Washington, D.C. 20549
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer", "accelerated filer", "smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
is therefore filing this Form 10-Q in the reduced disclosure format.
| | |
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| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial StatementsStatements—(Continued) |
1. BUSINESS AND BASIS OF PRESENTATION
Pruco Life Insurance Company of New Jersey ("PLNJ") is a wholly-owned subsidiary of Pruco Life Insurance Company (“Pruco Life”), which in turn is a wholly-owned subsidiary of The Prudential Insurance Company of America (“Prudential Insurance”). Prudential Insurance is a direct wholly-owned subsidiary of Prudential Financial, Inc. (“Prudential Financial”). PLNJ is a stock life insurance company organized in 1982 under the laws of the State of New Jersey. It is licensed to sell life insurance and annuities in New Jersey and New York only, and sells such products primarily through affiliated and unaffiliated distributors.
PLNJ had 1 subsidiary, formed in 2009 for the purpose of holding certain commercial mortgage loans and other investments which ceased operations and was dissolved as of December 31, 2018.
Basis of Presentation
The Unaudited Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated.
In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining deferred policy acquisition costs ("DAC") and related amortization; amortizationpolicyholders' account balances related to the fair value of deferred sales inducements ("DSI");embedded derivative instruments associated with the index-linked features of certain universal life products; valuation of investments including derivatives, measurement of allowance for credit losses, and the recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; reinsurance recoverables; provision for income taxes and valuation of deferred tax assets; and accruals for contingent liabilities, including estimates for losses in connection with unresolved legal and regulatory matters.
COVID-19
Beginning in the first quarter of 2020, the outbreak of the novel coronavirus (“COVID-19”) has resulted in extreme stress and disruption in the global economy and financial markets, and has adversely impacted, and may continue to adversely impact, our results of operations, financial condition and cash flows. Due to the highly uncertain nature of these conditions, it is not possible to estimate the ultimate impacts at this time. The risks may have manifested, and may continue to manifest, in our financial statements in the areas of, among others, i) investments: increased risk of loss on our investments due to default or deterioration in credit quality or value; and ii) insurance liabilities and related balances: potential changes to assumptions regarding investment returns, mortality and policyholder behavior which are reflected in our insurance liabilities and certain related balances (e.g., DAC, etc.). We cannot predict what impact the COVID-19 pandemic will ultimately have on the global economy, markets or our businesses.
Revision to Prior Period Financial Statements
The Company identified an error in the presentation of certain cash flow activity related to policyholders' account balances that impacted several line items within previously issued Statements of Cash Flows. Prior period amounts have been revised in the financial statements to correct this error. Management evaluated these adjustments and concluded they were not material to any previously reported quarterly or annual financial statements. See Note 11 for a more detailed description of the revision and for comparisons of amounts previously reported to the revised amounts.
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the current period presentation.
|
|
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS
Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("ASU"ASUs") to the FASB Accounting Standards Codification.Codification ("ASC"). The Company considers the applicability and impact of all ASU. ASUASUs. ASUs listed below include those that have been adopted during the current fiscal year and/or those that have been issued but not yet adopted as of September 30, 2020, and as of the date of this filing. ASUASUs not listed below were assessed and determined to be either not applicable or not material.
Adoption of ASU 2016-13
The Company adopted ASU 2016-13, and related ASUs, effective January 1, 2020 using the modified retrospective method for certain financial assets carried at amortized cost and certain off-balance sheet exposures. The modified retrospective method results in a cumulative effect adjustment to opening retained earnings. The Company adopted the guidance related to fixed maturities, available-for-sale on a prospective basis.
This ASU requires the use of a new current expected credit loss (“CECL”) model to account for expected credit losses on certain financial assets reported at amortized cost (e.g., loans held for investment, reinsurance receivables, etc.) and certain off-balance sheet credit exposures (e.g., indemnification of serviced mortgage loans and certain loan commitments). The guidance requires an entity to estimate lifetime credit losses related to such financial assets and credit exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that may affect the collectability of the reported amounts. The standard also modifies the OTTI guidance for fixed maturities, available-for-sale requiring the use of an allowance rather than a direct write-down of the investment.
The impacts of this ASU on the Company’s Financial Statements primarily include (1) A Cumulative Effect Adjustment Upon Adoption; (2) Changes to the Presentation of the Statements of Financial Position and Statements of Operations; and (3) Changes to Accounting Policies. Each of these impacts is described below. This section is meant to serve as an update to, and should be read in conjunction with, Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
(1) Cumulative Effect Adjustment Upon Adoption
Adoption of the standard resulted in a cumulative effect adjustment to opening retained earnings in the amount of $0.2 million, primarily related to commercial mortgage and other loans. The impact of adoption is not material to the following financial statement line items: income taxes payable and other liabilities. The prospective adoption of the portions of the standard related to fixed maturities, available-for-sale resulted in no impact to opening retained earnings.
(2) Changes to the Presentation of the Statements of Financial Position and Statements of Operations
The allowance for credit losses is presented parenthetically on relevant line items in the Statements of Financial Position. In the Statements of Operations, realized investment gains (losses), net are presented on one line item and will no longer reflect the breakout of OTTI on fixed maturity securities; OTTI on fixed maturity securities transferred to other comprehensive income (“OCI”); and other realized investment gains (losses), net. The presentation of this detail in prior periods is immaterial.
(3) Changes to Accounting Policies
This section has been updated to include the following changes in our accounting policies resulting from the adoption of ASU 2016-13.
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
Fixed maturities, available-for-sale
Fixed maturities, available-for-sale (“AFS debt securities”) are reported at fair value in the Statements of Financial Position. Interest income, and amortization of premium and accretion of discount are included in “Net investment income” under the effective yield method. 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 relating to the underlying collateral, including default rates and changes in value. These assumptions can significantly impact income recognition and the amount of impairments recognized in earnings and OCI. For mortgage-backed and asset-backed securities rated below AA, the effective yield is adjusted prospectively for any changes in the estimated timing and amount of cash flows unless the investment is impaired or purchased with credit deterioration. For impaired mortgage-backed and asset-backed securities rated below AA, the effective yield is adjusted prospectively only if subsequent favorable or adverse changes in expected cash flows are not reflected in the allowance for credit losses. Prior to the adoption of this standard, the effective yield was adjusted prospectively regardless of whether the investment was impaired or not.
AFS debt securities with unrealized losses are reviewed quarterly to determine whether the amortized cost basis of the security is recoverable. In evaluating whether the amortized cost basis is recoverable, the Company considers several factors including, but not limited to the extent of the decline and the reasons for the decline in value (credit events, currency or interest-rate related, including general credit spread widening), and the financial condition of the issuer.
When an AFS debt security is in an unrealized loss position and (1) the Company has the intent to sell the AFS debt security, or (2) it is more likely than not the Company will be required to sell the AFS debt security before its anticipated recovery, or (3) the Company has deemed the AFS debt security to be uncollectable, the amortized cost basis of the AFS debt security is written down to fair value and any previously recognized allowance is reversed. The impairment is reported in “Realized investment gains (losses), net.” The new cost basis is not adjusted for subsequent increases in estimated fair value.
For an AFS debt security in an unrealized loss position that does not meet these conditions, the Company analyzes its ability to recover the amortized cost by comparing the net present value of projected future cash flows (the “net present value”) 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 AFS debt security at the date of acquisition. The Company may use the estimated fair value of collateral, if any, as a proxy for the net present value if it believes that the security is dependent on the liquidation of collateral for recovery of its investment. If the net present value is less than the amortized cost of the investment, an allowance for losses is recognized in earnings for the difference between amortized cost and the net present value and is limited to the difference between amortized cost and fair value of the AFS debt security. Any difference between the fair value and the net present value of the debt security at the impairment measurement date remains in “Other comprehensive income (loss).” Changes in the allowance for losses are reported in “Realized investment gains (losses), net.”
Prior to the adoption of this standard, any impairments on AFS debt securities were reported as an adjustment to the amortized cost basis of the security. Subsequent to the impairment, the AFS debt security was treated as if it were newly acquired at the date of impairment, and any increases in cash flows expected to be collected were accreted into net investment income over the life of the investment.
Commercial mortgage and other loans
Commercial mortgage and other loans are reported in the Statements of Financial Position at amortized cost net of the CECL allowance. Additionally, certain off-balance sheet credit exposures (e.g., indemnification of serviced mortgage loans, and certain unfunded mortgage loan commitments where the Company cannot unconditionally cancel the commitment) are also subject to a CECL allowance.
The CECL allowance represents the Company’s best estimate of expected credit losses over the remaining life of the assets or off-balance sheet credit exposures. The determination of the allowance considers historical credit loss experience, current conditions, and reasonable and supportable forecasts. The allowance is calculated separately for commercial mortgage loans, agricultural mortgage loans, and other collateralized and uncollateralized loans.
For commercial mortgage and agricultural mortgage loans (and related unfunded commitments where the Company cannot unconditionally cancel the commitment), the allowance is calculated using an internally developed CECL model.
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
Key inputs to the CECL model include unpaid principal balances, internal credit ratings, annual expected loss factors, average lives of the loans adjusted for prepayment considerations, current and historical interest rate assumptions, and other factors influencing the Company’s view of the current stage of the economic cycle and future economic conditions. Subjective considerations include a review of whether historical loss experience is representative of current market conditions and the Company’s view of the credit cycle. Model assumptions and factors are reviewed and updated as appropriate. Information about certain key inputs is detailed below.
Key factors in determining the internal credit ratings for commercial mortgage and agricultural mortgage loans include loan-to-value and debt-service-coverage ratios. Other factors include amortization, loan term, and estimated market value growth rate and volatility for the property type and region. The loan-to-value ratio compares the carrying amount of the loan to the fair value of the underlying property or properties collateralizing the loan and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the carrying amount of the loan exceeds the collateral value. A loan-to-value ratio less than 100% indicates an excess of collateral value over the carrying amount of the loan. The debt-service-coverage ratio is a property’s net operating income as a percentage of its debt service payments. Debt-service-coverage ratios less than 1.0 times indicate that a property’s operations do not generate enough income to cover the loan’s current debt payments. A debt-service-coverage ratio greater than 1.0 times indicates an excess of net operating income over the debt service payments. The values utilized in calculating these ratios are developed as part of the Company’s periodic review of the commercial mortgage and agricultural mortgage loan portfolios, which includes an internal appraisal of the underlying collateral value. The Company’s periodic review also includes a credit re-rating process, whereby the internal credit rating originally assigned at underwriting is updated based on current loan, property and market information using a proprietary credit quality rating system. See Note 3 for additional information related to the loan-to-value ratios and debt-service-coverage ratios related to the Company’s commercial mortgage and agricultural mortgage loan portfolios. Generally, every loan is re-rated at least annually.
Annual expected loss rates are based on historical default and loss experience factors. Using average lives, the annual expected loss rates are converted into life-of-loan loss expectations.
When individual loans no longer have the credit risk characteristics of the commercial or agricultural mortgage loan pools, they are removed from the pools and are evaluated individually for an allowance. The allowance is determined based on the outstanding loan balance less the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
The CECL allowance on commercial mortgage and other loans can increase or decrease from period to period based on the factors noted above. The change in allowance is reported in “Realized investment gains (losses), net.” As it relates to unfunded commitments that are in scope of this guidance, the CECL allowance is reported in “Other liabilities”, and the change in the allowance is reported in “Realized investment gains (losses), net.”
When a commercial mortgage or other loan is deemed to be uncollectible, any allowance is reversed and a direct write-down of the carrying amount of the loan is recorded through "Realized investment gains (losses), net." The carrying amount of the loan is not adjusted for subsequent recoveries in value.
The CECL allowance for other collateralized and uncollateralized loans carried at amortized cost is determined based on probability of default and loss given default assumptions by sector, credit quality and average lives of the loans. Additions to or releases of the allowance are reported in “Realized investment gains (losses), net.”
Prior to the adoption of this standard, the impairments on commercial mortgage and other loans were collectively reviewed at a portfolio level for impairment based on probable incurred but not specifically identified losses with any such losses reflected in an allowance for credit losses. When a loan was individually identified to be impaired, the loan was individually evaluated for an allowance. Changes in these allowances were reported in “Realized investment gains (losses), net.” Additionally, an allowance for credit losses was not required on unfunded loan commitments.
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
Reinsurance Recoverables
Reinsurance recoverables are reported on the Statements of Financial Position net of the CECL allowance. The CECL allowance considers the credit quality of the reinsurance counterparty and is generally determined based on the probability of default and loss given default assumptions, after considering any applicable collateral arrangements. The CECL allowance does not apply to reinsurance recoverables with affiliated counterparties under common control. Additions to or releases of the allowance are reported in “Policyholders’ benefits.”
Prior to the adoption of this standard, an allowance for credit losses for reinsurance recoverables was established only when it was deemed probable that a reinsurer may fail to make payments to us in a timely manner.
Other ASUs adopted during the nine months ended September 30, 2019.2020.
| | | | | | | | | | | | | | | | | | | | |
| Standard | | Description | | Effective date and method of adoption | | Effect on the financial statements or other significant matters |
| | | | | | |
Standard | | Description | | Effective date and method ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of adoption | | Effectthe Effects of Reference Rate Reform on the financial statements or other significant matters |
ASU 2017-08,
Receivables -
Nonrefundable Fees
and Other Costs
(Subtopic 310-20)
Premium
Amortization on
Purchased Callable
Debt SecuritiesFinancial Reporting
| | This ASU requiresprovides optional relief for certain premiums on callable debt securitiescontracts impacted by reference rate reform. The standard permits an entity to consider contract modification due to reference rate reform to be amortizedan event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The ASU also temporarily (until December 31, 2022) allows hedge relationships to the earliest call date.
continue without de-designation upon changes due to reference rate reform. | | January 1, 2019March 12, 2020 to December 31, 2022 using the modified
retrospective method which included
cumulative-effect
adjustment on the
balance sheet as of the beginning of the fiscal year of adoption.
prospective method.
| | Adoption of theThis ASU did not have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements.
The impact ofCompany made the cumulative-effect adjustment to retained earnings was immaterial. |
election under ASU 2017-12, Derivatives and
Hedging (Topic
815): Targeted
Improvements to
Accounting2020-04 for
Hedging Activities
| | This ASU makes targeted changes all applicable contracts as they converted from the current reference rate 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. new reference rate.
The ASU eliminates separate measurement and recording of hedge ineffectiveness. It requires entities to present the earnings effect of the hedging instrument in the same income statement line item in which the hedged item is reported and also requires expanded disclosures.
| | January 1, 2019 using
the modified
retrospective method which included cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.
| | Adoption of the ASU did not have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements. The impact of the cumulative-effect adjustment to retained earnings and accumulated other comprehensive income (loss) ("AOCI") related to ineffectiveness of the hedge instruments outstanding at the date of the adoption was immaterial. See Note 4 for additional required disclosures. |
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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
ASU issued but not yet adopted as of September 30, 20192020 — ASU 2018-12
ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASB on August 15, 2018 and is expected to have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements. In October 2019, the FASB affirmedissued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of the ASU 2018-12 to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. ThisAs a result of the COVID-19 pandemic, in November 2020 the FASB issued ASU 2020-11, Financial Services-Insurance (Topic 944): Effective Date and Early Application to defer for an additional one year the effective date of ASU 2018-12 from January 1, 2022 to January 1, 2023, and to provide transition relief to facilitate the early adoption of the ASU. The transition relief would allow large calendar-year public companies that early adopt ASU 2018-12 to apply the guidance either as of January 1, 2020 or January 1, 2021 (and record transition adjustments as of January 1, 2020 or January 1, 2021, respectively) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements. ASU 2018-12 will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. Outlined below are four key areas of change, although there are other 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.
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
|
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| 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 willmay choose to apply the amendments to contracts in force as of the beginning of the prior year (if early adoption is elected) or as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCIAccumulated other comprehensive income (loss) ("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, andwhich will be required to be updated each quarter with the impact recorded through Other Comprehensive Income ("OCI").OCI. An entity shall maximize the use of relevant observable information and minimize the use of unobservable information in determining the discount rate assumptions. | | As noted above, an entity may choose either a modified retrospective transition method or full retrospective transition method for the liability for future policy benefits. Under either method, for balance sheet remeasurement purposes, the liability for future policy benefits will be remeasured using current discount rates as of either the beginning of the prior year (if early adoption is elected) or the beginning of the earliest period presented with the impact recorded as a cumulative effect adjustment to AOCI. | | Upon adoption, under either transition method, there will be an adjustment to AOCI as a result of remeasuring in force contract liabilities using current upper-medium grade fixed income instrument yields. The adjustment upon adoption will largely reflect the difference between the discount raterates locked-in at contract inception versus current discount rates at transition. The magnitude of such adjustment is currently being assessed. |
| Amortization of DAC and other balances | | Requires DAC and other balances, such as unearned revenue reserves and DSI,deferred sales inducements ("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 willmay choose to apply the amendments to contracts in force as of the beginning of the prior year (if early adoption is elected) or as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) if an entity chooses a full retrospective transition method for its liability for future policy benefits, as described above, it is required to also use a full retrospective transition method for DAC and other balances. | | The options for method of adoption and the impacts of such methods are under assessment. Under the modified retrospective transition method, the Company would not expect a significant impact to the balance sheet, other than the impact of the removal of any related amounts in AOCI. |
| Market Risk Benefits (MRB) | | Requires an entity to measure all market risk benefits (e.g., living benefit and death benefit guarantees associated with variable annuities) at fair value, with changesand record MRB assets and liabilities separately on the Statements of Financial Position. Changes in fair value of market risk benefits are recorded in net income, except for the portion of the change in MRB liabilities attributable to changes in an entity’s non-performance risk ("NPR"), which is recognized in OCI. | | An entity will apply ashall adopt the guidance for market risk benefits using the retrospective transition method which will includeincludes a cumulative-effect adjustment on the balance sheet as of either the beginning of prior year (if early adoption is elected) or the beginning of the earliest period presented. An entity shall maximize the use of relevant observable information and minimize the use of unobservable information in determining the balance of the market risk benefits upon adoption. | | Upon adoption, the Company expects an impact to retained earnings for the difference between the fair value and carrying value of benefits not currently measured at fair value (e.g., guaranteed minimum death benefits 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. |
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| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
Other ASU issued but not yet adopted as of September 30, 2019
|
| | | | | | |
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 OTTI 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 ASC 310-30 and for debt securities for which an OTTI was recognized prior to the date of adoption. Early adoption is permitted beginning January 1,
2019.
| | The Company continues to test and refine its expected credit loss models and related systems, processes and controls for assets held on the Statement of Financial Position at amortized cost. We currently estimate the cumulative impact of the adoption to retained earnings, primarily attributable to the reserves for commercial mortgage and other loans, to be immaterial.
|
3. INVESTMENTS
Fixed Maturity Securities
The following tables set forth the composition of fixed maturity securities (excluding investments classified as trading), as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Allowance for Credit Losses | | Fair
Value |
| (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 10,694 | | | $ | 1,144 | | | $ | 0 | | | $ | 0 | | | $ | 11,838 | |
| Obligations of U.S. states and their political subdivisions | 162,327 | | | 18,590 | | | 0 | | | 0 | | | 180,917 | |
| Foreign government bonds | 75,345 | | | 11,069 | | | 98 | | | 0 | | | 86,316 | |
| | | | | | | | | |
| U.S. public corporate securities | 743,982 | | | 132,179 | | | 1,045 | | | 0 | | | 875,116 | |
| U.S. private corporate securities | 223,616 | | | 19,538 | | | 560 | | | 0 | | | 242,594 | |
| Foreign public corporate securities | 61,164 | | | 8,119 | | | 624 | | | 0 | | | 68,659 | |
| Foreign private corporate securities | 157,423 | | | 9,466 | | | 2,502 | | | 0 | | | 164,387 | |
| Asset-backed securities(1) | 18,027 | | | 632 | | | 47 | | | 0 | | | 18,612 | |
| Commercial mortgage-backed securities | 143,234 | | | 12,821 | | | 0 | | | 0 | | | 156,055 | |
| Residential mortgage-backed securities(2) | 3,452 | | | 600 | | | 0 | | | 0 | | | 4,052 | |
| Total fixed maturities, available-for-sale | $ | 1,599,264 | | | $ | 214,158 | | | $ | 4,876 | | | $ | 0 | | | $ | 1,808,546 | |
(1)Includes credit-tranched securities collateralized by loan obligations and education loans.
(2)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value | | OTTI
in AOCI(3) |
| (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 14,983 | | | $ | 1,032 | | | $ | 0 | | | $ | 16,015 | | | $ | 0 | |
| Obligations of U.S. states and their political subdivisions | 123,505 | | | 10,172 | | | 0 | | | 133,677 | | | 0 | |
| Foreign government bonds | 70,287 | | | 6,993 | | | 0 | | | 77,280 | | | 0 | |
| | | | | | | | | |
| U.S. public corporate securities | 627,880 | | | 70,167 | | | 527 | | | 697,520 | | | 0 | |
| U.S. private corporate securities | 222,952 | | | 10,416 | | | 153 | | | 233,215 | | | 0 | |
| Foreign public corporate securities | 53,115 | | | 4,958 | | | 80 | | | 57,993 | | | 0 | |
| Foreign private corporate securities | 161,597 | | | 4,505 | | | 2,210 | | | 163,892 | | | 0 | |
| Asset-backed securities(1) | 17,816 | | | 753 | | | 27 | | | 18,542 | | | 0 | |
| Commercial mortgage-backed securities | 141,593 | | | 5,796 | | | 0 | | | 147,389 | | | 0 | |
| Residential mortgage-backed securities(2) | 4,068 | | | 509 | | | 4 | | | 4,573 | | | (50) | |
| Total fixed maturities, available-for-sale | $ | 1,437,796 | | | $ | 115,301 | | | $ | 3,001 | | | $ | 1,550,096 | | | $ | (50) | |
(1)Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, and education loans.
(2)Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI(3) |
| | (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 15,086 |
| | $ | 1,132 |
| | $ | 0 |
| | $ | 16,218 |
| | $ | 0 |
|
| Obligations of U.S. states and their political subdivisions | 120,367 |
| | 10,668 |
| | 0 |
| | 131,035 |
| | 0 |
|
| Foreign government bonds | 70,408 |
| | 7,153 |
| | 0 |
| | 77,561 |
| | 0 |
|
| U.S. public corporate securities | 563,811 |
| | 69,417 |
| | 719 |
| | 632,509 |
| | 0 |
|
| U.S. private corporate securities | 234,976 |
| | 12,317 |
| | 190 |
| | 247,103 |
| | 0 |
|
| Foreign public corporate securities | 51,696 |
| | 5,273 |
| | 222 |
| | 56,747 |
| | 0 |
|
| Foreign private corporate securities | 157,231 |
| | 3,629 |
| | 3,997 |
| | 156,863 |
| | 0 |
|
| Asset-backed securities(1) | 17,787 |
| | 968 |
| | 22 |
| | 18,733 |
| | 0 |
|
| Commercial mortgage-backed securities | 149,614 |
| | 8,842 |
| | 0 |
| | 158,456 |
| | 0 |
|
| Residential mortgage-backed securities(2) | 4,265 |
| | 556 |
| | 0 |
| | 4,821 |
| | (54 | ) |
| Total fixed maturities, available-for-sale | $ | 1,385,241 |
| | $ | 119,955 |
| | $ | 5,150 |
| | $ | 1,500,046 |
| | $ | (54 | ) |
Table of Contents | | |
(1) | Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages and education loans. |
| |
(2) | Includes publicly-traded agency pass-through securities and collateralized mortgage obligations. |
| |
(3) | Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $0.1 million of net unrealized gains on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date. |
|
|
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
(3)Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $0.1 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.
