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PRUCO LIFE INSURANCE CO – 10-Q – Administration’s Dialogue and Evaluation of Monetary Situation and Outcomes of Operations – InsuranceNewsNet

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Administration’s Dialogue and Evaluation of Monetary Situation and Outcomes of
Operations (“MD&A”) addresses the consolidated monetary situation of Pruco Life
Insurance coverage Firm, or the “Firm,” as of March 31, 2022, in contrast with
December 31, 2021, and its consolidated outcomes of operations for the three
months ended March 31, 2022 and 2021. You need to learn the next evaluation of
our consolidated monetary situation and outcomes of operations in conjunction
with the MD&A, the “Danger Elements” part, and the audited Consolidated
Monetary Statements included within the Firm’s Annual Report on Kind 10-Okay for
the yr ended December 31, 2021, in addition to the statements beneath
“Ahead-Trying Statements” , and the Unaudited Interim Consolidated Monetary
Statements included elsewhere on this Quarterly Report on Kind 10-Q.

Overview

The Firm sells variable annuities, common life insurance coverage, variable life
insurance coverage and time period life insurance coverage primarily by affiliated and unaffiliated
distributors in the USA. As of December 31, 2020, the Firm
discontinued the gross sales of conventional variable annuities with assured residing
profit riders.

Efficient July 1, 2021, the Firm recaptured the dangers associated to its variable
annuity base contracts, together with the residing profit ensures, that had
beforehand been reinsured to Prudential Annuities Life Assurance Company
(“PALAC”) from April 1, 2016 by June 30, 2021. The recapture doesn’t
impression Pruco Life Insurance coverage Firm of New Jersey (“PLNJ”), which can proceed
to reinsure its new and in drive enterprise to Prudential Insurance coverage. The product
dangers associated to the beforehand reinsured enterprise that have been being managed in
PALAC, have been transferred to the Firm. As well as, the residing profit hedging
program associated to the beforehand reinsured residing profit riders are being
managed throughout the Firm. This transaction is known as the “2021
Variable Annuities Recapture”. For extra data on this transition, see Word
1 to the Consolidated Monetary Statements.

Efficient December 1, 2021, the Firm entered right into a reinsurance settlement
with PALAC beneath which the Firm assumed all of its variable and stuck listed
annuities and stuck annuities with a assured lifetime withdrawal revenue
characteristic from PALAC.

Yearly through the second quarter of every yr, we carry out a complete
evaluate of actuarial assumptions. As a part of this evaluate, we might replace these
assumptions and make refinements to our fashions primarily based upon rising expertise,
future expectations and different information, together with any observable market information. For
further data, see “Accounting Insurance policies & Pronouncements-Software of
Essential Accounting Estimates” under in addition to the Firm’s Annual Report on
Kind 10-Okay for the yr ended December 31, 2021.

COVID-19

For the reason that first quarter of 2020, the COVID-19 pandemic has prompted excessive stress
and disruption within the world financial system and monetary markets and elevated
mortality and morbidity for the worldwide inhabitants. The COVID-19 pandemic
impacted our outcomes of operations within the present interval and is anticipated to
impression our outcomes of operations in future intervals. The Firm has taken
a number of measures to handle the impacts of this disaster. The precise and anticipated
impacts of those occasions and different objects are included within the following replace:

•Outlook. We anticipate COVID-19 to proceed to contribute within the close to time period to
elevated ranges of mortality, leading to elevated life insurance coverage claims.

•Outcomes of Operations. See “Outcomes of Operations” for a dialogue of outcomes
for the primary quarter of 2022.

•Danger Elements. The COVID-19 pandemic has adversely impacted our outcomes of
operations, monetary place, funding portfolio, new enterprise alternatives
and operations, and these impacts are anticipated to proceed. For added
data on the dangers to our enterprise posed by the COVID-19 pandemic, see
“Danger Elements” included within the Firm’s Annual Report on Kind 10-Okay for the yr
ended December 31, 2021.

•Enterprise Continuity. All through the COVID-19 pandemic, now we have been executing
Prudential Monetary Inc.’s (“Prudential Monetary”) and our enterprise continuity
protocols to make sure workers are protected and in a position to serve our clients. This
included successfully transitioning the overwhelming majority of workers to distant work
preparations. In March 2022, Prudential Monetary’s places of work have been reopened to
workers and we anticipate that many of the workforce will undertake a hybrid
association for the foreseeable future.

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We imagine we are able to maintain long-term hybrid or totally distant work preparations
whereas guaranteeing that important enterprise operations are sustained. As well as, we
are managing COVID-19 associated impacts on third-party offered providers, and do
not anticipate vital interruption in important operations.

