PRICOA Global Funding I
$15,000,000,000 Global Medium Term Note Program
This base prospectus supplement, including Annex 1 attached hereto (this "First Base Prospectus Supplement"), supplements and must be read in conjunction with the Offering Circular dated May 8, 2015 (the "Base Prospectus") prepared by PRICOA Global Funding I, a statutory trust organized in series under the laws of the State of Delaware (the “Issuer”), under the Program (as defined in the Base Prospectus).
This document constitutes a base prospectus supplement for purposes of Article 16 of Directive 2003/71/EC (the "Prospectus Directive 2003/71/EC"). This First Base Prospectus Supplement has been approved by the Central Bank of Ireland, as competent authority under the Prospectus Directive 2003/71/EC. The Central Bank of Ireland only approves this First Base Prospectus Supplement as meeting the requirements imposed under Irish and EU law pursuant to the Prospectus Directive 2003/71/EC.
Annex 1 of this First Base Prospectus Supplement includes the unaudited financial statements of The Prudential Insurance Company of America, a New Jersey, United States stock life insurance company (“PICA”), as of and for the three months ended March 31, 2015 and 2014 (including any notes thereto, the “First Quarter Financial Statements”), prepared on the basis of statutory accounting principles, and Management’s Discussion and Analysis of Financial Condition and Results of Operations of PICA (prepared based upon the First Quarter Financial Statements), as of and for the three months ended March 31, 2015 and 2014 (the “First Quarter MD&A”). Copies of the First Quarter Financial Statements and the First Quarter MD&A will also be made available for inspection at the offices of the Irish Listing Agent of the Issuer at A&L Listing Limited, International Financial Services Centre, North Wall Quay, Dublin 1, Ireland.
Moody’s Investors Service, Inc. (“Moody’s”) is not established in the European Economic Area but the ratings assigned by it are endorsed by Moody’s Investors Service Limited. Standard & Poor’s Ratings Services, a Standard & Poor’s Financial Services LLC business (“S&P”) is not established in the European Economic Area but the ratings assigned by it are endorsed by Standard & Poor’s Credit Market Services Europe Limited.
Fitch Ratings, Inc. (“Fitch”) is not established in the European Economic Area but the ratings assigned by it are endorsed by Fitch Ratings Ltd.
A.M. Best Company (“A.M. Best”) is not established in the European Economic Area but the ratings assigned by it are endorsed by A.M. Best Europe-Rating Services Ltd.
Each of Moody’s, S&P, Fitch and A.M. Best is a rating agency not established in the European Economic Area and not registered under Regulation (EC) No. 1060/2009 (the “CRA Regulation”) by the relevant competent authorities and not included in the list of credit rating agencies published by the European Securities and Market Authority (“ESMA”) on its website in accordance with the CRA Regulation.
The rating of certain Series of Notes to be issued under the Program may be specified in the applicable Final Terms (as defined in the Base Prospectus). Whether or not each rating applied for in relation to the relevant Series of Notes will be issued by a credit rating agency established in the European Economic Area and registered under the CRA Regulation will be disclosed in the applicable Final Terms.
A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating agency. In general, European regulated investors are restricted under the CRA Regulation from using credit ratings for regulatory purposes, unless such ratings are issued by a credit rating agency established in the EU and registered under the CRA Regulation (and such registration has not been withdrawn or suspended), subject to transitional provisions that apply in certain circumstances while the registration application is pending. Such general restriction will also apply in the case of credit ratings issued by non-EU credit rating agencies, unless the relevant credit ratings are endorsed by an EU-registered credit rating agency or the relevant non-EU rating agency is certified in accordance with the CRA Regulation (and such endorsement action or certification, as the case may be, has not been withdrawn or suspended).
Except as disclosed in this First Base Prospectus Supplement, there are no significant new factors, material mistakes or inaccuracies relating to the information included in the Base Prospectus affecting the assessment of the Notes to be offered under the Base Prospectus, that have arisen since the publication of the Base Prospectus. Each of the Issuer and PICA accepts responsibility that, having taken all reasonable care to ensure that such is the case, the information contained in this First Base Prospectus Supplement, to the best of its knowledge, is in accordance with the facts and contains no omission likely to affect the import of such information.
To the extent that there is any inconsistency between any statement in this First Base Prospectus Supplement and any statement in or incorporated by reference in the Base Prospectus, the statements in this First Base Prospectus Supplement will prevail.
The Issuer is not a subsidiary of PICA or of any affiliate of PICA. The obligations of the Issuer evidenced by the Notes will not be obligations of, and will not be guaranteed by, any person, including, but not limited to, PICA, Prudential Holdings, LLC ("PH"), or Prudential Financial, Inc. ("PFI"), or any of their respective subsidiaries or affiliates. PICA, PH and PFI of the United States are not affiliated with Prudential plc, which is headquartered in the United Kingdom.
THE NOTES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE OR FOREIGN SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD EXCEPT TO (1) PERSONS REASONABLY BELIEVED TO BE QUALIFIED INSTITUTIONAL BUYERS (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (2) PERSONS WHO ARE NOT U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT (“REGULATION S”)) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH REGULATION S.
All transfers of the Notes in the United States, whether in the initial distribution or in secondary trading, will be limited to transferees who are Qualified Institutional Buyers. The Notes are not transferable except as described in the Base Prospectus, as supplemented, and in the relevant Terms and Conditions of each Series of the Notes.
ANNEX 1
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PICA AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2015
(See Annex A for definitions of certain terms used in this Management’s Discussion and Analysis)
Summary of Principal Differences between SAP and GAAP
The financial information for The Prudential Insurance Company of America (“PICA”) in this Management’s Discussion and Analysis has been prepared in accordance with SAP. SAP differs in certain respects, which in some cases may be material, from GAAP.
The significant differences between SAP and GAAP are noted below:
The SAP financial statements of PICA do not consolidate its subsidiaries. The value of its subsidiaries are recorded as Preferred Stock, Common Stock and Other Invested Assets.
Under SAP, policy acquisition costs, such as commissions, and other costs incurred in connection with acquiring new business, are expensed when incurred; under GAAP, such costs are deferred and amortized either over the expected lives of the contracts or based on the level and timing of either gross margins, gross profits or gross premiums, depending on the type of contract.
Under SAP, the Commissioner's Reserve Valuation Method is used for the majority of individual insurance reserves; under GAAP, individual insurance policyholder liabilities for traditional forms of insurance are generally established using the net level premium method. For interest-sensitive policies, a liability for policyholder account balances is established under GAAP based on the contract value that has accrued to the benefit of the policyholder. Policy valuation assumptions used in the estimation of policyholder liabilities are generally prescribed under SAP; under GAAP, policy valuation assumptions are based upon best estimates as of the date the policy is issued, with provisions for the risk of adverse deviation.
