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Derivative Instruments
 3 Months Ended
Mar. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments 4.    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: futures, swaps, forwards, 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 types of financial contracts that the Company accounts for as derivatives include:
•Embedded derivatives

For detailed information on these contracts and the related strategies, see Note 4 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Primary Risks Managed by Derivatives

The table below provides a summary of the gross notional amount and fair value of derivative contracts by the primary underlying risks, excluding embedded derivatives and associated reinsurance recoverables. Many derivative instruments contain multiple underlying risks. 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.
 
 
March 31, 2019
 
December 31, 2018
Primary Underlying Risk/Instrument Type
 
 
 
Gross Fair Value
 
 
 
Gross Fair Value
 
Notional
 
Assets
 
Liabilities
 
Notional
 
Assets
 
Liabilities
 
 
(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Currency/Interest Rate
 
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Swaps
 
$
838,657

 
$
33,158

 
$
(20,530
)
 
$
768,075

 
$
33,348

 
$
(21,794
)
Total Derivatives Designated as Hedge Accounting Instruments
 
$
838,657

 
$
33,158

 
$
(20,530
)
 
$
768,075

 
$
33,348

 
$
(21,794
)
Derivatives Not Qualifying as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Futures
 
$
2,867,600

 
$
463

 
$
(7,020
)
 
$
908,100

 
$
4,380

 
$
(664
)
Interest Rate Swaps
 
86,415,325

 
3,904,603

 
(1,093,824
)
 
82,172,825

 
3,344,033

 
(1,395,270
)
Interest Rate Options
 
18,435,000

 
159,096

 
(268,250
)
 
19,255,000

 
139,765

 
(245,523
)
Interest Rate Forwards
 
501,438

 
29,715

 
0

 
1,713,947

 
56,562

 
(1,976
)
Foreign Currency
 
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Forwards
 
20,058

 
154

 
(55
)
 
19,467

 
287

 
(27
)
Currency/Interest Rate
 
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Swaps
 
216,835

 
10,332

 
(1,580
)
 
231,245

 
11,659

 
(2,850
)
Credit
 
 
 
 
 
 
 
 
 
 
 
 
Credit Default Swaps
 
100

 
0

 
(2
)
 
0

 
0

 
0

Equity
 
 
 
 
 
 
 
 
 
 
 
 
Equity Futures
 
1,188,970

 
0

 
(6,867
)
 
860,718

 
0

 
(6,629
)
Total Return Swaps
 
14,958,889

 
69,834

 
(519,910
)
 
14,456,836

 
986,130

 
(53,235
)
Equity Options
 
27,295,620

 
260,594

 
(342,643
)
 
26,861,807

 
271,630

 
(412,821
)
Total Derivatives Not Qualifying as Hedge Accounting Instruments
 
$
151,899,835

 
$
4,434,791

 
$
(2,240,151
)
 
$
146,479,945

 
$
4,814,446

 
$
(2,118,995
)
Total Derivatives(1)(2)
 
$
152,738,492

 
$
4,467,949

 
$
(2,260,681
)
 
$
147,248,020

 
$
4,847,794

 
$
(2,140,789
)

(1)
Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks.
(2)
Recorded in “Other invested assets”, “Other liabilities”, and "Payables to parent and affiliates" on the Unaudited Interim Statements of Financial Position.

The fair value of the embedded derivatives, included in "Future policy benefits", was a net liability of $9,317 million and $8,332 million as of March 31, 2019 and December 31, 2018, respectively. The fair value of the related reinsurance recoverables to Prudential Insurance was a net asset of $250 million and $234 million as of March 31, 2019 and December 31, 2018, respectively, included in "Reinsurance recoverables". See Note 6 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, included in "Reinsurance recoverables" or "Reinsurance payables", was a net asset of $34 million and $6 million as of March 31, 2019 and December 31, 2018, respectively.

The fair value of the embedded derivatives, included in "Policyholders' account balances", was a net liability of $81 million and $42 million as of March 31, 2019 and December 31, 2018, respectively, with no related reinsurance recoverables.

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.
 
March 31, 2019
 
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 thousands)
Offsetting of Financial Assets:
 
 
 
 
 
 
 
 
 
Derivatives(1)
$
4,467,949

 
$
(4,467,947
)
 
$
2

 
$
0

 
$
2

Securities purchased under agreements to resell
1,003,000

 
0

 
1,003,000

 
(1,003,000
)
 
0

Total Assets
$
5,470,949

 
$
(4,467,947
)
 
$
1,003,002

 
$
(1,003,000
)
 
$
2

Offsetting of Financial Liabilities:
 
 
 
 
 
 
 
 
 
Derivatives(1)
$
2,260,681

 
$
(2,095,054
)
 
$
165,627

 
$
(66,349
)
 
