1. BUSINESS AND BASIS OF PRESENTATION
Pruco Life Insurance Company, (“Pruco Life”) is a wholly-owned subsidiary of The Prudential Insurance Company of America (“Prudential Insurance”), which in turn is a direct wholly-owned subsidiary of Prudential Financial, Inc. (“Prudential Financial”). Pruco Life is a stock life insurance company organized in 1971 under the laws of the State of Arizona. It is licensed to sell life insurance and annuities in the District of Columbia, Guam and in all states except New York, and sells such products primarily through affiliated and unaffiliated distributors.
Pruco Life has one wholly-owned insurance subsidiary, Pruco Life Insurance Company of New Jersey, (“PLNJ”). PLNJ is a stock life insurance company organized in 1982 under the laws of the State of New Jersey. It is licensed to sell life insurance and annuities in New Jersey and New York only. Pruco Life and its subsidiary are together referred to as the "Company", "we" or "our" and all financial information is shown on a consolidated basis.
Basis of Presentation
The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). Intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining deferred policy acquisition cost ("DAC") and related amortization; policyholders' account balances related to the fair value of embedded derivative instruments associated with the index-linked features of certain universal life products; valuation of investments including derivatives, measurement of allowance for credit losses, and the recognition of other-than-temporary impairments ("OTTI"); future policy benefits including guarantees; reinsurance recoverables; provision for income taxes and valuation of deferred tax assets; and accruals for contingent liabilities, including estimates for losses in connection with unresolved legal and regulatory matters.
COVID-19
Beginning in the first quarter of 2020, the outbreak of the novel coronavirus (“COVID-19”) has resulted in extreme stress and disruption in the global economy and financial markets, and has adversely impacted, and may continue to adversely impact, the Company’s results of operations, financial condition and cash flows. Due to the highly uncertain nature of these conditions, it is not possible to estimate the ultimate impacts at this time. The risks may have manifested, and may continue to manifest, in the Company’s financial statements in the areas of, among others, i) investments: increased risk of loss on the Company's investments due to default or deterioration in credit quality or value; and ii) insurance liabilities and related balances: potential changes to assumptions regarding investment returns, mortality and policyholder behavior which are reflected in the Company's insurance liabilities and certain related balances (e.g., DAC, etc.). The Company cannot predict what impact the COVID-19 pandemic will ultimately have on the global economy, markets or its businesses.
Out of Period Adjustment
During the third quarter of 2020, the Company recorded an out of period adjustment which resulted in a net decrease of $7 million to "Income (loss) from operations before income taxes and equity in earnings of operating joint venture" for the year ended December 31, 2020. This adjustment primarily increased “General, administrative and other expenses” and relates to a correction of inputs to certain actuarial calculations which resulted in an overstatement of deferred policy acquisition costs. Management has evaluated the impact of all out of period adjustments, both individually and in the aggregate, and concluded that they are not material to any current or previously reported quarterly or annual financial statements.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Revision to Prior Period Consolidated Financial Statements
The Company identified an error in the presentation of certain cash flow activity related to policyholders' account balances that impacted several line items within previously issued Consolidated Statements of Cash Flows. Prior period amounts have been revised in the financial statements to correct this error. Management evaluated these adjustments and concluded they were not material to any previously reported quarterly or annual financial statements. See Note 16 for a more detailed description of the revision and for comparisons of amounts previously reported to the revised amounts.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the current period presentation.
2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS
ASSETS
Fixed maturities, available-for-sale, at fair value ("AFS debt securities") includes bonds, notes and redeemable preferred stock that are carried at fair value. See Note 5 for additional information regarding the determination of fair value. The purchased cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity or, if applicable, call date.
AFS debt securities, where fair value is below amortized cost, are reviewed quarterly to determine whether the amortized cost basis of the security is recoverable. For mortgage-backed and asset-backed AFS debt securities, a credit impairment will be recognized to the extent the amortized cost exceeds the net present value of projected future cash flows (the “net present value”) for the security. For all other AFS debt securities, qualitative factors are first considered including, but not limited to, the extent of the decline and the reasons for the decline in value (e.g., credit events, currency or interest-rate related, including general credit spread widening), and the financial condition of the issuer. If analysis of these qualitative factors results in the security needing to be impaired, the credit impairment will be measured as the extent to which the amortized cost exceeds the net present value. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the AFS debt security at the date of acquisition.
Credit impairment is recognized as an allowance for credit losses and reported in “Realized investment gains (losses), net.” Once the Company has deemed all or a portion of the amortized cost uncollectible, the allowance is removed from the balance sheet by writing down the amortized cost basis of the AFS debt security.
The Company adopted Accounting Standards Update ("ASU") 2016-13, and related ASUs, effective January 1, 2020. See “Recent Accounting Pronouncements” in this Note for additional information about the adoption. Prior to the adoption of ASU 2016-13, credit impairments were recognized as a direct write down to the cost basis of the security.
Interest income, including amortization of premium and accretion of discount, are included in “Net investment income” under the effective yield method. Prepayment premiums are also included in “Net investment income.”
For high credit quality mortgage-backed and asset-backed AFS debt securities (those rated AA or above), the amortized cost and effective yield of the securities are adjusted as necessary to reflect historical prepayment experience and changes in estimated future prepayments. The adjustments to amortized cost are recorded as a charge or credit to “Net investment income” in accordance with the retrospective method.
For mortgage-backed and asset-backed AFS debt securities rated below AA, the effective yield is adjusted prospectively for any changes in the estimated timing and amount of cash flows unless the investment is purchased with credit deterioration or an allowance is currently recorded for the respective security. If an investment is impaired, any changes in the estimated timing and amount of cash flows will be recorded as the credit impairment, as opposed to a yield adjustment. If the asset is purchased with credit deterioration (or previously impaired) the effective yield will be adjusted if there are favorable changes in cash flows subsequent to the allowance being reduced to zero. Prior to the adoption of ASU 2016-13, the effective yield was adjusted prospectively unless an impairment was recorded in the current period.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
For mortgage-backed and asset-backed AFS debt securities, cash flow estimates consider the payment terms of the underlying assets backing a particular security, including interest rate and prepayment assumptions based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also include other assumptions regarding the underlying collateral including default rates and recoveries, which vary based on the asset type and geographic location, as well as the vintage year of the security. These assumptions can significantly impact income recognition and the amount of impairment recognized in earnings and other comprehensive income (loss) (“OCI”). The payment priority of the respective security is also considered. For all other AFS debt securities, cash flow estimates are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company has developed these estimates using information based on its historical experience as well as using market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of a security, such as the general payment terms of the security and the security’s position within the capital structure of the issuer.
The Company may use the estimated fair value of collateral, if any, as a proxy for the net present value if it believes that the security is dependent on the liquidation of collateral for recovery of its investment. If the net present value is less than the amortized cost of the investment, an allowance for losses is recognized in earnings for the difference between amortized cost and the net present value and is limited to the difference between amortized cost and fair value of the AFS debt security. Any difference between the fair value and the net present value of the debt security at the impairment measurement date remains in OCI. Changes in the allowance for losses are reported in “Realized investment gains (losses), net.”
When an AFS debt security’s fair value is below amortized cost and (1) the Company has the intent to sell the AFS debt security, or (2) it is more likely than not the Company will be required to sell the AFS debt security before its anticipated recovery, the amortized cost basis of the AFS debt security is written down to fair value and any previously recognized allowance is reversed. The impairment is reported in “Realized investment gains (losses), net.”
The associated unrealized gains and losses, net of tax, and the effect on DAC, deferred sales inducements ("DSI"), future policy benefits and policyholders’ account balances that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss)” (“AOCI”). Each of these balances is discussed in greater detail below.
Fixed maturities, trading, at fair value consists of fixed maturities that are carried at fair value. Realized and unrealized gains and losses on these investments are reported in “Other income,” and interest and dividend income from these investments is reported in “Net investment income”.
Equity securities, at fair value is comprised of common stock and mutual fund shares that are carried at fair value. Realized and unrealized gains and losses on these investments are reported in “Other income,” and dividend income is reported in “Net investment income” on the ex-dividend date.
Effective January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities using a modified retrospective method. Adoption of this ASU impacted the Company’s accounting and presentation related to equity investments. The most significant impact is that the changes in fair value of equity securities previously classified as “available-for-sale” are reported in net income within “Other income” in the Consolidated Statements of Operations. The impact of this standard resulted in an increase to retained earnings of $7.9 million, a reduction to AOCI of $1.5 million, and an increase to equity of $6.4 million upon adoption on January 1, 2018.
Policy loans represent funds loaned to policyholders up to the cash surrender value of the associated insurance policies and are carried at the unpaid principal balances due to the Company from the policyholders. Interest income on policy loans is recognized in “Net investment income” at the contract interest rate when earned. Policy loans are fully collateralized by the cash surrender value of the associated insurance policies.
Short-term investments primarily consist of highly liquid debt instruments with a maturity of twelve months or less and greater than three months when purchased. These investments are generally carried at fair value or amortized cost that approximates fair value and include certain money market investments, funds managed similar to regulated money market funds, short-term debt securities issued by government sponsored entities and other highly liquid debt instruments.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Commercial mortgage and other loans consist of commercial mortgage loans and agricultural property loans. Commercial mortgage and other loans held for investment are generally carried at unpaid principal balance, net of unamortized deferred loan origination fees and expenses and net of the current expected credit loss ("CECL") allowance. Certain off-balance sheet credit exposures (e.g., indemnification of serviced mortgage loans, and certain unfunded mortgage loan commitments where the Company cannot unconditionally cancel the commitment) are also subject to a CECL allowance. See Note 14 for additional information.
Commercial mortgage and other loans acquired, including those related to the acquisition of a business, are recorded at fair value when purchased, reflecting any premiums or discounts to unpaid principal balances. Interest income, and the amortization of the related premiums or discounts, are included in “Net investment income” under the effective yield method. Prepayment fees are also included in “Net investment income.”
The CECL allowance represents the Company’s best estimate of expected credit losses over the remaining life of the assets or off-balance sheet credit exposures. The determination of the allowance considers historical credit loss experience, current conditions, and reasonable and supportable forecasts. Prior to the adoption of ASU 2016-13, the allowance was based upon credit losses that were probable of occurring for recognized loans, not an estimate of credit losses that may occur over the remaining life of the asset.
The allowance is calculated separately for commercial mortgage loans, agricultural mortgage loans, other collateralized and uncollateralized loans. For commercial mortgage and agricultural mortgage loans, the allowance is calculated using an internally developed CECL model.
Key inputs to the CECL model include unpaid principal balances, internal credit ratings, annual expected loss factors, average lives of the loans adjusted for prepayment considerations, current and historical interest rate assumptions, and other factors influencing the Company’s view of the current stage of the economic cycle and future economic conditions. Subjective considerations include a review of whether historical loss experience is representative of current market conditions and the Company’s view of the credit cycle. Model assumptions and factors are reviewed and updated as appropriate. Information about certain key inputs is detailed below.
Key factors in determining the internal credit ratings for commercial mortgage and agricultural mortgage loans include loan-to-value and debt-service-coverage ratios. Other factors include amortization, loan term, and estimated market value growth rate and volatility for the property type and region. The loan-to-value ratio compares the carrying amount of the loan to the fair value of the underlying property or properties collateralizing the loan, and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the carrying amount of the loan exceeds the collateral value. A loan-to-value ratio less than 100% indicates an excess of collateral value over the carrying amount of the loan. The debt service coverage ratio is a property’s net operating income as a percentage of its debt service payments. Debt service coverage ratios less than 1.0 times indicate that property operations do not generate enough income to cover the loan’s current debt payments. A debt service coverage ratio greater than 1.0 times indicates an excess of net operating income over the debt service payments. The values utilized in calculating these ratios are developed as part of the Company’s periodic review of the commercial mortgage loan and agricultural property loan portfolios, which includes an internal appraisal of the underlying collateral value. The Company’s periodic review also includes a quality re-rating process, whereby the internal quality rating originally assigned at underwriting is updated based on current loan, property and market information using a proprietary quality rating system. See Note 3 for additional information related to the loan-to-value ratios and debt service coverage ratios related to the Company’s commercial mortgage and agricultural loan portfolios.
Annual expected loss rates are based on historical default and loss experience factors. Using average lives, the annual expected loss rates are converted into life-of-loan loss expectations.
When individual loans no longer have the credit risk characteristics of the commercial or agricultural mortgage loan pools, they are removed from the pools and are evaluated individually for an allowance. The allowance is determined based on the outstanding loan balance less the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
The CECL allowance on commercial mortgage and other loans can increase or decrease from period to period based on the factors noted above. The change in allowance is reported in “Realized investment gains (losses), net.” As it relates to unfunded commitments that are in scope of this guidance, the CECL allowance is reported in “Other liabilities,” and the change in the allowance is reported in “Realized investment gains (losses), net.”
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
The CECL allowance for other collateralized and uncollateralized loans (e.g., corporate loans) carried at amortized cost is determined based on probability of default and loss given default assumptions by sector, credit quality and average lives of the loans. Additions to or releases of the allowance are reported in “Realized investment gains (losses), net.”
Once the Company has deemed a portion of the amortized costs to be uncollectible, the uncollectible portion of allowance is removed from the balance sheet by writing down the amortized cost basis of the loan. The carrying amount of the loan is not adjusted for subsequent recoveries in value.
Interest received on loans that are past due is either applied against the principal or reported as net investment income based on the Company’s assessment as to the collectability of the principal. The Company defines “past due” as principal or interest not collected at least 30 days past the scheduled contractual due date. See Note 3 for additional information about the Company’s past due loans.
The Company discontinues accruing interest on loans after the loans become 90 days delinquent as to principal or interest payments, or earlier when the Company has doubts about collectability. When the Company discontinues accruing interest on a loan, any accrued but uncollectible interest on the loan and other loans backed by the same collateral, if any, is charged against interest income in the same period. Generally, a loan is restored to accrual status only after all delinquent interest and principal are brought current and, in the case of loans where the payment of interest has been interrupted for a substantial period, or the loan has been modified, a regular payment performance has been established.
Commercial mortgage and other loans are occasionally restructured in a troubled debt restructuring (“TDR”). These restructurings generally include one or more of the following: full or partial payoffs outside of the original contract terms; changes to interest rates; extensions of maturity; or additions or modifications to covenants. Additionally, the Company may accept assets in full or partial satisfaction of the debt as part of a TDR. When restructurings occur, they are evaluated individually to determine whether the restructuring or modification constitutes a TDR as defined by authoritative accounting guidance. If the borrower is experiencing financial difficulty and the Company has granted a concession, the restructuring, including those that involve a partial payoff or the receipt of assets in full satisfaction of the debt is deemed to be a TDR. When there is a reasonable expectation that the Company will execute a TDR, all effects of the potential restructuring are considered for the estimation of the CECL allowance.
When a loan is modified in a TDR, the CECL allowance of the loan is remeasured using the modified terms and the loan’s original effective yield, and the allowance is adjusted accordingly. The loan will be evaluated to determine whether the loan no longer has similar credit risk characteristics of the commercial or agricultural mortgage loan pools and need to be evaluated for an allowance on an individual basis. Subsequent to the modification, income is recognized prospectively based on the modified terms of the loan.
In a TDR where the Company receives assets in full satisfaction of the debt, any CECL allowance is reversed and a direct write-down of the loan is recorded for the amount of the allowance, and any additional loss, net of recoveries, or any gain is recorded for the difference between the fair value of the assets received and the recorded investment in the loan. When assets are received in partial settlement, the same process is followed, and the remaining loan is evaluated prospectively for credit impairment based on the CECL allowance process noted above.
Other invested assets consist of the Company’s non-coupon investments in limited partnerships and limited liability companies ("LPs/LLCs"), other than operating joint ventures, as well as derivative assets. LPs/LLCs interests are accounted for using either the equity method of accounting, or at fair value with changes in fair value reported in “Other income”. The Company’s income from investments in LPs/LLCs accounted for using the equity method, other than the Company’s investments in operating joint ventures, is included in “Net investment income”. The carrying value of these investments is written down, or impaired, to fair value when a decline in value is considered to be other-than-temporary. In applying the equity method (including assessment for OTTI), the Company uses financial information provided by the investee, generally on a one to three-month lag. For the investments reported at fair value with changes in fair value reported in current earnings, the associated realized and unrealized gains and losses are reported in “Other income”.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Realized investment gains (losses) are computed using the specific identification method. Realized investment gains and losses are generated from numerous sources, including the sales of fixed maturity securities, investments in joint ventures and limited partnerships and other types of investments, as well as changes to the allowance for credit losses recognized in earnings. Realized investment gains and losses also reflect fair value changes on commercial mortgage loans carried at fair value, and fair value changes on embedded derivatives and free-standing derivatives that do not qualify for hedge accounting treatment. See “Derivative Financial Instruments” below for additional information regarding the accounting for derivatives.
Cash and cash equivalents include cash on hand, amounts due from banks, certain money market investments, funds managed similar to regulated money market funds, other debt instruments with maturities of three months or less when purchased, other than cash equivalents that are included in "Fixed maturities, available-for-sale, at fair value,” and receivables related to securities purchased under agreements to resell (see also "Securities sold under agreements to purchase" below.) The Company also engages in overnight borrowing and lending of funds with Prudential Financial and affiliates which are considered cash and cash equivalents. These assets are generally carried at fair value or amortized cost which approximates fair value.
Deferred policy acquisition costs are costs directly related to the successful acquisition of new and renewal insurance and annuity business that have been deferred to the extent such costs are deemed recoverable from future profits. Such DAC primarily includes commissions, costs of policy issuance and underwriting, and certain other expenses that are directly related to successfully acquired contracts. In each reporting period, capitalized DAC is amortized to “Amortization of DAC," net of the accrual of imputed interest on DAC balances. DAC is subject to periodic recoverability testing. DAC, for applicable products, is adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding credits or charges included in AOCI.
DAC related to universal and variable life products and fixed and variable deferred annuity products are generally deferred and amortized over the expected life of the contracts in proportion to gross profits arising principally from investment margins, mortality and expense margins, and surrender charges, based on historical and anticipated future experience, which is updated periodically. The Company uses a reversion to the mean approach for equities to derive future equity return assumptions; however, if the projected equity return calculated using this approach is greater than the maximum equity return assumption, the maximum equity return is utilized. Gross profits also include impacts from the embedded derivatives associated with certain of the optional living benefit features of variable annuity contracts, and index-linked crediting features of certain universal life contracts and related hedging activities. In calculating gross profits, profits and losses related to contracts issued by the Company that are reported in affiliated legal entities other than the Company as a result of, for example, reinsurance agreements with those affiliated entities are also included. The Company is an indirect subsidiary of Prudential Financial, a United States Securities and Exchange Commission (the "SEC") registrant, and has extensive transactions and relationships with other subsidiaries of Prudential Financial, including reinsurance agreements, as described in Note 9. Incorporating all product-related profits and losses in gross profits, including those that are reported in affiliated legal entities, produces a DAC amortization pattern representative of the total economics of the products. Total gross profits include both actual gross profits and estimates of gross profits for future periods. The Company regularly evaluates and adjusts DAC balances with a corresponding charge or credit to current period earnings, representing a cumulative adjustment to all prior periods’ amortization, for the impact of actual gross profits and changes in the Company's projections of estimated future gross profits. Adjustments to DAC balances include: (i) annual review of assumptions that reflect the comprehensive review of the assumptions used in estimating gross profits for future periods (ii) quarterly adjustments for current period experience (also referred to as “experience true-up” adjustments) that reflect the impact of differences between actual gross profits for a given period and the previously estimated expected gross profits for that period and (iii) quarterly adjustments for market performance (also referred to as “experience unlocking”) that reflect the impact of changes to the Company's estimate of total gross profits to reflect actual fund performance and market conditions.
For some products, policyholders can elect to modify product benefits, features, rights or coverages by exchanging a contract for a new contract or by amendment, endorsement or rider to a contract, or by the election of a feature or coverage within a contract. These transactions are known as internal replacements. If policyholders surrender traditional life insurance policies in exchange for life insurance policies that do not have fixed and guaranteed terms, the Company immediately charges to expense the remaining unamortized DAC on the surrendered policies. For other internal replacement transactions, except those that involve the addition of a nonintegrated contract feature that does not change the existing base contract, the unamortized DAC is immediately charged to expense if the terms of the new policies are not substantially similar to those of the former policies. If the new terms are substantially similar to those of the earlier policies, the DAC is retained with respect to the new policies and amortized over the expected life of the new policies. See Note 6 for additional information regarding DAC.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Accrued investment income primarily includes accruals of interest and dividend income from investments that have been earned but not yet received.
Reinsurance recoverables include corresponding receivables associated with reinsurance arrangements with affiliates and third party reinsurers, and are reported on the Consolidated Statements of Financial Position net of the CECL allowance. The CECL allowance considers the credit quality of the reinsurance counterparty and is generally determined based on the probability of default and loss given default assumptions, after considering any applicable collateral arrangements. The CECL allowance does not apply to reinsurance recoverables with affiliated counterparties under common control. Additions to or releases of the allowance are reported in “Policyholders’ benefits.” Prior to the adoption of this standard, an allowance for credit losses for reinsurance recoverables was established only when it was deemed probable that a reinsurer may fail to make payments to us in a timely manner. For additional information about these arrangements see Note 9.
Income taxes receivable primarily represents the net deferred tax asset and the Company’s estimated taxes receivable for the current year and open audit years.
The Company is a member of the federal income tax return of Prudential Financial and primarily files separate company state and local tax returns. Pursuant to the tax allocation arrangement with Prudential Financial, total federal income tax expense is determined on a separate company basis. Members record tax benefits to the extent tax losses or tax credits are recognized in the consolidated federal tax provision.
Items required by tax regulations to be included in the tax return may differ from the items reflected in the financial statements. As a result, the effective tax rate reflected in the financial statements may be different than the actual rate applied on the tax return. Some of these differences are permanent such as expenses that are not deductible in the Company’s tax return, and some differences are temporary, reversing over time, such as valuation of insurance reserves. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years for which the Company has already recorded the tax benefit in the Company’s Consolidated Statements of Operations. Deferred tax liabilities generally represent tax expense recognized in the Company’s financial statements for which payment has been deferred, or expenditures for which the Company has already taken a deduction in the Company’s tax return but have not yet been recognized in the Company’s financial statements.
Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes. The application of U.S. GAAP requires the Company to evaluate the recoverability of the Company’s deferred tax assets and establish a valuation allowance if necessary to reduce the Company’s deferred tax assets to an amount that is more likely than not expected to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. See Note 10 for a discussion of factors considered when evaluating the need for a valuation allowance.
In December of 2017, SEC staff issued "SAB 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"), which allowed registrants to record provisional amounts during a 'measurement period' not to extend beyond one year. Under the relief provided by SAB 118, a company could recognize provisional amounts when it did not have the necessary information available, prepared or analyzed in reasonable detail to complete its accounting for the change in tax law. See Note 10 for a discussion of refinements to the provisional amount related to The United States Tax Cuts and Jobs Act of 2017 ("Tax Act of 2017") included in “Income tax expense (benefit)” in 2018.
U.S. GAAP prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on tax returns. The application of this guidance is a two-step process. First, the Company determines whether it is more likely than not, based on the technical merits, that the tax position will be sustained upon examination. If a tax position does not meet the more likely than not recognition threshold, the benefit of that position is not recognized in the financial statements. The second step is measurement. The Company measures the tax position as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate resolution with a taxing authority that has full knowledge of all relevant information. This measurement considers the amounts and probabilities of the outcomes that could be realized upon ultimate settlement using the facts, circumstances, and information available at the reporting date.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
The Company’s liability for income taxes includes a liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by the Internal Revenue Service ("IRS") or other taxing jurisdictions. Audit periods remain open for review until the statute of limitations has passed. Generally, for tax years which produce net operating losses, capital losses or tax credit carryforwards (“tax attributes”), the statute of limitations does not close, to the extent of these tax attributes, until the expiration of the statute of limitations for the tax year in which they are fully utilized. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the liability for income taxes. The Company classifies all interest and penalties related to tax uncertainties as income tax expense. See Note 10 for additional information regarding income taxes.
Effective January 1, 2018, the Company adopted ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Loss), which allowed a reclassification from AOCI to retained earnings for stranded effects resulting from the Tax Act of 2017. The Company elected to apply the ASU subsequent to recording the adoption impacts of ASU 2016-01 as described above. As a result, the Company reclassified stranded effects resulting from the Tax Act of 2017 by increasing AOCI and decreasing retained earnings, each by $30.4 million upon adoption on January 1, 2018. Stranded effects unrelated to the Tax Act of 2017 are generally released from AOCI when an entire portfolio of the type of item related to the stranded effect is liquidated, sold or extinguished (i.e., portfolio approach).
Other assets consist primarily of premiums due, deferred loss on reinsurance with affiliates, receivables resulting from sales of securities that had not yet settled at the balance sheet date, prepaid tax expenses, and the Company’s investments in operating joint ventures. Investments in operating joint ventures are generally accounted for under the equity method. The carrying value of these investments is written down, or impaired, to fair value when a decline in value is considered to be other-than-temporary.
Separate account assets represent segregated funds that are invested for certain contractholders and other customers. The assets consist primarily of equity securities, fixed maturities, and real estate-related investments and are reported at fair value. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. Investment risks associated with market value changes are borne by the contractholders, except to the extent of minimum guarantees made by the Company with respect to certain accounts. The investment income and realized investment gains or losses from separate account assets generally accrue to the contractholders and are not included in the Company’s consolidated results of operations. Mortality, policy administration and surrender charges assessed against the accounts are included in “Policy charges and fee income”. Asset administration fees charged to the accounts are included in “Asset administration fees”. See Note 8 for additional information regarding separate account arrangements with contractual guarantees. See also “Separate account liabilities” below.
LIABILITIES
Future policy benefits include liabilities related to certain long-duration life and annuity contracts, which are discussed more fully in Note 8. These liabilities represent reserves for the guaranteed minimum death and optional living benefit features on our variable annuity products and no-lapse guarantees for our variable and universal life products. The optional living benefits are primarily accounted for as embedded derivatives, with fair values calculated as the present value of future expected benefit payments to customers less the present value of assessed rider fees attributable to the embedded derivative feature. For additional information regarding the valuation of these optional living benefit features, see Note 5.
The Company’s liability for future policy benefits also includes reserves based on the present value of estimated future payments to or on behalf of policyholders related to contracts that have fixed and guaranteed terms, where the timing and amount of payment depends on policyholder mortality and maintenance expenses less the present value of future net premiums. Expected mortality is generally based on Company experience, industry data, and/or other factors. Interest rate assumptions are based on factors such as market conditions and expected investment returns. Although mortality and interest rate assumptions are “locked-in” upon the issuance of new insurance or annuity business with fixed and guaranteed terms, significant changes in experience or assumptions may require the Company to provide for expected future losses on a product by recognizing a premium deficiency. A premium deficiency exists when the liability for future policy benefits plus the present value of expected future gross premiums are determined to be insufficient to provide for expected future policy benefits and expenses. If a premium deficiency is recognized, the assumptions without a provision for the risk of adverse deviation as of the premium deficiency test date are locked-in and used in subsequent valuations. The net reserves continue to be subject to premium deficiency testing. Any adjustments to future policy benefit reserves related to net unrealized gains on securities classified as available-for-sale are included in AOCI. See Note 7 for additional information regarding future policy benefits.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Policyholders’ account balances represents the contract value that has accrued to the benefit of the policyholder as of the balance sheet date. This liability is primarily associated with the accumulated account deposits, plus interest credited, less policyholder withdrawals and other charges assessed against the account balance, as applicable. These policyholders’ account balances also include provision for benefits under non-life contingent payout annuities. See Note 7 for additional information regarding policyholders’ account balances. Policyholders’ account balances also includes amounts representing the fair value of embedded derivative instruments associated with the index-linked features of certain universal life products. For additional information regarding the valuation of these embedded derivatives, see Note 5.
