Closed Block

12 Months Ended

Dec. 31, 2019

CLOSED BLOCK

On December 18, 2001, the date of demutualization, PICA established a closed block for certain in-force participating insurance policies and annuity products, along with corresponding assets used for the payment of benefits and policyholders’ dividends on these products, (collectively the “Closed Block”), and ceased offering these participating products. The recorded assets and liabilities were allocated to the Closed Block at their historical carrying amounts. The Closed Block forms the principal component of the Closed Block division. See Note 22 for financial information on the Closed Block division. The insurance policies and annuity contracts comprising the Closed Block are managed in accordance with the Plan of Reorganization approved by the New Jersey Department of Banking and Insurance (“NJDOBI”) on December 18, 2001, and PICA is directly obligated for the insurance policies and annuity contracts in the Closed Block.

The policies included in the Closed Block are specified individual life insurance policies and individual annuity contracts that were in force on the date of demutualization and for which PICA is currently paying or expects to pay experience-based policy dividends. Assets have been allocated to the Closed Block in an amount that has been determined to produce cash flows which, together with revenues from policies included in the Closed Block, are expected to be sufficient to support obligations and liabilities relating to these policies, including provision for payment of benefits, certain expenses and taxes and to provide for continuation of the policyholder dividend scales in effect in 2000, assuming experience underlying such scales continues. To the extent that, over time, cash flows from the assets allocated to the Closed Block and claims and other experience related to the Closed Block are, in the aggregate, more or less favorable than what was assumed when the Closed Block was established, total dividends paid to Closed Block policyholders may be greater than or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in effect in 2000 had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to Closed Block policyholders and will not be available to shareholders. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from PICA’s assets outside of the Closed Block. The Closed Block will continue in effect as long as any policy in the Closed Block remains in force unless, with the consent of the New Jersey insurance regulator, it is terminated earlier.

The excess of Closed Block liabilities over Closed Block assets at the date of the demutualization (adjusted to eliminate the impact of related amounts in AOCI) represented the estimated maximum future earnings at that date from the Closed Block expected to result from operations attributed to the Closed Block after income taxes. In establishing the Closed Block, the Company developed an actuarial calculation of the timing of such maximum future earnings. If actual cumulative earnings of the Closed Block from inception through the end of any given period are greater than the expected cumulative earnings, only the expected earnings will be recognized in income. Any excess of actual cumulative earnings over expected cumulative earnings will represent undistributed accumulated earnings attributable to policyholders, which are recorded as a policyholder dividend obligation. The policyholder dividend obligation represents amounts to be paid to Closed Block policyholders as an additional policyholder dividend unless otherwise offset by future Closed Block performance that is less favorable than originally expected. If the actual cumulative earnings of the Closed Block from its inception through the end of any given period are less than the expected cumulative earnings of the Closed Block, the Company will recognize only the actual earnings in income.

As of December 31, 2019 and 2018, the Company recognized a policyholder dividend obligation of $2,816 million and $2,252 million, respectively, to Closed Block policyholders for the excess of actual cumulative earnings over the expected cumulative earnings. Additionally, accumulated net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block have been reflected as a policyholder dividend obligation of $3,332 million and $899 million at December 31, 2019 and 2018, respectively, to be paid to Closed Block policyholders unless offset by future experience, with a corresponding amount reported in AOCI.

On December 8, 2017, PICA’s Board of Directors acted to decrease the dividends payable on Closed Block policies for 2018. On December 7, 2018, PICA’s Board of Directors approved a continuation of the dividends payable on Closed Block policies for 2019. On December 6, 2019, PICA’s Board of Directors acted to decrease the dividends payable on Closed Block policies for 2020. These actions resulted in a decrease of approximately $86 million for both years ending December 31, 2017 and 2018 and a decrease of approximately $79 million for the year ended December 31, 2019 in the liability for policyholders’ dividends recognized.

Closed Block liabilities and assets designated to the Closed Block at December 31, as well as maximum future earnings to be recognized from these liabilities and assets, are as follows:



	2019			2018

	(in millions)
Closed Block liabilities
Future policy benefits	$	47,613		$	48,282
Policyholders’ dividends payable	717			812
Policyholders’ dividend obligation	6,149			3,150
Policyholders’ account balances	4,973			5,061
Other Closed Block liabilities	4,049			3,955
Total Closed Block liabilities	63,501			61,260
Closed Block assets
Fixed maturities, available-for-sale, at fair value	41,146			38,538
Fixed maturities, trading, at fair value	256			195
Equity securities, at fair value	2,245			1,784
Commercial mortgage and other loans	8,629			8,782
Policy loans	4,264			4,410
Other invested assets	3,333			3,316
Short-term investments	227			477
Total investments	60,100			57,502
Cash and cash equivalents	191			467
Accrued investment income	456			466
Other Closed Block assets	93			105
Total Closed Block assets	60,840			58,540
Excess of reported Closed Block liabilities over Closed Block assets	2,661			2,720
Portion of above representing accumulated other comprehensive income (loss):
Net unrealized investment gains (losses)	3,280			857
Allocated to policyholder dividend obligation	(3,332		)	(899		)
Future earnings to be recognized from Closed Block assets and Closed Block liabilities	$	2,609		$	2,678

Information regarding the policyholder dividend obligation is as follows:



	2019		2018

	(in millions)
Balance, January 1	$	3,150	$	5,446
Cumulative effect adjustment from the adoption of ASU 2016-01(1)	0		157
Impact from earnings allocable to policyholder dividend obligation	564		(508		)
Change in net unrealized investment gains (losses) allocated to policyholder dividend obligation	2,435		(1,945		)
Balance, December 31	$	6,149	$	3,150

__________


(1)	See Note 2 for details.

Closed Block revenues and benefits and expenses for the years ended December 31, are as follows:



	2019		2018			2017

	(in millions)
Revenues
Premiums	$	2,207	$	2,301		$	2,524
Net investment income	2,332		2,298			2,669
Realized investment gains (losses), net	521		130			534
Other income (loss)	589		(39		)	113
Total Closed Block revenues	5,649		4,690			5,840
Benefits and Expenses
Policyholders’ benefits	2,906		2,972			3,220
Interest credited to policyholders’ account balances	130		132			133
Dividends to policyholders	2,187		1,236			2,007
General and administrative expenses	351		364			382
Total Closed Block benefits and expenses	5,574		4,704			5,742
Closed Block revenues, net of Closed Block benefits and expenses, before income taxes	75		(14		)	98
Income tax expense (benefit)	10		(78		)	43
Closed Block revenues, net of Closed Block benefits and expenses and income taxes	$	65	$	64		$	55