Under SAP, the Commissioner's Annuity Reserve Valuation Method is used for the majority of individual deferred annuity reserves; under GAAP, individual deferred annuity policyholder liabilities are generally equal to the contract value that has accrued to the benefit of the policyholder, in addition to liabilities for certain guarantees under variable annuity contracts. Under SAP, reinsurance reserve credits taken by ceding entities as a result of reinsurance contracts
are netted against the ceding entity’s policy and claim reserves and unpaid claims; under GAAP, reinsurance recoverables are reported as assets.
Under SAP, an interest maintenance reserve ("IMR") is established to capture realized investment gains and losses, net of tax, on the sale of bonds and interest-related other-than-temporary impairment of bonds resulting from changes in the general levels of interest rates, and is amortized into income over the remaining years to expected maturity of the assets sold or impaired; under GAAP, no such reserve is required.
Under SAP, investments in bonds and preferred stocks are generally carried at amortized cost; under GAAP, investments in bonds and preferred stocks, other than those classified as held to maturity, are carried at fair value.
Under SAP, certain assets designated as non-admitted are excluded from assets by a direct charge to surplus; under GAAP, such assets are carried on the balance sheet with appropriate valuation allowances.
Under SAP, surplus notes are recorded as a component of surplus; under GAAP, surplus notes are recorded as debt.
Under SAP, an extraordinary distribution approved by PICA’s regulator may be recorded as a return of capital; under GAAP, the distribution is recorded as a dividend when PICA has undistributed retained earnings.
Under SAP, goodwill is subject to admissibility limits and is amortized over a period not to exceed ten years; under GAAP, goodwill is subject to impairment testing and not amortized.
Under SAP, income tax expense is based upon taxes currently payable. Changes in deferred taxes are generally reported in surplus and subject to admissibility limits; under GAAP, changes in deferred taxes are generally recorded in income tax expense.
Under SAP, deposits to universal life contracts and immediate annuity contracts without life contingencies are credited to revenue; under GAAP, such deposits are reported as increases to the policyholder account balances.
Under SAP, certain contracts, in particular deferred annuities with mortality risk, are considered “life contracts” and, accordingly, premiums associated with these contracts are reported as revenues. Under U.S. GAAP, the Company’s deferred annuities are classified as either “insurance contracts” or “investment contracts” and, accordingly, those annuities classified as investment contracts are not reported as revenues. Amounts received for investment contracts are not reported as policy liabilities and insurance reserves.
Under SAP, interest-related other-than-temporary impairments for bonds are determined based primarily upon PICA’s intent to sell or inability to assert its intent and ability to hold the security until recovery; under GAAP, other-than-temporary impairments for debt securities are based primarily upon whether PICA intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis.
Overview
PICA is one of the largest insurance companies in the United States. The principal products and services of PICA include individual life insurance and annuities, group insurance and pension and retirement products and related services and administration. The results in the analysis below include the results of the Closed Block business, which comprises the assets and related liabilities of the Closed Block, defined below. The principal executive offices of PICA are located in Newark, New Jersey.
As of March 31, 2015, PICA's admitted assets were $251 billion (including $136 billion held in separate accounts), compared to $309 billion (including $132 billion held in separate accounts) as of December 31, 2014. Excluding separate accounts, assets were primarily comprised of a mix of bonds, mortgage loans, contract loans, cash and short-term investments, and equity investments designed to match the cash flow requirements of insurance liabilities. The decrease in admitted assets was driven by the Closed Block restructuring in the first quarter of 2015 in which PICA ceded approximately $58 billion of assets to its wholly owned subsidiary, PLIC.
Results of Operations
Net Income
2015 to 2014 Three Month Comparison. Net income for the three months ended March 31, 2015 was $3,867 million compared to $246 million for the three months ended March 31, 2014. The increase of $3,621 million between years includes a $1,275 million increase in operating income before income taxes, from $199 million for the three months ended March 31, 2014 to $1,474 million for the three months ended March 31, 2015, which was primarily driven by the following:
A $1,474 million increase in the corporate and other business primarily driven by a distribution of $1,031 million from PICA’s subsidiary, PLIC, to PICA. The distribution was made in connection with the Closed Block Business Tax Payment Agreement, entered into in connection with the first quarter, 2015 restructuring of the Closed Block business in order to facilitate the efficient settlement of taxes within the Prudential consolidated group. In addition, corporate and other business increased $433 million as a result of reinsuring certain reserves related to the Closed Block to PLIC in conjunction with the Closed Block restructuring in the first quarter of 2015. Closed Block reserves related to reserve valuation basis changes are included as part of PICA’s corporate and other business; and
A $43 million increase in the group insurance business primarily driven by favorable claims experience
in the group disability business; and Partially offset by:
A $224 million decrease in the individual life and annuity businesses mainly due to reinsurance of the
Closed Block to PLIC in the first quarter of 2015. Net losses resulting from the Closed Block reinsurance transaction were offset and deferred through a change in unrealized capital losses. Also contributing to the decrease in operating income before taxes were higher margin reserves and deficiency reserves in the individual life business as well as an unfavorable mortality experience in the Hartford business; and
A $12 million decrease in the retirement business primarily due to lower net spread income driven by
lower alternative and swap settlement income as well as reserve strengthening related to PICA’s pension risk transfer business, partially offset by higher separate account gains and fee income due to a pension risk transfer transaction in the first quarter of 2015.
The other components of net income included an increase in net realized capital gains of $3,270 million, from $49 million for the three months ended March 31, 2014 to $3,319 million for the three months ended March 31, 2015. Realized capital gains in the first quarter of 2015 were driven by gain from the Closed Block reinsurance transaction. Realized gains resulting from the Closed Block transaction were offset and deferred through change in unrealized capital losses. The components of net realized capital gains are discussed below under “Capital Gains.”
The above increases in net income were partially offset by a $924 million increase in the tax provision, from $2 million for three months ended March 31, 2014 to $926 million for the three months ended March 31, 2015. Income taxes in the first quarter of 2015 were driven by the Closed Block reinsurance transaction. The income tax provision is further discussed below under “Income Tax Provision.”
