REINSURANCE

The Company participates in reinsurance with its affiliates Prudential Life Insurance Company of Taiwan Inc. (“Prudential of Taiwan”), Prudential Arizona Reinsurance Captive Company (“PARCC”), UPARC, Prudential Arizona Reinsurance Term Company (“PAR Term”), Prudential Arizona Reinsurance Universal Company (“PAR U”), Prudential Universal Reinsurance Company ("PURC"), Prudential Term Reinsurance Company (“Term Re”), PALAC, its parent company Prudential Insurance, third parties, and participated in reinsurance with its affiliate Pruco Re through March 31, 2016. The reinsurance agreements provide risk diversification and additional capacity for future growth, limit the maximum net loss potential, manage statutory capital, facilitate its capital market hedging program, and align accounting methodology for the assets and liabilities of living benefit riders contained in annuities contracts. See Note 1 for additional information on the change effective April 1, 2016 related to the Variable Annuities Recapture. Life reinsurance is accomplished through various plans of reinsurance, primarily yearly renewable term and coinsurance. Reinsurance ceded arrangements do not discharge the Company as the primary insurer. Ceded balances would represent a liability of the Company in the event the reinsurers were unable to meet their obligations to the Company under the terms of the reinsurance agreements. The Company believes a material reinsurance liability resulting from such inability of reinsurers to meet their obligations is unlikely.

Reserves related to reinsured long duration contracts are accounted for using assumptions consistent with those used to account for the underlying contracts. Amounts recoverable from reinsurers for long duration reinsurance arrangements are estimated in a manner consistent with the claim liabilities and policy benefits associated with the reinsured policies. Reinsurance premiums ceded for universal life products are accounted for as a reduction of policy charges and fee income. Reinsurance premiums ceded for term insurance products are accounted for as a reduction of premiums.

Realized investment gains and losses include the impact of reinsurance agreements. The Company has entered into reinsurance agreements to transfer the risk related to the living benefit guarantees on variable annuities to PALAC excluding the PLNJ business which was reinsured to Prudential Insurance. See Note 1 for additional information on the change effective April 1, 2016 related to the Variable Annuities Recapture. The Company has also entered into an agreement with UPARC to reinsure a portion of the no-lapse guarantee provision on certain universal life products. These reinsurance agreements are derivatives and have been accounted for in the same manner as embedded derivatives and the changes in the fair value of these derivatives are recognized through “Realized investment gains (losses), net”. See Note 5 for additional information related to the accounting for embedded derivatives.

Prior period amounts in the tables below have been revised to correct previously reported amounts. These prior period revisions have also been reflected in the consolidated financial statements. See Note 9 for a more detailed description of the revisions.

Reinsurance amounts included in the Company’s Unaudited Interim Consolidated Statements of Financial Position as of September 30, 2016 and December 31, 2015 were as follows:



	September 30, 2016			December 31, 2015
	(in thousands)
Reinsurance recoverables	$	31,785,676		$	22,691,491
Policy loans	(82,497		)	(75,697		)
Deferred policy acquisition costs	(5,931,554		)	(2,158,121		)
Deferred sales inducements	(579,020		)	0
Other assets	217,222			35,616
Policyholders’ account balances	4,950,899			5,020,230
Future policy benefits	3,086,284			2,380,215
Other liabilities (1)	362,415			516,525


(1)	“Other liabilities” includes $18 million and $22 million of unaffiliated activity as of September 30, 2016 and December 31, 2015, respectively.

The reinsurance recoverable by counterparty is broken out below.



	September 30, 2016		December 31, 2015
	(in thousands)
PALAC	$	10,697,284	$	0
PAR U	10,604,627		9,867,902
PURC	2,807,832		2,324,163
PARCC	2,586,898		2,563,300
PAR Term	1,399,771		1,226,749
Prudential of Taiwan	1,266,956		1,169,664
Prudential Insurance	1,262,242		226,926
UPARC	570,617		376,660
Term Re	512,044		298,002
Pruco Re	0		4,594,412
Unaffiliated	77,405		43,713
Total reinsurance recoverables	$	31,785,676	$	22,691,491

The tables above include amounts related to the Variable Annuities Recapture effective April 1, 2016, as described in Note 1.