Cash collateral for loaned securities represent liabilities to return cash proceeds from security lending transactions. Securities lending transactions are used primarily to earn spread income or to facilitate trading activity. As part of securities lending transactions, the Company transfers U.S. and foreign debt and equity securities, as well as U.S. government and government agency securities, and receives cash as collateral. Cash proceeds from securities lending transactions are primarily used to earn spread income, and are typically invested in cash equivalents, short-term investments or fixed maturities. Securities lending transactions are treated as financing arrangements and are recorded at the amount of cash received. The Company obtains collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. The Company monitors the market value of the securities loaned on a daily basis with additional collateral obtained as necessary. Substantially all of the Company’s securities lending transactions are with large brokerage firms and large banks. Income and expenses associated with securities lending transactions used to earn spread income are reported as "Net investment income".
Securities sold under agreements to repurchase represent liabilities associated with securities repurchase agreements that are used primarily to earn spread income. As part of securities repurchase agreements, the Company transfers U.S. government and government agency securities to a third-party, and receives cash as collateral. For securities repurchase agreements, the cash received is typically invested in cash equivalents, short-term investments or fixed maturities. Receivables associated with securities purchased under agreements to resell are generally reflected as cash equivalents. As part of securities resale agreements, the Company invests cash and receives as collateral U.S. government securities or other debt securities.
Securities repurchase and resale agreements that satisfy certain criteria are treated as secured borrowing or secured lending arrangements. These agreements are carried at the amounts at which the securities will be subsequently resold or reacquired, as specified in the respective transactions. For securities purchased under agreements to resell, the Company’s policy is to take possession or control of the securities either directly or through a third-party custodian. These securities are valued daily and additional securities or cash collateral is received, or returned, when appropriate to protect against credit exposure. Securities to be resold are the same, or substantially the same, as the securities received. The majority of these transactions are with large brokerage firms and large banks. For securities sold under agreements to repurchase, the market value of the securities to be repurchased is monitored, and additional collateral is obtained where appropriate, to protect against credit exposure. The Company obtains collateral in an amount at least equal to 95% of the fair value of the securities sold. Securities to be repurchased are the same, or substantially the same, as those sold. The majority of these transactions are with highly rated money market funds. Income and expenses related to these transactions executed within the insurance companies used to earn spread income are reported as “Net investment income.”
Other liabilities consist primarily of accrued expenses, reinsurance payables, and technical overdrafts.
Separate account liabilities primarily represent the contractholders’ account balance in separate account assets and to a lesser extent borrowings of the separate account, and will be equal and offsetting to total separate account assets. See also “Separate account assets” above.
Short-term and long-term debt liabilities are primarily carried at an amount equal to unpaid principal balance, net of unamortized discount or premium and debt issue costs. Original-issue discount or premium and debt-issue costs are recognized as a component of interest expense over the period the debt is expected to be outstanding, using the interest method of amortization. Interest expense is generally presented within “General, administrative and other expenses” in the Company’s Consolidated Statements of Operations. Short-term debt is debt coming due in the next twelve months, including that portion of debt otherwise classified as long-term. The short-term debt caption may exclude short-term debt items for which the Company has the intent and ability to refinance on a long-term basis in the near term. See Note 13 for additional information regarding short-term and long-term debt.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Commitments and contingent liabilities are accrued if it is probable that a liability has been incurred and an amount is reasonably estimable. Management evaluates whether there are incremental legal or other costs directly associated with the ultimate resolution of the matter that are reasonably estimable and, if so, they are included in the accrual. These accruals are generally reported in “Other liabilities”.
REVENUES AND BENEFITS AND EXPENSES
Insurance Revenue and Expense Recognition
Premiums from individual life products, other than universal and variable life contracts, are recognized when due. Benefits are recorded as an expense when they are incurred. A liability for future policy benefits is recorded when premiums are recognized using the net level premium valuation methodology.
Premiums from single premium immediate annuities with life contingencies are recognized when due. When premiums are due over a significantly shorter period than the period over which benefits are provided, any gross premium in excess of the net premium is generally deferred and recognized into revenue based on expected future benefit payments. Benefits are recorded as an expense when they are incurred. A liability for future policy benefits is recorded when premiums are recognized using the net level premium methodology.
Certain individual annuity contracts provide the contractholder a guarantee that the benefit received upon death or annuitization will be no less than a minimum prescribed amount. These benefits are accounted for as insurance contracts. The Company also provides contracts with certain living benefits which are considered embedded derivatives. See Note 5 for information regarding the valuation of these embedded derivatives and Note 8 for additional information regarding these contracts.
Amounts received as payment for universal or variable individual life contracts, deferred fixed or variable annuities and other contracts without life contingencies are reported as deposits to “Policyholders’ account balances” and/or “Separate account liabilities.” Revenues from these contracts are reflected in “Policy charges and fee income” consisting primarily of fees assessed during the period against the policyholders’ account balances for mortality and other benefit charges, policy administration charges and surrender charges. In addition to fees, the Company earns investment income from the investment of deposits in the Company’s general account portfolio. Fees assessed that represent compensation to the Company for services to be provided in future periods and certain other fees are generally deferred and amortized into revenue over the life of the related contracts in proportion to estimated gross profits. Benefits and expenses for these products include claims in excess of related account balances, expenses of contract administration, interest credited to policyholders’ account balances and amortization of DAC and DSI.
Policyholders’ account balances also includes amounts representing the fair value of embedded derivative instruments associated with the index-linked features of certain universal life products. For additional information regarding the valuation of these embedded derivatives, see Note 5.
Asset administration fees primarily include asset administration fee income received on contractholders’ account balances invested in The Prudential Series Funds, which are a portfolio of mutual fund investments related to the Company’s separate account products. Also, the Company receives fee income calculated on contractholder separate account balances invested in the Advanced Series Trust ("AST") (see Note 13). In addition, the Company receives fees from contractholders’ account balances invested in funds managed by companies other than affiliates of Prudential Insurance. Asset administration fees are recognized as income when earned.
Other income includes realized and unrealized gains or losses from investments reported as “Fixed maturities, trading, at fair value”, “Equity securities, at fair value,” and “Other invested assets” that are measured at fair value.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
OTHER ACCOUNTING POLICIES
Derivative Financial Instruments
Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, values of securities or commodities, credit spreads, market volatility, expected returns, and liquidity. Values can also be affected by changes in estimates and assumptions, including those related to counterparty behavior and non-performance risk ("NPR") used in valuation models. Derivative financial instruments generally used by the Company include swaps, futures, forwards and options and may be exchange-traded or contracted in the over-the-counter (“OTC”) market. Certain of the Company’s OTC derivatives are cleared and settled through central clearing counterparties, while others are bilateral contracts between two counterparties. Derivative positions are carried at fair value, generally by obtaining quoted market prices or through the use of valuation models.
Derivatives are used to manage the interest rate and currency characteristics of assets or liabilities. Additionally, derivatives may be used to seek to reduce exposure to interest rate, credit, foreign currency and equity risks associated with assets held or expected to be purchased or sold, and liabilities incurred or expected to be incurred. As discussed in detail below and in Note 4, all realized and unrealized changes in fair value of derivatives are recorded in current earnings, with the exception of cash flow hedges. Cash flows from derivatives are reported in the operating, investing or financing activities sections in the Consolidated Statements of Cash Flows based on the nature and purpose of the derivative.
Derivatives are recorded either as assets, within “Other invested assets”, or as liabilities, within “Payables to parent and affiliates”, except for embedded derivatives which are recorded with the associated host contract. The Company nets the fair value of all derivative financial instruments with counterparties for which a master netting arrangement has been executed.
The Company designates derivatives as either (1) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); or (2) a derivative that does not qualify for hedge accounting.
To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged item. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship.
The Company formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions.
When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in its fair value are recorded in AOCI until earnings are affected by the variability of cash flows being hedged (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). At that time, the related portion of deferred gains or losses on the derivative instrument is reclassified and reported in the Consolidated Statements of Operations line item associated with the hedged item.
If it is determined that a derivative no longer qualifies as an effective cash flow hedge or management removes the hedge designation, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair value recognized currently in “Realized investment gains (losses), net”. The component of AOCI related to discontinued cash flow hedges is reclassified to the Consolidated Statements of Operations line associated with the hedged cash flows consistent with the earnings impact of the original hedged cash flows.
When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, or because it is probable that the forecasted transaction will not occur by the end of the specified time period, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair value recognized currently in “Realized investment gains (losses), net”. Any asset or liability that was recorded pursuant to recognition of the firm commitment is removed from the balance sheet and recognized currently in “Realized investment gains (losses), net”. Gains and losses that were in AOCI pursuant to the hedge of a forecasted transaction are recognized immediately in “Realized investment gains (losses), net”.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
If a derivative does not qualify for hedge accounting, all changes in its fair value, including net receipts and payments, are included in “Realized investment gains (losses), net” without considering changes in the fair value of the economically associated assets or liabilities.
The Company is a party to financial instruments that contain derivative instruments that are “embedded” in the financial instruments. At inception, the Company assesses whether the economic characteristics of the embedded instrument are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded instrument possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded instrument qualifies as an embedded derivative that is separated from the host contract, carried at fair value, and changes in its fair value are included in “Realized investment gains (losses), net.” For certain financial instruments that contain an embedded derivative that otherwise would need to be bifurcated and reported at fair value, the Company may elect to carry the entire instrument at fair value and report it within “Fixed maturities, trading, at fair value” or “Equity securities, at fair value".
The Company sells variable annuity contracts that include optional living benefit features that may be treated from an accounting perspective as embedded derivatives. Effective April 1, 2016, the Company reinsured the variable annuity base contracts, along with the living benefit guarantees, to Prudential Annuities Life Assurance Corporation ("PALAC"), excluding the PLNJ business, which was reinsured to Prudential Insurance, in each case under a coinsurance and modified coinsurance agreement. See Note 9 for additional information. The embedded derivatives related to the living benefit features and the related reinsurance agreements are carried at fair value and included in “Future policy benefits" and “Reinsurance recoverables”. Changes in the fair value are determined using valuation models as described in Note 5 and are recorded in “Realized investment gains (losses), net".
RECENT ACCOUNTING PRONOUNCEMENTS
Changes to U.S. GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of ASUs to the FASB Accounting Standards Codification ("ASC"). The Company considers the applicability and impact of all ASUs. ASUs listed below include those that have been adopted during the current fiscal year and/or those that have been issued but not yet adopted as of December 31, 2020, and as of the date of this filing. ASUs not listed below were assessed and determined to be either not applicable or not material.
Adoption of ASU 2016-13
The Company adopted ASU 2016-13, and related ASUs, effective January 1, 2020 using the modified retrospective method for certain financial assets carried at amortized cost and certain off-balance sheet exposures. The modified retrospective method results in a cumulative effect adjustment to opening retained earnings. The Company adopted the guidance related to fixed maturities, available-for-sale on a prospective basis.
This ASU requires the use of a new CECL model to account for expected credit losses on certain financial assets reported at amortized cost (e.g., loans held for investment, reinsurance receivables, etc.) and certain off-balance sheet credit exposures (e.g., indemnification of serviced mortgage loans and certain loan commitments). The guidance requires an entity to estimate lifetime credit losses related to such financial assets and credit exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that may affect the collectability of the reported amounts. The standard also modifies the OTTI guidance for fixed maturities, available-for-sale requiring the use of an allowance rather than a direct write-down of the investment.
The impacts of this ASU on the Company’s Consolidated Financial Statements primarily include (1) A Cumulative Effect Adjustment Upon Adoption; (2) Changes to the Presentation of the Consolidated Statements of Financial Position and Consolidated Statements of Operations; and (3) Changes to Accounting Policies. Each of these impacts is described below.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
(1) Cumulative Effect Adjustment Upon Adoption
Adoption of the standard resulted in a cumulative effect adjustment to opening retained earnings in the amount of $1.8 million, primarily related to commercial mortgage and other loans. The impact of adoption is not material to the following financial statement line items: deferred policy acquisition costs; reinsurance recoverables; income taxes receivable; future policy benefits; policyholders' account balances; and other liabilities. The prospective adoption of the portions of the standard related to fixed maturities, available-for-sale resulted in no impact to opening retained earnings.
(2) Changes to the Presentation of the Consolidated Statements of Financial Position and Consolidated Statements of Operations
The allowance for credit losses is presented parenthetically on relevant line items in the Consolidated Statements of Financial Position. In the Consolidated Statements of Operations, realized investment gains (losses), net are presented on one line item and will no longer reflect the breakout of OTTI on fixed maturity securities; OTTI on fixed maturity securities transferred to OCI; and other realized investment gains (losses), net. The presentation of this detail in prior periods is immaterial.
(3) Changes to Accounting Policies
The narrative description of our significant accounting policies at the beginning of this Note reflects our policies as of December 31, 2020, including the policies associated with the adoption of ASU 2016-13.
Other ASUs adopted during the year ended December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard
|
|
Description
|
|
Effective date and method of adoption
|
|
Effect on the financial statements or other significant matters
|
|
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation
of the Effects of Reference Rate Reform on Financial Reporting
|
|
This ASU provides optional relief for certain contracts impacted by reference rate reform. The standard permits an entity to consider contract modification due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The ASU also temporarily (until December 31, 2022) allows hedge relationships to continue without de-designation upon changes due to reference rate reform.
|
|
March 12, 2020 to December 31, 2022 using the prospective method.
|
|
This ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
The Company made the election under ASU 2020-04 for all applicable contracts as they converted from the current reference rate to the new reference rate.
|
ASU issued but not yet adopted as of December 31, 2020 — ASU 2018-12
ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASB on August 15, 2018 and is expected to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements. In October 2019, the FASB issued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of ASU 2018-12 to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. As a result of the COVID-19 pandemic, in November 2020, the FASB issued ASU 2020-11, Financial Services-Insurance (Topic 944): Effective Date and Early Application to defer for an additional one year the effective date of ASU 2018-12 from January 1, 2022 to January 1, 2023, and to provide transition relief to facilitate the early adoption of the ASU. The transition relief would allow large calendar-year public companies that early adopt ASU 2018-12 to apply the guidance either as of January 1, 2020 or January 1, 2021 (and record transition adjustments as of January 1, 2020 or January 1, 2021, respectively) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements. The Company currently intends to adopt ASU 2018-12 effective January 1, 2023. ASU 2018-12 will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. Outlined below are four key areas of change, although there are other less significant changes not noted below. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASU 2018-12 Amended Topic
|
|
Description
|
|
Method of adoption
|
|
Effect on the financial statements or other significant matters
|
|
Cash flow assumptions used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products
|
|
Requires an entity to review, and if necessary, update the cash flow assumptions used to measure the liability for future policy benefits, for both changes in future assumptions and actual experience, at least annually using a retrospective update method with a cumulative catch-up adjustment recorded in a separate line item in the Consolidated Statements of Operations.
|
|
An entity may choose one of two adoption methods for the liability for future policy benefits: (1) a modified retrospective transition method whereby the entity may choose to apply the amendments to contracts in force as of the beginning of the prior year (if early adoption is elected) or as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) a full retrospective transition method.
|
|
The options for method of adoption and the impacts of such methods are under assessment.
|
|
Discount rate assumption used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products
|
|
Requires discount rate assumptions to be based on an upper-medium grade fixed income instrument yield, which will be updated each quarter with the impact recorded through OCI. An entity shall maximize the use of relevant observable information and minimize the use of unobservable information in determining the discount rate assumptions.
|
|
As noted above, an entity may choose either a modified retrospective transition method or full retrospective transition method for the liability for future policy benefits. Under either method, for balance sheet remeasurement purposes, the liability for future policy benefits will be remeasured using current discount rates as of either the beginning of the prior year (if early adoption is elected) or the beginning of the earliest period presented with the impact recorded as a cumulative effect adjustment to AOCI.
|
|
Upon adoption, under either transition method, there will be an adjustment to AOCI as a result of remeasuring in-force contract liabilities using current upper-medium grade fixed income instrument yields. The adjustment upon adoption will largely reflect the difference between discount rates locked-in at contract inception versus current discount rates at transition. The magnitude of such adjustment is currently being assessed.
|
|
Amortization of DAC and other balances
|
|
Requires DAC and other balances, such as unearned revenue reserves and DSI, to be amortized on a constant level basis over the expected term of the related contract, independent of expected profitability.
|
|
An entity may apply one of two adoption methods: (1) a modified retrospective transition method whereby the entity may choose to apply the amendments to contracts in force as of the beginning of the prior year (if early adoption is elected) or as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) if an entity chooses a full retrospective transition method for its liability for future policy benefits, as described above, it is required to also use a full retrospective transition method for DAC and other balances.
|
|
The options for method of adoption and the impacts of such methods are under assessment. Under the modified retrospective transition method, the Company would not expect a significant impact to the balance sheet, other than the impact of the removal of any related amounts in AOCI.
|
|
Market Risk Benefits ("MRB")
|
|
Requires an entity to measure all market risk benefits (e.g., living benefit and death benefit guarantees associated with variable annuities) at fair value, and record MRB assets and liabilities separately on the Consolidated Statements of Financial Position. Changes in fair value of market risk benefits are recorded in net income, except for the portion of the change in MRB liabilities attributable to changes in an entity’s NPR, which is recognized in OCI.
|
|
An entity shall adopt the guidance for market risk benefits using the retrospective transition method, which includes a cumulative-effect adjustment on the balance sheet as of either the beginning of prior year (if early adoption is elected) or the beginning of the earliest period presented. An entity shall maximize the use of relevant observable information and minimize the use of unobservable information in determining the balance of the market risk benefits upon adoption.
|
|
Upon adoption, the Company expects an impact to retained earnings for the difference between the fair value and carrying value of benefits not currently measured at fair value (e.g., guaranteed minimum death benefits ("GMDB") on variable annuities) and an impact from reclassifying the cumulative effect of changes in NPR from retained earnings to AOCI. The magnitude of such adjustments is currently being assessed.
|
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
3. INVESTMENTS
Fixed Maturity Securities
The following tables set forth the composition of fixed maturity securities (excluding investments classified as trading), as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Allowance for Credit Losses
|
|
Fair
Value
|
|
|
(in thousands)
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. government authorities and agencies
|
$
|
74,946
|
|
|
$
|
2,931
|
|
|
$
|
22
|
|
|
$
|
0
|
|
|
$
|
77,855
|
|
|
Obligations of U.S. states and their political subdivisions
|
460,003
|
|
|
57,948
|
|
|
0
|
|
|
0
|
|
|
517,951
|
|
|
Foreign government bonds
|
206,633
|
|
|
44,254
|
|
|
32
|
|
|
0
|
|
|
250,855
|
|
|
U.S. public corporate securities
|
2,473,440
|
|
|
456,581
|
|
|
587
|
|
|
0
|
|
|
2,929,434
|
|
|
U.S. private corporate securities
|
919,316
|
|
|
95,793
|
|
|
2,198
|
|
|
855
|
|
|
1,012,056
|
|
|
Foreign public corporate securities
|
278,717
|
|
|
42,899
|
|
|
886
|
|
|
0
|
|
|
320,730
|
|
|
Foreign private corporate securities
|
977,539
|
|
|
123,006
|
|
|
7,131
|
|
|
1,484
|
|
|
1,091,930
|
|
|
Asset-backed securities(1)
|
236,909
|
|
|
1,115
|
|
|
386
|
|
|
0
|
|
|
237,638
|
|
|
Commercial mortgage-backed securities
|
480,412
|
|
|
40,660
|
|
|
125
|
|
|
0
|
|
|
520,947
|
|
|
Residential mortgage-backed securities(2)
|
49,456
|
|
|
3,779
|
|
|
0
|
|
|
0
|
|
|
53,235
|
|
|
Total fixed maturities, available-for-sale
|
$
|
6,157,371
|
|
|
$
|
868,966
|
|
|
$
|
11,367
|
|
|
$
|
2,339
|
|
|
$
|
7,012,631
|
|
(1)Includes credit-tranched securities collateralized by loan obligations, credit cards, auto loans, education loans and sub-prime mortgages.
(2)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
OTTI
in AOCI(3)
|
|
|
(in thousands)
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. government authorities and agencies
|
$
|
83,622
|
|
|
$
|
2,846
|
|
|
$
|
0
|
|
|
$
|
86,468
|
|
|
$
|
0
|
|
|
Obligations of U.S. states and their political subdivisions
|
458,152
|
|
|
39,675
|
|
|
0
|
|
|
497,827
|
|
|
0
|
|
|
Foreign government bonds
|
196,034
|
|
|
26,793
|
|
|
1
|
|
|
222,826
|
|
|
0
|
|
|
U.S. public corporate securities
|
1,914,503
|
|
|
229,071
|
|
|
2,247
|
|
|
2,141,327
|
|
|
0
|
|
|
U.S. private corporate securities
|
886,281
|
|
|
44,497
|
|
|
1,006
|
|
|
929,772
|
|
|
0
|
|
|
Foreign public corporate securities
|
256,843
|
|
|
22,158
|
|
|
385
|
|
|
278,616
|
|
|
0
|
|
|
Foreign private corporate securities
|
939,603
|
|
|
38,426
|
|
|
19,551
|
|
|
958,478
|
|
|
0
|
|
|
Asset-backed securities(1)
|
119,602
|
|
|
800
|
|
|
466
|
|
|
119,936
|
|
|
(7)
|
|
|
Commercial mortgage-backed securities
|
367,848
|
|
|
15,231
|
|
|
163
|
|
|
382,916
|
|
|
0
|
|
|
Residential mortgage-backed securities(2)
|
60,778
|
|
|
3,050
|
|
|
24
|
|
|
63,804
|
|
|
(131)
|
|
|
Total fixed maturities, available-for-sale
|
$
|
5,283,266
|
|
|
$
|
422,547
|
|
|
$
|
23,843
|
|
|
$
|
5,681,970
|
|
|
$
|
(138)
|
|
(1)Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, auto loans, education loans and other asset types.
(2)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
(3)Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $1.7 million of net unrealized gains on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
The following table sets forth the fair value and gross unrealized losses on available-for-sale fixed maturity securities without an allowance for credit losses aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the date indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Less Than Twelve Months
|
|
Twelve Months or More
|
|
Total
|
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
|
(in thousands)
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. government authorities and agencies
|
$
|
2,255
|
|
|
$
|
22
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,255
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign government bonds
|
2,270
|
|
|
32
|
|
|
0
|
|
|
0
|
|
|
2,270
|
|
|
32
|
|
|
U.S. public corporate securities
|
33,295
|
|
|
341
|
|
|
2,754
|
|
|
246
|
|
|
36,049
|
|
|
587
|
|
|
U.S. private corporate securities
|
33,806
|
|
|
771
|
|
|
6,659
|
|
|
1,427
|
|
|
40,465
|
|
|
2,198
|
|
|
Foreign public corporate securities
|
6,432
|
|
|
97
|
|
|
6,464
|
|
|
789
|
|
|
12,896
|
|
|
886
|
|
|
Foreign private corporate securities
|
2,931
|
|
|
131
|
|
|
85,340
|
|
|
6,657
|
|
|
88,271
|
|
|
6,788
|
|
|
Asset-backed securities
|
51,914
|
|
|
183
|
|
|
70,503
|
|
|
203
|
|
|
122,417
|
|
|
386
|
|
|
Commercial mortgage-backed securities
|
17,443
|
|
|
125
|
|
|
0
|
|
|
0
|
|
|
17,443
|
|
|
125
|
|
|
Residential mortgage-backed securities
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Total fixed maturities, available-for-sale
|
$
|
150,346
|
|
|
$
|
1,702
|
|
|
$
|
171,720
|
|
|
$
|
9,322
|
|
|
$
|
322,066
|
|
|
$
|
11,024
|
|
The following table sets forth the fair value and gross unrealized losses on fixed maturity securities aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the date indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Less Than Twelve Months
|
|
Twelve Months or More
|
|
Total
|
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
|
(in thousands)
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign government bonds
|
$
|
2,152
|
|
|
$
|
1
|
|
|
$
|
400
|
|
|
$
|
0
|
|
|
$
|
2,552
|
|
|
$
|
1
|
|
|
U.S. public corporate securities
|
81,622
|
|
|
984
|
|
|
19,206
|
|
|
1,263
|
|
|
100,828
|
|
|
2,247
|
|
|
U.S. private corporate securities
|
33,264
|
|
|
780
|
|
|
22,143
|
|
|
226
|
|
|
55,407
|
|
|
1,006
|
|
|
Foreign public corporate securities
|
3,839
|
|
|
23
|
|
|
9,379
|
|
|
362
|
|
|
13,218
|
|
|
385
|
|
|
Foreign private corporate securities
|
32,800
|
|
|
921
|
|
|
186,693
|
|
|
18,630
|
|
|
219,493
|
|
|
19,551
|
|
|
Asset-backed securities
|
32,361
|
|
|
243
|
|
|
55,461
|
|
|
223
|
|
|
87,822
|
|
|
466
|
|
|
Commercial mortgage-backed securities
|
22,153
|
|
|
163
|
|
|
0
|
|
|
0
|
|
|
22,153
|
|
|
163
|
|
|
Residential mortgage-backed securities
|
3,049
|
|
|
16
|
|
|
692
|
|
|
8
|
|
|
3,741
|
|
|
24
|
|
|
Total fixed maturities, available-for-sale
|
$
|
211,240
|
|
|
$
|
3,131
|
|
|
$
|
293,974
|
|
|
$
|
20,712
|
|
|
$
|
505,214
|
|
|
$
|
23,843
|
|
As of December 31, 2020, the gross unrealized losses on fixed maturity available-for-sale securities without an allowance were composed of $5.0 million related to “1” highest quality or “2” high quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $6.0 million, related to other than high or highest quality securities based on NAIC or equivalent rating. As of December 31, 2020, $9.3 million of gross unrealized losses of twelve months or more were concentrated in the Company’s corporate securities within the finance, energy and utility sectors.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
As of December 31, 2019, the gross unrealized losses on fixed maturity securities were composed of $16.0 million related to “1” highest quality or “2” high quality securities based on the NAIC or equivalent rating and $7.8 million related to other than high or highest quality securities based on NAIC or equivalent rating. As of December 31, 2019, the $20.7 million of gross unrealized losses of twelve months or more were concentrated in the Company's corporate securities within the finance, energy and consumer non-cyclical sectors.
In accordance with its policy described in Note 2, the Company concluded that an adjustment to earnings for credit losses related to these fixed maturity securities was not warranted at December 31, 2020. These conclusions were based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to general credit spread widening, increases in interest rates, foreign currency exchange rate movements and the financial condition or near-term prospects of the issuer. As of December 31, 2020, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.
