10-Q 1 prucoform10q-2q2018.htm 10-Q Document
Table of Contents                            

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ________________________
FORM 10-Q
________________________
ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from              to             
Commission file number 033-37587        
_____________________________________ 
Pruco Life Insurance Company
(Exact name of Registrant as specified in its charter)
Arizona
 
22-1944557
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
213 Washington Street
Newark, New Jersey 07102
(973) 802-6000
(Address and Telephone Number of Registrant's Principal Executive Offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer", "accelerated filer", "smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
x
(Do not check if a smaller reporting company)
 
 
 
 
 
 
 
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No  x
As of August 10, 2018, 250,000 shares of the registrant’s Common Stock (par value $10) were outstanding. As of such date, The Prudential Insurance Company of America, a New Jersey corporation, owned all of the Registrant’s Common Stock.
Pruco Life Insurance Company meets the conditions set
forth in General Instruction (H) (1) (a) and (b) on Form 10-Q and
is therefore filing this Form 10-Q in the reduced disclosure format.


Table of Contents                            

TABLE OF CONTENTS
 
 
 
Page
Number
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 6.
 
 

2




Table of Contents                            

FORWARD LOOKING STATEMENTS
Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Pruco Life Insurance Company and its subsidiaries. There can be no assurance that future developments affecting Pruco Life Insurance Company and its subsidiaries will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) losses on investments or financial contracts due to deterioration in credit quality or value, or counterparty default; (2) losses on insurance products due to mortality experience or policyholder behavior experience that differs significantly from our expectations when we price our products; (3) changes in interest rates and equity prices that may (a) adversely impact the profitability of our products, the value of separate accounts supporting these products or the value of assets we manage, (b) result in losses on derivatives we use to hedge risk or increase collateral posting requirements and (c) limit opportunities to invest at appropriate returns; (4) guarantees within certain of our products, in particular our variable annuities, which are market sensitive and may decrease our earnings or increase the volatility of our results of operations or financial position; (5) liquidity needs resulting from (a) derivative collateral market exposure, (b) asset/liability mismatches, (c) the lack of available funding in the financial markets or (d) unexpected cash demands due to severe mortality calamity or lapse events; (6) financial or customer losses, or regulatory and legal actions, due to inadequate or failed processes or systems, human error or misconduct, and external events, such as (a) disruption of our systems and data, (b) an information security breach, (c) a failure to protect the privacy of sensitive data or (d) reliance on third-parties, including to distribute our products; (7) changes in the regulatory landscape, including related to (a) regulation under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (b) changes in tax laws, (c) fiduciary rule developments, (d) state insurance laws and developments regarding group-wide supervision, capital and reserves, and (e) privacy and cybersecurity regulation; (8) technological changes which may adversely impact companies in our investment portfolio or cause insurance experience to deviate from our assumptions; (9) ratings downgrades; (10) market conditions that may adversely affect the sales or persistency of our products; (11) competition; and (12) reputational damage. Pruco Life Insurance Company does not intend, and is under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2017 for discussion of certain risks relating to our business and investment in our securities.

3




Table of Contents                            

PART I—FINANCIAL INFORMATION
ITEM 1. Financial Statements

PRUCO LIFE INSURANCE COMPANY
Unaudited Interim Consolidated Statements of Financial Position
June 30, 2018 and December 31, 2017 (in thousands, except share amounts)
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Fixed maturities, available for sale, at fair value (amortized cost: 2018 – $5,188,994; 2017 – $4,941,944)
$
5,214,544

 
$
5,223,302

Fixed maturities, trading, at fair value (amortized cost: 2018 – $38,279; 2017 – $38,279)(1)
36,875

 
38,793

Equity securities, at fair value (cost: 2018 – $37,718; 2017 – $32,694)(1)
43,783

 
40,610

Policy loans
1,189,889

 
1,161,101

Short-term investments
333

 
1,339

Commercial mortgage and other loans
1,120,642

 
1,083,419

Other invested assets (includes $66,160 and $726 measured at fair value at June 30, 2018 and December 31, 2017, respectively)(1)
313,920

 
263,074

Total investments
7,919,986

 
7,811,638

Cash and cash equivalents
72,206

 
212,569

Deferred policy acquisition costs
1,452,282

 
1,376,211

Accrued investment income
85,513

 
82,341

Reinsurance recoverables
31,935,722

 
32,521,264

Receivables from parent and affiliates
273,818

 
300,116

Other assets
431,710

 
465,467

Separate account assets
127,660,988

 
129,655,734

TOTAL ASSETS
$
169,832,225

 
$
172,425,340

LIABILITIES AND EQUITY
 
 
 
LIABILITIES
 
 
 
Policyholders’ account balances
$
21,121,547

 
$
20,036,134

Future policy benefits
17,199,539

 
18,561,550

Cash collateral for loaned securities
13,138

 
33,169

Income taxes
11,546

 
36,323

Short-term debt to affiliates
1,727

 
0

Payables to parent and affiliates
160,163

 
228,210

Other liabilities
953,596

 
1,038,972

Separate account liabilities
127,660,988

 
129,655,734

TOTAL LIABILITIES
167,122,244

 
169,590,092

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 10)

 

EQUITY
 
 
 
Common stock ($10 par value; 1,000,000 shares authorized; 250,000 shares issued and outstanding)
2,500

 
2,500

Additional paid-in capital
1,146,479

 
1,141,092

Retained earnings
1,551,327

 
1,526,310

Accumulated other comprehensive income
9,675

 
165,346

TOTAL EQUITY
2,709,981

 
2,835,248

TOTAL LIABILITIES AND EQUITY
$
169,832,225

 
$
172,425,340

(1) Prior period amounts have been reclassified to conform to current period presentation. See "Adoption of ASU 2016-01" in Note 2 for details.

