 10% or more of the board of directors of a New Jersey-domiciled insurance company or its parent company. Accordingly, any person who acquires “control” of Prudential Financial, either by the acquisition of voting securities or, in the case of New Jersey, by the accumulation of proxies without the prior approval of the applicable insurance regulator of the states in which our U.S. insurance companies are domiciled will be in violation of these states’ laws and may be subject to injunctive action requiring the disposition or seizure of those securities or proxies by the relevant insurance regulator or prohibiting the voting of those securities or proxies and to other actions determined by the relevant insurance regulator. In addition, many state insurance laws require prior notification to state insurance departments of a change in control of a non-domiciliary insurance company doing business in that state.
Group-Wide Supervision
NJDOBI acts as the group-wide supervisor of Prudential Financial pursuant to New Jersey legislation that authorizes group-wide supervision of internationally active insurance groups (“IAIGs”). The law, among other provisions, authorizes NJDOBI to examine Prudential Financial and its subsidiaries, including by ascertaining the financial condition of the insurance companies for purposes of assessing enterprise risk. In accordance with this authority, NJDOBI receives information about the Company’s operations beyond those of its New Jersey domiciled insurance subsidiaries.
Additional areas of focus regarding group-wide supervision of insurance holding companies include the following:
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Group Capital Calculation. The NAIC has developed and implemented a group capital calculation that uses a risk-based capital (“RBC”) aggregation methodology to serve as an additional tool to help state regulators assess potential risks within and across insurance groups.
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Macroprudential Framework. The NAIC is developing a macroprudential framework intended to: (1) improve state insurance regulators’ ability to monitor and respond to the impact of external financial and economic risks on insurers; (2) better monitor and respond to risk emanating from or amplified by insurers that might be transmitted externally; and (3) increase public awareness of NAIC/state monitoring capabilities regarding macroprudential trends. As part of this initiative, the NAIC has identified liquidity reporting and stress testing, resolution and recovery, capital stress testing, and counterparty exposure and concentration as areas of focus.
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Examination. State insurance departments conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled in their states, generally once every three to five years under guidelines promulgated by the NAIC. As group-wide supervisor, NJDOBI, along with our other insurance regulators, has expanded the periodic examinations to cover Prudential and all of its subsidiaries. NJDOBI, along with the insurance regulators of Arizona, Connecticut and Indiana, has commenced a global consolidated group-wide examination of Prudential and its subsidiaries for the five-year period ended December 31, 2021. We expect the examination to conclude in 2023.
We cannot predict what, if any, additional requirements and compliance costs any new group-wide standards will impose on Prudential Financial.
U.S. Insurance Operations
State insurance laws regulate all aspects of our U.S. insurance businesses. State insurance departments in the fifty states, the District of Columbia and various U.S. territories and possessions monitor our insurance operations. PICA is domiciled in New Jersey and its principal insurance regulatory authority is the NJDOBI. Our other U.S. insurance companies are principally regulated by the insurance departments of the states in which they are domiciled. Generally, our insurance products must be approved by the insurance regulators in the state in which they are sold. Our insurance products are substantially affected by federal and state tax laws.
State Insurance Regulation
State insurance authorities have broad administrative powers with respect to all aspects of the insurance business including: (1) licensing to transact business; (2) licensing agents; (3) admittance of assets to statutory surplus; (4) regulating premium rates for certain insurance products; (5) approving policy forms; (6) regulating unfair trade and claims practices; (7) establishing reserve requirements and solvency standards; (8) fixing maximum interest rates on life insurance policy loans and minimum accumulation or surrender values; (9) regulating the type, amounts and valuations of investments permitted; (10) regulating reinsurance transactions, including the role of captive reinsurers; and (11) other matters.
State insurance laws and regulations require our U.S. insurance companies to file financial statements with state insurance departments everywhere they do business in accordance with accounting practices and procedures prescribed or permitted by these departments. The operations of our U.S. insurance companies and accounts are subject to examination by those departments at any time.
Financial Regulation
Dividend Payment Limitations. New Jersey insurance law and the insurance laws of the other states in which our insurance companies are domiciled regulate the amount of dividends that may be paid by PICA and our other U.S. insurance companies. See Note 16 to the Consolidated Financial Statements for additional information.
Risk-Based Capital. We are subject to RBC requirements that are designed to enhance regulation of insurers’ solvency. The RBC calculation, which regulators use to assess the sufficiency of an insurer’s statutory capital, measures the risk characteristics of a company’s assets, liabilities and certain off-balance sheet items. In general, RBC is calculated by applying factors to various asset, premium, claim, expense and reserve items. Within a given risk category, these factors are higher for those items with greater underlying risk and lower for items with lower underlying risk. Insurers that have less statutory capital than required are considered to have inadequate capital and are subject to varying degrees of regulatory action depending upon the level of capital inadequacy.
Areas of the RBC framework that have recently been subject to reexamination or revision include the following:
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Bond Factors. In 2021, the NAIC adopted the Moody’s Analytics proposed revisions to the RBC C-1 factors for invested assets effective for the year-end 2021 RBC calculation. The revisions include expanding the current NAIC designations used in the RBC calculation from six bond structures to twenty. The new factors did not materially impact our RBC calculation. The NAIC is undertaking a second phase of this project to refine capital charges for structured securities. We cannot predict what impact the second phase of this work may ultimately have on our RBC calculation.
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Longevity/Mortality Risk. In 2021, the NAIC’s Life Risk-Based Capital Working Group adopted longevity risk factors for some annuity products and a correlation adjustment between longevity and mortality risk factors. The Company assumes this longevity risk primarily in its Retirement Strategies businesses. The new factors did not materially impact our RBC calculation. In June 2022, the NAIC adopted new C-2 mortality factors for year-end 2022 that differentiate between products based on the length of the mortality guarantee and degree of pricing flexibility. The new factors are not expected to have a material impact on our RBC calculation.
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Economic Scenario Generator (“Generator”). In 2017, the American Academy of Actuaries notified the NAIC that it did not have the resources to maintain its Generator used in regulatory reserve and capital
calculations. In 2020, the NAIC selected a third-party vendor to provide, maintain, and support the Generator prescribed for life and annuity statutory reserve and capital calculations. Development of the new Generator is ongoing, and the NAIC expects implementation to occur no earlier than 2025. We cannot predict what impact a new Generator may ultimately have on our businesses.
Due to the ongoing nature of the NAIC’s activities regarding RBC, we cannot determine the ultimate timing of the proposed changes or their impact on RBC or on our financial position.
Insurance Reserves and Regulatory Capital. State insurance laws require us to analyze the adequacy of our reserves annually. The respective appointed actuaries for each of our life insurance companies must each submit an opinion that our reserves, when considered in light of the assets we hold with respect to those reserves, make adequate provision for our contractual obligations and related expenses.
The reserving framework for certain of our products and the regulatory capital requirements applicable to our business have undergone reexamination and revision in recent years, including in the following areas:
*•*Principle-Based Reserving for Life Insurance Products. In 2016, the NAIC adopted a principle-based reserving (“PBR”) approach for life insurance products. Principle-based reserving replaces the reserving methods for life insurance products for which the former formulaic basis for reserves may not accurately reflect the risks or costs of the liability or obligations of the insurer. The principle-based reserving approach had a three-year phase-in period. Principle-based reserving will not affect reserves for policies in force prior to January 1, 2017.
The Company has introduced updated versions of its individual life products in conjunction with the requirement to adopt principle-based reserving by January 1, 2020. These updated products are currently priced to support the principle-based statutory reserve level without the need for reserve financing.
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Variable Annuities Framework for Change. In 2019, the NAIC adopted final revisions to the Valuation Manual (“VM-21”) and risk-based capital instructions to implement a new variable annuity statutory framework for 2020. Changes include: (i) providing more economic reflection of hedging in liability valuations; (ii) eliminating the Standard Scenario and replacing it with the Standard Projection; and (iii) standardizing capital market assumptions and aligning frameworks for total asset requirements and reserves. There was no material impact to our target capital levels from the revised framework. In 2022, the NAIC initiated a planned review of the Standard Projection implemented in 2020. The NAIC may update prescribed assumptions and/or methodologies and will be considering whether the calculation should be a binding requirement or disclosure only.
