0000777917us-gaap:OtherAssetsMemberus-gaap:OtherIncomeMember2020-01-012020-12-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| | | | | |
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED December 31, 20212022
OR
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission file number 033-37587
Pruco Life Insurance Company
(Exact Name of Registrant as Specified in its Charter)
| | | | | | | | |
| Arizona | | 22-1944557 |
(State or Other Jurisdiction of
Incorporation or Organization) | | (I.R.S Employer Identification Number) |
213 Washington Street, Newark, NJ 07102
(973) 802-6000
(Address and Telephone Number of Registrant’s Principal Executive Offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of the Regulation S-T ((§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer," "accelerated filer," "smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of March 16, 2022,20, 2023, 250,000 shares of the registrant’s Common Stock (par value $10) were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be furnished pursuant to Part III of this Form 10-K is set forth in, and is hereby incorporated by reference herein from, Prudential Financial, Inc.’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 20229, 2023, to be filed by Prudential Financial, Inc. with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the year ended December 31, 2021.2022.
Pruco Life Insurance Company meets the conditions set
forth in General Instruction (I) (1) (a) and (b) of Form 10-K
and is therefore filing this Form with the reduced disclosure.
TABLE OF CONTENTS
| | | | | | | | | | | |
| | | Page |
| PART I | Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| PART II | Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
| Item 9C. | | |
| PART III | Item 10. | | |
| Item 14. | | |
| PART IV | Item 15. | | |
| Item 16. | | |
| | | |
FORWARD-LOOKING STATEMENTS
Certain of the statements included in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Pruco Life Insurance Company and its subsidiary. There can be no assurance that future developments affecting Pruco Life Insurance Company and its subsidiary will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) the ongoing impact of therisks related to COVID-19 pandemic on the global economy, financial market and our business;could reemerge; (2) losses on investments or financial contracts due to deterioration in credit quality or value, or counterparty default; (3) losses on insurance products due to mortality experience or policyholder behavior experience that differs significantly from our expectations when we price our products; (4) changes in interest rates and equity prices that may (a) adversely impact the profitability of our products, the value of separate accounts supporting these products or the value of assets we manage, (b) result in losses on derivatives we use to hedge risk or increase collateral posting requirements and (c) limit opportunities to invest at appropriate returns; (5) guarantees within certain of our products which are market sensitive and may decrease our earnings or increase the volatility of our results of operations or financial position; (6) liquidity needs resulting from (a) derivative collateral market exposure, (b) asset/liability mismatches, (c) the lack of available funding in the financial markets or (d) unexpected cash demands due to severe mortality calamity or lapse events; (7) financial or customer losses, or regulatory and legal actions, due to inadequate or failed processes or systems, external events, and human error or misconduct such as (a) disruption of our systems and data, (b) an information security breach, (c) a failure to protect the privacy of sensitive data, (d) reliance on third-parties or (e) labor and employment matters; (8) changes in the regulatory landscape, including related to (a) financial sector regulatory reform, (b) changes in tax laws, (c) fiduciary rules and other standards of care, (d) state insurance laws and developments regarding group-wide supervision, capital and reserves, and (e) privacy and cybersecurity regulation; (9) technological changes which may adversely impact companies in our investment portfolio or cause insurance experience to deviate from our assumptions; (10) ratings downgrades; (11) market conditions that may adversely affect the sales or persistency of our products; (12) competition; and (13) reputational damage. Pruco Life Insurance Company does not intend, and is under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included in this Annual Report on Form 10-K for discussion of certain risks relating to our business and investment in our securities.
Part 1
Item 1. Business
Overview
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”). See Note 1 to the Consolidated Financial Statements for additional information.
Pruco Life has one wholly-owned insurance subsidiary, Pruco Life Insurance Company of New Jersey (“PLNJ”). 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.
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.
Prudential Insurance may make capital contributions to the Company, as needed, to enable it to comply with its reserve and capital requirements and fund expenses in connection with its business. Prudential Insurance is under no obligation to make such contributions and its assets do not back the benefits payable under the Company’s policyholders’ contracts.
Effective April 1, 2022, Prudential Financial completed the sale of Prudential Annuities Life Assurance Corporation (“PALAC”) to Fortitude Group Holdings, LLC (“Fortitude”). As such, PALAC is no longer an affiliate of Prudential Financial or the Company. Fortitude subsequently renamed the company Fortitude Life Insurance & Annuity Company (“FLIAC”).
Effective July 1, 2021, the Company recaptured the risks related to its variable annuity base contracts, along with the living benefit guarantees, that had previously been reinsured to Prudential Annuities Life Assurance Corporation (“PALAC”)PALAC from April 1, 2016 through June 30, 2021. The recapture does not impact PLNJ, which will continue to reinsure its new and in force business to Prudential Insurance. The product risks related to the previously reinsured business that were being managed in PALAC, were transferred to the Company. In addition, the living benefit hedging program related to the previously reinsured living benefit riders are being managed within the Company. This transaction is referred to as the "2021 Variable Annuities Recapture". See Note 1 to the Consolidated Financial Statements for more details.
Effective December 1, 2021, the Company entered into a reinsurance agreement with PALACFLIAC (previously named PALAC) under which the Company assumed all of its variable and fixed indexed annuities and fixed annuities with a guaranteed lifetime withdrawal income feature from PALAC.FLIAC. See Note 9 to the Consolidated Financial Statements for additional information regarding this reinsurance arrangement.
The Company sells variable and fixed annuities, variable life, term life and universal life insurance primarily through affiliated and unaffiliated distributors in the United States.
| | | | | |
| Products |
Annuities We offer a variety of products to serve different retirement needs and goals:
Indexed Variable Annuities •The Prudential FlexGuard® indexed variable annuity, offers the contractholder an opportunity to allocate funds to variable subaccounts and index-based strategies. The strategies provide interest or an interest component linked to, but not an investment in, the selected index, and its performance over the elected term, subject to certain contractual minimums and maximums, and also provides varying levels of downside protection at pre-determined levels and durations. The product also allows for additional deposits and provides a Return of Purchase Payment ("ROP") death benefit at no additional charge. •The Prudential FlexGuard® Income indexed variable annuity, launched in 2021, offers similar investment and crediting features as The Prudential FlexGuard® product, with focus on income protection by providing a protected income benefit for an additional fee. Crediting strategies are limited during the income phase.
Fixed Annuities •PruSecure®, SurePath® and SurePath® Income, all single premium fixed indexed annuities, offer flexibility to allocate account balances between an index-based strategy and a fixed rate strategy. The index-based strategy provides interest or an interest component linked to, but not an investment in, the selected index, and its performance over the elected term (i.e., 1, 3 or 5 years for PruSecure® and 1 or 3 years for SurePath® and SurePath® Income), subject to certain contractual minimums and maximums. The fixed rate strategy, not associated with an index, offers a guaranteed growth at a set interest rate for one year and can be renewed annually. Additionally, SurePath® Income offers a benefit that provides for guaranteed lifetime withdrawal payments. •The Prudential Fixed Annuity with Daily Advantage Income Benefit® (“DAI”), a single premium fixed annuity, provides principal protection as well as a guaranteed lifetime withdrawal income payment for an additional fee. The lifetime income amount increases daily without exposure to the equity market until the contractholder begins taking withdrawals.
| Life Insurance We offer a variety of products that serve different protection needs and goals: Variable Life - permanent coverage for life with potential to accumulate policy cash value based on underlying investment options •Our variable life policies offer flexibility in payment options and the potential to accumulate cash value through a suite of underlying investment options or a fixed rate option. •We offer different types ofIndexed variable life policies that,provide index-linked investment options (index strategies) in addition to a suite of underlying investment options or a fixed rate option. Index strategies credit interest to the death benefit, are tailoredcash value that is linked to, prioritize different goalsbut not an investment in, the performance of an external index, subject to certain parameters such as protection with moderate risk, growth with higher risk or legacy giving.cap, step, participation, and buffer rates, and contractual minimums/maximums.
Term Life - coverage for a specified number of years with a guaranteed tax-advantaged death benefit •Most of our term life policies offer an income tax-free death benefit, guaranteed premiums that will stay the same during the level-premium period and access to the death benefit while the policyholder is still alive to help them if they become terminally ill.period. •Most of our term life policies also offer a conversion option that allows the policyholder to convert the policy into a permanent policy that can potentially cover the insured for life.
Universal Life - permanent coverage for life with the potential to accumulate policy cash value •Our universal life policies offer flexibility in payment options and the potential to accumulate cash value in an account that earns interest based on a crediting rate determined by the Company subject to contractual minimums. •Indexed universal life policies provide interest credited to the cash value that is linked to, but not an investment in, the performance of an external index over a 1-year period, subject to certain cap and participation rates and contractual minimums/maximums.
Other Universal Life (Sales Discontinued as of July 13, 2020) •PruLife® Universal Protector,Final Expense Insurance - a singlewhole life guaranteed universal life insurance product.product that provides coverage in smaller face amounts, typically used for funeral expenses.
|
| | | | | |
Annuities Products (continued)
Traditional Variable Annuities •Prudential Premier® Investment Variable Annuity (“PPI”) offers tax-deferred asset accumulation, annuitization options and an optional death benefit that guarantees the contractholder’s beneficiary a return of total purchase payments made to the contract, adjusted for any partial withdrawals, upon death. •MyRock® Advisors, a fee-based variable annuity that offers an optional Dynamic Income Benefit (“IB”) rider, that provides longevity protection through a preset withdrawal percentage applied to a variable income base. In addition, the product offers either a basic death benefit, or a ROP death benefit. Both the IB and the ROP are available for an additional fee.
Other Traditional Variable Annuities (Sales Discontinued as of December 31, 2020)
•The Prudential Premier® Retirement Variable Annuity with Highest Daily Lifetime Income (“HDI”) offers lifetime income based on the highest daily account value plus a compounded deferral credit.
•The Prudential Defined IncomeSM (“PDI”) Variable Annuity provides for guaranteed lifetime withdrawal payments but restricts contractholder investment to a single bond sub-account within the separate account. PDI includes a living benefit rider which provides for a specified lifetime income withdrawal rate applied to total purchase payments made to the contracts, subject to annual roll-up increases until lifetime withdrawals commence.
•The Prudential Premier® Retirement Variable Annuity with Legacy Protection Plus (“LPP”) provides an optional enhanced death benefit based on the purchase payments rolling up at a preset rate on an annual basis until certain events occur.
| |
| | | | | |
Marketing and Distribution Our distribution efforts for our annuity products, which are supported by a network of internal and external wholesalers, are executed through a diverse group of distributors including: •Third-party distribution through: ◦Broker-dealers; ◦Banks and wirehouses; ◦Independent financial planners; and ◦Independent Marketing Organizations (“IMO”) (specifically for SurePath® and SurePath® Income). •Financial professionals, including those associated with Prudential Advisors, Prudential's proprietary nationwide sales organization. •LINK by Prudential, a personalized digital platform that connects customers to insurance professionals, through various channels (online, phone, video chat, or in person).
We primarily distribute our individual life products through the following four channels: •Third-party distribution ◦Independent brokers ◦Banks and wirehouses ◦General agencies and producer groups •Assurance IQ, Prudential's wholly-owned consumer solutions platform that leverages data science and technology to distribute a proprietary simplified products consisting of term life productand final expense insurance (as well as other third-party life, health and financial wellness solutions) directly to retail shoppers primarily through its digital and agent channels. •Prudential Advisors (Prudential's proprietary nationwide salesales organization), which: ◦Distributes Prudential life insurance, annuities and investment products with proprietary and non-proprietary investment options as well as select insurance, annuities and investment products from other carriers.financial services firms. ◦Offers certain retail brokerage and retail investment advisory services (through Prudential Insurance's dually registeredour dually-registered broker-dealer and investment advisor Pruco Securities, LLC) including brokerage accounts, discretionary and non-discretionary investment advisory programs and financial planning services. ◦Continues to executeExecutes a solutions-oriented business model centered around client relationships, while strengthening and driving Prudential’s brand promise. ◦Prudential Insurance pays Prudential Advisors a market rate to distribute our products. The Company is charged a distribution expense by Prudential Insurance related to this arrangement.
•Direct-to-Consumer ◦LINK by Prudential, a personalizedThe digital platform, that connectsPrudential.com, provides distribution of our simplified products online. ◦Personal Advisory Group is Prudential’s sales desk where customers can speak to an agent via phone to fulfill their insurance professionals, through various channels (online, phone, video chat, or in person).investment needs.
| Revenues and Profitability Our revenues primarily come in the form of: •Fee income from asset management fees and service fees, which represent administrative service and distribution fees from many of our proprietary and non-proprietary mutual funds. The asset management fees are determined as a percentage of the average assets of our proprietary mutual funds in our variable annuity and variable universal life products (net of sub-advisory expenses related to non-proprietary sub-advisors). •Policy charges and fee income representing mortality, expense and other fees for various insurance-related options and features based on asset-based fees of the separate accounts, account value, premium, or guaranteed value, as applicable. •Investment income (which contributes to the net spread over interest credited on certain products and related expenses). •Premiums that are fixed in accordance with the terms of the policies.
Our profitability is substantially impacted by our ability to appropriately price our products. We price our products based on: •An evaluation of the risks assumed and consideration of applicable risk management strategies, including hedging and reinsurance costs. •Assumptions regarding investment returns and contractholder behavior, including persistency, benefit utilization and the timing and efficiency of withdrawals for contracts with living benefit features, as well as other assumptions. •Our life-related product assumptions of future mortality and morbidity, persistency,policyholder behavior, interest rates, expenses, premium payment patterns, performance of ceded reinsurance, separate account fund performance and product-generated tax deductions.
|
| | | | | | |
Competition
We are among the industry’s largest providers of individual annuities and we compete with other providers of retirement savings and accumulation products, including large, well established insurance and financial services companies.companies, and private equity firms. We believe our competitive advantage lies primarily in our innovative product features and our risk management strategies as well as brand recognition, financial strength, the breadth of our distribution platform and our customer service capabilities. We periodically adjust product offerings, prices and features based on the market and our strategy, with a goal of achieving customer and enterprise value.
In our life insurance business, we compete with other large, well-established life insurance companies in a mature market. We compete primarily based on price, service (including the speed and ease of underwriting), distribution channel relationships, brand recognition and financial strength. Due to the large number of competitors, pricing is competitive. We periodically adjust product offerings, prices and features based on the market and our strategy, with a goal of achieving customer and enterprise value. | |
Seasonality of Key Financial Items
The following chart summarizes our key areas of seasonality in our results of operations:
| | | | | | | | | | | | | | | | | |
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |
| Annuities | | Impact of annual assumption update(1) | | Higher expenses(2) | |
| Life Insurance | Lowest underwriting gains | Impact of annual assumption update(1) | Highest underwriting gains | Higher expenses(2) | |
(1) Impact of annual reviews and update of actuarial assumptions and other refinements.
(2) Expenses are typically higher than the quarterly average in the fourth quarter.
Reinsurance
We regularly enter into third-party reinsurance agreements as either the ceding entity or the assuming entity. We also enter into affiliated reinsurance agreements as both the ceding and assuming entity for capital management purposes. As a ceding entity, exposure to the risks reinsured is reduced by transferring certain rights and obligations of the underlying insurance product to a counterparty. Conversely, as an assuming entity, exposure to the risks reinsured is increased by assuming certain rights and obligations of the underlying insurance products from a counterparty. We enter into reinsurance agreements as the ceding entity for a variety of reasons but primarily do so to reduce exposure to loss, reduce risk volatility, provide additional capacity for future growth and for capital management purposes for certain of our variable annuity, term and universal life products. Under ceded reinsurance, we remain liable to the underlying policyholder if a third-party reinsurer is unable to meet its obligations. We evaluate the financial condition of reinsurers, monitor the concentration of counterparty risk and maintain collateral, as appropriate, to mitigate this exposure.
We entered into a reinsurance agreement with a third-party reinsurer that grants us the ability to reinsure a portion of our fixed indexed annuity products (specifically PruSecure® and SurePath®), which includes the business assumed from PALAC.FLIAC. Under generally accepted accounting principles in the United States of America ("U.S. GAAP"), this agreement is accounted for under deposit accounting. We enter into reinsurance agreements as the assuming entity as part of our normal product offerings process. For additional information on our reinsurance agreements see Note 9 to the Consolidated Financial Statements.
For policies sold through 2017, we have reinsured the majority of our mortality risk which generally have maximum retained mortality risk amount of $100,000. For the new business going forward, Pruco Life retains the mortality risk not ceded to third-party or affiliated reinsurers, which may be up to $20 million on a single life.life and then down to $10 million per life for new business starting in 2020. See Note 9 to the Consolidated Financial Statements for more information related to these affiliated reinsurance arrangements.
Regulation
Overview
Our businesses are subject to comprehensive regulation and supervision. The purpose of these regulations is primarily to protect our customers and the overall financial system. Many of the laws and regulations to which we are subject are regularly re-examined. Existing or future laws and regulations may become more restrictive or otherwise adversely affect our operations or profitability, increase compliance costs, or increase potential regulatory exposure. In recent years we have experienced, and expect to continue to experience, extensive changes in the laws and regulations, and regulatory frameworks, applicable to our businesses. We cannot predict how current or future initiatives will further impact existing laws, regulations and regulatory frameworks.
State insurance laws regulate all aspects of our business. Insurance departments in the District of Columbia, Guam and all states monitor our insurance operations. The Company is domiciled in Arizona and its principal insurance regulatory authority is the Arizona Department of Insurance (“AZDOI”). Our subsidiary PLNJ is domiciled in New Jersey and its principal insurance regulatory authority is the New Jersey Department of Banking and Insurance ("NJDOBI"). Generally, our insurance products must be approved by the insurance regulators in the state in which they are sold. Our insurance products are substantially affected by federal and state tax laws.
The primary regulatory frameworks applicable to Prudential Financial and the Company are described further below under the following section headings:
•Dodd-Frank Wall Street Reform and Consumer Protection Act
•ERISA
•Fiduciary Rules and other Standards of Care
•U.S. State Insurance Holding Company Regulation
•U.S. Insurance Operations
◦State Insurance Regulation
◦U.S. Federal and State Securities Regulation Affecting Insurance Operations
◦Other Consumer Protection Regulation
•SECURE Act and other retirement product regulation
•Derivatives Regulation
•Privacy and Cybersecurity Regulation
•Anti-Money Laundering and Anti-Bribery Laws
•Unclaimed Property Laws
•Taxation
•International and Global Regulatory Initiatives
Several of Prudential Financial’s domestic and foreign regulators participate in an annual supervisory college facilitated by the NJDOBI. The purpose of the supervisory college is to promote ongoing supervisory coordination, facilitate the sharing of information among regulators and enhance each regulator’s understanding of Prudential Financial’s risk profile. The most recent supervisory college was held in October 2021.2022.
Existing and future accounting rules may also impact our results of operations or financial condition. For a discussion of accounting pronouncements and their potential impact on our business, including Accounting Standards Update (“ASU”) 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, see Note 2 to the Consolidated Financial Statements.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) increased the potential for federal regulation of our businesses. The Financial Stability Oversight Council (“FSOC” or the “Council”) may designate certain financial companies as a non-bank financial company (a “Designated Financial Company”) subject to supervision by the Board of Governors of the Federal Reserve System (“FRB”). In October 2017, the U.S. Department of the Treasury released a report titled “A Financial System That Creates Economic Opportunities - Asset Management and Insurance” which recommended, among other things, that primary federal and state regulators should focus on potential systemic risks arising from products and activities, and on implementing regulations that strengthen the asset management and insurance industries as a whole, rather than focus on an entity-based regulatory regime. The report also affirmed the role of the U.S. state-based system of insurance regulation. In December 2019, FSOC revised its interpretive guidance regarding Designated Financial Company determinations. The guidance describes the approach FSOC intends to take in prioritizing its work to identify and address potential risks to U.S. financial stability using an activities-based approach, and enhancing the analytical rigor and transparency in the processes FSOC intends to follow if it were to consider making a Designated Financial Company determination. From time to time Congress has also introduced legislation which if enacted, would amend certain provisions of Dodd-Frank, including by requiring the Council to prioritize the use of an activities-based approach to mitigate identified systemic risks.
The Council maintains the authority to designate entities, including the Company, for FRB supervision if it determines that either (i) material financial distress at the entity, or (ii) the nature, scope, size, scale, concentration, interconnectedness, or mix of the entity’s activities, could pose a threat to domestic financial stability. The Company continues to believe it does not meet the standards for designation.
We cannot predict whether Treasury reports, interpretive guidance, new legislation or other initiatives aimed at revising Dodd-Frank and regulation of the financial system will ultimately form the basis for changes to laws or regulations impacting the Company.
ERISA
The Employee Retirement Income Security Act (“ERISA”) is a comprehensive federal statute that applies to U.S. employee benefit plans sponsored by private employers and labor unions. Plans subject to ERISA include pension and profit sharing plans and welfare plans, including health, life and disability plans. ERISA provisions include reporting and disclosure rules, standards of conduct that apply to plan fiduciaries and prohibitions on transactions known as “prohibited transactions,” such as conflict-of-interest transactions and certain transactions between a benefit plan and a party in interest. ERISA also provides for civil and criminal penalties and enforcement. Prudential Financial’s insurance, investment management and retirement businesses provide services to employee benefit plans subject to ERISA, including services where Prudential Financial may act as an ERISA fiduciary. In addition to ERISA regulation of businesses providing products and services to ERISA plans, Prudential Financial becomes subject to ERISA’s prohibited transaction rules for transactions with those plans, which may affect Prudential Financial’s ability to enter transactions, or the terms on which transactions may be entered, with those plans, even in businesses unrelated to those giving rise to party in interest status.
Fiduciary Rules and Other Standards of Care
The Company and our distributors are subject to rules regarding the standard of care applicable to sales of our products and the provision of advice to our customers. In recent years, many of these rules have been revised or reexamined, as described below. We cannot predict whether any proposed or new amendments to the existing regulatory framework will ultimately become applicable to our businesses. Any new standards issued by the U.S. Department of Labor (“DOL”), the Securities and Exchange Commission (“SEC”), the National Association of Insurance Commissioners (“NAIC”) or state regulators may affect our businesses, results of operations, cash flows and financial condition.
DOL Fiduciary Rules
In June 2018,2016, the DOL issued a Fifth Circuit Court of Appeals decision became effective that vacated rules issued by the DOLrule that redefined who would be considered a “fiduciary” for purposes of transactions with qualified plans, plan participants and Individual Retirement Accounts (“IRAs”), and generally provided that investment advice to a plan participant or IRA owner would be treated as a fiduciary activity.activity (the "2016 Rules"). In 2018, the Fifth Circuit Court of Appeals vacated the 2016 Rules. Prior toto being vacated, the rules2016 Rules adversely impacted sales in our individual annuities business and resulted in increased compliance costs. Compliance with the new exemption has resulted in increased costs, in particular in the Prudential Advisors distribution system. In December 2020, the DOL finalizedissued a new prohibited transaction exemption, thatwhich became effective on February 16, 2021, whichthat replaced the previously vacated “best interest contract exemption,” and has since extended its non-enforcement relief for different parts of the exemption through January and June 2022, as applicable. The new exemption will allowallows fiduciaries meeting the requirements of the exemption to receive compensation, including as a result of
advice to rollover assets from a tax-qualified plan to an IRA, and to purchase from or sell certain investments to qualified plans and IRAs. The DOL also reinstated the pre-2016 investment advice regulation and provided its current interpretation of that regulation, which could result in rollover recommendations being fiduciary investment advice if certain conditions are met. On February 13, 2023, a U.S. District Court in Florida issued a decision that, in relevant part, vacates part of the DOL’s interpretation of what constitutes fiduciary investment advice under the pre-2016 investment advice regulation. In addition, there is another case pending that also challenges the DOL’s interpretation of that regulation. We are working to implementcannot predict the necessary policies, procedures and training to comply withoutcome of those cases or whether the final prohibited transaction exemption and accompanying interpretive guidance for our businesses. Compliance with the new exemption has resulted in increased costs, in particular in the Prudential Advisors distribution system.DOL will appeal.
SEC Best Interest Regulation
In June 2019, the SEC adopted a package of rulemakings and interpretative guidance that, among other things, requires broker-dealers to act in the best interest of retail customers when recommending securities transactions or investment strategies to them. The guidance also clarifies the SEC’s views of the fiduciary duty that investment advisers owe to their clients. The new best interest standards became effective on June 30, 2020. The new standards apply to recommendations to purchase certain of our products and have resulted in increased compliance costs, in particular in our Prudential Advisors distribution system.
U.S. State Standard of Care Regulation
In February 2020, the NAIC adopted revisions to the model suitability rule applicable to the sale of annuities. The revised model regulation states the insurance salesperson must act “without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interest.” The model rule will become applicable to us as it is adopted in each state.state, with 30 states having adopted the model to date. In addition, certain state regulators and legislatures have adopted or are considering adopting best interest standards.
U.S. State Insurance Holding Company Regulation
We are subject to the Arizona insurance holding company law which requires us to register with the insurance department and to furnish annually financial and other information about the operations of the Company. Generally, all transactions with affiliates that affect the Company must be fair and reasonable and, if material, require prior notice and approval or non-disapproval by the AZDOI. Similar laws are applicable to PLNJ in New Jersey.
Change of Control
Most states have insurance laws that require regulatory approval of a direct or indirect change of control of an insurer or an insurer’s holding company. Laws such as these that apply to us prevent any person from acquiring control of Prudential Financial or of its insurance subsidiaries unless that person has filed a statement with specified information with the insurance regulators and has obtained their prior approval. Under most states’ statutes, acquiring 10% or more of the voting stock of an insurance company or its parent company is presumptively considered a change of control, although such presumption may be rebutted. As of January 2022, New Jersey has recognized an additional presumption of control upon the holding or controlling of enough proxies to elect 10% or more of the board of directors of a New Jersey-domiciled insurance company or its parent company. Accordingly, any person who acquires “control” of Prudential Financial, either by the acquisition of voting securities or, in the case of New Jersey, by the accumulation of proxies without the prior approval of the applicable insurance regulator of the states in which our U.S. insurance companies are domiciled will be in violation of these states’ laws and may be subject to injunctive action requiring the disposition or seizure of those securities or proxies by the relevant insurance regulator or prohibiting the voting of those securities or proxies and to other actions determined by the relevant insurance regulator. In addition, many state insurance laws require prior notification to state insurance departments of a change in control of a non-domiciliary insurance company doing business in that state.
Group-Wide Supervision
NJDOBI acts as the group-wide supervisor of Prudential Financial pursuant to New Jersey legislation that authorizes group-wide supervision of internationally active insurance groups (“IAIGs”). The law, among other provisions, authorizes NJDOBI to examine Prudential Financial and its subsidiaries, including by ascertaining the financial condition of the insurance companies for purposes of assessing enterprise risk. In accordance with this authority, NJDOBI receives information about Prudential Financial’s operations beyond those of its New Jersey domiciled insurance subsidiaries.
Additional areas of focus regarding group-wide supervision of insurance holding companies include the following:
•Group Capital Calculation. The NAIC is developinghas developed and implemented a U.S. group capital calculation that uses a risk-based capital (“RBC”) aggregation methodology. The calculation is intendedmethodology to serve as an additional tool to help state
regulators assess potential risks within and across insurance group. A final version of the calculation is expected to be implemented for year-end December 31, 2022.groups.
•Macroprudential Framework. The NAIC is developing a macroprudential framework intended to: (1) improve state insurance regulators’ ability to monitor and respond to the impact of external financial and economic risks on insurers; (2) better monitor and respond to risk emanating from or amplified by insurers that might be transmitted externally; and (3) increase public awareness of NAIC/state monitoring capabilities regarding macroprudential trends. As part of this initiative, the areasNAIC has identified by the NAIC for potential enhancement include liquidity reporting and stress testing, resolution and recovery, capital stress testing, and counterparty exposure and concentration. The NAIC has completed and implemented its first liquidity stress test and made updates to ensure continuationconcentration as areas of essential services during an insurer resolution.focus.
•Examination. State insurance departments conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled in their states, generally once every three to five years under guidelines promulgated by the NAIC. As group-wide supervisor, NJDOBI, along with our other insurance regulators, has expanded the periodic examinations to cover Prudential and all of its subsidiaries. AZDOI and NJDOBI, along with the insurance regulators of Connecticut and Indiana, has commenced a global consolidated group-wide examination of Prudential Financial and its subsidiaries for the five-year period ended December 31, 2021. We expect the examination to conclude in 2023.
We cannot predict what, if any, additional requirements and compliance costs any new group-wide standards will impose on Prudential Financial.
U.S. Insurance Operations
Generally, our insurance products must be approved by the insurance regulators in the state in which they are sold. Our insurance products are substantially affected by federal and state tax laws.
State Insurance Regulation
State insurance authorities have broad administrative powers with respect to all aspects of the insurance business including: (1) licensing to transact business; (2) licensing agents; (3) admittance of assets to statutory surplus; (4) regulating premium rates for certain insurance products; (5) approving policy forms; (6) regulating unfair trade and claims practices; (7) establishing reserve requirements and solvency standards; (8) fixing maximum interest rates on life insurance policy loans and minimum accumulation or surrender values; (9) regulating the type, amounts and valuations of investments permitted; (10) regulating reinsurance transactions, including the role of captive reinsurers; and (11) other matters.
State insurance laws and regulations require the Company to file financial statements with state insurance departments everywhere it does business in accordance with accounting practices and procedures prescribed or permitted by these departments. The Company’s operations and accounts are subject to examination by those departments at any time.
Financial Regulation
Dividend Payment Limitations. The Arizona insurance law regulates the amount of dividends that may be paid by the Company. See Note 12 to the Consolidated Financial Statements for a discussion of dividend restrictions.
Risk-Based Capital. We are subject to RBC requirements that are designed to enhance regulation of insurers’ solvency. The RBC calculation, which regulators use to assess the sufficiency of an insurer’s statutory capital, measures the risk characteristics of a company’s assets, liabilities and certain off-balance sheet items. In general, RBC is calculated by applying factors to various asset, premium, claim, expense and reserve items. Within a given risk category, these factors are higher for those items with greater underlying risk and lower for items with lower underlying risk. Insurers that have less statutory capital than required are considered to have inadequate capital and are subject to varying degrees of regulatory action depending upon the level of capital inadequacy.
Areas of the RBC framework that have recently been subject to reexamination or revision include the following:
•Bond Factors. In August 2021, the NAIC adopted the Moody’s Analytics proposed revisions to the RBC C-1 factors for invested assets effective for the year-end 2021 RBC calculation. The revisions include expanding the current NAIC designations used in the RBC calculation from six bond structures to twenty. The new factors willdid not materially impact our 2021RBC calculation. The NAIC is undertaking a second phase of this project to refine capital charges for structured securities. We cannot predict what impact the second phase of this work may ultimately have on our RBC calculation.
•Longevity/Mortality Risk. In 2021, the NAIC’s Life Risk-Based Capital Working Group adopted longevity risk factors for some annuity products and a correlation adjustment between longevity and mortality risk factors. The Company assumes this longevity risk primarily in its individual annuities business. The NAIC is also developing updates to the existing mortality risknew factors in RBC.
•Operational Risk. In 2018, the NAIC adopted operational risk charges that became effective for the year-end 2018 RBC calculation. The operational risk charges did not materially impact our 2018 RBC ratios givencalculation. In June 2022, the NAIC adopted new C-2 mortality factors for year-end 2022 that we hold statutory capital consistent with or in excessdifferentiate between products based on the length of the thresholds established through thesemortality guarantee and degree of pricing flexibility. The new charges.factors are not expected to have a material impact on our RBC calculation.
•Economic Scenario Generator (“Generator”). In 2017, the American Academy of Actuaries notified the NAIC that it did not have the resources to maintain its Generator used in regulatory reserve and capital calculations. In 2020, the NAIC selected a third-party vendor to provide, maintain, and support the Generator prescribed for life and annuity statutory reserve and capital calculations. TheDevelopment of the new Generator is ongoing, and the NAIC is evaluating the vendor’s economic scenarios and other modifications.expects implementation to occur no earlier than 2025. We cannot predict what impact a new Generator may ultimately have on our businesses.
Due to the ongoing nature of the NAIC’s activities regarding RBC, we cannot determine the ultimate timing of the proposed changes or their impact on RBC or on our financial position.
Insurance Reserves and Regulatory Capital. State insurance laws require us to analyze the adequacy of our reserves annually. Our appointed actuary must submit an opinion that our reserves, when considered in light of the assets we hold with respect to those reserves, make adequate provision for our contractual obligations and related expenses.
The reserving framework for certain of our products and the regulatory capital requirements applicable to our business have undergone reexamination and revision in recent years, including in the following areas:
•Principle-Based Reserving for Life Insurance Products. In 2016, the NAIC adopted a principle-based reserving ("PBR") approach for life insurance products. Principle-based reserving replaces the reserving methods for life insurance products for which the former formulaic basis for reserves may not accurately reflect the risks or costs of the liability or obligations of the insurer. The principle-based reserving approach had a three-year phase-in period. Principle-based reserving will not affect reserves for policies in force prior to January 1, 2017.
The Company has introduced updated versions of its individual life products in conjunction with the requirement to adopt principle-based reserving by January 1, 2020. These updated products are currently priced to support the principle-based statutory reserve level without the need for reserve financing.
•Variable Annuities Framework for Change. In 2019, the NAIC adopted final revisions to the Valuation Manual (“VM-21”) and risk-based capital instructions to implement a new variable annuity statutory framework for 2020. Changes include: (i) providing more economic reflection of hedging in liability valuations; (ii) eliminating the Standard Scenario and replacing it with the Standard Projection; and (iii) standardizing capital market assumptions and aligning frameworks for total asset requirements and reserves. There was no material impact to our target capital levels from the revised framework. In 2022, the NAIC initiated a planned review of the Standard Projection implemented in 2020. The NAIC may update prescribed assumptions and/or methodologies and will be considering whether the calculation should be a binding requirement or disclosure only.
•Asset Adequacy Testing. In June 2022, the NAIC adopted Actuarial Guideline 53. The new guideline provides guidance and requires additional sensitivity tests and disclosures for complex or high yielding assets.
•New York Life Insurance Product Reserves. As a result of an agreement with the NY DFS regarding PLNJ's reserving methodologies for certain life insurance products, PLNJ holds additional statutory reserves on a New York basis, which reduces PLNJ's New York statutory surplus. PLNJ is not domiciled in New York, and these changes do not impact statutory reserves reported in New Jersey, its state of domicile, and therefore do not impact PLNJ's RBC ratio; however, the agreed reserve methodology may require PLNJ to hold additional New York statutory reserves in the future. New York’s version of PBR, which became effective in January 2020, allows for modifications to the NAIC valuation model and New York’s modifications might require us to increase our New York statutory reserves. In 2022, as a result of a periodic examination, the NY DFS determined that we would be required to change certain Asset Adequacy Testing methodologies that may require PLNJ to hold additional reserves on a New York statutory basis. If PLNJ were required to establish material additional reserves on a New York statutory accounting basis or post material amounts of additional collateral with respect to individual annuity or insurance products, PLNJ's ability to deploy capital for other purposes could be affected and it could be required to obtain additional funding from Prudential Financial or its affiliates.
•Principle-Based Reserving (“PBR”) for Non-Variable Annuities. The NAIC is developing a principle-based reserving framework for non-variable (fixed) annuity products in the accumulation and payout phases. We cannot predict what impact a new fixed annuity PBR framework may ultimately have on our businesses.
Table of Contents•Schedule D Long-Term Bonds. The NAIC’s Statutory Accounting and Principles Working Group is evaluating revisions to the definition of long-term bonds reported on Schedule D under SSAP No. 26R and SSAP No. 43R, to address the current inconsistency in practice for the reporting of non-rated residual tranches for structures captured in scope of SSAP No.43R.
•Reinsurance. In August 2021, the NAIC adopted a limit on yearly renewable term (“YRT”) reserve credits (Amendment Proposed Form 2020-10). The adoption requires insurers to complete the phase-in of pre-2020 PBR business by December 31, 2024, unless an insurer receives an additional extension of up to four years by their domiciliary commissioner. Prudential was granted approval for a seven-year transition along with an adjustment to the starting point for the year-ended December 31, 2021. The proposalamendment allows a prudent level of future mortality improvement (“FMI”) beyond the valuation date starting in 2022. The NAIC is discussing thehas implemented an FMI framework and level of margin.assumption for 2022.
•Surplus NotesInterest Maintenance Reserve.. The NAIC’s Statutory Accounting and Principles Working Group is evaluating changes In November 2022, in response to the accounting rules regarding surplus notes with linked assets. These changes could result inrapidly rising interest rate environment, the classification of the surplus notes as debt instead of surplus and require linked assetsNAIC undertook to be treated as non-admitted assets. These changes would materially adversely impactreassess the statutory financial positionaccounting treatment of negative interest maintenance reserve (“IMR”). Currently, negative IMR is non-admitted and reduces statutory surplus. A change to the Company’s captive reinsurance subsidiaries that use credit-linked note structures to finance Regulation XXX and Guideline AXXX reserves. Also,statutory accounting treatment of negative IMR could therefore cause an increase in May 2020,statutory surplus. We cannot, at this time, predict what action the NAIC adopted enhanced disclosures on surplus notes that became effective for year-end 2020 reporting.may take.
•Schedule D Long-Term Bonds. The NAIC’s Statutory Accounting and Principles Working Group is evaluating revisions to the definition of long-term bonds reported on Schedule D under SSAP No. 26R and SSAP No. 43R, to address the current inconsistency in practice for the reporting of non-rated residual tranches for structures captured in scope of SSAP No.43R
Captive Reinsurance Companies
We use captive reinsurance affiliates to finance the portion of the statutory reserves for term and universal life policies that we consider to be non-economic for policies written prior to the implementation of principle-based reserving. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital—Financing Activities—Term and Universal Life Reserve Financing” for a discussion of our life product reserves and reserve financing.
Market Conduct Regulation
State insurance laws and regulations include numerous provisions governing the marketplace activities of insurers, including provisions governing the form and content of disclosure to consumers, illustrations, advertising, sales practices and complaint handling, as well as underwriting and claims activity. State regulatory authorities generally enforce these provisions through periodic market conduct examinations. We have been subject to market conduct examinations relating to our marketplace activities, including with respect to the policies and procedures we use to locate guaranteed group annuity customers and establish related reserves. Market conduct examinations by state regulatory authorities have resulted and may in the future result in us increasing statutory reserves, changing operational processes and procedures, and being subject to fines or other discipline.
Registered Index Linked Annuities (“RILAs”)
The NAIC established the Index-Linked Variable Annuity Subgroup to address RILA regulation, which has beenwas charged with evaluating RILAsregistered index linked annuities (“RILAs”) and providing recommendations and changes, as appropriate, to nonforfeiture, or interim value requirements related to the product. The Life Actuarial Task Force of the NAIC adopted a draft actuarial guideline for RILA interim value requirements, effective for contracts issued on or after July 1, 2024. We cannot predict whathow state regulators may apply the new guidelines or how they may impact new or changes in existing regulation may ultimately have on our business.
Data and Underwriting
The NAIC Accelerated Underwriting Working Group is continuing to evaluate insurers' use of external data and data analytics in accelerated life insurance underwriting. The Working Group is drafting guidance that explores the current state of the industry and its use of accelerated underwriting in life insurance and recommendations for regulators and insurers when evaluating accelerating underwriting. In addition, the NAIC is researching the use of big data and artificial intelligence, including machine learning in the business of insurance, and will evaluate existing regulatory frameworks.
Climate Change
In 2020, the NAIC established a Climate and Resiliency Task Force under the Executive Committee to coordinate domestic and international discussions and engagement on climate-related risk and resiliency issues. Charges for the Task Force include: considering appropriate climate risk disclosures within the insurance sector; evaluating financial regulatory approaches to climate risk and resiliency, including stress testing, scenario modeling, and solvency implications; considering innovative insurer solutions to climate risk and resiliency; identifying sustainability, resilience and mitigation issues and solutions related to the insurance industry; and considering pre-disaster mitigation and resiliency and the role of state insurance regulators in resiliency. To date, the Task Force has not adopted anyimplemented updates to the NAIC's annual Climate Risk Disclosure Survey and developed proposed enhancements to existing regulatory requirements but may do so intools to address climate-related risks, which the future as it advances its work.NAIC continues to evaluate.
Insurance Guaranty Association Assessments
Each state has insurance guaranty association laws under which insurers doing business in the state are members and may be assessed by state insurance guaranty associations for certain obligations of insolvent insurance companies to policyholders and claimants. Typically, states assess each member insurer in an amount related to the member insurer’s proportionate share of the line of business written by all member insurers in the state. The majority of state guaranty association laws provide a tax offset for a percentage of the assessment against future years' premium taxes. While we cannot predict the amount and timing of future assessments on the Company under these laws, Prudential Financial has established estimated reserves for future assessments relating to insurance companies that are currently subject to insolvency proceedings.
U.S. Federal and State Securities Regulation Affecting Insurance Operations
Our variable life insurance and variable annuity products generally are “securities” within the meaning of federal securities laws and may be required to be registered under the federal securities laws and subject to regulation by the SEC and the Financial Industry Regulatory Authority (“FINRA”). Federal securities regulation affects investment advice, sales and related activities with respect to these products.
In certain states, our variable life insurance and variable annuity products are considered “securities” within the meaning of state securities laws. As securities, these products may be subject to filing and certain other requirements. Also, sales activities with respect to these products generally are subject to state securities regulation. Such regulation may affect investment advice, sales and related activities for these products.
Federal Insurance Office
Dodd-Frank established a Federal Insurance Office (“FIO”) within the Department of the Treasury headed by a director appointed by the Secretary of the Treasury. While the FIO does not have general supervisory or regulatory authority over the business of insurance, the FIO director performs various functions with respect to insurance, including serving as a non-voting member of the Council, monitoring the insurance sector and representing the U.S. on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors ("IAIS").
Other Consumer Protection Regulation
Assurance IQ engages or has engaged in certain marketing, lead generation and sales activities of certain insurance products and residential mortgage loan and other personal finance products that are subject to a variety of federal and state consumer protection laws and regulations, including the Telephone Consumer Protection Act, Real Estate Settlement Procedures Act, the Truth in Lending Act, the Federal Trade Commission Act, and other laws and regulations enforced by the Federal Trade Commission, Consumer Financial Protection Bureau, state Attorneys General, and/or state Departments of Banking.
SECURE Act
In December 2019, Congress enacted theThe Setting Every Community up for Retirement Enhancement (“SECURE”) Act. The SECURE Act, enacted in 2020, is intended to help promote retirement plan coverage and increase retirement plan savings, as well as facilitate access to guaranteed lifetime income solutions. The SECURE Act addresses coverage issues by making it easier for small businesses to participate in pooled employer plans and requires coverage of certain long-term, part-time workers. The SECURE Act addresses savings issues by raising the cap on amounts contributed through auto-enrollment, increasing the maximum age for required minimum withdrawals to 72 and removing the age cap (70 1/2) for making IRA contributions. The SECURE Act also made it easier for employers to include guaranteed lifetime income as part of their plan by providing an annuity provider
selection safe harbor, as well as providing for the portability of participant investments in annuity products. In addition, the SECURE Act included provisions that enable participants to withdraw, penalty-free, up to $5,000 for expenses attendant to the birth or adoption of a child and limit the ability of certain IRA beneficiaries to defer tax recognition of their inheritance beyond ten years. The 2023 Consolidated Appropriations Act, enacted on December 29, 2022, includes what is known as SECURE 2.0, which largely builds upon the changes made by the SECURE Act. Key provisions of SECURE 2.0 include, among other things, (1) increasing the age for required minimum withdrawals; (2) changes to the automatic enrollment rules for 401(k) plans; (3) allowing greater catch-up contributions and financial incentives for plan participation; (4) treating an employee's student loan payments as elective deferrals for purposes of matching contributions; and (5) new options for plan distributions.
In December, 2020, in response to the COVID-19 pandemic, Congress enacted the Consolidated Appropriations Act of 2021 (“CAA”). The CAA includes a provision that changes the floor interest rates used for Definition of Life Insurance (“DOLI”) testing under Section 7702 of the Internal Revenue Code of 1986, as amended (the “Code”), and Modified Endowment Contract (“MEC”) testing under Section 7702A of the Code. The change is intended to better reflect the current low interest rate environment and, for contracts issued on or after January 1, 2021, may increase the DOLI and MEC limits and allow more premium payments relative to the death benefit.
In March, 2021, the American Rescue Plan Act of 2021 (“ARPA”) was enacted. The ARPA includes, among other things, provisions intended to improve funding for multiemployer pension plans, including providing special financial assistance through the Pension Benefit Guarantee Corporation to qualifying underfunded plans and adding five years to the funding improvement period and the rehabilitation period for plans that were in endangered or critical status in 2020 or 2021. The ARPA includes single-employer pension funding relief in the form of interest rate stabilization and an extension of the period for amortizing funding shortfalls.
Derivatives Regulation
Prudential Financial and its subsidiaries use derivatives for various purposes, including hedging interest rate, foreign currency and equity market exposures. Dodd-Frank established a framework for regulation of the over-the-counter derivatives markets. This framework sets out requirements regarding the clearing and reporting of derivatives transactions, as well as collateral posting requirements for uncleared swaps. Affiliated swaps entered into between Prudential Financial subsidiaries are generally exempt from most of these requirements.
We continue to monitor the potential hedging cost impacts of new initial margin requirements, and increased capital requirements for derivatives transactions. Additionally, the increased need to post cash collateral in connection with mandatorily cleared swaps may also require the liquidation of higher yielding assets for cash, resulting in a negative impact on investment income.
Privacy and Cybersecurity Regulation
We are subject to laws, regulations and directives that require financial institutions and other businesses to protect the security and confidentiality of personal, proprietary, or other non-public information, including intellectual property, health-related and customer information, and to notify their customers and other appropriate individuals of their policies and practices relating to the collection, use and disclosure of health-related and customersuch information. In addition, we must comply withare subject to international data protection and privacy laws, regulations, and directives concerning the safeguarding and protection of personal information, including as such laws relate to the cross border transfer or use of employee and customer personal information. These laws, regulations and directives also:
•require protections regarding or limiting the use and disclosure of certain sensitive personal information such as national identifier numbers (e.g., social security numbers); or racial or ethnic origin;
•require notice to affected individuals, regulators and others if there is a breach of the securityconfidentiality, integrity, or availability of certain personal or confidential information;
•require financial institutions and creditors to implement effective programs to detect, prevent, and mitigate identity theft;
•regulate the process by which financial institutions make telemarketing calls and send e-mail, text, or fax messages to consumers and customers;
•require oversight of third parties that have access to, and handle, personal or confidential information;
•provide individuals with certain rights over their personal information, such as the right to know what personal information is being collected and whether the information is being sold or shared, and the right to obtain portable copies of or request the deletion or correction of their personal information; and
•prescribe the permissible uses of certain personal information, including customer information and consumer report information.
Regulatory and legislative activity in the areas of privacy, data protection and information and cybersecurity continues to increase worldwide. Financial regulators in the U.S. and international jurisdictions in which Prudential Financial operates continue to focus on data privacy and cybersecurity, including in proposed rulemaking, and have communicated heightened expectations and have increased emphasis in this area in their examinations of regulated entities. For example, the E.U.’s
General Data Protection Regulation (“GDPR”), which became effective in May 2018, confers additional privacy rights on individuals in the E.U. and establishes significant penalties for violations. In addition, in the U.S., certain lawmakers in Congress have proposed a number of sweeping privacy laws. In California, the California Consumer Privacy Act (the “CCPA”) became effective in 2020 and confers numerous privacy rights on individuals and corresponding obligations on businesses. Additional rights and obligations will be imposed by the California Privacy Rights Act (the “CPRA”), which we expect to largelyamends the CCPA and will become effective in 2023. Additional states, such as VirginiaColorado, Connecticut, Utah, and Colorado,Virginia have also passed comprehensive privacy laws similar in scope to the CCPA and CPRA that will also become effective in 2023. The NAIC is drafting updated model privacy legislation that will likely be completed in 2023, with states beginning to adopt the model in 2024. Internationally, a number of countries such as Brazil and ArgentinaJapan have enacted GDPR-like regulations, while others, such as India, are considering such regulations or, in the case of China, have enacted other privacy and data security regulations.
In October 2017, the NAIC adopted the Insurance Data Security Model Law. The model law requires that insurance companies establish a cybersecurity program and includes specific technical safeguards as well as requirements regarding governance, incident planning, data management, system testing, vendor oversight and regulator notification. The NY DFS adopted a similar regulation effective March 2017 and otherreleased its proposed amendments to the regulation in November 2022, which are expected to become effective in 2023. Other states have either implemented the Model Law or are anticipated to implement it or similar laws in the near future. In 2021, the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corporation adopted a new rule, effective May 1, 2022, requiring banking organizations to notify their banking regulator within 36 hours of a material incident.
The Company is monitoring regulatory guidance and rulemaking in these areas, and may be subject to increased compliance costs and regulatory requirements. In order to respond to the threat of security breaches and cyber-attacks, Prudential Financial has developed a program overseen by the Chief Information Security Officer and the Information Security Office that is designed to protect and preserve the confidentiality, integrity, and continued availability of all information owned by, or in the care of the Company. As part of this program, we also maintain an incident response plan. The program provides for the coordination of various corporate functions and governance groups and serves as a framework for the execution of responsibilities across businesses and operational roles. TheAmong other things, the program establishes security standards for our technological resources, and includes training for employees, contractors and third parties. As part of the program, we conduct periodic exercises with independent outside advisors to gain a third-party independent assessmentassess the effectiveness of our technical program and our internal response preparedness. We regularly engage with the outsidebroader security community and monitor cyber threat information.
Anti-Money Laundering and Anti-Bribery Laws
Our business is subject to various anti-money laundering and financial transparency laws and regulations that seek to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. In addition, under current U.S. law and regulations we may be prohibited from dealing with certain individuals or entities in certain circumstances and we may be required to monitor customer activities, which may affect our ability to attract and retain customers. We are also subject to various laws and regulations relating to corrupt and illegal payments to government officials and others, including the U.S. Foreign Corrupt Practices Act and the U.K.’s Anti-Bribery Law. The obligation of financial institutions, including the Company, to identify their clients, to monitor for and report suspicious transactions, to monitor dealings with government officials, to respond to requests for information by regulatory authorities and law enforcement agencies, and to share information with other financial institutions, has required the implementation and maintenance of internal practices, procedures and controls.
Unclaimed Property Laws
We are subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment of unclaimed or abandoned funds, and we are subject to audit and examination for compliance with these requirements. For additional discussion of these matters, see Note 14 to the Consolidated Financial Statements.
Taxation
U.S. Taxation
Prudential Financial and certain domestic subsidiaries, including the Company, file a consolidated federal income tax return that includes both life insurance companies and non-life insurance companies. The principal differences between the Company’s actual income tax expense and the applicable statutory federal income tax rate are generally deductions for non-taxable investment income, including the Dividends Received Deduction (“DRD”), foreign taxes applied at a different tax rate than the U.S. rate and certain tax credits. For tax years prior to 2018, the applicable statutory federal income tax rate was 35%. For tax years starting in 2018, the applicable statutory federal income tax rate is 21%. A future increase in the applicable statutory federal income tax rate above 21% would adversely impact the Company's tax position. In addition, as discussed further below, the tax attributes of our products may impact both the Company’s and our customers’ tax positions. See “Income Taxes” in Note 2 to the Consolidated Financial Statements and Note 10 to the Consolidated Financial Statements for a description of the Company’s tax position. As discussed further below, new tax legislation and other potential changes to the tax law may impact the Company’s tax position and the attractiveness of our products.
The United States Tax Cuts and Jobs Act of 2017 ("Tax Act of 2017") was enacted into law on December 22, 2017 and was generally effective starting in 2018. The Tax Act of 2017 changed the taxation of businesses and individuals by lowering tax rates and broadening the tax base through the acceleration of taxable income and the deferral or elimination of certain deductions, as well as changing the system of taxation of earnings of foreign subsidiaries. The most significant changes for the Company were: (1) the reduction of the corporate tax rate from 35% to 21%; (2) revised methodologies for determining deductions for tax reserves and the DRD; and (3) an increased capitalization and amortization period for acquisition costs related to certain products.
In March 2020, in response to the COVID-19 pandemic, Congress enacted the CARES Act. 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 for up to five years. See “Income Taxes” in Note 10 to the Consolidated Financial Statements for more information.
In August 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”). Among other provisions, the Inflation Reduction Act imposes a 15% alternative minimum tax on corporations (“CAMT”) with average applicable financial statement income over $1 billion for any 3-year period ending with 2022 or later. This provision is effective in taxable years beginning after December 31, 2022. The impact of the alternative minimum tax, if any, will vary from year to year based on the relationship of our GAAP income to our taxable income. Additionally, there remain several open items with respect to the application of the alternative minimum tax on corporations, including how to apply the provision to insurance company separate accounts and certain forms of reinsurance, which will inform how and to what degree this tax impacts the Company.
Since the enactment of the Tax Act of 2017, the Treasury Department and the Internal Revenue Service (“IRS”) promulgated Proposed and Final Regulations on a number of provisions within or impacted by the Tax Act of 2017. The Treasury and IRS have requested comments on the Proposed Regulations. Our analysis of these Proposed Regulations is on-going and further guidance may be needed from the Treasury Department and the IRS to fully understand and implement several provisions. Other life insurance and financial services companies may benefit more or less from these tax law changes, which could impact the Company’s overall competitive position. Notwithstanding the enactment of the Tax Act of 2017, the President, Congress, as well as state and local governments, may continue to consider from time to time legislation that could increase the amount of corporate taxes we pay, thereby reducing earnings.
U.S. federal tax law generally permits tax deferral on the inside build-up of investment value of certain retirement savings, annuities and life insurance products until there is a contract distribution and, in general, excludes from taxation the death benefit paid under a life insurance contract. The Tax Act of 2017 did not change these rules, though it is possible that some individuals with overall lower effective tax rates could be less attracted to the tax deferral aspect of the Company’s products. The general reduction in individual tax rates and elimination of certain individual deductions may also impact the Company, depending on whether current and potential customers have more or less after-tax income to save for retirement and manage their mortality and longevity risk through the purchase of the Company’s products. Congress from time to time may enact other changes to the tax law that could make our products less attractive to consumers, including legislation that would modify the tax favored treatment of retirement savings, life insurance and annuities products.
The products we sell have different tax characteristics and, in some cases, generate tax deductions and credits for the Company. Changes in either the U.S. or foreign tax laws may negatively impact the deductions and credits available to the Company, including the ability of the Company to claim foreign tax credits with respect to taxes withheld on our investments supporting separate account products. These changes would increase the Company’s actual tax expense and reduce its consolidated net income.
The profitability of certain products is significantly dependent on these characteristics and our ability to continue to generate taxable income, which is taken into consideration when pricing products and is a component of our capital management strategies. Accordingly, changes in tax law, our ability to generate taxable income, or other factors impacting the availability or value of the tax characteristics generated by our products, could impact product pricing, increase our tax expense or require us to reduce our sales of these products or implement other actions that could be disruptive to our businesses.
In March 2020, in response to the COVID-19 pandemic, Congress enacted the CARES Act. 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 for up to five years. See “Income Taxes” in Note 10 to the Consolidated Financial Statements for more information.
International and Global Regulatory Initiatives
In addition to the adoption of Dodd-Frank in the United States, lawmakers around the world are actively exploring steps to avoid future financial crises. In many respects, this work is being led by the Financial Stability Board (“FSB”), which consists of representatives of national financial authorities of the G20 nations. The G20, the FSB and related bodies have developed proposals to address such issues as financial group supervision, capital and solvency standards, systemic economic risk, corporate governance including executive compensation, and a host of related issues.
In July 2013, Prudential Financial, along with eight other global insurers, was designated by the FSB as a global systemically important insurer (“G-SII”) through a quantitative methodology developed and implemented by the IAIS. Prudential Financial remained designated as a G-SII until November 2018, at which point the FSB announced that it would not engage in an identification of G-SIIs based on the IAIS’ progress with development of the Holistic Framework for Systemic Risk in the Insurance Sector (“Holistic Framework”). The Holistic Framework, which was adopted by the IAIS in November 2019, focuses on employing an Activities Based approach (“ABA”) to assessing and managing potential sources of systemic risk through enhancements to IAIS policy measures pertaining to macroprudential surveillance, enterprise risk management, liquidity management, crisis management and recovery planning. In addition to the ABA elements, the Holistic Framework preserves the IAIS’ annual data collection and monitoring process. Upon the IAIS’ adoption of the Holistic Framework, the FSB announced that it hasinitially suspended and in December 2022 discontinued the annual identification of G-SIIs until November 2022, when itG-SIIs. The FSB will review the need to either discontinue or re-establish the annual process based on the initial years of implementation ofnow utilize assessments available through the Holistic Framework.Framework to evaluate systemic risk in the insurance sector.
In addition to its post financial crisis work on systemic risk, the IAIS developed the Common Framework for the Supervision of Internationally Active Insurance Groups (“ComFrame”). Through ComFrame, the IAIS seeks to promote effective and globally consistent supervision of the insurance industry through uniform standards for insurer corporate governance, enterprise risk management and other control functions, group-wide supervision and group capital adequacy. The non-capital related components of ComFrame were adopted by the IAIS in November 2019. The ICS, which is the capital adequacy component of ComFrame, entered a five-year monitoring phase beginning in 2020. During the monitoring phase, IAIGs are encouraged to report ICS results to their group supervisory authorities to support the IAIS’ efforts to obtain feedback on the appropriateness of the framework. The IAIS will use input from supervisory authorities and IAIGs as well as stakeholder feedback on a public consultation and the results of an economic impact assessment to further improve the ICS. The IAIS is scheduled to adopt a final version of the ICS, which it expects its member supervisory authorities to implement, in 2025.