Change in Statutory Capital and Surplus
For the three months ended March 31, 2015. Statutory capital (surplus plus AVR) increased $929 million, from $13,710 million at December 31, 2014 to $14,639 million at March 31, 2015. The increase in capital for the period ended March 31, 2015 was primarily driven by:
Net income of $3,867 million, as discussed above under “Net Income”; and
Partially offset by:
A $2,480 change in unrealized capital gains/(losses) (excluding deferred tax) primarily due to the Closed Block reinsurance transaction. Specifically, $1,431 million of common stock unrealized loss reflects previously recognized unrealized gains that were realized in the first quarter of 2015 as part of the transaction. Additionally, $1,274 million of unrealized losses reflects the deferral of PICA’s overall gain to surplus from the transaction. Partially offsetting the Closed Block reinsurance transaction unrealized losses were $271 million of unrealized derivative gains driven by lower interest rates; and A $434 million change in net admitted deferred income tax asset (including unrealized deferred tax
gains). Results are based upon the calculation for admissibility in accordance with SSAP No. 101, Income Taxes, A Replacement of SSAP No. 10R and SSAP No. 10.
Revenues
2015 to 2014 Three Month Comparison. Total revenues decreased $49,819 million from $5,348 million for the three months ended March 31, 2014 to ($44,471) million for the three months ended March 31, 2015. The decrease in total revenues was primarily driven by a $51,597 million decrease in premiums between periods from $3,975 million for the three months ended March 31, 2014 to ($47,622) million for the three months ended March 31, 2015. The decrease in premiums was primarily driven by:
A $52,802 million decrease in the individual life and annuity businesses primarily due to the Closed Block reinsurance transaction. Reinsurance ceded premiums of $52,631 million reflect the offset of Closed Block reserves and IMR transferred under the reinsurance agreement with PLIC, as discussed under “Net Increase in Reserves” and “Other Benefits” below; and
A $92 million decrease in the group insurance business primarily driven by higher lapse rates (one large life client lapsed in the first quarter of 2015) and lower sales resulting from enhanced pricing discipline across all products; and
A $1,215 million increase in the retirement business primarily due to pension risk transfer and longevity reinsurance transactions completed during the second half of 2014 and first quarter of 2015; and
A $80 million increase between periods in the international insurance business primarily driven by higher premiums assumed from the new coinsurance agreement with PGFL.
Partially offsetting the decrease in total revenue includes an increase in other income/(losses) of $1,495 million, from a $437 million loss for the three months ended March 31, 2014 to income of $1,058 million for the three months ended March 31, 2015. The increase in other income/(losses) was primarily driven by a favorable change in adjustments on reinsurance ceded related to the reinsurance agreement of the Closed Block business. The adjustments are based on formulas set forth in this reinsurance agreement that are mainly affected by investment experience. However, changes in adjustments on reinsurance related to the Closed Block are largely offset by the net impact of similar adjustments in premiums, benefits, expenses and dividends to policyholders. As a result, the reinsurance agreement of the Closed Block has minimal impact on net gain from operations.
Additionally, investment income, including IMR amortization, increased $282 million from $1,811 million for the three months ended March 31, 2014 to $2,093 million for the three months ended March 31, 2015. This increase was primarily due to the dividend distribution from PICA’s subsidiary, PLIC as discussed above under “Net Income”. Excluding the dividend distribution, investment income declined due to the reduction of PICA’s asset portfolio as a result of its Closed Block reinsurance transaction in the first quarter of 2015.
Benefits
2015 to 2014 Three Month Comparison. Total surrenders, benefits and fund withdrawals increased $572 million from $5,334 million for the three months ended March 31, 2014 to $5,906 million for the three months ended March 31, 2015. The increase in total surrenders, benefits and fund withdrawals was primarily driven by:
A $878 million increase in the retirement business primarily driven by benefit payments related to pension risk transfer and longevity reinsurance transactions completed during the second half of 2014 and the first quarter of 2015; and
A $51 million increase in the international business primarily due to higher assumed benefits from PLICJ as a result of higher benefit experience; and
Partially offset by:
A $352 million decrease in the individual life and annuity business primarily driven by the Closed Block reinsurance transaction in the first quarter of 2015. Also contributing to the decrease were lower surrender benefits in the annuity business as this block of business continues to run-off in PICA.
Net (Decrease) Increase in Reserves
2015 to 2014 Three Month Comparison. Reserves decreased $47,702 million for the three months ended March 31, 2015, compared to an increase of $392 million for the three months ended March 31, 2014. The decrease of $48,094 million in the change in reserves between periods was primarily due to the following:
A $47,973 million decrease between periods in the individual life and annuity business primarily due to
A $425 million decrease in the corporate and other business primarily driven by ceded reinsurance of certain reserves related to the Closed Block to PLIC. As discussed above under “Net Income”, Closed Block reserves related to reserve valuation basis changes are included as part of PICA’s corporate and other business; and
A $95 million decrease in the group insurance business primarily due to favorable claims experience reflecting lower new claims and higher claims resolutions in the disability business as well as favorable experience on life products; and
Partially offset by:
A $375 million increase in the retirement business primarily due to reserve strengthening related to PICA’s pension risk transfer business; and
A $24 million increase in international insurance business mainly due to new reserves established for the PGFL reinsurance agreement in the first quarter of 2015, partially offset by a decrease in assumed reserves from PLICJ.
Commissions
2015 to 2014 Three Month Comparison. Commissions decreased $32 million from $172 million for the three months ended March 31, 2014 to $140 million for the three months ended March 31, 2015. The decrease between periods was primarily driven by a decrease in the individual life business as its Hartford sales distribution channel was discontinued.
Other (Benefits) Expenses
2015 to 2014 Three Month Comparison. Other (benefits) expenses increased $3,771 million from $334 million for the three months ended March 31, 2014 to ($3,437) million for the three months ended March 31, 2015. The increase between periods was primarily driven by the transfer of $3,783 million of Closed Block IMR to PLIC as part of the Closed Block reinsurance transaction.
Net Transfer From Separate Accounts
2015 to 2014 Three Month Comparison. The net transfer from the separate accounts was ($901) million for the three months ended March 31, 2015, compared to net transfers from the separate accounts of ($1,181) million for the three months ended March 31, 2014. The $280 million change between periods was primarily driven by contributions to separate account products in the retirement business as a result of pension risk transfer transaction that occurred during the first quarter of 2015.
Dividends to Policyholders
2015 to 2014 Three Month Comparison. Dividends to policyholders decreased $49 million from $98 million for the three months ended March 31, 2014 to $49 million for the three months ended March 31, 2015 primarily driven by the continued run-off of the closed block, as well as adjustments related to the reinsurance of the Closed Block as discussed above under “Revenues”.
