PRUCO LIFE INSURANCE CO – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the consolidated financial condition of Pruco Life
Insurance Company, or the "Company," as of September 30, 2021, compared with
December 31, 2020, and its consolidated results of operations for the three and
nine months ended September 30, 2021 and 2020. You should read the following
analysis of our consolidated financial condition and results of operations in
conjunction with the MD&A, the "Risk Factors" section, and the audited
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2020, as well as the statements under
"Forward-Looking Statements" , and the Unaudited Interim Consolidated Financial
Statements included elsewhere in this Quarterly Report on Form 10-Q.

                                    Overview

The Company sells variable annuities, universal life insurance, variable life
insurance and term life insurance primarily through affiliated and unaffiliated
distributors in the United States. As of December 31, 2020, the Company
discontinued the sales of traditional variable annuities with guaranteed living
benefit riders.

Effective July 1, 2021, the Company recaptured the risks related to its variable
annuity base contracts, along with the living benefit guarantees, that had
previously been reinsured to Prudential Annuities Life Assurance Corporation
("PALAC") from April 1, 2016 through June 30, 2021. The recapture does not
impact Pruco Life Insurance Company of New Jersey, which will continue to
reinsure its new and in force business to The Prudential Insurance of America.
The product risks related to the previously reinsured business that were being
managed in PALAC, were transferred to the Company. In addition, the living
benefit hedging program related to the previously reinsured living benefit
riders will be managed within the Company. This transaction is referred to as
the "2021 Variable Annuities Recapture". For more information on this
transition, see Note 1 to the Unaudited Interim Consolidated Financial
Statements.
COVID-19
Since the first quarter of 2020, the novel coronavirus ("COVID-19") has created
extreme stress and disruption in the global economy and financial markets and
has elevated mortality and morbidity experience for the global population. The
COVID-19 pandemic continues to impact our results of operations in the current
period and is expected to continue to impact our results of operations in future
periods. The COVID-19 pandemic has moved in localized waves, with its impact
worsening and then improving in different locations at different times in a
repetitive but unpredictable pattern. During the third quarter of 2021, the
mortality impacts to our businesses from COVID-19 increased compared to the
second quarter. The Company has taken several measures to manage the impacts of
this crisis. The actual and expected impacts of these events and other items are
included in the following update:
•Outlook. We expect COVID-19 to continue to contribute to elevated levels of
mortality, resulting in increased life insurance claims in the near-term. The
pandemic may also impact sales volumes.

•Risk Factors. The COVID-19 pandemic has adversely impacted our results of
operations, financial position, investment portfolio, new business opportunities
and operations, and these impacts are expected to continue. For additional
information on the risks to our business posed by the COVID-19 pandemic, see
"Risk Factors" included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2020.

•Business Continuity. Throughout the COVID-19 pandemic, we have been executing
Prudential Financial Inc.'s ("Prudential Financial") and our business continuity
protocols to ensure our employees are safe and able to serve our customers. This
included effectively transitioning the vast majority of our employees to remote
work arrangements.

We believe we can sustain remote work and social distancing for an indefinite
period while ensuring that critical business operations are sustained. In
addition, we are managing COVID-19-related impacts on third-party provided
services, and do not anticipate significant interruption in critical operations.

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Impact of a Low Interest Rate Environment

As a global financial services company, market interest rates are a key driver
of our results of operations and financial condition. Changes in interest rates
can affect our results of operations and/or our financial condition in several
ways, including favorable or adverse impacts to:

• investment-related activity, including: investment income returns, net
interest margins, net investment spread results
new money rates, mortgage loan prepayments and bond redemptions;
• hedging costs and other risk mitigation activities;
• insurance reserve levels, amortization of deferred policy acquisition costs
("DAC") and market experience true-ups:
• customer account values, including their impact on fee income;
• product offerings, design features, crediting rates and sales mix; and
• policyholder behavior, including surrender or withdrawal activity.