As a standard setting body, the IAIS does not have direct authority to require insurance companies to comply with the policy measures it develops, including the ICS and proposed policy measures within the Holistic Framework. However, we could become subject to these policy measures if they were adopted by either our group supervisor or supervisors of Prudential Financial's international operations or companies, which could impact the manner in which Prudential Financial deploys its capital, structures and manages its businesses, and otherwise operates both within the U.S. and abroad.
Human Capital Resources
The Company has no employees. Services to the Company are primarily provided by employees of Prudential Insurance as described under “Expense Charges and Allocations” in Note 13 to the Consolidated Financial Statements.
Item 1A. Risk Factors
You should carefully consider the following risks. These risks are not exclusive, and additionalAdditional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our businesses described elsewhere in this Annual Report on Form 10-K. Many of these risks are interrelated and could occur under similar business and economic conditions, and the occurrence of certain of them may in turn cause the emergence or exacerbate the effect of others. Such a combination could materially increase the severity of the impact of these risks on our businesses, results of operations, financial condition and liquidity.
Overview
The Company's risk management framework documents the definition, potential manifestation, and management of its risks. The Company has categorized its risks into tactical and strategic risks. Tactical risks may cause damage to the Company, and the Company seeks to manage and mitigate them through models, metrics and the overall risk framework. The Company’s tactical risks include investment, insurance, market, liquidity, and operational risk. Strategicrisk, as well as strategic risks canthat may cause the Company’s
fundamental core business model to change, either through a shift in the businesses in which it is engaged or a change in execution. The Company’s strategic risks include regulatory and technological changes and other external factors. TheseThe Company's risks as well as the sub-risks that may impact the Company, are further discussed below.
Investment Risk
Our investment portfolios are subject to the risk of loss due to default or deterioration in credit quality or value.
We are exposed to investment risk through our investments, which primarily consist of public and private fixed maturity securities, commercial mortgage and other loans, equity securities and alternative assets including private equity, hedge funds and real estate. We are also exposed to investment risk through a potential counterparty default.
Investment risk may result from: (1) economic conditions; (2) adverse capital market conditions, including disruptions in individual market sectors or a lack of buyers in the marketplace; (3) volatility; (4) credit spread changes; (5) benchmark interest rate changes; and (6) declines in value of underlying collateral. These factors may impact the credit quality, liquidity and value of our investments and derivatives, potentially resulting in higher capital charges and unrealized or realized losses. Also, certain investments we hold, regardless of market conditions, are relatively illiquid and our ability to promptly sell these assets for their full value may be limited. Additionally, our valuation of investments may include methodologies, inputs and assumptions which are subject to change and different interpretation and could result in changes to investment valuations that may materially impact our results of operations or financial condition. For information about the valuation of our investments, see Note 5 to the Consolidated Financial Statements.
Our investment portfolio is subject to credit risk, which is the risk that an obligor (or guarantor) is unable or unwilling to meet its contractual payment obligations on its fixed maturity security, loan or other obligations. Credit risk may manifest in an idiosyncratic manner (i.e., specific to an individual borrower or industry) or through market-wide credit cycles. Financial deterioration of the obligor increases the risk of default and may increase the capital charges required under such regimes as the NAIC RBC, or other constructs to hold the investment and in turn, potentially limit our overall capital flexibility. Credit defaults (as well as credit impairments, realized losses on credit-related sales, and increases in credit related reserves) may result in losses which adversely impact earnings, capital and our ability to appropriately match our liabilities and meet future obligations.
Our Company is subject to counterparty risk, which is the risk that the counterparty to a transaction could default or deteriorate in creditworthiness before or at the final settlement of a transaction. In the normal course of business, we enter into financial contracts to manage risks (such as derivatives to manage market risk and reinsurance treaties to manage insurance risk), improve the return on investments (such as securities lending and repurchase transactions) and provide sources of liquidity or financing (such as credit agreements, securities lending agreements and repurchase agreements). These transactions expose the Company to counterparty risk. Counterparties include commercial banks, investment banks, broker-dealers and insurance and reinsurance companies. In the event of a counterparty deterioration or default, the magnitude of the losses will depend on then current market conditions and the length of time required to enter into a replacement transaction with a new counterparty. Losses are likely to be higher under stressed conditions.
Our investment portfolio is subject to equity risk, which is the risk of loss due to deterioration in market value of public equity or alternative assets. We include public equity and alternative assets (including private equity, hedge funds and real estate) in our portfolio constructions, as these asset classes can provide returns over longer periods of time, aligning with the long-term nature of certain of our liabilities. Public equity and alternative assets have varying degrees of price transparency. Equities traded on stock exchanges (public equities) have significant price transparency, as transactions are often required to be disclosed publicly. Assets for whichwith less price transparency is more opaque include private equity (joint ventures/limited partnerships) and direct real estate. As these investments typically do not trade on public markets and indications of realizable market value may not be readily available, valuations can be infrequent and/or more volatile. A sustained decline in public equity and alternative markets may reduce the returns earned by our investment portfolio through lower than expected dividend income, property operating income, and capital gains, thereby adversely impacting earnings, capital, and product pricing assumptions. These assets may also produce volatility in earnings as a result of uneven distributions on the underlying investments.
The COVID-19 pandemic may increase investment risk. During 2020, the COVID-19 pandemic and its impact on the global economy increased the risk of loss on our investments due to default or deterioration in credit quality or value and may do so again.
Insurance Risk
We have significant liabilities for policyholders' benefits which are subject to insurance risk. Insurance risk is the risk that actual experience deviates adversely from our insurance assumptions, including mortality and policyholder behavior assumptions. We provide a variety of insurance products that are designed to help customers protect against a variety of
financial uncertainties. Our insurance products protect customers against their potential risk of loss by transferring those risks to the Company, where those risks can be managed more efficiently through pooling and diversification over a larger number of independent exposures. During this transfer process, we assume the risk that actual losses experienced in our insurance products deviates significantly from what we expect. More specifically, insurance risk is concerned with the deviations that impact our future liabilities. Our profitability may decline if mortality experience or policyholder behavior experience differ significantly from our expectations when we price our products. In addition, if we experience higher than expected claims our liquidity position may be adversely impacted, and we may incur losses on investments if we are required to sell assets in order to pay claims. If it is necessary to sell assets at a loss, our results of operations and financial condition could be adversely impacted. For a discussion of the impact of changes in insurance assumptions on our financial condition, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting Policies and Pronouncements—Application of Critical Accounting Estimates—Insurance Liabilities”.
Certain of our insurance products are subject to mortality risk, which is the risk that actual deaths experienced deviate adversely from our expectations. Mortality risk is a biometric risk that can manifest in the following ways:
•Mortality calamity is the risk that mortality rates in a single year deviate adversely from what is expected as the result of pandemics, such as the COVID-19 pandemic, natural or man-made disasters, military actions or terrorism. A mortality calamity event will reduce our earnings and capital and we may be forced to liquidate assets before maturity in order to pay the excess claims. Mortality calamity risk is more pronounced in respect of specific geographic areas (including major metropolitan centers, where we have concentrations of customers),customers, concentrations of employees or significant operations,) and in respect of countries and regions in which we operate that are subject to a greater potential threat of military action or conflict. Ultimate losses would depend on several factors, including the rates of mortality and morbidity among various segments of the insured population, the collectability of reinsurance, the possible macroeconomic effects on our investment portfolio, the effect on lapses and surrenders of existing policies, as well as sales of new policies and other variables.
•Mortality trend is the risk that mortality improvements in the future deviate adversely from what is expected. Mortality trend is a long-term risk in that cancould emerge gradually over time. Longevity products, such as annuities, experience adverse impacts due to higher-than-expected mortality improvement. Mortality products, such as life insurance, experience adverse impacts due to lower-than-expected improvement. If this risk were to emerge, the Company would update assumptions used to calculate reserves for in-force business, which may result in additional assets needed to meet the higher expected annuity claims or earlier expected life claims. An increase in reserves due to revised assumptions has an immediate impact on our results of operations and financial condition; however, economically the impact is generally long-term as the excess outflow is paid over time.
•Mortality base is the risk that actual base mortality deviates adversely from what is expected in pricing and valuing our products. Base mortality risk can arise from a lack of credible data on which to base the assumptions.
We use reinsurance as a strategy to manage our mortality risks, however, this may not be fully effective and may lead to payments to counterparties in excess of recoveries depending on how actual mortality experience emerges and on future changes in the level of premiums we pay to reinsurers.
Certain of our insurance products are subject to policyholder behavior risk, which is the risk that actual policyholder behavior deviates adversely from what is expected.Policyholder behavior risk includes the following components:
•Lapse calamity is the risk that lapse rates over the short-term deviate adversely from what is expected, for example, surrenders of certain insurance products may increase following a downgrade of our financial strength ratings or adverse publicity. Only certain products are exposed to this risk. Products that offer a cash surrender value that resides in the general account could pose a potential short-term lapse calamity risk. Surrender of these products can impact liquidity, and it may be necessary in certain market conditions to sell assets to meet surrender demands. Lapse calamity can also impact our earnings through its impact on estimated future profits.
•Policyholder behavior efficiencyrisk is the risk that the behavior of our customers or policyholders deviates adversely from what is expected. Policyholder behavior efficiency risk arises through product features which provide some degree of choice or flexibility for the policyholder, which can impact the amount and/or timing of claims. Such choices include surrender, lapse, partial withdrawal, policy loan, utilization, and premium payment rates for contracts with flexible premiums. While some behavior is driven by macro factors such as market movements, policyholder behavior at a fundamental level is driven primarily by policyholders’ individual needs, which may differ significantly from product to product depending on many factors including the features offered, the approach taken to market each product, and competitor pricing. For example, persistency (the probability that a policy or contract will remain in force) within our annuities business may be significantly impacted by the value of guaranteed minimum benefits contained in many of our variable annuity products being higher than current account values in light of poor market performance as well as other factors. Many of our products also provide our customers with wide flexibility with respect to the amount and timing of premium deposits and the amount and timing of withdrawals from the policy’s value. Results may vary
based on differences between actual and expected premium deposits and withdrawals for these products, especially if these product features are relatively new to the marketplace. The pricing of certain of our variable annuity products that contain certain living benefit guarantees is also based on assumptions about utilization rates, or the percentage of contracts that will utilize the benefit during the contract duration, including the timing of the first withdrawal. Results may vary based on differences between actual and expected benefit utilization. We may also be impacted by customers seeking to sell their benefits. In particular, the development of a secondary market for life insurance, including life settlements or “viaticals” and investor owned life insurance, and third-party investor strategies in our annuities business, could adversely affect the profitability of existing business and our pricing assumptions for new business. Policyholder behavior efficiencyrisk is generally a long-term risk that emerges over time. An increase in reserves due to revised assumptions has an immediate impact on our results of operations and financial condition; however, from an economic or cash flow perspective, the impact is generally long-term as the excess outflow is paid over time.
Our ability to reprice products is limited, and may not compensate for deviations from our expected insurance assumptions. Although some of our products permit us to increase premiums or adjust other charges and credits during the life of the policy or contract, the adjustments permitted under the terms of the policies or contracts may not be sufficient to maintain profitability or may cause the policies or contracts to lapse. Many of our products do not permit us to increase premiums or adjust other charges and credits or limit those adjustments during the life of the policy or contract. Even if permitted under the policy or contract, weother factors may not be able or willingimpact our decision whether to raise premiums or adjust other charges sufficiently, or at all. Accordingly, significant deviations in actual experience from our pricing assumptions could have an adverse effect on the profitability of our products.
The COVID-19 pandemic has increased and may continue to increase insurance risk. The COVID-19 pandemic has caused and may continue to cause a mortality calamity or elevated mortality, which may lead to elevated losses. Elevated losses would reduce our earnings and capital, and we may be forced to liquidate assets before maturity in order to pay the excess claims. The pandemic situation may worsen depending on the evolution of the virus’s transmissibility and virulence, including the potential for further mutation, effectiveness of public health measures and availability and effectiveness of vaccines and treatments. Ultimate losses would depend on several factors, including the rates of mortality and morbidity among various segments of the insured population, age and geographic distribution of associated deaths, collectability of reinsurance, performance of our investment portfolio, effect on lapses and surrenders of existing policies, as well as sales of new policies and other variables.
The pandemic may also result in a change in policyholder behavior, such as policyholders choosing to defer or stop paying insurance premiums. It may also result in a lapse calamity, as discussed above.
Finally, we cannot predict whether COVID-19 will ultimately lead to longer-term deviations from the mortality or policyholder behavior assumptions we used to price our products.
Market Risk
The profitability of many of our insurance and annuity products are subject to market risk. Market risk is the risk of loss from changes in interest rates and equity prices.
The profitability of many of our insurance and annuity products depends in part on the value of the separate accounts supporting these products, which can fluctuate substantially depending on market conditions.
Derivative instruments that we use to hedge and manage interest rate and equity market risks associated with our products and businesses, and other risks might not perform as intended or expected resulting in higher than expected realized losses and stresses on liquidity.liquidity and/or regulatory capital. Market conditions can limit availability of hedging instruments, require us to post additional collateral, and further increase the cost of executing product related hedges and such costs may not be recovered in the pricing of the underlying products being hedged.
Market risk may limit opportunities for investment of available funds at appropriatedesired returns, including due to the current lowprevailing interest rate environment, or other factors, with possible negative impacts on our overall results. Limited opportunities for attractive investments may lead to holding cash for long periods of time and an increased use of derivatives for duration management and other portfolio management purposes. The increased use of derivatives or portfolio rebalancing may increase the volatility of our U.S. GAAP results and our statutory capital.
Our investments, results of operations and financial condition may also be adversely affected by developments in the global economy, and in the U.S. economy (including as a result of actions by the Federal Reserve with respect to interest rate and monetary policy, and adverse political developments). Global or U.S. economic activity and financial markets may in turn be negatively affected by adverse developments or conditions in specific geographical regions.
For a discussion of the impact of current market conditions on our liquidity and capital resources outlook, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Current Market Conditions.”
For a discussion of the impact of changes in market conditions on our financial condition see Item 7A “Quantitative and Qualitative Disclosures About Market Risk".
Our insurance and annuity products, and our investment returns, are subject to interest rate risk, which is the risk of loss arising from asset/liability duration mismatches within our general account investments. The risk of mismatch in asset/liability duration is mainly driven by the specific dynamics of product liabilities. Some product liabilities are expected to have only modest risk related to interest rates because cash flows can be matched by available assetsassets; however, other product liabilities generate long-term cash flows (i.e., 30 years or more), resulting in the investable space. Thesignificant interest rate risk, emerges primarily from their tailsince these cash flows (30 years or more), which cannot be matched by assets for sale in the marketplace, exposing the Company to future reinvestment risk. In addition, certain of our products provide for recurring premiums which may be invested at interest rates lower than the rates included in our pricing assumptions. Market-sensitive cash flows exist with other product liabilities including products whose cash flows can be linked to market performance through secondary guarantees, minimum crediting rates, and/or changes in insurance assumptions.
Our exposure to interest rates can manifest over years as in the case of earnings compression or in the short term by creating volatility in both earnings and capital. For example, some of our products expose us to the risk that changes in interest rates will reduce the spread between the amounts that we are required to pay under contracts and the rate of return we are able to earn on our general account investments supporting these contracts. When interest rates decline or remain low, as they have in recent years, we must invest in lower-yielding instruments, potentially reducing net investment income and constraining our ability to offer certain products. This risk is increased as more policyholders may retain their policies in a low rate environment. Since many of our policies and contracts have guaranteed minimum crediting rates or limit the resetting of crediting rates, the spreads could decrease or go negative.
Alternatively, when interest rates rise, we may not be able to replace the assets in our general account with the higher-yielding assets as quickly as needed to fund the higher crediting rates necessary to keep these products and contracts competitive. It is possible that fewer policyholders may retain their policies and annuity contracts as they pursue higher crediting rates, which could expose the Company to losses and liquidity stress.
Our mitigation efforts with respect to interest rate risk are primarily focused on maintaining an investment portfolio with diversified maturities that has a key rate duration profile that is approximately equal to the key rate duration profile of our liability and surplus benchmarks; however, these benchmarks are based on estimates of the liability cash flow profiles which are complex and could turn out to be inaccurate, especially when markets are volatile. In addition, there are practical and capital market limitations on our ability to accomplish this matching. Due to these and other factors we may need to liquidate investments prior to maturity at a loss in order to satisfy liabilities or be forced to reinvest funds in a lower rate environment.
Guarantees within certain of our products, in particular our variable annuities and to a lesser extent certain individual life products, are market sensitive and may decrease our earnings or increase the volatility of our results of operations or financial position under U.S. GAAP. Certain of our products, particularly our variable annuity products, include guarantees of minimum surrender values or income streams for stated periods or for life, which may be in excess of account values. Certain of our products, particularly certain index-linked annuity and individual life products, include interest crediting guarantees based on the performance of an index. Downturns in equity markets, increased equity volatility, increased credit spreads, or (as discussed above) reduced interest rates could result in an increase in the valuation of liabilities associated with such guarantees, resulting in increases in reserves and reductions in net income. We use a variety of hedging and risk management strategies, including product features, to mitigate these risks in part and we may periodically change our strategies over time. These strategies may, however, not be fully effective. In addition, we may be unable or may choose not to fully hedge these risks. Hedging instruments may not effectively offset the costs of guarantees or may otherwise be insufficient in relation to our obligations. Hedging instruments also may not change in value correspondingly with associated liabilities due to equity market or interest rate conditions, non-performance risk or other reasons. We may choose to hedge these risks on a basis that does not correspond to their anticipated or actual impact upon our results of operations or financial position under U.S. GAAP. Changes from period to period in the valuation of these policy benefits, and in the amount of our obligations effectively hedged, will result in volatility in our results of operations and financial position under U.S. GAAP and our statutory capital levels. Estimates and assumptions we make in connection with hedging activities may fail to reflect or correspond to our actual long-term exposure from our guarantees. Further, the risk of increases in the costs of our guarantees not covered by our hedging and other capital and risk management strategies may become more significant due to changes in policyholder behavior driven by market conditions or other factors. The above factors, individually or collectively, may have a material adverse effect on our results of operations, financial condition or liquidity.
Our valuation of the liabilities for the minimum benefits contained in many of our variable annuity products requires us to consider the market perception of our risk of non-performance, and a decrease in our own credit spreads resulting from ratings upgrades or other events or market conditions could cause the recorded value of these liabilities to increase, which in turn could adversely affect our results of operations and financial position.
The COVID-19 pandemic has increased and may continue to increase market risk. During 2020 and 2021, the COVID-19 pandemic caused market disruptions and volatility. Continued market disruptions and volatility may negatively impact the profitability of many of our insurance and annuity products, which depends in part on the value of the separate accounts supporting these products which can fluctuate substantially depending on market conditions. Market volatility and reduced liquidity may reduce our ability to implement asset-liability management and hedging strategies.
Liquidity Risk
As a financial services company, we are exposed to liquidity risk, which is the risk that the Company is unable to meet near-term obligations as they come due.
Liquidity risk is a manifestation of events that are driven by other risk types (market, insurance, investment, operational). A liquidity shortfall may arise in the event of insufficient funding sources or an immediate and significant need for cash or collateral. In addition, it is possible that expected liquidity sources may be unavailable or inadequate to satisfy the liquidity demands described below.
The Company has four primary sources of liquidity exposure and associated drivers that trigger material liquidity demand. Those sources are:
•Derivative collateral market exposure: Abrupt changes to interest rate, equity, and/or currency markets may increase collateral requirements to counterparties and create liquidity risk for the Company.
•Asset liability mismatch: There are liquidity risks associated with liabilities coming due prior to the matching asset cash flows. Structural maturities mismatch can occur in activities such as securities lending, where the liabilities are effectively overnight open transactions used to fund longer term assets.
•Wholesale funding: We depend upon the financial markets for funding. These sources might not be available during times of stress, or may only be available on unfavorable terms, which can result in a decrease in our profitability and a significant reduction in our financial flexibility.
•Insurance cash flows: We face potential liquidity risks from unexpected cash demands due to severe mortality calamity, customer withdrawals or lapse events. If such events were to occur, the Company may face unexpectedly high levels of claim payments to policyholders.
For a discussion of the Company's liquidity and sources and uses of liquidity see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity".
The COVID-19 pandemic has increased and may continue to increase liquidity risk. During 2020, the Company took significant actions to support liquidity in response to the emergence of the COVID-19 pandemic. Future impacts of the COVID-19 crisis and related market dislocations could strain our existing liquidity and cause us to increase the use of our alternative sources of liquidity, which could result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings. Furthermore, certain sources of liquidity might not be available during times of stress, or may only be available on unfavorable terms, which can result in a decrease in our profitability and a significant reduction in our financial flexibility.
Operational Risk
Our operations are exposed to the risk of loss resulting from inadequate or failed processes or systems, human error or misconduct, and as a result of external events.
An operational risk failure may result in one or more actual or potential impacts to the Company. Operational risk may be elevated as a result of organizational changes, including recent and planned changes related to Prudential Financial's business transformation efforts.
Operational Risk Types
•Processes - Processing failure; failure to safeguard or retain documents/records; errors in valuation/pricing models and processes; project management or execution failures; improper sales practices; improper administration of our products.
•Systems - Failures during the development and implementation of new systems; systems failures.
•People - Internal fraud, breaches of employment law, unauthorized activities; loss or lack of key personnel, inadequate training; inadequate supervision.
•External Events - External crime; cyber-attack; outsourcing risk; vendor risk; natural and other disasters; changes in laws/regulations.
•Legal - Legal and regulatory compliance failures.
Potential Impacts
•Financial losses - The Company experiences a financial loss. This loss may originate from various causes including, but not limited to, transaction processing errors and fraud.
•Client Service impacts - The Company may not be able to service customers. This may result if the Company is unable to continue operations during a business continuation event or if systems are compromised due to malware or virus.
•Regulatory fines or sanctions - When the Company fails to comply with applicable laws or regulations, regulatory fines or sanctions may be imposed. In addition, possible restrictions on business activities may result.
•Legal actions - Failure to comply with laws and regulations also exposes the Company to litigation risk. This may also result in financial losses.
•Reputational harm - Failure to meet regulator, customer, investor and other stakeholder expectations may cause reputational harm.
Liabilities we may incur as a result of operational failures are described further under “Contingent Liabilities” in Note 14 to the Consolidated Financial Statements. In addition, certain pending regulatory and litigation matters affecting us, and certain risks to our businesses presented by such matters, are discussed in Note 14 to the Consolidated Financial Statements. We may become subject to additional regulatory and legal actions in the future.
Key Enterprise Operational Risks - Key enterprise operational risks include, among others, the following:
We are subject to business continuation risk, which is the risk that our operations, systems or data, or those of third- parties on whom we rely, may be disrupted.We may experience a disruption in business continuation eventcontinuity as a result of, among other things, the following:
•Severe pandemic, epidemic, or other public health crises, either naturally occurring or resulting from intentionally manipulated pathogens.pathogens;
•Geo-political risks, including armed conflict and civil unrest.unrest;
•Terrorist events.events;
•Significant natural or accidental disasters.disasters;
•Cyber-attacks.Cyber-attacks, both systemic (e.g., affecting the internet, cloud services, and/or other financial services industry infrastructure) and targeted (e.g., failures in or breach of our systems or that of third-parties on whom we rely);
•Insider threats;
•Physical infrastructure outages;
•Workforce unavailability resulting from any of the above events, among others.
We depend heavily on our telecommunication, information technology and other operational systems and on the integrity and timelinesscontinuing availability of data we use to run our businesses and service our customers. These systems, and any available backups, may fail to operate properly or become disabled as a result of events or circumstances wholly or partly beyond our control.
Further, we face the risk of operational and technology failures experienced by others, including clearing agents, exchanges and other financial intermediaries and of vendors and other third parties to which we outsource the provision of services or business operations.
We, or third-parties on whom we rely, may not adequately maintain information security. There continues to be significant and organizedincreased cyber-attack activity against western organizations,businesses, including but not limited to the financial services sector and no organization, regardless of measures implemented to safeguard the systems and detect threats, is fully immune to cyber-attacks. Our cybersecurity risk and exposure remains heightened because of, among other things, the rapidly evolving nature and pervasiveness of cyber threats (including supply-chain attacks), our brand and reputation, our size and scale, our geographic presence and our role in the financial services industry and the broader economy. Risks related to cyber-attack arise in the following areas:various areas, including:
•Protecting both “structured” and “unstructured” sensitive information is a constant need. However,need; however, some risks cannot be fully mitigated using technologyadministrative, technological, or physical controls, or otherwise.
•Unsuspecting employees representEmployees, customers, or other users of our systems continue to be a primarykey avenue for malicious external parties to gain access to our network, and systems.systems, data, or that of our customers. Many attacks even from sophisticated actors, include rudimentary techniques suchleverage social engineering schemes (such as coaxingphishing, vishing, or smishing) to coax an internal user to click on a malicious attachment or link to introduce malware into companies’ systems or steal theirthe user’s username and password (i.e., phishing).password. Such social engineering schemes are becoming increasingly sophisticated and sometimes may involve emerging technologies such as deep-fakes. Senior-level executives are increasingly becoming the targets of such attacks. Fraudulent schemes to solicit information via call centers and interactive voice response systems are becoming more prevalent.
•The risk associated with wrongdoers encrypting dataCyber-attacks involving the encryption and/or threat to disclose personal or confidential information (i.e., ransomware) or disruptingdisruptions of communications (i.e., denial of service) for the purposes of extortion persists.or other motives persist and are on the rise.
•Financial services companies and their third-party service providers (including their downstream service providers) are increasingly being targeted by hackers and fraudulent actors seeking to monetize personally identifiablepersonal or confidential information to extort money, or extort money.for other malicious purposes. Such campaigns have targeted online applications and services.
•Nation-state sponsored or affiliated organizations are engaged in cyber-attacks, but not only for monetization purposes. Nation states appear to be motivated by the desirepurposes, but also to gain information about foreign citizens and governments, or to influence or cause disruptions in commerce or political affairs. In light of recent geopolitical events, including Russia’s invasion of Ukraine, state-sponsored or affiliated parties and/or their supporters may launch retaliatory cyber-attacks, and may attempt to cause supply chain and other third-party service provider disruptions, or take other geopolitically motivated retaliatory actions that may disrupt our business operations, and/or result in the compromise of our systems or data.
•We have also seen continued non-technical attemptsIncreasingly, malicious actors can be in companies’ systems for an extended period of time before being detected. It could take considerable additional time for us to commit fraud or solicitdetermine the scope of compromise, and the extent, amount, and type of information via call centerscompromised, if any, and interactive voice response systems.to fully remediate and recover.
•We rely on third parties to provide services, as described further below. While we have certain standards for all vendors that provide us services, our vendors, and in turn, their own service providers, may become subject to a security breach, including as a result of their failure to perform in accordance with their contractual arrangements.obligations.
•Hardware, software or applications developed by, obtained from, or implemented in accordance with specifications provided by third parties may contain vulnerabilities in design, maintenance or manufacturing that could be exploited to compromise the Company’s information security.
•Continuing use of remote or flexible work arrangements, including remote access tools and mobile technology (including use of personal devices), have expanded potential attack surfaces.
•The proliferation of third-party financial data aggregators and emerging technologies, including the development and use of artificial intelligence (“AI”), increase our information security risks and exposure.
We, or third-parties on whom we rely, may not adequately ensure the privacyintegrity, confidentiality, or availability of personal and confidential information. In the course of our ordinary business, we collect, store and share withdisclose to various third-parties (e.g., service providers, reinsurers, etc.) substantial amounts of privatepersonal and confidential information, including in some instances sensitive personal information, including health-related information. We are subject to the risk that the privacyintegrity, confidentiality, or availability of this information may be compromised, including as a result of an information security breach described above.above, or that such events occurring at third-parties may not be disclosed to us in a timely manner. We have experienced cyber-security breaches as a resultcybersecurity events resulting in the compromise of whichpersonal and confidential andinformation, including sensitive health-relatedhealth information, of our customers has been compromised.and other stakeholders. See “Business—Regulation—Privacy and Cybersecurity Regulation” for a discussion of the applicable laws and regulations (including those requiring notice, disclosure or remediation) relating to cybersecurity events.
We may incur significant costs and other negative consequences resulting from cyber-attacks or other information security breaches. Any compromise or perceived compromise of the security of our security by ussystems or bydata or that of one of our vendors could damage our reputation, cause the deterioration or termination of relationships with among others, customers, distributors, government-run health insurance exchanges, marketing partners and insurance carriers, reduce demand for our services, result in the loss of business opportunities, and subject us to significant liability and expense as well as regulatory action and lawsuits, which would harm our business, operating results and financial condition. We may also incur significant costs in connection with our response, recovery, remediation, and compliance efforts. Additionally, our failure to timely or accurately communicate cyber incidents to relevant parties could result in regulatory, privacy, operational and reputational risk. To the extent we maintain cyber insurance, liabilities or losses arising from certain cyber incidents may not be covered or fully covered under such policies, and the amount of insurance may not be adequate.
Third parties (outsourcing providers, vendors and suppliers and joint venture partners) present added operational risk to our enterprise. The Company's business model relies heavily on the use of third parties to deliver contracted services in a broad range of areas. This presents the risk that the Company is unable to meet legal, regulatory, financial or customer obligations because third parties fail to deliver contracted services, or that the Company is exposed to reputational damage because third parties operate in a poorly controlled manner. We use affiliates and third-party vendors located outside the U.S. to provide certain services and functions, which also exposes us to business disruptions and political risks as a result of risks inherent in conducting business outside of the United States. In our investments in which we hold a minority interest, or that are managed by third parties, we lack management and operational control over operations, which may subject us to additional operational, compliance and legal risks and prevent us from taking or causing to be taken actions to protect or increase the value of those investments. In those jurisdictions where we are constrained by law from owning a majority interest in jointly owned operations, our remedies in the event of a breach by a joint venture partner may be limited (e.g., we may have no ability to exercise a “call” option).
Affiliate and third-party distributors of our products present added regulatory, competitive and other risks to our enterprise. Our products are sold primarily through our captive/affiliated distributors and third-party distributing firms. Our captive/affiliated distributors are made up of large numbers of decentralized sales personnel who are compensated based on commissions. The third-party distributing firms generally are not dedicated to us exclusively and may frequently recommend and/or market products of our competitors. Accordingly, we must compete intensely for their services. Our sales could be adversely affected if we are unable to attract, retain or motivate third-party distributing firms or if we do not adequately provide support, training, compensation, and education to this sales network regarding our products, or if our products are not competitive and not appropriately aligned with consumer needs. While third-party distributing firms have an independent regulatory accountability, some regulators have been clear with expectations that product manufacturers retain significant sales practices accountability.
The Company and our distributors are subject to rules regarding the standard of care applicable to sales of our products and the provision of advice to our customers, and in recent years many of these rules have been revised or re-examined. In addition, there have been a number of investigations regarding the marketing practices of brokers and agents selling annuity and insurance products and the payments they receive. Furthermore, sales practices and investor protection have increasingly become areas of focus in regulatory examinations. These investigations and examinations have resulted in enforcement actions against us and companies in our industry and brokers and agents marketing and selling those companies’ products. Enforcement actions could result in penalties and the imposition of corrective action plans and/or changes to industry practices, which could adversely affect our ability to market our products. If our products are distributed in an inappropriate manner, or to customers for whom they are unsuitable, or distributors of our products otherwise engage in misconduct, we may suffer reputational and other harm to our business and be subject to regulatory action, penalties or damages. Our business may also be harmed if captive/affiliate distributors engage in inappropriate conduct in connection with the sale of third-party products.
Additionally, certain of our affiliated distributors engage in direct marketing to consumers through telemarketing, email marketing and other lead generation activities that subject us to various state and federal laws and state telemarketing regulations, including the Telephone Consumer Protection Act and the Americans with Disabilities Act. Violations of these regulations could subject our affiliated distributors to litigation and regulatory inquiries that result in penalties or damages.
Many of our distribution personnel are independent contractors or franchisees. From time to time, their status has been challenged in courts and by government agencies, and various legislative or regulatory proposals have been introduced addressing the criteria for determining the status of independent contractors’ classification as employees for, among other things, employment tax purposes or other employment benefits. The costs associated with potential changes with respect to
these independent contractor and franchisee classifications have impacted our results previously and could have a material adverse effect on our business in the future.
See Note 14 to the Consolidated Financial Statements for additional information onregarding litigation and regulatory matters relating to the distribution of products.
Although we distribute our products through a wide variety of distribution channels, we do maintain relationships with certain key distributors. We periodically negotiate the terms of these relationships, and there can be no assurance that such terms will remain acceptable to us or such third parties. An interruption in certain key relationships could materially affect our ability to market our products and could have a material adverse effect on our business, operating results and financial condition. Distributors may elect to reduce or terminate their distribution relationships with us, including for such reasons as adverse developments in our business, competitiveness of product offerings, adverse rating agency actions or concerns about market-related risks. We are also at risk that key distribution partners may merge, change their business models in ways that affect how our products are sold, or terminate their distribution contracts with us, or that new distribution channels could emerge and adversely impact the effectiveness of our distribution efforts. An increase in bank and broker-dealer consolidation activity could increase competition for access to distributors, result in greater distribution expenses and impair our ability to market products through these channels. Consolidation of distributors and/or other industry changes may also increase the likelihood that distributors will try to renegotiate the terms of any existing selling agreements to terms less favorable to us. Finally, we also may be challenged by new technologies and marketplace entrants that could interfere with our existing relationships.
As a financial services company, we are exposed to model risk, which is the risk of financial loss or reputational damage or adverse regulatory impacts caused by model errors or limitations, incorrect implementation of models, or misuse of or overreliance upon models. Models are utilized by our businesses and corporate areas primarily to project future cash flows associated with pricing products, calculating reserves and valuing assets, as well as in evaluating risk and determining capital requirements, among other uses. These models may not operate properly and may rely on assumptions and projections that are inherently uncertain. As our businesses continue to grow and evolve, the number and complexity of models we utilize expands, increasing our exposure to error in the design, implementation or use of models, including the associated input data and assumptions. Furthermore, our models might change as the resultmodel risk will be elevated during periods of thetransformation or due to new or changing laws or regulations.regulations (e.g., Accounting Standards Update (“ASU”) 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts).
The COVID-19 pandemic has increased and may continue to increase operational risk. One of the main impacts of the COVID-19 crisis has been executing Prudential Financial's and our business continuity protocols to ensure our employees are safe and able to serve our customers. This included transitioning the vast majority of the global workforce to remote work arrangements. We have also made a number of operational changes to accommodate our customers as further described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—COVID-19.”
In this environment, there is an elevated risk that weaknesses or failures in our business continuation plans could lead to disruption of our operations, liability to clients, exposure to disciplinary action or harm to our reputation. Furthermore, weaknesses or failures within a vendor’s business continuation plan can materially disrupt our business operations. Our information systems and those of our vendors and service providers may be more vulnerable to cyber-attacks, computer viruses or other computer related attacks, programming errors and similar disruptive problems during a business continuation event.
Strategic Risk
We are subject to the risk of events that can cause our fundamental business model to change, either through a shift in the businesses in which we are engaged or a change in our execution. In addition, tacticalother risks may become strategic risks. For example, we have considered and must continue to consider the impact of the prolonged low interest rate environment on new product development and continued sales of interest sensitive products.
Changes in the regulatory landscape may be unsettling to our business model. New laws and regulations are being considered in the U.S. and our other countries of operation at an increasing pace, as there has been greater scrutiny on financial regulation over the past several years. Proposed or unforeseen changes in law or regulation, or changes in the way existing laws or regulations are enforced, may adversely impact our business. See “Business—Regulation” for a discussion of certain recently enacted and pending proposals by international, federal and state regulatory authorities and their potential impact on our business, including in the following areas:
•Financial sector regulatory reform.
•U.S. federal, state and local tax laws.laws, including CAMT.
•Fiduciary rules and other standards of care.
•Our regulation under U.S. state insurance laws and developments regarding group-wide supervision and capital standards, accounting rules, RBC factors for invested assets and reserves for life insurance, variable annuities and other products.
•Privacy, big data, AI and cybersecurity regulation.
Changes in accounting rules applicable to our business may also have an adverse impact on our results of operations or financial condition. For a discussion of accounting pronouncements and their potential impact on our business, including Accounting Standards Update (“ASU”)ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, see Note 2 to the Consolidated Financial Statements.
Changes in technology and other external factors may be unsettling to our business model. We believe the following aspects of technological and other changes would significantly impact our business model. There may be other unforeseen changes in technology and the external environment, including the regulatory response to technological change, which may have a significant impact on our business model.
•Interaction with Customers. Technology is moving rapidly and as it does, it puts pressure on existing business models. Some of the changes we can anticipate are increased choices about how customers want to interact with the Company or how they want the Company to interact with them. Evolving customer preferences and changing privacy regulations may drive a need to redesign products.products and change the way we interact with customers. Our distribution channels may change to become more automated, at the place and time of the customer’s choosing. Such changes clearly have the potential to disrupt our business model.
•Investment Portfolio. Technology may have a significant impact on the companies in which the Company invests. For example, environmental concerns spur scientific inquiry which may reposition the relative attractiveness of wind or sun power over oil and gas. The transportation industry may favor alternative modes of conveyance of goods which may shift trucking or air transport out of favor. Consumers may change their purchasing behavior to favor online activity which would change the role of malls and retail properties.
•Medical Advances. The Company is exposed to the impact of medical advances in two major ways. Genetic testing and the availability of that information unequally to consumers and insurers can bring anti-selection risks. Specifically, data from genetic testing can give our prospective customers a clearer view into their future, allowing them to select products protecting them against likelihoods of mortality or longevity with more precision. Also, technologies that extend lives will challenge our actuarial assumptions especially in the annuity-based businesses.
The COVID-19 pandemic has increased and may continue to increase strategic risk. The COVID-19 pandemic has caused and could again cause an economic downturn, higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending. In such an environment, the demand for our products and our investment returns could be materially adversely affected.
We cannot predict other actions government will take in response to the COVID-19 pandemic, and how any new laws, regulations, or state-sponsored programs may impact our business.
The following items are examples of other factors which could have a meaningful impact on our business.
•A downgrade in our financial strength or credit ratings could potentially, among other things, adversely impact our business prospects, results of operations, financial condition and liquidity. For a discussion of our ratings and the potential impact of a ratings downgrade on our business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital.” We cannot predict what additional actions rating agencies may take, or what actions we may take in response to the actions of rating agencies, which could adversely affect our business. Our ratings could be downgraded at any time and without notice by any rating agency. Credit rating agencies continually review their methodologies, including capital and earnings assessment models, as well as their ratings for the companies that they follow, including us. The credit rating agencies also evaluate the industry as a whole and may change our credit rating based on their overall view of our industry. In addition, a sovereign downgrade could result in a downgrade of Prudential Financial's subsidiaries operating in that jurisdiction, and ultimately of Prudential Financial and its other subsidiaries. For example, in September 2015, S&P downgraded Japan's sovereign rating to A+ with a 'Stable' outlook citing uncertainties around the strength of economic growth and weak fiscal positions. As a result, S&P subsequently lowered the ratings of a number of institutions in Japan, including Prudential Financial's Japanese insurance subsidiaries. It is possible that Japan’s sovereign rating could be subject to further downgrades, which would result in further downgrades of Prudential Financial’s insurance subsidiaries in Japan. Given the importance of Prudential Financial’s operations in Japan to its overall results, such downgrades could lead to a downgrade of Prudential Financial and its domestic insurance companies.
•The elimination of London Inter-Bank Offered Rate ("LIBOR") may adversely affect certain derivatives and floating rate securities we hold, and any other assets or liabilities whose value is tied to LIBOR. Actions by regulators have resulted in the establishment of alternative reference rates to LIBOR in all major currencies. On March 5, 2021, the U.K. Financial Conduct Authority ("FCA") confirmed that the publication of the principal tenors of the U.S. dollar LIBOR (i.e., overnight, one-month, three-month, six-month and 12-month LIBOR) will cease immediately following a final publication on June 30, 2023. The scheduled cessation date for U.K. pound sterling, Japanese yen, Swiss franc and Euro LIBOR, and the one-week and two-month tenors of U.S. dollar LIBOR, was December 31, 2021. The primary risk in this transition is associated with USD LIBOR. Markets for instruments using rates other than LIBOR continue to develop. The effect of any changes or reforms to LIBOR or discontinuation of LIBOR on new or existing financial instruments to which we have exposure or the activities in our businesses will vary depending on (1) existing
fallback provisions in individual contracts, (2) the adoption of fallback provisions through the Inter-Bank Offered Rate Fallbacks Protocol produced by the International Swaps and Derivatives Association and (3) whether, how, and when industry participants develop and widely adopt new reference rates and fallbacks for both legacy and new products or instruments. Accordingly, it is difficult to predict the full impact of the transition away from LIBOR on certain derivatives and floating rate securities we hold, and any other assets or liabilities, as well as contractual rights and obligations, whose value is tied to LIBOR. The value or profitability of these products and instruments may be adversely affected. In addition, there is continued uncertainty resulting from the transition relief being considered by the U.S. Treasury Department regarding the tax implications of reference rate reform and the legislative progress associated with contracts or instruments that do not have satisfactory rate fallback mechanisms and that cannot easily be amended (e.g., certain floating rate debt securities, securitizations and adjustable rate mortgages).
•The changing competitive landscape may adversely affect the Company. In our business we face intense competition from insurance companies and diversified financial institutions, both for the ultimate customers for our products and, in many businesses, for distribution through non-affiliated distribution channels. Technological advances, changing customer expectations, including related to digital offerings, access to customer data or other changes in the marketplace may present opportunities for new or smaller companies without established products or distribution channels to meet consumers’ increased expectations more efficiently than us. Fintech and insurtech companies and companies in other industries with greater access to customers and data have the potential to disrupt industries globally, and many participants have been partially funded by industry players.
•Climate change may increase the severity and frequency of calamities, or adversely affect our investment portfolio or investor sentiment. Climate change may increase the frequency and severity of weather-related disasters and pandemics. In addition, climate change regulation may affect the prospects of companies and other entities whose securities we hold, or our willingness to continue to hold their securities. It may also impact other counterparties, including reinsurers, and affect the value of investments. We cannot predict the long-term impacts on us from climate change or related regulation. Climate change may also influence investor sentiment with respect to the Company and investments in our portfolio.
•We may fail to meet expectations relating to environmental, social, and governance standards and practices. Certain existing or potential investors, customers and regulators evaluate our business or other practices according to a variety of environmental, social and governance (“ESG”) standards and expectations. Certain of our regulators have proposed or adopted, or may propose or adopt, ESG rules or standards that would apply to our business. Our practices may be judged by ESG standards that are continually evolving and not always clear. Prevailing ESG standards and expectations may also reflect contrasting or conflicting values or agendas. We may fail to meet our commitments or targets, and our policies and processes to evaluate and manage ESG standards in coordination with other business priorities may not provebe completely effective or satisfy investors, customers, regulators, or others. We may face adverse regulatory, investor, customer, media, or public scrutiny leading to business, reputational, or legal challenges.
•Market conditions and other factors may adversely impact product sales or increase expenses. Examples include:
•A change in market conditions, such as highhigher inflation and highhigher interest rates, like we started to see in 2022, could cause a change in consumer sentiment and behavior adversely affecting sales and persistency of our savings and protection products. Conversely, low inflation and low interest rates could cause persistency of these products to vary from that anticipated and adversely affect profitability. Similarly, changing economic conditions and unfavorable public perception of financial institutions can influence customer behavior, including increasing claims or surrenders in certain products.
•Lapses and surrenders of certain insurance products may increase if a market downturn, increased market volatility or other market conditions result in customers becoming dissatisfied with their investments or products.
•Geopolitical risk, rapidly rising interest rates and significant equity market declines, as we have seen since the first half of 2022, among other factors, adversely impact our liquidity and capital positions, cash flows, results of operations, and financial position. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview - Current Market Conditions.”
•Our reputation may be adversely impacted if any of the risks described in this section are realized. Reputational risk could manifest from any of the risks as identified in the Company’s risk identification process. Failure to effectively manage risks across a broad range of risk issues exposes the Company to reputational harm. If the Company were to suffer a significant loss in reputation, both policyholders and counterparties could seek to exit existing relationships. Additionally, large changes in credit worthiness, especially credit ratings, could impact access to funding markets while creating additional collateral requirements for existing relationships. The mismanagement of any such risks may potentially damage our reputational asset. Our business is anchored in the strength of our brand, our alignment to our values, and our proven commitment to keep our promises to our customers. Any negative public perception, founded or otherwise, can be widely and rapidly shared over social media or other means, and could cause damage to our reputation.
•EachRisks related to COVID-19 could reemerge. Beginning with its emergence in 2020, the COVID-19 pandemic increased or caused the manifestation of many of the risks identifieddiscussed above, including, among others: the risk of loss on our investments, the risk of elevated mortality or morbidity, and the risk of market disruptions and volatility. The consequences of COVID-19 to the Company have included volatility in thisour investment portfolio during 2020, and a significant net negative impact on our underwriting results in 2021 and 2022. We have discussed these impacts, and others, in the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations in each of our Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K filed since the first quarter of 2020. On the basis of what we currently understand about the impact of COVID-19, we believe the risks it poses to our business will remain manageable but the risks relating to COVID-19 could reemerge if the COVID-19course of the pandemic deviates from our current expectations and could also manifest in the event of future pandemics, epidemics or other public health crises.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Office space is provided by Prudential Insurance, as described under “Expense Charges and Allocations” in Note 13 to the Consolidated Financial Statements.
Item 3. Legal Proceedings
See Note 14 to the Consolidated Financial Statements under “Litigation and Regulatory Matters” for a description of certain pending litigation and regulatory matters affecting us, and certain risks to our business presented by such matters.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company is a wholly-owned subsidiary of Prudential Insurance. There is no public market for the Company’s common stock.
Item 6. [Reserved]
Part II. Item 6 is no longer required pursuant to certain amendments to Regulation S-K that eliminated Item 301.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following analysis of our consolidated financial condition and results of operations in conjunction with the "Forward-Looking Statements" included below the Table of Contents, “Risk Factors”, and the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Overview
The Company sells variable annuities, universal life insurance, variable life insurance and term life insurance primarily through affiliated and unaffiliated distributors in the United States. As of December 31, 2020, the Company discontinued the sales of traditional variable annuities with guaranteed living benefit riders.
Effective April 1, 2022, Prudential Financial completed the sale of Prudential Annuities Life Assurance Corporation (“PALAC”) to Fortitude Group Holdings, LLC (“Fortitude”). As such, PALAC is no longer an affiliate of Prudential Financial or the Company. Fortitude subsequently renamed the company Fortitude Life Insurance & Annuity Company (“FLIAC”).
Effective July 1, 2021, the Company recaptured the risks related to its variable annuity base contracts, along with the living benefit guarantees, that had previously been reinsured to Prudential Annuities Life Assurance Corporation (“PALAC”)PALAC from April 1, 2016 through June 30, 2021.2021, subsequently renamed FLIAC. The recapture does not impact Pruco Life Insurance Company of New Jersey (“PLNJ”), which will continue to reinsure its new and in force business to The Prudential Insurance Company of America (“Prudential Insurance”). The product risks related to the previously reinsured business that were being managed in PALAC, were transferred to the Company. In addition, the living benefit hedging program related to the previously reinsured living benefit riders are being managed within the Company. This transaction is referred to as the "2021 Variable Annuities Recapture". For more information on this transition, see Note 1 to the Consolidated Financial Statements.
Effective December 1, 2021, the Company entered into a reinsurance agreement with PALACFLIAC (previously named PALAC) under which the Company assumed all of its variable and fixed indexed annuities and fixed annuities with a guaranteed lifetime withdrawal income feature from PALAC.FLIAC. See Note 9 to the Consolidated Financial Statements for more details.
Annually during the second quarter of each year, we perform a comprehensive review of actuarial assumptions. As part of this review, we may update these assumptions and make refinements to our models based upon emerging experience, future expectations and other data, including any observable market data. For additional information, see “Accounting Policies & Pronouncements—Application of Critical Accounting Estimates” below.
COVID-19
Since the first quarter of 2020, the novel coronavirus (“COVID-19”("COVID-19") pandemic has caused extreme stress and disruption in the global economy and financial markets and elevated mortality and morbidity for the global population. The COVID-19 pandemic continued to impactimpacted our results of operations in the current period and is expectedcould continue to impact our results of operations in future periods.
In 2021,Throughout the United States experienced multiple waves ofpandemic, COVID-19 had a significant net negative impact on our underwriting results, reflecting unfavorable mortality and morbidity impacts in our businesses. Beginning with the severitythird quarter of each wave depending2022, the Company has embedded COVID-19 considerations within its best estimate assumptions of future expected mortality impacts for its applicable businesses. The ultimate impact on suchour underwriting results, however, will continue to depend on various factors as seasonality, varying levels of population immunity,including: an insured's age; geographic concentration; insured versus uninsured populations among the fatalities; the transmissibility and the evolutionvirulence of the virus, itself into different variants. Deaths from COVID-19 inincluding the United States peaked inpotential for further mutation; and the first quarter of 2021, prior to widespread vaccination,ongoing acceptance and again in the third quarter, due to the emergenceefficacy of the Delta variant. In December, the Omicron variant emerged in the United States and has since become the dominant strain, causing many more infections but with a smaller percentage of infections resulting in hospitalizations and deaths compared to prior waves. Several vaccines are now widely accessible and other therapeutics, such as antiviral treatments, are increasingly becoming available. As a result, the overall financial impact to the Company is expected to remain manageable; however, the future evolution of the virus, among other factors, could cause the actual course of the pandemic to differ from our current expectations. The Company has taken several measures to manage the impacts of this pandemic. The actual and expected impacts of these measures and other items are set forth below:
•Outlook. We continue to focus on making life insurance solutions more available for financial professionals to distribute and for consumers to purchase, including the growth of accumulation and simplified protection products. We have taken pricing and product actions to ensure we realize appropriate returns for the current economic environment and to diversify our product mix to further limit our sensitivity to interest rates. We expect COVID-19 to continue to contribute in near-term to elevated levels of mortality, resulting in increased life insurance claims.
•Results of Operations. See “Results of Operations” for a discussion of results for the full year of 2021.therapeutics.
•Business Continuity. Throughout the COVID-19 pandemic, we have been executing Prudential Financial Inc.'s ("Prudential Financial") and our business continuity protocols to ensure our employees are safe and able to serve our customers. This included effectively transitioning the vast majority of our employees to remote work arrangements in 2020 and 2021.
We believe we can sustain long-term remote work and social distancing while ensuring that critical business operations are sustained. In addition, we are managing COVID-19 related impacts on third-party provided services, and do not anticipate significant interruption in critical operations.
•Risk Factors. See “Risk Factors” for a discussion of the risks to our business posed by the COVID-19 pandemic.
•CARES Act and Other Regulatory Developments. See "Business—Regulation" for additional information.
Revenues and Expenses
The Company earns revenues principally from insurance premiums, mortality and expense fees, asset administration fees from insurance and investment products, and from net investment income on the investment of general account and other funds. The Company receives premiums primarily from the sale of individual life insurance and annuity products. The Company earns mortality and expense fees, and asset administration fees, primarily from the sale and servicing of universal life insurance and separate account products including variable life insurance and variable annuities. The Company’s operating expenses principally consist of insurance benefits provided and reserves established for anticipated future insurance benefits, general business expenses, reinsurance premiums, commissions and other costs of selling and servicing the various products sold and interest credited on general account liabilities.
Industry Trends
Our business is impacted by financial markets, economic conditions, regulatory oversight, and a variety of trends that affect the industries where we compete.
Financial and Economic Environment. Interest rates in the U.S. have experienced a sustained period of historically low levels, whichfollowed by a sharp rise in 2022. We expect that a continued level of higher interest rates will benefit our results over time. We continue to negativelymonitor current market conditions and the impact to our investment-related activity, including our investment income returns, net investment spread results, and portfolio income and reinvestment yields. See “Impact of a Low Interest Rate Environment” below.business from slowing or negative economic growth. In addition, we are subject to financial impacts associated with movements in equity markets and the evolution of the credit cycle as discussed in “Risk Factors”.
Demographics. Customer demographics continue to evolve and new opportunities present themselves in different consumer segments such as the millennial and multicultural markets. Consumer expectations and preferences are changing. We believe existing customers and potential customers are increasingly looking for cost-effective solutions that they can easily understand and access through technology-enabled devices. At the same time, income protection, wealth accumulation and the needs of retiring baby boomers are continuing to shape the insurance industry. A persistent retirement security gap exists in terms of both savings and protection. Despite the ongoing phenomenon of the risk and responsibility of retirement savings shifting from employers to employees, employers are becoming increasingly focused on the financial wellness of the individuals they employ.their employees.
Regulatory Environment. See “Business—Regulation” for a discussion of regulatory developments that may impact the Company and the associated risks.
Competitive Environment. See “Business” for a discussion of the competitive environment and the basis on which we compete.
Current Market Conditions
Geopolitical risk, rapidly rising interest rates and significant equity market declines, as we saw throughout 2022, among other factors, adversely impact our liquidity and capital positions, cash flows, results of operations, and financial position. Our statutory capital will also be negatively affected by increased reserve requirements due to our annual update of actuarial assumptions and other refinements, particularly in our individual life business, and will be negatively affected by asymmetrical and non-economic statutory accounting impacts from rising rates. As we navigate through the current environment, we may take actions consistent with our risk and capital frameworks, as necessary, to preserve our liquidity and capital positions. For additional information on how these conditions may also impact our income taxes, see Note 10 to the Consolidated Financial Statements.
Impact of a LowChanges in the Interest Rate Environment
As a global financial services company, market interest rates are a key driver of the Company'sour liquidity and capital positions, cash flows, results of operations and financial condition.position. Changes in interest rates can affect our results of operations and/or our financial conditionthese in several ways, including favorable or adverse impacts to:
•investment-related activity, including: investment income returns, net interest margins, net investment spread results,
new money rates, mortgage loan prepayments and bond redemptions;
•the valuation of fixed income investments and derivative instruments;
•collateral posting requirements, hedging costs and other risk mitigation activities;
•customer account values and assets under management, including their impacts on fee-related income;
•insurance reserve levels, market experience true-ups and amortization of deferred policy acquisition costs (“DAC”);
•customer account values,policyholder behavior, including their impact on fee income;surrender or withdrawal activity; and
•product offerings, design features, crediting rates and sales mix; andmix.
•policyholder behavior, including surrender or withdrawal activity.
See “Current Market Conditions” above, for how rapidly rising interest rates, among other factors, adversely impact the Company’s financial results. For moreadditional information onregarding interest rate risks, see "Risk Factors—Market Risk".
Accounting Policies & Pronouncements
Application of Critical Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) requires the application of accounting policies that often involve a significant degree of judgment. Management, on an ongoing basis, reviews the estimates and assumptions used in the preparation of our financial statements. If management determines that modifications into assumptions and estimates are appropriate given current facts and circumstances, the Company’s results of operations and financial position as reported in the Consolidated Financial Statements could change significantly.
The following sections discuss the accounting policies applied in preparing our financial statements that management believes are most dependent on the application of estimates and assumptions and require management’s most difficult, subjective or complex judgments.
Insurance Assets
Deferred Policy Acquisition Costs and Deferred Sales Inducements
We capitalize costs that are directly related to the acquisition or renewal of insurance and annuity contracts. These costs primarily include commissions, as well as costs of policy issuance and underwriting and certain other expenses that are directly related to successfully negotiated contracts. We have also deferred costs associated with sales inducements offered in the past related to our variable and fixed annuity contracts. Sales inducements are amounts that are credited to the policyholders’ account balances mainly as an inducementincentive to purchase the contract. For additional information about sales inducements, see Note 8 to the Consolidated Financial Statements. We generally amortize DAC and deferred sales inducements ("DSI") over the expected lives of the contracts, based on our estimates of the level and timing of gross premiums or gross profits, depending on the type of contract. As described in more detail below, in calculating DAC and DSI amortization we are required to make assumptions about investment returns, mortality, persistency and other items that impact our estimates of the level and timing of gross profitspremiums or gross premiums.profits. We also periodically evaluate the recoverability of our DAC and DSI. For certain contracts, this evaluation is performed as part of our premium deficiency testing, as discussed further below in “Insurance Liabilities—Future Policy Benefits”. As of December 31, 2021,2022, DAC and DSI were $6.8$6.6 billion and $0.4$0.3 billion, respectively.
Amortization methodologies
Gross Premiums. DAC associated with term life policies is primarily amortized in proportion to gross premiums. Gross premiums are defined as the premiums charged to a policyholder for an insurance contract.
Gross Profits. DAC and DSI associated with the variable and universal life policies and the variable and fixed annuity contracts are generally amortized over the expected lives of these policies in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. Gross profits are defined as (i) amounts assessed for mortality, contract administration, surrender charges, and other assessments plus amounts earned from investment of policyholder balances less (ii) benefits in excess of policyholder balances, costs incurred for contract administration, the net cost of reinsurance for certain products, interest credited to policyholder balances and other credits. If significant negative gross profits are expected in any periods, the amount of insurance in force is generally substituted as the base for computing amortization. U.S. GAAP gross profits and amortization rates also include the impacts of the embedded derivatives associated with certain of the optional living benefit features of our variable annuity contracts, and index-linked crediting features of certain universal life and annuity contracts and related hedging activities. In calculating amortization expense, we estimate the amounts of gross profits that will be included in our U.S. GAAP results and utilize these estimates to calculate distinct amortization rates and expense amounts. In addition, in calculating gross profits, we include the 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. The Company is an indirect subsidiary of Prudential Financial (an SEC registrant) and has extensive transactions and relationships with other subsidiaries of Prudential Financial, including reinsurance agreements, as discussed in Note 9 and Note 13 to the Consolidated Financial Statements. Incorporating all product-related profits and losses in gross profits, including those that are reported in affiliated legal entities, produces an amortization pattern representative of the total economics of the products. For a further discussion of the amortization of DAC and DSI, see “—Results of Operations”.