Income Tax Provision
2015 to 2014 Three Month Comparison. The income tax provision increased $924 million between periods from $2 million for the three months ended March 31, 2014 to $926 million for the three months ended March 31, 2015. The increase in the income tax provision between periods is primarily due to the impact of the reinsurance transaction between PICA and its subsidiary, PLIC, which resulted in an estimated tax expense of $920 million.
Capital Gains
2015 to 2014 Three Month Comparison. Net realized capital gains, after taxes and contribution to the IMR, increased $3,270 million, from $49 million for the three months ended March 31, 2014 to $3,319 million for the three months ended March 31, 2015. The following table sets forth the components of net realized capital gains:
Three Months Three Months Ended March 31, Ended March 31, 2015 2014 Change Bonds……….……… $ 3,698 $ 71 $ 3,627 Equity securities………. 1,395 51 1,344 Derivative instruments……… 297 (22) 319 Mortgage loans……….………. 564 (2) 566
Other invested assets……….. 323 3 320
Other……….. 55 11 44
Gross realized capital gains………. 6,332 112 6,220
Less capital gains tax…...………..……… 157 20 137
Less IMR transfers, net of tax ………...……… 2,856 43 2,813
Net realized capital gains…..……… $ 3,319 $ 49 $ 3,270
Net realized capital gains for the three months ended March 31, 2015 were primarily driven by realized capital gains on bonds and equity securities, partially offset by IMR transfers. These realized capital gains were driven by the Closed Block reinsurance transaction as most of PICA’s Closed Block asset portfolio was transferred to PLIC. The IMR transfers of $2,856 million during the year were primarily driven by gains on bonds from this transaction. During the first quarter of 2015, bond gains of $3,698 million were partially offset by other-than-temporary bond impairments of $2 million while equity gains of $1,395 million were partially offset by $1 million of other-than-temporary equity impairments.
Net realized capital gains for the three months ended March 31, 2014 were primarily driven by realized capital gains on bond and equity securities, partially offset by realized capital losses on derivatives. During the first quarter of 2014, bond trading gains of $82 million were partially offset by other-than-temporary bond impairments of $11 million while equity trading gains of $53 million during the year were partially offset by $2 million of other-than-temporary equity impairments. IMR transfers of $43 million during the year were primarily driven by trading gains on bonds, partially offset by losses from derivatives.
Change in net unrealized capital gains/(losses) was ($1,301) million for the three months ended March 31, 2015. The change was mainly due to $1,431 million of unaffiliated common stock unrealized losses which reflect previously recognized unrealized gains that were realized in the first quarter of 2015 as part of the Closed
deferred tax gain and $271 million of unrealized derivative gains as a result of a decrease in interest rates during the period.
Change in net unrealized capital gains/(losses) was $407 million for the three months ended March 31, 2014. The $407 million change in net unrealized capital gains was mainly due to gains from derivatives as a result of a decrease in interest rates during the period. In addition, affiliated common stock gains were driven by earnings from PICA’s insurance subsidiary, PLI.
Investment Results
Summary of Investments
PICA's general account investment portfolio consists of public and private bonds, stocks, mortgage loans on real estate, real estate, contract loans, and other invested assets such as joint ventures and limited partnerships. The composition of PICA's portfolio reflects, within the discipline provided by its risk management approach, its need for competitive results and the selection of diverse investment alternatives available primarily through its asset management segment. The size of PICA's portfolio enables it to invest in asset classes that may be unavailable to the typical investor.
The following table sets forth the composition of PICA's invested assets as of the dates indicated in accordance with SAP.
March 31, 2015 December 31, 2014 Carrying % of Carrying % of
Amount Total Amount Total
($ in millions) Long-term bonds Public bonds………... $45,512 41.9 % $70,276 42.2 % Private bonds………... 22,666 20.9 34,830 20.8 Preferred stock………... 31 0.1 37 0.1 Common stock………... 7,680 7.1 10,554 6.3 Mortgage loans on real estate………. 17,298 15.9 25,486 15.3 Real estate……….…. 548 0.5 586 0.4 Contract loans………...….. 2,816 2.6 7,622 4.6 Cash and short-term investments……... 3,476 3.2 5,751 3.5 Joint ventures and limited partnerships………... 5,648 5.2 8,428 5.1 Receivables for securities………...…… 108 0.1 56 0.1 Derivatives……….. 2,732 2.5 2,693 1.6 Total invested assets………... $108,515 100.0 % $166,319 100.0 %
The overall income yield on PICA's invested assets after investment expenses, but excluding net realized investment gains (losses) and IMR amortization, for the three months ended March 31, 2015 and March 31, 2014 was 6.10% and 4.40%, respectively. The increase in the income yield was primarily attributable to the sale of assets to an affiliate at fair value on the date of the transfer. The following table sets forth the income yield and investment income, excluding realized investment gains (losses) and IMR amortization, for each major investment category of PICA for the periods indicated.
Bonds
PICA held approximately 63% of its invested general account assets in bonds as of both March 31, 2015 and December 31, 2014. These securities included both publicly-traded and privately-placed debt securities representing an array of industry categories.
PICA manages its public portfolio to a risk profile directed by the CIO Organization and Risk Management groups and to a profile that also reflects the local market environment impacting its insurance portfolio. PICA seeks to employ relative value analysis both in credit selection and in purchasing and selling securities. The return that PICA earns on the portfolio is reflected both as investment income and also as realized gains or losses on investments.
PICA uses privately-placed corporate debt securities and commercial mortgage loans, which consist of well-underwritten mortgages on diversified properties in terms of geography, property type and borrowers, to enhance yield on its portfolio and to improve the overall diversification of the portfolio. Private placements typically offer enhanced yields due to an illiquidity premium and generally offer enhanced credit protection in the form of covenants. PICA’s origination capability offers the opportunity to lead transactions and gives it the opportunity for better terms, including covenants and call protection, and to take advantage of innovative deal structures.
Three Months Ended
March 31, 2015 March 31, 2014 Yield Amount Yield Amount ($ in millions)
Long-term bonds……….……….. 3.71 % $800 4.76 % $1,222 Stocks………...…. 48.00 1,036 1.32 35 Mortgage loans……….………. 3.78 201 5.23 313 Contract loans……… 2.70 35 5.60 105 Cash and short-term investments... 0.29 3 0.39 5 Other investments……….……. 5.23 135 9.53 251 Total before investment expenses……….….. 6.49 % $2,210 4.80 % $1,931 Total after investment expenses……….. 6.10 % $2,080 4.40 % $1,769
The following table sets forth the composition of PICA's long-term bond portfolio by industry category as of the dates indicated.