|
| | | | | | | | | | | | | | | | | | | |
| | 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 | $ | 15,388 |
| | $ | 940 |
| | $ | 0 |
| | $ | 16,328 |
| | $ | 0 |
|
| Obligations of U.S. states and their political subdivisions | 121,031 |
| | 1,830 |
| | 555 |
| | 122,306 |
| | 0 |
|
| Foreign government bonds | 68,720 |
| | 96 |
| | 3,522 |
| | 65,294 |
| | 0 |
|
| U.S. public corporate securities | 486,872 |
| | 8,798 |
| | 14,945 |
| | 480,725 |
| | 0 |
|
| U.S. private corporate securities | 231,953 |
| | 1,935 |
| | 7,522 |
| | 226,366 |
| | 0 |
|
| Foreign public corporate securities | 49,684 |
| | 476 |
| | 1,945 |
| | 48,215 |
| | 0 |
|
| Foreign private corporate securities | 149,611 |
| | 736 |
| | 5,584 |
| | 144,763 |
| | 0 |
|
| Asset-backed securities(1) | 22,352 |
| | 1,040 |
| | 41 |
| | 23,351 |
| | (40 | ) |
| Commercial mortgage-backed securities | 147,464 |
| | 915 |
| | 3,173 |
| | 145,206 |
| | 0 |
|
| Residential mortgage-backed securities(2) | 4,817 |
| | 460 |
| | 7 |
| | 5,270 |
| | (66 | ) |
| Total fixed maturities, available-for-sale | $ | 1,297,892 |
| | $ | 17,226 |
| | $ | 37,294 |
| | $ | 1,277,824 |
| | $ | (106 | ) |
| |
(1) | Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, auto loans, education loans and other asset types. |
| |
(2) | Includes publicly-traded agency pass-through securities and collateralized mortgage obligations. |
| |
(3) | Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $0.2 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. |
The following tables settable sets forth the fair value and gross unrealized losses on available-for-sale fixed maturity securities without an allowance for credit losses aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the datesdate indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| Less Than Twelve Months | | Twelve Months or More | | Total |
| Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses |
| (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Foreign government bonds | $ | 5,707 | | | $ | 98 | | | $ | 0 | | | $ | 0 | | | $ | 5,707 | | | $ | 98 | |
| U.S. public corporate securities | 28,363 | | | 1,045 | | | 0 | | | 0 | | | 28,363 | | | 1,045 | |
| U.S. private corporate securities | 10,349 | | | 560 | | | 0 | | | 0 | | | 10,349 | | | 560 | |
| Foreign public corporate securities | 12,339 | | | 624 | | | 0 | | | 0 | | | 12,339 | | | 624 | |
| Foreign private corporate securities | 5,819 | | | 149 | | | 35,064 | | | 2,353 | | | 40,883 | | | 2,502 | |
| Asset-backed securities | 2,490 | | | 10 | | | 3,917 | | | 37 | | | 6,407 | | | 47 | |
| | | | | | | | | | | |
| Residential mortgage-backed securities | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total fixed maturities, available-for-sale | $ | 65,067 | | | $ | 2,486 | | | $ | 38,981 | | | $ | 2,390 | | | $ | 104,048 | | | $ | 4,876 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 |
| | Less Than Twelve Months | | Twelve Months or More | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| | (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | | | |
| Obligations of U.S. states and their political subdivisions | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| Foreign government bonds | 0 |
| | 0 |
| | 400 |
| | 0 |
| | 400 |
| | 0 |
|
| U.S. public corporate securities | 0 |
| | 0 |
| | 5,996 |
| | 719 |
| | 5,996 |
| | 719 |
|
| U.S. private corporate securities | 10,627 |
| | 95 |
| | 4,675 |
| | 95 |
| | 15,302 |
| | 190 |
|
| Foreign public corporate securities | 1,979 |
| | 10 |
| | 3,258 |
| | 212 |
| | 5,237 |
| | 222 |
|
| Foreign private corporate securities | 26,257 |
| | 838 |
| | 37,250 |
| | 3,159 |
| | 63,507 |
| | 3,997 |
|
| Asset-backed securities | 3,039 |
| | 12 |
| | 1,940 |
| | 10 |
| | 4,979 |
| | 22 |
|
| Commercial mortgage-backed securities | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Residential mortgage-backed securities | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Total fixed maturities, available-for-sale | $ | 41,902 |
| | $ | 955 |
| | $ | 53,519 |
| | $ | 4,195 |
| | $ | 95,421 |
| | $ | 5,150 |
|
|
|
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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: | | | | | | | | | | | |
| Obligations of U.S. states and their political subdivisions | $ | 36,191 |
| | $ | 356 |
| | $ | 7,585 |
| | $ | 199 |
| | $ | 43,776 |
| | $ | 555 |
|
| Foreign government bonds | 28,009 |
| | 1,002 |
| | 30,924 |
| | 2,520 |
| | 58,933 |
| | 3,522 |
|
| U.S. public corporate securities | 182,958 |
| | 7,696 |
| | 124,396 |
| | 7,249 |
| | 307,354 |
| | 14,945 |
|
| U.S. private corporate securities | 57,562 |
| | 4,549 |
| | 106,828 |
| | 2,973 |
| | 164,390 |
| | 7,522 |
|
| Foreign public corporate securities | 20,062 |
| | 695 |
| | 16,791 |
| | 1,250 |
| | 36,853 |
| | 1,945 |
|
| Foreign private corporate securities | 97,538 |
| | 4,321 |
| | 14,107 |
| | 1,263 |
| | 111,645 |
| | 5,584 |
|
| Asset-backed securities | 7,762 |
| | 41 |
| | 0 |
| | 0 |
| | 7,762 |
| | 41 |
|
| Commercial mortgage-backed securities | 26,453 |
| | 163 |
| | 61,338 |
| | 3,010 |
| | 87,791 |
| | 3,173 |
|
| Residential mortgage-backed securities | 535 |
| | 4 |
| | 243 |
| | 3 |
| | 778 |
| | 7 |
|
| Total fixed maturities, available-for-sale | $ | 457,070 |
| | $ | 18,827 |
| | $ | 362,212 |
| | $ | 18,467 |
| | $ | 819,282 |
| | $ | 37,294 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Less Than Twelve Months | | Twelve Months or More | | Total |
| Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses |
| (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Foreign government bonds | $ | 0 | | | $ | 0 | | | $ | 400 | | | $ | 0 | | | $ | 400 | | | $ | 0 | |
| U.S. public corporate securities | 16,892 | | | 190 | | | 1,073 | | | 337 | | | 17,965 | | | 527 | |
| U.S. private corporate securities | 7,350 | | | 140 | | | 4,757 | | | 13 | | | 12,107 | | | 153 | |
| Foreign public corporate securities | 2,054 | | | 23 | | | 2,427 | | | 57 | | | 4,481 | | | 80 | |
| Foreign private corporate securities | 10,659 | | | 281 | | | 27,048 | | | 1,929 | | | 37,707 | | | 2,210 | |
| Asset-backed securities | 1,488 | | | 12 | | | 2,985 | | | 15 | | | 4,473 | | | 27 | |
| | | | | | | | | | | |
| Residential mortgage-backed securities | 91 | | | 4 | | | 0 | | | 0 | | | 91 | | | 4 | |
| Total fixed maturities, available-for-sale | $ | 38,534 | | | $ | 650 | | | $ | 38,690 | | | $ | 2,351 | | | $ | 77,224 | | | $ | 3,001 | |
As of September 30, 2019 and December 31, 2018,2020, the gross unrealized losses on fixed maturity available-for-sale securities without an allowance were composed of $4.1$3.8 million and $31.0 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 $1.0$1.1 million and $6.3 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of September 30, 2019,2020, the $4.2$2.4 million of gross unrealized losses of twelve months or more were concentrated in the Company’s corporate securities within the finance, consumer non-cyclical, and transportation sectors.
finance, transportationTable of Contents and consumer non-cyclical sectors. | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
As of December 31, 2018,2019, the $18.5gross unrealized losses on fixed maturity securities were composed of $2.4 million related to “1” highest quality or “2” high quality securities based on the NAIC or equivalent rating and $0.6 million related to other than high or highest quality securities based on NAIC or equivalent rating. As of December 31, 2019, the $2.4 million of gross unrealized losses of twelve months or more were concentrated in commercial mortgage-backed securities and in the Company’s corporate securities within the finance,, utility and consumer non-cyclical and energy sectors.
In accordance with its policy described in Note 2, to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, the Company concluded that an adjustment to earnings for OTTI forcredit losses related to these fixed maturity securities was not warranted at either September 30, 2019 or December 31, 2018.2020. These conclusions were based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to general credit spread widening, increases in interest rates, and foreign currency exchange rate movements.movements and the financial condition or near-term prospects of the issuer. As of September 30, 2019,2020, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.
|
|
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
The following table sets forth the amortized cost and fair value of fixed maturities by contractual maturities, as of the date indicated:
| | | | | | | | | | | |
| September 30, 2020 |
| Amortized Cost | | Fair Value |
| (in thousands) |
| Fixed maturities, available-for-sale: | | | |
| Due in one year or less | $ | 38,528 | | | $ | 38,910 | |
| Due after one year through five years | 203,196 | | | 213,078 | |
| Due after five years through ten years | 206,436 | | | 221,643 | |
| Due after ten years | 986,391 | | | 1,156,196 | |
| Asset-backed securities | 18,027 | | | 18,612 | |
| Commercial mortgage-backed securities | 143,234 | | | 156,055 | |
| Residential mortgage-backed securities | 3,452 | | | 4,052 | |
| Total fixed maturities, available-for-sale | $ | 1,599,264 | | | $ | 1,808,546 | |
|
| | | | | | | |
| | September 30, 2019 |
| | Amortized Cost | | Fair Value |
| | (in thousands) |
| Fixed maturities, available-for-sale: | | | |
| Due in one year or less | $ | 34,443 |
| | $ | 34,790 |
|
| Due after one year through five years | 188,710 |
| | 192,139 |
|
| Due after five years through ten years | 245,987 |
| | 253,186 |
|
| Due after ten years | 744,435 |
| | 837,921 |
|
| Asset-backed securities | 17,787 |
| | 18,733 |
|
| Commercial mortgage-backed securities | 149,614 |
| | 158,456 |
|
| Residential mortgage-backed securities | 4,265 |
| | 4,821 |
|
| Total fixed maturities, available-for-sale | $ | 1,385,241 |
| | $ | 1,500,046 |
|
Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Asset-backed, commercial mortgage-backed and residential mortgage-backed securities are shown separately in the table above, as they do not have a single maturity date.
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
The following table sets forth the sources of fixed maturity proceeds and related investment gains (losses), as well as losses on write-downs, impairments and the allowance for credit losses of fixed maturities, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | |
| Proceeds from sales(1) | $ | 810 | | | $ | 482 | | | $ | 3,105 | | | $ | 12,121 | |
| Proceeds from maturities/prepayments | 14,331 | | | 11,536 | | | 31,946 | | | 33,742 | |
| Gross investment gains from sales and maturities | 136 | | | 7 | | | 162 | | | 150 | |
| Gross investment losses from sales and maturities | 1 | | | (2) | | | (43) | | | (461) | |
| OTTI recognized in earnings(2) | N/A | | (2,295) | | | N/A | | (5,458) | |
| Write-downs recognized in earnings(3) | 0 | | | N/A | | (625) | | | N/A |
| (Addition to) release of allowance for credit losses(4) | 0 | | | N/A | | 0 | | | N/A |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | |
| Proceeds from sales(1) | $ | 482 |
| | $ | 251 |
| | $ | 12,121 |
| | $ | 1,816 |
|
| Proceeds from maturities/prepayments | 11,536 |
| | 25,175 |
| | 33,742 |
| | 55,486 |
|
| Gross investment gains from sales and maturities | 7 |
| | 247 |
| | 150 |
| | 193 |
|
| Gross investment losses from sales and maturities | (2 | ) | | (9 | ) | | (461 | ) | | (139 | ) |
| OTTI recognized in earnings(2) | (2,295 | ) | | 0 |
| | (5,458 | ) | | 0 |
|
(2)For the three and nine months ended September 30, 2019, amounts exclude the portion of OTTI amounts remaining in OCI, representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of impairment.
(3)For the three and nine months ended September 30, 2020, amounts represent write-downs on securities approaching maturity related to foreign exchange movements and securities actively marketed for sale.
(4)Effective January 1, 2020, credit losses on available-for-sale fixed maturity securities are recorded within the "allowance for credit losses."
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| |
(1) | Includes $0.0 million and $0.0 million of non-cash related proceeds due to the timing of trade settlements for the nine months ended September 30, 2019 and 2018, respectively. | | | | | | | | | | | | |
| |
(2) | Excludes the portion of OTTI amounts remaining in OCI, representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of the impairment. | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
14For both the three and nine months ended September 30, 2020, there was 0 activity in the allowance for credit losses for fixed maturity securities.
See Note 2 for additional information about the Company's methodology for developing our allowance and expected losses.
The Company did 0t have any fixed maturity securities purchased with credit deterioration, as of September 30, 2020.
| | | | | |
|
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY | |
Notes to Unaudited Interim Financial Statements—(Continued) |
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 periods indicated:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (in thousands) |
| Credit loss impairments: | | | | | | | |
| Balance in OCI, beginning of period | $ | 3,149 |
| | $ | 177 |
| | $ | 179 |
| | $ | 561 |
|
| New credit loss impairments | 0 |
| | 0 |
| | 3,022 |
| | 0 |
|
| Increases due to the passage of time on previously recorded credit losses | 1 |
| | 6 |
| | 22 |
| | 21 |
|
| Reductions for securities which matured, paid down, prepaid or were sold during the period | (7 | ) | | (5 | ) | | (16 | ) | | (404 | ) |
| Reductions for securities impaired to fair value during the period(1) | (3,040 | ) | | 0 |
| | (3,040 | ) | | 0 |
|
| Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected | (2 | ) | | 0 |
| | (66 | ) | | 0 |
|
| Balance in OCI, end of period | $ | 101 |
| | $ | 178 |
| | $ | 101 |
| | $ | 178 |
|
| |
(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 equity securities still held at period end, recorded within “Other income,” was $0.0$1.1 million and $(0.2)$0.0 million during the three months ended September 30, 20192020 and 2018,2019, respectively, and $0.5$1.0 million and $(0.9)$0.5 million during the nine months ended September 30, 20192020 and 2018,2019, respectively.
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
Commercial Mortgage and Other Loans
The following table sets forth the composition of “Commercial mortgage and other loans,” as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Amount
(in thousands) | | % of Total | | Amount
(in thousands) | | % of Total |
| Commercial mortgage and agricultural property loans by property type: | | | | | | | |
| Apartments/Multi-Family | $ | 46,969 | | | 34.2 | % | | $ | 47,568 | | | 33.2 | % |
| Hospitality | 14,160 | | | 10.3 | | | 14,266 | | | 10.0 | |
| Industrial | 17,656 | | | 12.9 | | | 18,907 | | | 13.2 | |
| Office | 23,143 | | | 16.9 | | | 24,035 | | | 16.7 | |
| Other | 16,845 | | | 12.3 | | | 18,853 | | | 13.2 | |
| Retail | 15,945 | | | 11.6 | | | 16,174 | | | 11.3 | |
| Total commercial mortgage loans | 134,718 | | | 98.2 | | | 139,803 | | | 97.6 | |
| Agricultural property loans | 2,435 | | | 1.8 | | | 3,460 | | | 2.4 | |
| Total commercial mortgage and agricultural property loans | 137,153 | | | 100.0 | % | | 143,263 | | | 100.0 | % |
| Allowance for credit losses | (448) | | | | | (165) | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total net commercial mortgage and other loans | $ | 136,705 | | | | | $ | 143,098 | | | |
|
| | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | Amount (in thousands) | | % of Total | | Amount (in thousands) | | % of Total |
| Commercial mortgage and agricultural property loans by property type: | | | | | | | |
| Apartments/Multi-Family | $ | 45,371 |
| | 33.9 | % | | $ | 41,775 |
| | 35.2 | % |
| Hospitality | 13,200 |
| | 9.8 |
| | 9,988 |
| | 8.4 |
|
| Industrial | 18,458 |
| | 13.7 |
| | 12,264 |
| | 10.3 |
|
| Office | 20,748 |
| | 15.4 |
| | 16,930 |
| | 14.3 |
|
| Other | 16,817 |
| | 12.5 |
| | 19,024 |
| | 16.0 |
|
| Retail | 16,252 |
| | 12.1 |
| | 13,838 |
| | 11.6 |
|
| Total commercial mortgage loans | 130,846 |
| | 97.4 |
| | 113,819 |
| | 95.8 |
|
| Agricultural property loans | 3,530 |
| | 2.6 |
| | 4,968 |
| | 4.2 |
|
| Total commercial mortgage and agricultural property loans by property type | 134,376 |
| | 100.0 | % | | 118,787 |
| | 100.0 | % |
| Allowance for credit losses | (165 | ) | | | | (151 | ) | | |
| Total commercial mortgage and other loans | $ | 134,211 |
| | | | $ | 118,636 |
| | |
|
|
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
As of September 30, 2019,2020, the commercial mortgage and agricultural property loans were secured by properties geographically dispersed throughout the United States (withwith the largest concentrations in New York (14% (13%), Illinois (13%Texas (11%) and Texas (11%)Illinois (9%) and included loans secured by properties in Europe (8% (10%).
The following table setstables set forth the activity in the allowance for credit losses for commercial mortgage and other loans, as of the dates indicated:
|
| | | | | | | | | | | |
| | Commercial Mortgage Loans | | Agricultural Property Loans | | Total |
| | (in thousands) |
| Balance at December 31, 2017 | $ | 179 |
| | $ | 1 |
| | $ | 180 |
|
| Addition to (release of) allowance for credit losses | (29 | ) | | 0 |
| | (29 | ) |
| Charge-offs, net of recoveries | 0 |
| | 0 |
| | 0 |
|
| Balance at December 31, 2018 | 150 |
| | 1 |
| | 151 |
|
| Addition to (release of) allowance for credit losses | 15 |
| | (1 | ) | | 14 |
|
| Charge-offs, net of recoveries | 0 |
| | 0 |
| | 0 |
|
| Balance at September 30, 2019 | $ | 165 |
| | $ | 0 |
| | $ | 165 |
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| Commercial Mortgage Loans | | Agricultural Property Loans | | | | Total |
| (in thousands) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balance, beginning of period | $ | 457 | | | $ | 0 | | | | | $ | 457 | |
| | | | | | | |
| Addition to (release of) allowance for expected losses | (9) | | | 0 | | | | | (9) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balance, end of period | $ | 448 | | | $ | 0 | | | | | $ | 448 | |
| | | | | | | |
The following tables set forth | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Commercial Mortgage Loans | | Agricultural Property Loans | | | | Total |
| (in thousands) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balance at December 31, 2019 | $ | 164 | | | $ | 1 | | | | | $ | 165 | |
| Cumulative effect of adoption of ASU 2016-13 | 204 | | | 0 | | | | | 204 | |
| Addition to (release of) allowance for expected losses | 80 | | | (1) | | | | | 79 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balance at September 30, 2020 | $ | 448 | | | $ | 0 | | | | | $ | 448 | |
See Note 2 for additional information about the Company's methodology for developing our allowance and expected losses.
For the nine months ended September 30, 2020, the increase in the allowance for credit losses and the recorded investment inon commercial mortgage and other loans aswas primarily related to the cumulative effect of the dates indicated:adoption of ASU 2016-13.
|
| | | | | | | | | | | |
| | September 30, 2019 |
| | Commercial Mortgage Loans | | Agricultural Property Loans | | Total |
| | (in thousands) |
| Allowance for credit losses: | | | | | |
| Individually evaluated for impairment | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| Collectively evaluated for impairment | 165 |
| | 0 |
| | 165 |
|
| Total ending balance(1) | $ | 165 |
| | $ | 0 |
| | $ | 165 |
|
| Recorded investment(2): | | | | | |
| Individually evaluated for impairment | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| Collectively evaluated for impairment | 130,846 |
| | 3,530 |
| | 134,376 |
|
| Total ending balance(1) | $ | 130,846 |
| | $ | 3,530 |
| | $ | 134,376 |
|
Table of Contents | | |
(1) | As of September 30, 2019, there were 0 loans acquired with deteriorated credit quality. |
| |
(2) | Recorded investment reflects the carrying value gross of related allowance. |
|
| | | | | | | | | | | |
| | 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 | 150 |
| | 1 |
| | 151 |
|
| Total ending balance(1) | $ | 150 |
| | $ | 1 |
| | $ | 151 |
|
| Recorded investment(2): | | | | | |
| Individually evaluated for impairment | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| Collectively evaluated for impairment | 113,819 |
| | 4,968 |
| | 118,787 |
|
| Total ending balance(1) | $ | 113,819 |
| | $ | 4,968 |
| | $ | 118,787 |
|
| |
(1) | As of December 31, 2018, there were 0 loans acquired with deteriorated credit quality. |
| |
(2) | Recorded investment reflects the carrying value gross of related allowance. |
|
|
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
The following tables set forth certain key credit quality indicators for commercial mortgage and agricultural property loans based upon the recorded investment gross of allowance for credit losses, as of the datesdate indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| Amortized Cost by Origination Year |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans | | Total |
| (in thousands) |
| Commercial Mortgage Loans | | | | | | | | | | | | | | | |
| Loan-to-Value Ratio: | | | | | | | | | | | | | | | |
| 0%-59.99% | $ | 0 | | | $ | 10,359 | | | $ | 0 | | | $ | 8,440 | | | $ | 9,751 | | | $ | 58,431 | | | $ | 0 | | | $ | 86,981 | |
| 60%-69.99% | 2,198 | | | 20,944 | | | 1,488 | | | 4,005 | | | 3,192 | | | 11,798 | | | 0 | | | 43,625 | |
| 70%-79.99% | 0 | | | 4,112 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 4,112 | |
| 80% or greater | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | $ | 2,198 | | | $ | 35,415 | | | $ | 1,488 | | | $ | 12,445 | | | $ | 12,943 | | | $ | 70,229 | | | $ | 0 | | | $ | 134,718 | |
| Debt Service Coverage Ratio: | | | | | | | | | | | | | | | |
| Greater or Equal to 1.2x | $ | 2,198 | | | $ | 32,042 | | | $ | 0 | | | $ | 12,445 | | | $ | 11,872 | | | $ | 68,406 | | | $ | 0 | | | $ | 126,963 | |
| 1.0 - 1.2x | 0 | | | 3,373 | | | 1,488 | | | 0 | | | 1,071 | | | 1,823 | | | 0 | | | 7,755 | |
| Less than 1.0x | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | $ | 2,198 | | | $ | 35,415 | | | $ | 1,488 | | | $ | 12,445 | | | $ | 12,943 | | | $ | 70,229 | | | $ | 0 | | | $ | 134,718 | |
| Agricultural Property Loans | | | | | | | | | | | | | | | |
| Loan-to-Value Ratio: | | | | | | | | | | | | | | | |
| 0%-59.99% | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 2,435 | | | $ | 0 | | | $ | 2,435 | |
| 60%-69.99% | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| 70%-79.99% | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| 80% or greater | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 2,435 | | | $ | 0 | | | $ | 2,435 | |
| Debt Service Coverage Ratio: | | | | | | | | | | | | | | | |
| Greater or Equal to 1.2x | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 2,435 | | | $ | 0 | | | $ | 2,435 | |
| 1.0 - 1.2x | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Less than 1.0x | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 2,435 | | | $ | 0 | | | $ | 2,435 | |
|
| | | | | | | | | | | | | | | |
| | September 30, 2019 |
| | Debt Service Coverage Ratio | | |
| | ≥ 1.2X | | 1.0X to < 1.2X | | < 1.0X | | Total |
| | (in thousands) |
| Loan-to-Value Ratio: | | | | | | | |
| 0%-59.99% | $ | 90,476 |
| | $ | 3,046 |
| | $ | 0 |
| | $ | 93,522 |
|
| 60%-69.99% | 37,775 |
| | 0 |
| | 0 |
| | 37,775 |
|
| 70%-79.99% | 1,550 |
| | 1,529 |
| | 0 |
| | 3,079 |
|
| 80% or greater | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Total commercial mortgage and agricultural property loans | $ | 129,801 |
| | $ | 4,575 |
| | $ | 0 |
| | $ | 134,376 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Debt Service Coverage Ratio | | |
| | ≥ 1.2X | | 1.0X to < 1.2X | | < 1.0X | | Total |
| | (in thousands) |
| Loan-to-Value Ratio: | | | | | | | |
| 0%-59.99% | $ | 88,427 |
| | $ | 1,210 |
| | $ | 0 |
| | $ | 89,637 |
|
| 60%-69.99% | 19,975 |
| | 5,513 |
| | 0 |
| | 25,488 |
|
| 70%-79.99% | 2,102 |
| | 1,560 |
| | 0 |
| | 3,662 |
|
| 80% or greater | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Total commercial mortgage and agricultural property loans | $ | 110,504 |
| | $ | 8,283 |
| | $ | 0 |
| | $ | 118,787 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial mortgage loans | | | | | | | | |
| | December 31, 2019 |
| | Debt Service Coverage Ratio | | |
| | >1.2X | | 1.0X to <1.2X | | < 1.0X | | Total |
| | (in thousands) |
| Loan-to-Value Ratio: | | | | | | | | |
| 0%-59.99% | | $ | 89,855 | | | $ | 1,131 | | | $ | 0 | | | $ | 90,986 | |
| 60%-69.99% | | 42,726 | | | 1,877 | | | 0 | | | 44,603 | |
| 70%-79.99% | | 2,695 | | | 1,519 | | | 0 | | | 4,214 | |
| 80% or greater | | 0 | | | 0 | | | 0 | | | 0 | |
| Total commercial mortgage loans | | $ | 135,276 | | | $ | 4,527 | | | $ | 0 | | | $ | 139,803 | |
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Agricultural property loans | | | | | | | | | | |
| | December 31, 2019 | | |
| | Debt Service Coverage Ratio | | | | |
| | >1.2X | | 1.0X to <1.2X | | < 1.0X | | Total | | |
| | (in thousands) | | |
| Loan-to-Value Ratio: | | | | | | | | | | |
| 0%-59.99% | | $ | 3,460 | | | $ | 0 | | | $ | 0 | | | $ | 3,460 | | | |
| 60%-69.99% | | 0 | | | 0 | | | 0 | | | 0 | | | |
| 70%-79.99% | | 0 | | | 0 | | | 0 | | | 0 | | | |
| 80% or greater | | 0 | | | 0 | | | 0 | | | 0 | | | |
| Total agricultural property loans | | $ | 3,460 | | | $ | 0 | | | $ | 0 | | | $ | 3,460 | | | |
See Note 2 for additional information about the Company's commercial mortgage and other loans credit quality monitoring process.
The following tables set forth an aging of past due commercial mortgage and other loans based upon the recorded investment gross of allowance for credit losses, as well as the amount of commercial mortgage and other loans on non-accrual status, as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| Current | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due(1) | | Total Loans | | Non-Accrual Status(2) |
| (in thousands) |
| Commercial mortgage loans | $ | 134,718 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 134,718 | | | $ | 0 | |
| Agricultural property loans | 2,435 | | | 0 | | | 0 | | | 0 | | | 2,435 | | | 0 | |
| | | | | | | | | | | |
| Total | $ | 137,153 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 137,153 | | | $ | 0 | |
(1)As of September 30, 2020, there were 0 loans in this category accruing interest.
(2)For additional information regarding the Company’s policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Current | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due(1) | | Total Loans | | Non-Accrual Status(2) |
| (in thousands) |
| Commercial mortgage loans | $ | 139,803 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 139,803 | | | $ | 0 | |
| Agricultural property loans | 3,460 | | | 0 | | | 0 | | | 0 | | | 3,460 | | | 0 | |
| | | | | | | | | | | |
| Total | $ | 143,263 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 143,263 | | | $ | 0 | |
(1)As of December 31, 2019, there were 0 loans in this category accruing interest.
(2)For additional information regarding the Company’s policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
There were 0 loans on non-accrual status with a related allowance for credit losses which recognized interest income for both the three and nine months ended September 30, 2020.
The Company did 0t have any commercial mortgage and other loans purchased with credit deterioration, as of September 30, 2020.