We also regularly evaluate and adjust the related DAC and DSI balances with a corresponding charge or credit to current period earnings for the impact of actual gross profits and changes in our projections of estimated future gross profits on our DAC and DSI amortization rates. Adjustments to the DAC and DSI balances include the impact to our estimate of total gross profits of the annual review of assumptions, our quarterly adjustments for current period experience and our quarterly adjustments for market performance. Each of these adjustments is further discussed below in “—Annual assumptions review and quarterly adjustments.”
Annual assumptions review and quarterly adjustments
We perform an annual comprehensive review of the assumptions used in estimating gross profits for future periods. Over the last several years, the Company’s most significant assumption updates that have resulted in a change to expected future gross profits and the amortization of DAC and DSI have been related to lapse and other contractholder behavior assumptions, mortality, and revisions to expected future rates of returns on investments. These assumptions may also cause potential significant variability in amortization expense in the future. The impact on our results of operations of changes in these assumptions can be offsetting and we are unable to predict their movement or offsetting impact over time.
The quarterly adjustments for current period experience referred to above reflect the impact of differences between actual gross profits for a given period and the previously estimated expected gross profits for that period. To the extent each period’s actual experience differs from the previous estimate for that period, the assumed level of total gross profits may change. In these cases, we recognize a cumulative adjustment to all previous periods’ amortization, also referred to as an experience true-up adjustment.
The quarterly adjustments for market performance referred to above reflect the impact of changes to our estimate of total gross profits to reflect actual fund performance and market conditions. A significant portion of gross profits for our variable annuity contracts and, to a lesser degree, our variable life contracts are dependent upon the total rate of return on assets held in separate account investment options. This rate of return influences the fees we earn on variable annuity and variable life contracts, costs we incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts, as well as other sources of profit. Returns that are higher than our expectations for a given period produce higher than expected account balances, which increase the future fees we expect to earn on variable annuity and variable life contracts and decrease the future costs we expect to incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts, andas well as expected claims to be paid on variable life contracts. The opposite occurs when returns are lower than our expectations. The changes in future expected gross profits are used to recognize a cumulative adjustment to all prior periods’ amortization.
The weighted average rate of return assumptions used in developing estimated market returns consider many factors specific to each product type, including asset durations, asset allocations and other factors. With regard to equity market assumptions, the near-term future rate of return assumption used in evaluating DAC, DSI and liabilities for future policy benefits for certain of our products, primarily our domestic variable annuity and variable life insurance products is generally updated each quarter and is derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15.0%, we use our maximum future rate of return. If the near-term projected future rate of return is lower than our near-term minimum future rate of return of 0%, we use our minimum future rate of return. As of December 31, 2021,2022, our variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 0.0%6.9% near-term mean reversion equity expected rate of return.
With regard to interest rate assumptions used in evaluating DAC, DSI and liabilities for future policy benefits for certain of our products, we generally update the long-term and near-term future rates used to project fixed income returns annually and quarterly, respectively. As a result of our 20212022 annual reviews and update of assumptions and other refinements, we kept our long-term expectation of the 10-year U.S. Treasury rate unchanged and continue to grade to a rate of 3.25% over ten years. As part of our quarterly market experience updates, we update our near-term projections of interest rates to reflect changes in current rates.
Insurance Liabilities
Future Policy Benefits
Future Policy Benefit Reserves, including Unpaid Claims and Claim Adjustment Expenses
We establish reserves for future policy benefits to, or on behalf of, policyholders, using methodologies prescribed by U.S. GAAP. The reserving methodologies used include the following:
•For some long-duration contracts, we utilize a net premium valuation methodology in measuring the liability for future policy benefits. Under this methodology, a liability for future policy benefits is accrued when premium revenue is recognized. The liability, which represents the present value of future benefits to be paid to or on behalf of policyholders and related expenses less the present value of future net premiums (portion of the gross premium required to provide for all benefits and expenses), is estimated using methods that include assumptions applicable at the time the insurance contracts are made with provisions for the risk of adverse deviation, as appropriate. Original assumptions continue to be used in subsequent accounting periods to determine changes in the liability for future policy benefits (often referred to as the “lock-in concept”), unless a premium deficiency exists. The result of the net premium valuation methodology is that the liability at any point in time represents an accumulation of the portion of premiums received to date expected to be needed to fund future benefits (i.e., net premiums received to date), less any benefits and expenses already paid. The liability does not necessarily reflect the full policyholder obligation the Company expects to pay at the conclusion of the contract since a portion of that obligation would be funded by net premiums received in the future and would be recognized in the liability at that time. We perform premium deficiency tests using best estimate assumptions as of the testing date without provisions for adverse deviation. If the liabilities determined based on these best estimate assumptions are greater than the net reserves (i.e., GAAP reserves net of any DAC or DSI asset), the existing net reserves are first adjusted by first reducing these assets by the amount of the deficiency or to zero through a charge to current period earnings. If the deficiency is more than these asset balances for insurance contracts, we then increase the net reserves by the excess, again through a charge to current period earnings. If a premium deficiency is recognized, the assumptions as of the premium deficiency test date are locked-in and used in subsequent valuations and the net reserves continue to be subject to premium deficiency testing. In addition, for limited-payment contracts, future policy benefit reserves also include a deferred profit liability representing gross premiums received in excess of net premiums. The deferred profits are generally recognized in revenue in a constant relationship with insurance in force or with the amount of expected future benefit payments.
•For certain contract features, such as those related to guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”) and no-lapse guarantees, a liability is established when associated assessments (which include policy 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. The result of the benefit ratio method is that the liability at any point in time represents an accumulation of the portion of assessments received to date expected to be needed to fund future excess payments, less any excess payments already paid. The liability does not necessarily reflect the full policyholder obligation the Company expects to pay at the conclusion of the contract since a portion of that excess payment would be funded by assessments received in the future and would be recognized in the liability at that time. 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.
•For certain product guarantees, primarily certain optional living benefit features of the variable annuity products including guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum income and withdrawal benefits (“GMIWB”), the benefits are accounted for as embedded derivatives using a fair value accounting framework. The fair value of these contracts is calculated as the present value of expected future benefit payments to contractholders less the present value of assessed rider fees attributable to the embedded derivative feature. Under U.S. GAAP, the fair values of these benefit features are based on assumptions a market participant would use in valuing these embedded derivatives. Changes in the fair value of the embedded derivatives are recorded quarterly through a benefit or charge to current period earnings. For additional information regarding the valuation of these embedded derivatives, see Note 5 to the Consolidated Financial Statements.
The assumptions used in establishing reserves are generally based on the Company’s experience, industry experience and/or other factors, as applicable. We update our actuarial assumptions, such as mortality and policyholder behavior assumptions annually, unless a material change is observed in an interim period that we feel is indicative of a long-term trend. Generally, we do not expect trends to change significantly in the short-term and, to the extent these trends may change, we expect such changes to be gradual over the long-term. In a sustained low interest rate environment, there is an increased likelihood that the reserves determined based on best estimate assumptions may be greater than the net liabilities.
The following paragraphs provide additional details about the reserves we have established:
The reserves for future policy benefits of our individual annuity business relate to reserves for the GMDB and GMIB features of our variable annuities, and for the optional living benefit features that are accounted for as embedded derivatives. As discussed above, in establishing reserves for GMDBs and GMIBs, we utilize current best estimate assumptions. The primary assumptions used in establishing these reserves generally include annuitization, lapse, withdrawal and mortality assumptions, as well as interest rate and equity market return assumptions. Lapse rates are adjusted at the contract level based on the in-the-moneyness of the 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 are also generally assumed to be lower for the period where surrender charges apply. For life contingent payout annuity contracts, we establish reserves using best estimate assumptions with provisions for adverse deviations as of inception or best estimate assumptions as of the most recent loss recognition date.
The reserves for certain optional living benefit features, including GMAB, GMWB and GMIWB are accounted for as embedded derivatives at fair value, as described above. This methodology could result in either a liability or contra-liability 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 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 risk of its own non-performance risk (“NPR”), as well as actuarially determined assumptions, including mortality rates and contractholder behavior, such as lapse rates, benefit utilization rates and withdrawal rates. Capital market inputs and actual contractholders’ 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 returns used to grow the contractholders’ account values. TheThrough the first quarter of 2022, the Company’s discount rate assumption iswas based on the London Inter-Bank Offered Rate (“LIBOR”) swap curve adjusted for an additional spread, which included an estimate of NPR. As of the second quarter of 2022, the Company's discount rate assumption substituted the Secured Overnight Financial Rate ("SOFR") for LIBOR as part of the annual assumptions update. The discount rate assumption continues to use an additional spread which includes an estimate of NPR. 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, such as available industry studies or market transactions such as acquisitions and reinsurance transactions. For additional information regarding the valuation of these optional living benefit features, see Note 5 to the Consolidated Financial Statements.
The reserves for future policy benefits of our individual life business relate to term life, universal life and variable life products. For term life contracts, the future policy benefit reserves are generally calculated using the net premium valuation methodology, as described above. The primary assumptions used in determining expected future benefits and expenses include mortality, lapse, investment yield and maintenance expense assumptions. For variable and universal life products, which include universal life contracts that contain no-lapse guarantees, reserves for future policy benefits are primarily established using the reserving methodology for GMDB and GMIB contracts. As discussed above, in establishing reserves for GMDBs and GMIBs, we utilize current best estimate assumptions. The primary assumptions used in establishing these reserves generally include mortality, lapse, and premium pattern, as well as interest rate and equity market return assumptions. Reserves also include claims reported but not yet paid, and claims incurred but not yet reported.
Policyholders’ Account Balances
Policyholders’The policyholders’ account balances liability 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. The liability also includes provisions for benefits under non-life contingent payout annuities. Our unearned revenue reserve ("URR") is also reported as a component of Policyholders' account balances and had a balance of $2,020$2,893 million as of December 31, 2021.2022. This reserve primarily relates to the variable and universal life products and represents policy charges for services to be provided in future periods. The charges are deferred as unearned revenue and are generally amortized over the expected life of the contract in proportion to the product's estimated gross profits, similar to DAC and DSI as discussed above. Policyholders’ account balances also include amounts representing the fair value of embedded derivative instruments associated with the index-linked features of certain universal life and annuity products. For additional information regarding the valuation of these embedded derivatives, see Note 5 to the Consolidated Financial Statements.
Sensitivities for Insurance Assets and Liabilities
The following table summarizes the impact that could result on each of the listed financial statement balances from changes in certain key assumptions. The information below is for illustrative purposes and includes only the hypothetical direct impact on December 31, 20212022 balances of changes in a single assumption and not changes in any combination of assumptions. Additionally, the illustration of the insurance assumption impacts below reflects a parallel shift in the insurance assumptions; however, these may be non-parallel in practice. Changes in current assumptions could result in impacts to financial statement balances that are in excess of the amounts illustrated. A description of the estimates and assumptions used in the preparation of each of these financial statement balances is provided above. For traditional long-duration and limited-payment contracts, U.S. GAAP requires the original assumptions used when the contracts are issued to be locked-in and that those assumptions be used in all future liability calculations as long as the resulting liabilities are adequate to provide for the future benefits and expenses (i.e., there is no premium deficiency). Therefore, these products are not reflected in the sensitivity table below unless the hypothetical change in assumption would result in an adverse impact that would cause a premium deficiency. Similarly, the impact of any favorable hypothetical change in assumptions for traditional long duration and limited-payment contracts is not reflected in the table below given that the current assumption is required to remain locked-in and instead the positive impacts would be recognized into net income over the life of the policies in force.
The impacts presented within this table exclude the related impacts of our asset liability management strategy which seeks to offset the changes in certain of the balances presented within this table and is primarily composed of investments and derivatives. See further below for a discussion of the estimates and assumptions involved with the application of U.S. GAAP accounting policies for these instruments and “Quantitative and Qualitative Disclosures about Market Risk” for hypothetical impacts on related balances as a result of changes in certain significant assumptions.
| | | December 31, 2021 | | December 31, 2022 |
| | Increase (Decrease) in | | Increase (Decrease) in |
| | Deferred Policy Acquisition Costs | | Reinsurance Recoverables | | Future Policy Benefits and Policyholders’ Account Balances | | Net Impact | | Deferred Policy Acquisition Costs | | Reinsurance Recoverables | | Future Policy Benefits and Policyholders’ Account Balances | | Net Impact |
| | (in millions) | | (in millions) |
| Hypothetical change in current assumptions: | Hypothetical change in current assumptions: | | Hypothetical change in current assumptions: | |
| Long-term interest rate | | |
| Long-term interest rate: | | Long-term interest rate: | |
| Increase by 25 basis points | Increase by 25 basis points | $ | 5 | | | $ | (40) | | | $ | (25) | | | $ | (10) | | Increase by 25 basis points | $ | 5 | | | $ | (55) | | | $ | (45) | | | $ | (5) | |
| Decrease by 25 basis points | Decrease by 25 basis points | $ | (10) | | | $ | 35 | | | $ | 15 | | | $ | 10 | | Decrease by 25 basis points | $ | (5) | | | $ | 60 | | | $ | 50 | | | $ | 5 | |
| Long-term equity expected rate of return | | |
| Long-term equity expected rate of return: | | Long-term equity expected rate of return: | |
| Increase by 50 basis points | Increase by 50 basis points | $ | 85 | | | $ | (15) | | | $ | (20) | | | $ | 90 | | Increase by 50 basis points | $ | 100 | | | $ | (40) | | | $ | (25) | | | $ | 85 | |
| Decrease by 50 basis points | Decrease by 50 basis points | $ | (35) | | | $ | 15 | | | $ | 10 | | | $ | (30) | | Decrease by 50 basis points | $ | (70) | | | $ | 35 | | | $ | 10 | | | $ | (45) | |
| NPR credit spread | | |
| NPR credit spread: | | NPR credit spread: | |
| Increase by 50 basis points | Increase by 50 basis points | $ | (295) | | | $ | (115) | | | $ | (1,480) | | | $ | 1,070 | | Increase by 50 basis points | $ | (180) | | | $ | (60) | | | $ | (915) | | | $ | 675 | |
| Decrease by 50 basis points | Decrease by 50 basis points | $ | 325 | | | $ | 110 | | | $ | 1,610 | | | $ | (1,175) | | Decrease by 50 basis points | $ | 200 | | | $ | 50 | | | $ | 995 | | | $ | (745) | |
| Mortality | | |
| Mortality: | | Mortality: | |
| Increase by 1% | Increase by 1% | $ | (15) | | | $ | 5 | | | $ | (120) | | | $ | 110 | | Increase by 1% | $ | (15) | | | $ | 5 | | | $ | (85) | | | $ | 75 | |
| Decrease by 1% | Decrease by 1% | $ | 15 | | | $ | (5) | | | $ | 120 | | | $ | (110) | | Decrease by 1% | $ | 15 | | | $ | (5) | | | $ | 85 | | | $ | (75) | |
| Lapse | | |
| Lapse: | | Lapse: | |
| Increase by 10% | Increase by 10% | $ | (75) | | | $ | (125) | | | $ | (555) | | | $ | 355 | | Increase by 10% | $ | (60) | | | $ | (130) | | | $ | (420) | | | $ | 230 | |
| Decrease by 10% | Decrease by 10% | $ | 80 | | | $ | 125 | | | $ | 570 | | | $ | (365) | | Decrease by 10% | $ | 60 | | | $ | 135 | | | $ | 430 | | | $ | (235) | |
Valuation of Investments, Including Derivatives, Measurement of Allowance for Credit Loss, and the Recognition of Other-than-Temporary Impairments
Our investment portfolio consists of public and private fixed maturity securities, commercial mortgage and other loans, equity securities, other invested assets and derivative financial instruments. Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices or the values of securities. Derivative financial instruments wethat are generally useused include swaps, futures, forwards and options and may be exchange-traded or contracted in the over-the-counter (“OTC”) market. We are also party to financial instruments that contain derivative instruments that are “embedded” in the financial instruments. Management believes the following accounting policies related to investments, including derivatives, are most dependent on the application of estimates and assumptions. Each of these policies is discussed further within other relevant disclosures related to investments and derivatives, as referenced below:
•Valuation of investments, including derivatives;
•Measurement of the allowance for credit losses on fixed maturity securities classified as available-for-sale, commercial mortgage loans, and other loans; and
•Recognition of other-than-temporary impairments ("OTTI") for equity method investments.
We present at fair value in the statements of financial position our debt security investments classified as available-for-sale, investments classified as trading, and certain fixed maturities, equity securities and certain investments within “Other invested assets,” such as derivatives. For additional information regarding the key estimates and assumptions surrounding the determination of fair value of fixed maturity and equity securities, as well as derivative instruments, embedded derivatives and other investments, see Note 5 to the Consolidated Financial Statements.
For our investments classified as available-for-sale, the impact of changes in fair value is recorded as an unrealized gain or loss in “Accumulated other comprehensive income (loss)” (“AOCI”), a separate component of equity. For our investments classified as trading and equity securities, the impact of changes in fair value is recorded within “Other income”. Our commercial mortgage and other loans are carried primarily at unpaid principal balances, net of unamortized deferred loan origination fees and expenses and unamortized premiums or discounts and a valuation allowance for losses.
In addition, an allowance for credit losses is measured each quarter for available-for-sale fixed maturity securities, commercial mortgage and other loans. For additional information regarding our policies regarding the measurement of credit losses, see Note 2 to the Consolidated Financial Statements.
For equity method investments, 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. For additional information regarding our OTTI policies, see Note 2 to the Consolidated Financial Statements.
Taxes on Income
Our effective tax rate is based on income, non-taxable and non-deductible items, tax credits, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. Inherent in determining our annual tax rate are judgments regarding business plans, planning opportunities and expectations about future outcomes. The Dividend Received Deduction (“DRD”) is a major reason for the difference between the Company’s effective tax rate and the U.S. federal statutory rate. The DRD is an estimate that incorporates the prior and current year information, as well as the current year’s equity market performance. Both the current estimate of the DRD and the DRD in future periods 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 underlying fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD.
An increase or decrease in our effective tax rate by one percentage point would have resulted in a decrease or increase in our 20212022 "Income tax expense (benefit)" of $29$4 million.
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 2020,2018, 2019 or 20182020 to carry back those losses for up to five years. For 2020, the Company recorded an income tax benefit of $70 million from carrying the estimated 2020 NOL back to tax years that have a 35% tax rate.
Contingencies
A contingency is an existing condition that involves a degree of uncertainty that will ultimately be resolved upon the occurrence of future events. Under U.S. GAAP, accruals for contingencies are required to be established when the future event is probable and its impact can be reasonably estimated, such as in connection with an unresolved legal matter. The initial reserve reflects management’s best estimate of the probable cost of ultimate resolution of the matter and is revised accordingly as facts and circumstances change and, ultimately, when the matter is brought to closure.
Adoption of New Accounting Pronouncements
ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the Financial Accounting Standards Board (“FASB”) on August 15, 2018,and was amended by ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date, issued in October 2019, and ASU 2020-11, Financial Services-Insurance (Topic 944): Effective Date and Early Application, issued in November 2020. The Company will adopt ASU 2018-12 effective January 1, 2023 using the modified retrospective transition method where permitted, and apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements.
The Company has an established governance framework to manage the implementation of the standard. The Company has substantially completed its implementation efforts including, but not limited to, implementing refinements to key accounting policy decisions, modifications to actuarial valuation models, updates to data sourcing capabilities, automation of key financial reporting and analytical processes and updates to internal control over financial reporting and disclosure.
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. The Company expects the standard to have a significant financial impact on the Consolidated Financial Statements and will significantly enhanceincrease disclosures. As of the January 1, 2021 transition date, the Company estimates that the implementation of the standard will result in approximately a $700 million decrease to $100 million increase to "Total equity", largely from remeasuring in force contract liabilities using upper-medium grade fixed income instrument yields as of the transition date and from other changes in reserves. As of September 30, 2022, the Company estimates that the transition date impacts will significantly reverse, primarily as a result of increases in market interest rates from the January 1, 2021 transition date to September 30, 2022. In addition to the significant impacts to the balance sheet, upon adoption, the Company also expects an impact to the pattern of earnings emergence following the transition date. See Note 2 to the Consolidated Financial Statements.Statements for a more detailed discussion of ASU 2018-12, as well as other accounting pronouncements issued but not yet adopted and newly adopted accounting pronouncements.
Changes in Financial Position
20212022 to 20202021 Annual Comparison
Total assets increased $13decreased $32.4 billion from $208$221.7 billion at December 31, 20202021 to $222$189.3 billion at December 31, 2021.2022. Significant components were:
•$12Separate account assets decreased $35.7 billion increase in Total investments and Cash and cash equivalents primarily driven by consideration received related to the 2021 Variable Annuities Recapture and the new reinsurance with PALAC and capital contributions;
•$4 billionunfavorable equity performance, increase in Deferred policy acquisition costs primarily due to unwinding of ceded deferred acquisition costs as part of the 2021 Variable Annuities Recaptureinterest rates and assuming deferred acquisition costs as part of the new reinsurance with PALAC;net outflows; and
•$4Reinsurance recoverables decreased by $4.0 billion increase in Separate account assets primarily driven by favorable equity market performance,$4.8 billion of assets novated from FLIAC supporting the variable index annuities contracts (see Note 9 to the Consolidated Financial Statements for additional details), partially offset by net outflows and policy charges;ceding a portion of the variable life business to Lotus Reinsurance Company Ltd. ("Lotus Re").
Partially offset by:
•$10Total investments increased $5.5 billion driven by $4.7 billion of assets novated from FLIAC supporting the variable index annuities contracts (see Note 9 to the Consolidated Financial Statements for additional details)and due to new sales of general account annuity products, partially offset by mark to market losses on investments primarily due to rising interest rates and an $0.8 billion decrease in Reinsurance recoverables primarily relatedpolicy loans from ceding a portion of the variable life business to the 2021 Variable Annuities Recapture, partially offset by the new reinsurance with PALAC.Lotus Re.
Total liabilities increased $11decreased $30.8 billion from $204$215.7 billion at December 31, 20202021 to $216$184.9 billion at December 31, 2021.2022. Significant components were:
•$12 billion increase in Policyholders' account balance primarily driven by the new reinsurance with PALAC; and
•$4 billion increase in Separate account liabilities decreased $35.7 billion, corresponding to the increasedecrease in Separate account assets, as discussed above; and
Partially offset by:
•$5 billion decrease in Future policy benefits primarilydecreased $4.7 billion driven by a decrease in reserves related to our variable annuity living benefit liabilitiesguarantees due to widening of the Company's market-perceived non-performance risk ("NPR") spreads and rising interest rates, and favorablepartially offset by unfavorable equity market performance.
Partially offset by:
•Policyholder account balances increased $6.4 billion driven by new sales of general account annuity products.
Total equity increased $2decreased $1.6 billion primarilymainly due to unrealized losses on fixed maturity investments driven by capital contributionrising interest rates reflected in other comprehensive income (loss), net of $4 billion as a resulttax.
Results of Operations
Income (loss) from Operations before Income Taxes
20212022 to 20202021 Annual Comparison
Income from operations before income taxes decreased $2,970increased $3,318 million from income of $68 million in 2020 toa loss of $2,902 million in 2021.2021 to income of $416 million in 2022. This includes an unfavorablea favorable comparative net lossgain of $24$342 million from our annual reviews and update of assumptions and other refinements. Excluding the impact of our annual reviews and update of assumptions and other refinements, income decreasedincreased $2,9462,976 million primarily driven by:
•Significant Realized investment gains (losses), net reflecting an unfavorable impact due toImpacts of the 2021 Variable Annuities Recapture.Recapture in the prior year. See Note 1 for more details.
The following table provides the net impact to the Consolidated Statements of Operations, which is primarily driven by the changes in the U.S. GAAP embedded derivative liability and hedge positions under the Asset Liability Management ("ALM")
strategy, and the related amortization of DAC and other costs.
| | | | | |
| Year to Date |
| December 31, 2021 |
| (in millions)(1) |
U.S. GAAP embedded derivative and hedging positions | |
Change in value of U.S.GAAP liability, pre-NPR(2) | $ | 405 | |
Change in the NPR adjustment | 279 | |
Change in fair value of hedge assets, excluding capital hedges(3) | (1,136) | |
Change in fair value of capital hedges(4) | (383) | |
2021 Variable Annuities Recapture | (4,954) | |
Other | 1,062 | |
Realized investment gains (losses), net, and related adjustments | (5,210) | |
Market experience updates(5) | 69 | |
Charges related to realized investments gains (losses), net | (11) | |
Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs(6) | $ | (5,152) | |
| | | | | | | | |
| Year to Date |
| December 31, 2022 | December 31, 2021 |
| (in millions)(1) |
| U.S. GAAP embedded derivative and hedging positions | | |
| Change in value of U.S.GAAP liability, pre-NPR(2) | $ | 3,015 | | $ | 405 | |
| Change in the NPR adjustment | 992 | | (204) | |
| Change in fair value of hedge assets, excluding capital hedges(3) | (7,098) | | (1,136) | |
| Change in fair value of capital hedges(4) | 545 | | (383) | |
| 2021 Variable Annuities Recapture | 0 | (4,954) | |
| Other | 2,793 | | 1,062 | |
| Realized investment gains (losses), net, and related adjustments | 247 | | (5,210) | |
| Market experience updates(5) | (134) | | 69 | |
| Charges related to realized investments gains (losses), net | (201) | | (11) | |
| Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs(6) | $ | (88) | | $ | (5,152) | |
(1)Positive amount represents income; negative amount represents a loss.
(2)Represents the change in the liability (excluding NPR) for our variable annuities which is measured utilizing a valuation methodology that is required under U.S. GAAP. This liability includes such items as risk margins which are required by U.S. GAAP but not included in our best estimate of the liability.
(3)Represents the changes in fair value of the derivatives utilized to hedge potential claims associated with our variable annuity living benefit guarantees.
(4)Represents the changes in fair value of equity derivatives of the capital hedge program intended to protect a portion of the overall capital position of our business against exposure to the equity markets.
(5)Represents the immediate impacts in current period results from changes in current market conditions on estimates of profitability.
(6)Excludes amounts from the changes in unrealized gains and losses from fixed income instruments recorded in OCI (versus net income) of $29($185) million for the year ended December 31, 2021.2022.
For the year ending December 31, 2022, the loss of $88 million was primarily driven by an unfavorable impact related to the change in the fair value of hedge assets, partially offset a favorable impact related to the portions of our U.S. GAAP liability before NPR, that are excluded from hedge target, driven by rising interest rates and by a favorable impact from the NPR adjustment.
For the year ending December 31, 2021 the loss of $5 billion was primarily driven by the 2021 Variable Annuities Recapture. See Note 1 for more details.
Revenues, Benefits and Expenses
20212022 to 20202021 Annual Comparison
Revenues decreased $3,665increased $6,096 million from a gain of $1,123 million in 2020 to a loss of $2,542 million in 2021.2021 to a gain of $3,554 million in 2022. This includes an unfavorablea favorable comparative net decreaseincrease of $43$523 million from our annual reviews and updates of assumptions and other refinements, as mentioned above. Excluding the impact of our annual reviews and update to our assumptions and other refinements, the decreaseincrease was $3,6225,573 million primarily driven by:
•Significant Realized investment gains (losses), net reflecting an unfavorableRevenues increased in 2022 driven by the one-time impact due toof the 2021 Variable Annuities Recapture. SeeNote 1for more details; and
•Higher net investment income and policy charges and fee income is driven by the variable annuity recapture, partially offset by the fee paid to Prudential Insurance for the recapture of the yearly renewable term ("YRT") reinsurance for most of the Company's variable life insurance policies and by ceding a portion of the variable life business to Lotus Re.
Benefits and expenses decreased $695increased $2,778 million from an expense of $1,055 million in 2020 to an expense of $360 million in 2021.2021 to an expense of $3,138 million in 2022. This includes a favorablean unfavorable comparative net decreaseincrease of $19$181 million from our annual reviews of assumptions and other refinements, as mentioned above. Excluding the impact of our annual reviews and update to our assumptions and other refinements, the decreaseincrease was $676$2,597 million primarily driven by:
•Lower General, administrativeHigher Benefits and other expenses primarily driven by the unwinding of ceded deferred acquisition costs, partially offset by ceding allowance paid as part of the 2021 Variable Annuities Recapture.Recapture and new reinsurance with FLIAC in 2021.
Risks and Risk Mitigants
Variable Annuity Risks and Risk Mitigants. The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital markets assumptions such as equity market returns, interest rates and market volatility, along with actuarial assumptions such as contractholder mortality, the timing and amount of annuitization and withdrawals, and contract lapses. For these risk exposures, achievement of our expected returns is subject to the risk that actual experience will differ from the assumptions used in the original pricing of these products. Prudential Financial manages our exposure to certain risks driven by fluctuations in capital markets primarily through a combination of Product Design Features and an Asset Liability Management Strategy ("ALM"), as discussed below. The Company also manages these risk exposures through external reinsurance for certain of our variable annuity products.
annuity products.
Effective July 1, 2021, the Company recaptured the risks related to its variable annuity base contracts, along with the living benefit guarantees, that had previously been reinsured to PALACFLIAC from April 1, 2016 through June 30, 2021. The recapture does not impact PLNJ, which will continue to reinsure its new and in force business to Prudential Insurance. The product risks related to the previously reinsured business that were being managed in PALAC,FLIAC, were transferred to the Company. In addition, the living benefit hedging program related to the previously reinsured living benefit riders are being managed within the Company. For more information on this transaction, see Note 1 to the Consolidated Financial Statements.
Fixed Annuity Risks and Risk Mitigants. Effective December 1, 2021, the Company entered into a reinsurance agreement with PALACFLIAC under which the Company assumed all of its fixed indexed annuities and fixed annuities with a guaranteed lifetime withdrawal income feature from PALAC.FLIAC. The primary risk exposure of these fixed annuity products relates to investment risks we bear for providing customers a minimum guaranteed interest rate or an index-linked interest rate required to be credited to the customer’s account value, which include interest rate fluctuations and/or sustained periods of low interest rates, and credit risk related to the underlying investments. We manage these risk exposures primarily through our investment strategies and product design features, which include credit rate resetting subject to the minimum guaranteed interest rate, as well as surrender charges applied during the early years of the contract that help to provide protection for premature withdrawals. In addition, a portion of our fixed annuity products has a market value adjustment provision that affords protection of lapse in the case of rising interest rates. We also manage these risk exposures through external reinsurance for certain of our fixed annuity products. For information on our external reinsurance agreements, see Note 9 to the Consolidated Financial Statements.
Indexed Variable Annuity Risks and Risk Mitigants. Effective December 1, 2021, the Company entered into a reinsurance agreement with PALACFLIAC under which the Company assumed all of its indexed variable annuities from PALAC.FLIAC. The primary risk exposure of these indexed variable annuity products relates to the investment risks we bear in order to credit to the customer’s account balance the required crediting rate based on the performance of the elected indices at the end of each term. We manage this risk primarily through our investment strategies including derivatives and product design features, which include credit rate resetting subject to contractual minimums as well as surrender charges applied during the early years of the contract that help to provide protection for premature withdrawals. In addition, our indexed variable annuity strategies have an interim value provision that provides protection from lapse in the case of rising interest rates.
Product Design Features:
A portion of the variable annuity contracts that we offer include an asset transfer feature. This feature is implemented at the contract level, and transfers assets between certain variable investment sub-accounts selected by the annuity contractholder and, depending on the benefit feature, a fixed-rate account in the general account or a bond fund sub-account within the separate account. The objective of the asset transfer feature is to reduce our exposure to equity market risk and market volatility. The asset transfer feature associated with currently-soldour highest daily living benefit products uses a designated bond fund sub-account within the separate account. The transfers are based on a static mathematical formula used with the particular benefit which considers a number of factors, including, but not limited to, the impact of investment performance on the contractholder’s total account value. Other product design features we utilize include, among others, asset allocation restrictions, minimum issuance age requirements and certain limitations on the amount of contractholder purchase payments, as well as a required minimum allocation to our general account for certain of our products. We continue to introduce products that diversify our risk profile and have incorporated provisions in product design allowing frequent revisions of key pricing elements for certain of our products. In addition, there is diversity in our fee arrangements, as certain fees are primarily based on the benefit guarantee amount, the contractholder account value and/or premiums, which helps preserve certain revenue streams when market fluctuations cause account values to decline.
Asset Liability Management Strategy (including fixed income instruments and derivatives):
We employ an ALM strategy that utilizes a combination of both traditional fixed income instruments and derivatives to meet expected liabilities associated with our variable annuity living benefit guarantees. The economic liability we manage with this ALM strategy consists of expected living benefit claims under less severe market conditions, which are managed using fixed income instruments, derivatives, or a combination thereof, and potential living benefit claims resulting from more severe market conditions, which are hedged using derivative instruments. For our Prudential Defined Income (“PDI”) variable annuity, we utilize fixed income instruments to meet expected liabilities. For the portion of our ALM strategy executed with derivatives, we enter into a range of exchange-traded and over-the-counter equity, interest rate and credit derivatives, including, but not limited to: equity and treasury futures; total return, credit default and interest rate swaps; and options, including equity options, swaptions, and floors and caps. The intent of this strategy is to more efficiently manage the capital and liquidity associated with these products while continuing to mitigate fluctuations in net income due to movements in capital markets. To achieve this, we periodically review and recalibrate the ALM strategy by optimizing the mix of derivatives and fixed income instruments to achieve expected outcomes.
The valuation of the economic liability we seek to defray excludes certain items that are included within the U.S. GAAP liability, such as NPR in order to maximize protection irrespective of the possibility of our own default, as well as risk margins (required by U.S. GAAP but different from our best estimate) and valuation methodology differences. The following table provides a reconciliation between the liability reported under U.S. GAAP and the economic liability we manage through our ALM strategy, net of reinsurance recoverables, as of the period indicated:
| | | | | |
| As of December 30, 202131, 2022 |
| (in millions) |
| US GAAP Liability including NPR | $ | 8,1174,110 | |
| NPR Adjustment | 2,0473,039 | |
| Subtotal | 10,1647,149 | |
| Adjustments including risk margins and valuation methodology differences | (1,802)(2,171) | |
| Economic liability managed through the ALM strategy | $ | 8,3624,978 | |
As of December 31, 2021,2022, the fair value of our fixed income instruments and derivative assets exceed our economic liability.
Under our ALM strategy, we expect differences in the U.S. GAAP net income impact between the changes in value of the fixed income instruments (either designated as available-for-sale or designated as trading) and derivatives as compared to the changes in the embedded derivative liability these assets support. These differences can be primarily attributed to three distinct areas:
•Different valuation methodologies in measuring the liability we intend to cover with fixed income instruments and derivatives versus the liability reported under U.S. GAAP. The valuation methodology utilized in estimating the economic liability we intend to defray with fixed income instruments (either designated as available-for-sale or designated as trading) and derivatives is different from that required to be utilized to measure the liability under U.S. GAAP. Additionally, the valuation of the economic liability excludes certain items that are included within the U.S. GAAP liability, such as NPR in order to maximize protection irrespective of the possibility of our own default and risk margins (required by U.S. GAAP but different from our best estimate).
•Different accounting treatment between liabilities and assets supporting those liabilities. Under U.S. GAAP, changes in value of the embedded derivative liability, derivative instruments and fixed income instruments designated as trading immediately reflected in net income, while changes in the fair value of fixed income instruments that are designated as available-for-sale are recorded as unrealized gains (losses) in other comprehensive income.
•General hedge results. For the derivative portion of the ALM strategy, the net hedging impact (the extent to which the changes in value of the hedging instruments offset the change in value of the portion of the economic liability we are hedging) may be impacted by a number of factors, including: cash flow timing differences between our hedging instruments and the corresponding portion of the economic liability we are hedging, basis differences attributable to actual underlying contractholder funds to be hedged versus hedgeable indices, rebalancing costs related to dynamic rebalancing of hedging instruments as markets move, certain elements of the economic liability that may not be hedged (including certain actuarial assumptions), and implied and realized market volatility on the hedge positions relative to the portion of the economic liability we seek to hedge.
Capital Hedge Program:
We employ a capital hedge program within the Company to protect a portion of the overall capital position of the variable annuities business against its exposure to the equity markets. The capital hedge program is conducted using equity derivatives which include equity call and put options, total return swaps and futures contracts.
Income Taxes
The differences between income taxes expected at the U.S. federal statutory income tax rate of 21% applicable for 2022, 2021 2020 and 2019,2020, and the reported income tax expense (benefit) are provided in the following table:
| | | Year Ended December 31, | | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| | (in millions) | | (in millions) |
| Expected federal income tax expense (benefit) at federal statutory rate | Expected federal income tax expense (benefit) at federal statutory rate | | $ | (609) | | | $ | 14 | | | $ | 33 | | Expected federal income tax expense (benefit) at federal statutory rate | | $ | 87 | | | $ | (609) | | | $ | 14 | |
| Non-taxable investment income | Non-taxable investment income | | (49) | | | (47) | | | (52) | | Non-taxable investment income | | (46) | | | (49) | | | (47) | |
| Tax credits | Tax credits | | (37) | | | (28) | | | (40) | | Tax credits | | (48) | | | (37) | | | (28) | |
| Changes in tax law | Changes in tax law | | (4) | | | (70) | | | 0 | | Changes in tax law | | 0 | | | (4) | | | (70) | |
| Other | Other | | 7 | | | 1 | | | 0 | | Other | | 6 | | | 7 | | | 1 | |
| Reported income tax expense (benefit) | Reported income tax expense (benefit) | | $ | (691) | | | $ | (130) | | | $ | (59) | | Reported income tax expense (benefit) | | $ | (1) | | | $ | (691) | | | $ | (130) | |
| Effective tax rate | Effective tax rate | | 23.8 | % | | (191.2) | % | | (37.2) | % | Effective tax rate | | (0.2) | % | | 23.8 | % | | (191.2) | % |
Effective Tax Rate
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 ventures." Our effective tax rate for fiscal years 2022, 2021 and 2020 was (0.2)%, 23.8% and 2019 was 23.8%, (191.2)% and (37.2)%, respectively. For a detailed description of the nature of each significant reconciling item, see Note 10 to the Consolidated Financial Statements. The change in the effective tax rate from (191.2)% in 2020 to 23.8% in 2021 was primarily driven by a decrease in pre-tax income and the impact of the CARES Act in 2020. The change in the effective tax rate from (37.2)% in 2019 to (191.2)% in 2020 was primarily driven by a decrease in pre-tax income and the impact of the CARES Act in 2020.
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 Internal Revenue Service 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. The Company had no unrecognized benefit as of December 31, 2022, 2021 2020 and 2019.2020. We do not anticipate any significant changes within the next 12twelve months to our total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.
Income Tax Expense vs. Income Tax Paid in Cash
Income tax expense recorded under U.S. GAAP routinely differs from the income taxes paid in cash in any given year. Income tax expense recorded under U.S. GAAP is based on income reported in our Consolidated Statements of Operations for the current period and it includes both current and deferred taxes. Income taxes paid during the year include tax installments made for the current year as well as tax payments and refunds related to prior periods.
For additional information onregarding income tax related items, see “Business—Regulation” and Note 10 to the Consolidated Financial Statements.
Liquidity and Capital Resources
Overview
Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of our business, fund business growth, and provide a cushion to withstand adverse circumstances. Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of our business, general economic conditions our ability to borrow from affiliates and our access to the capital markets through affiliates asand the alternative sources of liquidity and capital described herein.
Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity of the Company on a daily basis and projects borrowing and capital needs over a multi-year time horizon. We use a Risk Appetite Framework (“RAF”) to ensure that all risks taken by the Company align with our capacity and willingness to take those risks. The RAF provides a dynamic assessment of capital and liquidity stress impacts, including scenarios similar to, and more severe than, those occurring due to COVID-19, and is intended to ensure that sufficient resources are available to absorb those impacts. We believe that our capital and liquidity resources are sufficient to satisfy the capital and liquidity requirements of the Company.
Our businesses are subject to comprehensive regulation and supervision by domestic and international regulators. These regulations currently include requirements (many of which are the subject of ongoing rule-making) relating to capital leverage,and liquidity stress-testing, overall risk management, credit exposure reporting and credit concentration.management. For information on these regulatory initiatives and their potential impact on us, see “Business—Regulation" and “Risk Factors".
Capital
We manage the Company to regulatory capital levels consistent with our "AA" ratings targets. We utilize the risk-based capital (“RBC”) ratio as a primary measure of capital adequacy. RBC is calculated based on statutory financial statements and risk formulas consistent with the practices of the National Association of Insurance Commissioners ("NAIC"). RBC considers, among other things, risks related to the type and quality of the invested assets, insurance-related risks associated with an insurer’s products and liabilities, interest rate risks and general business risks. RBC ratio calculations are intended to assist insurance regulators in measuring an insurer’s solvency and ability to pay future claims. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities, but is available to the public. The Company’s capital levels substantially exceed the minimum level required by applicable insurance regulations. Our regulatory capital levels may be affected in the future by changes to the applicable regulations, proposals for which are currently under consideration by both domestic and international insurance regulators.
The regulatory capital level of the Company can be materially impacted by interest rate and equity market fluctuations, changes in the values of derivatives, the level of impairments recorded, and credit quality migration of the investment portfolio, among other items. In addition, the reinsurance of business or the recapture of business subject to reinsurance arrangements due to defaults by, or credit quality migration affecting, the reinsurers or for other reasons could negatively impact regulatory capital levels. The Company’s regulatory capital level is also affected by statutory accounting rules, which are subject to change by each applicable insurance regulator.
Affiliated Captive Reinsurance Companies
Prudential Financial and the Company use captive reinsurance companies for our individual life business to more effectively manage our reserves and capital on an economic basis and to enable the aggregation and transfer of risks. The captive reinsurance companies assume business from affiliates only. To support the risks they assume, theour captives are capitalized to a level we believe is consistent with the “AA” financial strength rating targets of Prudential Financial’s insurance subsidiaries.All of the captive reinsurance companies are wholly-owned subsidiaries of Prudential Financial and are located domestically, typically in the state of domicile of the direct writing insurance subsidiary that cedes the majority of business to the captive. In addition to state insurance regulation, the captives are subject to internal policies governing their activities. In the normal course of business, Prudential Financial contributes capital to the captives to support business growth and other needs. Prudential Financial has also entered into support agreements with several of the captives in connection with financing arrangements.
The Company isPrudential Financial's life insurance subsidiaries are subject to a regulation entitled “Valuation of Life Insurance Policies Model Regulation,” commonly known as “Regulation XXX,” and a supporting guideline entitled “The Application of the Valuation of Life Insurance Policies Model Regulation,” commonly known as “Guideline AXXX.” The regulation and supporting guideline require insurers to establish statutory reserves for term and universal life insurance policies with long-term premium guarantees at a level that exceeds what our actuarial assumptions for this business would otherwise require. Prudential Financial uses captive reinsurance companies to finance the portion of the reserves for this business that we consider to be non-economic as described below under “—Financing Activities—Term and Universal Life Reserve Financing.”
Liquidity
Our liquidity is managed to ensure stable, reliable and cost-effective sources of cash flows to meet all of our obligations. Liquidity is provided by a variety of sources, as described more fully below, including portfolios of liquid assets. Our investment portfolios are integral to the overall liquidity of the Company. We use a projection process for cash flows from operations to ensure sufficient liquidity to meet projected cash outflows, including claims. The impact of Prudential Funding, LLC’s ("Prudential Funding"), a wholly-owned subsidiary of Prudential Insurance, financing capacity on liquidity (as described below) is considered in the internal liquidity measures of the Company.
Liquidity is measured against internally-developed benchmarks that take into account the characteristics of both the asset portfolio and the liabilities that they support. We consider attributes of the various categories of liquid assets (e.g., type of asset and credit quality) in calculating internal liquidity measures to evaluate our liquidity under various stress scenarios, including company-specific and market-wide events. We continue to believe that cash generated by ongoing operations and the liquidity profile of our assets provide sufficient liquidity under reasonably foreseeable stress scenarios.
The principal sources of the Company’s liquidity are premiums and certain annuity considerations, investment and fee income, investment maturities, sales of investments and internal borrowings. The principal uses of that liquidity include benefits, claims, and payments to policyholders and contractholders in connection with surrenders, withdrawals and net policy loan activity.
Other uses of liquidity include commissions, general and administrative expenses, purchases of investments, the payment of dividends and returns of capital to the parent company, hedging and reinsurance activity and payments in connection with financing activities.
In managing liquidity, we consider the risk of policyholder and contractholder withdrawals of funds earlier than our assumptions when selecting assets to support these contractual obligations. We use surrender charges and other contract provisions to mitigate the extent, timing and profitability impact of withdrawals of funds by customers.
Liquid Assets
Liquid assets include cash and cash equivalents, short-term investments, U.S. Treasury fixed maturities, fixed maturities that are not designated as held-to-maturity, and public equity securities. As of December 31, 20212022 and 2020,2021, the Company had liquid assets of $14.5$21.7 billion and $7.6$14.5 billion, respectively. The portion of liquid assets comprised cash and cash equivalents and short-term investments was $1.1$2.5 billion and $0.5$1.1 billion as of December 31, 20212022 and 2020,2021, respectively. As of December 31, 2021, $11.92022, $17.2 billion, or 90%, of the fixed maturity investments in the Company's general account portfolios were rated high or highest quality based on NAIC or equivalent rating.
Financing Activities
Term and Universal Life Reserve Financing
For business written prior to the implementation of principle-based reserving, Regulation XXX and Guideline AXXX require domestic life insurers to establish statutory reserves for term and universal life insurance policies with long-term premium guarantees that are consistent with the statutory reserves required for other individual life policies with similar guarantees. Many market participants believe that these levels of reserves are excessive relative to the levels reasonably required to maintain solvency for moderately adverse experience. The difference between the statutory reserve and the amount necessary to maintain solvency for moderately adverse experience is considered to be the non-economic portion of the statutory reserve.
The Company uses affiliated captive reinsurance companies to finance the portion of the statutory reserves required to be held under Regulation XXX and Guideline AXXX that is considered to be non-economic. The financing arrangements involve the reinsurance of term and universal life business to our affiliated captive reinsurers and the issuance of surplus notes by those affiliated captives that are treated as capital for statutory purposes. These surplus notes are subordinated to policyholder obligations, and the payment of principal and interest on the surplus notes can only be made with prior insurance regulatory approval.
As of December 31, 2021,2022, the affiliated captive reinsurance companies have entered into agreements with external counterparties providing for the issuance of up to an aggregate of $14,600$16,050 million of surplus notes by our affiliated captive reinsurers in return for the receipt of credit-linked notes (“Credit-Linked Note Structures”), of which $12,721$14,070 million of surplus notes was outstanding, compared to an aggregate issuance capacity of $14,825$14,600 million, of which $12,919$12,721 million was outstanding as of December 31, 2020.2021. These amounts reflect an increased Credit Link Note Structure expanded in December 2022 for Guideline AXXX reserves, of which $2,100 million was outstanding as of December 31, 2022. Under the agreements, the affiliated captive receives in exchange for the surplus notes one or more credit-linked notes issued by a special-purpose affiliate of the Company with an aggregate principal amount equal to the surplus notes outstanding. The affiliated captive holds the credit-linked notes as assets supporting Regulation XXX or Guideline AXXX non-economic reserves, as applicable. The captive can redeem the principal amount of the outstanding credit-linked notes for cash upon the occurrence of, and in an amount necessary to remedy, a specified liquidity stress event affecting the captive. Under the agreements, the external counterparties have agreed to fund any such payments under the credit-linked notes in return for the receipt of fees. Under certain of the transactions, Prudential Financial has agreed to make capital contributions to the captive to reimburse it for investment losses in excess of specified amounts and/or has agreed to reimburse the external counterparties for any payments made under the credit-linked notes. To date, no such payments under the credit-linked notes have been required. Under these transactions, because valid rights of set-off exist, interest and principal payments on the surplus notes and on the credit-linked notes are settled on a net basis, and the surplus notes are reflected in the Company’s total consolidated borrowings on a net basis.
As of December 31, 2021,2022, our affiliated captive reinsurance companies had outstanding an aggregate of $2,975$3,025 million of debt issued for the purpose of financing Regulation XXX and Guideline AXXX non-economic reserves, of which approximately $1,125$925 million relates to Regulation XXX reserves and approximately $1,850$2,100 million relates to Guideline AXXX reserves. In addition, as of December 31, 2021,2022, for purposes of financing Guideline AXXX reserves, one of our affiliated captives had approximately $3,982 million of surplus notes outstanding that were issued to affiliates.
The Company has introduced updated versions of its individual life products in conjunction with the requirement to adopt principle-based reserving by January 1, 2020. These updated products are currently priced to support the principle-based statutory reserve level without the need for reserve financing.
Prudential Funding, LLC
Prudential Financial and Prudential Funding borrow funds in the capital markets primarily through the direct issuance of commercial paper. The borrowings serve as an additional source of financing to meet our working capital needs. Prudential Funding operates under a support agreement with Prudential Insurance whereby Prudential Insurance has agreed to maintain Prudential Funding’s positive tangible net worth at all times.
Hedging activities associated with living benefit guarantees
The hedging portion of our risk management strategy associated with our living benefit guarantees is being managed within the Company. For the portion of the risk management strategy executed through hedging, we enter into a range of exchange-traded, cleared and other OTC equity and interest rate derivatives in order to hedge certain living benefit guarantees accounted for as embedded derivatives against changes in certain capital market risks above a designated threshold. The portion of the risk management strategy comprising the hedging portion requires access to liquidity to meet the Company's payment obligations relating to these derivatives, such as payments for periodic settlements, purchases, maturities and terminations. These liquidity needs can vary materially due to, among other items, changes in interest rates, equity markets, mortality and policyholder behavior.
The hedging portion of the risk management strategy may also result in derivative-related collateral postings to (when we are in a net pay position) or from (when we are in a net receive position) counterparties. The net collateral position depends on changes in interest rates and equity markets related to the amount of the exposures hedged. Depending on market conditions, the collateral posting requirements can result in material liquidity needs when we are in a net pay position.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk is defined as the risk of loss from changes in interest rates, equity prices and foreign currency exchange rates resulting from asset/liability mismatches where the change in the value of our liabilities is not offset by the change in value of our assets.
Effective April 1, 2016, the Company reinsured variable annuity base contracts, along with the living benefit guarantees to PALAC, excluding the Pruco life Insurance Company of New Jersey business, which was reinsured to Prudential Insurance, in each case under a coinsurance and modified coinsurance agreement. These reinsurance agreements cover new and in-force business and exclude business reinsured externally. As of December 31, 2020, the Company discontinued the sales of traditional variable annuities with guaranteed living benefit riders which had no impact on these reinsurance agreements. Effective July 1, 2021, the Company recaptured the risks related to its variable annuity base contracts, along with the living benefit guarantees, that had previously been reinsured to PALAC from April 1, 2016 through June 30, 2021. The product risks related to the previously reinsured business that were being managed in PALAC, were transferred to the Company. In addition, the living benefit hedging program related to the previously reinsured living benefit riders are being managed within the Company. The transaction is referred to as the "2021 Variable Annuities Recapture". Effective April 1, 2022, Prudential Financial completed the sale of PALAC to Fortitude Group Holdings, LLC.SeeNote 1 to the Consolidated Financial Statements for additional information.
Effective December 1, 2021, the Company entered into a reinsurance agreement with PALACFLIAC (formerly PALAC) under which the Company assumed all of its indexed variable and fixed indexed annuities and fixed annuities with a guaranteed lifetime withdrawal income feature from PALAC.annuities. For additional information regarding this agreement, see Note 9 to the Consolidated Financial Statements.
For additional information regarding the potential impacts of interest rate and other market fluctuations, as well as general economic and market conditions on our businesses and profitability, see Item 1A. “Risk Factors” above. See “Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview—Current Market Conditions” above, for how rapidly rising interest rates, among other factors, adversely impact the Company's financial results. For additional information regarding our liquidity and capital resources, which may be impacted by changing market risks, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” above.
Market Risk Management
Management of market risk, which we consider to be a combination of both investment risk and market risk exposures, includes the identification and measurement of various forms of risk, the establishment of risk thresholds and the creation of processes intended to maintain risks within these thresholds while optimizing returns on the underlying assets or liabilities. As an indirect wholly-owned subsidiary of Prudential Financial, the Company benefits from the risk management strategies implemented by Prudential Financial.
Our risk management process utilizes a variety of tools and techniques, including:
•Measures of price sensitivity to market changes (e.g., interest rates, equity index prices, foreign exchange);
•Asset/liability management;
•Stress scenario testing;
•Hedging programs and affiliated reinsurance; and
•Risk management governance, including policies, limits and a committee that oversees investment and market risk.
Market Risk Mitigation
Risk mitigation takes three primary forms:
•Asset/Liability Management: Managing assets to liability-based measures. For example, investment policies identify target durations for assets based on liability characteristics and asset portfolios are managed to within ranges around them. This mitigates potential unanticipated economic losses from interest rate movements.
•Hedging: Using derivatives to offset risk exposures. For example, for our variable annuities, potential living benefit claims resulting from more severe market conditions are hedged using derivative instruments.
•Management of portfolio concentration risk: For example, ongoing monitoring and management of key rate, currency and other concentration risks support diversification efforts to mitigate exposure to individual markets and sources of risk.
Market Risk Related to Interest Rates
We perform liability-driven investing and engage in careful asset/liability management. Asset/liability mismatches create the risk that changes in liability values will differ from the changes in the value of the related assets. Additionally, changes in interest rates may impact other items including, but not limited to, the following:
•Net investment spread between the amounts that we are required to pay and the rate of return we are able to earn on investments for certain products supported by general account investments;
•Asset-based fees earned on assets under management or contractholder account values;
•Estimated total gross profits and the amortization of deferred policy acquisition and other costs;
•Net exposure to the guarantees provided under certain products; and
•Our capital levels.
In order to mitigate the impact that an unfavorable interest rate environment has on our net interest margins, we employ a proactive asset/liability management program, which includes strategic asset allocation and derivative strategies within a disciplined risk management framework. These strategies seek to match the characteristics of our products, and to approximate the interest rate sensitivity of the assets with the estimated interest rate sensitivity of the product liabilities. Our asset/liability management program also helps manage duration gaps, currency and other risks between assets and liabilities through the use of derivatives. We adjust this dynamic process as products change, as customer behavior changes and as changes in the market environment occur. As a result, our asset/liability management process has permitted us to manage interest rate risk successfully through several market cycles.
We use duration and convexity analyses to measure price sensitivity to interest rate changes. Duration measures the relative sensitivity of the fair value of a financial instrument to changes in interest rates. Convexity measures the rate of change in duration with respect to changes in interest rates. We use asset/liability management and derivative strategies to manage our interest rate exposure by matching the relative sensitivity of asset and liability values to interest rate changes, or by controlling the “duration mismatch” of assets and liability duration targets. In certain markets, capital market limitations that hinder our ability to acquire assets that approximate the duration of some of our liabilities are considered in setting duration targets. We consider risk-based capital and tax implications as well as current market conditions in our asset/liability management strategies.
The Company also mitigates interest rate risk through a market value adjusted (“MVA”) provision on certain of the Company’s annuity products' fixed investment options. This MVA provision limits interest rate risk by subjecting the contractholder to an MVA when funds are withdrawn or transferred to variable investment options before the end of the guarantee period. In the event of rising interest rates, which generally make the fixed maturity securities underlying the guarantee less valuable, the MVA could be negative. In the event of declining interest rates, which generally make the fixed maturity securities underlying the guarantee more valuable, the MVA could be positive. The resulting increase or decrease in the value of the fixed option, from calculation of the MVA, is designed to offset the decrease or increase in the market value of the securities underlying the guarantee.