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Asset Adequacy Testing. In June 2022, the NAIC adopted Actuarial Guideline 53. The new guideline provides guidance and requires additional sensitivity tests and disclosures for complex or high yielding assets.
*•*New York Annuity and Life Insurance Product Reserves. As a result of an agreement with the NY DFS regarding our reserving methodologies for certain variable annuity and life insurance products, certain of our New York licensed insurance subsidiaries hold additional statutory reserves on a New York basis, which reduces their New York statutory surplus. None of our U.S. operating insurance companies are domiciled in New York, and these changes do not impact statutory reserves reported in our insurance subsidiaries’ states of domicile, or any states other than New York, and therefore do not impact RBC ratios; however, the agreed reserve methodologies may require us to increase our additional New York statutory reserves in the future. New York’s version of PBR, which became effective in January 2020, allows for modifications to the NAIC valuation model and New York’s modifications might require us to increase our New York statutory reserves. In 2022, as a result of a periodic examination, the NY DFS determined that we would be required to change certain Asset Adequacy Testing methodologies that may require us to hold additional reserves on a New York statutory basis. If we were required to establish material additional reserves on a New York statutory accounting basis or post material amounts of additional collateral with respect to individual and group annuity or insurance products, our ability to deploy capital held within our U.S. domestic insurance subsidiaries for other purposes could be affected.
- Principle-Based Reserving (“PBR”) for Non-Variable Annuities. The NAIC is developing a principle-based reserving framework for non-variable (fixed) annuity products in the accumulation and payout phases. We cannot predict what impact a new fixed annuity PBR framework may ultimately have on our businesses.
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Schedule D Long-Term Bonds. The NAIC’s Statutory Accounting and Principles Working Group is evaluating revisions to the definition of long-term bonds reported on Schedule D under SSAP No. 26R and SSAP No. 43R, to address the current inconsistency in practice for the reporting of non-rated residual tranches for structures captured in scope of SSAP No.43R.
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Yearly Renewable Term Reinsurance Reserve Credit. In August 2021, the NAIC adopted a limit on yearly renewable term (“YRT”) reserve credits (Amendment Proposal Form 2020-10). The adoption requires insurers to complete the phase-in of pre-2020 PBR business by December 31, 2024, unless an insurer receives an additional extension of up to four years by their domiciliary commissioner. Prudential was granted approval for a seven-year transition along with an adjustment to the starting point for the year-ended December 31, 2021. The amendment allows a prudent level of future mortality improvement (“FMI”) beyond the valuation date starting in 2022. The NAIC has implemented an FMI assumption for 2022.
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Credit for Reinsurance Model. During 2019, the NAIC approved revisions to the Credit for Reinsurance Model Law and Credit for Reinsurance Model Regulation to make the models consistent with the provisions of the U.S.’s bilateral covered agreements with the European Union (“E.U.”) and the U.K. with respect to reinsurance collateral requirements. The revisions eliminate reinsurance collateral requirements applicable to E.U. and U.S. reinsurers meeting certain minimum requirements. The revisions also eliminate the requirements to maintain a local presence to do business in the E.U. or U.K. or post collateral in any E.U. jurisdiction or the U.K. The amended model law will become applicable to the Company as it is adopted by each domiciliary state. Each E.U. jurisdiction and the U.K. must also enact the provisions of the covered agreements into local law/regulation.
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Interest Maintenance Reserve. In November 2022, in response to the rapidly rising interest rate environment, the NAIC undertook to reassess the statutory accounting treatment of negative interest maintenance reserve (“IMR”). Currently, negative IMR is non-admitted and reduces statutory surplus. A change to the statutory accounting treatment of negative IMR could therefore cause an increase in statutory surplus. We cannot, at this time, predict what action the NAIC may take.
Captive Reinsurance Companies.
We use captive reinsurance subsidiaries to finance the portion of the statutory reserves for term and universal life policies that we consider to be non-economic for policies written prior to the implementation of principle-based reserving. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations**—Liquidity and Capital Resources—Capital—Financing Activities—**Term and Universal Life Reserve Financing” for a discussion of our life product reserves and reserve financing.
Market Conduct Regulation
State insurance laws and regulations include numerous provisions governing the marketplace activities of insurers, including provisions governing the form and content of disclosure to consumers, illustrations, advertising, sales practices and complaint handling, as well as underwriting and claims activity. State regulatory authorities generally enforce these provisions through periodic market conduct examinations. We have been subject to market conduct examinations relating to our marketplace activities, including with respect to the policies and procedures we use to locate guaranteed group annuity customers and establish related reserves. Market conduct examinations by state regulatory authorities have resulted and may in the future result in us increasing statutory reserves, changing operational processes and procedures, and being subject to fines or other discipline.
Long-Term Care Rate Regulation
During 2019, the NAIC established a new Long-Term Care Insurance Task Force under the Executive Committee. It is charged with (1) developing a consistent national approach for reviewing long-term care insurance rates that result in actuarially appropriate increases being granted by the states in a timely manner and eliminates cross-state rate subsidization, and (2) ensuring consumers are provided with meaningful options to modify their contract benefits in situations where the premiums are no longer affordable due to rate increases. The rate review workgroup has developed a voluntary program for both companies and states to participate in, with full implementation targeted in 2023. It is unknown how many states or companies will participate in this program. The consumer options working group has developed guidance for states to consider during their
review of reduced benefit options offered by companies. Neither group has created specific regulatory requirements but these developments should enhance uniformity amongst states during rate increase requests and associated reduced benefit option reviews.
Registered Index Linked Annuities
The NAIC established the Index-Linked Variable Annuity Subgroup (“Subgroup”) which was charged with evaluating registered index linked annuities (“RILAs”) and providing recommendations and changes, as appropriate, to nonforfeiture, or interim value requirements related to the product. The Life Actuarial Task Force of the NAIC adopted a draft actuarial guideline for RILA interim value requirements, effective for contracts issued on or after July 1, 2024. We cannot predict what impact new or changes in existing regulation, or how state regulators may apply the regulations, may have on our business.
Data and Underwriting
The NAIC Accelerated Underwriting Working Group is continuing to evaluate insurers’ use of external data and data analytics in accelerated life insurance underwriting. The Working Group is drafting guidance that explores the current state of the industry and its use of accelerated underwriting in life insurance and recommendations for regulators and insurers when evaluating accelerating underwriting. In addition, the NAIC is researching the use of big data and artificial intelligence, including machine learning in the business of insurance, and will evaluate existing regulatory frameworks.
Climate Change
In 2020, the NAIC established a Climate and Resiliency Task Force under the Executive Committee to coordinate domestic and international discussions and engagement on climate-related risk and resiliency issues. To date, the Task Force has implemented updates to the NAIC’s annual Climate Risk Disclosure Survey and developed proposed enhancements to existing regulatory tools to address climate-related risks, which the NAIC continues to evaluate.
Insurance Guaranty Association Assessments
Each state has insurance guaranty association laws under which insurers doing business in the state are members and may be assessed by state insurance guaranty associations for certain obligations of insolvent insurance companies to policyholders and claimants. Typically, states assess each member insurer in an amount related to the member insurer’s proportionate share of the business written by all member insurers in the state. The majority of state guaranty association laws provide a tax offset for a percentage of the assessment against future years’ premium taxes. For the years ended December 31, 2022, 2021 and 2020, we paid $0.4 million, $0.5 million and $1 million, respectively, in assessments pursuant to state insurance guaranty association laws. While we cannot predict the amount and timing of future assessments on our U.S. insurance companies under these laws, we have established estimated reserves totaling approximately $29 million as of December 31, 2022, for future assessments relating to insurance companies that are currently subject to insolvency proceedings, including Penn Treaty Network America Insurance Company, Executive Life of California and Lincoln Memorial Life Insurance Company.
