Derivative Instruments

6 Months Ended

Jun. 30, 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 the 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 value of derivative contracts prior to taking into account the netting effects of master netting agreements, cash collateral and NPR.

	June 30, 2019							December 31, 2018
Primary Underlying Risk/Instrument Type	Gross Notional		Fair Value					Gross Notional		Fair Value
			Assets		Liabilities					Assets		Liabilities
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate
Foreign Currency Swaps	$	897,338	$	39,547	$	(20,748	)	$	768,075	$	33,348	$	(21,794	)
Total Derivatives Designated as Hedge Accounting Instruments	$	897,338	$	39,547	$	(20,748	)	$	768,075	$	33,348	$	(21,794	)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Futures	$	4,094,800	$	0	$	(1,470	)	$	908,100	$	4,380	$	(664	)
Interest Rate Swaps	86,329,325		5,976,912		(1,782,753		)	82,172,825		3,344,033		(1,395,270		)
Interest Rate Options	17,905,000		315,214		(192,825		)	19,255,000		139,765		(245,523		)
Interest Rate Forwards	293,076		17,348		0			1,713,947		56,562		(1,976		)
Foreign Currency
Foreign Currency Forwards	17,092		324		(62		)	19,467		287		(27		)
Currency/Interest Rate
Foreign Currency Swaps	210,641		14,595		(1,446		)	231,245		11,659		(2,850		)
Credit
Credit Default Swaps	100,000		3,850		(94		)	0		0		0
Equity
Equity Futures	1,191,402		276		(4,902		)	860,718		0		(6,629		)
Total Return Swaps	14,921,377		29,847		(271,467		)	14,456,836		986,130		(53,235		)
Equity Options	26,176,838		247,112		(413,442		)	26,861,807		271,630		(412,821		)
Total Derivatives Not Qualifying as Hedge Accounting Instruments	$	151,239,551	$	6,605,478	$	(2,668,461	)	$	146,479,945	$	4,814,446	$	(2,118,995	)
Total Derivatives(1)(2)	$	152,136,889	$	6,645,025	$	(2,689,209	)	$	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 $11,738 million and $8,332 million as of June 30, 2019 and December 31, 2018, respectively. The fair value of the related reinsurance recoverables to Prudential Insurance was a net asset of $300 million and $234 million as of June 30, 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 $40 million and $6 million as of June 30, 2019 and December 31, 2018, respectively.

The fair value of the embedded derivatives, included in "Policyholders' account balances", was a net liability of $121 million and $42 million as of June 30, 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.

	June 30, 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)	$	6,645,025	$	(6,645,023	)	$	2	$	0		$	2
Securities purchased under agreements to resell	835,000		0			835,000		(835,000		)	0
Total Assets	$	7,480,025	$	(6,645,023	)	$	835,002	$	(835,000	)	$	2
Offsetting of Financial Liabilities:
Derivatives(1)	$	2,689,209	$	(2,524,326	)	$	164,883	$	(624	)	$	164,259
Securities sold under agreements to repurchase	0		0			0		0			0
Total Liabilities	$	2,689,209	$	(2,524,326	)	$	164,883	$	(624	)	$	164,259

	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 June 30, 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	$	(399	)	$	2,977	$	1,956	$	1,882
Total cash flow hedges	(399		)	2,977		1,956		1,882
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	1,764,300			0		0		0
Currency	435			0		0		0
Currency/Interest Rate	6,784			0		17		0
Credit	1,579			0		0		0
Equity	(583,113		)	0		0		0
Embedded Derivatives	(2,080,538		)	0		0		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	(890,553		)	0		17		0
Total	$	(890,952	)	$	2,977	$	1,973	$	1,882

	Six Months Ended June 30, 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	$	(720	)	$	5,710	$	398	$	3,505
Total cash flow hedges	(720		)	5,710		398		3,505
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	2,756,745			0		0		0
Currency	248			0		0		0
Currency/Interest Rate	8,616			0		20		0
Credit	1,577			0		0		0
Equity	(2,233,223		)	0		0		0
Embedded Derivatives	(2,765,123		)	0		0		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	(2,231,160		)	0		20		0
Total	$	(2,231,880	)	$	5,710	$	418	$	3,505

	Three Months Ended June 30, 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	$	160		$	2,085	$	10,483	$	14,699
Total cash flow hedges	160			2,085		10,483		14,699
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(404,238		)	0		0		0
Currency	794			0		0		0
Currency/Interest Rate	17,228			0		84		0
Credit	0			0		0		0
Equity	(251,520		)	0		0		0
Embedded Derivatives	631,111			0		0		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	(6,625		)	0		84		0
Total	$	(6,465	)	$	2,085	$	10,567	$	14,699

	Six Months Ended June 30, 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	$	(678	)	$	3,700	$	6,489	$	1,727
Total cash flow hedges	(678		)	3,700		6,489		1,727
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(1,588,033		)	0		0		0
Currency	324			0		0		0
Currency/Interest Rate	4,734			0		29		0
Credit	0			0		0		0
Equity	(239,454		)	0		0		0
Embedded Derivatives	2,449,762			0		0		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	627,333			0		29		0
Total	$	626,655		$	3,700	$	6,518	$	1,727

(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	8,893
Total amount recorded in AOCI	8,893
Amount reclassified from AOCI to income
Currency/Interest Rate	(5,388		)
Total amount reclassified from AOCI to income	(5,388		)
Balance, June 30, 2019	$	(302	)

(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 June 30, 2019 values, it is estimated that a pre-tax gain of $12 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending June 30, 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 written credit protection on certain index references with notional amounts of $100 million and $0.0 million as of June 30, 2019 and December 31, 2018, respectively. These credit derivatives are reported at fair value as an asset of $4 million and $0.0 million as of June 30, 2019 and December 31, 2018. As of June 30, 2019, the notional amount of these credit derivatives had the following NAIC ratings: $50 million in NAIC 3 and $50 million in NAIC 6.

The Company has no exposure from credit derivative positions where it has purchased credit protection as of June 30, 2019 and December 31, 2018.

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