Affect of a Low Curiosity Charge Setting

As a world monetary providers firm, market rates of interest are a key driver
of our outcomes of operations and monetary situation. Adjustments in rates of interest
can have an effect on our outcomes of operations and/or our monetary situation in a number of
methods, together with favorable or hostile impacts to:

• investment-related exercise, together with: funding revenue returns, web
curiosity margins, web funding unfold outcomes
new cash charges, mortgage mortgage prepayments and bond redemptions;
• hedging prices and different threat mitigation actions;
• insurance coverage reserve ranges, amortization of deferred coverage acquisition prices
(“DAC”) and market expertise true-ups:
• buyer account values, together with their impression on price revenue;
• product choices, design options, crediting charges and gross sales combine; and
• policyholder habits, together with give up or withdrawal exercise.

For extra data on rate of interest dangers, see “Danger Elements-Market Danger”
included in our Annual Report on Kind 10-Okay for the yr ended December 31, 2021.

Revenues and Bills

The Firm earns revenues principally from insurance coverage premiums, mortality and
expense charges, asset administration charges from insurance coverage and funding merchandise,
and from web funding revenue on the funding of basic account and different
funds. The Firm receives premiums primarily from the sale of particular person life
insurance coverage and annuity merchandise. The Firm earns mortality and expense charges,
and asset administration charges, primarily from the sale and servicing of
common life insurance coverage and separate account merchandise together with variable life
insurance coverage and variable annuities. The Firm’s working bills principally
encompass insurance coverage advantages offered and reserves established for anticipated
future insurance coverage advantages, basic enterprise bills, reinsurance premiums,
commissions and different prices of promoting and servicing the varied merchandise offered
and curiosity credited on basic account liabilities.

Accounting Insurance policies & Pronouncements

Software of Essential Accounting Estimates

The preparation of monetary statements in conformity with U.S. GAAP requires
the applying of accounting insurance policies that usually contain a major diploma
of judgment. Administration, on an ongoing foundation, opinions estimates and assumptions
used within the preparation of monetary statements. If administration determines that
modifications in assumptions and estimates are acceptable given present information
and circumstances, the Firm’s outcomes of operations and monetary place as
reported within the Unaudited Interim Consolidated Monetary Statements may change
considerably.

Administration believes the accounting insurance policies referring to the next areas are
most depending on the applying of estimates and assumptions and require
administration’s most tough, subjective, or complicated judgments:

•DAC and different prices, together with deferred gross sales inducements (“DSI”);
•Policyholder liabilities;
•Valuation of investments, together with derivatives, measurement of allowance for
credit score losses, and recognition of other-than-temporary impairments;
•Reinsurance recoverables;
•Taxes on revenue; and
•Reserves for contingencies, together with reserves for losses in reference to
unresolved authorized issues.

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Market Efficiency – Fairness and Curiosity Charge Assumptions

DAC and different prices related to the variable and common life insurance policies and
the variable and stuck annuity contracts are typically amortized over the
anticipated lives of those insurance policies in proportion to complete gross earnings. Whole
gross earnings embody each precise gross earnings and estimates of gross earnings
for future intervals. The quarterly changes for market efficiency mirror the
impression of adjustments to our estimate of complete gross earnings to mirror precise fund
efficiency and market circumstances. A good portion of gross earnings for
our variable annuity contracts and, to a lesser diploma, our variable life
contracts are dependent upon the full fee of return on property held in separate
account funding choices. This fee of return influences the charges we earn on
variable annuity and variable life contracts, prices we incur related to the
assured minimal demise and assured minimal revenue profit options associated
to our variable annuity contracts and anticipated claims to be paid on variable
life contracts, in addition to different sources of revenue. Returns which might be increased than
our expectations for a given interval produce increased than anticipated account
balances, which improve the long run charges we anticipate to earn on variable annuity
and variable life contracts and reduce the long run prices we anticipate to incur
related to the assured minimal demise and assured minimal revenue
profit options associated to our variable annuity contracts and anticipated claims
to be paid on variable life contracts. The alternative happens when returns are
decrease than our expectations. The adjustments in future anticipated gross earnings are
used to acknowledge a cumulative adjustment to all prior intervals’ amortization.

Moreover, the calculation of the estimated legal responsibility for future coverage
advantages associated to sure insurance coverage merchandise consists of an estimate of
related revenues and bills which might be depending on each historic market
efficiency in addition to estimates of market efficiency sooner or later. Just like
DAC and different prices described above, these liabilities are topic to quarterly
changes for expertise together with market efficiency, along with annual
changes ensuing from our annual opinions of assumptions.