For both the three and nine months ended September 30, 2020 and 2019, there were 0 commercial mortgage and other loans acquired, other than those through direct origination, and there were 0 commercial mortgage and other loans sold.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 |
| | Current | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due(1) | | Total Loans | | Non-Accrual Status(2) |
| | (in thousands) |
| Commercial mortgage loans | $ | 130,846 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 130,846 |
| | $ | 0 |
|
| Agricultural property loans | 3,530 |
| | 0 |
| | 0 |
| | 0 |
| | 3,530 |
| | 0 |
|
| Total | $ | 134,376 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 134,376 |
| | $ | 0 |
|
Table of Contents | | |
(1) | As of September 30, 2019, there were 0 loans in this category accruing interest. |
| |
(2) | For additional information regarding the Company’s policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | $ | 113,819 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 113,819 |
| | $ | 0 |
|
| Agricultural property loans | 4,968 |
| | 0 |
| | 0 |
| | 0 |
| | 4,968 |
| | 0 |
|
| Total | $ | 118,787 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 118,787 |
| | $ | 0 |
|
| |
(1) | As of December 31, 2018, there were 0 loans in this category accruing interest. |
| |
(2) | For additional information regarding the Company’s policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. |
|
|
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
Other Invested Assets
The following table sets forth the composition of “Other invested assets,” as of the dates indicated:
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| | (in thousands) |
| Company’s investment in separate accounts | $ | 3,325 | | | $ | 3,418 | |
| LPs/LLCs: | | | |
| Equity method: | | | |
| Private equity | 34,157 | | | 26,609 | |
| Hedge funds | 32,375 | | | 30,629 | |
| Real estate-related | 4,450 | | | 4,154 | |
| Subtotal equity method | 70,982 | | | 61,392 | |
| Fair value: | | | |
| Private equity | 586 | | | 774 | |
| Hedge funds | 69 | | | 78 | |
| Real estate-related | 2,320 | | | 2,490 | |
| Subtotal fair value | 2,975 | | | 3,342 | |
| Total LPs/LLCs | 73,957 | | | 64,734 | |
| Derivative instruments | 26,147 | | | 21,384 | |
| Total other invested assets | $ | 103,429 | | | $ | 89,536 | |
|
| | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | (in thousands) |
| Company’s investment in separate accounts | $ | 3,254 |
| | $ | 3,008 |
|
| LPs/LLCs: | | | |
| Equity method: | | | |
| Private equity | 22,766 |
| | 15,081 |
|
| Hedge funds | 29,900 |
| | 28,266 |
|
| Real estate-related | 3,813 |
| | 1,385 |
|
| Subtotal equity method | 56,479 |
| | 44,732 |
|
| Fair value: | | | |
| Private equity | 806 |
| | 920 |
|
| Hedge funds | 95 |
| | 105 |
|
| Real estate-related | 2,551 |
| | 1,856 |
|
| Subtotal fair value | 3,452 |
| | 2,881 |
|
| Total LPs/LLCs | 59,931 |
| | 47,613 |
|
| Derivative instruments | 26,225 |
| | 7,792 |
|
| Total other invested assets | $ | 89,410 |
| | $ | 58,413 |
|
The following table sets forth “Net investment income” by investment type, for the periods indicated:
The following table sets forth “Realized investment gains (losses), net” by investment type, for the periods indicated:
Table of Contents | | |
(1)PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Includes fixed maturity securities classified as available-for-sale and excludes fixed maturity securities classified as trading.Notes to Unaudited Interim Financial Statements—(Continued) |
Net Unrealized Gains (Losses) on Investments within AOCI
The following table sets forth net unrealized gains (losses) on investments, as of the dates indicated:
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| | (in thousands) |
| Fixed maturity securities, available-for-sale — with OTTI(1) | $ N/A | | $ | 51 | |
| Fixed maturity securities, available-for-sale — all other(1) | N/A | | 112,249 | |
| Fixed maturity securities, available-for-sale with an allowance | 0 | | | N/A |
| Fixed maturity securities, available-for-sale without an allowance | 209,282 | | | N/A |
| Derivatives designated as cash flow hedges(2) | 6,634 | | | 3,193 | |
| Affiliated notes | 253 | | | 480 | |
| Other investments | 52 | | | 66 | |
| Net unrealized gains (losses) on investments | $ | 216,221 | | | $ | 116,039 | |
|
| | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | (in thousands) |
| Fixed maturity securities, available-for-sale—with OTTI | $ | 50 |
| | $ | 143 |
|
| Fixed maturity securities, available-for-sale—all other | 114,755 |
| | (20,211 | ) |
| Derivatives designated as cash flow hedges(1) | 7,653 |
| | 1,793 |
|
| Affiliated notes | 521 |
| | 509 |
|
| Other investments | 80 |
| | 145 |
|
| Net unrealized gains (losses) on investments | $ | 123,059 |
| | $ | (17,621 | ) |
(1)Effective January 1, 2020, per ASU 2016-13, fixed maturity securities, available-for-sale are no longer required to be disclosed “with OTTI” and “all other.”
(2)For more information on cash flow hedges, see Note 4.
| |
(1) | For more information on cash flow hedges, see Note 4. |
Repurchase Agreements and Securities Lending
In the normal course of business, the Company sells securities under agreements to repurchase and enters into securities lending transactions. As of September 30, 20192020 and December 31, 2018,2019, the Company had 0 repurchase agreements.
The following table sets forth the composition of “Cash collateral for loaned securities,” which represents the liability to return cash collateral received for the following types of securities loaned, as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Remaining Contractual Maturities of the Agreements | | | | Remaining Contractual Maturities of the Agreements | | |
| Overnight & Continuous | | Up to 30 Days | | Total | | Overnight & Continuous | | Up to 30 Days | | Total |
| (in thousands) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Foreign public corporate securities | $ | 2,731 | | | $ | 0 | | | $ | 2,731 | | | $ | 2,481 | | | $ | 0 | | | $ | 2,481 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total cash collateral for loaned securities(1) | $ | 2,731 | | | $ | 0 | | | $ | 2,731 | | | $ | 2,481 | | | $ | 0 | | | $ | 2,481 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | Remaining Contractual Maturities of the Agreements | | | | Remaining Contractual Maturities of the Agreements | | |
| | Overnight & Continuous | | Up to 30 Days | | Total | | Overnight & Continuous | | Up to 30 Days | | Total |
| | (in thousands) |
| U.S. public corporate securities | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 437 |
| | $ | 0 |
| | $ | 437 |
|
| Foreign public corporate securities | 2,528 |
| | 0 |
| | 2,528 |
| | 2,265 |
| | 0 |
| | 2,265 |
|
| Total cash collateral for loaned securities(1) | $ | 2,528 |
| | $ | 0 |
| | $ | 2,528 |
| | $ | 2,702 |
| | $ | 0 |
| | $ | 2,702 |
|
| |
(1) | The Company did 0t have any agreements with remaining contractual maturities of thirty days or greater, as of the dates indicated. |
�� (1) |
|
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
4. DERIVATIVE INSTRUMENTS
Types of Derivative Instruments and Derivative Strategies
The Company utilizes various derivative instruments and strategies to manage its risk. Commonly used derivative instruments include, but are not necessarily limited to:
•Interest rate contracts: futures, swaps, options, caps and floors
•Equity contracts: futures, options and total return swaps
•Foreign exchange contracts: futures, options, forwards and swaps
•Credit contracts: single and index reference credit default swaps
Other types of financial contracts that the Company accounts for as derivatives include:
•Embedded derivatives
For detailed information on these contracts and the related strategies, see Note 4 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
Primary Risks Managed by Derivatives
The table below provides a summary of the gross notional amount and fair value of derivative contracts by the primary underlying risks, excluding embedded derivatives and associated reinsurance recoverables. Many derivative instruments contain multiple underlying risks. The fair value amounts below represent the value of derivative contracts prior to taking into account the netting effects of master netting agreements and cash collateral, and NPR.collateral.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| Primary Underlying Risk/Instrument Type | | | | Fair Value | | | | Fair Value |
| Gross Notional | Assets | | Liabilities | | Gross Notional | Assets | | Liabilities |
| | (in thousands) |
| Derivatives Designated as Hedge Accounting Instruments: | | | | | | | | | | | | |
| Currency/Interest Rate | | | | | | | | | | | | |
| Foreign Currency Swaps | | $ | 128,688 | | | $ | 6,257 | | | $ | (469) | | | $ | 131,212 | | | $ | 4,653 | | | $ | (1,504) | |
| Total Derivatives Designated as Hedge Accounting Instruments: | | $ | 128,688 | | | $ | 6,257 | | | $ | (469) | | | $ | 131,212 | | | $ | 4,653 | | | $ | (1,504) | |
Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | | | | | | |
| Interest Rate | | | | | | | | | | | | |
| Interest Rate Swaps | | $ | 30,200 | | | $ | 4,851 | | | $ | 0 | | | $ | 32,075 | | | $ | 3,005 | | | $ | (5) | |
| Credit | | | | | | | | | | | | |
| Credit Default Swaps | | 713 | | | 9 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Currency/Interest Rate | | | | | | | | | | | | |
| Foreign Currency Swaps | | 33,224 | | | 3,626 | | | (69) | | | 33,224 | | | 2,691 | | | (579) | |
| Foreign Currency | | | | | | | | | | | | |
| Foreign Currency Forwards | | 2,690 | | | 33 | | | (1) | | | 1,858 | | | 0 | | | (36) | |
| Equity | | | | | | | | | | | | |
| Equity Options | | 429,925 | | | 27,273 | | | (15,355) | | | 379,350 | | | 24,064 | | | (10,919) | |
| Total Derivatives Not Qualifying as Hedge Accounting Instruments: | | $ | 496,752 | | | $ | 35,792 | | | $ | (15,425) | | | $ | 446,507 | | | $ | 29,760 | | | $ | (11,539) | |
| Total Derivatives(1)(2) | | $ | 625,440 | | | $ | 42,049 | | | $ | (15,894) | | | $ | 577,719 | | | $ | 34,413 | | | $ | (13,043) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2019 | | December 31, 2018 |
| Primary Underlying Risk/Instrument Type | | | | Fair Value | | | | Fair Value |
| | Gross Notional | Assets | | Liabilities | | Gross Notional | Assets | | Liabilities |
| | | (in thousands) |
| Derivatives Designated as Hedge Accounting Instruments: | | | | | | | | | | | | |
| Currency/Interest Rate | | | | | | | | | | | | |
| Foreign Currency Swaps | | $ | 125,872 |
| | $ | 8,377 |
| | $ | (148 | ) | | $ | 119,611 |
| | $ | 3,787 |
| | $ | (2,271 | ) |
| Total Derivatives Designated as Hedge Accounting Instruments: | | $ | 125,872 |
| | $ | 8,377 |
| | $ | (148 | ) | | $ | 119,611 |
| | $ | 3,787 |
| | $ | (2,271 | ) |
Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | | | | | | |
| Interest Rate | | | | | | | | | | | | |
| Interest Rate Swaps | | $ | 32,075 |
| | $ | 3,533 |
| | $ | (115 | ) | | $ | 59,075 |
| | $ | 2,360 |
| | $ | 0 |
|
| Credit | | | | | | | | | | | | |
| Credit Default Swaps | | 0 |
| | 0 |
| | 0 |
| | 756 |
| | 0 |
| | (9 | ) |
| Currency/Interest Rate | | | | | | | | | | | | |
| Foreign Currency Swaps | | 33,225 |
| | 3,847 |
| | (27 | ) | | 16,815 |
| | 2,364 |
| | (111 | ) |
| Foreign Currency | | | | | | | | | | | | |
| Foreign Currency Forwards | | 1,649 |
| | 51 |
| | (5 | ) | | 1,460 |
| | 21 |
| | 0 |
|
| Equity | | | | | | | | | | | | |
| Equity Options | | 351,198 |
| | 15,866 |
| | (5,269 | ) | | 281,400 |
| | 2,616 |
| | (749 | ) |
| Total Derivatives Not Qualifying as Hedge Accounting Instruments: | | $ | 418,147 |
| | $ | 23,297 |
| | $ | (5,416 | ) | | $ | 359,506 |
| | $ | 7,361 |
| | $ | (869 | ) |
| Total Derivatives(1)(2) | | $ | 544,019 |
| | $ | 31,674 |
| | $ | (5,564 | ) | | $ | 479,117 |
| | $ | 11,148 |
| | $ | (3,140 | ) |
| |
(1) | Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks. |
| |
(2) | Recorded in "Other invested assets" and "Other liabilities" on the Unaudited Interim Statements of Financial Position. |
(1) |
|
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks. The fair value of thethese embedded derivatives included in "Future policy benefits," was a net liability of $1,018$1,522 million and $489$761 million as of September 30, 20192020 and December 31, 2018, respectively.2019, respectively included in “Future policy benefits” and $145 million and $134 million as of September 30, 2020 and December 31, 2019, respectively included in “Policyholders’ account balances". The fair value of the related reinsurance, recoverables, included in "Reinsurance recoverables,"recoverables" or "Other liabilities" was a netan asset of $1,018$1,522 million and $489$761 million as of September 30, 20192020 and December 31, 2018,2019, respectively. See Note 6 for additional information
(2)Recorded in "Other invested assets" and "Payables to parent and affiliates" on these reinsurance agreements.the Unaudited Interim Statements of Financial Position.
Offsetting Assets and Liabilities
The following table presents recognized derivative instruments (excluding embedded derivatives and associated reinsurance recoverables), and repurchase and reverse repurchase agreements that are offset in the Unaudited Interim Statements of Financial Position, and/or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the Unaudited Interim Statements of Financial Position.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| Gross
Amounts of
Recognized
Financial
Instruments | | Gross
Amounts
Offset in the
Statements of
Financial
Position | | Net Amounts
Presented in
the Statements
of Financial
Position | | Financial
Instruments/
Collateral(1) | | Net
Amount |
| (in thousands) |
| Offsetting of Financial Assets: | | | | | | | | | |
| Derivatives(1) | $ | 42,049 | | | $ | (15,902) | | | $ | 26,147 | | | $ | (26,147) | | | $ | 0 | |
| Securities purchased under agreements to resell | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total Assets | $ | 42,049 | | | $ | (15,902) | | | $ | 26,147 | | | $ | (26,147) | | | $ | 0 | |
| Offsetting of Financial Liabilities: | | | | | | | | | |
| Derivatives(1) | $ | 15,894 | | | $ | (15,894) | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Securities sold under agreements to repurchase | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total Liabilities | $ | 15,894 | | | $ | (15,894) | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 |
| | Gross Amounts of Recognized Financial Instruments | | Gross Amounts Offset in the Statements of Financial Position | | Net Amounts Presented in the Statements of Financial Position | | Financial Instruments/ Collateral(1) | | Net Amount |
| | (in thousands) |
| Offsetting of Financial Assets: | | | | | | | | | |
| Derivatives(1) | $ | 31,674 |
| | $ | (5,449 | ) | | $ | 26,225 |
| | $ | (25,686 | ) | | $ | 539 |
|
| Securities purchased under agreements to resell | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Total Assets | $ | 31,674 |
| | $ | (5,449 | ) | | $ | 26,225 |
| | $ | (25,686 | ) | | $ | 539 |
|
| Offsetting of Financial Liabilities: | | | | | | | | | |
| Derivatives(1) | $ | 5,564 |
| | $ | (5,564 | ) | | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| Securities sold under agreements to repurchase | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Total Liabilities | $ | 5,564 |
| | $ | (5,564 | ) | | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Gross
Amounts of
Recognized
Financial
Instruments | | Gross
Amounts
Offset in the
Statements of
Financial
Position | | Net Amounts
Presented in
the Statements
of Financial
Position | | Financial
Instruments/
Collateral(1) | | Net
Amount |
| (in thousands) |
| Offsetting of Financial Assets: | | | | | | | | | |
| Derivatives(1) | $ | 34,413 | | | $ | (13,029) | | | $ | 21,384 | | | $ | (21,384) | | | $ | 0 | |
| Securities purchased under agreements to resell | 0 | | 0 | | | 0 | | | 0 | | | 0 | |
| Total Assets | $ | 34,413 | | | $ | (13,029) | | | $ | 21,384 | | | $ | (21,384) | | | $ | 0 | |
| Offsetting of Financial Liabilities: | | | | | | | | | |
| Derivatives(1) | $ | 13,043 | | | $ | (13,043) | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Securities sold under agreements to repurchase | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total Liabilities | $ | 13,043 | | | $ | (13,043) | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Gross Amounts of Recognized Financial Instruments | | Gross Amounts Offset in the Statements of Financial Position | | Net Amounts Presented in the Statements of Financial Position | | Financial Instruments/ Collateral(1) | | Net Amount |
| | (in thousands) |
| Offsetting of Financial Assets: | | | | | | | | | |
| Derivatives(1) | $ | 11,148 |
| | $ | (3,355 | ) | | $ | 7,793 |
| | $ | (7,307 | ) | | $ | 486 |
|
| Securities purchased under agreements to resell | 10,000 |
| | 0 |
| | 10,000 |
| | (10,000 | ) | | 0 |
|
| Total Assets | $ | 21,148 |
| | $ | (3,355 | ) | | $ | 17,793 |
| | $ | (17,307 | ) | | $ | 486 |
|
| Offsetting of Financial Liabilities: | | | | | | | | | |
| Derivatives(1) | $ | 3,140 |
| | $ | (3,140 | ) | | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| Securities sold under agreements to repurchase | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Total Liabilities | $ | 3,140 |
| | $ | (3,140 | ) | | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| |
(1) | Amounts exclude the excess of collateral received/pledged from/to the counterparty. |
(1) |
|
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
Amounts exclude the excess of collateral received/pledged from/to the counterparty.
For information regarding the rights of offset associated with the derivative assets and liabilities in the table above see “Credit Risk” below and Note 9. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company’s accounting policy for securities repurchase and resale agreements, see Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
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 embeddedequity derivatives in any of its cash flow hedge accounting relationships.
The following tables provide the financial statement classification and impact of derivatives used in qualifying and non-qualifying hedge relationships, excluding the offset of the hedged item in an effective hedge relationship.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| 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 | $ | (92) | | | $ | 470 | | | $ | (763) | | | $ | (6,962) | |
| Total cash flow hedges | (92) | | | 470 | | | (763) | | | (6,962) | |
| Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | |
| Interest Rate | (31) | | | 0 | | | 0 | | | 0 | |
| Currency | (96) | | | 0 | | | 0 | | | 0 | |
| Currency/Interest Rate | (1,733) | | | 0 | | | (16) | | | 0 | |
| Credit | (1) | | | 0 | | | 0 | | | 0 | |
| Equity | 4,281 | | | 0 | | | 0 | | | 0 | |
| Embedded Derivatives | 65 | | | 0 | | | 0 | | | 0 | |
| Total Derivatives Not Qualifying as Hedge Accounting Instruments: | 2,485 | | | 0 | | | (16) | | | 0 | |
| Total | $ | 2,393 | | | $ | 470 | | | $ | (779) | | | $ | (6,962) | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 |
| | 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 | $ | 597 |
|
| $ | 432 |
|
| $ | 376 |
| | $ | 4,525 |
|
| Total cash flow hedges | 597 |
|
| 432 |
|
| 376 |
| | 4,525 |
|
| Derivatives Not Qualifying as Hedge Accounting Instruments: |
|
|
|
|
| |
|
| Interest Rate | 432 |
|
| 0 |
|
| 0 |
| | 0 |
|
| Currency | 83 |
|
| 0 |
|
| 0 |
| | 0 |
|
| Currency/Interest Rate | 1,215 |
|
| 0 |
|
| 7 |
| | 0 |
|
| Credit | 0 |
|
| 0 |
|
| 0 |
| | 0 |
|
| Equity | 604 |
|
| 0 |
|
| 0 |
| | 0 |
|
| Embedded Derivatives | 2,122 |
|
| 0 |
|
| 0 |
| | 0 |
|
| Total Derivatives Not Qualifying as Hedge Accounting Instruments: | 4,456 |
|
| 0 |
|
| 7 |
| | 0 |
|
| Total | $ | 5,053 |
|
| $ | 432 |
|
| $ | 383 |
| | $ | 4,525 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| 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 | $ | (65) | | | $ | 1,436 | | | $ | (82) | | | $ | 3,441 | |
| Total cash flow hedges | (65) | | | 1,436 | | | (82) | | | 3,441 | |
| Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | |
| Interest Rate | 2,063 | | | 0 | | | 0 | | | 0 | |
| Currency | (65) | | | 0 | | | 0 | | | 0 | |
| Currency/Interest Rate | 1,830 | | | 0 | | | 4 | | | 0 | |
| Credit | (71) | | | 0 | | | 0 | | | 0 | |
| Equity | (376) | | | 0 | | | 0 | | | 0 | |
| Embedded Derivatives | 5,455 | | | 0 | | | 0 | | | 0 | |
| Total Derivatives Not Qualifying as Hedge Accounting Instruments: | 8,836 | | | 0 | | | 4 | | | 0 | |
| Total | $ | 8,771 | | | $ | 1,436 | | | $ | (78) | | | $ | 3,441 | |
| | |
|
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| 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 | $ | 597 | | | $ | 432 | | | $ | 376 | | | $ | 4,525 | |
| Total cash flow hedges | 597 | | | 432 | | | 376 | | | 4,525 | |
| Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | |
| Interest Rate | 432 | | | 0 | | | 0 | | | 0 | |
| Currency | 83 | | | 0 | | | 0 | | | 0 | |
| Currency/Interest Rate | 1,215 | | | 0 | | | 7 | | | 0 | |
| Credit | 0 | | | 0 | | | 0 | | | 0 | |
| Equity | 604 | | | 0 | | | 0 | | | 0 | |
| Embedded Derivatives | 2,122 | | | 0 | | | 0 | | | 0 | |
| Total Derivatives Not Qualifying as Hedge Accounting Instruments: | 4,456 | | | 0 | | | 7 | | | 0 | |
| Total | $ | 5,053 | | | $ | 432 | | | $ | 383 | | | $ | 4,525 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| 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 | $ | 587 | | | $ | 1,241 | | | $ | 402 | | | $ | 5,851 | |
| Total cash flow hedges | 587 | | | 1,241 | | | 402 | | | 5,851 | |
| Derivatives Not Qualifying as Hedge Accounting Instruments: | | | | | | | |
| Interest Rate | 1,791 | | | 0 | | | 0 | | | 0 | |
| Currency | 97 | | | 0 | | | 0 | | | 0 | |
| Currency/Interest Rate | 1,817 | | | 0 | | | 8 | | | 0 | |
| Credit | (1) | | | 0 | | | 0 | | | 0 | |
| Equity | 6,583 | | | 0 | | | 0 | | | 0 | |
| Embedded Derivatives | (13,554) | | | 0 | | | 0 | | | 0 | |
| Total Derivatives Not Qualifying as Hedge Accounting Instruments: | (3,267) | | | 0 | | | 8 | | | 0 | |
| Total | $ | (2,680) | | | $ | 1,241 | | | $ | 410 | | | $ | 5,851 | |
(1)Net change in AOCI.
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
| | 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 | $ | 587 |
|
| $ | 1,241 |
|
| $ | 402 |
| | $ | 5,851 |
|
| Total cash flow hedges | 587 |
|
| 1,241 |
|
| 402 |
| | 5,851 |
|
| Derivatives Not Qualifying as Hedge Accounting Instruments: |
|
|
|
|
| | |
| Interest Rate | 1,791 |
|
| 0 |
|
| 0 |
| | 0 |
|
| Currency | 97 |
|
| 0 |
|
| 0 |
| | 0 |
|
| Currency/Interest Rate | 1,817 |
|
| 0 |
|
| 8 |
| | 0 |
|
| Credit | (1 | ) |
| 0 |
|
| 0 |
| | 0 |
|
| Equity | 6,583 |
|
| 0 |
|
| 0 |
| | 0 |
|
| Embedded Derivatives | (13,554 | ) |
| 0 |
|
| 0 |
| | 0 |
|
| Total Derivatives Not Qualifying as Hedge Accounting Instruments: | (3,267 | ) |
| 0 |
|
| 8 |
| | 0 |
|
| Total | $ | (2,680 | ) |
| $ | 1,241 |
|
| $ | 410 |
| | $ | 5,851 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2018(2) |
| | 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 | $ | 60 |
|
| $ | 347 |
|
| $ | 147 |
| | $ | 395 |
|
| Total cash flow hedges | 60 |
|
| 347 |
|
| 147 |
| | 395 |
|
| Derivatives Not Qualifying as Hedge Accounting Instruments: |
|
|
|
|
| |
|
| Interest Rate | (282 | ) |
| 0 |
|
| 0 |
| | 0 |
|
| Currency | 13 |
|
| 0 |
|
| 0 |
| | 0 |
|
| Currency/Interest Rate | 125 |
|
| 0 |
|
| 3 |
| | 0 |
|
| Credit | 0 |
|
| 0 |
|
| 0 |
| | 0 |
|
| Equity | 2,615 |
|
| 0 |
|
| 0 |
| | 0 |
|
| Embedded Derivatives | (5,566 | ) |
| 0 |
|
| 0 |
| | 0 |
|
| Total Derivatives Not Qualifying as Hedge Accounting Instruments: | (3,095 | ) |
| 0 |
|
| 3 |
| | 0 |
|
| Total | $ | (3,035 | ) |
| $ | 347 |
|
| $ | 150 |
| | $ | 395 |
|
| | |
|
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018(2) |
| | 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 | $ | (437 | ) |
| $ | 993 |
|
| $ | 389 |
| | $ | 2,000 |
|
| Total cash flow hedges | (437 | ) |
| 993 |
|
| 389 |
| | 2,000 |
|
| Derivatives Not Qualifying as Hedge Accounting Instruments: |
|
|
|
|
| |
|
| Interest Rate | (1,420 | ) |
| 0 |
|
| 0 |
| | 0 |
|
| Currency | 65 |
|
| 0 |
|
| 0 |
| | 0 |
|
| Currency/Interest Rate | 786 |
|
| 0 |
|
| 7 |
| | 0 |
|
| Credit | (2 | ) |
| 0 |
|
| 0 |
| | 0 |
|
| Equity | 2,958 |
|
| 0 |
|
| 0 |
| | 0 |
|
| Embedded Derivatives | (10,676 | ) |
| 0 |
|
| 0 |
| | 0 |
|
| Total Derivatives Not Qualifying as Hedge Accounting Instruments: | (8,289 | ) |
| 0 |
|
| 7 |
| | 0 |
|
| Total | $ | (8,726 | ) |
| $ | 993 |
|
| $ | 396 |
| | $ | 2,000 |
|
| |
(2) | Prior period amounts have been updated to conform to current period presentation. |
Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:
|
| | | |
| | (in thousands) |
| Balance, December 31, 2018 | $ | 1,793 |
|
| Cumulative-effect adjustment from the adoption of ASU 2017-12(1) | 9 |
|
| Amount recorded in AOCI | |
| Currency/Interest Rate | 8,081 |
|
| Total amount recorded in AOCI | 8,081 |
|
| Amount reclassified from AOCI to income | |
| Currency/Interest Rate | (2,230 | ) |
| Total amount reclassified from AOCI to income | (2,230 | ) |
| Balance, September 30, 2019 | $ | 7,653 |
|
| | | | | |
| (in thousands) |
| Balance, December 31, 2019 | $ | 3,193 | |
| Amount recorded in AOCI | |
| |
(1) | See Note 2 for details. |
| Currency/Interest Rate | 4,730 | |
| Total amount recorded in AOCI | 4,730 | |
| Amount reclassified from AOCI to income | |
| |
| |
| Currency/Interest Rate | (1,289) | |
| Total amount reclassified from AOCI to income | (1,289) | |
| Balance, September 30, 2020 | $ | 6,634 | |
The changes in fair value of cash flow hedges are deferred in AOCI and are included in "Net unrealized investment gains (losses)" in the Unaudited Interim Statements of Operations and Comprehensive Income (Loss); these amounts are then reclassified to earnings when the hedged item affects earnings. Using September 30, 20192020 values, it is estimated that a pre-tax gain of $1.8$1.6 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending September 30, 2020, offset by amounts pertaining to the hedged items.2021.
