PRUDENTIAL FINANCIAL INC

Business Updates

•In May 2023, the Company entered into an agreement with The Ohio National Life Insurance Company, now known as AuguStar Life Insurance Company (“AuguStar”), an affiliate of Constellation Insurance Holdings, Inc., to reinsure approximately $10 billion of account values of PDI traditional variable annuity contracts with guaranteed living benefits issued by Pruco Life Insurance Company, a wholly-owned subsidiary of Prudential Financial. The transaction was completed on June 30, 2023 with an effective date of April 1, 2023. See Note 12 to the Unaudited Interim Consolidated Financial Statements for additional information.

•In September 2023, the Company entered into an agreement with Prismic Re to reinsure approximately $9 billion of reserves for certain structured settlement annuity contracts issued by PICA, a wholly-owned subsidiary of Prudential Financial, effective September 2023. These contracts represent approximately 70% of the Company’s in-force structured settlement annuities business. See Note 12 to the Unaudited Interim Consolidated Financial Statements for additional information.

The following table sets forth Retirement Strategies’ operating results for the periods indicated:

Adjusted operating income from our Institutional Retirement Strategies business increased $45 million, driven by higher net investment spread results, primarily reflecting business growth and higher income on non-coupon investments.

Adjusted operating income from our Individual Retirement Strategies business increased $33 million, primarily driven by higher net investment spread results due to higher reinvestment rates, more favorable short-term interest rates and growth in indexed variable annuities. This increase was partially offset by lower fee income, net of distribution expenses and other associated costs, resulting from lower average separate account values due to net outflows and the impact from the PDI reinsurance transaction, partially offset by favorable equity markets.

Revenues from our Institutional Retirement Strategies business increased $6,649 million, primarily reflecting higher pension risk transfer premiums due to significant sales in the current quarter, with corresponding offsets in policyholders’ benefits, as discussed below.

Benefits and expenses of our Institutional Retirement Strategies business increased $6,604 million. Policyholders’ benefits, including changes in reserves, increased primarily related to the higher pension risk transfer premiums discussed above.

Revenues from our Individual Retirement Strategies business increased $119 million, primarily driven by higher net investment income due to higher reinvestment rates and growth in indexed variable annuities.

Benefits and expenses of our Individual Retirement Strategies business increased $86 million primarily driven by higher interest expense, and higher general and administrative expenses, net of capitalization.

Account Values

Institutional Retire ment Strategies. Account values are a significant driver of our operating results and are primarily driven by net additions (withdrawals) and the impact of market changes. The investment income and interest we credit to policyholders on our spread-based products varies with the level of general account values. The income we earn on most of our fee-based products varies with the level of fee-based account values as many policy fees are determined by these values.

The following table shows the changes in the account values of Institutional Retirement Strategies’ products for the periods indicated. Account values include both internally- and externally-managed client balances as the total balances drive revenue for the Institutional Retirement Strategies business. For additional information regarding internally-managed balances, see “—PGIM.”

(1)Beginning total account values, net, were $258,417 million and $251,818 million for the three months ended March 31, 2024 and 2023, respectively, and $252,952 million for the twelve months ended March 31, 2024.

(2)Additions primarily include: group annuities and funded pension reinsurance calculated based on premiums received; international longevity reinsurance contracts calculated as the present value of future projected benefits; investment-only stable value contracts calculated as the fair value of customers’ funds held in a client-owned trust; and funding agreements issued calculated based on premiums received.

(3)“Other” activity includes the effect of foreign exchange rate changes associated with our British pounds sterling denominated international reinsurance business and changes in asset balances for externally-managed accounts. For the three months ended March 31, 2024 and 2023, “Other” activity also includes $1,072 million in receipts offset by $933 million in payments and $1,268 million in receipts offset by $1,044 million in payments, respectively, related to funding agreements backed by commercial paper that typically have maturities of less than 90 days.

The increase in Institutional Retirement Strategies net account values for the three months ended March 31, 2024 reflects net additions primarily driven by significant pension risk transfer transactions, interest credited on customer funds and an increase in the market value of assets.

The increase in Institutional Retirement Strategies net account values for the twelve months ended March 31, 2024 reflects net additions primarily driven by significant pension risk transfer transactions, including funded pension risk transfer and international reinsurance sales, interest credited on customer funds, the positive impact of foreign exchange rate changes and an increase in the market values of assets. These increases were partially offset by the reinsurance of certain structured settlement annuity contracts.

Individual Retirement Strategies. Account values are a significant driver of our operating results. Since most fees are determined by the level of separate account assets, fee income varies primarily based on the level of account values. Account values are driven by net flows from new business sales, surrenders, withdrawals and benefit payments, policy charges and the impact of positive or negative market value changes. The following table sets forth account value information of Individual Retirement Strategies’ products for the periods indicated:

(1)Beginning total account values, net, were $117,911 million and $119,205 million for the three months ended March 31, 2024 and 2023, respectively, and $122,725 million for the twelve months ended March 31, 2024.

(2)Includes net variable and fixed annuities sold as retail investment products. Variable annuity account values were $115.3 billion and $117.3 billion as of March 31, 2024 and 2023, respectively. Fixed annuity account values were $7.7 billion and $5.4 billion as of March 31, 2024 and 2023, respectively.

Individual Retirement Strategies sales, net of full surrenders and death benefits, for the three months ended March 31, 2024 increased in comparison to the prior year period driven by higher sales of fixed and indexed variable annuities products, partially offset by higher full surrenders.