In 2017, the NAIC approved amendments to the Life and Health Insurance Guaranty Association Model Act to address issues relating to long-term care insurance-related insolvencies. The amendments will spread costs from future long-term care insurance-related insolvencies across the entire health and life insurance industry, resulting in increased assessments for life insurers. The amended model law will become applicable to us as it is adopted by each state. Prior insolvencies will not be included under these amendments. Given our current market share of the impacted lines of business, we expect our cost related to future insolvencies, net of premium tax offsets available under current state laws, would be a small percentage of the gross industry liability.
U.S. Federal and State Securities Regulation Affecting Insurance Operations
Our variable life insurance, variable annuity and mutual fund products generally are “securities” within the meaning of federal securities laws and may be required to be registered under the federal securities laws and subject to regulation by the SEC and the Financial Industry Regulatory Authority (“FINRA”). Certain of our insurance subsidiaries are subject to SEC public reporting and disclosure requirements based on offerings of these products. Federal and some state securities regulation similar to that discussed below under “—U.S. Investment and Retirement Products and Investment Management Operations” and “—U.S. Securities and Commodities Regulation” affect investment advice, sales and related activities with respect to these products.
Our mutual funds, and in certain states our variable life insurance and variable annuity products, are also “securities” within the meaning of state securities laws. As securities, these products are subject to filing and certain other requirements. Also, sales activities with respect to these products generally are subject to state securities regulation. Such regulation may affect investment advice, sales and related activities for these products**.**
Federal Insurance Office
Dodd-Frank established a Federal Insurance Office (“FIO”) within the Department of the Treasury headed by a director appointed by the Secretary of the Treasury. While the FIO does not have general supervisory or regulatory authority over the business of insurance, the FIO director performs various functions with respect to insurance, including serving as a non-voting member of the Council, monitoring the insurance sector and representing the U.S. on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors (“IAIS”).
U.S. Federal and State Health Insurance Plan Regulation
The Patient Protection and Affordable Care Act (“PPACA”) and The Health Care and Education Reconciliation Act (together, the “Affordable Care Act”), as well as state insurance laws, include numerous provisions governing the marketing and sale of health insurance plans. Congress from time to time considers health care reform that could decrease or increase the attractiveness of health insurance products sold by Assurance IQ, or have an unfavorable or favorable effect on our ability to earn revenues from sales of these products. In addition, the marketing and sale of Medicare Advantage products by Assurance IQ is subject to federal laws, regulations and guidelines issued by the U.S. Centers for Medicare and Medicaid Services (“CMS”). In December 2022, CMS proposed certain changes to regulations governing the marketing and sale of Medicare Advantage products. If the proposed rule is enacted, these changes could impact Assurance IQ’s sales processes and ability to generate case referrals to third-party marketing partners.
Other Consumer Protection Regulation
Assurance IQ engages in certain marketing, lead generation and sales activities of certain insurance products that are subject to a variety of federal and state consumer protection laws and regulations, including the Telephone Consumer Protection Act, the Telemarketing Sales Rule, the Federal Trade Commission Act, and other laws and regulations enforced by the Federal Trade Commission, state Attorneys General, and/or state Departments of Insurance. The NAIC is in the process of examining industry lead generation practices but has not undertaken any formal activities. Assurance IQ ceased brokering residential mortgage loan products in December 2021 but has and continues to engage in lead generation of residential mortgage loan and other personal finance products, which also are subject to a variety of federal and state consumer protection laws and regulations, including laws and regulations enforced by the Consumer Financial Protection Bureau and/or state Departments of Banking.
International Insurance Regulation
Our international insurance operations are principally supervised by regulatory authorities in the jurisdictions in which they operate, including the Japanese FSA, the financial services regulator in Japan. In addition to Japan, we operate insurance companies in Argentina, Bermuda, Brazil and Mexico, and have insurance operations in China, India, Indonesia and Malaysia through joint ventures. We also have strategic investments in insurance operations in Ghana, Kenya and South Africa. The insurance regulatory bodies for these businesses typically oversee such issues as: (1) company licensing; (2) the licensing of insurance sales staff; (3) insurance product approvals; (4) sales practices; (5) claims payment practices; (6) permissible investments; (7) solvency and capital adequacy; (8) insurance reserves; (9) privacy; and (10) anti-money laundering and financial crimes, among other items. In some jurisdictions, for certain products, regulators will also mandate premium rates (or components of pricing) or minimum guaranteed interest rates. Periodic examinations of insurance company books and records, financial reporting requirements, market conduct examinations and policy filing requirements are among the techniques used by these regulators to supervise our non-U.S. insurance businesses. Finally, insurance regulatory authorities in the various jurisdictions in which our insurance companies are domiciled, including Japan, must approve any change of control of the insurance companies organized under their laws.
Solvency Regulation
In order to monitor insurers’ solvency, regulatory authorities in the jurisdictions in which we operate outside the U.S. generally establish some form of minimum solvency requirements for insurance companies, similar in concept to the RBC ratios that are employed by U.S. insurance regulators. These solvency ratios are used by regulators to assess the sufficiency of
an insurer’s capital and claims-paying ability and include the impact of transactions with affiliated entities. Certain jurisdictions require the disclosure of solvency ratios to the public. Insurers that have lower solvency ratios than the regulators require are considered to have inadequate capital and are subject to varying degrees of regulatory action depending upon the level of capital inadequacy.
Japan Capital and Solvency Regulation. Our Japan insurance operations are currently subject to a capital standard known as the Solvency Margin Ratio framework (“SMR”). This standard prescribes the manner in which an insurance company’s capital is calculated and is meant to respond to changes in financial markets, improve risk management practices of insurers and consider risks associated with the insurer’s subsidiaries. The Japan FSA has in recent years asked insurance market participants to engage in a series of annual field tests of a new market based alternative to the SMR framework called the Economic Solvency Ratio (“ESR”) that follows the Risk-based Global Insurance Capital Standard (“ICS”) the IAIS is developing, which is described below under “—Other International and Global Regulatory Initiatives.” We anticipate that the design of the ESR will continue to be informed by the development of the ICS and expect implementation to occur in 2026. Because of the potential for modifications to the ESR framework prior to implementation, we cannot predict what impact it may have on our businesses.
Dividend Payment Limitations
The insurance regulatory bodies in some of the countries where our international insurance businesses are located regulate the amount of dividends that our subsidiaries can pay to shareholders. See Note 19 to the Consolidated Financial Statements for additional information regarding the ability of our international subsidiaries to pay dividends to Prudential Financial.
Insurance Guaranty Fund Assessments
Certain of our international insurance operations, including those in Japan, may be subject to assessments, generally based on their proportionate share of business written in the relevant jurisdiction, for certain obligations of insolvent insurance companies to policyholders and claimants. In certain jurisdictions, we cannot predict the timing of future assessments and they may materially affect the results of operations of our international insurance operations in particular quarterly or annual periods. Under the Japanese insurance business law, all licensed life insurers in Japan are required to be members of and are assessed, on a pre-funded basis, by the Japan Policyholders Protection Corporation (“PPC”). These assessments generate a collective fund which is used to satisfy certain obligations of insolvent insurance companies to policyholders and claimants. The PPC assesses each member in an amount related to its premium income and policy reserves. For the years ended December 31, 2022, 2021 and 2020, we paid approximately $12 million, $25 million and $24 million, respectively, based on fixed currency exchange rates, in assessments pursuant to Japanese insurance guaranty association laws.
U.S. Investment and Retirement Products and Investment Management Operations
Our retirement and investment products and services are subject to federal and state securities and fiduciary laws, ERISA, and other laws and regulations. The SEC, FINRA, the Commodity Futures Trading Commission (“CFTC”), National Futures Association (“NFA”), state securities commissions, state banking and insurance departments, DOL and the Department of the Treasury are the principal U.S. regulators that regulate our retirement and investment management operations. In some cases, our domestic U.S. investment operations are also subject to non-U.S. securities laws and regulations.
