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 derivative 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: futures, options and total return swaps

•Foreign exchange contracts: futures, options, forwards and swaps

•Credit contracts: single and index reference credit default swaps

•Other contracts: embedded derivatives

For detailed information on these contracts and the related strategies, see Note 11 to the 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 which are recorded with the associated host and related 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 held with the same counterparty, and non-performance risk.

	September 30, 2017							December 31, 2016
			Gross Fair Value							Gross Fair Value
Primary Underlying	Notional		Assets		Liabilities			Notional		Assets		Liabilities
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate
Foreign Currency Swaps	$	626,315	$	18,743	$	(35,244	)	$	472,701	$	38,249	$	(2,776	)
Total Qualifying Hedges	$	626,315	$	18,743	$	(35,244	)	$	472,701	$	38,249	$	(2,776	)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Futures	$	2,034,000	$	7,982	$	0		$	2,474,000	$	23,967	$	0
Interest Rate Swaps	88,985,926		4,519,412		(1,062,495		)	81,872,695		4,439,270		(1,163,388		)
Interest Rate Options	13,010,000		186,644		(99,906		)	10,825,000		278,763		(135,554		)
Interest Rate Forwards	1,198,032		1,425		(5,168		)	498,311		0		(25,082		)
Foreign Currency
Foreign Currency Forwards	9,525		1		(283		)	1,491		6		0
Currency/Interest Rate
Foreign Currency Swaps	144,334		8,840		(5,588		)	130,470		16,627		(635		)
Equity
Equity Futures	0		0		0			1,269,044		0		(5,051		)
Total Return Swaps	11,602,226		1,384		(284,030		)	12,784,166		69,827		(281,193		)
Equity Options	6,185,001		234,899		(167,987		)	4,610,001		29,650		(45,732		)
Total Non-Qualifying Hedges	$	123,169,044	$	4,960,587	$	(1,625,457	)	$	114,465,178	$	4,858,110	$	(1,656,635	)
Total Derivatives (1)	$	123,795,359	$	4,979,330	$	(1,660,701	)	$	114,937,879	$	4,896,359	$	(1,659,411	)

(1) Excludes embedded derivatives and the related reinsurance recoverables which contain multiple underlyings.

Based on notional amounts, most of the Company’s derivatives do not qualify for hedge accounting. 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.

The fair value of the embedded derivatives, included in "Future policy benefits," was a net liability of $7,999 million and $7,707 million as of September 30, 2017 and December 31, 2016, respectively. The fair value of the related reinsurance recoverables was an asset of $232 million and $231 million as of September 30, 2017 and December 31, 2016, respectively, included in "Reinsurance recoverables". See Note 7 for additional information on these reinsurance agreements.

The fair value of the embedded derivatives pertaining to the variable annuity products with a market value adjustment option assumed from Pruco Life as part of the Variable Annuities Recapture, included in "Reinsurance payables," was a net asset of $10 million as of both September 30, 2017 and December 31, 2016.

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 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 Statements of Financial Position.

	September 30, 2017
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statement of Financial Position			Net Amounts Presented in the Statement of Financial Position		Financial Instruments/ Collateral(1)		Net Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives	$	4,979,330	$	(4,970,040	)	$	9,290	$	0	$	9,290
Securities purchased under agreements to resell	0		0			0		0		0
Total Assets	$	4,979,330	$	(4,970,040	)	$	9,290	$	0	$	9,290
Offsetting of Financial Liabilities:
Derivatives	$	1,660,701	$	(1,660,701	)	$	0	$	0	$	0

	December 31, 2016
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statement of Financial Position			Net Amounts Presented in the Statement of Financial Position		Financial Instruments/ Collateral(1)			Net Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives	$	4,872,392	$	(4,582,540	)	$	289,852	$	0		$	289,852
Securities purchased under agreements to resell	255,000		0			255,000		(255,000		)	0
Total Assets	$	5,127,392	$	(4,582,540	)	$	544,852	$	(255,000	)	$	289,852
Offsetting of Financial Liabilities:
Derivatives	$	1,654,360	$	(1,654,360	)	$	0	$	0		$	0

(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 “Credit Risk” below and Note 9.

Cash Flow Hedges

The primary derivative instruments used by the Company in its cash flow hedge accounting relationships are currency swaps. 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 cash flow hedge accounting relationships.