The following table sets forth the amortized cost and fair value of fixed maturities by contractual maturities, as of the date indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
Amortized Cost
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
Due in one year or less
|
|
$
|
132,265
|
|
|
$
|
134,349
|
|
|
Due after one year through five years
|
|
701,919
|
|
|
745,249
|
|
|
Due after five years through ten years
|
|
1,006,387
|
|
|
1,113,006
|
|
|
Due after ten years
|
|
3,550,023
|
|
|
4,208,207
|
|
|
Asset-backed securities
|
|
236,909
|
|
|
237,638
|
|
|
Commercial mortgage-backed securities
|
|
480,412
|
|
|
520,947
|
|
|
Residential mortgage-backed securities
|
|
49,456
|
|
|
53,235
|
|
|
Total fixed maturities, available-for-sale
|
|
$
|
6,157,371
|
|
|
$
|
7,012,631
|
|
Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Asset-backed, commercial mortgage-backed and residential mortgage-backed securities are shown separately in the table above, as they do not have a single maturity date.
The following table sets forth the sources of fixed maturity proceeds and related investment gains (losses), as well as losses on write-downs, impairments and the allowance for credit losses of fixed maturities, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
(in thousands)
|
|
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
Proceeds from sales(1)
|
|
$
|
81,766
|
|
|
$
|
633,787
|
|
|
$
|
234,617
|
|
|
Proceeds from maturities/prepayments
|
|
305,859
|
|
|
314,906
|
|
|
326,664
|
|
|
Gross investment gains from sales and maturities
|
|
1,293
|
|
|
59,557
|
|
|
1,370
|
|
|
Gross investment losses from sales and maturities
|
|
(1,878)
|
|
|
(3,785)
|
|
|
(11,000)
|
|
|
OTTI recognized in earnings(2)
|
|
N/A
|
|
(9,034)
|
|
|
(3,710)
|
|
|
Write-downs recognized in earnings(3)
|
|
(4,312)
|
|
|
N/A
|
|
N/A
|
|
(Addition to) release of allowance for credit losses(4)
|
|
(2,339)
|
|
|
N/A
|
|
N/A
|
(1)Includes $2.4 million, $0.0 million and $(0.1) million of non-cash related proceeds due to the timing of trade settlements for the years ended December 31, 2020, 2019 and 2018, respectively.
(2)For the years ended December 31, 2019 and 2018, amounts exclude the portion of OTTI amounts remaining in OCI, representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of impairment.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
(3)For the year ended December 31, 2020, amounts represent write-downs of credit adverse securities, write-downs on securities approaching maturity related to foreign exchange movements and securities actively marketed for sale.
(4)Effective January 1, 2020, credit losses on available-for-sale fixed maturity securities are recorded within the “allowance for credit losses.”
The following table sets forth the activity in the allowance for credit losses for fixed maturity securities, as of the date indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
|
U.S. Treasury Securities and Obligations of U.S. States
|
|
Foreign Government Bonds
|
|
U.S. and Foreign Corporate Securities
|
|
Asset-Backed Securities
|
|
Commercial Mortgage-Backed Securities
|
|
Residential Mortgage-Backed Securities
|
|
Total
|
|
|
(in thousands)
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Additions to allowance for credit losses not previously recorded
|
0
|
|
|
0
|
|
|
5,672
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
5,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reductions for securities sold during the period
|
0
|
|
|
0
|
|
|
(3,147)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(3,147)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addition (reductions) on securities with previous allowance
|
0
|
|
|
0
|
|
|
(186)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(186)
|
|
|
Write-downs charged against the allowance
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,339
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,339
|
|
See Note 2 for additional information about the Company’s methodology for developing our allowance and expected losses.
For the year ended December 31, 2020, the increase in the allowance for credit losses on available-for-sale securities was primarily related to adverse projected cash flows on private corporate securities.
The Company did not have any fixed maturity securities purchased with credit deterioration, as of December 31, 2020.
Equity Securities
The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Other income,” was $(1.2) million, $(1.0) million and $(2.8) million during the years ended December 31, 2020, 2019 and 2018, respectively.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Commercial Mortgage and Other Loans
The following table sets forth the composition of “Commercial mortgage and other loans,” as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
Amount
(in thousands)
|
|
% of
Total
|
|
Amount
(in thousands)
|
|
% of
Total
|
|
Commercial mortgage and agricultural property loans by property type:
|
|
|
|
|
|
|
|
|
|
Apartments/Multi-Family
|
|
$
|
364,549
|
|
|
28.2
|
%
|
|
$
|
355,175
|
|
|
28.6
|
%
|
|
Hospitality
|
|
34,069
|
|
|
2.6
|
|
|
31,449
|
|
|
2.5
|
|
|
Industrial
|
|
399,017
|
|
|
30.9
|
|
|
299,803
|
|
|
24.1
|
|
|
Office
|
|
195,443
|
|
|
15.1
|
|
|
205,498
|
|
|
16.6
|
|
|
Other
|
|
138,477
|
|
|
10.7
|
|
|
136,841
|
|
|
11.0
|
|
|
Retail
|
|
142,266
|
|
|
11.0
|
|
|
190,690
|
|
|
15.4
|
|
|
Total commercial mortgage loans
|
|
1,273,821
|
|
|
98.5
|
|
|
1,219,456
|
|
|
98.2
|
|
|
Agricultural property loans
|
|
19,577
|
|
|
1.5
|
|
|
22,197
|
|
|
1.8
|
|
|
Total commercial mortgage and agricultural property loans
|
|
1,293,398
|
|
|
100.0
|
%
|
|
1,241,653
|
|
|
100.0
|
%
|
|
Allowance for credit losses
|
|
(4,552)
|
|
|
|
|
(1,768)
|
|
|
|
|
Total net commercial mortgage and agricultural property loans
|
|
$
|
1,288,846
|
|
|
|
|
$
|
1,239,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020, the commercial mortgage and agricultural property loans were secured by properties geographically dispersed throughout the United States (with the largest concentrations in California (22%), Texas (13%) and New York (7%)) and included loans secured by properties in Europe (12%), Mexico (3%), and Australia (2%).
The following table sets forth the activity in the allowance for credit losses for commercial mortgage and other loans, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Mortgage Loans
|
|
Agricultural Property Loans
|
|
|
|
Total
|
|
|
(in thousands)
|
|
Balance at December 31, 2017
|
$
|
1,728
|
|
|
$
|
66
|
|
|
|
|
$
|
1,794
|
|
|
Addition to (release of) allowance for credit losses
|
298
|
|
|
(27)
|
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
$
|
2,026
|
|
|
$
|
39
|
|
|
|
|
$
|
2,065
|
|
|
Addition to (release of) allowance for credit losses
|
(283)
|
|
|
(14)
|
|
|
|
|
(297)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
$
|
1,743
|
|
|
$
|
25
|
|
|
|
|
$
|
1,768
|
|
|
Cumulative effect of adoption of ASU 2016-13
|
2,495
|
|
|
(8)
|
|
|
|
|
2,487
|
|
|
Addition to (release of) allowance for expected losses
|
308
|
|
|
(11)
|
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
$
|
4,546
|
|
|
$
|
6
|
|
|
|
|
$
|
4,552
|
|
See Note 2 for additional information about the Company's methodology for developing our allowance and expected losses.
For the year ended December 31, 2020, the increase in the allowance for credit losses on commercial mortgage and other loans was primarily related to the cumulative effect of adoption of ASU 2016-13.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
The following tables set forth key credit quality indicators based upon the recorded investment gross of allowance for credit losses, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Amortized Cost by Origination Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
|
|
Total
|
|
|
(in thousands)
|
|
Commercial mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan-to-Value Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0%-59.99%
|
$
|
10,645
|
|
|
$
|
47,284
|
|
|
$
|
33,443
|
|
|
$
|
92,410
|
|
|
$
|
162,030
|
|
|
$
|
251,903
|
|
|
|
|
$
|
597,715
|
|
|
60%-69.99%
|
69,819
|
|
|
95,331
|
|
|
141,260
|
|
|
52,710
|
|
|
80,875
|
|
|
43,823
|
|
|
|
|
483,818
|
|
|
70%-79.99%
|
63,783
|
|
|
36,099
|
|
|
22,431
|
|
|
32,476
|
|
|
21,178
|
|
|
15,342
|
|
|
|
|
191,309
|
|
|
80% or greater
|
0
|
|
|
0
|
|
|
0
|
|
|
979
|
|
|
0
|
|
|
0
|
|
|
|
|
979
|
|
|
Total
|
$
|
144,247
|
|
|
$
|
178,714
|
|
|
$
|
197,134
|
|
|
$
|
178,575
|
|
|
$
|
264,083
|
|
|
$
|
311,068
|
|
|
|
|
$
|
1,273,821
|
|
|
Debt Service Coverage Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater or Equal to 1.2x
|
$
|
128,839
|
|
|
$
|
159,476
|
|
|
$
|
177,098
|
|
|
$
|
171,255
|
|
|
$
|
238,010
|
|
|
$
|
290,741
|
|
|
|
|
$
|
1,165,419
|
|
|
1.0 - 1.2x
|
15,408
|
|
|
10,334
|
|
|
7,134
|
|
|
7,320
|
|
|
26,073
|
|
|
16,418
|
|
|
|
|
82,687
|
|
|
Less than 1.0x
|
0
|
|
|
8,904
|
|
|
12,902
|
|
|
0
|
|
|
0
|
|
|
3,909
|
|
|
|
|
25,715
|
|
|
Total
|
$
|
144,247
|
|
|
$
|
178,714
|
|
|
$
|
197,134
|
|
|
$
|
178,575
|
|
|
$
|
264,083
|
|
|
$
|
311,068
|
|
|
|
|
$
|
1,273,821
|
|
|
Agricultural property loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan-to-Value Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0%-59.99%
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
6,486
|
|
|
$
|
0
|
|
|
$
|
13,091
|
|
|
|
|
$
|
19,577
|
|
|
60%-69.99%
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
0
|
|
|
70%-79.99%
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
0
|
|
|
80% or greater
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
0
|
|
|
Total
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
6,486
|
|
|
$
|
0
|
|
|
$
|
13,091
|
|
|
|
|
$
|
19,577
|
|
|
Debt Service Coverage Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater or Equal to 1.2x
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
6,486
|
|
|
$
|
0
|
|
|
$
|
12,276
|
|
|
|
|
$
|
18,762
|
|
|
1.0 - 1.2x
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
0
|
|
|
Less than 1.0x
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
815
|
|
|
|
|
815
|
|
|
Total
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
6,486
|
|
|
$
|
0
|
|
|
$
|
13,091
|
|
|
|
|
$
|
19,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
Debt Service Coverage Ratio
|
|
|
|
|
|
> 1.2X
|
|
1.0X to <1.2X
|
|
< 1.0X
|
|
Total
|
|
|
|
(in thousands)
|
|
Loan-to-Value Ratio:
|
|
|
|
|
|
|
|
|
|
0%-59.99%
|
|
$
|
655,136
|
|
|
$
|
18,418
|
|
|
$
|
1,097
|
|
|
$
|
674,651
|
|
|
60%-69.99%
|
|
354,827
|
|
|
12,799
|
|
|
0
|
|
|
367,626
|
|
|
70%-79.99%
|
|
149,448
|
|
|
27,506
|
|
|
0
|
|
|
176,954
|
|
|
80% or greater
|
|
0
|
|
|
225
|
|
|
0
|
|
|
225
|
|
|
Total commercial mortgage loans
|
|
$
|
1,159,411
|
|
|
$
|
58,948
|
|
|
$
|
1,097
|
|
|
$
|
1,219,456
|
|
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural property loans
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
Debt Service Coverage Ratio
|
|
|
|
|
|
> 1.2X
|
|
1.0X to <1.2X
|
|
< 1.0X
|
|
Total
|
|
|
|
(in thousands)
|
|
Loan-to-Value Ratio:
|
|
|
|
|
|
|
|
|
|
0%-59.99%
|
|
$
|
21,382
|
|
|
$
|
0
|
|
|
$
|
815
|
|
|
$
|
22,197
|
|
|
60%-69.99%
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
70%-79.99%
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
80% or greater
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Total agricultural property loans
|
|
$
|
21,382
|
|
|
$
|
0
|
|
|
$
|
815
|
|
|
$
|
22,197
|
|
See Note 2 for additional information about the Company’s commercial mortgage and other loans credit quality monitoring process.
The following tables set forth an aging of past due commercial mortgage and other loans based upon the recorded investment gross of allowance for credit losses, as well as the amount of commercial mortgage and other loans on non-accrual status, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Current
|
|
30-59 Days Past Due
|
|
60-89 Days Past Due
|
|
90 Days or More Past Due(1)
|
|
Total Loans
|
|
Non-Accrual Status(2)
|
|
|
(in thousands)
|
|
Commercial mortgage loans
|
$
|
1,273,821
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,273,821
|
|
|
$
|
0
|
|
|
Agricultural property loans
|
19,577
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
19,577
|
|
|
0
|
|
|
Total
|
$
|
1,293,398
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,293,398
|
|
|
$
|
0
|
|
(1)As of December 31, 2020, there were no loans in this category accruing interest.
(2)For additional information regarding the Company’s policies for accruing interest on loans, see Note 2.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Current
|
|
30-59 Days Past Due
|
|
60-89 Days Past Due
|
|
90 Days or More Past Due(1)
|
|
Total Loans
|
|
Non-Accrual Status(2)
|
|
|
(in thousands)
|
|
Commercial mortgage loans
|
$
|
1,219,456
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,219,456
|
|
|
$
|
0
|
|
|
Agricultural property loans
|
22,197
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
22,197
|
|
|
0
|
|
|
Total
|
$
|
1,241,653
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,241,653
|
|
|
$
|
0
|
|
(1)As of December 31, 2019, there were no loans in this category accruing interest.
(2)For additional information regarding the Company’s policies for accruing interest on loans, see Note 2.
There were no loans on non-accrual status as of December 31, 2020. Loans on non-accrual status did not recognize interest income for the year ended December 31, 2020.
The Company did not have any commercial mortgage and other loans purchased with credit deterioration, as of December 31, 2020.
For both the years ended December 31, 2020 and 2019, there were no commercial mortgage and other loans acquired, other than those through direct origination. For the years ended December 31, 2020 and 2019, there were $0 million and $5 million of commercial mortgage and other loans sold, respectively.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Other Invested Assets
The following table sets forth the composition of “Other invested assets,” as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
Company's investment in separate accounts
|
$
|
44,018
|
|
|
$
|
46,573
|
|
|
LPs/LLCs:
|
|
|
|
|
Equity method:
|
|
|
|
|
Private equity
|
241,493
|
|
|
189,095
|
|
|
Hedge funds
|
77,311
|
|
|
64,002
|
|
|
Real estate-related
|
63,194
|
|
|
42,432
|
|
|
Subtotal equity method
|
381,998
|
|
|
295,529
|
|
|
Fair value:
|
|
|
|
|
Private equity
|
65,436
|
|
|
62,639
|
|
|
Hedge funds
|
499
|
|
|
562
|
|
|
Real estate-related
|
10,857
|
|
|
11,707
|
|
|
Subtotal fair value
|
76,792
|
|
|
74,908
|
|
|
Total LPs/LLCs
|
458,790
|
|
|
370,437
|
|
|
Derivative instruments
|
18,147
|
|
|
12,548
|
|
|
Total other invested assets
|
$
|
520,955
|
|
|
$
|
429,558
|
|
Equity Method Investments
The following tables set forth summarized combined financial information for significant LP/LLC interests accounted for under the equity method, including the Company’s investments in operating joint ventures. Changes between periods in the tables below reflect changes in the activities within the operating joint ventures and LPs/LLCs, as well as changes in the Company’s level of investment in such entities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
(in thousands)
|
|
STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
|
Total assets(1)
|
|
$
|
12,952,942
|
|
|
$
|
26,017,399
|
|
|
Total liabilities(2)
|
|
$
|
90,444
|
|
|
$
|
164,080
|
|
|
Partners’ capital
|
|
12,862,498
|
|
|
25,853,319
|
|
|
Total liabilities and partners’ capital
|
|
$
|
12,952,942
|
|
|
$
|
26,017,399
|
|
|
Total liabilities and partners’ capital included above
|
|
$
|
348,267
|
|
|
$
|
325,677
|
|
|
Equity in LP/LLC interests not included above
|
|
175,024
|
|
|
114,505
|
|
|
Carrying value
|
|
$
|
523,291
|
|
|
$
|
440,182
|
|
(1)Amount represents gross assets of each fund where the Company has a significant investment. These assets consist primarily of investments in real estate, investments in securities and other miscellaneous assets.
(2)Amount represents gross liabilities of each fund where the Company has a significant investment. These liabilities consist primarily of third-party-borrowed funds and other miscellaneous liabilities.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
(in thousands)
|
|
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
Total revenue(1)
|
|
$
|
565,409
|
|
|
$
|
819,904
|
|
|
$
|
128,356
|
|
|
Total expenses(2)
|
|
(201,644)
|
|
|
(200,666)
|
|
|
(39,040)
|
|
|
Net earnings (losses)
|
|
$
|
363,765
|
|
|
$
|
619,238
|
|
|
$
|
89,316
|
|
|
Equity in net earnings (losses) included above
|
|
$
|
8,644
|
|
|
$
|
24,971
|
|
|
$
|
(2,470)
|
|
|
Equity in net earnings (losses) of LP/LLC interests not included above
|
|
25,859
|
|
|
5,077
|
|
|
(1,452)
|
|
|
Total equity in net earnings (losses)
|
|
$
|
34,503
|
|
|
$
|
30,048
|
|
|
$
|
(3,922)
|
|
(1)Amount represents gross revenue of each fund where the Company has a significant investment. This revenue consists of income from investments in real estate, investments in securities and other income.
(2)Amount represents gross expenses of each fund where the Company has a significant investment. These expenses consist primarily of interest expense, investment management fees, salary expenses and other expenses.
Accrued Investment Income
The following table sets forth the composition of “Accrued investment income,” as of the date indicated:
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
(in thousands)
|
|
Fixed maturities
|
$
|
54,565
|
|
|
Equity securities
|
1
|
|
|
Commercial mortgage and other loans
|
3,610
|
|
|
Policy loans
|
35,374
|
|
|
|
|
|
Short-term investments and cash equivalents
|
63
|
|
|
|
|
|
Total accrued investment income
|
$
|
93,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no write-downs on accrued investment income for the year ended December 31, 2020.
Net Investment Income
The following table sets forth “Net investment income” by investment type, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
|
Fixed maturities, available-for-sale
|
$
|
224,262
|
|
|
$
|
235,456
|
|
|
$
|
220,942
|
|
|
Fixed maturities, trading
|
1,768
|
|
|
1,374
|
|
|
1,105
|
|
|
Equity securities
|
410
|
|
|
856
|
|
|
885
|
|
|
Commercial mortgage and other loans
|
50,534
|
|
|
57,886
|
|
|
49,577
|
|
|
Policy loans
|
70,363
|
|
|
68,485
|
|
|
66,305
|
|
|
Other invested assets
|
36,684
|
|
|
38,577
|
|
|
2,256
|
|
|
Short-term investments and cash equivalents
|
3,219
|
|
|
9,266
|
|
|
2,382
|
|
|
Gross investment income
|
387,240
|
|
|
411,900
|
|
|
343,452
|
|
|
Less: investment expenses
|
(19,890)
|
|
|
(18,103)
|
|
|
(18,165)
|
|
|
Net investment income
|
$
|
367,350
|
|
|
$
|
393,797
|
|
|
$
|
325,287
|
|
The carrying value of non-income producing assets included $10.5 million in available-for-sale fixed maturities as of December 31, 2020. Non-income producing assets represent investments that had not produced income for the twelve months preceding December 31, 2020.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Realized Investment Gains (Losses), Net
The following table sets forth “Realized investment gains (losses), net” by investment type, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
|
Fixed maturities(1)
|
$
|
(7,236)
|
|
|
$
|
46,738
|
|
|
$
|
(13,340)
|
|
|
|
|
|
|
|
|
|
Commercial mortgage and other loans
|
(226)
|
|
|
297
|
|
|
(271)
|
|
|
Other invested assets
|
(287)
|
|
|
(3,400)
|
|
|
849
|
|
|
Derivatives
|
(55,003)
|
|
|
(160,368)
|
|
|
(154,208)
|
|
|
Short-term investments and cash equivalents
|
(224)
|
|
|
(16)
|
|
|
(308)
|
|
|
Realized investment gains (losses), net
|
$
|
(62,976)
|
|
|
$
|
(116,749)
|
|
|
$
|
(167,278)
|
|
(1)Includes fixed maturity securities classified as available-for-sale and excludes fixed maturity securities classified as trading.
Net Unrealized Gains (Losses) on Investments within AOCI
The following table sets forth net unrealized gains (losses) on investments, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
|
Fixed maturity securities, available-for-sale — with OTTI(1)
|
$ N/A
|
|
$
|
1,568
|
|
|
$
|
(689)
|
|
|
Fixed maturity securities, available-for-sale — all other(1)
|
N/A
|
|
397,136
|
|
|
(44,619)
|
|
|
Fixed maturity securities, available-for-sale with an allowance
|
0
|
|
|
N/A
|
|
N/A
|
|
Fixed maturity securities, available-for-sale without an allowance
|
857,599
|
|
|
N/A
|
|
N/A
|
|
Derivatives designated as cash flow hedges(2)
|
(8,112)
|
|
|
26,126
|
|
|
22,122
|
|
|
Affiliated notes
|
4,024
|
|
|
4,715
|
|
|
810
|
|
|
Other investments(3)
|
(4,162)
|
|
|
(4,365)
|
|
|
5,055
|
|
|
Net unrealized gains (losses) on investments
|
$
|
849,349
|
|
|
$
|
425,180
|
|
|
$
|
(17,321)
|
|
(1)Effective January 1, 2020, per ASU 2016-13, fixed maturity securities, available-for-sale are no longer required to be disclosed “with OTTI” and “all other.”
(2)For more information on cash flow hedges, see Note 4.
(3)Includes net unrealized gains (losses) on certain joint ventures that are strategic in nature and are included in “Other assets.”
Repurchase Agreements and Securities Lending
In the normal course of business, the Company sells securities under agreements to repurchase and enters into securities lending transactions. As of both December 31, 2020 and 2019, the Company had no repurchase agreements.
The following table sets forth the composition of “Cash collateral for loaned securities,” which represents the liability to return cash collateral received for the following types of securities loaned, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
Remaining Contractual Maturities of the Agreements
|
|
|
|
Remaining Contractual Maturities of the Agreements
|
|
|
|
|
Overnight & Continuous
|
|
Up to 30 Days
|
|
Total
|
|
Overnight & Continuous
|
|
Up to 30 Days
|
|
Total
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. public corporate securities
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
5,048
|
|
|
$
|
0
|
|
|
$
|
5,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign public corporate securities
|
2,725
|
|
|
0
|
|
|
2,725
|
|
|
2,481
|
|
|
0
|
|
|
2,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash collateral for loaned securities(1)
|
$
|
2,725
|
|
|
$
|
0
|
|
|
$
|
2,725
|
|
|
$
|
7,529
|
|
|
$
|
0
|
|
|
$
|
7,529
|
|
(1)The Company did not have any agreements with remaining contractual maturities greater than thirty days, as of the dates indicated.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Securities Pledged, Restricted Assets and Special Deposits
The Company pledges as collateral investment securities it owns to unaffiliated parties through certain transactions, including securities lending, securities sold under agreements to repurchase, collateralized borrowings and postings of collateral with derivative counterparties. The following table sets forth the carrying value of investments pledged to third parties and the carrying amount of the associated liabilities supported by the pledged collateral, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
(in thousands)
|
|
Pledged collateral:
|
|
|
|
|
|
Fixed maturity securities, available-for-sale
|
|
$
|
2,525
|
|
|
$
|
7,292
|
|
|
Total securities pledged
|
|
$
|
2,525
|
|
|
$
|
7,292
|
|
|
Liabilities supported by the pledged collateral:
|
|
|
|
|
|
Cash collateral for loaned securities
|
|
$
|
2,725
|
|
|
$
|
7,529
|
|
|
|
|
|
|
|
|
Total liabilities supported by the pledged collateral
|
|
$
|
2,725
|
|
|
$
|
7,529
|
|
In the normal course of its business activities, the Company accepts collateral that can be sold or repledged. The primary sources of this collateral are securities purchased under agreements to resell. As of both December 31, 2020 and 2019, there was no collateral that could be sold or repledged.
As of December 31, 2020 and 2019, there were available-for-sale fixed maturities of $4.3 million and $3.8 million, respectively, on deposit with governmental authorities or trustees as required by certain insurance laws.
4. DERIVATIVES AND HEDGING
Types of Derivative Instruments and Derivative Strategies
Interest Rate Contracts
Interest rate swaps are used by the Company to reduce risks from changes in interest rates, manage interest rate exposures arising from mismatches between assets and liabilities and to hedge against changes in their values it owns or anticipates acquiring or selling.
Swaps may be attributed to specific assets or liabilities or to a portfolio of assets or liabilities. Under interest rate swaps, the Company agrees with counterparties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed upon notional principal amount.
Equity Contracts
Equity options are used by the Company to manage its exposure to the equity markets which impacts the value of assets and liabilities it owns or anticipates acquiring or selling.
Equity index options are contracts which will settle in cash based on differentials in the underlying indices at the time of exercise and the strike price. The Company uses combinations of purchases and sales of equity index options to hedge the effects of adverse changes in equity indices within a predetermined range.
Foreign Exchange Contracts
Currency derivatives, including currency swaps and forwards, are used by the Company to reduce risks from changes in currency exchange rates with respect to investments denominated in foreign currencies that the Company either holds or intends to acquire or sell.
Under currency forwards, the Company agrees with counterparties to deliver a specified amount of an identified currency at a specified future date. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. The Company executes forward sales of the hedged currency in exchange for U.S. dollars at a specified exchange rate. The maturities of these forwards correspond with the future periods in which the non-U.S. dollar-denominated earnings are expected to be generated.
Under currency swaps, the Company agrees with counterparties to exchange, at specified intervals, the difference between one currency and another at an exchange rate and calculated by reference to an agreed principal amount. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Credit Contracts
The Company writes credit protection to gain exposure similar to investment in public fixed maturity cash instruments. With these credit derivatives the Company sells credit protection on a single name reference, or certain index reference, and in return receives a quarterly premium. This premium or credit spread generally corresponds to the difference between the yield on the referenced name (or an index’s referenced names) public fixed maturity cash instruments and swap rates, at the time the agreement is executed. If there is an event of default by the referenced name or one of the referenced names in the index, as defined by the agreement, then the Company is obligated to pay the referenced amount of the contract to the counterparty and receive in return the referenced defaulted security or similar security or (in the case of a credit default index) pay the referenced amount less the auction recovery rate.
In addition to selling credit protection, the Company purchases credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio.
Embedded Derivatives
The Company offers certain products (for example, variable annuities and index-linked universal life) which may include guaranteed benefit features that are accounted for as embedded derivatives; related to certain of these derivatives, the Company has entered into reinsurance agreements with both affiliated and unaffiliated parties. Effective April 1, 2016, the Company entered into reinsurance agreements with affiliates, PALAC and Prudential Insurance. Additionally, the Company has entered into a reinsurance agreement with an external counterparty, Union Hamilton Reinsurance, Ltd. ("Union Hamilton"). See Note 9 for additional information on the reinsurance agreements.