For more information on interest rate risks, see "Risk Factors-Market Risk"
included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Revenues and Expenses

The Company earns revenues principally from insurance premiums, mortality and
expense fees, asset administration fees from insurance and investment products,
and from net investment income on the investment of general account and other
funds. The Company receives premiums primarily from the sale of individual life
insurance and annuity products. The Company earns mortality and expense fees,
and asset administration fees, primarily from the sale and servicing of
universal life insurance and separate account products including variable life
insurance and variable annuities. The Company's operating expenses principally
consist of insurance benefits provided and reserves established for anticipated
future insurance benefits, general business expenses, reinsurance premiums,
commissions and other costs of selling and servicing the various products sold
and interest credited on general account liabilities.

                      Accounting Policies & Pronouncements

Application of Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires
the application of accounting policies that often involve a significant degree
of judgment. Management, on an ongoing basis, reviews estimates and assumptions
used in the preparation of financial statements. If management determines that
modifications in assumptions and estimates are appropriate given current facts
and circumstances, the Company's results of operations and financial position as
reported in the Unaudited Interim Consolidated Financial Statements could change
significantly.

Management believes the accounting policies relating to the following areas are
most dependent on the application of estimates and assumptions and require
management's most difficult, subjective, or complex judgments:

•DAC and other costs, including deferred sales inducements ("DSI");
•Policyholder liabilities;
•Valuation of investments, including derivatives, measurement of allowance for
credit losses, and recognition of other-than-temporary impairments;
•Reinsurance recoverables;
•Taxes on income; and
•Reserves for contingencies, including reserves for losses in connection with
unresolved legal matters.


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Market Performance - Equity and Interest Rate Assumptions

DAC and other costs associated with the variable and universal life policies and
the variable and fixed annuity contracts are generally amortized over the
expected lives of these policies in proportion to total gross profits. Total
gross profits include both actual gross profits and estimates of gross profits
for future periods. The quarterly adjustments for market performance reflect the
impact of changes to our estimate of total gross profits to reflect actual fund
performance and market conditions. A significant portion of gross profits for
our variable annuity contracts and, to a lesser degree, our variable life
contracts are dependent upon the total rate of return on assets held in separate
account investment options. This rate of return influences the fees we earn on
variable annuity and variable life contracts, costs we incur associated with the
guaranteed minimum death and guaranteed minimum income benefit features related
to our variable annuity contracts and expected claims to be paid on variable
life contracts, as well as other sources of profit. Returns that are higher than
our expectations for a given period produce higher than expected account
balances, which increase the future fees we expect to earn on variable annuity
and variable life contracts and decrease the future costs we expect to incur
associated with the guaranteed minimum death and guaranteed minimum income
benefit features related to our variable annuity contracts and expected claims
to be paid on variable life contracts. The opposite occurs when returns are
lower than our expectations. The changes in future expected gross profits are
used to recognize a cumulative adjustment to all prior periods' amortization.

Furthermore, the calculation of the estimated liability for future policy
benefits related to certain insurance products includes an estimate of
associated revenues and expenses that are dependent on both historical market
performance as well as estimates of market performance in the future. Similar to
DAC and other costs described above, these liabilities are subject to quarterly
adjustments for experience including market performance, in addition to annual
adjustments resulting from our annual reviews of assumptions.

The weighted average rate of return assumptions used in developing estimated
market returns consider many factors specific to each product type, including
asset durations, asset allocations and other factors. With regard to equity
market assumptions, the near-term future rate of return assumption used in
evaluating DAC, other costs and liabilities for future policy benefits for
certain of our products, primarily our domestic variable annuity and variable
life insurance products, is generally updated each quarter and is derived using
a reversion to the mean approach, a common industry practice. Under this
approach, we consider historical equity returns and adjust projected equity
returns over an initial future period of five years (the "near-term") so that
equity returns converge to the long-term expected rate of return. If the
near-term projected future rate of return is greater than our near-term maximum
future rate of return of 15.0%, we use our maximum future rate of return. If the
near-term projected future rate of return is lower than our near-term minimum
future rate of return of 0%, we use our minimum future rate of return. As of
September 30, 2021, our variable annuities and variable life insurance
businesses assume an 8.0% long-term equity expected rate of return and a 0.4%
near-term mean reversion equity expected rate of return.