The exposures the Company is hedging with these qualifying cash flow hedges include the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments.
There were no material amounts reclassified from AOCI into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging.
|
|
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
Credit Derivatives
The Company has no exposure from credit derivative positions where it has written credit protection as of September 30, 20192020 and December 31, 2018.
The Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. The Company has outstanding notional amounts of $0$0.7 million and $1$0 million reported as of September 30, 20192020 and December 31, 2018,2019, respectively with a fair value of $0 million for both periods.
Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by a 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 over-the-counter ("OTC") derivatives. PGF, in turn, manages its credit risk by: (i) entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties governed by master netting agreement, as applicable; (ii) trading through central clearing and OTC parties; (iii) obtaining collateral, such as cash and securities, when appropriate; and (iv) setting limits on single-party credit exposures which are subject to periodic management review.
Substantially all of the Company’s derivative agreements have zero thresholds which require daily full collateralization by the party in a liability position.
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:
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities.
Level 2 - Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, and other market observable inputs.
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.
For a discussion of the Company's valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 5 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
|
|
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim 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 September 30, 2019 |
| | Level 1 | | Level 2 | | Level 3 | | Netting(1) | | Total |
| | (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 0 |
| | $ | 16,218 |
| | $ | 0 |
| | $ | 0 |
| | $ | 16,218 |
|
| Obligations of U.S. states and their political subdivisions | 0 |
| | 131,035 |
| | 0 |
| | 0 |
| | 131,035 |
|
| Foreign government bonds | 0 |
| | 77,561 |
| | 0 |
| | 0 |
| | 77,561 |
|
| U.S. corporate public securities | 0 |
| | 632,509 |
| | 0 |
| | 0 |
| | 632,509 |
|
| U.S. corporate private securities | 0 |
| | 246,729 |
| | 374 |
| | 0 |
| | 247,103 |
|
| Foreign corporate public securities | 0 |
| | 56,747 |
| | 0 |
| | 0 |
| | 56,747 |
|
| Foreign corporate private securities | 0 |
| | 156,039 |
| | 824 |
| | 0 |
| | 156,863 |
|
| Asset-backed securities(2) | 0 |
| | 18,733 |
| | 0 |
| | 0 |
| | 18,733 |
|
| Commercial mortgage-backed securities | 0 |
| | 158,456 |
| | 0 |
| | 0 |
| | 158,456 |
|
| Residential mortgage-backed securities | 0 |
| | 4,821 |
| | 0 |
| | 0 |
| | 4,821 |
|
| Subtotal | 0 |
| | 1,498,848 |
| | 1,198 |
| | 0 |
| | 1,500,046 |
|
| Fixed maturities, trading | 0 |
| | 12,970 |
| | 0 |
| | 0 |
| | 12,970 |
|
| Equity securities | 0 |
| | 255 |
| | 7,133 |
| | 0 |
| | 7,388 |
|
| Cash equivalents | 0 |
| | 28,842 |
| | 0 |
| | 0 |
| | 28,842 |
|
| Other invested assets(3) | 0 |
| | 31,674 |
| | 0 |
| | (5,449 | ) | | 26,225 |
|
| Reinsurance recoverables | 0 |
| | 0 |
| | 1,018,293 |
| | 0 |
| | 1,018,293 |
|
| Receivables from parent and affiliates | 0 |
| | 2,582 |
| | 0 |
| | 0 |
| | 2,582 |
|
| Subtotal excluding separate account assets | 0 |
| | 1,575,171 |
| | 1,026,624 |
| | (5,449 | ) | | 2,596,346 |
|
| Separate account assets(4)(5) | 0 |
| | 13,354,869 |
| | 0 |
| | 0 |
| | 13,354,869 |
|
| Total assets | $ | 0 |
| | $ | 14,930,040 |
| | $ | 1,026,624 |
| | $ | (5,449 | ) | | $ | 15,951,215 |
|
| Future policy benefits(6) | $ | 0 |
| | $ | 0 |
| | $ | 1,018,293 |
| | $ | 0 |
| | $ | 1,018,293 |
|
| Policyholders' account balances | 0 |
| | 0 |
| | 123,088 |
| | 0 |
| | 123,088 |
|
| Payables to parent and affiliates | 0 |
| | 5,564 |
| | 0 |
| | (5,564 | ) | | 0 |
|
| Total liabilities | $ | 0 |
| | $ | 5,564 |
| | $ | 1,141,381 |
| | $ | (5,564 | ) | | $ | 1,141,381 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Netting(1) | | Total |
| (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 0 | | | $ | 11,838 | | | $ | 0 | | | $ | 0 | | | $ | 11,838 | |
| Obligations of U.S. states and their political subdivisions | 0 | | | 180,917 | | | 0 | | | 0 | | | 180,917 | |
| Foreign government bonds | 0 | | | 86,316 | | | 0 | | | 0 | | | 86,316 | |
| U.S. corporate public securities | 0 | | | 875,116 | | | 0 | | | 0 | | | 875,116 | |
| U.S. corporate private securities | 0 | | | 242,181 | | | 413 | | | 0 | | | 242,594 | |
| Foreign corporate public securities | 0 | | | 68,659 | | | 0 | | | 0 | | | 68,659 | |
| Foreign corporate private securities | 0 | | | 143,672 | | | 20,715 | | | 0 | | | 164,387 | |
| Asset-backed securities(2) | 0 | | | 18,612 | | | 0 | | | 0 | | | 18,612 | |
| Commercial mortgage-backed securities | 0 | | | 156,055 | | | 0 | | | 0 | | | 156,055 | |
| Residential mortgage-backed securities | 0 | | | 4,052 | | | 0 | | | 0 | | | 4,052 | |
| Subtotal | 0 | | | 1,787,418 | | | 21,128 | | | 0 | | | 1,808,546 | |
| Fixed maturities, trading | 0 | | | 17,857 | | | 0 | | | 0 | | | 17,857 | |
| Equity securities | 0 | | | 126 | | | 8,312 | | | 0 | | | 8,438 | |
| | | | | | | | | |
| Cash equivalents | 0 | | | 61,000 | | | 0 | | | 0 | | | 61,000 | |
| Other invested assets(3) | 0 | | | 42,049 | | | 0 | | | (15,902) | | | 26,147 | |
| Reinsurance recoverables | 0 | | | 0 | | | 1,521,833 | | | 0 | | | 1,521,833 | |
| Receivables from parent and affiliates | 0 | | | 808 | | | 0 | | | 0 | | | 808 | |
| Subtotal excluding separate account assets | 0 | | | 1,909,258 | | | 1,551,273 | | | (15,902) | | | 3,444,629 | |
| Separate account assets(4)(5) | 0 | | | 13,926,414 | | | 0 | | | 0 | | | 13,926,414 | |
| Total assets | $ | 0 | | | $ | 15,835,672 | | | $ | 1,551,273 | | | $ | (15,902) | | | $ | 17,371,043 | |
| Future policy benefits(6) | $ | 0 | | | $ | 0 | | | $ | 1,521,833 | | | $ | 0 | | | $ | 1,521,833 | |
| Policyholders' account balances | 0 | | | 0 | | | 145,272 | | | 0 | | | 145,272 | |
| Payables to parent and affiliates | 0 | | | 15,894 | | | 0 | | | (15,894) | | | 0 | |
| Total liabilities | $ | 0 | | | $ | 15,894 | | | $ | 1,667,105 | | | $ | (15,894) | | | $ | 1,667,105 | |
| | |
|
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2019 |
| Level 1 | | Level 2 | | Level 3 | | Netting(1) | | Total |
| (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | 0 | | | $ | 16,015 | | | $ | 0 | | | $ | 0 | | | $ | 16,015 | |
| Obligations of U.S. states and their political subdivisions | 0 | | | 133,677 | | | 0 | | | 0 | | | 133,677 | |
| Foreign government bonds | 0 | | | 77,280 | | | 0 | | | 0 | | | 77,280 | |
| U.S. corporate public securities | 0 | | | 697,520 | | | 0 | | | 0 | | | 697,520 | |
| U.S. corporate private securities | 0 | | | 232,903 | | | 312 | | | 0 | | | 233,215 | |
| Foreign corporate public securities | 0 | | | 57,993 | | | 0 | | | 0 | | | 57,993 | |
| Foreign corporate private securities | 0 | | | 163,026 | | | 866 | | | 0 | | | 163,892 | |
| Asset-backed securities(2) | 0 | | | 18,542 | | | 0 | | | 0 | | | 18,542 | |
| Commercial mortgage-backed securities | 0 | | | 147,389 | | | 0 | | | 0 | | | 147,389 | |
| Residential mortgage-backed securities | 0 | | | 4,573 | | | 0 | | | 0 | | | 4,573 | |
| Subtotal | 0 | | | 1,548,918 | | | 1,178 | | | 0 | | | 1,550,096 | |
| Fixed maturities, trading | 0 | | | 13,700 | | | 0 | | | 0 | | | 13,700 | |
| Equity securities | 0 | | | 207 | | | 7,305 | | | 0 | | | 7,512 | |
| | | | | | | | | |
| Cash equivalents | 0 | | | 55,896 | | | 0 | | | 0 | | | 55,896 | |
| Other invested assets(3) | 0 | | | 34,413 | | | 0 | | | (13,029) | | | 21,384 | |
| Reinsurance recoverables | 0 | | | 0 | | | 760,558 | | | 0 | | | 760,558 | |
| Receivables from parent and affiliates | 0 | | | 2,433 | | | 0 | | | 0 | | | 2,433 | |
| Subtotal excluding separate account assets | 0 | | | 1,655,567 | | | 769,041 | | | (13,029) | | | 2,411,579 | |
| Separate account assets(4)(5) | 0 | | | 13,927,275 | | | 0 | | | 0 | | | 13,927,275 | |
| Total assets | $ | 0 | | | $ | 15,582,842 | | | $ | 769,041 | | | $ | (13,029) | | | $ | 16,338,854 | |
| Future policy benefits(6) | $ | 0 | | | $ | 0 | | | $ | 760,558 | | | $ | 0 | | | $ | 760,558 | |
| Policyholders' account balances | 0 | | | 0 | | | 133,793 | | | 0 | | | 133,793 | |
| Payables to parent and affiliates | 0 | | | 13,043 | | | 0 | | | (13,043) | | | 0 | |
| Total liabilities | $ | 0 | | | $ | 13,043 | | | $ | 894,351 | | | $ | (13,043) | | | $ | 894,351 | |
(1)“Netting” amounts represent cash collateral of $0.0 million as of both September 30, 2020 and December 31, 2019.
(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. As of September 30, 2020 and December 31, 2019, the fair values of such investments were $3.0 million and $3.3 million, respectively.
(4)Separate account assets included in the fair value hierarchy exclude investments in entities that calculate NAV per share (or its equivalent) as a practical expedient. Such investments excluded from the fair value hierarchy include investments in real estate, hedge funds and a corporate owned life insurance fund, for which fair value is measured at NAV per share (or its equivalent). At September 30, 2020 and December 31, 2019, the fair value of such investments was $1,961 million and $1,977 million, respectively.
(5)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 Unaudited Interim Statements of Financial Position.
(6)As of September 30, 2020, the net embedded derivative liability position of $1,522 million includes $31 million of embedded derivatives in an asset position and $1,553 million of embedded derivatives in a liability position. As of December 31, 2019, the net embedded derivative liability position of $761 million includes $60 million of embedded derivatives in an asset position and $821 million of embedded derivatives in a liability position.
|
| | | | | | | | | | | | | | | | | | | |
| | 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 |
| | $ | 16,328 |
| | $ | 0 |
| | $ | 0 |
| | $ | 16,328 |
|
| Obligations of U.S. states and their political subdivisions | 0 |
| | 122,306 |
| | 0 |
| | 0 |
| | 122,306 |
|
| Foreign government bonds | 0 |
| | 65,294 |
| | 0 |
| | 0 |
| | 65,294 |
|
| U.S. corporate public securities | 0 |
| | 480,725 |
| | 0 |
| | 0 |
| | 480,725 |
|
| U.S. corporate private securities | 0 |
| | 224,278 |
| | 2,088 |
| | 0 |
| | 226,366 |
|
| Foreign corporate public securities | 0 |
| | 48,215 |
| | 0 |
| | 0 |
| | 48,215 |
|
| Foreign corporate private securities | 0 |
| | 143,969 |
| | 794 |
| | 0 |
| | 144,763 |
|
| Asset-backed securities(2) | 0 |
| | 23,351 |
| | 0 |
| | 0 |
| | 23,351 |
|
| Commercial mortgage-backed securities | 0 |
| | 145,206 |
| | 0 |
| | 0 |
| | 145,206 |
|
| Residential mortgage-backed securities | 0 |
| | 5,270 |
| | 0 |
| | 0 |
| | 5,270 |
|
| Subtotal | 0 |
| | 1,274,942 |
| | 2,882 |
| | 0 |
| | 1,277,824 |
|
| Fixed maturities, trading | 0 |
| | 5,770 |
| | 0 |
| | 0 |
| | 5,770 |
|
| Equity securities | 0 |
| | 3,248 |
| | 6,622 |
| | 0 |
| | 9,870 |
|
| Cash equivalents | 19,972 |
| | 39,946 |
| | 0 |
| | 0 |
| | 59,918 |
|
| Other invested assets(3) | 0 |
| | 11,148 |
| | 0 |
| | (3,355 | ) | | 7,793 |
|
| Reinsurance recoverables | 0 |
| | 0 |
| | 488,825 |
| | 0 |
| | 488,825 |
|
| Receivables from parent and affiliates | 0 |
| | 8,824 |
| | 0 |
| | 0 |
| | 8,824 |
|
| Subtotal excluding separate account assets | 19,972 |
| | 1,343,878 |
| | 498,329 |
| | (3,355 | ) | | 1,858,824 |
|
| Separate account assets(4)(5) | 0 |
| | 11,648,322 |
| | 0 |
| | 0 |
| | 11,648,322 |
|
| Total assets | $ | 19,972 |
| | $ | 12,992,200 |
| | $ | 498,329 |
| | $ | (3,355 | ) | | $ | 13,507,146 |
|
| Future policy benefits(6) | $ | 0 |
| | $ | 0 |
| | $ | 488,825 |
| | $ | 0 |
| | $ | 488,825 |
|
| Policyholders' account balances | 0 |
| | 0 |
| | 1,949 |
| | 0 |
| | 1,949 |
|
| Payables to parent and affiliates | 0 |
| | 3,140 |
| | 0 |
| | (3,140 | ) | | 0 |
|
| Total liabilities | $ | 0 |
| | $ | 3,140 |
| | $ | 490,774 |
| | $ | (3,140 | ) | | $ | 490,774 |
|
Table of Contents | | |
(1) | “Netting” amounts represent cash collateral of $0.1 million and $0.2 million as of September 30, 2019 and December 31, 2018, respectively. |
| |
(2) | Includes credit-tranched securities collateralized by syndicated bank loans, sub-prime mortgages, auto loans, credit cards, education loans and other asset types. |
| |
(3) | Other invested assets excluded from the fair value hierarchy include certain hedge funds, private equity funds and other funds for which fair value is measured at net asset value ("NAV") per share (or its equivalent) as a practical expedient. As of September 30, 2019 and December 31, 2018, the fair values of such investments were $3.5 million and $2.9 million, respectively. |
| |
(4) | Separate account assets included in the fair value hierarchy exclude investments in entities that calculate NAV per share (or its equivalent) as a practical expedient. Such investments excluded from the fair value hierarchy include investments in real estate, hedge funds and a corporate owned life insurance fund, for which fair value is measured at NAV per share (or its equivalent). At September 30, 2019 and December 31, 2018, the fair value of such investments was $1,927 million and $1,734 million, respectively. |
| |
(5) | 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 Unaudited Interim Statements of Financial Position. |
| |
(6) | As of September 30, 2019, the net embedded derivative liability position of $1,018 million includes $42 million of embedded derivatives in an asset position and $1,060 million of embedded derivatives in a liability position. As of December 31, 2018, the net embedded derivative liability position of $489 million includes $60 million of embedded derivatives in an asset position and $549 million of embedded derivatives in a liability position. |
|
|
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
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 September 30, 2020 |
| Fair Value | | Valuation
Techniques | | Unobservable
Inputs | | Minimum | | Maximum | | Weighted
Average | | Impact of Increase in Input on Fair
Value(1) |
| (in thousands) | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | |
| Corporate securities(2) | $ | 21,128 | | | Discounted cash flow | | Discount rate | | 2.36 | % | | | 2.54 | % | | | 2.47 | % | | | Decrease |
| Reinsurance recoverables | $ | 1,521,833 | | | Fair values are determined using the same unobservable inputs as future policy benefits. |
| Liabilities: | | | | | | | | | | | | | | | | |
| Future policy benefits(3) | $ | 1,521,833 | | | Discounted cash flow | | Lapse rate(5) | | 1 | % | | | 20 | % | | | | | | Decrease |
| | | | | Spread over LIBOR(6) | | 0.09 | % | | | 1.59 | % | | | | | | Decrease |
| | | | | Utilization rate(7) | | 39 | % | | | 96 | % | | | | | | Increase |
| | | | | Withdrawal rate | | | | | | See table footnote (8) below. |
| | | | | Mortality rate (9) | | 0 | % | | | 15 | % | | | | | | Decrease |
| | | | | Equity volatility curve | | 18 | % | | | 26 | % | | | | | | Increase |
| Policyholders' account balances(4) | $ | 145,272 | | | Discounted cash flow | | Lapse rate(5) | | 1 | % | | | 6 | % | | | | | | Decrease |
| | | | | Spread over LIBOR(6) | | 0.09 | % | | | 1.59 | % | | | | | | Decrease |
| | | | | | | | | | | | | | | | |
| | | | | Mortality rate (9) | | 0 | % | | | 24 | % | | | | | | Decrease |
| | | | | Equity volatility curve | | 19 | % | | | 35 | % | | | | | | Increase |
|
| | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2019 |
| | Fair Value | | Valuation Techniques | | Unobservable Inputs | | Minimum | | Maximum | | Weighted Average | | Impact of Increase in Input on Fair Value(1) |
| | (in thousands) | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | |
| Corporate securities(2) | $ | 1,198 |
| | Discounted cash flow | | Discount rate | | 16.59 | % |
| | 16.59 | % |
| | 16.59 | % |
| | Decrease |
| Reinsurance recoverables | $ | 1,018,293 |
| | Fair values are determined using the same unobservable inputs as future policy benefits.
|
| Liabilities: | | | | | | | | | | | | | | | | |
| Future policy benefits(3) | $ | 1,018,293 |
| | Discounted cash flow | | Lapse rate(5) | | 1 | % | | | 18 | % | | | | | | Decrease |
| | | | | | Spread over LIBOR(6) | | 0.16 | % | | | 1.46 | % | | | | | | Decrease |
| | | | | | Utilization rate(7) | | 43 | % | | | 97 | % | | | | | | Increase |
| | | | | | Withdrawal rate | | | | | | See table footnote (8) below. |
| | | | | | Mortality rate (9) | | 0 | % | | | 15 | % | | | | | | Decrease |
| | | | | | Equity volatility curve | | 14 | % | | | 23 | % | | | | | | Increase |
| Policyholders' account balances(4) | $ | 123,088 |
| | Discounted cash flow | | Lapse rate(5) | | 1 | % | | | 6 | % | | | | | | Decrease |
| | | | | | Spread over LIBOR(6) | | 0.16 | % | | | 1.46 | % | | | | | | Decrease |
| | | | | | Mortality rate (9) | | 0 | % | | | 24 | % | | | | | | Decrease |
| | | | | | Equity volatility curve | | 11 | % | | | 24 | % | | | | | | Increase |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2019 |
| Fair Value | | Valuation
Techniques | | Unobservable Inputs | | Minimum | | Maximum | | Weighted
Average | | Impact of Increase
in Input on Fair
Value(1) |
| (in thousands) | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Reinsurance recoverables | $ | 760,558 | | | Fair values are determined using the same unobservable inputs as future policy benefits. |
| Liabilities: | | | | | | | | | | | | | | | | |
| Future policy benefits(3) | $ | 760,558 | | | Discounted cash flow | | Lapse rate(5) | | 1 | % | | | 18 | % | | | | | | Decrease |
| | | | | Spread over LIBOR(6) | | 0.10 | % | | | 1.23 | % | | | | | | Decrease |
| | | | | Utilization rate(7) | | 43 | % | | | 97 | % | | | | | | Increase |
| | | | | Withdrawal rate | | See table footnote(8) below. |
| | | | | Mortality rate(9) | | 0 | % | | | 15 | % | | | | | | Decrease |
| | | | | Equity volatility curve | | 13 | % | | | 23 | % | | | | | | Increase |
| Policyholders' account balances(4) | $ | 133,793 | | | Discounted cash flow | | Lapse rate(5) | | 1 | % | | | 6 | % | | | | | | Decrease |
| | | | | Spread over LIBOR(6) | | 0.10 | % | | | 1.23 | % | | | | | | Decrease |
| | | | | Mortality rate (9) | | 0 | % | | | 24 | % | | | | | | Decrease |
| | | | | Equity volatility curve | | 10 | % | | | 23 | % | | | | | | Increase |
|
| | | | | | | | | | | | | | | | | | | | | |
| | 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) | $ | 2,882 |
| | Discounted cash flow | | Discount rate | | 7 | % | | | 16.33 | % | | | 9.93 | % | | | Decrease |
| Reinsurance recoverables | $ | 488,825 |
| | Fair values are determined using the same unobservable inputs as future policy benefits.
|
| Liabilities: | | | | | | | | | | | | | | | | |
| Future policy benefits(3) | $ | 488,825 |
| | 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 |
| | |
|
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
(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)Future policy benefits primarily represent general account liabilities for the living benefit features of the Company’s variable annuity contracts which are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than a weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.
(4)Policyholders’ account balances primarily represent general account liabilities for the index-linked interest credited on certain of the Company’s life products that are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than a weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.
(5)Lapse rates for contracts with living benefit guarantees are adjusted at the contract level based on the in-the-moneyness of the living benefit and reflect other factors, such as the applicability of any surrender charges. Lapse rates are reduced when contracts are more in-the-money. Lapse rates for contracts with index-linked crediting guarantees may be adjusted at the contract level based on the applicability of any surrender charges, product type, and market related factors such as interest rates. Lapse rates are also generally assumed to be lower for the period where surrender charges apply. For any given contract, lapse rates vary throughout the period over which cash flows are projected for the purposes of valuing these embedded derivatives.
(6)The spread over the London Inter-Bank Offered Rate ("LIBOR") swap curve represents the premium added to the proxy for the risk-free rate (LIBOR) to reflect the Company's estimates of rates that a market participant would use to value the living benefits in both the accumulation and payout phases and index-linked interest crediting guarantees. This spread includes an estimate of NPR, which is the risk that the obligation will not be fulfilled by the Company. NPR is primarily estimated by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium. In order to reflect the financial strength ratings of the Company, credit spreads associated with funding agreements, as opposed to credit spread associated with debt, are utilized in developing this estimate because funding agreements, living benefit guarantees, and index-linked interest crediting guarantees are insurance liabilities and are therefore senior to debt.
(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 September 30, 2020 and December 31, 2019, the minimum withdrawal rate assumption is 76% and 78% respectively. As of September 30, 2020 and December 31, 2019, the maximum withdrawal rate assumption may be greater than 100%. The fair value of the liability will generally increase the closer the withdrawal rate is to 100% and decrease as the withdrawal rate moves further away from 100%.
(9)The range reflects the mortality rates for the vast majority of business with living benefits and other contracts, with policyholders ranging from 45 to 90 years old. While the majority of living benefits have a minimum age requirement, certain other contracts do not have an age restriction. This results in contractholders with mortality rates approaching 0% for certain benefits. Mortality rates may vary by product, age and duration. A mortality improvement assumption is also incorporated into the overall mortality table.
| |
(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) | 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. |
| |
(4) | Policyholders’ account balances primarily represent general account liabilities for the index-linked interest credited on certain of the Company’s life products that are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation. |
| |
(5) | Lapse rates for contracts with living benefit guarantees are adjusted at the contract level based on the in-the-moneyness of the living benefit and reflect other factors, such as the applicability of any surrender charges. Lapse rates are reduced when contracts are more in-the-money. Lapse rates for contracts with index-linked crediting guarantees may be adjusted at the contract level based on the applicability of any surrender charges, product type, and market related factors such as interest rates. Lapse rates are also generally assumed to be lower for the period where surrender charges apply. For any given contract, lapse rates vary throughout the period over which cash flows are projected for the purposes of valuing these embedded derivatives. |
| |
(6) | The spread over the London Inter-Bank Offered Rate ("LIBOR") swap curve represents the premium added to the proxy for the risk-free rate (LIBOR) to reflect the Company's estimates of rates that a market participant would use to value the living benefits in both the accumulation and payout phases and index-linked interest crediting guarantees. This spread includes an estimate of NPR, which is the risk that the obligation will not be fulfilled by the Company. NPR is primarily estimated by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium. In order to reflect the financial strength ratings of the Company, credit spreads associated with funding agreements, as opposed to credit spread associated with debt, are utilized in developing this estimate because funding agreements, living benefit guarantees, and index-linked interest crediting guarantees are insurance liabilities and are therefore senior to debt. |
| |
(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 September 30, 2019 and December 31, 2018, 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) | The range reflects the mortality rates for the vast majority of business with living benefits and other contracts, with policyholders ranging from 45 to 90 years old. While the majority of living benefits have a minimum age requirement, certain other contracts do not have an age restriction. This results in contractholders with mortality rates approaching 0% for certain benefits. Mortality rates may vary by product, age and duration. A mortality improvement assumption is also incorporated into the overall mortality table. |
Interrelationships Between Unobservable Inputs – In addition to the sensitivities of fair value measurements to changes in each unobservable input in isolation, as reflected in the table above, interrelationships between these inputs may also exist, such that a change in one unobservable input may give rise to a change in another, or multiple, inputs. For the discussionExamples of the relationships between unobservable inputs as well as market factors that may affect the range of inputs used in the valuation ofsuch interrelationships for significant internally-priced Level 3 assets and liabilities see Note 5are as follows:
Corporate Securities - The rate used to discount future cash flows reflects current risk-free rates plus credit and liquidity spread requirements that market participants would use to value an asset. The discount rate may be influenced by many factors, including market cycles, expectations of default, collateral, term, and asset complexity. Each of these factors can influence discount rates, either in isolation, or in response to other factors. During weaker economic cycles, as the expectations of default increases, credit spreads widen, which results in a decrease in fair value.
