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Derivative Instruments
 9 Months Ended
Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
DERIVATIVE INSTRUMENTS
 
Types of Derivative Instruments and Derivative Strategies

The Company utilizes various derivatives instruments and strategies to manage its risk. Commonly used derivative instruments include, but are not necessarily limited to:
•Interest rate contracts: swaps, options, swaptions, caps and floors
•Equity contracts: options and total return swaps
•Foreign exchange contracts: futures, options, forwards and swaps
•Credit contracts: single and index reference credit default swaps
•
Other contracts: to-be-announced forward contracts, loan commitments, embedded derivatives and synthetic guaranteed investment contracts

For detailed information on these contracts and the related strategies, see Note 21 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Primary Risks Managed by Derivatives
 
The table below provides a summary of the gross notional amount and fair value of derivatives contracts by the primary underlying, excluding embedded derivatives and associated reinsurance recoverables. Many derivative instruments contain multiple underlyings. The fair value amounts below represent the gross fair value of derivative contracts prior to taking into account the netting effects of master netting agreements, cash collateral and NPR. This netting impact results in total derivative assets of $1,847 million and $1,367 million as of September 30, 2017 and December 31, 2016, respectively, and total derivative liabilities of $722 million and $345 million as of September 30, 2017 and December 31, 2016, respectively, reflected in the Unaudited Interim Consolidated Statements of Financial Position.
Primary Underlying/Instrument Type
September 30, 2017
 
December 31, 2016
 
 
Gross Fair Value
 
 
 
Gross Fair Value
Notional
 
Assets
 
Liabilities
 
Notional
 
Assets
 
Liabilities
 
(in millions)
Derivatives Designated as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swaps
$
1,012

 
$
15

 
$
(95
)
 
$
1,117

 
$
17

 
$
(111
)
Foreign Currency
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Forwards
177

 
2

 
(3
)
 
167

 
3

 
(1
)
Currency/Interest Rate
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Swaps
17,384

 
1,033

 
(534
)
 
14,737

 
1,956

 
(54
)
Total Qualifying Hedges
$
18,573

 
$
1,050

 
$
(632
)
 
$
16,021

 
$
1,976

 
$
(166
)
Derivatives Not Qualifying as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swaps
$
164,478

 
$
8,652

 
$
(3,753
)
 
$
162,131

 
$
8,969

 
$
(4,274
)
Interest Rate Futures
26,464

 
19

 
(4
)
 
31,183

 
55

 
(1
)
Interest Rate Options
16,101

 
177

 
(148
)
 
13,290

 
289

 
(132
)
Interest Rate Forwards
1,783

 
11

 
(1
)
 
321

 
0

 
(1
)
Foreign Currency
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Forwards
24,239

 
176

 
(389
)
 
21,042

 
372

 
(892
)
Foreign Currency Options
69

 
0

 
0

 
93

 
0

 
0

Currency/Interest Rate
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Swaps
13,838

 
915

 
(404
)
 
12,336

 
1,218

 
(311
)
Credit
 
 
 
 
 
 
 
 
 
 
 
Credit Default Swaps
783

 
7

 
(6
)
 
918

 
1

 
(25
)
Equity
 
 
 
 
 
 
 
 
 
 
 
Equity Futures
74

 
0

 
0

 
1,371

 
0

 
(5
)
Equity Options
59,962

 
657

 
(566
)
 
12,020

 
102

 
(93
)
Total Return Swaps
14,644

 
16

 
(323
)
 
18,167

 
101

 
(390
)
Commodity
 
 
 
 
 
 
 
 
 
 
 
Commodity Futures
0

 
0

 
0

 
1

 
0

 
0

Synthetic GICs
76,931

 
2

 
(1
)
 
77,197

 
5

 
0

Total Non-Qualifying Derivatives
$
399,366

 
$
10,632

 
$
(5,595
)
 
$
350,070

 
$
11,112

 
$
(6,124
)
Total Derivatives(1)
$
417,939

 
$
11,682

 
$
(6,227
)
 
$
366,091

 
$
13,088

 
$
(6,290
)
__________
(1)
Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlyings. The fair value of these embedded derivatives was a net liability of $8,568 million and $8,252 million as of September 30, 2017 and December 31, 2016, respectively, primarily included in “Future policy benefits.”