We assess the impact of interest rate movements on the value of our financial assets, financial liabilities and derivatives using hypothetical test scenarios that assume either upward or downward 100 basis point parallel shifts in the yield curve from prevailing interest rates, reflecting changes in either credit spreads or the risk-free rate. The following table sets forth the net estimated potential loss in fair value on these financial instruments from a hypothetical 100 basis point upward shift at December 31, 20212022 and 2020.2021. This table is presented on a gross basis and excludes offsetting impacts to insurance liabilities that are not considered financial liabilities under U.S. GAAP. This scenario results in the greatest net exposure to interest rate risk of the hypothetical scenarios tested at those dates. While the test scenario is for illustrative purposes only and does not reflect our expectations regarding future interest rates or the performance of fixed-income markets, it is a near-term, reasonably possible hypothetical change that illustrates the potential impact of such events. These test scenarios do not measure the changes in value that could result from non-parallel shifts in the yield curve which we would expect to produce different changes in discount rates for different maturities. As a result, the actual loss in fair value from a 100 basis point change in interest rates could be different from that indicated by these calculations. The estimated changes in fair values do not include separate account assets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2021 | | As of December 31, 2020(1) |
| | Notional | | Fair Value | | Hypothetical
Change in
Fair Value | | Notional | | Fair Value | | Hypothetical
Change in
Fair Value |
| | | (in millions) |
| Financial assets with interest rate risk: | | | | | | | | | | | | |
| Fixed maturities(2) | | | | $ | 16,581 | | | $ | (1,780) | | | | | $ | 7,095 | | | $ | (691) | |
| Policy loans | | | | 1,327 | | | 0 | | | | | 1,324 | | | 0 | |
| Commercial mortgage and other loans | | | | 2,884 | | | (116) | | | | | 1,359 | | | (64) | |
| Derivatives: | | | | | | | | | | | | |
| Futures | | $ | 9,124 | | | (6) | | | (117) | | | $ | 58 | | | 0 | | | 0 | |
| Swaps | | 158,708 | | | (4,851) | | | (2,257) | | | 1,673 | | | 23 | | | (23) | |
| Options | | 19,462 | | | (633) | | | (317) | | | 3,245 | | | 109 | | | 1 | |
| Forwards | | 315 | | | 3 | | | (36) | | | 55 | | | (1) | | | 0 | |
| Variable annuity and other living benefit feature embedded derivatives(3) | | | | (9,048) | | | 4,457 | | | | | (13,024) | | | 5,997 | |
| Indexed universal life contracts | | | | (1,187) | | | 205 | | | | | (1,155) | | | 148 | |
| Indexed annuity contracts | | | | (2,110) | | | (344) | | | | | 0 | | | 0 | |
| Total embedded derivatives(4) | | | | (12,345) | | | 4,318 | | | | | (14,179) | | | 6,145 | |
| Financial liabilities with interest rate risk(5): | | | | | | | | | | | | |
| Policyholders' account balances-investment contracts | | | | (3,947) | | | 9 | | | | | (1,715) | | | 9 | |
| Net estimated potential gain (loss)(6) | | | | | | $ | (296) | | | | | | | $ | 5,377 | |
__________
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2022 | | As of December 31, 2021 |
| | Notional | | Fair Value | | Hypothetical
Change in
Fair Value | | Notional | | Fair Value | | Hypothetical
Change in
Fair Value |
| | | (in millions) |
| Financial assets with interest rate risk: | | | | | | | | | | | | |
| Fixed maturities(1) | | | | $ | 20,962 | | | $ | (1,077) | | | | | $ | 16,581 | | | $ | (1,780) | |
| Policy loans | | | | 505 | | | 0 | | | | | 1,327 | | | 0 | |
| Commercial mortgage and other loans | | | | 4,602 | | | (96) | | | | | 2,884 | | | (116) | |
| Derivatives: | | | | | | | | | | | | |
| Futures | | $ | 3,302 | | | 4 | | | 148 | | | $ | 9,124 | | | (6) | | | (117) | |
| Swaps | | 167,018 | | | (10,088) | | | (1,774) | | | 158,708 | | | (4,851) | | | (2,257) | |
| Options | | 25,188 | | | (873) | | | 245 | | | 19,462 | | | (633) | | | (317) | |
| Forwards | | 1,469 | | | (11) | | | 0 | | | 315 | | | 3 | | | (36) | |
| Variable annuity and other living benefit feature embedded derivatives | | | | (4,541) | | | 2,294 | | | | | (9,048) | | | 4,457 | |
| Indexed universal life contracts | | | | (880) | | | 143 | | | | | (1,187) | | | 205 | |
| Indexed annuity contracts | | | | (2,622) | | | (457) | | | | | (2,110) | | | (344) | |
| Total embedded derivatives(2) | | | | (8,043) | | | 1,980 | | | | | (12,345) | | | 4,318 | |
| Financial liabilities with interest rate risk(3): | | | | | | | | | | | | |
| Policyholders' account balances-investment contracts | | | | (4,333) | | | 5 | | | | | (3,947) | | | 9 | |
| Net estimated potential gain (loss) | | | | | | $ | (569) | | | | | | | $ | (296) | |
(1)Prior period amounts have been updated to conform to current period presentation.
(2)Includes assets classified as "Fixed maturities, available-for-sale, at fair value" and "Fixed maturities, trading, at fair value."
(3)(2)For the period ending December 31, 2020, the embedded derivatives associated with variable annuity contracts were generally reinsured to an affiliate as part of our risk management strategy prior to the "2021 Variable Annuities Recapture", as described above.
(4)ExExcludescludes any offsetting impact of derivative instruments purchased to hedge changes in the embedded derivatives. Amounts reported gross of reinsurance.
(5)(3)Excludes $59$61 billion and $55$59 billion as of December 31, 20212022 and 2020,2021, respectively, of insurance reserve and deposit liabilities whichthat are not considered financial liabilities. We believe that the interest rate sensitivities of these insurance liabilities would serve as an offset to the net interest rate risk of the financial assets and financial liabilities, including investment contracts.
(6)The period ending December 31, 2020, excludes reinsurance recoverable which offsets a portion of the gains and losses of embedded derivatives related primarily to certain features associated with variable annuity contracts and "Policyholders' account balances-investment contracts" that were generally reinsured to an affiliate as part of our risk management strategy prior to the "2021 Variable Annuities Recapture", as described above.
Market Risk Related to Equity Prices
We have exposure to equity price risk through our investments in equity securities, equity-based derivatives and embedded derivatives associated with certain of the optional living benefit features of variable annuity and indexed-linkedindex-linked crediting features of universal life and annuity contracts. Changes in equity prices may impact other items including, but not limited to, the following:
•Asset-based fees earned on assets under management or contractholder account value;
•Estimated total gross profits and the amortization of deferred policy acquisition and other costs; and
•Net exposure to the guarantees provided under certain products.
We manage equity price risk against benchmarks in respective markets. We benchmark our return on equity holdings against a blend of market indices, mainly the S&P 500 and Russell 2000 for U.S. equities. We benchmark foreign equities against the Tokyo Price Index, and the MSCI EAFE, a market index of European, Australian, and Far Eastern equities. We target price sensitivities that approximate those of the benchmark indices. For equity investments within the separate accounts, the investment risk is borne by the separate account contractholder rather than by the Company.
We estimate our equity risk from a hypothetical 10% decline in equity benchmark levels. The following table sets forth the net estimated potential loss in fair value from such a decline as of December 31, 20212022 and 2020.2021. While these scenarios are for illustrative purposes only and do not reflect our expectations regarding future performance of equity markets or of our equity portfolio, they do represent near-term, reasonably possible hypothetical changes that illustrate the potential impact of such events. These scenarios consider only the direct impact on fair value of declines in equity benchmark market levels and not changes in asset-based fees recognized as revenue, changes in our estimates of total gross profits used as a basis for amortizing deferred policy acquisition and other costs, or changes in any other assumptions such as market volatility or mortality, utilization or persistency rates in our variable annuity contracts that could also impact the fair value of our living benefit features. In addition, these scenarios do not reflect the impact of basis risk, such as potential differences in the performance of the investment funds underlying the variable annuity products relative to the market indices we use as a basis for developing our hedging strategy. The impact of basis risk could result in larger differences between the change in fair value of the equity-based derivatives and the related living benefit features in comparison to these scenarios. In calculating these amounts, we exclude separate account equity securities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2021 | | As of December 31, 2020(1) |
| | Notional | | Fair
Value | | Hypothetical
Change in
Fair Value | | Notional | | Fair
Value | | Hypothetical
Change in
Fair Value |
| | | (in millions) |
| Equity securities | | | | $ | 111 | | | $ | (11) | | | | | $ | 108 | | | $ | (11) | |
| Equity-based derivatives(2) | | $ | 39,607 | | | (1,048) | | | 1,062 | | | $ | 3,245 | | | 109 | | | (38) | |
| Variable annuity and other living benefit feature embedded derivatives(3) | | | | (9,048) | | | (1,128) | | | | | 0 | | | 0 | |
| Indexed universal life contracts | | | | (1,187) | | | 54 | | | | | (1,155) | | | 52 | |
| Indexed annuity contracts | | | | (2,110) | | | 680 | | | | | 0 | | | 0 | |
| Total embedded derivatives(2)(4) | | | | (12,345) | | | (394) | | | | | (1,155) | | | 52 | |
| Net estimated potential loss | | | | | | $ | 657 | | | | | | | $ | 3 | |
__________ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 | | December 31, 2021 |
| | Notional | | Fair
Value | | Hypothetical
Change in
Fair Value | | Notional | | Fair
Value | | Hypothetical
Change in
Fair Value |
| | | (in millions) |
| Equity securities | | | | $ | 143 | | | $ | (14) | | | | | $ | 111 | | | $ | (11) | |
| Equity-based derivatives(1) | | $ | 42,022 | | | (928) | | | (170) | | | $ | 39,607 | | | (1,048) | | | 1,062 | |
| Variable annuity and other living benefit feature embedded derivatives | | | | (4,541) | | | (781) | | | | | (9,048) | | | (1,128) | |
| Indexed universal life contracts | | | | (880) | | | 24 | | | | | (1,187) | | | 54 | |
| Indexed annuity contracts | | | | (2,622) | | | 841 | | | | | (2,110) | | | 680 | |
| Total embedded derivatives(1)(2) | | | | (8,043) | | | 84 | | | | | (12,345) | | | (394) | |
| Net estimated potential gain (loss) | | | | | | $ | (100) | | | | | | | $ | 657 | |
(1)Prior period amounts have been updated to conform to current period presentation.
(2)Both the notional amount and fair value of equity-based derivatives and the fair value of embedded derivatives are also reflected in amounts under “Market Risk Related to Interest Rates” above and are not cumulative.
(3)For the period ending December 31, 2020, the embedded derivatives associated with variable annuity contracts were not included as they were generally reinsured to an affiliate as part of our risk management strategy prior to the "2021 Variable Annuities Recapture", as described above.
(4)(2)Excludes any offsetting impact of derivative instruments purchased to hedge changes in the embedded derivatives. Amounts reported gross of reinsurance.
Market Risk Related to Foreign Currency Exchange Rates
The Company is exposed to foreign currency exchange rate risk in its domestic general account investment portfolios and previously through its operations in Taiwan.
For our domestic general account investment portfolios our foreign currency exchange rate risk arises primarily from investments that are denominated in foreign currencies. We manage this risk by hedging substantially all domestic foreign currency-denominated fixed-income investments into U.S. dollars. We generally do not hedge all of the foreign currency risk of our investments in equity securities of unaffiliated foreign entities.
The Company previously had foreign currency obligations related to its historic operations in Taiwan. Such currency obligations were offset by foreign currency assets from reinsurance agreements the Company entered into when the Company’s Taiwanese operation was transferred to an affiliated company, Prudential of Taiwan, in 2001. On June 30, 2021, Prudential of Taiwan was sold to an unaffiliated party which resulted in the removal of the Company's insurance related liabilities and offsetting reinsurance recoverables. SeeFor additional information regarding these reinsurance arrangements, see Note 9 to the Consolidated Financial Statements for more information related to these affiliated reinsurance arrangements.
Derivatives
We use derivative financial instruments primarily to reduce market risk from changes in interest rates, equity prices and foreign currency exchange rates, including their use to alter interest rate or foreign currency exposures arising from mismatches between assets and liabilities. Our derivatives primarily include swaps, futures, options and forward contracts that are exchange-traded or contracted in the OTC market. SeeFor additional information regarding our derivative activities, see Note 4 to the Consolidated Financial Statements for more information.Statements.
Market Risk Related to Certain Variable Annuity Products
The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital market assumptions, such as equity market returns, interest rates and market volatility, and actuarial assumptions. Certain variable annuity optional living benefit features are accounted for as embedded derivatives and recorded at fair value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PRUCO LIFE INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS INDEX
Management’s Annual Report on Internal Control Over Financial Reporting
Management of Pruco Life Insurance Company (together with its consolidated subsidiary, the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Management conducted an assessment of the effectiveness, as of December 31, 2021,2022, of the Company’s internal control over financial reporting, based on the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our assessment under that framework, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2021.2022.
Our internal control over financial reporting is a process designed by or under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm, PricewaterhouseCoopers LLP, regarding the internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
March 16, 202220, 2023
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder of Pruco Life Insurance Company
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Pruco Life Insurance Company and its subsidiary (the "Company") as of December 31, 20212022 and 2020,2021, and the related consolidated statements of operations and comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2021,2022, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20212022 and 2020,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20212022 in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for credit losses on certain financial assets reported at amortized cost in 2020.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Guaranteed Benefit Features Associated with Certain Life and Annuity Products Included in the Liability for Future Policy Benefits
As described in Notes 2, 5, 7 and 8 to the consolidated financial statements, the Company issues certain life and annuity contracts which contain guaranteed benefit features. Certain of the guarantees associated with variable annuity contracts are accounted for as embedded derivatives and recorded at fair value, with changes in fair value recognized currently in earnings. As of December 31, 2021,2022, the fair value of the obligations associated with these guarantees accounted for as embedded derivatives was $9.0$4.5 billion. As there is no observable active market for the transfer of these obligations, the valuations are calculated by management 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 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 non-performance risk under the contract, as well as actuarially determined assumptions, including mortality rates, lapse rates, benefit utilization rates and withdrawal rates. For certain life insurance and annuity products that include certain other contract features, including guaranteed minimum death benefits (“GMDB”) and no-lapse guarantees, additional policyholder liabilities are established when associated assessments are recognized. The liability for no-lapse guarantee features
is grouped with GMDB features in Note 8. As of December 31, 2021,2022, the additional liability for these contract features included inwas $10.0 billion recorded within the liability for future policy benefits was $10.4 billion.benefits. As disclosed by management, this liability is established using current best estimate assumptions, including mortality rates, lapse rates, benefit utilization rates, withdrawal rates, and premium pattern rates, as well as interest rate and equity market return assumptions, and is based on the ratio of the present value of total expected excess payments (i.e., 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.
The principal considerations for our determination that performing procedures relating to the valuation of guaranteed benefit features associated with certain life and annuity products included in the liability for future policy benefits is a critical audit matter are (i) the significant judgment by management to determine the valuation model for the benefit features accounted for as embedded derivatives in light of the valuation objective (fair value) given the lack of an observable market for these guarantees and to determine the aforementioned assumptions for the guaranteed benefit features accounted for as embedded derivatives and additional policyholder liabilities, (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the model for embedded derivatives recorded at fair value and the aforementioned assumptions used in the valuation of the liabilities for the guaranteed benefit features accounted for as embedded derivatives and additional policyholder liabilities, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of guaranteed benefit features associated with certain life and annuity products included in the liability for future policy benefits, including controls over the model for the benefit features accounted for as embedded derivatives and development of the assumptions used in the valuation of the liabilities for the guaranteed benefit features accounted for as embedded derivatives and additional policyholder liabilities. These procedures also included, among others, testing management’s process for determining the valuation of guaranteed benefit features associated with certain life and annuity products included in the liability for future policy benefits, which included the involvement of professionals with specialized skill and knowledge to assist in evaluating (i) the appropriateness of management’s models and (ii) the reasonableness of the aforementioned assumptions used in the valuation based on industry knowledge and data as well as historical Company data and experience. The procedures also included testing the completeness and accuracy of data used to develop the aforementioned assumptions and testing that the aforementioned assumptions are accurately reflected in the models.
Valuation of the Deferred Acquisition Costs Related to Universal Life and Variable Life Products and Fixed and Variable Deferred Annuity Products
As described in Notes 2 and 6 to the consolidated financial statements, the Company defers acquisition costs that relate directly to the successful acquisition of new and renewal insurance and annuity business to the extent such costs are deemed recoverable from future profits. As of December 31, 2021,2022, a significant portion of the $6.8$6.6 billion of deferred policy acquisition costs ("DAC") are associated with certain universal life and variable life products and fixed and variable deferred annuity products. DAC related to universal life and variable life products and fixed and variable deferred annuity products is generally 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. These margins are updated periodically based on historical and anticipated future experience. Gross profits also include impacts from the embedded derivatives associated with certain of the optional living benefit features of variable annuity contracts. The DAC balance is regularly adjusted with a corresponding charge or credit to current period earnings for the impact of actual gross profits and changes in management’s projections of estimated future gross profits. DAC is subject to periodic recoverability testing.
The principal considerations for our determination that performing procedures relating to the valuation of DAC related to universal life and variable life products and fixed and variable deferred annuity products is a critical audit matter are (i) the significant judgment by management to determine the assumptions used in the projection of gross profits used to amortize DAC related to mortality rates, lapse rates, benefit utilization rates, withdrawal rates, and premium pattern rates, as well as interest rate and equity market return assumptions (collectively, the “significant assumptions”), (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the significant assumptions, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of DAC related to universal life and variable life products and fixed and variable deferred annuity products, including controls over the development of the significant assumptions. These procedures also included, among others, testing management’s process for determining the valuation of DAC related to universal life and variable life products and fixed and variable deferred annuity products, which included the involvement of professionals with specialized skill and knowledge to assist in evaluating (i) the appropriateness of management’s models and (ii) the reasonableness of the significant assumptions used in the valuation based on industry knowledge and data as well as historical Company data and experience. The procedures also included testing the completeness and accuracy of data used to develop the assumptions and testing that the assumptions are accurately reflected in the models.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 16, 202220, 2023
We have served as the Company's auditor since 1996.
PRUCO LIFE INSURANCE COMPANY
Consolidated Statements of Financial Position
December 31, 20212022 and 20202021 (in thousands, except share amounts)
| | | December 31, 2021 | | December 31, 2020 | | December 31, 2022 | | December 31, 2021 |
| ASSETS | ASSETS | | | | | ASSETS | | | | |
| Fixed maturities, available-for-sale, at fair value (allowance for credit losses: 2021 – $4,149; 2020 – $2,339) (amortized cost: 2021 – $12,737,749; 2020 – $6,157,371) | | $ | 13,278,166 | | | $ | 7,012,631 | | |
| Fixed maturities, trading, at fair value (amortized cost: 2021 – $3,319,660; 2020 – $73,413) | | 3,302,392 | | | 82,482 | | |
| Equity securities, at fair value (cost: 2021 – $106,174; 2020 – $105,508) | | 111,267 | | | 108,457 | | |
| Fixed maturities, available-for-sale, at fair value (allowance for credit losses: 2022 – $4,769; 2021 – $4,149) (amortized cost: 2022 – $21,311,087; 2021 – $12,737,749) | | Fixed maturities, available-for-sale, at fair value (allowance for credit losses: 2022 – $4,769; 2021 – $4,149) (amortized cost: 2022 – $21,311,087; 2021 – $12,737,749) | | $ | 19,025,401 | | | $ | 13,278,166 | |
| Fixed maturities, trading, at fair value (amortized cost: 2022 – $2,682,022; 2021 – $3,319,660) | | Fixed maturities, trading, at fair value (amortized cost: 2022 – $2,682,022; 2021 – $3,319,660) | | 1,936,159 | | | 3,302,392 | |
| Equity securities, at fair value (cost: 2022 – $148,179; 2021 – $106,174) | | Equity securities, at fair value (cost: 2022 – $148,179; 2021 – $106,174) | | 143,072 | | | 111,267 | |
| | Policy loans | Policy loans | | 1,327,485 | | | 1,323,681 | | Policy loans | | 505,367 | | | 1,327,485 | |
| Short-term investments | Short-term investments | | 182,437 | | | 49,997 | | Short-term investments | | 124,491 | | | 182,437 | |
| Commercial mortgage and other loans (net of $5,951 and $4,552 allowance for credit losses at December 31, 2021 and December 31, 2020, respectively) | | 2,832,560 | | | 1,288,846 | | |
| Other invested assets (includes $348,004 and $94,939 measured at fair value at December 31, 2021 and 2020, respectively) | | 1,209,925 | | | 520,955 | | |
| Commercial mortgage and other loans (net of $20,263 and $5,951 allowance for credit losses at December 31, 2022 and December 31, 2021, respectively) | | Commercial mortgage and other loans (net of $20,263 and $5,951 allowance for credit losses at December 31, 2022 and December 31, 2021, respectively) | | 4,928,680 | | | 2,832,560 | |
| Other invested assets (includes $116,110 and $348,004 of assets measured at fair value at December 31, 2022 and 2021, respectively) | | Other invested assets (includes $116,110 and $348,004 of assets measured at fair value at December 31, 2022 and 2021, respectively) | | 1,088,613 | | | 1,209,925 | |
| Total investments | Total investments | | 22,244,232 | | | 10,387,049 | | Total investments | | 27,751,783 | | | 22,244,232 | |
| Cash and cash equivalents | Cash and cash equivalents | | 918,931 | | | 426,979 | | Cash and cash equivalents | | 2,397,627 | | | 918,931 | |
| Deferred policy acquisition costs | Deferred policy acquisition costs | | 6,830,972 | | | 2,433,936 | | Deferred policy acquisition costs | | 6,616,097 | | | 6,830,972 | |
| Accrued investment income | Accrued investment income | | 160,027 | | | 93,613 | | Accrued investment income | | 219,635 | | | 160,027 | |
| Reinsurance recoverables | Reinsurance recoverables | | 38,598,767 | | | 48,367,096 | | Reinsurance recoverables | | 34,561,825 | | | 38,598,767 | |
| Receivables from parent and affiliates | Receivables from parent and affiliates | | 278,131 | | | 266,473 | | Receivables from parent and affiliates | | 224,921 | | | 278,131 | |
| Deferred sales inducements | Deferred sales inducements | | 374,649 | | | 0 | | Deferred sales inducements | | 275,574 | | | 374,649 | |
| Income taxes receivable | | 1,316,879 | | | 175,024 | | |
| Income tax assets | | Income tax assets | | 1,873,740 | | | 1,316,879 | |
| Other assets | Other assets | | 1,140,948 | | | 417,508 | | Other assets | | 1,327,393 | | | 1,140,948 | |
| Separate account assets | Separate account assets | | 149,797,828 | | | 145,740,422 | | Separate account assets | | 114,051,246 | | | 149,797,828 | |
| TOTAL ASSETS | TOTAL ASSETS | | $ | 221,661,364 | | | $ | 208,308,100 | | TOTAL ASSETS | | $ | 189,299,841 | | | $ | 221,661,364 | |
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | | LIABILITIES AND EQUITY | | | | |
| LIABILITIES | LIABILITIES | | LIABILITIES | |
| Policyholders’ account balances | | Policyholders’ account balances | | $ | 41,748,241 | | | $ | 35,361,795 | |
| Future policy benefits | Future policy benefits | | $ | 27,927,029 | | | $ | 32,889,181 | | Future policy benefits | | 23,204,533 | | | 27,927,029 | |
| Policyholders’ account balances | | 35,361,795 | | | 23,857,574 | | |
| | Cash collateral for loaned securities | Cash collateral for loaned securities | | 3,004 | | | 2,725 | | Cash collateral for loaned securities | | 86,750 | | | 3,004 | |
| | Short-term debt to affiliates | | Short-term debt to affiliates | | 126,250 | | | 0 | |
| Long-term debt to affiliates | Long-term debt to affiliates | | 320,362 | | | 0 | | Long-term debt to affiliates | | 185,563 | | | 320,362 | |
| Payables to parent and affiliates | Payables to parent and affiliates | | 31,775 | | | 75,990 | | Payables to parent and affiliates | | 2,126,571 | | | 31,775 | |
| Other liabilities | Other liabilities | | 2,264,477 | | | 1,694,492 | | Other liabilities | | 3,407,156 | | | 2,264,477 | |
| Separate account liabilities | Separate account liabilities | | 149,797,828 | | | 145,740,422 | | Separate account liabilities | | 114,051,246 | | | 149,797,828 | |
| Total liabilities | Total liabilities | | 215,706,270 | | | 204,260,384 | | Total liabilities | | 184,936,310 | | | 215,706,270 | |
| COMMITMENTS AND CONTINGENT LIABILITIES (See Note 14) | COMMITMENTS AND CONTINGENT LIABILITIES (See Note 14) | | 0 | | 0 | COMMITMENTS AND CONTINGENT LIABILITIES (See Note 14) | | | | |
| EQUITY | EQUITY | | EQUITY | |
| Common stock ($10 par value; 1,000,000 shares authorized; 250,000 shares issued and outstanding) | Common stock ($10 par value; 1,000,000 shares authorized; 250,000 shares issued and outstanding) | | 2,500 | | | 2,500 | | Common stock ($10 par value; 1,000,000 shares authorized; 250,000 shares issued and outstanding) | | 2,500 | | | 2,500 | |
| Additional paid-in capital | Additional paid-in capital | | 6,042,491 | | | 1,726,690 | | Additional paid-in capital | | 6,037,914 | | | 6,042,491 | |
| Retained earnings | | (437,332) | | | 1,772,398 | | |
| Retained earnings / (accumulated deficit) | | Retained earnings / (accumulated deficit) | | (95,583) | | | (437,332) | |
| Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | | 347,435 | | | 546,128 | | Accumulated other comprehensive income (loss) | | (1,581,300) | | | 347,435 | |
| Total equity | Total equity | | 5,955,094 | | | 4,047,716 | | Total equity | | 4,363,531 | | | 5,955,094 | |
| TOTAL LIABILITIES AND EQUITY | TOTAL LIABILITIES AND EQUITY | | $ | 221,661,364 | | | $ | 208,308,100 | | TOTAL LIABILITIES AND EQUITY | | $ | 189,299,841 | | | $ | 221,661,364 | |
See Notes to Consolidated Financial Statements
PRUCO LIFE INSURANCE COMPANY
Consolidated Statements of Operations and Comprehensive Income
Years Ended December 31, 2022, 2021, 2020, and 20192020 (in thousands)
| | | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| REVENUES | REVENUES | | | | | | | REVENUES | | | | | | |
| Premiums | Premiums | | $ | 203,676 | | | $ | 92,176 | | | $ | 28,544 | | Premiums | | $ | 274,783 | | | $ | 203,676 | | | $ | 92,176 | |
| Policy charges and fee income | Policy charges and fee income | | 1,529,757 | | | 624,320 | | | 544,156 | | Policy charges and fee income | | 1,731,957 | | | 1,529,757 | | | 624,320 | |
| Net investment income | Net investment income | | 550,235 | | | 367,350 | | | 393,797 | | Net investment income | | 884,001 | | | 550,235 | | | 367,350 | |
| Asset administration fees | Asset administration fees | | 202,177 | | | 19,138 | | | 16,056 | | Asset administration fees | | 284,182 | | | 202,177 | | | 19,138 | |
| Other income | | 267,208 | | | 83,256 | | | 83,560 | | |
| Other income (loss) | | Other income (loss) | | (661,860) | | | 267,208 | | | 83,256 | |
| Realized investment gains (losses), net | Realized investment gains (losses), net | | (5,295,406) | | | (62,976) | | | (116,749) | | Realized investment gains (losses), net | | 1,041,435 | | | (5,295,406) | | | (62,976) | |
| TOTAL REVENUES | TOTAL REVENUES | | (2,542,353) | | | 1,123,264 | | | 949,364 | | TOTAL REVENUES | | 3,554,498 | | | (2,542,353) | | | 1,123,264 | |
| BENEFITS AND EXPENSES | BENEFITS AND EXPENSES | | | | | | | BENEFITS AND EXPENSES | | | | | | |
| Policyholders’ benefits | Policyholders’ benefits | | 655,910 | | | 298,149 | | | 153,074 | | Policyholders’ benefits | | 609,392 | | | 655,910 | | | 298,149 | |
| Interest credited to policyholders’ account balances | Interest credited to policyholders’ account balances | | (114,585) | | | 233,375 | | | 187,229 | | Interest credited to policyholders’ account balances | | 517,488 | | | (114,585) | | | 233,375 | |
| Amortization of deferred policy acquisition costs | Amortization of deferred policy acquisition costs | | 342,118 | | | 140,562 | | | 113,318 | | Amortization of deferred policy acquisition costs | | 857,385 | | | 342,118 | | | 140,562 | |
| General, administrative and other expenses | General, administrative and other expenses | | (523,925) | | | 383,043 | | | 336,959 | | General, administrative and other expenses | | 1,154,229 | | | (523,925) | | | 383,043 | |
| TOTAL BENEFITS AND EXPENSES | TOTAL BENEFITS AND EXPENSES | | 359,518 | | | 1,055,129 | | | 790,580 | | TOTAL BENEFITS AND EXPENSES | | 3,138,494 | | | 359,518 | | | 1,055,129 | |
| INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURE | INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURE | | (2,901,871) | | | 68,135 | | | 158,784 | | INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURE | | 416,004 | | | (2,901,871) | | | 68,135 | |
| Income tax expense (benefit) | Income tax expense (benefit) | | (691,439) | | | (130,248) | | | (59,132) | | Income tax expense (benefit) | | (882) | | | (691,439) | | | (130,248) | |
| INCOME (LOSS) FROM OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURE | INCOME (LOSS) FROM OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURE | | (2,210,432) | | | 198,383 | | | 217,916 | | INCOME (LOSS) FROM OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURE | | 416,886 | | | (2,210,432) | | | 198,383 | |
| Equity in earnings of operating joint venture, net of taxes | Equity in earnings of operating joint venture, net of taxes | | 702 | | | (1,686) | | | (917) | | Equity in earnings of operating joint venture, net of taxes | | (75,137) | | | 702 | | | (1,686) | |
| NET INCOME (LOSS) | NET INCOME (LOSS) | | $ | (2,209,730) | | | $ | 196,697 | | | $ | 216,999 | | NET INCOME (LOSS) | | $ | 341,749 | | | $ | (2,209,730) | | | $ | 196,697 | |
| Other comprehensive income (loss), before tax: | Other comprehensive income (loss), before tax: | | | Other comprehensive income (loss), before tax: | | | | | | |
| Foreign currency translation adjustments | Foreign currency translation adjustments | | (3,891) | | | 599 | | | 9,572 | | Foreign currency translation adjustments | | (9,337) | | | (3,891) | | | 599 | |
| Net unrealized investment gains (losses) | Net unrealized investment gains (losses) | | (247,176) | | | 334,893 | | | 381,447 | | Net unrealized investment gains (losses) | | (2,430,238) | | | (247,176) | | | 334,893 | |
| Total | Total | | (251,067) | | | 335,492 | | | 391,019 | | Total | | (2,439,575) | | | (251,067) | | | 335,492 | |
| Less: Income tax expense (benefit) related to other comprehensive income (loss) | Less: Income tax expense (benefit) related to other comprehensive income (loss) | | (52,374) | | | 70,806 | | | 81,281 | | Less: Income tax expense (benefit) related to other comprehensive income (loss) | | (510,840) | | | (52,374) | | | 70,806 | |
| Other comprehensive income (loss), net of taxes | Other comprehensive income (loss), net of taxes | | (198,693) | | | 264,686 | | | 309,738 | | Other comprehensive income (loss), net of taxes | | (1,928,735) | | | (198,693) | | | 264,686 | |
| Comprehensive income (loss) | Comprehensive income (loss) | | $ | (2,408,423) | | | $ | 461,383 | | | $ | 526,737 | | Comprehensive income (loss) | | $ | (1,586,986) | | | $ | (2,408,423) | | | $ | 461,383 | |
See Notes to Consolidated Financial Statements
PRUCO LIFE INSURANCE COMPANY
Consolidated Statements of Equity
Years Ended December 31, 2022, 2021 2020 and 20192020 (in thousands)
| | | Common Stock | | Additional Paid-in
Capital | | Retained Earnings | | Accumulated
Other
Comprehensive Income | | Total Equity | | Common Stock | | Additional Paid-in
Capital | | Retained Earnings | | Accumulated
Other
Comprehensive Income (Loss) | | Total Equity |
| Balance, December 31, 2018 | | $ | 2,500 | | | $ | 1,146,592 | | | $ | 1,612,435 | | | $ | (28,296) | | | $ | 2,733,231 | | |
| Balance, December 31, 2019 | | Balance, December 31, 2019 | | $ | 2,500 | | | $ | 1,153,632 | | | $ | 1,577,453 | | | $ | 281,442 | | | $ | 3,015,027 | |
| Cumulative effect of adoption of accounting changes(1) | Cumulative effect of adoption of accounting changes(1) | | (1,981) | | | (1,981) | | Cumulative effect of adoption of accounting changes(1) | | (1,752) | | | (1,752) | |
| Contributed capital | Contributed capital | | 5,900 | | | 5,900 | | Contributed capital | | 575,000 | | | 575,000 | |
| Dividend to parent | | (250,000) | | | (250,000) | | |
| | Contributed (distributed) capital-parent/child asset transfers | Contributed (distributed) capital-parent/child asset transfers | | 1,140 | | | 1,140 | | Contributed (distributed) capital-parent/child asset transfers | | (1,942) | | | (1,942) | |
| Comprehensive income: | | |
| Net income (loss) | | 216,999 | | | 216,999 | | |
| Other comprehensive income (loss), net of tax | | 309,738 | | | 309,738 | | |
| Total comprehensive income (loss) | | 526,737 | | |
| Balance, December 31, 2019 | | 2,500 | | | 1,153,632 | | | 1,577,453 | | | 281,442 | | | 3,015,027 | | |
| Cumulative effect of adoption of accounting changes(2) | | (1,752) | | | (1,752) | | |
| Contributed capital | | 575,000 | | | 575,000 | | |
| Dividend to parent | | 0 | | | 0 | | |
| Contributed (distributed) capital-parent/child asset transfers | | (1,942) | | | (1,942) | | |
| Comprehensive income: | | |
| Comprehensive income (loss): | | Comprehensive income (loss): | |
| Net income (loss) | Net income (loss) | | 196,697 | | | 196,697 | | Net income (loss) | | 196,697 | | | 196,697 | |
| Other comprehensive income (loss), net of tax | Other comprehensive income (loss), net of tax | | 264,686 | | | 264,686 | | Other comprehensive income (loss), net of tax | | 264,686 | | | 264,686 | |
| Total comprehensive income (loss) | Total comprehensive income (loss) | | 461,383 | | Total comprehensive income (loss) | | 461,383 | |
| Balance, December 31, 2020 | Balance, December 31, 2020 | | 2,500 | | | 1,726,690 | | | 1,772,398 | | | 546,128 | | | 4,047,716 | | Balance, December 31, 2020 | | 2,500 | | | 1,726,690 | | | 1,772,398 | | | 546,128 | | | 4,047,716 | |
| | Contributed capital | Contributed capital | | 4,342,215 | | | 4,342,215 | | Contributed capital | | 4,342,215 | | | 4,342,215 | |
| Dividend to parent | | 0 | | | 0 | | |
| | Contributed (distributed) capital-parent/child asset transfers | Contributed (distributed) capital-parent/child asset transfers | | (26,414) | | | (26,414) | | Contributed (distributed) capital-parent/child asset transfers | | (26,414) | | | (26,414) | |
| Comprehensive income: | | |
| Comprehensive income (loss): | | Comprehensive income (loss): | |
| Net income (loss) | Net income (loss) | | (2,209,730) | | | (2,209,730) | | Net income (loss) | | (2,209,730) | | | (2,209,730) | |
| Other comprehensive income (loss), net of tax | Other comprehensive income (loss), net of tax | | (198,693) | | | (198,693) | | Other comprehensive income (loss), net of tax | | (198,693) | | | (198,693) | |
| Total comprehensive income (loss) | Total comprehensive income (loss) | | (2,408,423) | | Total comprehensive income (loss) | | (2,408,423) | |
| Balance, December 31, 2021 | Balance, December 31, 2021 | | $ | 2,500 | | | $ | 6,042,491 | | | $ | (437,332) | | | $ | 347,435 | | | $ | 5,955,094 | | Balance, December 31, 2021 | | 2,500 | | | 6,042,491 | | | (437,332) | | | 347,435 | | | 5,955,094 | |
| | Contributed capital | | Contributed capital | | 17,861 | | | 17,861 | |
| | Contributed (distributed) capital-parent/child asset transfers | | Contributed (distributed) capital-parent/child asset transfers | | (22,438) | | | (22,438) | |
| Comprehensive income (loss): | | Comprehensive income (loss): | |
| Net income (loss) | | Net income (loss) | | 341,749 | | | 341,749 | |
| Other comprehensive income (loss), net of tax | | Other comprehensive income (loss), net of tax | | (1,928,735) | | | (1,928,735) | |
| Total comprehensive income (loss) | | Total comprehensive income (loss) | | (1,586,986) | |
| Balance, December 31, 2022 | | Balance, December 31, 2022 | | $ | 2,500 | | | $ | 6,037,914 | | | $ | (95,583) | | | $ | (1,581,300) | | | $ | 4,363,531 | |
(1) Includes the impact from the adoption of ASU 2017-08 and 2017-12.
(2) Includes the impact from the adoption of ASUAccounting Standards Update ("ASU") 2016-13. See Note 2.
See Notes to Consolidated Financial Statements
PRUCO LIFE INSURANCE COMPANY
Consolidated Statements of Cash Flows
Years Ended December 31, 2022, 2021 2020 and 20192020 (in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net income (loss) | | $ | (2,209,730) | | | $ | 196,697 | | | $ | 216,999 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
| Policy charges and fee income | | (21,763) | | | (81,850) | | | (53,158) | |
| Interest credited to policyholders’ account balances | | (114,585) | | | 233,375 | | | 187,229 | |
| Realized investment (gains) losses, net | | 5,295,406 | | | 62,976 | | | 116,749 | |
| Amortization and other non-cash items | | 1,488,904 | | | (102,443) | | | (81,847) | |
| Change in: | | | | | | |
| Future policy benefits | | 2,080,967 | | | 2,658,195 | | | 2,538,263 | |
| Reinsurance recoverables | | (1,304,306) | | | (2,440,532) | | | (2,739,573) | |
| Accrued investment income | | (66,414) | | | (4,165) | | | (1,170) | |
| Net payables to/receivables from parent and affiliates | | (16,904) | | | (145,743) | | | (7,175) | |
| Deferred policy acquisition costs | | (3,926,121) | | | (617,907) | | | (338,455) | |
| Income taxes | | (1,082,459) | | | (142,196) | | | (138,706) | |
| Derivatives, net | | (1,193,004) | | | 10,969 | | | 143,004 | |
| Other, net | | 186,068 | | | (6,498) | | | (22,573) | |
| Cash flows from (used in) operating activities | | (883,941) | | | (379,122) | | | (180,413) | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
| Proceeds from the sale/maturity/prepayment of: | | | | | | |
| Fixed maturities, available-for-sale | | 1,251,269 | | | 385,245 | | | 948,693 | |
| Fixed maturities, trading | | 914,662 | | | 0 | | | 0 | |
| Equity securities | | 100,151 | | | 5,043 | | | 29,532 | |
| Policy loans | | 172,932 | | | 174,208 | | | 162,744 | |
| Ceded policy loans | | (13,387) | | | (12,863) | | | (11,953) | |
| Short-term investments | | 221,645 | | | 371,508 | | | 51,117 | |
| Commercial mortgage and other loans | | 280,103 | | | 123,124 | | | 144,512 | |
| Other invested assets | | 302,692 | | | 16,280 | | | 18,599 | |
| | | | | | |
| Payments for the purchase/origination of: | | | | | | |
| Fixed maturities, available-for-sale | | (2,504,582) | | | (1,269,808) | | | (940,605) | |
| Fixed maturities, trading | | (117,247) | | | (13,418) | | | (15,235) | |
| Equity securities | | (98,122) | | | (99,871) | | | (110) | |
| Policy loans | | (122,297) | | | (137,133) | | | (196,508) | |
| Ceded policy loans | | 12,161 | | | 20,053 | | | 19,790 | |
| Short-term investments | | (317,593) | | | (421,495) | | | (51,113) | |
| Commercial mortgage and other loans | | (565,222) | | | (165,398) | | | (171,762) | |
| Other invested assets | | (148,842) | | | (74,231) | | | (84,762) | |
| | | | | | |
| Notes receivable from parent and affiliates, net | | (54,026) | | | 905 | | | 15,980 | |
| Derivatives, net | | (3,234) | | | (4,048) | | | (4,056) | |
| Other, net | | (10,392) | | | 2,290 | | | (6,342) | |
| Cash flows from (used in) investing activities | | (699,329) | | | (1,099,609) | | | (91,479) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
| Policyholders’ account deposits | | 5,690,619 | | | 4,775,163 | | | 5,407,620 | |
| Ceded policyholders’ account deposits | | (1,149,254) | | | (3,479,973) | | | (3,537,492) | |
| Policyholders’ account withdrawals | | (3,927,948) | | | (3,291,806) | | | (3,568,340) | |
| Ceded policyholders’ account withdrawals | | 326,680 | | | 2,709,182 | | | 2,431,701 | |
| Net change in securities sold under agreement to repurchase and cash collateral for loaned securities | | 287 | | | (4,804) | | | (3,534) | |
| Dividend to parent | | 0 | | | 0 | | | (250,000) | |
| Contributed Capital | | 776,657 | | | 575,000 | | | 0 | |
| Contributed (distributed) capital - parent/child asset transfers | | (6,148) | | | (2,458) | | | 1,443 | |
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net income (loss) | | $ | 341,749 | | | $ | (2,209,730) | | | $ | 196,697 | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | |
| Policy charges and fee income | | (78,754) | | | (21,763) | | | (81,850) | |
| Interest credited to policyholders’ account balances | | 517,488 | | | (114,585) | | | 233,375 | |
| Realized investment (gains) losses, net | | (1,041,435) | | | 5,295,406 | | | 62,976 | |
| | | | | | |
| Change in: | | | | | | |
| Future policy benefits | | 2,407,887 | | | 2,080,967 | | | 2,658,195 | |
| Reinsurance recoverables | | (1,181,692) | | | (1,304,306) | | | (2,440,532) | |
| Accrued investment income | | (58,762) | | | (66,414) | | | (4,165) | |
| Net payables to/receivables from parent and affiliates | | 80,370 | | | (16,904) | | | (145,743) | |
| Deferred policy acquisition costs | | (105,194) | | | (3,926,121) | | | (617,907) | |
| Income taxes | | (40,095) | | | (1,082,459) | | | (142,196) | |
| Derivatives, net | | (651,654) | | | (1,193,004) | | | 10,969 | |
| Other, net(1) | | 1,635,056 | | | 1,674,972 | | | (108,941) | |
| Cash flows from (used in) operating activities | | 1,824,964 | | | (883,941) | | | (379,122) | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
| Proceeds from the sale/maturity/prepayment of: | | | | | | |
| Fixed maturities, available-for-sale | | 1,688,079 | | | 1,251,269 | | | 385,245 | |
| Fixed maturities, trading | | 907,941 | | | 914,662 | | | 0 | |
| Equity securities | | 242,292 | | | 100,151 | | | 5,043 | |
| Policy loans | | 169,723 | | | 172,932 | | | 174,208 | |
| Ceded policy loans | | (112,164) | | | (13,387) | | | (12,863) | |
| Short-term investments | | 632,069 | | | 221,645 | | | 371,508 | |
| Commercial mortgage and other loans | | 196,672 | | | 280,103 | | | 123,124 | |
| Other invested assets | | 60,349 | | | 302,692 | | | 16,280 | |
| | | | | | |
| Payments for the purchase/origination of: | | | | | | |
| Fixed maturities, available-for-sale | | (7,009,578) | | | (2,504,582) | | | (1,269,808) | |
| Fixed maturities, trading | | (425,267) | | | (117,247) | | | (13,418) | |
| Equity securities | | (281,684) | | | (98,122) | | | (99,871) | |
| Policy loans | | (144,764) | | | (122,297) | | | (137,133) | |
| Ceded policy loans | | 71,402 | | | 12,161 | | | 20,053 | |
| Short-term investments | | (558,161) | | | (317,593) | | | (421,495) | |
| Commercial mortgage and other loans | | (1,076,351) | | | (565,222) | | | (165,398) | |
| Other invested assets | | (166,345) | | | (148,842) | | | (74,231) | |
| | | | | | |
| Notes receivable from parent and affiliates, net | | 771 | | | (54,026) | | | 905 | |
| Derivatives, net | | (366,805) | | | (3,234) | | | (4,048) | |
| Other, net | | 57,687 | | | (10,392) | | | 2,290 | |
| Cash flows from (used in) investing activities | | (6,114,134) | | | (699,329) | | | (1,099,609) | |
| | | | | | |
| | | | 2022 | | 2021 | | 2020 |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
| Policyholders’ account deposits | | Policyholders’ account deposits | | 9,996,128 | | | 5,690,619 | | | 4,775,163 | |
| Ceded policyholders’ account deposits | | Ceded policyholders’ account deposits | | (1,216,195) | | | (1,149,254) | | | (3,479,973) | |
| Policyholders’ account withdrawals | | Policyholders’ account withdrawals | | (3,727,579) | | | (3,927,948) | | | (3,291,806) | |
| Ceded policyholders’ account withdrawals | | Ceded policyholders’ account withdrawals | | 638,392 | | | 326,680 | | | 2,709,182 | |
| Net change in securities sold under agreement to repurchase and cash collateral for loaned securities | | Net change in securities sold under agreement to repurchase and cash collateral for loaned securities | | 83,762 | | | 287 | | | (4,804) | |
| | Contributed capital | | Contributed capital | | 0 | | | 776,657 | | | 575,000 | |
| Contributed (distributed) capital - parent/child asset transfers | | Contributed (distributed) capital - parent/child asset transfers | | (11,478) | | | (6,148) | | | (2,458) | |
| Net change in financing arrangements (maturities 90 days or less) | Net change in financing arrangements (maturities 90 days or less) | | 0 | | | (2,845) | | | 2,845 | | Net change in financing arrangements (maturities 90 days or less) | | 584 | | | 0 | | | (2,845) | |
| Proceeds from the issuance of debt (maturities longer than 90 days) | Proceeds from the issuance of debt (maturities longer than 90 days) | | 323,839 | | | 0 | | | 0 | | Proceeds from the issuance of debt (maturities longer than 90 days) | | 0 | | | 323,839 | | | 0 | |
| | Drafts outstanding | Drafts outstanding | | 43,741 | | | 40,514 | | | 7,150 | | Drafts outstanding | | 63,579 | | | 43,741 | | | 40,514 | |
| Other, net | Other, net | | (3,251) | | | 24,538 | | | (73,142) | | Other, net | | (59,327) | | | (3,251) | | | 24,538 | |
| Cash flows from (used in) financing activities | Cash flows from (used in) financing activities | | 2,075,222 | | | 1,342,511 | | | 418,251 | | Cash flows from (used in) financing activities | | 5,767,866 | | | 2,075,222 | | | 1,342,511 | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | 491,952 | | | (136,220) | | | 146,359 | | NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | 1,478,696 | | | 491,952 | | | (136,220) | |
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | | 426,979 | | | 563,199 | | | 416,840 | | CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | | 918,931 | | | 426,979 | | | 563,199 | |
| CASH AND CASH EQUIVALENTS, END OF YEAR | CASH AND CASH EQUIVALENTS, END OF YEAR | | $ | 918,931 | | | $ | 426,979 | | | $ | 563,199 | | CASH AND CASH EQUIVALENTS, END OF YEAR | | $ | 2,397,627 | | | $ | 918,931 | | | $ | 426,979 | |
| SUPPLEMENTAL CASH FLOW INFORMATION | SUPPLEMENTAL CASH FLOW INFORMATION | | | | | | | SUPPLEMENTAL CASH FLOW INFORMATION | | | | | | |
| Income taxes paid (refund) | Income taxes paid (refund) | | $ | 391,015 | | | $ | 11,948 | | | $ | 79,574 | | Income taxes paid (refund) | | $ | 39,201 | | | $ | 391,015 | | | $ | 11,948 | |
| Interest paid | Interest paid | | $ | 6,341 | | | $ | 2,783 | | | $ | 3,204 | | Interest paid | | $ | 7,863 | | | $ | 6,341 | | | $ | 2,783 | |
(1) Prior periods have been reclassified to conform to the current period presentation.
Significant Non-Cash Transactions
"Cash flows from (used in) operating activities" for the year ended December 31, 2022 excludes certain non-cash activities in the amount of $525 million related to the Company entering into an affiliated reinsurance agreement with Lotus Reinsurance Company Ltd. ("Lotus Re") on January 1, 2022 and $4,656 million related to the indexed variable annuities novated to the Company in connection with the reinsurance agreement with Fortitude Life Insurance & Annuity Company (“FLIAC”). See Note 9 for more details regarding these transactions. The Company also received $18 million of non-cash assets from its parent, The Prudential Insurance Company of America. See Note 13 for additional information.
Cash Flows from Investing and Financing Activities for the twelve monthsyear ended December 31, 2021 excludes certain non-cash activities related to the following transactions:
Effective July 1, 2021, Pruco Life Insurance Company recaptured the risks related to its business that had previously been reinsured to Prudential Annuities Life Assurance Corporation from April 1, 2016 through June 30, 2021. See Note 1 for additional information.
Effective December 1, 2021, the Pruco Life Insurance Company assumed certain variable and fixed annuities from Prudential Annuities Life Assurance Corporation, which resulted in $2.6 billion of investment transfers and $0.2 billion of dividend payment in securities. See Note 1 for additional information.
There were no significant non-cash transactions for the yearsyear ended December 31, 2020 and 2019.2020.
See Notes to Consolidated Financial Statements
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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 1one 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.
Prudential Financial Sale of PALAC
Effective April 1, 2022, Prudential Financial completed the sale of Prudential Annuities Life Assurance Corporation (“PALAC”) to Fortitude Group Holdings, LLC (“Fortitude”). As such, PALAC is no longer an affiliate of Prudential Financial or the Company. Fortitude subsequently renamed the company Fortitude Life Insurance & Annuity Company (“FLIAC”).
2021 Variable Annuities Recapture
Effective July 1, 2021, the Company recaptured the risks related to its variable annuity base contracts, along with the living benefit guarantees, that had previously been reinsured to Prudential Annuities Life Assurance Corporation (“PALAC”)PALAC from April 1, 2016 through June 30, 2021. The recapture does not impact PLNJ, which will continue to reinsure its new and in force business to Prudential Insurance. The product risks related to the previously reinsured business that were being managed in PALAC, were transferred to the Company. In addition, the living benefit hedging program related to the previously reinsured living benefit riders are being managed within the Company. This transaction is referred to as the "2021 Variable Annuities Recapture".
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
The financial statement impacts of this transaction are as follows:
Interim Consolidated Statement of Financial Position
| | | | | | | | |
| Day 1 Impact of 2021 Variable Annuities Recapture | | Impacts of Recapture |
| | (in millions) |
| ASSETS | | |
| Total investments(1)(2) | | $ | 8,324 | |
| Cash and cash equivalents | | 414 | |
| Deferred policy acquisition costs | | 3,286 | |
| Accrued investment income | | 42 | |
| Reinsurance recoverables | | (12,307) | |
| Deferred sales inducements | | 388 | |
| Receivable from parent and affiliates | | 0 | |
| Income taxes receivable | | 765 | |
| Other assets | | (84) | |
| Separate account assets | | 0 | |
| TOTAL ASSETS | | $ | 828 | |
| LIABILITIES AND EQUITY | | |
| LIABILITIES | | |
| Future policy benefits | | $ | 0 | |
| Policyholders’ account balances | | 0 | |
| Cash collateral for loaned securities | | 0 | |
| Payables to parent and affiliates | | (106) | |
| | |
| Other liabilities | | 0 | |
| Separate account liabilities | | 0 | |
| Total liabilities | | (106) | |
| EQUITY | | |
| Common stock | | 0 | |
| Additional paid-in capital(3) | | 3,786 | |
| Retained earnings | | (2,797) | |
| Accumulated other comprehensive income | | (55) | |
| Total equity | | 934 | |
| TOTAL LIABILITIES AND EQUITY | | $ | 828 | |
Significant non-cash transactions
(1) The increase in total investments includes non-cash activities of $8.3 billion related to the recapture transaction.
(2) The Company incurred a loss related to ceding commissions of $2 billion.
(3) The increase in Additional paid-in capital includes non-cash activities of $3.4 billion in invested assets related to capital contributions from Prudential Insurance.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Interim Consolidated Statement of Operations and Comprehensive Income (Loss)
| | | | | | | | | |
| Day 1 Impact of 2021 Variable Annuities Recapture | | Impacts of Recapture | |
| | (in millions) |
| REVENUES | | | |
| | | |
| Other income (loss) | | $ | (1) | | |
| Realized investment gains (losses), net | | (4,953) | | |
| TOTAL REVENUES | | (4,954) | | |
| BENEFITS AND EXPENSES | | | |
| Policyholders’ benefits | | 257 | | |
| Interest credited to policyholders’ account balances | | (399) | | |
| | | |
| General, administrative and other expenses | | (1,272) | | |
| TOTAL BENEFITS AND EXPENSES | | (1,414) | | |
| INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES | | (3,540) | | |
| Income tax expense (benefit) | | (743) | | |
| NET INCOME (LOSS) | | $ | (2,797) | | |
Affiliated Asset Transfers
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Affiliate | Period | Transaction | Security Type | Fair Value | Book Value | APIC/ Retained Earnings Increase/(Decrease) | Realized Investment Gain/(Loss), Net | Derivative Gain/(Loss) |
| | | | (in millions) |
| PALAC | July 1, 2021 | Purchase | Derivatives, Fixed Maturities, Equity Securities, Commercial Mortgages and JV/LP Investments | $ | 4,908 | | $ | 4,908 | | $ | 0 | | $ | 0 | | $ | 0 | |
| Prudential Insurance | July 1, 2021 | Contributed Capital | Fixed Maturities | $ | 3,420 | | $ | 3,420 | | $ | 3,420 | | $ | 0 | | $ | 0 | |
As part of the recapture transaction, the Company received invested assets of $6.8 billion, net of $2 billion ceding commissions as consideration from PALAC, which is equivalent to the amount of statutory reserve credit taken as of June 30, 2021. The Company released a reinsurance recoverable of $12.3 billion.
The Company derecognized its ceded Deferred Acquisition Costs ("DAC") and Deferred Sales Inducements ("DSI") balances as of June 30, 2021. The company also recognized a net deferred reinsurance loss from the original transaction of $0.1 billion. As a result of the recapture transaction, the Company recognized a pre-tax loss of $3.5 billion immediately.
There was a $3.8 billion capital contribution from Prudential Insurance, which includes $3.4 billion in invested assets and $0.4 billion in cash.
Affiliated Reinsurance Agreement with FLIAC
Effective December 1, 2021, the Company entered into a reinsurance agreement with PALACFLIAC (previously named PALAC) under which the Company assumed all of its variable and fixed indexed annuities and fixed annuities with a guaranteed lifetime withdrawal income feature from PALAC.FLIAC. As a result, the Company recognized a deferred reinsurance loss of $238 million. As of December 31, 2021, the reinsurance recoverable from the reinsurance of indexed variable indexed annuities was $7.2 billion, and the Policyholder Account BalancePolicyholders' account balances resulting from the reinsurance of variable and fixed indexed annuities and fixed annuities with a guaranteed lifetime withdrawal income benefit was $9.8 billion.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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 costs ("DAC") and related amortization; policyholders' account balances and reinsurance related to the fair value of embedded derivative instruments associated with the index-linked features of certain universal life and annuity products; valuation of investments including derivatives, measurement of allowance for credit losses, and the recognition of other-than-temporary impairments; 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
Since the first quarter of 2020, the novel coronavirus (“COVID-19”) has resulted in extreme stress and disruption in the global economy and financial markets. While markets have rebounded, theThe pandemic 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 our investments due to default or deterioration in credit quality or value; and ii)(i) insurance liabilities and related balances: potential changes to assumptions regarding investment returns, mortality and policyholder behavior which are reflected in our insurance liabilities and certain related balances (e.g., DAC, etc.).; and (ii) investments: increased risk of loss on our investments due to default or deterioration in credit quality or value. The Company cannot predict what impact the COVID-19 pandemic will ultimately have on its businesses.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the current period presentation.
Out of Period Adjustments
During the three and six months ended June 30, 2022, the Company recorded out of period adjustments resulting in an aggregate net benefit of $32 million and $50 million, respectively, to “Income (loss) from operations before income taxes and equity in earnings of operating joint venture” in 2022. These adjustments related to reserves for certain universal and variable life products and certain portions of variable life and annuities reinsurance activity, of which $48 million was recorded in the first quarter of 2022.
During the three months ended September 30, 2022, the Company recorded out of period adjustments resulting in an aggregate net charge of $68 million to “Income (loss) from operations before income taxes and equity in earnings of operating joint venture”. The adjustments were primarily related to the valuation of the embedded derivative associated with the indexed variable annuities reinsurance recoverable that should have been recorded in the second quarter of 2022 to "Realized investment gains (losses), net", with no net impact to the 2022 consolidated financial statements.
During the three months ended December 31, 2022, the Company recorded out of period adjustments resulting in an aggregate net benefit of $73 million to “Income (loss) from operations before income taxes and equity in earnings of operating joint venture”. The adjustments were primarily related to certain portions of fixed indexed annuities reinsurance activity that should have been recorded in the second quarter of 2022 to "Realized investment gains (losses), net", with no net impact to the 2022 consolidated financial statements.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
The aggregate impact of out of period adjustments recorded in 2022 was a net benefit of $53 million to "Income (loss) from operations before income taxes and equity in earnings of operating joint venture".
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.
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 in earnings as an allowance for credit losses and reported in “Realized investment gains (losses), net,” to the extent the amortized cost exceeds the net present value of projected future cash flows (the “net present value”) for the security. However, the credit impairment recorded cannot exceed the difference between the amortized cost and fair value of the respective security. The net present value used to measure a credit impairment 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. 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. Any amount of an AFS debt security’s change in fair value not recorded as an allowance for credit losses will be recorded in Other Comprehensive Income (loss) (“OCI”).
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, a credit impairment will be recognized and measured using the same process for mortgage-backed and asset-backed AFS debt securities.
When an AFS debt security's fair value is below amortized cost and the Company has the intent to sell the AFS debt security, or 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 write-down is reported in "Realized investment gains (losses), net."
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.
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, unrealized gains and loss recorded in OCI, and the amount of impairment recognized in earnings. 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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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("Trading debt securities") includes debt securities that are carried at fair value. See Note 5 for additional information regarding the determination of fair value. Realized and unrealized gains and losses onfor these investments are reported in “Other income (loss),” and interest and dividend income from these investments is reported in “Net investment income”.
Equity securities, at fair value is comprisedconsists of common stock and mutual fund shares carried at fair value. Realized and unrealized gains and losses on these investments are reported in “Other income (loss),” and dividend income is reported in “Net investment income” on the ex-dividend date.
Policy loans represents 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 consists 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.
Commercial mortgage and other loans consistsconsist 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 theany 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.”
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Effective January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related ASUs, using a modified retrospective method for certain financial assets carried at amortized cost and certain off-balance sheet exposures. Adoption of these ASUs requires an entity to estimate lifetime credit losses for certain financial assets carried at amortized cost and certain off-balance sheet exposures based
on relevant information about past events, current conditions, and reasonable and supportable forecasts that may affect the collectability of reported amounts. The most significant impact is thatfrom modifications made to the Company’s process for measuring credit losses for its commercial mortgage and other loans class classified as held for investment. The impact 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 wasis 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.
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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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 that pools together loans that share similar risk characteristics. Similar risk characteristics used to create the pools include, but are not limited to, vintage, maturity, credit rating, and collateral type.
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 indicates 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 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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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.”
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 cost 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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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. 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”income (loss)”.
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 includes 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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Deferred policy acquisition costs represent 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 and if the projected equity return is negative, the return is floored at 0%. 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 and annuity 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 result from: (i) the 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.