$
99,278

Securities sold under agreements to repurchase
0

 
0

 
0

 
0

 
0

Total Liabilities
$
2,260,681

 
$
(2,095,054
)
 
$
165,627

 
$
(66,349
)
 
$
99,278


 
December 31, 2018
 
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 thousands)
Offsetting of Financial Assets:
 
 
 
 
 
 
 
 
 
Derivatives(1)
$
4,847,794

 
$
(4,804,816
)
 
$
42,978

 
$
0

 
$
42,978

Securities purchased under agreements to resell
675,000

 
0

 
675,000

 
(675,000
)
 
0

Total Assets
$
5,522,794

 
$
(4,804,816
)
 
$
717,978

 
$
(675,000
)
 
$
42,978

Offsetting of Financial Liabilities:
 
 
 
 
 
 
 
 
 
Derivatives(1)
$
2,140,789

 
$
(2,134,160
)
 
$
6,629

 
$
(6,629
)
 
$
0

Securities sold under agreements to repurchase
0

 
0

 
0

 
0

 
0

Total Liabilities
$
2,140,789

 
$
(2,134,160
)
 
$
6,629

 
$
(6,629
)
 
$
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. 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 Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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 March 31, 2019
 
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
$
(321
)
 
$
2,733

 
$
(1,559
)
 
$
1,623

Total cash flow hedges
(321
)
 
2,733

 
(1,559
)
 
1,623

Derivatives Not Qualifying as Hedge Accounting Instruments:
 
 
 
 
 
 
 
Interest Rate
992,444

 
0

 
0

 
0

Currency
(186
)
 
0

 
0

 
0

Currency/Interest Rate
1,831

 
0

 
3

 
0

Credit
(1
)
 
0

 
0

 
0

Equity
(1,650,110
)
 
0

 
0

 
0

Embedded Derivatives
(684,585
)
 
0

 
0

 
0

Total Derivatives Not Qualifying as Hedge Accounting Instruments:
(1,340,607
)
 
0

 
3

 
0

Total
$
(1,340,928
)
 
$
2,733

 
$
(1,556
)
 
$
1,623

 
Three Months Ended March 31, 2018(2)
 
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
$
(838
)
 
$
1,615

 
$
(3,994
)
 
$
(12,971
)
Total cash flow hedges
(838
)
 
1,615

 
(3,994
)
 
(12,971
)
Derivatives Not Qualifying as Hedge Accounting Instruments:
 
 
 
 
 
 
 
Interest Rate
(1,183,795
)
 
0

 
0

 
0

Currency
(470
)
 
0

 
0

 
0

Currency/Interest Rate
(12,494
)
 
0

 
(55
)
 
0

Equity
12,066

 
0

 
0

 
0

Embedded Derivatives
1,818,651

 
0

 
0

 
0

Total Derivatives Not Qualifying as Hedge Accounting Instruments:
633,958

 
0

 
(55
)
 
0

Total
$
633,120

 
$
1,615

 
$
(4,049
)
 
$
(12,971
)

(1)
Net change in AOCI.
(2)
Prior period amounts have been updated to conform to current period presentation.

Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:
 
(in thousands)
Balance, December 31, 2018
$
(3,849
)
Cumulative-effect adjustment from the adoption of ASU 2017-12(1)
42

Amount recorded in AOCI
 
Currency/Interest Rate
2,476

Total amount recorded in AOCI
2,476

Amount reclassified from AOCI to income
 
Currency/Interest Rate
(853
)
Total amount reclassified from AOCI to income
(853
)
Balance, March 31, 2019
$
(2,184
)

(1) See Note 2 for details.

The changes in fair value of cash flow hedges are deferred in AOCI and are included in "Net unrealized investment gains (losses)" in the Unaudited Interim Statements of Operations and Comprehensive Income (Loss); these amounts are then reclassified to earnings when the hedged item affects earnings. Using March 31, 2019 values, it is estimated that a pre-tax gain of $11 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending March 31, 2020, offset by amounts pertaining to the hedged items.

The exposures the Company is hedging with these qualifying cash flow hedges include the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments.

There were no material amounts reclassified from AOCI 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.

Credit Derivatives

The Company has no exposure from credit derivative positions where it has written credit protection as of March 31, 2019 and December 31, 2018.

The Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. The Company has outstanding notional amounts of $0.1 million and $0.0 million reported as of March 31, 2019 and December 31, 2018 respectively with a fair value of $0.0 million for both periods.

Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by counterparty to financial derivative transactions with a positive fair value. The Company manages credit risk by entering into derivative transactions with its affiliate, Prudential Global Funding, LLC (“PGF”), related to its over-the-counter ("OTC") derivatives. PGF, in turn, manages its 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 central clearing and OTC parties; (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.

Substantially all of the Company’s derivative agreements have zero thresholds which require daily full collateralization by the party in a liability position