March 31, 2015 December 31, 2014
Estimated Estimated
Carrying % of Fair Carrying % of Fair
Value Total Value Value Total Value
($ in millions)
US governments……… $4,117 6.0 % $5,310 $7,903 7.5 % $9,808 All other governments………... 1,312 1.9 1,594 1,664 1.6 1,972 Political subdivisions of states, territories, &
possessions (direct & guaranteed)………... 698 1.0 689 734 0.7 737 Special revenue & special assessment obligations &
non guaranteed obligations of agencies…………... 4,494 6.6 5,136 5,720 5.4 6,472 Industrial & miscellaneous (unaffiliated)……….. 55,222 81.1 60,533 86,242 82.1 93,693 Credit tenant loans (unaffiliated)………... _ _ _ _ _ _ Parent, subsidiaries and affiliates……….. 2,262 3.3 2,338 2,649 2.5 2,778 Hybrid securities……… 73 0.1 105 194 0.2 241 Total long-term bonds……….… $68,178 100.0 % $75,705 $105,106 100.0 % $115,701
Asset-Backed Securities
As of both March 31, 2015 and December 31, 2014, the Industrial & miscellaneous (unaffiliated) carrying value included approximately $1.5 billion ($1.6 billion fair value) and $2.5 billion ($2.7 billion fair value) of securities collateralized by sub-prime mortgages. While there is no market standard definition, PICA defines sub-prime mortgages as residential mortgages that are originated to weaker quality obligors as indicated by weaker credit scores, as well as mortgages with higher loan-to-value ratios, or limited documentation.
The following table sets forth the carrying value and fair value of PICA’s asset-backed securities by credit quality as of the date indicated.
(1) Bonds are carried at amortized cost, excluding NAIC 6 rated bonds, which are carried at the lower of amortized cost or fair market value.
The table above provides ratings assigned by nationally recognized rating agencies as of March 31, 2015, including S&P, Moody’s and Fitch. In making its investment decisions, rather than relying solely on the rating agencies’ evaluations, PICA assigns internal ratings to its backed securities based upon its dedicated asset-backed securities unit’s independent evaluation of the underlying collateral and securitization structure, including any guarantees from monoline bond insurers.
The carrying value of asset-backed securities collateralized by sub-prime mortgages decreased from $2.5 billion ($2.7 billion fair value) as of December 31, 2014, to $1.5 billion ($1.6 billion fair value) as of March 31, 2015, primarily reflecting sales and principal paydowns.
Commercial Mortgage-Backed Securities
As of March 31, 2015 and December 31, 2014, Industrial & miscellaneous (unaffiliated) carrying value included approximately $5.5 billion ($5.7 billion fair value) and $9.7 billion ($10.0 billion fair value) of commercial mortgage-backed securities, respectively.
The following table sets forth the carrying value and fair value of PICA’s commercial mortgage-backed securities by credit quality and by the year of issuance (vintage) as of the date indicated.
March 31, 2015 Lowest Rating Agency Rating
AAA AA A BBB BB and below Carrying Value(1) Total Fair Value (in millions) Collateralized by sub-prime mortgages………. $ 0 $ 1 $ 37 $ 99 $ 1,326 $ 1,463 $ 1,639 Collateralized by auto loans ... 240 0 0 0 0 240 243 Collateralized by credit cards ... 65 0 6 0 0 71 75 Other asset-backed securities ... 3,441 497 213 18 60 4,229 4,257 Total asset-backed securities ... $ 3,746 $ 498 $ 256 $ 117 $ 1,386 $ 6,003 $ 6,214
(1) Bonds are carried at amortized cost, except NAIC 6 rated bonds, which are carried at the lower of cost or fair market value.
(2) The tables above provide ratings as assigned by nationally recognized rating agencies as of March 31, 2015, including S&P, Moody’s, Fitch, and Realpoint.
(3) There were no agency commercial mortgage-backed securities included in the table above as of March 31, 2015.
The following table sets forth the carrying value of our AAA commercial mortgage-backed securities as of the dates indicated, by type and by year of issuance (vintage).
AAA Rated Commercial Mortgage-Backed Securities – Carrying Value by Type and Vintage March 31, 2015
Super Senior AAA Structures Other AAA
Vintage Super Senior (shorter duration tranches) Super Senior (longest duration
tranche) Mezzanine Junior Other Senior Other Subordinate Other Total AAA Securities at Carrying Value (in millions) 2015 ... $ 21 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 21 2014 ... 1,601 0 0 0 0 0 17 1,618 2013 ... 1,566 0 0 0 0 0 0 1,566 2012 - 2009 ... 133 0 0 0 0 0 0 133 2008 - 2007 ... 67 0 0 0 0 0 0 67 2006 ... 560 927 0 0 0 0 0 1,487 2005 & Prior ... 1 565 0 0 0 0 0 566 Total ... $ 3,949 $ 1,492 $ 0 $ 0 $ 0 $ 0 $ 17 $ 5,458 March 31, 2015 Lowest Rating Agency Rating
Vintage AAA AA A BBB BB and below Total Carrying Value (1) Total Fair Value (in millions) 2015 ... $ 21 $ 0 $ 0 $ 0 $ 0 $ 21 $ 21 2014 ... 1,618 0 0 0 0 1,618 1,713 2013 ... 1,566 0 0 0 0 1,566 1,670 2012-2009 ... 133 0 0 0 0 133 133 2008-2007 ... 67 0 0 0 0 67 68 2006 ... 1,487 41 0 0 0 1,528 1,558 2005 & prior………...…… 566 13 0 0 0 579 584 Total commercial mortgage-backed
Bond Credit Quality
The SVO evaluates the investments of insurers for statutory reporting purposes and assigns bonds to one of six categories called "NAIC Designations." In general, NAIC Designations of "1" highest quality or "2" high quality include bonds considered investment grade, which include securities rated Baa3 or higher by Moody's or BBB- or higher by S&P. NAIC Designations of "3" through "6" generally include bonds referred to as below investment grade, which include securities rated Ba1 or lower by Moody's and BB+ or lower by S&P. The NAIC Designations for commercial mortgage-backed securities and non-agency residential mortgage-backed securities, including PICA’s asset-backed securities collateralized by sub-prime mortgages, are based on security level expected losses as modeled by an independent third-party (engaged by the NAIC) and the statutory carrying value of the security, including any purchase discounts or impairment charges previously recognized.
As a result of time lags between the funding of investments, the finalization of legal documents, and the completion of the SVO filing process, the bond portfolio generally includes securities that have not yet been rated by the SVO as of each balance sheet date. Pending receipt of SVO ratings, the categorization of these securities by NAIC Designation is based on the expected ratings indicated by internal analysis.
