Derivative Instruments

12 Months Ended

Dec. 31, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

4. DERIVATIVES AND HEDGING

Types of Derivative Instruments and Derivative Strategies

Interest Rate Contracts

Interest rate swaps are used by the Company to reduce risks from changes in interest rates, manage interest rate exposures arising from mismatches between assets and liabilities and to hedge against changes in the values it owns or anticipates acquiring or selling.

Swaps may be attributed to specific assets or liabilities or to a portfolio of assets or liabilities. Under interest rate swaps, the Company agrees with counterparties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed upon notional principal amount.

Equity Contracts

Equity options and equity total return swaps are used by the Company to manage its exposure to the equity markets which impacts the value of assets and liabilities it owns or anticipates acquiring or selling.

Equity index options are contracts which will settle in cash based on differentials in the underlying indices at the time of exercise and the strike price. The Company uses combinations of purchases and sales of equity index options to hedge the effects of adverse changes in equity indices within a predetermined range.

Equity total return swaps are contracts whereby the Company agrees with counterparties to exchange, at specified intervals, the difference between the return on an asset (or market index) and Secured Overnight Financing Rate (“SOFR”) plus an associated funding spread based on a notional amount. The Company generally uses total return swaps to hedge the effect of adverse changes in equity indices.

Foreign Exchange Contracts

Currency derivatives, including currency swaps and forwards, are used by the Company to reduce risks from changes in currency exchange rates with respect to investments denominated in foreign currencies that the Company either holds or intends to acquire or sell.

Under currency forwards, the Company agrees with counterparties to deliver a specified amount of an identified currency at a specified future date. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. The Company executes forward sales of the hedged currency in exchange for U.S. dollars at a specified exchange rate. The maturities of these forwards correspond with the future periods in which the non-U.S. dollar-denominated earnings are expected to be generated.

Under currency swaps, the Company agrees with counterparties to exchange, at specified intervals, the difference between one currency and another at an exchange rate and calculated by reference to an agreed principal amount. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party.

Credit Contracts

The Company writes credit protection to gain exposure similar to investment in public fixed maturity cash instruments. With these credit derivatives the Company sells credit protection on a single name reference, or certain index reference, and in return receives a quarterly premium. This premium or credit spread generally corresponds to the difference between the yield on the referenced name (or an index’s referenced names) public fixed maturity cash instruments and swap rates, at the time the agreement is executed. If there is an event of default by the referenced name or one of the referenced names in the index, as defined by the agreement, then the Company is obligated to pay the referenced amount of the contract to the counterparty and receive in return the referenced defaulted security or similar security or (in the case of a credit default index) pay the referenced amount less the auction recovery rate.

In addition to selling credit protection, the Company purchases credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio.

Embedded Derivatives

The Company offers certain products (for example, index-linked universal life), which may include features that are accounted for as embedded derivatives. Related to certain of these derivatives, the Company has entered into reinsurance agreements with an affiliate, Prudential Insurance, effective April 1, 2016. See Note 11 for additional information on the reinsurance agreements.

These embedded derivatives and reinsurance agreements, also accounted for as derivatives, are carried at fair value and marked to market through “Realized investment gains (losses), net” based on the change in value of the underlying contractual guarantees, which are determined using valuation models, as described in Note 5.

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 and deposit receivables. 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.


	December 31, 2024						December 31, 2023
Primary Underlying Risk/Instrument Type	Gross Notional		Fair Value				Gross Notional		Fair Value
			Assets		Liabilities				Assets		Liabilities
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate
Foreign Currency Swaps	$	225,884	$	13,344	$	(1,391)	$	169,101	$	7,865	$	(4,257)
Total Derivatives Designated as Hedge Accounting Instruments:	$	225,884	$	13,344	$	(1,391)	$	169,101	$	7,865	$	(4,257)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps	$	484,200	$	2,649	$	(6,417)	$	88,200	$	36	$	(2,063)
Credit
Credit Default Swaps	0		0		0		0		0		0
Currency/Interest Rate
Foreign Currency Swaps	33,693		2,782		(216)		39,965		1,563		(597)
Foreign Currency
Foreign Currency Forwards	12,198		527		0		9,550		7		(290)
Equity
Equity Total Return Swaps	450,000		28,166		(28,166)		0		0		0
Equity Options	$	2,930,701	$	107,964	$	(70,799)	$	1,288,555	$	30,679	$	(43,354)
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	$	3,910,792	$	142,088	$	(105,598)	$	1,426,270	$	32,285	$	(46,304)
Total Derivatives(1)(2)	$	4,136,676	$	155,432	$	(106,989)	$	1,595,371	$	40,150	$	(50,561)

(1)Excludes embedded derivatives which contain multiple underlying risks. The fair value of these embedded derivatives was a net liability of $241 million and $168 million as of December 31, 2024 and 2023, respectively included in “Policyholders’ account balances" and "Reinsurance recoverables and deposit receivables".

(2)Recorded in "Other invested assets" and "Payables to parent and affiliates" on the Statements of Financial Position.