Some of the separate account, registered fund and other pooled investment products offered by our businesses, in addition to being registered under the Securities Act, are registered as investment companies under the Investment Company Act of 1940, as amended, and the shares of certain of these entities are qualified for sale in some states and the District of Columbia. Separate account investment products are also subject to state insurance regulation as described above. We also have several subsidiaries that are registered as broker-dealers under the Securities Exchange Act of 1934 (“Exchange Act”), as amended, and are subject to federal and state regulation. In addition, we have subsidiaries that are investment advisers registered under the Investment Advisers Act of 1940, as amended. Our third-party advisors and licensed sales professionals within Prudential Advisors and other employees, insofar as they sell products that are securities, are subject to the Exchange Act and to examination requirements and regulation by the SEC, FINRA and state securities commissioners. Regulation and examination requirements also extend to various Prudential entities that employ or control those individuals.
Congress from time to time considers or enacts legislation that could decrease or increase the attractiveness of certain of our retirement products and services to retirement plan sponsors and administrators, or have an unfavorable or favorable effect on our ability to earn revenues from these products and services. Over time, these changes could limit our sales of defined benefit and defined contribution pension products and services and cause sponsors to discontinue existing plans for which we provide investment management, administrative, or other services; conversely, these changes could also increase the
attractiveness of certain products and services we offer in connection with such plans.
The Setting Every Community up for Retirement Enhancement (“SECURE”), enacted in 2020, is intended to help promote retirement plan coverage and increase retirement plan savings, as well as facilitate access to guaranteed lifetime income solutions. The SECURE Act addresses coverage issues by making it easier for small businesses to participate in pooled employer plans and requires coverage of certain long-term, part-time workers. The SECURE Act addresses savings issues by raising the cap on amounts contributed through auto-enrollment, increasing the maximum age for required minimum withdrawals to 72 and removing the age cap (70 1/2) for making IRA contributions. The SECURE Act also made it easier for employers to include guaranteed lifetime income as part of their plan by providing an annuity provider selection safe harbor, as well as providing for the portability of participant investments in annuity products. In addition, the SECURE Act included provisions that enable participants to withdraw, penalty-free, up to $5,000 for expenses attendant to the birth or adoption of a child and limit the ability of certain IRA beneficiaries to defer tax recognition of their inheritance beyond ten years. The 2023 Consolidated Appropriations Act, enacted on December 29, 2022, includes what is known as SECURE 2.0, which largely builds upon the changes made by the SECURE Act. Key provisions of SECURE 2.0 include, among other things, (1) increasing the age for required minimum withdrawals; (2) changes to the automatic enrollment rules for 401(k) plans; (3) allowing greater catch-up contributions and financial incentives for plan participation; (4) treating an employee's student loan payments as elective deferrals for purposes of matching contributions; and (5) new options for plan distributions.
In March 2020, in response to the COVID-19 pandemic, Congress enacted the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which waived Required Minimum Distributions for 2020, increased the amount qualified individuals may borrow from defined contribution plans from $50,000 to $100,000, and allowed qualified individuals to withdraw from defined contribution plans and individual retirement arrangements up to $100,000 penalty-free through December 31, 2020, with the withdrawal taxed over a three-year period (unless otherwise elected by the individual). The CARES Act also permitted the Company to suspend troubled debt restructuring (“TDR”) accounting under GAAP in certain circumstances for a period extending until December 31, 2021.
In December 2020, in response to the COVID-19 pandemic, Congress enacted the Consolidated Appropriations Act of 2021 (“CAA”). The CAA includes a provision that changes the floor interest rates used for Definition of Life Insurance (“DOLI”) testing under Section 7702 of the Internal Revenue Code of 1986, as amended (the “Code”), and Modified Endowment Contract (“MEC”) testing under Section 7702A of the Code. The change is intended to better reflect the current low interest rate environment and, for contracts issued on or after January 1, 2021, may increase the DOLI and MEC limits and allow more premium payments relative to the death benefit.
In March 2021, the American Rescue Plan Act of 2021 (“ARPA”) was enacted. The ARPA includes, among other things, provisions intended to improve funding for multiemployer pension plans, including providing special financial assistance through the Pension Benefit Guarantee Corporation to qualifying underfunded plans and adding five years to the funding improvement period and the rehabilitation period for plans that were in endangered or critical status in 2020 or 2021. The ARPA includes single-employer pension funding relief in the form of interest rate stabilization and an extension of the period for amortizing funding shortfalls.
U.S. Securities and Commodity Operations
We have subsidiaries that are broker-dealers or investment advisers. The SEC, the CFTC, state securities authorities, FINRA, the NFA, the Municipal Securities Rulemaking Board, and similar authorities are, as applicable, the principal regulators of these subsidiaries.
Our broker-dealer and commodities affiliates are members of, and are subject to regulation by, “self-regulatory organizations,” including FINRA and the NFA, as applicable. Self-regulatory organizations conduct examinations of, and have adopted rules governing, their members. In addition, state securities and certain other regulators have regulatory and oversight authority over our registered broker-dealers. Broker-dealers and their sales forces in the U.S. and in certain other jurisdictions are subject to regulations that cover many aspects of the securities business, including sales methods and trading practices. The regulations cover the suitability of investments for individual customers, use and safekeeping of customers’ funds and securities, capital adequacy, recordkeeping, financial reporting and the conduct of directors, officers and employees. The SEC, CFTC and other governmental agencies and self-regulatory organizations, as well as state securities commissions in the U.S. and non-U.S. regulatory agencies, have the power to conduct administrative proceedings that can result in censure, fine, the issuance of cease-and-desist orders or suspension, termination or limitation of the activities of a broker-dealer, an investment adviser or commodities firm or its employees. Our U.S. registered broker-dealer subsidiaries are subject to federal net capital requirements that may limit the ability of these subsidiaries to pay dividends to Prudential Financial.
International Investment and Retirement Products and Investment Management Operations
Our non-insurance international operations are supervised primarily by regulatory authorities in the countries in which they operate. We operate investment-related businesses in, among other jurisdictions, Japan, Taiwan, the U.K., Ireland, India, Hong Kong, Mexico, Germany, Luxembourg, the Netherlands, Switzerland, China and Singapore, and participate in investment-related joint ventures in China and South Africa and in a retirement related joint venture with operations in Chile, Peru and Columbia. These businesses may provide products such as investment management products and services, funds, separately managed accounts and retirement products. The regulatory authorities for these businesses typically oversee such issues as: (1) company licensing; (2) the licensing of investment product sales staff; (3) sales practices; (4) solvency and capital adequacy; (5) fund product approvals and related disclosures; and (6) securities, commodities, retirement, pension and related laws, among other items. In some cases, our international investment operations are also subject to U.S. securities laws and regulations.
Derivatives Regulation
Prudential Financial and our subsidiaries use derivatives for various purposes, including hedging interest rate, foreign currency and equity market exposures. Dodd-Frank established a framework for regulation of the over-the-counter derivatives markets. This framework sets out requirements regarding the clearing and reporting of derivatives transactions, as well as collateral posting requirements for uncleared swaps. Affiliated swaps entered into between our subsidiaries are generally exempt from most of these requirements.
We continue to monitor the potential hedging cost impacts of new initial margin requirements, and increased capital requirements for derivatives transactions. Additionally, the increased need to post cash collateral in connection with mandatorily cleared swaps may also require the liquidation of higher yielding assets for cash, resulting in a negative impact on investment income.
Privacy and Cybersecurity Regulation
We are subject to laws, regulations and directives that require financial institutions and other businesses to protect the security and confidentiality of personal, proprietary, or other non-public information, including intellectual property, health-related, and customer information, and to notify their customers and other appropriate individuals of their policies and practices relating to the collection, use and disclosure of such information. In addition, we are subject to international data protection and privacy laws, regulations, and directives concerning the safeguarding and protection of personal information, including as such laws relate to the cross border transfer or use of personal information.
These laws, regulations and directives also:
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require protections regarding or limiting the use and disclosure of certain sensitive personal information such as national identifier numbers (e.g., social security numbers) or racial or ethnic origin;
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require notice to affected individuals, regulators and others if there is a breach of the confidentiality, integrity, or availability of certain personal or confidential information;
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require financial institutions and creditors to implement effective programs to detect, prevent, and mitigate identity theft;
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regulate the process by which financial institutions make telemarketing calls and send e-mail, text, or fax messages to consumers and customers;
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require oversight of third parties that have access to, and handle, personal or confidential information;
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provide individuals with certain rights over their personal information, such as the right to know what personal information is being collected and whether the information is being sold or shared, and the right to obtain portable copies of or request the deletion or correction of their personal information; and
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prescribe the permissible uses of certain personal information, including customer information and consumer report information.