Accrued investment income primarily includes accruals of interest and dividend income from investments that have been earned but not yet received.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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. Reinsurance recoverables also include assumed modified coinsurance arrangements which generally reflect the value of the invested assets retained by the cedant and the associated asset returns. Modified coinsurance recoverables contain an embedded derivative (bifurcated and accounted for separately from the host contract) that is presented together with the derivative embedded in the modified coinsurance payables as one compound derivative. 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.
PRUCO LIFE INSURANCE COMPANY
Notessales inducements to Consolidated Financial Statements—(Continued)contractholders related to fixed and variable deferred annuity contracts. The Company defers sales inducements and amortizes them over the expected life of the policy using the same methodology and assumptions used to amortize DAC. Sales inducement balances are subject to periodic recoverability testing. The Company records amortization of DSI in “Interest credited to policyholders’ account balances.” DSI 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. See Note 9 for additional information regarding sales inducements.
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.
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.
Deferred sales inducements represents various types of sales inducements to contractholders related to fixed and variable deferred annuity contracts. The Company defers sales inducements and amortizes them over the expected life of the policy using the same methodology and assumptions used to amortize DAC. Sales inducement balances are subject to periodic recoverability testing. The Company records amortization of DSI in “Interest credited to policyholders’ account balances.” DSI 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. See Note 9 for additional information regarding sales inducements.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Other assets consists primarily of deposit assets related to a reinsurance agreement entered into with a third-party reinsurer during 2021 using deposit accounting under U.S. GAAP, which as of December 31, 2021 was $497.0 million.see Note 9 for additional information. Included in these deposit assets are amounts representing fair value of embedded derivative instruments associated with the index-linked features of certain annuity products. For additional information regarding the valuation of these embedded derivatives, see Note 5. Also included are 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 represents 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 represents liabilities related to certain long-duration life and annuity contracts, which are discussed more fully in Note 7.8. 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 include amounts representing the fair value of embedded derivative instruments associated with the index-linked features of certain annuity and universal life products. For additional information regarding the valuation of these embedded derivatives, see Note 5.
Cash collateral for loaned securities represents 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
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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 represents 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 consists primarily of reinsurance payables associated with reinsurance arrangements with affiliates that correspond to reinsurance receivables included above in “Reinsurance recoverables”. For additional information about these arrangements see Note 9. Also included is a funds withheld liability for assets retained under a reinsurance agreement that corresponds to the deposit assets above in "Other assets". The funds withheld liability as of December 31, 2021 was $419.2 million.For additional information about these arrangements see Note 9. Additionally other liabilities includes accrued expenses, technical overdrafts, deferred gain on reinsurance, and payables resulting from purchases of securities that had not yet settled at the balance sheet date. Other liabilities may also include derivative instruments for which fair values are determined as described below under “Derivative Financial Instruments”.
Separate account liabilities primarily represents the contractholders’ account balances 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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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 issueissuance 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.
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”.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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.
Revenues for variable deferred annuity contracts consist of charges against contractholder account values or separate accounts for mortality and expense risks, administration fees, surrender charges and an annual maintenance fee per contract. Revenues for mortality and expense risk charges and administration fees are recognized as assessed against the contractholder. Surrender charge revenue is recognized when the surrender charge is assessed against the contractholder at the time of surrender. Liabilities for the variable investment options on annuity contracts represent the account value of the contracts and are included in “Separate account liabilities”.
Revenues for variable immediate annuity and supplementary contracts with life contingencies consist of certain charges against
contractholder account values including mortality and expense risks and administration fees. These charges and fees are recognized as revenue when assessed against the contractholder. Liabilities for variable immediate annuity contracts represent the account value of the contracts and are included in “Separate account liabilities”.
Revenues for variable life insurance contracts consist of charges against contractholder account values or separate accounts for expense charges, administration fees, cost of insurance charges and surrender charges. Certain contracts also include charges against premium to pay state premium taxes. All of these charges are recognized as revenue when assessed against the contractholder. Liabilities for variable life insurance contracts represent the account value of the contracts and are included in “Separate account liabilities”.
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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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 include amounts representing the fair value of embedded derivative instruments associated with the index-linked features of certain annuity and 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
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
balances invested in funds managed by companies other than affiliates of Prudential Insurance. Asset administration fees are recognized as income when earned.
Other income (loss) 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.
Realized investment gains (losses), net includes realized gains or losses from sales and maturities of investments, changes to the allowance for credit losses, other impairments, fair value changes on mortgage loans where the fair value option has been elected, releases of Other Comprehensive Income and derivative gains or losses. The derivative gains or losses include the impact of maturities, terminations and changes in fair value of the derivative instruments, including embedded derivatives, and other hedging instruments.
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 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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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”.
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 "Other invested assets", or as liabilities, within “Payables to parent and affiliates” or "Other liabilities".
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 PALAC, excluding the PLNJ business, which was reinsured to Prudential Insurance, in each case under a coinsurance and modified coinsurance agreement. Effective July 1, 2021, the Company recaptured the risks related to its variable annuity base contracts, along with the living benefit guarantees, that had previously been reinsured to PALAC from April 1, 2016 through June 30, 2021. 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”. Additionally, changes in the fair value are determined using valuation models as described in Note 5 and are recorded in “Realized investment gains (losses), net".
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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, 2021,2022, and as of the date of this filing. ASUs not listed below were assessed and determined to be either not applicable or not material.
ASU issued but not yet adopted as of December 31, 20212022 — ASU 2018-12
ASU2018-12ASU 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 was amended by ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date, issued in October 2019, and ASU 2020-11, Financial Services-Insurance (Topic 944): Effective Date and Early Application, issued in November 2020. The Company will adopt ASU 2018-12 effective January 1, 2023 using the modified retrospective transition method where permitted, and apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements.
The Company has an established governance framework to manage the implementation of the standard. The Company has substantially completed its implementation efforts including, but not limited to, implementing refinements to key accounting policy decisions, modifications to actuarial valuation models, updates to data sourcing capabilities, automation of key financial reporting and analytical processes and updates to internal control over financial reporting and disclosure.
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. The Company expects the standard to have a significant financial impact on the Consolidated Financial Statements and will significantly enhanceincrease disclosures. As of the January 1, 2021 transition date, the Company estimates that the implementation of the standard will result in approximately a $700 million decrease to $100 million increase to "Total equity", largely from remeasuring in force contract liabilities using upper-medium grade fixed income instrument yields as of the transition date and from other changes in reserves. As of September 30, 2022, the Company estimates that the transition date impacts will significantly reverse, primarily as a result of increases in market interest rates from the January 1, 2021 transition date to September 30, 2022.In addition to the significant impacts to the balance sheet, the Company also expects an impact to the pattern of earnings emergence following the transition date.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
balance sheet upon adoption, the Company also expects an impact to the pattern of earnings emergence following the transition date.
Outlined below are four key areas of change, although there are other less significant policy changes not noted below.
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 Accumulated other comprehensive income (loss) ("AOCI") or (2) a full retrospective transition method. | | The Company will adopt this guidance effective January 1, 2023 using the modified retrospective transition method. The impactsAs a result of electing suchthe modified retrospective transition method, are currently under assessment.the Company expects the vast majority of the impact of updating cash flow assumptions as of the transition date to be reflected in the pattern of earnings in subsequent periods. |
| 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. | | As noted above, the Company will adopt the guidance for the liability for future policy benefits effective January 1, 2023 using the modified retrospective transition method. Upon adoption, there will beThe Company expects an adjustmentimpact to AOCI as a result of remeasuring in force contract liabilities using current upper-medium grade fixed income instrument yields.yields as of the adoption date. The adjustment upon adoption will largely reflect the difference between discount rates locked-in at contract inception versus current discount rates at transition. The magnitudeas of such adjustment is currently being assessed.the adoption date. |
| 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 Company will adopt this guidance effective January 1, 2023 using the modified retrospective transition method. Under the modified retrospective transition method, the Company woulddoes 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 non-performance risk ("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. | | The Company will adopt this guidance effective January 1, 2023 using the retrospective transition method. Upon adoption, the Company expects a decrease to "Retained earnings" and an offsetting increase to AOCI from reclassifying the cumulative effect of changes in NPR from retained earnings to AOCI. There will be an impact to retained earnings"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 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)
Modifications relatedASU 2022-05, Financial Services – Insurance (Topic 944) Transition for Sold Contracts was issued on December 15, 2022, to COVID-19amend the transition guidance in ASU 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The amendment allows an insurance entity to make an accounting policy election to not apply ASU 2018-12 to contracts or legal entities sold or disposed of before the effective date, and in which the insurance entity has no significant continuing involvement with the derecognized contracts. An insurance entity is permitted to apply the policy election on a transaction by transaction basis to each sale or disposal transaction. An insurance entity is required to disclose whether it has chosen to apply this accounting policy election and provide a qualitative description of the sale or disposal transactions to which the accounting policy election is applied. The Company does not currently intend to apply this accounting policy election.
We assess modifications to certain fixed income instruments on a case-by-case basis to evaluate whether a TDR has occurred. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") provides a temporary suspension of TDR accounting for certain COVID-19 related modifications where the investment wasOther ASU issued but not more than 30 days past dueyet adopted as of December 31, 2019 (“TDR Relief”). The TDR Relief was set to expire on December 31, 2020, but was extended through December 31, 2021 by the Consolidated Appropriations Act of 2021. The Company elected to apply the TDR Relief beginning in the first quarter of 2021. The TDR Relief does not apply to modifications completed 60 days after the national emergency related to COVID-19 ends, or December 31, 2021, whichever comes earlier. As of December 31, 2021, any such modifications did not have a material impact on the Company's results of operations.2022
| | | | | | | | | | | | | | | | | | | | |
| Standard | | Description | | Effective date and method of adoption | | Effect on the financial statements or other significant matters |
ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosure | | This ASU eliminates the accounting guidance for TDR for creditors and adds enhanced disclosure requirements for certain loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty. Following adoption of the ASU, all loan refinancings and restructurings are subject to the modification guidance in ASC 310-20. This ASU also amends the guidance on the vintage disclosures to require disclosure of current-period gross write-offs by year of origination. | | January 1, 2023 using the prospective method with an option to apply a modified retrospective transition method for the recognition and measurement of TDRs which will include a cumulative effect adjustment on the balance sheet in the period of adoption. | | The Company does not expect the adoption of the ASU to have a significant impact on the Consolidated Financial Statements and Notes to the Consolidated Financial Statements. |
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, 2022 |
| | 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 | $ | 354,348 | | | $ | 300 | | | $ | 72,856 | | | $ | 0 | | | $ | 281,792 | |
| Obligations of U.S. states and their political subdivisions | 654,884 | | | 4,275 | | | 30,959 | | | 0 | | | 628,200 | |
| Foreign government bonds | 330,967 | | | 1,140 | | | 58,640 | | | 5 | | | 273,462 | |
| U.S. public corporate securities | 7,414,790 | | | 21,299 | | | 992,145 | | | 0 | | | 6,443,944 | |
| U.S. private corporate securities | 4,140,734 | | | 13,071 | | | 335,205 | | | 1,871 | | | 3,816,729 | |
| Foreign public corporate securities | 1,539,172 | | | 2,455 | | | 163,384 | | | 21 | | | 1,378,222 | |
| Foreign private corporate securities | 4,338,585 | | | 19,761 | | | 589,153 | | | 2,863 | | | 3,766,330 | |
| Asset-backed securities(1) | 1,467,955 | | | 6,976 | | | 32,577 | | | 0 | | | 1,442,354 | |
| Commercial mortgage-backed securities | 727,159 | | | 94 | | | 69,101 | | | 0 | | | 658,152 | |
| Residential mortgage-backed securities(2) | 342,493 | | | 3,211 | | | 9,479 | | | 9 | | | 336,216 | |
| Total fixed maturities, available-for-sale | $ | 21,311,087 | | | $ | 72,582 | | | $ | 2,353,499 | | | $ | 4,769 | | | $ | 19,025,401 | |
(1) Includes credit-tranched securities collateralized by loan obligations, education loans, auto loans and home equity.
(2) Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | 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 | $ | 303,040 | | | $ | 31,011 | | | $ | 111 | | | $ | 0 | | | $ | 333,940 | |
| Obligations of U.S. states and their political subdivisions | 584,244 | | | 46,978 | | | 701 | | | 0 | | | 630,521 | |
| Foreign government bonds | 324,454 | | | 29,299 | | | 3,271 | | | 11 | | | 350,471 | |
| U.S. public corporate securities | 4,794,878 | | | 366,764 | | | 29,770 | | | 0 | | | 5,131,872 | |
| U.S. private corporate securities | 1,964,767 | | | 59,037 | | | 16,880 | | | 2,049 | | | 2,004,875 | |
| Foreign public corporate securities | 906,031 | | | 34,234 | | | 10,363 | | | 0 | | | 929,902 | |
| Foreign private corporate securities | 2,741,449 | | | 62,932 | | | 48,381 | | | 2,089 | | | 2,753,911 | |
| Asset-backed securities(1) | 547,549 | | | 860 | | | 1,099 | | | 0 | | | 547,310 | |
| Commercial mortgage-backed securities | 552,653 | | | 25,928 | | | 3,397 | | | 0 | | | 575,184 | |
| Residential mortgage-backed securities(2) | 18,684 | | | 1,501 | | | 5 | | | 0 | | | 20,180 | |
| Total fixed maturities, available-for-sale | $ | 12,737,749 | | | $ | 658,544 | | | $ | 113,978 | | | $ | 4,149 | | | $ | 13,278,166 | |
(1)Includes credit-tranched securities collateralized by loan obligations, education loans, auto loans and other asset types.
(2)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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.
.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
The following tables set 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 dates indicated:
| | | | December 31, 2021 | | December 31, 2022 |
| | | Less Than Twelve Months | | Twelve Months or More | | Total | | Less Than Twelve Months | | Twelve Months or More | | Total |
| | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses |
| | | (in thousands) | | (in thousands) |
| Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | | Fixed maturities, available-for-sale: | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 0 | | | $ | 0 | | | $ | 2,119 | | | $ | 111 | | | $ | 2,119 | | | $ | 111 | | U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 212,991 | | | $ | 46,928 | | | $ | 62,630 | | | $ | 25,928 | | | $ | 275,621 | | | $ | 72,856 | |
| Obligations of U.S. states and their political subdivisions | Obligations of U.S. states and their political subdivisions | 104,621 | | | 701 | | | 0 | | | 0 | | | 104,621 | | | 701 | | Obligations of U.S. states and their political subdivisions | 307,734 | | | 16,851 | | | 61,915 | | | 14,108 | | | 369,649 | | | 30,959 | |
| Foreign government bonds | Foreign government bonds | 59,550 | | | 2,826 | | | 6,473 | | | 371 | | | 66,023 | | | 3,197 | | Foreign government bonds | 139,577 | | | 19,435 | | | 111,371 | | | 39,205 | | | 250,948 | | | 58,640 | |
| U.S. public corporate securities | U.S. public corporate securities | 1,681,201 | | | 23,160 | | | 180,249 | | | 6,610 | | | 1,861,450 | | | 29,770 | | U.S. public corporate securities | 3,873,275 | | | 389,937 | | | 1,979,725 | | | 602,208 | | | 5,853,000 | | | 992,145 | |
| U.S. private corporate securities | U.S. private corporate securities | 972,796 | | | 14,036 | | | 16,409 | | | 2,844 | | | 989,205 | | | 16,880 | | U.S. private corporate securities | 2,506,932 | | | 157,853 | | | 948,686 | | | 177,352 | | | 3,455,618 | | | 335,205 | |
| Foreign public corporate securities | Foreign public corporate securities | 532,445 | | | 8,255 | | | 29,718 | | | 2,108 | | | 562,163 | | | 10,363 | | Foreign public corporate securities | 548,083 | | | 40,508 | | | 596,437 | | | 122,856 | | | 1,144,520 | | | 163,364 | |
| Foreign private corporate securities | Foreign private corporate securities | 1,253,739 | | | 42,392 | | | 57,637 | | | 5,616 | | | 1,311,376 | | | 48,008 | | Foreign private corporate securities | 1,772,413 | | | 199,124 | | | 1,479,608 | | | 390,029 | | | 3,252,021 | | | 589,153 | |
| Asset-backed securities | Asset-backed securities | 288,971 | | | 1,099 | | | 0 | | | 0 | | | 288,971 | | | 1,099 | | Asset-backed securities | 625,710 | | | 15,146 | | | 289,581 | | | 17,431 | | | 915,291 | | | 32,577 | |
| Commercial mortgage-backed securities | Commercial mortgage-backed securities | 157,355 | | | 1,622 | | | 40,689 | | | 1,775 | | | 198,044 | | | 3,397 | | Commercial mortgage-backed securities | 459,186 | | | 30,408 | | | 176,349 | | | 38,693 | | | 635,535 | | | 69,101 | |
| Residential mortgage-backed securities | Residential mortgage-backed securities | 1,393 | | | 5 | | | 0 | | | 0 | | | 1,393 | | | 5 | | Residential mortgage-backed securities | 129,721 | | | 9,220 | | | 1,294 | | | 259 | | | 131,015 | | | 9,479 | |
| Total fixed maturities, available-for-sale | Total fixed maturities, available-for-sale | $ | 5,052,071 | | | $ | 94,096 | | | $ | 333,294 | | | $ | 19,435 | | | $ | 5,385,365 | | | $ | 113,531 | | Total fixed maturities, available-for-sale | $ | 10,575,622 | | | $ | 925,410 | | | $ | 5,707,596 | | | $ | 1,428,069 | | | $ | 16,283,218 | | | $ | 2,353,479 | |
| | | | December 31, 2020 | | December 31, 2021 |
| | | Less Than Twelve Months | | Twelve Months or More | | Total | | Less Than Twelve Months | | Twelve Months or More | | Total |
| | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses |
| | | (in thousands) | | (in thousands) |
| Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | | Fixed maturities, available-for-sale: | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 2,255 | | | $ | 22 | | | $ | 0 | | | $ | 0 | | | $ | 2,255 | | | $ | 22 | | U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 0 | | | $ | 0 | | | $ | 2,119 | | | $ | 111 | | | $ | 2,119 | | | $ | 111 | |
| | Obligations of U.S. states and their political subdivisions | | Obligations of U.S. states and their political subdivisions | 104,621 | | | 701 | | | 0 | | | 0 | | | 104,621 | | | 701 | |
| Foreign government bonds | Foreign government bonds | 2,270 | | | 32 | | | 0 | | | 0 | | | 2,270 | | | 32 | | Foreign government bonds | 59,550 | | | 2,826 | | | 6,473 | | | 371 | | | 66,023 | | | 3,197 | |
| U.S. public corporate securities | U.S. public corporate securities | 33,295 | | | 341 | | | 2,754 | | | 246 | | | 36,049 | | | 587 | | U.S. public corporate securities | 1,681,201 | | | 23,160 | | | 180,249 | | | 6,610 | | | 1,861,450 | | | 29,770 | |
| U.S. private corporate securities | U.S. private corporate securities | 33,806 | | | 771 | | | 6,659 | | | 1,427 | | | 40,465 | | | 2,198 | | U.S. private corporate securities | 972,796 | | | 14,036 | | | 16,409 | | | 2,844 | | | 989,205 | | | 16,880 | |
| Foreign public corporate securities | Foreign public corporate securities | 6,432 | | | 97 | | | 6,464 | | | 789 | | | 12,896 | | | 886 | | Foreign public corporate securities | 532,445 | | | 8,255 | | | 29,718 | | | 2,108 | | | 562,163 | | | 10,363 | |
| Foreign private corporate securities | Foreign private corporate securities | 2,931 | | | 131 | | | 85,340 | | | 6,657 | | | 88,271 | | | 6,788 | | Foreign private corporate securities | 1,253,739 | | | 42,392 | | | 57,637 | | | 5,616 | | | 1,311,376 | | | 48,008 | |
| Asset-backed securities | Asset-backed securities | 51,914 | | | 183 | | | 70,503 | | | 203 | | | 122,417 | | | 386 | | Asset-backed securities | 288,971 | | | 1,099 | | | 0 | | | 0 | | | 288,971 | | | 1,099 | |
| Commercial mortgage-backed securities | Commercial mortgage-backed securities | 17,443 | | | 125 | | | 0 | | | 0 | | | 17,443 | | | 125 | | Commercial mortgage-backed securities | 157,355 | | | 1,622 | | | 40,689 | | | 1,775 | | | 198,044 | | | 3,397 | |
| Residential mortgage-backed securities | Residential mortgage-backed securities | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Residential mortgage-backed securities | 1,393 | | | 5 | | | 0 | | | 0 | | | 1,393 | | | 5 | |
| Total fixed maturities, available-for-sale | Total fixed maturities, available-for-sale | $ | 150,346 | | | $ | 1,702 | | | $ | 171,720 | | | $ | 9,322 | | | $ | 322,066 | | | $ | 11,024 | | Total fixed maturities, available-for-sale | $ | 5,052,071 | | | $ | 94,096 | | | $ | 333,294 | | | $ | 19,435 | | | $ | 5,385,365 | | | $ | 113,531 | |
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
As of December 31, 20212022 and 2020,2021, the gross unrealized losses on fixed maturity available-for-sale securities without an allowance were composed of $95.1$2,164.1 million and $5.0$95.1 million, respectively, related to “1” highest quality or “2” high quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $18.4$189.4 million and $6.0$18.4 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of December 31, 2021,2022, the $19.4$1,428.1 million of gross unrealized losses of twelve months or more were concentrated in the Company’s corporate securities within the utility, finance, and consumer non-cyclical and utility sectors. As of December 31, 2020,2021, the $9.3$19.4 million of gross unrealized losses of twelve months or more were concentrated in the Company's corporate securities within the utility, finance energy and utilityconsumer 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, 2021.2022. This conclusion was based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to increases in interest rates, general credit spread widening, foreign currency exchange rate movements and the financial condition or near-term prospects of the issuer. As of December 31, 2021,2022, 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, 2021 | | | December 31, 2022 |
| | | | Amortized Cost | | Fair Value | | | Amortized Cost | | Fair Value |
| | | | (in thousands) | | | (in thousands) |
| Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | | Fixed maturities, available-for-sale: | |
| Due in one year or less | Due in one year or less | | $ | 101,546 | | | $ | 101,320 | | Due in one year or less | | $ | 357,166 | | | $ | 347,772 | |
| Due after one year through five years | Due after one year through five years | | 2,063,502 | | | 2,075,819 | | Due after one year through five years | | 4,981,177 | | | 4,654,387 | |
| Due after five years through ten years | Due after five years through ten years | | 3,639,243 | | | 3,652,143 | | Due after five years through ten years | | 6,798,927 | | | 6,120,970 | |
| Due after ten years | Due after ten years | | 5,814,572 | | | 6,306,210 | | Due after ten years | | 6,636,210 | | | 5,465,550 | |
| Asset-backed securities | Asset-backed securities | | 547,549 | | | 547,310 | | Asset-backed securities | | 1,467,955 | | | 1,442,354 | |
| Commercial mortgage-backed securities | Commercial mortgage-backed securities | | 552,653 | | | 575,184 | | Commercial mortgage-backed securities | | 727,159 | | | 658,152 | |
| Residential mortgage-backed securities | Residential mortgage-backed securities | | 18,684 | | | 20,180 | | Residential mortgage-backed securities | | 342,493 | | | 336,216 | |
| Total fixed maturities, available-for-sale | Total fixed maturities, available-for-sale | | $ | 12,737,749 | | | $ | 13,278,166 | | Total fixed maturities, available-for-sale | | $ | 21,311,087 | | | $ | 19,025,401 | |
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, | | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| | | | | | (in thousands) | | | | | | | (in thousands) | | |
| Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | | Fixed maturities, available-for-sale: | |
| Proceeds from sales(1) | Proceeds from sales(1) | | $ | 790,331 | | | $ | 81,766 | | | $ | 633,787 | | Proceeds from sales(1) | | $ | 1,117,293 | | | $ | 790,331 | | | $ | 81,766 | |
| Proceeds from maturities/prepayments | Proceeds from maturities/prepayments | | 465,347 | | | 305,859 | | | 314,906 | | Proceeds from maturities/prepayments | | 624,640 | | | 465,347 | | | 305,859 | |
| Gross investment gains from sales and maturities | Gross investment gains from sales and maturities | | 14,972 | | | 1,293 | | | 59,557 | | Gross investment gains from sales and maturities | | 5,647 | | | 14,972 | | | 1,293 | |
| Gross investment losses from sales and maturities | Gross investment losses from sales and maturities | | (16,674) | | | (1,878) | | | (3,785) | | Gross investment losses from sales and maturities | | (58,432) | | | (16,674) | | | (1,878) | |
| OTTI recognized in earnings(2) | | N/A | | N/A | | (9,034) | | |
| Write-downs recognized in earnings(3) | | (2) | | | (4,312) | | | N/A | |
| (Addition to) release of allowance for credit losses(4) | | (1,810) | | | (2,339) | | | N/A | |
| Write-downs recognized in earnings(2) | | Write-downs recognized in earnings(2) | | (20,600) | | | (2) | | | (4,312) | |
| (Addition to) release of allowance for credit losses | | (Addition to) release of allowance for credit losses | | (620) | | | (1,810) | | | (2,339) | |
(1)Excludes activity from non-cash related proceeds due to the timing of trade settlements of $(53.9) million, $(4.4) million $(2.4) million and $0.0$(2.4) million for the years ended December 31, 2022, 2021 2020 and 2019,2020, respectively.
(2)Amounts represent write-downs of credit adverse securities and securities actively marketed for sale. In addition, for the year ended December 31, 2020, amount also includes write-downs on securities approaching maturities related to foreign exchange movements.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
(2)For the year ended December 31, 2019, amount excludes 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.
(3)Amounts represent write-downs of credit adverse securities and securities activity marketed for sale. In addition, for the year ended December 31, 2020, amount also include write-downs on securities approaching maturities related to foreign exchange movements.
(4)Effective January 1, 2020, credit losses on available-for-sale fixed maturity securities are recorded within the “allowance for credit losses.”
The following tables set forth the activity in the allowance for credit losses for fixed maturity securities, as of the dates indicated:
| | | Year Ended December 31, 2021 | | Year Ended December 31, 2022 |
| | 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 | | 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) | | (in thousands) |
| Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | | Fixed maturities, available-for-sale: | |
| Balance, beginning of year | $ | 0 | | | $ | 0 | | | $ | 2,339 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 2,339 | | |
| Balance, beginning of period | | Balance, beginning of period | $ | 0 | | | $ | 11 | | | $ | 4,138 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 4,149 | |
| Additions to allowance for credit losses not previously recorded | Additions to allowance for credit losses not previously recorded | 0 | | | 11 | | | 2,664 | | | 0 | | | 0 | | | 0 | | | 2,675 | | Additions to allowance for credit losses not previously recorded | 0 | | | 329 | | | 12,700 | | | 0 | | | 0 | | | 7 | | | 13,036 | |
| | Reductions for securities sold during the period | Reductions for securities sold during the period | 0 | | | 0 | | | (28) | | | 0 | | | 0 | | | 0 | | | (28) | | Reductions for securities sold during the period | 0 | | | (96) | | | (1,702) | | | 0 | | | 0 | | | 0 | | | (1,798) | |
| | Addition (reductions) on securities with previous allowance | 0 | | | 0 | | | (837) | | | 0 | | | 0 | | | 0 | | | (837) | | |
| | Reductions for securities with intent to sell | | Reductions for securities with intent to sell | 0 | | | (324) | | | (16,666) | | | 0 | | | 0 | | | 0 | | | (16,990) | |
| Additions (reductions) on securities with previous allowance | | Additions (reductions) on securities with previous allowance | 0 | | | 85 | | | 6,285 | | | 0 | | | 0 | | | 2 | | | 6,372 | |
| Balance, end of period | Balance, end of period | $ | 0 | | | $ | 11 | | | $ | 4,138 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 4,149 | | Balance, end of period | $ | 0 | | | $ | 5 | | | $ | 4,755 | | | $ | 0 | | | $ | 0 | | | $ | 9 | | | $ | 4,769 | |
| | | Year Ended December 31, 2020 | | Year Ended December 31, 2021 |
| | 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 | | 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) | | (in thousands) |
| Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | | Fixed maturities, available-for-sale: | |
| Balance, beginning of year | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | |
| Balance, beginning of period | | Balance, beginning of period | $ | 0 | | | $ | 0 | | | $ | 2,339 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 2,339 | |
| Additions to allowance for credit losses not previously recorded | Additions to allowance for credit losses not previously recorded | 0 | | | 0 | | | 5,672 | | | 0 | | | 0 | | | 0 | | | 5,672 | | Additions to allowance for credit losses not previously recorded | 0 | | | 11 | | | 2,664 | | | 0 | | | 0 | | | 0 | | | 2,675 | |
| | Reductions for securities sold during the period | Reductions for securities sold during the period | 0 | | | 0 | | | (3,147) | | | 0 | | | 0 | | | 0 | | | (3,147) | | Reductions for securities sold during the period | 0 | | | 0 | | | (28) | | | 0 | | | 0 | | | 0 | | | (28) | |
| | Addition (reductions) on securities with previous allowance | 0 | | | 0 | | | (186) | | | 0 | | | 0 | | | 0 | | | (186) | | |
| | Additions (reductions) on securities with previous allowance | | Additions (reductions) on securities with previous allowance | 0 | | | 0 | | | (837) | | | 0 | | | 0 | | | 0 | | | (837) | |
| Balance, end of period | Balance, end of period | $ | 0 | | | $ | 0 | | | $ | 2,339 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 2,339 | | Balance, end of period | $ | 0 | | | $ | 11 | | | $ | 4,138 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 4,149 | |
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 period | $ | 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) | |
| Additions (reductions) on securities with previous allowance | 0 | | | 0 | | | (186) | | | 0 | | | 0 | | | 0 | | | (186) | |
| 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, 2022, the net increase in the allowance for credit losses on available-for-sale securities was primarily related to net additions in the capital goods and utility sectors within private corporate securities due to adverse projected cash flows, partially offset by a net release on restructured private corporate securities within the communications and transportation sectors.
For the year ended December 31, 2021, the net increase in the allowance for credit losses on available-for-sale securities was primarily related to adverse projected cash flows on securities in the transportation and communications sectors within private corporate securities.
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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
The Company did not have any fixed maturity securities purchased with credit deterioration, as of both December 31, 20212022 and 2020.2021.
Fixed Maturities, Trading
The net change in unrealized gains (losses) from fixed maturities, trading still held at period end, recorded within “Other income (loss),” was $(728.6) million, $156.1 million $9.1 million and $3.1$9.1 million during the years ended December 31, 2022, 2021 and 2020, and 2019, respectively.
Equity Securities
The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Other income (loss),” was $(10.2) million, $2.1 million $(1.2) million and $(1.0)$(1.2) million during the years ended December 31, 2022, 2021 and 2020, and 2019, 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, 2021 | | December 31, 2020 | | | December 31, 2022 | | December 31, 2021 |
| | | | Amount
(in thousands) | | % of
Total | | Amount
(in thousands) | | % of
Total | | | Amount
(in thousands) | | % of
Total | | Amount
(in thousands) | | % of
Total |
| Commercial mortgage and agricultural property loans by property type: | Commercial mortgage and agricultural property loans by property type: | | | | | | | | | Commercial mortgage and agricultural property loans by property type: | | | | | | | | |
| Apartments/Multi-Family | Apartments/Multi-Family | | $ | 748,414 | | | 26.4 | % | | $ | 364,549 | | | 28.2 | % | Apartments/Multi-Family | | $ | 1,289,026 | | | 26.0 | % | | $ | 748,414 | | | 26.4 | % |
| Hospitality | Hospitality | | 48,141 | | | 1.7 | | | 34,069 | | | 2.6 | | Hospitality | | 104,177 | | | 2.1 | | | 48,141 | | | 1.7 | |
| Industrial | Industrial | | 916,398 | | | 32.2 | | | 399,017 | | | 30.9 | | Industrial | | 1,766,247 | | | 35.8 | | | 916,398 | | | 32.2 | |
| Office | Office | | 445,055 | | | 15.7 | | | 195,443 | | | 15.1 | | Office | | 590,897 | | | 11.9 | | | 445,055 | | | 15.7 | |
| Other | Other | | 252,590 | | | 8.9 | | | 138,477 | | | 10.7 | | Other | | 380,121 | | | 7.7 | | | 252,590 | | | 8.9 | |
| Retail | Retail | | 255,577 | | | 9.0 | | | 142,266 | | | 11.0 | | Retail | | 351,457 | | | 7.1 | | | 255,577 | | | 9.0 | |
| Total commercial mortgage loans | Total commercial mortgage loans | | 2,666,175 | | | 93.9 | | | 1,273,821 | | | 98.5 | | Total commercial mortgage loans | | 4,481,925 | | | 90.6 | | | 2,666,175 | | | 93.9 | |
| Agricultural property loans | Agricultural property loans | | 172,336 | | | 6.1 | | | 19,577 | | | 1.5 | | Agricultural property loans | | 467,018 | | | 9.4 | | | 172,336 | | | 6.1 | |
| Total commercial mortgage and agricultural property loans | Total commercial mortgage and agricultural property loans | | 2,838,511 | | | 100.0 | % | | 1,293,398 | | | 100.0 | % | Total commercial mortgage and agricultural property loans | | 4,948,943 | | | 100.0 | % | | 2,838,511 | | | 100.0 | % |
| Allowance for credit losses | Allowance for credit losses | | (5,951) | | | | | (4,552) | | | | Allowance for credit losses | | (20,263) | | | | | (5,951) | | | |
| Total net commercial mortgage and agricultural property loans | Total net commercial mortgage and agricultural property loans | | $ | 2,832,560 | | | $ | 1,288,846 | | | Total net commercial mortgage and agricultural property loans | | $ | 4,928,680 | | | $ | 2,832,560 | | |
|
As of December 31, 2021,2022, the commercial mortgage and agricultural property loans were secured by properties geographically dispersed throughout the United States (withwith the largest concentrations in California (25%(28%), Texas (10%(13%) and New York (7%)(6%) and included loans secured by properties in Europe (13%(10%), Mexico (2%) and Australia (3%), and Mexico (3%(1%).
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, 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 | |
| | | | | | | |
| Addition to (release of) allowance for expected losses | 1,301 | | | 98 | | | | | 1,399 | |
| | | | | | | |
| Balance at December 31, 2021 | $ | 5,847 | | | $ | 104 | | | | | $ | 5,951 | |
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | |
| Commercial Mortgage Loans | | Agricultural Property Loans | | Total |
| | (in thousands) |
| 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 | |
| Addition to (release of) allowance for expected losses | 1,301 | | | 98 | | | 1,399 | |
| Balance at December 31, 2021 | 5,847 | | | 104 | | | 5,951 | |
| Addition to (release of) allowance for expected losses | 13,818 | | | 494 | | | 14,312 | |
| Balance at December 31, 2022 | $ | 19,665 | | | $ | 598 | | | $ | 20,263 | |
See Note 2 for additional information about the Company's methodology for developing our allowance and expected losses.
For the year ended December 31, 2022, the net increase in the allowance for credit losses on commercial mortgage and other loans was primarily related to loan originations and declining market conditions, partially offset by loan repayments and payoffs.
For the year ended December 31, 2021, the net increase in the allowance for credit losses on commercial mortgage and other loans was primarily related to portfolio growth, partially offset by the improving credit environment.
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.
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, 2021 |
| Amortized Cost by Origination Year |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | | | Total |
| (in thousands) |
| Commercial mortgage loans | | | | | | | | | | | | | | | |
| Loan-to-Value Ratio: | | | | | | | | | | | | | | | |
| 0%-59.99% | $ | 47,161 | | | $ | 0 | | | $ | 179,682 | | | $ | 76,656 | | | $ | 126,934 | | | $ | 553,022 | | | | | $ | 983,455 | |
| 60%-69.99% | 307,999 | | | 225,330 | | | 289,322 | | | 170,444 | | | 126,159 | | | 116,654 | | | | | 1,235,908 | |
| 70%-79.99% | 163,451 | | | 86,083 | | | 75,185 | | | 13,728 | | | 55,032 | | | 51,203 | | | | | 444,682 | |
| 80% or greater | 0 | | | 0 | | | 0 | | | 0 | | | 958 | | | 1,172 | | | | | 2,130 | |
| Total | $ | 518,611 | | | $ | 311,413 | | | $ | 544,189 | | | $ | 260,828 | | | $ | 309,083 | | | $ | 722,051 | | | | | $ | 2,666,175 | |
| Debt Service Coverage Ratio: | | | | | | | | | | | | | | | |
| Greater or Equal to 1.2x | $ | 501,456 | | | $ | 195,164 | | | $ | 481,289 | | | $ | 253,938 | | | $ | 289,443 | | | $ | 638,092 | | | | | $ | 2,359,382 | |
| 1.0 - 1.2x | 17,155 | | | 109,862 | | | 39,577 | | | 6,890 | | | 7,100 | | | 39,213 | | | | | 219,797 | |
| Less than 1.0x | 0 | | | 6,387 | | | 23,323 | | | 0 | | | 12,540 | | | 44,746 | | | | | 86,996 | |
| Total | $ | 518,611 | | | $ | 311,413 | | | $ | 544,189 | | | $ | 260,828 | | | $ | 309,083 | | | $ | 722,051 | | | | | $ | 2,666,175 | |
| Agricultural property loans | | | | | | | | | | | | | | | |
| Loan-to-Value Ratio: | | | | | | | | | | | | | | | |
| 0%-59.99% | $ | 98,579 | | | $ | 26,581 | | | $ | 16,226 | | | $ | 6,463 | | | $ | 8,372 | | | $ | 16,115 | | | | | $ | 172,336 | |
| 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 | $ | 98,579 | | | $ | 26,581 | | | $ | 16,226 | | | $ | 6,463 | | | $ | 8,372 | | | $ | 16,115 | | | | | $ | 172,336 | |
| Debt Service Coverage Ratio: | | | | | | | | | | | | | | | |
| Greater or Equal to 1.2x | $ | 98,579 | | | $ | 26,581 | | | $ | 16,226 | | | $ | 6,463 | | | $ | 8,372 | | | $ | 15,300 | | | | | $ | 171,521 | |
| 1.0 - 1.2x | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | 0 | |
| Less than 1.0x | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 815 | | | | | 815 | |
| Total | $ | 98,579 | | | $ | 26,581 | | | $ | 16,226 | | | $ | 6,463 | | | $ | 8,372 | | | $ | 16,115 | | | | | $ | 172,336 | |
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Amortized Cost by Origination Year |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
| (in thousands) |
| Commercial mortgage loans | | | | | | | | | | | | | |
| Loan-to-Value Ratio: | | | | | | | | | | | | | |
| 0%-59.99% | $ | 266,453 | | | $ | 262,095 | | | $ | 63,558 | | | $ | 222,638 | | | $ | 201,087 | | | $ | 894,646 | | | $ | 1,910,477 | |
| 60%-69.99% | 344,110 | | | 681,996 | | | 243,800 | | | 219,593 | | | 61,757 | | | 305,175 | | | 1,856,431 | |
| 70%-79.99% | 166,629 | | | 304,386 | | | 47,388 | | | 66,148 | | | 2,409 | | | 53,336 | | | 640,296 | |
| 80% or greater | 0 | | | 0 | | | 0 | | | 3,249 | | | 0 | | | 71,472 | | | 74,721 | |
| Total | $ | 777,192 | | | $ | 1,248,477 | | | $ | 354,746 | | | $ | 511,628 | | | $ | 265,253 | | | $ | 1,324,629 | | | $ | 4,481,925 | |
| Debt Service Coverage Ratio: | | | | | | | | | | | | | |
| Greater or Equal to 1.2x | $ | 744,301 | | | $ | 1,248,477 | | | $ | 243,325 | | | $ | 452,626 | | | $ | 258,617 | | | $ | 1,203,807 | | | $ | 4,151,153 | |
| 1.0 - 1.2x | 32,891 | | | 0 | | | 83,655 | | | 26,558 | | | 6,636 | | | 45,742 | | | 195,482 | |
| Less than 1.0x | 0 | | | 0 | | | 27,766 | | | 32,444 | | | 0 | | | 75,080 | | | 135,290 | |
| Total | $ | 777,192 | | | $ | 1,248,477 | | | $ | 354,746 | | | $ | 511,628 | | | $ | 265,253 | | | $ | 1,324,629 | | | $ | 4,481,925 | |
| Agricultural property loans | | | | | | | | | | | | | |
| Loan-to-Value Ratio: | | | | | | | | | | | | | |
| 0%-59.99% | $ | 208,708 | | | $ | 133,126 | | | $ | 25,894 | | | $ | 16,053 | | | $ | 6,327 | | | $ | 20,700 | | | $ | 410,808 | |
| 60%-69.99% | 56,210 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 56,210 | |
| 70%-79.99% | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| 80% or greater | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | $ | 264,918 | | | $ | 133,126 | | | $ | 25,894 | | | $ | 16,053 | | | $ | 6,327 | | | $ | 20,700 | | | $ | 467,018 | |
| Debt Service Coverage Ratio: | | | | | | | | | | | | | |
| Greater or Equal to 1.2x | $ | 262,918 | | | $ | 133,126 | | | $ | 25,894 | | | $ | 16,053 | | | $ | 6,327 | | | $ | 20,700 | | | $ | 465,018 | |
| 1.0 - 1.2x | 2,000 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 2,000 | |
| Less than 1.0x | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | $ | 264,918 | | | $ | 133,126 | | | $ | 25,894 | | | $ | 16,053 | | | $ | 6,327 | | | $ | 20,700 | | | $ | 467,018 | |
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized Cost by Origination Year |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
| (in thousands) |
| Commercial mortgage loans | | | | | | | | | | | | | |
| Loan-to-Value Ratio: | | | | | | | | | | | | | |
| 0%-59.99% | $ | 47,161 | | | $ | 0 | | | $ | 179,682 | | | $ | 76,656 | | | $ | 126,934 | | | $ | 553,022 | | | $ | 983,455 | |
| 60%-69.99% | 307,999 | | | 225,330 | | | 289,322 | | | 170,444 | | | 126,159 | | | 116,654 | | | 1,235,908 | |
| 70%-79.99% | 163,451 | | | 86,083 | | | 75,185 | | | 13,728 | | | 55,032 | | | 51,203 | | | 444,682 | |
| 80% or greater | 0 | | | 0 | | | 0 | | | 0 | | | 958 | | | 1,172 | | | 2,130 | |
| Total | $ | 518,611 | | | $ | 311,413 | | | $ | 544,189 | | | $ | 260,828 | | | $ | 309,083 | | | $ | 722,051 | | | $ | 2,666,175 | |
| Debt Service Coverage Ratio: | | | | | | | | | | | | | |
| Greater or Equal to 1.2x | $ | 501,456 | | | $ | 195,164 | | | $ | 481,289 | | | $ | 253,938 | | | $ | 289,443 | | | $ | 638,092 | | | $ | 2,359,382 | |
| 1.0 - 1.2x | 17,155 | | | 109,862 | | | 39,577 | | | 6,890 | | | 7,100 | | | 39,213 | | | 219,797 | |
| Less than 1.0x | 0 | | | 6,387 | | | 23,323 | | | 0 | | | 12,540 | | | 44,746 | | | 86,996 | |
| Total | $ | 518,611 | | | $ | 311,413 | | | $ | 544,189 | | | $ | 260,828 | | | $ | 309,083 | | | $ | 722,051 | | | $ | 2,666,175 | |
| Agricultural property loans | | | | | | | | | | | | | |
| Loan-to-Value Ratio: | | | | | | | | | | | | | |
| 0%-59.99% | $ | 98,579 | | | $ | 26,581 | | | $ | 16,226 | | | $ | 6,463 | | | $ | 8,372 | | | $ | 16,115 | | | $ | 172,336 | |
| 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 | $ | 98,579 | | | $ | 26,581 | | | $ | 16,226 | | | $ | 6,463 | | | $ | 8,372 | | | $ | 16,115 | | | $ | 172,336 | |
| Debt Service Coverage Ratio: | | | | | | | | | | | | | |
| Greater or Equal to 1.2x | $ | 98,579 | | | $ | 26,581 | | | $ | 16,226 | | | $ | 6,463 | | | $ | 8,372 | | | $ | 15,300 | | | $ | 171,521 | |
| 1.0 - 1.2x | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Less than 1.0x | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 815 | | | 815 | |
| Total | $ | 98,579 | | | $ | 26,581 | | | $ | 16,226 | | | $ | 6,463 | | | $ | 8,372 | | | $ | 16,115 | | | $ | 172,336 | |
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, 2022 |
| 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 | $ | 4,481,925 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 4,481,925 | | | $ | 0 | |
| Agricultural property loans | 465,689 | | | 0 | | | 1,329 | | | 0 | | | 467,018 | | | 0 | |
| Total | $ | 4,947,614 | | | $ | 0 | | | $ | 1,329 | | | $ | 0 | | | $ | 4,948,943 | | | $ | 0 | |
(1)As of December 31, 2022, 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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| 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 | $ | 2,666,175 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 2,666,175 | | | $ | 0 | |
| Agricultural property loans | 172,336 | | | 0 | | | 0 | | | 0 | | | 172,336 | | | 0 | |
| Total | $ | 2,838,511 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 2,838,511 | | | $ | 0 | |
(1)As of December 31, 2021, 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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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.
For the years ended December 31, 20212022 and 2020,2021, there were $1,344$27.6 million and $0$1,344.3 million, respectively, of commercial mortgage loans acquired, other than those through direct origination. For the years ended December 31, 20212022 and 2020,2021, there were $69$24.8 million and $0$68.8 million of commercial mortgage and other loans sold, respectively.
The Company did not have any commercial mortgage and other loans purchased with credit deterioration, as of both December 31, 20212022 and 2020.2021.
Other Invested Assets
The following table sets forth the composition of “Other invested assets,” as of the dates indicated:
| | | December 31, | | December 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| | | (in thousands) | | (in thousands) |
Company's investment in separate accounts | Company's investment in separate accounts | $ | 53,694 | | | $ | 44,018 | | Company's investment in separate accounts | $ | 510 | | | $ | 53,694 | |
| LPs/LLCs: | LPs/LLCs: | | LPs/LLCs: | |
| Equity method: | Equity method: | | Equity method: | |
| Private equity | Private equity | 286,141 | | | 241,493 | | Private equity | 287,969 | | | 286,141 | |
| Hedge funds | Hedge funds | 432,749 | | | 77,311 | | Hedge funds | 576,595 | | | 432,749 | |
| Real estate-related | Real estate-related | 89,337 | | | 63,194 | | Real estate-related | 107,429 | | | 89,337 | |
| Subtotal equity method | Subtotal equity method | 808,227 | | | 381,998 | | Subtotal equity method | 971,993 | | | 808,227 | |
| Fair value: | Fair value: | | Fair value: | |
| Private equity | Private equity | 69,137 | | | 65,436 | | Private equity | 59,146 | | | 69,137 | |
| Hedge funds | Hedge funds | 481 | | | 499 | | Hedge funds | 396 | | | 481 | |
| Real estate-related | Real estate-related | 9,861 | | | 10,857 | | Real estate-related | 9,457 | | | 9,861 | |
| Subtotal fair value | Subtotal fair value | 79,479 | | | 76,792 | | Subtotal fair value | 68,999 | | | 79,479 | |
| Total LPs/LLCs | Total LPs/LLCs | 887,706 | | | 458,790 | | Total LPs/LLCs | 1,040,992 | | | 887,706 | |
| Derivative instruments | Derivative instruments | 268,525 | | | 18,147 | | Derivative instruments | 47,111 | | | 268,525 | |
| Total other invested assets | Total other invested assets | $ | 1,209,925 | | | $ | 520,955 | | Total other invested assets | $ | 1,088,613 | | | $ | 1,209,925 | |
(1)Assets consist of investments in separate account funds. The largest fund was liquidated during 2022.
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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
| | | | | December 31, | | | December 31, |
| | | | 2021 | | 2020 | | | 2022 | | 2021 |
| | | | (in thousands) | | | (in thousands) |
| STATEMENTS OF FINANCIAL POSITION | STATEMENTS OF FINANCIAL POSITION | | STATEMENTS OF FINANCIAL POSITION | |
| Total assets(1) | Total assets(1) | | $ | 72,416,906 | | | $ | 12,952,942 | | Total assets(1) | | $ | 67,721,613 | | | $ | 72,416,906 | |
| Total liabilities(2) | Total liabilities(2) | | $ | 12,120,390 | | | $ | 90,444 | | Total liabilities(2) | | $ | 12,174,133 | | | $ | 12,120,390 | |
| Partners’ capital | Partners’ capital | | 60,296,516 | | | 12,862,498 | | Partners’ capital | | 55,547,480 | | | 60,296,516 | |
| Total liabilities and partners’ capital | Total liabilities and partners’ capital | | $ | 72,416,906 | | | $ | 12,952,942 | | Total liabilities and partners’ capital | | $ | 67,721,613 | | | $ | 72,416,906 | |
| Total liabilities and partners’ capital included above | Total liabilities and partners’ capital included above | | $ | 746,870 | | | $ | 348,267 | | Total liabilities and partners’ capital included above | | $ | 815,783 | | | $ | 746,870 | |
| Equity in LP/LLC interests not included above | Equity in LP/LLC interests not included above | | 201,541 | | | 175,024 | | Equity in LP/LLC interests not included above | | 214,442 | | | 201,541 | |
| Carrying value | Carrying value | | $ | 948,411 | | | $ | 523,291 | | Carrying value | | $ | 1,030,225 | | | $ | 948,411 | |
(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.
| | | | | Years Ended December 31, | | | Years Ended December 31, |
| | | | 2021 | | 2020 | | 2019 | | | 2022 | | 2021 | | 2020 |
| | | | (in thousands) | | | (in thousands) |
| STATEMENTS OF OPERATIONS | STATEMENTS OF OPERATIONS | | STATEMENTS OF OPERATIONS | |
| Total revenue(1) | Total revenue(1) | | $ | 11,031,051 | | | $ | 565,409 | | | $ | 819,904 | | Total revenue(1) | | $ | 11,062,060 | | | $ | 11,031,051 | | | $ | 565,409 | |
| Total expenses(2) | Total expenses(2) | | (2,044,942) | | | (201,644) | | | (200,666) | | Total expenses(2) | | (1,655,673) | | | (2,044,942) | | | (201,644) | |
| Net earnings (losses) | Net earnings (losses) | | $ | 8,986,109 | | | $ | 363,765 | | | $ | 619,238 | | Net earnings (losses) | | $ | 9,406,387 | | | $ | 8,986,109 | | | $ | 363,765 | |
| Equity in net earnings (losses) included above | Equity in net earnings (losses) included above | | $ | 62,173 | | | $ | 8,644 | | | $ | 24,971 | | Equity in net earnings (losses) included above | | $ | (36,513) | | | $ | 62,173 | | | $ | 8,644 | |
| Equity in net earnings (losses) of LP/LLC interests not included above | Equity in net earnings (losses) of LP/LLC interests not included above | | 28,765 | | | 25,859 | | | 5,077 | | Equity in net earnings (losses) of LP/LLC interests not included above | | 7,320 | | | 28,765 | | | 25,859 | |
| Total equity in net earnings (losses) | Total equity in net earnings (losses) | | $ | 90,938 | | | $ | 34,503 | | | $ | 30,048 | | Total equity in net earnings (losses) | | $ | (29,193) | | | $ | 90,938 | | | $ | 34,503 | |
(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 dates indicated:
| | | | | | | | | | | | | December 31, |
| | December 31, 2021 | | December 31, 2020 | | 2022 | | 2021 |
| | (in thousands) | | (in thousands) |
| Fixed maturities | Fixed maturities | $ | 117,216 | | | $ | 54,565 | | Fixed maturities | $ | 187,628 | | | $ | 117,216 | |
| Equity securities | Equity securities | 2 | | | 1 | | Equity securities | 349 | | | 2 | |
| Commercial mortgage and other loans | Commercial mortgage and other loans | 7,025 | | | 3,610 | | Commercial mortgage and other loans | 13,335 | | | 7,025 | |
| Policy loans | Policy loans | 35,153 | | | 35,374 | | Policy loans | 14,525 | | | 35,153 | |
| Other invested assets | Other invested assets | 254 | | | 0 | | Other invested assets | 48 | | | 254 | |
| Short-term investments and cash equivalents | Short-term investments and cash equivalents | 377 | | | 63 | | Short-term investments and cash equivalents | 3,750 | | | 377 | |
| | Total accrued investment income | Total accrued investment income | $ | 160,027 | | | $ | 93,613 | | Total accrued investment income | $ | 219,635 | | | $ | 160,027 | |
|
There were $0.1$0.0 million and $0.0$0.1 million of write-downs on accrued investment income for the years ended December 31, 20212022 and 2020.2021.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Net Investment Income
The following table sets forth “Net investment income” by investment type, for the periods indicated:
| | | Years Ended December 31, | | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| | | (in thousands) | | (in thousands) |
| Fixed maturities, available-for-sale | Fixed maturities, available-for-sale | $ | 299,607 | | | $ | 224,262 | | | $ | 235,456 | | Fixed maturities, available-for-sale | $ | 589,248 | | | $ | 299,607 | | | $ | 224,262 | |
| Fixed maturities, trading | Fixed maturities, trading | 38,778 | | | 1,768 | | | 1,374 | | Fixed maturities, trading | 55,790 | | | 38,778 | | | 1,768 | |
| Equity securities | Equity securities | 530 | | | 410 | | | 856 | | Equity securities | 8,226 | | | 530 | | | 410 | |
| Commercial mortgage and other loans | Commercial mortgage and other loans | 63,548 | | | 50,534 | | | 57,886 | | Commercial mortgage and other loans | 119,358 | | | 63,548 | | | 50,534 | |
| Policy loans | Policy loans | 69,602 | | | 70,363 | | | 68,485 | | Policy loans | 21,189 | | | 69,602 | | | 70,363 | |
| Other invested assets | Other invested assets | 104,375 | | | 36,684 | | | 38,577 | | Other invested assets | 101,289 | | | 104,375 | | | 36,684 | |
| Short-term investments and cash equivalents | Short-term investments and cash equivalents | 712 | | | 3,219 | | | 9,266 | | Short-term investments and cash equivalents | 44,182 | | | 712 | | | 3,219 | |
| Gross investment income | Gross investment income | 577,152 | | | 387,240 | | | 411,900 | | Gross investment income | 939,282 | | | 577,152 | | | 387,240 | |
| Less: investment expenses | Less: investment expenses | (26,917) | | | (19,890) | | | (18,103) | | Less: investment expenses | (55,281) | | | (26,917) | | | (19,890) | |
| Net investment income | Net investment income | $ | 550,235 | | | $ | 367,350 | | | $ | 393,797 | | Net investment income | $ | 884,001 | | | $ | 550,235 | | | $ | 367,350 | |
The carrying value of non-income producing assets included $24.8$13.2 million in available-for-sale fixed maturities and less than $1 million in fixed maturities trading as of December 31, 2021.2022. Non-income producing assets represent investments that had not produced income for the twelve months preceding for December 31, 2021.2022.
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, | | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| | (in thousands) | | (in thousands) |
| Fixed maturities(1) | Fixed maturities(1) | $ | (3,514) | | | $ | (7,236) | | | $ | 46,738 | | Fixed maturities(1) | $ | (74,005) | | | $ | (3,514) | | | $ | (7,236) | |
| | Commercial mortgage and other loans | Commercial mortgage and other loans | 1,535 | | | (226) | | | 297 | | Commercial mortgage and other loans | (18,201) | | | 1,535 | | | (226) | |
| Other invested assets | Other invested assets | (2,737) | | | (287) | | | (3,400) | | Other invested assets | (78,671) | | | (2,737) | | | (287) | |
| Derivatives(2) | Derivatives(2) | (5,291,043) | | | (55,003) | | | (160,368) | | Derivatives(2) | 1,212,366 | | | (5,291,043) | | | (55,003) | |
| Short-term investments and cash equivalents | Short-term investments and cash equivalents | 353 | | | (224) | | | (16) | | Short-term investments and cash equivalents | (54) | | | 353 | | | (224) | |
| Realized investment gains (losses), net | Realized investment gains (losses), net | $ | (5,295,406) | | | $ | (62,976) | | | $ | (116,749) | | Realized investment gains (losses), net | $ | 1,041,435 | | | $ | (5,295,406) | | | $ | (62,976) | |
(1)Includes fixed maturity securities classified as available-for-sale and excludes fixed maturity securities classified as trading.
(2)Includes the impact of the 2021 Variable Annuities Recapture. See Note 1 for additional information.