Future Policy Benefits – The Company expects efficient benefit utilization and withdrawal rates to generally be correlated with lapse rates. However, behavior is 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 Financial Statements includedextent that increases in equity volatility are correlated with overall declines in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.capital markets, lapse rates may decline as contracts become more in-the-money.
|
|
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
Changes in Level 3 Assets and Liabilities – The following tables describe changes in fair values of Level 3 assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods. When a determination is made to classify assets and liabilities within Level 3, the determination is based on significance of the unobservable inputs in the overall fair value measurement. All transfers are based on changes in the observability of the valuation inputs, including the availability of pricing service information that the Company can validate. All transfersTransfers into Level 3 are generally reported at 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.
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| Fair Value, beginning of period | Total realized and unrealized gains (losses)(1) | Purchases | Sales | Issuances | Settlements | Other | Transfers into Level 3 | Transfers out of Level 3 | Fair Value, end of period | Unrealized gains (losses) for assets still held(2) |
| (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Corporate securities(3) | $ | 20,232 | | $ | 895 | | $ | 0 | | $ | 1 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 21,128 | | $ | 895 | |
| Structured securities(4) | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Other assets: | | | | | | | | | | | |
| | | | | | | | | | | |
| Equity securities | 7,187 | | 1,125 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 8,312 | | 1,125 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Reinsurance recoverables | 1,741,924 | | (247,857) | | 27,766 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 1,521,833 | | (236,111) | |
| | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | |
| Future policy benefits | (1,741,924) | | 247,857 | | 0 | | 0 | | (27,766) | | 0 | | 0 | | 0 | | 0 | | (1,521,833) | | 236,111 | |
| Policyholders' account balances(5) | (143,242) | | (232) | | 0 | | 0 | | (1,798) | | 0 | | 0 | | 0 | | 0 | | (145,272) | | 1,809 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| Total realized and unrealized gains (losses) | | Unrealized gains (losses) for assets still held(2) |
| Realized investment gains (losses), net(1) | Other income (loss) | | Included in other comprehensive income (loss) | Net investment income | | Realized investment gains (losses), net | Other income (loss) | Included in other comprehensive income (loss)(6) | |
| (in thousands) |
| Fixed maturities, available-for-sale | $ | 0 | | $ | 0 | | | $ | 895 | | $ | 0 | | | $ | 0 | | $ | 0 | | $ | 895 | | |
| Other assets: | | | | | | | | | | |
| | | | | | | | | | |
| Equity securities | 0 | | 1,125 | | | 0 | | 0 | | | 0 | | 1,125 | | 0 | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Reinsurance recoverables | (247,857) | | 0 | | | 0 | | 0 | | | (236,111) | | 0 | | 0 | | |
| | | | | | | | | | |
| Liabilities: | | | | | | | | | | |
| Future policy benefits | 247,857 | | 0 | | | 0 | | 0 | | | 236,111 | | 0 | | 0 | | |
| Policyholders' account balances | (232) | | 0 | | | 0 | | 0 | | | 1,809 | | 0 | | 0 | | |
| | | | | | | | | | |
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Fair Value, beginning of period | Total realized and unrealized gains (losses)(1) | Purchases | Sales | Issuances | Settlements | Other | Transfers into Level 3 | Transfers out of Level 3 | Fair Value, end of period | Unrealized gains (losses) for assets still held(2) |
| (in thousands) |
| Fixed maturities, available-for-sale: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Corporate securities(3) | $ | 1,178 | | $ | 1,080 | | $ | 0 | | $ | (860) | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 19,730 | | $ | 0 | | $ | 21,128 | | $ | 1,085 | |
| Structured securities(4) | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Other assets: | | | | | | | | | | | |
| | | | | | | | | | | |
| Equity securities | 7,305 | | 1,007 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 8,312 | | 1,007 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Reinsurance recoverables | 760,558 | | 680,424 | | 80,851 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 1,521,833 | | 697,223 | |
| | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | |
| Future policy benefits | (760,558) | | (680,424) | | 0 | | 0 | | (80,851) | | 0 | | 0 | | 0 | | 0 | | (1,521,833) | | (697,223) | |
| Policyholders' account balances(5) | (133,793) | | 5,017 | | 0 | | 0 | | (16,496) | | 0 | | 0 | | 0 | | 0 | | (145,272) | | 6,849 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Total realized and unrealized gains (losses) | | Unrealized gains (losses) for assets still held(2) |
| Realized investment gains (losses), net(1) | Other income (loss) | | Included in other comprehensive income (loss) | Net investment income | | Realized investment gains (losses), net | Other income (loss) | Included in other comprehensive income (loss)(6) | |
| (in thousands) |
| Fixed maturities, available-for-sale | $ | 32 | | $ | 0 | | | $ | 1,040 | | $ | 8 | | | $ | 0 | | $ | 0 | | $ | 1,085 | | |
| Other assets: | | | | | | | | | | |
| | | | | | | | | | |
| Equity securities | 0 | | 1,007 | | | 0 | | 0 | | | 0 | | 1,007 | | 0 | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Reinsurance recoverables | 680,424 | | 0 | | | 0 | | 0 | | | 697,223 | | 0 | | 0 | | |
| | | | | | | | | | |
| Liabilities: | | | | | | | | | | |
| Future policy benefits | (680,424) | | 0 | | | 0 | | 0 | | | (697,223) | | 0 | | 0 | | |
| Policyholders' account balances | 5,017 | | 0 | | | 0 | | 0 | | | 6,849 | | 0 | | 0 | | |
| | | | | | | | | | |
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Fair Value, beginning of period | Total realized and unrealized gains (losses)(1) | Purchases | Sales | Issuances | Settlements | Other | Transfers into Level 3 | Transfers out of Level 3 | Fair Value, end of period | Unrealized gains (losses) for assets still held(2) |
| (in thousands) | |
| Fixed maturities, available-for-sale: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Corporate securities(3) | $ | 2,035 | | $ | (1,017) | | $ | 180 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 1,198 | | $ | (1,731) | |
| Structured securities(4) | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Other assets: | | | | | | | | | | | |
| | | | | | | | | | | |
| Equity securities | 7,206 | | (73) | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 7,133 | | (72) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Reinsurance recoverables | 757,236 | | 236,174 | | 24,883 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 1,018,293 | | 244,163 | |
| | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | |
| Future policy benefits | (757,236) | | (236,174) | | 0 | | 0 | | (24,883) | | 0 | | 0 | | 0 | | 0 | | (1,018,293) | | (244,163) | |
| Policyholders' account balances(5) | (112,417) | | 3,796 | | 0 | | 0 | | (14,467) | | 0 | | 0 | | 0 | | 0 | | (123,088) | | 5,346 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Total realized and unrealized gains (losses) | | Unrealized gains (losses) for assets still held(2) |
| Realized investment gains (losses), net(1) | Other income (loss) | | Included in other comprehensive income (loss) | Net investment income | | Realized investment gains (losses), net | Other income (loss) | |
| (in thousands) |
| Fixed maturities, available-for-sale | $ | (1,730) | | $ | 0 | | | $ | 688 | | $ | 25 | | | $ | (1,731) | | $ | 0 | | |
| Other assets: | | | | | | | | | |
| | | | | | | | | |
| Equity securities | 0 | | (73) | | | 0 | | 0 | | | 0 | | (72) | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Reinsurance recoverables | 236,174 | | 0 | | | 0 | | 0 | | | 244,163 | | 0 | | |
| | | | | | | | | |
| Liabilities: | | | | | | | | | |
| Future policy benefits | (236,174) | | 0 | | | 0 | | 0 | | | (244,163) | | 0 | | |
| Policyholders' account balances | 3,796 | | 0 | | | 0 | | 0 | | | 5,346 | | 0 | | |
| | | | | | | | | |
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Fair Value, beginning of period | Total realized and unrealized gains (losses)(1) | Purchases | Sales | Issuances | Settlements | Other | Transfers into Level 3 | Transfers out of Level 3 | Fair Value, end of period | Unrealized gains (losses) for assets still held(2) |
| (in thousands) | |
| Fixed maturities, available-for-sale: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Corporate securities(3) | $ | 2,882 | | $ | (2,113) | | $ | 428 | | $ | 0 | | $ | 0 | | $ | (638) | | $ | 0 | | $ | 639 | | $ | 0 | | $ | 1,198 | | $ | (4,893) | |
| Structured securities(4) | 0 | | 432 | | 0 | | 0 | | 0 | | (68) | | 0 | | 24,960 | | (25,324) | | 0 | | 0 | |
| Other assets: | | | | | | | | | | | |
| | | | | | | | | | | |
| Equity securities | 6,622 | | 511 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 7,133 | | 511 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Reinsurance recoverables | 488,825 | | 458,557 | | 70,911 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 1,018,293 | | 470,731 | |
| | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | |
| Future policy benefits | (488,825) | | (458,557) | | 0 | | 0 | | (70,911) | | 0 | | 0 | | 0 | | 0 | | (1,018,293) | | (470,731) | |
| Policyholders' account balances(5) | (1,949) | | (99,712) | | 0 | | 0 | | (21,427) | | 0 | | 0 | | 0 | | 0 | | (123,088) | | (98,158) | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Total realized and unrealized gains (losses) | | Unrealized gains (losses) for assets still held(2) |
| Realized investment gains (losses), net(1) | Other income (loss) | | Included in other comprehensive income (loss) | Net investment income | | Realized investment gains (losses), net | Other income (loss) | |
| (in thousands) |
| Fixed maturities, available-for-sale | $ | (4,893) | | $ | 0 | | | $ | 3,041 | | $ | 171 | | | $ | (4,893) | | $ | 0 | | |
| Other assets: | | | | | | | | | |
| | | | | | | | | |
| Equity securities | 0 | | 511 | | | 0 | | 0 | | | 0 | | 511 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Reinsurance recoverables | 458,557 | | 0 | | | 0 | | 0 | | | 470,731 | | 0 | | |
| | | | | | | | | |
| Liabilities: | | | | | | | | | |
| Future policy benefits | (458,557) | | 0 | | | 0 | | 0 | | | (470,731) | | 0 | | |
| Policyholders' account balances | (99,712) | | 0 | | | 0 | | 0 | | | (98,158) | | 0 | | |
| | | | | | | | | |
(1)Realized investment gains (losses) on future policy benefits and reinsurance recoverables primarily represent the change in the fair value as of the beginningCompany's living benefit guarantees on certain of the quarter in which transfers occur for any suchits variable annuity contracts.
(2)Unrealized gains or losses related to assets still held at the end of the quarter.period do not include amortization or accretion of premiums and discounts.
(3)Includes U.S. corporate private and foreign corporate private securities.
(4)Includes asset-backed, commercial mortgage-backed and residential mortgage-backed securities.
(5)Issuances and settlements for Policyholders' account balances are presented net in the rollforward.
(6)Effective January 1, 2020, the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period were added prospectively due to adoption of ASU 2018-13. Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 | |
| | Fair Value, beginning of period | Total realized and unrealized gains (losses)(1) | Purchases | Sales | Issuances | Settlements | Other | Transfers into Level 3 | Transfers out of Level 3 | Fair Value, end of period | Unrealized gains (losses) for assets still held(2) |
| | (in thousands) | |
| Fixed maturities, available-for-sale: | | | | | | | | | | | |
| Corporate securities(3) | $ | 2,035 |
| $ | (1,017 | ) | $ | 180 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 1,198 |
| $ | (1,731 | ) |
| Structured securities(4) | 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
|
| Other assets: | | | | | | | | | | | |
| Equity securities | 7,206 |
| (73 | ) | 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 7,133 |
| (72 | ) |
| Reinsurance recoverables | 757,236 |
| 236,174 |
| 24,883 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 1,018,293 |
| 244,163 |
|
| Receivables from parent and affiliates | 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
|
| Liabilities: | | | | | | | | | | | |
| Future policy benefits | (757,236 | ) | (236,174 | ) | 0 |
| 0 |
| (24,883 | ) | 0 |
| 0 |
| 0 |
| 0 |
| (1,018,293 | ) | (244,163 | ) |
| Policyholders' account balances(5) | (112,417 | ) | 3,796 |
| 0 |
| 0 |
| (14,467 | ) | 0 |
| 0 |
| 0 |
| 0 |
| (123,088 | ) | 5,346 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 |
| | Total realized and unrealized gains (losses) | | Unrealized gains (losses) for assets still held(2) |
| | Realized investment gains (losses), net(1) | Other income (loss) | Included in other comprehensive income (loss) | Net investment income | | Realized investment gains (losses), net | Other income (loss) |
| | (in thousands) |
| Fixed maturities, available-for-sale | $ | (1,730 | ) | $ | 0 |
| $ | 688 |
| $ | 25 |
| | $ | (1,731 | ) | $ | 0 |
|
| Other assets: | | | | | | | |
| Equity securities | 0 |
| (73 | ) | 0 |
| 0 |
| | 0 |
| (72 | ) |
| Reinsurance recoverables | 236,174 |
| 0 |
| 0 |
| 0 |
| | 244,163 |
| 0 |
|
| Receivables from parent and affiliates | 0 |
| 0 |
| 0 |
| 0 |
| | 0 |
| 0 |
|
| Liabilities: | | | | | | | |
| Future policy benefits | (236,174 | ) | 0 |
| 0 |
| 0 |
| | (244,163 | ) | 0 |
|
| Policyholders' account balances | 3,796 |
| 0 |
| 0 |
| 0 |
| | 5,346 |
| 0 |
|
| | |
|
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 | |
| | Fair Value, beginning of period | Total realized and unrealized gains (losses)(1) | Purchases | Sales | Issuances | Settlements | Other | Transfers into Level 3 | Transfers out of Level 3 | Fair Value, end of period | Unrealized gains (losses) for assets still held(2) |
| | (in thousands) | |
| Fixed maturities, available-for-sale: | | | | | | | | | | | |
| Corporate securities(3) | $ | 2,882 |
| $ | (2,113 | ) | $ | 428 |
| $ | 0 |
| $ | 0 |
| $ | (638 | ) | $ | 0 |
| $ | 639 |
| $ | 0 |
| $ | 1,198 |
| $ | (4,893 | ) |
| Structured securities(4) | 0 |
| 432 |
| 0 |
| 0 |
| 0 |
| (68 | ) | 0 |
| 24,960 |
| (25,324 | ) | 0 |
| 0 |
|
| Other assets: | | | | | | | | | | | |
| Equity securities | 6,622 |
| 511 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 7,133 |
| 511 |
|
| Reinsurance recoverables | 488,825 |
| 458,557 |
| 70,911 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 1,018,293 |
| 470,731 |
|
| Receivables from parent and affiliates | 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
|
| Liabilities: | | | | | | | | | | | |
| Future policy benefits | (488,825 | ) | (458,557 | ) | 0 |
| 0 |
| (70,911 | ) | 0 |
| 0 |
| 0 |
| 0 |
| (1,018,293 | ) | (470,731 | ) |
| Policyholders' account balances(5) | (1,949 | ) | (99,712 | ) | 0 |
| 0 |
| (21,427 | ) | 0 |
| 0 |
| 0 |
| 0 |
| (123,088 | ) | (98,158 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
| | Total realized and unrealized gains (losses) | | Unrealized gains (losses) for assets still held(2) |
| | Realized investment gains (losses), net(1) | Other income (loss) | Included in other comprehensive income (loss) | Net investment income | | Realized investment gains (losses), net | Other income (loss) |
| | (in thousands) |
| Fixed maturities, available-for-sale | $ | (4,893 | ) | $ | 0 |
| $ | 3,041 |
| $ | 171 |
| | $ | (4,893 | ) | $ | 0 |
|
| Other assets: | | | | | | | |
| Equity securities | 0 |
| 511 |
| 0 |
| 0 |
| | 0 |
| 511 |
|
| Reinsurance recoverables | 458,557 |
| 0 |
| 0 |
| 0 |
| | 470,731 |
| 0 |
|
| Receivables from parent and affiliates | 0 |
| 0 |
| 0 |
| 0 |
| | 0 |
| 0 |
|
| Liabilities: | | | | | | | |
| Future policy benefits | (458,557 | ) | 0 |
| 0 |
| 0 |
| | (470,731 | ) | 0 |
|
| Policyholders' account balances | (99,712 | ) | 0 |
| 0 |
| 0 |
| | (98,158 | ) | 0 |
|
|
|
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2018(6) | |
| | Fair Value, beginning of period | Total realized and unrealized gains (losses)(1) | Purchases | Sales | Issuances | Settlements | Other | Transfers into Level 3 | Transfers out of Level 3 | Fair Value, end of period | Unrealized gains (losses) for assets still held(2) |
| | (in thousands) | |
| Fixed maturities, available-for-sale: | | | | | | | | | | | |
| Corporate securities(3) | $ | 10,007 |
| $ | (1,694 | ) | $ | 87 |
| $ | 0 |
| $ | 0 |
| $ | (5,337 | ) | $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 3,063 |
| $ | 0 |
|
| Structured securities(4) | 2,292 |
| (36 | ) | 9,606 |
| 0 |
| 0 |
| (2,101 | ) | 0 |
| 0 |
| 0 |
| 9,761 |
| 0 |
|
| Other assets: | | | | | | | | | | | |
| Equity securities | 6,966 |
| (153 | ) | 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 6,813 |
| (153 | ) |
| Reinsurance recoverables | 336,084 |
| (115,916 | ) | 21,916 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 242,084 |
| (113,221 | ) |
| Receivables from parent and affiliates | 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
|
| Liabilities: | | | | | | | | | | | |
| Future policy benefits | (336,084 | ) | 115,916 |
| 0 |
| 0 |
| (21,916 | ) | 0 |
| 0 |
| 0 |
| 0 |
| (242,084 | ) | 113,221 |
|
| Policyholders' account balances(5) | (5,627 | ) | (2,785 | ) | 0 |
| 0 |
| 0 |
| 343 |
| 0 |
| 0 |
| 0 |
| (8,069 | ) | (2,785 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2018(6) |
| | Total realized and unrealized gains (losses) | | Unrealized gains (losses) for assets still held(2) |
| | Realized investment gains (losses), net(1) | Other income (loss) | Included in other comprehensive income (loss) | Net investment income | | Realized investment gains (losses), net | Other income (loss) |
| | (in thousands) |
| Fixed maturities, available-for-sale | $ | 251 |
| $ | 0 |
| $ | (2,038 | ) | $ | 57 |
| | $ | 0 |
| $ | 0 |
|
| Other assets: | | | | | | | |
| Equity securities | 0 |
| (153 | ) | 0 |
| 0 |
| | 0 |
| (153 | ) |
| Reinsurance recoverables | (115,916 | ) | 0 |
| 0 |
| 0 |
| | (113,221 | ) | 0 |
|
| Receivables from parent and affiliates | 0 |
| 0 |
| 0 |
| 0 |
| | 0 |
| 0 |
|
| Liabilities: | | | | | | | |
| Future policy benefits | 115,916 |
| 0 |
| 0 |
| 0 |
| | 113,221 |
| 0 |
|
| Policyholders' account balances | (2,785 | ) | 0 |
| 0 |
| 0 |
| | (2,785 | ) | 0 |
|
|
|
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018(6) | |
| | Fair Value, beginning of period | Total realized and unrealized gains (losses)(1) | Purchases | Sales | Issuances | Settlements | Other | Transfers into Level 3 | Transfers out of Level 3 | Fair Value, end of period | Unrealized gains (losses) for assets still held(2) |
| | (in thousands) | |
| Fixed maturities, available-for-sale: | | | | | | | | | | | |
| Corporate securities(3) | $ | 14,516 |
| $ | (2,378 | ) | $ | 233 |
| $ | (45 | ) | $ | 0 |
| $ | (9,263 | ) | $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 3,063 |
| $ | 0 |
|
| Structured securities(4) | 11,575 |
| (39 | ) | 9,797 |
| (196 | ) | 0 |
| (2,682 | ) | 0 |
| 196 |
| (8,890 | ) | 9,761 |
| 0 |
|
| Other assets: | | | | | | | | | | | |
| Equity securities | 7,428 |
| (615 | ) | 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 6,813 |
| (615 | ) |
| Reinsurance recoverables | 472,157 |
| (294,969 | ) | 64,896 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 242,084 |
| (283,085 | ) |
| Receivables from parent and affiliates | 0 |
| (18 | ) | 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 6,047 |
| (6,029 | ) | 0 |
| 0 |
|
| Liabilities: | | | | | | | | | | | |
| Future policy benefits | (472,157 | ) | 294,969 |
| 0 |
| 0 |
| (64,896 | ) | 0 |
| 0 |
| 0 |
| 0 |
| (242,084 | ) | 283,085 |
|
| Policyholders' account balances(5) | (5,463 | ) | (3,111 | ) | 0 |
| 0 |
| 0 |
| 505 |
| 0 |
| 0 |
| 0 |
| (8,069 | ) | (3,111 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018(6) |
| | Total realized and unrealized gains (losses) | | Unrealized gains (losses) for assets still held(2) |
| | Realized investment gains (losses), net(1) | Other income (loss) | Included in other comprehensive income (loss) | Net investment income | | Realized investment gains (losses), net | Other income (loss) |
| | (in thousands) |
| Fixed maturities, available-for-sale | $ | 148 |
| $ | 0 |
| $ | (2,704 | ) | $ | 139 |
| | $ | 0 |
| $ | 0 |
|
| Other assets: | | | | | | | |
| Equity securities | 0 |
| (615 | ) | 0 |
| 0 |
| | 0 |
| (615 | ) |
| Reinsurance recoverables | (294,969 | ) | 0 |
| 0 |
| 0 |
| | (283,085 | ) | 0 |
|
| Receivables from parent and affiliates | 0 |
| 0 |
| (18 | ) | 0 |
| | 0 |
| 0 |
|
| Liabilities: | | | | | | | |
| Future policy benefits | 294,969 |
| 0 |
| 0 |
| 0 |
| | 283,085 |
| 0 |
|
| Policyholders' account balances | (3,111 | ) | 0 |
| 0 |
| 0 |
| | (3,111 | ) | 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) | 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) | Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities. |
| |
(4) | Includes asset-backed, commercial mortgage-backed and residential mortgage-backed securities. |
| |
(5) | Issuances and settlements for Policyholders' account balances are presented net in the rollforward. |
| |
(6) | Prior period amounts have been updated to conform to current period presentation. |
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 Unaudited Interim Statements of Financial Position. In some cases, as described below, the carrying amount equals or approximates fair value.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| Fair Value | | Carrying
Amount(1) |
| Level 1 | | Level 2 | | Level 3 | | Total | | Total |
| (in thousands) |
| Assets: | | | | | | | | | |
| | | | | | | | | |
| Commercial mortgage and other loans | $ | 0 | | | $ | 0 | | | $ | 144,666 | | | $ | 144,666 | | | $ | 136,705 | |
| Policy loans | 0 | | | 0 | | | 212,519 | | | 212,519 | | | 212,519 | |
| | | | | | | | | |
| | | | | | | | | |
| Cash and cash equivalents | 7,360 | | | 0 | | | 0 | | | 7,360 | | | 7,360 | |
| Accrued investment income | 0 | | | 21,027 | | | 0 | | | 21,027 | | | 21,027 | |
| Reinsurance recoverables | 0 | | | 0 | | | 28,806 | | | 28,806 | | | 26,975 | |
| Receivables from parent and affiliates | 0 | | | 31,967 | | | 0 | | | 31,967 | | | 31,967 | |
| Other assets | 0 | | | 3,205 | | | 0 | | | 3,205 | | | 3,205 | |
| Total assets | $ | 7,360 | | | $ | 56,199 | | | $ | 385,991 | | | $ | 449,550 | | | $ | 439,758 | |
| Liabilities: | | | | | | | | | |
| Policyholders’ account balances - investment contracts | $ | 0 | | | $ | 214,695 | | | $ | 41,800 | | | $ | 256,495 | | | $ | 254,662 | |
| | | | | | | | | |
| Cash collateral for loaned securities | 0 | | | 2,731 | | | 0 | | | 2,731 | | | 2,731 | |
| Short-term debt to affiliates | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Payables to parent and affiliates | 0 | | | 13,661 | | | 0 | | | 13,661 | | | 13,661 | |
| Other liabilities | 0 | | | 44,052 | | | 0 | | | 44,052 | | | 44,052 | |
| Total liabilities | $ | 0 | | | $ | 275,139 | | | $ | 41,800 | | | $ | 316,939 | | | $ | 315,106 | |
| | |
|
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Fair Value | | Carrying
Amount(1) |
| Level 1 | | Level 2 | | Level 3 | | Total | | Total |
| (in thousands) |
| Assets: | | | | | | | | | |
| | | | | | | | | |
| Commercial mortgage and other loans | $ | 0 | | | $ | 0 | | | $ | 148,855 | | | $ | 148,855 | | | $ | 143,098 | |
| Policy loans | 0 | | | 0 | | | 211,986 | | | 211,986 | | | 211,986 | |
| | | | | | | | | |
| | | | | | | | | |
| Cash and cash equivalents | 28 | | | 0 | | | 0 | | | 28 | | | 28 | |
| Accrued investment income | 0 | | | 19,539 | | | 0 | | | 19,539 | | | 19,539 | |
| Reinsurance recoverables | 0 | | | 0 | | | 26,400 | | | 26,400 | | | 26,286 | |
| Receivables from parent and affiliates | 0 | | | 30,387 | | | 0 | | | 30,387 | | | 30,387 | |
| Other assets | 0 | | | 3,071 | | | 0 | | | 3,071 | | | 3,071 | |
| Total assets | $ | 28 | | | $ | 52,997 | | | $ | 387,241 | | | $ | 440,266 | | | $ | 434,395 | |
| Liabilities: | | | | | | | | | |
| Policyholders’ account balances - investment contracts | $ | 0 | | | $ | 192,239 | | | $ | 40,475 | | | $ | 232,714 | | | $ | 232,600 | |
| | | | | | | | | |
| Cash collateral for loaned securities | 0 | | | 2,481 | | | 0 | | | 2,481 | | | 2,481 | |
| Short-term debt to affiliates | 0 | | | 89 | | | 0 | | | 89 | | | 89 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Payables to parent and affiliates | 0 | | | 24,958 | | | 0 | | | 24,958 | | | 24,958 | |
| Other liabilities | 0 | | | 41,310 | | | 0 | | | 41,310 | | | 41,310 | |
| Total liabilities | $ | 0 | | | $ | 261,077 | | | $ | 40,475 | | | $ | 301,552 | | | $ | 301,438 | |
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 |
| | Fair Value | | Carrying Amount(1) |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Total |
| | (in thousands) |
| Assets: | | | | | | | | | |
| Commercial mortgage and other loans | $ | 0 |
| | $ | 0 |
| | $ | 140,663 |
| | $ | 140,663 |
| | $ | 134,211 |
|
| Policy loans | 0 |
| | 0 |
| | 210,063 |
| | 210,063 |
| | 210,063 |
|
| Cash and cash equivalents | 1,884 |
| | 0 |
| | 0 |
| | 1,884 |
| | 1,884 |
|
| Accrued investment income | 0 |
| | 18,352 |
| | 0 |
| | 18,352 |
| | 18,352 |
|
| Reinsurance recoverables | 0 |
| | 0 |
| | 25,289 |
| | 25,289 |
| | 25,085 |
|
| Receivables from parent and affiliates | 0 |
| | 31,607 |
| | 0 |
| | 31,607 |
| | 31,607 |
|
| Other assets | 0 |
| | 4,840 |
| | 0 |
| | 4,840 |
| | 4,840 |
|
| Total assets | $ | 1,884 |
| | $ | 54,799 |
| | $ | 376,015 |
| | $ | 432,698 |
| | $ | 426,042 |
|
| Liabilities: | | | | | | | | | |
| Policyholders’ account balances - investment contracts | $ | 0 |
| | $ | 189,693 |
| | $ | 40,367 |
| | $ | 230,060 |
| | $ | 229,857 |
|
| Cash collateral for loaned securities | 0 |
| | 2,528 |
| | 0 |
| | 2,528 |
| | 2,528 |
|
| Payables to parent and affiliates | 0 |
| | 18,953 |
| | 0 |
| | 18,953 |
| | 18,953 |
|
| Other liabilities | 0 |
| | 41,593 |
| | 0 |
| | 41,593 |
| | 41,593 |
|
| Total liabilities | $ | 0 |
| | $ | 252,767 |
| | $ | 40,367 |
| | $ | 293,134 |
| | $ | 292,931 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Fair Value | | Carrying Amount(1) |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Total |
| | (in thousands) |
| Assets: | | | | | | | | | |
| Commercial mortgage and other loans | $ | 0 |
| | $ | 0 |
| | $ | 119,659 |
| | $ | 119,659 |
| | $ | 118,636 |
|
| Policy loans | 0 |
| | 0 |
| | 206,448 |
| | 206,448 |
| | 206,448 |
|
| Cash and cash equivalents | 523 |
| | 10,000 |
| | 0 |
| | 10,523 |
| | 10,523 |
|
| Accrued investment income | 0 |
| | 17,764 |
| | 0 |
| | 17,764 |
| | 17,764 |
|
| Reinsurance recoverables | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Receivables from parent and affiliates | 0 |
| | 31,564 |
| | 0 |
| | 31,564 |
| | 31,564 |
|
| Other assets | 0 |
| | 4,193 |
| | 0 |
| | 4,193 |
| | 4,193 |
|
| Total assets | $ | 523 |
| | $ | 63,521 |
| | $ | 326,107 |
| | $ | 390,151 |
| | $ | 389,128 |
|
| Liabilities: | | | | | | | | | |
| Policyholders’ account balances - investment contracts | $ | 0 |
| | $ | 179,239 |
| | $ | 40,349 |
| | $ | 219,588 |
| | $ | 220,553 |
|
| Cash collateral for loaned securities | 0 |
| | 2,702 |
| | 0 |
| | 2,702 |
| | 2,702 |
|
| Payables to parent and affiliates | 0 |
| | 20,413 |
| | 0 |
| | 20,413 |
| | 20,413 |
|
| Other liabilities | 0 |
| | 58,357 |
| | 0 |
| | 58,357 |
| | 58,357 |
|
| Total liabilities | $ | 0 |
| | $ | 260,711 |
| | $ | 40,349 |
| | $ | 301,060 |
| | $ | 302,025 |
|
| |
(1) | Carrying values presented herein differ from those in the Company’s Unaudited Interim 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. |
(1) |
|
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
Carrying values presented herein differ from those in the Company’s Unaudited Interim Statements of Financial Position because certain items within the respective financial statement captions are not considered financial instruments or out of scope under authoritative guidance relating to disclosures of the fair value of financial instruments.