With regard to interest rate assumptions used in evaluating DAC, DSI and
liabilities for future policy benefits for certain of our products, we generally
update the long-term and near-term future rates used to project fixed income
returns annually and quarterly, respectively. As a result of our 2021 annual
reviews and update of assumptions and other refinements, we kept our long-term
expectation of the 10-year U.S. Treasury rate unchanged and continue to grade to
a rate of 3.25% over ten years. As part of our quarterly market experience
updates, we update our near-term projections of interest rates to reflect
changes in current rates.

For a discussion of the impact that could result from changes in certain key
assumptions, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Accounting Policies and Pronouncements-Sensitivities
for Insurance Assets and Liabilities" in our Annual Report on Form 10-K for the
year ended December 31, 2020.

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Future Adoption of New Accounting Pronouncements

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements
to the Accounting for Long-Duration Contracts, was issued by the Financial
Accounting Standards Board ("FASB") on August 15, 2018. In October 2019, the
FASB issued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective
Date to affirm its decision to defer the effective date of ASU 2018-12 to
January 1, 2022 (with early adoption permitted), representing a one year
extension from the original effective date of January 1, 2021. As a result of
the COVID-19 pandemic, in November 2020 the FASB issued ASU 2020-11, Financial
Services-Insurance (Topic 944): Effective Date and Early Application to defer
for an additional one year the effective date of ASU 2018-12 from January 1,
2022 to January 1, 2023, and to provide transition relief to facilitate the
early adoption of the ASU. The transition relief would allow large calendar-year
public companies that early adopt ASU 2018-12 to apply the guidance either as of
January 1, 2020 or January 1, 2021 (and record transition adjustments as of
January 1, 2020 or January 1, 2021, respectively) in the 2022 financial
statements. Companies that do not early adopt ASU 2018-12 would apply the
guidance as of January 1, 2021 (and record transition adjustments as of January
1, 2021) in the 2023 financial statements. The Company currently intends to
adopt ASU 2018-12 effective January 1, 2023 using the modified retrospective
transition method where permitted.

ASU 2018-12 will impact, at least to some extent, the accounting and disclosure
requirements for all long-duration insurance and investment contracts issued by
the Company. The Company expects the standard to have a significant financial
impact on the Consolidated Financial Statements and will significantly enhance
disclosures. In addition to significant impacts to the balance sheet upon
adoption, the Company also expects an impact to the pattern of earnings
emergence following the transition date. See Note 2 to the Unaudited Interim
Consolidated Financial Statements for a more detailed discussion of ASU 2018-12,
as well as other accounting pronouncements issued but not yet adopted and newly
adopted accounting pronouncements.

                         Changes in Financial Position

Total assets decreased $1.7 billion from $208.3 billion at December 31, 2020 to
$206.6 billion at September 30, 2021. Significant components were:

•Reinsurance recoverables decreased $17.5 billion primarily driven by the
recapture of the living benefit guarantees as part of the 2021 Variable
Annuities Recapture;

Partially offset by:

•Total investments increased $8.8 billion primarily driven by consideration
received related to the 2021 Variable Annuities Recapture;
•Deferred policy acquisition costs increased $3.8 billion primarily due to the
unwinding of ceded costs as a result of the 2021 Variable Annuities Recapture;
and
•Separate account assets increased $1.1 billion primarily driven by favorable
equity performance, partially offset by net outflows and policy charges.
Total liabilities decreased $3.1 billion from $204.3 billion at December 31,
2020 to $201.2 billion at September 30, 2021. Significant components were:
•Future policy benefits decreased $5.1 billion primarily driven by a decrease in
reserves related to our variable annuity living benefit liabilities due to
rising rates and favorable equity performance;
Partially offset by:
•Separate account liabilities increased $1.1 billion, corresponding to the
increase in Separate account assets, as discussed above.
Total equity increased $1.4 billion from $4.0 billion at December 31, 2020 to
$5.4 billion at September 30, 2021 driven by a capital contribution of $3.8
billion as a result of the 2021 Variable Annuities Recapture, partially offset
by after-tax net loss of $2.4 billion.