These embedded derivatives and reinsurance agreements, also accounted for as derivatives, are carried at fair value and marked to market through “Realized investment gains (losses), net” based on the change in value of the underlying contractual guarantees, which are determined using valuation models, as described in Note 5.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
3,486
|
|
|
$
|
203
|
|
|
$
|
0
|
|
|
$
|
3,615
|
|
|
$
|
0
|
|
|
$
|
(50)
|
|
|
Foreign Currency Swaps
|
|
861,074
|
|
|
27,336
|
|
|
(49,316)
|
|
|
773,933
|
|
|
36,551
|
|
|
(12,471)
|
|
|
Total Derivatives Designated as Hedge Accounting Instruments
|
|
$
|
864,560
|
|
|
$
|
27,539
|
|
|
$
|
(49,316)
|
|
|
$
|
777,548
|
|
|
$
|
36,551
|
|
|
$
|
(12,521)
|
|
|
Derivatives Not Qualifying as Hedge Accounting Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
663,050
|
|
|
$
|
57,024
|
|
|
$
|
(11,117)
|
|
|
$
|
569,925
|
|
|
$
|
33,256
|
|
|
$
|
(4,490)
|
|
|
Interest Rate Futures
|
|
57,700
|
|
|
198
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Foreign Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Forwards
|
|
55,292
|
|
|
5
|
|
|
(1,322)
|
|
|
21,580
|
|
|
0
|
|
|
(518)
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Default Swaps
|
|
2,313
|
|
|
0
|
|
|
(18)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Currency/Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Swaps
|
|
143,011
|
|
|
6,584
|
|
|
(7,286)
|
|
|
151,792
|
|
|
7,563
|
|
|
(1,892)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Options
|
|
3,244,900
|
|
|
306,196
|
|
|
(196,767)
|
|
|
2,680,048
|
|
|
174,398
|
|
|
(78,381)
|
|
|
Total Derivatives Not Qualifying as Hedge Accounting Instruments
|
|
$
|
4,166,266
|
|
|
$
|
370,007
|
|
|
$
|
(216,510)
|
|
|
$
|
3,423,345
|
|
|
$
|
215,217
|
|
|
$
|
(85,281)
|
|
|
Total Derivatives(1)(2)
|
|
$
|
5,030,826
|
|
|
$
|
397,546
|
|
|
$
|
(265,826)
|
|
|
$
|
4,200,893
|
|
|
$
|
251,768
|
|
|
$
|
(97,802)
|
|
(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 $13,228 million and $8,530 million as of December 31, 2020 and 2019, respectively included in "Future policy benefits" and $1,155 million and $962 million as of December 31, 2020 and 2019, respectively included in "Policyholders' account balances". The fair value of the related reinsurance, included in "Reinsurance recoverables" or "Other liabilities" was an asset of $13,240 million and $8,540 million as of December 31, 2020 and 2019, respectively.
(2)Recorded in “Other invested assets” and “Payables to parent and affiliates” on the Consolidated Statements of Financial Position.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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 Consolidated 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 Consolidated Statements of Financial Position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
Gross
Amounts of
Recognized
Financial
Instruments
|
|
Gross
Amounts
Offset in the Consolidated
Statement of
Financial
Position
|
|
Net
Amounts
Presented in
the Consolidated Statement
of Financial
Position
|
|
Financial
Instruments/
Collateral(1)
|
|
Net Amount
|
|
|
|
(in thousands)
|
|
Offsetting of Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives(1)
|
|
$
|
397,546
|
|
|
$
|
(379,399)
|
|
|
$
|
18,147
|
|
|
$
|
(14,572)
|
|
|
$
|
3,575
|
|
|
Securities purchased under agreements to resell
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Total Assets
|
|
$
|
397,546
|
|
|
$
|
(379,399)
|
|
|
$
|
18,147
|
|
|
$
|
(14,572)
|
|
|
$
|
3,575
|
|
|
Offsetting of Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives(1)
|
|
$
|
265,826
|
|
|
$
|
(265,826)
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Securities sold under agreements to repurchase
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Total Liabilities
|
|
$
|
265,826
|
|
|
$
|
(265,826)
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
Gross
Amounts of
Recognized
Financial
Instruments
|
|
Gross
Amounts
Offset in the Consolidated
Statement of
Financial
Position
|
|
Net
Amounts
Presented in
the Consolidated Statement
of Financial
Position
|
|
Financial
Instruments/
Collateral(1)
|
|
Net Amount
|
|
|
|
(in thousands)
|
|
Offsetting of Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives(1)
|
|
$
|
251,765
|
|
|
$
|
(239,220)
|
|
|
$
|
12,545
|
|
|
$
|
(12,545)
|
|
|
$
|
0
|
|
|
Securities purchased under agreements to resell
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Total Assets
|
|
$
|
251,765
|
|
|
$
|
(239,220)
|
|
|
$
|
12,545
|
|
|
$
|
(12,545)
|
|
|
$
|
0
|
|
|
Offsetting of Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives(1)
|
|
$
|
97,802
|
|
|
$
|
(97,802)
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Securities sold under agreements to repurchase
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Total Liabilities
|
|
$
|
97,802
|
|
|
$
|
(97,802)
|
|
|
$
|
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 13. 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 Consolidated Financial Statements.
Cash Flow Hedges
The primary derivative instruments used by the Company in its cash flow hedge accounting relationships are currency swaps and interest rate 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 and equity derivatives in any of its cash flow hedge accounting relationships.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
|
|
|
|
|
|
Realized
Investment
Gains (Losses)
|
|
Net
Investment
Income
|
|
Other
Income
|
|
AOCI(1)
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Derivatives Designated as Hedge Accounting Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
$
|
(44)
|
|
|
$
|
21
|
|
|
$
|
0
|
|
|
$
|
284
|
|
|
|
|
|
|
Currency/Interest Rate
|
|
(314)
|
|
|
10,660
|
|
|
(10,161)
|
|
|
(34,522)
|
|
|
|
|
|
|
Total cash flow hedges
|
|
(358)
|
|
|
10,681
|
|
|
(10,161)
|
|
|
(34,238)
|
|
|
|
|
|
|
Derivatives Not Qualifying as Hedge Accounting Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
17,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
Currency
|
|
(2,560)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
Currency/Interest Rate
|
|
(4,130)
|
|
|
0
|
|
|
(109)
|
|
|
0
|
|
|
|
|
|
|
Credit
|
|
(284)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
Equity
|
|
37,480
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
Embedded Derivatives
|
|
(102,151)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
Total Derivatives Not Qualifying as Hedge Accounting Instruments
|
|
(54,645)
|
|
|
0
|
|
|
(109)
|
|
|
0
|
|
|
|
|
|
|
Total
|
|
$
|
(55,003)
|
|
|
$
|
10,681
|
|
|
$
|
(10,270)
|
|
|
$
|
(34,238)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
Realized
Investment
Gains (Losses)
|
|
Net
Investment
Income
|
|
Other
Income
|
|
AOCI(1)
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Derivatives Designated as Hedge Accounting Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
(50)
|
|
|
|
|
|
|
Currency/Interest Rate
|
|
425
|
|
|
9,007
|
|
|
(1,698)
|
|
|
4,081
|
|
|
|
|
|
|
Total cash flow hedges
|
|
425
|
|
|
9,007
|
|
|
(1,698)
|
|
|
4,031
|
|
|
|
|
|
|
Derivatives Not Qualifying as Hedge Accounting Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
18,609
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
Currency
|
|
20
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
Currency/Interest Rate
|
|
3,485
|
|
|
0
|
|
|
(5)
|
|
|
0
|
|
|
|
|
|
|
Credit
|
|
(1)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
Equity
|
|
74,068
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
Embedded Derivatives
|
|
(256,974)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
Total Derivatives Not Qualifying as Hedge Accounting Instruments
|
|
(160,793)
|
|
|
0
|
|
|
(5)
|
|
|
0
|
|
|
|
|
|
|
Total
|
|
$
|
(160,368)
|
|
|
$
|
9,007
|
|
|
$
|
(1,703)
|
|
|
$
|
4,031
|
|
|
|
|
|
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
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
|
|
$
|
(997)
|
|
|
$
|
6,819
|
|
|
$
|
10,066
|
|
|
$
|
39,801
|
|
|
Total cash flow hedges
|
|
(997)
|
|
|
6,819
|
|
|
10,066
|
|
|
39,801
|
|
|
Derivatives Not Qualifying as Hedge Accounting Instruments:
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
(7,688)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Currency
|
|
1,475
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Currency/Interest Rate
|
|
6,395
|
|
|
0
|
|
|
44
|
|
|
0
|
|
|
Credit
|
|
(2)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Equity
|
|
(27,212)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Embedded Derivatives
|
|
(126,179)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Total Derivatives Not Qualifying as Hedge Accounting Instruments
|
|
(153,211)
|
|
|
0
|
|
|
44
|
|
|
0
|
|
|
Total
|
|
$
|
(154,208)
|
|
|
$
|
6,819
|
|
|
$
|
10,110
|
|
|
$
|
39,801
|
|
(1)Net change in AOCI.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Balance, December 31, 2017
|
$
|
(17,678)
|
|
|
Amount recorded in AOCI
|
|
|
|
|
|
|
|
|
Currency/Interest Rate
|
55,689
|
|
|
Total amount recorded in AOCI
|
55,689
|
|
|
Amount reclassified from AOCI to income
|
|
|
|
|
|
|
|
|
Currency/Interest Rate
|
(15,889)
|
|
|
Total amount reclassified from AOCI to income
|
(15,889)
|
|
|
Balance, December 31, 2018
|
$
|
22,122
|
|
|
Cumulative-effect adjustment from the adoption of ASU 2017-12(1)
|
(27)
|
|
|
Amount recorded in AOCI
|
|
|
|
|
|
|
|
|
Interest Rate
|
(50)
|
|
|
|
|
|
Currency/Interest Rate
|
11,815
|
|
|
Total amount recorded in AOCI
|
11,765
|
|
|
Amount reclassified from AOCI to income
|
|
|
|
|
|
|
|
|
Currency/Interest Rate
|
(7,734)
|
|
|
Total amount reclassified from AOCI to income
|
(7,734)
|
|
|
Balance, December 31, 2019
|
$
|
26,126
|
|
|
Amount recorded in AOCI
|
|
|
Interest Rate
|
261
|
|
|
|
|
|
Currency/Interest Rate
|
(34,337)
|
|
|
Total amount recorded in AOCI
|
(34,076)
|
|
|
Amount reclassified from AOCI to income
|
|
|
Interest Rate
|
23
|
|
|
|
|
|
Currency/Interest Rate
|
(185)
|
|
|
Total amount reclassified from AOCI to income
|
(162)
|
|
|
Balance, December 31, 2020
|
$
|
(8,112)
|
|
(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 Consolidated Statements of Operations and Comprehensive Income (Loss); these amounts are then reclassified to earnings when the hedged item affects earnings. Using December 31, 2020 values, it is estimated that a pre-tax gain of $9 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending December 31, 2021.
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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Credit Derivatives
The Company has no exposure from credit derivative positions where it has written credit protection as of December 31, 2020 and 2019.
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 $2 million and $0 million reported as of December 31, 2020 and 2019, respectively with a fair value of $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 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.
5. FAIR VALUE OF ASSETS AND LIABILITIES
Fair Value Measurement – Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative fair value guidance establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. The Company’s Level 1 assets and liabilities primarily include certain cash equivalents and short-term investments, equity securities and derivative contracts that trade on an active exchange market.
Level 2 - Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, and other market observable inputs. The Company’s Level 2 assets and liabilities include: fixed maturities (corporate public and private bonds, most government securities, certain asset-backed and mortgage-backed securities, etc.), certain equity securities (mutual funds, which do not trade in active markets because they are not publicly available), certain cash equivalents, and certain OTC derivatives.
Level 3 - Fair value is based on at least one significant unobservable input for the asset or liability. The assets and liabilities in this category may require significant judgment or estimation in determining the fair value. The Company’s Level 3 assets and liabilities primarily include: certain private fixed maturities and equity securities, certain manually priced public fixed maturities, certain highly structured OTC derivative contracts, and embedded derivatives resulting from reinsurance or certain products with guaranteed benefits.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Assets and Liabilities by Hierarchy Level - The tables below present the balances of assets and liabilities reported at fair value on a recurring basis, as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Netting(1)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. government authorities and agencies
|
|
$
|
0
|
|
|
$
|
22,855
|
|
|
$
|
55,000
|
|
|
$
|
0
|
|
|
$
|
77,855
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. states and their political subdivisions
|
|
0
|
|
|
517,951
|
|
|
0
|
|
|
0
|
|
|
517,951
|
|
|
|
|
|
|
|
|
|
Foreign government bonds
|
|
0
|
|
|
250,692
|
|
|
163
|
|
|
0
|
|
|
250,855
|
|
|
|
|
|
|
|
|
|
U.S. corporate public securities
|
|
0
|
|
|
2,929,431
|
|
|
3
|
|
|
0
|
|
|
2,929,434
|
|
|
|
|
|
|
|
|
|
U.S. corporate private securities
|
|
0
|
|
|
977,423
|
|
|
34,633
|
|
|
0
|
|
|
1,012,056
|
|
|
|
|
|
|
|
|
|
Foreign corporate public securities
|
|
0
|
|
|
311,407
|
|
|
9,323
|
|
|
0
|
|
|
320,730
|
|
|
|
|
|
|
|
|
|
Foreign corporate private securities
|
|
0
|
|
|
961,113
|
|
|
130,817
|
|
|
0
|
|
|
1,091,930
|
|
|
|
|
|
|
|
|
|
Asset-backed securities(2)
|
|
0
|
|
|
235,573
|
|
|
2,065
|
|
|
0
|
|
|
237,638
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
0
|
|
|
520,947
|
|
|
0
|
|
|
0
|
|
|
520,947
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
0
|
|
|
53,235
|
|
|
0
|
|
|
0
|
|
|
53,235
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
0
|
|
|
6,780,627
|
|
|
232,004
|
|
|
0
|
|
|
7,012,631
|
|
|
|
|
|
|
|
|
|
Fixed maturities, trading
|
|
0
|
|
|
81,727
|
|
|
755
|
|
|
0
|
|
|
82,482
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
100,268
|
|
|
300
|
|
|
7,889
|
|
|
0
|
|
|
108,457
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
49,997
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
49,997
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
49,996
|
|
|
347,330
|
|
|
0
|
|
|
0
|
|
|
397,326
|
|
|
|
|
|
|
|
|
|
Other invested assets(3)
|
|
198
|
|
|
397,348
|
|
|
0
|
|
|
(379,399)
|
|
|
18,147
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverables
|
|
0
|
|
|
0
|
|
|
13,239,539
|
|
|
0
|
|
|
13,239,539
|
|
|
|
|
|
|
|
|
|
Receivables from parent and affiliates
|
|
0
|
|
|
111,970
|
|
|
0
|
|
|
0
|
|
|
111,970
|
|
|
|
|
|
|
|
|
|
Subtotal excluding separate account assets
|
|
200,459
|
|
|
7,719,302
|
|
|
13,480,187
|
|
|
(379,399)
|
|
|
21,020,549
|
|
|
|
|
|
|
|
|
|
Separate account assets(4)(5)
|
|
0
|
|
|
140,583,009
|
|
|
0
|
|
|
0
|
|
|
140,583,009
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
200,459
|
|
|
$
|
148,302,311
|
|
|
$
|
13,480,187
|
|
|
$
|
(379,399)
|
|
|
$
|
161,603,558
|
|
|
|
|
|
|
|
|
|
Future policy benefits(6)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
13,227,814
|
|
|
$
|
0
|
|
|
$
|
13,227,814
|
|
|
|
|
|
|
|
|
|
Policyholders' account balances
|
|
0
|
|
|
0
|
|
|
1,155,274
|
|
|
0
|
|
|
1,155,274
|
|
|
|
|
|
|
|
|
|
Payables to parent and affiliates
|
|
0
|
|
|
265,826
|
|
|
0
|
|
|
(265,826)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
0
|
|
|
$
|
265,826
|
|
|
$
|
14,383,088
|
|
|
$
|
(265,826)
|
|
|
$
|
14,383,088
|
|
|
|
|
|
|
|
|
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Netting(1)
|
|
Total
|
|
|
|
(in thousands)
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. government authorities and agencies
|
|
$
|
0
|
|
|
$
|
47,797
|
|
|
$
|
38,671
|
|
|
$
|
0
|
|
|
$
|
86,468
|
|
|
Obligations of U.S. states and their political subdivisions
|
|
0
|
|
|
497,827
|
|
|
0
|
|
|
0
|
|
|
497,827
|
|
|
Foreign government bonds
|
|
0
|
|
|
222,663
|
|
|
163
|
|
|
0
|
|
|
222,826
|
|
|
U.S. corporate public securities
|
|
0
|
|
|
2,141,324
|
|
|
3
|
|
|
0
|
|
|
2,141,327
|
|
|
U.S. corporate private securities
|
|
0
|
|
|
893,943
|
|
|
35,829
|
|
|
0
|
|
|
929,772
|
|
|
Foreign corporate public securities
|
|
0
|
|
|
278,435
|
|
|
181
|
|
|
0
|
|
|
278,616
|
|
|
Foreign corporate private securities
|
|
0
|
|
|
944,408
|
|
|
14,070
|
|
|
0
|
|
|
958,478
|
|
|
Asset-backed securities(2)
|
|
0
|
|
|
117,935
|
|
|
2,001
|
|
|
0
|
|
|
119,936
|
|
|
Commercial mortgage-backed securities
|
|
0
|
|
|
382,916
|
|
|
0
|
|
|
0
|
|
|
382,916
|
|
|
Residential mortgage-backed securities
|
|
0
|
|
|
63,804
|
|
|
0
|
|
|
0
|
|
|
63,804
|
|
|
Subtotal
|
|
0
|
|
|
5,591,052
|
|
|
90,918
|
|
|
0
|
|
|
5,681,970
|
|
|
Fixed maturities, trading
|
|
0
|
|
|
59,296
|
|
|
668
|
|
|
0
|
|
|
59,964
|
|
|
Equity securities
|
|
131
|
|
|
465
|
|
|
9,898
|
|
|
0
|
|
|
10,494
|
|
|
Short-term investments
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Cash equivalents
|
|
0
|
|
|
547,642
|
|
|
0
|
|
|
0
|
|
|
547,642
|
|
|
Other invested assets(3)
|
|
0
|
|
|
251,764
|
|
|
4
|
|
|
(239,220)
|
|
|
12,548
|
|
|
Reinsurance recoverables
|
|
0
|
|
|
0
|
|
|
8,539,671
|
|
|
0
|
|
|
8,539,671
|
|
|
Receivables from parent and affiliates
|
|
0
|
|
|
119,431
|
|
|
3,135
|
|
|
0
|
|
|
122,566
|
|
|
Subtotal excluding separate account assets
|
|
131
|
|
|
6,569,650
|
|
|
8,644,294
|
|
|
(239,220)
|
|
|
14,974,855
|
|
|
Separate account assets(4)(5)
|
|
0
|
|
|
133,625,669
|
|
|
0
|
|
|
0
|
|
|
133,625,669
|
|
|
Total assets
|
|
$
|
131
|
|
|
$
|
140,195,319
|
|
|
$
|
8,644,294
|
|
|
$
|
(239,220)
|
|
|
$
|
148,600,524
|
|
|
Future policy benefits(6)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
8,529,566
|
|
|
$
|
0
|
|
|
$
|
8,529,566
|
|
|
Policyholders' account balances
|
|
0
|
|
|
0
|
|
|
962,351
|
|
|
0
|
|
|
962,351
|
|
|
Payables to parent and affiliates
|
|
0
|
|
|
97,802
|
|
|
0
|
|
|
(97,802)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
0
|
|
|
$
|
97,802
|
|
|
$
|
9,491,917
|
|
|
$
|
(97,802)
|
|
|
$
|
9,491,917
|
|
(1)“Netting” amounts represent cash collateral of $113.6 million and $141.4 million as of December 31, 2020 and 2019, respectively.
(2)Includes credit tranched securities collateralized by syndicated bank loans, sub-prime mortgages, auto loans, credit cards, education loans and other asset types.
(3)Other invested assets excluded from the fair value hierarchy include certain hedge funds, private equity funds and other funds for which fair value is measured at net asset value ("NAV") per share (or its equivalent) as a practical expedient. At December 31, 2020 and 2019, the fair values of such investments were $77 million and $75 million, respectively.
(4)Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Consolidated Statements of Financial Position.
(5)Separate account assets included in the fair value hierarchy exclude investments in entities that calculate NAV per share (or its equivalent) as a practical expedient. Such investments excluded from the fair value hierarchy include investments in real estate, hedge funds and a corporate owned life insurance fund, for which fair value is measured at NAV per share (or its equivalent). At December 31, 2020 and 2019, the fair value of such investments was $5,157 million and $4,762 million, respectively.
(6)As of December 31, 2020, the net embedded derivative liability position of $13,228 million includes $483 million of embedded derivatives in an asset position and $13,711 million of embedded derivatives in a liability position. As of December 31, 2019, the net embedded derivative liability position of $8,530 million includes $611 million of embedded derivatives in an asset position and $9,141 million of embedded derivatives in a liability position.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair value on a recurring basis are summarized below.
Fixed Maturity Securities - The fair values of the Company’s public fixed maturity securities are generally based on prices obtained from independent pricing services. Prices for each security are generally sourced from multiple pricing vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. The Company ultimately uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type. The pricing hierarchy is updated for new financial products and recent pricing experience with various vendors. Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. Typical inputs used by these pricing services include but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, and/or estimated cash flow, prepayment speeds, and default rates. If the pricing information received from third-party pricing services is deemed not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process with the pricing service or classify the securities as Level 3. If the pricing service updates the price to be more consistent with the presented market observations, the security remains within Level 2.
Internally-developed valuations or indicative broker quotes are also used to determine fair value in circumstances where vendor pricing is not available, or where the Company ultimately concludes that pricing information received from the independent pricing services is not reflective of market activity. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may override the information with an internally-developed valuation. As of December 31, 2020 and 2019, overrides on a net basis were not material. Pricing service overrides, internally-developed valuations and indicative broker quotes are generally included in Level 3 in the fair value hierarchy.
The Company conducts several specific price monitoring activities. Daily analyses identify price changes over predetermined thresholds defined at the financial instrument level. Various pricing integrity reports are reviewed on a daily and monthly basis to determine if pricing is reflective of market activity or if it would warrant any adjustments. Other procedures performed include, but are not limited to, reviews of third-party pricing services methodologies, reviews of pricing trends, and back testing.
The fair values of private fixed maturities, which are originated by internal private asset managers, are primarily determined using discounted cash flow models. These models primarily use observable inputs that include Treasury or similar base rates plus estimated credit spreads to value each security. The credit spreads are obtained through a survey of private market intermediaries who are active in both primary and secondary transactions, and consider, among other factors, the credit quality and the reduced liquidity associated with private placements. Internal adjustments are made to reflect variation in observed sector spreads. Since most private placements are valued using standard market observable inputs and inputs derived from, or corroborated by, market observable data including, but not limited to observed prices and spreads for similar publicly or privately traded issues, they have been reflected within Level 2. For certain private fixed maturities, the discounted cash flow model may incorporate significant unobservable inputs, which reflect the Company’s own assumptions about the inputs that market participants would use in pricing the asset. To the extent management determines that such unobservable inputs are significant to the price of a security, a Level 3 classification is made.
Equity Securities - Equity securities consist principally of investments in common and preferred stock of publicly traded companies, privately traded securities, as well as mutual fund shares. The fair values of most publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. Estimated fair values for most privately traded equity securities are determined using discounted cash flow, earnings multiple and other valuation models that require a substantial level of judgment around inputs and therefore are classified within Level 3. The fair values of mutual fund shares that transact regularly (but do not trade in active markets because they are not publicly available) are based on transaction prices of identical fund shares and are classified within Level 2 in the fair value hierarchy.
Derivative Instruments - Derivatives are recorded at fair value either as assets, within “Other invested assets”, or as liabilities within “Payables to parent and affiliates”, except for embedded derivatives which are recorded with the associated host contract. The fair values of derivative contracts can be affected by changes in interest rates, foreign exchange rates, credit spreads, market volatility, expected returns, NPR, liquidity and other factors.
The Company's exchange-traded futures and options include treasury and equity futures. Exchange-traded futures and options are valued using quoted prices in active markets and are classified within Level 1 in the fair value hierarchy.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
The majority of the Company’s derivative positions are traded in the OTC derivative market and are classified within Level 2 in the fair value hierarchy. OTC derivatives classified within Level 2 are valued using models that utilize actively quoted or observable market input values from external market data providers, third-party pricing vendors and/or recent trading activity. The Company’s policy is to use mid-market pricing in determining its best estimate of fair value. The fair values of most OTC derivatives, including interest rate and cross-currency swaps, currency forward contracts and single name credit default swaps are determined using discounted cash flow models. The fair values of European style option contracts are determined using Black-Scholes option pricing models. These models’ key inputs include the contractual terms of the respective contract, along with significant observable inputs, including interest rates, currency rates, credit spreads, equity prices, index dividend yields, NPR, volatility and other factors.
The Company’s cleared interest rate swaps and credit derivatives linked to an index are valued using models that utilize actively quoted or observable market inputs, including the secured overnight financing rate ("SOFR"), obtained from external market data providers, third-party pricing vendors and/or recent trading activity. These derivatives are classified as Level 2 in the fair value hierarchy.
Cash Equivalents and Short-Term Investments - Cash equivalents and short-term investments include money market instruments and other highly liquid debt instruments. Certain money market instruments are valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. The remaining instruments in this category are generally fair valued based on market observable inputs and these investments have primarily been classified within Level 2.
Separate Account Assets - Separate account assets include fixed maturity securities, treasuries, equity securities, real estate, mutual funds and commercial mortgage loans for which values are determined consistent with similar instruments described above under “Fixed Maturity Securities” and “Equity Securities”.
Receivables from Parent and Affiliates - Receivables from parent and affiliates carried at fair value include affiliated bonds within the Company’s legal entity where fair value is determined consistent with similar securities described above under “Fixed Maturity Securities” managed by affiliated asset managers.
Reinsurance Recoverables - Reinsurance recoverables carried at fair value include the reinsurance of the Company’s living benefit guarantees on certain variable annuity contracts. These guarantees are accounted for as embedded derivatives and are recorded in “Reinsurance recoverables” or “Other liabilities” when fair value is in an asset or liability position, respectively. The methods and assumptions used to estimate the fair value are consistent with those described below in “Future policy benefits”. The reinsurance agreements covering these guarantees are derivatives with fair value determined in the same manner as the living benefit guarantee.