Offsetting Assets and Liabilities

The following table presents recognized derivative instruments (excluding embedded derivatives and associated reinsurance recoverables and deposit receivables), and repurchase and reverse repurchase agreements that are offset in the 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 Statements of Financial Position.


	December 31, 2024
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statements of Financial Position		Net Amounts Presented in the Statements of Financial Position		Financial Instruments/ Collateral(1)		Net Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives	$	155,432	$	(103,502)	$	51,930	$	(51,421)	$	509
Total Assets	$	155,432	$	(103,502)	$	51,930	$	(51,421)	$	509
Offsetting of Financial Liabilities:
Derivatives	$	106,989	$	(106,989)	$	0	$	0	$	0
Total Liabilities	$	106,989	$	(106,989)	$	0	$	0	$	0


	December 31, 2023
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statements of Financial Position		Net Amounts Presented in the Statements of Financial Position		Financial Instruments/ Collateral(1)		Net Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives	$	40,150	$	(40,150)	$	0	$	0	$	0
Total Assets	$	40,150	$	(40,150)	$	0	$	0	$	0
Offsetting of Financial Liabilities:
Derivatives	$	50,561	$	(42,247)	$	8,314	$	(8,314)	$	0
Total Liabilities	$	50,561	$	(42,247)	$	8,314	$	(8,314)	$	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 15.

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 or 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.


	Year Ended December 31, 2024
	Realized Investment Gains (Losses)		Change in Value of Market Risk Benefits, Net of Related Hedging Gains (Losses)		Net Investment Income		Other Income (Loss)		Change in AOCI
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	556	$	0	$	2,282	$	1,660	$	7,064
Total cash flow hedges	556		0		2,282		1,660		7,064
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(1,613)		0		0		0		0
Currency	587		0		0		0		0
Currency/Interest Rate	1,973		0		0		20		0
Credit	0		0		0		0		0
Equity	95,877		0		0		0		0
Embedded Derivatives	(87,192)		0		0		0		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments	9,632		0		0		20		0
Total	$	10,188	$	0	$	2,282	$	1,680	$	7,064


	Year Ended December 31, 2023
	Realized Investment Gains (Losses)		Change in Value of Market Risk Benefits, Net of Related Hedging Gains (Losses)		Net Investment Income		Other Income (Loss)		Change in AOCI
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	(6)	$	0	$	1,878	$	(697)	$	(8,856)
Total cash flow hedges	(6)		0		1,878		(697)		(8,856)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(2,236)		0		0		0		0
Currency	(120)		0		0		0		0
Currency/Interest Rate	(1,622)		0		0		(18)		0
Credit	0		0		0		0		0
Equity	23,279		0		0		0		0
Embedded Derivatives	(61,341)		0		0		0		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments	(42,040)		0		0		(18)		0
Total	$	(42,046)	$	0	$	1,878	$	(715)	$	(8,856)


	Year Ended December 31, 2022
	Realized Investment Gains (Losses)		Change in Value of Market Risk Benefits, Net of Related Hedging Gains (Losses)		Net Investment Income		Other Income (Loss)		Change in AOCI
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	1,802	$	0	$	1,891	$	1,202	$	8,695
Total cash flow hedges	1,802		0		1,891		1,202		8,695
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(2,666)		0		0		0		0
Currency	493		0		0		0		0
Currency/Interest Rate	2,100		0		0		35		0
Credit	0		0		0		0		0
Equity	(13,420)		0		0		0		0
Embedded Derivatives	29,814		0		0		0		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments	16,321		0		0		35		0
Total	$	18,123	$	0	$	1,891	$	1,237	$	8,695

Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:


	(in thousands)
Balance, December 31, 2021	$	5,407
Amount recorded in AOCI


Currency/Interest Rate	13,590
Total amount recorded in AOCI	13,590
Amount reclassified from AOCI to income


Currency/Interest Rate	(4,895)
Total amount reclassified from AOCI to income	(4,895)
Balance, December 31, 2022	$	14,102
Amount recorded in AOCI


Currency/Interest Rate	(7,681)
Total amount recorded in AOCI	(7,681)
Amount reclassified from AOCI to income


Currency/Interest Rate	(1,175)
Total amount reclassified from AOCI to income	(1,175)
Balance, December 31, 2023	$	5,246
Amount recorded in AOCI


Currency/Interest Rate	11,562
Total amount recorded in AOCI	11,562
Amount reclassified from AOCI to income


Currency/Interest Rate	(4,498)
Total amount reclassified from AOCI to income	(4,498)
Balance, December 31, 2024	$	12,310

The changes in fair value of cash flow hedges are deferred in AOCI and are included in “Net unrealized investment gains (losses)” in the Statements of Operations and Comprehensive Income (Loss); these amounts are then reclassified to earnings when the hedged item affects earnings. Using December 31, 2024 values, it is estimated that a pre-tax gain of $2.9 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending December 31, 2025.

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 December 31, 2024 and 2023.

Counterparty Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial derivative transactions with a positive fair value. The Company manages credit risk by entering into derivative transactions with regulated derivatives exchanges for exchange traded derivatives and its affiliate, Prudential Global Funding LLC (“PGF”), related to its 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.

PRUCO LIFE INSURANCE OF NEW JERSEY 10-K