PRUCO LIFE INSURANCE CO – 10-Q – Management Discussion and Analysis of Financial Condition and Results of Operations – InsuranceNewsNet | Business Insurance

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Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the consolidated financial condition of Pruco Life
Insurance Company, or the "Company," as of June 30, 2022, compared with
December 31, 2021, and its consolidated results of operations for the three and
six months ended June 30, 2022 and 2021. You should read the following analysis
of our consolidated financial condition and results of operations in conjunction
with the MD&A, the "Risk Factors" section, and the audited Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2021, as well as the statements under
"Forward-Looking Statements" , and the Unaudited Interim Consolidated Financial
Statements included elsewhere in this Quarterly Report on Form 10-Q.

                                    Overview

The Company sells variable annuities, universal life insurance, variable life
insurance and term life insurance primarily through affiliated and unaffiliated
distributors in the United States. As of December 31, 2020, the Company
discontinued the sales of traditional variable annuities with guaranteed living
benefit riders.

Effective April 1, 2022, Prudential Financial completed the sale of Prudential
Annuities Life Assurance Corporation ("PALAC") to Fortitude Group Holdings, LLC
("Fortitude"). As such, PALAC is no longer an affiliate of Prudential Financial
or the Company. Fortitude subsequently renamed the company Fortitude Life
Insurance & Annuity Company ("FLIAC").

Effective July 1, 2021, the Company recaptured the risks related to its variable
annuity base contracts, along with the living benefit guarantees, that had
previously been reinsured to Prudential Annuities Life Assurance Corporation
("PALAC") from April 1, 2016 through June 30, 2021, subsequently renamed FLIAC.
The recapture does not impact Pruco Life Insurance Company of New Jersey
("PLNJ"), which will continue to reinsure its new and in force business to The
Prudential Insurance Company of America ("Prudential Insurance"). The product
risks related to the previously reinsured business that were being managed in
PALAC, were transferred to the Company. In addition, the living benefit hedging
program related to the previously reinsured living benefit riders are being
managed within the Company. This transaction is referred to as the "2021
Variable Annuities Recapture". For more information on this transition, see Note
1 to the Consolidated Financial Statements.

Effective December 1, 2021, the Company entered into a reinsurance agreement
with FLIAC (previously named PALAC) under which the Company assumed all of its
variable and fixed indexed annuities and fixed annuities with a guaranteed
lifetime withdrawal income feature from FLIAC.

Annually during the second quarter of each year, we perform a comprehensive
review of actuarial assumptions. As part of this review, we may update these
assumptions and make refinements to our models based upon emerging experience,
future expectations and other data, including any observable market data. For
additional information, see "Accounting Policies & Pronouncements-Application of
Critical Accounting Estimates" below as well as the Company's Annual Report on
Form 10-K for the year ended December 31, 2021.

COVID-19

Since the first quarter of 2020, the COVID-19 pandemic has caused extreme stress
and disruption in the global economy and financial markets and elevated
mortality and morbidity for the global population. The COVID-19 pandemic
impacted our results of operations in the current period and is expected to
impact our results of operations in future periods. The Company has taken
several measures to manage the impacts of this crisis. The actual and expected
impacts of these events and other items are included in the following update:

•Panorama. COVID-19 may contribute to elevated levels of mortality, resulting in
increase in life insurance claims.

•Operating Results. See “Results of Operations” for a discussion of the results.
for the second quarter and the first six months of 2022.

•Risk Factors. The COVID-19 pandemic has adversely impacted our results of
operations, financial position, investment portfolio, new business opportunities
and operations, and these impacts are expected to continue. For additional
information on the risks to our business posed by the COVID-19 pandemic, see
"Risk Factors" included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2021.


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•Business Continuity. Throughout the COVID-19 pandemic, we have been executing
Prudential Financial Inc.'s ("Prudential Financial") and our business continuity
protocols to ensure employees are safe and able to serve our customers. This
included effectively transitioning the vast majority of employees to remote work
arrangements. In March 2022, Prudential Financial's offices were reopened to
employees and we expect that most of the workforce will adopt a hybrid
arrangement for the foreseeable future.

We believe we can sustain long-term hybrid or fully remote work arrangements
while ensuring that critical business operations are sustained. In addition, we
are managing COVID-19 related impacts on third-party provided services, and do
not anticipate significant interruption in critical operations.