See Notes to Unaudited Interim Consolidated Financial Statements

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Table of Contents                            

PRUCO LIFE INSURANCE COMPANY
Unaudited Interim Consolidated Statements of Operations and Comprehensive Income (Loss)
Three and Six Months Ended June 30, 2018 and 2017 (in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
REVENUES
 
 
 
 
 
 
 
Premiums
$
14,903

 
$
17,077

 
$
22,818

 
$
22,834

Policy charges and fee income
169,004

 
(116,167
)
 
298,159

 
11,835

Net investment income
81,649

 
91,041

 
159,564

 
180,656

Asset administration fees
3,544

 
4,390

 
7,017

 
8,577

Other income
16,078

 
14,148

 
35,374

 
30,125

Realized investment gains (losses), net:
 
 
 
 
 
 
 
Other-than-temporary impairments on fixed maturity securities
(57
)
 
(1,479
)
 
(651
)
 
(5,891
)
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income
0

 
358

 
0

 
366

Other realized investment gains (losses), net
(36,833
)
 
277,711

 
(85,281
)
 
249,536

Total realized investment gains (losses), net
(36,890
)
 
276,590

 
(85,932
)
 
244,011

TOTAL REVENUES
248,288

 
287,079

 
437,000

 
498,038

BENEFITS AND EXPENSES
 
 
 
 
 
 
 
Policyholders’ benefits
40,441

 
(181,098
)
 
92,177

 
(113,179
)
Interest credited to policyholders’ account balances
42,555

 
45,967

 
83,353

 
90,727

Amortization of deferred policy acquisition costs
62,316

 
41,183

 
88,461

 
57,455

General, administrative and other expenses
79,669

 
49,585

 
140,459

 
106,404

TOTAL BENEFITS AND EXPENSES
224,981

 
(44,363
)
 
404,450

 
141,407

INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURE
23,307

 
331,442

 
32,550

 
356,631

Income tax expense (benefit)
(13,012
)
 
(9,610
)
 
(15,711
)
 
(30,438
)
INCOME (LOSS) FROM OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURE
36,319

 
341,052

 
48,261

 
387,069

Equity in earnings of operating joint venture, net of taxes
(93
)
 
0

 
(731
)
 
0

NET INCOME (LOSS)
$
36,226

 
$
341,052

 
$
47,530

 
$
387,069

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(5,667
)
 
126

 
(6,590
)
 
149

Net unrealized investment gains (losses)
(82,003
)
 
102,113

 
(227,054
)
 
129,316

Total
(87,670
)
 
102,239

 
(233,644
)
 
129,465

Less: Income tax expense (benefit) related to other comprehensive income (loss)
(18,363
)
 
35,783

 
(49,063
)
 
45,312

Other comprehensive income (loss), net of tax
(69,307
)
 
66,456

 
(184,581
)
 
84,153

COMPREHENSIVE INCOME (LOSS)
$
(33,081
)
 
$
407,508

 
$
(137,051
)
 
$
471,222

See Notes to Unaudited Interim Consolidated Financial Statements

5




Table of Contents                            

PRUCO LIFE INSURANCE COMPANY
Unaudited Interim Consolidated Statements of Equity
Six Months Ended June 30, 2018 and 2017 (in thousands)
 
 
  Common  
Stock
 
 Additional  
Paid-in
Capital
 
Retained Earnings  
 
Accumulated
Other
Comprehensive  
Income
(Loss)
 
Total Equity  
Balance, December 31, 2017
$
2,500

 
$
1,141,092

 
$
1,526,310

 
$
165,346

 
$
2,835,248

Cumulative effect of adoption of ASU 2016-01
 
 
 
 
7,936

 
(1,539
)
 
6,397

Cumulative effect of adoption of ASU 2018-02
 
 
 
 
(30,449
)
 
30,449

 
0

Contributed capital
 
 
5,387

 
 
 
 
 
5,387

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
47,530

 
 
 
47,530

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
(184,581
)
 
(184,581
)
Total comprehensive income (loss)
 
 
 
 
 
 
 
 
(137,051
)
Balance, June 30, 2018
$
2,500

 
$
1,146,479

 
$
1,551,327

 
$
9,675

 
$
2,709,981


 
Common  
Stock
 
Additional  
Paid-in
Capital
 
Retained
Earnings  
 
Accumulated
Other
Comprehensive  
Income
(Loss)
 
Total Equity  
Balance, December 31, 2016
$
2,500

 
$
986,062

 
$
1,448,517

 
$
70,975

 
$
2,508,054

Contributed capital
 
 
5,000

 
 
 
 
 
5,000

Contributed (distributed) capital-parent/child asset transfers
 
 
875

 
 
 
 
 
875

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
387,069

 
 
 
387,069

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
84,153

 
84,153

Total comprehensive income (loss)
 
 
 
 
 
 
 
 
471,222

Balance, June 30, 2017
$
2,500

 
$
991,937

 
$
1,835,586

 
$
155,128

 
$
2,985,151












See Notes to Unaudited Interim Consolidated Financial Statements

6




Table of Contents                            

PRUCO LIFE INSURANCE COMPANY
Unaudited Interim Consolidated Statements of Cash Flows
Six Months Ended June 30, 2018 and 2017 (in thousands)

 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
47,530

 
$
387,069

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Policy charges and fee income
(75,175
)
 
(73,450
)
Interest credited to policyholders’ account balances
83,353

 
90,727

Realized investment (gains) losses, net
85,932

 
(244,011
)
Amortization and other non-cash items
(20,135
)
 
(33,396
)
Change in:
 
 
 
Future policy benefits
870,715

 
999,298

Reinsurance recoverables
(799,012
)
 
(1,116,831
)
Accrued investment income
(3,172
)
 
(1,096
)
Net payables to/receivables from parent and affiliates
(41,905
)
 
(31,547
)
Deferred policy acquisition costs
(56,030
)
 
(65,248
)
Income taxes
22,585

 
13,357

Derivatives, net
(2,927
)
 
6,735

Other, net
(127,216
)
 
87,749

Cash flows from (used in) operating activities
(15,457
)
 
19,356

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from the sale/maturity/prepayment of:
 
 
 