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, | | December 31, |
| | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| | (in thousands) | | (in thousands) |
| Fixed maturity securities, available-for-sale — with OTTI(1) | $ N/A | | $ N/A | | $ | 1,568 | | |
| Fixed maturity securities, available-for-sale — all other(1) | N/A | | N/A | | 397,136 | | |
| Fixed maturity securities, available-for-sale with an allowance | Fixed maturity securities, available-for-sale with an allowance | 3,685 | | | 0 | | | N/A | Fixed maturity securities, available-for-sale with an allowance | $ | 4,371 | | | $ | 3,685 | | | $ | 0 | |
| Fixed maturity securities, available-for-sale without an allowance | Fixed maturity securities, available-for-sale without an allowance | 540,881 | | | 857,599 | | | N/A | Fixed maturity securities, available-for-sale without an allowance | (2,285,288) | | | 540,881 | | | 857,599 | |
| Derivatives designated as cash flow hedges(2) | 39,896 | | | (8,112) | | | 26,126 | | |
| Derivatives designated as cash flow hedges(1) | | Derivatives designated as cash flow hedges(1) | 138,627 | | | 39,896 | | | (8,112) | |
| Affiliated notes | Affiliated notes | 73 | | | 4,024 | | | 4,715 | | Affiliated notes | (13,189) | | | 73 | | | 4,024 | |
| Other investments(3) | 1,854 | | | (4,162) | | | (4,365) | | |
| Other investments(2) | | Other investments(2) | (274) | | | 1,854 | | | (4,162) | |
| Net unrealized gains (losses) on investments | Net unrealized gains (losses) on investments | $ | 586,389 | | | $ | 849,349 | | | $ | 425,180 | | Net unrealized gains (losses) on investments | $ | (2,155,753) | | | $ | 586,389 | | | $ | 849,349 | |
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
(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)(2)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, 20212022 and 2020,2021, 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, 2021 | | December 31, 2020 | | December 31, 2022 | | December 31, 2021 |
| | Remaining Contractual Maturities of the Agreements | | | Remaining Contractual Maturities of the Agreements | | | 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 | | Overnight & Continuous | | Up to 30 Days | | Total | | Overnight & Continuous | | Up to 30 Days | | Total |
| | (in thousands) | | (in thousands) |
| | Foreign government bonds | | Foreign government bonds | $ | 506 | | | $ | 0 | | | $ | 506 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| U.S. public corporate securities | U.S. public corporate securities | $ | 3,004 | | | $ | 0 | | | $ | 3,004 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | U.S. public corporate securities | 7,903 | | | 0 | | | 7,903 | | | 3,004 | | | 0 | | | 3,004 | |
| | Foreign public corporate securities | Foreign public corporate securities | 0 | | | 0 | | | 0 | | | 2,725 | | | 0 | | | 2,725 | | Foreign public corporate securities | 12,873 | | | 0 | | | 12,873 | | | 0 | | | 0 | | | 0 | |
| | Equity securities | | Equity securities | 65,468 | | | 0 | | | 65,468 | | | 0 | | | 0 | | | 0 | |
| Total cash collateral for loaned securities(1) | Total cash collateral for loaned securities(1) | $ | 3,004 | | | $ | 0 | | | $ | 3,004 | | | $ | 2,725 | | | $ | 0 | | | $ | 2,725 | | Total cash collateral for loaned securities(1) | $ | 86,750 | | | $ | 0 | | | $ | 86,750 | | | $ | 3,004 | | | $ | 0 | | | $ | 3,004 | |
(1)The Company did not have any agreements with remaining contractual maturities greater than thirty days, as of the dates indicated.
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, | | December 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| | | | (in thousands) | | | (in thousands) |
| Pledged collateral: | Pledged collateral: | | Pledged collateral: | |
| Fixed maturity securities, available-for-sale | Fixed maturity securities, available-for-sale | | $ | 2,871 | | | $ | 2,525 | | Fixed maturity securities, available-for-sale | | $ | 20,553 | | | $ | 2,871 | |
| Equity securities | | Equity securities | | 63,895 | | | 0 | |
| Total securities pledged | Total securities pledged | | $ | 2,871 | | | $ | 2,525 | | Total securities pledged | | $ | 84,448 | | | $ | 2,871 | |
| Liabilities supported by the pledged collateral: | Liabilities supported by the pledged collateral: | | | | | Liabilities supported by the pledged collateral: | | | | |
| Cash collateral for loaned securities | Cash collateral for loaned securities | | $ | 3,004 | | | $ | 2,725 | | Cash collateral for loaned securities | | $ | 86,750 | | | $ | 3,004 | |
| | Total liabilities supported by the pledged collateral | Total liabilities supported by the pledged collateral | | $ | 3,004 | | | $ | 2,725 | | Total liabilities supported by the pledged collateral | | $ | 86,750 | | | $ | 3,004 | |
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, 2022 and 2021, there were $290 million and 2020, there was no$0 million of collateral that could be sold or repledged.
As of December 31, 20212022 and 2020,2021, there were available-for-sale fixed maturities of $4.1$3.9 million and $4.3$4.1 million, respectively, on deposit with governmental authorities or trustees as required by certain insurance laws.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
4. DERIVATIVES AND HEDGING
Types of Derivative Instruments and Derivative Strategies
Interest Rate Contracts
Interest rate swaps, options, and futures 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.
The Company also uses interest rate swaptions, caps and floors to manage interest rate risk. A swaption is an option to enter into a swap with a forward starting effective date. The Company pays a premium for purchased swaptions and receives a premium for written swaptions. In an interest rate cap, the buyer receives payments at the end of each period in which the interest rate exceeds the agreed strike price. Similarly, in an interest rate floor, the buyer receives payments at the end of each period in which the interest rate is below the agreed strike price. Swaptions, caps and floors are included in interest rate options.
In standardized exchange-traded interest rate futures transactions, the Company purchases or sells a specified number of contracts, the values of which are determined by the daily market values of underlying referenced investments. The Company enters into exchange-traded futures with regulated futures commission's merchants who are members of a trading exchange.
Equity Contracts
Equity options, total return swaps, and futures 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.
Total return swaps are contracts whereby the Company agrees with counterparties to exchange, at specified intervals, the difference between the return on an asset (or market index) and London Inter-Bank Offered Rate ("LIBOR") plus an associated funding spread based on a notional amount. The Company generally uses total return swaps to hedge the effect of adverse changes in equity indices.
In standardized exchange-traded equity futures transactions, the Company purchases or sells a specified number of contracts, the values of which are determined by the daily market values underlying referenced equity indices. The Company enters into exchange-traded futures with regulated futures commission's merchants who are members of a trading exchange.
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, indexed annuities, and index-linked universal life) which may include 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. The reinsurance agreement with PALAC was recaptured on July 1, 2021. Additionally, the Company has entered into a reinsurance agreement with an external counterparty, Union Hamilton Reinsurance, Ltd. ("Union Hamilton") effective April 1, 2015. See Note 9 for additional information on the reinsurance agreements.
Effective December 1, 2021, the Company entered into a reinsurance arrangement with PALAC,FLIAC (previously named PALAC), which includes features that are accounted for as embedded derivatives. See Note 19 for additional information on the reinsurance arrangement.
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 of the netting effects of master netting agreements and cash collateral.
| | | | | December 31, 2021 | | December 31, 2020 | | | December 31, 2022 | | December 31, 2021 |
| Primary Underlying Risk/Instrument Type | Primary Underlying Risk/Instrument Type | | Gross
Notional | | Fair Value | | Gross
Notional | | Fair Value | Primary Underlying Risk/Instrument Type | | Gross
Notional | | Fair Value | | Gross
Notional | | Fair Value |
| Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities |
| | | | (in thousands) | | | (in thousands) |
| Derivatives Designated as Hedge Accounting Instruments: | Derivatives Designated as Hedge Accounting Instruments: | | Derivatives Designated as Hedge Accounting Instruments: | |
| Currency/Interest Rate | Currency/Interest Rate | | Currency/Interest Rate | |
| Interest Rate Swaps | Interest Rate Swaps | | $ | 3,344 | | | $ | 55 | | | $ | 0 | | | $ | 3,486 | | | $ | 203 | | | $ | 0 | | Interest Rate Swaps | | $ | 3,225 | | | $ | 0 | | | $ | (316) | | | $ | 3,344 | | | $ | 55 | | | $ | 0 | |
| Foreign Currency Swaps | Foreign Currency Swaps | | 886,552 | | | 37,259 | | | (6,900) | | | 861,074 | | | 27,336 | | | (49,316) | | Foreign Currency Swaps | | 1,933,343 | | | 233,812 | | | (10,462) | | | 886,552 | | | 37,259 | | | (6,900) | |
| Total Derivatives Designated as Hedge Accounting Instruments | Total Derivatives Designated as Hedge Accounting Instruments | | $ | 889,896 | | | $ | 37,314 | | | $ | (6,900) | | | $ | 864,560 | | | $ | 27,539 | | | $ | (49,316) | | Total Derivatives Designated as Hedge Accounting Instruments | | $ | 1,936,568 | | | $ | 233,812 | | | $ | (10,778) | | | $ | 889,896 | | | $ | 37,314 | | | $ | (6,900) | |
| Derivatives Not Qualifying as Hedge Accounting Instruments: | Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | | | | | | | Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | | | | | | |
| Interest Rate | Interest Rate | | Interest Rate | |
| Interest Rate Swaps | Interest Rate Swaps | | $ | 130,358,860 | | | $ | 5,698,740 | | | $ | (10,348,130) | | | $ | 663,050 | | | $ | 57,024 | | | $ | (11,117) | | Interest Rate Swaps | | $ | 138,419,110 | | | $ | 6,757,890 | | | $ | (17,092,749) | | | $ | 130,358,860 | | | $ | 5,698,740 | | | $ | (10,348,130) | |
| Interest Rate Futures | Interest Rate Futures | | 4,109,300 | | | 2,876 | | | (2,709) | | | 57,700 | | | 198 | | | 0 | | Interest Rate Futures | | 2,425,500 | | | 3,267 | | | (201) | | | 4,109,300 | | | 2,876 | | | (2,709) | |
| Interest Rate Swaptions | Interest Rate Swaptions | | 9,883,000 | | | 280,323 | | | (173,863) | | | 0 | | | 0 | | | 0 | | Interest Rate Swaptions | | 8,368,000 | | | 123,168 | | | (225,125) | | | 9,883,000 | | | 280,323 | | | (173,863) | |
| Interest Rate Forwards | Interest Rate Forwards | | 195,000 | | | 3,760 | | | (991) | | | 0 | | | 0 | | | 0 | | Interest Rate Forwards | | 1,104,000 | | | 11,265 | | | (12,359) | | | 195,000 | | | 3,760 | | | (991) | |
| Foreign Currency | Foreign Currency | | Foreign Currency | |
| Foreign Currency Forwards | Foreign Currency Forwards | | 119,653 | | | 842 | | | (1,063) | | | 55,292 | | | 5 | | | (1,322) | | Foreign Currency Forwards | | 364,946 | | | 590 | | | (10,423) | | | 119,653 | | | 842 | | | (1,063) | |
| Credit | Credit | | Credit | |
| Credit Default Swaps | Credit Default Swaps | | 306,900 | | | 24,789 | | | 0 | | | 2,313 | | | 0 | | | (18) | | Credit Default Swaps | | 47,450 | | | 346 | | | 0 | | | 306,900 | | | 24,789 | | | 0 | |
| Currency/Interest Rate | Currency/Interest Rate | | Currency/Interest Rate | |
| Foreign Currency Swaps | Foreign Currency Swaps | | 2,139,523 | | | 68,477 | | | (23,251) | | | 143,011 | | | 6,584 | | | (7,286) | | Foreign Currency Swaps | | 2,289,170 | | | 194,412 | | | (14,624) | | | 2,139,523 | | | 68,477 | | | (23,251) | |
| Equity | Equity | | Equity | |
| | Total Return Swaps | Total Return Swaps | | 15,129,666 | | | 66,627 | | | (475,209) | | | 0 | | | 0 | | | 0 | | Total Return Swaps | | 15,958,130 | | | 120,341 | | | (175,104) | | | 15,129,666 | | | 66,627 | | | (475,209) | |
| Equity Options | Equity Options | | 19,461,881 | | | 902,050 | | | (1,535,272) | | | 3,244,900 | | | 306,196 | | | (196,767) | | Equity Options | | 25,187,516 | | | 239,003 | | | (1,112,196) | | | 19,461,881 | | | 902,050 | | | (1,535,272) | |
| Futures | Futures | | 5,015,002 | | | 736 | | | (6,595) | | | 0 | | | 0 | | | 0 | | Futures | | 876,790 | | | 956 | | | (513) | | | 5,015,002 | | | 736 | | | (6,595) | |
| Total Derivatives Not Qualifying as Hedge Accounting Instruments | Total Derivatives Not Qualifying as Hedge Accounting Instruments | | $ | 186,718,785 | | | $ | 7,049,220 | | | $ | (12,567,083) | | | $ | 4,166,266 | | | $ | 370,007 | | | $ | (216,510) | | Total Derivatives Not Qualifying as Hedge Accounting Instruments | | $ | 195,040,612 | | | $ | 7,451,238 | | | $ | (18,643,294) | | | $ | 186,718,785 | | | $ | 7,049,220 | | | $ | (12,567,083) | |
| Total Derivatives(1)(2) | Total Derivatives(1)(2) | | $ | 187,608,681 | | | $ | 7,086,534 | | | $ | (12,573,983) | | | $ | 5,030,826 | | | $ | 397,546 | | | $ | (265,826) | | Total Derivatives(1)(2) | | $ | 196,977,180 | | | $ | 7,685,050 | | | $ | (18,654,072) | | | $ | 187,608,681 | | | $ | 7,086,534 | | | $ | (12,573,983) | |
(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 $9,048$4,541 million and $13,228$9,048 million as of December 31, 20212022 and 2020,2021, respectively included in "Future policy benefits" and $3,246$3,502 million and $1,155$3,246 million as of December 31, 20212022 and 2020,2021, respectively included in "Policyholders' account balances". Other assets included $73$141 million and $0$73 million as of December 31, 20212022 and 2020,2021, respectively. Other liabilities included $13$10 million and $0$13 million as of December 31, 20212022 and 2020,2021, respectively. The fair value of the related reinsurance, included in "Reinsurance recoverables" and/or "Reinsurance payables" was an asset of $931$431 million and $13,240$931 million as of December 31, 20212022 and 2020,2021, 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, 2021 | | | December 31, 2022 |
| | | | 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 | | | Gross
Amounts of
Recognized
Financial
Instruments | | Gross
Amounts
Offset in the Consolidated
Statements of
Financial
Position | | Net
Amounts
Presented in
the Consolidated Statements
of Financial
Position | | Financial
Instruments/
Collateral(1) | | Net Amount |
| | | | (in thousands) | | | (in thousands) |
| Offsetting of Financial Assets: | Offsetting of Financial Assets: | | Offsetting of Financial Assets: | |
| Derivatives | Derivatives | | $ | 7,086,534 | | | $ | (6,818,009) | | | $ | 268,525 | | | $ | 0 | | | $ | 268,525 | | Derivatives | | $ | 7,685,050 | | | $ | (7,637,939) | | | $ | 47,111 | | | $ | 0 | | | $ | 47,111 | |
| Securities purchased under agreements to resell | Securities purchased under agreements to resell | | 185,000 | | | 0 | | | 185,000 | | | (185,000) | | | 0 | | Securities purchased under agreements to resell | | 290,000 | | | 0 | | | 290,000 | | | (290,000) | | | 0 | |
| Total Assets | Total Assets | | $ | 7,271,534 | | | $ | (6,818,009) | | | $ | 453,525 | | | $ | (185,000) | | | $ | 268,525 | | Total Assets | | $ | 7,975,050 | | | $ | (7,637,939) | | | $ | 337,111 | | | $ | (290,000) | | | $ | 47,111 | |
| Offsetting of Financial Liabilities: | Offsetting of Financial Liabilities: | | | | | | | | | | | Offsetting of Financial Liabilities: | | | | | | | | | | |
| Derivatives | Derivatives | | $ | 12,573,983 | | | $ | (12,568,082) | | | $ | 5,901 | | | $ | (5,901) | | | $ | 0 | | Derivatives | | $ | 18,654,072 | | | $ | (16,568,912) | | | $ | 2,085,160 | | | $ | (2,085,160) | | | $ | 0 | |
| Securities sold under agreements to repurchase | Securities sold under agreements to repurchase | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Securities sold under agreements to repurchase | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total Liabilities | Total Liabilities | | $ | 12,573,983 | | | $ | (12,568,082) | | | $ | 5,901 | | | $ | (5,901) | | | $ | 0 | | Total Liabilities | | $ | 18,654,072 | | | $ | (16,568,912) | | | $ | 2,085,160 | | | $ | (2,085,160) | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | | $ | 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 | | $ | 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, 2021 |
| | | Gross
Amounts of
Recognized
Financial
Instruments | | Gross
Amounts
Offset in the Consolidated
Statements of
Financial
Position | | Net
Amounts
Presented in
the Consolidated Statements
of Financial
Position | | Financial
Instruments/
Collateral(1) | | Net Amount |
| | | (in thousands) |
| Offsetting of Financial Assets: | | | | | | | | | | |
| Derivatives | | $ | 7,086,534 | | | $ | (6,818,009) | | | $ | 268,525 | | | $ | 0 | | | $ | 268,525 | |
| Securities purchased under agreements to resell | | 185,000 | | | 0 | | | 185,000 | | | (185,000) | | | 0 | |
| Total Assets | | $ | 7,271,534 | | | $ | (6,818,009) | | | $ | 453,525 | | | $ | (185,000) | | | $ | 268,525 | |
| Offsetting of Financial Liabilities: | | | | | | | | | | |
| Derivatives | | $ | 12,573,983 | | | $ | (12,568,082) | | | $ | 5,901 | | | $ | (5,901) | | | $ | 0 | |
| Securities sold under agreements to repurchase | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total Liabilities | | $ | 12,573,983 | | | $ | (12,568,082) | | | $ | 5,901 | | | $ | (5,901) | | | $ | 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, or 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, 2021 | | | | Year Ended December 31, 2022 | |
| | | | Realized
Investment
Gains (Losses) | | Net
Investment
Income | | Other
Income | | Change in AOCI | | | | Realized
Investment
Gains (Losses) | | Net
Investment
Income | | Other
Income | | Change in AOCI | |
| | | | (in thousands) | | | | (in thousands) | |
| Derivatives Designated as Hedge Accounting Instruments: | Derivatives Designated as Hedge Accounting Instruments: | | | Derivatives Designated as Hedge Accounting Instruments: | | |
| Cash flow hedges | Cash flow hedges | | | Cash flow hedges | | |
| Interest Rate | Interest Rate | | $ | 2 | | | $ | 47 | | | $ | 0 | | | $ | (161) | | | Interest Rate | | $ | 1 | | | $ | (8) | | | $ | 0 | | | $ | (312) | | |
| Currency/Interest Rate | Currency/Interest Rate | | 1,357 | | | 15,983 | | | 11,119 | | | 48,169 | | | Currency/Interest Rate | | 7,636 | | | 36,734 | | | 34,070 | | | 99,043 | | |
| Total cash flow hedges | Total cash flow hedges | | 1,359 | | | 16,030 | | | 11,119 | | | 48,008 | | | Total cash flow hedges | | 7,637 | | | 36,726 | | | 34,070 | | | 98,731 | | |
| Derivatives Not Qualifying as Hedge Accounting Instruments: | Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | | | | Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | | | |
| Interest Rate | Interest Rate | | (20,596) | | | 0 | | | 0 | | | 0 | | | Interest Rate | | (4,568,107) | | | 0 | | | 0 | | | 0 | | |
| Currency | Currency | | 2,006 | | | 0 | | | 0 | | | 0 | | | Currency | | 18,952 | | | 0 | | | 0 | | | 0 | | |
| Currency/Interest Rate | Currency/Interest Rate | | 44,350 | | | 0 | | | 79 | | | 0 | | | Currency/Interest Rate | | 107,388 | | | 0 | | | 557 | | | 0 | | |
| Credit | Credit | | 2,892 | | | 0 | | | 0 | | | 0 | | | Credit | | (15,904) | | | 0 | | | 0 | | | 0 | | |
| Equity | Equity | | (944,765) | | | 0 | | | 0 | | | 0 | | | Equity | | 1,090,215 | | | 0 | | | 0 | | | 0 | | |
Embedded Derivatives(1) | Embedded Derivatives(1) | | (4,376,289) | | | 0 | | | 0 | | | 0 | | | Embedded Derivatives(1) | | 4,572,185 | | | 0 | | | 0 | | | 0 | | |
| Total Derivatives Not Qualifying as Hedge Accounting Instruments | Total Derivatives Not Qualifying as Hedge Accounting Instruments | | (5,292,402) | | | 0 | | | 79 | | | 0 | | | Total Derivatives Not Qualifying as Hedge Accounting Instruments | | 1,204,729 | | | 0 | | | 557 | | | 0 | | |
| Total | Total | | $ | (5,291,043) | | | $ | 16,030 | | | $ | 11,198 | | | $ | 48,008 | | | Total | | $ | 1,212,366 | | | $ | 36,726 | | | $ | 34,627 | | | $ | 98,731 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 | | | | |
| | | Realized
Investment
Gains (Losses) | | Net
Investment
Income | | Other
Income | | Change in AOCI | | | | |
| | | (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, 2021 | | | | |
| | | Realized
Investment
Gains (Losses) | | Net
Investment
Income | | Other
Income | | Change in AOCI | | | | |
| | | (in thousands) | | | | |
| Derivatives Designated as Hedge Accounting Instruments: | | | | | | | | | | | | |
| Cash flow hedges | | | | | | | | | | | | |
| Interest Rate | | $ | 2 | | | $ | 47 | | | $ | 0 | | | $ | (161) | | | | | |
| Currency/Interest Rate | | 1,357 | | | 15,983 | | | 11,119 | | | 48,169 | | | | | |
| Total cash flow hedges | | 1,359 | | | 16,030 | | | 11,119 | | | 48,008 | | | | | |
| Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | | | | | | |
| Interest Rate | | (20,596) | | | 0 | | | 0 | | | 0 | | | | | |
| Currency | | 2,006 | | | 0 | | | 0 | | | 0 | | | | | |
| Currency/Interest Rate | | 44,350 | | | 0 | | | 79 | | | 0 | | | | | |
| Credit | | 2,892 | | | 0 | | | 0 | | | 0 | | | | | |
| Equity | | (944,765) | | | 0 | | | 0 | | | 0 | | | | | |
| Embedded Derivatives(1) | | (4,376,289) | | | 0 | | | 0 | | | 0 | | | | | |
| Total Derivatives Not Qualifying as Hedge Accounting Instruments | | (5,292,402) | | | 0 | | | 79 | | | 0 | | | | | |
| Total | | $ | (5,291,043) | | | $ | 16,030 | | | $ | 11,198 | | | $ | 48,008 | | | | | |
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
| | | | | Year Ended December 31, 2019 | | | Year Ended December 31, 2020 |
| | | | Realized
Investment
Gains (Losses) | | Net
Investment
Income | | Other
Income | | Change in AOCI | | | Realized
Investment
Gains (Losses) | | Net
Investment
Income | | Other
Income | | Change in AOCI |
| | | | (in thousands) | | | (in thousands) |
| Derivatives Designated as Hedge Accounting Instruments: | Derivatives Designated as Hedge Accounting Instruments: | Derivatives Designated as Hedge Accounting Instruments: |
| Cash flow hedges | Cash flow hedges | | Cash flow hedges | |
| Interest Rate | Interest Rate | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (50) | | Interest Rate | | $ | (44) | | | $ | 21 | | | $ | 0 | | | $ | 284 | |
| Currency/Interest Rate | Currency/Interest Rate | | 425 | | | 9,007 | | | (1,698) | | | 4,081 | | Currency/Interest Rate | | (314) | | | 10,660 | | | (10,161) | | | (34,522) | |
| Total cash flow hedges | Total cash flow hedges | | 425 | | | 9,007 | | | (1,698) | | | 4,031 | | Total cash flow hedges | | (358) | | | 10,681 | | | (10,161) | | | (34,238) | |
| Derivatives Not Qualifying as Hedge Accounting Instruments: | Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | | | Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | | |
| Interest Rate | Interest Rate | | 18,609 | | | 0 | | | 0 | | | 0 | | Interest Rate | | 17,000 | | | 0 | | | 0 | | | 0 | |
| Currency | Currency | | 20 | | | 0 | | | 0 | | | 0 | | Currency | | (2,560) | | | 0 | | | 0 | | | 0 | |
| Currency/Interest Rate | Currency/Interest Rate | | 3,485 | | | 0 | | | (5) | | | 0 | | Currency/Interest Rate | | (4,130) | | | 0 | | | (109) | | | 0 | |
| Credit | Credit | | (1) | | | 0 | | | 0 | | | 0 | | Credit | | (284) | | | 0 | | | 0 | | | 0 | |
| Equity | Equity | | 74,068 | | | 0 | | | 0 | | | 0 | | Equity | | 37,480 | | | 0 | | | 0 | | | 0 | |
| Embedded Derivatives | Embedded Derivatives | | (256,974) | | | 0 | | | 0 | | | 0 | | Embedded Derivatives | | (102,151) | | | 0 | | | 0 | | | 0 | |
| Total Derivatives Not Qualifying as Hedge Accounting Instruments | Total Derivatives Not Qualifying as Hedge Accounting Instruments | | (160,793) | | | 0 | | | (5) | | | 0 | | Total Derivatives Not Qualifying as Hedge Accounting Instruments | | (54,645) | | | 0 | | | (109) | | | 0 | |
| Total | Total | | $ | (160,368) | | | $ | 9,007 | | | $ | (1,703) | | | $ | 4,031 | | Total | | $ | (55,003) | | | $ | 10,681 | | | $ | (10,270) | | | $ | (34,238) | |
(1)Includes the impact from 2021 Variable Annuities Recapture, see Note 1 for further details.
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, 2018 | $ | 22,122 | |
Cumulative-effect adjustment from the adoption of ASU 2017-12 | (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) | |
| |
| Amount recorded in AOCI | |
| Interest Rate | (112) | |
| |
| Currency/Interest Rate | 76,628 | |
| Total amount recorded in AOCI | 76,516 | |
| Amount reclassified from AOCI to income | |
| Interest Rate | (49) | |
| |
| Currency/Interest Rate | (28,459) | |
| Total amount reclassified from AOCI to income | (28,508) | |
| Balance, December 31, 2021 | $ | 39,896 | |
| Amount recorded in AOCI | |
| Interest Rate | (319) | |
| Currency/Interest Rate | 177,483 | |
| Total amount recorded in AOCI | 177,164 | |
| Amount reclassified from AOCI to income | |
| Interest Rate | 7 | |
| Currency/Interest Rate | (78,440) | |
| Total amount reclassified from AOCI to income | (78,433) | |
| Balance, December 31, 2022 | $ | 138,627 | |
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, 20212022 values, it is estimated that a pre-tax gain of $11$20 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending December 31, 2022.2023.
The exposures the Company is hedging with these qualifying cash flow hedges include the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments.
There were no material amounts reclassified from AOCI into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Credit Derivatives
Credit Derivatives, where the Company has written credit protection on certain index references, hashave outstanding notional amounts of $157$47 million and $0$157 million as of December 31, 20212022 and December 31, 2020,2021, respectively. These credit derivatives are reported at fair value as an asset of $11$0 million and $0$11 million as of December 31, 20212022 and December 31, 2020,2021, respectively. As of December 31, 20212022 the notional amount of these credit derivatives had the following NAIC Rating: $57 million in NAIC 3 and $100$47 million in NAIC 6.
The Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. The Company has outstanding notional amounts of $150$0 million and $2$150 million as of December 31, 20212022 and 2020,2021, respectively. These credit derivatives are reported at fair value as an asset of $14$0 million and $0$14 million as of December 31, 2022 and 2021, and 2020.respectively.
Counterparty Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial derivative transactions with a positive fair value. The Company manages credit risk by entering into derivative transactions with regulated derivatives exchanges for exchange traded derivatives and its affiliate, Prudential Global Funding LLC (“PGF”), related to its OTCover-the-counter ("OTC") derivatives. PGF, in turn, manages its credit risk by: (i) entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties governed by master netting agreement, as applicable; (ii) trading through central clearing and OTC parties; (iii) obtaining collateral, such as cash and securities, when appropriate; and (iv) setting limits on single party credit exposures which are subject to periodic management review.
Substantially all of the Company’s derivative agreements have zero thresholds which require daily full collateralization by the party in a liability position.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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, derivative contracts that trade on an active exchange market, separate account assets and other liabilities.
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, short-term investments and certain OTC derivatives and embedded derivatives resulting from reinsurance.
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, 2021 | | | | December 31, 2022 | |
| | Level 1 | | Level 2 | | Level 3 | | Netting(1) | | Total | | | Level 1 | | Level 2 | | Level 3 | | Netting(1) | | Total | |
| | (in thousands) | | | (in thousands) | |
| Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | | | Fixed maturities, available-for-sale: | | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | U.S. Treasury securities and obligations of U.S. government authorities and agencies | | $ | 0 | | | $ | 333,940 | | | $ | 0 | | | $ | | $ | 333,940 | | | U.S. Treasury securities and obligations of U.S. government authorities and agencies | | $ | 0 | | | $ | 281,792 | | | $ | 0 | | | $ | | $ | 281,792 | | |
| Obligations of U.S. states and their political subdivisions | Obligations of U.S. states and their political subdivisions | | 0 | | | 630,521 | | | 0 | | | 630,521 | | | Obligations of U.S. states and their political subdivisions | | 0 | | | 628,200 | | | 0 | | | 628,200 | | |
| Foreign government bonds | Foreign government bonds | | 0 | | | 350,321 | | | 150 | | | 350,471 | | | Foreign government bonds | | 0 | | | 272,738 | | | 724 | | | 273,462 | | |
| U.S. corporate public securities | U.S. corporate public securities | | 0 | | | 5,131,872 | | | 0 | | | 5,131,872 | | | U.S. corporate public securities | | 0 | | | 6,443,944 | | | 0 | | | 6,443,944 | | |
| U.S. corporate private securities | U.S. corporate private securities | | 0 | | | 1,873,370 | | | 131,505 | | | 2,004,875 | | | U.S. corporate private securities | | 0 | | | 3,573,269 | | | 243,460 | | | 3,816,729 | | |
| Foreign corporate public securities | Foreign corporate public securities | | 0 | | | 921,008 | | | 8,894 | | | 929,902 | | | Foreign corporate public securities | | 0 | | | 1,371,354 | | | 6,868 | | | 1,378,222 | | |
| Foreign corporate private securities | Foreign corporate private securities | | 0 | | | 2,508,676 | | | 245,235 | | | 2,753,911 | | | Foreign corporate private securities | | 0 | | | 3,509,162 | | | 257,168 | | | 3,766,330 | | |
| Asset-backed securities(2) | Asset-backed securities(2) | | 0 | | | 484,861 | | | 62,449 | | | 547,310 | | | Asset-backed securities(2) | | 0 | | | 1,421,852 | | | 20,502 | | | 1,442,354 | | |
| Commercial mortgage-backed securities | Commercial mortgage-backed securities | | 0 | | | 463,689 | | | 111,495 | | | 575,184 | | | Commercial mortgage-backed securities | | 0 | | | 573,930 | | | 84,222 | | | 658,152 | | |
| Residential mortgage-backed securities | Residential mortgage-backed securities | | 0 | | | 20,180 | | | 0 | | | 20,180 | | | Residential mortgage-backed securities | | 0 | | | 336,216 | | | 0 | | | 336,216 | | |
| Subtotal | Subtotal | | 0 | | | 12,718,438 | | | 559,728 | | | | | 13,278,166 | | | Subtotal | | 0 | | | 18,412,457 | | | 612,944 | | | | | 19,025,401 | | |
| Fixed maturities, trading | Fixed maturities, trading | | 0 | | | 3,302,392 | | | 0 | | | 3,302,392 | | | Fixed maturities, trading | | 0 | | | 1,936,159 | | | 0 | | | 1,936,159 | | |
| Equity securities | Equity securities | | 58,160 | | | 40,635 | | | 12,472 | | | 111,267 | | | Equity securities | | 108,076 | | | 6,403 | | | 28,593 | | | 143,072 | | |
| Short-term investments | Short-term investments | | 9,997 | | | 135,440 | | | 0 | | | 145,437 | | | Short-term investments | | 0 | | | 81,215 | | | 16,945 | | | 98,160 | | |
| Cash equivalents | Cash equivalents | | 13,999 | | | 422,633 | | | 0 | | | 436,632 | | | Cash equivalents | | 0 | | | 1,432,182 | | | 0 | | | 1,432,182 | | |
| Other invested assets(3) | Other invested assets(3) | | 246,097 | | | 6,840,437 | | | 0 | | | (6,818,009) | | | 268,525 | | | Other invested assets(3) | | 4,223 | | | 7,680,827 | | | 0 | | | (7,637,939) | | | 47,111 | | |
| Other assets | Other assets | | 0 | | | 0 | | | 72,937 | | | 72,937 | | | Other assets | | 0 | | | 0 | | | 141,041 | | | 141,041 | | |
| Reinsurance recoverables | Reinsurance recoverables | | 0 | | | 0 | | | 931,207 | | | 931,207 | | | Reinsurance recoverables | | 0 | | | 0 | | | 430,911 | | | 430,911 | | |
| Receivables from parent and affiliates | Receivables from parent and affiliates | | 0 | | | 162,045 | | | 0 | | | 162,045 | | | Receivables from parent and affiliates | | 0 | | | 148,075 | | | 0 | | | 148,075 | | |
| Subtotal excluding separate account assets | Subtotal excluding separate account assets | | 328,253 | | | 23,622,020 | | | 1,576,344 | | | (6,818,009) | | | 18,708,608 | | | Subtotal excluding separate account assets | | 112,299 | | | 29,697,318 | | | 1,230,434 | | | (7,637,939) | | | 23,402,112 | | |
| Separate account assets(4)(5) | Separate account assets(4)(5) | | 52,100 | | | 144,059,558 | | | 0 | | | 144,111,658 | | | Separate account assets(4)(5) | | 102,243 | | | 108,682,425 | | | 4,645 | | | 108,789,313 | | |
| Total assets | Total assets | | $ | 380,353 | | | $ | 167,681,578 | | | $ | 1,576,344 | | | $ | (6,818,009) | | | $ | 162,820,266 | | | Total assets | | $ | 214,542 | | | $ | 138,379,743 | | | $ | 1,235,079 | | | $ | (7,637,939) | | | $ | 132,191,425 | | |
| Future policy benefits(6) | Future policy benefits(6) | | $ | 0 | | | $ | 0 | | | $ | 9,047,956 | | | $ | | $ | 9,047,956 | | | Future policy benefits(6) | | $ | 0 | | | $ | 0 | | | $ | 4,540,747 | | | $ | | $ | 4,540,747 | | |
| Policyholders' account balances | Policyholders' account balances | | 0 | | | 0 | | | 3,245,773 | | | 3,245,773 | | | Policyholders' account balances | | 0 | | | 0 | | | 3,502,096 | | | 3,502,096 | | |
| Payables to parent and affiliates | Payables to parent and affiliates | | 0 | | | 12,563,253 | | | 0 | | | (12,563,253) | | | 0 | | | Payables to parent and affiliates | | 0 | | | 18,653,159 | | | 0 | | | (16,568,242) | | | 2,084,917 | | |
| Other liabilities | Other liabilities | | 10,730 | | | 12,624 | | | 0 | | | (4,829) | | | 18,525 | | | Other liabilities | | 899 | | | (9,496) | | | 0 | | | (670) | | | (9,267) | | |
| Total liabilities | Total liabilities | | $ | 10,730 | | | $ | 12,575,877 | | | $ | 12,293,729 | | | $ | (12,568,082) | | | $ | 12,312,254 | | | Total liabilities | | $ | 899 | | | $ | 18,643,663 | | | $ | 8,042,843 | | | $ | (16,568,912) | | | $ | 10,118,493 | | |
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
| | | | | December 31, 2020 | | | December 31, 2021 |
| | | | Level 1 | | Level 2 | | Level 3 | | Netting(1) | | Total | | | Level 1 | | Level 2 | | Level 3 | | Netting(1) | | Total |
| | | | (in thousands) | | | (in thousands) |
| Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | | Fixed maturities, available-for-sale: | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | U.S. Treasury securities and obligations of U.S. government authorities and agencies | | $ | 0 | | | $ | 22,855 | | | $ | 55,000 | | | $ | | $ | 77,855 | | U.S. Treasury securities and obligations of U.S. government authorities and agencies | | $ | 0 | | | $ | 333,940 | | | $ | 0 | | | $ | | $ | 333,940 | |
| Obligations of U.S. states and their political subdivisions | Obligations of U.S. states and their political subdivisions | | 0 | | | 517,951 | | | 0 | | | 517,951 | | Obligations of U.S. states and their political subdivisions | | 0 | | | 630,521 | | | 0 | | | 630,521 | |
| Foreign government bonds | Foreign government bonds | | 0 | | | 250,692 | | | 163 | | | 250,855 | | Foreign government bonds | | 0 | | | 350,321 | | | 150 | | | 350,471 | |
| U.S. corporate public securities | U.S. corporate public securities | | 0 | | | 2,929,431 | | | 3 | | | 2,929,434 | | U.S. corporate public securities | | 0 | | | 5,131,872 | | | 0 | | | 5,131,872 | |
| U.S. corporate private securities | U.S. corporate private securities | | 0 | | | 977,423 | | | 34,633 | | | 1,012,056 | | U.S. corporate private securities | | 0 | | | 1,873,370 | | | 131,505 | | | 2,004,875 | |
| Foreign corporate public securities | Foreign corporate public securities | | 0 | | | 311,407 | | | 9,323 | | | 320,730 | | Foreign corporate public securities | | 0 | | | 921,008 | | | 8,894 | | | 929,902 | |
| Foreign corporate private securities | Foreign corporate private securities | | 0 | | | 961,113 | | | 130,817 | | | 1,091,930 | | Foreign corporate private securities | | 0 | | | 2,508,676 | | | 245,235 | | | 2,753,911 | |
| Asset-backed securities(2) | Asset-backed securities(2) | | 0 | | | 235,573 | | | 2,065 | | | 237,638 | | Asset-backed securities(2) | | 0 | | | 484,861 | | | 62,449 | | | 547,310 | |
| Commercial mortgage-backed securities | Commercial mortgage-backed securities | | 0 | | | 520,947 | | | 0 | | | 520,947 | | Commercial mortgage-backed securities | | 0 | | | 463,689 | | | 111,495 | | | 575,184 | |
| Residential mortgage-backed securities | Residential mortgage-backed securities | | 0 | | | 53,235 | | | 0 | | | 53,235 | | Residential mortgage-backed securities | | 0 | | | 20,180 | | | 0 | | | 20,180 | |
| Subtotal | Subtotal | | 0 | | | 6,780,627 | | | 232,004 | | | | | 7,012,631 | | Subtotal | | 0 | | | 12,718,438 | | | 559,728 | | | | | 13,278,166 | |
| Fixed maturities, trading | Fixed maturities, trading | | 0 | | | 81,727 | | | 755 | | | 82,482 | | Fixed maturities, trading | | 0 | | | 3,302,392 | | | 0 | | | 3,302,392 | |
| Equity securities | Equity securities | | 100,268 | | | 300 | | | 7,889 | | | 108,457 | | Equity securities | | 58,160 | | | 40,635 | | | 12,472 | | | 111,267 | |
| Short-term investments | Short-term investments | | 49,997 | | | 0 | | | 0 | | | 49,997 | | Short-term investments | | 9,997 | | | 135,440 | | | 0 | | | 145,437 | |
| Cash equivalents | Cash equivalents | | 49,996 | | | 347,330 | | | 0 | | | 397,326 | | Cash equivalents | | 13,999 | | | 422,633 | | | 0 | | | 436,632 | |
| Other invested assets(3) | Other invested assets(3) | | 198 | | | 397,348 | | | 0 | | | (379,399) | | | 18,147 | | Other invested assets(3) | | 246,097 | | | 6,840,437 | | | 0 | | | (6,818,009) | | | 268,525 | |
| Other assets | Other assets | | 0 | | | 0 | | | 0 | | | 0 | | Other assets | | 0 | | | 0 | | | 72,937 | | | 72,937 | |
| Reinsurance recoverables | Reinsurance recoverables | | 0 | | | 0 | | | 13,239,539 | | | 13,239,539 | | Reinsurance recoverables | | 0 | | | 0 | | | 931,207 | | | 931,207 | |
| Receivables from parent and affiliates | Receivables from parent and affiliates | | 0 | | | 111,970 | | | 0 | | | 111,970 | | Receivables from parent and affiliates | | 0 | | | 162,045 | | | 0 | | | 162,045 | |
| Subtotal excluding separate account assets | Subtotal excluding separate account assets | | 200,459 | | | 7,719,302 | | | 13,480,187 | | | (379,399) | | | 21,020,549 | | Subtotal excluding separate account assets | | 328,253 | | | 23,622,020 | | | 1,576,344 | | | (6,818,009) | | | 18,708,608 | |
| Separate account assets(4)(5) | Separate account assets(4)(5) | | 0 | | | 140,583,009 | | | 0 | | | 140,583,009 | | Separate account assets(4)(5) | | 52,100 | | | 144,059,558 | | | 0 | | | 144,111,658 | |
| Total assets | Total assets | | $ | 200,459 | | | $ | 148,302,311 | | | $ | 13,480,187 | | | $ | (379,399) | | | $ | 161,603,558 | | Total assets | | $ | 380,353 | | | $ | 167,681,578 | | | $ | 1,576,344 | | | $ | (6,818,009) | | | $ | 162,820,266 | |
| Future policy benefits(6) | Future policy benefits(6) | | $ | 0 | | | $ | 0 | | | $ | 13,227,814 | | | $ | | $ | 13,227,814 | | Future policy benefits(6) | | $ | 0 | | | $ | 0 | | | $ | 9,047,956 | | | $ | | $ | 9,047,956 | |
| Policyholders' account balances | Policyholders' account balances | | 0 | | | 0 | | | 1,155,274 | | | 1,155,274 | | Policyholders' account balances | | 0 | | | 0 | | | 3,245,773 | | | 3,245,773 | |
| Payables to parent and affiliates | Payables to parent and affiliates | | 0 | | | 265,826 | | | 0 | | | (265,826) | | | 0 | | Payables to parent and affiliates | | 0 | | | 12,563,253 | | | 0 | | | (12,563,253) | | | 0 | |
| Other liabilities | Other liabilities | | 0 | | | 0 | | | 0 | | | 0 | | Other liabilities | | 10,730 | | | 12,624 | | | 0 | | | (4,829) | | | 18,525 | |
| Total liabilities | Total liabilities | | $ | 0 | | | $ | 265,826 | | | $ | 14,383,088 | | | $ | (265,826) | | | $ | 14,383,088 | | Total liabilities | | $ | 10,730 | | | $ | 12,575,877 | | | $ | 12,293,729 | | | $ | (12,568,082) | | | $ | 12,312,254 | |
(1)“Netting” amounts represent cash collateral of $(5,750.1)$(8,931) million and $113.6$(5,750) million as of December 31, 20212022 and 2020,2021, 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, 20212022 and 2020,2021, the fair values of such investments were $79$69 million and $77$79 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, 20212022 and 2020,2021, the fair value of such investments was $5,686$5,262 million and $5,157$5,686 million, respectively.
(6)As of December 31, 2022, the net embedded derivative liability position of $4,541 million includes $801 million of embedded derivatives in an asset position and $5,342 million of embedded derivatives in a liability position. As of December 31, 2021, the net embedded derivative liability position of $9,048 million includes $610 million of embedded derivatives in an asset position and $9,658 million of embedded derivatives in a liability position. 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.
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, 20202022 and 2019,2021, 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” or "Other liabilities", 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 inputinputs 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 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.
Other assets consists primarily of deposit assets related to reinsurance agreements using deposit accounting under U.S. GAAP, which include amounts representing the fair value of embedded derivative instruments associated with the index-linked features of certain annuity products. The methods and assumptions used to estimate the fair value are consistent with those described below in “Policyholders' account balances”.
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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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 iswas based on the London Inter Bank Offered Rate ("LIBOR")SOFR swap curve, as of December 31, 2022, and the LIBOR swap curve as of December 31, 2021, and adjusted for an additional spread relative to LIBOR to reflect NPR.
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 and certain annuity 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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Quantitative Information Regarding Internally-Priced Level 3 Assets and Liabilities - The tables below present quantitative information onregarding significant internally-priced Level 3 assets and liabilities.
| | | | December 31, 2021 | | December 31, 2022 |
| | | Fair Value | | Valuation
Techniques | | Unobservable
Inputs | | Minimum | | Maximum | | Weighted
Average | | Impact of
Increase in Input on Fair Value(1) | | Fair Value | | Valuation
Techniques | | Unobservable
Inputs | | Minimum | | Maximum | | Weighted
Average | | Impact of
Increase in Input on Fair Value(1) |
| | | (in thousands) | | | | | | | | | | | | | | (in thousands) | | | | | | | | | | | | |
| Assets: | Assets: | | Assets: | |
| Corporate securities(2) | Corporate securities(2) | $ | 312,139 | | | Discounted cash flow | | Discount rate | | 1.65 | % | | 20 | % | | 4.57 | % | | Decrease | Corporate securities(2) | $ | 408,494 | | | Discounted cash flow | | Discount rate | | 9.77 | % | | 20 | % | | 16.53 | % | | Decrease |
| | Market Comparables | | EBITDA multiples(3) | | 4.9 | X | | 19.2 | X | | 9.0 | X | | Increase | | Market Comparables | | EBITDA multiples(3) | | 2.2 | X | | 23.5 | X | | 8.1 | X | | Increase |
| | Liquidation | | Liquidation value | | 62.58 | % | | 62.58 | % | | 62.58 | % | | Increase | |
| Reinsurance recoverables | Reinsurance recoverables | $ | 931,207 | | | Fair values are determined using the same unobservable inputs as future policy benefits. | Reinsurance recoverables | $ | 430,911 | | | Fair values are determined using the same unobservable inputs as future policy benefits. |
| Liabilities: | Liabilities: | | Liabilities: | |
| Future policy benefits(4) | Future policy benefits(4) | $ | 9,047,956 | | | Discounted cash flow | | Lapse rate(6) | | 1 | % | | 20 | % | | Decrease | Future policy benefits(4) | $ | 4,540,747 | | | Discounted cash flow | | Lapse rate(6) | | 1 | % | | 20 | % | | Decrease |
| | Spread over LIBOR(7) | | 0.03 | % | | 1.13 | % | | Decrease | | Spread over SOFR(7) | | 0.50 | % | | 2.20 | % | | Decrease |
| | Utilization rate(8) | | 39 | % | | 96 | % | | Increase | | Utilization rate(8) | | 38 | % | | 95 | % | | Increase |
| | Withdrawal rate | | See table footnote (9) below. | | Withdrawal rate | | See table footnote (9) below. |
| | Mortality rate(10) | | 0 | % | | 15 | % | | Decrease | | Mortality rate(10) | | 0 | % | | 15 | % | | Decrease |
| | | | | | Equity volatility curve | | 16 | % | | 25 | % | | | | Increase | | | | | | Equity volatility curve | | 18 | % | | 26 | % | | | | Increase |
| Policyholders' account balances(5) | Policyholders' account balances(5) | $ | 3,245,773 | | | Discounted cash flow | | Lapse rate(6) | | 1 | % | | 42 | % | | Decrease | Policyholders' account balances(5) | $ | 3,502,096 | | | Discounted cash flow | | Lapse rate(6) | | 1 | % | | 80 | % | | Decrease |
| | Spread over LIBOR(7) | | 0.03 | % | | 1.13 | % | | Decrease | | Spread over SOFR(7) | | 0.17 | % | | 1.93 | % | | Decrease |
| | Mortality rate(10) | | 0 | % | | 23 | % | | Decrease | | Mortality rate(10) | | 0 | % | | 23 | % | | Decrease |
| | Equity volatility curve | | 6 | % | | 31 | % | | Increase | | Equity volatility curve | | 6 | % | | 30 | % | | Increase |
| | | Option Budget(11) | | (2) | % | | 6 | % | | Decrease |
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
| | | | December 31, 2020 | | December 31, 2021 |
| | | Fair Value | | Valuation
Techniques | | Unobservable
Inputs | | Minimum | | Maximum | | Weighted
Average | | Impact of
Increase in Input on Fair Value(1) | | Fair Value | | Valuation
Techniques | | Unobservable
Inputs | | Minimum | | Maximum | | Weighted
Average | | Impact of
Increase in Input on Fair Value(1) |
| | | (in thousands) | | | | | | | | | | | | | | (in thousands) | | | | | | | | | | | | |
| Assets: | Assets: | | Assets: | |
| Corporate securities(2) | Corporate securities(2) | $ | 151,554 | | | Discounted cash flow | | Discount rate | | 0.99 | % | | 11.38 | % | | 3.44 | % | | Decrease | Corporate securities(2) | $ | 312,139 | | | Discounted cash flow | | Discount rate | | 1.65 | % | | 20 | % | | 4.57 | % | | Decrease |
| | | Market Comparables | | EBITDA multiples(3) | | 4.9 X | | 19.2 X | | 9.0 X | | Increase |
| | | Liquidation | | Liquidation Value | | 62.58 | % | | 62.58 | % | | 62.58 | % | | Increase |
| Reinsurance recoverables | Reinsurance recoverables | $ | 13,239,539 | | | Fair values are determined using the same unobservable inputs as future policy benefits. | Reinsurance recoverables | $ | 931,207 | | | Fair values are determined using the same unobservable inputs as future policy benefits. |
| Liabilities: | Liabilities: | | Liabilities: | |
| Future policy benefits(4) | Future policy benefits(4) | $ | 13,227,814 | | | Discounted cash flow | | Lapse rate(6) | | 1 | % | | 20 | % | | Decrease | Future policy benefits(4) | $ | 9,047,956 | | | Discounted cash flow | | Lapse rate(6) | | 1 | % | | 20 | % | | Decrease |
| | Spread over LIBOR(7) | | 0.06 | % | | 1.17 | % | | Decrease | | Spread over LIBOR(7) | | 0.03 | % | | 1.13 | % | | Decrease |
| | Utilization rate(8) | | 39 | % | | 96 | % | | Increase | | Utilization rate(8) | | 39 | % | | 96 | % | | Increase |
| | Withdrawal rate | | See table footnote (9) below. | | Withdrawal rate | | See table footnote (9) below. |
| | Mortality rate(10) | | 0 | % | | 15 | % | | Decrease | | Mortality rate(10) | | 0 | % | | 15 | % | | Decrease |
| | | | | | | Equity volatility curve | | 18 | % | | 26 | % | | | | Increase | | | | | | Equity volatility curve | | 16 | % | | 25 | % | | | | Increase |
| Policyholders' account balances(5) | Policyholders' account balances(5) | $ | 1,155,274 | | | Discounted cash flow | | Lapse rate(6) | | 1 | % | | 6 | % | | Decrease | Policyholders' account balances(5) | $ | 3,245,773 | | | Discounted cash flow | | Lapse rate(6) | | 1 | % | | 42 | % | | Decrease |
| | Spread over LIBOR(7) | | 0.06 | % | | 1.17 | % | | Decrease | | Spread over LIBOR(7) | | 0.03 | % | | 1.13 | % | | Decrease |
| | Mortality rate(10) | | 0 | % | | 24 | % | | Decrease | | Mortality rate(10) | | 0 | % | | 23 | % | | Decrease |
| | Equity volatility curve | | 15 | % | | 30 | % | | Increase | | Equity volatility curve | | 6 | % | | 31 | % | | 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, available-for-sale and fixed maturities trading.
(3)Represents multiples of earnings before interest, taxes, depreciation and amortization "EBITDA"("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 and annuity 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 SOFR swap curve and the LIBOR swap curve represents the premium added to the proxy for the risk-free rate (LIBOR)(SOFR or LIBOR, as applicable) 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.guarantees as of December 31, 2022 and 2021, respectively. 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.
(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 both December 31, 20212022 and 2020,2021, the minimum withdrawal rate assumption is 77% and 76%, respectively. As of December 31, 2022 and 2021, 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%.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
(10)The range reflects the mortality rates for the vast majority of business with living benefits and other contracts, with policyholders ranging from 4550 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.
(11)Option budget estimates the expected long-term cost of options used to hedge exposures associated with equity price changes. The level of option budgets determines future costs of the options, which impacts the growth in account value and the valuation of embedded derivatives.
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. During weaker economic cycles, as the expectations of default increases, credit spreads widen, which results in a decrease in fair value.