Impact of a low interest rate environment

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

• investment-related activity, including: investment income returns, net
interest margins, net investment spread results
new money rates, mortgage loan prepayments and bond redemptions;
• hedging costs and other risk mitigation activities;
• insurance reserve levels, amortization of deferred policy acquisition costs
("DAC") and market experience true-ups:
• customer account values, including their impact on fee income;
• product offerings, design features, crediting rates and sales mix; and
• policyholder behavior, including surrender or withdrawal activity.

For more information on interest rate risks, see “Risk Factors-Market Risk”
included in our Annual Report on Form 10-K for the year ended December 31, 2021.

PRUCO LIFE INSURANCE CO – 10-Q – Management Discussion and Analysis of Financial Condition and Results of Operations – InsuranceNewsNet | Business Insurance Allianz 728x90 2022 08

Income and expenses

The Company earns revenues principally from insurance premiums, mortality and
expense fees, asset administration fees from insurance and investment products,
and from net investment income on the investment of general account and other
funds. The Company receives premiums primarily from the sale of individual life
insurance and annuity products. The Company earns mortality and expense fees,
and asset administration fees, primarily from the sale and servicing of
universal life insurance and separate account products including variable life
insurance and variable annuities. The Company's operating expenses principally
consist of insurance benefits provided and reserves established for anticipated
future insurance benefits, general business expenses, reinsurance premiums,
commissions and other costs of selling and servicing the various products sold
and interest credited on general account liabilities.



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                      Accounting Policies & Pronouncements

Application of Critical Accounting Estimates

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

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

•DAC and other costs, including deferred sales inducements ("DSI");
•Policyholder liabilities;
•Valuation of investments, including derivatives, measurement of allowance for
credit losses, and recognition of other-than-temporary impairments;
•Reinsurance recoverables;
•Taxes on income; and
•Reserves for contingencies, including reserves for losses in connection with
unresolved legal matters.

Market Performance: Principal and Interest Rate Assumptions

DAC and other costs associated with the variable and universal life policies and
the variable and fixed annuity contracts are generally amortized over the
expected lives of these policies in proportion to total gross profits. Total
gross profits include both actual gross profits and estimates of gross profits
for future periods. The quarterly adjustments for market performance reflect the
impact of changes to our estimate of total gross profits to reflect actual fund
performance and market conditions. A significant portion of gross profits for
our variable annuity contracts and, to a lesser degree, our variable life
contracts are dependent upon the total rate of return on assets held in separate
account investment options. This rate of return influences the fees we earn on
variable annuity and variable life contracts, costs we incur associated with the
guaranteed minimum death and guaranteed minimum income benefit features related
to our variable annuity contracts and expected claims to be paid on variable
life contracts, as well as other sources of profit. Returns that are higher than
our expectations for a given period produce higher than expected account
balances, which increase the future fees we expect to earn on variable annuity
and variable life contracts and decrease the future costs we expect to incur
associated with the guaranteed minimum death and guaranteed minimum income
benefit features related to our variable annuity contracts and expected claims
to be paid on variable life contracts. The opposite occurs when returns are
lower than our expectations. The changes in future expected gross profits are
used to recognize a cumulative adjustment to all prior periods' amortization.

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

The weighted average rate of return assumptions used in developing estimated
market returns consider many factors specific to each product type, including
asset durations, asset allocations and other factors. With regard to equity
market assumptions, the near-term future rate of return assumption used in
evaluating DAC, other costs and liabilities for future policy benefits for
certain of our products, primarily our domestic variable annuity and variable
life insurance products, is generally updated each quarter and is derived using
a reversion to the mean approach, a common industry practice. Under this
approach, we consider historical equity returns and adjust projected equity
returns over an initial future period of five years (the "near-term") so that
equity returns converge to the long-term expected rate of return. If the
near-term projected future rate of return is greater than our near-term maximum
future rate of return of 15.0%, we use our maximum future rate of return. If the
near-term projected future rate of return is lower than our near-term minimum
future rate of return of 0%, we use our minimum future rate of return. As of
June 30, 2022, our variable annuities and variable life insurance businesses
assume an 8.0% long-term equity expected rate of return and a 6.4% near-term
mean reversion equity expected rate of return.



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With regard to interest rate assumptions used in evaluating DAC, DSI and
liabilities for future policy benefits for certain of our products, we generally
update the long-term and near-term future rates used to project fixed income
returns annually and quarterly, respectively. As a result of our 2022 annual
reviews and update of assumptions and other refinements, we kept our long-term
expectation of the 10-year U.S. Treasury rate unchanged and continue to grade to
a rate of 3.25% over ten years. As part of our quarterly market experience
updates, we update our near-term projections of interest rates to reflect
changes in current rates.