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                             Results of Operations

Income (loss) from Operations before Income Taxes

Three Months Comparison

Income (loss) from operations before income taxes decreased $3,229 million from
income of $33 million for the three months ended September 30, 2020 to a loss of
$3,196 million for the three months ended September 30, 2021 primarily driven
by:
•Significant Realized investment gains (losses), net reflecting an unfavorable
impact due to the 2021 Variable Annuities Recapture. See Note 1 to the Unaudited
Interim Consolidated Financial Statements for further details;
Partially offset by:
•Lower General, administrative and other expenses primarily driven by the
unwinding of ceded deferred acquisition costs, partially offset by ceding
allowance paid as part of the 2021 Variable Annuities Recapture.

Nine Months Comparison

Income (loss) from operations before income taxes decreased $3,249 million from
income of $85 million for the nine months ended September 30, 2020 to a loss of
$3,164 million for the nine months ended September 30, 2021. This includes an
unfavorable comparative net loss of $24 million from our annual reviews and
update of assumptions and other refinements, as mentioned above. Excluding the
impact of our annual reviews and update of assumptions and other refinements,
income (loss) from operations decreased $3,225 million primarily driven by:
•Significant Realized investment gains (losses), net reflecting an unfavorable
impact due to the 2021 Variable Annuities Recapture. See Note 1 to the Unaudited
Interim Consolidated Financial Statements for further details;
Partially offset by:
•Lower General, administrative and other expenses primarily driven by the
unwinding of ceded deferred acquisition costs, partially offset by ceding
allowance paid as part of the 2021 Variable Annuities Recapture.

The following table provides the net impact to the Unaudited Interim Statements
of Operations, which is primarily driven by the changes in the U.S. GAAP
embedded derivative liability and hedge positions under the Asset Liability
Management ("ALM") strategy, and the related amortization of DAC and other
costs.

                                                                       Three Months Ended
                                                                       September 30, 2021
                                                                        (in millions)(1)

U.S. GAAP embedded derivative and hedging positions
Change in value of U.S.GAAP liability, pre-NPR(2)

                  $                   266
Change in the NPR adjustment                                                          (217)
Change in fair value of hedge assets, excluding capital hedges(3)                     (453)
Change in fair value of capital hedges(4)                                              (54)
2021 Variable Annuities Recapture                                                   (4,953)
Other                                                                                  426
Realized investment gains (losses), net, and related adjustments                    (4,985)
Market experience updates(5)                                                           (26)
Charges related to realized investments gains (losses), net                              0

Net impact from changes in the U.S. GAAP embedded derivative and
hedge positions, after the impact of NPR, DAC and other costs(6) $

                (5,011)

(1)Positive amount represents income; negative amount represents a loss.
(2)Represents the change in the liability (excluding NPR) for our variable
annuities which is measured utilizing a valuation methodology that is required
under U.S. GAAP. This liability includes such items as risk margins which are
required by U.S. GAAP but not included in our best estimate of the liability.
(3)Represents the changes in fair value of the derivatives utilized to hedge
potential claims associated with our variable annuity living benefit guarantees.
(4)Represents the changes in fair value of equity derivatives of the capital
hedge program intended to protect a portion of the overall capital position of
our business against exposure to the equity markets.
(5)Represents the immediate impacts in current period results from changes in
current market conditions on estimates of profitability.

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(6)Excludes amounts from the changes in unrealized gains and losses from fixed
income instruments recorded in OCI (versus net income) of $20 million for the
three months ended September 30, 2021.

For the three months ended September 30, 2021, the loss of $5.0 billion was
primarily driven by the 2021 Variable Annuities Recapture. See Note 1 to the
Unaudited Interim Consolidated Financial Statements for further details.