Fixed maturities, available-for-sale
247,967

 
687,224

Equity securities(1)
90

 
510

Policy loans
77,733

 
71,180

Ceded policy loans
(7,833
)
 
(7,370
)
Short-term investments
6,244

 
51,631

Commercial mortgage and other loans
40,542

 
92,278

Other invested assets(1)
7,171

 
9,070

Payments for the purchase/origination of:
 
 
 
Fixed maturities, available-for-sale
(524,177
)
 
(831,056
)
Equity securities(1)
(5,000
)
 
(5,000
)
Policy loans
(81,882
)
 
(54,565
)
Ceded policy loans
8,198

 
9,320

Short-term investments
(5,270
)
 
(28,983
)
Commercial mortgage and other loans
(82,690
)
 
(150,040
)
Other invested assets(1)
(44,314
)
 
(17,030
)
Notes receivable from parent and affiliates, net
4,084

 
4,888

Derivatives, net
(327
)
 
(219
)
Other, net
(2,709
)
 
(2,993
)
Cash flows from (used in) investing activities
(362,173
)
 
(171,155
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Policyholders’ account deposits
2,331,075

 
2,283,780

Ceded policyholders’ account deposits
(1,572,155
)
 
(1,525,820
)
Policyholders’ account withdrawals
(1,462,569
)
 
(1,375,912
)
Ceded policyholders’ account withdrawals
956,062

 
832,659

Net change in securities sold under agreement to repurchase and cash collateral for loaned securities
(20,031
)
 
(92,390
)
Contributed (distributed) capital - parent/child asset transfers
0

 
1,347

Net change in financing arrangements (maturities 90 days or less)
1,727

 
35,951

Drafts outstanding
3,158

 
2,849

Cash flows from (used in) financing activities
237,267

 
162,464

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(140,363
)
 
10,665

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
212,569

 
96,157

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
72,206

 
$
106,822

(1) Prior period amounts have been reclassified to conform to current period presentation. See Note 2 for details.

Significant Non-Cash Transactions

There were no significant non-cash transactions for the six months ended June 30, 2018 and 2017.



























See Notes to Unaudited Interim Consolidated Financial Statements

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Table of Contents                            

PRUCO LIFE INSURANCE COMPANY
Notes to Unaudited Interim Consolidated Financial Statements
 
1.    BUSINESS AND BASIS OF PRESENTATION

Pruco Life Insurance Company (“Pruco Life”) is a wholly-owned subsidiary of The Prudential Insurance Company of America (“Prudential Insurance”), which in turn is a direct wholly-owned subsidiary of Prudential Financial, Inc. (“Prudential Financial”). Pruco Life is a stock life insurance company organized in 1971 under the laws of the State of Arizona. It is licensed to sell life insurance and annuities in the District of Columbia, Guam and in all States except New York, and sells such products primarily through affiliated and unaffiliated distributors.

Pruco Life has two subsidiaries, including one wholly-owned insurance subsidiary, Pruco Life Insurance Company of New Jersey (“PLNJ”) and one indirect subsidiary formed in 2009 for the purpose of holding certain commercial loan and other investments. Pruco Life and its subsidiaries are together referred to as the "Company", "we" or "our" and all financial information is shown on a consolidated basis.

PLNJ is a stock life insurance company organized in 1982 under the laws of the state of New Jersey. It is licensed to sell life insurance and annuities in New Jersey and New York only.

Variable Annuities Recapture

Through March 31, 2016, the Company reinsured the majority of its variable annuity living benefit guarantees to an affiliated reinsurance company, Pruco Reinsurance, Ltd. ("Pruco Re"). Effective April 1, 2016, the Company recaptured the risks related to its variable annuity living benefit guarantees that were previously reinsured to Pruco Re. In addition, the Company reinsured variable annuity base contracts, along with the living benefit guarantees, to Prudential Annuities Life Assurance Corporation ("PALAC"), excluding the PLNJ business, which was reinsured to Prudential Insurance, in each case under coinsurance and modified coinsurance agreements. These reinsurance agreements cover new and in force business and exclude business reinsured externally. The product risks related to the reinsured business are being managed in PALAC and Prudential Insurance, as applicable. In addition, the living benefit hedging program related to the reinsured living benefit guarantees is being managed within PALAC and Prudential Insurance, as applicable. These series of transactions are collectively referred to as the "Variable Annuities Recapture".

Basis of Presentation

The Unaudited Interim Consolidated 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 Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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 and related amortization; amortization of deferred sales inducements; valuation of investments including derivatives and the recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; reinsurance recoverables; provision for income taxes and valuation of deferred tax assets; and accruals for contingent liabilities, including estimates for losses in connection with unresolved legal and regulatory matters.



8




PRUCO LIFE INSURANCE COMPANY    
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


Revision to Prior Period Consolidated Financial Statements

The Company identified an error in the calculation of reserves for certain individual life products that impacted several line items within previously issued consolidated financial statements. Prior period amounts have been revised in the financial statements and related disclosures 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 revisions and for comparisons of amounts previously reported to the revised amounts.

Reclassifications

Certain amounts in prior periods have been reclassified to conform to the current period presentation.

2.    SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

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") to the FASB Accounting Standards Codification. The Company considers the applicability and impact of all ASU. ASU listed below include those that have been adopted during the current fiscal year and/or those that have been issued but not yet adopted as of the date of this filing. ASU not listed below were assessed and determined to be either not applicable or not material.

Adoption of ASU 2016-01

Effective January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities using a modified retrospective method. Adoption of this ASU impacted the Company’s accounting and presentation related to equity investments. The most significant impact is that the changes in fair value of equity securities previously classified as “available for sale” are to be reported in net income within “Other income” in the Consolidated Statements of Operations. Prior to this, the changes in fair value on equity securities classified as “available for sale” were reported in “Accumulated other comprehensive income”.