Future Policy Benefits - The liability for future policy benefits is related to guarantees primarily associated with the living benefit features of certain variable annuity contracts, including guaranteed minimum accumulation benefits ("GMAB"), guaranteed withdrawal benefits ("GMWB") and guaranteed minimum income and withdrawal benefits ("GMIWB"), accounted for as embedded derivatives. The fair values of these liabilities are calculated as the present value of future expected benefit payments to customers less the present value of future expected rider fees attributable to the embedded derivative feature. This methodology could result in either a liability or asset balance, given changing capital market conditions and various actuarial assumptions. Since there is no observable active market for the transfer of these obligations, the valuations are calculated using internally developed models with option pricing techniques. The models are based on a risk neutral valuation framework and incorporate premiums for risks inherent in valuation techniques, inputs, and the general uncertainty around the timing and amount of future cash flows. The determination of these risk premiums requires the use of management's judgment.
The significant inputs to the valuation models for these embedded derivatives include capital market assumptions, such as interest rate levels and volatility assumptions, the Company’s market-perceived NPR, as well as actuarially determined assumptions, including contractholder behavior, such as lapse rates, benefit utilization rates, withdrawal rates and mortality rates. Since many of these assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 in the fair value hierarchy.
Capital market inputs and actual policyholders’ account values are updated each quarter based on capital market conditions as of the end of the quarter, including interest rates, equity markets and volatility. In the risk neutral valuation, the initial swap curve drives the total return used to grow the policyholders’ account values. The Company’s discount rate assumption is based on the London Inter Bank Offered Rate ("LIBOR") swap curve adjusted for an additional spread relative to LIBOR to reflect NPR.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Actuarial assumptions, including contractholder behavior and mortality, are reviewed at least annually, and updated based upon emerging experience, future expectations and other data, including any observable market data. These assumptions are generally updated annually unless a material change that the Company feels is indicative of a long-term trend is observed in an interim period.
Policyholders' Account Balances - The liability for policyholders’ account balances is related to certain embedded derivative instruments associated with certain universal life products that provide the policyholders with the index-linked interest credited over contract specified term periods. The fair values of these liabilities are determined using discounted cash flow models which include capital market assumptions such as interest rates and equity index volatility assumptions, the Company’s market-perceived NPR and actuarially determined assumptions for mortality, lapses and projected hedge costs.
As there is no observable active market for these liabilities, the fair value is determined as the present value of account balances paid to policyholders in excess of contractually guaranteed minimums using option pricing techniques for index term periods that contain deposits as of the valuation date, and the expected option budget for future index term periods, where the terms of index crediting rates have not yet been declared by the Company. Premiums for risks inherent in valuation techniques, inputs, and the general uncertainty around the timing and amount of future cash flows are also incorporated in the fair value of these liabilities. Since the valuation of these liabilities require the use of management’s judgment to determine these risk premiums and the use of unobservable inputs, these liabilities are reflected within Level 3 in the fair value hierarchy.
Capital market inputs, including interest rates and equity markets volatility, and actual policyholders’ account values are updated each quarter. Actuarial assumptions are reviewed at least annually and updated based upon emerging experience, future expectations and other data, including any observable market data. Aside from these annual updates, assumptions are generally updated only if a material change is observed in an interim period that the Company believes is indicative of a long-term trend.
Quantitative Information Regarding Internally-Priced Level 3 Assets and Liabilities - The tables below present quantitative information on significant internally-priced Level 3 assets and liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Fair Value
|
|
Valuation
Techniques
|
|
Unobservable
Inputs
|
|
Minimum
|
|
Maximum
|
|
Weighted
Average
|
|
Impact of
Increase in Input on Fair Value(1)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities(2)
|
$
|
151,554
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
0.99
|
%
|
|
|
11.38
|
%
|
|
|
3.44
|
%
|
|
|
Decrease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverables
|
$
|
13,239,539
|
|
|
Fair values are determined using the same unobservable inputs as future policy benefits.
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits(4)
|
$
|
13,227,814
|
|
|
Discounted cash flow
|
|
Lapse rate(6)
|
|
1
|
%
|
|
|
20
|
%
|
|
|
|
|
|
Decrease
|
|
|
|
|
|
|
Spread over LIBOR(7)
|
|
0.06
|
%
|
|
|
1.17
|
%
|
|
|
|
|
|
Decrease
|
|
|
|
|
|
|
Utilization rate(8)
|
|
39
|
%
|
|
|
96
|
%
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
Withdrawal rate
|
|
See table footnote (9) below.
|
|
|
|
|
|
|
Mortality rate(10)
|
|
0
|
%
|
|
|
15
|
%
|
|
|
|
|
|
Decrease
|
|
|
|
|
|
|
Equity volatility curve
|
|
18
|
%
|
|
|
26
|
%
|
|
|
|
|
|
Increase
|
|
Policyholders' account balances(5)
|
$
|
1,155,274
|
|
|
Discounted cash flow
|
|
Lapse rate(6)
|
|
1
|
%
|
|
|
6
|
%
|
|
|
|
|
|
Decrease
|
|
|
|
|
|
|
Spread over LIBOR(7)
|
|
0.06
|
%
|
|
|
1.17
|
%
|
|
|
|
|
|
Decrease
|
|
|
|
|
|
|
Mortality rate(10)
|
|
0
|
%
|
|
|
24
|
%
|
|
|
|
|
|
Decrease
|
|
|
|
|
|
|
Equity volatility curve
|
|
15
|
%
|
|
|
30
|
%
|
|
|
|
|
|
Increase
|
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Fair Value
|
|
Valuation
Techniques
|
|
Unobservable
Inputs
|
|
Minimum
|
|
Maximum
|
|
Weighted
Average
|
|
Impact of
Increase in Input on Fair Value(1)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities(2)
|
$
|
27,816
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
5.24
|
%
|
|
|
17.47
|
%
|
|
|
8.25
|
%
|
|
|
Decrease
|
|
|
|
|
Market Comparables
|
|
EBITDA multiples(3)
|
|
5.7
|
X
|
|
|
5.7
|
X
|
|
|
5.7
|
X
|
|
|
Increase
|
|
Reinsurance recoverables
|
$
|
8,539,671
|
|
|
Fair values are determined using the same unobservable inputs as future policy benefits.
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits(4)
|
$
|
8,529,566
|
|
|
Discounted cash flow
|
|
Lapse rate(6)
|
|
1
|
%
|
|
|
18
|
%
|
|
|
|
|
|
Decrease
|
|
|
|
|
|
|
Spread over LIBOR(7)
|
|
0.10
|
%
|
|
|
1.23
|
%
|
|
|
|
|
|
Decrease
|
|
|
|
|
|
|
Utilization rate(8)
|
|
43
|
%
|
|
|
97
|
%
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
Withdrawal rate
|
|
See table footnote (9) below.
|
|
|
|
|
|
|
Mortality rate(10)
|
|
0
|
%
|
|
|
15
|
%
|
|
|
|
|
|
Decrease
|
|
|
|
|
|
|
Equity volatility curve
|
|
13
|
%
|
|
|
23
|
%
|
|
|
|
|
|
Increase
|
|
Policyholders' account balances(5)
|
$
|
962,351
|
|
|
Discounted cash flow
|
|
Lapse rate(6)
|
|
1
|
%
|
|
|
6
|
%
|
|
|
|
|
|
Decrease
|
|
|
|
|
|
|
Spread over LIBOR(7)
|
|
0.10
|
%
|
|
|
1.23
|
%
|
|
|
|
|
|
Decrease
|
|
|
|
|
|
|
Mortality rate(10)
|
|
0
|
%
|
|
|
24
|
%
|
|
|
|
|
|
Decrease
|
|
|
|
|
|
|
Equity volatility curve
|
|
10
|
%
|
|
|
23
|
%
|
|
|
|
|
|
Increase
|
(1)Conversely, the impact of a decrease in input would have the opposite impact on fair value as that presented in the table.
(2)Includes assets classified as fixed maturities and available-for-sale.
(3)Represents multiples of earnings before interest, taxes, depreciation and amortization "EBITDA", and are amounts used when the Company has determined that market participants would use such multiples when valuing the investments.
(4)Future policy benefits primarily represent general account liabilities for the living benefit features of the Company’s variable annuity contracts which are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than a weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.
(5)Policyholders’ account balances primarily represent general account liabilities for the index-linked interest credited on certain of the Company’s life products that are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than a weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.
(6)Lapse rates for contracts with living benefit guarantees are adjusted at the contract level based on the in-the-moneyness of the living benefit and reflect other factors, such as the applicability of any surrender charges. Lapse rates are reduced when contracts are more in-the-money. Lapse rates for contracts with index-linked crediting guarantees may be adjusted at the contract level based on the applicability of any surrender charges, product type, and market related factors such as interest rates. Lapse rates are also generally assumed to be lower for the period where surrender charges apply. For any given contract, lapse rates vary throughout the period over which cash flows are projected for the purposes of valuing these embedded derivatives.
(7)The spread over the LIBOR swap curve represents the premium added to the proxy for the risk-free rate (LIBOR) to reflect the Company's estimates of rates that a market participant would use to value the living benefits in both the accumulation and payout phases and index-linked interest crediting guarantees. This spread includes an estimate of NPR, which is the risk that the obligation will not be fulfilled by the Company. NPR is primarily estimated by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium. In order to reflect the financial strength ratings of the Company, credit spreads associated with funding agreements, as opposed to credit spread associated with debt, are utilized in developing this estimate because funding agreements, living benefit guarantees, and index-linked interest crediting guarantees are insurance liabilities and are therefore senior to debt.
(8)The utilization rate assumption estimates the percentage of contracts that will utilize the benefit during the contract duration and begin lifetime withdrawals at various time intervals from contract inception. The remaining contractholders are assumed to either begin lifetime withdrawals immediately or never utilize the benefit. Utilization assumptions may vary by product type, tax status and age. The impact of changes in these assumptions is highly dependent on the product type, the age of the contractholder at the time of the sale, and the timing of the first lifetime income withdrawal. Range reflects the utilization rate for the vast majority of business with living benefits.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
(9)The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These assumptions vary based on the age of the contractholder, the tax status of the contract and the duration since the contractholder began lifetime withdrawals. As of December 31, 2020 and 2019, the minimum withdrawal rate assumption is 76% and 78%, respectively. As of both December 31, 2020 and 2019, the maximum withdrawal rate assumption may be greater than 100%. The fair value of the liability will generally increase the closer the withdrawal rate is to 100% and decrease as the withdrawal rate moves further away from 100%.
(10)The range reflects the mortality rates for the vast majority of business with living benefits and other contracts, with policyholders ranging from 45 to 90 years old. While the majority of living benefits have a minimum age requirement, certain other contracts do not have an age restriction. This results in contractholders with mortality rates approaching 0% for certain benefits. Mortality rates may vary by product, age, and duration. A mortality improvement assumption is also incorporated into the overall mortality table.
Interrelationships Between Unobservable Inputs – In addition to the sensitivities of fair value measurements to changes in each unobservable input in isolation, as reflected in the table above, interrelationships between these inputs may also exist, such that a change in one unobservable input may give rise to a change in another, or multiple, inputs. Examples of such interrelationships for significant internally-priced Level 3 assets and liabilities are as follows:
Corporate Securities – The rate used to discount future cash flows reflects current risk-free rates plus credit and liquidity spread requirements that market participants would use to value an asset. The discount rate may be influenced by many factors, including market cycles, expectations of default, collateral, term, and asset complexity. Each of these factors can influence discount rates, either in isolation, or in response to other factors.
Future Policy Benefits – The Company expects efficient benefit utilization and withdrawal rates to generally be correlated with lapse rates. However, behavior is generally highly dependent on the facts and circumstances surrounding the individual contractholder, such as their liquidity needs or tax situation, which could drive lapse behavior independent of other contractholder behavior assumptions. To the extent more efficient contractholder behavior results in greater in-the-moneyness at the contract level, lapse rates may decline for those contracts. Similarly, to the extent that increases in equity volatility are correlated with overall declines in the capital markets, lapse rates may decline as contracts become more in-the-money.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Changes in Level 3 Assets and Liabilities – The following tables describe changes in fair values of Level 3 assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods. When a determination is made to classify assets and liabilities within Level 3, the determination is based on significance of the unobservable inputs in the overall fair value measurement. All transfers are based on changes in the observability of the valuation inputs, including the availability of pricing service information that the Company can validate. Transfers into Level 3 are generally the result of unobservable inputs utilized within valuation methodologies and the use of indicative broker quotes for assets that were previously valued using observable inputs. Transfers out of Level 3 are generally due to the use of observable inputs in valuation methodologies as well as the availability of pricing service information for certain assets that the Company can validate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
|
|
Fair Value, beginning of period
|
Total realized and unrealized gains (losses)(1)
|
Purchases
|
Sales
|
Issuances
|
Settlements
|
Other(2)
|
Transfers into Level 3
|
Transfers out of Level 3
|
Fair Value, end of period
|
Unrealized gains (losses) for assets still held(3)
|
|
|
(in thousands)
|
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
$
|
38,671
|
|
$
|
0
|
|
$
|
16,329
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
55,000
|
|
$
|
0
|
|
|
Foreign government
|
163
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
163
|
|
(1)
|
|
|
Corporate securities(4)
|
50,083
|
|
14,715
|
|
11,121
|
|
(3,680)
|
|
0
|
|
(7,850)
|
|
(1,914)
|
|
114,695
|
|
(2,394)
|
|
174,776
|
|
14,679
|
|
|
Structured securities(5)
|
2,001
|
|
(483)
|
|
7,444
|
|
(6)
|
|
0
|
|
(1,255)
|
|
0
|
|
0
|
|
(5,636)
|
|
2,065
|
|
(489)
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, trading
|
668
|
|
87
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
755
|
|
87
|
|
|
Equity securities
|
9,898
|
|
2,821
|
|
0
|
|
(4,830)
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
7,889
|
|
1,211
|
|
|
Other invested assets
|
4
|
|
(4)
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
(4)
|
|
|
Short-term investments
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
Cash equivalents
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
Reinsurance recoverables
|
8,539,671
|
|
3,604,075
|
|
1,095,793
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
13,239,539
|
|
3,889,923
|
|
|
Receivables from parent and affiliates
|
3,135
|
|
23
|
|
0
|
|
0
|
|
0
|
|
(3,158)
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits
|
(8,529,566)
|
|
(3,610,281)
|
|
0
|
|
0
|
|
(1,087,967)
|
|
0
|
|
0
|
|
0
|
|
0
|
|
(13,227,814)
|
|
(3,896,128)
|
|
|
Policyholders' account balances(6)
|
(962,351)
|
|
(30,199)
|
|
0
|
|
0
|
|
(162,724)
|
|
0
|
|
0
|
|
0
|
|
0
|
|
(1,155,274)
|
|
3,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
|
Total realized and unrealized gains (losses)
|
|
Unrealized gains (losses) for assets still held(3)
|
|
|
Realized investment gains (losses), net(1)
|
Other income (loss)
|
|
Included in other comprehensive income (loss)
|
Net investment income
|
|
Realized investment gains (losses), net
|
Other income (loss)
|
Included in other comprehensive income (loss)(7)
|
|
|
|
(in thousands)
|
|
Fixed maturities, available-for-sale
|
$
|
(5,019)
|
|
$
|
0
|
|
|
$
|
19,106
|
|
$
|
145
|
|
|
$
|
(4,773)
|
|
$
|
0
|
|
$
|
18,962
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, trading
|
0
|
|
87
|
|
|
0
|
|
0
|
|
|
0
|
|
87
|
|
0
|
|
|
|
Equity securities
|
0
|
|
2,821
|
|
|
0
|
|
0
|
|
|
0
|
|
1,211
|
|
0
|
|
|
|
Other invested assets
|
(4)
|
|
0
|
|
|
0
|
|
0
|
|
|
(4)
|
|
0
|
|
0
|
|
|
|
Short-term investments
|
0
|
|
0
|
|
|
0
|
|
0
|
|
|
0
|
|
0
|
|
0
|
|
|
|
Cash equivalents
|
0
|
|
0
|
|
|
0
|
|
0
|
|
|
0
|
|
0
|
|
0
|
|
|
|
Reinsurance recoverables
|
3,604,075
|
|
0
|
|
|
0
|
|
0
|
|
|
3,889,923
|
|
0
|
|
0
|
|
|
|
Receivables from parent and affiliates
|
0
|
|
0
|
|
|
0
|
|
23
|
|
|
0
|
|
0
|
|
0
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits
|
(3,610,281)
|
|
0
|
|
|
0
|
|
0
|
|
|
(3,896,128)
|
|
0
|
|
0
|
|
|
|
Policyholders' account balances
|
(30,199)
|
|
0
|
|
|
0
|
|
0
|
|
|
3,853
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
Fair Value, beginning of period
|
Total realized and unrealized gains (losses)(1)
|
Purchases
|
Sales
|
Issuances
|
Settlements
|
Other(2)
|
Transfers into Level 3
|
Transfers out of Level 3
|
Fair Value, end of period
|
Unrealized gains (losses) for assets still held(3)
|
|
|
(in thousands)
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
$
|
29,816
|
|
$
|
0
|
|
$
|
8,855
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
38,671
|
|
$
|
0
|
|
|
Foreign government
|
0
|
|
4
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
159
|
|
0
|
|
163
|
|
0
|
|
|
Corporate securities(4)
|
56,588
|
|
(5,229)
|
|
4,226
|
|
(81)
|
|
0
|
|
(18,884)
|
|
0
|
|
13,463
|
|
0
|
|
50,083
|
|
(8,467)
|
|
|
Structured securities(5)
|
6,556
|
|
1,322
|
|
0
|
|
(130)
|
|
0
|
|
(6,336)
|
|
0
|
|
77,660
|
|
(77,071)
|
|
2,001
|
|
0
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, trading
|
0
|
|
(83)
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
751
|
|
0
|
|
668
|
|
(83)
|
|
|
Equity securities
|
15,997
|
|
1,668
|
|
0
|
|
(7,767)
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
9,898
|
|
1,534
|
|
|
Other invested assets
|
4
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
4
|
|
0
|
|
|
Short-term investments
|
0
|
|
0
|
|
1,388
|
|
0
|
|
0
|
|
(1,388)
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
Cash equivalents
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
Reinsurance recoverables
|
5,600,008
|
|
1,936,363
|
|
1,003,300
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
8,539,671
|
|
2,142,421
|
|
|
Receivables from parent and affiliates
|
9,261
|
|
190
|
|
0
|
|
0
|
|
0
|
|
(6,316)
|
|
0
|
|
0
|
|
0
|
|
3,135
|
|
0
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits
|
(5,588,840)
|
|
(1,945,323)
|
|
0
|
|
0
|
|
(995,403)
|
|
0
|
|
0
|
|
0
|
|
0
|
|
(8,529,566)
|
|
(2,151,380)
|
|
|
Policyholders' account balances(6)
|
(13,015)
|
|
(765,917)
|
|
0
|
|
0
|
|
(183,419)
|
|
0
|
|
0
|
|
0
|
|
0
|
|
(962,351)
|
|
(759,661)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
Total realized and unrealized gains (losses)
|
|
Unrealized gains (losses) for assets still held(3)
|
|
|
Realized investment gains (losses), net(1)
|
Other income (loss)
|
|
Included in other comprehensive income (loss)
|
Net investment income
|
|
Realized investment gains (losses), net
|
Other income (loss)
|
|
|
|
(in thousands)
|
|
Fixed maturities, available-for-sale
|
$
|
(8,198)
|
|
$
|
0
|
|
|
$
|
3,615
|
|
$
|
680
|
|
|
$
|
(8,467)
|
|
$
|
0
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, trading
|
0
|
|
(83)
|
|
|
0
|
|
0
|
|
|
0
|
|
(83)
|
|
|
|
Equity securities
|
0
|
|
1,668
|
|
|
0
|
|
0
|
|
|
0
|
|
1,534
|
|
|
|
Other invested assets
|
0
|
|
0
|
|
|
0
|
|
0
|
|
|
0
|
|
0
|
|
|
|
Short-term investments
|
0
|
|
0
|
|
|
0
|
|
0
|
|
|
0
|
|
0
|
|
|
|
Cash equivalents
|
0
|
|
0
|
|
|
0
|
|
0
|
|
|
0
|
|
0
|
|
|
|
Reinsurance recoverables
|
1,936,363
|
|
0
|
|
|
0
|
|
0
|
|
|
2,142,421
|
|
0
|
|
|
|
Receivables from parent and affiliates
|
0
|
|
0
|
|
|
0
|
|
190
|
|
|
0
|
|
0
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits
|
(1,945,323)
|
|
0
|
|
|
0
|
|
0
|
|
|
(2,151,380)
|
|
0
|
|
|
|
Policyholders' account balances
|
(765,917)
|
|
0
|
|
|
0
|
|
0
|
|
|
(759,661)
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables summarize the portion of changes in fair values of Level 3 assets and liabilities included in earnings and OCI for the year ended December 31, 2018, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held as of December 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
Total realized and unrealized gains (losses)
|
|
Unrealized gains (losses) for assets still held(3)
|
|
|
Realized investment gains (losses), net(1)
|
Other income (loss)
|
|
Included in other comprehensive income (loss)
|
Net investment income
|
|
Realized investment gains (losses), net
|
Other income (loss)
|
|
|
|
(in thousands)
|
|
Fixed maturities, available-for-sale
|
$
|
(1,600)
|
|
$
|
0
|
|
|
$
|
(6,015)
|
|
$
|
418
|
|
|
$
|
(1,944)
|
|
$
|
0
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, trading
|
0
|
|
0
|
|
|
0
|
|
0
|
|
|
0
|
|
0
|
|
|
|
Equity securities
|
0
|
|
(1,453)
|
|
|
0
|
|
0
|
|
|
0
|
|
(1,453)
|
|
|
|
Other invested assets
|
(5)
|
|
0
|
|
|
0
|
|
0
|
|
|
(5)
|
|
0
|
|
|
|
Short-term investments
|
(47)
|
|
0
|
|
|
0
|
|
0
|
|
|
(19)
|
|
0
|
|
|
|
Cash equivalents
|
(256)
|
|
0
|
|
|
0
|
|
0
|
|
|
0
|
|
0
|
|
|
|
Reinsurance recoverables
|
(782,025)
|
|
0
|
|
|
0
|
|
0
|
|
|
(573,853)
|
|
0
|
|
|
|
Receivables from parent and affiliates
|
0
|
|
0
|
|
|
(20)
|
|
67
|
|
|
0
|
|
0
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits
|
780,261
|
|
0
|
|
|
0
|
|
0
|
|
|
572,088
|
|
0
|
|
|
|
Policyholders' account balances
|
24,405
|
|
0
|
|
|
0
|
|
0
|
|
|
24,405
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Realized investment gains (losses) on future policy benefits and reinsurance recoverables primarily represent the change in the fair value of the Company's living benefit guarantees on certain of its variable annuity contracts.
(2)Other includes reclassifications of certain assets and liabilities between reporting categories.
(3)Unrealized gains or losses related to assets still held at the end of the period do not include amortization or accretion of premiums and discounts.
(4)Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities.
(5)Includes asset-backed, commercial mortgage-backed and residential mortgage-backed securities.
(6)Issuances and settlements for Policyholders' account balances are presented net in the rollforward.
(7)Effective January 1, 2020, the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period were added prospectively due to adoption of ASU 2018-13. Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Fair Value of Financial Instruments
The table below presents the carrying amount and fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. The financial instruments presented below are reported at carrying value on the Company’s Consolidated Statements of Financial Position. In some cases, as described below, the carrying amount equals or approximates fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
Fair Value
|
|
Carrying
Amount(1)
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Total
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage and other loans
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,359,422
|
|
|
$
|
1,359,422
|
|
|
$
|
1,288,846
|
|
|
Policy loans
|
|
0
|
|
|
0
|
|
|
1,323,681
|
|
|
1,323,681
|
|
|
1,323,681
|
|
|
Cash and cash equivalents
|
|
29,653
|
|
|
0
|
|
|
0
|
|
|
29,653
|
|
|
29,653
|
|
|
Accrued investment income
|
|
0
|
|
|
93,613
|
|
|
0
|
|
|
93,613
|
|
|
93,613
|
|
|
Reinsurance recoverables
|
|
0
|
|
|
0
|
|
|
227,993
|
|
|
227,993
|
|
|
217,637
|
|
|
Receivables from parent and affiliates
|
|
0
|
|
|
154,503
|
|
|
0
|
|
|
154,503
|
|
|
154,503
|
|
|
Other assets
|
|
0
|
|
|
27,120
|
|
|
0
|
|
|
27,120
|
|
|
27,120
|
|
|
Total assets
|
|
$
|
29,653
|
|
|
$
|
275,236
|
|
|
$
|
2,911,096
|
|
|
$
|
3,215,985
|
|
|
$
|
3,135,053
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders’ account balances - investment contracts
|
|
$
|
0
|
|
|
$
|
1,428,043
|
|
|
$
|
286,533
|
|
|
$
|
1,714,576
|
|
|
$
|
1,704,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collateral for loaned securities
|
|
0
|
|
|
2,725
|
|
|
0
|
|
|
2,725
|
|
|
2,725
|
|
|
Short-term debt to affiliates
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Payables to parent and affiliates
|
|
0
|
|
|
75,990
|
|
|
0
|
|
|
75,990
|
|
|
75,990
|
|
|
Other liabilities
|
|
0
|
|
|
415,889
|
|
|
0
|
|
|
415,889
|
|
|
415,889
|
|
|
Total liabilities
|
|
$
|
0
|
|
|
$
|
1,922,647
|
|
|
$
|
286,533
|
|
|
$
|
2,209,180
|
|
|
$
|
2,198,824
|
|
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
Fair Value
|
|
Carrying
Amount(1)
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Total
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage and other loans
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,288,625
|
|
|
$
|
1,288,625
|
|
|
$
|
1,239,885
|
|
|
Policy loans
|
|
0
|
|
|
0
|
|
|
1,314,064
|
|
|
1,314,064
|
|
|
1,314,064
|
|
|
Cash and cash equivalents
|
|
15,557
|
|
|
0
|
|
|
0
|
|
|
15,557
|
|
|
15,557
|
|
|
Accrued investment income
|
|
0
|
|
|
89,448
|
|
|
0
|
|
|
89,448
|
|
|
89,448
|
|
|
Reinsurance recoverables
|
|
0
|
|
|
0
|
|
|
212,368
|
|
|
212,368
|
|
|
211,813
|
|
|
Receivables from parent and affiliates
|
|
0
|
|
|
149,415
|
|
|
0
|
|
|
149,415
|
|
|
149,415
|
|
|
Other assets
|
|
0
|
|
|
22,505
|
|
|
0
|
|
|
22,505
|
|
|
22,505
|
|
|
Total assets
|
|
$
|
15,557
|
|
|
$
|
261,368
|
|
|
$
|
2,815,057
|
|
|
$
|
3,091,982
|
|
|
$
|
3,042,687
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders’ account balances - investment contracts
|
|
$
|
0
|
|
|
$
|
1,264,128
|
|
|
$
|
277,782
|
|
|
$
|
1,541,910
|
|
|
$
|
1,541,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collateral for loaned securities
|
|
0
|
|
|
7,529
|
|
|
0
|
|
|
7,529
|
|
|
7,529
|
|
|
Short-term debt to affiliates
|
|
0
|
|
|
2,845
|
|
|
0
|
|
|
2,845
|
|
|
2,845
|
|
|
Payables to parent and affiliates
|
|
0
|
|
|
216,842
|
|
|
0
|
|
|
216,842
|
|
|
216,842
|
|
|
Other liabilities
|
|
0
|
|
|
387,109
|
|
|
0
|
|
|
387,109
|
|
|
387,109
|
|
|
Total liabilities
|
|
$
|
0
|
|
|
$
|
1,878,453
|
|
|
$
|
277,782
|
|
|
$
|
2,156,235
|
|
|
$
|
2,155,680
|
|
(1)Carrying values presented herein differ from those in the Company’s Consolidated Statements of Financial Position because certain items within the respective financial statement captions are not considered financial instruments or out of scope under authoritative guidance relating to disclosures of the fair value of financial instruments.
