Derivative Instruments

3 Months Ended

Mar. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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, 2021.

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.


	March 31, 2022						December 31, 2021
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	$	527,122	$	34,878	$	0	$	637,001	$	29,028	$	(1,372)
Total Derivatives Designated as Hedge Accounting Instruments	$	527,122	$	34,878	$	0	$	637,001	$	29,028	$	(1,372)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Futures	$	0	$	0	$	0	$	55,000	$	34	$	0
Interest Rate Swaps	10,513,400		117,862		(657,789)		10,520,230		338,731		(255,434)
Interest Rate Options	0		0		0		0		0		0
Interest Rate Forwards	0		0		0		0		0		0
Foreign Currency
Foreign Currency Forwards	44,567		607		(1,250)		50,346		370		(536)
Currency/Interest Rate
Foreign Currency Swaps	208,153		4,295		(1,373)		208,153		9,711		(826)
Credit
Credit Default Swaps	75,000		4,146		0		1,745,550		48,147		0
Equity
Equity Futures	2,067,205		22,169		0		855,432		892		(1,016)
Total Return Swaps	1,324,946		46		(32,225)		4,802,777		87,832		(80,808)
Equity Options	24,044,449		1,286,065		(1,117,154)		20,581,951		963,164		(1,028,221)
Total Derivatives Not Qualifying as Hedge Accounting Instruments	$	38,277,720	$	1,435,190	$	(1,809,791)	$	38,819,439	$	1,448,881	$	(1,366,841)
Total Derivatives(1)(2)	$	38,804,842	$	1,470,068	$	(1,809,791)	$	39,456,440	$	1,477,909	$	(1,368,213)

(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 $3,393 million and $4,060 million as of March 31, 2022 and December 31, 2021, respectively included in “Future policy benefits” and $1,933 million and $2,041 million as of March 31, 2022 and December 31, 2021, respectively included in “Policyholders’ account balances". Other assets included $377 million and $400 million as of March 31, 2022 and December 31, 2021, respectively. The fair value of the related reinsurance, included in "Reinsurance recoverables" and/or "Reinsurance payables" was an asset of $1,866 million and $1,881 million as of March 31, 2022 and December 31, 2021, 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.


	March 31, 2022
	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	$	1,470,068	$	(1,098,964)	$	371,104	$	(80,145)	$	290,959
Securities purchased under agreements to resell	0		0		0		0		0
Total Assets	$	1,470,068	$	(1,098,964)	$	371,104	$	(80,145)	$	290,959
Offsetting of Financial Liabilities:
Derivatives	$	1,809,791	$	(1,809,791)	$	0	$	0	$	0
Securities sold under agreements to repurchase	0		0		0		0		0
Total Liabilities	$	1,809,791	$	(1,809,791)	$	0	$	0	$	0


	December 31, 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	$	1,477,909	$	(1,474,780)	$	3,129	$	0	$	3,129
Securities purchased under agreements to resell	0		0		0		0		0
Total Assets	$	1,477,909	$	(1,474,780)	$	3,129	$	0	$	3,129
Offsetting of Financial Liabilities:
Derivatives	$	1,368,213	$	(1,153,610)	$	214,603	$	(214,603)	$	0
Securities sold under agreements to repurchase	0		0		0		0		0
Total Liabilities	$	1,368,213	$	(1,153,610)	$	214,603	$	(214,603)	$	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, 2021.

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 March 31, 2022
	Realized Investment Gains (Losses)		Net Investment Income		Other Income (Loss)		Change in AOCI
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	1,257	$	1,489	$	2,232	$	4,100
Total cash flow hedges	1,257		1,489		2,232		4,100
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(526,657)		0		0		0
Currency	(269)		0		0		0
Currency/Interest Rate	(5,790)		0		19		0
Credit	(11,751)		0		0		0
Equity	58,545		0		0		0
Embedded Derivatives	986,370		0		0		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	500,448		0		19		0
Total	$	501,705	$	1,489	$	2,251	$	4,100


	Three Months Ended March 31, 2021
	Realized Investment Gains (Losses)		Net Investment Income		Other Income (Loss)		Change in AOCI
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	1,405	$	4,339	$	6,572	$	2,997
Total cash flow hedges	1,405		4,339		6,572		2,997
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(3,744,843)		0		0		0
Currency	45		0		0		0
Currency/Interest Rate	3,227		0		(16)		0
Credit	2,323		0		0		0
Equity	(929,620)		0		0		0
Embedded Derivatives	6,713,023		0		0		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	2,044,155		0		(16)		0
Total	$	2,045,560	$	4,339	$	6,556	$	2,997

Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:


	(in thousands)
Balance, December 31, 2021	$	24,543
Amount recorded in AOCI


Currency/Interest Rate	9,076
Total amount recorded in AOCI	9,076
Amount reclassified from AOCI to income


Currency/Interest Rate	(4,977)
Total amount reclassified from AOCI to income	(4,977)
Balance, March 31, 2022	$	28,642

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, 2022 values, it is estimated that a pre-tax gain of $6 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending March 31, 2023.

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 $75 million and $1,746 million as of March 31, 2022 and December 31, 2021, respectively. These credit derivatives are reported at fair value as an asset of $4 million and $48 million as of March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022 the notional amount of these credit derivatives had the following NAIC rating: $75 million in NAIC 3.

The Company has no exposure from credit derivative positions where it has purchased credit protection as of March 31, 2022 and December 31, 2021.

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.