Based on notional amounts, most of the Company’s derivatives do not qualify for hedge accounting as follows: (i) derivatives that economically hedge embedded derivatives do not qualify for hedge accounting because changes in the fair value of the embedded derivatives are already recorded in net income, (ii) derivatives that are utilized as macro hedges of the Company’s exposure to various risks typically do not qualify for hedge accounting because they do not meet the criteria required under portfolio hedge accounting rules, and (iii) synthetic guaranteed investment contracts (“GICs”), which are product standalone derivatives, do not qualify as hedging instruments under hedge accounting rules.
Offsetting Assets and Liabilities
 
The following table presents recognized derivative instruments (excluding embedded derivatives and associated reinsurance recoverables), and repurchase and reverse repurchase agreements that are offset in the Unaudited Interim Consolidated Statements of Financial Position, and/or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the Unaudited Interim Consolidated Statements of Financial Position.
 
 
September 30, 2017
 
Gross
Amounts of
Recognized
Financial
Instruments
 
Gross
Amounts
Offset in the
Statements of
Financial
Position
 
Net
Amounts
Presented in
the Statements
of Financial
Position
 
Financial
Instruments/
Collateral(1)
 
Net
Amount
 
(in millions)
Offsetting of Financial Assets:
 
 
 
 
 
 
 
 
 
Derivatives(1)
$
11,566

 
$
(9,833
)
 
$
1,733

 
$
(1,422
)
 
$
311

Securities purchased under agreement to resell
576

 
0

 
576

 
(576
)
 
0

Total assets
$
12,142

 
$
(9,833
)
 
$
2,309

 
$
(1,998
)
 
$
311

Offsetting of Financial Liabilities:
 
 
 
 
 
 
 
 
 
Derivatives(1)
$
6,219

 
$
(5,505
)
 
$
714

 
$
(629
)
 
$
85

Securities sold under agreement to repurchase
8,145

 
0

 
8,145

 
(8,145
)
 
0

Total liabilities
$
14,364

 
$
(5,505
)
 
$
8,859

 
$
(8,774
)
 
$
85

 
 
December 31, 2016
 
Gross
Amounts of
Recognized
Financial
Instruments
 
Gross
Amounts
Offset in the
Statements
of Financial
Position
 
Net
Amounts
Presented in
the Statements
of Financial
Position
 
Financial
Instruments/
Collateral(1)
 
Net
Amount
 
(in millions)
Offsetting of Financial Assets:
 
 
 
 
 
 
 
 
 
Derivatives(1)
$
12,987

 
$
(11,716
)
 
$
1,271

 
$
(399
)
 
$
872

Securities purchased under agreement to resell
1,016

 
0

 
1,016

 
(1,016
)
 
0

Total assets
$
14,003

 
$
(11,716
)
 
$
2,287

 
$
(1,415
)
 
$
872

Offsetting of Financial Liabilities:
 
 
 
 
 
 
 
 
 
Derivatives(1)
$
6,281

 
$
(5,945
)
 
$
336

 
$
(299
)
 
$
37

Securities sold under agreement to repurchase
7,606

 
0

 
7,606

 
(7,606
)
 
0

Total liabilities
$
13,887

 
$
(5,945
)
 
$
7,942

 
$
(7,905
)
 
$
37

__________
(1)
Amounts exclude the excess of collateral received/pledged from/to the counterparty.
For information regarding the rights of offset associated with the derivative assets and liabilities in the table above, see “—Counterparty Credit Risk” below. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company’s accounting policy for securities repurchase and resale agreements, see Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2016.
 
Cash Flow, Fair Value and Net Investment Hedges
 
The primary derivative instruments used by the Company in its fair value, cash flow and net investment hedge accounting relationships are interest rate swaps, currency swaps and currency forwards. These instruments are only designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, equity or embedded derivatives in any of its fair value, cash flow or net investment hedge accounting relationships.
The following table provides the financial statement classification and impact of derivatives used in qualifying and non-qualifying hedge relationships, excluding the offset of the hedged item in an effective hedge relationship. 
 