Some countries have also instituted laws requiring in-country data processing and/or in-country storage of the personal information of its citizens, personal information collection in the jurisdiction, or other categories of in-scope data. Compliance with such laws may result in higher technology, administrative and other costs for us and affect how products and services are offered or require us to structure our businesses, operations and systems in less efficient ways.
Regulatory and legislative activity in the areas of privacy, data protection and information and cybersecurity continues to increase worldwide. Financial regulators in the U.S. and international jurisdictions in which we operate continue to focus on data privacy and cybersecurity, including in proposed rulemaking, and have communicated heightened expectations and have increased emphasis in this area in their examinations of regulated entities. For example, the E.U.’s General Data Protection Regulation (“GDPR”), which became effective in May 2018, confers additional privacy rights on individuals in the E.U. and establishes significant penalties for violations. In addition, in the U.S., certain lawmakers in Congress have proposed a number of sweeping privacy laws. In California, the California Consumer Privacy Act (the “CCPA”) became effective in 2020 and confers numerous privacy rights on individuals and corresponding obligations on businesses. Additional rights and obligations will be imposed by the California Privacy Rights Act (the “CPRA”), which amends the CCPA and will become effective in 2023. Additional states, such as Colorado, Connecticut, Utah, and Virginia have also passed comprehensive privacy laws similar in scope to the CCPA and CPRA that will also become effective in 2023. The NAIC is drafting updated model privacy legislation that will likely be completed in 2023, with states beginning to adopt the model in 2024. Internationally, a number of countries such as Brazil and Japan have enacted GDPR-like regulations, while others, such as India and Argentina, are considering such regulations or, in the case of China, have enacted other privacy and data security regulations.
In October 2017, the NAIC adopted the Insurance Data Security Model Law. The model law requires that insurance companies establish a cybersecurity program and includes specific technical safeguards as well as requirements regarding governance, incident planning, data management, system testing, vendor oversight and regulator notification. The NY DFS adopted a similar regulation effective March 2017 and released its proposed amendments to the regulation in November 2022, which are expected to become effective in 2023. Other states have either implemented the Model Law or are anticipated to implement it or similar laws in the near future.
The Company is monitoring regulatory guidance and rulemaking in these areas, and may be subject to increased compliance costs and regulatory requirements. In order to respond to the threat of security breaches and cyber-attacks, we have developed a program overseen by the Chief Information Security Officer and the Information Security Office that is designed to protect and preserve the confidentiality, integrity, and continued availability of all information owned by, or in the care of the Company. As part of this program, we also maintain an incident response plan. The program provides for the coordination of various corporate functions and governance groups and serves as a framework for the execution of responsibilities across businesses and operational roles. Among other things, the program establishes security standards for our technological resources and includes training for employees, contractors and third parties. As part of the program, we conduct periodic exercises with independent outside advisors to assess the effectiveness of our program and our internal response preparedness. We regularly engage with the broader security community and monitor cyber threat information.
Anti-Money Laundering and Anti-Bribery Laws
Our businesses are subject to various anti-money laundering and financial transparency laws and regulations that seek to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. In addition, under current U.S. law and regulations we may be prohibited from dealing with certain individuals or entities in certain circumstances and we may be required to monitor customer activities, which may affect our ability to attract and retain customers. We are also subject to various laws and regulations relating to corrupt and illegal payments to government officials and others, including the U.S. Foreign Corrupt Practices Act and the U.K.’s Anti-Bribery Law. The obligation of financial institutions, including the Company, to identify their clients, to monitor for and report suspicious transactions, to monitor dealings with government officials, to respond to requests for information by regulatory authorities and law enforcement agencies, and to share information with other financial institutions, has required the implementation and maintenance of internal practices, procedures and controls.
Environmental Laws and Regulations
Federal, state and local environmental laws and regulations apply to our ownership and operation of real property. Inherent in owning and operating real property are the risks of hidden environmental liabilities and the costs of any required clean-up. Although unexpected environmental liabilities can always arise, we seek to minimize this risk by undertaking environmental assessments, among other measures prior to taking title to real estate.
Unclaimed Property Laws
We are subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment of unclaimed or abandoned funds, and we are subject to audit and examination for compliance with these requirements. For additional discussion of these matters, see Note 23 to the Consolidated Financial Statements.
Taxation
U.S. Taxation
The Company and certain domestic subsidiaries file a consolidated federal income tax return that includes both life insurance companies and non-life insurance companies. The principal differences between the Company’s actual income tax expense and the applicable statutory federal income tax rate are generally deductions for non-taxable investment income, including the Dividends Received Deduction (“DRD”), foreign taxes applied at a different tax rate than the U.S. rate and certain tax credits. For tax years starting in 2018, the applicable statutory federal income tax rate is 21%. A future increase in the applicable statutory federal income tax rate above 21% would adversely impact the Company’s tax position. In addition, as discussed further below, the tax attributes of our products may impact both the Company’s and our customers’ tax positions. See “Income Taxes” in Note 2 to the Consolidated Financial Statements and Note 16 to the Consolidated Financial Statements for a description of the Company’s tax position. As discussed further below, new tax legislation and other potential changes to the tax law may impact the Company’s tax position and the attractiveness of our products.
The Tax Act of 2017 changed the taxation of businesses and individuals by lowering tax rates and broadening the tax base through the acceleration of taxable income and the deferral or elimination of certain deductions, as well as changing the system of taxation of earnings of foreign subsidiaries. The most significant changes for the Company were: (1) the reduction of the corporate tax rate from 35% to 21%; (2) revised methodologies for determining deductions for tax reserves and the DRD; (3) an increased capitalization and amortization period for acquisition costs related to certain products; and (4) the change from a worldwide deferred taxation system to a modified territorial system of taxation on applicable earnings of foreign subsidiaries, which includes (a) a new tax on earnings of foreign subsidiaries (the Global Intangible Low-Taxed Income (“GILTI”) provision ) and (b) a new alternative tax with respect to payments to non-U.S. affiliates that are at least 25% owned (the Base Erosion Anti-Abuse Tax (“BEAT”)).
The GILTI provision applies a minimum U.S. tax to earnings of foreign subsidiaries in excess of a 10% deemed return on tangible assets of consolidated foreign subsidiaries by imposing the U.S. tax rate to 50% of earnings of such foreign affiliates and provides for a partial foreign tax credit for foreign income taxes. The amount of tax in any period on GILTI can depend on annual differences between U.S. taxable income recognition rules and taxable income recognition rules in the country of operations and the overall taxable income of U.S. operations, as well as U.S. expense allocation rules which limit the amount of foreign tax credits that can be applied to reduce the U.S. tax on the GILTI. Under certain circumstances, the taxable income of U.S. operations may cause more than 50% of earnings of foreign affiliates to be subject to the GILTI provision. In years that the U.S. consolidated PFI group incurs a net operating loss or has a loss from domestic businesses, including as a result of loss carrybacks, the GILTI provision would operate to cause a loss of U.S. tax benefits for some or all of those losses, effectively increasing the tax on foreign earnings.
The BEAT provision could, under certain conditions, increase our tax expense. The BEAT is an alternative tax implicated if tax deductible payments from U.S. companies to foreign affiliates that are at least 25% owned exceed 3% of total U.S. tax deductions. If implicated, the BEAT taxes modified taxable income at a rate of 10% beginning in 2019, and increasing to 12.5% in 2026, and is due if the calculated BEAT tax amount that is determined without the benefit of foreign and certain other tax credits is greater than the regular corporate tax in any given year. In general, modified taxable income is calculated by adding back to a taxpayer’s regular taxable income the amount of certain “base erosion tax benefits” with respect to payments to foreign affiliates, as well as the “base erosion percentage” of any net operating loss deductions.