The fair values presented above have been determined by using available market information and by applying market valuation methodologies, as described in more detail below.
Commercial Mortgage and Other Loans
The fair value of most commercial mortgage loans is based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate or foreign government bond rate (for non-U.S. dollar-denominated loans) plus an appropriate credit spread for loans of similar quality, average life and currency. The quality ratings for these loans, a primary determinant of the credit spreads and a significant component of the pricing process, are based on an internally-developed methodology. Certain commercial mortgage loans are valued incorporating other factors, including the terms of the loans, the principal exit strategies for the loans, prevailing interest rates and credit risk.
Policy Loans
The Company's valuation technique for policy loans is to discount cash flows at the current policy loan coupon rate. Policy loans are fully collateralized by the cash surrender value of underlying insurance policies. As a result, the carrying value of the policy loans approximates the fair value.
Cash and Cash Equivalents, Accrued Investment Income, Receivables from Parent and Affiliates and Other Assets
The Company believes that due to the short-term nature of certain assets, the carrying value approximates fair value. These assets include: cash and cash equivalent instruments, accrued investment income, and other assets that meet the definition of financial instruments, including receivables, unsettled trades and accounts receivable.
Reinsurance Recoverables
Reinsurance recoverables include corresponding receivables associated with reinsurance arrangements between the Company and related parties. See Note 9 for additional information about the Company's reinsurance arrangements.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Policyholders’ Account Balances - Investment Contracts
Only the portion of policyholders’ account balances related to products that are investment contracts (those without significant mortality or morbidity risk) are reflected in the table above. For fixed deferred annuities, payout annuities and other similar contracts without life contingencies, fair values are generally derived using discounted projected cash flows based on interest rates that are representative of the Company’s financial strength ratings, and hence reflect the Company’s own NPR. For those balances that can be withdrawn by the customer at any time without prior notice or penalty, the fair value is the amount estimated to be payable to the customer as of the reporting date, which is generally the carrying value.
Cash Collateral for Loaned Securities
Cash collateral for loaned securities represents the collateral received or paid in connection with loaning or borrowing securities. Due to the short-term nature of these transactions, the carrying value approximates fair value.
Short-term Debt to Affiliates
The fair value of short-term debt is generally determined by either prices obtained from independent pricing services, which are validated by the Company, or discounted cash flow models. These fair values consider the Company’s own NPR. Discounted cash flow models predominately use market observable inputs such as the borrowing rates currently available to the Company for debt and financial instruments with similar terms and remaining maturities. For debt with a maturity of less than 90 days, the carrying value approximates fair value.
Other Liabilities and Payables to Parent and Affiliates
Other liabilities and payables to parent and affiliates are primarily payables, such as unsettled trades, drafts, escrow deposits and accrued expense payables. Due to the short term until settlement of most of these liabilities, the Company believes that carrying value approximates fair value.
6. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in DAC as of and for the years ended December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
(in thousands)
|
|
Balance, beginning of year
|
|
$
|
1,855,698
|
|
|
$
|
1,613,922
|
|
|
$
|
1,376,211
|
|
|
Capitalization of commissions, sales and issue expenses
|
|
758,469
|
|
|
451,773
|
|
|
346,885
|
|
|
Amortization-Impact of assumption and experience unlocking and true-ups
|
|
(27,844)
|
|
|
(34,619)
|
|
|
(54,772)
|
|
|
Amortization-All other
|
|
(112,718)
|
|
|
(78,699)
|
|
|
(81,054)
|
|
|
Change due to unrealized investment gains and losses
|
|
(39,861)
|
|
|
(37,337)
|
|
|
26,652
|
|
|
Other(1)(2)
|
|
192
|
|
|
(59,342)
|
|
|
0
|
|
|
Balance, end of year
|
|
$
|
2,433,936
|
|
|
$
|
1,855,698
|
|
|
$
|
1,613,922
|
|
|
|
|
|
|
|
|
|
(1)Represents the impact of the January 1, 2020 adoption of ASU 2016-13. See Note 2 for details.
(2) Includes ceded DAC upon reinsurance agreement with Prudential Arizona Reinsurance Term Company and Prudential Arizona Reinsurance Captive Company in 2019. See Note 9 for additional information.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
7. POLICYHOLDERS’ LIABILITIES
Future Policy Benefits
Future policy benefits at December 31 for the years indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
(in thousands)
|
|
Life insurance – domestic
|
|
$
|
17,167,209
|
|
|
$
|
14,522,350
|
|
|
Life insurance – Taiwan
|
|
1,642,747
|
|
|
1,493,716
|
|
|
Individual annuities and supplementary contracts
|
|
810,989
|
|
|
677,266
|
|
|
Other contract liabilities
|
|
13,268,236
|
|
|
8,565,341
|
|
|
Total future policy benefits
|
|
$
|
32,889,181
|
|
|
$
|
25,258,673
|
|
Life insurance liabilities include reserves for death benefits. Individual annuities and supplementary contract liabilities include reserves for life contingent immediate annuities. Other contract liabilities include unearned premiums and certain other reserves for annuities and individual life products.
Future policy benefits for domestic and Taiwanese individual non-participating traditional life insurance policies are generally equal to the present value of future benefit payments and related expenses, less the present value of future net premiums. Assumptions as to mortality and persistency are based on the Company’s experience, industry data, and/or other factors, when the basis of the reserve is established. Interest rates used in the determination of the present values range from 1.7% to 7.8% for setting domestic insurance reserves and 6.2% to 7.4% for setting Taiwanese reserves.
Future policy benefits for individual annuities and supplementary contracts with life contingencies are generally equal to the present value of expected future payments. Assumptions as to mortality are based on the Company’s experience, industry data, and/or other factors, when the basis of the reserve is established. The interest rates used in the determination of the present values range from 0.0% to 14.8%; less than 0.3% of the reserves based on an interest rate in excess of 8%.
The Company’s liability for future policy benefits are primarily liabilities for guaranteed benefits related to certain long-duration life and annuity contracts. Liabilities for guaranteed benefits with embedded derivative features are primarily in "Other contract liabilities" in the table above. The remaining liabilities for guaranteed benefits are primarily reflected with the underlying contract. The interest rates used in the determination of the present values range from 0.3% to 2.6%. See Note 8 for additional information regarding liabilities for guaranteed benefits related to certain long-duration life and annuity contracts.
Policyholders’ Account Balances
Policyholders’ account balances at December 31 for the years indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
(in thousands)
|
|
Interest-sensitive life contracts
|
|
$
|
18,638,033
|
|
|
$
|
17,793,669
|
|
|
Individual annuities
|
|
3,637,196
|
|
|
3,613,971
|
|
|
Guaranteed interest accounts
|
|
154,284
|
|
|
207,038
|
|
|
Other
|
|
1,428,061
|
|
|
1,264,145
|
|
|
Total policyholders’ account balances
|
|
$
|
23,857,574
|
|
|
$
|
22,878,823
|
|
Policyholders’ account balances represent an accumulation of account deposits plus credited interest less withdrawals, expenses and mortality charges, if applicable. These policyholders’ account balances also include provisions for benefits under non-life contingent payout annuities and certain unearned revenues. Policyholders' account balances also include amounts representing the fair value of embedded derivative instruments associated with the index-linked features of certain universal life products. See Note 5 for additional information on the fair value of these embedded derivative instruments. Interest crediting rates for interest-sensitive life contracts range from 1.9% to 4.6% . Interest crediting rates for individual annuities range from 0.0% to 6.3%. Interest crediting rates for guaranteed interest accounts range from 1.0% to 10.0%. Interest crediting rates range from 0.5% to 8.0% for other.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
8. CERTAIN LONG-DURATION CONTRACTS WITH GUARANTEES
The Company issues variable annuity contracts through its separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholder. The Company also issues variable annuity contracts with general and separate account options where the Company contractually guarantees to the contractholder a return of no less than total deposits made to the contract adjusted for any partial withdrawals (“return of net deposits”). In certain of these variable annuity contracts, the Company also contractually guarantees to the contractholder a return of no less than (1) total deposits made to the contract adjusted for any partial withdrawals plus a minimum return (“minimum return”), and/or (2) the highest contract value on a specified date adjusted for any withdrawals (“contract value”). These guarantees include benefits that are payable in the event of death, annuitization or at specified dates during the accumulation period and withdrawal and income benefits payable during specified periods. The Company also issued annuity contracts with market value adjusted investment options (“MVAs”), which provide for a return of principal plus a fixed rate of return if held to maturity, or, alternatively, a “market adjusted value” if surrendered prior to maturity or if funds are reallocated to other investment options. The market value adjustment may result in a gain or loss to the Company, depending on crediting rates or an indexed rate at surrender, as applicable. The Company also issued fixed deferred annuity contracts without MVA that have a guaranteed credited rate and annuity benefit.
In addition, the Company issues certain variable life, variable universal life and universal life contracts where the Company contractually guarantees to the contractholder a death benefit even when there is insufficient value to cover monthly mortality and expense charges, whereas otherwise the contract would typically lapse (“no-lapse guarantee”). Variable life and variable universal life contracts are offered with general and separate account options.
The assets supporting the variable portion of all variable annuities are carried at fair value and reported as “Separate account assets” with an equivalent amount reported as “Separate account liabilities.” Amounts assessed against the contractholders for mortality, administration, and other services are included within revenue in “Policy charges and fee income” and changes in liabilities for minimum guarantees are generally included in “Policyholders’ benefits” or “Realized investment gains (losses), net.”
For those guarantees of benefits that are payable in the event of death, the net amount at risk is generally defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date. The Company’s primary risk exposures for these contracts relates to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including fixed income and equity market returns, contract lapses and contractholder mortality.
For guarantees of benefits that are payable at annuitization, the net amount at risk is generally defined as the present value of the minimum guaranteed annuity payments available to the contractholder determined in accordance with the terms of the contract in excess of the current account balance. The Company’s primary risk exposures for these contracts relates to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including fixed income and equity market returns, timing of annuitization, contract lapses and contractholder mortality.
For guarantees of benefits that are payable at withdrawal, the net amount at risk is generally defined as the present value of the minimum guaranteed withdrawal payments available to the contractholder determined in accordance with the terms of the contract in excess of the current account balance. For guarantees of accumulation balances, the net amount at risk is generally defined as the guaranteed minimum accumulation balance minus the current account balance. The Company’s primary risk exposures for these contracts relates to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including equity market returns, interest rates, market volatility and contractholder behavior.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
The Company’s contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed may not be mutually exclusive. The liabilities related to the net amount at risk are reflected within “Future policy benefits”. As of December 31, 2020 and 2019, the Company had the following guarantees associated with these contracts, by product and guarantee type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
In the Event of
Death(1)
|
|
At Annuitization/
Accumulation(1)(2)
|
|
In the Event of
Death(1)
|
|
At Annuitization/
Accumulation(1)(2)
|
|
|
|
(in thousands)
|
|
Annuity Contracts
|
|
|
|
|
|
|
|
|
|
Return of net deposits
|
|
|
|
|
|
|
|
|
|
Account value
|
|
$
|
104,700,706
|
|
|
N/A
|
|
$
|
101,413,706
|
|
|
N/A
|
|
Net amount at risk
|
|
$
|
18,336
|
|
|
N/A
|
|
$
|
23,061
|
|
|
N/A
|
|
Average attained age of contractholders
|
|
68 years
|
|
N/A
|
|
67 years
|
|
N/A
|
|
Minimum return or contract value
|
|
|
|
|
|
|
|
|
|
Account value
|
|
$
|
19,949,435
|
|
|
$
|
114,832,594
|
|
|
$
|
20,008,013
|
|
|
$
|
111,734,329
|
|
|
Net amount at risk
|
|
$
|
1,272,073
|
|
|
$
|
2,042,199
|
|
|
$
|
1,423,229
|
|
|
$
|
2,214,835
|
|
|
Average attained age of contractholders
|
|
71 years
|
|
68 years
|
|
70 years
|
|
68 years
|
|
Average period remaining until earliest expected annuitization
|
|
N/A
|
|
0 years
|
|
N/A
|
|
0 years
|
(1)Balances are gross of reinsurance.
(2)Includes income and withdrawal benefits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
In the Event of Death(1)(2)
|
|
|
|
(in thousands)
|
|
Variable Life, Variable Universal Life and Universal Life Contracts
|
|
|
|
|
|
Separate account value
|
|
$
|
4,087,733
|
|
|
$
|
3,781,929
|
|
|
General account value
|
|
$
|
9,920,732
|
|
|
$
|
9,169,757
|
|
|
Net amount at risk
|
|
$
|
146,158,176
|
|
|
$
|
147,370,237
|
|
|
Average attained age of contractholders
|
|
56 years
|
|
55 years
|
(1)Balances are gross of reinsurance.
(2)Excludes assumed reinsurance of GUL business from Prudential Insurance in connection with the acquisition of The Hartford Life Business that is retroceded 100% to PAR U.
Account balances of variable annuity contracts with guarantees were invested in separate account investment options as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020(1)
|
|
December 31, 2019(1)
|
|
|
|
(in thousands)
|
|
Equity funds
|
|
$
|
68,436,773
|
|
|
$
|
67,526,437
|
|
|
Bond funds
|
|
51,126,536
|
|
|
48,484,071
|
|
|
Money market funds
|
|
1,578,516
|
|
|
1,877,377
|
|
|
Total
|
|
$
|
121,141,825
|
|
|
$
|
117,887,885
|
|
(1)Balances are gross of reinsurance.
In addition to the amounts invested in separate account investment options above, $3.5 billion at both December 31, 2020 and December 31, 2019 of account balances of variable annuity contracts with guarantees, inclusive of contracts with MVA features, were invested in general account investment options. For the years ended December 31, 2020, 2019 and 2018 there were no transfers of assets, other than cash, from the general account to any separate account, and accordingly no gains or losses recorded.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Liabilities for Guarantee Benefits
The table below summarizes the changes in general account liabilities for guarantees. The liabilities for GMDB and guaranteed minimum income benefits (“GMIB”) are included in “Future policy benefits” and the related changes in the liabilities are included in “Policyholders' benefits”. GMAB, GMWB and GMIWB are accounted for as embedded derivatives and are recorded at fair value within “Future policy benefits”. Changes in the fair value of these derivatives, including changes in the Company’s own risk of non-performance, along with any fees attributed or payments made relating to the derivative, are recorded in “Realized investment gains (losses), net.” See Note 5 for additional information regarding the methodology used in determining the fair value of these embedded derivatives. The Company maintains a portfolio of derivative investments that serve as a partial hedge of the risks associated with these products, for which the changes in fair value are also recorded in "Realized investment gains (losses), net." This portfolio of derivative investments does not qualify for hedge accounting treatment under U.S. GAAP. Additionally, the Company externally reinsures the guaranteed benefit features associated with certain contracts. See Note 9 for further information regarding the external reinsurance arrangement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMDB
|
|
GMIB
|
|
GMWB/GMIWB/
GMAB
|
|
Total
|
|
|
|
Variable Annuity
|
|
Variable Life, Variable Universal Life & Universal Life
|
|
Variable Annuity
|
|
|
|
|
(in thousands)
|
|
Balance at December 31, 2017
|
|
$
|
390,338
|
|
|
$
|
4,997,310
|
|
|
$
|
17,131
|
|
|
$
|
5,452,583
|
|
|
$
|
10,857,362
|
|
|
Incurred guarantee benefits(1)
|
|
71,467
|
|
|
717,444
|
|
|
1,889
|
|
|
136,256
|
|
|
927,056
|
|
|
Paid guarantee benefits
|
|
(35,800)
|
|
|
(76,944)
|
|
|
(2,032)
|
|
|
0
|
|
|
(114,776)
|
|
|
Change in unrealized investment gains and losses
|
|
(14,437)
|
|
|
(405,956)
|
|
|
(178)
|
|
|
0
|
|
|
(420,571)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
411,568
|
|
|
5,231,854
|
|
|
16,810
|
|
|
5,588,839
|
|
|
11,249,071
|
|
|
Incurred guarantee benefits(1)
|
|
52,717
|
|
|
1,473,762
|
|
|
2,266
|
|
|
2,940,727
|
|
|
4,469,472
|
|
|
Paid guarantee benefits
|
|
(25,992)
|
|
|
(110,642)
|
|
|
(2,209)
|
|
|
0
|
|
|
(138,843)
|
|
|
Change in unrealized investment gains and losses
|
|
22,208
|
|
|
805,259
|
|
|
240
|
|
|
0
|
|
|
827,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
460,501
|
|
|
7,400,233
|
|
|
17,107
|
|
|
8,529,566
|
|
|
16,407,407
|
|
|
Incurred guarantee benefits(1)
|
|
114,878
|
|
|
1,368,759
|
|
|
3,490
|
|
|
4,698,248
|
|
|
6,185,375
|
|
|
Paid guarantee benefits
|
|
(37,804)
|
|
|
(126,148)
|
|
|
(1,667)
|
|
|
0
|
|
|
(165,619)
|
|
|
Change in unrealized investment gains and losses
|
|
31,488
|
|
|
720,741
|
|
|
318
|
|
|
0
|
|
|
752,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
|
$
|
569,063
|
|
|
$
|
9,363,585
|
|
|
$
|
19,248
|
|
|
$
|
13,227,814
|
|
|
$
|
23,179,710
|
|
(1)Incurred guarantee benefits include the portion of assessments established as additions to reserves as well as changes in estimates affecting the reserves. Also includes changes in the fair value of features considered to be derivatives.
The GMDB, which includes the liability for no-lapse guarantees, and GMIB liability are established when associated assessments (which include all policy charges including charges for administration, mortality, expense, surrender, and other, regardless of how characterized) are recognized. This liability is established using current best estimate assumptions and is based on the ratio of the present value of total expected excess payments (e.g., payments in excess of account value) over the life of the contract divided by the present value of total expected assessments (i.e., benefit ratio). The liability equals the current benefit ratio multiplied by cumulative assessments recognized to date, plus interest, less cumulative excess payments to date. Similar to as described above for DAC, the reserves are subject to adjustments based on annual reviews of assumptions and quarterly adjustments for experience, including market performance. These adjustments reflect the impact on the benefit ratio of using actual historical experience from the issuance date to the balance sheet date plus updated estimates of future experience. The updated benefit ratio is then applied to all prior periods’ assessments to derive an adjustment to the reserve recognized through a benefit or charge to current period earnings.
The GMAB features provide the contractholder with a guaranteed return of initial account value or an enhanced value if applicable. The most significant of the Company’s GMAB features are the guaranteed return option features, which includes an automatic rebalancing element that reduces the Company’s exposure to these guarantees. The GMAB liability is calculated as the present value of future expected payments in excess of the account balance less the present value of future expected rider fees attributable to the embedded derivative feature.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
The GMWB features provide the contractholder with access to a guaranteed remaining balance if the account value is reduced to zero through a combination of market declines and withdrawals. The guaranteed remaining balance is generally equal to the protected value under the contract, which is initially established as the greater of the account value or cumulative deposits when withdrawals commence, less cumulative withdrawals. The contractholder also has the option, after a specified time period, to reset the guaranteed remaining balance to the then-current account value, if greater. The contractholder accesses the guaranteed remaining balance through payments over time, subject to maximum annual limits. The GMWB liability is calculated as the present value of future expected payments to customers less the present value of future expected rider fees attributable to the embedded derivative feature.
The GMIWB features, taken collectively, provide a contractholder two optional methods to receive guaranteed minimum payments over time, a “withdrawal” option or an “income” option. The withdrawal option (which was available under only one of the GMIWBs and is no longer offered) guarantees that a contractholder can withdraw an amount each year until the cumulative withdrawals reach a total guaranteed balance. The income option (which varies among the Company’s GMIWBs), in general, guarantees the contractholder the ability to withdraw an amount each year for life (or for joint lives, in the case of any spousal version of the benefit) where such amount is equal to a percentage of a protected value under the benefit. The contractholder also has the potential to increase this annual amount, based on certain subsequent increases in account value that may occur. The GMIWB can be elected by the contractholder upon issuance of an appropriate deferred variable annuity contract or at any time following contract issue prior to annuitization. Certain GMIWB features include an automatic rebalancing element that reduces the Company’s exposure to these guarantees. The GMIWB liability is calculated as the present value of future expected payments to customers less the present value of future expected rider fees attributable to the embedded derivative feature.
Sales Inducements
The Company defers sales inducements and amortizes them over the anticipated life of the policy using the same methodology and assumptions used to amortize DAC. The Company has offered various types of sales inducements, including: (1) a bonus whereby the policyholder’s initial account balance is increased by an amount equal to a specified percentage of the customer’s initial deposit and (2) additional credits after a certain number of years a contract is held.
There were no deferred sales inducements balances at December 31, 2020 and 2019 because they were fully ceded.
9. REINSURANCE
The Company participates in reinsurance with its affiliates Prudential Life Insurance Company of Taiwan Inc. (“Prudential of Taiwan”), Prudential Arizona Reinsurance Captive Company (“PARCC”), Prudential Arizona Reinsurance Term Company (“PAR Term”), Prudential Arizona Reinsurance Universal Company (“PAR U”), Prudential Universal Reinsurance Company ("PURC"), Prudential Term Reinsurance Company (“Term Re”), PALAC, Gibraltar Universal Life Reinsurance Company ("GUL Re") and Dryden Arizona Reinsurance Term Company (“DART”), its parent company Prudential Insurance, as well as third parties. The reinsurance agreements provide risk diversification and additional capacity for future growth, limit the maximum net loss potential, manage statutory capital, and facilitate the Company's capital market hedging program. Life reinsurance is accomplished through various plans of reinsurance, primarily yearly renewable term and coinsurance. Reinsurance ceded arrangements do not discharge the Company as the primary insurer. Ceded balances would represent a liability of the Company in the event the reinsurers were unable to meet their obligations to the Company under the terms of the reinsurance agreements. The Company believes a material reinsurance liability resulting from such inability of reinsurers to meet their obligations is unlikely.
Reserves related to reinsured long-duration contracts are accounted for using assumptions consistent with those used to account for the underlying contracts. Amounts recoverable from reinsurers for long-duration reinsurance arrangements are estimated in a manner consistent with the claim liabilities and policy benefits associated with the reinsured policies. Reinsurance policy charges and fee income ceded for universal life and variable annuity products are accounted for as a reduction of policy charges and fee income. Reinsurance premiums ceded for term insurance products are accounted for as a reduction of premiums.
Realized investment gains and losses include the impact of reinsurance agreements, particularly reinsurance agreements involving living benefit guarantees. The Company has entered into reinsurance agreements to transfer the risk related to the living benefit guarantees on variable annuities to PALAC excluding the PLNJ business which was reinsured to Prudential Insurance. These reinsurance agreements are derivatives and have been accounted for in the same manner as embedded derivatives and the changes in the fair value of these derivatives are recognized through “Realized investment gains (losses), net”. See Note 4 for additional information related to the accounting for embedded derivatives.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Reinsurance amounts included in the Company’s Consolidated Statements of Financial Position as of December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
(in thousands)
|
|
Reinsurance recoverables
|
|
$
|
48,367,096
|
|
|
$
|
40,710,159
|
|
|
Policy loans
|
|
(153,869)
|
|
|
(142,262)
|
|
|
Deferred policy acquisition costs
|
|
(6,574,020)
|
|
|
(6,989,618)
|
|
|
Deferred sales inducements
|
|
(445,493)
|
|
|
(515,968)
|
|
|
Other assets(1)
|
|
233,364
|
|
|
258,427
|
|
|
Policyholders’ account balances
|
|
4,773,439
|
|
|
4,934,544
|
|
|
Future policy benefits(2)
|
|
5,069,353
|
|
|
4,209,817
|
|
|
Other liabilities(3)
|
|
1,099,318
|
|
|
884,641
|
|
(1)Includes $0.0 million of unaffiliated activity as of both December 31, 2020 and 2019.
(2)Includes $0.0 million of unaffiliated activity as of both December 31, 2020 and 2019.
(3)Includes $42.6 million and $43.1 million of unaffiliated activity as of December 31, 2020 and 2019, respectively.
Reinsurance recoverables by counterparty are broken out below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
(in thousands)
|
|
PAR U
|
|
$
|
13,352,845
|
|
|
$
|
12,380,683
|
|
|
PALAC
|
|
15,941,123
|
|
|
11,635,405
|
|
|
PURC
|
|
5,368,831
|
|
|
4,692,769
|
|
|
PARCC
|
|
2,572,428
|
|
|
2,627,595
|
|
|
GUL Re
|
|
2,573,609
|
|
|
2,292,638
|
|
|
PAR Term
|
|
1,913,265
|
|
|
1,825,594
|
|
|
Prudential Insurance
|
|
2,421,226
|
|
|
1,764,512
|
|
|
Prudential of Taiwan
|
|
1,649,998
|
|
|
1,499,685
|
|
|
Term Re
|
|
1,766,978
|
|
|
1,506,366
|
|
|
DART
|
|
502,770
|
|
|
327,235
|
|
|
Unaffiliated
|
|
304,023
|
|
|
157,677
|
|
|
Total reinsurance recoverables
|
|
$
|
48,367,096
|
|
|
$
|
40,710,159
|
|
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Reinsurance amounts, included in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
(in thousands)
|
|
Premiums:
|
|
|
|
|
|
|
|
Direct
|
|
$
|
1,923,708
|
|
|
$
|
1,882,584
|
|
|
$
|
1,807,809
|
|
|
Assumed(1)
|
|
184
|
|
|
206
|
|
|
230
|
|
|
Ceded(2)
|
|
(1,831,716)
|
|
|
(1,854,246)
|
|
|
(1,757,231)
|
|
|
Net premiums
|
|
92,176
|
|
|
28,544
|
|
|
50,808
|
|
|
Policy charges and fee income:
|
|
|
|
|
|
|
|
Direct
|
|
3,491,735
|
|
|
3,725,113
|
|
|
3,248,574
|
|
|
Assumed
|
|
587,466
|
|
|
519,265
|
|
|
497,751
|
|
|
Ceded(3)
|
|
(3,454,881)
|
|
|
(3,700,222)
|
|
|
(3,212,998)
|
|
|
Net policy charges and fee income
|
|
624,320
|
|
|
544,156
|
|
|
533,327
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
Direct
|
|
372,822
|
|
|
398,762
|
|
|
330,058
|
|
|
Assumed
|
|
1,579
|
|
|
1,631
|
|
|
1,581
|
|
|
Ceded
|
|
(7,051)
|
|
|
(6,596)
|
|
|
(6,352)
|
|
|
Net investment income
|
|
367,350
|
|
|
393,797
|
|
|
325,287
|
|
|
Asset administration fees:
|
|
|
|
|
|
|
|
Direct
|
|
360,438
|
|
|
355,118
|
|
|
346,727
|
|
|
Assumed
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Ceded
|
|
(341,300)
|
|
|
(339,062)
|
|
|
(332,359)
|
|
|
Net asset administration fees
|
|
19,138
|
|
|
16,056
|
|
|
14,368
|
|
|
Other income:
|
|
|
|
|
|
|
|
Direct
|
|
78,445
|
|
|
83,891
|
|
|
68,931
|
|
|
Assumed(4)
|
|
(1)
|
|
|
(293)
|
|
|
96
|
|
|
Ceded
|
|
165
|
|
|
(59)
|
|
|
(55)
|
|
|
Amortization of reinsurance income
|
|
4,647
|
|
|
21
|
|
|
3,992
|
|
|
Net other income
|
|
83,256
|
|
|
83,560
|
|
|
72,964
|
|
|
Realized investment gains (losses), net:
|
|
|
|
|
|
|
|
Direct
|
|
(3,593,799)
|
|
|
(1,912,241)
|
|
|
769,114
|
|
|
Assumed
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Ceded(5)
|
|
3,530,823
|
|
|
1,795,492
|
|
|
(936,392)
|
|
|
Realized investment gains (losses), net
|
|
(62,976)
|
|
|
(116,749)
|
|
|
(167,278)
|
|
|
Policyholders’ benefits (including change in reserves):
|
|
|
|
|
|
|
|
Direct
|
|
3,584,011
|
|
|
3,352,159
|
|
|
2,647,574
|
|
|
Assumed(6)
|
|
1,055,277
|
|
|
885,542
|
|
|
599,589
|
|
|
Ceded(7)
|
|
(4,341,139)
|
|
|
(4,084,627)
|
|
|
(3,097,664)
|
|
|
Net policyholders’ benefits (including change in reserves)
|
|
298,149
|
|
|
153,074
|
|
|
149,499
|
|
|
Interest credited to policyholders’ account balances:
|
|
|
|
|
|
|
|
Direct
|
|
536,886
|
|
|
470,551
|
|
|
499,458
|
|
|
Assumed
|
|
136,153
|
|
|
135,355
|
|
|
141,307
|
|
|
Ceded
|
|
(439,664)
|
|
|
(418,677)
|
|
|
(468,772)
|
|
|
Net interest credited to policyholders’ account balances
|
|
233,375
|
|
|
187,229
|
|
|
171,993
|
|
|
Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization
|
|
(1,589,113)
|
|
|
(1,772,111)
|
|
|
(1,587,360)
|
|
(1)Includes $0.2 million of unaffiliated activity for each of the years ended December 31, 2020, 2019 and 2018.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
(2)Includes $(10.5) million, $(0.6) million and $(0.2) million of unaffiliated activity for the years ended December 31, 2020, 2019 and 2018, respectively.