For further discussion of impacts that could result from changes in certain key
assumptions, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Accounting Policies and Pronouncements-Application of
Critical Accounting Estimates" in our Annual Report on Form 10-K for the year
ended December 31, 2021.

Future Adoption of New Accounting Pronouncements

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements
to the Accounting for Long-Duration Contracts, was issued by the Financial
Accounting Standards Board ("FASB") on August 15, 2018, and was amended by ASU
2019-09, Financial Services - Insurance (Topic 944): Effective Date, issued in
October 2019, and ASU 2020-11, Financial Services-Insurance (Topic 944):
Effective Date and Early Application, issued in November 2020. The Company will
adopt ASU 2018-12 effective January 1, 2023 using the modified retrospective
transition method where permitted, and apply the guidance as of January 1, 2021
(and record transition adjustments as of January 1, 2021) in the 2023 financial
statements.

ASU 2018-12 will impact, at least to some extent, the accounting and disclosure
requirements for all long-duration insurance and investment contracts issued by
the Company. The Company expects the standard to have a significant financial
impact on the Consolidated Financial Statements and will significantly increase
disclosures. In addition to the significant impacts to the balance sheet upon
adoption, the Company also expects an impact to the pattern of earnings
emergence following the transition date. See Note 2 to the Unaudited Interim
Consolidated Financial Statements. for a more detailed discussion of ASU
2018-12, as well as other accounting pronouncements issued but not yet adopted
and newly adopted accounting pronouncements.

                         Changes in Financial Position

Total assets decreased $31.3 billion of $221.7 billion a December 31, 2021 a
$190.4 billion a June 30, 2022. The significant components were:

• Decrease in assets of separate accounts $31.0 billion primarily driven by unfavorable
return on stock and net outflows;

•Invested assets decreased $1.0 billion driven by $1.8 billion in unrealized
losses on investments primarily due to rising interest rates and partially
offset by a $0.8 billion decrease in policy loans from ceding a portion of the
variable life business to Lotus Reinsurance Company Ltd. ("Lotus Re");

Partially offset by:

•Cash and cash equivalents increased $900 million mainly due to warranty
financing requirements.

Total liabilities decreased $30.0 billion of $215.7 billion a December 31,
2021
a $185.7 billion a June 30, 2022. The significant components were:

•Liabilities of separate accounts decreased $31.0 billioncorresponding to the
decrease in separate account assets, as discussed above;

•Future policy benefits decreased $3.8 billion driven by a decrease in reserves
related to our variable annuity living benefit guarantees due to widening
non-performance risk ("NPR") spreads and rising interest rates, partially offset
by unfavorable equity market performance;

Partially offset by:

• Policyholder account balances increased $3.7 billion driven by increments
sales of indexed products; Y

•Other liabilities increased $0.9 billion driven by the deferred reinsurance
gain from ceding a portion of the variable life business to Lotus Re, partially
offset by a decrease to cost of reinsurance liabilities.

Total equity decreased $1.2 billion from $6.0 billion at December 31, 2021 to
$4.8 billion at June 30, 2022 driven by $1.8 billion of unrealized losses on
investments driven by rising interest rates reflected in Accumulated other
comprehensive income (loss).


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                             Results of Operations

Profit (loss) from Operations before Income Taxes

Three month comparison

Income (loss) from operations before income taxes increased $532 million from a
loss of $26 million for the three months ended June 30, 2021 to income of $506
million for the three months ended June 30, 2022. This includes a favorable
comparative net gain of $342 million from our annual reviews and update of
assumptions and other refinements driven by an NPR assumption update. Excluding
the comparative impact of our annual reviews and update of assumptions and other
refinements, income (loss) from operations increased $189 million primarily
driven by:

•Impact on profits from the recovery of the variable annuity and new reinsurance with
FLIAC in 2021;

Six Months Comparison

Income (loss) from operations before income taxes increased $444 million from
income of $32 million for the six months ended June 30, 2021 to a gain of $476
million for the six months ended June 30, 2022. This includes a favorable
comparative net gain of $342 million from our annual reviews and update of
assumptions and other refinements as noted above. Excluding the comparative
impact of our annual reviews and update of assumptions and other refinements,
income (loss) from operations increased $102 million primarily driven by:

•Impact on profits from the recovery of the variable annuity and new reinsurance with
FLIAC in 2021;

Partially offset by:

•Fees paid to prudential insurance for the recovery of annual renewables
term reinsurance (“YRT”) for most of the Company’s variable life insurance.
and divesting a portion of the variable life business to Lotus Re.

