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, we may not be able or willing to raise premiums or adjust other charges sufficiently, or at all, for regulatory or competitive reasons.
Legal actions - Failure to comply with laws and regulations may materially increase our direct and indirect compliance and other expenses of doing business, and thereby have a material adverse effect on our financial condition or results of operations.
See “Business-Regulation” for discussion of regulation of our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act subjectsalso exposes the Company our parent and our affiliates to substantial additional federal regulation and we cannot predict the effect on our business, results of operations, cash flows or financial condition.
In 2013, the Council made a final determination that Prudential Financial should be subject to stricter prudential regulatory standards and supervision by the FRB as a “Designated Financial Company” pursuant to Dodd-Frank, thereby subjecting Prudential Financial to substantial federal regulation, much of it pursuant to regulations not yet promulgated. Dodd-Frank directs existing and newly-created government agencies and bodies to promulgate regulations implementing the law, a process that is underway and expected to continue over the next few years. We cannot predict the timing or requirements of the regulations not yet adopted under Dodd-Frank or how such regulations will impact our business, Prudential Financial’s credit ratings or financial strength ratings, results of operations, cash flows, financial condition or competitive position. Furthermore, we cannot predict whether such regulations will make it advisable or how regulators will advise or require us to hold or raise additional capital or liquid assets, potentially affecting capital deployment activities, including paying dividends. Key aspects of Dodd-Frank’s impact on us include:
As a Designated Financial Company, Prudential Financial is now subject to supervision and examination by the FRB and to stricter prudential standards, which include or will include requirements and limitations (many of which are the subject of ongoing rule-making) relating to capital, leverage, liquidity, stress-testing, overall risk management, credit exposure reporting, early remediation, managing interlocks, credit concentration, and resolution and recovery planning. If the FRB and the FDIC jointly determine that Prudential Financials’ resolution plan is deficient, theylitigation risk. This may impose more stringent capital, leverage, or liquidity requirements, or restrictions on our growth, activities, or operations. Any continuing failure to adequately remedy the deficiencies couldalso result in the FRB and the FDIC jointly, in consultation with the Council, ordering divestiture of certain operations or assets. In addition, failure to meet defined measures of financial condition could result in substantial restrictions on our business and capital distributions. Prudential Financial will also be subject to stress tests to be promulgated by the FRB which could cause Prudential Financial to alter our business practices or affect the perceptions of regulators, rating agencies, customers, counterparties or investors of our financial strength. We cannot predict the requirements of the regulations not yet adopted or how the FRB will apply these prudential standards to Prudential Financial. As a Designated Financial Company, Prudential Financial must also seek pre-approval from the FRB for acquisition of certain companies engaged in financial activities.
As a Designated Financial Company, Prudential Financial could also be subject to additional capital requirements for, and other restrictions on, proprietary trading and sponsorship of, and investment in, hedge, private equity and other covered funds.
The Council could recommend new or heightened standards and safeguards for activities or practicesLiabilities we may incur as a result of operational failures are described further under “Contingent Liabilities” in which PrudentialNote 15 to the Financial and other financial services companies engage. We cannot predict whether any such recommendations will be made or their effect on our business, results of operations, cash flows or financial condition.
Dodd-Frank created a new framework for regulation of the OTC derivatives markets which could impact various activities of PGF, Prudential Financial and the Company, which use derivatives for various purposes (including hedging interest rate, foreign currency and equity market exposures). While many of the regulations required to be promulgated under Dodd-Frank or internationally with respect to derivatives markets have been adopted by the applicable regulatory agencies, the regulations that remain to be adopted or that have not been fully implemented could substantially increase the cost of hedging and related operations, affect the profitability of our products or their attractiveness to our clients or cause us to alter our hedging strategy or implementation thereof or increase and/or change the composition of the risks we do not hedge. In particular, we continue to monitor increased capital requirements for derivative transactions that may be imposed on banks that are our existing counterparties.
Title II of Dodd-Frank provides that a financial company such as Prudential Financial may be subject to a special orderly liquidation process outside the federal bankruptcy code, administered by the FDIC as receiver, upon a determination that Prudential Financial is in default or in danger of default and presents a systemic risk to U.S. financial stability, Prudential Financial and its U.S. insurance subsidiaries would be subject to rehabilitation and liquidation proceedings under state insurance law. We cannot predict how creditors of Prudential Financial or its insurance and non-insurance subsidiaries, including the holders of Prudential Financial debt, will evaluate this potential or whether it will impact our financing or hedging costs.
See “Business-Regulation” for further discussion of the impact of Dodd-Frank on our business.
Changes in the laws and regulations relating to retirement products and services, including proposed regulations released by the DOL in 2015, could adversely affect our business, results of operations, cash flows and financial condition.
In April 2015, the DOL released a proposed regulation, accompanied by new class exemptions and proposed amendments to long-standing exemptions from the prohibited transaction provisions under ERISA, and it is expected that the DOL will seek to promulgate final rules in 2016. If enacted, the rules will redefine who would be considered a “fiduciary” for purposes of transactions with plans, plan participants and IRAs. We cannot predict the exact nature and scope of any new final rules or their impact on our business; however, the new rules may effectively impose limits on interactions with existing and prospective customers in our business.Statements. In addition, we may experience increased costs if we need to adapt our technology and operational infrastructure to meet disclosure and compliance requirements under the proposed rules. Our compliance with the proposed rules could lead to a loss of customers and revenues, and otherwise adversely affect our business, results of operations, cash flows and financial condition. If the proposed rules are adopted in their current form, certain distributors may restrict the sale of annuities, and may remove themselves as broker of record, transitioning servicing and compliance back to Prudential Financial. In addition, we may need to alter our product design to comply with the new rules. We may also need to monitor wholesaling and other sales support activities so as not to be considered fiduciary advice, which would subject those activities to greater liability exposure.
In addition to the DOL rulemaking described above, lawmakers and regulatory authorities from time to time enact legislative and regulatory changes that could decrease the attractiveness of certain of Prudential Financial’s retirement products and services to retirement plan sponsors and administrators, or have an unfavorable effect on our ability to earn revenues from these products and services. Over time, these changes could hinder our sales of retirement products and services. We cannot predict with any certainty the effect these legislative and regulatory changes may have on our business, results of operations, cash flows and financial condition.
Foreign governmental actions could subject us to substantial additional regulation.
In addition to the adoption of Dodd-Frank in the United States, the FSB, has issued a series of proposals intended to produce significant changes in how financial companies, particularly companies that are members of large and complex financial groups, should be regulated.
The FSB identified Prudential Financial as a G-SII. The framework policy measures for G-SIIs published by the IAIS include enhanced group-wide supervision, enhanced capital standards, enhanced liquidity planning and management, and development of a risk reduction plan and recovery and resolution plans. The IAIS has released a basic capital requirement (“BCR”) and higher loss absorbency (“HLA”) standard that have been approved by the FSB and G20 with implementation in 2019. The IAIS is also developing ComFrame for the supervision of Internationally Active Insurance Groups that seeks to promote effective and globally-consistent supervision of the insurance industry and contribute to global financial stability through uniform standards for insurer corporate governance, enterprise risk management and other control functions, group wide supervision and group capital adequacy. ComFrame is also scheduled to be be adopted by the IAIS in 2019. Policy measures applicable to G-SIIs would need to be implemented by legislation or regulation in each applicable jurisdiction. We cannot predict the impact of BCR, HLA or ComFrame on our business, or the outcome of Prudential Financial’s identification as a G-SII on the regulation of our businesses.
Changes in accounting requirements could negatively impact our reported results of operations and our reported financial position.
Accounting standards are continuously evolving and subject to change. For example, the Financial Standards Accounting Board ("FASB") has an ongoing project to revise accounting standards for insurance contracts. While the final resolution of changes to U.S. GAAP pursuant to this project is unclear, changes to the manner in which we account for insurance products, or other changes in accounting standards, could have a material effect on our reported results of operations and financial condition. Further, changes in accounting standards may impose special demands on issuers in areas such as corporate governance, internal controls and disclosure, and may result in substantial conversion costs to implement.
Changes in U.S. federal income tax law or in the income tax laws of other jurisdictions that impact our tax profile could make some of our products less attractive to consumers and also increase our tax costs.
There is uncertainty regarding U.S. taxes both for individuals and corporations. Discussions in Washington continue concerning the need to reform the tax code, primarily by lowering tax rates and broadening the tax base, including by reducing or eliminating certain tax expenditures. Broadening the base or reducing or eliminating certain tax expenditures could make our products less attractive to customers. It is unclear whether or when Congress may take up overall tax reform and what would be the impact of reform on the Company and its products.
However even in the absence of overall tax reform, given the large federal deficit, as well as the budget constraints faced by many states and localities, Congress and state and local governments could raise revenue by enacting legislation to increase the taxes paid by individuals and corporations. This can be accomplished either by raising rates or otherwise changing the tax rules that affect the Company and its products.
Congress from time to time considers legislation that could make our products less attractive to consumers, Current U.S. federal income tax laws generally permit certain holders to defer taxation on the build-up of value of annuities and life insurance products until payments are actually made to the policyholder or other beneficiary and to exclude from taxation the death benefit paid under a life insurance contract. While higher tax rates increase the benefits of tax deferral on the build-up of value of annuities and life insurance, making our products more attractive to consumers, legislation that reduces or eliminates deferral could have a negative effect on our products.
Congress, as well as state and local governments, also considers from time to time legislation that could increase the amount of corporate taxes we pay, thereby reducing earnings. For example, changes in the law relating to tax reserving methodologies for term life or universal life insurance policies with secondary guarantees or other products could result in higher current taxes.
The Obama Administration’s Revenue Proposals include proposals which, if enacted, would affect the taxation of life insurance companies and certain life insurance products. The proposals would also change the method used to determine the amount of dividend income received by a life insurance company on assets held in separate accounts used to support products, including variable life insurance and variable annuity contracts, that is eligible for the dividends received deduction (“DRD”). The DRD reduces the amount of dividend income subject to tax and is a major reason for the difference between our actual tax expense and the expected tax amount determined using the federal statutory tax rate of 35%. If proposals of this type were enacted, the Company’s actual tax expense could increase, thereby reducing earnings.
Furthermore, the Administration’s Fiscal Year 2017 Revenue Proposals also include items that would change the way U.S. multinational corporations are taxed, as well as a liability-based fee on financial services companies, including insurance companies, with consolidated assets in excess of $50 billion. If these types of provisions are enacted into law, they could increase the amount of taxes Prudential Financial pays.
The products we have sold have different tax characteristics, in some cases generating tax deductions and credits for the Company. Changes in tax laws may negatively impact the deductions and credits available to the Company. These changes may increase the Company’s actual tax expense and reduce its consolidated net income.
The level of profitability of certain of our 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 returns. In addition, the adoption of a principles based approach for statutory reserves may lead to significant changes to the way tax reserves are determined and thus reduce future tax deductions.
Legal and regulatory actions are inherent in our business and could adversely affect our results of operations or financial position or harm our business or reputation.
We are, and in the future may be, subject to legal and regulatory actions in the ordinary course of our business. Some of these actions relate to aspects of the Company’s business and operations that are specific to us, while others are typical of the business in which we operate. We face or may face lawsuits alleging, among other things, issues relating to unclaimed property procedures, the settlement of death benefit claims, breaches of fiduciary duties, violations of securities laws and employment matters. Some
of these proceedings have been brought on behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages.
In addition, many insurancepending regulatory and other governmental or self-regulatory bodies have the authority to review our products and business practices and those of our agents and employees and to bring regulatory or other legal actions against us if, in their view, our practices, or those of our agents or employees, are improper. These actions can result in substantial fines, penalties or prohibitions or restrictions on our business activities and could adversely affect our business, reputation, results of operations, financial condition or liquidity. Further, the financial services industry in general has faced increased regulatory scrutiny from governmental and self-regulatory bodies conducting inquiries and investigations into various products and business practices. This regulatory scrutiny has in some cases led to proposed or final legislation and regulation that could significantly affect the financial services industry, and may ultimately result in an increased risk of regulatory penalties, settlements and litigation.
Legal liability or adverse publicity in respect of current or future legal or regulatory actions, whether or not involving us, could have an adverse affect on us or cause us reputational harm, which in turn could harm our business prospects. As a participant in the insurance and financial services industries, we may continue to experience a high level of legal and regulatory actions related to our businesses and operations.
Material pending litigation and regulatory matters affecting us, and certain risks to our businesses presented by such matters, are discussed under “Litigation and Regulatory Matters” in Note 1215 to the Financial Statements. Our litigationWe may become subject to additional regulatory and regulatory matterslegal actions in the future.
Key Enterprise Operational Risks - Key enterprise operational risks include the following:
We are subject to many uncertainties, and given their complexity and scope, their outcome cannot be predicted. Our reserves for litigation and regulatory matters may prove to be inadequate. Itbusiness continuation risk, which is possiblethe risk that our results of operations or cash flow in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigationsystems and regulatory matters. In light of the unpredictability of the Company’s litigation and regulatory matters, it is also possible that in certain cases an ultimate unfavorable resolution of one or more pending litigation or regulatory matters could have a material adverse effect on the Company’s financial position.
We may not be able to protect our intellectual property anddata may be subject to infringement claims.
We rely on a combination of contractual rights with Prudential Insurance’s employees and third parties and on copyright, trademark, patent and trade secret laws to establish and protect our intellectual property. Although we endeavor to protect our rights, third parties may infringe or misappropriate our intellectual property. We may have to litigate to enforce and protect our copyrights, trademarks, patents, trade secrets and know-how or to determine their scope, validity or enforceability. This would represent a diversion of resources that may be significant and our efforts may not prove successful. The inability to secure or protect our intellectual property assets could have a material adverse effect on our business and our ability to compete.
We may be subject to claims by third parties for (i) patent, trademark or copyright infringement, (ii) breach of copyright, trademark or license usage rights, or (iii) misappropriation of trade secrets. Any such claims and any resulting litigation could result in significant expense and liability for damages. If we were found to have infringed or misappropriated a third-party patent or other intellectual property right, we could in some circumstances be enjoined from providing certain products or services to our customers or from utilizing and benefiting from certain methods, processes, copyrights, trademarks, trade secrets or licenses. Alternatively, we could be required to enter into costly licensing arrangements with third parties or implement a costly work around. Any of these scenarios could have a material adverse effect on our business and results of operations.
Operational Risks
Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems, could harm our business.
disrupted.We depend heavily on our telecommunication, information technology and other operational systems and on the integrity and timeliness of data we use to run our businesses and service our customers. These systems 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 by others, including clearing agents, exchanges and other financial intermediaries and of vendors and parties to which we outsource the provision of services or business operations. If these parties do not perform as anticipated, weWe may experience operational difficulties, increased costsa business continuation event as a result of:
Severe pandemic, either naturally occurring or intentionally manipulated pathogens.
Geo-political risks, including armed conflict and other adverse effects on our business. These riskscivil unrest.
Terrorist events.
A significant natural or accidental disaster.
We are heightened by our offering of increasingly complex products, such as those that feature an asset transfer feature or re-allocation strategies, and by our employment of complex investment, trading and hedging programs.
Despite our implementation of a variety of security measures, our information technology and other systems could be subject to physical or electronic break-ins, unauthorized tampering or other security breaches, resulting in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to customers or in the misappropriation of our intellectual property or proprietary information. Many financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted
attacks intended to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, often through the introduction of computer viruses or malware, cyber attacks and other means.
Despite our efforts to ensure the integrity of our systems, it is possiblerisk that we may not adequately maintain information security. There continues to be ablesignificant and organized cyber-attack activity against western organizations, including but not limited to anticipatethe financial services sector and no organization is fully immune to cyber-attacks. Risks related to cyber-attack arise in the following areas:
Protecting both “structured” and “unstructured” sensitive information is a constant need. However, some risks associated with trusted insiders (i.e., employees, consultants, or to implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and because cyber attacks can originate from a wide variety of sources, including third parties outside of Prudential Financial such as personsvendors who are involved with organized crimeauthorized to access the Company’s systems) cannot be fully mitigated using technology or who may be linked to terrorist organizations or hostile foreign governments, as well asotherwise.
Unsuspecting employees represent a primary avenue for external service providers. Those parties may also attempt to fraudulently induce employees, customers or other users of Prudential Financial’s systems to disclose sensitive information in order to gain access to our network and systems. Many attacks, even from sophisticated actors, include rudimentary techniques such as coaxing an internal user to click on a malicious attachment or link to introduce malware or steal their username and password.
In the past, hackers went after credit and debit card data, which is easy to monetize. As credit card security improves, the hackers will look to other sources of monetization, specifically personally identifiable information or thatusing cyber-attacks or the threat of our customerscyber-attacks to extort money from companies. Insurance and retirement services companies are increasingly being targeted by hackers.
Nation-state sponsored organizations are engaged in cyber-attacks but not necessarily for monetization purposes. Nation states appear to be motivated by the desire to gain information about foreign citizens and governments or clients. In addition, whileto influence or cause disruptions in commerce or political affairs.
We have also seen an increase in non-technical attempts to commit fraud or solicit information via call centers and interactive voice response systems, and we anticipate the Company hasattempts will become more common.
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 contractual arrangements.
Security breaches or other technological failures may also result in regulatory inquiries, regulatory proceedings, regulatory and litigation costs, and reputational damage. We may incur reimbursement and other expenses, includingnot adequately ensure the costs of litigation and litigation settlements and additional compliance costs. We may also incur considerable expenses in enhancing and upgrading computer systems and systems security following such a failure.
Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residingdata. In the course of our ordinary business we collect, store and share with various third-parties (e.g., service providers, reinsurers, etc.) substantial amounts of private and confidential policyholder information, including in some instances sensitive health-related information. We are subject to the risk that the privacy of this information may be compromised, including as a result of an information security breach described above.
Third parties (outsourcing providers, vendors and suppliers) present added operational risk to our enterprise. The Company's business model relies heavily on such systems, whether duethe use of third parties to actions by us or others, could delay or disrupt our ability to do business and service our customers, harm our reputation, resultdeliver contracted services in a violationbroad range of applicable privacyareas. 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 U.S.
Affiliate and third-party distributors of our products present added regulatory, competitive and other laws, subject us to substantial regulatory sanctions and other claims, lead to a loss of customers and revenues, or financial lossrisks to our customersenterprise. Our products are sold primarily through our captive/affiliated distribution system and otherwisethird-party distributing firms. Our captive/affiliated distribution system is 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 affectaffected 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 business.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 risk accountability.
We face risks arising from acquisitions, divestitures and restructurings, including client losses, surrenders and withdrawals, difficulties in executing, integrating and realizing the projected results of acquisitions and contingent liabilities with respect to dispositions.
We faceIn addition, there have been a number of risks arising from acquisition transactions, includinginvestigations regarding the risk that, followingmarketing practices of brokers and agents selling annuity and insurance products and the acquisition payments they receive. These investigations have resulted in enforcement actions against companies in our industry and brokers and agents marketing and selling those companies’ products. These investigations and enforcement actions could result in penalties and the imposition of corrective action plans and/or reorganization of a business, we could experience client losses, surrenders or withdrawals or other results materially different from those we anticipate. We may also experience difficulties in executing previously-announced transactions, and integrating and realizing the projected results of acquisitions and restructurings and managing the litigation and regulatory matterschanges to which acquired entities are party. We may retain insurance or reinsurance obligations and other contingent liabilities in connection with our divestiture or winding down of various businesses, and our reserves for these obligations and liabilities may prove to be inadequate. Furthermore, transactions we enter into may alter the risks of our business. These risks may adversely affect our results of operations or financial condition.
Other Risks
Our risk management policies and procedures may prove to be ineffective and leave us exposed to unidentified or unanticipated risk,industry practices, which could adversely affect our businessesability to market our products. Furthermore, if our products are distributed in an inappropriate manner, or resultto customers for whom they are unsuitable, or distributors of our products otherwise engage in losses.
We have developed an enterprise-wide risk management framework to mitigate risk and loss to the Company, andmisconduct, we maintain policies, procedures and controls intended to identify, measure, monitor, report and analyze the risks to which the Company is exposed.
There are, however, inherent limitations to risk management strategies because there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, the Company may suffer unexpected lossesreputational and other harm to our business and be subject to regulatory action.
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 be materiallyhave 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, 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 affected. As our businesses change and the markets in which we operate evolve, our risk management framework may not evolve at the same pace as those changes. In times of market stress, unanticipated market movements or unanticipated claims experience resulting from adverse mortality or morbidity,impact the effectiveness of our risk management strategiesdistribution 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 limited, resulting in losseschallenged 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 Company. In addition, under difficultrisk of financial loss or less liquid market conditions, our risk management strategies may not be effective because other market participants may be using the samereputational damage or similar strategies to manage risk under the same challenging market conditions. In such circumstances, it may be difficultadverse regulatory impacts caused by model errors or more expensive for the Company to mitigate risk due to the activitylimitations, incorrect implementation of such other market participants.
Manymodels, or misuse of our risk management strategies or techniques are basedoverreliance upon historical customer and market behavior and all such strategies and techniques are based to some degree on management’s subjective judgment. We cannot provide assurance that our risk management framework, including the underlying assumptions or strategies, will be accurate and effective.
Management of operational, legal and regulatory risks requires, among other things, policies, procedures and controls to record properly and verify a large number of transactions and events, and these policies, procedures and controls may not be fully effective.
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.
PastStrategic 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 future misconduct by Prudential Insurance’s employees or employees ofa change in our vendors could result in violations of law byexecution. In addition, tactical risks may become strategic risks. For example, interest rates remaining low for a long time may, at some point, cause us regulatory sanctionsto change our sales goals, exit a certain business, and/or serious reputationalchange our business model.
Changes in the regulatory landscapemay 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 financial harmunforeseen changes in law or regulation 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 precautions we takefollowing areas:
Financial sector regulatory reform.
Tax laws (including U.S. federal, state, and non-U.S.).
Fiduciary rules and other standards of care.
Our regulation under U.S. state insurance laws and developments regarding group-wide supervision and capital standards, RBC factors for invested assets and reserves for variable annuities and other products.
Privacy and cybersecurity regulation.
Changes in accounting rules applicable to prevent and detect this activityour business may not be effective in all cases. There can be no assurance that controls and procedures that we employ, which are designed to monitor associates’ business decisions and prevent us from taking excessive or inappropriate risks, will be effective. We review our compensation policies and practices as part of our overall risk management program, but it is possible that our compensation policies and practices could inadvertently incentivize excessive or inappropriate risk taking. If our associates take excessive or inappropriate risks, those risks could harm our reputation andalso have a materialan adverse effectimpact 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”) 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, see Note 2 to the Financial Statements.
InTechnological changes may be unsettling to our investmentsbusiness model. We believe the following aspects of technological change would significantly impact our business model. There may be other unforeseen changes in technology 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 may drive a need to redesign products. 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 over the next 10 years.
Investment Portfolio. Technology may have a significant impact on the companies in which we hold a minority interest, or that are managed by third parties, we lack management and operational control over operations,the Company invests. For example, environmental concerns spur scientific inquiry which may subject usre-position 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 additional operational, compliancefavor online activity which would change the role of malls and legal risksretail properties.
Medical Advances. The Company is exposed to the impact of medical advances in two major ways. Genetic testing and prevent usthe availability of that information unequally to consumers and insurers can bring anti-selection risks. Specifically, data from takinggenetic testing can give our prospective customers a clearer view into their future, allowing them to select products protecting them against likelihoods of mortality or causinglongevity with more precision. Also, technologies that extend lives will challenge our actuarial assumptions especially in the annuity-based businesses.
Other factors may be unsettling to be taken actions to protect or increase the valueour business model. The following items are examples of those investments. In those jurisdictions where we are constrained by law from owningwhich, among others, could have a majority interestmeaningful impact on our business.
A downgrade in jointly ownedour 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 remedies inratings and the eventpotential impact of a breach by a joint venture partnerratings 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 be limited (e.g.,take, or what actions we may have no abilitytake in response to exercise a “call” option).
The occurrencethe actions of natural or man-made disastersrating agencies, which could adversely affect our business. Our ratings could be downgraded at any time and without notice by any rating agency. In addition, a sovereign downgrade could result in a downgrade of our 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 operationsPrudential Financial and its domestic insurance companies.
The elimination of London Inter-Bank Offered Rate ("LIBOR") may adversely affect the interest rates on and value of 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 most major currencies. On July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. However, it remains unclear if, how and in what form, LIBOR will continue to exist. The U.S. Federal Reserve, based on the recommendations of the New York Federal Reserve’s Alternative Reference Rate Committee (constituted of major derivative market participants and their regulators), has begun publishing a Secured Overnight Funding Rate ("SOFR") which is intended to replace U.S. dollar LIBOR, and SOFR-based investment products have been issued in the U.S. Proposals for alternative reference rates for other currencies have also been announced or have already begun publication. Markets are slowly developing in response to these new rates and questions around liquidity in these rates and how to appropriately adjust these rates to eliminate any economic value transfer at the time of transition remain a significant concern for us and others in the marketplace. The effect of any changes or reforms to LIBOR or discontinuation of LIBOR on new or existing financial condition.instruments to which we have exposure or the activities in our businesses will vary depending on (1) existing fallback provisions in individual contracts and (2) 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.
The occurrencechanging 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, or other changes in the marketplace may present opportunities for new or smaller competitors without established products or distribution channels to meet consumers’ increased expectations more efficiently than us. Fintech and insurtech companies 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 natural disasters, including hurricanes, floods, earthquakes, tsunamis, tornadoes, fires, explosions, pandemic disease and man-made disasters, including acts of terrorism and military actions, couldcalamities, or adversely affect our operations, results of operations or financial condition, including in the following respects:
Catastrophic loss of life due to natural or man-made disasters could cause us to pay benefits at higher levels and/or materially earlier than anticipated and could lead to unexpected changes in persistency rates.
A man-made or natural disaster could result in disruptions in our operations, losses in our investment portfolio or the failure of our counterparties to perform, or cause significant volatility in global financial markets.
A terrorist attack affecting financial institutions in the U. S. or elsewhere could negatively impact the financial services industry in general and our business operations, investment portfolio and profitability in particular.
Pandemic disease could have a severe adverse effect on our business. The potential impact of such a pandemic on our results of operations and financial position is highly speculative, and would depend on numerous factors, including: the effectiveness of vaccines and the rate of contagion; the regions of the world most affected; the effectiveness of treatment for the infected population; the rates of mortality and morbidity among various segments of the insured population; the collectability of reinsurance; the possible macroeconomic effects of a pandemic on the Company’s asset portfolio; the effect on lapses and surrenders of existing policies, as well as sales of new policies; and many other variables.
The above risks are more pronounced in respect of geographic areas, including major metropolitan centers, where we have concentrations of customers, concentrations of employees or significant operations, and in respect of countries and regions in which we operate subject to a greater potential threat of military action or conflict.
There can be no assurance that our business continuation plans and insurance coverages would be effective in mitigating any negative effects on our operations or profitability in the event of a terrorist attack or other disaster.
Finally, climateportfolio. Climate change may increase the frequency and severity of weather related disasters.weather-related disasters and pandemics. In addition, climate change regulation may affect the prospects of companies and other entities whose securities we hold, andor our willingness to continue to hold their securities. It may also impact other counterparties, including reinsurers, and affect the value of investments, including real estate investments that we hold.investments. We cannot predict the long termlong-term impacts on us from climate change or related regulation.
Market conditions and other factors may adversely impact product sales or increase expenses. Examples include:
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| ◦ | A change in market conditions, such as high inflation and high interest rates, 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. |
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| ◦ | 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. |
Our reputation may be adversely impacted if any of the risks described in this section are realized. Reputational riskcould 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.
Item 1B. Unresolved Staff Comments
NoneNone.
Item 2. Properties
The Company occupies office space in Shelton, Connecticut, which is leased from an affiliate, Prudential Annuities Information Services and Technology Corporation, as described under “Expense Charges and Allocations” in Note 1314 to the Financial Statements.
Item 3. Legal Proceedings
See Note 1215 to the Financial Statements under “—Litigation“Litigation and Regulatory Matters” for a description of materialcertain pending litigation and regulatory matters affecting us, and certain risks to our businesses presented by such matters.
Item 4. Mine Safety Disclosures
Not ApplicableApplicable.
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 ownedwholly-owned subsidiary of PAI.Prudential Annuities, Inc. (“PAI”). There is no public market for the Company’s common stock.
Item 6. Selected Financial Data
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following analysis of our financial condition and results of operations in conjunction with the Forward-Looking Statements included below the Table of Contents, “Risk Factors,” and the Financial Statements included in this Annual Report on Form 10-K.
Overview
The Company has sold a wide array of annuities, including deferred and immediate variable annuities with (1) fixed interest rate allocation options, subject to a market value adjustment, that are registered with the United States Securities and Exchange Commission (the “SEC”), and (2) fixed-rate allocation options not subject to a market value adjustment and not registered with the SEC. In addition, the Company has a relatively small in force block of variable life insurance policies. The Company no longerstopped actively sells such products.selling annuity products between March 2010 and December 2017.
Beginning inIn March 2010, the Company ceased offering its variable and fixed annuity products (and where offered, the companion market value adjustment option) to new investors upon the launch of a new product line by each of Pruco Life Insurance Company ("Pruco Life") and Pruco Life Insurance Company of New Jersey ("PLNJ") (which are affiliates of the Company). These initiatives were implemented to create operational and administrative efficiencies by offering a single product line of annuity products from a more limited group of legal entities. During 2012, the Company suspended additional customer deposits for variable annuities with certain optional living benefit riders.guarantees. However, subject to applicable contract provisions and administrative rules, the Company continues to accept additional customer deposits on certain in force contracts.contracts, subject to applicable contract provisions and administrative rules. The Company launched a new fixed indexed annuity and a new deferred income annuity during 2018.
On August 31, 2013, the Company redomesticated from Connecticut to Arizona. As a result of the redomestication, the Company is now an Arizona insurance company and its principal insurance regulatory authority is the Arizona Department of Insurance.Insurance ("AZDOI"). See Note 1 to the Financial Statements for additional information.
InAs disclosed in Note 1 to the fourth quarter ofFinancial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, the Company surrendered its New York license. The Company recaptured the New York living benefits previously ceded to Pruco Re,license effective as of December 31, 2015, and reinsured the majority of its New York business both the living benefit and base contract, to an affiliate, The Prudential Insurance Company of America (“Prudential Insurance”). The license surrender relieves the Company of the requirement to hold additional New York statutory reserves mandatedon its business in excess of the statutory reserves required by its domiciliary regulator, the fourth quarter of 2014 agreement with the New York State Department of Financial Services (“NY DFS”).AZDOI. For the small portion of New York business retained by the Company, a custodial account has been established to hold collateral assets in an amount equal to a percentage of the reserves associated with such business, as calculated in accordance with PALAC's New York Regulation 109 Plan approved by the reserve methodologiesNew York Department of Financial Services.
Variable Annuities Recapture
Through March 31, 2016, the Company reinsured the majority of its variable annuity living benefit guarantees to its affiliated companies, Pruco Re and Prudential Insurance, in order to facilitate the capital markets hedging program for these living benefit guarantees. Effective April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured to Pruco Re and Prudential Insurance. In addition, the Company reinsured the variable annuity base contracts, along with the living benefit guarantees, Pruco Life, excluding the PLNJ business which was reinsured to Prudential Insurance, under a coinsurance and modified coinsurance agreement. The reinsurance agreement covers new and in force business and excludes business reinsured externally by Pruco Life. The product risks related to the reinsured business are being managed in the Company. In addition, the living benefit hedging program related to the reinsured living benefit guarantees is being managed within the Company. These series of transactions are collectively referred to as the "Variable Annuities Recapture". As a result of the NY DFS.Variable Annuities Recapture, Pruco Re no longer had any material active reinsurance with affiliates. On September 30, 2016, Pruco Re was merged with and into the Company.
Regulatory DevelopmentsFor additional information on the potential impacts of regulation on
The Variable Annuities Recapture allows the Company see “Business—Regulation”to manage the capital and “Risk Factors”.liquidity risks of these products more efficiently by aggregating both the risks and the assets supporting these risks. In connection with this transaction, the Company evaluated the overall risk management strategy including potential future enhancements to the living benefit hedging program. During the third quarter of 2016, the Company implemented modifications to the risk management strategy in order to more efficiently manage the capital and liquidity associated with these products while continuing to mitigate fluctuations in net income due to capital market movements. These modifications include utilizing a combination of traditional fixed income instruments and derivatives to manage the associated risks.
Revenues and Expenses
The Company earns revenues principally from policycontract charges, fee income,mortality and expense fees, asset administration fees from insuranceannuity and investment products and from net investment income on the investment of general account and other funds. The Company earns contract fees, mortality and expense fees and asset administration fees primarily from the sale and servicing of annuity products. The Company’s operating expenses principally consist of insurance benefitsannuity benefit guarantees provided and reserves established for anticipated future insurance benefits,annuity benefit guarantees and costs of managing risk related to these products, interest credited to policyholders'contractholders' account balances, general business expenses, reinsurance premiums, commissions and other costs of selling and servicing the various products it sold.
Effective February 25, 2013, the Advanced Series Trust (“AST”) adopted a Rule 12b-1 Plan under the Investment Company Act of 1940 with respect to most of the AST portfolios that are offered through the Company’s variable annuity and variable life insurance products. Under the Rule 12b-1 Plan, AST pays an affiliate of the Company for distribution and administrative services. In June 2015, AST received shareholder approval to amend the Rule 12b-1 Plan. Effective July 1, 2015, there was an increase in the amount AST pays the Company's affiliate for distribution and administrative services. However, there was also a reduction in management fees. In addition, due to the revised Rule 12b-1 Plan, the asset administration fees received by the Company from AST Investment Services, Inc., and related distribution expenses of the Company, have decreased.
Profitability
The Company’s profitability depends principally on its ability to manage risk on insuranceprice our annuity products at a level that enables us to earn a margin over the costs associated with providing benefits and annuityadministering those products. Profitability also depends on, among other items, our actuarial and policyholdercontractholder behavior experience on insurance and annuity products, our ability to attract and retain customer assets, generate and maintain favorable investment results, effectively deploy capital and toutilize our tax capacity, and manage expenses.
See “Risk Factors” for a discussion of risks that have materially affected and may affect in the future the Company’s business, results of operations or financial condition, or cause the Company’s actual results to differ materially from those expected or those expressed in any forward lookingforward-looking statements made by or on behalf of the Company.
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. remain lower than historical levels, which may continue to negatively impact our portfolio income yields and our net investment spread results. See “Impact of a Low Interest Rate Environment” below. 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.
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.
Impact of a Low Interest Rate Environment
As a financial services company, market interest rates are a key driver of the Company's results of operations and financial condition. Changes in interest rates can affect our results of operations and/or our financial condition 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;
insurance reserve levels, amortization of deferred policy acquisition costs ("DAC")/value of business acquired (“VOBA”)
and market experience true-ups/deferred sales inducements ("DSI");
customer account values, including their impact on fee income;
fair value of, and possible impairments, on intangible assets;
product offerings, design features, crediting rates and sales mix; and
policyholder behavior, including surrender or withdrawal activity.
Accounting Policies and& Pronouncements
Application of Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted 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 estimates and assumptions used in the preparation of financial statements. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, the Company’s results of operations and financial position as reported in the 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 Other CostsDeferred Sales Inducements
We capitalize costs that are directly related to the acquisition of 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 policyholder’spolicyholders' account balancebalances mainly as an inducement to purchase the contract. For additional information about sales inducements, see Note 79 to the Financial Statements. We generally amortize these deferred policy acquisition costs (“DAC”),DAC and deferred sales inducements (“DSI”),DSI over the expected lives of the contracts, based on our estimates of the level and timing of gross profits. 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 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 “—Policyholder Liabilities.”“Insurance Liabilities—Future Policy Benefits". As of December 31, 2015,2018, DAC and DSI were $749$4,448 million and $453$890 million, respectively.
Amortization methodologies
We generally amortize DAC and other costs over the expected life of the contracts in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. In calculatingGross 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) benefit claims in excess of policyholder balances, costs incurred for contract administration, the net cost of reinsurance for certain businesses, interest credited to policyholder balances and other credits. If significant negative gross profits we consider mortality, persistency, and other elementsare expected in any periods, the amount of insurance in force is generally substituted as well as rates of return on investments associated with these contracts, and the cost related to our guaranteed minimum death and guaranteed minimum income benefits. Grossbase for computing amortization. For variable annuities, 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 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 previously 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, as discussed below.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 1310 to the Financial Statements. Incorporating all product-related profits and losses in gross profits, including those that are reported in affiliated legal entities, produceproduces a DAC amortization pattern representative of the total economics of the products. For a further discussion of the amortization of DAC and other costs, see “—Results of Operations.”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“—Annual assumptions review and quarterly adjustments.”adjustments”.
Annual assumptions review and quarterly adjustments
Annually, we perform a 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 resulting in a change to expected future gross profits and the amortization of DAC and DSI have been related to lapse experience 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 areis dependent upon the total rate of return on assets held in separate account investment options. This rate of return influences the fees we earn andon variable annuity policies, costs we incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity 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 policies 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. 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 near-term future equity rate of return assumption used in evaluating DAC and other costs 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%15.0%, we use our maximum future rate of return. As of December 31, 2015,2018, we assume an 8.0% long-term equity expected rate of return and a 6.0%7.6% near-term mean reversion equity expected rate of return.
The weighted average rate of return assumptions consider many factors, including asset durations, asset allocations and other factors. We generally update the near-term equity ratesrate of return and our estimate of total gross profits each quarter to reflect the result of the reversion to the mean approach. We generally update the future interest rates used to project fixed income returns annually and in any quarter when interest rates vary significantly from these assumptions. As a result of our 2018 annual reviews and update of assumptions and other refinements, we kept our long-term expectation of the 10-year U.S. Treasury rate unchanged from last year and continue to grade to 3.75% over ten years.
These market performance related adjustments to our estimate of total gross profits result in cumulative adjustments to prior amortization, reflecting the application of the new required rate of amortization to all prior periods’ gross profits.
DAC and DSI Sensitivities
For variable annuity contracts, DAC and DSI are sensitive to changes in our future rate of return assumptions due primarily to the significant portion of gross profits that is dependent upon the total rate of return on assets held in separate account investment options.
The following table provides a demonstration of the sensitivity of each of these balances relative to our future rate of return assumptions by quantifying the adjustments to each balance that would be required assuming both an increase and decrease in our future rate of return by 100 bps. The sensitivity includes both an increase and decrease of 100 bps to the future rate of return assumptions in all years. The information below is for illustrative purposes only and considers only the direct effect of changes in our future rate of return on the DAC and DSI balances and not changes in any other assumptions such as persistency, mortality, or expenses included in our evaluation of DAC and DSI. Further, this information does not reflect changes in reserves, such as the reserves for the guaranteed minimum death and optional living benefit features of our variable annuity products, or the impact that changes in such reserves may have on the DAC and DSI balances.
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| | | December 31, 2015 |
| | | Increase/(Decrease) in DAC | | Increase/(Decrease) in DSI |
| | | (in millions) |
| Increase in future rate of return by 100 bps | | $ | 50 |
| | $ | 30 |
|
| Decrease in future rate of return by 100 bps | | $ | (54 | ) | | $ | (31 | ) |
In addition to the impact of market performance relative to our future rate of return assumptions, other factors may also drive variability in amortization expense, particularly when our annual assumption updates are performed. As noted above, however, 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. In 2015, updates to fund mapping and mortality drove the most significant changes to amortization expense. For a discussion of DAC and DSI adjustments for the years ended December 31, 2015 and 2014, see “Results of Operations”.
Value of Business Acquired
In addition to DAC and DSI, we also recognize an asset for value of business acquired, or VOBA. VOBA is an intangible asset which represents an adjustment to the stated value of acquired in force insurance contract liabilities to present them at fair value, determined as of the acquisition date. VOBA is amortized over the expected life of the acquired contracts in proportionusing the same methodology and assumptions used to estimated gross profits, depending on the type of contract.amortize DAC and DSI (see “—Deferred Policy Acquisition Costs and Deferred Sales Inducements” above for additional information). VOBA is also subject to recoverability testing. As of December 31, 2015,2018, VOBA was $34$33 million. For additional information about VOBA including its bases for amortization, see Note 5
Valuation of Investments, Including Derivatives, 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 currency exchange rates, financial indices or the values of securities. Derivative financial instruments we generally use include swaps, and options. 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 the investments and derivatives, as referenced below:
Valuation of investments, including derivativesInsurance Liabilities
Recognition of other-than-temporary impairments; and
Determination of the valuation allowance for losses on commercial mortgage and other loans.Future Policy Benefits
We present at fair value in the statements of financial position our investments classified as available-for-sale including fixed maturity and equity securities investments classified as trading, derivatives, and embedded 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 10 to the 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” (“AOCI”), a separate component of equity. For our investments classified as trading, the impact of changes in fair value is recorded within “Asset administration fees and other income.” In addition, investments classified as available-for-sale are subject to impairment reviews to identify when a decline in value is other-than-temporary. For a discussion of our policies regarding other-than-temporary declines in investment value and the related methodology for recording other-than-temporary impairments of fixed maturity and equity securities, see Note 2 to the Financial Statements.
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. For a discussion of our policies regarding the valuation allowance for commercial mortgage and other loans see Note 2 to the Financial Statements.
Policyholder Liabilities
Future Policy Benefit Reserves
We establish reserves for future policy benefits to, or on behalf of, policyholders, in the same period in which the policy is issued or acquired, using methodologies prescribed by U.S. GAAP. The reserving methodologies used for our business include the following:
For most long-duration contracts,life contingent payout annuities, we utilize best estimate assumptions asa 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 dategross premium required to provide for all benefits and expenses), is estimated using methods that include assumptions applicable at the policy is issued or acquiredtime the insurance contracts are made with provisions for the risk of adverse deviation, as appropriate. AfterOriginal assumptions continue to be used in subsequent accounting periods to determine changes in the liabilities are initially established, weliability 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, DSI or VOBA asset), the existing net reserves are 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.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 reserves,contract features, such as our contracts withthose related to guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”), we utilizea liability is 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 (i.e., payments in establishing reserves.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, andperformance. These adjustments reflect the reserves may be adjustedimpact 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 withusing a fair valuesvalue 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.
The assumptions used in establishing reserves are generally based on the Company’s experience, industry experience and/or other factors, as applicable. We typically update our actuarial assumptions, such as mortality, morbidity 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 our reserves.reserves:
FutureThe reserves for future policy benefits also includeof our 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 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 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 event.
The reserves for certain optional living benefit features, including guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”)GMAB, GMWB and guaranteed minimum income and withdrawal benefits (“GMIWB”),GMIWB are accounted for as embedded derivatives withat fair values calculatedvalue, 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.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 (“NPR”), as well as actuarially determined assumptions, including mortality rates and contractholder behavior, such as lapse rates, benefit utilization rates withdrawal rates, and mortalitywithdrawal 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. The Company’s discount rate assumption is based on the London Inter-Bank Offered Rate (“LIBOR”) swap curve adjusted for an additional spread, relative to LIBOR to reflectwhich 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 105 to the Financial Statements.
Sensitivity
Sensitivities for Future Policy Benefit ReservesInsurance Assets and Liabilities
We expect the future benefit reserves that are based on current best estimate assumptions, and those that represent embedded derivatives recorded at fair value to be the ones most likely to drive variability in earnings from period to period.
For the GMDB and GMIB features of our variable annuities, the reserves for these contracts are significantly influenced by the future rate of return assumptions. The following table provides a demonstrationsummarizes the impact that could result on each of the sensitivity of the reserves for GMDBs and GMIBs relatedlisted financial statement balances from changes in certain assumptions that may be considered reasonably likely to variable annuity contracts relative to our future rate of return assumptions by quantifying the adjustments to these reserves that would be required assuming both a 100 basis point increase and decrease in our future rate of return.occur. The information below is for illustrative purposes only and considersincludes only the hypothetical direct effectimpact on December 31, 2018 balances of changes in our future rate of return on operating results due to the change in the reserve balancea single assumption and not changes in any other assumptions such as persistency or mortality includedcombination of assumptions. Changes in our evaluationexcess of the reserves, oramounts illustrated may occur in future periods. A description of the estimates and assumptions used in the preparation of each of these financial statement balances is provided further 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 changes on DAC or other balances, discussed abovefavorable change in “—Deferred Policy Acquisitionassumptions for traditional long duration and Other Costs.”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.
|
| | | |
| | December 31, 2015 |
| | Increase/(Decrease) in GMDB/GMIB Reserves |
| | (in millions) |
| Increase in future rate of return by 100 bps | $ | (25 | ) |
| Decrease in future rate of return by 100 bps | $ | 40 |
|
In additionThe impacts presented within this table do not reflect the related impacts of our asset liability management strategy which seeks to offset the changes in the balances presented within this table and is primarily comprised 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, 2018 |
| | Increase (Decrease) in |
| | Deferred Policy Acquisition Costs, Deferred Sales Inducements and Value of Business Acquired | | Reinsurance Recoverables | | Future Policy Benefits and Policyholders’ Account Balances(1)(6) | | Net Impact |
| | | | | | (in millions) | | |
| Hypothetical change in current | | | | | | | |
| Long-Term Equity Expected Rate of Return(2) | | | | | | | |
| Increase by 50 basis points | $ | 165 |
| | $ | 0 |
| | $ | (50 | ) | | $ | 215 |
|
| Decrease by 50 basis points | $ | (170 | ) | | $ | 0 |
| | $ | 50 |
| | $ | (220 | ) |
| NPR Credit Spread(3) |
| | | |
| |
|
| Increase by 50 basis points | $ | (285 | ) | | $ | (30 | ) | | $ | (1,405 | ) | | $ | 1,090 |
|
| Decrease by 50 basis points | $ | 315 |
| | $ | 30 |
| | $ | 1,530 |
| | $ | (1,185 | ) |
| Mortality(4) |
| | | |
| |
|
| Increase by 1% | $ | (10 | ) | | $ | 0 |
| | $ | (100 | ) | | $ | 90 |
|
| Decrease by 1% | $ | 10 |
| | $ | 0 |
| | $ | 100 |
| | $ | (90 | ) |
| Lapse(5) |
| | | |
| |
|
| Increase by 10% | $ | (90 | ) | | $ | (10 | ) | | $ | (475 | ) | | $ | 375 |
|
| Decrease by 10% | $ | 95 |
| | $ | 10 |
| | $ | 500 |
| | $ | (395 | ) |
| |
| (1) | Includes GMDB/GMIB reserves, embedded derivative liabilities for certain living benefit guaranteed features. |
| |
| (2) | Represents the impact of an increase or decrease in the long-term equity expected rate of return. |
| |
| (3) | Represents the impact of an increase or decrease in the NPR credit spread. |
| |
| (4) | Represents the impact of an increase or decrease in mortality rates. |
| |
| (5) | Represents the impact of an increase or decrease in lapse rates. |
| |
| (6) | Balances are gross of reinsurance. |
Valuation of Investments, Including Derivatives, 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 we generally use 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 the investments and derivatives, as referenced below:
Valuation of investments, including derivatives;
Recognition of other-than-temporary impairments ("OTTI"); and
Determination of the valuation allowance for losses on commercial mortgage and other loans.
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 Financial Statements.
For our investments classified as available-for-sale, the impact of market performance relative tochanges 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 future rate of return assumptions, other factors may also drive variability ininvestments classified as trading, equity securities, and derivatives, the change in reserves, particularly when our annual assumption updates are performed. As noted above, however, the impact on our results of operations of changes in these assumptions can be offsettingfair value is recorded within “Asset administration fees and weother income”. In addition, investments classified as available-for-sale are unablesubject to predict their movement or offsetting impact over time. In 2015, updatesimpairment reviews to utilization rate assumptions, partially offset by updates to projected interest rate assumptions, drove the most significant changes to these reserves.identify when a decline in value is other-than-temporary. For a discussion of adjustmentsour policies regarding other-than-temporary declines in investment value and the related methodology for recording OTTI of fixed maturity securities, see Note 2 to the reserves for GMDBs and GMIBs for the years ended December 31, 2015 and 2014, see “—Results of Operations”.Financial Statements.
For certain living benefit features of the variable annuities that are accounted for as embedded derivatives, the changes in reserves are significantly impacted by changes in both the capital markets assumptions and actuarial assumptions. Capital market inputs and actual contractholders’ account values are updated each quarter based on capital market conditions as of the end of the quarter, while actuarial assumptions are reviewed at least annually, and updated based upon emerging experience, future expectationsCommercial mortgage and other data. In 2015, updates to mappingloans are carried primarily at unpaid principal balances, net of funds to related indices, partially offset by updates to mortality rate assumptions drove the most significant changes to these reserves. Other factors may also drive variability in the change in reserves, particularly when our annual assumption updates are performed. As noted above, however, the impact on our results of operations of changes in these assumptions can be offsettingunamortized deferred loan origination fees and we are unable to predict their movementexpenses and unamortized premiums or offsetting impact over time.discounts and a valuation allowance for losses. For a discussion of our policies regarding the drivers ofvaluation allowance for commercial mortgage and other loans, see Note 2 to the changes in our optional living benefit features for the years ended December 31, 2015 and 2014, see “—Results of Operations.”Financial Statements.
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 contractholders, where the timing and amount of payment depends on policyholder mortality. 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 establishing premium deficiency reserves. Premium deficiency reserves are established, if necessary, 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.Taxes on Income
Our effective tax rate is based on income, non-taxable and non-deductible items, 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 federal statutory rate of 35%.rate. The DRD is an estimate that incorporates the prior and current year resultsinformation, 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. In addition, the Tax Cuts and Jobs Act of 2017 (the “Tax Act of 2017") modified the methodology for determining the DRD that will likely reduce this tax benefit in future periods.
In December 2017, SEC staff issued “SAB 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which allows the registrants to record provisional amounts during a ‘measurement period’ not to extend beyond one year. Under the relief provided by SAB 118, a company can recognize provisional amounts when it does not have the necessary information available, prepared or analyzed in reasonable detail to complete its accounting for the change in tax law. See Note 11 to the Financial Statements for a discussion of provisional amounts related to the Tax Act of 2017 included in “Total income tax expense (benefit)” in 2017 and adjustments to provisional amounts recorded in 2018.
An increase or decrease in our effective tax rate by one percent of income (loss) from continuing operations before income taxes,percentage point would have resulted in an increase or decrease in our 2018 "Total income from continuing operations in 2015tax expense (benefit)" of $2$18 million.
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 (“IRS”) or other taxing authorities. See Note 9 to the Financial Statements for a discussion of the impact in 2013, 2014 and 2015 of changes to our total unrecognized tax benefits. We do not anticipate any significant changes within the next 12 months to our total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.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
There were no newOn August 15, 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, which is expected to have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements. The ASU is effective January 1, 2021 (with early adoption permitted), and will impact, at least to some extent, the accounting pronouncements adopted during 2015 requiringand disclosure requirements for all long-duration insurance and investment contracts issued by the application of critical accounting estimates.Company. See Note 2 to the Financial Statements for a completemore detailed discussion of ASU 2018-12, as well as other accounting pronouncements issued but not yet adopted and newly issuedadopted accounting pronouncements.
Changes in Financial Position
20152018 to 20142017 Annual Comparison
Total assets decreased by $5.2$5.3 billion from $52.5$60.0 billion at December 31, 20142017 to $47.3$54.7 billion at December 31, 2015. 2018. Significant components were:
Separate account assets decreased $4.9$6.8 billion primarily driven by net outflows, unfavorable fundmarket performance and policy charges, and the impactcharges.
DAC and DSI decreased $0.6$0.3 billion primarily resultingdriven by base amortization and impacts from gains in our living benefit results partially offset by capitalization of new business.
Income tax receivable decreased $0.2 billion consistent with the impact of the embedded derivatives and related hedge positions and base amortization. increase in net income.
Partially offsetting these decreases to total assets was the above decrease wasfollowing:
Total investments and cash and cash equivalents increased $2.0 billion primarily driven by cash from insurance operations partially offset by a return of capital to Prudential Annuities Inc. ("PAI") and unrealized losses on investments due to an increase in receivables from parents and affiliates of $0.2 billion related to cash consideration to be received from an affiliate reinsurance related to the recapture of the New York contracts, and a $0.1 billion increase in other assets primarily driven by a deferred loss on reinsurance. Refer to “Business - Overview” for further analysis.rates.
Total liabilities decreased by $4.9$5.8 billion, from $50.8$53.7 billion at December 31, 20142017 to $45.9$47.9 billion at December 31, 2015. 2018. Significant components were:
Separate account liabilities decreased $4.9$6.8 billion, offsettingcorresponding with the decrease in separate account assets discussed above. Policyholders’ account balances decreased
Partially offsetting the decrease to total liabilities were the following:
| |
| • | Policyholders' account balances increased $0.5 billion primarily driven by sales of PruSecureSM and HDI 3.0. |
Other liabilities increased $0.4 billion primarily driven by investment payable on open trades as a result of settlement timing.
Future policy benefits increased $0.2 billion primarily driven by account value runoff due to contractholder surrendersunfavorable equity markets and living benefit reserve growth, partially offset by the impact of the asset transfer feature which moved contractholder account values from the separate account to the general account. Partially offsetting the above decrease was an increase in payables to parentcredit spread widening and affiliates of $0.2 billion related to the cash consideration relating to ceding the New York contracts to an affiliate.rising rates.
Total equity decreasedincreased by $0.4 billion from $1.7$6.3 billion at December 31, 20142017 to $1.3$6.7 billion at December 31, 2015,2018, primarily reflecting after-tax gain of $1.7 billion for the 2015 dividend of $0.5 billion paid to our parent, Prudential Annuities, Inc.,twelve months ended December 31, 2018, partially offset by net income.a $1.0 billion return of capital to PAI and $0.2 billion of accumulated other comprehensive income/(loss) primarily driven by unrealized losses in the current year, as discussed above.
Results of Operations
2015 to 2014 Annual Comparison
Income (Loss) from Operations before Income Taxes
2018 to 2017 Annual Comparison.
Income from operations before income taxes decreased $94 millionincreased $0.7 billion from $259 million$1.1 billion for the year ended 2017, to $1.8 billion for the year ended 2018.
The increase in 2014 to $165 million in 2015. Excluding the impacts of changes in the estimated profitability of the business, as discussed below, income from operations before income taxes was an increase of $1 million. Favorable variances wereprimarily driven by favorable realized investment gains in the current year due to decreasean unfavorable impact from living benefit results in base DAC amortizationthe prior year as a result of significant NPR losses due to lower gross profits,spread tightening in comparison to a favorable varianceimpact from spread widening in net generalthe current year, partially offset by a less favorable year over year impact from rates and administrative expensesequity markets. Also contributing to the increase was the favorable impact of realized gains related to our capital hedge program in 2018, primarily driven by a lower allocation of operating expenses due to business runoff, and lower interest expense due to paydown of debt. Offsetting the decreases were lower net fees driven by lower average separate account assets due to runoff of the business and unfavorable fund performance and a decline in net spread income primarily due to lower reinvestment yields and average annuity account valuesequity market declines in the general account.fourth quarter of 2018. Capital hedge impacts are excluded from the table below. Partially offsetting these increases is a less favorable market unlocking impact in 2Q18 compared to 2Q17.
The impactsfollowing table illustrates the net impact of changes in the estimated profitabilityU.S. GAAP embedded derivative liability and hedge positions,
and the related amortization of DAC and other costs, for the business include adjustmentsyear ended December 31, 2018 and 2017:
|
| | | | | | | | |
| | | | 2018 | 2017 |
| | | | in millions (1) |
| Excluding impact of assumption updates and other refinements: | | |
| | Net hedging impact(2) | $ | (208 | ) | $ | 547 |
|
| | Change in portions of U.S. GAAP liability, before NPR(3) | (865 | ) | 2,259 |
|
| | Change in the NPR adjustment | 1,325 |
| (3,551 | ) |
| | Net impact from changes in the U.S. GAAP embedded derivative and hedge positions | 252 |
| (745 | ) |
| | Related benefit (charge) to amortization of DAC and other costs | (173 | ) | 148 |
|
| Net impact of assumption updates and other refinements | (159 | ) | (75 | ) |
| Net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs—reported in Individual Annuities | $ | (80 | ) | $ | (671 | ) |
| |
| (1) | Positive amount represents income; negative amount represents a loss. |
| |
| (2) | Net hedging impact represents the difference between the change in fair value of the risk we seek to hedge using derivatives and the change in fair value of the derivatives utilized with respect to that risk. |
| |
| (3) | Represents risk margins and valuation methodology differences between the economic liability managed by the Asset Liability Management ("ALM") strategy and the U.S. GAAP liability, as well as the portion of the economic liability managed with fixed income instruments. |
For the twelve months ended December 31, 2018, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impact of NPR, DAC and other costs, was a charge of $80 million which includes a $159 million net charge from our annual reviews and update of assumptions and other refinements, including updates to expected withdrawal rates as well as economic assumptions. These charges were largely offset by changes in the U.S. GAAP embedded derivative and hedge positions as a result of credit spreads widening, partially offset by less favorable impacts from rates and equity markets.
For the twelve months ended December 31, 2017, the net impact from changes in the U.S. GAAP embedded derivative and hedge positions, after the impacts of NPR, DAC and other costs, was a charge of $671 million. The net impact from changes in the U.S. GAAP embedded derivative and hedge positions resulted in a net charge of $745 million, predominantly as a result of tightening credit spreads used in measuring our living benefit contracts. Partially offsetting this is a $148 million net benefit to amortization of DAC and other costs.
Revenues, Benefits and Expenses
2018 to 2017 Annual Comparison.
Revenues increased $1.6 billion from $2.3 billion for the twelve months ended December 31, 2017 to $3.9 billion for the twelve months ended December 31, 2018, primarily driven by an increase of $1.7 billion in realized investment gains (losses), as discussed above.
Benefits and expenses increased $0.9 billion from $1.2 billion for the twelve months ended December 31, 2017 to $2.1 billion for the twelve months ended December 31, 2018, primarily driven by an increase of $0.8 billion primarily related to the amortization of DAC and other costs and to reserves, resulted in a net charge of $230 million in 2015. The net charge primarily reflects the impact of NPR gains due to declining rates and spread widening. The net charge of $135 million in 2014 primarily reflects NPR gains due to declining rates, partially offset by a net change driven by an annual review and update of assumptions resulting in a DAC benefit.
Revenues, Benefits and Expenses
Revenues decreased $166 million. Excluding the $5 million impact of changes in the estimated profitability of the businessliving benefit reserves as a result of our annual assumption update, revenues decreased $171 million driven by an unfavorable variance in policy charges and fee income and asset administration fees and other income of $115 million primarily due to lower average separate account assets and the changes to the Rule 12b-1 Plan, as discussed above. Net investment income decreased $25 million primarily as a result of lower portfolio reinvestment yields and average annuity account valuescredit spread tightening in the general account. Premiums decreased $25 million primarily due toprior year and a favorable impact from spread widening in the reinsurance ceding agreement of New York contracts to an affiliate, Prudential Insurance.
Benefits and expenses decreased $72 million. Excluding the $100 million impacts of the amortization of DAC and other costs and to the reserves for the GMDB and GMIB features, as discussed above, benefits and expenses decreased $172 million. The decrease was driven by a decline in general, administrative and other expenses of $83 million due to lower distribution costs driven by lower average separate account values due to runoff of the business and the changes to the Rule 12b-1 Plan, as discussed above, and reduced expense allocations . DAC amortization and interest credited to policyholders’ account balances, decreased $64 million primarily due to lower base DAC and DSI amortization driven by lower gross profits and lower rate of amortization. Insurance and annuity benefits decreased $24 million primarily due to the reinsurance ceding agreement,current year, as discussed above.
Income TaxesVariable Annuity Risks and Risk Mitigants
Shown belowThe 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, 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. We currently manage our income tax provision for the years ended December 31, 2015exposure to certain risks driven by fluctuations in capital markets primarily through a combination of Product Design Features, an Asset Liability Management strategy and 2014, separately reflecting the impact of certain significant items.a Capital Hedge Program.
Product Design Features
A portion of the variable annuity contracts that we have offered include an automatic rebalancing feature, also referred to as 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 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 deposits. 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)
Under Prudential Financial's historical hedging program to manage certain capital market risks associated with certain variable annuity living benefit guarantees, the Company utilized the U.S. GAAP valuation, with certain modifications, to derive a hedge target that was more reflective of the Company's best estimate of future benefit payments, net of fees collected. Derivative positions were entered into that sought to offset the change in value of the hedge target.
During the third quarter of 2016, the Company implemented a new ALM strategy that utilizes a combination of both traditional fixed income instruments and derivatives to help defray potential claims associated with the variable annuity living benefit guarantees. Under the revised strategy, expected living benefit claims under less severe market conditions are managed through the accumulation of fixed income instruments and potential living benefit claims resulting from more severe market conditions are hedged using derivative instruments. For the portion of our ALM strategy executed with derivatives, we enter into a range of exchange-traded, cleared, and OTC equity and interest rate derivatives, including, but not limited to: equity and treasury futures; total return 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.