The impacts of this ASU on the Company’s Consolidated Financial Statements can be categorized as follows: (1) Changes to the presentation within the Consolidated Statements of Financial Position; (2) Cumulative-effect Adjustment Upon Adoption; and (3) Changes to Accounting Policies. Each of these components is described below. This section is meant to serve as an update to, and should be read in conjunction with Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

(1) Changes to the presentation within the Consolidated Statements of Financial Position

Because of the fundamental accounting changes as described in section "(3) Changes to Accounting Policies" below, the Company determined that changes to the presentation of certain balances in the investment section of the Company’s Consolidated Statements of Financial Position were also necessary to maintain clarity and logical presentation. The table below illustrates these changes by presenting the balances as previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and the reclassifications that were made, along with a footnote explanation of each reclassification.

9




PRUCO LIFE INSURANCE COMPANY    
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


 
December 31, 2017
 
As previously reported
 
Reclassifications
 
As currently reported
Consolidated Statements of Financial Position Line Items
 
(1)
 
(2)
 
(3)
 
 
(in thousands)
Fixed maturities, available for sale, at fair value
$
5,223,302

 
 
 
 
 
 
 
$
5,223,302

*Fixed maturities, trading, at fair value
0

 
 
 
38,793

 
 
 
38,793

Equity securities, available for sale, at fair value
23,122

 
(23,122
)
 
 
 
 
 
0

*Equity securities, at fair value
0

 
23,122

 
17,488

 
 
 
40,610

Trading account assets, at fair value
56,281

 
 
 
(56,281
)
 
 
 
0

Policy loans
1,161,101

 
 
 
 
 
 
 
1,161,101

Short-term investments
1,339

 
 
 
 
 
 
 
1,339

Commercial mortgage and other loans
1,083,419

 
 
 
 
 
 
 
1,083,419

Other long-term investments
263,074

 
 
 
 
 
(263,074
)
 
0

*Other invested assets
0

 
 
 
 
 
263,074

 
263,074

Total investments
$
7,811,638

 
$
0

 
$
0

 
$
0

 
$
7,811,638

* - New line item effective January 1, 2018.
Strikethrough - Eliminated line item effective January 1, 2018.

(1)
Retitled “Equity securities, available-for-sale, at fair value” to “Equity securities, at fair value” as equity securities can no longer be described as available-for-sale.
(2)
Eliminated the line item “Trading account assets, at fair value” and reclassified each component to another line item.
(3)
Retitled “Other long-term investments” to “Other invested assets”.

(2) Cumulative-effect Adjustment Upon Adoption

The provisions of ASU 2016-01 require that the Company apply the amendments through a cumulative-effect adjustment to the Consolidated Statements of Financial Position as of the beginning of the fiscal year of adoption. The following table illustrates the impact on the Company’s Consolidated Statement of Financial Position as a result of recording this cumulative-effect adjustment on January 1, 2018.

Summary of ASU 2016-01 Transition Impacts on the Consolidated Statement
of Financial Position upon Adoption on January 1, 2018
(in thousands)
 
Increase / (Decrease)
Other invested assets
$
8,097

Total assets
$
8,097

Income taxes
$
1,700

Total liabilities
1,700

Accumulated other comprehensive income (loss)
(1,539
)
Retained earnings
7,936

Total equity
6,397

Total liabilities and equity
$
8,097



(3) Changes to Accounting Policies

This section summarizes the changes in our accounting policies resulting from the adoption of ASU 2016-01 as well as an update to the components of the financial statement line items impacted by the Company’s Consolidated Statements of Financial Position presentation changes described above.


10




PRUCO LIFE INSURANCE COMPANY    
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


ASSETS

Fixed maturities, trading is a new financial statement line item comprised of fixed maturities that are carried at fair value. Prior to the adoption of the standard, these fixed maturities were reported in “Trading account assets, at fair value”. Realized and unrealized gains and losses on these investments are reported in “Other income”, and interest and dividend income from these investments is reported in “Net investment income”.

Equity securities, at fair value is the new title of the financial statement line item formerly titled “Equity securities, available for sale, at fair value”. As a result of the adoption of the standard, equity securities previously reported in “Trading account assets, at fair value” were reclassified to “Equity securities, at fair value”. The retitled financial statement line is comprised of common stock and mutual fund shares, which are carried at fair value. Realized and unrealized gains and losses on these investments are reported in “Other income,” and dividend income is reported in “Net investment income” on the ex-dividend date. Prior to the adoption of the standard, for the equity investments reported in the financial statement line formerly titled “Equity securities, available for sale, at fair value” the associated net realized gains and losses were included in “Realized investment gains (losses), net” and the associated net unrealized gains and losses were included in “Accumulated other comprehensive income (loss)” (“AOCI”). In addition, with the adoption of the standard, the identification of OTTI for these investments is no longer needed as all of these investments are now measured at fair value with changes in fair value reported in earnings.

Other invested assets is the new title of the financial statement line formerly titled “Other long-term investments”. Investments previously reported in “Other long-term investments” were reclassified to “Other invested assets”. The retitled financial statement line consists of the Company’s non-coupon investments in Limited Partnerships and Limited Liability Companies ("LPs/LLCs") (other than operating joint ventures) and derivative assets. LPs/LLCs interests are accounted for using either the equity method of accounting, or at fair value with changes in fair value reported in “Other income”. Prior to the adoption of the standard, the Company applied the cost method of accounting for certain LPs/LLCs interests when its partnership interest was considered minor. The standard effectively eliminated the cost method of accounting for these equity investments. The Company’s income from investments in LPs/LLCs accounted for using the equity method, other than the Company’s investments in operating joint ventures, is included in “Net investment income”. The carrying value of these investments is written down, or impaired, to fair value when a decline in value is considered to be other-than-temporary. In applying the equity method (including assessment for OTTI), the Company uses financial information provided by the investee, generally on a one to three month lag. For the investments reported at fair value with changes in fair value reported in current earnings, the associated realized and unrealized gains and losses are reported in “Other income”.

REVENUES AND BENEFITS AND EXPENSES

Other income includes realized and unrealized gains or losses from investments reported as “Fixed maturities, trading”, “Equity securities, at fair value,” and “Other invested assets” that are measured at fair value.