Since the enactment of the Tax Act of 2017, the Treasury Department and the Internal Revenue Service (“IRS”) promulgated Proposed and Final Regulations on a number of provisions within or impacted by the Tax Act of 2017, including GILTI, foreign tax credits, net interest deductibility and the BEAT. Regulations were issued making it clear that benefit and claim payments made by our U.S. insurance businesses to our foreign affiliates on reinsurance assumed by the U.S. affiliates should not be considered to be base erosion payments. During 2020, regulations were issued that allow taxpayers to elect to exclude income of foreign subsidiaries from being subject to tax under the GILTI provision if the income of the foreign subsidiary is subject to local tax in excess of 18.9%. Other life insurance and financial services companies may benefit more or less from these tax law changes, which could impact the Company’s overall competitive position. Notwithstanding the enactment of the Tax Act of 2017, the President, and Congress, as well as state and local governments, may continue to consider from time to time legislation that could increase the amount of corporate taxes we pay, thereby reducing earnings.
In March 2020, in response to the COVID-19 pandemic, Congress enacted the CARES Act. One provision of the CARES Act amends the Tax Act of 2017 and allows companies with net operating losses (“NOLs”) originating in 2018, 2019 or 2020 to carry back those losses for up to five years.
In January 2022, the Treasury Department and the IRS promulgated Final Regulations (the “Final FTC Regulations”) changing the criteria by which a foreign levy is treated as a foreign income tax or a tax in lieu of an income tax for which a foreign tax credit may be claimed. The Final FTC Regulations are effective for tax years beginning on or after December 28, 2021. The Final FTC Regulations provide that a foreign levy must satisfy an attribution or jurisdictional nexus rule to be a creditable foreign income tax. A foreign levy will not satisfy the jurisdictional nexus requirement if the foreign country’s transfer pricing rules do not require that the arm’s length principles apply. Brazil’s tax law may not follow arm’s length principles; therefore, as a result of the Final FTC Regulations, the Company may not be entitled to a foreign tax credit with respect to Brazil.
In August 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”). Among other provisions, the Inflation Reduction Act imposes (1) a 15% alternative minimum tax on corporations (“CAMT”) with average applicable financial statement income over $1 billion for any three-year period ending with 2022 or later; and (2) a 1% excise tax on the fair market value of stock that is repurchased by publicly traded U.S. corporations or their specified affiliates. Both provisions are effective in taxable years beginning after December 31, 2022. The impact of the alternative minimum tax, if any, will vary from year to year based on the relationship of our GAAP income to our taxable income. Additionally, there remain several open items with respect to the application of the alternative minimum tax on corporations, including how to apply the provision to insurance company separate accounts and certain forms of reinsurance, which will inform how and to what degree this tax impacts the Company.
The U.S. federal tax law provides that an election may be made pursuant to Internal Revenue Code Section 952 (the “952 election”) to subject earnings from certain insurance operations to tax in the U.S. in the tax year earned, net of related foreign tax credits. The Company made the 952 election effective for the 2017 and later tax years with respect to its affiliates incorporated in Brazil. In October 2019, the IRS issued a legal memorandum applicable to all taxpayers in which the IRS argues that the election became inoperable in 1998. The Company disagrees with the IRS’s position and the matter is now pending before IRS Independent Office of Appeals. If the Company is ultimately not successful, it will not be able to claim a U.S. tax credit for the Brazil taxes in excess of the U.S. tax rate, and thus will have a higher tax expense over time. For additional information regarding the 952 Election, see Note 16 to the Consolidated Financial Statements.
The Company has a number of subsidiaries incorporated under the laws of non-U.S. jurisdictions. Those non-U.S. subsidiaries intend to operate in a manner that will not cause any to be treated as being engaged in a trade or business within the U.S. or subject to current U.S. federal income taxation on their net income. However, because there is uncertainty as to when a foreign corporation is engaged in a trade or business within the United States, as the determination is highly factual and must be made annually, there can be no assurance that the IRS will not assert that a non-U.S. Company is engaged in a trade or business in the U.S. If a non-U.S. Company were considered to be engaged in a trade or business in the U.S., it could be subject to U.S. federal income taxation and possible state taxation on a net basis on its income that is effectively connected with such U.S. trade or business (including branch profits tax on the portion of its earnings and profits that is attributable to such income). Any such taxation could result in substantial tax liabilities.
U.S. federal tax law generally permits tax deferral on the inside build-up of investment value of certain retirement savings, annuities and life insurance products until there is a contract distribution and, in general, excludes from taxation the death benefit paid under a life insurance contract. The Tax Act of 2017 did not change these rules, though it is possible that some individuals with overall lower effective tax rates could be less attracted to the tax deferral aspect of the Company’s products. The general reduction in individual tax rates and elimination of certain individual deductions may also impact the Company, depending on whether current and potential customers have more or less after-tax income to save for retirement and manage their mortality and longevity risk through the purchase of the Company’s products. Congress from time to time may enact other changes to the tax law that could make our products less attractive to consumers, including legislation that would modify the tax favored treatment of retirement savings, life insurance and annuities products.
The products we sell have different tax characteristics and, in some cases, generate tax deductions and credits for the Company. Changes in either the U.S. or foreign tax laws may negatively impact the deductions and credits available to the Company, including the ability of the Company to claim foreign tax credits with respect to taxes withheld on our investments supporting separate account products. These changes would increase the Company’s actual tax expense and reduce its consolidated net income.
The profitability of certain products is significantly dependent on these characteristics and our ability to continue to generate taxable income, which is taken into consideration when pricing products and is a component of our capital management strategies. Accordingly, changes in tax law, our ability to generate taxable income, or other factors impacting the
availability or value of the tax characteristics generated by our products, could impact product pricing, increase our tax expense or require us to reduce our sales of these products or implement other actions that could be disruptive to our businesses.
International Taxation
Our international businesses are subject to the tax laws and regulations of the countries in which they are organized and in which they operate. Foreign governments from time to time consider legislation that could impact the amount of taxes that we pay or impact the sales of our products. For example, the Organization of Economic Cooperation and Development (“OECD”) continues to study and make recommendations with respect to model global base erosion tax options that are being considered and may be adopted by foreign governments. In 2021, as part of its Global Anti-Base Erosion Model Rules (Pillar Two), the OECD recommended a 15% global minimum tax on adjusted financial reported income. Many jurisdictions, including Japan, the European Union, the United Kingdom and South Korea, have adopted or announced an intention to adopt Pillar Two for tax years beginning in 2024. There are several open items with respect to the possible application of the proposed rules which will determine how and to what degree this tax impacts the Company.
The Japan national corporate tax rate is 23.2% for tax years beginning on or after April 1, 2018. In addition, there are local income taxes that are applied to our income earned in Japan. Insurance commissions paid to our Life Planners and Life Consultants are subject to a 10% consumption tax for individuals exceeding certain earnings thresholds; however, the tax is not charged on employee compensation (other than commissions) or insurance premiums.
In July 2019, the Japan National Tax Authority issued rules limiting policyholders’ tax deductions for premiums paid on certain corporate insurance products. For information regarding sales of corporate insurance products within our international insurance operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations by Segment—International Businesses.”
International and Global Regulatory Initiatives
In addition to the adoption of Dodd-Frank in the United States, lawmakers around the world are actively exploring steps to avoid future financial crises. In many respects, this work is being led by the Financial Stability Board (“FSB”), which consists of representatives of national financial authorities of the G20 nations. The G20, the FSB and related bodies have developed proposals to address such issues as financial group supervision, capital and solvency standards, systemic economic risk, corporate governance including executive compensation, and a host of related issues.
In July 2013, we, along with eight other global insurers, were designated by the FSB as a global systemically important insurer (“G-SII”) through a quantitative methodology developed and implemented by the IAIS. We remained designated as a G-SII until November 2018, at which point the FSB announced that it would not engage in an identification of G-SIIs based on the IAIS’ progress with development of the Holistic Framework for Systemic Risk in the Insurance Sector (“Holistic Framework”). The Holistic Framework, which was adopted by the IAIS in November 2019, focuses on employing an Activities Based approach (“ABA”) to assessing and managing potential sources of systemic risk through enhancements to IAIS policy measures pertaining to macroprudential surveillance, enterprise risk management, liquidity management, crisis management and recovery planning. In addition to the ABA elements, the Holistic Framework preserves the IAIS’ annual data collection and monitoring process. Upon the IAIS’ adoption of the Holistic Framework, the FSB initially suspended and in December 2022 discontinued the annual identification of G-SIIs. The FSB will now utilize assessments available through the Holistic Framework to evaluate systemic risk in the insurance sector.