Revenues, Benefits and Expenses
Three Months Comparison
Revenues decreased $4,317 million from $302 million for the three months ended
September 30, 2020 to $(4,015) million for the three months ended September 30,
2021 primarily driven by:
•Significant Realized investment gains (losses), net reflecting an unfavorable
impact due to the 2021 Variable Annuities Recapture. See Note 1 to the Unaudited
Interim Consolidated Financial Statements for further details.
Benefits and expenses decreased $1,089 million from $270 million for the three
months ended September 30, 2020 to $(819) million for the three months ended
September 30, 2021 primarily driven by:
•Lower General, administrative and other expenses primarily driven by the
unwinding of ceded deferred acquisition costs, partially offset by ceding
allowance paid as part of the 2021 Variable Annuities Recapture.
Nine Months Comparison
Revenues decreased $4,235 million from $846 million for the nine months ended
September 30, 2020 to $(3,389) million for the nine months ended September 30,
2021. This includes an unfavorable comparative net decrease of $43 million from
our annual reviews and update of assumptions and other refinements, as mentioned
above. Excluding the impact of our annual reviews and update of assumptions and
other refinements, Revenues decreased $4,191 million primarily driven by:
•Significant Realized investment gains (losses), net reflecting an unfavorable
impact due to the 2021 Variable Annuities Recapture. See Note 1 to the Unaudited
Interim Consolidated Financial Statements for further details.

Benefits and expenses decreased $986 million from $761 million for the nine
months ended September 30, 2020 to $(225) million for the nine months ended
September 30, 2021. This includes a favorable comparative net decrease of $19
million from our annual reviews and update of assumptions and other refinements,
as mentioned above. Excluding the impact of our annual reviews and update of
assumptions and other refinements, Benefits and expenses decreased $966 million
primarily driven by:
•Lower General, administrative and other expenses primarily driven by the
unwinding of ceded deferred acquisition costs, partially offset by ceding
allowance paid as part of the 2021 Variable Annuities Recapture.
Risks and Risk Mitigants
Variable Annuity Risks and Risk Mitigants:
The primary risk exposures of our variable annuity contracts relate to actual
deviations from, or changes to, the assumptions used in the original pricing of
these products, including capital markets assumptions such as equity market
returns, interest rates and market volatility, along with actuarial assumptions
such as contractholder mortality, the timing and amount of annuitization and
withdrawals, and contract lapses. For these risk exposures, achievement of our
expected returns is subject to the risk that actual experience will differ from
the assumptions used in the original pricing of these products. Prudential
Financial manages our exposure to certain risks driven by fluctuations in
capital markets primarily through a combination of Product Design Features and
an Asset Liability Management Strategy ("ALM"), as discussed below. The Company
also manages these risk exposures through reinsurance for certain of our
variable annuity products. For information on our reinsurance agreements, see
Note 6 to the Unaudited Interim Consolidated Financial Statements. Sales of
traditional variable annuities with guaranteed living benefit riders were
discontinued as of December 31, 2020.
Effective July 1, 2021, the Company recaptured the risks related to its variable
annuity base contracts, along with the living benefit guarantees, that had
previously been reinsured to PALAC from April 1, 2016 through June 30, 2021. The
recapture does not impact PLNJ, which will continue to reinsure its new and in
force business to Prudential Insurance. The product risks related to the
previously reinsured business that were being managed in PALAC, were transferred
to the Company. In addition, the living benefit hedging program related to the
previously reinsured living benefit riders will be managed within the Company.
For more information on this transaction, see Note 1 to the Unaudited Interim
Consolidated Financial Statements.