The following tables provide 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			AOCI(1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	1,678	$	(3,496	)	$	(12,020	)
Total cash flow hedges	0			1,678		(3,496		)	(12,020		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	52,535			0		0			0
Currency	(230		)	0		0			0
Currency/Interest Rate	(11,358		)	0		(314		)	0
Equity	(453,516		)	0		0			0
Embedded Derivatives	1,585,732			0		0			0
Total non-qualifying hedges	1,173,163			0		(314		)	0
Total	$	1,173,163		$	1,678	$	(3,810	)	$	(12,020	)

	Nine Months Ended September 30, 2017
	Realized Investment Gains (Losses)			Net Investment Income		Other Income			AOCI(1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	4,523	$	(9,308	)	$	(27,143	)
Total cash flow hedges	0			4,523		(9,308		)	(27,143		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	618,534			0		0			0
Currency	(307		)	0		0			0
Currency/Interest Rate	(22,712		)	0		(592		)	0
Equity	(1,468,601		)	0		0			0
Embedded Derivatives	550,630			0		0			0
Total non-qualifying hedges	(322,456		)	0		(592		)	0
Total	$	(322,456	)	$	4,523	$	(9,900	)	$	(27,143	)

	Three Months Ended September 30, 2016
	Realized Investment Gains (Losses)			Net Investment Income		Other Income		AOCI(1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	909	$	179	$	(6,351	)
Total cash flow hedges	0			909		179		(6,351		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	265,560			0		0		0
Currency	(136		)	0		0		0
Currency/Interest Rate	(5,303		)	0		65		0
Equity	(859,560		)	0		0		0
Embedded Derivatives	554,300			0		0		0
Total non-qualifying hedges	(45,139		)	0		65		0
Total	$	(45,139	)	$	909	$	244	$	(6,351	)

	Nine Months Ended September 30, 2016
	Realized Investment Gains (Losses)			Net Investment Income		Other Income		AOCI(1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0		$	1,954	$	5,724	$	(7,108	)
Total cash flow hedges	0			1,954		5,724		(7,108		)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	2,817,119			0		0		0
Currency	(15		)	0		0		0
Currency/Interest Rate	2,568			0		271		0
Equity	(1,346,122		)	0		0		0
Embedded Derivatives	(4,064,100		)	0		0		0
Total non-qualifying hedges	(2,590,550		)	0		271		0
Total	$	(2,590,550	)	$	1,954	$	5,995	$	(7,108	)

(1) Amounts deferred in AOCI.

For both the three and 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.

Presented below is a rollforward of current period cash flow hedges in “Accumulated other comprehensive income (loss)” before taxes:

	(in thousands)
Balance, December 31, 2016	$	11,745
Net deferred gains (losses) on cash flow hedges from January 1 to September 30, 2017	(29,004		)
Amounts reclassified into current period earnings	1,861
Balance, September 30, 2017	$	(15,398	)

Using September 30, 2017 values, it is estimated that a pre-tax gain of approximately $6 million will be reclassified from AOCI to earnings during the subsequent twelve months ending September 30,2018, offset by amounts pertaining to the hedged item. As of September 30, 2017, the Company did 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 18 years. Income amounts deferred in AOCI as a result of cash flow hedges are included in "Net unrealized investment gains (losses)" within OCI in the Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

Credit Derivatives

The Company has no exposure from credit derivative positions where it has written or purchased credit protection as of September 30, 2017 and December 31, 2016.

Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by counterparty to financial derivative transactions. The Company has credit risk exposure to an affiliate, Prudential Global Funding, LLC (“PGF”), related to its OTC derivative transactions. PGF manages credit risk with external counterparties by entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties, and by obtaining collateral, such as cash and securities, when appropriate. Additionally, limits are set on single party credit exposures which are subject to periodic management review.

Under fair value measurements, the Company incorporates the market’s perception of its own and the counterparty’s non-performance risk in determining the fair value of the portion of its OTC derivative assets and liabilities that are uncollateralized. Credit spreads are applied to the derivative fair values on a net basis by counterparty. To reflect the Company’s own credit spread, a proxy based on relevant debt spreads is applied to OTC derivative net liability positions. Similarly, the Company’s counterparty’s credit spread is applied to OTC derivative net asset positions.