The fair values of public bonds are based on quoted market prices or prices obtained from independent pricing services. In order to validate reasonability, prices are obtained from multiple independent services where available and are also reviewed by PICA’s internal asset managers through comparison with directly observed recent market trades or comparison of all significant inputs used by the pricing service to our observations of those inputs in the market. For investments in private bonds, this information is not available. For these private bonds, the fair value is determined typically by using a discounted cash flow model, which relies upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions and takes into account, among other factors, the credit quality of the issuer and the reduced liquidity associated with private bonds.
In determining the fair value of certain bonds, the discounted cash flow model may also use unobservable inputs, which reflect PICA’s own assumptions about the inputs market participants would use in pricing the asset.
The following table sets forth PICA's bond portfolio by NAIC Designation as of the dates indicated. Bonds by Credit Quality
March 31, 2015 December 31, 2014
Estimated Estimated
Carrying % of Fair Carrying % of Fair
NAIC Designation Value (1) Total Value Value(1) Total Value ($ in millions)
1 $44,591 65.4 % $49,906 $65,577 62.4 % $72,426 2 19,769 29.0 21,794 31,981 30.4 35,361 Subtotal High or Highest Quality Securities(2) 64,360 94.4 71,700 97,558 92.8 107,787
3 2,721 4.0 2,881 5,224 5.0 5,532
4 686 1.0 695 1,781 1.7 1,795
5 319 0.5 325 421 0.4 444
6 92 0.1 104 122 0.1 143
Subtotal Other Securities(3) 3,818 5.6 4,005 7,548 7.2 7,914 Total Bonds $68,178 100.0 % $75,705 $105,106 100.0 % $115,701
(1) Bonds are carried at amortized cost, except NAIC 6 rated bonds, which are carried at the lower of cost or fair market value.
(2) As of March 31, 2015, includes $44,181 million of public bonds and $20,179 million of private bonds and, as of December 31, 2014, includes $67,368 million of public bonds and $30,190 million of private bonds.
(3) As of March 31, 2015, includes $1,331 million of public bonds and $2,487 million of private bonds and, as of December 31, 2014, includes $2,908 million of public bonds and $4,640 million of private bonds.
Other-Than-Temporary Impairments of Bonds
PICA maintains separate monitoring processes for public and private bonds and creates watch lists to highlight bonds that require special scrutiny and management. The public bond asset managers formally review all public bond holdings on a quarterly basis and more frequently when necessary to identify potential credit deterioration whether due to ratings downgrades, unexpected price variances, and/or industry specific concerns.
For private placements, PICA’s credit and portfolio management processes help ensure prudent controls over valuation and management. PICA has separate pricing and authorization processes to establish "checks and balances" for new investments. PICA applies consistent standards of credit analysis and due diligence for all transactions, whether they originate through its own in-house origination staff or through agents. PICA's regional offices closely monitor the portfolios in their regions, set all valuation standards centrally, and assess the fair value of all investments quarterly. PICA formally reviews all private bonds on a quarterly basis or more frequently when necessary to identify potential credit deterioration whether due to ratings downgrades, unexpected price variances, and/or company or industry specific concerns.
All bonds with unrealized losses are subject to review to identify other-than-temporary impairments in value. In evaluating whether a decline in value is other-than-temporary, PICA considers several factors including, but not limited to, the following:
the reasons for the decline in value (credit event, currency or interest rate related, including general credit spread widening);
PICA's ability and intent to hold its investment for a period of time to allow for recovery of value;
PICA's intent to sell its investment before recovery of the cost of the investment;
the financial condition of and near-term prospects of the issuer; and
the extent and the duration of the decline.
In determining whether a decline in value is other-than-temporary, PICA places a greater emphasis on analysis of the underlying credit versus the extent and duration of a decline in value. PICA’s credit analysis of an investment includes determining whether the issuer is current on its contractual payments, evaluating whether it is probable that PICA will be able to collect all amounts due according to the contractual terms of the security, and analyzing PICA’s overall ability to recover the carrying value of the investment. PICA continues to utilize valuation declines as a potential indicator of credit deterioration, and applies additional levels of scrutiny in its analysis as the severity and duration of the decline increases.
Under SSAP No. 43R, an other-than-temporary impairment occurs when the entity does not expect (on a discounted basis) to recover the entire cost basis of a loan-backed or structured security. The amount of the other-than-temporary impairment recognized as a realized loss equals the difference between the investment's cost basis and the present value of cash flows expected to be collected, discounted at the effective interest rate implicit in the debt security prior to impairment. The present value of cash flows expected to be collected becomes the new cost basis of the investment. Additionally, if an entity wrote the security down to fair value due to the intent to sell or because it does not have the ability and intent to hold a security in an unrealized loss position for a period of time sufficient to recover the cost of the security, the non-interest related portion of the temporary impairment losses is recorded through the AVR while the interest related other-than-temporary impairment losses is recorded through the IMR.
Preferred Stock
PICA held less than 1% of its invested general account assets in preferred stock as of both March 31, 2015 and December 31, 2014.
Common Stocks
PICA held approximately 7% and 6% of its invested general account assets in common stock as of March 31, 2015 and December 31, 2014, respectively. Substantially all of PICA's unaffiliated common stocks are publicly-traded on national securities exchanges.
Impairments of Common Stocks
Common stocks with unrealized losses are subject to review to identify other-than-temporary impairments in value. In evaluating whether a decline in value is other-than-temporary, PICA consistently considers several
• the extent and the duration of the decline; including, but not limited to, the following general guidelines:
o declines in value greater than 20%, maintained for six months or greater;
o declines in value maintained for one year or greater; and
o declines in value greater than 50%.
• the reasons for the decline in value (credit event, currency or market fluctuation);
• PICA’s ability and intent to hold the investment for a period of time to allow for a recovery of value, including common stock managed by independent third parties where we do not have management discretion; and
• the financial condition of and near-term prospects of the issuer.
PICA generally recognizes other-than-temporary impairments for securities with declines in value greater than 50% maintained for six months or greater or with any decline in value maintained for one year or greater. In addition, in making its determinations PICA continues to analyze the financial condition and near-term prospects of the issuer, including an assessment of the issuer’s capital position, and considers its ability and intent to hold the investment for a period of time to allow for a recovery of value.
When it has been determined that there is an other-than-temporary impairment, PICA records a writedown in its Statement of Operations and Changes in Capital and Surplus within "Net Realized Capital Gains (Losses)" to the estimated fair value, which reduces the cost basis. The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. Estimated fair values for publicly traded common stock are based on quoted market prices or prices obtained from independent pricing services. Estimated fair values for privately traded common stock are determined using valuation and discounted cash flow models that require a substantial level of judgment.
