XML 21 R10.htm IDEA: XBRL DOCUMENT v3.21.2
Derivative Instruments
 6 Months Ended
Jun. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
4.    DERIVATIVES AND HEDGING

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, 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, 2020.
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 value of derivative contracts prior to taking into account the netting effects of master netting agreements and cash collateral.
 June 30, 2021December 31, 2020
Primary Underlying Risk/Instrument TypeGross
Notional		Fair ValueGross
Notional		Fair Value
AssetsLiabilitiesAssetsLiabilities
 (in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate
Foreign Currency Swaps$1,776,996 $34,965 $(54,455)$1,376,290 $23,167 $(82,625)
Total Derivatives Designated as Hedge Accounting Instruments$1,776,996 $34,965 $(54,455)$1,376,290 $23,167 $(82,625)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Futures$3,704,500 $3,152 $(157)$4,597,200 $2,755 $(1,621)
Interest Rate Swaps145,129,090 6,729,984 (11,252,213)131,129,200 12,448,036 (9,540,941)
Interest Rate Options10,048,000 242,653 (164,917)10,198,000 608,538 (178,563)
Interest Rate Forwards115,000 0 (36)75,000 464 0 
Foreign Currency
Foreign Currency Forwards38,424 155 (93)34,988 4 (557)
Currency/Interest Rate
Foreign Currency Swaps315,652 9,050 (4,034)228,117 7,939 (8,440)
Credit
Credit Default Swaps 1,562,750 45,970 0 1,574,173 38,875 (52)
Equity
Equity Futures4,236,011 5,994 (3,497)5,558,882 9,424 (24,688)
Total Return Swaps18,299,916 125,066 (414,104)22,121,729 62,362 (1,162,907)
Equity Options46,104,348 778,328 (1,255,690)23,856,379 1,617,672 (952,452)
Total Derivatives Not Qualifying as Hedge Accounting Instruments$229,553,691 $7,940,352 $(13,094,741)$199,373,668 $14,796,069 $(11,870,221)
Total Derivatives(1)(2)$231,330,687 $7,975,317 $(13,149,196)$200,749,958 $14,819,236 $(11,952,846)

(1)Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks. The fair value of these embedded derivatives was a net liability of $12,530 million and $17,314 million as of June 30, 2021 and December 31, 2020, respectively included in “Future policy benefits” and $1,361 million and $580 million as of June 30, 2021 and December 31, 2020, respectively included in “Policyholders’ account balances". Other assets included $68 million and $54 million as of June 30, 2021 and December 31, 2020, respectively. Other liabilities included $31 million and $35 million as of June 30, 2021 and December 31, 2020, respectively. The fair value of the related reinsurance, included in "Reinsurance recoverables" and/or "Reinsurance payables" was an asset of $366 million and $471 million as of June 30, 2021 and December 31, 2020, respectively.
(2)Recorded in “Other invested assets”, “Other liabilities”, and "Payables to parent and affiliates" on the Unaudited Interim Statements of Financial Position.
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, 2021
 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$7,975,317 $(7,669,767)$305,550 $0 $305,550 
Securities purchased under agreements to resell0 0 0 0 0 
Total Assets$7,975,317 $(7,669,767)$305,550 $0 $305,550 
Offsetting of Financial Liabilities:
Derivatives$13,149,196 $(13,147,675)$1,521 $(1,521)$0 
Securities sold under agreements to repurchase0 0 0 0 0 
Total Liabilities$13,149,196 $(13,147,675)$1,521 $(1,521)$0 
 December 31, 2020
 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$14,819,236 $(14,624,985)$194,251 $0 $194,251 
Securities purchased under agreements to resell150,000 0 150,000 (150,000)0 
Total Assets$14,969,236 $(14,624,985)$344,251 $(150,000)$194,251 
Offsetting of Financial Liabilities:
Derivatives$11,952,846 $(11,936,059)$16,787 $(16,787)$0 
Securities sold under agreements to repurchase0 0 0 0 0 
Total Liabilities$11,952,846 $(11,936,059)$16,787 $(16,787)$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, 2020.