The change in hedge strategy had no impact on how we value or account for the living benefit guarantees under U.S. GAAP.
The following table provides a reconciliation between the liability reported under U.S. GAAP and the economic liability the Company intends to manage through the ALM strategy.
|
| | | | | | | |
| | 2015 | | 2014 |
| | | | |
| | (in millions) |
| Tax provision Impact of: | $ | (8 | ) | | $ | 9 |
|
| Non taxable investment income | 57 |
| | 69 |
|
| Tax credits | 9 |
| | 13 |
|
| Other | 0 |
| | 0 |
|
| Tax provision at statutory rate | $ | 58 |
| | $ | 91 |
|
|
| | | | | | |
| | As of December 31, 2018 | As of December 31, 2017 |
| | (in millions) |
| U.S. GAAP liability (including non-performance risk) | $ | 8,332 |
| $ | 8,152 |
|
| Non-performance risk adjustment | 4,275 |
| 2,998 |
|
| Subtotal | 12,608 |
| 11,150 |
|
| Adjustments including risk margins and valuation methodology differences | (3,831 | ) | (2,603 | ) |
| Economic liability managed through the ALM strategy | $ | 8,777 |
| $ | 8,546 |
|
As of December 31, 2018, our fixed income instruments and derivative assets exceed the economic liability.
Under our ALM strategy, the Company expects differences in the U.S. GAAP net income impact between the changes in value of the fixed income instruments 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 the Company intends 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 the Company intends to defray with fixed income instruments and derivatives is different from that required to be utilized to measure the liability under U.S. GAAP. 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), as well as 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 and derivative instruments used to hedge a portion of the economic liability are immediately reflected in net income. In contrast, changes in fair value of fixed income instruments that support a portion of the economic liability are designated as available for sale and are not recorded in net income but rather 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.
For information regarding the Capital Protection Framework we use to evaluate and support the risks of the ALM strategy, see “—Liquidity and Capital Resources—Capital”.
Capital Hedge Program
During 2017, we commenced a capital hedge program within PALAC to further hedge equity market impacts. The program is intended 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.
Product Specific Risks and Risk Mitigants
For certain living benefits guarantees, claims will primarily represent the funding of contractholder lifetime withdrawals after the cumulative withdrawals have first exhausted the contractholder account value. Due to the age of the in force block, limited claim payments have occurred to date, and they are not expected to increase significantly within the next five years, based upon current assumptions. The timing and amount of future claims will depend on actual returns on contractholder account value and actual contractholder behavior relative to our assumptions. The majority of our current living benefits guarantees provide for guaranteed lifetime contractholder withdrawal payments inclusive of a “highest daily” contract value guarantee.
The majority of our variable annuity contracts with living benefits guarantees, include risk mitigants in the form of an asset transfer feature and/or inclusion in the ALM strategy. The risks associated with the guaranteed benefits of certain legacy products that were sold prior to our development of the asset transfer feature are also managed through our ALM strategy. Certain legacy GMAB products include the asset transfer feature, but are not included in the ALM strategy. The contracts with the GMIB feature have neither risk mitigant.
For our GMDBs, we provide a benefit payable in the event of death. Our base GMDB is generally equal to a return of cumulative purchase payments adjusted for any partial withdrawals. Certain products include an optional enhanced GMDB based on the greater of a minimum return on the contract value or an enhanced value. We have retained the risk that the total amount of death benefit payable may be greater than the contractholder account value. However, a substantial portion of the account values associated with GMDBs are subject to an asset transfer feature because the contractholder also selected a living benefit guarantee which includes an asset transfer feature. All of the variable annuity account values with living benefit guarantees also contain GMDBs. The living and death benefit features for these contracts cover the same insured life and, consequently, we have insured both the longevity and mortality risk on these contracts.
Income Taxes
The differences between income taxes expected at the U.S. federal statutory income tax provision amountedrate of 21% applicable for 2018 and 35% applicable for the periods prior to an2018, and the reported income tax benefit(benefit) expense are provided in the following table:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Expected federal income tax expense (benefit) at federal statutory rate | $ | 387 |
| | $ | 391 |
| | $ | (620 | ) |
| Non-taxable investment income | (19 | ) | | (47 | ) | | (50 | ) |
| Tax credits | (14 | ) | | (10 | ) | | (10 | ) |
| Changes in tax law | (193 | ) | | 882 |
| | 0 |
|
| Other | 0 |
| | (15 | ) | | 0 |
|
| Reported income tax expense (benefit) | $ | 161 |
| | $ | 1,201 |
| | $ | (680 | ) |
| Effective tax rate | 8.8 | % | | 107.5 | % | | 38.4 | % |
Effective Tax Rate
The effective tax rate is the ratio of $8 million in 2015 and an“Total income tax expense (benefit)” divided by “Income (loss) from operations before income taxes”. Our effective tax rate for fiscal years 2018, 2017 and 2016 was 8.8%, 107.5% and 38.4%, respectively. For a detailed description of $9 millionthe nature of each significant reconciling item, see Note 11 to the Financial Statements. The increase in 2014, respectively.the effective tax rate from 38.4% in 2016 to 107.5% in 2017 was primarily driven by an increase in pre-tax net income and the impact of deferred tax revaluation from tax law change under the Tax Act of 2017. The decrease in the effective tax rate from 107.5% in 2017 to 8.8% in 2018 was primarily driven by the impact of deferred tax revaluation from tax law change under the Tax Act of 2017.
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 (“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 benefit as of December 31, 2018, 2017 and 2016. We do not anticipate any significant changes within the next 12 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 primarily reflectsrecorded under U.S. GAAP routinely differs from the decreaseincome taxes paid in pre-taxcash in any given year. Income tax expense recorded under U.S. GAAP is based on income from continuing operationsreported in our Statements of Operations for the current period and it includes both current and deferred taxes. Income taxes paid during the year ended December 31, 2015.
We employ variousinclude tax strategies, including strategiesinstallments made for the current year as well as tax payments and refunds related to minimize the amount of taxes resulting from realized capital gains.prior periods.
For additional information regardingon income taxes,tax related items, see “Business—Regulation” and Note 911 to the 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 termlong-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 as described herein.
Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity of Prudential Financial, Prudential Insurance and the Company on a daily basis and projects borrowing and capital needs over a multi-year time horizon through our periodic planning process. We believe that cash flows from the sources of funds available to us are sufficient to satisfy the current liquidity requirements of Prudential Insurance, Prudential Financial and the Company, including under reasonably foreseeable stress scenarios. Prudential Financial has a capital management framework in place that governs the allocation of capital and approval of capital uses. Prudential Financial and the Company also employ a “Capital Protection Framework” to ensure the availability of capital resources to maintain adequate capitalization and competitive risk-based capital (“RBC”) ratios under various stress scenarios.
Prudential Financial is a “Designated Financial Company” under Dodd-Frank. As a Designated Financial Company, Prudential Financial isOur businesses are subject to comprehensive regulation and supervision by domestic and examination by the Federal Reserve Bank of Boston and to stricter prudential regulatory standards, whichinternational regulators. These regulations currently include, or willmay include in the future, requirements and limitations (some(many of which are the subject of ongoing rule-making) relating to capital, leverage, liquidity, stress-testing, overall risk management, resolution and recovery plans, credit exposure reporting early remediation, management interlocks and credit concentration. They may also include additional standards regarding capital, public disclosure, short-term debt limits, and other related subjects. In addition, the FSB has identified Prudential Financial as a G-SII. For information on these recent actionsregulatory initiatives and their potential impact on us, see “Business-Regulation” and “Risk Factors”."Business—Regulation”
Capital
Our capital management framework is primarily based on statutory RBC measures. The RBC ratio is a primary measure of the capital adequacy of the Company. RBC is calculated based on statutory financial statements and risk formulas consistent with the practices of the 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 RBC ratio is an annual calculation. As of December 31, 2015 the Company’s RBC ratio exceedscapital 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.
In June 2018, the Capital Adequacy Task Force of the NAIC approved revisions to the NAIC RBC framework as a result of the adoption of the Tax Act of 2017 and the corresponding reduction of the corporate tax rate from 35% to 21%. The revisions will apply to the calculation of our RBC ratio as of December 31, 2018. The reduction of the corporate tax rate under the Tax Act of 2017 has the effect of increasing certain RBC factors, resulting in an overall decrease in insurers’ RBC ratio. The Company evaluates its regulatory capital under reasonably foreseeable stress scenarios and believes weexpects to have adequatethe necessary resources to maintain ourits “AA” ratings targets under this proposed RBC framework.
The regulatory capital levels comfortably above regulatory requirements under these scenarios.
As discussed in “Business-Regulation,”level of the Company can be materially impacted by interest rate and equity market fluctuations, changes in the fourth quartervalues of 2015,derivatives, the level of impairments recorded, and credit quality migration of the investment portfolio, among other items. In addition, 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.
In December 2018, the Company surrenderedreturned capital of $225 million to its New York licenseparent, PAI. In June 2018 and reinsured the majority of its New York business to an affiliate, Prudential Insurance. The license surrender relievesSeptember 2018, the Company returned capital of the requirement$250 million to hold additional New York statutory reserves mandated by the agreement. For the small portion of New York business retained byPAI. In March 2018, the Company a custodial account has been establishedreturned capital of $300 million to hold collateral assets in an amount equal to the reserves
associated with such business, as calculated in accordance with the reserve methodologies of the New York State Department of Financial Services (“NY DFS”).
PAI. On June 7, 2017, September 6, 2017 and December 22, 2015 and June 29, 2015,21, 2017, the Company paid dividendsreturned capital of $180$100 million, $200 million and $270$650 million, respectively, to its parent, Prudential Annuities, Inc.PAI. On December 19, 2014 and June 27, 2014,21, 2016, the Company paid dividendsreturned capital of $75$1,140 million and $267 million, respectively, to its parent, Prudential Annuities, Inc. On December 16, 2013 and June 26, 2013, the Company paid dividends of $100 million and $184 million, respectively, to our parent, Prudential Annuities, Inc.PAI.
Capital Protection Framework
Prudential Financial employs a “CapitalCapital Protection Framework” (“the Framework”Framework (the "Framework”) to ensure that sufficient capital resources are available to maintain adequate capitalization and competitive RBC ratiosratio and solvency margins under various stress scenarios. The Framework incorporates the potential impacts from market related stresses, including equity markets, real estate, interest rates, and credit losses. Potentiallosses and foreign currency exchange rates.
The Framework accommodates periodic volatility within ranges that we deem acceptable, while also providing for additional potential sources of capital, includeincluding on-balance sheet capital derivativescapacity and contingent sources of capital. Although we continue to enhance our approach, weWe believe we currently have access to sufficient resources, either directly, or indirectly through Prudential Financial, to maintain adequate capitalization and a competitive RBC ratio under a range of potential stress scenarios.
Affiliated Captive Reinsurance Company
Prudential Financial and the Company use captive reinsurance companies to more effectively manage our reserves and capital on an economic basis and to enable the aggregation and transfer of risks. We reinsure the majority of our variable annuity living benefit guarantees to an affiliated captive reinsurance company, Pruco Re. This enables Prudential Financial to aggregate these risks within Pruco Re and manage them more efficiently through a hedging program. On August 31, 2013, the Company redomesticated from Connecticut to Arizona, and, as a result, PALAC is able to claim reinsurance reserve credit for business ceded to Pruco Re without the need for Pruco Re to post collateral. Pruco Re assumes business from affiliates only. To support the risks Pruco Re assumes, the captives are capitalized to a level we believe is consistent with the “AA” financial strength rating targets of Prudential Financial’s insurance subsidiaries. Pruco Re is a wholly-owned subsidiary of Prudential Financial, domiciled in Arizona, which is the state of domicile of PALAC. In addition to state insurance regulation, Pruco Re is subject to internal policies governing its 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 captives in connection with financing arrangements.
In 2016, the Company expects to recapture the risks related to our variable annuity living benefit riders that were previously reinsured to Pruco Re, and begin managing all of the product risks associated with our variable annuities.
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 (for example, 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.scenarios. 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.
Cash Flow
The principal sources of the Company’s liquidity are certain annuity considerations, investment and fee income, investment maturities as well asand 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 return of capital to the parent company, hedging activity and payments in connection with financing activities. As discussed above, inIn March 2010, the Company ceased offering its existing variable annuity products to new investors upon the launch of a new product line by certain affiliates. Therefore, the Company expects to continue to see the overall level of cash flows decrease going forward as the book of business runs off.affiliates, but has launched a new fixed indexed annuity in January 2018 and a new deferred income annuity in March 2018.
We believe that the cash flows from our operations are adequate to satisfy our current liquidity requirements. The continued adequacy of this liquidity will depend upon factors such as future securities market conditions, changes in interest rate levels, contractholder perceptions of our financial strength, customer behavior, catastrophic events and the relative safety and attractiveness of competing products, each of which could lead to reduced cash inflows or increased cash outflows. Our cash flows from investment activities result from repayments of principal, proceeds from maturities and sales of invested assets and investment income, net of amounts
reinvested. The primary liquidity risks with respect to these cash flows are the risk of default by debtors or bond insurers, our counterparties’ willingness to extend repurchase and/or securities lending arrangements, commitments to invest and market volatility. We closely manage these risks through our credit risk management process and regular monitoring of our liquidity position.
In managing ourthe 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 from annuity contracts and deposit liabilities.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, 20152018 and 2014,2017, the Company had liquid assets of $2.7$14.6 billion and $2.9$12.6 billion, respectively. The portion of liquid assets comprised of cash and cash equivalents and short-term investments was $0.2$4.5 billion and $0.1$2.4 billion as of December 31, 20152018 and 2014,2017, respectively. As of December 31, 2015, $2.32018, $9.3 billion, or 92%95%, of the fixed maturity investments in company general account portfolios were rated high or highest quality based on NAIC or equivalent rating. The remaining $0.2 billion, or 8%, of these fixed maturity investments were rated other than high or highest quality.
Given the size and liquidity profile of our investment portfolios, we believe that claim experience, including contractholder withdrawals and surrenders, varying from our projections does not constitute a significant liquidity risk. Our asset/liability management process takes into account the expected maturity of investments and expected claim payments as well as the specific nature and risk profile of the liabilities. To the extent we need to pay claims in excess of projections, we may borrow temporarily or sell investments sooner than anticipated to pay these claims, which may result in increased borrowing costs or realized investment gains or losses affecting results of operations.including from changes in interest rates or credit spreads. The payment of claims and sale of investments earlier than anticipated would have an impact on the reported level of cash flow from operating and investing activities, respectively, in our financial statements. Historically, there has been no significant variation between the expected maturities of our investments and the payment of claims.
Financing Activities
Prudential Funding, LLC
Prudential Financial and Prudential Funding LLC (“Prudential Funding”), a wholly-owned subsidiary of Prudential Insurance, 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
As noted above, effective April 1, 2016, the hedging portion of our risk management strategy associated with the living benefit guarantees recaptured from Pruco Re and Prudential Insurance, as well as the living benefit guarantees reinsured from Pruco Life, 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 collateral postings on derivatives to or from 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.
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. See Item 1A, “Risk Factors” above for a discussion of how difficult conditions in the financial markets and the economy generally may materially adversely affect our business and results of our operations.
Through March 31, 2016, the Company reinsured the majority of its variable annuity living benefit guarantees to its affiliated companies, Pruco Re and Prudential Insurance. Effective April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured to Pruco Re and Prudential Insurance. In addition, the Company reinsured the variable annuity base contracts, along with the living benefit guarantees, from Pruco Life, excluding the PLNJ business which was reinsured to Prudential Insurance, under a coinsurance and modified coinsurance agreement. This reinsurance agreement covers new and in force business and excludes business reinsured externally. The product risks related to the reinsured business are being managed in the Company. In addition, the living benefit hedging program related to the reinsured living benefit guarantees is being managed within the Company.
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 its parent. Risk range limits are established for each type of market risk, and are approved by the Investment Committee of the Prudential Financial Board of Directors and subject to ongoing review.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 mismatch analytics;management;
Stress scenario testing;
Hedging programs; 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.
35Hedging: 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.
TableManagement of Contentsportfolio 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. | |
1. | 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 ranges around them. This mitigates potential unanticipated economic losses from interest rate movements. |
| |
2. | Hedging non-strategic exposures. For example, our investment policies for our general account portfolios generally require hedging currency risk for all cash flows not offset by similarly denominated liabilities. |
| |
3. | Management of portfolio concentration risk. For example, ongoing monitoring and management at the enterprise level 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 unfavorable impact that the currentan unfavorable interest rate environment has on our net interest margins, we employ a proactive asset-liabilityasset/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 managementALM 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-liabilityasset/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 of duration with respect to changes in interest rates. We use asset/liability managementALM and derivative strategies to manage our interest rate exposure by matching the relative sensitivity of asset and liability values to interest rate changes, or controlling “duration mismatch” of assets and liabilities. We haveliability duration mismatch constraints. As of December 31, 2015 and 2014, the difference betweentargets. In certain markets, capital market limitations that hinder our ability to acquire assets that approximate the duration of assets and the targetsome of our liabilities are considered in setting duration of liabilities in our duration managed portfolios was within our policy limits.targets. We consider risk-based capital and tax implications as well as current market conditions in our asset/liability managementALM 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, 20152018 and 2014.2017. 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-
parallelnon-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.
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2015 | | December 31, 2014 |
| | | Notional | | Fair Value | | Hypothetical Change in Fair Value | | Notional | | Fair Value | | Hypothetical Change in Fair Value |
| | | | | | | | | | | | | |
| | | (in millions) |
| Financial assets with interest rate risk: | | | | | | | | | | | | |
| Financial Assets: | | | | | | | | | | | | |
| Fixed maturities, available for sale | | | | $ | 2,524 |
| | $ | (111 | ) | | | | $ | 2,801 |
| | $ | (123 | ) |
| Policy loans | | | | 13 |
| | 0 |
| | | | 13 |
| | 0 |
|
| Commercial loans | | | | 438 |
| | (20 | ) | | | | 423 |
| | (17 | ) |
| Derivatives (1): | | | | | | | | | | | | |
| Swaps | | $ | 2,284 |
| | 95 |
| | (76 | ) | | $ | 2,265 |
| | 85 |
| | (74 | ) |
| Options | | 18,387 |
| | 16 |
| | (4 | ) | | 6,942 |
| | 12 |
| | (4 | ) |
| Forwards | | 2,752 |
| | 23 |
| | 0 |
| | | | | | |
| Financial liabilities with interest rate risk: | | | | | | | | | | | | |
| Investment Contracts | | | | (102 | ) | | 3 |
| | | | (91 | ) | | 3 |
|
| Total estimated potential loss | | | | | | $ | (208 | ) | | | | | | $ | (215 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2018 | | December 31, 2017 |
| | | 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) | | | | $ | 10,062 |
| | $ | (1,238 | ) | | | | $ | 10,277 |
| | $ | (1,265 | ) |
| Policy loans | | | | 13 |
| | 0 |
| | | | 13 |
| | 0 |
|
| Commercial mortgage and other loans | | | | 1,340 |
| | (67 | ) | | | | 1,396 |
| | (75 | ) |
| Derivatives: | | | | | | | | | | | | |
| Swaps | | $ | 97,629 |
| | 2,902 |
| | (3,415 | ) | | $ | 102,609 |
| | 2,942 |
| | (2,916 | ) |
| Futures | | 1,769 |
| | (3 | ) | | (173 | ) | | 2,636 |
| | 11 |
| | (479 | ) |
| Options | | 46,117 |
| | (247 | ) | | 300 |
| | 47,477 |
| | 157 |
| | 146 |
|
| Forwards | | 1,733 |
| | 55 |
| | (204 | ) | | 988 |
| | 20 |
| | 1 |
|
| Variable annuity and other living benefit feature embedded derivatives(2) | | | | (8,321 | ) | | 4,684 |
| | | | (8,147 | ) | | 5,318 |
|
| Financial liabilities with interest rate risk(3): | | | | | | | | | | | | |
| Policyholders' account balances-investment contracts | | | | (561 | ) | | 3 |
| | | | (282 | ) | | 3 |
|
| Net estimated potential gain (loss) | | | | | | $ | (110 | ) | | | | | | $ | 733 |
|
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| (1) | Includes assets classified as "Fixed maturities, available-for-sale, at fair value" and "Fixed maturities, trading, at fair value." |
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| (2) | Excludes variable annuity optional living benefits accounted for asany offsetting impact of derivative instruments purchased to hedge changes in the embedded derivatives. Amounts reported gross of reinsurance. |
The tables above do not include approximately $5.9 billion of insurance reserve and deposit liabilities as of December 31, 2015 and $6.1 billion as of December 31, 2014 which 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 which are set forth in these tables. The tables above also exclude variable annuity optional living benefits accounted for as embedded derivatives as the Company generally reinsures the risks associated with these benefits to an affiliated reinsurance company, Pruco Re, as part of its risk management strategy. See “Item 1. Business—Products—Individual Annuities” for information regarding the reinsurance to Pruco Re and Prudential Insurance and the living benefit hedging program, which is primarily executed within Pruco Re.
| |
| (3) | Excludes $14.2 billion and $13.7 billion as of December 31, 2018 and 2017, respectively, of insurance reserve and deposit liabilities which 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. |
Market Risk Related to Equity Prices
We have exposure to equity risk primarily through asset/liability mismatches, including our equity-based derivatives and certain variable annuity and other living benefit feature embedded derivatives. As discussed above, our variable annuity optional living benefits accounted for as embedded derivatives are generally reinsured to an affiliate as part of our risk management strategy.strategy, the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured. Our equity based derivatives are primarily held as part of our capital hedging program discussed below.primarily holds equity derivatives. In addition to the impact on our capital hedges,equity derivatives, 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 values;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 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.
Our capital hedging program is managed at the Prudential Financial parent company level. The program broadly addresses
We estimate our equity market exposure of the overall statutory capital of Prudential Financial as a whole, under stress scenarios. The Company owns a portion of the derivatives related to the program. The program focuses on tail risk in order to protect statutory capital in a cost-effective manner under stress scenarios. Prudential Financial assesses the composition of the hedging program on an ongoing basis and may change it from time to time based on an evaluation of its risk position or other factors. Our estimated equity price risk associated with these capital hedges as of December 31, 2015 and 2014 was a $2 million and a $1 million benefit, respectively, estimated based on 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, 2018 and 2017. 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 which would partially offset an overall declineand not changes in asset-based fees recognized as revenue, changes in our capital position relatedestimates 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 market decline.securities.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2018 | | As of December 31, 2017 |
| | | Notional | | Fair Value | | Hypothetical Change in Fair Value | | Notional | | Fair Value | | Hypothetical Change in Fair Value |
| | | | | | | | | | | | | |
| | | (in millions) |
| Equity securities(1) | | | | $ | 11 |
| | $ | 0 |
| | | | $ | 15 |
| | $ | (2 | ) |
| Equity-based derivatives(2) | | $ | 42,179 |
| | 785 |
| | 1,376 |
| | $ | 46,216 |
| | (189 | ) | | 1,302 |
|
| Variable annuity living benefit feature embedded derivatives(3) | | | | (8,321 | ) | | (1,396 | ) | | | | (8,147 | ) | | (1,332 | ) |
| Net estimated potential loss | | | | | | $ | (20 | ) | | | | | | $ | (32 | ) |
| |
| (1) | Includes equity securities classified as trading securities under U.S. GAAP that are held for "other than trading" activities. |
| |
| (2) | Both the notional amount and fair value of equity-based derivatives are also reflected in amounts under “Market Risk Related to Interest Rates” above and are not cumulative. |
| |
| (3) | Excludes any offsetting impact of derivative instruments purchased to hedge changes in the embedded derivatives. Amounts reported gross of reinsurance. |
Derivatives
We use derivative financial instruments primarily to reduce market risk from changes in interest rates and equity prices, including their use to alter interest rate 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 over-the-counter ("OTC")OTC market. See Note 114 to the Financial Statements for a description of derivative activities as of December 31, 2015 and 2014.more information.
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 marketsmarket assumptions, such as equity market returns, interest rates, and market volatility and actuarial assumptions. For our capital marketsmarket assumptions, we manage our exposure to the risk created by capital markets fluctuations through a combination of product design elements, such as an asset transfer feature and inclusion of certain optional living benefits in our living benefits hedging program and affiliated and external reinsurance. Certain variable annuity optional living benefit features are accounted for as an embedded derivativederivatives and recorded at fair value.
Item 8. Financial Statements and Supplementary Data
Information required with respect to this Item 8 regarding Financial Statements and Supplementary Data is set forth within the Index to Financial Statements elsewhere in this Annual Report on Form 10-K.
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, 2015 are 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 Exchange Act Rules 13a-15(e) and 15d-15(e), as of December 31, 2015. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2015, 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) and 15d-15(f) occurred during the quarter ended December 31, 2015 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
We have adopted Prudential Financial’s code of business conduct and ethics known as “Making the Right Choices”. Making the Right Choices is posted at www.investor.prudential.com.
In addition, we have adopted Prudential Financial’s Corporate Governance Guidelines, which we refer to herein as the “Corporate Governance Principles and Practices.” Prudential Financial’s Corporate Governance Principles and Practices are available free of charge at www.investor.prudential.com.
Certain of 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, 2016 to be filed by Prudential Financial with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after December 31, 2015 (the “Proxy Statement”).
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 the Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
|
| |
(a) (1) | Financial Statements Financial Statements of the Company are listed in the accompanying “Index to Financial Statements” hereof and are filed as part of this Report. |
(2) | Financial Statement Schedules None.* |
(3) | Exhibits |
|
| | |
2. | | None. |
3. (i)(a) | | Certificate Restating the Certificate of Incorporation of American Skandia Life Assurance Corporation, dated February 8, 1988 is incorporated by reference to the Company’s Form 10-K, Registration No. 33-44202, filed March 27, 2004. |
(i)(b) | | Certificate of Amendment to the Restated Certificate of Incorporation of American Skandia Life Assurance Corporation, dated December 17, 1999 is incorporated by reference to the Company’s Form 10-K, Registration No. 33-44202, filed March 27, 2004. |
(i)(c) | | Certificate of Amendment changing the name from American Skandia Life Assurance Corporation to Prudential Annuities Life Assurance Corporation, effective as of January 1, 2008, is incorporated by reference to the Company’s Form 10-K. Registration No 33-44202 filed March 15, 2011. |
(i)(d) | | Articles of Domestication of Prudential Annuities Life Assurance Corporation, effective August 31, 2013, are incorporated by reference to the Company’s Form 8-K, Registration No. 33-44202, filed August 30, 2013. |
(ii)(a) | | By-Laws of American Skandia Life Assurance Corporation, as amended June 17, 1998, are incorporated by reference to the Company’s Form 10-K, Registration No. 33-44202, filed March 27, 2004. |
(ii)(b) | | By-Laws of Prudential Annuities Life Assurance Corporation, as amended and restated effective January 1, 2008,are incorporated by reference to the Company’s Form 10-K Registration No 33-44202 filed March 15, 2011. |
(ii)(c) | | Amended and Restated By-Laws of Prudential Annuities Life Assurance Corporation, effective August 31, 2013, are incorporated by reference to the Company’s Form 8-K, Registration No. 33-44202, filed August 30, 2013. |
9. | | None. |
10. | | None. |
11. | | Not applicable. |
12. | | Not applicable. |
13. | | Not applicable. |
16. | | None. |
18. | | None. |
21. | | Not applicable. |
22. | | None. |
23. | | Not applicable. |
24. | | Powers of Attorney are filed herewith. |
31.1 | | Section 302 Certification of the Chief Executive Officer. |
31.2 | | Section 302 Certification of the Chief Financial Officer. |
32.1 | | Section 906 Certification of the Chief Executive Officer. |
32.2 | | Section 906 Certification of the Chief Financial Officer. |
|
| | |
101.INS | | -XBRL Instance 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. |
* Schedules are omitted because they are either not applicable or because the information required therein is included in the Notes to Financial Statements.
SIGNATURES
Pursuant to the requirements of Section 13 and 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 Shelton, and State of Connecticut on the 10th day of March 2016.
|
| | |
PRUDENTIAL ANNUITIES LIFE ASSURANCE CORPORATION
(Registrant)
|
By: | | /s/ Lori D. Fouché |
| | Lori D. Fouché |
| | 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 10, 2016.
|
| | |
Name | | Title |
| | |
/s/ Lori D. Fouché | | President, |
Lori D. Fouché | | Chief Executive Officer and Director |
| | |
/s/ Yanela C. Frias | | Executive Vice President, |
Yanela C. Frias | | Chief Financial Officer, Principal Accounting
Officer and Director
|
| | |
* Bernard J. Jacob | | Director |
Bernard J. Jacob | | |
| | |
* George M. Gannon | | Director |
George M. Gannon
| | |
| | |
* Kenneth Y. Tanji | | Director |
Kenneth Y. Tanji | | |
| | |
* Arthur W. Wallace | | Director |
Arthur W. Wallace
| | |
| | |
* Richard F. Lambert | | Director |
Richard F. Lambert | | |
|
| | |
* By: | | /s/ Lynn K. Stone |
| | Lynn K. Stone |
| | (Attorney-in-Fact) |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PRUDENTIAL ANNUITIES LIFE ASSURANCE CORPORATION
FINANCIAL STATEMENTS INDEX
Management’s Annual Report on Internal Control Over Financial Reporting
Management of Prudential Annuities Life Assurance Corporation (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, 2015,2018, 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, 2015.2018.
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 10, 20167, 2019
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder of
Prudential Annuities Life Assurance Corporation:
In our opinion,Opinion on the Financial Statements
We have audited the accompanying statements of financial position of Prudential Annuities Life Assurance Corporation (the "Company") as of December 31, 2018 and 2017, and the related statements of operations and comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedules listed in the index appearing under Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Prudential Annuities Life Assurance Corporation (an indirect, wholly owned subsidiarythe Company as of Prudential Financial, Inc.) at December 31, 20152018 and December 31, 2014,2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20152018 in conformity with accounting principles generally accepted in the United States of America.
Changes in Accounting Principles
As discussed in Note 2 to the financial statements, the Company changed the manner in which it accounts for certain financial assets and liabilities and the manner in which it accounts for certain tax effects originally recognized in accumulated other comprehensive income in 2018.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company's 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 financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anmisstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit includesof 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 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 supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
Significant Transactions with Related Parties
As described in Note 13 of14 to the financial statements, the Company has entered into extensivesignificant transactions with affiliated entities.The Prudential Insurance Company of America, and other affiliates.
/S/ PRICEWATERHOUSECOOPERSs/ PricewaterhouseCoopers LLP
New York, New York
March 10, 20167, 2019
We have served as the Company's auditor since 2003.
Prudential Annuities Life Assurance Corporation
Statements of Financial Position
As of December 31, 2018 and 2017 (in thousands, except share amounts) |
| | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| ASSETS | | | |
| Fixed Maturities, available-for-sale, at fair value (amortized cost, 2018: $10,186,465; 2017: $10,145,266)(1) | $ | 9,771,673 |
| | $ | 10,110,786 |
|
| Fixed Maturities, trading, at fair value (amortized cost, 2018: $294,549 ; 2017: $161,393)(1) | 289,752 |
| | 166,360 |
|
| Equity securities, at fair value (cost, 2018: $18,765; 2017: $11,614)(1) | 20,613 |
| | 15,375 |
|
| Commercial mortgage and other loans | 1,353,478 |
| | 1,387,012 |
|
| Policy loans | 12,805 |
| | 12,558 |
|
| Short-term investments | 37,568 |
| | 711,071 |
|
| Other invested assets (includes $50,945 and $151,481 measured at fair value at December 31, 2018 and December 31, 2017, respectively)(1) | 348,541 |
| | 335,811 |
|
| Total investments | 11,834,430 |
| | 12,738,973 |
|
| Cash and cash equivalents | 4,503,534 |
| | 1,639,939 |
|
| Deferred policy acquisition costs | 4,447,505 |
| | 4,596,565 |
|
| Accrued investment income | 90,895 |
| | 88,331 |
|
| Reinsurance recoverables | 572,102 |
| | 563,428 |
|
| Income taxes | 964,521 |
| | 1,116,735 |
|
| Value of business acquired | 33,222 |
| | 35,109 |
|
| Deferred sales inducements | 889,598 |
| | 1,020,786 |
|
| Receivables from parent and affiliates | 46,381 |
| | 49,351 |
|
| Other assets | 85,310 |
| | 121,086 |
|
| Separate account assets | 31,210,346 |
| | 37,990,547 |
|
| TOTAL ASSETS | $ | 54,677,844 |
| | $ | 59,960,850 |
|
| LIABILITIES AND EQUITY | | | |
| LIABILITIES | | | |
| Future policy benefits | $ | 9,368,986 |
| | $ | 9,132,569 |
|
| Policyholders’ account balances | 5,353,596 |
| | 4,846,152 |
|
| Payables to parent and affiliates | 30,846 |
| | 36,026 |
|
| Cash collateral for loaned securities | 384 |
| | 17,383 |
|
| Short-term debt | 140,569 |
| | 43,734 |
|
| Long-term debt | 787,596 |
| | 928,165 |
|
| Reinsurance payables | 232,937 |
| | 262,588 |
|
| Other liabilities | 811,016 |
| | 422,636 |
|
| Separate account liabilities | 31,210,346 |
| | 37,990,547 |
|
| Total liabilities | 47,936,276 |
| | 53,679,800 |
|
| COMMITMENTS AND CONTINGENT LIABILITIES (See Note 15) |
| |
|
| EQUITY | | | |
| Common stock, $100 par value; 25,000 shares authorized, issued and outstanding | 2,500 |
| | 2,500 |
|
| Additional paid-in capital | 6,120,436 |
| | 7,145,436 |
|
| Retained earnings/(accumulated deficit) | 943,005 |
| | (776,762 | ) |
| Accumulated other comprehensive income (loss) | (324,373 | ) | | (90,124 | ) |
| Total equity | 6,741,568 |
| | 6,281,050 |
|
| TOTAL LIABILITIES AND EQUITY | $ | 54,677,844 |
| | $ | 59,960,850 |
|
(1) Prior period amounts have been reclassified to conform to current period presentation. See "Adoption of ASU 2016-01" in Note 2 for details.
See Notes to Financial Statements
Prudential Annuities Life Assurance Corporation
Statements of Operations and Comprehensive Income
Years Ended December 31, 2018, 2017 and 2016 (in thousands)
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| REVENUES | | | | | |
| Premiums | $ | 67,265 |
| | $ | 63,573 |
| | $ | 896,839 |
|
| Policy charges and fee income | 2,171,278 |
| | 2,209,579 |
| | 1,755,224 |
|
| Net investment income | 402,808 |
| | 422,809 |
| | 338,370 |
|
| Asset administration fees and other income | 389,156 |
| | 413,375 |
| | 299,384 |
|
| Realized investment gains (losses), net: | | | | | |
| Other-than-temporary impairments on fixed maturity securities | (6,813 | ) | | (8,576 | ) | | (7,853 | ) |
| Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income (loss) | 0 |
| | (546 | ) | | 1,354 |
|
| Other realized investment gains (losses), net | 890,886 |
| | (796,278 | ) | | (3,436,261 | ) |
| Total realized investment gains (losses), net | 884,073 |
| | (805,400 | ) | | (3,442,760 | ) |
| Total revenues | 3,914,580 |
| | 2,303,936 |
| | (152,943 | ) |
| BENEFITS AND EXPENSES | | | | | |
| Policyholders’ benefits | 187,088 |
| | 114,068 |
| | 604,057 |
|
| Interest credited to policyholders’ account balances | 249,175 |
| | 30,280 |
| | 68,889 |
|
| Amortization of deferred policy acquisition costs | 589,795 |
| | (13,946 | ) | | (179,816 | ) |
| Commission expense(1) | 862,338 |
| | 861,303 |
| | 653,906 |
|
| General, administrative and other expenses(1) | 181,964 |
| | 194,636 |
| | 470,602 |
|
| Total benefits and expenses | 2,070,360 |
| | 1,186,341 |
| | 1,617,638 |
|
| INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES | 1,844,220 |
| | 1,117,595 |
| | (1,770,581 | ) |
| Total income tax expense (benefit) | 161,504 |
| | 1,201,099 |
| | (680,493 | ) |
| NET INCOME (LOSS) | $ | 1,682,716 |
| | $ | (83,504 | ) | | $ | (1,090,088 | ) |
| Other comprehensive income (loss), before tax: | | | | | |
| Foreign currency translation adjustments | (1,354 | ) | | 109 |
| | (20 | ) |
| Net unrealized investment gains (losses) | (248,688 | ) | | 323,359 |
| | (555,540 | ) |
| Total | (250,042 | ) | | 323,468 |
| | (555,560 | ) |
| Less: Income tax expense (benefit) related to other comprehensive income (loss) | (52,510 | ) | | 98,644 |
| | (194,446 | ) |
| Other comprehensive income (loss), net of taxes | (197,532 | ) | | 224,824 |
| | (361,114 | ) |
| Comprehensive income (loss) | $ | 1,485,184 |
| | $ | 141,320 |
| | $ | (1,451,202 | ) |
| |
| (1) | Prior period amounts have been reclassified to conform to current period presentation. |
See Notes to Financial Statements
Prudential Annuities Life Assurance Corporation
Statements of Equity
Years Ended December 31, 2018, 2017 and 2016 (in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings/ (Accumulated Deficit) | | Accumulated Other Comprehensive Income (loss) | | Total Equity |
| Balance, December 31, 2015 | $ | 2,500 |
| | $ | 901,422 |
| | $ | 396,830 |
| | $ | 46,166 |
| | $ | 1,346,918 |
|
| Contributed capital |
|
| | 8,421,955 |
| |
|
| |
|
| | 8,421,955 |
|
| Return of capital | | | (1,140,000 | ) | | | | | | (1,140,000 | ) |
| Assets purchased/transferred from/to affiliates | | | (72,179 | ) | | | | | | (72,179 | ) |
| Impact of Pruco Re and PALAC merger | | | (15,762 | ) | | | | | | (15,762 | ) |
| Comprehensive income: | | | | | | | | | |
| Net income (loss) | | | | | (1,090,088 | ) | | | | (1,090,088 | ) |
| Other comprehensive income (loss), net of tax | | | | | | | (361,114 | ) | | (361,114 | ) |
| Total comprehensive income (loss) | | | | | | | | | (1,451,202 | ) |
| Balance, December 31, 2016 | 2,500 |
| | 8,095,436 |
| | (693,258 | ) | | (314,948 | ) | | 7,089,730 |
|
| Contributed capital | | |
|
| | | | | |
|
|
| Return of capital | | | (950,000 | ) | | | | | | (950,000 | ) |
| Comprehensive income: | | | | | | | | | |
| Net income (loss) | | | | | (83,504 | ) | | | | (83,504 | ) |
| Other comprehensive income (loss), net of tax | | | | | | | 224,824 |
| | 224,824 |
|
| Total comprehensive income (loss) | | | | | | | | | 141,320 |
|
| Balance, December 31, 2017 | 2,500 |
| | 7,145,436 |
| | (776,762 | ) | | (90,124 | ) | | 6,281,050 |
|
| Cumulative effect of adoption of ASU 2016-01 | | | | | 337 |
| | (3 | ) | | 334 |
|
| Cumulative effect of adoption of ASU 2018-02 | | | | | 36,714 |
| | (36,714 | ) | | 0 |
|
| Contributed capital | | | | | | | | | |
| Return of capital | | | (1,025,000 | ) | | | | | | (1,025,000 | ) |
| Comprehensive income: | | | | | | | | | |
| Net income (loss) | | | | | 1,682,716 |
| | | | 1,682,716 |
|
| Other comprehensive income (loss), net of tax | | | | | | | (197,532 | ) | | (197,532 | ) |
| Total comprehensive income (loss) | | | | | | | | | 1,485,184 |
|
| Balance, December 31, 2018 | $ | 2,500 |
| | $ | 6,120,436 |
| | $ | 943,005 |
| | $ | (324,373 | ) | | $ | 6,741,568 |
|
See Notes to Financial Statements
Prudential Annuities Life Assurance Corporation
Statements of Cash Flows
Years Ended December 31, 2018, 2017 and 2016 (in thousands)
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Net income (loss) | $ | 1,682,716 |
| | $ | (83,504 | ) | | $ | (1,090,088 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Policy charges and fee income | (2,686 | ) | | (766 | ) | | (245 | ) |
| Realized investment (gains) losses, net | (884,073 | ) | | 805,400 |
| | 3,442,760 |
|
| Depreciation and amortization | 7,905 |
| | 32,812 |
| | 10,737 |
|
| Interest credited to policyholders’ account balances | 249,175 |
| | 30,280 |
| | 68,889 |
|
| Change in: | | | | | |
| Future policy benefits | 1,095,204 |
| | 982,792 |
| | 759,604 |
|
| Accrued investment income | (2,564 | ) | | (2,327 | ) | | (63,389 | ) |
| Net receivables from/payables to parent and affiliates | (3,163 | ) | | 4,165 |
| | (55,984 | ) |
| Deferred sales inducements | (2,885 | ) | | (1,551 | ) | | (1,805 | ) |
| Deferred policy acquisition costs | 216,799 |
| | (291,532 | ) | | (449,496 | ) |
| Income taxes | 204,634 |
| | 763,227 |
| | (712,423 | ) |
| Reinsurance recoverables, net | (33,703 | ) | | 2,708 |
| | 199,107 |
|
| Derivatives, net | 131,874 |
| | (1,364,754 | ) | | 2,605,415 |
|
| Deferred (gain)/loss on reinsurance | (22,723 | ) | | 4,564 |
| | 305,464 |
|
| Other, net | 190,662 |
| | 87,036 |
| | (54,819 | ) |
| Cash flows from (used in) operating activities | 2,827,172 |
| | 968,550 |
| | 4,963,727 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
| Proceeds from the sale/maturity/prepayment of: | | | | | |
| Fixed maturities, available-for-sale | 2,534,470 |
| | 1,145,369 |
| | 4,072,242 |
|
| Fixed maturities, trading(1) | 99,656 |
| | 1,739 |
| | 2,666 |
|
| Equity securities(1) | 7,896 |
| | 3,306 |
| | 4,823 |
|
| Commercial mortgage and other loans | 143,331 |
| | 198,584 |
| | 122,086 |
|
| Policy loans | 675 |
| | 1,276 |
| | 1,833 |
|
| Other invested assets(1) | 29,103 |
| | 72,667 |
| | 9,587 |
|
| Short-term investments | 984,409 |
| | 1,949,758 |
| | 1,799,219 |
|
| Payments for the purchase/origination of: | | | | | |
| Fixed maturities, available-for-sale | (2,230,936 | ) | | (1,528,065 | ) | | (5,535,732 | ) |
| Fixed maturities, trading(1) | (231,316 | ) | | (15,964 | ) | | (3,170 | ) |
| Equity securities(1) | (14,221 | ) | | (3,048 | ) | | (4,991 | ) |
| Commercial mortgage and other loans | (125,007 | ) | | (348,520 | ) | | (353,692 | ) |
| Policy loans | (187 | ) | | (366 | ) | | (442 | ) |
| Other invested assets(1) | (167,930 | ) | | (7,668 | ) | | (111,838 | ) |
| Short-term investments | (311,277 | ) | | (1,713,877 | ) | | (2,561,044 | ) |
| Notes receivable from parent and affiliates, net | 3,518 |
| | 2,717 |
| | (4,923 | ) |
| Derivatives, net | 1,073 |
| | 4,948 |
| | (6,305 | ) |
| Other, net | (69 | ) | | 254 |
| | (2,911 | ) |
| Cash flows from (used in) investing activities | 723,188 |
| | (236,890 | ) | | (2,572,592 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
| Cash collateral for loaned securities | (16,999 | ) | | (5,967 | ) | | 12,782 |
|
| Proceeds from the issuance of debt (maturities longer than 90 days) | 0 |
| | 0 |
| | 125,000 |
|
| Repayments of debt (maturities longer than 90 days) | (43,734 | ) | | 0 |
| | (268,000 | ) |
| Net increase/(decrease) in short-term borrowing | 0 |
| | (28,101 | ) | | (1,000 | ) |
| Drafts outstanding | (7,026 | ) | | 10,624 |
| | 5,777 |
|
Prudential Annuities Life Assurance Corporation
|
| | | | | | | | | | | |
| Distribution to parent | (1,025,000 | ) | | (950,000 | ) | | (1,140,000 | ) |
| Contributed capital | 0 |
| | 0 |
| | 860,573 |
|
| Policyholders’ account deposits | 3,150,952 |
| | 2,623,534 |
| | 2,116,567 |
|
| Ceded policyholders’ account deposits | (47,449 | ) | | (24,191 | ) | | (23,890 | ) |
| Policyholders’ account withdrawals | (2,727,850 | ) | | (2,589,770 | ) | | (2,259,445 | ) |
| Ceded policyholders' account withdrawals | 30,341 |
| | 24,111 |
| | 28,004 |
|
| Cash flows from (used in) financing activities | (686,765 | ) | | (939,760 | ) | | (543,632 | ) |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | 2,863,595 |
| | (208,100 | ) | | 1,847,503 |
|
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 1,639,939 |
| | 1,848,039 |
| | 536 |
|
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 4,503,534 |
| | $ | 1,639,939 |
| | $ | 1,848,039 |
|
| SUPPLEMENTAL CASH FLOW INFORMATION | | | | | |
| Income taxes paid (refund) | $ | (43,130 | ) | | $ | 437,872 |
| | $ | 31,931 |
|
| Interest paid | $ | 33,901 |
| | $ | 34,217 |
| | $ | 23,392 |
|
| |
| (1) | Prior period amounts have been reclassified to conform to current period presentation. See Note 2 for details. |
Significant Non-Cash Transactions
Cash flows from investing and financing activities for the year ended December 31, 2016 excludes certain non-cash transactions related to the Variable Annuities Recapture. See Note 1 for additional information.
See Notes to Financial Statements
Prudential Annuities Life Assurance Corporation
Statements of Financial Position
As of December 31, 2015 and 2014 (in thousands, except share amounts)
|
| | | | | | | |
| | December 31, 2015 | | December 31, 2014 |
| ASSETS | | | |
| Fixed maturities, available-for-sale, at fair value (amortized cost, 2015: $2,433,626; 2014: $2,609,253) | $ | 2,524,272 |
| | $ | 2,800,593 |
|
| Trading account assets, at fair value | 5,653 |
| | 6,131 |
|
| Equity securities, available-for-sale, at fair value (cost, 2015: $14; 2014: $14) | 17 |
| | 17 |
|
| Commercial mortgage and other loans | 438,172 |
| | 422,563 |
|
| Policy loans | 13,054 |
| | 13,355 |
|
| Short-term investments | 158,227 |
| | 57,185 |
|
| Other long-term investments | 182,157 |
| | 162,783 |
|
| Total investments | 3,321,552 |
| | 3,462,627 |
|
| Cash and cash equivalents | 536 |
| | 594 |
|
| Deferred policy acquisition costs | 749,302 |
| | 1,114,431 |
|
| Accrued investment income | 22,615 |
| | 25,008 |
|
| Reinsurance recoverables | 3,088,328 |
| | 2,996,845 |
|
| Value of business acquired | 33,640 |
| | 39,738 |
|
| Deferred sales inducements | 452,752 |
| | 665,207 |
|
| Receivables from parent and affiliates | 212,696 |
| | 60,490 |
|
| Other assets | 123,158 |
| | 6,193 |
|
| Separate account assets | 39,250,159 |
| | 44,101,699 |
|
| TOTAL ASSETS | $ | 47,254,738 |
| | $ | 52,472,832 |
|
| LIABILITIES AND EQUITY | | | |
| LIABILITIES | | | |
| Policyholders’ account balances | $ | 2,416,125 |
| | $ | 2,633,085 |
|
| Future policy benefits and other policyholder liabilities | 3,578,662 |
| | 3,539,521 |
|
| Payables to parent and affiliates | 275,737 |
| | 71,675 |
|
| Cash collateral for loaned securities | 10,568 |
| | 5,285 |
|
| Income taxes | 274,951 |
| | 299,084 |
|
| Short-term debt | 1,000 |
| | 54,354 |
|
| Other liabilities | 100,618 |
| | 105,972 |
|
| Separate account liabilities | 39,250,159 |
| | 44,101,699 |
|
| Total Liabilities | 45,907,820 |
| | 50,810,675 |
|
| Commitments and Contingent Liabilities (see Note 12) |
| |
|
| EQUITY | | | |
| Common stock, $100 par value; 25,000 shares authorized, issued and outstanding | 2,500 |
| | 2,500 |
|
| Additional paid-in capital | 901,422 |
| | 901,422 |
|
| Retained earnings | 396,830 |
| | 673,613 |
|
| Accumulated other comprehensive income | 46,166 |
| | 84,622 |
|
| Total Equity | 1,346,918 |
| | 1,662,157 |
|
| TOTAL LIABILITIES AND EQUITY | $ | 47,254,738 |
| | $ | 52,472,832 |
|
See Notes to Financial Statements
Prudential Annuities Life Assurance Corporation
Statements of Operations and Comprehensive Income
Years Ended December 31, 2015, 2014 and 2013 (in thousands)
|
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| REVENUES | | | | | |
| Premiums | $ | 9,787 |
| | $ | 34,903 |
| | $ | 28,019 |
|
| Policy charges and fee income | 740,823 |
| | 806,327 |
| | 809,242 |
|
| Net investment income | 139,430 |
| | 164,011 |
| | 217,883 |
|
| Asset administration fees and other income | 177,479 |
| | 227,619 |
| | 239,489 |
|
| Realized investment gains (losses), net: | | | | | |
| Other-than-temporary impairments on fixed maturity securities | (44 | ) | | (10 | ) | | 0 |
|
| Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income | 24 |
| | 10 |
| | 0 |
|
| Other realized investment gains (losses), net | 6,072 |
| | 7,368 |
| | (184,351 | ) |
| Total realized investment gains (losses), net | 6,052 |
| | 7,368 |
| | (184,351 | ) |
| Total revenues | 1,073,571 |
| | 1,240,228 |
| | 1,110,282 |
|
| BENEFITS AND EXPENSES | | | | | |
| Policyholders’ benefits | 60,461 |
| | 137,135 |
| | 29,727 |
|
| Interest credited to policyholders’ account balances | 225,555 |
| | 211,058 |
| | (117,027 | ) |
| Amortization of deferred policy acquisition costs | 309,152 |
| | 238,416 |
| | (385,561 | ) |
| General, administrative and other expenses | 313,471 |
| | 394,248 |
| | 402,679 |
|
| Total benefits and expenses | 908,639 |
| | 980,857 |
| | (70,182 | ) |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES | 164,932 |
| | 259,371 |
| | 1,180,464 |
|
| Total income tax expense (benefit) | (8,285 | ) | | 8,604 |
| | 332,372 |
|
| NET INCOME | 173,217 |
| | 250,767 |
| | 848,092 |
|
| Other comprehensive income (loss), before tax: | | | | | |
| Foreign currency translation adjustments | (54 | ) | | (63 | ) | | 5 |
|
| Net unrealized investment gains (losses): | | | | | |
| Unrealized investment gains (losses) for the period | (54,279 | ) | | 35,931 |
| | (108,769 | ) |
| Reclassification adjustment for gains included in net income | (4,831 | ) | | (14,706 | ) | | (8,805 | ) |
| Net unrealized investment gains (losses) | (59,110 | ) | | 21,225 |
| | (117,574 | ) |
| Other comprehensive income (loss), before tax: | (59,164 | ) | | 21,162 |
| | (117,569 | ) |
| Less: Income tax expense (benefit) related to other comprehensive income (loss) | | | | | |
| Foreign currency translation adjustments | (19 | ) | | (23 | ) | | 2 |
|
| Net unrealized investment gains (losses) | (20,689 | ) | | 7,430 |
| | (41,151 | ) |
| Total | (20,708 | ) | | 7,407 |
| | (41,149 | ) |
| Other comprehensive income (loss), net of taxes | (38,456 | ) | | 13,755 |
| | (76,420 | ) |
| COMPREHENSIVE INCOME | $ | 134,761 |
| | $ | 264,522 |
| | $ | 771,672 |
|
See Notes to Financial Statements
Prudential Annuities Life Assurance Corporation
Statements of Equity
Years Ended December 31, 2015, 2014 and 2013 (in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Equity |
| Balance, December 31, 2012 | $ | 2,500 |
| | $ | 893,336 |
| | $ | 200,754 |
| | $ | 147,287 |
| | $ | 1,243,877 |
|
| Contributed capital |
|
| | 8,086 |
| |
|
| |
|
| | 8,086 |
|
| Dividend to parent |
|
| |
|
| | (284,000 | ) | |
|
| | (284,000 | ) |
| Comprehensive income: | | | | | | | | | |
| Net income |
|
| |
|
| | 848,092 |
| |
|
| | 848,092 |
|
| Other comprehensive income (loss), net of taxes |
|
| |
|
| |
|
| | (76,420 | ) | | (76,420 | ) |
| Total comprehensive income | | | | | | | | | 771,672 |
|
| Balance, December 31, 2013 | 2,500 |
| | 901,422 |
| | 764,846 |
| | 70,867 |
| | 1,739,635 |
|
| Dividend to parent |
|
| |
|
| | (342,000 | ) | |
|
| | (342,000 | ) |
| Comprehensive income: | | | | | | | | | |
| Net income |
|
| |
|
| | 250,767 |
| |
|
| | 250,767 |
|
| Other comprehensive income (loss), net of taxes |
|
| |
|
| |
|
| | 13,755 |
| | 13,755 |
|
| Total comprehensive income | | | | | | | | | 264,522 |
|
| Balance, December 31, 2014 | 2,500 |
| | 901,422 |
| | 673,613 |
| | 84,622 |
| | 1,662,157 |
|
| Dividend to parent |
|
| |
|
| | (450,000 | ) | |
|
| | (450,000 | ) |
| Comprehensive income: | | | | | | | | | |
| Net income |
|
| |
|
| | 173,217 |
| |
|
| | 173,217 |
|
| Other comprehensive income (loss), net of taxes |
|
| |
|
| |
|
| | (38,456 | ) | | (38,456 | ) |
| Total comprehensive income | | | | | | | | | 134,761 |
|
| Balance, December 31, 2015 | $ | 2,500 |
| | $ | 901,422 |
| | $ | 396,830 |
| | $ | 46,166 |
| | $ | 1,346,918 |
|
See Notes to Financial Statements
Prudential Annuities Life Assurance Corporation
Statements of Cash Flows
Years Ended December 31, 2015, 2014 and 2013 (in thousands)
Prudential Annuities Life Assurance Corporation
|
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Net income | $ | 173,217 |
| | $ | 250,767 |
| | $ | 848,092 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Policy charges and fee income | 907 |
| | 3,491 |
| | 10,678 |
|
| Realized investment (gains) losses, net | (6,052 | ) | | (7,368 | ) | | 184,351 |
|
| Depreciation and amortization | 37,530 |
| | 1,402 |
| | 11,032 |
|
| Interest credited to policyholders’ account balances | 225,555 |
| | 211,058 |
| | (117,027 | ) |
| Change in: | | | | | |
| Future policy benefits and other policyholder liabilities | 238,052 |
| | 324,284 |
| | 218,861 |
|
| Accrued investment income | 2,393 |
| | 7,161 |
| | 12,487 |
|
| Net payable to/receivable from parent and affiliates | 61,252 |
| | (26,936 | ) | | (40,051 | ) |
| Deferred sales inducements | 38,380 |
| | (11,515 | ) | | (31,370 | ) |
| Deferred policy acquisition costs | 381,480 |
| | 235,612 |
| | (389,611 | ) |
| Income taxes | (3,426 | ) | | (67,163 | ) | | 330,049 |
|
| Reinsurance recoverables | (270,868 | ) | | (273,480 | ) | | (275,321 | ) |
| Bonus reserve | (38,768 | ) | | (115,700 | ) | | (27,593 | ) |
| Derivatives, net | 21,581 |
| | (415 | ) | | (37,654 | ) |
| Deferred loss on reinsurance | (118,028 | ) | | 0 |
| | 0 |
|
| Other, net | (3,508 | ) | | (1,804 | ) | | (17,627 | ) |
| Cash flows from operating activities | 739,697 |
| | 529,394 |
| | 679,296 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
| Proceeds from the sale/maturity/prepayment of: | | | | | |
| Fixed maturities, available-for-sale | 486,648 |
| | 996,083 |
| | 1,484,339 |
|
| Commercial mortgage and other loans | 89,344 |
| | 20,988 |
| | 109,242 |
|
| Trading account assets | 3,765 |
| | 4,900 |
| | 7,690 |
|
| Policy loans | 1,257 |
| | 753 |
| | 752 |
|
| Other long-term investments | 3,764 |
| | (1,650 | ) | | 1,973 |
|
| Short-term investments | 2,318,219 |
| | 2,637,788 |
| | 3,220,082 |
|
| Payments for the purchase/origination of: | | | | | |
| Fixed maturities, available-for-sale | (336,954 | ) | | (494,947 | ) | | (743,854 | ) |
| Commercial mortgage and other loans | (106,185 | ) | | (43,859 | ) | | (80,319 | ) |
| Trading account assets | (3,681 | ) | | (4,312 | ) | | (5,469 | ) |
| Policy loans | (644 | ) | | (943 | ) | | (538 | ) |
| Other long-term investments | (3,994 | ) | | (14,691 | ) | | (12,969 | ) |
| Short-term investments | (2,419,261 | ) | | (2,576,786 | ) | | (3,234,508 | ) |
| Notes payable to/receivable from parent and affiliates, net | 3,110 |
| | (12,524 | ) | | (2,224 | ) |
| Derivatives, net | (6,528 | ) | | 1,682 |
| | 6,068 |
|
| Other, net | 1,070 |
| | (1,674 | ) | | (6,258 | ) |
| Cash flows from investing activities | 29,930 |
| | 510,808 |
| | 744,007 |
|
| CASH FLOWS USED IN FINANCING ACTIVITIES: | | | | | |
| Cash collateral for loaned securities | 5,283 |
| | (42,612 | ) | | 8,920 |
|
| Repayments of debt (maturities longer than 90 days) | 0 |
| | (200,000 | ) | | (200,000 | ) |
| Net increase (decrease) in short-term borrowing | (53,354 | ) | | 49,354 |
| | 5,000 |
|
| Drafts outstanding | (1,663 | ) | | (6,410 | ) | | 1,577 |
|
| Distribution to parent | (450,000 | ) | | (342,000 | ) | | (284,000 | ) |
| Contributed capital | 0 |
| | 0 |
| | 12,439 |
|
| Policyholders’ account deposits | 1,295,546 |
| | 1,375,761 |
| | 1,102,020 |
|
| Policyholders’ account withdrawals | (1,511,470 | ) | | (1,875,118 | ) | | (2,068,108 | ) |
| Policyholders’ account ceded | (54,027 | ) | | 0 |
| | 0 |
|
| Cash flows used in financing activities | (769,685 | ) | | (1,041,025 | ) | | (1,422,152 | ) |
| NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS | (58 | ) | | (823 | ) | | 1,151 |
|
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 594 |
| | 1,417 |
| | 266 |
|
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 536 |
| | $ | 594 |
| | $ | 1,417 |
|
| SUPPLEMENTAL CASH FLOW INFORMATION | | | | | |
| Income taxes paid, net of refunds | $ | (4,858 | ) | | $ | 75,745 |
| | $ | 2,325 |
|
| Interest paid | $ | 68 |
| | $ | 8,657 |
| | $ | 16,955 |
|
See Notes to Financial Statements
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements
1. BUSINESS AND BASIS OF PRESENTATION
Prudential Annuities Life Assurance Corporation (the “Company” or “PALAC”), with its principal offices in Shelton, Connecticut, is an indirect wholly-owned subsidiary of Prudential Financial, Inc. (“Prudential Financial”), a New Jersey corporation. The Company is a wholly-owned subsidiary of Prudential Annuities, Inc. (“PAI”), which in turn is an indirect wholly-owned subsidiary of Prudential Financial.Financial, Inc. ("Prudential Financial"), a New Jersey corporation.
The Company has developed long-term savings and retirement products, which were distributed through its affiliated broker/dealerbroker-dealer company, Prudential Annuities Distributors, IncorporatedInc. (“PAD”). The Company issued variable and fixed deferred and immediate annuities for individuals and groups in the United States of America District of Columbia and Puerto Rico. In addition, the Company has a relatively small in force block of variable life insurance policies. The Company no longerstopped actively sells such products.selling annuity products in March 2010.
Beginning in
In March 2010, the Company ceased offering its variable annuity products (and where offered, the companion market value adjustment option) to new investors upon the launch of a new product line by each of Pruco Life Insurance Company ("Pruco Life") and its wholly-owned subsidiary Pruco Life Insurance Company of New Jersey ("PLNJ") (which are affiliates of the Company). These initiatives were implemented to create operational and administrative efficiencies by offering a single product line of annuity products from a more limited group of legal entities. During 2012, the Company suspended additional customer deposits for variable annuities with certain optional living benefit riders.guarantees. However, subject to applicable contract provisions and administrative rules, the Company continues to accept additional customer deposits on certain in force contracts.contracts, subject to applicable contract provisions and administrative rules.