(3)Includes $(54) million, $(34) million and $(20) million of unaffiliated activity for the years ended December 31, 2020, 2019 and 2018, respectively.
(4)Includes $0 million, $(0.3) million and $0.1 million of unaffiliated activity for the years ended December 31, 2020, 2019 and 2018, respectively.
(5)Includes $73 million, $44 million and $(34) million of unaffiliated activity for the years ended December 31, 2020, 2019 and 2018, respectively.
(6)Includes $0.9 million, $1.9 million and $0.0 million of unaffiliated activity for the years ended December 31, 2020, 2019 and 2018, respectively.
(7)Includes $(70) million, $(30) million and $(10) million of unaffiliated activity for the years ended December 31, 2020, 2019 and 2018, respectively.
The gross and net amounts of life insurance face amount in force as of December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
(in thousands)
|
|
Direct gross life insurance face amount in force
|
|
$
|
1,045,775,819
|
|
|
$
|
993,850,732
|
|
|
$
|
936,489,617
|
|
|
Assumed gross life insurance face amount in force
|
|
38,818,752
|
|
|
39,877,183
|
|
|
40,811,929
|
|
|
Reinsurance ceded
|
|
(986,701,914)
|
|
|
(963,444,461)
|
|
|
(901,709,295)
|
|
|
Net life insurance face amount in force
|
|
$
|
97,892,657
|
|
|
$
|
70,283,454
|
|
|
$
|
75,592,251
|
|
Information regarding significant affiliated reinsurance agreements is described below.
PAR U
Pruco Life reinsures an amount equal to 70% of all the risks associated with Universal Protector policies having no-lapse guarantees as well as certain of its universal policies, with effective dates prior to January 1, 2011.
Effective July 1, 2012, PLNJ reinsures an amount equal to 95% of all the risks associated with Universal Protector policies having no-lapse guarantees as well as certain of its universal policies, with effective dates through December 31, 2019, excluding those policies that are subject to principle-based reserving.
On January 2, 2013, Pruco Life began to assume Guaranteed Universal Life ("GUL") business from Prudential Insurance in connection with the acquisition of The Hartford Life Business. The GUL business assumed from Prudential Insurance was subsequently retroceded to PAR U.
PALAC
Effective April 1, 2016, the Company entered into a reinsurance agreement to reinsure its variable annuity base contracts, along with the living benefit guarantees to PALAC, excluding the PLNJ business, which was reinsured to Prudential Insurance. This reinsurance agreement covers new and in-force business and excludes business reinsured externally. As of December 31, 2020, the Company discontinued the sales of traditional variable annuities with guaranteed living benefit riders. This discontinuation has no impact on the reinsurance agreement between PALAC, Prudential Insurance, and the Company.
PURC
Pruco Life reinsures an amount equal to 70% of all the risks associated with its Universal Protector policies having no-lapse guarantees as well as certain of its universal policies, with effective dates from January 1, 2011 through December 31, 2013 with PURC and 95% of all the risks associated with Universal Protector policies having no-lapse guarantees, as well as certain of its universal policies, with effective dates from January 1, 2014 through December 31, 2016.
PARCC
Prior to July 1, 2019, the Company reinsured 90% of the risks under its term life insurance policies, with effective dates prior to January 1, 2010 through an automatic coinsurance agreement with PARCC. Effective July 1, 2019, the Company amended the coinsurance agreement to increase the percentage from 90% to 100% of the policy risk amount reinsured, which resulted in an initial transfer of $476 million in premiums and $409 million in expenses ceded with the difference being deferred and subsequently amortized through income.
GUL Re
Effective January 1, 2017, Pruco Life entered into an automatic coinsurance agreement with GUL Re to reinsure an amount equal to 95% of all the risks associated with Universal Protector policies having no-lapse guarantees, as well as certain of its universal policies, with effective dates on or after January 1, 2017 through December 31, 2019, excluding those policies that are subject to principle-based reserving.
Effective July 1, 2017, Pruco Life amended this agreement to include 30% of Universal Protector policies having no-lapse guarantees as well as certain of its universal policies with effective dates prior to January 1, 2014.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
PAR Term
Prior to July 1, 2019, the Company reinsures 95% of the risks under its term life insurance policies with effective dates January 1, 2010 through December 31, 2013, through an automatic coinsurance agreement with PAR Term. Effective July 1, 2019, the Company amended the coinsurance agreement to increase the percentage from 95% to 100% of the policy risk amount reinsured, which resulted in an initial transfer of $150 million in premiums and $115 million in expenses ceded with the difference being deferred and subsequently amortized through income.
Prudential of Taiwan
On January 31, 2001, Pruco Life transferred all of its assets and liabilities associated with its Taiwanese branch, including its Taiwanese insurance book of business, to Prudential of Taiwan, an affiliated company. The mechanism used to transfer this block of business in Taiwan is referred to as a “full acquisition and assumption” transaction. Under this mechanism, Pruco Life is jointly liable with Prudential of Taiwan for two years from the giving of notice to all obligees for all matured obligations and for two years after the maturity date of not-yet-matured obligations. Prudential of Taiwan is also contractually liable, under indemnification provisions of the transaction, for any liabilities that may be asserted against Pruco Life.
The transfer of the insurance related assets and liabilities was accounted for as a long-duration coinsurance transaction under U.S. GAAP. Under this accounting treatment, the insurance related liabilities remain on the books of Pruco Life and an offsetting reinsurance recoverable is established. These assets and liabilities are denominated in U.S. dollars.
On August 11, 2020, Prudential International Insurance Holdings, Ltd. (“PIIH”), a subsidiary of Prudential Financial, entered into a Share Purchase Agreement with Taishin Financial Holding Co., Ltd. (the “Buyer”) pursuant to which PIIH has agreed to sell to the Buyer all of the issued and outstanding capital stock of Prudential of Taiwan. The Share Purchase Agreement contains customary warranties and covenants of PIIH and the Buyer. The Company expects the transaction to close in 2021, subject to regulatory approval and the satisfaction of customary closing conditions. The Buyer will provide Pruco Life a backstop indemnification and Pruco Life will provide a guarantee to stand ready to perform in the event of default by both Prudential of Taiwan and the Buyer.
Term Re
The Company reinsures 95% of the risks under its term life insurance policies, with effective dates on or after January 1, 2014, through December 31, 2017, through an automatic coinsurance agreement with Term Re.
Prudential Insurance
The Company has a yearly renewable term reinsurance agreement with Prudential Insurance and reinsures the majority of all mortality risks not otherwise reinsured. Effective July 1, 2017, this agreement has been terminated for certain new business, primarily Universal Life insurance policies. As of January 1, 2020, the remaining portions of new business (specifically Term policies) ceased being reinsured by the Company to Prudential Insurance. Effective July 1, 2017, the Company reinsures a portion of the mortality risk directly to third-party reinsurers and retains all of the non-reinsured portion of the mortality risk. Effective July 1, 2019, this agreement has been recaptured for certain term life insurance policies which are now reinsured to PARCC and PAR Term as noted above.
On January 2, 2013, Pruco Life began to assume GUL business from Prudential Insurance in connection with the acquisition of the Hartford Financial Services Group, Inc. ("Hartford Financial"). The GUL business assumed from Prudential Insurance was subsequently retroceded to PAR U. In May 2018, Hartford Financial sold a group of operating subsidiaries, which includes two of Prudential Insurance's counterparties to these reinsurance arrangements. There was no impact to the terms, rights or obligations of Prudential Insurance, or operation of these reinsurance arrangements, as a result of this change in control of such counterparties. Similarly, there was no impact to the Company's reinsurance arrangements with respect to such GUL business as a result of this change in control. In January 2021, there was a definitive agreement announced to subsequently sell the two counterparties mentioned above. We anticipate there will be no impact to the terms, rights or obligations of the Company, or operation of these reinsurance arrangements, as a result of this change in control of such counterparties.
The Company has reinsured a group annuity contract with Prudential Insurance, in consideration for a single premium payment by the Company, providing reinsurance equal to 100% of all payments due under the contract.
Effective April 1, 2016, PLNJ entered into a reinsurance agreement to reinsure its variable annuity base contracts, along with the living benefit guarantees to Prudential Insurance. This reinsurance agreement covers new and in-force business.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
DART
Effective January 1, 2018, the Company entered into an automatic coinsurance agreement with DART to reinsure an amount equal to 95% of the risks associated with its term life insurance policies with effective dates on or after January 1, 2018 through December 31, 2019, excluding those policies that are subject to principle-based reserving.
Information regarding significant third-party reinsurance arrangements is described below.
Union Hamilton
Between April 1, 2015 and December 31, 2016, the Company, excluding its subsidiary, reinsured approximately 50% of the new business related to “highest daily” living benefits rider guarantees on HDI v.3.0 product, available with Prudential Premier® Retirement Variable Annuity, to Union Hamilton. This reinsurance remains in force for the duration of the underlying annuity contracts. New sales of HDI v.3.0 subsequent to December 31, 2016 are not covered by this external reinsurance agreement. As of December 31, 2020, $3.2 billion of HDI v.3.0 account values are reinsured to Union Hamilton.
10. INCOME TAXES
The following schedule discloses significant components of income tax expense (benefit) for each year presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
(in thousands)
|
|
Current tax expense (benefit):
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
(358,548)
|
|
|
$
|
56,371
|
|
|
$
|
36,739
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(358,548)
|
|
|
56,371
|
|
|
36,739
|
|
|
Deferred tax expense (benefit):
|
|
|
|
|
|
|
|
U.S. federal
|
|
228,300
|
|
|
(115,503)
|
|
|
(89,380)
|
|
|
Total
|
|
228,300
|
|
|
(115,503)
|
|
|
(89,380)
|
|
|
Total income tax expense (benefit) on income (loss) before equity in earnings of operating joint ventures
|
|
(130,248)
|
|
|
(59,132)
|
|
|
(52,641)
|
|
|
Income tax expense (benefit) on equity in earnings of operating joint ventures
|
|
(518)
|
|
|
(1,773)
|
|
|
648
|
|
|
Income tax expense (benefit) reported in equity related to:
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
70,806
|
|
|
81,281
|
|
|
(55,174)
|
|
|
Total income tax expense (benefit)
|
|
$
|
(59,960)
|
|
|
$
|
20,376
|
|
|
$
|
(107,167)
|
|
Reconciliation of Expected Tax at Statutory Rates to Reported Income Tax Expense (Benefit)
The differences between income taxes expected at the U.S. federal statutory income tax rate of 21% applicable for 2020, 2019 and 2018, and the reported income tax expense (benefit) are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
(in thousands)
|
|
Expected federal income tax expense
|
|
$
|
14,308
|
|
|
$
|
33,345
|
|
|
$
|
12,136
|
|
|
Non-taxable investment income
|
|
(46,836)
|
|
|
(52,291)
|
|
|
(49,845)
|
|
|
Tax credits
|
|
(27,980)
|
|
|
(40,602)
|
|
|
(40,272)
|
|
|
Changes in tax law
|
|
(70,121)
|
|
|
0
|
|
|
3,618
|
|
|
Settlements with taxing authorities
|
|
0
|
|
|
0
|
|
|
20,984
|
|
|
Other
|
|
381
|
|
|
416
|
|
|
738
|
|
|
Reported income tax expense (benefit)
|
|
$
|
(130,248)
|
|
|
$
|
(59,132)
|
|
|
$
|
(52,641)
|
|
|
Effective tax rate
|
|
(191.2)
|
%
|
|
(37.2)
|
%
|
|
(91.1)
|
%
|
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
The effective tax rate is the ratio of “Income tax expense (benefit)” divided by “Income (loss) from operations before income taxes and equity in earnings of operating joint venture.” The Company’s effective tax rate for fiscal years 2020, 2019 and 2018 was (191.2)%, (37.2)% and (91.1)%, respectively. The following is a description of items that had the most significant impact on the difference between the Company’s statutory U.S. federal income tax rate of 21% applicable for 2020, 2019 and 2018, and the Company’s effective tax rate during the periods presented:
Non-Taxable Investment Income. The U.S. Dividends Received Deduction (“DRD”) reduces the amount of dividend income subject to U.S. tax and accounts for most of the non-taxable investment income shown in the table above. More specifically, the U.S. DRD constitutes $45 million of the total $47 million of 2020 non-taxable investment income, $50 million of the total $52 million of 2019 non-taxable investment income, and $47 million of the total $50 million of 2018 non-taxable investment income. The DRD for the current period was estimated using information from 2019, current year investment results, and current year’s equity market performance. The actual current year DRD can vary based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of distributions received from fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD.
Tax credits. These amounts primarily represent tax credits relating to foreign taxes withheld on the Company’s separate account investments.
Changes in Tax Law. The following is a list of notable changes in tax law that impacted the Company’s effective tax rate for the periods presented:
Tax Act of 2017. On December 22, 2017, the Tax Act of 2017 was enacted into U.S. law. During 2018, the Company completed the collection, preparation and analysis of data relevant to the Tax Act of 2017, and interpreted any additional guidance issued by the IRS, U.S. Department of the Treasury or other standard-setting organizations, and recognized a $1 million reduction in income tax expense primarily related to refinements of our provisional estimates.
2018 Industry Issue Resolution. In August 2018, the IRS released a Directive to provide guidance on the tax reserving for guaranteed benefits within variable annuity contracts and principle-based reserves on certain life insurance contracts. Adopting the methodology specified in the Directive resulted in an acceleration of taxable income for the Company's 2017 tax return that would have otherwise been deductible in future years. Prior to the adoption of this Directive, the Company accounted for these future deductions as deferred tax assets measured using the current 21% corporate income tax rate. Upon adoption of the Directive, the tax benefits were revalued using the 35% tax rate applicable for the 2017 tax year and resulted in an increase in income tax expense of $5 million in 2018.
The CARES Act. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted into law. One provision of the CARES Act amends the Tax Act of 2017 and allows companies with net operating losses (“NOLs”) originating in 2018, 2019, or 2020 to carry back those losses up to five years. For 2020, the Company has recorded an income tax benefit of $70 million from carrying the estimated 2020 NOL back to tax years that have a 35% tax rate.
Settlements with taxing authorities. During 2018, the Company reached an agreement with the IRS to resolve outstanding tax audit issues for tax years 2015 and 2016 and partially for 2017 which resulted in a $21 million increase to our income tax expense for 2018.
Other. This line item represents insignificant reconciling items that are individually less than 5% of the computed expected federal income tax expense (benefit) and have therefore been aggregated for purposes of this reconciliation in accordance with relevant disclosure guidance.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Schedule of Deferred Tax Assets and Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
Insurance reserves
|
|
$
|
296,635
|
|
|
$
|
427,843
|
|
|
Other(1)
|
|
0
|
|
|
9,110
|
|
|
Deferred tax assets
|
|
296,635
|
|
|
436,953
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Deferred policy acquisition cost
|
|
142,147
|
|
|
67,431
|
|
|
Net unrealized gain on securities
|
|
180,067
|
|
|
83,801
|
|
|
Investments
|
|
124,821
|
|
|
142,028
|
|
|
Other
|
|
4,032
|
|
|
0
|
|
|
Deferred tax liabilities
|
|
451,067
|
|
|
293,260
|
|
|
Net deferred tax asset (liability)
|
|
$
|
(154,432)
|
|
|
$
|
143,693
|
|
(1) Prior period amounts have been updated to conform to current period presentation.
The application of U.S. GAAP requires the Company to evaluate the recoverability of deferred tax assets and establish a valuation allowance if necessary to reduce the deferred tax asset to an amount that is more likely than not expected to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, the Company considers many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are ordinary or capital; (3) in which tax jurisdictions they were generated and the timing of their reversal; (4) taxable income in prior carryback years as well as projected taxable earnings exclusive of reversing temporary differences and carryforwards; (5) the length of time that carryovers can be utilized in the various taxing jurisdictions; (6) any unique tax rules that would impact the utilization of the deferred tax assets; and (7) any tax planning strategies that the Company would employ to avoid a tax benefit from expiring unused. Although realization is not assured, management believes it is more likely than not that the deferred tax assets, net of valuation allowances, will be realized.
The Company had no valuation allowance as of December 31, 2020 and 2019. Adjustments to the valuation allowance will be made if there is a change in management’s assessment of the amount of deferred tax asset that is realizable.
The Company’s “Income (loss) from operations before income taxes and equity in earnings of operating joint venture” includes income from domestic operations of $68 million, $159 million and $58 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Tax Audit and Unrecognized Tax Benefits
The Company’s liability for income taxes includes the liability for unrecognized tax benefits and interest that relate to tax years still subject to review by the IRS or other taxing authorities. The completion of review or the expiration of the Federal statute of limitations for a given audit period could result in an adjustment to the liability for income taxes.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
The following table reconciles the total amount of unrecognized tax benefits at the beginning and end of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
(in thousands)
|
|
Balance at January 1,
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
30,196
|
|
|
Increases in unrecognized tax benefits-prior years
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(Decreases) in unrecognized tax benefits-prior years
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Increases in unrecognized tax benefits-current year
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(Decreases) in unrecognized tax benefits-current year
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Settlements with taxing authorities
|
|
0
|
|
|
0
|
|
|
(30,196)
|
|
|
Balance at December 31,
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Unrecognized tax benefits that, if recognized, would favorably impact the effective rate
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
The Company does not anticipate any significant changes within the next twelve months to its total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.
The Company classifies all interest and penalties related to tax uncertainties as income tax expense (benefit). The company did not recognize tax related interest and penalties.
At December 31, 2020, the Company remains subject to examination in the U.S. for tax years 2014 through 2020.
The Company participates in the IRS’s Compliance Assurance Program. Under this program, the IRS assigns an examination team to review completed transactions as they occur in order to reach agreement with the Company on how they should be reported in the relevant tax returns. If disagreements arise, accelerated resolution programs are available to resolve the disagreements in a timely manner.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
11. EQUITY
Accumulated Other Comprehensive Income (Loss)
AOCI represents the cumulative OCI items that are reported separate from net income and detailed on the Consolidated Statements of Comprehensive Income. Net unrealized investment gains (losses) are described in further detail in Note 2. The balance of and changes in each component of AOCI as of and for the years ended December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
Foreign Currency
Translation
Adjustment
|
|
Net Unrealized
Investment Gains
(Losses)(1)
|
|
Total Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
|
(in thousands)
|
|
Balance, December 31, 2017
|
|
$
|
(234)
|
|
|
$
|
165,580
|
|
|
$
|
165,346
|
|
|
Change in OCI before reclassifications
|
|
(17,745)
|
|
|
(257,432)
|
|
|
(275,177)
|
|
|
Amounts reclassified from AOCI
|
|
0
|
|
|
(2,549)
|
|
|
(2,549)
|
|
|
Income tax benefit (expense)
|
|
581
|
|
|
54,593
|
|
|
55,174
|
|
|
Cumulative effect of adoption of ASU 2016-01
|
|
0
|
|
|
(1,539)
|
|
|
(1,539)
|
|
|
Cumulative effect of adoption of ASU 2018-02
|
|
(50)
|
|
|
30,499
|
|
|
30,449
|
|
|
Balance, December 31, 2018
|
|
(17,448)
|
|
|
(10,848)
|
|
|
(28,296)
|
|
|
Change in OCI before reclassifications
|
|
9,572
|
|
|
435,919
|
|
|
445,491
|
|
|
Amounts reclassified from AOCI
|
|
0
|
|
|
(54,472)
|
|
|
(54,472)
|
|
|
Income tax benefit (expense)
|
|
(41)
|
|
|
(81,240)
|
|
|
(81,281)
|
|
|
Balance, December 31, 2019
|
|
(7,917)
|
|
|
289,359
|
|
|
281,442
|
|
|
Change in OCI before reclassifications
|
|
599
|
|
|
327,819
|
|
|
328,418
|
|
|
Amounts reclassified from AOCI
|
|
0
|
|
|
7,074
|
|
|
7,074
|
|
|
Income tax benefit (expense)
|
|
(479)
|
|
|
(70,327)
|
|
|
(70,806)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2020
|
|
$
|
(7,797)
|
|
|
$
|
553,925
|
|
|
$
|
546,128
|
|
(1)Includes cash flow hedges of $(8) million, $26 million, and $22 million as of December 31, 2020, 2019 and 2018, respectively.
Reclassifications out of Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
(in thousands)
|
|
Amounts reclassified from AOCI(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment gains (losses):
|
|
|
|
|
|
|
|
Cash flow hedges—Currency/Interest rate(3)
|
|
$
|
162
|
|
|
$
|
7,734
|
|
|
$
|
15,889
|
|
|
Net unrealized investment gains (losses) on available-for-sale securities(4)
|
|
(7,236)
|
|
|
46,738
|
|
|
(13,340)
|
|
|
Total net unrealized investment gains (losses)
|
|
(7,074)
|
|
|
54,472
|
|
|
2,549
|
|
|
Total reclassifications for the period
|
|
$
|
(7,074)
|
|
|
$
|
54,472
|
|
|
$
|
2,549
|
|
(1)All amounts are shown before tax.
(2)Positive amounts indicate gains/benefits reclassified out of AOCI. Negative amounts indicate losses/costs reclassified out of AOCI.
(3)See Note 4 for additional information on cash flow hedges.
(4)See table below for additional information on unrealized investment gains (losses), including the impact on DAC and other costs, future policy benefits, policyholders’ account balances and other liabilities.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Net Unrealized Investment Gains (Losses)
Net unrealized investment gains (losses) on available-for-sale fixed maturity securities and certain other invested assets and other assets are included in the Company’s Consolidated Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from OCI those items that are included as part of “Net income” for a period that had been part of OCI in earlier periods. The amounts for the periods indicated below, split between amounts related to available-for-sale fixed maturity securities on which an OTTI had been previously recognized, an allowance for credit losses has been recognized, and all other net unrealized investment gains (losses), are as follows:
Net Unrealized Gains (Losses) on Available-for-Sale Fixed Maturity Securities on which an OTTI had been previously recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized
Gains (Losses)
on Investments
|
|
DAC and
Other Costs(2)
|
|
Future Policy
Benefits, Policyholders' Account Balances and Other Liabilities(3)
|
|
Deferred
Income Tax
(Liability)
Benefit
|
|
Accumulated
Other
Comprehensive
Income (Loss)
Related to Net
Unrealized
Investment
Gains (Losses)
|
|
|
|
(in thousands)
|
|
Balance, December 31, 2017
|
|
$
|
1,609
|
|
|
$
|
(99)
|
|
|
$
|
22
|
|
|
$
|
(682)
|
|
|
$
|
850
|
|
|
Net unrealized investment gains (losses) on investments arising during the period
|
|
(2,150)
|
|
|
0
|
|
|
0
|
|
|
451
|
|
|
(1,699)
|
|
|
Reclassification adjustment for (gains) losses included in net income
|
|
(20)
|
|
|
0
|
|
|
0
|
|
|
4
|
|
|
(16)
|
|
|
Reclassification adjustment for OTTI losses excluded from net income(1)
|
|
(128)
|
|
|
0
|
|
|
0
|
|
|
27
|
|
|
(101)
|
|
|
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs
|
|
0
|
|
|
(53)
|
|
|
0
|
|
|
11
|
|
|
(42)
|
|
|
Impact of net unrealized investment (gains) losses on future policy benefits, policyholders' account balances and other liabilities
|
|
0
|
|
|
0
|
|
|
15
|
|
|
(3)
|
|
|
12
|
|
|
Balance, December 31, 2018
|
|
(689)
|
|
|
(152)
|
|
|
37
|
|
|
(192)
|
|
|
(996)
|
|
|
Net unrealized investment gains (losses) on investments arising during the period
|
|
2,112
|
|
|
0
|
|
|
0
|
|
|
(450)
|
|
|
1,662
|
|
|
Reclassification adjustment for (gains) losses included in net income
|
|
210
|
|
|
0
|
|
|
0
|
|
|
(45)
|
|
|
165
|
|
|
Reclassification adjustment for OTTI losses excluded from net income(1)
|
|
(65)
|
|
|
0
|
|
|
0
|
|
|
14
|
|
|
(51)
|
|
|
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs
|
|
0
|
|
|
316
|
|
|
0
|
|
|
(67)
|
|
|
249
|
|
|
Impact of net unrealized investment (gains) losses on future policy benefits, policyholders' account balances and other liabilities
|
|
0
|
|
|
0
|
|
|
(355)
|
|
|
76
|
|
|
(279)
|
|
|
Balance, December 31, 2019
|
|
1,568
|
|
|
164
|
|
|
(318)
|
|
|
(664)
|
|
|
750
|
|
|
Reclassification due to implementation of ASU 2016-13(4)
|
|
(1,568)
|
|
|
(164)
|
|
|
318
|
|
|
664
|
|
|
(750)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2020
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
(1)Represents "transfers in" related to the portion of OTTI losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss.