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Product Design Features:
A portion of the variable annuity contracts that we offered include an asset
transfer feature. This feature is implemented at the contract level, and
transfers assets between certain variable investment sub-accounts selected by
the annuity contractholder and, depending on the benefit feature, a fixed-rate
account in the general account or a bond fund sub-account within the separate
account. The objective of the asset transfer feature is to reduce our exposure
to equity market risk and market volatility.
The asset transfer feature associated with highest daily living benefit products
uses a designated bond fund sub-account within the separate account. The
transfers are based on a static mathematical formula used with the particular
benefit which considers a number of factors, including, but not limited to, the
impact of investment performance on the contractholder's total account value.
Other product design features we utilize include, among others, asset allocation
restrictions, minimum issuance age requirements and certain limitations on the
amount of contractholder purchase payments, as well as a required minimum
allocation to our general account for certain of our products. In addition,
there is diversity in our fee arrangements, as certain fees are primarily based
on the benefit guarantee amount, the contractholder account value and/or
premiums, which helps preserve certain revenue streams when market fluctuations
cause account values to decline.
Asset Liability Management Strategy (including fixed income instruments and
derivatives):
We employ an ALM strategy that utilizes a combination of both traditional fixed
income instruments and derivatives to meet expected liabilities associated with
our variable annuity living benefit guarantees. The economic liability we manage
with this ALM strategy consists of expected living benefit claims under less
severe market conditions, which are managed using fixed income instruments,
derivatives, or a combination thereof, and potential living benefit claims
resulting from more severe market conditions, which are hedged using derivative
instruments. For the portion of our ALM strategy executed with derivatives, we
enter into a range of exchange-traded and over-the-counter equity, interest rate
and credit derivatives, including, but not limited to: equity and treasury
futures; total return, credit default and interest rate swaps; and options,
including equity options, swaptions, and floors and caps. The intent of this
strategy is to more efficiently manage the capital and liquidity associated with
these products while continuing to mitigate fluctuations in net income due to
movements in capital markets.
The valuation of the economic liability we seek to defray excludes certain items
that are included within the U.S. GAAP liability, such as NPR in order to
maximize protection irrespective of the possibility of our own default, as well
as risk margins (required by U.S. GAAP but different from our best estimate) and
valuation methodology differences. The following table provides a reconciliation
between the liability reported under U.S. GAAP and the economic liability we
manage through our ALM strategy, net of reinsurance recoverables, as of the
period indicated:
                                                                 As of September 30, 2021
                                                                      (in millions)
U.S. GAAP Liability, including NPR                          $                         8,269
NPR Adjustment                                                                        2,033
   Subtotal                                                                          10,302
Adjustments including risk margins and valuation
methodology differences                                                              (1,785)
   Economic liability managed by ALM strategy               $                         8,517

As of September 30, 2021, the fair value of our fixed income instruments and
derivative assets exceed our economic liability.
Under our ALM strategy, we expect differences in the U.S. GAAP net income impact
between the changes in value of the fixed income instruments (either designated
as available-for-sale or designated as trading) and derivatives as compared to
the changes in the embedded derivative liability these assets support. These
differences can be primarily attributed to three distinct areas:
•Different valuation methodologies in measuring the liability we intend to cover
with fixed income instruments and derivatives versus the liability reported
under U.S. GAAP. The valuation methodology utilized in estimating the economic
liability we intend to defray with fixed income instruments (either designated
as available-for-sale or designated as trading) and derivatives is different
from that required to be utilized to measure the liability under U.S. GAAP.
Additionally, the valuation of the economic liability excludes certain items
that are included within the U.S. GAAP liability, such as NPR in order to
maximize protection irrespective of the possibility of our own default and risk
margins (required by U.S. GAAP but different from our best estimate).

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•Different accounting treatment between liabilities and assets supporting those
liabilities. Under U.S. GAAP, changes in value of the embedded derivative
liability, derivative instruments and fixed income instruments designated as
trading immediately reflected in net income, while changes in the fair value of
fixed income instruments that are designated as available-for-sale are recorded
as unrealized gains (losses) in other comprehensive income.
•General hedge results. For the derivative portion of the ALM strategy, the net
hedging impact (the extent to which the changes in value of the hedging
instruments offset the change in value of the portion of the economic liability
we are hedging) may be impacted by a number of factors, including: cash flow
timing differences between our hedging instruments and the corresponding portion
of the economic liability we are hedging, basis differences attributable to
actual underlying contractholder funds to be hedged versus hedgeable indices,
rebalancing costs related to dynamic rebalancing of hedging instruments as
markets move, certain elements of the economic liability that may not be hedged
(including certain actuarial assumptions), and implied and realized market
volatility on the hedge positions relative to the portion of the economic
liability we seek to hedge.
For information regarding the Risk Appetite Framework ("RAF") we use to evaluate
and support the risks of the ALM strategy, see "-Liquidity and Capital
Resources-Capital"
Capital Hedge Program:
We employ a capital hedge program within the Company to protect a portion of the
overall capital position of the variable annuities business against its exposure
to the equity markets. The capital hedge program is conducted using equity
derivatives which include equity call and put options, total return swaps and
futures contracts.