The Company resumed offering annuity products to new investors (except in New York) when it launched a new fixed index annuity and a new deferred income annuity in 2018.
The Company is engaged in a business that is highly competitive because of the large number of stock and mutual life insurance companies and other entities engaged in marketing long-term savings and retirement products, including insurance products, and individual and group annuities.
On August 31, 2013, the Company redomesticated from Connecticut to Arizona. As a result of the redomestication, the Company is now an ArizonaArizona-based insurance company and its principal insurance regulatory authority is the Arizona Department of Insurance. Additionally,Insurance ("AZDOI"). The redomestication also resulted in the Company is nowbeing domiciled in the same jurisdiction as the then primary reinsurer of the Company’s living benefits,benefit guarantees, Pruco Reinsurance, Ltd. (“Pruco Re”), which is also regulated by the Arizona Department of Insurance. This change enablesenabled the Company to claim statutory reserve credit for business ceded to Pruco Re without the need for Pruco Re to collateralize its obligations under the reinsurance agreement. As of April 1, 2016, the Company no longer reinsures its living benefit guarantees to Pruco Re.
InAs disclosed in Note 1 to the fourth quarter ofFinancial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, the Company surrendered its New York license. The Company recaptured the New York living benefits previously ceded to Pruco Re,license effective December 31, 2015, and reinsured the majority of its New York business both the living benefit and base contract, to an affiliate, The Prudential Insurance Company of America (“Prudential Insurance”). The license surrender relieves the Company of the requirement to hold additional New York statutory reserves mandatedon its business in excess of the statutory reserves required by its domiciliary regulator, the fourth quarter of 2014 agreement with the New York State Department of Financial Services (“NY DFS”).AZDOI. For the small portion of New York business retained by the Company, a custodial account has been established to hold collateral assets in an amount equal to a percentage of the reserves associated with such business, as calculated in accordance with PALAC's New York Regulation 109 Plan approved by the reserve methodologiesNew York Department of Financial Services.
Variable Annuities Recapture
Through March 31, 2016, the Company reinsured the majority of its variable annuity living benefit guarantees to its affiliated companies, Pruco Re and Prudential Insurance. Effective April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured to Pruco Re and Prudential Insurance. In addition, the Company reinsured the variable annuity base contracts, along with the living benefit guarantees, from Pruco Life, excluding the PLNJ business which was reinsured to Prudential Insurance, under a coinsurance and modified coinsurance agreement. This reinsurance agreement covers new and in force business and excludes business reinsured externally. The product risks related to the reinsured business are being managed in the Company. In addition, the living benefit hedging program related to the reinsured living benefit guarantees is being managed within the Company. These series of transactions are collectively referred to as the "Variable Annuities Recapture".
As part of the NY DFS.Variable Annuities Recapture, the Company received invested assets of $3.1 billion as consideration from Pruco Re, which is equivalent to the amount of statutory reserve credit taken as of March 31, 2016, and unwound the associated reinsurance recoverable of $3.4 billion. As a result of the recapture transaction, the Company recognized a loss of $0.3 billion immediately.
For the Variable Annuities Recapture, the Company received invested assets of $7.1 billion as consideration from Pruco Life and established reserves of $9.4 billion. In addition, the Company incurred ceding commissions of $3.6 billion, of which $1.1 billion was in the form of reassignment of debt from Pruco Life. Also, the Company established deferred policy acquisition costs ("DAC") and deferred sales inducements ("DSI") balances, which were equivalent to the ceding commission incurred by the Company. For the reinsurance of the variable annuity base contracts, the Company recognized a benefit of $0.3 billion, which was deferred and will subsequently be amortized through "General, administrative and other expenses". For the reinsurance of the living benefit guarantees, the Company recognized a loss of $2.6 billion immediately since the reinsurance contract is accounted for as a free-standing derivative.
The Company also received a capital contribution of $8.4 billion from PAI.
As a result of the Variable Annuities Recapture, Pruco Re no longer had any material active reinsurance with affiliates. On September 30, 2016, Pruco Re was merged with and into the Company.
The impact of these transactions on the Statements of Operations and Comprehensive Income (Loss) was as follows:
|
| | | | | | | | | |
| Day 1 Impact of the Variable Annuities Recapture(1) | Impacts of Recapture | Impacts of Reinsurance | Total Impacts |
| | (in millions) |
| REVENUES | | | |
| Premiums | $ | 0 |
| $ | 832 |
| $ | 832 |
|
| Realized investment gains (losses), net | (305 | ) | (2,561 | ) | (2,866 | ) |
| TOTAL REVENUES | (305 | ) | (1,729 | ) | (2,034 | ) |
| BENEFITS AND EXPENSES | | | |
| Policyholders' benefits | 0 |
| 522 |
| 522 |
|
| General, administrative and other expenses | 0 |
| 310 |
| 310 |
|
| TOTAL BENEFITS AND EXPENSES | 0 |
| 832 |
| 832 |
|
| INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES | (305 | ) | (2,561 | ) | (2,866 | ) |
| Income tax expense (benefit) | (114 | ) | (961 | ) | (1,075 | ) |
| NET INCOME (LOSS) | $ | (191 | ) | $ | (1,600 | ) | $ | (1,791 | ) |
| |
| (1) | Day 1 Significant Non-Cash Transactions: |
Consideration transferred includes non-cash activities of $3.1 billion for assets received related to the recapture transaction with Pruco Re, $7.1 billion for assets received related to the reinsurance transaction with Pruco Life and $3.6 billion related to non-cash capital contributions from PAI.
Prudential Financial contributed current tax receivables through PAI of $1.5 billion to the Company as part of the Variable Annuities Recapture.
The Company incurred ceding commissions of $3.6 billion, of which $1.1 billion was in the form of reassignment of debt from Pruco Life.
Additional paid-in capital ("APIC") includes non-cash capital contributions from PAI of $3.6 billion in invested assets, $1.5 billion of current tax receivables and $2.5 billion funding for the ceding commission for the reinsurance transaction with Pruco Life.
Basis of Presentation
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
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 costsDAC and related amortization; value of business acquired ("VOBA") and its amortization; amortization of deferred sales inducements;DSI; valuation of investments including derivatives and the recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; reinsurance recoverables; provision for income taxes and valuation of deferred tax assets; and accruals for contingent liabilities, including estimates for losses in connection with unresolved legal and regulatory matters.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the current period presentation.
2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Investments and Investment Related Liabilities
The Company’s principal investments are fixed maturities, equity securities, commercial mortgage and other loans, policy loans, other long-term investments, including joint ventures (other than operating joint ventures), limited partnerships, and real estate, and short-term investments. Investments and investment-related liabilities also include securities repurchase and resale agreements and securities lending transactions. The accounting policies related to each are as follows:2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS
ASSETS
Fixed maturities, available-for-sale, at fair value are comprised of bonds, notes and redeemable preferred stock. Fixed maturities classified as “available-for-sale” are carried at fair value. See Note 105 for additional information regarding the determination of fair value. The amortizedassociated unrealized gains and losses, net of tax, and the effect on DAC, VOBA, DSI, future policy benefits, policyholders’ account balances that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss)” (“AOCI”). The purchased cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts over the contractual lives of the investments. to maturity or, if applicable, call date.
Interest income, as well as the relatedand amortization of premium and accretion of discount isare included in “Net investment income” under the effective yield method. Additionally, prepayment premiums are also included in “Net investment income”. For mortgage-backed and asset-backed securities, the effective yield is based on estimated cash flows, 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 vary based on other assumptions regarding the underlying collateral including default rates and changes in value. These assumptions can significantly impact income recognition and the amount of OTTI recognized in earnings and other comprehensive income. For high credit quality mortgage-backed and asset-backed securities (those rated AA or above), cash flows are provided quarterly, and the amortized cost and effective yield of the securitysecurities 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"Net investment incomeincome" in accordance with the retrospective method. For mortgage-backed and asset-backed securities rated below AA or those for which an OTTI has been recorded, the effective yield is adjusted prospectively for any changes in estimated cash flows. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Unrealized gains and losses on fixed
Fixed maturities, classified as “available-for-sale,” net of tax, and the effect on deferred policy acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”), and future policy benefits that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss)” (“AOCI”).
Trading account assets, trading, at fair value represents equity securities and otherconsists of fixed maturity securitiesmaturities that are carried at fair value. Realized and unrealized gains and losses foron these investments are reported in “Asset administration fees and other income.” Interestincome”, and interest and dividend income from these investments is reported in “Net investment income.”income”.
Equity securities, available-for-sale, at fairvalue areis comprised of common stock, mutual fund shares, and preferred stock, which are carried at fair value. The associatedRealized and unrealized gains and losses net of tax, and the effect on DAC, VOBA, DSI, and future policy benefits that would result from the realization of unrealized gains and losses, are included in AOCI. The cost of equity securities is written down to fair value when a decline in value is considered to be other-than-temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Dividends from these investments are recognizedreported in “Asset administration fees and other income”, and dividend income is reported in “Net investment income” when earned.on the ex-dividend date.
Commercial mortgage and other loans consist of commercial mortgage loans and agricultural loans and uncollateralizedproperty 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 an allowance for losses. 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, as well as prepayment fees and the amortization of the related premiums or discounts, related to commercial mortgage and other loans, are included in “Net investment income.”income” under the effective yield method. Prepayment fees are also included in "Net investment income".
Impaired loans include those loans for which it is probable that amounts due will not all be collected according to the contractual terms of the loan agreement. The Company defines “past due” as principal or interest not collected at least 30 days past the scheduled contractual due date. Interest received on loans that are past due, including impaired and non-impaired loans, as well as, loans that were previously modified in a troubled debt restructuring, 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. See Note 3 for additional information about the Company’s past due loans.
The Company discontinues accruing interest on loans after the loans become 90 days delinquent as to principal or interest payments, or earlier when the Company has doubts about collectability. When the Company discontinues accruing interest on a loan, any accrued but uncollectible interest on the loan and other loans backed by the same collateral, if any, is charged to 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.
The Company reviews the performance and credit quality of the commercial mortgage and other loan portfolio on an on-going basis. Loans are placed on watch list status based on a predefined set of criteria and are assigned one of threetwo categories. Loans
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
are placed on “early warning” status in cases where, based on the Company’s analysis of the loan’s collateral, the financial situation of the borrower or tenants or other market factors, it is believed a loss of principal or interest could occur. Loans are classified as “closely monitored” when it is determined that there is a collateral deficiency or other credit events that may lead to a potential loss of principal or interest. Loans “not in good standing” are those loans where the Company has concluded that there is a high probability of loss of principal, such as when the loan is delinquent or in the process of foreclosure. As described below, in determining the allowance for losses, the Company evaluates each loan on the watch list to determine if it is probable that amounts due will not be collected according to the contractual terms of the loan agreement.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial mortgage loans. The loan-to-value ratio compares the amount of the loan to the fair value of the underlying property collateralizing the loan, and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the loan amount exceeds the collateral value. A smaller loan-to-value ratio less than 100% indicates a greateran excess of collateral value over the loan amount. The debt service coverage ratio compares a property’s net operating income to its debt service payments. Debt service coverage ratios less than 1.0 times indicate that property operations do not generate enough income to cover the loan’s current debt payments. A larger debt service coverage ratio greater than 1.0 times indicates a greateran 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 portfolio,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. The loan-to-value ratio is the most significant of several inputs used to establish the internal credit rating of a loan which in turn drives the allowance for losses. Other key factors considered in determining the internal credit rating include debt service coverage ratios, amortization, loan term, and estimated market value growth rate and volatility for the property type and region. 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.
The allowance for losses includes a loan specific reserve for each impaired loan that has a specifically identified loss and a portfolio reserve for probable incurred but not specifically identified losses. For impaired commercial mortgage and other loans the allowances for losses are determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or based upon the fair value of the collateral if the loan is collateral dependent. The portfolio reserves for probable incurred but not specifically identified losses in the commercial mortgage and agricultural loan portfolios considersconsider the current credit composition of the portfolio based on an internal quality rating (asas described above).above. The portfolio reserves are determined using past loan experience, including historical credit migration, loss probability and loss severity factors by property type. These factors are reviewed each quarter and updated as appropriate.
The allowance for losses on commercial mortgage and other loans can increase or decrease from period to period based on the factors noted above. “Realized investment gains (losses), net” includes changes in the allowance for losses. “Realized investment gains (losses), net” also includes gains and losses on sales, certain restructurings, and foreclosures.
When a commercial mortgage or other loan is deemed to be uncollectible, any specific valuation allowance associated with the loan is reversed and a direct write down toof the carrying amount of the loan is made. The carrying amount of the loan is not adjusted for subsequent recoveries in value.
Commercial mortgage and other loans are occasionally restructured in a troubled debt restructuring. 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 troubled debt restructuring. When restructurings occur, they are evaluated individually to determine whether the restructuring or modification constitutes a “troubled debt restructuring” 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 troubled debt restructuring. Based on the Company’s credit review process described above, these loans generally would have been deemed impaired prior to the troubled debt restructuring, and specific allowances for losses would have been established prior to the determination that a troubled debt restructuring has occurred.
In a troubled debt restructuring where the Company receives assets in full satisfaction of the debt, any specific valuation 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 impairment based on the credit review process noted above. When a loan is restructured in a troubled debt restructuring, the impairment of the loan is remeasured using the modified terms and the loan’s original effective yield, and the allowance for loss is adjusted accordingly. Subsequent to the modification, income is recognized prospectively based on the modified terms of the loans in accordance with the income recognition policy noted above. Additionally, the loan continues to be subject to the credit review process noted above.
In situations where a loan has been restructured in a troubled debt restructuring and the loan has subsequently defaulted, this factor is considered when evaluating the loan for a specific allowance for losses in accordance with the credit review process noted above.
See Note 3 for additional information about commercial mortgage and other loans that have been restructured in a troubled debt restructuring.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Policy loans represent funds loaned to policyholders up to the cash surrender value of the associated insurance policies and are carried at the unpaid principal balances.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 investmentsprimarily consist of highly liquid debt instruments with a maturity of twelve months or less and greater than three months when purchased. These investments are generally carried at fair value or amortized cost that approximates fair value and include certain money market investments, funds managed similar to regulated money market funds, short-term debt securities issued by government sponsored entities and other highly liquid debt instruments.
Other long-term investmentsinvested assets consist of the Company’s non-coupon investments in joint ventureslimited partnerships and limited partnerships, otherliability companies ("LPs/LLCs") (other than operating joint ventures,ventures), as well as wholly-owned investment real estate, derivative assets and other investments. Joint venture and partnershipLPs/LLCs interests are accounted for using either the equity method of accounting, or at fair value with changes in fair value reported in “Asset administration fees and other income”. The Company’s income from investments in LPs/LLCs accounted for using the equity method, of accounting or under the cost method when the Company’s partnership interest is so minor (generally less than 3%) that it exercises virtually no influence over operating and financial policies. The Company’s income from investments in joint ventures and partnerships accounted for using the equity method or the cost method, other than the Company’s investmentinvestments 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 or the cost method (including assessment for other-than-temporary impairment)OTTI), the Company uses financial information provided by the investee, generally on a one to three monththree-month lag.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Short-term For the investments primarily consist of highly liquid debt instruments with a maturity of twelve months or less and greater than three months when purchased. These investments are generally carried reported at fair value with changes in fair value reported in current earnings, the associated realized and include certain money market investments, short-term debt securities issued by government sponsored entitiesunrealized gains and losses are reported in “Asset administration fees and other highly liquid debt instruments.income”.
Realized investment gains (losses) are computed using the specific identification method. Realized investment gains and losses are generated from numerous sources, including the salesales of fixed maturity securities, equity securities, investments in joint ventures and limited partnerships and other types of investments, as well as adjustments to the cost basis of investments for net other-than-temporary impairmentsOTTI recognized in earnings. Realized investment gains and losses are also generated from prepayment premiums received on private fixed maturity securities,reflect changes in the allowance for losses on commercial mortgage and other loans, 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.
The Company’s available-for-sale securities with unrealized losses are reviewed quarterly to identify other-than-temporary impairmentsOTTI in value. In evaluating whether a decline in value is other-than-temporary, the Company considers several factors including, but not limited to the following: (1) the extent and the duration of the decline; (2) the reasons for the decline in value (credit event, currency or interest-rate related, including general credit spread widening); and (3) the financial condition of and near-term prospects of the issuer. With regard to available-for-sale equity securities, the Company also considers the ability and intent to hold the investment for a period of time to allow for a recovery of value. When it is determined that a decline in value of an equity security is other-than-temporary, the carrying value of the equity security is reduced to its fair value, with a corresponding charge to earnings.
An other-than-temporary impairmentOTTI is recognized in earnings for a debt security in an unrealized loss position when the Company either (a)(1) has the intent to sell the debt security or (b)(2) it is more likely than not will be required to sell the debt security before its anticipated recovery. For all debt securities in unrealized loss positions that do not meet either of these two criteria, the Company analyzes its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. The Company may use the estimated fair value of collateral as a proxy for the net present value if it believes that the security is dependent on the liquidation of collateral for recovery of its investment. If the net present value is less than the amortized cost of the investment an other-than-temporary impairmentOTTI is recognized.
When an other-than-temporary impairmentOTTI of a debt security has occurred, the amount of the other-than-temporary impairmentOTTI recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the debt security meets either of these two criteria, the other-than-temporary impairmentOTTI recognized in earnings is equal to the entire difference between the security’s amortized cost basis and its fair value at the impairment measurement date. For other-than-temporary impairmentsOTTI of debt securities that do not meet these criteria, the net amount recognized in earnings is equal to the difference between the amortized cost of the debt security and its net present value calculated as described above. Any difference between the fair value and the net present value of the debt security at the impairment measurement date is recorded in “Other comprehensive income (loss)” (“OCI”). Unrealized gains or losses on securities for which an other-than-temporary impairmentOTTI has been recognized in earnings is tracked as a separate component of AOCI.
For debt securities, thePrudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
The split between the amount of an other-than-temporary impairmentOTTI recognized in other comprehensive incomeOCI and the net amount recognized in earnings for debt securities is driven principally by assumptions regarding the amount and timing of projected cash flows. For mortgage-backed and asset-backed 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. For structured securities, the payment priority within the tranche structure is also considered. For all other debt securities, cash flow estimates are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company has developed these estimates using information based on its historical experience as well as using market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of a security, such as the general payment terms of the security and the security’s position within the capital structure of the issuer.
The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. In periods subsequent to the recognition of an other-than-temporary impairment,OTTI, the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. For debt securities, the discount (or reduced premium) based on the new cost basis may be accreted into net investment income in future periods, including increases in cash flow on a prospective basis. In certain cases where there are decreased cash flow expectations, the security is reviewed for further cash flow impairments.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Unrealized investment gains and losses are also considered in determining certain other balances, including DAC, VOBA, DSI, certain future policy benefits and deferred tax assets or liabilities. These balances are adjusted, as applicable, 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. Each of these balances is discussed in greater detail below.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, certain money market investments, andfunds 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 “Trading account assets,"Fixed maturities, available-for-sale, at fair value.”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.
Deferred Policy Acquisition Costs
Costs that policy acquisition costs are related directly to the successful acquisition of new and renewal insurance and annuity business arethat have been deferred to the extent such costs are deemed recoverable from future profits. Such DAC primarily includeincludes commissions, costs of policy issuance and underwriting, and certain other expenses that are directly related to successfully negotiated contracts. In each reporting period, capitalized DAC is amortized to “Amortization of deferred policy acquisition costs,”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 fixed and variable deferred annuity products are generally deferred and amortized over the expected life of the contracts in proportion to gross profits arising principally from investment margins, mortality and expense margins, and surrender charges, based on historical and anticipated future experience, which is updated periodically. The Company uses a reversion to the mean approach for equities to derive future equity return assumptions.
However, if the projected equity return calculated using this approach is greater than the maximum equity return assumption, the maximum equity return is utilized. Gross profits also include impacts from the embedded derivatives associated with certain of the optional living benefit features of the Company’s variable 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, (an SEC registrant)an 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 13.10. 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 effectCompany regularly evaluates and adjusts DAC balances with a corresponding charge or credit to current period earnings, representing a cumulative adjustment to all prior periods’ amortization, for the impact of actual gross profits and changes in the Company's projections of estimated future gross profits. Adjustments to DAC balances include: (i) annual review of assumptions that reflect the comprehensive review of the assumptions used in estimating gross profits for future periods, (ii) quarterly adjustments for current period experience (also referred to as “experience true-up” adjustments) that reflect the impact of differences between actual gross profits for a given period and the previously estimated expected gross profits for that period, and (iii) quarterly adjustments for market performance (also referred to as “experience unlocking”) that reflect the impact of changes to the Company's estimate of total gross profits on unamortized DAC is reflected in the period such total gross profits are revised.to reflect actual fund performance and market conditions.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
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. For 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.
Deferred Sales InducementsAccrued investment income primarily includes accruals of interest and dividend income from investments that have been earned but not yet received.
Reinsurance recoverables include corresponding receivables associated with reinsurance arrangements with affiliates. For additional information about these arrangements see Note 10.
Income taxes asset primarily represents the net deferred tax asset and the Company’s estimated taxes receivable for the current year and open audit years.
The Company offered 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 with losses record tax benefits to the extent such losses 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 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 11 for a discussion of factors considered when evaluating the need for a valuation allowance.
In December of 2017, SEC staff issued "SAB 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"), which allowed registrants to record provisional amounts during a ‘measurement period’ not to extend beyond one year. Under the relief provided by SAB 118, a company could recognize provisional amounts when it did not have the necessary information available, prepared or analyzed in reasonable detail to complete its accounting for the change in tax law. See Note 11 for a discussion of provisional amounts related to the U.S. Tax Cuts and Jobs Act of 2017 ("Tax Act of 2017") recorded in 2017 and adjustments to provisional amounts recorded in 2018.
U.S. GAAP prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on tax returns. The application of this guidance is a two-step process. First, the Company determines whether it is more likely than not, based on the technical merits, that the tax position will be sustained upon examination. If a tax position does not meet the more likely than not recognition threshold, the benefit of that position is not recognized in the financial statements. The second step is measurement. The Company measures the tax position as the largest amount of benefit that is greater than 50 percent likely of being 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.
Prudential Annuities Life Assurance Corporation
Notes to 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 11 for additional information regarding income taxes.
VOBA represents identifiable intangible assets to which a portion of the purchase price in a business acquisition is attributed under the application of purchase accounting. VOBA represents an adjustment to the stated value of in force insurance contract liabilities to present them at fair value, determined as of the acquisition date. VOBA balances are subject to recoverability testing, in the manner in which it was acquired. The Company has established a VOBA asset primarily for its acquisition of American Skandia Life Assurance Corporation. The Company amortizes VOBA over the anticipated life of the acquired contracts using the same methodology and assumptions used to amortize DAC. The Company records amortization of VOBA in “General, administrative, and other expenses.” See Note 7 for additional information regarding VOBA.
Deferred sales inducements represent 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 anticipatedexpected 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 79 for additional information regarding sales inducements.
ValueOther assets consist primarily of Business Acquiredaccruals for asset administration fees, deferred loss on reinsurance with an affiliate and receivables resulting from sales of securities that had not yet settled at the balance sheet date.
As a result of certain acquisitions and the application of purchase accounting, the Company reports a financial asset representing VOBA. VOBA represents an adjustment to the stated value of in force insurance contract liabilities to present them at fair value, determined as of the acquisition date. VOBA balances are subject to recoverability testing, in the manner in which it was acquired. The Company has established a VOBA asset primarily for its acquisition of American Skandia Life Assurance Corporation. For
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
acquired annuity contracts, VOBA is amortized 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. See Note 5 for additional information regarding VOBA.
Reinsurance recoverables
Reinsurance recoverables include corresponding receivables associated with reinsurance arrangements with affiliates. For additional information about these arrangements see Note 13.
Separate Account Assets and Liabilities
Separate account assets are reported at fair value and represent segregated funds that are invested for certain contractholders. “Separate account assets” are predominantly shares in Advanced Series Trust co-managed by AST Investment Services, Incorporated (“ASISI”) and Prudential Investments LLC, which utilizes various fund managers as sub-advisors. The remaining assets are shares in other mutual funds, which are managed by independent investment firms. The contractholder has the option of directing funds to a wide variety of investment options, most of which invest in mutual funds. The investment risk on the variable portion of a contract is borne by the contractholder, except to the extent of minimum guarantees by the Company, which are not separate account liabilities. See Note 7 to the Financial Statements for additional information regarding separate account arrangements with contractual guarantees. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. Separate account liabilities primarily represent the contractholders’ account balance in separate account assets and to a lesser extent borrowings of the separate account, and will be equal and offsetting to total separate account assets. The investment income and realized investment gains or losses from separate accounts generally accrue to the contractholders and are not included in the Company’s 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 and other income.”income”. See Note 9 for additional information regarding separate account arrangements with contractual guarantees. See also “Separate account liabilities” below.
Other Assets and Other LiabilitiesLIABILITIES
“Other assets” consist primarily of accruals for asset administration fees and deferral of a loss on reinsurance with an affiliate. “Other assets” also consist of state insurance licenses. Licenses to do business in all states have been capitalized. Based on changes in facts and circumstances, effective September 30, 2012, the capitalized state insurance licenses were considered to have a finite life and are amortized over their useful life, which was estimated to be 8 years. Amortization is recorded through “General, administrative and other expenses.” “Other liabilities” consist primarily of accrued expenses and technical overdrafts. Other liabilities may also include derivative instruments for which fair values are determined as described above under “Derivative Financial Instruments”.
Future Policy Benefits
The Company’s liability for future policy benefits liability is primarily comprised of liabilities for guarantee benefits related to certain long-duration life and annuity contracts, which are discussed more fully in Note 7.9. These reserves represent reserves for the guaranteed minimum death and optional living benefit features on the Company’s variable annuity 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 10.5.
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, where the timing and amount of payment depends on policyholder mortality. 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, morbidity 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 establishing premium deficiency reserves. Premium deficiency reserves are established, if necessary, 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. Premium deficiency reserves do not include a provision for the risk of adverse deviation. 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 78 for additional information regarding future policy benefits.
Policyholders’ Account Balances
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
The Company’s liability for policyholders’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.balance, as applicable. These policyholders’ account balances also include provision for benefits under non-life contingent payout annuities and certain unearned revenues.
Securities repurchase and resale agreements and securities loaned transactionsannuities. See Note 8 for additional information regarding policyholders’ account balances.
Cash collateral for loaned securities represent liabilities to return cash proceeds from security lending transactions. Securities repurchase and resale agreements and securities loanedlending transactionsare used primarily to earn spread income, or to borrow funds, or to facilitate trading activity.funds. As part of securities repurchase agreements or securities loanedlending 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 used to earn spread income, and are typically invested in cash equivalents, short-term investments or fixed maturities. Securities lending transactions are treated as financing arrangements and are recorded at the amount of cash received. The Company obtains collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. The Company monitors the market value of the securities loaned on a daily basis with additional collateral obtained as necessary. Substantially all of the Company’s securities lending transactions are with large brokerage firms and large banks. Income and expenses associated with securities lending transactions used to earn spread income are reported as “Net investment income”; however, for securities lending transactions used for funding purposes the associated rebate is reported as interest expense (included in “General, administrative and other expenses”).
Securities sold under agreements to repurchase represent liabilities associated with securities repurchase agreements whichare used primarily to earn spread income, to borrow funds, or to facilitate trading activity. 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 used to earn spread income, 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 (see also "Cash and cash equivalents" above). As part of securities resale agreements, the Company invests cash and receives as collateral U.S. government securities or other debt securities. For securities repurchase agreements and securities loaned transactions used to earn spread income, the cash received is typically invested in cash equivalents, short-term investments or fixed maturities.
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 partythird-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 loaned transactionsto be repurchased are treatedthe same, or substantially the same, as financing arrangements and are recorded at the amountthose sold. The majority of cash received. The Company obtains collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. The Company monitors the market value of the securities loaned on a daily basis with additional collateral obtained as necessary. Substantially all of the Company’s securities loanedthese transactions are with large brokerage firms.highly rated money market funds. Income and expenses associated with securities loanedrelated to these transactions executed within the insurance companies used to earn spread income are reported as “Net investment income;”income”; however, for securities loaned transactions used for funding purposes, the associated rebateborrowing cost is reported as interest expense (included in “General, administrative and other expenses”).
Contingent Liabilities
Amounts Income and expenses related to these transactions executed within the Company’s derivative operations are reported in “Asset administration fees and other income”.
Short-term and long-term debt liabilities are primarily carried at an amount equal to unpaid principal balance, net of unamortized discount or premium and debt issue costs. Original-issue discount or premium and debt-issue costs are recognized as a component of interest expense over the period the debt is expected to be outstanding, using the interest method of amortization. Interest expense is generally presented within “General, administrative and other expenses” in the Company’s 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 14 for additional information regarding short-term and long-term debt.
Reinsurance payables include corresponding payables associated with reinsurance arrangements with affiliates. For additional information about these arrangements see Note 10.
Other liabilities consist primarily of accrued expenses, technical overdrafts, deferred gain on reinsurance with an affiliate, 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 represent the contractholders’ account balance in separate account assets and to a lesser extent borrowings of the separate account, and will be equal and offsetting to total separate account assets. See also “Separate account assets” above.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Commitments and contingent liabilities are accrued if it is probable that a liability has been incurred and an amount is reasonably estimable. Management evaluates whether there are incremental legal or other costs directly associated with the ultimate resolution of the matter that are reasonably estimable and, if so, they are included in the accrual. These itemsaccruals are recorded withingenerally reported in “Other liabilities.”liabilities”.
REVENUES AND BENEFITS AND EXPENSES
Insurance Revenue and Expense Recognition
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 fixed immediate annuity and fixed supplementary contracts with and without life contingencies consist of net investment income. In addition, revenues for fixed immediate annuity contracts with life contingencies also consist of single premium payments recognized as annuity considerations when received. Reserves for contracts without life contingencies are included in “Policyholders’ account balances” while reserves for contracts with life contingencies are included in “Future policy benefits and other policyholder liabilities.benefits.” Assumed interest rates ranged from 0.00%0.0% to 8.25%8.3% at December 31, 20152018 and 2014.2017.
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.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
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 and are discussed in further detail in Note 7.9. The Company also provides contracts with certain optional living benefits which are considered embedded derivatives. These contracts are discussed in further detail in Note 7.9.
Premiums, benefitsAmounts received as payment for 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 policy administration charges and surrender charges. In addition to fees, the Company earns investment income from the investments 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 are stated netfor these products include claims in excess of reinsurance ceded to other companies.
Asset Administration Fees
The Company receives asset administration fee income on contractholders’related account balances, invested in the Advanced Series Trust Funds or “AST”, and the Prudential Series Fund or "PSF" (see Note 13), which are a portfolioexpenses of mutual fund investments relatedcontract administration, interest credited to the Company’s separate account products. In addition, the Company receives fees on contractholders’policyholders’ account balances invested in funds managed by companies other than affiliatesand amortization of Prudential Insurance. DAC, DSI and VOBA.
Asset administration fees and other income principally includes asset-based asset management fees, which are recognized in the period in which the services are performed. This financial statement line also includes realized and unrealized gains or losses from investments reported as income when earned.“Fixed maturities, trading, at fair value”, “Equity securities, at fair value”, and “Other invested assets” that are measured at fair value.
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. Derivative positions are carried at fair value, generally by obtaining quoted market prices or through the use of valuation models.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Derivatives are used to manage the interest rate and currency characteristics of assets or liabilities. Additionally, derivatives may be used to seek to reduce exposure to interest rate, credit, foreign currency and equity risks associated with assets held or expected to be purchased or sold, and liabilities incurred or expected to be incurred. As discussed in detail below and in Note 11,4, all realized and unrealized changes in fair value of derivatives are recorded in current earnings, with the exception of the effective portion of cash flow hedges. Cash flows from derivatives are reported in the operating, investing, or financing activities sections in the Statements of Cash Flows based on the nature and purpose of the derivative.
Derivatives are recorded either as assets, within “Trading account“Other invested assets, at fair value” or “Other long-term investments,” or as liabilities, within “Other liabilities,“Payables to parent and affiliates,” except for embedded derivatives which are recorded with the associated host contract. The Company nets the fair value of all derivative financial instruments with counterparties for which a master netting arrangement has been executed.
The Company designates derivatives as either (1) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); or (2) a derivative that does not qualify for hedge accounting.
To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged item. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a derivative qualifies for hedge accounting treatment, there may be an element of ineffectiveness of the hedge. Under such circumstances, the ineffective portion is recorded in “Realized investment gains (losses), net.”
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 income statementStatements of Operations line item associated with the hedged item.
If it is determined that a derivative no longer qualifies as an effective cash flow hedge or management removes the hedge designation, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair value recognized currently in “Realized investment gains (losses), net.” The component of AOCI related to discontinued cash flow hedges is reclassified to the income statementStatements of Operations line associated with the hedged cash flows consistent with the earnings impact of the original hedged cash flows.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
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 cash flow 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 classifycarry the entire instrument as a trading account assetat fair value and report it within “Trading account assets, at fair value.”“Fixed maturities, trading" or "Other invested assets".
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
The Company sold variable annuity contracts that include optional living benefit features that may be treated from an accounting perspective as embedded derivatives. The Company hashad reinsurance agreements to transfer the riskrisks related to certain of these benefit features to affiliates, Pruco Re and Prudential Insurance through March 31, 2016. Effective April 1, 2016, the Company recaptured the risks related to its variable annuity optional living benefit guarantees that were previously reinsured to Pruco Re and Prudential Insurance. In addition, the Company reinsured the variable annuity base contracts, along with the living benefit guarantees, from Pruco Life, excluding the PLNJ business which was reinsured to Prudential Insurance, under a coinsurance and modified coinsurance agreement. See Note 1 and 10 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 other policyholder liabilities”benefits” and “Reinsurance recoverables,” respectively. Changes in the fair value are determined using valuation models as described in Note 10,5, and are recorded in “Realized investment gains (losses), net.”
Short-TermRECENT ACCOUNTING PRONOUNCEMENTS
Changes to U.S. GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("ASU") to the FASB Accounting Standards Codification. The Company considers the applicability and Long-Term Debt
Liabilities for short-termimpact of all ASU. ASU 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 the date of this filing. ASU not listed below were assessed and long-term debt are primarily carried at an amount equal to unpaid principal balance, net of unamortized discount or premium. Original-issue discount or premium and debt-issue costs are recognized as a component of interest expense over the period the debt is expecteddetermined to be outstanding,either not applicable or not material.
Adoption of ASU 2016-01
Effective January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities using a modified retrospective method. Adoption of this ASU impacted the interest methodCompany’s accounting and presentation related to equity investments. The most significant impact is that the changes in fair value of amortization. Interest expense is generally presentedequity securities previously classified as “available-for-sale” are to be reported in net income within “General“Asset administration fees and administrative expenses”other income” in the Company’s Statements of Operations. Interest expense may also be reported within “Net investment income” for certain activity, as prescribed by specialized industry guidance. Short-term debt is debt coming duePrior to this, the changes in the next twelve months, including that portion of debt otherwisefair value on equity securities classified as long-term. The short-term debt caption may exclude short-term debt items the Company intends to refinance on a long-term basis“available-for-sale” were reported in the near term. See Note 13 for additional information regarding short-term and long-term debt.AOCI.
Income Taxes
The Company is a memberimpacts of this ASU on the federal income tax return of PrudentialCompany’s Financial and primarily files separate company state and local tax returns. PursuantStatements can be categorized as follows: (1) Changes to the tax allocation arrangement with Prudentialpresentation within the Statements of Financial total federal income tax expense is determined on a separate company basis. Members with losses record tax benefitsPosition; (2) Cumulative-effect Adjustment Upon Adoption; and (3) Changes to the extent such losses are recognized in the consolidated federal tax provision.
Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes. A valuation allowance is recorded to reduce a deferred tax asset to the amount expected to be realized.
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. SomeAccounting Policies. Each 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 income statement. 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.components is described below.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
The application
(1) Changes to the presentation within the Statements of U.S. GAAP requiresFinancial Position
Because of the fundamental accounting changes as described in section "(3) Changes to Accounting Policies" below, the Company determined that changes to evaluate the recoverabilitypresentation of certain balances in the investment section of the Company’s deferred tax assets and establish a valuation allowance ifStatements of Financial Position were also necessary to reducemaintain clarity and logical presentation. The table below illustrates these changes by presenting the balances as previously reported in the Company’s deferred tax assets to an amount that is more likely than not to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so,Annual Report on Form 10-K for the amount of such valuation allowance. In evaluating the need for a valuation allowance the Company may consider 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 generatedyear ended December 31, 2017 and the timingreclassifications that were made, along with a footnote explanation of their reversal; (4) taxable income in prior carryback years as well as projected taxable earnings exclusiveeach reclassification.
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | As previously reported | | Reclassifications | | As currently reported |
| Statement of Financial Position Line Items | | (1) | | (2) | | (3) | |
| | (in thousands) |
| Fixed maturities, available-for-sale, at fair value | $ | 10,110,786 |
| | | | | | | | $ | 10,110,786 |
|
| *Fixed maturities, trading, at fair value | 0 |
| | | | 166,360 |
| | | | 166,360 |
|
| Trading account assets, at fair value | 181,717 |
| | | | (181,717 | ) | | | | 0 |
|
| Equity securities, available-for-sale, at fair value | 18 |
| | (18 | ) | | | | | | 0 |
|
| *Equity securities, at fair value | 0 |
| | 18 |
| | 15,357 |
| | | | 15,375 |
|
| Commercial mortgage and other loans | 1,387,012 |
| | | | | | | | 1,387,012 |
|
| Policy loans | 12,558 |
| | | | | | | | 12,558 |
|
| Short-term investments | 711,071 |
| | | | | | | | 711,071 |
|
| Other long-term investments | 335,811 |
| | | | | | (335,811 | ) | | 0 |
|
| *Other invested assets | 0 |
| | | | | | 335,811 |
| | 335,811 |
|
| Total investments | $ | 12,738,973 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 12,738,973 |
|
* - New line item effective January 1, 2018.
Strikethrough - Eliminated line item effective January 1, 2018.
| |
| (1) | Retitled “Equity securities, available-for-sale, at fair value” to “Equity securities, at fair value” as equity securities can no longer be described as available-for-sale. |
| |
| (2) | Eliminated the line item “Trading account assets, at fair value” and reclassified each component to another line item. |
| |
| (3) | Retitled “Other long-term investments” to “Other invested assets”. |
(2) Cumulative-effect Adjustment Upon Adoption
The provisions 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 strategiesASU 2016-01 require that the Company would employ to avoidapply the amendments through 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.
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, the first step being recognition. 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 of being 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.
The Company’s liability for income taxes includes the 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 ancumulative-effect adjustment to the liability for income taxes. The Company classifies all interest and penalties related to tax uncertaintiesStatements of Financial Position as income tax expense.
See Note 9 for additional information regarding income taxes.
Adoption of New Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (“FASB”) issued updated guidance (Accounting Standards Update (“ASU”) 2014-14, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure) requiring that mortgage loans be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The new guidance became effective for annual periods and interim periods within those annual periods that began after December 15, 2014, and was applied prospectively. Adoptionbeginning of the guidance did not have a significant effectfiscal year of adoption. The following table illustrates the impact on the Company’s financial position, resultsStatement of operations or financial statement disclosures.Financial Position as a result of recording this cumulative-effect adjustment on January 1, 2018.
In January 2014, the FASB issued updated guidance (ASU 2014-04, Receivables—Troubled Debt Restructuring by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure) for troubled debt restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan.The new guidance became effective for annual periods and interim periods within those annual periods that began after December 15, 2014, and was applied prospectively. Adoption of the guidance did not have a significant effect on the Company’s financial position, results of operations or financial statement disclosures.In December 2013, the FASB issued updated guidance (ASU 2013-12, Definition of a Public Business Entity—An Addition to the Master Glossary) establishing a single definition of a public entity for use in financial accounting and reporting guidance. This new guidance is effective for all current and future reporting periods and did not have a significant effect on the Company’s financial position, results of operations or financial statement disclosures. |
| | | |
| Summary of ASU 2016-01 Transition Impacts on the Statement |
| of Financial Position upon Adoption on January 1, 2018 |
| (in thousands) |
| | Increase / (Decrease) |
| Other invested assets | $ | 423 |
|
| Total assets | $ | 423 |
|
| Income taxes payable | 89 |
|
| Total liabilities | 89 |
|
| Accumulated other comprehensive income (loss) | (3 | ) |
| Retained earnings | 337 |
|
| Total equity | 334 |
|
| Total liabilities and equity | $ | 423 |
|
In July 2013, the FASB issued updated guidance (ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ) regarding the presentation of unrecognized tax benefits when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This new guidance became effective for interim or annual reporting periods that began after December 15, 2013, and was applied prospectively. Adoption of the guidance did not have a significant effect on the Company’s financial position, results of operations or financial statement disclosures.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
(3) Changes to Accounting Policies
The narrative description of our significant accounting policies at the beginning of this Note reflects our policies as of December 31, 2018, including policies associated with the adoption of ASU 2016-01.
Other ASU adopted during the twelve months ended December 31, 2018
|
| | | | | | |
| Standard | | Description | | Effective date and method of adoption | | Effect on the financial statements or other significant matters |
ASU 2014-09,
Revenue from Contracts with Customers (Topic 606) | | The ASU is based on the core principle that revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, and assets recognized from the costs to obtain or fulfill a contract with a customer. Revenue recognition for insurance contracts and financial instruments is explicitly scoped out of the standard. | | January 1, 2018 using the modified retrospective method which included a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.
| | Adoption of the ASU did not have an impact on the Company’s Financial Statements and Notes to the Financial Statements. |
ASU 2016-15,
Statement of Cash
Flows (Topic 230):
Classification of Certain Cash Receipts and Cash
Payments (a
Consensus of the
Emerging Issues
Task Force) | | This ASU addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard provides clarity on the treatment of eight specifically defined types of cash inflows and outflows. | | January 1, 2018 using the retrospective method (with early adoption permitted provided that all amendments are adopted in the same period). | | Adoption of the ASU did not have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements. |
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash | | In November 2016, the FASB issued this ASU to address diversity in practice from entities classifying and presenting transfers between cash and restricted cash as operating, investing, or financing activities, or as a combination of those activities in the Statement of Cash Flows. The ASU requires entities to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the Statement of Cash Flows. As a result, transfers between such categories will no longer be presented in the Statement of Cash Flows. | | January 1, 2018 using the retrospective method (with early adoption permitted). | | Adoption of the ASU did not have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements. |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | |
ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Loss)
| | In February 2018, this ASU was issued following the enactment of the Tax Act of 2017. This ASU allows an entity to elect a reclassification from AOCI to retained earnings for stranded effects resulting from the Tax Act of 2017.
| | January 1, 2019 with early adoption permitted. The ASU should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act of 2017 is recognized.
| | The Company early adopted the ASU effective January 1, 2018 and elected to apply the ASU in the period of adoption subsequent to recording the adoption impacts of ASU 2016-01 as described above. As a result, the Company reclassified stranded effects resulting from the Tax Act of 2017 by decreasing AOCI and increasing retained earnings, each by$36.7 million. Stranded effects unrelated to the Tax Act of 2017 are generally released from AOCI when an entire portfolio of the type of item related to the stranded effect is liquidated, sold or extinguished (i.e., portfolio approach). |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
ASU issued but not yet adopted as of December 31, 2018 — ASU 2018-12
In July 2013,ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASB issued new guidance (ASU 2013-10, Derivativeson August 15, 2018 and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes) regarding derivatives. The guidance permits the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate)is expected to be used as a U.S. benchmark interest rate for hedge accounting, in addition to the United States Treasury rate and London Inter-Bank Offered Rate (“LIBOR”). The guidance also removes the restriction on using different benchmark rates for similar hedges. The guidance is effective for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013, and was applied prospectively. Adoption of the guidance did not have a significant effect on the Company’s financial position, results of operations or financial statement disclosures.
In February 2013, the FASB issued updated guidance (ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income) regarding the presentation of comprehensive income. Under the guidance, an entity is required to separately present information about significant items reclassified out of accumulated other comprehensive income (“AOCI”) by component as well as changes in AOCI balances by component in either the financial statements or the notes to the financial statements. The guidance does not change the items that are reported in other comprehensive income, does not change when an item of other comprehensive income must be reclassified to net income, and does not amend any existing requirements for reporting net income or other comprehensive income. The guidance became effective for interim or annual reporting periods that began after December 15, 2012 and was applied prospectively. The disclosures required by this guidance are included in Note 3.
In December 2011 and January 2013, the FASB issued updated guidance (ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities) regarding the disclosure of recognized derivative instruments (including bifurcated embedded derivatives), repurchase agreements and securities borrowing/lending transactions that are offset in the statement of financial position or are subject to an enforceable master netting arrangement or similar agreement (irrespective of whether they are offset in the statement of financial position). The new guidance requires an entity to disclose information on both a gross and net basis about instruments and transactions within the scope of this guidance. The new guidance became effective for interim or annual reporting periods that began on or after January 1, 2013, and was applied retrospectively for all comparative periods presented. The disclosures required by this guidance are included in Note 11.
Future Adoption of New Accounting Pronouncements
In May 2014, the FASB issued updated guidance (ASU 2014-09, Revenue from Contracts with Customers (Topic 606)) on accounting for revenue recognition. The guidance is based on the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from cost incurred to obtain or fulfill a contract. Revenue recognition for insurance contracts is explicitly scoped out of the guidance. In August 2015, the FASB issued an update to defer the original effective date of this guidance. As a result of the deferral, the new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017, and must be applied using one of two retrospective application methods. Early adoption is permitted only for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently assessing the impact of the guidance on the Company’s financial position, results of operations and financial statement disclosures.
In August 2014, the FASB issued updated guidance (ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity) for measuring the financial assets and the financial liabilities of a consolidated collateralized financing entity. Under the guidance, an entity within scope is permitted to measure both the financial assets and financial liabilities of a consolidated collateralized financing entity based on either the fair value of the financial assets or the financial liabilities, whichever is more observable. If adopted, the guidance eliminates the measurement difference that exists when both are measured at fair value. The Company adopted the updated guidance effective January 1, 2016, and applied the modified retrospective method of adoption. This guidance did not have a significant impact on the Company’s financial position, resultsFinancial Statements and Notes to the Financial Statements. The ASU is effective January 1, 2021 (with early adoption permitted), and will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. Outlined below are four key areas of operations, or financial statement disclosures.change, although there are other changes not noted below. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter.
|
| | | | | | |
| 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 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 will apply the amendments to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) a full retrospective transition method. | | The options for method of adoption and the impacts of such methods are under assessment. |
| Discount rate assumption used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products | | Requires discount rate assumptions to be based on an upper-medium grade fixed income instrument yield and will be required to be updated each quarter with the impact recorded through OCI. | | 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 the beginning of the earliest period presented with the impact recorded as a cumulative effect adjustment to AOCI. | | Upon adoption, under either transition method, there will be an adjustment to AOCI as a result of remeasuring in force contract liabilities using current upper-medium grade fixed income instrument yields. The adjustment upon adoption will largely reflect the difference between the discount rate locked-in at contract inception versus current discount rates at transition. The magnitude of such adjustment is currently being assessed. |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | |
| 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 will apply the amendments to contracts in force 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 future policy benefits, as described above, it is required to also use a retrospective transition method for DAC and other balances. | | The options for method of adoption and the impacts of such methods are under assessment. Under the modified retrospective transition method, the Company would not expect a significant impact to the balance sheet, other than the impact of the removal of any related amounts in AOCI. |
| Market Risk Benefits | | Requires an entity to measure all market risk benefits (e.g., living benefit and death benefit guarantees associated with variable annuities) at fair value with changes in value attributable to changes in an entity’s NPR to be recognized in OCI. | | An entity will apply a retrospective transition method which will include a cumulative-effect adjustment on the balance sheet as of the earliest period presented. | | Upon adoption, the Company expects an impact to retained earnings for the difference between the fair value and carrying value of benefits not currently measured at fair value (e.g., Guaranteed Minimum Death Benefits ("GMDB") on variable annuities) and an impact from reclassifying the cumulative effect of changes in NPR from retained earnings to AOCI. The magnitude of such adjustments is currently being assessed. |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
In January 2016, the FASBOther ASU issued updated guidance (ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurementbut not yet adopted as of Financial Assets and Financial Liabilities) on the recognition and measurement of financial assets and financial liabilities. The guidance revises an entity’s accounting related to the classification and measurement of certain equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also amends certain disclosure requirements associated with the fair value of financial instruments. The new guidance is effective for annual periods and interim reporting periods within those annual periods beginning after December 15, 2017. Early adoption is not permitted except for the provisions related to the presentation of certain fair value changes for financial liabilities measured at fair value. The Company is currently assessing the impact of the guidance on the Company’s financial position, results of operations and financial statement disclosures.31, 2018
|
| | | | | | |
| Standard | | Description | | Effective date and method of adoption | | Effect on the financial statements or other significant matters |
ASU 2016-13,
Financial Instruments-Credit Losses (Topic 326):
Measurement of
Credit Losses on
Financial
Instruments | | This ASU provides a new current expected credit loss model to account for credit losses on certain financial assets and off-balance sheet exposures (e.g., loans held for investment, debt securities held to maturity, reinsurance receivables, net investments in leases and loan commitments). The model requires an entity to estimate lifetime credit losses related to such financial assets and exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The standard also modifies the current other-than-temporary impairment standard for available-for-sale debt securities to require the use of an allowance rather than a direct write down of the investment, and replaces existing standard for purchased credit deteriorated loans and debt securities. | | January 1, 2020 using the modified retrospective method which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption. However, prospective application is required for purchased credit deteriorated assets previously accounted for under ASU 310-30 and for debt securities for which an other-than-temporary impairment was recognized prior to the date of adoption. Early adoption is permitted beginning January 1, 2019. | | The Company is currently assessing the impact of the ASU on the Company’s Financial Statements and Notes to the Financial Statements. |
ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities | | This ASU requires certain premiums on callable debt securities to be amortized to the earliest call date.
| | January 1, 2019 using the modified retrospective method (with early adoption permitted) which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption. | | The Company does not expect the adoption of the ASU to have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements.
|
ASU 2017-12,
Derivatives and
Hedging (Topic
815): Targeted
Improvements to
Accounting for
Hedging Activities
| | This ASU makes targeted changes to the existing hedge accounting model to better portray the economics of an entity’s risk management activities and to simplify the use of hedge accounting.
| | January 1, 2019 using the modified retrospective method (with early adoption permitted) which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.
| | The Company does not expect the adoption of the ASU to have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements.
|
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
3. INVESTMENTS
Fixed Maturities and EquityMaturity Securities
The following tables provide information relating toset forth the composition of fixed maturities and equitymaturity securities (excluding investments classified as trading), as of the dates indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2015 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI (3) |
| | | | | | | | | | |
| | (in thousands) |
| Fixed maturities, available-for-sale | | | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 12,233 |
| | $ | 28 |
| | $ | 107 |
| | $ | 12,154 |
| | $ | 0 |
|
| Obligations of U.S. states and their political subdivisions | 20,116 |
| | 474 |
| | 378 |
| | 20,212 |
| | 0 |
|
| Foreign government bonds | 43,188 |
| | 6,123 |
| | 28 |
| | 49,283 |
| | 0 |
|
| Public utilities | 203,803 |
| | 15,969 |
| | 4,263 |
| | 215,509 |
| | 0 |
|
| All other U.S. public corporate securities | 818,627 |
| | 52,866 |
| | 7,717 |
| | 863,776 |
| | 0 |
|
| All other U.S. private corporate securities | 494,640 |
| | 30,996 |
| | 4,407 |
| | 521,229 |
| | 0 |
|
| All other foreign public corporate securities | 132,414 |
| | 3,781 |
| | 608 |
| | 135,587 |
| | 0 |
|
| All other foreign private corporate securities | 219,009 |
| | 2,487 |
| | 15,842 |
| | 205,654 |
| | 0 |
|
| Asset-backed securities (1) | 149,196 |
| | 2,786 |
| | 692 |
| | 151,290 |
| | (35 | ) |
| Commercial mortgage-backed securities | 211,429 |
| | 4,963 |
| | 652 |
| | 215,740 |
| | 0 |
|
| Residential mortgage-backed securities (2) | 128,971 |
| | 4,886 |
| | 19 |
| | 133,838 |
| | (7 | ) |
| Total fixed maturities, available-for-sale | $ | 2,433,626 |
| | $ | 125,359 |
| | $ | 34,713 |
| | $ | 2,524,272 |
| | $ | (42 | ) |
| Equity securities, available-for-sale | | | | | | | | | |
| Common stocks: | | | | | | | | | |
| Public utilities | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | |
| Mutual funds | 14 |
| | 3 |
| | 0 |
| | 17 |
| | |
| Total equity securities, available-for-sale | $ | 14 |
| | $ | 3 |
| | $ | 0 |
| | $ | 17 |
| | |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI(3) |
| | (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 5,240,519 |
| | $ | 20,065 |
| | $ | 376,493 |
| | $ | 4,884,091 |
| | $ | 0 |
|
| Obligations of U.S. states and their political subdivisions | 133,670 |
| | 621 |
| | 3,127 |
| | 131,164 |
| | 0 |
|
| Foreign government bonds | 199,044 |
| | 4,748 |
| | 4,156 |
| | 199,636 |
| | 0 |
|
| U.S. corporate public securities | 1,498,130 |
| | 26,425 |
| | 50,582 |
| | 1,473,973 |
| | 0 |
|
| U.S. corporate private securities | 1,070,400 |
| | 15,430 |
| | 22,877 |
| | 1,062,953 |
| | 0 |
|
| Foreign corporate public securities | 296,029 |
| | 1,888 |
| | 6,831 |
| | 291,086 |
| | 0 |
|
| Foreign corporate private securities | 829,588 |
| | 10,415 |
| | 27,771 |
| | 812,232 |
| | 0 |
|
| Asset-backed securities(1) | 505,862 |
| | 3,147 |
| | 3,765 |
| | 505,244 |
| | (16 | ) |
| Commercial mortgage-backed securities | 364,601 |
| | 2,770 |
| | 5,491 |
| | 361,880 |
| | 0 |
|
| Residential mortgage-backed securities(2) | 48,622 |
| | 1,290 |
| | 498 |
| | 49,414 |
| | 0 |
|
| Total fixed maturities, available-for-sale | $ | 10,186,465 |
| | $ | 86,799 |
| | $ | 501,591 |
| | $ | 9,771,673 |
| | $ | (16 | ) |
| |
| (1) | Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, auto loans, credit cards,equipment leases, education loans and other asset types. |
| |
| (2) | Includes publicly-traded agency pass-through securities and collateralized mortgage obligations. |
| |
| (3) | Represents the amount of OTTIunrealized losses remaining in AOCI, which were not included in earnings.from the impairment measurement date. Amount excludes $0.1$3.3 million of net unrealized gainslosses on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date. |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017(4) |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI(3) |
| | (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 5,059,168 |
| | $ | 9,109 |
| | $ | 236,627 |
| | $ | 4,831,650 |
| | $ | 0 |
|
| Obligations of U.S. states and their political subdivisions | 102,709 |
| | 2,089 |
| | 158 |
| | 104,640 |
| | 0 |
|
| Foreign government bonds | 133,859 |
| | 6,878 |
| | 432 |
| | 140,305 |
| | 0 |
|
| U.S. corporate public securities | 1,721,186 |
| | 90,953 |
| | 3,689 |
| | 1,808,450 |
| | 0 |
|
| U.S. corporate private securities | 1,166,682 |
| | 46,267 |
| | 5,005 |
| | 1,207,944 |
| | 0 |
|
| Foreign corporate public securities | 223,907 |
| | 6,291 |
| | 977 |
| | 229,221 |
| | 0 |
|
| Foreign corporate private securities | 730,449 |
| | 44,917 |
| | 3,806 |
| | 771,560 |
| | 0 |
|
| Asset-backed securities(1) | 341,277 |
| | 4,438 |
| | 128 |
| | 345,587 |
| | (17 | ) |
| Commercial mortgage-backed securities | 502,695 |
| | 7,334 |
| | 4,345 |
| | 505,684 |
| | 0 |
|
| Residential mortgage-backed securities(2) | 163,334 |
| | 2,950 |
| | 539 |
| | 165,745 |
| | (4 | ) |
| Total fixed maturities, available-for-sale | $ | 10,145,266 |
| | $ | 221,226 |
| | $ | 255,706 |
| | $ | 10,110,786 |
| | $ | (21 | ) |
| |
| (1) | Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, auto loans, credit cards, education loans and other asset types. |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2014 (4) |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI (3) |
| | | | | | | | | | |
| | (in thousands) |
| Fixed maturities, available-for-sale | | | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 6,324 |
| | $ | 22 |
| | $ | 10 |
| | $ | 6,336 |
| | $ | 0 |
|
| Obligations of U.S. states and their political subdivisions | 69,486 |
| | 1,323 |
| | 20 |
| | 70,789 |
| | 0 |
|
| Foreign government bonds | 29,738 |
| | 7,621 |
| | 4 |
| | 37,355 |
| | 0 |
|
| Public utilities | 198,277 |
| | 19,909 |
| | 1,593 |
| | 216,593 |
| | 0 |
|
| All other U.S. public corporate securities | 918,368 |
| | 81,539 |
| | 1,944 |
| | 997,963 |
| | 0 |
|
| All other U.S. private corporate securities | 512,793 |
| | 48,451 |
| | 528 |
| | 560,716 |
| | 0 |
|
| All other foreign public corporate securities | 110,909 |
| | 8,438 |
| | 35 |
| | 119,312 |
| | 0 |
|
| All other foreign private corporate securities | 201,040 |
| | 8,444 |
| | 2,384 |
| | 207,100 |
| | 0 |
|
| Asset-backed securities (1) | 144,324 |
| | 5,078 |
| | 391 |
| | 149,011 |
| | (39 | ) |
| Commercial mortgage-backed securities | 291,868 |
| | 10,523 |
| | 206 |
| | 302,185 |
| | (10 | ) |
| Residential mortgage-backed securities (2) | 126,126 |
| | 7,113 |
| | 6 |
| | 133,233 |
| | (36 | ) |
| Total fixed maturities, available-for-sale | $ | 2,609,253 |
| | $ | 198,461 |
| | $ | 7,121 |
| | $ | 2,800,593 |
| | $ | (85 | ) |
| Equity securities, available-for-sale | | | | | | | | | |
| Common stocks: | | | | | | | | | |
| Public utilities | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | |
| Mutual funds | 14 |
| | 3 |
| | 0 |
| | 17 |
| | |
| Total equity securities, available-for-sale | $ | 14 |
| | $ | 3 |
| | $ | 0 |
| | $ | 17 |
| | |
| |
(1) | Includes credit-tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans, and other asset types. |
| |
| (2) | Includes publicly-traded agency pass-through securities and collateralized mortgage obligations. |
| |
| (3) | Represents the amount of OTTIunrealized losses remaining in AOCI, which were not included in earnings.from the impairment measurement date. Amount excludes $0.1$12.3 million of net unrealized gains on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date. |
| |
| (4) | Prior period amounts are presented on a basis consistent with thehave been reclassified to conform to current period presentation. |
The following tables set forth the fair value and gross unrealized 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, 2018 |
| | Less Than Twelve Months | | Twelve Months or More | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| | (in thousands) |
| Fixed maturities, available-for-sale: | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 367,796 |
| | $ | 4,844 |
| | $ | 3,304,663 |
| | $ | 371,649 |
| | $ | 3,672,459 |
| | $ | 376,493 |
|
| Obligations of U.S. states and their political subdivisions | 25,764 |
| | 322 |
| | 83,950 |
| | 2,805 |
| | 109,714 |
| | 3,127 |
|
| Foreign government bonds | 98,437 |
| | 2,346 |
| | 58,975 |
| | 1,810 |
| | 157,412 |
| | 4,156 |
|
| U.S. corporate public securities | 627,589 |
| | 28,474 |
| | 386,599 |
| | 22,108 |
| | 1,014,188 |
| | 50,582 |
|
| U.S. corporate private securities | 269,545 |
| | 7,755 |
| | 422,498 |
| | 15,122 |
| | 692,043 |
| | 22,877 |
|
| Foreign corporate public securities | 97,367 |
| | 2,521 |
| | 107,286 |
| | 4,310 |
| | 204,653 |
| | 6,831 |
|
| Foreign corporate private securities | 373,891 |
| | 19,217 |
| | 116,743 |
| | 8,554 |
| | 490,634 |
| | 27,771 |
|
| Asset-backed securities | 358,668 |
| | 3,501 |
| | 24,529 |
| | 264 |
| | 383,197 |
| | 3,765 |
|
| Commercial mortgage-backed securities | 45,432 |
| | 355 |
| | 159,638 |
| | 5,136 |
| | 205,070 |
| | 5,491 |
|
| Residential mortgage-backed securities | 34 |
| | 1 |
| | 13,775 |
| | 497 |
| | 13,809 |
| | 498 |
|
| Total fixed maturities, available-for-sale | $ | 2,264,523 |
| | $ | 69,336 |
| | $ | 4,678,656 |
| | $ | 432,255 |
| | $ | 6,943,179 |
| | $ | 501,591 |
|
| |
| |
| | |
| | December 31, 2017(1) |
| | Less Than Twelve Months | | Twelve Months or More | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| | (in thousands) |
| Fixed maturities, available-for-sale: | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 13,174 |
| | $ | 23 |
| | $ | 4,550,472 |
| | $ | 236,604 |
| | $ | 4,563,646 |
| | $ | 236,627 |
|
| Obligations of U.S. states and their political subdivisions | 6,669 |
| | 26 |
| | 13,311 |
| | 132 |
| | 19,980 |
| | 158 |
|
| Foreign government bonds | 37,466 |
| | 428 |
| | 143 |
| | 4 |
| | 37,609 |
| | 432 |
|
| U.S. corporate public securities | 234,798 |
| | 1,181 |
| | 126,339 |
| | 2,508 |
| | 361,137 |
| | 3,689 |
|
| U.S. corporate private securities | 278,203 |
| | 3,383 |
| | 83,365 |
| | 1,622 |
| | 361,568 |
| | 5,005 |
|
| Foreign corporate public securities | 76,526 |
| | 637 |
| | 23,186 |
| | 340 |
| | 99,712 |
| | 977 |
|
| Foreign corporate private securities | 78,200 |
| | 536 |
| | 103,758 |
| | 3,270 |
| | 181,958 |
| | 3,806 |
|
| Asset-backed securities | 30,234 |
| | 128 |
| | 0 |
| | 0 |
| | 30,234 |
| | 128 |
|
| Commercial mortgage-backed securities | 113,423 |
| | 1,225 |
| | 129,458 |
| | 3,120 |
| | 242,881 |
| | 4,345 |
|
| Residential mortgage-backed securities | 26,916 |
| | 166 |
| | 24,833 |
| | 373 |
| | 51,749 |
| | 539 |
|
| Total fixed maturities, available-for-sale | $ | 895,609 |
| | $ | 7,733 |
| | $ | 5,054,865 |
| | $ | 247,973 |
| | $ | 5,950,474 |
| | $ | 255,706 |
|
| |
| (1) | Prior period amounts have been reclassified to conform to current period presentation. |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
As of December 31, 2018 and 2017, the gross unrealized losses on fixed maturity securities were composed of $485.7 million and $253.0 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 $15.9 million and $2.7 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of December 31, 2018, the $432.3 million of gross unrealized losses of twelve months or more were concentrated in U.S. government bonds and in the Company's corporate securities within the finance, consumer non-cyclical and capital goods sectors. As of December 31, 2017, the $248.0 million of gross unrealized losses of twelve months or more were concentrated in U.S. government bonds, commercial mortgage-backed securities and in the Company's corporate securities within the consumer non-cyclical and finance sectors. In accordance with its policy described in Note 2, the Company concluded that an adjustment to earnings for OTTI for these fixed maturity securities was not warranted at either December 31, 2018 or 2017. These conclusions were based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to general credit spread widening, increases in interest rates and foreign currency exchange rate movements. As of December 31, 2018, 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, at December 31, 2015, are as follows:
| | | | Available-for-Sale | December 31, 2018 |
| | Amortized Cost | | Fair Value | Amortized Cost | | Fair Value |
| | | | | (in thousands) |
| | (in thousands) | |
| Fixed maturities, available-for-sale: | | | | |
| Due in one year or less | $ | 206,605 |
| | $ | 201,762 |
| $ | 175,825 |
| | $ | 176,018 |
|
| Due after one year through five years | 812,798 |
| | 840,843 |
| 1,167,458 |
| | 1,162,211 |
|
| Due after five years through ten years | 524,967 |
| | 548,689 |
| 1,335,274 |
| | 1,332,143 |
|
| Due after ten years | 399,660 |
| | 432,110 |
| 6,588,823 |
| | 6,184,763 |
|
| Asset-backed securities | 149,196 |
| | 151,290 |
| 505,862 |
| | 505,244 |
|
| Commercial mortgage-backed securities | 211,429 |
| | 215,740 |
| 364,601 |
| | 361,880 |
|
| Residential mortgage-backed securities | 128,971 |
| | 133,838 |
| 48,622 |
| | 49,414 |
|
| Total | $ | 2,433,626 |
| | $ | 2,524,272 |
| |
| Total fixed maturities, available-for-sale | | $ | 10,186,465 |
| | $ | 9,771,673 |
|
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 aredo not due athave a single maturity date.
