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Derivative Instruments
 3 Months Ended
Mar. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments 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 Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

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.
 
 
March 31, 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
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swaps
 
$
3,592

 
$
205

 
$
0

 
$
3,615

 
$
0

 
$
(50
)
Foreign Currency Swaps
 
792,449

 
131,174

 
(12
)
 
773,933

 
36,551

 
(12,471
)
Total Derivatives Designated as Hedge Accounting Instruments
 
$
796,041

 
$
131,379

 
$
(12
)
 
$
777,548

 
$
36,551

 
$
(12,521
)
Derivatives Not Qualifying as Hedge Accounting Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swaps
 
$
569,925

 
$
73,669

 
$
(15,394
)
 
$
569,925

 
$
33,256

 
$
(4,490
)
Foreign Currency
 
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Forwards
 
28,478

 
996

 
(98
)
 
21,580

 
0

 
(518
)
Credit
 
 
 
 
 
 
 
 
 
 
 
 
Credit Default Swaps
 
0

 
0

 
0

 
0

 
0

 
0

Currency/Interest Rate
 
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Swaps
 
140,700

 
24,412

 
0

 
151,792

 
7,563

 
(1,892
)
Equity
 
 
 
 
 
 
 
 
 
 
 
 
Equity Options
 
2,855,249

 
25,441

 
(8,014
)
 
2,680,048

 
174,398

 
(78,381
)
Total Derivatives Not Qualifying as Hedge Accounting Instruments
 
$
3,594,352

 
$
124,518

 
$
(23,506
)
 
$
3,423,345

 
$
215,217

 
$
(85,281
)
Total Derivatives(1)(2)
 
$
4,390,393

 
$
255,897

 
$
(23,518
)
 
$
4,200,893

 
$
251,768

 
$
(97,802
)

(1)
Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks. The fair value of these embedded derivatives was a net liability of $20,196 million and $8,530 million as of March 31, 2020 and December 31, 2019, respectively included in "Future policy benefits" and $900 million and $962 million as of March 31, 2020 and December 31, 2019, respectively included in "Policyholders' account balances". The fair value of the related reinsurance, included in "Reinsurance recoverables" or "Other liabilities" was an asset of $20,215 million and $8,540 million as of March 31, 2020 and December 31, 2019, respectively.
(2)
Recorded in “Other invested assets” and “Payables to parent and affiliates” on the Unaudited Interim Consolidated 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 Consolidated Statements of Financial Position, and/or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the Unaudited Interim Consolidated Statements of Financial Position.

 
March 31, 2020
 
Gross
Amounts of
Recognized
Financial
Instruments
 
Gross
Amounts
Offset in the
Consolidated Statements of
Financial
Position
 
Net Amounts
Presented in
the Consolidated Statements
of Financial
Position
 
Financial
Instruments/
Collateral (1)
 
Net
Amount
 
(in thousands)
Offsetting of Financial Assets:
 
 
 
 
 
 
 
 
 
Derivatives(1)
$
255,893

 
$
(224,876
)
 
$
31,017

 
$
(31,017
)
 
$
0

Securities purchased under agreements to resell
0

 
0

 
0

 
0

 
0

Total Assets
$
255,893

 
$
(224,876
)
 
$
31,017

 
$
(31,017
)
 
$
0

Offsetting of Financial Liabilities:
 
 
 
 
 
 
 
 
 
Derivatives(1)
$
23,518

 
$
(23,518
)
 
$
0

 
$
0

 
$
0

Securities sold under agreements to repurchase
0

 
0

 
0

 
0

 
0

Total Liabilities
$
23,518

 
$
(23,518
)
 
$
0

 
$
0

 
$
0


 
December 31, 2019
 
Gross
Amounts of
Recognized
Financial
Instruments
 
Gross
Amounts
Offset in the Consolidated
Statements of
Financial
Position
 
Net Amounts
Presented in
the Consolidated Statements
of Financial
Position
 
Financial
Instruments/
Collateral (1)
 