11




PRUCO LIFE INSURANCE COMPANY    
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


Other ASU adopted during the six months ended June 30, 2018.

Standard
 
Description
 
Effective date and method of adoption
 
Effect on the financial statements or other significant matters
ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
 
The ASU is based on the core principle that revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, and assets recognized from the costs to obtain or fulfill a contract with a customer. Revenue recognition for insurance contracts and financial instruments is explicitly scoped out of the standard.
 
January 1, 2018 using the modified retrospective method which will
include a cumulative-effect
adjustment on the
balance sheet as of
the beginning of
the fiscal year of
adoption.
 
Adoption of the ASU did not have an impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
ASU 2016-15,
Statement of Cash Flows
(Topic 230):
Classification of Certain Cash Receipts and Cash
Payments (a
Consensus of the
Emerging Issues
Task Force)
 
This ASU addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard provides clarity on the treatment of eight specifically defined types of cash inflows and outflows.
 
January 1, 2018 using the retrospective method (with early adoption permitted provided that all amendments are adopted in the same period).
 
Adoption of the ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
 
In November 2016, the FASB issued this ASU to address diversity in practice from entities classifying and presenting transfers between cash and restricted cash as operating, investing, or financing activities, or as a combination of those activities in the Statement of Cash Flows. The ASU requires entities to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the Statement of Cash Flows. As a result, transfers between such categories will no longer be presented in the Statement of Cash Flows.
 
January 1, 2018 using the retrospective method (with early adoption permitted).
 
Adoption of the ASU did not have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.

12




PRUCO LIFE INSURANCE COMPANY    
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 
In February 2018, this ASU was issued following the enactment of the Tax Act of 2017. This ASU allows an entity to elect a reclassification from accumulated other comprehensive income to retained earnings for stranded effects resulting from the Tax Act of 2017.

 
January 1, 2019 with early adoption permitted. The ASU should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act of 2017 is recognized.
 
The Company early adopted the ASU effective January 1, 2018 and elected to apply the ASU in the period of adoption subsequent to recording the adoption impacts of ASU 2016-01 as described above. As a result, the Company reclassified stranded effects resulting from the Tax Act of 2017 by increasing accumulated other comprehensive income and decreasing retained earnings, each
by $30.4 million. Stranded effects unrelated to the Tax Act of 2017 are generally released from accumulated other comprehensive income when an entire portfolio of the type of item related to the
stranded effect is liquidated, sold or extinguished (i.e., portfolio approach).


13




PRUCO LIFE INSURANCE COMPANY    
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


ASU issued but not yet adopted as of June 30, 2018
Standard
 
Description
 
Effective date and method of adoption
 
Effect on the financial statements or other significant matters
ASU 2016-13,
Financial Instruments-Credit Losses (Topic 326):
Measurement of
Credit Losses on
Financial
Instruments
 
This ASU provides a new current expected credit loss model to account for credit losses on certain financial assets and off-balance sheet exposures (e.g., loans held for investment, debt securities held to maturity, reinsurance receivables, net investments in leases and loan commitments). The model requires an entity to estimate lifetime credit losses related to such financial assets and exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The standard also modifies the current other-than-temporary impairment standard for available-for-sale debt securities to require the use of an allowance rather than a direct write down of the investment, and replaces existing standard for purchased credit deteriorated loans and debt securities.
 
January 1, 2020 using the modified retrospective method which will
include a cumulative-effect
adjustment on the
balance sheet as of
the beginning of the fiscal year of
adoption.
However, prospective application is required for purchased credit deteriorated assets previously accounted for under ASU 310-30 and for debt securities for which an other-than-temporary-impairment was recognized prior to the date of adoption. Early
adoption is permitted
beginning January 1, 2019.

 
The Company is currently assessing the impact of the ASU on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
ASU 2017-08,
Receivables -
Nonrefundable Fees and
Other Costs
(Subtopic 310-20)
Premium
Amortization on
Purchased Callable
Debt Securities
 
This ASU requires certain premiums on callable debt securities to be amortized to the earliest call date.

 
January 1, 2019 using the modified
retrospective method (with early adoption
permitted) which will include a
cumulative-effect
adjustment on the
balance sheet as of
the beginning of the fiscal year of
adoption.
 
The Company does not expect the adoption of the ASU to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial
Statements.

ASU 2017-12,
Derivatives and
Hedging (Topic
815): Targeted
Improvements to
Accounting for
Hedging Activities
 
This ASU makes targeted changes to the existing hedge accounting model to better portray the economics of an entity’s risk management activities and to simplify the use of hedge accounting.
 
January 1, 2019 using the
modified
retrospective method (with early adoption
permitted) which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.
 
The Company does not expect the adoption of the ASU to have a significant impact on the Company’s Consolidated Financial Statements and Notes to the Consolidated Financial
Statements.

14




PRUCO LIFE INSURANCE COMPANY    
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


3.    INVESTMENTS

Fixed Maturity Securities

The following tables set forth information relating to fixed maturity securities (excluding investments classified as trading), as of the dates indicated:
 
June 30, 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
$
71,833

 
$
2,510

 
$
14

 
$
74,329

 
$
0

Obligations of U.S. states and their political subdivisions
596,503

 
19,469

 
1,230

 
614,742

 
0

Foreign government bonds
188,004

 
1,942

 
8,386

 
181,560

 
0

Public utilities
711,017

 
29,051

 
10,013

 
730,055

 
0

Redeemable preferred stock
4,096

 
657

 
18

 
4,735

 
0

All other U.S. public corporate securities
1,358,029

 
42,455

 
33,675

 
1,366,809

 
0

All other U.S. private corporate securities
685,544

 
6,312

 
12,448

 
679,408

 
0

All other foreign public corporate securities
243,884

 
4,597

 
8,778

 
239,703

 
0

All other foreign private corporate securities
775,375

 
16,922

 
21,808

 
770,489

 
0

Asset-backed securities(1)
171,018

 
2,004

 
195

 
172,827

 
(99
)
Commercial mortgage-backed securities
282,300

 
1,644

 
5,836

 
278,108

 
0

Residential mortgage-backed securities(2)
101,391

 
1,706

 
1,318

 
101,779

 
(195
)
Total fixed maturities, available-for-sale
$
5,188,994

 
$
129,269

 
$
103,719

 
$
5,214,544

 
$
(294
)

(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 $0.4 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.