The weighted common fee of return assumptions utilized in creating estimated
market returns think about many elements particular to every product kind, together with
asset durations, asset allocations and different elements. With regard to fairness
market assumptions, the near-term future fee of return assumption utilized in
evaluating DAC, different prices and liabilities for future coverage advantages for
sure of our merchandise, primarily our home variable annuity and variable
life insurance coverage merchandise, is usually up to date every quarter and is derived utilizing
a reversion to the imply method, a typical trade observe. Below this
method, we think about historic fairness returns and regulate projected fairness
returns over an preliminary future interval of 5 years (the “near-term”) in order that
fairness returns converge to the long-term anticipated fee of return. If the
near-term projected future fee of return is bigger than our near-term most
future fee of return of 15.0%, we use our most future fee of return. If the
near-term projected future fee of return is decrease than our near-term minimal
future fee of return of 0%, we use our minimal future fee of return. As of
March 31, 2022, our variable annuities and variable life insurance coverage companies
assume an 8.0% long-term fairness anticipated fee of return and a 0.9% near-term
imply reversion fairness anticipated fee of return.

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With regard to rate of interest assumptions utilized in evaluating DAC, DSI and
liabilities for future coverage advantages for sure of our merchandise, we typically
replace the long-term and near-term future charges used to mission fastened revenue
returns yearly and quarterly, respectively. On account of our 2021 annual
opinions and replace of assumptions and different refinements, we saved our long-term
expectation of the 10-year U.S.Treasury fee unchanged and proceed to grade to
a fee of three.25% over ten years. As a part of our quarterly market expertise
updates, we replace our near-term projections of rates of interest to mirror
adjustments in present charges.

In accordance with our established observe, we’ll replace actuarial
assumptions through the second quarter of 2022. Now we have a complete course of
that may embody, amongst different issues, the evaluate of long-term rates of interest,
inflation, COVID-19 mortality expertise, and trade research, together with
evaluating trade information as to its applicability to the Firm’s expertise. We
have not too long ago obtained trade information that displays expertise that’s extra
hostile than the assumptions we presently use in our particular person life enterprise.
We’re evaluating the applicability of this data to our block of enterprise
and the extent to which it might trigger a rise in reserves and corresponding
decline in earnings inside our particular person life enterprise. The general course of to
replace assumptions is ongoing and the result throughout our companies is
unsure.

For additional dialogue of impacts that would consequence from adjustments in sure key
assumptions, see “Administration’s Dialogue and Evaluation of Monetary Situation
and Outcomes of Operations-Accounting Insurance policies and Pronouncements-Software of
Essential Accounting Estimates” in our Annual Report on Kind 10-Okay for the yr
ended December 31, 2021.

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Future Adoption of New Accounting Pronouncements

ASU 2018-12, Monetary Providers – Insurance coverage (Subject 944): Focused Enhancements
to the Accounting for Lengthy-Period Contracts, was issued by the Monetary
Accounting Requirements Board (“FASB”) on August 15, 2018,and was amended by ASU
2019-09, Monetary Providers – Insurance coverage (Subject 944): Efficient Date, issued in
October 2019, and ASU 2020-11, Monetary Providers-Insurance coverage (Subject 944):
Efficient Date and Early Software, issued in November 2020. The Firm will
undertake ASU 2018-12 efficient January 1, 2023 utilizing the modified retrospective
transition methodology the place permitted, and apply the steerage as of January 1, 2021
(and file transition changes as of January 1, 2021) within the 2023 monetary
statements.

ASU 2018-12 will impression, at the very least to some extent, the accounting and disclosure
necessities for all long-duration insurance coverage and funding contracts issued by
the Firm. The Firm expects the usual to have a major monetary
impression on the Consolidated Monetary Statements and can considerably improve
disclosures. Along with the numerous impacts to the stability sheet upon
adoption, the Firm additionally expects an impression to the sample of earnings
emergence following the transition date. See Word 2 to the Unaudited Interim
Consolidated Monetary Statements. for a extra detailed dialogue of ASU
2018-12, in addition to different accounting pronouncements issued however not but adopted
and newly adopted accounting pronouncements.

Adjustments in Monetary Place

Whole property decreased $13 billion from $222 billion at December 31, 2021 to
$209 billion at March 31, 2022. Vital parts have been:

•Separate account property decreased $12.1 billion primarily pushed by unfavorable
fairness efficiency and web outflows;

•Invested property decreased $1.9 billion pushed by $1.0 in unrealized losses on
funding primarily because of rising rates of interest and a $0.9 billion lower in
coverage loans from ceding a portion of the variable life enterprise to Lotus
Reinsurance Firm Ltd. (“Lotus Re”);

Partially offset by:

•Money and money equivalents elevated $0.9 primarily because of the $0.8 billion money
consideration as a part of the preliminary ceding fee from the ceding of a
portion of the variable life enterprise to Lotus Re; and

•Reinsurance recoverables elevated $0.8 billion because of the ceding of a portion
of the variable life enterprise to Lotus Re partially offset by decreases in ceded
assured minimal demise profit liabilities from the common life enterprise
because of unrealized losses, primarily because of rising rates of interest.