Reinsurance amounts included in the Company’s Unaudited Interim Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015 were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(in thousands)
Premiums:
Direct	$	403,893		$	379,576		$	1,203,591		$	1,129,131
Assumed (1)	142			0			291			0
Ceded	(375,020		)	(359,255		)	(2,009,044		)	(1,069,691		)
Net premiums	29,015			20,321			(805,162		)	59,440
Policy charges and fee income:
Direct	753,980			759,102			2,038,611			2,182,915
Assumed	112,825			179,717			417,048			336,672
Ceded (2)	(778,326		)	(392,475		)	(1,781,686		)	(903,610		)
Net policy charges and fee income	88,479			546,344			673,973			1,615,977
Net investment income:



Direct	104,448		102,847		290,104		309,201
Assumed	356		354		1,051		1,047
Ceded	(1,061	)	(986	)	(3,341	)	(3,127	)
Net investment income	103,743		102,215		287,814		307,121
Asset administration fees:
Direct	80,474		84,814		229,865		285,866
Assumed	0		0		0		0
Ceded	(76,470	)	0		(149,466	)	0
Net asset administration fees	4,004		84,814		80,399		285,866
Other income:
Direct	15,572		8,138		39,344		33,289
Assumed (3)	(168	)	0		216		0
Ceded	32		0		27		0
Amortization of reinsurance income	0		3,576		(19,228	)	10,655
Net other income	15,436		11,714		20,359		43,944
Interest credited to policyholders’ account balances:
Direct	41,888		182,788		360,999		398,983
Assumed	33,662		31,541		99,080		93,155
Ceded	(33,469	)	(57,843	)	(203,591	)	(169,932	)
Net interest credited to policyholders’ account balances	42,081		156,486		256,488		322,206
Policyholders’ benefits (including change in reserves):
Direct	1,009,176		549,194		1,805,942		1,513,593
Assumed (4)	181,318		208,099		653,892		431,184
Ceded (5)	(1,135,998	)	(642,107	)	(2,777,218	)	(1,710,827	)
Net policyholders’ benefits (including change in reserves)	54,496		115,186		(317,384	)	233,950
Realized investment gains (losses), net:
Direct	383,846		(2,149,496	)	(2,378,582	)	18,471
Assumed	0		0		0		0
Ceded (6)	(393,514	)	2,146,512		3,284,527		(133,086	)
Realized investment gains (losses), net	(9,668	)	(2,984	)	905,945		(114,615	)
Net reinsurance expense allowances, net of capitalization and amortization	(109,108	)	(62,043	)	(682,124	)	(146,561	)


(1)	"Premiums assumed" includes $0.1 million and $0.3 million of unaffiliated activity for the three and nine months ended September 30, 2016, respectively.


(2)	"Policy charges and fee income ceded" includes $(4) million of unaffiliated activity for both the three and nine months ended September 30, 2016 and 2015.


(3)	"Other income assumed" includes $(0.2) million and $(0.1) million of unaffiliated activity for the three months ended September 30, 2016 and 2015, respectively, and $0.2 million and $(0.1) million for the nine months ended September 30, 2016 and 2015, respectively.


(4)	"Policyholders' benefits (including change in reserves) assumed" includes $(0.2) million of unaffiliated activity for the three months ended September 30, 2016.


(5)	"Policyholders' benefits (including change in reserves) ceded" includes $(2) million and $(19) million of unaffiliated activity for the three months ended September 30, 2016 and 2015, respectively, and $4 million and $(15) million for the nine months ended September 30, 2016 and 2015, respectively.


(6)	“Realized investment gains (losses), net ceded” includes $(5) million and $12 million of unaffiliated activity for the three months ended September 30, 2016 and 2015, respectively, and $41 million and $12 million for the nine months ended September 30, 2016 and 2015, respectively.

The table above includes amounts related to the Variable Annuities Recapture effective April 1, 2016, as described in Note 1.

The gross and net amounts of life insurance face amount in force as of September 30, 2016 and 2015 were as follows:



	September 30, 2016			September 30, 2015
	(in thousands)
Direct gross life insurance face amount in force	$	813,797,417		$	753,935,518
Assumed gross life insurance face amount in force	42,991,987			43,795,607
Reinsurance ceded	(792,883,439		)	(736,832,258		)
Net life insurance face amount in force	$	63,905,965		$	60,898,867

Information regarding significant affiliated reinsurance arrangements is described below.

PALAC

Effective April 1, 2016, the Company entered into a reinsurance agreement with PALAC, to reinsure its variable annuity base contracts, along with the living benefit riders, excluding business reinsured externally and the PLNJ business, which was reinsured to Prudential Insurance. See Note 1 for additional information related to the Variable Annuities Recapture.

PAR U

Pruco Life reinsures an amount equal to 70% of all the risks associated with Universal Protector policies having no-lapse guarantees as well as Universal Plus policies, with effective dates prior to January 1, 2011, with PAR U.

Effective July 1, 2011, PLNJ reinsures an amount equal to 95% of all the risks associated with universal life policies with PAR U.

On January 2, 2013, Pruco Life began to assume guaranteed universal life ("GUL") business from Prudential Insurance in connection with the acquisition of the Hartford Life Business. The GUL business assumed from Prudential Insurance was subsequently retroceded to PAR U.

PURC

Pruco Life reinsures an amount equal to 70% of all the risks associated with Universal Protector policies having no lapse guarantees as well as Universal Plus policies, with effective dates from January 1, 2011 through December 31, 2012, with PURC. Effective July 1, 2014, the agreement between Pruco Life and PURC was amended to reinsure policies with effective dates from January 1, 2013 through December 31, 2013. Under the amended agreement, PURC reinsures an amount equal to 70% of all the risks associated with Universal Protector policies having no-lapse guarantees as well as Universal Plus policies.