The following table provides the net impact to the Interim Unaudited Statements
of Operations, which is mainly due to changes in the U.S GAAP
embedded derivative liability and hedging positions under Assets Liabilities
management strategy (“ALM”), and the related amortization of DAC and other
costs

                                                            Three Months Ended           Six Months Ended
                                                              June 30, 2022               June 30, 2022
                                                                          

(in millions)(1)
U.S GAAP embedded derivatives and hedging positions
Change in the value of the USGAAP liability, beforeNPR(2) $

               (13)         $           1,364
Change in the NPR adjustment                                            1,125                      1,602

Change in fair value of hedging assets, excluding equity
hedges(3)

                                                                (752)                    (2,145)
Change in fair value of capital hedges(4)                                 439                           620
Other                                                                    (399)                      (709)

Gains (losses) on realized investments, net and related
settings

                                                               400                        732
Market experience updates(5)                                              (43)                      (120)

Charges related to gains (losses) on investments made,
net

                                                                       (36)                      (237)

Net impact due to changes in the U.S Integrated GAAP
derivatives and hedging positions, after the impact of NPR,
DAC and other costs(6)

                                    $               321          $             375


(1)Positive amount represents income; negative amount represents a loss.
(2)Represents the change in the liability (excluding NPR) for our variable
annuities which is measured utilizing a valuation methodology that is required
under U.S. GAAP. This liability includes such items as risk margins which are
required by U.S. GAAP but not included in our best estimate of the liability.
(3)Represents the changes in fair value of the derivatives utilized to hedge
potential claims associated with our variable annuity living benefit guarantees.
(4)Represents the changes in fair value of equity derivatives of the capital
hedge program intended to protect a portion of the overall capital position of
our business against exposure to the equity markets.
(5)Represents the immediate impacts in current period results from changes in
current market conditions on estimates of profitability.
(6)Excludes amounts from the changes in unrealized gains and losses from fixed
income instruments recorded in OCI (versus net income) of ($120) million and
($233) million for the three and six months ended June 30, 2022, respectively.



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For the three months ended June 30, 2022, the gain of $321 million was primarily
driven by a favorable impact from the NPR adjustment, partially offset by an
unfavorable impact related to the change in the fair value of hedge assets.

For the six months ended June 30, 2022, the gain of $375 million was primarily
driven by a favorable impact from the NPR adjustment and from a favorable impact
related to the portions of our U.S. GAAP liability before NPR, that are excluded
from hedge target, driven by rising interest rates, partially offset by an
unfavorable impact related to the change in the fair value of hedge assets.

Income, Benefits and Expenses

Three month comparison

Revenues increased $1,120 million from $230 million for the three months ended
June 30, 2021 to $1,350 million for the three months ended June 30, 2022. This
includes a favorable comparative increase of $523 million from our annual
reviews and update of assumptions and other refinements as noted above.
Excluding the comparative impact of our annual reviews and update of assumptions
and other refinements, revenues increased $597 million primarily driven by:

•Higher realized investment gains (losses), net, primarily driven by higher
impact of the NPR adjustment, partially offset by an unfavorable impact
related to the change in fair value of hedging assets;

•Higher policy charges and commission income are driven by the variable annuity
reconquest.

Benefits and expenses increased $588 million from $256 million for the three
months ended June 30, 2021 to $844 million for the three months ended June 30,
2022. This includes an unfavorable comparative increase of $181 million from our
annual reviews and update of assumptions and other refinements as noted above.
Excluding the comparative impact of our annual reviews and update of assumptions
and other refinements, benefits and expenses increased $407 million primarily
driven by:

•Higher profits and expenses driven by the recovery of variable annuities and new
reinsurance with FLIAC in 2021.

Six month comparison

Revenues increased $1,705 million from $626 million for the six months ended
June 30, 2021 to $2,331 million for the six months ended June 30, 2022. This
includes a favorable comparative increase of $523 million from our annual
reviews and update of assumptions and other refinements as noted above.
Excluding the comparative impact of our annual reviews and update of assumptions
and other refinements, revenues increased $1,183 million primarily driven by:

•Higher realized investment gains (losses), primarily driven by a favorable
impact from the NPR adjustment and from a favorable impact related to the
portions of our U.S. GAAP liability before NPR, that are excluded from hedge
target, driven by rising interest rates, partially offset by an unfavorable
impact related to the change in the fair value of hedge assets; and

•Higher policy charges and commission income are driven by the variable annuity
recover, partially offset by the fee paid to prudential insurance For him
YRT reinsurance recovery for most of the Company’s variable life
insurance policies and transferring a part of the variable life business to
Lotus Re.