Whole liabilities decreased $12 billion from $216 billion at December 31, 2021
to $204 billion at March 31, 2022. Vital parts have been:

•Separate account liabilities decreased $12.1 billion, equivalent to the
lower in Separate account property, as mentioned above;

•Future coverage advantages decreased $2.7 billion pushed by a lower in reserves
associated to our variable annuity residing profit ensures because of widening
non-performance threat (“NPR”) spreads and rising rates of interest, partially offset
by unfavorable fairness market efficiency;

Partially offset by:

•Policyholder account balances elevated $1.6 billion pushed by incremental
listed product gross sales; and

•Different liabilities elevated $1.2 billion pushed by the deferred reinsurance
achieve from ceding a portion of the variable life enterprise to Lotus Re, partially
offset by a lower to value of reinsurance liabilities.

Whole fairness decreased $1 billion from $6 billion at December 31, 2021 to $5
billion at March 31, 2022 pushed by $1.0 billion of unrealized losses on
investments pushed by rising rates of interest mirrored in Accrued different
complete revenue (loss).

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Outcomes of Operations

Revenue (loss) from Operations earlier than Revenue Taxes

Three Months Comparability

Revenue (loss) from operations earlier than revenue taxes decreased $88 million from
revenue of $58 million for the three months ended March 31, 2021 to a lack of $30
million for the three months ended March 31, 2022 primarily pushed by:

•Larger Advantages and bills pushed by the variable annuity recapture and new
reinsurance with PALAC in 2021;

Partially offset by:

•Larger coverage prices and price revenue is pushed by the variable annuity
recapture, partially offset by the price paid to The Prudential Insurance coverage Firm
of America (“Prudential Insurance coverage”) for the recapture of the yearly renewable
time period (“YRT”) reinsurance for many of the Firm’s variable life insurance coverage
insurance policies and by ceding a portion of the variable life enterprise to Lotus Re.

The next desk gives the web impression to the Unaudited Interim Statements
of Operations, which is primarily pushed by the adjustments within the U.S. GAAP
embedded by-product legal responsibility and hedge positions beneath the Asset Legal responsibility
Administration (“ALM”) technique, and the associated amortization of DAC and different
prices.

Three Months Ended
March 31, 2022
(in thousands and thousands)(1)

U.S. GAAP embedded by-product and hedging positions
Change in worth of U.S.GAAP legal responsibility, pre-NPR(2)

$ 1,376
Change within the NPR adjustment 477
Change in honest worth of hedge property, excluding capital hedges(3) (1,392)
Change in honest worth of capital hedges(4) 181
Different (326)
Realized funding features (losses), web, and associated changes 316
Market expertise updates(5) (77)
Costs associated to realized investments features (losses), web (201)

Web impression from adjustments within the U.S. GAAP embedded by-product and
hedge positions, after the impression of NPR, DAC and different prices(6) $

38

(1)Optimistic quantity represents revenue; adverse quantity represents a loss.
(2)Represents the change within the legal responsibility (excluding NPR) for our variable
annuities which is measured using a valuation methodology that’s required
beneath U.S. GAAP. This legal responsibility consists of such objects as threat margins that are
required by U.S. GAAP however not included in our greatest estimate of the legal responsibility.
(3)Represents the adjustments in honest worth of the derivatives utilized to hedge
potential claims related to our variable annuity residing profit ensures.
(4)Represents the adjustments in honest worth of fairness derivatives of the capital
hedge program meant to guard a portion of the general capital place of
our enterprise towards publicity to the fairness markets.
(5)Represents the quick impacts in present interval outcomes from adjustments in
present market circumstances on estimates of profitability.
(6)Excludes quantities from the adjustments in unrealized features and losses from fastened
revenue devices recorded in OCI (versus web revenue) of ($80) million for the
three months ended March 31, 2022.

For the three months ended March 31, 2022, the achieve of $38 million was primarily
pushed by a positive impression associated to the parts of our U.S. GAAP legal responsibility
earlier than NPR, which might be excluded from hedge goal pushed by rising rates of interest,
partially offset by unfavorable impression associated to the change within the honest worth
of hedge property.

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Revenues, Advantages and Bills

Three Months Comparability

Revenues elevated $585 million from $396 million for the three months ended
March 31, 2021 to $981 million for the three months ended March 31, 2022
primarily pushed by:

•Vital Realized funding features (losses), web reflecting a positive
impression associated to the parts of our U.S. GAAP legal responsibility earlier than NPR, which might be
excluded from hedge goal pushed by rising rates of interest; and

•Larger coverage prices and price revenue is pushed by the variable annuity
recapture, partially offset by the price paid to Prudential Insurance coverage for the
recapture of the YRT reinsurance for many of the Firm’s variable life
insurance coverage insurance policies and by ceding a portion of the variable life enterprise to
Lotus Re.

Advantages and bills elevated $673 million from $338 million for the three
months ended March 31, 2021 to $1,011 million for the three months ended March
31, 2022 primarily pushed by:

•Larger advantages and bills pushed by the Variable Annuities Recapture and new
reinsurance with PALAC in 2021.