The following table depictssets forth the sources of fixed maturity and equity security proceeds and related investment gains (losses), as well as losses on impairments of both fixed maturities, and equity securities:for the periods indicated:
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| | | | | | |
| | (in thousands) |
| Fixed maturities, available-for-sale | |
| Proceeds from sales | $ | 33,604 |
| | $ | 308,458 |
| | $ | 314,415 |
|
| Proceeds from maturities/repayments | 453,016 |
| | 681,426 |
| | 1,175,680 |
|
| Gross investment gains from sales, prepayments and maturities | 5,788 |
| | 18,110 |
| | 18,619 |
|
| Gross investment losses from sales and maturities | (937 | ) | | (3,404 | ) | | (9,824 | ) |
| Equity securities, available-for-sale | | | | | |
| Proceeds from sales | $ | 0 |
| | $ | 192 |
| | $ | 14 |
|
| Gross investment gains from sales | 0 |
| | 1 |
| | 10 |
|
| Fixed maturity and equity security impairments | | | | | |
| Net writedowns for other-than-temporary impairment losses on fixed maturities recognized in earnings (1) | $ | (20 | ) | | $ | 0 |
| | $ | 0 |
|
| Writedowns for impairments on equity securities | 0 |
| | 0 |
| | 0 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in thousands) |
| Fixed maturities, available-for-sale: | |
| Proceeds from sales(1) | $ | 2,126,886 |
| | $ | 517,743 |
| | $ | 3,577,346 |
|
| Proceeds from maturities/prepayments | 404,679 |
| | 630,140 |
| | 495,465 |
|
| Gross investment gains from sales and maturities | 21,129 |
| | 8,992 |
| | 98,095 |
|
| Gross investment losses from sales and maturities | (98,047 | ) | | (3,047 | ) | | (5,412 | ) |
| OTTI recognized in earnings(2) | (6,813 | ) | | (9,122 | ) | | (6,499 | ) |
| |
| (1) | Includes $(2.9) million, $2.5 million and $0.6 million of non-cash related proceeds due to the timing of trade settlements for the years ended December 31, 2018, 2017 and 2016, respectively. |
| |
| (2) | Excludes the portion of OTTI recordedamounts remaining in “Other comprehensive income (loss),”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 the impairment. |
As discussed in Note 2, a portionPrudential Annuities Life Assurance Corporation
Notes to impairment. Any remaining difference between the fair value and amortized cost is recognized in OCI. The following table sets forth the amount of pre-tax credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts.
Financial Statements - (Continued)
|
| | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 |
| | | | |
| | (in thousands) |
| Balance, beginning of period | $ | 93 |
| | $ | 1,800 |
|
| Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period | (17 | ) | | (1,682 | ) |
| Additional credit loss impairments recognized in the current period on securities previously impaired | 20 |
| | 0 |
|
| Increases due to the passage of time on previously recorded credit losses | 0 |
| | 0 |
|
| Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected | (10 | ) | | (25 | ) |
| Balance, end of period | $ | 86 |
| | $ | 93 |
|
Trading Account Assets
The following table sets forth a rollforward of pre-tax amounts remaining in OCI related to fixed maturity securities with credit loss impairments recognized in earnings, for the composition of “Trading account assets” as of the datesperiods indicated:
|
| | | | | | | | | | | | | | | |
| | December 31, 2015 | | December 31, 2014 |
| | Cost | | Fair Value | | Cost | | Fair Value |
| | | | | | | | |
| | (in thousands) |
| Total trading account assets - Equity securities | $ | 5,618 |
| | $ | 5,653 |
| | $ | 5,471 |
| | $ | 6,131 |
|
|
| | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| Credit loss impairments: | | | |
| Balance, beginning of period | $ | 792 |
| | $ | 1,325 |
|
| New credit loss impairments | 0 |
| | 366 |
|
| Additional credit loss impairments on securities previously impaired | 0 |
| | 606 |
|
| Increases due to the passage of time on previously recorded credit losses | 3 |
| | 10 |
|
| Reductions for securities which matured, paid down, prepaid or were sold during the period | (40 | ) | | (21 | ) |
| Reductions for securities impaired to fair value during the period(1) | (963 | ) | | (1,481 | ) |
| Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected | (1 | ) | | (13 | ) |
| Balance, end of period | $ | (209 | ) | | $ | 792 |
|
| |
| (1) | Represents circumstances where the Company determined in the current period that it intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of the security's amortized cost. |
Equity Securities
The net change in unrealized gains (losses) from trading account assetsequity securities, still held at period end, recorded within “Asset administration fees and other income (loss),” was $(0.6)$(1.9) million $(0.9)during the year ended December 31, 2018. The net change in unrealized gains (losses) from equity securities, still held at period end, recorded within “Other comprehensive income (loss),” was $0.4 million and $0.8$(0.4) million during the years ended December 31, 2015, 20142017 and 2013,2016, respectively.
Commercial Mortgage and Other Loans
The Company’s commercialfollowing table sets forth the composition of “Commercial mortgage and other loans, are comprised as follows,” as of the dates indicated:
|
| | | | | | | | | | | | | | |
| | | December 31, 2018 | | December 31, 2017 |
| | | Amount (in thousands) | | % of Total | | Amount (in thousands) | | % of Total |
| Commercial mortgage and agricultural property loans by property type: | | | | | | | | |
| Apartments/Multi-Family | | $ | 304,644 |
| | 22.4 | % | | $ | 348,718 |
| | 25.0 | % |
| Hospitality | | 3,633 |
| | 0.3 |
| | 3,782 |
| | 0.3 |
|
| Industrial | | 355,758 |
| | 26.2 |
| | 327,987 |
| | 23.6 |
|
| Office | | 305,537 |
| | 22.5 |
| | 294,072 |
| | 21.2 |
|
| Other | | 137,781 |
| | 10.2 |
| | 139,362 |
| | 10.0 |
|
| Retail | | 194,646 |
| | 14.4 |
| | 216,544 |
| �� | 15.6 |
|
| Total commercial mortgage loans | | 1,301,999 |
| | 96.0 |
| | 1,330,465 |
| | 95.7 |
|
| Agricultural property loans | | 54,375 |
| | 4.0 |
| | 59,197 |
| | 4.3 |
|
| Total commercial mortgage and agricultural property loans by property type | | 1,356,374 |
| | 100.0 | % | | 1,389,662 |
| | 100.0 | % |
| Allowance for credit losses | | (2,896 | ) | | | | (2,650 | ) | | |
| Total commercial mortgage and other loans | | $ | 1,353,478 |
| | | | $ | 1,387,012 |
| | |
As of December 31, 2018, the commercial mortgage and agricultural property loans were secured by properties geographically dispersed throughout the United States (with the largest concentrations in California (27%), Texas (14%) and New York (7%)) and included loans secured by properties in Europe (11%) and Australia (3%).
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | |
| | December 31, 2015 | | December 31, 2014 |
| | Amount (in thousands) | | % of Total | | Amount (in thousands) | | % of Total |
| Commercial mortgage and agricultural property loans by property type: | | | | | | | |
| Apartments/Multi-Family | $ | 136,190 |
| | 31.2 | % | | $ | 143,057 |
| | 34.0 | % |
| Industrial | 58,621 |
| | 13.5 |
| | 87,088 |
| | 20.7 |
|
| Retail | 67,358 |
| | 15.5 |
| | 72,226 |
| | 17.2 |
|
| Office | 100,357 |
| | 23.0 |
| | 44,621 |
| | 10.6 |
|
| Other | 18,660 |
| | 4.3 |
| | 14,119 |
| | 3.4 |
|
| Hospitality | 4,963 |
| | 1.1 |
| | 5,081 |
| | 1.2 |
|
| Total commercial mortgage loans | 386,149 |
| | 88.6 |
| | 366,192 |
| | 87.1 |
|
| Agricultural property loans | 49,926 |
| | 11.4 |
| | 54,113 |
| | 12.9 |
|
| Total commercial mortgage and agricultural property loans by property type | 436,075 |
| | 100.0 | % | | 420,305 |
| | 100.0 | % |
| Valuation allowance | (643 | ) | | | | (482 | ) | | |
| Total net commercial mortgage and agricultural property loans by property type | 435,432 |
| | | | 419,823 |
| | |
| Other loans | | | | | | | |
| Uncollateralized loans | 2,740 |
| | | | 2,740 |
| | |
| Valuation allowance | 0 |
| | | | 0 |
| | |
| Total net other loans | 2,740 |
| | | | 2,740 |
| | |
| Total commercial mortgage and other loans | $ | 438,172 |
| | | | $ | 422,563 |
| | |
The commercial mortgage and agricultural property loans are geographically dispersed throughoutfollowing table sets forth the United States (with the largest concentrations in California (22%) and New York (12%)) and include loans secured by properties in Europe and Australia at December 31, 2015.
Activityactivity in the allowance for credit losses for all commercial mortgage and other loans, as of the dates indicated, is as follows:indicated:
|
| | | | | | | | | | | |
| | December 31, 2015 | | December 31, 2014 | | December 31, 2013 |
| | | | | | |
| | (in thousands) |
| Allowance for credit losses, beginning of year | $ | 482 |
| | $ | 1,256 |
| | $ | 2,177 |
|
| Addition to (release of) allowance for losses | 161 |
| | (774 | ) | | (921 | ) |
| Total ending balance (1) | $ | 643 |
| | $ | 482 |
| | $ | 1,256 |
|
|
| | | | | | | | | | | |
| | Commercial Mortgage Loans | | Agricultural Property Loans | | Total |
| | (in thousands) |
| Balance at December 31, 2015 | $ | 622 |
| | $ | 21 |
| | $ | 643 |
|
| Addition to (release of) allowance for credit losses | 1,645 |
| | 1 |
| | 1,646 |
|
| Charge-offs, net of recoveries | 0 |
| | 0 |
| | 0 |
|
| Balance at December 31, 2016 | 2,267 |
| | 22 |
| | 2,289 |
|
| Addition to (release of) allowance for credit losses | 349 |
| | 12 |
| | 361 |
|
| Charge-offs, net of recoveries | 0 |
| | 0 |
| | 0 |
|
| Balance at December 31, 2017 | 2,616 |
| | 34 |
| | 2,650 |
|
| Addition to (release of) allowance for credit losses | 245 |
| | 1 |
| | 246 |
|
| Charge-offs, net of recoveries | 0 |
| | 0 |
| | 0 |
|
| Balance at December 31, 2018 | $ | 2,861 |
| | $ | 35 |
| | $ | 2,896 |
|
| |
(1) | Agricultural loans represent less than $0.1 million of the ending allowance as of December 31, 2015, 2014 and 2013. |
The following tables set forth the allowance for credit losses and the recorded investment in commercial mortgage and other loans, as of the dates indicated:
|
| | | | | | | |
| | December 31, 2015 | | December 31, 2014 |
| | | | |
| | (in thousands) |
| Allowance for Credit Losses: | | | |
| Individually evaluated for impairment (1) | $ | 0 |
| | $ | 0 |
|
| Collectively evaluated for impairment (2) | 643 |
| | 482 |
|
| Total ending balance | $ | 643 |
| | $ | 482 |
|
| Recorded Investment (3): | | | |
| Gross of reserves: individually evaluated for impairment (1) | $ | 0 |
| | $ | 0 |
|
| Gross of reserves: collectively evaluated for impairment (2) | 438,815 |
| | 423,045 |
|
| Total ending balance, gross of reserves | $ | 438,815 |
| | $ | 423,045 |
|
|
| | | | | | | | | | | |
| | December 31, 2018 |
| | Commercial Mortgage Loans | | Agricultural Property Loans | | Total |
| | (in thousands) |
| Allowance for credit losses: | | | | | |
| Individually evaluated for impairment | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| Collectively evaluated for impairment | 2,861 |
| | 35 |
| | 2,896 |
|
| Total ending balance(1) | $ | 2,861 |
| | $ | 35 |
| | $ | 2,896 |
|
| Recorded investment(2): | | | | | |
| Individually evaluated for impairment | $ | 0 |
| | $ | 3,439 |
| | $ | 3,439 |
|
| Collectively evaluated for impairment | 1,301,999 |
| | 50,936 |
| | 1,352,935 |
|
| Total ending balance(1) | $ | 1,301,999 |
| | $ | 54,375 |
| | $ | 1,356,374 |
|
| |
| (1) | ThereAs of December 31, 2018, there were no loans individually evaluated for impairment at both December 31, 2015 and 2014.acquired with deteriorated credit quality. |
| |
| (2) | Agricultural loans collectively evaluated for impairment had a recorded investment of $50 million and $54 million as of December 31, 2015 and 2014, respectively, and a related allowance of less than $0.1 million at both period ends. Uncollateralized loans collectively evaluated for impairment had a recorded investment of $3 million at both December 31, 2015 and 2014 and no related allowance at both period ends. |
| |
(3) | Recorded investment reflects the balance sheet carrying value gross of related allowance. |
Impaired loans include those loans for which it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. There were no impaired commercial mortgage and other loans identified in management’s specific review of probable loan losses and no related allowance for losses at both December 31, 2015 and 2014.
|
| | | | | | | | | | | |
| | December 31, 2017 |
| | Commercial Mortgage Loans | | Agricultural Property Loans | | Total |
| | (in thousands) |
| Allowance for credit losses: | | | | | |
| Individually evaluated for impairment | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| Collectively evaluated for impairment | 2,616 |
| | 34 |
| | 2,650 |
|
| Total ending balance(1) | $ | 2,616 |
| | $ | 34 |
| | $ | 2,650 |
|
| Recorded investment(2): | | | | | |
| Individually evaluated for impairment | $ | 1,571 |
| | $ | 4,865 |
| | $ | 6,436 |
|
| Collectively evaluated for impairment | 1,328,894 |
| | 54,332 |
| | 1,383,226 |
|
| Total ending balance(1) | $ | 1,330,465 |
| | $ | 59,197 |
| | $ | 1,389,662 |
|
| |
| (1) | As of December 31, 2017, there were no loans acquired with deteriorated credit quality. |
| |
| (2) | Recorded investment reflects the carrying value gross of related allowance. |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Impaired commercial mortgage and other loans with no allowance for losses are loans in which the fair value of the collateral or the net present value of the loans’ expected future cash flows equals or exceeds the recorded investment. The Company had no such loans at both December 31, 2015 and 2014. See Note 2 for information regarding the Company’s accounting policies for non-performing loans.
The following tables set forth certain key credit quality indicators as of December 31, 2015for commercial mortgage and 2014,agricultural property loans, based upon the recorded investment gross of allowance for credit losses.
Total commercial mortgage and agricultural property loanslosses, as of the dates indicated:
| | | | Debt Service Coverage Ratio - December 31, 2015 | December 31, 2018 |
| Greater than 1.2X | | 1.0X to <1.2X | | Less than 1.0X | | Total | Debt Service Coverage Ratio | | |
| | | | | | | | | > 1.2X | | 1.0X to <1.2X | | < 1.0X | | Total |
| | | | (in thousands) | | | | | (in thousands) | | |
| Loan-to-Value Ratio | | | | | | | | |
| Loan-to-Value Ratio: | | | | | | | | |
| 0%-59.99% | $ | 303,215 |
| | $ | 9,073 |
| | $ | 992 |
| | $ | 313,280 |
| $ | 709,342 |
| | $ | 14,814 |
| | $ | 345 |
| | $ | 724,501 |
|
| 60%-69.99% | 95,977 |
| | 0 |
| | 0 |
| | 95,977 |
| 442,308 |
| | 23,260 |
| | 0 |
| | 465,568 |
|
| 70%-79.99% | 25,401 |
| | 1,417 |
| | 0 |
| | 26,818 |
| 156,049 |
| | 7,236 |
| | 0 |
| | 163,285 |
|
| Greater than 80% | 0 |
| | 0 |
| | 0 |
| | 0 |
| |
| 80% or greater | | 2,000 |
| | 1,020 |
| | 0 |
| | 3,020 |
|
| Total commercial mortgage and agricultural property loans | $ | 424,593 |
| | $ | 10,490 |
| | $ | 992 |
| | $ | 436,075 |
| $ | 1,309,699 |
| | $ | 46,330 |
| | $ | 345 |
| | $ | 1,356,374 |
|
| | | | Debt Service Coverage Ratio - December 31, 2014 | December 31, 2017 |
| Greater than 1.2X | | 1.0X to <1.2X | | Less than 1.0X | | Total | Debt Service Coverage Ratio | | |
| | | | | | | | | > 1.2X | | 1.0X to <1.2X | | < 1.0X | | Total |
| | | | (in thousands) | | | | | (in thousands) | | |
| Loan-to-Value Ratio | | | | | | | | |
| Loan-to-Value Ratio: | | | | | | | | |
| 0%-59.99% | $ | 262,853 |
| | $ | 4,295 |
| | $ | 10,489 |
| | $ | 277,637 |
| $ | 667,338 |
| | $ | 14,426 |
| | $ | 4,566 |
| | $ | 686,330 |
|
| 60%-69.99% | 115,708 |
| | 468 |
| | 0 |
| | 116,176 |
| 503,922 |
| | 1,329 |
| | 0 |
| | 505,251 |
|
| 70%-79.99% | 25,034 |
| | 1,458 |
| | 0 |
| | 26,492 |
| 182,368 |
| | 13,281 |
| | 0 |
| | 195,649 |
|
| Greater than 80% | 0 |
| | 0 |
| | 0 |
| | 0 |
| |
| 80% or greater | | 1,387 |
| | 0 |
| | 1,045 |
| | 2,432 |
|
| Total commercial mortgage and agricultural property loans | $ | 403,595 |
| | $ | 6,221 |
| | $ | 10,489 |
| | $ | 420,305 |
| $ | 1,355,015 |
| | $ | 29,036 |
| | $ | 5,611 |
| | $ | 1,389,662 |
|
As of both December 31, 2015 and 2014, all commercial mortgage and other loans were in current status.
The Company defines current in itsfollowing tables set forth an aging of past due commercial mortgage and other loans as less than 30 days past due.
Basedbased upon the recorded investment gross of allowance for credit losses, there were noas well as the amount of commercial mortgage and other loans in nonaccrualon non-accrual status, as of both December 31, 2015 and 2014. Nonaccrual loans are those on which the accrual of interest has been suspended after the loans become 90 days delinquent as to principal or interest payments, or earlier when the Company has doubts about collectability and loans for which a loan-specific reserve has been established. See Note 2 for further discussion regarding nonaccrual status loans.dates indicated:
For the years ended December 31, 2015 and 2014, there were no commercial mortgage and other loans acquired, other than those through direct origination, nor were there any commercial mortgage and other loans sold.The Company’s commercial mortgage and other loans may occasionally be involved in a troubled debt restructuring. As of both December 31, 2015 and 2014, the Company had no significant commitments to borrowers that have been involved in a troubled debt restructuring. As of both December 31, 2015 and 2014, there were no new troubled debt restructurings related to commercial mortgage and other loans, and no payment defaults on commercial mortgage and other loans that were modified as a troubled debt restructuring within the twelve months preceding. See Note 2 for additional information relating to the accounting for troubled debt restructurings. |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | 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 | $ | 1,301,999 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 1,301,999 |
| | $ | 0 |
|
| Agricultural property loans | 54,375 |
| | 0 |
| | 0 |
| | 0 |
| | 54,375 |
| | 0 |
|
| Total | $ | 1,356,374 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 1,356,374 |
| | $ | 0 |
|
As of both December 31, 2015 and 2014, the Company did not have any foreclosed residential real estate property.
| |
| (1) | As of December 31, 2018, 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. |
Other Long-Term Investments |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | 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 | $ | 1,330,465 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 1,330,465 |
| | $ | 0 |
|
| Agricultural property loans | 59,197 |
| | 0 |
| | 0 |
| | 0 |
| | 59,197 |
| | 0 |
|
| Total | $ | 1,389,662 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 1,389,662 |
| | $ | 0 |
|
The following table sets forth the composition of “Other long-term investments” at December 31, for the years indicated.
| |
| (1) | As of December 31, 2017, 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. |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
For the years ended December 31, 2018 and 2017, there were no commercial mortgage and other loans acquired, other than those through direct origination, and there were $96 million and $129 million, respectively, of commercial mortgage and other loans sold.
Other Invested Assets
The following table sets forth the composition of “Other invested assets,” as of the dates indicated:
|
| | | | | | | |
| | 2015 | | 2014 |
| | | | |
| | (in thousands) |
| Joint ventures and limited partnerships | $ | 66,890 |
| | $ | 68,225 |
|
| Derivatives | 115,267 |
| | 94,558 |
|
| Total other long-term investments | $ | 182,157 |
| | $ | 162,783 |
|
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| LPs/LLCs: | | | |
| Equity method: | | | |
| Private equity | $ | 23,844 |
| | $ | 25,801 |
|
| Hedge funds | 179,014 |
| | 106,474 |
|
| Real estate-related | 94,738 |
| | 46,043 |
|
| Subtotal equity method | 297,596 |
| | 178,318 |
|
| Fair value: | | | |
| Private equity | 4,142 |
| | 3,500 |
|
| Hedge funds | 263 |
| | 302 |
|
| Real estate-related | 3,562 |
| | 2,512 |
|
| Subtotal fair value(1) | 7,967 |
| | 6,314 |
|
| Total LPs/LLCs | 305,563 |
| | 184,632 |
|
| Derivative instruments | 42,978 |
| | 151,179 |
|
| Total other invested assets(2) | $ | 348,541 |
| | $ | 335,811 |
|
| |
| (1) | As of December 31, 2017, $6.0 million was accounted for using the cost method. |
| |
| (2) | Prior period amounts have been reclassified to conform to current period presentation. For additional information, see Note 2. |
As of both December 31, 20152018 and 2014,2017, the Company had no significant equity method investments.
Net Investment Income
Net
The following table sets forth “Net investment incomeincome” by investment type, for the years ended December 31, was from the following sources:periods indicated:
|
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| | | | | | |
| | (in thousands) |
| Fixed maturities, available-for-sale | $ | 115,998 |
| | $ | 140,114 |
| | $ | 191,043 |
|
| Equity securities, available-for-sale | 0 |
| | 0 |
| | 0 |
|
| Trading account assets | 349 |
| | 325 |
| | 342 |
|
| Commercial mortgage and other loans | 22,696 |
| | 21,802 |
| | 28,463 |
|
| Policy loans | 794 |
| | 739 |
| | 675 |
|
| Short-term investments | 396 |
| | 281 |
| | 323 |
|
| Other long-term investments | 4,638 |
| | 6,492 |
| | 3,601 |
|
| Gross investment income | 144,871 |
| | 169,753 |
| | 224,447 |
|
| Less: investment expenses | (5,441 | ) | | (5,742 | ) | | (6,564 | ) |
| Net investment income | $ | 139,430 |
| | $ | 164,011 |
| | $ | 217,883 |
|
There were no non-income producing assets as of December 31, 2015. Non-income producing assets represent investments that have not produced income for the twelve months preceding December 31, 2015.
As of both December 31, 2015 and 2014, the Company had no low income housing tax credit investments. |
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in thousands) |
| Fixed maturities, available-for-sale | $ | 317,726 |
| | $ | 332,148 |
| | $ | 249,496 |
|
| Fixed maturities, trading | 5,184 |
| | 4,360 |
| | 3,143 |
|
| Equity securities, at fair value | 678 |
| | 567 |
| | 330 |
|
| Commercial mortgage and other loans | 51,040 |
| | 48,598 |
| | 40,258 |
|
| Policy loans | 737 |
| | 1,069 |
| | 444 |
|
| Short-term investments and cash equivalents | 28,645 |
| | 31,505 |
| | 26,831 |
|
| Other invested assets | 13,733 |
| | 20,626 |
| | 29,160 |
|
| Gross investment income | 417,743 |
| | 438,873 |
| | 349,662 |
|
| Less: investment expenses | (14,935 | ) | | (16,064 | ) | | (11,292 | ) |
| Net investment income(1) | $ | 402,808 |
| | $ | 422,809 |
| | $ | 338,370 |
|
| |
| (1) | Prior period amounts have been reclassified to conform to current period presentation. |
Realized Investment Gains (Losses), Net
Realized investment gains (losses), net, for the years ended December 31, were from the following sources:
|
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| | | | | | |
| | (in thousands) |
| Fixed maturities | $ | 4,831 |
| | $ | 14,706 |
| | $ | 8,795 |
|
| Equity securities | 0 |
| | 1 |
| | 10 |
|
| Commercial mortgage and other loans | (161 | ) | | 774 |
| | 933 |
|
| Derivatives | 1,381 |
| | (8,113 | ) | | (194,055 | ) |
| Other | 1 |
| | 0 |
| | (34 | ) |
| Realized investment gains (losses), net | $ | 6,052 |
| | $ | 7,368 |
| | $ | (184,351 | ) |
Accumulated Other Comprehensive Income (Loss)
The balance of and changes in each component of "Accumulated other comprehensive income (loss)” for the years ended December 31, are as follows:
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
The carrying value of non-income producing assets included $5.2 million in available-for-sale fixed maturities as of December 31, 2018. Non-income producing assets represent investments that had not produced income for the twelve months preceding December 31, 2018.
Realized Investment Gains (Losses), Net
The following table sets forth “Realized investment gains (losses), net” by investment type, for the periods indicated:
|
| | | | | | | | | | | |
| | Accumulated Other Comprehensive Income (Loss) |
| | Foreign Currency Translation Adjustment | | Net Unrealized Investment Gains (Losses) (1) | | Total Accumulated Other Comprehensive Income (Loss) |
| | | | | | |
| | (in thousands) |
| Balance at, December 31, 2012 | $ | 7 |
| | $ | 147,280 |
| | $ | 147,287 |
|
| Change in component during period (2) | 3 |
| | (76,423 | ) | | (76,420 | ) |
| Balance at, December 31, 2013 | $ | 10 |
| | $ | 70,857 |
| | $ | 70,867 |
|
| Change in component during period (2) | (40 | ) | | 13,795 |
| | 13,755 |
|
| Balance at, December 31, 2014 | $ | (30 | ) | | $ | 84,652 |
| | $ | 84,622 |
|
| Change in other comprehensive income before reclassifications | (54 | ) | | (54,279 | ) | | (54,333 | ) |
| Amounts reclassified from AOCI | 0 |
| | (4,831 | ) | | (4,831 | ) |
| Income tax benefit (expense) | 19 |
| | 20,689 |
| | 20,708 |
|
| Balance at, December 31, 2015 | $ | (65 | ) | | $ | 46,231 |
| | $ | 46,166 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in thousands) |
| Fixed maturities(1) | $ | (83,731 | ) | | $ | (3,177 | ) | | $ | 86,184 |
|
| Commercial mortgage and other loans | 128 |
| | (840 | ) | | (2,326 | ) |
| LPs/LLCs | 0 |
| | (39 | ) | | (648 | ) |
| Derivatives | 967,503 |
| | (801,429 | ) | | (3,526,514 | ) |
| Other invested assets | 123 |
| | 0 |
| | 0 |
|
| Short-term investments and cash equivalents | 50 |
| | 85 |
| | 544 |
|
| Realized investment gains (losses), net | $ | 884,073 |
| | $ | (805,400 | ) | | $ | (3,442,760 | ) |
| |
| (1) | Includes cash flow hedges of $14.8 million, $5.0 million,fixed maturity securities classified as available-for-sale and $(4.0) millionexcludes fixed maturity securities classified as of December 31, 2015, 2014,trading. |
Net Unrealized Gains (Losses) on Investments within AOCI
The following table sets forth net unrealized gains (losses) on investments, as of the dates indicated:
|
| | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in thousands) |
| Fixed maturity securities, available-for-sale — with OTTI | $ | (3,334 | ) | | $ | 12,311 |
| | $ | (1,261 | ) |
| Fixed maturity securities, available-for-sale — all other | (411,458 | ) | | (46,791 | ) | | (454,274 | ) |
| Equity securities, available-for-sale(1) | 0 |
| | 4 |
| | (347 | ) |
| Derivatives designated as cash flow hedges(2) | (3,849 | ) | | (25,851 | ) | | 11,745 |
|
| Affiliated notes | 658 |
| | 829 |
| | 1,181 |
|
| Other investments | 1,074 |
| | 86 |
| | (619 | ) |
| Net unrealized gains (losses) on investments | $ | (416,909 | ) | | $ | (59,412 | ) | | $ | (443,575 | ) |
| |
| (1) | Effective January 1, 2018, unrealized gains (losses) on equity securities are recorded within “Asset administration fees and 2013, respectively.other income (loss).” |
Reclassifications out of Accumulated Other Comprehensive Income (Loss)
|
| | | | | | | | | | | |
| | Year Ended December 31, 2015 | | Year Ended December 31, 2014 | | Year Ended December 31, 2013 |
| | | | | | |
| | (in thousands) |
| Amounts reclassified from AOCI (1)(2): | | | | | |
| Net unrealized investment gains (losses): | | | | | |
| Cash flow hedges - Currency/Interest rate (3) | $ | 2,070 |
| | $ | 148 |
| | $ | (95 | ) |
| Net unrealized investment gains (losses) on available-for-sale securities | 2,761 |
| | 14,558 |
| | 8,900 |
|
| Total net unrealized investment gains (losses) (4) | 4,831 |
| | 14,706 |
| | 8,805 |
|
| Total reclassifications for the period | $ | 4,831 |
| | $ | 14,706 |
| | $ | 8,805 |
|
| |
(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 11 for additionalFor more information on cash flow hedges. |
| |
(4) | See table below for additional information on unrealized investment gains (losses), including the impact on deferred policy acquisition and other costs and future policy benefits.hedges, see Note 4. |
Net Unrealized Investment Gains (Losses)
Net unrealized investment gains and losses on securities classified as available-for-sale and certain other long-term investments and other assets are included in the Company’s Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from “Other comprehensive income (loss)” those items that are included as part of “Net income” for a period that had been part of “Other comprehensive income (loss)” in earlier periods. The amounts for the periods indicated below, split between amounts related to fixed maturity securities on which an OTTI loss has been recognized, and all other net unrealized investment gains and losses, are as follows:
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Net Unrealized Investment Gains and Losses on Fixed Maturity Securities on which an OTTI loss has been recognized
|
| | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Investments | | Deferred Policy Acquisition Costs and Other Costs | | Future Policy Benefits | | Deferred Income Tax (Liability) Benefit | | Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses) |
| | | | | | | | | | |
| | (in thousands) |
| Balance, December 31, 2012 | $ | 545 |
| | $ | (214 | ) | | $ | 0 |
| | $ | (100 | ) | | $ | 231 |
|
| Net investment gains (losses) on investments arising during the period | 483 |
| | 0 |
| | 0 |
| | (168 | ) | | 315 |
|
| Reclassification adjustment for (gains) losses included in net income | (705 | ) | | 0 |
| | 0 |
| | 247 |
| | (458 | ) |
| Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs | 0 |
| | 98 |
| | 0 |
| | (35 | ) | | 63 |
|
| Impact of net unrealized investment (gains) losses on future policy benefits | 0 |
| | 0 |
| | (14 | ) | | 5 |
| | (9 | ) |
| Balance, December 31, 2013 | $ | 323 |
| | $ | (116 | ) | | $ | (14 | ) | | $ | (51 | ) | | $ | 142 |
|
| Net investment gains (losses) on investments arising during the period | (11 | ) | | 0 |
| | 0 |
| | 4 |
| | (7 | ) |
| Reclassification adjustment for (gains) losses included in net income | (311 | ) | | 0 |
| | 0 |
| | 109 |
| | (202 | ) |
| Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs | 0 |
| | 116 |
| | 0 |
| | (41 | ) | | 75 |
|
| Impact of net unrealized investment (gains) losses on future policy benefits | 0 |
| | 0 |
| | 14 |
| | (5 | ) | | 9 |
|
| Balance, December 31, 2014 | $ | 1 |
| | $ | 0 |
| | $ | 0 |
| | $ | 16 |
| | $ | 17 |
|
| Net investment gains (losses) on investments arising during the period | (9 | ) | | 0 |
| | 0 |
| | 3 |
| | (6 | ) |
| Reclassification adjustment for (gains) losses included in net income | 17 |
| | 0 |
| | 0 |
| | (6 | ) | | 11 |
|
| Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs | 0 |
| | (3 | ) | | 0 |
| | 1 |
| | (2 | ) |
| Impact of net unrealized investment (gains) losses on future policy benefits | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Balance, December 31, 2015 | $ | 9 |
| | $ | (3 | ) | | $ | 0 |
| | $ | 14 |
| | $ | 20 |
|
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
All Other Net Unrealized Investment Gains and Losses in AOCI
|
| | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Investments (1) | | Deferred Policy Acquisition Costs and Other Costs | | Future Policy Benefits | | Deferred Income Tax (Liability) Benefit | | Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses) |
| | | | | | | | | | |
| | (in thousands) |
| Balance, December 31, 2012 | $ | 376,777 |
| | $ | (147,089 | ) | | $ | (2,164 | ) | | $ | (80,468 | ) | | $ | 147,056 |
|
| Net investment gains (losses) on investments arising during the period | (183,950 | ) | | 0 |
| | 0 |
| | 64,383 |
| | (119,567 | ) |
| Reclassification adjustment for (gains) losses included in net income | (8,100 | ) | | 0 |
| | 0 |
| | 2,835 |
| | (5,265 | ) |
| Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs | 0 |
| | 80,637 |
| | 0 |
| | (28,222 | ) | | 52,415 |
|
| Impact of net unrealized investment (gains) losses on future policy benefits | 0 |
| | 0 |
| | (6,023 | ) | | 2,109 |
| | (3,914 | ) |
| Balance, December 31, 2013 | $ | 184,727 |
| | $ | (66,452 | ) | | $ | (8,187 | ) | | $ | (39,363 | ) | | $ | 70,725 |
|
| Net investment gains (losses) on investments arising during the period | 28,590 |
| | 0 |
| | 0 |
| | (10,013 | ) | | 18,577 |
|
| Reclassification adjustment for (gains) losses included in net income | (14,395 | ) | | 0 |
| | 0 |
| | 5,036 |
| | (9,359 | ) |
| Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs | 0 |
| | 7,407 |
| | 0 |
| | (2,594 | ) | | 4,813 |
|
| Impact of net unrealized investment (gains) losses on future policy benefits | 0 |
| | 0 |
| | (185 | ) | | 64 |
| | (121 | ) |
| Balance, December 31, 2014 | $ | 198,922 |
| | $ | (59,045 | ) | | $ | (8,372 | ) | | $ | (46,870 | ) | | $ | 84,635 |
|
| Net investment gains (losses) on investments arising during the period | (86,623 | ) | | 0 |
| | 0 |
| | 30,319 |
| | (56,304 | ) |
| Reclassification adjustment for (gains) losses included in net income | (4,848 | ) | | 0 |
| | 0 |
| | 1,697 |
| | (3,151 | ) |
| Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs | 0 |
| | 28,580 |
| | 0 |
| | (10,003 | ) | | 18,577 |
|
| Impact of net unrealized investment (gains) losses on future policy benefits | 0 |
| | 0 |
| | 3,776 |
| | (1,322 | ) | | 2,454 |
|
| Balance, December 31, 2015 | $ | 107,451 |
| | $ | (30,465 | ) | | $ | (4,596 | ) | | $ | (26,179 | ) | | $ | 46,211 |
|
| |
(1) | Includes cash flow hedges. See Note 11 for information on cash flow hedges. |
Net Unrealized Gains (Losses) on Investments by Asset Class
The table below presents net unrealized gains (losses) on investments by asset class as of the dates indicated:
|
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| | | | | | |
| | (in thousands) |
| Fixed maturity securities on which an OTTI loss has been recognized | $ | 9 |
| | $ | 1 |
| | $ | 323 |
|
| Fixed maturity securities, available-for-sale - all other | 90,637 |
| | 191,339 |
| | 184,891 |
|
| Equity securities, available-for-sale | 3 |
| | 3 |
| | 2 |
|
| Affiliated notes | 1,660 |
| | 2,351 |
| | 3,113 |
|
| Derivatives designated as cash flow hedges (1) | 14,847 |
| | 4,839 |
| | (3,653 | ) |
| Other investments | 304 |
| | 390 |
| | 374 |
|
| Net unrealized gains (losses) on investments | $ | 107,460 |
| | $ | 198,923 |
| | $ | 185,050 |
|
| |
(1) | See Note 11 for more information on cash flow hedges. |
Duration of Gross Unrealized Loss Positions for Fixed Maturities and Equity Securities
The following table shows the fair value and gross unrealized losses aggregated by investment category and length of time that individual fixed maturity securities and equity securities have been in a continuous unrealized loss position, at December 31, for the years indicated:
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2015 |
| | Less than twelve months | | Twelve months or more | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| | | | | | | | | | | | |
| | (in thousands) |
| Fixed maturities, available-for-sale | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 8,480 |
| | $ | 107 |
| | $ | 0 |
| | $ | 0 |
| | $ | 8,480 |
| | $ | 107 |
|
| Obligations of U.S. states and their political subdivisions | 6,887 |
| | 378 |
| | 0 |
| | 0 |
| | 6,887 |
| | 378 |
|
| Foreign government bonds | 13,616 |
| | 28 |
| | 0 |
| | 0 |
| | 13,616 |
| | 28 |
|
| Public utilities | 49,104 |
| | 1,421 |
| | 14,217 |
| | 2,842 |
| | 63,321 |
| | 4,263 |
|
| All other U.S. public corporate securities | 207,578 |
| | 6,297 |
| | 29,828 |
| | 1,420 |
| | 237,406 |
| | 7,717 |
|
| All other U.S. private corporate securities | 84,318 |
| | 4,020 |
| | 3,550 |
| | 387 |
| | 87,868 |
| | 4,407 |
|
| All other foreign public corporate securities | 76,573 |
| | 608 |
| | 0 |
| | 0 |
| | 76,573 |
| | 608 |
|
| All other foreign private corporate securities | 38,047 |
| | 1,972 |
| | 85,341 |
| | 13,870 |
| | 123,388 |
| | 15,842 |
|
| Asset-backed securities | 50,195 |
| | 430 |
| | 26,359 |
| | 262 |
| | 76,554 |
| | 692 |
|
| Commercial mortgage-backed securities | 55,065 |
| | 642 |
| | 833 |
| | 10 |
| | 55,898 |
| | 652 |
|
| Residential mortgage-backed securities | 2,141 |
| | 19 |
| | 0 |
| | 0 |
| | 2,141 |
| | 19 |
|
| Total | $ | 592,004 |
| | $ | 15,922 |
| | $ | 160,128 |
| | $ | 18,791 |
| | $ | 752,132 |
| | $ | 34,713 |
|
| Equity securities, available-for-sale | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| | | | | | | | | | | | |
| | 2014 (1) |
| | Less than twelve months | | Twelve months or more | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| | | | | | | | | | | | |
| | (in thousands) |
| Fixed maturities, available-for-sale | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 2,676 |
| | $ | 10 |
| | $ | 0 |
| | $ | 0 |
| | $ | 2,676 |
| | $ | 10 |
|
| Obligations of U.S. states and their political subdivisions | 0 |
| | 0 |
| | 7,305 |
| | 20 |
| | 7,305 |
| | 20 |
|
| Foreign government bonds | 4,632 |
| | 4 |
| | 0 |
| | 0 |
| | 4,632 |
| | 4 |
|
| Public utilities | 18,222 |
| | 1,321 |
| | 2,174 |
| | 272 |
| | 20,396 |
| | 1,593 |
|
| All other U.S. public corporate securities | 144,106 |
| | 1,525 |
| | 6,569 |
| | 419 |
| | 150,675 |
| | 1,944 |
|
| All other U.S. private corporate securities | 44,014 |
| | 518 |
| | 2,834 |
| | 10 |
| | 46,848 |
| | 528 |
|
| All other foreign public corporate securities | 26,193 |
| | 35 |
| | 0 |
| | 0 |
| | 26,193 |
| | 35 |
|
| All other foreign private corporate securities | 46,101 |
| | 2,384 |
| | 0 |
| | 0 |
| | 46,101 |
| | 2,384 |
|
| Asset-backed securities | 31,756 |
| | 58 |
| | 32,732 |
| | 333 |
| | 64,488 |
| | 391 |
|
| Commercial mortgage-backed securities | 4,309 |
| | 108 |
| | 7,377 |
| | 98 |
| | 11,686 |
| | 206 |
|
| Residential mortgage-backed securities | 342 |
| | 6 |
| | 0 |
| | 0 |
| | 342 |
| | 6 |
|
| Total | $ | 322,351 |
| | $ | 5,969 |
| | $ | 58,991 |
| | $ | 1,152 |
| | $ | 381,342 |
| | $ | 7,121 |
|
| Equity securities, available-for-sale | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| |
(1) | Prior period amounts are presented on a basis consistent with the current period presentation. |
The gross unrealized losses on fixed maturity securities at December 31, 2015Repurchase Agreements and 2014, are composed of $22.6 million and $4.0 million, respectively, related to high or highest quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $12.1 million and $3.1 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. At December 31, 2015, the $18.8 million of gross unrealized losses of twelve months or more were concentrated in consumer non-cyclical, capital goods, utility and finance sectors of the Company’s corporate securities. At December 31, 2014, the $1.2 million of gross unrealized losses of twelve months or more were concentrated in asset-backed
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
securities and the energy and utility sectors of the Company’s corporate securities. In accordance with its policy described in Note 2, the Company concluded that an adjustment to earnings for OTTI for these securities was not warranted at December 31, 2015 or 2014. These conclusions are based on a detailed analysis of the underlying credit and cash flows on each security. The gross unrealized losses are primarily attributable to general credit spread widening and foreign currency exchange rate movements. At December 31, 2015, the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before the anticipated recovery of its remaining amortized cost basis.
SecuritiesSecurities Lending and Repurchase Agreements
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, 2015, the Company had $11 million of securities lending transactions recorded as "Cash collateral loaned for securities," all of which were corporate securities. The remaining contractual maturity of all securities lending transactions is overnight2018 and continuous. As of December 31, 2015,2017, the Company had no repurchase transactions.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, 2018 | | December 31, 2017 |
| | Remaining Contractual Maturities of the Agreements | | | | Remaining Contractual Maturities of the Agreements | | |
| | Overnight & Continuous | | Up to 30 Days | | Total | | Overnight & Continuous | | Up to 30 Days | | Total |
| | (in thousands) |
| Foreign government bonds | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 10,505 |
| | $ | 0 |
| | $ | 10,505 |
|
| U.S. public corporate securities | 384 |
| | 0 |
| | 384 |
| | 6,878 |
| | 0 |
| | 6,878 |
|
| Total cash collateral for loaned securities(1) | $ | 384 |
| | $ | 0 |
| | $ | 384 |
| | $ | 17,383 |
| | $ | 0 |
| | $ | 17,383 |
|
| |
| (1) | The Company did not have agreements with remaining contractual maturities of thirty days or greater, 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. At December 31,The following table sets forth the carrying value of investments pledged to third parties as reported in the Statements of Financial Position included the following:
|
| | | | | | | |
| | 2015 | | 2014 |
| | | | |
| | (in thousands) |
| Fixed maturity securities, available-for-sale | $ | 10,218 |
| | $ | 5,098 |
|
| Trading account assets | 0 |
| | 0 |
|
| Total securities pledged | $ | 10,218 |
| | $ | 5,098 |
|
As of December 31, 2015 and 2014, the carrying amount of the associated liabilities supported by the pledged collateral, was $11 million and $5 million, respectively, allas of which was “Cash collateral for loaned securities.”the dates indicated:
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| Pledged collateral: | | | |
| Fixed maturity securities, available-for-sale | $ | 365 |
| | $ | 16,825 |
|
| Total securities pledged | $ | 365 |
| | $ | 16,825 |
|
| Liabilities supported by the pledged collateral: | | | |
| Cash collateral for loaned securities | $ | 384 |
| | $ | 17,383 |
|
| Total liabilities supported by the pledged collateral | $ | 384 |
| | $ | 17,383 |
|
In the normal course of its business activities, the Company accepts collateral that can be sold or repledged. There was no suchThe primary sources of this collateral asare securities purchased under agreements to resell. As of December 31, 20152018 and 2014.2017, there was $675 million and $0 million, respectively, of such collateral.
Fixed
As of December 31, 2018 and 2017, there were available-for-sale fixed maturities of $8$8.4 million and $7$8.3 million, at December 31, 2015 and 2014, respectively, were on deposit with governmental authorities or trustees as required by certain insurance laws.
4. DERIVATIVE INSTRUMENTS
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.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
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) andLondon 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.
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 names (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 sells certain products (for example, variable annuities) which may include guaranteed benefit features that are accounted for as embedded derivatives. Related to these embedded derivatives, the Company had previously entered into reinsurance agreements with Pruco Re and Prudential Insurance through March 31, 2016; effective April 1, 2016, the Company recaptured these reinsurances. Also, effective April 1, 2016, the Company assumed variable annuities living benefit guarantees from Pruco Life, excluding PLNJ business. See Note 1 for additional information on the change to the reinsurance agreements.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Additionally, the Company reinsured the majority of its New York business to an affiliate, Prudential Insurance, as a result of surrendering its New York license, effective December 31, 2015. See Note 1 for additional information on these reinsurance agreements.
These embedded derivatives and reinsurance agreements, also accounted for as derivatives, are carried at fair value and marked to market through “Realized investment gains (losses), net” based on the change in value of the underlying contractual guarantees, which are determined using valuation models, as described in Note 5.
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 gross fair value of derivative contracts prior to taking into account the netting effects of master netting agreements, cash collateral and NPR.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | | | Gross Fair Value | | | | Gross Fair Value |
| Primary Underlying | Notional | | Assets | | Liabilities | | Notional | | Assets | | Liabilities |
| | | | | | | | | | | | |
| | (in thousands) |
| Derivatives Designated as Hedge Accounting Instruments: | | | | | | | | | | | |
| Currency/Interest Rate | | | | | | | | | | | |
| Foreign Currency Swaps | $ | 768,075 |
| | $ | 33,348 |
| | $ | (21,794 | ) | | $ | 677,257 |
| | $ | 13,348 |
| | $ | (47,209 | ) |
| Total Qualifying Hedges | $ | 768,075 |
| | $ | 33,348 |
| | $ | (21,794 | ) | | $ | 677,257 |
| | $ | 13,348 |
| | $ | (47,209 | ) |
| Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | | | | | |
| Interest Rate | | | | | | | | | | | |
| Interest Rate Futures | $ | 908,100 |
| | $ | 4,380 |
| | $ | (664 | ) | | $ | 1,964,000 |
| | $ | 8,296 |
| | $ | 0 |
|
| Interest Rate Swaps | 82,172,825 |
| | 3,344,033 |
| | (1,395,270 | ) | | 87,939,425 |
| | 4,374,658 |
| | (1,065,549 | ) |
| Interest Rate Options | 19,255,000 |
| | 139,765 |
| | (245,523 | ) | | 15,775,000 |
| | 175,156 |
| | (160,181 | ) |
| Interest Rate Forwards | 1,713,947 |
| | 56,562 |
| | (1,976 | ) | | 975,929 |
| | 19,870 |
| | (2 | ) |
| Foreign Currency | | | | | | | | | | | |
| Foreign Currency Forwards | 19,467 |
| | 287 |
| | (27 | ) | | 12,455 |
| | 1 |
| | (319 | ) |
| Currency/Interest Rate | | | | | | | | | | | |
| Foreign Currency Swaps | 231,245 |
| | 11,659 |
| | (2,850 | ) | | 151,400 |
| | 7,779 |
| | (7,488 | ) |
| Equity | | | | | | | | | | | |
| Equity Futures | 860,718 |
| | 0 |
| | (6,629 | ) | | 672,055 |
| | 2,442 |
| | 0 |
|
| Total Return Swaps | 14,456,836 |
| | 986,130 |
| | (53,235 | ) | | 13,841,333 |
| | 8,517 |
| | (341,700 | ) |
| Equity Options | 26,861,807 |
| | 271,630 |
| | (412,821 | ) | | 31,702,334 |
| | 460,597 |
| | (318,955 | ) |
| Total Non-Qualifying Hedges | $ | 146,479,945 |
| | $ | 4,814,446 |
| | $ | (2,118,995 | ) | | $ | 153,033,931 |
| | $ | 5,057,316 |
| | $ | (1,894,194 | ) |
Total Derivatives (1) | $ | 147,248,020 |
| | $ | 4,847,794 |
| | $ | (2,140,789 | ) | | $ | 153,711,188 |
| | $ | 5,070,664 |
| | $ | (1,941,403 | ) |
(1) Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks.
The fair value of the embedded derivatives, included in "Future policy benefits", was a net liability of $8,332 million and $8,152 million as of December 31, 2018 and 2017, respectively. The fair value of the related reinsurance recoverables to Prudential Insurance was an asset of $234 million and $232 million as of December 31, 2018 and 2017, respectively, included in "Reinsurance recoverables". See Note 10 for additional information on these reinsurance agreements.
The fair value of the embedded derivatives pertaining to the variable annuity products with a market value adjustment option assumed from Pruco Life as part of the Variable Annuities Recapture, included in "Reinsurance recoverables" or "Reinsurance payables", was a net asset of $6 million and $12 million as of December 31, 2018 and 2017, respectively.
The fair value of the embedded derivatives, included in "Policyholders' account balances", was a net liability of $42 million as of December 31, 2018 with no related reinsurance recoverables.
Prudential Annuities Life Assurance Corporation
Notes to 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 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 Statements of Financial Position.
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Gross Amounts of Recognized Financial Instruments | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts Presented in the Statement of Financial Position | | Financial Instruments/ Collateral(1) | | Net Amount |
| | | | | | | | | | |
| | (in thousands) |
| Offsetting of Financial Assets: | | | | | | | | | |
| Derivatives(1) | $ | 4,847,794 |
| | $ | (4,804,816 | ) | | $ | 42,978 |
| | $ | 0 |
| | $ | 42,978 |
|
| Securities purchased under agreements to resell | 675,000 |
| | 0 |
| | 675,000 |
| | (675,000 | ) | | 0 |
|
| Total Assets | $ | 5,522,794 |
| | $ | (4,804,816 | ) | | $ | 717,978 |
| | $ | (675,000 | ) | | $ | 42,978 |
|
| Offsetting of Financial Liabilities: | | | | | | | | | |
| Derivatives(1) | $ | 2,140,789 |
| | $ | (2,134,160 | ) | | $ | 6,629 |
| | $ | (6,629 | ) | | $ | 0 |
|
| Securities sold under agreements to repurchase | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Total Liabilities | $ | 2,140,789 |
| | $ | (2,134,160 | ) | | $ | 6,629 |
| | $ | (6,629 | ) | | $ | 0 |
|
| | | | | | | | | | |
| | December 31, 2017 |
| | Gross Amounts of Recognized Financial Instruments | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts Presented in the Statement of Financial Position | | Financial Instruments/ Collateral(1) | | Net Amount |
| | | | | | | | | | |
| | (in thousands) |
| Offsetting of Financial Assets: | | | | | | | | | |
| Derivatives(1) | $ | 5,070,517 |
| | $ | (4,919,486 | ) | | $ | 151,031 |
| | $ | 0 |
| | $ | 151,031 |
|
| Securities purchased under agreements to resell | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Total Assets | $ | 5,070,517 |
| | $ | (4,919,486 | ) | | $ | 151,031 |
| | $ | 0 |
| | $ | 151,031 |
|
| Offsetting of Financial Liabilities: | | | | | | | | | |
| Derivatives(1) | $ | 1,941,403 |
| | $ | (1,941,403 | ) | | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| Securities sold under agreements to repurchase | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Total Liabilities | $ | 1,941,403 |
| | $ | (1,941,403 | ) | | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| |
| (1) | Amounts exclude the excess of collateral received/pledged from/to the counterparty. |
For information regarding the rights of offset associated with the derivative assets and liabilities in the table above see “Credit Risk” below and Note 14. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company’s accounting policy for securities repurchase and resale agreements, see Note 2 to the Financial Statements.
Cash Flow Hedges
The primary derivative instruments used by the Company in its cash flow hedge accounting relationships are currency swaps. These instruments are only designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, equity or embedded derivatives in any of its cash flow hedge accounting relationships.
Prudential Annuities Life Assurance Corporation
Notes to 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, 2018 |
| | Realized Investment Gains (Losses) | | Net Investment Income | | Other Income | | AOCI(1) |
| | (in thousands) |
| Derivatives Designated as Hedge Accounting Instruments: | | | | | | | |
| Cash flow hedges | | | | | | | |
| Currency/Interest Rate | $ | 0 |
| | $ | 8,285 |
| | $ | 13,321 |
| | $ | 22,002 |
|
| Total cash flow hedges | 0 |
| | 8,285 |
| | 13,321 |
| | 22,002 |
|
| Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | |
| Interest Rate | (1,021,687 | ) | | 0 |
| | 0 |
| | 0 |
|
| Currency | 1,022 |
| | 0 |
| | 0 |
| | 0 |
|
| Currency/Interest Rate | 21,043 |
| | 0 |
| | 91 |
| | 0 |
|
| Credit | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Equity | 995,958 |
| | 0 |
| | 0 |
| | 0 |
|
| Embedded Derivatives | 971,167 |
| | 0 |
| | 0 |
| | 0 |
|
| Total non-qualifying hedges | 967,503 |
| | 0 |
| | 91 |
| | 0 |
|
| Total | $ | 967,503 |
| | $ | 8,285 |
| | $ | 13,412 |
| | $ | 22,002 |
|
| | | | | | | | |
| Year Ended December 31, 2017 |
| | Realized Investment Gains (Losses) | | Net Investment Income | | Other Income | | AOCI(1) |
| | (in thousands) |
| Derivatives Designated as Hedge Accounting Instruments: | | | | | | | |
| Cash flow hedges | | | | | | | |
| Currency/Interest Rate | $ | 0 |
| | $ | 6,152 |
| | $ | (11,043 | ) | | $ | (37,596 | ) |
| Total cash flow hedges | 0 |
| | 6,152 |
| | (11,043 | ) | | (37,596 | ) |
| Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | |
| Interest Rate | 550,797 |
| | 0 |
| | 0 |
| | 0 |
|
| Currency | (454 | ) | | 0 |
| | 0 |
| | 0 |
|
| Currency/Interest Rate | (30,173 | ) | | 0 |
| | (183 | ) | | 0 |
|
| Credit | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Equity | (2,000,297 | ) | | 0 |
| | 0 |
| | 0 |
|
| Embedded Derivatives | 678,698 |
| | 0 |
| | 0 |
| | 0 |
|
| Total non-qualifying hedges | (801,429 | ) | | 0 |
| | (183 | ) | | 0 |
|
| Total | $ | (801,429 | ) | | $ | 6,152 |
| | $ | (11,226 | ) | | $ | (37,596 | ) |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, 2016 |
| | Realized Investment Gains (Losses) | | Net Investment Income | | Other Income | | AOCI(1) |
| | (in thousands) |
| Derivatives Designated as Hedge Accounting Instruments: | | | | | | | |
| Cash flow hedges | | | | | | | |
| Currency/Interest Rate | $ | 0 |
| | $ | 3,006 |
| | $ | 9,648 |
| | $ | (3,102 | ) |
| Total cash flow hedges | 0 |
| | 3,006 |
| | 9,648 |
| | (3,102 | ) |
| Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | |
| Interest Rate | (2,219,894 | ) | | 0 |
| | 0 |
| | 0 |
|
| Currency | 361 |
| | 0 |
| | 0 |
| | 0 |
|
| Currency/Interest Rate | 11,642 |
| | 0 |
| | 516 |
| | 0 |
|
| Credit | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Equity | (1,755,946 | ) | | 0 |
| | 0 |
| | 0 |
|
| Embedded Derivatives | 437,323 |
| | 0 |
| | 0 |
| | 0 |
|
| Total non-qualifying hedges | (3,526,514 | ) | | 0 |
| | 516 |
| | 0 |
|
| Total | $ | (3,526,514 | ) | | $ | 3,006 |
| | $ | 10,164 |
| | $ | (3,102 | ) |
| |
| (1) | Amounts deferred in AOCI. |
For the years ended December 31, 2018, 2017 and 2016, the ineffective portion of derivatives accounted for using hedge accounting was de minimis to the Company’s results of operations. Also, there were no material amounts reclassified 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.
Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:
|
| | | |
| | (in thousands) |
| Balance, December 31, 2015 | $ | 14,847 |
|
| Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2016 | 9,698 |
|
| Amount reclassified into current period earnings | (12,800 | ) |
| Balance, December 31, 2016 | 11,745 |
|
| Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2017 | (39,434 | ) |
| Amount reclassified into current period earnings | 1,838 |
|
| Balance, December 31, 2017 | (25,851 | ) |
| Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2018 | 42,763 |
|
| Amount reclassified into current period earnings | (20,761 | ) |
| Balance, December 31, 2018 | $ | (3,849 | ) |
The changes in fair value of cash flow hedges are deferred in AOCI and are included in “Net unrealized investment gains (losses)” in the Statements of Operations and Comprehensive Income; these amounts are then reclassified to earnings when the hedged item affects earnings. Using December 31, 2018 values, it is estimated that a pre-tax gain of approximately $10 million will be reclassified from AOCI to earnings during the subsequent twelve months ending December 31, 2019, offset by amounts pertaining to the hedged items.
The exposures the Company is hedging with these qualifying cash flow hedges include the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments.
Credit Derivatives
The Company has no exposure from credit derivative positions where it has written or purchased credit protection as of December 31, 2018 and 2017.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by counterparty to financial derivative transactions with a positive fair value. The Company manages credit risk by entering into derivative transactions with its affiliate, Prudential Global Funding, LLC (“PGF”), related to its OTC derivatives. PGF, in turn, manages its credit risk by: (i) entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties governed by master netting agreement, as applicable; (ii) trading through central clearing and OTC parties; (iii) obtaining collateral, such as cash and securities, when appropriate; and (iv) setting limits on single party credit exposures which are subject to periodic management review.
Substantially all of the Company’s derivative agreements have zero thresholds which require daily full collateralization by the party in a liability position.
5. FAIR VALUE OF ASSETS AND LIABILITIES
Fair Value Measurement – Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative fair value guidance establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. The Company’s Level 1 assets and liabilities primarily include certain cash equivalents, equity securities, short-term investments, and derivative contracts that trade on an active exchange market.
Level 2 - Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, and other market observable inputs. The Company’s Level 2 assets and liabilities include: fixed maturities (corporate public and private bonds, most government securities, certain asset-backed and mortgage-backed securities, etc.), certain equity securities (mutual funds, which do not trade in active markets because they are not publicly available), certain short-term investments, certain cash equivalents and certain OTC derivatives.
Level 3 - Fair value is based on at least one significant unobservable input for the asset or liability. The assets and liabilities in this category may require significant judgment or estimation in determining the fair value. The Company’s Level 3 assets and liabilities primarily include: certain private fixed maturities and equity securities, certain manually priced fixed maturities, certain highly structured OTC derivative contracts and embedded derivatives resulting from reinsurance or certain products with guaranteed benefits.
Prudential Annuities Life Assurance Corporation
Notes to 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.
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2018 |
| | Level 1 | | Level 2 | | Level 3 | | Netting(1) | | Total |
| | (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | |
| U.S Treasury securities and obligations of U.S. government authorities and agencies | $ | 0 |
| | $ | 4,875,959 |
| | $ | 8,132 |
| | $ | 0 |
| | $ | 4,884,091 |
|
| Obligations of U.S. states and their political subdivisions | 0 |
| | 131,164 |
| | 0 |
| | 0 |
| | 131,164 |
|
| Foreign government bonds | 0 |
| | 199,636 |
| | 0 |
| | 0 |
| | 199,636 |
|
| U.S. corporate public securities | 0 |
| | 1,473,973 |
| | 0 |
| | 0 |
| | 1,473,973 |
|
| U.S. corporate private securities | 0 |
| | 1,008,632 |
| | 54,321 |
| | 0 |
| | 1,062,953 |
|
| Foreign corporate public securities | 0 |
| | 291,086 |
| | 0 |
| | 0 |
| | 291,086 |
|
| Foreign corporate private securities | 0 |
| | 781,101 |
| | 31,131 |
| | 0 |
| | 812,232 |
|
| Asset-backed securities(2) | 0 |
| | 495,908 |
| | 9,336 |
| | 0 |
| | 505,244 |
|
| Commercial mortgage-backed securities | 0 |
| | 361,880 |
| | 0 |
| | 0 |
| | 361,880 |
|
| Residential mortgage-backed securities | 0 |
| | 49,414 |
| | 0 |
| | 0 |
| | 49,414 |
|
| Subtotal | 0 |
| | 9,668,753 |
| | 102,920 |
| | 0 |
| | 9,771,673 |
|
| Fixed maturities, trading | 0 |
| | 289,752 |
| | 0 |
| | 0 |
| | 289,752 |
|
| Equity securities | 4,896 |
| | 12 |
| | 5,705 |
| | 0 |
| | 10,613 |
|
| Short-term investments | 0 |
| | 29,818 |
| | 0 |
| | 0 |
| | 29,818 |
|
| Cash equivalents | 1,098,903 |
| | 2,593,456 |
| | 0 |
| | 0 |
| | 3,692,359 |
|
| Other invested assets(3) | 4,380 |
| | 4,843,414 |
| | 0 |
| | (4,804,816 | ) | | 42,978 |
|
| Reinsurance recoverables | 0 |
| | 0 |
| | 239,911 |
| | 0 |
| | 239,911 |
|
| Receivables from parent and affiliates | 0 |
| | 37,193 |
| | 0 |
| | 0 |
| | 37,193 |
|
| Subtotal excluding separate account assets | 1,108,179 |
| | 17,462,398 |
| | 348,536 |
| | (4,804,816 | ) | | 14,114,297 |
|
| Separate account assets(4) | 0 |
| | 31,210,346 |
| | 0 |
| | 0 |
| | 31,210,346 |
|
| Total assets | $ | 1,108,179 |
| | $ | 48,672,744 |
| | $ | 348,536 |
| | $ | (4,804,816 | ) | | $ | 45,324,643 |
|
| Future policy benefits(5) | $ | 0 |
| | $ | 0 |
| | $ | 8,332,474 |
| | $ | 0 |
| | $ | 8,332,474 |
|
| Policyholders' account balances | 0 |
| | 0 |
| | 42,350 |
| | 0 |
| | 42,350 |
|
| Payables to parent and affiliates | 0 |
| | 2,133,496 |
| | 0 |
| | (2,133,496 | ) | | 0 |
|
| Other liabilities | 7,293 |
| | 0 |
| | 0 |
| | (664 | ) | | 6,629 |
|
| Total liabilities | $ | 7,293 |
| | $ | 2,133,496 |
| | $ | 8,374,824 |
| | $ | (2,134,160 | ) | | $ | 8,381,453 |
|
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Netting (1) | | Total |
| | | | | | | | | | |
| | (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | |
| U.S Treasury securities and obligations of U.S. government authorities and agencies | $ | 0 |
| | $ | 4,826,413 |
| | $ | 5,237 |
| | $ | 0 |
| | $ | 4,831,650 |
|
| Obligations of U.S. states and their political subdivisions | 0 |
| | 104,640 |
| | 0 |
| | 0 |
| | 104,640 |
|
| Foreign government bonds | 0 |
| | 140,305 |
| | 0 |
| | 0 |
| | 140,305 |
|
| U.S. corporate public securities | 0 |
| | 1,806,888 |
| | 1,562 |
| | 0 |
| | 1,808,450 |
|
| U.S. corporate private securities | 0 |
| | 1,148,536 |
| | 59,408 |
| | 0 |
| | 1,207,944 |
|
| Foreign corporate public securities | 0 |
| | 229,006 |
| | 215 |
| | 0 |
| | 229,221 |
|
| Foreign corporate private securities | 0 |
| | 737,539 |
| | 34,021 |
| | 0 |
| | 771,560 |
|
| Asset-backed securities(2) | 0 |
| | 160,229 |
| | 185,358 |
| | 0 |
| | 345,587 |
|
| Commercial mortgage-backed securities | 0 |
| | 505,684 |
| | 0 |
| | 0 |
| | 505,684 |
|
| Residential mortgage-backed securities | 0 |
| | 165,745 |
| | 0 |
| | 0 |
| | 165,745 |
|
| Subtotal | 0 |
| | 9,824,985 |
| | 285,801 |
| | 0 |
| | 10,110,786 |
|
| Fixed maturities, trading(6) | 0 |
| | 166,360 |
| | 0 |
| | 0 |
| | 166,360 |
|
| Equity securities(6) | 5,599 |
| | 18 |
| | 9,758 |
| | 0 |
| | 15,375 |
|
| Short-term investments | 448,712 |
| | 262,272 |
| | 87 |
| | 0 |
| | 711,071 |
|
| Cash equivalents | 0 |
| | 1,146,466 |
| | 0 |
| | 0 |
| | 1,146,466 |
|
| Other invested assets(3)(6) | 10,738 |
| | 5,059,779 |
| | 147 |
| | (4,919,486 | ) | | 151,178 |
|
| Reinsurance recoverables | 0 |
| | 0 |
| | 244,006 |
| | 0 |
| | 244,006 |
|
| Receivables from parent and affiliates | 0 |
| | 38,145 |
| | 0 |
| | 0 |
| | 38,145 |
|
| Subtotal excluding separate account assets | 465,049 |
| | 16,498,025 |
| | 539,799 |
| | (4,919,486 | ) | | 12,583,387 |
|
| Separate account assets(4) | 0 |
| | 37,990,547 |
| | 0 |
| | 0 |
| | 37,990,547 |
|
| Total assets | $ | 465,049 |
| | $ | 54,488,572 |
| | $ | 539,799 |
| | $ | (4,919,486 | ) | | $ | 50,573,934 |
|
| Future policy benefits(5) | $ | 0 |
| | $ | 0 |
| | $ | 8,151,902 |
| | $ | 0 |
| | $ | 8,151,902 |
|
| Payables to parent and affiliates | 0 |
| | 1,941,403 |
| | 0 |
| | (1,941,403 | ) | | 0 |
|
| Other liabilities | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Total liabilities | $ | 0 |
| | $ | 1,941,403 |
| | $ | 8,151,902 |
| | $ | (1,941,403 | ) | | $ | 8,151,902 |
|
| |
| (1) | “Netting” amounts represent cash collateral of $2,671 million and $2,978 million as of December 31, 2018 and 2017, respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting arrangements. |
| |
| (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, 2018 and 2017, the fair values of such investments were $8 million and $0.3 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 Statements of Financial Position. |
| |
| (5) | As of December 31, 2018, the net embedded derivative liability position of $8,332 million includes $625 million of embedded derivatives in an asset position and $8,957 million of embedded derivatives in a liability position. As of December 31, 2017, the net embedded derivative liability position of $8,152 million includes $819 million of embedded derivatives in an asset position and $8,971 million of embedded derivatives in a liability position. |
| |
| (6) | Prior period amounts have been reclassified to conform to current period presentation. See Note 2 for details. |
Prudential Annuities Life Assurance Corporation
Notes to 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, 2018 and 2017 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 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.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
The majority of the Company’s derivative positions are traded in the OTC derivative market and are classified within Level 2 in the fair value hierarchy. OTC derivatives classified within Level 2 are valued using models that utilize actively quoted or observable market input values from external market data providers, third-party pricing vendors and/or recent trading activity. The Company’s policy is to use mid-market pricing in determining its best estimate of fair value. The fair values of most OTC derivatives, including interest rate and cross-currency swaps, currency forward contracts and single name credit default swaps are determined using discounted cash flow models. The fair values of European style option contracts are determined using Black-Scholes option pricing models. These models’ key inputs include the contractual terms of the respective contract, along with significant observable inputs, including interest rates, currency rates, credit spreads, equity prices, index dividend yields, NPR, volatility and other factors.
The Company’s cleared interest rate swaps and credit derivatives linked to an index are valued using models that utilize actively quoted or observable market inputs, including Overnight Indexed Swap discount rates, 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, mutual funds, and commercial mortgage loans for which values are determined consistent with similar instruments described above under “Fixed Maturity Securities” and “Equity Securities”.
Receivables from Parent and Affiliates – Receivables from parent and affiliates carried at fair value include affiliated bonds within the Company’s legal entity where fair value is determined consistent with similar securities described above under “Fixed Maturity Securities” managed by affiliated asset managers.
Reinsurance Recoverables – Reinsurance recoverables carried at fair value include the reinsurance of the Company’s living benefit guarantees on certain variable annuity contracts. These guarantees are accounted for as embedded derivatives and are recorded in “Reinsurance recoverables” or “Reinsurance payables” 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 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 determination of these risk premiums requires the use of management's judgment.
The significant inputs to the valuation models for these embedded derivatives include capital market assumptions, such as interest rate levels and volatility assumptions, the Company’s market-perceived NPR, as well as actuarially determined assumptions, including contractholder behavior, such as lapse rates, benefit utilization rates, withdrawal rates, and mortality rates. Since many of these assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 in the fair value hierarchy.
Capital market inputs and actual policyholders’ account values are updated each quarter based on capital market conditions as of the end of the quarter, including interest rates, equity markets and volatility. In the risk neutral valuation, the initial swap curve drives the total return used to grow the policyholders’ account values. The Company’s discount rate assumption is based on the LIBOR swap curve 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.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Policyholders' Account Balances -The liability for policyholders' account balances is related to certain embedded derivative instruments associated with certain policyholders' account balances. The fair values are determined consistent with similar derivative instruments described above under "Derivative Instruments".
Quantitative Information Regarding Internally-Priced Level 3 Assets and Liabilities – The tables below present quantitative information on significant internally-priced Level 3 assets and liabilities.
|
| | | | | | | | | | | | | | | | | | |
| | As of December 31, 2018 |
| | Fair Value | | Valuation Techniques | | Unobservable Inputs | | Minimum | | Maximum | | Weighted Average | | Impact of Increase in Input on Fair Value(1) |
| | | | | | | | | | | | | | |
| | (in thousands) | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | |
| Corporate securities(2) | $ | 18,609 |
| | Discounted cash flow | | Discount rate | | 7.00 | % | | 20.00 | % | | 11.30 | % | | Decrease |
| | | | Market Comparables(3) | | EBITDA multiples | | 6.7X |
| | 6.7X |
| | 6.7X |
| | Increase |
| | | | Liquidation | | Liquidation | | 41 | % | | 41 | % | | 41 | % | | Increase |
| Reinsurance recoverables | $ | 239,911 |
| | Fair values are determined using the same unobservable inputs as future policy benefits. | | |
| Liabilities: | | | | | | | | | | | | | |
| Future policy benefits(4) | $ | 8,332,474 |
| | Discounted cash flow | | Lapse rate(5) | | 1 | % | | 13 | % | | | | Decrease |
| | | | | | Spread over LIBOR(6) | | 0.36 | % | | 1.60 | % | | | | Decrease |
| | | | | | Utilization rate(7) | | 50 | % | | 97 | % | | | | Increase |
| | | | | | Withdrawal rate | | See table footnote (8) below |
| | | | | | Mortality rate(9) | | 0 | % | | 15 | % | | | | Decrease |
| | | | | | Equity volatility curve | | 18 | % | | 22 | % | | | | Increase |
|
| | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 |
| | Fair Value | | Valuation Techniques | | Unobservable Inputs | | Minimum | | Maximum | | Weighted Average | | Impact of Increase in Input on Fair Value (1) |
| | | | | | | | | | | | | | |
| | (in thousands) | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | |
| Corporate securities(2) | $ | 22,215 |
| | Discounted cash flow | | Discount rate | | 5.06 | % | | 22.23 | % | | 8.57 | % | | Decrease |
| Reinsurance recoverables | $ | 244,006 |
| | Fair values are determined using the same unobservable inputs as future policy benefits. | | |
| Liabilities: | | | | | | | | | | | | | |
| Future policy benefits(4) | $ | 8,151,902 |
| | Discounted cash flow | | Lapse rate(5) | | 1 | % | | 12 | % | | | | Decrease |
| | | | | | Spread over LIBOR(6) | | 0.12 | % | | 1.10 | % | | | | Decrease |
| | | | | | Utilization rate(7) | | 52 | % | | 97 | % | | | | Increase |
| | | | | | Withdrawal rate | | See table footnote (8) below |
| | | | | | Mortality rate(9) | | 0 | % | | 14 | % | | | | Decrease |
| | | | | | Equity volatility curve | | 13 | % | | 24 | % | | | | 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. |
| |
| (3) | Represents multiples of earnings before interest, taxes, depreciation and amortization ("EBITDA"), and are amounts used when the Company has determined that market participants would use such multiples when valuing the investments. |
| |
| (4) | Future policy benefits primarily represent general account liabilities for the living benefit features of the Company’s variable annuity contracts which are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation. |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
| |
| (5) | Lapse rates 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 are also generally assumed to be lower for the period where surrender charges apply. |
| |
| (6) | The spread over the LIBOR swap curve represents the premium added to the proxy for the risk-free rate (LIBOR) to reflect our estimates of rates that a market participant would use to value the living benefit contracts in both the accumulation and payout phases. 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 both funding agreements and living benefit contracts are insurance liabilities and are therefore senior to debt. |
| |
| (7) | 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. |
| |
| (8) | The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These assumptions vary based on the age of the contractholder, the tax status of the contract and the duration since the contractholder began lifetime withdrawals.As of December 31, 2018 and 2017, the minimum withdrawal rate assumption is 78% and 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%. |
| |
| (9) | Range reflects the mortality rate for the vast majority of business with living benefits, with policyholders ranging from 50 to 90 years old. While the majority of living benefits have a minimum age requirement, certain benefits do not have an age restriction. This results in contractholders for certain benefits with mortality rates approaching 0%. Based on historical experience, the Company applies a set of age and duration specific mortality rate adjustments compared to standard industry tables. A mortality improvement assumption is also incorporated into the overall mortality table. |
Interrelationships Between Unobservable Inputs– In addition to the sensitivities of fair value measurements to changes in each unobservable input in isolation, as reflected in the table above, interrelationships between these inputs may also exist, such that a change in one unobservable input may give rise to a change in another, or multiple, inputs. Examples of such interrelationships for significant internally-priced Level 3 assets and liabilities are as follows:
Corporate Securities – The rate used to discount future cash flows reflects current risk-free rates plus credit and liquidity spread requirements that market participants would use to value an asset. The discount rate may be influenced by many factors, including market cycles, expectations of default, collateral, term and asset complexity. Each of these factors can influence discount rates, either in isolation, or in response to other factors.
Future Policy Benefits – The Company expects efficient benefit utilization and withdrawal rates to generally be correlated with lapse rates. However, behavior is generally highly dependent on the facts and circumstances surrounding the individual contractholder, such as their liquidity needs or tax situation, which could drive lapse behavior independent of other contractholder behavior assumptions. To the extent more efficient contractholder behavior results in greater in-the-moneyness at the contract level, lapse rates may decline for those contracts. Similarly, to the extent that increases in equity volatility are correlated with overall declines in the capital markets, lapse rates may decline as contracts become more in-the-money.
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. During the second quarter of 2018, $213 million of investments in collateralized loan obligations (“CLOs”) reported as “Asset-backed securities” were transferred from Level 3 to Level 2 as market activity, liquidity and overall observability of valuation inputs of CLOs have increased.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | Fair Value, beginning of period | Total realized and unrealized gains (losses)(1) | Purchases | Sales | Issuances | Settlements | Other(2) | Transfers into Level 3 | Transfers out of Level 3 | Fair Value, end of period | Unrealized gains (losses) for assets still held(3) |
| | (in thousands) | |
| Fixed maturities, available-for-sale: | | | | | | | | | | | |
| U.S. Government | $ | 5,237 |
| $ | 0 |
| $ | 2,895 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 8,132 |
| $ | 0 |
|
| Foreign Government | 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
|
| Corporate Securities(4) | 95,206 |
| (10,922 | ) | 15,268 |
| (275 | ) | 0 |
| (22,332 | ) | 24 |
| 9,969 |
| (1,486 | ) | 85,452 |
| (6,627 | ) |
| Structured Securities(5) | 185,358 |
| (724 | ) | 84,810 |
| (14,236 | ) | 0 |
| (37,672 | ) | 0 |
| 51,979 |
| (260,179 | ) | 9,336 |
| 0 |
|
| Other assets: | | | | | | | | | | | |
| Equity securities | 9,758 |
| (591 | ) | 0 |
| (3,609 | ) | 0 |
| 0 |
| 147 |
| 0 |
| 0 |
| 5,705 |
| (1,208 | ) |
| Other invested assets | 147 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| (147 | ) | 0 |
| 0 |
| 0 |
| 0 |
|
| Short-term investments | 87 |
| (20 | ) | 0 |
| 0 |
| 0 |
| (43 | ) | (24 | ) | 0 |
| 0 |
| 0 |
| (55 | ) |
| Cash equivalents | 0 |
| 13 |
| 0 |
| 0 |
| 0 |
| (13 | ) | 0 |
| 0 |
| 0 |
| 0 |
| 0 |
|
| Reinsurance recoverables | 244,006 |
| (28,757 | ) | 19,061 |
| 0 |
| 0 |
| 0 |
| 5,601 |
| 0 |
| 0 |
| 239,911 |
| (19,962 | ) |
| Receivables from parent and affiliates | 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
|
| Liabilities: | | | | | | | | | | | |
| Future policy benefits | (8,151,902 | ) | 843,914 |
| 0 |
| 0 |
| (1,024,486 | ) | 0 |
| 0 |
| 0 |
| 0 |
| (8,332,474 | ) | 529,804 |
|
| Policyholders' account balances | 0 |
| 6,051 |
| 0 |
| 0 |
| (48,401 | ) | 0 |
| 0 |
| 0 |
| 0 |
| (42,350 | ) | 6,051 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | Total realized and unrealized gains (losses) | | Unrealized gains (losses) for assets still held(3) |
| | Realized investment gains (losses), net(1) | Asset administration fees and other income | Included in other comprehensive income (losses) | Net investment income | | Realized investment gains (losses), net | Asset administration fees and other income |
| | (in thousands) |
| Fixed maturities, available-for-sale | $ | (6,693 | ) | $ | 0 |
| $ | (5,194 | ) | $ | 241 |
| | $ | (6,627 | ) | $ | 0 |
|
| Other assets: | | | | | | | |
| Equity securities | 0 |
| (591 | ) | 0 |
| 0 |
| | 0 |
| (1,208 | ) |
| Other invested assets | 0 |
| 0 |
| 0 |
| 0 |
| | 0 |
| 0 |
|
| Short-term investments | (20 | ) | 0 |
| 0 |
| 0 |
| | (55 | ) | 0 |
|
| Cash equivalents | 13 |
| 0 |
| 0 |
| 0 |
| | 0 |
| 0 |
|
| Reinsurance recoverables | (28,757 | ) | 0 |
| 0 |
| 0 |
| | (19,962 | ) | 0 |
|
| Receivables from parent and affiliates | 0 |
| 0 |
| 0 |
| 0 |
| | 0 |
| 0 |
|
| Liabilities: | | | | | | | |
| Future policy benefits | 843,914 |
| 0 |
| 0 |
| 0 |
| | 529,804 |
| 0 |
|
| Policyholders' account balances | 6,051 |
| 0 |
| 0 |
| 0 |
| | 6,051 |
| 0 |
|
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017(7) |
| | Fair Value, beginning of period | Total realized and unrealized gains (losses)(1) | Purchases | Sales | Issuances | Settlements | Other(2) | Transfers into Level 3 | Transfers out of Level 3 | Fair Value, end of period | Unrealized gains (losses) for assets still held(3) |
| | (in thousands) | |
| Fixed maturities, available-for-sale: | | | | | | | | | | | |
| U.S. Government | $ | 0 |
| $ | 0 |
| $ | 4,264 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 973 |
| $ | 0 |
| $ | 0 |
| $ | 5,237 |
| $ | 0 |
|
| Foreign Government | 87 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| (87 | ) | 0 |
| 0 |
|
| Corporate Securities(4) | 151,989 |
| (2,630 | ) | 17,920 |
| (15,283 | ) | 0 |
| (111,675 | ) | (4,157 | ) | 64,412 |
| (5,370 | ) | 95,206 |
| (6,498 | ) |
| Structured Securities(5) | 31,735 |
| 976 |
| 237,469 |
| (5,613 | ) | 0 |
| (55,184 | ) | 0 |
| 106,034 |
| (130,059 | ) | 185,358 |
| (8 | ) |
| Other assets: | | | | | | | | | | | |
| Equity securities(6) | 4,864 |
| 1,040 |
| 0 |
| 0 |
| 0 |
| 0 |
| 3,854 |
| 0 |
| 0 |
| 9,758 |
| 338 |
|
| Other invested assets(6) | 0 |
| (7 | ) | 0 |
| 0 |
| 0 |
| 0 |
| 154 |
| 0 |
| 0 |
| 147 |
| (7 | ) |
| Short-term investments | 450 |
| 0 |
| 94 |
| (5 | ) | 0 |
| (2 | ) | (450 | ) | 0 |
| 0 |
| 87 |
| 0 |
|
| Cash equivalents | 375 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| (375 | ) | 0 |
| 0 |
| 0 |
| 0 |
|
| Reinsurance recoverables | 240,091 |
| (18,240 | ) | 19,416 |
| 0 |
| 0 |
| 0 |
| 2,739 |
| 0 |
| 0 |
| 244,006 |
| (10,303 | ) |
| Receivables from parent and affiliates | 33,962 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| (33,962 | ) | 0 |
| 0 |
|
| Liabilities: | | | | | | | | | | | |
| Future policy benefits | (7,707,333 | ) | 552,047 |
| 0 |
| 0 |
| (996,616 | ) | 0 |
| 0 |
| 0 |
| 0 |
| (8,151,902 | ) | 307,529 |
|
| Policyholders' account balances | 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017(7) |
| | Total realized and unrealized gains (losses) | | Unrealized gains (losses) for assets still held(3) |
| | Realized investment gains (losses), net(1) | Asset administration fees and other income | Included in other comprehensive income (losses) | Net investment income | | Realized investment gains (losses), net | Asset administration fees and other income |
| | (in thousands) |
| Fixed maturities, available-for-sale | $ | (6,301 | ) | $ | 0 |
| $ | (3,410 | ) | $ | 8,057 |
| | $ | (6,506 | ) | $ | 0 |
|
| Other assets: | | | | | | | |
| Equity securities(6) | 0 |
| 689 |
| 351 |
| 0 |
| | 0 |
| 338 |
|
| Other invested assets(6) | (7 | ) | 0 |
| 0 |
| 0 |
| | (7 | ) | 0 |
|
| Short-term investments | 0 |
| 0 |
| 0 |
| 0 |
| | 0 |
| 0 |
|
| Cash equivalents | 0 |
| 0 |
| 0 |
| 0 |
| | 0 |
| 0 |
|
| Reinsurance recoverables | (18,240 | ) | 0 |
| 0 |
| 0 |
| | (10,303 | ) | 0 |
|
| Receivables from parent and affiliates | 0 |
| 0 |
| 0 |
| 0 |
| | 0 |
| 0 |
|
| Liabilities: | | | | | | | |
| Future policy benefits | 552,047 |
| 0 |
| 0 |
| 0 |
| | 307,529 |
| 0 |
|
| Policyholders' account balances | 0 |
| 0 |
| 0 |
| 0 |
| | 0 |
| 0 |
|
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
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, 2016, 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, 2016.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016(7) |
| | Total realized and unrealized gains (losses) | | Unrealized gains (losses) for assets still held(3) |
| | Realized investment gains (losses), net(1) | Asset administration fees and other income | Included in other comprehensive income (losses) | Net investment income | | Realized investment gains (losses), net | Asset administration fees and other income |
| | (in thousands) |
| Fixed maturities, available-for-sale | $ | (4,014 | ) | $ | (161 | ) | $ | 2,466 |
| $ | 5,974 |
| | $ | (4,943 | ) | $ | 0 |
|
| Other assets: | | | | | | | |
| Equity securities(6) | 0 |
| (123 | ) | (351 | ) | 0 |
| | 0 |
| (123 | ) |
| Other invested assets(6) | 0 |
| 0 |
| 0 |
| 0 |
| | 0 |
| 0 |
|
| Short-term investments | 0 |
| 0 |
| 0 |
| 0 |
| | 0 |
| 0 |
|
| Cash equivalents | 0 |
| 0 |
| 0 |
| 0 |
| | 0 |
| 0 |
|
| Reinsurance recoverables | (2,852,588 | ) | 0 |
| 0 |
| 0 |
| | 59,501 |
| 0 |
|
| Receivables from parent and affiliates | (13 | ) | 0 |
| 50 |
| 0 |
| | 0 |
| 0 |
|
| Liabilities: | | | | | | | |
| Future policy benefits | (3,791,759 | ) | 0 |
| 0 |
| 0 |
| | (3,740,535 | ) | 0 |
|
| Policyholders' account balances | 0 |
| 0 |
| 0 |
| 0 |
| | 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. |
| |
| (2) | Other, primarily represents reclassifications of certain assets and liabilities between reporting categories. |
| |
| (3) | Unrealized gains or losses related to assets still held at the end of the period do not include amortization or accretion of premiums and discounts. |
| |
| (4) | Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities. Prior period amounts were aggregated to conform to current period presentation. |
| |
| (5) | Includes asset-backed, commercial mortgage-backed and residential mortgage-backed securities. Prior period amounts were aggregated to conform to current period presentation. |
| |
| (6) | Prior period amounts have been reclassified to conform to current period presentation. See Note 2 for details. |
| |
| (7) | Prior period amounts have been updated to conform to current period presentation. |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Fair Value of Financial Instruments
The table below presents the carrying amount and fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. The financial instruments presented below are reported at carrying value on the Company’s Statements of Financial Position. In some cases, as described below, the carrying amount equals or approximates fair value.
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018(1) |
| | Fair Value | | Carrying Amount(2) |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Total |
| | | | | | | | | | |
| | (in thousands) |
| Assets: | | | | | | | | | |
| Commercial mortgage and other loans | $ | 0 |
| | $ | 0 |
| | $ | 1,339,707 |
| | $ | 1,339,707 |
| | $ | 1,353,478 |
|
| Policy loans | 0 |
| | 0 |
| | 12,805 |
| | 12,805 |
| | 12,805 |
|
| Short-term investments | 7,750 |
| | 0 |
| | 0 |
| | 7,750 |
| | 7,750 |
|
| Cash and cash equivalents | 136,175 |
| | 675,000 |
| | 0 |
| | 811,175 |
| | 811,175 |
|
| Accrued investment income | 0 |
| | 90,895 |
| | 0 |
| | 90,895 |
| | 90,895 |
|
| Reinsurance recoverables | 0 |
| | 0 |
| | 55,236 |
| | 55,236 |
| | 55,236 |
|
| Receivables from parent and affiliates | 0 |
| | 9,188 |
| | 0 |
| | 9,188 |
| | 9,188 |
|
| Other assets | 0 |
| | 3,735 |
| | 0 |
| | 3,735 |
| | 3,735 |
|
| Total assets | $ | 143,925 |
| | $ | 778,818 |
| | $ | 1,407,748 |
| | $ | 2,330,491 |
| | $ | 2,344,262 |
|
| Liabilities: | | | | | | | | | |
| Policyholders’ account balances - investment contracts | $ | 0 |
| | $ | 0 |
| | $ | 560,548 |
| | $ | 560,548 |
| | $ | 565,903 |
|
| Cash collateral for loaned securities | 0 |
| | 384 |
| | 0 |
| | 384 |
| | 384 |
|
| Short-term debt | 0 |
| | 139,843 |
| | 0 |
| | 139,843 |
| | 140,569 |
|
| Long-term debt | 0 |
| | 791,670 |
| | 0 |
| | 791,670 |
| | 787,596 |
|
| Reinsurance Payables | 0 |
| | 0 |
| | 55,236 |
| | 55,236 |
| | 55,236 |
|
| Payables to parent and affiliates | 0 |
| | 30,846 |
| | 0 |
| | 30,846 |
| | 30,846 |
|
| Other liabilities | 0 |
| | 554,162 |
| | 0 |
| | 554,162 |
| | 554,162 |
|
| Separate account liabilities - investment contracts | 0 |
| | 71 |
| | 0 |
| | 71 |
| | 71 |
|
| Total liabilities | $ | 0 |
| | $ | 1,516,976 |
| | $ | 615,784 |
| | $ | 2,132,760 |
| | $ | 2,134,767 |
|
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017(1) |
| | Fair Value | | Carrying Amount(2) |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Total |
| | | | | | | | | | |
| | (in thousands) |
| Assets: | | | | | | | | | |
| Commercial mortgage and other loans | $ | 0 |
| | $ | 0 |
| | $ | 1,396,167 |
| | $ | 1,396,167 |
| | $ | 1,387,012 |
|
| Policy loans | 0 |
| | 0 |
| | 12,558 |
| | 12,558 |
| | 12,558 |
|
| Short-term investments | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Cash and cash equivalents | 493,473 |
| | 0 |
| | 0 |
| | 493,473 |
| | 493,473 |
|
| Accrued investment income | 0 |
| | 88,331 |
| | 0 |
| | 88,331 |
| | 88,331 |
|
| Reinsurance recoverables | 0 |
| | 0 |
| | 59,588 |
| | 59,588 |
| | 59,588 |
|
| Receivables from parent and affiliates | 0 |
| | 11,206 |
| | 0 |
| | 11,206 |
| | 11,206 |
|
| Other assets | 0 |
| | 13,802 |
| | 0 |
| | 13,802 |
| | 13,802 |
|
| Total assets | $ | 493,473 |
| | $ | 113,339 |
| | $ | 1,468,313 |
| | $ | 2,075,125 |
| | $ | 2,065,970 |
|
| Liabilities: | | | | | | | | | |
| Policyholders’ account balances - investment contracts | $ | 0 |
| | $ | 0 |
| | $ | 281,582 |
| | $ | 281,582 |
| | $ | 281,051 |
|
| Cash collateral for loaned securities | 0 |
| | 17,383 |
| | 0 |
| | 17,383 |
| | 17,383 |
|
| Short-term debt | 0 |
| | 43,734 |
| | 0 |
| | 43,734 |
| | 43,734 |
|
| Long-term debt | 0 |
| | 1,003,251 |
| | 0 |
| | 1,003,251 |
| | 928,165 |
|
| Reinsurance payables | 0 |
| | 0 |
| | 59,588 |
| | 59,588 |
| | 59,588 |
|
| Payables to parent and affiliates | 0 |
| | 36,026 |
| | 0 |
| | 36,026 |
| | 36,026 |
|
| Other liabilities | 0 |
| | 135,556 |
| | 0 |
| | 135,556 |
| | 135,556 |
|
| Separate account liabilities - investment contracts | 0 |
| | 102 |
| | 0 |
| | 102 |
| | 102 |
|
| Total liabilities | $ | 0 |
| | $ | 1,236,052 |
| | $ | 341,170 |
| | $ | 1,577,222 |
| | $ | 1,501,605 |
|
| |
| (1) | The information presented as of December 31, 2017, excludes certain hedge funds, private equity funds and other funds that were accounted for using the cost method and for which the fair value was measured at NAV per share (or its equivalent) as a practical expedient. The fair value and the carrying value of these cost method investments were $6.4 million and $6.0 million, respectively. Due to the adoption of ASU 2016-01 effective January 1, 2018, these assets are carried at fair value at each reporting date with changes in fair value reported in “Asset administration fees and other income.” Therefore, as of December 31, 2018, these assets are excluded from this table but are reported in the fair value recurring measurement table. |
| |
| (2) | Carrying values presented herein differ from those in the Company’s Statements of Financial Position because certain items within the respective financial statement captions are not considered financial instruments or are 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
Policy loans carrying value approximates fair value.
Short-Term Investments, Cash and Cash Equivalents, Accrued Investment Income, Receivables from Parent and Affiliates, and Other Assets
The Company believes that due to the short-term nature of certain assets, the carrying value approximates fair value. These assets include: certain short-term investments which are not securities, are recorded at amortized cost; cash and cash equivalent instruments; accrued investment income; and other assets that meet the definition of financial instruments, including receivables such as unsettled trades and accounts receivable.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Reinsurance Recoverables and Reinsurance Payables
Reinsurance recoverables and reinsurance payables include corresponding receivables and payables associated with reinsurance arrangements between the Company and related parties. See Note 10 for additional information about the Company's reinsurance arrangements.
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. Discounted cash flow models predominately use market observable inputs such as the borrowing rates currently available to the Company for debt and financial instruments with similar terms and remaining maturities. For debt with a maturity of less than 90 days, the carrying value approximates fair value.
Other Liabilities and Payables to Parent and Affiliates
Other liabilities and payables to parent and affiliates are primarily payables, such as unsettled trades, drafts, escrow deposits and accrued expense payables. Due to the short-term until settlement of most of these liabilities, the Company believes that carrying value approximates fair value.
Separate Account Liabilities - Investment Contracts
Only the portion of separate account liabilities related to products that are investment contracts are reflected in the table above. Separate account liabilities are recorded at the amount credited to the contractholder, which reflects the change in fair value of the corresponding separate account assets including contractholder deposits less withdrawals and fees; therefore, 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:
| | | | 2015 | | 2014 | | 2013 | | | | | | | |
| | | | | | | 2018 | | 2017 | | 2016 |
| | (in thousands) | (in thousands) |
| Balance, beginning of year | $ | 1,114,431 |
| | $ | 1,345,504 |
| | $ | 906,814 |
| $ | 4,596,565 |
| | $ | 4,344,361 |
| | $ | 749,302 |
|
| Capitalization of commissions, sales and issue expenses | 1,535 |
| | 2,804 |
| | 4,050 |
| 372,996 |
| | 277,586 |
| | 269,679 |
|
| Amortization-Impact of assumption and experience unlocking and true-ups | 33,113 |
| | 91,895 |
| | 31,666 |
| (113,534 | ) | | 288,974 |
| | 226,204 |
|
| Amortization-All other | (342,265 | ) | | (330,311 | ) | | 353,895 |
| (476,261 | ) | | (275,028 | ) | | (46,388 | ) |
| Changes in unrealized investment gains and losses | 16,352 |
| | 4,539 |
| | 49,079 |
| 67,739 |
| | (39,328 | ) | | 18,772 |
|
| Ceded DAC upon Reinsurance Treaty with Prudential Insurance (1) | (73,864 | ) | | 0 |
| | 0 |
| |
| Ceded DAC upon reinsurance agreement with Prudential Insurance(1)(2) | | 0 |
| | 0 |
| | (7,480 | ) |
| Assumed DAC upon reinsurance agreement with Pruco Life(1) | | 0 |
| | 0 |
| | 3,134,272 |
|
| Balance, end of year | $ | 749,302 |
| | $ | 1,114,431 |
| | $ | 1,345,504 |
| $ | 4,447,505 |
| | $ | 4,596,565 |
| | $ | 4,344,361 |
|
| |
| (1) | See Note 1 and Note 10 for further details.additional information. |
| |
| (2) | Represents a $7.5 million true-up in 2016 to the ceded DAC upon reinsurance agreement with Prudential Insurance in 2015. |
7. VALUE OF BUSINESS ACQUIRED
DetailsThe balances of and changes in VOBA as of and related interest and gross amortization for the years ended December 31, are as follows:
| | | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| | | | | | | | | | | |
| | (in thousands) | (in thousands) |
| Balance, beginning of year | $ | 39,738 |
| | $ | 43,500 |
| | $ | 43,090 |
| $ | 35,109 |
| | $ | 30,287 |
| | $ | 33,640 |
|
| Amortization-Impact of assumption and experience unlocking and true-ups (1) | 3,412 |
| | 5,412 |
| | 6,376 |
| 1,485 |
| | 10,035 |
| | 2,372 |
|
| Amortization-All other (1) | (10,477 | ) | | (11,181 | ) | | (11,593 | ) | (7,348 | ) | | (7,422 | ) | | (8,176 | ) |
| Interest (2) | 2,436 |
| | 2,615 |
| | 2,762 |
| 1,983 |
| | 2,001 |
| | 1,939 |
|
| Change in unrealized investment gains and losses | 1,163 |
| | (608 | ) | | 2,865 |
| 1,993 |
| | 208 |
| | 512 |
|
| Ceded VOBA upon Reinsurance Treaty with Prudential Insurance (3) | (2,632 | ) | | 0 |
| | 0 |
| |
| Balance, end of year | $ | 33,640 |
| | $ | 39,738 |
| | $ | 43,500 |
| $ | 33,222 |
| | $ | 35,109 |
| | $ | 30,287 |
|
| |
| (1) | The weighted average remaining expected life of VOBA was approximately 5.225.62 years as of December 31, 2015.2018. |
| |
| (2) | The interest accrual rate for the VOBA related to the businesses acquired was 6.05%5.96%, 6.1%5.96% and 6.14%6.00% for the years ended December 31, 2015, 20142018, 2017 and 2013. |
| |
(3) | See Note 1 for further details.2016. |
The following table provides estimated future amortization, net of interest, for the periods indicated (in thousands):indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| | | | | | | | | | |
| | (in thousands) |
| Estimated future VOBA amortization | $ | 5,570 |
| | $ | 4,797 |
| | $ | 4,171 |
| | $ | 3,510 |
| | $ | 2,956 |
|
6. REINSURANCE
The Company utilizes both affiliated and unaffiliated reinsurance arrangements. On its unaffiliated arrangements, the Company uses primarily modified coinsurance reinsurance arrangements whereby the reinsurer shares in the experience of a specified book of business. These reinsurance transactions result in the Company receiving from the reinsurer an upfront ceding commission on the book of business ceded in exchange for the reinsurer receiving in the future, a percentage of the future fees and benefits generated from that book of business. Such transfer does not relieve the Company of its primary liability and, as such, failure of reinsurers to honor their obligation could result in losses to the Company. The Company reduces this risk by evaluating the financial condition and credit worthiness of reinsurers. |
| | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
| | | | | | | | | | |
| | (in thousands) |
| Estimated future VOBA amortization | $ | 4,531 |
| | $ | 4,039 |
| | $ | 3,626 |
| | $ | 3,247 |
| | $ | 2,909 |
|
On its affiliated arrangements, the Company uses automatic and modified coinsurance reinsurance arrangements. These agreements cover all significant risks under features of the policies reinsured. The Company is not relieved of its primary obligation to the policyholder as a result of these reinsurance transactions. These affiliated agreements include the reinsurance of the Company’s guaranteed minimum accumulation | |
| 8. | POLICYHOLDERS’ LIABILITIES |
Future Policy Benefits
Future policy benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum income and withdrawal benefits (“GMIWB”) features. These features are accounted for as embedded derivatives, and changes in the fair value of the embedded derivative are recognized through “Realized investment gains (losses), net.” Please see Note 13 for further details around the affiliated reinsurance agreements.
The effect of reinsuranceat December 31 for the years ended December 31, 2015, 2014 and 2013, wasindicated are as follows:
|
| | | | | | | | |
| | | 2018 | | 2017 |
| | | | | |
| | | (in thousands) |
| Life insurance – domestic | | $ | 74 |
| | $ | 800 |
|
| Individual and group annuities and supplementary contracts(1) | | 1,021,854 |
| | 970,936 |
|
| Other contract liabilities(1) | | 8,347,058 |
| | 8,160,833 |
|
| Total future policy benefits | | $ | 9,368,986 |
| | $ | 9,132,569 |
|
| |
| (1) | Includes assumed reinsurance business. |
Individual and group annuities and supplementary contract liabilities include reserves for life contingent immediate annuities and life contingent group annuities. Other contract liabilities include unearned premiums and certain other reserves for annuities and individual life products.
Future policy benefits for domestic life insurance policies reflect in course of settlement amounts.
Future policy benefits for individual and group 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 generally range from 0.0% to 8.3%, with less than 1.0% of the reserves based on an interest rate in excess of 8.0%.
The Company’s liability for future policy benefits are primarily liabilities for guaranteed benefits related to certain long-duration life and annuity contracts. Liabilities for guaranteed benefits with embedded derivative features are primarily in "Other contract liabilities" in the table above. The remaining liabilities for guaranteed benefits are primarily reflected with the underlying contract. The interest rates used in the determination of the present values range from 3.1% to 4.4%. See Note 9 for additional information regarding liabilities for guaranteed benefits related to certain long-duration contracts.
Premium deficiency reserves included in “Future policy benefits” are established, if necessary, 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. Premium deficiency reserves have been recorded for the individual annuity business, which consists of limited-payment, long-duration; and single premium immediate annuities with life contingencies.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Policyholders’ Account Balances
Policyholders’ account balances at December 31 for the years indicated are as follows:
|
| | | | | | | | | | | | | | | |
| | Gross | | Unaffiliated Ceded | | Affiliated Ceded | | Net |
| | (in thousands) |
| 2015 | | | | | | | |
| Policy charges and fee income - Life (1) | $ | 3,416 |
| | $ | (1,701 | ) | | $ | 0 |
| | $ | 1,715 |
|
| Policy charges and fee income - Annuity | 740,540 |
| | (1,432 | ) | | 0 |
| | 739,108 |
|
| Realized investment gains (losses), net | 247,525 |
| | 0 |
| | (241,473 | ) | | 6,052 |
|
| Policyholders’ benefits | 60,535 |
| | (74 | ) | | 0 |
| | 60,461 |
|
| General, administrative and other expenses | $ | 317,928 |
| | $ | (682 | ) | | $ | (3,775 | ) | | $ | 313,471 |
|
| 2014 | | | | | | | |
| Policy charges and fee income - Life (1) | $ | 3,522 |
| | $ | (856 | ) | | $ | 0 |
| | $ | 2,666 |
|
| Policy charges and fee income - Annuity | 805,550 |
| | (1,889 | ) | | 0 |
| | 803,661 |
|
| Realized investment gains (losses), net | (1,967,588 | ) | | 0 |
| | 1,974,956 |
| | 7,368 |
|
| Policyholders’ benefits | 137,502 |
| | (367 | ) | | 0 |
| | 137,135 |
|
| General, administrative and other expenses | $ | 398,960 |
| | $ | (838 | ) | | $ | (3,874 | ) | | $ | 394,248 |
|
| 2013 | | | | | | | |
| Policy charges and fee income - Life (1) | $ | 3,472 |
| | $ | (1,231 | ) | | $ | 0 |
| | $ | 2,241 |
|
| Policy charges and fee income - Annuity | 809,549 |
| | (2,548 | ) | | 0 |
| | 807,001 |
|
| Realized investment gains (losses), net | 1,076,184 |
| | 0 |
| | (1,260,535 | ) | | (184,351 | ) |
| Policyholders’ benefits | 29,874 |
| | (147 | ) | | 0 |
| | 29,727 |
|
| General, administrative and other expenses | $ | 407,365 |
| | $ | (776 | ) | | $ | (3,910 | ) | | $ | 402,679 |
|
|
| | | | | | | | |
| | | 2018 | | 2017 |
| | | | | |
| | | (in thousands) |
| Interest-sensitive life contracts | | $ | 15,049 |
| | $ | 15,301 |
|
| Individual annuities(1) | | 4,729,973 |
| | 4,162,138 |
|
| Guaranteed interest accounts | | 608,574 |
| | 668,713 |
|
| Total policyholders’ account balances | | $ | 5,353,596 |
| | $ | 4,846,152 |
|
| |
| (1) | Life insurance in force face amounts at December 31, 2015, 2014 and 2013 was $113 million, $121 million and $128 million, respectively.Includes assumed reinsurance business from Pruco Life. |
The Company’s StatementsPolicyholders’ account balances represent an accumulation of Financial Positionaccount deposits plus credited interest less withdrawals, expenses and mortality charges, if applicable. These policyholders’ account balances also included reinsurance recoverablesinclude provisions for benefits under non-life contingent payout annuities. Interest crediting rates range from Pruco Re and Prudential Insurance of $3,088 million at December 31, 2015 and $2,997 million at December 31, 2014.3.5% to 6.0% for interest-sensitive life contracts. Interest crediting rates for individual annuities range from 0.0% to 6.5%. Interest crediting rates for guaranteed interest accounts range from 0.1% to 5.8%.
See Note 1 for a discussion of the of the fourth quarter 2015 reinsurance treaty related to the Company's New York license surrender.
7.9. CERTAIN LONG-DURATION CONTRACTS WITH GUARANTEES
The Company has issued 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 has 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 less any partial withdrawals (“return of net deposits”), (2) total deposits made to the contract lessadjusted for any partial withdrawals plus a minimum return (“minimum return”('minimum return"), and/or (3)(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 hasalso 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 allocatedreallocated to other investment options. The market value adjustment may result in a gain or loss to the Company, depending on crediting rates or an indexed rate at surrender, as applicable. The Company also issued fixed deferred annuity contracts without MVA that have a guaranteed credited rate and annuity benefit.
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."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
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
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.
Prudential Annuities Life Assurance Corporation
Notes to 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 and other policyholder liabilities.benefits.” As of December 31, 20152018 and 2014,2017, the Company had the following guarantees associated with itsthese contracts, by product and guarantee type:
| | | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
| | In the Event of Death | | At Annuitization/ Accumulation (1) | | In the Event of Death | | At Annuitization/ Accumulation (1) | In the Event of Death(1) | | At Annuitization/ Accumulation(1)(2) | | In the Event of Death(1) | | At Annuitization/ Accumulation (1)(2) |
| | | | | | | | | | | | | | | |
| Variable Annuity Contracts | (in thousands) | |
| Annuity Contracts | | (in thousands) |
| Return of net deposits | | | | | | | | | | | | | | |
| Account value | $ | 34,305,352 |
| | N/A |
| | $ | 38,410,155 |
| | N/A |
| $ | 106,779,202 |
| | N/A |
| | $ | 119,182,143 |
| | N/A |
|
| Net amount at risk | $ | 341,707 |
| | N/A |
| | $ | 353,902 |
| | N/A |
| $ | 843,419 |
| | N/A |
| | $ | 274,617 |
| | N/A |
|
| Average attained age of contractholders | 66 years |
| | N/A |
| | 65 years |
| | N/A |
| 67 years |
| | N/A |
| | 66 years |
| | N/A |
|
| Minimum return or contract value | | | | | | | | | | | | | | |
| Account value | $ | 6,976,880 |
| | $ | 34,565,409 |
| | $ | 7,886,833 |
| | $ | 38,471,465 |
| $ | 22,184,537 |
| | $ | 115,822,894 |
| | $ | 25,835,100 |
| | $ | 129,630,456 |
|
| Net amount at risk | $ | 1,194,988 |
| | $ | 2,257,837 |
| | $ | 916,016 |
| | $ | 1,358,023 |
| $ | 4,322,406 |
| | $ | 7,252,486 |
| | $ | 2,161,133 |
| | $ | 3,225,700 |
|
| Average attained age of contractholders | 68 years |
| | 66 years |
| | 67 years |
| | 64 years |
| 70 years |
| | 68 years |
| | 69 years |
| | 67 years |
|
| Average period remaining until expected annuitization | N/A |
| | 0.0 years |
| | N/A |
| | 0.1 years |
| |
| Average period remaining until earliest expected annuitization | | N/A |
| | 0 years |
| | N/A |
| | 0 years |
|
| |
| (1) | Amounts include assumed reinsurance business. |
| |
| (2) | Includes income and withdrawal benefits described herein.benefits. |
|
| | | | | | | | | | | | | | | |
| | December 31, 2015 | | December 31, 2014 |
| | Unadjusted Value | | Adjusted Value | | Unadjusted Value | | Adjusted Value |
| | | | | | | | |
| Variable Annuity Contracts | (in thousands) |
| Market value adjusted annuities | | | | | | | |
| Account value | $ | 1,056,235 |
| | $ | 1,053,952 |
| | $ | 1,244,131 |
| | $ | 1,251,084 |
|
Account balances of variable annuity contracts with guarantees were invested in separate account investment options as follows:
| | | | December 31, 2015 | | December 31, 2014 | December 31, 2018(1) | | December 31, 2017(1) |
| | | | | | | |
| | (in thousands) | (in thousands) |
| Equity funds | $ | 24,639,438 |
| | $ | 28,191,315 |
| $ | 69,686,791 |
| | $ | 83,556,771 |
|
| Bond funds | 12,264,741 |
| | 12,844,788 |
| 51,855,361 |
| | 53,027,241 |
|
| Money market funds | 2,081,684 |
| | 2,783,023 |
| 2,542,219 |
| | 3,726,553 |
|
| Total | $ | 38,985,863 |
| | $ | 43,819,126 |
| $ | 124,084,371 |
| | $ | 140,310,565 |
|
| |
| (1) | Amounts include assumed reinsurance business. |
In addition to the above mentioned amounts invested in separate account investment options $2.3above, $4.9 billion at December 31, 2018 and $2.5$4.7 billion at December 31, 2017 of account balances of variable annuity contracts with guarantees, inclusive of contracts with MVA features, were invested in general account investment options as of December 31, 2015 and 2014, respectively.options. For the years ended December 31, 2015, 20142018, 2017 and 2013,2016, there were no transfers of assets, other than cash, from the general account to any separate account, and accordingly no gains or losses recorded.
Liabilities for Guarantee Benefits
The table below summarizes the changes in general account liabilities for guarantees. The liabilities for guaranteed minimum death benefits (“GMDB”)GMDB and guaranteed minimum income benefits (“GMIB”)GMIB are included in “Future policy benefits and other policyholder liabilities”benefits” and the related changes in the liabilities are included in “Policyholders’ benefits.” Guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”)GMAB, GMWB and guaranteed minimum income and withdrawal benefits (“GMIWB”)GMIWB are accounted for as embedded derivatives and are recorded at fair value.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 105 for additional information regarding the methodology used in determining the fair value of these embedded derivatives. The liabilities for GMAB, GMWB and GMIWB are included in “Future policy benefits and other policyholder liabilities.” The Company and its reinsurance affiliates maintainmaintains 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.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | |
| | GMDB | | GMAB/GMWB/ GMIWB | | GMIB | | Totals |
| | Variable Annuity (in thousands) |
| Balance as of December 31, 2012 | $ | 222,527 |
| | $ | 1,793,135 |
| | $ | 23,516 |
| | $ | 2,039,178 |
|
| Incurred guarantee benefits (1) | (3,191 | ) | | (1,014,909 | ) | | (11,650 | ) | | (1,029,750 | ) |
| Paid guarantee benefits | (27,507 | ) | | 0 |
| | (747 | ) | | (28,254 | ) |
| Changes in unrealized investment gains and losses | 8,041 |
| | 0 |
| | 160 |
| | 8,201 |
|
| December 31, 2013 | 199,870 |
| | 778,226 |
| | 11,279 |
| | 989,375 |
|
| Incurred guarantee benefits (1) | 81,524 |
| | 2,334,185 |
| | 8,506 |
| | 2,424,215 |
|
| Paid guarantee benefits | (25,909 | ) | | 0 |
| | (724 | ) | | (26,633 | ) |
| Changes in unrealized investment gains and losses | 128 |
| | 0 |
| | 43 |
| | 171 |
|
| December 31, 2014 | 255,613 |
| | 3,112,411 |
| | 19,104 |
| | 3,387,128 |
|
| Incurred guarantee benefits (1) | 43,167 |
| | 21,666 |
| | (4,616 | ) | | 60,217 |
|
| Paid guarantee benefits | (29,240 | ) | | 0 |
| | (511 | ) | | (29,751 | ) |
| Changes in unrealized investment gains and losses | (3,663 | ) | | 0 |
| | (113 | ) | | (3,776 | ) |
| December 31, 2015 | $ | 265,877 |
| | $ | 3,134,077 |
| | $ | 13,864 |
| | $ | 3,413,818 |
|
|
| | | | | | | | | | | | | | | |
| | GMDB | | GMAB/GMWB/ GMIWB | | GMIB | | Totals |
| Variable Annuity | (in thousands) |
| Balance at December 31, 2015 | $ | 265,877 |
| | $ | 3,134,077 |
| | $ | 13,864 |
| | $ | 3,413,818 |
|
| Incurred guarantee benefits(1) | 43,185 |
| | (1,979,215 | ) | | (3,683 | ) | | (1,939,713 | ) |
| Paid guarantee benefits | (55,604 | ) | | 0 |
| | (2,209 | ) | | (57,813 | ) |
| Change in unrealized investment gains and losses | (5,206 | ) | | 0 |
| | (209 | ) | | (5,415 | ) |
| Assumed guarantees upon reinsurance agreement with Pruco Life | 389,067 |
| | 6,552,471 |
| | 30,130 |
| | 6,971,668 |
|
| Balance at December 31, 2016 | 637,319 |
| | 7,707,333 |
| | 37,893 |
| | 8,382,545 |
|
| Incurred guarantee benefits(1)(2) | 29,605 |
| | 444,569 |
| | (11,686 | ) | | 462,488 |
|
| Paid guarantee benefits(2) | (57,053 | ) | | 0 |
| | (3,798 | ) | | (60,851 | ) |
| Change in unrealized investment gains and losses(2) | 12,931 |
| | 0 |
| | 117 |
| | 13,048 |
|
| Balance at December 31, 2017 | 622,802 |
| | 8,151,902 |
| | 22,526 |
| | 8,797,230 |
|
| Incurred guarantee benefits(1)(2) | 103,596 |
| | 180,572 |
| | 2,679 |
| | 286,847 |
|
| Paid guarantee benefits(2) | (67,887 | ) | | 0 |
| | (2,915 | ) | | (70,802 | ) |
| Change in unrealized investment gains and losses(2) | (20,108 | ) | | 0 |
| | (230 | ) | | (20,338 | ) |
| Balance at December 31, 2018 | $ | 638,403 |
| | $ | 8,332,474 |
| | $ | 22,060 |
| | $ | 8,992,937 |
|
| |
| (1) | Incurred guarantee benefits include the portion of assessments established as additions to reservereserves as well as changes in estimates affecting the reserves. Also includes changes in the fair value of features accounted for asconsidered to be derivatives. |
| |
| (2) | Amounts include assumed reinsurance business. |
The GMDB liability is determined each period end by estimating the accumulated value of a portion of the total assessments to date less the accumulated value of the guaranteed death benefits in excess of the account balance. The GMIB liability associated with variable annuities is determined each period by estimating the accumulated value of a portion of the total assessments to date less the accumulated value of the projected income benefits in excess of the account balance. The portion of assessments used is chosen such that, at issue the present value of expected death benefits or expected income benefits in excess of the projected account balance and the portion of the present value of total expected assessments over the lifetime of the contracts are equal. The Company regularly evaluates the estimates used and adjusts the GMDB and GMIB liability balances with an associated charge or credit to earnings, if actual experience or other evidence suggests that earlier estimates should be revised.
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 (“GRO”) features, which includeincludes an asset transfer featureautomatic 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.
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.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
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 asset transfer featureautomatic 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.
As part of its risk management strategy, the Company limits its exposure to these risks through a combination of product design elements, such as an asset transfer feature, and affiliated reinsurance agreements. The asset transfer feature, included in the design of certain optional living benefits, transfers assets between certain variable investments selected by the annuity contractholder and, depending on the benefit feature, a fixed rate account in the general account or a bond portfolio within the separate accounts.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
The transfers are based on the static mathematical formula, used with the particular optional benefit, which considers a number of factors, including, but not limited to, the impact of investment performance of the contractholder total account value. In general, but not always, negative investment performance may result in transfers to a fixed-rate account in the general account or a bond portfolio within the separate accounts, and positive investment performance may result in transfers back to contractholder-selected variable investments. Other product design elements utilized for certain products to manage these risks include asset allocation restrictions and minimum issuance age requirements. For risk management purposes, the Company segregates the variable annuity living benefit features into those that include the asset transfer feature including certain GMIWB riders and certain GMAB riders that feature the GRO policyholder benefits, and those that do not include the asset transfer feature, including certain legacy GMIWB, GMWB, GMAB and GMIB riders. Living benefit riders that include the asset transfer feature also include GMDB riders, and as such, the GMDB risk in these riders also benefits from this feature.