Benefits and expenses increased $1,260 million from $594 million for the six
months ended June 30, 2021 to $1,854 million for the six months ended June 30,
2022. This includes an unfavorable comparative increase of $181 million from our
annual reviews and update of assumptions and other refinements as noted above.
Excluding the comparative impact of our annual reviews and update of assumptions
and other refinements, benefits and expenses increased $1,079 million primarily
driven by:

•Higher profits and expenses driven by the recovery of variable annuities and new
reinsurance with FLIAC in 2021.

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Risks and Risk Mitigators

Variable Annuity Risks and Risk Mitigators:

The primary risk exposures of our variable annuity contracts relate to actual
deviations from, or changes to, the assumptions used in the original pricing of
these products, including capital markets assumptions such as equity market
returns, interest rates and market volatility, along with actuarial assumptions
such as contractholder mortality, the timing and amount of annuitization and
withdrawals, and contract lapses. For these risk exposures, achievement of our
expected returns is subject to the risk that actual experience will differ from
the assumptions used in the original pricing of these products. Prudential
Financial manages our exposure to certain risks driven by fluctuations in
capital markets primarily through a combination of Product Design Features and
an Asset Liability Management Strategy ("ALM"), as discussed below. The Company
also manages these risk exposures through external reinsurance for certain of
our variable annuity products.



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Effective July 1, 2021, the Company recaptured the risks related to its variable
annuity base contracts, along with the living benefit guarantees, that had
previously been reinsured to PALAC from April 1, 2016 through June 30, 2021,
subsequently renamed FLIAC. The recapture does not impact PLNJ, which will
continue to reinsure its new and in force business to Prudential Insurance. The
product risks related to the previously reinsured business that were being
managed in PALAC, were transferred to the Company. In addition, the living
benefit hedging program related to the previously reinsured living benefit
riders will be managed within the Company. For more information on this
transaction, see Note 1 to the Consolidated Financial Statements.

Fixed Annuity Risks and Risk Mitigants. Effective December 1, 2021, the Company
entered into a reinsurance agreement with FLIAC (previously named PALAC) under
which the Company assumed all of its fixed indexed annuities and fixed annuities
with a guaranteed lifetime withdrawal income feature from FLIAC. The primary
risk exposure of these fixed annuity products relates to investment risks we
bear for providing customers a minimum guaranteed interest rate or an
index-linked interest rate required to be credited to the customer's account
value, which include interest rate fluctuations and/or sustained periods of low
interest rates, and credit risk related to the underlying investments. We manage
these risk exposures primarily through our investment strategies and product
design features, which include credit rate resetting subject to the minimum
guaranteed interest rate, as well as surrender charges applied during the early
years of the contract that help to provide protection for premature withdrawals.
In addition, a portion of our fixed annuity products has a market value
adjustment provision that affords protection of lapse in the case of rising
interest rates. We also manage these risk exposures through external reinsurance
for certain of our fixed annuity products.

Indexed Variable Annuity Risks and Risk Mitigants. Effective December 1, 2021,
the Company entered into a reinsurance agreement with FLIAC (previously named
PALAC) under which the Company assumed all of its indexed variable annuities
from FLIAC. The primary risk exposure of these indexed variable annuity products
relates to the investment risks we bear in order to credit to the customer's
account balance the required crediting rate based on the performance of the
elected indices at the end of each term. We manage this risk primarily through
our investment strategies including derivatives and product design features,
which include credit rate resetting subject to contractual minimums as well as
surrender charges applied during the early years of the contract that help to
provide protection for premature withdrawals. In addition, our indexed variable
annuity strategies have an interim value provision that provides protection from
lapse in the case of rising interest rates.