In addition to its post financial crisis work on systemic risk, the IAIS developed the Common Framework for the Supervision of Internationally Active Insurance Groups (“ComFrame”). Through ComFrame, the IAIS seeks to promote effective and globally consistent supervision of the insurance industry through uniform standards for insurer corporate governance, enterprise risk management and other control functions, group-wide supervision and group capital adequacy. The non-capital related components of ComFrame were adopted by the IAIS in November 2019. The ICS, which is the capital adequacy component of ComFrame, entered a five-year monitoring phase beginning in 2020. During the monitoring phase, IAIGs are encouraged to report ICS results to their group supervisory authorities to support the IAIS’ efforts to obtain feedback on the appropriateness of the framework. The IAIS will use input from supervisory authorities and IAIGs as well as stakeholder feedback on a public consultation and the results of an economic impact assessment to further improve the ICS. The IAIS is scheduled to adopt a final version of the ICS, which it expects its member supervisory authorities to implement, in 2025.
As a standard setting body, the IAIS does not have direct authority to require insurance companies to comply with the policy measures it develops, including the ICS and proposed policy measures within the Holistic Framework. However, we could become subject to these policy measures if they were adopted by either our group supervisor or supervisors of our
international operations or companies, which could impact the manner in which we deploy our capital, structure and manage our businesses, and otherwise operate both within the U.S. and abroad.
Human Capital Resources
As of December 31, 2022, our employee population was comprised as set forth in the tables below:
| Global Employee Profile | ||||||||||||||
| Region | Number of Employees(1) | Full-time Equivalent Positions(2) | ||||||||||||
| U.S. | 16,081 | 15,857 | ||||||||||||
| Non-U.S. | 23,773 | 23,726 | ||||||||||||
| Total | 39,854 | 39,583 |
(1)Excludes independent contractors and other individuals classified as non-employees in their respective jurisdictions.
(2)Represents the total number of full-time equivalent positions and does not reflect the total number of individual employees as some work part-time.
| U.S. Top Leadership Diversity Metrics | ||||||||||||||||||||||||||||||||||||||
| Diverse(1) | Women | People of Color(1) | Asian | Black | Latinx | |||||||||||||||||||||||||||||||||
| Top Leadership(2) | 58 | % | 41 | % | 28 | % | 13 | % | 6 | % | 8 | % | ||||||||||||||||||||||||||
| 1 Level Down | 47 | % | 40 | % | 13 | % | 13 | % | 0 | % | 0 | % | ||||||||||||||||||||||||||
| 2 Levels Down | 58 | % | 44 | % | 30 | % | 16 | % | 7 | % | 5 | % | ||||||||||||||||||||||||||
| 3 Levels Down | 58 | % | 40 | % | 28 | % | 13 | % | 6 | % | 8 | % |
(1)The percentages set forth in this column are not intended to equal the sum of the percentages in the columns to their right.
(2)“Top Leadership” is defined as the approximately 350 senior leaders who are within three reporting levels of our Chairman and CEO and Vice-Chairman. The percentages set forth in this row are not intended to equal the sum of the percentages in the rows below.
Prudential’s Board of Directors, including its Corporate Governance and Business Ethics Committee, has oversight responsibility for our human capital resources, diversity and inclusion practices and corporate culture. Human capital is discussed by management at every Board meeting and, at least once per year, the Board devotes time to discuss human capital at each business and functional leadership level across the Company.
Attracting Employees
We believe that our success depends on our ability to attract, develop and retain talented, skilled, and motivated employees. We aim to attract individuals who share our commitment to creating accessible financial solutions that meet the long-term objectives of our global customers. Building a diverse and inclusive organization is a component of our strategic business initiative.
Developing Employees
We believe that all employees deserve equal access to career opportunities. We have enhanced our talent practices and centralized career tools in our Talent Marketplace, an interactive and innovative platform that brings training, career advancement opportunities, and a career advisory program, together in one place. The Talent Marketplace offers employees the opportunity to grow as Prudential grows. Regardless of our employees’ level, business or function, all have access to Prudential’s talent tools, delivering on our commitment to advance and modernize our talent practices to offer equal opportunities to all employees to learn and grow.
Also, we require U.S. employees to attend training programs addressing core issues such as understanding racism and everyday bias, building cultural intelligence, and using tools and techniques to support an inclusive culture. The goal of these training programs is for all employees to develop a baseline understanding of these concepts, which we expect will better equip us to solve the financial challenges of our increasingly diverse customers. During 2022, the majority of our U.S. employees attended such training programs.
Retaining Employees
We believe that our rigorous talent acquisition process, provision of opportunities for professional enrichment and advancement throughout our employees’ careers, and our inclusive culture will enhance our ability to retain employees.
Prudential conducts a global employee engagement survey, entitled the “EQ Survey”. The EQ Survey solicits employee feedback addressing our culture, management, career opportunities, compensation and benefits. The results of the EQ Survey influence how we strengthen our culture and implement change within the Company. In 2022, over 88% of our eligible global employees responded to the EQ Survey.
Prudential’s annual turnover rate (including voluntary and involuntary terminations) in 2022 was 12.4%. Voluntary turnover among Prudential’s U.S. workforce was 9.2%. In 2022, Prudential filled over 3,800 positions in the United States and 32% of those positions were filled internally.
Protecting and supporting our employees is a priority at Prudential. At the outset of the COVID-19 pandemic, we quickly transitioned more than 97% of our U.S. workforce to remote working in a matter of days. During 2022, most of our workforce transitioned from fully remote work to a hybrid work arrangement.
Diversity and Inclusion at Prudential
We view inclusion, diversity and racial equity as a moral and business imperative. Our inclusive approach to human capital management starts with our Board of Directors. Our Board embodies diversity: 80% of Prudential’s independent directors are diverse. Our commitment to advance racial equity spans our talent practices, how we design and deliver our products, our investments and public policy work, and our support of community institutions.
To reinforce our commitment to diversity and inclusion, we use a diversity modifier in our long-term incentive program that ties the long-term incentive compensation of senior management to a performance objective based on the achievement of improved diversity outcomes across the organization.
Compensation Program and Retirement Plans
The philosophy underlying our compensation program is to provide an attractive, flexible, and market-based total compensation program tied to performance and aligned with the interests of our shareholders. Our objective is to recruit and retain the caliber of employees necessary to deliver sustained high performance to our shareholders, customers, and communities. Our compensation program is an important component of these overall human resources policies. Equally important, we view compensation practices as a means for communicating our goals and standards of conduct and performance and for motivating and rewarding employees in relation to their achievements.
We view retirement benefits as a key component of our compensation program because they encourage long-term service. Accordingly, we offer our employees a comprehensive benefits program that provides the opportunity to accumulate retirement income. This program includes both defined benefit and defined contribution plans.
Periodically, we compare the competitiveness of our benefits programs for our employees, including retirement benefits, against other employers with whom we broadly compete for talent. It is our objective to provide our employees with a benefits package that is at or around the median of the competitive market when compared to other employers.
Available Information
Prudential Financial files periodic and current reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information may be obtained through the SEC’s website (www.sec.gov).
You may also access our press releases, financial information and reports filed with the SEC (for example, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to those Forms) online at www.investor.prudential.com. Copies of any documents on our website are available without charge, and reports filed with or furnished to the SEC will be available as soon as reasonably practicable after they are filed with or furnished to the SEC. The information found on our website is not part of this or any other report filed with or furnished to the SEC.