(2)"Other costs" primarily includes reinsurance recoverables and deferred reinsurance losses.
(3)"Other liabilities" primarily includes reinsurance payables.
(4)Represents net unrealized gains (losses) for which an OTTI had been previously recognized.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Net Unrealized Gains (Losses) on Available-for-Sale Fixed Maturity Securities on which an allowance for credit losses has been recognized and All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized Gains (Losses) on Investments on Available-for-Sale Fixed Maturity Securities on which an allowance for credit losses has been recognized(1)
|
|
Net Unrealized Gains (Losses) on All Other Investments(3)
|
|
DAC and
Other Costs(4)
|
|
Future Policy
Benefits, Policyholders' Account Balances and Other Liabilities(5)
|
|
Deferred
Income Tax
(Liability)
Benefit
|
|
Accumulated
Other
Comprehensive
Income (Loss)
Related to Net
Unrealized
Investment
Gains (Losses)
|
|
|
|
(in thousands)
|
|
Balance, December 31, 2017
|
|
$
|
0
|
|
|
$
|
272,809
|
|
|
$
|
1,832
|
|
|
$
|
(28,998)
|
|
|
$
|
(80,913)
|
|
|
$
|
164,730
|
|
|
Net unrealized investment gains (losses) on investments arising during the period
|
|
0
|
|
|
(284,672)
|
|
|
0
|
|
|
0
|
|
|
59,778
|
|
|
(224,894)
|
|
|
Reclassification adjustment for (gains) losses included in net income
|
|
0
|
|
|
(2,529)
|
|
|
0
|
|
|
0
|
|
|
531
|
|
|
(1,998)
|
|
|
Reclassification adjustment for OTTI losses excluded from net income(2)
|
|
0
|
|
|
128
|
|
|
0
|
|
|
0
|
|
|
(27)
|
|
|
101
|
|
|
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs
|
|
0
|
|
|
0
|
|
|
(67,575)
|
|
|
0
|
|
|
14,190
|
|
|
(53,385)
|
|
|
Impact of net unrealized investment (gains) losses on future policy benefits, policyholders' account balances and other liabilities
|
|
0
|
|
|
0
|
|
|
0
|
|
|
97,003
|
|
|
(20,369)
|
|
|
76,634
|
|
|
Cumulative effect of adoption of ASU 2016-01
|
|
0
|
|
|
(2,368)
|
|
|
0
|
|
|
0
|
|
|
829
|
|
|
(1,539)
|
|
|
Cumulative effect of adoption of ASU 2018-02
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
30,499
|
|
|
30,499
|
|
|
Balance, December 31, 2018
|
|
0
|
|
|
(16,632)
|
|
|
(65,743)
|
|
|
68,005
|
|
|
4,518
|
|
|
(9,852)
|
|
|
Net unrealized investment gains (losses) on investments arising during the period
|
|
0
|
|
|
494,861
|
|
|
0
|
|
|
0
|
|
|
(105,395)
|
|
|
389,466
|
|
|
Reclassification adjustment for (gains) losses included in net income
|
|
0
|
|
|
(54,682)
|
|
|
0
|
|
|
0
|
|
|
11,646
|
|
|
(43,036)
|
|
|
Reclassification adjustment for OTTI losses excluded from net income(2)
|
|
0
|
|
|
65
|
|
|
0
|
|
|
0
|
|
|
(14)
|
|
|
51
|
|
|
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs
|
|
0
|
|
|
0
|
|
|
488,806
|
|
|
0
|
|
|
(104,105)
|
|
|
384,701
|
|
|
Impact of net unrealized investment (gains) losses on future policy benefits, policyholders' account balances and other liabilities
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(549,821)
|
|
|
117,100
|
|
|
(432,721)
|
|
|
Balance, December 31, 2019
|
|
0
|
|
|
423,612
|
|
|
423,063
|
|
|
(481,816)
|
|
|
(76,250)
|
|
|
288,609
|
|
|
Reclassification due to implementation of ASU 2016-13(6)
|
|
0
|
|
|
1,568
|
|
|
164
|
|
|
(318)
|
|
|
(664)
|
|
|
750
|
|
|
Net unrealized investment gains (losses) on investments arising during the period
|
|
616
|
|
|
416,479
|
|
|
0
|
|
|
0
|
|
|
(87,588)
|
|
|
329,507
|
|
|
Reclassification adjustment for (gains) losses included in net income
|
|
0
|
|
|
7,074
|
|
|
0
|
|
|
0
|
|
|
(1,486)
|
|
|
5,588
|
|
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification due to allowance for credit losses recorded during the period
|
|
(616)
|
|
|
616
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs
|
|
0
|
|
|
0
|
|
|
776,821
|
|
|
0
|
|
|
(163,131)
|
|
|
613,690
|
|
|
Impact of net unrealized investment (gains) losses on future policy benefits, policyholders' account balances and other liabilities
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(866,097)
|
|
|
181,878
|
|
|
(684,219)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2020
|
|
$
|
0
|
|
|
$
|
849,349
|
|
|
$
|
1,200,048
|
|
|
$
|
(1,348,231)
|
|
|
$
|
(147,241)
|
|
|
$
|
553,925
|
|
(1)Allowance for credit losses on available-for-sale fixed maturity securities effective January 1, 2020.
(2)Represents "transfers out" related to the portion of OTTI losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss.
(3)Includes cash flow hedges. See Note 4 for information on cash flow hedges.
(4)"Other costs" primarily includes reinsurance recoverables and deferred reinsurance losses.
(5)"Other liabilities" primarily includes reinsurance payables.
(6)Represents net unrealized gains (losses) for which an OTTI had been previously recognized.
12. STATUTORY NET INCOME AND SURPLUS AND DIVIDEND RESTRICTIONS
The Company is required to prepare statutory financial statements in accordance with accounting practices prescribed or permitted by the AZDOI. Statutory accounting practices primarily differ from U.S. GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions and valuing investments, deferred taxes, and certain assets on a different basis.
Statutory net income (loss) for the Company, including its subsidiary PLNJ, amounted to $(828) million, $262 million and $192 million for the years ended December 31, 2020, 2019 and 2018, respectively. Statutory surplus of the Company, including its subsidiary PLNJ, amounted to $1,304 million and $1,665 million at December 31, 2020 and 2019, respectively.
The Company does not utilize prescribed or permitted practices that vary materially from the statutory accounting practices prescribed by the NAIC.
The Company is subject to Arizona law, which limits the amount of dividends that insurance companies can pay to stockholders without approval of the AZDOI. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the lesser of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year. Cash dividends may only be paid out of surplus derived from realized net profits. Also, if any dividend, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of 10% of statutory capital and surplus as of the preceding December 31 or its statutory net gain from operations excluding realized investment gains and losses for the twelve-month period ending on the preceding December 31, the dividend is considered to be an "extraordinary dividend" and requires the prior approval of the AZDOI. Based on these limitations, there is no capacity to pay a dividend in 2021. In December 2019, the Company paid a dividend of $250 million to its sole shareholder, Prudential Insurance, of which $146 million was an ordinary dividend and $104 million was recorded as a return of capital. The dividend was approved by the State of Arizona. The Company did not pay dividends to Prudential Insurance in 2020 and 2018.
13. RELATED PARTY TRANSACTIONS
The Company has extensive transactions and relationships with Prudential Insurance and other affiliates. Although we seek to ensure that these transactions and relationships are fair and reasonable, it is possible that the terms of these transactions are not the same as those that would result from transactions among unrelated parties.
Expense Charges and Allocations
The majority of the Company’s expenses are allocations or charges from Prudential Insurance or other affiliates. These expenses can be grouped into general and administrative expenses and agency distribution expenses.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
The Company’s general and administrative expenses are charged to the Company using allocation methodologies based on business production processes. Management believes that the methodology is reasonable and reflects costs incurred by Prudential Insurance to process transactions on behalf of the Company. The Company operates under service and lease agreements whereby services of officers and employees, supplies, use of equipment and office space are provided by Prudential Insurance. The Company reviews its allocation methodology periodically which it may adjust accordingly. General and administrative expenses include allocations of stock compensation expenses related to a stock-based awards program and a deferred compensation program issued by Prudential Financial. The expense charged to the Company for the stock-based awards program was $1 million for each of the years ended December 31, 2020, 2019 and 2018. The expense charged to the Company for the deferred compensation program was $5 million, $6 million and $6 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company is charged for its share of employee benefit expenses. These expenses include costs for funded and non-funded, non-contributory defined benefit pension plans. Some of these benefits are based on final earnings and length of service while others are based on an account balance, which takes into consideration age, service and earnings during a career. The Company’s share of net expense for the pension plans was $17 million, $20 million and $23 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company is also charged for its share of the costs associated with welfare plans issued by Prudential Insurance. These expenses include costs related to medical, dental, life insurance and disability. The Company's share of net expense for the welfare plans was $18 million, $24 million and $28 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Prudential Insurance sponsors voluntary savings plans for its employee 401(k) plans. The plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual salary. The Company’s expense for its share of the voluntary savings plan was $7 million, $9 million and $10 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company is charged distribution expenses from Prudential Insurance’s agency network for both its domestic life and annuity products through a transfer pricing agreement, which is intended to reflect a market-based pricing arrangement.
The Company pays commissions and certain other fees to Prudential Annuities Distributors, Inc. (“PAD”) in consideration for PAD’s marketing and underwriting of the Company’s annuity products. Commissions and fees are paid by PAD to broker-dealers who sell the Company’s annuity products. Commissions and fees paid by the Company to PAD were $529 million, $747 million and $739 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company is charged for its share of corporate expenses incurred by Prudential Financial to benefit its businesses, such as advertising, executive oversight, external affairs and philanthropic activity. The Company’s share of corporate expenses was $76 million, $116 million and $69 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Corporate-Owned Life Insurance
The Company has sold five Corporate Owned Life Insurance (“COLI”) policies to Prudential Insurance, and one to Prudential Financial. The cash surrender value included in separate accounts for these COLI policies was $4,757 million at December 31, 2020 and $4,339 million at December 31, 2019. Fees related to these COLI policies were $50 million, $48 million and $45 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Company retains the majority of the mortality risk associated with these COLI policies up to $3.5 million per individual policy.
Affiliated Investment Management Expenses
In accordance with an agreement with PGIM, Inc. ("PGIM"), the Company pays investment management expenses to PGIM who acts as investment manager to certain Company general account and separate account assets. Investment management expenses paid to PGIM related to this agreement were $15 million, $14 million and $13 million for the years ended December 31, 2020, 2019 and 2018, respectively. These expenses are recorded as “Net investment income” in the Consolidated Statements of Operations and Comprehensive Income.
Derivative Trades
In its ordinary course of business, the Company enters into OTC derivative contracts with an affiliate, PGF. For these OTC derivative contracts, PGF has a substantially equal and offsetting position with an external counterparty. See Note 4 for additional information.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Joint Ventures
The Company has made investments in joint ventures with certain subsidiaries of Prudential Financial. "Other invested assets" includes $111 million and $96 million as of December 31, 2020 and 2019, respectively. "Net investment income" related to these ventures includes a gain of $12 million, a gain of $9 million and a loss of $1 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Affiliated Asset Administration Fee Income
The Company has a revenue sharing agreement with AST Investment Services, Inc. ("ASTISI") and PGIM Investments LLC ("PGIM Investments") whereby the Company receives fee income based on policyholders' separate account balances invested in the Advanced Series Trust. Income received from ASTISI and PGIM Investments related to this agreement was $344 million, $341 million and $333 million for the years ended December 31, 2020, 2019 and 2018, respectively. These revenues are recorded as “Asset administration fees” in the Consolidated Statements of Operations and Comprehensive Income.
The Company has a revenue sharing agreement with PGIM Investments, whereby the Company receives fee income based on policyholders’ separate account balances invested in The Prudential Series Fund. Income received from PGIM Investments related to this agreement was $11 million, $10 million and $10 million for the years ended December 31, 2020, 2019 and 2018, respectively. These revenues are recorded as “Asset administration fees” in the Consolidated Statements of Operations and Comprehensive Income.
Affiliated Notes Receivable
Affiliated notes receivable included in “Receivables from parent and affiliates” at December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Dates
|
|
Interest Rates
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar fixed rate notes
|
2020
|
-
|
2027
|
|
0.00%
|
-
|
14.85
|
%
|
|
$
|
111,970
|
|
|
$
|
122,566
|
|
|
Total long-term notes receivable - affiliated(1)
|
|
|
|
|
|
|
|
|
$
|
111,970
|
|
|
$
|
122,566
|
|
(1)All long-term notes receivable may be called for prepayment prior to the respective maturity dates under specified circumstances.
The affiliated notes receivable shown above are classified as available-for-sale securities and other trading assets carried at fair value. The Company monitors the internal and external credit ratings of these loans and loan performance. The Company also considers any guarantees made by Prudential Insurance for loans due from affiliates.
Accrued interest receivable related to these loans was $1 million at both December 31, 2020 and 2019, and is included in “Other assets.” Revenues related to these loans were $4 million, $4 million and $5 million for the years ended December 31, 2020, 2019 and 2018, respectively, and are included in “Other income.”
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Affiliated Asset Transfers
The Company participates in affiliated asset trades with parent and sister companies. Book and market value differences for trades with a parent and sister are recognized within "Additional paid-in capital" ("APIC") and "Realized investment gains (losses), net," respectively. The table below shows affiliated asset trades for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
|
|
Date
|
|
Transaction
|
|
Security Type
|
|
Fair
Value
|
|
Book Value
|
|
APIC, Net
of Tax
Increase/
(Decrease)
|
|
Realized
Investment
Gain/
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Prudential Insurance
|
|
February 2019
|
|
Sale
|
|
Commercial Mortgages
|
|
$
|
4,995
|
|
|
$
|
5,000
|
|
|
$
|
(4)
|
|
|
$
|
0
|
|
|
|
|
PALAC
|
|
April 2019
|
|
Sale
|
|
Equity Securities
|
|
$
|
14,525
|
|
|
$
|
13,466
|
|
|
$
|
0
|
|
|
$
|
1,059
|
|
|
|
|
Term Re
|
|
September 2019
|
|
Sale
|
|
Fixed Maturities
|
|
$
|
9,178
|
|
|
$
|
8,135
|
|
|
$
|
0
|
|
|
$
|
1,043
|
|
|
|
|
PURC
|
|
September 2019
|
|
Sale
|
|
Fixed Maturities
|
|
$
|
8,399
|
|
|
$
|
7,455
|
|
|
$
|
0
|
|
|
$
|
944
|
|
|
|
|
PAR U
|
|
September 2019
|
|
Sale
|
|
Fixed Maturities
|
|
$
|
31,466
|
|
|
$
|
28,146
|
|
|
$
|
0
|
|
|
$
|
3,320
|
|
|
|
|
Prudential Insurance
|
|
September 2019
|
|
Sale
|
|
Fixed Maturities
|
|
$
|
10,702
|
|
|
$
|
9,254
|
|
|
$
|
1,144
|
|
|
$
|
0
|
|
|
|
|
PURC
|
|
December 2019
|
|
Sale
|
|
Equity Securities
|
|
$
|
7,767
|
|
|
$
|
6,002
|
|
|
$
|
0
|
|
|
$
|
1,765
|
|
|
|
|
Par Term
|
|
December 2019
|
|
Sale
|
|
Fixed Maturities
|
|
$
|
27,330
|
|
|
$
|
24,739
|
|
|
$
|
0
|
|
|
$
|
2,591
|
|
|
|
|
PURC
|
|
December 2019
|
|
Sale
|
|
Fixed Maturities
|
|
$
|
93,830
|
|
|
$
|
75,586
|
|
|
$
|
0
|
|
|
$
|
18,244
|
|
|
|
|
PURC
|
|
December 2019
|
|
Sale
|
|
Fixed Maturities
|
|
$
|
78,884
|
|
|
$
|
68,645
|
|
|
$
|
0
|
|
|
$
|
10,239
|
|
|
|
|
Prudential Insurance
|
|
December 2019
|
|
Purchase
|
|
Other Invested Assets
|
|
$
|
9,000
|
|
|
$
|
9,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
Prudential Insurance
|
|
March 2020
|
|
Purchase
|
|
Other Invested Assets
|
|
$
|
1,390
|
|
|
$
|
1,390
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
Prudential Insurance
|
|
April 2020
|
|
Purchase
|
|
Fixed Maturities
|
|
$
|
61,953
|
|
|
$
|
59,659
|
|
|
$
|
(1,812)
|
|
|
$
|
0
|
|
|
|
|
Prudential Insurance
|
|
April 2020
|
|
Purchase
|
|
Fixed Maturities
|
|
$
|
3,485
|
|
|
$
|
3,320
|
|
|
$
|
(130)
|
|
|
$
|
0
|
|
|
|
|
GA BV LLC
|
|
July 2020
|
|
Transfer Out
|
|
Fixed Maturities
|
|
$
|
1,914
|
|
|
$
|
1,914
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Agreements
The Company is authorized to borrow funds up to $2.2 billion from affiliates to meet its capital and other funding needs. There was no debt outstanding as of December 31, 2020. Short-term debt outstanding was $2.8 million as of December 31, 2019.
The total interest expense to the Company related to loans payable to affiliates was $0.7 million, $2.3 million and $0.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Contributed Capital and Dividends
In February of 2021, the Company received a capital contribution in the amount of $100 million from Prudential Insurance. In June, September, and December of 2020, the Company received capital contributions in the amounts of $325 million, $75 million and $175 million, respectively, from Prudential Insurance. In December of 2019, the Company received a capital contribution in the amount of $6 million from Prudential Insurance. In March of 2018, the Company received a capital contribution in the amount of $6 million from Prudential Insurance.
Through December 2020, the Company did not pay any dividends to Prudential Insurance. In December 2019, the Company paid a dividend in the amount of $250 million to Prudential Insurance. Through December 2018, the Company did not pay any dividends.
Reinsurance with Affiliates
As discussed in Note 9, the Company participates in reinsurance transactions with certain affiliates.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
14. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
The Company has made commitments to fund commercial mortgage loans. As of December 31, 2020 and 2019, the outstanding balances on these commitments were $30 million and $26 million, respectively. These amounts include unfunded commitments that are not unconditionally cancellable. For related credit exposure, there was an allowance for credit losses of $0.0 million as of December 31, 2020, which is a change of $0.0 million for the twelve months ended December 31, 2020. The Company also made commitments to purchase or fund investments, mostly private fixed maturities. As of December 31, 2020 and 2019, $354 million and $261 million, respectively, of these commitments were outstanding. These amounts include unfunded commitments that are not unconditionally cancellable. There were no related charges for credit losses for the twelve months ended December 31, 2020.
Guarantees
In July 2017, the Company formed a joint venture with CT Corp to provide life insurance solutions in Indonesia. The Company owns a 49% interest in the joint venture and has entered into a shareholders agreement with CT Corp that sets out their respective rights and obligations with respect to the joint venture. Among other things, the shareholders agreement obligates the Company and CT Corp to provide capital to the joint venture, as necessary to comply with applicable law or to maintain a specified minimum amount of capital in the joint venture. This obligation is not limited to a maximum amount. The Company does not expect to make any payments on this guarantee and is not carrying any liabilities associated with the guarantee.
Contingent Liabilities
On an ongoing basis, the Company and its regulators review its operations including, but not limited to, sales and other customer interface procedures and practices, and procedures for meeting obligations to its customers and other parties. These reviews may result in the modification or enhancement of processes or the imposition of other action plans, including concerning management oversight, sales and other customer interface procedures and practices, and the timing or computation of payments to customers and other parties. In certain cases, if appropriate, the Company may offer customers or other parties remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.
The Company is subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment of unclaimed or abandoned funds, and is subject to audit and examination for compliance with these requirements. For additional discussion of these matters, see “Litigation and Regulatory Matters” below.
It is possible that the results of operations or the cash flows of the Company in a particular quarterly or annual period could be materially affected as a result of payments in connection with the matters discussed above or other matters depending, in part, upon the results of operations or cash flows for such period. Management believes, however, that ultimate payments in connection with these matters, after consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on the Company’s financial position.
Litigation and Regulatory Matters
The Company is subject to legal and regulatory actions in the ordinary course of its business. Pending legal and regulatory actions include proceedings specific to the Company and proceedings generally applicable to business practices in the industry in which it operates. The Company is subject to class action lawsuits and other litigation involving a variety of issues and allegations involving sales practices, claims payments and procedures, premium charges, policy servicing and breach of fiduciary duty to customers. The Company is also subject to litigation arising out of its general business activities, such as its investments, contracts, leases and labor and employment relationships, including claims of discrimination and harassment, and could be exposed to claims or litigation concerning certain business or process patents. In addition, the Company, along with other participants in the businesses in which it engages, may be subject from time to time to investigations, examinations and inquiries, in some cases industry-wide, concerning issues or matters upon which such regulators have determined to focus. In some of the Company’s pending legal and regulatory actions, parties are seeking large and/or indeterminate amounts, including punitive or exemplary damages. The outcome of litigation or a regulatory matter, and the amount or range of potential loss at any particular time, is often inherently uncertain.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but the matter, if material, is disclosed. The Company estimates that as of December 31, 2020, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is less than $100 million. This estimate is not an indication of expected loss, if any, or the Company's maximum possible loss exposure on such matters. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.
Behfarin v. Pruco Life
In July 2017, a putative class action complaint entitled Richard Behfarin v. Pruco Life Insurance Company was filed in the United States District Court for the Central District of California, alleging that the Company imposes charges on owners of universal life policies to cure defaults and/or reinstate lapses, that are inconsistent with the applicable universal life policy. The complaint includes claims for breach of contract, breach of implied covenant of good faith and fair dealing, and violation of California law, and seeks unspecified damages along with declaratory and injunctive relief. In September 2017, the Company filed its answer to the complaint. In September 2018, plaintiff filed a motion for class certification. In October 2019, plaintiff filed: (1) the First Amended Complaint adding Prudential Insurance Company of America and Pruco Life Insurance Company of New Jersey as defendants; and (2) a motion seeking preliminary certification of a settlement class, appointment of a class representative and class counsel, and preliminary approval of the proposed class action settlement. In November 2019, the court issued an order granting the motion for preliminary approval of the settlement. In June 2020, the court issued an order: (i) granting plaintiffs’ motion for certification of the settlement class; (ii) approving the proposed nationwide class settlement agreement; (iii) approving the class notice; (iv) awarding attorneys’ fees and costs to plaintiffs and a reduced incentive award to Behfarin; and (v) dismissing the action with prejudice, but maintaining jurisdiction over the settlement.
Doyle C. Stone v. PFI, et al.
In February 2021, a putative class action complaint entitled Doyle C. Stone v. Prudential Financial, Inc., Pruco Life Insurance Company, was filed in the United States District Court for the District of New Jersey. The complaint asserts claims against Prudential Financial, Inc. and Pruco Life Insurance Company for violation of the New Jersey Consumer Fraud Act, breach of contract, breach of fiduciary duty, breach of implied duty of good faith and fair dealing, misrepresentation and unjust enrichment, based on: (i) the Company’s alleged deficient identification, notification and payment practices for retirement plan participants in transferred group retirement, annuity and insurance plans (“Plan Participants”); and (ii) improper transfer of Plan Participant funds to its own accounts. The putative class includes all Plan Participants from January 2015 to the present.
Summary
The Company’s litigation and regulatory matters are subject to many uncertainties, and given their complexity and scope, their outcome cannot be predicted. It is possible that the Company’s results of operations or cash flows in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters depending, in part, upon the results of operations or cash flows for such period. In light of the unpredictability of the Company’s litigation and regulatory matters, it is also possible that in certain cases an ultimate unfavorable resolution of one or more pending litigation or regulatory matters could have a material adverse effect on the Company’s financial position. Management believes, however, that, based on information currently known to it, the ultimate outcome of all pending litigation and regulatory matters, after consideration of applicable reserves and rights to indemnification, is not likely to have a material adverse effect on the Company’s financial position.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for the years ended December 31, 2020 and 2019 are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
|
(in thousands)
|
|
2020
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
337,490
|
|
|
$
|
206,054
|
|
|
$
|
302,378
|
|
|
$
|
277,342
|
|
|
Total benefits and expenses
|
|
266,192
|
|
|
225,426
|
|
|
269,772
|
|
|
293,739
|
|
|
Income (loss) from operations before income taxes and equity in earnings of operating joint venture
|
|
71,298
|
|
|
(19,372)
|
|
|
32,606
|
|
|
(16,397)
|
|
|
Net income (loss)
|
|
$
|
97,612
|
|
|
$
|
9,532
|
|
|
$
|
150,078
|
|
|
$
|
(60,525)
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
222,412
|
|
|
$
|
233,359
|
|
|
$
|
273,205
|
|
|
$
|
220,388
|
|
|
Total benefits and expenses
|
|
150,798
|
|
|
219,237
|
|
|
234,568
|
|
|
185,977
|
|
|
Income (loss) from operations before income taxes and equity in earnings of operating joint venture
|
|
71,614
|
|
|
14,122
|
|
|
38,637
|
|
|
34,411
|
|
|
Net income (loss)
|
|
$
|
87,788
|
|
|
$
|
48,435
|
|
|
$
|
43,373
|
|
|
$
|
37,403
|
|
16. REVISION TO PRIOR YEAR INFORMATION
Revision to 2019 and 2018 Consolidated Financial Statements
The Company identified an error in the presentation of certain cash flow activity related to policyholders' account balances that impacted several line items within previously issued Consolidated Statements of Cash Flows. While these items affect the cash flows from operating and financing activities, they had no impact on the net increase (decrease) in cash and cash equivalents for the previously reported periods. Prior period amounts have been revised in the financial statements to correct this error as shown below.
Management assessed the materiality of the misstatement described above on prior period financial statements in accordance with SEC Staff Accounting Bulletin ("SAB") No. 99, Materiality, codified in ASC 250-10, Accounting Changes and Error Corrections ("ASC 250"), and concluded that these misstatements were not material to any prior annual or interim periods. Accordingly, in accordance with ASC 250 (SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), the consolidated financial statements for the years ended December 31, 2019 and 2018, which are presented herein, have been revised. The following are selected line items from the consolidated financial statements illustrating the effects of these revisions:
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
As Previously Reported
|
|
Revision
|
|
As Revised
|
|
|
(in thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Policy charges and fee income
|
$
|
(126,300)
|
|
|
$
|
73,142
|
|
|
$
|
(53,158)
|
|
|
Cash flows from (used in) operating activities
|
(253,555)
|
|
|
73,142
|
|
|
(180,413)
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
0
|
|
|
(73,142)
|
|
|
(73,142)
|
|
|
Cash flows from (used in) financing activities
|
491,393
|
|
|
(73,142)
|
|
|
418,251
|
|
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
As Previously Reported
|
|
Revision
|
|
As Revised
|
|
|
(in thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Policy charges and fee income
|
$
|
(116,675)
|
|
|
$
|
67,637
|
|
|
$
|
(49,038)
|
|
|
Cash flows from (used in) operating activities
|
23,147
|
|
|
67,637
|
|
|
90,784
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
0
|
|
|
(67,637)
|
|
|
(67,637)
|
|
|
Cash flows from (used in) financing activities
|
717,599
|
|
|
(67,637)
|
|
|
649,962
|
|