Effective January 1, 2014, Pruco Life entered into an automatic coinsurance agreement with PURC to reinsure an amount equal to 95% of all the risks associated with Universal Protector policies having no-lapse guarantees, as well as Universal Plus policies, with effective dates on or after January 1, 2014.

PARCC

The Company reinsures 90% of the risks under its term life insurance policies, with effective dates prior to January 1, 2010, through an automatic coinsurance agreement with PARCC.

PAR Term

The Company reinsures 95% of the risks under its term life insurance policies with effective dates January 1, 2010 through December 31, 2013, through an automatic coinsurance agreement with PAR Term.

Prudential of Taiwan

On January 31, 2001, Pruco Life transferred all of its assets and liabilities associated with its Taiwan branch, including its Taiwan insurance book of business, to Prudential of Taiwan, an affiliated company. The mechanism used to transfer this block of business in Taiwan is referred to as a “full acquisition and assumption” transaction. Under this mechanism, Pruco Life is jointly liable with Prudential of Taiwan for two years from the giving of notice to all obligees for all matured obligations and for two years after the maturity date of not-yet-matured obligations. Prudential of Taiwan is also contractually liable, under indemnification provisions of the transaction, for any liabilities that may be asserted against Pruco Life.

The transfer of the insurance related assets and liabilities was accounted for as a long-duration coinsurance transaction under U.S. GAAP. Under this accounting treatment, the insurance related liabilities remain on the books of Pruco Life and an offsetting reinsurance recoverable is established. These assets and liabilities are denominated in U.S. dollars.

Prudential Insurance

The Company, has a yearly renewable term reinsurance agreement with Prudential Insurance and reinsures the majority of all mortality risks not otherwise reinsured.

On January 2, 2013, Pruco Life began to assume GUL business from Prudential Insurance in connection with the acquisition of the Hartford Life Business. The GUL business assumed from Prudential Insurance was subsequently retroceded to PAR U.

The Company has reinsured a group annuity contract with Prudential Insurance, in consideration for a single premium payment by the Company, providing reinsurance equal to 100% of all payments due under the contract.

Effective April 1, 2016, PLNJ entered into a reinsurance agreement with Prudential Insurance to reinsure its variable annuity base contracts, along with the living benefit riders. See Note 1 for additional information related to the Variable Annuity Recapture.

UPARC

Pruco Life reinsures Universal Protector policies having no-lapse guarantees with effective dates prior to January 1, 2013 with UPARC. UPARC reinsures an amount equal to 27% of the net amount at risk related to the first $1 million in face amount plus 30% of the net amount at risk related to the face amount in excess of $1 million as well as 30% of the risk of uncollectible policy charges and fees associated with the no-lapse guarantee provision of these policies.

Effective January 1, 2014, the agreement between Pruco Life and UPARC to reinsure Universal Protector policies having no-lapse guarantees was amended for policies with effective dates on or after January 1, 2014. Under the amended agreement, UPARC will no longer reinsure Universal Protector policies having no-lapse guarantees.

Effective July 1, 2014, the agreement between Pruco Life and UPARC to reinsure Universal Protector policies having no-lapse guarantees was further amended for policies with effective dates January 1, 2013 through December 31, 2013. Under the amended agreement, UPARC reinsures an amount equal to 27% of the net amount at risk related to the first $1 million in face amount plus 30% of the net amount at risk related to the face amount in excess of $1 million as well as 30% of the risk of uncollectible policy charges and fees associated with the no-lapse guarantee provision of these policies.

Term Re

The Company reinsures 95% of the risks under its term life insurance policies with effective dates on or after January 1, 2014 through an automatic coinsurance agreement with Term Re.

Pruco Re

Through March 31, 2016, the Company, including its wholly-owned subsidiary PLNJ, entered into various automatic coinsurance agreements with Pruco Re to reinsure its living benefit features sold on certain of its annuities. See Note 1 for additional information on the change effective April 1, 2016 related to the Variable Annuities Recapture.

Information regarding significant third party reinsurance arrangements is described below.

Union Hamilton

Effective April 1, 2015, the Company, excluding its subsidiaries, entered into an agreement with Union Hamilton, an external counterparty, to reinsure approximately 50% of the Prudential Premier® Retirement Variable Annuity with Highest Daily Lifetime Income (“HDI”) v.3.0 business, a guaranteed benefit feature. This reinsurance agreement covers most new HDI v.3.0 variable annuity business issued between April 1, 2015 and December 31, 2016 on a quota share basis, until Union Hamilton’s quota share reaches $5 billion of new rider premiums through December 31, 2016. These guaranteed benefit features are accounted for as embedded derivatives.