Three Months Ended September 30, 2017
 
Realized
Investment
Gains
(Losses)
 
Net
Investment
Income
 
Other
Income
 
Interest
Expense
 
Interest
Credited To
Policyholders’
Account
Balances
 
AOCI(1)
 
(in millions)
Derivatives Designated as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
$
3

 
$
(4
)
 
$
0

 
$
0

 
$
0

 
$
0

Currency
(2
)
 
0

 
0

 
0

 
0

 
0

Total fair value hedges
1

 
(4
)
 
0

 
0

 
0

 
0

Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
0

 
0

 
0

 
(1
)
 
0

 
1

Currency/Interest Rate
0

 
50

 
(108
)
 
0

 
0

 
(447
)
Total cash flow hedges
0

 
50

 
(108
)
 
(1
)
 
0

 
(446
)
Net investment hedges
 
 
 
 
 
 
 
 
 
 
 
Currency
0

 
0

 
0

 
0

 
0

 
(2
)
Currency/Interest Rate
0

 
0

 
0

 
0

 
0

 
0

Total net investment hedges
0

 
0

 
0

 
0

 
0

 
(2
)
Derivatives Not Qualifying as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
137

 
0

 
0

 
0

 
0

 
0

Currency
(113
)
 
0

 
1

 
0

 
0

 
0

Currency/Interest Rate
(93
)
 
0

 
(2
)
 
0

 
0

 
0

Credit
(8
)
 
0

 
0

 
0

 
0

 
0

Equity
(604
)
 
0

 
0

 
0

 
0

 
0

Commodity
0

 
0

 
0

 
0

 
0

 
0

Embedded Derivatives
1,726

 
0

 
0

 
0

 
0

 
0

Total non-qualifying hedges
1,045

 
0

 
(1
)
 
0

 
0

 
0

Total
$
1,046

 
$
46

 
$
(109
)
 
$
(1
)
 
$
0

 
$
(448
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
Realized
Investment
Gains
(Losses)
 
Net
Investment
Income
 
Other
Income
 
Interest
Expense
 
Interest
Credited to
Policyholders’
Account
Balances
 
AOCI(1)
 
(in millions)
Derivatives Designated as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
$
11

 
$
(15
)
 
$
0

 
$
0

 
$
0

 
$
0

Currency
(4
)
 
0

 
0

 
0

 
0

 
0

Total fair value hedges
7

 
(15
)
 
0

 
0

 
0

 
0

Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
0

 
0

 
0

 
(2
)
 
0

 
5

Currency/Interest Rate
0

 
142

 
(272
)
 
0

 
0

 
(988
)
Total cash flow hedges
0

 
142

 
(272
)
 
(2
)
 
0

 
(983
)
Net investment hedges
 
 
 
 
 
 
 
 
 
 
 
Currency
0

 
0

 
0

 
0

 
0

 
(9
)
Currency/Interest Rate
0

 
0

 
0

 
0

 
0

 
0

Total net investment hedges
0

 
0

 
0

 
0

 
0

 
(9
)
Derivatives Not Qualifying as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
1,101

 
0

 
0

 
0

 
0

 
0

Currency
(121
)
 
0

 
0

 
0

 
0

 
0

Currency/Interest Rate
(233
)
 
0

 
(4
)
 
0

 
0

 
0

Credit
8

 
0

 
0

 
0

 
0

 
0

Equity
(1,761
)
 
0

 
0

 
0

 
0

 
0

Commodity
0

 
0

 
0

 
0

 
0

 
0

Embedded Derivatives
544

 
0

 
0

 
0

 
0

 
0

Total non-qualifying hedges
(462
)
 
0

 
(4
)
 
0

 
0

 
0

Total
$
(455
)
 
$
127

 
$
(276
)
 
$
(2
)
 
$
0

 
$
(992
)
 
 
 
 
 
 
 
 
 
 
 
 

 
Three Months Ended September 30, 2016
 
Realized
Investment
Gains
(Losses)
 