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, or equity 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, 2021
 Realized
Investment
Gains (Losses)		Net
Investment
Income		Other Income (Loss)AOCI(1)
 (in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate$2,837 $4,219 $(1,070)$22,293 
Total cash flow hedges2,837 4,219 (1,070)22,293 
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate1,955,222 0 0 0 
Currency109 0 0 0 
Currency/Interest Rate7,002 0 (20)0 
Credit7,036 0 0 0 
Equity(850,347)0 0 0 
Embedded Derivatives(1,934,083)0 0 0 
Total Derivatives Not Qualifying as Hedge Accounting Instruments:(815,061)0 (20)0 
Total$(812,224)$4,219 $(1,090)$22,293 

Six Months Ended June 30, 2021
 Realized
Investment
Gains (Losses)		Net
Investment
Income		Other Income (Loss)AOCI(1)
 (in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate$4,242 $8,558 $5,502 $25,290 
Total cash flow hedges4,242 8,558 5,502 25,290 
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate(1,789,620)0 0 0 
Currency154 0 0 0 
Currency/Interest Rate10,228 0 (36)0 
Credit9,360 0 0 0 
Equity(1,779,968)0 0 0 
Embedded Derivatives4,778,940 0 0 0 
Total Derivatives Not Qualifying as Hedge Accounting Instruments:1,229,094 0 (36)0 
Total$1,233,336 $8,558 $5,466 $25,290 
Three Months Ended June 30, 2020
 Realized
Investment
Gains (Losses)		Net
Investment
Income		Other Income (Loss)AOCI(1)
 (in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate$2,712 $4,668 $(9,648)$(34,394)
Total cash flow hedges2,712 4,668 (9,648)(34,394)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate(79,874)0 0 0 
Currency57 0 0 0 
Currency/Interest Rate(11,767)0 (2)0 
Credit1,629 0 0 0 
Equity(4,830,379)0 0 0 
Embedded Derivatives1,531,563 0 0 0 
Total Derivatives Not Qualifying as Hedge Accounting Instruments:(3,388,771)0 (2)0 
Total$(3,386,059)$4,668 $(9,650)$(34,394)

Six Months Ended June 30, 2020
 Realized
Investment
Gains (Losses)		Net
Investment
Income		Other Income (Loss)AOCI(1)
 (in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate$4,567 $8,928 $7,295 $68,462 
Total cash flow hedges4,567 8,928 7,295 68,462 
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate6,970,027 0 0 0 
Currency1,087 0 0 0 
Currency/Interest Rate30,082 0 69 0 
Credit(5,528)0 0 0 
Equity184,909 0 0 0 
Embedded Derivatives(11,335,743)0 0 0 
Total Derivatives Not Qualifying as Hedge Accounting Instruments:(4,155,166)0 69 0 
Total$(4,150,599)$8,928 $7,364 $68,462 

(1)Net change in AOCI.
Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:
 (in thousands)
Balance, December 31, 2020$(43,000)
Amount recorded in AOCI
Currency/Interest Rate43,592 
Total amount recorded in AOCI43,592 
Amount reclassified from AOCI to income
Currency/Interest Rate(18,302)
Total amount reclassified from AOCI to income(18,302)
Balance, June 30, 2021$(17,710)

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, 2021 values, it is estimated that a pre-tax gain of $19 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending June 30, 2022.

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

Credit derivatives, where the Company has written credit protection on certain index references, had outstanding notional amounts of $1,563 million and $1,568 million as of June 30, 2021 and December 31, 2020, respectively. These credit derivatives are reported at fair value as an asset of $46 million and $39 million as of June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021 the notional amount of these credit derivatives had the following NAIC rating: $1,488 million in NAIC 3 and $75 million in NAIC 6.

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 million and $6 million reported as of June 30, 2021 and December 31, 2020, respectively, with a fair value of $0 million for both periods.

Counterparty Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by counterparties 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.