6. REINSURANCE
The Company participates in reinsurance with its affiliates Prudential Arizona Reinsurance Captive Company (“PARCC”), Prudential Arizona Reinsurance Term Company (“PAR Term”), Prudential Arizona Reinsurance Universal Company (“PAR U”), Prudential Term Reinsurance Company (“Term Re”) and Dryden Arizona Reinsurance Term Company (“DART”), its parent companies, Pruco Life and Prudential Insurance, as well as third parties. The reinsurance agreements provide risk diversification and additional capacity for future growth, limit the maximum net loss potential, manage statutory capital, and facilitate the Company's capital market hedging program. Life reinsurance is accomplished through various plans of reinsurance, primarily yearly renewable term and coinsurance. Reinsurance ceded arrangements do not discharge the Company as the primary insurer. Ceded balances would represent a liability of the Company in the event the reinsurers were unable to meet their obligations to the Company under the terms of the reinsurance agreements. The Company believes a material reinsurance liability resulting from such inability of reinsurers to meet their obligations is unlikely.
Reserves related to reinsured long-duration contracts are accounted for using assumptions consistent with those used to account for the underlying contracts. Amounts recoverable from reinsurers for long-duration reinsurance arrangements are estimated in a manner consistent with the claim liabilities and policy benefits associated with the reinsured policies. Reinsurance policy charges and fee income ceded for universal life and variable annuity products are accounted for as a reduction of policy charges and fee income. Reinsurance premiums ceded for term insurance products are accounted for as a reduction of premiums.
Realized investment gains and losses include the impact of reinsurance agreements, particularly reinsurance agreements involving living benefit guarantees. The Company has entered into a reinsurance agreement to transfer the risk related to living benefit guarantees on variable annuities to Prudential Insurance. These reinsurance agreements are derivatives and have been accounted for in the same manner as embedded derivatives and the changes in the fair value of these derivatives are recognized through “Realized investment gains (losses), net”. See Note 4 for additional information related to the accounting for embedded derivatives.
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
Reinsurance amounts included in the Company’s Unaudited Interim Statements of Financial Position as of September 30, 20192020 and December 31, 20182019 were as follows:
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| | (in thousands) |
| Reinsurance recoverables(1) | $ | 4,116,435 | | | $ | 3,200,642 | |
| Policy loans | (21,317) | | | (18,627) | |
| Deferred policy acquisition costs | (665,414) | | | (736,575) | |
| Deferred sales inducements | (40,283) | | | (47,423) | |
| Other assets | 15,195 | | | 16,540 | |
| Other liabilities | 112,754 | | | 93,557 | |
|
| | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | (in thousands) |
| Reinsurance recoverables | $ | 3,421,705 |
| | $ | 2,723,518 |
|
| Policy loans | (18,500 | ) | | (17,297 | ) |
| Deferred policy acquisition costs | (723,661 | ) | | (754,569 | ) |
| Deferred sales inducements | (48,241 | ) | | (52,875 | ) |
| Other assets | 16,920 |
| | 17,959 |
|
| Other liabilities | 86,430 |
| | 65,225 |
|
The reinsuranceReinsurance recoverables by counterparty are broken out below:
| | | | | | | | | | | |
| |
| | September 30, 2020 | | December 31, 2019 |
| | (in thousands) |
| Prudential Insurance | $ | 2,044,812 | | | $ | 1,245,450 | |
| PAR U | 1,100,831 | | | 1,027,304 | |
| PARCC | 438,289 | | | 458,441 | |
| PAR Term | 235,103 | | | 219,757 | |
| Term Re | 214,421 | | | 190,633 | |
| DART | 59,500 | | | 38,651 | |
| Pruco Life | 19,523 | | | 16,428 | |
| Unaffiliated | 3,956 | | | 3,978 | |
| Total reinsurance recoverables | $ | 4,116,435 | | | $ | 3,200,642 | |
|
| | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | (in thousands) |
| Prudential Insurance | $ | 1,496,948 |
| | $ | 924,847 |
|
| PAR U | 1,003,402 |
| | 922,904 |
|
| PARCC | 466,227 |
| | 480,627 |
|
| PAR Term | 216,380 |
| | 205,972 |
|
| Term Re | 189,338 |
| | 156,303 |
|
| DART | 31,132 |
| | 13,367 |
|
| Pruco Life | 14,719 |
| | 15,013 |
|
| Unaffiliated | 3,559 |
| | 4,485 |
|
| Total reinsurance recoverables | $ | 3,421,705 |
| | $ | 2,723,518 |
|
Reinsurance amounts, included in the Company’s Unaudited Interim Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, were as follows:
The gross and net amounts of life insurance face amount in force as of September 30, 20192020 and 20182019 were as follows:
Information regarding significant affiliated reinsurance agreements is described below.
The Company has a yearly renewable term reinsurance agreement with Prudential Insurance and reinsures the majority of all mortality risks not otherwise reinsured. Effective July 1, 2017, this agreement was terminated for certain new business, primarily Universal Life business, and such business was reinsured to Pruco Life under a yearly renewable term reinsurance agreement. As of January 1, 2020, the remaining portions of new business (specifically Term policies) ceased being reinsured by the Company to Prudential Insurance, and a separate yearly renewable term reinsurance agreement was established with Pruco Life for Term policies. Effective April 1, 2016, the Company entered into a reinsurance agreement with Prudential Insurance to reinsure its variable annuity base contracts, along with the living benefit guarantees. This reinsurance agreement covers new and in force business.
Effective July 1, 2012, the Company reinsures an amount equal to 95% of all risks associated with Universal Protector policies having no-lapse guarantees as well as certain of its universal policies, excluding those policies that are subject to principles-basedprinciple-based reserving.
The Company reinsures 90% of the risks under its term life insurance policies with effective dates prior to January 1, 2010 through an automatic coinsurance agreement with PARCC.
The Company reinsures 95% of the risks under its term life insurance policies, with effective dates January 1, 2010 through December 31, 2013, through an automatic coinsurance agreement with PAR Term.
The Company reinsures 95% of the risks under its term life insurance policies with effective dates on or after January 1, 2014 through December 31, 2017, through an automatic coinsurance agreement with Term Re.
Effective July 1, 2017, the Company entered into a yearly renewable term reinsurance agreement with Pruco Life for new business, primarily covering Universal Life policies. Effective January 1, 2020, the Company entered in a similar yearly renewable term reinsurance agreement with Pruco Life for new business relating to Term policies. Under this agreementthese agreements the majority of all mortality risk is ceded to Pruco Life. The Company also reinsures certain Corporate Owned Life Insurance (“COLI”) policies with Pruco Life. Through March 31, 2016, the Company reinsured Prudential Defined Income ("PDI") living benefit guarantees with Pruco Life. Effective April 1, 2016, the Company recaptured PDI living benefit guarantees from Pruco Life and reinsured them, together with the related variable annuity base contracts, with Prudential Insurance.
Effective January 1, 2018, the Company entered into an automatic coinsurance agreement with DART to reinsure an amount equal to 95% of the risks associated with its term life insurance policies with effective dates on or after January 1, 2018.2018 through December 31, 2019, excluding those policies that are subject to principle-based reserving.
| | |
|
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
7. INCOME TAXES
The Company uses a full yearfull-year projected effective tax rate approach to calculate year-to-date taxes. In addition, certain items impacting total income tax expense are recorded in the periods in which they occur. The projected effective tax rate is the ratio of projected “Income tax expense (benefit)” divided by projected “Income (loss) from operations before income taxes". The interim period tax expense (or benefit) is the difference between the year-to-date income tax provision and the amounts reported for the previous interim periods of the fiscal year.
The Company's income tax provision amounted to an income tax expensebenefit of $0.0$(5.4) million, or 0.06%(14.15)% of income (loss) from operations before income taxes in the first nine months of 2019,2020, compared to an income tax expense of $1.6$0.0 million, or 6.44%0.06%, in the first nine months of 2018.2019. The Company’s current and prior effective tax rates differed from the U.S. statutory tax rate of 21% primarily due to non-taxable investment income, tax credits, and tax credits. In addition, the first nine months of 2018 includes a $0.1 million increase in income tax expense primarily related to refinementitem discussed below.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted into law. One provision of the Company’s provisional estimates related toCARES Act amends the U.S. Tax Cuts and Jobs Act (“TCJA”) and allows companies with net operating losses (“NOLs”) originating in 2018, 2019 or 2020 to carry back those losses for five years. The Company has incorporated into the full year projected effective tax rate an income tax benefit of 2017 and$5 million that would result from carrying the item described below that was recorded in the period in which it occurred.
Resolution of tax audit issues - During the third quarter of 2018, the Company reached an agreement with the Internal Revenue Serviceestimated 2020 NOL back to resolve outstanding tax audit issues for tax years 2015that have a 35% tax rate. This amount is an estimate and 2016will change if the amount of, and partially for 2017 which resulted in a $2.1 million increase to oursources of, 2020 net taxable income tax expense for the first nine months of 2018.
| | |
|
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
8. EQUITY
Accumulated Other Comprehensive Income (Loss)
AOCI represents the cumulative OCI items that are reported separate from net income and detailed on the Unaudited Interim Statements of Comprehensive Income. The balance of and changes in each component of AOCI as of and for the nine months ended September 30, 20192020 and 2018,2019, 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, 2019 | $ | (981) | | | $ | 86,616 | | | $ | 85,635 | |
| Change in OCI before reclassifications | 133 | | | 91,833 | | | 91,966 | |
| Amounts reclassified from AOCI | 0 | | | (783) | | | (783) | |
| Income tax benefit (expense) | (28) | | | (19,121) | | | (19,149) | |
| Balance, September 30, 2020 | $ | (876) | | | $ | 158,545 | | | $ | 157,669 | |
|
| | | | | | | | | | | |
| | Accumulated Other Comprehensive Income (Loss) |
| | Foreign Currency Translation Adjustment | | Net Unrealized Investment Gains (Losses)(1) | | Total Accumulated Other Comprehensive Income (Loss) |
| | (in thousands) |
| Balance, December 31, 2018 | $ | (989 | ) | | $ | (13,378 | ) | | $ | (14,367 | ) |
| Change in OCI before reclassifications | (60 | ) | | 125,543 |
| | 125,483 |
|
| Amounts reclassified from AOCI | 0 |
| | 7,999 |
| | 7,999 |
|
| Income tax benefit (expense) | 13 |
| | (28,044 | ) | | (28,031 | ) |
| Balance, September 30, 2019 | $ | (1,036 | ) | | $ | 92,120 |
| | $ | 91,084 |
|
| | | | | | | | | | | | | | | | | |
| Accumulated Other Comprehensive Income (Loss) |
| Foreign Currency Translation Adjustment | | Net Unrealized
Investment Gains
(Losses)(1) | | Total Accumulated Other Comprehensive Income (Loss) |
| (in thousands) |
| Balance, December 31, 2018 | $ | (989) | | | $ | (13,378) | | | $ | (14,367) | |
| Change in OCI before reclassifications | (60) | | | 125,543 | | | 125,483 | |
| Amounts reclassified from AOCI | 0 | | | 7,999 | | | 7,999 | |
| Income tax benefit (expense) | 13 | | | (28,044) | | | (28,031) | |
| Balance, September 30, 2019 | $ | (1,036) | | | $ | 92,120 | | | $ | 91,084 | |
|
| | | | | | | | | | | |
| | Accumulated Other Comprehensive Income (Loss) |
| | Foreign Currency Translation Adjustment | | Net Unrealized Investment Gains (Losses)(1) | | Total Accumulated Other Comprehensive Income (Loss) |
| | (in thousands) |
| Balance, December 31, 2017 | $ | (42 | ) | | $ | 34,372 |
| | $ | 34,330 |
|
| Change in OCI before reclassifications | (1,162 | ) | | (67,102 | ) | | (68,264 | ) |
| Amounts reclassified from AOCI | 0 |
| | (998 | ) | | (998 | ) |
| Income tax benefit (expense) | 243 |
| | 14,301 |
| | 14,544 |
|
| Cumulative effect of adoption of ASU 2016-01 | 0 |
| | (175 | ) | | (175 | ) |
| Cumulative effect of adoption of ASU 2018-02 | (8 | ) | | 5,901 |
| | 5,893 |
|
| Balance, September 30, 2018 | $ | (969 | ) | | $ | (13,701 | ) | | $ | (14,670 | ) |
| |
(1) | Includes cash flow hedges of $8 million and $2 million as of September 30, 2019 and December 31, 2018, respectively, and $(3) million and $(5) million as of September 30, 2018 and December 31, 2017, respectively.
|
Reclassifications out of Accumulated Other Comprehensive Income (Loss)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 | | | | |
| | (in thousands) | | | | |
| Amounts reclassified from AOCI (1)(2): | | | | | | | | | | | |
| Net unrealized investment gains (losses): | | | | | | | | | | | |
| Cash flow hedges - Currency/ Interest rate(3) | $ | (384) | | | $ | (1,405) | | | $ | 1,289 | | | $ | (2,230) | | | | | |
| Net unrealized investment gains (losses) on available-for-sale securities | 137 | | | (2,290) | | | (506) | | | (5,769) | | | | | |
| Total net unrealized investment gains (losses)(4) | (247) | | | (3,695) | | | 783 | | | (7,999) | | | | | |
| Total reclassifications for the period | $ | (247) | | | $ | (3,695) | | | $ | 783 | | | $ | (7,999) | | | | | |
(1)All amounts are shown before tax.
(2)Positive amounts indicate gains/benefits reclassified out of AOCI. Negative amounts indicate losses/costs reclassified out of AOCI.
(3)See Note 4 for additional information on cash flow hedges.
(4)See table below for additional information on unrealized investment gains (losses), including the impact on DAC and other costs, future policy benefits, policyholders’ account balances and other liabilities.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (in thousands) |
| Amounts reclassified from AOCI (1)(2): | | | | | | | |
| Net unrealized investment gains (losses): | | | | | | | |
| Cash flow hedges - Currency/ Interest rate(3) | $ | (1,405 | ) | | $ | 554 |
| | $ | (2,230 | ) | | $ | 944 |
|
| Net unrealized investment gains (losses) on available-for-sale securities | (2,290 | ) | | 238 |
| | (5,769 | ) | | 54 |
|
| Total net unrealized investment gains (losses)(4) | (3,695 | ) | | 792 |
| | (7,999 | ) | | 998 |
|
| Total reclassifications for the period | $ | (3,695 | ) | | $ | 792 |
| | $ | (7,999 | ) | | $ | 998 |
|
Table of Contents | | |
(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, future policy benefits, policyholders’ account balances and other liabilities. |
|
|
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
Net Unrealized Investment Gains (Losses)
Net unrealized investment gains (losses) on available-for-sale fixed maturity securities classified as available-for-sale and certain other invested assets and other assets are included in the Company’s Unaudited Interim Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from OCI those items that are included as part of “Net income” for a period that had been part of OCI in earlier periods. There are no amounts related to available-for-sale fixed maturity securities on which an allowance for credit losses has been recognized as of September 30, 2020. The amounts for the periods indicated below split between amounts related to fixed maturity securities on which an OTTI loss has been recognized, andrepresent all other net unrealized investment gains (losses), are as follows::
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, Policyholders' Account Balances and Other Liabilities(3) | | Deferred Income Tax (Liability) Benefit | | Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses) |
| | (in thousands) |
| Balance, December 31, 2018 | $ | 143 |
| | $ | (54 | ) | | $ | 42 |
| | $ | (54 | ) | | $ | 77 |
|
| Net investment gains (losses) on investments arising during the period | (532 | ) | | 0 |
| | 0 |
| | 112 |
| | (420 | ) |
| Reclassification adjustment for (gains) losses included in net income | 646 |
| | 0 |
| | 0 |
| | (136 | ) | | 510 |
|
| Reclassification adjustment for OTTI (gains) losses excluded from net income(1) | (207 | ) | | 0 |
| | 0 |
| | 43 |
| | (164 | ) |
| Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs | 0 |
| | 15 |
| | 0 |
| | (3 | ) | | 12 |
|
| Impact of net unrealized investment (gains) losses on future policy benefits, policyholders' account balances and other liabilities | 0 |
| | 0 |
| | (4 | ) | | 1 |
| | (3 | ) |
| Balance, September 30, 2019 | $ | 50 |
| | $ | (39 | ) | | $ | 38 |
| | $ | (37 | ) | | $ | 12 |
|
| |
(1) | Represents "transfers in" related to the portion of OTTI losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss. |
| |
(2) | "Other costs" primarily includes reinsurance recoverables and deferred reinsurance losses. |
| |
(3) | "Other liabilities" primarily includes reinsurance payables. |
|
|
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
All Other Net Unrealized Investment Gains (Losses) in AOCI
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Unrealized Gains (Losses) on
Investments(1) | | DAC and Other Costs(3) | | Future Policy Benefits, Policyholders' Account Balances 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, 2019(2) | $ | 116,039 | | | $ | 8,973 | | | $ | (15,373) | | | $ | (23,023) | | | $ | 86,616 | |
| Net investment gains (losses) on investments arising during the period | 100,965 | | | 0 | | | 0 | | | (21,203) | | | 79,762 | |
| Reclassification adjustment for (gains) losses included in net income | (783) | | | 0 | | | 0 | | | 164 | | | (619) | |
| | | | | | | | | |
| Impact of net unrealized investment (gains) losses on DAC and other costs | 0 | | | 18,403 | | | 0 | | | (3,865) | | | 14,538 | |
| Impact of net unrealized investment (gains) losses on future policy benefits, policyholders' account balances and other liabilities | 0 | | | 0 | | | (27,535) | | | 5,783 | | | (21,752) | |
| Balance, September 30, 2020 | $ | 216,221 | | | $ | 27,376 | | | $ | (42,908) | | | $ | (42,144) | | | $ | 158,545 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Investments(2) | | Deferred Policy Acquisition Costs and Other Costs(3) | | Future Policy Benefits, Policyholders' Account Balances 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, 2018 | $ | (17,764 | ) | | $ | 3,169 |
| | $ | (2,472 | ) | | $ | 3,612 |
| | $ | (13,455 | ) |
| Net investment gains (losses) on investments arising during the period | 133,213 |
| | 0 |
| | 0 |
| | (27,975 | ) | | 105,238 |
|
| Reclassification adjustment for (gains) losses included in net income | 7,353 |
| | 0 |
| | 0 |
| | (1,544 | ) | | 5,809 |
|
| Reclassification adjustment for OTTI (gains) losses excluded from net income(1) | 207 |
| | 0 |
| | 0 |
| | (43 | ) | | 164 |
|
| Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs | 0 |
| | 5,714 |
| | 0 |
| | (1,200 | ) | | 4,514 |
|
| Impact of net unrealized investment (gains) losses on future policy benefits, policyholders' account balances and other liabilities | 0 |
| | 0 |
| | (12,863 | ) | | 2,701 |
| | (10,162 | ) |
| Balance, September 30, 2019 | $ | 123,009 |
| | $ | 8,883 |
| | $ | (15,335 | ) | | $ | (24,449 | ) | | $ | 92,108 |
|
| |
(1) | 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. |
| |
(2) | Includes cash flow hedges. See Note 4 for information on cash flow hedges. |
| |
(3) | "Other costs" primarily includes reinsurance recoverables and deferred reinsurance losses. |
| |
(4) | "Other liabilities" primarily includes reinsurance payables. |
(2)Includes net unrealized gains (losses) for which an OTTI loss had been previously recognized. (3)"Other costs" primarily includes reinsurance recoverables and deferred reinsurance losses.
(4)"Other liabilities" primarily includes reinsurance payables.
9. 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
ManyThe majority of the Company’s expenses are allocations or charges from Prudential Insurance or other affiliates. These expenses can be grouped into general and administrative expenses and agency distribution expenses.
Table of Contents | | |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
The Company’s general and administrative expenses are charged to the Company using allocation methodologies based on business production processes. Management believes that the methodology is reasonable and reflects costs incurred by Prudential Insurance to process transactions on behalf of the Company. The Company operates under service and lease agreements whereby services of officers and employees, supplies, use of equipment and office space are provided by Prudential Insurance. The Company reviews its allocation methodology periodically which it may adjust accordingly. General and administrative expenses include allocations of stock compensation expenses related to a stock-based awards program and a deferred compensation program issued by Prudential Financial. The expense charged to the Company for the stock-based awards program was $0.0 million for both the three months ended September 30, 20192020 and 2018,2019, and $0.1 million for both the nine months ended September 30, 20192020 and 2018.2019. The expense charged to the Company for the deferred compensation program was $0.1$0.2 million and $0.2$0.1 million for the three months ended September 30, 20192020 and 2018,2019, respectively, and $0.5 million and $0.6 million for both the nine months ended September 30, 20192020 and 2018, respectively.
|
|
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
The Company is charged for its share of employee benefit expenses. These expenses include costs for funded and non-funded, non-contributory defined benefit pension plans. Some of these benefits are based on final earnings and length of service while others are based on an account balance, which takes into consideration age, service and earnings during a career. The Company’s share of net expense for the pension plans was $0.5 million and $0.6 million for both the three months ended September 30, 2020 and 2019, respectively, and 2018,$1.5 million and $2$1.7 million for both the nine months ended September 30, 2020 and 2019, and 2018.respectively.
The Company is also charged for its share of the costs associated with welfare plans issued by Prudential Insurance. These expenses include costs related to medical, dental, life insurance and disability. The Company's share of net expense for the welfare plans was $0.7$0.5 million and $0.8$0.7 million for the three months ended September 30, 20192020 and 2018,2019, respectively, and $2$1.6 million and $2.1 million for both the nine months ended September 30, 2020 and 2019, and 2018.respectively.
Prudential Insurance sponsors voluntary savings plans for its employee 401(k) plans. The plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual salary. The Company’s expense for its share of the voluntary savings plan was $0.2 million and $0.3 million for both the three months ended September 30, 2020 and 2019, respectively, and 2018,$0.6 million and $0.8 million for both the nine months ended September 30, 2020 and 2019, and 2018.respectively.
The Company is charged distribution expenses from Prudential Insurance’s agency network for both its domestic life and annuity products through a transfer pricing agreement, which is intended to reflect a market-based pricing arrangement.