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 that 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, 2021 | | | Year Ended December 31, 2022 | |
| | 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) | | 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) | | | (in thousands) | |
| Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | | Fixed maturities, available-for-sale: | |
| U.S. government | U.S. government | $ | 55,000 | | $ | 0 | | $ | 0 | | $ | (55,000) | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | U.S. government | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
| Foreign government | Foreign government | 163 | | (13) | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 150 | | (15) | | Foreign government | 150 | | 73 | | 501 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 724 | | 69 | |
| Corporate securities(4) | Corporate securities(4) | 174,776 | | (10,914) | | 95,294 | | (5,085) | | 0 | | (28,690) | | 156,667 | | 9,313 | | (5,727) | | 385,634 | | (11,298) | | Corporate securities(4) | 385,634 | | (47,296) | | 323,603 | | (62,827) | | 0 | | (102,377) | | 106,408 | | 10,475 | | (106,124) | | 507,496 | | (45,235) | |
| Structured securities(5) | Structured securities(5) | 2,065 | | 4,165 | | 74,800 | | (29) | | 0 | | (1,761) | | 32,859 | | 107,038 | | (45,193) | | 173,944 | | 4,189 | | Structured securities(5) | 173,944 | | (26,318) | | 81,576 | | 0 | | 0 | | (1,993) | | 0 | | 0 | | (122,485) | | 104,724 | | (28,489) | |
| Other assets: | Other assets: | | Other assets: | |
| Fixed maturities, trading | Fixed maturities, trading | 755 | | 46 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | (801) | | 0 | | 46 | | Fixed maturities, trading | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Equity securities | Equity securities | 7,889 | | 709 | | 0 | | 0 | | 0 | | 0 | | 3,874 | | 0 | | 0 | | 12,472 | | 709 | | Equity securities | 12,472 | | (3,310) | | 10,000 | | (230) | | 0 | | 0 | | 9,661 | | 0 | | 0 | | 28,593 | | (3,872) | |
| Other invested assets | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | |
| | Short-term investments | Short-term investments | 0 | | 181 | | 0 | | 0 | | 0 | | (1,871) | | 1,690 | | 0 | | 0 | | 0 | | 0 | | Short-term investments | 0 | | 114 | | 18,046 | | 0 | | 0 | | (8,560) | | 7,290 | | 55 | | 0 | | 16,945 | | 73 | |
| Cash equivalents | Cash equivalents | 0 | | 147 | | 0 | | 0 | | 0 | | (1,377) | | 1,230 | | 0 | | 0 | | 0 | | 0 | | Cash equivalents | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Other assets | Other assets | 0 | | 1,258 | | 1,170 | | 0 | | 0 | | (899) | | 71,408 | | 0 | | 0 | | 72,937 | | 359 | | Other assets | 72,937 | | 44,096 | | 49,677 | | 0�� | | 0 | | (3,855) | | (21,814) | | 0 | | 0 | | 141,041 | | 47,951 | |
| Reinsurance recoverables | Reinsurance recoverables | 13,239,539 | | (12,937,591) | | 629,259 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 931,207 | | (545,001) | | Reinsurance recoverables | 931,207 | | (635,649) | | 135,353 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 430,911 | | (607,225) | |
| Receivables from parent and affiliates | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | |
| Separate account assets | | Separate account assets | 0 | | (70) | | 7,715 | | (3,000) | | 0 | | 0 | | 0 | | 0 | | 0 | | 4,645 | | (70) | |
| Liabilities: | Liabilities: | | Liabilities: | |
| Future policy benefits | Future policy benefits | (13,227,814) | | 5,281,553 | | 0 | | 0 | | (1,101,695) | | 0 | | 0 | | 0 | | 0 | | (9,047,956) | | 4,647,753 | | Future policy benefits | (9,047,956) | | 5,513,374 | | 0 | | 0 | | (1,006,165) | | 0 | | 0 | | 0 | | 0 | | (4,540,747) | | 5,256,263 | |
| Policyholders' account balances(6) | Policyholders' account balances(6) | (1,155,274) | | (78,321) | | 0 | | 0 | | (265,807) | | 0 | | (1,746,371) | | 0 | | 0 | | (3,245,773) | | 5,476 | | Policyholders' account balances(6) | (3,245,773) | | (409,912) | | 0 | | 0 | | (1,094,824) | | 0 | | 1,248,413 | | 0 | | 0 | | (3,502,096) | | (289,548) | |
|
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
| | | Year Ended December 31, 2021 | | Year Ended December 31, 2022 |
| | Total realized and unrealized gains (losses) | | Unrealized gains (losses) for assets still held(3) | | 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) | | | Realized investment gains (losses), net(1) | Other income (loss) | Interest credited to policyholders' account balances | Included in other comprehensive income (loss) | Net investment income | | Realized investment gains (losses), net | Other income (loss) | Interest credited to policyholders' account balances | Included in other comprehensive income (loss) |
| | (in thousands) | | (in thousands) |
| Fixed maturities, available-for-sale | Fixed maturities, available-for-sale | $ | (832) | | $ | 0 | | | $ | (6,318) | | $ | 388 | | | $ | (1,778) | | $ | 0 | | $ | (5,346) | | | Fixed maturities, available-for-sale | $ | (16,829) | | $ | 0 | | $ | 0 | | $ | (56,470) | | $ | (242) | | | $ | (14,416) | | $ | 0 | | $ | 0 | | $ | (59,239) | |
| Other assets: | Other assets: | | | | | Other assets: | |
| Fixed maturities, trading | Fixed maturities, trading | 0 | | 46 | | | 0 | | 0 | | | 0 | | 46 | | 0 | | | Fixed maturities, trading | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 0 | |
| Equity securities | Equity securities | 0 | | 709 | | | 0 | | 0 | | | 0 | | 709 | | 0 | | | Equity securities | 0 | | (3,310) | | 0 | | 0 | | 0 | | | 0 | | (3,872) | | 0 | | 0 | |
| Other invested assets | 0 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | 0 | | | |
| | Short-term investments | Short-term investments | 181 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | 0 | | | Short-term investments | 77 | | 0 | | 0 | | 73 | | (36) | | | 0 | | 0 | | 0 | | 73 | |
| Cash equivalents | Cash equivalents | 147 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | 0 | | | Cash equivalents | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 0 | |
| Other assets | Other assets | 1,258 | | 0 | | | 0 | | 0 | | | 359 | | 0 | | 0 | | | Other assets | 44,096 | | 0 | | 0 | | 0 | | 0 | | | 47,951 | | 0 | | 0 | | 0 | |
| Reinsurance recoverables | Reinsurance recoverables | (12,937,591) | | 0 | | | 0 | | 0 | | | (545,001) | | 0 | | 0 | | | Reinsurance recoverables | (635,649) | | 0 | | 0 | | 0 | | 0 | | | (607,225) | | 0 | | 0 | | 0 | |
| Receivables from parent and affiliates | 0 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | 0 | | | |
| Separate account assets | | Separate account assets | 0 | | 0 | | (70) | | 0 | | 0 | | | 0 | | 0 | | (70) | | 0 | |
| Liabilities: | Liabilities: | | | | | Liabilities: | |
| Future policy benefits | Future policy benefits | 5,281,553 | | 0 | | | 0 | | 0 | | | 4,647,753 | | 0 | | 0 | | | Future policy benefits | 5,513,374 | | 0 | | 0 | | 0 | | 0 | | | 5,256,263 | | 0 | | 0 | | 0 | |
| Policyholders' account balances | Policyholders' account balances | (78,321) | | 0 | | | 0 | | 0 | | | 5,476 | | 0 | | 0 | | | Policyholders' account balances | (409,912) | | 0 | | 0 | | 0 | | 0 | | | (289,548) | | 0 | | 0 | | 0 | |
|
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
| | | Year Ended December 31, 2020 | | Year Ended December 31, 2021 |
| | 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) | | 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) | | (in thousands) |
| Fixed maturities, available-for-sale: | Fixed maturities, available-for-sale: | | Fixed maturities, available-for-sale: | |
| U.S. government | U.S. government | $ | 38,671 | | $ | 0 | | $ | 16,329 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 55,000 | | $ | 0 | | U.S. government | $ | 55,000 | | $ | 0 | | $ | 0 | | $ | (55,000) | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
| Foreign government | Foreign government | 163 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 163 | | (1) | | Foreign government | 163 | | (13) | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 150 | | (15) | |
| Corporate securities(4) | Corporate securities(4) | 50,083 | | 14,715 | | 11,121 | | (3,680) | | 0 | | (7,850) | | (1,914) | | 114,695 | | (2,394) | | 174,776 | | 14,679 | | Corporate securities(4) | 174,776 | | (10,914) | | 95,294 | | (5,085) | | 0 | | (28,690) | | 156,667 | | 9,313 | | (5,727) | | 385,634 | | (11,298) | |
| Structured securities(5) | Structured securities(5) | 2,001 | | (483) | | 7,444 | | (6) | | 0 | | (1,255) | | 0 | | 0 | | (5,636) | | 2,065 | | (489) | | Structured securities(5) | 2,065 | | 4,165 | | 74,800 | | (29) | | 0 | | (1,761) | | 32,859 | | 107,038 | | (45,193) | | 173,944 | | 4,189 | |
| Other assets: | Other assets: | | Other assets: | |
| Fixed maturities, trading | Fixed maturities, trading | 668 | | 87 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 755 | | 87 | | Fixed maturities, trading | 755 | | 46 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | (801) | | 0 | | 46 | |
| Equity securities | Equity securities | 9,898 | | 2,821 | | 0 | | (4,830) | | 0 | | 0 | | 0 | | 0 | | 0 | | 7,889 | | 1,211 | | Equity securities | 7,889 | | 709 | | 0 | | 0 | | 0 | | 0 | | 3,874 | | 0 | | 0 | | 12,472 | | 709 | |
| Other invested assets | 4 | | (4) | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | (4) | | |
| | Short-term investments | Short-term investments | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | Short-term investments | 0 | | 181 | | 0 | | 0 | | 0 | | (1,871) | | 1,690 | | 0 | | 0 | | 0 | | 0 | |
| Cash equivalents | Cash equivalents | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | Cash equivalents | 0 | | 147 | | 0 | | 0 | | 0 | | (1,377) | | 1,230 | | 0 | | 0 | | 0 | | 0 | |
| Other assets | Other assets | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | Other assets | 0 | | 1,258 | | 1,170 | | 0 | | 0 | | (899) | | 71,408 | | 0 | | 0 | | 72,937 | | 359 | |
| Reinsurance recoverables | Reinsurance recoverables | 8,539,671 | | 3,604,075 | | 1,095,793 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 13,239,539 | | 3,889,923 | | Reinsurance recoverables | 13,239,539 | | (12,937,591) | | 629,259 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 931,207 | | (545,001) | |
| Receivables from parent and affiliates | 3,135 | | 23 | | 0 | | 0 | | 0 | | (3,158) | | 0 | | 0 | | 0 | | 0 | | 0 | | |
| Separate account assets | | Separate account assets | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Liabilities: | Liabilities: | | Liabilities: | |
| Future policy benefits | Future policy benefits | (8,529,566) | | (3,610,281) | | 0 | | 0 | | (1,087,967) | | 0 | | 0 | | 0 | | 0 | | (13,227,814) | | (3,896,128) | | Future policy benefits | (13,227,814) | | 5,281,553 | | 0 | | 0 | | (1,101,695) | | 0 | | 0 | | 0 | | 0 | | (9,047,956) | | 4,647,753 | |
| Policyholders' account balances(6) | Policyholders' account balances(6) | (962,351) | | (30,199) | | 0 | | 0 | | (162,724) | | 0 | | 0 | | 0 | | 0 | | (1,155,274) | | 3,853 | | Policyholders' account balances(6) | (1,155,274) | | (78,321) | | 0 | | 0 | | (265,807) | | 0 | | (1,746,371) | | 0 | | 0 | | (3,245,773) | | 5,476 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | |
| 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) | |
| (in thousands) | |
| Fixed maturities, available-for-sale | $ | (832) | | $ | 0 | | | $ | (6,318) | | $ | 388 | | | $ | (1,778) | | $ | 0 | | $ | (5,346) | | |
| Other assets: | | | | | | | | | | |
| Fixed maturities, trading | 0 | | 46 | | | 0 | | 0 | | | 0 | | 46 | | 0 | | |
| Equity securities | 0 | | 709 | | | 0 | | 0 | | | 0 | | 709 | | 0 | | |
| | | | | | | | | | |
| Short-term investments | 181 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | 0 | | |
| Cash equivalents | 147 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | 0 | | |
| Other assets | 1,258 | | 0 | | | 0 | | 0 | | | 359 | | 0 | | 0 | | |
| Reinsurance recoverables | (12,937,591) | | 0 | | | 0 | | 0 | | | (545,001) | | 0 | | 0 | | |
| Separate account assets | 0 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | 0 | | |
| Liabilities: | | | | | | | | | | |
| Future policy benefits | 5,281,553 | | 0 | | | 0 | | 0 | | | 4,647,753 | | 0 | | 0 | | |
| Policyholders' account balances | (78,321) | | 0 | | | 0 | | 0 | | | 5,476 | | 0 | | 0 | | |
| | | | | | | | | | |
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) | |
| (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 | | |
| Other assets | 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 | | |
| | | | | | | | | | |
| | | | | | | | | | |
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, 2019, 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, 2019.
| | | Year Ended December 31, 2019 | | Year Ended December 31, 2020 |
| | Total realized and unrealized gains (losses) | | Unrealized gains (losses) for assets still held(3) | | 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) | | | 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) |
| | (in thousands) | | (in thousands) |
| Fixed maturities, available-for-sale | Fixed maturities, available-for-sale | $ | (8,198) | | $ | 0 | | | $ | 3,615 | | $ | 680 | | | $ | (8,467) | | $ | 0 | | | Fixed maturities, available-for-sale | $ | (5,019) | | $ | 0 | | | $ | 19,106 | | $ | 145 | | | $ | (4,773) | | $ | 0 | | | $ | 18,962 | |
| Other assets: | Other assets: | | | | | Other assets: | | | | | |
| Fixed maturities, trading | Fixed maturities, trading | 0 | | (83) | | | 0 | | 0 | | | 0 | | (83) | | | Fixed maturities, trading | 0 | | 87 | | | 0 | | 0 | | | 0 | | 87 | | | 0 | |
| Equity securities | Equity securities | 0 | | 1,668 | | | 0 | | 0 | | | 0 | | 1,534 | | | Equity securities | 0 | | 2,821 | | | 0 | | 0 | | | 0 | | 1,211 | | | 0 | |
| Other invested assets | 0 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | | |
| | Short-term investments | Short-term investments | 0 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | | Short-term investments | 0 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | | 0 | |
| Cash equivalents | Cash equivalents | 0 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | | Cash equivalents | 0 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | | 0 | |
| Other assets | Other assets | 0 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | | Other assets | 0 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | | 0 | |
| Reinsurance recoverables | Reinsurance recoverables | 1,936,363 | | 0 | | | 0 | | 0 | | | 2,142,421 | | 0 | | | Reinsurance recoverables | 3,604,075 | | 0 | | | 0 | | 0 | | | 3,889,923 | | 0 | | | 0 | |
| Receivables from parent and affiliates | Receivables from parent and affiliates | 0 | | 0 | | | 0 | | 190 | | | 0 | | 0 | | | Receivables from parent and affiliates | 0 | | 0 | | | 0 | | 23 | | | 0 | | 0 | | | 0 | |
| Liabilities: | Liabilities: | | | | | Liabilities: | | | | | |
| Future policy benefits | Future policy benefits | (1,945,323) | | 0 | | | 0 | | 0 | | | (2,151,380) | | 0 | | | Future policy benefits | (3,610,281) | | 0 | | | 0 | | 0 | | | (3,896,128) | | 0 | | | 0 | |
| Policyholders' account balances | Policyholders' account balances | (765,917) | | 0 | | | 0 | | 0 | | | (759,661) | | 0 | | | Policyholders' account balances | (30,199) | | 0 | | | 0 | | 0 | | | 3,853 | | 0 | | | 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. Refer to Note 1 for impacts to Realized investments gains (losses), net related to the 2021 Variable Annuities Recapture and the Affiliated Reinsurance Agreement.
(2)For current year "Other" in policyholders' account balances largely represent non-cash moves related to novated indexed variable annuities under the reinsurance agreement with FLIAC. See Note 9 for more details regarding these transactions. In addition, other assets and policyholders' account balances represents noncashan out of period adjustment related to certain portions of reinsurance activity that had been incorrectly recorded on the balance sheet during the fourth quarter of 2021. Prior year represents non-cash transfers related to the 2021 Variable Annuities Recapture and the Affiliated Reinsurance Agreement.Recapture. Refer to Note 1 for additional information.more details.
(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.securities and foreign government bonds.
(5)Includes asset-backed commercial mortgage-backed and residentialcommercial mortgage-backed securities.
(6)Issuances and settlements for Policyholders' account balances are presented net in the rollforward.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Nonrecurring Fair Value Measurements -The following tables represent information for assets measured at fair value on a nonrecurring basis. The fair value measurement is nonrecurring as these assets are measured at fair value only when there is a triggering event (e.g., an evidence of impairment). Assets included in the table are those that were impaired during the respective reporting periods and that are still held as of the reporting date. The estimated fair values for these amounts were determined using significant unobservable inputs (Level 3).
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (in thousands) |
| Equity in earnings of operating joint venture, net of taxes | | | | | |
| Investment in joint venture | $ | (75,000) | | | $ | 0 | | | $ | 0 | |
| | | | | |
| Gains (Losses): | | | | | |
| Other invested assets | $ | (11,125) | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| (in thousands) |
| Carrying value after measurement as of period end: | | | |
| Investment in joint venture(1) | $ | 60,456 | | | $ | 0 | |
| Other invested assets | 0 | | | 0 | |
(1)Reported carrying value includes value as of the measurement period of June 30, 2022 for the Investment in joint venture.
Fair Value of Financial Instruments
The tabletables below presentspresent 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, 2021 |
| | Fair Value | | Carrying
Amount(1) |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Total |
| | | (in thousands) |
| Assets: | | | | | | | | | | |
| Commercial mortgage and other loans | | $ | 0 | | | $ | 0 | | | $ | 2,883,710 | | | $ | 2,883,710 | | | $ | 2,832,560 | |
| Policy loans | | 0 | | | 0 | | | 1,327,485 | | | 1,327,485 | | | 1,327,485 | |
| Short-term investments | | 37,000 | | | 0 | | | 0 | | | 37,000 | | | 37,000 | |
| Cash and cash equivalents | | 297,299 | | | 185,000 | | | 0 | | | 482,299 | | | 482,299 | |
| Accrued investment income | | 0 | | | 160,027 | | | 0 | | | 160,027 | | | 160,027 | |
| Reinsurance recoverables | | 0 | | | 0 | | | 29,931 | | | 29,931 | | | 28,883 | |
| Receivables from parent and affiliates | | 0 | | | 116,086 | | | 0 | | | 116,086 | | | 116,086 | |
| Other assets | | 0 | | | 134,598 | | | 434,383 | | | 568,981 | | | 568,981 | |
| Total assets | | $ | 334,299 | | | $ | 595,711 | | | $ | 4,675,509 | | | $ | 5,605,519 | | | $ | 5,553,321 | |
| Liabilities: | | | | | | | | | | |
| Policyholders’ account balances - investment contracts | | $ | 0 | | | $ | 1,356,850 | | | $ | 2,590,487 | | | $ | 3,947,337 | | | $ | 3,941,822 | |
| | | | | | | | | | |
| Cash collateral for loaned securities | | 0 | | | 3,004 | | | 0 | | | 3,004 | | | 3,004 | |
| | | | | | | | | | |
| Long-term debt to affiliates | | 0 | | | 319,225 | | | 0 | | | 319,225 | | | 320,362 | |
| Payables to parent and affiliates | | 0 | | | 31,775 | | | 0 | | | 31,775 | | | 31,775 | |
| Other liabilities | | 0 | | | 864,788 | | | 34,091 | | | 898,879 | | | 898,879 | |
| Total liabilities | | $ | 0 | | | $ | 2,575,642 | | | $ | 2,624,578 | | | $ | 5,200,220 | | | $ | 5,195,842 | |
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
| | | | | December 31, 2020 | | | December 31, 2022 |
| | | Fair Value | | Carrying
Amount(1) | | Fair Value | | Carrying
Amount(1) |
| | | | Level 1 | | Level 2 | | Level 3 | | Total | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Total |
| | | | (in thousands) | | | (in thousands) |
| Assets: | Assets: | | Assets: | |
| Commercial mortgage and other loans | Commercial mortgage and other loans | | $ | 0 | | | $ | 0 | | | $ | 1,359,422 | | | $ | 1,359,422 | | | $ | 1,288,846 | | Commercial mortgage and other loans | | $ | 0 | | | $ | 0 | | | $ | 4,602,177 | | | $ | 4,602,177 | | | $ | 4,928,680 | |
| Policy loans | Policy loans | | 0 | | | 0 | | | 1,323,681 | | | 1,323,681 | | | 1,323,681 | | Policy loans | | 0 | | | 0 | | | 505,367 | | | 505,367 | | | 505,367 | |
| Short Term investments | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | |
| Short-term investments | | Short-term investments | | 26,331 | | | 0 | | | 0 | | | 26,331 | | | 26,331 | |
| Cash and cash equivalents | Cash and cash equivalents | | 29,653 | | | 0 | | | 0 | | | 29,653 | | | 29,653 | | Cash and cash equivalents | | 675,445 | | | 290,000 | | | 0 | | | 965,445 | | | 965,445 | |
| Accrued investment income | Accrued investment income | | 0 | | | 93,613 | | | 0 | | | 93,613 | | | 93,613 | | Accrued investment income | | 0 | | | 219,635 | | | 0 | | | 219,635 | | | 219,635 | |
| Reinsurance recoverables | Reinsurance recoverables | | 0 | | | 0 | | | 227,993 | | | 227,993 | | | 217,637 | | Reinsurance recoverables | | 0 | | | 0 | | | 25,127 | | | 25,127 | | | 27,183 | |
| Receivables from parent and affiliates | Receivables from parent and affiliates | | 0 | | | 154,503 | | | 0 | | | 154,503 | | | 154,503 | | Receivables from parent and affiliates | | 0 | | | 76,846 | | | 0 | | | 76,846 | | | 76,846 | |
| Other assets | Other assets | | 0 | | | 27,120 | | | 0 | | | 27,120 | | | 27,120 | | Other assets | | 0 | | | 94,200 | | | 730,682 | | | 824,882 | | | 824,882 | |
| Total assets | Total assets | | $ | 29,653 | | | $ | 275,236 | | | $ | 2,911,096 | | | $ | 3,215,985 | | | $ | 3,135,053 | | Total assets | | $ | 701,776 | | | $ | 680,681 | | | $ | 5,863,353 | | | $ | 7,245,810 | | | $ | 7,574,369 | |
| Liabilities: | Liabilities: | | | | | | | | | | | Liabilities: | | | | | | | | | | |
| Policyholders’ account balances - investment contracts | Policyholders’ account balances - investment contracts | | $ | 0 | | | $ | 1,428,043 | | | $ | 286,533 | | | $ | 1,714,576 | | | $ | 1,704,220 | | Policyholders’ account balances - investment contracts | | $ | 0 | | | $ | 1,192,271 | | | $ | 3,141,000 | | | $ | 4,333,271 | | | $ | 4,351,945 | |
| | Cash collateral for loaned securities | Cash collateral for loaned securities | | 0 | | | 2,725 | | | 0 | | | 2,725 | | | 2,725 | | Cash collateral for loaned securities | | 0 | | | 86,750 | | | 0 | | | 86,750 | | | 86,750 | |
| Long-term Debt | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | |
| | Short-term debt to affiliates | | Short-term debt to affiliates | | 0 | | | 120,325 | | | 0 | | | 120,325 | | | 126,250 | |
| Long-term debt to affiliates | | Long-term debt to affiliates | | 0 | | | 173,905 | | | 0 | | | 173,905 | | | 185,563 | |
| Payables to parent and affiliates | Payables to parent and affiliates | | 0 | | | 75,990 | | | 0 | | | 75,990 | | | 75,990 | | Payables to parent and affiliates | | 0 | | | 41,654 | | | 0 | | | 41,654 | | | 41,654 | |
| Other liabilities | Other liabilities | | 0 | | | 415,889 | | | 0 | | | 415,889 | | | 415,889 | | Other liabilities | | 0 | | | 1,269,615 | | | 33,250 | | | 1,302,865 | | | 1,302,866 | |
| Total liabilities | Total liabilities | | $ | 0 | | | $ | 1,922,647 | | | $ | 286,533 | | | $ | 2,209,180 | | | $ | 2,198,824 | | Total liabilities | | $ | 0 | | | $ | 2,884,520 | | | $ | 3,174,250 | | | $ | 6,058,770 | | | $ | 6,095,028 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| | Fair Value | | Carrying
Amount(1) |
| | | Level 1 | | Level 2 | | Level 3 | | Total | | Total |
| | | (in thousands) |
| Assets: | | | | | | | | | | |
| Commercial mortgage and other loans | | $ | 0 | | | $ | 0 | | | $ | 2,883,710 | | | $ | 2,883,710 | | | $ | 2,832,560 | |
| Policy loans | | 0 | | | 0 | | | 1,327,485 | | | 1,327,485 | | | 1,327,485 | |
| Short-term investments | | 37,000 | | | 0 | | | 0 | | | 37,000 | | | 37,000 | |
| Cash and cash equivalents | | 297,299 | | | 185,000 | | | 0 | | | 482,299 | | | 482,299 | |
| Accrued investment income | | 0 | | | 160,027 | | | 0 | | | 160,027 | | | 160,027 | |
| Reinsurance recoverables | | 0 | | | 0 | | | 29,931 | | | 29,931 | | | 28,883 | |
| Receivables from parent and affiliates | | 0 | | | 116,086 | | | 0 | | | 116,086 | | | 116,086 | |
| Other assets | | 0 | | | 134,598 | | | 434,383 | | | 568,981 | | | 568,981 | |
| Total assets | | $ | 334,299 | | | $ | 595,711 | | | $ | 4,675,509 | | | $ | 5,605,519 | | | $ | 5,553,321 | |
| Liabilities: | | | | | | | | | | |
| Policyholders’ account balances - investment contracts | | $ | 0 | | | $ | 1,356,850 | | | $ | 2,590,487 | | | $ | 3,947,337 | | | $ | 3,941,822 | |
| | | | | | | | | | |
| Cash collateral for loaned securities | | 0 | | | 3,004 | | | 0 | | | 3,004 | | | 3,004 | |
| Long-term debt to affiliates | | 0 | | | 319,225 | | | 0 | | | 319,225 | | | 320,362 | |
| | | | | | | | | | |
| Payables to parent and affiliates | | 0 | | | 31,775 | | | 0 | | | 31,775 | | | 31,775 | |
| Other liabilities | | 0 | | | 864,788 | | | 34,091 | | | 898,879 | | | 898,879 | |
| Total liabilities | | $ | 0 | | | $ | 2,575,642 | | | $ | 2,624,578 | | | $ | 5,200,220 | | | $ | 5,195,842 | |
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
(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.
Short-Term Investments, Cash and Cash Equivalents, Accrued Investment Income, Receivables from Parent and Affiliates
The Company believes that due to the short-term nature of certain assets, the carrying value approximates fair value. These assets include: certain short-term investments, which are not securities, are recorded at amortized cost; cash and cash equivalent instruments, accrued investment income.
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)
Other Assets
Other assets primarily consists of deposit assets related to the reinsurance agreements with Pruco Life and a third party reinsurer, which uses deposit accounting under U.S. GAAP. Also included are other assets that meet the definition of financial instruments, including receivables such as unsettled trades and accounts receivable.
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.
Debt
The fair value of short-term and long-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 includes the funds withheld liability for assets retained under the reinsurance agreement that corresponds to the deposit assets above in "Other Assets". Also included are unsettled trades, drafts, and escrow deposits. Payables to parent and affiliates is primarily related to 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:
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| | | (in thousands) |
| Balance, beginning of year | | $ | 2,433,936 | | | $ | 1,855,698 | | | $ | 1,613,922 | |
| Capitalization of commissions, sales and issue expenses | | 1,057,030 | | | 758,469 | | | 451,773 | |
| Amortization-Impact of assumption and experience unlocking and true-ups | | 40,482 | | | (27,844) | | | (34,619) | |
| Amortization-All other | | (382,600) | | | (112,718) | | | (78,699) | |
| Change due to unrealized investment gains and losses | | (81,031) | | | (39,861) | | | (37,337) | |
| Other (1)(2)(3) | | 3,763,155 | | | 192 | | | (59,342) | |
| Balance, end of year | | $ | 6,830,972 | | | $ | 2,433,936 | | | $ | 1,855,698 | |
| | | | | | |
(1) 2021 includes the impact of the 2021 Variable Annuities Recapture as well as the assuming ofDAC upon Affiliated Reinsurance Agreement with PALAC. See Note 1 and Note 9 for additional information.
(2) 2020 represents the impact of the January 1, 2020 adoption of ASU 2016-13.
(3) 2019 represents 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)
6. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in DAC as of and for the years ended December 31, are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | | (in thousands) |
| Balance, beginning of year | | $ | 6,830,972 | | | $ | 2,433,936 | | | $ | 1,855,698 | |
| Capitalization of commissions, sales and issue expenses | | 962,579 | | | 1,057,030 | | | 758,469 | |
| Amortization-Impact of assumption and experience unlocking and true-ups | | (289,619) | | | 40,482 | | | (27,844) | |
| Amortization-All other | | (567,766) | | | (382,600) | | | (112,718) | |
| Change due to unrealized investment gains and losses | | 251,513 | | | (81,031) | | | (39,861) | |
| Other (1)(2)(3) | | (571,582) | | | 3,763,155 | | | 192 | |
| Balance, end of year | | $ | 6,616,097 | | | $ | 6,830,972 | | | $ | 2,433,936 | |
| | | | | | |
(1) 2022 includes the impact of the reinsurance agreement with Lotus Reinsurance Company Ltd. ("Lotus Re"). See Note 9 for additional information.
(2) 2021 includes the impact of the 2021 Variable Annuities Recapture as well as the assuming ofDAC upon Affiliated Reinsurance Agreement with FLIAC. See Note 1 and Note 9 for additional information.
(3) 2020 represents the impact of the January 1, 2020 adoption of ASU 2016-13.
7. POLICYHOLDERS’ LIABILITIES
Future Policy Benefits
Future policy benefits at December 31 for the years indicated are as follows:
| | | 2021 | | 2020 | | 2022 | | 2021 |
| | (in thousands) | | (in thousands) |
| Life insurance – domestic | | $ | 18,095,368 | | | $ | 17,167,209 | | |
| Life insurance – Taiwan | | 0 | | | 1,642,747 | | |
| Life insurance | | Life insurance | | $ | 17,842,327 | | | $ | 18,095,368 | |
| | Individual annuities and supplementary contracts | Individual annuities and supplementary contracts | | 740,941 | | | 810,989 | | Individual annuities and supplementary contracts | | 781,605 | | | 740,941 | |
| Other contract liabilities | Other contract liabilities | | 9,090,720 | | | 13,268,236 | | Other contract liabilities | | 4,580,601 | | | 9,090,720 | |
| Total future policy benefits | Total future policy benefits | | $ | 27,927,029 | | | $ | 32,889,181 | | Total future policy benefits | | $ | 23,204,533 | | | $ | 27,927,029 | |
Life insurance liabilities include reserves for death benefits. Individual annuities and supplementary contract liabilities include reserves for life contingent immediate annuities and guaranteed minimum death benefits. Other contract liabilities include liabilities for variable annuity living benefit guarantees and certain other reserves for annuities and individual life products.
Future policy benefits for 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%.
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 1.7% 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 interest rates used in the determination of the present values range from 0.6%4.9% to 2.9%5.5%. The remaining liabilities for guaranteed benefits are primarily reflected with the underlying contract. See Note 8 for additional information regarding liabilities for guaranteed benefits related to certain long-duration life and annuity contracts.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Policyholders’ Account Balances
Policyholders’ account balances at December 31 for the years indicated are as follows:
| | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| | (in thousands) |
| Interest-sensitive life contracts | | $ | 19,729,444 | | | $ | 18,638,033 | |
| Individual annuities(1) | | 14,150,233 | | | 3,637,196 | |
| Guaranteed interest accounts | | 125,249 | | | 154,284 | |
| Other | | 1,356,869 | | | 1,428,061 | |
| Total policyholders’ account balances | | $ | 35,361,795 | | | $ | 23,857,574 | |
(1) 2021 amount includes assumed business from PALAC.
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| | (in thousands) |
| Interest-sensitive life contracts | | $ | 20,730,040 | | | $ | 19,729,444 | |
| Individual annuities | | 19,718,745 | | | 14,150,233 | |
| Guaranteed interest accounts | | 107,168 | | | 125,249 | |
| Other | | 1,192,288 | | | 1,356,869 | |
| Total policyholders’ account balances | | $ | 41,748,241 | | | $ | 35,361,795 | |
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 and annuity products. See Note 5 for additional information onregarding the fair value of these embedded derivative instruments. Interest crediting rates for interest-sensitive life contracts range from 0.8% to 4.6%4.9%. 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%4.9%. Interest crediting rates for other range from 0.5% to 5.4%.
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 issued 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 issues fixed deferred and fixed indexed annuity contracts without MVA that have a guaranteed credited rate, annuity benefit and withdrawal benefit. The Company also issues indexed variable annuity contracts for which the return, when the account value is allocated to the index strategies, is tied to the return of specific indices subject to applicable contractual minimums and maximums and also varying levels of downside protection. The contract also guarantees to the contractholder a return of no less than total deposits made to the contract adjusted for any partial withdrawals upon death. In certain of these indexed variable annuity contracts, the Company also contractually guarantees to the contractholder withdrawal benefits payable during specific periods.
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, 20212022 and 2020,2021, the Company had the following guarantees associated with these contracts, by product and guarantee type:
| | | | | December 31, 2021 | | December 31, 2020 | | | December 31, 2022 | | December 31, 2021 |
| | In the Event of
Death(1) | | At Annuitization/
Accumulation(1)(2) | | In the Event of
Death(1) | | At Annuitization/
Accumulation(1)(2) | | In the Event of
Death(1) | | At Annuitization/
Accumulation(1)(2) | | In the Event of
Death(1) | | At Annuitization/
Accumulation(1)(2) |
| | (in thousands) | | (in thousands) |
| Annuity Contracts | Annuity Contracts | | Annuity Contracts | |
| Return of net deposits | Return of net deposits | | Return of net deposits | |
| Account value | Account value | | $ | 103,862,788 | | | N/A | | $ | 104,700,706 | | | N/A | Account value | | $ | 77,282,989 | | | N/A | | $ | 103,862,788 | | | N/A |
| Net amount at risk | Net amount at risk | | $ | 27,872 | | | N/A | | $ | 18,336 | | | N/A | Net amount at risk | | $ | 976,756 | | | N/A | | $ | 27,872 | | | N/A |
| Average attained age of contractholders | Average attained age of contractholders | | 69 years | | N/A | | 68 years | | N/A | Average attained age of contractholders | | 70 years | | N/A | | 69 years | | N/A |
| Minimum return or contract value | Minimum return or contract value | | Minimum return or contract value | |
| Account value | Account value | | $ | 19,634,387 | | | $ | 113,689,139 | | | $ | 19,949,435 | | | $ | 114,832,594 | | Account value | | $ | 14,521,870 | | | $ | 84,579,903 | | | $ | 19,634,387 | | | $ | 113,689,139 | |
| Net amount at risk | Net amount at risk | | $ | 1,124,519 | | | $ | 1,653,394 | | | $ | 1,272,073 | | | $ | 2,042,199 | | Net amount at risk | | $ | 4,053,465 | | | $ | 8,644,043 | | | $ | 1,124,519 | | | $ | 1,653,394 | |
| Average attained age of contractholders | Average attained age of contractholders | | 72 years | | 69 years | | 71 years | | 68 years | Average attained age of contractholders | | 72 years | | 70 years | | 72 years | | 69 years |
| Average period remaining until earliest expected annuitization | Average period remaining until earliest expected annuitization | | N/A | | 0 years | | N/A | | 0 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, 2021 | | December 31, 2020 | | December 31, 2022 | | December 31, 2021 |
| | | In the Event of Death(1)(2) | | In the Event of Death(1)(2) |
| | | | (in thousands) | | | (in thousands) |
| Variable Life, Variable Universal Life and Universal Life Contracts | Variable Life, Variable Universal Life and Universal Life Contracts | | Variable Life, Variable Universal Life and Universal Life Contracts | |
| Separate account value | Separate account value | | $ | 4,473,502 | | | $ | 4,087,733 | | Separate account value | | $ | 3,711,310 | | | $ | 4,473,502 | |
| General account value | General account value | | $ | 10,558,009 | | | $ | 9,920,732 | | General account value | | $ | 11,081,838 | | | $ | 10,558,009 | |
| Net amount at risk | Net amount at risk | | $ | 149,872,088 | | | $ | 146,158,176 | | Net amount at risk | | $ | 155,866,833 | | | $ | 149,872,088 | |
| Average attained age of contractholders | Average attained age of contractholders | | 58 years | | 56 years | Average attained age of contractholders | | 58 years | | 58 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, 2021(1) | | December 31, 2020(1) | | December 31, 2022(1) | | December 31, 2021(1) |
| | (in thousands) | | (in thousands) |
| Equity funds | Equity funds | | $ | 69,299,203 | | | $ | 68,436,773 | | Equity funds | | $ | 43,963,573 | | | $ | 69,299,203 | |
| Bond funds | Bond funds | | 47,895,089 | | | 51,126,536 | | Bond funds | | 42,054,051 | | | 47,895,089 | |
| Money market funds | Money market funds | | 3,016,761 | | | 1,578,516 | | Money market funds | | 2,703,108 | | | 3,016,761 | |
| Total | Total | | $ | 120,211,053 | | | $ | 121,141,825 | | Total | | $ | 88,720,732 | | | $ | 120,211,053 | |
(1)Balances are gross of reinsurance.
In addition to the amounts invested in separate account investment options above, $3.1 billion at December 31, 2022 and $3.3 billion at December 31, 2021 and $3.5 billion at December 31, 2020 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, 2022, 2021 2020 and 20192020 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 | | | GMDB | | GMIB | | GMWB/GMIWB/
GMAB | | Total |
| | | | Variable Annuity | | Variable Life, Variable Universal Life & Universal Life | | Variable Annuity | | | | Variable Annuity | | Variable Life, Variable Universal Life & Universal Life | | Variable Annuity | |
| (in thousands) | |
| 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 | | |
| | | (in thousands) |
| Balance at December 31, 2019 | Balance at December 31, 2019 | | 460,501 | | | 7,400,233 | | | 17,107 | | | 8,529,566 | | | 16,407,407 | | Balance at December 31, 2019 | | $ | 460,501 | | | $ | 7,400,233 | | | $ | 17,107 | | | $ | 8,529,566 | | | $ | 16,407,407 | |
| Incurred guarantee benefits(1) | Incurred guarantee benefits(1) | | 114,878 | | | 1,368,759 | | | 3,490 | | | 4,698,248 | | | 6,185,375 | | Incurred guarantee benefits(1) | | 114,878 | | | 1,368,759 | | | 3,490 | | | 4,698,248 | | | 6,185,375 | |
| Paid guarantee benefits | Paid guarantee benefits | | (37,804) | | | (126,148) | | | (1,667) | | | 0 | | | (165,619) | | Paid guarantee benefits | | (37,804) | | | (126,148) | | | (1,667) | | | 0 | | | (165,619) | |
| Change in unrealized investment gains and losses | Change in unrealized investment gains and losses | | 31,488 | | | 720,741 | | | 318 | | | 0 | | | 752,547 | | Change in unrealized investment gains and losses | | 31,488 | | | 720,741 | | | 318 | | | 0 | | | 752,547 | |
| | Balance at December 31, 2020 | Balance at December 31, 2020 | | 569,063 | | | 9,363,585 | | | 19,248 | | | 13,227,814 | | | 23,179,710 | | Balance at December 31, 2020 | | 569,063 | | | 9,363,585 | | | 19,248 | | | 13,227,814 | | | 23,179,710 | |
| Incurred guarantee benefits(1) | Incurred guarantee benefits(1) | | (10,596) | | | 1,089,139 | | | (3,650) | | | (4,179,858) | | | (3,104,965) | | Incurred guarantee benefits(1) | | (10,596) | | | 1,089,139 | | | (3,650) | | | (4,179,858) | | | (3,104,965) | |
| Paid guarantee benefits | Paid guarantee benefits | | (24,394) | | | (189,453) | | | 0 | | | 0 | | | (213,847) | | Paid guarantee benefits | | (24,394) | | | (189,453) | | | 0 | | | 0 | | | (213,847) | |
| Change in unrealized investment gains and losses | Change in unrealized investment gains and losses | | (46,542) | | | (326,128) | | | (484) | | | 0 | | | (373,154) | | Change in unrealized investment gains and losses | | (46,542) | | | (326,128) | | | (484) | | | 0 | | | (373,154) | |
| | Balance at December 31, 2021 | Balance at December 31, 2021 | | $ | 487,531 | | | $ | 9,937,143 | | | $ | 15,114 | | | $ | 9,047,956 | | | $ | 19,487,744 | | Balance at December 31, 2021 | | 487,531 | | | 9,937,143 | | | 15,114 | | | 9,047,956 | | | 19,487,744 | |
| Incurred guarantee benefits(1) | | Incurred guarantee benefits(1) | | 100,830 | | | 2,260,795 | | | (1,279) | | | (4,507,209) | | | (2,146,863) | |
| Paid guarantee benefits | | Paid guarantee benefits | | (62,461) | | | (200,877) | | | (1,392) | | | 0 | | | (264,730) | |
| Change in unrealized investment gains and losses | | Change in unrealized investment gains and losses | | (9,129) | | | (2,498,668) | | | (76) | | | 0 | | | (2,507,873) | |
| | Balance at December 31, 2022 | | Balance at December 31, 2022 | | $ | 516,771 | | | $ | 9,498,393 | | | $ | 12,367 | | | $ | 4,540,747 | | | $ | 14,568,278 | |
(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. DSI is included in “Deferred sales inducements”. 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. Changes in DSI, reported as “Interest credited to policyholders’ account balances”, are as follows:
| | | | | |
| | Sales Inducements |
| (in thousands) |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Balance at December 31, 2020 | $ | 0 | |
| Capitalization | 167 | |
| Amortization - Impact of assumption and experience unlocking and true-ups | 16,286 | |
| Amortization - All other | (37,737) | |
| Change in unrealized investment gains and losses | 7,669 | |
| Other (1) | 388,264 | |
| Balance at December 31, 2021 | 374,649 | |
| Capitalization | 675 | |
| Amortization - Impact of assumption and experience unlocking and true-ups | (44,422) | |
| Amortization - All other | (61,640) | |
| Change in unrealized investment gains and losses | 6,312 | |
| |
| Balance at December 31, 2022 | $ | 374,649275,574 | |
| |
(1) Represents the impact of the 2021 Variable Annuities Recapture.
There were no deferred sales inducements balances at December 31, 2020 because they were fully ceded.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
9. REINSURANCE
The Company participates in reinsurance with its affiliates 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"), Dryden Arizona Reinsurance Term Company (“DART”), Lotus Reinsurance Company Ltd. ("Lotus Re")Re, PALAC, a former subsidiary of Prudential Financial that was sold to Fortitude on April 1, 2022, which is discussed in Note 1, and Prudential Life Insurance Company of Taiwan Inc. ("Prudential of Taiwan"), a subsidiary of Prudential Financial that was sold to a third-party on June 30, 2021, as discussed below. As of July 1, 2021, the Company recaptured the risks related to its business that had been previously reinsured to PALAC as a result of the 2021 Variable Annuities Recapture, which is discussed below and in Note 1. The Company also participates in reinsurance with 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.
Reinsurance agreements that do not expose the Company to a reasonable possibility of a significant loss from insurance risk are recorded using the deposit method of accounting. The deposit assets on reinsurance are recorded within “Other assets” and the corresponding funds withheld liability for assets retained under these reinsurance agreements are recorded within “Other liabilities.” Balances associated with these agreements are included in the tables below.
Realized investment gains and losses include the impact of reinsurance agreements, particularly reinsurance agreements involving living benefit guarantees.guarantees and index-linked features of certain annuity products. The Company has entered into reinsurance agreements to transfer the risk related to the living benefit guarantees on variable annuities to PALAC which was recaptured as part of the 2021 Variable Annuities Recapture, and 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.
Reinsurance amounts included in the Company’s Consolidated Statements of Financial Position as of December 31, were as follows:
| | | 2021 | | 2020 | | 2022 | | 2021 |
| | | | (in thousands) | | (in thousands) |
| Reinsurance recoverables | Reinsurance recoverables | | $ | 38,598,767 | | | $ | 48,367,096 | | Reinsurance recoverables | $ | 34,561,825 | | | $ | 38,598,767 | |
| Policy loans | Policy loans | | (156,749) | | | (153,869) | | Policy loans | (1,011,112) | | | (156,749) | |
| Deferred policy acquisition costs | Deferred policy acquisition costs | | (2,575,232) | | | (6,574,020) | | Deferred policy acquisition costs | (3,155,419) | | | (2,575,232) | |
| Deferred sales inducements | Deferred sales inducements | | (37,905) | | | (445,493) | | Deferred sales inducements | (33,346) | | | (37,905) | |
| Other assets(1) | Other assets(1) | | 353,669 | | | 233,364 | | Other assets(1) | 1,142,083 | | | 850,681 | |
Policyholders’ account balances | Policyholders’ account balances | | 12,005,839 | | | 4,773,439 | | Policyholders’ account balances | 7,137,766 | | | 14,386,443 | |
Future policy benefits(2) | Future policy benefits(2) | | 5,286,252 | | | 5,069,353 | | Future policy benefits(2) | 5,173,784 | | | 5,286,252 | |
Other liabilities(3)(1) | Other liabilities(3)(1) | | 1,224,399 | | | 1,099,318 | | Other liabilities(3)(1) | 2,701,216 | | | 1,642,413 | |
(1)Includes $0.0 millionPrior period has been reclassified to conform to the current period presentation to include reinsurance agreements using the deposit method of unaffiliated activity as of both December 31, 2021 and 2020.
(2)Includes $0.0 million of unaffiliated activity as of both December 31, 2021 and 2020.
(3)Includes $49.2 million and $42.6 million of unaffiliated activity as of December 31, 2021 and 2020, respectively.accounting.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Unaffiliated reinsurance amounts included in the table above and in the Company's Consolidated Statements of Financial Position as of December 31, were as follows:
| | | | | | | | | | | |
| 2022 | | 2021(1) |
| (in thousands) |
| Deferred policy acquisition costs | $ | 484,730 | | | $ | 0 | |
| Other assets | 1,034,000 | | | 497,050 | |
| Policyholders' account balances | 2,782,114 | | | 0 | |
| Future policy benefits | 0 | | | 9 | |
| Other liabilities | 820,185 | | | 467,203 | |
(1)Prior period has been reclassified to conform to the current period presentation.
The deposit assets on reinsurance totaled $828 million and $497 million at December 31, 2022 and 2021, respectively. The funds withheld liabilities totaled $705 million and $419 million at December 31, 2022 and 2021, respectively.
Reinsurance recoverables by counterparty are broken out below:as of December 31, were as follows:
| | | December 31, 2021 | | December 31, 2020 | | 2022 | | 2021 |
| | | | (in thousands) | | (in thousands) |
| PAR U | PAR U | | $ | 13,523,832 | | | $ | 13,352,845 | | PAR U | $ | 13,365,780 | | | $ | 13,523,832 | |
PALAC | PALAC | | 7,198,504 | | | 15,941,123 | | PALAC | 0 | | | 7,198,504 | |
| PURC | PURC | | 5,830,441 | | | 5,368,831 | | PURC | 5,921,664 | | | 5,830,441 | |
| PARCC | PARCC | | 2,371,491 | | | 2,572,428 | | PARCC | 2,211,803 | | | 2,371,491 | |
| GUL Re | GUL Re | | 2,710,926 | | | 2,573,609 | | GUL Re | 2,709,538 | | | 2,710,926 | |
| PAR Term | PAR Term | | 1,972,339 | | | 1,913,265 | | PAR Term | 2,043,970 | | | 1,972,339 | |
| Prudential Insurance | Prudential Insurance | | 2,082,551 | | | 2,421,226 | | Prudential Insurance | 1,263,411 | | | 2,082,551 | |
| Prudential of Taiwan | | 0 | | | 1,649,998 | | |
| | Term Re | Term Re | | 1,953,063 | | | 1,766,978 | | Term Re | 2,054,090 | | | 1,953,063 | |
| Lotus Re | | Lotus Re | 2,015,687 | | | 32,039 | |
| DART | DART | | 644,101 | | | 502,770 | | DART | 763,004 | | | 644,101 | |
| Lotus Re | | 32,039 | | | 0 | | |
Unaffiliated | Unaffiliated | | 279,480 | | | 304,023 | | Unaffiliated | 2,212,878 | | | 279,480 | |
| Total reinsurance recoverables | Total reinsurance recoverables | | $ | 38,598,767 | | | $ | 48,367,096 | | Total reinsurance recoverables | $ | 34,561,825 | | | $ | 38,598,767 | |
(1)Due to the sale of PALAC on April 1, 2022 the reinsurance recoverable balance has become unaffiliated.
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:
| | | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| | | | (in thousands) | | (in thousands) |
| Premiums: | Premiums: | | Premiums: | |
| Direct | Direct | | $ | 1,909,878 | | | $ | 1,923,708 | | | $ | 1,882,584 | | Direct | $ | 1,871,264 | | | $ | 1,909,878 | | | $ | 1,923,708 | |
| Assumed(1) | | 162 | | | 184 | | | 206 | | |
| Ceded(2) | | (1,706,364) | | | (1,831,716) | | | (1,854,246) | | |
| Assumed | | Assumed | 776 | | | 162 | | | 184 | |
| Ceded | | Ceded | (1,597,257) | | | (1,706,364) | | | (1,831,716) | |
| Net premiums | Net premiums | | 203,676 | | | 92,176 | | | 28,544 | | Net premiums | 274,783 | | | 203,676 | | | 92,176 | |
| Policy charges and fee income: | Policy charges and fee income: | | | | | | | Policy charges and fee income: | | | | | |
| Direct | Direct | | 3,647,883 | | | 3,491,735 | | | 3,725,113 | | Direct | 3,436,953 | | | 3,647,883 | | | 3,491,735 | |
| Assumed | Assumed | | 582,003 | | | 587,466 | | | 519,265 | | Assumed | 608,458 | | | 582,003 | | | 587,466 | |
| Ceded(3) | | (2,700,129) | | | (3,454,881) | | | (3,700,222) | | |
| Ceded | | Ceded | (2,313,454) | | | (2,700,129) | | | (3,454,881) | |
| Net policy charges and fee income | Net policy charges and fee income | | 1,529,757 | | | 624,320 | | | 544,156 | | Net policy charges and fee income | 1,731,957 | | | 1,529,757 | | | 624,320 | |
| Net investment income: | Net investment income: | | | | | | | Net investment income: | | | | | |
| Direct | Direct | | 555,404 | | | 372,822 | | | 398,762 | | Direct | 920,674 | | | 555,404 | | | 372,822 | |
| Assumed | Assumed | | 1,049 | | | 1,579 | | | 1,631 | | Assumed | 1,513 | | | 1,049 | | | 1,579 | |
| Ceded | Ceded | | (6,218) | | | (7,051) | | | (6,596) | | Ceded | (38,186) | | | (6,218) | | | (7,051) | |
| Net investment income | Net investment income | | 550,235 | | | 367,350 | | | 393,797 | | Net investment income | 884,001 | | | 550,235 | | | 367,350 | |
| Asset administration fees: | Asset administration fees: | | | | | | | Asset administration fees: | | | | | |
| Direct | Direct | | 403,359 | | | 360,438 | | | 355,118 | | Direct | 351,600 | | | 403,359 | | | 360,438 | |
| Assumed | Assumed | | 0 | | | 0 | | | 0 | | Assumed | 0 | | | 0 | | | 0 | |
| Ceded | Ceded | | (201,182) | | | (341,300) | | | (339,062) | | Ceded | (67,418) | | | (201,182) | | | (341,300) | |
| Net asset administration fees | Net asset administration fees | | 202,177 | | | 19,138 | | | 16,056 | | Net asset administration fees | 284,182 | | | 202,177 | | | 19,138 | |
| Other income: | | | | | | | |
| Other income (loss): | | Other income (loss): | | | | | |
| Direct | Direct | | 227,035 | | | 78,445 | | | 83,891 | | Direct | (731,796) | | | 227,035 | | | 78,445 | |
| Assumed(4) | | (66) | | | (1) | | | (293) | | |
| Assumed | | Assumed | 271 | | | (66) | | | (1) | |
| Ceded | Ceded | | 35,790 | | | 165 | | | (59) | | Ceded | (3,457) | | | 35,790 | | | 165 | |
| Amortization of reinsurance income | Amortization of reinsurance income | | 4,449 | | | 4,647 | | | 21 | | Amortization of reinsurance income | 73,122 | | | 4,449 | | | 4,647 | |
| Net other income | Net other income | | 267,208 | | | 83,256 | | | 83,560 | | Net other income | (661,860) | | | 267,208 | | | 83,256 | |
| Realized investment gains (losses), net: | Realized investment gains (losses), net: | | | | | | | Realized investment gains (losses), net: | | | | | |
| Direct | | 7,656,388 | | | (3,593,799) | | | (1,912,241) | | |
| Assumed | | 18,171 | | | 0 | | | 0 | | |
| Direct(1) | | Direct(1) | 1,838,136 | | | 7,663,351 | | | (3,593,799) | |
| Assumed(1) | | Assumed(1) | (244,000) | | | 12,593 | | | 0 | |
Ceded(5)(1) | Ceded(5)(1) | | (12,969,965) | | | 3,530,823 | | | 1,795,492 | | Ceded(5)(1) | (552,701) | | | (12,971,350) | | | 3,530,823 | |
| Realized investment gains (losses), net | Realized investment gains (losses), net | | (5,295,406) | | | (62,976) | | | (116,749) | | Realized investment gains (losses), net | 1,041,435 | | | (5,295,406) | | | (62,976) | |
| Policyholders’ benefits (including change in reserves): | Policyholders’ benefits (including change in reserves): | | | | | | | Policyholders’ benefits (including change in reserves): | | | | | |
| Direct | Direct | | 3,611,402 | | | 3,584,011 | | | 3,352,159 | | Direct | 3,951,690 | | | 3,611,402 | | | 3,584,011 | |
| Assumed(6) | | 849,599 | | | 1,055,277 | | | 885,542 | | |
| Ceded(7) | | (3,805,091) | | | (4,341,139) | | | (4,084,627) | | |
| Assumed | | Assumed | 1,504,204 | | | 849,599 | | | 1,055,277 | |
| Ceded | | Ceded | (4,846,502) | | | (3,805,091) | | | (4,341,139) | |
| Net policyholders’ benefits (including change in reserves) | Net policyholders’ benefits (including change in reserves) | | 655,910 | | | 298,149 | | | 153,074 | | Net policyholders’ benefits (including change in reserves) | 609,392 | | | 655,910 | | | 298,149 | |
| Interest credited to policyholders’ account balances: | Interest credited to policyholders’ account balances: | | | | | | | Interest credited to policyholders’ account balances: | | | | | |
| Direct | Direct | | 563,821 | | | 536,886 | | | 470,551 | | Direct | 883,398 | | | 563,821 | | | 536,886 | |
| Assumed | Assumed | | 138,202 | | | 136,153 | | | 135,355 | | Assumed | 74,402 | | | 138,202 | | | 136,153 | |
| Ceded | Ceded | | (816,608) | | | (439,664) | | | (418,677) | | Ceded | (440,312) | | | (816,608) | | | (439,664) | |
| Net interest credited to policyholders’ account balances | Net interest credited to policyholders’ account balances | | (114,585) | | | 233,375 | | | 187,229 | | Net interest credited to policyholders’ account balances | 517,488 | | | (114,585) | | | 233,375 | |
| Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization | Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization | | (2,265,350) | | | (1,589,113) | | | (1,772,111) | | Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization | (427,208) | | | (2,265,350) | | | (1,589,113) | |
(1)Includes $0.2 millionPrior period has been reclassified to conform to the current period presentation to include reinsurance agreements using the deposit method of unaffiliated activity for the year ended December 31, 2021 and $0.2 million for both years ended December 31, 2020 and 2019.accounting.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
(2)Includes $(19.8) million, $(10.5) millionUnaffiliated reinsurance assumed and $(0.6) millionceded amounts included in the table above and in the Company's Consolidated Statements of unaffiliated activityOperations and Comprehensive Income (Loss) for the years ended December 31, 2021, 2020 and 2019, respectively.were as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021(1) | | 2020(1) |
| (in thousands) |
| Premiums: | | | | | |
| Assumed | $ | 149 | | | $ | 162 | | | $ | 184 | |
| Ceded | (35,867) | | | (19,785) | | | (10,526) | |
| | | | | |
| Policy charges and fee income: | | | | | |
| Assumed | 2,113 | | | 0 | | | 0 | |
| Ceded | (81,781) | | | (65,451) | | | (53,871) | |
| | | | | |
| Net investment income: | | | | | |
| Ceded | 10,802 | | | 687 | | | 0 | |
| | | | | |
| Other income (loss): | | | | | |
| Assumed | 270 | | | (68) | | | 1 | |
| | | | | |
| Realized investment gains (losses), net: | | | | | |
| Assumed | 778,620 | | | 0 | | | 0 | |
| Ceded | (38,317) | | | (49,460) | | | 73,108 | |
| | | | | |
| Policyholders' benefits (including change in reserves): | | | | | |
| Assumed | 2,566 | | | 429 | | | 949 | |
| Ceded | (87,370) | | | (200,973) | | | (69,720) | |
| | | | | |
| Interest credited to policyholders' account balances: | | | | | |
| Assumed | (95,285) | | | 0 | | | 0 | |
(1)Prior period has been reclassified to conform to the current period presentation.
(3)Includes $(65) million, $(54) million and $(34) million of unaffiliated activity for the years ended December 31, 2021, 2020 and 2019, respectively.
(4)Includes $0.0 million, $0.0 million and $(0.3) million of unaffiliated activity for the years ended December 31, 2021, 2020 and 2019, respectively.
(5)Includes $(48) million, $73 million and $44 million of unaffiliated activity for the years ended December 31, 2021, 2020 and 2019, respectively.
(6)Includes $0.4 million, $0.9 million and $1.9 million of unaffiliated activity for the years ended December 31, 2021, 2020 and 2019, respectively.
(7)Includes $(201) million, $(70) million and $(30) million of unaffiliated activity for the years ended December 31, 2021, 2020 and 2019, respectively.
The gross and net amounts of life insurance face amount in force as of December 31, were as follows:
| | | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| | | | (in thousands) | | (in thousands) |
| Direct gross life insurance face amount in force | Direct gross life insurance face amount in force | | $ | 1,079,382,740 | | | $ | 1,045,775,819 | | | $ | 993,850,732 | | Direct gross life insurance face amount in force | $ | 1,093,610,227 | | | $ | 1,079,382,740 | | | $ | 1,045,775,819 | |
| Assumed gross life insurance face amount in force | Assumed gross life insurance face amount in force | | 37,822,851 | | | 38,818,752 | | | 39,877,183 | | Assumed gross life insurance face amount in force | 36,668,045 | | | 37,822,851 | | | 38,818,752 | |
| Reinsurance ceded | Reinsurance ceded | | (992,635,327) | | | (986,701,914) | | | (963,444,461) | | Reinsurance ceded | (1,009,571,304) | | | (992,635,327) | | | (986,701,914) | |
| Net life insurance face amount in force | Net life insurance face amount in force | | $ | 124,570,264 | | | $ | 97,892,657 | | | $ | 70,283,454 | | Net life insurance face amount in force | $ | 120,706,968 | | | $ | 124,570,264 | | | $ | 97,892,657 | |
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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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 had no impact on the reinsurance agreement between PALAC, Prudential Insurance, and the Company.
Effective July 1, 2021, the Company recaptured the risks related to its business, as discussed above, that had previously been reinsured to PALAC from April 1, 2016 through June 30, 2021. The recapture does not impact PLNJ, which will continue to reinsure its new and in force business to Prudential Insurance. The product risks related to the previously reinsured business that were being managed in PALAC, were transferred to the Company. In addition, the living benefit hedging program related to the previously reinsured living benefit riders are being managed within the Company. See Note 1 for additional information.
Effective DecemberOn April 1, 2021, the Company entered into a reinsurance agreement with2022, PALAC under which the Company assumed all of its variable indexed annuities. The reinsurancewas sold to Fortitude as discussed in Note 1 and is no longer considered an affiliate of the variable indexed annuities transfers all significant risks, including mortality risk, embedded in the reinsured contracts. As a result of the agreement, Reinsurance recoverables includes the assumed modified coinsurance arrangement, which reflects the value of the invested assets retained by PALAC and the associated asset returns.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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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,reinsured. The amended agreement does not impact contracts issued by PLNJ, which resulted in an initial transfer of $476 million in premiums and $409 million in expenses ceded withremain at the difference being deferred and subsequently amortized through income.original percentage.
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.
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,reinsured. The amended agreement does not impact contracts issued by PLNJ, which resulted in an initial transfer of $150 million in premiums and $115 million in expenses ceded withremain at the difference being deferred and subsequently amortized through income.original percentage.
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. 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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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. On June 30, 2021, PIIH completed the sale of Prudential of Taiwan to the Buyer. This resulted in the removal of the insurance related liabilities and offsetting reinsurance recoverables previously on the books of Pruco Life. The Buyer provided Pruco Life a backstop indemnification and Pruco Life provided a guarantee to stand ready to perform in the event of default by both Prudential of Taiwan and the Buyer. Refer to Note 14 for details on the guarantee.
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 renewableyearly-renewable term ("YRT") reinsurance agreement with Prudential Insurance and reinsures the majority of all mortality risks not otherwise reinsured. Effective JulyThis agreement was terminated for new business effective January 1, 2017, this agreement has been terminated for2020, with certain new business primarily(primarily Universal Life insurance policies. As of January 1, 2020, the remaining portions of new business (specifically Term policies) ceased being reinsured by theterminated as early as 2017. The Company to Prudential Insurance. Effective July 1, 2017, the Companynow 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 nowwere recaptured and subsequently reinsured to PARCC and PAR Term as noted above.
PRUCO LIFE INSURANCE COMPANY
NotesJanuary 1, 2022, most of the variable life insurance policies were recaptured resulting in a $305 million loss recorded through "Policy charges and fee income." Those policies were then reinsured to Consolidated Financial Statements—(Continued)
Lotus Re as mentioned below.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 beabove, which were then acquired by Sixth Street in July 2021. There was 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.
Lotus Re
Effective October 1, 2021, the Company entered into an automatic coinsurance agreement with Lotus Re to reinsure $32 million worth of liabilities associated with the risks associated with a portion of its Variable Life policies in the extended term policy status.
Effective January 1, 2022 the Company recaptured the risks that were previously ceded to Lotus Re from October 1, 2021 through December 31, 2021. Immediately thereafter, the Company entered into a reinsurance agreement with Lotus Re to cede 100% of the risks associated with a closed block of Variable Life business on a coinsurance and modified coinsurance basis including policies in the extended term policy status. The amount of the net liabilities associated with the transaction for coinsurance and modified coinsurance were $1,381 million and $14,037 million, respectively. As part of the consideration, the Company also ceded to Lotus Re $855 million of policy loan assets associated with the reinsured policies while receiving $820 million in cash from Lotus Re. As a result, the Company recorded a $1,346 million deferred gain, which will be recognized over the remaining life of the underlying policies. In tandem with the transaction, effective January 1, 2022, Lotus Re established an automatic YRT agreement with the Company to cede back a portion of the mortality risks associated with the reinsured policies for the purposes of the Company maintaining YRT reinsurance with external counterparties.
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.
Lotus Re
Effective October 1, 2021, the Company entered into an automatic coinsurance agreement with Lotus Re to reinsure the risks associated with a portion of its Variable Life policies in the extended term policy status.
During the first quarter of 2022, subject to the receipt of regulatory approvals and the satisfaction of customary closing conditions, the Company will enter into a reinsurance agreement to cede a closed block of Variable Life business to Lotus Re.
Information regarding significant third-party reinsurance arrangements is described below.