Sales InducementsFair Value of Financial Instruments
The Company defers sales inducementstable below presents the carrying amount and amortizes them over the anticipated lifefair value by fair value hierarchy level of the policy using the same methodology and assumptions used to amortize DAC. DSI is included in “Deferred sales inducements” incertain financial instruments that are not reported at fair value. The financial instruments presented below are reported at carrying value on the Company’s Statements of Financial Position. The Company offered various types of sales inducements. These inducements include: (1) a bonus wherebyIn some cases, as described below, the policyholder’s initial account balance is increased by ancarrying 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:equals or approximates fair value.
|
| | | |
| | |
| | Sales Inducements |
| | (in thousands) |
| Balance as of December 31, 2012 | $ | 556,830 |
|
| Capitalization | 31,370 |
|
| Amortization - Impact of assumption and experience unlocking and true-ups | 13,038 |
|
| Amortization - All other | 179,219 |
|
| Change in unrealized investment gains and losses | 28,790 |
|
| Balance as of December 31, 2013 | 809,247 |
|
| Capitalization | 11,515 |
|
| Amortization - Impact of assumption and experience unlocking and true-ups | 45,417 |
|
| Amortization - All other | (204,563 | ) |
| Change in unrealized investment gains and losses | 3,591 |
|
| Balance as of December 31, 2014 | 665,207 |
|
| Capitalization | 873 |
|
| Amortization - Impact of assumption and experience unlocking and true-ups | 21,125 |
|
| Amortization - All other | (206,263 | ) |
| Change in unrealized investment gains and losses | 11,063 |
|
| Ceded DSI upon Reinsurance Treaty with Prudential Insurance (1) | (39,253 | ) |
| Balance as of December 31, 2015 | $ | 452,752 |
|
| |
(1) | See Note 1 for further details. |
8. STATUTORY NET INCOME AND SURPLUS AND DIVIDEND RESTRICTIONS |
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018(1) |
| | Fair Value | | Carrying Amount(2) |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Total |
| | | | | | | | | | |
| | (in thousands) |
| Assets: | | | | | | | | | |
| Commercial mortgage and other loans | $ | 0 |
| | $ | 0 |
| | $ | 1,339,707 |
| | $ | 1,339,707 |
| | $ | 1,353,478 |
|
| Policy loans | 0 |
| | 0 |
| | 12,805 |
| | 12,805 |
| | 12,805 |
|
| Short-term investments | 7,750 |
| | 0 |
| | 0 |
| | 7,750 |
| | 7,750 |
|
| Cash and cash equivalents | 136,175 |
| | 675,000 |
| | 0 |
| | 811,175 |
| | 811,175 |
|
| Accrued investment income | 0 |
| | 90,895 |
| | 0 |
| | 90,895 |
| | 90,895 |
|
| Reinsurance recoverables | 0 |
| | 0 |
| | 55,236 |
| | 55,236 |
| | 55,236 |
|
| Receivables from parent and affiliates | 0 |
| | 9,188 |
| | 0 |
| | 9,188 |
| | 9,188 |
|
| Other assets | 0 |
| | 3,735 |
| | 0 |
| | 3,735 |
| | 3,735 |
|
| Total assets | $ | 143,925 |
| | $ | 778,818 |
| | $ | 1,407,748 |
| | $ | 2,330,491 |
| | $ | 2,344,262 |
|
| Liabilities: | | | | | | | | | |
| Policyholders’ account balances - investment contracts | $ | 0 |
| | $ | 0 |
| | $ | 560,548 |
| | $ | 560,548 |
| | $ | 565,903 |
|
| Cash collateral for loaned securities | 0 |
| | 384 |
| | 0 |
| | 384 |
| | 384 |
|
| Short-term debt | 0 |
| | 139,843 |
| | 0 |
| | 139,843 |
| | 140,569 |
|
| Long-term debt | 0 |
| | 791,670 |
| | 0 |
| | 791,670 |
| | 787,596 |
|
| Reinsurance Payables | 0 |
| | 0 |
| | 55,236 |
| | 55,236 |
| | 55,236 |
|
| Payables to parent and affiliates | 0 |
| | 30,846 |
| | 0 |
| | 30,846 |
| | 30,846 |
|
| Other liabilities | 0 |
| | 554,162 |
| | 0 |
| | 554,162 |
| | 554,162 |
|
| Separate account liabilities - investment contracts | 0 |
| | 71 |
| | 0 |
| | 71 |
| | 71 |
|
| Total liabilities | $ | 0 |
| | $ | 1,516,976 |
| | $ | 615,784 |
| | $ | 2,132,760 |
| | $ | 2,134,767 |
|
The Company is required to prepare statutory financial statements in accordance with accounting practices prescribed or permitted by the State of Arizona Insurance Department. Prescribed statutory accounting practices include publications of the NAIC, as well as state laws, regulations and general administrative rules. 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 of the Company amounted to $340 million, $393 million and $406 million for the years ended December 31, 2015, 2014 and 2013, respectively. Statutory surplus of the Company amounted to $482 million and $606 million at December 31, 2015 and 2014, respectively.
The Company is subject to Arizona law which limits the amount of dividends that insurance companies can pay to its stockholder. 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
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
year. Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is a capacity to pay a dividend of $48 million after December 22, 2015, without prior approval.
On December 22, 2015 and June 29, 2015, the Company paid dividends of $180 million and $270 million, respectively, to its parent, PAI. On December 19, 2014 and June 27, 2014, the Company paid dividends of $75 million and $267 million, respectively, to PAI. On December 16, 2013 and June 26, 2013, the Company paid dividends of $100 million and $184 million, respectively, to PAI.
9. INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31, were as follows:
|
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| | | | (in thousands) | | |
| Current tax expense (benefit): | | | | | |
| U.S. federal | $ | 76,175 |
| | $ | (8,499 | ) | | $ | 36,759 |
|
| State and local | 0 |
| | 0 |
| | 0 |
|
| Total | 76,175 |
| | (8,499 | ) | | 36,759 |
|
| Deferred tax expense (benefit): | | | | | |
| U.S. federal | (84,460 | ) | | 17,103 |
| | 295,613 |
|
| State and local | 0 |
| | 0 |
| | 0 |
|
| Total | (84,460 | ) | | 17,103 |
| | 295,613 |
|
| Total income tax expense (benefit) | (8,285 | ) | | 8,604 |
| | 332,372 |
|
| Total income tax expense (benefit) reported in equity related to: | | | | | |
| Other comprehensive income (loss) | (20,708 | ) | | 7,407 |
| | (41,149 | ) |
| Additional paid-in capital | 0 |
| | 0 |
| | 4,354 |
|
| Total income tax expense (benefit) | $ | (28,993 | ) | | $ | 16,011 |
| | $ | 295,577 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017(1) |
| | Fair Value | | Carrying Amount(2) |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Total |
| | | | | | | | | | |
| | (in thousands) |
| Assets: | | | | | | | | | |
| Commercial mortgage and other loans | $ | 0 |
| | $ | 0 |
| | $ | 1,396,167 |
| | $ | 1,396,167 |
| | $ | 1,387,012 |
|
| Policy loans | 0 |
| | 0 |
| | 12,558 |
| | 12,558 |
| | 12,558 |
|
| Short-term investments | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Cash and cash equivalents | 493,473 |
| | 0 |
| | 0 |
| | 493,473 |
| | 493,473 |
|
| Accrued investment income | 0 |
| | 88,331 |
| | 0 |
| | 88,331 |
| | 88,331 |
|
| Reinsurance recoverables | 0 |
| | 0 |
| | 59,588 |
| | 59,588 |
| | 59,588 |
|
| Receivables from parent and affiliates | 0 |
| | 11,206 |
| | 0 |
| | 11,206 |
| | 11,206 |
|
| Other assets | 0 |
| | 13,802 |
| | 0 |
| | 13,802 |
| | 13,802 |
|
| Total assets | $ | 493,473 |
| | $ | 113,339 |
| | $ | 1,468,313 |
| | $ | 2,075,125 |
| | $ | 2,065,970 |
|
| Liabilities: | | | | | | | | | |
| Policyholders’ account balances - investment contracts | $ | 0 |
| | $ | 0 |
| | $ | 281,582 |
| | $ | 281,582 |
| | $ | 281,051 |
|
| Cash collateral for loaned securities | 0 |
| | 17,383 |
| | 0 |
| | 17,383 |
| | 17,383 |
|
| Short-term debt | 0 |
| | 43,734 |
| | 0 |
| | 43,734 |
| | 43,734 |
|
| Long-term debt | 0 |
| | 1,003,251 |
| | 0 |
| | 1,003,251 |
| | 928,165 |
|
| Reinsurance payables | 0 |
| | 0 |
| | 59,588 |
| | 59,588 |
| | 59,588 |
|
| Payables to parent and affiliates | 0 |
| | 36,026 |
| | 0 |
| | 36,026 |
| | 36,026 |
|
| Other liabilities | 0 |
| | 135,556 |
| | 0 |
| | 135,556 |
| | 135,556 |
|
| Separate account liabilities - investment contracts | 0 |
| | 102 |
| | 0 |
| | 102 |
| | 102 |
|
| Total liabilities | $ | 0 |
| | $ | 1,236,052 |
| | $ | 341,170 |
| | $ | 1,577,222 |
| | $ | 1,501,605 |
|
In July 2014, IRS issued guidance relating to the hedging of variable annuity guaranteed minimum benefits (“Hedging IDD”).
| |
| (1) | The information presented as of December 31, 2017, excludes certain hedge funds, private equity funds and other funds that were accounted for using the cost method and for which the fair value was measured at NAV per share (or its equivalent) as a practical expedient. The fair value and the carrying value of these cost method investments were $6.4 million and $6.0 million, respectively. Due to the adoption of ASU 2016-01 effective January 1, 2018, these assets are carried at fair value at each reporting date with changes in fair value reported in “Asset administration fees and other income.” Therefore, as of December 31, 2018, these assets are excluded from this table but are reported in the fair value recurring measurement table. |
| |
| (2) | Carrying values presented herein differ from those in the Company’s Statements of Financial Position because certain items within the respective financial statement captions are not considered financial instruments or are out of scope under authoritative guidance relating to disclosures of the fair value of financial instruments. |
The Hedging IDD provides an elective safe harbor tax accounting method for certain contracts which permits the current deduction of lossesfair values presented above have been determined by using available market information and the deferral of gains for hedging activities that can be applied to open years under IRS examination beginning with the earliest open year. The Company will apply this tax accounting method for hedging gainsby applying market valuation methodologies, as described in more detail below.
Commercial Mortgage and losses covered by the Hedging IDD beginning with 2013. As a result of applying such accounting method in 2014, the Company’s 2014 U.S. current tax includes a tax benefit of $59 million and a corresponding reduction of deferred tax assets.Other Loans
The Company’s actual income tax expense on continuing operations forfair value of most commercial mortgage loans is based upon the years ended December 31, differs frompresent value of the expected amount computed by applyingfuture cash flows discounted at the statutory federal income taxappropriate U.S. Treasury rate or foreign government bond rate (for non-U.S. dollar-denominated loans) plus an appropriate credit spread for loans of 35% to income from continuing operations before income taxessimilar quality, average life and currency. The quality ratings for the following reasons:
|
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| | | | | | |
| | (in thousands) |
| Expected federal income tax expense (benefit) | $ | 57,727 |
| | $ | 90,780 |
| | $ | 413,162 |
|
| Non taxable investment income | (56,614 | ) | | (69,122 | ) | | (69,665 | ) |
| Tax credits | (9,389 | ) | | (13,080 | ) | | (10,595 | ) |
| Other | (9 | ) | | 26 |
| | (529 | ) |
| Total income tax expense (benefit) | $ | (8,285 | ) | | $ | 8,604 |
| | $ | 332,372 |
|
The dividends received deduction (“DRD”) reduces the amount of dividend income subject to U.S. tax and is thethese loans, a primary componentdeterminant of the non-taxable investment income shown in the table above,credit spreads and as such, is a significant component of the difference betweenpricing process, are based on an internally-developed methodology. Certain commercial mortgage loans are valued incorporating other factors, including the Company’s effective tax rate andterms of the federal statutory tax rate of 35%. The DRDloans, the principal exit strategies for the current period was estimated using informationloans, prevailing interest rates and credit risk.
Policy Loans
Policy loans carrying value approximates fair value.
Short-Term Investments, Cash and Cash Equivalents, Accrued Investment Income, Receivables from 2014Parent and current year results,Affiliates, and was adjustedOther Assets
The Company believes that due to take into account the current year’s equity market performance. The actual current year DRD can vary fromshort-term nature of certain assets, the estimate based on factorscarrying 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; and other assets that meet the definition of financial instruments, including receivables 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 mutual fund investments, changes in the account balances of variable lifeunsettled trades and annuity contracts, and the Company’s taxable income before the DRD.accounts receivable.
In August 2007, the IRS released Revenue Ruling 2007-54, which included, among other items, guidance on the methodology to be followed in calculating the DRD related to variable life insurance and annuity contracts. In September 2007, the IRS released Revenue Ruling 2007-61. Revenue Ruling 2007-61 suspended Revenue Ruling 2007-54 and informed taxpayers that the U.S. Treasury Department and the IRS intend to address through new guidance the issues considered in Revenue Ruling 2007-54, including the methodology to be followed in determining the DRD related to variable life insurance and annuity contracts. In May 2010, the IRS issued an Industry Director Directive (“IDD”) confirming that the methodology for calculating the DRD set forth
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
in Revenue Ruling 2007-54 should not be followed. The IDD also confirmed that the IRS guidance issued before Revenue Ruling 2007-54, which guidanceReinsurance Recoverables and Reinsurance Payables
Reinsurance recoverables and reinsurance payables include corresponding receivables and payables associated with reinsurance arrangements between the Company relied upon in calculating its DRD, should be used to determineand related parties. See Note 10 for additional information about the DRD. In February 2014,Company's reinsurance arrangements.
Policyholders’ Account Balances - Investment Contracts
Only the IRS released Revenue Ruling 2014-7, which modified and superseded Revenue Ruling 2007-54, by removing the provisionsportion of Revenue Ruling 2007-54policyholders’ account balances related to products that are investment contracts (those without significant mortality or morbidity risk) are reflected in the methodologytable 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 followedpayable 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 calculatingconnection with loaning or borrowing securities. Due to the DRDshort-term nature of these transactions, the carrying value approximates fair value.
Debt
The fair value of short-term and making Revenue Ruling 2007-61 obsolete. These activities had no impact onlong-term debt is generally determined by either prices obtained from independent pricing services, which are validated by the Company’s 2013, 2014Company, or 2015 results. However, there remainsdiscounted cash flow models. Discounted cash flow models predominately use market observable inputs such as the possibilityborrowing rates currently available to the Company for debt and financial instruments with similar terms and remaining maturities. For debt with a maturity of less than 90 days, the carrying value approximates fair value.
Other Liabilities and Payables to Parent and Affiliates
Other liabilities and payables to parent and affiliates are primarily payables, such as unsettled trades, drafts, escrow deposits and accrued expense payables. Due to the short-term until settlement of most of these liabilities, the Company believes that carrying value approximates fair value.
Separate Account Liabilities - Investment Contracts
Only the IRS and the U.S. Treasury will address, through subsequent guidance, the issuesportion of separate account liabilities related to products that are investment contracts are reflected in the calculationtable above. Separate account liabilities are recorded at the amount credited to the contractholder, which reflects the change in fair value of the DRD. For the last several years, the revenue proposals included in the Obama Administration’s budgets included a proposal that would change the method used to determine the amount of the DRD. A change in the DRD,corresponding separate account assets including the possible retroactive or prospective elimination of this deduction through guidance or legislation, could increase actual tax expensecontractholder deposits less withdrawals and reduce the Company’s net income.fees; therefore, carrying value approximates fair value.
Deferred tax assets and liabilities at December 31, resulted from the items listed in the following table: |
| | | | | | | |
| | 2015 | | 2014 |
| | | | |
| | (in thousands) |
| Deferred tax assets | | | |
| Insurance reserves | $ | 156,639 |
| | $ | 267,536 |
|
| Investments | 0 |
| | 13,270 |
|
| Compensation reserves | 0 |
| | 1,760 |
|
| Other | 833 |
| | 0 |
|
| Deferred tax assets | 157,472 |
| | 282,566 |
|
| Deferred tax liabilities | | | |
| VOBA and deferred policy acquisition cost | 247,825 |
| | 370,548 |
|
| Investments | 4,467 |
| | 0 |
|
| Deferred sales inducements | 158,463 |
| | 232,822 |
|
| Net unrealized gain on securities | 32,414 |
| | 68,819 |
|
| Other | 0 |
| | 1,239 |
|
| Deferred tax liabilities | 443,169 |
| | 673,428 |
|
| Net deferred tax asset (liability) | $ | (285,697 | ) | | $ | (390,863 | ) |
| | | | |
The applicationbalances 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 requiredchanges in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance the Company considers many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are ordinary or capital; (3) in which tax jurisdictions they were generated and the timing of their reversal; (4) taxable income in prior carryback years as well as projected taxable earnings exclusive of reversing temporary differences and carryforwards; (5) the length of time that carryovers can be utilized in the various taxing jurisdictions; (6) any unique tax rules that would impact the utilization of the deferred tax assets; and (7) any tax planning strategies that the Company would employ to avoid a tax benefit from expiring unused. Although realization is not assured, management believes it is more likely than not that the deferred tax assets, net of valuation allowances, will be realized. The Company had no valuation allowanceDAC as of December 31, 2015, and 2014.
Management believes that based on its historical pattern of taxable income, the Company will produce sufficient income in the future to realize its deferred tax assets. 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 continuing operations before income taxes includes income (loss) from domestic operations of $165 million, $259 million and $1,180 million, and no income from foreign operations for the years ended December 31, 2015, 2014are as follows:
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in thousands) |
| Balance, beginning of year | $ | 4,596,565 |
| | $ | 4,344,361 |
| | $ | 749,302 |
|
| Capitalization of commissions, sales and issue expenses | 372,996 |
| | 277,586 |
| | 269,679 |
|
| Amortization-Impact of assumption and experience unlocking and true-ups | (113,534 | ) | | 288,974 |
| | 226,204 |
|
| Amortization-All other | (476,261 | ) | | (275,028 | ) | | (46,388 | ) |
| Changes in unrealized investment gains and losses | 67,739 |
| | (39,328 | ) | | 18,772 |
|
| Ceded DAC upon reinsurance agreement with Prudential Insurance(1)(2) | 0 |
| | 0 |
| | (7,480 | ) |
| Assumed DAC upon reinsurance agreement with Pruco Life(1) | 0 |
| | 0 |
| | 3,134,272 |
|
| Balance, end of year | $ | 4,447,505 |
| | $ | 4,596,565 |
| | $ | 4,344,361 |
|
| |
| (1) | See Note 1 and Note 10 for additional information. |
| |
| (2) | Represents a $7.5 million true-up in 2016 to the ceded DAC upon reinsurance agreement with Prudential Insurance in 2015. |
7. VALUE OF BUSINESS ACQUIRED
The balances of and 2013, respectively.changes in VOBA as of and for the years ended December 31, are as follows:
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | | | | | |
| | (in thousands) |
| Balance, beginning of year | $ | 35,109 |
| | $ | 30,287 |
| | $ | 33,640 |
|
| Amortization-Impact of assumption and experience unlocking and true-ups (1) | 1,485 |
| | 10,035 |
| | 2,372 |
|
| Amortization-All other (1) | (7,348 | ) | | (7,422 | ) | | (8,176 | ) |
| Interest (2) | 1,983 |
| | 2,001 |
| | 1,939 |
|
| Change in unrealized investment gains and losses | 1,993 |
| | 208 |
| | 512 |
|
| Balance, end of year | $ | 33,222 |
| | $ | 35,109 |
| | $ | 30,287 |
|
| |
| (1) | The weighted average remaining expected life of VOBA was approximately 5.62 years as of December 31, 2018. |
| |
| (2) | The interest accrual rate for the VOBA related to the businesses acquired was 5.96%, 5.96% and 6.00% for the years ended December 31, 2018, 2017 and 2016. |
The following table provides estimated future amortization, net of interest, for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
| | | | | | | | | | |
| | (in thousands) |
| Estimated future VOBA amortization | $ | 4,531 |
| | $ | 4,039 |
| | $ | 3,626 |
| | $ | 3,247 |
| | $ | 2,909 |
|
| |
| 8. | POLICYHOLDERS’ LIABILITIES |
Future Policy Benefits
Future policy benefits at December 31 for the years indicated are as follows:
|
| | | | | | | | |
| | | 2018 | | 2017 |
| | | | | |
| | | (in thousands) |
| Life insurance – domestic | | $ | 74 |
| | $ | 800 |
|
| Individual and group annuities and supplementary contracts(1) | | 1,021,854 |
| | 970,936 |
|
| Other contract liabilities(1) | | 8,347,058 |
| | 8,160,833 |
|
| Total future policy benefits | | $ | 9,368,986 |
| | $ | 9,132,569 |
|
| |
| (1) | Includes assumed reinsurance business. |
Individual and group annuities and supplementary contract liabilities include reserves for life contingent immediate annuities and life contingent group annuities. Other contract liabilities include unearned premiums and certain other reserves for annuities and individual life products.
Future policy benefits for domestic life insurance policies reflect in course of settlement amounts.
Future policy benefits for individual and group 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 generally range from 0.0% to 8.3%, with less than 1.0% of the reserves based on an interest rate in excess of 8.0%.
The Company’s liability for income taxes includesfuture policy benefits are primarily liabilities for guaranteed benefits related to certain long-duration life and annuity contracts. Liabilities for guaranteed benefits with embedded derivative features are primarily in "Other contract liabilities" in the table above. The remaining liabilities for guaranteed benefits are primarily reflected with the underlying contract. The interest rates used in the determination of the present values range from 3.1% to 4.4%. See Note 9 for additional information regarding liabilities for guaranteed benefits related to certain long-duration contracts.
Premium deficiency reserves included in “Future policy benefits” are established, if necessary, when the liability for unrecognized taxfuture policy benefits plus the present value of expected future gross premiums are determined to be insufficient to provide for expected future policy benefits and interest that relate to tax years still subject to review byexpenses. Premium deficiency reserves have been recorded for the IRS or other taxing authorities. The completionindividual annuity business, which consists 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 classifies all interestlimited-payment, long-duration; and penalties related to tax uncertainties as income tax expense (benefit). As of December 31, 2015, 2014, and 2013 the Company recognized nothing in the Consolidated Statement of Operations and recognized no liabilities in the Statement of Financial Position for tax-related interest and penalties. The Company had zero unrecognized tax benefits assingle premium immediate annuities with life contingencies.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
ofPolicyholders’ Account Balances
Policyholders’ account balances at December 31 2015 and 2014. The Company does not anticipate any significant changes withinfor the next 12 months to its total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.
At December 31, 2015, the Company remains subject to examination in the U.S. for tax years 2009 through 2015.
For tax years 2009 through 2016, the Company is participating in the IRS’s Compliance Assurance Program (“CAP”). Under CAP, 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 resolutions programs are available to resolve the disagreements in a timely manner before the tax returns are filed.
10. 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 hierarchyindicated are as follows:
|
| | | | | | | | |
| | | 2018 | | 2017 |
| | | | | |
| | | (in thousands) |
| Interest-sensitive life contracts | | $ | 15,049 |
| | $ | 15,301 |
|
| Individual annuities(1) | | 4,729,973 |
| | 4,162,138 |
|
| Guaranteed interest accounts | | 608,574 |
| | 668,713 |
|
| Total policyholders’ account balances | | $ | 5,353,596 |
| | $ | 4,846,152 |
|
| |
| (1) | Includes assumed reinsurance business from Pruco Life. |
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. Interest crediting rates range from 3.5% to 6.0% for interest-sensitive life contracts. Interest crediting rates for individual annuities range from 0.0% to 6.5%. Interest crediting rates for guaranteed interest accounts range from 0.1% to 5.8%.
9. CERTAIN LONG-DURATION CONTRACTS WITH GUARANTEES
The Company issued 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 is based on unadjusted quoted prices in active marketsa specified date adjusted for any withdrawals (“contract value”). These guarantees include benefits that are accessiblepayable 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, for identical assetsdepending on crediting rates or liabilities.an indexed rate at surrender, as applicable. The Company’s Level 1 assetsCompany also issued fixed deferred annuity contracts without MVA that have a guaranteed credited rate and liabilities primarily include short-term investments and equity securities that trade on an active exchange market.annuity benefit.
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 actively trade and are priced based on a net asset value ("NAV")), short-term investments and certain over-the-counter ("OTC") derivatives.
Level 3 - Fair value is based on at least one significant unobservable input for the asset or liability. The assets and liabilities in this category may require significant judgment or estimation in determiningsupporting the fair value. The Company’s Level 3 assets and liabilities primarily include: certain private fixed maturities, certain manually priced public fixed maturities, short-term investments, certain highly structured OTC derivative contracts and embedded derivatives resulting from certain products with guaranteed benefits.
Assets and Liabilities by Hierarchy Level – The tables below present the balancesvariable portion of assets and liabilities reportedall variable annuities are carried at fair value on a recurring basis,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 dates indicated.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.
78For 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.
Prudential Annuities Life Assurance Corporation
Notes to 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, 2018 and 2017, the Company had the following guarantees associated with these contracts, by product and guarantee type:
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2015 |
| | Level 1 | | Level 2 | | Level 3 | | Netting (1) | | Total |
| | (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | |
| U.S Treasury securities and obligations of U.S. government authorities and agencies | $ | 0 |
| | $ | 12,154 |
| | $ | 0 |
| | $ | 0 |
| | $ | 12,154 |
|
| Obligations of U.S. states and their political subdivisions | 0 |
| | 20,212 |
| | 0 |
| | 0 |
| | 20,212 |
|
| Foreign government bonds | 0 |
| | 49,283 |
| | 0 |
| | 0 |
| | 49,283 |
|
| U.S. corporate public securities | 0 |
| | 934,109 |
| | 15,000 |
| | 0 |
| | 949,109 |
|
| U.S. corporate private securities | 0 |
| | 523,298 |
| | 107,777 |
| | 0 |
| | 631,075 |
|
| Foreign corporate public securities | 0 |
| | 136,222 |
| | 0 |
| | 0 |
| | 136,222 |
|
| Foreign corporate private securities | 0 |
| | 220,818 |
| | 4,531 |
| | 0 |
| | 225,349 |
|
| Asset-backed securities (4) | 0 |
| | 104,797 |
| | 46,493 |
| | 0 |
| | 151,290 |
|
| Commercial mortgage-backed securities | 0 |
| | 215,740 |
| | 0 |
| | 0 |
| | 215,740 |
|
| Residential mortgage-backed securities | 0 |
| | 133,838 |
| | 0 |
| | 0 |
| | 133,838 |
|
| Subtotal | 0 |
| | 2,350,471 |
| | 173,801 |
| | 0 |
| | 2,524,272 |
|
| Trading account assets: | | | | | | | | | |
| Equity securities | 5,653 |
| | 0 |
| | 0 |
| | 0 |
| | 5,653 |
|
| Subtotal | 5,653 |
| | 0 |
| | 0 |
| | 0 |
| | 5,653 |
|
| Equity securities, available-for-sale | 0 |
| | 17 |
| | 0 |
| | 0 |
| | 17 |
|
| Short-term investments | 157,257 |
| | 520 |
| | 450 |
| | 0 |
| | 158,227 |
|
| Cash equivalents | 0 |
| | 0 |
| | 225 |
| | 0 |
| | 225 |
|
| Other long-term investments | 0 |
| | 135,209 |
| | 2,119 |
| | (21,508 | ) | | 115,820 |
|
| Reinsurance recoverables | 0 |
| | 0 |
| | 3,012,653 |
| | 0 |
| | 3,012,653 |
|
| Receivables from parent and affiliates | 0 |
| | 29,676 |
| | 7,664 |
| | 0 |
| | 37,340 |
|
| Subtotal excluding separate account assets | 162,910 |
| | 2,515,893 |
| | 3,196,912 |
| | (21,508 | ) | | 5,854,207 |
|
| Separate account assets (2) | 0 |
| | 39,250,159 |
| | 0 |
| | 0 |
| | 39,250,159 |
|
| Total assets | $ | 162,910 |
| | $ | 41,766,052 |
| | $ | 3,196,912 |
| | $ | (21,508 | ) | | $ | 45,104,366 |
|
| Future policy benefits (3) | $ | 0 |
| | $ | 0 |
| | $ | 3,134,077 |
| | $ | 0 |
| | $ | 3,134,077 |
|
| Payables to parent and affiliates | 0 |
| | 25,277 |
| | 0 |
| | (25,277 | ) | | 0 |
|
| Total liabilities | $ | 0 |
| | $ | 25,277 |
| | $ | 3,134,077 |
| | $ | (25,277 | ) | | $ | 3,134,077 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | In the Event of Death(1) | | At Annuitization/ Accumulation(1)(2) | | In the Event of Death(1) | | At Annuitization/ Accumulation (1)(2) |
| | | | | | | | |
| Annuity Contracts | (in thousands) |
| Return of net deposits | | | | | | | |
| Account value | $ | 106,779,202 |
| | N/A |
| | $ | 119,182,143 |
| | N/A |
|
| Net amount at risk | $ | 843,419 |
| | N/A |
| | $ | 274,617 |
| | N/A |
|
| Average attained age of contractholders | 67 years |
| | N/A |
| | 66 years |
| | N/A |
|
| Minimum return or contract value | | | | | | | |
| Account value | $ | 22,184,537 |
| | $ | 115,822,894 |
| | $ | 25,835,100 |
| | $ | 129,630,456 |
|
| Net amount at risk | $ | 4,322,406 |
| | $ | 7,252,486 |
| | $ | 2,161,133 |
| | $ | 3,225,700 |
|
| Average attained age of contractholders | 70 years |
| | 68 years |
| | 69 years |
| | 67 years |
|
| Average period remaining until earliest expected annuitization | N/A |
| | 0 years |
| | N/A |
| | 0 years |
|
| |
| (1) | Amounts include assumed reinsurance business. |
| |
| (2) | Includes income and withdrawal benefits. |
Account balances of variable annuity contracts with guarantees were invested in separate account investment options as follows:
|
| | | | | | | |
| | December 31, 2018(1) | | December 31, 2017(1) |
| | | | |
| | (in thousands) |
| Equity funds | $ | 69,686,791 |
| | $ | 83,556,771 |
|
| Bond funds | 51,855,361 |
| | 53,027,241 |
|
| Money market funds | 2,542,219 |
| | 3,726,553 |
|
| Total | $ | 124,084,371 |
| | $ | 140,310,565 |
|
| |
| (1) | Amounts include assumed reinsurance business. |
In addition to the amounts invested in separate account investment options above, $4.9 billion at December 31, 2018 and $4.7 billion at December 31, 2017 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, 2018, 2017 and 2016, there were no transfers of assets, other than cash, from the general account to any separate account, and accordingly no gains or losses recorded.
Liabilities for Guarantee Benefits
The table below summarizes the changes in general account liabilities for guarantees. The liabilities for GMDB and 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.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2014 (5) |
| | Level 1 | | Level 2 | | Level 3 | | Netting (1) | | Total |
| | | | | | | | | | |
| | (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | |
| U.S Treasury securities and obligations of U.S. government authorities and agencies | $ | 0 |
| | $ | 6,336 |
| | $ | 0 |
| | $ | 0 |
| | $ | 6,336 |
|
| Obligations of U.S. states and their political subdivisions | 0 |
| | 70,789 |
| | 0 |
| | 0 |
| | 70,789 |
|
| Foreign government securities | 0 |
| | 37,355 |
| | 0 |
| | 0 |
| | 37,355 |
|
| U.S. corporate public securities | 0 |
| | 1,072,258 |
| | 16,860 |
| | 0 |
| | 1,089,118 |
|
| U.S. corporate private securities | 0 |
| | 560,113 |
| | 98,544 |
| | 0 |
| | 658,657 |
|
| Foreign corporate public securities | 0 |
| | 123,860 |
| | 0 |
| | 0 |
| | 123,860 |
|
| Foreign corporate private securities | 0 |
| | 229,383 |
| | 666 |
| | 0 |
| | 230,049 |
|
| Asset-backed securities (4) | 0 |
| | 108,487 |
| | 40,524 |
| | 0 |
| | 149,011 |
|
| Commercial mortgage-backed securities | 0 |
| | 302,185 |
| | 0 |
| | 0 |
| | 302,185 |
|
| Residential mortgage-backed securities | 0 |
| | 133,233 |
| | 0 |
| | 0 |
| | 133,233 |
|
| Subtotal | 0 |
| | 2,643,999 |
| | 156,594 |
| | 0 |
| | 2,800,593 |
|
| Trading account assets: | | | | | | | | | |
| Equity securities | 6,131 |
| | 0 |
| | 0 |
| | 0 |
| | 6,131 |
|
| Subtotal | 6,131 |
| | 0 |
| | 0 |
| | 0 |
| | 6,131 |
|
| Equity securities, available-for-sale | 0 |
| | 17 |
| | 0 |
| | 0 |
| | 17 |
|
| Short-term investments | 57,185 |
| | 0 |
| | 0 |
| | 0 |
| | 57,185 |
|
| Cash equivalents | 0 |
| | 0 |
| | 225 |
| | 0 |
| | 225 |
|
| Other long-term investments | 0 |
| | 118,846 |
| | 633 |
| | (24,288 | ) | | 95,191 |
|
| Reinsurance recoverables | 0 |
| | 0 |
| | 2,996,154 |
| | 0 |
| | 2,996,154 |
|
| Receivables from parent and affiliates | 0 |
| | 18,748 |
| | 22,320 |
| | 0 |
| | 41,068 |
|
| Subtotal excluding separate account assets | 63,316 |
| | 2,781,610 |
| | 3,175,926 |
| | (24,288 | ) | | 5,996,564 |
|
| Separate account assets (2) | 0 |
| | 44,101,699 |
| | 0 |
| | 0 |
| | 44,101,699 |
|
| Total assets | $ | 63,316 |
| | $ | 46,883,309 |
| | $ | 3,175,926 |
| | $ | (24,288 | ) | | $ | 50,098,263 |
|
| Future policy benefits (3) | 0 |
| | 0 |
| | 3,112,411 |
| | 0 |
| | 3,112,411 |
|
| Payables to parent and affiliates | 0 |
| | 21,249 |
| | 0 |
| | (21,249 | ) | | 0 |
|
| Total liabilities | $ | 0 |
| | $ | 21,249 |
| | $ | 3,112,411 |
| | $ | (21,249 | ) | | $ | 3,112,411 |
|
|
| | | | | | | | | | | | | | | |
| | GMDB | | GMAB/GMWB/ GMIWB | | GMIB | | Totals |
| Variable Annuity | (in thousands) |
| Balance at December 31, 2015 | $ | 265,877 |
| | $ | 3,134,077 |
| | $ | 13,864 |
| | $ | 3,413,818 |
|
| Incurred guarantee benefits(1) | 43,185 |
| | (1,979,215 | ) | | (3,683 | ) | | (1,939,713 | ) |
| Paid guarantee benefits | (55,604 | ) | | 0 |
| | (2,209 | ) | | (57,813 | ) |
| Change in unrealized investment gains and losses | (5,206 | ) | | 0 |
| | (209 | ) | | (5,415 | ) |
| Assumed guarantees upon reinsurance agreement with Pruco Life | 389,067 |
| | 6,552,471 |
| | 30,130 |
| | 6,971,668 |
|
| Balance at December 31, 2016 | 637,319 |
| | 7,707,333 |
| | 37,893 |
| | 8,382,545 |
|
| Incurred guarantee benefits(1)(2) | 29,605 |
| | 444,569 |
| | (11,686 | ) | | 462,488 |
|
| Paid guarantee benefits(2) | (57,053 | ) | | 0 |
| | (3,798 | ) | | (60,851 | ) |
| Change in unrealized investment gains and losses(2) | 12,931 |
| | 0 |
| | 117 |
| | 13,048 |
|
| Balance at December 31, 2017 | 622,802 |
| | 8,151,902 |
| | 22,526 |
| | 8,797,230 |
|
| Incurred guarantee benefits(1)(2) | 103,596 |
| | 180,572 |
| | 2,679 |
| | 286,847 |
|
| Paid guarantee benefits(2) | (67,887 | ) | | 0 |
| | (2,915 | ) | | (70,802 | ) |
| Change in unrealized investment gains and losses(2) | (20,108 | ) | | 0 |
| | (230 | ) | | (20,338 | ) |
| Balance at December 31, 2018 | $ | 638,403 |
| | $ | 8,332,474 |
| | $ | 22,060 |
| | $ | 8,992,937 |
|
| |
| (1) | “Netting” amounts represent cash collateralIncurred guarantee benefits include the portion of $(3.8) million and $3.0 millionassessments established as additions to reserves as well as changes in estimates affecting the reserves. Also includes changes in the fair value of December 31, 2015 and December 31, 2014, respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subjectfeatures considered to master netting arrangements.be derivatives. |
| |
| (2) | 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 Company’s Statements of Financial Position. |
| |
(3) | As of December 31, 2015, the net embedded derivative liability position of $3,134 million includes $34 million of embedded derivatives in an asset position and $3,168 million of embedded derivatives in a liability position. As of December 31, 2014, the net embedded derivative liability position of $3,112 million includes $55 million of embedded derivatives in an asset position and $3,167 million of embedded derivatives in a liability position. |
| |
(4) | Includes credit-tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans and other asset types. |
| |
(5) | Prior period amounts are presented on a basis consistent with the current period presentation.Amounts include assumed reinsurance business. |
The methods and assumptionsGMDB liability is determined each period end by estimating the Company uses to estimate the fairaccumulated value of assetsa portion of the total assessments to date less the accumulated value of the guaranteed death benefits in excess of the account balance. The GMIB liability associated with variable annuities is determined each period by estimating the accumulated value of a portion of the total assessments to date less the accumulated value of the projected income benefits in excess of the account balance. The portion of assessments used is chosen such that, at issue the present value of expected death benefits or expected income benefits in excess of the projected account balance and liabilities measured at fairthe portion of the present value onof total expected assessments over the lifetime of the contracts are equal. The Company regularly evaluates the estimates used and adjusts the GMDB and GMIB liability balances with an associated charge or credit to earnings, if actual experience or other evidence suggests that earlier estimates should be revised.
The GMAB features provide the contractholder with a recurring basis are summarized below.
Fixed Maturity Securities –guaranteed return of initial account value or an enhanced value if applicable. The fair valuesmost significant of the Company’s public fixed maturity securitiesGMAB features are generally based on prices obtained from independent pricing services. Prices for each security are generally sourced from multiple pricing vendors, andthe 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.
The GMWB features provide the contractholder with access to a vendor hierarchyguaranteed remaining balance if the account value 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 limitedreduced 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 reflectivezero through a combination of market activitydeclines 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 other inputs observable incumulative deposits when withdrawals commence, less cumulative withdrawals. The contractholder also has the market,option, after a specified time period, to reset the Company may challengeguaranteed remaining balance to the pricethen-current account value, if greater. The contractholder accesses the guaranteed remaining balance through a formal process withpayments over time, subject to maximum annual limits. The GMWB liability is calculated as the pricingpresent value of future expected payments to customers less the present value of future expected rider fees attributable to the embedded derivative feature.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
serviceThe GMIWB features, taken collectively, provide a contractholder two optional methods to receive guaranteed minimum payments over time, a “withdrawal” option or classifyan “income” option. The withdrawal option (which was available under only one of the securities as Level 3. IfGMIWBs and is no longer offered) guarantees that a contractholder can withdraw an amount each year until the pricing service updatescumulative withdrawals reach a total guaranteed balance. The income option (which varies among the priceCompany’s GMIWBs) in general guarantees the contractholder the ability 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 withwithdraw an internally developed valuation. As of December 31, 2015 and 2014 overrides on a net basis were not material. Pricing service overrides, internally-developed valuations and indicative broker quotes are generally included in Level 3amount each year for life (or for joint lives, 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 reflectivecase 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 value of private fixed maturities, which are comprised of investments in private placement securities, 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 industry sectorspousal version of the issuer andbenefit) where such amount is equal to a percentage of a protected value under the reduced liquidity associated with private placements. Since most private placements are valued using standard market observable inputs and inputs derived from,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 corroborated by, market observable data including observed prices and spreads for similar publicly traded 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 reflectat any time following contract issue prior to annuitization. Certain GMIWB features include an automatic rebalancing element that reduces 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 significantexposure to the price of a security, a Level 3 classificationthese guarantees. The GMIWB liability is made.
Trading Account Assets – Trading account assets consist primarily of equity securities whose fair values are determined consistent with similar instruments described below under “Equity Securities.”
Equity Securities – Equity securities consist principally of investments in common stock of publicly traded companies, as well as mutual fund shares. 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 long-term investments,” or as liabilities, within “Payables to parent and affiliates”, except for embedded derivatives which are recorded with the associated host contract. The fair values of derivative contracts can be affected by changes in interest rates, foreign exchange rates, credit spreads, market volatility, expected returns, NPR, liquidity and other factors. For derivative positions included within Level 3 of the fair value hierarchy, liquidity valuation adjustments are made to reflect the cost of exiting significant positions, and consider the bid-ask spread, maturity, complexity, and other specific attributes of the underlying derivative position.
The majority of the Company’s derivative positions are traded in the over-the counter ("OTC") derivative market and are classified within Level 2 in the fair value hierarchy. OTC derivatives classified within Level 2 are valued using models that utilize actively quoted or observable market input values from external market data providers, third-party pricing vendors and/or recent trading activity. The Company’s policy is to use mid-market pricing in determining its best estimate of fair value. The fair values of most OTC derivatives, including interest rate and cross currency swaps, currency forward contracts and single name credit default swaps are determined using discounted cash flow models. The fair values of European style option contracts are determined using Black-Scholes option pricing models. These models’ key inputs include the contractual terms of the respective contract, along with significant observable inputs, including interest rates, currency rates, credit spreads, equity prices, index dividend yields, NPR, volatility and other factors.
The Company’s cleared interest rate swaps and credit derivatives linked to an index are valued using models that utilize actively quoted or observable market inputs, including Overnight Indexed Swap discount rates, 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.
The vast majority of the Company's derivative agreements are with highly rated major international financial institutions. To reflect the market’s perception of its own and the counterparty’s NPR, the Company incorporates additional spreads over London Interbank Offered Rates ("LIBOR") into the discount rate used in determining the fair value of OTC derivative assets and liabilities that are not otherwise collateralized.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Derivatives classified as Level 3 include structured products. These derivatives are valued based upon models, such as Monte Carlo simulation models and other techniques, that utilize significant unobservable inputs. Level 3 methodologies are validated through periodic comparison of the Company’s fair values to external broker-dealer values. As of December 31, 2015, there was $1.6 million in internally valued derivatives with the fair value classified within Level 3. As of December 31, 2014 there were no internally valued derivatives with the fair value classified within Level 3, and all derivatives were classified within Level 2. See Note 11 for more details on the fair value of derivative instruments by primary underlying.
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 classified within Level 2 and Level 3. Level 2 instruments are generally fair valued based on market observable inputs. Level 3 instruments are internally valued based on internal asset manager valuations.
Separate Account Assets – Separate account assets include fixed maturity securities, treasuries, equity securities and mutual funds 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 whose fair values are determined consistent with similar securities described above under “Fixed Maturity Securities” managed by affiliated asset managers.
Reinsurance Recoverables – Reinsurance recoverables carried at fair value include the reinsurance of the Company’s living benefit guarantees on certain of its variable annuity contracts. These guarantees are accounted for as embedded derivatives and are 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 guarantees.
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 offered by the Company, including guaranteed minimum accumulation benefits ("GMAB"), guaranteed minimum 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 contractholderscustomers less the present value of future expected rider fees attributable to the optional living benefitembedded derivative feature. 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 determination of these risk premiums requires the use of management's judgment.
The significant inputs to the valuation models for these embedded derivatives include capital market assumptions, such as interest rate levels and volatility assumptions, the Company’s market-perceived NPR, as well as actuarially determined assumptions, including contractholder behavior, such as lapse rates, benefit utilization rates, withdrawal rates, and mortality rates. Since many of these assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 in the fair value hierarchy.
Capital market inputs and actual policyholders’ account values are updated each quarter based on capital market conditions as of the end of the quarter, including interest rates, equity markets, and volatility. In the risk neutral valuation, the initial swap curve drives the total return used to grow the policyholders’ account values. The Company’s discount rate assumption is based on the LIBOR swap curve, 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.
Transfers between Levels 1 and 2 – Overall, transfers between levels are made to reflect changes in observability of inputs and market activity. Transfers into or out of any level are generally reported as the value as of the beginning of the quarter in which the transfers occur for any such assets still held at the end of the quarter. Periodically there are transfers between Level 1 and Level 2 for assets held in the Company’s Separate Account. During the year ended December 31, 2015, there were no transfers between Level 1 and Level 2. During the year ended December 31, 2014, $963 million was transferred from Level 1 to Level 2.
Level 3 Assets and Liabilities by Price Source – The tables below present the balances of Level 3 assets and liabilities measured at fair value with their corresponding pricing sources.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | |
| | As of December 31, 2015 |
| | Internal (1) | | External (2) | | Total |
| | | | | | |
| | (in thousands) |
| Corporate securities (3) | $ | 111,295 |
| | $ | 16,013 |
| | $ | 127,308 |
|
| Asset-backed securities (4) | 0 |
| | 46,493 |
| | 46,493 |
|
| Short-term investments | 450 |
|
| 0 |
|
| 450 |
|
| Cash equivalents | 225 |
| | 0 |
| | 225 |
|
| Other long-term investments | 1,565 |
| | 554 |
| | 2,119 |
|
| Reinsurance recoverables | 3,012,653 |
| | 0 |
| | 3,012,653 |
|
| Receivables from parent and affiliates | 0 |
| | 7,664 |
| | 7,664 |
|
| Total assets | $ | 3,126,188 |
| | $ | 70,724 |
| | $ | 3,196,912 |
|
| Future policy benefits | $ | 3,134,077 |
| | $ | 0 |
| | $ | 3,134,077 |
|
| Total liabilities | $ | 3,134,077 |
| | $ | 0 |
| | $ | 3,134,077 |
|
|
| | | | | | | | | | | |
| | As of December 31, 2014 |
| | Internal (1) | | External (2) | | Total |
| | | | | | |
| | (in thousands) |
| Corporate securities (3) | $ | 99,209 |
| | $ | 16,861 |
| | $ | 116,070 |
|
| Asset-backed securities (4) | 0 |
| | 40,524 |
| | 40,524 |
|
| Cash equivalents | 225 |
| | 0 |
| | 225 |
|
| Other long-term investments | 0 |
| | 633 |
| | 633 |
|
| Reinsurance recoverables | 2,996,154 |
| | 0 |
| | 2,996,154 |
|
| Receivables from parent and affiliates | 0 |
| | 22,320 |
| | 22,320 |
|
| Total assets | $ | 3,095,588 |
| | $ | 80,338 |
| | $ | 3,175,926 |
|
| Future policy benefits | $ | 3,112,411 |
| | $ | 0 |
| | $ | 3,112,411 |
|
| Total liabilities | $ | 3,112,411 |
| | $ | 0 |
| | $ | 3,112,411 |
|
| |
(1) | Represents valuations reflecting both internally-derived and market inputs as well as third-party pricing information or quotes. See below for additional information related to internally-developed valuation for significant items in the above table. |
| |
(2) | Represents unadjusted prices from independent pricing-services and independent indicative broker quotes where pricing inputs are not readily available. |
| |
(3) | Includes assets classified as fixed maturities available-for-sale. |
| |
(4) | Includes credit-tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans and other asset types. |
Quantitative Information Regarding Internally Priced Level 3 Assets and Liabilities – The tables below present quantitative information on significant internally-priced Level 3 assets and liabilities.
|
| | | | | | | | | | | | | | | | | | |
| | As of December 31, 2015 |
| | Fair Value | | Primary Valuation Techniques | | Unobservable Inputs | | Minimum | | Maximum | | Weighted Average | | Impact of Increase in Input on Fair Value (1) |
| | | | | | | | | | | | | | |
| | (in thousands) | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | |
| Corporate securities | $ | 111,295 |
| | Discounted cash flow | | Discount rate | | 3.71 | % | | 17.95 | % | | 4.43 | % | | Decrease |
| Reinsurance recoverables | $ | 3,012,653 |
| | Fair values are determined in the same manner as future policy benefits | | |
| Liabilities: | | | | | | | | | | | | | |
| Future policy benefits (2) | $ | 3,134,077 |
| | Discounted cash flow | | Lapse rate (3) | | 0 | % | | 14 | % | | | | Decrease |
| | | | | | NPR spread (4) | | 0.06 | % | | 1.76 | % | | | | Decrease |
| | | | | | Utilization rate (5) | | 63 | % | | 95 | % | | | | Increase |
| | | | | | Withdrawal rate (6) | | 74 | % | | 100 | % | | | | Increase |
| | | | | | Mortality rate (7) | | 0 | % | | 14 | % | | | | Decrease |
| | | | | | Equity volatility curve | | 17 | % | | 28 | % | | | | Increase |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | | | | |
| | As of December 31, 2014 |
| | Fair Value | | Primary Valuation Techniques | | Unobservable Inputs | | Minimum | | Maximum | | Weighted Average | | Impact of Increase in Input on Fair Value (1) |
| | | | | | | | | | | | | | |
| | (in thousands) | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | |
| Corporate securities | $ | 99,209 |
| | Discounted cash flow | | Discount rate | | 3.55 | % | | 11.75 | % | | 3.96 | % | | Decrease |
| Reinsurance recoverables | $ | 2,996,154 |
| | Fair values are determined in the same manner as future policy benefits | | |
| Liabilities: | | | | | | | | | | | | | |
| Future policy benefits (2) | $ | 3,112,411 |
| | Discounted cash flow | | Lapse rate (3) | | 0 | % | | 14 | % | | | | Decrease |
| | | | | | NPR spread (4) | | 0 | % | | 1.30 | % | | | | Decrease |
| | | | | | Utilization rate (5) | | 63 | % | | 95 | % | | | | Increase |
| | | | | | Withdrawal rate (6) | | 74 | % | | 100 | % | | | | Increase |
| | | | | | Mortality rate (7) | | 0 | % | | 14 | % | | | | Decrease |
| | | | | | Equity volatility curve | | 17 | % | | 28 | % | | | | Increase |
| |
(1) | Conversely, the impact of a decrease in input would have the opposite impact for the fair value as that presented in the table. |
| |
(2) | 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 weighted average, is a more meaningful representation of the unobservable inputs used in the valuation. |
| |
(3) | Lapse rates 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 are also generally assumed to be lower for the period where surrender charges apply. |
| |
(4) | To reflect NPR, the Company incorporates an additional spread over LIBOR into the discount rate used in the valuation of individual living benefit contracts in a liability position and generally not to those in a contra-liability position. The NPR spread reflects the financial strength ratings of the Company and its affiliates, as these are insurance liabilities and senior to debt. The additional spread over LIBOR is determined by utilizing the credit spreads associated with issuing funding agreements adjusted for any illiquidity risk premium. |
| |
(5) | 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. |
| |
(6) | The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These assumptions may vary based on the product type, contractholder, age, tax status, and withdrawal timing. The fair value of the liability will generally increase the closer the withdrawal rate is to 100%. |
| |
(7) | Range reflects the mortality rate for the vast majority of business with living benefits, with policyholders ranging from 35 to 90 years old. While the majority of living benefits have a minimum age requirement, certain benefits do not have an age restriction. This results in contractholders for certain benefits with mortality rates approaching 0%. Based on historical experience, the Company applies a set of age and duration specific mortality rate adjustments compared to standard industry tables. A mortality improvement assumption is also incorporated into the overall mortality table. |
Interrelationships Between Unobservable Inputs– In addition to the sensitivities of fair value measurements to changes in each unobservable input in isolation, as reflected in the table above, interrelationships between these inputs may also exist, such that a change in one unobservable input may give rise to a change in another, or multiple, inputs. Examples of such interrelationships for significant internally-priced Level 3 assets and liabilities are as follows:
Corporate Securities – The rate used to discount future cash flows reflects current risk-free rates plus credit and liquidity spread requirements that market participants would use to value an asset. The discount rate may be influenced by many factors, including market cycles, expectations of default, collateral, term, and asset complexity. Each of these factors can influence discount rates, either in isolation, or in response to other factors.
Future Policy Benefits – The Company expects efficient benefit utilization and withdrawal rates to generally be correlated with lapse rates. However, behavior is generally highly dependent on the facts and circumstances surrounding the individual contractholder, such as their liquidity needs or tax situation, which could drive lapse behavior independent of other contractholder behavior assumptions. To the extent more efficient contractholder behavior results in greater in-the-moneyness at the contract level, lapse rates may decline for those contracts. Similarly, to the extent that increases in equity volatility are correlated with overall declines in the capital markets, lapse rates may decline as contracts become more in-the-money.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Valuation Process for Fair Value Measurements Categorized within Level 3 – The Company has established an internal control infrastructure over the valuation of financial instruments that requires ongoing oversight by its various business groups. These management control functions are segregated from the trading and investing functions. For invested assets, the Company has established oversight teams, often in the form of pricing committees within each asset management group. The teams, which typically include representation from investment, accounting, operations, legal and other disciplines are responsible for overseeing and monitoring the pricing of the Company’s investments and performing periodic due diligence reviews of independent pricing services. An actuarial valuation team oversees the valuation of living benefit features of the Company’s variable annuity contracts.
The Company has also established policies and guidelines that require the establishment of valuation methodologies and consistent application of such methodologies. These policies and guidelines govern the use of inputs and price source hierarchies and provide controls around the valuation processes. These controls include appropriate review and analysis of investment prices against market activity or indicators of reasonableness, analysis of portfolio returns to corresponding benchmark returns, back-testing, review of bid/ask spreads to assess activity, approval of price source changes, price overrides, methodology changes and classification of fair value hierarchy levels. For living benefit features of the Company’s variable annuity products, the actuarial valuation unit periodically tests contract input data and actuarial assumptions are reviewed at least annually, and updated based upon emerging experience, future expectations and other data, including any observable market data. The valuation policies and guidelines are reviewed and updated as appropriate.
Within the trading and investing functions, the Company has established policies and procedures that relate to the approval of all new transaction types, transaction pricing sources and fair value hierarchy coding within the financial reporting system. For variable annuity product changes or new launches of living benefit features, the actuarial valuation unit validates input logic and new product features and agrees new input data directly to source documents.
Changes in Level 3 assets and liabilities – The following tables provide summaries of the 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.
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2015 | |
| | Fixed Maturities Available-For-Sale | |
| | U.S. Corporate Public Securities | | U.S. Corporate Private Securities | | Foreign Corporate Private Securities | | Asset- Backed Securities (4) | | Commercial Mortgage-Backed Securities | |
| | (in thousands) |
| Fair Value, beginning of period | $ | 16,860 |
| | $ | 98,544 |
| | $ | 666 |
| | $ | 40,524 |
| | $ | 0 |
| |
| Total gains (losses) (realized/unrealized): | | | | | | | | | | |
| Included in earnings: | | | | | | | | | | |
| Realized investment gains (losses), net | 0 |
| | (16 | ) | | 62 |
| | 9 |
| | 0 |
| |
| Asset management fees and other income | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| |
| Included in other comprehensive income (loss) | (23 | ) | | (2,992 | ) | | (24 | ) | | (170 | ) | | 0 |
| |
| Net investment income | 9 |
| | 5,264 |
| | 1 |
| | 49 |
| | 0 |
| |
| Purchases | 0 |
| | 6,233 |
| | 0 |
| | 20,053 |
| | 1,565 |
| |
| Sales | 0 |
| | (1,548 | ) | | 0 |
| | (15,878 | ) | | 0 |
| |
| Issuances | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| |
| Settlements | (119 | ) | | (1,863 | ) | | (678 | ) | | (3,704 | ) | | 0 |
| |
| Transfers into Level 3 (1) | 0 |
| | 4,155 |
| | 4,504 |
| | 34,921 |
| | 0 |
| |
| Transfers out of Level 3 (1) | (1,727 | ) | | 0 |
| | 0 |
| | (29,311 | ) | | (1,565 | ) | |
| Fair Value, end of period | $ | 15,000 |
| | $ | 107,777 |
| | $ | 4,531 |
| | $ | 46,493 |
| | $ | 0 |
| |
| Unrealized gains (losses) for assets still held(2): | | | | | | | | | | |
| Included in earnings: | | | | | | | | | | |
| Realized investment gains (losses), net | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| |
| Asset management fees and other income | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2015 |
| | Short-term Investments | | Cash Equivalents | | Other Long-term Investments | | Reinsurance Recoverables | | Receivables from Parent and Affiliates | | Future Policy Benefits |
| | | | (in thousands) |
| Fair Value, beginning of period | $ | 0 |
| | $ | 225 |
| | $ | 633 |
| | $ | 2,996,154 |
| | $ | 22,320 |
| | $ | (3,112,411 | ) |
| Total gains (losses) (realized/unrealized): |
| | | | | | | | | | |
| Included in earnings: |
| | | | | | | | | | |
| Realized investment gains (losses), net | 0 |
| | 0 |
| | 1,405 |
| | (212,035 | ) | | 0 |
| | 217,101 |
|
| Asset management fees and other income | 0 |
| | 0 |
| | (17 | ) | | 0 |
| | 0 |
| | 0 |
|
| Included in other comprehensive income (loss) | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (264 | ) | | 0 |
|
| Net investment income | 0 |
| | 0 |
| | 22 |
| | 0 |
| | 1 |
| | 0 |
|
| Purchases | 450 |
| | 0 |
| | 179 |
| | 228,534 |
| | 0 |
| | 0 |
|
| Sales | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Issuances | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (238,767 | ) |
| Settlements | 0 |
| | 0 |
| | (103 | ) | | 0 |
| | 0 |
| | 0 |
|
| Transfers into Level 3 (1) | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 6,941 |
| | 0 |
|
| Transfers out of Level 3 (1) | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (21,334 | ) | | 0 |
|
| Fair Value, end of period | $ | 450 |
| | $ | 225 |
| | $ | 2,119 |
| | $ | 3,012,653 |
| | $ | 7,664 |
| | $ | (3,134,077 | ) |
| Unrealized gains (losses) for assets/liabilities still held(2): |
| | | | | | | | | | |
| Included in earnings: |
| | | | | | | | | | |
| Realized investment gains (losses), net | $ | 0 |
| | $ | 0 |
| | $ | 1,405 |
| | $ | (117,840 | ) | | $ | 0 |
| | $ | 119,609 |
|
| Asset management fees and other income | $ | 0 |
| | $ | 0 |
| | $ | (17 | ) | | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2014 (5) |
| | Fixed Maturities Available-For-Sale | | Trading Account Assets - Equity Securities | | Equity Securities Available- for-Sale |
| | U.S. Corporate Public Securities | | U.S. Corporate Private Securities | | Foreign Corporate Private Securities | | Asset- Backed Securities (4) | | Commercial Mortgage- Backed Securities | |
| | (in thousands) |
| Fair Value, beginning of period | $ | 2,065 |
| | $ | 93,841 |
| | $ | 890 |
| | $ | 63,789 |
| | $ | 0 |
| | $ | 313 |
| | $ | 192 |
|
| Total gains (losses) (realized/unrealized): | | | | | | | | | | | | | |
| Included in earnings: | | | | | | | | | | | | | |
| Realized investment gains (losses), net | 0 |
| | 1,423 |
| | 169 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Asset management fees and other income | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 15 |
| | 0 |
|
| Included in other comprehensive income (loss) | (42 | ) | | (763 | ) | | (41 | ) | | 196 |
| | (83 | ) | | 0 |
| | 0 |
|
| Net investment income | 37 |
| | 4,953 |
| | 34 |
| | 120 |
| | 0 |
| | 0 |
| | 0 |
|
| Purchases | 14,999 |
| | 5,712 |
| | 9 |
| | 14,933 |
| | 52,518 |
| | 0 |
| | 0 |
|
| Sales | 0 |
| | 0 |
| | (202 | ) | | 0 |
| | 0 |
| | 0 |
| | (192 | ) |
| Issuances | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Settlements | (199 | ) | | (6,622 | ) | | (193 | ) | | (40,337 | ) | | 0 |
| | (328 | ) | | 0 |
|
| Transfers into Level 3 (1) | 0 |
| | 0 |
| | 0 |
| | 28,152 |
| | 0 |
| | 0 |
| | 0 |
|
| Transfers out of Level 3 (1) | 0 |
| | 0 |
| | 0 |
| | (26,329 | ) | | (52,435 | ) | | 0 |
| | 0 |
|
| Fair Value, end of period | $ | 16,860 |
| | $ | 98,544 |
| | $ | 666 |
| | $ | 40,524 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| Unrealized gains (losses) for assets still held(2): | | | | | | | | | | | | | |
| Included in earnings: | | | | | | | | | | | | | |
| Realized investment gains (losses), net | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| Asset management fees and other income | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 15 |
| | $ | 0 |
|
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2014 (5) |
| | Cash Equivalents | | Other Long-term Investments | | Reinsurance Recoverables | | Receivables from Parent and Affiliates | | Future Policy Benefits |
| | (in thousands) |
| Fair Value, beginning of period assets/(liabilities) | $ | 0 |
| | $ | 486 |
| | $ | 748,005 |
| | $ | 6,347 |
| | $ | (778,226 | ) |
| Total gains (losses) (realized/unrealized): | | | | | | | | | |
| Included in earnings: | | | | | | | | | |
| Realized investment gains (losses), net | 0 |
| | 0 |
| | 2,013,931 |
| | 0 |
| | (2,088,505 | ) |
| Asset management fees and other income | 0 |
| | (14 | ) | | 0 |
| | 0 |
| | 0 |
|
| Included in other comprehensive income (loss) | 0 |
| | 0 |
| | 0 |
| | (420 | ) | | 0 |
|
| Net investment income | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Purchases | 400 |
| | 166 |
| | 234,218 |
| | 19,351 |
| | 0 |
|
| Sales | (175 | ) | | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Issuances | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (245,680 | ) |
| Settlements | 0 |
| | (5 | ) | | 0 |
| | 0 |
| | 0 |
|
| Transfers into Level 3 (1) | 0 |
| | 0 |
| | 0 |
| | 1,985 |
| | 0 |
|
| Transfers out of Level 3 (1) | 0 |
| | 0 |
| | 0 |
| | (4,943 | ) | | 0 |
|
| Fair Value, end of period assets/(liabilities) | $ | 225 |
| | $ | 633 |
| | $ | 2,996,154 |
| | $ | 22,320 |
| | $ | (3,112,411 | ) |
| Unrealized gains (losses) for assets/liabilities still held(2): | | | | | | | | | |
| Included in earnings: | | | | | | | | | |
| Realized investment gains (losses), net | $ | 0 |
| | $ | 0 |
| | $ | 2,040,048 |
| | $ | 0 |
| | $ | (2,115,680 | ) |
| Asset management fees and other income | $ | 0 |
| | $ | (14 | ) | | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2013 (5) | | |
| | Fixed Maturities Available-For-Sale | | Trading Account Assets - Equity Securities | | Equity Securities Available- for-Sale |
| | U.S. Corporate Public Securities | | U.S. Corporate Private Securities | | Foreign Corporate Private Securities | | Asset- Backed Securities (4) | | Commercial Mortgage-Backed Securities | |
| | (in thousands) | | |
| Fair Value, beginning of period assets/(liabilities) | $ | 3,292 |
| | $ | 91,088 |
| | $ | 1,175 |
| | $ | 69,298 |
| | $ | 0 |
| | $ | 207 |
| | $ | 0 |
|
| Total gains (losses) (realized/unrealized): | | | | | | | | | | | | | |
| Included in earnings: | | | | | | | | | | | | | |
| Realized investment gains (losses), net | 0 |
| | 48 |
| | 1 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Asset management fees and other income | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 106 |
| | 0 |
|
| Included in other comprehensive income (loss) | (551 | ) | | (3,490 | ) | | (138 | ) | | (470 | ) | | 18 |
| | 0 |
| | 0 |
|
| Net investment income | 41 |
| | 4,658 |
| | 30 |
| | 454 |
| | 0 |
| | 0 |
| | 0 |
|
| Purchases | 0 |
| | 4,817 |
| | 0 |
| | 40,868 |
| | 17,169 |
| | 0 |
| | 192 |
|
| Sales | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Issuances | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Settlements | (1,171 | ) | | (3,280 | ) | | (178 | ) | | (13,924 | ) | | 0 |
| | 0 |
| | 0 |
|
| Transfers into Level 3 (1) | 4,976 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Transfers out of Level 3 (1) | (4,522 | ) | | 0 |
| | 0 |
| | (29,441 | ) | | (17,187 | ) | | 0 |
| | 0 |
|
| Other (3) | 0 |
| | 0 |
| | 0 |
| | (2,996 | ) | | 0 |
| | 0 |
| | 0 |
|
| Fair Value, end of period assets/(liabilities) | $ | 2,065 |
| | $ | 93,841 |
| | $ | 890 |
| | $ | 63,789 |
| | $ | 0 |
| | $ | 313 |
| | $ | 192 |
|
| Unrealized gains (losses) for assets still held(2): | | | | | | | | | | | | | |
| Included in earnings: | | | | | | | | | | | | | |
| Realized investment gains (losses), net | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| Asset management fees and other income | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 107 |
| | $ | 0 |
|
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2013 (5) |
| | Other Long- term Investments | | Reinsurance Recoverables | | Receivables from Parent and Affiliates | | Future Policy Benefits |
| | (in thousands) |
| Fair Value, beginning of period assets/(liabilities) | $ | 1,054 |
| | $ | 1,732,094 |
| | $ | 1,995 |
| | $ | (1,793,137 | ) |
| Total gains or (losses) (realized/unrealized): | | | | | | | |
| Included in earnings: | | | | | | | |
| Realized investment gains (losses), net | (739 | ) | | (1,220,073 | ) | | 0 |
| | 1,262,310 |
|
| Asset management fees and other income | 60 |
| | 0 |
| | 0 |
| | 0 |
|
| Included in other comprehensive income (loss) | 0 |
| | 0 |
| | 99 |
| | 0 |
|
| Net investment income | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Purchases | 111 |
| | 235,984 |
| | 6,250 |
| | 0 |
|
| Sales | 0 |
| | 0 |
| | (2,996 | ) | | 0 |
|
| Issuances | 0 |
| | 0 |
| | 0 |
| | (247,399 | ) |
| Settlements | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Transfers into Level 3 (1) | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Transfers out of Level 3 (1) | 0 |
| | 0 |
| | (1,997 | ) | | 0 |
|
| Other (3) | 0 |
| | 0 |
| | 2,996 |
| | 0 |
|
| Fair Value, end of period | $ | 486 |
| | $ | 748,005 |
| | $ | 6,347 |
| | $ | (778,226 | ) |
| Unrealized gains (losses) for assets/liabilities still held(2): | | | | | | | |
| Included in earnings: | | | | | | | |
| Realized investment gains (losses), net | $ | 0 |
| | $ | (1,166,676 | ) | | $ | 0 |
| | $ | 1,207,600 |
|
| Asset management fees and other income | $ | 51 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| |
(1) | Transfers into or out of any level are generally reported as the value as of the beginning of the quarter in which the transfer occurs for any such assets still held at the end of the quarter. |
| |
(2) | 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. |
| |
(3) | Other primarily represents reclassifications of certain assets between reporting categories. |
| |
(4) | Includes credit-tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans and other asset types. |
| |
(5) | Prior period's amounts are presented on a basis consistent with the current period presentation. |
Transfers – 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 is able to validate.