15




PRUCO LIFE INSURANCE COMPANY    
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


 
December 31, 2017
 
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
$
95,851

 
$
3,964

 
$
0

 
$
99,815

 
$
0

Obligations of U.S. states and their political subdivisions
597,254

 
38,204

 
0

 
635,458

 
0

Foreign government bonds
128,058

 
7,536

 
496

 
135,098

 
0

Public utilities
677,702

 
61,588

 
1,058

 
738,232

 
0

Redeemable preferred stock
4,053

 
957

 
0

 
5,010

 
0

All other U.S. public corporate securities
1,254,140

 
105,524

 
2,580

 
1,357,084

 
(215
)
All other U.S. private corporate securities
710,424

 
18,306

 
1,644

 
727,086

 
0

All other foreign public corporate securities
168,399

 
12,522

 
732

 
180,189

 
0

All other foreign private corporate securities
737,037

 
41,405

 
9,598

 
768,844

 
0

Asset-backed securities(1)
179,935

 
2,519

 
26

 
182,428

 
(138
)
Commercial mortgage-backed securities
320,223

 
5,148

 
2,539

 
322,832

 
0

Residential mortgage-backed securities(2)
68,868

 
2,527

 
169

 
71,226

 
(220
)
Total fixed maturities, available-for-sale
$
4,941,944

 
$
300,200

 
$
18,842

 
$
5,223,302

 
$
(573
)

(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 $2.2 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.


16




PRUCO LIFE INSURANCE COMPANY    
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


The following tables set forth the fair value and gross unrealized losses aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the dates indicated:

 
June 30, 2018
 
Less Than Twelve Months
 
Twelve Months or More
 
Total
 
Fair Value  
 
Gross
  Unrealized  
Losses
 
Fair Value  
 
Gross
  Unrealized  
Losses
 
Fair Value  
 
Gross
  Unrealized  
Losses
 
(in thousands)
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
621

 
$
14

 
$
0

 
$
0

 
$
621

 
$
14

Obligations of U.S. states and their political subdivisions
102,109

 
1,230

 
0

 
0

 
102,109

 
1,230

Foreign government bonds
143,401

 
7,096

 
11,721

 
1,290

 
155,122

 
8,386

Public utilities
283,552

 
8,082

 
17,233

 
1,931

 
300,785

 
10,013

Redeemable preferred stock
1,791

 
18

 
0

 
0

 
1,791

 
18

All other U.S. public corporate securities
600,364

 
25,564

 
89,649

 
8,111

 
690,013

 
33,675

All other U.S. private corporate securities
389,065

 
9,928

 
41,258

 
2,520

 
430,323

 
12,448

All other foreign public corporate securities
151,899

 
7,925

 
6,656

 
853

 
158,555

 
8,778

All other foreign private corporate securities
300,641

 
10,470

 
58,167

 
11,338

 
358,808

 
21,808

Asset-backed securities
47,033

 
190

 
332

 
5

 
47,365

 
195

Commercial mortgage-backed securities
126,345

 
2,968

 
42,853

 
2,868

 
169,198

 
5,836

Residential mortgage-backed securities
65,326

 
1,026

 
5,529

 
292

 
70,855

 
1,318

Total fixed maturities, available-for-sale
$
2,212,147

 
$
74,511

 
$
273,398

 
$
29,208

 
$
2,485,545

 
$
103,719


 
December 31, 2017
 
Less Than Twelve Months
 
Twelve Months or More
 
Total
 
Fair Value  
 
Gross
  Unrealized  
Losses
 
Fair Value  
 
Gross
  Unrealized  
Losses
 
Fair Value  
 
Gross
  Unrealized  
Losses
 
(in thousands)
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of
U.S. government authorities and agencies
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Obligations of U.S. states and their political subdivisions
0

 
0

 
0

 
0

 
0

 
0

Foreign government bonds
16,522

 
210

 
11,959

 
286

 
28,481

 
496

Public utilities
26,466

 
380

 
27,354

 
678

 
53,820

 
1,058

Redeemable preferred stock
0

 
0

 
0

 
0

 
0

 
0

All other U.S. public corporate securities
36,100

 
304

 
102,490

 
2,276

 
138,590

 
2,580

All other U.S. private corporate securities
79,495

 
781

 
36,642

 
863

 
116,137

 
1,644

All other foreign public corporate securities
27,078

 
190

 
8,390

 
542

 
35,468

 
732

All other foreign private corporate securities
48,109

 
472

 
133,055

 
9,126

 
181,164

 
9,598

Asset-backed securities
6,351

 
22

 
317

 
4

 
6,668

 
26

Commercial mortgage-backed securities
49,823

 
285

 
93,403

 
2,254

 
143,226

 
2,539

Residential mortgage-backed securities
8,030

 
28

 
6,160

 
141

 
14,190

 
169

Total fixed maturities, available-for-sale
$
297,974

 
$
2,672

 
$
419,770

 
$
16,170

 
$
717,744

 
$
18,842



17




PRUCO LIFE INSURANCE COMPANY    
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


As of June 30, 2018 and December 31, 2017, the gross unrealized losses on fixed maturity securities were composed of $91.4 million and $13.9 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 $12.3 million and $4.9 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of June 30, 2018, the $29.2 million of gross unrealized losses on fixed maturity securities of twelve months or more were concentrated in the Company's corporate securities within the energy, finance and consumer non-cyclical sectors and in commercial mortgage-backed securities. As of December 31, 2017, the $16.2 million of gross unrealized losses on fixed maturity securities of twelve months or more were concentrated in commercial mortgage backed securities and in the Company's corporate securities within the energy and finance sectors. In accordance with its policy described in Note 2 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, the Company concluded that an adjustment to earnings for OTTI for these fixed maturity securities was not warranted at either June 30, 2018 or December 31, 2017. These conclusions were based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to general credit spread widening, increases in interest rates and foreign currency exchange rate movements. As of June 30, 2018, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.