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                                  Income Taxes

For information regarding income taxes, see Note 7 to the Unaudited Interim
Consolidated Financial Statements.

                        Liquidity and Capital Resources
This section supplements and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" included in our Annual Report on
Form 10-K for the year ended December 31, 2020.
Overview
Liquidity refers to the ability to generate sufficient cash resources to meet
the payment obligations of the Company. Capital refers to the long-term
financial resources available to support the operations of our business, fund
business growth, and provide a cushion to withstand adverse circumstances. Our
ability to generate and maintain sufficient liquidity and capital depends on the
profitability of our business, general economic conditions, our ability to
borrow from affiliates and our access to the capital markets through affiliates
as described herein.
Effective and prudent liquidity and capital management is a priority across the
organization. Management monitors the liquidity of the Company on a daily basis
and projects borrowing and capital needs over a multi-year time horizon. We use
a Risk Appetite Framework ("RAF") to ensure that all risks taken by the Company
aligns with our capacity and willingness to take those risks. The RAF provides a
dynamic assessment of capital and liquidity stress impacts, including scenarios
similar to, and more severe than, those occurring due to COVID-19, and is
intended to ensure that sufficient resources are available to absorb those
impacts. We believe that our capital and liquidity resources are sufficient to
satisfy the capital and liquidity requirements of the Company.
Our businesses are subject to comprehensive regulation and supervision by
domestic and international regulators. These regulations currently include
requirements (many of which are the subject of ongoing rule-making) relating to
capital, leverage, liquidity, stress-testing, overall risk management, credit
exposure reporting and credit concentration. For information on these regulatory
initiatives and their potential impact on us, see "Business-Regulation" and
"Risk Factors" included in our Annual Report on Form 10-K for the year ended
December 31, 2020.
Capital
We manage the Company to regulatory capital levels consistent with our "AA"
ratings targets. We utilize the risk-based capital ("RBC") ratio as a primary
measure of capital adequacy. RBC is calculated based on statutory financial
statements and risk formulas consistent with the practices of the National
Association of Insurance Commissioners ("NAIC"). RBC considers, among other
things, risks related to the type and quality of the invested assets,
insurance-related risks associated with an insurer's products and liabilities,
interest rate risks and general business risks. RBC ratio calculations are
intended to assist insurance regulators in measuring an insurer's solvency and
ability to pay future claims. The reporting of RBC measures is not intended for
the purpose of ranking any insurance company or for use in connection with any
marketing, advertising or promotional activities, but is available to the
public. The Company's capital levels substantially exceed the minimum level
required by applicable insurance regulations. Our regulatory capital levels may
be affected in the future by changes to the applicable regulations, proposals
for which are currently under consideration by both domestic and international
insurance regulators.
The regulatory capital level of the Company can be materially impacted by
interest rate and equity market fluctuations, changes in the values of
derivatives, the level of impairments recorded, and credit quality migration of
the investment portfolio, among other items. In addition, the reinsurance of
business or the recapture of business subject to reinsurance arrangements due to
defaults by, or credit quality migration affecting, the reinsurers or for other
reasons could negatively impact regulatory capital levels. The Company's
regulatory capital level is also affected by statutory accounting rules, which
are subject to change by each applicable insurance regulator.
Captive Reinsurance Companies:
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources-Capital-Affiliated Captive
Reinsurance Companies" included in our Annual Report on Form 10-K for the year
ended December 31, 2020, for a discussion of our use of captive reinsurance
companies.
Liquidity
Our liquidity is managed to ensure stable, reliable and cost-effective sources
of cash flows to meet all of our obligations. Liquidity is provided by a variety
of sources, as described more fully below, including portfolios of liquid
assets. Our investment portfolios are integral to the overall liquidity of the
Company. We use a projection process for cash flows from