Dangers and Danger Mitigants

Variable Annuity Dangers and Danger Mitigants:

The first threat exposures of our variable annuity contracts relate to precise
deviations from, or adjustments to, the assumptions used within the unique pricing of
these merchandise, together with capital markets assumptions akin to fairness market
returns, rates of interest and market volatility, together with actuarial assumptions
akin to contractholder mortality, the timing and quantity of annuitization and
withdrawals, and contract lapses. For these threat exposures, achievement of our
anticipated returns is topic to the danger that precise expertise will differ from
the assumptions used within the unique pricing of those merchandise. Prudential
Monetary manages our publicity to sure dangers pushed by fluctuations in
capital markets primarily by a mix of Product Design Options and
an Asset Legal responsibility Administration Technique (“ALM”), as mentioned under. The Firm
additionally manages these threat exposures by exterior reinsurance for sure of
our variable annuity merchandise.

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Efficient July 1, 2021, the Firm recaptured the dangers associated to its variable
annuity base contracts, together with the residing profit ensures, that had
beforehand been reinsured to PALAC from April 1, 2016 by June 30, 2021. The
recapture doesn’t impression PLNJ, which can proceed to reinsure its new and in
drive enterprise to Prudential Insurance coverage. The product dangers associated to the
beforehand reinsured enterprise that have been being managed in PALAC, have been transferred
to the Firm. As well as, the residing profit hedging program associated to the
beforehand reinsured residing profit riders will probably be managed throughout the Firm.
For extra data on this transaction, see Word 1 to the Consolidated
Monetary Statements.

Mounted Annuity Dangers and Danger Mitigants. Efficient December 1, 2021, the Firm
entered right into a reinsurance settlement with PALAC beneath which the Firm assumed
all of its fastened listed annuities and stuck annuities with a assured
lifetime withdrawal revenue characteristic from PALAC. The first threat publicity of
these fastened annuity merchandise pertains to funding dangers we bear for offering
clients a minimal assured rate of interest or an index-linked rate of interest
required to be credited to the client’s account worth, which embody curiosity
fee fluctuations and/or sustained intervals of low rates of interest, and credit score
threat associated to the underlying investments. We handle these threat exposures
primarily by our funding methods and product design options, which
embody credit score fee resetting topic to the minimal assured rate of interest,
in addition to give up prices utilized through the early years of the contract that
assist to supply safety for untimely withdrawals. As well as, a portion of
our fastened annuity merchandise has a market worth adjustment provision that affords
safety of lapse within the case of rising rates of interest. We additionally handle these
threat exposures by exterior reinsurance for sure of our fastened annuity
merchandise.

Listed Variable Annuity Dangers and Danger Mitigants. Efficient December 1, 2021,
the Firm entered right into a reinsurance settlement with PALAC beneath which the
Firm assumed all of its listed variable annuities from PALAC. The first
threat publicity of those listed variable annuity merchandise pertains to the
funding dangers we bear with a view to credit score to the client’s account stability
the required crediting fee primarily based on the efficiency of the elected indices at
the top of every time period. We handle this threat primarily by our funding
methods together with derivatives and product design options, which embody
credit score fee resetting topic to contractual minimums in addition to give up
prices utilized through the early years of the contract that assist to supply
safety for untimely withdrawals. As well as, our listed variable annuity
methods have an interim worth provision that gives safety from lapse
within the case of rising rates of interest.

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Product Design Options:

A portion of the variable annuity contracts that we provide embody an asset
switch characteristic. This characteristic is applied on the contract stage, and
transfers property between sure variable funding sub-accounts chosen by
the annuity contractholder and, relying on the profit characteristic, a fixed-rate
account within the basic account or a bond fund sub-account throughout the separate
account. The target of the asset switch characteristic is to scale back our publicity
to fairness market threat and market volatility. The asset switch characteristic
related to currently-sold highest day by day residing profit merchandise makes use of a
designated bond fund sub-account throughout the separate account. The transfers are
primarily based on a static mathematical components used with the actual profit which
considers quite a few elements, together with, however not restricted to, the impression of
funding efficiency on the contractholder’s complete account worth. Different
product design options we make the most of embody, amongst others, asset allocation
restrictions, minimal issuance age necessities and sure limitations on the
quantity of contractholder buy funds, in addition to a required minimal
allocation to our basic account for sure of our merchandise. We proceed to
introduce merchandise that diversify our threat profile and have integrated
provisions in product design permitting frequent revisions of key pricing parts
for sure of our merchandise. As well as, there may be variety in our price
preparations, as sure charges are based totally on the profit assure
quantity, the contractholder account worth and/or premiums, which helps protect
sure income streams when market fluctuations trigger account values to
decline.