Product Design Features:

A portion of the variable annuity contracts that we offer include an asset
transfer feature. This feature is implemented at the contract level, and
transfers assets between certain variable investment sub-accounts selected by
the annuity contractholder and, depending on the benefit feature, a fixed-rate
account in the general account or a bond fund sub-account within the separate
account. The objective of the asset transfer feature is to reduce our exposure
to equity market risk and market volatility. The asset transfer feature
associated with currently-sold highest daily living benefit products uses a
designated bond fund sub-account within the separate account. The transfers are
based on a static mathematical formula used with the particular benefit which
considers a number of factors, including, but not limited to, the impact of
investment performance on the contractholder's total account value. Other
product design features we utilize include, among others, asset allocation
restrictions, minimum issuance age requirements and certain limitations on the
amount of contractholder purchase payments, as well as a required minimum
allocation to our general account for certain of our products. We continue to
introduce products that diversify our risk profile and have incorporated
provisions in product design allowing frequent revisions of key pricing elements
for certain of our products. In addition, there is diversity in our fee
arrangements, as certain fees are primarily based on the benefit guarantee
amount, the contractholder account value and/or premiums, which helps preserve
certain revenue streams when market fluctuations cause account values to
decline.

Asset and Liability Management Strategy (including fixed income instruments and
derivatives):

We employ an ALM strategy that utilizes a combination of both traditional fixed
income instruments and derivatives to meet expected liabilities associated with
our variable annuity living benefit guarantees. The economic liability we manage
with this ALM strategy consists of expected living benefit claims under less
severe market conditions, which are managed using fixed income instruments,
derivatives, or a combination thereof, and potential living benefit claims
resulting from more severe market conditions, which are hedged using derivative
instruments. For the portion of our ALM strategy executed with derivatives, we
enter into a range of exchange-traded and over-the-counter equity, interest rate
and credit derivatives, including, but not limited to: equity and treasury
futures; total return, credit default and interest rate swaps; and options,
including equity options, swaptions, and floors and caps. The intent of this
strategy is to more efficiently manage the capital and liquidity associated with
these products while continuing to mitigate fluctuations in net income due to
movements in capital markets.



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

                                                                            As of June 30, 2022
                                                                               (in millions)
U.S. GAAP Liability, including NPR                                        $              5,152
NPR Adjustment                                                                           3,649
   Subtotal                                                                              8,801

Adjustments including risk margins and differences in valuation methodology

            (2,710)
   Economic liability managed by ALM strategy                             $              6,091

From June 30, 2022the fair value of our fixed income instruments and
derivative assets exceed our financial responsibility.

Under our ALM strategy, we expect differences in the U.S. GAAP net income impact
between the changes in value of the fixed income instruments (either designated
as available-for-sale or designated as trading) and derivatives as compared to
the changes in the embedded derivative liability these assets support. These
differences can be primarily attributed to three distinct areas:

•Different valuation methodologies in measuring the liability we intend to cover
with fixed income instruments and derivatives versus the liability reported
under U.S. GAAP. The valuation methodology utilized in estimating the economic
liability we intend to defray with fixed income instruments (either designated
as available-for-sale or designated as trading) and derivatives is different
from that required to be utilized to measure the liability under U.S. GAAP.
Additionally, the valuation of the economic liability excludes certain items
that are included within the U.S. GAAP liability, such as NPR in order to
maximize protection irrespective of the possibility of our own default and risk
margins (required by U.S. GAAP but different from our best estimate).

•Different accounting treatment between liabilities and assets supporting those
liabilities. Under U.S. GAAP, changes in value of the embedded derivative
liability, derivative instruments and fixed income instruments designated as
trading immediately reflected in net income, while changes in the fair value of
fixed income instruments that are designated as available-for-sale are recorded
as unrealized gains (losses) in other comprehensive income.

•General hedge results. For the derivative portion of the ALM strategy, the net
hedging impact (the extent to which the changes in value of the hedging
instruments offset the change in value of the portion of the economic liability
we are hedging) may be impacted by a number of factors, including: cash flow
timing differences between our hedging instruments and the corresponding portion
of the economic liability we are hedging, basis differences attributable to
actual underlying contractholder funds to be hedged versus hedgeable indices,
rebalancing costs related to dynamic rebalancing of hedging instruments as
markets move, certain elements of the economic liability that may not be hedged
(including certain actuarial assumptions), and implied and realized market
volatility on the hedge positions relative to the portion of the economic
liability we seek to hedge.

Capital Coverage Program:

We employ a capital hedge program within the Company to protect a portion of the
overall capital position of the variable annuities business against its exposure
to the equity markets. The capital hedge program is conducted using equity
derivatives which include equity call and put options, total return swaps and
futures contracts.



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See also  Security Risks Affect Employers

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                                  Income Taxes

For information on income taxes, see Note 7 of the Interim Unaudited Reports.
Consolidated financial statement.