Fair Value of Financial Instruments
The table below presents the carrying amount and fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. The financial instruments presented below are reported at carrying value on the Company’s Statements of Financial Position; however, inPosition. In some cases, as described below, the carrying amount equals or approximates fair value.
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018(1) |
| | Fair Value | | Carrying Amount(2) |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Total |
| | | | | | | | | | |
| | (in thousands) |
| Assets: | | | | | | | | | |
| Commercial mortgage and other loans | $ | 0 |
| | $ | 0 |
| | $ | 1,339,707 |
| | $ | 1,339,707 |
| | $ | 1,353,478 |
|
| Policy loans | 0 |
| | 0 |
| | 12,805 |
| | 12,805 |
| | 12,805 |
|
| Short-term investments | 7,750 |
| | 0 |
| | 0 |
| | 7,750 |
| | 7,750 |
|
| Cash and cash equivalents | 136,175 |
| | 675,000 |
| | 0 |
| | 811,175 |
| | 811,175 |
|
| Accrued investment income | 0 |
| | 90,895 |
| | 0 |
| | 90,895 |
| | 90,895 |
|
| Reinsurance recoverables | 0 |
| | 0 |
| | 55,236 |
| | 55,236 |
| | 55,236 |
|
| Receivables from parent and affiliates | 0 |
| | 9,188 |
| | 0 |
| | 9,188 |
| | 9,188 |
|
| Other assets | 0 |
| | 3,735 |
| | 0 |
| | 3,735 |
| | 3,735 |
|
| Total assets | $ | 143,925 |
| | $ | 778,818 |
| | $ | 1,407,748 |
| | $ | 2,330,491 |
| | $ | 2,344,262 |
|
| Liabilities: | | | | | | | | | |
| Policyholders’ account balances - investment contracts | $ | 0 |
| | $ | 0 |
| | $ | 560,548 |
| | $ | 560,548 |
| | $ | 565,903 |
|
| Cash collateral for loaned securities | 0 |
| | 384 |
| | 0 |
| | 384 |
| | 384 |
|
| Short-term debt | 0 |
| | 139,843 |
| | 0 |
| | 139,843 |
| | 140,569 |
|
| Long-term debt | 0 |
| | 791,670 |
| | 0 |
| | 791,670 |
| | 787,596 |
|
| Reinsurance Payables | 0 |
| | 0 |
| | 55,236 |
| | 55,236 |
| | 55,236 |
|
| Payables to parent and affiliates | 0 |
| | 30,846 |
| | 0 |
| | 30,846 |
| | 30,846 |
|
| Other liabilities | 0 |
| | 554,162 |
| | 0 |
| | 554,162 |
| | 554,162 |
|
| Separate account liabilities - investment contracts | 0 |
| | 71 |
| | 0 |
| | 71 |
| | 71 |
|
| Total liabilities | $ | 0 |
| | $ | 1,516,976 |
| | $ | 615,784 |
| | $ | 2,132,760 |
| | $ | 2,134,767 |
|
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2015 |
| | Fair Value | | Carrying Amount (1) |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Total |
| | | | | | | | | | |
| | (in thousands) |
| Assets: | | | | | | | | | |
| Commercial mortgage and other loans | $ | 0 |
| | $ | 2,793 |
| | $ | 448,349 |
| | $ | 451,142 |
| | $ | 438,172 |
|
| Policy loans | 0 |
| | 0 |
| | 13,054 |
| | 13,054 |
| | 13,054 |
|
| Other long-term investments | 0 |
| | 0 |
| | 3,258 |
| | 3,258 |
| | 3,050 |
|
| Cash and cash equivalents | 311 |
| | 0 |
| | 0 |
| | 311 |
| | 311 |
|
| Accrued investment income | 0 |
| | 22,615 |
| | 0 |
| | 22,615 |
| | 22,615 |
|
| Receivables from parent and affiliates | 0 |
| | 14,868 |
| | 0 |
| | 14,868 |
| | 14,868 |
|
| Other assets | 0 |
| | 1,085 |
| | 0 |
| | 1,085 |
| | 1,085 |
|
| Total assets | $ | 311 |
| | $ | 41,361 |
| | $ | 464,661 |
| | $ | 506,333 |
| | $ | 493,155 |
|
| Liabilities: | | | | | | | | | |
| Policyholders’ account balances - investment contracts | $ | 0 |
| | $ | 0 |
| | $ | 102,438 |
| | $ | 102,438 |
| | $ | 103,003 |
|
| Cash collateral for loaned securities | 0 |
| | 10,568 |
| | 0 |
| | 10,568 |
| | 10,568 |
|
| Short-term debt | 0 |
| | 1,000 |
| | 0 |
| | 1,000 |
| | 1,000 |
|
| Payables to parent and affiliates | 0 |
| | 25,678 |
| | 0 |
| | 25,678 |
| | 25,678 |
|
| Other liabilities | 0 |
| | 83,464 |
| | 0 |
| | 83,464 |
| | 83,464 |
|
| Separate account liabilities - investment contracts | 0 |
| | 293 |
| | 0 |
| | 293 |
| | 293 |
|
| Total liabilities | $ | 0 |
| | $ | 121,003 |
| | $ | 102,438 |
| | $ | 223,441 |
| | $ | 224,006 |
|
| | | | December 31, 2014 | December 31, 2017(1) |
| | Fair Value | | Carrying Amount (1) | Fair Value | | Carrying Amount(2) |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Total | Level 1 | | Level 2 | | Level 3 | | Total | | Total |
| | | | | | | | | | | | | | | | | | | |
| | (in thousands) | (in thousands) |
| Assets: | | | | | | | | | | | | | | | | | | |
| Commercial mortgage and other loans | $ | 0 |
| | $ | 2,779 |
| | $ | 447,157 |
| | $ | 449,936 |
| | $ | 422,563 |
| $ | 0 |
| | $ | 0 |
| | $ | 1,396,167 |
| | $ | 1,396,167 |
| | $ | 1,387,012 |
|
| Policy loans | 0 |
| | 0 |
| | 13,355 |
| | 13,355 |
| | 13,355 |
| 0 |
| | 0 |
| | 12,558 |
| | 12,558 |
| | 12,558 |
|
| Other long-term investments | 0 |
| | 0 |
| | 2,639 |
| | 2,639 |
| | 2,238 |
| |
| Short-term investments | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Cash and cash equivalents | 369 |
| | 0 |
| | 0 |
| | 369 |
| | 369 |
| 493,473 |
| | 0 |
| | 0 |
| | 493,473 |
| | 493,473 |
|
| Accrued investment income | 0 |
| | 25,008 |
| | 0 |
| | 25,008 |
| | 25,008 |
| 0 |
| | 88,331 |
| | 0 |
| | 88,331 |
| | 88,331 |
|
| Reinsurance recoverables | | 0 |
| | 0 |
| | 59,588 |
| | 59,588 |
| | 59,588 |
|
| Receivables from parent and affiliates | 0 |
| | 10,367 |
| | 0 |
| | 10,367 |
| | 10,367 |
| 0 |
| | 11,206 |
| | 0 |
| | 11,206 |
| | 11,206 |
|
| Other assets | 0 |
| | 1,009 |
| | 0 |
| | 1,009 |
| | 1,009 |
| 0 |
| | 13,802 |
| | 0 |
| | 13,802 |
| | 13,802 |
|
| Total assets | $ | 369 |
| | $ | 39,163 |
| | $ | 463,151 |
| | $ | 502,683 |
| | $ | 474,909 |
| $ | 493,473 |
| | $ | 113,339 |
| | $ | 1,468,313 |
| | $ | 2,075,125 |
| | $ | 2,065,970 |
|
| Liabilities: | | | | | | | | | | | | | | | | | | |
| Policyholders’ account balances - investment contracts | $ | 0 |
| | $ | 0 |
| | $ | 91,217 |
| | $ | 91,217 |
| | $ | 92,663 |
| $ | 0 |
| | $ | 0 |
| | $ | 281,582 |
| | $ | 281,582 |
| | $ | 281,051 |
|
| Cash collateral for loaned securities | 0 |
| | 5,285 |
| | 0 |
| | 5,285 |
| | 5,285 |
| 0 |
| | 17,383 |
| | 0 |
| | 17,383 |
| | 17,383 |
|
| Short-term debt | 0 |
| | 54,354 |
| | 0 |
| | 54,354 |
| | 54,354 |
| 0 |
| | 43,734 |
| | 0 |
| | 43,734 |
| | 43,734 |
|
| Long-term debt | | 0 |
| | 1,003,251 |
| | 0 |
| | 1,003,251 |
| | 928,165 |
|
| Reinsurance payables | | 0 |
| | 0 |
| | 59,588 |
| | 59,588 |
| | 59,588 |
|
| Payables to parent and affiliates | 0 |
| | 37,415 |
| | 0 |
| | 37,415 |
| | 37,415 |
| 0 |
| | 36,026 |
| | 0 |
| | 36,026 |
| | 36,026 |
|
| Other liabilities | 0 |
| | 89,956 |
| | 0 |
| | 89,956 |
| | 89,956 |
| 0 |
| | 135,556 |
| | 0 |
| | 135,556 |
| | 135,556 |
|
| Separate account liabilities - investment contracts | 0 |
| | 487 |
| | 0 |
| | 487 |
| | 487 |
| 0 |
| | 102 |
| | 0 |
| | 102 |
| | 102 |
|
| Total liabilities | $ | 0 |
| | $ | 187,497 |
| | $ | 91,217 |
| | $ | 278,714 |
| | $ | 280,160 |
| $ | 0 |
| | $ | 1,236,052 |
| | $ | 341,170 |
| | $ | 1,577,222 |
| | $ | 1,501,605 |
|
| |
| (1) | The information presented as of December 31, 2017, excludes certain hedge funds, private equity funds and other funds that were accounted for using the cost method and for which the fair value was measured at NAV per share (or its equivalent) as a practical expedient. The fair value and the carrying value of these cost method investments were $6.4 million and $6.0 million, respectively. Due to the adoption of ASU 2016-01 effective January 1, 2018, these assets are carried at fair value at each reporting date with changes in fair value reported in “Asset administration fees and other income.” Therefore, as of December 31, 2018, these assets are excluded from this table but are reported in the fair value recurring measurement table. |
| |
| (2) | Carrying values presented herein differ from those in the Company’s Statements of Financial Position because certain items within the respective financial statement captions are not considered financial instruments or are out of scope under authoritative guidance relating to disclosures of the fair value of financial instruments. Financial statement captions excluded from the above table are not considered financial instruments. |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
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 denominateddollar-denominated loans) plus an appropriate credit spread for loans of similar quality, loans.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. Other loan valuations are primarily based upon the present value of the present value of the expected future cash flows discounted at the appropriate local government bond rate and local market swap rates or credit default swap spreads, plus an appropriate credit spread and liquidity premium. The credit spread and liquidity premium are a significant component of the pricing inputs, and are based upon an internally-developed methodology, which takes into account, among other factors, the credit quality of the loans, the property type of the collateral, the weighted average coupon and the weighted average life of the loans.
Policy Loans
Policy loans carrying value approximates fair value.
Other Long-TermShort-Term Investments,
Other long-term investments include investments in joint ventures and limited partnerships. The estimated fair values of these cost method investments are generally based on the Company’s share of the NAV as provided in the financial statements of the investees. In certain circumstances, management may adjust the NAV by a premium or discount when it has sufficient evidence to support applying such adjustments. No such adjustments were made as of December 31, 2015 and 2014.
Cash and Cash Equivalents, Accrued Investment Income, Receivables from Parent and Affiliates, and Other Assets
The Company believes that due to the short-term nature of certain assets, the carrying value approximates fair value. These assets include: certain short-term investments which are not securities, are recorded at amortized cost; cash and cash equivalents,equivalent instruments; accrued investment income,income; and other assets that meet the definition of financial instruments, including receivables such as unsettled trades and accounts receivable.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Reinsurance Recoverables and Reinsurance Payables
Reinsurance recoverables and reinsurance payables include corresponding receivables and payables associated with reinsurance arrangements between the Company and related parties. See Note 10 for additional information about the Company's reinsurance arrangements.
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. ForDue to the short-term nature of these transactions, the carrying value of the related asset/liability approximates fair value as they equal the amount of cash collateral received or paid.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
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Other liabilities and payables to parent and affiliates are primarily payables, such as unsettled trades, drafts, escrow deposits and accrued expense payables. Due to the short termshort-term until settlement of most of these liabilities, the Company believes that carrying value approximates fair value.
Separate Account Liabilities - Investment Contracts
Only the portion of separate account liabilities related to products that are investment contracts are reflected in the table above. Separate account liabilities are recorded at the amount credited to the contractholder, which reflects the change in fair value of the corresponding separate account assets including contractholder deposits less withdrawals and fees; therefore, carrying value approximates fair value.
11. DERIVATIVE INSTRUMENTS
Types6. DEFERRED POLICY ACQUISITION COSTS
The balances of Derivative Instruments and Derivative Strategies
Interest Rate Contracts
Interest rate swaps are used by the Company to reduce risks from changes in interest rates, manage interest rate exposures arising from mismatches between assetsDAC as of and liabilities (including duration mismatches)for the years ended December 31, are as follows:
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in thousands) |
| Balance, beginning of year | $ | 4,596,565 |
| | $ | 4,344,361 |
| | $ | 749,302 |
|
| Capitalization of commissions, sales and issue expenses | 372,996 |
| | 277,586 |
| | 269,679 |
|
| Amortization-Impact of assumption and experience unlocking and true-ups | (113,534 | ) | | 288,974 |
| | 226,204 |
|
| Amortization-All other | (476,261 | ) | | (275,028 | ) | | (46,388 | ) |
| Changes in unrealized investment gains and losses | 67,739 |
| | (39,328 | ) | | 18,772 |
|
| Ceded DAC upon reinsurance agreement with Prudential Insurance(1)(2) | 0 |
| | 0 |
| | (7,480 | ) |
| Assumed DAC upon reinsurance agreement with Pruco Life(1) | 0 |
| | 0 |
| | 3,134,272 |
|
| Balance, end of year | $ | 4,447,505 |
| | $ | 4,596,565 |
| | $ | 4,344,361 |
|
| |
| (1) | See Note 1 and Note 10 for additional information. |
| |
| (2) | Represents a $7.5 million true-up in 2016 to the ceded DAC upon reinsurance agreement with Prudential Insurance in 2015. |
7. VALUE OF BUSINESS ACQUIRED
The balances of and to hedge against changes in VOBA as of and for the years ended December 31, are as follows:
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | | | | | |
| | (in thousands) |
| Balance, beginning of year | $ | 35,109 |
| | $ | 30,287 |
| | $ | 33,640 |
|
| Amortization-Impact of assumption and experience unlocking and true-ups (1) | 1,485 |
| | 10,035 |
| | 2,372 |
|
| Amortization-All other (1) | (7,348 | ) | | (7,422 | ) | | (8,176 | ) |
| Interest (2) | 1,983 |
| | 2,001 |
| | 1,939 |
|
| Change in unrealized investment gains and losses | 1,993 |
| | 208 |
| | 512 |
|
| Balance, end of year | $ | 33,222 |
| | $ | 35,109 |
| | $ | 30,287 |
|
| |
| (1) | The weighted average remaining expected life of VOBA was approximately 5.62 years as of December 31, 2018. |
| |
| (2) | The interest accrual rate for the VOBA related to the businesses acquired was 5.96%, 5.96% and 6.00% for the years ended December 31, 2018, 2017 and 2016. |
The following table provides estimated future amortization, net of interest, for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
| | | | | | | | | | |
| | (in thousands) |
| Estimated future VOBA amortization | $ | 4,531 |
| | $ | 4,039 |
| | $ | 3,626 |
| | $ | 3,247 |
| | $ | 2,909 |
|
| |
| 8. | POLICYHOLDERS’ LIABILITIES |
Future Policy Benefits
Future policy benefits at December 31 for the years indicated are as follows:
|
| | | | | | | | |
| | | 2018 | | 2017 |
| | | | | |
| | | (in thousands) |
| Life insurance – domestic | | $ | 74 |
| | $ | 800 |
|
| Individual and group annuities and supplementary contracts(1) | | 1,021,854 |
| | 970,936 |
|
| Other contract liabilities(1) | | 8,347,058 |
| | 8,160,833 |
|
| Total future policy benefits | | $ | 9,368,986 |
| | $ | 9,132,569 |
|
| |
| (1) | Includes assumed reinsurance business. |
Individual and group annuities and supplementary contract liabilities include reserves for life contingent immediate annuities and life contingent group annuities. Other contract liabilities include unearned premiums and certain other reserves for annuities and individual life products.
Future policy benefits for domestic life insurance policies reflect in course of settlement amounts.
Future policy benefits for individual and group annuities and supplementary contracts with life contingencies are generally equal to the present value of assets it owns or anticipates acquiring or selling. Swaps may be attributedexpected future payments. Assumptions as to specific assets or liabilities or may be used on a portfolio basis. Under interest rate swaps, the Company agrees with counterparties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed upon notional principal amount.
Equity Contracts
Equity index optionsmortality 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 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.
Foreign Exchange Contracts
Currency derivatives, including currency swaps, 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 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. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty for payments made in the same currency at each due date.
Credit Contracts
Credit derivatives are used by the Company to enhance the return on the Company’s investment portfolio by creating credit exposure similar to an investment in public fixed maturity cash instruments. With credit derivativesexperience, industry data, and/or other factors, when the Company sells credit protection on a single name reference, or certain index reference, and in return receives a quarterly premium. With credit default derivatives, this premium or credit spread generally corresponds to the difference between the yield on the referenced name’s 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, as defined by the agreement, then the Company is obligated to pay the counterparty the referenced amountbasis of the contract and receive in return the referenced defaulted security or similar security or pay the referenced amount less the auction recovery rate. See the credit derivatives section for a discussion of guarantees related to credit derivatives written. In addition to selling credit protection, the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposuresreserve is established. The interest rates used in the Company’s investment portfolio.
Embedded Derivativesdetermination of the present values generally range from 0.0% to 8.3%, with less than 1.0% of the reserves based on an interest rate in excess of 8.0%.
The Company sells variable annuity products, which may includeCompany’s liability for future policy benefits are primarily liabilities for guaranteed benefit features that are accounted for as embedded derivatives. The Company has reinsurance agreements to transfer the riskbenefits related to certain long-duration life and annuity contracts. Liabilities for guaranteed benefits with embedded derivative features are primarily in "Other contract liabilities" in the table above. The remaining liabilities for guaranteed benefits are primarily reflected with the underlying contract. The interest rates used in the determination of these benefit featuresthe present values range from 3.1% to affiliates,4.4%. See Note 9 for additional information regarding liabilities for guaranteed benefits related to certain long-duration contracts.
93Premium deficiency reserves included in “Future policy benefits” are established, if necessary, 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. Premium deficiency reserves have been recorded for the individual annuity business, which consists of limited-payment, long-duration; and single premium immediate annuities with life contingencies.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Pruco Re and Prudential Insurance. The embedded derivatives related toPolicyholders’ Account Balances
Policyholders’ account balances at December 31 for the living benefit features and the related reinsurance agreementsyears indicated are carried at fair value. These embedded derivatives are 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 10.
The table below provides a summary of the gross notional amount and fair value of derivatives contracts by the primary underlying, excluding embedded derivatives which are recorded with the associated host. Many derivative instruments contain multiple underlyings. The fair value amounts below represent the gross fair value of derivative contracts prior to taking into account the netting effects of master netting agreements, cash collateral held with the same counterparty, and non-performance risk.follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2015 | | December 31, 2014 |
| | | | Gross Fair Value | | | | Gross Fair Value |
| Primary Underlying | Notional | | Assets | | Liabilities | | Notional | | Assets | | Liabilities |
| | | | | | | | | | | | |
| | (in thousands) |
| Derivatives Designated as Hedge Accounting Instruments: | | | | | | | | | | | |
| Currency/Interest Rate | | | | | | | | | | | |
| Foreign Currency Swaps | $ | 115,358 |
| | $ | 15,910 |
| | $ | (206 | ) | | $ | 83,412 |
| | $ | 5,555 |
| | $ | (654 | ) |
| Total Qualifying Hedges | $ | 115,358 |
| | $ | 15,910 |
| | $ | (206 | ) | | $ | 83,412 |
| | $ | 5,555 |
| | $ | (654 | ) |
| Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | | | | | |
| Interest Rate | | | | | | | | | | | |
| Interest Rate Swaps | $ | 1,872,750 |
| | $ | 84,817 |
| | $ | (13,452 | ) | | $ | 1,902,750 |
| | $ | 92,507 |
| | $ | (18,480 | ) |
| Interest Rate Options | 100,000 |
| | 9,431 |
| | 0 |
| | 100,000 |
| | 10,736 |
| | 0 |
|
| Foreign Currency | | | | | | | | | | | |
| Foreign Currency Forwards | 2,752 |
| | 23 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Currency/Interest Rate | | | | | | | | | | | |
| Foreign Currency Swaps | 77,729 |
| | 11,220 |
| | 0 |
| | 57,011 |
| | 4,363 |
| | (5 | ) |
| Credit | | | | | | | | | | | |
| Credit Default Swaps | 0 |
| | 0 |
| | 0 |
| | 1,200 |
| | 0 |
| | (43 | ) |
| Equity | | | | | | | | | | | |
| Total Return Swaps | 217,999 |
| | 320 |
| | (3,626 | ) | | 220,986 |
| | 1,937 |
| | 0 |
|
| Equity Options | 18,286,800 |
| | 15,054 |
| | (7,993 | ) | | 6,842,242 |
| | 3,748 |
| | (2,067 | ) |
| Total Non-Qualifying Hedges | $ | 20,558,030 |
| | $ | 120,865 |
| | $ | (25,071 | ) | | $ | 9,124,189 |
| | $ | 113,291 |
| | $ | (20,595 | ) |
Total Derivatives (1) | $ | 20,673,388 |
| | $ | 136,775 |
| | $ | (25,277 | ) | | $ | 9,207,601 |
| | $ | 118,846 |
| | $ | (21,249 | ) |
|
| | | | | | | | |
| | | 2018 | | 2017 |
| | | | | |
| | | (in thousands) |
| Interest-sensitive life contracts | | $ | 15,049 |
| | $ | 15,301 |
|
| Individual annuities(1) | | 4,729,973 |
| | 4,162,138 |
|
| Guaranteed interest accounts | | 608,574 |
| | 668,713 |
|
| Total policyholders’ account balances | | $ | 5,353,596 |
| | $ | 4,846,152 |
|
| |
| (1) | Excludes embedded derivatives which contain multiple underlyings. The fair value of these embedded derivatives was a net liability of $3,134 million and $3,112 million as of December 31, 2015 and 2014, respectively, included in “Future policy benefits.” The fair value of the embedded derivatives related to theIncludes assumed reinsurance of certain of these benefits tobusiness from Pruco Re and Prudential Insurance included in “Reinsurance recoverables” was an asset of $3,013 million and $2,996 million as of December 31, 2015 and 2014, respectively.Life. |
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. Interest crediting rates range from 3.5% to 6.0% for interest-sensitive life contracts. Interest crediting rates for individual annuities range from 0.0% to 6.5%. Interest crediting rates for guaranteed interest accounts range from 0.1% to 5.8%.
Offsetting Assets and Liabilities9. CERTAIN LONG-DURATION CONTRACTS WITH GUARANTEES
The following table presents recognized derivative instruments (excluding embedded derivativesCompany issued variable annuity contracts through its separate accounts for which investment income and associated reinsurance recoverables)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 offsetpayable in the Statementsevent of Financial Position, and/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 subjectreallocated to other investment options. The market value adjustment may result in a gain or loss to the Company, depending on crediting rates or an enforceable master netting arrangementindexed rate at surrender, as applicable. The Company also issued fixed deferred annuity contracts without MVA that have a guaranteed credited rate and annuity benefit.
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 similar agreement, irrespective"Realized investment gains (losses), net".
For those guarantees of whether theybenefits that are offsetpayable in the Statementsevent of Financial Position.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.
94For 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.
Prudential Annuities Life Assurance Corporation
Notes to 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, 2018 and 2017, the Company had the following guarantees associated with these contracts, by product and guarantee type:
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2015 |
| | Gross Amounts of Recognized Financial Instruments | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts Presented in the Statement of Financial Position | | Financial Instruments/ Collateral(1) | | Net Amount |
| | | | | | | | | | |
| | (in thousands) |
| Offsetting of Financial Assets: | | | | | | | | | |
| Derivatives | $ | 135,210 |
| | $ | (21,508 | ) | | $ | 113,702 |
| | $ | (101,288 | ) | | $ | 12,414 |
|
| Offsetting of Financial Liabilities: | | | | | | | | | |
| Derivatives | $ | 25,277 |
| | $ | (25,277 | ) | | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| | | | | | | | | | |
| | December 31, 2014 |
| | Gross Amounts of Recognized Financial Instruments | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts Presented in the Statement of Financial Position | | Financial Instruments/ Collateral(1) | | Net Amount |
| | | | | | | | | | |
| | (in thousands) |
| Offsetting of Financial Assets: | | | | | | | | | |
| Derivatives | $ | 118,846 |
| | $ | (24,288 | ) | | $ | 94,558 |
| | $ | (82,602 | ) | | $ | 11,956 |
|
| Offsetting of Financial Liabilities: | | | | | | | | | |
| Derivatives | $ | 21,249 |
| | $ | (21,249 | ) | | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | In the Event of Death(1) | | At Annuitization/ Accumulation(1)(2) | | In the Event of Death(1) | | At Annuitization/ Accumulation (1)(2) |
| | | | | | | | |
| Annuity Contracts | (in thousands) |
| Return of net deposits | | | | | | | |
| Account value | $ | 106,779,202 |
| | N/A |
| | $ | 119,182,143 |
| | N/A |
|
| Net amount at risk | $ | 843,419 |
| | N/A |
| | $ | 274,617 |
| | N/A |
|
| Average attained age of contractholders | 67 years |
| | N/A |
| | 66 years |
| | N/A |
|
| Minimum return or contract value | | | | | | | |
| Account value | $ | 22,184,537 |
| | $ | 115,822,894 |
| | $ | 25,835,100 |
| | $ | 129,630,456 |
|
| Net amount at risk | $ | 4,322,406 |
| | $ | 7,252,486 |
| | $ | 2,161,133 |
| | $ | 3,225,700 |
|
| Average attained age of contractholders | 70 years |
| | 68 years |
| | 69 years |
| | 67 years |
|
| Average period remaining until earliest expected annuitization | N/A |
| | 0 years |
| | N/A |
| | 0 years |
|
| |
| (1) | Amounts exclude the excess of collateral received/pledged from/to the counterparty.include assumed reinsurance business. |
| |
| (2) | Includes income and withdrawal benefits. |
Account balances of variable annuity contracts with guarantees were invested in separate account investment options as follows:
|
| | | | | | | |
| | December 31, 2018(1) | | December 31, 2017(1) |
| | | | |
| | (in thousands) |
| Equity funds | $ | 69,686,791 |
| | $ | 83,556,771 |
|
| Bond funds | 51,855,361 |
| | 53,027,241 |
|
| Money market funds | 2,542,219 |
| | 3,726,553 |
|
| Total | $ | 124,084,371 |
| | $ | 140,310,565 |
|
| |
| (1) | Amounts include assumed reinsurance business. |
In addition to the amounts invested in separate account investment options above, $4.9 billion at December 31, 2018 and $4.7 billion at December 31, 2017 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, 2018, 2017 and 2016, there were no transfers of assets, other than cash, from the general account to any separate account, and accordingly no gains or losses recorded.
Liabilities for Guarantee Benefits
The table below summarizes the changes in general account liabilities for guarantees. The liabilities for GMDB and 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 rightsmethodology used in determining the fair value of offsetthese 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 assets and liabilities in the table above see “Credit Risk” below.
Cash Flow Hedges
The primary derivative instruments used by the Company in its cash flow hedge accounting relationships are currency swaps. These instruments are only designatedinvestments does not qualify for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, equity or embedded derivatives in any of its cash flow hedge accounting relationships.treatment under U.S. GAAP.
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:
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2015 |
| | Realized Investment Gains (Losses) | | Net Investment Income | | Other Income | | AOCI(1) |
| | (in thousands) |
| Derivatives Designated as Hedge Accounting Instruments: | | | | | | | |
| Cash flow hedges | | | | | | | |
| Currency/Interest Rate | $ | 0 |
| | $ | 608 |
| | $ | 1,116 |
| | $ | 10,008 |
|
| Total cash flow hedges | 0 |
| | 608 |
| | 1,116 |
| | 10,008 |
|
| Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | |
| Interest Rate | 20,536 |
| | 0 |
| | 0 |
| | 0 |
|
| Currency | 115 |
| | 0 |
| | 0 |
| | 0 |
|
| Currency/Interest Rate | 8,337 |
| | 0 |
| | 202 |
| | 0 |
|
| Credit | (3 | ) | | 0 |
| | 0 |
| | 0 |
|
| Equity | (3,233 | ) | | 0 |
| | 0 |
| | 0 |
|
| Embedded Derivatives | (24,371 | ) | | 0 |
| | 0 |
| | 0 |
|
| Total non-qualifying hedges | 1,381 |
| | 0 |
| | 202 |
| | 0 |
|
| Total | $ | 1,381 |
| | $ | 608 |
| | $ | 1,318 |
| | $ | 10,008 |
|
| | | | | | | | |
| Year Ended December 31, 2014 |
| | Realized Investment Gains (Losses) | | Net Investment Income | | Other Income | | AOCI(1) |
| | (in thousands) |
| Derivatives Designated as Hedge Accounting Instruments: | | | | | | | |
| Cash flow hedges | | | | | | | |
| Currency/Interest Rate | $ | 0 |
| | $ | 14 |
| | $ | 134 |
| | $ | 8,492 |
|
| Total cash flow hedges | 0 |
| | 14 |
| | 134 |
| | 8,492 |
|
| Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | |
| Interest Rate | 123,327 |
| | 0 |
| | 0 |
| | 0 |
|
| Currency | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Currency/Interest Rate | 5,934 |
| | 0 |
| | 143 |
| | 0 |
|
| Credit | (14 | ) | | 0 |
| | 0 |
| | 0 |
|
| Equity | (23,811 | ) | | 0 |
| | 0 |
| | 0 |
|
| Embedded Derivatives | (113,549 | ) | | 0 |
| | 0 |
| | 0 |
|
| Total non-qualifying hedges | (8,113 | ) | | 0 |
| | 143 |
| | 0 |
|
| Total | $ | (8,113 | ) | | $ | 14 |
| | $ | 277 |
| | $ | 8,492 |
|
|
| | | | | | | | | | | | | | | |
| | GMDB | | GMAB/GMWB/ GMIWB | | GMIB | | Totals |
| Variable Annuity | (in thousands) |
| Balance at December 31, 2015 | $ | 265,877 |
| | $ | 3,134,077 |
| | $ | 13,864 |
| | $ | 3,413,818 |
|
| Incurred guarantee benefits(1) | 43,185 |
| | (1,979,215 | ) | | (3,683 | ) | | (1,939,713 | ) |
| Paid guarantee benefits | (55,604 | ) | | 0 |
| | (2,209 | ) | | (57,813 | ) |
| Change in unrealized investment gains and losses | (5,206 | ) | | 0 |
| | (209 | ) | | (5,415 | ) |
| Assumed guarantees upon reinsurance agreement with Pruco Life | 389,067 |
| | 6,552,471 |
| | 30,130 |
| | 6,971,668 |
|
| Balance at December 31, 2016 | 637,319 |
| | 7,707,333 |
| | 37,893 |
| | 8,382,545 |
|
| Incurred guarantee benefits(1)(2) | 29,605 |
| | 444,569 |
| | (11,686 | ) | | 462,488 |
|
| Paid guarantee benefits(2) | (57,053 | ) | | 0 |
| | (3,798 | ) | | (60,851 | ) |
| Change in unrealized investment gains and losses(2) | 12,931 |
| | 0 |
| | 117 |
| | 13,048 |
|
| Balance at December 31, 2017 | 622,802 |
| | 8,151,902 |
| | 22,526 |
| | 8,797,230 |
|
| Incurred guarantee benefits(1)(2) | 103,596 |
| | 180,572 |
| | 2,679 |
| | 286,847 |
|
| Paid guarantee benefits(2) | (67,887 | ) | | 0 |
| | (2,915 | ) | | (70,802 | ) |
| Change in unrealized investment gains and losses(2) | (20,108 | ) | | 0 |
| | (230 | ) | | (20,338 | ) |
| Balance at December 31, 2018 | $ | 638,403 |
| | $ | 8,332,474 |
| | $ | 22,060 |
| | $ | 8,992,937 |
|
| |
| (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. |
| |
| (2) | Amounts include assumed reinsurance business. |
The GMDB liability is determined each period end by estimating the accumulated value of a portion of the total assessments to date less the accumulated value of the guaranteed death benefits in excess of the account balance. The GMIB liability associated with variable annuities is determined each period by estimating the accumulated value of a portion of the total assessments to date less the accumulated value of the projected income benefits in excess of the account balance. The portion of assessments used is chosen such that, at issue the present value of expected death benefits or expected income benefits in excess of the projected account balance and the portion of the present value of total expected assessments over the lifetime of the contracts are equal. The Company regularly evaluates the estimates used and adjusts the GMDB and GMIB liability balances with an associated charge or credit to earnings, if actual experience or other evidence suggests that earlier estimates should be revised.
96The 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.
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.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
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” in the Company’s Statements of Financial Position. 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:
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, 2013 |
| | Realized Investment Gains (Losses) | | Net Investment Income | | Other Income | | AOCI(1) |
| | (in thousands) |
| Derivatives Designated as Hedge Accounting Instruments: | | | | | | | |
| Cash flow hedges | | | | | | | |
| Currency/Interest Rate | $ | 0 |
| | $ | (89 | ) | | $ | (7 | ) | | $ | (585 | ) |
| Total cash flow hedges | 0 |
| | (89 | ) | | (7 | ) | | (585 | ) |
| Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | |
| Interest Rate | (116,025 | ) | | 0 |
| | 0 |
| | 0 |
|
| Currency | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Currency/Interest Rate | (204 | ) | | 0 |
| | 24 |
| | 0 |
|
| Credit | (103 | ) | | 0 |
| | 0 |
| | 0 |
|
| Equity | (79,498 | ) | | 0 |
| | 0 |
| | 0 |
|
| Embedded Derivatives | 1,775 |
| | 0 |
| | 0 |
| | 0 |
|
| Total non-qualifying hedges | (194,055 | ) | | 0 |
| | 24 |
| | 0 |
|
| Total | $ | (194,055 | ) | | $ | (89 | ) | | $ | 17 |
| | $ | (585 | ) |
|
| | | |
| | Sales Inducements |
| | (in thousands) |
| Balance at December 31, 2015 | $ | 452,752 |
|
| Capitalization | 1,805 |
|
| Amortization - Impact of assumption and experience unlocking and true-ups | 101,424 |
|
| Amortization - All other | (81,603 | ) |
| Change in unrealized investment gains and losses | 4,915 |
|
| Assumed DSI upon reinsurance agreement with Pruco Life(1) | 499,530 |
|
| Balance at December 31, 2016 | 978,823 |
|
| Capitalization | 1,551 |
|
| Amortization - Impact of assumption and experience unlocking and true-ups | 145,141 |
|
| Amortization - All other | (94,014 | ) |
| Change in unrealized investment gains and losses | (10,715 | ) |
| Balance at December 31, 2017 | 1,020,786 |
|
| Capitalization | 2,888 |
|
| Amortization - Impact of assumption and experience unlocking and true-ups | (5,713 | ) |
| Amortization - All other | (149,236 | ) |
| Change in unrealized investment gains and losses | 20,873 |
|
| Balance at December 31, 2018 | $ | 889,598 |
|
| |
| (1) | Amounts deferred in AOCI.See Note 1 for additional information. |
For the years ended December 31, 2015, 2014 and 2013, the ineffective portion of derivatives accounted for using hedge accounting was not material to the Company’s results of operations. Also, there were no material amounts reclassified 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.
Presented below is a rollforward of current period cash flow hedges in “Accumulated other comprehensive income (loss)” before taxes:
|
| | | |
| | (in thousands) |
| Balance, December 31, 2012 | $ | (3,068 | ) |
| Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2013 | (680 | ) |
| Amount reclassified into current period earnings | 95 |
|
| Balance, December 31, 2013 | (3,653 | ) |
| Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2014 | 8,640 |
|
| Amount reclassified into current period earnings | (148 | ) |
| Balance, December 31, 2014 | 4,839 |
|
| Net deferred gains (losses) on cash flow hedges from January 1 to December 31, 2015 | 12,078 |
|
| Amounts reclassified into current period earnings | (2,070 | ) |
| Balance, December 31, 2015 | $ | 14,847 |
|
Using December 31, 2015 values, it is estimated that a pre-tax gain of approximately $1 million will be reclassified from AOCI to earnings during the subsequent twelve months ending December 31, 2016, offset by amounts pertaining to the hedged items. As of December 31, 2015 and 2014, the Company did not have any qualifying cash flow hedges of forecasted transactions other than those related to the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments. The maximum length of time for which these variable cash flows are hedged is 18 years. Income amounts deferred in AOCI as a result of cash flow hedges are included in "Net unrealized investment gains (losses)" within OCI in the Statements of Operations and Comprehensive Income.
Credit Derivatives
The Company has no exposure from credit derivatives where it has written credit protection as of December 31, 2015 and 2014.
As of December 31, 2015, the Company had no open positions where it has purchased credit protection using credit derivatives in order to hedge specific credit in the Company’s investment portfolio. As of December 31, 2014, the Company had $1 million of outstanding notional amounts reported at fair value as a liability of less than $1 million.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Credit Risk10. REINSURANCE
The Company uses reinsurance as part of its risk management and capital management strategies for certain of its living benefit guarantees and variable annuity base contracts. Through March 31, 2016, the Company reinsured its living benefit guarantees on certain variable annuity products to Pruco Re and Prudential Insurance, which are the legal entities in which the Company previously executed its living benefit hedging program. Effective April 1, 2016 the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured to Pruco Re and Prudential Insurance, as discussed further in Note 1. In addition, the Company reinsured variable annuity base contracts, along with the living benefit guarantees, from Pruco Life, excluding the PLNJ business which was reinsured to Prudential Insurance. This reinsurance covers new and in force business and excludes business reinsured externally.
In the fourth quarter of 2015, the Company surrendered its New York license. The Company recaptured the New York living benefits previously ceded to Pruco Re, and reinsured the majority of its New York business, both the living benefit guarantees and base contracts, to Prudential Insurance. See Note 1 for additional information. 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.
Realized investment gains and losses include the impact of reinsurance agreements, particularly reinsurance agreements involving living benefit guarantees. 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 Statements of Financial Position as of December 31, were as follows:
|
| | | | | | | |
| | 2018 | | 2017 |
| | (in thousands) |
| Reinsurance recoverables | $ | 572,102 |
| | $ | 563,428 |
|
| Deferred policy acquisition costs | 3,703,166 |
| | 3,766,066 |
|
| Deferred sales inducements | 476,608 |
| | 540,389 |
|
| Value of business acquired | (2,431 | ) | | (2,702 | ) |
| Other assets | 79,992 |
| | 105,167 |
|
| Policyholders’ account balances | 3,098,537 |
| | 2,825,030 |
|
| Future policy benefits | 5,680,939 |
| | 5,511,496 |
|
| Reinsurance payables(1) | 232,937 |
| | 262,588 |
|
| Other liabilities | 290,330 |
| | 329,019 |
|
| |
| (1) | "Reinsurance payables" includes $0.1 million of unaffiliated activity as of both December 31, 2018 and 2017. |
The reinsurance recoverables by counterparty are broken out below:
|
| | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | (in thousands) |
| Prudential Insurance | $ | 335,349 |
| | $ | 310,758 |
|
| Pruco Life | 236,716 |
| | 252,383 |
|
| Unaffiliated | 37 |
| | 287 |
|
| Total reinsurance recoverables | $ | 572,102 |
| | $ | 563,428 |
|
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Reinsurance amounts, included in the Company’s Statements of Operations and Comprehensive Income for the years ended December 31, were as follows:
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in thousands) |
| Premiums: | | | | | |
| Direct | $ | 37,895 |
| | $ | 33,908 |
| | $ | 39,326 |
|
| Assumed | 31,989 |
| | 32,890 |
| | 860,831 |
|
| Ceded | (2,619 | ) | | (3,225 | ) | | (3,318 | ) |
| Net premiums | 67,265 |
| | 63,573 |
| | 896,839 |
|
| Policy charges and fee income: | | | | | |
| Direct | 549,500 |
| | 622,099 |
| | 647,226 |
|
| Assumed | 1,661,484 |
| | 1,632,132 |
| | 1,153,752 |
|
| Ceded(1) | (39,706 | ) | | (44,652 | ) | | (45,754 | ) |
| Net policy charges and fee income | 2,171,278 |
| | 2,209,579 |
| | 1,755,224 |
|
| Asset administration fees and other income: | | | | | |
| Direct | 96,743 |
| | 129,847 |
| | 103,892 |
|
| Assumed | 301,549 |
| | 293,275 |
| | 205,221 |
|
| Ceded | (9,136 | ) | | (9,747 | ) | | (9,729 | ) |
| Net asset administration fees and other income | 389,156 |
| | 413,375 |
| | 299,384 |
|
| Realized investment gains (losses), net: | | | | | |
| Direct | 81,120 |
| | (1,335,253 | ) | | (3,612,578 | ) |
| Assumed | 823,129 |
| | 554,686 |
| | (81,510 | ) |
| Ceded | (20,176 | ) | | (24,833 | ) | | 251,328 |
|
| Realized investment gains (losses), net | 884,073 |
| | (805,400 | ) | | (3,442,760 | ) |
| Policyholders' benefits (including change in reserves): | | | | | |
| Direct | 81,045 |
| | 52,477 |
| | 74,438 |
|
| Assumed | 110,358 |
| | 46,375 |
| | 553,280 |
|
| Ceded(2) | (4,315 | ) | | 15,216 |
| | (23,661 | ) |
| Net policyholders' benefits (including change in reserves) | 187,088 |
| | 114,068 |
| | 604,057 |
|
| Interest credited to policyholders’ account balances: | | | | | |
| Direct | 127,018 |
| | 9,834 |
| | 74,389 |
|
| Assumed | 132,324 |
| | 24,708 |
| | (1,551 | ) |
| Ceded | (10,167 | ) | | (4,262 | ) | | (3,949 | ) |
| Net interest credited to policyholders’ account balances | 249,175 |
| | 30,280 |
| | 68,889 |
|
| Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization | 1,131,351 |
| | 725,749 |
| | 563,027 |
|
| |
| (1) | "Policy charges and fee income ceded" includes $(1) million, $(2) million and $(2) million of unaffiliated activity for the years ended December 31, 2018, 2017 and 2016, respectively. |
| |
| (2) | "Policyholders' benefits (including change in reserves) ceded" includes $(0.3) million, $(0.1) million and $(0.3) million of unaffiliated activity for the years ended December 31, 2018, 2017 and 2016, respectively. |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
11. INCOME TAXES
The following schedule discloses significant components of income tax expense (benefit) for each year presented:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | | | (in thousands) | | |
| Current tax expense (benefit): | | | | | |
| U.S. federal | $ | (422,999 | ) | | $ | 501,088 |
| | $ | 2,524,458 |
|
| State and local | 0 |
| | 1,349 |
| | 0 |
|
| Total | (422,999 | ) | | 502,437 |
| | 2,524,458 |
|
| Deferred tax expense (benefit): | | | | | |
| U.S. federal | 584,503 |
| | 698,662 |
| | (3,204,951 | ) |
| State and local | 0 |
| | 0 |
| | 0 |
|
| Total | 584,503 |
| | 698,662 |
| | (3,204,951 | ) |
| Total income tax expense (benefit) | 161,504 |
| | 1,201,099 |
| | (680,493 | ) |
| Total income tax expense (benefit) reported in equity related to: | | | | | |
| Other comprehensive income (loss) | (52,510 | ) | | 98,644 |
| | (194,446 | ) |
| Additional paid-in capital | 0 |
| | 0 |
| | (9,531 | ) |
| Total income tax expense (benefit) | $ | 108,994 |
| | $ | 1,299,743 |
| | $ | (884,470 | ) |
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 2018 and 35% applicable for the periods prior to 2018, and the reported income tax expense (benefit) are summarized as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in thousands) |
| Expected federal income tax expense (benefit) | $ | 387,286 |
| | $ | 391,158 |
| | $ | (619,704 | ) |
| Non-taxable investment income | (18,954 | ) | | (46,625 | ) | | (49,630 | ) |
| Tax credits | (13,694 | ) | | (10,358 | ) | | (10,507 | ) |
| Changes in tax law | (193,306 | ) | | 882,175 |
| | 0 |
|
| Other | 172 |
| | (15,251 | ) | | (652 | ) |
| Reported income tax expense (benefit) | $ | 161,504 |
| | $ | 1,201,099 |
| | $ | (680,493 | ) |
| Effective tax rate | 8.8 | % | | 107.5 | % | | 38.4 | % |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
The effective tax rate is the ratio of “Total income tax expense (benefit)” divided by “Income (loss) from operations before income taxes”. The Company’s effective tax rate for fiscal years 2018, 2017 and 2016 was 8.8%, 107.5% and 38.4%, respectively. The following is a description of items that had the most significant impact on the difference between the Company’s statutory U.S. federal income tax rate of 21% applicable for 2018 and 35% applicable for the periods prior to 2018, and the Company’s effective tax rate during the periods presented:
Changes in Tax Law. The following is a list of notable changes in tax law that impacted the Company’s effective tax rate for the periods presented:
Tax Act of 2017 - On December 22, 2017, the Tax Act of 2017 was enacted into U.S. law. As a result, the Company recognized a $882 million tax expense in “Total income tax expense (benefit)” in the Company’s Statement of Operations for the year ended December 31, 2017. In accordance with SEC Staff Accounting Bulletin 118, in 2017 the Company recorded the effects of the Tax Act of 2017 using reasonable estimates due to the need for further analysis of the provisions within the Tax Act of 2017 and collection, preparation and analysis of relevant data necessary to complete the accounting. During 2018, the Company completed the collection, preparation and analysis of data relevant to the Tax Act of 2017, and interpreted any additional guidance issued by the IRS, U.S. Department of the Treasury, or other standard-setting organizations, and recognized a $0.2 million increase in income tax expense for a total of $882.3 million recognized from the reduction in net deferred tax assets to reflect the reduction in the U.S. tax rate from 35% to 21%.
2018 Industry Issue Resolution (IIR) - In August 2018, the IRS released a Directive to provide guidance on the tax reserving for guaranteed benefits within variable annuity contracts and principle-based reserves on certain life insurance contracts. Adopting the methodology specified in the Directive resulted in an accelerated deduction for the Company’s 2017 tax return that would have otherwise been deductible in future years. Prior to the adoption of this Directive, the Company accounted for these future deductions as deferred tax assets measured using the current 21% corporate income tax rate. Upon adoption of the Directive, the tax benefits were revalued using the 35% tax rate applicable for the 2017 tax year in which they will now be recognized, resulting in a reduction in income tax expense of $193 million.
Non-Taxable Investment Income. The U.S. Dividends Received Deduction (“DRD”) reduces the amount of dividend income subject to U.S. tax and accounts for most of the non-taxable investment income shown in the table above. More specifically, the U.S. DRD constitutes $15 million of the total $19 million of 2018 non-taxable investment income, $46 million of the total $47 million of 2017 non-taxable investment income, and $50 million of the total $50 million of 2016 non-taxable investment income. The DRD for the current period was estimated using information from 2017, 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.
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.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Schedule of Deferred Tax Assets and Deferred Tax Liabilities
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| Deferred tax assets: | | | |
| Insurance reserves | $ | 1,521,729 |
| | $ | 2,064,659 |
|
| Investments | 276,880 |
| | 404,703 |
|
| Net unrealized loss on securities | 86,742 |
| | 7,048 |
|
| Other | 638 |
| | 205 |
|
| Deferred tax assets | 1,885,989 |
| | 2,476,615 |
|
| Deferred tax liabilities: | | | |
| VOBA and deferred policy acquisition cost | 929,849 |
| | 960,841 |
|
| Deferred sales inducements | 186,816 |
| | 214,365 |
|
| Deferred tax liabilities | 1,116,665 |
| | 1,175,206 |
|
| Net deferred tax asset (liability) | $ | 769,324 |
| | $ | 1,301,409 |
|
| | | | |
The application of U.S. GAAP requires the Company to evaluate the recoverability of deferred tax assets and establish a valuation allowance if necessary to reduce the deferred tax asset to an amount that is more likely than not expected to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, the Company considers many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are ordinary or capital; (3) in which tax jurisdictions they were generated and the timing of their reversal; (4) taxable income in prior carryback years as well as projected taxable earnings exclusive of reversing temporary differences and carryforwards; (5) the length of time that carryovers can be utilized in the various taxing jurisdictions; (6) any unique tax rules that would impact the utilization of the deferred tax assets; and (7) any tax planning strategies that the Company would employ to avoid a tax benefit from expiring unused. Although realization is not assured, management believes it is more likely than not that the deferred tax assets, net of valuation allowances, will be realized.
The company had no valuation allowance as of December 31, 2018 and 2017. 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 includes income (loss) from domestic operations of $1,844 million, $1,118 million, and $(1,771) million for the years ended December 31, 2018, 2017 and 2016, 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, 2018, 2017, and 2016. 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.
At December 31, 2018, the Company remains subject to examination in the U.S. for tax years 2015 through 2017.
The Company is exposed to credit-related lossesparticipating in the eventIRS’s Compliance Assurance Program. Under this program, the IRS assigns an examination team to review completed transactions as they occur in order to reach agreement with the Company on how they should be reported in the relevant tax returns. If disagreements arise, accelerated resolution programs are available to resolve the disagreements in a timely manner before the tax return is filed.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
12. EQUITY
Accumulated Other Comprehensive Income (Loss)
AOCI represents the cumulative OCI items that are reported separate from net income and detailed on the Statements of Comprehensive Income. Each of the components that comprise OCI are described in further detail in Note 2 (Foreign Currency Translation Adjustment and Net Unrealized Investment Gains (Losses)). The balance of and changes in each component of AOCI as of and for the years ended December 31, are as follows:
|
| | | | | | | | | | | |
| | Accumulated Other Comprehensive Income (Loss) |
| | Foreign Currency Translation Adjustment | | Net Unrealized Investment Gains (Losses)(1) | | Total Accumulated Other Comprehensive Income (Loss) |
| | | | | | |
| | (in thousands) |
| Balance, December 31, 2015 | $ | (65 | ) | | $ | 46,231 |
| | $ | 46,166 |
|
| Change in OCI before reclassifications | (20 | ) | | (469,356 | ) | | (469,376 | ) |
| Amounts reclassified from AOCI | 0 |
| | (86,184 | ) | | (86,184 | ) |
| Income tax benefit (expense) | 7 |
| | 194,439 |
| | 194,446 |
|
| Balance, December 31, 2016 | (78 | ) | | (314,870 | ) | | (314,948 | ) |
| Change in OCI before reclassifications | 109 |
| | 320,182 |
| | 320,291 |
|
| Amounts reclassified from AOCI | 0 |
| | 3,177 |
| | 3,177 |
|
| Income tax benefit (expense) | (38 | ) | | (98,606 | ) | | (98,644 | ) |
| Balance, December 31, 2017 | (7 | ) | | (90,117 | ) | | (90,124 | ) |
| Change in OCI before reclassifications | (1,354 | ) | | (311,658 | ) | | (313,012 | ) |
| Amounts reclassified from AOCI | 0 |
| | 62,970 |
| | 62,970 |
|
| Income tax benefit (expense) | 285 |
| | 52,225 |
| | 52,510 |
|
| Cumulative effect of adoption of ASU 2016-01 | 0 |
| | (3 | ) | | (3 | ) |
| Cumulative effect of adoption of ASU 2018-02 | (2 | ) | | (36,712 | ) | | (36,714 | ) |
| Balance, December 31, 2018 | $ | (1,078 | ) | | $ | (323,295 | ) | | $ | (324,373 | ) |
| |
| (1) | Includes cash flow hedges of $(4) million, $(26) million and $12 millionas of December 31, 2018, 2017, and 2016, respectively. |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Reclassifications out of Accumulated Other Comprehensive Income (Loss)
|
| | | | | | | | | | | |
| | Year Ended December 31, 2018 | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 |
| | | | | | |
| | (in thousands) |
| Amounts reclassified from AOCI(1)(2): | | | | | |
| Net unrealized investment gains (losses): | | | | | |
| Cash flow hedges - Currency/Interest rate(3) | $ | 20,761 |
| | $ | (1,838 | ) | | $ | 12,800 |
|
| Net unrealized investment gains (losses) on available-for-sale securities | (83,731 | ) | | (1,339 | ) | | 73,384 |
|
| Total net unrealized investment gains (losses)(4) | (62,970 | ) | | (3,177 | ) | | 86,184 |
|
| Total reclassifications for the period | $ | (62,970 | ) | | $ | (3,177 | ) | | $ | 86,184 |
|
| |
| (1) | All amounts are shown before tax. |
| |
| (2) | Positive amounts indicate gains/benefits reclassified out of AOCI. Negative amounts indicate losses/costs reclassified out of AOCI. |
| |
| (3) | See Note 4 for additional information on cash flow hedges. |
| |
| (4) | See table below for additional information on unrealized investment gains (losses), including the impact on deferred policy acquisition and other costs and future policy benefits. |
Net Unrealized Investment Gains (Losses)
Net unrealized investment gains (losses) on securities classified as available-for-sale, certain other invested assets and other assets are included in the Company’s Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from “Other comprehensive income (loss)” those items that are included as part of “Net income” for a period that had been part of “Other comprehensive income (loss)” in earlier periods. The amounts for the periods indicated below, split between amounts related to fixed maturity securities on which an OTTI loss has been recognized, and all other net unrealized investment gains (losses), are as follows:
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities on which an OTTI loss has been recognized
|
| | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Investments | | Deferred Policy Acquisition Costs and Other Costs(2) | | Future Policy Benefits and Other Liabilities(3) | | Deferred Income Tax (Liability) Benefit | | Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses) |
| | | | | | | | | | |
| | (in thousands) |
| Balance, December 31, 2015 | $ | 9 |
| | $ | (3 | ) | | $ | 0 |
| | $ | 14 |
| | $ | 20 |
|
| Net investment gains (losses) on investments arising during the period | 378 |
| | 0 |
| | 0 |
| | (132 | ) | | 246 |
|
| Reclassification adjustment for (gains) losses included in net income | 556 |
| | 0 |
| | 0 |
| | (195 | ) | | 361 |
|
| Reclassification adjustment for OTTI losses excluded from net income | (2,204 | ) | | 0 |
| | 0 |
| | 771 |
| | (1,433 | ) |
| Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs | 0 |
| | (2,130 | ) | | 0 |
| | 746 |
| | (1,384 | ) |
| Impact of net unrealized investment (gains) losses on future policy benefits | 0 |
| | 0 |
| | (522 | ) | | 183 |
| | (339 | ) |
| Balance, December 31, 2016 | (1,261 | ) | | (2,133 | ) | | (522 | ) | | 1,387 |
| | (2,529 | ) |
| Net investment gains (losses) on investments arising during the period | 11,328 |
| | 0 |
| | 0 |
| | (3,481 | ) | | 7,847 |
|
| Reclassification adjustment for (gains) losses included in net income | 2,172 |
| | 0 |
| | 0 |
| | (667 | ) | | 1,505 |
|
| Reclassification adjustment for OTTI losses excluded from net income | 72 |
| | 0 |
| | 0 |
| | (22 | ) | | 50 |
|
| Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs | 0 |
| | 1,125 |
| | 0 |
| | (352 | ) | | 773 |
|
| Impact of net unrealized investment (gains) losses on future policy benefits | 0 |
| | 0 |
| | 365 |
| | (128 | ) | | 237 |
|
| Balance, December 31, 2017 | 12,311 |
| | (1,008 | ) | | (157 | ) | | (3,263 | ) | | 7,883 |
|
| Net investment gains (losses) on investments arising during the period | (15,199 | ) | | 0 |
| | 0 |
| | 3,192 |
| | (12,007 | ) |
| Reclassification adjustment for (gains) losses included in net income | (205 | ) | | 0 |
| | 0 |
| | 43 |
| | (162 | ) |
Reclassification adjustment for OTTI losses excluded from net income(1) | (241 | ) | | 0 |
| | 0 |
| | 51 |
| | (190 | ) |
| Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs | 0 |
| | (111 | ) | | 0 |
| | 23 |
| | (88 | ) |
| Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities | 0 |
| | 0 |
| | 89 |
| | (19 | ) | | 70 |
|
| Balance, December 31, 2018 | $ | (3,334 | ) | | $ | (1,119 | ) | | $ | (68 | ) | | $ | 27 |
| | $ | (4,494 | ) |
| |
| (1) | Represents "transfers in" related to the portion of OTTI losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss. |
| |
| (2) | "Other costs" primarily includes reinsurance recoverables, DSI and VOBA. |
| |
| (3) | "Other liabilities" primarily includes reinsurance payables and deferred reinsurance gains. |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
All Other Net Unrealized Investment Gains (Losses) in AOCI
|
| | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Investments (1) | | Deferred Policy Acquisition Costs and Other Costs(3) | | Future Policy Benefits and Other Liabilities(4) | | Deferred Income Tax (Liability) Benefit | | Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses) |
| | | | | | | | | | |
| | (in thousands) |
| Balance, December 31, 2015 | $ | 107,451 |
| | $ | (30,465 | ) | | $ | (4,596 | ) | | $ | (26,179 | ) | | $ | 46,211 |
|
| Net investment gains (losses) on investments arising during the period | (637,597 | ) | | 0 |
| | 0 |
| | 223,159 |
| | (414,438 | ) |
| Reclassification adjustment for (gains) losses included in net income | 85,628 |
| | 0 |
| | 0 |
| | (29,970 | ) | | 55,658 |
|
| Reclassification adjustment for OTTI losses excluded from net income | 2,204 |
| | 0 |
| | 0 |
| | (771 | ) | | 1,433 |
|
| Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs | 0 |
| | (786 | ) | | 0 |
| | 275 |
| | (511 | ) |
| Impact of net unrealized investment (gains) losses on future policy benefits | 0 |
| | 0 |
| | (1,068 | ) | | 374 |
| | (694 | ) |
| Balance, December 31, 2016 | (442,314 | ) | | (31,251 | ) | | (5,664 | ) | | 166,888 |
| | (312,341 | ) |
| Net investment gains (losses) on investments arising during the period | 376,012 |
| | 0 |
| | 0 |
| | (115,538 | ) | | 260,474 |
|
| Reclassification adjustment for (gains) losses included in net income | (5,349 | ) | | 0 |
| | 0 |
| | 1,644 |
| | (3,705 | ) |
| Reclassification adjustment for OTTI losses excluded from net income | (72 | ) | | 0 |
| | 0 |
| | 22 |
| | (50 | ) |
| Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs | 0 |
| | (50,961 | ) | | 0 |
| | 15,949 |
| | (35,012 | ) |
| Impact of net unrealized investment (gains) losses on future policy benefits | 0 |
| | 0 |
| | (11,333 | ) | | 3,967 |
| | (7,366 | ) |
| Balance, December 31, 2017 | (71,723 | ) | | (82,212 | ) | | (16,997 | ) | | 72,932 |
| | (98,000 | ) |
| Net investment gains (losses) on investments arising during the period | (405,264 | ) | | 0 |
| | 0 |
| | 85,105 |
| | (320,159 | ) |
| Reclassification adjustment for (gains) losses included in net income | 63,175 |
| | 0 |
| | 0 |
| | (13,267 | ) | | 49,908 |
|
Reclassification adjustment for OTTI losses excluded from net income(2) | 241 |
| | 0 |
| | 0 |
| | (51 | ) | | 190 |
|
| Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs | 0 |
| | 90,717 |
| | 0 |
| | (19,049 | ) | | 71,668 |
|
| Impact of net unrealized investment (gains) losses on future policy benefits and other liabilities | 0 |
| | 0 |
| | 18,110 |
| | (3,803 | ) | | 14,307 |
|
| Cumulative effect of adoption of ASU 2016-01 | (4 | ) | | 0 |
| | 0 |
| | 1 |
| | (3 | ) |
| Cumulative effect of adoption of ASU 2018-02 | 0 |
| | 0 |
| | 0 |
| | (36,712 | ) | | (36,712 | ) |
| Balance, December 31, 2018 | $ | (413,575 | ) | | $ | 8,505 |
| | $ | 1,113 |
| | $ | 85,156 |
| | $ | (318,801 | ) |
| |
| (1) | Includes cash flow hedges. See Note 4 for information on cash flow hedges. |
| |
| (2) | Represents "transfers out" related to the portion of OTTI losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss. |
| |
| (3) | "Other costs" primarily includes reinsurance recoverables, DSI and VOBA. |
| |
| (4) | "Other liabilities" primarily includes reinsurance payables and deferred reinsurance gains. |
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
13. STATUTORY NET INCOME AND SURPLUS AND DIVIDEND RESTRICTIONS
The Company is required to prepare statutory financial statements in accordance with accounting practices prescribed or permitted by the AZDOI. Prescribed statutory accounting practices include publications of the NAIC, as well as state laws, regulations and general administrative rules. Statutory accounting practices ("SAP") 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) of the Company amounted to $(852) million, $3,911 million and $(2,018) million for the years ended December 31, 2018, 2017 and 2016, respectively. Statutory surplus of the Company amounted to $6,396 million and $8,059 million at December 31, 2018 and 2017, respectively.