Asset Legal responsibility Administration Technique (together with fastened revenue devices and
derivatives):

We make use of an ALM technique that makes use of a mix of each conventional fastened
revenue devices and derivatives to fulfill anticipated liabilities related to
our variable annuity residing profit ensures. The financial legal responsibility we handle
with this ALM technique consists of anticipated residing profit claims beneath much less
extreme market circumstances, that are managed utilizing fastened revenue devices,
derivatives, or a mix thereof, and potential residing profit claims
ensuing from extra extreme market circumstances, that are hedged utilizing by-product
devices. For the portion of our ALM technique executed with derivatives, we
enter into a variety of exchange-traded and over-the-counter fairness, rate of interest
and credit score derivatives, together with, however not restricted to: fairness and treasury
futures; complete return, credit score default and rate of interest swaps; and choices,
together with fairness choices, swaptions, and flooring and caps. The intent of this
technique is to extra effectively handle the capital and liquidity related to
these merchandise whereas persevering with to mitigate fluctuations in web revenue because of
actions in capital markets.

The valuation of the financial legal responsibility we search to defray excludes sure objects
which might be included throughout the U.S. GAAP legal responsibility, akin to NPR with a view to
maximize safety regardless of the opportunity of our personal default, as properly
as threat margins (required by U.S. GAAP however totally different from our greatest estimate) and
valuation methodology variations. The next desk gives a reconciliation
between the legal responsibility reported beneath U.S. GAAP and the financial legal responsibility we
handle by our ALM technique, web of reinsurance recoverables, as of the
interval indicated:

As of March 31, 2022
(in thousands and thousands)
U.S. GAAP Legal responsibility, together with NPR $ 6,264
NPR Adjustment 2,523
Subtotal 8,787
Changes together with threat margins and valuation
methodology variations (1,717)
Financial legal responsibility managed by ALM technique $ 7,071

As of March 31, 2022, the honest worth of our fastened revenue devices and
by-product property exceed our financial legal responsibility.

Below our ALM technique, we anticipate variations within the U.S. GAAP web revenue impression
between the adjustments in worth of the fastened revenue devices (both designated
as available-for-sale or designated as buying and selling) and derivatives as in comparison with
the adjustments within the embedded by-product legal responsibility these property help. These
variations could be primarily attributed to a few distinct areas:

•Completely different valuation methodologies in measuring the legal responsibility we intend to cowl
with fastened revenue devices and derivatives versus the legal responsibility reported
beneath U.S. GAAP. The valuation methodology utilized in estimating the financial
legal responsibility we intend to defray with fastened revenue devices (both designated
as available-for-sale or designated as buying and selling) and derivatives is totally different
from that required to be utilized to measure the legal responsibility beneath U.S. GAAP.
Moreover, the valuation of the financial legal responsibility excludes sure objects
which might be included throughout the U.S. GAAP legal responsibility, akin to NPR with a view to
maximize safety regardless of the opportunity of our personal default and threat
margins (required by U.S. GAAP however totally different from our greatest estimate).

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•Completely different accounting therapy between liabilities and property supporting these
liabilities. Below U.S. GAAP, adjustments in worth of the embedded by-product
legal responsibility, by-product devices and stuck revenue devices designated as
buying and selling instantly mirrored in web revenue, whereas adjustments within the honest worth of
fastened revenue devices which might be designated as available-for-sale are recorded
as unrealized features (losses) in different complete revenue.

•Common hedge outcomes. For the by-product portion of the ALM technique, the web
hedging impression (the extent to which the adjustments in worth of the hedging
devices offset the change in worth of the portion of the financial legal responsibility
we’re hedging) could also be impacted by quite a few elements, together with: money stream
timing variations between our hedging devices and the corresponding portion
of the financial legal responsibility we’re hedging, foundation variations attributable to
precise underlying contractholder funds to be hedged versus hedgeable indices,
rebalancing prices associated to dynamic rebalancing of hedging devices as
markets transfer, sure parts of the financial legal responsibility that might not be hedged
(together with sure actuarial assumptions), and implied and realized market
volatility on the hedge positions relative to the portion of the financial
legal responsibility we search to hedge.

Capital Hedge Program:

We make use of a capital hedge program throughout the Firm to guard a portion of the
total capital place of the variable annuities enterprise towards its publicity
to the fairness markets. The capital hedge program is carried out utilizing fairness
derivatives which embody fairness name and put choices, complete return swaps and
futures contracts.

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Revenue Taxes

For data concerning revenue taxes, see Word 7 to the Unaudited Interim
Consolidated Monetary Statements.

Liquidity and Capital Assets

Overview

Liquidity refers back to the capacity to generate enough money assets to fulfill
the cost obligations of the Firm. Capital refers back to the long-term
monetary assets obtainable to help the operations of our enterprise, fund
enterprise progress, and supply a cushion to resist hostile circumstances. Our
capacity to generate and keep enough liquidity and capital relies on the
profitability of our enterprise, basic financial circumstances, our capacity to
borrow from associates and our entry to the capital markets by associates
as described herein.