Mortgage Loans on Real Estate Investment Mix
PICA held approximately 16% and 15% of its invested general account assets in mortgage loans on real estate as of March 31, 2015 and December 31, 2014, respectively. The following table sets forth the composition of PICA’s general account investments in commercial mortgage and other loans, as of the dates indicated.
March 31, December 31,
2015 2014
(in millions)
Commercial mortgage loans………... $ 16,047 $ 23,578 Agricultural property loans………. 1,247 1,904 Residential property loans……….. 4 4 Total (1)……….. $ 17,298 $ 25,486
(1) The portfolio as of March 31, 2015, consisted of 1,215 commercial mortgage loans and 458 residential and agricultural loans and as of December 31, 2014, consisted of 1,392 commercial mortgage loans and 511 residential and agricultural loans.
PICA originates mortgage loans on real estate using dedicated investment staff and a network of independent companies through various regional offices. All loans are underwritten consistently with PICA's standards using a proprietary quality rating system that has been developed using its experience in real estate and mortgage lending.
PICA’s loan portfolio strategy emphasizes diversification by property type and geographic location. The following table sets forth the breakdown of the mortgage loan portfolio by geographic region as of the dates indicated.
March 31, 2015 December 31, 2014 Carrying % of Carrying % of
U.S. Regions: Value Total Value Total
($ in millions)
Pacific $5,731 33.1 % $8,558 33.5 % South Atlantic 3,620 20.9 5,170 20.3 Middle Atlantic 2,599 15.0 4,067 16.0 West South Central 1,639 9.5 2,327 9.1 East North Central 1,145 6.6 1,730 6.8
Mountain 699 4.1 903 3.5
New England 801 4.6 1,344 5.3 West North Central 301 1.8 346 1.4 East South Central 190 1.1 172 0.7
Subtotal – U.S. Regions $16,725 96.7 % $24,617 96.6 %
Other 573 3.3 869 3.4
Total mortgage loans $17,298 100.0 % $25,486 100.0 %
PICA’s commercial mortgage and agricultural property loans are geographically dispersed throughout the United States and internationally with the largest concentrations in California ($4.7 billion), New York ($1.8 billion), and Texas ($1.5 billion) as of March 31, 2015.
As of March 31, 2015, PICA’s investments in commercial and agricultural mortgage loans had a weighted average debt service coverage ratio of 2.50 times, and a weighted average loan-to-value ratio of 54%. Loan-to-value and debt service coverage ratios are measures commonly used to assess the quality of commercial and agricultural mortgage loans. The loan-to-value ratio compares the amount of the loan to the fair value of the underlying property collateralizing the loan, and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the loan amount is greater than the collateral value. A smaller loan-to-value ratio indicates a greater excess of collateral value over the loan amount. The debt service coverage ratio compares a property’s net operating income to its debt service payments. Debt service coverage ratios less than 1.0 times indicate that property operations do not generate enough income to cover the loan’s current debt payments. A larger debt service coverage ratio indicates a greater excess of net operating income over the debt service payments.
The values utilized in calculating these loan-to-value ratios are developed as part of PICA’s periodic review of the commercial and agricultural mortgage loan portfolio, which includes an internal evaluation of the underlying collateral value. PICA’s periodic review also includes a quality re-rating process, whereby it updates the internal quality rating originally assigned at underwriting based on the proprietary quality rating system
The following table sets forth the gross carrying value of PICA’s investments in mortgage loans on real estate by loan-to-value and debt service coverage ratios as of the date indicated.
March 31, 2015 Debt Service Coverage Ratio Greater than 1.2x 1.0x to <1.2x Less than 1.0x Total Mortgage Loans
Loan–to-Value Ratio (in millions)
0%-59.99% ... $ 9,795 $ 246 $ 129 $ 10,170 60%-69.99% ... 4,721 127 105 4,953 70%-79.99% ... 1,618 267 15 1,900 Greater than 80% ... 131 66 78 275
Total mortgage loans ... $ 16,265 $ 706 $ 327 $ 17,298
The following table sets forth the breakdown of PICA’s mortgage loans on real estate portfolio by year of origination as of the date indicated.
March 31, 2015 Year of Origination Gross Carrying Value % of Total ($ in millions) 2015 $ 691 4.0 % 2014 3,224 18.6 2013 2,791 16.1 2012 2,302 13.3 2011 3,029 17.5 2010 1,811 10.5 2009 196 1.1 2008 & prior 3,254 18.9 Total mortgage loans on real estate $ 17,298 100.0 %
Mortgage Loans on Real Estate Quality
Ongoing review of the portfolio is performed and loans are placed on watch list status based on a predefined set of criteria, where they are assigned to one of the following categories. PICA places loans on early warning status in cases where, based on its analysis of the loan’s collateral, the financial situation of the borrower or tenants or other market factors, PICA believes a loss of principal or interest could occur. PICA classifies loans as closely monitored when it determines there is a collateral deficiency or other credit events that may lead to a potential loss of principal or interest. Loans not in good standing are those loans where PICA has concluded that
there is a high probability of loss of principal, such as when the loan is in the process of foreclosure or the borrower is in bankruptcy. PICA’s workout and special servicing professionals manage the loans on the watch list. As described below, in determining PICA’s allowance for losses, it evaluates each loan on the watch list to determine if it is probable that amounts due according to the contractual terms of the loan agreement will not be collected.
PICA establishes an allowance for losses to provide for the risk of credit losses inherent in the lending process. The allowance includes loan specific reserves for loans that are determined to be impaired as a result of PICA’s loan review process. PICA defines an impaired loan as a loan for which it estimates it is probable that amounts due according to the contractual terms of the loan agreement will not be collected. The loan specific loss allowance is based on PICA’s assessment as to ultimate collectability of loan principal and interest. Valuation allowances for an impaired loan are recorded based on the present value of expected future cash flows discounted at the loan’s effective interest rate or based on the fair value of the collateral less the estimated costs to obtain and sell. The valuation allowance for commercial mortgage and other loans can increase or decrease from period to period based on these factors.
The following table sets forth the breakdown of PICA's mortgage loans on real estate portfolio by quality as of the dates indicated.