The following table sets forth the amortized cost and fair value of fixed maturities by contractual maturities, as of the date indicated:

 
June 30, 2018
 
Amortized Cost
 
Fair Value
 
(in thousands)
Fixed maturities, available-for-sale:
 
 
 
Due in one year or less
$
138,874

 
$
140,388

Due after one year through five years
729,234

 
725,360

Due after five years through ten years
1,008,886

 
1,004,600

Due after ten years
2,757,291

 
2,791,482

Asset-backed securities
171,018

 
172,827

Commercial mortgage-backed securities
282,300

 
278,108

Residential mortgage-backed securities
101,391

 
101,779

Total fixed maturities, available-for-sale
$
5,188,994

 
$
5,214,544


Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Asset-backed, commercial mortgage-backed and residential mortgage-backed securities are shown separately in the table above, as they do not have a single maturity date.

The following table sets forth the sources of fixed maturity proceeds and related investment gains (losses), as well as losses on impairments of fixed maturities, for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
Proceeds from sales(1)
$
117,235

 
$
139,131

 
$
134,087

 
$
426,839

Proceeds from maturities/prepayments
85,808

 
152,346

 
140,118

 
267,192

Gross investment gains from sales and maturities
(30
)
 
5,823

 
114

 
9,020

Gross investment losses from sales and maturities
(3,231
)
 
(472
)
 
(3,590
)
 
(3,295
)
OTTI recognized in earnings(2)
(57
)
 
(1,121
)
 
(651
)
 
(5,525
)

(1)
Includes $26.2 million and $6.8 million of non-cash related proceeds due to the timing of trade settlements for the six months ended June 30, 2018 and 2017, respectively.
(2)
Excludes the portion of OTTI amounts remaining in “Other comprehensive income (loss)” ("OCI"), representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of the impairment.


18




PRUCO LIFE INSURANCE COMPANY    
Notes to Unaudited Interim Consolidated 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 June 30, 2018
 
Six Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
 
(in thousands)
Credit loss impairments:
 
 
 
 
 
 
 
Balance, beginning of period
$
4,344

 
$
4,374

 
$
5,357

 
$
5,520

New credit loss impairments
0

 
0

 
424

 
424

Additional credit loss impairments on securities previously impaired
0

 
0

 
0

 
0

Increases due to the passage of time on previously recorded credit losses
10

 
47

 
36

 
63

Reductions for securities which matured, paid down, prepaid or were sold during the period
(1,918
)
 
(1,960
)
 
(1,752
)
 
(1,870
)
Reductions for securities impaired to fair value during the period(1)
0

 
0

 
(327
)
 
(327
)
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected
(454
)
 
(479
)
 
(14
)
 
(86
)
Assets transferred to parent and affiliates
0

 
0

 
0

 
0

Balance, end of period
$
1,982

 
$
1,982

 
$
3,724

 
$
3,724


(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 $(0.7) million and $0.1 million during the three months ended June 30, 2018 and 2017, respectively.

The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Other income,” was $(1.9) million and $1.5 million during the six months ended June 30, 2018 and 2017, respectively.




19




PRUCO LIFE INSURANCE COMPANY    
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


Commercial Mortgage and Other Loans

The following table sets forth the composition of "Commercial mortgage and other loans," as of the dates indicated:
 
June 30, 2018
 
December 31, 2017
 
Amount
(in thousands)
 
% of
Total
 
Amount
(in thousands)
 
% of
Total
Commercial mortgage and agricultural property loans by property type:
 
 
 
 
 
 
 
Apartments/Multi-Family
$
360,812

 
32.0
%
 
$
356,694

 
32.9
%
Hospitality
16,308

 
1.5

 
16,529

 
1.5

Industrial
226,192

 
20.2

 
180,619

 
16.7

Office
173,648

 
15.5

 
159,646

 
14.7

Other
92,895

 
8.3

 
99,119

 
9.1

Retail
186,064

 
16.6

 
205,367

 
18.9

Total commercial mortgage loans
1,055,919

 
94.1

 
1,017,974

 
93.8

Agricultural property loans
66,511

 
5.9

 
67,239

 
6.2

Total commercial mortgage and agricultural property loans by property type
1,122,430

 
100.0
%
 
1,085,213

 
100.0
%
Valuation allowance
(1,788
)
 
 
 
(1,794
)
 
 
Total commercial mortgage and other loans
$
1,120,642

 
 
 
$
1,083,419

 
 

As of June 30, 2018, the commercial mortgage and agricultural property loans were secured by properties geographically dispersed throughout the United States (with the largest concentrations in California (23%), Texas (14%) and New York (6%)) and included loans secured by properties in Europe (6%), Australia (4%) and Mexico (2%).

The following tables set forth the activity in the allowance for credit losses for commercial mortgage and other loans, as of the dates indicated:
 
June 30, 2018
 
Commercial Mortgage Loans
 
Agricultural Property Loans
 
Total
 
(in thousands)
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of year
$
1,728

 
$
66

 
$
1,794

Addition to (release of) allowance for losses
(6
)
 
0

 
(6
)
Charge-offs, net of recoveries
0

 
0

 
0

Total ending balance
$
1,722

 
$
66

 
$
1,788

 
December 31, 2017
 
Commercial Mortgage Loans
 
Agricultural Property Loans
 
Total
 
(in thousands)
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of year
$
1,513

 
$
45

 
$
1,558

Addition to (release of) allowance for losses
215

 
21

 
236

Charge-offs, net of recoveries
0

 
0

 
0

Total ending balance
$
1,728

 
$
66

 
$
1,794



20




PRUCO LIFE INSURANCE COMPANY    
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


The following tables set forth the allowance for credit losses and the recorded investment in commercial mortgage and other loans, as of the dates indicated:
 
June 30, 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
1,722

 
66

 
1,788

Total ending balance(1)
$
1,722

 
$
66

 
$
1,788

Recorded investment(2):
 
 
 
 
 
Individually evaluated for impairment
$
0

 
$
815

 
$
815

Collectively evaluated for impairment
1,055,919

 
65,696

 
1,121,615

Total ending balance(1)
$
1,055,919

 
$
66,511

 
$
1,122,430


(1)
As of June 30, 2018, there were no loans acquired with deteriorated credit quality.
(2)
Recorded investment reflects the carrying value gross of related allowance.
 