Efficient and prudent liquidity and capital administration is a precedence throughout the
group. Administration displays the liquidity of the Firm each day
and initiatives borrowing and capital wants over a multi-year time horizon. We use
a Danger Urge for food Framework (“RAF”) to make sure that all dangers taken by the Firm
align with our capability and willingness to take these dangers. The RAF gives a
dynamic evaluation of capital and liquidity stress impacts, together with eventualities
much like, and extra extreme than, these occurring because of COVID-19, and is
meant to make sure that enough assets can be found to soak up these
impacts. We imagine that our capital and liquidity assets are enough to
fulfill the capital and liquidity necessities of the Firm.

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Our companies are topic to complete regulation and supervision by
home and worldwide regulators. These rules presently embody
necessities (a lot of that are the topic of ongoing rule-making) referring to
capital, leverage, liquidity, stress-testing, total threat administration, credit score
publicity reporting and credit score focus. For data on these regulatory
initiatives and their potential impression on us, see “Enterprise-Regulation” and
“Danger Elements” included in our Annual Report on Kind 10-Okay for the yr ended
December 31, 2021.

Capital

We handle the Firm to regulatory capital ranges in keeping with our “AA”
scores targets. We make the most of the risk-based capital (“RBC”) ratio as a major
measure of capital adequacy. RBC is calculated primarily based on statutory monetary
statements and threat formulation in keeping with the practices of the Nationwide
Affiliation of Insurance coverage Commissioners (“NAIC”). RBC considers, amongst different
issues, dangers associated to the sort and high quality of the invested property,
insurance-related dangers related to an insurer’s merchandise and liabilities,
rate of interest dangers and basic enterprise dangers. RBC ratio calculations are
meant to help insurance coverage regulators in measuring an insurer’s solvency and
capacity to pay future claims. The reporting of RBC measures is just not meant for
the aim of rating any insurance coverage firm or to be used in reference to any
advertising, promoting or promotional actions, however is obtainable to the
public. The Firm’s capital ranges considerably exceed the minimal stage
required by relevant insurance coverage rules. Our regulatory capital ranges might
be affected sooner or later by adjustments to the relevant rules, proposals
for that are presently into account by each home and worldwide
insurance coverage regulators.

The regulatory capital stage of the Firm could be materially impacted by
rate of interest and fairness market fluctuations, adjustments within the values of
derivatives, the extent of impairments recorded, and credit score high quality migration of
the funding portfolio, amongst different objects. As well as, the reinsurance of
enterprise or the recapture of enterprise topic to reinsurance preparations because of
defaults by, or credit score high quality migration affecting, the reinsurers or for different
causes may negatively impression regulatory capital ranges. The Firm’s
regulatory capital stage can also be affected by statutory accounting guidelines, which
are topic to vary by every relevant insurance coverage regulator.

Captive Reinsurance Firms:

See “Administration’s Dialogue and Evaluation of Monetary Situation and Outcomes of
Operations-Liquidity and Capital Assets-Capital-Affiliated Captive
Reinsurance Firms” included in our Annual Report on Kind 10-Okay for the yr
ended December 31, 2021, for a dialogue of our use of captive reinsurance
corporations.

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Liquidity

Our liquidity is managed to make sure steady, dependable and cost-effective sources
of money flows to fulfill all of our obligations. Liquidity is offered by a spread
of sources, as described extra totally under, together with portfolios of liquid
property. Our funding portfolios are integral to the general liquidity of the
Firm. We use a projection course of for money flows from operations to make sure
enough liquidity to fulfill projected money outflows, together with claims. The
impression of Prudential Funding, LLC’s (“Prudential Funding”), a wholly-owned
subsidiary of Prudential Insurance coverage, financing capability on liquidity (as
described under) is taken into account within the inner liquidity measures of the
Firm.

Liquidity is measured towards internally-developed benchmarks that take into
account the traits of each the asset portfolio and the liabilities that
they help. We think about attributes of the varied classes of liquid property
(for instance, kind of asset and credit score high quality) in calculating inner
liquidity measures to judge our liquidity beneath varied stress eventualities,
together with company-specific and market-wide occasions. We proceed to imagine that
money generated by ongoing operations and the liquidity profile of our property
present enough liquidity beneath moderately foreseeable stress eventualities.

The principal sources of the Firm’s liquidity are premiums and sure
annuity concerns, funding and price revenue, funding maturities, gross sales
of investments and inner borrowings. The principal makes use of of that liquidity
embody advantages, claims, and funds to policyholders and contractholders in
reference to surrenders, withdrawals and web coverage mortgage exercise. Different makes use of
of liquidity embody commissions, basic and administrative bills, purchases
of investments, the cost of dividends and returns of capital to the dad or mum
firm, hedging and reinsurance exercise and funds in reference to
financing actions.