Net
Investment
Income
 
Other
Income
 
Interest
Expense
 
Interest
Credited To
Policyholders’
Account
Balances
 
AOCI(1)
 
(in millions)
Derivatives Designated as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
$
9

 
$
(8
)
 
$
0

 
$
0

 
$
0

 
$
0

Currency
7

 
0

 
0

 
0

 
0

 
0

Total fair value hedges
16

 
(8
)
 
0

 
0

 
0

 
0

Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
0

 
0

 
0

 
(1
)
 
0

 
3

Currency/Interest Rate
0

 
31

 
32

 
0

 
0

 
(208
)
Total cash flow hedges
0

 
31

 
32

 
(1
)
 
0

 
(205
)
Net investment hedges
 
 
 
 
 
 
 
 
 
 
 
Currency
0

 
0

 
0

 
0

 
0

 
(5
)
Currency/Interest Rate
0

 
0

 
0

 
0

 
0

 
0

Total net investment hedges
0

 
0

 
0

 
0

 
0

 
(5
)
Derivatives Not Qualifying as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
340

 
0

 
0

 
0

 
0

 
0

Currency
536

 
0

 
(1
)
 
0

 
0

 
0

Currency/Interest Rate
(199
)
 
0

 
0

 
0

 
0

 
0

Credit
13

 
0

 
0

 
0

 
0

 
0

Equity
(954
)
 
0

 
0

 
0

 
0

 
0

Commodity
0

 
0

 
0

 
0

 
0

 
0

Embedded Derivatives
583

 
0

 
0

 
0

 
0

 
0

Total non-qualifying hedges
319

 
0

 
(1
)
 
0

 
0

 
0

Total
$
335

 
$
23

 
$
31

 
$
(1
)
 
$
0

 
$
(210
)
 
 
 
 
 
 
 
 
 
 
 
 

 
Nine months ended September 30, 2016
 
Realized
Investment
Gains
(Losses)
 
Net
Investment
Income
 
Other
Income
 
Interest
Expense
 
Interest
Credited to
Policyholders’
Account
Balances
 
AOCI(1)
 
(in millions)
Derivatives Designated as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
$
(10
)
 
$
(24
)
 
$
0

 
$
0

 
$
0

 
$
0

Currency
28

 
(1
)
 
0

 
0

 
0

 
0

Total fair value hedges
18

 
(25
)
 
0

 
0

 
0

 
0

Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
0

 
0

 
0

 
(4
)
 
0

 
(7
)
Currency/Interest Rate
0

 
89

 
149

 
0

 
0

 
(65
)
Total cash flow hedges
0

 
89

 
149

 
(4
)
 
0

 
(72
)
Net investment hedges
 
 
 
 
 
 
 
 
 
 
 
Currency
0

 
0

 
0

 
0

 
0

 
(16
)
Currency/Interest Rate
0

 
0

 
0

 
0

 
0

 
0

Total net investment hedges
0

 
0

 
0

 
0

 
0

 
(16
)
Derivatives Not Qualifying as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
8,213

 
0

 
0

 
0

 
0

 
0

Currency
1,104

 
0

 
(4
)
 
0

 
0

 
0

Currency/Interest Rate
(729
)
 
0

 
1

 
0

 
0

 
0

Credit
6

 
0

 
0

 
0

 
0

 
0

Equity
(1,705
)
 
0

 
0

 
0

 
0

 
0

Commodity
(1
)
 
0

 
0

 
0

 
0

 
0

Embedded Derivatives
(3,684
)
 
0

 
0

 
0

 
0

 
0

Total non-qualifying hedges
3,204

 
0

 
(3
)
 
0

 
0

 
0

Total
$
3,222

 
$
64

 
$
146

 
$
(4
)
 
$
0

 
$
(88
)
__________
(1)
Amounts deferred in AOCI.
For the nine months ended September 30, 2017 and 2016, the ineffective portion of derivatives accounted for using hedge accounting was not material to the Company’s results of operations. Also, there were no material amounts reclassified into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging. In addition, there were no instances in which the Company discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.
 
Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:  
 
(in millions)
Balance, December 31, 2016
$
1,316

Net deferred gains/(losses) on cash flow hedges from January 1 to September 30, 2017
(1,021
)
Amount reclassified into current period earnings
38

Balance, September 30, 2017
$
333


 
Using September 30, 2017 values, it is estimated that a pre-tax gain of approximately $151 million will be reclassified from AOCI to earnings during the subsequent twelve months ending September 30, 2018, offset by amounts pertaining to the hedged items. As of September 30, 2017, the Company does not have any qualifying cash flow hedges of forecasted transactions other than those related to the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments. The maximum length of time for which these variable cash flows are hedged is 40 years. Income amounts deferred in AOCI as a result of cash flow hedges are included in “Net unrealized investment gains (losses)” in the Unaudited Interim Consolidated Statements of Comprehensive Income.
 
For effective net investment hedges, the amounts, before applicable taxes, recorded in the cumulative translation adjustment account within AOCI were $528 million and $536 million as of September 30, 2017 and December 31, 2016, respectively.

Credit Derivatives
 
Credit derivatives, where the Company has written credit protection on a single name reference, had outstanding notional amounts of $110 million and $112 million as of September 30, 2017 and December 31, 2016, respectively. These credit derivatives are reported at fair value as an asset of $2 million and an asset of less than $1 million as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, the notional amount of these credit derivatives had the following NAIC ratings: $36 million in NAIC 1; $62 million in NAIC 2; $5 million in NAIC 3; $1 million in NAIC 4; $2 million in NAIC 5; and $4 million in NAIC 6. The Company has also written credit protection on certain index references with notional amounts of $480 million and $50 million as of September 30, 2017 and December 31, 2016, respectively. These credit derivatives are reported at fair value as a liability of $5 million and less than $1 million as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, the notional amount of these credit derivatives had the following NAIC ratings: $50 million in NAIC 1; and $430 million in NAIC 4. NAIC designations are based on the lowest rated single name reference included in the index.
 
The Company’s maximum amount at risk under these credit derivatives equals the aforementioned notional amounts and assumes the value of the underlying referenced securities become worthless. These single name credit derivatives have maturities of less than 3 years, while the credit protection on the index references have maturities of less than 30 years. This excludes a credit derivative related to surplus notes issued by a subsidiary of Prudential Insurance as further disclosed below.
 
The Company had entered into a credit derivative that required the Company to make certain payments in the event of deterioration in the value of the surplus notes issued by a subsidiary of Prudential Insurance. A $12 million payment was made to terminate the credit derivative effective September 14, 2017. As of December 31, 2016, the notional amount of this credit derivative was $500 million and was reported at fair value as a liability of $17 million. No collateral was pledged for this credit derivative.
 
In addition to writing credit protection, the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. As of September 30, 2017 and December 31, 2016, the Company had $193 million and $256 million of outstanding notional amounts reported at fair value as a liability of $6 million and $8 million, respectively.
Counterparty Credit Risk
 
The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial derivative transactions. The Company manages credit risk by (i) entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties governed by master netting agreement as applicable, (ii) trading through a central clearinghouse and over-the-counter (“OTC”), (iii) obtaining collateral, such as cash and securities, when appropriate, and (iv) setting limits on single party credit exposures which are subject to periodic management review. For detailed information on counterparty credit risk, see “—Counterparty Credit Risk” in Note 21 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
 
A majority of the Company’s derivative agreements have zero thresholds which require full collateralization by the party in a liability position. The Company also has derivative agreements with non-zero thresholds; if the Company’s credit rating were to fall below a certain level, the counterparties to the derivative instruments in a net liability position may request full collateralization. In addition, certain of the Company’s derivative agreements with counterparties contain credit-risk related contingent features; if the Company’s credit rating were to fall below a certain level, the counterparties to the derivative instruments could request termination at the then fair value of the derivative resulting in settlement.

As of September 30, 2017, there were no net liability derivative positions with non-zero thresholds and/or downgrading of credit ratings; as such all derivatives have been appropriately collateralized by the Company or the counterparty in accordance with the terms of the derivative agreements.