The increase in Individual Retirement Strategies net account values for the three months ended March 31, 2024 was primarily driven by market value appreciation. The increase in Individual Retirement Strategies net account values for the twelve months ended March 31, 2024 was primarily driven by market value appreciation, partially offset by the reinsurance of PDI traditional variable annuity contracts, net outflows and policy charges on contractholder accounts.

Risks and Risk Mitigants

The following is a summary of certain risks associated with Individual Retirement Strategies’ products, certain strategies in mitigating those risks including any updates to those strategies since the previous year-end, and the related financial results.

Fixed Annuity Risks and Risk Mitigants. The primary risk exposure of our 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 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. For additional information regarding our external reinsurance agreements, see Note 12 to the Unaudited Interim Consolidated Financial Statements.

Indexed Variable Annuity Risks and Risk Mitigants. The primary risk exposure of our 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 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 some protection from lapse in the case of rising interest rates.

Variable Annuity Risks and Risk Mitigants. The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital markets assumptions such as equity market returns, interest rates and market volatility, along with actuarial assumptions such as contractholder mortality, the timing and amount of annuitization and withdrawals, and contract lapses. For these risk exposures, achievement of our expected returns is subject to the risk that actual experience will differ from the assumptions used in the original pricing of these products. We manage our exposure to certain risks driven by fluctuations in capital markets primarily through a combination of i) Product Design Features, and ii) our Asset Liability Management Strategy, as discussed below. We also manage these risk exposures through external reinsurance for certain of our variable annuity products. Effective April 2023, the Company entered into an agreement with AuguStar to reinsure approximately $10 billion of account values of PDI traditional variable annuity contracts with guaranteed living benefits. For additional information regarding our external reinsurance agreements, see Note 12 to the Unaudited Interim Consolidated Financial Statements.

i. Product Design Features:

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

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

We employ an ALMstrategy that utilizes a combination of both traditional fixed income instruments and derivatives to meet expected liabilities associated with our annuity guarantees that under U.S. GAAP are considered MRBs. The MRB liability that we hedge consists of expected living and death benefit claims under various market conditions, which are managed using fixed income instruments, derivatives, or a combination thereof. For our PDI variable annuity, we utilize fixed income instruments to meet expected liabilities. For the portion of our ALM strategy executed with derivatives, we enter into a range of exchange-traded and over-the-counter (“OTC”) 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. To achieve this, we periodically review and recalibrate the ALM strategy by optimizing the mix of derivatives and fixed income instruments to achieve expected outcomes. As part of our periodic review of our variable annuities ALM strategy, and in accordance with our Risk Appetite Framework (“RAF”), the Company simplified its hedging approach in the first quarter of 2023 and collapsed the aggregate amount of equity hedging into one program.

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 MRB liability these assets support. These differences can be primarily attributed to twodistinct areas:

•Different accounting treatment between liabilities and assets supporting those liabilities. Under U.S. GAAP, changes in the fair value of the derivative instruments and fixed income instruments designated as trading, and MRBs, excluding the changes in the Company’s non-performance risk (“NPR”) spreads, are 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 MRBs 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 MRBs 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 MRBs 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 MRBs we seek to hedge.

Product Specific Risks and Risk Mitigants

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

(1)All contracts with living benefit guarantees also contain GMDB features, which cover the same insured contract.

(2)Contracts with living benefits that are included in our ALM strategy and that have an automatic rebalancing feature.

(3)Excludes PDI which is presented separately within this table.

(4)Represents contracts subject to reinsurance transactions with external counterparties. Includes approximately $10 billionof account values in relation to the PDI reinsurance transaction, as discussed above, and certain Highest Daily Lifetime Income (“HDI”) v.3.0 business for the period April 1, 2015 through December 31, 2016. The HDI contracts with living benefits also have an automatic rebalancing feature. See Note 12 to the Unaudited Interim Consolidated Financial Statements for additional information.

(5)Includes contracts that have a GMDB feature and do not have an automatic rebalancing feature.

Results excluded from adjusted operating income

The following table provides the net impact to the Unaudited Interim Consolidated Statements of Operations from the portion of Retirement Strategies’ results excluded from adjusted operating income:

(1)Positive amounts represent income; negative amounts represent a loss.

(2)Also excludes related hedging gains (losses), which are included within this table in “Change in the fair value of hedge assets.”

(3)Represents the change in the liability for our fixed and variable indexed annuities, which is measured utilizing a valuation methodology required under U.S. GAAP. The total GAAP liability includes the fair value of all index credits for the current term and all future projected renewals of the policy; however, only changes in the fair value of the current term elected by the policyholder are included in adjusted operating income, while changes in the fair value of all future projected renewals of the policy are excluded from adjusted operating income.

(4)Represents the change in fair value of the derivatives utilized to hedge potential claims associated with our variable annuity living and death benefit guarantees.

(5)Includes changes in the fair value of equity derivatives related to the capital hedge program of $0 million and $(225) million for the three months ended March 31, 2024 and 2023, respectively, that were intended to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets. The capital hedge program was discontinued in the first quarter of 2023.

(6)Includes the changes in duration swaps, deferred policy acquisition costs (“DAC”) amortization, trading gains or losses, and other activity.

For the three months ended March 31, 2024, the loss of $182 million was primarily driven by the impact of rising interest rates on fixed maturity securities and derivatives, partially offset by favorable equity market performance.