The Company does not utilize prescribed or permitted practices that vary materially from the statutory accounting practices prescribed by the NAIC.
The Company is subject to Arizona law, which limits the amount of dividends that insurance companies can pay to stockholders. 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. Based on these limitations, the Company is not permitted to pay a dividend in 2019 without prior notification.
In December, September, June and March, 2018, the Company paid an extra-ordinary dividend of $225 million, $250 million, $250 million and $300 million, respectively, to its counterpartyparent, PAI, which was recorded as a return of capital. In December, September, and June, 2017, the Company paid an extra-ordinary dividend of $650 million, $200 million and $100 million, respectively to financial derivative transactions.PAI, which was recorded as a return of capital. In December, 2016, the Company paid an extra-ordinary dividend of $1,140 million to PAI, which was recorded as a return of capital.
14. RELATED PARTY TRANSACTIONS
The Company has credit risk exposureextensive 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
Many 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 $0.1 million for each of the years ended December 31, 2018, 2017 and 2016. The expense charged to the Company for the deferred compensation program was $0.5 million, $0.9 million and $0.8 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The Company is charged for its share of employee benefit expenses. These expenses include costs for funded and non-funded contributory and non-contributory defined benefit pension plans. Some of these benefits are based on final earnings and length of service while others are based on an account balance, which takes into consideration age, service and earnings during a career. The Company’s share of net expense for the pension plans was $2 million, $1 million and $1 million for the years ended December 31, 2018, 2017 and 2016, 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 $2 million for each of the years ended December 31, 2018, 2017 and 2016.
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 $0.7 million, $0.5 million and $0.5 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
The Company pays commissions and certain other fees to PAD in consideration for PAD’s marketing and underwriting of the Company’s products. Commissions and fees are paid by PAD to broker-dealers who sell the Company’s products. Commissions and fees paid by the Company to PAD were $122 million, $109 million and $108 million for the years ended December 31, 2018, 2017 and 2016, 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 $15 million, $14 million and $10 million for the years ended December 31, 2018, 2017 and 2016, respectively.
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 $12 million, $13 million and $11 million for the years ended December 31, 2018, 2017 and 2016, respectively. These expenses are recorded as “Net investment income” in the Statements of Operations and Comprehensive Income (Loss).
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.
Joint Ventures
The Company has made investments in joint ventures with certain subsidiaries of Prudential Global Funding,Financial. "Other invested assets" includes $228 million and $111 million as of December 31, 2018 and 2017, respectively. "Net investment income" related to these ventures includes a gain of $1 million, $9 million and $5 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Affiliated Asset Administration Fee Income
The Company has a revenue sharing agreement with AST Investment Services, Inc. (“ASTISI”) and PGIM Investments LLC (“PGF”PGIM Investments”), whereby the Company receives fee income based on policyholders' separate account balances invested in the Advanced Series Trust and the Prudential Series Fund. Income received from ASTISI and PGIM Investments related to this agreement was $105 million, $111 million and $112 million for the years ended December 31, 2018, 2017 and 2016, respectively. These revenues are recorded as “Asset administration fees and other income” in the Statements of Operations and Comprehensive Income (Loss).
Affiliated Notes Receivable
Affiliated notes receivable included in "Receivables from parent and affiliates" at December 31, were as follows:
|
| | | | | | | | | | | | | | | | |
| | Maturity Dates | | Interest Rates | | 2018 | | 2017 |
| | | | | | | | | | (in thousands) |
| U.S. dollar floating rate notes | | | 2028 | | 3.83% | - | 4.25 | % | | $ | 34,008 |
| | $ | 34,268 |
|
| U.S. dollar fixed rate notes | 2027 | - | 2027 | | 8.15% | - | 14.85 | % | | 3,184 |
| | 3,877 |
|
| Total long-term notes receivable - affiliated(1) | | | | | | | | | $ | 37,192 |
| | $ | 38,145 |
|
| |
| (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 $0.3 million and $0.2 million as of December 31, 2018 and 2017, respectively, and is included in “Other assets”. Revenues related to these loans were $0.4 million, $0.7 million and $0.9 million for the years ended December 31, 2018, 2017 and 2016, respectively, and are included in “Asset administration fees and other income”.
Prudential Annuities Life Assurance Corporation
Notes to 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 APIC and "Realized investment gains (losses), net", respectively. The table below shows affiliated asset trades for the years ended December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | |
| Affiliate | | Date | | Transaction | | Security Type | | Fair Value | | Book Value | | APIC, Net of Tax Increase/ (Decrease) | | Realized Investment Gain/ (Loss), Net of Tax |
| | | | | | | | | (in thousands) |
| Pruco Life | | January 2017 | | Sale | | Fixed Maturities | | $ | 29 |
| | $ | 29 |
| | $ | 0 |
| | $ | 0 |
|
| Prudential Insurance | | October 2017 | | Sale | | Commercial Mortgages | | $ | 131,953 |
| | $ | 128,529 |
| | $ | 0 |
| | $ | 2,226 |
|
| Gibraltar Universal Life Reinsurance Company | | October 2017 | | Purchase | | Fixed Maturities | | $ | 113,686 |
| | $ | 96,583 |
| | $ | 0 |
| | $ | (11,117 | ) |
| Prudential Insurance | | December 2017 | | Purchase | | Other long-term investments - Derivatives | | $ | 171,363 |
| | $ | 171,363 |
| | $ | 0 |
| | $ | 0 |
|
| Prudential Insurance | | December 2017 | | Sale | | Fixed Maturities | | $ | 13,793 |
| | $ | 7,113 |
| | $ | 0 |
| | $ | 4,342 |
|
| Prudential Insurance | | February 2018 | | Purchase | | Fixed Maturities | | $ | 136,963 |
| | $ | 136,963 |
| | $ | 0 |
| | $ | 0 |
|
| Pruco Life Insurance Company of Arizona | | April 2018 | | Sale | | Fixed Maturities | | $ | 64,313 |
| | $ | 64,514 |
| | $ | 0 |
| | $ | (159 | ) |
| Prudential Insurance | | April 2018 | | Sale | | Fixed Maturities | | $ | 57,747 |
| | $ | 43,434 |
| | $ | 0 |
| | $ | 11,308 |
|
| Prudential Insurance | | May 2018 | | Sale | | Fixed Maturity & Commercial Mortgages | | $ | 162,111 |
| | $ | 159,237 |
| | $ | 0 |
| | $ | 2,271 |
|
| Passaic Fund LLC | | June 2018 | | Transfer Out | | Other Invested Assets - Privates | | $ | 15,281 |
| | $ | 15,281 |
| | $ | 0 |
| | $ | 0 |
|
| Prudential Insurance | | July 2018 | | Sale | | Fixed Maturities | | $ | 11,160 |
| | $ | 9,277 |
| | $ | 0 |
| | $ | 1,488 |
|
| Prudential Insurance | | August 2018 | | Sale | | Commercial Mortgages | | $ | 13,414 |
| | $ | 13,165 |
| | $ | 0 |
| | $ | 196 |
|
| Prudential Insurance | | December 2018 | | Purchase | | Fixed Maturities | | $ | 33,256 |
|
| $ | 33,166 |
|
| $ | 0 |
|
| $ | (71 | ) |
| Prudential Agricultural Investors LP | | December 2018 | | Transfer Out | | Other Invested Assets - Privates | | $ | 7,324 |
|
| $ | 7,324 |
|
| $ | 0 |
|
| $ | 0 |
|
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Debt Agreements
The Company is authorized to borrow funds up to $9 billion from Prudential Financial and its OTC derivative transactions. PGF manages credit riskaffiliates to meet its capital and other funding needs. The debt issued during the second quarter of 2016 in the table below was assigned from affiliates as part of the Variable Annuities Recapture, as described further in Note 1. The following table provides the breakout of the Company's short and long-term debt to affiliates:
|
| | | | | | | | | | | | | | | | | | | |
| Affiliate | | Date Issued | | Amount of Notes - December 31, 2018 | | Amount of Notes - December 31, 2017 | | Interest Rate | | Date of Maturity |
| | | | | (in thousands) | | | | | | | | |
| Prudential Insurance | | 4/20/2016 | | 0 |
| | 18,734 |
| | | | 2.60 | % | | | | 12/15/2018 |
| Prudential Insurance | | 4/20/2016 | | 0 |
| | 25,000 |
| | | | 2.60 | % | | | | 12/15/2018 |
| Prudential Insurance | | 4/20/2016 | | 46,835 |
| | 46,835 |
| | | | 2.80 | % | | | | 6/20/2019 |
| Prudential Insurance | | 4/20/2016 | | 18,734 |
| | 18,734 |
| | | | 2.80 | % | | | | 6/20/2019 |
| Prudential Insurance | | 4/20/2016 | | 37,468 |
| | 37,468 |
| | | | 3.64 | % | | | | 12/6/2020 |
| Prudential Insurance | | 4/20/2016 | | 93,671 |
| | 93,671 |
| | | | 3.64 | % | | | | 12/15/2020 |
| Prudential Insurance | | 4/20/2016 | | 103,039 |
| | 103,039 |
| | | | 3.64 | % | | | | 12/15/2020 |
| Prudential Insurance | | 4/20/2016 | | 93,671 |
| | 93,671 |
| | | | 3.47 | % | | | | 6/20/2021 |
| Prudential Insurance | | 4/20/2016 | | 93,671 |
| | 93,671 |
| | | | 4.39 | % | | | | 12/15/2023 |
| Prudential Insurance | | 4/20/2016 | | 28,102 |
| | 28,102 |
| | | | 4.39 | % | | | | 12/15/2023 |
| Prudential Insurance | | 4/20/2016 | | 37,468 |
| | 37,468 |
| | | | 3.95 | % | | | | 6/20/2024 |
| Prudential Insurance | | 4/20/2016 | | 93,671 |
| | 93,671 |
| | | | 3.95 | % | | | | 6/20/2024 |
| Prudential Insurance | | 4/20/2016 | | 46,835 |
| | 46,835 |
| | | | 3.95 | % | | | | 6/20/2024 |
| Prudential Insurance | | 6/28/2016 | | 30,000 |
| | 30,000 |
| | | | 2.08 | % | | | | 6/28/2019 |
| Prudential Insurance | | 6/28/2016 | | 50,000 |
| | 50,000 |
| | | | 3.49 | % | | | | 6/28/2026 |
| Prudential Insurance | | 6/28/2016 | | 25,000 |
| | 25,000 |
| | | | 3.49 | % | | | | 6/28/2026 |
| Prudential Insurance | | 6/28/2016 | | 26,000 |
| | 26,000 |
| | | | 2.59 | % | | | | 6/28/2021 |
| Prudential Insurance | | 6/28/2016 | | 25,000 |
| | 25,000 |
| | | | 2.08 | % | | | | 6/28/2019 |
| Prudential Insurance | | 6/28/2016 | | 20,000 |
| | 20,000 |
| | | | 2.08 | % | | | | 6/28/2019 |
| Prudential Insurance | | 6/28/2016 | | 25,000 |
| | 25,000 |
| | | | 3.49 | % | | | | 6/28/2026 |
| Prudential Retirement Insurance & Annuity | | 6/28/2016 | | 34,000 |
| | 34,000 |
| | | | 3.09 | % | | | | 6/28/2023 |
| Total Loans Payable to Affiliates | | | | $ | 928,165 |
| | $ | 971,899 |
| | | | | | | | |
The total interest expense to the Company related to loans and other payables to affiliates was $58 million, $66 million and $53 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Contributed Capital and Dividends
Through December 31, 2018 and 2017, the Company did not receive any capital contributions. In June of 2016, the Company received a capital contribution in the amount of $8,422 million from PAI, related to the Variable Annuities Recapture, as discussed in Note 1.
In March, June, September and December of 2018, there was a $300 million, $250 million, $250 million and $225 million return of capital, respectively, to PAI. In June, September and December of 2017, there was a $100 million, $200 million and $650 million return of capital, respectively, to PAI. In December of 2016, there was a $1,140 million return of capital to PAI.
Reinsurance with external counterparties by entering into derivativeAffiliates
As discussed in Note 10, the Company participates in reinsurance transactions with highly rated major international financial institutions and other creditworthy counterparties, and by obtaining collateral, such as cash and securities, when appropriate. Additionally, limits are set on single party credit exposures which are subject to periodic management review.
Under fair value measurements, the Company incorporates the market’s perception of its own and the counterparty’s non-performance risk in determining the fair value of the portion of its OTC derivative assets and liabilities that are uncollateralized. Credit spreads are applied to the derivative fair values on a net basis by counterparty. To reflect the Company’s own credit spread a proxy based on relevant debt spreads is applied to OTC derivative net liability positions. Similarly, the Company’s counterparty’s credit spread is applied to OTC derivative net asset positions.certain affiliates.
12.Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
15. COMMITMENTS AND CONTINGENT LIABILITIES AND LITIGATION AND REGULATORY MATTERS
Commitments
The Company hadhas made commitments to fund $5$4 million and $1$37 million of commercial loans as of December 31, 20152018 and 2014,2017, respectively. The Company also made commitments to purchase or fund investments, mostly private fixed maturities, of $36$271 million and $22$134 million as of December 31, 20152018 and 2014,2017, respectively.
Contingent Liabilities
On an ongoing basis, the Company’s internal supervisory and control functions review the quality of sales, marketing and other customer interface procedures and practices and may recommend modifications or enhancements. From time to time, this review process results in the discovery of product administration, servicing or other errors, including errors relating to the timing or amount of payments or contract values due to customers. In certain cases, if appropriate, the Company may offer customers remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.
The Company is subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment of unclaimed or abandoned funds, and is subject to audit and examination for compliance with these requirements. For additional discussion of these matters, see “Litigation and Regulatory Matters” below.
It is possible that the results of operations or the cash flows of the Company in a particular quarterly or annual period could be materially affected as a result of payments in connection with the matters discussed above or other matters depending, in part, based upon the results of operations or cash flows for such period. Management believes, however, that ultimate payments in connection with these matters, after consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on the Company’s financial position.
Litigation and Regulatory MattersAffiliated Investment Management Expenses
The Company is subject to legal and regulatory actions in the ordinary course of its business. Pending legal and regulatory actions include proceedings specific toIn accordance with an agreement with PGIM, Inc. (“PGIM”), the Company and proceedings generally applicablepays investment management expenses to business practices in the industry in which it operates. ThePGIM who acts as investment manager to certain Company is subject to class action lawsuitsgeneral account 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.
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, including matters discussed below. The Company estimates that as of December 31, 2015, 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 $0 to approximately $3 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
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.
Escheatment Audit and Claims Settlement Practices Market Conduct Exam
In January 2012, a Global Resolution Agreement entered into by the Company and a third-party auditor became effective upon its acceptance by the unclaimed property departments of 20 states and jurisdictions. Under the terms of the Global Resolution Agreement, the third-party auditor acting on behalf of the signatory states will compare expanded matching criteria to the Social Security Master Death File (“SSMDF”) to identify deceased insureds and contractholders where a valid claim has not been made. In February 2012, a Regulatory Settlement Agreement entered into by the Company to resolve a multi-state market conduct examination regarding its adherence to state claim settlement practices became effective upon its acceptance by the insurance departments of 20 states and jurisdictions. The Regulatory Settlement Agreement applies prospectively and requires the Company to adopt and implement additional procedures comparing its records to the SSMDF to identify unclaimed death benefits and prescribes procedures for identifying and locating beneficiaries once deaths are identified. Substantially all other jurisdictions that are not signatories to the Global Resolution Agreement or the Regulatory Settlement Agreement have entered into similar agreements with the Company.
The New York Attorney General has subpoenaed the Company, along with other companies, regarding its unclaimed property procedures and may ultimately seek remediation and other relief, including damages. Additionally, the New York Office of Unclaimed Funds is conducting an audit of the Company’s compliance with New York’s unclaimed property laws.
Securities Lending Matter
In February 2016, Prudential Financial self-reported to the SEC, and notified other regulators, that in some cases it failed to maximize securities lending income due to a long-standing restriction benefitting the Company and Prudential Financial that limited the availability of loanable securities for certain of the Company's separate account investments. The restriction has been removed and Prudential Financial intendsassets. Investment management expenses paid to implement a remediation plan for the benefit of customers. Prudential Financial intends to fully cooperate with regulators in this matter.
The Company’s litigation and regulatory matters are subject to many uncertainties, and given their complexity and scope, their outcome cannot be predicted. It is possible that the Company’s results of operations or cash flows in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters depending, in part, upon the results of operations or cash flows for such period. In light of the unpredictability of the Company’s litigation and regulatory matters, it is also possible that in certain cases an ultimate unfavorable resolution of one or more pending litigation or regulatory matters could have a material adverse effect on the Company’s financial position. Management believes, however, that, based on information currently known to it, the ultimate outcome of all pending litigation and regulatory matters, after consideration of applicable reserves and rights to indemnification, is not likely to have a material adverse effect on the Company’s financial position.
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
Many of the Company’s expenses are allocations or charges from Prudential Insurance or other affiliates.
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 also include allocations of stock compensation expensesPGIM related to a stock option program and a deferred compensation program issued by Prudential Financial. The expense charged to the Company for the stock option program and deferred compensation program was less than $1this agreement were $12 million, $1$13 million and $2$11 million for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively.
Prudential Annuities Life Assurance CorporationDerivative Trades
Notes to Financial Statements - (Continued)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.
Joint Ventures
The Company is charged for its sharehas made investments in joint ventures with certain subsidiaries of employee benefits expenses. These expenses include costs for fundedPrudential Financial. "Other invested assets" includes $228 million and non-funded contributory$111 million as of December 31, 2018 and non-contributory defined benefit pension plans. Some2017, respectively. "Net investment income" related to these ventures includes a gain of these benefits are based on earnings and length of service. Other benefits are based on an account balance, which takes into consideration age, service and earnings during career. The Company’s share of net expense for the pension plans was $1 million, $1$9 million and $3$5 million for the years ended December 31, 2015, 20142018, 2017 and 2013, respectively.
Prudential Insurance sponsors voluntary savings plans for the Company’s employees (“401(k) plans”). The 401(k) plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual salary. The expense charged to the Company for the matching contribution to the 401(k) plans was $1 million for the years ended December 31, 2015, 2014 and 2013,2016, respectively.
Affiliated Asset Administration Fee Income
In accordance withThe Company has a revenue sharing agreementsagreement with AST Investment Services, Inc. (“ASTISI”) and PrudentialPGIM Investments LLC (“PGIM Investments”) whereby the Company receives fee income calculatedbased on contractholderpolicyholders' separate account balances invested in the Advanced Series Trust and Thethe Prudential Series Fund. Income received from AST Investment Services, Inc.ASTISI and PrudentialPGIM Investments LLC related to the agreementsthis agreement was $173$105 million, $221$111 million and $227$112 million for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively. These revenues are recorded as “Asset administration fees and other income” in the Statements of Operations and Comprehensive Income.Income (Loss).
Affiliated Notes Receivable
Affiliated notes receivable included in "Receivables from parent and affiliates" at December 31, were as follows:
|
| | | | | | | | | | | | | | | | |
| | Maturity Dates | | Interest Rates | | 2018 | | 2017 |
| | | | | | | | | | (in thousands) |
| U.S. dollar floating rate notes | | | 2028 | | 3.83% | - | 4.25 | % | | $ | 34,008 |
| | $ | 34,268 |
|
| U.S. dollar fixed rate notes | 2027 | - | 2027 | | 8.15% | - | 14.85 | % | | 3,184 |
| | 3,877 |
|
| Total long-term notes receivable - affiliated(1) | | | | | | | | | $ | 37,192 |
| | $ | 38,145 |
|
| |
| (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 $0.3 million and $0.2 million as of December 31, 2018 and 2017, respectively, and is included in “Other assets”. Revenues related to these loans were $0.4 million, $0.7 million and $0.9 million for the years ended December 31, 2018, 2017 and 2016, respectively, and are included in “Asset administration fees and other income”.
Prudential Annuities Life Assurance Corporation
Notes to 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 APIC and "Realized investment gains (losses), net", respectively. The table below shows affiliated asset trades for the years ended December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | |
| Affiliate | | Date | | Transaction | | Security Type | | Fair Value | | Book Value | | APIC, Net of Tax Increase/ (Decrease) | | Realized Investment Gain/ (Loss), Net of Tax |
| | | | | | | | | (in thousands) |
| Pruco Life | | January 2017 | | Sale | | Fixed Maturities | | $ | 29 |
| | $ | 29 |
| | $ | 0 |
| | $ | 0 |
|
| Prudential Insurance | | October 2017 | | Sale | | Commercial Mortgages | | $ | 131,953 |
| | $ | 128,529 |
| | $ | 0 |
| | $ | 2,226 |
|
| Gibraltar Universal Life Reinsurance Company | | October 2017 | | Purchase | | Fixed Maturities | | $ | 113,686 |
| | $ | 96,583 |
| | $ | 0 |
| | $ | (11,117 | ) |
| Prudential Insurance | | December 2017 | | Purchase | | Other long-term investments - Derivatives | | $ | 171,363 |
| | $ | 171,363 |
| | $ | 0 |
| | $ | 0 |
|
| Prudential Insurance | | December 2017 | | Sale | | Fixed Maturities | | $ | 13,793 |
| | $ | 7,113 |
| | $ | 0 |
| | $ | 4,342 |
|
| Prudential Insurance | | February 2018 | | Purchase | | Fixed Maturities | | $ | 136,963 |
| | $ | 136,963 |
| | $ | 0 |
| | $ | 0 |
|
| Pruco Life Insurance Company of Arizona | | April 2018 | | Sale | | Fixed Maturities | | $ | 64,313 |
| | $ | 64,514 |
| | $ | 0 |
| | $ | (159 | ) |
| Prudential Insurance | | April 2018 | | Sale | | Fixed Maturities | | $ | 57,747 |
| | $ | 43,434 |
| | $ | 0 |
| | $ | 11,308 |
|
| Prudential Insurance | | May 2018 | | Sale | | Fixed Maturity & Commercial Mortgages | | $ | 162,111 |
| | $ | 159,237 |
| | $ | 0 |
| | $ | 2,271 |
|
| Passaic Fund LLC | | June 2018 | | Transfer Out | | Other Invested Assets - Privates | | $ | 15,281 |
| | $ | 15,281 |
| | $ | 0 |
| | $ | 0 |
|
| Prudential Insurance | | July 2018 | | Sale | | Fixed Maturities | | $ | 11,160 |
| | $ | 9,277 |
| | $ | 0 |
| | $ | 1,488 |
|
| Prudential Insurance | | August 2018 | | Sale | | Commercial Mortgages | | $ | 13,414 |
| | $ | 13,165 |
| | $ | 0 |
| | $ | 196 |
|
| Prudential Insurance | | December 2018 | | Purchase | | Fixed Maturities | | $ | 33,256 |
|
| $ | 33,166 |
|
| $ | 0 |
|
| $ | (71 | ) |
| Prudential Agricultural Investors LP | | December 2018 | | Transfer Out | | Other Invested Assets - Privates | | $ | 7,324 |
|
| $ | 7,324 |
|
| $ | 0 |
|
| $ | 0 |
|
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Debt Agreements
The Company is authorized to borrow funds up to $9 billion from Prudential Financial and its affiliates to meet its capital and other funding needs. The debt issued during the second quarter of 2016 in the table below was assigned from affiliates as part of the Variable Annuities Recapture, as described further in Note 1. The following table provides the breakout of the Company's short and long-term debt to affiliates:
|
| | | | | | | | | | | | | | | | | | | |
| Affiliate | | Date Issued | | Amount of Notes - December 31, 2018 | | Amount of Notes - December 31, 2017 | | Interest Rate | | Date of Maturity |
| | | | | (in thousands) | | | | | | | | |
| Prudential Insurance | | 4/20/2016 | | 0 |
| | 18,734 |
| | | | 2.60 | % | | | | 12/15/2018 |
| Prudential Insurance | | 4/20/2016 | | 0 |
| | 25,000 |
| | | | 2.60 | % | | | | 12/15/2018 |
| Prudential Insurance | | 4/20/2016 | | 46,835 |
| | 46,835 |
| | | | 2.80 | % | | | | 6/20/2019 |
| Prudential Insurance | | 4/20/2016 | | 18,734 |
| | 18,734 |
| | | | 2.80 | % | | | | 6/20/2019 |
| Prudential Insurance | | 4/20/2016 | | 37,468 |
| | 37,468 |
| | | | 3.64 | % | | | | 12/6/2020 |
| Prudential Insurance | | 4/20/2016 | | 93,671 |
| | 93,671 |
| | | | 3.64 | % | | | | 12/15/2020 |
| Prudential Insurance | | 4/20/2016 | | 103,039 |
| | 103,039 |
| | | | 3.64 | % | | | | 12/15/2020 |
| Prudential Insurance | | 4/20/2016 | | 93,671 |
| | 93,671 |
| | | | 3.47 | % | | | | 6/20/2021 |
| Prudential Insurance | | 4/20/2016 | | 93,671 |
| | 93,671 |
| | | | 4.39 | % | | | | 12/15/2023 |
| Prudential Insurance | | 4/20/2016 | | 28,102 |
| | 28,102 |
| | | | 4.39 | % | | | | 12/15/2023 |
| Prudential Insurance | | 4/20/2016 | | 37,468 |
| | 37,468 |
| | | | 3.95 | % | | | | 6/20/2024 |
| Prudential Insurance | | 4/20/2016 | | 93,671 |
| | 93,671 |
| | | | 3.95 | % | | | | 6/20/2024 |
| Prudential Insurance | | 4/20/2016 | | 46,835 |
| | 46,835 |
| | | | 3.95 | % | | | | 6/20/2024 |
| Prudential Insurance | | 6/28/2016 | | 30,000 |
| | 30,000 |
| | | | 2.08 | % | | | | 6/28/2019 |
| Prudential Insurance | | 6/28/2016 | | 50,000 |
| | 50,000 |
| | | | 3.49 | % | | | | 6/28/2026 |
| Prudential Insurance | | 6/28/2016 | | 25,000 |
| | 25,000 |
| | | | 3.49 | % | | | | 6/28/2026 |
| Prudential Insurance | | 6/28/2016 | | 26,000 |
| | 26,000 |
| | | | 2.59 | % | | | | 6/28/2021 |
| Prudential Insurance | | 6/28/2016 | | 25,000 |
| | 25,000 |
| | | | 2.08 | % | | | | 6/28/2019 |
| Prudential Insurance | | 6/28/2016 | | 20,000 |
| | 20,000 |
| | | | 2.08 | % | | | | 6/28/2019 |
| Prudential Insurance | | 6/28/2016 | | 25,000 |
| | 25,000 |
| | | | 3.49 | % | | | | 6/28/2026 |
| Prudential Retirement Insurance & Annuity | | 6/28/2016 | | 34,000 |
| | 34,000 |
| | | | 3.09 | % | | | | 6/28/2023 |
| Total Loans Payable to Affiliates | | | | $ | 928,165 |
| | $ | 971,899 |
| | | | | | | | |
The total interest expense to the Company related to loans and other payables to affiliates was $58 million, $66 million and $53 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Contributed Capital and Dividends
Through December 31, 2018 and 2017, the Company did not receive any capital contributions. In June of 2016, the Company received a capital contribution in the amount of $8,422 million from PAI, related to the Variable Annuities Recapture, as discussed in Note 1.
In March, June, September and December of 2018, there was a $300 million, $250 million, $250 million and $225 million return of capital, respectively, to PAI. In June, September and December of 2017, there was a $100 million, $200 million and $650 million return of capital, respectively, to PAI. In December of 2016, there was a $1,140 million return of capital to PAI.
Reinsurance with Affiliates
As discussed in Note 10, the Company participates in reinsurance transactions with certain affiliates.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
15. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
The Company has made commitments to fund $4 million and $37 million of commercial loans as of December 31, 2018 and 2017, respectively. The Company also made commitments to purchase or fund investments, mostly private fixed maturities, of $271 million and $134 million as of December 31, 2018 and 2017, respectively.
Contingent Liabilities
On an ongoing basis, the Company’s internal supervisory and control functions review the quality of sales, marketing and other customer interface procedures and practices and may recommend modifications or enhancements. From time to time, this review process results in the discovery of product administration, servicing or other errors, including errors relating to the timing or amount of payments or contract values due to customers. In certain cases, if appropriate, the Company may offer customers remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.
The Company is subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment of unclaimed or abandoned funds, and is subject to audit and examination for compliance with these requirements. For additional discussion of these matters, see “Litigation and Regulatory Matters” below.
It is possible that the results of operations or the cash flows of the Company in a particular quarterly or annual period could be materially affected as a result of payments in connection with the matters discussed above or other matters depending, in part, upon the results of operations or cash flows for such period. Management believes, however, that ultimate payments in connection with these matters, after consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on the Company’s financial position.
Affiliated Investment Management Expenses
In accordance with an agreement with Prudential Investment Management,PGIM, Inc. (“PIMI”, renamed PGIM, Inc. beginning January 1, 2016)PGIM”), the Company pays investment management expenses to PIMIPGIM who acts as investment manager to certain Company general account and separate account assets. Investment management expenses paid to PIMIPGIM related to this agreement were $5$12 million, $6$13 million and $7$11 million for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively. These expenses are recorded as “Net investment income” in the Statements of Operations and Comprehensive Income.
Cost Allocation Agreements with Affiliates
Certain operating costs (including rental of office space, furniture and equipment) have been charged to the Company at cost by Prudential Annuities Information Services and Technology Corporation (“PAIST”), an affiliated company. PALAC signed a written service agreement with PAIST for these services executed and approved by the Connecticut Insurance Department in 1995. This agreement automatically continues in effect from year to year and may be terminated by either party upon 30 days written notice.
Allocated lease expense was $4 million, $4 million and $10 million for the years ended December 31, 2015, 2014 and 2013, respectively. Allocated sub-lease rental income, recorded as a reduction to lease expense was less than $1 million, $1 million and $4 million for the years ended December 31, 2015, 2014 and 2013, respectively. Assuming that the written service agreement between PALAC and PAIST continues indefinitely, PALAC’s allocated future minimum lease payments and sub-lease receipts per year and in aggregate as of December 31, 2015 are as follows:
|
| | | | | |
| | Lease | | Sub-Lease |
| | | | |
| | (in thousands) |
| 2016 | $ | 3,279 |
| | 0 |
| 2017 | 3,279 |
| | 0 |
| 2018 | 3,279 |
| | 0 |
| 2019 | 3,006 |
| | 0 |
| 2020 | 0 |
| | 0 |
| 2021 and thereafter | 0 |
| | 0 |
| Total | $ | 12,843 |
| | 0 |
The Company pays commissions and certain other fees to PAD in consideration for PAD’s marketing and underwriting of the Company’s products. Commissions and fees are paid by PAD to broker-dealers who sold and service the Company’s products. Commissions and fees paid by the Company to PAD were $143 million, $177 million and $172 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Debt Agreements
Short-term and Long-term Debt
The Company is authorized to borrow funds up to $2 billion from Prudential Financial and its affiliates to meet its capital and other funding needs. The Company had debt of $1 million and $54 million outstanding with Prudential Funding, LLC as of
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
December 31, 2015 and 2014, respectively. Total interest expense on debt with Prudential Funding, LLC was less than $1 million for the years ended December 31, 2015, 2014 and 2013.
The Company had debt of $0 million outstanding with Prudential Financial as of December 31, 2015 and 2014, respectively. The Company had a loan with Prudential Financial that had a fixed interest rate of 4.49% and matured on December 29, 2014. In December 2014 we paid off the remaining portion of debt with a payment of $200 million. Total interest expense on debt with Prudential Financial was less than $1 million, $9 million and $17 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Reinsurance Agreements
The Company uses reinsurance as part of its risk management and capital management strategies for certain of its optional living benefit features. Fees ceded under these agreements are included in “Realized investment gains (losses), net” on the Statement of Operations and Comprehensive Income. The Company ceded fees of $269 million, $274 million and $275 million to Pruco Re for the years ended December 31, 2015, 2014 and 2013, respectively. The Company ceded fees of $1 million to Prudential Insurance for the years ended December 31, 2015, 2014 and 2013. The Company’s reinsurance payables related to affiliated reinsurance were $250 million and $25 million as of December 31, 2015 and 2014, respectively.
The Company’s reinsurance recoverables related to affiliated reinsurance were $3,088 million and $2,997 million as of December 31, 2015 and December 31, 2014, respectively. The assets are reflected in “Reinsurance recoverables” in the Company’s Statements of Financial Position. Realized gains (losses) were $(241) million, $1,975 million and $(1,260) million for the years ended December 31, 2015, 2014 and 2013, respectively. Changes in realized gains (losses) for the 2015 and 2014 periods were primarily due to changes in market conditions in each respective period.
See Note 1 for a discussion of the fourth quarter 2015 reinsurance treaty related to the Company's New York license surrender.
Income (Loss).
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.
Purchase/saleJoint Ventures
The Company has made investments in joint ventures with certain subsidiaries of fixed maturities from/Prudential Financial. "Other invested assets" includes $228 million and $111 million as of December 31, 2018 and 2017, respectively. "Net investment income" related to an affiliatethese ventures includes a gain of $1 million, $9 million and $5 million for the years ended December 31, 2018, 2017 and 2016, respectively.
During 2014,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 sold fixed maturity securitiesreceives fee income based on policyholders' separate account balances invested in the Advanced Series Trust and the Prudential Series Fund. Income received from ASTISI and PGIM Investments related to affiliated companies. These securities had an amortized cost of $36this agreement was $105 million, $111 million and a fair value of $44 million. The net difference between historic amortized cost$112 million for the years ended December 31, 2018, 2017 and 2016, respectively. These revenues are recorded as “Asset administration fees and other income” in the fair value of $8 million was accounted for as a realized gain on the Company’s StatementStatements of Operations and Comprehensive Income.Income (Loss).
During 2014,Affiliated Notes Receivable
Affiliated notes receivable included in "Receivables from parent and affiliates" at December 31, were as follows:
|
| | | | | | | | | | | | | | | | |
| | Maturity Dates | | Interest Rates | | 2018 | | 2017 |
| | | | | | | | | | (in thousands) |
| U.S. dollar floating rate notes | | | 2028 | | 3.83% | - | 4.25 | % | | $ | 34,008 |
| | $ | 34,268 |
|
| U.S. dollar fixed rate notes | 2027 | - | 2027 | | 8.15% | - | 14.85 | % | | 3,184 |
| | 3,877 |
|
| Total long-term notes receivable - affiliated(1) | | | | | | | | | $ | 37,192 |
| | $ | 38,145 |
|
| |
| (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 Company purchased commercial mortgageinternal and external credit ratings of these loans from an affiliated company. These securities had an amortized cost of $6 million, and were purchased at a cost of $6 million.loan performance. The Company also purchasedconsiders any guarantees made by Prudential Insurance for loans due from affiliates.
Accrued interest receivable related to these loans was $0.3 million and $0.2 million as of December 31, 2018 and 2017, respectively, and is included in “Other assets”. Revenues related to these loans were $0.4 million, $0.7 million and $0.9 million for the years ended December 31, 2018, 2017 and 2016, respectively, and are included in “Asset administration fees and other income”.
Prudential Annuities Life Assurance Corporation
Notes to 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 APIC and "Realized investment gains (losses), net", respectively. The table below shows affiliated asset trades for the years ended December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | |
| Affiliate | | Date | | Transaction | | Security Type | | Fair Value | | Book Value | | APIC, Net of Tax Increase/ (Decrease) | | Realized Investment Gain/ (Loss), Net of Tax |
| | | | | | | | | (in thousands) |
| Pruco Life | | January 2017 | | Sale | | Fixed Maturities | | $ | 29 |
| | $ | 29 |
| | $ | 0 |
| | $ | 0 |
|
| Prudential Insurance | | October 2017 | | Sale | | Commercial Mortgages | | $ | 131,953 |
| | $ | 128,529 |
| | $ | 0 |
| | $ | 2,226 |
|
| Gibraltar Universal Life Reinsurance Company | | October 2017 | | Purchase | | Fixed Maturities | | $ | 113,686 |
| | $ | 96,583 |
| | $ | 0 |
| | $ | (11,117 | ) |
| Prudential Insurance | | December 2017 | | Purchase | | Other long-term investments - Derivatives | | $ | 171,363 |
| | $ | 171,363 |
| | $ | 0 |
| | $ | 0 |
|
| Prudential Insurance | | December 2017 | | Sale | | Fixed Maturities | | $ | 13,793 |
| | $ | 7,113 |
| | $ | 0 |
| | $ | 4,342 |
|
| Prudential Insurance | | February 2018 | | Purchase | | Fixed Maturities | | $ | 136,963 |
| | $ | 136,963 |
| | $ | 0 |
| | $ | 0 |
|
| Pruco Life Insurance Company of Arizona | | April 2018 | | Sale | | Fixed Maturities | | $ | 64,313 |
| | $ | 64,514 |
| | $ | 0 |
| | $ | (159 | ) |
| Prudential Insurance | | April 2018 | | Sale | | Fixed Maturities | | $ | 57,747 |
| | $ | 43,434 |
| | $ | 0 |
| | $ | 11,308 |
|
| Prudential Insurance | | May 2018 | | Sale | | Fixed Maturity & Commercial Mortgages | | $ | 162,111 |
| | $ | 159,237 |
| | $ | 0 |
| | $ | 2,271 |
|
| Passaic Fund LLC | | June 2018 | | Transfer Out | | Other Invested Assets - Privates | | $ | 15,281 |
| | $ | 15,281 |
| | $ | 0 |
| | $ | 0 |
|
| Prudential Insurance | | July 2018 | | Sale | | Fixed Maturities | | $ | 11,160 |
| | $ | 9,277 |
| | $ | 0 |
| | $ | 1,488 |
|
| Prudential Insurance | | August 2018 | | Sale | | Commercial Mortgages | | $ | 13,414 |
| | $ | 13,165 |
| | $ | 0 |
| | $ | 196 |
|
| Prudential Insurance | | December 2018 | | Purchase | | Fixed Maturities | | $ | 33,256 |
|
| $ | 33,166 |
|
| $ | 0 |
|
| $ | (71 | ) |
| Prudential Agricultural Investors LP | | December 2018 | | Transfer Out | | Other Invested Assets - Privates | | $ | 7,324 |
|
| $ | 7,324 |
|
| $ | 0 |
|
| $ | 0 |
|
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
Debt Agreements
The Company is authorized to borrow funds up to $9 billion from Prudential Financial and its affiliates to meet its capital and other funding needs. The debt issued during the second quarter of 2016 in the table below was assigned from affiliates as part of the Variable Annuities Recapture, as described further in Note 1. The following table provides the breakout of the Company's short and long-term debt to affiliates:
|
| | | | | | | | | | | | | | | | | | | |
| Affiliate | | Date Issued | | Amount of Notes - December 31, 2018 | | Amount of Notes - December 31, 2017 | | Interest Rate | | Date of Maturity |
| | | | | (in thousands) | | | | | | | | |
| Prudential Insurance | | 4/20/2016 | | 0 |
| | 18,734 |
| | | | 2.60 | % | | | | 12/15/2018 |
| Prudential Insurance | | 4/20/2016 | | 0 |
| | 25,000 |
| | | | 2.60 | % | | | | 12/15/2018 |
| Prudential Insurance | | 4/20/2016 | | 46,835 |
| | 46,835 |
| | | | 2.80 | % | | | | 6/20/2019 |
| Prudential Insurance | | 4/20/2016 | | 18,734 |
| | 18,734 |
| | | | 2.80 | % | | | | 6/20/2019 |
| Prudential Insurance | | 4/20/2016 | | 37,468 |
| | 37,468 |
| | | | 3.64 | % | | | | 12/6/2020 |
| Prudential Insurance | | 4/20/2016 | | 93,671 |
| | 93,671 |
| | | | 3.64 | % | | | | 12/15/2020 |
| Prudential Insurance | | 4/20/2016 | | 103,039 |
| | 103,039 |
| | | | 3.64 | % | | | | 12/15/2020 |
| Prudential Insurance | | 4/20/2016 | | 93,671 |
| | 93,671 |
| | | | 3.47 | % | | | | 6/20/2021 |
| Prudential Insurance | | 4/20/2016 | | 93,671 |
| | 93,671 |
| | | | 4.39 | % | | | | 12/15/2023 |
| Prudential Insurance | | 4/20/2016 | | 28,102 |
| | 28,102 |
| | | | 4.39 | % | | | | 12/15/2023 |
| Prudential Insurance | | 4/20/2016 | | 37,468 |
| | 37,468 |
| | | | 3.95 | % | | | | 6/20/2024 |
| Prudential Insurance | | 4/20/2016 | | 93,671 |
| | 93,671 |
| | | | 3.95 | % | | | | 6/20/2024 |
| Prudential Insurance | | 4/20/2016 | | 46,835 |
| | 46,835 |
| | | | 3.95 | % | | | | 6/20/2024 |
| Prudential Insurance | | 6/28/2016 | | 30,000 |
| | 30,000 |
| | | | 2.08 | % | | | | 6/28/2019 |
| Prudential Insurance | | 6/28/2016 | | 50,000 |
| | 50,000 |
| | | | 3.49 | % | | | | 6/28/2026 |
| Prudential Insurance | | 6/28/2016 | | 25,000 |
| | 25,000 |
| | | | 3.49 | % | | | | 6/28/2026 |
| Prudential Insurance | | 6/28/2016 | | 26,000 |
| | 26,000 |
| | | | 2.59 | % | | | | 6/28/2021 |
| Prudential Insurance | | 6/28/2016 | | 25,000 |
| | 25,000 |
| | | | 2.08 | % | | | | 6/28/2019 |
| Prudential Insurance | | 6/28/2016 | | 20,000 |
| | 20,000 |
| | | | 2.08 | % | | | | 6/28/2019 |
| Prudential Insurance | | 6/28/2016 | | 25,000 |
| | 25,000 |
| | | | 3.49 | % | | | | 6/28/2026 |
| Prudential Retirement Insurance & Annuity | | 6/28/2016 | | 34,000 |
| | 34,000 |
| | | | 3.09 | % | | | | 6/28/2023 |
| Total Loans Payable to Affiliates | | | | $ | 928,165 |
| | $ | 971,899 |
| | | | | | | | |
The total interest expense to the Company related to loans and other payables to affiliates was $58 million, $66 million and $53 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Contributed Capital and Dividends
Through December 31, 2018 and 2017, the Company did not receive any capital contributions. In June of 2016, the Company received a capital contribution in the amount of $8,422 million from PAI, related to the Variable Annuities Recapture, as discussed in Note 1.
In March, June, September and December of 2018, there was a $300 million, $250 million, $250 million and $225 million return of capital, respectively, to PAI. In June, September and December of 2017, there was a $100 million, $200 million and $650 million return of capital, respectively, to PAI. In December of 2016, there was a $1,140 million return of capital to PAI.
Reinsurance with Affiliates
As discussed in Note 10, the Company participates in reinsurance transactions with certain affiliates.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
15. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
The Company has made commitments to fund $4 million and $37 million of commercial loans as of December 31, 2018 and 2017, respectively. The Company also made commitments to purchase or fund investments, mostly private fixed maturity securities frommaturities, of $271 million and $134 million as of December 31, 2018 and 2017, respectively.
Contingent Liabilities
On an affiliated company. These securities had an amortizedongoing basis, the Company’s internal supervisory and control functions review the quality of sales, marketing and other customer interface procedures and practices and may recommend modifications or enhancements. From time to time, this review process results in the discovery of product administration, servicing or other errors, including errors relating to the timing or amount of payments or contract values due to customers. In certain cases, if appropriate, the Company may offer customers remediation and may incur charges, including the cost of $27 million,such remediation, administrative costs and were purchased atregulatory fines.
The Company is subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment of unclaimed or abandoned funds, and is subject to audit and examination for compliance with these requirements. For additional discussion of these matters, see “Litigation and Regulatory Matters” below.
It is possible that the results of operations or the cash flows of the Company in a costparticular quarterly or annual period could be materially affected as a result of $30 million. The securities were recordedpayments 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 Statementfinancial position.
Litigation and Regulatory Matters
The Company is subject to legal and regulatory actions in the ordinary course of Financial Position.
During 2013,its business. Pending legal and regulatory actions include proceedings specific to the Company sold fixed maturity securitiesand proceedings generally applicable to Prudential Financial. These securities had an amortized costbusiness practices in the industry in which it operates. The Company is subject to class action lawsuits and other litigation involving a variety of $90 millionissues 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 fair value of $103 million. The net difference between historic amortized costregulatory matter, and the fair value was accounted for as an increaseamount or range of $8 million to additional paid-in capital, net of taxes. potential loss at any particular time, is often inherently uncertain.
The Company also sold commercial mortgage loans to an affiliated company. These securities had an amortized cost of $6 millionestablishes accruals for litigation and regulatory matters when it is probable that a fair value of $6 million. The net difference between historic amortized costloss has been incurred and the fair value wasamount 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, 2018, 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 $1 million$150 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 was recorded asregulatory matters on a realized investment gainquarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.
Unclaimed Property
In 2011 the New York Attorney General subpoenaed the Company, along with other companies, regarding its unclaimed property procedures and may ultimately seek remediation and other relief, including damages. Additionally, in 2011 the New York Office of Unclaimed Funds commenced an audit of the Company’s compliance with New York’s unclaimed property laws.
Securities Lending and Foreign Tax Reclaim Matter
In 2016, Prudential Financial self-reported to the SEC and the U.S. Department of Labor ("DOL"), and notified other regulators, that in some cases it failed to maximize securities lending income for the benefit of certain separate account investments due to a long-standing restriction benefiting Prudential Financial that limited the availability of loanable securities. Prudential Financial has removed the restriction and implemented a remediation plan for the benefit of customers. As part of Prudential Financial’s review of this matter, in 2018 it further self-reported to the SEC, and notified other regulators, that in some cases it failed to timely process foreign tax reclaims for the separate account investments. Prudential Financial has corrected the foreign tax reclaim process and has implemented a remediation plan for the benefit of customers.
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)
The DOL’s review of the securities lending matter is closed. Prudential Financial is cooperating with the SEC in its review of the securities lending and foreign tax reclaim matters (which includes a review of the remediation plans) and has entered into discussions with the SEC staff regarding a possible settlement of the securities lending matter that would potentially involve charges under the Investment Advisers Act and financial remedies. Prudential Financial cannot predict the outcome of the discussions with the SEC regarding the foreign tax reclaim matter or the possible settlement of the securities lending 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 Statementfinancial position. Management believes, however, that, based on information currently known to it, the ultimate outcome of Operationsall pending litigation and Comprehensive Income.regulatory matters, after consideration of applicable reserves and rights to indemnification, is not likely to have a material adverse effect on the Company’s financial position.
14.16. CONTRACT WITHDRAWAL PROVISIONS
Most of the Company’s separate account liabilities are subject to discretionary withdrawal by contractholders at market value or with market value adjustment.value. Separate account assets, which are carried at fair value, are adequate to pay such withdrawals, which are generally subject to surrender charges ranging from 9% to 1% for contracts held less than 10 years.
15.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for the years ended December 31, 20152018 and 20142017 are summarized in the table below:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31 | | June 30 | | September 30 | | December 31 |
| | | | | | | | |
| 2018 | (in thousands) |
| Total revenues | $ | 1,331,262 |
| | $ | 769,260 |
| | $ | 826,028 |
| | $ | 988,030 |
|
| Total benefits and expenses | 539,327 |
| | 517,619 |
| | 561,865 |
| | 451,549 |
|
| Income (loss) from operations before income taxes | 791,935 |
| | 251,641 |
| | 264,163 |
| | 536,481 |
|
| Net income (loss) | $ | 635,679 |
| | $ | 202,546 |
| | $ | 412,236 |
| | $ | 432,255 |
|
| 2017 (1) | | | | | | | |
| Total revenues | $ | 766,669 |
| | $ | (726,666 | ) | | $ | 1,949,155 |
| | $ | 314,778 |
|
| Total benefits and expenses | 386,941 |
| | (165,242 | ) | | 597,242 |
| | 367,400 |
|
| Income (loss) from operations before income taxes | 379,728 |
| | (561,424 | ) | | 1,351,913 |
| | (52,622 | ) |
| Net income (loss) | $ | 262,358 |
| | $ | (400,583 | ) | | $ | 938,926 |
| | $ | (884,205 | ) |
(1) The variability in the quarterly results for 2017 was primarily due to NPR gains/losses as a result of credit spread widening/tightening coupled with $882 million tax expense impact due to the enactment of the Tax Act of 2017 on December 22, 2017. See Note 11 for additional information.
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, 2018 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), as of December 31, 2018. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2018, 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), occurred during the quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
We have adopted Prudential Financial’s code of business conduct and ethics known as “Making the Right Choices”. Making the Right Choices is posted at www.investor.prudential.com.
In addition, we have adopted Prudential Financial’s Corporate Governance Guidelines, which we refer to herein as the “Corporate Governance Principles and Practices”. Prudential Financial’s Corporate Governance Principles and Practices are available free of charge at www.investor.prudential.com.
Certain of 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 14, 2019 to be filed by Prudential Financial with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after December 31, 2018 (the “Proxy Statement”).
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 the Proxy Statement.
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
Prudential Annuities Life Assurance Corporation
Notes to Financial Statements - (Continued)Schedule I
Summary of Investments Other Than Investments in Related Parties
As of December 31, 2018
(in thousands)
|
| | | | | | | | | | | | | | | |
| | Three months ended |
| | March 31 | | June 30 | | September 30 | | December 31 |
| | | | | | | | |
| 2015 | (in thousands) |
| Total revenues | $ | 305,682 |
| | $ | 279,135 |
| | $ | 268,802 |
| | $ | 219,952 |
|
| Total benefits and expenses | 331,751 |
| | 122,886 |
| | 388,581 |
| | 65,421 |
|
| Income (loss) from operations before income taxes | (26,069 | ) | | 156,249 |
| | (119,779 | ) | | 154,531 |
|
| Net income (loss) | $ | (21,302 | ) | | $ | 131,914 |
| | $ | (104,826 | ) | | $ | 167,431 |
|
| | | | | | | | |
| | Three months ended |
| | March 31 | | June 30 | | September 30 | | December 31 |
| | | | | | | | |
| | (in thousands) |
| 2014 | | | | | | | |
| Total revenues | $ | 311,249 |
| | $ | 309,786 |
| | $ | 308,006 |
| | $ | 311,187 |
|
| Total benefits and expenses | 216,896 |
| | 242,370 |
| | 197,204 |
| | 324,387 |
|
| Income from operations before income taxes | 94,353 |
| | 67,416 |
| | 110,802 |
| | (13,200 | ) |
| Net income | $ | 77,498 |
| | $ | 57,431 |
| | $ | 96,037 |
| | $ | 19,801 |
|
|
| | | | | | | | | | | | |
| Type of Investment | | Amortized Cost or Cost(1) | | 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 | | $ | 5,240,519 |
| | $ | 4,884,091 |
| | $ | 4,884,091 |
|
| Obligations of U.S. states and their political subdivisions | | 133,670 |
| | 131,164 |
| | 131,164 |
|
| Foreign governments | | 199,044 |
| | 199,636 |
| | 199,636 |
|
| Asset-backed securities | | 505,862 |
| | 505,244 |
| | 505,244 |
|
| Residential mortgage-backed securities | | 48,622 |
| | 49,414 |
| | 49,414 |
|
| Commercial mortgage-backed securities | | 364,601 |
| | 361,880 |
| | 361,880 |
|
| Public utilities | | 572,791 |
| | 565,510 |
| | 565,510 |
|
| Certificates of deposit | | 0 |
| | 0 |
| | 0 |
|
| All other corporate bonds | | 3,091,931 |
| | 3,046,569 |
| | 3,046,569 |
|
| Redeemable preferred stock | | 29,425 |
| | 28,165 |
| | 28,165 |
|
| Total fixed maturities, available-for-sale | | $ | 10,186,465 |
| | $ | 9,771,673 |
| | $ | 9,771,673 |
|
| Equity securities: | | | | | | |
| Common stocks: | | | | | | |
| Other common stocks | | $ | 11,519 |
| | $ | 12,341 |
| | $ | 12,341 |
|
| Mutual funds | | 4,902 |
| | 4,908 |
| | 4,908 |
|
| Perpetual preferred stocks | | 2,344 |
| | 3,364 |
| | 3,364 |
|
| Total equity securities, at fair value | | $ | 18,765 |
| | $ | 20,613 |
| | $ | 20,613 |
|
| Fixed maturities, trading | | $ | 294,549 |
| | $ | 289,752 |
| | $ | 289,752 |
|
| Commercial mortgage and other loans(2) | | 1,353,478 |
| | | | 1,353,478 |
|
| Policy loans | | 12,805 |
| | | | 12,805 |
|
| Short-term investments | | 37,568 |
| | | | 37,568 |
|
| Other invested assets | | 348,541 |
| | | | 348,541 |
|
| Total investments | | $ | 12,252,171 |
| | | | $ | 11,834,430 |
|
Results for the fourth quarter
| |
| (1) | For fixed maturities available-for-sale, original cost reduced by repayments and impairments and adjusted for amortization of premiums and accretion of discounts. |
| |
| (2) | At carrying value, which is net of allowance for credit losses. |
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the third quarterrequirements of 2014, relatedSection 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to an out-of-period adjustment recordedbe signed on its behalf by the Company primarily due to additional DAC amortization relatedundersigned, thereunto duly authorized, in the City of Shelton, and State of Connecticut on the 7th day of March 2019.
|
| | |
PRUDENTIAL ANNUITIES LIFE ASSURANCE CORPORATION (Registrant) |
| By: | | /s/ Kent D. Sluyter |
| | Kent D. Sluyter |
| | President and Chief Executive Officer |
Pursuant to the overstatementrequirements of reinsured reserves in prior periods.
In 2015, the Company identified and recorded additional outSecurities Exchange Act of period adjustments1934, this report has been signed below by the following persons on behalf of $5 million impacting the third quarter of 2014, primarily reflecting a benefit from the release of reserves related to certain variable annuities products with optional living benefit guarantees.
Management has evaluated the impact of all out-of-period adjustments in 2014 and 2015, both individuallyRegistrant and in the aggregate, and concluded that they are not material to the current quarter or to any previously reported quarterly or annual financial statements.capacities indicated on March 7, 2019.
|
| | |
| Signature | | Title |
| | |
| /s/ Kent D. Sluyter | | President, |
| Kent D. Sluyter | | Chief Executive Officer and Director |
| | |
| /s/ John Chieffo | | Executive Vice President, |
| John Chieffo | | Chief Financial Officer, Principal Accounting Officer and Director |
| | |
| * Caroline A. Feeney | | Director |
| Caroline A. Feeney | | |
| | |
| * Nandini Mongia | | Director |
| Nandini Mongia | | |
| | |
| * Arthur W. Wallace | | Director |
Arthur W. Wallace
| | |
| | |
| * Candace J. Woods | | Director |
| Candace J. Woods | | |
|
| | |
| * By: | | /s/ Lynn K. Stone |
| | Lynn K. Stone |
| | (Attorney-in-Fact) |