In managing liquidity, we think about the danger of policyholder and contractholder
withdrawals of funds sooner than our assumptions when deciding on property to
help these contractual obligations. We use give up prices and different
contract provisions to mitigate the extent, timing and profitability impression of
withdrawals of funds by clients.

Liquid Property

Liquid property embody money and money equivalents, short-term investments, U.S.
Treasury fastened maturities, and stuck maturities that aren’t designated as
held-to-maturity and public fairness securities. As of March 31, 2022 and
December 31, 2021, the Firm had liquid property of $17,629 million and $17,793
million, respectively. The portion of liquid property comprised money and money
equivalents and short-term investments was $1,880 million and $1,101 million as
of March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022,
$11,752 million, or 90%, of the fastened maturity investments within the Firm’s
basic account portfolios, have been rated excessive or highest high quality primarily based on NAIC or
equal ranking.

Prudential Funding, LLC

Prudential Monetary and Prudential Funding borrow funds within the capital markets
primarily by the direct issuance of business paper. The borrowings serve
as an extra supply of financing to fulfill our working capital wants.
Prudential Funding operates beneath a help settlement with Prudential Insurance coverage
whereby Prudential Insurance coverage has agreed to keep up Prudential Funding’s
constructive tangible web value always.

Hedging actions related to residing profit ensures

The hedging portion of our threat administration technique related to our residing
profit ensures is being managed throughout the Firm. For the portion of the
threat administration technique executed by hedging, we enter into a variety of
exchange-traded, cleared and different OTC fairness and rate of interest derivatives in
order to hedge sure residing profit ensures accounted for as embedded
derivatives towards adjustments in sure capital market dangers above a chosen
threshold. The portion of the danger administration technique comprising the hedging
portion requires entry to liquidity to fulfill the Firm’s cost obligations
relating to those derivatives, akin to funds for periodic settlements,
purchases, maturities and terminations. These liquidity wants can range
materially because of, amongst different objects, adjustments in rates of interest, fairness markets,
mortality and policyholder habits.

The hedging portion of the danger administration technique may additionally end in
derivative-related collateral postings to (once we are in a web pay place) or
from (once we are in a web obtain place) counterparties. The online collateral
place relies on adjustments in rates of interest and fairness markets associated to the
quantity of the exposures hedged. Relying on market circumstances, the collateral
posting necessities may end up in materials liquidity wants once we are in a web
pay place.

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Time period and Common Life Reserve Financing

The Firm makes use of affiliated captive reinsurance subsidiaries to finance the
portion of the statutory reserves required to be held beneath Regulation XXX and
Guideline AXXX that’s thought-about to be non-economic. The financing preparations
contain the reinsurance of time period and common life enterprise to our affiliated
captive reinsurers and the issuance of surplus notes by these affiliated
captives which might be handled as capital for statutory functions. These surplus notes
are subordinated to policyholder obligations, and the cost of principal and
curiosity on the excess notes can solely be made with prior insurance coverage regulatory
approval.

As of March 31, 2022, the affiliated captive reinsurance corporations have entered
into agreements with exterior counterparties offering for the issuance of as much as
an mixture of $14,600 million of surplus notes by our affiliated captive
reinsurers in return for the receipt of credit-linked notes (“Credit score-Linked Word
Buildings”), of which $12,821 million of surplus notes was excellent,
in comparison with an mixture issuance capability of $14,600 million, of which $12,721
million was excellent as of December 31, 2021. Below the agreements, the
affiliated captive receives in change for the excess notes a number of
credit-linked notes issued by a special-purpose affiliate of the Firm with an
mixture principal quantity equal to the excess notes excellent. The
affiliated captive holds the credit-linked notes as property supporting Regulation
XXX or Guideline AXXX non-economic reserves, as relevant. For extra data
on our Credit score-Linked Word Buildings, see “Administration’s Dialogue and Evaluation
of Monetary Situation and Outcomes of Operation-Liquidity and Capital
Assets-Financing Actions” within the Annual Report on Kind 10-Okay for the yr
ended December 31, 2021.

As of March 31, 2022, our affiliated captive reinsurance corporations had
excellent an mixture of $3,025 million of debt issued for the aim of
financing Regulation XXX and Guideline AXXX non-economic reserves, of which
roughly $1,125 million pertains to Regulation XXX reserves and
roughly $1,900 million pertains to Guideline AXXX reserves. As well as, as
of March 31, 2022, for functions of financing Guideline AXXX reserves, one in every of our
affiliated captives had roughly $3,982 million of surplus notes
excellent that have been issued to associates.

The Firm has launched up to date variations of its particular person life merchandise in
conjunction with the requirement to undertake principle-based reserving by January
1, 2020. These up to date merchandise are presently priced to help the
principle-based statutory reserve stage with out the necessity for reserve financing.

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