December 31, 2017
 
Commercial Mortgage Loans
 
Agricultural Property Loans
 
Total
 
(in thousands)
Allowance for credit losses:
 
 
 
 
 
Individually evaluated for impairment
$
0

 
$
0

 
$
0

Collectively evaluated for impairment
1,728

 
66

 
1,794

Total ending balance(1)
$
1,728

 
$
66

 
$
1,794

Recorded investment(2):
 
 
 
 
 
Individually evaluated for impairment
$
2,316

 
$
1,153

 
$
3,469

Collectively evaluated for impairment
1,015,658

 
66,086

 
1,081,744

Total ending balance(1)
$
1,017,974

 
$
67,239

 
$
1,085,213


(1)
As of December 31, 2017, there were no loans acquired with deteriorated credit quality.
(2)
Recorded investment reflects the carrying value gross of related allowance.

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 dates indicated:

 
June 30, 2018
 
Debt Service Coverage Ratio
 
 
 
≥ 1.2X
 
1.0X to < 1.2X
 
< 1.0X
 
Total Loans
 
(in thousands)
Loan-to-Value Ratio:
 
 
 
 
 
 
 
0%-59.99%
$
576,447

 
$
21,980

 
$
0

 
$
598,427

60%-69.99%
358,204

 
19,862

 
1,976

 
380,042

70%-79.99%
126,612

 
17,118

 
0

 
143,730

80% or greater
0

 
231

 
0

 
231

Total loans
$
1,061,263

 
$
59,191

 
$
1,976

 
$
1,122,430


21




PRUCO LIFE INSURANCE COMPANY    
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


 
December 31, 2017
 
Debt Service Coverage Ratio
 
 
 
≥ 1.2X
 
1.0X to < 1.2X
 
< 1.0X
 
Total Loans
 
(in thousands)
Loan-to-Value Ratio:
 
 
 
 
 
 
 
0%-59.99%
$
606,846

 
$
21,709

 
$
705

 
$
629,260

60%-69.99%
333,185

 
9,594

 
2,010

 
344,789

70%-79.99%
84,492

 
26,439

 
0

 
110,931

80% or greater
0

 
0

 
233

 
233

Total loans
$
1,024,523

 
$
57,742

 
$
2,948

 
$
1,085,213


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:
 
June 30, 2018
 
Current
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due(1)
 
Total Loans
 
Non-Accrual Status(2)
 
(in thousands)
Commercial mortgage loans
$
1,055,919

 
$
0

 
$
0

 
$
0

 
$
1,055,919

 
$
0

Agricultural property loans
66,511

 
0

 
0

 
0

 
66,511

 
0

Total
$
1,122,430

 
$
0

 
$
0

 
$
0

 
$
1,122,430

 
$
0


(1)
As of June 30, 2018, there were no loans in this category accruing interest.
(2)
For additional information regarding the Company's policies for accruing interest on loans, see Note 2 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
 
December 31, 2017
 
Current
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due(1)
 
Total Loans
 
Non-Accrual Status(2)
 
(in thousands)
Commercial mortgage loans
$
1,017,974

 
$
0

 
$
0

 
$
0

 
$
1,017,974

 
$
0

Agricultural property loans
67,239

 
0

 
0

 
0

 
67,239

 
0

Total
$
1,085,213

 
$
0

 
$
0

 
$
0

 
$
1,085,213

 
$
0


(1)
As of December 31, 2017, there were no loans in this category accruing interest.
(2)
For additional information regarding the Company's policies for accruing interest on loans, see Note 2 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

For the three and six months ended June 30, 2018, there were no commercial mortgage and other loans acquired, other than those through direct origination, and there were no commercial mortgage and other loans sold. For both the three and six months ended June 30, 2017, there were no commercial mortgage and other loans acquired, other than those through direct origination, and there were $42 million of commercial mortgage and other loans sold.




22




PRUCO LIFE INSURANCE COMPANY    
Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


Other Invested Assets

The following table sets forth the composition of “Other invested assets,” as of the dates indicated:
 
June 30, 2018
 
December 31, 2017
 
(in thousands)
Company's investment in separate accounts
$
40,967

 
$
37,404

LPs/LLCs:
 
 
 
Equity method:
 
 
 
Private equity
141,165

 
123,957

Hedge funds
56,830

 
53,066

Real estate-related
8,798

 
7,040

Subtotal equity method
206,793

 
184,063

Fair value:
 
 
 
Private equity
58,133

 
35,686

Hedge funds
774

 
726

Real estate-related
7,248

 
5,186

Subtotal fair value(1)
66,155

 
41,598

Total LPs/LLCs
272,948

 
225,661

Derivative instruments
5

 
9

Total other invested assets(2)
$
313,920

 
$
263,074


(1)
As of December 31, 2017, $40.9 million was accounted for under the cost method.
(2)
Prior period amounts have been reclassified to conform to current period presentation. For additional information, see Note 2.

Net Investment Income

The following table sets forth "Net investment income" by investment type, for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Fixed maturities, available-for-sale
$
55,195

 
$
59,181

 
$
108,455

 
$
118,248

Fixed maturities, trading
272

 
181

 
538

 
360

Equity securities, at fair value
221