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operations to ensure sufficient liquidity to meet projected cash outflows,
including claims. The impact of Prudential Funding, LLC's ("Prudential
Funding"), a wholly-owned subsidiary of Prudential Insurance, financing capacity
on liquidity is considered in the internal liquidity measures of the Company.
Liquidity is measured against internally-developed benchmarks that take into
account the characteristics of both the asset portfolio and the liabilities that
they support. We consider attributes of the various categories of liquid assets
(for example, type of asset and credit quality) in calculating internal
liquidity measures to evaluate our liquidity under various stress scenarios,
including company-specific and market-wide events. We continue to believe that
cash generated by ongoing operations and the liquidity profile of our assets
provide sufficient liquidity under reasonably foreseeable stress scenarios.
The principal sources of the Company's liquidity are premiums and certain
annuity considerations, investment and fee income, investment maturities, sales
of investments and internal borrowings. The principal uses of that liquidity
include benefits, claims, and payments to policyholders and contractholders in
connection with surrenders, withdrawals and net policy loan activity. Other uses
of liquidity include commissions, general and administrative expenses, purchases
of investments, the payment of dividends and returns of capital to the parent
company, hedging and reinsurance activity and payments in connection with
financing activities.
In managing liquidity, we consider the risk of policyholder and contractholder
withdrawals of funds earlier than our assumptions when selecting assets to
support these contractual obligations. We use surrender charges and other
contract provisions to mitigate the extent, timing and profitability impact of
withdrawals of funds by customers.
Liquid Assets
Liquid assets include cash and cash equivalents, short-term investments, U.S.
Treasury fixed maturities, and fixed maturities that are not designated as
held-to-maturity and public equity securities. As of September 30, 2021 and
December 31, 2020, the Company had liquid assets of $15,692 million and $7,681
million, respectively. The portion of liquid assets comprised cash and cash
equivalents and short-term investments was $1,185 million and $477 million as of
September 30, 2021 and December 31, 2020, respectively. As of September 30,
2021, $6,677 million, or 93%, of the fixed maturity investments in the Company's
general account portfolios, were rated high or highest quality based on NAIC or
equivalent rating.

Term and Universal Life Reserve Financing
The Company uses affiliated captive reinsurance subsidiaries to finance the
portion of the statutory reserves required to be held under Regulation XXX and
Guideline AXXX that is considered to be non-economic. The financing arrangements
involve the reinsurance of term and universal life business to our affiliated
captive reinsurers and the issuance of surplus notes by those affiliated
captives that are treated as capital for statutory purposes. These surplus notes
are subordinated to policyholder obligations, and the payment of principal and
interest on the surplus notes can only be made with prior insurance regulatory
approval.

As of September 30, 2021, the affiliated captive reinsurance companies have
entered into agreements with external counterparties providing for the issuance
of up to an aggregate of $14,700 million of surplus notes by our affiliated
captive reinsurers in return for the receipt of credit-linked notes
("Credit-Linked Note Structures"), of which $12,746 million of surplus notes was
outstanding, compared to an aggregate issuance capacity of $14,825 million, of
which $12,919 million was outstanding as of December 31, 2020. Under the
agreements, the affiliated captive receives in exchange for the surplus notes
one or more credit-linked notes issued by a special-purpose affiliate of the
Company with an aggregate principal amount equal to the surplus notes
outstanding. The affiliated captive holds the credit-linked notes as assets
supporting Regulation XXX or Guideline AXXX non-economic reserves, as
applicable. For more information on our Credit-Linked Note Structures, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operation-Liquidity and Capital Resources-Financing Activities" in the Annual
Report on Form 10-K for the year ended December 31, 2020.

As of September 30, 2021, our affiliated captive reinsurance companies had
outstanding an aggregate of $2,775 million of debt issued for the purpose of
financing Regulation XXX and Guideline AXXX non-economic reserves, of which
approximately $1,175 million relates to Regulation XXX reserves and
approximately $1,600 million relates to Guideline AXXX reserves. In addition, as
of September 30, 2021, for purposes of financing Guideline AXXX reserves, one of
our affiliated captives had approximately $3,982 million of surplus notes
outstanding that were issued to affiliates.

The Company has introduced updated versions of its individual life products in
conjunction with the requirement to adopt principle-based reserving by January
1, 2020. These updated products are currently priced to support the
principle-based statutory reserve level without the need for reserve financing.

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