Net
Amount
 
(in thousands)
Offsetting of Financial Assets:
 
 
 
 
 
 
 
 
 
Derivatives(1)
$
251,765

 
$
(239,220
)
 
$
12,545

 
$
(12,545
)
 
$
0

Securities purchased under agreements to resell
0

 
0

 
0

 
0

 
0

Total Assets
$
251,765

 
$
(239,220
)
 
$
12,545

 
$
(12,545
)
 
$
0

Offsetting of Financial Liabilities:
 
 
 
 
 
 
 
 
 
Derivatives(1)
$
97,802

 
$
(97,802
)
 
$
0

 
$
0

 
$
0

Securities sold under agreements to repurchase
0

 
0

 
0

 
0

 
0

Total Liabilities
$
97,802

 
$
(97,802
)
 
$
0

 
$
0

 
$
0


(1)
Amounts exclude the excess of collateral received/pledged from/to the counterparty.

For information regarding the rights of offset associated with the derivative assets and liabilities in the table above see “Credit Risk” below and Note 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 Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

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, and equity 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 March 31, 2020
 
Realized
Investment
Gains (Losses)
 
Net
Investment
Income
 
Other
Income
 
AOCI(1)
 
(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
Interest Rate
$
(45
)
 
$
(3
)
 
$
0

 
$
300

Currency/Interest Rate
384

 
2,629

 
8,828

 
97,770

Total cash flow hedges
339

 
2,626

 
8,828

 
98,070

Derivatives Not Qualifying as Hedge Accounting Instruments:
 
 
 
 
 
 
 
Interest Rate
30,506

 
0

 
0

 
0

Currency
1,471

 
0

 
0

 
0

Currency/Interest Rate
19,333

 
0

 
58

 
0

Credit
0

 
0

 
0

 
0

Equity
(74,944
)
 
0

 
0

 
0

Embedded Derivatives
116,752

 
0

 
0

 
0

Total Derivatives Not Qualifying as Hedge Accounting Instruments
93,118

 
0

 
58

 
0

Total
$
93,457

 
$
2,626

 
$
8,886

 
$
98,070

 
Three Months Ended March 31, 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
$
(160
)
 
$
2,069

 
$
(1,515
)
 
$
(6,654
)
Total cash flow hedges
(160
)
 
2,069

 
(1,515
)
 
(6,654
)
Derivatives Not Qualifying as Hedge Accounting Instruments:
 
 
 
 
 
 
 
Interest Rate
7,616

 
0

 
0

 
0

Currency
(20
)
 
0

 
0

 
0

Currency/Interest Rate
1,430

 
0

 
1

 
0

Credit
(1
)
 
0

 
0

 
0

Equity
28,863

 
0

 
0

 
0

Embedded Derivatives
(82,205
)
 
0

 
0

 
0

Total Derivatives Not Qualifying as Hedge Accounting Instruments
(44,317
)
 
0

 
1

 
0

Total
$
(44,477
)
 
$
2,069

 
$
(1,514
)
 
$
(6,654
)

(1)
Net change in AOCI.
Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:
 
(in thousands)    
Balance, December 31, 2019
$
26,126

Amount recorded in AOCI
 
Interest Rate
252

Currency/Interest Rate
109,611

Total amount recorded in AOCI
109,863

Amount reclassified from AOCI to income
 
Interest Rate
48

Currency/Interest Rate
(11,841
)
Total amount reclassified from AOCI to income
(11,793
)
Balance, March 31, 2020
$
124,196



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 Consolidated Statements of Operations and Comprehensive Income (Loss); these amounts are then reclassified to earnings when the hedged item affects earnings. Using March 31, 2020 values, it is estimated that a pre-tax gain of $10 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending March 31, 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.

Credit Derivatives

The Company has no exposure from credit derivative positions where it has written or purchased credit protection as of March 31, 2020 and December 31, 2019.

Credit Risk

The Company is exposed to 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.