                        Liquidity and Capital Resources

Overview

Liquidity refers to the ability to generate sufficient cash resources to meet
the payment obligations of the Company. Capital refers to the long-term
financial resources available to support the operations of our business, fund
business growth, and provide a cushion to withstand adverse circumstances. Our
ability to generate and maintain sufficient liquidity and capital depends on the
profitability of our business, general economic conditions, our ability to
borrow from affiliates and our access to the capital markets through affiliates
as described herein.

Effective and prudent liquidity and capital management is a priority across the
organization. Management monitors the liquidity of the Company on a daily basis
and projects borrowing and capital needs over a multi-year time horizon. We use
a Risk Appetite Framework ("RAF") to ensure that all risks taken by the Company
align with our capacity and willingness to take those risks. The RAF provides a
dynamic assessment of capital and liquidity stress impacts, including scenarios
similar to, and more severe than, those occurring due to COVID-19, and is
intended to ensure that sufficient resources are available to absorb those
impacts. We believe that our capital and liquidity resources are sufficient to
satisfy the capital and liquidity requirements of the Company.

Our businesses are subject to comprehensive regulation and supervision by
domestic and international regulators. These regulations currently include
requirements (many of which are the subject of ongoing rule-making) relating to
capital, leverage, liquidity, stress-testing, overall risk management, credit
exposure reporting and credit concentration. For information on these regulatory
initiatives and their potential impact on us, see "Business-Regulation" and
"Risk Factors" included in our Annual Report on Form 10-K for the year ended
December 31, 2021.

Capital

We manage the Company to regulatory capital levels consistent with our "AA"
ratings targets. We utilize the risk-based capital ("RBC") ratio as a primary
measure of capital adequacy. RBC is calculated based on statutory financial
statements and risk formulas consistent with the practices of the National
Association of Insurance Commissioners ("NAIC"). RBC considers, among other
things, risks related to the type and quality of the invested assets,
insurance-related risks associated with an insurer's products and liabilities,
interest rate risks and general business risks. RBC ratio calculations are
intended to assist insurance regulators in measuring an insurer's solvency and
ability to pay future claims. The reporting of RBC measures is not intended for
the purpose of ranking any insurance company or for use in connection with any
marketing, advertising or promotional activities, but is available to the
public. The Company's capital levels substantially exceed the minimum level
required by applicable insurance regulations. Our regulatory capital levels may
be affected in the future by changes to the applicable regulations, proposals
for which are currently under consideration by both domestic and international
insurance regulators.

The regulatory capital level of the Company can be materially impacted by
interest rate and equity market fluctuations, changes in the values of
derivatives, the level of impairments recorded, and credit quality migration of
the investment portfolio, among other items. In addition, the reinsurance of
business or the recapture of business subject to reinsurance arrangements due to
defaults by, or credit quality migration affecting, the reinsurers or for other
reasons could negatively impact regulatory capital levels. The Company's
regulatory capital level is also affected by statutory accounting rules, which
are subject to change by each applicable insurance regulator.

Captive Reinsurance Companies:

See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources-Capital-Affiliated Captive
Reinsurance Companies" included in our Annual Report on Form 10-K for the year
ended December 31, 2021, for a discussion of our use of captive reinsurance
companies.



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Liquidity

Our liquidity is managed to ensure stable, reliable and cost-effective sources
of cash flows to meet all of our obligations. Liquidity is provided by a variety
of sources, as described more fully below, including portfolios of liquid
assets. Our investment portfolios are integral to the overall liquidity of the
Company. We use a projection process for cash flows from operations to ensure
sufficient liquidity to meet projected cash outflows, including claims. The
impact of Prudential Funding, LLC's ("Prudential Funding"), a wholly-owned
subsidiary of Prudential Insurance, financing capacity on liquidity (as
described below) is considered in the internal liquidity measures of the
Company.

Liquidity is measured against internally-developed benchmarks that take into
account the characteristics of both the asset portfolio and the liabilities that
they support. We consider attributes of the various categories of liquid assets
(for example, type of asset and credit quality) in calculating internal
liquidity measures to evaluate our liquidity under various stress scenarios,
including company-specific and market-wide events. We continue to believe that
cash generated by ongoing operations and the liquidity profile of our assets
provide sufficient liquidity under reasonably foreseeable stress scenarios.

The principal sources of the Company's liquidity are premiums and certain
annuity considerations, investment and fee income, investment maturities, sales
of investments and internal borrowings. The principal uses of that liquidity
include benefits, claims, and payments to policyholders and contractholders in
connection with surrenders, withdrawals and net policy loan activity. Other uses
of liquidity include commissions, general and administrative expenses, purchases
of investments, the payment of dividends and returns of capital to the parent
company, hedging and reinsurance activity and payments in connection with
financing activities.