March 31, December 31, 2015 2014 Carrying Carrying Value Value (in millions) Good standing $ 17,269 $ 25,457 Good standing with restructured terms 28 28 Interest overdue more than three months, not in foreclosure 1 1
Foreclosure in process 0 0
Total mortgage loans $ 17,298 $ 25,486
The following table sets forth the change in valuation allowances for PICA’s mortgage loans on real estate portfolio as of the dates indicated:
March 31, December 31,
2015 2014
(in millions)
Allowance, beginning of year $ 5 $ 0 Addition to/(release of) allowance for losses 0 5 Charge-offs, net of recoveries 0 0 Change in foreign exchange 0 0 Allowance, end of period $ 5 $ 5
Joint Ventures and Limited Partnerships
PICA held 5% of its invested general account assets in joint ventures and limited partnerships as of both March 31, 2015 and December 31, 2014. The following table sets forth the composition of PICA's joint ventures and limited partnerships, by type, as of the dates indicated.
March 31, 2015 December 31, 2014
Carrying % of Carrying % of
Value Total Value Total
($ in millions)
Joint venture and limited partnership interests in real estate $226 4.0 % $ 722 8.6 %
Joint venture and limited partnership interests in common stock 3,144 55.7 4,940 58.6
Joint venture and limited partnership interests in fixed income 1,281 22.7 1,385 16.4
Joint venture and limited partnership interests – other 997 17.6 1,381 16.4
Total joint ventures and limited partnerships(1) $ 5,648 100.0 % $ 8,428 100.0 %
Liquidity and Capital Resources
Liquidity
Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of PICA. Capital refers to the long term financial resources available to support the operation of PICA’s businesses, fund business growth, and provide a cushion to withstand adverse circumstances.
PICA employs a Capital Protection Framework to ensure that sufficient capital resources are available to maintain adequate capitalization and competitive RBC ratio and solvency margins under various stress scenarios. The Capital Protection Framework incorporates the potential impacts from market related stresses, including equity markets, real estate, interest rates, credit losses, and foreign currency exchange rates. Potential sources of capital include on-balance sheet capital, derivatives, reinsurance and contingent sources of capital. Although we continue to enhance our approach, we believe we currently have access to sufficient resources to maintain adequate capitalization and competitive RBC ratios and solvency margins under a range of potential stress scenarios.
PICA's principal cash flow sources from insurance, annuities and guaranteed products are premiums and annuity considerations, investment and fee income, and investment maturities and sales. PICA supplements these cash inflows with financing activities. PICA’s cash outflow requirements principally relate to benefits, claims, dividends paid to policyholders, and payments to contract holders in connection with surrenders, withdrawals and net policy loan activity. Benefits include the payment of benefits under life insurance, annuity and guaranteed products. PICA’s uses of cash also include commissions, general and administrative expenses, purchases of investments, and debt service and repayments in connection with financing activities, as well as dividend payments to its parent, PFI.
Some of PICA's products, such as guaranteed products offered to institutional customers, provide for payment of accumulated funds to the contract holder at a specified maturity date unless the contract holder elects to roll over the funds into another contract with PICA. PICA regularly monitors its liquidity requirements associated with policyholder and contract holder obligations so that it can manage cash inflows to match anticipated cash outflow requirements.
In addition, PICA has several subsidiaries that are subject to regulatory limitations on the payment of dividends to PICA.
PICA is subject to regulatory limitations on the payment of dividends. New Jersey insurance law provides that, except in the case of extraordinary dividends (as described below), all dividends or distributions paid by PICA may be paid only from unassigned surplus, as determined pursuant to SAP, less unrealized capital gains and revaluation of assets. PICA must give prior notification to the Commissioner of its intent to pay any dividend or distribution. Also, if any dividend, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (i) 10% of the prior calendar year’s statutory surplus or (ii) the prior calendar year’s statutory net gain from operations (excluding realized capital gains), the dividend is considered to be an “extraordinary dividend” and the prior approval of the Commissioner is required for payment of the dividend. Moreover, the Commissioner is authorized to disallow the payment of any dividend or distribution, even if the dividend is not an “extraordinary dividend”, if it determines that PICA does not have a reasonable surplus as to policyholders relative to its outstanding liabilities and adequate to its financial needs or if it finds PICA to be in a hazardous financial condition.
In May 2015, PICA paid a $1.95 billion extraordinary dividend to PFI, which was approved by the Commissioner in May 2015.
Net cash provided by operations was $327 million and $117 million for the three months ended March 31, 2015 and March 31, 2014, respectively. The fluctuation between periods was primarily driven by an increase in net premiums and lower operating expenses, partially offset by a decline in net investment income.
Net cash (used in) investing activities was ($2,825) million and ($1,921) million for the three months ended March 31, 2015 and March 31, 2014, respectively. The fluctuation between periods was principally driven by an increase in net payments for investments acquired. PICA’s cash flows from investment activities result from repayments of principal, proceeds from maturities and sales of invested assets and investment income, net of amounts reinvested. The primary liquidity risks with respect to these cash flows are the risk of default by debtors or bond insurers, PICA counterparties’ willingness to extend repurchase and/or securities lending arrangements and market volatility. PICA closely manages these risks through our credit risk management process and regular monitoring of our liquidity position.
Net cash provided by financing activities was $223 million and $835 million for the three months ended March 31, 2015 and March 31, 2014, respectively. The fluctuation in net cash provided by financing activities between periods was principally driven by an increase in payments of borrowed money.
Included in financing activity above were contractually scheduled withdrawals and prepayments of general account GICs totaling $147 million for the three months ended March 31, 2015. Because these contractual withdrawals, as well as the level of surrenders experienced, were consistent with PICA's assumptions in asset liability management, the associated cash outflows did not have an adverse impact on PICA’s overall liquidity.
PICA believes that cash flows from its insurance, annuity and guaranteed products operations are adequate to satisfy the current liquidity requirements of these operations based on its current liability structure and considering a variety of reasonably foreseeable stress scenarios. The continued adequacy of this liquidity will depend upon factors including future securities market conditions, changes in interest rate levels, policyholder perceptions of PICA's financial strength and the relative safety of competing products, each of which could lead to reduced cash inflows or increased cash outflows. In addition, market volatility can impact the level of capital required to support PICA’s businesses, particularly PICA’s annuity business.
As of March 31, 2015 and December 31, 2014, PICA had cash and short-term investments of approximately $3.5 billion and $5.8 billion, respectively, and investment grade bonds with a fair market value of $71.7 billion and $107.8 billion, respectively.
Non-Insurance Contractual Obligations
The following table presents PICA's contractual cash flow commitments on notes payable and other borrowings and surplus notes, excluding interest payable, as of March 31, 2015. This table does not reflect PICA's obligations under its insurance, annuity and guaranteed products contracts.