The Company pays commissions and certain other fees to Prudential Annuities Distributors, Inc. (“PAD”) in consideration for PAD’s marketing and underwriting of the Company’s annuity products. Commissions and fees are paid by PAD to broker-dealers who sell the Company’s annuity products. Commissions and fees paid by the Company to PAD were $21$12 million and $19$21 million for the three months ended September 30, 20192020 and 2018,2019, respectively, and $60$41 million and $54$60 million for the nine months ended September 30, 20192020 and 2018,2019, 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 $2 million for both the three months ended September 30, 2020 and 2019, and 2018,$5 million and $6 million for both the nine months ended September 30, 2020 and 2019, and 2018.respectively.
Corporate-Owned Life Insurance
The Company has sold 3 Corporate-Owned Life Insurance ("COLI") policies to Prudential Insurance and 1 to Prudential Financial. The cash surrender value included in separate accounts for these COLI policies was $2,630$2,852 million at September 30, 20192020 and $2,239$2,743 million at December 31, 2018.2019. Fees related to these COLI policies were $7 million and $6 million for both the three months ended September 30, 2020 and 2019, respectively, and 2018,$21 million and $20 million and $19 million for the nine months ended September 30, 20192020 and 2018,2019, respectively. The Company retains 10% of the mortality risk associated with these COLI policies up to $0.1 million per individual policy.
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| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
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 $0.6$0.8 million and $0.7$0.6 million for the three months ended September 30, 20192020 and 2018,2019, respectively, and $2$2.1 million and $1.7 million for both the nine months ended September 30, 2020 and 2019, and 2018.respectively. These expenses are recorded as “Net investment income” in the Company's Unaudited Interim 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.
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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
Joint Ventures
The Company has made investments in joint ventures with certain subsidiaries of Prudential Financial. "Other invested assets" includes $37$39 million and $33$37 million as of September 30, 20192020 and December 31, 2018,2019, respectively. "Net investment income" related to these ventures includes a gain of $0.0$2.1 million and $0.4$0.0 million for the three months ended September 30, 20192020 and 2018,2019, respectively, and $2a gain of $2.4 million and $1$2.2 million for the nine months ended September 30, 20192020 and 2018,2019, respectively.
Affiliated Asset Administration Fee Income
The Company has a revenue sharing agreement with AST Investment Services, Inc. ("ASTISI") and PGIM Investments LLC ("PGIM Investments") whereby the Company receives fee income based on policyholders' separate account balances invested in the Advanced Series Trust. Income received from ASTISI and PGIM Investments related to this agreement was $8 million for both the three months ended September 30, 20192020 and 2018,2019, and $24 million and $23 million for both the nine months ended September 30, 20192020 and 2018, respectively.2019. These revenues are recorded as “Asset administration fees” in the Company's Unaudited Interim Statements of Operations and Comprehensive Income (Loss).
The Company has a revenue sharing agreement with PGIM Investments, whereby the Company receives fee income based on policyholders' separate account balances invested in The Prudential Series Fund. Income received from PGIM Investments related to this agreement was $2 million and $1 million for both the three months ended September 30, 2020 and 2019, respectively, and 2018,$5 million and $4 million for both the nine months ended September 30, 2020 and 2019, and 2018.respectively. These revenues are recorded as “Asset administration fees” in the Company’s Unaudited Interim Statements of Operations and Comprehensive Income (Loss).
Affiliated Notes Receivable
Affiliated notes receivable included in “Receivables from parent and affiliates” at September 30, 20192020 and December 31, 20182019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturity Date | | Interest Rates | | September 30, 2020 | | December 31, 2019 |
| | | | | | | | | (in thousands) |
| | | | | | | | | |
| U.S. dollar fixed rate notes | | | 2027 | | 0.00% | - | 14.85 | % | | $ | 808 | | | $ | 2,433 | |
| Total notes receivable - affiliated(1) | | | | | | | | | $ | 808 | | | $ | 2,433 | |
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| | | | | | | | | | | | | | | | |
| | Maturity Dates | | Interest Rates | | September 30, 2019 | | December 31, 2018 |
| | | | | | | | | | (in thousands) |
| U.S. dollar floating rate notes | 2028 | | 3.83% | - | 4.25 | % | | $ | 0 |
| | $ | 6,001 |
|
| U.S. dollar fixed rate notes | 2026 | - | 2027 | | 0.00% | - | 14.85 | % | | 2,582 |
| | 2,823 |
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| Total notes receivable - affiliated(1) | | | | | | | | | $ | 2,582 |
| | $ | 8,824 |
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(1) All notes receivable may be called for prepayment prior to the respective maturity dates under specified circumstances.
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(1) | All 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.
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| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
Accrued interest receivable related to these loans was $0.0 million and $0.1 million at both September 30, 20192020 and December 31, 2018, respectively,2019 and is included in “Other assets”. Revenues related to these assets were $0.0 million and $0.1 million for both the three months ended September 30, 2020 and 2019, and 2018,respectively, and $0.1 million and $0.2 million for both the nine months ended September 30, 20192020 and 2018, respectively,2019, and are included in “Other income”.
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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
Affiliated Asset Transfers
The Company participates in affiliated asset trades with parent and sister companies. Book and market value differences for trades with a parent and sister are recognized within "Additional paid-in capital" (“APIC”) and "Realized investment gains (losses), net", respectively. The table below shows affiliated asset trades for the nine months ended September 30, 20192020 and for the year ended December 31, 2018.2019.
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| Affiliate | | Date | | Transaction | | Security Type | | Fair Value | | Book Value | | APIC, Net of Tax Increase/(Decrease) | | Realized
Investment
Gain (Loss) | | |
| | | | | | | | | (in thousands) | | |
| Prudential Annuities Life Assurance Corporation | | April 2019 | | Sale | | Equity Securities | | $ | 3,293 | | | $ | 2,995 | | | $ | 0 | | | $ | 298 | | | |
| Prudential Insurance | | April 2020 | | Purchase | | Fixed Maturities | | $ | 3,485 | | | $ | 3,320 | | | $ | (130) | | | $ | 0 | | | |
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| | | | | | | | | | | | | | | | | | | | | | |
| Affiliate | | Date | | Transaction | | Security Type | | Fair Value | | Book Value | | APIC, Net of Tax Increase/(Decrease) | | Realized Investment Gain (Loss) |
| | | | | | | | | (in thousands) |
| Gibraltar Universal Life Reinsurance Company | | May 2018 | | Purchase | | Fixed Maturities | | $ | 17,904 |
| | $ | 17,904 |
| | $ | 0 |
| | $ | 0 |
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| Prudential Annuities Life Assurance Corporation | | April 2019 | | Sale | | Equity Securities | | $ | 3,293 |
| | $ | 2,995 |
| | $ | 0 |
| | $ | 298 |
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Debt Agreements
The Company is authorized to borrow funds up to $200 million from affiliates to meet its capital and other funding needs. As of September 30, 2019 and December 31, 2018,2020 there was 0 debt outstanding. The short-term debt was $0.1 million as of December 31, 2019.
The total interest expense to the Company related to loans payable to affiliates was $0.1$0.0 million and $0.0$0.1 million for the three months ended September 30, 20192020 and 2018,2019, respectively, and $0.1$0.0 million and $0.0$0.1 million for the nine months ended September 30, 2020 and 2019, and 2018.respectively.
Contributed Capital and Dividends
Through September of 2019, the Company did 0t receive any capital contributions. In March of 2018,2020, the Company received a capital contribution in the amount of $1$85 million from Pruco Life. In December 2019, the Company received a capital contribution in the amount of $60 million from Pruco Life.
Through September of2020, the Company did 0t pay any dividends. In 2019, and December of 2018, the Company did 0t pay any dividends to Pruco Life.
Reinsurance with Affiliates
As discussed in Note 6, the Company participates in reinsurance transactions with certain affiliates.
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| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
10. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
The Company has made commitments to fund commercial mortgage loans. As of September 30, 2020 and December 31, 2019, the outstanding balances on these commitments were $0.4 million and $4 million, respectively. The above amount includes unfunded commitments that are not unconditionally cancellable. For related credit exposure, there were $3was an allowance for credit losses of $0.0 million outstanding commitments to fund commercial loans, and NaN as of December 31, 2018.September 30, 2020, which is a change of $0.0 million for the three and nine months ended September 30, 2020. The Company has made commitments to purchase or fund investments, mostly private fixed maturities. As of September 30, 20192020 and December 31, 2018, $462019, $70 million and $41$48 million, respectively, of these commitments were outstanding. The above amount includes unfunded commitments that are not unconditionally cancellable. There were 0 related charges for credit losses for both the three and nine months ended September 30, 2020.
Contingent Liabilities
On an ongoing basis, the Company and its regulators review its operations including, but not limited to, sales and other customer interface procedures and practices, and procedures for meeting obligations to ourits customers and other parties. These reviews may result in the modification or enhancement of processes or the imposition of other action plans, including concerning management oversight, sales and other customer interface procedures and practices, and the timing or computation of payments to customers and other parties. In certain cases, if appropriate, the Company may offer customers or other parties remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.
The Company is subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment of unclaimed or abandoned funds, and is subject to audit and examination for compliance with these requirements.
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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
It is possible that the results of operations or the cash flows of the Company in a particular quarterly or annual period could be materially affected as a result of payments in connection with the matters discussed above or other matters depending, in part, upon the results of operations or cash flows for such period. Management believes, however, that ultimate payments in connection with these matters, after consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on the Company’s financial position.
Litigation and Regulatory Matters
The Company is subject to legal and regulatory actions in the ordinary course of its business. Pending legal and regulatory actions include proceedings specific to the Company and proceedings generally applicable to business practices in the industry in which it operates. The Company is subject to class action lawsuits and other litigation involving a variety of issues and allegations involving sales practices, claims payments and procedures, premium charges, policy servicing and breach of fiduciary duty to customers. The Company is also subject to litigation arising out of its general business activities, such as its investments, contracts, leases and labor and employment relationships, including claims of discrimination and harassment, and could be exposed to claims or litigation concerning certain business or process patents. In addition, the Company, along with other participants in the businesses in which it engages, may be subject from time to time to investigations, examinations and inquiries, in some cases industry-wide, concerning issues or matters upon which such regulators have determined to focus. In some of the Company’s pending legal and regulatory actions, parties are seeking large and/or indeterminate amounts, including punitive or exemplary damages. The outcome of litigation or a regulatory matter, and the amount or range of potential loss at any particular time, is often inherently uncertain.
The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but the matter, if material, is disclosed. The Company estimates that as of September 30, 2019,2020, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is less thanthan $10 million. This estimate is not an indication of expected loss, if any, or the Company's maximum possible loss exposure on such matters. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.
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| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
The following discussion of litigation and regulatory matters provides an update of those matters discussed in Note 14 to the Company’sCompany's Financial Statements included in the Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 2018,2019, and should be read in conjunction with the complete descriptions provided in the Form 10-K.
Behfarin v. Pruco Life
In July 2017, a putative class action complaint entitled Richard Behfarin v. Pruco Life Insurance Company was filed inJune 2020, the United States District Court for the Central District of California, alleging that the Company imposes charges on owners of universal life policies to cure defaults and/or reinstate lapses, that are inconsistent with the applicable universal life policy. The complaint includes claims for breach of contract, breach of implied covenant of good faith and fair dealing, and violation of California law, and seeks unspecified damages along with declaratory and injunctive relief. In September 2017, the Company filed its answer to the complaint. In September 2018, plaintiff filed acourt issued an order: (i) granting plaintiffs’ motion for class certification. In October 2019, plaintiff filed: (1) the First Amended Complaint adding Prudential Insurance Company of America and Pruco Life Insurance Company of New Jersey as defendants; and (2) a motion seeking preliminary certification of a settlement class, appointment of a class representative and class counsel, and preliminary approval of the proposed class action settlement.
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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
Notes to Unaudited Interim Financial Statements—(Continued) |
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.
The DOL’s review of the securities lending matter is closed. In September 2019, Prudential Financial reached a settlement of these
matters with the SEC. As part of the settlement Prudential Financial agreedclass; (ii) approving the proposed nationwide class settlement agreement; (iii) approving the class notice; (iv) awarding attorneys’ fees and costs to payplaintiffs and a fine of $5 millionreduced incentive award to Behfarin; and disgorgement of $27.6 million, and consented to(v) dismissing the entry of an Administrative Order containing findings that two of its subsidiaries violated certain sections ofaction with prejudice, but maintaining jurisdiction over the Investment Advisers Act of 1940 and the Investment Advisers Act Rules and ordering the subsidiaries to cease and desist from committing or causing any violations and any future violations of those provisions. In reaching this settlement, Prudential Financial neither admitted nor denied the SEC’s findings.settlement.
Summary
The Company’s litigation and regulatory matters are subject to many uncertainties, and given their complexity and scope, their outcome cannot be predicted. It is possible that the Company’s results of operations or cash flows in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters depending, in part, upon the results of operations or cash flows for such period. In light of the unpredictability of the Company’s litigation and regulatory matters, it is also possible that in certain cases an ultimate unfavorable resolution of one or more pending litigation or regulatory matters could have a material adverse effect on the Company’s financial position. Management believes, however, that, based on information currently known to it, the ultimate outcome of all pending litigation and regulatory matters, after consideration of applicable reserves and rights to indemnification, is not likely to have a material adverse effect on the Company’s financial position.
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| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
11. REVISION TO PRIOR YEAR INFORMATION
Revision to 2019 Financial Statements
The Company identified an error in the presentation of certain cash flow activity related to policyholders' account balances that impacted several line items within previously issued Statements of Cash Flows. While these items affect the cash flows from operating and financing activities, they had no impact on the net increase (decrease) in cash and cash equivalents for the previously reported periods. Prior period amounts have been revised in the financial statements to correct this error as shown below.
Management assessed the materiality of the misstatement described above on prior period financial statements in accordance with SEC Staff Accounting Bulletin ("SAB") No. 99, Materiality, codified in ASC 250-10, Accounting Changes and Error Corrections ("ASC 250"), and concluded that these misstatements were not material to any prior annual or interim periods. Accordingly, in accordance with ASC 250 (SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), the financial statements for the nine months ended September 30, 2019, which are presented herein, have been revised. Similarly, impacted prior periods presented within the Annual Report on Form 10-K for the year ended December 31, 2020 will be revised.
The following are selected line items from the financial statements illustrating the effects of these revisions:
Statements of Cash Flows
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| As Previously Reported | | Revision | | As Revised |
| (in thousands) |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Policy charges and fee income | $ | (37,295) | | | $ | 23,421 | | | $ | (13,874) | |
| Cash flows from (used in) operating activities | (6,247) | | | 23,421 | | | 17,174 | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
| Policyholders' account withdrawals | (248,126) | | | (15,815) | | | (263,941) | |
| Other, net | 0 | | | (7,606) | | | (7,606) | |
| Cash flows from (used in) financing activities | 80,929 | | | (23,421) | | | 57,508 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the financial condition of Pruco Life Insurance Company of New Jersey, or the “Company,” as of September 30, 2019,2020, compared with December 31, 2018,2019, and its results of operations for the three and nine months ended September 30, 20192020 and 2018.2019. You should read the following analysis of our financial condition and results of operations in conjunction with the MD&A, the “Risk Factors” section, and the audited Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, as well as the statements under “Forward-Looking Statements”, the "Risk Factors" section and the Unaudited Interim Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Overview
The Company is licensed to sellsells variable and fixed annuities, universal life insurance, variable life insurance and term life insurance in New Jersey and New York only and sells such products primarily through affiliated and unaffiliated distributors.
COVID-19
Beginning in the first quarter of 2020, the outbreak of the 2019 novel coronavirus (“COVID-19”) created extreme stress and disruption in the global economy and financial markets and elevated mortality and morbidity experience for the global population. These events impacted our results of operations in the current period and are expected to drive future impacts to our results of operations. The Company has taken several measures to manage the impacts of this crisis. The actual and expected impacts of these events and other items are included in the following update:
•Outlook. We expect COVID-19 to continue to contribute to elevated levels of mortality, resulting in increased life insurance claims in the near-term. We have taken pricing and product actions to ensure we realize appropriate returns for the current economic environment, and to diversify our product mix to further limit our sensitivity to interest rates, while maintaining a solid value proposition for our customers. These actions included the suspension in July 2020 of our single life guaranteed universal life product, and a pivot to less rate-sensitive annuities products with the decision to discontinue sales of traditional variable annuities with guaranteed living benefits effective December 31, 2020. In addition, while our distribution platforms include a suite of digital, hybrid, and in-person options, mandated social distancing has limited in-person engagement between customers and financial professionals. Collectively, we expect the product actions we have taken and the constrained distribution environment to adversely impact our sales prospects in the near-term.
•Results of Operations. For the three months and nine months ended September 30, 2020 we reported a net gain of $19 million and $44 million, respectively, inclusive of the unfavorable financial market conditions that impacted our reported results. See “Results of Operations” for a discussion of results for the third quarter and the first nine months of 2020.
•Liquidity. The impact of COVID-19 and related market dislocations could strain our existing liquidity and cause us to increase the use of our alternative sources of liquidity, which could result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings or ratings outlooks. See “Liquidity and Capital Resources-Liquidity” for a discussion of our liquidity.
•Capital Resources. As of September 30, 2020, we maintained capital levels consistent with our ratings targets. However, market conditions could negatively impact our statutory capital and constrain our overall capital flexibility. Adverse market conditions could require us to take additional management actions to maintain capital consistent with our ratings objectives, which may include redeploying financial resources from internal sources, or using available affiliate sources of capital or seeking additional sources. See “Liquidity and Capital Resources-Capital” for a discussion of our capital resources.
•Risk Factors. The COVID-19 pandemic has adversely impacted our results of operations, financial position, investment portfolio, new business opportunities and operations, and these impacts are expected to continue. For additional information on the risks to our business posed by the COVID-19 pandemic, see “Risk Factors.”
•Business Continuity. One of the main impacts of the COVID-19 pandemic has been executing our business continuity protocols to ensure our employees are safe and able to serve our customers. This included effectively transitioning the vast majority of our employees to remote work arrangements.
We believe we can sustain remote work and social distancing for an indefinite period while ensuring that critical business operations are sustained. In addition, we are managing COVID-19-related impacts on third-party provided services, and do not anticipate significant interruption in critical operations.
•CARES Act and Other Regulatory Developments. In March 2020 Congress enacted the Coronavirus Aid, Relief, and Economic Security Act ("the CARES Act"), which provides $2 trillion in economic stimulus to taxpayers, small businesses, and corporations through various grant and loan programs, tax provisions and regulatory relief. One provision of the CARES Act amends the Tax Cuts and Jobs Act ("TCJA") and allows companies with net operating losses (“NOLs”) originating in 2018, 2019 or 2020 to carry back those losses for five years. See Note 7 to the Unaudited Interim Financial Statements for more information.
Other governments and regulators, including the NAIC and state insurance regulators, have implemented, or are considering, a number of actions in response to the crisis, including delaying implementation of certain regulatory changes, temporarily waiving certain regulatory requirements and requiring or requesting insurers to waive premium payments and policy provisions and exclusions for certain periods of time.
The Company is not aware of any new or proposed government mandates that could materially impact the Company’s solvency or liquidity position.
Regulatory Developments
SEC Best Interest Regulation
In June 2019,2020, the SEC adoptedDepartment of Labor ("DOL") announced that it is proposing a package of rulemakings and interpretative guidance that, among other things, requires broker-dealersnew exemption to act inreplace the bestpreviously vacated “best interest of retail customers when recommending securities transactions or investment strategies to them. The guidance also clarifiescontract exemption." This proposed exemption would allow fiduciaries meeting the SEC’s viewsrequirements of the fiduciary duty thatexemption to receive compensation, including as a result of advice to roll over assets from a qualified plan to an Individual Retirement Account (“IRA”), and to purchase from or sell certain investments to qualified plans and IRAs. The DOL also reinstated the prior investment advisers owe to their clients. The new best interest standards will become effective on June 30, 2020. We are evaluating the impactsadvice regulation and other existing exemptions and provided its current interpretation of the new standards and have begun to implement them. We believe that the new standards will apply to recommendations to purchase certain of our products, and will result in increased compliance costs, in particular in our Prudential Advisors distribution system.
SECURE Act
In May 2019, the U.S. House of Representatives passed the Setting Every Community up for Retirement Enhancement (“SECURE”) Act. If enacted into law in its current form, the SECURE Act would help promote retirement plan coverage by expanding access to and use of Multiple Employer Plans; facilitate access to lifetime income disclosures for plan participants to better understand how their retirement savings translate into monthly lifetime income in retirement; improve upon the current annuity selection safe harbor; and provide lifetime income portability.pre-2016 fiduciary investment advice regulation. We cannot predict whetherwhat impact the SECURE Actnewly proposed exemption or interpretative guidance will ultimately be adopted, or its impact on our business.
For additional informationhave on the potential impacts of regulation on the Company see “Business—Regulation” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.Company.
Impact of a Low Interest Rate Environment
As a financial services company, market interest rates are a key driver of our 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, market experience true-ups and amortization of deferred policy acquisition costs (“DAC”); and market experience true-ups;
• customer account values, including their impact on fee income;
• product offerings, design features, crediting rates and sales mix; and
• policyholder behavior, including surrender or withdrawal activity.
Interest rates in the U.S. have experienced a period of historically low levels in large part due to Federal Reserve efforts to assist with the economic recovery subsequent to the financial crisis of 2008. While market conditions and events make uncertain the timing, amount and impact of any monetary policy decisions by the Federal Reserve, changes in interest rates may impact our reinvestment yields, primarily for our investments in fixed maturity securities and commercial mortgage loans. As interest rates rise, our reinvestment yield may exceed the overall portfolio yield resulting in a favorable impact to earnings. Conversely, if interest rates were to decline, our reinvestment yield may be below our overall portfolio yield, resulting in an unfavorable impact to earnings.
For more information on interest rate risks, see "Risk Factors" in this Quarterly Report on Form 10-Q and “Risk Factors—Market Risk” included in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Revenues and Expenses
The Company earns revenues principally from insurance premiums, mortality and expense fees, asset administration fees from insurance and investment products, and from net investment income on the investment of general account and other funds. The Company receives premiums primarily from the sale of individual life insurance and annuity products. The Company earns mortality and expense fees, and asset administration fees, primarily from the sale and servicing of universal life insurance and separate account products including variable life insurance and variable annuities. The Company’s operating expenses principally consist of insurance benefits provided and reserves established for anticipated future insurance benefits, general business expenses, reinsurance premiums, commissions and other costs of selling and servicing the various products sold and interest credited on general account liabilities.
Profitability
The Company’s profitability depends principally on its ability to price our insurance and annuity products at a level that enables us to earn a margin over the costs associated with providing benefits and administering those products. Profitability also depends on, among other items, our actuarial and policyholder behavior experience on insurance and annuity products, our ability to attract and retain customer assets, generate and maintain favorable investment results, and manage expenses.
See “Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 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-looking statements made by or on behalf of the Company.
Accounting Policies & Pronouncements
Application of Critical Accounting Estimates
The preparation of financial statements in conformity with 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 on an ongoing basis.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 Unaudited Interim Financial Statements could change significantly.
Management believes the accounting policies relating to the following areas are most dependent on the application of estimates and assumptions and require management’s most difficult, subjective, or complex judgments:
•DAC and other costs, including deferred sales inducements (“DSI”);
•Policyholder liabilities;
•Valuation of investments, including derivatives, measurement of allowance for credit losses, and the recognition of other-than-temporary impairments ("OTTI");
•Reinsurance recoverables;
•Taxes on income; and
•Reserves for contingencies, including reserves for losses in connection with unresolved legal matters.
Market Performance - Equity and Interest Assumptions
DAC and other costs associated with the variable and universal life policies and the variable and fixed annuity contracts are generally amortized over the expected lives of these policies in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. The quarterly adjustments for market performance reflect the impact of changes to our estimate of total gross profits to reflect actual fund performance and market conditions. A significant portion of gross profits for our variable annuity contracts and, to a lesser degree, our variable life policiescontracts are dependent upon the total rate of return on assets held in separate account investment options. This rate of return influences the fees we earn on variable annuity and variable life contracts, costs we incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts, as well as other sources of profit. Returns that are higher than our expectations for a given period produce higher than expected account balances, which increase the future fees we expect to earn on variable annuity and variable life contracts and decrease the future costs we expect to incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts and expected claims to be paid on variable life contracts. The opposite occurs when returns are lower than our expectations. The changes in future expected gross profits are used to recognize a cumulative adjustment to all prior periods’ amortization.
Furthermore, the calculation of the estimated liability for future policy benefits related to certain insurance products includes an estimate of associated revenues and expenses that are dependent on both historical market performance as well as estimates of market performance in the future. Similar to DAC and other costs described above, these liabilities are subject to quarterly adjustments for experience including market performance, in addition to annual adjustments resulting from our annual reviews of assumptions.
The weighted average rate of return assumptions used in developing estimated market returns consider many factors specific to each business,product type, including asset durations, asset allocations and other factors. With regard to equity market assumptions, the near-term future rate of return assumption used in evaluating DAC, other costs and liabilities for future policy benefits for certain of our products, primarily our domestic variable annuity and variable life insurance products, is generally updated each quarter and is derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15.0%, we use our maximum future rate of return. As of September 30, 2019,2020, our variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 4.6%3.5% near-term mean reversion equity expected rate of return.
With regard to interest rate assumptions used in evaluating DAC, DSI and liabilities for future policy benefits for certain of our products, we generally update the long-term and near-term future rates used to project fixed income returns annually and quarterly, respectively. As a result of our 20192020 annual reviews and update of assumptions and other refinements, we keptreduced our long-term expectation of the 10-year U.S. Treasury rate unchangedby 50 basis points and continue to grade to a rate of 3.75%3.25% over ten years. As part of our quarterly market experience updates, we update our near-term projections of interest rates to reflect changes in current rates.
For a discussion of the impact that could result from changes in certain key assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting Policies and Pronouncements—Sensitivities for Insurance Assets and Liabilities” in our Annual Report on Form 10-K for the year ended December 31, 2019
Future Adoption of New Accounting Pronouncements
ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASBFinancial Accounting Standards Board (“FASB”) on August 15, 2018 and is expected to have a significant impact on the Company’sConsolidated Financial Statements and Notes to the Consolidated Financial Statements. In October 2019, the FASB affirmedissued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date to affirm its decision to defer the effective date of the ASU 2018-12 to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. As a result of the COVID-19 pandemic, in November 2020 the FASB issued ASU 2020-11, Financial Services - Insurance (Topic 944): Effective Date and Early Application to defer for an additional one year the effective date of ASU 2018-12 from January 1, 2022 to January 1, 2023, and to provide transition relief to facilitate the early adoption of the ASU. The transition relief would allow large calendar-year public companies that early adopt ASU 2018-12 to apply the guidance either as of January 1, 2020 or January 1, 2021 (and record transition adjustments as of January 1, 2020 or January 1, 2021) in the 2022 financial statements. Companies that do not early adopt ASU 2018-12 would apply the guidance as of January 1, 2021 (and record transition adjustments as of January 1, 2021) in the 2023 financial statements. ASU 2018-12 will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter. See Note 2 to our Unaudited Interim Financial Statements for a more detailed discussion of ASU 2018-12, as well as other accounting pronouncements issued but not yet adopted and newly adopted accounting pronouncements.