FLIAC
Effective December 1, 2021, the Company entered into a reinsurance agreement with FLIAC under which the Company assumed all of its indexed variable annuities. The reinsurance of the indexed variable annuities transfers all significant risks, including mortality risk, embedded in the reinsured contracts to the Company. As a result of the agreement, Reinsurance recoverables includes the assumed modified coinsurance arrangement, which reflects the value of the invested assets retained by FLIAC and the associated asset returns. The Company also assumed all of FLIAC’s fixed indexed annuities and fixed annuities with a guaranteed lifetime withdrawal income feature which are accounted for under deposit accounting. The reinsurance agreement offers the policyholders the opportunity to novate their contracts from FLIAC to the Company and any such novated contracts shall cease to be reinsured under this agreement. As of December 31, 2022, the total account value of contracts novated from FLIAC to the Company were $4.8 billion for indexed variable annuities contracts and $1.9 billion for fixed annuities and fixed indexed annuities contracts, which is approximately 74% of the total reinsured block.
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, 2021, $3.32022, $2.5 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, |
| | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Current tax expense (benefit): | | | | | | |
| U.S. federal | | $ | (345,263) | | | $ | 440,649 | | | $ | (358,548) | |
| State and local | | 4,479 | | | 5,002 | | | 0 | |
| Total | | (340,784) | | | 445,651 | | | (358,548) | |
| Deferred tax expense (benefit): | | | | | | |
| U.S. federal | | 339,902 | | | (1,137,090) | | | 228,300 | |
| Total | | 339,902 | | | (1,137,090) | | | 228,300 | |
| Total income tax expense (benefit) on income (loss) before equity in earnings of operating joint ventures | | (882) | | | (691,439) | | | (130,248) | |
| Income tax expense (benefit) on equity in earnings of operating joint ventures | | (193) | | | (147) | | | (518) | |
| Income tax expense (benefit) reported in equity related to: | | | | | | |
| Other comprehensive income (loss) | | (510,840) | | | (52,374) | | | 70,806 | |
| Total income tax expense (benefit) | | $ | (511,915) | | | $ | (743,960) | | | $ | (59,960) | |
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
10. INCOME TAXES
The following schedule discloses significant components of income tax expense (benefit) for each year presented:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
| Current tax expense (benefit): | | | | | | |
| U.S. federal | | $ | 440,649 | | | $ | (358,548) | | | $ | 56,371 | |
| State and local | | 5,002 | | | 0 | | | 0 | |
| Total | | 445,651 | | | (358,548) | | | 56,371 | |
| Deferred tax expense (benefit): | | | | | | |
| U.S. federal | | (1,137,090) | | | 228,300 | | | (115,503) | |
| Total | | (1,137,090) | | | 228,300 | | | (115,503) | |
| Total income tax expense (benefit) on income (loss) before equity in earnings of operating joint ventures | | (691,439) | | | (130,248) | | | (59,132) | |
| Income tax expense (benefit) on equity in earnings of operating joint ventures | | (147) | | | (518) | | | (1,773) | |
| Income tax expense (benefit) reported in equity related to: | | | | | | |
| Other comprehensive income (loss) | | (52,374) | | | 70,806 | | | 81,281 | |
| Total income tax expense (benefit) | | $ | (743,960) | | | $ | (59,960) | | | $ | 20,376 | |
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 2022, 2021 2020 and 2019,2020, and the reported income tax expense (benefit) are summarized as follows:
| | | Year Ended December 31, | | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| | (in thousands) | | (in thousands) |
| Expected federal income tax expense (benefit) | Expected federal income tax expense (benefit) | | $ | (609,393) | | | $ | 14,308 | | | $ | 33,345 | | Expected federal income tax expense (benefit) | | $ | 87,361 | | | $ | (609,393) | | | $ | 14,308 | |
| Non-taxable investment income | Non-taxable investment income | | (48,662) | | | (46,836) | | | (52,291) | | Non-taxable investment income | | (46,426) | | | (48,662) | | | (46,836) | |
| Tax credits | Tax credits | | (36,806) | | | (27,980) | | | (40,602) | | Tax credits | | (47,544) | | | (36,806) | | | (27,980) | |
| Changes in tax law | Changes in tax law | | (3,644) | | | (70,121) | | | 0 | | Changes in tax law | | 0 | | | (3,644) | | | (70,121) | |
| | Other | Other | | 7,066 | | | 381 | | | 416 | | Other | | 5,727 | | | 7,066 | | | 381 | |
| Reported income tax expense (benefit) | Reported income tax expense (benefit) | | $ | (691,439) | | | $ | (130,248) | | | $ | (59,132) | | Reported income tax expense (benefit) | | $ | (882) | | | $ | (691,439) | | | $ | (130,248) | |
| Effective tax rate | Effective tax rate | | 23.8 | % | | (191.2) | % | | (37.2) | % | Effective tax rate | | (0.2) | % | | 23.8 | % | | (191.2) | % |
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 2022, 2021 and 2020 was (0.2)%, 23.8% and 2019 was 23.8%, (191.2)% and (37.2)%, respectively. The following is a description of items that had the mosta significant impact on the difference between the Company’s statutory U.S. federal income tax rate of 21% applicable for 2022, 2021 2020 and 2019,2020, 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 foris included in most of the non-taxable investment income shown in the table above. More specifically, the U.S. DRD constitutes $44 million of the total $46 million of 2022 non-taxable investment income, $46 million of the total $49 million of 2021 non-taxable investment income, and $45 million of the total $47 million of 2020 non-taxable investment income, and $50 million of the total $52 million of 2019 non-taxable investment income. The DRD for the current period was estimated using information from 2020,2021, 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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Changes in Tax Law. The following is a notable change in tax law that impacted the Company’s effective tax rate for the periods presented:
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 2020, 2019 or 2018 to carry back those losses for up to five years. For 2020, the Company recorded an income tax benefit of $70 million from carrying the estimated 2020 NOL back to tax years that have a 35% tax rate.
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, | | As of December 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| | | | (in thousands) | | | (in thousands) |
| Deferred tax assets: | Deferred tax assets: | | Deferred tax assets: | |
| Insurance reserves | Insurance reserves | | $ | 2,391,739 | | | $ | 296,635 | | Insurance reserves | | $ | 1,338,174 | | | $ | 2,391,739 | |
| Investments | | Investments | | 343,012 | | | 0 | |
| Net unrealized loss on securities | | Net unrealized loss on securities | | 481,763 | | | 0 | |
| Other | Other | | 2,894 | | | 0 | | Other | | 2,800 | | | 2,894 | |
| Deferred tax assets | Deferred tax assets | | 2,394,633 | | | 296,635 | | Deferred tax assets | | 2,165,749 | | | 2,394,633 | |
| Deferred tax liabilities: | Deferred tax liabilities: | | | | | Deferred tax liabilities: | | | | |
| Deferred policy acquisition cost | Deferred policy acquisition cost | | 1,003,301 | | | 142,147 | | Deferred policy acquisition cost | | 888,944 | | | 1,003,301 | |
| Deferred sales inducements | Deferred sales inducements | | 78,676 | | | 0 | | Deferred sales inducements | | 57,870 | | | 78,676 | |
| Net unrealized gain on securities | Net unrealized gain on securities | | 114,705 | | | 180,067 | | Net unrealized gain on securities | | 0 | | | 114,705 | |
| Investments | Investments | | 155,891 | | | 124,821 | | Investments | | 0 | | | 155,891 | |
| Other | | 0 | | | 4,032 | | |
| | Deferred tax liabilities | Deferred tax liabilities | | 1,352,573 | | | 451,067 | | Deferred tax liabilities | | 946,814 | | | 1,352,573 | |
| Net deferred tax asset (liability) | Net deferred tax asset (liability) | | $ | 1,042,060 | | | $ | (154,432) | | Net deferred tax asset (liability) | | $ | 1,218,935 | | | $ | 1,042,060 | |
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.
Changes in market conditions during 2022, including rising interest rates, resulted in the recording of deferred tax assets related to net unrealized tax capital losses. When assessing recoverability of these deferred tax assets, we consider our ability and intent to hold the underlying securities to recovery in value, if necessary, as well as other factors as noted above. As of December 31 2022, based on all available evidence, including capital loss carryback capacity, we concluded that the deferred tax assets related to the unrealized tax capital losses on the available for sale securities portfolios are, more likely than not, expected to be realized.
The Company had no valuation allowance as of December 31, 20212022 and 2020.2021. 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 $416 million, $(2,902) million $68 million and $159$68 million for the years ended December 31, 2022, 2021 2020 and 2019,2020, 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.
The Company had no unrecognized tax benefits as of December 31, 2022, 2021, 2020, and 2019.2020. 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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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, 2021,2022, the Company remains subject to examination in the U.S. for tax years 2014 through 2021.2022.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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 resolutionresolutions programs are available to resolve the disagreements in a timely manner.
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) | | | 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, 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) | | |
| | | | Foreign Currency
Translation
Adjustment | | Net Unrealized
Investment Gains
(Losses)(1) | | Total Accumulated
Other
Comprehensive
Income (Loss) |
| | | | (in thousands) |
| Balance, December 31, 2019 | Balance, December 31, 2019 | | (7,917) | | | 289,359 | | | 281,442 | | Balance, December 31, 2019 | | $ | (7,917) | | | $ | 289,359 | | | $ | 281,442 | |
| Change in OCI before reclassifications | Change in OCI before reclassifications | | 599 | | | 327,819 | | | 328,418 | | Change in OCI before reclassifications | | 599 | | | 327,819 | | | 328,418 | |
| Amounts reclassified from AOCI | Amounts reclassified from AOCI | | 0 | | | 7,074 | | | 7,074 | | Amounts reclassified from AOCI | | 0 | | | 7,074 | | | 7,074 | |
| Income tax benefit (expense) | Income tax benefit (expense) | | (479) | | | (70,327) | | | (70,806) | | Income tax benefit (expense) | | (479) | | | (70,327) | | | (70,806) | |
| | Balance, December 31, 2020 | Balance, December 31, 2020 | | (7,797) | | | 553,925 | | | 546,128 | | Balance, December 31, 2020 | | (7,797) | | | 553,925 | | | 546,128 | |
| Change in OCI before reclassifications | | Change in OCI before reclassifications | | (3,891) | | | (222,182) | | | (226,073) | |
| Amounts reclassified from AOCI | | Amounts reclassified from AOCI | | 0 | | | (24,994) | | | (24,994) | |
| Income tax benefit (expense) | | Income tax benefit (expense) | | 414 | | | 51,960 | | | 52,374 | |
| Balance, December 31, 2021 | | Balance, December 31, 2021 | | (11,274) | | | 358,709 | | | 347,435 | |
| Change in OCI before reclassifications | Change in OCI before reclassifications | | (3,891) | | | (222,182) | | | (226,073) | | Change in OCI before reclassifications | | (9,337) | | | (2,425,810) | | | (2,435,147) | |
| Amounts reclassified from AOCI | Amounts reclassified from AOCI | | 0 | | | (24,994) | | | (24,994) | | Amounts reclassified from AOCI | | 0 | | | (4,428) | | | (4,428) | |
| Income tax benefit (expense) | Income tax benefit (expense) | | 414 | | | 51,960 | | | 52,374 | | Income tax benefit (expense) | | 604 | | | 510,236 | | | 510,840 | |
| | Balance, December 31, 2021 | | $ | (11,274) | | | $ | 358,709 | | | $ | 347,435 | | |
| Balance, December 31, 2022 | | Balance, December 31, 2022 | | $ | (20,007) | | | $ | (1,561,293) | | | $ | (1,581,300) | |
(1)Includes cash flow hedges of $139 million, $40 million, $(8) million, and $26$(8) million as of December 31, 2022, 2021 2020 and 2019,2020, respectively.
Reclassifications out of Accumulated Other Comprehensive Income (Loss)
| | | Year Ended December 31, | | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| | | | (in thousands) | | | (in thousands) |
| Amounts reclassified from AOCI(1)(2): | Amounts reclassified from AOCI(1)(2): | | Amounts reclassified from AOCI(1)(2): | |
| | Net unrealized investment gains (losses): | Net unrealized investment gains (losses): | | Net unrealized investment gains (losses): | |
| Cash flow hedges—Currency/Interest rate(3) | Cash flow hedges—Currency/Interest rate(3) | | $ | 28,508 | | | $ | 162 | | | $ | 7,734 | | Cash flow hedges—Currency/Interest rate(3) | | $ | 78,433 | | | $ | 28,508 | | | $ | 162 | |
| Net unrealized investment gains (losses) on available-for-sale securities(4) | Net unrealized investment gains (losses) on available-for-sale securities(4) | | (3,514) | | | (7,236) | | | 46,738 | | Net unrealized investment gains (losses) on available-for-sale securities(4) | | (74,005) | | | (3,514) | | | (7,236) | |
| Total net unrealized investment gains (losses) | Total net unrealized investment gains (losses) | | 24,994 | | | (7,074) | | | 54,472 | | Total net unrealized investment gains (losses) | | 4,428 | | | 24,994 | | | (7,074) | |
| Total reclassifications for the period | Total reclassifications for the period | | $ | 24,994 | | | $ | (7,074) | | | $ | 54,472 | | Total reclassifications for the period | | $ | 4,428 | | | $ | 24,994 | | | $ | (7,074) | |
(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 onregarding cash flow hedges.
(4)See table below for additional information regarding 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)
(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.
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” (loss) 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 recorded, and all other net unrealized investment gains (losses), are as follows:
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
| | Net Unrealized Gains (Losses) on Available-for-Sale Fixed Maturity Securities on which an OTTI Loss has been Recognized | | Net Unrealized Gains (Losses) on Investments on Available-for-Sale Fixed Maturity Securities on which an allowance for credit losses has been recorded(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) | |
Income Tax
Benefit (Expense) | | Accumulated
Other
Comprehensive
Income (Loss)
Related to Net
Unrealized
Investment
Gains (Losses) | |
| | | (in thousands) | |
| Balance, December 31, 2018 | | $ | (689) | | | $ | 0 | | | $ | (16,632) | | | $ | (65,895) | | | $ | 68,042 | | | $ | 4,326 | | | $ | (10,848) | | |
| Net unrealized investment gains (losses) on investments arising during the period | | 2,112 | | | 0 | | | 494,861 | | | 0 | | | 0 | | | (105,845) | | | 391,128 | | |
| Reclassification adjustment for (gains) losses included in net income | | 210 | | | 0 | | | (54,682) | | | 0 | | | 0 | | | 11,601 | | | (42,871) | | |
| Reclassification adjustment for OTTI losses excluded from net income(2) | | (65) | | | 0 | | | 65 | | | 0 | | | 0 | | | 0 | | | 0 | | |
Impact of net unrealized investment
(gains) losses | | 0 | | | 0 | | | 0 | | | 489,122 | | | (550,176) | | | 13,004 | | | (48,050) | | |
| | | Net Unrealized Gains (Losses) on Available-for-Sale Fixed Maturity Securities on which an OTTI Loss has been Recognized | | Net Unrealized Gains (Losses) on Investments on Available-for-Sale Fixed Maturity Securities on which an allowance for credit losses has been recorded(1) | | Net Unrealized Gains (Losses) on All Other Investments(2) | | DAC and
Other Costs(3) | | Future Policy
Benefits, Policyholders' Account Balances and Other Liabilities(4) | |
Income Tax
Benefit (Expense) | | Accumulated
Other
Comprehensive
Income (Loss)
Related to Net
Unrealized
Investment
Gains (Losses) |
| | | | (in thousands) |
| Balance, December 31, 2019 | Balance, December 31, 2019 | | 1,568 | | | 0 | | | 423,612 | | | 423,227 | | | (482,134) | | | (76,914) | | | 289,359 | | Balance, December 31, 2019 | | $ | 1,568 | | | $ | 0 | | | $ | 423,612 | | | $ | 423,227 | | | $ | (482,134) | | | $ | (76,914) | | | $ | 289,359 | |
| Reclassification due to implementation of ASU 2016-13 (6) | Reclassification due to implementation of ASU 2016-13 (6) | | (1,568) | | | 0 | | | 1,568 | | | 0 | | | 0 | | | 0 | | | 0 | | Reclassification due to implementation of ASU 2016-13 (6) | | (1,568) | | | 0 | | | 1,568 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Net unrealized investment gains (losses) on investments arising during the period | Net unrealized investment gains (losses) on investments arising during the period | | 0 | | | 616 | | | 416,479 | | | 0 | | | 0 | | | (87,588) | | | 329,507 | | Net unrealized investment gains (losses) on investments arising during the period | | 0 | | | 616 | | | 416,479 | | | 0 | | | 0 | | | (87,588) | | | 329,507 | |
| Reclassification adjustment for (gains) losses included in net income | Reclassification adjustment for (gains) losses included in net income | | 0 | | | 0 | | | 7,074 | | | 0 | | | 0 | | | (1,486) | | | 5,588 | | Reclassification adjustment for (gains) losses included in net income | | 0 | | | 0 | | | 7,074 | | | 0 | | | 0 | | | (1,486) | | | 5,588 | |
| Reclassification due to allowance for credit losses recorded during the period | Reclassification due to allowance for credit losses recorded during the period | | 0 | | | (616) | | | 616 | | | 0 | | | 0 | | | 0 | | | 0 | | Reclassification due to allowance for credit losses recorded during the period | | 0 | | | (616) | | | 616 | | | 0 | | | 0 | | | 0 | | | 0 | |
Impact of net unrealized investment
(gains) losses | Impact of net unrealized investment
(gains) losses | | 0 | | | 0 | | | 0 | | | 776,821 | | | (866,097) | | | 18,747 | | | (70,529) | | Impact of net unrealized investment
(gains) losses | | 0 | | | 0 | | | 0 | | | 776,821 | | | (866,097) | | | 18,747 | | | (70,529) | |
| | Balance, December 31, 2020 | Balance, December 31, 2020 | | 0 | | | 0 | | | 849,349 | | | 1,200,048 | | | (1,348,231) | | | (147,241) | | | 553,925 | | Balance, December 31, 2020 | | 0 | | | 0 | | | 849,349 | | | 1,200,048 | | | (1,348,231) | | | (147,241) | | | 553,925 | |
| | Net unrealized investment gains (losses) on investments arising during the period | | Net unrealized investment gains (losses) on investments arising during the period | | 0 | | | 2,951 | | | (240,917) | | | 0 | | | 0 | | | 50,016 | | | (187,950) | |
| Reclassification adjustment for (gains) losses included in net income | | Reclassification adjustment for (gains) losses included in net income | | 0 | | | (8) | | | (24,986) | | | 0 | | | 0 | | | 5,277 | | | (19,717) | |
| Reclassification due to allowance for credit losses recorded during the period | | Reclassification due to allowance for credit losses recorded during the period | | 0 | | | 742 | | | (742) | | | 0 | | | 0 | | | 0 | | | 0 | |
Impact of net unrealized investment
(gains) losses | | Impact of net unrealized investment
(gains) losses | | 0 | | | 0 | | | 0 | | | (216,963) | | | 232,747 | | | (3,333) | | | 12,451 | |
| Balance, December 31, 2021 | | Balance, December 31, 2021 | | 0 | | | 3,685 | | | 582,704 | | | 983,085 | | | (1,115,484) | | | (95,281) | | | 358,709 | |
| | | Net unrealized investment gains (losses) on investments arising during the period | Net unrealized investment gains (losses) on investments arising during the period | | 0 | | | 2,951 | | | (240,917) | | | 0 | | | 0 | | | 50,016 | | | (187,950) | | Net unrealized investment gains (losses) on investments arising during the period | | 0 | | | (149) | | | (2,737,565) | | | 0 | | | 0 | | | 574,791 | | | (2,162,923) | |
| Reclassification adjustment for (gains) losses included in net income | Reclassification adjustment for (gains) losses included in net income | | 0 | | | (8) | | | (24,986) | | | 0 | | | 0 | | | 5,277 | | | (19,717) | | Reclassification adjustment for (gains) losses included in net income | | 0 | | | 831 | | | (5,259) | | | 0 | | | 0 | | | 930 | | | (3,498) | |
| Reclassification due to allowance for credit losses recorded during the period | Reclassification due to allowance for credit losses recorded during the period | | 0 | | | 742 | | | (742) | | | 0 | | | 0 | | | 0 | | | 0 | | Reclassification due to allowance for credit losses recorded during the period | | 0 | | | 4 | | | (4) | | | 0 | | | 0 | | | 0 | | | 0 | |
Impact of net unrealized investment
(gains) losses | Impact of net unrealized investment
(gains) losses | | 0 | | | 0 | | | 0 | | | (216,963) | | | 232,747 | | | (3,333) | | | 12,451 | | Impact of net unrealized investment
(gains) losses | | 0 | | | 0 | | | 0 | | | (2,177,588) | | | 2,489,492 | | | (65,485) | | | 246,419 | |
| | Balance, December 31, 2021 | | $ | 0 | | | $ | 3,685 | | | $ | 582,704 | | | $ | 983,085 | | | $ | (1,115,484) | | | $ | (95,281) | | | $ | 358,709 | | |
| Balance, December 31, 2022 | | Balance, December 31, 2022 | | $ | 0 | | | $ | 4,371 | | | $ | (2,160,124) | | | $ | (1,194,503) | | | $ | 1,374,008 | | | $ | 414,955 | | | $ | (1,561,293) | |
(1)Allowance for credit losses on available-for-sale fixed maturity securities effective January 1, 2020.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
(2)(1)Represents "transfers out" related to the portion of OTTIAllowance for credit losses recognized during the period that were not recognized in earnings foron available-for-sale fixed maturity securities with no prior OTTI loss.effective January 1, 2020.
(3)(2)Includes cash flow hedges. See Note 4 for information onregarding cash flow hedges.
(4)(3)"Other costs" primarily includes reinsurance recoverables and deferred reinsurance losses.
(5)(4)"Other liabilities" primarily includes reinsurance payables.
(6)(5)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 Arizona Department of Insurance ("AZDOI"). It's subsidiary PLNJ is required to prepare statutory financial statements in accordance with accounting practices prescribed or permitted by the New Jersey Department of Insurance and Banking. 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)The following table summarizes certain statutory financial information for the Company, including its subsidiary PLNJ, amounted to $833 million, $(671) million and $262 million for the years ended December 31, 2021, 2020 and 2019, respectively. Statutory surplus of the Company, including its subsidiary PLNJ, amounted to $5,955 million and $1,461 million at December 31, 2021 and 2020, respectively.periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | (in millions) |
| Statutory net income (loss)(1) | | $ | 3,369 | | | $ | 833 | | | $ | (671) | |
| Statutory capital and surplus(1) | | 4,839 | | | 5,955 | | | 1,461 | |
(1) Prior year amounts have been updated to conform to finalized statutory filingsfiling where applicable.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. The Company must obtain approval from AZDOI prior to paying a dividend if the dividend, together with other dividend distributions made within the preceding twelve months, would exceed the lesser of 10% of statutory surplus or net gain from operations. Based on these limitations, there is ano capacity to pay a dividend of $595 million in 20222023 without prior approval. 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 2022, 2021 and 2020.
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.
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, 2022, 2021 2020 and 2019.2020. The expense charged to the Company for the deferred compensation program was $5 million, $4 million $5 million and $6$5 million for the years ended December 31, 2022, 2021 and 2020, and 2019, respectively.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
Company’s share of net expense for the pension plans was $19 million, $14 million $17 million and $20$17 million for the years ended December 31, 2022, 2021 2020 and 2019,2020, 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 $15 million, $13 million $18 million and $24$18 million for the years ended December 31, 2022, 2021 2020 and 2019,2020, 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 $9 million, $5 million $7 million and $9$7 million for the years ended December 31, 2022, 2021 2020 and 2019,2020, respectively.
The Company is charged distribution expenses from Prudential Insurance’s agency network for both its domestic life and annuity productsPrudential’s proprietary nationwide sales organization, “Prudential Advisors” through a transfer pricing agreement, which is intended to reflect a market-based pricing arrangement. Prudential Advisors distributes Prudential life insurance, annuities, and investment products with proprietary and non-proprietary product options.
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 $611 million, $379 million $529 million and $747$529 million for the years ended December 31, 2022, 2021 2020 and 2019,2020, 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 $105 million, $86 million $76 million and $116$76 million for the years ended December 31, 2022, 2021 2020 and 2019,2020, respectively.
Corporate-Owned Life Insurance
The Company has sold 5five Corporate Owned Life Insurance (“COLI”) policies to Prudential Insurance, and 1one to Prudential Financial. The cash surrender value included in separate accounts for these COLI policies was $4,512 million at December 31, 2022 and $5,248 million at December 31, 2021 and $4,757 million at December 31, 2020.2021. Fees related to these COLI policies were $52 million, $56 million $50 million and $48$50 million for the years ended December 31, 2022, 2021 2020 and 2019,2020, respectively. The Company retainsreinsures the majority of the mortality risk associated with these COLI policies up to $3.5 million per individual policy.an affiliate reinsurer as part of a broader program related to variable insurance policies.
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 $41 million, $20 million $15 million and $14$15 million for the years ended December 31, 2022, 2021 2020 and 2019,2020, 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.
The interest income to the Company from PGF related to affiliated cash collateral was $137 million for the year ended December 31, 2022.
Joint Ventures
The Company has made investments in joint ventures with certain subsidiaries of Prudential Financial. "Other invested assets" includes $466$606 million and $111$466 million as of December 31, 20212022 and 2020,2021, respectively. "Net investment income" related to these ventures include gains of $21 million, $39 million $12 million and $9$12 million for the years ended December 31, 2022, 2021 2020 and 2019,2020, respectively.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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 $306 million, $374 million $344 million and $341$344 million for the years ended December 31, 2022, 2021 2020 and 2019,2020, 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 $36 million, $21 million $11 million and $10$11 million for the years ended December 31, 2022, 2021 and 2020, and 2019,
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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 | | 2021 | | 2020 | | Maturity Dates | | Interest Rates | | 2022 | | 2021 |
| | | | | | (in thousands) | | | | | | (in thousands) |
| | U.S. dollar fixed rate notes | U.S. dollar fixed rate notes | 2024 | - | 2032 | | 0.00% | - | 14.85 | % | | $ | 162,045 | | | $ | 111,970 | | U.S. dollar fixed rate notes | 2022 | - | 2027 | | 0.00% | - | 14.85 | % | | $ | 148,076 | | | $ | 162,045 | |
| Total long-term notes receivable - affiliated(1) | Total long-term notes receivable - affiliated(1) | | $ | 162,045 | | | $ | 111,970 | | Total long-term notes receivable - affiliated(1) | | $ | 148,076 | | | $ | 162,045 | |
(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, 20212022 and 2020,2021, and is included in “Other assets.” Revenues related to these loans was $3 million, $4 million and $4 million for each of the years ended December 31, 2022 , 2021 and 2020, and 2019,respectively, and are included in “Other income.income (loss).”
Affiliated Commercial Mortgage Loan
The affiliated commercial mortgage loan included in "Commercial mortgage and other loans" at December 31, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturity Date | | Interest Rate | | 2021 | | |
| | | | | | | | | (in thousands) |
| Affiliated Commercial Mortgage Loan | 2025 | | 4.60% | | $ | 73,412 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturity Date | | Interest Rate | | 2022 | | 2021 | | |
| | | | | | | | | (in thousands) |
| Affiliated Commercial Mortgage Loan | 2025 | | 8.67% | | $ | 72,225 | | | $ | 73,412 | | | |
This affiliated commercial mortgage loan was transferred from PALAC as part of the 2021 Variable Annuities Recapture. See Note 1 for details. The Company did not have any affiliated commercial mortgage loans outstanding at December 31, 2020.
The commercial mortgage loan shown above is carried at unpaid principal balance, net of unamortized deferred loan origination fees and expenses, and net of an allowance for losses. The Company reviews the performance and credit quality of the commercial mortgage loan on an on-going basis.
Accrued interest receivable related to the loan was $0.5 million and $0.3 million atfor years ended December 31, 2022 and 2021, respectively, and is included in "Accrued investment income". Revenue wasRevenues were $4.6 million and $1.7 million and for the yearyears ended December 31, 2022 and 2021, respectively, and is included in "Net investment 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, 20212022 and 2020,2021, excluding those related to the 2021 Variable Annuities Recapture effective July 1, 2021, as described in Note 1.
| | Affiliate | Affiliate | | Date | | Transaction | | Security Type | | Fair
Value | | Book Value | | APIC, Net
of Tax
Increase/
(Decrease) | | Realized
Investment
Gain/
(Loss) | | Affiliate | | Date | | Transaction | | Security Type | | Fair
Value | | Book Value | | APIC, Net
of Tax
Increase/
(Decrease) | | Realized
Investment
Gain/
(Loss) | |
| | | | | | | | | | (in thousands) | | | | | | | | | | (in thousands) | |
| PALAC | | PALAC | | June 2021 | | Purchase | | Equities | | $ | 40,284 | | | $ | 40,284 | | | $ | 0 | | | $ | 0 | | |
| Prudential Insurance | Prudential Insurance | | March 2020 | | Purchase | | Other Invested Assets | | $ | 1,390 | | | $ | 1,390 | | | $ | 0 | | | $ | 0 | | | Prudential Insurance | | September 2021 | | Purchase | | Fixed Maturities | | $ | 64,374 | | | $ | 59,642 | | | $ | (3,739) | | | $ | 0 | | |
| Prudential Insurance | Prudential Insurance | | April 2020 | | Purchase | | Fixed Maturities | | $ | 61,953 | | | $ | 59,659 | | | $ | (1,812) | | | $ | 0 | | | Prudential Insurance | | September 2021 | | Sale | | Fixed Maturities | | $ | 37,887 | | | $ | 35,264 | | | $ | 2,073 | | | $ | 0 | | |
| Hirakata LLC | | Hirakata LLC | | September 2021 | | Purchase | | Fixed Maturities | | $ | 13,944 | | | $ | 13,944 | | | $ | 0 | | | $ | 0 | | |
| Prudential Retirement Insurance & Annuity Co | | Prudential Retirement Insurance & Annuity Co | | September 2021 | | Purchase | | Fixed Maturities | | $ | 120,256 | | | $ | 120,256 | | | $ | 0 | | | $ | 0 | | |
| Prudential Retirement Insurance & Annuity Co | | Prudential Retirement Insurance & Annuity Co | | September 2021 | | Sale | | Fixed Maturities | | $ | 173,590 | | | $ | 166,427 | | | $ | 0 | | | $ | 7,163 | | |
| Prudential Insurance | Prudential Insurance | | April 2020 | | Purchase | | Fixed Maturities | | $ | 3,485 | | | $ | 3,320 | | | $ | (130) | | | $ | 0 | | | Prudential Insurance | | September 2021 | | Purchase | | Commercial Mortgage and Other Loans | | $ | 45,358 | | | $ | 42,127 | | | $ | (2,553) | | | $ | 0 | | |
| GA BV LLC | | July 2020 | | Transfer Out | | Fixed Maturities | | $ | 1,914 | | | $ | 1,914 | | | $ | 0 | | | $ | 0 | | | |
| Prudential Insurance | | Prudential Insurance | | September 2021 | | Sale | | Commercial Mortgage and Other Loans | | $ | 22,796 | | | $ | 21,780 | | | $ | 802 | | | $ | 0 | | |
| Prudential Retirement Insurance & Annuity Co | | Prudential Retirement Insurance & Annuity Co | | September 2021 | | Purchase | | Commercial Mortgage and Other Loans | | $ | 29,483 | | | $ | 29,483 | | | $ | 0 | | | $ | 0 | | |
| Prudential Retirement Insurance & Annuity Co | | Prudential Retirement Insurance & Annuity Co | | September 2021 | | Sale | | Commercial Mortgage and Other Loans | | $ | 51,005 | | | $ | 47,020 | | | $ | 0 | | | $ | 3,985 | | |
| Prudential Insurance | | Prudential Insurance | | September 2021 | | Purchase | | Derivatives | | $ | 600 | | | $ | 494 | | | $ | (84) | | | $ | 0 | | |
| Prudential Insurance | | Prudential Insurance | | September 2021 | | Sale | | Derivatives | | $ | 335 | | | $ | 175 | | | $ | 127 | | | $ | 0 | | |
| Prudential Retirement Insurance & Annuity Co | | Prudential Retirement Insurance & Annuity Co | | September 2021 | | Purchase | | Derivatives | | $ | (1,243) | | | $ | (1,243) | | | $ | 0 | | | $ | 0 | | |
| Prudential Retirement Insurance & Annuity Co | | Prudential Retirement Insurance & Annuity Co | | September 2021 | | Sale | | Derivatives | | $ | 2,846 | | | $ | 770 | | | $ | 0 | | | $ | 2,076 | | |
| PARU | | PARU | | November 2021 | | Purchase | | Fixed Maturities | | $ | 41,021 | | | $ | 41,021 | | | $ | 0 | | | $ | 0 | | |
| PALAC | PALAC | | June 2021 | | Purchase | | Equities | | $ | 40,284 | | | $ | 40,284 | | | $ | 0 | | | $ | 0 | | | PALAC | | November 2021 | | Purchase | | Derivatives | | $ | 1,112 | | | $ | 1,112 | | | $ | 0 | | | $ | 0 | | |
| Prudential Insurance | | September 2021 | | Purchase | | Fixed Maturities | | $ | 64,374 | | | $ | 59,642 | | | $ | (3,739) | | | $ | 0 | | | |
| PALAC | | PALAC | | December 2021 | | Transfer in | | Fixed Maturities | | $ | 2,037,320 | | | $ | 2,037,320 | | | $ | 0 | | | $ | 0 | | |
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
| | Prudential Insurance | | September 2021 | | Sale | | Fixed Maturities | | $ | 37,887 | | | $ | 35,264 | | | $ | 2,073 | | | $ | 0 | | | |
| Hirakata LLC | | September 2021 | | Purchase | | Fixed Maturities | | $ | 13,944 | | | $ | 13,944 | | | $ | 0 | | | $ | 0 | | | |
| Prudential Retirement Insurance & Annuity Co | | September 2021 | | Purchase | | Fixed Maturities | | $ | 120,256 | | | $ | 120,256 | | | $ | 0 | | | $ | 0 | | | |
| Prudential Retirement Insurance & Annuity Co | | September 2021 | | Sale | | Fixed Maturities | | $ | 173,590 | | | $ | 166,427 | | | $ | 0 | | | $ | 7,163 | | | |
| Prudential Insurance | | September 2021 | | Purchase | | Commercial Mortgage and Other Loans | | $ | 45,358 | | | $ | 42,127 | | | $ | (2,553) | | | $ | 0 | | | |
| PURC | | PURC | | December 2021 | | Purchase | | Fixed Maturities | | $ | 48,041 | | | $ | 48,041 | | | $ | 0 | | | $ | 0 | | |
| PALAC | | PALAC | | December 2021 | | Purchase | | Fixed Maturities | | $ | 57,087 | | | $ | 57,087 | | | $ | 0 | | | $ | 0 | | |
| PALAC | | PALAC | | December 2021 | | Transfer in | | Commercial Mortgage and Other Loans | | $ | 517,309 | | | $ | 517,309 | | | $ | 0 | | | $ | 0 | | |
| Prudential Insurance | Prudential Insurance | | September 2021 | | Sale | | Commercial Mortgage and Other Loans | | $ | 22,796 | | | $ | 21,780 | | | $ | 802 | | | $ | 0 | | | Prudential Insurance | | December 2021 | | Contributed Capital | | Fixed Maturities | | $ | 166,676 | | | $ | 166,676 | | | $ | 0 | | | $ | 0 | | |
| Prudential Retirement Insurance & Annuity Co | Prudential Retirement Insurance & Annuity Co | | September 2021 | | Purchase | | Commercial Mortgage and Other Loans | | $ | 29,483 | | | $ | 29,483 | | | $ | 0 | | | $ | 0 | | | Prudential Retirement Insurance & Annuity Co | | December 2021 | | Sale | | Derivatives | | $ | 31,567 | | | $ | 0 | | | $ | 0 | | | $ | 31,567 | | |
| Prudential Retirement Insurance & Annuity Co | Prudential Retirement Insurance & Annuity Co | | September 2021 | | Sale | | Commercial Mortgage and Other Loans | | $ | 51,005 | | | $ | 47,020 | | | $ | 0 | | | $ | 3,985 | | | Prudential Retirement Insurance & Annuity Co | | December 2021 | | Purchase | | Derivatives | | $ | 73,572 | | | $ | 73,572 | | | $ | 0 | | | $ | 0 | | |
| PALAC | | PALAC | | December 2021 | | Purchase | | Derivatives | | $ | 8,455 | | | $ | 8,455 | | | $ | 0 | | | $ | 0 | | |
| PALAC | | PALAC | | January 2022 | | Purchase | | Fixed Maturities | | $ | 4,432 | | | $ | 4,432 | | | $ | 0 | | | $ | 0 | | |
| PALAC | | PALAC | | January 2022 | | Purchase | | Derivatives | | $ | 404 | | | $ | 404 | | | $ | 0 | | | $ | 0 | | |
| PALAC | | PALAC | | February 2022 | | Purchase | | Fixed Maturities | | $ | 128,909 | | | $ | 128,909 | | | $ | 0 | | | $ | 0 | | |
| PARU | | PARU | | April 2022 | | Purchase | | Fixed Maturities | | $ | 48,970 | | | $ | 48,970 | | | $ | 0 | | | $ | 0 | | |
| Prudential Insurance | Prudential Insurance | | September 2021 | | Purchase | | Derivatives | | $ | 600 | | | $ | 494 | | | $ | (84) | | | $ | 0 | | | Prudential Insurance | | May 2022 | | Purchase | | Fixed Maturities | | $ | 233,426 | | | $ | 241,128 | | | $ | 6,085 | | | $ | 0 | | |
| Prudential Insurance | Prudential Insurance | | September 2021 | | Sale | | Derivatives | | $ | 335 | | | $ | 175 | | | $ | 127 | | | $ | 0 | | | Prudential Insurance | | June 2022 | | Purchase | | Fixed Maturities | | $ | 88,754 | | | $ | 81,216 | | | $ | (5,955) | | | $ | 0 | | |
| Prudential Retirement Insurance & Annuity Co | | September 2021 | | Purchase | | Derivatives | | $ | (1,243) | | | $ | (1,243) | | | $ | 0 | | | $ | 0 | | | |
| Prudential Retirement Insurance & Annuity Co | | September 2021 | | Sale | | Derivatives | | $ | 2,846 | | | $ | 770 | | | $ | 0 | | | $ | 2,076 | | | |
| Prudential Arizona Reinsurance Universal Co. | | November 2021 | | Purchase | | Fixed Maturities | | $ | 41,021 | | | $ | 41,021 | | | $ | 0 | | | $ | 0 | | | |
| PALAC | | November 2021 | | Purchase | | Derivatives | | $ | 1,112 | | | $ | 1,112 | | | $ | 0 | | | $ | 0 | | | |
| PALAC | | December 2021 | | Transfer in | | Fixed Maturities | | $ | 2,037,320 | | | $ | 2,037,320 | | | $ | 0 | | | $ | 0 | | | |
| Prudential Universal Reinsurance Co. | | December 2021 | | Purchase | | Fixed Maturities | | $ | 48,041 | | | $ | 48,041 | | | $ | 0 | | | $ | 0 | | | |
| PALAC | | December 2021 | | Purchase | | Fixed Maturities | | $ | 57,087 | | | $ | 57,087 | | | $ | 0 | | | $ | 0 | | | |
| PALAC | | December 2021 | | Transfer in | | Commercial Mortgage and Other Loans | | $ | 517,309 | | | $ | 517,309 | | | $ | 0 | | | $ | 0 | | | |
| Prudential Insurance | Prudential Insurance | | December 2021 | | Contributed Capital | | Fixed Maturities | | $ | 166,676 | | | $ | 166,676 | | | $ | 0 | | | $ | 0 | | | Prudential Insurance | | June 2022 | | Transfer In | | Fixed Maturities | | $ | 52,089 | | | $ | 45,031 | | | $ | (5,577) | | | $ | 0 | | |
| Prudential Insurance | | Prudential Insurance | | June 2022 | | Transfer Out | | Fixed Maturities | | $ | 48,786 | | | $ | 58,984 | | | $ | (8,057) | | | $ | 0 | | |
| PARU | | PARU | | June 2022 | | Purchase | | Commercial Mortgage and Other Loans | | $ | 6,492 | | | $ | 6,492 | | | $ | 0 | | | $ | 0 | | |
| PARU | | PARU | | June 2022 | | Sale | | Commercial Mortgage and Other Loans | | $ | 14,853 | | | $ | 15,725 | | | $ | 0 | | | $ | (872) | | |
| GUL RE | | GUL RE | | June 2022 | | Purchase | | Commercial Mortgage and Other Loans | | $ | 13,551 | | | $ | 13,551 | | | $ | 0 | | | $ | 0 | | |
| GUL RE | | GUL RE | | June 2022 | | Sale | | Commercial Mortgage and Other Loans | | $ | 8,692 | | | $ | 9,033 | | | $ | 0 | | | $ | (341) | | |
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Prudential Retirement Insurance & Annuity Co | | December 2021 | | Sale | | Derivatives | | $ | 31,567 | | | $ | 0 | | | $ | 0 | | | $ | 31,567 | | | |
| Prudential Retirement Insurance & Annuity Co | | December 2021 | | Purchase | | Derivatives | | $ | 73,572 | | | $ | 73,572 | | | $ | 0 | | | $ | 0 | | | |
| PALAC | | December 2021 | | Purchase | | Derivatives | | $ | 8,455 | | | $ | 8,455 | | | $ | 0 | | | $ | 0 | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| PURC | | June 2022 | | Purchase | | Commercial Mortgage and Other Loans | | $ | 4,403 | | | $ | 4,403 | | | $ | 0 | | | $ | 0 | | | |
| Prudential Insurance | | July 2022 | | Transfer In | | Fixed Maturities | | $ | 6,319 | | | $ | 7,230 | | | $ | 719 | | | $ | 0 | | | |
| PARU | | July 2022 | | Purchase | | Fixed Maturities | | $ | 16,284 | | | $ | 16,284 | | | $ | 0 | | | $ | 0 | | | |
| Prudential Insurance | | August 2022 | | Purchase | | Fixed Maturities | | $ | 155,823 | | | $ | 139,712 | | | $ | (12,728) | | | $ | 0 | | | |
| Vantage Casualty Insurance Company | | September 2022 | | Purchase | | Fixed Maturities | | $ | 3,497 | | | $ | 3,497 | | | $ | 0 | | | $ | 0 | | | |
| WH Warehouse Ltd | | October 2022 | | Sale | | Fixed Maturities | | $ | 26,536 | | | $ | 26,388 | | | $ | 0 | | | $ | 148 | | | |
| PARU | | November 2022 | | Purchase | | Fixed Maturities | | $ | 91,051 | | | $ | 91,051 | | | $ | 0 | | | $ | 0 | | | |
| Prudential Insurance | | December 2022 | | Purchase | | Fixed Maturities | | $ | 67,477 | | | $ | 71,369 | | | $ | 3,075 | | | $ | 0 | | | |
| | | | | | | | | | | | | | | | |
Debt Agreements
The Company is authorized to borrow funds up to $2.2$7 billion from affiliates to meet its capital and other funding needs. The following table provides the breakout of the Company's short and long-term debt to affiliates as of December 31, 2021:2022:
| | Affiliate | Affiliate | | Date Issued | | Amount of Notes - December 31, 2021 | | Amount of Notes - December 31, 2020 | | Interest
Rate | | | Date of Maturity | Affiliate | | Date Issued | | Amount of Notes - December 31, 2022 | | Amount of Notes - December 31, 2021 | | Interest
Rate | | | Date of Maturity |
| | | | | (in thousands) | | | | | | | | | | | | (in thousands) | | | | | | | |
| Prudential Insurance | Prudential Insurance | | 8/13/2021 | | $ | 99,770 | | | $ | 0 | | | | | 4.39 | % | | | 12/15/2023 | Prudential Insurance | | 8/13/2021 | | $ | 96,666 | | | $ | 99,770 | | | | | 4.39 | % | | | 12/15/2023 |
| Prudential Insurance | Prudential Insurance | | 8/13/2021 | | 29,931 | | | 0 | | | | | 4.39 | % | | | 12/15/2023 | Prudential Insurance | | 8/13/2021 | | 29,000 | | | 29,931 | | | | | 4.39 | % | | | 12/15/2023 |
| Prudential Insurance | Prudential Insurance | | 8/13/2021 | | 100,348 | | | 0 | | | | | 3.95 | % | | | 6/20/2024 | Prudential Insurance | | 8/13/2021 | | 97,665 | | | 100,348 | | | | | 3.95 | % | | | 6/20/2024 |
| Prudential Insurance | Prudential Insurance | | 8/13/2021 | | 40,139 | | | 0 | | | | | 3.95 | % | | | 6/20/2024 | Prudential Insurance | | 8/13/2021 | | 39,066 | | | 40,139 | | | | | 3.95 | % | | | 6/20/2024 |
| Prudential Insurance | Prudential Insurance | | 8/13/2021 | | 50,174 | | | 0 | | | | | 3.95 | % | | | 6/20/2024 | Prudential Insurance | | 8/13/2021 | | 48,832 | | | 50,174 | | | | | 3.95 | % | | | 6/20/2024 |
| Prudential Funding, LLC | | Prudential Funding, LLC | | 12/28/2022 | | 138 | | | 0 | | | | | 4.73 | % | | | 1/31/2023 |
| Prudential Funding, LLC | | Prudential Funding, LLC | | 12/29/2022 | | 62 | | | 0 | | | | | 4.73 | % | | | 1/31/2023 |
| Prudential Funding, LLC | | Prudential Funding, LLC | | 12/30/2022 | | 384 | | | 0 | | | | | 4.73 | % | | | 1/31/2023 |
| Total Loans Payable to Affiliates | Total Loans Payable to Affiliates | | $ | 320,362 | | | $ | 0 | | | | | | | | Total Loans Payable to Affiliates | | $ | 311,813 | | | $ | 320,362 | | | | | | | |
Effective August 2021, the affiliated long-term debt was transferred to the Company from PALAC based on the market value of $324 million. The Company recorded a premium of $24 million which will beis amortized into earnings over the life of the loans.
The total interest expense to the Company related to affiliated loans payable to affiliates was $3.2 million, $0.4 million $0.7 million and $2.3$0.7 million for the years ended December 31, 2022, 2021 and 2020, and 2019, respectively.
Contributed Capital and Dividends
In February 2023, the Company received a capital contribution in the amount of $405 million from Prudential Insurance. In March, June and September of 2022, the Company received capital contributions in the amount of $8 million, $3 million and $7 million, respectively, from Prudential Insurance. In January, July and December of 2021, the Company received capital contributions in the amountamounts of $106 million, and $3,813 million and $457 million, respectively, from Prudential Insurance. The December 2021 capital contribution includes $167includes$167 million of invested assets related to the Affiliated Reinsurance Agreementaffiliated reinsurance agreement with PALAC. 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
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
In June 2021, there was a $34 million return of capital to Prudential Insurance associated with the financial guarantee related to the sale of Prudential of Taiwan. In 2020 the Company did notThere was no return capital.of capital in 2022 or 2020.
In 2022, 2021 and 2020, the Company did not pay any dividends to Prudential Insurance. In 2019, the Company paid a dividend in the amount of $250 million to Prudential Insurance.
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, 20212022 and 2020,2021, the outstanding balances on these commitments were $121$333 million and $30$121 million, respectively. These amounts include unfunded commitments that are not unconditionally cancellable. For related credit exposure, there was an allowance for credit losses of $0.1 million and $0.0 million as of both December 31, 2022 and 2021, and 2020,respectively, which is a change of $0.1 million and $0.0 million for both the years ended December 31, 2022 and 2021, and 2020.respectively. The Company also made commitments to purchase or fund investments, mostly private fixed maturities. As of December 31, 2022 and 2021, and 2020, $753$582 million and $354$753 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 both the years ended December 31, 20212022 and 2020.2021.
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.
Since 2001, the Company entered into an arrangement with Prudential of Taiwan as discussed in Note 9. In June 2021, PIIH completed the sale of Prudential of Taiwan. As a result of the sale, the Company has a financial guarantee to stand ready to perform in an event that both Prudential of Taiwan and the Buyer default and fail to perform their obligations to make payments to the policyholders. The Company has a liability of $33 million and $34 million as of December 31, 2022 and 2021, respectively, which represents the fair value of the guarantee and is amortized in revenue over a period which approximates the life of the underlying insurance in force. Since this obligation is not subject to limitations, it is not possible to determine the maximum potential amount due under this 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.
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.
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
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, 2021,2022, 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. This matter is now closed.
Moreland, Socorro v. PICA, et al.
In June 2020, a putative class action complaint entitled Socorro Moreland v. The Prudential Insurance Company of America; Pruco Life Insurance Company, was filed in the United States District Court for the Northern District of California, alleging that the Company failed to comply with California laws requiring that life insurance policies issued and delivered in California: (i) provide for a 60-day grace period pre-lapse during which a policy must stay in force; (ii) provide a 30-day written notice of pending lapse; and (iii) notify policyowners of their right to designate additional recipients for lapse notices. The complaint asserts claims for violation of California law, breach of contract, unfair competition, and bad faith violation of the implied covenant of good faith and fair dealing, and seeks unspecified damages, declaratory and injunctive relief. In August 2020, defendants filed an answer to the complaint and a motion to stay the action pending the California Supreme Court’s decision, in McHugh v. Protective Life Insurance, on the question of whether the California lapse statutes apply to policies that were in force when the statutes went into effect on January 1, 2013, or solely to policies issued after that date. The Moreland court granted defendants’ motion to stay in October 2020. Subsequently, in August 2021, the California Supreme Court in McHugh determined that the California lapse statutes apply to policies that were in force as of January 1, 2013. In October 2021, the Moreland court lifted the stay order.
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. In April 2021, defendants filed a motion to dismiss the complaint. In June 2021, plaintiff filed a notice of voluntary dismissal of the complaint, without prejudice. In August 2021, plaintiff filed a new putative class action complaint in the United States District Court for the District of New Jersey (the “Second Complaint”), asserting claims against Prudential Financial, Inc. and Pruco Life Insurance Company for violation of the New Jersey Consumer Fraud Act, breach of fiduciary duty, unjust enrichment and common law fraud. The putative class includes all Plan Participants from January 2015 until the present. In September 2021, defendants filed a motion to dismiss the Second Complaint.In November 2021, the court issued an order granting defendants’ motion and dismissed plaintiff’s: (i) fraud claims without prejudice; and (ii) breach of fiduciary duty and
PRUCO LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements—(Continued)
unjust enrichment claims with prejudice. In JanuaryDecember 2022, plaintiff filed a Notice of Voluntary Dismissal With Prejudice that was approved by the Court.This matter is now closed.motion for class certification.
Regulatory
Variable Products
The Company has received regulatory inquiries and requests for information from state and federal regulators, including subpoenas from the U.S. Securities and Exchange Commission, concerning the appropriateness of variable product sales and replacement activity. The Company is cooperating with regulators and may become subject to additional regulatory inquiries and other actions related to this matter.
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 statements. 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 statements.
Item 9. Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Management’s Annual Report on Internal Control Over Financial Reporting on the effectiveness of internal control over financial reporting as of December 31, 20212022 is included in Part II, Item 8 of this Annual Report on Form 10-K.
In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized, and reported on a timely basis, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in the Securities Exchange Act of 1934, as amended (“Exchange Act”) Rules 13a-15(e)Rule 15d-15(e), as of December 31, 2021.2022. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2021,2022, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f)15d-15(f), occurred during the quarter ended December 31, 2021,2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 14. Principal Accountant Fees and Services
The information called for by this item is hereby incorporated herein by reference to the relevant portions of Prudential Financial's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 2022.9, 2023.
PART IV
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this report:
| | | | | | | | |
| | Page |
| (a) (1) | | |
| (2) | Financial Statement Schedules: | |
| | |
| Any remaining schedules provided for in the applicable SEC regulations are omitted because they are either
inapplicable or the relevant information is provided elsewhere within this Form 10-K. | |
(3) Exhibits
| | | | | |
| |
| |
| |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| |
| 101.SCH | XBRL Taxonomy Extension Schema Document. |
| |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
| |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
| |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
| |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
| |
| 104. | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
PRUCO LIFE INSURANCE COMPANY
Schedule I
Summary of Investments Other Than Investments in Related Parties
As of December 31, 20212022
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| Type of Investment | | Amortized Cost or Cost | | Fair
Value | | Amount
Shown in the
Balance Sheet |
| Fixed maturities, available-for-sale: | | | | | | |
| Bonds: | | | | | | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | | $ | 303,040 | | | $ | 333,940 | | | $ | 333,940 | |
| Obligations of U.S. states and their political subdivisions | | 584,244 | | | 630,521 | | | 630,521 | |
| Foreign governments | | 324,454 | | | 350,471 | | | 350,471 | |
| Asset-backed securities | | 547,549 | | | 547,310 | | | 547,310 | |
| Commercial mortgage-backed securities | | 552,653 | | | 575,184 | | | 575,184 | |
| Residential mortgage-backed securities | | 18,684 | | | 20,180 | | | 20,180 | |
| Public utilities | | 1,343,463 | | | 1,436,962 | | | 1,436,962 | |
| | | | | | |
| All other corporate bonds | | 9,061,083 | | | 9,380,909 | | | 9,380,909 | |
| Redeemable preferred stock | | 2,579 | | | 2,689 | | | 2,689 | |
| Total fixed maturities, available-for-sale | | $ | 12,737,749 | | | $ | 13,278,166 | | | $ | 13,278,166 | |
| Equity securities: | | | | | | |
| Common stocks: | | | | | | |
| Other common stocks | | $ | 467 | | | $ | 2,331 | | | $ | 2,331 | |
| Mutual funds | | 96,858 | | | 98,634 | | | 98,634 | |
| | | | | | |
| Perpetual preferred stocks | | 8,849 | | | 10,302 | | | 10,302 | |
| Total equity securities, at fair value | | $ | 106,174 | | | $ | 111,267 | | | $ | 111,267 | |
| Fixed maturities, trading | | $ | 3,319,660 | | | $ | 3,302,392 | | | $ | 3,302,392 | |
| | | | | | |
| Commercial mortgage and other loans | | 2,832,560 | | | | | 2,832,560 | |
| Policy loans | | 1,327,485 | | | | | 1,327,485 | |
| Short-term investments | | 182,437 | | | | | 182,437 | |
| Other invested assets | | 1,209,925 | | | | | 1,209,925 | |
| Total investments | | $ | 21,715,990 | | | | | $ | 22,244,232 | |
| | | | | | | | | | | | | | | | | | | | |
| Type of Investment | | Amortized Cost or Cost | | Fair
Value | | Amount
Shown in the
Balance Sheet |
| Fixed maturities, available-for-sale: | | | | | | |
| Bonds: | | | | | | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | | $ | 354,348 | | | $ | 281,792 | | | $ | 281,792 | |
| Obligations of U.S. states and their political subdivisions | | 654,884 | | | 628,200 | | | 628,200 | |
| Foreign governments | | 330,967 | | | 273,462 | | | 273,462 | |
| Asset-backed securities | | 1,467,955 | | | 1,442,354 | | | 1,442,354 | |
| Commercial mortgage-backed securities | | 727,159 | | | 658,152 | | | 658,152 | |
| Residential mortgage-backed securities | | 342,493 | | | 336,216 | | | 336,216 | |
| Public utilities | | 1,895,412 | | | 1,642,060 | | | 1,642,060 | |
| All other corporate bonds | | 15,535,223 | | | 13,760,732 | | | 13,760,732 | |
| Redeemable preferred stock | | 2,646 | | | 2,433 | | | 2,433 | |
| Total fixed maturities, available-for-sale | | $ | 21,311,087 | | | $ | 19,025,401 | | | $ | 19,025,401 | |
| Equity securities: | | | | | | |
| Common stocks: | | | | | | |
| Other common stocks | | $ | 111,987 | | | $ | 109,609 | | | $ | 109,609 | |
| Mutual funds | | 7,681 | | | 6,297 | | | 6,297 | |
| Perpetual preferred stocks | | 28,511 | | | 27,166 | | | 27,166 | |
| Total equity securities, at fair value | | $ | 148,179 | | | $ | 143,072 | | | $ | 143,072 | |
| Fixed maturities, trading | | $ | 2,682,022 | | | $ | 1,936,159 | | | $ | 1,936,159 | |
| Commercial mortgage and other loans | | 4,928,680 | | | | | 4,928,680 | |
| Policy loans | | 505,367 | | | | | 505,367 | |
| Short-term investments | | 124,491 | | | | | 124,491 | |
| Other invested assets | | 1,088,613 | | | | | 1,088,613 | |
| Total investments | | $ | 30,788,439 | | | | | $ | 27,751,783 | |
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Newark, and State of New Jersey, on the 16th20th day of March 2022.2023.
| | | | | | | | |
PRUCO LIFE INSURANCE COMPANY
(Registrant) |
| |
| By: | | /s/ Dylan J. Tyson |
| | Dylan J. Tyson |
| | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 16, 2022.20, 2023.
| | | | | | | | |
| Signature | | Title |
| | |
| /s/ Dylan J. Tyson | | President, |
| Dylan J. Tyson | | Chief Executive Officer and Director |
| | |
| /s/ Robert E. Boyle | | Chief Financial Officer, Chief Accounting Officer |
| Robert E. Boyle | | and Director |
| | |
| *Nandini Mongia | | Director |
| Nandini Mongia | | |
| | |
| *Salene Hitchcock-Gear | | Director |
| Salene Hitchcock-Gear | | |
| | |
| *Markus Coombs | | Director |
| Markus Coombs | | |
| | |
| *Candace J. Woods | | Director |
| Candace J. Woods | | |
| | |
| *Caroline A. Feeney | | Director |
| Caroline A. Feeney | | |
| | | | | | | | |
| * By: | | /s/ Lynn K. StoneMichael Pignatella |
| | Lynn K. StoneMichael Pignatella |
| | (Attorney-in-Fact) |