In managing liquidity, we consider the risk of policyholder and contractholder
withdrawals of funds earlier than our assumptions when selecting assets to
support these contractual obligations. We use surrender charges and other
contract provisions to mitigate the extent, timing and profitability impact of
withdrawals of funds by customers.

Liquid assets

Liquid assets include cash and cash equivalents, short-term investments, U.S.
Treasury fixed maturities, and fixed maturities that are not designated as
held-to-maturity and public equity securities. As of June 30, 2022 and
December 31, 2021, the Company had liquid assets of $18,544 million and $17,793
million, respectively. The portion of liquid assets comprised of cash and cash
equivalents and short-term investments was $2,061 million and $1,101 million as
of June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022,
$13,056 million, or 90%, of the fixed maturity investments in the Company's
general account portfolios, were rated high or highest quality based on NAIC or
equivalent rating.

Prudential Funding, LLC

Prudential Financial and Prudential Funding borrow funds in the capital markets
primarily through the direct issuance of commercial paper. The borrowings serve
as an additional source of financing to meet our working capital needs.
Prudential Funding operates under a support agreement with Prudential Insurance
whereby Prudential Insurance has agreed to maintain Prudential Funding's
positive tangible net worth at all times.

Hedging activities associated with living benefit guarantees

The hedging portion of our risk management strategy associated with our living
benefit guarantees is being managed within the Company. For the portion of the
risk management strategy executed through hedging, we enter into a range of
exchange-traded, cleared and other OTC equity and interest rate derivatives in
order to hedge certain living benefit guarantees accounted for as embedded
derivatives against changes in certain capital market risks above a designated
threshold. The portion of the risk management strategy comprising the hedging
portion requires access to liquidity to meet the Company's payment obligations
relating to these derivatives, such as payments for periodic settlements,
purchases, maturities and terminations. These liquidity needs can vary
materially due to, among other items, changes in interest rates, equity markets,
mortality and policyholder behavior.

The hedging portion of the risk management strategy may also result in
derivative-related collateral postings to (when we are in a net pay position) or
from (when we are in a net receive position) counterparties. The net collateral
position depends on changes in interest rates and equity markets related to the
amount of the exposures hedged. Depending on market conditions, the collateral
posting requirements can result in material liquidity needs when we are in a net
pay position.


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Universal and Term Life Reserve Financing

The Company uses affiliated captive reinsurance subsidiaries to finance the
portion of the statutory reserves required to be held under Regulation XXX and
Guideline AXXX that is considered to be non-economic. The financing arrangements
involve the reinsurance of term and universal life business to our affiliated
captive reinsurers and the issuance of surplus notes by those affiliated
captives that are treated as capital for statutory purposes. These surplus notes
are subordinated to policyholder obligations, and the payment of principal and
interest on the surplus notes can only be made with prior insurance regulatory
approval.

As of June 30, 2022, the affiliated captive reinsurance companies have entered
into agreements with external counterparties providing for the issuance of up to
an aggregate of $14,600 million of surplus notes by our affiliated captive
reinsurers in return for the receipt of credit-linked notes ("Credit-Linked Note
Structures"), of which $12,821 million of surplus notes was outstanding,
compared to an aggregate issuance capacity of $14,600 million, of which $12,721
million was outstanding as of December 31, 2021. Under the agreements, the
affiliated captive receives in exchange for the surplus notes one or more
credit-linked notes issued by a special-purpose affiliate of the Company with an
aggregate principal amount equal to the surplus notes outstanding. The
affiliated captive holds the credit-linked notes as assets supporting Regulation
XXX or Guideline AXXX non-economic reserves, as applicable. For more information
on our Credit-Linked Note Structures, see "Management's Discussion and Analysis
of Financial Condition and Results of Operation-Liquidity and Capital
Resources-Financing Activities" in the Annual Report on Form 10-K for the year
ended December 31, 2021.

As of June 30, 2022, our affiliated captive reinsurance companies had
outstanding an aggregate of $3,025 million of debt issued for the purpose of
financing Regulation XXX and Guideline AXXX non-economic reserves, of which
approximately $1,125 million relates to Regulation XXX reserves and
approximately $1,900 million relates to Guideline AXXX reserves. In addition, as
of June 30, 2022, for purposes of financing Guideline AXXX reserves, one of our
affiliated captives had approximately $3,982 million of surplus notes
outstanding that were issued to affiliates.

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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