Changes in Financial Position
Total assets increased $2.8$1.2 billion from $18.1$21.4 billion at December 31, 20182019 to $20.9$22.6 billion at September 30, 2019.2020. Significant components were:component was:
Separate account assets increased $1.9 billion primarily driven by favorable market performance and net inflows partially offset by policy charges;
•Reinsurance recoverables increased $0.7$0.9 billion primarily related to the variable annuity reinsured living benefit liabilities resulting from an increase in future expectedreserves related to our variable annuity living benefit paymentsguarantees driven by declining interest rates and the widening of credit spreads, partially offset by a favorable equity markets, as well as by universal and term life business growth; andnon-performance risk adjustment.
Total investments and Cash and cash equivalents increased $0.2 billion primarily driven by unrealized investment gains due to declining interest rates and universal, term and variable life business growth.
Total liabilities increased $2.7$1.0 billion from $17.7$20.8 billion at December 31, 20182019 to $20.4$21.8 billion at September 30, 2019.2020. Significant components were: component was:
Separate account liabilities increased $1.9 billion, corresponding to the increase in separate account assets, described above; and
•Future policy benefits increased $0.7$0.9 billion primarily driven by an increase in thereserves related to our variable annuity living benefit liabilities,guarantees, as discussed above, as well as growth in universal and term life, as discussed above.life.
Total equity increased $0.2 billion from $0.4$0.6 billion at December 31, 20182019 to $0.6$0.8 billion at September 30, 2019,2020, primarily driven by unrealized investment gains duea capital contribution from Pruco Life to declining interest rates and by net income.fund additional reserve requirements.
Results of Operations
Income (loss) from Operations before Income Taxes
Three Months Comparison
Income (loss) from operations before income taxes increased $1$11.7 million from $8 million for the three months ended September 30, 2018 to $9 million for the three months ended September 30, 2019. This increase was primarily driven by higher Policy charges and fee income as a result of business growth in the life business, Total realized investment gains / (losses), net reflecting derivative gains and higher commission and expense allowance ceded in the annuities business partially offset by higher Policyholders' benefits, Interest credited to policyholders’ account balances and amortization of Deferred policy acquisition costs, as discussed below.
Nine Months Comparison
Income from operations before income taxes increased $4 million from $25 million for the nine months ended 2018 to $29 million for the nine months ended 2019, which includes an unfavorable comparative net impact of $2 million from our annual reviews and update of assumptions and other refinements. The impact of this annual review for the second quarter of 2019 was not significant, and for the second quarter of 2018 was a $2 million net benefit, mainly driven by favorable impacts related to mortality and investment assumption updates. Excluding this item, income (loss) from operations before income taxes increased $6 million, primarily driven by higher Policy charges and fee income, as a result of business growth, higher profits on products that are subject
to principle-based reserving ("PBR") retained in the Company and not reinsured to our affiliated captive reinsurance companies and the impact of the internal Corporate-Owned Life Insurance ("COLI") restructure in the life business in the first quarter of 2018, as well as, higher Net investment income primarily driven by business growth and higher income on non-coupon investments. In addition, General, administrative and other expenses decreased primarily driven by higher commission and expense allowance ceded in the annuities business, as discussed above. Partially offsetting the increases to pre-tax income is an increase in Policyholders' benefits primarily driven by unfavorable mortality on term and variable life products and business growth and higher Interest credited to policyholders’ account balances, as discussed above. For more information on PBR products, please see the "Term and Universal Life Reserve Financing" section within the "Liquidity and Capital Resources" section below.
Revenues, Benefits and Expenses
Three Months Comparison
Revenues increased $13 million from $23 million for the three months ended September 30, 2018 to $36$8.6 million for the three months ended September 30, 2019 resulting from a $7 million increase in Policy charges and fee income driven by business growth in the life business, increase of $5 million in Total realized investment gains (losses), net reflecting derivative gains and $1 million increase in Net investment income primarily driven by business growth and higher income from non-coupon investments.
Benefits and expenses increased $12 million from $15to $20.3 million for the three months ended September 30, 20182020 primarily driven by:
•Higher Policy charges and fee income due to $27 million forhigher revenue from sales of principle-based reserving (“PBR”) products;
•Higher Net investment income due to higher non-coupon investment results from favorable market conditions; and
•Higher Premiums from continued growth in PBR term policies retained within the three months ended September 30, 2019, resultingCompany;
Partially offset by:
•Higher Policyholders' benefits from a $8 millionan increase in Policyholders’ benefits primarily driven by unfavorable mortality andguaranteed minimum death benefit ("GMDB") reserves due to business growth as discussed above, $5 million increase in Interest credited to policyholders' account balances as a resultfrom sales of business growthPBR products and $2 million increase in Amortization of deferred policy acquisition costs primarily driven by the impact from the new business in the life business. Partially offsetting these increases is a $3 million decrease inprojected low interest rates; and
•Higher General, administrative and other expenses primarily driven by favorablean unfavorable comparative impact from commission and expense allowance ceded as discussed above.
Nine Months Comparison
RevenuesIncome (loss) from operations before income taxes increased $13$9.1 million from $105$29.4 million for the nine months ended September 30, 20182019 to $118$38.5 million for the nine months ended September 30, 2019.2020. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenuesincome (loss) increased $14$6 million primarily driven by:
•Higher Policyholders' benefits from an increase in benefit reserves from continued growth in retained PBR term products and higher GMDB reserves due to business growth from sales of PBR products and unfavorable interest rate environment; and
•Higher General, administrative and other expenses driven by higheran unfavorable comparative impact from commission and expense allowance ceded due to lower annuity sales;
Partially offset by:
•Higher Premiums from continued growth in PBR term policies; and
•Higher Policy charges and fee income due to higher revenue from sales of $6PBR products.
Revenues, Benefits and Expenses
Three Months Comparison
Revenues increased $14.9 million higherfrom a gain of $36.2 million for the three months ended September 30, 2019 to a gain of $51.1 million for the three months ended September 30, 2020 primarily driven by:
•Higher Net investment income of $5 million, as discussed above, anddue to an increase in revenue from non-coupon investments;
•Higher Policy charges and fee income due to higher revenue from sales of $2 millionPBR products that are fully retained in Other income primarily driven by lower trading losses on fixed maturitiesthe Company; and equities.
•Higher Premiums from continued growth in PBR term policies.
Benefits and expenses increased $9$3.3 million from $80an expense of $27.6 million for the three months ended September 30, 2019 to an expense of $30.9 million for the three months ended September 30, 2020 primarily driven by:
•Higher General, administrative and other expenses driven by an unfavorable comparative impact from commission and expense allowance ceded due to lower annuity sales; and
•Higher Amortization of deferred policy acquisitions costs primarily driven by higher retained business growth in the Company;
Partially offset by:
•Lower Interest credited to policyholders' account balances primarily driven by an offsetting Index Universal Life refinement impact to Realized investment gains (losses), net.
Nine Months Comparison
Revenues increased $32 million from a gain of $117.7 million for the nine months ended September 30, 20182019 to $89a gain of $149.7 million for the nine months ended September 30, 2019.2020. Excluding the comparative net impact of our annual reviews and update of assumptions and other refinements, Revenues increased $32 million primarily driven by:
•Higher Policy charges and fee income due to higher revenue from sales of PBR products that are fully retained in the Company;
•Higher Realized Investment gains (losses), net driven by an increase in living benefit fees ceded as discussed above, reserves on the living benefit guarantees increased relatively more than prior year with an offsetting impact in Policy charges and fee income; and
•Higher Premiums from continued growth in PBR term policies.
Benefits and expenses increased $8$22.9 million resulting from an increase in Policyholders’ benefitsexpense of $10$88.3 million for the nine months ended September 30, 2019 to an expense of $111.2 million for the nine months ended September 30, 2020. Excluding the impact of our annual reviews and update of assumptions and other refinements, Benefits and expenses increased $26 million primarily driven by unfavorable mortality and business growth in the life business, as discussed above, and an increase in Interest credited to policyholders' account balances of $6 million as result of business growth. Partially offsetting these increases are lowerby:
•Higher General, administrative and other expenses of $7 million, as discussed above, and a decrease in Amortization of deferred policy acquisition costs of $1 million, primarily driven by thean unfavorable comparative impact from commission and expense allowance ceded due to lower annuity sales; and
•Higher Policyholders' benefits from an increase in benefit reserves from continued growth in retained PBR term products and higher GMDB reserves due to business growth from sales of the internal COLI restructure in the life business in the first quarter of 2018, as discussed above.
Variable Annuity Risks and Risk Mitigants
The following is a summary of: (i)of certain risks associated with individual annuityIndividual Annuities' products, and (ii) certain strategies in mitigating those risks, including any updates to those strategies since the previous year end.year-end, and the related financial results. For a more detailed description of these items and their related accounting treatment, refer to the complete descriptions provided in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital markets assumptions such as equity market returns, interest rates and market volatility, along with actuarial assumptions such as contractholder mortality, the timing and amount of annuitization and withdrawals, and contract lapses. For these risk exposures, achievement of our expected earnings and profitability is subject to the risk that actual experience will differ from the assumptions used in the original pricing of these products. Prudential Financial currently manages our exposure to certain risks driven by capital markets fluctuations primarily through a combination of Product Design Features and an Asset Liability Management Strategy ("ALM") Strategy., as discussed below.
Product Design Features
A portion of the variable annuity contracts that we offer include an asset transfer feature. This feature is implemented at the contract level, and transfers assets between certain variable investment sub-accounts selected by the annuity contractholder and, depending on the benefit feature, a fixed-rate account in the general account or a bond fund sub-account within the separate account. The objective of the asset transfer feature is to reduce our exposure to equity market risk and market volatility. The asset transfer feature associated with currently-sold highest daily living benefit products uses a designated bond fund sub-account within the separate account. The transfers are based on a static mathematical formula used with the particular benefit which considers a number of factors, including, but not limited to, the impact of investment performance on the contractholder’s total account value. Other product design features we utilize include, among others, asset allocation restrictions, minimum issuance age requirements and certain limitations on the amount of contractholder deposits,purchase payments, as well as a required minimum allocation to our general account for certain of our products. We have also introduced products that diversify our risk profile and have incorporated provisions in product design allowing frequent revisions of key pricing elements for certain products. In addition, there is diversity in our fee arrangements, as certain fees are primarily based on the benefit guarantee amount, the contractholder account value and/or premiums, which helps preserve certain revenue streams when market fluctuations cause account values to decline.
Asset Liability Management Strategy (including fixed income instruments and derivatives)
The currentPrudential Insurance employs an ALM strategy conducted within Prudential Insurancethat utilizes a combination of both traditional fixed income instruments and derivatives to help defray potential claims associated with our variable annuity living benefit guarantees. The economic liability we manage with this ALM strategy consists of expected living benefit claims under less severe market conditions, which are managed using a traditionalan ALM strategy through the accumulation of fixed income and derivative instruments, and potential living benefit claims resulting from more severe market conditions, which are hedged using derivative instruments. For our Prudential Defined Income (“PDI”) variable annuity, we utilize fixed income instruments to help defray potential claims. For the portion of our ALM strategy executed with derivatives, Prudential Insurance enter into a range of exchange-traded cleared, and over-the-counter 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. Since the ALM strategy is conducted in Prudential Insurance, the results of the strategy do not directly impact the Company's results of operations or financial condition.
Income Taxes
For information regarding income taxes, see Note 7 to the Unaudited Interim Financial Statements.
Liquidity and Capital Resources
This section supplements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Overview
Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of our business, fund business growth, and provide a cushion to withstand adverse circumstances. Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of our business, general economic conditions, our ability to borrow from affiliates and our access to the capital markets through affiliates as described herein.
Effective and prudent liquidity and capital managementThe Company 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.
Our businesses are subject to comprehensive regulation and supervision by domestic and international regulators. These regulations currently include, or may include in the future 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 and credit concentration. For information on these regulatory initiatives and their potential impact on us, see “Business—Regulation” and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
COVID-19 and Related Market Disruptions
Beginning in the first quarter of 2020, broad market concerns over the impact of COVID-19 have led to significant volatility and disruptions in the global economy and financial markets. Given this macro environment and the global pandemic, as examined through our stress testing, in the first nine months of the year we accelerated our product diversification strategy and repriced certain products, which are expected to support the capital position over time.
Liquidity. The Company continues to operate with significant liquid resources. Nevertheless, adverse developments related to COVID-19 and associated market dislocations could strain our existing liquidity. Any need to increase the use of our alternative sources of liquidity may result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings or ratings outlooks.
Capital. As of September 30, 2020, the Company maintained capital levels consistent with its ratings targets. However, market conditions could negatively impact the statutory capital and constrain our overall capital flexibility. For example, adverse market conditions may lead to increased defaults and/or further deterioration in the credit quality or fair values of our investment portfolio, which would negatively impact our statutory capital. Adverse market conditions could require us to take additional management actions to maintain capital consistent with our ratings objectives, which may include redeploying financial resources from internal sources or using available external sources of capital or seeking additional sources.
Liquidity and Capital Risk Management. Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity of the Company on a daily basis and projects borrowing and capital needs over a multi-year time horizon. We use a Risk Appetite Framework (“RAF”) to ensure that all risks taken by the Company aligns with our capacity and willingness to take those risks. The RAF provides a dynamic assessment of capital and liquidity stress impacts, including scenarios similar to, and more severe than, those occurring due to COVID-19, and is intended to ensure that sufficient resources are available to absorb those impacts. We believe that our capital and liquidity resources are sufficient to satisfy the capital and liquidity requirements of the Company.
Capital
OurWe manage the Company to regulatory capital management framework is primarily based on statutory Risk-Based Capitallevels consistent with our "AA" ratings targets. We utilized the risk-based capital ("RBC") measures. The RBC ratio isas a primary measure of the capital adequacy of the Company.adequacy. RBC is calculated based on statutory financial statements and risk formulas consistent with the practices of the National Association of Insurance Commissioners ("NAIC"). RBC considers, among other things, risks related to the type and quality of the invested assets, insurance-related risks associated with an insurer’s products and liabilities, interest rate risks and general business risks. RBC ratio calculation iscalculations are intended to assist insurance regulators in measuring an insurer’s solvency and ability to pay future claims. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities, but is available to the public. The Company’s capital levels substantially exceed the minimum level required by applicable insurance regulations.
Our regulatory capital levels may be affected in the future by changes to the applicable regulations, proposals for which are currently under consideration by both domestic and international insurance regulators.
The regulatory capital level of the Company can be materially impacted by interest rate and equity market fluctuations, changes in the values of derivatives, the level of impairments recorded, and credit quality migration of the investment portfolio, among other items. In addition, the reinsurance of business or the recapture of business subject to reinsurance arrangements due to defaults by, or credit quality migration affecting, the reinsurers or for other reasons could negatively impact regulatory capital levels. The Company’s regulatory capital level is also affected by statutory accounting rules, which are subject to change by each applicable insurance regulator.
Risk Appetite Framework
Prudential Financial manages capital consistent with our Risk Appetite Framework (“RAF”) to determine the amount of capital it needs to hold given its risk profile. The RAF is designed to ensure that all risks taken across the enterprise align with our capacity and willingness to take those risks. It allows for a cohesive assessment of risk and available resources and supports management’s decision-making. The RAF is supported by our comprehensive stress testing framework to provide a dynamic assessment of stress impacts and the resources available to absorb those impacts under stress scenarios. It incorporates the objectives of what we previously referred to as our Capital Protection Framework.
Affiliated Captive Reinsurance Companies
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Capital-Affiliated Captive Reinsurance Companies” included in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, for a discussion of our use of captive reinsurance companies.
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, LLCLLC's ("Prudential Funding"), a wholly-owned subsidiary of Prudential Insurance, financing capacity on liquidity 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,(e.g., type of asset and credit quality) in calculating internal liquidity measures to evaluate our liquidity under various stress scenarios, including company-specific and market-wide events. We continue to believe that cash generated by ongoing operations and the liquidity profile of our assets provide sufficient liquidity under reasonably foreseeable stress scenarios.
Cash Flow
The principal sources of the Company’s liquidity are premiums and certain annuity considerations, investment and fee income, investment maturities, sales of investments and internal borrowings. The principal uses of that liquidity include benefits, claims, and payments to policyholders and contractholders in connection with surrenders, withdrawals and net policy loan activity. Other uses of liquidity include commissions, general and administrative expenses, purchases of investments, the payment of dividends and returns of capital to the parent company, hedging and reinsurance activity and payments in connection with financing activities.
In managing liquidity, we consider the risk of policyholder and contractholder withdrawals of funds earlier than our assumptions when selecting assets to support these contractual obligations. We use surrender charges and other contract provisions to mitigate the extent, timing and profitability impact of withdrawals of funds by customers.
Liquid Assets
Liquid assets include cash and cash equivalents, short-term investments, U.S. Treasury fixed maturities, and fixed maturities that are not designated as held-to-maturity and public equity securities. As of September 30, 20192020 and December 31, 2018,2019, the Company had liquid assets of $1,551$1,903 million and $1,364$1,627 million, respectively. The portion of liquid assets comprised of cash and cash equivalents and short-term investments was $31$68 million and $70$56 million as of September 30, 20192020 and December 31, 2018,2019, respectively. As of September 30, 2019, $1,4312020, $1,734 million, or 95%96%, of the fixed maturity investments in companythe Company's general account portfolios, were rated high or highest quality based on NAIC or equivalent rating.
Term and Universal Life Reserve Financing
The Company uses affiliated captive reinsurance companiessubsidiaries to finance the portion of the statutory reserves required to be held under Regulation XXX and Guideline AXXX that is considered to be non-economic. The financing arrangements involve the reinsurance of term and universal life business to our affiliated captive reinsurers and the issuance of surplus notes by those affiliated captives that are treated as capital for statutory purposes. These surplus notes are subordinated to policyholder obligations, and the payment of principal and interest on the surplus notes can only be made with prior insurance regulatory approval.
As of September 30, 2019,2020, the affiliated captive reinsurance companies have entered into agreements with external counterparties providing for the issuance of up to an aggregate of $13.7 billion$14,825 million of surplus notes by our affiliated captive reinsurers in return for the receipt of credit-linked notes (“Credit-Linked Note Structures”), of which $11.6 billion$12,849 million of surplus notes was outstanding, compared to an aggregate insurance capacity of $13,700 million, of which $12,009 million was outstanding as of December 31, 2019. The amounts reflect a $1,200 million Credit-Linked Note Structure entered into in June 2020 for Guideline AXXX reserves, of which $700 million was outstanding as of September 30, 2019.2020. Under the agreements, the affiliated captive receives in exchange for the surplus notes one or more credit-linked notes issued by a special-purpose affiliate of the Company with an aggregate principal amount equal to the surplus notes outstanding. The affiliated captive holds the credit-linked notes as assets supporting Regulation XXX or Guideline AXXX non-economic reserves, as applicable. For more information on theour Credit-Linked Note Structures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-LiquidityOperations—Liquidity and Capital Resources-FinancingResources—Financing Activities” in theour Annual Report on Form 10-K for the year ended December 31, 2018.2019.
As of September 30, 2019,2020, our affiliated captive reinsurance companies had outstanding an aggregate of $2.4$2.3 billion of debt issued for the purpose of financing Regulation XXX and Guideline AXXX non-economic reserves, of which approximately $0.7 billion relates to Regulation XXX reserves and approximately $1.7$1.6 billion relates to Guideline AXXX reserves. In addition, as of September 30, 2019,2020, for purposes of financing Guideline AXXX reserves, one of our affiliated captives had outstanding approximately $4.0 billion of surplus notes outstanding that were issued to affiliates.
The Company has introduced updated versions of its individual life insurance products in conjunction with the requirement to adopt principle-based reserving by January 1, 2020. These updated products are currently priced to support the principle-based statutory reserve level without the need for reserve financing. Certain elements of the implementation of principle-based reserving are yet to be finalized by the NAIC and may have a material impact on statutory reserves. The Company continues to assess the impact of the implementation of principle-based reserving on projected statutory reserve levels, product pricing and the use of financing.
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| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| Notes to Unaudited Interim Financial Statements—(Continued) |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of fluctuations in the value of financial instruments as a result of absolute or relative changes in interest rates, foreign currency exchange rates, equity prices or commodity prices. To varying degrees, our products and services, and the investment activities supporting them, generate exposure to market risk. The market risk incurred, and our strategies for managing this risk, vary by product. As of September 30, 2019,2020, there have been no material changes in our economic exposure to market risk from December 31, 2018,2019, a description of which may be found in our Annual Report on Form 10-K, for the year ended December 31, 2018,2019, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” filed with the SEC.Securities and Exchange Commission. See “Risk Factors” in this Quarterly Report on Form 10-Q and Item 1A, “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2018,2019, 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.
Item 4. Controls and Procedures
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 Securities Exchange Act of 1934, as amended (“Exchange Act”) Rule 13a-15(e), as of September 30, 2019.2020. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2019,2020, 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 September 30, 2019,2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
See Note 10 to the Unaudited Interim Financial Statements under “—Litigation and Regulatory Matters” for a description of certain pending litigation and regulatory matters affecting us, and certain risks to our business presented by such matters, which is incorporated herein by reference.
Item 1A. Risk Factors
You should carefully consider the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. These risks could materially affect our business, results of operations or financial condition or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by or on behalf of the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our business described elsewhere in this Quarterly Report on Form 10-Q. The following should be read in conjunction with and supplements and amends the section titled “Risk Factors” in our Annual Report on Form 10-K.
We cannot predict what impact the COVID-19 pandemic will ultimately have on the global economy, markets or our business. The pandemic could exacerbate existing areas of concern, such as the pace of economic growth, equity market performance, and continued low interest rates, among others. Changes in consumer spending, business investment, and government debt and spending as a result of the crisis may negatively impact our business.
These risks may have manifested, and may continue to manifest, in our business in the following areas, among others:
Investment Risk. The COVID-19 pandemic and its impact on the global economy has increased the risk of loss on our investments due to default or deterioration in credit quality or value.
Insurance Risk. We expect COVID-19 to drive elevated levels of mortality in the near-term. The COVID-19 pandemic may ultimately result in a mortality calamity, which is the risk that short-term mortality rates deviate adversely from what is expected as a result of pandemics or other disasters. Elevated losses will reduce our earnings and capital, and we may be forced to liquidate assets before maturity in order to pay the excess claims. The pandemic situation may worsen depending on the evolution of the virus’s transmissibility and virulence, effectiveness of public health measures and availability of potential vaccines and treatments. Ultimate losses would depend on several factors, including the rates of mortality and morbidity among various segments of the insured population, age distribution of associated deaths, collectability of reinsurance, performance of our investment portfolio, effect on lapses and surrenders of existing policies, as well as sales of new policies and other variables.
The pandemic may also result in a change in policyholder behavior, such as policyholders choosing to defer or stop paying insurance premiums. It may also result in a lapse calamity, which is the risk that lapse rates over the short-term deviate adversely from what is expected. For example, surrenders of cash surrender value products by customers in need of liquidity can impact our liquidity, and it may be necessary in certain market conditions to sell assets to meet surrender demands. Lapse calamity can also impact our earnings through its impact on estimated future profits.
Finally, we cannot predict whether COVID-19 will ultimately lead to longer-term deviations from the mortality or policyholder behavior assumptions we used to price our products.
Market Risk. Continued market disruptions and volatility may further negatively impact the profitability of many of our insurance and annuity products, which depends in part on the value of the separate accounts supporting these products which can fluctuate substantially depending on market conditions. Market volatility and reduced liquidity may reduce our ability to implement asset-liability management and hedging strategies. The decline in interest rates, in particular, may result in lower investment income, higher reserve levels and other consequences.
Liquidity Risk. The impact of the COVID-19 crisis and related market dislocations could strain our existing liquidity and cause us to increase the use of our alternative sources of liquidity, which could result in increased financial leverage on our balance sheet and negatively impact our credit and financial strength ratings. Furthermore, certain sources of liquidity might not be available during times of stress, or may only be available on unfavorable terms, which can result in a decrease in our profitability and a significant reduction in our financial flexibility.
In particular, abrupt changes to interest rate, equity, and/or currency markets could lead to increased collateral requirements to counterparties, and cash demands due to severe mortality calamity, customer withdrawals or lapse events.
Operational Risk. One of the main impacts of the COVID-19 crisis has been executing our business continuity protocols to ensure our employees are safe and able to serve our customers. This included transitioning the vast majority of our employees to remote work arrangements. We have also made a number of operational changes to accommodate our customers.
In this environment, there is an elevated risk that weaknesses or failures in our business continuation plans could lead to disruption of our operations, liability to clients, exposure to disciplinary action or harm to our reputation. Furthermore, weaknesses or failures within a vendor’s business continuation plan can materially disrupt our business operations. Our information systems and those of our vendors and service providers may be more vulnerable to cyber-attacks, computer viruses or other computer related attacks, programming errors and similar disruptive problems during a business continuation event.
Strategic Risk. The COVID-19 pandemic could ultimately generate an economic downturn; higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending. In such an environment, the demand for our products and our investment returns could be materially adversely affected. In addition, we expect near-term sales to be slowed by the impact of social distancing and financial hardship on our customers.
Finally, we cannot predict what actions governments will take in response to the COVID-19 pandemic, and how any new laws, regulations, or state-sponsored programs may impact our business.
Item 6. Exhibits
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| EXHIBIT INDEX |
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EXHIBIT INDEX |
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| 101.INS - XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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| 101.SCH - XBRL Taxonomy Extension Schema Document. |
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| 101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.LAB - XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document |
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| 101.DEF - XBRL Taxonomy Extension Definition Linkbase Document |
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| 104.Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements 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.
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| Pruco Life Insurance Company of New Jersey |
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| By: | | /s/ John ChieffoSusan M. Mann |
| Name: | | John ChieffoSusan M. Mann |
| | | Vice President and Chief Financial Officer |
| | | (Authorized Signatory and Principal Financial Officer) |
Date: November 13, 201912, 2020