Information About our Executive Officers
The names of the executive officers of Prudential Financial and their respective ages and positions, as of February 16, 2023, were as follows:
| Name | Age | Title | Other Public Directorships | |||||||||||||||||
| Charles F. Lowrey | 65 | Chairman, Chief Executive Officer and President | None | |||||||||||||||||
| Robert M. Falzon | 63 | Vice Chair | None | |||||||||||||||||
| Ann M. Kappler | 64 | Executive Vice President and General Counsel | None | |||||||||||||||||
| Kenneth Y. Tanji | 56 | Executive Vice President and Chief Financial Officer | None | |||||||||||||||||
| Andrew F. Sullivan | 52 | Executive Vice President and Head of International Businesses and PGIM | None | |||||||||||||||||
| Caroline A. Feeney | 53 | Executive Vice President and Head of U.S. Businesses | None | |||||||||||||||||
| Lucien A. Alziari | 63 | Executive Vice President and Chief Human Resources Officer | None | |||||||||||||||||
| Stacey Goodman | 60 | Executive Vice President and Chief Information Officer | None | |||||||||||||||||
| Candace J. Woods | 62 | Senior Vice President and Chief Actuary | None | |||||||||||||||||
| Timothy L. Schmidt | 64 | Senior Vice President and Chief Investment Officer | None |
Biographical information about Prudential Financial’s executive officers is as follows:
Charles F. Lowrey was elected Chairman of Prudential Financial in April 2019 and Chief Executive Officer, President and Director of Prudential Financial and PICA in December 2018. Previously, he served as Executive Vice President and Chief Operating Officer, International Businesses, of Prudential Financial and PICA from March 2014 to November 2018. He served as Executive Vice President and Chief Operating Officer, U.S. Businesses, of Prudential Financial and PICA from February 2011 to March 2014. He also served as Chief Executive Officer and President of Prudential Investment Management, Inc. (now known as “PGIM”) from January 2008 to February 2011, and as Chief Executive Officer of Prudential Real Estate Investors (“PREI”) (now known as PGIM Real Estate), our real estate investment management and advisory business from February 2002 to January 2008. He joined the Company in March 2001, after serving as a managing director and Head of the Americas for J.P. Morgan’s Real Estate and Lodging Investment Banking group, where he began his investment banking career in 1988. He also spent four years as a managing partner of an architecture and development firm he founded in New York City.
Robert M. Falzon was elected Director of Prudential Financial in August 2019 and has served as Vice Chair of Prudential Financial and PICA since December 2018. Previously, he served as Executive Vice President and Chief Financial Officer of Prudential Financial and PICA from March 2013 to November 2018. Mr. Falzon has been with Prudential since 1983, serving in various positions. He served as Senior Vice President and Treasurer of Prudential Financial and PICA from 2010 to 2013. Previously he had been a managing director at PREI, Head of PREI’s Global Merchant Banking Group and Chief Executive Officer of its European business; a managing director at Prudential Securities; and regional vice president at Prudential Capital Group (now known as PGIM Private Capital).
Ann M. Kappler was elected Executive Vice President and General Counsel for Prudential Financial and PICA in September 2020. She served as Senior Vice President, Deputy General Counsel and Head of External Affairs from 2015 to 2020. She had served in various supervisory positions since 2009, including Deputy General Counsel and Head of External Affairs from 2014 to 2015, Chief Legal Officer for Litigation and Regulation from 2012 to 2014 and Chief Legal Officer for Corporate Services from 2009 to 2012. Prior to joining Prudential in 2009, she was a Partner at Wilmer Cutler Pickering Hale and Dorr, General Counsel at Fannie Mae, and a Litigation Partner at Jenner & Block. She started her career as a Judicial Law Clerk at the U.S. Supreme Court and the U.S. Court of Appeals, D.C. Circuit.
Kenneth Y. Tanji was elected Executive Vice President and Chief Financial Officer of Prudential Financial and PICA in December 2018. Prior to this role, he was Senior Vice President and Treasurer of Prudential Financial and PICA from March 2013 to November 2018. In 2013, he served as Chief Financial Officer of Prudential’s International Businesses. Previously, he was Senior Financial Officer of Prudential Annuities and was Prudential’s business representative for its retail brokerage joint
venture with Wachovia Securities from 2003 through 2009. He also served as Vice President of Finance for Prudential’s asset management business and held various positions with Prudential Securities’ Private Client and Debt Capital Markets Groups. Mr. Tanji joined Prudential in 1988.
Andrew F. Sullivan was elected Executive Vice President and Head of International Businesses and PGIM in January 2023. Previously, he served as Executive Vice President and Head of U.S. Businesses from December 2019 to December 2022. He also served as CEO of Prudential’s Workplace Solutions Group, which consisted of Prudential Retirement and Prudential Group Insurance. Before joining Prudential in 2011, he served as Senior Vice President at CareFirst BlueCross BlueShield. Previously, he spent eight years at Cigna where he held a number of senior leadership positions. He also held management roles at Diamond Technology Partners and DaimlerChrysler.
Caroline A. Feeney was elected Executive Vice President and Head of U.S. Businesses in January 2023. Prior to this role, she served as CEO of U.S. Insurance & Retirement Businesses from January 2021 to December 2022, which consisted of Group Insurance, Individual Life Insurance, Prudential Retirement Strategies, the Retail Advice and Solutions organization, as well as key support functions which include Enabling Solutions and Enterprise Capabilities. Previously, she was CEO of Individual Solutions, and prior to that, she was President of Prudential Individual Life Insurance and Prudential Advisors. Ms. Feeney joined Prudential in 1993.
Lucien A. Alziari is Executive Vice President and Chief Human Resources Officer for Prudential Financial and PICA. Starting in June 2017, he served as Senior Vice President and Chief Human Resources Officer for Prudential Financial and PICA. From 2012 to 2017, Mr. Alziari served as Executive Vice President and Chief Human Resources Officer of A.P. Moller-Maersk. From 2004 to 2012, he was the Chief Human Resources Officer and Head of Corporate Responsibility for Avon Products, Inc. Prior to Avon Products, Inc., Mr. Alziari held roles with Mars Confectionary in the United Kingdom and PepsiCo Inc. in New York, Vienna and Dubai.
Stacey Goodman was elected Executive Vice President and Chief Information Officer of Prudential Financial and Prudential Insurance in July 2019. Previously, she served as the Chief Information Officer at Freddie Mac, where she was responsible for the technology division, and served as a member of the Senior Operating Committee. Prior to Freddie Mac, Ms. Goodman was Executive Vice President and Chief Information and Operations Officer for CIT Group, Inc., where she was a member of the Executive Management Committee. Previously, Ms. Goodman was the Divisional Chief Information Officer of Global Technology and Operations at Bank of America. She also held global leadership positions at UBS and PaineWebber. Ms. Goodman began her career at Salomon Brothers.
Candace J. Woods was elected Senior Vice President and Chief Actuary of Prudential Financial and PICA in November 2017. Prior to her current role, Ms. Woods served as Vice President and Chief Actuary for the Actuarial Center of Excellence within PICA. Also, Ms. Woods served as Vice President and Actuary from 2012 to 2013 and Vice President and Chief Actuary from 2013 to 2017 for Prudential’s International Businesses. From 2010 to 2012, Ms. Woods was Vice President and Actuary in Corporate Actuarial, and the appointed actuary for Pruco Life Insurance Company and Pruco Reinsurance. Ms. Woods joined Prudential in 1982.
Timothy L. Schmidt was elected Senior Vice President and Chief Investment Officer of Prudential Financial and PICA in December 2018. He chairs the Senior Asset Liability Committee and serves as Prudential’s representative to the Institute of International Finance’s Committee on Asset and Investment Management. Previously, Mr. Schmidt was the Head of Global Portfolio Management for Prudential from 2012 to 2018 and he was responsible for the overall asset/liability management for Prudential’s Retirement and Group Insurance businesses from 2010 to 2012. Prior to joining Prudential in July 2010, he served as Chief Financial Officer for MetLife’s Individual Business and had headed MetLife’s Wealth Strategy Group. Earlier in his 25-year tenure at MetLife, Schmidt held various positions in the investment organization, including Head of MetLife’s Portfolio Management Unit, as well as its Structured Finance and Government Securities unit.
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